Peering into the Abyss:
Ron Bolin: October 30, 2011
Tomorrow will be Halloween when ghosts and ghouls return to haunt the living and to demand their pound of flesh. Examining the city’s financial information is a similarly haunting experience. While our Council and Staff continue to add to our existing infrastructure at a rate of hundreds of millions of dollars in the last few years, the City discloses an overall infrastructure replacement estimate of $1,800,000,000 dollars.
“…the $1.8 billion is an estimate. You won’t find it in our financial statements or our budget. It is an estimate of what it would cost to replace, at current costs, all of our infrastructure. This includes roads, sewers, water systems, buildings, street lights, etc. In effect, it is the replacement cost for the $550 million dollars of assets that we have recorded at book value.” City of Nanaimo
This year we have added about another $100,000,000 dollars in infrastructure to the our existing $1.8 billion by way of approving a water treatment plant, a City Hall Annex, a water pipeline connection to the Harmac water supply, widening Bowen Road and other smaller projects.
Why should we be concerned? We should be concerned because this entire infrastructure inventory must eventually be replaced. With the new additions, we now have nearly $2 billion dollars’ worth of assets to replace.
“… think of it this way. You buy a car for $50,000 that has a life of 10 years and has no value at the end. It is now 5 years old. Your net book value (a.k.a. depreciated value) would be $25,000. That’s the amount we record in our financial statements. However, to replace that car would cost you $50,000 or more at current costs. It doesn’t mean that you have to spend that money this year, or even in five years, but that is still the replacement cost.“ City of Nanaimo
Notice that the operating costs are not included, this is simply the replacement cost. Your car would require gas and oil, tune-ups, tires etc. which are included neither in the case of the car or that of Nanaimo’s infrastructure.
Routine maintenance and operation aside, what should be very concerning is the replacement cost of this infrastructure. Unless we can find a way to do without our roads, sewers, water systems, buildings, street lights, etc., in the future, they will have to be replaced. Some of the elements have a longer life than others and some have been installed more recently and thus have more life remaining in them. However, if we were to say that our existing infrastructure had a life remaining of 50 years (this seems unlikely given the ratio of the $550 million asset value to the $1.8 billion replacement cost) we should be setting aside and/or replacing some $40 million dollars of infrastructure each year just to stay even. In 2011 property taxes in Nanaimo brought in about $83 million. That is to say if we were funding our infrastructure replacement costs by this reckoning, nearly half of all our taxes would go to our infrastructure replacement account. Is this sustainable? Are we living too high on the hog? Can we afford any more major infrastructure projects such as multiplexes, publically funded hotels or foot ferry services, etc.? I don’t think so. What do you think?
A Note on the Occupy Nanaimo folks:
I have made a couple of trips to Diana Krall Plaza to see the people and the venue. I spent some time looking at the various signs that are being carried or have been erected. While some harp on the apparent lack of a unified message from these demonstrators, it appeared to be clear to me. Behind all those signs was the simple message: “We do not trust our institutions.” This is a sad message and one that deserves sober consideration.
Good show Ron for bringing this up . . .
CIBC is currently offering car loans at 3% over 5 years . . . ergo a C$50,000 car in the end cost C$57,963.70 which is, I suppose, manageable.
But let’s take a RBC North Nanaimo family home mortgage: C$750,000 with a 5% down payment.
Down payment: C$37,500
RBC 7 year @ 6.35% mortgage.
Cost at 7 years maturation: C$909,749.64
Cost of home @ end of 7 years: C$947,249.64
And most family homes are occupied for well over seven years so the whole, absurd, unsustainable, process is repeated exponentially!
So applying the same math to city borrowing I suggest the new council do some severe soul searching: choose wisely Nov. 19.
I prefer to be on the receiving end of usury.
And that is what OCCUPY is all about!
The numbers very likely low. The Tangible Capital Assets work is based on PSAB 3150 accounting standard that required historical costs to be recorded along with condition. Limited data exists on condition though the CIty has done a lot of condition assessment on sewers, roads and bridges but not drainage works, buildings or other assets. The fleet is already funded for replacement on a workable schedule. The statement says 2010 replacement but we do not know the basis for this.
In November 2010, Public Works published a document estimating annual needs for water distribution, water supply, sanitary sewers, drainage, transportation and fleet. Note it does NOT include all the other city asset namely buildings, street furniture, parks etc.nor our City contribution to the same work for bought services through RDN for solid waste and sewage treatment. Even at that the CIty document says our 2010 replacement costs for those assets listed are $26,300,000 and we are actually investing $13,730,000. Therefore we are creating a growing potential deficit of $12,700,000 annually in 2010 $$ without adding new assets. These are published numbers created by the CIty of Nanaimo. No analysis of the assets other than public works has been published so we really do not know the whole story yet.
