Understanding the Cost Equity Removal

​All around the country municipalities are faced with a difficult question.
“How can we provide the best possible service to our community with the limited budget we have?”

When it comes to the pavement network of your city, it should be seen as the most valuable visible asset that the city maintains. Because these assets are constantly under heavy use, municipalities must always be coming up with new strategies and methods for maintaining them. In some cases, street maintenance can be deferred without significantly increasing the future costs associated with needed repairs. In other cases, deferring a street can result in a tremendous increase to the cost of repairs. In pavement management, this concept is referred to as, “equity removal”. Without a sufficient grasp of this important concept, cities risk losing millions of dollars in value from their pavement network.

Managing Pavement Equity

In a perfect world, a city would fix every defect in their entire pavement network. This is an unattainable goal, but it is important to understand the cost of achieving this goal in order to calculate the equity removal. This cost is known as a “Fix All Budget”. Using the Fix All budget, pavement management software is able to calculate the cost per PCI (Pavement Condition Index) point. Pavement managers use a PCI number system to rate the overall condition of a road.

When a pavement manager knows the cost per PCI point they can calculate an accurate estimate of how much value is lost or gained from the pavement network given a particular budget scenario.  These budgets are then compared to something called the “Steady State PCI” budget.  A Steady State PCI budget is the funding necessary to maintain the city’s current average PCI score.

The condition of a roadway network may be equated to equity in a depreciating asset. Regular payments to that asset must be made in order to maintain the equity at a constant level. Should those payments fall short, the equity must eventually be replaced through a large influx of capital in order to make the investment whole again. Roadway networks are no different. Long term underfunding of rehabilitation and maintenance is the direct equivalent of removing equity from an asset – eventually it must be repaid through total reconstruction.

The following table compares the real cost of the various budgets against the Do Nothing and Steady State options for an example municipality:

As you can see from the table, the Do Nothing budget after 5 years results in an additional $24 million need to recover the average PCI to the starting level of 63. Try telling a group of taxpayers that improper pavement maintenance and funding cost them $24 million in just 5 years. I’ll just watch from a safe distance…