Managing Infrastructure Investment

Infrastructure repair and maintenance typically do not make headlines, which makes the job of seeking investment extremely difficult. Fortunately, there are some promising approaches.
August 8, 2007 AT 3:00 AM
By Stephen Goldsmith  |  Contributor
Professor of practice at the Harvard Kennedy School and director of the Innovations in American Government Program

Last week's bridge collapse in Minnesota triggered many examinations, recriminations, and explanations. Engineers and capable Minneapolis officials will have their hands full dealing with the issues concerning the Interstate 35W bridge collapse--from both a human and an administrative perspective.

The tragedy has also brought light to the nation's infrastructure challenge. With total road and bridge repair costs estimated at $140 billion annually, state and local officials face a steep uphill battle. State and local governments will be held responsible for most of these costs--the federal government provides only $2 billion annually for the 592,473 bridges that receive federal funding, less than $3,500 per bridge.

Spread the $2 billion over only the 79,000 bridges nationwide considered to be "functionally obsolete" (a worse rating than the 35W bridge recently received) and the available funding is $25,000 each. What does $25,000 pay for? New York City alone spends about half a billion dollars on maintaining its bridges each year. And federal funding is on the wane. As state and municipal officials, you know that you are largely on your own.

Unless there is some tragedy like Minneapolis' 35W or the failure of New Orleans' levees, infrastructure repair and maintenance typically do not make headlines. This makes the job of seeking efficiency reforms and appropriate levels of investment extremely difficult. Fortunately, there are some promising approaches. These approaches will not resolve the huge preventative maintenance deficit but they will help stretch existing dollars and generate more suitable appropriations.

Capital account and budgeting

Because the federal government--and most cities and states--do not have separate capital budgets and the value of road and bridge assets are not reflected on balance sheets, it is easy to overlook a depreciating asset. One positive step is to establish both a capital account and capital budgeting. Cities with separate capital accounts provide clear information to voters about depreciating assets and must acknowledge publicly--through financial statements--when the capital budget is raided to patch operating deficits.

Accounting standards

Included in the Governmental Accounting Standards Board's (GASB) comprehensive changes to Statement 34--approved in 1999--was the requirement that state and local governments include the value of infrastructure and public assets in their financial reporting. For the first time, Statement 34 called for tying expenses such as infrastructure maintenance and the depreciation of public assets to specific departments or functions. Many officials have tried to avoid these standards, but as the final implementation phases have now arrived, even the smallest governments will need to implement them despite the risks that they might expose new liabilities and perhaps hurt credit ratings. The transparency and greater detail gained by following GASB standards help focus attention on true costs and better inform infrastructure budgeting.

Project management

In many cities, project design and management are confusing and provide classic examples of good people in bad systems. "Concept-to-concrete" timelines are generally longer than necessary while the relationship between in-house engineers and outside consultants is often unnecessarily duplicative. These issues drive up costs and delay repairs. Thanks to just such an uncoordinated and outdated project delivery system, Kansas City faced a 150-project, $400-million infrastructure backlog and weak public confidence. Officials formed a public/private management collaboration with nationally recognized engineering firms to centralize and streamline capital project delivery. Within one year, "annual contracts executed" jumped from 40 to 240, improving public confidence and the relationship between contractors and labor. Kansas City's redesign not only made it one of 18 finalists in this year's Innovations in American Government Awards program but also improved confidence in local government, including access to capital through the bond markets.

Eliminate earmarks

This country's infrastructure investment plan is also plagued with low priority projects. It is time for governors and other prominent state and local officials to encourage Congress to allow them to make more targeted investment in critical infrastructure. In the 2005 transportation bill, arguably mislabeled the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), over 5,000 earmarks for pet projects--nearly three times greater than in the 1998 bill--represented an absurd portion of the federal dollars spent.

Financing alternatives

In large part, infrastructure funding comes from appropriated dollars, often with bonds sold against future revenues. However, many other options exist. It's a must for public officials to consider alternative financing models or innovative contract approaches: sale-lease backs; long-term leases; build-operate-transfer; design-build-operate-maintain; design-build-finance-operate; build-own-operate. The potential for creativity is limitless, which is good because we need bold new solutions in the face of declining tax dollars. Financing these projects makes sense when the cost of the money is less than the costs associated with the rate of decay. Further, delaying a road improvement or bridge rehabilitation can accelerate deterioration and put off any benefits from less congestion. In addition, of course, the rising cost of construction may be approximately the same, or in some instances more, than the associated financing costs. Other factors to consider in value-engineering include lost wages and extra gas from traffic congestion and delays, the rising cost of raising capital, and lost economic growth for the region.

