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PERSPECTIVES




A

f&Mrn

Public u tility ta x a tio n
in Illinois
Foreign d ereg u la tio n , a g ricu ltu ra l
c re d it problem s h ig h lig h t
bank co n feren ce
M e tro m etrics

C ontents
ECONOMIC PERSPECTIVES
July/August 1985

Volume IX, Issue 4

Editorial Committee

Harvey Rosenblum, vice president and
associate director of research
Robert Laurent, research economist
John J. Di Clemente, research economist
Edward G. Nash, editor
Christine Pavel, assistant editor
Gloria Hull, editorial assistant
Roger Thryselius, graphics
Nancy Ahlstrom, typesetting
Rita Molloy, typesetter

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ISSN 0164-0682



Public utility taxation
in Illinois

The state's taxes on gas, electricity, and
phone calls, higher than average
and regressivefor low-income
consumers, are easy to collect and
relatively stable sources of revenue

Foreign deregulation, agricultural
credit problems highlight
bank conference

Safety and soundness and deposit
insurance schemes were other topics
that concerned the bankers, economists,
and regulators at the 21st annual
Bank Structure Conference

Metro metrics

Defining metropolitan areas is no easy
matter, but experts mix people, patterns,
and political realities to come up
with useful classifications

Public utility taxation in Illinois
Diane F. Siegel and William A. Testa
Taxation of natural gas, electricity, and
telephone utility revenues has become an im­
portant source of state and local government
revenue in Illinois. Rising costs of fossil fuels
and electric power plant construction have
caused utility tax revenues to grow more rap­
idly than such other revenue sources as general
sales and property taxes. The increase in utility
taxes has been especially dramatic in those
municipalities, such as the City of Chicago,
that have raised tax rates on the expanding
utility tax base. The rapid growth of state and
local utility taxes in Illinois is of special concern
because the state has one of the highest utility
tax levels in the nation.
This paper analyzes the Illinois utility
taxes in terms of their likely impact on eco­
nomic growth, their fairness to taxpayers, and
their contribution to state and local fiscal sta­
bility. Our findings indicate that the Illinois
utility taxes add to the state’s relatively high
energy utility prices. Another drawback of the
state’s utility tax system is that its burden falls
most heavily on low-income taxpayers. How­
ever, the utility taxes do provide a stable source
of revenue for state and local governments, and
their costs of administration and taxpayer
compliance are quite low.
Growth of utility taxation in Illinois

Both state and municipal governments in
Illinois tax the gross receipts of utility sales un­
der selective excise taxes. The state tax applies
to sales of natural gas, electricity, and intrastate
messages. Local governments are allowed to
tax these three utilities as well as water services.
Together, state and local utility tax revenue
amounted to $959 million in fiscal 1983, twothirds collected by the state government and
one-third by municipal governments (Table 1).
While one out of five Illinois cities taxes one or
more utility services, the City of Chicago ac­
counts for over three-fourths of all local utility
tax revenues.
has been levied
at a five percent rate since 1967. In fiscal 1984,
the state government collected $652 million

The Illinois state utility tax

Federal Reserve Bank of Chicago




from the utility tax. Electricity receipts con­
tributed 47 percent of that amount, while gas
and telephone utilities contributed 33 percent
and 20 percent respectively.
Since the late 1960s, state utility tax rev­
enues have consistently grown faster than the
rate of inflation. This is demonstrated by the
increase in the index of constant dollar utility
tax revenue relative to the 1968 level (Figure
1). Real state utility tax revenues increased by
roughly five percent per year, on average, from
1968 to 1974, with gas, electricity and message
revenues all growing at approximately the
same rate. Total utility tax revenues continued
this real growth rate from 1974 to 1983, but the
growth of the individual components diverged.
The constant dollar revenues from intrastate
telephone services remained fairly stagnant, but
the growth of real gas and electricity revenues
accelerated following the dramatic increase in
world energy prices.
The rapid growth in public utility tax
revenues has increased the tax’s importance to
the state’s revenue system. Utility tax revenues
as a share of total state taxes grew from 5.0
percent in fiscal 1970 to 7.5 percent in fiscal
1984. Growth in the utility tax revenues ex­
ceeded the growth in the general sales tax, the
other selective excise taxes, and the state in­
come tax. The corporate income tax was the
only major state tax to increase faster than the
public utility tax since 1970, and its growth was
partly attributable to the addition of the per­
sonal property tax replacement surcharge in
1979.
Local utility taxes in Illinois. Public utility
taxes have also been an expanding source of
revenue for local governments in Illinois since
the early 1970s, generally outpacing local
property and sales taxes. All municipalities,
except Chicago, are limited to a maximum
public utility tax rate of five percent on gross
receipts from the sale of electric, natural gas,
Diane F. Siegel is an associate economist and William A.
Testa is an economist at the Federal Reserve Bank of
Chicago. The authors thank Georgia Stefanski for valuable
assistance and Gary Koppenhaver and Donna Vandenbrink
for useful comments.
3

Table 1
Illinois s ta te and local public u tility tax revenues
fiscal years 1970-1984
State revenue
Fiscal
year

M illion
dollars

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984

144
158
175
189
209
248
277
329
372
429
470
526
595
607
652

Total local revenue

Percent
of taxes

M illion
dollars

5.0
5.0
5.2
5.1
5.1
5.6
5.8
6.2
6.4
6.8
6.6
7.2
8.0
8.2
7.5

n.a.
74
82
89
95
118
143
162
183
207
229
255
295
352
n.a.

Percent
of taxes
n.a.
2.8
2.7
2.8
2.5
3.2
3.7
3.7
4.0
4.2
4.3
4.3
4.7
5.0
n.a.

City of Chicago revenue
M illion
dollars

Percent
of taxes

55
60
66
71
75
95
111
123
141
158
175
192
222
267
285

14.5
13.3
13.6
12.6
13.5
16.0
17.9
18.9
21.1
22.0
23.8
24.2
25.4
26.2
24.1

SOURCES: City of Chicago, Illinois Department of Revenue, and U.S. Bureau of the Census.

water, and message services. Not all munici­
palities tax all utility services at the maximum
rate. Many impose the tax at a lower rate,
many do not tax all types of utility services,
and some Illinois communities do not tax util­
ity receipts at all.
The City of Chicago effectively taxes
electric, natural gas, and telephone receipts at
an eight percent rate, although for electric and
telephone services this rate is achieved through
the combination of two separate taxes. One is
a public utility tax that is similar to the state
and other local utility taxes in that it is col­
lected by the utilities from the customers. The
other tax is a franchise tax on gross receipts
that the utility pays directly to the city. Unlike
the utility tax, the franchise tax does not ap­
pear on customer billings. There is no fran­
chise tax on natural gas sales, but the city’s
utility tax covers natural gas receipts at an
eight percent rate. This was increased from
five percent in July 1981.
In fiscal 1983, Illinois municipalities
raised a total of $352 million from public utility
taxes with the great bulk collected by the City
of Chicago (Table 1). Local utility taxes grew
from 2.8 percent of total local taxes in fiscal
1971 to 5.0 percent in fiscal 1983. As with the
state utility tax, the growth in local public
utility tax revenues was spurred by the energy
4




price increases in the 1970s and 1980s, though
statutory tax rate increases also contributed.
In Chicago the importance of utility taxes
to the city budget has grown tremendously.
From fiscal 1970 to 1984, the utility tax share
of total city tax revenues increased from 14.5
to 24.1 percent. Over the same period, the
contribution of the city sales tax grew much
Figure 1
C o n s ta n t d o lla r in d ex of s ta te
u tility ta x re v e n u e in Illino is
in d e x , 1 9 6 8 = 1 0 0

Economic Perspectives

more slowly, from 13.5 to 17.2 percent, and the
contribution of the property tax fell from 59.0
to 34.5 percent.
Interstate comparison of utility tax levels

Public utility taxes in Illinois have been
controversial not only because of their rapid
growth, but also because many contend that
the Illinois utility taxes are very high relative
to those in other states. Concern about the
level of utility taxes in Illinois increased as
utility prices rose, stimulating some support for
proposals to lower the state’s utility tax.1 This
section of the paper conducts a comprehensive
comparison of utility receipts taxation across
states and finds that Illinois does have one of
the highest utility tax levels in the country.
Interstate comparison of public utility
taxation is complicated because utility receipts
are covered under different types of taxes across
states. Many states levy a separate tax on
public utilities as Illinois does, while others tax
utility receipts under their general sales taxes.
There are twenty-two states which cover utility
receipts under both a sales tax and a separate
utility excise tax. Furthermore, in many states
public utility receipts are taxed at the local
level under general sales taxes or selective util­

ity excise taxes. The economic effects of these
different forms of utility taxation should be
very similar. For this reason, our utility tax
comparison includes all taxes which apply to
public utility receipts or sales at the state and
local levels.
There is also substantial variation across
states in the type of utility service covered and
the basis of taxation. Most often, utility taxes
are imposed on utilities’ gross receipts, but in
a few states they apply to units of service sold,
miles of line for transportation utilities, or miles
of poles for telephone companies. To simplify
our comparison of utility tax levels, we focus
on the total revenues collected by such taxes in
each state.2
It is not enough to compare utility tax
collections across states, however. The relative
level of utility taxation in each state is best in­
dicated by revenue measures that correct for
differences in state size and taxable resources.
Our interstate comparison is based on four such
measures: the ratios of utility tax revenues to
state general revenues, population, income, and
total utility sales. The top ten states according
to each measure in fiscal 1982 are shown in
Table 2. Illinois ranks very high by each of
these criteria.

Table 2
Ten states w ith highest levels o f public u tility ta x a tio n
according to fo u r measures, fiscal year 1982
Revenues as a
percent of state
& local own
source general
revenue
Florida
New Jersey

New York
New Jersey

West Virginia
Missouri
New York
Alabama
Connecticut
Arizona
Hawaii

5.3%
5.2
5.1
5.0
4.7
4.6
4.3
4.3
4.1
4.0

Hawaii
Florida
Connecticut
West Virginia
Arizona
Rhode Island
Pennsylvania

50-state mean
std. dev.

2.5
1.5

50-state mean
std. dev.

Illin o is

Revenues
per $1,000
personal income

Revenues
per capita

Illin o is

$103.79
89.51
77.77
75.85
69.76
69.51
65.71
61.77,
56.46
55.53
38.57
22.99

New York
West Virginia
New Jersey
Hawaii
Florida
Illin o is

Arizona
Alabama
Missouri
Rhode Island
50-state mean
std. dev.

$9.05
7.82
7.40
6.87
6.84
6.70
6.33
6.27
5.63.
5.571
3.82
2.12

Revenues as a
percent of
standard base
New York
New Jersey
Hawaii
West Virginia
Florida
Washington
Connecticut
Rhode Island
Missouri

12.7%
9.2
8.3
8.18
8.18
8.17
8.1
7.6
7.5
6.9

50-state mean
std. dev.

4.5
2.7

Illin o is

Rhode Island's tax revenues are understated because information on revenues from taxation of public utility receipts under the state
sales tax was not available. This understatement is probably small because Rhode Island's state sales tax does not apply to residential
or manufacturing purchases of public utility services.

Federal Reserve Bank of Chicago




5

Figure 2
S ta te and local u tility ta x e ffo rt by s ta te -1 9 8 2

to p te n s ta te s

o th e r a b o v e a v e ra g e s ta te s

The first measure indicates the impor­
tance of utility taxes to state and local govern­
ments by their contribution to state and local
own source general revenue (column l).3
Illinois is third among states with 5.1 percent
of all state and local tax revenues contributed
by utility taxation. The two states which lead
the list outrank Illinois only slightly. Utility
tax revenues contributed 5.3 percent of state
and local own source general revenue in
Florida and 5.2 percent in New Jersey.
Measures of utility tax revenue per capita
and per SI000 of personal income (columns 2
and 3) are used to estimate the burden of utility
taxation on state residents. Illinois utility taxes
rank third in the country on a per capita basis
and, because of high personal incomes in the
state, sixth in utility tax revenue per SI000 of
personal income. These ratios suggest that
utility tax burdens on Illinois taxpayers are
higher than in most states, assuming the taxes
are borne fully by state residents.
Finally, we measure tax collections rela­
tive to the expenditure on utility services in the
state (column 4).4 This measure reflects the de­
gree to which each state employs the taxable
base, utility consumption, as a tax source.
6




b e lo w a v e ra g e s ta te s

Comparisons using this “tax effort” or effective
rate correct for the fact that utility consump­
tion varies across states due to industry mix,
climate, and proximity to energy sources. If
utility taxes are largely passed forward to final
customers, this measure estimates the extent to
which the taxes raise utility prices.
Illinois ranks eighth in the nation ac­
cording to this measure, with an effective tax
rate of 7.6 percent compared to a 4.5 percent
50-state average. The fact that Illinois ranks
a little lower according to the tax effort index
suggests that its taxable base of utility sales
slightly exceeds that of the other high utility
tax states.
Figure 2 compares the utility tax effort
levels of all 50 states. High utility taxes appear
much more prevalent in the eastern half of the
country. Of all the midwestern states, Illinois
has the highest utility tax effort, though it is
closely followed by Missouri.
The four tax level measures all indicate
that the Illinois utility taxes are among the
highest in the nation. Such high utility taxes
might have adverse effects on business expan­
sion and income distribution in the state. A
further concern is whether the tax is a reliable
Economic Perspectives

source of financing for government services
through economic upturns and downturns.
The following sections consider the implications
of the Illinois public utility taxes for economic
development, utility consumers, and state-local
governments.
Implications for economic development

The relatively high utility tax levels in
Illinois may adversely affect economic growth
in two ways. First, the tax may raise utility
prices relative to other production inputs so
that businesses will substitute other inputs for
the taxed utilities. This use of resources will
be less efficient because it is not based on prices
that reflect the true scarcity of inputs. Second,
if the tax raises industrial utility prices in
Illinois relative to those in other states, it may
discourage energy-intensive industries from lo­
cating or expanding in Illinois.
The
Illinois sales tax does not cover sales of inter­
mediate goods used in production, including
utility services.5 However, the Illinois utility
excise taxes cover both commercial and indus­
trial sales. As a result, firm decisions concern­
ing choice of input mix and production method
are affected by the uneven tax coverage of in­
puts. To the extent that utility taxes raise the
price of utilities relative to substitutes, pro­
duction choices are based on prices that do not
reflect the scarcity value of alternative inputs.
The use of utility services is discouraged in fa­
vor of substitute inputs to production.
This effect may be partly offset by Illinois
sales taxation of the closest substitutes to gas
and electricity, such as fuel oil and coal.
Illinois levies a sales tax on these products at
an identical five percent rate so that production
choices between alternative fuels are not neces­
sarily distorted because taxes raise fuel prices
proportionately. Local tax treatment of alter­
native fuels, however, is often more diverse be­
cause local sales taxes in Illinois seldom exceed
one percent while municipal utility taxes are
often higher.
The taxation of utility inputs to pro­
duction also results in inordinate tax burdens
on those goods, both final consumer and inter­
mediate producer goods, that use utility ser­
vices intensively in their production process.
This leads to multiple taxation and the upward

Utility taxation and resource use.

