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Thursday
Sep052013

Rational Response #2: Inventory

Most cities of any appreciable size have a capital improvements plan (CIP). With a veneer of credibility often provided by professional consultation and/or some limited public input, the CIP purports to outline the spending priorities of the community. A typical CIP identifies five years' worth of projects with a ranking that denotes their order of priority. It all looks and feels very professional.

Unfortunately, the typical CIP is nothing more than a wish list, one that is destined to get a city deeper into the Ponzi scheme without some serious inquiry.

In a legal sense, a city is an incorporated municipality. Like any other corporation, it has assets and liabilities that should be reflected on a balance sheet. It also has cash flow, which is the net of the amount of money coming and going each day. Many an otherwise successful business has gone bankrupt by not understanding the difference between their cash flow and their balance sheet.

Local governments have annual budgets that run into the hundreds of millions. They manage assets worth billions. And they have dependent partners -- property owners -- that control hundreds of billions of dollars in assets. But shockingly, despite their critical nature, local governments have no accounting of their long term liabilities.

Doubt me? Here's some simple questions for any local government to answer. See if yours can pass.

Streets

  • How many square feet of street do you have?
  • How many square feet of sidewalk do you have?
  • How many lineal feet of curb and gutter do you have?
  • How many storm sewer manholes and intakes do you have?
  • How many lineal feet of storm sewer do you have?
  • What is the condition of each of these components?
  • When will each need to be repaired?
  • What is the projected cost of that repair? 
  • What is the revenue stream that will cover that laibility?

Water System

  • How many feet of water pipe do you have? How many valves? How many pumps? How many meters? How many water towers and storage tanks?
  • What is the condition of these water system assets?
  • When will each component need to be repaired?
  • What is the projected cost of that repair?
  • What is the revenue stream to cover that liability?
  • How large is the water treatment facility? How much additional capacity does it have?
  • What is the current condition of the water treatment facility?
  • What anticipated expenses are necessary to keep the water treatment facility running in the coming decades?
  • What are the range of unanticipated expenses given present operating conditions?
  • Given current growth rates, when would expansion of the system be necessary? What would the approximate cost of that expansion be?
  • What is the revenue stream that is expected to fund the ongoing maintenance?
  • What is the revenue stream that is expected to fund system expansion?

We can go on and look at the sanitary sewer system, public parks and public buildings in this same way.

These are basic questions any well run organization should be able to answer without too much problem. The answers won't always be precise -- they never are when you are looking into the future -- but there needs to be a general sense of where we're at. A balance of assets and obligations.

Many times in my career I've seen conscientous city council members presented with a plan to do some type of expansion to the system. As part of deciding whether or not to go forward with it, they'll ask some of these basic questions. There's never a satisfactory answer, one that gives confidence that we know what we're doing. At best, the council member can get the city to perform a "facilities study" to get some of these answers. 

Facilities study? Seriously? Maintaining a running inventory of your assets and obligations is a basic part of operating and maintaining a system. If you have to do a facilities study to find out what facilities you have, you have a total mess.

That means most local governments are a total mess because few have even a basic inventory, let alone maintain a record of present condition, anticipated future expenses and corresponding revenue stream. Yet, how can any city staff member recommend, or any public official approve, for the incorporated municipality they serve to take on additional obligations when there is no basic accounting of current obligations?

Let's look at another local government obligation: pension funds. Imagine that a pension fund did no accounting of the assets it had, had no projection for future demands, had no understanding of its revenue stream and how that matched up with liabilities, but just simply looked at the money coming in each year and the money going out each year. If the money coming in exceeded the money going out, well then reduce the pension contribution because the fund obviously is bringing in too much money.

That's insanity! No pension fund could operate this way and we all understand that. We need to also see that cities cannot continue to operate this way either. It's simply not responsible.

All local governments need a thorough accounting of their assets, their liabilities, all of their future obligations and the corresponding revenue stream for each. This is a matter of day-to-day operations for any competent department head. It is the bare minimum obligation any local government has to its residents.

If you want to be a Strong Town, you have to actually measure whether you are. Do an inventory. The results will shock you.

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Reader Comments (3)

Add "managing the long-term effects of these practices on city, state and regional environmental health" and I am all about this list.

September 5, 2013 | Unregistered CommenterSophia Katt

Not sure how many articles are going to be in this series, but a 3-parter could be branded as "Stop, Look & Listen." Good read so far ..

September 6, 2013 | Unregistered CommenterGary Dickens

This summer I sat down to write a list of Rational Responses. In about five minutes I came up with 52 of them. This will go on for quite some time -- there is a lot of work to do.

September 6, 2013 | Registered CommenterCharles Marohn
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