July 22, 2023 5:55 pm

Lessons from six years of income-based water assistance in Philadelphia

Six years ago, to great fanfare, Philadelphia Water launched a new approach to bill assistance for low-income water and sewer customers: the Tiered Assistance Program (TAP). Casually dubbed “income-based rates,” TAP held out the promise of achieving true “affordability” by whatever standard policymakers set. Philadelphia TAP has garnered widespread media attention* and has received tacit endorsements from some academic researchers and institutions.** TAP is also popular with some activists, who now champion TAP-style programs as the solution to the water affordability challenge. Inspired by Philadelphia, Baltimore started a similar income-based water/sewer rate program last year.

With more than five full years in the rear view mirror, it’s time to ask: how well has Philadelphia TAP worked? Rigorous empirical analysis of processes and outcomes ensure that public policies do what they're supposed to do. In this post we’ll review Philadelphia TAP’s basic design and its purported benefits. Then we’ll look at the program’s performance, costs, and overall impact based on data from the City of Philadelphia.

Buckle up for what is easily my longest blogpost ever. If you haven’t got the appetite for 4,000 words and a slew of graphs, here’s the TL;DR:

  • Lackluster participation. Philadelphia TAP reaches about 28% of eligible customers—a rate that has not changed significantly since 2019, despite significant investments in program promotion.
  • High administrative burdens. The time and effort required for customers to participate in TAP are mainly to blame for high attrition and stubbornly low participation rates.
  • High administrative costs. Over the program’s first five full years, Philadelphia Water spent an average of $313 in administration to deliver an average of $623 in benefits for each TAP participant each year—an administrative cost rate of more than 50%.
  • More harm than help. TAP made water/sewer less affordable for the vast majority of Philadelphians, and the program hurts far more low-income customers than it helps.

For the data behind these dismal conclusions, read on.

TAP in theory

Let’s start with what TAP is and what it’s supposed to do. Unlike conventional assistance programs that provide flat percentage or dollar value discounts to participants, TAP tailors its discounts to reflect participants’ individual household and financial circumstances. Specifically, TAP caps monthly water and sewer bills at 2-4% of a participating customer’s income, with discounts based on where the customer’s income falls relative to Federal Poverty Levels (FPL). Customers can qualify for TAP with incomes up to 150% of FPL. Since the FPL varies by household size, Philadelphia TAP discounts also vary according to the number of people in each participant’s household. Maximum bills come in four tiers—hence Tiered Assistance Program (you can find more program details here). Philadelphia Water effectively subsidizes TAP participants’ monthly bills by varying amounts to make up the difference between the full price and discounted price. In exchange for these subsidies, participants agree to pay on-time and inform the utility of any changes to household size or income.

To pay for the TAP subsidies, Philadelphia Water imposes a volumetric surcharge on every gallon of water that it sells (in addition to its regular water and sewer rates). These surcharges are adjusted each year based on projected subsidies, and then adjusted up or down to reflect actual subsidy costs. Effectively, then, every Philadelphian who does not participate in TAP subsidizes the bills of those who participate. To date, surcharges have averaged around 19 cents per hundred cubic feet (ccf), or 26 cents per thousand gallons.

The main purported advantage of this “income-based rate” scheme is that, in theory, TAP provides the right amount of assistance to the right customers, and so ensures that each customer’s bill is affordable according to whatever standard the utility adopts. A conventional discount program that gives a simple percentage or flat dollar benefit can end up providing too little assistance to very poor customers or too much assistance to customers who could afford to pay more. The TAP approach avoids that problem: the utility defines an “affordable” bill at whatever level it deems appropriate and then sets the discounts for each customer accordingly. Discounts are adjusted up or down periodically to ensure that each customer’s subsidy always reflects his/her income and household size and affordability is always maintained.

In principle, then, TAP seems like a great deal: true affordability for low-income customers, funded by modest surcharges. 

Does TAP live up to that promise?

TAP in reality

Let’s see what the data say. The analysis that follows draws entirely from City of Philadelphia financial reports, Philadelphia Water’s filings with the city’s Rates Board, and Philadelphia TAP Annual Reports.

