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HomeMy WebLinkAbout022624 - Port Townsend “Healthier Together” Financial Feasibility Critique (2)Port Townsend “Healthier Together”Financial Feasibility Critique By the All County Citizens Alliance1 The projections for the construction and operation of the proposed Port Townsend “Healthier Together”aquatic center understate foreseeable construction and operating costs and unreasonably rely upon an overly and wholly unsupported aggressive prediction of high consumer demand for the aquatic center’s relatively expensive offerings.The feasibility study by Ballard*King Associates (BK)should be viewed with great skepticism in light of the consultant’s slipshod work product. Credibility Undermined by Slipshod Work The BK feasibility study is replete with such slipshod work that it is not prudent to rely on the judgment calls they make regarding the future behavior of Jefferson County consumers.This will be a recurring theme as their report is considered in more detail below. At first glance,several red flags suggest deeper problems and an overall lack of accuracy in the data and the conclusions reached.For example,the study’s purpose was to examine the feasibility of replacing the existing Mountain View pool at the same site with a much larger aquatic center.Competition from existing swimming venues,as BK acknowledges,could have significant impacts on the new facility’s bottom line.But BK doesn’t even know where the Mountain View pool is.At page 41 it purports to map the area’s existing aquatic facilities.BK puts the Mountain View pool in Kala Point, which has its own pool,while it puts the Kala Point pool in Port Ludlow.Port Ludlow already has three fine pools,which BK moves to Silverdale in neighboring Kitsap County.The Cape George community has its own indoor pool,but BK indicates no knowledge of that fact. BK’s report published on the City of Port Townsend website contained the following graphic comparing household expenditures in Jefferson County to Pennsylvania: 1 Lead authors:Thomas Thiersch (Management Consultant)and James R.Scarantino,(J.D.,University of Pennsylvania 1981,areas of practice included construction litigation). 1 The url for the report,still on the city’s website,bears the title of a report for Upper Macungie,PA: 2 T See: https://cityofpt.us/sites/default/files/fileattachments/engage_pt/page/20561/port_townse nd_healthier_together_center_final_report_002.pdf 3 Internal references further show that the report confused work on the Port Townsend project with work for a client in the MidAtlantic Region. Elsewhere BK mistakenly uses socioeconomic data from irrelevant communities.For instance,on page 4 it reports an unemployment rate of 2.5%.Jefferson County would be very fortunate,indeed,to have such a low unemployment rate.Unfortunately, Jefferson County is classified an economically distressed county by the Washington Employment Securities Department due to an unemployment rate of 7.3%for 2022. https://esd.wa.gov/labormarketinfo/distressed-areas It seems that BK may have substituted King County’s much better unemployment rate, which had dropped to 2.5%in recent years.Whether intentional or simply negligent,this misuse of data is employed,along with other incorrect data,to falsely portray Jefferson County’s population as having plenty of disposable income to spend on a new recreational destination.We will return to this issue later in this memorandum when 4 discussing how BK overstates likely consumer demand for the relatively expensive services of the proposed aquatic center.But first we turn to problems in the estimate of construction costs. Understating Construction Costs The report prepared by DCW Cost Estimating (DCW)estimates construction costs, pegged to a second quarter 2025 start date,of $24,436,537.This figure is approximately $10.5 million under budget,according to a review conducted by Mark Grant,of Grant Steel Structures and Concrete Buildings,Inc.of Port Townsend.His analysis is available at https://www.porttownsendfreepress.com/2023/12/09/10-5-million-cost-overruns-and-del ays-projected-for-pt-aquatic-center-a-professional-analysis/ Mr.Grant observed that the DCW estimate contains no construction schedule.Escalator clauses for all the years of construction are not factored into DCW’s calculations.Mr. Grant observed that the DCW estimate contains no provision for the expensive stormwater system that will be required for the site chosen for the project.He further observed that the DCW estimate contains no costs for remediation of hazardous materials for a building constructed in the early 1960’s,and that a substantial sum should be included in the estimate to address the likelihood that hazardous materials remediation will be necessary.He further found the contingencies incorporated into the estimate to be significantly below current industry standards. Assessing these missing elements and other considerations,Mr.Grant concluded that a more realistic estimated cost for the aquatic center is $47.6 million.This more accurate amount renders infeasible the cost and financing plans for the “Healthier Together” project as proposed.There is no construction reserve in the budget to cover an inevitable $10.5 million cost overrun,nor any other substantial cost overruns. Understated Operational Costs Turning now to the operational budget,BK estimates costs as of the second full year of operation at $1,268,557 annually.The expenditure side of their budget includes no expenditures for management.The entry for salary and