Monday, July 9, 2007

Jake Kimberley: Price too steep to save school buildings

The following appeared in the June 29th editions of both The Herald and the Western News:

Having to put sentiment aside when dealing with the responsibility of spending tax dollars, my decision regarding the Pen High Auditorium and Gymnasium was based on that responsibility alone, not the sentimental value of these two buildings.
I am not sure why the Destroy Our Gym but Mainly the Auditorium (D.O.G.M.A.) group keeps calling proponents of saving the gym and auditorium “sentimental” (recall Ben Amos’ first letter as well). I don’t think SONG has ever offered a sentimental reason for saving the buildings. This is merely a form of name calling, of dismissing dissent.
Plus the issue of safety re: the increased traffic around the property now and into the future.

Costs associated with the renovation and upgrade of these two buildings was provided by an independent consultant hired by the city and a local well-known construction company. The estimates were $1.7 million and $1.5 million respectively.

Okay, this is just plain sloppy. Look at the memo from the city’s Director of Special Projects, Barry Reid: On page 2, it clearly states that the city’s estimate (reviewed by an independent quantity surveyor) is $1.5M. Greyback’s quote was $1.2M.

These cost estimates did not take into consideration the unknown costs that are often found when renovating older buildings, if you were to investigate similar projects you would find this to be the case.

Take, for example, the risk of asbestos (which the mayor spent some time discussing during the June 4th, 2007, city council meeting as a possible unknown cost). As the mayor certainly knows, asbestos is safe when inert. Things become costly when asbestos insulation is disturbed, say, during a renovation or demolition. Bottom line: it costs $X to deal with asbestos during a renovation and at least $X to deal with asbestos during a demolition. Either way, the taxpayer picks up the tab.

Any renovation work to these buildings would require them to be brought up to the latest building code requirements, such as a sprinkler system, plus additional washrooms. Washrooms and change rooms would also have to be constructed behind the stage area plus a larger lobby for the entranceway would also have to meet the building code. As stand-alone buildings they would require an additional electrical room, a new source of heating, and air conditioning units would have to be installed. The school board staff were also concerned about the exterior of these buildings and how they would appear against the new school. This exterior upgrade was not considered in the cost estimates quoted above.

Look at Greyback's estimate. Most of these items are already accounted for (except for air conditioning). As for the exterior, we can always hide the building behind wood slats (Trade and Convention Centre) or paint grapes on it (Visitors’ Information Centre).

Industry costs have escalated between 1.5 per cent and 2.0 per cent per month, case in point, the new Pen High construction costs almost doubled from the estimated costs to the final accepted bid price. This is a matter of record.

This is an important point because it involves placing a bet on long-term real (i.e., inflation-adjusted) interest rates.

We all know from our mortgages that a dollar today is worth more than a dollar in the future. That is, if we borrow $1000 today we have to pay the bank back more than this (say $1060) in a year. However, what if, because of inflation, $1000 today buys us more than $1060 in a year? Then it would make sense for us to borrow like crazy and buy everything we want now because the increase in price over time is much larger than our borrowing costs during the same period.

The real interest rate is the nominal interest rate (the rate charged by the bank) less inflation. So, if my mortgage is at 6% and inflation is at 2%, then the real interest rate (the rate that matters) is 4%. However, what about the situation above? Say interest rates are at 6%, inflation in the economy as a whole is 2%, but inflation in non-residential construction is 10%. In this case, real interest rates for construction projects are actually negative (-4%). It makes sense to borrow and spend as long as the rate of inflation (in the relevant sector of the economy) outpaces interest rates.

The problem is, real interest rates in all parts of the economy are normally positive. Even if we consider only non-residential construction (which has experienced considerable inflation recently), the long-term trend is more variable (see graph below; click to enlarge). When you are financing a major project over 20 or 30 years, what is "normal" really matters. Betting that inflation is always going to be higher than interest rates is, from a historical point of view, a bit nutty.

I should add that to save just one of these two buildings as a stand-alone building, the cost would almost be the same estimated costs as saving both.

Yes, this is well established.

The estimated costs of maintaining and managing these two buildings was between $167,000 to $227,000 per year. The average bookings for the auditorium over the last few years were 37 per year. If the city were to be successful in booking the auditorium for 259 days for the next seven years (maximum estimated years before a new structure) and applying that against the estimated costs of taking over these buildings, that would mean that each booking would cost an average of $10,000. Is that a fiscally responsible cost to enter into until a new performing arts facility is built?

