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

What is GASB Statement 34? How will it affect us? . Sue McNeil Director Urban Transportation Center University of Illinois, Chicago. Asset Valuation GASB 34. Requirements: state and local agencies to include the value of physical assets in their financial statements

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

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  1. What is GASB Statement 34? How will it affect us? Sue McNeil Director Urban Transportation Center University of Illinois, Chicago

  2. 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.

  3. 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.

  4. Asset Valuation • Driving forces • Mechanisms • Government Accounting Standards Board (GASB) 34 • Mechanics

  5. Asset Valuation Driving forces • Public skepticism of government • Focus on the use of private sector management practices in the public sector • Interest in privatization

  6. Asset Valuation Mechanisms • Government Performance and Results Act and similar state legislation • Self reporting of economic value • GASB 34

  7. SURVEY RESPONSES Received responses from shaded states

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

  9. Asset Valuation GASB 34 Issues • Confusion between economic and financial value • Implications for policy making, funding etc • Cost to implement

  10. 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)

  11. Illustration • Replacement cost highway - $1m/mile • Historical cost • 15 year old highway • CCI 1993 / CCI 1998 = 0.6903 • => $0.69 m/mile • Book value • Expected life 25 years • Depreciation = 60% (straight line) • => $0.27m/mile

  12. 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

  13. Case Study - City of Hopkins, Minnesota • Located West of Minneapolis • Settled 1854 • Population ~16,500 • 4 square miles • 98% developed • AA Bond Rating

  14. 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

  15. Hopkins - Infrastructure

  16. 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?

  17. 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

  18. 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

  19. Summary- value of pavement assets

  20. 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

  21. Sample output from ICON

  22. 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

  23. 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?

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

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