The Stanford Professor Taking on Racism in the $4 Trillion Muni-Bond Market

People tend to think of munis—if they think of them at all—as the boring part of their investment portfolio, or the funding for the new school being built down the street. The bankers and bureaucrats involved in the day-to-day operations of the $4 trillion market for state and local debt tend to be more focused on yield curves than historical transgressions.

But the market has also, many argue, helped some Americans a lot more than others. Studies show that Black communities often pay more to borrow in the muni market. Jenkins’s own research has found that white residents have benefited the most from some projects funded by citywide taxes.

Jenkins, an assistant history professor at Stanford University, has spent a decade studying these sorts of topics. And after George Floyd was murdered in 2020 and racial-justice protests followed, more people wanted to hear what Jenkins had to say. Underwriters, traders, investors and analysts started listening.

“The book he wrote created a buzz within the industry," said Heather Willis, vice president of sales with Siemens Financial Services. She was referring to Jenkins’s 307-page tome, “The Bonds of Inequality: Debt and the Making of the American City."

“There’s a lot of this stuff that’s like ‘Oh, slavery is really bad.’ His scholarship was the first thing that really focused on our industry," said Willis.

The head of the muni market’s self-regulatory organization hosted a “fireside chat" with Jenkins. A virtual conversation with him organized by two finance trade publications attracted more than 100 money managers, bankers, analysts, government finance officials and others. In video recordings, he has a laid-back demeanor and warm smile even as he reviews decades of difficult history.

Among the uncomfortable truths Jenkins’s research has unearthed: Jackson, Miss., refused to desegregate hiring at its airport in 1963 even though it meant turning down federal aid for the facility. Muni investors provided financing instead. A few years later, the winning entry in a 1966 Investment Bankers Association of America essay contest argued that the racial composition of a city should be factored into its bond rating.

“The Bonds of Inequality" focuses mainly on mid-20th century San Francisco, using it to make a detailed case that the muni market has exacerbated disparities. With the encouragement of public officials, investors, banks, ratings firms and often a majority of voters, San Francisco borrowed to finance parks and cultural offerings that disproportionately benefited white residents—and then paid the money back with everyone’s tax dollars.

“Black neighborhoods," Jenkins writes, “were continuously deemed unworthy of debt."

Jenkins, 36, saw early the difference money can make in communities. He grew up in a working-class neighborhood in Jamaica, Queens, but attended a private school in Manhattan on a scholarship. His father was a subway conductor and later a graphic artist for the city’s transit system. His mother supervised lab tests in a hospital.

Jenkins lived next door to a foster home. He felt like the richest kid on the block. At school, he played basketball in a state-of-the-art gym nothing like his neighborhood parks. His classmates were the children of executives and power brokers.

“That daily juxtaposition was the way I first encountered inequality," Jenkins said.

Over time, elite spaces grew less intimidating. At freshman orientation at Columbia University in 2006, he introduced himself to several classmates as the future first Black president of the U.S. (“Oh my God," he says now, cringing in recollection.) He eventually decided to major in U.S. history.

By the time Detroit went bankrupt in summer 2013, Jenkins was pursuing a doctorate in history at Stanford. He happened to be at an intro course on bonds the day the news broke. The fact that Detroit’s bankruptcy filing came after years of white flight struck Jenkins as part of a larger story about race. He eventually settled on the role of race in the muni market as the topic for his Stanford dissertation.

Back in New York City a couple of years later, Jenkins was putting the finishing touches on the dissertation when he joined an activist group called Black Youth Project 100, or BYP100.

The group had been galvanized in part by the death of Michael Brown, an unarmed Black teen who was shot by a police officer in Ferguson, Mo., in 2014. A Justice Department report found problems with the city’s finances—namely, that Ferguson was heavily dependent on fines.

“Many officers appear to see some residents, especially those who live in Ferguson’s predominantly African-American neighborhoods, less as constituents to be protected than as potential offenders and sources of revenue," the report said.

Jenkins and other BYP100 members pored over New York City’s budget, studying where the city got its money and where it went. In one education campaign, they passed out factsheets on the subway that detailed how much of the city’s revenue came from fines and how much went to policing.

“He was always able to break things down just in a really helpful way," said Karl Kumodzi, who at the time was the New York City chapter’s organizing co-chair.