Participation

Philadelphia Water estimated that 56,156 customers would be eligible for TAP when the program launched in 2017. Participation ramped up quickly from just 8% in its first year to 28% by the end of 2019, its second year of operation. Participation has stagnated since then, hovering between 25-30% through FY2022-23. Five full years into implementation, customers who qualify for TAP but do not participate in the program outnumber TAP participants by more than two-to-one. Here’s how participation and non-participation look over TAP’s lifetime:

Source: Philadelphia TAP annual reports. Eligible non-participant count estimates for 2019-2023 based on American Community Survey growth rates for population with incomes <150% FPL.

At first blush, those numbers are disappointing but not terribly surprising. Despite the hype around TAP, low participation is pretty typical for public assistance programs generally and utility assistance programs specifically, so it’s not surprising that TAP enrollment remains low after five full years of implementation.

A closer look reveals a more troubling picture. You see, Philadelphia Water has been working very hard to recruit TAP participants. The utility has promoted the program heavily through bill stuffers, email, posters (in English and Spanish), newspaper ads, bus shelter ads, subway ads, and contracted partnerships with community organizations. All that advertising is expensive (more on that below), but the fruits of those efforts are evident in the impressive numbers of TAP applications: from FY2018-2023, Philadelphia Water handled an average of more than 17,500 applications each year.

Despite those efforts, participation remains stubbornly low because nearly half of new TAP applications are rejected, and because large numbers of participants drop out of the program each year. This plot of TAP applications, enrollments, and non-renewals over the past six years tells a story of astonishing attrition:

Source: Philadelphia TAP Annual Reports. Non-renewals include participants who did not respond to renewal requests, renewal applications with missing or invalid documentation, and customers who defaulted from payment agreements.

Philadelphia Water rejects an average of 46% of TAP applicants. Large numbers of participating customers exit the program each year, too. Most exiting customers are dropped because they did not submit renewal applications or because those applications were missing information. Put simply, customers are exiting the program faster than Philadelphia Water can sign up new participants.

And it could have been worse! The utility automatically renewed participants through most of 2021 and 2022 as part of its COVID relief efforts. But since the pandemic, attrition has been dire. Last year 2,078 TAP participants defaulted from their payment agreements and another 7,122 TAP participants—that’s 42 percent(!)—didn’t bother to renew.

Administrative burdens

Administrative burden is the main culprit behind the staggering attrition and high rejection rates. TAP’s application form is an intimidating document. In addition to proof of residency, a TAP applicant must provide names, birth dates, and monthly incomes for each member of her household. For each source of income, applicants must provide a tax return, pay stub(s), or other proof of income. Applicants must agree to report any changes in household size or income, and must allow their information to be shared with other city departments and third party contractors. The form includes punitive threats for delinquencies or fraudulent applications. Applicants with zero income and those who request assistance due to special hardship (e.g., serious illness, death of a primary wage earner, domestic violence) must complete additional forms.

There are plenty of ways for a TAP applicant to go wrong with missing, inconsistent, or invalid information; it’s no surprise that thousands of applications are rejected each year for these kinds of problems. What’s more, TAP applicants are low-income customers by definition, and so many of them likely must navigate a slew of other assistance programs with their own forms and requirements and renewal processes. In exchange for their time, effort, privacy, and no small measure of their dignity, TAP applicants may receive an average monthly water/sewer discount of around $53. Is it any wonder that participation remains low?

Unfortunately, heavy administrative burdens are built into the very fabric of TAP. This program isn’t burdensome because Philadelphia Water staff are deliberately trying to depress participation—it’s burdensome because complexity is inherent to an income-based rates strategy. In order to deliver on the promise of true “affordability,” the utility must know exactly how many people live in each household and exactly how much income they earn. Without that detailed and timely information, it is impossible to assign the customer to the correct assistance tier, and a TAP participant might end up receiving too little or too much assistance.

