[Senate Hearing 118-235]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 118-235

                        INVESTING IN THE FUTURE:
                   SAFEGUARDING MUNICIPAL BONDS FROM
                              CLIMATE RISK

=======================================================================

                                HEARING

                               BEFORE THE

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            January 10, 2024

                               __________

           Printed for the use of the Committee on the Budget
           
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                            www.govinfo.gov
                            
                               __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
54-921                    WASHINGTON : 2024                    
          
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                        COMMITTEE ON THE BUDGET

               SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington             CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan            LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont             RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia             MITT ROMNEY, Utah
JEFF MERKLEY, Oregon                 ROGER MARSHALL, Kansas
TIM KAINE, Virginia                  MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland           JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico            RICK SCOTT, Florida
ALEX PADILLA, California             MIKE LEE, Utah

                   Dan Dudis, Majority Staff Director
        Kolan Davis, Republican Staff Director and Chief Counsel
                   Mallory B. Nersesian, Chief Clerk 
                  Alexander C. Scioscia, Hearing Clerk
                            
                            
                            C O N T E N T S

                              ----------                              

                                WEDNESDAY, JANUARY 10, 2024
                
                OPENING STATEMENTS BY COMMITTEE MEMBERS

                                                                   Page
Senator Sheldon Whitehouse, Chairman.............................     1
    Prepared Statement...........................................    28
Senator Charles E. Grassley, Ranking Member......................     3
    Prepared Statement...........................................    30

                    STATEMENTS BY COMMITTEE MEMBERS

Senator Tim Kaine................................................    17
Senator Ron Johnson..............................................    19
Senator Jeff Merkley.............................................    20
Senator John Kennedy.............................................    22
Senator Alex Padilla.............................................    23
Senator Mike Braun...............................................    25

                               WITNESSES

Mr. Thomas G. Doe, President and Founder, Municipal Market 
  Analytics......................................................     6
    Prepared Statement...........................................    32
Ms. Megan N. Kilgore, City Auditor, Columbus, Ohio...............     7
    Prepared Statement...........................................    43
Dr. Chris Hartshorn, Advisor, Zeus AI............................     9
    Prepared Statement...........................................    45
Dr. Matthew Kahn, Provost Professor of Economics and Spatial 
  Sciences, University of Southern California....................    11
    Prepared Statement...........................................    50
Dr. Eric Leeper, Paul Goodloe McIntire Professor in Economics, 
  University of Virginia.........................................    12
    Prepared Statement...........................................    59

                                APPENDIX

Responses to post-hearing questions for the Record
    Dr. Leeper...................................................    80
Statements submitted for the Record by Chairman Sheldon 
  Whitehouse.....................................................    82

 
                        INVESTING IN THE FUTURE:
                   SAFEGUARDING MUNICIPAL BONDS FROM
                              CLIMATE RISK

                              ----------                              


                      WEDNESDAY, JANUARY 10, 2024

                                           Committee on the Budget,
                                                       U.S. Senate,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:00 
a.m., in the Dirksen Senate Office Building, Room SD-608, Hon. 
Sheldon Whitehouse, Chairman of the Committee, presiding.
    Present: Senators Whitehouse, Merkley, Kaine, Padilla, 
Grassley, Johnson, Braun, Kennedy, and R. Scott.
    Also present: Democratic Staff: Dan Dudis, Majority Staff 
Director; Melissa Kaplan-Pistiner, General Counsel; Matthew 
Bolden, Climate Policy Advisor.
    Republican Staff: Chris Conlin, Deputy Staff Director; 
Krisann Pearce, General Counsel; Jordan Pakula, Professional 
Staff Member; Ryan Flynn, Staff Assistant.
    Witnesses:
    Mr. Thomas G. Doe, President and Founder, Municipal Market 
Analytics
    Ms. Megan N. Kilgore, City Auditor, Columbus, Ohio
    Dr. Chris Hartshorn, Advisor, Zeus AI
    Dr. Matthew Kahn, Provost Professor of Economics and 
Spatial Sciences, University of Southern California
    Dr. Eric Leeper, Paul Goodloe McIntire Professor in 
Economics, University of Virginia

          OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
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    \1\ Prepared statement of Chairman Whitehouse appears in the 
appendix on page 28.
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    Chairman Whitehouse. My distinguished colleague and Ranking 
Member, Senator Grassley, has an obligation to check in on 
another Committee before he comes here, and that starts at 
10:00, so he's going to be here fairly soon, and I have his 
staff's permission to begin the hearing, so let me gavel it 
into order.
    And I welcome the witnesses, welcome all colleagues to the 
first hearing of the Senate Budget Committee in 2024, and what 
is our 12th hearing on the looming fiscal and economic dangers 
of climate change. In the year since we started, climate 
economic warnings have just gotten worse.
    We are barreling past warning sign after warning sign. The 
facts are bad.
    Last year was the hottest year on record. It set a new 
record for billion dollar disasters, including the deadliest 
wildfire in modern United States (U.S.) history, and a new 
worst for global fossil fuel emissions. Climate change 
disrupted global food markets with flooding, persistent drought 
and shipping bottlenecks, and raised sugar, cocoa, and olive 
oil prices as just a few examples, causing climate inflation 
around the world.
    Shattered weather records battered insurance markets. 
Vermont and New York's once in a thousand year storms triggered 
deadly floods. California saw its first ever tropical storm 
warning. El Paso had 44 consecutive days at or above 100 
degrees, topped by Phoenix's 55 days at or above 110 degrees. 
The Dallas fed estimated the summer heatwave cost Texas $24 
billion.
    Insurance companies are already cutting their losses and 
exiting markets on the frontline of climate change in 
Louisiana, Florida, and California. Follow the real estate 
economics here. Without insurance it's hard to get a mortgage. 
But if you can't get mortgages, property markets suffer, 
causing pain to families, communities, and ultimately the 
entire U.S. financial system.
    Look at when the 2008 mortgage crisis cascaded into the 
Great Recession. As this current insurance crisis spirals into 
a mortgage crisis, and then spills over into housing markets, 
property values will suffer. The former Chief Economist at 
Freddie Mac warned this Committee that in this mortgage crisis, 
``Unlike during the experience of 2007-2008, these homeowners 
will have no expectation that the values of their homes will 
ever recover.''
    I share my colleague's debt and deficit concern about the 
impending budgetary and fiscal crisis facing our nation. One 
front of that impending crisis is climate change's economic 
threat. A threat to families, neighborhoods, banks, federal 
housing lenders, real estate developers, insurers, investors, 
and to state and local tax bases, which brings us to the topic 
of today's hearing, the $4 trillion municipal bond market.
    Municipal bonds, much like the 30-year mortgage, are a 
bedrock of our American economic systems, enabling local 
governments to make investments that are essential for their 
communities. Basic public services, like water service, sewage 
treatment, electricity and roads. Local government bonds 
finance more than 70 percent of U.S. infrastructure, including 
airports, bridges, railways and seaports.
    Climate change now threatens that bond market. 
Historically, municipal bonds have a sterling reputation among 
investors with default rates of less than 1 percent. Investors 
lend their dollars to build a new school or highway, and 
typically receive a tax exempt stream of interest for the next 
15 or even 30 years.
    These bonds, secured by government revenues, are among our 
most stable investments. Climate change undermines the 
stability in two ways. More intense storms, wildfires, 
droughts, heatwaves and floods impose higher costs on state and 
local governments, putting pressure on the spending side.
    And on the revenue side storm damage and insurance risk can 
undermine the municipal tax base. Already climatechange is 
making it harder for municipalities to service their bond payments, and 
making it harder for governments to raise new capital for needed 
climate investments.
    After a disaster, communities' local tax bases can be 
devastated. 5 years after the Camp Wildfire, only \1/3\ of the 
population has returned to Paradise, California. Hurricane 
Matthew undermined tax bases across small towns in North 
Carolina. After a disaster, population declines mean revenues 
decline, and bond markets are watching. 15 or 30 year municipal 
bonds start to look less safe.
    Moody's has already given notice to coastal communities. 
This risk comes home to roost in the federal budget. Over 40 
percent of our national debt relates back to crises we did not 
prepare for adequately, like the mortgage meltdown and the 
COVID pandemic.
    Today we'll hear more evidence that climate change is just 
such a crisis, an impending budgetary and fiscal crisis facing 
our nation. It could well be the worst yet. We've heard 
warnings about a coastal properties values crash. A similar 
collapse in wildfire adjacent areas, a bursting of the 
international carbon bubble, of turmoil in insurance markets, 
of climate inflation, and now danger to a pillar of American 
investment, the municipal bond.
    Nothing says that these all don't come to pass. Ignoring 
all of this is akin to financial negligence. And if there's one 
thing the Budget Committee should be able to agree on is that 
we oughtn't be negligent, and with that I will turn to my 
distinguished Ranking Member, and also wish him a Happy New 
Year. This is the first time we've seen each other in person 
since the New Year.

