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Arkansas Just Banned 12 Financial Institutions. Now Taxpayers are at Risk

Prudent fiscal management. Deference to private-sector expertise. Competitive marketplaces. Protecting taxpayers.

These bedrock principles have long guided conservative governance, and for good reason. We believe that a limited government is key to private-sector ingenuity and economic growth.

>>>READ: C3 Solutions Unveils Free-market, Pro-growth Investment Principles Related to ESG

Unfortunately, these principles are now being challenged from an unexpected quarter. State legislatures and government officials in several Republican-led states, including Arkansas, have been meddling in financial markets by restricting the options that state officials can use for financial services. Unsurprising for those of us who still hold these free market values, this imprudent approach is costing states millions of dollars and putting taxpayers at risk of footing the bill.

Last year, Arkansas passed legislation that bans financial institutions from any government contracts if state officials determine those institutions discriminate against certain industries such as the oil and gas sector. This spring, state officials announced 12 such institutions that would be banned from work such as issuing government debt or managing pension funds, a list that included Goldman Sachs, TD Bank, Credit Suisse and others.

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These policies create severe financial risk for the state itself. Competition and choice incentivize companies to provide better products at competitive prices. Financial lending is no different. By banning certain institutions from offering financial services to the state, these policies reduce competition and put state and local governments in an economically disadvantaged position in their ability to receive competitive contractual terms or solid investment returns. Indeed, the Arkansas legislation passed last year despite warnings from the state’s pension managers that it would result in lower returns of between $30 million and $40 million per year.

With less competition in the marketplace, the remaining financial institutions could charge higher interest rates and fees for the same services. When the government is the one incurring the higher borrowing costs, the economic burden falls on Arkansan taxpayers.

Oklahoma passed similar legislation and ran into this problem, as municipalities incurred $184.7 million in additional costs due to the lower competition and higher rates. These higher costs ripple throughout the economy. In Texas, for example, the state’s Chamber of Commerce estimates that the additional debt burden from its policy will cost the state more than two-thirds of a billion dollars in lost economic activity and destroy more than 3,000 full-time jobs. 

By dictating investment decisions, these policies encourage financial institutions to ignore certain types of risk – even though risk management is at the heart of prudent investing. If a company is not adequately protecting against these risks – which have profound impacts on supply chains, infrastructure, workforces, and other key business considerations – then long-term value creation becomes questionable. Meanwhile, companies that integrate all relevant economic risks and opportunities in their decision-making create a strong incentive to invest.

>>>READ: To Reduce Climate Risk, the SEC Should Ease the Cost of Doing Business

State policymakers do not know better than professional financial managers in how to invest or manage financial risk. Nor should the government be determining which industries are deserving of investment. This holds true for blue states that are forcing fossil fuel divestment and red states that are banning banks for choosing not to lend to oil and gas projects. 

Policymakers in Arkansas and elsewhere have apparently taken exception to this common-sense investment approach and are now using the heavy hand of government to ban companies who are trying to maximize the return on capital by properly managing risk. 

States need to stop adopting restrictive investment policies that jeopardize the financial future of their citizens and instead adopt policies that embrace free-market principles. We at C3 Solutions – along with peer organizations like the National Taxpayer Union, R Street, and Taxpayers Protection Alliance – wrote to Congress earlier this year, calling on elected officials to “resist the urge to empower government bureaucrats to pick winners and losers in the private sector. Ideologically driven mandates from both parties only harm average Americans’ retirement accounts and waste taxpayer dollars.”

Let’s get back to conservative principles that value financial prudence, limited government intervention, and more competition all to the benefit of taxpayers.

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.

Copyright © 2020 Conservative Coalition for Climate Solutions

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