Municipal Price Index, 1995
By NORMAN WALZER and LORI YORK*
Monitoring services provided by cities and determining the allocation of resources among competing
uses is complicated by the fact that the output provided is so difficult to measure. The measurement difficulties cause citizen groups and local public officials to
monitor the level of services provided based on city
expenditures with the idea that higher expenditures
mean more services. While, with data available, this
approach may be one of the few feasible options, a
comparison of expenditures through time requires allowing for increases in the prices of goods and services
purchased by cities.
Since 1970, the Illinois Municipal League has supported a price index based on goods and services purchased by cities in Illinois to capture the impact of inflation on city expenditures. While the price index
does not necessarily reflect changes in the cost per unit
of service provided, it nevertheless represents a useful
management tool in evaluating whether the resources
available to provide these services have changed during a certain period. This article updates the
Municipal Price Index for 1995.
Index Construction
A price index has two major components: expenditure weights and price relatives. Conceptually, a
fixed-weight price index simply weighs the price increases of relevant groups of goods and services by
their relative importance in the total expenditures in a
sample of cities. In the case of the municipal index,
the sample includes 54 Illinois cities larger than
20,000, excluding Chicago. The expenditures were last
updated in 1994 so they should reasonably reflect current city spending patterns.
Expenditure weights are the proportion that each
of as many as 30 expenditure categories represent in a
specific department. These spending patterns then are
used to weigh the price increases of each type of expenditure, at the departmental or city level. Two indices are constructed, city and department, to enable
local public officials to evaluate changes in resources
available to provide services.
Price relatives are the percentage price increases
for each type of good or service included in a department. Since personnel costs represent a significant
proportion of city expenditures, current information
on wage and salary changes is especially important if
the index is to accurately reflect the effect of price increases. Capturing the importance of increases in personnel costs is difficult for two reasons. First, with experience, municipal employees often become more
productive in their work and, thus, higher pay rates
may partly reflect productivity increases. Second, the
compensation paid is a substantial portion of the budget but the diversity of benefits provided makes determining changes in the overall cost difficult. The index
construction tries to adjust for these factors.
City Price Index
Between 1982 and 1995, the prices for the goods
and services included in this index increased 60.8 percent indicating that it cost $160.80 in 1995 to purchase
the items that $100.00 would have purchased in 1982.
The implication, therefore, is that if city expenditures
did not increase at least this amount, fewer resources
are available to provide services. This finding does not
necessarily mean, however, that fewer services are being provided. During the period of study, productivity
advancements may have been incorporated into the
production of city services, causing more services to
be provided with the same or even fewer resources.
In
using the index, therefore, local public officials should
examine the types of productivity changes that have
been initiated.
While constructed to reflect the impact of inflation on groups with different spending patterns, the
Consumer Price Index (CPI) and Producer Price Index
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Table 1. Price Indices (1982-100.0)
Index
Consumer Price Index
|
1982
|
1987
|
1992
|
1993
|
1994
|
1995
|
(All Items)
|
100.0
|
117.7
|
145.4
|
149.7
|
153.6
|
157.9
|
Commodities
|
100.0
|
111.0
|
133.1
|
135.6
|
137.9
|
140.6
|
Services
|
100.0
|
125.2
|
158.3
|
164.5
|
169.9
|
175.7
|
Producer Price Index
|
100.0
|
102.8
|
117.2
|
118.9
|
120.4
|
125.7
|
State & Local Implicit
|
|
|
|
|
|
|
Price Deflator
|
100.0
|
117.9
|
141.0
|
144.0
|
146.1
|
150.5
|
Illinois Municipal Price Index
|
100.0
|
115.1
|
144.4
|
149.9
|
155.1
|
160.8
|
Source: U.S. Department of Labor, Bureau of Labor Statistics and IIRA compilations.
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*The authors are director and research associate, Illinois Institute
for Rural Affairs, Western Illinois University. They thank the Illinois
Municipal League for its support of this project.
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August 1996 / Illinois Municipal Review / Page 11
Table 2. Department Price Indices
|
Index
|
1982
|
1987
|
1992
|
1993
|
1994
|
1995
|
General Control
|
100.0
|
122.0
|
158.3
|
165.7
|
172.2
|
177.9
|
Other Sanitation
|
100.0
|
113.6
|
131.2
|
135.5
|
140.0
|
143.9
|
Health
|
100.0
|
116.8
|
153.3
|
162.0
|
170.0
|
180.5
|
Water/Sewer
|
100.0
|
109.7
|
127.1
|
129.6
|
134.7
|
138.1
|
Parks/Recreation
|
100.0
|
121.8
|
148.8
|
154.4
|
159.6
|
164.7
|
Police Protection
|
100.0
|
116.9
|
151.6
|
157.8
|
163.5
|
171.6
|
Fire Protection
|
100.0
|
116.6
|
149.6
|
155.9
|
162.1
|
168.0
|
Streets
|
100.0
|
106.7
|
129.2
|
133.1
|
136.7
|
140.6
|
Library
|
100.0
|
117.6
|
155.2
|
162.3
|
169.6
|
177.6
|
Source: Illinois Institute for Rural Affairs, Western Illinois University, Macomb.
