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GASB 34…Are You Prepared?
Tim M. Sosinski
EMA, Inc., 1970 Oakcrest Ave
Suite 100, St. Paul, MN 55113-2624
Tim M. Sosinski
EMA, Inc., 1970 Oakcrest Ave
Suite 100, St. Paul, MN 55113-2624
“Without a doubt, GASB Statement No. 34 represents one of the most important changes in the history of financial reporting and accounting for local governments.”
The Governmental Accounting Standards Board (GASB) has issued new guidelines that will fundamentally change the way local government’s cities and counties, including public works and utilities, report their finances. For the first time, financial statements will need to contain more detailed information about the full cost of providing services, including the infrastructure assets of water and sewer systems, roads, bridges, storm water systems, and tunnels.
The figure following presents the cycle for describing the key steps and dependencies associated with infrastructure asset management and reporting under GASB Statement No. 34. Implementing GASB 34 may be a significant effort on the part of local government. Those who succeed will do so only by proper advanced planning. The challenge is to develop a practical set of practices and procedures to guide the efforts to develop consistent documentation about the value of the infrastructure assets and what is being done to ensure that they are being properly maintained.
Following the inventory and assessment process, the team responsible for the Consolidated Annual Financial Report (CAFR) will determine whether the depreciation approach (for defining historical costs) or the modified approach (for calculating upkeep requirements) should be used to comply with GASB 34. The results from the selected approach will be published and an annual CAFR work plan should be prepared and carried out. The two approaches are discussed more fully in Illustration 1.1.
Illustration 1. 1 - Infrastructure Identification and Valuation Cycle
During the years leading up to full implementation and compliance with GASB 34, the costs of inventories, condition assessments, valuation, and supporting technical and human resources will have budgetary consequences for local governments, which they should plan accordingly.
Background
Local governments in the U.S. invest over a billion dollars annually in construction, improvement and rehabilitation of capital assets, including water and sewer systems, bridges, roads. These expenditures are significant, representing more than one out of every ten dollars spent by those agencies. Borrowing, that is, selling municipal bonds and using the proceeds to pay for construction of the infrastructure, finances the majority of infrastructure investments.
The need for public accountability arises when such funds are spent and when current and future generations are committed to repay such debts. The public wants to know how much their city spends on infrastructure construction and how much they borrow to finance it. The public also wants to know if city or county officials subsequently are caring for the infrastructure they have built with public resources.
Although the need for information about infrastructure is clearly shown, the primary instruments for demonstrating fiscal accountability—the government’s annual financial statements—currently do not support accounting. The current accounting method for preparing local government financial statements focuses on short-term financial resources like cash and investments, which leaves infrastructure off the balance sheet and does not including any charge (debit) on the income statement for the cost of using those infrastructure assets to provide services.
The new reporting rules of GASB 34 address many of the shortcomings of current financial reporting. Under the new rules, local governments will continue to provide information for major funds. However, they will also provide government-wide statements using full accrual accounting so that all revenues and all expenses in a fiscal year are reported. That includes all measurable assets and liabilities, short-term and long-term, financial and capital, whether they support local government activities or fee-for-service activities. The government-wide statements will look at government from an economic perspective, which views a city or a county as a single economic unit, not just a collection of separate funds.
The government-wide statements will give users the information they need to answer these questions:
- Is the city paying for police patrols with money collected from utility customers?
- How much does the city spend to maintain treatment plants, bridges, etc.?
- What is the full cost of the services provided by the county?
- Does the city have sufficient resources to meet future obligations?
- Does the county spend more than it takes in each year, or is it running a surplus?
- Is the city’s overall debt increasing, placing a burden on future taxpayers?
- Are the city's parks and recreational facilities self-supporting or do they require funding from general taxes?
Financial Accounting and Reporting
In the next few years these local governments will begin to produce new financial statements that include infrastructure and other assets with long service lives. For the first time, cities and counties will show in their financial statements all of the resources available to them for the provision of public services. Those financial statements will also reflect the cost of providing government services more completely by encompassing the capital assets employed to support service delivery.
While most local governments currently use this type of accounting for fee-for-service enterprises like water and sewer utilities, they do not do so for the majority of their services. Many private sector firms and nonprofit organizations, as well as many other governments around the world, already include their capital assets and the cost of using them in their financial statements. This accounting method spreads the purchase or construction price of their long-lived assets over the years those assets are expected to be used, often in equal amounts.