             OPENING STATEMENT SENATOR GRASSLEY \2\
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    \2\ Prepared statement of Senator Grassley appears in the appendix 
on page 30.
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    Senator Grassley. And I'm going to wish you in turn a Happy 
New Year, and your family as well. And as you would expect, I'm 
going to say that I have enjoyed the first year we've had, even 
though we've had some disagreement on the agenda of the 
Committee, and so I'm going to probably start out where you 
would expect me to start out.
    The purpose of the Budget Committee and the----
    Chairman Whitehouse. Understood.
    Senator Grassley [continuing]. Fiscal problems of our 
nation. One of my hopes for the year is for this Committee to 
turn its attention to the pressing fiscal challenges that we 
face as a nation. Our unsustainable fiscal outlook is a 
bipartisan problem because both parties talk about it, and it's 
going to require a bipartisan solution to resolve.
    That was the crux of the letter that Senator Scott and I, 
along with all the Republican members of this Committee, sent 
you in December. Your December 7th response suggests that you 
agree that reducing the federal deficit and shrinking national 
debt are good ideas, and yet you rejected our request to hold a 
bipartisan hearing focused on that matter.
    Yes, we do disagree on the merits of many policies and 
proposals, but for the good of our nation we must begin to find 
common ground to address a national debt that recently topped 
$34 trillion, and is growing at a historic pace. Yesterday the 
Congressional Budget Office (CBO) warned that the federal 
budget deficit totaled $509 billion in just the first 3 months 
of fiscal year 2024.
    That's $87 billion more than this time last year, and 
that's despite the fact that revenues are coming in 8 percent 
higher than a year ago. The Treasury Department recently 
reported that we ran a $1.7 trillion deficit in 2023, larger 
than all but 6 deficits recorded since 1946, as a share of 
gross domestic product (GDP). Now we now that Fitch Ratings has 
downgraded our credit rating, and Moody's Investor Service 
recently placed a negative outlook on the U.S. sovereign credit 
rating.
    This morning the Budget Committee holds its 13th climate 
change hearing this Congress. This has prevented us from 
discussing ways to improve our immediate and dire economic 
position. Climate discussion is always worthy of our time as 
legislators, and must be considered, and debated, and 
discussed.
    But climate change doomsday isn't just around the corner. 
Recent adaptation is the key to coping with any climate change. 
Today's hearing is about the role of climate change in the 
municipal bond market. The $4 trillion municipal bond market is 
very resilient according to Moody's. Over 99 percent of 
municipal bonds issued by cities, school districts, states and 
other local governments, are categorized as investment grade.
    The infrequency of general government defaults reflects a 
key feature of state and local governments. That is, they have 
the power to raise revenue through taxation unlike private 
sector counterparts. State and local governments understand the 
risks their jurisdictions face, and they're uniquely qualified 
to so adapt.
    Where there have been defaults in municipal bonds it's been 
in places that have been mismanaged for decades, such as the 
City of Detroit, and I haven't looked at Detroit lately, but I 
think they're making some progress coming out of the hole that 
they dug for themselves. In fact, according to Moody's they've 
never seen a bond that they rated default due to natural 
disasters.
    This includes rated bonds for Paradise, California, which 
suffered near complete destruction in 2018 California wildfire. 
Paradise has made every scheduled bond payment. I agree that 
municipal bond issuers face challenges. A big one is the extent 
to which municipalities rely on the federal government for 
transfers.
    Let's face it, we're broke. I welcome all today's 
witnesses, and look forward to hearing each of their 
testimonies. Thank you, Mr. Chairman.
    Chairman Whitehouse. Thank you, Senator Grassley. Let me 
take a moment to introduce our witnesses. I'll introduce all of 
you together, and then we'll go through your testimony. As you 
know, the practice in this Committee is to hold your statement 
to 5 minutes, have your complete testimony made a part of the 
record, and by adhering to that we give more time for the 
Senators who are present to ask questions, so thank you for 
accommodating us with that.
    Our first witness is Mr. Thomas Doe. Mr. Doe is the Founder 
and President of Municipal Market Analytics, a leading 
independent strategy, research, and advisory firm for the 
municipal bond industry. Clients include major investment 
firms, banks, securities dealers, financial advisers, bond 
issuers, and regulators.
    Mr. Doe served on the Municipal Securities Rulemaking Board 
(MSRB) from 2002 to 2005, and he's previously testified on the 
health of the industry to the Senate Banking Committee, and to 
the Securities and Exchange Commission. Welcome back to 
Washington, Mr. Doe.
    Our second witness is Ms. Megan Kilgore, the City Auditor 
of Columbus, Ohio. As City Auditor, she oversees a nearly $5 
billion debt portfolio, and a $2 billion investment portfolio, 
and she administers the collection of approximately $1 billion 
in revenue every year.
    Prior to elected office, Ms. Kilgore was a Municipal 
Advisor, helping cities, counties, school districts, and 
economic development districts all over the country navigate 
complicated financing transactions. Ms. Kilgore, thank you for 
being with us today.
    Our third witness is Dr. Chris Hartshorn. Dr. Hartshorn is 
currently an adviser to Zues AI, a National Aeronautics and 
Space Administration (NASA) spinoff focused on next generation 
weathering modeling and forecasting, as well as a number of 
other environmental data science startups and a venture capital 
firm.
    Previously, Dr. Hartshorn helped build risQ and Level 11 
Analytics, which became the leading providers of physical 
climate risk data for the municipal bond market, until their 
acquisition by Intercontinental Exchange in 2021. Thank you for 
being here today, Dr. Hartshorn.
    Following Dr. Hartshorn is Dr. Matthew Kahn. Dr. Kahn is a 
Provost Professor of Economics and Spatial Sciences at the 
University of Southern California. Dr. Kahn is also a visiting 
Fellow at the Hoover Institution, and a Research Associate at 
the National Bureau of Economic Research (NBER), and a Research 
Fellow at the Institute of Labor Economics (IZA). Dr. Kahn's 
research focuses on urban and environmental economics.
    He previously taught at Columbia, the Fletcher School at 
Tufts, the University of California, Los Angeles (UCLA), 
Harvard, Stanford, and the National University of Singapore. 
Thank you for being with us, Dr. Kahn.
    Our final witness is Dr. Eric Leeper, the Paul Goodloe 
McIntire Professor in Economics at the University of Virginia 
(UVA)--my at least law school alma mater, if that actually 
counts in UVA. You know, they take the undergrad and the law 
school differentiation pretty seriously. Dr. Leeper is also a 
distinguished visiting scholar at the Mercatus Center, a 
research associate at NBER, Director of the Virginia Center for 
Economic Policy at UVA, and external Advisor to the Swedish 
Central Bank, and a member of the Research Council of the 
Bundesbank.
    His work focuses on theoretical and empirical models of 
macroeconomic policy, with special emphasis on monetary, fiscal 
policy interactions. Fair description? Yes. That's good. Okay. 
Welcome, Dr. Leeper. Mr. Doe please proceed.

 STATEMENT OF THOMAS G. DOE, PRESIDENT AND FOUNDER, MUNICIPAL 
                      MARKET ANALYTICS \3\
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    \3\ Prepared statement of Mr. Doe appears in the appendix on page 
32.
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    Mr. Doe. Thank you, Chair Whitehouse, Ranking Member 
Grassley, and members of the Committee for inviting me here 
today. My discussions with state and local sustainability and 
resilience officers have revealed woeful ignorance regarding 
the capital markets essential role in financing their climate 
adaptation needs.
    My name is Tom Doe. I'm Founder and President of Municipal 
Market Analytics, and I've also served on the MSRB as Chair 
Whitehouse noted. I also serve on the Advisory Board of the 
Center of Municipal Finance at the University of Chicago's 
Harris School. Municipal bond issuance can serve as the 
initiative-taking financing tool to reduce the federal 
government's burden in responding to catastrophes via the 
Federal Emergency Management Agency (FEMA).
    To date, municipal investors have been able to downplay the 
climate issue because of FEMA's historical presence to backstop 
areas impacted by extreme weather events, and rating agencies' 
limited credit outlook to a few years into the future. 
Investors' positive expectations have inhibited issuers' 
proactive action to reduce the consequences of future climate-
related risks.
    The Administration and Congress climate initiatives have 
been laudable. However, the federal government has emphasized 
mitigation over adaptation, and still, as Chair Whitehouse 
knows, global mitigation efforts to date will not halt the 
breech of the earth's 1.5-degree warming barrier. As a result, 
U.S. citizens will rely on state and local governments to 
execute needed adaptation and resilience measures.
    It is fair to characterize the municipal market as the best 
form of partnership between state, local, and federal 
governments. Municipal bonds have financed 75 percent of U.S. 
public infrastructure. They provide low-cost capital for state 
and local infrastructure needs, both large and small.
    Since 2004, the municipal market has raised an annual 
average of $400 billion for a variety of purposes. Its 
stability has created investor confidence, steady regulation 
has improved markets' integrity, state revolving fund programs 
have served as a shining example for financing future 
resilience needs.
    The pandemic reiterated that in the U.S. the avoidance of 
taxes is a motivational force for investors. Over the past 3 
years states with population increases have an average state 
income tax of approximately 3 percent, while those who have 
lost population have a tax rate of approximately 7 percent. 
Ironically, the movement has been to states that have the 
greatest climate risks.
    These areas and elsewhere will need to finance adaptation 
projects to improve stormwater management, provide clean water, 
cool educational and healthcare facilities, secure the 
provision of electricity, make transportation systems 
resilient, while also anticipating catastrophic events. 
Municipals' tax exemption not only incentivizes high earners to 
invest in infrastructure, but also allows state and local 
governments to apply capital to where it is most needed.
    Once again, largely because of FEMA's historical backstop, 
investors and rating agencies have not significantly penalized 
the most climate-vulnerable state and local governments with 
lower prices or ratings. Hence, in the absence of the penalty, 
this provides a current opportunity for issuers to invest now 
before greater investor sensitivity evolves.
    State and local governments have an extremely low default 
rate, both on absolute and relative basis. Ninety percent of 
the $4 trillion public outstanding municipal bond debt is 
investment grade, suggesting that too great of an emphasis may 
have been placed on government officials' aspirations for the 
highest credit rating, instead of efficient market utilization.
    In other words, state and local governments could assume a 
greater debt burden to address climate risk. Greater debt might 
result in a possible lower rating today, but could put an 
issuer in a better position to stabilize or improve its future 
rating. This is admittedly a difficult needle to thread because 
climate instability poses an unprecedented systemic risk to 
municipals' hallmark credit quality.
    The Committee's prior hearings have revealed data sources 
to inform investors of climate risk and security offering 
documents. Fortunately, the government-financed Officer's 
Association in 2021, led in part by Florida's debt leadership, 
provided best practice guidance for climate disclosure. Also, 
the U.S. Securities and Exchange Commission (SEC) is 
continually reviewing state and local borrowing disclosure 
practices, which have been disappointingly inconsistent or 
silent regarding climate change's specific risks, and the plans 
to address them.
    It is egregious that state and local governments' easily-
quantified climate risks are not clear to investors who deliver 
capital, and to the federal government who provides the 
critical subsidy. I appreciate your invitation to join you 
today, and look forward to the questions and discussion.
    Chairman Whitehouse. Thank you very much, Mr. Doe. Ms. 
Kilgore, please.