TAP’s onerous process has drawn criticism and even a bit of media attention; Philadelphia Water’s most recent TAP Annual Report acknowledged that processes and paperwork is partly to blame for the program’s high attrition, and the utility has responded by extending its renewal cycle so participants now only have to re-apply every three years. Less frequent renewal will probably reduce attrition because customers won’t have to scrape together all of the required documentation so often.

Thing is, extending the renewal cycle undermines TAP’s raison d’etre. The whole point of individualized rates is to tailor each customer’s assistance to his/her specific circumstances so that nobody gets too little or too much. Getting the assistance levels right requires knowing how many people live behind each meter and exactly how much income they earn. Those numbers inevitably shift over time as people come and go, and incomes rise and fall. The longer you extend the renewal cycle the less certain you can be that you’re delivering the right amount of assistance. Without frequent renewal and extensive documentation, there’s no advantage to TAP compared with a conventional assistance program that gives each participant a flat discount.

Extending the renewal cycle also doesn’t help address TAP’s very high…

Administrative costs

Implementing any utility assistance program is difficult, and income-based rates are exceptionally complex and expensive to administer. TAP’s individualized benefits require careful documentation and verification of customers’ household information. Significant organizational capacity is required to manage certification, enrollment, periodic recertification, and removal of participants. Utility staff also have to manage outreach and advertising efforts. Implementing TAP required Philadelphia Water to develop specialized software and management processes. Coordinating these complexities with existing billing systems required adding customer service and information technology (IT) staff.

Philadelphia Water recognized the program’s administrative demands in its initial plans for TAP, estimating that the program would require ongoing costs of “…$2.8 million annually to cover two full-time equivalent positions (FTEs) for IT support and 22 positions for program administration.”  Philadelphia Water’s staffing expenditures bear out those projections.

Philadelphia Water situates administration of TAP in its Public Affairs program, which includes Public Relations & Education and Customer Information functions. Customer Information personnel include the customer service staff who administer TAP. Check out the dramatic increase in the utility’s customer service staffing from 2013-2022, as reported in city budgets:

guess what changed between 2017 and 2018?

This figure shows Philadelphia Water’s Public Affairs personnel, with Customer Information staff (the solid red line) and Public Relations & Education (the dashed blue line) reported separately. Depicting both trends in staffing helps illustrate the impact of income-based tiered rates on customer service staffing. The dramatic rise of customer service staffing required by the implementation of TAP in FY2017-2018 is obvious. Unsurprisingly, the customer service payroll shot up over the same period of time:

woah

City budget documents show that Philadelphia Water has also spent more than $1.4 million in advertising and contracts with community organizations to assist with outreach for TAP.

TAP’s high administrative costs are not limited to customer service. The analytical complexity of designing, calculating, and regularly updating these rates requires specialized expertise. Beginning in 2015, Philadelphia Water has engaged specialized engineering and financial consulting firms to support the development and ongoing implementation of the rates, charges, and benefits required to run TAP. The utility also contracts with vendors on TAP application printing, processing, and online hosting. City budgets show that, since the program’s inception, Philadelphia Water has spent more than $17 million in contracted services in support of TAP:


Source: City of Philadelphia annual budgets. Includes only line contracts items specifically associated with TAP.

These expenses are for TAP alone—they are over and above the utility’s ongoing contracts for regular consulting and other contracted services. The figure above shows the substantial contracted support that income-based tiered rates required during the initial years of development and implementation (2017-2021). However, analytical needs remain intense, even as the program has reached maturity, with more than $1.1 million annually in contracted expenses to support TAP on an ongoing basis.

Put it all together, and it’s clear that TAP is a stunningly expensive program to manage. Holding aside the program’s first year when participation was understandably quite low, Philadelphia Water has spent an average of $313 in administrative expenses to deliver an average of $623 in benefits to each TAP participant each year—an administrative overhead rate of more than 50%. Even if we disregard 2017-2021 costs as inflated due to startup expenses, TAP administrative costs still average 44%. Philadelphia Water management isn't the problem here. The heavy administrative costs aren't due to waste or inefficiency, they're inherent to TAP’s complicated design.

