HEPI VS. CPI - Making Them Both Work for You

Transcription

1 HEPI VS. CPI - Making Them Bth Wrk fr Yu HEPI and the Cnsumer Price Index are bth useful tls fr measuring inflatin but they have t be used apprpriately: HEPI is useful as an verall measure f inflatin affecting the higher educatin sectr, just as cnsumers everywhere use the natinal Cnsumer Price Index as a general measure f family purchasing pwer. In an educatinal cntext, the CPI is mst prperly used t adjust faculty and ther cllege and university persnnel salaries t dllars f cnstant purchasing pwer. Using HEPI HEPI measures the average relative level in the prices f a fixed market basket f gds and services purchased by clleges and universities thrugh currentfund educatinal and general expenditures, excluding expenditures fr research. Educatinal and general expenditures include the functins f instructin and departmental research, extensin and public services, educatinal prgrams such as wrkshps and instructinal institutes supprted by spnsrs utside the institutin, student services, general administratin and expenses, staff benefits, libraries, and peratin and maintenance f the physical plant. Nte that spnsred research, sales and services f educatin departments, and auxiliary enterprises are nt priced by HEPI. The prices measured are natinal average prices, which means that HEPI des nt accunt fr any departure frm available state-f-the-art services and typical quality gds nrmally emplyed by clleges and universities. It fllws that a single natinal price index, such as HEPI, has value in reprting prices fr average quality items. HEPI has five critical characteristics that shuld be kept in mind when using it: HEPI measures general inflatin affecting all clleges and universities in the sectr, nt any specific institutin. In measuring average prices, HEPI reflects the quality f typically emplyed cmmdities. Any institutinal departure in real expenditure frm these averages represents a quality differential.

2 HEPI measures price changes fr a fixed market basket f gds and services, s it des nt accunt fr the budgetary needs f institutins t buy mre r better items t meet enrllment expansin, quality imprvement, and cmpetitin. The market basket has remained fixed ver the years, which means that the index assumes a typical budget weighting f, fr example, the number f gallns f fuel il versus the number f prfessrs. Specialized indices fr specific gegraphic regins and types f institutin are included in the annual HEPI Reprt, but because the data series fr which specialized infrmatin is available accunt fr less than half f the factr weightings in the HEPI equatin, they are f necessity apprximatins and shuld be used accrdingly. Using the CPI The Cnsumer Price Index fr All Urban Cnsumers (CPI), cmpiled by the U.S. Labr Department s Bureau f Labr Statistics (BLS), is a measure f the average change in prices ver time in a fixed market basket f gds and services that peple buy fr day-t-day living. The items priced include fd, clthing, shelter and fuels, transprtatin fares, charges fr dctrs and dentists services, and drugs. Prices are cllected in 85 urban areas acrss the cuntry frm abut 57,000 husing units and apprximately 19,000 retail establishments. All taxes directly assciated with the purchase and use f the items are included in the index. The CPI cvers apprximately 80% f the ttal ppulatin. Separate indices are published by the BLS by regin and fr 27 lcal areas. Technically, the CPI is prperly used nly t adjust the varius incmes and alltments, and cllective typical expenditures f American wrkers t establish general cnsumptin purchasing pwer. Misuse f the index t calculate inflatin fr ther categries f expenditure is misleading in that, at the least, it cnveys a false impressin f accuracy. In an article[ ticktmeasureinflatin.aspx] in Trusteeship magazine, Cmmnfund Institute s Executive Directr, Jhn Griswld, explains the difference between HEPI and CPI and shws hw educatinal institutins can use them t plan fr the future.

3 What's the Best Yardstick t Measure Inflatin? by Jhn Griswld (featured in the July/August 06 editin f Trusteeship One price index helps fficials frecast budget needs and shws why clleges actual csts rise faster than inflatin. The ther is the Cnsumer Price Index. TO SAY THAT TRUSTEES HAVE A LOT ON THEIR PLATES these days risks serius understatement. Bard practices are being scrutinized n everything frm independent audits t financial transparency t whistle-blwer prtectin and much mre. And these are just the challenges that are ut in the pen. There lms anther lng-standing issue that is mre insidius but n less f a risk: inflatin. It s a prblem with bth external and internal facets. Externally, clleges and universities are n the defensive t explain why tuitin rates cntinue t rise faster than inflatin, as measured by the federally cmpiled Cnsumer Price Index (CPI). Internally, trustees becme aware that the prblem is acute as they wrestle with the increasing csts assciated with faculty salaries and benefits, energy, infrmatin technlgy, physical plant maintenance, and ther expenditures mandated by the institutin s missin. Such csts cnsiderably exceeded the 3 percent increase in the CPI fr 2005 and every ther year in recent memry. One tl trustees may find useful in fighting the inflatin wars is the Higher Educatin Price Index, r HEPI. This inflatin index the nly ne if its kind is designed specifically fr higher educatin and is a mre accurate and custmtailred indicatr f cst changes fr clleges and universities than the CPI. Released each July, HEPI has been calculated every year since 1983; in fact, n its riginal release it included histric inflatin data back t (Cmmnfund Institute tk ver the cmpilatin f HEPI last year and plans t evaluate and refine the index ver time. It has frmed an advisry bard f experts t advise it n management f HEPI and t determine future enhancements t its annual reprt, the latest f which is available free f charge at Currently, HEPI is used by sme 19 percent f the 729 institutins respnding t the 2006 Cmmnfund Benchmarks Study Educatinal Endwment Reprt, Cmmnfund s annual natinwide survey f educatinal endwment plicies and practices. This is an increase frm 14 percent the previus year. Ntably, institutins with large endwments $500 millin and larger reprt using HEPI at a significantly higher rate than their smaller cunterparts. Althugh HEPI s reach is grwing, it has lived fr t lng in the shadw f the CPI. Traditinally, CPI is the index that cmmands the headlines, but it s nt an accurate yardstick fr measuring the cnsistently higher csts that clleges must

