Mayor's rebuttal

An open letter from the mayor appeared in the Penticton Herald prior to my op-ed article entitled Maintaining our hidden economic engine. According to the mayor's letter, Penticton is the city of "beaches and peaches". I have requested a detailed breakdown of where all these numbers come from ($17M-$26M in direct spending?). More on this when the numbers are made available to me.

Maintaining our hidden economic engine

Op-ed column in the Penticton Herald: 27 June, 2006

Quick: what is the largest industry in Penticton? Tourism? Agriculture? Healthcare? According to the “Community Profile” on the city’s economic development website, the largest industry in Penticton (measured by wages paid to residents in 2000) is “retail trade” (16%), followed by health and social services (14%), and manufacturing (10%). No other industry accounts for more than 10% of the wages earned in the city.

Clearly, there is something wrong with this data. Only a small percentage of each dollar we spend in retail trade at Wal-Mart or any other store remains in the local economy as wages. The balance is sent to places in the supply chain where value is added, such as coastal China via Bentonville, Arkansas. Apparently, there is some economic “dark matter” that holds the economy of Penticton together while we ship our money elsewhere.

A closer look at the data reveals a hidden economic engine. Our region is unique in that total employment in all industries accounts for just over half of our $1.3B annual income. The other half comes from “non-employment” sources, the largest of which is pensions paid to retirees—a whopping 23% of total regional income. In other words, the largest “industry” by far in this region is the Canada Pension Plan. But there is more to it. An additional 10% of the money that flows into Penticton comes from “investments”, which ostensibly includes private retirement income. And, if we attribute a disproportionately large part of the “health and social services” industry to retirees, we conclude that retirees, who currently make up roughly 25% of the population, are responsible for nearly 40% of the money flowing into the local economy. And this excludes any savings that retirees might bring with them and spend on, say, housing.

There is both good and bad news associated with this conclusion. The good news is that Penticton is in a position to experience enviable economic growth for the next 25-30 years due to the large cohort of baby boomers who are just now entering their retirement years. According to forecasts in a report by Urban Futures (available from the RDOS web site), in-migration will double the number of Pentictonites in the 65-74 year-old segment by 2031. The recipe for economic success seems pretty simple given this opportunity: protect what we have now (clean lakes, green hillsides, a relaxed rural/agricultural environment, the best climate a Canadian retiree can get without buying private health insurance), permit construction of high-density high-end residences on the valley floor, and provide world-class infrastructure for our citizens. The bad news is that by underestimating the economic importance of retirees, we might squander our natural advantages. A small, but representative example is provided by city’s reluctance to underwrite the cost of chipping orchard and vineyard waste. If the health and comfort of retirees are adversely affected by high levels of smoke in the valley, then should we not do everything we can to minimize smoke, including providing the agricultural industry with an alternative to burning waste?

Unfortunately, providing world-class infrastructure for the influx of retiring baby boomers will require more than chipper trucks. Both provincial and regional governments will have to make massive investments to support our booming population of seniors. The unique problem facing Penticton is that the tax base for locally-funded infrastructure—things like public transit and recreation facilities—will be small relative to the number of retirees. Ruthless prioritization of finite tax dollars is critical if we hope to avoid being a high tax/low amenities destination. But prioritization requires that we acknowledge the emergence of new economic drivers in this community and reevaluate our willingness to expend scarce resources chasing revenue from increasingly marginal sources such as tourism and conventions. I know it is blasphemy to say such things, but the data is pretty clear on the matter.

Consider, for example, the proposed events center. A shiny new venue makes sense if it attracts retirees looking for something to do in the winter. But many of the arguments made in favor of the current proposal emphasize the economic benefits of spending $30M-$50M in order to attract more conventions. I am a bit skeptical about this given that the entire accommodation and food industry in Penticton accounts for only 5% of our total income. How big can the upside be? The risk is that the magnitude of the event center as it is currently conceived precludes spending on other facilities to attract retirees, such as a new performing arts center, a museum/library upgrade and so on. Indeed, the risk is that the events center precludes all other spending, period. So much for the chipper truck.

The bottom line is that our future is grey. By failing to acknowledge this and prioritize our tax revenues accordingly, we jeopardize the dominant source of future economic growth for our region. Setting priorities and making trade-offs is hard; but I believe it is worthwhile to have the debate before we spend all the money.

Conventions as an economic driver (a letter to the mayor)

23 May, 2006

Mayor Jake Kimberley
City Hall
171 Main Street
Penticton, British Columbia
Canada
V2A 5A9

Dear Mayor Kimberley:

There has been much said in the local press about the potential for the SOEC as a venue for conventions. However, to this point, I seen nothing that addresses a very basic question: What is the potential marginal benefit of the SOEC to the convention industry in Penticton?

