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Is Racism The Reason Why Black Colleges Pay More To Issue Bonds?

Is Racism The Reason Why Black Colleges Pay More To Issue Bonds?

Should HBCUs pay more than other schools with similar credit profiles to issue bonds? Well, they do. Racial bias is alive and well in muni markets and it’s costing historically black colleges and universities.

A recent study has found that HBCUs actually pay more to issue municipal bonds than non-traditionally Black schools. “After controlling for credit quality, issue type and other relevant factors, HBCUs pay on average 14 percent more in underwriting fees compared with historically white institutions,” Bloomberg reported.

Municipal bonds, commonly known as a muni bonds, are issued by a local government or one of its agencies. IThey are generally used to finance public projects such as schools, roads, airports and and infrastructure-related repairs.

Since banks have to work harder to sell HBCU bonds, the schools get charged higher fees, according to Pengjie Gao, professor of finance at the Mendoza College of Business at Notre Dame. Gao co-authored a report, “What’s in a (School) Name? Racial Discrimination in Higher Education Bond Markets.”

Here’s the breakdown:

  • For non-HBCUs, an average 81 cents out of every $100 raised flows to underwriters.
  • HBCUs pay 11 basis points more, at 92 cents per $100 dollars raised, Bloomberg reported.
  • Fees may be a lot higher depending on what part of the country the school is based in. For example, schools in Louisiana, Mississippi and Alabama may pay 30 points more.


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In this Monday, Nov. 13, 2017 photo, Devante Kincade, quarterback for the Grambling’s NCAA college football game college football team, listens during a criminal justice class at the university in Grambling, La. Kincade, who played two seasons at Mississippi , says playing football at a Historically Black College or University is an experience to savor. Playing at an HBCU is not just about entertaining halftime shows the schools are known for, it’s about community. (AP Photo/Gerald Herbert)

 

HBCUs in Louisiana, Alabama and Mississippi — “which rank highest in racial resentment and opposition to affirmative action as measured by the Cooperative Congressional Election Study survey — pay underwriters municipal bond fees three times that of HBCUs in other states,” CBS News reported.

In dollar amounts, this is costing HBCUs about $35,000, Gao said. What’s makes this even more significant, is that students at these school tend to rely on financial aid such as Pell Grants.

This discrepancy has not gone unnoticed by lawmakers and some have tried to address the issue.

In 2016, Minnesota Congressman Keith Ellison introduced the HBCU Investment Expansion Act, an action that would grant triple tax-exempt status to bonds sold by the schools, Bloomberg reported. “That would allow out-of-state buyers to purchase the bonds tax-free. In theory, expanding the pool of possible investors outside of the state they were sold would make it easier for underwriters to place the bonds–and less costly for the historically Black colleges.”

“This legislation will level the playing field and help HBCUs get the funds they need to build new dorms, labs or classrooms without additional costs or fees,” Ellison said at the time.

The bill didn’t get far — it stalled in both the Ways and Means and Finance committees.

With HBCUs like Howard University already struggling financially, facing racial bias in bond issuance is just another uphill battle.