Examining the Role of Municipal Bond Markets in Advancing--and Undermining--Economic, Racial,. and Social Justice, House hearing transcript (April 28, 2021), GovInfo CHRG-117hhrg44667, PDF
Summary
The House Financial Services Subcommittee on Oversight and Investigations examined how municipal bond markets advance or undermine economic, racial and social justice at this April 28, 2021 virtual hearing. Chairman Al Green cited research by one of the witnesses finding that Historically Black Colleges and Universities pay an average of 20 percent more to issue bonds than similarly situated non-HBCUs. In questioning, Ranking Member Andy Barr told Jim Nadler of Kroll Bond Rating Agency that there wasn’t as much uptake of the Federal Reserve’s Municipal Liquidity Facility as expected, and that its support may have been “more psychological than actually through utilization.” The other witnesses were Christopher Parsons of the University of Southern California, William Fisher, Chelsea McDaniel and Gary Hall.
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EXAMINING THE ROLE OF MUNICIPAL BOND
MARKETS IN ADVANCING—AND UNDERMINING—
ECONOMIC, RACIAL, AND SOCIAL JUSTICE
VIRTUAL HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
APRIL 28, 2021
Printed for the use of the Committee on Financial Services
Serial No. 117–19
(
U.S. GOVERNMENT PUBLISHING OFFICE
44–667 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK MCHENRY, North Carolina,
NYDIA M. VELÁZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESÚS ‘‘CHUY’’ GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
CHARLA OUERTATANI, Staff Director
(II)
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SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
AL GREEN, Texas Chairman
EMANUEL CLEAVER, Missouri ANDY BARR, Kentucky, Ranking Member
ALMA ADAMS, North Carolina BARRY LOUDERMILK, Georgia
RASHIDA TLAIB, Michigan ALEXANDER X. MOONEY, West Virginia
JESÚS ‘‘CHUY’’ GARCIA, Illinois DAVID KUSTOFF, Tennessee
SYLVIA GARCIA, Texas WILLIAM TIMMONS, South Carolina, Vice
NIKEMA WILLIAMS, Georgia Ranking Member
(III)
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CONTENTS
Page
Hearing held on:
April 28, 2021 ................................................................................................... 1
Appendix:
April 28, 2021 ................................................................................................... 27
WITNESSES
WEDNESDAY, APRIL 28, 2021
Fisher, William, Chief Executive Officer, Rice Capital Access Program ............ 7
Hall, Gary, Partner and Head of Investment Banking [Infrastructure and
Public Finance], Siebert Williams Shank & Co., LLC, on behalf of the
Securities Industry and Financial Markets Association (SIFMA) ................... 9
McDaniel, Chelsea, Senior Fellow, Activest .......................................................... 8
Nadler, Jim, President and Chief Executive Officer, Kroll Bond Rating Agency
(KBRA) .................................................................................................................. 11
Parsons, Christopher, Professor of Finance, University of Southern California 5
APPENDIX
Prepared statements:
Fisher, William ................................................................................................. 28
Hall, Gary .......................................................................................................... 29
McDaniel, Chelsea ............................................................................................ 35
Nadler, Jim ....................................................................................................... 38
Parsons, Christopher ........................................................................................ 42
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Green, Hon. Al:
Written statement of the Action Center on Race and the Economy
(ACRE) ........................................................................................................... 44
Written statement of the Bond Dealers of America (BDA) ........................... 47
Written responses to questions for the record submitted to William Fish-
er .................................................................................................................... 53
Written responses to questions for the record submitted to Gary Hall ....... 55
Written responses to questions for the record submitted to Christopher
Parsons .......................................................................................................... 56
Parsons, Christopher:
Journal of Financial Economics article entitled, ‘‘What’s in a (school)
name? Racial discrimination in higher education bond markets’’ ............ 57
(V)
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EXAMINING THE ROLE OF MUNICIPAL
BOND MARKETS IN ADVANCING—AND
UNDERMINING—ECONOMIC, RACIAL,
AND SOCIAL JUSTICE
Wednesday, April 28, 2021
U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS,
COMMITTEE ON FINANCIAL SERVICES,
Washington, DC
The subcommittee met, pursuant to notice, at 12 p.m., via
Webex, Hon. Al Green [chairman of the subcommittee] presiding.
Members present: Representatives Green, Cleaver, Adams, Tlaib,
Garcia of Illinois, Garcia of Texas; Barr, Mooney, and Kustoff.
Also present: Representative San Nicolas.
Chairman GREEN. The Subcommittee on Oversight and Inves-
tigations will come to order. Without objection, the Chair is author-
ized to declare a recess of the subcommittee at any time. Also,
without objection, members of the full Financial Services Com-
mittee who are not members of this subcommittee are authorized
to participate in today’s hearing.
As a reminder, I ask all Members to keep themselves muted
when they are not being recognized by the Chair, to minimize dis-
turbances while Members are asking questions of our witnesses.
The staff has been instructed not to mute Members, except where
a Member is not being recognized by the Chair and there is inad-
vertent background noise.
Members are reminded that all House rules relating to order and
decorum apply to this remote hearing. Members are also reminded
that they may participate in only one remote hearing at a time. If
you are participating today, please keep your camera on, and if you
choose to attend a different remote proceeding, please turn your
camera off. If Members wish to be recognized during the hearing,
please identify yourself by name to facilitate recognition by the
Chair.
The title of today’s hearing is, ‘‘Examining the Role of Municipal
Bond Markets in Advancing—and Undermining—Economic, Racial,
and Social Justice.’’
I now recognize myself for 4 minutes to give an opening state-
ment.
Today’s hearing will assess the municipal bond markets as a
driver of systemic discrimination on one hand, and of restorative
justice on the other hand.
(1)
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First, it will examine material disparities and costs of capital
raising for Minority Serving Institutions, more specifically, Histori-
cally Black Colleges and Universities (HBCUs).
Second, this hearing will explore the fact that municipal bonds
can drive positive change and promote fiscal justice, a truly excit-
ing area of finance today thanks to the efforts of some issuers and
investors and some of those represented among the witnesses.
Research authored by one of today’s witnesses demonstrates con-
clusively that HBCUs use higher underwriting fees to issue tax-ex-
empt bonds compared to similarly situated institutions that are not
HBCUs, thereby materially increasing their costs of capital. Nota-
bly, this analysis held constant. The issue was credit quality and
default risk by comparing HBCUs and non-HBCUs having AAA
credit ratings.
As a result, timely payment of municipal bonds analyzed was vir-
tually assured, and therefore, any cost differential would not be the
result of differing risk exposures affecting investor behavior. Rath-
er, as we will hear from our panel, the disparities and fees were
attributable to racial animus among investor pools. This conclusion
is buttressed by the findings that cost disparities were magnified
in States where anti-Black racial resentment is most severe.
As the beneficiary of an HBCU education myself, these findings
are, at once, both deeply personal and profoundly troubling. Specifi-
cally, the data show that HBCUs pay an average of 20 percent
more to issue bonds than similarly situated non-HBCUs, with the
size of this differential varying by State.
To illustrate the magnitude of the disparity, consider that HBCU
bond issuers in Alabama, Louisiana, and Mississippi paid 30 basis
points more in fees than non-HBCU issuers in the same States. In
all other States, by contrast, HBCUs paid issuance costs that were
11 basis points more than non-HBCU issuers, which paid an aver-
age of 81 basis points.
In closing, I would like to thank my long-standing colleague, Rep-
resentative Adams from North Carolina, for her support of this
hearing, and quite frankly, without her, this hearing probably
would not be taking place.
At this time, I would like to recognize the ranking member of the
subcommittee, the gentleman from Kentucky, Mr. Barr, for 5 min-
utes for an opening statement.
Mr. BARR. Thank you, Mr. Chairman. I appreciate you holding
today’s hearing, and I thank all of our witnesses as well for appear-
ing today. The municipal bond market (muni market) provides a
reliable source of capital for municipalities to finance their long-
term growth and a stable avenue for investors to put their money
to work for the public good. It is made up of a diverse group of over
55,000 issuers, ranging from State and local governments to local
transportation authorities. Of the more than $3.7 trillion of munic-
ipal debt in the market, over 50 percent is held by individuals, with
the remaining split between banks, mutual funds, insurance com-
panies, and other investors. The muni market is a strong and reli-
able way for issuers to finance their operations.
During the pandemic, the muni market experienced significant
volatility and liquidity challenges. Widespread lockdowns, stay-at-
home orders, and government-mandated business closures weighed
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on the economic well-being of States and localities as taxes, tour-
ism, and other revenue sources declined. To respond to this chal-
lenge, Congress directed the Federal Reserve to establish the Mu-
nicipal Liquidity Facility (MLF), and shortly after the establish-
ment of this Facility, the market normalized. The muni taxable and
tax-exempt markets are now performing well after the initial shock
of the pandemic.
