Historically Black colleges need equal access to the bond market
With the eyes of the nation recently affixed on a Minneapolis courtroom, awaiting the fate of the police officer who murdered George Floyd almost exactly a year before, a larger conversation about racial equality that was spurred by that tragedy is still permeating virtually every aspect of American life.
On Wall Street, as in many industries and institutions, leaders are searching for ways to identify ingrained and unconscious biases, and remove some of the barriers that have led to pronounced inequality and lack of opportunity for African Americans. It is no secret that the financial industry has not traditionally reflected the diversity of the country, and at times has served to reinforce some of the inequities endemic to American society.
However, the capital markets, particularly the $46 trillion U.S. bond market, have the power to drive real solutions to help level the playing field and extend opportunities to traditionally underserved communities.
One of the great engines of advancement for African Americans going back more than a century and a half are Historically Black Colleges and Universities (HBCUs), which have consistently produced some of the most dynamic leaders in all fields of the economy. As a proud graduate of Howard University, and an even prouder parent of a current Howard student, I have seen firsthand how HBCUs open pathways that many don’t realize existed.
As higher education becomes more expensive and competitive across the board, many HBCUs have not been able to access opportunities in the bond market as easily as more highly capitalized colleges and universities. Our analysis of figures provided by Bloomberg Data Subscription Services revealed since the year 2000, more than 1,400 Higher Education issuers have come to market to issue municipal debt; of those, only 46 were HBCU issuers.
This needs to change.
Recently, I was honored to testify before Congress, as it has taken important steps to address this gap, with the House Financial Services Committee convening a hearing in April, to discuss efficient ways to drive capital investment to HBCUs. The first step ought to be extending tax-exempt status at the federal, state and local levels to HBCU bonds.
The rationale behind such actions is grounded in the assumption that the modern-day investor will pay a premium for new credit opportunities. Investors in states such as Vermont, Montana, Wyoming, Idaho and many others are very limited in their ability to diversify their municipal holdings, all while maintaining a tax advantaged position.
Under present market conditions, such investors would flock to purchase bonds from a new name. Therefore, enabling “triple exempt” debt will not only broaden the market for HBCU bonds to investors nationwide, but also allow these institutions to tap into capital that is available to many other institutions and governments.
Broadening the market would mean increasing investor demand for HBCUs, which would result in favorable pricing and greater capital flow to HBCU bonds, and consequently better educational and career opportunities for young African Americans across the country.
Further, the appeal of social impact bonds, part of the larger movement towards Environmental, Social, and Governance (ESG) bonds, has never been greater.
In 2020, the market volume for ESG securities rose to $154 billion, a whopping 800 percent increase over 2019. While ESG bonds have been gaining in popularity for years, it seems reasonable to conclude that the year of reckoning over racial justice that followed the George Floyd murder had something to do with that.
In addition to granting “triple exempt” status, other ways to expand the buyer base for HBCU bonds include creating a high-subsidy direct pay bond (similar to disaster recovery bonds) or a federal guaranty on taxable direct pay bonds for HBCUs, as there can be no federal guaranty on tax-exempt debt.
What will be the result of increasing investor demand for HBCU bonds and bringing HBCUs more robustly into the bond market? The possibilities are limited only by these institutions’ ambitions.
New high-tech classrooms and labs for learning; new academic disciplines and departments, with top-flight faculty talent to match; new dorms to house more students; career pipeline programs and student exchange opportunities.
At Siebert Williams Shank, the nation’s top-ranked women and minority-owned investment bank, we have welcomed countless HBCU grads into our ranks. Many of them, myself included, did not originally envision themselves working in financial services because they did not see very many people who looked like them represented on Wall Street.
We have the opportunity to change that, to empower HBCUs to even further expand the horizons of its students and open new career pathways. The whole industry, indeed the whole country, will benefit from that.
Recently, we created an endowment for business education programs at Howard University and at Spelman College. President Biden recently proposed extending tuition subsidies for students at HBCUs, which will certainly give more families the ability to send their children to college.
But unleashing the power of the market by allocating capital to the institutions themselves will help correct structural disadvantages that HBCUs face, positioning them for greater success for decades to come.
Gary Hall is national head of Infrastructure and Public Finance at Siebert Williams Shank & Co.