The Community Solutions Act of 2001 (H.R.7) introduced by Representative J.C. Watts (R-OK) is a response to President Bush's effort to engage both faith-based and community-based organizations in programs to help the needy. Title II seeks to expand faith-based initiatives through charitable choice provisions in current law, and Title III is designed to help lower income Americans build wealth and strengthen their communities through savings in individual development accounts (IDAs).

Though H.R. 7 wisely adopts previously enacted charitable-choice protections in its treatment of indirect government aid to religious organizations, it also includes restrictions on groups receiving direct assistance that could undermine its intent and reverse established policy. While its provisions for establishing and funding IDAs through savings matches are complex and somewhat paternalistic, demonstration projects have shown that IDAs are a successful way to encourage lower income workers to begin to save. Including funding for IDAs in H.R. 7 will be well worth the cost.

Title II: Expansion of Charitable Choice

Title II of the Community Solutions Act of 2001 (H.R. 7) seeks to expand existing federal "charitable choice" law to encourage the participation of religious organizations in programs assisting the needy.¹ Passed as part of the 1996 Welfare Reform Act, charitable choice ends discrimination on the basis of religion against providers of certain federally funded social services. It allows religious charities to compete for anti-poverty money-via grants, certificates, or vouchers-on the same basis as their secular counterparts without impairing their religious character. Current law also includes protections to safeguard the religious freedom of individuals in faith-based programs.

Specifically, the existing charitable choice law enables faith-based organizations to compete for welfare (TANF) money, social services block grant funds, and drug and alcohol addiction services money. H.R. 7 would expand the protections in the law against religious discrimination to the following program areas that now receive federal funding:

• Juvenile delinquency and prevention programs
  
• Crime prevention programs
  
• Housing grants
  
• Job training funds
  
• Senior citizen programs under the Older Americans Act
  
• High school equivalency degree (GED) training funds

Community development block grant funds
Domestic violence prevention and intervention programs
Hunger relief funds

Charitable choice follows the most recent Supreme Court decisions by insisting on the equal treatment of religious groups when federal assistance is made generally available. Last year's 6-3 decision in Mitchell v. Helms, for example, held that government-funded computers could go to parochial schools, as long as the assistance was available to public and private secular schools. The majority ruled that government may support faith-based organizations if the purpose is to achieve a legitimate secular goal-boosting literacy rates, for example-but not to advance religion. By allowing a Catholic school to receive government support, the court effectively ended the ban on assistance to "pervasively sectarian" groups. Charitable choice is the legislative cousin to the court's understanding of equal treatment.

As to the church-state issues raised by H.R. 7, several provisions are especially important to ensure the independence of faith-based groups, while extending their compassionate reach to the poor.

First, H.R. 7 embraces existing charitable choice law by preserving the right of a faith-based organization to make hiring decisions based on religious criteria. It requires that employment practices "shall not be affected by its participation" in federally funded programs. There is no more vital protection for organizations with a religiously-rooted approach to social assistance. It is not hard to understand why: The leadership and staff of an organization determine its destiny. They alone will carry out its mission, uphold its priorities, and embody its deepest values. They are the last defense against secularization.

Critics of this provision claim that employment decisions based on religion violate the protections of the 1964 Civil Rights Act. The architects of that historic legislation, however, plainly understood the importance of protecting the integrity of religion in America. While banning acts of discrimination in employment based on race, ethnicity, gender, religion or national origin under Title VII, they crafted an exemption for religious organizations-including churches, colleges, and universities.² Congress expanded the statutory exemption in 1972 to cover most employees of religious institutions, whether they served in clergy positions or not. The Supreme Court unanimously upheld the protections in its 1987 ruling in Corporation of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints v. Amos. It is the critics of the exemption who are trying to undo 35 years of civil rights guarantees.

Indeed, opponents call this protection an excuse for "religious bigotry"-an astonishing attack on the independence of churches, synagogues, mosques and religious organizations of every kind. The right of private religious groups to freely determine their membership is a cornerstone of our constitutional order. America's Framers could not conceive of religious liberty-or the existence of civil society-without this guarantee. This explains its protection by the First Amendment's religion clauses and by the rights of free association. Churches and other religious entities do not give up this fundamental freedom the moment they receive a dime of federal money. Doing so would make them mere appendages of the administrative state.

Second, H.R. 7 parallels previous charitable choice law by mandating that organizations "retain…control over the definition, development, practice, and expression" of their religious beliefs. Charitable organizations need not purge their programs of inherently religious activities-such as prayer, worship services, Bible studies, or evangelism-in order to receive federal support. Based on the Supreme Court's current understanding of the First Amendment, however, such activities must be privately funded and separated from secular social services. This compromise approach helps restore a more constitutional view of the relationship between religion and government.

