Cost Accounting in Local Government

Yet Another Looming Financial Disaster

Last November I wrote the above titled topic about municipal asset replacement programs for the RCS monthly newsletter, and here is an excerpt:

“Needless to say, with the constant demands for increasing existing public service staff/operations, this City and all others, simply cannot address these depreciating asset needs, thus by 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 what appears to largely be a “Replacement Plan” that is little more than “replace what breaks”.

I’m not going to hurt my shoulder trying to pat myself on the back for anything more than what is common knowledge and a bit of good timing, and also because I made two errors in my analysis and comments. First, the recent UCLA water pipe was a mere 93 years old, not 100 years; my bad.  Secondly, I did not recognize what could be the magnitude of damage costs incurred by property and assets should a near-catastrophic sized break occur.  The recent well-publicized UCLA break under Sunset Boulevard damaged six buildings along with 400 vehicles of people who had made the mistake of parking there, assuming their cars would be fine at the end of the day.  Pauley Pavilion alone had undergone a $136.0 million rehabilitation just two years ago.  The floor that was ruined cost one-half million dollars.

Well somebody is going to have to pay.  That stuff is not going to fix itself.

Sadly enough I doubt there are insurance policies in place for this, so in the end some group of tax or ratepayers will pay in some way. It will be either the LADWP water rate payers if they lose the inevitable lawsuits, or the taxpayers of the State of California if somehow it was UCLA’s fault.  While we certainly can blame UCLA for the lack of positive results inside of Pauley Pavilion, we would be hard pressed to blame them for what happens outside of it.

Hopefully, there will be an upside in the greater awareness of the magnitude of the problem of aging pipes that we frankly can’t see.  So once again with gusto I will give you a real world example of a recent DIF client’s asset replacements results.

Following is the table from a recently completed DIF report for a city with contract law enforcement, but is otherwise a full-service city with a population of just under 23,500. They are responsible for sewer collection but contract for treatment facilities.   While I consider this client (both staff and city council) to be one of the more enlightened, efficient and effective at meeting their various Master Plans Levels of Service, I do not believe they have a good handle on the magnitude of the replacement program they should be addressing yet.  But who does?

The following table identifies that this City’s total replacement cost of their spine system and local system is about $1.06 billion in replacement costs. Land and water share values are not included since they do not depreciate.  The $1.06 billion figure includes above ground structures and the underground back-bone portions of the major infrastructure systems, as well as the public improvements included within the footprint of normal development, which would have been constructed by the developer and dedicated to the City.  The following table indicates the current replacement values of the various infrastructure owned by the City.

Replacement Cost of Existing City Infrastructure

Infrastructure Replacement Value
  Fire Protection Facilities, et. al. $15,400,949
  Streets, Signals & Bri­dges System $629,740,036
  Storm Drainage Collection System $39,787,683
  Water Distribution System et. al. $173,643,435
  Sewer Collection Syste­m $148,537,997
  City Hall Facilities and Electronics $19,268,140
  Community Center Type Facilities $10,947,828
  Park Land and Park Improvements $44,813,370
 Open Space Land $25,833,368
Total City Infrastructure Assets $1,107,961,806
Total Assets (from above) $1,107,961,806
Less Land, Shares, Odd R.O.W. etc. ($46,777,427)
Total Depreciable Assets $1,061,184,380
100 Year Replacement Plan 100
Required Replacement Investment/Year $10,611,844

If we assume that this $1.06 billion in replaceable assets were to be consumed over an extremely conservative 100 year period, it means that this City should be either replacing or setting aside money for replacement at the combined amount of $10.6 million annually.

Again, strike while the iron is hot.  Use the L.A. Department of Water and Power’s inability to execute a reasonable and responsible plan, or at least make the public aware of it.  I use the word execute because I realize that LADWP has probably planned for it, but simply cannot execute it.  There is no shortage of parties to blame for that, including LADWP staff, elected officials, the sensationalizing but clueless local press, and then again there are citizens who show up at every utility rate increase public hearing to argue against it.  But informing the legislative body is the place to start.


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