benefits for a facility manager is left blank (p.54).The salary and benefits for an executive director and support staff are not included.Nor are related costs,such as office expenses factored into the budget.By contrast,the William A.Shore Aquatic Center in Port Angeles has found it necessary to have on its staff an executive director,facility manager,bookkeeper and administrative 5 assistant.That facility is almost a mirror image in size and features of the proposed Port Townsend facility.Its management costs for salaries alone are about $200,000 annually. Why did BK not include in its calculation of operating costs the costs for management of the facility?The answer is found on page 46 of its report.BK assumes that “The center will be managed by a public agency…”so that these necessary expenses need not be factored into the operational budget for the aquatic center. Neither the city of Port Townsend nor Jefferson County will be managing this facility.It is to be constructed,owned and managed by a new Public Facilities District (PFD). Whether in the facility budget or in the PFD budget,the costs for management must be calculated and included in an operational budget.They are not.Thus,the BK operational cost projections are incomplete and seriously understate operating costs. That means that the operational deficit will be higher than stated in the Ballard*King budget.A greater subsidy from the city or other public entity will be required.In short, the operational budget cannot be evaluated for feasibility until such time as it is completed. The Missing Years and Unfunded Public Facilities District The proposed aquatic center is to be built,operated and owned by a new Public Facilities District.However,there is no mention,anywhere,of the funding to support and costs that would be incurred by the PFD from its inception to the grand opening of the facility.During this time,the PFD would have to hire an executive director,at the very least,to finalize construction and architectural plans,raise money,manage donations, grants and tax receipts,prepare,analyze,accept and negotiate bids from contractors, architects and engineers,and oversee and approve construction through a process which will take several years. As a public agency,the PFD will incur expenses in maintaining financial records and reporting to the state auditor.The PFD will also have to respond to public records requests and comply with the Open Public Meetings Act.The PFD will need to hire a public records and open meetings officer. But there is nothing,anywhere,in the financial plans to estimate the PFD’s expenses during this period of time,or to explain the source of funding to cover those expenses.If the PFD were to contract for these services,there must still be an estimate of the cost to determine if this plan is feasible. 6 The PFD cannot cover its operating costs with proceeds from the anticipated revenue bond as all those funds will most likely be needed for construction costs. The BK operational budget starts in the second full year of operations.It assumes the first year of operation would be 2026,something that is highly unlikely as the earliest date for a ballot measure for a sales tax to support pool construction would be November 2024 and this project is too large and complicated to be completed in a single year. BK simply ignores the first two years of operation.What is the PFD’s budget during this time?Revenues would likely be lower,thus increasing the deficit by an unknown amount.How will those losses be covered?Without adequate funding from the start, this project could immediately encounter financial stress.This obvious problem is not addressed in the BK study. It must also be noted that there is no operating reserve included in their budget. Unreasonably Aggressive Revenue Projections BK states that its projections are “reasonably aggressive”(p.46).It offers no explanation as to why an aggressive anticipation of high revenue is reasonable.Indeed, its “reasonably aggressive”approach is contraindicated by its “market analysis” (discussed below)that shows Jefferson County citizens to be poorer and older than other communities,and demonstrating a lower than average demand for recreational activities that require monetary expenditures. The Price Point Assumptions Are Speculative So that BK’s operational budget for the “base model”can pencil out (pp.56-57),583 monthly passes,recurring every month,must be purchased at prices ranging from $21 for youth to $75 per household.258 annual passes must be purchased at prices ranging from $250 for youth to $900 for families.Additionally,28 daily passes,every day,must be purchased at prices ranging from $5 for youth to $17 for a household. This level of patronage is significantly higher than what the current Mountain View pool enjoys. BK conducted no consumer research to determine that these sales targets,at the required prices,would likely be reached.No polling,not even of current pool users was conducted. The BK rates for the Healthier Together facility are considerably higher than rates charged by the comparable William A.Shore Aquatic Center in Port Angeles.There,a family annual pass costs $556 compared to $900 in BK’s budget assumptions.An adult pass at the Port Angeles 7 facility costs $400 versus $600 in BK’s budget for the Port Townsend facility.A senior pass at the Shore Center costs $236.BK’s budget requires that senior swimmers be charged $400. Would consumers in Jefferson County,in the numbers needed for BK’s budget to pencil out,pay more than those in Clallam County