posting
02-20-2007, 12:03 PM
City Councillor Bill Glover (Sydenham District) has provided the following commentary and analysis of the LVEC project as result of the issuing of detailed city reports on the project on February 14, 2006.
LVEC challenges
Bill Glover, 2007-02-20
http://www.billglover.org/cms/index.php/lvec_challenges
(http://www.billglover.org/cms/index.php/lvec_challenges)A discussion of what I see as the LVEC "challenges" may be helpful.
I would welcome comment.
Some of you may remember my answer last October when questioned about the LVEC at an all candidates meeting. I replied that I thought we had probably passed the point of cancelling it, and we would have to make the best of a bad deal. Why, therefore, have a debate now about cancelling the LVEC?
First, I believe it is important to understand that the first objective of the motion to cancel The LVEC is neither a silver bullet that can make everything wrong, right, nor the kiss of death that will stop all good things. (moved by Councillor Vicki Schmolka, seconded by me) is to provide this Council with an opportunity to discuss the LVEC issue and all its ramifications. The secret KPMG report, released last Tuesday, has in my view significantly altered the circumstances of the project, making such a discussion necessary.
Unless something is on the agenda for a meeting, we cannot talk about. The agenda is driven in the most part by staff reports. We were supposed to have met as the Committee of the Whole on Wednesday, 14 February when we had two staff reports about the LVEC to discuss. That meeting was cancelled because of snow. We were told it would be ?rescheduled? - no date suggested. The agenda for the Council meeting on Tuesday, 20 February, closed at noon on Thursday, 15 February. In the absence of any information about what was going to happen to the reports that should have been discussed on 14 February, putting a motion on the agenda was the only way we could be certain that the LVEC would be discussed.
Two Basic Issues.
I identify two basic issues about the LVEC.
The first is its cost, and whether we can afford it.
My second issue is the problem of information coming to Council about it and the quality of project management. Regardless of the merits of the LVEC, I believe that the information and management questions are so important that of themselves, if they are not resolved, they are sufficient reason to cancel the project. Therefore let me begin with them.
KPMG's Four Risks.
The KPMG report on the LVEC, dated 22 September, 2006 is central both to the management and the information problem. That report identified four key risks.
1. "The risk that insufficient capacity/capability exists in the City to effectively manage the Kingston Regional Sports and Entertainment capital project."
2. "The risk that roles, responsibilities and accountabilities are unclear, potentially leading to duplication of efforts and/or key actions not being completed."
3. "The risk that the current risk management plan has not identified all key risks and/or the current and planned mitigation is not sufficient to mitigate risk to the City?s level or risk tolerance."
4. "The risk that the current budget is inconsistent with actual commitments to date and/or is not complete."
When I first saw these I thought it was dja vu all over again. These four risks should be compared with the KPMG report of 25 May about the Grand Theatre. The Summary of Key Recommendations in that report says:
1. The project budgeting process would benefit from a more rigorous due diligence process at the project planning stage. Any limitation in the due diligence should be clearly communicated and the related budgetary risks quantified and communicated. The Finance function should be involved in the preparation and monitoring of the budget.
2. A risk-based approach should be adopted for the planning and approval of major projects. This approach would require the identification of principle project execution risks and would require the development of an appropriate risk mitigation plan for review and approval at the Senior Management and Council level. In addition, ongoing projects monitoring should incorporate regular risk management updates.
3. Project scheduling should be considered at the City level, and even at the community level, to ensure that priority projects do not complete with each other for limited City staff, contractor and fundraising resources.
4. A Project Management Committee should be established with cross-departmental representation based on the project management skills required, including senior level leadership from the City, the Project manager and potentially other key contractors. More than an advisory or consultative committee, the Project Management Committee would have the authority to act, delegated in the form of a formal mandate, and would be held accountable through regular reporting to the project sponsor. The Project Management Committee would review, approve and communicate all material change order requests and regularly review progress (Project Master Schedule), risk management, budgeting and quality control reports. In this way, the Project Management Committee could be the main source of regular communication on status to senior management and Council.
