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Local government officials in Texas are increasingly feeling the sting of 2021 state laws that banned big banks from underwriting municipal bonds for “boycotting” or “discriminating” against the fossil fuel or firearm industries. Several aired their grievances at The Bond Buyer’s Texas Public Finance conference in Austin last week, noting the impact of the laws, which pertain to state and local government contracts worth $100,000 or more, has spread beyond bond underwriting to other functions, such as the procurement of letters of credit and investment and depository services.

Texas borrowers gathered at an industry conference bemoaned two Republican-backed laws in the state that issuers say have restricted which Wall Street banks they can do business with. The local officials spoke on a panel Tuesday before a packed room of city representatives, bankers and lawyers at an event hosted by the Bond Buyer in Austin. Several bankers at the conference work at firms that have been ensnared by the laws at various points since they took effect almost three years ago.

The State Board of Education is putting the oil and gas industry ahead of Texas schoolchildren, hobbling the public school trust fund and damaging the climate. The Republican leader of the State Board of Education made headlines last week when he declared the Permanent School Fund would pull $8.5 billion out of BlackRock, the world’s largest investment firm. “BlackRock’s destructive approach toward the energy companies that this state and our world depend on is incompatible with our fiduciary duty to Texas,” Chair Aaron Kinsey wrote on social media last week. While that turned out to be essentially political posturing, as my colleague Edward McKinley reported, Kinsey’s co-opting a financial decision for political gain reveals a higher truth about growing authoritarianism in Texas. Any company or individual who contradicts the Republican regime’s orthodoxy will pay an economic price.

For a state that touts being good for business, Texas is sacrificing its reputation by using the heavy hand of government to force investment into oil wells owned by a group with lots of political influence — the owners of the least producing, highest polluting oil wells. What’s worse is that these politically driven blacklists are so sloppily executed that the self-declared saviors of Texas oil and gas are blacklisting investment in oil and gas itself. According to a recent Bloomberg investigation, the Texas comptroller forbade Texas’ public pensions from investing with a number of funds that have invested a combined $5 billion in the Texas oil and gas industry. What’s the downside for Texans? By blacklisting many of the best-performing financial firms, state lawmakers reduced competition and reduced Texas counties’ options when it came time to issue bonds. A Wharton study estimated that Texas taxpayers were already on the hook for an additional $303 million to $52 million in interest in just the first eight months after the law’s enactment.

New Texas laws regulating major companies are worrying small government advocates. A low-tax group is concerned Texas may be losing its low-regulation reputation with new rules on banks, insurance companies, social media giants, and other businesses. State lawmakers have shifted in their ideology along with the Republican party. The Bush-era hands-off approach to business is slowly being replaced by people who are more comfortable using government in cultural and social issues. If companies shift money away from fossil fuels, gun manufacturers, and “key Texas industries” – the state may look into it. Senate Bill 13 became state law in 2021 to encourage businesses to stay away from environmental, social, and corporate governance (ESG). The comptroller now maintains a list of companies that limit commercial relations with the fossil fuel industry, boycott Israel, or stay away from gun manufacturing. The National Taxpayers Union advocates for low taxes and less regulation. Their executive vice president, Brandon Arnold tells Lone Star Politics, “They’re trying to put their ideological viewpoint basically into statute and force the state to stop doing business with companies where they have political or cultural disagreements.”

The fight over environmental and social governance (ESG) policy has gotten so out of control that Texas is seemingly trying to emulate California. The Lone Star State –  a great economic success story – is now trying to engage in the concerning practice of micromanaging private businesses.  This approach is incredibly surprising, when you consider that California and Texas have been almost polar opposites in recent years.

Texas bars its public pensions from investing in 350 funds run by asset-management giants such as BlackRock Inc. and Invesco Ltd. because a key Republican state official says they “boycott” the oil and gas industries. But a Bloomberg News analysis found that the 72 BlackRock funds on the prohibited list have invested more than $2 billion in the oil industry, while an Invesco fund allocates about 20% to oil and natural gas companies, some of which are also Texas-based. The TIAA-CREF Social Choice International Equity Fund has a nearly 5% allocation to fossil fuels. […] “Policies that block responsible investing hurt the economy, and now we see they can’t be executed,” said Kyle Herrig, spokesperson for Unlocking America’s Future, a left-leaning political group that’s critical of anti-ESG legislation. “Texas wanted to pave the way for other states to attack ESG, but they’ve just shown the nation their plan is a failure and, in the process, damaged their reputation as a state that’s good for business.”

There’s nothing more dangerous to business than big government deciding it knows best. Thankfully, we don’t have to worry about that here in Texas, right? If only that were true. The reality is that the populist wing of the GOP now running state government is only too eager to mirror the worst habits of the far left to push its own social agenda. In mid-December, major banks across the U.S. got a detailed questionnaire from Attorney General Ken Paxton demanding information about their policies, investments and relationships with clients. Why is that any of Ken Paxton’s business? He thinks it is because in 2021 the Legislature foolishly passed a law to make a socialist swoon.

In this op-ed, the president and CEO of the North Texas Commission argues against a relatively new Texas law that stops many kinds of business between the state and financial companies based on their ESG policies. “Nonsensical enforcement of Fair Access laws that target certain financial institutions due to their corporate governance policies could threaten the pro-growth groundwork we have laid by tightening our municipal bond market, costing Texas taxpayers, municipalities and businesses.”

Texans pride themselves on being champions of business. So, if you think the biggest investors in and financiers of the fastest-growing Texas companies are welcomed as tried-and-true capitalists, think again. And if you believe Texas and its top-rated AAA debt would never willingly borrow money on behalf of citizens at anything but the best rates and terms, you’re also wrong. You see, Republicans, who control the executive and legislative branches of Texas government (increasingly through gerrymandering and voter suppression), have become statists, forbidding anyone favoring alternative energy over fossil fuel or promoting gun safety over unfettered access to lethal firearms from doing business with the Lone Star state. And don’t think these policies are costless. The Texas prohibition laws, enacted in 2021, were initially estimated to add as much as $532 million to what the state and its municipalities pay in interest on their borrowings over time – payments that are ultimately borne by taxpayers, according to a 2022 paper published by University of Pennsylvania professor Daniel Garret and Federal Reserve economist Ivan Ivanov. This hidden tax comes about partly because the new state rules forbid many of the nation’s biggest banks – the same banks that handle at least 25% of the $50 billion-a-year market for new municipal offerings and have clients all around the world that want to buy bonds from the US — from underwriting Texas debt sales. The result is significantly reduced distribution and liquidity of Texas securities.