Digitized Federal Reserve Bank of Chicago
for FRASER


skewing of prices of certain final goods. These
goods are taxed once under the utility tax be­
cause final prices reflect embodied taxed utility
services, and they are taxed once again by the
retail sales tax. In the case of final consumer
goods, utility-intensive product prices and the
attendant consumer choices are thus distorted.
Similarly, prices of utility-intensive intermedi­
ate goods in production reflect utility taxation
so that firm choices among production methods
are also affected.
An additional
concern is that utility taxes may discourage in­
dustry from locating or expanding in Illinois
by ultimately raising utility prices and total
production costs in comparison to neighboring
regions. Because utility costs account for a
small share of production cost for most indus­
tries, wide utility price disparities across lo­
cations are necessary to generate significant
regional differences in profitability and hence
to affect location or investment decisions.
Total gas plus electric cost per dollar of
value added in manufacturing provides one
measure of the importance of utility costs to
Illinois industry. As Table 3 shows, utility costs
are not a large cost component for most Illinois
manufacturers. In 1980, total manufacturing
outlays on utility services amounted to only
four percent of value added. Only one major
Illinois industry, primary metals, consumed gas
and electricity at far above the average for all
manufacturers. Other industries reported out­
lays on utilities in the one to six percent range.
The extent to which Illinois utility taxes
increase utility prices can be estimated by util­
ity revenues as a percent of utility sales for all
end uses (Table 2, column 4). This measure
yields an average potential tax-induced price
hike assuming that taxes are largely passed
forward in utility prices. Here we find that, on
average, state and local tax policies in Illinois
tend to raise utility prices three percent above
the 50-state mean and approximately seven to
eight percent in relation to low tax states.1
’
For industrial prices specifically, these es­
timated price add-ons understate the potential
price markup because many states exempt na­
tural gas and electricity, along with other fuels,
that are used directly in industrial production
(Figure 3). Thirty states, including Illinois, tax
industrial gas or electricity sales under a selec­
tive utility tax. Thirty states levy a sales tax

Utility taxes and investment.

7

Table 3
Energy u tility costs (n atu ral gas plus e le ctric)
as a share o f value-added in m anufacturing
fo r Illinois and U .S .—1980
Utility cost/
value added
U.S.

Illinois

(percent)
SIC 20 - Food and kindred products
SIC 21 - Tobacco manufacturers
SIC 22 - Textile mill products
SIC 23 - Apparel and other textile
SIC 24 - Lumber and wood prods.
SIC 25 - Furniture and fixtures
SIC 26 - Paper and allied prods.
SIC 27 - Printing and publishing
SIC 28 - Chemicals and allied prods.
SIC 29 - Petroleum and coal prods.
SIC 30 - Rubber, misc. plastics
SIC 31 - Leather and leather prods.
SIC 32 - Stone, clay, glass prods.
SIC 33 - Primary metals
SIC 34 - Fabricated metal prods.
SIC 35 - Machinery, except elec.
SIC 36 - Electric, Electronic equip.
SIC 37 - Transportation equip.
SIC 38 - Instruments, related prod.
SIC 39 - Misc. manu. prods.
All manufacturers

3.9
1.1
5.9
1.4
3.5
1.9
9.0
1.2
9.5
14.4
4.8
1.7
10.5
14.4
2.8
1.7
1.9
2.1
1.2
1.7
4.7

4.4
—
—

1.5
—

2.2
4.7
1.4
5.2
—

5.8
—
—
15.5
3.2
2.0
2.0
1.8
1.8
1.9
4.0

SOURCE: U.S. Department of Commerce, Annual Survey of
Manufacturers, May 1984.

on gas or electricity sales; however, 19 of those
either exempt or partially exempt industrial
fuel use. Due to this widespread exemption
practice, the U.S. average utility tax on indus­
trial utility sales likely falls short of the 4.5
percent mean measured over all end uses re­
ported in Table 2. Accordingly, the Illinois 7.6
percent markup from gross utility receipts tax­
ation looms somewhat larger in comparison.
Industrial utility tax differences are par­
ticularly notable in relation to neighboring
states. The state sales taxes in the nearby states
of Iowa, Michigan, and Indiana cover utility
sales but exempt gas and electricity used in in­
dustrial production. The Kentucky and
Missouri sales taxes offer partial exempdons to
one or more utility services (Figure 3). Utility
price differences among neighboring states are
expected to be important to business location
choices because other factor costs, such as labor
and transportation, often diverge less within
the same general region.
These findings notwithstanding, utility
taxes alone probably cannot cause price dis­
parities large enough to significantly affect in­
vestment decisions in Illinois because utility
8



costs remain a lesser cost consideration in pro­
duction. However, utility tax reform can con­
tribute to a broader set of policies intended to
maintain competitive utility prices in Illinois.
Such policies could improve the state’s business
climate if utility prices greatly were to exceed
those in neighboring states and regions.
Industrial gas and electricity prices in
Illinois exceeded the national average and
those in most neighboring states in 1981 (Table
4). Illinois natural gas prices compared more
favorably than electricity prices to prices in
neighboring states and the national average.
Gas prices in some parts of Illinois, such as the
Chicago area, benefit from regulated contract
prices on older vintage natural gas wells under
the Natural Gas Policy Act of 1978. However,
as these particular reserves of natural gas are
exhausted over time, Illinois natural gas prices
may rise relative to prices in other states.
Electricity prices in Illinois were much
greater than those in most neighboring states
and the nation in 1981. This electricity price
differential did not change significantly in the
period from 1974 to 1981. However, the am­
bitious nuclear program in Illinois may widen
these price differences further in the near future
as the costs of completed nuclear power plants
are passed along in customer billings. As of
March, 1985, four nuclear power plants in
Illinois remain under construction.
In summary, although utility prices in
Illinois are not now critically out of line with
other regions, utility prices, especially electric­
ity, are higher than those in neighboring states,
and they could increase further in coming
years. Retrenchment of utility taxation on in­
dustrial and commercial use cannot, by itself,
lower comparative utility prices to a degree
that would significantly encourage economic
development. However, if Illinois utility prices
become uncompetitive in coming years, utility
tax reform may grow increasingly attractive
when packaged with other price containment
policies.
Implications for residential consumers

In addition to its potential impact on
business development, the Illinois public utility
tax may also influence the consumption pat­
terns and welfare of residential utility custom­
ers. We find little indication that the utility tax
does alter consumer behavior, but there is subEconomic Perspectives

U tility ta x a tio n in Seventh D is tric t states

Gross receipts tax
State

Sales and use tax

Local

State

Local

Major sales
tax exemptions

Effective
tax rate

Illinois

5%

0-5%**

X

X

no sales tax coverage
of utilities

7.6

Indiana

X

X

5%

X

gas and electricity used
in industrial processing

2.3

Iowa

X

X

4%

X

gas and electricity used
in industrial processing

2.4

Michigan

X

5%

4%

X

gas and electricity used
in industrial processing

2.7

Wisconsin

rate
varies

X

5%

X

gas and electricity for
both residential and
agricultural use from
November to April.

5.7

'Utilities taxes in all the Seventh District States cover natural gas, electricity, and intrastate message receipts. Some also
include sales by water, steam, and car line companies.
" T h e City of Chicago effectively taxes gross receipts at 8 percent.
X—means the tax does not apply to utility receipts.

Utility taxation practices vary widely
among Seventh District states. In Illinois,
utility receipts are taxed at both the state
and local levels. Taken together, these
taxes cover the estimated utility tax base
at a 7.6 percent rate, which exceeds the
4.5 percent for all states. In addition to
the five percent state tax on gas, electric­
ity, and intrastate messages, approxi­
mately 230 Illinois municipalities (18
percent) tax one or more utility services
at rates up to five percent. The City of
Chicago taxes utility receipts at an eight
percent rate through a combination of
business franchise and gross receipts taxes.
Wisconsin also taxes utility sales at
an effective rate greater than the national
average. This is accomplished through a
combination of utility gross receipts taxa­
tion and state sales tax coverage of utility

Federal Reserve Bank of Chicago



services. Wisconsin is the only Seventh
District state to target tax relief to resi­
dential consumers by exempting home
utility sales from taxation during the cold
weather season.
The states of Iowa, Indiana, and
Michigan share similar utility tax levels
and administrative practices. Their statelocal tax effort, at approximately two and
one-half percent of utility sales, falls below
the national average. In practice, these
states include utility services in their state
sales taxes but exempt fuel used in indus­
trial processing. At the local government
level, the city of Detroit alone imposes a
sales-type tax on utility services. This is
achieved by a five percent levy on gross
receipts which is earmarked for wage and
salary disbursements to Detroit policemen.

9

Figure 3
S ta te g o v e rn m e n t ta x a tio n of u tility s e rv ic e s (g as or e le c tric )
u sed by in d u s tria l c u s to m e rs - 1 9 8 3

n e ith e r ta x

p u b lic u tility

g e n e ra l sales

both ta x e s

t p a rtia l e x e m p tio n o r lo w e r ra te u n d e r sales tax

stantial evidence that the tax alters the distri­
bution of income in the state by falling more
heavily on low income households.
Utility
taxadon can influence consumption behavior if
it changes the relative prices of consumer goods
and services. Therefore, the utility tax must
be compared with other consumer taxes, par­
ticularly state and local sales taxes, which affect
the prices of non-utility goods and services.
The State of Illinois imposes a sales tax
of five percent on the purchase and use of tan­
gible property. This sales tax base is narrower
than in many other states because it excludes
services and utility sales. The Illinois state
public utility tax effectively broadens the base
of consumer taxation at the state level by tax­
ing residential udlity sales at a five percent rate.
Since the utility tax increases the number of
consumer purchases taxed at five percent, it
generally enhances the consumer price neu­
trality of the state tax system.
The neutrality of utility taxation at the
state level is not always achieved at the local
level in Illinois. Many municipalities impose
utility tax rates that exceed or fall below the
Utility taxes and consumer prices.

70




local sales tax rate. The City of Chicago is an
extreme example for it imposes an eight percent
tax on utilities and a two percent tax on gen­
eral retail sales. In the absence of other offset­
ting government policies, this can be expected
to raise Chicago utility prices relative to other
consumption goods.
A more seri­
ous concern about the Illinois utility taxes is
that their burden may fall inordinately on
low-income households. If low-income people
spend a greater share of their income on utili­
ties, the utility tax will take up a greater share
of their income. Such a tax is called a regres­
sive tax and is often considered inequitable be­
cause it redistributes income away from
low-income people.
The Illinois state public utility tax does
appear to be highly regressive. Because the
utility tax is proportional to total utility ex­
penditure, the equity of the tax can be inferred
from the schedule of utility expenditure by in­
come level. Figure 4 shows that in Illinois
spending on natural gas and electricity as a
share of household income declines dramat­
ically as income rises. Households with the
The equity of utility taxation.

