Present value is present value

I took a shortcut in my previous post: I said reserves in 1995 would have cost $275 per month.  This is wrong.

1. The starting point was my estimate that the near-term change to our water bills after RDOS takeover will be something like $500 per month.
2. The value of $500/month in 1995 dollars is about $295.  I am not sure where I got $275 in my original post.  Dumb math error or failing eyesight.  The consumer price index was 91.6 for 1995 and 155.2 for 2024.  So what $1 buys today could be had for $0.59 in 1995.
3. In any case, both $295 and $275 are much too high.  Solving for the correct number is a bit trickier because it involves two opposing rates: inflation and interest.

One way to make sense of this is to lay it out year-by-year in Excel.  To start with, let's keep it simple and assume the RDOS borrows what it says it wants to borrow for all phases of the water system upgrade: $33M.  I have been using the McElhanney number of connections in my calculations (244) so that means the share of the capital cost allocated to each connection is about $135K*.  Let's assume the Water Comptroller in 1995 decided to start building a reserve fund so that the Sage Mesa Water System could fully replace its aging assets in 2025.  In the first year, each household is billed an additional $157 each month on its water bill (I get that our water bills are currently quarterly, but multiply by four as required).  This amounts to $1888 per connection per year, which the Water Comptroller puts in a trust account earning 4%.  What happens to $1,888 if it is left in a bank account for 30 years earning 4%?  It is worth $5,890.70 at the end of 2024.  This is in the "Future Value" column.

Assuming that inflation is about 2%, in the following year, the Water Comptroller increases the monthly reserve contribution to $160.55 per household.  In this way, the purchasing power of the reserve contribution is kept constant.  Using such "real dollars" is how the Comptroller accounts for increases in the cost of the replacement system over time.   As before, the contributions are added to the trust and your share of the 1996 contributions is worth $5777.42 by the end of 2024.  If the Water Comptroller continues to do this for 30 years, the reserve fund will contain $135K per connection.  The $33M cost of the system can be paid for at the start of 2025 by cashing out the trust (and restarting the reserve-building process, of course).

Obviously, the Comptroller of Water chose not to do this.  One reason is the size of the numbers.  Your contribution to reserves in 2024 would have been an additional $3,354 on your water bill.  And you still would have had to put up with boil water advisories.

Note, however, that there was nothing stopping you from doing this without the Water Comptroller.  You could have opened an investment account and each month deposited the equivalent of $157.41 in 1995 dollars.  If you had done this and earned 4% per year, you would have $135K in the bank today and could easily pay your share of the capital costs of the upgrade.

But what if you did not do this?  What if instead you contributed to your pension, or paid your mortgage, or bought food and clothing?  From an economic point of view, it makes no difference.  By not contributing to either the Water Comptroller's reserved fund or your own reserve fund, you saved money and are richer as a result.  How much richer?  See above: $135,245.90.  If you don't feel richer—and I am certain you do not—you can look at it this way: you would be $135,245.90 poorer if the Water Comptroller had forced you to pay reserve contributions on the schedule above.

If, in contrast, the system is debt-financed (which is the only real option at this point), things look a bit different.  First, the initial monthly payment is much higher: $651 per connection per month (recall, I am assuming the whole $33M in Year 1 here).  However, it is important to recognize that debt payments, as opposed to the reserve contributions above, are in nominal, not real dollars.  The number never changes over the life of the loan.  This means that, thanks to inflation, the purchasing power of the payment decreases over time.  Moreover, these cashflows are in the future, so they are worth less (the "Present Value" column below).  But here is the critical point: The present value of these debt payments over 30 years is $135,245.90—which is exactly what you saved by not having to pay into a Sage Mesa Water System reserve fund for the last 30 years.

This is why I say in my original post that it does not matter whether you started paying into reserves 30 years ago or are starting to pay back debt for the next 30 years.  The present value is the same $135K.

Where this does make a difference—a big difference—if you paid into reserves for 29 years and then left the neighborhood before the upgrades.  Maybe got that money back when you sold your house (when the new buyers examined the water system's balance sheet and noted the large replacement reserve).  But my guess is not.

My point in all this is not to suggest that everything is fine.  $135K per connection is not fine at all.  Rather, my point is that ratepayers are currently on the hook for the same amount either way.  There is little use—at least for people who have been here a long time and plan to stay here a long time—in getting bent out of shape over the timing of cash flows.  It is the size of the cash flows that should be the focus.

Sage Mesa Water: Some history and thoughts

I was the Area F director from 2008 to 2018 and can perhaps provide some background on the Sage Mesa Water system and how we got here. I can also identify some possible paths forward.

