Economic Security. The United States has two distinct financial systems. In the. and Opportunities BUILDING A FINANCIALLY EMPOWERED CITY

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1 Economic Security and Opportunities Supporting Strong Communities through Individual Economic Opportunities Quarterly Volume 4: Issue 3 Fall 2012 BUILDING A FINANCIALLY EMPOWERED CITY By Leigh Phillips Director, San Francisco Office of Financial Empowerment Office of the Treasurer, City and County of San Francisco The United States has two distinct financial systems. In the financial mainstream, Americans have access to safe and sound financial products such as low-cost checking accounts, savings products, and mortgages offered by mainstream banks and credit unions. These products help families to save for the future, build wealth, and acquire assets such as a home or a college education. The second system the financial fringe is made up of high-cost, often predatory, financial products and services such as check cashers and payday lenders. Mostly used by low-income people, the average unbanked worker will spend five percent of net income on check cashing fees each year. Worse, they are unable to access the financial tools they need to become financially secure. This is not a minor issue. In America today, 7.7 percent of U.S. households are unbanked and 17.9 percent of U.S. households are underbanked, meaning they still access fringe financial services despite having a relationship with a mainstream bank or credit union. Lack of access to mainstream financial services disproportionately affects low-income communities and communities of color 43 percent of households with a yearly income below $30,000 are either unbanked or underbanked. Nationally, 54 percent of African American households and 43 percent of Hispanic households are unbanked or underbanked, compared to only 18 percent of white households. A local approach to a national problem In San Francisco, we believe that local government can and should play a significant role in reducing financial exclusion. San Francisco is one of only two cities in the country with a municipal Office of Financial Empowerment (the first OFE was launched in New York City). Financial Empowerment describes a set of approaches designed to help families with low incomes stabilize their financial lives. In San Francisco, we focus on four key areas: Improving Access to Financial Services Advancing Financial Education and Counseling Encouraging Asset Building Strengthening Consumer Protections The San Francisco Office of Financial Empowerment (SF OFE), housed within the Office of the Treasurer, has undertaken an ambitious agenda of programs designed to help our underserved communities enter and succeed in the financial mainstream. In 2006, we launched the country s first local government-led initiative to bank the unbanked, Bank On San Francisco. When Bank On San Francisco started, we challenged many of the city s financial institutions to lead the way in removing barriers to keep low-income families from opening bank accounts. So far, we have partnered with 14 banks and credit unions, with over 170 branches across San Francisco. Since we launched in 2006, we have helped over 10,000 San Franciscans each year to open bank accounts and enter the financial mainstream. The Bank On approach has since taken off across the country, with as many as 100 Bank On programs either launched or planning to launch, in cities and states all over America. Many of these programs are led by local or state governments. In addition to Bank On, San Francisco has also launched a small dollar emergency loan program, Payday Plus; a financial education program called the Smart Money Network; and the nation s first universal, automatic college savings program for public school children, Kindergarten to College. Extending our reach through employer engagement Several years ago, a financial institution partner alerted us to the fact that very low numbers of Bank On clients were using cont d on pg. 2 1

2 Building, cont d from pg. 1 direct deposit. When we took a closer look at this issue, we learned the problem was significant almost 70 percent of low-wage workers in our city still got paid by a paper check. This insight led us to launch our newest initiative, CurrenC SF, a new program working with employers across San Francisco to get as many San Franciscans as possible using direct deposit to either a checking account or a payroll card. It is a small change with big benefits. Better for workers. Depositing checks in person wastes time, and funds take several days to clear driving many workers to turn their check into instant cash at the check casher and pay high fees. That is money that should go for rent, food, utilities, clothing, savings, and other necessities. Also, workers take a big risk by cashing a whole paycheck. A single event, like loss or theft, could leave them helpless until the next payday. Better for employers. By moving to electronic pay, a company can lower payroll processing, printing, and distributing costs up to 90 percent. Also, by depositing wages electronically, businesses can eliminate the headache of lost or stolen checks. Better for the environment. If just 10 percent of San Francisco s workers receiving paper checks converted to electronic pay, it would save five tons of paper and 44,800 gallons of water each year. It would also reduce greenhouse gases by an amount equal to the annual emissions from 2.6 cars. Better for the City. All these improvements add up to a better, stronger city. Empowered, financially self-sufficient workers become the anchors of more stable families and communities. They support local businesses and add to the city s tax base. Our vision is for everyone in our community to have access to healthy, mainstream financial products; to be banked and able