I have submitted a longer letter to the editor regarding this claim. As a general observation, this type of argument is very risky. The basic issue is the following: is $10,000 per event too much? What is the basis for comparison?

I took a quick look at the upcoming schedules for the “state of the art” performing arts facilities in Kelowna (326 seats) and Vernon (750 seats). I count 57 events in Kelowna and 39 in Vernon in the coming/past year.

Since our new performing arts facility will more attractive to both performers and spectators than the old Pen-Hi, we might reasonably assume that we will be able to stage more than 37 events in a year. Let’s assume we do better than both Kelowna and Vernon and stage 65 events per year in the new facility. Now let’s compare the cost per show of the new facility with that of the old Pen-Hi auditorium. In order to err on the conservative side, I have assumed a seven year life for the Pen-Hi auditorium (the mayor’s estimate) and a 50-year life/50-year bond for the new facility. For operating costs, I have assumed the lower end of the mayor’s scale ($167K) for the new facility and the upper end ($227K) for the drafty old Pen-Hi auditorium.

Oddly, I get different numbers than the mayor (see table below; click to enlarge). I used Excel and am pretty confident that I did not mess it up; perhaps he did not include the carrying cost of the debt. I calculate the cost of each performance over the seven year life of the Pen-Hi auditorium at $13,700. Interestingly, this is roughly the same as the cost per show over the 50 year life of the new facility. Both are significantly higher than the $10K that so outrages the mayor, so I am not sure what we should take away from all this. If $10K per show is too high, it is pretty clear that we should have no performing arts facility, old or new. I don’t think this was the point the mayor intended to make.

These estimated costs would mean a one per cent overall property tax increase for the renovation work and an annual one per cent tax increase for operation and maintenance costs — a total ongoing property tax increase of two per cent starting in 2008. Monies for the purchase of land for a Performing Arts Centre site would be taken out of the Capitol Reserve fund and therefore would not require a property tax increase.

So the capital reserve money is not tax money? Good to know.

Parking in and around Pen High has always been a problem for the city and property owners in that area have always put forward complaints of school vehicles blocking their driveways. Safety regarding the unloading of the students from school buses must be taken off Eckhardt Avenue where the new entrance will be, this is why the school board was insistent that the gym could not remain on the site.

Odd, the SONG plan makes use of some unused school district land on east of the gym/auditorium to provide more parking than what is in the current plan. I am assuming the mayor read this. Of course, this land could be sold and thus has an opportunity cost. But it has no immediate cash cost—it is school district land.

It was also found in the independent review that there are adequate facilities in the community to accommodate the arts and culture up until a new state of the art facility is constructed.

Obvious question: If the Pentecostal church is adequate for Community Concerts, why are we spending $10M of taxpayer’s money on a new performing arts facility? Are there no other priorities?

Plus, the construction of an indoor soccer facility funded and constructed by the soccer club will fill the void from losing the gym. This new structure will also free up space in the community centre gym.

According to information from Sandra Congram, adult recreational soccer uses the Community Centre gym once per week. I tried to confirm this, but in response to my request for gym usage information, I was told by city staff in an email: “Unfortunately, we do not publish the gym usage numbers and I am told that the use is quite variable from year to year.” In other words, Community Centre gym usage information is top secret.

The indoor soccer facility is a great idea precisely because it will be used for soccer. See the proposal.
Following this decision, city staff will be entering into discussions with the school board staff on joint use of all school gymnasiums including the new state of the art gym being built at Pen High. This maximizes the use of school board facilities, i.e. better use of school taxes and properties.

As stated elsewhere in this blog, the problem with elementary school gyms is not booking efficiency, the problem is that these little gyms are designed for llittle children. They are not great venues for adult recreational sports.

As for community use of the new Pen-Hi gym, the mayor is dreaming. See my previous posting on this topic. It even has video.

Based on the above assessment of upgrading these buildings, I believe this decision will encourage other levels of government to support the need of a new state of the art performing arts facility in Penticton equal to other communities in the valley.

Ah, the theory: destroy what we have and other levels of government will sweep in with money for a replacement. Permit me to doubt.