I only know the history prior to 2008 second-hand and imperfectly, so others can fill in the gaps with corrections and additions. Sadly, Ron Perrie (my long-serving predecessor as Area F director) passed away in March and knew more about all this than anyone.

System History

Here is a sketch of the history of the system:

1. Dick Chapman, and perhaps others, built, paid for, and operated the Sage Mesa water system in order to enable development of the Sage Mesa subdivision. This kind of developer-provided infrastructure was common in rural areas during the heavy growth following the Second World War.
2. The system was subsequently modified to service Husula Highlands. This required the construction of an upper reservoir and a connection to the lower reservoir on the property of the Pine Hills golf course.
3. At some point in the 1990s, the disagreements between the Chapman family and the Office of the Water Comptroller came to a head and the province seized operation (but not ownership) of the Sage Mesa system. Some context: all private water systems in British Columbia are accountable to the provincial Water Comptroller (for operations) and the local Health Authority (for water quality). The Comptroller monitors the core operation of the systems and the financial operation of the utility. For example, the Comptroller ensures that the owner’s rate of return is appropriate. This prevents private utilities from exploiting their extraordinary monopoly power. A bureaucrat in Victoria was appointed to operate the system, although in practice, a local water operator was hired to monitor and maintain the many moving pieces. Billing was also contracted to a local accounting firm (now HLW).
4. In the 1990s Dave Kampe made a deal to connect the Westwood Properties subdivision, again from the upper reservoir. The province was in control of the system, so it was not a simple negotiation process between Mr. Chapman and Mr. Kampe.
5. Soon after I joined the RDOS board, Frank Lamberty, the local water operator appointed by the province retired. The Water Comptroller needed someone on the ground to swing wrenches, so the RDOS—which had semi-recently acquired the Naramata water system—bid on and won the contract to operate the Sage Mesa system. The RDOS water operations team became decision-makers for the system, but only at the most operational level (chlorine levels, pump pressures, and occasionally suggested repairs).
6. When we executed the "bulk water" agreement for the West Bench with the City of Penticton in 2012, we included an option for the Sage Mesa system to join on exactly the same terms (adjusted for inflation) as the West Bench.

Seizure of private water systems is uncommon in BC, but Sage Mesa is hardly the only example. The plan is, and always has been, for the provincial Water Management Branch to find an alternative arrangement. As Al Aderichin pointed out in his recent presentation, his office is not really equipped to manage a water system for the long haul. System seizure should normally be followed by transfer of the utility to a more locally-responsive entity, such as an irrigation district or a local government.

This leads to the following question: why has the transfer to a locally-responsive entity not yet occurred?  It is not like people have not been working on it. When I came on as Area F director in 2008, Ron Perrie handed it to me as one of the top priorities. To answer this, we need to stray from verifiable facts and consider the complex dynamic that has existed for many years around Sage Mesa, its personalities, and its water system. I came to this dynamic late, and there are many who must know more about it than me, so I will just sketch it as I understand it.  Dick Chapman, who passed away in 2015, did not like or trust the RDOS. And since his family owned (and still owns) the water system, this is not a bit of gossip or trivia. It is a critical piece of the puzzle.

My Involvement 2008-2018

I never met Dick Chapman or his wife Mary Kathleen. However, I had many conversations with their son John between 2008 and 2018. I do not want to speak out of turn on what is clearly a sensitive topic or tell a story that is not mine to tell. But if you walk down to the end of Sage Mesa Drive, to the paved cul-de-sac with no houses, you get a sense of the scale of the issue. There is also a good-sized scar on the hill adjacent to the Pine Hill golf course entrance. These are clues that Mr. Chapman’s development ambitions were thwarted by the RDOS and others. And there was secondary beef, such as perceived mistreatment surrounding the Westwood Properties expansion (e.g., Westwood took too much water from the lower system, precluding further development in Sage Mesa or even functioning fire hydrants in the lower zone).  The Chapmans had put a lot of their money and effort into building a water system so that they could develop land but felt that others, especially the RDOS, had reneged on the deal.

Since I was then the elected representative of the mendacious and mean-spirited RDOS, I walked directly into a hornets’ nest of blame and recrimination. However, I was new and most of the people at the RDOS had turned over many times over the years. A personal grudge against the RDOS seemed misplaced. John and I made a lot of progress, I think. I had no history in this battle and could see legitimacy in many of the Chapmans’ claims. On the other hand, many of the Bad Things that occurred were ultimately the consequence of changing standards regarding, for example, rural development, and were outside of the direct control of the RDOS. Moreover, the change reflected accumulated experience. Some development practices, such as putting septic fields on the edge of silt cliffs, turned out to be problematic in the long term. Mr. Chapman’s recipe for developing land no longer fit the evolving regulatory environment.

