Municipal finance underwent several changes during the 1980s. Rapid inflation and severe recession marked the early 1980s followed by an expansionary period. The inflation rate bottomed out in the mid- 1980s and has slowly crept up each year since. Because the rate of inflation affects the amounts of goods and services that cities can purchase, it is important that local officials be able to determine the impact which inflation has had on previous budgets.

The Illinois Municipal Price Index is designed to measure the effects of inflation on municipal governments. It measures the price increases for goods and services purchased by municipal governments and is comprised of two components, the salaries and wages of municipal employees and the prices of other goods and services purchased by cities.

Salary and wage information is obtained from the Annual Municipal Compensation Survey published by the Illinois Municipal League. Because personnel services comprise the majority of municipal budgets, they are weighted heavily within the index. Wage and salary data have been based on a sample of 33 cities but reporting difficulties necessitated changes in the salary and wage component. The original panel was expanded to 41 cities, including both downstate and suburban, all with populations of 25,000 and over, excluding Chicago. The larger number of cities assures more representative information on wages and salaries. The 1989 index has been updated, with only minor changes resulting.

The second component of the Municipal Price Index includes prices of goods and services purchased by municipalities. Price information is obtained from detailed Consumer Price Index and Producer Price Index reports. These prices are then weighted by their relative importance within the budget.

Aggregate City Index
Two price indices are computed. The first includes expenditure weights over the entire city budget. This aggregate city index shows the effects of inflation for the city as a whole. The second is a set of indices which reflects the effects of inflation for each major department within a city.

The most popular method of measuring inflation in the private sector is the Consumer Price Index (CPI) which reflects price increases faced by an average family or individual. A second index often reported in the news media is the Producer Price Index (PPI) which measures price increases in the industrial and wholesale sectors. The effects of inflation on municipal expenditures cannot be strictly compared to either of these because personnel expenditures constitute a larger proportion of municipal budgets than reflected in either of the private sector indices.

In 1990, the Municipal Price Index increased 4.8 percent, while the Consumer Price Index and the Producer Price Index increased by 5.4 and 2.1 percent, respectively (Table 1). The municipal index indicates that it cost approximately $205 in 1990 to purchase what $100 would have purchased in 1977. Thus, if city revenues have not increased by approximately the same proportion, fewer resources were available for services. This, of course, does not mean that services have been reduced. It may be that productivity increases

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offset the need for expenditures to keep pace with inflation. Given that many city services are labor intensive, large increases in productivity may be relatively uncommon or at least do not reduce the need for personnel.

Personal services represent a majority of expenditures in several city departments, especially police and fire. Although the MPI has not increased as fast as the

CPI, this is not to say that salaries and wages have necessarily fallen behind. For instance, salaries in two of the largest expenditure categories, police and fire protection, increased an average 6.1 percent and 6.0 percent, respectively in 1990, compared with an increase of 5.1 percent in the Consumer Price Index. The price index does not attempt to evaluate the cost of employee benefits which also may have increased substantially.

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Departmental Indices
The Municipal Price Index also reflects the effects of inflation on departmental expenditures. When comparing price increases by department it is important to remember the relative importance of each department within the city budget. Thus, if a large price increase occurs in a department which represents a small portion of the total budget, the overall impact of this price increase may be low.

Approximately one-third of general expenditures are for police and fire protection. The cost of providing police and fire protection increased 5.6 percent and 5.5 percent, respectively during 1990 (Table 2). This increase is akin to the 5.5 percent increase in the CPI-All Services index, which is no surprise since these departments are highly labor intensive and the price increases of services often exceed those for goods. What $100 purchased in police provision in 1977 cost $206 to provide in 1990. Streets, another large expenditure category, did not increase as rapidly because this department spends more on capital and materials.

Price Increases for Selected Items
Table 3 shows price increases for several specific items purchased by municipalities to provide additional information about price changes. For example, during 1990, petroleum products increased 33.6 percent. However, the prices of metal products declined during the year and concrete products remained relatively stable. The overall effects of these price changes, of course, are determined by the relative importance of expenditures for each item in the budget. Nevertheless, they provide insight into factors underlying the effects of inflation on city expenditures.

Summary
Effective planning by municipal officials requires information on the resources available for providing city services. Expenditure comparisons over time typically are used in measuring both the levels of services and in the commitment of the city to specific programs. What is not always recognized by taxpayers and municipal officials is that expenditure or revenue increases alone do not mean a higher resource commitment. Inflation erodes the purchasing power of taxes or grant revenues in much the same way as it does for family budgets. The effects of inflation must be recognized in planning future budgets.

While the municipal price index shows the effects of inflation on purchases by municipalities, it should not just be incorporated into future budgets. Rather, if it is used to understand how inflation has eroded prior budgets, it can be useful in planning and evaluating future resource needs. •

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