Moreover, these millions of dollars in administrative costs aren’t included in the TAP surcharge—they’re added to Philadelphia Water’s operating budget, driving up bills for everyone who pays for water or sewer in the City of Brotherly Love. That turns out to be pretty important, because the data show that…

TAP hurts more low-income customers than it helps

The volumetric surcharges that Philadelphia Water imposes to pay for TAP apply to all volume for all customers. Between administrative expenses and surcharges, total water and sewer bills in Philadelphia are significantly higher under TAP than they would be absence of the program—including bills for the majority of low-income customers who are eligible for TAP but do not participate in the program.

More than 70 percent of TAP-eligible low-income customers do not participate in the program, but must pay volumetric surcharges to support TAP anyway. Those surcharges add up. Philadelphia Water describes “typical” residential consumption as 500 cubic feet monthly, or 6 MCF annually. Here’s how the surcharges impact low-income customers who don’t participate in TAP:

At that level of consumption, a non-TAP customer paid $9.66 in TAP Rider surcharges in 2018 and 2019; higher surcharges in subsequent years pushed the prices higher. The right-hand column shows that, during the first five full years of the program (2018-2022), low-income Philadelphia Water customers who didn’t participate in TAP collectively paid about $2.4 million in TAP surcharges. The administrative costs associated with TAP drive up rates even further. For the roughly 40,000 low-income eligible Philadelphians who don’t participate in the program each year, TAP didn’t just fail to help—it actually made water less affordable

Customers who do participate in TAP evidently benefit significantly from the program, and it may be tempting to dismiss this added financial burden as trivial since it amounts to a little over a dollar per month at typical consumption levels. But the financial impact of these higher bills isn’t trivial to families who struggle make ends meet: in 2022 the roughly $16 of additional water/sewer surcharges that a non-participant paid over the course of a year represents more than two hours of labor at Pennsylvania’s minimum wage to pay for a program from which they do not benefit. Put another way, at a cost of $10.61 per meal under the USDA’s Thrifty Food Plan, the TAP surcharges paid by a non-participating low-income family of four in Philadelphia cost that family the equivalent of 1.5 healthy meals in 2022. Add it all up, and TAP took nearly 285,000 meals off of poor Philadelphians’ tables from 2018-2022.

that's a lot of cheese steaks

This analysis actually understates the negative impact of TAP on low-income households. TAP costs drive up prices for every water/sewer customer in Philadelphia--including apartment buildings that serve the lion's share of the city's poor and working class families. Those higher prices likely pushed rents higher for low-income households that pay for water through their leases. It’s weird that nobody talks about that when discussing income-based water rates.


The part where Manny chats with himself

Two sock puppets

yikes

Yeah. Not great.

TAP doesn't seem to work very well

The data are clear: TAP has made water less affordable for most Philadelphians and has hurt far more low-income customers than it has helped. The program’s high attrition indicates that even the people who participate don’t find it very helpful. Hard to see any way to call it a success. Overall, poor Philadelphians would be better off today if the TAP had never existed.

more like Philadelphia CRAP amirite

Don’t be puerile, my electronic alter ego.† Philadelphia’s leaders weren’t wrong in wanting to try something bold and new. When you approach public policy scientifically, every program is a hypothesis; this one turned out to be false.

There's nothing wrong with trying new solutions to hard problems, but new policies often fail... just like new businesses. The point is to learn from the failure and make better decisions.

is Philadelphia Water management stupid, corrupt, or just hideously inefficient? 

None of the above! As far as I can tell, Philadelphia Water is a well-led, well-managed, well-run organization that’s doing its best to implement the program that it was tasked with administering.

so just bad luck for PW?

Not bad luck. TAP is a profoundly bad program. Its staggering complexity requires the huge administrative costs and administrative burdens relative to the benefits that it provides. That complexity limits participation and makes the inefficiency virtually inevitable. Don’t blame Philadelphia Water’s management because the city’s politicians foisted this program on them.

are poor Philadelphia Water customers just screwed then?

