Creating Wealth With ‘Baby Bonds’

When Efrem Fesaha first heard about baby bonds this spring, it made him think back to when he was 17 and a senior at Chief Sealth High School in West Seattle. He was the fourth of six children, his father had just died, and he wondered, “How am I going to fund my college?”

He had to think about transitioning from high school to college, figuring out financial aid, feeding and housing himself, and the economic straits of his family.

“As soon as I arrived on campus, I was at zero,” Fesaha said of his financial status.

Today Fesaha is a member of a philanthropy-funded Washington State committee that will study baby bonds, which would establish trust funds for children at birth so they accumulate wealth to use when they are adults. If such a program had been around to help him during his childhood, his perspectives as a teenager would have been a lot different. Not only would he have breathed easier knowing he had a nest egg but his hopes for his future during his modest upbringing would have had a firmer foothold.

That is why a growing number of nonprofits and foundations are working to advance baby-bonds programs. Nonprofits focused on economic equity, like Prosperity Now, have laid the groundwork for the current moment with such programs as children’s saving accounts, aimed at helping low-income families afford postsecondary education.

The Covid pandemic and intensified focus on racial justice have given nearly a dozen state and local governments the impetus to address racial economic inequalities. And nonprofits and foundations are backing the efforts of state treasurers and governors, or even leading the charge.

Eventually, proponents hope to see a federal baby-bonds program. The idea was central to Sen. Cory Booker’s presidential run and has been proposed by Booker and Rep. Ayanna Pressley in Congress.

Nonprofits have helped conduct research on the racial wealth gap, mobilized to educate both legislators and the public, and organized local groups in support of baby bonds — support that has not been difficult to find, as many parents immediately grasp the effect such programs could have on their children’s futures.

Notable efforts around the country include a Connecticut program that has been approved by the state legislature and is expected to launch in 2023. On the other coast, the Washington State Budget & Policy Center is working with other nonprofits to support proposed baby-bonds legislation.

Jeriel Calamayan, Courtesy of Efrem Fesaha

Up next, Prosperity Now is seeking new potential local champions of baby-bonds legislation. Meanwhile, economist Darrick Hamilton, the intellectual father of baby bonds — whose idea stemmed from a request from the Ford Foundation for ideas to address wealth inequities — is calling upon foundations to help fund studies to demonstrate its benefits.

All Eyes on Connecticut

As the first state to pass a baby-bonds program, Connecticut is serving as a real-world test case in a state with one of the largest racial wealth gaps in the nation.

Under the Connecticut program, championed by state treasurer Shawn Wooden and supported by nonprofits and local foundations, babies covered by the state’s Medicaid program born after July 1, 2023, will be automatically enrolled.

Each child will receive $3,200, which the state’s treasurer’s office will invest. When the child is 18, the funds, with a share of the trust’s earnings, can be used for postsecondary education, the purchase of a home in Connecticut, investment in a small business, or other wealth-building efforts.

“Folks that we engaged, everyday folks, understand how expensive it is to live in this state,” said Emily Byrne, executive director of Connecticut Voices for Children, a nonprofit with an annual budget of $1.7 million. “When we talk about these baby trusts with folks in the community, this is a concept they don’t need to be sold on.”

Connecticut Voices helped advance the baby-bonds policy by “building critical mass” along with other partners — community-based organizations, organized labor, foundations, elected officials, and Connecticut residents, Byrne said.

The Connecticut Urban Opportunity Collaborative, for example, a collective of three local foundations — the Hartford Foundation for Public Giving, Fairfield County’s Community Foundation, and the Community Foundation for Greater New Haven — provided $20,000 to create a parental advisory board for the program to ensure community participation.

The Connecticut baby-bonds program, originally destined for children born in 2021, was thrown an unexpected curveball when Democratic Gov. Ned Lamont’s office announced a two-year delay of the $50 million-per-year program.

Supporters of the legislation are undeterred. Janine McMahon is co-chair of the parent-engagement work group of Connecticut’s 2Gen Advisory Board, a state effort to promote family economic self-sufficiency.

The state asked McMahon to help organize the parental advisory board, which will help shape the legislation going forward. She also aided in gathering parents from across the state for focus groups to review and comment on baby-bonds informational material. A mother of two, she has experienced poverty and was a teenage mother.

McMahon, who also works at a branch of Catholic Charities, in Hartford, said she wished she and her children had had access to such a program. Her 19-year-old son, who is trying to establish a clothing business, has had difficulty finding funding. McMahon imagines the benefits of a baby-bonds program that he “could access for entrepreneurial reasons.”

