Coal-producing counties across the U.S. are failing to account for the harm inflicted on their finances by the ongoing decline of the fuel. That decline, prompted mostly by market competition from cheaper gas and renewable energy, stands to get worse if the federal government passes a significant policy to combat climate change and restrict carbon emissions.
But counties in coal-reliant Appalachia and in the Powder River Basin out west are failing to communicate that risk when they issue municipal bonds to pay for everything from schools, highways, hospitals, sewer systems, and waste disposal facilities.
Municipalities are “at best uneven and at worst misleading” in their characterizations of climate change-related risks, according to a report issued this month by Columbia University and the Brookings Institution, which warned “a fiscal tsunami is heading toward coal-backed assets.”
The report found coal-dependent communities, by neglecting disclosure of risk to their primary industry, are unprepared to plan for the diversification of their economies, and are leaving bondholders on the hook for potential default.
“There has been a lot of attention on the disclosure of climate-related risks from corporations but we noticed a lot less attention being paid to local governments,” said Noah Kaufman, an economist at Columbia who co-authored the report. “A lot of these counties are selling the idea the industry is something between not going away and coming back. But the reality is coal-reliant counties are facing an existential risk.”
The decline of coal production in the U.S. puts 26 coal-mining dependent counties in 10 states at severe economic risk, Kaufman’s report says. The Department of Agriculture’s Economic Research Service defines a county as “mining-dependent” if 8% or more of its employment is engaged in the industry.
Coal-related revenue funds a third of some of these counties’ budgets, and the loss of that income threatens their ability to fund school systems, support other public services, and issue and serve debt.
“It’s pretty hard to wrap your head around all the different ways coal-mining communities’ finances are dependent on the industry,” Kaufman said.
Kaufman, along with his co-authors, reviewed a sampling of bond documents issued in coal-dependent counties, including Campbell and Boone counties in West Virginia and Mercer County in North Dakota.
“In some of the bond documents I saw, they were extolling their robust coal industry as a virtue, not as an exposure,” said report co-author Adele Morris, a senior fellow and policy director for climate and energy economics at Brookings. “The risk of the collapse of the coal industry threatens their ability to repay outstanding bonds.”
Coal production in the U.S. declined by one third between 2007 and 2017, with jobs in the industry falling from 70,000 in 2003 to 53,000 today. Even a “moderately stringent” federal climate policy could create potential declines in production of around 75% in the 2020s, the report found.
While there are federal regulations requiring disclosure of risks regarding the financial health of municipalities, they aren’t very strong, according to John Coffee, a law professor and director of the Center on Corporate Governance at Columbia Law School, who did not work on the report.
Coffee said municipalities are sometimes understaffed and unsophisticated about disclosure risks, compared to corporations.
“Anyone who makes disclosures at the municipal level will focus on the positive stuff more than negative,” he said.
Coffee says municipal bonds issued by states, cities, and counties, are exempt from many provisions of federal securities laws written in the 1930s, including risk disclosure requirements enforced by the Securities and Exchange Commission.
Instead, the Municipal Securities Rulemaking Board, a self-regulatory agency overseen by the SEC, sets the rules for what risks municipalities must disclose in issuing bonds.
Those rules are not strict or specific, and were written before climate change was considered a threat.
The SEC does have the authority to sue municipalities for misleading disclosures in connection with their bond offerings under anti-fraud rules, but Coffee said the bar is high. The SEC, or a private investor bringing a suit, would have to prove that risks to paying back the bond are “material” and the defendant acted with an intent to defraud, behaving with “extreme recklessness.”
“There is no question the SEC could bring an action against a municipality because of a crisis like climate change,” said Coffee, who added the agency has not sued a county over climate change-related risk disclosure.
It is easier for businesses to be held legally accountable for insufficient risk disclosure related to climate change. Since 2017, eight U.S. cities, six counties, and the state of Rhode Island have sued companies such as ExxonMobil, Shell, BP, and Chevron, accusing them of selling products that cause climate change while misleading the public about the harms of their business activities.
The pressure has resulted in many companies publishing, or committing to release, reports on climate risk, and promising actions to reduce that risk.
Some Democratic presidential candidates, including Jay Inslee, Joe Biden, Beto O’Rourke, and Elizabeth Warren, have proposed plans to strengthen the SEC’s climate change-related disclosure rules for public companies, which are currently voluntary.
But none have focused on the failure of coal-reliant counties to do their part in communicating they have a problem, too, which is trickier to address.
“There really isn’t a parallel effort for local governments,” Kaufman said.
Kaufman, Morris, and Coffee say the Municipal Securities Rulemaking Board could develop more specific guidance or requirements for counties’ disclosure of climate-related risks when issuing bonds.
Coffee, however, projected such change to be unlikely without action by Congress, which has struggled to pass climate change policies.
“There is no constitutional problem here, but Congress is usually not in the business of forcing cities, states, and municipalities to do much,” Coffee said.
