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HomeMy Public PortalAboutExhibit MSD 30M - Operation and Maintenance Inflation Assumptions Inflation Assumptions Inflation assumptions are used in the rate model as a way to account for anticipated price increases for the goods and services acquired by the District in fulfillment of its mission. The rate model uses inflation rates for operating and maintenance expenses as well as the construction, improvement, and replacement program (CIRP) expenses. Inflation for CIRP will be covered in a later appendix. During the preparation of the District’s February 2015 Rate Proposal, the District sought assistance from William T. Gavin, Vice President and Review Editor, at the Federal Reserve Bank of St. Louis. Mr. Gavin was consulted regarding inflation assumptions for use in the rate model. The District again used the methodology recommended at that time by Mr. Gavin in the current rate model. The District chose to use The Budget and Economic Outlook: 2017 to 2027 published by the Congressional Budget Office of the Congress of The United States (CBO) as a source for inflation rates related to operations and maintenance expenses. Published in January of 2017, this document provided a 10-year forecast that best matched the District’s rate model time horizon. Table C-2 in that publication contains the Core PCE Price Index (excluding food and energy) which the District used in the model for most expenses. The index remained steady at 2.0 from 2018 to 2027. In that same table, a Consumer Price Index reported numbers in the 2.3 to 2.4 range. This index is computed differently, but most importantly it includes food and energy which were excluded from the Core PCE Price Index. Since the index which includes energy forecasts a higher inflation rate, a higher rate was used for utilities in the rate model. The District performed trend analyses on utility expenses changes over a five-year time period. The combination of changes in usage and rate over the last five years results in the following average increases which were used in the rate model. Electric Natural Gas Water Telephone 3.90% 13.10% 13.30% 5.60% Also on Table C-2, is an Employment Cost Index. This index was used as the basis for projected salary increases of 2.7% for years beyond the current collective bargaining agreements. Adjustments were made to the CBO projections to account for regional differences, State and local government differences to private industry, and to remove benefits. Overall these adjustments served to lower the projected rate increases published by the CBO. Group insurance was inflated at rates ranging from 6.2% to 8.2% based on projections provided by the District’s insurance consultant, Arthur J. Gallagher & Company.