Though her own children will not benefit from the program, McMahon said she was moved by the appeal to parents for their input. “The willingness to elevate parents’ voices, to give parents a seat at the table to lend their expertise to this work is commendable,” she said.

She notes some disappointment about the delay but continues to look to the future.

“The benefits have already started,” she said. “It makes people think differently; it shifts their mentality.”

She says some people in focus groups, just in learning about the effort, expressed interest in buying bonds for their children. Moreover, she looks upon the delay as an opportunity to reinforce the program, to gather and disburse information.

“We’re the pilot state now,” she said. “If we get this done right, then other states can pick this up.”

Many Programs in Gestation

Shira Markoff, a policy fellow at Prosperity Now, has helped coordinate efforts supporting baby-bonds programs around the country.

And things are percolating. Besides Connecticut, Washington, D.C., passed legislation last year. Bills have been introduced in state legislatures in Delaware, Iowa, Nevada, New Jersey, New York, and Wisconsin. Louisiana, Massachusetts, and Washington State have agreed to study the matter. California passed related legislation in July.

The issues driving momentum over the past two years at the state and local levels are twofold, said Markoff.

“The pandemic laid bare inequities, especially around race, and a lot of legislators and policy makers were looking for ways to address that. It coincided in 2020 with the racial-justice uprisings following the murder of George Floyd,” she said.

Though Markoff credits Hamilton with sparking the movement, her own organization’s contribution has been key, with its foundational research on poverty and children’s savings accounts.

At the federal level, Prosperity Now, which had an annual budget of $12.6 million in 2020, worked with Booker’s office to draw up the original baby-bonds legislation and is continuing to promote it by helping prepare congressional briefings and papers for the elected officials. Though hopeful, and working to prepare the groundwork for a future successful passage of the bill, Markoff admitted, “We’re definitely seeing it as a longer-term play.”

With states seeming more likely to yield near-term successes, Markoff says, the group will focus on states such as New Jersey and Washington to get them “over the finishing line.”

Its next step is to identify other states that have the potential for passing baby-bonds policies, “based on the political landscape in that particular state,” she said. “We’re building out a whole state-level strategy right now.”

Its Origins — and Future — in Philanthropy

Though many may be familiar with the idea of baby bonds from Booker’s presidential run, or Hillary Clinton’s brief flirtation with the idea in 2007, the concept is not new, with some tracing its roots to Thomas Paine, during America’s earliest days. However, the recent form raising interest across the country derives from a 2010 paper written by Hamilton and fellow economist William Darity Jr.

As is befitting the proud papa of baby bonds, bespectacled Hamilton, on a video call, appears open and optimistic about the future of the plan he has been nurturing for more than 10 years. He traces the origins of his baby-bonds concept to meetings about racial wealth inequality held by the Ford Foundation in the mid-2000s.

Asked by the foundation for his input, Hamilton said he felt the obvious answer was reparations for slavery. The response, he said, was, “Give us something that can politically take place.”

The New School professor cites Prosperity Now’s research into children’s savings accounts as an essential spark for his ideas. In 2003, Prosperity Now (then known as the Corporation for Enterprise Development or, more commonly, CFED) and five other organizations ran a 10-year national research project about the effect of savings accounts for children. The accounts were jump-started with an initial $100 to $1,000 deposit and encouraged savings with contributions matching those from the family.

The innovative pilot received funding from 12 national foundations and counted more than 50 partners, including community organizations, financial institutions, academic researchers, foundations, and state policy coalitions. Since then, cities and nonprofits have started their own programs. At the end of 2021, more than 1.2 million children were participating in the 123 programs across the country.

Hamilton, though, cautions that baby bonds are not children’s savings accounts. Baby bonds’ emphasis is on endowment and not family deposits.

“Let’s do what wealthy people do,” he said. “Let’s seed endowment.”

His idea is that trust funds, managed by the government, would be established for all American babies. Though race-neutral, the trusts — not literally bonds, which are fixed-income financial instruments — would effectively address the racial wealth gap because race tracks closely with wealth in the United States. All children would be beneficiaries, but the poorest children would receive the most funds.

Under the federal program, $1,000 trusts would be established for all babies at birth, and in each successive year, up to $2,000 would be deposited into children’s accounts, depending upon the household’s income level. When kids reached 18, they could withdraw the funds, which could be as much as $45,000, with accumulated returns, to fund higher education, purchase real estate, or start a business — investments that could help build more wealth.

