Transportation Systems Casebook/Deferred Maintenance

Summary

Deferred maintenance occurs when municipalities or states postpone needed maintenance to infrastructure. Deferred maintenance is an issue because the cost to repair infrastructure in the future is significantly higher than it would have been to repair at the present time. States and municipalities may choose to defer maintenance on infrastructure for any number of reasons. One primary reason why maintenance is often deferred has to do with how state and municipal budgets are calculated and reported on annual balance sheets. If maintenance costs are built into the budget, then money will be allocated for the incremental upkeep of infrastructure assets, rather than deferring until large repair projects have to compete with other funding priorities. 

Actors

• GASB - Governmental Accounting Standards Board - established in 1984 as a non-government, private sector entity. Mission is to improve financial reporting by state and local governments by issuing recommendations that follow Generally Accepted Accounting Principles.
• ASCE - American Society of Civil Engineers- Publishes an Infrastructure Report Card every four years, which outlines transportation deficiencies state by state and assigns grades by infrastructure type.
• AASHTO - American Association of State Highway and Transportation Officials - National organization representing the interests of transportation officials, mainly from the highway industry.
• FHWA- Federal Highway Administration- Government agency located within the US DOT that oversees the national interstate highway system. Issues grants for highway development projects, and rules that relate to technical standards.
• AGA - Association of Government Accountants - membership-based organization that advances the knowledge and integrity of the government accounting profession.
• State and Municipal Comptrollers - Officials who oversee the financial reporting operations of their respective jurisdictions.
• State and Local DOTs (Department of Transportation)- Responsible for maintaining safe road systems.

Timeline of Events

• 1977 - Representatives from the Union Pacific railroad write an article calling for the freight rail industry to repair tracks quickly, with the idea of maximizing profits. Basis for the "make more money" approach, which contradicts the "avoid losing money" argument often made when addressing deferred maintenance.
• 1984 - GASB is established.
• 1988 - First infrastructure grades assigned by National Council on Public Works Improvements
• 1998 - First ASCE Report Card is released
• 1999 - GASB issues Statement 34, requiring states and municipalities to list infrastructure assets on financial statements
• 2001 - Second ASCE Report Card is released. Next Report Cards issued at four year intervals
• 2012 - MAP-21 (Moving Ahead for Progress in the 21st Century) signed into law. Mainly a transportation authorization bill, but also requires each state to develop a risk-based asset management plan for the National Highway System.
• 2015 - FAST Act (Fixing America's Surface Transportation) signed into law. Authorizes transportation funding for next five fiscal years. Continues MAP-21 procedures related to asset management
• 2017 - Most recent version of ASCE report card is released

Narrative of the Case

The History of Deteriorating Infrastructure

US investment in transportation infrastructure peaked in early 1900’s and has been declining, barring a few short-term blips, ever since. Comprising federal, state, and local funding, total US public spending on transportation infrastructure reached 4% of the nation’s GDP in 1932. Spending plummeted during World War 2, rose somewhat afterwards, and continued declining into the 21st century. Given this declining funding -- translating to a lack of funding for maintenance of infrastructure -- roads, bridges, and other transportation infrastructure assets have fallen into disrepair.

Current Status of US Infrastructure

In 2016, the American Society of Civil Engineers rated the condition of US infrastructure as (on average) a D+. The ASCE Report Card is the most widely recognized rating system of its type, and it publishes an evaluation every 4 years. 

The Infrastructure Report Card grades are determined by a committee of civil engineers from a range of industries. They consult data, objective reports, and other experts to evaluate infrastructure based on the following criteria:

• Capacity: Does the infrastructure’s capacity meet current and future demands?
• Condition: What is the infrastructure’s existing and projected-future physical condition?
• Funding: What is the current level of funding from all levels of government for the infrastructure category as compared to the estimated funding need?
• Future Need: What is the cost to improve the infrastructure? Will future funding prospects address the need?
• Operation and Maintenance: What is the owners’ ability to operate and maintain the infrastructure properly? Is the infrastructure in compliance with government regulations?
• Public Safety: To what extent is public safety jeopardized by the condition of the infrastructure, and what are potential consequences of failure?
• Resilience: What is the infrastructure system’s capacity to prevent or protect against significant multi-hazard threats and incidents? Can it quickly recover critical services with minimum consequences for public safety and health, the economy, and national security?
• Innovation: What new and innovative techniques, materials, technologies, and delivery methods are being implemented to improve the infrastructure? 

Additionally, to further emphasize the importance of infrastructure, ASCE publishes a Failure to Act report. This report seeks to answer the following question: ''How does the nation’s failure to improve the condition of U.S. infrastructure systems affect the nation’s economic performance?.'' The report outlines infrastructure’s impact on the “economy, impacting business productivity, gross domestic product (GDP), employment, personal income, and international competitiveness.” The report’s headline finding is that between 2016 and 2025, every single year each US household will lose $3,400 in disposable income because of infrastructure inadequacies. In 2025, if the condition of infrastructure in the US is not improved, it will cost the economy $4 trillion in GDP and 2.5 million jobs.