Economic Perspectives

Table 4
Average cost o f natural gas and
e le c tric ity delivered to m anufacturers
1974 to 1981
Ratio of
Illinois price
to other regions
1974

1981

1974

1981

.80
.68

3.47
3.20

1.00
1.17

1.00
1.08

.72
.64
.70
.92
.65
.80

3.05
3.01
3.26
3.62
3.32
3.84

1.11
1.25
1.14
.87
1.23
1.00

1.14
1.15
1.06
.96
1.05
.90

1.6
1.4

4.6
3.8

1.00
1.18

1.00
1.19

1.2
1.6
.9
1.8
1.4
1.7

3.5
3.8
3.2
4.8
3.5
3.9

1.36
1.05
1.77
.91
1.13
.96

1.30
1.21
1.42
.95
1.31
1.18

Natural gas ($/mcf)
Illinois
U.S.
Neighboring states
Indiana
Iowa
Kentucky
Michigan
Missouri
Wisconsin
Electricity (C/kwh)
Illinois
U.S.
Neighboring states
Indiana
Iowa
Kentucky
Michigan
Missouri
Wisconsin

SOURCE: U.S. Department of Commerce, Bureau of the Cen­
sus, Annual Survey of Manufacturers 1974 and 1982 Census
of Manufacturers.

highest ten percent of income had a ratio of
utility expenditure to income that was less than
one-tenth the ratio for households with the
lowest ten percent of income.
The utility expenditure rate declines very
steeply at the beginning of the schedule, par­
ticularly over the first three income deciles.
Over 25 percent of money income was spent
on gas and electricity in those households in the
lowest decile in 1979. The second income
decile paid slightly less than 12 percent and the
third decile paid less than eight percent of in­
come on utilities.
In addition, there is evidence that utility
taxation has become more regressive since the
early 1970s. This trend can be most easily
demonstrated by the change in income
elasticity of utility expenditures over time. The
elasticity measure summarizes tax regressivity
by computing the ratio of the percentage
change in utility expenditure to the percentage
change in income level. Since the utility tax is
directly proportional to utility expenditures,
Federal Reserve Bank ol Chicago




the income elasticity of the tax is identical to
the elasticity measure for total utility expendi­
tures. An elasticity estimate less than one in­
dicates that the tax is regressive because the tax
burden does not rise proportionately with in­
come. An elasticity estimate greater than one
suggests that the tax is progressive because it
rises more rapidly than income.
We estimate the income elasticity of util­
ity expenditure from data on consumer spend­
ing in the Central Census Region for 1972-73
to be 0.39.7 This low elasticity measure rein­
forces our conclusion that the Illinois tax is
highly regressive. By 1980-81, the region’s in­
come elasticity estimate had fallen to 0.17, in­
dicating that utility taxation had grown even
more regressive.
This increase in the regressivity of utility
taxation appears to be due to the slower ad­
justment by low income households to the real
increase in energy prices that occurred in the
1970s. The quadrupling of world oil prices,
accompanied by rising prices of associated fu­
els, sparked a significant investment in
weatherization improvements in the household
sector. Construction methods were also modi­
fied to increase the efficiency of residential en­
ergy use. However, low-income households
apparently did not keep up with the pace of
improvement in energy efficiency. There is
evidence that housing occupied by low-income
families was weatherized less often during the
Figure 4
P e r c e n t o f h o u s e h o ld in c o m e s p e n t on
gas and e le c tric ity in Illin o is by
in c o m e class - 1 9 7 9
percent of income

11

1970s than the housing of high-income
people.8 As a result, utility consumption, and
utility tax payments, as a percent of income,
grew more rapidly for low-income households
across the nation as energy prices rose. Thus,
there is strong evidence that the portion of the
Illinois utility tax that falls directly on residen­
tial customers is highly regressive and that its
regressivity increased during the recent period
of rapidly rising energy prices.
The equity of the utility tax that is levied
directly on commercial and industrial utility
customers is much more difficult to measure
because it is not clear who actually pays the
tax. The incidence of nonresidential utility
taxes will depend on the income levels of the
customers who ultimately pay the taxes
through the prices of final goods and services.
While the actual tax incidence is very difficult
to measure, the nonresidential component of
the utility tax is most likely less regressive than
the residential component because household
utility services are more concentrated in low
income budgets than are general household
expenditures.9
Residential exemptions. Since the late
1970s, many state governments have sought to
reduce the regressivity of utility taxation by
specifically exempting household consumption
from the tax base. In the vast majority of cases,
these exemptions have applied to sales taxes
rather than selective utility excise taxes such
as the Illinois utility tax. In a few states, resi­
dential utility sales are still taxed at the local
level even though they have been exempted
under the state sales tax.
Of the 47 states which have sales taxes 31
cover some or all utilities and 30 of these cover
gas or electricity. Seventeen of these 30 states
provide some type of exemption for utility ser­
vices, primarily gas or electricity purchased by
residential users (Figure 5). Delaware is the
only state that exempts residential utility sales
under a selective utility excise tax.
The exemption of residential utility sales
has clearly accelerated during the past decade
of rising fuel prices. Virtually all of these ex­
emptions have been enacted since 1974, many
within the past five years, in attempts to soften
the consumer burden of rising energy prices.
Illinois has not participated in the recent
movement toward residential exemption, and
as a result low income households in the state
72



clearly bear an inordinate share of the rising
utility tax burden. Relatively high utility taxes
in Illinois, and particularly in Chicago, inten­
sify concerns over the fairness of this tax. As
most economic analysts believe that income
redistribution programs are best handled at the
federal level, it is questionable whether statelocal tax structure design should be dominated
by equity concerns. However, if state legisla­
tors perceive that the federal government is not
accounting for the detrimental effect of rising
energy prices on the poor, state-local utility tax
reform is an alternative policy course.
Implications for government

Finally, the advantages and disadvan­
tages of the rapidly growing Illinois utility tax
should be considered from the point of view of
state and local government administration.
From this perspective the tax scores fairly well.
The cost to governments of administering the
tax and the cost to taxpayers of complying with
it are low. In addition, utility taxes are a rea­
sonably reliable revenue source, for they dis­
play only a moderate level of sensitivity to the
business cycle.
Administration

and

compliance

costs.

The cost of collecting the utility tax is low be­
cause the number of collection points, the
public utility companies in the state, is very
small. Moreover, the extensive recordkeeping
required of regulated utilities facilitates the au­
diting of revenues for tax purposes. There are
no extra costs of tax compliance on the
taxpayers’ side because utility customers usu­
ally pay the taxes along with their utility bills.
Local sales taxes on utility services are
usually administered and collected by the state
along with the state sales tax where the local
sales tax base includes utilities. This practice
lowers the cost of tax administration because it
requires little duplication of facilities.
Another
major consideration for state and local govern­
ments is the stability of tax revenues with re­
spect to changing economic conditions,
particularly swings in national economic activ­
ity. Extreme tax revenue volatility can be
costly. Many state governments borrow to fi­
nance long-run capital expenditures and to
meet very short-term deficits. Borrowing to
Utility taxes and fiscal stability.

Economic Perspectives

Figure 5
S ta te sales ta x e x e m p tio n of re s id e n tia l
gas and e le c tric ity by y e a r of e n a c tm e n t

E x em p tio n

sale s ta x c o v e rs
gas and e le c tric ity

p a rtia l e x e m p tio n fo r
re s id e n tia l s e rv ic e s

meet unexpected shortfalls in revenues from
cyclically sensitive taxes raises costs to state
governments, especially during periods of high
interest rates. And insofar as most state gov­
ernments are prohibited from running operat­
ing deficits beyond their fiscal years, revenue
shortfalls during periods of recession often
prompt legislatures to enact new taxes or pro­
gram cutbacks in a haphazard manner. Tax
and spending changes designed in haste may
include poorly conceived features that are not
always revised during the subsequent economic
recoveries.
Assuming that interactions between the
stability of various taxes are negligible, the
Illinois utility tax’s contribution to the cyclical
sensitivity of the tax system can be assessed by
comparing the stability of the utility tax to that
of other major taxes. Our analysis focuses on
the state utility tax, but we expect the behavior
of local utility taxes in Illinois to be very simi­
lar. We find that the three components of the
Illinois state utility tax contribute very different
amounts of business cycle sensitivity to state tax
revenues. However, the cyclical behavior of
combined total utility tax revenues does not
sharply differ from that of other major state
Federal Reserve Bank of Chicago




to ta l e x e m p tio n fo r
re s id e n tia l s e rv ic e s

taxes so that broad-based utility tax abatement
would not radically change the stability of the
Illinois tax system.
In order to estimate the cyclical sensitiv­
ity of the utility tax, we must hold the influence
of many noncyclical factors constant. The
weather is the strongest noncyclical influence
on utility tax revenues. Changes in the tax rate
or base can produce dramatic shifts in tax rev­
enues. Movements in relative utility prices also
have a powerful independent effect on the
growth in real utility tax revenues.
We estimate the stability of the utility tax
by regressing quarterly real tax receipts on
quarterly real income in Illinois and on the
aforementioned noncyclical factors which are
thought to affect tax revenue variation.10 The
stability of the tax, or its elasticity, is indicated
by the coefficient on the real income variable.
Since the regressions are specified in logarith­
mic form, the income coefficient measures the
percent change in real tax revenues in response
to a one percent change in economic activity.
Separate equations for electricity, natural
gas, and message tax revenues are specified to
provide an understanding of the behavior of the
three components of the utility tax. These
13

The regressions estimated over the shorter
sample period have fairly similar results. The
major difference is that the real income
elasticity estimated for gas tax revenues is very
low (0.48) and statistically insignificant. This
may be because the period of natural gas
shortage in the 1970s makes up a substantial
portion of the shorter sample. When gas con­
sumption is limited by supply, the effect of in­
come on consumption is not likely to be very
strong. Therefore, it is not surprising that the
income elasticity estimate for gas is low and
insignificant in the shorter period.
The other income elasticity estimates dif­
fer somewhat from the estimates in the full
sample, although their ranking remains the
same. The low income elasticity for natural gas
pulls the weighted average elasticity for the
total public utility tax down to 1.14 in the
shorter sample. This is lower than the esti­
mated real income elasticities of 1.53 and 1.68
for the sales and individual income taxes.
However, because the weighted average
elasticity for the total utility tax may be unu­
sually low over this period, we do not reverse
our conclusion from the full sample that the
cyclical sensitivity of the utility tax is fairly
similar to that of the sales tax. The fact that
the income elasticities of the income tax and
the sales tax are close suggests that, under
normal market conditions, the stability levels
of the utility tax and the income tax may also
be similar.
The public utility, sales, and individual
income taxes each contribute a moderate

equations are first estimated using quarterly
data from the third quarter of 1962 through the
second quarter of 1983. The results are com­
pared to the estimates of a similar equation for
the state sales tax. The four equations are reestimated over a shorter sample beginning in
the fourth quarter of 1969 so as to allow com­
parison with the state individual income tax
which was enacted in 1969.
Stability estimates from the full sample
indicate that the elasticity of real tax revenues
with respect to real income is very different for
the three components of the utility tax (Table
5). Real electricity revenues have a high real
income elasticity of 2.38. Message revenues
appear to be very stable with a real income
elasticity of 0.65. The natural gas elasticity of
1.22 indicates that revenues from this portion
of the public utility tax are moderately sensitive
to economic conditions. The sales tax revenues
also display a moderately sensitive elasticity
estimate of 1.30.
The cyclical sensitivity of the total public
utility tax is estimated by averaging the real
income elasticities of the three components
weighted by each component’s average share
of total utility tax revenue. This weighted av­
erage utility tax elasticity is 1.59, which exceeds
the estimated sales tax elasticity. However, the
difference is not large enough to suggest that
the overall utility tax is much less stable than
the sales tax. The fact that both elasticities are
greater than one suggests that the public utility
tax and the sales tax are fairly sensitive to cy­
clical changes in the state’s economy.

Table 5
Cyclical s ta b ility o f Illinois s ta te tax revenues1
1962 Q3 -1983 Q2
Real
income
elasticity
Public U tility Tax
Electricity
Natural Gas
Messages
Sales Tax
Individual Income Tax

2.38
1.22
.65
1.30

95%
confidence
interval

1.95 to 2.81
.19 to 2.25
.36 to .94
1.16 to 1.44

1969 Q4 - 1983 Q2
Real
income
elasticity

95%
confidence
interval

1.92
.48
.53
1.53
1.68

1.53 to 2.31
-.9 6 to 1.92
.14 to .92
1.24 to 1.82
.95 to 2.41

Cyclical stability is estimated by the partial elasticity pf real tax revenues with respect to real income. For complete regression esti­
mates see Diane F. Siegel and William A. Testa, "Taxation of Public Utility Sales in Illinois" (Regional Working Paper, Federal Reserve
Bank, Chicago, 1985).

