Creating capital for asset sustainability

By Doug Wall, P. Eng.

With the recent release of the three-year budget by the B.C. Minister of Finance, the government has re-emphasized its longstanding priority of managing the province’s debt-to-GDP ratio. Combined with the adoption of Generally Accepted Accounting Principles (GAAP), however, this policy has resulted in school districts being prohibited from leveraging future operating cost savings to create capital for facility renewal and carbon emissions reduction projects. Borrowing against the guaranteed energy savings of a new school boiler would make sense both economically and environmentally – and put B.C. in line with access to capital being leveraged by school systems in neighbouring provinces in states.

Missing from discussions regarding the province’s debt is the level of deferred infrastructure liability the government is facing. For example, in Ontario, the deferred school building renewal liability is currently pegged at $12 billion and is expected to increase to $20 billion over the next 10 years. Their current liability as a percentage of the Current Replacement Value of their 5,000+ schools (commonly referred to as Facility Condition Index or FCI) is estimated at 27 per cent. In B.C., the funding levels for age-related building renewal have historically been higher than other jurisdictions but our FCI is likely in the 12 to 15 per cent range which would put our K-12 deferred liability in the order of $1.5 billion (and climbing). The point at which a deferred renewal liability in a school starts to impact learning outcomes will vary by circumstances, but it is safe to say that continued deferral will not have a positive impact on learning. Therefore, one would hope that self-funded projects that help reduce this liability would be prioritised appropriately within the debt management framework.

As most school districts know, there is a significant opportunity to implement facility upgrade projects that simultaneously reduce utility costs while addressing deferred renewal liabilities such as boiler replacements. Despite the fact that these projects can pay for themselves, reduce actual emissions, create jobs, reduce deferred renewal liabilities and can be done in such a way that the risks are transferred to the private sector, the debt prohibition is preventing what should be a high priority from being implemented while taxpayer funds continue to go to the utilities (who would be more than happy to help reduce energy consumption).

The level of desperation about the lack of access to capital for school districts is evidenced by the willingness of some districts to entertain contracting with a utility for a regulated, own-operate thermal energy program for boiler replacements and geo-exchange systems. In addition to costing school districts hundreds of thousands of dollars more than their base case maintenance and utility costs each year, these districts would also assume all of the capital cost and efficiency performance risks of these projects and be left with a very large residual liability even after 20 years. This would seem an expensive and risky approach given that the government has already concluded that these types of arrangements constitute debt and do not get around the debt management restrictions.

The concept of replacing boilers with geo-exchange in schools is a noble one but also one that works much better on new construction than in existing schools (especially given the trends in the relative costs of gas and electricity). If a number of schools are bundled together as a combined retrofit “package”, it is likely that a limited number of geo-exchange retrofits would be viable within the financial parameters of the project. The carbon neutral mandate does not require school districts to actually reduce emissions but merely to purchase offsets for their emissions. The intent was to factor carbon costs into capital decisions but if a project costs significantly more than merely buying offsets, then it should not be implemented.

The carbon neutral mandate does not require school districts to actually reduce emissions but merely to purchase offsets for their emissions.

If the true net costs of a project (calculated over the analysis period) is divided by the avoided tonnes over that period, the resultant net cost per tonne should not exceed the alternative of purchasing offsets, otherwise tax payer funding will be wasted. Compared to a traditional boiler replacement project, the incremental net cost per tonne of expanding the project to geo-exchange is typically over $200 per tonne and a multi-school project can only absorb so many of these before the entire project becomes nonviable.

While B.C. may be leading the way in terms of carbon awareness, we are surrounded by jurisdictions which provide the access to capital that allows school districts to do something about facility renewal and actual emissions reductions (as opposed to just purchasing offsets). Alberta amended its School Act Borrowing Regulations to specifically allow school districts to borrow against guarantee utility savings (for up to 20 years) to create capital for facility renewal. Washington State, like most states, not only allows but overtly encourages school districts (through leveraging grants) to create capital for energy efficiency and renewal projects by borrowing against guaranteed utility savings.

The province’s capital spending priorities include a number of infrastructure projects that will play an important part in growing our economy in the future. Some of these projects are partially selffunded from an operating budget perspective (through tolls, etc.) and some are not. One would hope that our school building infrastructure is considered to be equally important to our long-term economic growth and competitiveness. Perhaps when the bond rating agencies start demanding data on existing public infrastructure liabilities, we will see the debt associated with self-funded school district efficiency/renewal projects receive the prioritization it deserves within the province’s debt management framework.

About the Author

Doug Wall is a professional engineer and regional vice president for Ameresco Canada. b

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