GASB 34: Penalty or Panacea?
The Finance Director:
The Finance Director will make every effort to comply with GASB 34 so that the
financial, or bond, rating of the organization does not suffer.
In so doing they will understand that the capital infrastructure assets are reported on
using full accrual basis, as required by GASB 34. The Finance Director will understand
the objective of the new report will be better accountability and information to decision-
makers. They will also organize the report properly. The statements will be government
(agency) wide; they will contain explanatory notes, including analysis of significant
difference between the original and final amended budget; and they will describe capital
asset and long-term debt activities.
The new reports will not include information on internal service funds, nor include double
counting and will eliminate internal balances.
Typically Finance Directors will favor reporting on capital assets using the depreciation
method, by using the cost minus depreciation over the useful life. This decision can be
for several reasons, including it is ‚easier™, all the data to create the report appears to be
at hand, and the Finance Director does not have any way to measure an infrastructure
asset™s condition or have knowledge of what assets have had their condition improved
with the addition of maintenance.
The City Engineer
For local units of government, the City Engineer is a key player in GASB 34. Generally
the planning, design, construction, maintenance functions and requisite funding for
these assets are within the scope of responsibility of the City Engineer. These assets
include roads, bridges, traffic appurtenances, waterlines, sanitary and storm sewers, etc.
Management of these facilities varies by agency. Some agencies are organized by
functional area; some are by asset; and some are a combination. Some of these
agencies work closely together; some of these are separate fiefdoms fighting internally
within the department for funds either from the City Engineer or directly from elected
public officials.
Some agencies have implemented asset management systems to assist them in
managing their individual pieces of infrastructure. Other agencies manage assets by the
‚seat-of-the-pants™ method, where individuals in the field subjectively make construction
or maintenance decisions. Most of those subjective decisions are not tracked either
financially or locationally.
Asset management systems have come into play with the spread of the computer in
Engineering departments. Initially organizations created an inventory recording when an
asset was built, its cost, location, material, size, etc. These were developed for road
systems, then traffic sign systems, then bridges, etc. More recently they have spread to
water systems and to sanitary and storm sewer networks. Over time organizations
refined the development of these systems by adding condition rating to the various
assets.
The American Public Works Association (APWA) developed a standardized road condition
rating system, from 0 (poor) to 100 (excellent), which could be used by an agency to
determine a numerical condition of a road. More importantly research over time has
shown that roads did not degrade linearly, but instead parabolically. A road stays in
good condition for the first 10-15 years, then degrades much faster over the next 5-10
years.
This had several important ramifications. Road asset managers could ‚rate™ a road
objectively and repeatably, taking opinion out of the equation. The objective number
could be used to determine a remediation treatment; from seal coat (at $1 per unit), to
mill/overlay (at $4-7 per unit), to complete reconstruction (at $28 per unit). In addition
by seal coating in the first 7 years, for example, the numerical condition of a road could
be improved at relatively little cost extending the life, and lowering the long-term cost of
the road. This process, also used in value engineering, can be repeated to extend the life
of roads from 30 years to 60 years.
Managers are also starting to understand that they can use their new systems to make
the infrastructure value and needs more understandable to policy makers and the public.
For the first time they are starting to get their arms around the total replacement value
of their infrastructure and the yearly maintenance cost.
The net result of this approach is a rational, professional approach to managing road
assets. This automated technique has come to be called ‚asset management™ and has
spread to bridges, traffic signs, and most other infrastructure assets.
In history, some of the greatest inventions of mankind have been laboratory mistakes.
Ironically, the GASB 34 financial reporting requirement for infrastructure by Finance
Directors has been enacted at approximately the same time that the stewards of the
infrastructure have independently started using asset management systems.
As stated earlier, GASB 34 has two compliance methods: the depreciation method and
the modified method. The former appears to be easier to implement, but has no residual
value to the City Engineer. The latter has large residual value to the City Engineer, but
appears to be harder to implement.
The irony is that at least two of the stars appear to be properly aligned in the
infrastructure sky. At the same time that the GASB 34 modified method is being
recommended as good business practice in one part of the organization, the technique
to comply with the method is being implemented in another part of the organization.
But for the complete synergy of the equation to come into place, the third leg of the
stool needs to be inplace: the GIS Manager.
