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More than 84,000 state and local governments in the United States are facing the enactment of new requirements that will dramatically affect their annual financial reporting process. These new requirements were recently announced by GASB�the Government Accounting Standards Board�and some agencies will need to comply with the new guidelines as early as the fiscal year beginning July 1, 2001.
GASB (say �gasbee�) is a private, non-profit group responsible for establishing accounting standards for the country�s governmental units, as well as for any organization under their jurisdiction. This means that in addition to City Hall and the state capitol, public power authorities, municipal hospitals, state universities and local school systems will all be affected by the new financial reporting standards, and they must implement these new requirements when their primary governments do.
The new financial reporting model for governments is being called �Statement 34�, shorthand for �Governmental Accounting Standards Board Statement 34, Basic Financial Statements�and Management�s Discussion and Analysis�for State and Local Governments.� Statement 35 is like an amendment to Statement 34, and it includes the options public colleges and universities have for their financial reports, which must be compiled under the same guidelines.
A Significant Change
Tom Allen is chairman of the seven member GASB, which spent more than a decade establishing over 30 new standards of governmental accounting and financial reporting. These standards together form the foundation of the Statement 34 and Statement 35 guidelines. Allen has been widely quoted as describing the new set of accounting standards as �the most significant change to occur in the history of governmental financial reporting.�
The most significant and far-reaching requirements of Statement 34, and probably the most difficult for governments to implement, will be those dealing with infrastructure assets.
Public agencies will now be required to report on the value of all capital assets (assets with a valuation threshold of $500-5000), including their infrastructure assets like roads, bridges, tunnels, dams, water and sewer facilities and lighting systems. GASB defines infrastructure assets as �long-lived capital assets, � stationary in nature,� (i.e. not vehicles) which can normally �be preserved for a significantly greater number of years than most capital assets.� Buildings are not included here unless they are part of an infrastructure system. The pump station would, for example, be considered part of a water system.
Traditionally, government agencies have included the cost of infrastructure investments in their annual financial reports during the years in which construction costs were incurred. In actuality, physical infrastructure like a road or a bridge continues to have value, or usefulness, for many years after agencies have incurred the expense of construction, but traditionally that value isn�t shown on the books.
Just as cars depreciate in value, the value of an agency�s physical assets�like roads, bridges or sewer systems�declines over the years. A more realistic report of any government agency�s current financial status, then, would show the existing value of the agency�s capital assets. Under this accounting method � accrual accounting � the cost, or loss in value, of an asset is spread across the asset�s useful lifetime, rather than accounted for in its first year. An agency�s capital assets, its infrastructure assets, are always �on the books,� which is a more realistic picture of the agency�s financial condition, and is an accounting method more in line with accounting done in the private sector.
One thing GASB�s Statement 34 requires is that government financial statements use accrual accounting for all governmental activities. A corollary requirement of Statement 34, and perhaps the most complex issue facing governments, is the need to develop objective and consistent procedures for estimating monetary values for their infrastructure assets, or �capitalizing� their assets.
State and local governments in this country invest $140-$150 billion annually in construction, rehabilitation or improvement of capital assets, including infrastructure assets. GASB considers accountability for the expenditure of this and other monies the objective of any government agency�s financial reporting. Explains GASB, �Because citizens have invested a great deal of their resources in government, they have a right to know the cost of services their government provides and who pays that cost. They have a right to know whether the government�s financial health has improved or deteriorated.�
GASB�s new accounting standards require that government agencies use accrual accounting methods to show depreciation of their capital assets, and that they present easily understood information that will inform citizens about the condition, costs, and value of their infrastructure assets.
Is This A Good Thing?
Consider this: The National Federation of Municipal Analysts (NFMA), or the people who evaluate the credit risk of municipal bonds, in 1999 sent a letter to GASB members: �The creditworthiness of municipalities is dependent on numerous factors, including the condition of infrastructure assets such as roads and bridges. Unlike businesses and other types of enterprises, state and local governments are not currently required to report on the condition of capital assets. � By their nature, most municipal bonds finance �capital assets� and as such, the relevance of this information to public finance professionals is paramount.�
Also, traditionally during budget development, preventive maintenance doesn�t do well when competing with demand maintenance, capital improvement projects, or safety, educational, and social services. Statement 34 has the potential to improve the competitive position of preventive maintenance, and to make a lot of maintenance engineers and facilities managers a great deal happier. The new requirements may result in open discussion of deferred maintenance, something very important to those responsible for maintaining public infrastructure, but normally not a subject for open debate.
Finally, capitalizing roads and bridges permits the public to understand stewardship more clearly. Expressing a street�s value in dollar terms may mean more to people than using engineering measures like �inches of roughness per mile.� Tracking dollar value may mean more than telling the public a street�s condition has gone from 5 to 4. Also, an agency can very clearly demonstrate whether an asset is declining in value faster than money is being invested by the public to protect the asset.
