[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
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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
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
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
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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\
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\6\ Prepared statement of Dr. Kahn appears in the appendix on page
50.
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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\
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\7\ Prepared statement of Dr. Leeper appears in the appendix on
page 59.
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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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