to save, and to have the education and knowledge they need to be financially secure. Initiatives like Bank On and CurrenC SF are successful because they work as a public-private partnership, using the city s influence to bring diverse stakeholders to the same table. This work is starting to take hold across the country, and the emerging role of local governments as leaders in financial empowerment is proving to be highly successful. San Francisco and New York have created a national coalition called Cities for Financial Empowerment (CFE) to bring together like-minded municipal governments to share best practices, grow the field, and join our voices for advocacy. Financial insecurity is a national problem. To learn more about financial empowerment approaches in San Francisco and beyond, please visit and www. joinbankon.org for more information. Leigh Phillips was a speaker at the 2012 Women In Government Western Regional Conference. Visit womeningovernment.org/files/image/staff/leigh_phillips.pdf to view her conference presentation. n EMPOWERING WORKERS THROUGH ELECTRONIC WAGE PAYMENT By Cathy S. Beyda, JD, Paul Hastings LLP Electronic wage payment offers employees access to their pay in a far safer, more secure, and less expensive way than traditional paper paychecks. However, a surprisingly large number of workers are unable to participate in direct deposit because they have little or no access to traditional banking services. A 2009 study by the Federal Deposit Insurance Company found that more than 25 percent of U.S. households are either unbanked (having no checking or savings account) or underbanked (having a checking or savings account, but still reliant on alternative financial services such as check cashing). 1 Payroll cards bring the benefits of electronic wage payment to these underserved workers. Unfortunately, the wage payment statutes in most states were enacted well before payroll cards were envisioned. Accordingly, many employers remain hesitant to offer this beneficial payment method to their employees. What is a Payroll Card? A payroll card is a reloadable prepaid card issued to an employee through a financial institution on behalf of his or her employer. Payroll cards are offered as a complement to the employer s direct deposit program. Because no applications, credit checks, or personal bank accounts are required, every employee is able to participate. Each payday, the payroll card is electronically loaded with the full amount of the employee s net pay. The employee can then use the card to receive cash from an ATM or bank teller, make purchases both in-person and online, and pay bills. The vast majority of payroll cards are branded, meaning they bear a Visa, MasterCard, or Discover logo. These cards can be used anywhere that payment brand is accepted. This means that 2 employees can take their cards to more than 90,000 bank branches nationwide and receive their full wages from the bank teller without cost. The Benefits of Payroll Cards Employees who choose to receive their wages on a payroll card are guaranteed a means to access their full wages each pay period without cost. Without payroll cards, underserved workers often are forced to rely on expensive alternative financial services, such as check cashers, to access their wages. They then incur additional expense when purchasing money orders to pay their bills. Studies have shown that payroll cards are one of the least expensive ways for employees to receive their wages. 2 Equally important, payroll cards offer underserved workers a pathway into the financial mainstream. In a recent study by the San Francisco Office of Financial Empowerment and the Corporation for Enterprise Development (CFED), low-income workers reported that their financial options improved because of electronic wage payment. Participants stated that payroll cards helped them prioritize their spending, allowed them to shop online, and helped them save money. 3 As a result, CFED recently issued a policy encouraging states to adopt legislation promoting cont d on pg. 3

3 Empowering, cont d from pg. 2 direct deposit and payroll cards as part of the organization s annual Assets and Opportunities Scoreboard. 4 Electronic wage payment also benefits employers. The cost of issuing and distributing paper paychecks, and the costs associated with lost and stolen checks, can be enormous. Electronic wage payment eliminates these costs thereby decreasing the cost of doing business in the state. The Legal Landscape Governing Electronic Wage Payment Although direct deposit is lawful in every state, state law treatment of payroll cards is still developing. Today, the wage payment statutes and/or regulations in only twenty states expressly authorize the use of payroll cards. 5 In many of the remaining states, the wage and hour enforcement agencies have issued informal enforcement positions permitting the use of payroll cards when specified conditions are met. While providing beneficial guidance, these enforcement positions do not have the force of law. Consumer Protections Recent claims in the media have fostered a belief that prepaid cards are unregulated and lack consumer protections. This has given payroll cards an undeserved negative reputation and has frustrated legislative efforts designed to promote the use of payroll cards as a complement to direct deposit. Among other inaccuracies, these claims fail to distinguish between types of prepaid cards. Unlike many prepaid products, payroll cards are subject to Federal Reserve Regulation E. Regulation E includes many 1. FDIC National Survey of Unbanked and Underbanked Households (Dec. 2009). 