STATEMENT OF MEGAN N. KILGORE, CITY AUDITOR, COLUMBUS, OHIO \4\
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    \4\ Prepared statement of Ms. Kilgore appears in the appendix on 
page 43.
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    Ms. Kilgore. Chairman Whitehouse, Ranking Member Grassley, 
members of the Committee, thank you for inviting me here today. 
My name is Megan Kilgore. This marks my 20th year in the public 
finance industry. For the last 6 years, I have had the 
privilege of serving as the elected City Auditor of the City of 
Columbus, Ohio.
    My office is responsible for debt issuance, capital 
planning and rating agencies strategy, and investor relations. 
I am proud to say that we are the largest city in America to 
maintain the highest credit rating possible, Triple A from 
Standard & Poor's (S&P), Moody's, and Fitch, respectively.
    Prior to my elected service, as the Chair noted, I worked 
as a municipal Financial Advisor, helping clients, cities, 
counties, school districts, community colleges, all across the 
country plan for and finance their infrastructure. Any time we 
have a major initiative in our industry, local governments ask 
a number of good questions. Why? How? What? When? And who will 
pay for it?
    In my conversation, the why has been fairly evident, and 
local governments are becoming increasingly aware of the 
economic and societal risks of climate change. The remaining 
questions are where I would like to focus my time today, as my 
objective is to leave this Committee with solutions for 
increasing climate oriented project financing and 
implementation, both mitigation and adaptation.
    To date, of the hundreds and hundreds of bond issues that I 
have worked on, I have not issued, nor have I advised that a 
client issue, bonds that are designated as green, even if the 
projects could earn that designation. The primary reason for 
that is lack of definitive financial benefit.
    I have also not found there to be any incentive from a 
rating agency standpoint. Green debt is still considered debt, 
and carries no quality--credit quality advantage. In other 
words, municipal debt that is financing a renewable energy 
project with sizable long-term economic benefit is still on 
parity with a community pool.
    Our objectives at the City of Columbus are to get the best 
deal possible, and to maintain affordability for our residents. 
So in addition to the traditional municipal debt market, we 
also consider available federal funding. The good news is that 
there are incredible levels of federal programs available 
today.
    The Inflation Reduction Act (IRA), programs like Water 
Infrastructure Finance and Innovation Act (WIFIA), 
Transportation Infrastructure Finance and Innovation Act 
(TIFIA), rural specific programs, and numbers of other acronyms 
exist, but we lack a user friendly resource that wholly 
connects the dots. I can attest that even a Triple A, like the 
City of Columbus with a deep bench of experts, working through 
this complexity has been difficult, let alone many of my former 
clients who lack the similar financial and technical resources.
    So how do we get these necessary projects underway? I'd 
like to share opportunities that I see that could eliminate 
barriers to local governments' participation in more climate 
oriented projects. One, provide clear financial incentives for 
both local governments and investors. For instance, consider 
broadening the definition of municipal backed bonds, tax 
exemption for projects that reach certain climate metrics, and 
growing climate related opportunities with things like private 
activity bonds.
    Number two, help local governments overcome human capacity 
barriers by creating a federal office to serve as the single 
point of knowledge. There are over 50,000 local governments who 
issue debt, making it incredibly difficult to generate 
transformational change using a one size fits all approach.
    I am inspired by how the websites America is All In, and 
Rewiring America have done this using technology to create 
highly personalized tools that estimate, for instance, how much 
money homeowners can save by employing clean technologies.
    Which types of tax credits the homeowner may be eligible 
for, and how to go about applying. Similar to President 
Eisenhower's Public Roads Administration, we need this onestop 
shop to help local governments with project analysis, regional design, 
implementation, as well as a place to collect, analyze and communicate 
information regarding grant loan and financing sources and uses.
    Just imagine if a single source of information was 
available to my small hometown on the Ohio River. A site where 
users could see their location-specific estimates of physical 
climate risk exposure, alongside potential economic loss, types 
of projects that would best benefit that area, and 
corresponding funding opportunities.
    Number three, help smaller and lower credit communities 
achieve total funding needs. I saw a ton of success with the 
Super-Build America Bonds (BAB)-type structure under the 
Recovery Zone Economic Development Bonds. Such a reinvented 
program could help these local governments, especially those 
seeking last mile funding, use bonds to spread the costs of 
projects over a reasonable number of years, while keeping 
affordability in check.
    The solutions I see are big, transformative, and require 
our federal government to take action at a scale commensurate 
with the opportunities before us. Thank you for the time.
    Chairman Whitehouse. Thank you, Ms. Kilgore. Dr. Hartshorn.

     STATEMENT OF DR. CHRIS HARTSHORN, ADVISOR, ZEUS AI \5\
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    \5\ Prepared statement of Dr. Hartshorn appears in the appendix on 
page 45.
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    Dr. Hartshorn. Good morning, Chairman Whitehouse, Ranking 
Member Grassley, and members of the Committee. Thank you for 
inviting me to testify at this hearing. It is an honor to do 
so, and to represent the hard work of many colleagues and 
collaborators.
    My name is Chris Hartshorn. I currently advise numerous 
entities operating at the finance industry and sustainability 
nexus. More relevant for this hearing, are my many years fully 
dedicated to building market leading capabilities focused on 
climate risk to U.S. fixed income debt instruments, including 
municipal bonds.
    Firstly, it is importantly to note that the municipals as 
defined by the municipal bond market, are a vast diaspora of 
overlapping debt issuers covering states, counties, utilities, 
school districts, transit systems, airports, hospitals, charter 
schools, retirement communities and many others.
    The implications of climate action to the population are 
broad and stark under this financial market municipal 
definition. With respect to climate risk, it is easiest for 
most to conceptualize property destroying, evacuation invoking 
perils, hurricanes, wildfires, floods and the like. As these 
acute events happen quickly, catalyze local, and often federal 
emergency responses, have quantified economic consequences and 
costs, and leave single named scars, Katrina, Sandy, Paradise, 
to name just three.
    Such climate risks are material to municipal finance, 
taking wildfires as one example. In the 5 years after a fire, 
the net fiscal effect of wildfires on a municipality is a 
decline in excess revenues of $97 per capita, equivalent to 11 
percent of the per capital budget size, and a 25 percent 
increase in the probability of a budget deficit.
    For hurricanes, local governments experience significant 
declines in revenues, expenditures, and debt. In the 10 years 
after a hurricane strike these are initially offset by 
intergovernmental transfers, but ramp up 10 to 16 years after 
post--after a hurricane. The impacts of past floods also litter 
the official statements of the bond issuing community.
    Across these acute perils, rebuilding costs have been 
underpinned by FEMA Disaster Relief Fund (DRF) funding that has 
been on a bumpy, but nonetheless upward trajectory over recent 
decades. Another key constituent of post-disaster recovery has 
been property insurers that help re-establish property value. 
Noting that property taxes are a key revenue stream for many 
municipal bond issuers.
    It is noteworthy therefore, that in higher climate risk 
states, Florida, Louisiana, California, that major insurers are 
withdrawing from those markets. And those that remain are 
ramping up policy premiums, an outcome that will inevitably 
lead to a decrease in coverage, and anecdotally already has.
    The diminishing of this historically critical pillar of 
past disaster recovery, will only heighten the post-disaster 
financial pressure on the municipal and federal system. Other 
perils must be accounted for, for which the impacts are more 
chronic in nature. Heat, drought, sea level rising effects on 
water supply in many coastal areas.
    Heat is a good example, given we've just experienced the 
hottest year on record globally, and cities such as El Paso and 
Phoenix shattered their own records. This is a critical issue 
across much of the municipal U.S. for the health and safety of 
these served populations, and the municipal workforce, and for 
municipal infrastructure.
    Municipal sectors beyond cities also feel this heat. For 
example, school districts exposure to heat risk is already 
apparent. Temperature has been shown to have a direct impact on 
educational performance, noting that September, the start of a 
typical U.S. school year also set new records in 2023.
    In schools without functioning air-conditioning, a 1 degree 
Fahrenheit hotter school year reduces test scores by 1 percent 
versus expected learning gains. By some estimates, around $40 
billion of new air-conditioning installation is required across 
U.S. K through 12 schools to address this.
    These K through 12 schools represent around 15 percent of 
the municipal bond market, while access to debt has shown to 
improve K through 12 educational outcomes, there is now a 
climate driven educational performance imperative to add to 
this mix.
    In reality, any combination of a given climate peril in a 
given sector within the municipal universe can be explored for 
underlying materiality, but the themes of present and future 
climate risk and cost would remain. Critically, mitigation 
funding can save the nation $6 in future disaster costs to 
every $1 spent on hazard mitigation.
    That 6x multiple needs to be seen in the context of the 
U.S.' estimated $2.6 trillion infrastructure deficit over the 
next 10 years.
    The question is how to maximize the upfront dollars to 
address this risk. This does not need to be a monolithic draw 
on the federal purse. The municipal bond market has held steady 
around $4 trillion over the last 15 years, but this is 
misleading. There is an undoubtedly willing capital just 
sitting on the sidelines.
    Again, thank you for the opportunity to address the 
Committee. I look forward to your questions.
    Chairman Whitehouse. Thank you, Dr. Hartshorn. Dr. Kahn.

