Hello folks:
Back to battle the "neutral", anti-anti-velodrome crowd ...
This post is numbers-heavy. If the "neutral", anti-anti- crowd haven’t already used the argument, I’m sure they’ll be tempted to play the “lies, damned lies, and statistics" card.
To that I say, “If you’re going to criticize and you don’t bring forth your own numbers, you’re talking through your hat.Subject: Capital reserve
HV commenter Martin Capper has posted some thoughtful comments on the capital reserve subject and raised some good questions.
The annual contribution to capital reserve appears in each Town report scenario analysis and it is the same in each. I choose to reference the Community Legacy Stream, Scenario 2, found on page 178 of the report part 2 PDF file.
Here’s report part 2:
http://www.milton.ca/MeetingDocuments/Council/agendas2012/rpts2012/Milestone%20005-001-12%20Velodrome_%20Part%20II.pdfThe annual capital reserve amount is identified as $ 250,000, while there is notation on the same line (to the left) that says “1.5 % of original capital costs”. Now consider that the nominal capital cost of the velodrome is to be in the order of $ 40 million.
1.5 % of $ 40 million is $ 600,000 – a number $ 350,000 or 140 % more than the lower value used in the report. The fact that there was some discrepancy was acknowledged during the consultant’s January 30 presentation but town staff added little or nothing to the discussion. I can’t recall if anyone indicated that they had any intention to delve into the subject and include any modified values in a revised business case.
So, we are all left to wonder “why the discrepancy ?” and whether ort not any one’s going to do their “due diligence” on this.
Before moving on to calculations, I’ll state that the choice of a low operating reserve value certainly seems convenient and so by that measure alone it is suspect. The convenience derives from the fact that the annual net operating income shortfall of $ 116,000 plus the low $ 250,000 capital reserve are offset by the estimated annual $ 350,000 to come from the legacy fund. (More on the legacy fund in a future post.)
Now for the results of a series of calculations. These calculations can be done by anyone with a big-button calculator and a good set of and understanding of financial analysis factors. In my case, I chose to use an Excel spreadsheet and would be happy to provide any details people are interested in.
I’m sure the so-called-neutral, anti-anti- crowd will want to pounce on at least one aspect of the first scenario presented below. Perhaps they’ll surprise me by being patient enough to consider all of the scenarios and considerations presented below. If they don’t, it might indicate they wouldn’t have fared too well as children if they’d been part of the Stanford marshmallow test (
http://en.wikipedia.org/wiki/Stanford_marshmallow_experiment).
For the op-ed pieces published in the Hamilton Spectator and Toronto Star, I quoted an equivalent upfront cost (aka net present value / NPV) of $ 3.6 million for each additional $ 100,000 of operating shortfall. The other assumptions germane to the above metric are a 40-year analysis period, a future value (at the end of 40 years) of zero, a 3 % annual growth rate in the shortfall (consistent with the Town report’s cost increase projections for years 3 and beyond) and earned income (on the up-front amount) of 3.5 %.
For the version of the analysis behind the op-ed pieces, I assume a very conservative capital cost of $ 30 million and used the 1.5 % annual capital reserve factor noted in the Town report. This generated a required annual capital reserve payment of $ 450,000. With the Town report claiming $ 250,000, I identified an additional related annual shortfall of $ 200,000.
So the up-front cost of the operating reserve shortfall would be:
$ 200,000 annual shortfall x $ 3.6 million up-front per $ 100,000 of annual shortfall = $ 7.2 million
This is 77 % of the $ 9.4 million of additional up-front costs identified in the op-ed piece, with the remaining 23 % or $ 2.2 million coming from the estimated labour shortfall of $ 61,000 (noted in my previous post).
Now, the “neutral”, anti-anti- crowd might notice that I escalated the annual additional value of $ 200,000. At the time of putting together my initial analysis, I didn’t note that the Town report’s (low-balled) annual capital reserve amount of $ 250,000 was held steady at that amount and not escalated.
Adjusting for an escalator of zero, the up-front cost factor is $ 2.2 million per $ 100,000 of additional operating shortfall. This produces a lower up-front cost of $ 4.4 million for the additional operating reserve shortfall.
The table below shows these two scenarios (identified as A and B, respectively), plus two similar scenarios, the difference being that scenarios C and D use a higher capital cost of $ 40 million.
(Apologies for the table formatting ... looked OK in full editor mode but didn't translate to screen ... will later try to provide a table image.)
Scenario A B C D
Town report, annual $ $250,000 $250,000 $250,000 $250,000
Capital cost used , $ $30,000,000 $30,000,000 $40,000,000 $40,000,000
Appropriate capital reserve % 1.5% 1.5% 1.5% 1.5%
Appropriate annual capital reserve $ $450,000 $450,000 $600,000 $600,000
Additional shortfall, annual $ $200,000 $200,000 $350,000 $350,000
Escalated @ 3 % ? Yes No Yes No
Up-front cost factor, $ per $100,000 annual $3,600,000 $2,200,000 $3,600,000 $2,200,000
Up-front additional cost, $ $7,200,000 $4,400,000 $12,600,000 $7,700,000
So, using the assumptions and parameters identified above, the additional up-front cost arising from the low-balled capital reserve number ranges anywhere from $ 4.4 million to $ 12.6 million.
So Town staff, show us your numbers on this … and include them in the business case !
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