The Municipal Price Index., 1990
By CAROL RACHUS and NORMAN WALZER
"Research associate and director, Illinois Institute for Rural Affairs,
Western Illinois University.
Municipal finance underwent several changes during the 1980s. Rapid inflation and severe recession
marked the early 1980s followed by an expansionary
period. The inflation rate bottomed out in the mid-
1980s and has slowly crept up each year since. Because
the rate of inflation affects the amounts of goods and
services that cities can purchase, it is important that
local officials be able to determine the impact which
inflation has had on previous budgets.
The Illinois Municipal Price Index is designed to
measure the effects of inflation on municipal governments. It measures the price increases for goods and
services purchased by municipal governments and is
comprised of two components, the salaries and wages
of municipal employees and the prices of other goods
and services purchased by cities.
Salary and wage information is obtained from the
Annual Municipal Compensation Survey published by
the Illinois Municipal League. Because personnel services comprise the majority of municipal budgets, they
are weighted heavily within the index. Wage and salary
data have been based on a sample of 33 cities but
reporting difficulties necessitated changes in the salary
and wage component. The original panel was expanded to 41 cities, including both downstate and suburban, all with populations of 25,000 and over, excluding Chicago. The larger number of cities assures more
representative information on wages and salaries. The
1989 index has been updated, with only minor changes
resulting.
The second component of the Municipal Price Index includes prices of goods and services purchased by
municipalities. Price information is obtained from detailed Consumer Price Index and Producer Price Index
reports. These prices are then weighted by their relative
importance within the budget.
Aggregate City Index
Two price indices are computed. The first includes
expenditure weights over the entire city budget. This
aggregate city index shows the effects of inflation for
the city as a whole. The second is a set of indices which
reflects the effects of inflation for each major department within a city.
The most popular method of measuring inflation in
the private sector is the Consumer Price Index (CPI)
which reflects price increases faced by an average family or individual. A second index often reported in the
news media is the Producer Price Index (PPI) which
measures price increases in the industrial and wholesale
sectors. The effects of inflation on municipal expenditures cannot be strictly compared to either of these
because personnel expenditures constitute a larger
proportion of municipal budgets than reflected in
either of the private sector indices.
In 1990, the Municipal Price Index increased 4.8
percent, while the Consumer Price Index and the Producer Price Index increased by 5.4 and 2.1 percent,
respectively (Table 1). The municipal index indicates
that it cost approximately $205 in 1990 to purchase what
$100 would have purchased in 1977. Thus, if city revenues have not increased by approximately the same
proportion, fewer resources were available for services. This, of course, does not mean that services have
been reduced. It may be that productivity increases
July 1991 / Illinois Municipal Review / Page 11
Table 1
PRICE INDICES
(1977=100.0)
Index
|
1977
|
1980
|
1985
|
1987
|
1988
|
1989
|
1990
|
Consumer Price Index
|
100.0
|
135.9
|
177.5
|
187.5
|
194.7
|
204.6
|
215.6
|
All Commodities
|
100.0
|
133.9
|
164.1
|
167.7
|
173.4
|
181.8
|
191.2
|
All Services
|
100.0
|
139.1
|
196.3
|
214.7
|
223.9
|
235.5
|
248.5
|
Producer Price Index
|
100.0
|
135.9
|
161.6
|
162.7
|
166.6
|
175.4
|
179.2
|
Illinois Municipal Index
|
100.0
|
128.3
|
167.5
|
178.5
|
186.3
|
195.7
|
205.2
|
Table 2
DEPARTMENT PRICE INDICES
Department
|
1977
|
1980
|
1985
|
1987
|
1988
|
1989
|
1990
|
Miscellaneous
|
100.0
|
127.2
|
165.9
|
177.6
|
185.7
|
201.9
|
208.6
|
General Control
|
100.0
|
122.6
|
160.3
|
174.4
|
181.2
|
192.9
|
203.4
|
Other Sanitation
|
100.0
|
129.4
|
166.2
|
174.6
|
179.7
|
189.1
|
198.5
|
Civil Defense
|
100.0
|
129.0
|
171.2
|
179.3
|
183.8
|
194.6
|
202.3
|
Health
|
100.0
|
122.3
|
160.6
|
171.3
|
175.5
|
185.8
|
195.4
|
Water/Sewer
|
100.0
|
129.8
|
174.8
|
185.6
|
193.1
|
201.4
|
208.0
|
Parks/Recreation
|
100.0
|
131.2
|
176.5
|
189.0
|
194.6
|
203.1
|
211.4
|
Police Protection
|
100.0
|
127.3
|
163.6
|
176.8
|
185.1
|
195.2
|
206.2
|
Fire Protection
|
100.0
|
111.4
|
159.4
|
172.0
|
180.5
|
190.6
|
201.2
|
Streets
|
100.0
|
139.1
|
175.2
|
180.0
|
184.6
|
192.8
|
202.7
|
Library
|
100.0
|
128.1
|
174.4
|
191.1
|
199.1
|
211.0
|
225.5
|
offset the need for expenditures to keep pace with
inflation. Given that many city services are labor intensive, large increases in productivity may be relatively
uncommon or at least do not reduce the need for personnel.
