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Municipal Price Index, 1992 By NORMAN WALZER and POH C. P'NG* Financing city services has always been a topic of major interest to policy-makers and citizens alike as local officials try to balance budgets matching desired services with available public resources. Citizens resist local tax increases, not always recognizing that, in constant dollars, property taxes have decreased in many Illinois cities, despite the fact that wages and prices of inputs used in providing services have increased. City finance during the past decade has been turbulent. A major recession began the 1980s, followed by a period of expansion, and then a significant recession at the end of the decade. During this period, major cutbacks in federal aid to local governments occurred. State revenue sources have not performed well in recent years and currently the city share of recent increases in income taxes is under discussion. A careful examination of city financing practices must recognize trends in prices and how they affect municipal revenues. While inflation rates in recent years have not been high, by historical standards, inflation continues to erode the resources available to provide public services in cities. This article reports an update to the Illinois Municipal Price Index constructed in 1970. The index is designed to demonstrate price increases of wages and prices for purchases made by Illinois cities of 25,000 and larger, excluding Chicago. Price Index Construction A price index shows the effects of inflation on a specific group of purchases. The Consumer Price Index, for instance, reflects price increases for goods and services purchased by families and related individuals. The Producer Price Index demonstrates price increases for markets, other than retail. The relative distribution of expenditures in neither of these groups, however, approximates city purchases. Construction of the Illinois Municipal Price Index requires two types of information. First, the relative importance of major expenditure categories within the total municipal expenditure package is needed to weight the price information. The expenditure information is determined by grouping city spending into relatively homogeneous categories for which estimates of price increases are available. Basic municipal spending information is generated from a survey of Illinois cities in 1978-79. Second, information on price increases in each spending category is needed. In the municipal index, price increase information comes from the detailed Consumer Price Index and the Producer Price Index as well as a variety of price trends for specific spending categories. The largest portion of city expenditures involves wages and salaries. Data on these trends are from the Annual Compensation Survey published by the Illinois Municipal League. Two price indices are presented in this article — one for aggregate city spending and the other for spending by city departments. The two indices differ in construction and use. The aggregate index should be used to evaluate how resources available for city spending has changed and each departmental index demonstrates the extent to which inflation has eroded resources available for that specific department. Aggregate Price Index The aggregate city price index is compared with the Consumer Price Index and the Producer Price Index. Traditionally, price increases for services are higher than in goods-producing industries because of the relative importance of wages and salaries in service industries. These differences carry over into the public sector also, mainly because public agencies must compete with private businesses for employees. Wage and salary increases in the private sector, therefore, affect the public sector. Price indices must be based on a specific year and the indices in this article are based on 1977. Therefore, the indices show the extent to which prices of a specific set of goods and services purchased in 1977 have increased between 1977 and 1992. Without doubt, changes in the composition of city purchases during this period but, for present purposes, the market basket remains the same. July 1992 / Illinois Municipal Review / Page 13 Two subcomponents and the overall Consumer Price Index are compared with the index for municipal purchases (Table 1). The index for private services, in the past, has outrun the index for commodities by a wide margin. Price increases for services were 5.1 percent during 1991, compared with an increase of 3.1 for goods. While the percentage point comparison seems small, relatively speaking, the price increases for services increased 1.64 times goods. The importance is that municipal expenditures are mainly for personal services so one might expect the impact of inflation on cities to be higher than in primarily goods-producing industries.
The limiting factor with respect to cities, however, is their ability to afford wage and salary increases. When tax bases are growing and funds are relatively available, pay increases can be higher. If, at present, the recession and declines in federal aid are pressuring city budgets, pay increases are less. In 1991, for example, pay increases for police officers and firefighters averaged 4.9 percent and 5.0 percent, respectively. Since these are among the largest departments in the city budgets, pay increases have a major impact on the price index. Table 1. Price Indices
It cost municipal governments $213.90 in 1991 to purchase the same goods and services that $100 bought in 1977 (Table 1), This compares with a cost of $250.90 to purchase the same bundle of services that cost $100 in 1977. In the late 1980s, the municipal index increased more than the Consumer Price Index but the public sector index has continually lagged the CPI services index. The main explanation is that city budgets have not permitted comparable pay increases comparable with the private sector. However, increases in the public sector have outstripped the Consumer Price Index in recent years. Departmental Price Index Price increases have affected municipal departments widely, depending both on types of purchases and the price increases. During the energy crunch, departments such as streets, that spend significant proportions of their budgets on petroleum-related products experienced substantial inflation. Currently, petroleum products have experienced relatively slow price increases, or in some instances, declines. Wage and salary increases are relatively more important in these times. Goods and services in the three largest departments, police protection, fire protection, and streets had relatively large price increases (4.8 percent, 4.9 percent, and 4.4 percent, respectively). These were above the Consumer Price Index increases (4.2 percent). This has been a common pattern because, in periods of relatively low price increases in the private sector, municipal employees often gain in real purchasing power but when inflation in the private is high, sector public employees are more likely to lose. In any event, between 1977 and 1991, the real purchasing power of resources in most municipal departments were reduced by more than half. Table 2. Department Price Indices
Page 14 / Illinois Municipal Review / July 1992 A sampling of items purchased by cities in relatively large amounts indicates what has happened (Table 3). In most instances, with the exception of gas and electricity, the price increases were relatively small and in the case of refined petroleum products, the price decreased between 1990 and 1991. Even small increases, though, can affect a departmental index if the item is purchased in relatively large quantities. General Observations In recent years, inflation has not been particularly troublesome, especially while the U.S. economy has been in a major recession. Experts disagree regarding how fast the economy will recover as well as what the impact on inflation might be. No one is seriously predicting a return to the high inflation of the early 1980s but inflation could pick up if a stronger recovery materializes. A recent forecast by a major consulting firm is that the Consumer Price Index will be in the range of 3.0 to 3.2 percent for FY92. A national price deflator for State and Local Government Purchases is projected to be between 2.9 and 3.8 percent. If the national economic recovery strengthens, inflation could increase also. The importance of inflation is that expenditures will increase, even for the same level of services. There is significant evidence that property taxes in many Illinois cities, especially those downstate, have decreased in purchasing power. Combined with less federal aid, these declines pressure city budgets Table 3. Price Changes for Selected Purchases
Effective management of city resources requires at least an estimate of the resources available to Illinois cities to provide services. Inflation tends to reduce the purchasing power and should be monitored. The municipal price index can assist in those efforts. •
*The authors are director and research associate, Illinois Institute for Rural Affairs, Western Illinois University
July 1992 / Illinois Municipal Review / Page 15 |
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