The idea of “marginal” benefit is critical because the SOEC only contributes to the local economy if two conditions are met:

1. The SOEC attracts conventions that otherwise would not be held in Penticton due to the lack of the type of space that the SOEC provides. We already have a convention center so using the aggregate value of conventions in Penticton is misleading.
2. The additional conventions in (a) occur when the main benefactors of conventions (hotels, motels, and restaurants) have excess capacity. Clearly, a large convention held when Penticton’s hotels and motel are full has negligible economic impact since the convention visitors simply crowd-out non-convention visitors. (This assumes that the non-convention visitors would have contributed a similar amount to the local economy had they been able to find accommodation in Penticton.)

With regards to the first condition, the following excerpt from the May 9, 2006, Penticton Herald is troubling:

Chesher, who retired in 2003 after almost 23 years as head of the convention centre, noted the facility has delivered economic benefits to the entire community over the years. […] "I don't believe our city has lost many, if any, conventions because of the size of our facility," he said. "The only reason we may have lost conventions is the (small) number of adequate, quality rooms adjacent to the convention centre."

I suppose Chesher’s comments are consistent with common sense. After all, the existing convention center is not undersized; it is the second largest in the province according to the city’s website. And I personally can only think of a handful of events that are suitable for the type of space provided by a 4,000 seat arena: car shows, boat shows, RV shows. (Of course, it is not clear that these kinds of events lead to overnight stays and economic spillovers.)

So my question is this: Is it true that Penticton will benefit in a significant way from additional car, boat, and RV shows held here in the shoulder seasons? If so, can this benefit be quantified and explained better in either the final economic feasibility analysis, the FAQ section of the SOEC website, or in the periodic updates in the Herald? At the very least, I would expect such an analysis to provide:

1. A convincing rebuttal to Chesher’s assertion that convention space is not a barrier to increased convention activity. Given that he ran the facility for 23 years, I think it is appropriate that his concerns be addressed head-on.
2. Some vacancy rate data to show that the new conventions will indeed fill unused capacity and not simply lead to one type of visitor being replaced by another type of visitor.

I thank you in advance for your efforts in clarifying this important issue.

---

Dear Mr. Brydon,

Thank you for enquiry regarding the impact the proposed Event Centre will have on the local economy. Regarding Mr. Chesher’s comments printed in the local media, I would tend to agree with the points he made that to accommodate larger conventions by combining the present Trade and Convention Centre facility and the proposed Event Centre the city does presently lack the number of quality rooms that would be needed. However, if and when the Event Centre goes ahead as planned there are two private investors wanting and waiting to construct new hotels to accommodate that need.

To answer your second question I don’t think we’ll be replacing one visitor with another visitor, as stated, with the proposed construction of the proposed fairly significant large new hotels the city should be in a position to accommodate all visitors to the city, whether they are delegates to a large convention, involved in a sports event or our regular influx of tourists.

Further to your enquiry regarding what events can be held in the new facility, the whole push and promotion to have this facility to go ahead was to allow the city to host not just larger conventions or RV shows etc., it was to also accommodate the Olympic hockey teams practice games during the 2010 Winter Games, plus some touring variety shows and performers such as Kelowna is currently doing and doing very successfully, which will as suggested add a significant amount of employment and economy to the city and the outlying areas.

To have answered Mr. Chesher’s comments publicly would not have been appropriate for me to do because it would have caused public reaction and enquiry into the proposed hotels and put the developers/investors into the public eye, which is not my privilege at this time to anounce.

Again I thank you for your enquiry and hopefully I have answered your well put questions.

Jake K.

Vision only as strong as its underlying economic model

Op-ed column in the Penticton Herald: 20 Jan, 2006

I submitted a letter to the editor in mid-2004 that was critical of the South Okanagan Events Centre (SOEC) for being out of step with Penticton’s future demographic reality. I was subsequently chided (albeit gently) by a number of people for failing to get behind a fantastic opportunity for the community. This is fair enough: many people have invested significant time and talent into developing a vision for the SOECC and the last thing they need is negativity from people without a vision. But a few days ago, I drove past the former Ford Theatre for the Performing Arts in Yaletown (built for $27M, sold three years later for $7.75M) and was reminded that a vision is only as strong as its underlying economic model.

