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REVISED MUNICIPAL PRICE INDEX By LORI A. YORK and NORMAN WALZER The Municipal Price Index was recently revised to update the expenditure weights which serve as a base for the index. In addition, relatively minor changes were made in the expenditure categories to reflect shifts in the purchases by city. This means that the index values change slightly. For those cities using the index as a basis for computing charges some of the values will show minor variations from last year. If more information is needed, call Norman Walzer at 309-298-1031. Since 1970, the Illinois Municipal League has sponsored the Illinois Municipal Price Index to depict changes in the prices of goods and services purchased by Illinois municipalities larger than 20,000, excluding Chicago. This Index has been updated annually and is currently used by cities across Illinois in estimating the effects of inflation on budgets and in negotiating contracts for services. Periodically, the base for the index must be updated to reflect changes in the types of goods and services purchased. This article presents the 1993 update as well as revisions using 1992 expenditures by Illinois cities. Price Index Construction Information from many sources is used in constructing a price index. Most important is having reasonably current information on the types of items for which cities spend funds. The main elements of an index are expenditure weights used to show the importance of each expenditure category purchased and price relatives which show price increases for each of these categories. The price index expenditure weights were revised, based on 1992-93 budget information from 15 Illinois cities with populations between 20,000 and 100,000. The previous index was based on 1978-79 expenditure weights. The expenditures were allocated into 45 like categories so that representative price increase information could be obtained from other sources. Since indices are organized by city department, it is important that fairly detailed information is available on expenditure patterns. The single largest expenditure is for wages and salaries. While the relative importance of many expenditure categories remained similar with the previous indices, there were some changes. We noted that more municipalities have contracted for services. Overall, personal services were 55.3 percent of expenditures, down 7.3 percentage points compared with 1978-79. Part of this may reflect differences in cities but it makes sense in light of a general trend toward contracting out or privatization. Water and Sewer and Other Sanitation reported the highest changes in contractual. The second major component of a price index requires detailed information on wage and price increases. Due to the importance of personal services in overall expenditures, it is crucial that this information represent experiences in Illinois cities. The Illinois Municipal League conducts an annual compensation survey providing detailed information on wages, salaries, and benefits. This information is incorporated into the index by selecting representative positions, by department, and computing increases in pay as reflected in the surveys. Information on price increases for other items purchased by municipalities is obtained from the Consumer Price Index, Producer Price Index, and national publications. The price increase information for other items is not specific to Illinois but, in most departments, the price increases should reflect prices paid in Illinois cities. Index Comparisons The Consumer Price Index (CPI), probably the most commonly used indicator of inflation, depicts price increases in the private sector, whereas the Producer Price Index (PPI) measures inflation in industrial and wholesale sectors. In neither of these indices, however, is personnel costs as high a proportion as in cities. Thus, while price increase information from the CPI or the PPI on specific items is useful for cities, it is impor-
Source: U.S. Department of Labor, Bureau of Labor Statistics and IIRA compilations. Page 14 / Illinois Municipal review / June 1994
Source: Illinois Institute for Rural Affairs, Western Illinois University, Macomb, IL.
Source: U.S. Department of Labor, Bureau of Labor Statistics. tant that this information be weighted appropriately to reflect price increases paid by cities. Two types of indices are prepared for Illinois cities. The index compiled for all city expenditures shows how inflation has affected cities as a whole; whereas the indices prepared by department show how each department is affected. Differences by departments arise from differential wage and salary increases and variations in types of goods and services used by specific departments. Municipal Price Index A price index compares the cost of the same bundle of goods and services through time. It cost municipalities $223.90 in 1993 to purchase the same goods and services that $100.00 would have purchased in 1977 (Table 1). This compares with the Consumer Price Index which shows that $230.20 purchased what $100.00 would have bought in 1977. Thus, if revenues have not increased at least 130 percent during this period, fewer resources are available for services, assuming no productivity changes. If the productivity of municipal employees has increased, more services can be provided with fewer employees. Since 1977, the inflation has hit private consumers harder than municipalities. However, the gap between the Consumer Price Index and the Illinois Municipal Price Index is narrowing. In 1980, the Consumer Price Index was 7.1 percentage points higher than the Municipal Price Index. By 1993, the difference was 2.8 percent. Essentially what happens is that during periods of high inflation in the private sector, city employees often receive wage increases less than inflation. In periods of low private inflation, public employees gain and these, wage increases are picked up in the municipal price index. Departmental Indices Prices increases, by department, ranged from 2.0 percent in Health to 4.5 percent in Library (Table 2). Both of these departments are relatively small, com- June 1994 / Illinois Municipal Review / Page 15 pared with the overall city budget. Two of the three largest components of the city budget, however, had price increases greater than the city increase of 3.7 percent. They were Police and Fire Protection, 4.2 and 3.8 percent, respectively. Water and Sewer, the second biggest component, increased 3.5 percent. These three departments represent more than 60 percent of the City Price Index. When comparing price increases by departments, it is important to remember the relative importance of each department within the budget. In small departments, small increases in expenditures represent fairly large percentage growth. Price Changes of Selected Products Table 3 shows the price increases for selected items purchased by municipalities in various amounts. These items are only illustrations of items included in the Municipal Price Index to show 7 how prices can vary. Of the items listed, three had price declines since 1992: Petroleum Products Refined, Gasoline, and Metal & Metal Products. Machinery and Equipment, on the other hand, remained fairly stable. Summary Effective city management requires detailed information on availability of resources for providing city services. Through time, differential price changes can reduce the purchasing power of inputs in some departments more than others. The Municipal Price Index provides information on the effects of inflation both by department and for the city as a whole. City administrators can use this information to evaluate how resources available for services have changed through time. It is important, however, not to budget inflation into the city spending. In other words, while the index can identify losses or gains in resources, there may be ways to introduce productivity improvements so that fewer expenditures or resources are needed to provide equivalent services. Certainly, the introduction of computers has changed the ways that services are provided and offered opportunities for cost savings. Used appropriately and effectively, the municipal price index can be an effective management tool.
The authors are research associate and director, Illinois Institute for Rural Affairs, Western Illinois University. Page 16 / Illinois municipal review / June 1994 |
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