An Asset-Building Policy Roadmap for Establishing Real Opportunities for Kansas Families to Achieve Financial Prosperity

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1 Getting Ahead in Kansas An Asset-Building Policy Roadmap for Establishing Real Opportunities for Kansas Families to Achieve Financial Prosperity

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3 . Table of Contents Introduction The endangered middle class Why assets matter An assets roadmap Asset-Building Policies in the United States Federal asset-building policies State asset-building policies Asset-Building Policies in Kansas Individual Development Account (IDA) programs State college savings 529 plan Kansas Earned Income Tax Credit (EITC) Food Sales Tax Rebate State homeownership programs Anti-predatory lending provisions Asset-Building Priorities for Kansas Continuation of the KIDS College Savings Program Strengthen financial education efforts Improve support for Individual Developement Accounts (IDAs) Inhibit predatory lending practices and promote available and accessible fair lending practices Remove policy disincentives to saving and asset building Expand the state EITC Provide a dedicated funding source for the State Housing Trust Fund Improve access to health care for Kansans with low to moderate incomes Initiatives to get more Kansans banked or rebanked Create a variety of savings opportunities for low-income Kansans Improve access to early learning opportunities for working parents Increase and improve post-secondary job training opportunities Traveling the Asset-Building Policy Road: Next Steps Endnotes References and Sources Acknowledgements This report is produced by Kansas Action for Children and funded, in part, by the Annie E. Casey Foundation. The findings and conclusions presented are those of Kansas Action for Children and do not necessarily reflect the opinions of the Foundation. The report was written by Karen M. Edwards of KME Consulting with contributions from Gary Brunk and April Holman of Kansas Action or Children.

4 Introduction Restoring the American promise of economic opportunity for all is one of the most important issues facing our country and in the midst of a deepening recession is the most important issue for an increasing number of middle- to lowincome families. In this report we examine how state-level public policy can help create pathways to opportunity, focusing especially on the critical role of asset ownership. The endangered middle class For far too many families, belonging or aspiring to belong to the middle class seems a fading hope. In The Great Risk Shift 1 political scientist Jacob Hacker describes the growing economic insecurity of American workers. Hacker describes how the traditional employment-based safety net is being dismantled as corporations reduce or eliminate health insurance benefits and abandon defined benefit retirement plans. As these risks are transferred to individual workers and their families, more Americans are left with inadequate or no health insurance and are financially unprepared for retirement. Because corporations seeking to take maximum advantage of global economic changes can move plants to less-developed countries or buy goods and services from areas where labor is cheap, American workers today are also much more likely to experience a significant drop in income. According to Hacker, an average person today is two and a half times more likely than 30 years ago to experience an income drop of 50 percent or more, and the chances of persons in their 40s spending a year in poverty almost tripled between the 1970s and the 1990s. In order to measure the extent of middle class economic insecurity, Dēmos and the Institute on Assets and Social Policy developed the Middle Class Security Index. 2 What they found was that a strong majority of families that are likely to think of themselves as middle class, with an annual household income between $40,000 and $120,000, were at some risk of slipping out of the middle class. The index shows that 7 out of 10 middle-income families do not enjoy middle class economic security. Middle-class economic security is measured by: The amount of savings they can fall back on in case of an economic crisis, such as loss of employment; Level of education; How much of after-tax income goes to housing; How much cash is left after paying for living expenses and taxes; and Whether or not health care coverage has been secured. Middle class economic insecurity, which with the exception of a few years in the 1990s has been increasing over a period of several decades, was not helped by the last business cycle. In spite of increasing worker productivity, [f]or the first time in the history of the data going back to 1947, middleincome families were left no better off at the end of this business cycle in 2007 than they were in Similarly, a smaller share of the adult population was working at the end of this cycle than at the beginning. 3 Today we are faced with an economic crisis that some have described as the most serious since the Great Depression. For good reason, many families are concerned about their finances. Restoring the Page 4

5 promise of a thriving American middle class by creating greater economic opportunity for all requires switching from a short-term focus on quarterly profits to a focus on responsible long-term planning. Across the country, communities, citizens, elected officials and business leaders are responding to the economic crisis by coming together to plan and create greater opportunities. We need to do the same in Kansas. Why assets matter In this report we use a framework for thinking about economic opportunity that is based on the idea that one of the most important ways we can help families is through public policies that encourage the ownership of assets. An example of a long-standing asset-building policy is the tax deduction for the interest homeowners pay on their mortgages. In effect, by this deduction we are saying that, as a country, we believe home ownership is desirable, and we will use public policy to help many families attain it. Assets can be defined as anything owned or controlled that brings security and prosperity to individuals and families, including financial capital, human capital, and social capital. Financial capital may include checking and savings accounts, the equity in a home or business, and monies saved through transaction accounts or investments for development, emergency and retirement purposes. Human capital may include the value derived from having and retaining good health, job readiness through completing post-secondary education or learning specialized job skills, and gaining useful life knowledge and experience for personal betterment. Social capital may include the connectedness people have to other people, organizations, or groups that may provide valuable life and work supports and services, such as reliable child care services, accessible and affordable health care services, transportation services, job referrals and communitybased amenities. A body of research points to significant positive impacts of asset ownership, not only on individuals and families, but also on the neighborhoods where they live. This is most clearly demonstrated in the research on benefits of home ownership, a topic that has been the subject of a good deal of attention, but it is also evident in the research of the impact on other assets. In the case of home ownership, the research shows that, among other effects, ownership contributes to residential stability, better care of the house compared to renters, more involvement in neighborhood civic and political life and to more stable marriages. 4 But, positive impacts are also being found in the growing body of research on other kinds of assets. For example, research on the Saving for Education, Entrepreneurship and Downpayment Initiative (SEED), is showing that children participating in SEED savings accounts gain self-confidence and an orientation to the future. 5 Page 5