As we were tragically reminded in Minneapolis last week, the price of poor infrastructure is far more than monetary. The risk to human life should factor significantly into any cost-benefit analysis. State and local government leaders face daunting infrastructure challenges, but they also have the capacity and responsibility to take the long-term view. Ultimately, given today's huge deficit in building new infrastructure and completing necessary repairs, we need all levels of government to work together towards updating and preparing a more effective and efficient infrastructure plan for the 21st century. Until that day comes, the tools above can make the best use of existing funds and provide new funding sources to help ensure that required levels of investment are met.

A Reader Responds:

While I agree with most of Stephen Goldsmith's comments, I would also offer the following:

Another factor that plays into the "Project Management" issue is the fact that many local governments are dealing with significantly reduced staffing and/or staffing having extensive experience in municipal capital projects. This is the result of many factors, among them years of effort by local governments to "do more with less" and keep taxes low; the inability of many local governments over the past couple of decades to offer competitive salaries that would facilitate the recruiting and retention of qualified employees; and the increasingly significant issue of an aging workforce where substantial retirements will take place (baby boomers). The "institutional knowledge" lost and the lack of continuity in staffing are a challenge when major capital projects require knowledge and experience from all participating departments (engineering, public works, finance, executive management, etc.). Also contributing to the continuity issue is the tenure (or lack of it) that is a natural function of the political process: The composition of the governing board of most local governments can change materially, and with it their priorities, goals and objectives, every two or four years.

I must disagree wholeheartedly with Mr. Goldsmith's paragraph entitled "Accounting Standards." Specifically, exactly what "transparency and greater detail gained by following GASB standards help focus attention on true costs and better inform infrastructure budgeting"? In my opinion, GASB 34 did little, if anything, to provide any information on infrastructure that would be useful in the budgeting, planning, or management of infrastructure assets:

o GASB 34 requires that phase 1 and 2 governments report infrastructure acquired after June 30, 1980 (GASB 34 para 154). Obviously this could lead to significant under-reporting of major infrastructure acquired prior to that date, not to mention that phase 3 governments are not required to report retroactively (GASB 34 paragraph 148).

o GASB 34 allows governments to report infrastructure assets in varying levels of detail, from networks to individual assets (GASB paragraph 156).

o GASB 34 allows governments the option of reporting infrastructure using a "historical cost/depreciation" (which allows for differences in the way that historical cost would be calculated as well as the useful life and method of depreciation) or "modified approach" (which allows subjectively establishing a condition level and periodic condition assessment) (GASB 34 paragraphs 152-166).

Taking all of the above into consideration, I do not personally see how GASB 34 enhanced the transparency, comparability or even the consistency of governmental financial reports. The most effective tools I have seen to drive more appropriate capital project and capital budget management are those management systems designed to inventory infrastructure and its condition, provided that the infrastructure is objectively evaluated periodically as to condition and the management information system is updated to reflect changes in condition and improvements. The reports generated from such a system provide a basis for prioritizing, planning and budgeting projects that is easily understood, and if made a part of the public administration process, can transcend changes in the governing board.

In closing, it is important to note that I am not among the "many officials" who "have tried to avoid these standards". As comptroller, I led the city of Rye in the early implementation of GASB 34, which earned us a "Certificate of Recognition" from then-GASB Board Chairman Tom Allen. However, there is a distinction between compliance with GAAP, and whether or not a GAAP standard improves the transparency or usefulness of financial statements. In my opinion, the most significant benefit of GASB 34 was the requirement that financial reports include an MD&A (management's discussion and analysis). Properly prepared, an MD&A provides the reasons behind the numbers and the changes in those numbers. On the other hand, the government-wide statements provide little or no benefit to those who manage a government or analyze the creditworthiness of a government (just ask one of the three nationally recognized credit rating agencies what information they use to analyze a government).

Michael A. Genito

Assistant City Manager/Comptroller

Rye, N.Y.