August 2007 Volume 20, Number 3 The Abell Report What we think about, and what we’d like you to think about Published as a community service by The Abell Foundation The Market Is Failing Low Wage Baltimoreans The “poverty premium” is as much as $3,000 a year in cost-of-living-- Everything from groceries, financial transaction, cars, home mortgages. Recommendations to help restore equality, and availability of goods and services. A Report by the Job Opportunities Task Force ABELL SALUTES: fter decades of decline, Balti- sumption choices, predatory business Preservation Maryland: more has taken a number of practices, and under-informed con- Apositive steps in recent years, sumers—all but assure that they’re pay- Making history a as officials and residents have pursued ing more overall. partner in economic the shared vision of a city that features These factors combine to keep fam- development strong neighborhoods and a diverse, ilies on a seemingly endless treadmill in growing economy, where families can which costs “snowball” as one extra “Historic preservation,” at least thrive and the path to upward mobility expense begets another. The inability to among many business development is well-marked and heavily traveled. pay a utility bill one day might necessi- types, has a bad name -- building-hug- But city leaders have yet to address a tate paying a fee to quickly cash a check gers lying in front of bulldozers, block- major obstacle blocking that path: low- the next, or to pay an extra hundred dol- ing progress. Preservation Maryland is wage individuals tend to pay more than lars to secure a loan in advance of a tax doing a lot to change that perception. their wealthier neighbors for a wide refund that might not come for another While the agency is in the business of range of goods and services, from gro- month. A family that can’t afford to buy saving buildings, it is also in the business ceries and financial transactions to cars and maintain a car must rely on public of making those same buildings impor- and home mortgages. transit; this makes conducting transac- tant factors in fostering community Over the course of a year, The Job tions too far from home time-consum- wealth; for starters, working to save the Opportunities Task Force estimates that ing and burdensome, and might lead the historic fabric of the West Side of down- low-wage Baltimoreans can pay as family to utilize higher-priced but more town as an unprecedented $1 billion has much as $3,000 more than their wealth- convenient neighborhood options. been invested within it—making history ier neighbors for equivalent goods and Consider the cost differential for a a partner in economic development. services. This “poverty premium” can range of goods and services purchased Long known as a caretaker of his- consume over 10 percent of a low-wage by two families over the course of a toric properties, the 75-year-old Preser- family’s total income. And every dollar year. The first lives in a neighborhood vation Maryland (PM) is today engaged that goes toward the poverty premium where median household income is less in broad-based strategies of grassroots is a dollar that cannot be saved or than $30,000 per year, uses a check- advocacy, outreach and funding. In 1997 invested in education, home ownership, casher, purchases a Refund Anticipation PM spearheaded the creation of the or retirement. Loan (RAL), and buys groceries at a Maryland Heritage Structure Rehabilita- The magnitude and specifics of small store nearby. The other lives in a tion Tax Credits, which, according to these added costs vary from one low- neighborhood where median household PM, is the city’s single most effective income family to another, depending on income is over $100,000, has a check- economic incentive for preserving and whether the family owns or rents their ing account at the bank with a monthly rehabilitating historic structures. Over home, owns a car or relies upon public charge, does not buy a RAL, and pur- $260 million in heritage tax credits has transit, or shops for food at a neighbor- chases the same groceries at a super- been received, leveraging over $1 billion hood corner store rather than a super- market. Both are homeowners and car in investment. market. But a number of systemic fac- owners, paying back loans for each. To help neighborhoods enjoy access tors—neighborhoods with limited con- Using approximations and the best and continued on page 8 continued on page 2 continued from page 1 Financial Services institutions are much less concentrated National data from the Survey of in the poorest neighborhoods of the Bal- most recent data available, the table Consumer Finances suggests that indi- timore metro area than in middle- below details how much more the low- viduals in the lowest quintile of the income communities. Their