6 An assets roadmap This report presents a roadmap for how we can go about helping Kansas families build and protect assets. To help prepare this report, Kansas Action for Children and Kansas Partners in Asset Development (KPAD) 6 organized meetings in Dodge City, Wichita, Parsons, Topeka and Kansas City to discuss with members of those communities the importance of assets and ideas for how we can encourage asset ownership as a state. Based on the community The core of this roadmap is divided into four sections: 1. A review of asset-building policies at the federal level. 2. A review of asset-building policies at the state level. 3. A review of current Kansas asset-building policies. 4. Recommendations for new policies, and policy amendments that would better encourage the asset-building efforts of Kansans. discussions and discussions at KPAD meetings, the following five issues emerged as strategic priorities: 1. Support the continuation of the KIDS College Savings Program in Kansas. Few assets are as important as a good education. In a globalized economy, access to post-secondary education is rapidly becoming essential. Learning Quest is the Kansas 529 College Savings Plan program. The Kansas Investments Developing Scholars initiative (KIDS), part of the Learning Quest program, is designed to help qualified low-income Kansans establish 529 accounts and save for their children s education. In the KIDS program, every dollar that is contributed to a 529 account is matched up to a maximum of $600 per year. Additionally, KIDS participants are eligible for a state tax deduction of $3,000 per year for single taxpayers (or $6,000 for married couples filing jointly). The policy is up for reauthorization in Retaining and expanding KIDS is a foundational building block for a Kansas state-level asset-building policy agenda. 2. Enact a Financial Education Initiative in Kansas. Build upon existing financial education efforts in Kansas to institute a comprehensive financial education initiative mandated by law that serves both children and adults. This initiative would most desirably be offered through the public school system. Financial education courses offered would include components such as basic budgeting, credit worthiness, debt management, homeownership, business ownership, and investor education. 3. Improve Support for Individual Development Accounts (IDAs). Amend current Individual Development Account (IDA) legislation 7 to make IDAs more user-friendly in Kansas, including increasing the state tax credit percentage allowed for contributions from 50 percent to 75 percent and instituting a system of funds apportionment whereby contributions obtained through the granting of state tax credits are leveraged and distributed by one or two lead organizations, chosen by the state on a competitive basis, to approved community-based organizations. 4. Inhibit Predatory Lending Practices and Promote Accessible Fair Lending Practices. A limitation on the number of loans that can be offered consecutively to consumers and a cap on the percentage of interest that can be charged would be effective policy restrictions on predatory Page 6

7 lenders. Predatory lenders are lenders that offer products, such as car title and payday loans, that prey upon financially-vulnerable consumers. In their place, alternative financial services and product development could be encouraged across the state, particularly in rural areas, including state support for innovative low-cost banking products and pools of funding for small loans. 5. Remove Policy Disincentives to Saving and Asset Building. Disincentives to saving are asset limits and tests on means-based benefits programs. These disincentives penalize low-income families for having savings dedicated to such purposes as retirement and education. These policy priorities will be further examined later in this document. Additional policy recommendations that emerged from the community meetings will also be covered later in this document. farms. The Land Grant Act laid the foundation for higher education in much of the country. And, after the Civil War, federally-owned land was used to encourage the expansion of rail lines, which in turn spurred economic growth in the late 19th century. In the 20th century, the G.I. Bill helped returning World War II veterans buy homes and gave education stipends to almost 10 million veterans so they could attend college or trade schools. It is not an exaggeration to say that the G.I. Bill helped create the middle class of the second part of the 20th century. Their education and another public investment, the interstate highway system, propelled the economic growth of the 1950s and 1960s. These are examples of how past generations recognized that as a nation we have aspirations for great goals whose achievement require common sense public investments. Before going further, let s be clear about the potential and the limits of public policy as a tool to help families attain economic success. Public policy can open doors to pathways to opportunity, but individuals have to enter those doors and walk the pathways. To go back to the example of the mortgage interest deduction, public policy created the deduction, but individuals pay for the mortgages, take care of their homes and invest in improvements. We believe public policy and public investments, coupled with individual incentive can make a positive difference for individuals and families. The United States has a history of common sense public investments. The Homestead Act made possible the creation of hundreds of thousands of Page 7

8 Asset-Building Policies in the United States Federal Asset-Building Policies Social welfare policies enacted in the 20th century were suited to an industrial era marked primarily by labor markets that depended on manufacturing and farming, and required mostly low-skilled labor. These policies were successful for their purposes and served to provide income to support basic consumption for a workforce that often held their jobs for many years. In the 21st century, new kinds of social policies have become required to serve more widely fluctuating technological labor markets that depend on skilled and highlyskilled workers for jobs that are generally less stable. Public and private safety nets are also shrinking, including union benefits and company pension plans for workers, leaving an uncertain economic present and future for many workers in the United States. 8 In recent years, new U.S. economic policies have been enacted that are designed to serve many of the same asset-building purposes as those of earlier years. These policies are intended to assist individuals and families to secure financial well-being through home purchase, business capitalization, obtaining a college education, saving and planning for retirement, saving for medical emergencies, and creating a personal safety net. However, even though the United States currently spends around $350 billion annually on these types of asset-based policy subsidies, less affluent Page 8 More than a third of the asset-building tax benefits go to the wealthiest one percent of Americans those who typically earn over $1 million per year. In contrast, less than five percent of the benefits go to the bottom 60 percent of taxpayers. Americans and workers are not able to effectively utilize these policies because they operate mainly through the tax system (mortgage interest deduction; tax breaks for retirement savings, such as 401(k)s; and education accounts, such as 529 College Savings Plans) with no effective incentives for people with little or no tax liability, and those who do not own homes, investments or retirement accounts. Additionally, federal asset-building policies disproportionately benefit those who already have considerable assets, and these types of subsidies mostly serve non-minority populations who earn $50,000 or more per year in household income. These policy inequalities may have contributed to the fact that 20 percent of all Americans have zero or negative net worth with asset inequality being much greater than income inequality between income tiers. 9 In a study published by the Corporation for Economic Development, the authors state, For every dollar spent on assetbuilding outlays, the government gives up to $642 in revenue through tax expenditures that reward asset-building behavior [of high-income earners]. Many benefits of federal asset policies can only be realized by people with certain types of assets or levels of tax liability. 10 Analysis of the largest governmental tax spending categories also shows that more than a third of the asset-building tax benefits go to the wealthiest one percent of Americans those who typically earn over $1 million per year. In contrast, less than five percent of the benefits go to the bottom 60 percent of taxpayers.

