Deferred maintenance…the same as debt? Really?
Imagine receiving a bill that escalates each month in spite of no additional spending, fees or interest being added. That’s what is happening in many governmental entities.
It’s happening on college campuses, in public school districts, cities, counties and states throughout the country. The dollar amount is accumulating at an alarming rate.
The culprit? Deferred maintenance!
Throughout the country, public officials are postponing overdue maintenance on almost every type of public asset. They do this because they simply don’t have the funds to address maintenance needs. Postponing maintenance doesn’t cost anything today, but neglecting it for long periods of time guarantees a negative long-term financial impact in the future. It also allows public assets to deteriorate and lose value.
Postponing maintenance is one way to preserve scant budget dollars for other projects but the bill eventually comes due. Maintenance problems get worse quickly and the cost of repair escalates.
Estimates are that deferred maintenance costs, just for higher education, are approximately $30 billion nationwide. The cost for roads, bridges and other public facilities is much larger.
At the state level, deferred maintenance is not quite as grave a concern as it is for local governments. In fact, 29 states have funding mechanisms in their capital budgets to cover maintenance. That’s rarely the case at the local levels of government.
The looming problem, and the one that will force a change, is that deferred maintenance is now being counted as debt. That’s a very serious problem.
Credit rating agencies are beginning to penalize cities, counties, universities and states because of deferred maintenance. They book it as debt and plug in interest rates for every year that it continues. This pushes the debt totals even higher.
It’s a significant problem and one that few taxpayers have realized. What should public officials do when they recognize the issue but don’t provide funding to address the problems?
Oklahoma legislators recently created a Maintenance of State Buildings Revolving Fund and state agencies now receive a direct appropriation for maintenance. Two other states – Utah and Vermont – have maintenance funding available based on replacement costs for state facilities.
In Utah, there’s a law that requires annual capital funding equal to at least 0.9 percent of the estimated cost of replacement of all state facilities. In New York, the capital budget includes appropriations for preservation and maintenance of facilities.
Maintenance funding can be requested in Texas as an operating budget appropriation. The requests, however, are not always granted.
Many cities and counties use a public-private partnership (P3/PPP) engagement when deferred maintenance cannot be handled in any other way. P3 engagements not only bring private-sector capital which can be used for construction, renovation or maintenance projects, but also the ongoing maintenance and repairs are handled by the private-sector partner as long as the partnership exists. And, depending on how the engagement is structured, at the end of the partnership, the public entity takes over a well-maintained facility or infrastructure – that has never been subjected to deferred maintenance. Not a bad deal in any way for taxpayers if the engagement was structured correctly.