Friday, December 03, 2010

A Way Out: Life Cycle Budgeting

Okay, America, listen up.  It's time we had a talk about your spending habits.  But I don't want to bore you with all the usual boring talk about deficits this and percentage of GDP that...there's a graphic to the left for that.

I want to talk about a way to fix it.  For good.


Life Cycle Budgeting.


We need to start looking at the real price of things our government is purchasing with our tax dollars and the only way to do that is to look at the total cost of the acquisition.  Government must consider the full life cycle cost of any investment it makes.

Let's take infrastructure, for example, since that is a topic near and dear to everybody's heart since it is such a sexy topic.

"Infrastructure.  Sooner or later, it matters." -- an old IBM slogan

Let's start with the "non-partisan" Congressional Budget Office (Page 22 of the document; page 30 of the PDF):
One way to accomplish [Reducing the Cost of Providing Infrastructure] is to encourage funding of high-value projects through more systematic use of rigorous analysis, and conversely, to minimize funding of potentially low-value projects—for example, by careful scrutiny of projects initiated by the Congress, which represent significant portions of federal investments in infrastructure.
Allow me to translate: Government has to look not just at how much something costs to build, but also how much it costs to operate and maintain decades into the future.

In the case of drinking water and wastewater projects, this type of analysis can also lead to less wear and tear thus extending the life of equipment, eliminating redundant systems, reducing the cost of operations and maintenance as much as 40 percent, and improving systems’ reliability by roughly 70%.  Source: CBO study)

A fundamental lack of transparency in infrastructure spending is creating budgetary uncertainty which has trickled down to the state level. This kind of short-sighted infrastructure budgeting is jeopardizing economic growth all over the country.

  • In New Jersey, Governor Chris Christie canceled a tunnel project because he discovered the full costs of the project would exceed projections by as much as $5 billion. While the tunnel would have eased traffic congestion among commuters in the nation’s most densely populated state, the cost was just too high and the state could afford the project.

  • In California, a study conducted by the Sacramento Area Council of Governments found that routine repairs cost roughly $20,000 per mile of road per year. (Source: bottom of page 3) When roads break down, reconstruction is needed, costing up to $2 million per mile per year. (Source: top of page 4) When maintenance costs are not accounted for the from the start of the project, repairs aren’t factored in to the budget process and ultimately it costs more for major reconstruction of the road.  The longer those repairs are pushed back, the more it costs and the conditions of the road deteriorate faster.

  • The budget process is completely broken on both the state and federal levels.  Here is an example of federal spending gone out of control:

  • TSA Hiring Project Runs 700% Over Budget
    In this Washington Post article, we learn that the TSA issued a $104 million contract to hire airport screeners in 2002. By 2006, the cost had skyrocketed almost 700% to $741 million.
    “TSA officials then moved forward with no planning ‘or adequate cost control,’ the report said, and they ignored warnings from contractor NCS Pearson Inc. that project costs had far exceeded the budget approved by Congress.” When asked why the initial cost projections were so inaccurate, the TSA program administer who managed the program said, “That $1 billion was a number out of the air, frankly.” He continued, “All I got from the DOT was, ‘When you hit $1 billion, come back to us.’”
    With insightful analysis like this put into estimating the true costs of the project, no one should really be all that surprised that the TSA went over budget.

  • The bottom line...
    Times are tough and in this climate of budget shortfalls and huge deficits, we simply can not afford to continue investing in projects without taking the necessary due diligence in studying the long term costs.  How many times have we heard that infrastructure projects create jobs?  While it is true that these projects can create short-term employment, the true cost of these jobs are destroying any opportunity for communities to get our from the heavy burden of massive debt.  Taking the short-term view is the default position for politicians since most are concerned with their next election and not actually focused on developing a long-term solution to the problems. 
    Citizens must step up and hold these politicians accountable.  Opposition must raised against any infrastructure project which does not include a fully transparent, life-cycle analysis of the true and full costs of the project.  As taxpayers, we should demand accountability of our elected officials to make sure that the real costs of these projects are known, that budgets are appropriately considered, and informed decisions are made regarding the responsible investment of tax dollars.

     We can do better. We can get the facts. We can budget projects with transparency.
    Our future depends on it...