74




Economic Perspectives

amount of instability to the Illinois state tax
system. Their behavior is not different enough
to suggest that altering the relative levels of the
three taxes would radically change the overall
sensitivity of the state’s real tax receipts.
However, the three components of the utility
tax do react very differently to cyclical changes
in the state’s economy. Thus, any restructuring
of the utility tax could alter the stability of total
utility tax revenues.
Conclusion

Given the offsetting advantages and dis­
advantages of the Illinois utility taxes, outright
elimination or comprehensive reduction of
utility tax rates is an undesirable path of re­
form. Utility taxes are an attractive revenue
source for state and local governments because
the costs of administration and taxpayer com­
pliance are very low. Furthermore, the cyclical
sensitivity of state utility tax revenues is not
substantially different from that of revenues
from other major state taxes. High utility
taxes in Illinois may be detrimental to the
state’s business climate because of their con­
tribution to the relatively high utility costs in
the state. However, as yet, utility prices do not
appear to be critically higher than other re­
gions and utility taxes contribute only a modest
amount to total utility price. The case for
lowering the utility tax on industrial and com­
mercial use is thus not overwhelming, although
such a policy is an option for state lawmakers
if the utility price disadvantage in Illinois
grows larger.
The policy trade-offs concerning the util­
ity tax on residential sales are much sharper.
The tax is very burdensome to low-income
households, and it has grown more so over the
past decade of rising energy prices. Yet, the tax
is distributed more in proportion to income for
middle and upper income consumers and it has
a fairly neutral influence on overall consumer
purchase decisions. For this reason, policy­
makers should consider those reforms that tar­
get tax relief to the lower end of the income
distribution where utility taxes are the most
regressive.1
1 In 1984, several bills were introduced into the
Illinois General Assembly which would lower the
state public utility tax in some way. The two that
Federal Reserve Bank of Chicago




attracted the most support were a proposal to cut
the state utility tax rate in half (an amendment to
H.B. 1736) and another proposal, sponsored by
Rep. Tom Homer (D., Canton), to levy the tax on
units of utility consumption rather than gross utility
receipts (H.B. 2442). An advisory referendum in
support of the bill to halve the tax rate passed in
75 communities in the March 1984 primary. That
bill was later changed to support a consumptionbased tax at slightly lower rates than proposed by
H.B. 2442. Neither bill made it out of committee
during the 1984 legislative session.
In 1985, the Homer bill was introduced as
H.B. 18 in the House and S.B. 334 in the Senate.
The House Revenue Committee passed an
amended version of the bill. The amendments
raised the rate slightly; removed payments for ser­
vices rendered, including minimum service charges,
from the definition of gross receipts; and required
that each customer be taxed at the lower of the
consumption-based rate and the five percent rate.
An amendment to S.B. 334 replaced the Homer
proposal with a requirement that utility receipts be
taxed at a rate set each year to insure that
projected tax receipts equal the revenue collected
in fiscal 1985. At the time this article went to press,
H.B. 18 had passed in the House and S.B. 334 had
passed in the Senate.
2 State and local public utility tax revenue data
were obtained from the Bureau of the Census.
State sales tax revenues from public utilities were
collected directly from the state revenue depart­
ments. Data on local sales tax revenues from public
utilities are not available from the Bureau of the
Census or from state revenue departments, so they
were estimated from information on state sales
taxes.
3 Own source general revenue is the revenue raised
directly by the government through taxes and user
fees.
4 The standard base measure used is the sum of
total revenues from sales of electricity, natural gas,
and telephone services. The telephone revenues are
estimates of sales of local telephone services in each
state. This method understates the telephone tax
base for those states that tax intrastate long dis­
tance calls or interstate messages.
5 Along with most other states, Illinois exempts
sales for resale along with tangible personal prop­
erty that becomes a constituent part of another
product under its state sales tax. In recent years,
the sales tax has become more consumptionoriented by exempting manufacturing machinery
and equipment along with farm machinery and
equipment exceeding $1000 in value.
f> Public utilities and other firms pay a wide range
of state-local taxes including property, corporate
income, unemployment insurance, and other taxes.
15

While favorable tax administration on these tax
bases may tend to offset high gross receipts taxation
in Illinois, evidence to date suggests that public
utilities in Illinois pay above-average taxes in other
guises as well. See Donald J. Reeb and Eliot T.
Howe, “State Taxation of the Public Utilities In­
dustry: The Need For A Theory”, Proceedings, Na­
tional Tax Association—Tax Institute of America,
1983, pps. 72-75.
7 This analysis is based on summary data from the
Bureau of Labor Statistics, Consumer Expenditure
Survey, which precluded state-specific estimation.
The relation generally holds true for other Census
regions. For a complete description see Diane F.
Siegel and William A. Testa, “Taxation of Public
Utility Sales in Illinois” (Regional Working Paper,
Federal Reserve Bank of Chicago, 1985).

76




8 Raymond J. Struyk, “Home Energy Cost and the
Housing of the Poor and the Elderly,” in Anthony
Downs and Katherine L. Bradbury, eds., Energy
Costs, Urban Development and Housing (The Brookings
Institution, 1984).
9 Some studies have indicated that high income
households consume a greater share of those items
that embody high energy usage in their production
process. These findings imply that a tax on house­
hold utility fuels alone falls more heavily on lowincome households than broad-based energy taxes.
For example see R.A. Hcrendeen, “Affluence and
Energy Demand”, Mechanical Engineering, October,
1974, pps. 18-22.
10 A complete description of the tax revenue re­
gression equations is given in Diane F. Siegel and
William A. Testa, ibid.

Economic Perspectives

Foreign deregulation, agricultural credit problems
highlight bank conference
The financial services industry has been
changing rapidly, and over the last year or so,
marketplace events have accelerated change.
Some of these events, such as the flood of ap­
plications for nonbank banks and the increase
in interstate banking legislation at the state
level have pushed the industry toward greater
deregulation.
But several crises over the past year have
provoked calls for re-regulation—or even more
regulation. Continental Illinois in Chicago and
Financial Corporation of America in California
ran into liquidity problems. The number of
banks in trouble because of agricultural loans
has more than doubled since 1983. And the
collapse of several government securities firms
compounded the problems of the thrift indus­
try, and called into question the viability of
deposit insurance that is not backed by the
federal government.
Issues raised by financial deregulation
and by the crises of the past year were ad­
dressed at the twenty-first annual Conference
on Bank Structure and Competition, held in
Chicago at the Westin Hotel from May 1st to
the 3rd. The conference, sponsored by the
Federal Reserve Bank of Chicago, assembles a
unique audience of bankers and other practi­
tioners from the financial services industry to­
gether with regulators and research economists.
This year’s conference was attended by more
than 300 participants who discussed issues
concerning deregulation, safety and soundness
regulation, the problems of agricultural banks,
and deposit insurance.
Financial deregulation

Although the United States has been
traveling on a deregulatory path, it is still un­
certain which direction to take concerning
some areas that have not yet been deregulated.
The experiences of other countries may shed
some light on the proper course for the United
States. At this year’s Bank Structure Confer­
ence, the deregulation experiences of a number
of countries were explored. These countries
include Japan, New Zealand, Australia,
Canada, and the United Kingdom.
Federal Reserve Bank of Chicago




Herbert L. Baer, economist at the Federal
Reserve Bank of Chicago, gave an overview of
the financial structures in other countries. He
pointed out that individual countries differ in
their treatment of barriers to entry, geographic
and product line restrictions, interest rate ceil­
ings, and the mix of bank financing and fi­
nancing from the money and capital markets.
According to research conducted by Mr.
Baer and Larry Mote, a vice president at the
Federal Reserve Bank of Chicago, most coun­
tries have restrictions on the financial activities
of nonbank financial institutions, but the dif­
ferences among countries in their treatment of
banks and nonbanks are substantial. Product
line restrictions also vary. Securities activities
are permitted in most countries, but under­
writing and brokerage are prohibited in Japan,
while there are no such restrictions in the
United Kingdom and Germany. Equity par­
ticipations are also allowed in most countries,
but they are usually limited.
Although countries’ financial structures
do differ, these differences can be isolated to
some extent. The effects of regulation, there­
fore, can be measured through systematic
intercountry comparisons of structure and per­
formance. According to Baer, comparative
banking studies provide “information on the
effects of banking structure and regulation that
is not available from studies based on purely
domestic data.” Comparative studies can help
determine whether regulation merely alters fi­
nancial structure or whether it also alters fi­
nancial performance.
Most of the panelists tried to explain why
deregulation occurred in the countries they
studied. Thomas F. Cargill, professor of eco­
nomics at the University of Nevada, said that
Japan’s “financial liberalization” occurred be­
cause Japan’s former system, which was highly
restrictive, no longer met the needs of economic
growth for the future. Similarly, New
Zealand’s and Australia’s highly controlled fi­
nancial systems hindered economic growth.
In the United Kingdom and in Canada,
deregulation has been market driven. John F.
Chant, professor of economics at Simon Fraser
University in British Columbia, reported that,
77

in Canada, the prospect of bank failures was
becoming a reality and product line restrictions
were becoming blurred as holding companies
emerged that engaged in commercial lending
as well as trust, securities, and insurance activ­
ities. Also in Canada, provincial regulations
began to conflict with federal regulations as the
province of Quebec, like Delaware and South
Dakota in the United States, undertook its own
financial deregulation. In the United King­
dom, according to Mervyn K. Lewis, professor
of money and banking at the University of
Nottingham in England, government controls
were distorting the financial services industry
and banks were losing business to nonbank in­
stitutions.
Deregulation in these five countries de­
pended on the specific circumstances in each
country. In general, however, deregulation
included the relaxation or elimination of inter­
est rate ceilings and product line restrictions.
Most foreign countries have nationwide bank­
ing; therefore, the decontrol of geographic re­
strictions generally took the form of allowing
foreign bank entry.
Drawing lessons for the United States
from foreign experiences was not easy for the
panelists. Andrew Carron, vice president at
Shearson Lehman Mortgage Securities, did,
however, discuss the lessons of financial reform
in Australia and New Zealand. Carron noted
that decontrol can be accomplished quickly,
and partial deregulation—i.e., deregulation of
some institutions while still restricting
others—does not work because it only causes
imbalances elsewhere in the system. Also,
mergers and acquisitions among financial insti­
tutions are to be expected, and concerns over
the safety and soundness and the survival of
nonbank institutions may arise.
In New Zealand and Australia, the suc­
cess of some nonbank financial services firms
hinged on the restrictions placed on banks.
When these restrictions were lifted, “reintermediation’' occurred; funds flowed from
the nonbanks back to the banks. Money mar­
ket mutual funds may provide an example of
re-intermediation in the United States. To the
extent that some nonbank financial services
firms in the United States developed to fill a
void left by regulation, deregulation may jeop­
ardize the survival of some firms.
78




Safety and soundness

Safety and soundness regulation was the
topic of a “gripe” session that included repre­
sentatives from the commercial banking sector,
the S&L industry, and regulatory authorities.
Barry Sullivan, chairman and CEO of First
Chicago Corporation, discussed dual standards
in capital adequacy between banks and bank
holding companies, domestic banks and foreign
banks, and banks and nonbanks. Sullivan ar­
gued that, because foreign banks and nonbanks
generally have lower capital requirements than
domestic banks, domestic banks operate at a
competitive disadvantage, which might cause
them to incur increasingly more credit risk.
One group of nonbank financial insti­
tutions that supposedly have a competitive ad­
vantage over banks in several respects are the
savings and loan associations (S&Ls). Joseph
C. Scully, president and CEO of St. Paul Fed­
eral Bank for Savings in Chicago challenged
this assertion, noting that there has not been a
rush by banks to convert to thrift charters.
Scully also argued that S&Ls are not, in
effect, turning into commercial banks. S&Ls
are sticking to mortgage lending. “Home
mortgages are about as safe an investment as
you can make,” said Scully. S&Ls have not
greatly expanded into commercial lending be­
cause they have no expertise in this area. Also,
Scully reported that in moving into other
product lines, such as real estate brokerage and
insurance, S&Ls, in general, have not met with
much success: “More [S&LsJ have lost money
than made money in such service corporation
ventures.”
Both Scully and Sullivan agreed that
banks and S&Ls are two very different types
of financial institutions and should therefore be
regulated differently. And Sullivan, who is also
a director of the Federal Reserve Bank of
Chicago, noted that the rapidly changing fi­
nancial services environment makes keeping
pace with the contradictions and discrimi­
nation in the regulatory system a difficult task.
Thomas H. Huston, superintendent of
banking for the state of Iowa, illustrated this
point as he relayed the problems that his de­
partment faces in supervising banks in Iowa.
Because of the poor condition of agriculture
and the high concentration of agricultural
lending among banks in Iowa, many banks in
Economic Perspectives

that state are experiencing difficulties. As a
result, Huston and his staff are now faced with
valuing assets such as farm and nonfarm real
estate and farm equipment for which there are
no well-defined markets, and hence no unam­
biguous value.
Problems of agricultural banks

Problems facing agricultural lenders was
the topic of another session at the 1985 Bank
Structure Conference. Gary Benjamin, vice
president and economic adviser at the Federal
Reserve Bank of Chicago, outlined the situation
facing farmers and their lenders. Citing a study
by the U.S. Department of Agriculture,
Benjamin said that one out of every six farmers
are “financially vulnerable.” Financially vul­
nerable is defined as insolvent or so highly lev­
eraged that insolvency is imminent if present
conditions persist for another one to five years.
These farmers account for over half of all farm
debt outstanding, and banks hold over 20 per­
cent of this debt.
George D. Irwin, associate deputy gover­
nor and chief economist for the Farm Credit
Administration, elaborated on the problems
facing those institutions that lend to the farm
community. Among the problems, according
to Irwin, are the concentration of problem
loans and the lack of diversification among ag­
ricultural lenders and the illiquidity of the sys­
tem. As Gary Benjamin and other panelists
pointed out, the restructuring and liquidation
of farm assets are necessary', but markets for
such assets are not big enough to handle such
huge transfers.
Restructuring asset ownership is only one
of four necessary adjustments to attain a
healthy financial farm system, according to
Michael Boehlje, professor of economics and
assistant dean of the College of Agriculture at
Iowa State University. The other three ad­
justments that are necessary, said Boehlje, are
the elimination of excess farm capacity, lower
land and other input prices, and lower farmer
debt load.
Boehlje reviewed the policy options to
achieve such adjustments. He opposes in­
creases in price and income supports because
they do not address the problems of farmers
under financial stress, and he opposes a debt
moratorium, which halts the adjustment pro­
cess and disrupts the financial system. Boehlje
Federal Reserve Bank ol Chicago




advocated asset restructuring by allowing
lenders to hold farm assets on their books in the
case of default and by recapitalization through
debt-to-equity conversions.
C. Robert Brenton, President of Brenton
Banks in Iowa, also suggested a few measures
to improve the current situation of farmers and
agricultural banks. Brenton advocated the
freezing of price supports, equity financing by
banks, and diversification into such activities
as real estate and insurance.
James R. Morrison, senior vice president
at the Federal Reserve Bank of Chicago, char­
acterized the economic environment in the
farm sector as poor, but he said “the outlook is
not bleak.” Citing the “strong capital base
prevailing at most agricultural banks,”
Morrison said that such banks could withstand
the impact of poor earnings performance. He
also said, “This capital position together with
a low level of dependence on uninsured funding
suggest that liquidity crises will not be a major
problem” for agricultural banks.
Deposit insurance

