Peering into the Abyss:

Posted by on October 30, 2011 in CITY FINANCE, CITY GOVERNMENT, PLANNING AND DEVELOPMENT | 9 Comments

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.