Explaining structural racism in municipal borrowing
The 11th annual Brookings Municipal Finance conference was held this week and it’s always yielded a bucket of new ideas and findings for me to write about. This year didn’t disappoint. In this issue, I’ll look at new research on structural racism in the municipal bond market and what it means. I’ll go back to this well throughout the year to write about other interesting research presentations from the conference.
Also, one last reminder I’ll be moderating this year’s “State of the States” online event hosted by the Urban Institute on July 25 @Noon EDT. Learn more and register here.
Yes, there is a ‘Black Tax’
Cities and towns with a higher percentage of Black residents pay higher borrowing costs than otherwise comparable jurisdictions in the same state and, on average, this amounts to an up-charge of about 0.44%. The average bond issue in the sample was $7 million over 15 years, which translates into hundreds of thousands of dollars in higher interest payments. On average, Blacks made up about 7% of the population of municipalities in the sample.
This higher cost comes even as the municipalities with a higher share of Black residents were found to have larger populations, higher incomes and higher employment levels when compared with other localities in the same state or region. In other words, economic theory would dictate that these municipalities should pay lower costs. But that’s not the case.
The paper is called “Black Tax: Evidence of Racial Discrimination in Municipal Borrowing Costs” and is authored by scholars at American University, Stony Brook University and the University of Tennessee. It found the Black Tax is most severe in bond issues where bond investors are more likely to be local and in regions where there is “heightened racial resentment.” The authors look at the latter in a few ways, but one way was by measuring national political sentiment. Prior survey work has indicated that racial resentment fell during the election cycles of Obama in 2008 and 2012 and rose during the election cycle of Trump in 2016. The pricing penalty on more diverse municipalities decreased in the Obama years and increased in the Trump years.
What this means: The authors are careful to explain it’s not that market participants are racist, but that racial bias built into the capital markets can cause localities to pay higher risk premiums. It’s the same racial bias that results in Blacks paying higher car loan rates and being lowballed on their home appraisal.
These higher borrowing costs means that more diverse localities wind up with less capital to invest in their communities. Since infrastructure investment is one of the biggest ways a government helps its economy grow, this inequity in borrowing can ultimately further perpetuate other structural inequities (think: school buildings, streetscapes, etc.) that only contribute to the overall misperception.
Tribal governments get charged nearly double on their debt
The racial bias is even harder on tribal governments issuing municipal debt. But the reasons might be slightly different.
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