 STATEMENT OF DR. MATTHEW KAHN, PROVOST PROFESSOR OF ECONOMICS 
  AND SPATIAL SCIENCES, UNIVERSITY OF SOUTHERN CALIFORNIA \6\
---------------------------------------------------------------------------

    \6\ Prepared statement of Dr. Kahn appears in the appendix on page 
50.
---------------------------------------------------------------------------
    Dr. Kahn. Good morning, Chairman. Thank you Ranking Member 
Grassley and members of the Committee for inviting me to 
testify. I'm relentlessly optimistic about the way cities can 
adapt to the climate challenges. Climate change is not a 
catastrophic threat to the municipal bond market.
    Bond buyers have an incentive to do their due diligence.
    If a municipality faces rising climate impacts that imperil 
its abilities to repay debt, bond buyers will recognize this, 
and they will offer lower prices for bonds. The places that 
fail to adapt to new risks will pay higher interest rates, and 
higher insurance rates.
    To see why climate risk does not imperil the financial 
system, via municipal bond defaults, let's play out a 
hypothetical doomsday scenario. What does it take for a climate 
event to cause a financial crisis? The year is 2034. Over the 
last decade the climate has gotten worse.
    Storms are more frequent. The City of Chicago continues to 
issue new municipal debt. Chicago has huge public pension 
obligations. The city's bonds are rated as barely investment 
grade quality. Suppose a hedge fund buys these Chicago bonds, 
using money borrowed short-term from several banks. An 
unprecedented storm hits Chicago.
    Infrastructure is flooded and damaged. The city appeals to 
the federal government for disaster relief, but none arrives. 
Tax revenue plummets, a local economic depression ensues. The 
city defaults on all of its bonds. The hedge fund, who owns the 
bonds, goes under. Banks who lent Chicago bond buyers money now 
own worthless collateral and they fail.
    Still, only a few banks have failed. Depositors at other 
banks worried about the hidden risks run. The federal 
government does not bail out the banks or the depositors. 
Finally, we have a crisis. Folks, elementary economics shows 
that this scenario is implausible. Why?
    First, local property owners seek to enhance the value of 
the assets. They have an incentive to lobby local leaders to 
invest in resilience to reduce default risks. Property owners 
recognize that a municipal default leads to lower local quality 
of life and higher property taxes.
    Second, over the last 40 years, hurricane strikes have had 
a minor impact on municipal bond prices, and their impact on 
default rates has been tiny. While federal disaster relief 
helps cities to recover from shocks, this reduces bond default 
risk. It is arguable that the federal government has been too 
generous with respect to state and local aid, and this creates 
perverse incentives for local investment in resilience.
    Third, portfolio theory warns against putting all your eggs 
in one basket. Meaning super bond investors tend to be high net 
worth individuals and pension plans. They do not hold 
concentrated investments in any one city's bonds. A city's 
default will not cause these investors to fail. They invest in 
a spatially diversified asset portfolio.
    Fourth, climate science progress offers ever improving real 
time geo-coded predictions. These models inform predictions 
concerning which cities face severe medium-term climate risks. 
Cities predicted to face rising risks will experience rising 
insurance costs, and they will pay higher interest rates on 
their long-term debt relative to their short-term debt.
    The expectation of facing higher insurance prices, and 
higher interest rates provides an incentive for municipalities 
to invest their own money in adaptation. Fifth, as we grow 
richer, property owners are willing to pay more for safety, for 
products that enhance their safety, such as anti-flood 
equipment, and stronger windows.
    Firms have a profit motive to design these climate 
resilient products. My own research agenda has been this focus 
of how we unleash free markets, the profit motive to create a 
new menu of products that help us to adapt. Competition in 
adaptation product markets leads to lower prices.
    As more of a city's property owners make these investments, 
the overall local real estate capital stock becomes more 
resilient to disaster shocks. Going forward, Senators, big city 
municipal bond risk will mainly be determined by public pension 
obligations, and day to day quality of life concerns, leading 
to suburban flight, not by a change in the frequency of bad 
weather events beyond that which cities and bond investors are 
already planning for, thank you.
    Chairman Whitehouse. Thank you very much, Dr. Kahn. Dr. 
Leeper.

 STATEMENT OF DR. ERIC LEEPER, PAUL GOODLOE MCINTIRE PROFESSOR 
            IN ECONOMICS, UNIVERSITY OF VIRGINIA \7\
---------------------------------------------------------------------------