for the same services?BK does not address the issue. Overstating Market Size,Understating Competition BK states,on page 44,“The Secondary Service Area,with a population of almost 31,000,is large enough to support a comprehensive aquatic/recreation center.”The Secondary Service Area includes almost all of East Jefferson County. BK provides no support for its speculation that people living in the far flung rural communities of East Jefferson County would travel significant distances to use the aquatic center in Port Townsend at the prices BK factors into its budget.It is not reasonable to accept the speculative foundations of the Secondary Service Area.For instance,the Secondary Service Area includes Coyle,which is 52 miles (104 mile roundtrip)from the proposed location of the aquatic center. Also included in the Secondary Service Area is Quilcene,a 45-minute drive away over two-lane country roads that can prove difficult and hazardous during winter weather and on dark rainy nights.There is no reasonable explanation for including the populations of those communities in the market for a new aquatic center in Port Townsend.Their combined populations of approximately 2,500 should be excluded from calculations. At page 40,BK observes:“[O]ne of the greatest impacts on the market for a possible Healthier Together center in Port Townsend is the presence of similar providers in the area.”Cape George and Kala Point,both located in BK’s Primary Service Area,have community pools.Port Ludlow, located in the Secondary Service Area,has two indoor and one outdoor pool.As noted in the discussion of BK’s slipshod work,the BK map on page 41 purports to identify and map these pools that would have an impact on the Healthier Together facility,but incorrectly locates them. It places the Mountain View (located in Port Townsend)in Kala Point.It locates the Port Ludlow pools in Silverdale,Kitsap County,and it completely overlooks the Cape George pool which is just a few miles outside Port Townsend. The combined populations of communities with their own resident-supported pools is 4,681. This population should not be included when calculating the likely consumer base for a competing pool in Port Townsend.. Deducting the Coyle,Quilcene,Gardiner,Port Ludlow,Kala Point and Cape George populations from the overall population of the Secondary Service Area leaves a population of about 22,000, This is close to the population of 21,500 BK determined resided in the Primary Service Area,a number it described as “relatively small.”BK’s feasibility study does not state whether that number is sufficient to support the “base”model of the proposed Healthier Together facility.This aspect of the feasibility thus remains incomplete. 8 Portraying Jefferson County As More Prosperous Than It Is BK’s claims that the median household income in the Primary Service Area is $65,175 and $66,196 in the Secondary Service Area.Both figures somewhat exceed what the U.S.Census Bureau has reported for Jefferson County Median Household Income (2022),$64,796.More significantly,the per capita income for Jefferson County,$49,315,is 11.3%higher than what the U.S.Census Bureau reports ($44,289).The Median Household Net Worth for Jefferson County reported by BK is $185,554,a figure for which no citation is provided.That number is 45% higher than the Median Household Net Worth for the state of Washington reported by the Washington State Office of Financial Management.BK’s unexplained number does not square with Jefferson County’s status as one of the poorest counties in the state. https://ofm.wa.gov/tags/county-data As mentioned above,BK claims that the unemployment rate for Jefferson County is 2.5%, when,in fact,Jefferson County’s unemployment rate is several times higher,at 7.3%in 2022. Jefferson County is an economically distressed area,not an area blessed with above average wealth and prosperity. The false portrayal of Jefferson County’s economic well-being discredits BK’s “reasonably aggressive”prediction of high consumer demand for the services and acceptance of the high fees of the proposed aquatic center. Inappropriate Use of ESRI Data At page 15 of its report,BK makes inappropriate use of ESRI’s Spending Potential Index.BK incorrectly states that the data “indicates that residents of the two service areas value recreation activities and are willing to potentially spend more for these purposes.”This conclusion,in fact, is contraindicated by the data which shows that Jefferson County residents simply exhibit a lower demand for commercial recreational activities than the rest of the nation.Perhaps this is because they are older and less affluent,or perhaps because the Olympic Peninsula offers a broad array of outstanding outdoor recreational opportunities that are free,easily accessible, and permanent. The ESRI Spending Potential Index is an indicator of household propensity to spend dollars on recreational activities.It is a measurement of existing demand.It is not a measurement of unsatisfied or pent-up demand.What BK does is take data showing (p.14)that Jefferson County households have less demand for recreational activities than the rest of the nation and repackages that data as a conclusion that Jefferson County households are “willing”to spend more money on recreational activities.