According to the numbers being circulated, the SOEC will cost roughly $30M to build. The provincial government has agreed to contribute almost $10M so, if we take the land as free, pretend that a contribution from federal government will offset the $10M or so in site preparation and relocation costs, and assume no cost overruns, the outstanding capital cost is $20M. The cost of financing $20M over 50 years at 5% is roughly $1.1M per year. In their initial feasibility study, International Coliseums Company (ICC) estimates that the facility will generate roughly $2.6M per year in revenue and cost roughly $1.7M per year to operate. This leaves about $0.9M per year to apply to financing costs. The ongoing annual shortfall of $200K is modest (the parks and recreation budget for the city is $6.3M), but we should recognize that the ICC numbers are based on some conspicuously rosy assumptions.

As others have already pointed out, ICC makes money by building and operating facilities, not by preparing feasibility analyses. Given that operating fees (roughly $130K/year in this case) typically come off the top line, the city, not its operating partner, bears the risk of overly optimistic revenue projections. There are at least three problems with the initial feasibility analysis that suggest that the revenue projections are indeed optimistic. First, the revenue from the major tenant, the Penticton Vees, is double-counted. Specifically, the city’s cut of revenue from 30 games x 1800 spectators plus rent and “ticket surcharge” is included in the SOECC’s feasibility analysis even though the bulk of this revenue is not new to the city. In reality, the money appearing in the revenue model for the SOECC is offset by a gapping hole in the revenue model for Memorial Arena. Second, the projected operating surplus for the SOEC includes a significant contribution (approximately $350K annually) from pay parking. The problem is that the parking space for the SOECC is contiguous with that of other community facilities. As a consequence, anyone who is unlucky enough to have a swimming lesson, minor hockey practice, or concert that happens to overlap with the 143 events scheduled for the SOECC each year will either be stuffing $2.25 into a meter or buying an annual pass. This seems to me more like a tax on people with kids than a legitimate revenue source for a premium facility. Finally, there are the attendance estimates themselves. The largest non-hockey sources of gate revenue for the facility are projected to be concerts and “thrill shows”. ICC, based on its experience operating other facilities, predicts 22 events per year with an average attendance of 3,500 per show. Unfortunately, our limited experience with this type of event in Penticton suggests that these estimates are high. For example, the rodeo held Memorial Arena last fall attracted crowds in the hundreds, not thousands.

Even if we ignore double counting and attendance estimates that are off by an order of magnitude, it is clear that the SOECC will never spin enough cash to cover its costs. This is true whether the facility is financed by the city alone or with a private-sector partner (which invariably has a higher cost of capital and a shorter investment horizon). Unfortunately, no one seems willing to face up to the inevitable consequence of building such a facility: it will cost taxpayers money. Instead, we are being treated to some suspicious economic reasoning. For example, we are told that casino revenue can be used to cover the shortfall and that this is somehow preferable to using tax revenue. As others have already pointed out, this is nonsense. We are also told that the indirect economic benefits of the project more than compensate for its costs. But a short-term economic stimulus only makes sense when the target of the stimulus has idle capacity. The construction industry here and elsewhere is having difficulty satisfying existing demand. Rather than stimulating the construction industry in a positive way, the SOEC will lead to increased costs and delays for other projects in our region. The result is a costly distortion in which public spending crowds-out private investment.

The single most important factor that makes the SOEC worth considering despite its challenges is the $10M contribution by the province. As much as many of us despise the notion of spending $30M on an events center while those needing emergency care in our crumbling hospital are made to wait for hours in a linen closet, it is pretty clear that if we decide to pass on the SOECC, the money will not end up not in our hospital, but in some other community. Plus, there are other considerations: the prospect of more ice, bigger ice, comfortable seats with room for legs, and the cachet of having some Finns or Belarusians living among us for few weeks before heading to the Olympics. These may be modest benefits. But spread over the Penticton and surrounding RDOS tax base, the annual cost per household of subsidizing the SOEC may also be modest. The problem is that it is impossible to know whether we are talking about $10 or $100 without a realistic, informed, and objective economic reckoning. And, despite a looming deadline, we still have not seen one.

A letter to the editor regarding the proposed multiplex

Letter to the editor, Penticton Herald: Feb 2004

I applaud our mayor and council for their determination to invest in public infrastructure and for their willingness to consider risky, controversial proposals. Oddly, the largest and riskiest proposal so far—the $30 million sports and entertainment complex at Queen’s Park—has attracted less public scrutiny than the pros and cons of burning rubber on Lakeshore Drive. The apparent lack of dissent surprises me because I believe the arena proposal rests on some shaky assumptions and the decision process itself appears flawed. It is probably worthwhile to voice some concerns now given our history in this province of paying dearly for shaky assumptions and flawed decision processes.