The quick stabilization of the muni market is evidence of the suc-
cess of the Municipal Liquidity Facility. Some of my colleagues
have said that the MLF should be evaluated on its take-up rate,
suggesting the fact that only two issuers utilize the Facility was
somehow indicative of its failure, but I believe the opposite. The
mere existence of the Facility served as a backstop that allowed the
private market to function properly in uncertain times.
I think we can all agree that our nation’s infrastructure needs
improvement. We must repair, improve, and expand existing infra-
structure such as roads and bridges, and invest in infrastructure
for future generations, such as rural broadband, to ensure an equi-
table path toward the future of work and education. The question
then becomes, how do we achieve our shared goals of strong, com-
prehensive, and resilient infrastructure?
Municipal bonds are a key funding source for State and local gov-
ernments to finance long-term infrastructure improvement plans.
As Congress and the Administration begin a dialogue on how best
to improve our roads, bridges, and connectivity, we should assess
all of the available options to pay for it. Significant tax increases
would reverse the economic prosperity and growth realized over the
last few years since the passage of the Tax Cuts and Jobs Act. It
would certainly reduce wages, and it would compromise American
economic competitiveness.
Instead, we should look for ways to incentivize and mobilize pri-
vate capital. The muni bond market provides a mutually beneficial
avenue to match investors seeking stable long-term returns with
issuers seeking to improve their roads, bridges, and schools.
I hope to use this hearing to investigate ways that Congress can
improve the municipal bond market both for issuers and investors.
There are bipartisan proposals such as reinstating advanced re-
funding for municipal bonds that could expand access to needed
capital for issuers and improve investors’ access to municipal
paper. I also look forward to learning more about the ratings proc-
ess for municipal bonds. Bond ratings are an important factor that
determines the interest costs of a security and informs investors’
appetite for risk.
Last Congress, I worked, on a bipartisan basis, with my col-
league from Pennsylvania, Ms. Dean, to ensure equitable access to
the Fed’s emergency facilities for issuers, to ensure that issuers
were not excluded from the Facility solely based on the SEC-regu-
lated rating agency they chose to work with. This effort was in-
tended to help small businesses find liquidity and provide options
for smaller municipalities.
I would also emphasize the importance for investors that credit
ratings be based solely on the creditworthiness of the issuer and
not compromised by non-material information. Credit ratings based
on subjective criteria derived from social or other political goals
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4
would pose challenges for issuers selling their bonds and may not
properly inform the market of the issuer’s ability to repay its debt.
This hearing will also review a study which showed that Histori-
cally Black Colleges and Universities (HBCUs) paid more to sell
their debt compared to their non-HBCU peers. Discrimination in
the municipal bond market is illegal and it should not occur. To the
extent that such discrimination exists, Congress, regulators, and
market participants should work to ensure that it does not persist.
I share my friend and colleague, Mr. Green’s, personal interest
in this. I didn’t graduate from an HBCU, but I do have the privi-
lege of representing Kentucky State University, and this is an im-
portant topic.
I look forward to hearing from our witnesses about the important
role the municipal bond market plays in our investment ecosystem.
And again, I thank the chairman, and I yield back.
Chairman GREEN. The gentleman yields back, and the Chair
thanks the gentleman for his recognition of this most important
issue.
At this time, the Chair recognizes for one minute the gentle-
woman from North Carolina, Representative Adams, who has been
an autonomous advocate for HBCUs throughout her career. Rep-
resentative Adams, you are now recognized for one minute.
Ms. ADAMS. Thank you, Mr. Chairman, for granting me a minute
of your time. It is a privilege to serve on the Oversight Sub-
committee under your leadership, and I am grateful to you for
holding this hearing. It is critical that we better understand the
role that the municipal bond market plays in advancing, or in some
cases, limiting economic, racial, and social justice. As a two-time
graduate of an HBCU, and a 40-year professor at an HBCU, I am
particularly concerned that Historically Black Colleges and Univer-
sities and other Minority Serving Institutions are getting a raw
deal when it comes to accessing equal and affordable financing
through the bond market.
A 2019 study published in the Journal of Financial Economics
found that HBCUs pay higher underwriting fees to issue tax-ex-
empt bonds compared with similar institutions that are not
HBCUs, thus raising the cost of capital for HBCUs. And this dis-
crepancy is unrelated to the issuer’s credit risk or quality. It is ap-
proximately 3 times greater in geographic areas of the United
States where racial discrimination is most severe.
I want to thank you for the opportunity to speak. I yield back,
and I look forward to hearing from our witnesses. Thank you, Mr.
Chairman.
Chairman GREEN. The gentlelady’s time has expired.
At this time, the Chair would welcome our outstanding wit-
nesses, and I am pleased to introduce our panel: Chris Parsons,
who is a professor of finance at the University of Southern Cali-
fornia; William Fisher, who is the chief executive officer of the Rice
Capital Access Program; Chelsea McDaniel, who is a senior fellow
at Activest; Gary Hall, who is a partner and head of investment
banking at Siebert Williams Shank & Co.; and Jim Nadler, who is
president and CEO of Kroll Bond Ratings.
Witnesses are reminded that your oral testimony will be limited
to 5 minutes. You should be able to see a timer on your screen that
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will indicate how much time you have left, and a chime will go off
at the end of your time. I would ask that you please be mindful
of the timer, and quickly wrap up your testimony if you hear the
chime, so that we can be respectful of both the witnesses’ and the
committee members’ time. And without objection, your written
statements will be made a part of the record.
Once the witnesses finish their testimony, each member will
have 5 minutes to ask questions.
Mr. Parsons, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF CHRISTOPHER PARSONS, PROFESSOR OF
FINANCE, UNIVERSITY OF SOUTHERN CALIFORNIA
Mr. PARSONS. Thank you, Chairman Green, and members of the
subcommittee. Thank you for the opportunity to share the high-
lights of research I have conducted on the pricing and issuance
costs faced by Historically Black Colleges and Universities
(HBCUs). My testimony today is based on the research manuscript,
‘‘What’s in a (school) name? Racial discrimination in higher edu-
cation bond markets,’’ which was published in the Journal of Fi-
nancial Economics in December 2019, and which I have submitted
separately to the committee. My co-authors on the study are Casey
Dougal of Florida State, Pengjie Gao of Notre Dame, and William
Mayew of Duke University, who asked me to pass along their re-
gards.
Economists have been interested in discrimination for many dec-
ades, and indeed, have documented race and/or gender disparities
in wages, job placement and retention, home ownership, mortgage
rates, access to capital, and dozens of other outcomes. A key empir-
ical challenge, however, is that simply documenting differences in
average outcomes between groups formed by gender, race, age, or
other characteristics may not always paint a complete and accurate
picture.
The reason is because these or other characteristics may be cor-
related with other determinants of the outcome of interest. Con-
sequently, it is rare to find examples where we can be almost cer-
tain that we have accounted for such competing factors, other than
discrimination itself. Although no real-world study can be 100 per-
cent perfect in this regard, studying municipal bonds issued by col-
leges and universities provides a close approximation to this ideal.
There are three reasons why. First, when you buy a bond, all
that should matter is the financial return, that is, whether you are
paid back according to the contractual terms. Compared to labor
markets or other settings, this simplifies the analysis, since the no-
tion of the issuer’s quality or productivity is well-defined and rel-
atively objective.
Second, there is a well-accepted way of measuring an issuer’s
ability to pay called, ‘‘credit,’’ or ‘‘bond ratings.’’ By comparing two
issuers with the same credit rating, we, as researchers, can account
for credit quality in the same manner that investors do.
Finally, in about half of the cases we will study, universities with
low credit ratings purchase credit insurance, which allows them to
adopt the credit rating of the parent insurance company. In these
instances, we can compare two universities not only with the same
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6
credit rating, but with the same insurance company, an extremely
precise control for creditworthiness.
With these advantages as a backdrop, we collected data on 4,145
college-issued municipal bond offerings between 1988 and 2010, of
which 102 were conducted by HBCUs. Our analysis asked two
questions: first, do HBCUs pay more in issuance fees versus non-
HBCUs; and second, once HBCU bonds have been placed in the
market, do they trade at lower prices or otherwise show evidence
of discrimination by investors?
The answer to the first question is, yes. HBCUs pay about 20
percent more in fees to underwriters, which are the brokers that
sell, or place, the bonds with investors. This increases to 30 percent
if we focus on States with historically high levels of racial animus,
specifically in the U.S.’s Deep South. These analyses account for
the fact that HBCUs may be smaller than non-HBCUs, may have
different credit ratings, or may differ in other important ways.
