Appreciating Depreciation

I had the most depressing discussion with a friend who runs an HRM facility yesterday. His assistant manager is retiring, and when I asked why, I was told ‘He is 60… but he also does not want to be here when the building starts to fall down’

Intrigued, I asked what he meant. What he said confirmed everything anyone who follows Halifax and Nova Scotia politics knows about universities, public schools, and extends it into sports and recreation facilities. He said that they are not allowed to show a depreciation charge on a budget for a city facility.

This means that only specific maintenance and renovation expenses can be budgeted as incurred each year, but that an amount of earned revenue cannot be set aside toward the day when the facility needs major renovations or refits.

In the private sector, and in the generally accepted accounting practices, a business depreciates its capital assets. So if you own a building, you set aside 5% of the value of the building each year towards the depreciated value of the building over time. Theoretically, after 20 years you have set aside enough money to replace the building.

Now, accounting is way more complicated that this, as principle payments on a loan are not expensed on an Income Statement, but do effect cash flow and balance sheets, so while this depreciation is going in, money is going to go out, as well.

But in the public sector case, the buildings are all paid for up front, by the province, feds, and municipality, and fundraising. So if buildings are depreciated in government budgets, they are creating a maintenance and repair fund, or capital fund, to keep the building in good repair.

The bottom line for citizens is that Nova Scotia is full of perfectly good buildings, 40-100 years old, that are rotting away, because government does not maintain them. It is easier now to get millions to build new, than to get a million to renovate.

This expresses itself in sports and arts facilities (building Alderney when the Cohn remains chronically underfunded, building a new Metro Centre when 4 years ago we were talking about closing rec centres like Centennial Pool to balance the budget), hospitals (the new Infirmary cost $400 million, the VG has many empty floors awaiting renovation and renewal), and schools.

School construction is my pet peeve. How can we possibly justify tearing down schools like LeMarchant and Charles Tupper when a million dollars each would renovate them to last 15-20 years, but the new building will cost 10-15 million? The only justification is that politicians and bureaucrats like to take credit for, and cut ribbons in front of, new construction.

HRM and the Province must move to require all capital assets to be accounted for and maintained based on some percentage of replacement cost. Until we have a evaluation system that weighs the yearly maintenance, operation and renovation costs for any building against the cost of replacement, we the taxpayers will continue to throw good money after bad. And we will see buildings that, in other provinces, may have continued to serve for another hundred years torn down to be replaced with cheap, modern, cookie cutter buildings that often serve the exact same purpose as the building that was replaced.

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