An academic study draws a line between the decreasing use of coal to generate electricity with fiscal decline and higher bond yields as measured among coal-dependent municipal governments.
The discussion came in conjunction with a
"The production of natural gas increased rapidly in the U.S. since the early 2000s thanks to the fracking revolution," said Ochoa. "Fracking made natural gas cheaper and more abundant source for producing electricity, and that replaced coal."
Power generation is frequently funded by municipal bonds, especially in the public power sector. The American Public Power Association estimates that nearly $70 billion in municipal bonds were issued in the last decade to finance public power investments.
The study reveals that the decline of coal, which has slipped from accounting for about 50% of the fuel used in generating electricity in the U.S. in the early 2000's to about 16% was sudden and unexpected by the industry.
"They underestimated the effect that natural gas was going to have on coal production," said Ochoa. "Forecasters consistently were optimistic, and they failed to anticipate the decline in coal."
According to the U.S. Energy Information Administration burning natural gas now accounts for 60% or electricity generation.
The study drew on data tracking coal mining activities, municipal bond yields, local debt levels, and economic indicators in specific counties.
"One standard deviation decline in coal employment leads to a 14% increase in debt levels, a 15% annual increase in the debt to revenue levels and a half percentage point annual increase in interest payments as a share of revenue," said Ochoa.
"As core jobs are disappearing from these communities, local governments are facing a severe fiscal squeeze."
Mining and burning coal is a reliable political football used by both parties as it serves as a traditional employer in blue collar communities and a leading cause in greenhouse gas emissions.
Wyoming, West Virginia, Pennsylvania, Illinois, and Pennsylvania account for over 70% of the coal mined in the U.S.
Some who participated in the discussion had questions about the size and location of the municipalities examined.
"I believe one way to sharpen this analysis could be to cluster the counties or cities and the issuances in their sample by region and by size," said Melissa Winkler, head of commercials for Crosswalk Labs.
"Clustering could help show whether the worst impacts are falling on counties or the issuances with the steepest production declines and the highest coal dependency."
One of the study's key findings centers on the notion that declines in coal production increase muni bond yields by as much as 8 basis points.
Tying the demise of coal to rising bond yields appears to be a commonsense conclusion.
"What do bond yields reveal about investor's perceptions?" said Ochoa. "They revealed that bond markets are pricing long term risks."
"They see these as a persistent fiscal weakness. Are some communities better positioned to minimize this effect? Yes, those that have more diverse economies,"
"The largest takeaway for practitioners in this paper is that markets are doing what they're supposed to do. They're sending signals about material risks," said Winkler.
