MUNICIPAL PRICE INDEX, 1994
By NORMAN WALZER and LORI YORK
1994 Municipal Price Index
Proposed cutbacks in federal and state programs
require local elected officials to find ways to finance
public services with fewer dollars. Residents in many
areas are resisting property tax increases and, in some
instances, seeking declines. While municipal officials
are often not responsible for these increases, they still
experience the same pressures to do more with less.
This is at the same time that expansions in population
require infrastructure repair and replacement and, in
some instances, infrastructure increases.
Effective financial management will be key in the
1990s as municipal officials try to maintain services with
fewer federal dollars and possibly less growth in local
revenues. Understanding shifts in resources available
and spending patterns will be important as administrators plan budgets. One component in creating an effective financial plan is understanding how resources have
changed due to price increases of goods and services
purchased. This article describes the 1994 Municipal
Price Index and recent changes in its construction.
Construction of Price Index
The Illinois Municipal Price Index was constructed
in 1969 to understand how price increases affect municipal finance, i.e. how price increases of goods and services purchased by cities affect the purchasing power.
It indicates the price increases that would occur if the
city purchased essentially the same market basket of
goods and services in two time periods. In this case, the
base year is 1977. To construct a price index, information is needed on two components. First, we must know
how important each type of good or service is within
the municipal budget. Second, the price increases for
each type of good or service purchased are needed.
Expenditure Weights. The relative importance of
each type of good or service is determined by computing the percentage distribution of purchases. Goods
and services are grouped into similar classifications and
then the percentage which each group represents in the
city expenditure pattern is calculated. These expenditure weights change as cities alter the types of services
provided or as technology improvements cause shifts in
purchasing patterns. Thus, the expenditure weights
must be recalculated periodically.
The expenditure weights were revised, based on
1991 expenditure patterns in 1993 Illinois municipalities
larger than 20,000, excluding Chicago. Expenditure
classifications were kept homogeneous so that price
increases could be determined for each type of purchase. Expenditure patterns were examined by department and for the city as a whole so that two price
indices could be calculated.
Price Relatives. Price increases for each of the expenditure groups are more difficult to compute be-
Table 1. Price Indices
|
Index
|
1977
|
1982
|
1987
|
1990
|
1991
|
1992
|
1993
|
1994
|
Consumer Price Index
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
154.8
|
170.6
|
208.2
|
217.0
|
223.5
|
230.2
|
236.1
|
1982=100.0
|
62.8
|
100.0
|
117.7
|
135.4
|
141.1
|
145.4
|
149.7
|
153.6
|
Producer Price Index
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
159.3
|
161.0
|
179.2
|
179.5
|
181.5
|
184.1
|
186.4
|
1982=100.0
|
64.6
|
100.0
|
102.8
|
116.3
|
116.5
|
117.2
|
118.9
|
120.4
|
Illinois Municipal Index
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
151.1
|
174.0
|
200.6
|
209.4
|
217.3
|
225.4
|
233.9
|
1982=100.0
|
66.2
|
100.0
|
115.1
|
132.8
|
138.6
|
143.8
|
149.2
|
154.8
|
Source: U.S. Department of Labor, Bureau of Labor Statistics and IIRA compilations.
|
May 1995 / Illinois Municipal Review / Page 9
cause detailed information on prices in Illinois are difficult to obtain for a large number of cities. Municipal
expenditures, being primarily service in nature, rely
heavily on wages and salaries. Fortunately for this project, detailed information on compensation is available
in the IML Annual Compensation Survey and this is the
source of information used to depict price increases for
personal service expenditures.1
Price increases for the remaining municipal purchases are obtained from a variety of state and federal
sources, including the detailed Consumer Price Index
and the Producer Price Index. These sources contain
information on price increases, by commodity or type
of purchase and, while not specific to Illinois or to city
purchases, they are the best source of information
available.
Comparison of Price Increases
Two types of municipal price indices are computed
— by department and for the city as a whole. The
former can help municipal officials determine how inflation affects the resources available to each department and the latter shows how inflation affects cities
overall. Because of the revisions in the index and the
change in base year (1982=100.0), we provided two sets
of indices — one with the former base year, 1977, and
one with the new base year, 1982. Users can then see
how the indices changed because of the change in base
year.
Aggregate City Index. The aggregate index is computed for the overall city expenditures and reflects the
general impact of inflation on city resources. This index
is compared with several other measures of inflation
including the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI is based on purchases
by families and unrelated individuals whereas the PPI
more reflects price changes in other than retail markets.
