The Brookings Inst itut ion

Metropol itan Pol icy Program

The Price is WrongGetting the Market Right for

Working Famil ies in Phi ladelphia

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1775 Massachusetts Ave. NWWashington, DC 20007

The Brookings Institution 2005©

The Brookings Inst itut ion

Metropol itan Pol icy Program

THE PRICE IS WRONGGett ing the Market Right for

Working Famil ies in Phi ladelphia

We would like to first acknowl-edge the Annie E. CaseyFoundation who provided the gen-erous support that made this reportpossible. In particular, we want tothank Robert Giloth, JohnMonahan, Gwen Robinson andIrene Skricki who provided criticalinitial guidance. We would also liketo thank Douglas Nelson and RalphSmith. Their work over the pastseveral years on the high costs ofbeing poor was the inspiration forthis report and provided the foun-dation for our analysis. Out of theirbroader work on the high costs ofbeing poor, we focus here exclu-sively on higher prices, since thishas such novel and somewhat dis-tinct implications for marketreforms. But, it is certainly not theonly type of high cost. The pooralso must manage a higher burdenpaying for goods and services thanother households, face out-of-reachexpenses for some necessities, andcontend with a reduction in bene-fits when their earnings increase.This range of higher costs isexplored by the Annie E. CaseyFoundation in several publications,including a 2003 Kids Count essay

titled “The High Costs of BeingPoor: Another Perspective onHelping Low-Income Families GetBy and Get Ahead.”

A special note of gratitude alsogoes to Sharmain Matlock-Turnerand Jean Hunt at the GreaterPhiladelphia Urban AffairsCoalition. Through their extraordi-nary efforts, we were able to bene-fit from five listening forums with asteering committee comprised of adiverse and insightful group of stateand local leaders. In addition toSharmain and Jean, these included:Dwight Evans, state representative;Mark Alan Hughes, distinguishedsenior fellow at the University of Pennsylvania; Hilary Hunt,director of financial education for Pennsylvania; William RossMiller IV, president of RossAssociates; Jeremy Nowak, presi-dent of The Reinvestment Fund;Jacqueline Bratton Patterson, associate at The ReinvestmentFund; Patricia L. Smith, director ofthe Neighborhood TransformationInitiative; Marian Tasco, city coun-cilwoman; David B. Thornburgh,executive director of the Pennsyl-vania Economy League; and

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Acknowledgments

While preparing this report we have benefited from a

great number of people who have shared with us

their expertise, insight, and resources. We are pro-

foundly grateful.

Richard Voith, senior vice presidentand principal of EconsultCorporation. All of these leadersgave us their unique perspective onthe city and state, and candid feed-back throughout the research andwriting process. We are profoundlygrateful to each of these membersof the steering committee for thesecontributions.

We would also like to thank anumber of people that opened theirdoors during the past nine monthsto us and shared their expertise anddata resources. Many of those peo-ple also generously made time tocomment on all or sections of thisreport. These include HannahBurton; Laurie Actman; SonnyPopowski; Meg Power; Lance

Haver; Debb Kinter; PhilKaufmann; Ephraim Leibtag; ScottBernstein; Carrie Makarewicz;Joyce Iutcovich; Bob Hunt; LouSouers; Brett Mandel; KevinGillen; Lydia E. Hernandez-Velez;Allison Hughes; Janet Parrish;Steve Hershey; Liz Robinson; rep-resentatives from the followinginstitutions: Pennsylvania Chamberof Commerce, PennsylvaniaDepartment of Insurance;Pennsylvania Department ofBanking; Pennsylvania PublicUtility Commission; PhiladelphiaGas Works; and the many, manypeople we have talked to about dataresources. Evan Decorte, KirkKlausmeyer, Nicholas Minter, HieuTruong, and Dustin White provided

excellent help finding many ofthese resources.

We would also like to thankKerri Shaffer, Temple Universitycommunications intern, andCrystal Jacobs, communicationsassociate at the GreaterPhiladelphia Urban AffairsCoalition, for providing us withinsightful interviews of several fam-ilies in Philadelphia. And, we wantto thank Steve Bowers, a formercommunications analyst at TheBrookings Institution, RobinRobinowitz, director of communi-cations at the Greater PhiladelphiaUrban Affairs Coalition, andCharlie Thomson, president ofThomson Communications, forhelping us communicate the ideasin this report to a wider audiencethan we would otherwise have beenable to.

Matt Fellowes is the principalauthor of this report. Bruce Katzwas a critical partner in its develop-ment. Alan Berube, David Jackson,Amy Liu, and Mark Muro providedcrucial guidance and supportthroughout this project. They alsofostered a catalytic, stimulatingenvironment to work in, which pro-vided daily inspiration for thisreport.

The responsibility for the con-tents of this report is ours alone.

Note: The views expressed here donot necessarily reflect those of thetrustees, officers, or staff members ofthe Brookings Institution, the boardsor staff of the Annie E. CaseyFoundation, or the members of thesteering committee.

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Targeting schools, its tax code,and its business environment, thecity is making great efforts toreverse decades of decline.

And yet, while much ofPhiladelphia transforms, many ofthe city’s large number of familiesworking toward middle class mem-bership are being left behind.

The statistics are bleak: Over onein five of Philadelphians lives belowthe poverty line. Over one out ofevery four households lives off lessthan the minimum wage. And justone in five adults in the city has acollege degree, a lower proportionthan nearly 100 other large U.S.cities.

To move ahead, the city mustrenew opportunities for its largenumber of aspiring middle classfamilies. Schools, the economy, cityservices, neighborhoods—all themajor ingredients of city life—are

more vigorous when cities have alarge and growing middle class.

Certainly, Philadelphia and itsstate and local leaders shouldexplore a broad, traditional agendaof expanding access for low-incomefamilies to jobs, while making surethose jobs pay. But, the city mustdo more.

Put simply, Philadelphia mustmake the market work for low-income families. Thousands of dol-lars are currently drained from thebudgets of Philadelphia’s workingfamilies through higher prices foreveryday goods and services. Thesehigher prices—higher than thosepaid by better off families for theexact same goods and services—hold back all aspiring middle classfamilies, even those who gainaccess to jobs and benefits thatmake those jobs pay, drainingmuch-needed family investmentdollars and increasing family finan-cial insecurity. Just as Philadelphiahas worked to change its schools,economy, and tax code, the citymust also transform the market tobetter price everyday goods andservices for low-income families.

This report is about this tremen-dous, and largely hidden, opportuni-ty Philadelphia has to grow its mid-

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Executive Summary

The challenges facing major U.S. cities are daunting—pop-

ulation loss, disinvestment, and fiscal difficulty are all too

common. But Philadelphia, facing all these trends and

then some, has been in the vanguard of combating them.

Put simply, Philadelphia must

also grow a middle class by

making the market work for

low-income families.

dle class. We reach several conclu-sions about the need for state andlocal leaders to seize this opportuni-ty and pursue avenues for change:

Philadelphia’s low-incomeworking families pay higherprices for most everydaygoods and services thanother households. In general,these families pay more to buy andinsure their cars. They pay higherprices to buy groceries in theirneighborhoods. They pay higherprices to buy and insure homes.They pay higher prices to buy fur-niture and appliances. They payhigher real estate taxes. And, theyoften pay higher prices for utilities.In fact, aside from the lower valueof their homes, low-wage familiesin Philadelphia pay higher pricesthan other households for nearlyevery basic necessity. In particular:• Car purchases: Low-income

families in Philadelphia can payover $500 more for the same carbought by a higher-income house-hold.

• Car loans: More than half ofhouseholds with an auto loan thatearn less than $30,000 a year paya higher interest rate than theaverage borrower.

• Car insurance: The annual costto insure the exact same car anddriver in the Philadelphia area isover $400 more in a neighbor-hood with a median income lessthan $30,000 than in a neighbor-hood with a median income morethan $70,000.

• Buying groceries: Philadelphia’slow-income neighborhoods havesmaller grocery stores and moreconvenience stores than otherneighborhoods.

• Cashing checks: Most of thecity’s 147 check-cashing establish-ments are in low-income neigh-borhoods, which are allowed bystate law to charge up to $450every year to cash checks for ahousehold earning $15,000.

• Short-term loans: AlthoughPennsylvania is often heralded asa state that has banned paydaylending, state regulations allowproviders of short, two-week loansto charge an annual percentagerate over 450 percent.

• Establishing utility service:

Current state regulations makelow-income families more likely topay a higher security deposit touse Philadelphia’s utilities thanother households.

• Gas prices: At current rates, itcosts the typical family inPhiladelphia about $300 more

every year to use a typical amountof natural gas than households inthe suburbs.

• Home loans: Low-income house-holds can pay hundreds, eventhousands, more every year forthe same mortgage taken-out by ahigh-income household.

• Home appliances and furni-

ture: A survey of Philadelphia’srent-to-own stores, used almostexclusively by low- and moderate-income households, found thatthe average installment planmark-up was 90 percent over thepurchase price.

• Real estate taxes: Homes inPhiladelphia’s low-income neigh-borhoods are much more likelythan homes in high-incomeneighborhoods to be assessed atvalues higher than their worth.

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These higher prices are theconsequence of the marketnot working for low-incomefamilies in Philadelphia. Fourmarket characteristics, in particu-lar, cause these higher prices inPhiladelphia, which include:• Businesses react rationally to

the real or perceived higher

risks of selling goods and serv-

ices to low-income households

by charging higher prices.

Generally higher loan and billdelinquency rates among low-income families, and higher acci-dent rates in the neighborhoodsmany of these families live in,drive up the costs of selling manygoods and services to low-incomehouseholds. These higher costsare passed on to low-income con-sumers through higher prices.

For instance, low-incomehouseholds are more likely thanother households to fall behindin bill payments. This drivesdown their credit scores, whichdrives up the prices they pay forauto, home, and other types ofinsurance; auto, home, and othertypes of loans; and securitydeposits.

But, low-income householdsare also often perceived as higherrisks because of limitations incurrent methods used to measurerisk, rather than because of a real,higher risk. For instance, marketdemand data is less reliable inlow-income neighborhoods, whichcan create artificially high risks inthese neighborhoods. Similarly,there is evidence that errors incredit scores, which are factoredinto insurance, loan, and utilitysecurity deposit prices, inflateperceptions about the risk of sell-

ing goods and services to low-income households.

• Consumers lack full informa-

tion about the marketplace.

This particularly hurts low-income households since theygenerally have less access thanother households to informationresources, such as the Internetand financial education. Thismakes them less able to shop forlower prices, recognize inflatedprices, and effectively managetheir money. In turn, this drivesup the prices they pay for basicnecessities.

Lack of basic market informa-tion is exacerbated by the increas-ing complexity associated withbuying goods and services. Creditscores, for instance are now usedto set prices for auto, home, andother types of insurance; auto,home, and other types of loans;and security deposits. Withoutknowledge about how to raisethese scores, low-income house-holds can end up paying higherprices than they might otherwisequalify for.

• Weak enforcement, deregula-

tion, and limited regulation

have fostered market abuses

that take advantage of low-

income households. A perfectmarketplace would automaticallyset the lowest possible price foreveryday goods and services. But,markets are often far from perfectand fringe suppliers of thesenecessities can take advantage ofthese imperfections by chargingexcessively high prices.

For instance, a gap in state reg-ulations allows short-term lendersto charge an annual percentagerate over 450 percent for short-

term loans, even though state lawcaps interest rates at 23.75 per-cent.

• And, in Philadelphia, the public

supply of goods and services

drives up prices for some

necessities. Most householdsconsume public utilities, so thiscause of higher prices does notraise prices for just low-incomefamilies. But, low-income familiesdo have less room in their budg-ets, which makes these higherprices particularly difficult to payfor.

For instance, the typical house-hold in Philadelphia that useshome gas will pay about $300more for that gas than suburbanhouseholds pay for the sameamount of gas. This takes $300out of the budget of low-incomefamilies every year, a significanthit for families trying to moveahead.

Higher prices undermine theability of low-income work-ing families in Philadelphiato accumulate wealth,stalling the efforts underwayto make the economy trulycompetitive. The fates ofPhiladelphia’s aspiring middle classfamilies and the city are inextrica-bly linked.

When low-income working fami-lies have to pay higher prices foreveryday goods and services theyhave less money to invest in sav-ings, education, homes and homeimprovements, their retirement,and their children. This holds thesefamilies back.

But, higher prices also hold backeverybody else in the city frommoving forward. Aspiring middle

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class families that are not gettingahead keep the city’s tax base weak,lowering the quality of life foreveryone, threatening the promiseof a public education, and makingit increasingly difficult for the cityto attract and retain new families.Unabated crime, low property val-ues, and all of the many conse-quences of concentrated povertycontinue to wear away neighbor-hoods. In turn, these neighbor-hoods remain unattractive formainstream business investment,since the risks of doing businessare too high. And, this void ininvestment is left filled by predato-ry businesses that take advantage ofthe everyday needs of Philadelphia’slow-income working families.

The city of Philadelphia hasa tremendous opportunity toget the market right for low-income working families andmove the city farther aheadin reaching its aspirations.State and local government, busi-nesses, and organizations in thecity all can contribute to an agendathat lowers the risks of doing busi-ness with low-wage families, booststhe amount of information aboutthe market for everyday goods andservices, fights market abuses, andlowers the costs of publicly-sup-plied necessities.

Reduce the risks of doing busi-

ness with low-wage families by:

• Investing in financial literacy

This will give families the toolsto reduce the risks they facewhen buying goods and services.

• Reassessing the market

demand in low-income neigh-

borhoods

This will reduce some of therisks of selling goods and serv-ices in more uncertain marketsfor businesses.

• Studying how companies

measure risk

This will help companies meas-ure risk in ways that do notascribe undue risks to low-income families.

• Leveraging capital for business

investment in low-income

neighborhoods

This will directly subsidize thecosts of doing business in low-income neighborhoods.

• Reducing neighborhood risks

This will lower the risks of sell-ing goods and services in low-income neighborhoods.

Boost the amount of informa-

tion low-wage families have

about the market by:

• Developing and distributing a

roadmap for families to

improve credit scores

This will give families animportant tool to lower theprices they pay for everydaygoods and services.

• Rethinking and reinvesting in

financial education

This will give consumers theknow-how to recognize inflatedprices, shop for good deals, andmanage their money effectively.

• Giving low-income families a

catalog of programs designed

to lower prices

This will give families access tothe numerous existing pro-grams designed to lower theircosts of living.

Fight market abuses by:

• Fortifying efforts underway to

curb market abuses in the city

This will create a safety net toprotect consumers from marketabuses

• Strengthening regulations

governing the short-term loan

industry

This curbs a major gap in stateregulations that allows annualpercentage rates to soar wellabove interest rate caps.

• Publicizing the names of com-

panies that take advantage of

low-income families

This creates a strong incentivefor market abusers to changetheir behavior.

• Investigating and developing

policy to curb predatory tort

lawyers.

This will directly drive downthe prices that low-wage fami-lies pay for insurance.

Lower the prices of publicly

supplied goods and services by:

• Expanding support for home

efficiency

This will lower the amount ofhigh-priced gas that familiesconsume.

• Reform state regulations to

expand resources for

Philadelphia Gas Works

This will reduce the pressurePhiladelphia’s gas companyfaces to raise rates.

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ContentsIntroduction: The importance of growing a middle class in Philadelphia ..................................................................9

Methodology and Definitions ..................................................................................................................................13

The prices that Philadelphia’s low-wage families pay for goods and services ...........................................................15Automobile Costs

Car purchases.............................................................................................................................................15Car loans ....................................................................................................................................................17Car insurance.............................................................................................................................................19

What causes higher car prices? ............................................................................................................21Grocery Costs

Grocery prices ............................................................................................................................................23What causes higher grocery prices?......................................................................................................24

Financial Services CostsCashing checks...........................................................................................................................................25Short-term loans.........................................................................................................................................26

What causes higher financial services prices? ......................................................................................28Utility Costs

Establishing utility service ..........................................................................................................................29Gas prices...................................................................................................................................................30

What causes higher utility prices? ........................................................................................................31Home Costs

Home loans ................................................................................................................................................32Home insurance .........................................................................................................................................34Home appliances and furnishings...............................................................................................................35Real estate taxes .........................................................................................................................................37

What causes higher prices related to housing?.....................................................................................38

What are the effects of these higher prices on Philadelphia? ..................................................................................40A cycle of market dysfunctions .........................................................................................................................40Financially insecure families throughout Philadelphia......................................................................................43Limited asset investments among low-wage families.........................................................................................44Lost opportunities for local businesses .............................................................................................................45

Policy RemediesGetting the prices right: improving market dynamics for working families ..............................................................46

Goal: Reduce the risk of selling goods and services to low-wage families .........................................................46Goal: Give consumers the information they need in today’s new market ..........................................................51Goal: Curb market abuses through regulation ..................................................................................................54Goal: Lower the prices of goods and services sold by government in Philadelphia............................................56

Conclusion .............................................................................................................................................................58

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But, the city has set itself apartfrom its peers with the innovationsresponding to these challenges. Arecently completed reform of thecity’s tax code will fundamentallyimprove the climate for businessinvestment if implemented. TheNeighborhood TransformationInitiative, undertaken in 2001 torevitalize the city’s many blightedneighborhoods, has already cleaned31,000 vacant lots, removed200,000 abandoned cars, anddeveloped 5,000 new affordable

housing units.2 And, Philadelphiahas a vibrant community of organi-zations developing new marketproducts and collaborative partner-ships to grow the assets andincomes of low-income workingfamilies.

And yet, for all of the concretepoured, ribbons cut, and goals set,there is an important trend eatingaway at this progress: Philadelphia’smiddle class is shrinking.

In fact, households in the bot-tom quintile of income were the

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Introduction:

The importance of growing a

middle class in Philadelphia

Like many large cities, Philadelphia faces the daunting chal-

lenges of population loss, outmigration of young and talent-

ed workers, a stressed revenue base, business disinvestment,

racial tensions, and high concentrations of poor neighborhoods.1

only group to grow in Philadelphiabetween 1979 and 1999.3 In con-trast, every other income quintilelost households between 1979 and1999. The middle three incomequintiles lost between 1 and 13percent of its households between1979 and 1999 and the highestincome quintile lost 24 percent of its households during this peri-od. The result: by 2003 one out of every five individuals inPhiladelphia lived below the pover-ty line, nearly the same level in1999.4

Shrinking numbers of middleclass households in Philadelphiaerode the city’s effort to becomecompetitive again. Without a mid-dle class tax base, the city has lessmoney to spend on schools andservices, which lowers the qualityof living for everyone, threatens thepromise of a public education, andmakes it increasingly difficult forthe city to attract and retain newfamilies. Crime rates, property val-ues, and all of the many conse-quences of concentrated povertyalso continue to wear away neigh-borhoods.5

But, the city is not alone amongits peers in struggling to grow,attract, and retain a middle class.Nor, is the city alone in its struggleto attract and retain middle- andhigher-income households. One-fourth of households in the 100largest cities have incomes that arein the bottom one-fifth nationally.The proportion of households withhigh incomes declined in 79 of the100 largest cities between 1979and 1999. And, almost half of the100 largest cities saw the size oftheir middle class shrink duringthis period.

For these reasons, Philadelphiacan both learn from and sharestrategies to grow a middle classwith its peer cities around thecountry, much as it has alreadydone in the campaigns to transformthe city’s landscape and climate forbusiness. And many middle classstrategies are underway fromexpanding worker access to jobs tomaking work pay. However,Philadelphia has an opportunity toundertake a new market-orientedapproach to building a middleclass, one focused on getting theprice of daily living right for fami-lies.

