Alternative Credit Reporting: Is Experian Really Going to Help You Rebuild Your Credit?

BillsExperian aims to bring millions of Americans into the mainstream credit market by incorporating rental data into credit reports. RentBureau, which Experian acquired last June, is the largest collector of rental payment data. It collects and reports rental data from property management companies nationwide so lessors can screen potential tenants. Experian’s announcement earlier this month that it will include positive rental data is being billed as a new way for the estimated 50 million unbanked consumers to build credit. 

Credit scores have increasingly become a key factor in families’ ability to acquire assets. Credit scores are used to determine whether or not a family can get a loan to buy a home or a car, start a business, fund post-secondary education, or even obtain a credit card. Employers are also starting to use credit scores in the hiring process to screen applicants. Thus, a thin credit file or a low credit score can prevent families from acquiring the assets that lead to economic mobility.

For these reasons, consumer advocates, credit analysts, and lenders have been exploring different options for calculating credit-worthiness. The reporting of nontraditional or alternative credit data has frequently been suggested as one of these options. Since traditional data, such as credit cards, mortgages, and student loans, are not typically available for lower income families, the use of nontraditional data, such as utility bills, mobile phone bills, and rental payments, is viewed as a means of incorporating these individuals into the credit reporting industry. For example, one third of people in the United States are renters and now, like mortgage owners, their payment histories will affect their credit scores.

Yet, there is much debate as to whether the inclusion of nontraditional credit data will be helpful or harmful to low-income and credit-thin families. Some argue that such reporting will catapult previously excluded families into the mainstream lending market, allowing them to access the credit needed to build assets. Others argue that alternative reporting could prove to be harmful and be used to further marginalize low-income families. If, for example, a family must choose between paying for groceries or paying the light bill most families will choose groceries, thereby negatively affecting their credit scores. The Shriver Center addressed this issue in-depth in the Clearinghouse Review article,Alternative Credit Data: To Report or Not to Report, That is the Question, and facilitated a discussion of industry experts in a webinar, Credit Scoring and the Un-Scored: Alternative Credit Data.

Although, Experian’s announcement highlights the fact that its use of positive rental data in its calculation of consumers’ FICO scores “will … help many renters who are looking for ways to rebuild their credit scores due to financial hardships such as a foreclosure or a bankruptcy,” it omits the fact that in 2012 Experian will also begin reporting negative data (i.e., missed payments). Reporting such negative data will most certainly push those same families struggling to recover from foreclosure and bankruptcy out of their rental homes.

To be financially stable members of the U.S. economy, families must have access to credit. It remains to be seen whether reporting alternative data is the appropriate way to ensure low-income and asset-poor families’ successful entry into the mainstream credit industry. One thing for certain is that Experian’s so-called concern for those ”recovering from financial hardship” is not all that it seems. 

Kelly Ward coauthored this blog post.



Additional LIHEAP Funds for Illinois's Low-Income Households

Gas MetersThe U.S. Department of Health and Human Services (HHS) has recently released additional funding for the Low-Income Home Energy Assistance Program (LIHEAP). LIHEAP is a federally funded program that assists qualified, low-income households in paying for winter energy costs.  The program is designed to assist individuals and families with energy costs, primarily winter energy costs, so they are not forced to make painful decisions regarding which bills to pay and which necessities to live without. HHS has allocated nearly $230 million in additional funds to Illinois. In 2009, 415,669 low-income households in Illinois received energy assistance through LIHEAP; about two million households were actually eligible.

LIHEAP will provide a one-time payment for eligible households to be used for winter energy bills and emergency furnace repairs. The amount of payment is determined by household size, energy type, and the household's 30-day income, which cannot exceed 150% of the federal poverty level.   If heat and electricity are included in the household’s rent, the monthly rent must be greater than 30% of household income to receive assistance. When applying, applicants should bring the following items to their local Community Action Agency:

  • Proof of gross income from all household members for the 30-day period prior to the application date.
  • A current copy of heat and electric bills (if the applicant pays for home energy directly). The utility bill must have been issued within the last 30 days.
  • Proof of Social Security numbers of all household members.
  • If a member in the household receives TANF, the applicant must bring the recipient’s Medical Eligibility Card.
  • Applicants who have their utilities included in the rent must bring proof of the  rental agreement stating the monthly rental amount and that utilities are included, as well as contact information for the landlord.

