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22 MICHIGAN Response: Only the auditors had a lot of interest in this project. We believe there are not many readers of the Interview with Ann Dennis CAFR. No infrastructure audit had been performed before and Patrick McCarthy GASB 34. The auditors raised good questions, but some- times they were concerned about immaterial items and General Question to Key Stakeholders: Could you give us sometimes it was difficult to convince them of alternatives your perspective as to how the implementation of the GASB to their views (GASB clearly permits and some would say 34 infrastructure reporting went in your state? What were the encourages alternatives). These concerns pertained only to major hurdles? How were they resolved? Are you satisfied the historical cost calculations and not to the ongoing infra- with the results? How has the implementation of GASB 34 structure addition and deletion calculations, with which the affected budgeting or decision making in your state? What auditors generally agreed. would you have done differently? What do you plan to do differently for the next cycle and submission? Topic 3: Basic Decisions (Survey Question Reference 25): You indicated that the paramount factor in your agency's deci- Response: The GASB 34 infrastructure implementation sion to select the modified approach was consistency with the effort was not all that easy--11/2 years of advance planning department's asset management philosophy. Please elaborate was necessary. It required interaction with a lot of people, further. What key premises or assumptions did you feel should mostly towards the end when the auditors became involved. be reflected in GASB reporting? How do you see the role of It was hoped that many of the implementation decisions your agency's management systems and data resources in sup- would be totally agreed upon early on, but that did not porting GASB? happen. At the end the auditors raised issues such as those concerning land, primarily because recent purchases by Response: The DOT already had a good asset manage- the state have been above fair market value. The state con- ment system with over 25 years of history. Our state wanted troller helped resolve the issues with research. Another to speak with one voice. So why shouldn't the state comp- hurdle was highway ramps, for which asset management troller report information from that system rather than data are not available. Overall, we are satisfied with the depreciation calculations which are not part of that system? results. No effect on budgeting and decision making has been noted. Topic 4: Selection of Approach (Survey Question Refer- ence 2): You noted that in selecting the modified approach, Topic 1: Committee Efforts (Survey Question Reference you did not seriously consider the alternative. What was the 32): You indicated that the DOT CFO, the Chief Engineer reason for this? Who was primarily involved in the decision and the Chief Accountant determined policies to implement (e.g., was it an agency decision or was the decision made at the GASB 34 infrastructure requirements. Tell us more about the state government level?)? In general, what do you see as the advantages/disadvantages of each approach? Was the how that worked. How many times did that group meet? potential effect on DOT funding a consideration in your Who chaired the committee? Was it effective in airing all selection? In what way--please explain. views and building consensus? Response: See above. Response: No formal committee to implement the GASB 34 infrastructure provisions was established in Michigan. Topic 5: Perspectives (Survey Question Reference 3 and Financial operations of the DOT led the effort and jumped 34): You noted no significant difference in perspectives among on GASB 34 issues early. The planning office also played stakeholders as to which approach (depreciation/modified) to an important role. We believe an early start is key to a use. This is a different answer than what we expected based smooth implementation. Ad hoc meetings were held with upon what we were hearing elsewhere (e.g., finance wants others as needed. Towards the end, meetings with the depreciation and engineers want modified). Any thoughts or DOT CFO were held fairly regularly. observations as to what generated the consensus in your state? Or was it decided by a single office without much consultation? Topic 2: Outside Inquires (Survey Question Reference 6): To elaborate further on Question #6, has the DOT received Response: There never really was a perspective difference any inquiries or questions from the public, legislature, or other within DOT. Only a few people in DOT dealt with GASB interested parties regarding the new information presented in 34 infrastructure issues and they all agreed on the approach. its financials? If so, who requested the information and what State officials did not object at any time. Accordingly, there kind of information/clarification were they requesting? Has was very little discussion involved in the decision. the DOT received any feedback from outside parties regard- ing the DOT's use of depreciation or the modified approach Topic 6: Challenges (Survey Question Reference 7): You in reporting infrastructure? indicated that the modified approach is more challenging to

