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MUNICIPAL PRICE INDEX, 1992 By NORMAN WALZER and POH C. P'NG In planning budgets and evaluating resources available for providing public services, it is necessary to have information on price changes of goods and services purchased to produce these services. While inflation in recent years has not been a major issue nationally, over time even relatively small price increases can erode budgets and can cause a reallocation of resources not intended by public policy makers. More than 20 years ago, the Illinois Municipal League sponsored a project to determine the effects of inflation on goods and services purchased by Illinois municipalities. That index has been continually updated and the 1992 figures are presented in this article. Price Index Construction Constructing a price index involves matching the relative importance of various expenditure groups with the price increases for each of them during a specified period. For this reason, it is not appropriate to use the Consumer Price Index or the Producer Price Index for city purchases. City spending is mainly for personal services such as police officers, firefighters, street personnel and other groups. The Consumer Price Index reflects spending by a sample of families and related individuals. The Illinois Municipal Price Index is based on expenditures from a sample of 41 Illinois municipalities larger than 25,000, excluding Chicago. The current index is based on 1978-79 expenditures and the base weights are currently being updated. The relative importance of specific items in the overall city budget most likely has changed since the last update. Information on price increases for items purchased by cities is obtained from detailed data contained in the Consumer Price Index, Producer Price Index, and other national sources. Data on increases in wages and salaries of municipal employees are obtained from the Annual Compensation Survey prepared by the Illinois Municipal League. Annual averages of wage increases for more than 30 cities are tabulated and used in constructing the price index. Two price indices are available. First, inflation affects aggregate city resources and an index is built to depict the impact on overall city expenditures. Second, inflation is likely to affect departments differently due to differences in wage and salary increases and differences in the types of goods and services purchased by department. Each index is presented below. City Price Index The overall city price index for selected years shows that inflation has not hit cities quite as hard, since 1977, as it has private consumers. However, the gap between the CPI and the Municipal Index is narrowing. The municipal index in Table 1 shows that it cost $216.80 in 1992 to purchase what $100.00 would have bought in 1977. This compares with the Consumer Price Index which shows that it cost $223.50 to purchase what $100.00 would have purchased in 1977. While, overall, municipal index increased less rapidly than the index for final goods, the percentage change between 1991 and 1992 for the municipal index was 3.8 percent, compared with 3.0 percent for the Consumer Price Index. When inflation in the private sector is relatively low, price increases in the public sector tend above the CPI. One explanation is that public agencies are limited in the percentage increases Table 1. Price Indices
June 1993 / Illinois Municipal Review / Page 9 that can be paid, either because of fiscal resources or public opinion. When private sector inflation is relatively low, public managers are able to provide wage increases, in real terms, to employees to retain high quality workers. Thus, the wage increases in the public sector index make it increase more rapidly than the private sector index. Services in the private economy tend to increase more rapidly than goods-producing industries. Since services are a higher proportion of expenditures by public agencies than in the private sector, price increases in the public sector are higher. For several reasons, therefore, increases in the Municipal Price Index exceeded those in the Consumer Price Index between 1991 and 1992. Departmental Index Detailed price changes also are presented by specific department (Table 2). Price increases, by department, ranged from 2.6 percent in the case of Other Sanitation to 3.9 percent in the case of Libraries. The effect of these price increases on city finances is determined mainly by the relative importance of the department in the overall city budget. For instance, the police and fire departments are often the largest components in the budget, followed by streets. Thus, if the goods and services purchased by these departments increase markedly, the effects of inflation will be substantial. The largest annual increases in the common departments were water/sewer (4.1 percent) and police (3.9 percent) and fire protection (4.0 percent). Miscellaneous expenditures contains hard to allocate expenditures and are difficult to interpret. Libraries experienced relatively high increases but are a relatively small part of the city budget and sometimes are not provided by the city. Price Changes of Selected Products Examples of products purchased by cities and their percentage price changes are presented in Table 3. Some of the price movements are especially interesting. For instance, gas and electricity, as measured in the Producer Price Index, declined from 232.8 to 211.8 from 1991 to 1992. Gasoline, petroleum products, concrete, and metal products also reported price decreases. This type of detail can help explain why the street department index increased by 2.9 percent, one of the smallest increases among departments. Summary Municipal budgeting and planning activities require a detailed understanding of price changes or the amount of resources available to provide public services is difficult to determine. This is not to say that price increases should necessarily be just inserted into future budgets. Alternatively, it is important that past spending trends be evaluated in light of price changes Page 10 / Illinois Municipal Review / June 1993 for goods and services purchased. Effective municipal management is crucial when funds are tight. Accurate budgeting can help significantly in managing a city effectively. The municipal price index presented in this article is designed to assist in that endeavor. •
Table 2. Department Price Indices
Table 3. Price Changes for Selected Purchases
The authors are director and research associate, Illinois Institute for Rural Affairs, Western Illinois University. June 1993 / Illinois Municipal Review / Page 11 |
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