Liquidity has been a problem lately for
some financial institutions. Prior to 1933, runs
posed very serious threats to the macroecon­
omy. In 1933, the U.S. government adopted a
system of federal deposit insurance to alleviate
such problems. However, this flat-rate deposit
insurance system does not discourage and may
even encourage bank risk taking.
One often cited solution to this problem
is private deposit insurance. At this year’s
Bank Structure Conference, a panel was as­
sembled to discuss the viability of private de­
posit insurance as an alternative to federal
deposit insurance.
Two of the panelists representing the in­
surance industry said that private deposit in­
surance written by conventional property and
casualty companies is not feasible, at least not
at this time. Russell VanHooser, senior vice
president at MGIC Investment Corporation,
said “substantial regulatory and economic
conflicts and obstacles must be resolved before
[private deposit insurance] can be a viable al­
ternative to government insurance.” Roger E.
Lumpp II, vice president at CNA Insurance
Corporation, felt that both the banking indus­
try and the insurance industry, especially the
property and casualty insurance industry, were
19

in “turmoil;” therefore, private insurance could
not possibly insure the deposits of the banking
and savings and loan industries at this time.
Lumpp said that if private insurers were to in­
sure these deposits, the premiums for compara­
ble coverage would be staggering—perhaps 20
to 50 times the present federal deposit insur­
ance premiums.
Two other panelists disagreed with the
insurance industry representatives. They be­
lieve that private deposit insurance is a viable
alternative to federal deposit insurance.
Bert Ely, a corporate financial consultant
with Ely & Company, described a self insur­
ance system in which each depository
institution’s deposits would be guaranteed by
other depository institutions. Under Ely’s
“cross-guarantee” system, four parties would
be involved: the depository institution to be
guaranteed; the guarantors, which are com­
posed of other depository institutions; an agent,
or middle man, who organizes and administers
the syndicate of guarantors; and the Federal
Reserve System. The Fed would act as lender
of last resort to guard against potential bank
runs.
Catherine England, senior policy analyst
at the Cato Institute, also advocated private
deposit insurance. She, however, did not pro­
pose a self insurance scheme, but rather a sys­
tem whereby the amount of deposit coverage
would be inversely related to the amount of
regulation to which the depository institution
is subjected. An institution, for example, that

20




only insures 50 percent of its deposits would be
more restricted in its activities than an institu­
tion that insured 80 percent of its deposits.
Under this system, said England, each con­
sumer would deposit his funds in an institution
which offers the deposit protection that he de­
sires; thus, this system would allow the market
to determine the proper mix of deposit insur­
ance and regulation.
Other BSC topics

Other topics at this year’s Bank Structure
Conference included issues concerning bank
failures, financial disclosure, and risk manage­
ment in banking. Papers presented on this last
topic included a discussion of the use of interest
rate futures by commercial banks and a dis­
cussion of off-balance-sheet behavior of Seventh
District banks presented by Gary D.
Koppenhaver, an economist at the Chicago
Fed.
Silas Keehn, President of the Federal Re­
serve Bank of Chicago, in his opening speech
to the Conference, remarked that “a more rel­
evant set of topics could not have been chosen,
given the issues confronting us at this time.”
The record attendance at the Conference,
hosted by Harvey Rosenblum, vice president
and associate director of research at the
Chicago Fed, was ample evidence of the
Conference’s relevance and timeliness.
—Christine Pavel

Economic Perspectives

Metro metrics
Diana Fortier
The 1984 edition of an influential survey
by Sales and Marketing Management ranked St.
Louis, Mo, 20th in the nation in buying power.
Today St. Louis would rank tenth. Such an
astonishing jump should be classed as an eco­
nomic miracle—especially for an aging midwestern city like St. Louis. But St. Louis’
sudden rise actually was accomplished by an
Act of Congress, when Senator John C.
Danforth, (R., Mo.) attached an amendment
to an omnibus spending bill to change the
census designation of St. Louis from Primary
Metropolitan Statistical Area (PMSA) to Met­
ropolitan Statistical Area (MSA). With the
stroke of a pen, the city regained its suburbs
and satellite cities and its national ranking. It
was a triumph of metropolitan statistical facts
of life over the misplaced municipal pride that
had led St. Louis to ask to be counted alone in
1983.
Most urban Americans will identify
themselves to strangers by their city—as a
Bostonian or a Chicagoan—with no further
precision. It means little to others whether you
come from a central city, Chicago, say, or
Hoffman Estates, miles north and west of the
Loop. Among themselves, Bostonians and
Chicagoans may be more precise. They may
name their neighborhood, or their suburban
community. They will retain community alle­
giances and rivalries but they will also have a
metropolitan pride. Their real estate taxes,
schools, and zoning laws are likely to be local.
Their weather and traffic reports and profes­
sional sports scores are metropolitan. So are
their transportation networks and their business
and commercial lives.
But while these Americans acknowledge
their membership in “Chicagoland,” or the
“Quad Cities,” or “Greater St. Louis,” they
would be hard-pressed to define these metro­
politan notions exactly. They might be sur­
prised to learn that a detailed system for
defining metropolitan areas has existed since
1910. The system has undergone numerous
changes over the years and its use by govern­
ment and business planners often means eco­
nomic benefits for the communities involved.
Federal Reserve Bank of Chicago



A major revision in the system occurred
in 1983. Old designations—the Standard Met­
ropolitan Statistical Area (SMSA) and the
Standard Consolidated Statistical Area (SCSA)
were dropped. Replacing them were the MSA,
the PMSA, and a new category, the Consol­
idated Metropolitan Statistical Area (CMSA).
It was during this overhaul that St. Louis
came to statistical grief. By choosing to become
a PMSA, it fell from 10th to 20th in marketing
power nationwide. Senator Danforth’s eco­
nomic miracle was simply a restoration of the
status quo ante, with a new acronym.
A similar action by Senator Robert Dole
(R., Ka.) reunited the Kansas City, MO, and
Kansas City, KA, PMSAs, ranking 49th and
84th among metropolitan areas, into a single
MSA that stood 28th in the Sales and Marketing
Management survey. The improved statistical
rankings represent increased attractiveness in
terms of sales, marketing, business relocations,
and investments, which translate into economic
development, jobs, and revenue.
The metropolitan statistical area desig­
nation itself is an application criterion for cer­
tain government regulations (e.g., the Federal
Reserve Board’s Regulation L, which controls
management interlocks among depository or­
ganizations, and the Home Mortgage Disclo­
sure Act and the Fed’s Regulation C, which
require loan-related data for depository orga­
nizations in metropolitan areas) and an eligi­
bility criterion for federal aid in social and
economic programs (e.g., HUD Community
Block Grants). Indeed the association between
metropolitan area status, federal funds, and
potential economic growth was the driving
force behind the Benton Harbor, Mich., push
to alter the central city criteria for twin cities
in defining metropolitan statistical areas.1
Pressures by cities to gain possible mone­
tary benefits and the perceived prestige associ­
ated with metropolitan status, along with more
general social, demographic, economic, and
political forces, have been the impetus behind
changes in the function and definition of metDiana Fortier is an economist at the Federal Reserve Bank
of Chicago.
21

ropolitan areas. It is important to understand
these changes and their impact on metropolitan
areas, not only in their definition, but more
important, in their characteristics. MSA clas­
sifications and redefinitions are much more
than a numbers game. The metropolitan sta­
tistical area designation was developed to pro­
vide a consistent uniform standard intended
primarily for statistical purposes and the pre­
sentation of census data. The factors contrib­
uting to the designation of metropolitan areas,
such as their population growth, employment/residence ratios, and commuting patterns
reflect underlying structural, social, and eco­
nomic characteristics of an area. The correct
interpretation of such data reflecting changes
in MSA designations is essential to appropriate
public policy and business decisions. Endless
volumes of data are gathered by the govern­
ment and the private sector to track the social
and economic well-being of our metropolitan
(and nonmetropolitan) areas. The significance
of metropolitan areas and their rankings is ap­
parent by the fact that in 1980 74.8 percent of
the nation’s 226.5 million people lived in met­
ropolitan areas. (See Table 1 for a list of major
District MSAs.)
The purpose of this article is to provide
an understanding of metropolitan areas and
their characteristics. First, it explains the nu­
merous acronyms and terminology of metro­
politan areas, and then the effect of the 1983
metropolitan redefinitions on the metropolitan
areas of the states comprising the Seventh Fed­
eral Reserve District: Illinois, Indiana, Iowa,
Michigan and Wisconsin. Finally, it looks at
the effect of the redefinitions on the adminis­
tration of government regulations and social
and economic programs.
Metropolitan areas: Component parts

Prior to any description or analysis of
metropolitan areas, it is imperative to clarify
the terminology and acronyms which refer to
the geographic components and characteristics
of these areas. In general, a metropolitan area
consists of one or more counties (or county
equivalents) which have a significant degree of
social and economic integration.2 Each metro­
politan area must have a large population nu­
cleus and have at least one central city.
The preliminary population criterion for
the population nucleus is a city (central city)
22




Table 1
Seventh D istric t M SA s in th e Top 50*

Population

Rank

Area

Percentage
change
1983
1980-83
(thousands)
(%)

3

Chicago, IL (PMSA)

6,028.5

- 0 .5

5

Detroit, Ml (PMSA)

4,346.9

-3 .1

10

St. Louis, M O -IL (M S A )**

2,375.8

0

29

Cincinnati, OH-KV-IN (P M S A )' * 1,395.0

-0 .5

31

Milwaukee, Wl (PMSA)

1,389.2

- 0 .6

37

Indianapolis, IN (M SA )

1,180.4

1.2

46

Louisville, KY-IN (M S A )**

964.7

.9

•Rank is among the nation's MSAs and PMSAs. Population data are
estimates as of December 31, 1983. Percentage changes are from
census data 1 980 to December 31, 1 983.
"Partially within the Seventh District.
SOURCE: 1985 Rand McNally Commercial Atlas and Marketing
Guide, 116th Edition, Rand McNally & Co., Chicago.

of at least 50,000 people or an urbanized area
(UA) with the same population and a total
metropolitan area population of at least
100,000.3 Central cities of a qualifying metro­
politan area are determined based on the city’s
total population, total number of workers and
percentage of employed residents working in
the city.4 An urbanized area (UA) has at least
one incorporated city, and a population con­
centration of at least 50,000 with a density of
at least 1,000 persons per square mile. The
UA usually comprises a central city and its
surrounding suburbs, the urban fringe.
The metropolitan area also has one or
more central counties in which the area’s pop­
ulation is concentrated. To be a central county
the county must have at least 50 percent of its
population residing in the area’s qualifying
UA; or it must contain a central city or a sig­
nificant portion of a central city. Additional
counties are included as part of the metropol­
itan area if they are deemed to have a metro­
politan character and strong social and
economic ties to the central county.
In general, the criteria to qualify an
outlying county as part of a metropolitan area
are a combination of factors reflecting metro­
politan character and economic integration.
Metropolitan character is measured by popu­
lation density, decennial population growth,
Economic Perspectives

and percentage of urban population. Eco­
nomic integration with the central county is
determined by worker commuting patterns be­
tween the counties, particularly out-commuting
to the central county. A trade-off is allowed in
the mix of these factors: the more economically
integrated the counties, the less metropolitan
the outlying county needs to be.
MSAs, PMSAs and CMSAs

Currently, metropolitan areas are referred
to as either metropolitan statistical areas
(MSAs), primary metropolitan statistical areas
(PMSAs) or consolidated metropolitan statis­
tical areas (CMSAs).5 (See Figure 1.)
Each county is first analyzed as to its
qualification in an MSA as either a central or
an outlying county. Two adjacent MSAs are
analyzed further to determine if they may be
combined as a single MSA. Factors affecting
this adjustment are similar to those for adding
outlying counties. They are total population,
percentage of urban population, commuting
interchange, residence of employed workers
and the proximity of the MSAs’ urbanized
areas and central cities. MSAs are relatively
independent areas with no close affiliation with
other MSAs. These MSAs are then classified
by population size as follows:
• Level A = 1,000,000 or more
• Level B = 250,000 to 1,000,000
• Level C = 100,000 to 250,000
• Level D = less than 100,000.
Level A MSAs are analyzed further to
determine if they are made up of PMSAs.
PMSAs are composed of counties that meet
additional requirements for determining so­
cially and economically integrated counties
within an initially designated Level A MSA.6
Within MSAs for which at least one PMSA is
designated, the remaining counties not meeting
the PMSA requirements are also given a
PMSA classification, even though they may not
be ‘true’ PMSAs per the designated require­
ments. PMSAs, like MSAs, are given classi­
fication levels based on total population.
If a Level A MSA is found to be com­
posed of PMSAs, the MSA is redesignated as a
CMSA unless local opinion disfavors separate
recognition of the PMSAs, as became the case
with the St. Louis and Kansas City PMSAs.
CMSAs, made up of various level PMSAs, are
not given a population level classification. Yet
Federal Reserve Bank of Chicago




by definition they all have population of at
least one million.
Titles

The titles given to MSAs, PMSAs, and
CMSAs are more than just names; they reflect
information about the designated areas. The
MSA title includes the names of one to three
of the area’s central cities in descending order
of population (provided the cities have at least
one-third the population of the MSA’s largest
city or meet other specified criteria) and the
name of each state which the MSA covers (e.g.,
Davenport-Rock Island-Moline, IA-IL MSA).
CMSAs, PMSAs, and MSAs, although based
on county boundaries, may cross state lines.
Similarly, PMSA titles consist of up to
three of the names of the central cities qualified
as the initial Level A MSA’s central cities (e.g.,
Gary-Hammond, IN PMSA) or the names of
one to three counties in the PMSA (e.g., Lake
County, IL PMSA), all listed in descending
order of population. CMSA titles also have up
to three names, the first being the largest cen­
tral city in the area and the next two being the
first names (cities or counties) in the titles of
each of the next two most populated PMSAs.
For example, the Chicago-Gary-Lake County,
IL-IN-WI CMSA crosses three states, Chicago
is its largest central city and the GaryHammond and Lake County PMSAs are its
next two most populated PMSAs.
Urban/rural distinction

