Morningstar - Q3 2021 - 45

could have created some police accountability and
reduce that kind of social unrest.
Lauricella: The Activest website talks about the
bondholder engagement campaign you took part in
around Chicago. What was the story there?
Bowers: In Chicago, they were getting about 9%
or 10% of revenue from fines. And there's research
that shows Chicago has bankrupted thousands
of residents a year because of debts owed for
unpaid fines. They found that over 100% of
the revenue brought into the city of Chicago goes
back out the door in the cost of obtaining
these fines, court operating costs, and collections
agencies. And it's eroding the tax base,
which is actually one of the things that impacts
your city credit profile.
It's bad financial practice, and it's bad from a
justice and equity perspective. We ended up
writing to bondholders, which includes the
usual suspects like Vanguard and big insurers and
banks, saying there is an unmitigated risk that
your investors might be exposed to.
Lauricella: It also sounds like part of the problem
is that some of these cities become addicted to this
revenue stream.
Bowers: Yes. New Jersey is one of those places
your driver's license can be suspended for
unpaid criminal justice debt or even motor vehicle
violations. New Jersey, like many states, is
realizing that this is onerous and hampers
economic security for residents. They did a study
of their fines and found these fines actually
are the revenue that backs so many state bonds.
So, they had to push it out 15 years.
Lauricella: In terms of the investment strategy, how
does it come together? Does this mean you're excluding
certain issuers?
Chelsea McDaniels: We have an engagement
strategy, not an exclusion strategy. Black and
brown communities don't usually have the luxury
of excluding problematic issuers, communities,
and deals-and neither do we.
Lauricella: The Activest website details a strategy
around bonds issued to help address the water crisis
in Flint, Michigan. While Activest had concerns
about inequities in the details of the revenue plan,
it also explains the rationale for owning the Flint
water bonds, those of a hospital in the area,
and specific areas of engagement to directly help
residents of the city.
Robasciotti: The way we built this, it's really a
75/25 kind of strategy, where 75% of the portfolio
is flowing capital to those really well-run,
fiscally just communities, and in doing so, we help
to resolve some of that mispricing. And then
25% of the strategy are municipalities that may
have some fiscal justice issues but there's
deep relationships on the ground. What they need
While we primarily invest in general-obligation
municipal bonds in Black communities,
we may also invest in school bonds, such as
those issued by historically Black colleges
and universities.
Lauricella: There's research that shows that historically
Black colleges and universities pay higher bond costs
than comparable schools that are predominantly white.
McDaniels: It's getting more liquidity in
that direction and helping to correct some of
that mispricing.
After the consent decree, Moody's
downgraded Ferguson's bonds from investmentgrade
to junk, and the pricing on their bonds
went from one to one on the dollar down
to around 50 cents on the dollar. So, we saw
that and had an aha moment because
we knew that the rating agencies don't have
a racial justice lens.
Ryan Bowers
is somebody with a seat at the table. In
other words, something where you know the city
treasurer wants to listen when you call.
McDaniels: Hampton, Virginia, is a good
example. Hampton is a Black-affirming community,
takes a generative approach to public
safety and economic development, and presents
an exciting opportunity to invest in a
traditionally under-resourced community. They
have a different approach to policing, and
even when you look at their budget, it's much,
much smarter.
Lauricella: Ryan, Rachel, Chelsea-thanks for taking
the time.
Bowers: This is the intersection between
social justice and finance, and this is really why
we got into this work. K
Tom Lauricella is editor, professional audiences,
at Morningstar.
morningstar.com/lp/magazine
45
https://www.morningstar.com/authors/1953/tom-lauricella http://www.morningstar.com/lp/magazine
Morningstar - Q3 2021

Table of Contents for the Digital Edition of Morningstar - Q3 2021
