Florida and Texas Have Better Credit Ratings Than California, But They Pay More in Interest

The reason has to do with politically expedient, but fiscally shortsighted policies.

Politicians in Florida and Texas love to mock California.

It's easy to understand why. 

It's a convenient target and the attacks go down great with populations that suffer from inferiority complexes built up over decades or even lifetimes. 

So now, as more people start to follow jobs from the golden state to places with fewer regulations, cheaper housing costs and lower taxes, the schadenfreude is thick enough to cut with a knife. 

Elon Musk even moved Tesla’s headquarters from Silicon Valley to Austin and has taken to wearing cowboy hats on occasion.

Taking on 'Big Woke'

Flush with their newfound popularity and relevance, political leaders in the sun-belt giants like Texas and Florida have taken on another threat to freedom and the American way — the insidious plot that is ESG investing. Such investing takes into account environmental, social, and governance issues in addition to financial ones. 

And not since the conspiracy to fluoridate U.S. water supplies — or to vaccinate against highly communicable diseases — has there been a greater threat to the well being of the American people, or, apparently, the oil industry!

So ESG makes a big fat juicy target for the likes of Florida Governor, and presidential wannabe, Ron DeSantis, as well as Texas Gov. Gregg Abbot (who was probably the only person who wasn’t a suspect in the shooting of J.R. Ewing).

After all, nothing evokes the “woke” mindset more than people turning business discussions into debates about air quality, global warming and equal opportunity hiring practices, not to mention background checks for people who want to buy guns.

True to form, political leaders in both states have pushed through legislation baring state and local governments from using any of those ESG Wall Street firms to underwrite their bond issues.

As politics goes, it’s pretty cute.

As fiscal finance goes, it’s utter stupidity.

The Downside Is the Cost

That’s because the measures are costing local governments in the states big time in higher financing rates — hundreds of millions by some estimates.

As pointed out by Bloomberg Editor Emeritus Matt Winkler, the laws have pushed out Wall Street’s biggest finance houses, which have all embraced ESG investing styles, thus reducing competition in the muni underwriting markets.

So, with the largest and best capitalized underwriters unavailable, municipalities in Texas and Florida have to make do with fewer competitors and wind up paying higher interest rates.

A study by researchers at the University of Pennsylvania’s Wharton School of Business and the Federal Reserve found “Texas issuers will incur $300-$500 million in additional interest on the $31.8 billion borrowed during the first eight months following enactment” of the legislation.

Winkler noted that the states of Texas and Florida are themselves paying more in interest on their financial offerings than California, even though they have better credit ratings. “Since it began its assault on ESG in 2022, Texas, with its perfect AAA credit rating, is paying 19 basis points more in yield (the equivalent of $1.9 million on every $1 billion of bonds sold) than AA rated California on routine borrowings, according to data compiled by Bloomberg,” Winkler noted.

Triple A-rated Florida “now pays 43 basis points more in yield (or $4.3 million for every $1 billion of bonds sold) than California with an inferior credit rating,” Winkler added.

In potentially even worse news for school and water districts planning to borrow, lawmakers in more than a dozen other states have jumped on the anti-ESG bandwagon, passing, or introducing similar legislation. Those include: Arizona, Arkansas, Georgia, Indiana, Kentucky, Louisiana, Missouri, Ohio, West Virginia, and Wyoming.

Well, at least the politicians are being consistent and putting other people's money where their mouths are.