So we started talking about compromise and placating the family so that they would be willing to transfer the utility to the RDOS. There was no other real option. Irrigation districts had fallen out of favor by this point. The City of Penticton had zero interest in taking over the system outside its municipal boundary. So, unfortunately for Mr. Chapman pere, the RDOS was the only feasible exit. I think John recognized this, but Dick was the decision-maker. 

So we did not make much progress on the Sage Mesa water project despite plans and consultant reports and many meetings. During the same time frame, however, we transferred ownership and upgraded the West Bench system and upgraded the Faulder system, so it is not like everything the RDOS touched ground to a halt. Mr. Chapman’s death in 2015 was, of course, a significant turning point. And although his widow (and system owner) seemed to remain loyal to her late husband’s aversion to an RDOS transfer, it was becoming increasingly obvious that the transfer was inevitable. When I left the RDOS directorship in 2018 the deal seemed done. We had agreements in principle and all we needed was the paperwork. But paperwork takes time, then Covid, significant personnel changes at the RDOS, and so on.

A question that might arise at this point is: Why did the provincial government not simply seize complete ownership system against the wishes of the owner and hand it to the RDOS to own and operate on behalf of its ratepayers? If you think about this a bit, I believe you will agree that governments in Canada should avoid seizing private property as a matter or principle. The small number of exceptions mostly involve grave dangers to public safety. But the Sage Mesa water system has never come anywhere close to this trigger point. The water system was, and is, just about as good as any other small water system in BC.  For many decades we have turned on the taps in our houses and water has come out. And even with the many water quality advisories (which my family, for one, routinely ignore), I have heard of no illness due to our water. Lastly, the water has remained cheap—cheaper than West Bench and Faulder for sure. Ironically, this cheapness has now become a focal point for outcry. More on this later.

So here we are finally. We are now at the point where we, as a community, decide whether to authorize the RDOS to initiate a voluntary transfer of the Sage Mesa water utility from private ownership to local government ownership. There is no question that this ownership structure, with the built-in democratic accountability of local government, and removal of the Water Comptroller from day-to-day operational decisions is better. Moreover, water systems benefit from economies of scale and the RDOS has an established track record of running multiple systems using shared resources. This vote should be a no-brainer, right?

Transfer

Here is the issue: much of the system is past its (theoretical) useful life and should be replaced to avoid unscheduled maintenance (best case) or catastrophic failure (worst case).  In addition, standards for water treatment have changed dramatically in the last 20 years so fundamental changes to the core supply system and treatment train are also required. The policy of the RDOS, which seems sensible to me, is to bring any water system it acquires up to standard. So transferring ownership of the Sage Mesa water utility to the RDOS for $1 isn’t as simple as it sounds.  A vote in favor of transfer is also a vote in favor of the RDOS borrowing a whole bunch of money to pay for the upgrades. My own calculations, which are shown below, suggest that an initial round of upgrades (necessary fixes and supply upgrades) will cost each household an additional $500/month.*  This is just for phases A & B in the McElhanney report. The engineers also anticipate a third phase C starting in 2036-ish. But that seems a long way off to me, so I am ignoring it for now. Thus, just for starters, transfer of the Sage Mesa water system to the RDOS will require an additional $6K per year per household on our water bills. Yikes!

So what are the alternatives?

Grants

The best alternative is to get huge grants from the federal and provincial governments to cover two-thirds of the capital cost of the upgrade. The remaining one-third would still be a significant burden for ratepayers, but no one says no to free money. The fundamental problem with grants is that there is zero obligation for other levels of government to give us anything. Water systems are meant to be user-pay. Not only is there no guarantee of getting a grant, the new rules around grants mean that the RDOS has to own the utility before even making an application. As noted above, transfer to the RDOS entails a borrowing authorization bylaw. So we have to commit to paying the full costs of upgrading the system before finding out whether we get a nickel of grant relief.

How likely is it, then, that we will get a significant grant? I don’t think anyone knows, but keep in mind that another name for “grants” is “other people’s taxes”. The question you have to ask yourself is whether other people should be paying for your water system (or roof or driveway, or whatever)? And do you agree, in turn, to pay for theirs? I am not saying that a grant won’t happen. We may get lucky, or maybe this whole thing will become such a corrosive mess that the government will throw us a grant just to keep us from tearing each other’s heads off. This is roughly what happened on the West Bench. But the West Bench was different for many other reasons: coming out of an economic downturn meant that all governments were looking to pump money into communities. And we had (effectively) two MLAs then (one in cabinet, one speaker of the leg)**. Things are different today. Governments are more interested in fighting inflation by slowing the economy than stimulating it with infrastructure spending. The province is cutting costs on all fronts. Things may change quickly, of course, thanks to a certain amount of chaos to our south. All we know at this point is that if we don’t allow the RDOS to acquire the system, the probability of a grant is exactly zero. Not much to go on, so let’s consider other alternatives.