9 Federal policies and initiatives that give people in the lower and moderate income tiers opportunities and incentives to save are equally as important, or likely more important, for developing selfsufficiency and self-sustainability as offering the types of aforementioned asset-building subsidies that promote saving and investing for high-income earners. A handful of policies have been put into place at the federal level in the last three decades that are making some positive impacts on reducing poverty and increasing savings and asset-building opportunities for people with low incomes, including: The Earned Income Tax Credit (at both the Federal and state levels), and other refundable tax credits that give low-income families additional resources. IDAs established in the federal welfare reform act of 1996 [Section 404(h)]. The Assets for Independence Act (a Federallysupported IDA program). The Department of Housing and Urban Development s Family Self-Sufficiency Escrow Accounts (subsidized savings accounts serving as work incentives). The Social Security Administration s Plan for Acquiring Self-Sufficiency (PASS) Accounts for people with disabilities. College 529 Plans that allow states to offer a match for college savings for children from lowerincome households. The Department of Labor s Workforce Investment Act Individual Training Accounts. The Federal Home Loan Bank s Savings Club Accounts (matched savings along the lines of IDAs, designed to assist families in obtaining homeownership). Additionally, a number of new, more universal and inclusive asset-building policies were proposed in the 2007 Federal Congressional Session, some of which were also proposed in the latest session. These proposed policies included: The New Savers Act includes 14 low-cost proposals to stimulate savings, especially by lower-income Americans (Senate). The ASPIRE Act would establish universal children s savings accounts, opened automatically at birth, with initial deposit amounts increased for children from households with lower incomes (House). The Freedom to Save Act is a sweeping proposal to reform asset limits for major public assistance programs (House). Savings for Working Families Act gives Federal tax credits to financial institutions that support IDAs (House). Farm Bill reforms the asset limit for the Food Stamp Program (House and Senate versions). The previously mentioned policy trend toward providing social welfare benefits to Americans through an individual account system will likely not only continue but increase in scope. The George W. Bush administration suggested establishing individual accounts as part of the delivery of Social Security benefits, which is still on the policy discussion table. An ongoing concern is whether low- to moderate-income families would be effectively left out of these types of policies. A more universal Federal policy system of savings and investment - working in coordination with statelevel asset policy systems, that include incentives and structures targeting people at all income levels, in a variety of circumstances - will likely have to be established before these policies become truly effective asset-building tools for families and individuals of low- to moderate-income. Page 9

10 State Asset-Building Policies State governments often serve as policy incubators for Federal policies. States have been called laboratories of democracy, supporting particular cultural, societal, political, and fiscal environments that must be specifically addressed when policies are created. Federal policies are typically designed as larger and less flexible policies than similar state policies. This has proven particularly true in the development of many state-level assetbuilding policies targeting low- to moderate income individuals and families, including IDAs. Several states have already taken a leadership role in enacting savings and investment policies that effectively serve people in all income groups. These policies include: Instituting IDA programs with funding appropriations for match and program operations. Establishing state-supported financial education programs (including promoting or establishing financial education programs in schools). Enacting anti-predatory lending laws and initiatives, including limiting fees, number of loans offered, and regulating products offered by tax preparers. Removing or reducing asset limits tied to social welfare policies, to remove barriers to assetbuilding activities in households with lower incomes. Developing and promoting local savings campaigns for all income groups. Enacting state EITC and Children s Tax Credit policies that compliment Federal policies. Establishing state funding assistance and support for Volunteer Income Tax Assistance (VITA) sites and EITC campaigns. Establishing tax-benefited college 529 savings plans that provide a match for the savings of lowincome households. Creating Housing Trust Funds to increase homeownership rates, with dedicated funding sources. Supporting microenterprises and small business development (especially for low-income individuals and families). Developing policies and initiatives to bank the unbanked or underbanked. Subsidizing savings accounts for all children in the state. Subsidizing health care for all low-income families in the state. 11 Providing support for the activities of statewide asset-building coalitions. Several states created and enacted Individual Development Account policies and programs before IDAs first appeared in Federal legislation. Federal IDA legislation, including the Assets for Independence Act of 1998, mirrored state IDA legislation previously enacted. To date about 25 states support IDA programs, instituted by policy or administrative rule, with states being innovators in allowing policy features that are more flexible than those in federal IDA legislation such as more flexible goal uses for IDAs, more flexible program implementation and reporting structures and requirements, and allowing IDAs to be established for children. Besides IDA policies, 24 states (including the District of Columbia) have enacted an Earned Income Tax Credit law. State EITC laws are based on, and compliment, the federal EITC. A large Page 10

11 body of evidence shows that both federal and state EITC laws serve a number of important public policy goals. Another area of asset policy innovation on the state level is anti-predatory lending laws. 12 States have led the way in enacting effective predatory lending policies, attempting to protect the vulnerable assets built by lower-income families. Houses owned by lower-income families became particularly vulnerable as the subprime lending market in the United States grew to $401 billion in Residents of rural areas have been shown to be most often targeted for predatory loans, products and services. State College Savings 529 Plans are now found in all 50 states. Most states provide state tax relief from deposits made in these accounts if the funds are withdrawn for college tuition or expenses. However, in addition to tax benefits, six states (including Kansas) have enacted policies allowing for matching deposits from the state into the college savings accounts of low-income familie, most often allowing people from households with incomes at or below 200 percent of the federal poverty line to participate. Maine instituted a program that gives every child born in the state a $500 college grant if their parents open the 529 account for their child so that the grant can be deposited, regardless of income level. This in addition to the fact that Maine offers a savings match for account deposits for children from low-income households. 13 Many of these policies and initiatives have been advocated and improved through the engagement and involvement of state-level asset-building coalitions. Asset-building coalitions of partners, operating at various levels of development and activity, can be found in about 30 states, including Kansas. 14 These asset-building coalitions typically focus on enacting a variety of assets policies, including matched savings accounts (for adults and children), state EITCs, anti-predatory lending, asset test elimination or amendment, homeownership assistance, and financial education initiatives. Twenty-five of these state-level asset-building coalitions met in St. Louis in June 2008 at a meeting sponsored by the Annie E. Casey Foundation to discuss many common opportunities, successes, and challenges to both their organizational development, and their attempts to establish assets policies. 15 Kansas Partners in Asset Development (KPAD) was represented in this group. Achieving financial security through savings and investment building the proverbial nest egg to be used for emergencies and special life events and goals, such as a college education for one s self or one s children, establishing a home, or retiring was once a family priority in America across all income levels. State and federal asset-building policies must work together to initiate a resurgence of this triedand-true route to self-sufficiency. Financial fitness and viability should be widely revived as a privatepublic partnership and priority, as it has historically been in the United States. Only now these policies must be more inclusive, designed to assist people at all income levels to prosper. Coordinating inclusive state and federal assets policies as part of a universal and comprehensive asset-building plan and strategy with funding dedicated by both federal and state governments could go a long way toward curbing poverty, establishing economic prosperity for a great many more people than are presently experiencing it, and strengthening the middle class. Page 11

