{T} he controversy over campus antisemitism appears to be triggering a backlash against diversity, equity and inclusion (DEI) at universities and other institutions. Donors are now realizing that DEI protects some groups while neglecting others, and those donors are now pressuring administrators to make reforms.
If those reforms break the momentum toward DEI, it will not be a moment too soon for the municipal-finance industry, which has been embracing racial equity in the aftermath of George Floyd’s death.
In 2021, Blackrock, Vanguard, Goldman Sachs Asset Management, and other bond-market participants launched the Municipal Issuer Racial Equity and Inclusion Engagement Framework, a five-page questionnaire that cities can use to establish their DEI bona fides. Among the questions: “Does your municipality conduct racial and socioeconomic impact studies to assess the effects of city planning, rezoning, and development projects on communities?” Issuers can post their answers to the Bloomberg Professional Terminal where institutional investors may review responses as they make investment decisions.
Another municipal DEI scorecard has been developed by the Bond Markets and Racial Equity Project, an initiative of the Public Finance Initiative, National League of Cities, Urban Institute, and others funded by a $4 million Robert Wood Johnson Foundation grant. The project is providing technical assistance to municipal bond issuers around the country, including the cities of Atlanta, Chicago, and Dallas, as well as King County, Wash., and the Metropolitan Water District of Southern California.
A logical next step would be the issuance of a municipal equity bond, marketed to investors as a way for them to support DEI with their dollars. As I’ve discussed in Capital Matters previously, several municipal issuers have floated climate bonds in recent years, thereby implementing the “E” (environmental) in ESG. A municipal equity bond would be more in line with the “S”(social).
Although King County has yet to issue a municipal equity bond per se, it recently floated a $126 million bond which conforms to the Social Bond Principles promulgated by the International Capital Market Association. Projects utilizing the proceeds of this “Social Bond” include some that are participating in King County’s Equitable Affordable Housing program and its Affordable Housing Climate Equity program.
Since these projects involve building low-income housing and providing the housing units with carbon-free power, they are within the realm of expenditures historically financed by municipal bonds. So, the “Social Bond” certification may just be a relabeling of a bond issue that would have gone to market anyway.
More concerning is another 2023 Social Bond issued by the City of Chicago. Some of the proceeds from this debt issue are going to “increase equitable community access to healthy foods,” “assist survivors of gender-based violence,” and “expand supportive in-home healthcare services to new moms.”
These seem like worthwhile initiatives, but they are poorly suited for debt financing. Municipal debt is traditionally issued to fund capital projects that provide benefits over the life of the bond (if not beyond). In this case, Chicago is borrowing to fund operational expenditures that provide immediate benefits while repayment is deferred, thereby creating an “inequity” from the perspective of future taxpayers.
Further, while bond proceeds are one-time, these programs appear to require ongoing expenditures, requiring that a new revenue source be found. That could be a tall order for the already highly taxed and indebted city of Chicago.
Aside from using debt proceeds for operations, another worrisome financial practice encouraged by DEI involves procurement. Denver International Airport, for example, has adopted the Equity in Infrastructure Pledge which requires “increasing the number, size, and proportion of contracting opportunities” going to Minority and Women-Owned Business Enterprises, Disadvantaged Business Enterprises, and Small Business Enterprises. Choosing contactors based on equity considerations, rather than pricing and capabilities, means that future infrastructure projects at the airport will likely cost more and be subject to greater execution risk than is necessary.
Finally, as I discussed here previously, some agencies are empaneling Equity Advisory Councils to weigh in on project designs. This practice can slow down infrastructure projects and raise their costs.
Agency staff can and should discuss community impacts of a proposed project in the Environmental Impact Statement required for federal funding. Since large projects inevitably require federal funding as well as municipal debt, the existing process already addresses disparate impacts and so there is no need to create new bureaucracies to debate them.
The U.S. is well known for its bloated infrastructure costs. Layering more equity considerations into the infrastructure financing process threatens to make construction even more expensive while siphoning off scarce bond proceeds to fund operating costs. One hopes the negative light now being cast on DEI in academia will help to slow its expansion into the realm of municipal finance.