The Climate Politics Almanac: State Treasuries

Municipal Liquidity in the Age of Chronic Crisis

When the COVID-19 crisis hit in March 2020, state and local governments were among the most profoundly affected. Conditions in municipal bond markets were so “unprecedented” that state treasurers urged the Federal Reserve to step in, and Congress directed the Fed to set up a Municipal Liquidity Facility (MLF) to lend to states and cities in distress. 

Through most of 2020, state governments were facing truly dire revenue shortfalls, with some estimates reaching nearly $1 trillion. While state and local officials struggled to negotiate more federal aid during the pandemic, the MLF made it possible for state and local governments to access municipal bond markets again, but was nonetheless badly underutilized throughout the pandemic.

After former Treasury Secretary Steve Mnuchin shut the MLF down near the end of 2020, Democrats taking back the Senate enabled approval of $350 billion in state and local aid through the American Rescue Plan, which more or less closed the chapter of pandemic-induced emergencies for state and local municipalities.¹

In revealing how vulnerable municipal bonds and other segments of financial markets are to sudden disruption, the pandemic illustrated that “our climate and economic crises are converging.” In this real-life stress test, it is telling that, although federal assistance and a faster-than-expected recovery helped most localities avoid the worst-case scenarios, the states with the greatest dependence on oil and gas revenue ended up in the worst shape.

In preparing for the future, a permanent MLF has been one suggestion to help states and cities deal with the climate crisis with the formidable but necessary costs of building climate resilience and shifting to a clean energy economy. This was Alex Yablon’s point in his essay “Can Banking Magic Save Cities from Climate Disaster?”

The Power of State Treasurers

Most states have a position called state treasurer that serves as the chief financial officer of the state government, overseeing the management of revenue, budget allocations, and public pension capital. In all but eleven states, this position is a statewide elected office.

In recent testimony to Congress, Connecticut Treasurer Shawn Wooden endorsed the concept of a permanent MLF that stands ready to be deployed to meet ongoing emergencies (although he didn’t directly allude to the climate crisis).

Advocating for state budgets to have the resources to avoid lurching from disaster to disaster is not the only way that state treasurers are relevant actors in the climate crisis. Because of their positions as state’s top bankers and stewards of trillions of dollars in worker pensions, state treasurers are crucial decision-makers in determining the course of climate finance in the years to come. In 2020, nine state treasurers exercised their power as institutional investors to help push former Exxon CEO Lee Raymond off the board of directors at JPMorganChase.

The trillions of dollars in assets overseen by these treasurers are currently heavily invested in private equity and dirty energy. State financial officers in New York, Rhode Island, and elsewhere have begun steering their portfolios away from these dirty sources and toward a more sustainable pathway. 

Upcoming Climate Politics Almanac entries will review the performance of current state treasurers and discuss the 2022 elections. Subscribe to make sure they get to your inbox.

1. The normally staid economic analysts at the Fed acknowledged as much in a January 2021 assessment of municipal bond markets that concluded:

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