SOURCE: AP/Carolyn Kaster

President Barack Obama speaks at Ohio State University's spring commencement ceremony in the Ohio Stadium, May 5, 2013, in Columbus. He urged graduating students to be active citizens, to fight for causes they believe in, and to be better than generations before them. The rise in income inequality and the decline of the middle class have contributed to underinvestment in higher education.

State spending on colleges and universities has dropped off sharply in recent years. Most people blame the Great Recession and its effect on state budgets for this decline, but this misses the larger story. We are underinvesting in education because the middle class has weakened and no longer has the political power necessary to translate its desires into actions. And this underinvestment threatens our economic competitiveness as more students are priced out of college and other countries surpass us in educational attainment.

Polling strongly suggests that the American public would prefer higher levels of spending on higher education. A Brookings Institution/Northeastern University poll conducted in October 2012, for example, found that 70 percent of the public felt that a college education is very or extremely important for achieving the American Dream, with an additional 24 percent saying it is somewhat important. Not surprisingly, the poll found that 81 percent of Americans believe the government needs to invest more in America’s higher education system. Other polls show similarly high figures: The General Social Survey, for example, a longstanding academic survey, finds that 72 percent of Americans support spending more on education.

So if the public wants more education spending, why hasn’t the government been more responsive and boosted spending?

Undoubtedly, increased pressure on state budgets has contributed to the 28 percent reduction in state spending on higher education since the Great Recession began in December 2007. But other factors are also at work.

States can choose what to spend money on and at what level to set taxes, and thus have some ability to prioritize higher education over other demands. Indeed, two states—North Dakota and Wyoming—have actually increased spending on higher education since the Great Recession began. And in states that have reduced spending on higher education, cuts range from a low of just 3 percent to a high of 50 percent.

There are many reasons for these differences, including state income levels and demographics, but one underappreciated reason is the declining political clout of the middle class and the growing influence of the affluent. As incomes for the middle class have stagnated and those for the top 1 percent of Americans have exploded over recent decades, the political power of the rich relative to the broad middle class has consequently increased. As a host of studies show, in an increasingly unequal America the voices of the rich carry great weight with politicians, but the desires of the middle class are often ignored.

When push comes to shove, education spending generally isn’t as important for the wealthy as it is for the middle class. As a result, the United States spends less than the general public—and the middle class—would prefer.

Certainly the wealthy often support spending on public education, but the intensity of their support for education spending is far less than that of the middle class. That’s because the rich have greater ability to send their children to private colleges, while the middle class depends more upon public universities.

And compared to the middle class, the rich are much more concerned with keeping taxes low than with paying for public education. Indeed, as Princeton University political scientist Martin Gilens found in his study of nearly 2,000 poll questions, the wealthy are “much less supportive of taxes and government spending” than the middle class.

A groundbreaking poll of very rich Americans, roughly the top 1 percent of wealth holders, highlighted how the preferences of the wealthy and the middle class diverge on education. The authors—political scientists Benjamin Page, Larry Bartels, and Jason Seawright from Northwestern University and Vanderbilt University—found that only 28 percent of the wealthy agreed that the government should “make sure that everyone who wants to go to college can do so,” compared to the 78 percent of the general public that agreed. Similarly, only 35 percent of the wealthy felt that the “government should spend whatever is necessary to ensure that all children have really good public schools they can go to,” compared to 87 percent of the general public.

When the wealthy have more power, their preferences are more likely to prevail. This is clear when analyzing spending on education across the 50 states.

A simple look at the data shows that states with strong middle classes spend more on higher education. Figures 1 and 2 show that the 10 states with the strongest middle classes—defined by the share of income going to the middle 60 percent of households—spent more on higher education, both as a share of the budget and gross domestic product, or GDP. In 2010 the 10 states with the strongest middle classes the year before spent, on average, 10.5 percent of their budget and 2.05 percent of their GDP on higher education. In contrast, the 10 states with the weakest middle classes averaged expenditures of 8.8 percent of their budget and 1.53 percent of their GDP.

Critically, these results hold even when controlling for other factors that influence education spending.

Specifically, in a regression analysis that controls for other factors that affect education spending, such as state income levels, the share of the population comprised of people of color, and the age distribution of the state, states with stronger middle classes spend more—as a share of their economy and of their budget—on education. We find that a 1 percentage-point increase in the share of income going to the middle 60 percent of income earners is associated with a 0.1 percentage-point increase in the share of the state’s budget spent on higher education and a 0.015 percentage-point increase in the share of the state’s GDP spent on higher education in the next year.

These results are consistent with a more detailed report we wrote in November 2011 on elementary and secondary education, “Middle-Class Societies Invest More in Public Education.” Those interested in on our methodology and data can consult the appendix of that report for more details.

The economic future of the United States is intrinsically tied to the future of American education. In the era of heightened global competition, the United States needs to make sure that all of its citizens are prepared to seize the economic opportunities of the future. Ensuring the American population is well educated is vital to that effort.

Just as the need for a well-educated workforce is highest, however, the United States appears to be failing in this effort. While other countries have worked to ensure that their citizens have become more educated, education levels in the United States have stagnated in recent decades, and part of that stagnation is because we are underinvesting in education.

As of 2010 about 41 percent of Americans between the ages of 55 and 64 had at least a college degree, while the college-educated share of Americans between the ages of 25 and 34 was only slightly higher at roughly 42 percent, according to data from the Organisation for Economic Co-operation and Development. This small difference means that the United States has not made significant increases in college attainment in recent decades.

Compare this stagnation in college attainment to the large gains made by our neighbor to the north, Canada, whose middle class has remained relatively strong. Similar to the American population, about 42 percent of Canadians between the ages of 55 and 64 had at least a college degree as of 2010. Fifty-six percent of Canadians between the ages of 25 and 34, however, had at least a college education—a gain of 14 percentage points. While the United States has stagnated in terms of college-graduation rates, Canada and others have succeeded in furthering the education of their citizens.

Increased access to higher education is often described as one of the remedies for the current historic level of income inequality. But as this analysis shows, the rise in income inequality and the decline of the middle class has skewed public policy toward the wishes of the rich and contributed to underinvestment in higher education. This suggests that strengthening the middle class will require not only policies that directly help the middle class—such as investments in education—but also political reforms to ensure that the voice of the middle class is heard.

David Madland is a Senior Fellow at the Center for American Progress. Nick Bunker is a Research Assistant with the Economic Policy team at the Center.

SOURCE: AP/Orlin Wagner

Third-grade teacher Cindy Rasmussen works with students at Ware Elementary School at Fort Riley, Kansas. Cuts in Impact Aid funding for education will hurt schools on military bases.

Author’s note: On Capitol Hill “sequestration” may mean a percentage point or two in lower GDP growth, but beyond the Beltway it is more than an abstract economic concept. It means real pain for real people.

Each week in our “Sequestration Nation” series, we will highlight examples of the many ways in which the federal budget cuts may hurt you and your neighbors. This week we explore sequestration’s effect on schoolchildren from military households and Native American reservations.

In the aftermath of Congress’s rapid response to address sequestration-related flight delays, Secretary of Education Arne Duncan stated that, “Budgets aren’t just numbers, they reveal our value choices.” By choosing to ease sequestration-related inconveniences for air travelers while others deeply affected by sequestration continue to wait in line for relief, Congress cast a negative light on our national priorities.

According to the World Bank, in 2009 the United States ranked 44th in the world in education spending as a percentage of gross domestic product. This has become ever more clear under sequestration as children whose schools rely on federal Impact Aid continue to wait in line for relief from the draconian cuts. Impact Aid funding was established in 1950 to level the playing field for schools on military bases, Native American reservations, and near other large federal lands compared to other public schools. Schools on or near federal lands are negatively affected by their inability to receive as much tax revenue from local property and sales taxes the way that most other public schools can.

These school districts deal with very different tax regulations than other parts of the country. Military bases and military housing are not subject to local property taxation, and base commissaries charge no sales taxes for purchases. Because many military families are not permanent residents of the states in which they reside, they are not subject to income tax in those states. In the case of Native American reservations, longstanding treaties between tribes and the federal government prevent the tribes from being subject to taxation. Similar difficulties are faced by schools near large federal annexes. Illinois’s Burr Ridge School Superintendent Tom Schneider said he “can’t help but think about the money that would be coming to the district if a large corporation owned the Argonne [National Laboratory] property, rather than the federal government.”

Sequestration means this gap in school funding will be harder to close. In places such as Burr Ridge, where 67 percent of students are from low-income homes, Impact Aid is particularly important. Yet across the country schoolchildren on and near military bases, Native American reservations, and other federal lands will have to make do with less. In 2013 alone sequestration will reduce the federal government’s $1.2 billion Impact Aid contribution by more than $60 million.

Some Impact Aid schools are more dependent on the funding than others. This past month we discussed sequestration’s effect on schoolchildren living on Naval Air Station Lemoore in California. Schools in that district rely on Impact Aid for 30 percent of their entire budget. As Heiko Sweeney, principal of the base’s Akers Elementary School, explained, “For us, Impact Aid is critical.” The students and staff of Akers Elementary School are not alone in this regard: Federal Impact Aid accounts for more than half the budget for the Dulce Independent School District in New Mexico. In Mascoutah, Illinois, Superintendent Todd Koehl is expecting a 20 percent reduction in Impact Aid this year. “State and federal dollars are some of our biggest revenues,” said Koehl. And according to Dawn Kirby, vice president of the Travis Unified School District in California, Impact Aid provides them with “a lot of money. … That money has to come from somewhere. A lot of our students come from military families.”

While some school systems might be able to rely on reserves to make up some of the shortfall resulting from Impact Aid cuts, others such as the Tomah School District in Wisconsin are not as fortunate. “The only thing left is to reduce salaries and benefits or eliminate programs,” said Greg Gaarder, the district’s business manager. “There are no tools left in the toolbox.”

On the Wind River Indian Reservation in Ethete, Wyoming, a loss of $1.7 million in Impact Aid to School District 14 means a cut of 11 percent of the district’s overall budget. Such a drastic cut in Impact Aid will only serve to make a bad situation worse on reservations across the country. Native Americans have the lowest educational attainment of any racial or ethnic group in the United States. “We are at the mercy of the federal government,” said an unnamed District 14 school official. According to Michelle Hoffman, superintendent of District 14, Impact Aid is critical in addressing a host of problems: “Poverty, alcoholism, drug abuse.” She continued, “We have two full-time nurses in our district, which the state model does not cover. We pay for that through Impact Aid.”

Sequestration’s $85 billion in cuts to federal spending in 2013 alone were meant to hurt. The president and Congress intended the cuts to be so painful that no one in their right mind would allow them to occur. Unfortunately, due to the federal government’s inability to agree on how to avoid sequestration, the cuts are happening, and they are causing a lot of pain. But while air travelers no longer have to be concerned with how sequestration will affect their travel plans, some of the country’s most vulnerable schoolchildren are facing the prospects of fewer teachers, counselors, nurses, and other resources. “The FAA got relief, so maybe we will, too,” said Burr Ridge Superintendent Schneider. Hopefully, he’s right.

Elsewhere around the country, sequestration continues to affect the daily lives of Americans. Below are just a few of the many examples.

Sequestration reduces health services to Native Americans in Mission, Oregon

Unfortunately for Native American communities across the country, federal Impact Aid cuts are not the only consequence of sequestration. In Eastern Oregon health services to tribes such as the Walla Walla, Cayuse, and Umatilla are also being scaled back because of federal budget cuts. Tim Gilbert, CEO of the Yellowhawk Tribal Health Center, believes that these sequestration-imposed cuts violate longstanding rights established through treaties between Native American tribes and the federal government. “The treaty represents a federal trust responsibility,” said Gilbert. According to Gilbert and others, the free health services provided by the Department of the Interior are not free at all. “It was pre-paid with a whole bunch of land,” said Gilbert. Health and Human Services Secretary Kathleen Sebelius said that sequestration cuts to the Indian Health Services agency could result in “3,000 fewer inpatient admissions and 804,000 fewer outpatient visits.”

Rebuilding after Hurricane Sandy on Long Island is a taller task thanks to sequestration

Across the greater New York City area, local officials have been implementing plans to bolster wastewater and drinking water facilities damaged by Hurricane Sandy last October. Sequestration cuts will unfortunately make their efforts more difficult. Although Congress promised $600 million for New York and New Jersey to repair their water infrastructure and make it more resilient against any future storms, sequestration will now reduce this funding by $25 million. According to Rep. Tim Bishop (D-NY) of Long Island, “Any reduction in this badly needed funding will limit our ability to recover from the damage caused by Sandy and ensure our wastewater and drinking water infrastructure can withstand Hurricane Sandy-sized storms.”

Gov. Rick Scott discusses sequestration’s effect on hurricane preparedness in Fort Lauderdale, Florida

While New York and New Jersey contend with sequestration’s effect on their ability to recover from Hurricane Sandy, Florida officials are wringing their hands over how federal budget cuts might affect their ability to prepare for the upcoming hurricane season. “My biggest concern is that while they say sequestration will stop during a disaster, are they going to be ready in the meantime,” said Florida Gov. Rick Scott. Gov. Scott and other officials along the Atlantic and Gulf coasts worry that the $1 billion in sequestration cuts to the Federal Emergency Management Agency, or FEMA, will leave their communities underprepared to address the onset of a major storm. Officials in Florida are particularly concerned because the lack of a direct hit from a hurricane over the past seven years may have lulled some residents into a false sense of security. “Let’s hope it’s a quiet hurricane season,” said FEMA Administrator Craig Fugate. “But in our business, it ain’t about hope. It’s about being ready.”

National Guard furloughs could make wildfire season in California more dangerous

The potential furloughs of the National Guard’s 2,000 technicians has California officials concerned about their ability to fight fires during what some expect to be a particularly intense wildfire season. According to Bloomberg, a recent wildfire in Ventura County burned an area the size of San Francisco. The sequestration-related furloughs would put most of the Pentagon’s civilian employees on unpaid leave one day each week, meaning the time available for National Guard technicians to keep firefighting aircrafts operable would be reduced by 20 percent, “which during fire season can be decisive,” said Maj. Gen. David Baldwin. “If these furloughs go through, it will have a direct and immediate impact.”

Sequestration will lead to a less enriching summer for low-income students in Davis County, Utah

In Davis County, Utah, education officials see the district’s summer school programs as a critical element in helping low-income students close the achievement gap. “By the time they get to fifth grade, we’re looking at a two-to-three-year gap in education, unless we do something to fill that gap during the summer time,” said Janet Sumner, principal of Wasatch Elementary in the county. Sequestration’s cuts in federal Title I funding—education dollars dedicated to supporting children from low-income households—mean that Davis County may have to scale back its summer reading and math programs due to impending cuts of $600,000. According to the local CBS News affiliate, summer school students at the Davis Community Learning Center “will only have one hour of learning rather than the 2.5 hours per four-day week the summer school program had been providing for the past two years.”

Kwame Boadi is a Policy Analyst at the Center for American Progress.

SOURCE: AP/Gene J. Puskar

A home is for sale in Mt. Lebanon, Pennsylvania, May 6, 2013. The housing market continues to recover from historic lows as unemployment and economic suffering remain too high.

Endnotes and citations are available in the PDF of this issue brief.

Amid the current economic recovery, closing in on the end of its fourth year, policymakers must remain vigilant and look out for persisting and newly emerging threats to economic and job growth. Both the economy and the labor market are slowly improving, held back by persisting factors such as states’ fiscal struggles, European financial troubles, and high household debt, as well as newly emerging threats such as the across-the-board federal spending cuts known as sequestration.