Current Local Strategies to

Grow a Middle Class

There are a set of core strategies toexpand low-income workers’ accessto jobs through education, training,and transportation initiatives. Thisincludes such initiatives as educa-

tion tax credits and loan programs,numerous workforce developmentprograms, car-waivers in supple-mental programs, and vanpool serv-ices, among other examples. Incases where all or most of thefunding for these programs comesfrom the federal government, citiesuse these programs to grow a mid-dle class by boosting the participa-tion rates among eligible house-holds. In other cases, states, cities,or local organizations have devel-oped their own initiatives. Forinstance, the Greater ClevelandGrowth Association, one of thenation’s largest metropolitan cham-bers of commerce, identified theworkforce needs of companies inthe metropolitan area and helpedequip over 2,000 individuals withskills needed by employers, landingthem well-paying jobs.6 And, gov-ernments and organizations in 30states have sponsored car owner-

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Source: Berube and Tiffany (Brookings Institution 2004).

Philadelphia’s middle and upper classes shrank over the last two decades

0,000

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

HighUpper-MiddleMiddleLower-MiddleLow

Household Income Quintile

Num

ber

of H

ouse

hold

s

+7%

-1%

-10%

-13%

-24%

Philadelphia 1979Philadelphia 1999

ship programs among low- andmoderate-income households toexpand access to jobs located out-side the reach of public transporta-tion.

Another important set of strate-gies aim to make work pay. Thisincludes initiatives to increase theminimum wage, or impose whatsome states and cities now call a

“livable wage” and improve employ-ee benefits from employers. Theseinitiatives also include outreach toimprove low-income workers’ par-ticipation in key federal people-based investments, including theEarned Income Tax Credit (EITC),Child Care Tax Credit, Food Stamps,and Medicaid, among many otherprograms. Again, where the federal

government provides the bulk offunding, cities use these programsto grow a middle class by boostingparticipation. Organizations like theCampaign for Working Families inPhiladelphia, for instance, havebeen integral to boosting partic-ipation in the Earned IncomeTax Credit program, which in2002 brought nearly $300 million

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Source: Authors’ analysis of 2000 CensusNotes: These maps were created by rank-ordering the median income in every census tract in Bucks, Chester, Delaware, Montgomery, andPhiladelphia counties, and then splitting the tracts into four, even groups. Data is displayed for all census tracts in the designated quartile ofhousehold income.

Most low- and moderate-income households in the Philadelphia area live in the city

Census Tracts within the First Quartile of Median Income (<$32,634) Census Tracts within the Second Quartile of Median Income ($32,634 – $46,730)

Census Tracts within the Third Quartile of Median Income ($46,730 – $63,274) Census Tracts within the Fourth Quartile of Median Income (>$63,274)

0 10 20 30 405

Miles

County Boundaries

Census Tracts

Chester

Montgomery

Bucks

Delaware

Philadelphia

Chester

Montgomery

Bucks

Delaware

Philadelphia

Chester

Montgomery

Bucks

Delaware

Philadelphia

Chester

Montgomery

Bucks

Delaware

Philadelphia

into the Philadelphia economy andover $500 million into the metro-politan area.7 In other cases, thestate, city, or local organizationshave supplemental or independentprograms. Many states, forinstance, have adopted a stateEITC. Similarly, thirteen stateshave now passed legislation thatboosts the minimum wage abovethe federal standard.

A New Strategy to Get the

Market Right for Working

Families

A potentially powerful but lessunderstood set of strategies used togrow a middle class is reducing theprices charged to low-wage familiesfor basic necessities. Nearly all ofthe work in this category has beenrelated to reducing the costs offinancial services, particularly costsassociated with high-fee and high-rate mortgage lending, check cash-ers, payday lenders, pawnshops,and refund anticipation loans. Forinstance, state governments likePennsylvania and North Carolinahave passed laws that are meant tocurb abuses in the mortgage lend-ing market. City governments likePhiladelphia’s have responded withlow-cost alternative loan productsand new financial education forhousing counselors supported bythe Community DevelopmentBlock Grant. And, organizationslike The Reinvestment Fund andthe Greater Philadelphia UrbanAffairs Coalition have also helpeddevelop alternative loan products.

But, the same factors that causelow-income working families to payhigher prices for basic financialservices also cause higher prices forother basic necessities. As this

report demonstrates, low-wage fam-ilies pay higher prices to buy andinsure cars. They pay higher pricesto buy groceries in their neighbor-hoods. They pay higher prices tobuy and insure homes. They payhigher prices to buy furniture andappliances. They pay higher realestate taxes. And, in Philadelphia,they often pay higher costs for utili-ties. Aside from the lower value oftheir homes, low-wage families payhigher prices than higher-incomehouseholds for nearly every neces-sity.

Although these costs can add upto thousands of dollars in higherprices for individual families everyyear, many of these higher prices

are unrecognized by state and localleaders. This report is the first toever fully document these highercosts and does so for thePhiladelphia region. The stark find-ings in this report afford an oppor-tunity for state and local leaders toreclaim potentially thousands ofdollars for low-income workingfamilies. Moreover, lowering thecosts of basic necessities benefitsnot just working families but allPhiladelphians. All households, forinstance, would gain by receivingmore information about pricing fac-tors, like credit scores. Similarly allhouseholds would benefit frompolicies that lower the costs of nat-

ural gas and car insurance, both ofwhich are more expensive inPhiladelphia than in most othercities across the country.

The report starts by reviewingthe costs of many household budg-et items and how these costs varyacross neighborhood and householdincome levels. The report thenexamines the reasons behind thewide differences in the costs ofthese basic items.

Finally, the report examinessome solutions to the high pricedilemma facing working families:Reducing the risks of doing busi-ness, giving consumers the infor-mation they need in today’s market-place, curbing market abuses, and

lowering the cost of publicly sup-plied goods and services inPhiladelphia—in short, getting themarket right—are all within reachof leaders in the private and publicsector. ■

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Aside from the lower value of their

homes, low-wage families pay higher

prices than higher-income households for

nearly every necessity.

Low-wage or a low-income

working family

This report uses the terms“low-wage family” and “low-income working family”

interchangeably. Many definitionsof these terms exist. Some arebased on a percentage of the pover-ty line; others are based on thepopulation of recipients in a federalincome support program; others arebased on distributions of income,such as quartiles or quintiles; andstill others are based on one of ahandful of alternative measures ofsufficiency.

Of these definitions, the mostappropriate measure for this reportis one that is based on a distribu-tion of income, the most literal ofthe extant measures. This isbecause many unit prices for basicnecessities are systematically asso-ciated with family income, regard-less of the sufficiency of one’swages or the size of one’s house-hold. In most cases this means thatthe costs of basic necessities arehighest for those with the lowestincome and least expensive forthose with the highest income.

But, income was not defined as a

constant distribution of income inthis report because we rely ondozens of different data resources,many of which vary in the measure-ment of income. Where possible,measures are consistent. Thismeans that the most frequent dis-tribution of income we present ishousehold income increments of$15,000. For instance, the lowestincome group earns between $0and $14,999 annually, the secondearns between $15,000 and$29,999, and so on. We also usehouseholds who earn less than$30,000 as representative of low-income families, and householdswho earn more than $70,000 asrepresentative of high-income fami-lies. None of the results or conclu-sions we draw are dependent onthese categories of income. As thefigures in each section suggest, wecould have nearly as easily usedhouseholds earning less than$20,000 or $10,000 as low-income,or households earning more than$80,000 or $90,000 as high-income. The bottom line is thatthese unit prices are systematicallyassociated with household income,which means families earning a

low-income are likely to pay a high-er price than households with high-er income.

The Philadelphia metropolitan

area

This report focuses on house-holds that are living withinthe city of Philadelphia.

However, data are also presentedwhere it is available, for the fourother Pennsylvania counties thatmake-up the rest of thePennsylvania portion of the metro-politan area. This includes Bucks,Chester, Delaware, andMontgomery counties. Data fromthe five counties that make-up thePennsylvania portion of the metro-politan area—Bucks, Chester,Delaware, Montgomery, andPhiladelphia—are referred to as the“Philadelphia area” or the“Pennsylvania portion of the metro-politan area.” Data from the cityare referred to as “Philadelphia” or“the city.”

Data on multiple levels of geog-raphy are used to put the informa-tion about Philadelphia’s familiesand neighborhoods in context withthe metro area. It’s also meant toillustrate for state and local leadersthat higher prices charged to low-wage families affects familiesthrough out the metropolitan area.And, we focus specifically on thePennsylvania portion of the metro-politan area because this reportconcentrates on reforms govern-ments, businesses, and organiza-tions in Pennsylvania can act upon.

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Methodology and Definitions

The prices of basic necessities

The price of basic necessitiesused in this report refers tothe unit price. The unit

price does not refer to cost burden,or the cost of a necessity relative toeither annual income or annualexpenditures. It also does not referto the absolute expense of an item.For instance, an Audi A4 has ahigher absolute expense than aFord Taurus. However, this reportdemonstrates that the unit price ofboth cars is higher for low-incomefamilies than higher-income house-holds. This means, for instance,that a low-income household ischarged a higher price for the FordTaurus than a high-income house-hold. It also means that low-incomeworking families are charged morethan higher-income households toborrow the same amount of moneyto buy this car and the sameamount of insurance to insure thiscar.

Measuring the prices of basic

necessities

There are numerous samplesthat measure informationrelated to the prices of basic

necessities. The ConsumerExpenditure Survey, for instance,measures the amount that differenthouseholds expend on basic neces-sities. Similarly, the ConsumerPrice Index is one of manyresources that measure the price ofmany necessities in different partsof the country.8 But, there is nosimilar, comprehensive resourcethat provides information about theprices different consumers pay forthe exact same good or service indifferent areas of the country. Forthis reason, this report uses dozens

of different data resources to docu-ment the prices that consumers payfor the exact same necessity inPhiladelphia and the Pennsylvaniasuburbs around the city.

In particular, the major sourcesof data in this report are J.D. Powerand Associates, the FederalReserve’s Survey of ConsumerFinances, the Department ofCommerce’s American CommunitySurvey, the Department ofCommerce’s Decennial Census,Fair Issac, Allstate InsuranceCompany, Progressive InsuranceCompany, the PennsylvaniaDepartment of Insurance, thePennsylvania Public UtilityCommission, the Philadelphia GasWorks Company, Oil PriceInformation Service, TradeDimensions, Department ofCommerce County BusinessPatterns data, the Federal TradeCommission’s Survey of Rent-to-Own Establishments, Departmentof Energy’s Residential EnergyConsumption Survey, thePhiladelphia Tax ReformCommission, two anonymoussources, and Loan Performance. Inaddition to these major dataresources, we also relied on numer-ous additional minor data resourcesto inform this report.

In spite of this broad cross sec-tion of data, we were still unable tofind unit prices for every basicnecessity where there were strongreasons to believe that low-wagefamilies are charged higher pricesfor basic necessities than higherincome households. In some caseswe supplemented this informationgap with data on neighborhoods.For instance, although we were notable to directly compare the aver-

age cost of using a rent-to-owninstitution relative to a mainstreamsupplier of short-term credit orbuying furniture outright, we wereable to find data on the distributionof rental establishments throughout the metropolitan area. But, inother cases, we have noted thatsufficient data was not available.

Similarly, we were not able tofind local information about pricesfor every basic necessity reviewedin this report. For instance, wecould not find sufficient local datato measure the higher prices thatlow-wage working families arecharged to buy a car. But, there isexcellent national data related tothese prices, and we have no rea-son to suspect that Philadelphia’sfamilies are systematically differentfrom families represented in thisnational sample. Also, the majorcauses of higher prices for low-wage families—rational marketresponses, market information fail-ures, and market abuses—are gen-eral causes, which means thatnational data should illustratetrends in Philadelphia’s market.9

For these reasons, we have docu-mented the methodology andsources used to measure prices inevery section. We have noted in thetext where we have used neighbor-hood data in place of individualinformation, and where nationaldata is used to illustrate the exis-tence of higher prices inPhiladelphia’s market. And, wehave refrained from publishing an estimate of the total value ofthese higher prices for workingfamilies. ■

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This section of The Price isWrong reviews these higher pricesin Philadelphia. The analysis indi-cates that, in general, low-wagefamilies in the Philadelphia areapay more than higher incomehouseholds to:• Buy and insure their cars• Buy groceries in their neighbor-

hoods• Access and borrow money from

financial institutions• Establish utility service and use

gas • Buy, maintain, and furnish a

home.

Alarge majority of low-income families inPhiladelphia own a car. In

fact, over 66 percent of all house-holds in the Philadelphia area thatearn less than $30,000 every yearhave access to at least one car.10

And, the median household in thisincome group has access to twocars. Similarly, over 57 percent ofhouseholds that earn less than$30,000 and live in the city own at

least one car. Although householdswho earn higher annual incomesare more likely to own a car thanhouseholds in this income group,most low-income households in thePhiladelphia area own a car.

Data on the prices that werecharged to these households whenthey bought their cars is scarce. Infact, no information is availablethat would allow us to examinehow many people buy a new or

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The prices that Philadelphia’s

low-wage families pay for

goods and services

All households rely on basic goods and services, like trans-

portation, grocery stores, financial services, insurance,

utilities, and housing. But, the unit prices for many of

these necessities are higher for low-income families than higher-

income households. Some of these higher costs, like financials serv-

ices, are well documented and analyzed. But, most are unrecognized

by state and local leaders, who tend to focus on the burden of these

necessities rather than the unit price, or on higher prices that are

caused exclusively by market abuses.

THE COSTS TO PURCHASE AND MAINTAIN A CAR

CAR PURCHASES: Philadelphia’s low-income

working families can pay over $500 more for the same

car bought by a higher-income household.

used car in the Philadelphia area,the prices they pay for these cars,and the demographics of each carbuyer. But, there are national datathat can speak to these questions.11

Assuming that this consumerbehavior in a national sample ofhouseholds is similar inPhiladelphia, then approximately27,000 households that earn lessthan the median income in thePhiladelphia area likely buy carsevery year.12

National data also allow us toinfer the likely prices charged tothese households when they buyautomobiles. We can see exactlyhow much more a low-wage familywould be charged for a car than ahigher-income family by comparingtwo hypothetical customers.13

Customer 1 is white (43 percent ofthe individuals in Philadelphia),has a high school diploma (75 per-cent over 24), owns a house (42percent of individuals live in anowned-home), and lives in a neigh-borhood with a median income of$80,000 (46 percent earn between$70,000 and $90,000). Customer 2is African American (44 percent ofthe individuals in Philadelphia),dropped out of high school (25 per-cent over 24), rents a home (58percent of individuals live in ahome they don’t own), and lives ina neighborhood with a medianincome of $20,000 (27 percentearn between $10,000 and$30,000).14

According to research based onover 650,000 car purchases,Customer 2 would pay over $500more for the same automobile thanCustomer 1. Although the differ-ences in income accounts for onlyabout one fifth of this total effect,

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Source: Authors’ analysis of 2000 Census PUMS.Note: Access is defined as having at least one car in the household. The Philadelphia areaincludes the city and the four suburban Pennsylvania counties—Bucks, Chester, Delaware,and Montgomery.

Nearly all households in Philadelphia have access to at least one car.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Philadelphia CityPhiladelphia Area

$100k+$90–99k

$80–89k

$70–79k

$60–69k

$50–59k

$40–49k

$30–39k

$20–29k

$10–19k

<9k

Household Income

Per

cent

age

of H

ouse

hold

s w

ith

Acc

ess

to a

t L

east

One

Car

60%

66%

47%

59% 61%

74%72%

84%

79%

88%

80%

91%

87%

95%

86%

95%

89%

96%

90%

97% 97%

88%

Source: Fiona Scott Morton, Florian Zettelmeyer, and Jorge Silva-Risso. 2001. “ConsumerInformation and Price Discrimination: Does the Internet Affect the Pricing of New Cars toWomen and Minorities?” Working Paper 8688, National Bureau of Economic Research.

Low-income households in Philadelphia pay more to buy the same car ahigh-income household buys.

$0

$100

$200

$300

$400

$500

$600

Customer 2(Median Neighborhood Income:

$20,000):Mark-Up Effects

African

American Effect

High School

Drop-Out Effect

Income Effect

Rent Effect

Customer 1(Median Neighborhood Income:

$80,000):No Mark-Up Effects

Total Effect: If these twocustomers walked into a dealer

to buy the same car,Customer 2 would be charged

over $500 more thanCustomer 1

many of these other characteristicsin this estimate are typical of low-income individuals in Philadelphia.In particular, a majority of individu-als in the city who earn less than75 percent of all of the otherhouseholds in the Philadelphia areaare African American, do not own ahome, and dropped out of highschool if they are 18 years old orolder. In the greater Philadelphiaarea, 40 percent of the individualsin this income group are AfricanAmerican, 31 percent of 18 yearolds and above do not have a highschool degree, and 63 percent donot own a home.15 This means thatlow-wage families in Philadelphiacan pay over $500 more for thesame car than if it were bought bya high-income household. ■

Most low-income workingfamilies pay higher inter-est rates for car loans

than households with higher-incomes. Although there is onlylimited individual level informationabout auto loans in Philadelphia,there is national data on lendingterms among different households.If these households are similar tohouseholds in Philadelphia, thedata suggest that Philadelphia’slow-income working families gener-ally pay much higher interest ratesfor auto loans than higher-incomehouseholds.

We illustrate this by sorting allhouseholds in a national sample offamilies first by the income theyannually earn.16 Using this distribu-tion, we break all households upinto income groups demarcated by$10,000 in income. This means thelowest-income group of householdsearns between $0 and $9,999, thenext earns between $10,000 and$19,999, and so on. We then takethe average interest rate charged onany outstanding auto loans withineach group. These differences inmeans indicate that lenders charge

much higher rates for low-incomeworking families than higher-income households.

In particular, the average interestrate among all households earningbelow $30,000 every year—about55 percent of all households inPhiladelphia—is about 10.6 per-cent for an auto loan. In contrast,households earning more than$70,000 every year—about 14 per-cent of all households in the city -pay an average rate of 8.3 percent.While a 2.3 point difference ininterest rates adds up over time toa significant amount of money,even larger differences amongincome groups exist on either sideof the distribution around thesemeans. In particular, over 50 per-cent of households that earn lessthan $30,000 pay an interest rateon their auto loan that is above theaverage rate charged to all house-holds—9.36 percent. Alternatively,just 25 percent of households thatearn more the $70,000 every yearpay a higher interest rate than theaverage interest rate charged to allhouseholds with an auto loan.17

To get a sense of just how quick-ly these higher prices for auto loansadds up, we compared the totalinterest paid for a $5,000 auto loanand a $10,000 loan across a rangeof possible interest rates.18 A 13.79interest rate—the lowest ratecharged to about one in five house-holds earning less than $30,000and about one in 10 householdsearning more than $70,000—adds

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THE COSTS TO PURCHASE AND MAINTAIN A CAR

CAR LOANS: More than half of households with an

auto loan that earn less than $30,000 a year pay a high-

er interest rate than the average borrower.

Philadelphia’s low-income working fami-

lies generally pay much higher interest

rates for auto loans than higher-income

households.

up to nearly $1,500 in interest overthe course of a 48 month, $5,000auto loan. In contrast, a 7.3 inter-est rate—the highest rate chargedto about one in five householdsearning less than $30,000 and onein three households earning morethan $70,000—on the same loanamount adds up to just under $800in total interest payments.

Since $11,000 is the medianloan amount among householdswith a loan that earn less than$30,000, this means that low-wageworking families can pay thousandsof dollars in extra costs while pay-ing back an auto loan that higher-income households do not have topay. In fact, households with alower interest rate can pay lessinterest for a $10,000 loan than ahousehold with a high interest ratethe borrows half that amount.19

Importantly, not all low-incomehouseholds have to pay these high-er rates. In fact, about 25 percentof households who earn less than$10,000 a year pay an interest rateof under 8 percent on the loansthey have taken out, which is belowthe median interest rate charged tothe entire population of householdswith auto loans. It’s also less thanthe rate paid by the majority ofhouseholds who earn more than$100,000. So, while income is cer-tainly related to interest rates,household income is not an immov-able roadblock to qualify for lowerinterest rates. Instead, the chal-lenge before leaders is to give morelow-income working families theopportunity to qualify for lowrates.20 ■

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Source: Authors’ analysis of 2001 Survey of Consumer Finances.Note: Total loan amount is the total amount originally borrowed on any outstanding autoloan for any household automobiles; APR is the average APR paid on any auto loans in thehousehold; Households earning more than $100,000 are not shown for illustrative reasons;although this group continues the displayed trends.