The answer to the second question is, maybe. On average,
HBCU-issued bonds appear to trade at somewhat lower prices than
otherwise similar non-HBCU bonds, but the differences are small,
and in most specifications are not statistically significant. However,
we do find that when HBCU bonds are traded, it takes about 23
percent longer to find a willing buyer.
What explains these results? Due to tax reasons, municipal
bonds offer the largest advantage to investors residing in the same
State as the issuer. What this means is that HBCUs, by virtue of
being located mostly in the American South and Southeast, may
face collective reluctance from what should be their most receptive
investor base. If wealthy investors in their home States, due to ra-
cial animus, disproportionately shun HBCU-issued bonds, we
would expect to find results similar to what we document in our
analysis. Because underwriters have a harder time finding willing
buyers, they will charge a higher commission.
Critically however, the effects of discrimination may or may not
manifest directly in bond prices, because the higher selling efforts
of underwriters should be, and appear to be, sufficient to secure
prices that are close to fair market value. Of course, ultimately,
this means that HBCUs do pay higher costs for accessing debt mar-
kets in either case, whether the bonds trade for lower prices, or
whether they simply pay higher issuance costs.
One possible policy tool to help remediate these challenges docu-
mented by our study would be affording investors of HBCU-issued
bonds tax exemption from State and local taxes. The effect of this
policy would be to remove the tax disadvantages an investor living
in, for example, New York or California, currently faces when po-
tentially investing in an HBCU-issued bond from another State.
Thank you for your attention, and I look forward to any ques-
tions you may have.
[The prepared statement of Mr. Parsons can be found on page 42
of the appendix.]
Chairman GREEN. The gentleman’s time has expired. Thank you,
sir.
Mr. Fisher, you are now recognized for 5 minutes to give an oral
presentation of your testimony.
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STATEMENT OF WILLIAM FISHER, CHIEF EXECUTIVE
OFFICER, RICE CAPITAL ACCESS PROGRAM
Mr. FISHER. Good afternoon, Chairman Green, and distinguished
members of this subcommittee. My name is William Fisher. I have
over 30 years of experience in the municipal finance sector as a fi-
nancial advisor, as an underwriter, and as an issuer of tax exempt
and taxable securities for State and local governments. As a grad-
uate of Howard University, I am also the proud parent of both a
Tuskegee University graduate, and a third-year Morehouse School
of Medicine student in Atlanta.
I also have the privilege of serving on the board of trustees for
Jarvis Christian College in Hawkins, Texas. I currently serve as
the chief executive officer of the Rice Capital Access Program, the
designated bonding authority for the Historically Black College and
University Capital Financing Program for the United States De-
partment of Education.
HBCUs play a vital role in higher education that is not easily
recognized or appreciated by the capital markets. The mission
these institutions serve cannot be fully understood by mere exam-
ination of standardized test scores, selectivity metrics, and finan-
cial ratios. This lack of understanding subjects these institutions to
higher interest rates when borrowing as well as restrictive cov-
enants that impair financial flexibility. As a result, investments in
physical facilities, student support initiatives, and academic pro-
grams suffer.
These increased borrowing costs also increase the cost of attend-
ance at these institutions on several levels. For example, increased
costs associated with the financing of a dormitory are borne by the
student through higher student housing fees. These increased stu-
dent housing fees increase the need for students and their families
to borrow additional funds to finance their education. This in-
creased debt burden impacts not only the students and their fami-
lies, but also the institution.
As the committee is aware, institutions with a high cohort de-
fault rate are in jeopardy of losing access to Title IV funds and pos-
sibly its accreditation. The impact of expensive debt is not limited
to the institution and its students. The local economy in the local
communities is also negatively impacted. Several advocacy groups
have completed economic impact studies on the value that HBCUs
bring to the local economy. In short, the presence of an HBCU fos-
ters a vibrant community by providing employment opportunities,
and the purchase of goods and services. Expensive debt limits the
institution’s ability to fully engage with the local economy.
When Congress created the HBCU Capital Financing Program,
not only did it provide access to low-cost borrowing, but it created
a path to financial stability. To further secure HBCU’s place in
America and higher education, the feasibility of the recommenda-
tions offered by the HBCU Capital Financing Advisory Board in-
clude: (1) an increase in the borrowing capacity of the program; and
(2) expanding the use of the program to include operating lines of
credit merit consideration.
Thank you for the opportunity to appear before you.
[The prepared statement of Mr. Fisher can be found on page 28
of the appendix.]
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Chairman GREEN. Thank you, Mr. Fisher.
Ms. McDaniel, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF CHELSEA MCDANIEL, SENIOR FELLOW,
ACTIVEST
Ms. MCDANIEL. Thank you. Good afternoon, Chairman Green,
Ranking Member Barr, and members of the subcommittee.
Thank you for the opportunity to appear before you today and
discuss the role of municipal bond markets in advancing, and un-
dermining, economic, racial, and social justice. My name is Chelsea
McDaniel, (she/her/hers as pronouns), and I am a senior fellow at
Activest. Activest is an investment research firm that quantifies
fiscal justice risk within the municipal bond market. We define fis-
cal justice as the analysis of public budgets at the intersection of
fiscal health and racial justice. Our thesis is simple: Communities
and public entities that treat their residents and clients more justly
realize stronger fiscal outcomes over the intermediate and long
term.
We are not only critics of the market, but also market partici-
pants through efforts like the Fiscal Justice Municipal Investment
Strategy we developed alongside Adasina Social Capital, or the Fis-
cal Justice Credit Rating Agency we are launching this year. Our
work blends economic modeling, financial analysis, and social pol-
icy research, and we exist to protect savers and everyday municipal
investors from taking hidden and uncompensated risks of the more
egregiously unjust corners of the municipal market.
Today, I would like to present a high-level sectoral view of the
post-secondary education institutions within the context of the larg-
er municipal finance market. Broadly, we have seen that social and
environmental risks have emerged within public entities like local
governments and schools as a result of long-standing policies borne
out of segregation-era views of development and progress that have
yet to be updated.
Whether it is the $70 billion in municipal revenue that schools
lose annually to corporate tax incentives, the $11 billion lost to ex-
clusionary school discipline policies, the $2 billion for municipal
sediments, or the $7 billion of excessive fines and fees dispropor-
tionately extracted from BICOP communities, inequitable budget,
public budgets serve as the supply lines fueling State-sanctioned,
taxpayer-funded exclusion and oppression.
U.S. local government finance is built on a long history of sordid
financial practices, and the current public finance system does a
poor job of integrating the true social and fiscal costs of racial eq-
uity into the evaluation of cities and bond issuances. The fiscal and
budgetary cost of ignoring the fiscal justice risk is growing as the
reported incidence and pricing severity of fiscal justice events are
growing within government entities, including post-secondary insti-
tutions. In the world of post-secondary finance, Activest’s research
has focused on ways in which Predominantly White Institutions
(PWIs) have been extractive as opposed to collaborative, let alone
peacefully existing with Minority Serving Institutions (MSIs). Al-
though PWI’s fiscal justice risks have to this point been unpriced,
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9
their materiality is growing in real time and the long-tail risk of
their behavior is likewise expanding.
Recent examples of this include the recent $577 million settle-
ment for HBCUs in Maryland, numerous institutions granting
funds or some form of relationship to descendants of enslaved Afri-
cans who were sold into finance schools under endowments, and fi-
nally, post-secondary schools that race to become federally recog-
nized Hispanic Serving Institutions (HSIs) to capitalize on the
growing Latinx population where scholar Gina Garcia discusses
what it means to move from simply enrolling Latinx students to ac-
tually serving them.
From a credit perspective, we see MSIs as strong municipal in-
vestments as opposed to PWIs, which are evidencing a growing
body of unpriced fiscal justice risks. Accordingly, we have devel-
oped a series of recommendations to counter the aforementioned
fiscal justice risks in the post-secondary market. The first of these
is accounting for equity research. We see the need for a study to
track and quantify all of the Federal and State funding withheld
from MSIs from their inception, and the estimated financial impact
on States and the Federal Government when these payments come
due. This research has been partially completed for Tribal Colleges
and Universities (TCUs) through efforts like the Land Grab Uni-
versities Project, but more research remains for HBCUs, PWIs, and
HSIs.
I am just going to say that we anticipate at least two components
of this. The first would focus on long-term liabilities, which would
be historical accounting of the financial support that was denied or
stolen from MSIs since their creation, and second, the elimination
of current liabilities. Thank you so much for your time, and I look
forward to any questions.
[The prepared statement of Ms. McDaniel can be found on page
35 of the appendix.]