In other words, the concerns were the same. In September there was no evidence that the LVEC project had profited from the previously-identified problems of the Grand Theatre.
LVEC Risk / Grand Theatre Recommendations.
* capacity/capability #1 #3
* management problems #2 #4
* risk management #3 #2
* budget #4 #1
The Grand Theatre report was publicly released as soon as it was available. The LVEC report, received on 22 September 2006, was released on 13 February 2007. At Tuesday's council meeting, I shall ask why it was kept secret. I do not believe it would have been released even then except that Council had adopted a motion on 23 January 2007 that I put forward with Councillor Matheson. It required the Treasurer, amongst other things, to Identify in the budget and business plan documents all assumptions that in turn may become a risk, to review the risk management plans, and to assess related financial risks the city may have to bear.
Briefings to Council.
On December 18 at a special meeting of Council staff briefed the new Council on the three major capital projects, the Grand Theatre, the Multiplex and the LVEC. Commissioner Beach has written of that meeting, Although staff did not have all financial facts and figures, the project update provided to council in December 2006, included all information known as of that date including about the possibility of some financial shortfalls in areas such as environmental work. The figure provided for the ?environmental work was $300,000. There was no mention or reference to the KPMG finding, ?the current budget is inconsistent with actual commitments to date and/or is not complete.
On 19 December, the day following the special Council meeting and briefing, as a result of detail that had been requested and a review of contractor and operator responsibilities for food and beverage as well as furnishing, fixtures and equipment (FF&E), the contract was signed. On 13 February we were advised that an additional $2,616, 670 will be required for FF&E. I would have thought that one of two conditions must apply. Either that was known on 18 December, the day before the contract was signed, and Council was not told, in which case we have a real problem with the quality of information Council, and therefore the public, are being given by staff, or the people responsible for finalising the contract did not do a very good job. Are they still involved with the project and are there other similar cost overruns waiting to bite us?
The Whig Standard quoted the Project Manager on 15 February (front page headline article) saying The increases proposed are conservative amounts that include maintaining a contingency fund to address any future increases. There is always a potential that some figures are not right on so that's why we are recommending the contingency fund stay in place. I am fully aware that Ms Hurdle may have said more than was quoted, that may have provided amplification to her comments, or in some way reflected a different meaning. Therefore, I would hope that at the Tuesday Council meeting I will have the opportunity to ask her if indeed she said what is quoted, and if she would like to elaborate or expand on it in any way.
More Questions.
I have several questions stemming from that comment. The Council report 07-081 prepared by Ms Hurdle and submitted through Commissioner Beach has a budget variance for line item 7, Administration, Construction management & pre-opening (10% contingency). The variance is $773,230, amending the total to $2,543,230. This suggests to me that this contingency is now fully committed. The Contingency base building remains unchanged at $1,500,000. To the best of my knowledge there are at least two unfunded problems that may incur cost overruns. One is the matter of noise abatement, and the other is handicap access. I have not seen figures for either of these. Further, I understand that the building design is still only about 90% complete. I wonder if the base building contingency is indeed sufficient.
Is it prudent to continue the project until we have a degree of certainty on the basic questions of costs and management ?
As we go into Tuesday evening?s meeting, there are two unknowns. One is the cost to cancel the project and the other is the cost to continue it.
At the end of the day, whichever option is followed, there will be an impact on taxes. My job is to try to determine which has the least impact, and then try to mitigate it. As costs continue to rise, it is worth remembering that the business plan was originally written to cover a capital cost of $37 million. Commissioner Beach told Council in December that any shortfall of the operating plan would have to be made up by the taxpayers. How well does the business plan support capital costs of $50 million or more?
Using the Reserves.
The staff recommendation is that the current budget increase be made up from the city's reserves (created from tax money). The budget as approved in 2006 made the following LVEC charges against the reserves:
Municipal Capital Reserve Fund $3.3 million
Working Fund Reserve $ .15 million
Development Charges $3.0 million
The increase costs funding proposal makes these extra demands:
Municipal Capital Reserve Fund $2.34 million
Environment reserve $ .505 million
Parking Reserve $. 5 million
Total: $9.795 million.
