[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                  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
                             
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                           
                                                          
                               __________
                               

                    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. VELAZQUEZ, 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
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
              Subcommittee on Oversight and Investigations

                        AL GREEN, Texas Chairman

EMANUEL CLEAVER, Missouri            ANDY BARR, Kentucky, Ranking 
ALMA ADAMS, North Carolina               Member
RASHIDA TLAIB, Michigan              BARRY LOUDERMILK, Georgia
JESUS ``CHUY'' GARCIA, Illinois      ALEXANDER X. MOONEY, West Virginia
SYLVIA GARCIA, Texas                 DAVID KUSTOFF, Tennessee
NIKEMA WILLIAMS, Georgia             WILLIAM TIMMONS, South Carolina, 
                                         Vice Ranking Member
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   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 Fisher.............................................    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

 
                    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 
Investigations will come to order. Without objection, the Chair 
is authorized to declare a recess of the subcommittee at any 
time. Also, without objection, members of the full Financial 
Services Committee 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 
disturbances 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 inadvertent 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 
statement.
    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.
    First, it will examine material disparities and costs of 
capital raising for Minority Serving Institutions, more 
specifically, Historically 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 exciting 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 
conclusively that HBCUs use higher underwriting fees to issue 
tax-exempt bonds compared to similarly situated institutions 
that are not HBCUs, thereby materially increasing their costs 
of capital. Notably, 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 
virtually assured, and therefore, any cost differential would 
not be the result of differing risk exposures affecting 
investor behavior. Rather, 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. Specifically, 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 average of 81 basis points.
    In closing, I would like to thank my long-standing 
colleague, Representative 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 minutes 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 
appearing 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 municipal debt 
in the market, over 50 percent is held by individuals, with the 
remaining split between banks, mutual funds, insurance 
companies, and other investors. The muni market is a strong and 
reliable 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 on the economic well-being of States 
and localities as taxes, tourism, and other revenue sources 
declined. To respond to this challenge, Congress directed the 
Federal Reserve to establish the Municipal Liquidity Facility 
(MLF), and shortly after the establishment 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 success 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 
infrastructure such as roads and bridges, and invest in 
infrastructure for future generations, such as rural broadband, 
to ensure an equitable path toward the future of work and 
education. The question then becomes, how do we achieve our 
shared goals of strong, comprehensive, and resilient 
infrastructure?
    Municipal bonds are a key funding source for State and 
local governments 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 private 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 refunding 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 process 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 
colleague 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-regulated rating agency they chose to work with. 
This effort was intended 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 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 
Historically 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 privilege of representing Kentucky State University, and 
this is an important 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 
gentlewoman from North Carolina, Representative Adams, who has 
been an autonomous advocate for HBCUs throughout her career. 
Representative 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 Subcommittee 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 Universities 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-exempt bonds compared with similar institutions that 
are not HBCUs, thus raising the cost of capital for HBCUs. And 
this discrepancy is unrelated to the issuer's credit risk or 
quality. It is approximately 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 
witnesses, and I am pleased to introduce our panel: Chris 
Parsons, who is a professor of finance at the University of 
Southern California; 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 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 
highlights 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 education bond markets,'' which was 
published in the Journal of Financial 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 regards.
    Economists have been interested in discrimination for many 
decades, 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 empirical 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 
correlated with other determinants of the outcome of interest. 
Consequently, it is rare to find examples where we can be 
almost certain that we have accounted for such competing 
factors, other than discrimination itself. Although no real-
world study can be 100 percent perfect in this regard, studying 
municipal bonds issued by colleges 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 notion of the issuer's quality or 
productivity is well-defined and relatively 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 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 racial 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 markets 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 
documented 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 potentially investing in an HBCU-issued 
bond from another State.
    Thank you for your attention, and I look forward to any 
questions 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.

