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.

Pre-DAC thoughts

I was working on the following as an op-ed submission to the Herald. As it turns out, however, the city came through in a big way with DAC funding.

-------

I am in favor of the South Okanagan Events Centre (SOEC). After all, I have young children in hockey, lacrosse, and figure skating. The whole family enjoys a good Vees game. And, since we live on the West Bench, I will not have to subsidize the facility by paying higher property taxes. All benefit and no cost (other than user fees and hotdogs, which I suspect will suddenly be more expensive).

Unfortunately, the taxpayers of Penticton are being told a similar story and I think this lack of precision by City Hall may ultimately jeopardize the referendum on the project. In particular, I am alarmed that the city keeps presenting it $4.5M “direct spending” figure without ever addressing the cost of generating that spending. I have spent more than a month sending emails to City Hall requesting a standard cost-benefit analysis for the project. I was told that such information was “confidential”. This reluctance to provide such information surprised me since the Mayor’s Review Panel, a group of local heavy-hitters who reviewed all aspects of the proposals, specifically recommended (Recommendation 8) that the city make a detailed cost-benefit analysis available to the public. I finally resorted to a request under the Freedom of Information act and received something like a detailed cost-benefit analysis. Oddly, this document pertaining to the SOEC, a publicly owned facility, was accompanied by an email disclaimer warning me that “dissemination, disclosure, distribution or copying of this email (including attachments) is strictly prohibited and unlawful.” To avoid gratuitous threats of litigation, I have posted a completed Freedom of Information request on my website (http://michaelbrydon.blogspot.com); you may fill in your own name and address and fax it to City Hall if you want to see for yourself what is so secret. (Update: a version of the report was posted to the City's web site on 11 September, 2006—five days before the referendum.)

In case you are too busy, I will give you the punch line: The cost of generating the oft-cited $4.5M per year of direct spending attributable to the SOEC comes at a cost of roughly $7M per year. Normally, it is not a good idea to spend $7M to create something for which consumers are only willing to pay $4.5M. The technical term for this practice is wealth destruction. However, subsidies may be warranted if the project creates “externalities”—benefits to others in the form of spillovers. Many have argued, for example, that it is important to stem the flow of concert goers to Kelowna because it is preferable for the money they spend at the concert to recirculate within our own economy. The problem is: concerts are expensive. Good data is hard to come by, but the newspaper in Youngstown, OH, is doing a good job of documenting the woes of the Chevrolet Centre, a SOEC-like complex built and operated by ICC in 2005. It seems that after almost a year of operation, profits at the Chevy Centre are about one-third of ICC’s “conservative” projections. A recent concert by Clay Aiken illustrates the issue: The concerts, which were well attended, generated $126,490 in ticket sales and $14,413 in concession and other revenue. However, the cost to mount the concert was $143,421. This left -$2,517 to circulate around the local economy and generate spillovers. Herein lies the importance of a detailed cost-benefit analysis: $4.6 of direct spending is not nearly impressive when the bulk of it leaves town on a tour bus.

This perhaps accounts for the city’s recent emphasis on conventions and out of town visitors in its promotion of the SOEC. Forming a strong association between the SOEC and the Penticton Trade and Convention Centre [ depends on DAC]

However, we can drop the charade now. Harry Chesher, who managed the PTCC for nearly 23 years (and who has retired and therefore does not stand to lose his job when Global Spectrum takes over) stated the following in the Penticton Herald “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." Maybe I am missing something, but to me this says the following: No one wants a convention in an arena. And even if they did, Penticton does not have enough hotels to lodge the conventioneers. And even if private developers fill the void by building new hotels, we will have to bring the thousands of conventioneers to town 35 at a time on Jazz flights.

It is almost as if the Penticton City Hall learned its economics from a multiplex salesman. A better source of information, and some light summer reading for anyone toying with the idea of spending $50M of other people’s money, is a collection of papers entitled “Sports, Jobs, & Taxes”, available free of charge from the Brookings Institution’s web site. Although the emphasis of the book is on American professional sports teams, much of the basic economic reasoning applies to any publicly-funded facility. Brookings is a prestigious, explicitly pro-business think tank. If their economist conclude that public sports facilities are bad business, I am inclined to take note.

But just because City Hall’s claims of SOEC self-sufficiency are mostly nonsense does not mean that the SOEC is a bad idea. It is just a luxury. We buy it not because it pays for itself, but because we get pleasure from it. This particular luxury will cost each Penticton taxpayer, on average, $100 per year. It may cost more than this if, like the Chevy Centre in Youngstown, the initial revenue projects turn out to be absurdly optimistic. But still, a small town can do amazing things when its pools its resources and commits to a vision. The SOEC would get my vote (if I had one to give).

Go DAC go!

I finally figured it out, I think. Up until recently, I could not understand the city’s relentless focus on the SOEC as a convention facility. But a long a frustrating Google search of the BC Lotteries Corporation’s web site yielded the following tidbit from the 2003/04 annual report:

Host local governments where destination casinos are located receive a one-sixth share of the net income generated by that casino. Two-thirds goes to Government and one-sixth to the casino proponent for Development Assistance Compensation (DAC). […] DAC goes toward local economic development associated with a destination casino. This may include a service such as a restaurant, or a facility project such as a convention centre. Destination casino proponents received almost $8 million in DAC funding.

The city has worked hard to re-cast the SOEC as an integral part of the convention center, rather than as a stand-alone sports and entertainment complex. The difference between the two is critical. Ostensibly, the whole point of DAC funding is to encourage casino operators to invest in better facilities so that more people will gamble and casino revenues increase. DAC is not charity, but an investment to maintain and increase the government’s gaming revenue. As Las Vegas and other convention destinations vividly illustrate, conventions and gambling are economic complements. The availability of after-hours entertainment (e.g., a casino) makes a convention more interesting and a steady stream of conventioneers keeps money flowing into the casino. An events center, on the other hand, is an economic substitute for a casino. Indeed, one measure of the SOEC’s success will be its ability draw people out of the casino and have them spend a large chunk of their finite entertainment budgets on shows and sporting events rather than gambling.

The city has been very shrewd in emphasizing the convention aspect of the project and de-emphasizing the entertainment side. The proposed contract brings the SOEC under the same management and marketing contract as the Penticton Trade and Convention Centre (PTCC) and helps make the case that the SOEC is really just another meeting room—a Peach Bowl annex. Bravo to the city if they pull this off. The $25M or so in DAC funding, unlike the one-sixth share of gambling revenues that the city receives unconditionally, is project based. If we don’t get it, someone else will. DAC funding, if it materializes, will transform this project from a marginal luxury item to an unbelievable win for Pentictonites.

If the DAC funding falls though, then we should expect the convention-based focus to disappear from the city’s justification for the SOEC. (see the posting: “Conventions as an economic driver (a letter to the mayor)” on 23 May, 2006).