Life-cycle Budgeting Makes Budget Sense

Budgeting in Washington D.C. is neither pretty, or at times, easy to understand.  Life-cycle budgeting is a lesser known budgeting term that more people should know about.  It basically means that governments must consider the full life cycle cost of any investment it makes.  Those costs don’t stop at just the cost to build, but also the cost to maintain and operate that project decades into the future.

This concept is critically important to infrastructure projects because costs can be “hidden” by only accounting for construction costs without consideration of maintenance costs.  A March 9, 2011 editorial in the Washington Times noted that “For example, if a road using pavement material A will cost $100 million to build but $3 million per year to repair, the 30-year life-cycle cost would be $190 million. If the same road using pavement material B would cost $120 million to build but just $1 million annually to maintain, the 30-year cost would be $150 million. Either way, the budget writers would need to account not just for the $100 million, but for the full, higher amount. In this case, option B is more expensive on the front end but represents a better long-term deal.“

States have had to deal with this concept for years because they can’t print money and they have to be extra careful in planning projects.  According to Joann Butler in the Daily Caller “You may recall that last year, New Jersey governor Chris Christie cancelled plans for a commuter rail tunnel to Manhattan over concerns that his state would have to pay for additional costs, ranging from $2.5 to $5 billion.”  This was a prime example of states knowing full well the fiscal implications of not using life cycle budgeting.

Even government number crunchers agree with the premise.  According to the non-partisan Congressional Budget Office, “In constructing new infrastructure, asset management involves evaluating total life-cycle costs—both the initial capital costs and the subsequent costs for operation, maintenance, and disposal— to ensure not only that projects are prioritized appropriately, but also that they are built cost-effectively.”

It is time for the federal government to use life-cycle budgeting because this gives a clearer picture of the cost of a project.  It prevents the government from hiding future costs of projects.  Taxpayers understand that the government has to spend money on infrastructure projects.  What taxpayers want is truth and an honest accounting of the costs and life-cycle budgeting is the first step in that process.