For example, currently if a public water utility buys some water pumps, the purchase price of $1 million would be divided by the 10 years the pumps are expected to last, to arrive at an annual amount of $100,000. In each of those 10 years, then, the utility’s income statement would include a $100,000 charge, commonly called "depreciation expense." On the other hand, a city that builds a $10 million bridge would show the entire $10 million expenditure in the year it was built, and no charges in subsequent years as the bridge provides transportation services to the public.
Cities and counties can take several approaches toward developing systems for complying with GASB 34. Options run the gamut: local governments might rewrite code, install middleware, install new financial management software, modify current software or simply modify spreadsheets. One approach is to simply install a PC and software to run reports annually for legislators. But if agencies want to use detailed financial information frequently as an integral management tool, they should consider using GASB 34 as an opportunity to develop both advanced technical solutions (i.e., geographic information systems, maintenance management systems), and improve infrastructure asset maintenance practices.
Two Approaches
GASB 34 provides for two ways in which local governments may analyze and report the value of infrastructure assets. The “depreciation approach” is analogous to the manner in which private businesses determine and report the value of assets. It is based ascertaining historical cost, determining a useful life of the asset, then reducing the initial value of the asset over the useful life in accordance with an accepted depreciation formula.
The second, alternative, approach is potentially more useful for many local governments. This approach, the “modified approach,” aims at documenting the preservation of the asset. The modified approach does not require ascertaining historical cost. For this reason, it may be a useful approach for older infrastructure elements for which records regarding historical cost may not be as solid as desirable.
Even for infrastructure elements for which such records are available, the modified approach may make more sense. Since it focuses on preservation, the appearance of exhausting the asset is avoided. The depreciation approach implies that at the end the infrastructure element is somehow used up. On the other hand, the preservation approach implies that some types of infrastructure are immortal with timely, periodic investments in them.
Neither implication is completely true, of course. Perhaps the major benefit of the modified approach flows to the community. For those in the community concerned about husbanding infrastructure assets, the comparison of required upkeep dollars to actual upkeep dollars can be telling.
Infrastructure Asset Maintenance Practices
Traditionally during a city’s program budget development process, predictive and preventive maintenance programs for infrastructure assets have not done well in competing for fiscal resources with reactive forms of maintenance; capital improvements; or other governmental programs such as public safety, education, or social services. GASB 34 provides local governments the opportunity to emphasize the strategic importance of predictive and preventative maintenance practices. As a result, there will be policy implications of GASB’s 34 infrastructure reporting requirements as they relate to budgeting and allocating fiscal resources between infrastructure construction and maintenance practices, as well as between infrastructure and non-infrastructure programs.
As local governments begin looking at implementing or improving maintenance practices, it will likely require them to make a major shift from viewing maintenance as a business expense, to viewing it as a revenue center. This means moving from being reactive, viewing infrastructure asset maintenance as an expense, to proactive, seeing maintenance as a value-added effort, including innovation as well as rehabilitation. A number of key initiatives are essential for implementing maintenance practices, as well as complying with GASB 34. These include:
- Commitment to infrastructure asset management requires leadership at the highest level. It is essential because any successful change as a result of this effort must be led from the top. There must be an internal champion, perceived to be high enough in organization to make the rest of the employees believe management is committed to complying with GASB 34.
- All infrastructure asset related work must be recorded on work orders, all non-emergency work must be entered in advance of assignment, emergencies must be entered as soon as possible, job plans must be created, and work orders must be closed out.
- Formal advance infrastructure asset management planning must be used for all nonemergency work, always in advance of assignment; job plans must include materials, labor, and safety information.
- Use performance indicators is the only way to track progress of infrastructure asset maintenance. Metrics are essential to obtain data for knowledgeable decisions, provide feedback on maintenance activity, form the justification for staffing changes, and provide improved forecasting through the analysis and trending of data.
- Planned maintenance and predictive maintenance program development are essential, as these are some of the strongest tools, providing high payback on infrastructure asset investment. They can lead to maintenance cost savings of up to 40 percent, increased equipment reliability, and extended equipment life, when linked to equipment criticality and actual equipment condition to determine the appropriate level of service.
- Inventory control of the infrastructure asset being maintained must be integrated with maintenance through a Maintenance Management System (MMS). All transactions must be recorded in the MMS to support overall tracking of the infrastructure assets.