Before that amount of reserve funding can be used for other infrastructure programs, it must be replaced. Other work set aside represents the opportunity cost.
Cost of Borrowing Money.
The city has currently borrowed $25.5 million for the LVEC at a rate of 5.391%. The budget as approved in May, 2006 called for a debt of $29.32 million. The total cost of that debt, to be repaid in 2040, will be approximately $40 million. The recommendation going to Council is that the cost overruns be made up from capital reserves, without any discussion of what the impact would be on other necessary infrastructure work. If additional money is borrowed for 33 years, (the term of the current loan) at a rate of 5.394%, the cost for each million borrowed over the term would be $1,161,883.34. The cost to borrow $4.3 million (the current budget shortfall) plus an extra $4 million to make up federal funding projected but not received, over 33 years would be $9,643,632. Any shortfalls between the operating revenues and debenture repayment would have to be made up from the tax base.
The cost of tickets for events at the LVEC is important.
Ticket prices:
Hockey $8 - 22 + taxes $1.12 - $3.08 + surcharge $1.50 = $10.62 - $26.58
Concerts $55 - 65 + taxes $7.70 - $9.10 + surcharge $2 = $64.70 - $76.10
Family shows $22 - 55 + taxes $3.08 - $7.70 + surcharge $2 = $27.08 - $64.70
Other events $27 - 43 + taxes $3.78 - $6.02 + surcharge $2 = $32.78 - $51.02
Each year the business plan calls for five major concerts with an attendance of 5,000 and six minor concerts with an attendance of 2,500 and 4,000 at all hockey games. One person who has sent me an e-mail recently saying, ?I expect I will be in this center 50 plus times a year!? I would be surprised if there were many Kingston residents who would be able either financially or time-wise, given other activities such as going to a movie, or family events, who could be such frequent supporters.
Is Kingston's reputation at stake?
Several people have raised concerns about what stopping the project would do to the reputation of the city. I suspect the answer is ?not much.?
The LVEC is neither a silver bullet that can make everything wrong, right, nor the kiss of death that will stop all good things.
I put much more weight on the concerns expressed by Standard and Poors in their credit rating. They noted that the completion of outstanding capital projects are expected to fully use the city?s resources in the coming years, limiting financial flexibility and notable cost increases in the larger projects planned, the undertaking of additional, large medium-term projects, or both, could set the city's credit profile on a deteriorating path.
I understand that Brockville once lost its credit rating for a couple of years. That makes the conduct of the city's ongoing business very difficult. For example, we borrow short term against the payment of tax bills.
Value to the economy.
Other have pointed out how important this will be to the economy. I do not see how the value of tickets sold is a factor, as suggested in a staff report, as much of the face value of a ticket goes to the entertainer or event organiser (such as Monster trucks). For other factors I look first to Richard Florida. He has said, At all levels of government and even in the private sector Americans have been cutting back crucial investment in creativity - in education, in research, in arts and culture - while pouring bullions into low-return or no-return public projects like sports stadiums (Rise of the Creative Class, xxiv).
Second, at the LVEC public meeting on 25 April 2005, an associate professor of Phys Ed at Queen's, whose area of research is sports centres, said the LVEC ?would be unique if it delivered an economic benefit. Sports facilities are not economic engines. To the extent that the LVEC has an entertainment component not included in the facilities either of the above were considering, there may well be an impact, but I suspect it may not be a much as some would say. What in fact is a realistic estimate of the return on the tax payers investment?
The way ahead.
In May, 2006 Council approved the budget and the project. At almost the same time, the KPMG report on the Grand Theatre was released indicating serious problems. Last Tuesday we [were] told that KPMG found the same problems in the LVEC project in September 2006. The secrecy surrounding that report does little to encourage confidence that the problems have been fully addressed. The apparent inconsistency between what was known about budget problems and what was told to Council likewise does not encourage confidence. At a minimum those problems must be fully resolved. To continue without the necessary level of confidence on these matters would be imprudent.
Given the confidence levels, what are the best projections of the cost to cancel and the cost to complete the project? How much do either of those estimates vary from the current known taxpayer liability? What becomes the best commitment of current and future taxes?