Reserves

The second-best alternative is to tap into the large replacement reserves that have been collected over the years to offset the capital cost of the upgrades. The hitch here is that the Sage Mesa system has accumulated no meaningful replacement reserves. Oops. Not that this should be much of a surprise. The push to more disciplined capital asset management is relatively new and is not without its critics. The issue is who pays for system upgrades? I have seen this issue debated many times, so let’s take a moment to walk through it. 

When my wife and I bought our house in Westwood Properties, the developer (Dave Kampe) had paid for all the infrastructure (including the connections to the Sage Mesa water system) and, to make a profit, he had to pass those costs along to us as homebuyers. So we effectively paid for our share of the new system when we bought the lot. Now, if we had also paid over the years into replacement reserves, we would have paid twice: once for the new system and a second time for the future replacement system. The key to the reserve-funding approach is that, when we sell our house, the new buyer recognizes that the aging water system comes with a large replacement reserve fund (making it functionally equivalent to a new water system). The new buyer should therefore be willing to pay more for our house. We pay twice for the water system but get compensated when we sell our house by getting a higher price than if no reserves were in place.

The problem in practice is that it seldom works this way. Future buyers are clueless about whether the water utility has adequate reserves. When it comes time for them to make an offer, they are more likely to be looking at the prices of similar homes in Wiltse than the balance sheet of our water utility. It is therefore unrealistic for us to expect them to pay us a higher price (and thereby pay back our reserve contributions). Instead, we have strong incentives to skimp on reserves and furtively pass our under-funded utility along to the next buyer. This is precisely why the most democratically responsive governance structure for water systems—irrigation districts with elected boards—typically have notoriously inadequate reserves.  The reserve-skimpers give people what they want and get elected. No one votes for a reserve-building buzzkill.

These same incentives are, of course, at work whenever there is common property, elected decision-makers, and information asymmetry between buyers and sellers. We can look to the much larger strata corporation ecosystem to see the forces play out. The province has had to introduce massive changes to the Strata Property Act to increase the transparency of every strata corporation’s reserve positions relative to the conditions of its assets. Stratas are now required to commission and pay for detailed depreciation reports and make minimum annual contributions to contingency reserve funds. The province has not yet taken the step of requiring strata corporations to match their reserve contributions to the depreciation report (thus creating the fully-funded reserve situation described above) because it would be political suicide. People generally do not want to pay huge strata fees so that the person who buys their unit can benefit from fully-funded upgrades.  I have sat through many strata AGMs in which people have argued convincingly in favor of special levies (see pay-as-you-go below) over increased reserve contributions and higher strata fees.

The government has also mandated something similar for local governments. But again, they have opted for a nudge instead of a shove. Since 2009 local governments have been required—at considerable taxpayer cost—to have tangible capital asset (TCA) plans that are similar in spirit to the much-hated depreciation reports for strata corps. The idea is transparency. For example, when West Bench water users check to ensure that the regional district is putting enough money away to cover the theoretical depreciation of their pumping and distribution assets, they can compare the annual depreciation (or amortization) expense for the water system to the contributions to capital reserves. Who am I kidding? I know no ratepayer of the West Bench water system has ever done this. In fact, it is impossible. Although the ledger entries are (I assume) made in accordance with the law, none of this is exposed to the public in budgets or financial statements. So when I say the next buyer of your house is clueless, it is not entirely their fault. The provincial government's efforts to increase financial transparency seem to have foundered catastrophically on the shoals of local government disclosure.

So getting back to Sage Mesa Water: The Water Comptroller, on seizing the system, did not increase water fees to the level necessary to create a fully-funded replacement reserve. Doing so would have required exactly what is so controversial now: adding $275 per month to everyone’s water bills (this is the inflation-adjusted equivalent of $500/month today; $275 certainly would have stung in 1995 [update: yeah, I cut some corners on this math; see the follow-on post for a correction]). The situation was obvious to anyone paying attention at the time, and I, for one, supported the reserve skimping. There are a couple of reasons for this:

1. As a matter of principle, an unelected bureaucrat hundreds of kms away in Victoria should be content to be a temporary caretaker and not go off making major decisions about a community’s core infrastructure. Conveniently, the unelected bureaucrat and his bosses saw it this way too.
2. I did not want to pay for upgrades that I might or might not be around to benefit from. I did not know we would still be in this house decades later. This is the rational reserve-skimping strategy noted above.
3. Squeaky hinge gets the oil. Granting processes are competitions that pit communities against each other.  It seemed to me that asking for grants for a system that had fully-funded reserves was a losing strategy. Better to come to the table as a financial basket case on the verge of collapse. In short, the province’s granting practices created a strong disincentive for utilities to make investments in reserves.
4. Who knew what was going to happen? As always, there was talk of major expansions of Westwood Properties, the West Bench joining Penticton, PIB development, and other major changes. Wait and see seemed like a better approach.

