The Cost of Living in Iowa — 2011 Edition
Appendix 1: Methodology
By Lily French, Peter Fisher and Noga O'Connor

May 31, 2012
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Food

The U.S. Department of Agriculture (USDA) provides monthly estimates of the average cost of four different food plans: Thrifty, Low-Cost, Moderate-cost and Liberal. Because studies have shown it is almost impossible for low-income families to follow the Thrifty Food Plan, we have chosen to use the Low-Cost monthly estimates in calculating a budget that reflects basic family needs.[19]

USDA bases its budget assessments upon specific family types with children of specified ages, so we have followed USDA guidelines in adjusting for age and family size differentials. For family size adjustments we have again followed USDA guidelines. For example, the food costs for a family of two are increased by 10 percent per capita above the per capita cost of a four-person family in order to account for the decreased economies of scale. In all cases, we have averaged the male/female values. Although restaurant meals have become increasingly common in family budgets and diets, we do not include this additional cost, as it would violate our no-frills criteria. In choosing the Low-Cost Food Plan over the Thrifty one, we exercised some consideration of the modern family lifestyle and the occasional consumption of prepared foods.

We used the June 2011 estimate, following the USDA practice by which the June costs of each year are used to represent the annual average.[20]

Housing

The U.S. Department of Housing and Urban Development (HUD) Fair Market Rent (FMR) survey is the most widely accepted standard for the cost of basic-needs housing.[21] According to HUD guidelines, the FMR is the amount needed to rent privately owned, decent, safe, and sanitary rental housing of a modest (non-luxury) nature with suitable amenities. FMRs are figured at the 40th percentile of rent. That is, 40 percent of units rent for less than this amount, 60 percent for more. This cost includes utilities but not telephone service, which we calculated from the Consumer Expenditure Survey and include in a separate budget line item.

Budget estimates are adjusted for differences in family size. We assume a studio apartment for a single person, a one-bedroom apartment for a couple, two bedrooms for a family with one child, three for a family with two children, and four for a larger family.

The survey provides fair market rents for each county. We used the data for fiscal year 2011-12. The statewide average is an average of the rents across 99 counties, with each county weighted by population.

Health Care

Health care costs include both the family share of insurance premiums and out-of-pocket expenses. For those families that receive health insurance through their employers, insurance premium costs are equal to the employee contribution. For those families that do not receive health care benefits through work, insurance must be purchased on the individual market.

The employee share of premiums for employer-sponsored insurance was based on data from the 2010 Medical Expenditures Panel Survey (MEPS).[22] The published survey results include data for Iowa showing the average employee contribution for single employee coverage, for employee-plus-one coverage (employee and spouse or child), and for family coverage, as well as the total premium for such coverage. No adjustment was made to bring rates up to 2011 because the Consumer Price Index (CPI) for health insurance premiums did not increase between 2010 and 2011.

For insurance purchased on the private market, we obtained quotes for premiums on policies with a $1,000 deductible for individuals or $2,000 for a family, with 20 percent co-insurance, and a $30 co-pay for office visits. We obtained rates for all of the family types in our study. We assumed adults were 30 years of age and nonsmokers; for single persons, the rates for males and females were averaged; for single parent families, the parent was female. We obtained premiums for 15 urban and rural areas in the state representing counties of all sizes. Rates were averaged across the various geographic areas to obtain a statewide average. The rates were obtained in April 2012.[23]

Out-of-pocket expenses (for co-pays and co-insurance) were based on data from the household component of the 2009 MEPS.[24] We started with national average out-of-pocket expenses for families with incomes between 1.25 and 2.0 times poverty, where the family had private (non-government) health insurance and the household head was under ager 65. We then adjusted for the higher average spending in the Midwest (by 13 percent) and for inflation on overall health costs according to the CPI-U from 2009 to 2011 (6.6 percent). The average out-of-pocket expense was about $1,100 for single-parent families, and about $2,100 for married couples with children. These amounts are a little over the annual deductibles we assumed for the private market policies and the average annual deductibles for employer sponsored insurance in Iowa. Out of pocket expenses include the office visit co-pays as well as the coinsurance that is limited by the deductible.

From the 2008-2010 American Community Survey (ACS) we were able to determine that 62 percent of Iowans with incomes between 1.5 and 2.5 times the federal poverty level were covered by employer-sponsored insurance. This report presents family basic-needs budgets that include health insurance, so we assumed that the remaining 38 percent obtain policies on the private market and none were uninsured. Therefore the insurance premium cost in the family budgets is a weighted average of the cost of employer-sponsored and private-market coverage, with the private coverage weighted 38 percent. To the weighted average premium cost is added the out-of-pocket expenditure.