12 Asset-building policies in Kansas Kansas Action for Children, KPAD and other assetbuilding stakeholders and constituencies in Kansas believe that establishing more inclusive assetbuilding policies in the state would be a win-win proposition for both state government and individuals and families. Asset-building policies are proving to be more and more effective for creating prosperous individuals and families, especially families with low to moderate incomes. More prosperous individuals and families create more prosperous Kansas communities, which in turn will create a more prosperous and vigorous state economy. Kansas has enacted a number of assetbuilding policies targeting low- to moderateincome families. These policies include: Two state-supported Individual Development Account (IDA) programs A State College Savings 529 Plan with matching deposits for lower income families (KIDS) A Kansas Earned Income Tax Credit (EITC) Food Sales Tax Rebate for children and families State homeownership programs, including a Kansas Housing Trust Fund Kansas state anti-predatory lending provisions Two state-supported Individual Development Account (IDA) programs The first IDA law in Kansas was passed in 2001, providing IDA tax credits (originally set at less than $10,000) for creating IDA programs to support the savings of households with incomes at 300 percent of the federal poverty line or less for purchasing assistive technology devices for people with disabilities. This program, established through the only state law of its kind in the United States, was very slow to get off the ground and is still highly underutilized although the total amount of tax credits allowed has been increased. The Kansas IDA Program, enacted through legislation in 2005, allows more general uses for IDAs, such as homeownership and improvement, business development, and higher education and job training. This program targets lower-income families with incomes at 200 percent of the federal poverty line or less. The law provides up to $500,000 per year in 50 percent state tax credits for contributions to IDA programs run by selected non-profit organizations and Kansans with state tax liabilities (which would yield $1 million for the program if all tax credits were leveraged). The total number of IDA programs in Kansas is not known. However, few of these programs utilize the state program because most of the non-profit organizations running IDA programs do not have the staff time or expertise needed for leveraging tax credits. A State College Savings 529 Plan with matching deposits for lower income families (KIDS) The Learning Quest college savings 529 plan in Kansas was one of the first such state college savings programs to be legislated and instituted nationwide. The Kansas Investments Developing Scholars (KIDS) is a program within Learning Quest that offers dollar-for-dollar matching deposits for college savings contributions from Kansas residents earning up 200 percent of the federal poverty line. For every Page 12

13 dollar that families in the KIDS program contribute to a 529 plan, the state matches up to $600 per year. Additionally, families with a 529 account receive a state tax deduction up to $3,000 for a single taxpayer or $6,000 for married taxpayers filing jointly. After a slow start the KIDS program is becoming successful with 540 KIDS accounts established in 2007 out of a maximum of 800 accounts allowed. In 2008, 1,200 matched accounts were allowed. Even though most of the progress made with the KIDS program occurred toward the end of the current pilot period, this may be one of the best initiatives in the state for lower-income Kansas families to establish significant savings for college tuition for their children. A Kansas Earned Income Tax Credit (EITC) Enacted in 1998, the Kansas EITC is one of the most generous state EITCs in the country, offering a refundable credit of 17 percent of the Federal amount to qualified earners. The average Kansas EITC refund in 2007, the most recent year available, was $276.83, which can provide a substantial income support and savings opportunity for Kansas families in the lower income tiers. Food Sales Tax Rebate for children and families The Food Sales Tax Rebate law is intended to provide some recompense for the burden of a state sales tax on food to low-income Kansans who are over age 55, blind, disabled, or have at least one dependent child under 18 who resides with them most of the year. Kansas is one of only a handful of states that still charges a state sales tax on food purchases. The FSTR provides for a cash rebate on food purchases for households with incomes at or below $30,300. The rebate is adjusted for income and inflation, and provides rebates of $80 or $39 per person (each qualified person in the household). The average Kansas FSTR amount per family in 2007 was $ State homeownership programs, including a Kansas Housing Trust Fund Kansas has established a First Time Homebuyers Program that is administered by the Kansas Housing Resources Corporation. This program offers downpayment assistance to Kansans with incomes at or below 80 percent of the median income for the area of residence. The program provides a low-cost loan for 15 to 20 percent of the purchase price of the home (based on a sliding scale dependent on income). However, the program is only available to qualified homebuyers outside of major Kansas metropolitan areas, which include Topeka, Wichita, Lawrence, Kansas City, and Johnson County. Another state homebuyers assistance program includes the Kansas Housing Trust Fund. This program also provides downpayment assistance to homebuyers, but may or may not have a funding appropriation in any given year due to the fact that the funds for this program depend on state tax surpluses, and the program has no dedicated sources of funding (as is the case in many other states). Kansas state anti-predatory lending provisions Kansas law provides only minimal protections against financial abuse in the area of payday loans, and no protections against financial abuse in the area of car title loans. However, this is a beginning which could be expanded on to the great benefit of lowerincome Kansans. At present, payday loan interest Page 13

14 rates in Kansas are capped at 15 percent, but the number of repeat loans by one lender is not restricted. Since the average length of a payday loan is two weeks and since several loans are typically taken out by each borrower to pay off the first loan which was not able to be repaid on time this omission in policy could create an annualized interest percentage for the borrower of 390 percent or higher. The above policies are a good foundation for establishing an effective asset-building policy agenda in Kansas with the goal of increasing initiatives and opportunities for low- to moderate-income families. However, there is definitely room for improvement and advancement in this policy area, in Kansas. Excellent participation in community discussions across the state during the fall of along with the asset-building policy advocacy efforts of KAC, KPAD, and others - shows a renewed dedication to creating greater asset-building opportunities for lowto moderate-income families. Page 14