Low-income working families borrow less money and pay higher interestrates for auto loans than higher-income households

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

The APR range paid by the middle 50 percent

The loan range borrowed by the middle 50 percent

$90–99k

$80–89k

$70–79k

$60–69k

$50–59k

$40–49k

$30–39k

$20–29k

$10–19k

$0–9k

Household Income

LOAN

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Source: MyFico.Note: Based on an average among financial lending institutions in the Philadelphia market in October 2004.

Higher interest rates for auto loans quickly adds up to significantly higherinterest payments for low-income working families

5.39%

6.06%

7.73%

9.82%

13.52%

13.79%$3,059

$3,000$1,500

$2,132$1,066

$1,657$828

$1,286$643

$1,139$570

$1,530

APR

Total Interest on a 4-year $5,000 auto loan

Total Interest on a 4-year $10,000 auto loan

The Pennsylvania Departmentof Insurance does not collectdata on the prices charged

for insurance to every driver in thestate. In fact, the state was unableto provide any information thatwould allow an independent, robustassessment of the algorithms orother more crude methods used bycompanies to assess what differenttypes of customers should pay forinsurance. To overcome this infor-mation gap, we estimate pricescharged to Philadelphia’s house-holds by obtaining quotes from twoof the least expensive companiesthat sell insurance in Philadelphia.Quotes were obtained for every ZIPcode in the five counties that makeup the Pennsylvania portion of themetropolitan area. The only vari-able that varied in these quotes wasthe median income in each of theseZIP codes. This means we were notable to examine the effects of creditscores, which are an importantcomponent of insurance rates. Butthese data do illustrate systematicneighborhood effects, which arealso factored into insurance rates.

We sorted each ZIP code in thisarea into increments of $15,000,which means that the first group ofneighborhoods has a medianincome less than $15,000; the sec-ond group of neighborhoods has amedian income between $15,000-30,000, and so on.21 These dataindicate that the highest auto

insurance rates in the Philadelphiaarea are paid by households thatlive in neighborhoods where themedian income is between $15,000and $24,999—about $562 every sixmonths. In contrast, the lowestrate—$342 a every six months—isin neighborhoods where the medi-an income is between $85,000 and$94,999.22 This low rate providesthese higher income householdsover $400 in annual savings thatlower income households have topay. Since a majority of low-incomehouseholds own a car and autoinsurance is compulsory inPennsylvania, the majority ofPhiladelphia’s low-wage families

pay that higher price.23

For the typical low-incomehousehold that drives an automo-bile valued around $5,100, thismeans that their auto insurancepremium could be over $400 moreexpensive every year than a higherincome household that insures theexact same car and driver.24 But,the true value of the higher pricelow-wage families pay for auto

insurance could be much higher.This estimate of the price of

insurance for different householdsis based on a driver with a perfectinsurance record, which leaves outa large number of drivers with vio-lations or who have had interrup-tions in their insurance policies. It’salso based on the median value of acar owned by the bottom incomequintile of all households, whichleaves out the higher valued carsowned by many low- and moderate-income households. And, it holdscredit scores constant at a scoreslightly above the average for allindividuals with a credit score, eventhough these scores are systemati-cally associated with householdincome.

But most importantly, it is basedon information provided by the twocheapest companies in Philadelphiathat sell insurance—Progressiveand Allstate. The rates of bothcompanies are much less expensive

than the other 16 companies thatare authorized to sell auto insur-ance in Pennsylvania.25 In fact, aone-year insurance policy for thesame car and driver can vary withinPhiladelphia by nearly $4,000,depending on which company adriver is insured with. The mostexpensive companies—AmericanIndependent Insurance Company,Erie Insurance Company, Farmers

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THE COSTS TO PURCHASE AND MAINTAIN A CAR

CAR INSURANCE: The annual cost to insure the

exact same car and driver in the Philadelphia area is

over $400 more in a neighborhood with a median

income less than $30,000 than in a neighborhood with a median

income more than $70,000.

Many low-wage families end up paying

higher rates than they would actually

qualify for if car insurance companies

could measure risk more accurately.

New Century Insurance Company,and Allstate Indemnity Company—charge between $4,600 and $5,500a year to insure a $5,100 car to a35 year old married male driverwith a perfect driving history.Alternatively, Progressive andAllstate would only charge between$1,800 and $2,000 every year.26

Although there is no data thatindicates which customers buyinsurance from these differentcompanies, low-wage customers dohave access to less information-gathering resources, such as theInternet.27 This may make low-wagehouseholds less able to shoparound for the lowest possibleinsurance rate. It also certainlymakes these households more sus-ceptible to market abuses. Evenwithout this consumer information,however, it is clear from the datathat is available that low-incomehouseholds are charged higher autoinsurance rates than higher-incomehouseholds. ■

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Source: Pennsylvania Department of Insurance.Note: Quotes are six month premiums for a 2002 Ford Taurus SE. The driver lives in thecity of Philadelphia, is 35 years old, married, has a clean driving record, commutes fivemiles to work, and annually drives about 10,000 and 15,000 miles. The current blue bookvalue of this car in the Philadelphia market is approximately equal to the median value ofautomobiles owned by the lowest income quintile.

Six-month auto insurance premiums for the same car and driver inPhiladelphia vary among companies by over $1,800

Allstate Property and Casualty Ins. Co.

Progressive Casualty Insurance Company

Progressive Halcyon Insurance Company

Prudential General Insurance Company

Liberty Mutual Fire Company

GEICO General Insurance Company

Travelers Property Casualty Ins. Co. of IL

State Farm Mutual Automobile Ins. Co.

Erie Insurance Exchange

Nationwide Mutual Insurance Company

Harleysville Preferred Insurance Company

Pennsylvania National Mutual Casualty

State Farm Fire and Casualty Company

Donegal Mutual Insurance Company

Allstate Indemnity Company

Farmers New Century Insurancy Company

Erie Insurance Company

American Independent Insurance Co. $2,780

$2,426$2,326$2,303

$1,894$1,861

$1,856$1,819

$1,772

$1,723$1,698

$1,488$1,311

$1,191$1,002

$982

$969$923

Six-month insurance premium for the same car and driver in Philadelphia

Note: Quotes are six month premiums for a 2002 Ford Taurus SE. The driver lives in thecity of Philadelphia, is 35 years old, married, has a clean driving record, commutes fivemiles to work, and annually drives between 10,000 and 15,000 miles. Quotes are averagesix month premium quoted by Progressive and Allstate for all ZIP codes in Philadelphiaand the surrounding suburban counties in Pennsylvania. Source: Authors’ analysis of data collected from the Progressive and Allstate Insurance

Companies.

Low-income working families in Philadelphia pay much higher rates forauto insurance than higher-income households.

0

$100

$200

$300

$400

$500

$600

$105k+$95–104k

$85–94k

$75–84k

$65–74k

$55–64k

$45–54k

$35–44k

$25–34k

$15–24k

$0–14k

Median Neighborhood Income

$543$562

$526

$462

$371 $380$355 $357 $342

$375$354

Median six-monthpremium for the same car and driver inthe Philadelphia area

Just owning a car can addthousands of dollars everyyear in extra charges for low-

wage families that higher-incomehouseholds do not have to pay.There are numerous market forces

that cause these higher prices.First, businesses face higher risks

when they sell car-related productsto low-wage families than to otherhouseholds, which they respond toby raising prices for these con-

sumers. Some of these higher risksare real; others are perceptionsbased on the limitations of how riskis measured.

Real risks include both individ-ual and neighborhood differencesamong income groups. Low-incomehouseholds generally default onpayments more often than otherhouseholds, driving up prices forauto loans and auto insurance.

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Source: Authors’ analysisNotes: Auto insurance premiums and income groups are shown by census tract. Areas with no data are shown in gray; data is displayed for allcensus tracts in the designated quartile of household income; all rated areas with data are included.

Households in Philadelphia pay higher auto insurance rates than households in the suburban counties and low-income working families pay much higher rates than higher-income households

³

403020100Miles

Auto Insurance Premiums by ZIP Code and Income Quartiles by Census Tract, Philadelphia MSA

County Boundaries Auto Insurance Premiums/Rates

403$ - 162$

743$ - 403$

093$ - 743$

434$ - 093$

774$ - 434$

025$ - 774$

365$ - 025$

706$ - 365$

056$ - 706$

396$ - 056$

Bucks

Chester

Montgomery

Delaware

Philadelphia

Bucks

Chester

Montgomery

Delaware

Philadelphia

Census Tracts within the First Quartile of Median Income (<$32,634) Census Tracts within the Second Quartile of Median Income (<$32,634 – $46,730)

Bucks

Chester

Montgomery

Delaware

Philadelphia

Bucks

Chester

Montgomery

Delaware

Philadelphia

Census Tracts within the Third Quartile of Median Income (<$46,730 – $63,274) Census Tracts within the Fourth Quartile of Median Income (>$63,274)

THE COSTS TO PURCHASE AND MAINTAIN A CAR

WHAT CAUSES HIGHER CAR PRICES?

Similarly, some low-income house-holds live in higher-risk neighbor-hoods, which drives up the pricesthat insurance companies chargefor insurance because they need tocover the higher probability that acar will need to be replaced orrepaired.

But, there are also higher risksthat are ascribed to low-wage fami-lies because limitations in riskmeasurement. Not all or even mostlow-income households inPhiladelphia may default on pay-ments, but, because they belong toan income group that is generallymore likely to have these character-istics than other groups, they aremore likely to be assigned a higherrisk than other households. Forinstance, most companies that sellinsurance and loans use creditscores to predict risk, which arestrongly related to householdincome. This means that many low-wage families can end up payinghigher rates than they would actu-ally qualify for if companies couldmeasure risk more accurately.Many low-income households areperceived to be a higher risk to sellinsurance and loans to because ofthe way risk is currently measured,in other words, not because of areal higher risk.

Another perceived higher riskcaused by limitations in risk meas-urement is the use of ZIP codes byinsurance companies to determinepolicy rates. Many low-wage fami-lies in the Philadelphia area live inthe city, where the high density ofmajor commuting roads makesaccidents more likely. Insurancecompanies could pass on the higherrisk caused by driving in theseneighborhoods to the commuters

who use these roads and cause thishigher risk. They could measurethe accident rate by the ZIP codethe drivers in the accident live in,for instance, rather than the ZIPcode where the accident occurs.But, insurance companies insteadmeasure the risk of driving by theaccident rates in ZIP codes. Thismeans that low-wage families canbe perceived by insurance compa-nies as more risky, when in fact thehigher risk is being created by thewider population who uses majorcommuting roads.

A second cause of higher car-related prices is the lack of infor-mation that many low-wage familieshave about the market. This putsthese families at a disadvantagewhen they need to bargain forprices, which leads to families over-paying for goods and services relat-ed to cars. For instance, one of themost important sources to findinformation today about auto insur-ance, car prices, auto loans, andeven gas prices is the Internet.State Web pages provide the dataon insurance companies used inthis report, a range of online com-panies provide comparative pricesfor insurance, car prices, and loaninformation, and there are numer-ous resources to find independentinformation about car prices. But,fewer low-wage families haveaccess to the Internet inPhiladelphia than higher-incomehouseholds.28 This allows higher-income households to do morecompetitive shopping in thePhiladelphia market than lower-wage families, and pay lower pricesfor car-related products.

Finally, weak regulation andenforcement allows some compa-

nies that sell automobile-relatedproducts to discriminate againstlow-wage families. Car dealers andpredatory loan products are twowell-known sources of price dis-crimination. Car dealers boost theprices of cars for low-income cus-tomers, and some lending servicescharge unnecessarily high fees andinterest rates. Both also loan toomuch money to some of these fam-ilies, making them more likely tohave to pay extra fees and defaulton their loans.

But a less well known, but stillpernicious, institution in theseneighborhoods is the predatory tortindustry, which often advertiseslawsuits as an opportunity to winlarge financial settlements.Although the effect of this is yet tobe fully measured, anecdotal evi-dence in Philadelphia suggests thatlow-wage families in Philadelphiaare responding to this advertisingstrategy. This can drive up the costof insuring low-wage families, sinceinsurance companies are more like-ly to have to pay for law suit costsin low-income neighborhoods thanhigher-income neighborhoods. Still,the interaction between the tortindustry and insurance premiums isstill a relatively unknown issue.Future research will need to inves-tigate the scope of the tort industrythat derives revenue from auto-related suits, the extent and uni-verse of households targeted byindustry advertising, and the meas-urable impact that it has on autoinsurance premiums.29 ■

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Although there is no infor-mation on food prices atevery store in the

Philadelphia area, there is evidenceon the size of grocery stores. And,store size is an important determi-nant of food prices.30 Research byUnited States Department ofAgriculture’s Phillip Kaufman andCharles Handy, for instance, showsthat the prices charged by an estab-lishment are strongly related tostore size.31 This formalizes thebusiness model of big-box super-stores like Wal-Mart and K-Mart,which are able to afford lowerprices than many of their competi-tors because of the higher volumeof goods stocked in their stores.

But, big-box grocery stores aregenerally not in either low-incomeor high-income neighborhoods inthe Philadelphia area. In fact, thetypical grocery store is much small-er in Philadelphia’s low- and high-income neighborhoods than in mid-dle-income neighborhoods. Takingthe median grocery store size inevery ZIP code and comparing thatto the median income in those ZIPcodes illustrates this relationshipbetween grocery store size andneighborhood income. In particu-lar, neighborhoods in the city witha median income less than $15,000have grocery stores that have amedian size of about 6,000 squarefeet.32 Similarly, neighborhoodswith a median income between$15,000 and $30,000 have stores

with a median size of 7,000 squarefeet.33 But, neighborhoods with amedian income between $75,000and $90,000 have grocery storeswith a median store size of 46,000square feet. With many times theamount of space, these grocerystores in higher-income neighbor-hoods are able to stock a substan-tially higher volume of goods,which considerably increases theirability to lower prices.34

In place of large grocery stores,low-income neighborhoods are

stocked in the Philadelphia areawith small, convenience stores. Inthe city, there are approximately 4convenience stores for every 1,000individuals living in a neighborhoodwith a median income less than$15,000.35 Although there is aslightly higher concentration ofconvenience stores in neighbor-hoods with a median incomebetween $75,000 and $90,000,there are only about 1.5 conven-ience stores for every 1,000 individ-uals in neighborhoods with a medi-an income between $15,000 and$75,000. This means that the low-est income neighborhoods inPhiladelphia have smaller grocerystores and a higher concentrationof convenience stores than nearlyall other neighborhoods in the city.

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THE COSTS TO PURCHASE GROCERIES

GROCERY PRICES: Philadelphia’s low-income

neighborhoods have smaller and fewer grocery stores

than other neighborhoods, which can drive up food

prices in low-income neighborhoods.

Source: Authors’ analysis of 2004 Trade Dimensions data.Note: Median neighborhood income is measured as the median ZIP code income. Thereare no ZIP codes in the city of Philadelphia with a median income above $90,000.

Grocery stores in Philadelphia are generally much smaller in low-incomeneighborhoods than in middle-income or suburban neighborhoods, whichcan drive up food prices.

$105k+$90–104k

$75–89k

$60–74k

$45–59k

$30–44k

$15–29k

$0–14k

Median Neighborhood Income

6 6 7 7

2017

33

6

35

10

36

46

28

17

Median size grocery stores in Philadelphia, in 1000s of square feet

Median size grocery stores in thePhiladelphia area, in 1000s of square feet

This creates a market in low-income neighborhoods with rela-tively weak pressure for low foodprices. Stores in these neighbor-hoods do not have the space to cutprices by boosting volume. Each ofthese stores also can subsist off asmall number of customers, whichcan reduce competition amongstores.

Do low-wage families inPhiladelphia actually pay higherfood prices? Although there is noevidence from Philadelphia toanswer this question, the nationalevidence on both sides of thisdebate is mixed. On the one hand,there is a literature that suggeststhe poor do pay higher foodprices.36 But, there is also researchthat suggests the poor economize inresponse to higher prices, whichmay lead to external higher costslike higher healthcare bills becauseof poor nutrition.37 Unfortunately,much of this literature is plaguedby sample selection errors, sincemost studies are based on a uniquebasket of grocery items of anunknown (and probably unknow-able) generalness. For this reason,we can point to very clear differ-ences in market dynamics amongdifferent neighborhoods, but moreevidence is needed on consumerbehavior before we can determinethe absolute magnitude of theeffect these differences have onfamily budgets. ■

Low-income neighborhoods inPhiladelphia are stocked withgrocery stores that research

suggests charge higher overallprices than the larger stores thatare in middle-income neighbor-hoods. Stores are generally smallerin low-income neighborhoods fortwo major reasons.

First, businesses often face high-er risks selling food in low-incomeneighborhoods. But, those higherrisks are usually perceived based onmisleading market information.

Recent analyses have shown thatmany marketing consulting firmsundercount residents in low-income neighborhoods, make gen-eralizations, and do not includelocal data in trend analysis.38 Thismakes market data about consumerdemand in Philadelphia’s low-income neighborhoods much lesscertain than in neighborhoods withhigher-income, which increases therisks of selling food in these neigh-borhoods. Since market data onlow-income neighborhoods inPhiladelphia may suffer from thesesame limitations, large supermar-kets that now populate many mid-dle-income neighborhoods may bedissuaded from moving into theselower income neighborhoodsbecause they perceive a higher riskthat may not exist.

Similarly, there is a perceptionthat selling food in low-incomeneighborhoods requires more secu-rity than in higher-income neigh-borhoods, which would justify high-er prices for low-income house-

holds. But, recent research by theUnited States Department ofAgriculture’s Economic ResearchService found that there are no sta-tistically significant differences inoperating expenses in grocery storeswith a large low income populationthan a store with a smaller low-income customer base.39 This per-ception of higher risks, in otherwords, may drive the prices chargedat different stores.

A second cause of smaller gro-cery stores in Philadelphia’s low-income neighborhoods is the publicsector control over the developmentreview process in Philadelphia,which a recent report indicates isslower and more burdensome thanin its peer cities.40 This analysis,undertaken by the BuildingIndustry Association ofPhiladelphia, found that the city’szoning and development processlags behind Baltimore, Boston,Chicago, Milwaukee, andPittsburgh.41 They also find thatPhiladelphia’s development reviewprocess is unclear, uncoordinated,and not user-friendly compared tothese other cities. This means thatbuilding the next generation of gro-cery stores that are larger and havelower prices, which dot the morerecently built suburbs, is a muchmore expensive and arduousprocess for builders inPhiladelphia. This slows downdevelopment in the city and canserve as an incentive for developersto locate in the suburbs. ■

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THE COSTS TO PURCHASE GROCERIES

WHAT CAUSES HIGHER GROCERY PRICES?

Low-income households areless likely than higher-incomehouseholds to have access to

a mainstream financial institution.42

Although there is only limited dataon the banking behavior ofPhiladelphia’s families, there isnational data about this consumerbehavior. Assuming these nationaldata are representative ofPhiladelphia’s working families, thedata suggest that low-income fami-lies in Philadelphia generally payhigher prices to cash checks thanhigher-income households.43

We can see this by sorting allhouseholds in a national sample ofhouseholds into increments of$15,000 annual income.44 Thismeans the lowest income groupearns between $0 and $14,999every year, the next earns between$15,000 and $29,999, and so on.These data indicate the low-incomehouseholds are much less likely touse mainstream banking servicesthan higher-income households. Inparticular, only 62 percent ofhouseholds earning between $0and $14,999 are banked with afinancial institution.45 But, over 80percent of households earningmore than $15,000 annually arebanked, and over 90 percent ofhouseholds earning more than$30,000 are banked.

This means that low-incomehouseholds are much more likely toneed the services of a check casherthan households with higher-

incomes, who almost all rely onmainstream financial institutions.These services, found in about 147storefronts in the Philadelphia areatoday, cash government, paycheck,and personal checks in exchangefor a fee.46 While nearly all cus-tomers of financial services pay toaccess money, the fees charged bycheck cashers are generally higherand assessed with more frequencythan banks, which amount to sub-stantially higher, overall prices forcustomers of these services.