I imagine that there are smart, responsible people  at City Hall and 1101 Market Street having frank conversations about the future of TAP and thinking about ways to do better.

if TAP is so lousy, why do so many people think income-based water rates are a great idea?

I dunno, man.

I guess the idea of individualized rates tied to household needs and incomes is intuitively appealing, and might even work in an economist’s (or politician’s!) fantasy world with zero transaction costs. In the real world, administrative costs limit everything we do. But those costs are easy for advocates to forget and easy for academics and politicians to ignore. TAP's biggest fans seem to have little or no background in water finance or management.

TAP sure gets a lot of media attention

Yeah. Income-based rates are novel and offer great stories, which makes TAP appealing for journalists. Most news articles about TAP focus on the stories of one or two specific customers who struggled with their bills but found relief through the program. It’s easy to tell stories about benefits delivered to struggling people. It’s harder to craft a human interest story out of the 70% of low-income customers who don’t participate in TAP and the millions of dollars that the program has cost ratepayers in aggregate.

why hasn't the water finance geek squad figured this out already?

There’s not much profit in debunking bad policy ideas with hard analysis. It’s a lot of work, and it makes people grouchy. Heck, it makes me grouchy.

yeah what’s your deal, man? you just dropped 4,000 words and sifted through heaven knows how much data just to crap on this program that is only trying to help and never did anything to you

Look, like a lot of people, I care about water affordability. I want to help utilities get it right. Some advocates and consultants tout income-based rates as a kind of affordability magic bullet. They're well-intentioned, but pretty clearly wrong. The stakes are too high to screw this stuff up. If this post helps at least one community avoid making the same mistakes Philadelphia did, then that’s a success.

will enthusiasm for TAP decline now that six years of experience reveal its problems?

Maybe? I want to believe that policymakers try to make data-driven decisions. I hope that people—activists, managers, finance types, whoever—will read this blog post and think differently about income-based rates. 

brandolini’s law still applies. 

bad ideas die hard bro

Too true, dear alter ego. But I'm an incurable optimist.

FWIW, most utility finance and management folks I know are actually pretty skeptical about income-based rates—probably because they’re more realistic about how hard they are to implement.

Rocky and his coach

when you're losing the fight, you gotta change tactics

imagine you're Mickey Goldmill and PW is Rocky. what should they do about affordability?

I’d start with the Five Pillars of Affordability.

yeah but come on. we’re talking about assistance programs. that’s what everybody wants to know about. 

Fine. Philadelphia already has programs for low-income seniors and for special hardship cases. I'd keep those going. For a general low-income assistance program, I’d ditch TAP and go with a Walden Pond program: pick an income threshold and then give any customer who qualifies a 30% or 40% or 50% discount regardless of household size. Reduce the customer service and IT staff, cut a million dollars from your contracting budget, and use the savings to reduce prices for everyone.

how about those administrative burdens you were fussing about?

Instead of creating their own income/household size rules, regulations, and procedures, Philadelphia Water could just declare that anyone who participates in SNAP, LIHEAP, Medicaid, SSDI, TANF, or other income-qualified programs qualifies for water assistance. The utility might even be able to coordinate with state or county officials to enroll folks automatically.

but that simple program wouldn't achieve the perfect "affordability" that income-based rates are supposed to deliver

True, but a simpler program would reach just as many people—probably more—at a far lower cost. It’s a more realistic approach for the real world.

And anyway Philadelphia Water already kind of gave up on the dream of perfect affordability when they moved to a three-year application renewal cycle.

is there a moral to this Philadelphia Story?

Things get complicated when policies move from economic theory to public administration, and from political rhetoric to practical reality. In the case of Philadelphia TAP, a policy that seemed promising in principle turned out to be a mess in practice. Whatever you’re trying to do, you ignore administration at your peril.

so you’re saying all policy is implementation?

Manny wearing all policy is implementation tshirt







*See this story, this story, this story, this story, and many more. 

**See this article and this article, for example.

†Apologies to MGoBlog again.

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