We’ve said before that affordability is going to be one of the primary challenges faced by water and sewer utility managers in the coming years (Why Affordability is the New Challenge for Water and Sewer Utility Owners, July 2010). The story that is unfolding in Jefferson County, Alabama (home to Birmingham) sheds some light on how, like the wide distribution on income itself, affordability means different things to different people. The Wall Street Journal reports today that a proposed settlement that would avoid bankruptcy for Alabama’s most populated county is being held up because of the impact the plan would have on those with low household incomes.
The problem it seems is that the current monthly sewer bill in the county of $37 might appear to be about average from the eyes of a Wall Street lawyer, but is in fact 7% of the household income of those making just $500 to $600 per month (about $7,500 per year). The median income in the city of Birmingham is about $31,000 per year ($10,000 less than Alabama’s statewide average). The current bill is around 1.5% of the city’s median income level, a level that might seem low enough but is relatively 3 times higher than the bills for municipal utilities rated A or higher by credit rating agencies. That’s just looking at the median…
A full 15% of Birmingham’s households earn less than $10,000 per year. The average monthly bill costs those families at least 4.5% of their monthly income, a level that EPA would call unaffordable by its current standards. By EPA standards, anyone making less than about $17,500 per year already has unaffordable sewer bills in Birmingham, and those bills are proposed to increase in the proposed settlement to avoid the largest municipal bankruptcy in US history. Additional increases are “inevitable” according to the county’s officials.
A good friend of mine once said that comparing average bills is kind of like dunking one of your feet in boiling water, and another in an ice bucket: the average temperature of the two might be fine, but the reality is that one foot is burning and the other one is freezing. Measuring affordability at median levels can be risky if you have what we call “fat tails” in the distribution where income is concentrated at the low and/or high ends. Since growth in real personal income has fallen for the first time in over 50 years, utility managers should expect more of their customers to be negatively affected by proposed rate increases than before. Even if income growth returns – and everyone believes will happen eventually – increased costs will still present challenges to utilities making affordability a major rather than minor consideration.