In particular, state regulationsstipulate that check cashers cancharge up to 2.5 percent of the

amount of a government check, 3percent of a payroll check, and amaximum fee equal to 10 percentfor a personal check. In addition tothese per-check fees, check casherscan also charge new customers amaximum of $10.00 to use theirservice.47 For a household thatearned an after tax income between$15,000 and $30,000—about 20percent of all households in thePhiladelphia area—from a privateemployer, using a check cashingservice would annually amount tobetween $450 and $900 incharges.48

Of course, many mainstreambanks may also charge higher ratesto these households if their balanceslipped below a minimum or if theyoverdrew their accounts. And, near-ly all banks now charge clients forwriting checks or using customerservices. For instance, nearly all

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THE COSTS TO USE FINANCIAL SERVICES

CASHING CHECKS: Low-income families often pay

higher prices for cashing checks than higher-income

families by using one of Philadelphia’s 147 check-cash-

ing establishments.

Source: Authors’ analysis of 2001 Survey of Consumer Finances.

Low- and moderate-income families are much less likely to have a checking account than higher-income families.

$105k+$90–104k

$75–89k

$60–74k

$45–59k

$30–44k

$15–29k

$0–14k

Household Income

61% 62%

27%

81%83%

36%

93%94%

37%

96% 96%98% 98% 99% 99% 99% 99% 99%100%

52%

57%59%

75%

15%

Proportion with a Checking AccountProportion Banked

Proportion with a Savings Account

banks charge a fee to open a basicaccount, a fee for most debits, anda fee each time an account is over-drawn. And a recent FederalReserve analysis indicates thatthese fees have significantlyincreased in recent years along withthe minimum balances required toavoid them. For clients who fre-quently withdraw money or havetrouble maintaining balances, thesefees can quickly add up to equaland even surpass those charged bycheck cashers.49 ■

Low-wage families can payhundreds of dollars in highercosts for short-term loans that

are not charged to households withhigher-incomes. Many low-incomefamilies do not have access tomainstream sources for short-termloans, like credit cards or homeequity, and instead turn to alterna-tive financial services for short-term loans.50

Although there is only limiteddata on the sources of creditextended to Philadelphia’s families,national data indicate that low-income families are much less like-

ly than other households to haveaccess to mainstream sources ofcredit.51 In particular, just 41 per-cent of families earning less than$15,000 a year have access to acredit card, and just 4 percent haveaccess to a home equity loan.Similarly, 67 percent of familiesearning less than $30,000 a yearhave access to a credit card, andjust 6 percent have access to ahome equity loan. But, over 80 per-cent of families earning more than$30,000 a year have at least one

credit card, and over 90 percent offamilies earning more than$60,000 a year have a card. Homeequity loans are much less ubiqui-tous, but nonetheless are extendedwith more regularity to householdswith higher incomes.

This means that low-incomefamilies are more likely to demandthe services of alternative sourcesof credit for short-term loans.These alternative financial servicesinclude businesses such as paydaylenders, tax preparation servicesthat provide rapid refunds, pawn-brokers, title lenders, and somelending companies. These servicesare distinguished from mainstreamsources of credit by their unusuallyhigh fees and interest rates. Forinstance, current state regulationsin Pennsylvania mandate thatpawnbrokers can charge up to a 3percent interest rate every monthand up to $1.50 fee for everypawned item. Interest is allowed toaccrue through a maximum of 12months, meaning that a client whoreceived a $100 loan from a pawn-broker could owe a maximum of$144 if no payments were made, atotal annual percentage rate of 44percent of the original loan. This isa significantly higher interest ratethan that typically charged for moremainstream short-term loan prod-ucts, like credit cards or homeequity loans.

Similarly, short-term lenders typi-cally charge much higher ratesthan these mainstream sources of

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THE COSTS TO USE FINANCIAL SERVICES

SHORT-TERM LOANS: Low-income families often

can pay hundreds of dollars in higher prices for short-

term loans than higher-income families.

Alternative financial services are distin-

guished from mainstream sources of cred-

it by their unusually high fees and interest

rates.

short-term loans.52 Nationally, theannual percentage rates for loansfor that industry are typically in arange between 391 percent and443 percent.53 AlthoughPennsylvania law caps small-loaninterest rates at 24 percent, compa-nies can avoid this law by chargingmajor fees and by renting chartersof banks that are not subject toPennsylvania rules.54 This allowsthe short-term loan industry inPhiladelphia and elsewhere in thestate to charge low-wage familiesthe same high rates that arecharged in other states that do nothave rate caps.55 For instance, ACECash Express, which has about 26stores in the Philadelphia area, pro-vides short-term loans between$100 and $425, and charges$17.64 for every $100 borrowed for14 days or less.56 This equals anannual percentage rate of 459.9percent, a significantly higher ratethan the typical range offered bymainstream financial services.Customers who extend this loananother two weeks past the original14 days can be charged this samefee for the extension.

Even some mainstream suppliersof credit are now starting to adoptthe practices of these alternativesources of credit. Between 1994and 2004, for instance, the averagemonthly late fee on a credit cardincreased from $12 to $30 and thegrace period following a scheduledbill date was eliminated by manycompanies.57 Moreover, credit cardcompanies are increasingly usinglate payments to trigger higherinterest rates. One missed bill cansubstantially increase an annualpercentage rate of interest. Thismeans that low-wage families have

a range of options to obtain short-term loans which are significantlymore expensive than options avail-able to higher-income households.It also means that even mainstreamsources of credit offer higher pricedproducts to low-wage families.

Besides these daily sources ofcredit, low-wage families inPhiladelphia also have an optiononce a year to apply for a taxrefund anticipation loan, or moneylent by a tax preparation service inanticipation of a tax refund.58 Theseloans are offered by a majority ofPhiladelphia’s 131 tax preparationestablishments, and are used byabout 42 percent of filers whoclaim the Earned Income TaxCredit in Philadelphia.59 Althoughdata on the prices charged forthese loans in Philadelphia isscarce, analyses indicate thatnational chains like Jackson

Hewitt, which has over 30 estab-lishments in the city ofPhiladelphia, typically charge atleast $100 in fees per customer andfiling, and an additional $75 to$100 for a refund anticipationloan.60 These fees create an annualpercentage rate that is equivalentto the other alternative sources ofcredit. ■

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Source: Authors’ analysis of 2001 Survey of Consumer Finances

Low- and moderate-income families are much less likely to have accessto mainstream sources of credit, like credit cards and home equity loans,than higher-income families

$105k+$90–104k

$75–89k

$60–74k

$45–59k

$30–44k

$15–29k

$0–14k

Household Income

4%

41%

67%

81%85%

91%94%

97% 98%

6% 8%10%

14%

24% 21% 22%

Proportion with a Credit CardProportion with Access to a Home Equity Loan

Low-wage families pay higherprices for financial servicesthan other types of house-

holds for numerous reasons.First, businesses face higher

risks when they sell financial serv-ices to many low-wage families,which they rationally respond to byraising prices for these families.Some of these risks are real, suchas the higher propensity of low-wage families to miss payments ordefault on loans. In fact, nearlyone out of every three householdsthat earn less than $15,000 andhave borrowed money sometimesget behind or miss payments, com-pared to about 8 percent of house-holds who earn more than$90,000.61

As Michael Barr recently notedin a Brookings Institution policybrief, this means that “the cost toindividual financial institutions ofresearch, product development,account administration, staff train-ing, marketing and financial educa-tion with respect to new financialproducts for the poor, relative totheir expected financial return,means that the market is unlikelyto change quickly on its own.” Italso means that many mainstreamfinancial institutions adopt policiesthat are meant to discourage low-income clients, such as minimumbalances, high fees for late pay-ments, and high interest rates

But, there are other risks thatfinancial services may falsely per-ceive. As noted earlier, there issome evidence that credit scores

may bias against “high risk” bor-rowers. And, there is also evidencethat mainstream banks could prof-itably compete with many alterna-tive financial institutions by devel-oping less expensive alternatives.As Barr notes in the same brief,“one such alternative might bebank overdraft protection.Although current disclosures areinadequate and costs arehigh…overdraft policies could beprovided at lower cost than payday[short-term in Pennsylvania] loansbecause there is no need for face-

to-face interaction.” Automaticallyperceiving higher risks, in otherwords, delimits the range of lowcost financial services offered tolow-wage families.

A second cause of higher finan-cial service prices is weak regula-tion and enforcement of existingregulations. Besides the shortcom-ing in Pennsylvania’s regulation ofshort-term lenders discussed earli-er, the state cannot afford to inde-pendently monitor each of thefinancial establishments in thestates. For instance, in 2003 theBanking Secretary issued areminder to check cashers thattheir fees must be clearly posted forcustomers to see, but two of thethree establishments we randomly

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THE COSTS TO USE FINANCIAL SERVICES

WHAT CAUSES HIGHER FINANCIAL SERVICES PRICES?

Source: Authors’ analysis of 2001 County Business Patterns Data from the Department ofCommerce Notes: Neighborhood income is measured as the median income in the ZIP code that thecredit establishment is located. Alternative credit intermediation establishments includecheck cashing services, loan servicing, money order issue services, and travelers checkissuance services, as defined by the NAICS. There are no neighborhoods in Philadelphiawith a median income greater than $90,000. The Philadelphia area includes Bucks,Chester, Delaware, Montgomery, and Philadelphia counties.

Alternative credit establishments like check-cashers are much more likelyto be located in low- and moderate-income neighborhoods than higher-income neighborhoods

$105k+$90–104k

$75–89k

$60–74k

$45–59k

$30–44k

$15–29k

$0–14k

Neighborhood Income

5.0 5.04.8 4.8

1.6

1.9

0.7

1.5

0.3

0.0 0.0 0.0 0.0

0.9

0.4

1.0

Average number of alternative credit establishments in Philadelphia

Average number of alternative credit establishments in the Philadelphia area

visited did not have their fees post-ed.62 This does not mean that thisis the norm, but it does indicatethe room that alternative financialservices currently have in the stateto sell services. Paying for a dailycompliance check-up of each estab-lishment is well beyond the meansof the state.

This difficulty with enforcementis exacerbated by the concentrationof alternative financial services inPhiladelphia’s low-income neigh-borhoods, which increases the like-lihood that families in these neigh-borhoods will be the target of abu-sive market practices. Over 42 per-cent of check cashing services, loanservicing institutions, money orderissuance services, and travelers’check issuance services in thePennsylvania area are located inneighborhoods where the medianincome is less than $30,000.63 And,nearly three of every four of theseestablishments are located inneighborhoods with a medianincome less than $45,000.

This is partly due to the highconcentration of the area’s popula-tion in these low-income neighbor-hoods. But, it also has to do withthe targeting of these neighbor-hoods by alternative financial serv-ices. Even after we control for thedispersion of the population byanalyzing the mean number ofestablishments among differentneighborhoods, it is clear that low-wage families have much more con-venient access to higher-pricedfinancial services than householdswith higher-incomes. For instance,Philadelphia neighborhoods with amedian income of less than$30,000 have an average of fivealternative credit establishments to

buy financial services from in eachneighborhood.64 In contrast, neigh-borhoods in the Philadelphia areawith a median income of more than$75,000 average just one of theseestablishments. Clearly, low-wagefamilies are targeted by these com-panies, making them much morelikely to pay higher prices for finan-cial services than higher-incomehouseholds.

A third cause of higher financialservices is lack of education andinformation among low-wage fami-lies about how to manage finances,which raises their demand for alter-native financial services. Financialeducation classes used to be stan-dard components of home econom-ics classes in public schools, whichprovided broad access to the basictools of personal finance manage-ment. But, the home economicscourse is no longer a standardoffering in the public school cur-riculum, and most schools havedropped this course altogether.65

This puts any household thatdepended on this education at risk.

And, this risk is much higher forlow-wage families since their mar-gin of error is much smaller.Without the education to makeinformed choices about financialservices, low-wage families may beless able to discern a fair pricefrom one that is inflated. Thismakes low-income working familiesmore likely to fall victim to abusivemarket practices than higher-income families.■

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THE COSTS OF USING UTILITIES

ESTABLISHING SERVICE: Current state regula-

tions make low-income families more likely to pay a

security deposit and a higher security deposit than

higher-income households.

Although the state does notcollect data on the demo-graphics of all the people

that are charged a security depositor on the amount charged to differ-ent households, nearly all of thecriteria the state uses to determinethe need for, and amount of, asecurity deposit describe character-istics of low-wage families.66 In par-

ticular, utility companies are cur-rently allowed by the state to deter-mine the necessity and amount of ahook-up charge if: a) the applicantdoes not own the property whereservice will be provided, b) theapplicant has had service withinthe last 24 months and missed apayment, or c) has no prior credithistory. These criteria make low-

income families much more likelyto pay a security deposit and ahigher amount of money for thedeposit than higher-income house-holds, since low-income householdsare more likely to rent and miss billpayments than higher-incomehouseholds.

At current Philadelphia GasWorks rates, which supplies gas toover 80 percent of Philadelphia’shouseholds, a typical householdwould be charged $283 for a secu-rity deposit.67 The amount of thedeposit assessed by either gas orelectric utilities cannot exceed theestimated bill for two billing peri-ods, and four billing periods forwater and sewer.68 Although thedeposit is refunded when thehousehold cancels service, it ismoney that households would haveotherwise been able to spend. Italso may increase the demandamong these households for higher-priced short-term loan products,since it takes money that could beinvested in savings out of familybudgets. ■

Amajority of low-wage fami-lies in the Philadelphiametropolitan area pay hun-

dreds of dollars more than house-holds with higher-incomes to usegas to heat their homes, cook food,and warm up water. This is becausea large proportion of low-wage fam-ilies live in the city of Philadelphia,where gas rates are much higherthan in the surroundingPennsylvania suburbs.

Take the most recent ratesapproved by the PennsylvaniaPublic Utility Commission. For atypical household that consumes

10 million cubic feet of gas everymonth, Philadelphia’s gas company,Philadelphia Gas Works (PGW),would charge approximately $1,805every year to that household.Alternatively, the company thatsupplies gas to most of thePennsylvania counties that sur-round the city would charge about$309 less every year, or about$1,496 for the same amount ofgas.69

While this is a higher price forall households in the city ofPhiladelphia, the low-wage house-holds in the Pennsylvania side ofTH

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THE COSTS OF USING UTILITIES

GAS PRICES: Philadelphia’s households, a high

share of whom are working class, pay approximately

$300 more per year for gas than households in the sur-

rounding Pennsylvania suburbs.

Notes: Based on the same 10 MCF monthly consumption. September/October 2004approved rates.Source: Authors’ analysis of rate information published by the Pennsylvania Public UtilityCommission.

Philadelphia’s gas company charges the highest overall prices in the state.

T.W. Phillips

Dom. Peoples

PG Energy

PFG/North Penn

Columbia

PECO

NFGD

UGI

Equitable

PGW $1,805Philadelphia City Gas Distributor

$1,697

$1,557

$1,539

$1,496Suburban Gas Distributor

$1,462

$1,457

$1,447

$1,359

$1,290

Annual Gas Bill Estimate

the metropolitan area are clusteredin the city. Of the approximately391,000 households that earn lessthan $17,550 in this area, or lessthan 75 percent of all households,over 65 percent live in the city. Incontrast, only about 20 percent ofall households that earn more than75 percent of all households in thearea live in the city. This meansthat low-wage families in the metroarea that use gas in their homes aremuch more likely than higher-income households to pay higherrates.

And, this is not a small propor-tion of households in Philadelphia.More than 80 percent of all house-holds in the metropolitan area usegas in their homes. And, more than55 percent of households in thecity that earn less than 75 percentof the other households in thePennsylvania side of the metro areause gas in their homes.70 Althoughgas is generally less expensive thanelectricity, the other major sourceof energy in the metropolitan area,most households do not have achoice about their energy source.For low-wage families, this meansthat they often pay higher rates forgas than the higher-income house-holds.71 ■

Low-income working familiesin Philadelphia often payhigher utility prices than

higher income households in thearea for a number of reasons.72

First, utility companies facehigher risks when they sell goodsand services to low-wage families,which they rationally pass ontothese consumers through higherprices. Again, some of these higherrisks are real, others are falsely per-ceived due to limitations of riskmeasurement.

Utility companies do face realhigher risks by selling services tolow-income households becausethese households are more likelythan other households to fallbehind payments. Utility companiesrespond to these higher risks bycharging security deposits, sincethis serves as a down paymentagainst any future unpaid bills.

But, these higher risks are alsoautomatically perceived by compa-nies because of the way that risk iscurrently measured. Since utilitycompanies cannot perfectly predictwhich households or businesseswill become delinquent, they useproxies, like home ownership andcredit scores, to predict the proba-bility of nonpayment. These cur-rent measures nearly guaranteethat a low-income household willpay a security deposit, since theyare much more likely than otherhouseholds to rent and have lowcredit scores. But, households at alllevels of income, and even busi-nesses, do not pay their bills in

Philadelphia. In fact, over 50 per-cent of Philadelphia Gas Works’customers regularly do not paytheir bills. This means that low-income customers in Philadelphiacan end up subsidizing all late- ornon-payers in the city, even thoughmany of these households may notactually represent a real higher riskto utility companies.

A second cause of these higherprices in Philadelphia is the publicmonopoly over the distribution ofgas in the city. As a public utility,PGW has found it very difficult tosuspend gas service for non-pay-ment, leading a near majority of itscustomers to not pay their bills reg-ularly. This means that PGW hasunique budget pressure to raiserates to make up for lost revenuecompared to the private companiesthat distribute gas in the suburbancounties.73 Although the city is cur-rently taking steps to reduce delin-quency rates, years of mismanage-ment let this problem go unre-solved, contributing to the utility’sover $1 billion in debt. This meansthat rates must be increased tocover growing interest costs at thesame time that management mustraise rates to cover lost revenuefrom delinquent accounts.

To complicate matters further,the high concentration of low-wagefamilies in Philadelphia means thatthe low-income support programsmandated by the PennsylvaniaPublic Utility Commission aremore expensive for PGW thanother utilities. At the same time,

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THE COSTS OF USING UTILITIES

WHAT CAUSES HIGHER UTILITY PRICES?

funding for the federal Low-IncomeHome Energy Assistance Program(LIHEAP) has not kept pace withthe rising burden of energy costsfor low-wage families. This programprovides three types of payments.The first type provides payments toenergy suppliers to pay for residen-tial heating costs; the second typeprovides cash-grants in energycrises, or instances when a house-hold’s utility service has been ter-minated or is under considerationfor termination; and the third typeis investments in weatherization.Up to 15 percent of federalLIHEAP money sent to a state canbe invested in this third fundingstream. But, LIHEAP money wasonly distributed to about 300,000households in Pennsylvania out ofabout 600,000 eligible householdsin 2003, which means that manylow-income families are not able topay their bills. This drives up thedelinquency rates throughout thestate, leading to higher prices. ■

Most low-income workingfamilies who have amortgage pay hundreds

of dollars more every year for itthan higher-income householdswho borrow the same amount ofmoney. This higher cost is due tothe higher interest rates and feesthat are charged to low-wage fami-lies.

Although the mortgage data onPhiladelphia households is sparse,there is national lending data onconsumer behavior. We use thesedata to make inferences about theprices charged for loans among dif-ferent households in Philadelphia.In particular, all households wererank-ordered by their annualincome, and then divided intoincome groups in increments of$10,000. This means that the low-

est-income group earned between$0 and $9,999, the next earnsbetween $10,000 and $19,999, andso on. We then looked at the rangeof rates in each of these incomegroups.

The average rate of interestcharged for a mortgage to house-holds earning less than $30,000

every year—about 55 percent of allhouseholds in Philadelphia—isapproximately 8.10 percent. In con-trast, households earning morethan $70,000 every year—about 14percent of all households in thecity—pay an average rate of 7.95percent. Although this differenceadds up over time to a significantamount of money, the major differ-ences across income groups occurson either side of the central ten-dency. Over 52 percent of house-holds that earn less than $30,000 ayear pay a higher interest rate thanthe average rate charged to allhouseholds—about 8 percent. Incontrast, about 32 percent ofhouseholds earning more than$70,000 pay an above-averageinterest rate.