Supporting Infrastructure Asset Management Technology
Beyond the challenges of compliance, GASB 34 has the potential to focus greater attention by legislators, budget analysis, infrastructure asset managers, and the investment community on infrastructure maintenance and preservation. As a result of cities and counties having to become more accountable for the physical condition of their roads, bridges, water systems, and other major types of infrastructures, they will likely require the need for infrastructure asset management tools.
Infrastructure asset management solutions include a family of software applications centered on the maintenance and management of assets such as roads, water and sewer systems, and bridges. These applications are often designed, implemented and integrated together to effectively support improved infrastructure asset maintenance practices.
Infrastructure asset management begins with compiling baseline inventories, which describe the local government’s physical and service characteristics. In addition to this simple inventory of infrastructure asset characteristics, additional data such as inventory, condition, usage, performance, location, and maintenance history will be collected using a combination of Geographic Information Systems (GIS) and MMS.
Most infrastructure asset maintenance work, for example, requires a site inspection to determine the details of the work. The map data along with infrastructure asset data for the work area could be downloaded to the field computer. At the job site, a work order sketch could be prepared on top of the map data or engineering drawings. Depending on the complexity of the work order, the sketch can simply be printed and attached as part of the work order package of the MMS. Alternatively, the collected data and sketch could be uploaded to the host for further quality assurance and processing.
There are several key functions in which the integration of GIS and MMS can support in infrastructure asset maintenance and management activities. These include:
- As described above, the linking of the work order capabilities of the MMS to the GIS will allow work orders to be geographically referenced. Location plays a key role in the scheduling and tracking of maintenance work orders. The capability to print out a map and attach engineering drawings to the work order can provide valuable information to the crews. GIS technology also assists crews in quickly locating and maintaining data on a particular feature item requiring maintenance in the field.
- Maintenance history information generated will be valuable data for use in determining budgets, planning capital improvements, and developing preventive/predictive maintenance activities. The GIS will facilitate collecting, retrieving and maintaining this information for analysis by identifying specific infrastructure assets, locations, or attributes. Once maintenance history and infrastructure asset inventory data is available through the GIS, it can also be reviewed in conjunction with other data sets found in the GIS.
- Preventive maintenance planning activities for roads are normally planned by either geographic area or maintenance history. Retrieving specific infrastructure and maintenance information about a particular segment or fitting of the sewer and water systems within a particular supply area requires spatial reference to those infrastructure assets. This will assist in more effective preventive maintenance planning and scheduling.
Who GASB 34 Includes and Compliance Timeline
The GASB has included many provisions in its new financial reporting guidelines to make it easier for governments to comply. For instance, all governments have a minimum of two years to get ready to publish the new financial statements, and smaller governments have as many as two additional years to prepare. (The largest governments must prepare the new statements for fiscal years beginning after June 15, 2001.) Cities and counties also have an additional four years to meet the new requirements for reporting infrastructure assets.
The GASB has addressed concerns about the cost and difficulty of establishing a historical cost for existing infrastructure items by requiring that local governments initially report only the most significant assets, and then only those built within the last 25 years. Local governments also will be allowed to use certain methods to produce an estimated historical cost.
Regarding smaller cities and counties, the GASB has exempted those agencies with less than $10 million in total annual revenues (in their first fiscal year ending after June 30, 1999) from reporting infrastructure information retroactively. Although the GASB will encourage them to report infrastructure assets currently in place, these governments (which in the early 1990s comprised approximately two-thirds of the 84,000 governmental entities in the U.S.) will only be required to report new infrastructure prospectively as it is acquired, constructed, or improved.
Getting Prepared
Local governments need to understand Statement No. 34’s requirements as soon as possible. Cities and counties should begin developing strategies that consider the following actions:
Financial Management
- Review existing depreciation practices for their applicability on infrastructure assets
- Determine if existing system support depreciation of assets
- Modify existing accounting practices for reporting on asset infrastructure
- Enhance or modify existing financial management system
- Assess extent and condition of existing infrastructure asset records
- Determine if existing system supports inventory documentation, valuation and reporting
- Develop policies and procedures on inventory documentation, valuation and reporting
- Institute inventory tracking and valuation processes
- Develop asset condition assessment and maintenance practices
- Coordinate resources to performing an asset condition assessment
- Define performance measures for asset maintenance
- Develop integrated GIS and MMS solutions to support asset management
Implementation of GASB 34 provides local governments the opportunity to build on these earlier efforts and enables further development of practices and procedures for reporting and maintaining infrastructure assets over the long term.