Copyright 2007: Bill Glover.
LVEC challenges
Bill Glover, 2007-02-20
http://www.billglover.org/cms/index.php/lvec_challenges
(http://www.billglover.org/cms/index.php/lvec_challenges)A discussion of what I see as the LVEC "challenges" may be helpful.
I would welcome comment.
Some of you may remember my answer last October when questioned about the LVEC at an all candidates meeting. I replied that I thought we had probably passed the point of cancelling it, and we would have to make the best of a bad deal. Why, therefore, have a debate now about cancelling the LVEC?
First, I believe it is important to understand that the first objective of the motion to cancel The LVEC is neither a silver bullet that can make everything wrong, right, nor the kiss of death that will stop all good things. (moved by Councillor Vicki Schmolka, seconded by me) is to provide this Council with an opportunity to discuss the LVEC issue and all its ramifications. The secret KPMG report, released last Tuesday, has in my view significantly altered the circumstances of the project, making such a discussion necessary.
Unless something is on the agenda for a meeting, we cannot talk about. The agenda is driven in the most part by staff reports. We were supposed to have met as the Committee of the Whole on Wednesday, 14 February when we had two staff reports about the LVEC to discuss. That meeting was cancelled because of snow. We were told it would be ?rescheduled? - no date suggested. The agenda for the Council meeting on Tuesday, 20 February, closed at noon on Thursday, 15 February. In the absence of any information about what was going to happen to the reports that should have been discussed on 14 February, putting a motion on the agenda was the only way we could be certain that the LVEC would be discussed.
Two Basic Issues.
I identify two basic issues about the LVEC.
The first is its cost, and whether we can afford it.
My second issue is the problem of information coming to Council about it and the quality of project management. Regardless of the merits of the LVEC, I believe that the information and management questions are so important that of themselves, if they are not resolved, they are sufficient reason to cancel the project. Therefore let me begin with them.
KPMG's Four Risks.
The KPMG report on the LVEC, dated 22 September, 2006 is central both to the management and the information problem. That report identified four key risks.
1. "The risk that insufficient capacity/capability exists in the City to effectively manage the Kingston Regional Sports and Entertainment capital project."
2. "The risk that roles, responsibilities and accountabilities are unclear, potentially leading to duplication of efforts and/or key actions not being completed."
3. "The risk that the current risk management plan has not identified all key risks and/or the current and planned mitigation is not sufficient to mitigate risk to the City?s level or risk tolerance."
4. "The risk that the current budget is inconsistent with actual commitments to date and/or is not complete."
When I first saw these I thought it was dja vu all over again. These four risks should be compared with the KPMG report of 25 May about the Grand Theatre. The Summary of Key Recommendations in that report says:
1. The project budgeting process would benefit from a more rigorous due diligence process at the project planning stage. Any limitation in the due diligence should be clearly communicated and the related budgetary risks quantified and communicated. The Finance function should be involved in the preparation and monitoring of the budget.
2. A risk-based approach should be adopted for the planning and approval of major projects. This approach would require the identification of principle project execution risks and would require the development of an appropriate risk mitigation plan for review and approval at the Senior Management and Council level. In addition, ongoing projects monitoring should incorporate regular risk management updates.
3. Project scheduling should be considered at the City level, and even at the community level, to ensure that priority projects do not complete with each other for limited City staff, contractor and fundraising resources.
4. A Project Management Committee should be established with cross-departmental representation based on the project management skills required, including senior level leadership from the City, the Project manager and potentially other key contractors. More than an advisory or consultative committee, the Project Management Committee would have the authority to act, delegated in the form of a formal mandate, and would be held accountable through regular reporting to the project sponsor. The Project Management Committee would review, approve and communicate all material change order requests and regularly review progress (Project Master Schedule), risk management, budgeting and quality control reports. In this way, the Project Management Committee could be the main source of regular communication on status to senior management and Council.
In other words, the concerns were the same. In September there was no evidence that the LVEC project had profited from the previously-identified problems of the Grand Theatre.
