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Saturday, December 3, 2011

Devon 2012 - 2013 : The Growth Ahead

As Devon moves forward in the 2012-2013 time frame, we are moving from the preparation and planning stages to execution phase of municipal growth.  This is the "proof is in the pudding" phase, so to speak.  Where previously there was no growth, or extremely limited growth, the municipality is now embarking on a controlled growth phase that will bring new residential housing and a business park. 

Both of these developments will take place on the south side of town near highway 19.  Below are the general areas, and keep in mind these maps are not precise, I have just overlaid a box in the general area to give you an idea of where the residential development is planned and where a new business park is planned.  The actual size will vary somewhat from what I've drawn here, but it gives you a good idea of the area.

These projects are coming together in a municipality that is extraordinarily well placed to serve key strategic growth plans for the Edmonton International Airport and the Port Alberta initiatives.  Our proximity to transportation options via the QE2, highway 19, and highway 60 place Devon in a position to offer prime business park options that can feed Port Alberta growth while providing immediate access to Nisku, Leduc, and the greater Edmonton market.  In turn, this growth will act as a catalyst to accelerate economic development within the municipality while providing increased linear and non-linear assessment value.  In other words, our tax base will grow, facilitating our ability to contemplate and undertake new projects and infrastructure to service our citizens and the region while being fiscally prudent.

One of the items of discussion in recent council meeting involved completing plans for expansion west of highway 60.  Having these plans ready to go precipitates a short time fuse in the event we need to deliver completed engineering packages that are ready to tender when landholders west of 60 decide they wish to proceed with development west of 60.  Since the developers west of 60 are the same groups invested in the highway 19 land on the south side, we have asked them about their intentions.  They have said it is their intention to focus their investment activities in the south before proceeding across highway 60.  As a businessman, I find it logical to proceed with servicing lands that are going to be developed rather than invest into areas that are not.  I also anticipate the absorption rate of new residential and business park areas will exceed expectations which, in turn, will accelerate their desire to move across 60. 

Some council members expressed their desires to move services across 60 without the developers investment, and of course I understand their desires, especially since this was the mandate delivered by voters in the last election.  The fundamental circumstances, however, have changed since then.  The prospects for the southern development and the twinning of Highway 19 were not fully known at that time.  It is logical then, to proceed with the southern development because residents of Devon did not demand development must be west over south, instead, it was simply their mandate to grow and west of 60 was the only option on the table.  Things have changed.  Progress with fiscal responsibility is exactly what Devon is getting and I believe it fulfills the intention of the public mandate even though circumstances are somewhat different.

Let us consider a less rational prospect.  Suppose we decided to move utilities across highway 60 and the developers decide to wait until after their southern developments are completed.  This is a reasonable assumption because it is their publicly stated intention.  If that were the case, the taxpayers would have to carry a the tax bill to sustain a 2.2 million dollar loan or debenture (estimated) to run the servicing across highway 60.  Typically, with any debenture or loan, there are some closing costs factored in... call it the price of doing the deal.  This is not dissimilar to the closing costs associated with purchasing a home.  The rate of interest assumed, for a municipality, is typically much lower than would be the case for a private or public corporation or an individual.  But we would have interest payments to pay for services that run to an empty field.

To have some estimate of what the interest rates would be, I have prepared a spreadsheet that extrapolates an interest range from 3.00% - 9.00% interest; I assume the municipal rate would be closer to the low side of that estimate.  Given those assumptions, and given a 1% tax rate increase represents approximately 42,000 - the following table would be a rough scale that could be leveraged to make a reasonable estimate of carrying costs.  Finally, a mathematical extrapolation of expected cost increases that are typically passed through to ratepayers by way of a tax increase, assumes a range that runs from 3.5% to 7%.  The reason I selected that range was to reflect what we faced in this year's budget deliberations.  We started with a budget that required a 6.99% tax increase and wound up, after deliberations, with a tax increase of approximately 3.5%.  Given rather conservative estimates, none of which account for any extraordinary fiscal issues that could arise in the proximal year, we arrive at the following table.

As you can see, the cost of carrying 2.2 million dollars is rather substantial for an area with no ASP filed and developers who have openly stated that for the next two years, their business intentions are to develop the lands south of Devon.  We need to ask if it is a good business decision to invest in running services to a field with no plans for development.  Whereas if we run utilities to areas that are going to be developed, we recuperate these funds at an accelerated pace, preserve our municipal borrowing power, and alleviating the potential of having to pass along more substantial tax increases to service carrying the debt for an unspecified number of years.  Those increases, as you can see, could result in a modest net tax rate increase of 5 to 6% all the way up to the 9 to 10% range of net tax implication.  These are presented because, logically, they account for variation of economic activity, and as such, they could all be considered to fall within a range of expected economic circumstances even if the higher end is neither statistically nor historically probable.

