City tests Statement 34 compliance

The recent adoption of Governmental Accounting Standards Board (GASB) Statement 34 may end up helping public works directors, finance directors and other local officials in their efforts to keep citizens informed about infrastructure issues affecting them. Released last June, Statement 34 is expected to restructure much of the information local governments have reported in the past. That information, traditionally limited to enterprise fund infrastructure, now includes new financial reporting requirements involving all capital assets — including infrastructure assets like roads, bridges, tunnels, drainage systems, water and sewer systems, dams and lighting systems. It also calls for reporting of depreciation expenses in activity statements.

Over the past year, local government agencies have been investigating what it will take to comply with the new accounting standards. In doing so, they are attempting to answer questions such as: * How much effort will this take, and how much will it cost? * How do we deal with the new requirements in a way that will be most beneficial to citizens? There are two basic ways in which an agency can comply with Statement 34. It can: * establish an historical cost for the asset less its estimated salvage value; then depreciate the asset; or * conduct a complete inventory and condition assessment of each network (or subsystem of a network); then decide on a minimum level of maintenance for the particular asset. Tracy, Calif., recently conducted a test to assess its current status in regard to Statement 34. The results of the test were presented on Feb. 29, 2000, at the annual conference of the California Society of Municipal Finance Officers.

Tracy has experienced significant growth over the past 20 years. The city maintains more than 150 miles of roads and streets and more than 140 acres of parks, along with the associated storm drainage system, curbs, gutters and traffic control devices. It also maintains an airport — with its own water and wastewater systems — covering 166 acres.

For purposes of the test, Tracy Finance Director Zane Johnston decided to reformat the city’s financial report for the year that ended June 30, 1999. The reformatted version, set up to comply with Statement 34, would then be compared to the original financial report.

Johnston included information in the report regarding the value and condition of infrastructure that was gleaned from field reviews, cost assessments and the city’s Pavement Management System (PMS). In place since 1994, the city’s PMS contains a complete inventory of the roadway system, a condition assessment of each section, a computerized maintenance schedule, and estimated costs to efficiently maintain the system during a five-year period.)

Working with the city, a team comprised of Walnut Creek, Calif.-based auditing firm Maze & Associates and engineering company Berryman & Henigar, San Diego, used data from previous studies and additional research to put a value of $131 million on Tracy’s infrastructure. (Absent Statement 34, that value had not previously been reported on the city’s financial statements.) Results of the project also indicated it would be expeditious for Tracy to use a combination of the depreciation and asset management programs, both of which can be phased in during the compliance period.

Ultimately, Tracy elected to use the inventory-and-assessment approach for reporting its road and street systems. The test concluded that, given information like that contained in the PMS, as well as the fact that most jurisdictions have existing records and previous studies about their infrastructure assets, compliance with Statement 34 would not be as traumatic as finance officials had feared.

The question of how far to take the final program is more difficult

to answer than the question of whether compliance is possible. Like Tracy, many jurisdictions currently have some level of asset management programs for various systems, whether those are buildings, vehicle fleets, road and street systems, or water treatment plants and piping systems. Local governments must determine whether they want to establish a reasonable financial basis for depreciating the asset, or incur the cost and effort necessary to set up a computerized program that would allow the asset to be maintained economically. With the latter, an asset’s useful life will be extended over a much longer time period than if depreciation or deferred maintenance were used.