To get a sense of how quicklythese higher interest rates chargedto low-wage families add up, wecompared the total interest paid fora $50,000 home loan and a$100,000 loan across a range ofpossible interest rates. A 9.39 per-cent interest rate—the lowest ratecharged to nearly 18 out of every100 households earning less than$30,000 and about five out of every100 households earning more than$70,000—adds up to nearly$100,000 in interest over thecourse of a 30-year loan for$50,000. In contrast, a 5.56 per-cent interest rate—the highestinterest rate charged to about fourout of every 100 households thatearn less than $30,000 and one of

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THE COSTS TO PURCHASE AND MAINTAIN A HOME

HOME LOANS: Low-income households can pay

hundreds, even thousands, of dollars more for the

same mortgage taken-out by a high-income household.

In fact, there are a host of mortgage-

related fees which can add up to even

more money for low-wage families over

time.

every 100 households earning morethan $70,000—on the same loanamount adds up to just over$50,000 in interest payments.74

Since the median mortgage amonghouseholds earning less than$30,000 is just over $50,000, thismeans that low-wage families canpay tens of thousands of dollarsmore in interest payments than ahigher-income household.75

However, research indicates thatinterest rates are not the onlysource of higher mortgage-relatedprices for low-wage families. Infact, there are a host of mortgage-related fees which can add up toeven more money for low-wagefamilies over time. These includepoints charged to a total loanamount, prepayment penalties,yield-spread premiums, mandatoryarbitration clauses which can leadto additional costs, and refinancedloans that have assigned fees.76 Thelikelihood of being charged thesefees is strongly related to the demo-graphic characteristics of the bor-rower. For instance, black borrow-ers and borrowers with low creditscores are much more likely to becharged prepayment penalties thanother borrowers.77 This evidencemeans that low-wage families payhigher interest rates and are morelikely to be charged additionalmortgage-related fees than house-holds with higher-incomes. ■

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Source: Federal Reserve, 2001 Survey of Consumer Finances.Note: Total loan amount is the total amount originally borrowed on any outstanding homeloan for any household with a home loan; APR is the average annual percentage rate paidon any home loans in the household.

Low-income working families borrow less money and pay higher interestrates for home loans than higher-income households

$0,000

$25,000

$50,000

$75,000

$100,000

$125,000

$150,000

$175,000

$200,000

$225,000

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

APRLOAN

$100k+$80–89k$60–69k$40–49k$20–29k$0–9k

Household Income

The mortgage range borowed by the middle 50 percent

The APR range paid by the middle 50 percent

Source: MyFicoNote: Based on an average among financial lending institutions in the Philadelphia market in October 2001.

Higher interest rates for mortgages quickly adds up to significantly higherinterest payments for low-income working families

5.56%

5.72%

6.25%

7.38%

8.72%

9.39%$199,796

$99,898

$182,518$91,259

$148,864$74,432

$121,635$60,817

$109,355$54,677

$106,555$53,277

APR

Total Interest on a 30 year fixed $50,000 home loan

Total Interest on a 30 year fixed $100,000 home loan

The Pennsylvania Departmentof Insurance does not collectdata on the prices charged

for insurance to every homeownerin the state. It also does not pro-vide information that would allowindependent analyses of the meth-ods used by each of the companieslicensed in the state to determinerates. But, we can use prices fromAllstate Insurance Company, one ofthe least expensive insurance com-panies in the state, to make infer-ences about what these costs arefor different households. In partic-ular, we obtained online quotesfrom Allstate to insure a $45,000home in every ZIP code in the fivecounties that make up thePennsylvania portion of the metro-politan area. The only variable thatvaried in these quotes was themedian income in each ZIP code.78

To interpret these data we sortedall of the neighborhoods into incre-ments of $15,000. This means thatthe lowest income group earnsbetween $0 and $14,999, the nextearns between $15,000 and$29,999, and so on. The evidenceindicates that the average pricecharged in each of these neighbor-hood income groups is dependenton the median income earned inthat neighborhood. In particular,households living in a neighbor-hood with a median incomebetween $0 and $14,999 arecharged an average price of $434every six months to insure a$45,000 home and households liv-

ing in a neighborhood with medianincome between $15,000 and$29,999 are charged an averageprice of $452 every six months. Incontrast, the average price chargedin neighborhoods with a medianincome more than $30,000 wasbetween $339 and $414 every sixmonths to insure an equally-valuedhome.79

These data suggest that low-income homeowners are chargedhigher prices for insurance thanhigher-income households. But, the

true value of the higher price low-and moderate-income householdspay for home insurance could bemuch higher than these data sug-gest. This home insurance quotehad to be estimated with theassumption that the homeownerhad a perfect credit score, a scorethat is strongly related to house-hold income. It also had to be esti-mated with data from one of theleast expensive companies that sellinsurance in Pennsylvania.80 And,the rates of 18 of the other 19major companies that are author-ized to sell insurance in the stateare much higher than Allstate. Infact, data published by thePennsylvania Department ofInsurance indicate that a one-year

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THE COSTS TO PURCHASE AND MAINTAIN A HOME

HOME INSURANCE: Families in Philadelphia’s low-

income neighborhoods pay relatively higher homeown-

ers’ insurance.

Source: Authors’ analysis of Allstate quotes collected in 2004. Note: Quotes are six month premiums for a $45,000 house in 164 ZIP codes in thePhiladelphia area from Allstate, one of the least expensive home insurers in the state according to data published by the Pennsylvania Department of Insurance.Neighborhood income is the median income in each ZIP code.

Low-income working families in Philadelphia pay higher home insurancerates than higher-income households

$105k+$95–104k

$85–94k

$75–84k

$65–74k

$55–64k

$45–54k

$35–44k

$25–34k

$15–24k

$0–14k

$434$452 $456

$414$397

$376 $374 $369

$339$365 $375

Six month medianpremium for a$45,000 house

home insurance policy inPhiladelphia for an owner of a$75,000 home varies betweenAllstate Insurance Company andDonegal Mutual InsuranceCompany, which charge under$500 every six months, to BuckeyeUnion Insurance Company andPrudential Property and CasualtyInsurance Company, which chargeover $1,000 for the exact same pol-icy.81

There is no data collected by theDepartment of Insurance that indi-cates which types of consumers buyinsurance from these differentcompanies, so it is impossible toknow if low-wage families inPhiladelphia also pay more forinsurance because they are targetedby more expensive companies. But,low-income households do haveless access to information-gatheringresources, like the Internet, whichmay make them less able to shoparound for a better insurance pre-mium and less able to detect aninflated price. In any case, it isclear from what evidence does existthat low-income households paymore to insure their homes thanhouseholds with higher-incomehouseholds. ■

Low-wage families inPhiladelphia can pay hun-dreds of dollars more for the

same piece of furniture or appli-ance bought by a higher-incomehousehold. This is because low-income working families are muchmore likely to use rent-to-ownstores than higher-income house-holds. These stores generallycharge higher interest rates forloans than other sources of credit,such as credit cards or home equity

loans, and can also charge higherfees than these other sources ofcredit.82

Although there is no informationon the customers of rent-to-ownstores in Philadelphia, the FederalTrade Commission (FTC) recentlydrew a national sample of 12,000households to analyze their use ofrent-to-own stores. According tothese data, 59 percent of the cus-tomers of rent-to-own stores earnedless than $25,000 and nearly 90

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Source: Pennsylvania Department of InsuranceNotes: The Pennsylvania Department of Insurance annually releases approved rates foreach company for every county in Pennsylvania. The average rate was used in cases wherecompanies report two different rates for the same house. Data are from 2004.

Six month home insurance premiums for the same house in Philadelphiavary by over $700 among companies

Donegal Mutual Ins. Co.

Allstate Ins. Co.

Philadelphia Contributionship Ins. Co.

Keystone Ins. Co.

Penn National Mutual Casualty Ins. Co.

Old Guard Ins. Co.

Erie Ins. Exchange

Property & Casualty Ins. Co. of Hartford

Farmington Casualty Co.

State Farm and Casualty Co.

Farmers New Century Ins. Co.

Nationwide Mutual Fire Ins. Co.

Phoenix Ins. Co.

Travelers Indemnity Co.

Liberty Mutual Fire Ins.

Harleysville Mutual Ins. Co.

United Services Automobile Assoc.

USAA Casualty Ins. Co.

Prudential Property & Casualty Ins. Co.

Buckeye Union Ins. Co. $1,224$1,041

$983

$862

$815

$799

$776

$683

$675

$653

$635

$606

$590

$569

$552

$535

$522

$518

$499$491

Six month home insurance premium for a $75,000 home

THE COSTS TO PURCHASE AND MAINTAIN A HOME

HOME APPLIANCES AND FURNISHING: A sur-

vey of Philadelphia’s rent-to-own stores, which are

used by predominately low-income households, found

that the rental price of an appliance was marked-up by 90 percent

over the purchase price.

percent earned less than $50,000every year.83 This means that nearlyall of the customers of rent-to-ownstores, or nearly all of the cus-tomers that pay these higher pricesfor furniture and appliances, have alow- or moderate-income.

This national information aboutcustomers of rent-to-own stores isreflected in Philadelphia by thelocation of these stores through outthe area.84 Although only 2 of the35 rental stores in this area arelocated in neighborhoods with amedian income less than $30,000,just 11 percent of these stores arelocated in neighborhoods with amedian income more than$75,000. This means that nearly allof the rental establishments in thearea are clustered in moderate-income neighborhoods.

Although it is impossible to knowhow this dispersion of rental estab-lishments is reflected in consumerbehavior, we do know that thenational FTC sample suggests near-ly all of the customers of rent-to-own establishments are low- ormoderate-income. We can also esti-mate the higher costs that usingthese services could add up to inPhiladelphia. In particular, weselected a handful of householditems and received quotes from arent-to-own business with 11 estab-lishments in the Philadelphia met-ropolitan area. We found that theaverage price of an item increasedby 90 percent if the item was notpurchased up-front, and wasinstead financed with the recom-mended rent-to-own installmentplan. These higher prices may becharged to the majority of rent-to-own customers in Philadelphia,since nearly 70 percent of rent-to-

own customers reported in the FTCsurvey that they intend to own theitem they are renting.85 Besides thismark-up, low-income householdsare also frequently extended toomuch credit at rent-to-own stores,which adds extra fees to renting-to-own these items. In the FTC sam-ple, for instance, more than 46 per-cent reported that they had missedpayments. ■

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Source: Authors’ analysis of 2002 County Business Patterns data from the Department ofCommerce.Notes: Neighborhood Income is measured as the median income in the ZIP code that therental establishment is located.

Rental establishments like rent-to-own stores are concentrated in low- and moderate-income neighborhoods in Philadelphia

$105+$90–104k

$75–89k

$60–74k

$45–59k

$30–44k

$15–29k

$0–14k

0.0 0.0

0.11 0.11

0.33

0.220.20

0.21

0.27

0.00.00.00.0 0.0 0.0 0.0

Average number of rental establishments in PA portion of metro area

Average number of rental establishments in Philadelphia

Neighborhood Income

Low- and moderate-incomehouseholds in Philadelphiapay taxes on a higher portion

of their house’s worth than higher-income households. This is becausethe accuracy of assessed home val-ues is systematically related toneighborhood income inPhiladelphia.

In particular, houses inPhiladelphia’s low- and moderate-income neighborhoods are muchmore likely to be assessed at highervalues than their actual value; andhouses in higher-income neighbor-hoods tend to be assessed at lowervalues than they are worth. Thismeans that real estate taxes, whichon paper look to be a constant per-centage of a house’s worth, areregressive in Philadelphia, sincelow-income homeowners pay ahigher realized tax rate than higher-income households.

This is illustrated by comparingthe assessment error in everyneighborhood in Philadelphia withthe average error across the entirecity. Using data collected for thePhiladelphia Tax ReformCommission, we start by calculat-ing the average accuracy of anassessment in the city, which is89.9 percent of a house’s worth.86

This means that the average home-owner in Philadelphia is taxed on89.8 percent of their house’s actualworth. We then take the averageaccuracy of an assessment in eachof the city’s census tracts, and

divide each of these into the aver-age assessed value in the city. Thismeans that neighborhoods with aratio greater than one are paying,on average, a higher share of theirhouse’s worth in real estate taxesthan the average homeowner in thecity. Neighborhoods with a ratiobelow one are paying, on average, alower share of their house’s worthin real estate taxes than the averagehomeowner.

These data indicate that home-owners in low- and moderate-income neighborhoods in Northand West Philadelphia tend to pay

a much larger share of their house’sactual worth in taxes every yearthan higher-income households inthe lower and upper Northeastneighborhoods of Philadelphia. Theaverage neighborhoods where themedian income is less than$30,000 have an error rate that is35 percent higher than the cityaverage. In contrast, houses inneighborhoods with a medianincome higher than $70,000 havean error rate that is about 3 per-cent lower than the city average.This means that low- and moder-ate-income households are actuallysubsidizing the city services con-sumed by higher income house-holds on a percentage basis,because these households are pay-ing higher realized real estate taxrates than higher-income house-holds. ■ TH

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Source: Authors’ analysis of data obtained from the Philadelphia Tax ReformCommission and the 2000 CensusNote: The Pearson product moment correlation between tract median income and theassessment accuracy ratio shown in this figure is -.52. Data are from 359 Census tractsin the city of Philadelphia.

Low-income working families in Philadelphia pay more of their house’sworth in real estate taxes than higher-income households

0.0

0.2

0.4

0.6

0.8

1.0

1.2

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1.6

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$71,

827

$53,

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$45,

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$42,

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$38,

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The ratio of the tract’s average assessment accuracy to the city’s average assessment accuracy—89.8% of a house’s actual worth

THE COSTS TO PURCHASE AND MAINTAIN A HOME

REAL ESTATE TAXES: Homes in Philadelphia’s

low-income neighborhoods are much more likely than

homes in high-income neighborhoods to be assessed

at values higher than their worth.

Median Income in Census Tract

Although home values aregenerally lower in low-income neighborhoods than

in higher income neighborhoods,nearly everything else related to ahome is more expensive for thehouseholds that live in low-incomeneighborhoods. There are a numberof reasons why this is the case.

First, businesses rationally reactto the higher risks they face whenthey sell housing-related goods andservices to low-income householdsby raising prices for these con-sumers. Some of these higher risksare real; suppliers of housing relatedgoods and services perceive others.

For instance, default rates onloans tend to be higher among low-income households than otherhouseholds. This drives up the costof selling goods and services tothese households, which is passedon to low-income consumersthrough higher prices

But, in other cases, these higherrisks are perceived. For instancethere is some evidence that the useof credit scores has expanded lend-ing institutions capacity to extendcredit to previously under-servedhouseholds. But, there is other evi-dence that indicates that the use ofcredit scores can harm householdswith low credit scores.87 This isbecause of numerous data qualityissues that affect the accuracy ofcredit scores, which can drive upthe prices that businesses charge to“high risk” households. This isclearly a field that is still develop-

ing, but the evidence that has beenmarshaled does suggest thatimproved estimation of creditscores would lower prices forhouseholds that are currently ratedas “high risk.” In fact, the MichiganInsurance Commissioner recentlybanned the use of credit scores inestimations of insurance premiumsdue to concerns about the errorrate in risk assessments caused bycredit scores.

A second cause of higher homerelated prices for low-wage familiesis the lack of information many ofthese households have about themarkets that sell housing relatedgoods and services. This informa-tion disparity makes low-incomeworking families more susceptibleto overpriced goods and servicesthan higher-income households. Italso makes them less able to shoparound the market in Philadelphiafor the lowest possible price. Forinstance, the Internet now containsnumerous websites that aredesigned to save households moneyon insurance, loans, furniture, andappliances. But many low-incomefamilies are not able to take advan-

tage of these cost-savings, sincelow-income households have lessaccess to the Internet than higher-income households.88 Lack of infor-mation goes beyond the Internet,though. Public school curriculumsused to provide a free financial edu-cation to children. And, many banksalso used to regularly sponsor finan-cial education classes, which incul-cated money management skills.Both sources of financial educationhave significantly diminished overtime.89 For families that relied onthese free financial educationresources, they now are at a disad-vantage in the market when theyshop for goods and services.

A third cause of higher home-related prices is weak regulationand enforcement.

The rent-to-own industry, forinstance, is regulated by a piecemealcollection of mandates which leavesthe market vulnerable to predatorybehavior. As one sign of this, rent-to-own establishments are notrequired by Pennsylvania law to dis-close the total cost of a purchase,even though over 70 percent ofrent-to-own customers intend to buythe item they have rented.90

Although this information is avail-able upon request, the absence ofthis information along with the highprofile weekly installment pricesmakes customers less able to assess

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THE HIGHER PRICES CHARGED TO LOW-WAGE FAMILIES

WHAT CAUSES HIGHER PRICES RELATED TO HOUSING?

…evidence that has been marshaled does

suggest that improved estimation of

credit scores would lower prices for

households that are currently rated as

‘high risk.’

the true value of their purchase.91

Similarly, loans and insurance aresold without representation of themarketplace of prices. In fact, onlyone insurance company—Progressive Insurance—that sellsinsurance in Pennsylvania will giveconsumers the rates charged by anyof their competitors. The effects ofthese market conditions are that anyhousehold without access to suffi-cient market information are moresusceptible to inflated prices forgoods and services.

A final cause of higher home-related prices in Philadelphia isthe public supply of goods and serv-ices. This cause relates specificallyto the higher realized tax rates thatlow-income households pay inPhiladelphia. Although there maynot be anything intrinsic toPhiladelphia’s city governmentthat causes assessment error to besystematically related to neighbor-hood income, it is responsible forthis error. It is also responsible fordetermining what it is about itsassessment evaluation process thatis causing low-income neighbor-hoods to pay higher realized taxrates than higher-income neigh-borhoods. ■

STORIES FROM TWO FAMILIES

This section has covered awide range of everyday goodsand services for which low-

wage families pay higher pricesthan other households. What do allof these higher prices add up to forindividual families in Philadelphia?

The stories of two differentworking families in Philadelphia(whose names have been changedto protect their identities) are illus-trative.

Couple Denise and AnthonyWashington have been married forfifteen years and care for five chil-dren. They’ve been homeowners fornearly ten years and also own twocars, so that they can get to work inthe suburbs.

The Washingtons routinely try tosave money by taking advantage ofthe informational resources theyhave access to. When they pur-chased their two cars, Denisecalled all of the insurance compa-nies listed in the Yellow Pages tocompare prices. When they buyclothes or consumer electronics,they routinely go online to compar-ative shopping sites that providedeals or on-line outlets. And, whenthey need to buy other basic goodsand services, Denise will often lookaround for a sale to get the lowestpossible price.

Although the Washingtons didnot use similar approaches to gettheir mortgage and home insur-ance, in general they take advan-tage of a wide variety of marketinformation to save money.

In contrast, married coupleDebra and Rick Shoup take advan-tage of much less information. Rickneeds a car to commute to work, so

they have one car, and they’verecently invested in a home. TheShoups did not shop around fortheir car and bought it in passingbecause it was “clean” and Rick“liked it.” They also use a for-profittax preparation service, usuallyshop at the local grocery store, andhave just recently stopped using acheck-casher and signed-up with alocal bank.

The Shoups probably have verygood reasons for using less infor-mation to save money than theWashington’s. Like most low-wagefamilies, for instance, they probablydo not have home access to theInternet.