The following example illustrates the application process:

A family of four living in Rock Island, Illinois, is interested in receiving LIHEAP assistance for their gas heat. They are eligible for LIHEAP if their gross income does not exceed $2,756 in the 30 days prior to their application. At this income level, they will qualify for a one-time direct payment to the vendor of $379 to help pay their gas bill. If heating costs are included in the family’s rent, their monthly rent must be greater than $827 to receive a one-time cash grant to offset energy costs. Once the application is complete, the Community Action Agency has 30 days to notify the applicant of approval or denial. Upon approval, the payment will be made within 15 days to the vendor or applicant.

LIHEAP assistance is available until May 31, 2011, or until funding is exhausted.   For more eligibility information and where to apply visit the Illinois LIHEAP website.

Heidy Robertson coauthored this blog post.



Sargent Shriver: Legal Services as Peace Building

Sargent ShriverThe passing of Sargent Shriver brought about a satisfying outpouring of tributes. His personality was a unique combination of larger-than-life and down-to-earth. He came annually to our fund-raisers in the late 1990s and early 2000s, and I had a chance to see him in action. He clearly loved people. And they clearly loved him. His constant message was both upbeat and demanding: “What have you done today to make the world a better place?” he would ask with a gleam in his eye, conveying his confidence that you not only could do it but also would love doing it. People left with an excitement about being of service.

Shriver was a brilliant thinker and tactician. He launched many life-changing programs that are still vibrant: good ideas created to tackle real problems discerned at the community level. They were launched with tactical skill, pragmatic good sense, and that rare Shriver energy—upbeat and demanding. These ideas flowed from Shriver’s values and his big-picture strategic vision that transcended his own time and place and set of circumstances and generated staying power.

Among those transcendent values were peace and peace building. Joby Taylor, who directs the Shriver Peaceworker Program at the “other” Shriver Center, located at the University of Maryland–Baltimore County, published a beautiful tribute that highlighted Shriver’s compelling concept of practical idealism: “[B]ecause service highlights our common humanity even as it solves real and pressing problems, it is a primary pathway to peace. . . . The experience of working alongside others and solving problems … instills in us a sense of the usefulness of our idealism.” Amen. Joby’s main focus is the Peace Corps and service learning, but he was describing the best aspects of legal services work, too.

The aspect of peace building that revealed itself in Shriver’s original vision for legal services was an eyes-open realism about power. Shriver located legal services within community action agencies. The lawyers were not only to represent community members in court to assure them equal access to civil justice but also to represent community leaders and the community itself in the solution of wider problems identified locally. The lawyers were to bring their skills to bear to increase the power of community interests to be players on issues of policy and social systems that might affect them.

This was a realistic understanding about producing peace in spite of conflict. Peace will not come if people experience inevitable and constant defeat in public policy matters, and peace cannot be manufactured by eliminating all conflict. No matter how much society ameliorates the losers, they eventually become frustrated and dangerously uninterested in legitimate policy processes. The tension between haves and have-nots, and between groups with competing interests, is a constant feature of the human condition. Conceding the presence of conflict, Shriver concentrated instead on promoting a fair process to deal with conflict. Providing lawyers, with their expertise and advocacy skills, to serve low-income communities in public policy conflicts was a way to level the playing field. Low-income communities would have an improved chance to assert their interests, to win their share, to influence outcomes—to be players on issues that affect them. And, feeling empowered, they will invest in the process, tolerate setbacks, and have the confidence to resolve conflicts through compromise. Peace proceeds from arm’s-length handling of public policy conflicts, and this brings low-income communities into the flow of American life. Practical realism indeed.

Fifty years later, legal services programs are vindicating Shriver’s moral vision of building peace through service. They are also recognizing the lasting wisdom of his insight that, by building the power of communities to be players in policy debates on issues that affect them, legal services lawyers build peace in a very realistic way.

This blog post will also be published as a letter to subscribers in the January-February issue of Clearinghouse Review: Journal of Poverty Law and Policy.



Progress Made with Illinois Medicaid Reforms, But Policy Concerns Remain

Kid playing doctorIllinois’s legislators were hard at work this winter discussing ways to make changes to Illinois’s Medicaid program that would result in short-term savings. Members of Illinois House and Senate’s Special Committees on Medicaid Reform held hearings where representatives from the Governor’s office, the Illinois Department of Healthcare and Family Services (HFS), advocates, providers, and others offered ideas on how to save money by reforming the Medicaid program. Afterwards, the Governor’s office, HFS, and co-chairs of these committees drafted amendment 2 of H.B. 5420, which passed with bipartisan support and was signed into law January 25, 2011. The reforms contained in the new law are expected to save the state hundreds of millions of dollars. Some of these reforms are discussed below.

