The recent and dramatic pile of rubble from the condominium tower in Miami provides gruesome evidence of the short-term mentality that haunts modern society. It is of a piece with the 2007 collapse of the I-35 highway bridge in Minneapolis, the decades of national engineering surveys showing underinvestment in maintenance and repair of our national physical infrastructure, and numerous other examples from both the public and private sectors. Even the proposed federal “infrastructure” legislation, currently being over-politicized in Washington, will only make a modest reduction in the backlog of work to be done.
The Champlain Towers Condo association (and thousands of similar groups around the country) failed charge high-enough monthly dues to prevent large “special assessments” to fund major repair/construction projects in the face of resistance from resident/owners. This is entirely comparable to the issues facing state and local governments and school districts, and the country as a whole. Private owners such as condo associations will now be forced by their insurance companies to attend to their finances to a much greater degree than previously. Unfortunately, public entities have consistently eschewed the basic principles of depreciation accounting for capital assets for decades (even if they have the ability (usually) to fund such projects with long-term bonds).
If a company builds a factory for $10M and the factory is expected to last for 40 years, then accountants will require the company to recognize that they are effectively spending $250k/year on the factory. A prudent company will store up enough cash so that when the building’s useful life is over, it will have the resources to replace it. This is called depreciation.
Depreciation as a concept actually didn’t exist until the late 19C. The surge in large-scale investments driven by the “industrial revolution” and the lengthening horizons of businesses (due to perpetual corporations and longer-lived individuals) both fed a need for financial managers to think differently about “capital” expenditures as compared with on-going operating expenses. Depreciation has long been required in tax accounting and for the audits of public companies.
However, governments don’t like to think about it. Elected officials typically have a time horizon somewhere between the length of their current term in office and the length of time they might “serve” in total. The longer the time horizon, the mistier things become and the rationalizations for “kicking the can down the road” flow more freely. The result is “deferred maintenance;” which is a nice bureaucratic term meaning “we only fix potholes when they’re large enough to swallow a bus, even if it costs us five times as much.”
This refusal to deal with the long-term costs of physical infrastructure is but one scandal of public finance; but it is matched by elected officials’ refusal to deal with accrued pension liabilities. Here, too, short-term electability means placating public sector unions with fat pension schemes, and then not worrying about how those pay-outs will be supported in a few decades. Again, governmental agencies aren’t held to the same basic accounting principles as the private sector.
The mid-20C US boom—in population, buildings, the Interstate Highway System, and economy in general—would have been the ideal time to bake in sensible policies requiring reserves for such things (i.e., depreciation accounts, fully-funding pensions and health care costs). As it is, a lot of stuff got built and now, in the 21C, those buildings are reaching the end of their useful lives and the expanding body of governmental employees is retiring.
Just as with the Champlain condo owners, the real responsibility lies not with the governing board, but with the electors. Invisible expenditures are less popular than a shiny new cultural center and we would need to expect a different breed of political candidates to bravely promise to pay for the full (life-time) costs of such investments or to propose the taxes to pay for them.
Several states have “balanced budget” constitutional requirements and a similar sort of approach would work here as well. Let’s prohibit public capital expenditures unless they’re funded for their full lifetimes. If we make such requirements part of the baseline of government operations and therefore politically invisible, we would not end up with collapsing bridges or buildings or bankrupt municipalities when the inevitable bills come due.
This is hardly a new phenomenon. There is probably a good social history research project in compiling all the adages across time and cultures which are variations of “an ounce of prevention is worth a pound of cure.”
The burden, as so much of the results of the anomalous era of Western “progress,” will fall on those now under 40. It’s a similar story with our environmental blindness. As a broad culture, we have taken deeply-embedded human traits (e.g., greed, gluttony) and leveraged them on the economic growth and technological wonders of the past 200 years. Typical adolescent behavior: “we’re gonna live forever,” or “we can do it, therefore we will do it” (but here by an entire set of societies).
Those born in the last 40 years—Gen X’ers, Millenials, Gen Z’ers, Gen Alphas (in the lingo)—will reap the whirlwind. They’ll be paying the bills for road repairs, Social Security, and storm/fire damage. They’ll have to figure out what to do when Phoenix runs out of water or the State of Illinois goes bankrupt. It will be interesting to see the political trade-offs they will make between the programs and services which we are used to receiving and covering the costs of disaster recovery (especially since insurance companies will either charge way too much for premiums or will have gone bankrupt themselves).