Third, H.R. 7 would protect freedom of conscience by making it unlawful for recipients of assistance to be forced into religious programs against their will. If someone objects to the religious character of a program, government must provide an alternative "within a reasonable period of time." Along with provisions to protect hiring decisions and program content, this is the brick and mortar of any sensible partnership between church and state. All previous charitable choice legislation, signed into law by President Clinton, has embodied these principles.³

There is disagreement, however, over the best way to protect the religious freedom rights of individuals in federally-funded grant programs. The White House wants the legislation to include three provisions: 1) a notice of rights to alert individuals to their protections when receiving social services; 2) a "trap-door" provision, which promises individuals an alternative program if they object to a religious program; and 3) an "opt-out" provision, which allows individuals to remain in a faith-based program but not participate in religious activities. The original charitable-choice legislation contains both the trap-door and opt-out rules.

The first two provisions (a notice of rights and a requirement that alternative services be available) pose no threat to the independence of religious groups. But the "opt-out" language-more expansive than existing charitable choice law-unreasonably interferes with an organization's control over its own program. According to the bill, activities such as religious instruction, proselytizing, or worship "shall be voluntary for the individuals receiving services and offered separate from the program funded." Allowing individuals to remain in a program while avoiding some or all of its religious components could compromise the integrity of many faith-based charities. Aspects deemed vital to the service could be ignored, while a person's refusal to fully participate could adversely affect others in the program.

Proponents worry about people being forced into faith-based services. But individuals exercise freedom of choice when they first seek help from a religious organization over a secular one. It makes little sense to join a 12-Step recovery group and then agree to participate only in steps 1, 3, 5, 7, 9, and 11. How is the religious liberty of a person compromised by being required to participate fully in a program he himself has chosen?

Furthermore, the bill would seem to compel organizations not only to segregate religious and secular services, but to offer them in separate rooms or facilities. Though intended as a legal safeguard, the bill's language places a needless burden on religious charities. As long as a program's religious activities are funded privately or run by volunteers, government should have no interest in the overall religious climate of the social services made available. Contrary to extreme separationists, the First Amendment does not give individuals a right to never hear religious speech that might make them uncomfortable. As long as alternatives are available, the trap-door provision ensures that no one would remain in a faith-based program against his will. This would appear to satisfy the central objective of the two religion clauses of the First Amendment-to protect freedom of conscience for people of all faiths or of no faith.

The same argument applies to indirect government assistance, otherwise known as certificates or vouchers. H.R. 7 allows federal grants covered under its provisions to be converted to certificates or vouchers, which individuals could use to enroll in secular or religious programs. This is a much better way to publicly support faith-based organizations. Vouchers expand the program choices available to needy individuals, while widening the protections for organizations involved in caring for them. Under charitable choice, faith-based groups receiving indirect assistance can infuse their services with religious activities, with no opt-out rules and no requirements that the religious and secular aspects be segregated.

 H.R. 7 wisely adopts previous charitable-choice protections in its treatment of indirect government aid. Any attempt, then, to impose opt-out rules or other restrictions on groups receiving such assistance would overturn federal law. It also would reverse established government policy: Since 1990, for example, poor families have used publicly-funded certificates to pay for day care at church-run facilities, with no conditions on providers.⁴ Clearly, not all faith-based programs require participation in religious activities; some oppose the approach on religious grounds. Moreover, the vast majority of people choosing faith-based groups probably do so because they are attracted to the religious aspects of the programs. The challenge is to balance the religious freedom rights of private organizations with those of the people they are serving.

H.R. 7 strongly affirms that government's social-service regime must not discriminate against groups guided by their belief in God as they care for their neighbors. Neither should these organizations be forced to compromise their religious character or philosophy of assistance in order to receive public support. Charitable choice legislation must accomplish both objectives if it hopes to engage America's Good Samaritans as equal partners with government. If it does, we can expect more of the nation's poor to find the compassionate help they so urgently need.

For more information, contact Joseph Loconte at 202-608-6164.

Title III: Individual Development Accounts

Title III of H.R. 7 would greatly expand Individual Development Accounts (IDAs). The language comes from the Savings for Working Families Act introduced as H.R. 2160 by Representatives Joseph Pitts (R-PA) and Charles Stenholm (D-TX) and as S. 1025 by Senators Rick Santorum (R-PA) and Joseph Lieberman (D-CT).

How Do IDAs Operate?
IDAs are subsidized savings accounts that may be used to build funds for such purposes as opening a small business, purchasing a first home, or paying for post-secondary education. There currently are 14 existing IDA programs in operation.⁵ Under H.R. 7, IDAs would be available to individuals between the ages of 18 and 60 whose federal adjusted gross income on their federal income tax forms does not exceed $20,000 annually, to single heads of households with incomes below $25,000, and to married couples with incomes below $40,000.