A few provisions of the new law make changes to the All Kids children’s health insurance program. Starting July 1, 2011, children in households with incomes over 300% of the poverty level (about $66,150/year for a family of four) will no longer be eligible for All Kids. If these children are already enrolled, they will be allowed to stay in the program for one year. Also, starting July 1, 2011, new applicants to the All Kids program will need to provide proof of one-month of income and to verify their Illinois residency. Enrollees in the All Kids and FamilyCare programs will need to recertify their coverage with HFS—to verify income and other eligibility information—in order to stay in the program. HFS will notify current enrollees of these changes within 90 days of the bill becoming law. These provisions changing the All Kids program may not align with national health reform, and it is not yet clear whether they will be approved by federal authorities, since they may implicate the maintenance of effort provision in that law, which applies to procedural changes. 

The new law also requires HFS to conduct an analysis of how All Kids determines eligibility and to submit reports in 2011 and 2012. The law also institutes a two-year moratorium on medical assistance program expansions beyond anything in place on January 1, 2011, with the exception of anything that would jeopardize the federal Medicaid match if it wasn’t implemented. Further, the law extends the sunset date of the bipartisan Covering All Kids Health Insurance Act —which authorized coverage for undocumented children and for those in households with incomes greater than 200% of the poverty level—by five years to July 1, 2016. The extension of the sunset is immensely important to promote the health and well being of Illinois’s children and will help Illinois to maintain its position as a national leader in covering kids.

Other provisions in the new law will improve upon Illinois’s existing information technology infrastructure to allow for data sharing among government agencies. For instance, these provisions will allow HFS and the Department of Human Services (DHS) to access records of other governmental agencies, such as the Social Security Administration, Illinois Secretary of State, Illinois Department of Insurance, and the Illinois Department of Employment Security, to verify eligibility information. These steps will help build a foundation for the enormous information technology infrastructure requirements necessary for the successful working of a state-based health insurance exchange marketplace. The eventual goal is a streamlined and simplified Eligibility, Verification, and Enrollment (EVE) electronic data-sharing system that will fully comply with the Affordable Care Act.

The new law also provides that by 2015, at least half of all Medicaid enrollees will be in a care coordination program—an integrated delivery system with providers that furnish or arrange for the majority of care, including primary care and referrals from those providers, hospital services, dental services, etc. Illinois Health Connect—Illinois’s existing primary care case management (PCCM) program—does not, in its current form, qualify. However, it may qualify at a later date if the PCCM program makes changes that define its services more comprehensively and assumes more risk on behalf of its enrollees. HFS will be required to report to the General Assembly from April 2012 until April 2016 on the progress and implementation of the coordinated care program initiatives.

Medicaid is the primary payer for long-term care, which covers a variety of services needed by people to live independently in the community, such as home health and personal care, as well as services provided in institutional settings, such as nursing homes. The new law makes changes to Illinois’s existing long-term care system to allow for the state to shift Medicaid long‐term services budgets to noninstitutional, community-based settings. The law provides the governor with the authority to redesignate a portion of funds set aside for institutional services to be transferred to community-based, long-term care programs. This reform represents an opportunity for Illinois to address the long‐term care needs of low‐income individuals with chronic and disabling conditions. The law’s provisions affecting long-term care rebalancing, enhancing care coordination delivery systems, and EVE can all be implemented in a way that aligns with parts of the national health reform law, and that they should be done that way.

The law will also make many changes to the way government monitors and enforces Medicaid fraud. It provides for a civil remedy to combat Medicaid fraud, which includes a financial penalty of up to $2,000 for each fraudulent claim for benefits or payments. Illinois will also be repaid 5% interest per annum on the value of benefits fraudulently received.  HFS’s Inspector General’s office will be required to report to the General Assembly 12 months after the law’s effective date on the number of fraud cases identified and pursued and the fines assessed and collected.

In sum, the new law makes progress in necessary areas, especially in implementing national health reform, but may not be best policy in others. The Shriver Center is supportive of many of the measures in the law, including the ones that have the most potential to reduce health care costs in constructive ways, such as long-term care rebalancing. We regret the changes to the All Kids program narrowing eligibility and increasing red tape. We urge the General Assembly to fully fund the staff needed to competently manage the increased bureaucracy. We are hopeful that when EVE is fully implemented, the red tape can be removed.


The Next Frontier in Public Benefits: Electronic Benefit Cards

Electronic Benefits CardOver the past 20 years, electronic deposit and electronic benefit transfers (EBT) have replaced paper checks for the delivery of public assistance benefits. EBT systems deliver government benefits by allowing recipients to use a plastic card to access their benefits through ATMs and point of sale (POS) devices located in select retail outlets (e.g., the LINK card in Illinois is the card for SNAP funds). Recently, more and more states are transitioning away from EBTs and toward the use of electronic payment cards (EPCs) – i.e., prepaid Visa or MasterCard branded cards. In 2008, The U.S. Government Accountability Office (GAO) released a report to highlight this trend. In addition, the U.S. Treasury recently finalized a new regulation that requires federal public benefit payments to be delivered via direct deposit or Direct Express Debit MasterCard, a form of EPC.

