Bacon’s Buzzword of the Day: Life Cycle Budgeting

The Springfield Mixing Bowl

by James A. Bacon

One of the big problems Virginia and other states have in reining in the cost of government is nonsensical accounting. Here in our great commonwealth, the General Assembly draws up spending plans in two-year increments called biennial budgets. Because the investment time horizon does not extend beyond two years, decision makers fail to consider the life-cycle costs for roads, highways, rail, ports, buildings, water, sewer and other infrastructure.

For most infrastructure investments, there are three components of cost: (1) the up-front capital costs and (2) maintenance and operating costs, and (3) the expected life of the asset, after which it must be replaced. From what I can tell — and someone please correct me if I’m wrong — the thinking of Virginia budgeters at both the state and local levels traditionally has not not extended beyond the up-front capital costs. Politicians’ interest lapses after the ribbon cutting, when the hosannahs fade away.

The problem is national in scope. Consider this statement from a group of cement contractors that has been pushing life-cycle analysis in Washington and in Virginia:

Federal and local governments have used accounting gimmicks to hide the real cost of building and maintaining infrastructure projects to sneak budgets past taxpayers or gain political points. As a result, our infrastructure is crumbling. Current plans to repair and rebuild it are short-sighted, stop-gap measures that capture only a fraction of the cost. No one wins when we budget infrastructure projects this way. By refusing to make a thoughtful, serious investment in these projects, decision-makers leave us roads, bridges, and transit systems that are quicker to crumble, more expensive to maintain, and chronically over budget. When it comes to infrastructure, how much longer are we willing to pay more and get less?

The cement manufacturers call for governments to adopt transparent, life-cycle analysis that shows taxpayers the true and full cost of projects – including construction and maintenance – so taxpayer dollars can be allocated more efficiently (which presumably means buying more cement).

The concept of life-cycle costs has found a somewhat receptive audience in the Old Dominion. This year, the General Assembly enacted HB 1965 that allows local planning commissions to “prepare and revise annually a capital improvement program based on the comprehensive plan of the locality for a period not to exceed the ensuing five years. … The capital improvement program shall include the commission’s recommendations, and estimates of cost of the facilities and life cycle costs, including any road improvement and any transportation improvement … and the means of financing them.”

Number of VDOT value engineering studies since Fiscal 2000

In a recent presentation to the Commonwealth Transportation Board, State Construction Engineer Mark E. Cacamis described the Virginia Department of Transportation’s commitment to “value engineering,” which incorporates life-cycle analysis into a larger, multi-disciplinary process to save money and improve functionality of state road projects. The good news: VDOT has saved $600 million in avoided costs since 1990. The bad news: the number of value engineering studies and savings have  trailed off in the past six to seven years.

Value engineering avoided costs since Fiscal 2000

In Fiscal 2004, VDOT conducted 40 studies resulting in a hefty $103 million in cost savings in Fiscal 2005. The number of studies declined significantly thereafter, and savings over the next six years totaled only $77 million. The avoided costs are a drop in the bucket compared to the backlog of VDOT’s maintenance needs,  but the value-engineering program does appear to represent an opportunity to save a few bucks. A million here, a million there, and pretty soon it adds up!

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2 responses to “Bacon’s Buzzword of the Day: Life Cycle Budgeting”

  1. One cannot do value engineering on costs without also considering the life cycle benefits. If you assume a highway will be used more in the out years, as population and development grows, then a value trade-off has to be made considering how much more up-front costs are justified to meet increased out year usage.

    In an area destined for high growth it may make sense to build to a higher and longer lastig standard. In a lesser growth are it may be enought to slap some pavement on the ground and do a better job later.

    But, you wold hate to build a road for high growth and then have it sit there for thirty years while the developers and preservationists slug it out in court.

  2. The GA is well aware of life cycle costs…. and I have a decent example.

    A State Park at Lake Anna was created when the land became available either as an outright gift or dirt cheap… but the park did not come online for more than a decade because of the up front capital and longer term O&M costs.

    On our west trip this year – we sampled 30 days worth of campgrounds and the State and Federal parks are almost unstaffed much of the time… a victim of the economy for sure…

    Many of the Federal & State parks are now..for all intent and purposes operated by volunteer “camp hosts” … people who have an RV and are allowed to camp for free in exchange for campground duties…

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