Cost Accounting in Local Government

(Yet Another) Looming Financial Disaster: The Lack of a Funded Infrastructure Replacement Program

When RCS undertakes a Development Impact Fee (DIF) Calculation and Nexus Report, one of the exhibits included in the Report is a table indicting the replacement value (not the depreciated value) of the City’s currently owned infrastructure/physical assets.  The replacement value information is not technically required for the calculation of the DIFs but has proved valuable in the adoption of the resulting DIFs.  The exhibit is helpful for several reasons, but primarily as a demonstration of what a new homeowner or private developer will benefit from upon construction and occupancy of a new residence or a new business building. The existing community residents and business property owners are, in effect, the owners of these assets and when a new resident or business owner is welcomed to the community (via a certificate of occupancy), they immediately become a shareholder of these assets. A collateral benefit is that it identifies the magnitude of the City’s infrastructure replacement requirements.

Following is that table from a recently completed DIF report for a fairly large, full-service city with a population in the 175,000 range.  It also has a thriving business climate. The table identifies that this City’s depreciable assets (identified below in Table-1) are about $2.06 billion in replacement costs (land and water share values are not included since they do not depreciate).  The $2.06 billion dollar figure includes above ground structures and the underground back-bone portions of the major infrastructure systems but does not include the improvements included within the footprint of normal development, which would have been constructed by the developer and dedicated to the City and are not part of the DIF calculation.  The following table indicates the replacement values of the various infrastructure owned by the City.

MFP Table-1

Replacement Value of Existing City Infrastructure

 Infrastructure

 Replacement Value

 Law Enforcement Facilities, Et. Al.

$35,268,864

Fire Protection Facilities, Et. Al.

$93,825,672

Streets, Signals & Bri­dges System (a)

$700,080,412

Storm Drainage Collection System (a)

$228,076,754

Water Distribution System (a)

$399,988,218

Sewer Collection Syste­m (a)

$215,892,617

General Facilities, et. al.

$85,472,666

Library Facility and Collection

$45,633,616

Public Use Facilities

$48,355,874

Aquatics Centers

$3,283,900

Park Improvements (excludes land)

$200,143,939

Total

$2,056,022,532

 (a)   Limited to major spine infrastructure.

If we assume that his $2.06 billion in replaceable spine assets were to be consumed over a very conservative 100 year period, it means that this City should be either replacing or setting aside money for replacement at the combined amount of $20.6 million annually.  And the annual replacement requirements only get more significant when the many “local” storm drainage, water and sewer pipes and roadways/parkway improvements within City’s neighborhoods are included.  Inclusion of these “local” system replacement costs would probably add anywhere from 50% to 75% on top of the $20.6 million annual replacement figure so you should probably add an additional $10.0 to $15.0 million in annual deprecation.  Hopefully these “locals” would last longer than the 100 years used in this analysis but admittedly the 100 year remaining life figure was employed for ease in computation of the example and is probably an unrealistically low estimate.

Needless to say, with demands for increasing existing public service operations the City simply cannot address these depreciating asset needs, putting them off onto future residents/businesses. This is why, as an example, the City of Los Angeles has recently experienced many significant water system transmission pipe failures that are often identified as being near or over 100 years old.  Given that there are many 100 year old water lines still in use and they cannot set a water rate schedule that provides the financial resources necessary to replace them all, it forces the City to employ a “replacement plan” that is little more than “replace what breaks”.

The Answer?  Certainly providing the public with full details about the pending fiscal infrastructure replacement problem (or future crisis) is always the better choice and dovetails quite well with relating an annual review of progress towards meeting the agency’s General Plan’s LOS (levels of service) claims (see August 13, 2013 article).   All of us are stockholders in the local municipal corporation we live in and we all deserve a fair and complete “stockholder’s” report.  It is time to expand the City’s budget into such a document.

 

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