    \7\ Prepared statement of Dr. Leeper appears in the appendix on 
page 59.
---------------------------------------------------------------------------
    Dr. Leeper. Chairman Whitehouse, Ranking Member Grassley, 
Committee members, thank you for inviting me to talk today. 
Good morning. I'm Eric Leeper from the University of Virginia. 
Today I'd like to talk about federal budget policy and its 
implications for financing expenditures associated with climate 
change.
    I draw on consensus economic theory about optimal public 
finance at the macroeconomic level, and talk about growing 
weakness in the market for treasuries. Weakness that stems in 
large part from fiscal uncertainty in Washington. Treasury 
securities and municipal bonds, like any assets, derive their 
value from expected future payoffs discounted to the present.
    For government issued bonds, those payoffs are budget 
surpluses, excluding interest payments, what we call primary 
surpluses. Higher expected payoffs raise demand for and the 
value of bonds, so governments can borrow on more favorable 
terms. Bonds lose value as they have the last 4 years, when 
investors worry that surpluses don't lie in the future.
    Optimal public financial avoids sharp swings in tax rates 
and spending, swings that distort behavior and reduce social 
welfare. Large, temporary bursts in spending that arise from 
say a war, call for increased borrowing. When spending needs 
subside, policy generates primary budget surpluses to support 
the new debt. The expectation that surpluses will rise 
maintains the value of that debt.
    George Hall and Tom Sargent document that U.S. policymakers 
largely followed this advice after the two world wars. Hall and 
Sargent also examined the fight against COVID in this light. 
Large COVID related spending was financed by new debt issuance, 
marketable treasury debt grew by more than $7 trillion over the 
3 years starting January of 2020.
    What we haven't seen is the follow through that optimal 
policy requires. The Congressional Budget Office projects 
primary deficits for the next 30 years. This tells us that 
nothing about today's budget process ensures that policy will 
generate the required surpluses.
    Budgetary consequences of climate change won't resemble the 
large, temporary spending bursts associated with wars or COVID. 
Instead, climate change seems likely to entail sustained 
elevated spending levels. Permanently higher spending on 
something new requires either permanently lower spending on 
something else, or permanently higher tax revenues.
    Ever increasing borrowing, whether in the muni or the 
treasury market, cannot be the answer. The lack of clear fiscal 
plans harms the economy today, and we're seeing some evidence 
of that in the treasury market. The price of the treasury bond 
portfolio has declined 18 percent since early 2020. The last 
time we saw declines like this was in the 1970s.
    Interest payments on outstanding debt are growing rapidly. 
Treasury has had to auction new bonds in weak markets to meet 
those payments. If as now, there are no prospects for future 
surpluses, it's hard to see inflation returning to the Fed's 2 
percent target.
    Fiscal priorities change with every new administration or 
Congress. That's as it should be in a representative democracy. 
But to achieve those priorities there must be some constancy in 
fiscal behavior. If bond market weakness continues, the federal 
government may find it increasingly costly to borrow--to 
finance its priorities.
    The only fiscal constancy we have in the United States 
comes from a set of norms that have evolved informally over the 
country's history, and owe much to Alexander Hamilton. The 
Hamilton norm springs from his first report to Congress in 
1790. He argued that proper provision for the public debt 
arises ``when it is well funded, and has acquired an adequate 
and stable value.''
    By following this norm, the United States has earned a 
reputation for repaying its debt. Is that reputation now in 
jeopardy? If century's old norms can be wantonly tossed aside, 
then they're powerless to prevent fiscal policy from becoming a 
source of instability in the economy.
    Perhaps the time has come to institutionalize the norms 
through rules and procedures that have bite. Thank you very 
much.
    Chairman Whitehouse. Thank you very much. Let me start if I 
may, with Mr. Doe. You've suggested that the short horizon that 
bond rating agencies tend to look at, plus the surge of FEMA 
funding that comes into a community after a disaster creates a 
sort of an artificial, if you will, zone that doesn't 
contemplate the full risk.
    And Dr. Hartshorn suggested after that FEMA funding passes, 
there's a secondary period where municipal revenues and 
spending are affected by the disaster, but the federal support 
has been pulled, and that's a more fiscally challenging period 
for the municipalities, if I properly understood your 
testimony.
    Mr. Doe. Well, thanks for the question. The--first of all, 
it is one of the challenges that the rating agencies are of 
course critically important to the financial marketplace. 
Unfortunately, the outlook that they have with their rating is 
maybe 2 to 3 years, maybe 5 in some instances. It doesn't mean 
they're not considering long-term impacts, but the changes in 
that all important letter, right, that conveys the risk to an 
investor, is pretty stable for a short period of time. So the 
real challenge is----
    Chairman Whitehouse. That's a short period of time in which 
federal FEMA support is likely to be present, but not for long 
in the municipal.
    Mr. Doe [continuing]. And what the reality has been 
regarding FEMA is in place such as when a hurricane hits, when 
Katrina hit New Orleans. What happens is that the initial 
response by the municipal market is prices of those securities 
in the affected area are declining, and then afterwards the 
expectation, or the rebuilding that comes from the federal 
government via FEMA actually increases those prices.
    Chairman Whitehouse. Ms. Kilgore, do you see that in your 
experience as well? You live on the ground with this setup all 
the time.
    Ms. Kilgore. Senator, certainly, the rating agencies right 
now do have a shorter, in my opinion, horizon of which they're 
looking at our climate related projects. But again, I would say 
they're on parity with any other type of basic infrastructure, 
recognizing a little bit that we are seeking to plan for the 
future, but we would like to see there be more focus on that.
    Chairman Whitehouse. More focus on the period once the 
immediate surge of FEMA funding has pulled away, and you now 
have the more persistent problems still present in the fiscal 
outlook for the community.
    Ms. Kilgore. It is certainly, Senator, in my opinion, 
management is what separates good governments from great 
governments, and being able to proactively plan for the future, 
and try and get ahead of anything that we can possibility get 
ahead of, that's the most important part.
    Chairman Whitehouse. Mr. Doe, you used the following 
phrase, if I wrote it down correctly. ``Climate instability 
presents an unprecedented, systemic risk.'' That phrase, 
``systemic risk,'' keeps popping up in these hearings. It has a 
relatively technical meaning among economists. Could you please 
describe what a systemic risk is?
    Mr. Doe. So a systemic risk would be not just an isolated 
specific stress for a specific issuance or state and local 
government, but across broadly, across the entire marketplace, 
so that all municipal bonds in this case would be impacted to 
some degree.
    Chairman Whitehouse. Understood. And Dr. Hartshorn, you 
have two companies that you founded that were bought by the 
Intercontinental Exchange. Can you explain a little bit first 
for the record of the Committee, what is the Intercontinental 
Exchange, and why were they interested in acquiring the 
expertise that those two entities provided?
    Dr. Hartshorn. Yeah. Thank you for the question. 
Intercontinental Exchange had a bunch of different businesses, 
I guess you would describe them. They are the owner of the New 
York Stock Exchange for one. They are one of leading data 
providers to the financial industry, in terms of pricing data, 
you know, data, the market, and they also operate a substantial 
mortgage data business.
    The reason why I believe, Intercontinental Exchange 
acquired us, they had seen the momentum in the market for our 
data. There was a screaming need especially from the buy side, 
from ratings agencies, and even bond insurers to get 
comprehensive data for the entire municipal bond system in 
terms of the physical climate risk to that system, which was 
substantially unavailable, and certainly across the entire 
realm of what I've described as municipal bonds data.
    Chairman Whitehouse. Thank you. Dr. Kahn, do you agree that 
the emissions from the combustion of fossil fuel amount to an 
economic negative externality that ought to be priced into the 
underlying product?
    Dr. Kahn. So in theory I do support a carbon tax, but I do 
worry that if only the United States adopts a carbon tax, that 
it has little effect because it's a global externality.
    Chairman Whitehouse. Yeah.
    Dr. Kahn. And it lowers the purchasing power of poor 
people. But as an economist, of course I support people 
internalizing the social costs of their actions.
    Chairman Whitehouse. Thank you. Let me just put into the 
Record, or the proceedings, Dr. Kahn's article called The Green 
Economy and Foreign Policy, an interview entitled Economist 
Matthew Kahn says human ingenuity is key to living with climate 
change, and an Openforum.com article that the Doctor wrote on 
July 24th, 2022, called are there still ``limits to growth''. 
And with that I'll turn it over to my distinguished colleague.
    [The information of Senator Whitehouse appears in the 
index.]
    Senator Grassley. Thanks to all the witnesses, and Dr. 
Kahn, I've got something that you could probably spend the full 
5 minutes on answering, but I'd like to have a short answer, so 
I can get a lot of questions in. We hear Democrats argue for a 
cascade of expensive and expansive federal climate proposals 
that will saddle us and local governments with debt and red 
tape.
    Democrats attempt to justify these proposals with 
apocalyptic hyperbole rooted in extreme Representative 
Concentration Pathways (RCP) 8.5 scenario. How can cities help 
themselves mitigate risk, and adapt to climate change without 
relying on more federal spending?
    Dr. Kahn. Senator, thank you. So I am optimistic that the 
RCP8.5 projection model overstates where global greenhouse gas 
emissions are going. I believe the work of Roger Pielke and 
others that the world's greenhouse gas emissions will grow, but 
at a less extreme rate, so we face less risk.
    To directly answer your question of what cities can do, 
similar to me having a checkup with the doctor, it's to become 
aware of emerging risks. Every city has its own topography, 
history, demographics. Every city needs to do the sort of self-
checkup of what risks it faces, and then with engineers to 
identify cost effective solutions to mitigate the challenges.
    And then using its own funds. Senator, I think we agree of 
the importance of fiscal discipline of using the city's own 
funds to consider strategies that are cost-effective to adapt 
to the challenge, and to speak to insurers, and bond buyers of 
what risks are they worried about. So this set of actions can 
help a city be proactive to mitigate the physical risks, and to 
be attractive to insurers and bond buyers to be able to 
participate in municipal finance markets.
    Senator Grassley. And also to you when states and Local 
governments face budget challenges, they can restrain spending, 
and hopefully be able to tap rainy day funds. It's not 
appropriate for us to micromanage the state for the sake of 
climate change, or anything else for that matter. My state of 
Iowa is required to have a balanced budget.
    We don't take fiscal responsibility for granted, unlike 
here in Washington, D.C. How does fiscal discipline help cities 
mitigate severe weather risk, and could federal intervention in 
the matter lead to bad outcomes?
    Dr. Kahn. Thank you, Senator. Professor Leeper spoke about 
reputation in his remarks. If a city has a reputation for 
fiscal responsibility, firms and successful people will move 
with confidence to that city expecting good services and low 
taxes going forward. A city with a robust tax base can weather 
the storm.
    New York City after Sandy, a city that has a resilient, 
industrial base, an economic base, has the resources to protect 
itself when surprising contingencies emerge.
    Senator Grassley. And for you Dr. Leeper in 2020 the share 
of federal aid to state and local governments reached an all-
time high, as a share of GDP, well over 4 percent. And of 
course, as we don't have to mention too often, or can mention 
too often, we're broke here in Washington, D.C. Are there more 
immediate and bigger risks to the broader economy than climate 
change?
    Dr. Leeper. Well, I think that right now one of the most 
pressing questions really is getting the fiscal house in order. 
No matter what you want to spend your money on you need to have 
sound fiscal underpinnings. And I think those are increasingly 
under threat these days.
    We celebrate when Congress manages to avoid shutting down 
the government. I think we can set the bar a little higher than 
that.
    Senator Grassley. And also for you we've heard a proposal 
to create an expensive new federal climate bureaucracy, doling 
out billions in green handouts to large corporations. This 
agency would be environmental, social, and corporate governance 
(ESG) police telling local governments across the country what 
to do. I've been trying to find out how the U.S. Environmental 
Protection Agency (EPA) has spent the billions of dollars in 
green grant programs that the democrats have already passed.
    Guess what? The EPA and the grantees still haven't told us. 
Is spending hundreds of billions of dollars for the sake of 
climate change advisable when the federal debt is cascading out 
of control?
    Dr. Leeper. Well, here I go back to what I said in my 
testimony that we are thinking about a sustained increase in 
spending levels. You cannot finance that through borrowing, 
it's just infeasible to do that forever. And so, just as when I 
planned to put my children through college, I pre-financed that 
spending. So to, the government needs to be thinking about how 
do you finance the spending that is being planned for climate 
change, because that's going to be a sustained increase in 
spending, and it can't be done through borrowing.
    Senator Grassley. Thank you both. Thank you.
    Chairman Whitehouse. Thank you, Senator Grassley. Senator 
Kaine.

