Association for Public Policy Analysis & Management

States and municipalities report the value of their infrastructure assets one of two ways. The first is traditional depreciation, where infrastructure assets lose value according to a pre-defined schedule. The second method - known as the "modified approach" - focuses on capital maintenance. With this approach a government identifies the condition or quality at which it wants to preserve a piece of infrastructure, and then reports the spending needed to maintain that infrastructure at that condition. Proponents of the modified approach believe it is much more effective than depreciation at showing how governments maintain - or do not maintain - their critical infrastructure. Critics argue it's costly to implement and adds little value to government financial reports. In this paper we test the efficacy of the modified approach. Specifically, we compare the pricing uncertainty of bonds issued by states that use the modified approach to bonds from states that use traditional depreciation. We measure pricing uncertainty with a novel dataset of more than 25,000 secondary market bond auctions that took place from August 2013 through December 2014. The distance between the lowest and highest bid prices in these auctions - known as the "bid spread" - is a good proxy for investor disagreement about a bond's fundamental value. The results suggest the modified approach reduces investor uncertainty. In particular, bid spreads on auctions of bonds from states that use the modified approach are around 24% lower than spreads on states that do not use the modified approach. These findings have important implications for several ongoing policy debates about the breadth and scope of state and local government financial reporting.