4 bear and that drive increases in tuitin. In additin t being a better indicatr f the factrs that cntribute t cllege csts, HEPI is a far superir tl fr such key bard and administrative functins as prjecting the need fr budget increases. S the questin is hw can bards and senir administratrs make mre and better use f HEPI? What HEPI Measures. Cmpiled frm data reprted by federal agencies and higher educatin rganizatins, HEPI measures the average relative level f prices in a fixed basket f gds and services typically purchased by clleges and universities each year thrugh current-fund educatinal and general expenditures, excluding research. The index is rganized arund eight categries that cver mst campuses current peratinal csts. These include faculty, administrative, clerical, and service emplyees salaries and fringe benefits; miscellaneus services (such as cmputer prgrammers and auditrs); supplies and materials (such as ffice supplies); and utilities (such as fuel and electricity). HEPI measures price levels frm a designated reference year in which budget weights are assigned. The base year is fiscal 1983 (using a July-t-June fiscal year) and is assigned a price value f 100 fr index cmpilatin. Cmparing ne year s index value with that f anther year reflects relative change. Thus, an index value f 115 represents a 15 percent price increase ver 1983 values. This change als can be expressed in mnetary terms. The price f $100 wrth f gds and services purchased in 1983, fr example, culd be said t have risen t $115. Mvements f the index frm ne year t anther usually are expressed as percentage changes by dividing a later year s value by that f any earlier year and subtracting 1. Thus, an increase in index values frm in 1987 t in 1988, fr example, wuld have been a yearly increase f = 1.07, r +7.0 percent. The tl f a price index measures the effects nly f a price change, as reflected by differences in the price f a fixed grup f items. The prcedure in calculating the index is t measure the price level f purchased items each year, cmparing the aggregate amunt paid with that f the base perid. The amunt and quality f the selected cmmdities that make up the market basket remain cnstant s that nly the effects f price changes are reflected in the index. Under these restrictive cnditins, the annual change in price-index values may be interpreted as the change in dllars required t ffset the effects f inflatin in buying the same kinds and amunts f gds and services purchased frm ne year t the next. Cntrast With the CPI. T appreciate the value f HEPI, it s useful t cmpare it

5 with the CPI. The price f gds and services purchased by clleges and universities frm 1980 t 2000 rse 154 percent, accrding t HEPI measurements, while inflatin measured by the CPI increased 118 percent. Anther significant difference between HEPI and CPI is hw the indices treat changes in quality (the pint mentined earlier abut hlding quality cnstant). HEPI is a straight frward measurement f csts, whereas CPI is a measure f quality-adjusted prices. Fr example, let s say it csts $2,000 t replace an ld cmputer that riginally cst $1,500. The new cmputer, hwever, is twice as fast as the ld ne. HEPI wuld reprt that as a $500 increase, while CPI wuld reprt the new cmputer as a $500 price decrease due t the quality adjustment. Overall, in nly nine f the 45 years that HEPI has been calculated has it been exceeded by the CPI. Lking back ver the past ten years, the rate f price change fr HEPI has averaged abut 3.6 annually versus 2.4 percent fr the CPI. The pint is that HEPI demnstrates that csts fr higher educatin histrically run at a rate substantially higher than the CPI. Fr the public r equally imprtant, the media, regulatrs, and lawmakers t believe therwise is a perceptin prblem that higher educatin fficials need t crrect. T help mre clleges and universities anticipate inflatin and respnd t cncerns abut rising prices, the Cmmnfund Institute has mdified hw it publicizes HEPI data. The U.S. Bureau f Labr Statistics updates CPI statistics mnthly and prvides six-mnth and 12-mnth average changes fr the perids January t June, July t December, and January t December. In January 2006, the Cmmnfund Institute began publishing mnthly HEPI frecasts n its Web site during the last week f each mnth. This is an imprtant step frward because many clleges and universities frmulate budgets in the secnd calendar quarter and cannt wait until the annual HEPI reprt is released in July. In additin, the institute issues a final reprt in July s it can include fficial Julyt-June CPI numbers as a basis fr cmparisn. Just hw imprtant mnthly psting can be is illustrated by the fact that ne categry utilities sared mre than 27 percent in 2006 ver the previus year. Supplies and materials shwed a rise f mre than 8 percent, and administrative salaries rse 5 percent. These were the first categries t be reprted, and they prvided trustees with a prtent f things t cme. Once cst changes in the remaining five categries were determined and added in the verall 2006 increase in HEPI was 5 percent, cmpared with 3.5 percent fr Nw that s significant inflatin. Prjecting Budget Increases. Budgets fr fiscal 2007 are already in place. But given such a significant increase, trustees and business fficers will need t examine current budgets fr pssible verages and be especially watchful as they budget fr the future. This addresses what is perhaps the mst imprtant