                   STATEMENT OF SENATOR KAINE

    Senator Kaine. Thank you. Mr. Chairman, thanks to the 
witnesses for this first Budget Committee Hearing of 2024.
    I spent a lot of time in the bond market as a former mayor 
and former governor. In fact, the first lesson that I learned 
as a public servant was a lesson from the bond market. In the 
time between my first election in Richmond City Council, and 
swearing in on July 1 of 1994.
    We had a bad calendar of budget and elections. The 
elections run May 1. The City Council would finish the budget 
on June 1, and the new Council would be sworn in on July 1. I 
came in in a clean sweep crowd. We pushed about 6 of the 9 City 
Council members out, and so the Council voting on the budget 
were all lame ducks, and they were all mad.
    And they just decided to kind of go wild. And they did a 
bunch of things, especially with the city's reserve fund that 
caused the bonding agencies to downgrade Richmond's bond rating 
right before we swore into office on July 1 of 1994. We were 
naive. We thought well, all we have to do is retract the 
action. The bond agency acted in the middle of June. We came 
in, we retracted the foolish budgetary moves made by our 
predecessors.
    We went to New York, and we said guess what guys, there's a 
new group in town. We've cleaned it all up. And the lesson that 
I learned from the bonding agencies is yeah, we get it. We're 
glad you did that, but when you lose our confidence, it takes 
you a while to win it back. And it took us 6 years of really 
persistent effort to get the bond rating upgrade back to where 
we were.
    I did that when I was Mayor, and then as Governor, I had 
the good fortunate to be Governor of Virginia, where we had 
been Triple A bond rated forever, and were able to maintain 
that, even during the recession of 2008-2009. I want to get at 
an underlying issue. For most cities, for most counties, the 
primary revenue source is property tax.
    There's other taxes, visitor, lodging, sales tax. We have a 
particular challenge in Virginia with climate that I just want 
to talk about, and I think I'm going to direct this question of 
Ms. Kilgore, my City Auditor. The Hampton Roads area of 
Virginia is Norfolk, Virginia Beach, Chesapeake, Suffolk, a 
number of communities that are very vulnerable to sea level 
rise.
    The Hampton Roads Planning District has a low estimate of 
sea level rise indicating that approximately 59,000 residential 
homes in Hampton Roads will be permanently or regularly 
inundated by the end of the century, that's the low estimate. 
And the high estimate is 175,000 homes. Freddie Mac has 
estimated that the total losses to coastal real estate are 
``likely to be greater in total than those experienced during 
the housing crisis and Great Recession.''
    So, Ms. Kilgore, my understanding, my recollection from 
Mayor and Governor is our ability to get bonds to fund projects 
in Richmond were based on our ability to pay off the bonds, or 
based on our revenue base. That revenue base was primarily real 
estate property tax collection. Can you imagine a scenario 
where a metropolitan area of 1.6 million people would lose 
59,000 to 175,000 homes?
    Losing the real estate property tax attendant upon those 
dramatic numbers. How would that affect that region's ability 
to go into the bond market and get bonds to do projects 
necessary for quality of life in that metropolitan area?
    Ms. Kilgore. Thank you, Senator, for the question. Anytime 
with a major government I look at it as a very complicated 
recipe. And one day you have a little bit of eggs, you have a 
little bit of flour, and in each of those categories for our 
world it is revenue streams. And so, when things are a little 
bit tight you have to have an offset in another area. And a lot 
of the communication that I have with peers around the country, 
in large governments, all the way down to places where I grew 
up, is the fact that revenue base often dictates what folks can 
do.
    And so, for example, if you do have a tight, or even worse, 
downward trending revenue stream, revenue base, your capital 
plan is going to be very constrained. And so projects that are 
planning for several years out are going to fall victim to 
immediate, every single day needs, roads being repaved, things 
like that, which is why for me, it's so important that we have 
a menu of options, so that federal programs can come into play 
effectively to help get that last mile funding to keep things 
on track.
    Infrastructure, as you know, is an incredible multiplier, 
and will help regrow that community over time.
    Senator Kaine. And just using the example that I used about 
Hampton Roads, if even the low estimate occurs, and you see 
this shrinking of the residential real estate base and 
residential real estate values, the community will become more 
constrained on infrastructure investments at the very time 
where they might need more infrastructure investments to 
promote resilience against sea level rise.
    And last question really quickly, there may be outliers to 
this. I can think of a couple, but am I basically correct that 
for most cities and counties in the United States the real 
estate property collection is the most sizable revenue source?
    Ms. Kilgore. My suspicion is property taxes for most. For 
Ohio is the income tax, but yeah. There's certainly a number of 
ingredients across the country that support revenue streams.
    Senator Kaine. Great. Thank you. Thank you, Mr. Chair.
    Chairman Whitehouse. So quick, logistical interruption. I 
have been called to a meeting with Chairman Wyden, and I'm 
going to go attend that for a while. Senator Padilla has been 
kind enough to agree to take over chairing this hearing until I 
can return. Senator Johnson will be next to be recognized.
    Senator Johnson. Thank you, Mr. Chairman.
    Chairman Whitehouse. And I wish you all well until my 
return.

                  STATEMENT OF SENATOR JOHNSON

    Senator Johnson. So, let me state at the outset I'm not a 
climate change denier. I'm just not a climate change alarmist. 
What I am is I'm a debt and deficit, U.S. federal government 
debt and deficit alarmist, and so I surely align myself with 
Dr. Leeper. Dr. Leeper, you're talking about the fact that the 
bond market has been weak for U.S. treasuries.
    As the Federal Reserve has been going in to, you know, 
going into the bond market floating debt, what is the cost to 
that debt? What is the interest rate they've been paying? On 
recent debt? I mean is there again, we have a different 
material levels through the government. Last year on public 
debt, the cost of that goes about 2.5 percent, correct?
    Dr. Leeper. Yeah, it's gone up.
    Senator Johnson. Did you know what the cost of our debt was 
in the last three decades of the last century? 70s, 80s and 
90s?
    Dr. Leeper. It was substantially lower. Is that what you're 
saying?
    Senator Johnson. I think it was substantially higher wasn't 
it?
    Dr. Leeper. I'm not sure what you mean by the cost?
    Senator Johnson. So the interest cost, the interest rate. 
Again, I want you to describe what a debt crisis is going to 
look like. As we become less and less credit worthy, as 
creditors look at the United States and say they may not pay 
this money back. I'm still loaning the money, but I'm going to 
ask for a higher interest rate.
    And I think that's--I don't think we've factored that into 
this discussion.
    Dr. Leeper. I think that's correct. And a debt crisis in 
the United States would first manifest as very high inflation. 
And the reason for that is because these bonds are denominated 
in dollars. And they're just a promise to repay in dollars. And 
if I think that when I get repaid in dollars, the dollars are 
going to buy fewer goods, then I want to get rid of those bonds 
today.
    And the way I do that is I go out and buy stuff, it raises 
inflation. And so that would be the first instance, I think.
    Senator Johnson. So again, we don't focus enough on the 
numbers here. Again, here we're talking about climate, we can 
do something about the bond market, which I think is not 
realistic. I agree with, you know, Dr. Kahn. Last fiscal year 
2022 our interest expense was $476 billion. Last year it's $659 
billion. A $183 billion increase, 30 percent increase.
    According to CBO, in 10 years that expense will be $1.44 
trillion. But again, that's an overall average interest rate of 
3.1 percent compared to 2.5 percent for last year. I'm not so 
sure 3.1 percent is a realistic rate. I think that will be way 
too low.
    In 10 years, according to CBO, I think they're low balling. 
This is rosy scenario. We're going to go from 600--we went from 
476 to 659. In 10 years according to CBO, $1.44 trillion and 
that's a low ball estimate, assuming a 3.1 percent interest 
rate. What could it be? What's realistic?
    And again, I'm looking at--I don't have the exact figures, 
but I saw one analysis that the last three decades of the last 
century as something with a 5.3 percent average interest 
expense on federal debt.
    Dr. Kahn. Yeah. And I think that the interest rate will 
follow the inflation rate, so if we start to see--this is why 
I'm worried that you cannot rely on the federal reserve alone 
to get inflation under control. It's as much a fiscal 
phenomenon as it is a monetary phenomenon.
    Senator Johnson. So again, if we were to go back, let's say 
the interest rate rolls to 5 percent, we would be looking at an 
interest expense of well over $2 trillion.
    Dr. Leeper. Exactly.
    Senator Johnson. That's what this Budget Committee ought to 
be focusing on. That's what we ought to be alarmed about, not 
about how something that you know I've entered into the record 
that there is no climate emergency. This 1,600 scientists, led 
by two Nobel Prize winning physicists declared, there's no 
climate emergency.
    We are spending, and by the way what will fuel that debt 
crisis is when we spend, according to Goldman Sachs, $1.2 
trillion on these green energy boondoggles that were passed in 
the Inflation Reduction Act, that will fuel that deficit. That 
will increase interest rates. Isn't that a concern?
    Dr. Leeper. I think that's a very serious concern.
    Senator Johnson. That's all I have. Thanks.
    Senator Padilla. Thank you. Senator Merkley is next.