Transportation

As Iowans rarely use public transportation, our transportation figures are derived from the basic costs of owning and operating a car. We assumed one car for a household with a single adult, and two cars for a household with more than one adult.

For both state and county-level transportation figures, we used 2010 ACS data on commuting times for each Public Use Microdata Area (PUMA) in Iowa. We multiplied that figure by the average speed of commute, which varies by the population density in each PUMA.[25] That way, we ended up with an estimate of annual commute miles, using a work year of 50 weeks and a work week of five days. We doubled that figure to reflect non-commute miles,[26] and multiplied that last figure by the IRS business travel allowance for 2011, which average to 53.3 cents per mile (it was 51 cents for the first half of the year, 55.5 cents for the second half). For households with more than one working adult, we added commute miles for each additional adult, but not non-commute miles.

Child Care

The Iowa Child Care Resource and Referral (CCRR) system consists of five regional offices that maintain extensive, county-by-county data on child care providers drawn from a survey of all child care centers and all in-home child care facilities in the state. Home care by relatives is not included. Each report must specify the rates charged, whether full- or part-time, and the number as well as the ages of all clients served. From these reports, the regional CCRR office then compiles a series of average child care rates for each county in its region. The CCRR data provides separate rates by the child’s age.[27]

For families with one or two children under 6 years old, we defined a one-child family as including a toddler of 2 years, and a two-child family as including a toddler of 2 years and a child of 4 years. Since daycare facilities often charge on a monthly basis, we calculated the weekly rates for full 52 weeks. We used the average tuition charged by registered in-home facilities, as it was cheaper than the tuition charged by licensed child care centers. For the 4-year-old preschoolers, we deducted the state’s 10 weekly hours of paid preschool tuition. Children age 6 to 18 were assumed to require child care during the summer months and to be enrolled in a before-after school program during the school year. It should be noted that all the two-parent families reported in the tables in this report were assumed to have one child under 6 and one age 6 to 18. (Additional family types were constructed and were used in estimating the proportions of the population with income below basic needs.)

In all two-parent families with only one full-time worker, we assumed that the non-working parent provides all child care services. The same calculations were performed for the statewide analysis as well as for the county-level analysis. We used the latest data, which was from the July 2011 reports for each county and for the state as a whole.

Clothing and Household Expenses

This category includes telephone, clothing, home furnishings and appliances, housekeeping supplies, personal care products and services, and “other household expenses,” which includes repairs and other services. Data are from the Consumer Expenditure Survey (CEX) for 2010, tables showing expenses by income class and household size, adjusted for the Midwest region (because spending on these categories was only about 95.5 percent of the national level) and for age of the household head (because spending for households in the 25 to 44 age group was 3.3 percent higher than for households of all ages). For personal care products and services, and for other household expenses, we included only 50 percent of the amount reported on the CEX to make sure that we were including only necessities.

We estimated, for each household type, the amount spent on these categories by the average household with income of 1.5 times the federal poverty threshold. While the income level required to achieve the basic family budgets ends up being around twice the poverty level, we adjusted spending down to the level achieved by the average household that was just 50 percent above the poverty level to ensure that no unnecessary expenditures are included. Entertainment, alcohol and tobacco, education, reading materials and personal insurance were all left out completely, in accordance with our basic-needs approach. The 2010 figures were inflated to 2011 using the increase in the CPI from 2010 to 2011 in these five expenditure categories, which was just 0.6 percent.

Taxes and Tax Credits

There are two kinds of taxes: those imposed on things that we buy or own — property and sales taxes — and those that depend on our income — federal payroll taxes (Social Security and Medicare) and federal and state income taxes. Property and sales taxes in this report are treated as part of the basic family budget because the amount of housing required determines the value on which property taxes must be paid, and the amount one needs to spend on taxable items determines the sales tax one will pay. Property taxes are paid out of rental income and therefore are included in the cost of housing in our family budgets; similarly, expenditures for goods and services include any sales tax on those items. The basic family budget thus reflects total needs and is the same for a family of a given composition in a given part of the state regardless of that family’s income.

We then compare the cost of living with after-tax income. We work backwards to determine the before-tax wage and salary income required to leave a family with net income after taxes just sufficient to cover the basic family budget. The taxes included are the employee portion of payroll taxes (Social Security and Medicare) and federal and state income taxes, including local school district surtaxes (based on weighted average rates for the school districts in each county or region). Taxes were calculated based on 2011 tax law — that is, the rules for 2011 income tax returns filed in 2012.