A rural resident may also be a resident of
a MSA (PMSA). (As a matter of convenience
throughout the remainder of this article the
term MSA will be used generically to refer to
MSAs and PMSAs.) This apparent disparity
is resolved with an understanding of the con­
cepts of rural and urban population. (See Ta­
ble 2.) These concepts are used to refer to area
types based on population size and population
density. They are independent of MSA desig­
nations. Thus, metropolitan and nonmetro­
politan area counties may be composed of both
urban and rural areas. For example, the level
C Eau Claire, WI MSA has a 42.2 percent ru­
ral population. As a group, District MSAs
have a 16 percent rural population.
The rural population consists of persons
residing in places with a population of less than
23

2,500. Places with a population of 2,500 or
more have an urban population. The urban
population includes persons inside and outside
of urbanized areas. Every MSA is associated
with at least one UA. However, UAs do not
necessarily have to be part of an MSA. For
instance, a UA may be in a county of less than
100,000 inhabitants.
Changes in definitions

At the time of each decennial census, the
official criteria for metropolitan areas are re­
viewed. (See Box 1 for the major changes of
the past 75 years.) Technical changes in met­
ropolitan area definitions have resulted from
increased data availability, national trends,
and comments of federal and state officials and
data users.
The initial purpose for metropolitan areas
was the presentation of census data. The ex­
panded statistical use of these areas by federal
agencies resulted in a change of the definitional
unit from township to county. The advantage
of more refined and accurate definitions
achieved with the use of the smaller township
unit was outweighed by the greater extent of
data available at the county level and the need
Table 2
Types of Areas
Urban
Urbanized Area (UA): Population > 50,000 and
at least one incorporated
city
Population Density >
1,000/sq. mile
Central City (CC)
Central Business District (CBD)*
Remainder of Central City
Urban Fringe (Non CC portion of UA)
Outside Urbanized Area 8- Population > 2,500
Rural: Outside Urbanized Area 8 Population < 2,500
Non farm
Farm
*CBDs are designated, with the city's cooperation, for central
cities of MSAs and other cities of 50,000 or more population.
As defined by the Bureau of the Census, they are based on
census tract boundaries and are characterized by: a high con­
centration of retail and service businesses, hotels, theaters, and
offices; high traffic flows; and high land valuation.

24



of other federal, state, local, and private agen­
cies to compile related data for the defined
areas.
Other major changes in metropolitan
area definitions prior to 1983 related to the
question of how large a city should be to qual­
ify for metropolitan area classification. The
interpretation of a city with a population of at
least 50,000 was broadened to take into ac­
count twin cities and the central cities’ sur­
rounding incorporated and unincorporated
areas (e.g., the Poughkeepsie rule, see box).
In general, the cumulative effect of these
definitional changes from 1910 to 1983 resulted
in liberalized standards, creating increased
numbers of MSAs and some MSAs without
demographically dominant central cities. (The
number of SMSAs increased from 215 in 1960
to 335 [MSAs] in 1983.) Thus, the increase in
metropolitan areas over time is not entirely at­
tributable to an increase in the metropolitan
character of our cities and counties. The di­
versity of metropolitan character across metro­
politan areas was tested by USDA
demographer Calvin L. Beale. He rated MSAs
based on the presence (absence) of nine func­
tions, facilities, and conditions. The largest 31
areas, each with one million or more residents,
scored 100 percent but the areas with central
city populations between 25,000 and 50,000
scored 67 percent and the areas having a cen­
tral city of 25,000 scored only 40 percent, a
failing grade by most standards.7
Definitional changes and the growth of
urban population have not only increased the
number of metropolitan areas, but also their
variety and complexity. Total MSA popu­
lations range from a low of 62,820 (Enid, OK
MSA) to a high of 8.3 million (New York, NY
PMSA). Population density ranges from
12,108 persons per square mile (Jersey City,
NJ PMSA) to 13.4 persons per square mile
(Casper, WY MSA) and the percentage of ur­
ban population of MSAs ranges from 42 per­
cent (Hickory, NC MSA) to 100 percent
(Jersey City, NJ PMSA). The variance in
economic and social functions between large
urban centers and smaller central cities resulted
in a need to maintain MSA uniformity through
the differentiation of MSAs by population size
(Levels A-D) and the use of a two-tier data
system incorporating CMSAs and their com­
ponent PMSAs.

Economic Perspectives

Box 1
M a jo r changes in m e tro p o lita n area d e fin itio n s and te rm in o lo g y
1910

Metropolitan districts officially defined for presentation of census data. Defined along MCD boundaries
and based primarily on population density. Described as a concentration of urban development with
internal commuting ties and weak ties to other densely settled areas. Used to compare urban centers
without disparities of central city boundaries.
Qualification for metropolitan districts
1910 city population of at least 200,000
1930 city population of at least 50,000 and total metropolitan population of at least 100,000
1940 city population of at least 50,000 and total metropolitan population requirement dropped.

1949

Standard Metropolitan Area (S M A ) established for use by all federal statistical agencies, not just for
census purposes. To be defined by the Bureau of the Budget (later renamed Office of Management and
Budget) with the advice of an interagency committee. SMA concept same as metropolitan district only
definitional unit became the county. Criterion of city population of at least 50,000 remained and
criterion of 1 5% out commuting from outlying county to central county added for inclusion of
outlying counties.

1950

172 SMAs defined. Statistical Policy responsibility assigned to Bureau of the Budget in the
Budget and Accounting Procedures Act of 1950.

1950

SMA renamed to Standard Metropolitan Statistical Area (SMSA)

1960s

215 SMSAs defined. Place of work question on 1960 census form provided uniform national
commuting data. Previous data from state and local employment agency surveys were
not uniform nationwide. 2 Standard Consolidated Areas (SCAs) were defined for census purposes
for New York City and Chicago.

Late 1960s

Poughkeepsie exception: Poughkeepsie, New York, a city with no annexation ability under state
law, argued it would qualify as metropolitan with over 50,000 persons if adjacent unincorporated
'places' were added to the city population of 38,000. Resulted in liberalization of standards
to include such areas as long as the area has at least one incorporated central city of at least
25,000 persons.

1970

247 SMSAs defined with 21 areas qualifying under the Poughkeepsie exception. 252 UAs defined.
Twin City exception: UA to include not only city population of 50,000 or more, but also twin cities
with combined population of 50,000 or more with the smaller city having at least 15,000 persons,
(e.g., Champaign-Urbana, IL)

1973

101 of the 247 1970 SMSAs were redefined based on 1970 census commuting data.

1973-1979

33 new SMSAs defined based on current population estimates.

1974

Liberalization for qualification for metropolitan status for certain cities with population between
25 ,000 and 50,000. As a result, 27 new UAs created.

1975

Criteria adopted for defining Standard Consolidated Statistical Areas (SCSAs). 13 SCSAs defined.

1977

Statistical policy responsibility delegated by President Carter to the Department of Commerce,
wherein it was implemented by the Office of Federal Statistical Policy and Standards (OFSPS).

1980

Official publication of changes in SMSA definitions and terminology, Federal Register 1 /3 /8 0 ,
Vol. 45, No. 2. (Final approval on the changes was received on January 31, 1979 from the
Statistical Policy Coordination Committee.)
Benton Harbor rule created 9 new SMSAs with central city populations less than 25,000.
(Neither Benton Flarbor, Ml nor St. Joseph, M l, twin cities, had a population of 15,000 yet argued
that combined with contiguous unincorporated areas, they would have a population of 50,000.)
As a result, no minimum population is required for the central city of the qualifying UA of the SMSA
and contiguous unincorporated population (Poughkeepsie rule) need not be in census defined 'places'.
24 new SMSAs created with central city populations between 25,000 and 49,000.
Total of 287 SMSAs defined (including the 101 redefinitions and 33 new SMSAs of 1973-1979).

1981

Responsibility for metropolitan designations redelegated to Office of Management and Budget.
36 new SMSAs defined based on 1 980 population counts for a total of 323 SMSAs.

1983

23 Consolidated Metropolitan Statistical Areas (CMSAs), 78 Primary Statistical Areas (PMSAs),
and 257 Metropolitan Statistical Areas (MSAs) created (effective June 30, 1983) as a result of a
re-evaluation of SMSA boundaries using 1980 census data and new criteria and terminology
of January 1980.
Recognition of a two-tier data need for users of metropolitan area data resulted in use of CMSA,
PMSA, and MSA categories.
Use of population size Levels (A -D ) for MSAs (PMSAs) reflects complexity of MSAs
and need to maintain uniformity among metropolitan areas by differentiating among
metropolitan sizes. Allows data user ease in applying population standards.

Federal Reserve Bank of Chicago



25

1983 redefinitions of metropolitan areas:
Their effect on District areas

The District states account for 14.9 per­
cent of the U.S. population and 7.3 percent
(258,920 square miles) of its land area. Yet,
21.7 percent (5), and 18.2 percent (60) of the
nation’s defined CMSAs and MSAs (PMSAs),
respectively, are partially or entirely in these
five states wherein 14.7 percent of the U.S.
metropolitan population resides. The distri­
bution of these areas throughout the District
states is presented in Figure 2.
The net effect of the 1983 MSA redefi­
nitions should be to increase the number of
central cities, MSAs, CMSAs and their com­
ponent PMSAs, and decrease the number of
metropolitan counties. All but one of these
expected effects of the 1983 redefinitions held
true for the District. The District gained cen­
tral cities, CMSAs, and component PMSAs,
and lost metropolitan counties but did not in­
crease its number of MSAs.8
Central city changes

The new central city criteria, although
stricter in terms of central city character re­
quirements, allows for the inclusion of less
populated central cities (e.g., 15,000 to 25,000).
The rule changes for central city quali­
fication added 23 central cities in the District,
which was 23 percent of the total gained na­
tionwide. The effect of the one-third size rule
deletion is greatest in Illinois where 11 of the
12 added central cities were in the Chicago or
St. Louis SMSA. With relatively high outcommuting and relatively few jobs for their
residents, four District cities, three of which are
in Michigan, lost central city status. These
cities more resembled suburban areas than
central cities, and size alone was not enough to
retain them as central cities. (See Table 3.)
Consolidated areas changes

A lower percentage urban population re­
quirement (60 percent rather than the previous
75 percent) and a more lenient total population
requirement (population of at least one million
that applies to the total CMSA rather than at
least one component part, as previously) should
result in more CMSAs and additional PMSAs
26



in existing consolidated areas under the new
rules.
Although the District gained six newly
defined metropolitan areas (1 CMSA and 5
PMSAs), all in Illinois, it lost one potential
CMSA. The Anderson, IN MSA and the level
A Indianapolis, IN MSA failed the economic
integration test of the less restrictive 1983 re­
quirements for combining MSAs. Thus the
Anderson, IN MSA, previously part of the
Indianapolis SCSA, failed to qualify as part of
the potential CMSA. Moreover, the India­
napolis MSA was one of nine Level A MSAs
nationwide that did not meet the PMSA re­
quirements.
The St. Louis SMSA with the addition
of Jersey County, IL passed the 1983 CMSA
standards of percentage urban population and
economic integration to become the St. LouisEast St. Louis-Alton, MO-IL CMSA composed
of three PMSAs, two of which were newly de­
fined. (Subsequently, local opinion altered this
designation.)
The biggest change in consolidated areas
was the reorganization of the Chicago-Gary,
IL-IN SCSA into the Chicago-Gary-Lake
County, IL-IN-WI CMSA. The Kenosha
SMSA became a PMSA of this new CMSA and
three new PMSAs were created within the old
Chicago SMSA.
The other three District CMSAs have re­
mained unchanged from their old SCSA
counterparts in terms of their component
PMSAs (SMSAs). They are the CincinnatiHamilton, OH-KY-IN, Detroit-Ann Arbor,
MI, and Milwaukee-Racine, WI CMSAs.
MSAs and their component counties

