Why am I still writing about this?
The economics of it are weird enough to be interesting. (I am an economist. Or, at least, was.)
Plus, I’m retired.
So, the rest of this, I’m doing for fun. Or what passes for fun, in my life.
First, a moment for catharsis, or how did I get here?
I will briefly express my dismay, then anger, then amazement, then horror at the Town’s decision-making process. This, by way of understanding my motivation.
Dismay at reading the projection of demand, revenue, and operating losses for the proposed Vienna pool/gym facility. I benchmarked the key demand and revenue quantities against some seemingly common-sense standards, and I didn’t much like what I saw. And I liked even less, why I thought I was seeing it. FWIW.
Anger once I realized that this seemed part of a systematic campaign to make 2014 Town Council members Polychrones and Kelleher уничтожить, that is, made into nothingness, as if they had never existed. Intentional or not, that’s a big failure in the decision-making process, and failure is failure. Because, not understanding the likely operating cost implications of Kelleher’s economies-of-scale point, coupled with Polychrones’ local competition point — that’s not acceptable, if you want a good outcome all around.
Amazement when it dawned on me that — this is hard to say — maybe not every person on Town Council was necessarily aware that they, Town Council, were the buyers in this transaction, and that they were looking at the seller’s numbers, for the financial projections. My wife tells me it’s rude to say that, but hey, I’m just reporting my thought processes. And the fact that it took me a while to figure that out myself. But the financials were done by a chosen partner of the folks trying to sell Vienna a couple-million worth of architectural services.
Did I say amazed? Wrong nuance entirely. Horrified, when that sank in.
As an interested bystander on the buyer’s side of the table, with some relevant professional experience, I was thinking, wow, for sure, our side of this was thoroughly prepped as to this bedrock aspect of what they’re being shown, right?
But … some of my more difficult times as a consultant arose because I’d just plow ahead, thinking the client and I were on the same page. When that wasn’t so, and it would have saved a lot of heartache to straighten that out first. So it’s not a waste of time, particularly given that this is likely a once-in-a-lifetime experience for everybody on my (the buyer’s) side of the table, to make sure everybody understands the basic framework.
Even if that means possibly looking like an ass by stating the obvious. It comes with the job.
As subtlety is not my strong suit, nor is it effective in a situation like this, I worked to give the issue of operating losses higher visibility, make sure the Polychrones/Kelleher logic of the 2014 decision was understood, and so on.
That’s how I got to this point.
With that out of the way, let’s see if I can step it up to Econ 202.
The story so far, as I tell it.
By starting with 2014 Town Council member Kelleher’s warning on the inefficient scale of a Vienna facility, and layering on a stringent model of competition in this market (thou shalt not price above Fairfax user fees), I came up with sort of Econ 101 synopsis of the situation. Here:
Taxpayers pay for scale inefficiency. If a Vienna facility’s average cost per user is twice that of Fairfax’s REC Centers (Kelleher’s warning, quantified), then, all other things equal, taxpayers end up eating that excess cost due to inefficient scale of operation. Like $1.1M a year, here. Forever, because it’s baked into the inefficient scale of the facility.
The immediate policy implications.
Unless you still want to rely on the seller’s rosy scenario for projected taxpayer subsidy for this facility, a shift of thinking is in order.
Now, instead of having faith that your staff can run one of these every bit as well as Fairfax County runs the REC Centers, …
… in order not to take an ongoing financial beating (50% operating losses), you must believe that …
… your staff must make up for the cost-side deficiency of a small-scale building …
… which means that your staff must significantly outdo Fairfax County, in bringing in revenue per square foot of facility.
And in my world, they can’t do that with price increases beyond what Fairfax charges, so …
… they have to do that by bringing in a higher volume of services/number of paying customers, (per facility square foot, relative to Fairfax.)
In other words, assuming Kelleher’s warning is right, and that the numbers as presented are ballpark, to avoid taking an economic beating year after year, you have to assume not just that your staff are as good at this as the Fairfax County staff, you have to assume that they’ve got some aces up their sleeve, and that your staff must outperform Fairfax REC Centers considerably, in terms of volume of paying customers served, per square foot of facility.
Maybe they can. Maybe they can’t. I don’t know.
But all of a sudden, once you realize the cost handicap Vienna faces, this is a lot bigger ask. I’m not saying this hurdle cannot be overcome. I’m just saying that Town Council needs to be aware of it.
Of luck or skill, either one will do.
On the one hand, there’s luck. Maybe you could get much higher revenue per square foot merely because you’re lucky enough to be located in a particularly lush part of the surrounding gym-market landscape.
