Millions of Americans have built assets and improved their economic standing through higher education, business creation, and homeownership. Yet in order to engage in such efforts, most people need some savings or credit history. This fact of life keeps the door to opportunity shut for many low-income people. To help those for whom homeownership, college, or business creation may seem an impossible dream, the concept of the individual development account (IDA) has emerged.
The IDA concept was pioneered by Michael Sherradan, a professor at Washington University in St. Louis, based on his research demonstrating that accumulation of assets, rather than just income, plays a major role in allowing people to escape poverty and achieve wealth. IDAs are leveraged, restricted investment accounts that help low- and moderate-income individuals build savings. When IDA holders make deposits, those funds are matched primarily by external sources: foundations, corporations, religious institutions, and government. IDA savings can be used for education and training, homeownership, and development of home-based and micro-enterprise businesses.
Interest in the IDA concept is growing. Several CDCs and community-based organizations have launched IDA demonstrations. The Corporation for Enterprise Development (CfED) has begun an $11 million national IDA demonstration supported by several major foundations. The recent welfare reform bill passed by Congress paves the way for states to use block grant funds for IDAs and raise the limits on assets recipients may accumulate. And legislation recently introduced by Senators Dan Coats of Indiana and Carol Moseley-Braun of Illinois proposes a $100 million national IDA demonstration.
IDAs and Community Economic Development
Creating opportunities and resources for low-income residents is central to the mission of community economic development. In communities heavily disinvested over the past several decades, IDAs become part of a reinvestment strategy aimed at creating stakeholders in the community.
Recent years have seen growing interest in community development strategies emphasizing low-income residents’ assets, skills, and gifts. “Even the poorest neighborhood is a place where individuals and organizations represent resources upon which to build,” John McKnight and John Kretzmann write in their book Building Communities From The Inside Out [see Shelterforce #83]. “The key to neighborhood regeneration is to locate all of the available local assets, to begin connecting them with one another in ways that multiply their power and effectiveness, and to begin harnessing those local institutions that are not yet available for local development purposes.”
IDAs help neighborhood asset development by strengthening the growing role of self-help groups such as homebuyer clubs, savings clubs, and peer lending groups. New Community Corporation (NCC) in Newark, New Jersey, is developing an IDA demonstration in which account holders who plan to use their IDAs to buy a home will be required to join a homebuyers club, to share advice, ideas, and support with other participants. Savings clubs have also been a major route immigrants and other ethnic groups have used to escape poverty. An IDA savings club, in which individuals work with each other to save a specified amount each month, can lead to greater understanding of economic concepts and savings, as well as providing the intangible but essential support participants need in order to progress.
The beauty of the IDA concept is that while it is simple in design, it helps achieve a number of important community economic development goals. These include:
- Increased Savings. Savings have eroded for many American families faced with declining wages and increased costs, especially in low-income communities. IDAs help low-income individuals/families increase their savings for investment-related activities. Eastside Community Investment (ECI), an Indianapolis CDC that offers a comprehensive range of services, has developed several IDA programs to help low-income residents build savings. ECI will place $250 in the account of a new IDA participant, and will then match nine to one up to $1000 of the new account holder’s savings.
- Long-Term Thinking and Planning. When accumulating assets, people begin to look beyond monthly consumption cycles, and start thinking about how to set long-term goals. One of the assumptions behind IDAs is that people’s long-term expectations will blossom in terms of education, business opportunities/careers, and homeownership. Motivation and increased awareness of opportunities is a crucial factor in enabling people to develop. This can lead to increased self-esteem and positive attitudes.
- Increased Economic Literacy. Setting long-term goals leads people to increase their economic literacy, meaning they develop greater knowledge of economic issues and how to save and invest. Likewise, as people increase their economic literacy, they see more choices and options for their future. IDA programs need to incorporate training and technical assistance that lead to increased understanding of the basics of finance and investment. Community development credit unions can be an important vehicle for managing IDAs and educating and training community residents. A local credit union manages ECI’s IDA, and the New Community Federal Credit Union, an affiliate of NCC, will manage its IDA demonstration.
- Expanding the Field of Stakeholders. IDAs are important tools in encouraging more people to think of themselves as stakeholders in their communities. For example, in the Central Ward of Newark, where the homeownership rate is 20 percent, NCC plans to use its IDA program to help enhance home ownership. People who own their own home or business are more likely to be committed to improving their community. These individuals often become more active and volunteer in community-service-related functions.
IDA Design Principles
The Corporation for Enterprise Development (CfED) and The Center for Social Development at Washington University have identified a number of design principles that IDA programs should incorporate, including:
- Fitting an Organization’s Mission. IDAs need to support an organization’s mission, programs, and initiatives, such as developing microenterprises or housing. NCC’s mission, for example, is to help low-income people become more economically independent through education, training opportunities, and job creation. IDAs support this mission by providing NCC residents, clients, and employees with resources for education and to help capitalize businesses.
