Charles Abbott Associates, Inc.

Our GASB (Governmental Accounting Standards Board) Consulting Team have successfully completed GASB 34 compliant financial statements. The financials have been submitted to the board and has been approved and accepted. A special recognition and appreciation was received by the City of Corona for adopting the first of its kind modified approach for their street system. This task was accomplished in alliance with a certified public accounting firm, providing a full range of accounting, information technology and comprehensive asset management services.

The City developed an implementation plan to determine the value of and include infrastructure costs. The City defined infrastructure as the basic physical assets that allow the City to function. The assets include the street system; water purification and distribution system, sewer collection and treatment system; park and recreation land and improvement system; storm water conveyance system; and buildings combined with the site amenities such as parking and landscaped areas used by the City to conduct its business.

This is the first City where the modified approach was used. Although, the City elected to use "modified" approach for the street system only, as defined by statement number 34 for infrastructure costing. The City commissioned a physical assessment of the street system condition in 1998, which will be conducted every three years. Each homogenous segment of City owned street was assigned a physical condition based on seventeen potential defects. The index is expressed in a continuous scale from 0 to 100, where 0 is assigned to the least acceptable physical conditions and 100 is assigned to segments of street that have the physical characteristics of a new street. The following conditions were defined.

Excellent Condition is assigned to segments with a scale rating between 100 and 85.
Good Condition is assigned to segments with a scale rating between 84 and 70.
Fair Condition is assigned to segments with a scale rating between 69 and 55.
Poor Condition is assigned to segments with a scale rating between 54 and 40.
Failed Condition is assigned to segments with a scale rating between 39 and 0.

Listed below is the paper presented by John Whitman, RCE, who was the lead principal-in charge for this effort, at conferences for "2000 Government and School District Conference" in May at two locations in California.

Introduction
The GASB 34 requirement for infrastructure reporting is a major change in governmental accounting practices. Statement 34 includes two optional approaches for including infrastructure -- the basic and modified approaches. Each agency is free to choose which method suits its needs. This paper discusses some of the implementation differences between the two Statement 34 approaches.

What Is Infrastructure?
A definition of infrastructure is needed to begin this discussion. Infrastructure comprises the basic physical improvements that governments need to provide public services such as streets, water lines, and storm drains. Statement 34 uses key words in the infrastructure definition such as long-lived, stationary, and can be preserved. However, beyond this, infrastructure has some common characteristics that must be understood to have a complete definition. For instance:

Infrastructure tends to be expensive to construct;
Periodic maintenance is needed; and
Maintenance is often delayed by decision makers;

As growth and development take place, the capacity of the infrastructure is used up, requiring new capital expenditures. Infrastructure tends to be forgotten until it no longer "works", is too expensive to maintain, or it no longer can support new growth and development.

Because of these characteristics, budgeting for infrastructure is difficult. It is always possible to delay funding for infrastructure for one more year, or until an emergency strikes. As an example, water lines are perfectly acceptable until the consumer cannot get water or until a broken line floods a street or a home.

What are the Two Approaches to Infrastructure in Statement 34?
GASB outlines two approaches to reporting infrastructure -- the basic approach and the modified approach. The basic approach requires that infrastructure be reported in the financial statement at historic cost and depreciated over its estimated useful life. With the modified approach, infrastructure need not be depreciated. However, this approach requires:

that an asset management system, with certain characteristics, be used; and
that the government documents that the asset is preserved at an established and disclosed condition.

What are the Differences in Implementing the Two Approaches?
It is clear from Statement 34 that there are obvious differences in implementing infrastructure reporting depending on whether the basic or the modified approach is used.

Implementation of the basic approach requires depreciation to be identified for assets that probably do not actually decrease in value. In fact, depending on deterioration rates, infrastructure may increase in value as construction costs increase. Construction/acquisition costs must be identified for each asset. In many agencies, records of these costs have not traditionally been maintained. An even bigger problem occurs when inventory records donor even exist for all of the assets.

Implementation of the modified approach requires asset management systems that periodically identify asset condition and set acceptable condition levels. Except for pavements, many governments do not have asset management systems in place. Typically, condition assessment has not been performed by local governments.

Measurable and acceptable condition levels are not commonly established in budgeting and policy documents.

Other differences in implementation of the two approaches are apparent. A brief list of these differences includes the following table.

DIFFERENCES IN IMPLEMENTING
THE TWO INFRASTRUCTURE APPROACHES

ISSUES MODIFIED APPROACH BASIC APPROACH

DEVELOPMENT AND IMPLEMENTATION EXPENSIVE AND TIME CONSUMING QUICK AND DIRTY

LEAD ROLE ASSET MANAGERS FISCAL MANAGERS

OPERATIONAL CHANGES SIGNIFICANT BUSINESS AS USUAL

How Can the Best Approach be Determined?
The answer to this question depends on the situation of each agency. There are always two ways to determine the best answer.

