What is GASB Statement 34? How will it affect us?

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What is GASB Statement 34? How will it affect
us?

• Sue McNeil
• Director
• Urban Transportation Center
• University of Illinois, Chicago

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Asset Valuation GASB 34

• Requirements
• state and local agencies to include the value of
  physical assets in their financial statements
• value based on depreciated historical cost, or
  historical cost without depreciation if the
  agency can demonstrate that they
• have an inventory of assets
• perform condition assessment at least every 3
  years
• have spent funds sufficient to maintain the
  infrastructure assets at an established level of
  condition.

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WHAT IS ASSET MANAGEMENT?

• Asset management is a systematic process of
  maintaining, upgrading and operating physical
  assets cost-effectively. It combines sound
  business practices and economic theory, and it
  provides tools to facilitate a more organized,
  logical approach to decision- making. Thus,
  asset management provides a framework for
  handling short- and long-range planning.

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Asset Valuation

• Driving forces
• Mechanisms
• Government Accounting Standards Board (GASB) 34
• Mechanics

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Asset Valuation Driving forces

• Public skepticism of government
• Focus on the use of private sector management
  practices in the public sector
• Interest in privatization

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Asset Valuation Mechanisms

• Government Performance and Results Act and
  similar state legislation
• Self reporting of economic value
• GASB 34

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SURVEY RESPONSES
Received responses from shaded states
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SURVEY RESPONSES(CONTINUED)

• States Attempting Asset Valuation -- 13
• four methods -- 1 (La)
• three methods -- 8
• two methods -- 2
• one method -- 2

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Asset Valuation GASB 34

• Issues
• Confusion between economic and financial value
• Implications for policy making, funding etc
• Cost to implement

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Mechanics of (Methods for) Asset Valuation
(Examples)

• Book value
• Written down replacement cost
• Market value
• Equivalent present worth in place
• Productivity realized value

(Source Lemer)
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Illustration

• Replacement cost highway - 1m/mile
• Historical cost
• 15 year old highway
• CCI 1993 / CCI 1998 0.6903
• gt 0.69 m/mile
• Book value
• Expected life 25 years
• Depreciation 60 (straight line)
• gt 0.27m/mile

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To Depreciate or Not?

• Depreciating your assets implies you are not
  maintaining
• Not depreciating requires an asset management
  system to demonstrate that you have maintained
  the condition of your assets and that you have
  expended funds to maintain the assets

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Case Study - City of Hopkins, Minnesota

• Located West of Minneapolis
• Settled 1854
• Population 16,500
• 4 square miles
• 98 developed
• AA Bond Rating

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Pavement Management in Hopkins

• 1994 implemented the Infrastructure Consultant
  (ICON) developed by GoodPointe Technology
  Corporation
• All sections inventoried
• 3-year inspection cycle using PCI (0-100)
• 1994
• 1997
• 2000

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Hopkins - Infrastructure
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Complying with GASB 34

• What are the assets worth?
• What funding level does Hopkins need to invest to
  maintain the network at an acceptable level?

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What are the assets worth?

• Replacement cost - 2.15 per square foot - Total
  value 20.8 m
• Depreciated value
• For assets build prior to 1980
• 76 of the network
• Value 0
• For assets built or reconstructed after 1980
• 24 of the network
• Value 5.8 m

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Depreciated value

• Based on
• overlay unit cost - 0.70/ sq ft
• reconstruction unit cost - 2.70 / sq ft
• overlay life - 23 years
• reconstruction cost - 29 years
• straight line depreciation
• conversion to current dollars using the highway
  construction cost index

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Summary- value of pavement assets
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What is the appropriate funding level?

• Determine benchmark
• Local - PCI 65
• Collector - PCI 70
• Determine scenarios that match expectations
• Determine annual budget
• Local - 275,000 per year
• Collector - 100,000 per year
• Document expenditures

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Sample output from ICON
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Issues and Lessons

• Mismatch between annual reporting and inspection
  every 3 years.
• May want to include assets constructed prior to
  1980
• GASB allows for any consistent method.
  Depreciated book value may not be the most useful
  version of value
• If PMS is used, implementation effort in minimal

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Recommendations

• Engineers need to work with financial managers.
• Ask questions - for example
• Are you managing your inventory?
• Is your inventory complete and up to date?
• How do you want to categorize your assets?

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Issues

• Role of performance versus value in decision
  making
• Role of performance versus value in
  accountability
• Relationship to life cycle cost analysis