The same vernacular that came up with cute names for each “generation” will need to undergo some revision. Our group—Boomers—followed the WWII-era “Greatest Generation”, but we (i.e., Western society for the past 200 years) have all been marching down this path. I don’t think we’ll be so fondly remembered.
The Champlain Towers Condo association (and thousands of similar groups around the country) failed charge high-enough monthly dues to prevent large “special assessments” to fund major repair/construction projects in the face of resistance from resident/owners. This is entirely comparable to the issues facing state and local governments and school districts, and the country as a whole. Private owners such as condo associations will now be forced by their insurance companies to attend to their finances to a much greater degree than previously. Unfortunately, public entities have consistently eschewed the basic principles of depreciation accounting for capital assets for decades (even if they have the ability (usually) to fund such projects with long-term bonds).
If a company builds a factory for $10M and the factory is expected to last for 40 years, then accountants will require the company to recognize that they are effectively spending $250k/year on the factory. A prudent company will store up enough cash so that when the building’s useful life is over, it will have the resources to replace it. This is called depreciation.
Depreciation as a concept actually didn’t exist until the late 19C. The surge in large-scale investments driven by the “industrial revolution” and the lengthening horizons of businesses (due to perpetual corporations and longer-lived individuals) both fed a need for financial managers to think differently about “capital” expenditures as compared with on-going operating expenses. Depreciation has long been required in tax accounting and for the audits of public companies.
However, governments don’t like to think about it. Elected officials typically have a time horizon somewhere between the length of their current term in office and the length of time they might “serve” in total. The longer the time horizon, the mistier things become and the rationalizations for “kicking the can down the road” flow more freely. The result is “deferred maintenance;” which is a nice bureaucratic term meaning “we only fix potholes when they’re large enough to swallow a bus, even if it costs us five times as much.”
This refusal to deal with the long-term costs of physical infrastructure is but one scandal of public finance; but it is matched by elected officials’ refusal to deal with accrued pension liabilities. Here, too, short-term electability means placating public sector unions with fat pension schemes, and then not worrying about how those pay-outs will be supported in a few decades. Again, governmental agencies aren’t held to the same basic accounting principles as the private sector.
The mid-20C US boom—in population, buildings, the Interstate Highway System, and economy in general—would have been the ideal time to bake in sensible policies requiring reserves for such things (i.e., depreciation accounts, fully-funding pensions and health care costs). As it is, a lot of stuff got built and now, in the 21C, those buildings are reaching the end of their useful lives and the expanding body of governmental employees is retiring.
Just as with the Champlain condo owners, the real responsibility lies not with the governing board, but with the electors. Invisible expenditures are less popular than a shiny new cultural center and we would need to expect a different breed of political candidates to bravely promise to pay for the full (life-time) costs of such investments or to propose the taxes to pay for them.
Several states have “balanced budget” constitutional requirements and a similar sort of approach would work here as well. Let’s prohibit public capital expenditures unless they’re funded for their full lifetimes. If we make such requirements part of the baseline of government operations and therefore politically invisible, we would not end up with collapsing bridges or buildings or bankrupt municipalities when the inevitable bills come due.
This is hardly a new phenomenon. There is probably a good social history research project in compiling all the adages across time and cultures which are variations of “an ounce of prevention is worth a pound of cure.”
The burden, as so much of the results of the anomalous era of Western “progress,” will fall on those now under 40. It’s a similar story with our environmental blindness. As a broad culture, we have taken deeply-embedded human traits (e.g., greed, gluttony) and leveraged them on the economic growth and technological wonders of the past 200 years. Typical adolescent behavior: “we’re gonna live forever,” or “we can do it, therefore we will do it” (but here by an entire set of societies).
Those born in the last 40 years—Gen X’ers, Millenials, Gen Z’ers, Gen Alphas (in the lingo)—will reap the whirlwind. They’ll be paying the bills for road repairs, Social Security, and storm/fire damage. They’ll have to figure out what to do when Phoenix runs out of water or the State of Illinois goes bankrupt. It will be interesting to see the political trade-offs they will make between the programs and services which we are used to receiving and covering the costs of disaster recovery (especially since insurance companies will either charge way too much for premiums or will have gone bankrupt themselves).
The same vernacular that came up with cute names for each “generation” will need to undergo some revision. Our group—Boomers—followed the WWII-era “Greatest Generation”, but we (i.e., Western society for the past 200 years) have all been marching down this path. I don’t think we’ll be so fondly remembered.
RSS Feed