I recognize that the carrying costs can be passed along to developers, but we must also consider the time value of money.  Some would argue that we could find ourselves in a bad position should the economy overheat, a position where we would be unable to contract the personnel and equipment to run services and, possibly, if we were able to secure such contracted services, they might come at an inflated price.  I understand that concern, but I do not think the concern warrants the carrying cost insomuch as the engineering plans will be complete and the amount of time from filed ASP or council decision, to the running of the services, all the way to completion is estimated to be three or four months in duration. 

In short, the planning work will be completed soon.  Once done, we submit this plan for RFP, select the winning proposal, and prosecute the work with likely outcome of delivering services to site in less than 4 months.  Four months, in a macroeconomic sense, is a tiny sliver of time.  And while a wildly fluctuating economy is possible, it is both historically and economically unlikely.  Moreover, having at our disposal a very short time window for our reaction because we have completed engineering studies, functionally negates any reasonably forecasted risk to a level that becomes immaterial to the financial considerations of the deal.  In other words, we're prepared for the worst even if it is unlikely to present.

I personally do not believe the economy is capable of overheating at such a rate so as to create a business case to undertake this work without knowing there will be development on the other end.  Why do I make that statement?  Because our length of time to vulnerability is estimated to be three months, or one fiscal quarter.  Historically, the Canadian quarterly GDP average is approximately .84% with a statistical high of 3.33% in 1963 and a low of -1.80 in March of 2009.  The most recent data we have is FQ3 of 2011, checking in at .9% GDP quarterly growth rate.  Given these economic realities, and even if we were extraordinarily conservative and said our vulnerability could exceed the fastest rate of GDP quarterly growth ever recorded in Canadian history (3.33%) we still do not arrive at a successful business case to undertake this work until we know there will be development.

Further, by planting 2.2 million borrowed dollars on the backs of our taxpayers (plus closing costs and accumulated carrying costs) and then putting those dollars into the ground, we will effectively compress our municipal ability to engage in financing other business arrangements as they present.  As such, I think it's wise to consider these very basic principles of economics before moving into substantial investment decisions as a municipality. 

Accordingly, I support our expansion and running services to the south, where we have development in the chute, including residential and business park development.  I do not support plowing cash into a hole in the ground just to say we've crossed 60 and no developers are there!  We will cross 60 when the developers are prepared to invest and in the interim, we will have successful development on Highway 19 and there is a good chance we will have further clarity on the redirection of Highway 60 at or about the time our southern developments reach critical mass.

The other highlight of financial deliberations during the council meeting surrounded the discussions of the Summer Special Olympics.  Some were reluctant to believe we could "handle" the event or properly staff such an event.  There were also concerns surrounding accessibility.  My viewpoints on this are simple.  First, the accessibility issues are real, but it's also equally true that this represents a great opportunity for us to address accessibility issues here in Devon.  I think we should take that challenge head on... not because it's easy but because it is hard and because it's worthwhile to do it.  Second, I have complete confidence in our ability to secure volunteers to support a successful event.  Finally, I made the point that it would be quite difficult to explain to the local and regional business community how it is we decided to back away from an event that could inject tremendous economic impact to the municipality and the region.

The formula for economic impact was discussed, at length, in my previous post about BikeTown.  The formula is quite simple, so I whipped one up during the Council meeting and briefed the Council on the potential outcome of such and event vis-a-vis economic impact while we were debating the matter.  The economic multiplier (range 1.6 - 3.5) x number of participants (650 est) x number of days (3) x average daily spend (range local to regional i.e. 65 to 150) is a simple formula to enter into a spreadsheet.  Then, one can adjust assumptions and have an quick and fairly accurate estimate of the range of economic impacts one might expect.

 Let's look at the potential economic impact of a three day event using 650 participants and support personnel.  The participant number is exceptionally conservative as it does not account for spectators, this was done intentionally to provide a very conservative estimate.  The multiplier uses 1.6, the most conservative number in the range.  It is arguable that the range should probably be from 2.5 to 4.5, but such a range could be argued to be "blue sky" estimating.  As such, taking 1.6 as a multiplier leaves that number totally unchallenged as a conservative estimate.  The number of days is carried as 3, although we know there will be residual days added in before and after the event.  Finally, the average spend is examined from two levels, the first is a conservative estimate of 65 dollars a day for local spend and 150 dollars a day for regional impact estimating... the higher side accounts for hotel rooms that would likely be taken up in Leduc.

