2011 Legislative Session: Fourth Session, 39th Parliament

SELECT STANDING COMMITTEE ON FINANCE AND GOVERNMENT SERVICES

MINUTES AND HANSARD

MINUTES SELECT STANDING COMMITTEE ON FINANCE AND GOVERNMENT SERVICES

Thursday, November 24, 2011

10 a.m.

Douglas Fir Committee Room

Parliament Buildings, Victoria, B.C.

Present: Rob Howard, MLA (Chair); Doug Donaldson, MLA (Deputy Chair); Bill Bennett, MLA; Mable Elmore, MLA; Dave S. Hayer, MLA; Pat Pimm, MLA; Bruce Ralston, MLA; Bill Routley, MLA; Dr. Moira Stilwell, MLA;
Jane Thornthwaite, MLA.

1. The Chair called the Committee to order at 10:02 a.m.

2. Pursuant to its terms of reference, the Committee continued its review of the three-year rolling service plans, annual reports and budget estimates of the statutory officers.

The following witnesses appeared before the Committee and answered questions:

3. The Committee recessed from 10:29 a.m. to 10:33 a.m.

4. Resolved, that the Committee meet in-camera to deliberate on its Report. (Dave S. Hayer, MLA)

5. The Committee met in-camera from 10:33 a.m. to 10:54 a.m.

6. The Committee recessed from 10:54 a.m. to 10:58 a.m.

7. The Committee continued in-camera.

8. The Committee recessed from 11:38 a.m. to 11:39 a.m.

9. The Committee continued in open session.

10. Resolved, that the Committee adopt the report to be drafted based on the decisions agreed to today. (Dr. Moira Stilwell, MLA)

11. Resolved, that the Chair present the report to the House at the earliest possible opportunity and if the House is not sitting, that the Chair deposit a copy of the report with the Clerk of the Legislative Assembly at the earliest opportunity. (Dr. Moira Stilwell, MLA)

12. The Committee adjourned to the call of the Chair at 11:40 a.m.

The following electronic version is for informational purposes only.

The printed version remains the official version.

REPORT OF PROCEEDINGS
(Hansard)

select standing committee on
Finance and Government Services

Thursday, November 24, 2011

Issue No. 67

ISSN 1499-4178

[ Page 1827 ]

THURSDAY, NOVEMBER 24, 2011

The committee met at 10:02 a.m.

[R. Howard in the chair.]

R. Howard (Chair): Good morning, Members. We'll come together. We are the Select Standing Committee on Finance and Government Services, Thursday, November 24, continuing our annual review of statutory officers. We have with us again this morning the Office of the Auditor General — Mr. John Doyle, Auditor General; Katrina Hall, manager, finance and administration; and Malcolm Gaston, assistant Auditor General.

Thank you all for showing up again on short notice. We really appreciate that. We asked you back because there were some unanswered questions from members.

I'll ask members to indicate if they'd like to ask a question. We have received the e-mail response from the Auditor General on the questions that were asked during the last meeting.

Office of the Auditor General

B. Bennett: I'll go first.

John, just some clarification on the whole situation with regard to your premises. My understanding is you've got two different premises right now. Both of those leases expire or come up for renewal in fall of 2014, but you can get out of those leases. You can do early termination of those leases with no cost. The landlord will pick up the costs.

You have said that if you were to stay in your current arrangements in your current premises, by fiscal year '16 you calculate that the rate would be something in the order of $29 a square foot.

Nobody is saying anything, so maybe to get on the record for Hansard: am I correct so far?

J. Doyle: You are. And the $29 might be a bit low. We think it might be going up a little bit higher than that.

[1005]

B. Bennett: One of the questions that came up that I think all of us needed an answer for was: if this committee says no and you remain where you are, are you going to be, in a year or two, paying the same amount of money for two spaces that aren't as useful to you as this new space would be? It looks like the answer is that it basically is a comparison between $31.56 a square foot, which is what you'd pay at your new space, and an estimate of roughly $29 a square foot by 2016. So in four years, 4½ years, five years, you'd be up to about $29 a square foot.

Am I correct in assuming that there is a savings to the organization of staying in the present space?

J. Doyle: Thank you for the question. There's a bit of a lengthy answer.

What we've been given is a one-off opportunity to occupy the same standard of space in a close location that probably won't be there some time in the future. To sweeten the process, we've also been told that there would be no liability to the office in regard to moving out early from the existing space and consolidating all our staff into one building.

We believe that there will be an increase in rates, going forward — in 2014, not 2016. The reason we believe that that's likely to happen is that it's part of our lease agreement that there will be a correction at that time. If we wanted to stay in the building in 2014 and onwards, we would have to give them about six to nine months' notice that we propose to stay.