Chairman GREEN. Thank you, Ms. McDaniel.
Mr. Hall, you are now recognized for 5 minutes to give an oral
presentation of your testimony.
STATEMENT OF GARY HALL, PARTNER AND HEAD OF INVEST-
MENT BANKING [INFRASTRUCTURE AND PUBLIC FINANCE],
SIEBERT WILLIAMS SHANK & CO., LLC, ON BEHALF OF THE
SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIA-
TION (SIFMA)
Mr. HALL. SIFMA commends members of this subcommittee for
your collective focus on these important issues. I currently sit on
the board of directors of SIFMA, which is the leading trade associa-
tion for broker-dealers, investment banks, and asset managers op-
erating in the U.S. and in global capital markets. I am also a part-
ner and the national head of infrastructure in public finance in-
vestment banking at Seibert Williams Shank, the nation’s largest
minority-owned investment bank and a SIFMA member firm.
As I describe in my written testimony, I am extremely proud of
my firm’s, my family’s, and my strong connections to HBCUs.
Hence, I would like to join SIFMA by expressing appreciation on
behalf of my firm, my family, and myself to the subcommittee for
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10
bringing attention to HBCUs having fair access to the public mu-
nicipal bonds market.
My career in the municipal bond market includes serving as an
issuer, a lawyer, and a banker. I am the immediate past chairman
of the Municipal Securities Rulemaking Board, the self-regulatory
organization that safeguards the $4 trillion municipal securities in-
dustry, therefore, I know firsthand how municipal bonds are a crit-
ical funding source for infrastructure in America.
As it pertains to the subject of this hearing, I would like to first
emphasize that SIFMA and its members are committed to fair pric-
ing. While I am always appreciative of being able to learn from
scholarly research and academic analysis, I do believe there are
certain contextual considerations that weren’t highlighted with re-
spect to the study that spurred this hearing. I detailed these con-
siderations in my written testimony, however, I can tell you that
the municipal market has undergone seismic changes with respect
to pricing transparency, regulatory framework, and technological
transformation that would mitigate many of the conclusions
reached in the study.
Again, my written testimony outlines these considerations in
more detail, and I am happy to answer any questions from mem-
bers of this distinguished panel, including my classmate, Mr. Fish-
er. Despite my and SIFMA’s concerns as it pertains to the study,
we fervently believe more can be done to assist HBCUs with ac-
cessing the capital markets more cost-effectively. Specifically,
SIFMA supports authorizing triple exemption for HBCU-sponsored
debt. Ironically, the study suggests that providing HPCUs with the
ability to attract a larger pool of investors would contribute to fa-
vorable pricing in the capital markets. I believe this idea is spot
on and perfect for the current market environment given the strong
appetite for social impact bonds, a subset of ESG bonds.
Social impact investors with highly coveted HVCU-issued debt,
whether such was tax-exempt or even taxable. Hence, ways to ex-
pand the taxable investor base for HBCUs include having the Fed-
eral Government authorize a high subsidy direct pay bond similar
to disaster recovery bonds. Moreover, authorizing a Federal guar-
antee on taxable, direct-pay bonds for HBCU-sponsored debt would
be a valuable credit enhancement to attracting new class and in-
vestors for these bonds.
With respect to the overall bond market, please know that
SIFMA supports, as Ranking Member Barr mentioned, reinstating
tax exemption on advanced refundings of municipal bonds, expand-
ing private activity bonds, and reinstating a direct pay program
similar to the Build America Bond Program, especially in light of
the infrastructure legislation that is currently under consideration.
Adding these tools will be vital to helping State and local govern-
ments both address critical infrastructure needs and obtain savings
that tilt down to taxpayers.
Again, I commend the work of this subcommittee on this impor-
tant topic, and I encourage lawmakers to faithfully consider the
policy proposals that SIFMA supports. Thank you for having me,
and I look forward to answering your questions.
[The prepared statement of Mr. Hall can be found on page 29 of
the appendix.]
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Chairman GREEN. Thank you, Mr. Hall.
Mr. Nadler, you are now recognized for 5 minutes to give an oral
presentation of your testimony.
STATEMENT OF JIM NADLER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, KROLL BOND RATING AGENCY (KBRA)
Mr. NADLER. Thank you. Good afternoon, Chairman Green,
Ranking Member Barr, and members of the subcommittee. Thank
you for the opportunity to testify today. My name is Jim Nadler
and I am the president and CEO of Kroll Bond Rating Agency
(KBRA). Since KBRA’s founding in 2010, we have been a vocal pro-
ponent of the importance of open competition in the credit rating
space to protect investors and increase market liquidity for under-
served sectors, and we greatly appreciate the work of this com-
mittee in advancing that goal, including by unanimously passing
legislation through the House last year.
Today, KBRA, an SEC-registered credit rating agency with more
than 400 employees in offices in the United States and Europe, has
issued more than 42,000 ratings, representing $2.2 trillion in rated
issuances. KBRA is currently one of the five largest rating agencies
globally, and the largest established after the great financial crisis.
We rate over $364 billion of the municipal debt, nearly 10 percent
of the total outstanding debt in the market. Our ratings add impor-
tant insight for investors across a wide variety of municipal issuers
including: States such as Texas; the Commonwealth of Kentucky;
cities, including Dallas, Chicago, and Los Angeles; transit systems
such as New York’s MTA; airports like DFW, and Chicago O’Hare;
and large municipal utilities such as the Los Angeles Department
of Water and Power.
In observing the bond market in 2020, the municipal market was
significantly impacted by the outbreak of COVID-19. The effect of
the pandemic was uneven; it varied city to city and State to State.
Initially, the cost of issuing debt increased considerably, especially
for issuers with lower rated debt. Municipal issuers did benefit
from the historic Federal Government intervention both in terms
of direct infusion of funds and monetary policy, and the municipal
market today is more stable than many municipal observers ex-
pected.
As we look to the future, we believe that some States and mu-
nicipalities will come out of the crisis stronger, but this may not
be true for those municipalities that had pre-existing structural
deficits in their budgets. Some States and municipalities may find
that their particular economy may be fundamentally altered for
some time, including those dependent on long commutes to down-
town office districts, as well as leisure and business travel destina-
tions.
Moving to the topic of racial and social issues, I would like to ad-
dress their impact on municipal bonds. Municipalities, by their
very nature, have material attributes of positive social impact that
deserve amplification. Some do not and those that do not will suffer
by tnot having that type of analysis to show on their behalf. Many
of these attributes are not included in the separate ESG scores that
are proliferating in the market, particularly in the areas of health,
safety, housing, and education. In our view, investor preferences
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12
will continue to drive pricing and liquidity in favor of municipali-
ties that have exhibited a commitment to economic, racial, and so-
cial justice.
Mr. Chairman, knowing the subcommittee’s interest in the rat-
ings of Historically Black College and Universities, I would also
like to provide our perspective on that topic. While KBRA is not
significantly involved in rating institutions of higher education
today, our general observation is that competition among ratings
and research has dramatically increased the quality of research
and underpinnings of those credit analysis. As has certainly been
our experience in the community bank space, we believe that sun-
light is the best disinfectant, and that HBCUs would benefit from
better, more thorough analysis and research to ensure that their
ratings are based on consistently applied and fair assessment of
credit quality.
Mr. Chairman, I thank you and the subcommittee for the oppor-
tunity to testify today, and I look forward to any questions you may
have.
[The prepared statement of Mr. Nadler can be found on page 38
of the appendix.]
Chairman GREEN. Thank you, sir.
At this time, the Chair will recognize the gentleman from Mis-
souri, Mr. Cleaver, who is also the Chair of our Housing, Commu-
nity Development, and Insurance Subcommittee, for 5 minutes for
questions.
Mr. CLEAVER. Mr. Chairman, thank you very much. And I am
particularly thrilled that you called this hearing.
I am not sure if all of you, like Mr. Green—well, Mr. Green is
not a native Texan. I am a native Texan. I grew up in in Texas
and became quite familiar with a lot of the communities around
Texas.
I discovered early on when I moved to Missouri after HBCU
Prairie View at Indiana University that Missouri had, I think,
seven sundown towns. And one of the sundown towns has become
famous. It is called Ferguson, Missouri. Now, if you are not famil-
iar with what a sundown town is—I am sure that Mr. Hall and
others are—it means that if you were African American, by the
time the sun set, you had to be out of that town, or you could face
just about anything from beating to death. And these towns were
all over the country; they were not just in Missouri. In Texas, we
had a town with a banner up across the street that said, ‘‘The
blackest land, the whitest people.’’
And we had to deal with sundown towns in Missouri, of course.
