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Connecticut’s $600 Million Plan to Narrow Wealth Gap: Give Kids Trust Funds

The idea behind baby bonds is to establish trust funds for children when they’re born, allowing the money to grow over time and then be accessed in young adulthood for wealth-building purposes like education, buying a home, starting a small business or saving for retirement.

 

(Bloomberg) -- A once-radical proposal to narrow the vast racial wealth gap and other economic disparities is poised to achieve a key milestone in the US: actual funding to put programs in place.

Connecticut Governor Ned Lamont and fellow Democrats in the legislature are about to announce a 12-year, $600 million deal to launch a baby bonds program for newborns starting in July. 

A proposed budget in Washington, DC, under consideration by the City Council also on Tuesday, would restore $54 million for a baby bonds program in the nation’s capital.

“We are celebrating. It was a little scary at times,” said Darrick Hamilton, the New School economics professor who developed the baby bonds proposal. “These ideas are getting momentum,” he said, driven by a wide political coalition that made “clear and plain the value of the program.” 

The idea behind baby bonds is to establish trust funds for children when they’re born, allowing the money to grow over time and then be accessed in young adulthood for wealth-building purposes like education, buying a home, starting a small business or saving for retirement.

Read more: A Once Radical Idea to Close Wealth Gap Is Actually Happening

Connecticut and Washington, DC, both approved the programs in 2021, and several other states have seriously considered the idea. But it’s been a challenge to find funding for the grants for each child, generally limited to babies in poorer families eligible for Medicaid.

The deal in Connecticut resolves a funding dispute between lawmakers and the governor, who had resisted borrowing money to pay for baby bonds. Legislators, led by members of its Black and Puerto Rican Caucus, had threatened to block the budget if the issue wasn’t resolved. 

To set up a $3,200 trust for each eligible baby born after July 1, it would have cost $600 million over a dozen years, plus an estimated $165 million in interest charges. Instead, under the deal, the state will devote $381 million upfront to baby bonds, which will be invested to provide long-term funding for the program.

“CT Baby Bonds has the potential to transform the future of our state by providing opportunity and economic resources to the next generation of young Connecticut residents, regardless of the financial circumstances of their families,” the state’s elected treasurer, Erick Russell, said in a statement. 

The treasurer’s office has estimated that, by investing the money, accounts could grow to roughly $11,000 or as much as $24,000, depending on when recipients access them. An estimated 15,000 babies born each year are eligible.

In Washington, DC, officials said a mistake in the budget process had stripped $54 million from the program. By restoring the money, the district would be able to hire a firm to invest funds for the program, which was supposed to be setting aside cash for each eligible baby born since October 1, 2021. 

Children were set to receive $500 at birth, then $1,000 each additional year that their parents’ income remains under a threshold of three times the poverty level.

“We didn’t have another broken promise” to vulnerable communities, said Hamilton, who now hopes Connecticut’s neighbor, Massachusetts, “is emboldened to go further,” along with other states. 

A task force convened by Massachusetts’ state treasurer recommended creating a program in a December report. Washington State’s legislature took a first step toward baby bonds last year, and legislators and officials in several other states have proposed similar efforts.

Many states are facing more difficult financial situations as the economy has cooled and pandemic-era funding dries up. These fiscal realities are why Hamilton ultimately envisions a federal baby bond program. 

“This is a tremendous leap forward toward the north star when the federal government eventually legislates this,” he said.

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