A busy few years followed. After postings at Harvard and the University of Chicago, Jenkins joined Stanford’s faculty in 2021, the same year “The Bonds of Inequality" was published. He and his wife, a pediatrician, settled in the Bay Area and welcomed a baby.

During that period, two more events brought public finance and race into a larger national conversation. When Covid-19 hit in 2020, the Federal Reserve created its first-ever rescue package for the muni-bond market, backstopping bonds to keep prices stable. That same year, the murder of George Floyd prompted many big companies to rethink how they do business.

News outlets wanted Jenkins’s take. Bond firms invited him to speak. City finance officials passed around his book.

The question on their minds was one Jenkins has thought a lot about: If the muni market reinforced racial injustice in the last century, could its power be harnessed to mitigate those injustices in this one?

One suggestion came in 2021. Congress held what was likely its first-ever hearing on race in the muni market. Lawmakers were presented with an academic study about historically Black colleges and universities. Organizations like colleges are eligible to borrow alongside states and cities in the muni market.

HBCUs paid disproportionately higher underwriting fees, especially the HBCUs in Alabama, Mississippi and Louisiana, according to the study. The higher fees suggest that trading desks found it more difficult to find buyers.

The study’s authors thought they knew why. Because of a tax quirk, borrowers in the muni market generally sell bonds largely to residents of the state where they are located. The study found that states where HBCUs paid the highest fees also had the highest levels of “anti-Black racial animus," as measured by surveys, internet searches and social-media posts.

The study examined college-bond issuances over 23 years and was conducted by scholars from Florida State University, the University of Notre Dame, Duke University and the University of Southern California. It was published in the peer-reviewed Journal of Financial Economics.

The study’s authors recommended Congress make HBCU bonds tax-exempt in all states, not just the state in which they are issued, a privilege some muni borrowers already have. That would give HBCUs a greater potential audience for their bonds. Powerful trade groups like the Securities Industry and Financial Markets Association and the Bond Dealers of America voiced their support. It still hasn’t happened.

Another study looked at about half of all bonds outstanding as of April 2022. It found that places with more Black residents pay a combined total of roughly $900 million a year in extra interest unexplained by other factors—a phenomenon sometimes called “the Black tax."

The study was published last year in the peer-reviewed journal PLOS One. It was led by a researcher at Duke University with help from analysts with $47 billion asset manager Breckinridge Capital Advisors.

Muni investors are typically high-earning U.S. households who like munis because the interest is tax-exempt and cities seldom default. Jenkins has come to believe that a market that shortchanges minority communities isn’t entirely good for them either.

When Moody’s Investors Service sought public input on an updated methodology for rating cities’ creditworthiness in 2022, Jenkins wrote in. He suggested that along with the risk of natural disasters, pandemics and cybercrimes, Moody’s should evaluate “democracy risk." He argued that investors might want to steer clear of places where, for example, restrictions on voting rights could lead courts to eventually invalidate bond deals approved by voters.

Elsewhere, he and others have suggested that police misconduct is bad for bondholders. Cities spend millions of dollars a year on legal payouts in cases involving alleged brutality, wrongful detention or other misconduct.

But Jenkins is less interested in scaring investors into doing good than in reminding them that they want to and giving them the opportunity. He envisions a muni market where bondholders seek out projects planned by and for Black communities. He recently secured a grant to teach people in traditionally overlooked neighborhoods how bonds work.

Others are catching on. Before completing plans to extend Chicago’s Red Line subway deep into the majority-Black South Side, city transit officials held dozens of meetings with nearby residents to gather their suggestions. Bonds for that project could go on sale later this year.

What Jenkins isn’t pitching: Doing well by doing good. To really make a difference, he says, investors will have to sacrifice some yield.

Already, on some parts of Wall Street, values-based funds seem to be losing popularity amid rising rates and conservative backlash. But Jenkins remains hopeful that at least in the muni market, investor dollars will follow the vocal outpouring of support in 2020.

“Some would even say I was naive and gave too much of the benefit of the doubt that actually, you know, people would act on it," he said. “But I don’t think that. This is an opportunity. You give people a chance to show you who they are."

Write to Heather Gillers at heather.gillers@wsj.com