But, the different extent towhich these two families use infor-mation means that theWashington’s pay lower prices thanthe Shoups. And, this is reflected inthe different ability of the familiesto get ahead. The Shoups say theydo not “have any extra money atthe end of the month” and theWashingtons are “saving for theirretirement and [their] children’seducations.” They’re also makingplans to start their own business.Clearly, gaining access to marketinformation can save familiesmoney and help them get ahead. ■

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This section will review theeffect these higher prices have onworking families and the city, showing that higher prices:• Trap low-wage families and the

city in a cycle of weak marketimperfections

• Make families financially inse-cure

• Hinder asset investments and • Weaken prospects for mainstream

business investments inPhiladelphia

The current market that setsprices for everyday goodsand services in Philadelphia

traps both working families and thecity in a cycle of market imperfec-tions. This cycle begins with thefact that mainstream businessesface higher risks (both real and per-ceived) when they sell goods andservices to low-wage families, for anumber of reasons we discussed inthe previous section. These busi-nesses respond to the higher risksby charging low-wage families high-er prices for everyday goods andservices. This creates higher pricesfor the consumers in the market

least able to afford extra costs,which leads to financial insecurity,higher delinquency rates, and agreater likelihood of needing toturn to abusive suppliers of goodsand services. And, the cycle turnsfull circle when these characteris-tics of low-wage families are fac-tored into the pricing decisions ofmainstream suppliers of goods andservices.

This cycle of market imperfec-tions holds everyone behind.

Low-wage families are drained ofmoney to pay for investments.Mainstream businesses sacrificeprofitable markets to fringe suppli-

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THE EFFECTS OF HIGHER PRICES CHARGED TO LOW-WAGE FAMILIES

A CYCLE OF MARKET IMPERFECTIONS

What are the effects of these

higher prices in Philadelphia?

The current market that sets prices for everyday goods and

services in Philadelphia is not working for the benefit of

low-income working families or the city. Both are stuck in

a cycle of market imperfections keeping them from getting ahead.

This makes the entire city financially insecure, stifling business

growth and keeping working families asset poor. It also stalls the

city’s effort to turn around its multi-decade decline.

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Source: Authors’ analysis of data from an anonymous source.Note: Past-due ratio is measured as the ratio of all consumer trades 60 or more days past-due to all consumer trades. Time series is in quarters.

Philadelphia households are much more likely to miss loan payments than households in the rest of the state

0%

2%

4%

6%

8%

10%

12%

2004200320022001200019991998199719961995199419931992

Philadelphia’s ratio of past due loans to all loansPennsylvania’s ratio of past due loans to all loans

Source: Authors’ analysis of data from an anonymous source.Note: Past-due ratio is measured as the ratio of all mortgages 60 or more days past-due to all mortgages. Time series is in quarters.

Philadelphia households are much more likely to miss mortgage payments than households in the rest of the state

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2004200320022001200019991998199719961995199419931992

Philadelphia’s ratio of past due mortgages to all loansPennsylvania’s ratio of past due mortgages to all loans

ers of goods and services becauselow-wage families are trapped in acycle of high risk. The city missesout on benefiting from claiming adividend from healthy neighbor-hoods, rising property values,expanded investment by main-stream businesses, and a boomingmiddle class. And many, or evenmost, households in Philadelphiaend up paying higher pricesbecause of the broad brush effectof price increases, such as autoinsurance rates and utility prices.

One of the most illuminatingsigns of this cycle of market imper-fections in Philadelphia is the soar-ing loan delinquency rates in thecity. Compared to the rest of thestate, Philadelphia has a 67 percenthigher proportion of past-due loansto all loans made in the city as ofthe 3rd quarter in 2004. Home

mortgage past-due rates were 140percent higher in Philadelphia thanthe rest of the state in the samequarter. And retail loans—for furni-ture, appliances, and other retailgoods—were 153 percent higherthan the rest of the state.Philadelphia also has a past-dueloan ratio that is nearly twice ashigh as in any of the neighboringsuburban counties inPennsylvania—Bucks, Chester,Delaware, and Montgomery.

All of this is known to the busi-nesses that Philadelphia is trying toattract, limiting their eagerness toreinvest in Philadelphia. This cycleof market imperfections will haveto be broken for families and thecity to move ahead. ■

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Source: Authors’ analysis of data from an anonymous source.Note: Past-due retail ratio is measured as the ratio of all retail loans 60 or more days past-due to all retail loans. Time series is in quarters.

Philadelphia households are much more likely to miss retail loan payments than households in the rest of the state

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Philadelphia’s ratio of past due retail loans to all loansPennsylvania’s ratio of past due retail loans to all loans

The thousands of dollars inextra costs that are annuallytacked onto the everyday

goods and services that low- andmoderate-income households buyin Philadelphia make these familiesfinancially insecure.

For an alarming number ofPhiladelphians this insecurityforces them to declare bankruptcy.As of the last quarter of 2003, thequarterly bankruptcy rate inPhiladelphia was 16 percent higherthan the U.S. average and 45 per-cent higher than the rate in thesurrounding Pennsylvania suburbs.This converts into about six new

bankruptcy filings in this economicquarter for every 1,000Philadelphia residents.92

Although the official bankruptcyrate is influenced by numerous fac-tors and includes families of allincome levels, the thousands ofdollars in higher costs for necessi-ties certainly are an important fac-tor to families not being able tomake ends meet through out themetro area. And, the population ofbankruptcy filers remains predomi-nately low- and moderate-incomehouseholds.93 ■

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THE EFFECTS OF HIGHER PRICES CHARGED TO LOW-WAGE FAMILIES

FINANCIALLY INSECURE FAMILIES

Source: Loan PerformanceNotes: Bankruptcy rate is number of new filings per 1,000 individuals in indicated place.

Bankruptcy rates in Philadelphia are higher than the average filing rate in Pennsylvania and the rest of the country

0

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Delaware CountyPhiladelphia County

Chester CountyPennsylvania

Montgomery County

Bucks County

United States

2003

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When low-income workingfamilies have to paymore to buy basic

necessities than higher-incomehouseholds, they are less able tomake investments in the future.This holds these families back fromgetting ahead by acting as a road-block to their middle class aspira-tions.

Consider each component ofeveryday living that is more expen-sive for low-income working fami-lies. This report has shown thatlow- and moderate-income house-

holds can be charged every year, forthe exact same good or servicebought by a higher-income house-hold:• $100s more to buy the same car• $100s more to borrow the same

amount of money for an autoloan

• $100s, perhaps $1000s, more toinsure the same car and driver

• More to buy food in their neigh-borhood

• $100s more to access the same

amount of money• $100s more to obtain a short-

term loan• $100s more to establish the same

type of utility service• $100s more to use the same

amount of gas to heat homes andcook meals

• $100s more to borrow the sameamount of money for a homeloan

• $100s more to insure the samevalue of a home

• $100s more buy to buy the sameappliances and furniture

These systematic, higher pricesfor basic necessities contributemightily to the struggles of workingfamilies in Philadelphia trying tomake investments in education andstruggling to buy, and then hold onto, homes. For instance, only 20percent of adults 25-years andolder in the city have a college-degree, lower than nearly everyother one of the largest 100 citiesin America.94 And, the majority ofhomeowners in Philadelphia are atleast 55 years old. This means thatif Philadelphia cannot create capi-tal for a new generation of low-wage families to invest in houses,many of these properties couldeventually turn into rental proper-ties. ■

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THE EFFECTS OF HIGHER PRICES CHARGED TO LOW-WAGE FAMILIES

ASSET POOR FAMILIES

…only 20 percent of adults 25-years and

older in the city have a college-degree,

lower than nearly every other one of the

largest 100 cities in America.

When households cannotinvest in income-grow-ing assets, like educa-

tion and houses, or pay for nutri-tious food, upkeep of their homes,and maintenance of their vehicles,economies can retract. Less dispos-able income becomes available forlocal businesses, which meansbusinesses and neighborhoods can-not grow, and potential businessesmay be dissuaded from entering the

market. An extra $400 charge foran auto insurance premium, forinstance, means that a family for-feits their potential to spend thatmoney on another good or servicesold by a local business.

These effects are magnified bythe fact that many of the business-es that charge higher prices, likeinsurance and financial institu-tions, have their headquarterslocated in other states. This means

that an extra $400 charge for autoinsurance not only reduces moneyspent on local goods and services, italso may primarily benefit a firmlocated out-of-state. But, there isno way of knowing the extent ofthese trade-offs. Families may verywell decide to spend any extramoney at the movies or on con-sumer electronics instead of put-ting it into a savings account orusing the services of a local busi-ness. Similarly, the higher prices donot all support businesses whichhave their headquarters in otherstates. And, even those businesseswith out-of-state headquarters sup-port jobs and invest in real estate inPhiladelphia, which can benefitlocal businesses.

This means that, at the veryleast, higher prices charged toPhiladelphia’s working familiesreduce options for local businesses.In the absence of these higherprices, families would have morechoices about where and how tospend their money, creating anopportunity for local businesses.But, as long as these higher pricescontinue to be charged, this marketopportunity will continue to be lim-ited. ■

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THE EFFECTS OF HIGHER PRICES CHARGED TO LOW-WAGE FAMILIES

WEAK PROSPECTS FOR MAINSTREAM BUSINESS INVESTMENTS IN PHILADELPHIA

Leaders will have to work withinseveral levels of government andacross many business sectors toimprove the market for workingfamilies. Broad coalitions of con-stituents need to be rallied, theinterests of businesses need to beleveraged, and the full weight ofthe legislative and regulatory role ofstate and local government willneed to be invested.

Four specific goals should drivethis reform agenda:• Reduce the risk of selling goods

and services to low-wage families• Give consumers the information

they need in today’s new market• Curb market abuses through reg-

ulation• And, in Philadelphia, lower the

prices of publicly sold goods andservices.

Low-wage families inPhiladelphia pay higher pricesfor basic necessities, in part,

because of the higher risk thatbusinesses face when they sellgoods and services to these house-holds. This has something to dowith their higher actual risk, indi-cated by any range of items, suchas a higher delinquency rate. But,it also has something to do with theway that risk is measured, such asthe use of ZIP codes by insurancecompanies to calculate insurancerates or the use of credit scores topredict the likelihood of delinquen-cy. In either case, state and localgovernment have numerous oppor-tunities to lower the risk that busi-nesses face when they sell goodsand services to low-wage families.In turn, prices for goods and servic-es sold to low-income families willdrop. To bring about these lowerprices, state and local leaders needto make changes in the market.

Leaders will have to address thebehavior of low-wage consumersthat are buying goods and services,the businesses selling to them, andtheir neighborhoods. There is notone person or group, in otherwords, to single out for changes. Inaddition, leaders will have to adoptboth short and long term perspec-tives. While some reforms shouldengender rapid deductions in theprices charged to low-wage fami-lies, others will require sustainedinvestment and attention. Together,these reforms can create powerfulchanges in the marketplace thatwill give low-wage families accessto much less expensive goods andservices.

• The city needs to renew and

expand investments in financial

literacy. Organizations outside ofgovernment and the city govern-ment have made numerous invest-ments in financial literacy to pick

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Getting the market right:

improving market dynamics for

low-income working families

What can state and local leaders do to lower these

higher prices?

GETTING THE MARKET RIGHT

GOAL 1: Reduce the risk of selling goods and

services to low-wage families

up where public schools left off.Among other items, this included aone-time city investment in finan-cial literacy training for housingcounselors and the establishmentof a hotline that prospective mort-gage borrowers can call to receivefinancial advice.

But, more investments are need-ed. While these initiatives by organ-izations in Philadelphia and citygovernment reach some of the peo-ple who once would have relied ona course in a public school to learnfinancial management skills, this iscertainly not equal to a guaranteedfinancial education in a publicschool. This opportunity inculcateslessons that can be used to make alifetime of wise financial decisions.It is also a guaranteed opportunityfor financial education for any stu-dent that attends public schools.Also, the city should establish anOffice of Financial Education thatparallels the recently created stateoffice, which will coordinate theextant financial literacy trainingavailable in the city; promote addi-tional funding for financial literacyclasses; work to expand the scopeand quality of the training providedin the city; and coordinate with thestate office.

• The city should pay for a mar-

ket study of the true market

demand in its neighborhoods.

Part of the higher risk of sellinggoods and services to low-wagefamilies is caused by the lack ofreal market information—or thepresence of misinformation—aboutmarket activity and assets in lowerincome neighborhoods. As RobertWeissbourd noted in a recentBrookings Institution article,

“While business intelligence onmiddle- and upper-income con-sumers abounds, identifying theassets and special market dynamicsof low-income communities has notbeen a focus of traditional businessmarket analysis.” This means thatmany low- and moderate-incomecommunities go underserved bymainstream suppliers of basicnecessities that charge lower pricesand that there is less competitionin these neighborhoods to drivedown the prices for necessities.Weak market data also meansmainstream suppliers of basicnecessities are not capitalizing on arobust market for their goods andservices.

For these reasons, the city needsto reduce the higher risk businessesperceive in these neighborhoods by

investing in a study that analyzesthe market demand in its neighbor-hoods. These results should thenbe leveraged to market neighbor-hoods to prospective businessesusing the Philadelphia Departmentof Commerce’s Urban IndustryInitiative as a model. This initiativeacts to promote industrial develop-ment in the city by providing anumber of time and money-savingservices to existing and potentialindustry businesses, includingassistance with recruiting, network-ing, finding development resources,and addressing neighborhood devel-opment. It has set a precedent forworking with businesses and pro-moting their development whichcity leaders should use to take fulladvantage of a market researchreport.

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FROM PURSES TO PORTFOLIOS

The Delaware Treasury Department, the Delaware Money

School, and Citigroup recently teamed up to offer a free

one-day financial education conference to women in

Delaware. This conference kicked off the Delaware Money

School’s 350 free financial educations classes that it provides

through out the year, which have in the past attracted over

10,000 participants.

The courses are instructed by financial professionals who

have volunteered to teach classes on subjects that include

money management and debt reduction, investing, and retire-

ment planning, among other topics. At the completion of 10

hours, participants receive a certificate that certifies that they

have received a financial education.

In addition to the classes, the Delaware Money School also

provides free financial education speakers to visit workplaces

and community organization meetings.

For more information visit the website of the Delaware

Money School at http://www.delawaremoneyschool.com

• New capital needs to be lever-

aged to reduce the costs of

doing business in underserved

neighborhoods. In cases wherethe higher risks of doing businessare real, the state and city shouldsubsidize these higher costs forbusinesses. One of the largest exist-ing sources of capital is the FirstIndustries program, a $150 millionprogram to support Pennsylvania’sagriculture and tourism industriesthat passed in spring 2004. In thisprogram, supermarkets—whichhave been defined as retail storesthat primarily sell groceries, exclud-ing convenience stores—and farm-ers markets are eligible for up to$10 million in planning grants andup to $90 million in loans and loanguarantees. Nonprofits and individ-uals can also apply for fundingwithin the program guidelines.

Another major source of newfunding in the state is the FreshFood Financing Initiative, whichPhiladelphia State Rep. DwightEvans fought to include in thestate’s recently passed economicstimulus package. Created in part-nership with The Food Trust andthe Greater Philadelphia UrbanAffairs Coalition (GPUAC), thisinitiative awarded Philadelphia-based The Reinvestment Fund $10million to increase the number ofsupermarkets in underserved neigh-borhoods.

But, more capital is also neededfor large grocery store development.City government should use all ofthe typical tools of economic devel-opment to attract major grocerystores, including tax incrementfinancing, small business loans,and political leadership. Mayoralleadership was critical, for

instance, in the success of super-market development projects inDallas, TX, where a study showed apaucity of supermarkets in predom-inantly low-income South Dallas.The city negotiated a comprehen-sive package of financial incentiveswith Houston-based Fiesta Martand asked the store to develop aminimum of five sites. The first, a45,000 square foot store in a low-income neighborhood, has shownthat there was a profitable marketmissed by typical market demandstudies.95

Organizations outside of govern-ment can grow capital for grocery

stores by providing potential gro-cery stores with information oncommunity demographics, conductfocus groups, and help supermar-kets establish a positive presence inthe community. The CEO of FirstNational, a leading supermarketchain, remarked that, “Cultivatingclose ties to community groups isthe place to start (to create) trustthat dispels the view that outsidechains come in to take advantage.”The trust between a supermarketand the community may result inloyal customers.

Organizations outside of govern-ment should also directly fund new

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ETI’S PURCHASING POWER PROFILES

Using data from the Consumer Expenditure Survey and

state revenue data, the University of Wisconsin-

Milwaukee Employment and Training Institute (ETI) has

recently published estimates of market demand in every ZIP

code and the 100 largest metropolitan areas in the United

States.

The “ETI Purchasing Power Profiles” provide estimates of

expenditures by neighborhood for 16 categories of expendi-

tures, including food at home; food away from home; apparel

and related services; television equipment, tapes and discs;

audio equipment, CDs, and tapes; household textiles; furniture;

floor coverings; major appliances; small appliances and house-

wares; computer hardware and software; miscellaneous house-

hold equipment; non-prescription drugs and supplies; house-

keeping supplies; personal products; and home repair com-

modities.

The profiles are used by cities and developers to estimate

neighborhood market demand, particularly in low- and moder-

ate-income neighborhoods that often have their market

demand underestimated by traditional evaluative methods.

For more information please visit the website of the

Employment and Training Institute at: http://www.uwm.edu/

Dept/ETI

grocery store development.Foundations such as the WilliamPenn Foundation, the PewCharitable Trust, and theWilmington Trust have all con-tributed resources toward thedevelopment of new urban stores.In the 1990s, the Local InitiativeSupport Corporation’s The RetailInitiative and Fannie Mae’sAmerican Communities Fundfocused on closing the financinggap and returning retail to cities.Some CDCs, for instance, notablythe Bed-Stuy RestorationCorporation in New York and theNew Community DevelopmentCorporation in Newark, NewJersey, have taken on lead roles asthe owners of the retail facility inwhich new supermarkets locate.

• State and city government

need to commission research

on methods that are used by

companies to measure risk. Thisreport has documented instances inwhich companies may be undulyassigning higher risk to low-wagefamilies because of the currentmethods that are used to measurerisk.

One example of this is the waythat insurance companies deter-mine automobile premiums. Low-income households may be chargedhigher premiums because insur-ance companies incorporate ZIPcode measures of accident and fil-ing rates. This means that manylow-wage neighborhoods inPhiladelphia that are clusteredaround high-density commutingroads may end up paying higherpremiums because of the higheraccident rate caused by commuters,not their neighbors. Insurance

companies have a choice hereabout how they measure risk. Byusing ZIP code information, theyare unduly passing that higher riskonto every driver in that ZIP code.Alternatively, the companies couldask more information about theparticular driver, such as the roadsthey use to commute to and fromwork, which would allow them topass that higher risk directly to thedrivers that are causing the higheraccident rates.

Similarly, credit scores are awidely used measure of risk, butthere is mounting evidence thatsuggests the error in these scoresharms low-wage families.96 As aresponse to this error, the MichiganInsurance Commissioner recently

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banned their use by insurance com-panies licensed to sell insurance inthe state.

Both of these examples indicatethat state and local governmentshould make investments in study-ing how risk is being measured bycompanies. Both businesses andlow-wage families stand to benefitimmensely from more accuratemeasures of risk.

• The city should reduce real

neighborhood risk. Insurancepremiums, food prices, and utilityprices are affected by either highercrime or accident rates, since theserates affect the cost of supplying agood or service. Higher crime rates,for instance, mean that some com-panies have a greater need forsecurity services. It also means thatinsurance companies are more like-ly to have to replace stolen or dam-aged belongings. Similarly, higheraccident rates drive up the likeli-hood that insurance companies willhave to pay for automobile repairsor replacements. For these reasons,the city can lower the prices ofbasic necessities by lowering crimeand accident rates. ■

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MICHIGAN BAN ON INSURANCE COMPANIESUSING CREDIT SCORES

Michigan’s Department of Labor and Economic Growth,

which regulates insurance providers in the state,

announced last year that insurance rates in the state

will be reduced by a regulation that took effect on January 1,

2005 banning the use of credit scores by insurance companies.

Insurance Commissioner Linda Watters explained her rational

for the new regulation by saying, “I believe that using credit

scores to determine insurance rates is unfair.”