Repairing US Transportation Infrastructure

To fix these infrastructure issues, ASCE makes several recommendations. First, they recommend increasing investment in infrastructure from 2.5% to 3.5% of GDP. Specifically, they suggest the investment approach follow the following steps:

• Put the “trust” back into “trust funds.” Dedicated public funding sources on the local, state, and federal levels need to be consistently and sufficiently funded from user-generated fees, with infrastructure trust funds never used to pay for or offset other parts of a budget.
• Fix the Highway Trust Fund by raising the federal motor fuel tax. To ensure long-term, sustainable funding for the federal surface transportation program the current user fee – 18.4 cents per gallon on gasoline and 24.4 cents per gallon on diesel fuel – must be raised by at least 25 cents per gallon and tied to inflation to restore its purchasing power, fill the funding deficit, and ensure reliable funding for the future.
• Authorize programs to improve specific categories of deficient infrastructure and support that commitment by fully funding them in an expedient, prioritized manner.
• Infrastructure owners and operators must charge, and Americans must be willing to pay, rates and fees that reflect the true cost of using, maintaining, and improving all infrastructure, including our water, waste, transportation, and energy services.

From a leadership and planning standpoint, ASCE identifies the following approaches to alleviating the burden of the nation’s deteriorating infrastructure:

• Require all projects greater than $5 million that receive federal funding use life cycle cost analysis and develop a plan for funding the project, including its maintenance and operation, until the end of its service life.
• Create incentives for state and local governments and the private sector to invest in maintenance, and to improve the efficiency and performance of existing infrastructure.
• Develop tools to ensure that projects most in need of maintenance are prioritized, to leverage limited funding wisely.
• Streamline the project permitting process across infrastructure sectors, by providing clarity to regulatory requirements, bringing priority projects to reality more quickly, and securing cost savings, while still safeguarding the natural environment
• Identify a pipeline of infrastructure projects attractive to private sector investment and public-private partnership.

While ASCE's evaluation approach is empirical and their organization in general is widely regarded as impartial, it's worth noting that increased spending on infrastructure will translate to many more jobs and money for civil engineers.

Motivating Change to Better Maintain Infrastructure

The changes suggested by ASCE are more easily said than implemented. In order to spur action to improving infrastructure, and to encourage investment in transportation infrastructure, GASB has released Statement 34, which stated that infrastructure assets should be reported on balance sheets. Reporting infrastructure on government balance sheets will create a public record of the status of the infrastructure in financial terms, and encourage better upkeep.

Reporting infrastructure on government balance sheets encourages them to address infrastructure maintenance because it ties the value of the infrastructure to the municipality's financial status. If the infrastructure is in good health -- it's well maintained -- then it will show up as an asset. If the infrastructure is not being well maintained it will show up as less valuable, and potentially even as a negative or debt. This reduction in value will look bad for the municipality, potentially leading to the municipality appearing in worse financial health than it is. Municipalities do not want to appear in poor financial health -- both for public relations reasons, and because it can affect their credit rating and thus their ability to borrow money and issue bonds, all of which are immensely important to a municipality's operations. Given these incentives, the modified approach is considered better for the way that it’s more closely and accurately tied to the true condition of the infrastructure, not some potentially misleading, linear depreciation line.

Furthermore, reporting infrastructure on balance sheets will ensure greater transparency.

GASB 34 specifies two methods for reporting reporting maintenance costs on balance sheets. Each approach yields slightly different incentives for governments to maintain their infrastructure. 

The Traditional Approach

Often referred to as "cost and depreciation," the traditional approach involves reporting the initial cost to build the asset as well as a depreciation amount. The depreciation amount would be the initial cost of the asset divided by its expected lifetime in years. If a road cost $100,000 to build and its expected lifetime is 40 years, then the asset would depreciate at a rate of $100,000/40 = $2,500 per year. After 20 years, the asset would be half as valuable as it was when it was first built. A few issues with this approach:

• Assumes that the rate of depreciation is linear. Assets may depreciate much faster in the first few years after they are built.
• Does not take into account inflation or the changes in economic activity in the future
• How is any maintenance factored into this? If a state or municipality spends money to maintain the asset, will that extend the life of the asset? If they don't maintain the asset at all, will it's expected useful life still be 40 years?

Many states report infrastructure costs using this approach because they consider this to be enough information. Others will argue that the depreciation cost is somewhat useless information. Depreciation is really about how much useful life an asset has left.