LVEC Risk / Grand Theatre Recommendations.
* capacity/capability #1 #3
* management problems #2 #4
* risk management #3 #2
* budget #4 #1
The Grand Theatre report was publicly released as soon as it was available. The LVEC report, received on 22 September 2006, was released on 13 February 2007. At Tuesday's council meeting, I shall ask why it was kept secret. I do not believe it would have been released even then except that Council had adopted a motion on 23 January 2007 that I put forward with Councillor Matheson. It required the Treasurer, amongst other things, to Identify in the budget and business plan documents all assumptions that in turn may become a risk, to review the risk management plans, and to assess related financial risks the city may have to bear.
Briefings to Council.
On December 18 at a special meeting of Council staff briefed the new Council on the three major capital projects, the Grand Theatre, the Multiplex and the LVEC. Commissioner Beach has written of that meeting, Although staff did not have all financial facts and figures, the project update provided to council in December 2006, included all information known as of that date including about the possibility of some financial shortfalls in areas such as environmental work. The figure provided for the ?environmental work was $300,000. There was no mention or reference to the KPMG finding, ?the current budget is inconsistent with actual commitments to date and/or is not complete.
On 19 December, the day following the special Council meeting and briefing, as a result of detail that had been requested and a review of contractor and operator responsibilities for food and beverage as well as furnishing, fixtures and equipment (FF&E), the contract was signed. On 13 February we were advised that an additional $2,616, 670 will be required for FF&E. I would have thought that one of two conditions must apply. Either that was known on 18 December, the day before the contract was signed, and Council was not told, in which case we have a real problem with the quality of information Council, and therefore the public, are being given by staff, or the people responsible for finalising the contract did not do a very good job. Are they still involved with the project and are there other similar cost overruns waiting to bite us?
The Whig Standard quoted the Project Manager on 15 February (front page headline article) saying The increases proposed are conservative amounts that include maintaining a contingency fund to address any future increases. There is always a potential that some figures are not right on so that's why we are recommending the contingency fund stay in place. I am fully aware that Ms Hurdle may have said more than was quoted, that may have provided amplification to her comments, or in some way reflected a different meaning. Therefore, I would hope that at the Tuesday Council meeting I will have the opportunity to ask her if indeed she said what is quoted, and if she would like to elaborate or expand on it in any way.
More Questions.
I have several questions stemming from that comment. The Council report 07-081 prepared by Ms Hurdle and submitted through Commissioner Beach has a budget variance for line item 7, Administration, Construction management & pre-opening (10% contingency). The variance is $773,230, amending the total to $2,543,230. This suggests to me that this contingency is now fully committed. The Contingency base building remains unchanged at $1,500,000. To the best of my knowledge there are at least two unfunded problems that may incur cost overruns. One is the matter of noise abatement, and the other is handicap access. I have not seen figures for either of these. Further, I understand that the building design is still only about 90% complete. I wonder if the base building contingency is indeed sufficient.
Is it prudent to continue the project until we have a degree of certainty on the basic questions of costs and management ?
As we go into Tuesday evening?s meeting, there are two unknowns. One is the cost to cancel the project and the other is the cost to continue it.
At the end of the day, whichever option is followed, there will be an impact on taxes. My job is to try to determine which has the least impact, and then try to mitigate it. As costs continue to rise, it is worth remembering that the business plan was originally written to cover a capital cost of $37 million. Commissioner Beach told Council in December that any shortfall of the operating plan would have to be made up by the taxpayers. How well does the business plan support capital costs of $50 million or more?
Using the Reserves.
The staff recommendation is that the current budget increase be made up from the city's reserves (created from tax money). The budget as approved in 2006 made the following LVEC charges against the reserves:
Municipal Capital Reserve Fund $3.3 million
Working Fund Reserve $ .15 million
Development Charges $3.0 million
The increase costs funding proposal makes these extra demands:
Municipal Capital Reserve Fund $2.34 million
Environment reserve $ .505 million
Parking Reserve $. 5 million
Total: $9.795 million.
Before that amount of reserve funding can be used for other infrastructure programs, it must be replaced. Other work set aside represents the opportunity cost.
