FEATURED STATE: Maryland
Across the country, the financial crisis and its damaging ripple effects continue to roil budgets at every level of government. Yet despite several years of difficult politics and bleak economic conditions, Maryland has found fiscally responsible ways to support low-income working families.
Facing funding shortages and grim revenue projections, leaders within the legislature and the administration chose to emphasize the compounding benefits of thrift. In light of the enormous problems befuddling Congress and the states, Maryland’s actions may look relatively insignificant. But by focusing on savings, the state has made it easier for low-income families to shore up their finances and move up the economic ladder.
Savings are critical for financial health. Families with reserves are better equipped to withstand a crisis, such as a job loss or serious illness. They also have the means to invest in higher education, skills training, a car or a home – assets that can lead to better jobs and future prosperity. There are many benefits to savings, but one of the most telling is upward mobility. Studies conducted by the Economic Mobility Project show that when parents save regularly, their children will likely earn more later in life.
Although the national savings rate has slowly crept up from its historic low of 0.1 percent in 2008, many low and middle income families still have little or no savings. Debt, on the other hand, has ballooned. On average, families owe nearly $10,000 on their credit cards, double what they owed in 1994. Median income in Maryland tops all other states, yet almost 20 percent of Marylanders are asset poor, meaning they lack the savings to survive at the poverty level for three months without income.
To encourage savings, Maryland took action to ensure that its most vulnerable families weren’t being penalized for setting aside some of their paycheck. Legislators also tried to make saving money more appealing to citizens who have previously not had much savings.
Save to Win – Jackpot!
One of the biggest reasons people don’t save is that it’s boring. There’s no immediate gratification, no reward. Despite the magic of compound interest, spending is much more fun. Combine this simple but powerful psychological force with easy credit and you get poor money management. But what if saving, even small amounts, was more exciting – more like the lottery?
Americans like a jackpot. In 2007, for instance, annual sales of the nation’s 42 state lotteries approached $54 billion, an average of more than $189 per person or $479 per household. That’s more, studies suggest, than families spend on milk! Instead of fighting this behavior, the idea of tying savings to prize-winning has gained popularity over the last few years.
The first large-scale prize-linked savings (PLS) program in the U.S. was launched by eight Michigan credit unions in 2009. For every $25 deposited into savings, Michigan ‘Save to Win’ participants get a chance to win monthly raffles and a yearly $100,000 grand prize. Savers also earn interest, just like they would with an ordinary account. In just 11 months, more than 11,600 participants saved more than $8.5 million. The program has since expanded to more than 47 credit unions across the state, and evidence suggests that the opportunity to win big has induced even lower- and middle-income households to save. Data shows that 34 percent of savers earn less than $40,000 per year.
Based on this success in Michigan, Maryland enacted legislation, permitting credit unions to offer prize-linked savings (PLS) accounts. In response to banking industry concerns, however, a provision in the law keeps it from taking effect until banks are also allowed to offer PLS products. Current federal regulations explicitly prohibit banks and depository institutions from operating lotteries – a restriction that does not apply to credit unions. Although supportive of the PLS concept, banks worried that they would be unfairly barred from entering the PLS market.
Following 2010’s partial victory, Maryland legislators began working with a growing network of supporters to find a way for both banks and credit unions to offer PLS accounts under existing laws. Their persistence paid off in May of 2012, when Governor O’Malley signed HB 786, clearing the way for Maryland financial institutions to develop and market PLS products.
The new Maryland law found a way to comply with federal regulations by reclassifying PLS as a ‘sweepstakes’ instead of a ‘raffle,’ which basically means that people can enter for free. Consumers will be able to open a PLS account and have a chance to win simply by making a deposit or filling out a form.
Maryland’s progress on this issue resulted from two years of collaboration among legislators, business and community leaders, and NGO stakeholders. After repeated appeals to Congress and the FDIC failed to produce the necessary changes in federal law, frustrated Maryland legislators engaged their homegrown coalition of PLS supporters and advisors in search of a different solution.
The sponsors of Maryland’s new legislation generated support for their bill by forming strong relationships with financial institutions, encouraging their input, highlighting the success of PLS programs in other states, and engaging issue experts to help educate other legislators and earn their backing.
