Social injustices like overpolicing, displacement and lack of investment in communities of color are costing municipalities and their bondholders more than you think. In Louisville, KY we found $90M in waste, foregone revenue and added expenses—almost totaling up to 3/4 of the $110M spent on all key social services such as libraries. Our new report reveals the what, who and how much of Louisville’s fiscal justice issues.
The Material Impact of Social Justice for Municipal Bondholders
Investors in municipal securities are just beginning to understand how social justice indicators such as police settlements, corporate tax abatements or fines & forfeitures revenue affect credit risk—due in part to the lack of ESG research informing municipal and public finance rating criteria as well as limited disclosures by municipal issues. This month, Activest made two major contributions to this body of work.
The first is a new academic study from The Wharton School that incorporates Activest’s research to demonstrate how social factors materially impact financial risk. The second contribution is Activest’s latest report, which focuses on Louisville, KY and examines how, in practice, fiscal justice indicators such as public safety spending and tax abatements affected municipal spending and revenue.
Our findings? Last year, Louisville Metro Government squandered over $90 million through waste, added expenditures and foregone revenues in activities that had a disproportionate negative impact on BIPOC communities. Their cumulative impact represents 13% of Louisville Metro’s annual budget. By choosing to starve the municipality of funds needed to operate effectively due to this lost revenue and added expenses, Louisville’s governance is increasing risk of return because of these unnecessary budgetary pitfalls.
In short, Louisville could have an additional $90 million to execute their policy initiatives, invest in BIPOC communities, and in doing so, mitigate their financial risk. So even as Louisville leaders are failing to prioritize people over property, they still are not decreasing their risk of credit downgrades, defaults, or investors’ realization of mark-to-market losses.
Key Fiscal Justice Insights:
- Fiscal justice methodology finds social indicators are materially costly. Public safety (use of excessive force) at $7.2 million in police settlements. In 2020, Louisville Metro paid out $12 million to Breonna Taylor’s family to settle the wrongful death lawsuit. Louisville Metro paid an additional $32 million in the last 12 years from other police brutality incidents, in turn diverting money away from investments in education, workforce development, and other social services. With over 50% of Louisville’s budget spent on policing and incarceration, police brutality settlements are the financial risk of biased and aggressive policing. Louisville Metro should tie police settlement costs and risks to the police budget and create accountability for financial and social impacts of policing to curb police violence. Police risks should no longer be borne by taxpayers.
- Reliance of abatements & subsidies losing $11,700,000 between 2017-2020 in potential revenue. West Louisville is Louisville Metro’s largest historically Black residential area, comprising nine neighborhoods and 60,000 residents. The West End was recently designated as a TIF district. The data further indicates that at least 50% of residents currently living in the TIF boundaries are vulnerable to displacement based on their annual income of at or under $35,000. This TIF is an economic development solution to the city’s issue of divestment and extraction from the West End—which neither solves the root cause of such divestment nor serves the needs of the community-at-large.
- Black occupational tax loss of $43 million due to lack of workforce development. The City of Louisville receives approximately $900 million in income from tax dollars and other fees. The largest portion of that income comes from occupational taxes collected from working residents, which totaled $432 million in 2019. Louisville tax revenues from occupational taxes should be over $500 million but, due to underinvestment over time, Louisville’s Black and Brown population is unemployed, underemployed, underpaid, and have fewer opportunities. Inequality results in lower income for Black and Latinx residents, which translates to less tax revenue and reduced business investment for the city. Louisville has either neglected to address these gaps or, in many cases, invested resources in ways that exacerbate its disparities.
Wharton’s research, based in part on Activest’s research, examines over 10 years of data from 3,000 U.S. counties, quantifying local government’s contribution to structural racism and the increasing costs of over-policing and shrinking revenues. According to the authors, “local governments differ in the environmental and social outcomes they provide their residents… and these differences are material for investors.” Louisville maintains AA rated GO bonds because social justice factors don’t show up in the mandated financial disclosures or traditional accounting standard. Only a more nuanced fiscal justice analysis reveals how historically rooted systems of divestment and exclusion in Louisville’s schools, housing and employment opportunities have cemented racialized income inequities over time, coupled with over-policing and excessive investments in business tax breaks instead of people.
An investor’s role is not only to analyze and consider risk—but also to engage as bondholders with the issuers themselves. As the market searches for new tools to protect investor returns, our Fiscal Justice methodology aggregates key factors from municipal budgetary documents and grassroots community resources, to see behind the curtain and inside municipal spending like never before.