A Leaky Roof

There's an $80 billion gap in what we spend and what we need to spend to maintain our infrastructure as is.
January 2004
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

Last weekend, I cleaned leaves out of the gutters on my house. If I don't, the gutters clog up, water can get under the shingles and the roof may spring a leak. This routine chore made me think of the nation's infrastructure and whether we are keeping our proverbial gutters in good shape.

About 20 years ago, "America in Ruins" was published. The book called attention to the imperiled state of the nation's infrastructure, pointing to an under-investment in things such as roads and water and sewer plants--the physical sinews that support and connect modern life.

Since then, the American Society of Civil Engineers--the folks who, following professional standards, design the structures and equipment that make up public works projects--have kept up a drumbeat of concern over the well-being of our infrastructure. While their expertise is undeniable, they also have an economic interest in keeping the concrete pouring and dirt flying. Nonetheless, they can tell us what we should spend on infrastructure--even if we don't follow their advice.

Every few years, the Society turns out "report cards" on how infrastructure is doing, and these do make for somber reading. Just like school, "A" means outstanding and "F" means, well, failing. Over time, the categories of infrastructure examined have changed somewhat, but the average ratings have stayed in the D range. (They actually improved slightly to D+ between 1998 and 2001, when boom-time capital spending by state and local governments was increasing.) However, the 2003 report card saw most public works category scores sinking again. According to the experts, the annual spending needed just to maintain service levels (that is, replacing worn-out facilities and replicating the existing service for added population and commerce) rose from $260 billion in 2001 to $310 billion in 2003. With actual infrastructure spending now totaling roughly $230 billion a year, that implies an $80 billion gap in spending. And it is likely to grow.

The difficulties in calculating such heroic figures are manifold. Clearly, society makes spending choices that do not result in our having the most up-to-date landfill or a newly asphalted road. Yet, if we look at particular categories of spending and recall what we know is now going on in federal, local and state budgets, the growing gap talk makes sense.

Take wastewater treatment, for example. The U.S. Environmental Protection Agency makes projections on what states and localities will need to spend to replace pipes and other equipment that are wearing out, not to mention meeting the needs of new growth. About 35 percent of the water and sewer pipes nationwide today are in less than "good" condition, as opposed to 15 percent in 1980 when many systems were new. By 2020, about 60 percent of the pipes could be below standard. That means two things: increasing money spent on pipe replacement and, because aging pipes leak, spending more on treatment. Just to keep existing standards in place, EPA has estimated that a 3 percent annual increase in real, price-deflated water and sewer bills will be needed, on average, not to meet all the financial needs but rather to keep the annual deficit in meeting those needs in the range of $60 billion. Without that annual rate increase, the waste-treatment systems will slip back in 20 years or so to their condition of 30 years ago. That means water-pollution levels returning to those of the 1970s when the whole national water clean-up shebang started. The reality is, things wear out.

Charges for water and sewer at the local level will go up for another reason. Revenues collected locally were not used to finance most of the early capital improvements. An irony facing aging sewer plants is that they were largely built with federal grant funds--under a program that no longer exists. Back in the 1970s when the feds picked up 75 to 90 percent of the capital costs, little borrowing was needed and the user charges only had to cover operating expenses. Now, with the plants wearing out, the feds no longer give grants. As a result, fees will need to go up by enough to cover both continuing operations and the debt service on new bonds sold to pay for replacement. It's a similar story with highways and transit, where federal construction grants have played major roles in getting the original facilities built and started. Forget about the next generation of new projects; now, the fiscal trick is how to pay for maintaining and replacing what we already have.

No doubt, many elected officials will find cleaning the old gutters a lot less fun than cutting ribbons on snazzy new projects. But with Uncle Sam having left the capital grant scene and with a legacy of aging infrastructure, it will be a major effort to keep what we already have in working order. My guess is that more roofs are going to leak in years to come.