Local Governments’ Alarming Capital Spending Ratios

Reinvestment ratios for Virginia cities and counties have been declining in recent years. Source: Moody’s. (Click for larger image.)

I’ve been strenuously making the point over the past several months that there are many ways for state and local governments to run hidden deficits. One of those is deferred maintenance — an issue that has played out most prominently in the debate over aging, run-down school buildings. What I never realized is that there is a way to measure the extent to which local governments kick the maintenance can down the road. It turns out that we can track what Moody’s calls the “median capital asset reinvestment ratio.”

I cannot find an exact definition of this ratio, but, generally speaking, it expresses a local government’s capital investments as a ratio of its assets. A higher ratio indicates that local governments are spending more — building new buildings and infrastructure and/or renovating, retrofitting and otherwise updating older facilities. A lower ratio is a tip-off that a local government might be falling behind on repairs and maintenance.

The chart above shows that Virginia localities had healthy capital asset reinvestment ratios a decade ago, but those ratios have declined sharply in recent years — barely reaching replacement value for Virginia counties. As Moody’s writes in a recently issued report on the credit quality of Virginia localities:

The condition of capital assets has suffered from a lack of investment. Asset quality will likely improve if local governments make capital investment a priority. But funding will be a challenge, given the already above-average fixed-cost burdens many Virginia local governments carry.

A slowdown in capital investment is reflected in another statistic, the median age of capital assets.

Median age of capital assets, Virginia cities and counties. Source: Moody’s.

As this graph shows, the average age of Virginia’s capital assets is steadily and relentlessly increasing for both cities and counties. Needless to say, there is variability between jurisdictions. Some localities do a better job of maintaining the level of capital investment than others. The Richmond Public School System is noteworthy for doing a particularly poor job — keeping open more schools than justified by the number of students and scrimping on maintenance and repairs. But the problem goes far beyond the City of Richmond.

Growth Ponzi scheme. In past posts I have discussed Charles Marohn’s concept of the “growth Ponzi scheme,” a malady afflicting fast-growth counties. Under the logic of the growth Ponzi scheme, counties encourage inefficient growth (low-density, autocentric, segregated land uses in contrast to walkable, mixed-use projects) to get a quick hit of revenue from new development. Typically, developers pay for their own roads, water and sewer, plus proffers and impact fees, and then turn the assets over to counties for maintenance, so counties have only modest up-front costs. After 20 or 30 years, however, the assets need replacing and aging and tax-inefficient projects now cost more than they reap in revenue. Counties have kept the system going by soliciting more growth.

Eventually, the Ponzi scheme sputters and stalls. Counties run out of new land to develop. Recessions put an end to growth. We can see this happening in the top chart. In the go-go days of the early 2000s (not seen on the chart) and even in the recession, Virginia counties dedicated considerably more to capital investment than did cities. They built a vast, costly infrastructure of roads, utilities and other public amenities. Since then, maintenance has consumed an increasing share of capital spending. Absolute levels of capital spending may look robust compared to past levels, but as a ratio of assets, they’re not.

If you think Richmond Public School buildings are a blight, just wait twenty years and see what happens to the infrastructure quality of Virginia counties as they continue to under-invest in capital spending.

Essential ratios. There are undoubtedly complexities and nuances to the capital spending I’ve discussed here. And a general statement that applies to one locality may not apply to another. But these ratios are critical to evaluating the fiscal health of local government. Every city and county manager should have these ratios at their fingertips. Every council and board member should know them by heart. If they don’t, they have no idea what they’re doing, and they should be booted out of office.

There are currently no comments highlighted.

10 responses to “Local Governments’ Alarming Capital Spending Ratios

  1. If you handed $100 million to any group of politicians, of any partisan combination, what do you think are the chances they would wisely set most of it aside for maintenance and repairs? Watched the process at SCHEV as we often recommended an increase in funds for maintenance reserves, but seldom saw it approved. Nobody gets a ribbon cutting photo on those boring projects. In the VDOT arena, as I recall, there are some statutory requirements around maintenance (and of course bad maintenance can kill on the highway), so you see better attention.

    • TMT, commenting on other recent Bacon posts, has made a devastating case against great increases in spending within the Fairfax County school system on low income, second language, and special needs children that is draining the coffers of monies otherwise available to all the other children within the Fairfax School system, all without any apparent accountability or beneficial result for those very same special children needing such special attention and services.

      So where does this all end.

      Unfortunately, we have seen this show many times before. We create ever more victims then pump those victims up into cash cows to be milked for generations for the benefit of those running the system that in practical affect harms the kids, instead of helping them remedy the issues and challenges that they confront, so they can gain the good and prosperous future that they deserve.

      Another words, the system we have built keeps spinning off ever more victims, and ever more aggrieved groups of people, who grow up to be angry at their fellow citizens, while becoming ever more dependent on the state.

      We are now approaching the point where our society is beginning to seriously fracture, and become ever more financially fragile.

