At the Environmental Finance Center, we think a lot about the affordability of public services including environmental services such as drinking water. Historically, many programs have measured affordability by looking at the cost of service compared to a community’s median household income, though this measure is limited. A better way to measure affordability is to look at the cost of services over a range of income buckets.
All of these measures, though, are looking at affordability compared to annual income. That can be a good measure if households only have regular expenses. But what happens if a household has an unexpected expense? Would that household be able to cover its regular expenses if it had an emergency expense?
Since 2013, the Federal Reserve Board has conducted the Survey of Household Economics and Decisionmaking (SHED), which measures the economic well-being of U.S. households and identifies potential risks to their finances. The survey includes modules on a range of topics of current relevance to financial well-being including credit access and behaviors, savings, retirement, economic fragility, and education and student loans. Their most recent report came out on May 22, 2018, and The Indicator podcast from Planet Money featured the survey results on a recent episode.
One section of the survey looks at how adults in the United States can handle unexpected expenses. Respondents were asked whether they would be able to cover an unexpected $400 expense. Needing $400 for an unexpected expense is not unreasonable—the average car repair bill is between $500 and $600, and the median cost of a major unexpected medical bill is about $1,200.
The survey found that about 4 in 10 adults in 2017 would either borrow, sell something, or not be able pay if faced with a $400 emergency expense, while the rest said they could easily cover it, using entirely cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). For the 4 in 10 without access to $400 cash or its equivalent, most said they would carry a balance on their credit cards or borrow from friends or family.
The survey also looked at whether people can pay bills regardless of whether they have an emergency expense. Even without an unexpected expense, 22 percent of adults expected to forgo payment on some of their bills in the month of the survey. Most frequently, this involves not paying, or making a partial payment on, a credit card bill. But one-third of those who are not able to pay all their bills say that their rent, mortgage, or utility bills will be left at least partially unpaid in the month that they were surveyed. Another 11 percent of adults reported that they would be unable to pay their current month’s bills if they also had an unexpected $400 expense that they had to pay.
While these numbers may seem high, they have been improving since the Fed began the survey back in 2013. That year, half of adults surveyed reported that they could not cover an unexpected $400 expense with cash or its equivalent.
What does all of this mean for public services? Most services are aware of how many of their customers are not currently paying bills in full or in part, but they should also be aware that many customers may be vulnerable to not being able to pay bills in full or in part if those customers faced an unexpected expense. For water and wastewater systems interested in creating an assistance program for those types of customers, the Environmental Finance Center has resources describing the legal pathways to funding customer assistance programs with rate revenue.