6 applicatin f HEPI prjecting the need fr future budget increases required t preserve purchasing pwer. If next year s inflatin affecting current peratins is expected t be 6 percent, fr example, the budget must be increased by this amunt if a cllege r university intends t purchase the same level and quality f gds and services. A discussin f this nature at a budget hearing requires a publicly defensible inflatin frecast. Unfrtunately, the basic nature f price indices in reflecting yearly percentage changes cannt be prjected in the traditinal manner. Incremental changes seldm exhibit trends that can be used fr reliable extraplatins. A tw-year r three-year average increase in an annual percentage change f 3 percent is nt evidence that this phenmenn will cntinue int the future. The sundest means f estimating next year s inflatin is t slightly adjust the rate f the recent past t accunt fr expected changes in the ecnmy. An equivalent three- year cmpund interest rate establishes the recent histry, and it can, f curse, be fully dcumented. This unadjusted rate itself may be selected as the estimate, r if an inflatinary ecnmy is expected, the average can be frecast upward slightly (r dwnward if there is evidence f the ppsite). Nte, hwever, that any departure frm the recent average requires supprting dcumentatin, whereas the cmpund interest rate is a fact. In additin, in general terms a price index cmpiled and published regularly can serve at least three ther majr purpses: 1. Index values may be prjected int the future t estimate the degree f change in expenditures that will be necessitated by anticipated price changes. If price increases are expected, the prjected index values are used t inflate expected real resurce needs t equal future funding requirements in actual dllars. Usually, these real resurce needs are expressed in user-unit terms fr example, cnstant (inflatin-adjusted) dllars per full-time-equivalent student. Budget requests based n a HEPI prjectin accunt nly fr inflatin that is, the prvisin f additinal funding sufficient t purchase the same resurces as acquired in the previus year. Additinal funding fr greater curse lads fr students, prgram expansin, and quality imprvements wuld need t be separately requested and justified. 2. Past expenditures may be cmpared with mvements in a price index t ascertain whether spending has kept pace with changes in prices. Adjusting expenditures by an apprpriate price index t cnvert actual r current dllars t cnstant dllars permits fficials t cmpare the real purchasing pwer f varius funding levels ver time. Similarly, revenues in dllar terms may be deflated by a price index t identify trends in the level f real purchasing pwer f funding by varius surces.

7 3. Price indices may be used t prvide autmatic inflatin adjustments f varius administrative and cntractual transactins. The price charged fr a particular service, fr example, may be tied t input prices r the cst f labr as measured by an apprpriate price index. Finally, the investment cmmittee and bard may wish t use HEPI in frmulating endwment spending plicy and distributin rates. The Value f an Index. What makes an industry-specific price index s valuable is that by reprting nly price increases, withut quality r quantity changes, it is pssible fr fficials t dcument the additinal revenues required t cntinue business as usual. Few financial supprters f the cllege r university wuld deny that funding shuld at least maintain if nt imprve the status qu. Thus, price indices such as HEPI can reliably reprt increased funding requirements that fficials can defend as essential if the institutin is t maintain the same level f services. If quality changes were included in HEPI, as they are in the CPI, then the frce f the argument wuld be lst, because justificatin f the added csts t imprve peratins is seldm bvius. HEPI has been widely recgnized as the nly benchmark t effectively mnitr changes in a cllege r university s purchasing pwer, and many institutins have fund it t be a practical tl in establishing imprtant plicies. At a time when clleges and universities are under public scrutiny t be accuntable fr the price f tuitin and fr their gvernance plicies and practices, HEPI is a great public-infrmatin tl t help key cnstituencies understand the higher csts institutins must absrb in the prcess f fulfilling their missins.