Policymakers not only need to be vigilant for factors that hold back economic and job growth, but they also need to learn their lessons about what works and what doesn’t. The past few years since the start of the Great Recession at the end of 2007 have seen several policy interventions that brought the economy back from the brink of a depression, saved the financial system from completely cratering, and helped save and create millions of jobs. Now it is time to consider additional policy measures to bring down unemployment and economic suffering from their still-too-high levels. Such measures should include, as a start, replacing sequestration with a balanced approach to long-term deficit reduction comprised of slower spending growth and more revenue, much-needed infrastructure investments to lower the costs of doing business, and an increase in the minimum wage to support those Americans struggling the most.

1. Economic growth picked up at the beginning of 2013. Gross domestic product, or GDP, increased in the first quarter of 2013 at an annual rate of 2.5 percent. Domestic consumption increased by an inflation-adjusted annual rate of 3.2 percent, housing spending grew by 12.6 percent, and business investment accelerated moderately by 2.1 percent. Exports grew by 2.8 percent in the first quarter, but government spending shrank again by 4.1 percent. Policy solutions should therefore aim to ease the strain of fiscal austerity on the economy by replacing across-the-board spending cuts with a balanced approach of slower spending growth and revenue increases.

2. The moderate labor market recovery continues in its fourth year. There were 4.9 million more jobs in April 2013 than in June 2009, when the economic recovery officially started. The private sector added 5.6 million jobs during this period. The loss of nearly 695,000 state and local government jobs explains the difference between the net gain and the private-sector gain in this period, as budget cuts reduced the number of teachers, bus drivers, firefighters, and police officers, among others. Job creation should be a top policy priority since private-sector job growth is still too weak to quickly overcome other job losses and rapidly lower the unemployment rate. Once again, removing the uncertainty over fiscal changes is a key step toward strengthening economic and job growth.

3. Long-term unemployment stays high, and some communities continue to struggle disproportionately from unemployment. The unemployment rate stood at 7.5 percent in April 2013, and 37.4 percent of the unemployed had been out of work for at least six months. Those out of a job for a long time struggle to regain employment because their skills atrophy. In April the African American unemployment rate was 13.2 percent, the Hispanic unemployment rate was 9 percent, and the white unemployment rate was 6.7 percent. Meanwhile, youth unemployment stood at 24.1 percent. The unemployment rate for people without a high school diploma ticked up to 11.6 percent, compared to 7.4 percent for those with a high school degree, 6.4 percent for those with some college education, and 3.9 percent for those with a college degree. These population groups with higher unemployment rates have struggled disproportionately more amid the weak labor market than white workers, older workers, and workers with more education. This creates a greater need for progressive policy actions to strengthen job creation for everybody.

4. The rich continue to pull away from most Americans. Incomes of households in the 95th percentile—with incomes of $186,000 in 2011, the most recent year for which data are available—were more than nine times the incomes of households in the 20th percentile, whose incomes were $20,262. This is the largest gap between the top 5 percent and the bottom 20 percent of households since the U.S. Census Bureau started keeping record in 1967. Median inflation-adjusted household income stood at $50,054 in 2011, its lowest level in inflation-adjusted dollars since 1995. And the poverty rate remains high, at 15 percent in 2011, as the economic slump continues to take a massive toll on the most vulnerable citizens.

5. Employer-sponsored benefits disappear. The share of people with employer-sponsored health insurance dropped from 59.8 percent in 2007 to 55.1 percent in 2011, the most recent year for which data are available. The share of private-sector workers who participated in a retirement plan at work fell to 39.2 percent in 2011, down from 42 percent in 2007. Families now have less economic security than in the past due to fewer employment-based benefits, which requires that they have more private savings to make up the difference.

6. Family wealth losses still linger. In December 2012 total family wealth was down $8.4 trillion (in 2012 dollars) from March 2007, its last peak. Homeowners on average own only 46.6 percent of their homes—compared to the long-term average of 61 percent before the Great Recession—with the rest owed to banks. Homeowners’ massive debt slows household spending growth, as households still have little collateral for banks to loosen their lending standards and households spend less than they otherwise would on new homes and other big-ticket items.

7. Household debt is still high. Household debt equaled 105.5 percent of after-tax income in December 2012, down from a peak of 126 percent in March 2007. The unprecedented fall in debt over the past few years is a result of tighter lending standards, falling interest rates, massive foreclosures, and increased household saving. But unless incomes rise faster than they have in the past, further deleveraging will likely slow since most factors that helped reduce household debt in the past have slowed or disappeared, such as falling interest rates and the payroll tax holiday. This high debt could continue to slow economic growth as households focus on saving rather than on spending.

8. The housing market continues to recover from historic lows. New home sales amounted to an annual rate of 417,000 in March 2013—an 18.5 percent increase from the 352,000 homes sold in March 2012 but well below the historical average of 698,000 homes sold before the Great Recession. The median new home price in March 2013 was 3 percent higher than one year earlier. Existing home sales were up by 10.3 percent in February 2013 from one year earlier, and the median price for existing homes was up by 11.8 percent during the same period. Home sales have to go a lot further, given that homeownership in the United States stood at 65 percent in the first quarter of 2013, down from 68.2 percent before the crisis. The current homeownership rates are similar to those recorded in 1995, well before the most recent housing bubble started. The housing market could potentially grow and contribute to economic progress because the recovery in the spring of 2012 started from historically low home sales and the housing market fell throughout most of the recovery. The fledgling housing recovery could gain further strength if policymakers focus on personal income gains in the near term.

9. Homeowners’ distress remains high. Even though mortgage troubles have gradually eased since March 2010, nearly one in nine mortgages is still delinquent or in foreclosure. In the fourth quarter of 2012, the share of mortgages that were delinquent was 7.1 percent, and the share of mortgages that were in foreclosure was 3.7 percent. Many families delayed and defaulted on mortgage payments amid high unemployment and massive wealth losses. This caused some banks to be nervous about extending new mortgages, which further prolonged the economic slump. Policymakers can accelerate economic growth by helping households lower their debt burdens through refinancing help and debt forgiveness.

10. Corporate profits stay high near pre-crisis peaks. Inflation-adjusted corporate profits were 85.2 percent larger in December 2012 than in June 2009, when the economic recovery started. The after-tax corporate profit rate—profits to total assets—stood at 3.1 percent in December 2012, nearing the previous peak after-tax profit rate of 3.2 percent that occurred prior to the Great Recession.

11. Slow productivity growth marks the U.S. economy. Productivity growth is the main ingredient in rising living standards. Wages, jobs, and profits depend on workers and companies figuring out how to make more and better things in the same amount of time. Output per hour, the main measure of productivity growth, has expanded by 7.5 percent from December 2007, when the Great Recession started, to March 2013, the last quarter for which data are available. This is substantially less than the average productivity growth of 8.9 percent during the same periods in previous business cycles of equal or greater length.

12. Budget deficits decline. The nonpartisan Congressional Budget Office, or CBO, estimated in February 2013 that the federal budget deficit for fiscal year 2013—running from October 1, 2012, to September 30, 2013—will amount to 5.3 percent of GDP, down from 7 percent in fiscal year 2012. The projected deficit for FY 2013 is somewhat worse than CBO anticipated in August 2012, when it estimated a deficit of 4 percent of GDP for FY 2013, in large part because of the Bush tax cuts that were put permanently into law at the beginning of 2013 to avoid the so-called fiscal cliff. The estimated deficit for FY 2013 is still much smaller than it was in previous years, however, due to a number of measures that policymakers have already taken to slow the growth of spending and raise a little more revenue than was expected just last year.

Christian E. Weller is a Senior Fellow at the Center for American Progress and a professor in the Department of Public Policy and Public Affairs at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts Boston. Sam Ungar is a Special Assistant at the Center.

SOURCE: AP/ Jeff Chiu

Scientists Matt Drever and Charlie Holst conduct an experiment at the Pfizer laboratory at the University of California at San Francisco. Sequestration will result in substantial cuts to federal funding for research and development.

Author’s note: On Capitol Hill “sequestration” may mean a percentage point or two in lower GDP growth, but beyond the Beltway it is more than an abstract economic concept. It means real pain for real people.

Each week in our “Sequestration Nation” series, we will highlight examples of the many ways in which the federal budget cuts may hurt you and your neighbors. This week we explore sequestration’s effect on the nation’s future innovation and economic competitiveness, as well as some of the other ways it is affecting communities around the country.

Some of the most insidious effects of sequestration are those whose full effect will not be felt for years to come. Such is the case with the $95 billion in federal research and development, or R&D, spending that will be eliminated from the budget between 2013 and 2021. Cutting R&D spending is one of the most glaring examples of the shortsightedness of sequestration because any benefit of deficit reduction accomplished this way could be far outweighed by the negative impacts it will have on future economic growth.

As President Barack Obama described in his 2011 State of the Union address, decreasing R&D spending in order to reduce the deficit is “like lightening an overloaded airplane by removing its engine. It may make you feel like you’re flying high at first, but it won’t take long before you feel the impact.” Sustained economic growth relies upon sustained increases in productivity, and much of the productivity in the U.S. economy stems from consistent technological innovation. According to Alan Leshner, CEO of the American Association for the Advancement of Science, or AAAS, “Over 50 percent of the U.S. economic growth has come from science and technology advances since World War II.”

Sequestration’s R&D cuts will exacerbate an already troubling trend of decreasing R&D spending in the United States. Federal investment in research and development as a share of discretionary spending has fallen from 17 percent in 1962 to 9 percent today. Through 2021 sequestration will reduce federal spending on R&D by $95 billion, resulting in a reduction in GDP of at least $203 billion, according to a report by the Information Technology and Innovation Foundation, or ITIF. According to the same report, another effect of decreased R&D spending could be 800,000 fewer jobs over the next four years.

To make matters worse, the continuing trend of reducing R&D spending is taking place at the same time that economic competitors such as China are increasing their commitment to research and development. Whereas the United States increased R&D expenditure by an average of less than 6 percent per year between 1992 and 2009, China’s annual growth in R&D expenditure was almost 19 percent over the same time period. According to the AAAS, federal funding of research and development already decreased by 18 percent between 2009 and 2012.

While private industry has picked up some of the slack by increasing its share of national R&D spending as the federal government has been decreasing its share, not all research and development is created equally. Private investment in research and development tends to focus narrowly on applied uses and incremental improvements of existing technology, while federal investment—largely conducted in universities and federally funded labs—tends to focus on more long-term basic research. It is this sort of basic research that helped pave the way for groundbreaking developments such as the internet, which began as a Defense Department-funded project, and the human genome project—a joint project of the Department of Energy and the National Institutes of Health, or NIH, that has generated economic output far in excess of the money devoted to it. It is precisely this kind of research that is at risk as a result of sequestration. “To put it kindly, this is an irrational approach to deficit reduction,” said Hunter R. Rawlings, III, president of the Association of American Universities. “To put it not so kindly, it is just plain stupid.”

To be sure, the $12 billion cut in R&D spending in 2013 alone is having significant short-term impacts as well. The University of Texas, Austin, stands to lose $18 million this year in research grants, while the University of North Carolina, Chapel Hill, could lose up to $28 million. For Moffitt Cancer Center CEO Alan List, sequestration “means there will be less money coming in. It means we will have to let people go. … Ultimately, it’s a real problem for the [patients] for whom we’re trying to get closer to new breakthroughs and discoveries.

In university and federally funded research labs across the country, research directors are concerned that sequestration will create a “generational gap,” according to Elias Zerhouni, former director of NIH. A decrease in grants to universities and federal laboratories means that some projects that are midstream may be suspended, some projects may never begin, and some researchers may have to find new lines of work. “We’re driving a bunch of young people out of science,” said Jonathan Chernoff, chief scientific officer for Fox Chase Cancer Center. Moreover, the lack of consistent federal support for research and development could lead future science and technology graduates, particularly those who come from abroad to obtain a university education, to take their talents elsewhere to countries that display more of a commitment to scientific innovation.

In order for deficit reduction to truly benefit the country, it must not hamper the nation’s prospects for long-term economic growth and global economic competitiveness. Sequestration cuts to research and development, however, do just that.

Elsewhere around the country, sequestration continues to affect the lives of Americans. Below are just a few of the many examples from the past week.

Canton, Ohio

For Deborah Flowers and nearly 20 other dialysis patients around Canton, Ohio, sequestration means the end of the medical transport service that these patients rely on to get to and from their weekly treatments. Due to federal funding cuts to Asset-Based Community Development, Inc., or ABCD, which runs the service around Stark County, Ohio, patients such as Flowers will be forced to find other means to make it to their treatment. Getting to and from treatment is not optional for these Ohio residents—it’s mandatory. “It is life or death,” said Flowers, “Even missing one or two treatment forces your body to start to shut down.” Will Dent, CEO of the nonprofit, noted the overlooked irony of last week’s fix to Federal Aviation Administration cuts that left other critical services suffering. When it came to air-traffic controllers’ furloughs, “people thought ‘oh, we need to make an exception,’ but for dialysis patients, the transportation means life or death.”

Newport News, Virginia

While many agree that the nation’s defense budget could stand to be trimmed, the unintended local effect of Defense Department cuts can go overlooked by national media. For the Hampton Roads region of Virginia, home to one of the world’s largest naval ports and largest air stations, sequestration’s effect on the area’s economy is coming into focus. The civilian-contractor furloughs and cuts to Defense Department programs could result in a loss of almost 7,000 local jobs in 2013, according to Gary Wagner, an economics professor at Old Dominion University. The secondary effects of decreased spending on restaurants, hotels, and other businesses are estimated to result in a loss of $799 million to the region’s economy this year. “It’s going to have this ripple effect all throughout the community,” said Wagner.

San Francisco, California

As a result of cuts to the Department of Homeland Security, the Coast Guard is cutting back on its patrols in the San Francisco Bay. “What they’re not going to be able to do is some of the preventative searches and that’s a little disturbing,” said Monique Moyer, San Francisco port director. According to the local ABC News affiliate, the local police and fire departments have been asked to take up some of the slack by increasing their patrols—a cost that will have to be borne by state and local governments.

Orlando, Florida

Beverly Hougland, CEO of the Osceola County Council on Aging, refuses to let elderly residents in her community go hungry as a result of sequestration. “I’m not going to tell some 90-year-old, ‘We aren’t feeding you today.’ That’s not going to happen,” said Hougland. Nevertheless, due to federal cuts in funding to community programs that provide senior services, cuts will have to be made in other services. In Seminole County, for example, Meals on Wheels Etc. is making up for a $63,000 cut by eliminating housekeeping services for elderly residents. For 80-year-old double amputee Willie Bryant, this means finding another way to get household chores such as dishes and laundry done despite being confined to a wheelchair.

Columbia, Missouri

According to the local ABC News affiliate, “Central Missouri Community Action [or CMCA] is making extreme changes to its Head Start program,” in order to deal with the loss of $300,000 in federal funding. In addition to eliminating 105 Head Start slots, the organization will be laying off 20 employees and changing some centers to half-day schedules. “Without assistance programs like Head Start, I do worry that those [children] aren’t going to be ready for school,” said Darin Preis of CMCA. Preis fears that with poverty on the rise in Columbia, cuts to the area’s Head Start program will only make the problem worse. “[Poverty has] gone up over the last ten years, it hasn’t gone down and it just seems like the wrong time to cut programs and services that are designed to help those people in poverty,” he said.

Kwame Boadi is a Policy Analyst at the Center for American Progress.

SOURCE: AP/Damian Dovarganes

Travelers stand on line at the LAX International Airport in Los Angeles. It was a tough start to the week for many air travelers, as thousands of air traffic controllers were forced to take an unpaid day off because of federal budget cuts.

Author’s note: On Capitol Hill “sequestration” may mean a percentage point or two in lower GDP growth, but beyond the Beltway it is more than an abstract economic concept. It means real pain for real people.

Each week in our “Sequestration Nation” series, we will highlight examples of the many ways in which the federal budget cuts may hurt you and your neighbors. This week we explore sequestration’s inconvenience on the nation’s air travelers, as well as some of the other effects it is having around the country.

