Create an “Affinity Credit Card” to Support Public Schools
Involving the private sector in supporting public education could help school districts generate extra revenue. The City of Huntington Beach, California is creating an innovative approach to encourage such involvement by contracting with a bank to issue credit cards to private citizens who designate their rebates to the city for parks, libraries and other services. The Legislature should authorize the Comptroller to contract with banking and marketing firms to issue a similar “affinity card” to benefit public schools.
A number of public-private efforts in support of education have sprung up around the country; one of newest ideas involves the issuance of “affinity” credit cards to raise funds for public schools.
An affinity card is a credit card that pays a monetary benefit to the holder or a third party, typically a charitable organization, each time the card is used. The University of Texas alumni association has issued affinity cards whose proceeds support university activities. Southwest Airlines uses affinity cards to promote brand loyalty among its customers.
The financial benefits from affinity cards come from the 2 percent discount fee merchants pay on card transactions. Part of the fee goes to card associations such as Visa or MasterCard, part to the issuing bank, part to the merchant’s bank and part to a clearinghouse that processes the payment.
Under the terms of a typical affinity card program, part of the fee due to the issuing bank goes to a charity. The issuing bank benefits from gaining access to people who identify with some larger group or cause, making marketing easier and building brand loyalty. The cardholder, in turn, provides support to a favored charity and receives personal rewards, rebates or discounts associated with the card.
Affinity card for local programs
The city of Huntington Beach, California has pioneered the use of affinity cards to support its own programs. On July 1, 2002 the Huntington Beach City Council voted to pursue a corporate sponsorship for an affinity card, procurement card and automated teller card services to produce revenue for city programs. Public Enterprise Group was hired as the city’s marketing partner and is assisting in drafting a request for proposals to be issued in late 2002. The city council expects to select a vendor in January 2003.
Huntington Beach expects to receive a rebate of $2.8 million per year from users of its “Surf City Card.” This rebate will be used to fund parks, libraries and other public purposes. Ron Hagen, the city’s director of Community Services, reports a considerable amount of interest in the idea from other local governments. According to Hagen, to be successful, such a program must produce tangible public benefits that can be seen by cardholders and must be marketed aggressively.
Previous Texas efforts
The 1997 Legislature authorized an affinity card benefiting Texas parks. According to the statute, the Comptroller’s office may enter into an agreement with a credit card issuer to produce a credit card benefiting state parks; the Comptroller must agree to the design of the card and deposit the rebates into the state parks account. The agency has not yet taken action on this statutory authority.
The Texas Parks and Wildlife Foundation, a nonprofit organization created to raise funds to benefit the state’s parks and wildlife programs, has issued a card benefiting the state’s parks and wildlife resources. (This is a separate effort from the Comptroller authority mentioned above.) The foundation contracted with First USA to introduce a Texas Parks and Wildlife card with designs including bluebonnets, deer, fish and buffalo. According to Texas Parks and Wildlife Department (TPWD) staff, the foundation has received $150,000 generated by the spending of 10,000 cardholders over the last three years.
The terms of the royalty agreement pay the foundation $1 for each card issued and 30 basis points (three-tenths of a percent) of sales. At first, TPWD provided mailing lists of potential cardholders to First USA; after changes in the law, however, this practice was discontinued. Since then, efforts to market the card have been limited to magazine ads, which probably explains the program’s relatively low returns.
The 1995 Legislature also authorized the use of credit cards by state agencies to pay for purchases. The Texas Building and Procurement Commission (TBPC) entered into contracts to provide cards to state employees to purchase goods and services and pay for state-related travel expenses.
According to a recent audit by the State Auditor’s Office, however, the state’s arrangements were poorly executed. Because TBPC did not actively manage the contract between the vendor bank and the state, Texas struck a relatively poor bargain, negotiating a rebate of just 0.002 percent. In comparison, Colorado and Kentucky receive rebates of 0.5 percent of purchase amounts, while Nebraska receives up to 0.8 percent.
In fiscal 2001, cardholders at state agencies and universities charged more than $122 million; the total rebate resulting from this expenditure was only $18,000. Similarly, the state’s travel card has yielded little in the way of returns. In 2000, the state received $45,000 back on more than $36 million in billings.
TPBC is taking steps to improve its card program. According to TBPC staff, the agency plans to combine the travel and procurement cards to get a better deal for the state. In the meantime, existing contracts for both travel and procurement cards were extended until October 2002. At this writing, TBPC is developing a new request for proposals from possible card issuers.
State law should be amended to allow for the creation of a credit card benefiting Texas public schools.
Other products such as debit cards and pre-paid cash cards should be included as well. Amending Section 403.0231 of the Government Code would allow the Comptroller’s office to procure banking and marketing services to support an affinity card benefiting Texas’ public schools. Rebates could be credited to the appropriate school by the vendor. People could sign up for the card and designate what school would get the rebates they earn by making purchases with the card.
The Comptroller should follow the structure of successful credit card plans in developing a request for proposals. Previous efforts in partnering with credit card companies have not benefited the state to the extent that they could have; weak contract negotiation and marketing yielded poor results.
The request for proposals should consider issues such as the financial stability of the issuing bank; the best available financial terms for the state and cardholders; and the strength of the marketing effort to be made by lenders and marketing partners. The vendor should give cardholders as much latitude as possible in designating the beneficiary of their purchases, down to the campus level if possible.
The fiscal impact of this recommendation would be positive for local schools but cannot be estimated.
The Comptroller’s office would use existing resources to absorb the associated administrative costs. Revenue would depend upon the terms of the contract between the Comptroller’s office and vendor banks and marketing firms, as well as the public’s response to the card. Private banking and marketing firms would absorb card issuance and marketing expenses and would be compensated from fees once the cards are issued.
Texans’ unique sense of identification with their state could provide a large market for a Texas affinity card and yield significant money to support education. For example, the Texas Parent Teacher Association has 750,000 members in Texas. Assuming a rebate of one percent of each transaction, if 20 percent of the members used a card at the average rate of $3,500 per year, the card would yield nearly $5.3 million annually for schools.
Interview with Ron Hagen, director of Community Services, city of Huntington Beach, California, Austin, Texas, May 28, 2002; and telephone interview with Mike Riley, Public Enterprise Group, city of Huntington Beach, California, July 19, 2002.
Tex. Gov’t Code Ann. § 403.0231 (Vernon 1988).
Interview with Gene McCarty, chief of staff, Texas Parks and Wildlife Department, June 19, 2002.
Tex. Gov’t Code Ann. § 403.0231 (Vernon 1988).
National Association of State Auditors, Comptrollers and Treasurers, Use of Procurement Cards in the States (Lexington, Kentucky, August 2001), p. 38-39.
Texas State Auditor’s Office, An Audit Report on Procurement Card Processes and Controls (Austin, Texas, February 2002), p. 6.
E-mail communication from Jennifer Wick, Texas Building and Procurement Commission, June 11, 2002.
Interview with Cindy Reed, assistant director of Administration and Procurement, Texas Building and Procurement Commission, May 30, 2002.