Capital is Often Poorly Maintained
Staff Paper Prepared for the President's Commission to Study Capital Budgeting

June 19, 1998

What is the evidence about maintenance of capital assets and what are the problems associated with the failure to maintain capital assets?


Maintenance of capital assets can have two very different meanings. In financial accounting, costs incurred to maintain a given level of services should be expensed (i.e., considered an operating cost). This can include, for example, routine maintenance of buildings, such as painting, or minor repairs of the electrical, plumbing, or other systems.

In a different sense, maintenance of infrastructure assets can involve major capital expenditures. For example, maintaining current highway conditions, which the Congressional Budget Office (1) has reviewed, can mean reconstruction of the interstate highway system as it deteriorates, including reconstruction of bridges. This spending would be capitalized, not expensed.


Information.--The General Accounting Office has issued two recent reports(2) that focus on reporting requirements regarding deferred maintenance. Both reports note a comment by the Advisory Commission on Intergovernmental Relations (3) that "maintenance of existing infrastructure often does not receive adequate attention, especially in times of tight budgets, and that deferred maintenance can result in poor quality public facilities, reduced public safety, higher subsequent repair costs, and poor service to the public."

GAO notes that the validity of past estimates of spending on maintenance has been questioned. However, as the result of recent accounting standards recommended by the Federal Accounting Standards Advisory Board (FASAB), agencies are now required to disclose spending on deferred maintenance in agency financial statements beginning for fiscal years after September 30, 1997, for all property, plant, and equipment (PP&E). Some agencies report that they have had difficulty in reporting deferred maintenance because they have been unable to report PP&E reliably.

Economic returns. The Congressional Budget Office has estimated high economic returns to maintaining current highway conditions. It found that real rates of return could be as high as 30-40 percent, much higher than the returns to adding more capacity.

Role in planning. The role of maintenance is important in the Capital Programming Guide. Maintenance costs are an important element in life-cycle costs, which are used in the planning process and in benefit-cost analysis to help determine whether an asset is justified. In addition, in the management-in-use phase, maintenance is important to prolonging the life of an asset.

Bias. Funding for maintenance is often reduced when economic conditions deteriorate, because it is assumed that facilities will continue to function and such spending can be deferred. In addition, there is often little political benefit to following maintenance schedules compared to "ribbon cutting" associated with completion of a new facility.

Conclusion. Because of the lack of basic government wide information, it is difficult to assess precisely the governmentwide impact of deferred maintenance. Selected individual programs and projects may recognize the importance of adhering to regular maintenance schedules.


Option I: Continue current procedures

Continue to allow agencies to assess deferred maintenance as they are now, on a decentralized basis according to their own priorities. There is little or no evidence that this is a governmentwide problem. Efforts to change would create burdensome reporting and data that are probably not reliable. The benefits of change would probably not exceed the cost.

Option II: Encourage the collection of better information

Encourage better information on planned maintenance. Assessments of maintenance costs are an important element in assessing life-cycle costs, completing benefit-cost analysis, and making judgments on whether resources should be used to acquire and asset and, if so, which asset. Better analysis of maintenance costs should improve planning.

Encourage better information on actual maintenance. Current efforts underway related to FASAB requirements will result in better information regarding deferred maintenance for certain Federal assets (PP&E). As this and other information become available, it should improve estimates of the value of capital assets, improve agency capital plans, and result in better planning, budgeting, acquisition, and management of capital assets. An evaluation of maintenance costs can help determine whether the asset should be continued in use or discarded. Efforts at better information should be encouraged.

Encourage better information on planned vs. actual maintenance. Once an asset is acquired and in use, information should be developed comparing planned maintenance developed for determining whether to acquire the asset, and actual maintenance. This information can improve life-cycle cost estimates and the planning process.

Option III: Review the role of grant programs regarding maintenance of assets

Review grant programs to State and local governments for capital purchases to assess whether the grants encourage misuse of resources by favoring capital acquisitions over maintenance (e.g., purchase of new buses vs. maintenance of existing fleets). Taking into consideration the fungibility of grant funds and other potential problems, redesign grant programs, if feasible, to encourage the most efficient use of resources.

1.  Congressional Budget Office, How Federal Spending for Infrastructure and Other Public Investments Affects the Economy(July 1991), Table 3, page 39.

2.  GAO, "Reporting Requirements and Identified Issues," (GAO/AIMD-97-103R, May 23, 1997) and "Deferred Maintenance Reporting: Challenges to Implementation," (GAO/AIMD-98-42; January 1998).

3.  U.S. Advisory Commission on Intergovernmental Relation, "High Performance Public Works: A New Federal Infrastructure investment Strategy for America (SR-16, November 1993).

President's Commission to Study Capital Budgeting

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