The Modified Approach

The "modified approach" of reporting infrastructure costs assumes that states and municipalities are building "long-life assets," or that the assets will be maintained at a certain condition. A long-life asset is an asset whose condition will allow it to persist year after year where the only work done is to maintain its condition. Some argue that reporting the cost to maintain an asset at a certain condition is more useful information than the depreciation cost. Using the modified approach addresses deferred maintenance from the perspective of "here's what we're going to have to invest to maintain the asset." This bakes in the cost of maintaining assets into the budget so that the money is allocated for incremental maintenance costs. Some potential issues with this approach:

• Cost of determining the level of condition for each asset and how much it would cost to maintain that condition
• Assumes that the state/municipality plans to maintain infrastructure assets. Allowing an asset to naturally deteriorate is also an option.
• May be difficult to accurately estimate maintenance costs. What if one winter is really bad and the next is not so bad?

The two approaches differ in how they motivate government entities. Generally, the Modified Approach is considered better because it more closely and accurately ties the condition of the infrastructure assets to the financial representation on the government's balance sheet. To ensure this, the Modified Approach also requires a summary of condition assessments of eligible assets using an established measurement scale and target condition level. With the Traditional Approach, there is very little motivation to maintain infrastructure assets because the value of the asset on the balance sheet will always be based on the predetermined depreciation schedule.

Currently, there are 20 states that follow the Modified Approach.

Challenges and Incentives

Why aren't all states and municipalities adopting the modified approach for reporting infrastructure maintenance costs? Many have argued that it is difficult to qualify and standardize the condition of infrastructure. The American Society of Civil Engineers refute this idea and have developed a comprehensive rating system to rate the condition of infrastructure assets. There are a few challenges associated with the traditional approach:

1. Repair costs can be much more expensive if left for long periods of time. It's relatively inexpensive to patch a road, but once water gets in, freezes, expands and damages the subsurface, then repairing becomes much more costly.
2. Expensive repairs have to compete with other budget priorities. Build a new school, or repair a bridge? Which is a politician more likely to advocate?
3. Legislative appropriations process that enables Congressmen/Senators to fund projects in their districts (pork-barrell spending).

GASB does not have enforcement powers, and is not written in law. However, there is significant pressure to conform to GASB's statements because creditors and rating agencies will look unfavorably on entities that do not conform. Many argue that GASB should be given enforcement powers.

Potential Funding Strategies

GASB 34 specifies how expected maintenance costs should be reported on state and local balance sheets, but does not provide guidance on possible funding sources. Often having a dedicated funding stream makes it easier to set aside and allocate that money for maintenance. Typical funding sources include:

• State gasoline tax
• Tolls on high-traffic roads
• Public-private partnerships
• Highway Trust Fund

Edward Mazur, previous State Comptroller for the Commonwealth of Virginia, suggests that to facilitate funding infrastructure maintenance projects the federal and state governments enact laws that commit them to basically co-signing when a municipality is borrowing money. By having the state or federal government co-sign, they will be responsible for making payments if the municipality is unable to. This provides the benefit of securing a lower interest rate for the municipality, reducing the cost of borrowing money or issuing bonds, and ultimately making it less expensive to carry out the infrastructure maintenance initiative. Several states currently have programs like this, such as Virginia.

Additional Reading

1. Last Call for Common Sense - In Addressing the Fiscal Sustainability of the U.S. Government, by Ed Mazur: https://www.claconnect.com/-/media/files/media/lastcallforcommonsense.pdf
2. Consequences of Delayed Maintenance of Highway Assets, by The National Cooperative Highway Research Program: http://www.trb.org/Publications/Blurbs/176740.aspx
3. Infrastructure Report Card, by The American Society of CIvil Engineers: https://www.infrastructurereportcard.org/

Discussion Questions

• Would you agree that raising the national gas tax is a viable option for supporting road maintenance, or are there other solutions that would help alleviate the funding problem?

• Should GASB have enforcement powers to mandate that states and municipalities list infrastructure assets on their annual financial statements? Should another federal agency have this responsibility?

• In your view, which of the following needs the most attention in terms of addressing deferred maintenance backlogs: Highways/vehicle bridges, railroad infrastructure, airports, or coastal ports? What criteria do you think are important for determining priority of infrastructure to receive maintenance dollars?

References

Dornan, Daniel, "Asset management: remedy for addressing the fiscal challenges facing highway infrastructure" International Journal of Transport Management, Volume 1, Issue 1, February 2002, Pages 41-54. https://doi.org/10.1016/S1471-4051(01)00005-2

Baim, Earl, and Hastak, Makarand, "Risk Factors Affecting Management and Maintenance Cost of Urban Infrastructure," Journal of Infrastructure Systems, Volume 7 Issue 2 - June 2001 https://doi.org/10.1061/(ASCE)1076-0342(2001)7:2(67)