Dear Winnipeg

A Fun Blog About Infrastructure and Municipal Finance

Shortcuts Are for Trendy Hair-dos, Not Municipal Cost Calculations

Dear Winnipeg,

Hey, have you heard this one? The Minister of Finance, a former City Councillor, a Winnipeg Sun reporter and the President of the Manitoba Home Builders Association walk into a bar. Before you know it, they’re all talking about how they think new developments subsidize older neighbourhoods…

Yeah, I know, it sounds like the beginning of an exquisite joke.

[One where the punch line could be something like: Developer? I barely knew ‘er!]

[Or: Ohhhhh! Infill! I thought you said ‘I’ll have the swill’!]

[Or: The duck is paying, he told us to put it on his bill. (There’s also a duck in this one).]

[Ok, I’ll stop now.]

Sounds like fun. Except it’s not a joke. It’s real life.

[And by real life, I mean Twitter-life, so not real-real, but at least real enough to affect public policy.]

Yes, these four characters actually had such a conversation recently. It’s all laid out right here if you’re interested. But, the crux of it comes down to this comment by a former city councillor:

I asked the question when I was on Council, “how much to service the average sized lot in this city?” Was told about $1700. If you’re paying more than that on your municipal portion, guess what, you’re subsidizing an older neighbourhood.

– Paula Havixbeck on Twitter, Feb 15th, 2019

Now, given what we already know about the crushing long-term financial obligations that new developments foist upon you, the real joke is the Cost-Benefit Analyses that developers are selling you on.

We’ve already talked about how their analyses don’t include all the costs, and so, of course, they show a profit.

But there’s more to it than that. The flaws in analysis are even deeper, yet ever so subtler. And that’s because they’re using averages for their service cost calculations. An average is a shortcut you can use when you don’t want to do the full math on something.

And a short cut can be great. [Like when you’re looking for that fresh, sleek and oh-so-perfect hairstyle for spring!]

But a shortcut, though, can also be misleading. [Like in this case, where it hides the true costs and helps lead you straight into bankruptcy.]

Let’s do a hypothetical example to see what I mean.

Say you own a house cleaning business, let’s call it Maid in Winnipeg Inc. [Your slogan is ‘You bring the slop, we bring the mop!’]

Now say I call you to clean the goat pen that is my house. [Because I have 3 kids.]

You charge me $125, and it costs you $50 in cleaning supplies and wages. Profit to you $75.

I am so pleased with your services that I ask if you would be able to clean my cousin’s house for $125 too. You accept, thinking your profit margins should be safe, since my cousin’s house couldn’t possibly be any dirtier than mine.

And it’s not.

But it is in Edmonton. [Yeah, sorry, didn’t I mention that earlier?]

Ok, so you’ve wised up to my game, and are going to charge my cousin $525 to clean his house, versus the $125 you charge me, for a total of $650 in revenue.

And since your total expenses are $600, or an average of $300 per house, you think you’re doing pretty well. ($500 return-airfare to Edmonton + $100 supplies/wages).

Using the average cost, it looks like my cousin is subsidizing my house cleaning:

  • My house: Revenue $125. Average cost $300. Total loss $175.
  • My cousin’s house: Revenue $525. Average cost $300. Total profit $225.

But when we do the actual math, without shortcuts, we get this:

  • My house: Revenue $125. Actual cost $50. Total profit $75.
  • My cousin’s house: Revenue $525. Actual cost $550. Total loss $25.

It turns out I am subsidizing my cousin’s house cleaning. That’s important to know, because under the average-cost method, you would aim to sign up as many clients like my cousin as possible, and try to quit servicing clients like me, rather than the other way around.

Maid in Winnipeg Inc. would be steadily marching towards insolvency, and you wouldn’t even know it.

If all this just seems like a bad way to run a business, it’s because it is. And it’s also a bad way to run a city.

That’s why it’s important not to take any shortcuts when doing the math. Because when it comes to the cost of delivering municipal services, as in house cleaning, where and how close together things are is much more important than how many things there are. Geography matters.

[Great, first math, now geography?]

Let’s look at a real-life example.

This is a map of all the Fire & Paramedic stations in Winnipeg.

Fire service is a prime example of geography over quantity. If we have a Fire Station which services a given number of properties, building another house or ten right beside the Fire Station won’t force us to build another station.

The metric we care about isn’t the number of properties, it’s the response time. And as long as a fire truck can get to my house in, say 5 minutes, then I’m sufficiently protected by that station. No need to build another. And that’s a function of where and how neighbourhoods are built, not of how many houses there are.

Let’s get specific by comparing the Watt St Fire station to the Sage Creek Fire station.

[Sorry Sage Creek, I don’t mean to pick on you, but you make it so easy!]

The total cost to operate Winnipeg’s 30 Fire & Paramedic stations in 2017 was $193,457,000, or about $6.45M per station.

The Sage Creek station can reach, within about 5 minutes, the neighbourhoods of Sage Creek and Island Lakes. That’s a total of 4,151 properties. The $6.45M annual operating cost of the station divided by 4,151 properties comes to an annual cost of $1,554 per property.

The Watt St station can reach, within about 5 minutes, the neighbourhoods of Glenelm, Chalmers, Talbot-Grey, East Elmwood, Tyne-Tees, and Tissot, for a total of 6,349 properties.

That comes out to a cost of $1,016 per property, or 53% less than in Sage Creek.

We could repeat that exercise for every city service, like garbage pickup, policing and more, and we’d find the same thing.

Older neighbourhoods are absolutely propping up new developments, because while they may pay less property tax, they also cost MUCH less to service.

You just have to do the actual math to see it. Stop letting developers convince you to keep using averages as a shortcut. It’ll bankrupt you AND your house cleaning business.

Or, as the opposite of what President of the MHBA would say:

Hope this helps correct the misconception that older neighbourhoods are somehow subsidized by the new developments. The opposite is, in fact, the case.

Bizzaro President of the MHBA in a parallel but opposite universe

Love,

Elmwood Guy