Study the situation and develop a "learned" answer; or
Implement an approach and learn the answer.

The remainder of this paper relies on experiences of implementing a beta site for Statement 34 with the City of Corona, California.

Implementing Statement 34
The City of Corona, California decided to implement Statement 34 beginning early in calendar year 2000. Implementation was planned to be a conversion of the existing FY 2000 City budget document from the current format to the Statement 34 format. The conversion would then provide the platform for preparing the FY 2001 budget document in Statement 34 format. Work began in March 2000. As of this conference, the conversion effort is nearing completion.

In 1999, the City had commissioned a complete appraisal of all City owned assets, including determining original cost, accumulated depreciation and book value. This information was available to be used as a part of the Statement 34 conversion. The approach to be used for inclusion of infrastructure was discussed and it was decided by City managers to use the modified approach where possible. After interviews with infrastructure managers, the Statement 34 Conversion Team determined that the Pavement Management System (PMS) was the City’s only asset management system meeting the Statement 34 requirements. Therefore, the Team determined that the City street system would be included in the converted budget document using the modified approach while all other infrastructure systems would be included in the converted budget document using the basic approach.

Comparing Street Infrastructure Using the Two Approaches
Because the City had implemented the PMS and had commissioned an appraisal of the street system as a part of a citywide asset appraisal, it is possible to make some comparisons regarding the two approaches. The elements that can be compared are:

Effort necessary to implement the two approaches, and
Book value of the streets.

Effort to Implement
The effort required to implement the two approaches for reporting infrastructure valuation within the City of Corona’s 1999 Budget document is significantly different.

For the basic approach, the City employed a contractor to prepare a comprehensive report of original cost, accumulated depreciation, and book value for all City owned assets. It appears that for the street system the contractor used unit cost data by classification of streets (e.g. arterials, collectors, residentials) to compute the current value of the street. The current values were then adjusted using a consumer price index to original cost. The cost of the contract to perform the valuation of all City assets was approximately $65,000. The book value of the street system (including pavement, curb and gutter, sidewalk, signs, traffic signals, and street lights) was determined to be 45.4% of the total value of assets. Based on a straight ratio of book value of total assets to street assets, the portion of the valuation contract that should be assigned to streets would be $26,351.

In addition to the contractor’s cost, the City staff’s effort involved obtaining the contractor, negotiating the contract, supplying available asset data, reviewing the contractor’s findings, and performing all necessary contract administration functions. For the purposes of comparison within this document, it is assumed that the cost of City staff time for support and administrative functions was 50 percent of the value of the contract. Therefore, the City’s total cost to implement the basic approach for street related infrastructure was approximately $39,500.

For the modified approach, the City employed a contractor to develop and implement an asset management system (Pavement Management System).

The major activities of the contractor were:

a field condition survey of the street system in which the pavement was divided into sections and defects were identified and quantified in each section;
installation of a propitiatory computer program on City computers that computes a pavement condition index (pci) for each section of pavement;
data entry of all field data collected in the City;
manipulation of the data using the computer program to compute a pci and to determine programming recommendations for each street segment; and
production of various reports displaying pavement condition, recommended rehabilitation techniques for each street segment, cost to rehabilitate the street, recommendations as to timing of rehabilitation, and annual rehabilitation programs for various funding levels.

The cost of the initial contract was approximately $193,000. The PMS was originally developed in 1998. As a part of the PMS effort, City staff obtained the contractor, negotiated the contract, supplied available street data, received training in how to operate the computer software, reviewed the contractor’s findings, and performed all necessary contract administration functions. City staff currently operates the PMS, providing data and updating capital improvement programs annually. Again, for purposes of comparison within this document, it is assumed that the cost of City staff time to perform the support and administrative functions was 50 percent of the value of the initial contract. Therefore, the City’s initial cost to implement the modified approach for street related infrastructure was approximately $289,500.

Book Value of the Streets
The City of Corona, California has determined the book value of its street system using two approaches. The first approach satisfies the Statement 34 basic approach for reporting infrastructure. The second approach satisfies the Statement 34 modified approach for reporting infrastructure. The following paragraphs briefly display the two valuations.

For the basic approach, the following table shows the assessed value of the street system in Corona by classification and/or component.

