Anti-ESG bills return in Arizona, Oklahoma; Texas continues underwriter purge

An Arizona state senator is once again attempting to pass a law banning governmental contracts with companies, including banks that underwrite municipal bonds, that "discriminate" against the firearm industry. 

For the 2024 legislative session, Republican Frank Carroll introduced legislation that would take the question to voters, bypassing Democratic Gov. Katie Hobbs, who vetoed his bill last year.

"I've been working on this for three years and along the path we've refined the bill and along the path we've had a lot of attempts to get it to the finish line and it resulted in a veto last year," he told the Arizona Senate Military Affairs, Public Safety and Border Security Committee last week. "This decision to make it a ballot referral is the fact that the people have been asking for this to come through and this is their opportunity." 

Arizona Senate Republicans

Senate Concurrent Resolution 1007, which advanced out of the committee in a 4-3 vote, would place a proposition on the next general election ballot to prohibit Arizona public entities from entering into contracts worth $100,000 or more unless the contract contains written certification from a company providing goods or services that it does not discriminate against firearm businesses or associations.

Opponents of the measure who appeared before the committee said it would reduce competition among banks.

"When you increase the risk and decrease the number of competitors who can participate in providing the services to the state, to counties, to municipalities to others, you ultimately raise those costs," Arizona Bankers Association lobbyist Jay Kaprosy said.

The fear of driving banks out of the Arizona market was cited by Hobbs in her March 2023 veto of Carroll's Senate Bill 1096.

"This bill would limit competition and increase costs for local governments, costs which ultimately fall on taxpayers," her veto letter stated.

Republicans hold narrow majorities in the state legislature.

While the effort is ongoing in Arizona, so-called anti-environmental, social, and governance bills with contract prohibitions have been passed in other states with Republican-controlled legislatures, including Oklahoma, where bills this session seek to revise or expand its fossil fuel protection law and provide the same for the firearm industry.

Legislators continue to push anti-ESG policies despite evidence they increase municipal borrowing costs, according to Justin Marlowe, director of the Center for Municipal Finance at the University of Chicago's Harris School of Public Policy. 

"But it seems the political benefits outweigh those costs, especially since a larger share of those costs are paid by cities, school districts and other municipal borrowers in the more urbanized 'blue' parts of these otherwise 'red' states," he said in an email.

In Texas, which enacted laws in 2021 aimed at protecting the fossil fuel and firearm industries from "boycotts" or "discrimination," the list of investment banks no longer eligible to underwrite state and local government debt grew last week with Barclays joining previously banned UBS and Citigroup. Five other big banks – Bank of America, JP Morgan Chase, Morgan Stanley, RBC Capital Markets, and Wells Fargo – remain under a Texas Attorney General review over their involvement with the Net Zero Alliance, which seeks a transition to net-zero greenhouse gas emissions by 2050. 

While Citigroup is shutting down its nation-wide muni business and UBS dropped negotiated muni underwriting nationally, Barclays and the other banks under scrutiny remain active in munis. 

The underwriter purge comes amid a deluge of voter-approved debt from Texas issuers with more to come. Texas was the top source of municipal bonds among all states in 2023 for the first time in 42 years.

"You pair that with the significant infrastructure needs associated with the increased population (in Texas) and you've got less financial intermediaries — banks to underwrite this debt," said Martin Luby, associate professor of Public Affairs at the University of Texas at Austin. "I can't imagine there wouldn't be an impact on borrowing costs over time and that in fact could get larger over time with less competition in the market."

A 2022 study analyzed eight months of borrowing activity in Texas under the two laws and found interest costs increased by at least $300 million due to less competition as some banks sidelined their underwriting activity in the state. 

The Dallas City Council last week approved a 36-member pool of bond underwriters that included Barclays, along with the five banks targeted by the AG's office for a term of at least three years.

Marlowe said regional underwriters have stepped in to replace big banks. 

"If they continue to fill that void and minimize the borrowing costs impacts, that's an additional reason for state legislators to pursue these types of bills," he added.

Aside from financial consequences, Luby, who recently co-authored an opinion piece for The Dallas Morning News, pointed to a potential creativity drain.

"Taking out four or five of the biggest Wall Street banks has an impact in terms of the pipeline of financial ideas that these governments receive that they just aren't going to receive anymore," he said. "You can't quantify that." 

Bloomberg News

The Firearm Industry Discrimination Elimination Act is back for another try in Oklahoma after similar measures failed to make it out of the legislature during the past two sessions. The bill requires the state treasurer to compile a list of companies that boycott firearm businesses for divestment purposes, as well as for state and local government contracts.

Oklahoma's Energy Discrimination Elimination Act of 2022 landed Bank of America, JP Morgan, and Wells Fargo on the treasurer's boycotter list last year, resulting in Wells Fargo's resignation in May as lead manager for a $500 million Oklahoma Turnpike Authority revenue bond sale.

House Bill 3541 would add the timber, mining, and agriculture industries to the law, while applying a provision against contracts worth $100,000 or more with boycotters only to state agencies.

Senate Bill 1510 would also remove local governments from the act in the wake of legislative hearings last year when potential tweaks were discussed.

Another bill would require the treasurer to seek an opinion from the Oklahoma Attorney General if there is a fiduciary or other dispute with a state government entity regarding the law.

Senate Bill 469 seeks to extend the energy law's divestment requirement to the higher education sector.

Some of the legislation also aims to strengthen compliance with and curb litigation against the law's required divestment of state funds from boycotters.

The law's constitutionality is being challenged in Oklahoma County District Court by a state pension recipient who claims Oklahoma retirement system funds are being used for "political warfare" and not exclusively for the benefit of the system.

A hearing is scheduled for Feb. 6 on defendant Oklahoma Treasurer's motion to dismiss the lawsuit on grounds that include the plaintiff allegedly lacks standing to bring the case and the defendant has sovereign immunity.