Among the many issuers of municipal bonds in the U.S. are institutions of higher education. And while all these schools pay underwriting fees to issue their securities in the capital market, some pay notably more. New academic research found that historically black colleges and universities (HBCUs) in particular pay much higher fees than their peers to issue their bonds. The economists argue in their report that this is the result of racism.
Scheduled to be published in an upcoming edition of The Journal of Financial Economics, the economists found that borrowing costs for HBCUs were about 20 percent higher than non-HBCUs, placing HBCUs at a financial disadvantage in raising money to fund their operations. For example, an HBCU borrowing $30 million pays about $299,000 in fees, roughly $57,000 higher than other colleges and universities. These costs add up quickly.
Other factors including state tax breaks and the credit ratings of individual school issues were considered in the paper, which examined 4,145 tax-exempt bond issues from 1988 to 2010. These securities were worth $150 billion, and were issued by 965 colleges and universities, including 102 HBCUs.
However, the paper concluded that racial discrimination was the primary reason for the higher costs borne by HBCUs, half of which are public and supported by taxpayers. Those steeper fees appear "to reflect higher costs of finding willing buyers," the researchers said.
Furthermore, 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.
The authors of the paper, Paul Gao of Notre Dame's Mendoza College of Business, Casey Dougal of Drexel University, William J. Mayew of Duke University and Christopher A. Parsons of the University of Washington, propose several solutions to the fee disparities. Among the fixes they envision are boosting incentives to investors, such as making the HBCUs' bonds exempt from all income taxes. Muni bondholders typically don't pay any federal taxes and are usually exempt from state taxes if they buy from entities in states where they live.
The paper's findings ring true for Alvin J. Schexnider, management consultant and a former chancellor at Winston-Salem State University, an HBCU.
"There are instances where HBCUs present profiles similar to [predominantly white institutions], yet must pay more to borrow," he wrote in an email to CBS MoneyWatch. "What can be done? Discrimination must also be called out."
Unfortunately for many HBCUs, such as Pennsylvania's Cheney University, they face serious financial challenges. Cheney, the oldest HBCU, averted a potential shutdown last year when the Middle States Commission on Higher Education extended the .the probationary period for its accreditation to give it more time to get its financial affairs in order.
The institutions, many of which were founded during the Reconstruction Era when African Americans had no other higher education options, have seen their enrollments dwindle over the decades as other colleges diversified their student bodies. As a result, experts predict that a quarter of them may close their doors within the next two decades, which may result in the merger of some institutions.
"We will be sending a formal letter to U.S. Secretary of Education DeVos to request that she look into these findings and work with us to find solutions for HBCU sustainability and higher education equality," writes wrote Harry L. Williams, CEO of the Thurgood Marshall College Fund, in an email to CBS MoneyWatch. "The findings that this study makes also helps to reemphasize the importance of the HBCU Capital Finance Program, which is a lower-cost alternative to existing bond markets, and about the work that the Department of Education needs to undertake to further educate and engage more HBCUs in the Cap Finance program."