Both EBT and EPC systems provide improved delivery in that they avoid delays due to slow mail, mail theft and long waiting lines to pick up benefit checks. Using EPCs particularly decreases the stigma associated with being recognized as a public assistance beneficiary because EPCs have the appearance of commercially recognized credit cards. Moreover, transitioning to an EPC system allows beneficiaries to use their cards virtually anywhere that a MasterCard or VISA logo is displayed.

Although EPC systems appear to be an effective and efficient way to distribute benefits, there are potential negative ramifications for low-income families. For instance, mandatory use of EPCs, while easing benefit delivery, may pose difficulties for people with special needs. It also requires regulations to limit associated fees and education and training on the use of EPCs for the beneficiaries unfamiliar with debit card systems. Most importantly, effective consumer protection measures must be implemented because benefit recipients are more likely than general consumers to need basic consumer protections. Public benefit recipients are already living at the margins and cannot afford to suffer out-of-pocket losses from potential consumer fraud or other problems that may arise under the EPC systems.  

In particular, the Electronic Funds Transfer Act and Regulations (Regulation E), which provide several consumer protections through error resolution and disclosure regulations, do not cover state-based EPC programs and privately issued prepaid cards receiving benefits through direct deposit. In order to address this lack of sufficient consumer protections, Congressman Sandy Levin and Congressman Jim McDermott introduced a Benefit Card Fairness Act (H.B. 4552) last year. This bill will be reintroduced in the new session in attempt to repeal the exemption of electronic benefit transfer systems established by a government agency.

Last month, Treasury also announced the interim final rule on the Federal Government Participation on the Automated Clearing House. This rule permits the delivery of federal payments to prepaid cards that meet particular standards and extends Regulation E coverage from payroll prepaid cards to other prepaid cards. It also prohibits card issuers from offering line of credits or loan features that trigger automatic repayment from the prepaid card account. Because using government issued cards such as the Direct Express card is different than using direct deposit to general prepaid cards, beneficiaries must be aware of the consumer protection issues that arise with respect to prepaid cards.

On February 3, 2011, the Shriver Center, the National Consumer Law Center (NCLC) and Consumers Union will host a free webinar to discuss the differences between various electronic benefit payment methods and investigate the implications of the new trend toward electronic payment cards (EPCs) for low-income families. Readers are encouraged to learn more and join an in-depth discussion of the new regulation and the consumer protection issues surrounding electronic benefit cards, by attending the upcoming webinar.

Ji Won Kim co-authored this post.



The Amazon Battle: Illinois Passes Legislation to Recoup $150 Million in Internet Sales Tax

Cash registerAs the effects of the recession continue to unravel across the country, many states are struggling to secure funding for essential programs. One notable solution that is gaining momentum is broadening the sales tax by collecting taxes on remote sales and Internet sales.

Sales taxes are imposed on goods and services and are generally accepted by the public because they are paid in small increments at the time of purchases, so their cumulative value is not seen. Yet, a number of states, including Illinois, do not apply sales tax to movies, books, music or computer games that are purchased online, even though the tax would apply if the transaction took place in a brick-and-mortar store. Usually, a seller collects the tax at the time of purchase and remits it to the state. Even if the seller does not collect the tax, a purchaser is still legally obligated to pay it, though very few do. 

One reason for states’ failure to collect Internet sales taxes is because until recently it has been unclear whether or not a state can legally require an Internet seller to collect the tax. A series of U.S. Supreme Court decisions starting in the late 1960s relating to catalog and mail orders--National Bellas Hess Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992)--appear to preclude states’ taxing authority. 

According to these cases, understanding, administering, and collecting different state and local sales codes were too complex and placed an undue burden on catalog and mail order companies as well as an unreasonable restriction on interstate commerce in violation of the Commerce Clause. Instead, the Court held that only states in which a company has a nexus, through the presence of retail outlets or distribution centers, can be required to collect sales taxes.

Yet, technology has made computing sales tax less burdensome so the justification for the Court’s original ruling is gone. In fact, two other Supreme Court decisions--Scripto Inc. v. Carson, 362 U.S. 207 (1960) and Tyler Pipe v. Washington Department of Revenue, 438 U.S. 232 (1987)--seem to establish that an out-of-state seller is deemed to have a nexus through a physical presence in a state if it uses in-state third parties to help establish and maintain a market for its goods within the state.