- Flexible and Easy Access. To encourage the widest number of people to be involved in crafting the program to their particular needs, IDA programs should be kept as simple as possible. If IDAs are too complicated, and people have difficulty accessing their accounts, the program will have limited impact. While IDAs are restricted accounts, participants should be able to withdraw funds in a timely manner for education, housing, or business capitalization.
- Access to Information. For an IDA program to succeed, individuals need timely, clear, and understandable information on the status of their accounts and investments. Using the advances in information technology, account holders should be able to access computers to view monthly financial statements.
- Clear Message. IDAs need to convey clear messages of the values of saving, planning for the future, household development, participation in the community, and active citizenship. IDAs do not simply exist for people to receive more funds, but to help low-income people form a vision for their future. Marketing an IDA program is important, since such programs are designed for people who have the desire to improve their future.
- Long-Term and Sustained Support. Asset development should be viewed in a long-term context. It generally takes considerable time for a low-income person to save and invest in their future. IDAs should last for a number of years to help individuals work towards their goals.
Launching an IDA program will require the capability to raise external resources, both public and private sector, to provide as matching funds in each IDA account.
Government is an important source of funding for IDAs. IDAs, which emphasize economic self sufficiency, fit well with the stated goals of the recent federal welfare reform legislation. Under this legislation, states can allocate some of the federal funds for welfare reform to capitalize IDAs. Previously, welfare recipients without a state-approved waiver were penalized if they accumulated assets. This major change in public policy will allow former recipients to build savings as part of their economic self-sufficiency strategy. Some states use state-appropriated funds to support IDA programs, while others leverage private sector contributions to IDAs. The Corporation for Enterprise Development has been promoting a plan to create state IDA Reserve Funds to capitalize IDAs. The capital could come from either taxes or captured IDA funds that were not properly used.
Along with federal and state sources, contributors to IDAs may include foundations, corporations, individuals, and religious institutions. The Charles Stewart Mott Foundation and Joyce Foundation have played a lead role in several pioneering IDA demonstrations. Other foundations, including Ford and Annie E. Casey, are exploring how to finance the next round of IDA demonstrations to create greater awareness of asset development as an anti-poverty strategy. Another intriguing idea is to have individuals make monthly contributions to the IDAs of families, friends, or community residents, similar to the sponsorship model that Save the Children has pioneered. Finally, Federal Home Loan Banks can adopt the model of the Federal Home Loan Bank of New York’s “First Home Club” program, which matches funds for first-time homebuyers.
IDAs offer a promising way to help low-income people develop financial and technical assets for their future. By engaging financial institutions that have a community development mission or focus (credit unions, community development banks, etc.), using welfare reform and state policy to generate public sector resources for IDAs, encouraging economic literacy efforts and constant training of IDA recipients, and making the IDA program as accessible and user-friendly as possible, IDAs can achieve significant impact.
Starting an IDA
For organizations thinking of starting an IDA program, the following steps are recommended:
- Form a workgroup that reflects the diversity of the organization.
- Learn about the IDA concept, and the experience of current IDA demonstrations, especially Eastside Community Investments (ECI), and Women’s Self-Employment Project (WSEP). The Corporation for Enterprise Development (CFED), has published two excellent guidebooks, and a quarterly newsletter called Assets.
- Hold focus groups for potential participants. Each focus group should have a facilitator and a recorder.
- Based on the recommendations of the focus group and the IDA workgroup, develop clear guidelines for the IDA demonstration – for eligibility, usage, matching rate, sponsoring financial institution (credit union or other vehicle), withdrawal procedures, counseling, training, and technical assistance.
- Keep the IDA program as simple as possible, and make sure it builds upon the mission of CDCs, and supports some of the key initiatives, e.g. microenterprise, homeownership, and skills-based training.
- Aggressively market the IDA program through community meetings and forums, staff meetings, other CBOs, churches, schools, and newsletters.
- Offer economic literacy training seminars and programs on a regular basis, ideally on a monthly basis with times that are convenient for participants.
- Monitor and evaluate the IDA demonstration, and make changes that are appropriate.
- Communicate on a regular basis with participants, CDC stakeholders, and funders.
IDAs for empowerment
The Women’s Opportunities Resource Center (WORC) is working with Pennsylvania Governor Tom Ridge’s Urban Development Team to design an IDA initiative. The statewide program is proposed as a broad empowerment strategy to support existing programs and initiatives that promote self-sufficiency.
The proposed IDA initiative would be available to all Pennsylvania residents, but would be especially useful in helping low-income people build assets. To stimulate savings, account holders would be expected to save $40 per month. The state would match this amount quarterly at a 50 percent rate. The program would allow individuals to save up to $2000 per year, but the state’s match would be capped at $300 per year. Local agencies would be able to negotiate additional matching dollars from private and public sources. The IDAs would last for two years, limited to one per household at a time.
The program would also teach economic literacy and short- and long-term financial management skills. Neighborhood organizations, such as CDCs or churches, would inform individuals about IDAs and train participants in their use.
For more information, contact WORC, 1930 Chestnut St, Suite 1600, Philadelphia, PA 19103; 215-564-5500.