It may be a surprise for you to know that Ferguson is a town of
about 21,000 people, and yet Ferguson police issued, based on the
Patterns and Practice Study of the Department of Justice, 32,000
traffic tickets a year. That is, again, with a population 21,000, the
police issued an average of 32,000 tickets a year, traffic tickets. We
call that policing for profit. And they collected millions and millions
of dollars in fines to finance the government of Ferguson, Missouri,
through traffic tickets.
This is not based on an annual, ‘‘Cleaver analysis.’’ It is not
based on what I think. These are facts that were that were brought
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out when the Patterns and Practice Report was issued on Fer-
guson, Missouri. So, how does that fit in?
If you had a town where you had revenue-focused policing and
a declining tax base, it means that you are going to have a difficult
time getting anything done as a municipality. And so, I would like
the witnesses to accept the fact that—you can challenge me if you
want, but I will win. But you can challenge what I have said. How
many of you believe that socioeconomic factors like poverty, incom-
ing inequality, the availability of affordable housing, unemploy-
ment or diversity of employment all factor in on a risk of a munici-
pality and their ability to get significant bonding?
With all of the things I just mentioned, which is a fact, it is a
fact, what do you think Ferguson’s ability to get bonding would be,
and how many people would say, well, what he says has nothing
to do with this, the city is just poorly? But race has been the major
factor in that City’s inability to get funding. So who would like to
clear this up for me? And then, give me some ways in which we
can prevent this from continuing to happen.
Mr. HALL. Representative, yes, this is Gary Hall. The only thing
that I would significantly challenge in your supposition is you men-
tioned these towns having, sort of, restrictions. I grew up in Chi-
cago, and I would also say that neighborhoods there had the same
sort of restrictions that you mentioned, so it is not [inaudible] to
towns.
I don’t know if the chairman wants to grant me additional time
to try to answer the question?
Chairman GREEN. The Chair will grant an additional 30 seconds.
Mr. HALL. The bottom line is that while I can’t speak to the spe-
cific credit nature of Ferguson, I can tell you that a lot of consider-
ations are taken into effect when we are going into the municipal
bond market. The socioeconomic background is not as important as
the economic power and the tax base, and that is something that
we evaluate a lot, working with our issuers for access to the bond.
As evidence of the fact that during the pandemic, we did a trans-
action, my firm, for a convention center in St. Louis, and as you
might know, the convention centers during the pandemic were not
readily visited. So, that is a statement to the ability to navigate tu-
multuous, sort of, market conditions to even access the capital mar-
kets during tough times.
Mr. CLEAVER. Thank you.
Thank you, Mr. Chairman.
Chairman GREEN. The gentleman’s time has expired.
The Chair now recognizes the ranking member of the sub-
committee, Mr. Barr for 5 minutes for questions.
Mr. BARR. Thank you, Mr. Chairman.
Let me ask Mr. Nadler first about market performance during
the pandemic and the Municipal Liquidity Facility. I was some-
what surprised that there wasn’t as much uptake. There has been
so much conversation about the plight of State and local govern-
ments during the pandemic and the decline in revenues. And, of
course, we did find out that large municipalities’ revenues actually
went up during the pandemic. But we were somewhat surprised
after supporting the MLF, that there wasn’t as much uptake, and
throughout the pandemic, really, the municipal bond market
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14
proved to be very resilient. The market certainly benefited from
support from the Federal Reserve through the MLF, but maybe
that was more psychological than actually through utilization. But
it did perform well, and we avoided the worst-case scenario that
some feared.
Mr. Nadler, where do you see the municipal bond market moving
in the future, post-pandemic? How has the market changed? And
can you speak to whether or not we actually needed the bailouts
of the State and local governments, if we had just encouraged mu-
nicipalities to utilize the MLF, maybe they would have just been
as well off?
Mr. NADLER. Thank you, Representative Barr. I think that you
mentioned a couple of things that are true. I do think that we were
surprised as well by the low number of people who took advantage
of the of the Facility. I do think that the mere fact that the Facil-
ity, along with very aggressive monetary policy, did have a very
large impact on the psyche of both municipal issuers and municipal
investors. And so, I think that had much to do with how quickly
we saw the municipal market move back to some semblance of nor-
malcy.
The second thing I will say is that the impacts going forward are
going to be uneven. There were structural issues before the pan-
demic, and we are going to see those exacerbated after the pan-
demic. And they are going to be in towns that were primarily vaca-
tion destinations. It is going to take a while for those to come back.
I mentioned towns that have a lot of commuters coming into the
city. It is going to be a while before commuters feel comfortable
getting on mass transit again in large numbers. And so, I think the
recovery, while it is has been real and it has been great, and has
been, I think, faster than most participants thought, we will see an
unevenness to it, going forward.
Mr. BARR. Let me ask you about materiality. A bond rating is a
significant factor that affects the interest cost of a security and
helps inform investors’ demand for bonds. What is the process, Mr.
Nadler, for evaluating a municipal bond for the purposes of issuing
a rating? What criteria go into assigning a rating for a municipal
bond? In other words, what factors does Kroll consider to be mate-
rial to a bond rating, and why is materiality so important?
Mr. NADLER. Materiality is huge, and I think that is one of the
most important factors. So when you are thinking about a bond
rating and an actual credit rating, whether it is a municipality or
a company, you really need to make sure that what you are ana-
lyzing really does have an impact on the fiscal health of that enti-
ty, whether it is a city or a State. Importantly, I think that we
found that disclosure along these lines is probably one of the most
important aspects.
The second thing I will say is that there are aspects of municipal
bonds that impact the liquidity of that bond going forward, and
they may not necessarily impact the creditworthiness today, they
may not have a material impact on it, but they would be inter-
esting to investors, and investors are asking for that type of infor-
mation. And so, we are advocates of more disclosure, particularly
the type of disclosure that may align with investor preferences over
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time and may also give investors insight into the liquidity issues
around some aspects of bonds
Mr. BARR. In my remaining time, let me just turn to Mr. Hall,
very quickly. I am the co-sponsor of bipartisan legislation, the In-
vesting in Our Communities Act, which would reinstate advanced
refunding for municipal bonds. Mr. Hall, could you detail how rein-
statement of advanced refunding, especially with low interest rates,
would help municipalities and issuers?
Mr. HALL. Absolutely. We are in an unprecedented time of a low-
interest rate environment and budgetary stress on State and local
governments. The ability to refund existing debt with lower tax-ex-
empt debt is invaluable, too, and really needs to be reinstated.
Mr. BARR. Thank you.
I yield back.
Chairman GREEN. The gentleman’s time has expired.
The Chair now recognizes the gentlelady from North Carolina,
Ms. Adams, for 5 minutes.
Ms. ADAMS. I thank the Chair. Again, thank you for hosting this
hearing today.
And I want to thank all of the witnesses. Professor Parsons, first,
I want to thank you and your colleagues for your research which
shows that HBCUs pay higher underwriting fees to issue tax-ex-
empt bonds compared with non-HBCUs. Without this data, we
would not be able to have this conversation today, so I do thank
you.
Your study found that, unrelated to user credit risk or quality,
underwriting fees are 3 times larger in certain areas of the United
States, and you also found that HBCUs pay an average of 20 per-
cent more to issue bonds that are similarly suited to non-HBCUs.
Very succinctly, can you share to what you attribute this signifi-
cant differential, and have you attempted to quantify the collective
costs to HBCU bond issuers of this premium? And how would you
begin to quantify that cost over the decades?
Mr. PARSONS. That it is a complicated question. The total costs,
if you just want to look at the dollar amounts that are specifically
implied by the differences in underwriting costs, 20 to 30 basis
points on a $50 million bond issue is in the hundreds of thousands
of dollars. So, it is not several million dollars, it is in the hundreds
of thousands of dollars. Now, hundreds of thousands of dollars, you
can quantify that lots of ways. That is a couple of professors;
maybe it is 10 scholarships. But again, these are going to depend
on the size of the issue for any one bond.
One of the things that I wish our study could do that we simply
cannot do is look at the decisions to issue bonds that were not
taken because of higher underwriting costs. You can compare the
wages of two people in the job market. What you cannot compare
is the wages between someone who is in the job market and some-
one who is not in the job market because they don’t have a wage.
And so everything in our study, and indeed every empirical study
of this kind, is going to be conditioned on bonds that successfully
went to the market. That is going to naturally lead you to an esti-
mate that is a lower bound on the all-in costs, because we don’t ob-
serve what happens to HBCUs that are not able to go to the mar-
ket.
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My intuition—and this is outside the realm of the study at this
point; this is a supposition—is that the cost is probably signifi-
cantly larger to the firms for the HBCUs that did not go to market.
Ms. ADAMS. Okay, great. Thank you.