This is not to say that the Water Comptroller did nothing to build reserves. As far as I can tell as a ratepayer, the system was run pretty well: our water rates have been low relative other systems, breaks and failures have been fixed when they have occurred, and I have so far not had to cough up any special levies. There are apparently adequate operating reserves; the issue is replacement reserves.

Pay as you go

The third alternative is the only one that is being formally presented to us: pay-as-you-go. As with the reserve case, the source of money is the ratepayer. Indeed, if you calculate the present value of the cash flows associated with the fully-funded-reserve approach and the pay-as-you-go approach, you should get the same number.  The only difference is in the timing of the increased water fees: before or after the upgrade. In the pay-as-you approach, the local government borrows a bunch of money to pay for the upgrades, the work is done by contractors, and ratepayers are billed to cover the system’s operating and debt service costs over some term (say 20 or 30 years).  

This is conceptually similar to the new construction case: the person who owns the house when the upgrade is done pays for it. But unlike the new construction case, in which all capital costs (including those attributable to utilities) are generally rolled into the homeowner’s mortgage, the established utility usually takes on the debt. Of course, if you want, you could commute your share of the utility’s upgrade costs (pay a lump sum) and add it to your mortgage. But this makes little sense given that the borrowing rate charged to the utility (though the local government and the Municipal Finance Authority) is invariably lower than anything you could get as an individual borrower.  And, according to the Clueless Buyer Theory elaborated above, you would never get compensated for this outlay if you sold prior to the retirement of the debt.

The other major difference with the new construction case is that new construction involves the creation of large and obvious value. The difference in value between a plot of dirt with lumber stacked on it and a new house is large enough that paying for a portion of new utility infrastructure seems doable. On the other hand, paying to upgrade existing utility infrastructure seems much less doable. The additional value is there, but only in theory. It is invisible and creates no obvious benefit apart from risk reduction.  As discussed above, buyers are unlikely to notice the upgrade and hence unwilling to pay for it.

Growth

The fourth alternative is something that has apparently been explicitly ruled out by the RDOS, even though it was an important part of the 2018 Area F Official Community Plan (OCP): growth to fund infrastructure. As noted above, new development generally unlocks massive value. Here, value means the difference between the developer’s cost and the buyer’s willingness to pay. The negotiated selling price determines the distribution of value between the two parties. If the price is very close to the buyer’s maximum willingness to pay, and higher than the developer’s cost, then the value accrues to the developer. If, on the other hand, the developer breaks even, all the value accrues to the buyer. A third option is possible, however: if development creates a negative externality for neighbors (say traffic, noise, view impingement), then the neighbors have a theoretical claim to some of the value created by development to compensate them. It is not an actual claim in any legal sense—no law protects your view or promises you acceptable levels of traffic. However, in practice, incumbent residents can extract a piece of the development surplus by enacting and enforcing land use bylaws.

The land use bylaw I am thinking of is Section 7.2.1.14 of the Area F OCP:

[The RDOS] may consider residential development proposals with a range of densities […] only on parcels shown in Figure 15 […]. If development is proposed for these areas, it is predicated on full sewer, storm water and water community infrastructure services being in place, all geotechnical risks being addressed […]

I do not know if anyone recalls the process we ran for the 2018 OCP, but it was a multi-round Delphi survey in which we presented the community with a series of scenarios. The important thing about the scenarios is that they were designed to elicit tradeoffs. The simple reality of rural land use is that you cannot have it all. For example, you can not have bucolic rural densities, low taxes, and high-quality amenities, such as water, sewer, vibrant retail, good schools, and so on. You can, however, give up one thing to achieve the other two. I have always illustrated this using the Rural Growth Triangle, which is shown below.  The regions A, B, and C of the Venn diagram represent feasible combinations (overlapping objectives).  The shaded area in the middle denotes an unobtainable combination.

Traditionally, the West Bench (broadly defined in this section) has valued rural ambiance and low taxes and made do with barely adequate amenities (no sewer, woefully inadequate stormwater management, and so on)***. This is region A of the Rural Growth Triangle. In contrast, the OCP surveys surfaced divergent opinions about the future. There was a large contingent that wanted the area to stay exactly as it was and another large contingent that wanted to shift away from the focus on rural ambiance and in favor of increased amenities (primarily storm, sewer, and water)—towards region C.

