KPMG conducted a Value for Money ("VfM") analysis to compare the total payments under the P3 method versus what it would cost to procure a criminal justice center under a more traditional procurement method. Because KPMG had contingency payments riding on the success of the P3, it naturally skewed its results to support the pre-ordained P3 model. The independent report for the council identifies how KPMG produced its desired outcome:
- KPMG’s VfM used an arbitrary and unsubstantiated discount rate of 5% in calculating the net present value of the City’s costs under the proposed agreement with WMB. This artificially deflated the present value of the proposed overall WMB project cost by over $191M compared to using a more appropriate and recognized discount rate.
- KPMG’s VfM arbitrarily ignored the entire Design-Build project delivery method available to the City under I.C. 5-30. Similar to a D-B-F-O-M delivery method, the Design-Build method would allow the City to finance a guaranteed construction price and transfer much of its design and construction risks to the winning Design-Build team.
- KPMG’s VfM used unsubstantiated and yet highly-unfavorable assumptions to estimate the City’s alternative public, tax-exempt financing capabilities, including using an unjustifiably expensive 30 year A- rated bond plus 75 basis points. This bond rating was arbitrarily low and unsupported by the City’s existing AAA credit rating. Indianapolis maintains a AAA credit rating with two rating agencies and a AA rating with the third. Rather, far more supportable estimate would assume the City could reasonably issue a Bond through the Building Authority backed by a COIT pledge from the City with a AA municipal bond plus 50 basis points. This would significantly reduce the net-debt service payments and overall costs for the city to finance the project itself. There would be no need for a referendum, and the Building Authority is not subject to debt limitations.
- KPMG’s VfM estimated the City’s operation costs for the proposed facility at $10.25 per square foot of space. A standard industry survey put the average operating cost per square ft. in Indianapolis at $7.95 in 2013, or conservatively adjusted to $9.10 in 2015. Importantly, Building Authority (which currently operates both Jail and City-County Building) independently quoted the cost per square foot as $6.25 to operate the proposed justice center in 2019. Including funding of life cycle costs, the Director of the Building Authority estimated costs to be $8.08 in 2019. Given the vast experience of the Building Authority, we believe this is the appropriate figure to estimate the present value of operating and maintenance costs.
- KPMG’s VfM includes an unnecessary “operating risk adjustment” cost to the City for alternatively operating the facility itself. This calculation, however, assumes an unreasonable and unsubstantiated 80% likelihood of an operating outage and assumes that the City is incapable of negotiating a separate operating agreement sufficient to avoid this risk.
- KPMG’s VfM assessment includes a state tax adjustment amount that is wholly inappropriate, because local governments do not receive any state corporate tax-revenue. As such, WMB paying corporate taxes is not a value-add for the county.