2. T. Sloane and P. Hewitt, Payroll Cards: 100% Electronic Payments 80% of the Time, Crossing the Market Finish Line (Mercator Advisory Group January 2009); J. McGrath, Federal Reserve Bank of Philadelphia Payment Card Center, Discussion Paper, The Cost Effectiveness of Stored-Value Products for Unbanked Consumers (May 2005). important consumer protections. For example, Regulation E limits cardholder liability when a lost or stolen card is used fraudulently so long as the cardholder reports the lost or stolen card within a specified period. It also requires that dispute resolution procedures be available to cardholders and that all terms, conditions, and fees are clearly disclosed. Moreover, although overdrafts on payroll cards are uncommon, Regulation E prohibits fees for overdraft services without prior consent. In addition, all of the benefits and protections offered on debit products by the major payment brands are available on payroll cards free of charge. These include purchase protection, dispute resolution procedures, and zero liability programs. Conclusion Payroll cards offer a much-needed solution to underserved workers. Outdated wage payment statutes should be updated to recognize this modern method of payment. Statutory provisions should require that employees have full and free access to their wages each pay period. Restrictions that go beyond placing payroll cards on equal footing with other wage payment methods are unwarranted, however, and make it unlikely that employers will offer this beneficial solution to deserving employees. Cathy Beyda was a speaker at the 2012 Women In Government Western Regional Conference. Visit Beyda.pdf to view her conference presentation. n 3. E. Fitzgerald and L. Phillips, Financial Empowerment through Employer Engagement: Migrating a City to a Paperless Payday (CFED and the San Francisco Office of Financial Empowerment, March 2011). 4. CFED 2012 Assets and Opportunity Score Board, Policy on Paperless Payday. 5. These states are Arizona, Colorado, Delaware, Florida, Kansas, Maine, Maryland, Michigan, Minnesota, Nevada, New Hampshire, New Jersey, North Dakota, Oklahoma (Attorney General Opinion), Oregon, Tennessee, Utah, Vermont, Virginia, and West Virginia. SPOTLIGHT ON SENATOR LINDA PONDEXTER CHESTERFIELD By Senator Linda Pondexter Chesterfield, Arkansas My name is Linda Pondexter Chesterfield and I am the Assistant Pro Tempore of the Arkansas state Senate. Currently, I chair the Transportation, Technology, and Legislative Affairs Committee. As chairperson, I compromised and fought with my committee members to secure the passage of legislation that will allow us to improve the state s highway infrastructure, which is the key to economic growth in our state. I sponsored legislation that provided a tax exemption to single heads of households who have two or more children. I also sponsored legislation to provide start up funding for a Science, Technology, Engineering, and Mathematics (STEM) Department at the University of Arkansas - Pine Bluff (UAPB), a historically black university. Children of minority groups who attend school in the Delta (our poorest area of the state) need the skills that will attract industry and lead to greater economic growth. I also sponsored legislation to sponsor Student Success Centers at Pulaski Technical College, a two-year institution in my district. Many children at UAPB and Pulaski Tech are first generation college students like me; I want them to have every opportunity to succeed. Additionally, I sponsored legislation for the construction and repair of levees and the provision of flood control for my district so that their quality of life might improve. Finally, I sponsored legislation to provide funding for transitional living 3 facilities for people seeking a second chance. As a freshman senator, I took the view that economic opportunities come in many forms. I co-sponsored legislation to overhaul our prison system, which is taking a disproportionate amount of state dollars from other programs that might improve the lives of all of our citizens, and I invested in behavioral health because mental illness robs us of too much human potential. Education and economic growth are inextricably intertwined, and Senator Linda Pondexter Chesterfield Arkansas, 34th District will remain as such as we move forward in Arkansas to reach our full potential as a state. As chairperson of the Joint Advanced Communications and Technology Committee, my next great opportunity is to expand broadband capacity so that every citizen in our state who wants it will have access. n

4 EDUCATING YOUTH TO TAKE CONTROL OF THEIR FINANCIAL FUTURE By Jasmine Senior, Graduate Policy Fellow Financial literacy encompasses a broad education about the way the economy functions, economic actors and their roles, and personal finance concerns such as personal savings and financial credit. Knowledge of these topics gives individuals a sturdy foundation for most of the monetary decisions they will make throughout their lives. Unfortunately, too many people do not have the opportunity to gain this knowledge and therefore often make detrimental economic decisions. To remedy this problem, the U.S. is seeing more and more initiatives to encourage financial education starting in secondary schools. The hope is that if this instruction starts earlier in life, benefits to individuals and communities will increase in the long-term. Beginning as early as middle school, most youth will start engaging with financial decision-making. They may begin a part-time job, receive information about credit cards, and/or start making personal purchases. During this time, students are also considering their next steps after high school. Whether the decision is to further pursue their education or immediately start working, many youth have financial concerns. Eventually they will also have options such as purchasing a car or a home. If students think about how to manage these financial decisions earlier, they will have a higher chance of extending this thought process to financial choices they will make later on. Many students do not come from financially stable households, which influences their opportunities to receive financial education at home. Low-income communities face a number of financial problems that include reduced access to basic financial services, difficulties saving and building assets, predatory lending, and credit card debt. Lack of sufficient knowledge or ability (due to harsh circumstances) to handle scarce resources effectively and to avoid debt increases the odds against low-income households. 