      Every year it becomes ever more difficult for our society to meet its critical obligations, while our social capital within our society, particularly our youth, become ever more unable and dis-empowered to find the prosperous future that they will need to keep our and their society afloat, and raise the boats of all citizens. Quite likely, we have now, or soon will, reach a tipping point.

      What is so enlightening to me by Jim Bacon’s above post, and by the comments of Steve, and Acbar, and Izzo here and elsewhere, is how these now alarming shortfalls, and deferred obligations, and remarkable incompetencies are now coming at us from so many different directions.

      What else is remarkable to me is how easily this society of ours could remedy these mounting problems if we only had the will, and made the effort to do so. But oddly, we can find neither the will nor the energy to act. What we are engaging in now, I believe, is akin to a willful act of suicide.

      For example, today we cannot ever summons the will as mature adults to insist that our kids work hard to learn in schools, nor will we maintain safe classrooms where our kids have the space and means to learn, nor will we provide our kids with the tools to learn, that is the means to learn real facts about the real world they live in, instead of our ideologies, and grievances, whether real or imagined. Meanwhile too we waste huge amounts building school houses that we by simple neglect allow to fall apart around our children. This is a dereliction of duty of historic proportions.

  2. An important look at the problem. Deferred maintenance on buildings is bad enough, but your discussion of the “Ponzi scheme development” aspect of this is devastating in its implications for suburban growth trends. Seems to me, this begs the question how much does the quick tax revenue bias these Counties and their staffs towards favoring quick-infill McMansion-type sprawl rather than the denser, town-house-dominated, curb-and-sidewalk-intensive, public-transportation-inducing planned-community development so many of the younger generation actually seems to prefer these days?

  3. There’s a certain amount of damned if you do and damned if you don’t though when Conservative types promise not to increase taxes and when capital needs rear their ugly head – it becomes of game of which path has the least pain – voters ire at the ballot box or let them eat cake on their infrastructure?

    take that ratio for each locality – and add to it a column that expresses in pennies on the tax rate – the amount needed to pay for infrastructure.

    And no it’s not just “go-go” development… look at how much it costs to maintain METRO and the mountains of hate and discontent about it – when the core truth is – transit infrastructure is not cheap; no matter where you go – the story with transit is the same- it’s expensive and no one wants to pay for it.

    But localities in Virginia save for two – are totally irresponsible about transportation infrastructure. Contrary to the idea that developers pay for new roads – they only pay for the roads that directly serve their development and that traffic ends up on State maintained roads and local pols blame VDOT for not building capacity fast enough for development!

    But we should credit VDOT with a credible approach to infrastructure … they set aside up-front FIRST – the money that is needed for HMOF.

    Take a look at their budget:

    Total State Taxes and Fees $3,533,255 (billion)
    amount devoted to Highway maintenance and operation – $2,558,000

    and that number goes up every year because the more roads we build – the more roads we have to maintain.

  4. Contrary to the idea that developers pay for new roads – they only pay for the roads that directly serve their development…

    Developers also pay proffers and impact fees.

    I think I’ll make that explicit in my post.

  5. Proffers have been outlawed in Virginia for all practical purposes for schools and roads and Impact fees are not allowed in most counties.

    Very few new roads are paid for by developers and the proffer law completely changed the way that proffers could be collected for schools.

    So if you’re gonna do that – get it correct!

    • We’re talking about proffers that were given 20, 30, 40 years ago for roads and infrastructure that now need major maintenance and repairs. The fact that proffers have been “outlawed” the past several years is irrelevant.

      As for impact fees not being allowed in most counties, they are allowed in many counties most impacted by growth. So they are, in fact, relevant to this discussion.

      • “proffers” are tiny in comparison to needs. No one project can really “proffer” enough money – it has to be from all of them on a continuing basis.

        You can’t get one new school from one project. Multiple projects, each proffering their fair share is how it works.

        On impact fees – You or Steve or both need to research and write about. Impact fees are equivalent to proffers in their intent but are prescribed in specifics as opposed to the developer offering different levels of different kinds.

        If you take the time to investigate, you will find that they are NOT allowed in general in most counties in Virginia – growth or not. Look it up! A FEW select counties have been offered the ability to do impact fees for roads only but the rules are so convoluted and tortuous that the few counties that do it have to have extra employees and consultants to implement and operate it. It does nothing for schools, EMS, etc as far as I know.

        So I think you are wrong… and need to bone up on it… We live the issue in Spotsylvania and Stafford -exurbs of NoVa and when proffers essentially went away – that was it. What we had accumulated to that point in time was tiny compared to actual needs.

        Hey – do an article on it! educate yourself and readers!

  6. Just FYI for folks – if you take the total VDOT budget and divide it by the population of Virginia – you get $588 per capita.

    Keep in mind that 1/3 of that number – about $200 is sales tax not gasoline tax.

    That includes both the Federal and State gas taxes but it does not reflect the extra regional taxes paid by NoVa and Hampton.

Leave a Reply