Do the maths on stadium costs

Where is the Dunedin City Council with its budget and how much the stadium is costing the council and ratepayers? The deputy chairman of the finance committee, Cr Richard Thomson, explains the official council view while council critic Calvin Oaten adds up all the costs as he sees them.

Calvin Oaten and I can agree on one thing anyway. Neither of us thought Forsyth Barr Stadium was a good idea and both of us thought it would cost ratepayers far more than the mythical $66 a year. Blimey, that's two things. Unfortunately, from there it gets a bit more discordant. I mightn't have thought the financial analysis that justified the stadium proceeding stood very close analysis, but I'm afraid neither does the accounting in Calvin's opinion piece.

Let's just get a few disclaimers out first.

To all those people who said it would cost ratepayers far more than its proponents promised. You are correct.

To all those people who said it could not make a profit without further subsidies. You are correct.

There we are. No need to argue with me. I surrender up front.

But there is another self evident truth. It's there now.

I recently attempted to explain in the ODT's online columns why ratepayers were better off paying more to keep the stadium open than they would be if they closed it (as numerous people keep telling me should occur). This resulted in responses that could wound a more sensitive soul. Indeed, Calvin Oaten said (of me): ''I am not sure where he learned his maths, but it sure as hell shows what intellect is around that council table.''

I may be wrong of course, but I don't think he was being complimentary about the intellect thing. So let me have another go.

It is proposed that Dunedin ratepayers will contribute roughly $9.125 million a year in real costs to them in 2013-14, made up of. -

Dividend forgone from DCHL: $5.25 million.

Additional debt repayment: $2.725 million (compared to what was originally promised).

DVL service level agreement: $0.75 million (either a payment to enable more community usage or a further ratepayer subsidy depending on point of view).

Events Attraction Fund: $0.40 million (not a direct stadium cost but only proposed because of it).

Calvin argues that it is much more than this: ''The decision by council to purchase shares in DVML for an amount of $3.381 million ... is a cost to the ratepayer''.

I'm sorry Calvin, but it isn't. The council paid this money several years ago. Converting it to shares has no cash flow impact (which is what ratepayers fund). ''The stadium's rated value is $1.8 million and only $134,000 is being charged. A subsidy of $1.66 million.''

Well, he is correct that the stadium, if rated as a normal commercial activity, would have generated a rate of $1.8 million. But he is incorrect to imply that somehow ratepayers are worse off by $1.66 million. Council decided to rate the stadium based on the rates it received from the properties that previously occupied the site.

The net impact to ratepayers is therefore zero. If you dislike the stadium, you will evidence that as a further indication that it cannot pay its way as a commercial entity. Fair enough. I agree with you. Your argument, Calvin, is presumably that if it was paying a commercial rate then ratepayers would be receiving more revenue and that would offset rates.

Again, fair enough. But you can't have it both ways. That $1.66 million would not have been there if it hadn't been built either. Calvin goes on to argue that the losses in DVL (the entity owning the stadium) are large and likely to be ongoing. Again, he is correct, but his implication that this is a further cost to the ratepayer is not so. DVL's losses are contributed to substantially by depreciation.

For non accountants, this is an allowance that companies make for the reduction in value of their plant over time. There is no actual cash paid out. DVL's role is to own the stadium, collect the rent, and use it (plus the monies provided from the figures given in the first leg, at left) to pay the mortgage on the stadium.

What the ratepayer needs to be concerned about is that the cash coming in is sufficient to pay the interest and loans going out. If it was also to fund the depreciation then that would simply mean DVL was building up large sums of money in the bank (not something that I think ratepayers want) or it was paying loans off faster (but at an additional cost to ratepayers).

The ORFU debt write-off had nothing to do with the stadium. You might be able to mount an argument that the Carisbrook holding costs are stadium related, but you would also have to then factor back in the Carisbrook costs now avoided since its closure. These are complete red herrings.

So, what would happen if we closed it? DVML collects revenue (around $9 million) and pays its fixed costs including the rent ($4 million) out of this. It is this rent which allows DVL to pay off the loans (with the other ratepayer assistance outlined above). If you close it down, you do not remove any of the costs in DVL.

They still have the stadium loans and interest to pay but they do not have $4 million rent from DVML. We would be able to remove council funding of DVML ($750,000 for the community usage/subsidy) and the events fund ($400,000). On the other hand, council would have to put Carisbrook back into operation. Let's use Calvin's figure of $450,000 per annum holding costs as an ongoing expense. Adding the pluses and minuses we are now about $3.3 million worse off per annum before any net operating costs of putting Carisbrook back into operation.