“Willing,”is an odd term when describing consumer demand.It is noncommittal as it does not really state that consumers want to spend more money on recreation. The SPI only shows existing spending compared to the national average.It does not show a 9 willingness to spend more to reach or exceed the national average.And what it shows is a Jefferson County with a lower than national average demand for recreational activities that cost money. ESRI’s Spending Potential Index is explained in their White Paper, https://downloads.esri.com/esri_content_doc/dbl/us/J9945_US_Consumer_Spending_Data_201 9.pdf Ludicrous Extrapolations The BK report purports to extrapolate national and regional recreational participation rates to Jefferson County.The ostensible objective is to lay the foundation for believing that the proposed aquatic center will enjoy the results of a “reasonably aggressive”revenue projection. But the results produced are ludicrous. BK “anticipates”that the Primary Service Area should have had 1,310 people playing basketball,313 engaged in gymnastics,and 173 on cheerleading squads (see p.35).These are remarkable statistics for a community that has the oldest demographic in the state,and one of the oldest in the nation.It has no basketball league outside the small school teams and no outdoor basketball court.The two high schools have no gymnastics teams.No squads with anything approaching 173 cheerleaders have ever been seen in Jefferson County. BK also,again applying its national and regional data,reaches the conclusion that 4.1%, approximately 1,200 people,of the Primary Service Population uses Planet Fitness (p.30). There is no Planet Fitness in Jefferson County.Or an LA Fitness club.But BK concludes that 1.3%of the Primary Service Area population,or about 400 people,get their exercise at an LA Fitness club. Oddly,BK found that no Jefferson County residents engage in bicycling.But Jefferson County has one of the premier bike trails in the nation,the Olympic Discovery/Larry Scott Trail that sees regular,heavy use.The city of Port Townsend promotes bicycling and cyclists can be seen along roads in the city and county every day in significant numbers.It is clear that whoever conducted the study for BK has never stepped foot in Jefferson County to seek any ground truth for their data projections. Critical Questions Remain Unanswered The construction budget depends upon the Jeffco Aquatic Coalition raising $5 million in gifts.To date,that group has not reported the amount of pledges or gifts it has received.We have been informed that the person they had hoped to kick start their fundraising with a $1 million gift turned them down completely,and other large contributors who in the past had offered to fund an aquatic center have expressed no interest in supporting the Healthier Together plan. 10 The construction budget also depends on at least $12 million in grants,an extraordinary sum for a pool project.Receipt of that $12 million in grants remains speculative. The operational budget requires that the City of Port Townsend cover the annual operating deficit,which for the “base”model is projected at $430,000.But no city council can bind future city councils to continue,for decades into the future,to give money to something like this.This is especially concerning since the new owner of the aquatic center will be another,independent governmental entity.Further,the city has admitted that it is heading over “a fiscal cliff”in the next several years (see graph below from the city’s Financial Sustainability Task Force report).It has consumed 35%of its General Fund balance in the past two years and faces a staggering backlog of necessary repairs and upgrades to sewers,streets and the city’s only freshwater pipeline.The cumulative price tag for that work is about $300 million.The city’s high level of indebtedness is also a cause of great concern. It may not be a wise bet for a future PFD to depend upon the continued largesse of a city that may need all of its stressed and declining financial resources for core services and payroll. The Bond Financing Pro Forma The pro forma that has been shared with the public is based upon a sum of $20 million being financed over 30 years at the rate of 5.5%interest.The pro forma shows that revenues from a .2%county-wide sales tax are insufficient to cover debt service in the first five years.The 5.5% 11 interest rate,as stated by Carrie Hite,Director of Port Townsend’s Parks and Recreation,is a general obligation bond rate,not a revenue bond rate.The revenue bond that a PFD could conceivably float would most likely be subject to a higher interest rate as (1)it would be issued by a brand-new entity with no assets;(2)it would not be backed by the full faith and credit of a county or city government;and (3)it would depend on volatile retail sales. Conclusion The proposed Healthier Together aquatic center is a huge and high-risk undertaking for Jefferson County.The feasibility study conducted by Ballard*King is incomplete in many respects and displays repeated instances of sloppy and slipshod work.It is not trustworthy. Much of the Ballard*King work product is pure speculation.Additionally,the DCW cost estimate is seriously under-budget.Inevitable construction cost overruns will overwhelm a PFD which is struggling without revenue to cover its own costs. Far less costly,less risky alternatives and more manageable alternatives have been proposed. We understand that evaluation of those alternatives is not within the scope of work of a Department of Commerce review for potential Public Facility Districts.It is encouraging to know that if Jefferson County truly desires a regional aquatic center and that there are responsible and financially viable pathways to reach that goal.The Healthier Together proposal is not one of them. 12