If the past couple of weeks have taught us anything, it is that the prospect of low-income families being kicked off of housing assistance and pre-K students being removed from Head Start may not move Congress to act, but delayed airline flights will get everyone on Capitol Hill worked up.

In response to angry passengers and airlines, Congress sprang into action last week to ease the effects of sequestration on air travel. On Thursday night the Senate passed by unanimous consent, which does not require a vote, legislation that would give the Federal Aviation Administration more flexibility in implementing the spending cuts that the agency is required to make under sequestration. The House of Representatives passed the legislation on Friday, and President Obama is expected to sign the bill this week.

In the meantime, the legislation does nothing to address the reduced access seniors have to Meals on Wheels, the reduction in border security, the decrease in unemployment insurance for the 2 million Americans unable to find work, or any of the other negative effects of sequestration.

Nonetheless, Congress took such swift action because on Sunday, April 21 many air travelers across the country started experiencing the pain of sequestration firsthand. Due to sequestration, the FAA is required to make $637 million in spending cuts this year. To account for those spending reductions, the FAA initially ordered air-traffic controllers to give up one payday during each two-week pay period. The result of this policy would be that on any given day about 10 percent of the nation’s 15,000 air-traffic controllers would be on unpaid leave. The FAA reported that as a result of furloughs to air-traffic controllers, 400 flights were delayed across the country that Sunday evening.

The havoc caused by these furloughs has been particularly significant at major air-traffic hubs such as New York’s LaGuardia Airport, which reported delays of more than an hour, and Los Angeles International Airport, which reported delays of up to two hours. According to the Los Angeles Times, the delays were enough to cause David Brooks of Los Angeles to miss a funeral in Boston. “We had to cancel our whole trip because the funeral is tonight, and we’re not going to make it in time,” said Brooks.

Some in Congress accused the FAA of not being creative enough to find areas to cut that would not impact air travel. Moreover, the Airline Pilots Association and two airline-industry trade associations filed suit against the agency to halt the furloughs. In the face of the criticism, however, the agency maintains that with 70 percent of its operational costs going toward payroll—costs that are subject to sequestration—there is very little fat left over in its budget to cut.

Though few things garner much bipartisan support on Capitol Hill these days, the effort to ease the hardships faced by air travelers received near-universal support. The Reducing Flight Delays Act of 2013 was introduced last week by Sen. Susan Collins (R-ME) and co-sponsored by several Democratic and Republican senators.

To be sure, while the pain of a 75-minute flight delay at Baltimore-Washington International Airport may not necessarily compare to the pain of an elderly cancer patient being unable to obtain treatment or a low-income family facing the possibility of becoming homeless, it is certainly an inconvenience for many people. What’s more, continued flight delays could negatively impact the country’s fledgling economic recovery. The Global Business Travel Association raised this point, warning, “If these disruptions unfold as predicted, business travelers will stay home, severely impacting not only the travel industry but the economy overall.”

Sequestration’s impact is unquestionably negative, and Congress should take steps to end it. According to the Congressional Budget Office, sequestration could cost the economy 750,000 jobs and reduce GDP growth by 1.5 percent. But the narrow focus on whether or not planes leave on time indicates that, “We’ve got our priorities upside down,” according to Sen. John McCain (R-AZ). Congress should instead focus on all of sequestration’s impacts and replace the required across-the-board cuts with a balanced approach to spending cuts and increased revenue.

Until then, we will continue to update you on the effect sequestration is having across the country. Below are just a few of the many examples from the past week.

Lemoore, California

Similar to their counterparts across the country, the military families of Naval Air Station Lemoore have sacrificed a great deal over the past several years. According to The Nation, sequestration is requiring these families to sacrifice even more as the base’s school district now faces severe cuts in funding. The school district relies on the federal Impact Aid program to cover 30 percent of its budget, but because of sequestration cuts, federal spending on the Impact Aid program will be reduced by 7 percent. As Heiko Sweeney, principal of Akers Elementary School, explained, “For us, Impact Aid is critical.” Sequestration will reduce the district’s budget by $350,000 due to cuts to Impact Aid at a time when the district is trying to cope with the loss of nearly 20 percent of its teaching staff over the past several years. If the sequester cuts are not rolled back and become permanent, “It would be … devastating,” said Sweeney.

Las Vegas, Nevada

The Las Vegas Review-Journal recently reported on a woman who may no longer have a safe place to sleep because of sequestration. That is because the Shade Tree, which provides shelter for the woman who asked not to be named and 350 other abused women and children, had its federal funding cut by 15 percent beginning on March 1. This 15 percent cut comes in addition to several state and local funding cuts that the Shade Tree has had to absorb recently. In spite of the fact that the shelter reported an increase in the number of victims of domestic violence and sexual assault seeking assistance, sequestration threatens to make North Las Vegas less hospitable to abused women and children in search of a safe place to sleep.

Yuma, Arizona

Seniors in Yuma, Arizona, face a wide variety of sequestration-related difficulties, ranging from less access to Meals on Wheels programs to the inability to pay the increased rent required by the Section 8 housing-assistance program. The way Dan Weber, president of the Association of Mature American Citizens, sees it, “the sad truth is that seniors, in particular, are being made to suffer for the sake of political brinksmanship.” And although sequestration is intended to save the federal government money, according to the Leadership Council of Aging Organizations, “Any ‘savings’ from the sequester would pale in comparison to the added costs, resulting in premature nursing home placement for seniors who can no longer stay in their homes and communities because of reduced federal funding.”

Atlanta, Georgia

For Georgia students enrolled in technical colleges, sequestration may mean decreased educational opportunities. According to Georgia Public Broadcast News, “the state’s technical schools are anxious about how … sequestration[] could impact their students.” Though Pell Grants, a federal program to help students of limited means pay for college, are exempted from sequestration until at least the 2014 or 2015 academic year, the effects of potential future cuts if sequestration becomes permanent are being felt now. That’s because Georgia lawmakers, in anticipation of future cuts to Pell Grants and other federal programs, raised the GPA requirement on their state scholarship program in 2011, resulting in 9,000 students leaving the state’s technical schools. Ron Jackson, commissioner of Georgia’s Technical College System, believes this will extend beyond individual students because, “It could hurt Georgia’s economic development” by limiting Georgia’s ability to “[create] the workforce we need.”

Kwame Boadi is a Policy Analyst at the Center for American Progress.

SOURCE: AP/Carolyn Kaster

Sylvia Mathews Burwell, the new director of the Office of Management and Budget, testifies on Capitol Hill in Washington, Wednesday, April 10, 2013, before the Senate Budget Committee hearing on her nomination.

Calling for an end to government waste is common rhetoric in Washington, but it is rarely followed by real conversation on how to better direct funds to achieve real results. Recently, however, the Obama administration has taken new steps to reverse that trend and find smart ways to manage government programs.

In February the Obama administration issued a proposal that, if adopted, would improve the management and oversight of the more than $600 billion annually awarded by the federal government in grants and other financial-assistance programs.

Certainly, “Proposed Uniform Guidance: Cost Principles, Audit, and Administrative Requirements for Federal Awards” isn’t exactly a page-turner. The proposed changes would harmonize eight different sets of Office of Management and Budget grant guidance into one master document, simplify some reporting requirements for grantees, and refocus auditing efforts on preventing waste, fraud, and abuse, among other changes.

The Office of Management and Budget shouldn’t stop there, though. This is a rare opportunity to significantly advance Pay for Success, a key Obama administration initiative, throughout the federal government. “Pay for Success” is the administration’s umbrella term for a new breed of financing tools for social programs in which the emphasis is placed on paying for measurable outcomes rather than for inputs or activities. This includes Social Impact Bonds, an innovative new public-private approach to paying for social programs in which government agencies pay only for improved social outcomes after the outcomes have been achieved and verified.

Pay for Success and Social Impact Bonds together represent a fundamental departure from how programs are currently monitored. Including Pay for Success in this new grant guidance is essential to the process of moving government grant making away from obsessively tracking inputs and toward monitoring—and rewarding—positive outcomes. Pay for Success allows the government to set the “outcome,” or the goal that it wants to see achieved, rather than strictly defining what activities it will fund and hoping that those activities lead to improved results.

The way Social Impact Bonds work is relatively straightforward. A government agency or agencies defines a specific, measurable social outcome they want achieved in a given population over a certain period of time, such as reducing the number of asthma-related emergencies in low-income children by 15 percent over five years in a small city. They then contract with an external organization that pledges to achieve that outcome within the specified time period. The external organization—sometimes called an intermediary—raises money from private investors to fund the interventions and actions needed to achieve the outcome. If an independent assessor verifies that the outcome has been achieved through a rigorous evaluation, the government releases an agreed-upon sum of money for the outcome, and the external organization repays its investors with a slight return for shouldering the financial risk. If the external organization fails to achieve the outcome, the government doesn’t pay, and the investors stand to lose their capital.

Government involvement is critical in every stage of Social Impact Bonds, from clearly defining the outcome to ensuring third-party verification. Additionally, it will fall upon the government to ensure that improved outcomes continue beyond the end of an individual Social Impact Bond deal.

The idea originated in the United Kingdom, where the model is being used to reduce recidivism in a prison in Peterborough, address homelessness in London, and prevent at-risk adolescents from entering residential foster care in Essex.

All signs point to significant and growing interest in Social Impact Bonds at the state and municipal level in the United States. New York City recently announced the details of the nation’s first Social Impact Bond agreement last August to address recidivism among young boys. In that deal, which targeted a reduction of at least 10 percent in recidivism among 16- to 18-year-old boys imprisoned at Rikers Island, Goldman Sachs ponied up a $9.6 million investment to MDRC, the social-science research organization acting as the intermediary. Bloomberg Philanthropies guaranteed Goldman Sachs’s investment with a $7.2 million grant, meaning that Goldman will not lose the entirety of its investment should the Social Impact Bond fail. If the deal succeeds, the Bloomberg grant remains with MDRC to use toward future Social Impact Bonds. Legislation has also been introduced in New Jersey, Connecticut, New York, Maryland, and Texas. And Massachusetts, which last August announced the names of the organizations that it intends to contract with for Social Impact Bonds on homelessness and juvenile justice, is well into the process of negotiating the details of those deals.

What does this have to do with the Office of Management and Budget’s grant guidance? The federal government has already identified two funding streams through which they can support Pay for Success and Social Impact Bonds—the Justice Department’s Second Chance Act, which aims to reduce recidivism, and the Labor Department’s Workforce Innovation Fund, which provides funds for workforce-training programs.

The federal government can play a major role in helping translate the budding interest into a sustainable flow of actual Social Impact Bond deals by making small portions of existing budgets available for supporting Pay for Success. Cities and states need this money for technical assistance to negotiate these complex transactions. They need grant dollars to either help set up the structure, help pay for evaluations, or help service providers scale their data-collection abilities. And in cases where some savings from a successful preventive intervention are likely to flow into the federal government’s pocket, cities and states need the Obama administration to make funds available to partially finance outcome payments.

The federal government also needs to act as a learning hub, gathering information about what is and is not working at city and state levels and using that information to make better decisions at the national level.

It can take a lot of effort to prompt a bureaucratic organization to try a new approach, which is precisely why the Office of Management and Budget should take this opportunity to encourage agencies to explore options for using their budgets to support Pay for Success and Social Impact Bond initiatives. Including these programs in its new grant guidance would do just that. In particular, it should consider explicitly allowing agencies to pursue a waiver process that would allow small portions of their existing budgets to be diverted and used to support Pay for Success.

Governments at all levels are working to find ways to cope with shrinking budgets, use taxpayer dollars responsibly, and address ballooning needs in the social sector after the recession. Pay for Success and Social Impact Bonds offer a modest means of tackling all three challenges at once. The Obama administration must not miss this opportunity to encourage federal agencies to use these new tools and to help the pioneers in city and state governments who are leading the way.

Sonal Shah is a Senior Fellow at the Case Foundation and at the Center for American Progress. Formerly, she served as the director of the White House Office of Social Innovation and Civic Participation. Kristina Costa is Speechwriter to the Chair and Research Assistant in Economic Policy at the Center.

SOURCE: AP/ Seth Perlman

Gov. Pat Quinn (D-Il) speaks to reporters in his office at the Illinois State Capitol. In the fiscal year 2014 budget, Gov. Quinn outlined plans for Illinois to become the second state to launch a Social Impact Bond program.

Media attention following the release of the White House fiscal year 2014 budget last week focused on the big programs and the usual issues: tax provisions, entitlement reforms, and new investments in early childhood education and physical infrastructure. But it is a little-noticed government reform proposal that should be making waves.

The idea is simple and appealing: Pay for Success. In this innovative new approach to financing social programs, government agencies pay for concrete and measurable social outcomes only after they are achieved. Pay for Success mechanisms, such as Social Impact Bonds, leverage private and philanthropic resources to finance social interventions upfront in exchange for a modest return on investment if the program is successful. This ensures that taxpayer dollars truly flow to what works.

Take, for example, a Social Impact Bond aimed at reducing recidivism rates among former convicts. In such an agreement, a city might contract with an outside organization that pledges to achieve a specific, measurable outcome such as reducing the juvenile offender reconviction rate by 15 percent over a period of five years. If the organization is successful, the city will pay an agreed-upon amount, which may be based in part on the anticipated savings in incarceration costs. Pay for Success programs spend government money only on programs with proven results, provide an innovative way to form effective public-private partnerships, and deliver the best outcomes possible at a lower cost to government over time.

This isn’t the first time the White House budget proposed Pay for Success. In fiscal year 2012 there was a modest $100 million request to support Pay for Success models in domestic discretionary spending programs to reduce recidivism, provide workforce training, and combat homelessness. In fiscal year 2013 a similar request was made but for $109 million. Neither of these proposals went anywhere in Congress. In fact, very little attention was given to the idea of Pay for Success, even at a time when budget deficits were a big part of the discussion in Washington.

In this year’s budget proposal, the Obama administration increased support for Pay for Success programs significantly by requesting nearly $500 million to support these programs. The 2014 budget request for domestic discretionary dollars is similar to those in fiscal years 2012 and 2013 and includes a $195 million request this fiscal year in analogous program areas. But the big news is the recently proposed $300 million fund designed to incentivize state and local governments to develop Social Impact Bonds, which will be administered by the Treasury Department.

This minor provision could greatly impact the way our government thinks about and pays for certain social services. A wide range of organizations, from foundations to investment banks to social service providers, see promise in Pay for Success and Social Impact Bonds. These financing tools can provide new capital to scale highly effective social programs, particularly preventive interventions in areas such as homelessness, recidivism, workforce development, health care, education, and other human services.

The Social Impact Bond concept was conceived and tested in the United Kingdom. In 2010 the United Kingdom announced a $13 million deal to bring down recidivism rates among inmates released from Peterborough Prison. Since then the United Kingdom has launched 14 deals to improve everything from foster care to workforce training. The United States enacted its first Social Impact Bond last August in New York City, where Mayor Michael Bloomberg’s administration hoped to reduce recidivism among adolescent males imprisoned at Rikers Island. A host of states, including Massachusetts, Illinois, New York, Texas, Maryland, and New Jersey, are at various stages of exploring how they too can use these programs. Congress hasn’t followed suit, but the new White House budget proposal presents an opportunity for Democrats and Republicans on Capitol Hill to work together to push Pay for Success forward.

Pay for Success and Social Impact Bonds aim to change the way government does business. Governments at all levels in the United States routinely contract out the provision of social services. A study by the Urban Institute found that nearly 200,000 contracts and grants were issued to some 33,000 service providers in 2009. But many social programs and grants aren’t regularly evaluated for effectiveness, even if they track information on program outputs. Of 47 federal programs for workforce development, 41 tracked some outcome measures, but only five programs had completed an impact study since 2004, according to a 2011 Government Accountability Office report.

Pay for Success and Social Impact Bonds include an impact assessment in the funding model since the government does not make payments until positive outcomes are achieved and verified. This allows governments at the local, state, and national levels to pilot new preventive programs with the potential to save money down the line without shouldering all of the financial risk for whether the programs will succeed or fail.