That's roughly a 3% additional rates increase through closing it. But, what if DVML can't pay the rent? Fair question. Even if revenue dropped by $3 million (an extraordinary amount), we would only be at the cost neutral point and still have the benefits the stadium brings. So, hate it if you like. By all means continue to argue that it was an unwise decision. Make the valid point that the real costs to ratepayers are much greater than they were promised.

But at least do the maths.

DCC Asset Sales

chirpbird, there is no definite proposal to sell assets that I have heard of; what have you heard?. But if there was, they would deny that the reason was because of their gigantic mistake of deciding to build their stadium.

CitiBus was sold because it made 6 years of consecutive losses and the losses were expected to continue. Every year they received a ratepayer subsidy which they used to undercut other tenderers trying to win ORC bus routes. Even with the subsidy (subvention payment) they still lost money.

Their staff costs ballooned and they ended up winning more bus routes than they had buses for. In 2008 and 2009 they spent $4.8 million on new buses, thereby greatly increasing their debt. Otago is better off without the inefficient CitiBus using ratepayer subsidies to compete against more efficient non-subsidised operators. [abridged]

 

Stadium subvention payment

chirpbird, "subvention payment", in this case, is another name for subsidy. By providing these subsidies to the loss-making businesses of DVL and DVML, the DCC and the ratepayers benefit from a tax reduction. I am pleased that there is a tax benefit, but the huge losses still remain.

Last financial year (2012), DVL (the stadium owner) made a loss of $12.38 million before adding the subsidy payment of $7.29 million. Including this subsidy, the company still made a net loss of $4.31 million. What most people (including our DCC councillors) don't seem to realise is that the ratepayers are responsible for paying both the subsidy and the net loss, a total of $12.38 million just for that one year (11 months of operation). We paid this money both directly and indirectly, through both rates increases and unsustainable increases in the debt of Dunedin City Holdings.

The bad thing about the subvention payments is that they represent a large and real cost to the city. The DVL media statement says "$4.31m loss", but $12.38m has disappeared down the financial black hole.

The total ratepayer impact of the stadium is much bigger than this $12.38m because DVML also makes a loss, and the very significant costs which have been shifted from DVL and DVML into the DCC also need to be included.

[Abridged]

Selling run-down assets

This is a really alarming scenario, if correct.

DCC-owned company CitiBus was sold after reportedly making a significant loss. But that was only because it had lost ORC contracts to Ritchies immediately before. Before that, it had made a profit.

If DCC was going to end up selling council-owned companies to pay for the stadium (one way or another and in the long run) at least the companies might have been sold in good heart and so at a good price.

I think $2.6 million was the reported loss on the sale of CitiBus. 

That will be enough of that

chirpbird, please stop posting on this thread.  You are making way too much sense.

No problems

Chirpbird: I have no problems with the 'subvention payment' system. It is an old method of minimising tax liability recognised by the IRD. I am not sure, but I think it is only applicable to public bodies and possibly incorporated societies. Check it out. But in this case, it meant that DVL received from DCHL $7.292ml instead of just $5.25ml. which is the dividend value forgone by the DCC/ratepayers. A $2.042ml differential. Good eh? But that does nothing but reduce DVL's stated losses from ($6.354ml) to ($4.312ml). A real benefit poured down the hole. And that is the tragedy of it all.

Subventions

Chirpbird: yes it makes sense for the council to cancel out profits in one arm of its operations with losses in another - it avoids income tax and saves the city money. 

But we're currently in a situation where council companies are being forced to cough up so much money that their long term viability is being put into question, they can't reinvest their profits in their own futures - we'll start seeing the 'underperforming' companies being sold off because they're not well enough capitalised to operate.

It also allows us to have a situation where the council claims it increases rates by "only 4%" while the ratepayers find their actual amount paid ratepayers going up by much much more than that because  the rebate we previously received from the companies' profits is reduced because they are being diverted to pay the interest on the rugby stadium debt.

subvention payments

Jimmy Jones; if you understand these please enlighten me further.

My understanding is that under certain circumstances, with common company ownership, a profit company can make a payment to a loss company resulting in lower tax paid overall.

See this link where it is stated:  A subvention payment is a payment by the profit company to the loss company. A subvention payment reduces the profit company's net income and the loss company's available net losses for tax purposes by the amount of the payment.

It seems to me to be sensible business practice for the DCC to do this. And they seem to be reporting correctly that they are doing it. So I  genuinely want to understand where you (or anyone else) see a problem. 

Councillors can speak independently

I never got the impression that Cr Thomson was speaking for anyone but himself. I hope that  more councillors will make public statements more often, in the hope of clarifiying issues.