Sometimes, it is possible to make tradeoffs that achieve a kind of compromise. In the case of the West Bench, the planners identified the large parcels referred to in the bylaw (specifically: the Peter Bros. pit, the Pine Hills golf course, and the Wow golf course) as possible areas of pocket densification. The idea was that high-density development on these parcels only would not unduly alter our rural ambiance and, in the case of the asphalt plant, might solve a whole different set of problems. The second part of the OCP section outlines the other side of the tradeoff: we may consider development on these parcels if and only if adequate water, storm, and sewer infrastructure is in place.  How does such infrastructure get paid for? From the value created by development, of course.  In other words, densification of these parcels would require the developers to share some of their profits with the community in the form of investments in infrastructure.  No infrastructure, no development.

I am not advocating for massive pocket densification on these parcels. I am merely identifying alternatives. The reality is that the West Bench cannot afford to skimp on infrastructure and services much longer. Our traditional comfort with region A in the diagram is increasingly untenable due to a mismatch between the cost of modern infrastructure and the size of the rate-paying base to support it.  We are, by definition, unsustainable because our community cannot function without periodic infusions of external money.  That leaves region B (which is pay-as-you-go), or region C (which is growth). Naturally, since I was heavily involved in the OCP, I think the region C option with pocket densification is a reasonable compromise.

But is it is realistic? Well, in one sense, yes. When I look out my window and see Penticton’s Sendero Canyon, massive hillside development in Naramata (which, by the way, is no longer consistent with their OCP, which was developed in a similar way to our OCP), and Skaha Hills on PIB land, I conclude that the supply and demand for such projects exist. As long as sufficient money is up for grabs, everything else is a mere engineering challenge.

In another sense, however, meaningful and dramatic change is not possible on the Greater West Bench. The primary issue is not soil stability (at least not in the Peter Bros. pit or Pine Hills), but our governance structure. I was on the RDOS board for a decade and believe that regional districts in British Columbia exist to solve an important set of problems. But they are not designed to facilitate transformative growth or renewal. I think OK Falls has come to this realization the hard way.

So, to be candid, the only path forward I see for the Greater West Bench (other than pay-you-go) is to amalgamate with the City of Penticton. The advantage of this is not that it will be cheaper. There is zero chance that Penticton taxpayers will underwrite a penny of any of the infrastructure costs we are talking about. The primary advantage is that municipalities in British Columbia have powers and capabilities that regional districts are, by design, denied. Penticton can, for example, run infrastructure up to Sendaro before there are any residents there. A regional district cannot. If our only way forward is to grow our way out of infrastructure deficits and then develop a critical mass of ratepayers to make our community truly self-sufficient, we will need the flexibility and organizational capacity of a good-sized municipality.

Another possible benefit—and now I am in the realm of dreamworld speculation—is that the province may look more favorably on a solution that permanently addresses a problem than one that just kicks the problem down the road. Bringing our community, the City of Penticton, owners of the large parcels, and big-league developers together to address multifaceted infrastructure and governance problems will require a good amount of fire starter. Maybe senior governments are willing to help this along with some grant funding.

Update: A new site

Just in case anyone cares how all this ended, here is a quick update as of Feb 2010 (the day after the Olympics started):

1. The South Okanagan Events Centre was built in 2008. It cost $81M, give or take.
2. As of FY 2009, it is losing about $2M per year for the City of Penticton (that is, expenses exceed revenue from all sources by $2M).
3. This $2M does not include the $200,000/year management fee the City of Penticton pays Global Spectrum.
3. The carrying costs (debt and principal) are another $2M per year.

So, in a town with a total tax requisition of roughly $20M/year, just over $4M/year, or about 20 cents of every tax dollar, is going to pay for the SOEC. Ouch! And no Olympic hockey team from any country ever showed to use the facility prior to the Vancouver/Whistler games....

Having said that, this massive cost is borne by City of Penticton taxpayers only; West Benchers were never invited to vote on the project and thus have no financial responsibility for the outcome. As an added bonus, it is a very nice facility. My boy plays hockey from time to time in the community rink (nice rink, terrible viewing area) and my family enjoys the Vees games (we billet players so get free seasons passes).

So my bottom line: The City of Penticton spent too much money on an grossly oversized facility. Due to my opposition to the financial chicanery around the SOEC and the fundamentally idiotic decision by the City of Penticton and School District 67 to tear down the Pen-Hi gym and auditorium (http://saveournorthgym.blogspot.com), I became involved in local government.

This new responsibility keeps me, for the most part, from using the work "idiotic" in a political context. But I do maintain a site for Area F of the Regional District of the Okanagan-Similkameen: http://areaf.rdos.bc.ca.

