Effective financial management will be key in the 1990s as municipal officials try to maintain services with fewer federal dollars and possibly less growth in local revenues. Understanding shifts in resources available and spending patterns will be important as administrators plan budgets. One component in creating an effective financial plan is understanding how resources have changed due to price increases of goods and services purchased. This article describes the 1994 Municipal Price Index and recent changes in its construction.

Expenditure Weights. The relative importance of each type of good or service is determined by computing the percentage distribution of purchases. Goods and services are grouped into similar classifications and then the percentage which each group represents in the city expenditure pattern is calculated. These expenditure weights change as cities alter the types of services provided or as technology improvements cause shifts in purchasing patterns. Thus, the expenditure weights must be recalculated periodically.

The expenditure weights were revised, based on 1991 expenditure patterns in 1993 Illinois municipalities larger than 20,000, excluding Chicago. Expenditure classifications were kept homogeneous so that price increases could be determined for each type of purchase. Expenditure patterns were examined by department and for the city as a whole so that two price indices could be calculated.

Price Relatives. Price increases for each of the expenditure groups are more difficult to compute be-

Table 1. Price Indices
Index	1977	1982	1987	1990	1991	1992	1993	1994
Consumer Price Index
1977=100.0	100.0	154.8	170.6	208.2	217.0	223.5	230.2	236.1
1982=100.0	62.8	100.0	117.7	135.4	141.1	145.4	149.7	153.6
Producer Price Index
1977=100.0	100.0	159.3	161.0	179.2	179.5	181.5	184.1	186.4
1982=100.0	64.6	100.0	102.8	116.3	116.5	117.2	118.9	120.4
Illinois Municipal Index
1977=100.0	100.0	151.1	174.0	200.6	209.4	217.3	225.4	233.9
1982=100.0	66.2	100.0	115.1	132.8	138.6	143.8	149.2	154.8
Source: U.S. Department of Labor, Bureau of Labor Statistics and IIRA compilations.

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cause detailed information on prices in Illinois are difficult to obtain for a large number of cities. Municipal expenditures, being primarily service in nature, rely heavily on wages and salaries. Fortunately for this project, detailed information on compensation is available in the IML Annual Compensation Survey and this is the source of information used to depict price increases for personal service expenditures.¹

Price increases for the remaining municipal purchases are obtained from a variety of state and federal sources, including the detailed Consumer Price Index and the Producer Price Index. These sources contain information on price increases, by commodity or type of purchase and, while not specific to Illinois or to city purchases, they are the best source of information available.

Two types of municipal price indices are computed — by department and for the city as a whole. The former can help municipal officials determine how inflation affects the resources available to each department and the latter shows how inflation affects cities overall. Because of the revisions in the index and the change in base year (1982=100.0), we provided two sets of indices — one with the former base year, 1977, and one with the new base year, 1982. Users can then see how the indices changed because of the change in base year.

Aggregate City Index. The aggregate index is computed for the overall city expenditures and reflects the general impact of inflation on city resources. This index is compared with several other measures of inflation including the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI is based on purchases by families and unrelated individuals whereas the PPI more reflects price changes in other than retail markets. The expenditure weights for each of these indices includes items in different proportions from those included in the Municipal Price Index.

The Municipal Price Index value of 233.9 shows that it cost approximately $233.90 in 1994 to purchase what $100.00 would have purchased in 1977. In recent years, the MP1 has been increasing slightly faster than the CPI and has outstripped the PPI since 1977. The main explanation is the fact that municipal expenditures mainly reflect services and, due to the high concentration on compensation, the prices of services tend to increase more rapidly than those of goods in the private sector.

During periods of low inflation in the private sector, it is more likely that public employees receive pay increases of more than inflation. In times of high inflation, public employees may tend to lose in purchasing power. One would expect then that during low inflation, the MPI is likely to advance more rapidly than the CPI and, in general, that seems to be the case.