Personal services represent a majority of expenditures in several city departments, especially police and
fire. Although the MPI has not increased as fast as the
CPI, this is not to say that salaries and wages have
necessarily fallen behind. For instance, salaries in two
of the largest expenditure categories, police and fire
protection, increased an average 6.1 percent and 6.0
percent, respectively in 1990, compared with an increase of 5.1 percent in the Consumer Price Index. The
price index does not attempt to evaluate the cost of
employee benefits which also may have increased substantially.
Page 12 / Illinois Municipal Review / July 1991
Tables 3
PRICE CHANGES FOR SELECTED PURCHASES
(1977=100.0)
Category
|
1987
|
1989
|
1990
|
Gasoline (CPI)
|
160.1
|
183.0
|
203.2
|
Auto Maintenance & Repair (CPI)
|
186.0
|
193.6
|
210.1
|
Metal & Metal Products (PPI)
|
158.1
|
180.0
|
177.3
|
Machinery & Equipment (PPI)
|
174.1
|
180.3
|
185.1
|
Gas & Electricity (CPI)
|
208.5
|
198.3
|
216.4
|
Petroleum Products Refined (PPI)
|
127.1
|
152.3
|
203.6
|
Concrete & Concrete Ingredients (PPI)
|
175.4
|
177.6
|
179.6
|
Departmental Indices
The Municipal Price Index also reflects the effects
of inflation on departmental expenditures. When comparing price increases by department it is important to
remember the relative importance of each department
within the city budget. Thus, if a large price increase
occurs in a department which represents a small portion
of the total budget, the overall impact of this price
increase may be low.
Approximately one-third of general expenditures
are for police and fire protection. The cost of providing
police and fire protection increased 5.6 percent and 5.5
percent, respectively during 1990 (Table 2). This increase is akin to the 5.5 percent increase in the CPI-All
Services index, which is no surprise since these departments are highly labor intensive and the price increases
of services often exceed those for goods. What $100
purchased in police provision in 1977 cost $206 to provide in 1990. Streets, another large expenditure category, did not increase as rapidly because this department spends more on capital and materials.
Price Increases for Selected Items
Table 3 shows price increases for several specific
items purchased by municipalities to provide additional information about price changes. For example,
during 1990, petroleum products increased 33.6 percent. However, the prices of metal products declined
during the year and concrete products remained relatively stable. The overall effects of these price changes,
of course, are determined by the relative importance of
expenditures for each item in the budget. Nevertheless,
they provide insight into factors underlying the effects
of inflation on city expenditures.
Summary
Effective planning by municipal officials requires
information on the resources available for providing
city services. Expenditure comparisons over time typically are used in measuring both the levels of services
and in the commitment of the city to specific programs.
What is not always recognized by taxpayers and municipal officials is that expenditure or revenue increases
alone do not mean a higher resource commitment. Inflation erodes the purchasing power of taxes or grant
revenues in much the same way as it does for family
budgets. The effects of inflation must be recognized in
planning future budgets.
While the municipal price index shows the effects of
inflation on purchases by municipalities, it should not
just be incorporated into future budgets. Rather, if it is
used to understand how inflation has eroded prior
budgets, it can be useful in planning and evaluating
future resource needs. •
July 1991 / Illinois Municipal Review / Page 13