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During periods of economic hardship, virtually all segments of the population are adversely affected. While many individuals eventually make strides in recovering financially, some are not as fortunate. The less fortunate are not only unable to effectively improve their financial well-being but they also have difficulty contributing to the revitalization of their communities. In order to assist those in this sector, it is imperative to understand the factors that contribute to the difficulties they encounter in improving their plight, to pinpoint strategies to aid in their endeavor, and to identify the organizations/institutions best suited to help them become financially stable. The Corporation for Enterprise Development (CFED) confronts this challenge in a report that it compiled detailing the efforts of the Cities for Financial Empowerment (CFE) Coalition. The report chronicles the lessons learned by the local governments of the member cities (now 12, but 11 at the time) in addressing the struggles of financially vulnerable populations to restore their economic well-being after experiencing an economic setback.1 The following is a summary of CFED’s report.
Marvin M. Smith, Ph.D., Senior Community Development Economic Advisor
CFED maintains that city leaders should think more prospectively when contemplating assistance for the most vulnerable members of the population. More specifically, they should “think beyond reactive policies focused narrowly on crisis intervention and preservation of the safety net, to policies that aim to proactively help individuals out of poverty — in essence offering them a hand up instead of a hand out.” Although CFED deems the efforts at the state and federal levels to be helpful, when it comes to “affordable housing, to transportation, to banking services, to consumer protection, cities are uniquely positioned to align their array of services to advance the common goal of building the prosperity of all its residents.” The authors of the report stressed that municipal governments have devoted their efforts to assist individuals in achieving economic security by increasing their “income through job creation and job training strategies, and by proving subsidies for housing and other basic goods.” But “what they have not traditionally focused on is parlaying that increased income into savings and durable assets — and then protecting that income, savings and assets from predatory financial practices.”
The CFE Coalition consists of 12 member cities (Chicago; County of Hawai’i; Los Angeles; Louisville, KY; Miami; Newark, NJ; New York City; Providence, RI; San Antonio; San Francisco; Savannah, GA; and Seattle) that are piloting financial empowerment strategies “often in collaboration with partners from the private, nonprofit and philanthropic sectors.” CFED worked in conjunction with member cities of CFE to document the program and strategies being implemented in the cities to “financially educate, empower and protect their residents.”
In its report, CFED focuses on five main strategies.
The CFE’s member cities are working to help households build their financial knowledge and develop positive financial behaviors by improving and making available quality education and counseling. Thus, the cities of Seattle, Savannah, and New York are incorporating these services into social services, welfare programs, and other federally funded programs targeted to low-income households. Moreover, the cities maintain that “providing dedicated funding streams for financial education, credit repair and asset-specific financial counseling would facilitate the expansion of these highly successful local initiatives.”
Having adequate income is key to being able to afford basic needs and save for the future. Regrettably, many low-wage workers must rely on employment that is characterized by instability and unpredictable earnings. While cities traditionally have had services and benefits to aid individuals during hard times, they “have begun to devise new ways to leverage existing services and benefits to reach the largest number of residents possible.”
Fortunately, one program that enjoys a great deal of alignment among the different levels of government is the earned income tax credit (EITC). “The federal EITC is one of the largest and most effective wage support programs for low- and moderate-income families.” Since the federal credit was enacted in 1975, it has been increased markedly — from $1.3 billion to $48.7 billion in 2007. According to a 2009 CFED publication, “since the federal credit was enacted, 23 states and the District of Columbia have enacted state-level EITCs, and several local jurisdictions — San Francisco, New York and Montgomery County, MD — have enacted local credits that piggy-back on the federal credit.”2 The authors of the CFED report noted that some cities are pursuing public awareness campaigns in regard to the EITC and are also encouraging residents to avail themselves of public benefits and work supports. Thus, “cities are using a range of technology platforms to link residents to city- and state-administered benefits.”
According to the CFED report’s authors, “a household’s ability to save depends on several factors: minimizing costs for basic goods and services, access to convenient, low-cost financial products and structures (transaction, saving, credit and insurance products as well as direct deposit, automatic enrollment, etc.), and financial capability related to money management, financial products and credit.”
Unfortunately, many low-income people are unable to afford basic goods and services, let alone unanticipated contingencies. Thus, many rely on credit to make ends meet. But the high-cost credit products that some individuals use increase their debt — leaving even less for saving. The authors of the CFED report indicate that some cities are working with financial institutions to lower the cost of borrowing by developing “more affordable short-term credit products.” Some of the products or activities include low-cost savings accounts, small-dollar loans, refund anticipation loans, auto refinance loans, and urging employers to use direct deposit.
When individuals are able to generate savings, they can cover emergency expenses in the short run and leverage their savings in the long run to obtain appreciable assets, such as education or marketable credentials, or to purchase a home or start a business. But many individuals with modest means find it difficult to amass a reasonable amount of liquid savings and tangible assets.
The authors of the report point out that some cities are embarking on efforts to assist individuals in their savings endeavors. Some of the undertakings include providing incentives for individuals to establish savings accounts that can be used for their own or their children’s education or for purchasing a home or vehicle. Also, some cities “have forged strategic partnerships with not-for-profit microenterprise finance organizations to provide micro-loans to low- and moderate-income entrepreneurs who have difficulty securing financing through traditional institutions.”
The final set of strategies by cities to assist the financial security and empowerment of consumers with limited incomes involves programs and policies to protect against loss of income or assets and the harmful consequences of predatory lending practices. In the report, the authors list several efforts being undertaken by cities that include “limiting or managing the proliferation of alternative, high-cost financial service providers through licensing and zoning powers, curbing predatory consumer lending through enforcement of disclosure laws or litigation, and foreclosure prevention strategies, including foreclosure counseling, forgivable emergency loans, encouraging lender workouts and assistance to tenants in foreclosed properties.”
The authors of the CFED report noted that “the fundamental approach of each of the cities documented in [their] report is to embed and centralize financial empowerment and asset-building strategies within city administration.” Thus, “no matter what door a person walks through, they can access the financial supports, products and services they need.”