Michael J. Barnhart, CPA
Senior Accountant, Finance Division
City of Eugene, Oregon
During the first meeting between the City of Eugene's accounting staff and the Public Works department, the formidable task before them became clearly evident. The accountants were faced with the challenge of implementing the complex and exhaustive requirements of Governmental Accounting Standards Board Statement No. 34 (GASB 34), the new financial reporting model for state and local governments. Public Works was confronted with the fact that these new reporting standards were being forced on them at an unknown cost for what appeared to be no tangible benefit. For both parties, the sheer enormity of identifying the City's existing infrastructure, coupled with accumulating their historical costs and depreciating them, was almost more than they could bear. How does one capitalize a street? Must each light post be depreciated individually? What about donated infrastructure? Only with teamwork and cooperation could the City successfully implement the infrastructure reporting requirements of GASB 34.
The City of Eugene
As a phase-one government, Eugene must implement GASB 34 by fiscal year ended June 30, 2002, although retroactive infrastructure reporting may be delayed to June 30, 2006. However, Eugene will not delay infrastructure reporting. Instead, they will implement it in 2002 with the rest of the GASB 34 requirements. Really? How will they do it? Although not a large city by most standards, the reporting requirements of GASB 34 are no less stringent. What decisions did they make? How will they meet the requirements in a cost-effective manner? The following narrative describes the major hurdles faced and important decisions made by Eugene during the implementation of the infrastructure reporting requirements of GASB 34. Before you start counting your stop signs, you may want to read further.
The City of Eugene has kept excellent records on-line over the years and can easily identify actual infrastructure costs by project since 1986. Although manual research is required for costs prior to that date, discounting fair values to estimate historical costs were not considered necessary since manual research was relatively easy and inexpensive.
The Transportation Network
Next, the City needed to decide how to categorize the assets within their infrastructure. An analysis of the costs coded to infrastructure revealed that the majority of costs were road or road related (sidewalks, curbs, trees, signage, traffic lights, loop detectors, and streetlights). Since no material infrastructure was noted outside of the road system, the City decided to capitalize all infrastructure into one network called the Transportation Network.
An attempt was then made to break down 1,100 lane miles of roadway in the Transportation Network into subsystems (sidewalks, curbs, trees, signage, etc.). However, the current accounting structure accumulates costs by project only (e.g., Avalon and Terry Street Project), and does not organize them by type (e.g., roads, streetlights, and sidewalks). Therefore, in keeping with the least-cost approach encouraged by GASB, the City chose to account for its infrastructure at the network level only.
The Modified Approach versus Depreciation
GASB 34 allows governments to report infrastructure assets using a "modified approach" where depreciation is not computed, but rather, all infrastructure costs (excluding additions or improvements) are immediately expensed. However, such infrastructure must be maintained at or above acceptable condition levels established by the government. If acceptable condition levels cannot be maintained, depreciation is then required prospectively.
Public Works currently utilizes a pavement management system that provides condition assessments for significant components of the City's Transportation Network. However, such condition assessments reveal that acceptable levels are not always maintained due to limited resources for operation, maintenance, and preservation of the transportation system. Rather than employ two different methods of accounting, the City decided to disregard the modified approach option and depreciate all infrastructure assets over their estimated useful lives.
To determine the useful life of the Transportation Network, the pavement management system was used again. Specifically, five groups of 12' lane mile road categories were provided: major arterials, minor arterials, collectors, neighborhoods, and residential. Each of these categories was further divided between concrete and asphalt. Public Works personnel assigned an average life to each of the ten categories based on actual experience of road deterioration within the City. The average lives (between 10 and 40 years) were weighted using the 12' lane miles, and the result was a composite depreciable life of the Transportation Network of 25 years.
The City chose the group depreciation method as described in GASB 34's first Implementation Guide. As addressed in the Guide's exercise #2, infrastructure costs are accumulated each year and treated as one asset in the depreciation system. Even though asset capitalization occurs at a very high level, detailed costs can still be tracked in the accounting system. The use of group depreciation radically eases the potential burden of depreciating individual infrastructure assets, especially when it comes to subsequent removal and replacement of significant components.
In order to catch up for not recording governmental infrastructure as an asset in years past, GASB 34 requires governments to capitalize infrastructure retroactively. However, retroactive capitalization may be limited to fiscal years ended after June 30, 1980. Eugene has chosen to limit retroactive capitalization as allowed by GASB since costs prior to that date were not readily available, and the assets would be almost fully depreciated anyway.
Donated infrastructure was one of the biggest challenges facing Eugene. Each year, private contractors build new subdivisions that are not located on previously existing streets. Upon completion, ownership of the infrastructure is transferred to the City in exchange for future maintenance and repairs. Each year, the City assumes responsibility for numerous infrastructure projects, and in accordance with GASB 34, must record them as donations at the fair market value when title is transferred.
The City used contractor project bond amounts to determine historical costs for donated assets. When a project bond was not available, the Public Works staff reviewed the project plans to estimate the project costs in current dollars. These cost estimates were discounted back to the year the project was completed using the U.S. Department of Transportation's report from the Federal Highway Administration titled "Price Trends for Federal-Aid Highway Construction" as an indicator of historical inflation in road construction. The total estimated historical value of donated infrastructure was then added to the Transportation Network and depreciated along with the rest of the infrastructure.
Complexity Made Simple
The City of Eugene has done a tremendous job tackling GASB 34 as it relates to infrastructure. The issues can seem extremely complicated and burdensome when viewed for the first time. However, using the least-cost approach encouraged by GASB, infrastructure does not have to be the monster it appears to be. Although careful planning and analysis go far in making a GASB 34 conversion manageable, the real key to success is teamwork between the professionals in accounting and Public Works. Pooling knowledge, communicating expertise, and sharing resources are vital for making timely, correct decisions that don't waste time and money. When it comes to implementing GASB 34 your greatest asset is not your infrastructureâ€”it is each other.
Michael J. Barnhart, CPA, can be reached at firstname.lastname@example.org.