Monitoring services provided by cities and determining the allocation of resources among competing uses is complicated by the fact that the output provided is so difficult to measure. The measurement difficulties cause citizen groups and local public officials to monitor the level of services provided based on city expenditures with the idea that higher expenditures mean more services. While, with data available, this approach may be one of the few feasible options, a comparison of expenditures through time requires allowing for increases in the prices of goods and services purchased by cities.

Since 1970, the Illinois Municipal League has supported a price index based on goods and services purchased by cities in Illinois to capture the impact of inflation on city expenditures. While the price index does not necessarily reflect changes in the cost per unit of service provided, it nevertheless represents a useful management tool in evaluating whether the resources available to provide these services have changed during a certain period. This article updates the Municipal Price Index for 1995.

Index Construction

A price index has two major components: expenditure weights and price relatives. Conceptually, a fixed-weight price index simply weighs the price increases of relevant groups of goods and services by their relative importance in the total expenditures in a sample of cities. In the case of the municipal index, the sample includes 54 Illinois cities larger than 20,000, excluding Chicago. The expenditures were last updated in 1994 so they should reasonably reflect current city spending patterns.

Expenditure weights are the proportion that each of as many as 30 expenditure categories represent in a specific department. These spending patterns then are used to weigh the price increases of each type of expenditure, at the departmental or city level. Two indices are constructed, city and department, to enable local public officials to evaluate changes in resources available to provide services.

Price relatives are the percentage price increases for each type of good or service included in a department. Since personnel costs represent a significant proportion of city expenditures, current information on wage and salary changes is especially important if the index is to accurately reflect the effect of price increases. Capturing the importance of increases in personnel costs is difficult for two reasons. First, with experience, municipal employees often become more productive in their work and, thus, higher pay rates may partly reflect productivity increases. Second, the compensation paid is a substantial portion of the budget but the diversity of benefits provided makes determining changes in the overall cost difficult. The index construction tries to adjust for these factors.

City Price Index

Between 1982 and 1995, the prices for the goods and services included in this index increased 60.8 percent indicating that it cost $160.80 in 1995 to purchase the items that $100.00 would have purchased in 1982. The implication, therefore, is that if city expenditures did not increase at least this amount, fewer resources are available to provide services. This finding does not necessarily mean, however, that fewer services are being provided. During the period of study, productivity advancements may have been incorporated into the production of city services, causing more services to be provided with the same or even fewer resources.

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During the early 1980s, private sector inflation was high and the CPI exceeded the MPI but by about 1992, the MPI was increasing more rapidly than the CPI. The latter period is explained by the low inflation in recent years in the private sector. Municipal employees who received compensation increases of four to five percent gained in purchasing power in these years.

When compared with the services component of the CPI, the municipal index increased less rapidly (Table 1). Between 1982 and 1995, services (CPI) increased 75.7 percent compared with the 60.8 percent increase in the MPI. This probably means that municipal employees, in many instances, receive smaller compensation increases than service workers in the private sector.

Departmental Indices

In using the index to evaluate the allocation of resources among city services, it is useful to have price increases by department. For this reason, an index is created for each of nine traditional departments or functions within a city (Table 2). In using these indices, two main considerations are relevant. First, the price increases of items purchased show the impact of inflation on expenditures in a department. Second, the size of the department within a city expenditures reflects the importance that these price increases have on the aggregate city budget. Thus, a relatively large increase in prices of items purchased by libraries (77.6 percent) may seem substantial, but libraries do not represent as large a proportion of the city budget as police protection, fire protection, or streets for example.

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some instances, declined from 1982 levels. Also true is that some cities contract for these services. It is more difficult to obtain a consistent set of prices when contracting is compared with city expenditures for streets.

Examples of Items Purchased

More detail on the price increases for a sample of items purchased by cities can help in understanding the indices. Gasoline, for instance, is approximately the same price as in 1982 (Table 3) while automotive maintenance and repair increased 54 percent, according to the Consumer Price Index. Again, the impact on city expenditures is a function both of the increases in prices but also of the relative amount of the items purchased. Concrete and concrete ingredients are important in street departments whereas gasoline or auto maintenance may affect police and fire protection, depending on the municipal accounting system as to where these services are budgeted.

Conclusions

Keeping track of municipal expenditures and budgeting resources to meet the demands of the public is not an easy task. Through time, price increases affect specific departments differently and resources have to be reallocated to make sure that goals for delivering services are met. The Municipal Price Index offers yet another tool to accomplish this task.

In recent years, the impact of inflation on the public sector has exceeded the private sector and will likely continue to do so as long as inflation remains relatively low in the private sector. Municipal employees, in many instances, have gained in purchasing power. Should inflation in the private sector increase substantially in the future, these gains may erode. The future of inflation is a topic of major interest as Federal officials adjust interest rates to stabilize the economy. It is important to understand that the outcomes of their actions affect city expenditures as well as, if not more than, families and individuals. •

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