Ms. McDaniel, Mr. Hall, what are some other solutions that you
might propose to help address these disparities?
Mr. HALL. I will take the first crack at it, if you don’t mind. First
of all, Congresswoman Adams, I just want to applaud you for your
advocacy for HBCUs and your work in ensuring that over a billion
dollars of financing was forgiven in the Capital Financing Program.
That was a huge benefit to HBCUs, so thank you for your out-
standing work.
The proposal, the study actually mentions this whole notion of
expanding the tax base for HBCUs, which SIFMA supports by
incenting by having a triple tax exemption for HBCUs, thereby
States’ debt issued in North Carolina would be attractive to inves-
tors in New York and California, where the State income tax is
high and the incentive will be higher as well.
Additionally, having a direct pay program similar to build Amer-
ica bonds where the HBCUs can tax the taxable market, a wider
investment base over $9 trillion versus $4 trillion, will be another
way to allow HBCUs to increase the demand for their bonds and
close their overall cost to borrow.
Ms. ADAMS. Okay. Ms. McDaniel, do you have a comment?
Ms. MCDANIEL. Yes, thank you. I think from our perspective, and
when we look at the municipal bond and bond market in general,
we look at the things that aren’t being accounted for first. We here
know that HBCUs are amazing and they outperform in terms of
producing, whether it is doctors, and graduates, Black graduates at
a higher success rate. And so, I think it is looking at some of those
different factors that aren’t typically folded into the creditworthi-
ness assessment of municipal bonds, including those and how we
view HBCUs. Similarly, how we are viewing PWIs that seem to get
a positive boost in their ratings, but don’t have similar performance
for African-American students.
Ms. ADAMS. Thank you very much.
Mr. Chairman, I yield back. Thank you.
Chairman GREEN. The gentlelady yields back.
The Chair now recognizes the gentleman from Tennessee, Mr.
Kustoff, for 5 minutes.
Mr. KUSTOFF. Thank you, Mr. Chairman. Thank you for con-
vening today’s hearing.
Thank you also to the witnesses who are here.
Mr. Hall, when you look at evaluating a municipal bond deal, can
you talk about what are the most important factors that impact the
structuring of any issuance, fee structure, the eventual cost of cap-
ital for the issue or the bonds?
Mr. HALL. Sure. Thank you for the question. First and foremost,
we have to evaluate the credit underpinnings of the specific issuer,
making sure that investors have confidence that they will be re-
paid, and what are the sort of revenue triggers that allow for a
debt service to be repaid.
Second, and one of the things that I thought the study did not
highlight enough, is the actual size of the issuance and whether or
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not it would actually be very liquid in the market. Smaller bond
issuances are less liquid than larger issuers. Issuers who are infre-
quently in the marketplace are less liquid than those who are fre-
quently in the marketplace. And so, the liquidity of the issuance
would be a very important factor in the actual residence of the
bond in the market.
All of those things are taken into consideration when you are
evaluating the risks associated with the issuance, when you are
evaluating the likelihood of success in the bond market, whether or
not you would incur any sort of inventory risk in having those
bonds in your inventory, and how long it would take to get the
bonds out of your inventory and very important to the overall re-
ceptivity of the bond in the capital markets.
Mr. KUSTOFF. Thank you, Mr. Hall. Can I also ask you, if you
would, to expand on working with higher education issues? You all
have talked about that somewhat in your testimony. Specifically,
can you talk about what the market is like for those types of
issuances for higher education and how does that compare to other
types of available debt within the market?
Mr. HALL. One of the key components of the credit structure of
higher education is the size of the endowment, the student mix,
and the different sort of sources of revenue that the higher edu-
cation entity has; this is critically important. I would tell you, as
I mentioned in my written testimony, that there is peak demand
for social impact bonds in the current market.
Just to give you an example, we had over $150 billion of social
impact bonds placed in 2020. The year before, it was less than $20
billion. And so, higher education even K–12 education, given the in-
vestment objectives of certain ESG investors, is extremely attrac-
tive and and most incur a pretty lost cost to bar and doing the com-
petition for those bonds in the current marketplace.
Mr. KUSTOFF. Thank you, Mr. Hall. Can I shift gears with you
for just a moment, and talk about the importance of municipal
bonds as a tool for individuals who use it for financial planning and
certainly for saving for retirement? Can you speak about the indi-
viduals and the households who incorporate municipal bonds into
their financial planning, and obviously the specific benefits of in-
cluding municipal bonds in an investment portfolio?
Mr. HALL. Absolutely, sir. We are pretty fortunate in this country
to have the ability for citizens to actually invest in their own com-
munities by owning municipal bonds, whether it be the Erie Canal
or the Golden Gate Bridge, all were funded by municipal bonds,
and the ability of actual citizens to take a piece of those worthy in-
vestments.
For a long-term investment vehicle on a risk-weighted basis
where municipal bonds offer a pretty significant return relative to
a risk weight on a corporate side, if you think of the active tax ben-
efit. And the benefit of these bonds is sort of evidenced by the fact
that over 50 percent of our market is held by mom-and-pop inves-
tors in their households. It is changing. It is evolving as to how
that access is granted these days, but it is still an important fea-
ture of the investment objectives of our everyday American citizens.
Mr. KUSTOFF. Thank you, Mr. Hall.
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18
And I have about 30 seconds left, Mr. Chairman, so I will yield
back. I do thank the witnesses. And thank you for calling today’s
hearing.
Chairman GREEN. The gentleman yields back his time, and the
Chair thanks the gentleman.
The Chair now recognizes the gentlelady from Michigan, Ms.
Tlaib, for 5 minutes.
Ms. TLAIB. Thank you so much, Mr. Chairman.
I know that whenever we experience an economic crisis, it is the
budgets of States and cities that are hit the hardest. And I have
seen that firsthand, the devastating impact of the bankruptcy of
the City of Detroit, and the impact it had on its residents and also
the retirees. Last year, despite more than 1.5 million public sector
layoffs across the country, the Fed’s Municipal Lending Facility
only purchased two municipal bonds, amounting to less than one
percent of the Facility’s capacity.
And I know the Brookings Institution did find that the Municipal
Lending Facility’s initial eligibility excluded countless communities
like mine, including not only Detroit, but Atlanta, Baltimore, Bos-
ton, and Pittsburgh metro statistics areas. Meanwhile, the Fed Sec-
ondary Market Corporate Credit Facility purchased hundreds of
millions in corporate bonds in the energy sector, including from
dirty polluters like ExxonMobil, Chevron, BP, and Marathon Oil,
right here in my district.
So, Professor Parsons, at this point the Fed has been unwilling
and unable to facilitate meaningful emergency assistance for State
and local governments. How do you think our role as Congress
should step in to fill this gap in fostering long-term investments in
our communities?
Mr. PARSONS. I would like to speak rather specifically to the re-
sults of the findings specifically with HBCUs. And one of the ways
that I think about the triple tax exemption, is it is almost a free
market solution to a problem. One could characterize it that way.
If the problem is that the market is too small in the sense that if
you are an HBCU attempting to place your bonds in the hands of
less-than-willing investors and that investor base is too small, tri-
ple tax exemption essentially opens up the market to other States
where you give other investors a crack at it. So that is something
I am quite optimistic about, and I would support that very much
if that was on the table.
Ms. TLAIB. As COVID and the pandemic has threatened our City
and State Governments with fiscal crises, they are in survivor
mode right now. Unlike any other time or experience I have seen,
I know that public banks could offer a much more accessible option
for dealing with these debts than investing traditional underserved
communities. I know in 1919, the State of North Dakota estab-
lished a public bank, which conducts business on behalf of the
State, bringing down borrowing costs on the State needs and offer-
ing limited banking services to State residents. For example, I
don’t know if the chairman knows this, but according to the Bank
of North Dakota’s 2020 report, the bank financed $36 million in
school construction at a lower cost.
So, Ms. McDaniel, do you believe that a public bank would be
more likely to consider other factors beyond mere profits in issuing
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bonds compared to private bond underwriters? Compared to a pri-
vate bond underwriter?
Ms. MCDANIEL. Yes. Thank you for that question, Representa-
tive. Based on the research by the Action Center on Race and the
Economy (ACRE), municipal banks definitely allow cities to recap-
ture local tax revenues and local funds currently invested in mar-
ket instruments, retain those tax revenues currently siphoned off
by payments of the principal and interest municipal bond owners.
So, that is a definite advantage there. And they enable the munici-
pality to channel that back into affordable housing infrastructure,
and economic development.
I would definitely agree with what you said about public banks
and the advantages there, and being able to consider different fac-
tors with that, and also providing potentially more for the cities in
terms of services that I previously mentioned.
