Using the Federal Poverty Level to Quantify Affordability

By Dr. Ahmed Rachid El-Khattabi, Research Director, SOG Environmental Finance Center

Water and sewer affordability is a growing concern for local government officials. This post breaks down keyways to measure affordability and suggests a more meaningful option for communities focused on supporting residents with the greatest need.

Percentage of Median Household Income

For many years, percentage of MHI served as the standard measure of income for assessing affordability and it remains the standard in many states. MHI represents the income earned by the household at the midpoint of the income distribution—essentially, a “typical” or “representative” household. This measure is the primary measure of affordability displayed on EFC’s dashboard. Though MHI is a solid measure for providing a general sense of economic conditions in a community, scholars and practitioners, including those at EFC, have increasingly pointed out many of its limitations in capturing the experiences of low-income households (for example, see here, here, here). Chief among its limitations is that low-income households often have incomes many times lower than the community’s MHI.

Affordability at the 20^th Percentile

In recent years, there has been a gradual shift towards alternative measures of income to better assess the extent to which households that are most economically vulnerable can afford water and wastewater services. The most prominent alternative is using income at the 20^th percentile.

In theory, measuring what’s left after a household pays for basics like housing, food, and healthcare, called “discretionary income,” gives a better picture of financial stress. But because that data is hard to get, most affordability studies rely on total (gross) income.

Shortcomings of Metrics Based on Percentiles

The idea behind 20th percentile measures is to understand how much lower-income households—those earning less than 80% of their neighbors—are paying for water. But this approach has two problems: the income level may not reflect actual poverty, and it varies so much across communities that it’s hard to compare fairly.

Figure 1 shows how much variation there is in both the income levels and the number of households at the 20^th percentile for water systems across North Carolina.

Figure 1: Income and Population Counts at 20^th Percentiles of Gross Income Note: EPA’s water service area boundaries are used to represent water systems.

Combining Measures of Household Burden with the Poverty Prevalence Indicator

To address the scale issue, scholars have attempted to create a blended approach to give both a sense of burden and scale. The Household Burden Indicator combines percentage income of 20^th percentile gross income with the Poverty Prevalence Indicator. The poverty indicator is defined in terms of the Federal Poverty Level (FPL) Guidelines (often referred to as federal poverty level guidelines, or FPL for short), a measure of income published annually by the US Department of Health and Human.

The FPL guidelines are national income thresholds used to determine eligibility for programs like Medicaid and SNAP. It’s one of the clearest, most widely recognized benchmarks for economic hardship and that makes it useful for thinking about affordability.

In practice, people have interpreted the FPL to be the minimum adequate amount to live. The FPL is used to determine eligibility for federal assistance programs including Medicaid; Supplemental Nutrition Assistance Program (SNAP); Women, Infants, and Children (WIC); and other programs. Note this is distinct from the US Census’s poverty thresholds that are used for statistical purposes.

The Household Burden Indicator approach essentially decouples the intensity from the scale issue by anchoring the number of households in a definition related to poverty as shown in Table 1.

Table 1: Household Burden Indicator

Federal Poverty Level as a Measure of Income

Other than its use in the poverty prevalence indicator and as a measure of poverty in analyses, the FPL is not commonly in affordability metrics as an income level in its own right. In my view, using it as the measure of income in affordability metric calculation offers a more meaningful alternative to median income or 20^th percentile income. Unlike median or 20^th percentile incomes, the FPL has inherent policy significance—it is explicitly used in practice as a clear benchmark for economic hardship.

Though many have criticized the FPL, there are practical workarounds. Many argue that the FPL underestimates the minimum income necessary for survival in today’s economy. Barring an update from the Department of Health and Human Services, one could use multiples of the FPL. The poverty prevalence indicator, for example, uses 200%. In the policy realm: Medicaid uses 138% of FPL, SNAP uses 130% of FPL, and WIC limits eligibility to 185% of FPL.

Others have criticized the FPL for not accounting for regional cost-of-living differences. This can be fixed by adjusting it using local data on cost of living. You can think of adjusting the FPL for cost of living like adjusting the weather report to account for humidity. It gives a more realistic picture of what families actually experience.

Still, the primary strength of using the FPL lies in its policy relevance: it is a widely recognized threshold in public policy and is often used to determine eligibility for assistance programs, thereby aligning affordability analyses with broader social and economic frameworks.

The question using percentage of FPL effectively answers is: “could an objectively poor person afford water in this community?” To get a sense of how many people are burdened at the relevant threshold, one can combine it with the poverty prevalence indicator, just like what is done with the Household Burden Indicator approach.

Figure 2A shows how much of their income a three-person household at the poverty line would pay for water and sewer service in each system. Figure 2B shows what share of households in each community fall below the poverty line, giving a clearer picture of who may struggle to pay.

Figure 2: Percentage of Income and Population at 100% FPL for Three-Person Household Note: EPA’s water service area boundaries are used to represent water systems.

Varying Objectives

There’s no single “best” way to measure affordability. Table 2 overviews the different metrics and summarizes advantages and disadvantages of each. Given some of the challenges associated with existing metrics, some scholars have recommended visualizing the cost of water for the entire income distribution, an approach adopted by the EFC in its affordability assessment tool and affordability dashboard. But if your community wants a single metric to understand how rate structures affect people living in or near poverty, using the FPL offers a clearer, more policy-relevant benchmark and helps align water affordability decisions with broader social service efforts. More importantly, using the FPL in affordability metrics gives local governments a more consistent, policy-aligned way to understand and address water affordability for their most vulnerable residents.