Complying With Infrastructure Reporting Under Gasb Statement 34: A Tale Of Four Cities

By
K. Dennis Klingelhofer, P.E.
Chuck Crandall, CPA
Berryman & Henigar

In June 1999, the Government Accounting Standards Board (GASB; www.gasb.org) issued Statement 34, Basic Financial Statements – and Management's Discussion and Analysis – for State and Local Governments. GASB is a nonprofit organization responsible for establishing and improving accounting and financial reporting standards for more than 84,000 non-federal governmental units nationwide. These include states, counties, cities and other local agencies and authorities such as public power authorities, transportation/transit agencies, municipal hospitals and state universities.

INTRODUCTION

GASB 34 established a new financial reporting model for state and local governments and was the most significant change in the history of public sector accounting. GASB implemented these new requirements to make annual reports more thorough and easier to understand and use.

Since its adoption more than four years ago, municipalities nationwide have been challenged by the considerable task of valuing their infrastructure to include in these annual statements. Complying with GASB 34 is crucial as it demonstrates sound fiscal responsibility by city managers, council members and other governing bodies. Governments are required to follow GASB standards in preparing annual financial statements in order to obtain clean opinions from their financial auditors.

The Phase 3 (for governmental units with total annual revenues of less than $10 million) deadline is the fiscal year starting after June 15, 2003. The Phase 2 deadline (total annual revenues between $10-100 million) was the fiscal year started after June 15, 2002. Phase 1 deadline (annual revenues exceeding $100 million) was the fiscal year started after June 15, 2001.

In brief, GASB identified two reporting methods that municipalities could use to report their infrastructure in order to comply with GASB 34 – the modified approach and the straight-line depreciation approach. Both had distinct advantages and disadvantages. The modified approach, once in place, is easy to update, provides information on asset conditions and estimated versus actual maintenance costs, and aids in Capital Improvement Program (CIP) planning. The modified approach was also generally more costly and time intensive to implement. The depreciation approach was less costly and future costs are less, but due to inflation, this approach may under report the amount needed to fund infrastructure replacement and doesn't provide condition information. Agencies, however, were allowed to mix-n-match methods and can change the reporting methods in future years.

This article focuses on how four municipalities – three in California, and one in Arizona, complied with infrastructure reporting under GASB 34 – the challenges each faced, and how they resolved them.

CITY OF MENLO PARK

Located in the heart of Silicon Valley about 30 miles south of San Francisco, the City of Menlo Park, CA has a population of 30,000 and an annual operating budget of $26 million. According to Supervising Engineer Yaw Owusu, complying with GASB 34 took about 10 months.

"We worked closely with the City Manager, the Finance, Public Works and Recreation Departments, and our consultant in order to get a good grasp on providing a valuation of our infrastructure," Owusu said. "It was a huge job, encompassing a detailed description of inventory sources, historical dating, determining replacement costs and estimated historical costs."

Valuations were estimated for pavement, curb & gutter, sidewalks, streetlights, traffic signals, parking plazas, street trees, right-of-way, storm drains, major park facilities and rails. Useful lives for each infrastructure network and system were developed and an independent review of City-owned buildings and the water system was conducted.

"We elected to use the depreciation method to report our infrastructure assets, including pavement, on our financial statements," Owusu said. "These depreciation amounts, for example, will be ‘expensed' annually, giving the City a net value reduction of the asset each year – the activity will thus adjust the approximate value or worth of the asset to the City."

The total infrastructure valuation was $355.4 million reported for the fiscal year ending June 30, 2003 (salvage value was not included, since the costs for demolition and removal exceeded this). Key assets (in millions) included:

As an example of how valuations were determined, Menlo Park has 21,783 street trees. To calculate their value, a formula recommended by the Council of Tree Landscape Appraisers Guide for Plant Appraisal was used, which encompasses four variables to determine tree value: size (cross section trunk area in inches), species, condition and location. Unlike other assets, however, street trees actually appreciate over time until they reach the end of their useful life – estimated valuation was not depreciated in this instance.

"We're now using a new budgeting format based on programs, services and results," Owusu said. "It requires the City to objectively measure and track the performance of programs and services they provide. Now that we have effectively identified all City assets as part of complying with GASB 34, we'll be able to better forecast future asset performance within different budgeting levels."

CITY OF TRACY

The City of Tracy, CA has experienced tremendous growth – it has doubled in size since 1993. In 1980, the population was 18,428 – it's now over 70,000. Located about 60 miles east of San Francisco, the City has an annual operating budget of $78.2 million. The City operates its own water and wastewater systems and maintains over 150 miles of roads and streets, more than 150 acres of parks plus storm drains and a local airport.

Finance and Administrative Services Director Zane Johnston said the City anticipated the ramifications of GASB 34 "well in advance" and even put together a ‘test case' in late 1999 that would represent June 30, 1999 financial statements.