Of course these deals are considerably more complicated than traditional government contracts. First, they begin with a clearly defined, measurable set of outcomes that must be achieved to trigger payment. Second, savings from successful preventive programs can accrue across different budgets and at different levels of government, which causes accounting complications for agencies that wish to use reduced expenditures to repay investors. Third, investors need to assess their appetite for risk with the understanding that some of the deals being considered will adhere to an all-or-nothing model; partial outcomes will not provide partial payments. Finally, different levels of government are best suited to very different roles in Pay for Success, as we recently explained in the Community Development Investment Review. State and municipal governments are much more likely to actually launch Social Impact Bonds, while the federal government’s role is primarily to set standards, galvanize interest, and support the pipeline of deals.

The proposed $300 million Treasury Department incentive fund would be a big deal for Pay for Success in the United States for two reasons. First, the fund would provide incentives for local government by creating a federal budget to partially finance outcome payments for Social Impact Bond deals created by cities and states. This would help mitigate the complicated accounting challenges these agreements pose. Second, the fund would provide credit enhancements for philanthropic organizations’ investments in Social Impact Bonds, offering partial guarantees to reduce the risk that the investor organization will lose all of its capital if a deal fails.

This $300 million Treasury fund, the White House budget explains, is partially modeled on the U.K.’s Social Outcomes Fund. Its £20 million fund “will be used to provide a ‘top-up’ contribution”—a portion of the outcome expenses beyond what any single budget is able or willing to contribute—to help finance payments for complex Social Impact Bond agreements where benefits will cut across multiple budget lines.

To be sure, there are challenges ahead for the proposals in the White House budget and for Social Impact Bonds generally. There’s no guarantee that any part of the White House budget, including Pay for Success, will be enacted by Congress. And Social Impact Bonds are still a work in progress. We need to learn from our experiences with the deals currently in progress in New York, Massachusetts, and elsewhere and continue to modify our approach as we learn what works and what does not. In other words, while Social Impact Bonds are enormously promising, they are not yet proven.

But just because Pay for Success and Social Impact Bonds are complex doesn’t mean we should miss the opportunities they can offer. They provide an improvement, albeit limited, compared to the vast majority of government expenditures on social services that are made without evaluating whether the programs actually work. They allow the government to focus more effort on preventive programs. When budgets get tight, effective preventive services such as reducing reoffending rates among prisoners to break the cycle of recidivism are more likely to get cut than emergency remedial services such as imprisonment. The nearly $500 million the White House proposes for Social Impact Bonds and Pay for Success in a budget that totals $3.7 trillion is a modest proposal with the potential for a tremendous impact.

The Obama administration has taken a big step in proposing the Treasury Department incentive fund, as well as asking for more flexibility in discretionary dollars for Pay for Success financing. These innovative approaches are good for the government, moving them toward paying for outcomes. They are good for nonprofits because they provide more flexible, multiyear funding streams focused on outcomes and not on processes. And they provide an opportunity to align the interests and financing of philanthropic causes and the private sector to achieve real results. Over the next decade the government will be forced to fundamentally change its habits. Rather than relentlessly cutting services, efforts such as Pay for Success provide a good start to finding new ways to effect positive social change.

Sonal Shah is a Senior Fellow at the Case Foundation and at the Center for American Progress. She was previously the director of the White House Office of Social Innovation and Civic Participation. Kristina Costa is Speechwriter to the Chair and Research Assistant in Economic Policy at the Center for American Progress.

SOURCE: AP/ Elaine Thompson

Rose Inman stands on the walkway at the home she is about to lose in Seattle. Inman has been laid-off twice and can no longer afford her $3,100 monthly mortgage payments

Author’s note: On Capitol Hill “sequestration” may mean a percentage point or two in lower GDP growth, but beyond the Beltway it is more than an abstract economic concept. It means real pain for real people.

Each week in our “Sequestration Nation” series, we will highlight examples of the many ways in which the federal budget cuts may hurt you and your neighbors. This week we explore sequestration’s devastating effect on low-income families receiving federal housing assistance, as well as some of the other impacts it is having around the country.

Over the past few years, public officials have expressed a desire for deficit reduction without increasing poverty in America. Unfortunately, thanks to sequestration, that will no longer be possible.

As we mentioned in last week’s installment of “Sequestration Nation,” low-income families receiving federal housing assistance are bearing the brunt of some of the most painful sequestration cuts. The Center on Budget and Policy Priorities estimates that sequestration will reduce federal housing assistance by more than $2 billion in 2013. Furthermore, there will be additional cuts to housing assistance included in the Budget Control Act.

Facing severe sequestration cuts, local housing agencies such as the Montpelier Housing Authority in Vermont must choose from a range of bad options to address budget shortfalls. Agencies that previously could rely on reserve funds to meet shortfalls in funding are now facing the reality of those funds drying up. Housing officials fear the prospects of furloughing or laying off employees, requiring housing assistance recipients to pay more for their rent, or having to provide subsidies to fewer people. Jo Ann Troiano, executive director of the Montpelier Housing Authority, worries that sequestration “was the straw that broke the camel’s back.”

Cuts to the Housing Choice Voucher Program, commonly known as “Section 8,” represent a perfect storm of unease for voucher recipients. Generally, households in the program are obligated to pay up to 30 percent of their income toward rent, and the voucher program provides subsidies that cover the difference. Most families receiving housing vouchers are elderly, disabled, working, or recently stopped working. This population lacks the means to adjust to federal budget cuts, are already underserved, and are facing an increasingly expensive rental markets.

The average household income of families receiving Housing Choice Vouchers is $12,500. But sequestration could increase monthly rent payments by up to $200 for voucher recipients such as Chanel Henderson of California. “That’s a lot for people who are already struggling,” said Henderson.

Ultimately, sequestration will make an already bad situation worse. Only one in four families that actually qualify for housing assistance in the United States are receiving it due to already limited funding. Sequestration will only exacerbate this situation because many local agencies are “shelving” vouchers in order to save money—meaning that once a family graduates from the program, their now-unused voucher is not reallocated to a family currently on the waiting list. This shelving is taking place in communities such as Paterson, New Jersey, where officials imposed a freeze on reissuing unused vouchers.

If these methods are not sufficient to close the funding gaps, local housing agencies may need to remove people from the voucher program entirely or lay off or furlough staff to make ends meet. The Center for Budget and Policy Priorities estimates that cuts to the voucher program could result in 140,000 families across the country losing housing assistance. Ed Mayer, executive director of the Butte County Housing Authority in California, laments the reality that, “We begin to look at the prospect of putting people on the street who have no alternative.” Rather than remove people from their voucher program, officials in the Philadelphia Housing Authority chose to lay off 82 employees.

Neither of these last ditch efforts bode well for the local economies that will be affected. Laid-off or furloughed housing-authority employees result in fewer dollars circulating in the local economies. More homeless people will mean “an increased use in emergency rooms, healthcare costs, mental health services, the court system, policing, [and] shelters,” according to Greg Spiegel, public policy director for the Inner City Law Center of Los Angeles.

To add insult to injury, these cuts come at a time when rental prices are rising and the need for housing assistance is growing. As a recent Harvard University study indicates, rental prices have increased sharply over the past decade to the point where half of renters currently pay more than 30 percent of their household income for housing, and 27 percent pay more than half of their income for housing. At the same time, the number of homeless families with children has increased by 32 percent since 2007, according to Housing and Urban Development Department data.

Sequestration’s cuts to federal housing assistance are significant and painful for some of the most vulnerable members of society. Doug DeSoto, Section 8 housing manager for the Butte County Housing Authority, concludes, “It’s not just the housing authority—a faceless bureaucracy—that’s cut. We know these people and we know their concerns. … If you are a young single mom, it can be the platform to keep your life together.”

Sequestration is having similarly negative impacts across America. Below are just a few of the many examples.

Cheyenne, Wyoming
Sequestration will make it harder for officials in Wyoming to forecast and plan for floods and droughts. The Wyoming Tribune Eagle recently reported that budget cuts to the U.S. Geological Survey will force the agency to discontinue nationwide operations at 375 streamgages, which continuously monitor the amount and quality of water in a particular waterway. According to spokeswoman Jessica Robertson, the data gathered from these instruments are critical “to issue timely flood forecasts.” In Wyoming where more than 100 streamgages are operational, these instruments were particularly useful for flood warnings “during June and July of 2011, when streamflows were at record levels in the Wind and North Platte River basins.” In the midst of sequestration, Wyoming residents must hope that history doesn’t repeat itself this year.

Chelsea, Massachusetts
For the 45,000 Massachusetts residents who have been unemployed for at least six months, sequestration will make it much more difficult to survive. The Telegram reported that due to sequestration, these individuals will see an average drop of $50 per week in unemployment benefits. Harriette Baston of Chelsea, Massachusetts, recognizes that, “People might not think that’s a lot of money, but in fact it is, especially in this economy with rising food prices, transportation costs, and health care payments.” Moreover, the resulting decrease in spending on food, transportation, and other necessities will affect the businesses that rely on those consumer dollars.

Yuma, Arizona
As the immigration reform debate picks up steam in Washington, a major sticking point will be the extent to which federal officials can secure the border with Mexico. Sequestration comes at a particularly bad time for those concerned with border security and comprehensive immigration reform. Sequestration mandated 14 furlough days for Border Patrol employees, which will reduce the time that agents can spend patrolling the border, according to the Yuma Sun. For Derek Hernandez, vice president of the western region of the National Border Patrol Council, it is clear: “Bottom line is the border would be less secure.”

Detroit, Michigan
For employees at Detroit Medical Center, the impact of sequestration has been swift and blunt. Last week the hospital system announced that it was laying off 300 employees, according to the Detroit Free Press. These layoffs represent 2 percent of the hospital’s full-time staff. Since roughly a third of the hospital system’s patients are Medicare recipients, sequestration’s 2 percent cut to Medicare payments will impact the medical-center system to the tune of $12 million to $15 million. The 300 layoffs may ultimately signal additional layoffs to come. Kevin Downey, spokesman for the Michigan Health and Hospital Association, indicated that many member hospitals, including some that will lose even more money than Detroit Medical Center, still need to specify their plans to close their budget gaps.

Dayton, Ohio
The effects of sequestration are most difficult to grasp when they concern long-term, as opposed to immediate, impacts. These long-term impacts, however, are just as significant. Such is the case with the reductions in research and development funding for Ohio universities. “What people need to understand is that research is their future,” said Dr. William Ball, vice president for research at the University of Cincinnati. The Dayton Daily News recently reported that Ohio public universities are slated to lose $95 million in research grants as a result of sequestration. These grants fund a wide array of research in fields such as microbiology and immunology. Commenting on her current research, master’s student Renee Albers believes that when it comes to money for research, “You can really see that this could really help people. … What we’re doing is amazing.” Hopefully sequestration will not halt this potentially groundbreaking work in its tracks.

Kwame Boadi is a Policy Analyst at the Center for American Progress.

SOURCE: AP/Toby Talbot

In this Thursday, April 3, 2013, photo, people fill out applications at the Green Mountain Flagging table at the 4th Annual Central Vermont Job Fair in Montpelier, Vermont.

Endnotes and citations are available in the PDF version of this issue brief.

Doubts remain about the strength of the economic recovery even in the fourth year of the economic expansion that officially started in June 2009. Most importantly, job growth slowed again in March 2013 after gaining some strength in the preceding months. The economic recovery should be self-sustaining at this point, but large, persistent problems such as massive household-debt burdens, high U.S. income inequality, and public fiscal problems both in the United States and overseas are holding back economic and job growth.

As a result, the U.S. economy will require continued policy attention to generate the much-vaunted self-sustaining momentum. Infrastructure investments, for example, would help create more private-sector jobs in the short run and lay the foundation for faster growth in the long term by lowering the cost of doing business, thereby making America more competitive globally. A higher minimum wage, in addition, would be a first step in attacking the massive income inequality in the United States, as it would ease the financial struggles of those households with the lowest incomes. And policymakers can do more to help households with outstanding mortgages refinance their debt into lower-interest mortgages to ease the still relatively large debt burden. The modest recovery will still require additional policy interventions to accelerate economic growth and, even more importantly, job creation.

1. Economic growth slowed markedly at the end of 2012. Gross domestic product, or GDP, was essentially flat in the fourth quarter of 2012, increasing slightly at an annual rate of 0.4 percent. Domestic consumption increased by an inflation-adjusted annual rate of 1.8 percent; housing spending grew by 17.6 percent; and business investment accelerated by 13.2 percent. In the fourth quarter of 2012, however, exports fell by 2.8 percent, and government spending shrank by 7 percent. Policy solutions should therefore aim to ease the strain of fiscal austerity on the economy by dampening spending cuts, and they should boost domestic private-sector economic activity to offset the fall-off in overseas demand.

2. The moderate labor-market recovery continues in its fourth year. There were 4.6 million more jobs in March 2013 than in June 2009 when the economic recovery officially started. The private sector added 5.3 million jobs during this period. The loss of nearly 687,000 state and local government jobs explains the difference between the net gain and the private-sector gain in this period, as budget cuts reduced the number of teachers, bus drivers, firefighters, and police officers, among others. Job creation should be a top policy priority since private-sector job growth is still too weak to quickly overcome other job losses and rapidly lower the unemployment rate. Once again, removing the uncertainty about fiscal changes is a key step toward strengthening economic and job growth.

3. Long-term unemployment remains high. The unemployment rate stood at 7.6 percent in March 2013. Long-term unemployment—defined as people who are out of work and have been looking for a job for more than six months—also remained high. In March 2013, 39.6 percent of the unemployed were considered long-term unemployed. The average length of unemployment also grew slightly in March 2013, rising to 37.1 weeks. Those out of a job for a long time struggle to regain employment because their skills atrophy and entry into a new job becomes increasingly harder. The continuation of extended unemployment insurance benefits as part of the resolution to the fiscal showdown on January 1, 2013, was thus a welcome policy that helped many of those most vulnerable to economic shocks.

4. Labor-market troubles fall especially hard on communities of color, young workers, and Americans with less education. The African American unemployment rate in March 2013 was 13.3 percent; the Hispanic unemployment rate was 9.2 percent; and the white unemployment rate was 6.7 percent. The population groups with higher unemployment rates—those that typically also have low incomes and little wealth—have struggled disproportionately more amid the weak labor market than white workers, older workers, and workers with more education. This creates a greater need for progressive policy actions to strengthen job creation for everybody. Meanwhile, youth unemployment stood at 24.2 percent. The unemployment rate for people without a high school diploma ticked down slightly to 11.1 percent—compared to 7.6 percent for those with a high school degree, 6.4 percent for those with some college education, and 3.8 percent for those with a college degree.

5. Household incomes continue to drop amid prolonged weaknesses in the labor market. Median inflation-adjusted household income stood at $50,054 in 2011—the most recent year for which data are available—its lowest level in inflation-adjusted dollars since 1995. Median income fell by 1.5 percent in 2011, dropping for the fourth year in a row. American families as a whole have experienced no income gains during the current economic recovery since 2009, exacerbating the losses that occurred during the Great Recession.

6. Income inequality on the rise. Incomes of households in the 95th percentile—with incomes of $186,000 in 2011—were more than nine times the incomes of households in the 20th percentile, whose incomes were $20,262. This is the largest gap between the top 5 percent and the bottom 20 percent of households since the U.S. Census Bureau started keeping record in 1967.

7. Poverty stays high. The poverty rate fell to 15 percent in 2011, down from 15.1 percent in 2010. The African American poverty rate was 27.6 percent; the Hispanic poverty rate was 25.3 percent; and the white rate was 9.8 percent. The poverty rate for children under the age of 18 stood at 21.9 percent. More than one-third of African American children—38.8 percent—lived in poverty in 2011, compared to 34.1 percent of Hispanic children, and 12.5 percent of white children. The prolonged economic slump, following an exceptionally weak labor market before the crisis, has taken a massive toll on the most vulnerable citizens.