However, they are unlikely to do so if public debate  becomes clouded with  ad hominem attacks and  unexamined assumptions about devious motives. 

Unanswered questions from Cr Thomson

While noting that Cr Richard Thomson now appears to be the Council spokesperson on financial matters for the Council, it raises a couple of issues that require some form of answer.  Is Cr Syd Brown no longer the Chair of the Finance committee of the Council?  Secondly, when is Cr Thomson going to learn about depreciation, and why it is necessary in accounting practices and thirdly that rating a building based upon its previous rating income arguement is so full of holes that it makes readers really wonder which particular planet he actually lives on.  We know that Cr Thomson is a reader of these posts, so maybe time to answer some really basic questions!

Question for Richard

A quick question for Cr Richard Thomson.  He runs a chain of retail stores.  Does he allow for depreciation in his books?  If not, why?  If so, then why shouldn't the stadium?  Goose and Gander.

Wrong

Depreciation of capital items is a very real cost. It means that at the end of expected life, you have to replace them by borrowing again. And so the cycle continues.

The Council does not have to reopen Carisbrook. It can tell rugby to go play somewhere else.

Cr Thomson has also neglected to account for operational losses in DVML. He also hasn't fully appreciated the complexity of the money-go-round. By tying DVML up with all the other city venues, it makes it almost impossible to identify exactly stadium-related costs.

He also omits (possibly because he is not yet aware of) the additional multi-million dollar costs relating to the SH88 realignment. This is most certainly stadium related as without the realignment, the stadium could not have been opened for RWC2011.

He also neglects to consider the way in which some of these costs could be recouped - instigate action against those who proposed the rosy business models and economic impacts as they are so woefully out of whack with reality. And pursue the personal assets of those Councillors who approved this project, as to be in such a mess within 2 years of opening demonstrates very poor judgement. Jointly and severally responsible.

Stadium depreciation

The scedule of depreciation for the stadium in the Horwath HTL Report (2007, Table 4.9) shows the estimated cost and life expectancy of the more expensive components of the DCC Stadium. This tells us that significant expenses are expected about every five years. 

Cr Thomson's belief that we should not fund stadium depreciation, does not mean that these large repeating costs disappear, it just means that the DCC and DVL will be financially unprepared whenever something needs to be replaced. Each time this happens our councilors will be surprised and disappointed that even more money is needed by DVL.

Funding depreciation means avoiding nasty surprises. For DVL this means, every year, paying off some of its debt ahead of schedule in preparation for the big chunks of new debt. To some, it might seem revolutionary to plan ahead five or ten years, but, in fact this is normal business practice in NZ. Stadium depreciation is not imaginary, it is a real cost. Not funding depreciation is a very temporary solution to a very large problem; a permanent solution needs to be found.

The stadium decision

The decision about how long to keep the financially debilitating DCC stadium is an important one that most ORC and DCC councilors seem to not want to think about. Richard Thomson deserves some points for trying, but his efforts fall far short of an official DCC assessment/analysis. The DCC has strenuously avoided revealing the net financial impact of their stadium on Otago's and Dunedin's renters and ratepayers despite many people making many public and private requests for them to do so. My view is that the DCC can not be trusted to make an unbiased assessment of the merits of keeping the DCC Stadium. Finding a truly independent outfit to do the job is also problematic if the DCC is the one that chooses and pays the consultant. 

The first step in deciding whether to keep it or trash it, is to determine the current and expected ongoing costs. I agree with Calvin Oaten that the net costs are a lot more than what Cr Thomson calls the "proposal that Dunedin ratepayers will contribute roughly $9.125 million a year". Note that neither the DCC, nor Cr Thomson, nor the ODT have stated that this "contribution" is the total amount. The word "contribute" can be misleading. Every citizen should expect the DCC to provide an accurate and comprehensive calculation of the total net financial impact of their stadium. No more duck-shoving.

 

Self evident truth

Cr Thomson is now one of the few DCC councilors to have recognized that the FB Stadium can not make a profit without subsidies. The size of these subsidies is large and yet the stadium companies still made a loss. The presence of these subsidies (called "subvention payments") is poorly understood by the average DCC councilor and gives them a very misleading impression of the financial viability of the two companies. The 2012 annual reports showed that they lost a total of $16 million (DVL: $12m + DVML: $4m) without counting the hidden subsidies and the loss on interest rate swaps and various other DCC costs.

The reason why the FB Stadium will always make a loss is because the revenue is too low and can't increase much, and the costs are too high and mostly can't be changed. Even if our stadium was fully booked with sold-out events every week, the revenue would still be insufficient to pay for the expenses. Even if we built it in Auckland or Sydney instead of here, it would still make a big loss.

