GASB 34: Penalty or Panacea?
Bradford Henry, PE URS, Senior Transportation Engineer 700 Third Street South Minneapolis, MN 55415 Phone: (612) 373-6850 Fax: (612) 373-6522 Email: brad_henry@urscorp.com Abstract GASB 34 is a new and oftentimes misunderstood mandate placed upon governmental organizations. The requirement of the mandate is for an organization to create a consolidated annual financial report to describe the value of its infrastructure. This requirement will place new burdens upon the Engineering and Finance Departments. These are two agencies that today generally speak different languages and are already stretched thin meeting the day-to-day requirements of their present jobs. The perceived dilemma GASB 34 places upon an organization is: should it supply the bare minimum to meet Finance™s needs or create an expensive new apparatus to also meet Engineering™s needs. Enter a third player: GIS, a largely untapped tool already in most organizations. The irony of GASB 34 compliance is that by using under-utilized existing systems, including GIS and asset management; and by cooperation and coordination between the Engineer, the Finance Director and the GIS manager; the organization can be managed more responsibly and GASB 34 compliance is essentially a by-product. Introduction A basic function of government is to protect the health and welfare of its constituents. To do that government has created agencies, for example Engineering departments, who build and manage infrastructure. Infrastructure includes such physical asset facilities as roads, bridges, drinking water systems, sanitary and storm water systems, dams, and in some cases electric, gas and telephone systems. Managing these assets includes budgeting, planning, designing, building and maintaining them. Governmental agencies that perform these functions include local (city), county, regional, state, and federal units of government. Because the individual assets and the units of government are large, typically these assets are broken up into smaller, more manageable units. The good news about this form of organization is that many of these separate assets are well managed. The bad news is that few managers, public officials or citizens have any idea how these assets are managed in the aggregate. Indeed few organizations have any idea of the total value of the assets that they manage inside their corporate boundary or have an objective way of measuring how well their assets are managed. Most of these organizations take great pride in their perception that they are excellent stewards of their infrastructure but most of the evidence today is subjective. Part of the reason is that individual infrastructure assets have a long life, 20-50 years, which puts them beyond the work experience of most agency employees. Part of the reason is that most infrastructure is buried out-of-sight, hence it is ‚out-of-mind™. Another portion of the reason for this is that up to this time few tools have been developed to manage and measure this stewardship. Part of the reason is that few requirements have been placed upon these agencies to report how well they manage their infrastructure so therefore the tools don™t get developed or if they are created, they aren™t used. Also generally if the infrastructure agencies have developed measures, the measures themselves are arcane and have no meaning to the layperson. Into this situation steps a new financial reporting requirement for infrastructure: GASB 34. This new requirement will potentially have a profound impact on the producers, the users and the payers of infrastructure. Once it becomes well known that this requirement is inplace, it will be incumbent for agencies to responsibly comply with it. How conscientiously agencies supply the GASB 34 number may have long-term impacts on the funding and support of these agencies. Background The Government Accounting Standards Board (GASB) is a non-profit agency that establishes generally accepted accounting practices (GAAP) for local and state governments. There is no legal requirement for governmental agencies to adhere to these voluntary standards, but it is good public business sense to do so. In part this is true because bonding companies use GAAP to look at the financial condition of governmental agencies and they use the results to set the bond rating for an agency™s general obligation and revenue bonds. Over the last several years, GASB has been studying how governmental agencies value and report infrastructure under their domain. Traditionally agencies reported via the cash accounting method. Under that method, the capital cost of a bridge, for example, only appears in the annual financial report in the year of its construction. Neither the long-term value of an individual bridge over a period of years is reported, nor is the total value of all bridges. Also existing reporting allows the cost of separate infrastructure built in any one year to be reported in separate funds, which makes it difficult to even determine the total infrastructure built by one agency in one year. The result of the GASB study was a statement issued in June 1999 and numbered 34, hence GASB 34. This statement outlined a new reporting standard by government for its infrastructure assets, including roads, bridges, water, sewer, storm sewer, etc. The standard outlined in statement number 34 requires several changes, the most important of which is accrual accounting. Accrual accounting is the standard in the private sector, and thus places governmental accounting more in line with the private sector. With this method, the cost and value of an asset is spread across its life. Also agencies are required to report the value of all of their assets in one report. Therefore, the benefit of the new GASB requirement is that any citizen, public official, investor or agency can look at the financial report and see the financial condition and remaining useful life that agency™s entire infrastructure. With GASB 34 comes better accountability and better infrastructure stewardship. Governmental agencies are expected to comply with the new GASB 34 requirement based upon their annual revenues. Agencies with over $100M in revenue were required starting in June 2001. Agencies from $10M to $100M in revenues are affected starting in June 2002. The remaining agencies face compliance beginning in June 2003. Initially agencies have to report projects from the first year of compliance forward. Within four years of each agency™s report start date, all projects going back to 1980 will have to be reported. The exception to the retroactive requirement will be agencies with under $10M in revenue. They will only have to report on projects from inception date forward. GASB 34 allows two methods for valuing infrastructure: the depreciated method and the modified approach. Each method will require a good inventory, including an asset™s cost, condition and remaining