  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 financial advisor, as an underwriter, and 
as an issuer of tax exempt and taxable securities for State and 
local governments. As a graduate 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 Department 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 examination of standardized test scores, selectivity 
metrics, and financial ratios. This lack of understanding 
subjects these institutions to higher interest rates when 
borrowing as well as restrictive covenants that impair 
financial flexibility. As a result, investments in physical 
facilities, student support initiatives, and academic programs 
suffer.
    These increased borrowing costs also increase the cost of 
attendance 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 student housing fees increase the 
need for students and their families to borrow additional funds 
to finance their education. This increased debt burden impacts 
not only the students and their families, but also the 
institution.
    As the committee is aware, institutions with a high cohort 
default rate are in jeopardy of losing access to Title IV funds 
and possibly 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 fosters 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 
recommendations offered by the HBCU Capital Financing Advisory 
Board include: (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.]
    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 undermining, 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 fiscal 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 
participants through efforts like the Fiscal Justice Municipal 
Investment Strategy we developed alongside Adasina Social 
Capital, or the Fiscal Justice Credit Rating Agency we are 
launching this year. Our work blends economic modeling, 
financial analysis, and social policy 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 larger 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 exclusionary school discipline policies, the $2 
billion for municipal sediments, or the $7 billion of excessive 
fines and fees disproportionately 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 equity 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 institutions. 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). Although PWI's fiscal justice risks have to this point 
been unpriced, 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 
settlement for HBCUs in Maryland, numerous institutions 
granting funds or some form of relationship to descendants of 
enslaved Africans who were sold into finance schools under 
endowments, and finally, post-secondary schools that race to 
become federally recognized 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 actually serving them.
    From a credit perspective, we see MSIs as strong municipal 
investments as opposed to PWIs, which are evidencing a growing 
body of unpriced fiscal justice risks. Accordingly, we have 
developed 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 
Universities 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 INVESTMENT BANKING 
 [INFRASTRUCTURE AND PUBLIC FINANCE], SIEBERT WILLIAMS SHANK & 
 CO., LLC, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL 
                  MARKETS ASSOCIATION (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 association for broker-dealers, investment banks, and 
asset managers operating in the U.S. and in global capital 
markets. I am also a partner and the national head of 
infrastructure in public finance investment 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 bringing attention to HBCUs having fair access to the 
public municipal 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 industry, therefore, I know firsthand how 
municipal bonds are a critical 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 pricing. 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 respect to the study that spurred this 
hearing. I detailed these considerations 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 
members of this distinguished panel, including my classmate, 
Mr. Fisher. Despite my and SIFMA's concerns as it pertains to 
the study, we fervently believe more can be done to assist 
HBCUs with accessing 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 favorable 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 expand the taxable investor base for HBCUs include having 
the Federal Government authorize a high subsidy direct pay bond 
similar to disaster recovery bonds. Moreover, authorizing a 
Federal guarantee on taxable, direct-pay bonds for HBCU-
sponsored debt would be a valuable credit enhancement to 
attracting new class and investors 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, 
expanding 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 governments both address critical 
infrastructure needs and obtain savings that tilt down to 
taxpayers.
    Again, I commend the work of this subcommittee on this 
important 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.]
    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 proponent 
of the importance of open competition in the credit rating 
space to protect investors and increase market liquidity for 
underserved sectors, and we greatly appreciate the work of this 
committee 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 important 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 expected.
    As we look to the future, we believe that some States and 
municipalities 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 downtown office districts, as well as 
leisure and business travel destinations.
    Moving to the topic of racial and social issues, I would 
like to address 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 will continue to drive pricing and liquidity in 
favor of municipalities that have exhibited a commitment to 
economic, racial, and social justice.
    Mr. Chairman, knowing the subcommittee's interest in the 
ratings 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 sunlight 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 
opportunity 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 
Missouri, Mr. Cleaver, who is also the Chair of our Housing, 
Community 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 
familiar 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 out when the Patterns and Practice Report was issued on 
Ferguson, 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, incoming inequality, the availability of 
affordable housing, unemployment or diversity of employment all 
factor in on a risk of a municipality 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 mentioned these towns having, sort of, restrictions. I 
grew up in Chicago, 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 specific credit nature of Ferguson, I can tell you that a 
lot of considerations 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 transaction, 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 
tumultuous, sort of, market conditions to even access the 
capital markets 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 
subcommittee, 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 
somewhat surprised that there wasn't as much uptake. There has 
been so much conversation about the plight of State and local 
governments 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 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 municipalities 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 Facility, 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 normalcy.
    The second thing I will say is that the impacts going 
forward are going to be uneven. There were structural issues 
before the pandemic, and we are going to see those exacerbated 
after the pandemic. And they are going to be in towns that were 
primarily vacation 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 material 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 analyzing really does have an impact on the fiscal 
health of that entity, 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 interesting to investors, and investors 