Although it took multiple legislative sessions and more than one attempt for PLS to succeed in Maryland, the network that legislators built in the process remains active in critical ways. Representatives from the FDIC, banks, credit unions, and community organizations are meeting with issue experts and other stakeholders to define the features of Maryland PLS products. The group’s diverse expertise is helping to hone key program provisions, such as account management and data collection, prize amounts and selection, eligibility requirements, marketing and branding – and more.
Maryland’s development process continues to benefit from new research from PLS experts who have been following the progress of ‘Save to Win’ (STW) programs in Michigan and Nebraska. Both programs have grown dramatically, attracting thousands of account holders that have saved millions. The chance at a jackpot is creating a powerful incentive to save among a diverse customer base, including the financially vulnerable. Research has also shown that even fairly small prize pools can still draw big savings. In Michigan’s pilot year, for example, savers put away $61.58 for every $1 awarded in prize money. That’s only 2 pennies spent for every dollar saved.
Updated March 2013
Removing Asset Limits
A Maryland family of three needs about $2,200 per month to maintain a minimal standard of living, according to the state Department of Human Resources. Prior to a recent rule change, however, Maryland’s cash welfare program stopped providing assistance to recipients who saved more than $2,000 – or less than one month’s expenses.
Such limits were designed to prevent the abuse of public benefit programs, but many argue these caps discourage exactly the type of long-term savings that low-income families need to become self-sufficient. Allowing families to build a small reserve while still receiving vital short-term assistance encourages smart financial behavior and hastens their return to financial independence. Asset limits can be particularly counterproductive at tax time. Instead of saving their refund for emergencies or any number of productive investments, low-income families will often spend it to avoid losing the aid they need for basic living costs.
In 2010, Maryland lawmakers introduced legislation that would have lifted asset limits from the state’s Temporary Cash Assistance (TCA) program. Critics of the bill questioned if it was appropriate to provide services to families with savings. The bill failed to pass, forcing its supporters to find an alternative course of action. Proponents of the bill worked with Secretary Dallas of the Department of Human Resources to remove the asset limits administratively.
Roughly one-half of states nationwide no longer consider assets when determining a family’s eligibility for either Medicaid or SNAP (Supplemental Nutrition Assistance Program – formerly Food Stamps). Maryland’s rule change made it one of five states that have also eliminated the asset tests from their TANF program’s eligibility requirements.
Opponents argue that removing asset limits will lead to more cases and higher costs. Early evidence, however, suggests that states actually save money, especially since welfare reform’s time limits and work requirements provide stringent safeguards against abuse. After eliminating its Medicaid asset limits, for example, Oklahoma reduced administrative costs by nearly $1 million as eligibility determinations became significantly less complicated. And in Virginia, one of the first states to drop its TANF asset test, caseloads in December 2008—during a major recession—were 37 percent fewer than in 1997.
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Hear it from them
Q and A with Senator Katherine Klausmeier and Delegate Johnny Olszewski, Jr., Maryland
Hear from lawmakers and others who have been intimately involved with their state’s efforts to create opportunities for low-income working families. Legislators explain why they feel these issues are important. They also discuss the factors that helped them be successful – both in the statehouse and at home in their district.
Senator Katherine Klausmeier
Delegate Johnny Olszewski, Jr.
Q: Over the last several years, Maryland has seen hundreds of millions of dollars in budget cuts and is looking at reduced revenue projections in coming fiscal years. Has this changed your attitude toward governing?
Del. Olszewski: Maybe not changed my perspective so much as informed my career from the outset. It hasn’t been the most enjoyable thing to be forced to find new revenues or trim services and worthy causes. That said, you have to walk in and ask, how do we best meet the needs of the people we represent despite limited resources, how do we get the best bang for our buck? So we look at changes in the law that don’t cost anything but encourage positive behavior. That’s why we like prize-linked savings, for instance, and lifting asset limits. I’m sort of thankful I’ve grown up in this environment because at the end of the day, I think it promotes good governance.
Sen. Klausmeier: Knowing that people are not making that much money and wages are going down, we want to help these people. There are more people asking for help now than ever before. And because we’ve been cutting back, we have a problem. We’re acutely aware of this, and it’s become a real focus.