Having looked at the financial analysis given to the board, it is my opinion that it is methodologically flawed. The standard, widely accepted, way to evaluate
alternative uses of money in the future is to use a Discounted Cash Flow analysis and to look at the Net Present Value to see if it is a positive number. As many have said, the board should have had alternatives to compare. If that were the case, one would compare each alternative's Net Present Value to the others, and the highest number would be the best investment use for the money. There have been many reasons stated for questioning the purchase that were unrelated to the financial analysis, and I want to acknowledge that numbers are only part of a thorough search for data to support a decision making process. However, since the numbers are being used to justify the proponents decision, I think it is important to point out the flawed nature of the data upon which they are basing their argument. There have also been questions about some of the assumptions Bob Fine makes in his letter to the editor. When there are disagreements such as these, analyses should be undertaken to compare the end results using the differing assumptions. Sometimes, in the context of the overall funds, differing assumptions make a material difference over the long run and other times they do not. There is no way to know whether or not your argument over these differing scenarios is material unless you do an analysis. Why argue publicly before one knows if the matter is inconsequential in the long run? I would hope that, at the very least, the Board will insist on an upgrade in the skills of staff in their finance area. It is shocking to me -- and, I presume, would be to anyone with a modicum of education in financial analysis -- to find that the executive in charge of the administration of parks does not recognize the need for, or provide, this kind of analysis to members of the board as a routine matter. Moreover, it is disturbing that most members of the board (Mason and Erwin being the exceptions) did not demand better data when they saw the quality of the analysis presented to them. I'll admit I was naive when I assumed that our government officials were using practices that have been standard amongst financial professionals for many years. Isn't it time that we demand that analyses done on the public's behalf be done according to methodologically sound, standard practices? And that they are made widely available to citizens? I also question the validity of other points being used to argue for the boards position. Briefly: * over $157,000 a year being avail for operating expenses... their own spreadsheet shows that average operating expenses are well over $200K annually over the next 20 years. Where will the rest of this money come from? * projected savings of $500,000 in scheduled, long overdue repairs to the current north side maintenance facility will no longer be necessary-- will that property be sold or left unmaintained? If it is being sold, who will buy it in such a condition of disrepair and is that really a smart move? Sometimes repairs made to a property disproportionately increase its market price. I agree with list members who say that too much of existing MPRB property is in a state of disrepair and/or is poorly maintained. Furthermore, if this facility is expected to be sold, and the funds applied to this purchase it should have been included in the financial analysis. As it is, the board's intentions are unclear, as is their best course. * Isn't there plenty of reasonably priced commercial office space available in downtown Mpls. where vacancies are up and rents down due to all the new TIF office space that has been built in recent years? These older buildings have been vacated in order to fill the newer properties. How do these rents compare with the Parks' current rent and the HQ purchase option? Did anyone even bother to look? As I noted above, these comparisons should be part of the financial analysis. * They are also talking of using their self insurance pool of resources to provide cash down on the purchase... aren't those funds required to be on hand for prudent management of potential MPRB liabilities? Brian Rice notes the board's plan to return those funds, but will their absence influence other MPRB/City borrowing costs, and how does the Board evaluate the risks they are taking by depleting their reserve? (see excerpt from Brian Rice's posting below). Congratulations if you have stayed with me this far. Only a few more points: Why aren't our city agencies and boards aren't required to utilize a DCF-type of NPV analysis in capital budgeting situations like this, moreover, why aren't they required to research competitive bids/evaluations when comparing alternative options involving future capital and operating budgets? Is any standard financial review process used across the board, or is every board operating willy-nilly? Taxpayers deserve, if not a standard review process, at least a competent financial analysis. In summary, one cannot know whether or not the Park Board made a good decision because the financial analysis was fundamentally flawed and many of their assertions are untested and/or unresearched. These kinds of decisions always are taken with some amount of risk, the question is what level of risk is acceptable? The more unknowns, the greater the risk. Surely, some research around the points made above would produce more knowledge, and a better basis for making assumptions. It seems to me that the Board could have and should have conducted a more thorough decision making process using valid and widely accepted methods for analysis. If they had done this, the discussion and dissension surrounding their decision would be much more enlightening, not to mention more productive. Barbara Nelson Once and future Minneapolitan living in Burnsville for the time being Brian Rice's post to the list: <snip> "9. The Board staff has been extremely conservative in its estimates. Mortgage payments are scheduled, a repayment of borrowed Park Board reserve funds with interest is included and a significant operations and reserve fund is maintained. The repayment of the tax exempt mortgage note requires a yearly payment of $256,000. The Board currently spends $430,000 on rent and parking. This means the Board starts with a savings of $176,000. The Board to be prudent wants to repay its self insurance reserve fund with interest at the amount of $81,000 annually. They don't need to do this, but should a catastrophic loss occur they don't want to raise taxes to pay for a contingency as yet unknown. The analysis assumes a starting operations and maintence cost of $200,000 per year. The Board currently rents 25,000 sq ft. Plans call for about the same amount of space for the administrative functions and about 25,000 sq. ft. for operations consolidation. In my view this is extremely high but in the government world also within the realm of prudence. To make the numbers work, the Board is betting that it needs to rent out 25,000 sq. ft. at $4 per square ft. This also is a very conservative assumption. Rates as high as $10 per sq ft are not unheard of in the private sector for this type of property. In fact since the purchase was announce there has been considerable interest from both public and non-public sources. If however no renters materialize, the Board could forego repaying itself and still have the $176,000 to pay operational and building maintenance costs". _______________________________________ Minneapolis Issues Forum - A Civil City Civic Discussion - Mn E-Democracy Post messages to: [EMAIL PROTECTED] Subscribe, Unsubscribe, Digest option, and more: http://e-democracy.org/mpls