The elimination of a minimum city pop­
ulation requirement for a UA and the inclusion
of contiguous unincorporated areas should in­
crease the number of MSAs centered around
smaller cities (less than 50,000) with a signif­
icant urban fringe, as long as the total MSA
population is at least 100,000. The change in
rules to qualify as a central county should have
a net result of adding central counties and in­
creasing the number of potential outlying MSA
counties.
But the criteria to qualify outlying coun­
ties as MSA counties have become more strin­
gent. These rule changes for metropolitan
character aim at deleting sparsely populated
Economic Perspectives

Table 3
Changes in 7th D is tric t C en tral C ities

Additions (23)

Deletions (4)***

Population
>50,000

Population
25,000-50,000

Population
<25,000

Population
25,000-50,000

Population
<25,000

ILLINOIS.
Aurora
E. St. Louis
Elgin
Evanston
Joliet
Waukegan

ILLINOIS:
Alton
Belleville
Chicago Hts.
Granite City
North Chicago
Pekin

INDIANA:
Goshen**

MICHIGAN:
Portage

INDIANA:
W. Lafayette

IOWA:
Council Bluffs

INDIANA:
Mishawaka**
New Albany

MICHIGAN:
Dearborn
Pontiac
WISCONSIN:
Waukesha

MICHIGAN:
Muskegon Hts.
Norton Shores

WISCONSIN:
Neenah**

MICHIGAN:
Holland
Midland
Port Huron

'Changes are based on criteria effective June 30, 1983 using 1980 decennial census data. All additions (except Goshen and
Neenah) were due to the elimination of the rule that a central city of 25,000 must be at least one-third the size of the area's largest
central city. (Each of these 21 cities was larger than 25,000 in 1970 but was not one-third the size of the largest central city in its
respective SMSA.) Goshen and Neenah became central cities under the new 15,000-25,000 size class of central cities. All deletions
were of cities under 50,000 that failed the commuting requirements of economic integration.
" C ity name was added to its respective M SA (PM SA ) title.
‘ "E ach deleted city was dropped from the title of its respective M SA(PM SA ).
NOTE: Although E. Chicago, IN and Superior, Wl maintained central city status, they were dropped from M SA (PM SA ) titles because
each failed to be one-third the size of its area's largest central city for two consecutive censuses.

or rural counties that previously qualified as
MSA counties based solely on high outcommuting to a central county, perhaps from
only a few townships. Thus, the minimum 15
percent out-commuting criterion, which re­
mains unchanged, combined with the new,
more restricdve, criteria of character (i.e.,
population density, population growth, and
urban population) is likely to decrease the
number of outlying counties attaining MSA
status.
The reasons for changes in metropolitan
area boundaries (addition, deletion, or transfer
of counties) have been grouped into three cat­
egories: economic integration, metropolitan
character, and rule changes. Economic inte­
gration refers to the minimum requirement of
15 percent out-commuting to the central
county. Metropolitan character consists of
population density, UA population, and per­
centage urban population. (See Table 4.)
The 1983 MSA redefinitions left the Dis­
trict with one less (S)MSA and a net loss of
Federal Reserve Bank of Chicago




three counties from metropolitan status.
Illinois gained the most metropolitan counties
by adding three while Iowa added two.
Wisconsin had no change in the number of
metropolitan counties. Indiana and Michigan
each had a net loss of four metropolitan coun­
ties. However, 9 of the District’s 19 counties
that changed status were added or deleted from
metropolitan status not because of changes in
their urban character or economic ties to a
central county but solely as a result of rule
changes.
Deleted counties

Although economically tied to the metro­
politan area’s central county, 7 of the District’s
11 deleted counties did not have enough urban
population or population growth to maintain
metropolitan area status. They qualified under
the minimum 15 percent out-commuting rule
but failed to meet the more rigorous 1983 metropolitan
character requirements. However, Sullivan
27

Figure 1
How metropolitan is your county?

(generalization of MSA definitions)

N on-m etropolitan
County

M etrop olitan
Ch arater:

Econom ic
Integration:
—

—

Pop. d e n s ity

—

Pop. g ro w th

—

% urban pop.

—

Pop. in UA

Independent M SA:
—

Level B = 2 50 ,00 0 - 1 mil.

—

Level C = 100,000 - 250,000

—

M in. 15%
o u t-c o m m u tin g
to ce n tra l co., o r
M in. 20% com m u tin g in te rch a n g e

M e e ts cen tral city
requirem ents:
— T o ta l p o p u la tio n
—

T o ta l no. w o rke rs

— % e m p loye d re sid e n ts

R enam e as C M S A :
(p o p. >1 m il.) C o m p ose d
o f 1 o r m o re P M S A s

— Level D = Less than 100,000

NOTE: This is a g e n e ra liz a tio n o f th e M S A d e fin itio n p ro c e s s fo r co u n ty-b a se d M S A s. Fo r a p re cise and d e ta ile d e xp la n a tio n and lis t o f
q u a lify in g c rite ria in v o lv e d in th is 3 5 -ste p d e fin itio n a l p ro c e s s see: Statistical R eporter, A u g u s t 1980, pp. 335 -3 84 . E xam ples o f ty p ic a l
M S A s are n o te d on F ig u re 2.

28




Economic Perspectives

Figure 2
The metropolitan Midwest

Level A MSA:
Indianapolis

MSA (PM SA) boundary
county boundary

Federal Reserve Bank of Chicago




29

Table 4
Changes in 7th D is tric t M e tro p o lita n Counties

Counties added (8)
Rule change

Real change

Counties deleted (11)
Rule change

Real change

Metropolitan Character
INDIANA: W hitley

M etropolitan Character
ILLINOIS: Jersey***
IOWA: Dallas

Economic Integration
MICHIGAN: Midland

Economic Integration
IOWA: Bremer

Economic Integration
INDIANA: Adams, Gibson
MICHIGAN: Barry

Metropolitan Character
Et Economic Integration
ILLINOIS: Kendall,
Grundy, Jersey****
1

M etropolitan Character
Et Economic Integration
INDIANA: Harrison

M etropolitan Character
Et Economic Integration
INDIANA: Marshall

M etropolitan Character
INDIANA: Vermillion, Wells
MICHIGAN: Ionia, Oceana,
Shiawassee,** Van Buren

M etropolitan Character
INDIANA: Sullivan

*Re-designations are based on criteria effective June 30, 1983 using 1 980 decennial census data.
‘ “Even with its decline in metropolitan character from 1970 to 1980 this county would have met the 1980 standards but failed the
1 983 requirements.
* * ‘ This county would not have become an outlying metropolitan county under the central city and central county rule changes without
its increase in metropolitan character since 1970.

County, IN was the only one to be deleted for
a real decline in metropolitan character. The
other six counties would have qualified were
the old metropolitan character requirements
maintained. (43 counties elsewhere in the U.S.
were also deleted due to these rule changes.)
The remaining four District counties were de­
leted from MSA status due to a real decline in
economic integration. They failed the minimum
out-commuting requirement and except for
Marshall County, IN would otherwise have
met both the old and new metropolitan char­
acter criteria needed with a 15 percent outcommuting ratio.
Added counties

Rule changes relaxing central city and central
county requirements created four new central
counties (Kane, Lake, Madison, and Will
Counties, Illinois), which, in turn, changed
three outlying counties (Grundy, Jersey, and
Kendall Counties, Illinois) into metropolitan
counties due to their economic and social ties
to the newly defined central county. Kendall
and Grundy Counties met the 1970 metropol­
itan criteria but failed to have significant eco­
nomic integration with Cook County, the
central county in 1970. However, Jersey
County’s metropolitan character had to in­
30




crease from 1970 to 1980 (while its commuting
to Madison County remained about the same)
for it to meet the 1983 rules.
Other rule changes added Whitley County,
IN and Midland County, MI to MSA status.
The new classification of higher out-commuting
percentages with lower metropolitan character
criteria added Whitley County (with no change
in its 28.2 percent out-commuting to its central
county, Allen County). The rule change for
combining MSAs created the Saginaw-Bay
City-Midland MSA, with the central counties
of Bay and Saginaw, which then qualified
Midland County as a metropolitan county
based on the commuting interchange between
it and the central counties. Thus, the District
lost one independent MSA (the Bay City, MI
MSA) but not its metropolitan county.
Three other counties, two in Iowa, were
added based not on rule changes but on changes
in their metropolitan character and economic ties to
central counties. Commuting from Bremer
County, IA to its central county, Black Hawk
County, increased from 14.8 percent in 1970 to
25.1 percent in 1980 to qualify it in the
Waterloo-Cedar Falls MSA. Dallas County’s
high level of out-commuting to its central
county of Polk, IA allowed it to qualify as a
metropolitan county by barely meeting only
one of four metropolitan character criteria, that
Economic Perspectives

of population density of 50 persons per square
mile. Harrison County, IN is the only county
that significantly changed in terms of commut­
ing to its central county, and metropolitan
character to become a MSA county.
Transferred counties

As noted above, Bay County was trans­
ferred to the Saginaw-Bay City-Midland MSA
due to a rule change on combining adjacent
MSAs. The transfer of Monroe County, MI
from the Toledo, OH-MI SMSA to the Detroit
PMSA was based upon the rule change that
allows for the consideration of local opinion,
through the appropriate congressional dele­
gation, in certain borderline cases.9 Monroe
County qualified on the basis of commuting to
the central county (Lucas County, OH) of the
Toledo MSA and the central counties
(Macomb, Oakland, and Wayne Counties, MI)
of the Detroit PMSA. Such commuting per­
centages were within 5 points of each other,
thus instead of being assigned to the area to
which the commuting was greatest, local opin­
ion was considered in choosing the assigned
metropolitan area. Hence, Monroe County is
associated with the Detroit PMSA, although it
has slightly more commuting to the Toledo
MSA. (Monroe County had been added to the
Toledo OH-MI SMSA in October 1963.)
The 1983 MSA redefinitions caused a
heavy loss of metropolitan counties in
Michigan and Indiana resulting in a net loss
of metropolitan population (154,495) and land
area (1,690 sq. miles) in the District. The re­
mainder of the nation (excluding New England
where metropolitan areas are not defined on a
county basis) had a net gain of metropolitan
counties (11) and metropolitan population (2.4
million), and a net loss of metropolitan land
area (7,042 sq. miles). That is, the nation lost
large sparsely populated counties and gained
smaller densely populated counties. Neverthe­
less, the District provides approximately the
same percentage of the nation’s total popu­
lation as metropolitan population.
The effects of the MSA redefinitions on
the metropolitan character and economic inte­
gration of the District’s metropolitan areas
were negligible, as counties at the margin of
metropolitan qualification were deleted and
added. The metropolitan counties under the
new designations have a slightly more dense
Federal Reserve Bank of Chicago




population and greater percentage of urban
population than those under the old rules.
Effect on regulations & funding

A more significant effect of the MSA re­
designations is the impact on regulated insti­
tutions from changes in the administration of
certain regulations, and the ability of certain
areas to receive federal funds through Federal
Grant-In-Aid programs. Particularly affected
are depository organizations and entitlement
grant recipients under the Community Devel­
opment Block Grant Program (CDBG).
Regulation L: Management Interlocks

The Federal Reserve Board’s Regulation
L implements the Depository Institution Man­
agement Interlocks Act.10 The purpose of the
regulation is to foster competition by generally
prohibiting management interlocks among unaffiliated depository organizations that are of
substantial size (total assets of $500 million or
more) or located in the same local area. The
Board’s Regulation L applies to state member
banks, bank holding companies, and their
nonbank affiliates. Other depository institution
regulatory agencies have similar regulations
implementing the Interlocks Act for their re­
spective regulated institutions.
Generally, Regulation L prohibits persons
from serving as management officials for unaffiliated depository organizations in the same
metropolitan area. Thus the MSA redefinitions
have made some previously permissible inter­
locks impermissible as well as creating permis­
sible interlock opportunities for what would
have been impermissible associations under the
old SMSA definitions. The District’s 184 de­
pository organizations located in the counties
added or deleted from MSA status may be af­
fected by these regulatory changes regarding
management interlocks.
A previously prohibited interlock may now be
permissible if a county has been deleted from a
MSA or changed MSA affiliation.
For example: The Fort Wayne, IN SMSA
was defined as Adams, Allen, DeKalb, and
Wells Counties, Indiana. The Fort Wayne,
IN MSA is now defined as Allen, DeKalb,
and Whitley Counties, Indiana. Thus, all
else remaining the same, a management
interlock between unaffiliated depository
31

organizations in Adams and Allen Counties
which was previously prohibited is now
permissible.