Individuals and families who qualify for IDAs would receive a dollar-for-dollar match for the first $500 saved in the account per person (in families) per year. Thus, a married couple could receive a match of up to $1,000 per year. They could save more than $500 per person per year, but only savings up to $500 would receive any match. The contributions come from after-tax income, and interest on them would be taxable. However, any matching funds and interest earned by the matching funds would be tax-free.

In order to receive the matching funds, the savers must open an IDA with a qualified financial institution. For the purposes of Title III, the term "qualified financial institution" includes any financial institution that is allowed under federal law to hold Independent Retirement Accounts (IRAs). In addition, nonprofits such as credit unions, community development financial institutions, 501(c)3 organizations, and Native American Tribes may sponsor an IDA program. Nonprofits can affiliate with a profit-making financial institution or subsidiary.

The IDA savings matches would be placed in a parallel interest earning account that the account holder could not access until it is time to purchase the approved asset. During the savings period, account holders must attend general financial education classes that are offered through the financial institution or an affiliated non-profit. This system is somewhat overly paternal, but does ensure that savings matches are only used for their intended purpose.

Under Title III, the cost of the savings matches and certain other costs borne by the financial institution would be reimbursed through a tax credit payable to the institution or program sponsor. These tax credits would repay the cost of the actual savings matches plus an annual $30 per account to cover administrative costs. In addition, program sponsors would receive a one-time $100 per account credit to cover the cost of financial education provided to account holders, marketing, administration, and similar expenses. Funds would only be available through 2008 for accounts opened through 2006.

Do IDAs Work?
Savings are important to low income households for two reasons. First, through savings goals and budgets, they encourage workers to focus on the future instead of on instant gratification and consumption. This changes behavior and improves the odds of getting out of poverty. They become more focused on improving their children's lives and are more likely to identify with their community and to feel that they have a stake in its future.         

Just as important, saving allows low-income workers to build assets. Studies show that it is very difficult for these workers to improve their economic status simply through spending their income. It takes accumulated assets to purchase a house, start a small business, or to increase one's level of education.

Empirical data from demonstration projects indicate that IDAs are an effective way for lower income individuals to save for life-improving purposes. A recent study of the 14 existing IDA programs shows that participants made a deposit in 7 out of 12 months and accumulated an average of $552 of their own money.⁶ Most of this money appears to be new savings that would not have occurred except through the IDA program.

Through June 30, 2000, the study found that only about 16 percent of participants had left the programs without receiving a savings match. The rest either had continued to build savings or had withdrawn their money and used it for a purpose that qualified for a match. About a quarter of those who received a match used their money to purchase a home, and about an equal proportion invested in a small business. About 21 percent used their money for education, with the rest using their money for home repair, job training or retirement.

More important, the data show that when given financial education, IDAs provide the lowest income groups with an incentive to build assets. The study showed that lowest income group saved an average of 5.6 percent of their income in IDAs. This is well above the national personal savings rate.⁷ Experts believe that the combination of financial education and a savings match provides lower income workers with the belief that they can reach their savings goal and improve their lives.

Why Use a Tax Credit Instead of a Tax Refund?
If a taxpayer-subsidized savings match is desirable, in most circumstances it would be preferable to finance it through a refund of taxes that the individual pays. However, those who qualify for IDAs have incomes that are so low that in most cases they would not actually pay any federal taxes. As a result, the matches must be funded through other methods.

It is true that the mechanism used to fund IDAs is complex, but it does ensure both that the savings matches are used for the planned purpose and that the participants receive financial education that would not necessarily be available otherwise. In addition, the program is structured to meet its goals with a minimum level of day-to-day federal involvement that would otherwise consume money that could be better used to match actual savings.

Operating the program through community-based organizations and financial institutions allows the program to meet the special needs of the populations being served. This helps to avoid the usual one-size-fits-all mentality found in far too many federal programs.

IDAs are not perfect. As mentioned above, the program is complex and somewhat paternalistic. However, demonstration projects have shown that IDAs are a successful way for lower income workers to begin to save and to increase their financial education. Because beginning to save has been shown to greatly change behavior, it is worth the cost to include funding for IDAs in H.R. 7.

For more information, contact David C. John at 202-608-6229.

Joseph Loconte is William E. Simon Fellow in Religion and a Free Society and David C. John is Senior Policy Analyst for Social Security at The Heritage Foundation.

1 "Personal Responsibility and Work Opportunity Reconciliation Act of 1996," Sec. 104(d), enacted August 22, 1996.

2 Section 702 of the Civil Rights Act of 1964 states: "This subchapter shall not apply to an employer with respect to the employment of aliens outside any State, or to a religious corporation, association, educational institution, or society with respect to the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation, association, educational institution, or society of its activities."