I know what my decision would be
I applaud (Lake Oswego city) Councilor Jeff Gudman's March 8 column in the Review and his efforts to have the city council address the city's major capital projects as a coherent whole. I think this is the right thing to do.
Unfortunately, I have to disagree with his recommendation that the city sell the West End Building in an attempt to gain some funding to keep the library, city hall and police/911 center downtown.
The principles and practices of sound analysis in the area of capital project decision making are well established in the fields of accounting, finance, and economics. These fields agree that the proper approach to analyzing capital project decisions can be summarized as follows:
Capital project decisions should be forward looking, not backward looking and present the real cash flows of the projects being considered.
Costs that are committed by past decisions are called sunk costs and, as such, are not relevant to a capital projects decision. Any attempt to make these costs relevant creates a flawed decision framework likely to lead to poor quantitative results.
Costs that are common to a single element (i.e., the cost of a building and the property it sits on) should never be allocated to any sub-component of the common element for decision-making purposes. All such allocations are by their nature arbitrary and introduce opinion into the decision framework as though it were fact.
Said simply, the money the city paid for the WEB is today irrelevant in any decision the city makes on how to use the WEB. The only thing relevant about the WEB today is its value if it were sold.
With this in mind, and using the best publicly available information, I have analyzed three of the major capital spending decisions facing the city council and have come to the conclusion that the cost to taxpayers of not using the WEB property to consolidate the library, city hall, police/911 center will be about $51 million. Here is how I arrived at this number:
The city's own estimates place the cost of locating the library, city hall and police/911 center at the WEB to be $12 million, net of recovery from the sale of the existing city hall and library properties.
Alternatively, once you factor in the temporary relocation of the city hall and the return from the sale of the existing library property, the cost to keep the library, city hall and police/911 center downtown is estimated to be $74 million. If you deduct $10.7 million for the sale of the WEB (an estimate used by Mr. Gudman) the cost of this option is reduced to approximately $63 million. The difference is $51 million.
With the above in mind, I believe councilors and taxpayers have a simple decision to make. Is it worth $51 million to keep the library and city services downtown? As a guy who has spent his career teaching students and executives how to make good financial decisions, I know what my decision would be.
Paul Hooper is a retired professor of accounting from the University of Delaware and retired visiting professor of accounting from Tulane University and holds a doctorate in accounting from Tulane University. He has lived in downtown Lake Oswego for four years.
Editor's note: City Councilor Jeff Gudman responds:
'Dr. Hooper's point about looking to the future is well taken and I agree with him with respect to the analysis of capital projects like the library or LOCOM. We are also in agreement the only relevant thing about the WEB today is the value it would receive when sold. We are in further agreement the $10.7 million is the current value assigned to it by the county assessor's office. The $10.7 million value is not the future value I believe it can be sold for. The cycles of economic and real estate activity strongly suggest the value the WEB can be sold for in a few years will be substantially higher than the estimated $10.7 current value.
'Some additional information. In February 2012, the city received an updated estimate for building only the police/911/LOCOM facility at the WEB. The construction figure from the engineering firm Group McKenzie is $12.3 million. The costs for a library and city hall at the West End Building location would have to be added to the $12.3 million.
'Lastly is the issue of how to pay for the facilities, regardless of their location. The downtown Lake Oswego site can be used with voter approval and without asking for additional property taxes from the citizens. The same cannot be said of the WEB location. There are trade-offs associated with the choice but it can be done.
'My previous conversation with Dr. Paul Hooper was enjoyable and mutually beneficial. The conversations will continue to be so.'