What that discussion doesn't include is a number of things that I'd like to share. The first is that we need to do some work within the existing office that would cost us, which is not part of the lease but is the lessee's responsibility. It goes from everything from the washrooms through to some refurbishment of areas — removing those areas of carpet that we've got duct tape on at the moment and actually refurbishing some areas. We've been an occupant in that building for some 30 years at the moment.

The second thing about the current space is that there have been suggestions that it should be upgraded to make it seismically safer than it is at the moment. The el cheapo version of that was going to cost just under $300,000 when it was costed in 2004. It's likely to cost a lot more than that now. The expensive version of that I don't think anyone has costed, but it's obviously a much higher figure. In order for that to occur, we would have to decant out of the building and have other accommodation for the period of the upgrading. My guess is that it is about a year to upgrade.

If we were to say, "No, we don't want the building upgraded," we would still be on the hook for all the office changes that are currently there that need to be done. The way we've paid for those over time is a little bit of capital money and a little bit of operational money, if we've managed to squeeze any savings as we've gone forward.

The new accommodation is all seismically upgraded, and what they will do as part of the arrangement is make sure that all of the office is up to an appropriate standard. That's built into the rental agreement, and therefore, we wouldn't have to incur those high levels of expenditure that we'd otherwise have to incur.

[1010]

If the question is, "Do you have to move?" the answer is that we're probably going to have to move at some time in the future. If the question is, "What's the cheapest option?" if I were to use the same methodology that we use for discounting cash flow or we use for P3s, it actually is probably cheaper to move now than it is to wait
[ Page 1828 ]
until all these other matters are dealt with over time — using a discount-cash-flow type of process.

I haven't run those numbers, but in my head I can figure it out fairly reasonably well.

P. Pimm: I'm just looking at this. You make the assumption between your class A and your class B building, and you show quite a difference there. I don't see the actual square footage. I think I asked that question before, and of course I can't find my paperwork — a normal thing for me. But total square footage. If you were at the existing rate, what does your rent come out to on that square footage? That's just for that comparison, if I could.

J. Doyle: Okay, first of all, the difference between a class A and a class B. Class A is the same office accommodation that some other offices of the Legislature moved into last year. Class B is the one that we've lived in for a long time. We found that with all other comments aside, it's served us well over the last 30 years, and we're quite happy to move into class B accommodation if we move to the new building. We don't need the class A.

There is a huge difference in rental costs. I think class B is about 60 percent of the class A rental, per square foot. Currently we have just under 26,000 square feet of space, and we have it in two locations. One is on Pandora Avenue, which is not signposted by anything, so you wouldn't know that we were there. The other one is in Bastion Square, which does have signs.

The reason we had to take on the Pandora location was that we were getting too squeezed for space. Ever since we've moved over there, we've had difficulties with the technologies to ensure that we could actually operate as one office. We have people moving backwards and forwards on quite a regular basis. It basically demonstrates that two offices, even though they're close, actually don't work very well for us.

When you have square feet, you have the total footprint, and then you have the usable space. The usable space on Pandora and in Bastion Square is about 23,000 square feet. In the building that we're thinking of, the usable space there is about 25,000 square feet. So we're not talking about a huge shift or a change, but there is some extra.

It's a different structure. It's like a core with the office space going around the outside, which is slightly less efficient than the space that we currently have. We've done some preliminary plans to see how we could fit in, and we believe that we can fit all our staff into the new space, which is set out on four floors in the Dogwood Building.

D. Donaldson (Deputy Chair): Thanks for coming by again — you and your staff.

Aside from the points in No. 3, on the questions that we sent regarding when the real cost-per-square-foot lease rates will kind of come to a break-even point regardless of where you are, compared to moving….

My question is around the answer that you have in point 4 — that this class of office space is available now; that the likelihood of this class of office space being available in 2014 when your leases expire is a riskier proposition; and that moving in 2014 will more than likely end up requiring a move to a class A office space, which you've outlined is considerably more expensive — savings of $782,000, as you've put it. If you could just expand on that at bit.

[1015]

To me, it's a function of what's available right now and the cost savings that that will provide, compared to less than two years from now.

J. Doyle: I think the reason that we were approached was because of a change of ownership of our current building. In that change of ownership, the new owners have a different view in regard to the plans for our current building and to make it a different quality of office accommodation than it currently is. So it was the same people that were in this Dogwood Building that were upgrading the Dogwood Building. We didn't go out looking. They approached us.