On the other hand, a previously permissible inter­
lock may have become prohibited. This would occur
if a county gained MSA status or a county
changed MSA affiliation.
For example: A management interlock be­
tween unaffiliated depository organizations
in Whitley and DeKalb Counties was per­
missible prior to June 30, 1983 because
Whitley was not a metropolitan county.
That interlock or the establishment of a
similar one is now prohibited.
Regulation C: Home Mortgage Disclosure

Another effect of the MSA redefinitions
on bank-related regulations is its impact on the
reporting burdens of the Board’s Regulation C
which is issued pursuant to the Home Mort­
gage Disclosure Act of 1975, as amended. One
reason behind the Act was the finding by Con­
gress that some depository institutions have
sometimes contributed to the decline of certain
geographic areas by their failure pursuant to
their chartering responsibilities to provide ade­
quate home financing to qualified applicants
on reasonable terms and conditions. The pur­
pose of this regulation is to provide the public
with loan data to determine whether depository
institutions are serving the housing needs of the
communities in which they are located.
Home mortgage disclosure (HMDA)
statements must be filed annually by all depos­
itory institutions with total assets of more than
$10 million that make federally related mort­
gages and have a home office or a branch office
in a MSA.11 The 1983 MSA redesignations
have eliminated this reporting requirement for,
at most, 112 of the District’s organizations (59
commercial banks, 29 savings and loan associ­
ations, and 24 credit unions) which have an
office in the 11 counties deleted from MSA
status. This number may be less if an orga­
nization has offices in other counties that are
part of an MSA. Likewise, the redefinitions
may add a reporting requirement for, at most,
72 depository organizations (43 commercial
banks, 14 savings and loan associations, and 15
credit unions) in the District’s 8 counties added
to MSA status.
32




A depository institution’s HMDA state­
ment must contain data on the number and
total dollar amount of home purchase and
home improvement loans (for single family and
multi-family housing) that the institution orig­
inates or purchases. Aggregate data are avail­
able for each MSA by census tract for all
reporting depository institutions. This infor­
mation shows aggregate lending patterns for
various categories of census tracts grouped ac­
cording to location, age of housing stock, in­
come level, and racial characteristics.
Community Reinvestment Act

Such aggregate data are useful for regu­
latory agency examinations under the Com­
munity Reinvestment Act (CRA). This Act
and the Board’s Regulation BB, which imple­
ments the Act, are to encourage regulated fi­
nancial institutions to meet the depository and
credit needs of their local community consistent
with safe and sound banking practices. The
institution’s record of doing so, as partially re­
flected in its HMDA statements, is taken into
account in the evaluation of an application
submitted by the institution to its regulatory
agency (e.g., bank merger applications). Poor
performance under the CRA may be grounds
for denial of an application.
Federal funding

Under the CDBG program, MSA central
cities and counties are entitlement recipients
which as a group receive 80 percent of CDBG
funding. (See Box 2 for description of CDBG
program.) Nonmetropolitan and other non­
entitlement units are allocated the remaining
20 percent of funding on a competitive basis.
Thus, the District’s central cities and metro­
politan counties dropped from MSA status lost
their CDBG entitlement privilege. Likewise,
cities and counties that gained MSA status be­
came entitlement recipients. In the aggregate
the District experienced a net addition of 23
qualifying entitlement central cities, a net loss
of 3 metropolitan counties, and the loss of one
independent MSA. However, what is good for
the whole may not be good for each of its parts.
As the number of MS As and central cities in­
crease nationwide, less funds are available per
MSA or central city (given no change in the
total funding under the CDBG).
Economic Perspectives

Box 2
Community Development Block Grant Program (CDBG)

Authorized under Title I of The
Housing and Community Development
Act of 1974, as amended, the CDBG pro­
gram annually allocates funds to local
areas on the basis of a formula. The for­
mula considers population, poverty
(weighted double), and overcrowding of
housing. It is designed to give local con­
trol over community development funds.
The primary purpose of the CDBG
program is to develop viable urban com­
munities, provide decent housing and a
suitable living environment, and expand
economic opportunities, principally for
low and moderate income individuals.
Although its major goals are aimed at
preventing slums and urban blight and
conserving and expanding the nation’s
housing stock, its other goals include the
improvement of local services, the rational
utilization of land and natural resources,
and the restoration of special value prop­
erties for esthetic, architectural, or historic
reasons.
The distributional formula for
CDBG funds is 80 percent to MSAs and
For the majority of formula and formulaproject Grant-in-Aid programs, MSA desig­
nation alone does not directly determine
funding recipients. Rather, the major factors
are an area’s: 1) population characteristics,
(i.e., total population, percentage urban popu­
lation and decennial population growth); 2)
income characteristics, (i.e., per capita income,
median family or median household income,
and the number and percentage of persons or
families below the poverty level or in low- to
moderate-income areas); and, 3) housing char­
acteristics (i.e., age of housing and housing
conditions). These conditions, as measured by
statistical factors using decennial census data,
are used to determine need and the eligibility
for and the amount of federal assistance.
General Revenue Sharing as well as 8 of
the 12 Block Grant programs for FY 1984 used
population or per capita income as eligibility
criteria. Also 32.1 percent of all FY 1984
Federal Reserve Bank of Chicago




20 percent to nonmetropolitan areas. The
funds are then allocated on an entitlement
or discretionary basis. The entitlement
areas are: MSA cities of 50,000 or more
persons; cities with populations of less than
50,000 which are central cities of MSAs;
and metropolitan counties of 200,000 or
more persons (minus the population in the
entitlement cities of the county). The
amount of funds received by each metro­
politan county is determined by a statu­
tory formula, intended to measure housing
needs based on total population, poverty
and overcrowding. (In FY 1983, 716
grants were approved for 790 eligible units
of local government.) Nonentitlement
areas received funds based on the same
statistical factors and formula. Such areas
are ranked nationally based on these fac­
tors. To the extent funds are available
these areas receive funds based on their
ranking. (In FY 1983 there were 84 ap­
provals under the CDBG Small Cities
Program for nonentitlement areas.)
categorical grants to state and local govern­
ments were formula or formula-project grants
allocated based on factors of total population
(or the population of a special group, e.g.,
school age population) or per capita income (or
per capita income of a special group or used to
modify other formula factors, e.g, number of
persons below poverty level).12 Typically the
larger metropolitan areas have larger, older
cities and hence have more problems of urban
blight. This is not to say that rural areas are
immune from problems of poverty and inade­
quate housing. Indeed they are not and there
are federal assistance programs designed spe­
cifically for rural areas, (e.g., Farm Home Ad­
ministration low-income home loans). Yet, the
fastest growing metropolitan areas (Level D
areas) and rural areas are most likely to need
CDBG funds to solve problems related to urban
growth.
33

For the MSA redesignations to have sig­
nificantly affected the funding for federal aid
programs (except in the case of CDBGs), the
redefinitions would have had to alter signif­
icantly the population, income, and housing
factors upon which aid is based. Data for se­
lected statistical factors calculated under the
old and new designations for District MS As
reveal that this was not the case. The major
losers were the counties in Indiana and
Michigan dropped from CDBG entitlement
because they lost metropolitan status, partic­
ularly those losing status as a result of rule
changes rather than any metropolitan charac­
ter change. Similarly, the most likely gainers
are the new, relatively small metropolitan
counties which have become entitlement recip­
ients. This is particularly true if the addition
was based solely on rule changes. In this case
Illinois would be the greatest beneficiary.
Illinois is also the District’s greatest beneficiary
in terms of cities gaining entitlement status.
Nonetheless, census statistics are impor­
tant in tracking the social and economic well­
being of both metropolitan and
nonmetropolitan areas. Census data assist in
the allocation of limited resources to areas of
greatest need or with the greatest number of
beneficiaries. The FY 1984 budget allotted
$90.8 billion dollars for Grant-In-Aid to state
and local governments. A portrait of the
District’s population, income, and housing
characteristics gives an indication of the rela­
tive impact of public policy changes, such as
federal budget cuts on areas within the District.
For example, (Chicago) Cook County, IL;
(Milwaukee) Milwaukee County, WI and (Des
Moines) Johnson County, IA would be most
severely hurt by cuts to public transportation.
Illinois with 83.3 percent urban population
would be significantly affected by changes to
the Urban Mass Transportation program.
District areas with the lowest per capita income
(Menominee and Delta Counties WI; and Lake
County, MI) would be most affected by cuts in
aid to low income individuals. Illinois and
Michigan rank among the top ten states in
terms of numbers of individuals or families be­
low the poverty level.
Conclusion

MSAs provide uniformity and continuity
in the presentation of census data. The tabu­
34




lation of such data aids in the analysis of social,
demographic, and economic trends of local
economies, such as metropolitan areas. It also
provides a basis for public and private sector
policy decisions, i.e., urban development or the
location of production and sales facilities.
The use of a standardized unit of measure
is of prime importance in any time series anal­
ysis. Amidst decades of changing demograph­
ics, decennial MSA criteria revisions have been
aimed at maintaining uniformity in the analysis
of local areas. For example, to aid in the
comparison across the universe of diverse met­
ropolitan areas, MSA size level classifications
were created with the 1983 standards.
For District MSAs, the 1983 redesig­
nations had a negligible impact on aggregate
metropolitan characteristics and selected fed­
eral aid factors. Michigan and Indiana had the
greatest loss of metropolitan counties while
Illinois not only gained the most metropolitan
counties but also the most central cities.
As MSAs lost and gained counties, the
people and institutions within the MSAs were
affected to varying degrees. Changes in Fed­
eral Grant-In-Aid funds (i.e., CDBG funds) to
local governments will affect the social and
economic well-being of the county’s residents.
Regulatory requirements for certain types of
institutions (e.g. depository organizations) may
have changed for those located in counties
gaining or losing MSA status. Finally, as evi­
denced by the legislative actions taken in the
St. Louis and Kansas City cases, there is a
perceived prestige and attractiveness associated
with a MSA’s relative rank in terms of buying
power or population—an attractiveness that
may translate into an area’s prospects for future
growth and economic viability.1
1 “Benton Harbor Speaks”, Charles Eckenstahler,
(Executive Director, Southwestern Michigan Com­
mission, St. Joseph, Michigan), American Demo­
graphics, May 1984, p. 8.
2 Parishes in Louisiana, boroughs and census areas
in Alaska, and independent cities in Georgia,
Maryland, Missouri, and Nevada are county
equivalents for metropolitan designations. Cities
and towns are administratively more important
than counties in the six New England states and
thus are used as the basic metropolitan area unit in
these states. The official standards for metropolitan
areas are developed by the interagency Federal
Committee on Metropolitan Statistical Areas.
Economic Perspectives

Based on these standards, metropolitan areas are
designated and defined by the Office of Information
and Regulatory Affairs, Office of Management and
Budget (OMB).
3 A few MSAs do not meet these population re­
quirements, but are still recognized as MSAs be­
cause they qualified as such under previously used
population standards for SMSAs.
4 Central cities are those cities with: 1) the largest
population in the metropolitan area or 2) 250,000
or more persons; or 3) 100,000 or more persons
employed in the city; or 4) 25,000 or more persons,
an employment/residence ratio of 75 percent or
greater, and less than 60 percent of its employed
residents working outside of the city; or 5) 15,000
to 25,000 persons and at least one-third the size of
the largest central city, an employment/residence
ratio of 75 percent or more, and less than 60 per­
cent of its employed residents working outside of
the city.
5 This terminology, effective June 30, 1983, re­
placed the previous terms: Standard Metropolitan
Statistical Area (SMSA)—now MSA; Standard
Consolidated Statistical Area (SCSA) now CMSA.
The term PMSA was added to specify the compo­
nents of CMSAs.
For the specific conditions needed to qualify
as MSAs, PMSAs, or CMSAs: see “The Metro­
politan Statistical Area Classification,’’Federal
Committee on Standard Metropolitan Statistical
Areas, Statistical Reporter, December 1979, pp. 33-45
and “Documents Relating to the Metropolitan
Area Classification for the 1980’s,” Statistical Repor­
ter, August 1980, pp. 335-384.
6 The initial criteria for a PMSA county are:
100,000 or more population, at least 60 percent
urban population, and less than 50 percent resident
workers working in a different county. Then, spe­
cific commuting interchange requirements and lo­
cal opinion through the congressional delegation
are used to designate single county or grouped
county PMSAs.

Federal Reserve Bank of Chicago



7 “Poughkeepsie’s Complaint, or Defining Metro­
politan Areas”, Calvin L. Beale, American Demo­
graphics, January 1984, pg. 29.
8 NEW AREAS: St. Louis-East St. Louis-Alton
(MO-IL) CMSA, Aurora-Elgin PMSA, Joliet
PMSA, Lake County PMSA, Alton-Granite City
PMSA and East St. Louis-Belleville PMSA. NEW
COUNTIES: IL: Aurora-Elgin PMSA —Kendall;
Joliet PMSA —Grundy; Alton-Granite City
PMSA—
Jersey; IN: Fort Wayne MSA —Whitley;
Louisville KY-IN MSA —Harrison; IA: Des Moines
MSA —Dallas; Waterloo-Cedar Falls MSA —Bre­
mer; and MI: Saginaw-Bay City-Midland —Mid­
land. DELETED COUNTIES: IN: Evansville
MSA —Gibson; Fort Wayne MSA —Adams and
Wells; South Bend-Mishawaka MSA —Marshall;
Terre Haute MSA —Sullivan and Vermillion; MI:
Flint MSA —Shiawassee; Lansing-East Lansing
MSA —Ionia; Battle Creek MSA —Barry; Kalama­
zoo MSA —Van Buren; Muskegon MSA —Oceana.
9 Local opinion is considered in several cases: 1)
approximately equal commuting (within 5 per­
centage points) to two different areas; 2) central
cities within 25 miles of each other may be com­
bined into a single MSA, without meeting the 15
percent commuting requirement, or left as parts of
two separate MSAs; 3) the establishment of sepa­
rately recognized PMSAs versus only inclusion in
the Level A MSA and; 4) selecting appropriate
PMSA and CMSA titles.
10 The Interlocks Act was enacted as Title II of the
Financial Institutions Regulatory and Interest Rate
Control Act of 1978.
11 Depository institutions include commercial
banks, savings banks, savings and loan associations,
building and loan associations, and credit unions.
12 A Catalog of Federal Grant-In-Aid to State and Local
Governments: Grants Funded FT 1984, Advisory Com­
mission on Intergovernmental Relations, Wash­
ington, D.C.

35

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