First Things First � Your Inventory
Statement 34 lists two ways agencies can show depreciation of their capital assets, including their infrastructure assets. Whichever method is used, the first thing to consider is developing an accurate inventory of all capital assets. The inventory must include the historical cost, or estimated cost, of construction since June 30, 1980. This extensive data gathering is the first step any government agency should undertake to comply with Statement 34.
After compiling a complete inventory of capital assets, in order to comply with the requirement for accrual accounting, an agency may opt to use any �reasonable� and �established� method to depreciate an asset�s value over its useful life until it reaches salvage value. This means an agency can use a simple straight-line depreciation. An agency can show the depreciation on each year�s financial statement as an expense, and the capitalized value of the asset will decline each year by the amount of the annual depreciation. This simple approach is one many government agencies use to depreciate their rolling stock.
However simple depreciation formulas may not be the best way to value infrastructure assets because they omit one very important variable: Maintenance. And, not recognizing the fiscal benefits of preservation efforts could be interpreted as an indication that assets are being allowed to deteriorate.
So, if governments can demonstrate that they maintain their infrastructure at an established level, they can list all of their maintenance expenses, instead of simply depreciating the assets. This method of accounting for infrastructure is called by GASB the �Modified Approach.� The Modified Approach will provide a realistic and meaningful gauge of the government�s ongoing stewardship. The documentation they have to create will enable governments to more cost-effectively manage their assets�and to take credit for the results.
The Modified Approach
While GASB�s guidelines are not detailed, they are specific about what is required for a government agency to follow the Modified Approach. The Modified Approach provides a strong incentive for taking steps to develop a full-fledged asset management system. To use this alternative approach, government agencies must use asset management systems with specific characteristics, and they must be able to document their maintenance efforts.
Specifically, they must use an asset management system that enables them to do the following:
� Maintain an up-to-date inventory of eligible infrastructure assets.
� Perform condition assessments of the infrastructure assets at least every three years, using a replicable basis of measurement and a measurement scale. Consistency is the important thing here.
� Summarize the results, noting any factors that may influence trends as required for RSI, Required Supplemental Information.
� Estimate each year the annual amount required to maintain and preserve infrastructure assets at or above the target condition levels established by the agency. The condition level should be expressed in terms of categories or a condition index, i.e. good, fair, poor or 5,4,3,� and should be established in a formal, documented manner via the appropriate administrative or executive policy or by legislative action.
Government agencies must also document that they are providing sufficient maintenance efforts to be able to:
� Provide reasonable assurance that the results of the three most recent condition assessments meet or exceed the target condition level.
� Compare the estimated amount (the amount originally budgeted) required to maintain and preserve eligible infrastructure assets at or above the agency�s established levels with the amounts actually spent for each of the past five reporting periods.
If an agency develops a thorough inventory and then regularly assesses the condition of infrastructure assets, using the same standards for each condition assessment, it will have completed most of the work involved in establishing an asset management system.
Why Not Turn This Work Into An Asset Management System?
Asset management systems help decision makers assess economic trade-offs among alternate investment or spending options, thus providing information for cost-effective investment decisions. The advent of powerful computer systems and sophisticated software has made the practice of real asset management possible.
Many agencies already systematically manage various physical assets through management systems� building management, pavement management, bridge management, etc.�, which help decision-makers to allocate resources within each system.
However a broad asset management system�the type supported, as least implicitly, by GASB 34�would help decision-makers allocate resources effectively among a variety of different systems.
There is no reason a government agency can�t have an asset management system that includes buildings, roads, bridges, parklands, and lighting systems in one database, accessible by all. GASB has provided an opportunity for public works professionals to acquire the tools for true asset management. Statement 34 should lead to benefits beyond financial accounting, such as the establishment of preventative maintenance, bid, and work-order management and reporting systems.
GASB is encouraging agencies to adopt the Modified Approach and its requirement that assets be regularly inspected and that maintenance efforts and infrastructure condition be regularly documented. GASB, by extension, is urging governments to systemize the way they care for and document their capital assets. Compliance is not strictly required, but bond-rating agencies will probably favor the Modified Approach for two reasons:
� It avoids the distorting effects of reporting depreciation based on historical costs, and
� It demonstrates good stewardship of assets that is not achieved by simply reporting depreciation.
Which Approach Do You Use?
Governments, school systems, hospitals and universities are all going to have to make a decision on whether they should report depreciation or use the Modified Approach. The decision should be discussed with an agency�s financial officer, who will help develop a strategy for addressing Statement 34. Talking to auditors can help to determine their standards for a GASB compliant fixed asset system, as well as which approach will generate the most favorable explanatory footnotes, which are also required by Statement 34.