                  STATEMENT OF SENATOR MERKLEY

    Senator Merkley. Awe thank you, Mr. Chairman, and Dr. 
Hartshorn, we had in 2020 Labor Day fires that burned six of 
our towns to the ground, and did serious damage to six others. 
When other similarly situated towns look to issue a municipal 
bond, are they going to be having to essentially pay a lot 
higher interest rate as a result?
    Dr. Hartshorn. There is that possibility, depending on how 
the market perceives their risk relative to how the risk was 
for the given issuer and the given set of cities that you're 
actually talking about.
    Senator Merkley. Yeah.
    Dr. Hartshorn. It's one of the reasons why that dataset 
that we put together was valuable. It provided a levelized 
benchmark for to compare risks across all issuers.
    Senator Merkley. Well, it's just one example. If we look to 
California where there is much broader swaths of fire, or New 
Mexico, I cannot imagine the market does not look pretty 
carefully at the towns situated in those increased fire risk 
zones. We can pretend that nothing's changing, but the facts 
are otherwise.
    I want to turn, Ms. Kilgore, to the fact that you had 
mentioned the idea of broadening the definition of municipal 
bond tax exemption for projects that reach certain climate 
metrics. Can you give a little example of what that might look 
like?
    Ms. Kilgore. Certainly. Thank you for the question, 
Senator. My recommendation is when you're looking at 
governments across the country, I ask myself two questions. Are 
they motivated? And are they able? And, I have had a number of 
conversations with local governments who are very motivated to 
try and move projects forward, but they lack either technical 
capacity, you know, internal human capacity, or perhaps the 
opportunity because of constrained revenue sources, to be able 
to get projects funded in their respective capital plans.
    So looking creatively to try and help them with the tools 
necessary to get those projects moving forward, and opening up 
some awareness, opportunities, incentivization, investor 
interest, et cetera, sir.
    Senator Merkley. Okay. But let me be a little more 
specific. What type of metric are we talking about? For 
example, if a city says we want to take all of our municipal 
buildings and convert them to heat pumps, and can buy renewable 
energy to power those heat pumps, having a significant decrease 
in carbon dioxide, would that be something like an example of a 
metric, like reductions in carbon dioxide that would be used to 
create such a category?
    Ms. Kilgore. Absolutely. And I think there is a good, 
perhaps bedrock of prior examples with water and sewer efforts 
across the country to mimic.
    Senator Merkley. Okay. Mr. Doe, so in the City of 
Stillwater, Oklahoma, borrowed money to do water projects. And 
their low-cost provider of the lending was Bank of America. But 
it turned down Bank of America because Bank of America has an 
ESG policy. And the result is they are paying $1.2 million more 
to finance the loan with the next highest bidder.
    What does such an ESG policy achieve for the town of 
Stillwater, other than paying more, delivering less?
    Mr. Doe. Well, the ESG, thanks for the question, but the 
ESG policies and the whole issues around that certainly has 
become politically weaponized, and what is has is kind of 
obfuscated the responses of the kind of responsible responses 
to funding projects to mitigate climate risk, or adaptation 
risk.
    So, to your point, is that yes, I mean that penalty that we 
are seeing in Oklahoma, we are seeing in Texas as well, is it 
that has been unfortunate. When the market though has responded 
in many cases, and again I can't remember the specifics about 
what the market conditions at the Stillwater issue, but that 
those bankers that have been--they eliminated from being able 
to underwrite a deal, have been replaced by other firms, and in 
some cases there has not been any negative impact at all.
    Senator Merkley. Yeah. Sometimes there is though, as there 
was in that case, and if I was a citizen of that town I'd be 
kind of frustrated that we're paying more for less, especially 
because Bank of America is financing fossil projects. It is not 
like they are not willing to be in that space.
    I want to turn--well no, I'm down to six seconds, so I will 
turn it back over to the Chair.
    Senator Padilla. Thank you Senator Merkley. Senator Kennedy 
is up next.

                  STATEMENT OF SENATOR KENNEDY

    Senator Kennedy. Thank you, Mr. Chairman. Mr. Doe, as I 
understand your testimony, you are saying that at some point 
climate change is going to cause municipal bonds to default. Is 
that right?
    Mr. Doe. No. I would say that they will be under pressure 
just because of there being increased budgetary concerns.
    Senator Kennedy. Well, can they withstand that pressure?
    Mr. Doe. I think so.
    Senator Kennedy. Then what is the problem?
    Mr. Doe. The problem is that there might be a higher 
interest rate if there are issues that are not addressed by 
state and local governments. That if because of let us just say 
in anticipation of extreme weather events, that----
    Senator Kennedy. So, you are worried that the interest 
rates will go up?
    Mr. Doe. Yes.
    Senator Kennedy. Okay. I looked on your website. You say, 
and I quote. I am quoting now, ``contribution to the municipal 
industry has been extensive as an analyst, strategist, and 
visionary of the industry's future.'' So, I want to tap your 
visionary expertise. At what point do you think climate change 
is going to cause interest rates on municipal bonds to rise to 
the point that they will--the interest rates will be 
prohibitive? When will all this happen?
    Mr. Doe. Well, I'll dust my crystal ball off, if I perhaps 
I think in 10 to 20 years.
    Senator Kennedy. 10 to 20 years. Okay. What do you think we 
ought to do about it?
    Mr. Doe. I think we ought to be able to identify where 
infrastructure is most vulnerable to weather events, and that 
infrastructure is then--appropriate dollars are used to 
modernize infrastructure. For example, in the town of 
Marshfield----
    Senator Kennedy. I want to cut you off because I don't have 
too much time.
    Mr. Doe. Sure.
    Senator Kennedy. Do you think we ought to spend money?
    Mr. Doe. Wisely and appropriately.
    Senator Kennedy. Okay. Sure. Well, nobody around here ever 
stands up and says I have got a good idea, and I need to spend 
money unwisely and inappropriately.
    Mr. Doe. Correct.
    Senator Kennedy. You understand that?
    Mr. Doe. I do.
    Senator Kennedy. Okay. Do you support the world becoming 
carbon neutral by 2050? Would that solve? Do you support that?
    Mr. Doe. I don't think that's a reasonable expectation.
    Senator Kennedy. Yeah. But if it were, do you support it?
    Mr. Doe. It doesn't seem like it's a bad thing.
    Senator Kennedy. Okay. Do you support the United States 
becoming carbon neutral by 2050?
    Mr. Doe. This may not be possible.
    Senator Kennedy. But do you support it?
    Mr. Doe. If it were the right mix of power and energy in 
order to provide electricity that is needed for essential 
needs.
    Senator Kennedy. Well, you do understand that that is the 
goal of the most ardent proponents of climate change, do you 
not?
    Mr. Doe. I do understand that.
    Senator Kennedy. Okay. How much will that cost?
    Mr. Doe. I couldn't give a figure to that because it is 
outside my area of expertise.
    Senator Kennedy. Do you think we ought to just start 
spending money without an understanding of how much it is going 
to cost?
    Mr. Doe. I don't think that's ever wise.
    Senator Kennedy. Okay. Well, don't you think we ought to 
look into how much it is going to cost?
    Mr. Doe. Again, that's around that area, that's not an area 
of expertise. I am really focused on addressing the updating of 
infrastructure for our state and local governments.
    Senator Kennedy. You don't seem to have very many 
solutions, except what I take away from your testimony is that 
climate change is going to cause interest rates to rise on 
municipal bonds, so at some point the cost will become 
prohibitive, and we need to spend money on infrastructure to 
stop it. Where do you think this money will--should come from?
    Mr. Doe. I think state and local governments have the 
capacity to borrow because the rates are significantly low, and 
there is an opportunity now to do so and be proactive.
    Senator Kennedy. So, you think state and local governments 
ought to borrow the money?
    Mr. Doe. I do. I think they have the capacity to do so.
    Senator Kennedy. Just out of curiosity, what kind of car do 
you drive?
    Mr. Doe. I drive a Jeep Wagoneer.
    Senator Kennedy. Is it gas or electric?
    Mr. Doe. It's gas.
    Senator Kennedy. Okay. Do you have a gas stove?
    Mr. Doe. I do not.
    Senator Kennedy. Okay. Do you have a heat pump?
    Mr. Doe. I do not.
    Senator Kennedy. You don't?
    Mr. Doe. I do not.
    Senator Kennedy. Oh. Okay. How big a house do you live in?
    Mr. Doe. I live in a condominium 853 square feet.
    Senator Kennedy. Okay. I'm over. Thank you, Mr. Chairman.