The Westpac Stadium in Wellington is nearly fully used, and the healthy revenue it earns ($18m per year) is much too small to pay all the expenses of Dunedin's FB Stadium (expenses shared between DVL, DVML, DCHL and DCC). The hope that one day it wouldn't loose money, was a false hope created by the Carisbrook Stadium Trust, the DCC staff and some councillors. It is time that Paul Orders and his staff started providing accurate information to the councillors and the public and abandoned their "let's make it work" media campaign. Giving the stadium more and more subsidies is not "making it work", it's making us poor.

Stadium Bailout: Shares for debt

The conversion of some of DVML's debt into shares is a very bad idea because it obscures the unfortunate financial position of the company. The conversion of the $3.4 million debt relieves DVML of paying interest on the debt, and has the effect of shifting costs from DVML to the DCC. This is in effect another hidden subsidy, another way of hiding how bad DVML's finances are. Another disadvantage is that this behaviour encourages bad spending habits. DVML's decision-makers need to feel bad consequences when they make bad decisions.

Cr Thomson's statement about the stadium rates being "based on the rates it received from the properties that previously occupied the site" seems wrong, or at least inconsistent with the Financial Planners report (24/1/12) which says that the rates bill was expected to be $1.8m to $2.0m based on the rateable value (CV) of $175m to $200m. Presently the CV is $205 million and therefore DVML would have to pay close to 2.0 million per year in rates.

It seems reasonable to me to assume that DVML will expect, and be given, a rates subsidy of 100% (close to $2.0 million) given that its total rates payments so far have been negligible (less than $55,000). As with the debt bailout, the rates subsidy is a method of hiding costs. Moving costs from DVML to DCC as a way to make DVML look good, is very bad policy. Councillors should aim for information to be open and honest.

 

Financial black-hole stadium

Richard Thomson tries to explain that the annual losses being made are not as large as indicated by the audited annual reports. This, it seems to me, is a mistake and is the main reason that he has his sums wrong and incorrectly concludes that it would cost us more to demolish the stadium than it would to keep it going. My view is that there would be a significant saving to the city if the demolition crew was called in. Many millions of dollars have been borrowed and spent and there is no escape from paying off that debt and the interest. All the other costs, however, will stop when the bulldozers have finished and the land once again becomes financially productive.

Cr Thomson agrees that "the losses in DVL (the entity owning the stadium) are large and likely to be ongoing." He then says that these losses are not a further cost to ratepayers because depreciation is a large contribution to the annual losses and that we don't need to bother with funding depreciation.

Depreciation is the way we account for expensive items that last several years. The cost of these items is spread over the estimated useful life of the items. This keeps the accountants happy and has more practical benefits. In the case of the stadium the depreciation is calculated ($8.4m for DVL, 2012, 12 months-adjusted), but the DCC and the board of DVL have decided not to fund it. This means that when the parts of the stadium wear out and need to be replaced, there will be nothing in the cupboard.

Removing the stadium will remove this ongoing cost to the city.

[Abridged]

'If this proves anything.......'

Thanks to Cr Thompson for trying to shed light on the indefinable, which by my recollection, he had played no part in cobbling into existence. But all his article proves, is what a mess of tenuous 'ifs, buts and maybes', the whole morass was from the beginning; with all the hallmarks of bean-counters trying to outdo each other, in the 'cleverness' stakes. 'There's no such thing, as a free lunch'. The only thing 'free' about the Stadium now, is that 'Old Uncle Tom Cobleigh, and all' seem to have worked out strategies enabling them to extract from DVML, the 'free' use of it. Make it pay, or watch Dunedin's people and investment capital drift off to parts of the country, where they, as ratepayers, don't have to suffer this yoke eternally around their necks. 

What is Carisbrook's value, and to whom?

"Do the maths on stadium costs"by Richard Thomson, op.ed. Feb 7, answering Calvin Oaten's "DVML debt much understated" piece immediately above it, contains: "...You might be able to mount an argument that the Carisbrook holding costs are stadium related, but you would also have to then factor back in the Carisbrook costs now avoided since its closure. These are complete red herrings......"

But Carisbrook was purchased by the DCC on the basis of a valuation instead of offered on the open market so the market itself could set the value buyers were prepared to pay, and now it is still being maintained as if it were a stadium-in-waiting rather than having been cleared for building. Usual practice is for investors in development real estate to adde value by presenting it to the market ready for redevelopment.

This would have added to the value when the shortage of industrial land sees buyers eager to pay the DCC the price it paid plus (now) costs of years of holding the property. These are not costs avoided. The downturn in demand may be excusable. The DCC is among many who paid unrealistic prices for property and now sits on "assets" that have lost value in a big way.

