States and localities face $873 billion of deferred maintenance costs

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Over $800 billion of projects put off by state and local governments leaves plenty of room for bond financing, though a new study suggests investors should be wary due to inconsistent practices in disclosing future capital needs.

In a working paper released Wednesday, the Volcker Alliance found that the gap to pay for repairs put off by states, or deferred maintenance, could be as large as $873 billion. Combined with a reported federal backlog of $170 billion, the national total deferred maintenance costs may be at least $1 trillion, according to the paper.

“Considering the poor condition of America’s infrastructure, the nation’s trillion dollar deferred maintenance deficit and the dominant role that states play in financing construction and maintenance, states need to give high priority to improving how they identify and disclose their infrastructure needs,” researchers wrote in the paper.

States disclose information in the general fund budgets, but do not do the same for capital budgeting practices, researchers said. Researchers said they had a hard time finding information on capital budgeting.

Current revenues were the primary funding source for most state capital projects, despite their long life spans, researchers found. Capital improvement plans are usually one-time expenses. Operating expenditures are paid through general fund budgets, include things like education and routine maintenance of infrastructure.

Over the last 20 years, current revenues have funded about 70% of capital projects, while bond proceeds have financed the remaining 30%, researchers found.

“This is a trillion dollars of work, more or less that needs to be done and would probably be funded through the bond market if there were revenue sources to support it,” said William Glasgall, senior vice president and director for state and local initiatives at The Volcker Alliance.

However, bond investors would need to be careful since disclosure of capital needs varies widely among states, Glasgall said. Investors buying general obligation bonds should want to know what states’ future obligations are, Glasgall later said.

“You buy a bond to build a bridge and it’s financed by tolls or water fuel tax or general revenue,” Glasgall said. “It’s some known quantity, but what you don’t know is what cities and state and school boards and counties will face down the road.”

Hawaii, Illinois, Alaska, California and Tennessee publish deferred maintenance cost estimates. Other states may disclose thorough information about their general funds or budgeting processes, but the same can not be said for capital budgeting practices, Volcker Alliance wrote.

States’ capital budgets may not include all capital expenditures and budgets frequently covered less than half of total capital funding, according to the paper. Transportation was the major exclusion followed by higher education.

The federal government has a Federal Accounting Standards Advisory Board which has a set of standards for reporting deferred maintenance, but states and cities don’t follow suit.

Climate change will also have profound implications down the road to states and local governments' capital projects, researchers believe.

Water and transportation are big items that would be affected by climate change, said Jerry Zhirong Zhao, one of the authors of the report during a webinar.

Volcker Alliance recommended ten steps states should take to promote fiscal transparency such as separating capital budgets from operating budgets, standardization of budgets, and developing a centralized statewide asset inventory.

Not having a standardized budget makes it difficult to compare capital budgeting practices across states since different terms could have different meanings, the researchers said.

Many states don’t know what they own, Glasgall said.

“This is a bill that is going to be need to be paid, somehow, somewhere, sometime,” Glasgall said.

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State budgets Government finance State and local finance Climate change Volcker Alliance Washington DC
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