15 Asset-Building Policy Priorities for Kansas KAC and KPAD want to move an assets policy agenda forward while making the best use of the assets policies Kansas has in place. At a KACsponsored Asset Summit held in 2007, participants and stakeholders carefully considered the current asset-building policies outlined above evaluating how effectively they serve people in lower income tiers in Kansas. This same process was used by members of KPAD at a number of 2008 regional meetings and by participants of the five community meetings held in 2008 across the state. Consensus from all convening participants, partners and stakeholder groups was that 1) some existing Kansas asset-building policies are effective; 2) some must be amended to become more effective; 3) a few are seriously lacking in effectiveness and may need to be reconsidered; and 4) new policies that more effectively serve the asset-building priorities of lowto moderate-income families must be proposed and enacted. It was also determined that a prioritized policy action strategy should be established. As previously mentioned, the following five policy recommendations emerged as strategic priorities: 1. Support continuation of the KIDS College Savings Program; 2. Strengthen financial education efforts in Kansas; 3. Improve support for Individual Development Accounts (IDAs); 4. Inhibit predatory lending practices and promote available and accessible fair lending practices; and 5. Remove policy disincentives to saving and assetbuilding. 1. Support continuation of the KIDS College Savings Program. Few individual assets are more important than a good education. In a globalized economy, access to a postsecondary education that prepares students for the knowledge-based jobs of the 21st century is essential to economic self-sufficiency. However, for many low- and moderate-income families, post-secondary education is becoming unaffordable. While the KIDS program was somewhat slow getting off the ground, it has gained momentum in the last year and should be re-authorized and supported. The members of KPAD, as well as many participants of the asset-building community discussions, agreed that retaining and expanding KIDS is a necessary policy building block in any foundational state-level asset-building policy agenda. Recommendations for supporting KIDS include: Advocate for reauthorization of the KIDS program in Kansas. Continue to provide state funds for matching dollars for the accounts of children in eligible families. 2. Strengthen Financial Education Efforts in Kansas A repeated priority policy item to emerge from all groups that met across the state is establishing an initiative that provides access to comprehensive financial education for children and adults. There currently exist some innovative financial education programs in the state (some of which are operated through schools), but no consistent learning plan or curriculum has been developed. Existing initiatives often suffer from lack of support and funding from the school districts they are in. Page 15

16 If financial education in Kansas is made part of the curriculum, teachers may not feel as overburdened with adding a subject as they might otherwise. Also, teachers require more training in this area than is currently available (financial education instructors in Kansas are often not well-trained on financial topics themselves). Programs in Kansas that work should be identified and evaluated for success, so that they might be replicated by other interested schools and organizations. Elements from successful programs could then be incorporated into a new state initiative. It is recommended that any financial education initiative include the following elements: Become mandated and supported by law; Be offered through the public school system; Provide venues for delivery to adults; Besides basic budgeting and banking skills, include financial education courses with components, such as credit access and worthiness, credit and debt management, how to evaluate the efficacy of financial products and services, homeownership skills, business ownership skills, and investment skills; Be incorporated into Kansas curriculum with adequate training provided for teachers and instructors. Why might financial education be such an important policy priority? In past years, financial education - also called financial literacy by some - was delivered to people (most often children) primarily through the family unit. Children were taught the importance of saving, and actually encouraged to save at home and at school through a number of children s savings account initiatives. However, with today s more complex economies, and a great variety of financial products and services to choose from, parental encouragement to save part of one s income for a rainy day is not adequate advice for children who need to learn how to negotiate the more complex features of modern-day financial products, credit access and management, investments, and marketing. Financially-savvy children will yield financiallysavvy adults. Asset policy advocates in Kansas are right in line with national counterparts regarding the importance of financial education, especially at the youth level. Financial education has surfaced as a high policy priority at both the national level and state levels. The federal government established the Office of Financial Education (OFE) in 2002, hoping to improve the personal financial skills of Americans so that they might better negotiate a complex financial environment, and to provide Americans with better access to financial education programs. A Financial Literacy and Education Commission has also been created and is coordinated by the OFE, which released a National Strategy for Financial Literacy in Several states, including Oklahoma, Pennsylvania, Illinois, Washington, Maryland, Nebraska, and California have either passed, proposed, or are currently considering financial education policy initiatives that would be mandatory and serve all citizens in their respective states. These initiatives include provisions for targeted efforts to be made in communities where citizens more likely earn low to moderate incomes, or where citizens do not have access to financial education through their job or schools. The completion of a certain amount of financial education is also required for participation in all state-supported IDA programs. Page 16

17 3. Improve Support for Individual Development Accounts (IDAs) IDAs were also a high-priority item for many people in the community meetings. There is an IDA law in Kansas. Several IDA programs are currently being implemented, and several others are in the planning or early implementation stages. Over the last several years, IDAs have played a pivotal role in building interest in asset-building initiatives in the state. However, according to participants in all of the community discussions, IDAs in Kansas are currently underfunded, underutilized, and the current legislation and funding appropriations are not effective for successful implementation of such an innovative policy. According to research on IDAs by the Center for Social Development at Washington University in St. Louis, participants in IDA programs (most participants were at 150 to 200 percent of the federal poverty line) reported that saving in IDAs changed their financial expectations and attitudes for the better. Most participants stated that because of the program they are more likely to work and seek further education for themselves and their children. More than four in five participants stated that the IDA program helped them feel more economically secure, in control of their lives, and confident about their futures. 16 Several large philanthropies have made considerable investments in researching whether or not low- to moderate-income families would build wealth if given comparable opportunities to wealthier families, and the answer seems to be a resounding yes. The Ford Foundation and its grantees learned that families in the lower income tiers can and will save for the future, and they can and will build assets and make economic progress that can improve their lives in significant ways. However, these families save only if they also have connections to the financial mainstream and are offered meaningful opportunities to save and invest, opportunities that reflect their needs, goals, and circumstances, such as IDAs offering homeownership as a goal. Some IDA programs in Kansas have already proven successful for participants, however, not many programs have been able to successfully leverage their portion of the Kansas state tax credits issued for IDAs. Many Kansas IDA programs must seek additional funding to stay viable over the term of their IDA programs. Recommendations for better supporting IDAs in Kansas include that: Increasing the percentage of the tax credits appropriated for contributions to IDAs from 50 percent to 75 percent. A more effective structure for leveraging the credits should be established such as providing additional funding for outreach and assisting nonprofits to leverage the credits; or the state contracting with one or two non-profit organizations (on a competitive basis) to leverage all the credits and disperse the funds to stateapproved community-based IDA program sites. This method is currently being successfully utilized in Oregon, where millions of dollars in 75 percent state IDA tax credits are leveraged and utilized annually. Additional funds should be allocated to operational funds for IDA programs. IDA programs report that case management for IDA participants - who are often clients in other programs at their sites, such as homeownership or microenterprise programs - can be staff intensive, but worth the effort. Page 17

