You’ve Heard of Unfunded Pension Liabilities. Unfunded Infrastructure Liabilities Are Huge, Too

Lafayette, La., like many other U.S. cities, is running a huge hidden deficit in the form of backlogged infrastructure maintenance. Charles Marohn, founder of the Strong Towns movement, has done a brilliant job of illuminating the time bomb ticking away in municipal budgets around the country. This week he has honed in on Lafayette, a midsize city of about 125,000. His tale probably could apply to many Virginia localities.

In “The Real Reason Your City Has No Money,” he lays out the problem:

Lafayette had the written reports detailing an enormously large backlog of infrastructure maintenance. At current spending rates, roads were going bad faster than they could be repaired. With aggressive tax increases, the rate of failure could be slowed, but not reversed. The story underground was even worse. Ironically, this news had historically been the rationale for building even more infrastructure (theory: this is a problem that we’ll grow our way out of). …

When we added up the replacement cost of all of the city’s infrastructure — an expense we would anticipate them cumulatively experiencing roughly once a generation — it came to $32 billion. When we added up the entire tax base of the city, all of the private wealth sustained by that infrastructure, it came to just $16 billion. This is fatal. …

The median house in Lafayette costs roughly $150,000. A family living in this house would currently pay about $1,500 per year in taxes to the local government of which 10%, approximately $150, goes to maintenance of infrastructure (more is paid to the schools and regional government). A fraction of that $150 – it varies by year – is spent on actual pavement.

To maintain just the roads and drainage systems that have already been built, the family in that median house would need to have their taxes increase by $3,300 per year. That assumes no new roads are built and existing roadways are not widened or substantively improved. That is $3,300 in additional local taxes just to tread water.

That does not include underground utilities – sewer and water – or major facilities such as treatment plants, water towers and public buildings. Using ratios we’ve experienced from other communities, it is likely that the total infrastructure revenue gap for that median home is closer to $8,000 per year.

Freaking out? We haven’t even talked about schools and unfunded pension liabilities yet.

Can we find the information in local government’s Comprehensive Annual Financial Reports to make these same calculations ourselves? I don’t know. But every local government officials are living in La La Land if they can’t calculate the unfunded maintenance backlogs for their community.

There is a solution to the problem, by the way, but it isn’t raising taxes, and it isn’t unleashing infrastructure spending in Washington — it’s changing the land- and infrastructure-intensive pattern of development commonly called suburban sprawl. A few localities in Virginia get it. But most will have no appetite to make the necessary changes until they reach a Lafayette-level of desperation. Too bad.

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9 responses to “You’ve Heard of Unfunded Pension Liabilities. Unfunded Infrastructure Liabilities Are Huge, Too

  1. Okay… I’m going to be extra careful here so I won’t be accused of Ad Hominems!

    There are quite a few cities, towns, counties, states that DO a decent job of maintaining their infrastructure but there are also a few – a much smaller number that, like people … some of whom will change their oil for their car regularly and some who will habitually wait until the engine light comes on!

    So it’s NOT a pattern of most of them sliding inevitably towards unsustainable fiscal hell!!!

    For every Lafayette and Petersburg.. there are Charlottesvilles and Henricos.

    For every METRO – there is a VDOT – who takes O&M super serious – enough so by policy and law they fund maintenance before they spend a penny on new construction.

    It’s just not the case – that human settlement patterns are fatally and fiscalled doomed but one can always find an example of one ..

    we’ll point out a dozen US cities that have gone bankrupt without also pointing out how many have not and how many actually have AAA ratings!

    Governments are like people.. they are organized cultures – a lot that are well run and do a good job at O&M and pension funding and others who are, like some people, a mess.

    we have to get over this “we are all doomed” chicken little – paranoid view of the world..

    We take way too much for granted. How many traffic signals have you seen “fail” .. i.e. the red light fails to work and there is disaster – all due to the fact that we are ‘sprawling’ so much that we not have enough money to properly maintain the infrastructure?

    So I argue the opposite.

    All society and government are NOT going lockstep down some filthy rate hole to fiscal hell!!

    think of cities, towns, counties , subways, highway depts like we do people – like this:

  2. Not surprising. They don’t care about us, only giving out whatever they can to keep being voted in. Basically using the office to buy the votes of people.

    I have one state senator in mind when I got confronted with this by the LA and the senator. I didn’t come in all friendly, I came in asking about allegations in newspapers about the senator and their family, where they voted for and stood on the issues. They wouldn’t do anything for me because I asked that.

    This should tell you a lot about why we need term limits.

    Same goes for politicians that aren’t booted out for things like this. Obviously they are not in for Virginians as a whole, because when you vote in the General Assembly that is who you are voting on behalf of.

  3. Public sector pensions, which tend to be quite generous in many instances, are crowding out other government programs, including the construction and maintenance of public facilities. Of course, this is not the only cause of infrastructure disrepair problems.

    A study by AON Hewitt consultants from 2012 and updated in 2016 concluded the Fairfax County Employees’ pension plan pays benefits to its Participants which exceed all competitors against which the County asked to be compared, including six neighboring counties, the Virginia Retirement System and the Federal Government, and exceeds the average and the median of the neighboring counties by more than 67 percent. Part of the difference comes from a supplemental plan that allows retirees to get the equivalent of Social Security from retirement to full eligibility age for SS.