The rapid increase in Internet sales has created a corresponding loss of state sales tax revenue. Illinois, for example, estimates it lost $150 million in sales tax due to online commerce and neighboring Michigan lost an estimated $414 million due to remote sales the state during fiscal year 2010.

The clearest guidance on the legality of taxing remote sales would be for Congress to mandate that companies must collect these taxes. The Main Street Fairness Act (H.R. 5660) was introduced in the 111th Congress in July 2010 to “require all remote sellers not qualifying for the small seller exception to collect and remit sales and use taxes on remote sales owed to each such member state.” Although the legislation did not pass it is likely to be reintroduced this year. 

In the meantime, several state-based efforts are underway to address this issue. First, through the Streamlined Sales Tax Project, twenty-three states, including Illinois, are working together to standardize their sales tax codes to reduce the burden on sellers to collect sales taxes on Internet sales. 

Second, states are adopting laws redefining “nexus.” In 2008, New York was the first state to enact an innovative law that relies on the fact that many out-of-state retailers enlist independent in-state websites known as affiliates to promote sales. At least 210 of the 250 largest Internet retailers operate affiliate programs. Affiliates place links on their websites to the retailer’s site and receive a commission when someone follows the link and buys something from the retailer. It has long been established that states can require out-of-state sellers to collect sales taxes if they use independent representatives paid on commission to solicit business within the state. New York’s new law effectively deems a retailer to have a physical presence, or nexus, within the state when it has independent affiliate websites promoting sales on its behalf within the state.

Legislators in at least seven other states introduced similar bills last year. Similar bills passed in North Carolina and Rhode Island, but California’s, Hawaii’s, Connecticut’s and Minnesota’s bills were vetoed by their governors. Additionally, states such as Arizona, Florida, Maryland, Mississippi, New Mexico, Tennessee, Texas, Vermont, Virginia and Wisconsin have either introduced or are considering legislation.

Illinois is the most recent state to pass an Internet tax law (H.B. 3659). The bill, which passed the General Assembly in early January, is awaiting Governor Pat Quinn’s approval and would become effective in July. In a sense, however, this tax is not new. The Illinois General Assembly passed the Use Tax Act in 1995, requiring a purchaser to pay taxes on items bought for use in Illinois since. In fact, Illinois recently implemented an amnesty program to allow customers to pay sales and use taxes on past online purchases, between June 30, 2004 and December 31, 2010, without penalty. Under the amnesty program, which lasts until October 15, consumers can pay this tax as part of their Illinois Form IL-1040 income tax.

This amnesty program and the new legislation will create new revenues to help decrease Illinois’ budget deficit, however, as Internet sales continue to grow and this revenue increases the extra revenue could be used to fund new and innovative programming in Illinois.

Ji Won Kim contributed to this blog post.


The Affordable Care Act Is Working! Turning Back the Clock Would Hurt Millions of Americans

Health Care for AllThe House of Representatives is going to vote on H.R. 2 and H. Res. 9, which would repeal the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively referred to as “the Affordable Care Act”). These two laws are already providing critically important benefits and protections for individuals and families across the country. Turning back the clock by repealing these vitally important laws would harm millions of Americans, and would once again allow insurance companies to put profits first

Repeal would allow unfair and discriminatory insurance practices to continue. Repeal would eliminate important measures that hold insurance companies accountable. Repeal would once again impose lifetime or annual dollar limits on covered services, or rescind insurance coverage when an individual gets sick. Repeal would allow insurers to deny women coverage if they’ve had a Cesarean section, breast or cervical cancer, or received medical treatment for domestic or sexual violence.

Repeal would allow insurance companies to continue to deny coverage to those with pre-existing conditions. Members of Congress are guaranteed access to health coverage even if they or family members have a pre-existing condition. The Affordable Care Act provides this protection for America's families. The ACA is already working to provide children with pre-existing conditions the coverage they need to grow up healthy. The repeal bill would take this right away from America's families--as many as 129 million Americans under age 65--while members of Congress keep it for themselves.

Repeal would make obtaining insurance more difficult and more expensive. The new law would give individuals and families the ability to find more affordable insurance options through the new exchanges to be established in 2014. Repeal would eliminate those opportunities for an estimated 54 million Americans, including the 15.9 million who are expected to enroll in Medicaid by 2019, and the families who would be eligible for tax credit subsidies to help with the cost of premiums and out-of-pocket costs. Members of Congress receive subsidies of almost three-quarters of their health insurance premiums--all paid by taxpayers. 