Save Our North Gym (S.O.N.G.)

I have set up a new blog for Save Our North Gym (S.O.N.G.). Please see http://saveournorthgym.blogspot.com/. Also, check out the nifty tag cloud, which I found here.

Saving the Pen-Hi gym and auditorium

Congratulations to me. With this post, I am officially no longer a one-topic blogger!
Submitted to the Herald as a letter:

What if, as Dodi Morrison asks in a recent column, Penticton cannot afford a new performing arts center? What if the $17M cost overrun for the South Okanagan Event Centre and increased spending for critical infrastructure (water, sewers) mean that the City of Penticton is unable to come up with its one-third share of a new $25M facility (even if the provincial governments agrees to foot the rest of the bill)? The decision for the local performing arts community then becomes whether to throw its support behind efforts to save the Pen-Hi auditorium or risk being left with no facility (other than the much-maligned Cleland Theatre). Little suspension of disbelief is required to imagine a three-act tragedy in which City Hall continues to make encouraging noises about a new performing arts centre, local arts groups stand by as bulldozers flatten the Pen-Hi auditorium, and, for one reason or another, City Hall’s vague commitment to a new facility never materializes in its capital budgets. Given the near certainty of continued pressure on the city’s financial resources, the performing arts community might want to consider hanging on to the Pen-Hi auditorium as a hedge against being left empty handed.

As some have already pointed out, a commitment to save the auditorium then raises the issue of Pen-Hi’s north gym. A good chunk of the estimated cost of converting the auditorium to a community facility arises from the need to sever its heating, water, and other services from the centralized facilities of the soon-to-be demolished school. Since the auditorium and gym are connected, the additional cost of including the gym in the conversion would be relatively small. The two buildings can thus be thought of as a package deal. Faced with the possibility of a bargain, the question is whether the auditorium and gym would create enough value in the community to justify the city’s costs of acquisition and conversion.

In the absence of rock-solid commitments by both city and provincial governments to a new performing arts facility, the community value of the Pen-Hi auditorium is bound to be high. The case for the gym, however, is less clear. Some in the community have a sentimental attachment to the gym. Others are less sentimental but think it is short-sighted and foolish to knock over a perfectly good building to make room for a parking lot, especially given the replacement cost of the building in question. The problem is that, to this point, no strong, unified voice in favor of saving the gym has emerged. The rebuilt Pen-Hi will include a massive new gym, so the school district cannot be expected to champion anything beyond its educational mandate. And additional gym space—bargain or no bargain—does not currently rank high on the City’s lists of capital spending priorities. However, we should recognize that fragmented support within the community is not the same as no support. Many small, diverse groups could benefit from community ownership of the gym. Perhaps, for example, adult basketball leagues would return to Penticton if more gym time was available in the evenings. And what about floor hockey, badminton, archery, martial arts, gymnastics, dance, and so on? It may be that these many small groups are, in aggregate, large enough to get the attention of local politicians.

The risk is that we might never find out. City Hall appears to have little time or stomach for the inter-jurisdictional negotiations required to bring an auditorium/gym proposal forward for a full public dialog. This is troubling since artistic and recreational facilities involve subtle tradeoffs between hard, tangible costs and soft, intangible benefits. It is not clear how a high-quality decision can be made without the full involvement of the community. In the worst case, the deadline for action on the gym will pass without careful and open consideration of its potential. All the important decisions will then be made by the driver of a bulldozer.

The importance of good trade-offs

(submitted to the Penticton Herald as a letter to the editor)

If one takes letters to the editor in the local paper as a barometer of public opinion, then we can conclude that Pentictonites are strongly in favor of three things: low-density, controlled development; protection of agricultural land against urban sprawl; and affordable housing. The problem is that we cannot have all three, especially given that people outside of our community want to live here. Constrained supply and strong demand for housing inevitably leads to increasing prices. If we really want affordable housing, we will have to accept either higher density or increased sprawl. The only way to sidestep this economic reality is to impose a non-market solution like, for example, Banff, which has capped its population at 10,000 and requires residents to apply to live there. The downside, of course, is that by outlawing growth, Banff has become the town that time forgot.

This pattern of tradeoffs, in which only two-of-three desirable objectives are achievable, seems common in city politics. Consider the South Okanagan Events Centre. The rule of thumb in project management is that a project can be on time, on budget, or be fully functional, but it cannot be all three. This implies that project managers must pick two of these objectives and accept slippages on the third. Apparently, we have decided to let the budget for the events centre slip. I have always believed that the events centre would become a white elephant; however, like many others, I was under the impression that it would be free white elephant (at least as far as capital costs are concerned). Recent revelations about mixups and misunderstandings—I have to be careful here, because I do not want to say anything actionable—mean that the event centre is actually going to cost Penticton taxpayers (er, I mean water and electricity users) a fair chunk of money.