Speaking of infrastructure . . . .
So talk to me about that (completely unnecessary, pollution producing, lifestyle destructive) widening project on Bowen Road. Who approved it? Was there a referendum or plebiscite? Who in council approved it (this will probably affect who I vote for in a couple of weeks)?: How much is it costing us? I realize the justification is that the bridge needed replacing; they replaced a similar bridge on Bruce a few years ago (it took a couple of months) by detouring traffic and putting in a footbridge. Why not do the same on Bowen even if the detour would be a bit longer. . And put the zillion million dollars into improving bus service so we wouldn’t have to drive so much and could enjoy the park instead of a four lane highway?
Less taxes, nicer city – – win win.
The Engineering Design Award for Quarterway Bridge replacement and adjacent Bowen Road widening was on the agenda of the regular council meeting of October 15, 2007.
Staff recommended that: “Council award the design of the Quarterway Bridge replacement and the widening of Bowen Road from Pryde Avenue to Buttertubs Road to AMEC in the amount of $308,859.”
The motion carried unanimously. Mayor Korpan and Councillors Bestwick, Brennan, Cameron, Holdom, McNabb, Manhas, Sherry, Unger were in attendance.
The flip side is; this city will become so expensive to live in, people will leave; meaning we won’t have to replace most of the infrastructure we are worried about. An unused bridge, unused sewers, unused buildings don’t need replacing. The good news is, we are building assets that are going to last well beyond our need for them. Of course, building these assets actually reduces our need for them by making it uneconomical to live here. In a sick way, that’s funny; the checks and balances built into our economy resolve the problem perfectly.
The crumbling infrastructure is not unique to Nanaimo. Perhaps this will simply be the legacy the Baby Boomers will be leaving to the next generation. We came …. we saw …. we consumed…. we ran up a huge tab …… we died……..
I’m not much of an historian, but haven’t future generations always built on the ruins of past generations?
Not to worry though we are leaving a monstrous deficit they will also have to deal with.
I suspect the reason no one at city hall is loosing any sleep over the issue, is the fact that nearly 50% of senior staff can retire in 2013. Long before they would have to deal with it. With pension packages to die for, no less.
As for the protesters at Occupy Nanaimo not trusting the present institutions, what institutions in history have been worthy of the trust of the masses? In all fairness, I don’t see any great hope for the future coming from the occupiers either.
I think there is perhaps a reason that man is always peering into the Abyss……. that is where we always seem to wind up. But cheer up …… a good war every now and then seems to ‘reset’ the finances and we stumble along for another 50 years or so.
Happy Halloween everyone!!!!
Jim: You might be interested in this note from the 2010 Financial Report: (See sentence 2 in Paragraph 2)
“NOTE 19 – MUNICIPAL PENSION PLAN
The City and its employees contribute to the Municipal Pension Plan (Plan), a jointly trusted pension plan. The Board of Trustees, representing plan members and employers, is responsible for overseeing the management of the Plan, including investment of the assets and administration of benefits. The Plan is a multi-employer contributory pension plan. Basic pension benefits provided are defined. The plan has about 163,000 active members and approximately 60,000 retired members. Active members include approximately
35,000 contributors from local governments.
Every three years an actuarial valuation is performed to assess the financial position of the Plan and the adequacy of Plan funding. The most recent valuation as at December 31, 2009 indicated an unfunded liability of $1.024 billion for basic pension benefits. The next valuation will be at December 31, 2012 with results available in 2013. The actuary does not attribute portions of the unfunded liability to individual employers.
Contributions to the plan were:
Employer portion $ 3,489,925 $ 3,468,581
Employee portion 2,831,085 2,863,234
$ 6,321,010 $ 6,331,815
@ Jim . . .
“Not to worry though we are leaving a monstrous deficit they will also have to deal with.”
Not to worry . . . apply the concept of Odious debt. I didn’t approve or incur it. Did you?
As for understanding how to the current debt load came to be, for the most part I doubt any one did and I’m sure none of the incumbents and certainly none of the hopefuls have a clue about compound interest and fractional reserve banking!
As for another war to clear the books! Well, we have shipped all our manufacturing capacity to wage war off-shore. But we have drone delivered nukes.
Good luck clearing the books that way!
“Contributions to the plan were: 2010 2009 Employer portion $ 3,489,925 $ 3,468,581 Employee portion 2,831,085 2,863,234 $ 6,321,010 $ 6,331,815” Phew Ron, that sure is heavy duty big bucks . . .
. . . but, “Wouldn’t it make more sense to learn how to grow potatoes and train a mule?”
. . . or join OCCUPY