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School Services of California, Inc.
Community College Update
December 20, 1996
Copyright© 1996 by School Services of California, Inc.
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ASK SSC ...

Effect of CPI Revision on Community
College Statutory COLA

Q. The December 6 issue of the Update recently clarified that the proposed revision to the Consumer Price Index (CPI) would have little, if any, effect on the calculation of the Proposition 98 funding guarantee. What about the potential effect of this change on the calculation of the community college statutory COLA?

A. The proposal (and remember, this is only a proposal) to change the CPI would have no direct effect on the calculation of the community college statutory COLA, which is based on the change in the "Implicit Price Deflator for State and Local Government Purchases in the United States" (Implicit Price Deflator). Adoption of the proposal, however, could indirectly lead to a reduction in the statutory COLA, in two ways.

First, to the extent that the U.S. Department of Commerce were to revise the method used to compute the Implicit Price Deflator in order to correct for the same kinds of problems that have been ascribed to the CPI, this could lead to a reduction in the rate of growth of the Implicit Price Deflator. The exact magnitude of such a reduction would depend upon the specific changes adopted &emdash; but it would probably be nowhere near the 1.1% average annual reduction that is being estimated as a result of the proposed changes to the CPI. (The market basket of goods in the Implicit Price Deflator is not as subject to the kinds of distortion found in the CPI.)

Second, to the extent that labor unions rely on the CPI to push for purchasing power-related wage increases, a slower growth rate for the CPI could help moderate the rate of public employee wage inflation. And, because labor is a significant part of the state and local government market basket of purchases, this could indirectly lead to a (probably slight) reduction in the rate of growth of the Implicit Price Deflator.

Don't panic yet, though. Both of these scenarios depend on a number of assumptions that may or may not ultimately materialize. Key among them is the assumption that the change in the CPI will, in fact, be adopted. As recent news articles indicate, while the proposed change may make sense from an analytical perspective, the political calculus is much more difficult &emdash; given the cuts in CPI-linked public benefits that would result.

&emdash; Ray Reinhard
[Posted 12/20/96]