A fresh and rigorous approach to quantifying the cost of aging infrastructure aims to shed light on what prominent municipal buysider Richard Ciccarone calls a "critical blind spot in municipal finance."
Years in the making, a report authored by Ciccarone, president emeritus of Merritt Research Services, an Investortools company, lays out a framework for calculating the replacement cost of depleted public infrastructure and capital assets in credit analysis.
Deferred maintenance represents an underreported cost that poses risks for taxpayers, finance officials and bond buyers who may not be aware of the burden facing the cities whose debt they're buying.
"It's a hidden fiscal risk," said Ciccarone, who has a long career as an advocate for greater and more timely issuer disclosure and other topics of importance to the muni buyside community.
Cities and states are not required to report the cost of deferred maintenance as a liability on their balance sheets, so there's a lack of consistent data on the condition of public infrastructure and capital assets.
But it's a burden that's as real as bond debt, pensions and other post-employment obligation, say Ciccarone and other buyside analysts.
"I first started thinking about this when I came into the business in the late 1970s, when there were major studies on infrastructure crumbling," Ciccarone said. He focused seriously on the topic more than a decade ago, and two years ago began to craft what became
The report crunches the audited financial statements of 2,000 cities, putting a number to each one. Together, the inflation-adjusted cost to offset the depletion of infrastructure and capital assets still in use by cities totals $1.03 trillion, the analysis found.
"This is a first big step to measuring the hidden commitment burden of cities when its comes to capital assets," said Ciccarone said, who will talk about the paper Friday at the National Federation of Municipal Analysts' conference.
Figuring out the most accurate method to quantify the burden was half the challenge, Ciccarone said.
"This has taken a lot longer to do than I ever thought it would," he said, adding that he had to re-do his original approach after realizing it had too many flaws.
The report identifies the dollar value of cities' "spent" municipal capital assets, defined as the "ICA Burden," as well as their fiscal ability to address the obligations, or the "ICA Burden Fiscal Ability." It takes into account all governmental activities' capital assets, a broader category than the traditional definition of infrastructure.
The ICA Burden is derived from accumulated depreciation data in audited financial statements, adjusted for inflation, and normalized using average asset age. The ICA Burden Fiscal Ability looks at "indicators of fiscal capacity," such as population, taxable property value, income levels, debt burden and pension obligations.
Together, "these two metrics distinguish between cities with large infrastructure and capital asset needs that are affordable and those where the burden poses acute financial stress," according to the report.
"The complications involved in estimating the dollar replacement value of the ICA Burden cannot be understated. [But] failure to incorporate a reasonable quantitative measure of capital asset burden leaves too big of a gap to properly assess credit quality and fiscal strength," the report said.
"What we've achieved is not just the results of the cities — it's also a process for evaluating it and a clearer understanding of what we're dealing with," Ciccarone said. "When you look at all the cities' long term liabilities and then add this, you get the full feel for what the city has on its burden base," he said. "And the number is massive," he added. "There are some that are in pretty good shape, but many are not."
The accumulated value of the spent portion of capital assets "dwarfs both outstanding direct debt and unfunded pension and OPEB liabilities combined," the report said. "The growing need to replace aging assets threatens to escalate costs further, especially as new infrastructure demands emerge in the evolving economy."
Jacksonville, Florida, San Francisco, Calif., and Columbus, Ohio were found to be the best-positioned among cities with more than 500,000 people. San Jose, Calif., Portland, Ore. and Indianapolis, Ind. were the worst positioned of the large cities.
Smaller cities are generally better off than larger ones, the analysis found. The report also identified a 10-year worsening trend for the median per-capita ICA burden for all cities, a trend that has accelerated for the big cities since 2022 despite federal infrastructure stimulus programs.
One of the goals of the analysis is to help cities identify the cost as a problem, Ciccarone said.
"One of my purposes is to get reforms out of this; to have cities take this seriously," he said. "We're going to eventually do school districts, counties and states," he added. "The methodology can be used in any area."
The debate among bond buyers over the cost of deferred maintenance has gained steam over the last few years. Some muni market participants and think tanks, including Ciccarone and
The Governmental Accountability Standards Board, which is responsible for establishing standards of state and local governmental accounting and financial reporting, decided not to require cities to report it as a liability as the board crafted its recent
The board decided that deferred maintenance does not meet the definition of a liability for financial reporting purposes in part because "management has the discretion to determine whether infrastructure assets are in an acceptable condition or whether they need additional maintenance or preservation work performed to continue to provide services," according to the exposure draft, which was released on March 25.
"This is a little different [from pensions and other liabilities]," Black said. "There's no set timetable, no thing or person or entity the government owes the money to. It's up to the government to determine when or if or how it's going to expend the costs," he said. "So the board didn't feel like it met that definition of liability," he said.
"But we do want to provide information about aged infrastructure to help users understand the situation and to get at some of what [Ciccarone's paper] is talking about."
GASB's exposure draft lays out how a final rule would require stepped-up reporting on infrastructure assets. Among other things, it would require periodic reviews of estimated useful lives for infrastructure assets and separating out various components of the same network — separating a road's surface from its base, for example. It would also require cities to disclose their assets that are nearing the end of their useful lives.
The board will take comments on the draft until June 26 and hold three public forums for stakeholders in June and July, Black said.
If finalized, the effective date would be fiscal year 2029.
Not recognizing deferred maintenance as a liability means the market is missing a "once-in-a-generation opportunity" for better data, Timothy Little, principal in Public Finance & Capital Markets Strategy at the Federal Reserve Bank of New York, said last week on a LinkedIn post.
GASB's decision is "essentially running the risk of keeping a crucial question unanswered: Are state and local governments keeping up with their infrastructure?" Little asked.
"Bottom line, we need better data. As studies and events have shown, the deferred maintenance problem is real. What's missing is decision-useful information in the financial statements," Little said. "How can we expect governments to budget for something if they don't know the cost?"