1 Partnerships for Solutions To overcome these odds and set up a better future for younger populations, various entities are working to increase access to financial education. A number of non-profit organizations collaborate with governments or work independently to form educational programs that focus on personal finance; these programs can offer everything from virtual to formal classroom instruction. In the state of Washington, the Financial Education Public-Private Partnership (FEPPP) exists to determine the best means of helping students gain knowledge and skills to make important financial decisions. 2 This partnership includes legislators, members of the financial services sector, educators, and representatives from the Office of the Superintendent of Public Instruction and the Department of Financial Institutions. 3 At Women In Government s Outreach to Vulnerable Populations Conference in May of 2012, Director of Credit Unions in the Washington Department of Financial Institutions, Linda Jekel, discussed how the FEPPP has developed since its inception. The Partnership has worked to define financial education, examine possible curriculums for instruction, and analyze similar work done by other states and organizations. Since 2004, financial education has become one of the goals of Washington s Basic Education and it is now a part of Washington s Seventh Grade Level Expectations for social studies and economics. 4 In 2009, the FEPPP began implementing demonstration projects. Washington state Representative Sharon Tomiko Santos took the work a step further in 2011 by introducing House Bill 1594, which requires an annual evaluation of FEPPP demonstration projects and encourages schools to adopt JumpStart National Standards in K-12 personal finance. The Partnership also began providing two-day financial education teacher training to better equip instructors. A New Graduation Requirement In some states, financial literacy has become a graduation requirement for public schools. In 2011, the Council for Economic Education conducted a survey that details the number of states offering some form of economics or personal finance instruction and the varying level of requirements and subjects taught in these courses. As of 2011, 22 states require a high school course in economics for graduation and 13 states require a course in personal finance. 5 cont d on pg Annie E. Casey Foundation, publicationfiles/tools%20for%20survival.pdf. 2. The FEPPP was originally named Financial Literacy Public-Private Partnership when created in The name changed to Financial Education Public Private Partnership in FEPPP Annual Report to the Legislature, legisgov/2011documents/fepppdec11.pdf. 4. Ibid. 5. Council for Economic Education, wp/wp-content/uploads/2011/11/2011-survey-of-the-states.pdf. 6. Virginia Department of Education, instruction/economics_personal_finance/background/objectives.pdf 7. Richmond Times Dispatch, news/2011/oct/02/tdmony01-virginias-high-school-students-nowrequir-ar /. 4

5 Educating, cont d from pg. 4 In 2011, Virginia joined the list making a financial education course a requirement within public school curriculums. The process started in 2009 when the Virginia Board of Education (VBOE) approved a one-credit course in economics and personal finance as a graduation requirement. After experiencing legislative delays in 2010, the requirement became official in 2011, starting with all incoming ninth grade classes. According to the Standards of Learning objectives outlined by the VBOE, the course examines topics such as computing and understanding taxes, preparing and balancing a personal/ family budget, and managing debt. 6 To prepare for this new addition to the curriculum, teachers were equipped with resources that included a CD compilation of over 1,200 possible lessons for classroom instruction as well as economics and personal finance seminars offered by the Virginia Council on Economic Education. 7 Federal Government Initiatives On the national level, the Financial Literacy and Education Commission works to provide resources and strategies geared toward improving financial literacy across the U.S. The Commission is composed of 21 federal entities that all contribute to its resources. The primary project of this Commission is the website mymoney.gov. Through this website, everyone from children to adults can access videos, publications, and other multimedia, all of which offer basic lessons in financial education. The website even features advice on how to manage life events such as starting a job, home ownership, and retirement. From the local to the national level, financial literacy is becoming an education priority. Administrators and leaders recognize the benefits of financial education as a means to lower economic inequality and financial distress. Financial literacy alone is not the solution to these problems. However, it is a necessary step towards resolving many economic concerns and has the potential to foster community empowerment and stabilization. To view the presentation mentioned in this article, visit n Women In Government 1319 F Street, NW Suite 710 Washington, DC Women In Government Foundation, Inc. is a national, non-profit, non-partisan organization of women state legislators providing leadership opportunities, networking, expert forums, and educational resources. 5