The expenditure weights for each of these indices includes items in different proportions from those included in the Municipal Price Index.
The Municipal Price Index value of 233.9 shows that
it cost approximately $233.90 in 1994 to purchase what
$100.00 would have purchased in 1977. In recent years,
the MP1 has been increasing slightly faster than the CPI
and has outstripped the PPI since 1977. The main explanation is the fact that municipal expenditures mainly
reflect services and, due to the high concentration on
compensation, the prices of services tend to increase
more rapidly than those of goods in the private sector.
During periods of low inflation in the private sector,
it is more likely that public employees receive pay
increases of more than inflation. In times of high inflation, public employees may tend to lose in purchasing
power. One would expect then that during low inflation, the MPI is likely to advance more rapidly than the
CPI and, in general, that seems to be the case.
Table 2. Department Price Indices
Index
|
1977
|
1982
|
1987
|
1990
|
1991
|
1992
|
1993
|
1994
|
General Control
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
145.1
|
176.7
|
207.3
|
218.3
|
227.0
|
236.0
|
247.0
|
1982=100.0
|
68.9
|
100.0
|
121.9
|
142.9
|
150.5
|
156.5
|
162.7
|
170.3
|
Other Sanitation
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
151.0
|
171.8
|
196.7
|
192.9
|
198.6
|
205.3
|
212.0
|
1982=100.0
|
66.2
|
100.0
|
113.9
|
130.4
|
127.9
|
131.7
|
136.2
|
140.6
|
Health
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
140.3
|
161.5
|
188.7
|
199.1
|
208.5
|
219.0
|
230.1
|
1982=100.0
|
71.3
|
100.0
|
116.9
|
137.3
|
145.1
|
152.2
|
159.9
|
168.0
|
Water/Sewer
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
156.7
|
172.9
|
190.3
|
195.7
|
200.4
|
204.5
|
211.7
|
1982=100.0
|
63.8
|
100.0
|
109.6
|
120.4
|
123.7
|
126.6
|
129.2
|
133.7
|
Parks/Recreation
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
156.4
|
192.8
|
218.7
|
228.2
|
237.3
|
246.6
|
255.0
|
1982=100.0
|
64.0
|
100.0
|
121.6
|
137.4
|
143.2
|
148.7
|
154.6
|
159.8
|
Police Protection
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
145.4
|
169.9
|
199.2
|
208.8
|
217.9
|
226.6
|
235.1
|
1982=100.0
|
68.8
|
100.0
|
116.8
|
137.0
|
143.6
|
149.9
|
155.8
|
161.7
|
Fire Protection
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
144.0
|
167.7
|
196.0
|
205.1
|
213.7
|
222.4
|
231.7
|
1982=100.0
|
69.4
|
100.0
|
116.5
|
136.1
|
142.4
|
148.4
|
154.4
|
160.9
|
Streets
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
165.4
|
179.8
|
207.7
|
213.3
|
219.9
|
226.9
|
232.9
|
1982=100.0
|
60.5
|
100.0
|
106.6
|
122.4
|
125.5
|
129.1
|
133.2
|
136.8
|
Library
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
153.8
|
182.5
|
216.8
|
228.9
|
240.7
|
251.9
|
264.5
|
1982=100.0
|
65.0
|
100.0
|
119.4
|
142.2
|
150.2
|
158.0
|
165.4
|
173.7
|
Source: Illinois Institute
|
for Rural Affairs, Western
|
Illinois
|
University,
|
Macomb,
|
IL.