This action followed a review of several recent reports that

have found credit scoring is error prone, including a Consumer

Reports study than found 30 percent of the scores they ana-

lyzed contained errors, and a series of hearings held in July

2004. It was also motivated by the wide diversity in the use of

credit scores by insurance companies. Some insurers in the

state have two or three tiers of rates based on credit scores,

whereas another company has 46 tiers. Insurance premiums

vary significantly across these tiers.

In addition to this new regulation, the state annually publish-

es an extensive list of approved rates for a range of different

cars in the state.

For more information please visit the Office of Financial and

Insurance Services (OFIS) at http://www.michigan.gov/cis

All consumers should havethe information they needto shop for lower prices,

recognize inflated prices, and effec-tively manage money. But, manylow-wage families lack this infor-mation, which makes them moresusceptible to bad deals.

Lack of basic information aboutthe market is exacerbated by theincreasing complexity associatedwith buying basic necessities.Credit scores now determine pricesfor a wide range of necessities, butknowledge about how to improvethese scores is uneven. New com-petition in utility markets hasexpanded the range of prices andservices consumers can buy, butthis information is on an obscurestate agency webpage. New marketproducts are available which aredesigned to specifically reducecosts for low-income households,but advertising for these products isdisjointed and random. And, newonline companies are designed tolower prices for all households, butlow-income households have lessaccess to the Internet than higher-income households.

Even in cases where low-wagefamilies do have a potential to useinformation to save money, thecosts may be too prohibitive. Forinstance, grocery customers mustvisit different stores to collect andcompare coupons; insurance cus-tomers must make calls to at least18 different companies; and carshoppers must visit different deal-ers to find the best price. This col-

lection of price information takesaccess to resources like automo-biles which many low-wage familiescannot afford.

The city has already taken somesteps to fill this information gapamong households. In just the pastfour years, the city has trained over300 city housing counselors aboutpredatory lending, set up a finan-cial education hotline, and heavilymarketed these resources throughfliers sent out in utility bills and byrelying on the dense network ofcommunity organizations in

Philadelphia. Similarly, organiza-tions like the Greater PhiladelphiaUrban Affairs Coalition’s Campaignfor Working Families have providedlow income tax filers with freefinancial literacy information.These are all impressive and inno-vative steps that distinguishPhiladelphia as a leader in financialliteracy.

But, more reforms are needed.In particular:

• Low- and moderate-income

households need to be provided

with a roadmap for how to

improve their credit scores.

These scores are becoming increas-ingly important as a determinant ofprices for basic necessities, and are

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THE MULTILATERAL INVESTMENT FUND’S REMITTANCE COST-CUTTING CAMPAIGN

With the support of 32 countries, this organization pro-

motes economic growth in Latin America and the

Caribbean. The fund has recently turned its attention

to remittances as an economic development tool, since the

high cost of sending money back to families in countries of ori-

gin annually drains a significant portion of the $38 billion sent

to Latin American and the Caribbean every year through remit-

tances.

Among the many activities undertaken over the past four

years, their work has focused on developing alternative remit-

tance products, raising awareness about the economic develop-

ment potential of remittance cost-cutting, and increasing com-

petition for remittances. For instance, one grant went to the

Federation of Associations of Cooperatives in Argentina to

broaden the supply of financial products available for recipients

of remittances.

For more information please visit the website of the

Multilateral Investment Fund at: http://www.iadb.org/

mif/v2/remittances.html

GETTING THE MARKET RIGHT

GOAL 2: Give consumers the information they need

in today’s new market

already factored into the prices thatare charged for loans, insurance,and even utility security deposits.By providing a roadmap for differ-ent types of households to improvetheir credit scores, more low- andmoderate-income households willqualify for lower interest rates,insurance premiums, and securitydeposits.

For instance, a roadmap toimprove credit scores for new con-sumers would stress the optionsthey have to build a good creditscore. On the other hand, aroadmap for a customer heavilyindebted would stress the steps thatcustomer could take to improvetheir scores.

This roadmap should be distrib-uted by a number of different insti-tutions. The city government needs

to provide this information on itswebpage and leverage its vast net-work of housing counselors, utili-ties, and its anti-predatory lendinghotline; state government needs touse the newly established Office ofFinancial Education to publicizethis information; and organizationsoutside of government should takeadvantage of their network of mem-bers or clients and the coalitionsthey belong to.

Most importantly, business lead-ers need to work within their net-works to publicize the importanceof having customers with lowercredit scores. Accident rates, law-suit incidences, and default ratesare all correlated with credit scores.As a consequence, increasing theproportion of customers that havehigh credit scores means that thebusinesses that rely on creditscores should face less risk supply-ing basic necessities.

• The state needs to make

investments in rethinking finan-

cial education curriculum.

Today’s marketplace for basicnecessities is full of new informa-tion and knowledge that anyresponsible consumer must keeptrack of. This means that a finan-cial literacy curriculum needs to berobust and not focused on a singleset of skills, such as financial plan-ning. It also means that inculcatingfinancial skills cannot be confinedto just single events, such as homepurchases, or single members ofworking families, such as homebuy-ers. Financial literacy is somethingthat every member of a workingfamily needs to succeed. Thismeans that the state must makeinvestments in rethinking financial

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education in the state.In particular, the state should

follow the lead recommendations ofthe Governor’s Task Force forWorking Families and commissiona report or taskforce that: (a) ana-lyzes the current state of financialliteracy and consumer counseling;(b) the best practices used to reachclients, particularly practices thatcreate “teachable moments” forlow- and moderate-income childrenand adults; and (c) develop new,innovative practices for reachingfamilies.97

• Low- and moderate-income

households need to be provided

with a catalog of existing mar-

ket products that are specifical-

ly designed to lower prices for

low- and moderate income con-

sumers. Among other items, thiscatalog should include informationabout the limited tort insuranceplan; the several utility cost savingsplans; low cost checking plans; freetax preparation services that areavailable to low and moderateincome households; and speciallypriced loan products created by thecity, including Mini-Phil and Phil+.

The limited tort insurance planis available to all drivers inPennsylvania and reduces insur-ance premiums by as much as 40

percent for participants. Inexchange for this substantial dis-count, drivers waive their right tosue the party at fault in a minoraccident. But, drivers retain theirright to sue for unpaid medicalbills, lost wages, out-of-pocketexpenses, and “pain and suffering”in more serious accidents.Currently, about 70 percent of thecity’s drivers have selected thisinsurance option.

Such a catalog should alsoinclude information about utilitycost savings plans, which is alreadysupplied at http://www.utility-choice.org/, a Pennsylvania-specificprice guide to every utility in thePennsylvania market. For instance,PGW provides numerous programsfor reducing gas bills, including theCustomer Responsibility Program,Conservation Works Program, andCustomer Assistance Referral andEvaluation Program. Similarly, alltelephone providers are required tooffer numerous discount programs,including Lifeline, Link-Up-America, and UTAP.

Finally, there are numerousfinancial services that are alreadyavailable that provide a discount tolow- and moderate-income house-holds. For instance, the GreaterPhiladelphia Urban AffairsCoalition’s Campaign for WorkingFamilies provides free tax prepara-tion service; the city has workedwith area banks to create low costloans for home renovations; andsome banks offer low cost checkingaccounts. ■

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FLEXCAR

Flexcar is the nation’s largest car-sharing program. It allows

members to buy a variety of different types of member-

ships, which allow users to gain access to automobiles for

limited periods of time.

Flexcar provides members with a fleet of cars located across

10 metropolitan areas. Each area contains multiple locations for

members to pick-up and drop-off the rental automobile.

For instance, in Washington, DC there are over 125 vehicles

located at or near 53 stops on the city’s mass transit system.

The annual membership fee is only $35 and the usage fee is $9

hour.

The fee covers the costs of the vehicle, gas, maintenance,

and the insurance for the car and driver. The cars are generally

some of the most fuel-efficient automobiles available in the

market.

This market innovation saves households from the costs of

buying, maintaining, insuring, filling-up, and storing a car. For

many households, car-sharing programs can significantly

reduce the costs associated with using an automobile.

For more information please visit the Flexcar webpage at:

http://www.flexcar.com/

Aperfect marketplace wouldautomatically set the lowestpossible price for basic

necessities. But, marketplaces areoften far from perfect, and fringesuppliers of basic necessities areable to take advantage of theseimperfections by charging exces-sively high prices. In some casesthese high prices are illegal, thoughin other cases high prices are justunethical.

Philadelphia has already takenseveral innovative steps to curbthese market abuses. Just in thepast four years, the city’sNeighborhood TransformationInitiative (NTI) used part of a bondsale to train 300 housing coun-selors about predatory lending andset up a hotline for city residents toreport and find out about predatorylending.

The state has also shown leader-ship in this area. The governor cre-ated a new Office of FinancialEducation in May 2004, whichincludes a commitment to educateconsumers about predatory lending,among other things. Similarly, thestatehouse passed thePennsylvania’s Mortgage Bankers

and Brokers and Consumer EquityProtection Act (MBCEPA) in 2001,which eliminated or curtailednumerous predatory practices inPhiladelphia’s financial serviceindustry.

Outside of government, organiza-tions like The Reinvestment Fund(TRF) have been leaders in thefight against predatory lending bydeveloping an ambitious and com-prehensive catalog of tools to fightpredatory home lending practices.For instance, TRF has assembled aPredatory Lending Strategy Teamwhich brings together industry, gov-ernment, and nongovernment rep-resentatives to study and track pat-terns of predatory lending. Theresearch that comes out of thisproject will be an invaluable assetto crack down on predatory institu-tions.

As a consequence of this work,future reforms need to strengthenthese underway efforts and tobranch into additional markets withabuses, particularly predatory tortlawyers, car dealers, and rent toown establishments. In particular:

• Fortify underway efforts to

curb market abuses.

City government needs to reautho-rize funding for the anti-predatorylending training it provided itshousing counselors in 2002; con-tinue to widely publicize the anti-predatory lending hotline it estab-lished in 2003; work with localorganizations to monitor companiesthat receive chronic complaints on

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GETTING THE MARKET RIGHT

GOAL 3: Curb market abuses through regulation

The research that comes out of TRF’s lend-

ing project will be an invaluable asset to

crack down on predatory institutions.

the anti-predatory lending hotline;expand the number of alternativeloan products it has developed witharea banks; and continue to lobbythe state government to makeMBCEPA a stronger anti-predatorylending law.

At the state level, the GeneralAssembly and the governor need toexpand the 2001 MBCEPA to putmore regulatory emphasis on pro-tecting consumers. A new lawneeds to include a cap on pointsassigned to loans, assign punitivedamages when these caps are vio-lated, and mandate that theDepartment of Banking developfinancial counseling materials thatlenders in the state must berequired to share with high interestand high fee loan consumers.Similarly, it needs to follow stateslike North Carolina that havebanned lenders from collecting feeson loan-flipping, a practice thatcontributes to the number of peo-ple who pay subprime loans.

Organizations outside of govern-ment need to continue to play anenforcement role. Studies likeTRF’s subprime lending analysisare models of how organizations inPhiladelphia can use their capacityto monitor, evaluate, and reportpredatory lending practices inPhiladelphia. These efforts need tobe expanded and made into perma-nent initiatives.

• Strengthen regulations gov-

erning the short-term loan

industry. A campaign against mar-ket abuses in the loan marketneeds to move beyond the almostexclusive focus on mortgage lend-ing companies and instead broadenits focus on a number of additional

small-loan companies, includingpawnshops, rent-to-own- stores,short-term lenders, check-cashers,and for profit tax preparation serv-ices that supply rapid refund antici-pation loans. Each of these busi-nesses has a strong incentive toexploit the lack of competition theyface from more mainstream suppli-ers by charging unnecessarily highprices.

One obvious loophole in stateregulations that needs to be closedis the lack of regulation governingfees. Although payday lenders aretechnically not allowed in the state,a short-term loan industry is nowclustered in the state and offerssimilar, inflated APRs for short-

term loans. This industry is differ-ent from the payday lenders inname only, since both charge APRsfor short-term loans that soar over400 percent. The city or stateneeds to pass stronger regulationsto limit these companies from tak-ing advantage of the short-termloan needs of low-income cus-tomers.

• Predatory tort lawyers need to

be investigated and held

accountable. The city must act toinvestigate and perhaps regulatethe predatory tort lawyers that driveup insurance premiums in lowerincome neighborhoods. This agen-da should include: more aggressive

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NORTH CAROLINA’S ANTI-PREDATORY LENDINGLAW

Fully implemented in 2000, the North Carolina anti-predato-

ry lending law has reduced subprime lending through out

the state, according to recent analysis by Roberto Quercia,

Michael Stegman, and Walter Davis. Among the numerous pro-

visions that are designed to curb predatory lending, this law

prohibits prepayment penalties on first-lien mortgages under

$150,000; defines high cost loans; prohibits numerous lending

practices without consideration of a borrower’s ability to pay;

prohibits refinancing if there is no net benefit to homeowner;

prohibits the financing of single premium credit insurance; and

requires applicants for high cost loans to receive financial coun-

seling before taking out the loan.

Since the law has taken effect, purchase originations

increased; but, there was a substantive decline in the number

of refinance originations, which research by The Reinvestment

Fund in Philadelphia has shown to be the major source of sub-

prime loans in the home mortgage market.

For more information about this and related efforts under-

way throughout the country please visit the homepage of the

Center for Responsible Lending at: http://www.responsible-

lending.org

enforcement of the city’s doubledip laws which prevent tort lawyersfrom recruiting tow truck lawyersto advertise; new commissionedresearch that analyzes how theselawyers drive up premiums; andregular monitoring of the advertis-ing by these lawyers. Further,insurance companies, the city, ororganizations in the city shouldcombat the advertising campaign oftort lawyers by running public serv-ice announcement and sending outfliers of information about theeffects of tort lawyers.

• Publicize the names of compa-

nies that take advantage of low-

income families. The names ofcompanies that charge excessivelyhigh prices need to be regularlypublicized. City government canpost this information on their web-page, distribute it to the city’s vastnetwork of housing counselors andto the new financial educationcounselors, and disseminate itthrough the monthly bills sent outby the city’s two major utilities,Philadelphia Gas Works andPhiladelphia Water Works.Organizations outside of govern-ment need to make this available totheir members or clients, and usetheir networks to distribute thisinformation. ■

The last reform needed toreduce prices inPhiladelphia is one that may

be unique to Philadelphia. Thepublic natural gas monopoly ispoorly run and more expensive forall households in the city, whichparticularly hurts low-wage familieswho are less able to pay these high-er rates than higher-income house-holds. The city can work to directlyreduce these rates. But, it also hasan indirect opportunity to reducethese rates by increasing theresources available for making

homes more efficient. This strategywould reduce the consumption ofresources by households, which willlower the overall cost of energy forthese households.

There is already a strong prece-dent in Philadelphia for achievingthis policy goal.

The city owned Philadelphia GasWorks, for instance, is one of thefew utilities in the country to sup-plement federal LIHEAP fundingon weatherization. The city utilityhas also created a number of spe-cial, utility payment plans for low-

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GETTING THE MARKET RIGHT

GOAL 4: Lower the high prices of goods and services

sold by government in Philadelphia

and moderate-income householdsthat temporarily subsidize utilitycosts.

Future reforms need to build onthese efforts. In particular:

• Expand support for home effi-

ciency. According to PGW, the fed-eral LIHEAP program is reachingonly about 50 percent of the eligi-ble households in the state. And, inPhiladelphia 50 percent of the resi-dential users do not pay their gasbill regularly. The higher prices thatlow- and moderate-income house-holds have to pay to heat theirhomes is simply too high in the cityfor many to afford.

The General Assembly needs tojoin the numerous other states whohave funded a state LIHEAP pro-gram that supplements federalspending. Such a program wouldreduce the pressure utilities face toraise rates when customers are notable to pay their bills.

Such a program should specifi-cally focus on investments in effi-ciency. As energy prices climb, thestate cannot afford to subsidizeevery household that needs and willneed assistance. It also makes littlelong-term sense to subsidize ineffi-cient homes, since this does notsolve any of the causes that aredriving up prices for low-wage fam-ilies. Instead, the state shouldfocus on reducing consumption byincreasing the efficiency of theirhousing stock. This should includeinvestments in roof repairs, effi-ciency standards for appliances andequipment, and enforcement of thestate energy code. It should also

include an extensive review of otherstate initiatives.

• Reform state regulations to

expand resources for

Philadelphia Gas Works. ThePennsylvania Department ofWelfare needs to stop allowingLIHEAP emergency funds to beused for secondary and tertiaryenergy heating sources This staterule drains money away fromPhiladelphia Gas Works, sinceclients can use the spending to payfor other utilities. ■

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NEW YORK’S SUPPLEMENTAL HOME ENERGYALLOWANCE

Although it is the single largest beneficiary from the

LIHEAP program, receiving about 6.8 percent of the

annual federal spending, New York has joined 25 other

states to provide a state subsidized supplement. In fiscal year

2004 this amounted to $74 million, which was spent on rate

assistance and promoting energy efficiency through out the

state.

In addition to this additional state spending, New York also

prohibits collection by regulated utilities of security deposits

and, in some cases, reconnection fees from recipients of public

assistance, supplemental security income (SSI), and a selection

of state supplemental programs.

For more information about LIHEAP please visit the LIHEAP

Clearinghouse online at: http://www.ncat.org/liheap. For more

information about efforts underway to boost the efficiency of

low- and moderate-income homes please visit the homepage of

the Energy Coordinating Agency (http://www.ecasavesenergy.

org) or the Center for Neighborhood Technology

(http://www.cnt.org).

This report has outlined anothertool that can be used in that effort,one that addresses the particularneeds of low- and moderate-incomeworking families throughoutPhiladelphia.

Thousands of dollars are drainedfrom these households throughhigher prices, much of which couldbe regained by transforming the

markets that set these prices.Moreover, many of these reformsunite broad cross sections of con-stituents within the metropolitanarea, building a political and eco-nomic base that has beenunmatched in many previousefforts to help these families moveahead.

While different, each of thesereforms aspires to transform themarkets that set prices for basicnecessities. For consumers, leaderswill need to make the marketplace

more transparent, help lower- andmoderate-income householdsbecome more attractive customers,and improve accessibility to main-stream suppliers of necessities,reducing the opportunities forthese households to become miredin a cycle of higher prices in theprocess. For suppliers of necessi-ties, leaders will have to make themarket of consumers more trans-parent, crack down on a range ofpredatory market behaviors, and,most importantly, foster market-place innovations by harnessing theself-interest of entrepreneurs andarea businesses.

Through these efforts, leaderswill be able to put thousands ofdollars back into the pockets ofworking families for investment inassets like education and houses,growing the incomes of individualsand the competitiveness of the met-ropolitan area.

Philadelphia can continue tomove ahead by getting back to thebasics—the prices we pay everydayin the markets for necessities. ■

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Conclusion

Philadelphia is at a crossroads. After decades of decline

leaders in the metropolitan area are now poised to bring

substantial economic development to the area.

Philadelphia can continue to move

ahead by getting back to the basics—the

prices we pay everyday in the markets for

necessities.

1. Brookings Institution Analysis.

2. “Transforming Our Neighborhoods—

Building Our Future.” 2000–2003

Neighborhood Transformation

Initiative Progress Report. City of

Philadelphia.

3. Alan Berube and Thacher Tiffany.

2004. “The Shape of the Curve:

Household Income Distributions in

U.S. Cities, 1979–1999. Brookings

Institution, Metropolitan Policy

Program.

4. Department of Commerce, 2003

American Community Survey.

5. Also see: Manuel Pastor Jr., Peter

Drier, J. Eugene Grigsby III, and Marta

Lopez-Garza. 2000. Regions That Work:

How Cities and Suburbs Can Grow

Together. Minneapolis: University of

Minnesota Press.

6. Robert P. Giloth. 2003. Workforce

Intermediaries for the Twenty-first

Century. Philadelphia: Temple

University Press.

7. Brookings Institution analysis.

8. For a recent analysis of six different

measures, see Leah Curran, Harold

Wolman, Edward W. Hill, and Kimberly

Furdell. 2005. “Economic Wellbeing

and Where We Live: Accounting for

Geographic Cost-of-Living

Differences.” Unpublished manuscript.

