SimCity...rules of the game

Asset management is boring to most people, but critical to municipalities across the country. Consider Metro Vancouver's North Shore wastewater treatment plant. A very necessary project initiated and overseen by professionals. The original cost estimated in 2013 at $700 million, has now ballooned to $3.8 billion with completion date 2030.

Why bring this to light now?

The Town of Qualicum Beach (TQB) has hired a number of consultants, to assist staff to prepare the town’s asset management strategy. It is a prudent move to use subject matter experts to pull this complicated information together. During the Oct 2 2024 regular council meeting, the consultant led council and members of the public in the gallery, through a 30 minute presentation of the financial modelling process*. The model brought back memories of the "Sim City" game we played in our youth, where you designed your city with all the fun city amenities, while in the background, the game's algorithms applied reality effects such as over building and underfunding infrastructure.

The presentation indicated that we have capital assets ( buildings, roads, water and sewer infrastructure) that if replaced today would cost about $360 million.

The good news is that we don't have to replace everything all at once. Of these assets about $22 million dollars worth (6% of the total) are past their useful economic life. The remaining $338 million dollars worth are on average 52% consumed. (The higher the consumption percentage, the sooner you will have to replace the assets.) On the surface, not a bad position to be in, but as always, the devil is in the details.

QB taxpayers are currently topping up our capital asset reserves by approximately $2.5 million a year from current years taxation. If we continue at this rate we will fall behind as those assets past their useful economic life, will grow from 6% (22 million) to 32% ($115 million.) This may potentially result in costly service failures. Imagine if a third of town assets needed to be replaced immediately because they are failing. In addition, our consumption rate will rise to 90% which means the remaining two thirds of our buildings roads etc. are much nearer to the end of their useful life. This would mean a gigantic amount of investment in the future from somewhere (taxes and debt) to replace ageing, and now failing, infrastructure. Obviously we cannot continue on the current path of $2.5 million annual top ups.

The consultant provided several scenarios for council to consider. Scenario 1, would see the town increase the annual top up from $2.5million to $5.8 million. This would see the risk of failure and service levels remain relatively constant with the current situation. (4% of total assets at beyond their useful life and an average consumption level of 64%)

This scenario requires an increase of $3.3 million dollars annually for 15 years.

Based on the model, this would see tax payers contributing $66 (+ inflation + any new capital expenditure projects) more each year for 15 years just to maintain the current level of capital assets and maintaining the current risk level.  Expect this number to go up significantly, as construction material and labour costs continue to rise and given our propensity to approve new capital asset spending without a firm plan for how to fund the ultimate replacement.

Two further options of using debt or increased risk were presented. The town has borrowing capacity of approximately $74 million, of which we currently use very little. Presumably we could choose to borrow to top up our capital reserves as an alternative to increasing taxes or or some combination thereof. Having lived through a period of 21% mortgage rates, I personally am debt adverse. I can get along with older vehicles, but being a safe rather than sorry type, I am not very comfortable with increased risk inherent in delaying the replacement of critical infrastructure such as sewer, water and information systems.

A comparison of other municipalities using this model would have been helpful to determine the appropriate level of risk and debt use. How do we compare with other similar sized communities? What is the towns policy with respect to using debt?

Are we getting good value for these capital assets...should we be replacing them or should we plan to phase them out when they expire? (Example Qualicum Beach community hall)

A further option not discussed in the presentation was to reallocate some of the tax payer money which is currently allocated to other initiatives. A small reduction in these many other less essential budget lines would reduce the need to increase taxes. We could also consider trimming back non essential operating expenses to increase the allocation to reserves.

Fixing the funding gap through taxation alone is the easy way out, but it does not solve the problem in the long run. There does come a limit as to what the tax payer can afford. Many families are facing an affordability crisis and town leadership should fully explore all options as we cannot keep asking tax payers to pay more.

Further, once we fix the funding gap, we need a policy governing new capital expenditures and the budget discipline so that we do not again find ourselves with yet another asset funding gap in the future. Consider the Skatepark, if previous councils had applied a more disciplined approach, we would not now need our kids to fund raise for a portion of the replacement cost. A more disciplined approach to new assets would help everyone including entrepreneurs on which services we can afford to offer publicly and which should be left to the private sector.

Our town leadership will be faced with some difficult but important choices as they move through the strategic planning and budget setting sessions. These sessions are open to the public and will be live streamed. Dates are scheduled for October 21st through November 27th with details posted on the towns website.

Marie Noel

Oct 06 2024

We welcome your feedback and comments.

You can email us at QualicumBeachInsights@gmail.com

More info on asset management

Watch the council meeting presentation ( starts at 39:40 ) here

*The financial model is based on replacing "like for like" assets. Example given was a 6 inch pipe being replaced by another 6 inch pipe even though you may need an 8 inch pipe.

(In real life we often increase the quality and capacity of this type of construction therefore the model may underestimate ultimate replacement costs.)

The only adjustment for inflation in the model would be when the annual review of the replacement cost is updated. So every year you adjust the start point but add no inflationary input throughout the 30 year horizon. ( Probably the right approach as it is virtually impossible to predict a rate of inflation over 30 year term, but if history repeats itself, we will likely see high inflationary costs, particularly in the nearer 1 to 3 year term. Given the opportunity, I would have asked the consultant to comment on impact of near term inflation. If you use 5% rise in construction costs for the period 2024 to 2025 the cost to replace existing $360 million goes up to $378M so presumably the $66 a year tax increase proposed in scenerio1, will not be enough to keep us in the same risk profile.)

Prudently, the model does not include any assumptions of grants, which is not a reliable source of funding and outside of our control. Given the size of current senior government deficits, there will likely be considerable pressure to rein in and or rationalize spending.

 The model also does not include any additional "new" infrastructure.