Let us first consider the decision process. Much of the enthusiasm for the sports and entertainment complex appears to be contingent on receiving Legacies 2010 funding. Of course, this is not free money. Our federal and provincial governments are committed to covering just over half the cost of the 2010 Olympics and the Legacies 2010 funding is simply tax money that is being used to offset some of the massive flows of public investment into Vancouver and Whistler. Although it is not necessarily a bad thing for governments to use our own money to buy our acquiescence, we should expect the money, like any tax revenue, to be allocated to the highest priority projects in our communities. Moreover, we should expect the process for setting these priorities to be transparent and inclusive. Instead, the impression I get is that the city is rushing the planning process because “[it] believes by being among the first to make a presentation to the government, it could have an inside track in acquiring some of the Olympic legacy funding” (Mayor Perry quoted in “Olympic Dream: City commits 25,000 to arena study”, 13 Jan 04). Mayor Perry may be simply reacting to the reality imposed on him by another level of government, but this begs the more fundamental question: How does an allocation scheme that pits municipalities against each other in a race to spend tax money serve the public interest?

My second concern is the proposal itself—two ice rinks at Queen’s park. My informal sampling of hockey parents suggests that ice is indeed in short supply in Penticton. However, it is important to recognize that the current shortage is due in large part to a demographic anomaly that pits a massive cohort of baby boomers playing recreational hockey against their own children (also a large demographic cohort) for ice time. David Foot, a University of Toronto demographer, pegged 2002 as the peak year for hockey in Canada (“Boom, Bust & Echo”, p.112). Foot’s advice to municipalities in 1996 was unambiguous—do not overbuild ice capacity to satisfy a one-time demographic bulge (unless, he remarked, the rinks could easily be converted to curling, which he identified as an up-and-coming baby boomer sport). Put another way, it makes little sense for our school district to close an elementary school due to dropping enrollments while our city council doubles our capacity for minor hockey.

Don’t get me wrong: I have a son who will soon start minor hockey and I, too, would like shiny new facilities. But I would also like a new dance studio for my daughters, better soccer fields for all my kids, and more than anything, a great big wave pool (the pool at least has the virtue of being something we can do year-round as a family). This issue, however, is not of wants, but of priorities. And our priorities in this community have to be consistent with our demographic reality. According to data from the 2001 census (available on the Statistics Canada website) we need to face two facts. First, 24% of the population of Penticton is 65 years old or older whereas this age group constitutes only 13% of the population of Canada. The difference leads me to conclude, not surprisingly, that Penticton attracts a disproportionate number of retirees. Second, the absolute number of people aged 65 and older in Canada is projected to grow by 9% by 2006, 23% by 2011 and 45% by 2016. Combining the baseline growth of retirees with the hypothesis that people like to retire here means that 45% is a lower bound on the increase in the number of senior citizens in our city. And you think the parking lot at Art Knapp’s is busy now? My thinking would be different if our core infrastructure was adequate to meet the challenges of an ageing population. However, not only are our museum, library, walking trails, and swimming pool inadequate for our current population, but also our hospital, long-term care facilities, and overall health and support infrastructure. It is not clear to how a $30 million entertainment complex solves any of these problems.

Of course, the question of prioritizing our public infrastructure investments is moot if the sports and entertainment facility is self-supporting or leads to sustained economic growth. The projections outlined in “Arena plans unveiled”, 29 Jan 04, suggest a total attendance of 428,000 per year. This works out to just over ten events per year for each person in the Penticton region (mostly on Tuesday and Wednesday evenings, it should be noted). Even if these numbers are realistic, they tell us nothing about the net economic benefit to the community. As economists Roger Noll and Andrew Zimbalist have pointed out, much of the economic analysis that accompanies stadium proposals ignores the effects of substitution on discretionary spending. Put simply, a new stadium does not mean that people automatically have more money to spend on entertainment. Thus the money earned at the gate of the stadium is not new growth; it is simply a slice of people’s entertainment budget that is not being spent at restaurants, bars, theatres, and other local business. Increased consumer choice is a good thing, but we should not confuse it with meaningful economic growth.

In short, I think the proposed sports and entertainment complex is a nice idea, but an idea that is ultimately at odds with the unique challenges we face as a community in the next couple of decades. Personally, I would like to see the mayor and council be more explicit about the relative merits of other uses for any Legacy 2010 funding that may come our way. And if the project does go forward, I think we will need to see much better economic justification for our $30 million investment.