The Hidden Balance Sheet: How Infrastructure Deficits Are Imperiling City Budgets, and What Can Be Done About It

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Andrew Kleine
December 2, 2024

Have you ever wondered what happens when a bunch of public finance nerds get together? They all agree that the sky is falling, sure, but they also search for solutions to weighty and worrisome problems. Some of these problems make headlines, like the impact of remote work on tax revenues, while others fester in the shadows of government budgets. 

On September 17, I had the privilege of participating in the second annual Richard Ravitch Public Finance Symposium, a roundtable of experts from all levels of government, academia, consulting, the finance industry and nonprofit think tanks. The symposium, which was sponsored by the Volcker Alliance and hosted by the Pew Charitable Trusts, honored Richard Ravitch, a real estate developer who is credited with helping to stave off New York City’s financial collapse and rejuvenating the city’s mass transit system in the 1970s and 80s. Ravitch, who died in 2023, left behind a legacy as a financial fix-it man that extended to service as New York State’s Lieutenant Governor and roles rescuing Detroit and Puerto Rico from financial meltdown.

The purpose of the day was to discuss three topics: how to ensure state and local solvency as federal pandemic aid recedes, how state and local governments can build capacity and work collectively to leverage federal funding, and how to improve equity in financing and managing infrastructure projects. One issue came up over and over again, kind of like a bad penny. Someone dubbed it “unbooked liabilities”—the growing cost of deferred capital maintenance that shows up nowhere on municipal balance sheets but is every bit as concerning as unfunded pension costs and outstanding debt.

Infrastructure deficits are pervasive. A recent audit of San Diego’s street maintenance program revealed a $1.2 billion gap between needed and available funding over the coming decade. The Bureau of Transportation in Portland, Oregon reports a $6 billion shortfall over the next ten years for all transportation infrastructure. Similar stories can be found pretty much everywhere. In 2021, the American Society of Civil Engineers estimated the nation’s infrastructure investment gap at $2.6 trillion.

Why aren’t cities keeping themselves in a state of good repair? There are many reasons. Elected officials tend to prioritize ribbon cutting over resurfacing. The deterioration of roads, bridges, retaining walls, water pipes, etc. happens slowly and is not always visible. Cash-strapped cities underinvest in almost everything.

A less obvious root cause of neglected infrastructure is urban planning. Chuck Marohn of Strong Towns has written extensively about how postwar suburban development lacks the density needed to financially support its infrastructure long-term. He makes the point that the tax revenue per acre of a single-family neighborhood is insufficient to maintain its streets, curbs, gutters, parks and schools, not to mention all the stuff underground. He sees even wealthy cities facing painful choices as the bills come due on capital assets that have reached the ends of their useful lives and must be replaced.

The not-so-secret truth about infrastructure is that the longer it is ignored, the more expensive it becomes to fix or replace. A pavement condition report published by the City of Sacramento explains that preventive maintenance costing $5–$10 per square yard can delay or prevent reconstruction costing $88–$117 per square yard. Its conclusion is that “the cost of reconstructing one failed street is equivalent to preserving 26 good streets.”

How can cities catch up to their maintenance backlogs and sustainably manage their capital assets going forward? Here are five ways:

Account for the true cost of assets: As a reviewer for the Government Finance Officers Association’s (GFOA’s) budget award program, I’ve found that local governments commonly fail to prepare for the operating cost implications of capital projects. The decaying recreation centers I closed as a budget director were a direct result of this failure. Local governments should understand the full lifecycle costs of the things they build and plan accordingly. 

Spend available funds: This may sound like a “no duh” strategy, but spending money is not so easy in a world of slow-moving procurement processes, staffing shortages and lax accountability for results. One city’s audit found that more than 20 percent of budgeted road maintenance funds went unspent over a six-year period. The budget office of a large mid-Atlantic city determined that $500 million of general obligation (GO) bond authorization has accumulated, unused, over multiple decades. Tracking capital plan implementation and identifying bottlenecks are simple first steps.

Leverage your assets: The flip side of the hidden balance sheet is that many local governments own property that is undervalued or not valued at all. Cities and counties in GFOA’s Putting Assets to Work Incubator have identified billions of dollars in assets that can be sold, leased or repurposed. One city is replacing an aging fire station at no cost as part of a mixed-income housing project on the same site.

Know your assets: Cities that have invested to inventory their assets, including conditions and maintenance cycles, have a powerful tool for prioritizing capital spending. Putting available dollars where they will have the biggest impact on extending asset lifecycles and preventing future failures can save money and improve infrastructure performance. 

Get more out of your existing investments: Cities that find themselves overwhelmed by the costs of keeping neighborhood infrastructure in good repair should consider strategies to increase housing density and land use diversity. It may be possible to boost the taxable value of each acre of land within the “carrying capacity” of existing streets, water and sewer lines, bus routes, schools, etc. Optimizing the use of today’s infrastructure also avoids the cost of building more money-losing subdivisions in the future.      

A new term I learned at the Ravitch Symposium is “service solvency,” the ability of governments to sustain the programs and amenities residents want and need. Fixing infrastructure deficits is not just about balancing the bottom line, it is about preserving quality of life for our communities.   

The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

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Author: Andrew Kleine is Managing Director for Government & Public Sector at EY-Parthenon, Ernst & Young LLP. He is the author of City on the Line: How Baltimore Transformed Its Budget to Beat the Great Recession and Deliver Outcomes (Rowman & Littlefield, 2018) and has served as Baltimore’s budget director. His email is [email protected], and his X/Twitter handle is @awkleine.

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