8. Employer-sponsored benefits are disappearing. The share of people with employer-sponsored health insurance dropped from 59.8 percent in 2007 to 55.1 percent in 2011, the most recent year for which data are available. The share of private-sector workers who participated in a retirement plan at work fell to 39.2 percent in 2011, down from 42 percent in 2007. Families now have less economic security than in the past due to fewer employment-based benefits, which requires more private savings to make up the difference.

9. Family wealth losses still linger. In December 2012 total family wealth was down $8.4 trillion—in 2012 dollars—from its last peak in March 2007. Homeowners on average own only 46.6 percent of their homes—compared to the long-term average of 61 percent before the Great Recession—with the rest owed to banks. Homeowners’ massive debt slows household spending growth, as households still do not have a lot of collateral for banks to loosen their lending standards, and households spend less than they otherwise would on new homes and on other large-ticket items.

10. Household debt is still high. Household debt equaled 105.5 percent of after-tax income in December 2012, down from a peak of 126 percent in March 2007. The unprecedented fall in debt over the past few years is a result of tighter lending standards, falling interest rates, massive foreclosures, and increased household saving. But unless incomes rise faster than they have in the past, further deleveraging will likely slow since most factors that helped reduce household debt in the past have slowed or disappeared, such as falling interest rates and the payroll tax holiday. This high debt could continue to slow economic growth, as households focus on saving rather than on spending.

11. The housing market continues to recover from historic lows. New home sales amounted to an annual rate of 411,000 in February 2013—a 12.3 percent increase from the 339,000 homes sold in February 2012, but well below the historical average of 698,000 before the Great Recession. The median new home price in February 2013 was 2.9 percent higher than one year earlier. Existing home sales were up by 10.2 percent in February 2013 from one year earlier, and the median price for existing homes was up by 11.6 percent during the same period. The housing market could potentially grow and contribute to economic progress because the recovery in the spring of 2012 started from historically low home sales, and the housing market fell throughout most of the recovery. The fledgling housing recovery could gain further strength if policymakers focus on personal income gains in the near term.

12. Homeowners’ distress remains high. Even though mortgage troubles have gradually eased since March 2010, nearly one in nine mortgages are still delinquent or in foreclosure. In the fourth quarter of 2012, the share of mortgages that were delinquent was 7.1 percent, and the share of mortgages that were in foreclosure was 3.7 percent. Many families delayed and defaulted on mortgage payments amid high unemployment and massive wealth losses. This caused some banks to be nervous about extending new mortgages, which further prolonged the economic slump. Policymakers can accelerate economic growth by helping households lower their debt burdens through refinancing help and debt forgiveness.

13. Corporate profits stay high near precrisis peaks. Inflation-adjusted corporate profits were 85.2 percent larger in December 2012 than in June 2009, when the economic recovery started. The after-tax corporate profit rate—profits to total assets—stood at 3.1 percent in December 2012, nearing the previous peak after-tax profit rate of 3.2 percent that occurred prior to the Great Recession. 

14. Slow productivity growth marks the U.S. economy. Productivity growth is the main ingredient in rising living standards since wages, jobs, and profits depend on workers and companies figuring out how to make more and better things in the same amount of time. Output per hour, the main measure of productivity growth, has expanded by only 7.3 percent from December 2007 when the Great Recession started to December 2012, the last quarter for which data are available. This is substantially less than the average productivity growth of 8.9 percent during the same periods in previous business cycles of equal or greater length.

Christian E. Weller is a Senior Fellow at the Center for American Progress and a professor in the Department of Public Policy and Public Affairs at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts Boston. Sam Ungar is a Special Assistant at the Center. 

SOURCE: AP/Mark Lennihan

A front-end loader carries scraps of timber as it dismantles the storm-damaged boardwalk in Long Beach, New York, Friday, February 1, 2013. Three months after Superstorm Sandy devastated the coastal areas of New Jersey and New York, Congress finally passed a $50.5 billion bill to rebuild homes, businesses, utilities, mass transit, and other critical infrastructure.

Endnotes and citations are available in the PDF version of this issue brief.

America has begun the hard work of rebuilding our infrastructure. … We need to repair our existing infrastructure, and invest in the infrastructure of tomorrow including high-speed rail, high-tech schools, and power grids that are resilient to future extreme conditions.” — President Barack Obama, in his proposed fiscal year 2014 budget

SOURCE: AP/Ross D. Franklin

Former Census Bureau Director Robert Groves talks about filling out the 2010 Census forms during a news conference Monday, March 15, 2010, in Phoenix.

Endnotes and citations are available in the PDF version of this issue brief.

The U.S. Census Bureau’s surveys and data underlie many of our national statistics, and their results are used to guide federal policymaking and business decision making. But the agency is once again under attack in Washington, with budget cuts threatening some of the bureau’s core functions and an ideological challenge brewing from some of the most hardcore, antigovernment congressional Republicans.

The automatic across-the-board cuts known as sequestration, combined with additional cuts enacted in the continuing resolution funding the government through this September, will reduce the Census Bureau’s requested budget for fiscal year 2013 by nearly 13 percent, to $845 million from a requested $970 million. At the same time, the American Community Survey, or ACS—the annual sampling survey that replaced the “long-form” census after the 2000 census—is in the crosshairs of the House Republicans who last year voted to fundamentally alter and defund the survey.

Both of these efforts are certainly pound foolish, but they can’t even be said to be penny wise. Census Bureau statistics are essential to the effective functioning of our government and our economy; the bureau is responsible for accurately collecting, analyzing, and reporting much of the data underpinning crucial government operations.

At a time when we need more data-driven decision making in government, it shows an utter lack of foresight on the part of policymakers to reduce financial and political support for the agency.

Cutting the Census Bureau’s budget and eviscerating the American Community Survey will lead to less-informed government and a more expensive decennial count in 2020, as well as endanger data sources essential to government, researchers, and businesses alike. Let’s consider each of these issues in turn.

Reckless budget cuts to the Census Bureau will lead to less-informed government 

The Census Bureau faces an estimated $46 million budget cut under sequestration, the automatic across-the-board spending cuts that took effect at the beginning of March. In a letter last month, acting Commerce Secretary Rebecca Blank wrote that sequestration would force the agency to delay the economic census, the once-every-five-years survey that forms the basis for a wide range of economic indicators from gross domestic product, or GDP, to unemployment. Blank described the move as “putting at risk our ability to take accurate stock of current economic conditions and well-being and potentially impacting policymaking and economic decisions in the private sector.”

It’s unclear exactly how the Census Bureau will actually deal with sequestration now that the cuts are beginning to take effect. Blank’s letter also mentioned reducing contract work, letting open positions in the census workforce go unfilled, and potentially delaying or canceling tests of new methodologies for conducting the decennial census—tests that are necessary to implement cost-saving measures in 2020.

Delaying the release of data from the economic census is a problematic proposition at a time when Congress is potentially planning to address large-scale economic issues such as comprehensive tax reform. The most recent economic census data date to 2007, before the Great Recession. “We have one of the fastest-moving economies in the world,” said Phil Sparks, co-founder of the Census Project, an advocacy group for local governments, businesses, and other census advocates in an interview with The Huffington Post. “To have data that is this dated and dog-eared, we’re just tying one hand behind our backs economically.”

The economic census isn’t the only Census Bureau survey that directly impacts government and business decision making. Data collected in the much-maligned American Community Survey help direct more than $400 billion in federal money to states and localities each year. Highway planning and construction, special education, Section 8 housing assistance, and transit grants are among some of the program areas where ACS data guide state-by-state spending.

“We already suffer too much from what might be referred to as ‘policymaking by anecdote,’ where lawmakers seek to pass legislation before sufficiently examining the severity—or sometimes even the existence—of a perceived problem,” American Enterprise Institute scholar Andrew Biggs said in 2012 testimony before the House Oversight and Government Reform Committee supporting the American Community Survey. “Reducing the quantity and quality of data available to policymakers, analysts and researchers threatens to exacerbate this problem.”

Cutting the Census Bureau budget today means a more expensive count in 2020

While the census gets the spotlight during the year of the decennial count, the Census Bureau is far from idle during the rest of the decade. In addition to running surveys such as the economic census, the Current Population Survey, and the American Community Survey, the early and middle parts of the decade give the agency time to analyze on the recently completed decennial survey and begin planning for the next population count.

This planning period is critical if the Census Bureau is to counteract the rising cost of counting each household. In 2010 it cost $96 per household to conduct the decennial survey, up from just $39 in 1990. Absent actions to control the cost of the count, the 2020 census could cost as much as $25 billion overall, according to the Government Accountability Office. That’s a 92 percent increase from the Census 2010 price tag of $13 billion.

The Census Bureau has pledged to keep the cost of counting each household from rising in the 2020 decennial census. In order to do that, the agency will need to design and pilot programs and statistical methods that could save money on the decennial count, and they will need to launch those pilots in the next few years in order to be ready for 2020. Budget cuts today could doom the potential for offering an Internet response option for the decennial count. This option allows households to reply to the census online, cutting printing, labor, and mailing costs considerably. In addition, some Census Bureau tests have shown that the Internet option also boosts the initial response rate of households, which reduces the need to hire door-to-door canvassers to follow up with nonresponding households. Budget cuts could also prevent the Census Bureau from finding cost-effective ways to use administrative records—data collected by other agencies through things such as tax records and benefit claims—while preserving individual privacy and survey accuracy during the 2020 count.

The Census Bureau simply will not be able to deploy potentially cost-saving methods in the 2020 decennial census if they do not have adequate time and resources to field test those methods well in advance. As a result, the population count could wind up costing billions more than it needs to cost.

Without being able to test these new approaches, the Census Bureau in the later part of the decade will have only two choices: ask Congress for more money to conduct an accurate count, or diminish the quality of the survey. The Census Bureau doesn’t want either of these outcomes, and both possibilities could easily be avoided if Congress adopts a more long-term view of the census budget.

The deficit hawks in Congress should take note. Not all budget cuts are created equal; accurate and timely data on the economy, the demographic composition of the population, and socioeconomic measures are necessary for efficient government and data-driven decision making. These are compelling reasons why policymakers should protect the Census Bureau’s budget.

The debate over the American Community Survey is more about messaging than governing, and will have real-world consequences 

For 150 years a long-form census was distributed to a sample of the population as part of the decennial census process. The survey asked a range of detailed questions about everything from housing characteristics to how respondents commuted to work in order to guide federal policymaking. After the 2000 census the Census Bureau transitioned the long-form census from a decennial count to a continuous sample survey, which is conducted on an ongoing basis to provide more current socioeconomic data. This is the American Community Survey, an annual exercise that provides policymakers, researchers, and businesses with granular, real-time information about our constantly changing nation.

In 2012 the Republican-controlled House voted first on an amendment to make responding to the American Community Survey voluntary rather than mandatory, which would make the survey less accurate and much more expensive to administer, as more manpower would have to be devoted to following up in person or by phone with nonresponsive households. In the same debate, the House voted on another amendment to defund the survey entirely, claiming that it was unconstitutional. The Senate didn’t take up either proposal, and the American Community Survey was preserved.

But Rep. Ted Poe (R-TX) and Sen. Rand Paul (R-KY) have now introduced new legislation concerning the American Community Survey. Much like the 2012 amendment, the legislation would make ACS response voluntary. But it goes further than that. First, it would require the Census Bureau to explicitly note in the survey instructions that responding to the bulk of the form is not mandatory. Second, it would bar the Census Bureau from asking questions related to religious affiliation or practice. Because the agency is already prohibited by law from asking these questions, an amendment such as this would merely waste congressional time and resources.

Poe claimed in a press release that the survey is “intrusive” and that he hears from “countless Texans” who “feel intimidated” by the survey. In last year’s floor debate over defunding the American Community Survey, Iowa Republican Steve King summed up his support for the amendment to defund the survey, saying, “I think it’s important to have the information, but it’s important that people have freedom and liberty and we do not have an intrusive federal government that would impose a fine on people if they didn’t let the information come out about whether they had a flush toilet.”

Every question asked on the American Community Survey, however, must have a direct federal purpose. Housing questions, for instance, are used to determine fair market rents for housing-assistance programs, while questions about educational attainment and household income are used to help direct federal education dollars to low-income areas. The Census Bureau provides extensive information on its website about how the government uses the data collected. A 2010 analysis found that seven of the questions in the American Community Survey have been asked in every long-form census since 1850.

Businesses also use ACS data in a range of decisions, including where to build new stores. In a Bloomberg Businessweek story about last year’s attempt to defund the survey, the Chamber of Commerce’s chief economist, Martin Regalia, is quoted as saying that the survey “is especially important to some of our bigger members for trying to understand geographic distinctions and other granularity in the economy.” Tom Beers, the executive director of the National Association of Business Economists, said that ACS data prevent businesses from “flying blind.”

Simply put, there is no valid policy motivation behind legislation to make the American Community Survey voluntary. Not only is the Census Bureau already barred from asking questions related to religious affiliation or practice, but making the American Community Survey voluntary would also raise costs and make the results of the survey less accurate. We need only look to our neighbors to the north for evidence that voluntary censuses don’t work.

Canada conducts a short- and long-form census every five years, and after the 2006 count, the conservative Harper government made responding to the long-form survey—but not the short-form survey—voluntary. Canada is the only country to have made part of its census process voluntary, and the results are staggering. In 2006, when the long-form census was last mandatory, Statistics Canada, our neighbor’s Census Bureau equivalent, saw a 94 percent response rate. In 2011, when that same survey was made voluntary, the response rate dropped to just 69.3 percent. What’s more, the survey cost about $30 million more than its predecessor because Statistics Canada increased the sample size in an attempt to maintain data reliability.

The Census Bureau produced a report on the expected costs of a voluntary American Community Survey following last year’s attempts to defund it. They found that maintaining the current level of data reliability if the American Community Survey became voluntary would require a larger sample size and, ultimately, a bigger price tag—about $90 million higher in 2013.

Since the policies proposed in this legislation would be actively detrimental to the American Community Survey—or outright illegal—the astute observer is forced to conclude that the legislation is more about messaging than it is about governing.

Conclusion

The Census Bureau needs champions. When the House voted last year to defund the American Community Survey, business groups and researchers on both sides of the political spectrum spoke out in passionate defense of the survey’s purposes and the Census Bureau’s professionalism. But that broadside was just clearly the beginning of challenges to the agency’s ability to gather and publish data on the well-being, population, and socioeconomic status of the nation—data essential to the effective functioning of our government and our economy.

Kristina Costa is Speechwriter to the Chair of American Progress. She also conducts research and writes on social impact bonds and other topics in government reform. 

SOURCE: AP/David Goldman

Kathleen Watson is photographed outside Shands Lake Shore Hospital, where she receives her cancer treatment and also picks up patients for her medical transport company, Monday, May 14, 2012, in Lake City, Florida.

Author’s note: On Capitol Hill “sequestration” may mean a percentage point or two in lower gross domestic product growth, but beyond the Beltway, it is more than just an abstract economic concept; it means real pain for real people.

Each week in our “Sequestration Nation” series, we will highlight examples of the many ways in which the federal budget cuts may hurt you and your neighbors. This week we explore sequestration’s devastating impact on elderly cancer patients who depend on Medicare for treatment, as well as some of the other impacts it is having around the country.

In case you didn’t know, April is National Cancer Control Month. Ironically, though, as of April 1, the government began doing less to control cancer. As part of sequestration, the government began reducing funding for a specific portion of the Medicare program that is critical to cancer patients.

As The Washington Post recently reported, legislators intended to partially shield Medicare from sequestration by limiting reductions to the program to 2 percent, as opposed to the 7.8 percent cuts faced by most other programs. This 2 percent cut, however, will fall heavily on cancer patients enrolled in Medicare. For John Peterson, a cancer patient at Texas Oncology, this cut could be a serious burden. “I have a lot of exotic drugs that we have Medicare pick up the cost or we almost can’t afford to do it and it’s been a life saver,” said Peterson.

