Individual Development Accounts: Another Tool in the Community-Development Toolkit

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CED Program Interns & Students

Suzanne Julian is UNC-Chapel Hill graduate student pursuing a master’s degree in Public Administration. She is currently working with the STEP leadership team in Pamlico County as part of the Carolina Economic Revitalization Corps program.

What’s the connection between community development and economic development? One very broad way to think about economic development is that it is the project of growing a community’s capital—human capital, social capital, financial capital, and physical capital. The more resources economic developers can bring into the community, the better, whether those resources come from outside or come from the internal growth of assets and wealth.

Economic development is concerned with attracting, retaining, or building private investment and economic activity in a particular area. Community development helps build the capacity of the community, so that the community is better positioned to attract and keep (or to develop from within) that private investment when the opportunity comes. And of course, community development generally addresses equality more fully than economic development alone can.

This week, inspired by the Small Business Center in Pamlico County and its nascent plans to launch a multi-part small business development program, I’d like to talk about a great community development tool that intersects nicely with economic development strategies: Individual Development Accounts.

Individual Development Accounts (IDAs) are matched savings accounts designed to support asset-building for low-income people. The specific terms of IDA programs vary, but generally participants can use their IDA money to purchase a first home, pursue further education or job training, or open or expand a small business. IDA programs are often run by nonprofit organizations or community development corporations, usually in partnership with a local financial institution. The match amount varies by program; some IDA programs offer a simple one-for-one match, whereby the program supplies a dollar for every dollar the participant saves in the account. Others offer matches as high as 3:1 or 4:1 (up to a limit, usually). The funding for the matched portion of the account can come from several different sources, including local government investment, the nonprofit or CDC itself, or various federal or state-level sources.

As with other community development tools, the goals of IDA programs overlap with the goals of economic development: IDA programs help build wealth in the community and support economic self-sufficiency. They reinforce neighborhood stability by helping people to achieve home ownership. They help build human capital in the community by making education and job training accessible for more people. And of course, they help generate local economic activity by fostering the creation and expansion of small businesses.

This last element is maybe the most salient way that IDA programs can contribute to a community’s economic development goals. For places pursuing entrepreneurship and small-business development strategies, IDAs can be a great way to widen the pool of potential entrepreneurs, by giving more people access to the capital they need to open or expand a business. And, like many of the strategies we discuss on this blog, they’re best used in combination with other, complementary approaches. An IDA program that also involves business training or mentoring, microloans, and incubator resources is more likely to succeed than one that merely provides participants with a bit of extra cash.

It’s important to be realistic about the impact an IDA program can have. The kinds of new businesses likely to come out of an IDA program probably won’t generate millions of dollars of private investment or tax revenues, or create hundreds of new jobs. IDA programs can get more people involved in creating or expanding businesses; they can’t subsidize the entire lifespan of a firm that starts small and grows into a large business. Because the model aims to support asset building specifically for low-wealth individuals, IDA programs generally establish income or asset thresholds for participants. This means that IDAs can function like an incubator of sorts—as participants build their assets, they may eventually surpass the thresholds and outgrow the program.

And IDA program alone certainly won’t transform a community’s economy. But just like any other economic and community development tools, these programs can be a small but useful part of a larger strategy. By investing in the capacity of a community’s small businesses and entrepreneurs, we can encourage small business development, private investment, and increased local economic activity.

If you’re interested in creating an IDA program in your community, several great resources exist:

  • The IDA and Asset-Building Collaborative of North Carolina offers information on IDAs, guidance about where to get the resources you need, and a chance to connect with other asset-building programs across the state.
  • The U.S. Department of Health and Human Services operates the “Assets for Independence” (AFI) program. Their website has a comprehensive guide to designing and launching a successful IDA program. The AFI program also provides grant money to help fund both account matches and administrative costs.
  • The Division of Community Assistance in the NC Department of Commerce provides CDBG grants to help establish IDA programs. The funding can be used to match down payments for participants, run housing education & counseling programs for participants, and support the administrative costs of running the program.  The DCA also provides training and technical assistance for all applicant sites, even the ones who don’t receive funding.
  • For housing IDAs, the North Carolina Housing Finance Agency operates an IDA loan pool (IDALP) that can provide gap financing to homebuyers through local IDA sites. To participate in the IDAPL, local IDA programs first apply with the Housing Finance Agency to become members of the loan pool. Once sites are approved as members, accessing funds is straightforward: members simply send in requests for funds, and requests are granted on a first-come, first-serve basis.

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