18 TANF funds could be allocated to IDAs, especially for operational expenses. TANF funds can be used for IDA program operational expenses, as well as for matching dollars. This concept is being successfully implemented in Virginia, Arkansas, New Jersey, and other states. State general funds could also be appropriated for IDAs, in addition to the tax credits, to create a more sustainable pool of funding for IDAs. Other states, including Indiana, Arkansas, and Pennsylvania use a combination of state tax credits and state general funds successfully. States such as Minnesota, Washington, New Mexico, and Pennsylvania are successfully utilizing an annual appropriation of state general funds for IDAs, and have been for several years. Utilizing non-federal funds for IDA matches enables the state and approved non-profit IDA program partners to receive double the funds raised for IDAs by applying for a matching federal IDA program funding grant (AFIA IDA program). 4. Inhibit Predatory Lending Practices and Promote Available and Accessible Fair Lending Practices The fourth policy priority for asset-building advocates in Kansas is to place effective restrictions on so-called predatory lenders. Policy recommendations include: By using non-federal funds for IDA matches, the state and approved non-profit IDA partners can receive double the funds raised for IDAs by applying for a matching federal IDA program funding grant. Limit the number of loans that can be offered consecutively to consumers. Limit the percentage of interest that can be charged consumers. Encourage and support affordable alternative financial services and products in the state, which may include state support for the development and utilization of innovative low-cost banking products and pools of funding for small loans. In 1993, there were 53 payday lenders in Kansas, but by August 2008, there were 444 payday lending locations in Kansas and 60 car title loan locations. This means that there are eight times as many predatory lenders currently established in the state as there were only 15 years ago. A major factor in this growth could be the high rural population in the state, since predatory lenders are most prevalent in rural areas. The growing number of predatory lenders implies a great cost to both Kansas consumers and the state. Nationally, in 2004, nearly 97, percent - of loans originated in rural areas were classified as high-cost loans. Out of the manufactured homes purchased in rural areas in that same year, over 50 percent of buyers received high-cost loans. These loans include a higher than normal Annual Percentage Rate of interest and excessive fees, creating extraordinary financial stresses for people who can least afford them. 17 Additionally, many consumers in rural and remote areas do not have reputable financial institutions close to where they reside, and use storefront loan businesses to cash checks and take out small emergency loans. These loans often end up costing two to 10 times as much than the original loan amount. According to the Center for Responsible Page 18

19 Lending, the average payday loan amount is $325; with an average 14-day interest of $52; the average amount of the paycheck being $377; the average loan being refinanced eight times; and the average borrower paying $800 to borrow $325. They also state that 99 percent of loans go to repeat borrowers, creating an average annual percentage rate (APR) of 416 percent. Nationally, Congress responded to the predatory lending threat facing men and women serving in the Armed Forces by enacting the Limitations on Terms of Consumer Credit Extended to Service Members and Dependents Act. This law became effective October 1, 2007, and targets payday lenders, auto and title pawn lenders, and providers of income tax refund anticipation loans (RALS). The law imposes several important regulations on lenders, including: limits the APR lenders can charge to the military to no more than 36 percent; prohibits rollovers with the proceeds of other credit extended to the borrower by the same creditor; prohibits lenders from requiring borrowers to use a check or other method of access to a deposit, savings or other financial account of the borrower as security; and prohibits lenders from requiring borrowers to waive their right to legal recourse. 18 This law has great potential for being replicated in states for the benefit of the general public. Predatory loans not only reduce, but often destroy credit scores. As the credit industry has become more dependent on automated loan processing in recent years, credit scores have become an increasingly important factor in determining financing practices at the national level. Ten years ago, credit scores were used in judging one-fourth of all credit applications. Today, credit scores are used in judging 90 percent of credit applications. Currently, such life goals as getting a job, renting an apartment, and obtaining reasonably-priced car According to the Center for Responsible Lending: average payday loan amount is $325 average 14-day interest is $52 average amount of borrower s paycheck is $377 average loan is refinanced eight times average borrower pays $800 to borrow $325 insurance cannot be accomplished without having an acceptable credit score. What is judged as acceptable is up to the lender. Payday loan businesses, which barely existed before 1990, now outnumber fast food franchises in most areas with well over 25,000 storefronts nationwide. Check-cashing outlets now process more than 180 million checks per year, with an estimated value of over $55 million in fees. 19 Some states have addressed the predatory lending crisis by setting caps on interest rates for these types of loans. Others are additionally limiting the number of high-interest loans that can be offered to one customer within a specified period in an attempt to reduce the 400 to 500 percent APR equivalent interest rates of rolled-over payday loans. In addition to a partnership effort with federal lawmakers, states can do much in this area. Page 19