The extent to which it paid over the going rate, based on an estimate whose provenance and details have not been on public record so far, is hard to fathom. So is the decision to present it to the public as a property cleared of old buildings and sprayed to clear it of weeds. Imagine what would happen if a private buyer purchased it as a stadium and went into competion for events based on low purchase price and offering the "special added value" of historic, emotional attachment to the Carisbrook "brand"!

Thanks to Cr Thomson

Cr Thomson stands out by being prepared to attempt to shed some light on this horrible financial tangle.

Except it's so complicated that I can hardly make head nor tail of it.

One point that seems to be overlooked though is that the chances of the stadium earning any kind of profit over the coming years don't look stable to me, but rather declining.

The cost of air travel is going up and will never come down again due to the rising cost of fuel. We still face a global financial crisis which is arguably structural and not just a low point in an 'economic cycle'. This will continually result in fewer and fewer people being able to afford tickets or travel.

And Christchurch seems set to get a covered stadium.

For Dunedin to cuts its losses looks essential - the only matter of dispute seems to be how, by how much and how fast.

Rates 101

Rates in Dunedin are not based on some sort of neighbourhood average.  The residential general rate is based upon the capital value of individual properties as determined by Quotable Values.  If you look at the rateable values for properties in any given neighbourhood there will be a range of values, not some mythical neighbourhood average.

Simply put, the DCC calculates how much revenue in total it needs to cover net costs in the coming year, determines how much of this is to be paid by residential ratepayers (via the differentials mechanism) and divides this figure by the total residential capital value of the city to get a rate-in-the-dollar figure.  This rate-in-the-dollar is then applied to individual properties capital value.  The higher your capital value, the higher your relative share of the rates requirement.

If the ratepayer base decreases, then the revenue required is split among fewer ratepayers, and everyone pays more, but still in proportion to their capital value.

While the DCC talks about average rates increases, this is the amount a ratepayer with a property of average capital value will pay.  Some will have a higher increase, some will have a lower one. 

Not sure how Waitaki calculates their rates, but I suspect it will be extremely similar as this is how most territorial local authorities do it.  The difference might be land value as opposed to capital value, or there might be a different mix of targeted rates for some sevices, but the general rates will be based on some form of rate-in-the-dollar calculation based upon property value.

No contradiction

There's no contradiction in these statements. Rates are set based on a portion of the value of the property and its improvements. That portion is set by the TLA's, and is essentially a tax for the privilege of living in the area, and using the amenities provided by the council. If costs are fixed, then fewer ratepayers means less money which in turn suggests that rates are liable to go up.

One of the differences between how the various TLA's deal with this is in how the funds are apportioned, that illustrates this is the DCC versus the CDC. My understanding is that within DCC boundaries all rates are collected into one bag, and costs approtioned accordingly. The net result is that you wind up with ratepayers in Dunedin Central paying for projects in Allanton, and vice versa.

The other way of doing this is illustrated by the CDC where rates paid in Milton pay for projects in Milton, and not Balclutha. The flipside of this is reflected in Mr Crawford's lament, in that small communities in the Clutha District - for example, Benhar, face a much greater increase in rates for any improvements then, for example, Balclutha would, because they have fewer ratepayers to spread the cost around.

Ratepayers and non-rates payers

In the print edition of the ODT Peter Brown takes issue with Waitaki Ratepayers Assn's Mr W Crawford who said "the fewer ratepayers ... the higher your rates will be", saying "and here's me believing rates were struck on the value of property, not the number of ratepayers".

On the opposite page Cr Richard Thomson comes out with something that will further confuse those who read Mr Brown's letter and nodded their agreement. Cr Thomson says "Council decided to rate the stadium based on the rates it received from the properties that previously occupied the site. The net impact to ratepayers is therefore zero."

Even putting aside the impact that building the stadium has had on ratepayers, this is hard to reconcile with ordinary property owners' experience. Should they buy a section with a houe totally unsuited to today's standards, pull it down and build a new one, even if it is bigger, safer, well insulated and incorporates the best in design for sustainability, they will pay far more rates than the were levied on the old shack. Not only that but because rates take into account the average in the immediate neighbourhood, the neighbours in rather humble dwellings may find their rates go up because the immediate neighbourhood has been nudged upmarket. Even adding a conservatory adds to the value of a house and thus to its ratable value.

I confess the logic linking Oamaru's rating system and Dunedin's escapes me, perhaps there is none and for historic or other reasons they are entirely different. I am sure someone can shine light on what appears to be a contradiction in practice here.