TABLE 1 CITY OF CORONA ASSESSED VALUE OF STREET SYSTEM
CLASSIFICATION/ COMPONENT	MILES	ORIGINAL COST	DEPRECIATION	BOOK VALUE
Local	233.9	$94,632,"36"9	$21,110,298	$73,522,071
Collector	60.5	$30,495,377	$6,802,815	$23,692,562
Secondary	41.2	$20,835,979	$4,648,026	$16,187,953
Arterial/Major	34.5	$14,621,370	$4,386,411	$10,234,959

SUBTOTAL:	370.1	$160,585,095	$"36",947,550	$123,637,545
Curbing	765.2	$69,585,095	$15,583,888	$54,118,198
Sidewalk	739.8	$74,348,859	$16,585,515	$57,763,347
Sign/Lights	-	$16,727,621	$2,701,302	$14,026,319
GRAND TOTAL STREETS:	-	$321,246,670	$71,818,255	$249,545,409

For the modified approach, the current value of the street system was computed by the PMS contractor to be $371,000,000. This value was confirmed by developing a typical cost per mile for urban streets in Corona. The following average per mile cost components were computed using current unit costs and average physical units for a typical urban street.

COST COMPONENT	COST/MILE
6" of asphalt pavement @ $35/Ton	$265,500
8" of base material @ $16/TON	45,300
8,000 cubic yards of grading @ $4/cy	32,000
14,000 linear feet of curb and gutter @ $13/lf	182,000
42,240 square feet of sidewalk @ $2.50/sf	105,600
5,280 linear feet of striping @ $0.05/lf	264
1 sign per 100 feet @ $100/sign5,	280
1 traffic signal per 4 miles @ $150,000/signal	37,500
21 street lights per mile @ $3,500/light	73,500
4 square feet of landscaping per mile @ $3/sf	73,500
right of way @ $35,000/mile	35,000
engineering costs @ 18%	153,200
TOTAL	$999,100

The total cost per mile computed is $999,100. The total cost per mile used in computing the value of the street system for PMS was $1,006,000. This is a difference of $6,900 (less than 1%) per mile. This accuracy is sufficient for Statement 34 purposes.

Corona defined conditions of the street system based on ranges of value of the Pavement Condition Index. The following conditions and ranges of rating values were defined.

CONDITION	RATING
Excellent	100-85
Good	84-70
Fair	69-55
Poor	54-40
Substandard	39-0

Rehabilitation needs from the pavement management system are shown in the following table.

TABLE 2 CITY OF CORONA PAVEMENT MANAGEMENT SYSTEM NEEDS IDENTIFICATION
RATING RANGE	PAVEMENT CONDITION	AREA OF PAVEMENT (SF)	COST TO REHABILITATE
99-85	Excellent	14,767,094.85	$2,477,310.82
84-70	Good	16,311,989.48	$3,311,893.81
69-55	Fair	5,005,770.70	$2,722,891.70
54-40	Poor	3,853,768.17	$4,199,241.31
39-0	Fair	5,697,949.92	$11,227,653.54
TOTALS:

The City of Corona has determined that an acceptable condition standard for all street segments is a minimum pavement rating index of 70. By simply adding all pavement sections that have a condition rating of below 70, the total pavement rehabilitation needs can be identified. The total costs are shown below. In addition, through sampling of sidewalk and curb and gutter conditions, it was determined that there is an additional need of approximately $7,431,000 related to these components of the street system. Therefore, the total funding needs to achieve the acceptable condition standard is $25,681,000.

CITY OF CORONA	AREA OF PAVEMENT (SF)	COST TO REHABILITATE
TOTAL REHABILITATION TO ACHIEVE MINIMUM PCI = 70	14,557,488.79	18,149,786.55

The total book value of the street system deducting rehabilitation needs is $345,319,000.

The book value of the City of Corona’s street system when based on an asset management system is approximately $95,764,000 greater than the book value of the same street system based on original cost and depreciation.

Summary
Local governments will need to determine the approach that they will use to include infrastructure in the financial statements as a result of Statement 34. The decision will be driven by several factors including:

Time schedules to achieve GASB implementation,
Managers’ goals in managing and reporting infrastructure,
Overall financial position of the jurisdiction, and
Funding available to implement.

Based on actual implementation of Statement 34 in Corona, California, managers in other local government entities can expect the following:

Significantly more effort will be needed to implement the modified method than the basic method-the estimated implementation costs for the modified approach were approximately 700% of the estimated implementation cost for the basic approach;
The modified approach will result in the book value of the infrastructure being significantly greater than the book value determined through the basic approach-the book value using the modified approach resulted In an increase of approximately $95,800,000 or 38%;
Time necessary to implement the modified approach is significantly greater than to implement the basic approach-the PMS project required approximately 9 months and did not address non-street system infrastructure while the assessment work required approximately 6 months and included all infrastructure; and
Decisions will be based to a large degree on current policies regarding infrastructure management and which areas already have asset management systems-only the street system had an asset management system in place, although other systems are planned.