Repeal will make finding comprehensive health insurance more difficult. Too many Americans struggle to find health insurance that covers important health care services they need, like maternity and mental health care as well as prescription drugs. Repeal of the Affordable Care Act will eliminate the requirement that all plans sold to individuals and small employers cover these critically essential health benefits. Under repeal, adults would also lose free access to recommended preventive screenings. 

Repeal will eliminate critical tax credits for small employers, making it harder for them to provide insurance coverage for their employees. The Affordable Care Act provides critical tax credits to small employers that help them provide health insurance to their employees. And, the ACA will offer small employers new options to find affordable coverage when the exchanges are operational in 2014. 

Repeal will eliminate many additional provisions providing important benefits to families, including extending dependent coverage to children up to age 26 and prohibiting insurers from requiring pre-authorization for emergency room care or for women to get a referral to see their ob/gyn.

The Affordable Care Act is working! The law preserves what works while giving Americans the freedom to change jobs and the security of knowing they won't lose their homes because someone in the family got sick. Repeal will turn back the clock on important progress and cause real harm to real families struggling everyday to ensure comprehensive affordable health care coverage. Repeal would destroy 250,000 to 400,000 jobs annually over the next decade by reducing the share of workers who start new businesses, move to new jobs, or otherwise invest in themselves and the economy. And the Congressional Budget Office’s preliminary analysis of the effects of the bill estimated that repeal would increase the deficit by $230 billion from 2012 to 2021. 

Call your congressperson today to urge them to vote against repeal! Call toll free: 1-866-922-4970


Poverty by Any Other Name Is Still Poverty

PenniesLast September the Census Bureau released the 2009 poverty statistics, which showed that 14.3 percent of Americans are living in poverty. At 43.6 million people, this number has not been this high during the 51 years that the U.S. has published poverty rates.  Additionally, also published last September, the American Community Survey (ACS), which offers additional demographic and geographic information about poverty levels, revealed that in Illinois, 13.3 percent of the population is living in poverty. Another 6 percent of Illinois families are experiencing ‘extreme poverty’, surviving on $11,025 a year for a family of four.

Both the Census Bureau’s and the ACS’s estimates are calculated using the official poverty measure, a formula created in the mid-1960s based on the cost to feed a family. Yet, advocates, government agencies, and social service providers alike have pushed for a new, more accurate way to measure poverty. 

Since 1979, the Census Bureau has published a variety of experimental poverty measures using expanded definitions of income and alternative methods to account for inflation.

The Annual Social and Economic (ASEC) Supplement released annually by the Census Bureau, is one such alternative measure. The most recent statistics, published this month, revealed that 23.7 percent of Americans lived in poverty in 2009, a number almost 10 percent higher than the official poverty measure. This ASEC data takes into account government benefit transfers (e.g., public assistance, medical assistance, etc.) in its calculation and shows that without public benefits the poverty rate would be much higher.

In the meantime, last May the Census Bureau announced that it will introduce a Supplemental Poverty Measure (SPM) starting in the fall of 2011. The SPM will have many advantages over the official measure in that it will include factors such as family structure, public assistance, child support payments, and homeownership in its analysis. The Bureau is working hard at developing and testing different measures and it recently posted the following key findings from its initial research using the SPM:

  • The SPM poverty rate for all persons is 15.7 percent as opposed to 14.3 percent for the official rate.
  • The SPM poverty threshold is $24,869 whereas the official poverty threshold is $21,834.
  • The SPM calculates that 16.1 percent of the elderly are living in poverty. When out-of-pocket medical expenses are taken into consideration, the percentage drops drastically to 8.7 percent, indicating that medical expenses are a huge factor for the elderly.
  • The Earned Income Tax Credit (EITC) and food assistance (SNAP) appear to be effective at reducing poverty among children. According to the SPM calculation, the EITC reduces child poverty by 4 percent and SNAP reduces child poverty by almost 3 percent.

The SPM will be especially useful in evaluating the effectiveness of anti-poverty policies such as EITC. It will not replace the official poverty measure, which means that eligibility for government benefit programs will still use the outdated and incorrect official poverty measure thereby precluding many  from receiving the benefits they need. It also appears that the ACS and perhaps the ASEC will also continue to be published. Ultimately, however, it is important that the SPM, which will present a clearer picture of poverty, becomes the official measure so that policymakers can better serve the ever increasing number of families living in poverty with the hope of one day eliminating poverty entirely.  

This blog post was coauthored by Kelly Ward.


Illinois General Assembly Approves Temporary Revenue Increase

In the waning hours of the lame duck legislative session, the Illinois General Assembly approved a temporary increase in the state income tax along with a series of spending restrictions designed to ensure that the new revenues go towards paying down the state’s massive debt and bringing financial stability to our state. The passage of this revenue package is the culmination of the efforts of the Responsible Budget Coalition, an unprecedented coalition of anti-poverty, human services, education, labor, good government, seniors and faith-based advocates.     