                  STATEMENT OF SENATOR PADILLA

    Senator Padilla. Thank you, Senator Kennedy. It is actually 
my opportunity to ask questions, and I will be followed by 
Senator Braun. Good morning, and thank you to all the witnesses 
for your participation today. I am proud to represent 
California. I know you are familiar with the most populous and 
diverse state in the nation, and it has been a leader on 
climate policy across the board.
    And in recent years, the urgency has been inspired by 2018, 
when the campfire devastated the town of Paradise, California, 
burning 95 percent of its structures, and claiming 85 lives. I 
know Senator Whitehouse touched on some of this dynamic earlier 
in the hearing, but despite federal assistance in the aftermath 
of the fire, the town has struggled to rebuild, with only \1/3\ 
of the residents that lived there prior to the disaster 
returning.
    This has decimated the local economy, as you can imagine. 
If you go to the tax base, and a dynamic similar to what 
Senator Kaine was talking about in his questions, it has 
resulted in the inability of the Town of Paradise to meet its 
financial obligations on previously issued municipal bonds.
    Right? The revenue is just not there at the moment. This 
type of systemic risk--financial risk, extends beyond 
wildfires, and has the potential to affect drought-stricken 
towns, heat-prone communities, or high-flood-risk areas across 
the country, all which have the potential to disproportionately 
impact both agricultural regions, as well as historically 
underserved communities.
    My question is for Mr. Doe. How can the federal government 
improve support to communities like Paradise to ensure that 
bond obligations are met, while also ensuring they have the 
ability to issue future bonds in the process of rebuilding and 
economic recovery?
    Mr. Doe. I think there are two ways. One is regarding the 
federal government. I think it is making it a priority for 
issuers of debt that are exposed to climate risk to disclose 
them appropriately. I think the second thing is that that way 
you are signaling to investors, and to the broader community of 
where there is area at risk, and that there are plans that are 
being made by those state and local governments to address 
those risks so that they are--when the federal government comes 
in after a disaster, the federal government is aware that those 
state and local governments have taken proactive action.
    The second thing is that I think the federal government's 
big role here is to assure that issuers, the state and local 
governments, that the tax exemption is secure, and that that 
will continue onward and be an important part of the financing 
effort, so that state and local governments can plan with 
confidence and assurance that there will be low interest rates 
going forward.
    Senator Padilla. Thank you. I know earlier in the hearing 
there was a suggestion that part of addressing the longer term 
challenges ensuring that local jurisdictions are doing the 
appropriate planning, or thinking ahead if you will. Now, 
municipal bonds can play an important role in funding capital 
projects that mitigate climate related risks.
    However, the up front costs of sustainable development 
projects are often substantial. This can leave ``grain 
projects'' out of reach for rural or underserved communities, 
limiting their ability to reduce their vulnerability to climate 
hazards, and it relies on federal dollars.
    A question for Ms. Kilgore. Do you agree that the average 
cost differential for climate adaptation projects can at times 
be a significant burden for some communities? And how does the 
federal government help bridge the gap for underserved and 
vulnerable communities through the Infrastructure Bill or the 
Inflation Reduction Act?
    Ms. Kilgore. Thank you, Senator. I think that sometimes we 
have to separate out infrastructure that is climate oriented 
from just the simple word ``infrastructure.'' For us, 
oftentimes our infrastructure today is inclusive of the 
technologies, or the materials necessary to plan for the 
future.
    For us, we do have a technical bench of experts to help us, 
and so when I'm talking to local communities, smaller 
communities, a lot of times it's that basic knowledge, 
awareness, education, in the tools to go about successfully 
employing those different loans.
    That is the piece that in my head is the sweet spot where 
we, as a federal--asking for your support to lean on there.
    Senator Padilla. Is there any additional steps you would 
recommend that Congress take to incentivize some of the 
infrastructure spot projects that are specifically geared 
towards changing weather patterns, or changing climate, 
frankly?
    Ms. Kilgore. I think you said earlier the most beautiful 
thing about our democracy is state sovereignty; one size fits 
all rarely works. And so, my sincere request would be to do a 
really good analysis, and have a data lake if you will, 
understand the governments across our country, where they are 
accessing funding. What their risks are at this time, and 
because until then I don't have an effective answer. I will 
just say from X percent you are going to be able to grow these 
types of projects because we don't have right now a holistic 
viewpoint as to where everyone is in the Nation.
    Senator Padilla. Thank you. Senator Braun.

                   STATEMENT OF SENATOR BRAUN

    Senator Braun. Thank you. You know it has been an 
interesting discussion. We have heard systemic. We have heard 
I'd like to put an existential along with it, what the thread 
is currently. I want to give you a few givens. I come from the 
world of finance. This place, not hardly anyone has had finance 
101, or understands the macroeconomics.
    And I think the proof is in the pudding. Dr. Leeper has 
talked about a little bit of that. So, in 2000, that's when 
Bush took office, we were $5 trillion in debt. So, cumulative 
up to that point, $5 trillion. Put two R's on the credit card, 
we're at $10 trillion. Obama comes in.
    So from there to 2016, we added $6 trillion more. We're at 
$16 trillion in 2016. You had the Coronavirus Aid, Relief, and 
Economic Security Act (CARES) and COVID and structural trillion 
dollar deficits annually, so we are about $26 to $27 at the end 
of the Trump years, but never now have we been at the level of 
where our deficits are close to 5 to 6 percent of our GDP, 
outside of a reason that would have driven it there.
    World War II, savers, investors, we paid it off. Now we're 
consumers and spenders by nature, and this is the worst place 
of all that. Have not done a budget in over 20 years, okay. And 
we have tried to do it in fix and spurts where you had some 
discipline in there. We unravel it almost as soon as we do it.
    Biden has put us out there with a budget. The only place it 
is publicly out there, $42 trillion in debt in 5 years, $52 
trillion, in 10 years. Now, I want to go to Mr. Doe. What is 
more of an existential threat, 10 to 20 years where climate 
might drive up interest rates, which you just told Senator 
Kennedy, or the behavior of this institution that I think you 
can extrapolate very easily what's going to be the driver of 
interest rates.
    What do you fear more? Which is more inexorable? Which is 
more kind of hypothetical?
    Mr. Doe. There is no question you have touched on a key 
issue in terms of the federal deficit and the borrowing that 
has placed a great deal of risk on the entire U.S. economy, if 
not the globe. I think one thing I will say about the municipal 
bond market is that it has been interesting over the last 20 
years the average issuance has remained steady at $400 billion.
    I think it is a real credit to state and local governments 
that even though they had the borrowing capability, that they 
have shown some restraint, but to come back to your point is I 
don't disagree with you.
    Senator Braun. So, you feel more comfortable really, with 
state and localities to probably navigate through whatever we 
do invest in infrastructure, as opposed to this place that will 
be borrowed from our kids and grandkids.
    Mr. Doe. I do.
    Senator Braun. That's good to know. You know, the other 
thing when you look at the reality of this place, you go back 
over 50 years, we have never been able to tease out more than 
about 17.5 percent in federal revenues of our GDP. I said 
earlier that is now up to a deficit of 5 to 6 percent since we 
have had Bidenomics.
    I want to ask Dr. Leeper this question. When it comes to 
the arithmetic we know that the climate issue is somewhat a 
bird in the bush in terms of what the financial cost is going 
to be. Mr. Doe has just said that. How quantifiable is it in 
terms of this current trajectory of borrowing and spending the 
modern monetary theory?
    Where does that take our country, future generations, at 
this current pace?
    Dr. Leeper. Thank you very much for the question. One thing 
I would like to say is that these trajectories that say the 
Congressional Budget Office regularly produces with 
exponentially growing debt as a share of GDP, are things that 
can't happen.
    And the reason they can't happen is because people are not 
going to be willing to absorb all of that debt. The price of 
that debt is going to get driven down, just as has been 
discussed about munis. Interest rates are going to take off. 
Inflation is going to take off.
    Senator Braun. So, we will be saddled with almost an 
unbearable interest cost along the way driving by the behavior 
and actions of the federal government in a nutshell?
    Dr. Leeper. Exactly. Yes.
    Senator Braun. And I think that is why it begs the question 
in this Committee, the Budget Committee. Shouldn't we be 
attending to that? And I can tell you in the 5 years I have 
been here, Chairman Enzi, who was a Certified Public Accountant 
(CPA) from Wyoming, attempted to do some of this discussion.
    It was too uncomfortable. He didn't do it.
    And I have just cited I think the last balanced budget was 
with the Clinton administration and Newt Gingrich, back in the 
late 90s. The easiest thing, the chip shot for this place, 
ought to be to just do a budget, quit borrowing from our kids 
and grandkids, and all of this gets mitigated, whether you are 
dealing with climate, or any other issue that might confront 
the federal government.
    And it sounds like everyone is more comfortable with 
actually more action being done by the states where there is 
responsibility, where there is budgeting, than there would be 
with this outfit. Everybody there, would you raise your hand if 
you think that makes sense? 3 out of 5 is not bad. Thank you.
    Senator Padilla. Thank you Senator Braun. Seeing no 
additional Senators here asking questions, we'll begin to bring 
this hearing to a close. I want to certainly thank the 
witnesses again for appearing before the Committee today. Their 
full, written statements will be included for the record.
    And as information for all Senators, questions for the 
record will be due by 12:00 noon tomorrow, with the signed, 
hard copies delivered to the Committee Clerk in Dirksen in 624. 
Copies delivered via email will also be accepted. We ask that 
the witnesses respectfully respond to our questions within 7 
days of receiving them. And with no further business before the 
Committee today, this hearing is adjourned.
    [Whereupon, at 11:31 a.m., Wednesday, January 10, 2024 the 
hearing was adjourned.]

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