Ms. TLAIB. Thank you, Ms. McDaniel. What you said is basically
that the money stays within the community. And again, it must be
able to reinvest and again help, I think, improve the quality of life
of the many of the residents.
Professor Parsons, you heard what Ms. McDaniel said, and I
would love to hear from you about how public banking could ensure
that traditionally underserved cities like mine gain access to re-
sources and are better equipped to weather budget crises that were
created by COVID, another really critical time in our country espe-
cially the last great recession in my City?
Mr. PARSONS. My main observation about public banks is they
serve a role when the private markets are, for whatever reason,
failing or struggling, when there are frictions in that market. Dur-
ing COVID, the Fed was buying up basically everything. They were
buying up municipal bonds and other fixed-income instruments,
and one could imagine a similar situation here.
Ms. TLAIB. Thank you.
I yield back, Mr. Chairman.
Chairman GREEN. The gentlelady yields back. Thank you.
And the Chair now recognizes the gentleman from Illinois, Mr.
Garcia, for 5 minutes.
Mr. GARCIA OF ILLINOIS. Thank you, Mr. Chairman, and I thank
you and Ranking Member Barr for holding this hearing.
And, of course, thank you to all the very informative witnesses
for joining us. This hearing is especially important to me, because
we have to think a lot about the bond market where I come from;
I represent parts of Chicago and suburban Cook County. Because
our municipal bonds have attracted low ratings, our borrowing
costs are high. That usually cuts wages and benefits for working-
class people like the constituents I represent, and results in bigger
checks for bondholders. Many of my constituents are from Puerto
Rico, so they know this dynamic very well. We even have some of
the same Activest bond holders like Aurelius Capital calling for
cuts in spending. It often means that the less money you have,
whether you are Chicago, Puerto Rico, or a small university trying
to keep the doors open, the more money you have to pay.
Mr. Nadler, it seems to me that a lot of what goes into credit rat-
ings is outside of issuers’ control. For instance, if Puerto Rico is
devastated by a hurricane or Detroit loses thousands of good jobs
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20
because of changes in national economic policy, that would have a
major impact on bond ratings. We know that communities of color
and working-class neighborhoods are hit especially hard by these
kinds of shocks.
Do rating firms consider whether their criteria have a disparate
impact on communities like mine, in your opinion?
Mr. NADLER. I think that they don’t do a good job of that, and
I will give you an example in your own City of Chicago, of the Chi-
cago Public Schools. There was a point with the two main rating
agencies—the two largest rating agencies had Chicago public
schools and non-investment grade. We did a much larger study and
looked at the housing market, basically the wherewithal of the City
of Chicago and found that they could sustain higher taxes if they
needed it, and that there was no reason that school district should
be non-investment grade. Now, they have sort of come back to the
investment grade.
So I think that competition is important, because I think that
when you are looking at, whether it is Puerto Rico or whether it
is the State of California, making sure that you have competing
ideas and that you have enough research out there for investors so
that they can use their preferences to choose where they want to
invest their money is important. So, I believe competition is impor-
tant.
And I will also just say one other thing, that a lot of times these
incumbent rating agencies get into a rut, and they just look at the
same things every year, every month, instead of re-imagining and
re-looking at cities and States as they grow and evolve. And I think
it is important to take a new, fresh look at all of the different enti-
ties that you pointed to.
Mr. GARCIA OF ILLINOIS. Thank you, Mr. Nadler.
Ms. McDaniel, it sounds like some bond issuers face financial
troubles that can’t be fixed with more debt, whether it is a univer-
sity with a declining student body or a city with a declining tax
base. Is the bond market itself capable of protecting these institu-
tions from arrangements that just extract wealth from local com-
munities? And do you think that a public bank or a national invest-
ment authority could provide better results?
Ms. MCDANIEL. Thank you, Representative, for that question. I
think we have seen that in the case of certain cities—in our recent
past, as you mentioned, Puerto Rico. We can add Detroit to that
list and others. There has been unfortunate exploitation, I believe,
of these cities and their tax populations, whether because there is
a declining tax base or other reasons and I think there is definitely
a need for different institutions that can hold both the impact to
the communities and the financial considerations at the same time.
So to your point, I think, yes, that may be something that a com-
munity bank or a public bank could better serve in that role, tak-
ing those things into consideration. Thank you.
Mr. GARCIA OF ILLINOIS. Thank you very much.
Mr. Chairman, I yield back.
Chairman GREEN. Thank you. The gentleman yields back.
The Chair now recognizes the gentlelady from Texas, Ms. Garcia,
for 5 minutes.
Ms. GARCIA OF TEXAS. Thank you, Mr. Chairman.
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21
And thank you to all of the witnesses who are appearing today.
And, Mr. Chairman, as you know, this is also, for me, something
that is close and personal. In my first elected position as the City
Comptroller in Houston, I worked with Rice Financial, and I
worked with Muriel Siebert before the start of the firm of Siebert
Brandford Shank & Co.. So, these issues are really important and
it is regrettable that people don’t realize how important they are,
as my colleague Representative Garcia mentioned, how it is all con-
nected to what happens in the community with regard to the jobs
and the wages and the impact to the everyday workers. So, thank
you for holding this critical hearing.
And I do want to start with you, Mr. Hall. I want to piggyback
on some of the questions that my colleague, Ms. Tlaib, was asking
about the Municipal Liquidity Facility. It just didn’t work. A lot of
it was the high penalty fees, and a lot of it was that they initially
excluded most of the Black cities in America. My question to you
is, is it needed? And if we were to bring it back, what changes do
we have to make?
Mr. HALL. Let me say two things at the outset. I happen to
know, personally and professionally, the people at the Fed tapped
to run that program, and I have the utmost respect for them in
both their professional and personal characters and abilities. So, I
think that is important.
But I also think it is important to know the time that program
was enacted. First of all, $500 billion was the size of that program.
That is larger than the entire municipal bond market. We have
never issued $500 billion. I think the intent of the program is to
be sort of shock and awe to make sure that investors knew that
the Fed and Treasury were behind a municipal bond market. And
I think that worked. We had $20 billions of outflows in early March
of 2020, and we were really suffering from a liquidity crisis.
After the MLF program came in, we started seeing access to the
municipal bond markets so much so that by the end in October, we
had the largest issuance of any month that we have had in the his-
tory of our market. I attribute a lot of that to the early efforts of
Congress and the MLF in providing stability. I know only it was
only four issuances, and only two issuers benefited from that, and
they afforded a tremendous amount of flexibility not just in the
cost of borrowing, but actually the terms that were really impor-
tant for those particular issues. But the overall benefit to the mar-
ketplace and providing stability was a huge objective of the MLF,
and from that score, I think it really achieved its objectives.
Ms. GARCIA OF TEXAS. But do we need to do it, and then, what
changes, was the question.
Mr. HALL. Right now, the municipal bond market is extremely
resilient. And so, from that standpoint, I think access to the munic-
ipal bond market in the public way is in due course and is not nec-
essary at this particular point. Having that as an emergency back-
stop should there be shocks to our market in the future is always
important.
It is also important to note the difference between what was used
for the corporate market versus what was used for the municipal
market. The corporate market was a secondary sort of platform,
which helped those investors who already had actual corporate
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22
bonds. The municipal liquidity was a direct loan to issuers. Dif-
ferent ways of stabilizing the marketplace really serve this pur-
pose, and I think having that lever going forward is important, but
thank God we have a municipal bond market that is extremely re-
silient.
Ms. GARCIA OF TEXAS. Thank you.
Mr. Parsons, my question to you, sir, is, I looked at your study
and your results, and I just wondered if you are familiar or have
seen a similar study that perhaps has been done on the impact of
the bond work and the costs as to Hispanic Serving Institutions?
Mr. PARSONS. No, I am not aware of that.
Ms. GARCIA OF TEXAS. Not at all?
Ms. McDaniel, are you aware of any study or work that has been
done in the area of the impact of borrowing costs and higher fees
as is related to Hispanic Serving Institutions?
Ms. MCDANIEL. Thank you for that question. I think the best
point to focus on there is I believe Excelencia does some great work
on that, but that it is segmented because you have institutions that
were predominantly White institutions becoming HSIs and often
have higher capacity with getting bonds. And so there are some
variants there with different HSIs, but their research speaks to
that. Thank you.
Ms. GARCIA OF TEXAS. I agree with your comment that it is not
just about including them in the population but actually serving
them. I thank you for that comment, and I think that is true of any
institution, that they need to serve all of their population regard-
less of where they come from or what color. So, thank you very
much.
And, Mr. Chairman, I yield back.
Chairman GREEN. The gentlelady’s time has expired.
