CPI Changes for Washington Indices Effective January 1

On January 1, 2018, the Consumer Price Index (CPI) will begin to implement its update for sampling areas. The CPI is one of the most widely used measures of inflation by both government and private sector organizations. It provides information about price changes in the nation's economy in the areas of government, business, labor, and consumer spending. It is used by each of these interests as a guide to making economic decisions.

Historically, new sampling areas were implemented after each decennial census: however, the impacts of collection costs required a new methodology. This is the first rotation of geographic sampling since 1998 and will reduce the urban sampling areas from 87 to 75. These areas will consist of large, medium, and small population samplings.

Currently the Bureau of Labor Statistics (BLS) publishes the CPI-U (urban consumers), which covers approximately 87% of the US population. Under the new geographic sampling of core-based statistical areas (CBSA), CPI-U coverage will increase to 94% of the US population and the published areas will be reduced from 27 to 23. Three of these 23 areas will be published monthly and 20 will be published bimonthly. There will be no semi-annual published areas.

The first indexes using the new structure will be published in February 2018.

Impact on Washington State

Through the end of 2017, there are two primary sampling units (PSU’s) in Washington

• Seattle-Tacoma-Bremerton, WA (Island, King, Kitsap, Pierce, Snohomish, and Thurston Counties)
• Portland-Salem, OR-WA (Counties specific to the Portland/Salem area, plus Washington’s Clark and Skamania counties)

On January 1, 2018, the Seattle/Tacoma/Bremerton index will be redefined and renamed to the Seattle/Tacoma/Bellevue index, consisting of King, Pierce, and Snohomish counties. This Washington state index will no longer include Island, Kitsap, or Thurston counties. The redefined index will continue to be published on a bimonthly basis during even months (February, April, June, August, October, and December) with the first publication in February 2018.

The Portland/Salem-OR-WA index (which includes Clark and Skamania counties) will see more drastic changes. The new geographic design and sampling criteria used population/size as a qualifying factor and the Portland/Salem index fell below the population threshold, which means it will no longer be published on a semi-annual basis. However, the Portland/Salem-OR-WA CBSA will continue to be part of the sampling areas as a non-self-representing PSU in the Western region and Pacific Division.

What Does This Mean for Local Governments?

Many Washington local government entities that use the CPI will be affected by these geographic changes in some way or another.

The CPI is often used to adjust consumers' income payments (e.g., Social Security), to adjust income eligibility levels for government assistance, and, frequently, as the basis of cost-of-living adjustments (COLA) for employees who are part of collective bargaining agreements.

The CPI is also used for pension payments to those local government retirees enrolled in the state's Retirement System (DRS). As a result, the CPI affects the income of most of the individuals who are currently working for and/or have retired from local government jurisdictions in Washington State. The WA State legislature has legislatively set the Seattle-Area (CPI-W) as the index to use when calculating COLA for retirees in the DRS system.

It will be important for local government entities that use the CPI in collective bargaining agreements to evaluate the impacts of the changes to the CPI indices. For example, if your entity was using the Portland-Salem-WA-OR index in your collective bargaining or other service agreements you will need to consider which index to use in the future. For those using the Seattle-Tacoma-Bremerton index, will the new geographic area of Seattle-Tacoma-Bellevue have an impact? The results of these changes will be realized over the course of the BLS transition period.

The BLS has an explanatory article on the impacts and anticipated variables associated with the new geographic sampling. Titled 2018 revision of the Consumer Price Index geographic sample, this document will assist with your analysis of these changes and what, if any, impacts may be realized as a result of the shift in geographic sampling.

Which is the Most Appropriate CPI Index to Use?

Each month, indexes are published along with percent changes for month-to-month and the year-over-year (12-month) change for the US City Average CPI-U and CPI-W, as well as the four regions (Northeast, Midwest, South and West). Beginning in January 2018, the BLS will publish new indexes for nine Census divisions within the regions. The West region will include new Mountain and Pacific census divisions.

MRSC has long recommended, along with the BLS, that local governments use the national or regional CPIs for escalator clauses. These indexes are more stable and subject to less sampling errors due to the fact that they are more statistically reliable. The BLS has prepared a fact sheet to assist with your decision making process titled, How to Use the Consumer Price Index for Escalation. Utilizing tools such as these will assist you with this important decision.

The decision to use the CPI as an escalation mechanism and which index is the most appropriate to use is up to each local government entity. The methodology of using one escalation measure over another should be reviewed by management, legal, and financial staff. There is no right or wrong answer, but the decision to use a CPI index should be spelled out clearly within any collective bargaining agreements and/or service agreements to avoid any potential conflicts in the future. 

Questions? Comments?

If you have any questions about other local government finance issues, please use our Ask MRSC form or call us at (206) 625-1300 or (800) 933-6772. If you have comments about this blog post, please comment below or email Toni Nelson at tnelson@mrsc.org.