No matter how robust a city’s economy, its budgetary bottom line is affected by financially insecure residents. In findings released today, the Urban Institute examines the cost of residents’ financial insecurity to city budgets in 10 American cities and finds it ranges from $8 million to $18 million in New Orleans to $280 million to $646 million in New York City.
Financially insecure residents (those with less than $2,000 saved) are less able to recover from a job loss or financial emergency. They can cost cities in lost tax revenue, unpaid public utility bills, and public benefit use.
Looking at those costs proportional to city budgets, we found that residents’ financial insecurity costs cities between 0.3 percent (San Francisco) and 4.6 percent (Seattle) of their total annual budgets. Residents’ economic insecurity can take a toll on city budgets. Here are five reasons cities should care about families’ financial health.
1. Property taxes make up a sizeable portion of city revenue. In Chicago’s proposed 2016 budget, 18 percent of the city’s revenue was anticipated to come from property taxes. But what if many of the city’s homeowners are financially insecure and cannot pay their tax assessments? In Chicago, where the homeownership rate is around 44 percent (above average for most cities studied), 62 percent of families are financially insecure, and 38 percent have subprime credit scores, exposing the city to the risk of a revenue shortfall if some residents cannot pay their property taxes.
2. Unpaid bills shortchange public utilities and cost cities tax money. For cities with public utilities, unpaid bills can directly affect operating costs. In Seattle, where the city has public electricity and water services, we estimate that the city collected $4,411, on average, from each household in 2015. Los Angeles and Chicago collect an annual tax from their residential electricity users, so unpaid bills directly affect city revenue. We know from prior research that families without savings are more than twice as likely to miss a utility payment after an economic shock, compared with families with $2,000 or more in savings, so residents’ financial insecurity has implications for public utilities and city revenue.
3. Homeless services are intensive and costly. When families get evicted or lose their homes—a potential consequence of financial insecurity—they don’t always have friends or relatives to help them. City-provided homeless services can support these families, but are intensive and cost cities tens of thousands of dollars a year. While federal funds also cover homeless services, all the cities we studied provided homelessness services.
4. Boosting homeownership depends upon creditworthy residents. Many cities make homeownership a policy priority and for good reason: homeownership conveys personal and community benefits. Homeowners are invested in their communities and pay property taxes every year. But cities would be well served to also prioritize improving residents’ basic financial needs.
In seven of 10 cities in our study (Chicago, Columbus, Dallas, Houston, Los Angeles, Miami, and New Orleans), one-third or more residents have subprime credit, making home loans nearly impossible to secure. Even when financially vulnerable residents secure mortgages, they often pay higher rates. Why couldn’t a city-led homeownership program focus on residents ready to buy a home today and on those who aspire to own in the future? Helping families save for a home and improve their creditworthiness could boost city homeownership rates in the long term.
5. Financially healthy residents can boost the local economy. Financially healthy residents can boost a city’s economy by spending more and by starting or growing businesses. In Miami, 85 percent of businesses are solely owned with no paid employees. While some of these businesses are undoubtedly intermittent and secondary jobs, some are likely to be businesses with growth potential. But our data find that 73 percent of Miami families have less than $2,000 in available savings, suggesting that most Miamians don’t have enough saved to grow an existing business.
What about access to credit? One-third of Miami residents have subprime credit, which makes it difficult to obtain loans, lines of credit, and credit cards to fund businesses. Those with less than the best credit will pay higher fees for the privilege of borrowing. While not all entrepreneurs leverage their own funds or need cash in hand, a cushion of savings and a good credit history could help them be more successful.
What cities can do to increase residents’ financial health
These five reasons underscore why cities have an economic interest in helping improve their residents’ financial health. To be clear, this is not an issue that affects only low-income residents; the financial insecurity of middle- and upper-income families can also affect city budgets. Other studies offer pointers on how residents across the income distribution could improve their financial health, from starting or improving their savings to bolstering their credit. Cities can put financial empowerment front and center in programming, integrate financial coaching and other elements into existing programs to help residents at prime moments, and provide incentives for savings so families can build assets.
Beyond watching their bottom line, cities have a moral imperative to care about residents’ financial health. Can a city be great if only some residents are thriving? Can a city be successful if many residents are close to financial ruin because of a spell of unemployment or a broken down car? Empowering residents with the financial tools to prosper moves cities closer to being more equitable to all who call it home.