|
|
|
|
Page 10 / Illinois Municipal Review / May 1995
Table 3. Price Changes for Selected Purchases
Index
|
1977
|
1982
|
1987
|
1990
|
1991
|
1992
|
1993
|
1994
|
Gasoline (CPI)
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
206.9
|
160.1
|
203.2
|
205.1
|
204.7
|
202.1
|
203.1
|
1982=100.0
|
48.3
|
100.0
|
77.4
|
99.4
|
99.2
|
99.0
|
97.7
|
98.2
|
Auto Maintenance & Repair (CPI)
|
1977-100.0
|
100.0
|
155.0
|
186.0
|
201.7
|
210.8
|
219.0
|
226.1
|
232.8
|
1982=100.0
|
64.5
|
100.0
|
114.8
|
130.1
|
136.0
|
141.3
|
145.9
|
150.2
|
Metal & Metal Products (PPI)
|
1977=100.0
|
100.0
|
145.0
|
158.1
|
179.1
|
175.1
|
173.6
|
172.8
|
180.9
|
1982=100.0
|
69.0
|
100.0
|
109.1
|
122.9
|
120.2
|
119.2
|
119.2
|
124.8
|
Machinery & Equipment (PPI)
|
1977=100.0
|
100.0
|
153.6
|
174.1
|
195.1
|
198.8
|
199.4
|
200.4
|
202.2
|
1982=100.0
|
65.1
|
100.0
|
113.4
|
120.7
|
123.0
|
123.4
|
124.0
|
125.1
|
Gas & Electricity (CPI)
|
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
184.5
|
208.5
|
226.0
|
232.8
|
237.3
|
244.9
|
246.3
|
1982=100.0
|
54.2
|
100.0
|
103.8
|
109.3
|
112.6
|
114.8
|
118.5
|
119.2
|
Petroleum Products Refined
|
(PPI)
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
248.9
|
127.1
|
186.2
|
167.3
|
161.1
|
154.6
|
147.4
|
1982=100.0
|
40.2
|
100.0
|
51.1
|
74.8
|
67.2
|
64.7
|
62.1
|
59.2
|
Concrete & Concrete Ingred
|
(PPI)
|
|
|
|
|
|
|
|
1977=100.0
|
100.0
|
156.9
|
175.4
|
186.3
|
191.3
|
192.9
|
199.5
|
207.9
|
1982=100.0
|
63.7
|
100.0
|
111.8
|
115.3
|
118.4
|
119.4
|
123.5
|
128.7
|
Source: U.S. Department of Labor, Bureau of Labor Statistics.
Departmental Price Indices. In comparing price
increases, by department, two issues are important —
the rate of price increase for the department and the
relative importance of the department in the overall
city expenditure. The three largest departments are
police, fire, and streets. The police and fire departments also had relatively large price increases
(Table 2). The price index shows that it cost $235.20 in 1994 to
purchase what $100.00 would have bought in 1977 and so on.
Departmental price indices also depend on the relative proportion which personal services represent in the
overall budget plus the level of compensation in the
base year. Libraries, for instance, had relatively low
May 1995 / Illinois Municipal Review / Page 11
salary levels in 1977 and increases less than in other
departments will appear as greater percentage increases. Other departments, such as Other Sanitation,
often rely heavily on contracting for services and these
departments may differ from the others in which most
of the work is undertaken by municipal employees.
The departmental price indices can be used to compare the resource allocation through time among departments. If the budget of a department has not increased at least at the approximate rate of the price
index, then real resources available to that department
have decreased. This does not necessarily mean that the
department cannot produce as much because there
may have been productivity increases at the same time
causing inputs to be able to produce more. The price
index is not sophisticated enough to capture these productivity gains and, should be used only as a rough
guide in decision-making. The price index should not
be automatically incorporated into next year's budget; rather, it should be used as a guide to how resources
have shifted in recent years.
Price Increases of Inputs. Additional insight into the
Municipal Price Index is available by examining specific goods and services purchased by cities (Table 3).
Departments relying heavily on those items which have
had large increases, such as gas and electricity, have
experienced an erosion of purchasing power greater
than other departments. In a few instances, such as
petroleum products, the prices have declined. Also clear is the importance of compensation increases because the overall increases in many departments are
greater than the items in Table 3.
Summary
The Municipal Price Index is intended to aid in
municipal decision-making as municipal officials strive
to manage their budgets in times of cutbacks. In recent
years, inflation has not been a major factor in local
decisions as it was in the early 1980s. There are indications that inflation would increase substantially in the
relatively near future but the Federal Reserve Board
has increased interest rates several times this year to
prevent potential inflation. There are now signs that the
economy may have started a downturn which could
mean that inflation will not become an issue.
Page 12 / Illinois Municipal Review / May 1995
This article indicates that since 1977, inflation has
impacted the public sector more than the private sector
and the differential seems to be increasing. As long as
inflation in the private sector stays relatively low, one
can expect the differential between the private and
public sectors to widen. Municipal officials should recognize the fact that inflation does affect the budget and
should factor this consideration into their evaluation of
resources at budgeting time.
1. For several years a compensation survey was not published and information was collected through a mail survey of cities. With the resumption of the annual Compensation Survey, the numbers for 1991 and 1992 have been recomputed.
"The authors are director and research associate in the Illinois
Institute for Rural Affairs at Western Illinois University. They thank
the Illinois Municipal League for financial support in conducting this
project.
May 1995 / Illinois Municipal Review / Page 13
|