How Racial Bias in the Bond Market Impacts Black Americans

January 31, 2023

Communities of color face a variety of deeply-rooted racial issues: the wealth gap, discrimination and a funding gap to name a few. Due to these issues, people of color typically have to work harder and pay more to earn similar benefits, wealth and opportunities compared to their white counterparts. In the Black community, this phenomenon is known as the “Black tax.”

The Black tax can be paid in different ways and can impact a Black American’s ability to build generational wealth, their career, family and education. According to recent studies, the Black tax is causing bias in the U.S. municipal bond market.

The Impact of the Black Tax on the U.S. Bond Market

Municipal bonds, also known as “munis,” are loans that are used by states and cities to fund building or repair projects such as schools, roadwork or sewer repairs. The study found that communities with a high concentration of Black Americans, such as Southern communities like Memphis, pay higher interest rates for projects funded by bonds since the residents are primarily Black.

To put it into perspective, the study estimates that some communities such as Shelby County, which funds the Memphis school system, is paying $5 million more per year due to its Black residents. Another study found that each percentage increase in a community’s Black population boosted its chances of getting a low bond rating between 1 and 1.5 percentage points.

While communities with higher unemployment and lower income rates commonly qualify for lower bond ratings with higher interest rates, this type of disparity makes it hard to ignore the role that racial bias plays in the bond market.

How Racial Bias in the Bond Market Impacts Education

These gaps have damaging impacts on these communities, especially on the quality of education students receive. In Memphis, some schools are close to 100 years old and lack the funding they need to make repairs. For example, some lack essentials like air conditioning, locks, intercoms and outdoor lighting. While other schools need funds for major repairs for water leaks, roof repairs and sewage.

These types of learning environments have a negative impact on a student’s ability to learn and succeed. Research shows that before the pandemic, students at primarily Black schools were nine months behind students in some courses at majority-White schools.

Over the last few years throughout the pandemic, the achievement gap increased by three months. This puts Black students behind by an entire year compared to their white counterparts.

A Need for Student Support

While community and school leaders fight for long-term solutions to fund their schools, philanthropists like Founder, Chairman and CEO of Vista Equity Partners (Vista) Robert F. Smith have been doing everything they can to bridge racial inequities in the education system. As the son of two school teachers, Smith learned about the power of education and the value in giving back to one’s community at an early age. As a result, Smith made education reform a key tenet of his philanthropic commitments.

During Smith’s commencement speech to the 2019 graduating class of Morehouse College, he promised to take on the student loan debt for the entire class, a $34 million commitment. After Smith’s pledge at Morehouse, Student Freedom Initiative was created. The Initiative, which Smith is the Chairman of, is a nonprofit dedicated to freeing students from the crushing burden of student loan debt.

In 2021, Smith partnered with Vista and PowerSchool to fulfill over 1,800 teacher funding requests for classroom supplies through DonorsChoose. The $1.25 million donation covered the supply requests from more than 1,300 teachers at 670+ predominantly Black schools in six Southern U.S. communities.

Most recently, Smith made generous donations to his alma maters. In 2022, Smith gifted $10 million to Columbia Business School for the Robert F. Smith ’94 Scholarship Fund. Later in the year, he gave $15 million to Cornell University’s College of Engineering to establish three funds.

Learn more about Smith’s education reform commitments.