Consumer Price Index: What It Means To Us

MARCH 2005
- First Step Toward Cost-Of-Living - When it comes to reporting on cost-of-living adjustments (COLA) on
your pension, you've read or heard us referring to the Consumer Price
Index or CPI. What is the CPI and why is it important to us?

According
to Legislative Chairman Bill Hill, "You can look at the CPI as the
measuring device on how the price for goods and services has either
increased or decreased over a period of time (i.e., monthly, annually,
etc.). Each month, a federal agency, known as the Bureau of Labor
Statistics, collects and analyzes the prices of food, drugs, clothing,
shelter, fuels, doctor/dentist services and other items across the
country .

"From their analysis,
Labor Statistics is able to calculate the CPI or how prices have
changed - up or down - during that month. They report their findings by
the middle of the following month.

"Typically
we see that the CPI increases each month by a certain percentage. But
there are exceptions to the cost-of-living increasing each month, and
we've recently witnessed that very thing when Labor Statistics
announced in January that the CPI had gone down during the month of
December by four-tenths of a percent or, as they term it, a -0.4%.

It's
important to note that Labor Statistics reports on different CPIs,
including one for what they call urban consumers and another for urban
workers. The one, on which we focus our attention, is the CPI for urban
workers or the CPI-W.

Triggers State and Local COLAs

"We
closely monitor reports on the CPI-W over a very specific 12-month
cycle, which starts each October and ends the following September,"
comments Hill. "And here's why."

When
our current COLA law (Chapter 17) was enacted in 1997, it was decided
that Social Security's method for determining its annual COLA would
serve as the trigger for COLAs in the Commonwealth. After Social
Security has determined its COLA and the results have been reported,
local retirement boards, as well as the state legislature for retired
state employees and teachers, can then begin the process of determining
the COLA for their retirees.

To
determine how much of a COLA will be paid commencing January of each
year, Social Security bases its calculations on the CPI changes that
occurred during a 12-month cycle that starts every October and
continues through the next September. After this cycle has been
completed, Social Security then basically compares what the CPI was at
the beginning to what it is when the cycle ended. If it indicates that
the CPI has gone up, then Social Security will set the percent of the
CPI increase as the COLA for the next calendar year.

For
example, those, receiving Social Security checks, saw a 2.7% COLA
increase in their January 2005 checks. That COLA increase was based
upon Social Security comparing the CPI changes at the beginning and end
of the October 2003 - September 2004 cycle. It determined that the CPI
had increased by 2.7% and in October announced that percentage as the
2005 COLA. Social Security's COLA announcement has triggered action by
local retirement boards on their COLAs, to be paid to eligible retirees
this upcoming July.

"We must
remember that the Social Security's CPI calculations are a first step
toward the COLA decisions made here at the state and local levels,"
stressed Hill. "Under our pension law, local retirement boards have the
discretion to establish an annual COLA above the CPI up to 3%, and
almost all have done so.

"Regardless
that the CPI calculations are not the final and absolute word on the
state and local COLAs, there's no question that they carry considerable
weight. As we've done over the years, we will continue to watch and
report on important developments concerning the CPI."

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