Because oncologists can’t change the cost of the drugs they purchase, the entire 2 percent reduction must come out of overhead costs for storing and administering the medicine. For drug treatments for cancer, which can run up to $15,000 for a full course, a 2 percent funding reduction can be a significant strain on the clinics offering these services. According to Ted Okon, director of the Community Oncology Alliance, “The costs don’t change and you can’t do without it. There isn’t really wiggle room.” Put more bluntly, Ralph Boccia, director of the Center for Cancer and Blood Disorders in Bethesda, Maryland, states that, “When I look at the numbers, they don’t add up. Business 101 says we can’t stay open if we don’t cover costs.”

Clinics that are able stay open will likely only be able to do so by drastically reducing the number of patients they currently see. In response to the funding cut, North Shore Hematology Oncology Associates in Long Island, New York, recently announced that one-third of their 16,000 Medicare patients would have to seek treatment elsewhere. Hospitals may be able to pick up some of the slack caused by private clinics dropping cancer patients; it is, however, far from clear whether they have the capacity to fully meet the increased need. This means that cancer patients may have simply nowhere to turn in their battle against the illness.

What’s even more galling is that patients who are fortunate enough to find a nearby hospital to treat them will need to pay more, according to the actuarial firm Milliman. The firm found that Medicare patients paid an average of $650 more per year when they received cancer treatment solely from hospitals. This increased cost is one that many patients may not be able to handle. Cancer patient Helen Jeton-Mantooth of Arkansas knows “people that because they can’t afford their medications just don’t take them … and they wind up dying.” The Milliman study also found that the federal government faces increased costs, paying an average of $6,500 more per year for cancer-patient care in a hospital versus a community clinic. Due to the government’s recent attempt to save money by cutting Medicare, some cancer patients will be left out in the cold—and the government may actually end up paying for it down the road.

For elderly cancer patients involved in traditional treatment programs, sequestration will be a heavy load to bear. For those involved in clinical trials, however, the situation is even more dire. Because clinical trials for cancer treatment involve the development of experimental drugs, both facilities and individual patients must receive approval from the government and pharmaceutical companies to take part. As a result, the options for those patients who lose coverage could be severely limited. Rather than simply going to a nearby hospital to receive traditional chemotherapy, participants in clinical trials might in some instances have to travel across the country to find another approved facility that will enable them to continue their participation.

Cancer patients often take part in clinical trials as a last resort. The way Devin Goodman, an administrator at Glacier Oncology in Kalispell, Montana, sees it, “If they are on a clinical trial they are on the end of their rope. They don’t have energy or resources. This is it for them. To put that burden [of higher costs] on them is really absurd.”

The 2 percent reduction in Medicare services that cancer patients face is precisely the kind of blunt and indiscriminate cut that the Obama administration and Congress warned were on the way. As a result, some cancer patients will not receive treatment, clinical trials vital to ultimately finding a cure for cancer will be hampered, and the government may have to pay even more money when everything is said and done. The irony of sequestration’s negative impact on cancer treatment during National Cancer Control Month is painful, and for some elderly cancer patients, it could also be deadly.

Sequestration is having similarly negative impacts on individuals and situations across America. Below are just a few of the many examples.

Gilroy, California
Some of the most painful sequestration cuts are being felt by low-income families receiving federal housing assistance. Those in areas where the cost of living is high are particularly vulnerable to the loss of housing subsidies. Take 81-year-old Verna Hayden, for example, who is a resident of the San Francisco Bay Area. “They should be in our shoes for just one week to see how we’re doing our best to make ends meet and how losing even a little bit will hurt someone like me,” said Hayden. The Santa Clara Housing Authority will lose $21 million due to sequestration, resulting in up to 1,000 households losing their subsidies in one of the most expensive rental markets in the country. Alicia Diaz fears what sequestration might mean for her and her two children. “I probably would be homeless,” said Diaz. “I don’t understand why they’re cutting something that helps working people like me.”

Stoughton, Massachusetts
For many high school seniors, Advanced Placement, or AP, exams are an integral step toward academic success in college. According to Stoughton Public Schools Superintendent Marguerite Rizzi, “Sitting for Advanced Placement exams is a way to ensure acceptance in more prestigious colleges and can even reduce the cost of a college education.” Unfortunately for low-income Stoughton students, sequestration has resulted in the immediate suspension of a program that subsidizes the $89 cost of each exam for students whose families qualify for the Free and Reduced Lunch Program. Sequestration will rob these students of a chance to seek better academic opportunities that could one day help to lift them and their families out of poverty.

Cedar Rapids, Iowa
Joe O’Hern, Cedar Rapids’ executive administrator of development services, told The Gazette that following the 2008 record floods that devastated Cedar Rapids, “A promise was made to the people of Iowa to help them recover.” That promise amounted to significant federal funding to help Cedar Rapids build flood-protection infrastructure. Officials and residents in Cedar Rapids now believe, however, that sequestration could cause the federal government to renege on that promise. Due to budget cuts to the U.S. Army Corps of Engineers, significant portions of the $9.3 million in federal funding for the project are at risk. According to Ron Fournier, an Army Corps official, “If we don’t get any money for ongoing engineering and design work, there won’t be any work. Right now, there’s no funding.”

New York, New York
U.S. District Judge Lewis Kaplan recently expressed his exasperation that sequestration will delay the terrorism trial of Osama bin Laden’s son-in-law. “It is extremely troublesome to contemplate the possibility of a case of this nature being delayed because of sequestration,” said Kaplan. As is the case with judges around the country, Judge Kaplan is faced with the possibility of delaying criminal prosecutions due to furloughs for federal public defenders. The trial of bin Laden’s son-in-law, Sulaiman Abu Ghaith, which Judge Kaplan had hoped to begin in September, may now be delayed until 2014.

Columbus, Ohio
The award for the most novel approach to dealing with budget cuts to the offices of federal public defenders goes to Steve Nolder, the now-former director of the Federal Public Defender’s Office for the Southern District of Ohio. In response to forced cuts to his office’s budget, Nolder fired himself. According to The Columbus Dispatch, after considering all other options, Nolder came to the conclusion that there simply wasn’t enough fat to cut. “We can’t furlough our way out of this situation,” said Nolder. Ultimately, the decision came down to saving his job or the jobs of his attorneys. He chose to help his employees, but it is a shame that sequestration forced him to make the decision at all.

Kwame Boadi is a Policy Analyst at the Center for American Progress.

SOURCE: AP/ Charles Dharapak

President Barack Obama, accompanied by acting budget director Jeff Zients, speaks about his proposed fiscal 2014 proposed budget, April 10, 2013, in the Rose Garden at the White House in Washington.

President Barack Obama’s budget proposal for fiscal year 2014 would eliminate $39 billion of special tax breaks for Big Oil companies over the next decade as part of comprehensive business tax reform. These companies earned billions of dollars in recent years due to high oil and gasoline prices and do not need additional support from taxpayers. These tax breaks emerged over the past 100 years to help the then-nascent industry develop, and they relieved the oil and gas industry of $466 billion in tax payments to the federal treasury between 1918 through 2009, according to DBL Investors. Now that the oil and gas industry is fully developed and mature, President Obama’s budget would end this century of largesse.

The five largest oil companies—BP, Chevron, ConocoPhillips, ExxonMobil, and Shell—earned a combined total of $255 billion in 2011 and 2012, largely a result of higher oil prices. Meanwhile, these companies are producing less oil, have $72 billion in cash reserves, and are using one-quarter of their profits to buy back their own stock to enrich their largest shareholders. (see Table 1) Reuters reported last year that Chevron, ConocoPhillips, and ExxonMobil—the three largest American oil companies—paid half or less of the standard corporate tax rate. President Obama’s budget recognizes that oil companies no longer need tax relief.

In contrast, the House of Representatives would continue to provide tax subsidies for one of the richest industries in the world. It passed an FY 2014 budget authored by Rep. Paul Ryan (R-WI) that retains these existing special tax preferences and provides yet another tax break on top of them. What’s more, the House budget cuts the corporate tax rate by nearly one-third, which would provide more than $2 billion annually in additional tax relief to the five largest oil companies.

The American Petroleum Institute, or API, serves as Big Oil’s lobbying arm and is spending tens of millions of dollars on ads and lobbying to pressure Congress to retain these special tax breaks. API equates eliminating special tax breaks with tax increases, when in actuality such legislation would simply make Big Oil pay its fair share of taxes. Economists recognize that tax breaks are simply federal government spending through the tax code, which also contributes to the budget deficit.

Donald Marron, the director of the independent nonpartisan Washington research group Tax Policy Center, explains that “a great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences—preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise.”

Many influential conservatives also understand that tax expenditures have the same budgetary impact as direct government expenditures. Martin Feldstein, for instance, who chaired the Council of Economic Advisers under President Ronald Reagan, notes that tax expenditures are “those features of the tax code that are a substitute for direct government spending.” And in 2010 Rep. Dave Camp (R-MI), the current chair of the House Ways and Means Committee, observed that:

… we must admit that not all of that spending has been through increased appropriations or expanded entitlements; much of it has been through the back-door proliferation of “tax expenditures”—provisions that technically reduce someone’s tax liability, but that in reality amount to spending through the tax code.

The House-passed Ryan budget would keep existing special tax breaks and give Big Oil additional tax cuts, while also slicing vital middle-class programs, including education, science, and infrastructure. Meanwhile, President Obama’s proposal to eliminate $40 billion of special tax breaks for Big Oil as part of comprehensive business tax reform would make the tax code more fair.

Daniel J. Weiss is a Senior Fellow and the Director of Climate Strategy at the Center for American Progress.

SOURCE: AP/Matt Rourke

Government workers, supporting union members and activists, protest against the across-the-board federal spending cuts called sequestration at Independence National Historical Park, Wednesday, March 20, 2013, in Philadelphia.

Make no doubt about it: The impacts of sequestration are real.

Not only will the broader U.S. economy be negatively affected by the $1.2 trillion in federal budget cuts, but in 2013 alone communities large and small will face a total of $85 billion in cuts. Every day, people across America are starting to see how sequestration may affect their quality of life, safety, and ability to get ahead.

Sequestration means a parent may be unable to work because the Head Start program is no longer available for their children. Sequestration means a student may find it harder to earn a college degree and pursue the American Dream. Sequestration means a scientist may forgo critical research at a time when America faces increasing competition from other countries. And sequestration means a local firefighter may have fewer resources to respond to emergencies.

In Washington, D.C., sequestration may mean a percentage point or two in lower gross domestic product growth, but beyond the beltway sequestration is not some abstract economic concept. It means real pain for real people.

Each week in our “Sequestration Nation” series, we will highlight examples of the many ways the cuts may hurt you and your neighbors. This week we explore issues ranging from the possible effects on one 94-year-old woman in Indiana who relies on Meals on Wheels, to the effects on food and car distributors in southern California.

Check back each Monday to learn more about the ways in which sequestration is harming neighborhoods across the country—perhaps even your own.

South Bend, Indiana
Seniors such as 94-year-old Dorothy Zmyslo depend on Meals on Wheels programs to deliver food five days a week. Yet according to local TV station WSBT, thanks to sequestration Dorothy may be forced to explore other options, of which she seems less than assured. “My kids can probably give me food, they live 25 miles away from me,” said Zmyslo. “I think somehow or another they would manage. But I don’t know.” Zmyslo is one of 300 people that REAL Services of St. Joseph County delivers meals to each day. But due to an expected 10 percent decrease in funding, up to 30 local seniors may have to make other arrangements.

Port Hueneme, California
According to the Ventura County Star, sequestration recently resulted in more than 100 dockworkers in Port Hueneme sitting idly as they endured cargo-inspection delays; a shipment of cars had to wait for U.S. Customs and Border Patrol inspectors to begin work. “I have to hire the labor and pay them while I wait for customs to clear the vessel,” said Chuck Caulkins, a port manager for Del Monte. He expects his fresh produce ship will be held up because it has been scheduled outside the CBP’s normal workday. Distributers recognize the ripple effects of these interruptions: Every minute of delay adds up to big bucks for the businesses relying upon shipments. These disruptions may only get worse, as CBP estimates budget cuts could result in cargo-inspection delays of up to five days.

Emmaus, Pennsylvania
After returning from the Iraq War, veteran Michael Hoffman had difficulty securing work. Fortunately, he was able to rely on government services such as unemployment benefits and job counseling, according to The Morning Call. Unfortunately, these are just two of the government services on the chopping block. Because the Department of Veterans Affairs is not impacted by sequestration, the irony, according to Hoffman, is that “people think we are immune from the cuts.”. In reality, the opposite is true. Services that address substance abuse, mental health, and homelessness—issues that disproportionately affect war veterans—all face reduced funding, leading Dr. Jonathan Woodson, assistant secretary of defense for health affairs, to express “concerns over the long-term capability to provide mental health care to the force.”

Lexington, Kentucky
Sequestration could not have come at a worse time for families affected by Alzheimer’s disease. “We need to find a cure for Alzheimer’s,” said Dr. Gregory Jicha, clinical director at the University of Kentucky’s Alzheimer’s Disease Center. Local TV station WTVQ reports the national cost of the disease will balloon from $200 million this year to more than $1 trillion by 2050. But the University of Kentucky’s Alzheimer’s center would “cease to exist” were it not for federal funding, some of which could be cut by sequestration, according to Dr. Jicha. As more baby boomers become seniors, the government needs to devote more, not fewer, resources to finding a cure.

Washington Township, New Jersey
Thanks to sequestration, fewer children in Morris County, New Jersey will be able to enroll in Head Start, according to the Long Valley Patch. Eileen Jankunis, executive director of the county’s Head Start Community Program, believes “the effect of these cuts would be felt when our students enter public school” because of the additional spending that will be required in the future on programs such as English as a second language. Morris County will turn away 7 percent to 14 percent of its current enrollment due to $113,000 in reduced funding, a fact that troubles Rep. Rodney Frelinghuysen (R-NJ). “I view potential budget cuts to such an important program as another reason why sequestration is a bad idea,” said Rep. Frelinghuysen.

Kwame Boadi is a Policy Analyst at the Center for American Progress.

SOURCE: AP/Mark Lennihan

Signs for MasterCard and Visa credit cards are shown at the entrance to a New York coffee shop in 2005. Millions of Americans are now turning to prepaid cards to help them manage their finances, and regulations need to evolve in order for cards to best serve consumers.

Endnotes and citations are available in the PDF version of this issue brief.

* Correction, April 9, 2013: The paragraph referencing JPMorgan Chase’s partnership with the state of Louisiana has been updated for purposes of accuracy.

March 1, 2013, marked “the end of cash” for the U.S. government. Starting on that date federal payments such as Social Security, Supplemental Security Income, also known as SSI, veterans’ benefits, and retirement benefits for federal employees were, for the most part, no longer available in check form, and instead were only made available electronically.

In other words, beginning in March, most new recipients of federal government payments no longer receive paper checks. This move is expected to save the federal government $1 billion over the next 10 years. Not only are electronic payments often less expensive to process than paper checks, but they can also reduce the potential for fraud and can provide more flexibility to recipients, according to the Government Accountability Office.

In practical terms, this means that recipients of federal payments have two options: They can elect to receive their payments by direct deposit to a bank account of their choice, or they can use a government-issued prepaid card called the Direct Express Card. This is an easy decision for the vast majority of Americans, given the fact that they have had bank accounts their entire lives and just need to set up direct deposit. But for the millions of adults in America who do not have bank accounts, including seniors and the poor, this is a much tougher choice. These individuals can open an account at a bank or credit union, or they can go with the Direct Express Card. Consumers also have the option of switching to another prepaid card if it meets certain requirements.

