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Inflation index questioned

The city is touting a new method to track the inflation of its expenses, but one expert suggests such methods can be a way for municipalities to defend tax increases at budget time.

The city is touting a new method to track the inflation of its expenses, but one expert suggests such methods can be a way for municipalities to defend tax increases at budget time.

At Tuesday’s finance and audit committee meeting, the city unveiled its municipal price index (MPI) that forecasts how much more the city’s baseline services are expected to cost before new spending is worked into the budget.

The city projects an inflation rate of 3.1 per cent in 2010, and staff are pleased with the methodology that they’ve used to create St. Albert’s first price index.

“The methodology is extremely solid,” said Jason LabontĂ©, the city’s financial director.

MPI weighs the city’s historic expenditures against national price indexes from Statistics Canada and the Conference Board of Canada.

The index tracks a basket of goods and services unique to the city such as asphalt, gravel and equipment costs as well as wages and fuel, and is different from the national Consumer Price Index (CPI).

“The CPI uses a basket of goods that is supposed to represent what the average household purchases,” LabontĂ© said. “The municipality doesn’t act like a household.”

Earlier this week, Statistics Canada said the CPI rose 0.1 per cent in the year leading up to May, 2009.

LabontĂ© said the MPI would not drive this year’s budget process, explaining that it’s simply a tool the city uses to track the cost of goods and services.

But not everyone thinks it’s worthwhile.

Frank Atkins, an economist at the University of Calgary, believes MPIs can be used to justify higher taxes.

“I suspect that municipalities are doing this to try and defend tax increases,” Atkins said. “What they’re saying is, ‘Geez, look at this index here it tells us how much our costs have gone up and you’re going to have to pay. That’s my guess.”

The City of Calgary also uses an MPI to track inflation, and St. Albert city staff used it and Waterloo, Ont.’s methodology to create St. Albert’s index.

Atkins advises politicians to be wary.

“I wouldn’t pay attention to MPI,” he said. “What is wrong with a budgeting strategy where you say, ‘Hmm, okay, here’s our revenues and here’s what we want to spend it on, and let’s try and balance it.’”

Last year, the city used a six per cent MPI that it borrowed from Strathcona County.

This year the city discovered that its basket of goods was different from Strathcona’s and it was important to create an index specifically for St. Albert, LabontĂ© said.

“We didn’t think it was a good measure for what we wanted to do here in St. Albert,” he said.

Atkins remains opposed to municipalities that create local price indexes, noting they are notoriously difficult to calculate accurately.

“I don’t understand why they need to make an index,” Atkins said. “Why don’t they just say, here’s our costs.”

Although council’s finance committee gave the MPI early acceptance, Coun. Roger Lemieux remains unconvinced the index is worthwhile.

“My first reaction was, do we need this? Why are we going through the efforts of buying another yardstick when we’re the ones that do the measuring?” Lemieux said, finance and audit committee chair.

Although he’s not opposed to the index, Lemieux remains confident it won’t have much bearing on his decisions come budget time.

“I certainly wouldn’t want to be talking about this very long,” he said. “When we get to budget we’re going to look at it, we’re going to analyze it, use some common sense and logic and move forward.”