absence has wage Baltimorean might pay over the income distribution are considerably left a void that check-cashers and other course of a year. less likely to have bank accounts of any higher-priced providers of financial kind (75.5 percent) than the population services have moved in to fill. The Added Costs of Poverty as a whole (91.3 percent). In informal In addition, banks have failed to in Baltimore focus groups we conducted for this offer tailored products and services that Expense Annual report, most participants had bank would make it worthwhile for banks and Added Cost accounts, but complaints and misunder- their potential clients to do business standings about banking services were with each other. In the financial services Check Cashing $328 common. Thus, a sizable portion even of industry, low-wage consumers are Refund Anticipation Loan $100 those who do have nominal relation- known as the “fee-driven” market. As Mortgage Payment $817 ships with mainstream financial institu- this name implies, many banks seek to Home Insurance $136 tions may be closer in attitude and com- make this segment of the market prof- Energy $222 prehension of banking services to the itable through reliance on fees that can Auto Loan $83 “unbanked” than to wealthier individu- be difficult for a consumer without a Car Insurance $424 als who hold bank accounts and avail steady income to avoid. Groceries $704 themselves of other services banks offer. This approach might strengthen the bank’s bottom line in the short term, but TOTAL POVERTY According to the 2006 Brookings it neither builds a sustainable clientele PREMIUM $2,815 Institution report “From Poverty, Opportunity,” one reason why so many nor serves those who face snowballing *Details on how these estimates were low-wage Baltimore residents pay more of costs in trying to recover from steep calculated can be found in the Appendix than their wealthier neighbors for finan- charges for overdrawn accounts, of the full JOTF report. cial transactions is that the cheaper bounced checks, and other financial mis- mainstream options, such as banks and steps. The experience of San Francisco, a What could this extra $2,800 a year credit unions, are simply absent from city which makes a conscious effort to buy? A more reliable car, a year of more than two-thirds of low-income connect its “unbanked” residents to tuition at Baltimore City Community neighborhoods in the Baltimore metro mainstream financial institutions College, an interest-generating invest- area. In general, mainstream financial through the Bank on San Francisco ment in retirement, or part of a down payment on a home. Having to spend these dollars on necessities that are available to wealthier individuals for less represents a powerful barrier to eco- nomic advancement. This Abell Report sets out the partic- ulars of the poverty premium in Balti- more, focusing on four main categories: financial services, home-related expens- es, automobile-related expenses, and gro- ceries. We show how much more low- wage Baltimore residents are paying in each of these areas, and explain the mix of factors that contribute to the higher prices for these items. Finally, we offer an action agenda to make the market work for all of Baltimore’s communities. The Abell Report is published bi-monthly by The Abell Foundation 111 S. Calvert Street, 23rd Floor, Baltimore, Maryland 21202-6174 • (410) 547-1300 • Fax (410) 539-6579 Abell Reports on the Web: http://www.abell.org/publications 2 continued from page 2 even the most costly credit cards. Unfor- to prepare their own tax returns, partic- tunately, low-wage consumers often ularly as additional forms are required initiative, shows that when banks tailor have few alternatives. At some point, to file for the EITC. Most low-wage their products to the different needs and almost every family needs access to taxpayers, though, qualify for free tax expectations of this market, consumers short-term credit, whether to cover unex- preparation services; in 2007, the Balti- respond with greater demand. pected medical expenses, make ends more CASH (Creating Assets, Savings meet during a spell of unemployment, or and Hope) Campaign prepared more Alternative Providers pay for a car repair. While Maryland has than 7,200 returns free of charge at 15 The volume of business done by taken positive steps to protect consumers sites around the city. One priority for check cashers and pawnshops is from the most usurious practices, few local and state policymakers in unknown, but the concentration of these local businesses have stepped forward addressing the higher costs poorer Bal- stores in Baltimore’s low-income neigh- with competitively priced products to timoreans pay for financial services borhoods suggests that they serve a siz- serve the low-wage market.