modified version of a method used by the Department of Housing and Urban Development (HUD) to create annual fair market rents (FMRs), which are used in the administration of Section 8 rental housing subsidies. Essentially, data from the 1990 census on rents for two-bedroom apartments were used to gauge differences in the cost of housing across areas (see National Research Council, 1995:194-200; Nelson, 2004).

U.S. Census Bureau reports and papers have implemented experimental poverty measures with and without geographic adjustments and have also investigated the effect of these adjustments on state-level poverty rates (Short et al., 1999; Short, 2001b). This research has shown some of the limitations of the NRC-recommended approach, in which, for example, all metropolitan areas in New England have the same index value, though housing costs in Maine are lower than those in other New England states.

The second Census Bureau report devoted to experimental poverty measures (Short, 2001a) presented geographic indexes based explicitly on the HUD FMRs. FMRs are available annually for all U.S. metropolitan areas and nonmetropolitan counties. They represent the gross rent, including utilities, at the 40th percentile (with some exceptions) of the rent distribution of standard-quality rental housing. This adjustment is applied to the housing portion of the poverty threshold. The advantage of this method over the NRC-recommended approach is it provides a finer level of geographic detail and allows for fairly simple annual updating.

Applying these geographic adjustments has a considerable effect on many state poverty rates. The poverty rates decline in low-cost areas and increase in high-cost areas (when compared with rates for which no geographic adjustments to thresholds are used). For example, the poverty rate in Alabama drops from 14.8 percent to 10.2 percent, while the poverty rate in California rises from 13.1 percent to 18.4 percent (Nelson, 2004).

The presenters at the workshop noted that the geographic adjustment method recommended in the NRC report and the refined approach implemented by the Census Bureau—both of which are based on FMR information from HUD—have several limitations. First, it would be advantageous to adjust the thresholds for regional differences in costs of other basic items rather than just housing. Second, FMR data, by design, incorporate only rental costs and not owner-occupied housing. Third, rents reflect amenities and disamenities of geographic areas. John Ruser (Bureau of Economic Analysis) raised the question of whether, for example, people who live in low-cost areas should have a lower poverty threshold (which makes them less likely to be counted as poor) if they live in an undesirable place.

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