It may be the case, as both Giffels and City Hall contend, that costs have increased dramatically since the referendum. But if this is so, why are we so willing to let the budget slip instead of making other tradeoffs? A smaller, cheaper facility is one possibility. However, many long-time residents warn against scaling back the functionality of the project (as we apparently did, but should not have done, with the Community Centre in the 1980s). What about letting the schedule slip instead? Do we really need to undertake a major project during a period of unprecedented inflation in construction costs? If, as Giffels claims, costs are spiraling upwards due to an Olympic building boom, why not wait out the boom? We know when it will end. And Giffels might be happy to have some post-boom projects on the books.

Delaying the project would certainly involve costs and unpleasantries. We would not, for example, have the centre completed in time for our centennial year. Imagine the civic shame. And delay would mean missing the Olympic-related spillovers that we have heard so much about, such as having (say) the Belarusian hockey team train for a couple of weeks on our ice. Yet, we are talking about a lot of money: for $17M, we could fly all of Penticton to the Olympics for the real thing. To frame the tradeoff differently, consider the following question: Would you, as a resident of Penticton, prefer Package A or Package B given that both packages cost the same? Package A consists of an event centre delivered in our centennial year and a couple of weeks of pre-Olympic activity. Package B consists of the same event centre delivered in 2011, no Belarusians, and a new wave pool (or a new community arts centre, or some other major project built with the money saved by timing the events centre better). If the Olympic boom is the true cause of the event centre’s cost overruns, then Package B is a real alternative.

The problem, as a recent editorial pointed out, is that we seem to be guilty of escalating commitment to the event centre. But this does not mean that we are powerless to make changes. In the same way that George W. might want to fully reconsider his options in Iraq, the City of Penticton might want to fully reconsider its options in our own little quagmire.

Recanting

I have submitted the following to the Penticton Herald as a letter or op-ed piece:

Judging from the opinion pages of the Herald, the referendum for the SOEC might be closer than expected. One factor working against a resounding “yes” is voter apathy on the part of the “non-no” side (Pentictonites who are not against the SOEC but do not feel strongly enough about it either way to bother voting). A second factor is general wariness due in part to the city’s frustrating secrecy about the true costs and benefits of the project. I had to resort to a request under the Freedom of Information Act to pry a copy of the SOEC business plan away from the city. After reviewing the numbers, it became apparent to me that the only way the SOEC would make any financial sense is if $20 million fell from the sky.

As it turns out, the DAC funding is closer to $40 million. And saying that it fell from the sky does not give credit where credit is due. According to the small amount of information about the program available from the BC Lotteries Corporation website, DAC is an investment in casinos, not communities. The city already gets one-sixth of the revenue from the casino to spend on community programs. The purpose of DAC funding, in contrast, is to increase gaming revenue by making destination casinos around the province more attractive to gamblers. By bringing the SOEC and the Penticton Trade and Convention Centre (PTCC) under one management umbrella, the city can claim that the SOEC is part of a large, proven convention facility. And, as Las Vegas illustrates, conventions and gambling are a potent combination.

Regardless of whether any SOEC-casino synergies materialize in practice, the city’s decision to promote the events centre as a complement, rather than a competitor, to the casino was brilliant. Thanks to their success, the only remaining barrier to the project is the referendum on Saturday. The first question is pretty straightforward. It mentions borrowing but it is really asking Pentictonites whether we should accept a pile of free money or instead watch as $40 million is spent to upgrade casinos elsewhere in the province. The second question is more controversial because it asks about Global Spectrum’s role in managing the SOEC and PTCC. Blanket generalizations about public-private partnerships (PPPs) are not particularly helpful in this debate because there are many variations on the theme and the evidence is mixed: some PPPs work very well and some municipally-managed facilities are poorly run. Much depends on the city’s ability to write and enforce a good contract with its partner. As I see it, the risk of voting against combined private sector management is that separate management of the two facilities undermines the argument used to obtain the DAC support in the first place. Given that the funding is spread over many years, the last thing we want to do is give a future government a pretext for seeing the SOEC as anything other than an integral part of a thriving, well-run convention machine.

I still believe the project has its problems, most notably the city’s exposure to high operational costs and over-optimistic revenue projections. But let’s face it: $50 million in outside funding buys the SOEC team a lot of wiggle room. DAC funding has transformed the project from an iffy luxury into a complete no-brainer. My hope is that those who are eligible to vote in Saturday’s referendum will take the time to do so and will recognize the SOEC team’s accomplishment with an overwhelming vote of confidence.