This, I think, is the essence of what the seller’s analysis of the situation was trying to say. That there’s so much money in Vienna, and it’s looking to be spent on an indoor pool, and it’s going to be spent on your pool, that, no problem, if you merely run your facility with technical competence, your losses will be minimal. So, despite any up-front handicap of high average costs due to small size, Vienna will come out of it whole, financially, or nearly, because the location of the facility allows you to skim the cream off this particular market location.
So, in my view, the seller’s analysis is at root a luck argument. We just weren’t directly aware that we had to count on that kind of luck, because Kelleher’s scale economy warning had been buried.
So rephrase the received wisdom on this proposal as: By being sufficiently lucky in its choice of location, Vienna can offset the innate handicap of high average costs due to inefficient scale, with high customer volumes per square foot of facility.
To which I say, maybe. Maybe we’re lucky enough that simply our location offsets our cost disadvantage. Moderately high population density, lot of disposable income, what’s not to like?
But while Vienna is the highest-income community in Virginia (per news report), it’s not like we’re exactly surrounded by slums.
The alternative to luck is skill. That is, a business plan for the facility that specifically acknowledges the cost handicap, and realistically shows specific actions by Vienna that plausibly will overcome that, to avoid high levels of operating losses for this facility.
To the contrary, on the skill side — the business plan, if you will — I’ve now stumbled across three things that suggest that little thought has been given to ways to maximize revenue in this facility.
The first is dismissing any notion of binding capacity limits for the proposed Vienna pool. The seller’s proposal explicitly – and kind of weirdly, come to think of it — makes a big deal about those not being binding. No problem, everybody will fit. But when you toss around projections of 4000 memberships — which, if they were all family memberships, would be like 12,000 people — for a building with 100 parking places and a pool with a maximum capacity of 130 people or so — eh, I’m just not seeing it.
Visit Vienna Aquatic Club on Memorial Day weekend, and you’ll likely agree with me. That’s a bigger pool than is proposed for the Vienna facility, with just 450 memberships. Note the full 100-car parking lot, and the crowded pool, realize that 4000 memberships for a smaller pool is asking a lot.
So, to me, it still looks like the financial proposal for this Vienna pool was tacked onto the physical proposal for the building, at the last minute (which I know to be true in essence, as it was an after-the-fact add-on), and that the apparently discrepancy between the financials and physicals of this overall presentation was never reconciled, merely papered over.
Surely, this facility has some finite capacity in terms of memberships that can be effectively served from a building of this size. Somebody needs to state what that is and why, and otherwise prove that capacity limits don’t put the kibosh on the notion that we’ve simply lucked into a very rich vein of ready pool money, by having the good sense to put a pool in Vienna, and that’s all we need to know.
Second, “25% up-charge” needs to be, well, explained, at a minimum, as to how Vienna plans to implement charging 25% above the Fairfax annual membership rate (what they prose to charge to Vienna residents, roughly, per the proposal), for (effectively) a small clone of a Fairfax REC Center, in Fairfax’s back yard. Because I’m not seeing it.
And now, news to me, I stumbled across what appears to be the Town locking out a potential source of pool revenue, with a Vienna pool design that appears ill-suited to accommodate swim teams. This, when Fairfax thinks enough of swim team revenue for the Reston facility that, in its budget fund 40050 summary, it calls out three different swim-team-related organizations by name. (Which I interpreted to be, in effect, thanking them for being good, paying partners in this endeavor.)
If nothing else, further progress calls for an eyes-open analysis of the average cost hurdle Kelleher warned about ten years ago, and what, if anything, Vienna is going to do to surmount that.
A Tetris-like exercise to help you see the problem. The graphic above is the pool schedule at Oakmont REC Center, for some recent random day. Except for “open swim”, the little colored (non-blue) blocks of time represent customers and revenue, from classes and swim team practices. So that’s a graphic representation of how well Fairfax is doing now, in terms of “customers per square foot of pool”. Now try to fit in twice as many of those blocks, in that same space. That’s more-or-less what you’re asking Vienna to do, to come close to breaking even, in a facility that has twice the operating cost per square foot. Worse, try it again, but this time expand the “open swim” area to cover half the pool, as Vienna seems to be selling this as roughly half “fun” pool, have “exercise” pool. Now try to fit in two copies of all those colored blocks, into half the pool. That’s the flavor of what Vienna must do, to break even financially, if they really aren’t kidding about this being a half-and-half, fun/exercise pool. It illustrates the ask you are making, by starting off with high costs due to an inefficient scale of operation.
Or, just have the taxpayers cover the proposed facility’s operating deficit, whatever it may be.
I guess this ended up being business 101, instead of econ 202.
Or maybe Tetris 101.
Free advice for what it’s worth.