The amount of class B space that we could occupy is very, very limited in Victoria. In fact, when we went out looking a few years ago to see if there was some space we could move to, we had great difficulty finding anywhere that wasn't in the astronomical cost category. So if you like, it's just fortunate at this point in time that we've been given this opportunity, and because of it, we've turned our mind to the cost consequences of the two options. As I say, I think that of the two options, the one that would cost the least on an NPV-type basis would be the actual move one.

My guess is that if we waited and stayed where we were and then we needed to move in 2014, we would be going back into the market to have a look. My guess is that at that stage, to find office accommodation, it would be class A rather than class B.

As a consequence of that, there is not a guarantee but an expectation that we'd be paying a much higher rent than we're currently likely to pay. We would have already incurred some expenses to live in the current accommodations to just make them safe and appropriate for what we're doing at the moment. Some of that cost could be avoided if, in fact, we were moving.

It could be — you never know in this world — that someone could turn up with a building that's completely empty with appropriate office space in 2014, but it's highly unlikely. We've never noticed it before.

This building has got a bit of a history. The Representative for Children and Youth was in it before it
[ Page 1829 ]
was upgraded, although I can't remember which floor they were on before they moved to Johnson Street. Also, other government offices were in the building. If you go in there, you can actually see the signs still up. That's how I know they were originally in this building. So we're not talking about anything different than has previously been used by government organizations or independent offices. It's just that it's been upgraded seismically, and they've improved the quality of the fitting.

D. Hayer: Thank you very much for coming over and providing some more detailed information about the office space there. As you know, the committee is just trying to take a look at if we can defer some of the expenses till later on because of the budget constraints we're having with the financial issues all around the world. Is there any possibility, when you talk to this landlord…? They own both buildings, the one you are in right now and the one you're moving into — right?

J. Doyle: Yes.

D. Hayer: They could say: "Look, could we defer it for one year?" You could pre-sign the lease. When the move is later on, maybe some of the expenses required might be a little later on. That will defer the expenses, and maybe the revenues will be a little bit higher next year or something. I don't know if that's possible or workable. But on the other hand, if not, this seems like a good deal. Instead of having 56 bucks per square foot, paying $31 per square foot seems like a good deal. On the other hand, have you looked at that option at all? Is it feasible to have that option, or is it not feasible to have that option?

J. Doyle: Yes, it's one of the vagaries of accounting that if you make a saving, you don't necessarily show it in your books. You have to show the actual cost.

My guess is that they would like to upgrade both buildings. The reality at the moment is that this building is currently being worked on, and they want to lease it as soon as possible, lock in tenancy and everything else, rather than leave it empty.

[1020]

So if we are not interested…. They put a little bit of pressure on us just to get an answer, which we have held off because we needed to come to this committee in regard to the funding. They need to get people into their building, and they need to have a cash flow for that building. To have us in the other building, if it was in their plans to upgrade, would be problematical for them. Really, they need the space so that they can do the work, whether it's the small upgrade or the large upgrade. I don't know which, and they haven't shared that with us.

There is a reason for them to offer us this kind of deal, and it's because they want us to leave that building and go into the Dogwood so that they can do something in our old building and upgrade its value.

There was some talk a little while back, in our old building, of expanding the floor space and actually putting out a floor over our current car-parking area, which is quite a big space — it's not just our car park, but there was a car-parking area around the back — and putting a big new floor around the back of there. That may still be in their plans as well. We don't know. They haven't shared that with us.

I thought of that, but I think really, at the end of the day, the issue for them is to decant us to somewhere else so that they can get on with refurbishing or doing whatever they want to do with Bastion Square. I don't think they'll buy a one-year delay.

B. Ralston: In paragraph 4 in your response you've got two figures of $56 a square foot and $31.56, and you've noted a savings. I take it that's the multiple of the square footage that would be available in the Dogwood multiplied by the price per square foot. Can I confirm that's accurate?

J. Doyle: That's correct, Member.

B. Ralston: If you were to project that out over ten years, the life of the lease, then the savings would be close to $8 million. Would that be accurate?

J. Doyle: That's what I meant when I said that if you do this on a net-present-value calculation, there would be a significant saving by shifting over to the class B accommodation.

B. Ralston: I understood that, but I just wanted to make it a little bit simpler.

J. Doyle: Yes, $8 million.

B. Ralston: Right, okay. Would it be possible to go to the landlord and say, "For the first year of the new lease I'd like to have it at the same rate as I'm paying in Bastion Square now and then step up after one year," and for the remaining nine years pay the agreed rate?

J. Doyle: Are we talking about the class B accommodation still?

B. Ralston: Yes, in the Dogwood Building.

J. Doyle: We have had some preliminary discussions with them in regard to what the rate should be, and a lot depends on what they build into the package. If they actually refurbish the building and then fold those costs into the rent, it
[ Page 1830 ]
means we don't have to incur the lump-sum cost, the snake-and-the-python type of cost that may be required.