9. Note that some costs in Philadelphia

are also higher because of the public

supply of goods and services. We have

no expectation that this is a general

cause.

10. Authors’ analysis of 2000 PUMS sam-

ple from the the decennial census.

11. We feel confident using national data

to illustrate the existence of this higher

price in Philadelphia because the major

causes of higher prices—rational mar-

ket responses to risk, market failures,

and market abuses—are general, which

means we have no prior to suspect that

Philadelphia is somehow insulated

from these market forces.

12. Authors’ analysis of the 2001 Survey of

Consumer Finance and 2000 PUMS

sample from the Census. We use the

median income because of data limita-

tions.

13. These simulations are based on the

multivariable regression models esti-

mated in Fiona Scott Morton, Florian

Zettelmeyer, and Jorge Silva-Risso.

2001. “Consumer Information and

Price Discrimination: Does the

Internet Affect the Pricing of New Cars

to Women and Minorities?” Working

Paper 8688, National Bureau of

Economic Research. In these models,

the car value is held constant by a least

squares with dummy variables model

design, which controls for over 400 dif-

ferent automobile makes and models.

14. In the Pennsylvania portion of the met-

ropolitan area (Bucks, Chester,

Delaware, Montgomery, and

Philadelphia counties), 71 percent of

the individuals are white; 22 percent

are black; 86 percent of individuals

older than 18 have a high school

degree; 56 percent of individuals live in

a home owned by someone in their

household; 15 percent live in a house-

hold with an annual income between

$70,000 and 90,000; and 27 percent

live in a household with an annual

income between $.01 and $30,000.

About 11 percent of individuals over

18 in the Pennsylvania side of the

metro area fit the Customer 1 profile

and about 8 percent of individuals over

18 fit the Customer 2 profile (give or

take $10,000 household income in

both cases). Race and education data

are from the U.S. Census Bureau 2003

American Community Survey. Income

and home ownership data are from the

U.S. Census Bureau 2000 Decennial

Census. Finally, note that the home-

ownership rate—or the proportion of

households that own homes—is 59.3

percent. This is different from the per-

centage of individuals that live in an

owned home, which is much lower.

15. Authors’ analysis of 2000 PUMS sam-

ple. Greater Philadelphia area is the

five counties that make-up the

Pennsylvania portion of the metropoli-

tan area.

16. This is the 2001 Survey of Consumer

Finances, The Federal Reserve.

17. Authors’ analysis of the 2001 Survey of

Consumer Finances.

18. These rates were automatically selected

by Fair Isaac at www.myfico.com as a

representative range of interest being

offered for auto loans in the

Philadelphia market in October 2004.

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Endnotes

19. Authors’ analysis of the 2001 Survey of

Consumer Finances.

20. The current, reliable, and general data

that is available on auto loans provide

no information as to why some low-

income families are able to qualify for

competitive interest rates, while others

are charged higher rates than other

households.

21. The results are not dependent on these

arbritary income group categories.

22. This estimate is based on quotes from

two insurance companies—Allstate and

Progressive—in every ZIP code in

Philadelphia, Bucks, Chester,

Delaware, and Montgomery counties.

The quote is for a car that is valued at

the same value of automobiles owned

by the median household in the lowest

income quintile - $5,100. In the

Philadelphia market, this is a 2002

Ford Taurus. The driver is assumed to

have a perfect driving and insurance

record, to be 35 years old and married,

commutes five miles to work, and

annually drives between 10,000 and

15,000 miles. Credit scores are held

constant in this analysis—one company

assumes the highest possible score, the

other company assumes an undisclosed

“average score.” This means that we

are likely underestimating the true vari-

ance in rates among households, since

credit scores are strongly related to

household income.

23. Authors’ analysis of 2000 PUMS.

24. Typical is measured as the median

value of automobiles owned by the low-

est income quintile in the 2001 Survey

of Consumer Finances sample of

American households, which is $5,100.

25. All of these caveats represent data limi-

tations. Also, company rates vary, in

part, because of the different market

niches each company serves. Those

companies that specialize in insuring

high risk drivers will charge higher

rates than companies that insure a

more general cross-section of drivers.

26. Quotes from insurance companies for

the same car and driver were obtained

from the Pennsylvania Department of

Insurance.

27. U.S. Department of Commerce

Economics and Statistics

Administration. 2001. “Home

Computers and Internet Use in the

United States: August 2000.” U.S.

Census Bureau Special Studies

(P23–207).

28. U.S. Department of Commerce

Economics and Statistics

Administration. 2001. “Home

Computers and Internet Use in the

United States: August 2000.” U.S.

Census Bureau Special Studies

(P23–207).

29. Auto maintenance, car inspection fees,

driver’s education classes, and licensing

fees are some of the many additional

costs associated with car ownership

that we have not considered because of

data limitations.

30. We tried unsuccessfully to purchase

store-level data from AC Nielson.

Future work may want to try this

resource again.

31. Phillip R. Kaufman and Charles R.

Handy. 1989. “Supermarket Prices and

Price Differences: City, Firm, and

Store-Level Determinants.” United

States Department of Agriculture,

Economic Research Service, Technical

Bulletin Number 1776.

32. Neighborhoods are defined as ZIP

codes.

33. This estimate was derived from data on

the size of all grocery stores in

Philadelphia. The median income in

the ZIP code of each store location was

obtained. These stores were then rank

ordered by the ZIP code and a median

store size was obtained for each ZIP

code. Finally, we obtained the median

income in each of the ZIP codes from

the Department of Commerce and

sorted these data in increments of

$10,000.

34. Besides having smaller stores, the Food

Trust has shown in several publications

that many low-income neighborhoods

in Philadelphia also lack a sufficient

number of stores. See for instance: The

Food Trust. 2002. “The Need for More

Supermarkets in Philadelphia: Food for

Every Child.” Available online at

www.thefoodtrust.org. This analysis is

based on a finer definition of a neigh-

borhood that we were unable to repli-

cate. However, a ZIP code level analy-

sis—a much higher level of geography

than used by the Food Trust— showed

no relationship between the number of

stores and median ZIP code income.

35. Authors’ analysis of 2004 Trade

Dimensions data.

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36. For example, see David M. Frankel and

Eric D. Gould. 2001. “The Retail Price

of Inequality.” Journal of Urban

Economics 49: 210–39

37. For example, see Phillip Kaufman,

James M. MacDonald, Steven M. Lutz,

and David Smallwood. 1997. “Do the

Poor Pay More for Food? Item

Selection and Price Differences Affect

Low-Income Household Food Costs.”

United States Department of

Agriculture: Agricultural Economic

Report Number 759. And, see the Food

Trust organization for evidence that

nutritional health in Philadelphia is

strongly related to income.

38. Robert Weissbourd. 1999. The Market

Potential of Inner-City Neighborhoods:

Filling the Information Gap.”

Brookings Institution Metropolitan

Policy Program. Also see: 2003.

“Houston Strikes It Big with

DrillDown.” Federal Reserve Bank

of Dallas, E-Perspectives, Volume 3,

Issue 4; The Food Trust (based in

Philadelphia) www.thefoodtrust.org;

and "The Changing Models of Inner

City Grocery Retailing." Boston:

Initiative for a Competitive Inner City.

39. Robert P. King, Ephraim S. Leibtag,

and Ajay S. Behl. 2004. “Supermarket

Characteristics and Operating Costs in

Low-Income Areas” Agricultural

Economic Report No. (AER839).

40. Building Industry Association of

Philadelphia. 2004. “If We Fix It, They

Will Come.”

41. For further evidence, compare

Chicago’s efforts to streamline the

development process at www.develop-

mentcode.com/ChicagoNew/ with

Philadelphia’s numerous publications

which explain the development

process.

42. Michael Barr. 2004. “Banking the

Poor.” Brookings Institution

Metropolitan Policy Program. It is

important to note that many of these

alternative financial services are filling

market needs unmet by mainstream

financial services. For this reason,

reforms aimed at lowering these prices

must engage these institutions to cre-

ative profitable services with incentives

for low-income households to use

them.

43. We feel confident using national data

to illustrate the existence of this higher

price in Philadelphia because the major

causes of higher prices—rational mar-

ket responses to risk, market failures,

and market abuses—are general, which

means we have no prior reason to sus-

pect that Philadelphia is somehow

insulated from these market forces.

44. These national data are the 2001

Survey of Consumer Finances. We do

not use increments of $15,000, since

the data in this section are rich enough

to allow for a more detailed analysis of

household income.

45. Banked is defined as having a checking

or some type of savings account. The

2001 Survey of Consumer Finances

estimates that approximately 13 per-

cent of American families are

unbanked. Nearly all of these families

earn less than $30,000 a year.

46. Estimate based on a content analysis of

Philadelphia’s Yellow Pages.

47. The NAICS industry coding system

once assigned a unique code to check

cashing establishments, which allowed

researchers to study their market pene-

tration. But, the code has been reas-

signed several times over the past 18

years to a higher level of aggregation,

which makes it impossible to identify

these establishments.

48. ($15,000/26 2-week pay peri-

ods)*3.0%(the fee charged for payroll

checks)*26(the number of times a

customer uses the service every year) =

$450; ($30,000/26)*(3%)*(26) = $900

49. For an interesting discussion of the

fees charged by retail banks, see

Timothy H. Hannan. 2002. “Retail

Fees of Depositary Institutions, 1997–

2001.” Federal Reserve Bulletin,

Summer.

50. Michael Barr. 2004. “Banking the

Poor.” Brookings Institution

Metropolitan Policy Program.

51. 2001 Survey of Consumer Finances.

52. Pennsylvania law prohibits payday lend-

ing. But, in its place, companies pro-

vide short-term loans to would-be

clients of payday lenders.

53. Keith Ernst, John Farris, Uriah King.

2004. “Quantifying the Economic Cost

of Predatory Payday Lending.”

Durham, NC: Center for Responsible

Lending.

54. Regulations for these loans in

Pennsylvania are governed by the

Consumer Discount Summary Act,

which mandates that interest rates for

these loans are not allowed to exceed

24 percent. Longer loans—1 to 5

years—cannot exceed 28 percent. Note

that this legislation does not specify

finance charge limits for these particu-

lar loans, which is why the annual per-

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centage rates are so high. The

Pennsylvania House of Representatives

has recently considered a bill that

would legalize payday lending as well

as APRs as high as 910 percent for a

one-week loan. This shift to state-char-

tered banks followed a federal ruling

that prevents banks from renting

national charters to avoid state laws.

The Pennsylvania Department of

Banking responded to this ruling with a

letter to its state chartered banks on

April 1, 2003, which endorsed the fed-

eral rule. But, the Department has not

taken any regulatory position on the

renting of state charters.

55. For an interesting discussion of the

efforts by payday lenders to create

revolving debt among customers, see

www.kenan-flagler.unc.edu/

assets/documents/CC_Payday_

lending.pdf. Also, see numerous

studies by the Center for Responsive

Lending at http://www.responsible-

lending.org/payday/index.cfm for

more information about these services.

They estimate that American families

pay $3.4 billion in costs to use these

services every year.

56. This check casher is owned by

Republic Bank and Trust Company,

based in Kentucky. These fees were

obtained directly from the company on

2/13/05 at http://www.acecashex-

press.com/loan_apps/PA.pdf.

57. Annie E. Casey Foundation. 2005.

“Double Jeopardy: Advocasey Explores

The High Costs of Being Poor.”

Baltimore, MD: Annie E. Casey

Foundation.

58. Alan Berube, Anne Kim, Benjamin

Forman, and Megan Burns. 2002. “The

Price of Paying Taxes.” Survey Series,

The Brookings Institution Metropolitan

Policy Program and Progressive Policy

Institute. Assessment based on random

sampling of Philadelphia’s tax estab-

lishments.

59. Feather Hustoun. 2004. “Philadelphia’s

Campaign for Working Families.”

Brookings Institution Metropolitan

Policy Program.

60. Alan Berube, Anne Kim, Benjamin

Forman, and Megan Burns. 2002. “The

Price of Paying Taxes.” Survey Series,

The Brookings Institution Metropolitan

Policy Program and Progressive Policy

Institute.

61. Authors’ analysis of the 2001 Survey of

Consumer Finances. Michael Barr.

2004. “Banking the Poor: Policies to

Bring Low-Income Americans Into the

Financial Mainstream.” Brookings

Institution Research Brief.

62. This reminder was published on May

5, 2003.

63. Of course, these distributions only

become significant if the size of the

banking population does not track this

distribution. In fact, the population in

each of these neighborhoods does not

track this distribution.

64. Neighborhoods are measured by ZIP

codes. Median neighborhood income is

median income in every ZIP code.

65. For more information see Kathryn

Gwatkin and George McCarthy. 2003.

“A Critical Examination of Financial

Literacy Education.” Presented at

Building Assets, Building Credit: A

Symposium on Improving Financial

Services in Low-Income Communities.

Also, data from the 2001 Survey of

Consumer Finances indicate that 88

percent of the individuals who reported

that “they just haven’t gotten around to

it” as the primary reason why they did

not have a checking account earned

less than $45,000. Also see Saundra

Braunstein and Carolyn Welch.

November 2002. "Financial Literacy:

An Overview of Practice, Research, and

Policy." Federal Reserve Bulletin.

66. For instance, the 2000 Census indi-

cates that there are fewer low-income

homeowners in Philadelphia than high-

er-income households; and the 2001

Survey of Consumer Finances indicates

that low-income consumers are more

likely to fall behind in payments than

higher-income households.

67. Authors’ analysis of data obtained from

correspondence with Steven Hershey,

Vice President - Community Initiatives,

Philadelphia Gas Works.

68. We were not able to obtain any data

from the state or PGW on the typical

amount actually charged by PGW for a

security deposit. Nor were we able to

obtain an estimate of the proportion of

households served by PGW that pay a

security deposit. This information was

also not located for other utility compa-

nies that serve the Pennsylvania market.

69. Authors’ analysis of rate information

published by the Pennsylvania Public

Utility Commission.

70. Authors’ analysis of 2000 Public Use

Micro Data from the Decennial

Census.

71. PGW, like most utilities, also charges a

fixed fee of $12.00 to all customers.

PGW does not adjust this charge for

usage, which means that this charge is

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a higher percentage of a bill for low-

income families than higher-income

households, since low-income house-

holds use less energy, on average, than

higher-income households. For evi-

dence of this point please refer to the

Department of Energy’s Residential

Energy Consumption Survey.

72. We were not able to find reliable data

for the other energy sources and utili-

ties, including telephones and water

and sewer.

73. Steve Hershey. February 20, 2004.

“Briefing for the Philadelphia

Delegation: Low-Income Home Energy

Assistance Program (LIHEAP).”

Sponsored by Philadelphia Gas Works,

Philadelphia Facilities Management

Corporation, and Philadelphia Gas

Commission.

74. These interests rates were automatical-

ly generated by MyFico as representa-

tive of the range of rates being offered

by banks in the Philadelphia area.

75. Authors’ analysis of 2001 Survey of

Consumer Finances. Note that interest

rates have fallen since this sample was

drawn.

76. For more information, please refer to

the Center for Responsive Lending.

The information cited here was

accessed at the following web address:

http://www.responsiblelending.org/abus-

es/abusive.cfm

77. John Farris and Christopher A.

Richardson. 2004. “The Geography of

Subprime Mortgage Prepayment

Penalty Patterns.” Housing Policy

Debate 15 (3) 687–714.

78. Although home insurance is not

required by a state law, like auto insur-

ance, nearly all mortgage companies

require that lenders have insurance on

their home.

79. This estimate is based on an analysis of

home insurance premiums in every ZIP

code in Philadelphia, Bucks, Chester,

Delaware, and Montgomery counties.

The quotes are from Allstate for a six

month premium for a $50,000 house.

Allstate is one of the least expensive

home insurers in the state according to

data published by the Pennsylvania

Department of Insurance. Everything

except the ZIP code of the applicant

was held constant in the analysis of

premiums.

80. These caveats represent data limita-

tions.

81. The Pennsylvania Department of

Insurance releases a purchasing guide

every year which provides quotes on

several types of insurance policies from

each of the major companies licensed

to sell insurance in the state. The least

expensive home in this publication is a

$75,000 home. We repeatedly called

the Department for quotes on a less

expensive home but were told that they

do not collect enough information from

the insurance companies to estimate

these additional rates.

82. James M. Lacko, Signe-Mary

McKernan, and Manoj Hastak. 2000.

“Survey of Rent-to-Own Customers.”

Federal Trade Commission, Bureau of

Economics Staff Report.

83. James M. Lacko, Signe-Mary

McKernan, and Manoj Hastak. 2000.

“Survey of Rent-to-Own Customers.”

Federal Trade Commission, Bureau of

Economics Staff Report.

84. Note that the rent-to-own NAICS

code, which is used by the Department

of Commerce, is exceedingly broad,

including furniture and appliance

stores in addition to party event and

office furniture stores. Given this, it is

particularly noteworthy that these

results parallel so closely the Federal

Trade Commission results, which were

based on a sample of exclusively furni-

ture and appliance rent to own cus-

tomers.

85. James M. Lacko, Signe-Mary

McKernan, and Manoj Hastak. 2000.

“Survey of Rent-to-Own Customers.”

Federal Trade Commission, Bureau of

Economics Staff Report. For the

remaining 30 percent who are just

renting the item, it is conceivable that

their costs could be even higher if they

continue to use rent-to-own stores to

update items they are renting.

86. Kevin C. Gillen. 2003. “Challenges and

Solutions to Real Property Assessment

Uniformity in Philadelphia.” Prepared

for the Philadelphia Tax Reform

Commission. Brett Mandel. 2004 “Tax

Reform in Philadelphia.” Prepared for

this report.

87. Hollis Fishelson-Holstine. 2004. “The

Role of Credit Scoring in Increasing

Homeownership for Underserved

Populations.” Presented at: Building

Assets, Building Credit: A Symposium

on Improving Financial Services in

Low-Income Communities, hosted by

the Joint Center for Housing Studies at

Harvard University. Robert B. Avery,

Paul S. Calem, and Glenn B. Canner.

2004. “Credit Information Reporting

and the Practical Implications of

Inaccurate or Missing Information in

Underwriting Decisions.” Presented at:

Building Assets, Building Credit: A

Symposium on Improving Financial

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Services in Low-Income Communities,

hosted by the Joint Center for Housing

Studies at Harvard University.

88. U.S. Department of Commerce

Economics and Statistics

Administration. 2001. “Home

Computers and Internet Use in the

United States: August 2000.” U.S.

Census Bureau Special Studies

(P23–207).

89. Kathryn Gwatkin and George

McCarthy. 2004. “A Critical

Examination of Financial Literacy

Education.” Presented at: Building

Assets, Building Credit: A Symposium

on Improving Financial Services in

Low-Income

90. James M. Lacko, Signe-Mary

McKernan, and Manoj Hastak. 2000.

“Survey of Rent-to-Own Customers.”

Federal Trade Commission, Bureau of

Economics Staff Report.

91. There is no better sign of this than the

fact that many rent-to-own establish-

ments do not display these prices. It is

also worth noting that we often had to

ask repeatedly to get this information

from the company that we called to

obtain sample price discrimination sta-

tistics.

92. Numbers are rounded.

93. Teresa A. Sullivan, Elizabeth Warren,

and Jay Lawrence Westbrook. 2000.

The Fragile Middle Class. New Haven:

Yale University Press.

94. In particular, Philadelphia ranked 92

out of the 100 largest cities in the

United States. Brookings Institution

analysis.

95. Hannah Burton. 2004. “Exchanging

Public Policy Solutions to Closing the

Urban Grocery Store Gap.” Prepared

for the Brookings Institution.

96. One way this is illustrated is the

research on high risk mortgage lending

and credit scores. For instance, see

Avery, Calem, Canner, (2004).

97. This report is available online on the

homepage of the Pennsylvania

Department of Banking. Its title is:

“Dollars and Sense: Realistic Ways

Policymakers can help Pennsylvania’s

Families.”

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