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1987 MUNICIPAL PRICE INDEX Since 1970, the Illinois Municipal League has sponsored the construction of a price index reflecting the price changes for goods and services commonly purchased by Illinois municipalities. This index has been used for a variety of purposes in Illinois and other states, especially in planning future budgets. The price index described in this article is based on expenditure patterns in Illinois municipalities and incorporates information from national data sources and information specific to Illinois. This article describes past trends in the index and briefly illustrates how the index can be used.
Construction of Index The Producer Price Index is constructed to reflect price changes in other than retail markets and is weighted by the importance of industries in the overall economic structure of the U.S. Neither of the weighting systems in these national indices is relevant for present purposes. Hence, a municipal index is needed. Expenditure Weights. In constructing the municipal price index, a survey of spending patterns of Illinois municipalities was undertaken. The amounts that cities spent on each of a wide variety of items were recorded and calculated as percentage of either a departmental budget or the overall city expenditure package. These expenditure percentages form the basis for a system of weights that are used to assign importance to price changes for each of the expenditure categories. Price Changes. Information on price changes is derived from two basic sources. First, because of the major importance of wages and salaries in city expenditures, data on compensation changes specific to Illinois municipalities is obtained from the Annual Compensation Survey compiled by the Illinois Municipal League. This survey contains detailed information on all aspects of compensation. Information from the sample cities on wage and salary changes is incorporated into the index and weighted by their relative importance in either a departmental or overall city expenditure package. Data on other price changes are obtained from the detailed Consumer Price Index, the Producer Price Index, or other specific index reflecting price changes of items purchased by cities. The important consideration is that the price changes reflect the types of goods purchased. If the expenditure category is too broad, for instance, it is difficult to obtain information on price changes appropriate for this group of purchases.
Aggregate Municipal Index Second is an index appropriate for each major department maintained by city governments. Within each index, the price changes are weighted by the relative importance of the expenditure categories. Thus, the price changes differ in importance by departmental category. Information on the Consumer Price Index, Producer Price Index, and the Illinois Municipal Index is provided in Table 1. The interpretation of the municipal index is that in 1987 it cost $178.50 to purchase what $100 would have bought in 1977. This index assumes that cities purchase the same items in both years. This is *Professor of economics and research assistant, respectively, in the Department of Economics at Western Illinois University. The authors thank the Illinois Municipal League for financial support of this project. Any errors of fact or interpretation belong solely to the authors. April 1988 / Illinois Municipal Review / Page 9
probably not correct and, if anything, this index probably understates the effects of inflation. Cities make adjustments in purchasing patterns because of inflation and also because of changes in technology. While the municipal index, since 1977 has not increased as rapidly as the Consumer Price Index, the percentage increase between 1986 and 1987 for the CPI was 3.6 percent compared with 4.0 percent for the municipal index. The municipal index is based on preliminary information from the national indices. With revisions, the final municipal index value could change. A comparison of the municipal index with the private sector indices indicates that cities have suffered more from inflation in the past year than has the private sector. This is mainly because cities are heavily dependent on services. Between 60 and 80 percent of a city expenditure is for personal services. Wages and salaries have a tendency to increase more rapidly than price increases for goods. In Table 1, the price increases of goods are compared with those for services in the private sector. In 1987, for instance, it cost approximately $274.70 to purchase the same services as $100 would have bought in 1977. For goods, however, the 1987 price was $167.70. Clearly the costs of services have risen more rapidly than for goods, as measured by the Consumer Price Index. The comparison between private and public sector indices illustrates a trend which has been experienced since the municipal index began. In periods of relatively low inflation in the private sector, the municipal index increases are higher. In other words, during periods of low inflation municipal employees obtain real Page 10 / Illinois Municipal Review /April 1988 wage gains; and therefore, the cost of an hour's effort increases to the city. In periods of high inflation, as measured by the Consumer Price Index, municipal employees receive wage increases smaller than inflation; and because personal services are such a large component of the expenditure package, the municipal index does not increase as rapidly as the private sector.
Departmental Price Index The effects of inflation, by department, are compared in Table 2. Since 1977, the greatest price increases, by department, have occurred in public works departments (water/sewer), streets, and libraries. The public works areas are more affected by increases in construction costs. The case of libraries is partly a statistical artifact because wages and salaries of library personnel were relatively low in 1977. However, the costs of books and reading materials increased substantially in the 1980s. The magnitude of the price changes is important but the relative size of the department in the overall budget has a major effect also. The largest departments, in relative importance, usually include police, fire, and streets. The price increases for police and fire departments are not as high as other areas mainly because salaries are the dominant expenditures, and the salaries were high relative to other departments in 1977. Thus, comparable pay increases represent smaller percentage gains. In addition, the police and fire department indices are understated because some of the benefits, such as clothing allowances, are not included in the employment compensation used in the index.
Detailed Price Comparisons
Summary April 1988 / Illinois Municipal Review / Page 11
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