Defining an overall compliance strategy that meets the needs and desires of your financial people, the auditors and your public works professionals is important. Remember, although GASB 34 & 35�s end result is expressed in a financial statement, compliance is not merely a financial problem. Financial values can only be assigned to assets that have been defined and inventoried, and success will depend on the coordinated efforts of financial, information systems, and public works personnel in all taxing or tax funded authorities, higher education, power and water authorities, municipalities and schools.
The challenge is to develop consistent documentation of the value of your infrastructure assets and what is being done to ensure they are being properly maintained and preserved. Concurrently, you must consider the expense of inventory and valuation efforts, possible engineering studies, computer system applications, and staff training.
Over the next five years, state and local governments will make major efforts to develop appropriate standards, methodologies, and systems in order to comply with Statement 34. There will be a growing emphasis on asset management practices and systems, something already being emphasized by state transportation agencies for highway preservation.
Now Is When You Evaluate Your Systems
Now is the time to consider whether the systems you have in place are easy to use and easy to maintain and whether they can do the job at a reasonable cost. Statement 34 will move many government agencies to install asset management software as the most cost-effective way to comply with the GASB�s organizational and record-keeping requirements while managing their assets well.
Some agencies will consider hiring consultants to do the work required by Statement 34. The consultants will undoubtedly use powerful and tested asset management solutions. They will rely on a relational database that includes property, infrastructure, buildings, components, systems, and fixed and movable assets. The consultants will define critical operating data. They will standardize the data-collection process. Then they will implement procedures to maintain and analyze the data. And then they�ll create reports.
Of course, with the right software, you could do this yourself, not just to comply with Statement 34 in fiscal year 2001, but also to ensure good ongoing management of all your capital assets, your personnel, their time, and the public�s money.
What To Look For
If you decide to do it for yourself, what general things should you look for in asset management software?
� Software that can flexibly handle all of your assets in an integrated database�buildings, equipment, parklands, sewer systems, computers, HVAC systems, roadways, your office chair�everything.
� Software that�s in an �open format� and that permits data access to many different types of information, depending on what decisions need to be made.
� A vendor who has been around for a while and who has experience in facility operations and management. You want a vendor who can speak the language of your public works people as well as that of your financial people; who can work with the dean, the school superintendent, or the facilities manager. You�ll need a vendor who has experience creating an integrated database and can successfully move your data from wherever you have been keeping it up until now.
� Software that facilitates the important operational processes but is flexible enough to adapt to the way you do things today.
� Software that is integrated across a variety of applications�property, assets, maintenance and project management, facility conditions, lease management, work orders, capital planning�and from many diverse formats, like CAD drawings, blueprints, images and documents.
� Software that has a reporting component, and one that�s not too complicated. Everyone has to be able to access his or her reports with little or no training. The capability to create customized reports is a plus.
Specific Features to Make Life Easier
You should look for certain specific features which will mean that the software will be used daily on a daily basis and you will not have a difficult time selling its value to people. Effective asset management software should:
� Be easy to use. It should include toolbars, drag and drop and search capabilities, a simple graphical user interface (GUI) and a logic that will be easily grasped by a new employee.
� Provide examples and include online help and documentation, which explains not only �how� but �why do I?�
� Be customizable for your environment. Good asset management software can serve entities ranging from the smallest school district, from government agency and all their various departments to the enterprise functions they manage.
� Provide good security. This is a must. Your system administrator must be able to assign privileges to specific groups or specific users, and must be able to restrict access to various data.
The Components Of Your Asset Management System
There is specific capability and functionality you�ll want in your software:
� The ability to create an inventory and to monitor the assets as they come and go. You�ll want to include information like location, replacement cost, square footage, warranty and leasing information, and specific details that you define as important.
� The ability to audit your assets with pre-defined and consistent rating criteria, to schedule maintenance, to prioritize health, safety and insurance needs, and to justify the basis for your capital improvement plan. You�ll want a detailed audit trail.
� The capability to schedule maintenance, create bid specifications, compare bids, generate work orders, and have vendor and staff information at your fingertips. You�ll want costs, service histories, the day�s work schedule and a determination of whether using staff or vendors will be more cost-effective for a certain job.
� To be able to analyze information and create ad-hoc reports, maintenance reports, financial reports, vendor reports, and reports for decision makers to help them with strategic planning.
� To be able to objectively justify spending money. You�ll want to be able to prioritize routine maintenance and capital renewal projects and analyze asset conditions. You�ll want to track actual versus budgeted expenses and see the depreciated value of an asset. You�ll want to ensure that your agency is making the best choices in its resource allocation.
The Future
Some governments have already started applying the new Statement 34 rules. The GASB has stated that after examining �some of the asset management systems that many governments use as a tool to manage their infrastructure assets,� board members feel �that most governments that have invested in asset management systems intend to preserve their infrastructure assets at a condition level that would result in a relatively small depreciation expense.�
This is why GASB is suggesting the Modified Approach. GASB didn�t say so, but because of their asset management systems, these same governments are going to bequeath healthier infrastructure assets to the generations who follow them.
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