    As of June 30, 2016, the three Fairfax County pension plans had a total Pension Liability of $8.4 billion and are under-funded by $1.9 billion, an increase in under-funding of $0.4 billion over the FY 2015. Fairfax County contributed to the three plans approximately $262 million in FY 2016, an increase of $25 million compared to the prior year and an increase of $90 million per year com-pared to FY 2011. Total cash payments for all retirement plans, including VRS for teachers, was $531 million in FY 2016, an increase of $64 million from the prior year. With additional debt assumed (due to the short-funding of pensions) of $552 million, Fairfax County’s FY 2016 public pension costs were almost $1.1 billion.

    And this is for Fairfax County alone. My sources are the recently adopted resolutions of the McLean Citizens Association, available at http://mcleancitizens.org/bt.html

  4. Isn’t Fairfax an AAA county which means the rating agencies like their finances?

    And Virginia has some pretty stringent requirements these days for CAFR – they have to be done according to GAPP standards which now requires representing the pension liabilities as well as the often overlooked Other Postemployment Benefits (or OPEB) liabilities.

    These things show up as deficits now on financial statements.

    GAPP also requires booking the capital expenditures and liabilities but there are loopholes for obsolete stuff that has to be replaced.

    Fully one-half of Fairfax county positions are school and more than half of the school positions are local discretionary pensions – associated with teaching positions that are not mandated by the state SOQs. They are purely the choice of the county.

    In other words – Fairfax County elected – CHOOSE to levy taxes for schools that is not required by the State.

    That’s typical most of the f counties in Va that are not in economically distressed regions. They typically spend more on teaching positions that the state does not require – and the locality is responsible for ALL of the funding including pensions and health care for those positions.

    All County elected are required to stand for election and to be held accountable for their spending decisions.

    If people at the lowest elected level can spend money willy-nilly and stay in office – I don’t think anyone else can be blamed other than the voters of that county…

    • Fairfax County came close to seeing its AAA bond rating downgraded by Moody’s because, in part, of its huge unfunded pension liabilities. In a study by Boston Colleges’ retirement studies center, Fairfax County has one of the highest pension burdens of any large county in the United States. Only Fresno, CA; Sacramento, CA; Kern, CA; Los Angeles, CA; Orange, CA; Cook County, IL; San Diego, CA; and Prince Georges County, MD had higher burdens for the combination of 1) Required pension payments; 2) Required OPEB payments ; and 3) Debt service as a percentage of locally controlled tax revenues. Fairfax County came in at 39.5%, of which 35.6% was related to pensions.

      And you are correct, Fairfax County officials spend money and incur debt like drunken sailors, with most of the many highly educated residents being clueless. Fairfax County voters, on the whole, are some of least sophisticated voters in all of Virginia. Another reason for the protections of Dillon’s Rule.

  5. Hey.. if you want to see REAL GLOOM and DOOM!

    More than a TRILLION dollars of debt.. that people are saddled with!

    what sane person goes into debt deeper than their chosen career will allow them to pay back to start with? No wonder the govt is acting!!

    “Under the [Obama] Administration’s new gainful employment regulations, if schools fall in what the Education Department refers to as a “zone” rate for four straight years, their programs would be ineligible for federal funding. The goal of policing this sector is to get these schools to either lower their prices or eliminate poorly performing vocational programs.”

    Now that’s a policy with REAL TEETH in it that’s really going to put it to the folks who think any college degree is “okay”. Not anymore.

    And neither did Congress nor the Virginia GA did it – but rather done by those nasty govt “regulators”.

    • Applying Larry’s consistent position that rules for public schools should also govern private schools that take public money, why is the Obama effort geared seemingly just to private, for profit schools? It ought to apply to traditional colleges and universities as well.

      All of this debt is crowding out the ability to rehabilitate existing infrastructure.

  6. here you go TMT:

    ” About one in four career-training programs at U.S. colleges is at risk of losing federal funding, the lifeblood for most schools, the Department of Education said on Monday. In a news statement, the department disclosed for the first time the number of recent graduates saddled with potentially unmanageable debt.

    The figures are part of the package of rules known as the gainful employment regulations, which attempt to measure whether graduates of career-training programs end up earning enough to afford their student debt. The Obama administration defined affordability as annual loan payments of no more than 20 percent of discretionary income, or 8 percent of total earnings.

    The schools range from the defunct ITT Technical Institute to Harvard University. (A graduate certificate in drama from the Ivy League school leaves the typical student with debt that’s 44 percent of discretionary earnings). Unless they challenge the data, schools must warn prospective students that they’re at risk of losing access to federal student loans within a few years.”

    in case you read fast – ” The schools range from the defunct ITT Technical Institute to Harvard University”

    read the full article – it seems to apply to ALL higher ed – private, public, Ivy

    https://www.bloomberg.com/news/articles/2017-01-09/hundreds-of-colleges-saddling-students-with-unaffordable-debt-feds-say

    of course this is another one of those nasty Executive decisions that probably will be undone by the new Depart of Ed appointee …

    Virginia could have chosen to do something like this on it’s own without waiting for the Feds… but like most things .. it chooses to do nothing but blame the Feds…

    • Thanks for the clarification. Now I’d also like to see a requirement for anyone lobbying the US DoEd on this subject to reduce the discussion to writing and to have such summary posted on the Agency’s website.

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