20 5. Remove Policy Disincentives to Saving and Asset Building The fifth asset-building policy recommendation that was mentioned at all of the community discussions is to remove disincentives to save from all staterun, means-tested benefit programs so that Kansas families are not penalized for saving for retirement, a college education, or a home because they may temporarily need to utilize public assistance or have a disability that makes it difficult for them to find lucrative work. This recommendation would include: Removing or raising any asset limits (asset tests) imposed in public benefit programs, such as TANF. As an alternative initiative, asset limits (at least in TANF) could be eliminated or raised for savings in specific savings accounts, such as those established for higher education, job training, business development, or retirement use. There have been some issues with implementing many asset-building policies on the ground. Many social welfare laws penalize significant savings or investments for development purposes by the working poor, the unemployed, people with disabilities and others who must temporarily access public benefits so that they and their families may survive income loss or other personal catastrophes. These families are often penalized for owning assets by the withholding of much-needed assistance until all savings account balances are essentially spent down, eliminating family safety nets and putting these families in financial jeopardy. Asset tests for assistance programs prohibit people who access public benefits from becoming self sufficient, stripping them of the personal savings that would assist them in dealing with the emergencies that would typically return them to welfare. These policies also serve to strip many children of hope for a college education and may create a generation of elderly poor with little personal savings. Temporary Assistance to Needy Families, or TANF, allows individual states to determine the asset test rules for many public benefits programs. In Kansas, to receive TANF benefits you cannot own cash assets, or cash value assets, of more than $2,000; Limits in Kansas for Medicaid are also set at $2,000 in assets, which is among the lowest limits in the country. Many states have raised asset limits to at least $5,000 for TANF and Medicaid. Vehicles owned by families are excluded from asset tests in Kansas though many states have imposed a value limit for vehicles. Policymakers in a few states are beginning to acknowledge the false economies of asset tests associated with social welfare policies. 20 These states have either eliminated the asset test, raised the asset test amounts for savings accounts and car values, waived the asset test for certain savings programs (such as Individual Development Accounts, 21 college savings, or retirement savings), or waived the test completely for TANF and some other public benefits programs. Ohio and Virginia have eliminated asset tests for TANF, and have collected data showing that caseloads did not increase as a result of this innovation. Several states are currently considering legislation to this effect. If we consider asset tests combined with income tests, we must consider the Federal Poverty Line which the participants in the community discussions agreed is significantly out of date. Fewer than 13 percent of American households live below the official poverty line. However, more than 25 percent live paycheck to paycheck with little or no net worth, and for minorities the picture worsens even more. Between 1983 and 2001, the net worth of the least affluent 40 percent of American households fell by almost half a disturbing drop, and a likely costly drop for state economies. 22 Page 20

21 Additional Policy Recommendations that Emerged from Advocates Seven additional asset-policy change and development recommendations emerged from the asset-building discussions held across the state and are generally seen as important for establishing an effective asset-building effort in the state. Some of the additional recommendations have direct ties to the five main recommendations made, but all are considered important for creating assetbuilding opportunities for low- to moderate-income Kansans. Participants in the meetings see these recommendations as no less important than the five priority recommendations, but acknowledge that they are perhaps not among the starting policy priorities. It was agreed by many participants that policies or administrative rules that facilitate these types of initiatives and actions might be accomplished in the next five to 10 years. Seven additional asset-policy change and development recommendations emerged from the asset-building discussions held across the state, and are generally seen as important for establishing an effective asset-building effort in the state. Expand the state EITC. Provide a dedicated funding source for the State Housing Trust Fund. Improve access to affordable and available health care for Kansans with low to moderate incomes. Establish programs or initiatives to get more Kansans banked or rebanked. Create a variety of savings opportunities for low-income Kansans. Improve access to quality and affordable early learning opportunities for working parents in Kansas. Increase and improve post-secondary job training opportunities. 6. Expand the state EITC to be a more effective asset-building tool for Kansans Even though Kansas has enacted a generous EITC law, many qualified Kansans are still not receiving the benefit. Convening participants recommend that Kansas provide some additional funding for marketing efforts to establish more effective VITA sites and EITC campaigns in Kansas, increasing the amount of Federal and state EITC dollars that goes to Kansas families. Kansas could increase the effectiveness of the EITC by expanding state EITC eligibility to include adults without children, people with disabilities, and people in life transitions (such as loss of a job). Kansas lawmakers could also provide a small incentive that encourages people to place state EITC refunds in savings or investment accounts. Research shows that states with EITC laws that reach many qualifying families in the state can significantly reduce child poverty, cut taxes, and increase the incentive to work for working families struggling to make ends meet. 23 State EITC policies provide an important additional income source that, in many cases, allows tax filers in the lower-income tiers to save and invest. 24 EITC claimants have more opportunities than ever before to save part of their refund: Many IDA programs encourage making deposits with part of an EITC refund and federal legislation passed in 2006 allows electronic income tax deposits to be deposited in up to three transactional accounts at one or more financial institutions. Page 21

22 7. Provide a dedicated funding source for the State Housing Trust Fund Homeownership is key to building and retaining assets for people in all income levels, but particularly for those in lower-income tiers. In 2001, low-income families nationwide who rented their homes had a median net worth of $500. However, among low-income families who owned their own homes, median net worth was $62,500, with home equity by far their most valuable asset. Homeownership is widely accepted as the cornerstone of the American Dream. Despite negative press about such entities as Fannie Mae and Freddie Mac, a national effort to make mortgage credit more widely available for low-wealth families - by creating a secondary market for loans to lowincome borrowers who otherwise would not have qualified for a conventional mortgage - has proven to be a major success. So far, $3.9 million in loans to 45,000 borrowers have been negotiated, with extremely low foreclosure rates (this data was collected before the most recent financial crisis related to home foreclosures). 25 The Kansas First Time Homebuyers Program and Housing Trust Fund assist many lower-income families in achieving the American Dream of homeownership. Research shows that homeowners become more engaged in positive community and family activities than renters and experience fewer negative familial experiences than renters. Kansas lawmakers should secure these positive effects for all Kansans who want to become homeowners by creating a dedicated funding source - as many other states do - for the Housing Trust Fund. In 2001, low-income families that rented their homes had a median net worth of $500. However, among low-income families that owned their own homes, median net worth was $62,500 with home equity as their most valuable asset. 8. Improve access to affordable and available health care for Kansans with low to moderate incomes Kansas families who owe moderate to high amounts of medical debt are most vulnerable to the dire effects of a number of family financial crises, large and small. They are also the families most likely to lose their homes, their cars, their savings, and their hope, due to debt and lost employment. For people in medical debt, saving for the future or owning a home often seems like an impossible dream. Not all families in this situation are what we would consider low income or low-moderate income, but a majority are. However, the incidence of people with moderate to high-moderate incomes suffering financial ruin from medical debt is rising at an alarming rate. According to a survey administered in Kansas in 2005, 26 out of 1,058 adults that were generally from low-income families (the median income was $17,000), nearly two-thirds (63 percent) reported currently owing money for medical bills. These families reflected a significant portion of the Kansas population which, in 2002, included 138,000 households (or 20 percent of the population) having incomes below $25,000. The prevalence of medical debt was higher for those in families where everyone was uninsured (66 percent) and in households where some people were uninsured during the previous year (72 percent). This data also reveals the temporary nature of much employment in Kansas, and the lack of insurance benefits for a significant number of low-wage Page 22