"We wanted to reformat our financial report using GASB 34 requirements for comparison purposes," Johnston said. "So we knew we would need a complete inventory, valuation and recording of the City's maintained infrastructure. We were one of a handful of cities nationwide to implement a test case."

Johnston added that the City also had 20 years worth of data maintained from all CIPs.

"We were able to get much of the data needed for GASB 34 compliance from this source," he said. "We also had a pavement management system (PMS) in place so we were able to get a lot of infrastructure information and not have to start from scratch."

The City's total infrastructure valuation is $524.9 million. Major areas include $132.5 million for the roads and streets network, $65.8 million for wastewater collection, treatment and disposal; and $59.5 million for water treatment, wells, storage reservoir and distribution system.

Pavement, for example, part of the roads and streets network category, was reported using the modified approach and was valued at $96.2 million. Other major components within the roads and streets network included street drainage ($18.4 million); grading, curb & gutter, sidewalks and driveway approaches ($12.8 million); and traffic signals ($5.04 million).

"Now that we have a complete infrastructure valuation in place we'll not only be able to better justify capital expenditures for future endeavors such as asset management programs and geographic information systems, but we'll easily meet any new GASB reporting standards," Johnston said.

CITY OF BURBANK

With a population of 102,400 and an annual operating budget of $406 million, the City of Burbank, CA is one of the largest cities in the San Fernando Valley, just north of Los Angeles.

The City's street system is extensive – 227 miles of streets, 49 miles of alleys, 369 miles of sidewalks, 8,430 streetlights, 61 miles of storm drains, 182 signalized intersections, and 26 bridges.

Financial Services Director Derek Hanway said the City began the GASB 34 compliance process in March 2001, completing the project the following August.

"It was a truly collaborative effort between our consultant and five departments – Public Works; Water and Power; Parks & Recreation; Financial Services and Information Technology," Hanway said. "Our infrastructure is huge and quite diverse so we knew this was not going to be an easy task."

By the time the project was finished, the City came up with a total infrastructure valuation of $559 million. The historical cost for land rights-of-way alone was estimated at $345 million. Valuation was derived from local replacement costs of the existing infrastructure systems inventories and indexed to the year of installation. The City didn't measure deferred maintenance.

"Keeping meticulous records over the years greatly facilitated the GASB 34 data collection and valuation process," Hanway said. "Cities and public agencies should do this as a matter of course in order to remain in compliance for the future."

CITY OF PEORIA

Since its incorporation in 1954, the City of Peoria, AZ, situated 20 miles northwest of downtown Phoenix has expanded from one square mile to more than 175 square miles and a current population of 125,000. Annual operating budget is $137.9 million.

Accounting Supervisor Dan Leahy said when the City took a close look at GASB 34, "we realized we had to determine what our inventory consisted of and figure out a way to put a value on it. A lot of the assets have been donated or annexed because we're a growing community – developers, for instance, are required to put in street lights, water and wastewater lines and turn them over to the City."

Leahy added that while the City had always capitalized much of its infrastructure, "we really didn't have a good feel for what we had. During the six months it took for the City to comply with GASB 34, we discovered that we have eight bridges that we're responsible for – only two were built by the City, the rest of them were constructed by the county or the local flood control district!"

Fortunately for the City, a pavement management system (PMS) had been installed 18 months prior to the start of the GASB 34 compliance project so an extensive condition assessment was easily available. This inventory comprised more than 400 centerline miles of streets. In order to determine valuations for curbs, gutters and sidewalks, Leahy and his staff sat down with a consultant and city engineers and poured over aerial maps that enabled them to come up with the requisite data.

"I think that most cities will find that even if they don't have great financial records of infrastructure, they have a tremendous amount of knowledge and information in the various city departments and staff," Leahy said.

Once completed, the City's valuation for the street system was $231 million; $463 million total for all assets.

Leahy said while complying with GASB 34 provided the City with a better understanding of their infrastructure assets and needs, it also opened up other areas of concern.

"Our big issue now is how to capture donated and annexed assets on an ongoing basis," he said. "We're still looking at different systems to implement to best accomplish this task, but once we do, this will be yet another example of how complying has helped us identify strategies for integrating our infrastructure reporting with our financial reporting."

CONCLUSION

The new accounting standards set forth by GASB 34 have helped these four cities document the community's investment in their infrastructure. They are developing procedures for ongoing reporting and now have in place the value of all the infrastructure that the cities are responsible for maintaining, making for better informed decision making.

K. Dennis Klingelhofer, P.E., is senior vice president; Chuck Crandall, CPA, is project manager with Berryman & Henigar. Berryman & Henigar provides municipal management consulting, civil engineering, public finance, building safety, asset management, and program and construction management to public agencies. Further information is available on the Web at www.bhiinc.com. Contact Mr. Klingelhofer at Klingelhofer@bhiinc.com; Mr. Crandall at Crandall@bhiinc.com.