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(PPI) are interesting to compare with the Municipal
Price Index (MPI) if for no other reason than to help
taxpayers understand that inflation affects cities as
much as it does individuals. The importance of personal service expenditures in municipal budgets
means that if municipal employees gain in purchasing
power during periods of relatively low inflation CPI,
the impact of inflation on cities will be more than in
the private sector. The converse is true also.
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During the early 1980s, private sector inflation was
high and the CPI exceeded the MPI but by about 1992,
the MPI was increasing more rapidly than the CPI.
The latter period is explained by the low inflation in
recent years in the private sector. Municipal employees
who received compensation increases of four to five
percent gained in purchasing power in these years.
When compared with the services component of
the CPI, the municipal index increased less rapidly
(Table 1). Between 1982 and 1995, services (CPI) increased 75.7 percent compared with the 60.8 percent
increase in the MPI. This probably means that municipal employees, in many instances, receive smaller
compensation increases than service workers in the
private sector.
Departmental Indices
In using the index to evaluate the allocation of resources among city services, it is useful to have price
increases by department. For this reason, an index is
created for each of nine traditional departments or
functions within a city (Table 2). In using these indices, two main considerations are relevant. First, the
price increases of items purchased show the impact of
inflation on expenditures in a department. Second,
the size of the department within a city expenditures
reflects the importance that these price increases have
on the aggregate city budget. Thus, a relatively large
increase in prices of items purchased by libraries (77.6
percent) may seem substantial, but libraries do not
represent as large a proportion of the city budget as
police protection, fire protection, or streets for example.
The price increases for two large city departments
- police and fire - are substantial. It cost $171.60 in
1995 for the police department to purchase the same
items that would have cost $100.00 in 1982. Thus, if
spending did not match these increases or productivity improvements were not incorporated, it is likely that
fewer real (constant dollars) resources are available to
provide police protection.
Street construction and repair is also a large city
expenditure but the increases in prices of purchases
were not as large as in some other departments. One
explanation is that petroleum-based products have, in
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Table 3 Price Changes for Selected Purchases
Index
|
1982
|
1987
|
1992
|
1993
|
1994
|
1995
|
Gasoline (CPI)
|
100.0
|
77.4
|
99.0
|
97.7
|
98.2
|
99.8
|
Auto Maintenance &
|
Repair (CPI)
|
100.0
|
114.8
|
141.3
|
145.9
|
150.2
|
154.0
|
Metal & Metal
|
|
|
|
|
|
|
Products (PPI)
|
100.0
|
109.1
|
119.2
|
119.2
|
124.8
|
133.4
|
Machinery &
|
|
|
|
|
|
|
Equipment (PPI)
|
100.0
|
113.4
|
123.4
|
124.0
|
125.1
|
127.0
|
Gas & Electricity (CPI)
|
100.0
|
103.8
|
114.8
|
118.5
|
119.2
|
119.2
|
Concrete & Concrete
|
|
|
|
|
|
|
Ingredients (PPI)
|
100.0
|
111.8
|
119.4
|
123.5
|
128.7
|
135.9
|
Source: U.S. Department of Labor, Bureau of Labor Statistics.
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Page 12 / Illinois Municipal Review / August 1996
some instances, declined from 1982 levels. Also true is
that some cities contract for these services. It is more
difficult to obtain a consistent set of prices when contracting is compared with city expenditures for streets.
Examples of Items Purchased
More detail on the price increases for a sample of
items purchased by cities can help in understanding
the indices. Gasoline, for instance, is approximately
the same price as in 1982 (Table 3) while automotive
maintenance and repair increased 54 percent, according to the Consumer Price Index. Again, the impact
on city expenditures is a function both of the increases in prices but also of the relative amount of the items
purchased. Concrete and concrete ingredients are important in street departments whereas gasoline or auto
maintenance may affect police and fire protection, depending on the municipal accounting system as to
where these services are budgeted.
Conclusions
Keeping track of municipal expenditures and budgeting resources to meet the demands of the public is
not an easy task. Through time, price increases affect
specific departments differently and resources have to
be reallocated to make sure that goals for delivering
services are met. The Municipal Price Index offers yet
another tool to accomplish this task.
In recent years, the impact of inflation on the public sector has exceeded the private sector and will likely continue to do so as long as inflation remains relatively low in the private sector. Municipal employees,
in many instances, have gained in purchasing power.
Should inflation in the private sector increase substantially in the future, these gains may erode. The future
of inflation is a topic of major interest as Federal officials adjust interest rates to stabilize the economy. It is
important to understand that the outcomes of their actions affect city expenditures as well as, if not more
than, families and individuals. •
August 1996 / Illinois Municipal Review / Page 13
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