23 workers. According to the Kansas Health Policy Authority, over two-thirds of uninsured full-time working adults in Kansas are employed by firms with less than 25 employees. KHPA has also determined that 11 percent of the population in Kansas (nearly 300,000 people) are uninsured. Some suggested policy routes for addressing this problem, by asset-building advocates in Kansas, include: 1) Create refundable state tax credits for small employers who want to offer their employees health insurance; 2) Create other incentives for large employers who want to give part-time or temporary workers insurance benefits; 3) Create a pool of state and private funding for health coverage assistance to low- and moderate-income families. Lower income families must have at least basic health coverage before they will be able to accumulate significant long-term savings for development purposes. 9. Establish programs or initiatives to get more Kansans banked or rebanked A full 10 percent of households nationwide maintain no checking or savings accounts at financial institutions, and rely almost entirely on fringe financial businesses to cash checks, pay bills, and get short-term credit, illustrating that there are exorbitantly high costs levied on people in the lowerincome tiers who are disconnected to the mainstream financial industry. Having a transactional financial account is essential in today s economic environment, considering that people with transactional accounts are more than twice as likely to save money than those who are unbanked, and much more likely to add to their savings on a regular basis. Research indicates that there are savers and spenders in all income classes. Those with modest incomes are not likely to save as much as those who are more affluent, but almost all people have the ability to build wealth over time. Research has also shown that, through contributions to a workplace retirement program, home purchase, and other savings opportunities that open up during working years, many low- to moderate-income people can accumulate up to six-figure assets over a lifetime. 27 Nationally-originated savings initiatives exist that focus specifically on getting more people to establish financial accounts at banks or other financial institutions (such as a credit union). Kansas participates in one of them the Kansas Saves campaign. This existing initiative and opportunity, used along with IDAs and a campaign to encourage low-income Kansans to save part of their EITC refunds, might be a good starting point to get more Kansans in at least one transactional account at a financial institution and to increase savings opportunities for Kansans. The America Saves program (of which Kansas Saves is affiliated), is a broad coalition of more than 1,000 non-profit, corporate and government groups across the country dedicated to helping individuals and families get banked, save and build wealth. Through information and advice, those who wish to pay down debt, build an emergency fund, save for a home, save for an education, or save for retirement are encouraged in their efforts. The goal of the America Saves campaign is to convince all Americans that they can build significant wealth and to assist them in getting started. More than 100,000 enrolled savers participate in this initiative, nationwide, including the financially vulnerable. Page 23

24 10. Create a variety of savings opportunities for Kansans in lowerincome tiers, in addition to IDAs, such as subsidized children s savings accounts and retirement accounts A growing body of research suggests that the practice of saving money plays a key role in developing healthy life goals and aspirations, and breaking the cycle of poverty in families. Children who save money and learn saving skills may be able to look toward their futures with confidence that the resources and knowledge necessary for investing in themselves is there. The federal government will have to change policies that penalize children s savings by severely reducing or eliminating financial aid. Children saving for life goals is a sound idea and likely the wave of the future. 28 Kansas could be a leader in the nation by establishing opportunities for children who receive financial education to save on a regular basis. Nationally, there are eight retirement savings plans designed to take advantage of federal tax laws: 401(k)s, 403(b)s, 457(b)s, the Thrift Savings Plan, SIMPLE IRAs, traditional IRAs, and Roth IRAs. Most of these plans are available only through employers or states, which are the plans most successful at attracting savers and savings. Nationwide, less than one-quarter of workers earning less than $20,000 annually are enrolled in employer-sponsored retirement plans. This discrepancy illustrates how few lower-income Americans have savings plans offered where they work, and how many are often excluded from work-based plans. These plans, in total, held more than $6 trillion in assets at the end of 2004 which includes contributions by savers, employers, and interest earnings. However, most people saving in these plans earn incomes in the top half of the income distribution, are middle-aged, and are educated at a post-secondary level. Nationwide, less than one-quarter of workers earning less than $20,000 annually are enrolled in employer-sponsored retirement plans. This discrepancy illustrates how few lower-income Americans have savings plans offered where they work, and how many are often excluded from work-based plans Improve access to quality and affordable early learning opportunities for working parents in Kansas Quality early learning environments are essential for healthy development and prosperous futures of children. The ability to form relationships, as well as life-long learning skills, depends on appropriate brain stimulation during the critical first five years of a child s life. Researchers have established a clear link between quality early learning and success in school and in adult life. Kansas families at all income levels must have the same opportunities to meet their children s most basic needs if they are to begin to look forward and plan for future financial security. Ensuring this opportunity for all Kansas children requires that essential supports for families, including access to quality and affordable child care and early education opportunities for working parents in Kansas, should be a priority in the state budget process. In recent years Kansas has made important new investments in early learning. Those investments need to be sustained in the short-run and increased when the state fiscal situation improves. Page 24

25 12. Increase and improve post-secondary and job training opportunities in the state so that young people are prepared to enter the workforce, and unemployed and displaced workers with new skills can be matched with a variety of industries that lack workers Although Kansas usually has a relatively low unemployment rate, jobs in much of Kansas particularly rural areas are often seasonal, parttime, or temporary, and mostly without key benefits such as health insurance. However, non-profit organizations working with Kansans to find jobs (or better jobs) have found that one of the main barriers to obtaining employment in Kansas is lack of a workforce that is skilled to do the work Kansas companies and industries require. Repetitive unemployment, low wages, and persistent poverty could be seriously reduced if workers skills matched employers needs. Greater access to affordable post-secondary education including to vocational schools and additional job training programs, supported by the state, perhaps as a public-private partnership with Kansas industry would likely yield tremendously positive results, particularly in establishing more secure employment and a wage rise that would better allow Kansas families to save and invest a part of their income. Traveling the Asset- Building Policy Road: Next Steps Any Kansas economic development plans should help restore the American promise of opportunity for all. Public policy that supports asset ownership, coupled with individual initiative, is an important strategy for increasing economic opportunity. Readers can join the efforts of other asset-building advocates by: Providing feedback to Kansas Action for Children (KAC) and/or Kansas Partners in Asset Development (KPAD) members on why these policy recommendations are important to your efforts. Making suggestions for policy initiatives not covered in this report. Joining the policy advocacy efforts of KAC, KPAD, and other asset-building organizations in Kansas. Contact KAC to learn how you can get involved. Kansas Action for Children 720 SW Jackson, Suite 201 Topeka, KS kac@kac.org Page 25