Under the legislation, S.B. 2505 amdt. 3, the individual income tax will increase from 3 to 5 percent for the tax years 2011-2014, revert to 4 percent for the next ten years, and then go to 3.5 percent thereafter. The corporate income tax will increase from its current level of 4.8 percent to 7 percent for the tax years 2011-2014, revert to 5.6 percent for the next ten years, and then go back to 4.8 percent thereafter. 

It is estimated that increasing the individual income tax from 3 to 5 percent will yield over $6 billion in revenue. Increasing the corporate income tax to 7 percent will yield another $1 billion.

The legislation includes a number of spending restrictions designed to ensure that the new revenues go towards paying down the state’s debt and addressing the structural imbalance that has resulted from state revenues failing to keep pace with needed expenditures. These spending restrictions are:

  • A hard cap on spending for the next four years. The cap will be $36.8 billion in year one (FY12), or 10 percent more than FY11 estimated spending of $33.5 billion, and will then increase by 2 percent each year for the following three years. The reason that the first year cap in 2012 is higher is so that it can include all of the spending lines from 2011 that the state simply did not pay--the pension payment, bills to providers, making up for the loss of federal  stimulus funds, debt services, and more. Once that “base” is set, then limits for the three following years are very tight.
  • The hard cap encompasses all state spending, including general funds, continuing appropriations (pensions), and general funds transfers.
  • Within 60 days after the General Assembly passes a law authorizing state spending from state general funds (e.g., the state budget), the Illinois Auditor-General will have 60 days to review the legislation and determine whether the spending in the bill exceeds the hard cap. If he determines that it does, then the General Assembly has 45 days to reduce spending below the cap or, failing that, the Governor then has 15 days to do so. If spending is not reduced below the cap, then the individual income tax rates revert to the existing rates of 3 percent for individuals and 4.8 percent for corporations.
  • The spending cap can be exceeded only if the Governor declares an emergency and neither the Comptroller nor the Treasurer notifies the General Assembly that they do not concur with the Governor that there is an emergency.
  • Statutorily mandated spending of any kind may be reduced by the Governor if he determines that doing so is necessary to remain within the annual spending cap.

The cumulative effect of these spending restrictions will require further assessment, so stay tuned for a future blog on that topic. Nevertheless, the magnitude of the spending cuts that would have been required had the revenue package not been approved are unimaginable and would have imposed grave hardship on millions of Illinoisans and consigned our state to a very bleak future. Illinois would also have begun defaulting on loan payments and missing payrolls, becoming a financial pariah.

The revenue package also provides that in 2015, after the spending restrictions expire and the individual income tax reverts to 4 percent, a defined amount of funds will be set aside for education, and the same amount will be set aside for human services. The education and human services set-asides will be 3.1 percent of increased revenues from 2015-2024 and 3.6 percent thereafter.

The revenue package approved by the General Assembly is also noteworthy for what it did not include. Despite the fact that Illinois’ individual income tax is highly regressive, with all taxpayers subject to the same 3 percent rate, the final package did not include any provision to lighten the burden on the working poor, such as an expansion of the state’s earned income tax credit. On the positive side, while the package includes tough restrictions on spending over the next four years, they are temporary and will expire. The General Assembly did not pass a proposed constitutional amendment that would have permanently locked in spending at levels that would have eventually led to drastic cuts in services.

In closing, nothing threatens a politician’s career more than voting to raise taxes, especially an increase of this magnitude. In the end, the members of the General Assembly who voted in favor of the revenue package, and its leadership, must be lauded for their courage in doing the only responsible thing they could do to restore financial stability to the State of Illinois and ensure that it lives up to its obligations and does not forsake its children, its teachers, its mentally ill and developmentally disabled, and all of its other most vulnerable residents. The Senate vote is available here, and the House vote is available here. Be sure to thank those who voted yes and rally to their defense if they are attacked for their vote.


Addressing the Toll Recession Has Taken on Working Families

Frustrated WorkerThe Working Poor Families Project has released its winter policy brief detailing the toll the recession has taken on America’s working poor. While headlines during the recession have primarily focused on the high unemployment rate, they have often ignored the millions of working families who are still employed, but have been squeezed by reduced pay and reduced hours. The brief includes some sobering statistics on the challenges facing America’s working poor.