The federal government’s shift to the Direct Express Card is part of a broader trend toward electronic transactions replacing cash and paper checks. Beginning in 2003 more electronic payments were made in the United States than check payments. Even environments where one would expect cash to be more prevalent such as on airplanes or at tollbooths, the switch has been made to electronic payments. Major airlines have shifted to “cashless cabins,” requiring credit or debit cards for onboard meal purchases. Several states now have toll roads that rely solely on electronic payments instead of cash. Even the U.S. Treasury itself began moving away from cash several decades ago, when the iconic Cash Room—a two-story marble hall in the Treasury building where government checks could be cashed—closed in 1976.

The Federal Deposit Insurance Corporation, or FDIC, estimates that there are approximately 17 million adults in America who do not have a checking or savings account. They are known collectively as the “unbanked” population, which makes up about 8 percent of all American households. An additional one in five households in the United States are “underbanked,” meaning that they have bank accounts but also use nonbank financial services such as check cashers and pawn shops.

Many populations most affected by the shift to electronic payments have much higher rates of being unbanked, according to the FDIC. Nearly 1 million households ages 65 or over are unbanked, and another nearly 3 million are underbanked. About 8 million American households earning less than $30,000 a year have no bank account, and another nearly 10 million are underbanked. Thirty percent of households earning less than $15,000 a year are unbanked, as are 22 percent of all unemployed people. Nearly 45 percent of unbanked households previously had a bank account, while others have never used banks or credit unions in their lifetimes.

Without bank accounts, the unbanked have traditionally relied on cash-based financial services such as check cashers, money orders, and in-person bill payment to handle their transaction needs. But the federal Direct Express Card is part of a new wave of prepaid cards that can bring millions of unbanked Americans into the financial system while providing tremendous benefits, including the ability to make purchases without carrying cash; saving money and time by avoiding check cashers and money orders; paying bills electronically; getting cash from automatic teller machines, or ATMs, and merchants; and living financial lives much akin to their counterparts who have bank accounts and debit and credit cards.

For an increasing number of Americans, prepaid cards are already a familiar product. Currently, 41 states and the District of Columbia use prepaid cards to distribute unemployment benefits. Several states also use prepaid cards for tax refunds, although for the time being federal tax refunds are still distributed by check. Moreover, in recent years both traditional brick-and-mortar banks and alternative prepaid card providers such as GreenDot and NetSpend have sold millions of prepaid cards to consumers. About 3 million people without traditional bank accounts now manage their money with prepaid cards. And according to the FDIC, fully 27 percent of households that once held bank accounts but don’t anymore used a prepaid card in 2011—and that number is steadily growing. What’s more, competition and innovation in the prepaid-card market has meant new features and decreasing fees, making the product even more attractive to consumers.

That is not to say, however, that prepaid cards are free of pitfalls, including some that carry high fees. Most notoriously, in 2010 the fee-laden “Kardashian Kard”—which had an upfront fee of at least $59.95, a minimum fee of $1.50 for every ATM withdrawal, and a fee of $1.50 for live customer service—was quickly pulled from the market after the celebrities themselves, the Kardashian sisters, withdrew their support. Products on the market today have improved, but it is still possible for the users of these types of cards to be nickel-and-dimed on fees.

Federal regulators such as the Consumer Financial Protection Bureau and the FDIC have a role to play in ensuring that an expanding prepaid sector for both government and private cards ultimately serves consumers’ needs. These agencies should take actions to ensure that prepaid cards are safe, affordable, and transparent, and that consumers know how to use them wisely. They should also propose and enforce minimal standards for state-government-issued cards that are similar to the federal government’s Direct Express Card. And as prepaid cards increasingly resemble bank accounts, regulators should look to treat them the same way.

This issue brief examines the growing role of prepaid cards in the economy, the various types of prepaid cards on the market, and the potential benefits and drawbacks of a growing prepaid sector.

The potential for prepaid cards among the unbanked population

Since 2009 the FDIC has asked Americans nationwide about their banking habits as part of the U.S. Census Bureau’s Current Population Survey. Under a 2005 law, the FDIC is required to conduct ongoing surveys about unbanked consumers and banks’ efforts to reach them. The latest National Survey of Unbanked and Underbanked Households estimated that the number of unbanked consumers increased from 7.6 percent in 2009 to 8.2 percent in 2011.

Unbanked consumers need better financial options

According to the FDIC survey, unbanked consumers give several main reasons for not having bank accounts. About one-third of unbanked households—whether or not they have previously had an account—claim that they do not currently have a bank account because they do not have enough money. This is the most common reason given. The second-most common reason given—by 26 percent of households who have never had a bank account and 16 percent of the formerly banked—is that the consumer does not need or want an account. Other reasons given include that the consumer doesn’t like dealing with banks or doesn’t trust banks and that fees or minimum-balance requirements are too high. And about 15 percent of formerly banked households report that they either previously held a bank account that was subsequently closed by the bank or that they are unable to open an account due to identification, credit, or banking-history barriers.

Being unbanked has often meant that these consumers rely on cash-based financial products such as check cashers and money orders, which can have several consequences. One such consequence is that these products may cost more than having a bank account. Check-cashing fees may range from 1 percent to 5 percent of one’s paycheck or government-benefit check. Between 1987 and 2006 the cost of cashing a paper payroll check more than doubled, and the cost of cashing a Social Security check increased by 53 percent. Money orders, which can be used for payments in place of checks, cost $1.20 each for amounts up to $500 through the U.S. Postal Service; other money-order vendors may charge similar rates. Consider a low-income worker who is paid $700 every two weeks and needs to buy two money orders each month: With a 2 percent check-cashing fee, he or she would pay more than $30 per month just for financial services.

Beyond cost factors, being unbanked or underbanked may also leave families more vulnerable to loss. Consumers who rely primarily or exclusively on cash face the risk of theft. An analysis of payday lenders in the city of Seattle found that the presence of these alternative financial-services companies, which are often used by underbanked consumers, was associated with increased violent-crime rates, possibly because payday-loan recipients carry large amounts of cash on them. Moreover, without access to secure methods of saving money such as a savings account, unbanked consumers may have more difficulty coping with emergencies. Roughly half of all Americans at all income levels would “probably not” or “certainly not” be able to come up with $2,000 in 30 days to deal with an emergency, according to a recent nationwide survey by the market research firm TNS Global. This lack of financial security was a reality for about three-quarters of those earning less than $20,000 per year in 2009.

Prepaid cards can create a stronger financial relationship

In the early 2000s financial-services giants Visa and American Express launched some of the first prepaid cards—then called “stored-value cards”—to enable parents to set aside funds on a prepaid card for their teenage children to spend. These cards were more flexible and convenient than handling cash, and they enabled parents to track their children’s spending.

Since then prepaid-card use has grown rapidly, with the Federal Reserve reporting 1.3 billion general-purpose prepaid-card transactions in 2009. This is up significantly from the 300 million transactions that were made in 2006. Prepaid cards represent a more formalized financial relationship for unbanked consumers. Prepaid-card users have access to many of the same features as their counterparts with checking accounts, including withdrawing cash from ATMs, paying bills online by debit card, making electronic transfers between accounts, receiving direct deposits, and even depositing paper checks using a mobile phone. And prepaid cards have the potential to save consumers both time and money by avoiding the need to go to multiple retail outlets for their financial transactions.

The usage of prepaid cards has grown significantly among the unbanked. In 2009 only 12 percent of unbanked consumers used prepaid cards; by 2011 18 percent did. And among the previously banked—those who once had a traditional bank account but no longer do—usage increased from 19 percent in 2009 to 27 percent in 2011. This suggests that prepaid debit cards are being used as substitutes for traditional bank accounts. And contrary to the FDIC’s estimates of an increasing unbanked population, if prepaid usage is considered equivalent to having a bank account, the percentage of unbanked Americans remains constant at about 6.7 percent of all households. As the Center for American Progress noted in the fall of 2012, the FDIC should consider changing its definition of a bank account to include prepaid cards.

Clearly, prepaid cards can be a substitute for financial services such as check cashing and money orders that could be more expensive and less appealing. And the trend seems to indicate that prepaid cards and bank accounts are converging. The FDIC has even tested a model bank account for unbanked consumers known as a Safe Account that relies on a card-based structure.

A wide variety of prepaid cards exist

Consumers may carry several types of prepaid cards, each of which has slightly different regulations. The following are some of the more common types of prepaid cards:

Government-issued prepaid cards

Government-issued prepaid cards have been available for more than a decade both to access in-kind benefits such as the Supplemental Nutrition Assistance Program, or SNAP, and to replace cash. Forty-one states and the District of Columbia currently use these cards to distribute unemployment benefits. In 2012, six states used prepaid cards to distribute tax refunds. Cards receiving federal benefit payments have stricter regulations that make them more comparable to bank accounts. These regulations include mandating FDIC insurance to safeguard funds on the account, requiring either paper statements to show card activity or access to a 60-day written account history by request, as well as expanded consumer protections for lost or stolen cards.

Prepaid payroll cards

A growing number of employers issue prepaid cards—known as payroll cards—to workers who choose not to enroll in direct-deposit programs. One such employer is WalMart, which in 2009 began issuing payroll cards to its employees. Similar to government prepaid cards, payroll cards have regulations that are more comparable to bank accounts. The City of San Francisco has promoted model payroll cards to employers throughout the city through its CurrenC SF initiative, which encourages direct deposit but also sets minimum standards for participating cards. These features include no overdraft fees, no monthly or annual fees, and at least one free bank withdrawal and one in-network ATM withdrawal per pay period, as well as one free phone call to a live customer-service agent each month.

General-purpose reloadable prepaid cards

These cards are issued both by traditional brick-and-mortar banks and by other prepaid-card distributors such as GreenDot and NetSpend. These types of cards have been marketed as a way to properly manage spending and, in some cases, as a bank account substitute. Many, but not all, of these cards have FDIC pass-through insurance. In other words, even if the card provider is not an insured bank, the consumer’s card balance is insured through another bank that holds all deposits. Cards that can also receive government payments through direct deposit must be FDIC-insured and meet similar requirements as government and payroll cards, but they do not have restrictions on fees.

Gift cards

While prepaid cards are closely related to gift cards, most gift cards have more stringent consumer protections. They are not discussed in this brief. Cards that can only be used in one store or a set of related stores are considered gift cards, not general-purpose reloadable cards. Gift cards are subject to provisions in the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, including a ban on any fees within the first year, limitations on service fees after the first year, and restrictions on when funds can expire. Instead, some merchants now charge an upfront activation fee for their gift cards—an arrangement that is not always attractive to consumers. General-purpose reloadable cards must be marketed separately from gift cards, but they sometimes co-exist on store shelves, making it more difficult to distinguish one card from another.

The state of prepaid cards today

Despite their advantages for unbanked consumers relative to carrying cash, prepaid cards still have potential drawbacks when compared to bank accounts, as shown through the examination of products on the market in early 2013.

Not all prepaid cards facilitate access to cash

Free access to deposits on prepaid cards can be surprisingly difficult. State-distributed cards often rely on a single provider and its own branch and ATM networks. The ReliaCard—the card that Ohio uses to distribute unemployment compensation—is issued by USBank, which has branches and in-network ATMs across the state. But unemployed Ohioans in 33 of the state’s 88 counties have no USBank branches, and in 16 counties, there are no USBank in-network ATMs. The counties lacking USBank access also tend to be counties with the highest unemployment rates. Louisiana issues its state tax refund on prepaid cards issued by JPMorgan Chase, which offers branches in 23 of the state’s 64 parishes and free ATM access in another 33 parishes. But in the other eight rural parishes in Louisiana—similar to rural areas elsewhere—access can be challenging.*

According to the National Consumer Law Center, which recently reviewed states’ unemployment-benefit cards, 18 states with unemployment cards offer at least one free non-network ATM withdrawal per month, making benefit dollars available to consumers even in areas where network ATMs or branches may not exist. But other states make it difficult to regularly access cash for free. Tennessee’s card, for example, offers two free ATM withdrawals per month, but benefits are paid weekly. Moreover, in Missouri and Arkansas there is no way to withdraw funds from accounts for free at a teller, even though this is the only way to fully cash out and obtain the full amount left on the card.

Similarly, with general-purpose reloadable cards, cash access varies based on the network to which the card provider belongs. Consumers using cards issued by banks that have widespread branches and ATMs or that are in partnerships with national retailers may easily get cash for free in certain locations. But some cards do not have any in-network ATMs, and many general-purpose reloadable cards will charge as much as $2 or $2.50 for cash withdrawals at non-network ATMs, in addition to fees imposed by the ATM’s owner. RushCard users, for example, may be charged up to $2.50 for each ATM use—plus fees from the ATM’s owner—no matter which ATMs they choose.

Prepaid cards may impose fees for common services

While not an issue for government cards, which do not accept nongovernment funds, users of general-purpose reloadable cards may actually need to pay a fee when depositing funds on the card. This process is also known as “loading” funds. Reloading GreenDot cards at retailers, for example, may cost as much as $4.95 per transaction, although some cards offer free alternatives at certain merchants or bank branches. While having more retail locations where consumers can add money may provide added convenience, it comes at a cost.

General-purpose reloadable cards also often have monthly fees. These fees may range as high as $9.95, but they are waived in some cases if a minimum amount is loaded onto the card by direct deposit each month—often $500 or $1,000. Bank-account structures are increasingly similar, as fewer banks now offer free checking without conditions. Banks typically offer products with a monthly fee that can be waived if the account balance or direct deposits exceed a certain amount or if the consumer opts to forego certain features such as monthly paper statements.

Account information can also be hard to access for free. Many prepaid-card providers are successfully using technology to provide account information, offering features such as online account access and text alerts. But for consumers not using high-tech options, prepaid-card providers may charge customer-service fees for even basic information. Some prepaid-card customers will incur fees even to find out how much is left on the card at an ATM or through an automated phone line, and many cards charge to speak to a customer-service representative on the phone. Unfortunately, these less-than-consumer-friendly practices are not limited to general-purpose reloadable cards: Among unemployment-benefit cards, 22 states charge for some balance inquiries at ATMs, and six states charge for all balance inquiries, including inquiries made at in-network ATMs.

Some products have managed to provide lower costs to consumers

Among government-issued prepaid cards, Direct Express most closely resembles a model card. The card has no initial or monthly fees, and it offers one free cash withdrawal per month at more than 50,000 in-network ATMs. Direct Express also allows recipients to receive cash from bank tellers at no cost and offers free balance inquiries at ATMs and free customer-service phone calls. Monthly paper statements are available for $0.75, and recipients can be automatically notified when government direct deposits are made and when the account balance is low.

Similarly, California’s card for unemployment compensation received the highest ranking from the National Consumer Law Center for its lack of fees. Consumers can access cash for free through both in-network ATMs and—for up to four withdrawals per month—out-of-network ATMs, as well as bank tellers. Consumers using out-of-network ATMs, however, may still incur fees from the ATM’s owner. Balance inquiries and customer-service phone calls are always free. California, however, does not offer direct deposit for unemployment compensation, meaning that all funds must be routed through the card instead of giving consumers the choice to receive funds in their bank account—a choice that banked Californians would likely prefer.

Recently, some new entrants into the general-purpose reloadable-prepaid-card market have also approached fees differently, signaling a potential shift away from nickel-and-diming consumers. American Express’s Bluebird card, launched jointly with Walmart, has no monthly fees at all, but it charges for some services. And the Chase Liquid card takes a somewhat different approach, with a $4.95 monthly fee for all customers but free deposits and withdrawals at all Chase branches and ATMs. Offering more predictable fees may lead to stronger products in the future.

The future of prepaid cards

Despite promising advances, prepaid-card fees remain a serious issue. An analysis by the Pew Charitable Trusts of typical bank-account and prepaid-card customer costs found that bank accounts may often be more economical than prepaid cards, but this ultimately depends on how each financial product is used and which fees are incurred. Either way, these fees are likely to be far lower than what check cashers and other alternative financial providers may charge.