I must note that having laptops in Chambers allows me to whip up these formulas during a discussion at a Council meeting and this facilitates my ability to analyze discussions with financial calculations.  Having quantitative data to supplement the qualitative information presented creates a more robust decision matrix!  Oh happy days!  But I digress...

Expected local economic impact would be (using very conservative estimates) about 202,000 for local impact - the high side for that could be about a half million dollars if the multiplier were 3.6 and, of course, the regional economic impact could be about a half a million dollars to a little over a million dollars with a larger multiplier used.  In short, I had to ask the question (and I did ask the question), "how are we going to explain to our local and regional business community and residents that we've walked away from the potential of a million dollars in regional economic impact because we were worried it would be hard to host the Special Olympics?"  I know that we've hosted far more than 650 people at an event, we did it just last week for Christmas in the Park.  We have staff, equipment, administration, and volunteerism sufficient to handle this with confidence.  Such an event also brings us the chance to add to our event resume, something that will be considered as we bid for other events.  Here are the quick calculations;

Even using the most conservative estimates, you can see this is a tremendous economic windfall for our local merchants and our regional business partners.  It seems logical to examine these sorts of events through the practical lens common sense.  And I would ask, why not scribble up a bit of math to help clarify things just a wee bit?

Finally, to underscore my beliefs and my business outlook on these decision sets, I would point out that it is my belief our administration would not bring these things forward if they did not have the confidence in their ability to undertake them successfully.  They also expressed a similar sentiment during the meeting. 

All in all, I'm quite confident that we are delivering business and residential growth that speaks to a more prosperous Devon.  I believe that in the proximal two years, our growth and prosperity will be admired by many throughout the province and, in fact, across the country.  We have accomplished a great deal in the last year, we have planned to succeed and we have built the infrastructure required to execute our plans.  We have crossed into the phase where we now start rolling up the accomplishments, one after the other. 

Personal notes: I did have two notice of motions prepared for council deliberation, both were voted on, one was passed and one was defeated.  

The motion entitled "Public Board Documents" was passed by unanimous vote of council with the text relating to the placement of these documents on the web stricken so as to accommodate web changes in the future.  This motion was designed to make it easier for the public to find strategy documents created by public boards and to insure their accessibility in a timely manner.  The text of that passed motion can be seen at this link.

The failed motion was for a public facing dashboard, an instrument to quickly communicate our service levels and other assorted information of interest to the community at a quick glance.  This is common practice in business and is becoming widely adopted by municipal governments.  The motion was defeated by a vote count of 6-1.  The administration is working on a dashboard that may come forward for council consideration, possibly at a committee of the whole meeting at a later date.  The text of the failed dashboard motion can be see at this link.

As residents you can, and in my opinion, you should be proud of your organization; of the new structure of the municipality; and of the people who will be tasked to marshal our growth phase.  I have every expectation that our accomplishments will most assuredly accelerate in the year ahead.  I also believe that as residents, we all enjoy a fiscally responsible municipality that is well governed, well managed, and well run.  Not many municipalities of our size have accomplished what we have accomplished in the last year, and fewer still will be able to measure up after we start putting shovels in the ground in 2012.  The residents of Devon delivered a strong mandate through their vote, your council and administration are carrying the freight, and now you're starting to see the delivered goods! 

Finally, I have some sadness to share with you.  One of our neighboring communities, Beaumont, suffered a tragic week with the loss of several youth in a most unfortunate car accident.  In addition, Beaumont also lost Chantal Berube, who passed away suddenly.  On Friday, my life and all things in it, came to a halt as I sat there watching the services streaming over the internet to a packed overflow in the school gymnasium.  The last time I was in that gym, the Prime Minister was there.  

I suppose it is poignant that all I have ever known of Beaumont is the wonderful and classy people who live there, and that whenever I am in Beaumont, the importance of the moment is always of the most dignified and honored level.  Friday was a day of great sadness, compassion, and heartfelt pain for the great people of Beaumont.  My heart goes out to them and to all the people of Beaumont and our region who knew and loved Chantal.  

When you say a prayer on Sunday, please remember all the people of Beaumont who were taken from us, and pray for those who go on living, for their pain will never be totally healed, but with love and care, it can be eased over time.  

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