More than half (55%) of the American labor force has “suffered a spell of unemployment, a cut in pay, a reduction in hours or have become involuntary part-time workers.” The consequence has been a significant rise in the number of working families who are not earning enough to have any kind of economic security. The Working Poor Families Project defines low-income as earning less than 200% of the federal poverty line. A low-income family of four is earning just about $44,000

Census data summarized in the policy brief reveal that in 2009 there were more than 10 million low-income working families – that’s more than 45 million Americans, including 22 million children. Now 30 percent of all working families are low-income. The increase from 2008 is stark – 1.5 million Americans joined the ranks of low-income working families.

The recession has not hit all groups equally. 

  • Because a disproportionate job losses have been in traditionally male-dominated fields (especially construction and manufacturing), male unemployment has significantly exceeded female unemployment during the recession. As a consequence, the proportion of married women who are working and have an unemployed husband has more than doubled in just two years. Women still earn just about 77 cents to the dollar earned by men. This means more families are relying exclusively or primarily on the generally lower income of women to make ends meet. 
  • Racial minorities continue to earn less money than non-Hispanic whites. Nearly twice as many working families with at least one minority parent were considered low-income in 2009 as white families. This is in part because minorities on average have lesser educational attainment, and education continues to be critical both for preventing unemployment, and to increase wages.  
  • Meanwhile, income inequality continued to rise in 2009 – with the highest 20% of earners earning ten times what the bottom 20% did.
  • Children have been hit hard by this recession – nearly half the increase in members of low-income families is made up of children. Over 700,000 children joined the ranks of low-income families last year. Growing up in poverty has long term consequences for children, their families, and all our community. As Professor Holzer has argued, in order to have long-term growth, we need robust employment and poverty-reduction measures over the near-term to mitigate this recession’s harm to parents and their children.

Far too many hard-working American families are not able to earn enough money to achieve economic security. As we address the challenges of this recession, we must consider not only the unemployment crisis, but also the ongoing crisis for families who cannot find a job that pays a family-sustaining wage. The president has already begun to address the need to increase enrollment and success in post-secondary education. Cities around the country are working to improve wages and benefits for low-income working families. Health care reform is already being implemented around the country. This landmark success will increase access to health insurance, improve coverage, and reduce premiums for millions of low-income working families, helping make ends meet. Low-income families want to contribute to this country’s economic prosperity, we all have a stake in creating the opportunity for each American to succeed. Together, we must recommit to make work pay. 

Happy New Year? Not for Refund Anticipation Loans

Tax formsThis tax season one of the largest tax preparation sites, H&R Block, will not be offering refund anticipation loans (RALs) thanks to the Office of Comptroller of the Currency (OCC). The OCC has prohibited H&R Block’s financial partner, HSBC Bank, from funding any RALs whatsoever.

H&R Block was the leader in providing these loans, and in 2010 H&R Block collected about $146 million in loan related fees from tax payers. Until recently HSBC Bank has been the financial backer for the H&R Block RALs. In August of last year, however, the Internal Revenue Service (IRS) announced that it would no longer provide tax preparers and associated financial institutions with the “debt indicator,” which is used to underwrite RALs. As a result, HSBC, which began exiting the RAL business in 2007, attempted to break its long-term 2005 contract with H&R Block, its only remaining RAL customer.

H&R Block, on the other hand, contended that RALs can be done without the IRS debt indicator and filed suit against HSBC seeking to require the bank to perform its contractual obligations. Although the parties reached an agreement wherein HSBC would provide the loans for one more year, the OCC intervened and issued a regulatory directive prohibiting HSBC from funding the loans, leaving H&R Block with no financial partner to provide both RALs and some of its refund anticipation checks, "RACs." H&R Block shares also went down 7% as a result of this news.

Last tax season, H&R Block’s main competitor, Jackson Hewitt, lost its main RAL partner when Santa Barbara Bank & Trust was ordered by banking regulators to exit the RAL market. That left Jackson Hewitt scrambling to find another banking partner. In December 2010, Jackson Hewitt reached agreement with Republic Bank & Trust Co., a unit of Republic Bancorp Inc. to back some, but not all, of its RAL program. Upon this announcement Jackson Hewitt shares went up 35%.

H&R Block will continue to offer RACs which, though not an instant refund, provide a check to the tax filer in 7 to 10 days. In the meantime, its competitor, Jackson Hewitt, will be seeking to lure former H&R Block customers away. 

As discussed in previous Shriver blogs, this is just the latest RAL repercussion. It seems that consumer advocates’ and financial regulators’ continual push for stricter guidelines and policies regarding RALs have paid off. Today, with quick turnaround from electronic filing and direct deposit, many taxpayers can likely receive their tax returns within ten business days, reducing the need for RALs. Now is the time to demand that the OCC protect low=income families and prohibit all RALs.

This article was coauthored by Kelly Ward.