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Table 3. Price Changes for Selected Purchases

Index	1977	1982	1987	1990	1991	1992	1993	1994
Gasoline (CPI)
1977=100.0	100.0	206.9	160.1	203.2	205.1	204.7	202.1	203.1
1982=100.0	48.3	100.0	77.4	99.4	99.2	99.0	97.7	98.2
Auto Maintenance & Repair (CPI)
1977-100.0	100.0	155.0	186.0	201.7	210.8	219.0	226.1	232.8
1982=100.0	64.5	100.0	114.8	130.1	136.0	141.3	145.9	150.2
Metal & Metal Products (PPI)
1977=100.0	100.0	145.0	158.1	179.1	175.1	173.6	172.8	180.9
1982=100.0	69.0	100.0	109.1	122.9	120.2	119.2	119.2	124.8
Machinery & Equipment (PPI)
1977=100.0	100.0	153.6	174.1	195.1	198.8	199.4	200.4	202.2
1982=100.0	65.1	100.0	113.4	120.7	123.0	123.4	124.0	125.1
Gas & Electricity (CPI)
1977=100.0	100.0	184.5	208.5	226.0	232.8	237.3	244.9	246.3
1982=100.0	54.2	100.0	103.8	109.3	112.6	114.8	118.5	119.2
Petroleum Products Refined	(PPI)
1977=100.0	100.0	248.9	127.1	186.2	167.3	161.1	154.6	147.4
1982=100.0	40.2	100.0	51.1	74.8	67.2	64.7	62.1	59.2
Concrete & Concrete Ingred	(PPI)
1977=100.0	100.0	156.9	175.4	186.3	191.3	192.9	199.5	207.9
1982=100.0	63.7	100.0	111.8	115.3	118.4	119.4	123.5	128.7

Source: U.S. Department of Labor, Bureau of Labor Statistics.

Departmental Price Indices. In comparing price increases, by department, two issues are important — the rate of price increase for the department and the relative importance of the department in the overall city expenditure. The three largest departments are police, fire, and streets. The police and fire departments also had relatively large price increases (Table 2). The price index shows that it cost $235.20 in 1994 to purchase what $100.00 would have bought in 1977 and so on.

Departmental price indices also depend on the relative proportion which personal services represent in the overall budget plus the level of compensation in the base year. Libraries, for instance, had relatively low

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salary levels in 1977 and increases less than in other departments will appear as greater percentage increases. Other departments, such as Other Sanitation, often rely heavily on contracting for services and these departments may differ from the others in which most of the work is undertaken by municipal employees.

The departmental price indices can be used to compare the resource allocation through time among departments. If the budget of a department has not increased at least at the approximate rate of the price index, then real resources available to that department have decreased. This does not necessarily mean that the department cannot produce as much because there may have been productivity increases at the same time causing inputs to be able to produce more. The price index is not sophisticated enough to capture these productivity gains and, should be used only as a rough guide in decision-making. The price index should not be automatically incorporated into next year's budget; rather, it should be used as a guide to how resources have shifted in recent years.

Price Increases of Inputs. Additional insight into the Municipal Price Index is available by examining specific goods and services purchased by cities (Table 3). Departments relying heavily on those items which have had large increases, such as gas and electricity, have experienced an erosion of purchasing power greater than other departments. In a few instances, such as petroleum products, the prices have declined. Also clear is the importance of compensation increases because the overall increases in many departments are greater than the items in Table 3.

The Municipal Price Index is intended to aid in municipal decision-making as municipal officials strive to manage their budgets in times of cutbacks. In recent years, inflation has not been a major factor in local decisions as it was in the early 1980s. There are indications that inflation would increase substantially in the relatively near future but the Federal Reserve Board has increased interest rates several times this year to prevent potential inflation. There are now signs that the economy may have started a downturn which could mean that inflation will not become an issue.

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This article indicates that since 1977, inflation has impacted the public sector more than the private sector and the differential seems to be increasing. As long as inflation in the private sector stays relatively low, one can expect the differential between the private and public sectors to widen. Municipal officials should recognize the fact that inflation does affect the budget and should factor this consideration into their evaluation of resources at budgeting time.

1. For several years a compensation survey was not published and information was collected through a mail survey of cities. With the resumption of the annual Compensation Survey, the numbers for 1991 and 1992 have been recomputed.

"The authors are director and research associate in the Illinois Institute for Rural Affairs at Western Illinois University. They thank the Illinois Municipal League for financial support in conducting this project.

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