Having accumulated capital can make the difference, Hamilton points out, between a renter and a homeowner, a worker and an entrepreneur. Or, as he has put it in the past, “Wealth begets more wealth.”

This helps explain the intractability of the wealth gap in a country where Black families’ median wealth is $24,100, compared with white families’ $188,200, according to a Federal Reserve study using 2019 data. Another study modeled the impact of the baby-bonds program if it had been enacted for babies born in the late ‘80s and early ‘90s. In just one generation, the wealth gap would have narrowed considerably: from white households having 15.9 times the wealth of Black households to only 1.4 times the wealth.

Though ultimately Hamilton wants the baby-bonds program to have the impact — and funding — that only federal support could give, he sees the value of building political momentum and demonstrating the impact of baby bonds through scaled-down local programs.

Similar to state baby-bonds efforts, Hamilton also sees a possible role for foundations to demonstrate the impact of baby bonds — not unlike Prosperity Now’s research in children’s savings accounts. Foundations have been slow to take up the gauntlet, Hamilton says, because of the cost involved as well as the long gestation period. He counters, however, that foundations could conduct shorter-term pilot studies, giving older children resources that they could use in a year or two, and examine the effects. All it requires is one pioneer.

“When we get a first mover, more will come along,” he said.

In the Wings

Some nonprofits agree that philanthropy could have a role in pilot studies. Misha Werschkul, executive director of the Washington State Budget & Policy Center, which is working to promote a baby-bonds program, said, “I think the idea of using private philanthropic funds to pilot studies is a great option, especially to test out different strategies and see what is impactful.”

She points to successful privately funded pilots for guaranteed basic income and child savings accounts.

“Ultimately, though, we will need public-policy solutions and public investments to solve large-scale problems like racial wealth inequities.”

In the meantime, Werschkul is working with several other nonprofits to support the Washington Future Fund, the proposed baby-bonds legislation in the state.

With little run-up time, Washington State Treasurer Mike Pellicciotti advanced the baby-bonds idea for the 2022 legislative session. Collaborating with the treasurer’s office and a coalition of other local nonprofits, the Washington State Budget & Policy Center, a nonprofit with an annual budget of $1.2 million, provided feedback on the proposed legislation and worked to educate legislators about racial inequities in the community.

Though the measure did not pass, the treasurer’s office obtained a fund to study the wealth gap and organize a committee to examine the issues.

“Oftentimes big ideas that address something so monumental like the racial wealth gap take some time to work through state legislative processes,” Werschkul said. “It’s rare for a big idea like this to pass in one legislative session.”

Going forward, a policy analyst from her group will sit on the treasurer’s committee in an advisory capacity. Werschkul says she appreciates the time to collect state data about the racial wealth gap.

“We need to get the details right and have a policy that really does make a meaningful impact on the problem we’re trying to solve,” she said.

‘The Beauty of Baby Bonds’

Named 2022’s Washington Small Business Person of the Year by the U.S. Small Business Administration, today Efrem Fesaha recalls the seven years of “grinding through” — working at a full-time job while slowly building a market for his Africa-imported coffee. He finally opened a brick-and-mortar location of Boon Boona Coffee, a roastery and café in 2019, in Renton, Wash., with a Seattle location added in 2021.

To the Washington Future Fund committee, which will issue its recommendations at the end of the year, he will bring both his experiences as the owner of a small business and memories of the pressures he faced as a teenager after his father died.

Fesaha did manage to work his way through Washington State University. But in 2004 he ended his college years in debt, which he paid off incrementally while working in corporate finance.

In 2011, he made a life-changing trip to Eritrea, where his family is from, and was seized by a passion for coffee. He began drawing up a business plan to open a café that served African coffees. Here again, accumulated capital would have made an enormous difference, probably saving him years of toil.

“A barrier of entry keeps us away from starting up our businesses,” Fesaha said of aspiring BIPOC businesspeople. “You still have to put some skin in the game, put some money down — in addition to all these other factors — then we’ll support you.”

He now imagines the “massive” advantage — and hope — some seed capital would have provided at a pivotal time.

That hope is the kind of intangible benefit that Connecticut Voices’ executive director Byrne sees in baby bonds.

“The beauty of baby bonds is that they are creating a world where there is hope of equality, hope that government can be a force for good, and that we nonprofit foundations might not be necessary,” Byrne said. “Wouldn’t that be wonderful?”

Reporting for this article was underwritten by a Lilly Endowment grant to enhance public understanding of philanthropy. See more about the grant and our gift-acceptance policy.