CT State Treasurer on becoming first state to pass baby bonds program

Shawn Wooden, Connecticut State Treasurer, joins Yahoo Finance to discuss Connecticut becoming the first state in the U.S. to pass legislation creating a baby bonds program to aid in closing the wealth gap.

Video transcript

- Connecticut has become the first state to pass legislation to create a baby bonds program within the state. Now, baby bonds, for those that do not know, is a publicly funded trust that is created for a child upon their birth that is then invested. When they turn 18, they can use those funds for a number of allowed purchases, like higher education or purchasing a home or a business investment. We're joined now by Shawn Wooden, Connecticut's State Treasurer. So Shawn, let's just start here, how is the program going to work in Connecticut, and what about the children that are under the age of 18, but, obviously, older than infancy in this state, how is it going to be applied to them?

SHAWN WOODEN: Sure, so, first, I'm thrilled that we could be first in the nation with such a program. And it was just passed by the legislature this week and awaiting the governor's signature. And I champion this to address generational poverty, racial equity, and economic recovery for all in our state.

The program will commence on July, 1 of this year, and will be available to children born into poverty, and on Medicaid, mothers on Medicaid giving birth after July, 1 of this year. You asked about other kids, I mean, the reality is we can't go back.

I'd love to address more, but this is a pretty significant step forward that every child born into poverty in Connecticut will have this trust in this fund that we will invest in and grow over a period of not less than 18 years. And the allowable purposes are all geared towards things that contribute to the wealth gap in our society, so education, home ownership, business ownership, as well as retirement security. And so I'm very excited about this.

- So this is a $600 million program. Talk to us about how that's going to be funded. And at that level, how much will be allocated per year and for how many years?

SHAWN WOODEN: Sure, so the allocation is $50 million a year for the next 12 years. And that would fund the projection is somewhere between 16,000 to 18,000 kids born into poverty a year in Connecticut, and I might add in every town in Connecticut. I know we have significant wealth disparities, but even in our wealthier communities poverty exists.

And in terms of the funding itself, will be from borrowing. We'll issue debt. As you know, we're at historically low interest rates. And the return on this investment will be significant.

Study after study has shown-- you have McKinsey, that says if we don't close these gross disparities, it's going to cost our economy between $1 and $1.5 trillion over the next decade. You have a city study 2020, that showed similar results. You have a 2019 Columbia University study on the federal baby bonds proposal, so not what I propose, but you know they are similar, that says that it can be one of the most powerful tools to close the wealth gap among young adults.

And so that's how it will be funded. It's an investment that will pay off tremendously, not just for the individuals who have these accounts when they get older, but for Connecticut, because it's home ownership in Connecticut, it's investing in a business or an entrepreneurial pursuit in Connecticut. So we are reinvesting in our economy. And we're closing these wealth gaps and disparity gaps that constrain our economy.

- So Shawn, let's talk about that ROI, the return on that investment that you guys are making with this baby bonds program. What are you projecting to be essentially making smaller of that gap inside the state of that wealth gap? What kind of projections do you guys have in how you're able to close perhaps a racial wealth gap within the state? What are you guys expecting over the course of nearly two decades after those first children turn 18 and are able to make, to use some of those funds that had been invested on their behalf?

SHAWN WOODEN: So in terms of-- there are obviously a lot of variables between birth in 18. And the funds can be claimed anywhere from the age of 18 to 30, because you're most likely not in a position to or want to purchase a home when you turn 18, but you will have funds available for education. And based on the studies that we know this is about leveling the playing field and having adults, young adults enter society not behind the eight ball, not still in that next generation of poverty.

With respect to-- so this is a race neutral program. With that said, you know we all know that Black and Brown communities are disproportionately impacted. So state of Connecticut on Medicaid, 62% of those families are white. And that number surprises people, but it shouldn't. But the balance are people of color.

And so it is race neutral in that sense. But it is racial equity in the sense of the gross disparate impact that poverty has on those communities of color.

- What about things that the family or the child getting these funds needs to do in order to access the money. I know there's an educational component to this. I think that's fabulous. But tell us what some of that criteria is.

SHAWN WOODEN: So not a lot of criteria, but important, right? One, be born here in Connecticut. Two, be a Connecticut resident when the funds are claimed. And the third, and critically important piece is a financial literacy course requirement that will be prescribed, because this is also about kind of educating more people on the basics of finance, and not just having a pot of money available when you get older.

- Now Shawn, you know, New Jersey Senator Cory Booker wants this program on a national scale. So I want to ask you how easily replicable you think this program is not just in Connecticut, but in a state like New York, or Wisconsin, or California, or Florida, or Texas, or Alabama, all around the country if other states wanted to replicate this? And have you had interest from other states looking to replicate your program in their own states?

SHAWN WOODEN: I have had interest. And I've had conversations with other treasurers and the Vice President the National Association of Treasurers. And so we talk fairly frequently, and so we've had these discussions.

I do believe that Connecticut can and will be a model for the baby bonds concept being the first. I've been in touch with Senator Booker on this, and certainly support, and wholeheartedly endorse the federal efforts. What we've done is more targeted towards a poverty metric. But this is something that we have to start thinking long term, structural changes.

So often-- and I understand it, coming from a community myself where most people struggled, you're just trying to stay afloat. But oftentimes, as policymakers, we're not thinking 20 years down the road. But in order to address the economic inequality in our society, structural racism, a number of these issues, we have to be systemic and long term in our thinking. And that's the case I made to our state legislature. And I was happy to receive strong support to get this program enacted.

- I'm wondering which states, if you can share with us, have contacted you about trying to replicate your program. And also I know that you're going to be providing $3,200 at birth. What kind of animal return are you expecting? What kind of money might that child have when they become 18?

SHAWN WOODEN: Sure, so the other states, I will let them disclose the ones that are thinking about proposing it, because they were private conversations. But with respect to the funding, we're using 6.9% targeted annual assume rate of return. That tracks our pension system assumed return levels.

That would translate into approximately $11,000 over a period of 18 years. If it's claimed at a later date, obviously, it would be more based on those projections. You know, we would love to do more, but this is significant in terms of that ability.

And the other thing, there was another study, a very different program, but the idea and the power with respect to college savings, and having an account as a kid, and how that changes behavior in terms of what one aspires to. And I, anecdotally, believe that in addition to the financial resources and the financial education that comes along with this program, having a pathway out of poverty and something to aspire to, and having a nest egg will similarly have an impact in terms of changed behavior and wanting to go to college, because you have something to get started. Thinking about owning a home, when all you thought you could ever do for the rest of your life is what you grew up in, possibly, which is subsidized housing. So it's changing a mindset as well as providing resources.

- All right, definitely a great first step that the state is making. Shawn Wooden, State Treasurer for the state of Connecticut, thanks so much for joining us.