We assume that the family receives only wage and salary income; this is a reasonable assumption for families in the income ranges we are considering, where non-work income (rent, interest, dividends, capital gains) accounts for a very small share of total income. We also assume that the families rent rather than own a home, which means that the standard deduction will be more beneficial than itemizing (since the taxpayer will have neither property taxes nor mortgage interest to deduct, while charitable donations, state income taxes and other deductions are unlikely to exceed the allowed standard deduction). In the income range we are considering, the majority of families do in fact use the standard deduction.

The tax calculation also includes several very important tax credits. For federal taxes, these are (1) the child and dependent care credit, for a portion of day care costs (non-refundable), (2) the child tax credit (non-refundable), (3) the Earned Income Tax Credit, or EITC (refundable), and (4) the additional child tax credit (refundable). For state taxes, the credits are the child and dependent care credit and the state EITC, both refundable. The state return includes the personal exemption credits, the deduction for federal taxes, and the deduction for health insurance premiums. The tax calculations were made by creating a spreadsheet version of federal and state tax returns, with accompanying schedules. The model’s tax calculations were confirmed by preparing tax returns for imaginary families with the same income and family structure using TurboTax.

Where state and federal refundable credits exceed income tax liability, the family’s net taxes are negative. This means that the before-tax income required to cover the basic-needs budget will be less than that budget amount, with the refundable credits filling the gap.

Weighting Methodology: Converting County Level Data to Metropolitan, Regional and Statewide Averages

Budgets for each Metropolitan Statistical Area (MSA) and region were constructed through weighting county-level data by each county’s share of the total population of the MSA or region. The same process was used to calculate the statewide values using the data from all 99 counties, with the exception of child care, where the state average cost from Iowa Child Care Resource and Referral was used. Since no data were available below the state level for food costs or the costs of clothing, telephone and other household expenses, these two expense categories are identical throughout the state.

Household Types

Table 8 - appendix1The focus of this report is on non-senior families. We have made an effort to include in our analysis as many different types of households as possible, but some households were excluded because there was no satisfactory way of determining how incomes and expenses were shared among household members, and therefore no way to define basic household needs, or the income of the household available to meet those needs, that was not quite arbitrary. This resulted in excluding households with an adult child living at home (including adult children with their own children), and single childless adults rooming with other single childless adults (such as college students). We also did not include married couples with more than three children or single parents with more than two children because their numbers were very low. We have also focused on households with at least one adult employed at least half-time. Table 8 shows the estimated number of each of the broad family types in Iowa. The highlighted numbers indicate family types included in our tables and in our estimates of the share of families with incomes below basic needs.


[19] See, for example, Wilde, P. E. and Llobrera, J. (2009), “Using the Thrifty Food Plan to assess the cost of a nutritious diet.” Journal of Consumer Affairs, 43(2), 274-304. http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.2009.01140.x/full; Davis, G. C. and You, W. (2010). “The Thrifty Food Plan is not thrifty when labor cost is considered.” The Journal of Nutrition, 140(4), 854-857. http://jn.nutrition.org/content/140/4/854.full.pdf
[20] http://www.cnpp.usda.gov/USDAFoodCost-Home.htm
[21] http://www.huduser.org/portal/datasets/fmr/fmr2010f/index.html
[22] U.S. Dept. of Health and Human Services, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey, Insurance/Employer Component, available at. http://meps.ahrq.gov/mepsweb/index.jsp
[23] The rates were obtained at www.ehealthinsurance.com and in most cases were for policies from Coventry Health Care, Inc.
[24] U.S. Dept. of Health and Human Services, Agency for Healthcare Research and Quality: Medical Expenditure Panel Survey, Household Component, available at. http://meps.ahrq.gov/mepsweb/index.jsp
[25] Population density was calculated from http://www.naco.org/Counties/Pages/FindACounty.aspx. Mean speed of commute by population density was taken from table 2, “Transportation variables by density class”, in Levinson, D. M. and Kumar, A. (1997), “Density and the journey to work,”Growth and Change, 28 (2), 147-172. http://nexus.umn.edu/papers/density.pdf
[26] Here we relied on the U.S. Department of Transportation's 2001 Nationwide Highway Transportation Survey (NHTS). This survey provides reports on various dimensions of automobile travel based on actual vehicle miles traveled and trip duration for all personal travel within a day. By selecting survey data on travel only for basic needs, we were able to estimate that total miles per year averaged between 1.8 and 2.6 times the average commute miles in single-worker families. We used a somewhat conservative figure of 2.0; that is, we doubled commute miles to arrive at total vehicle miles traveled.
[27] http://www.iowaccrr.org/County%20Data/Statewide%20Data%20Sheet%20FY%2020101.pdf