Cost of Borrowing Money.
The city has currently borrowed $25.5 million for the LVEC at a rate of 5.391%. The budget as approved in May, 2006 called for a debt of $29.32 million. The total cost of that debt, to be repaid in 2040, will be approximately $40 million. The recommendation going to Council is that the cost overruns be made up from capital reserves, without any discussion of what the impact would be on other necessary infrastructure work. If additional money is borrowed for 33 years, (the term of the current loan) at a rate of 5.394%, the cost for each million borrowed over the term would be $1,161,883.34. The cost to borrow $4.3 million (the current budget shortfall) plus an extra $4 million to make up federal funding projected but not received, over 33 years would be $9,643,632. Any shortfalls between the operating revenues and debenture repayment would have to be made up from the tax base.
The cost of tickets for events at the LVEC is important.
Ticket prices:
Hockey $8 - 22 + taxes $1.12 - $3.08 + surcharge $1.50 = $10.62 - $26.58
Concerts $55 - 65 + taxes $7.70 - $9.10 + surcharge $2 = $64.70 - $76.10
Family shows $22 - 55 + taxes $3.08 - $7.70 + surcharge $2 = $27.08 - $64.70
Other events $27 - 43 + taxes $3.78 - $6.02 + surcharge $2 = $32.78 - $51.02
Each year the business plan calls for five major concerts with an attendance of 5,000 and six minor concerts with an attendance of 2,500 and 4,000 at all hockey games. One person who has sent me an e-mail recently saying, ?I expect I will be in this center 50 plus times a year!? I would be surprised if there were many Kingston residents who would be able either financially or time-wise, given other activities such as going to a movie, or family events, who could be such frequent supporters.
Is Kingston's reputation at stake?
Several people have raised concerns about what stopping the project would do to the reputation of the city. I suspect the answer is ?not much.?
The LVEC is neither a silver bullet that can make everything wrong, right, nor the kiss of death that will stop all good things.
I put much more weight on the concerns expressed by Standard and Poors in their credit rating. They noted that the completion of outstanding capital projects are expected to fully use the city?s resources in the coming years, limiting financial flexibility and notable cost increases in the larger projects planned, the undertaking of additional, large medium-term projects, or both, could set the city's credit profile on a deteriorating path.
I understand that Brockville once lost its credit rating for a couple of years. That makes the conduct of the city's ongoing business very difficult. For example, we borrow short term against the payment of tax bills.
Value to the economy.
Other have pointed out how important this will be to the economy. I do not see how the value of tickets sold is a factor, as suggested in a staff report, as much of the face value of a ticket goes to the entertainer or event organiser (such as Monster trucks). For other factors I look first to Richard Florida. He has said, At all levels of government and even in the private sector Americans have been cutting back crucial investment in creativity - in education, in research, in arts and culture - while pouring bullions into low-return or no-return public projects like sports stadiums (Rise of the Creative Class, xxiv).
Second, at the LVEC public meeting on 25 April 2005, an associate professor of Phys Ed at Queen's, whose area of research is sports centres, said the LVEC ?would be unique if it delivered an economic benefit. Sports facilities are not economic engines. To the extent that the LVEC has an entertainment component not included in the facilities either of the above were considering, there may well be an impact, but I suspect it may not be a much as some would say. What in fact is a realistic estimate of the return on the tax payers investment?
The way ahead.
In May, 2006 Council approved the budget and the project. At almost the same time, the KPMG report on the Grand Theatre was released indicating serious problems. Last Tuesday we [were] told that KPMG found the same problems in the LVEC project in September 2006. The secrecy surrounding that report does little to encourage confidence that the problems have been fully addressed. The apparent inconsistency between what was known about budget problems and what was told to Council likewise does not encourage confidence. At a minimum those problems must be fully resolved. To continue without the necessary level of confidence on these matters would be imprudent.
Given the confidence levels, what are the best projections of the cost to cancel and the cost to complete the project? How much do either of those estimates vary from the current known taxpayer liability? What becomes the best commitment of current and future taxes?
Copyright 2007: Bill Glover.