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1988 MUNICIPAL PRICE INDEX
By NORMAN WALZER and POH P'NG* Municipalities in Illinois, and across the U.S., face difficulties raising enough revenues to provide needed services. The revenue bases used to finance services do not increase rapidly and taxpayers resist tax increases, especially property taxes. Losses of revenue sources, such as General Revenue Sharing, and the rising costs of goods and services used in providing public services are squeezing city budgets. This article presents a price index for goods and services purchased by cities to provide public services. While indices such as the Consumer Price Index and the Producer Price Index representing price changes in the private sector are readily available, the purchasing patterns on which they are based do not reflect city spending. The Illinois Municipal Price Index is the only index designed to depict goods and services purchased by cities. The Consumer Price Index, for instance, is based on purchases of families and unrelated individuals. The Producer Price Index reflects price increases in other than retail markets. Purchases by city governments, however, are mainly personal services and are not reflected in the other indices. Price Index Construction The construction of a price index involves identifying price changes of specific items and matching the price increases with the relative importance of each item in overall city spending patterns. a. Expenditure Weights. The Illinois Municipal Index is based on 1978-79 spending patterns of Illinois municipalities larger than 25,000, excluding Chicago. City expenditures were divided into 11 departments with as many as 40 expenditure categories within some department. The expenditure weights are the percentage which each category represents within total expenditures. b. Price Changes. Especially difficult is obtaining information on price changes of goods and services purchased by Illinois municipalities. It is not feasible to find price changes unique to each city in the sample but it is important that the price change information is representative of the prices paid by cities. Wages and salaries are the largest single component of municipal expenditures and are particularly important in the municipal price index. Fortunately, detailed information on wages, salaries, and employee benefits is available in the Annual Compensation Survey, compiled annually by the Illinois Municipal League. The wage information is specific to the cities included in the index. The remaining price information is based on detailed price comparisons in the Consumer Price Index and the Producer Price Index, compiled by the U.S. Bureau of Labor Statistics. While this information is not unique to Illinois, there is little reason to think that Illinois cities pay prices substantially different from those reflected in the national indices, especially with purchases from business selling nationwide. The available price information is sufficiently detailed that price changes can be matched with expenditure categories. Aggregate Price Index Indices in this article are presented at two levels. An aggregate index is presented first, followed by an index for each department. The aggregate municipal index presents the effects of inflation on the entire city spending package. This index is most comparable with the Consumer Price Index and should be used with total city spending patterns. The second index captures the effects of inflation on each major municipal department. Wage and salary changes differ widely, by position classification, and departments with the highest percentage changes are most adversely affected. The main difference between the two types of indices arise from the expenditure weights. The departmental index reflects expenditure patterns within each municipal department such as police protection, fire protection and so on. Comparisons of the Consumer Price Index, the Producer Price Index and the Illinois Municipal Index are shown in Table 1. The Consumer Price Index is subdivided into commodities and services. It is clear that Page 22 / Illinois Municipal Review / April 1989 services in the private sector have increased in price more rapidly than commodities (223.9 compared with 173.4). Because municipal expenditures are service-oriented, the impact of inflation can be substantial. The interpretation of the Municipal Index is that it cost $186.30 in 1988 to purchase what $100 would have bought in 1977. Thus, if revenues have not increased at approximately the same pace, fewer real resources were available in 1988 than in previous periods. This assumes, however, that major productivity changes did not occur. If the productivity of municipal employees increased, more services can be provided with fewer employees. According to the Consumer Price Index, it cost $194.70 in 1988 to purchase what $100 would have purchased in 1977, While, since 1977, prices have increased more in the private sector, in recent years, the percentage increases for the municipal index have been higher. One explanation is that in periods of relatively low inflation in the private sector, employees gain in real purchasing power. During periods of high private sector inflation, employees lose because cities are unable to offer pay increases of, say, 9 or 10 percent for very long. In 1988, the Consumer Price Index increased only 3.8 percent and municipal wages and salaries (excluding benefits) increased, on average, 4 to 5 percent. Departmental Price Indices Because purchases vary with municipal departments, a price index for each department is useful. Wage and salary changes for police officers and fire-fighters, for instance, may differ from those for building custodians or other employee classifications. A price index representing police or fire department expenditures varies from the general municipal index or that of another department. The major difference in expenditures between departments is the relative importance of personal services. In police and fire departments, personal services, including retirement benefits, may represent as much as 80 percent of the total expenditures. In other departments, personal services are a much smaller percentage. Inflation had the greatest impact on library expenditures in recent years (Table 2). In 1988, it required $199.10 to buy what $100 would have bought in 1977. While the differential impact of inflation, by department, is important to understand, the relative importance of each department within the total municipal expenditure package is equally important. While librarians have been particularly hard hit by inflation between 1977 and 1988, they represent a relatively small portion of municipal expenditures. Police, fire, and streets, on the other hand, are the largest departments. The effects of inflation on their expenditures are more critical in the overall spending program. Price Increases for Specific Purchases Examples of items purchased by municipalities and the price increases during the past three years reveal major differences. While gasoline and petroleum products increased in price, auto maintenance and repair products, machinery and equipment, and gas-electricity declined (Table 3). Prices of concrete and ingredients, nationwide, remained approximately the same. Depending on the use of these and other goods or services by department, the indices can vary widely. These items are illustrative of the types of purchases made by municipalities in the sample. Summary In the past year or two, inflation has not posed a serious threat, at least in the private sector. Price increases have been relatively low. Municipal wage and salary increases have exceeded inflation as often occurs
April 1989 / Illinois Municipal Review / Page 23
during low inflation. Based on the initial months in 1989, however, inflation could increase substantially. Food and petroleum are major contributors to these price increases. While food is relatively unimportant in municipal purchases, petroleum price increases could significantly affect the costs of certain municipal services. Ties between the Consumer Price Index and municipal labor contracts also are important, either because of cost-of-living adjustments or other efforts by employees to maintain purchasing power. The municipal price index should not be automatically built into a budget plan. Rather, the index provides useful information on how resources for municipal services are affected by price changes and, in this way, can assist municipal officials in better evaluating budget proposals. Annual reviews of the impact of inflation can be very beneficial to municipal management. •
*Interim director and research associate, Illinois Institute for Rural Affairs, Western Illinois University, respectively. The authors thank the Illinois Municipal League for financial support of this article. Any errors of fact or interpretation belong solely to the authors. Page 24 / Illinois Municipal Review / April 1989 |
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