A study published last month by the Social Science Research Network reveals that historically black colleges pay, on average, nearly $50,000 more in bond issuing costs than predominantly white colleges with similar credit ratings and financial outlook. Bonds are typical funding sources for new construction or extensive renovation of campus facilities. The report shows that HBCUs incur higher underwriting fees and and accrue longer waiting periods in inventory for potential investors. From the study:
Unconditionally, underwriters collect about $8,050, on average, for every million dollars raised in the municipal market. However, for bonds issued by HBCUs, the underwriter’s share is $9,200. For a typically sized deal ($35 million), the total difference grows to about $40,000. We hypothesize that the high spreads HBCUs are charged reflect, in turn, high selling costs born by underwriters. Indeed, conversations with municipal bond traders (the original source of inspiration for this paper) suggest that bonds issued by HBCUs are particularly illiquid, or in industry parlance, “harder to place.”
The study also shows that states with measurably high racial animus towards African Americans yield higher costs for HBCUs seeking bonds.
The results of such rankings are unsurprising, with Alabama, Mississippi, and Louisiana earning the dubious distinction as having the highest levels of anti-Black racial animus in the U.S. There is a clear structural break between these three and the fourth (Georgia), a distinction also reflected in the White vote share for Barack Obama in both elections. Accordingly, we compare the HBCU effect in these three Deep South states. For example, in 2008 (2012), Obama garnered only 10% (10%), 11% (11%), and 14% (13%) in the above 4 that observed in all others.
The results are remarkable. Outside Louisiana, Alabama, and Mississippi, we estimate that HBCUs pay 11 basis points (p = 0.01) more in gross spreads compared to non-HBCUs. However, within these three states — representing about one quarter of HBCU issuances — the marginal effect is three times as large (32 basis points, p = 0.04). This difference is statistically significant, and similar to our benchmark tests, does not change when controlling for school or bond characteristics. Further, we note that spreads for non-HBCUs are virtually identical between Louisiana/Alabama/Mississippi (82 basis points) and elsewhere (81 basis points), suggesting that differences in wealth, investor sophistication, or similar regional effects do not drive the differences observed for HBCU-issued bonds.
Louisiana has come under recent criticism from higher education observers in the state, for allowing dilapidated physical plant conditions on the campus to persist for decades.
Last September, Alabama A&M University announced a deal with the US Department of Education to refinance more than $65 million in outstanding debt, which will allow the university to build a new residence hall and to renovate several facilities with the annual savings of more than $400,000.
According to the Center on Budget and Policy Priorities, Louisiana, South Carolina and Alabama are among the nation’s worst in legislative cuts to higher education, each with reductions of more than 35 percent since 2008.