At the moment their position is that they would give us a standard rent for five years, possibly ten years, with limited variability. We haven't explored the thought that it could be at zero change for the first year and then an increase or stepped cost in future years. My guess would be that if I were the landlord, somehow I'd get it back. So it would just be an increased step cost in year 2 onwards. I'm not sure that solves the problem.

R. Howard (Chair): Last question to MLA Bennett.

B. Bennett: A couple things. Maybe we should be looking at getting the other statutory officers into class B space if class A space is so much more expensive, rather than contemplating you going into class A space. But that's just kind of an idle comment. It has no particular relevancy, I guess. I'm okay with the information I have, and I appreciate the information that you've provided here today.

[1025]

Out of curiosity, I'm not sure I have the comparison of square footage between the two premises today and the proposed new premises. I'm just kind of curious about this. There's a $1.50 difference between the estimated 2016 square footage cost and the current cost. I know that there are other costs, and I'm persuaded that those other costs are real and meaningful.

What's the comparison of square footage?

J. Doyle: First, Member, I'd just like to make a comment. Thank you for getting me off the Christmas card list for all of my colleagues.

The current space…. There are two calculations you use when you're looking at space. One is the raw footage, which is the footprint, and then, the second is how much of that you can use. Currently we occupy just under 26,000 square feet, of which 23,000 is usable. It's the 26,000 that is used to calculate the rent.

When we go forward, the usable square space that we're going to have, because it's a change in design, is only going to be about 25,000. So we're looking at an increase of about 2,000 square feet for the office. The calculation, then, would shift it from about $700,000 a year to about $1 million a year for our rental and all our other expenses.

I guess rental is broken down into two components. One is pure rent, and then there's an add-on, which is all utilities and other things that go with occupying that piece of space. So the difference between the mortgage payments and then the mortgage payments plus the rates and everything else you have to pay. You use electricity, gas and so on.

Now, we don't see us changing the way that we utilize utilities, and we don't see a big shift or change in the other on-costs that are there. It's a fairly modest shift and change in the rental per square foot. It's just that we've got a little bit more space, which we need. We're a bit squeezed in, in places. But we're not planning any increase in the number of staff that we've got.

I hope that's cleared it up a bit for you.

R. Howard (Chair): Excellent. Thank you. Well, just by way of comment, John, again I thank you for coming out. There are some interesting arguments to be made, obviously. I know that in some comments, we're predicting what the future might look like. Of course, we don't know that. I could, I think, equally argue that a year or two out, if things continue to unfold the way they are in Europe, there could be more space available. There could be other opportunities.

I think the out-years are just as problematic, as you know probably better than I. Anyway, just by way of comment, would you like to talk to that, John?

J. Doyle: Well, just mentioning Europe, I think Canada is in a much better place to cope with what's going forward than Europe will be, because Canada has actually addressed some of the issues that were at the root cause, and so has the U.S. Moving forward, I think we're going to be in a very different place, plus the fact that this province has got a high reliance on natural resources. I think we are, actually, going to be in a quite different place than the basket case that's going to be Europe over the next few years. You heard it here for the first time.

R. Howard (Chair): Well, of course, you're right, and I should have been, perhaps, a little more articulate in my words. We're a trading economy. Those are going to be some pretty serious headwinds for us, looking forward. Of course, we're looking to close a pretty significant budget gap next fiscal — so challenging times.

Again, thank you. I appreciate your second visit at our request on short notice.

We'll take a one-minute recess.

The committee recessed from 10:29 a.m. to 10:33 a.m.

[R. Howard in the chair.]

R. Howard (Chair): Thank you, Members. We'll reconvene. The first order of business would be a motion to go in camera. So moved.

Motion approved.

The committee continued in camera from 10:33 a.m. to 11:39 a.m.

[ Page 1831 ] [R. Howard in the chair.]

R. Howard (Chair): We're back on the record. Having deliberated over the budgets of the eight statutory officers, I think we're in a position now to cast a vote.

I'll seek somebody to make a motion.

M. Stilwell: I move that the committee adopt the report to be drafted based on the decisions agreed to today.

R. Howard (Chair): Any comments?

Motion approved.

M. Stilwell: I move that the Chair present the report to the House at the earliest opportunity, and if the House is not sitting, that the Chair deposit a copy of the report with the Clerk of the Legislative Assembly at the earliest possible opportunity.

R. Howard (Chair): Seconded by MLA Donaldson.

Motion approved.

R. Howard (Chair): Motion to adjourn? We're adjourned.

The committee adjourned at 11:40 a.m.

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