Texas taxpayers are footing the bill for the state’s war with Wall Street over guns.
The state’s municipal borrowers have been hit with as much as $532 million of extra debt costs because of a new GOP law that’s led some banks to step back from Texas’s bond market. That’s the conclusion of a new paper by Daniel Garrett, a University of Pennsylvania professor, and Ivan Ivanov, a principal economist at the Federal Reserve.
The researchers examined sales in Texas’s $50-billion-a-year municipal-bond market after a law took effect in September that targeted banks for their gun policies.
The legislation, known as Senate Bill 19, bars governments from entering into contracts with companies that “discriminate” against firearms entities. It has caused banks including Bank of America Corp. and JPMorgan Chase & Co., among the biggest underwriters of state and city debt nationwide, to stop most public-finance business in the state.
The study found that “the exit of the targeted underwriters from the Texas market has significant impact on underwriter competition and that the remaining banks are unable to offset the adverse effects of removing banks from the market.” The result is “large adverse effects for borrowers.”
The working paper offers an in-depth study into the cost borne by Texas governments after the law took effect. Market participants and opponents of the legislation have warned that Texas Republicans’ move to punish the banks could raise expenses for cities, counties, school districts, and even the state itself, by reducing competition for bond sales.
‘Very Surprising’
Garrett, a finance professor at the University of Pennsylvania’s Wharton School, said the magnitude of the increase in costs was unexpected given that Texas has a competitive muni market, with many underwriters participating.
“To see even the biggest issuers affected by this sort of shock was very surprising,” Garrett said in an interview. The paper examined bond sales from September through April.
The research focused on the departure of firms including Bank of America, Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase from the Texas municipal market, which is second only to California’s in terms of annual issuance.
Citigroup paused underwriting in Texas for several months, but has since underwritten sales. JPMorgan has been moving to re-enter the market as well.