The Chair now recognizes the gentleman from Guam, Mr. San
Nicholas, who is also the Vice Chair of the Full Committee. You
are recognized for 5 minutes for questions, Mr. San Nicholas.
Mr. SAN NICHOLAS. Thank you so much, Mr. Chairman.
And thank you to all of our witnesses here today. As a Rep-
resentative from a Territory, I can absolutely attest to the fact that
triple tax exemption for municipal debt does greatly improve the
market environment for the issuance of municipal securities.
Guam, as a Territory, does enjoy triple tax exempt status for the
bonds that we issue, whether they are revenue bonds, or they are
GEO bonds, or whether they are limited-obligation bonds. And so,
I would fully endorse, Mr. Chairman, as an option, triple tax ex-
empt status for HBCUs and for Minority Serving Institutions as a
solution for us to bring down the cost of debt for these institutions.
Another option, Mr. Chairman, would be perhaps to also consider
having land grant institutions classified as agencies of the U.S.
Government similar to Fannie Mae and Freddie Mac. That way,
they also have their debt implied on the full backing of the full
faith and credit of the United States Government. That would also
greatly help in driving down the interest costs for the debt at issue.
I know that we are discussing the cost of issuing debt particularly
on the underwriter side, but I wanted to highlight, Mr. Chairman,
that the biggest cost of debt, of course, is the interest rate paid on
the debt. And the triple tax exempt status would absolutely help
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23
to lower interest rates for these institutions. In fact, Guam is so
successful that we oftentimes have our debt oversubscribed.
And so, Mr. Hall, I wanted to tap into your expertise here on
oversubscriptions, which basically drive down interest rates even
below the coupon rate. What is a typical oversubscription that
would be healthy?
Mr. HALL. That is a very, very, very important point, and you are
absolutely right that creating peak competition for bonds drives
yields downward. The good news is that our market has had an in-
fusion of regulatory changes in recent years, and one of the impor-
tant features now is the expanded inclusion of municipal advisors
in the process that have a very defined fiduciary role. Why they are
important in the underwriting process is, when you get over-
subscription in an offering based on investor interest, typically mu-
nicipal advisors, acting on behalf of the issuers, ask that the under-
writers actually lower yields to reduce that subscription.
And so, that actually improves the pricing performance during
the course of a transaction of an issuer and that is one of the sort
of helpful support systems that the regulatory framework now al-
lows for to ensure that oversubscription inures to the benefit of the
issuer.
Mr. SAN NICHOLAS. What would healthy oversubscription typi-
cally be like? Four times oversubscribed?
Mr. HALL. I am reticent to say, because it is always contingent
on the deal, size, and type of credit of that particular day in those
particular market environments. But I would say a healthy sub-
scription that would require maybe revisiting the bonds offering
price would be over 2 to 3 times.
Mr. SAN NICHOLAS. Thank you so much for putting that on the
record.
And, Mr. Chairman, I wanted to get this on the record, because
even if we do get triple tax exempt status for HBCUs, there is still
a danger that we are not going to get best interest rate pricing due
to oversubscriptions. And Guam, Mr. Chairman, has a horrendous
oversubscription problem, and I think that kind of circles back to
underwriters not pricing the debt properly.
We had one example of a debt that was issued in the month of
June, and then another debt that was issued in the month of Au-
gust, both by the same agency, both are revenue bonds, both for
over $100 million. The coupon rate on the first debt was 5 percent.
The coupon rate on the second debt was 3.61 percent. The 5 per-
cent was oversubscribed by 21 times, and the second debt was over-
subscribed by 1.2 times.
And so, as we seek out ways to reduce costs to our institutions,
we need to be very mindful of the fact that the underwriting fees
upfront are one thing, but we need to also protect institutions from
mispriced offerings that are going to result in interest expenses.
One hundred million dollars at an 89 basis point differential over
30 years of debt is a $26.7 million interest expense.
Thank you, Mr. Chairman.
Chairman GREEN. The gentleman’s time has expired.
The Chair will now recognize himself for 5 minutes. And my first
question will go to Ms. McDaniel.
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Ms. McDaniel, as it relates to this subcommittee, I think you
may have made history today by announcing your pronouns, and
I think I am going to join you in making history, and announce my
pronouns as he/him/his. So, maybe you are changing the world
today, Ms. McDaniel.
Language is very important, which is one of the reasons why I
appreciate this President, President Biden. He uses the language
of the suffering. If you want to change the status quo, you have to
change the language. You cannot use the language of the status
quo and change the status quo. And I appreciate President Biden.
Which takes me to you, Mr. Parsons. Sir, you have indicated that
you found that HBCUs pay an average of 20 percent more to issue
bonds than similarly situated non-HBCUs. My question to you, Mr.
Parsons, is, is this a question or a case of this being institutional-
ized, since it applies to HBCUs? And if you will give me a brief yes
or no, I will then follow up.
Mr. PARSONS. Can you please clarify your question, what you
mean by ‘‘institutionalized?’’
Chairman GREEN. Is it such that the institutions that are pro-
moting, producing, promulgating, and perpetuating this cir-
cumstance, are they doing it not because they want to discriminate
necessarily, but because this is institutionalized in their habits and
their norms?
Mr. PARSONS. The results of our functions are consistent with in-
vestors.
Chairman GREEN. Investors are owned by institutions, are they
not?
Mr. PARSONS. About half of municipal bonds are owned by just
mom-and-pop retail investors, and about another half are owned by
institutions.
Chairman GREEN. Okay. Those that are representing institu-
tions, let’s just talk about that, something that is institutionalized.
Mr. PARSONS. Our paper does not address that.
Chairman GREEN. I am just asking you for your opinion. No pen-
alties today.
Mr. PARSONS. No, no opinion offered.
Chairman GREEN. Okay. Let’s go to Ms. McDaniel.
Ms. McDaniel, do you see these circumstances as being institu-
tionalized, this 20 excess charge?
Ms. MCDANIEL. It would certainly appear that way. Sorry, you
asked for a yes or a no. I think it would be a yes, but it seems that
way.
Chairman GREEN. I tend to take people to the edge, so please for-
give me. But it is just something that a person who is a liberated
Democrat does. I am not a part-time freedom fighter, so sometimes
you bring your full-time fighting to the arena where it can be most
beneficial.
So if this is institutionalized, is it institutionalized discrimina-
tion? Ms. McDaniel, is it institutionalized discrimination?
Ms. MCDANIEL. It would certainly seem that way. Judging by the
outcomes, I would say, yes.
Chairman GREEN. Let’s go to Mr. Fisher. Mr. Fisher, is this insti-
tutionalized discrimination?
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25
Mr. FISHER. I believe so, when we are discussing institutional in-
vestors.
Chairman GREEN. Thank you. As it relates to institutional inves-
tors, is a good preamble for my commentary, and I appreciate you
calling it to my attention as I move next to Mr. Hall.
Mr. Hall, is this institutionalized discrimination?
Mr. HALL. Chairman Green, I have not studied that. I can tell
you that what I saw in the study that pointed to taste-based dis-
crimination is not something consistent with my experience in the
marketplace. And I don’t think the study done at the time that it
was done really benefited from the transformation that has taken
place in our market. They would make a study like that today a
little bit more inductive. So I can’t conclude that I see that there
has been institutional racism, sir.
Chairman GREEN. Okay. The Chair appreciates all of the an-
swers. I have 22 seconds left, and I try to be a good example for
the rest of the committee, so I will just close with this comment
before I do my official closing. We know, and probably can take ju-
dicial notice of the fact—I say, judicially as we do it in court—that
these institutions have been discriminated against in the past. And
I think that we probably have to do more to acknowledge and work
to acknowledge what the current circumstance is. I will leave it at
that and yield back the balance of my time.
Seeing no additional Members to ask questions, the Chair will
now thank the witnesses for their testimony and for devoting the
time and resources to share their expertise with this subcommittee.
Your testimony today will help to advance the important work of
this subcommittee and of the U.S. Congress in addressing lending
discrimination and systemic racial inequality.
The Chair notes that some Members may have additional ques-
tions for this panel, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 5 legis-
lative days for Members to submit written questions to these wit-
nesses and to place their responses in the record. Also, without ob-
jection, Members will have 5 legislative days to submit extraneous
materials to the Chair for inclusion in the record.
This hearing is now adjourned.
[Whereupon, at 1:32 p.m., the hearing was adjourned.]
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File and source
- File
- CHRG-117hhrg44667.pdf
- Size
- 26,875,595 bytes
- SHA-256
- 5bc7d3bb493381ed975399b74a32d40f4861d0cfd85fedd788ff475821c04511
- Our copy
- CHRG-117hhrg44667.pdf
- Original
- www.govinfo.gov