life. The depreciated method appears on the surface to be the easiest. Using a straight-line depreciation method for each asset, the agency calculates the annual depreciation by determining the historical cost, subtracting the salvage value and dividing that number by the useful life in years. Using this method, the ‚formula™ current value of the asset is easy to calculate, but unfortunately annual maintenance and its value to the asset is not taken into consideration. The modified approach does not come with a neat formula, but it outlines how a value should be arrived at. To arrive at it, an agency needs an up-to-date inventory, a regular assessment of an asset™s condition and a scale upon which to rate condition. The agency also needs to determine an estimated annual cost to maintain an asset at a minimum condition level and a definition of that minimum condition (i.e. good, fair, etc.). GASB 34 gives infrastructure managers latitude in valuing their assets, with the caveat that they should use consistent and reasonable methods. With the GASB 34 table set, how will agencies comply with the new requirement? Will the new requirement be looked at as an unfunded mandate for the agency to comply with? Or will the requirement become a tool for the agency to truly become a sound and justifiable manager of the infrastructure assets. What remains to be seen is how well all the players play together. Those players are of course the Finance Director, the Engineer and one additional player, the GIS Manager. 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. The GIS Manager GIS is a technology whereby users can attach word (attribute) data to map features, and in turn create colored maps of particular data. For example a street inventory database that has a field for year built, can be linked inside a GIS system to a map feature that shows a road. The user can then have the system create a plot of all roads built in the year 1970, for example. These plots have value to the user because the eye can quickly assimilate a lot of data by looking at the GIS map, as opposed to seeing a word printout of the file. The user can also see patterns of the data. For example a GIS system can show that all streets in the northeast part of the city were built in the 1970™s. The GIS system can also find errors in the map or attribute data, either automatically or by the user recognizing that all streets in northeast are not shaded correctly, hence an error in the underlying data. The value of GIS is that by showing data errors, they can easily be corrected. While the promise of GIS is seen to be large by the GIS Manager, the fulfillment of that promise hasn™t been very large for most users. Until GASB 34 came along, it might be said that users have been looking for GIS benefit in all the wrong places. Let™s see where they might look for larger GIS benefits. First using asset management systems, Engineers are starting to place hard numbers on the value of the infrastructure they manage and the numbers are very large. For example the value of the infrastructure for one moderate sized midwestern city, population of 375,000, is over $6 Billion. Secondly City Engineers are also recognizing they are key players in the GIS equation because they generally are the keepers of the maps. Also they are understanding that they are the biggest user of the maps to plan, design, construct and maintain infrastructure facilities. They also have utility inventories to attach to the maps, and as stewards of the infrastructure, they are starting to understand how to use GIS to manage their assets. Thirdly by using the tools of asset management and GIS, and by getting a return on investment of only one-tenth of one percent, the city illustrated above gains a yearly benefit over $ 6 Million. So instead of scrambling for peanuts, GIS should step into the big leagues in Engineering. Is such a benefit possible? While not automatic, benefits have been attained at least three ways. First by implementing a performance budgeting and management system. By regularly measuring and analyzing the time it takes to perform each work task, implementers can automatically improve their productivity, or return on investment. Secondly, by recognizing the life cycle of projects, and their underlying GIS maps, GIS users in Engineering organizations can gain incremental benefits. By putting all maps into an engineering accurate electronic map database, users can immediately start the planning process by extracting the map elements and geography for engineering layout creation. Upon layout approval, the engineers can move directly into final design using the engineering layout as a starting point versus starting from scratch. Plan sheet quantities can also be extracted from this map. During construction this electronic map goes directly into the field as a plan document, to be edited in the field and have the updated map loaded back into the map database in the office. This concept can double their productivity. Lastly electronic maps linked to asset management databases are used to better manage and lower the cost of the infrastructure, as outlined above. The ‚freebie™ is that with all these pieces inplace, which all have benefit in their own right, responding to GASB 34 requirements becomes a byproduct. In this case, though, that byproduct can have enormous value to the individual Finance Director, Engineer and GIS Manager; to the entire organization; and to the taxpayers served by that organization. By working together and using all of these tools the organization can achieve the benefits described above and will enable each taxpayer to see ‚with their own eyes™ proof that their taxes are being well spent. Summary GASB 34 is a mandate placed upon each governmental agency that manages infrastructure. Each of these organizations has the choice of determining how they look at the reporting requirements. They can look at them very narrowly as an unfunded mandate, and therefore as a penalty. Or they can look at the GASB 34 requirements as having a residual value; as having all the ingredients of an excellent management tool. By looking at the big picture and using, combining and modifying asset management systems and GIS, which in many cases are already inplace, organizations can better manage existing infrastructure at a lower cost. Departments can work together for the common good and the Finance Director, The Engineer and the GIS Manager can actually ‚show™ elected officials and the public that they are properly stewarding the infrastructure, and in so doing help themselves by justifying infrastructure funding. Lastly, with departmental cooperation and the management tools inplace and properly used, GASB 34 compliance is the press of a button. Rarely have mandated requirements been such a win/win/win situation, or panacea, for governmental agencies. | ||
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