At the same time, fees remain only one distinction between prepaid cards and bank accounts. A regular bank-account customer may be able to obtain an affordable car loan, home mortgage, or other financial products by virtue of the banking relationship, and he or she may also be encouraged to open a savings account. It remains unclear whether prepaid-card customers will be able to graduate to other financial products in the same way that bank-account customers do. Some prepaid-card providers such as NetSpend now provide savings features through a linked account, but this is still not a common practice in the prepaid-card sector.

Moreover, prepaid cards have been used to evade consumer-protection laws designed to rein in predatory lending. In states where the practice of short-term, high-cost payday lending—making small loans for about two weeks at triple-digit annual interest rates—is banned, payday lenders have tried to use prepaid cards with overdraft features as a way to skirt state law. In September 2012 the Office of the Comptroller of the Currency challenged one bank for “safety and soundness” concerns after the bank was found to be issuing prepaid cards in this manner. While bank accounts have clear rules on overdrafts—and consumers need to affirmatively give banks the power to allow overdrafts and charge for them—these standards are still unclear for prepaid cards, despite what conventional wisdom suggests the word “prepaid” means.

In 2011 Sen. Robert Menendez (D-NJ) introduced S. 2030, a bill that would create a new regulatory category of prepaid cards known as “spending accounts” for most general-purpose cards, not including nonreloadable cards of under $250. Spending accounts would be required to have FDIC insurance, free access to account information, and paper statements at the cost of $1 or less. Additionally, the bill would ban fees at the point of sale, overdraft fees, declined-transaction fees, in-network ATM fees, inactivity fees, customer-service fees, and account-closing fees, among others. Overdraft and credit features would be banned as well. The proposed Senate bill would also require the Consumer Financial Protection Bureau to create standardized fee disclosures for consumers so that they are able to compare fees across cards. The bill did not make it out of committee.

In addition to government regulation, voluntary moves toward improved products have also taken place in the prepaid industry. The Center for Financial Services Innovation, an organization that tracks financial products for the unbanked, launched the Compass Principles in 2012, a blueprint that recommends a set of model practices that prepaid providers can follow to create stronger products. The four principles for prepaid providers are to “embrace inclusion, build trust, promote success, and create opportunity.” The organization has also proposed a model “fee box” based on lessons from other environments such as credit-card disclosures and nutrition labels. This fee box would both provide key information on fees and guide consumers to make better decisions when buying and using prepaid cards.

Recommendations

Prepaid cards of all stripes—government, payroll, and general-purpose reloadable cards—have evolved to meet consumers’ needs with lower costs and greater convenience than cash and traditional paper checks. But current market practices suggest that, in some circumstances, prepaid cards have a long way to go before they are truly affordable and effective bank-account substitutes. The following actions are valuable first steps to improving prepaid cards for unbanked consumers.

Revise and enforce minimum standards for all government cards using the Direct Express Card as a model

Government cards should be held to a higher standard to ensure that taxpayer-funded benefits ultimately go to recipients. This includes clearly stating fees, offering free account-balance information, and expanding free ATM access. Direct Express offers some of the strongest features of any government card, while some states’ cards fall short.States that contract with financial-services providers to issue cards should take into account available branch networks to ensure that benefits are not needlessly eroded by an array of fees. Furthermore, states should also offer a way to cash out the remaining balance on a card without a penalty. These standards must also maintain direct deposit as an option. As the National Consumer Law Center indicated in its latest report on state unemployment cards, five states do not offer direct deposit of unemployment benefits, forcing recipients to use a single card. This is illegal. Consumers cannot be forced to accept a certain card or account.

Offer comparable consumer protections for bank accounts and prepaid cards

Some bank-account regulations, including deposit insurance, access to account information, and protection for lost or stolen cards, already apply to government cards, as well as payroll cards. To create consistency across personal-banking products, these rules should also extend to all general-purpose reloadable cards.

Regulating prepaid cards as distinct from bank accounts runs the risk of creating loopholes for financial institutions. Consumer-focused regulations in general should reflect what financial products actually do, not the technicalities of who issues them or what legal status they hold. Requiring common consumer protections across prepaid cards and bank accounts not only suggests changes for prepaid cards but also offers an opportunity to modernize bank-account requirements as well.

Prepaid cards should have standardized, transparent disclosures

Before purchasing a prepaid product, consumers should be able to clearly understand the fees that prepaid cards may charge for common services such as adding money to the card and using the card at ATMs or in retail stores. This information should be available both on the card’s packaging and on the Internet so as to encourage consumers to make smart decisions. What’s more, these fees should be described in plain language, not financial industry jargon. “Loads” should not be used in place of deposits, for example, and “POS” should not be used to describe cash back at merchants. Consumers should also know about fees that can be collected by other companies as part of their card usage.

The fee box proposed by the Center for Financial Services Innovation is a valuable first step. Based on existing disclosures for credit cards and food labeling, the proposed fee box would include major categories of fees, as well as clearly spelled-out opportunities for consumers to reduce or avoid fees altogether.

Monitor advertising and statements by prepaid-card providers for accuracy and truthfulness

Some prepaid cards have been marketed as tools for “building credit,” even though their credit-building claims may be experimental or unproven. Moreover, some cards may even carry frivolous disclosures such as “free FDIC insurance,” even though consumers would not directly pay for deposit insurance. Similarly, prepaid-card packaging in retail stores often includes the statement “This is Not a Gift Card” to distinguish general-purpose reloadable cards from gift cards, yet both types of cards may be on the same display. Given these trends, regulators, including the Consumer Financial Protection Bureau and the FDIC, should consider requiring additional warnings to clearly indicate what these cards truly can and cannot do.

Prepaid card providers should add opportunities to learn more about using prepaid cards wisely

Managing money with a prepaid card may be different than handling cash or a checking account. The transition to a prepaid card may be challenging for some consumers, particularly for recipients of government cards who have been able to easily track expenses using cash in the past. One potential educational opportunity being tested with the Direct Express Card is the PayPerks initiative, which provides online financial education to customers with the potential for small cash prizes. If prepaid cards are truly intended to be a mainstream product, helping consumers be more informed about their cards is in all prepaid providers’ best interest.

Conclusion

Nearly four decades after the Cash Room closed at Treasury Department headquarters, federal and state governments and private businesses have moved away from cash and paper checks. In recent years prepaid cards have risen in popularity and importance, enabling consumers without bank accounts to benefit from the shift to electronic transactions from cash and participate in the financial mainstream. At the same time, however, not all prepaid cards are created equal. Improving consumer protections can bring prepaid cards closer to their bank-account counterparts, expanding access to safe, affordable, and transparent financial services for all Americans.

Joe Valenti is the Director of Asset Building at the Center for American Progress.

SOURCE: AP

A worker levels dirt for a light rail bridge construction project over the Willamette River in Portland, Oregon, Friday, October 5, 2012.

See also: Infrastructure Partnerships: Labor’s Evolving Experience by Bill Barnhart

Endnotes and citations are available in the PDF version of this report.

America’s infrastructure—its roads, bridges, water and sewer systems, energy grids, and telecommunications systems, to name a few—is outdated and is, in far too many places, crumbling due to lack of sufficient public investment. America’s construction workers faced levels of unemployment close to 14 percent in 2012, and our construction industry is experiencing lackluster levels of activity, as the value added by the industry in 2011 was still more than $100 billion lower than the prerecession high. And while public and private employee pension funds are confronting distressing levels of unfunded liabilities due to the most recent market crash and rising levels of retirement—with 90 percent of the pension funds that responded to a Wilshire Consulting survey reporting higher amounts of liabilities than assets—public pension funds and private funds managing union pensions have more than $4.5 trillion in assets. Any one of these indicators alone would signal deep economic distress. Together, they should be setting off alarm bells that new economic policies are needed. The Center for American Progress is calling for new federal policies that encourage responsible pension-fund investment in U.S. infrastructure projects because such policies can help reverse these negative trends and make a significant contribution to putting the economy on sounder footing.

The Center for American Progress estimates that all levels of government, together with the private sector, invest approximately $130 billion annually in energy, surface transportation, and water infrastructure. But the estimates also show that an additional $129 billion per year is needed for at least the next 10 years to repair and improve our transportation and water systems, dams and levees, and energy infrastructure, all of which are critical to supporting globally competitive businesses and a high quality of life in communities across America.

Private investment from sources such as pension funds cannot close this gap in infrastructure funding unilaterally. Nevertheless, it makes sense to find ways to accelerate private investment in infrastructure so that annual government appropriations can be directed to projects in which user fees or other dedicated revenues such as gas taxes or sales taxes and the expanded use of tolling—fees charged for the use of highway facilities—is not likely to be sufficient to repay investors. CAP estimates that at least $60 billion a year in infrastructure improvements could be financed with private capital, thereby relieving federal and state budgets of this upfront cost, although in some cases government appropriations may be part of the mix of funds used to repay investors over time. Even with a ready and eager pool of private investment capital, public policies that promote an increase in dedicated revenues are needed to generate the funds necessary to repay investors for their risk and effort.

Canada, Australia, and many of the EU nations are investing more in their infrastructure and modernizing it at a more rapid pace than the United States. A significant portion of this updating and expansion is being financed with pension-fund capital invested in projects through public-private partnerships, which give investors an equity stake in the infrastructure asset through a long-term lease—commonly known as a concession agreement—or through outright ownership. In some high-profile infrastructure projects overseas, U.S. pension funds are major investors. The largest public pension fund in the United States, the California Public Employee Retirement System, for instance, recently took a 12.7 percent equity stake in the London Gatwick Airport with a $155 million investment.

Pension funds are making these types of investments when opportunities align well with their investment-portfolio needs and can thus contribute to achieving fund solvency. Over the next decade investment consultants forecast that pension funds will invest $3.5 trillion in traditional infrastructure and what is termed “social infrastructure”—public buildings such as schools, government facilities, and hospitals. According to The Financial News, “the investments … in these funds … would build 170,000 new hospitals or pay for 73,000 miles of three-lane motorway, enough to circle the globe three times.”

This hefty level of investments represents a very small share of overall U.S. and international pension-fund investments. The Organisation for Economic Co-operation and Development, or OECD, estimates that less than 1 percent of pension funds worldwide are invested in infrastructure projects, excluding indirect investment in infrastructure via the equity of listed utility companies and infrastructure companies.

U.S. pension funds are much less active in infrastructure investment than their counterparts in Canada, Australia, and the European Union. In Australia, retirement funds, known as superannuation funds, are increasingly investing in infrastructure. While these Australian funds also struggle to find financially feasible domestic infrastructure projects in which to invest, their domestic market is maturing. An average of approximately 5 percent of their assets is invested in Australia, with some funds’ investment stakes in the double digits and representing as much as $80 billion available to invest in infrastructure. The question is: Why are U.S. pension funds less active in infrastructure investment than their international counterparts? What can be done to spur such investment in financially rewarding and publicly needed domestic infrastructure projects? This report highlights the key challenges that U.S. pension funds face in increasing transportation-related investments in roads, bridges, ports, waterways, airports, transit, and rail. It then discusses policy options that are aimed at reducing or removing these barriers.

One key factor in the relatively low level of pension-fund engagement in U.S. infrastructure investment is the existence of the robust tax-exempt municipal-bond market, typically referred to as the “muni market.” In 2012 this nearly $400 billion market offered states and localities easy access to low-cost capital for infrastructure projects. Municipal bonds are financially beneficial to investors with tax liabilities. Since pension funds are not taxable entities, infrastructure projects financed with tax-exempt debt don’t offer pension funds a financially attractive vehicle through which to make investment in U.S. infrastructure projects. That’s the reason pension funds don’t enter the muni market. Likewise, neither state and local governments nor quasi-governmental entities such as ports and airports need to engage pension investors because of the strength of the muni market.

Beyond the muni market’s effect of crowding out tax-exempt investors, where there are infrastructure investments in the United States that offer a competitive rate of return to pension funds, the funds themselves have confronted significant barriers to investments. These barriers include a lack of experience; lack of investment-review capacity; the paucity of opportunities for investments that align with pension-fund needs and expectations; a mismatch between infrastructure deal structure and size and pension-fund needs and obligations; an aversion to operational and headline risks where there is a possibility of negative publicity associated with the investment; and political conflict and uncertainty where the viability of an investment can become subject to legislative action.

One reason to address these barriers is that adding pension funds to the “investor table” increases the number of willing investors, which in turn increases the supply of capital, creating a healthier marketplace that can produce a lower cost for capital. In addition, engaging pension funds at the investor table can mean that there is an investor that will demand employment policies that will ensure that workers are well trained and well paid throughout the construction and operation of the projects. For these reasons, CAP believes that a strategy that increases pension-fund investment in infrastructure will contribute to increasing the pace of American infrastructure repair and improvement while boosting the likelihood that our projects are built by well-trained workers who can do high-quality work.

New federal and state policies and resources can address some of these challenges by helping make pension funds more knowledgeable of and comfortable with infrastructure investments. Options include policies that close the knowledge and capacity gap through education and training, increase investor confidence in the infrastructure sector, and boost the predictability of returns on such investments. Specifically, we suggest:

Closing the information gap to build experience

• Establish a national infrastructure bank that has the capacity to hire experts who can work with pension funds where investment needs align with infrastructure projects.
• Provide seed capital to launch a network of fee-supported nonprofit intermediaries that are not affiliated with any infrastructure funds or other private-investment vehicles to disseminate to pension-fund staff, trustees, and advisors expertise in pension and infrastructure investing.
• Support small working conferences where pension-fund managers and project sponsors work jointly on products, metrics, templates, and any other necessary documents or information that can enable pension funds to review projects according to their needs and give project sponsors a well-informed approach to seeking partnerships with pension funds.
• Establish an industry-standard group that would bring pension funds together to establish benchmarks for infrastructure investment and consider prudent fee structures for public pension funds investing in projects funded in part through tax credits, public grants, or publicly subsidized debt.
• Use the training capacity of the U.S. Department of Transportation to prepare state transportation departments to work in partnership with pension funds, including through the creation of templates for responsible contractor policies and clarification about what categories of projects are likely to be approved for private financing, as well as through clarification of state performance and the earnings expectations of private investors. Tap the expertise of the U.S. Department of Labor to increase the understanding of Employee Retirement Income Security Act-related requirements and the degree to which infrastructure investments meet those requirements for private-pension-fund trustees, managers, and advisors. Where further clarification is required, the Department of Labor should undertake releasing such guidance.

Increasing confidence in the soundness of infrastructure investments

• Fund a pension-trustee training institute that prepares materials for pension-fund fiduciaries and administrators that can build trustee understanding of infrastructure investment and separate the facts and myths about investments made in this sector. Charge the institute with creating tools to help trustees consider risks so that sound decisions can be made about the likelihood of financial or headline risks and the options for addressing these risks should they materialize.

Increasing the financial return to pension funds for investing

• Launch a new federally subsidized, taxable bond instrument that can offer pension funds sufficient return for debt investments in infrastructure. Enable infrastructure projects where pension funds are majority equity owners in order to tap the tax-exempt bond markets for the share of ownership under their control.
• Improve U.S. loan-guarantee and credit-enhancement options to improve protections available for projects in which pension funds are equity owners.

Ensuring that project financing is reliable and predictable

• Enable states to use tolling on all highway lanes where tolling is viable throughout the National Highway System.
• Increase the amount of dedicated and predictable federal revenues available for states to use to offer a reliable and competitive rate of return to investors.

This paper describes the current state of pension-fund activity in infrastructure investments in the transportation-related sectors, explains the barriers to mobilizing more pension-fund investment in the sector, and offers recommendations to address these challenges.

Donna Cooper is the executive director of Public Citizens for Children and Youth and was formerly a Senior Fellow with the Economic Policy team at the Center for American Progress. John Craig is a Research Assistant with the Economic Policy team at the Center.