are asking for that type of information. And so, we are 
advocates of more disclosure, particularly the type of 
disclosure that may align with investor preferences over 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 Investing in Our Communities Act, which would 
reinstate advanced refunding for municipal bonds. Mr. Hall, 
could you detail how reinstatement 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-exempt 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-exempt 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 percent more to issue bonds that are similarly 
suited to non-HBCUs. Very succinctly, can you share to what you 
attribute this significant 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 someone 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 estimate that is a lower bound on the 
all-in costs, because we don't observe what happens to HBCUs 
that are not able to go to the market.
    My intuition--and this is outside the realm of the study at 
this point; this is a supposition--is that the cost is probably 
significantly 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 outstanding 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 
investors 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 
America 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 creditworthiness 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 
convening 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 capital 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 repaid, 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 not it would actually be very liquid in the market. 
Smaller bond issuances are less liquid than larger issuers. 
Issuers who are infrequently in the marketplace are less liquid 
than those who are frequently 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 receptivity 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 education 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 investment objectives of certain ESG 
investors, is extremely attractive and and most incur a pretty 
lost cost to bar and doing the competition 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 individuals and the households who 
incorporate municipal bonds into their financial planning, and 
obviously the specific benefits of including 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 communities 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 investments.
    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 benefit. 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 investors in their households. It is 
changing. It is evolving as to how that access is granted these 
days, but it is still an important feature of the investment 
objectives of our everyday American citizens.
    Mr. Kustoff. Thank you, Mr. Hall.
    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, Boston, and Pittsburgh metro statistics 
areas. Meanwhile, the Fed Secondary 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 results 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, triple 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 established a public bank, which conducts 
business on behalf of the State, bringing down borrowing costs 
on the State needs and offering 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 bonds compared to private bond underwriters? Compared 
to a private bond underwriter?
    Ms. McDaniel. Yes. Thank you for that question, 
Representative. Based on the research by the Action Center on 
Race and the Economy (ACRE), municipal banks definitely allow 
cities to recapture local tax revenues and local funds 
currently invested in market 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 municipality 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 factors 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 resources and are better equipped to weather budget 
crises that were created by COVID, another really critical time 
in our country especially 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. 
During 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 ratings is outside of issuers' control. For instance, if 
Puerto Rico is devastated by a hurricane or Detroit loses 
thousands of good jobs 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 Chicago 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 important.
    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 entities 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 university with a declining student body or a city with 
a declining tax base. Is the bond market itself capable of 
protecting these institutions from arrangements that just 
extract wealth from local communities? And do you think that a 
public bank or a national investment 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 community bank or a public bank could better serve in that 
role, taking 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.
    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 connected 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 history 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 important for those 
particular issues. But the overall benefit to the marketplace 
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 
municipal bond market in the public way is in due course and is 
not necessary at this particular point. Having that as an 
emergency backstop 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 bonds. The municipal liquidity was a direct loan to 
issuers. Different ways of stabilizing the marketplace really 
serve this purpose, and I think having that lever going forward 
is important, but thank God we have a municipal bond market 
that is extremely resilient.
    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 regardless 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 
Representative 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 exempt 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 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 infusion of regulatory changes in recent years, and 
one of the important 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 oversubscription in an offering based 
on investor interest, typically municipal advisors, acting on 
behalf of the issuers, ask that the underwriters 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 allows for to ensure that oversubscription inures 
to the benefit of the issuer.
    Mr. San Nicholas. What would healthy oversubscription 
typically 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 subscription 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 
August, 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 percent was oversubscribed by 21 times, and the second 
debt was oversubscribed 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.
    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 institutionalized, 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 
promoting, producing, promulgating, and perpetuating this 
circumstance, 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 investors.
    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 
institutions, 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 
penalties 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 
institutionalized, 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 forgive 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 
discrimination? 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 
institutionalized discrimination?
    Mr. Fisher. I believe so, when we are discussing 
institutional investors.
    Chairman Green. Thank you. As it relates to institutional 
investors, 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 discrimination 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 
answers. 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 judicial 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 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, 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.]

                            A P P E N D I X


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