Could Life-Cycle Budgeting Be the Answer to America's Financial Challenges?

By

Published April 25, 2011

| FoxNews.com

The dire state of finances in many municipalities and states is making it difficult for leaders to invest in critically needed infrastructure repairs, improvements and modernizations. According to the American Society of Civil Engineers (ASCE), 44 percent of Pennsylvania’s major roads are in poor or mediocre condition. Worse, half of our state’s bridges are structurally deficient or functionally obsolete.

Consequently, many policymakers are considering alternatives to traditional government budgeting approaches.

One alternative gaining popularity is life-cycle budgeting, which recognizes the entire cost of a project before approval including: research, design, development, completion, and dissolution of the project.

Failure to understand the life-cycle costs of infrastructure investments may, in fact, be fatal to the finances of our government and wreak havoc on discretionary spending during difficult economic times. All too often, initial project estimates are wrought with cost overruns that emerge too late into the project while legislators and executive branches have no discretionary funds left to allocate. There are countless recent examples of this scenario playing out, with the most infamous case being the New Jersey ARC Tunnel that Governor Chris Christie had to cancel due to lack of clarity on the long-term project costs.

Life-cycle budgeting allows officials charged with designing and building major infrastructure and building projects to identify the value of the project at inception. By looking at the long-term costs before the project is even begun, officials can design a building or a road with an eye towards eliminating waste at every step of the process.

Furthermore, new research from the Massachusetts Institute of Technology (MIT) is making it possible to sharpen the focus of this life-cycle approach like never before. When we think about what our roads, highways, and buildings “cost” we tend to operate with a fairly limited conception of process. We anticipate what it costs to build, add in some of what it costs to keep the structures adequately running, and build-in costs to demolish or replace. Yet too often, we ignore the substantial costs associated with the overwhelming majority of the service life period for these structures – the decades-long period when they are actually being used.

This period – known as the operational or “use phase” – represents the least appreciated and most important calculation of life-cycle costs. From an accounting perspective, when you run a business, you don’t simply calculate start-up costs. The costs incurred during the day-to-day operations – heating, lighting, personnel costs – are substantial. A smart bookkeeper would focus on these routine-operating expenses to find ways to cut costs and improve efficiency.

This is exactly what we should be expecting from the officials who design, plan, and implement our nation’s network of roads, highways, and public buildings. MIT’s research is identifying ways in which we can dramatically reduce the operational costs of our infrastructure with an unprecedented emphasis on the use phase of buildings and pavements. 

With all of the conversations surrounding budget deals and debt ceilings, it appears that we are finally getting serious about grappling with our financial challenges on a systemic level.

In this spirit, it’s time we captured some of the “low-hanging fruit” to increase the efficiency and cost-effectiveness of our public expenditures. Life-cycle budgeting for our infrastructure and public building projects represents one such opportunity and – if implemented – could help create substantial savings nationwide.

Frank Ryan, CPA specializes in corporate restructuring. He is on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com

URL

http://www.foxnews.com/opinion/2011/04/25/life-cycle-budgeting-answer-americas-financial-challenges/