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23 implement. Please explain your reasoning. How do you see maintenance components; that was judged to be admin- the role of your department's management systems and data istratively prohibitive. in supporting the modified approach? We use the codes to identify expenditures as capitalizable Response: Depreciation is a calculation. It does not require or expendable. much effort other than determining lives and salvage value. Asset management used for the modified approach involves Topic 9: Categorization of Costs (Survey Question Ref- more understanding of the different types of infrastruc- erence 27): How does your agency characterize the costs ture and related condition assessments. That understanding included in Capital, Preservation and Maintenance cate- might not matter so much for depreciation. Accountants are gories? You indicated that you do not differentiate between familiar with depreciation but have a learning curve for the Preservation and Maintenance for GASB purposes. How modified approach. We did use deprecation for ramps and do you see this distribution relating to the cost categories buildings due to the lack of asset management information. described in GASB Statement 34 for your department's selected approach? Topic 7: Condition Targets (Survey Question Reference 31): GASB requires that you specify annual targets for con- Response: This matter doesn't make a difference for the dition and planned budget expenditures for infrastructure modified approach--both preservation and maintenance assets. How has your agency determined these targets? Are costs are expensed in the financial statements. In other the GASB targets consistent with performance targets used words, we followed the GASB accounting guidelines in your asset management? Was a financial check done to see regardless of the label assigned to the costs. if these targets are feasible given planned program budgets? Topic 10: Estimating Costs of Preservation (Survey Ques- Response: We wanted the target low enough so we tion Reference 29): You indicated difficulty in estimating the wouldn't likely go under it but we also wanted to be real- costs of preservation for purposes of GASB disclosures. What istic. The Director wanted a somewhat more aggressive exactly were these difficulties? How did you go about over- target that he could use, as appropriate, to justify fund- coming them? Did your agency apply management systems ing requests. We reached a compromise. In Michigan no (e.g., PMS, BMS, MMS) to estimate these costs? Were you new money is currently available--funding results from concerned about the impact of these disclosures? a shift in appropriations. Since the target was well below actual conditions, a financial check wasn't deemed to be Response: In our state, budget numbers for infrastructure necessary. generally are not prepared on an annual basis and are not set up to distinguish preservation from maintenance costs. Topic 8: Additions and Retirements (Survey Question Reference 1): Unlike many states, your response did not indi- The ways we budget for and manage infrastructure assets cate that difficulty in accounting for additions to and retire- do not necessarily fit GASB RSI requirements. We believe ments of infrastructure assets is significant. How did you the GASB disclosure requirement should have addressed keep track of these additions and retirements? Was this the all infrastructure budgeting considerations. For example, same process as used before GASB 34? the DOT may decide to construct more new roads and do less preservation because there is not enough deterioration Response: We have 250 work type codes in the system (see in the condition assessments to be of concern. GASB's attached for listing, Appendix VI). Fortunately, the auditors focus on preservation costs only is too narrow to reflect did not have problems with the codes. These codes clearly decisions like this. indicate whether the project is considered to be capital or preservation/maintenance. We will use the codes in the Also, there is a problem with projects being budgeted in one future to roll forward costs for average year of construction year with funds expensed over several years. This means purposes--i.e. new road values will be based on average that the comparison in the RSI is not apples-to-apples. cost by year of construction. Two important points: Topic 11: Asset Classes (Survey Question Reference 28): Our codes consider complete reconstruction of road- You indicated five asset classes. Please describe the reason- way to be capital additions because we believe we ing in reaching this determination. Do you expect that the are constructing a new product and that inevitably number of asset classes might vary in the future? there are improvements to service based upon cur- rent standards. Response: Actually, we used two principal asset classes-- Projects in their entireties were treated as one category roads and bridges--for the modified approach. Ramps and or the other; there was no attempt to allocate costs buildings were depreciated. In the CAFR, all assets were within a single project to capital and preservation/ lumped together under infrastructure and land.

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24 Topic 12: Asset Threshold (Survey Question Reference Topic 17: Condition Targets (Survey Question Refer- 39): You reported that no capitalization thresholds were used ence 44): In response to question #44, you indicated that to determine whether assets were significant enough to report? condition assessments will be used to aid in budgeting & Are unofficial "rules of thumb" employed? funding requests and develop long range plans. Do condition targets influence the size of the preservation budget? Response: None. Response: Theoretically, yes but this has yet to be demon- Topic 13: Capitalization (Survey Question Reference 38): strated. There is no mention of GASB whatsoever in our You indicated that project costs are accrued and capitalized current budget requests. each year. Please describe how the DOT defines capitalization. Topic 18: Communications (Survey Question Reference Response: All costs are recorded in "construction in prog- 35): You indicated significant improvement in communi- ress" as incurred. They are transferred to individual capi- cations among the various offices within DOT. Could you tal asset accounts when the project is complete. describe further? Topic 14: Historical Cost (Survey Question Reference 41): Response: As noted above, lots of meetings were required. You indicated financial statements, bond and budget records The Bureau of Planning was very helpful. Assistance from and the department's asset management system as your basis within the Department was much greater than expected. for estimating historical costs. Please describe the process used in making this calculation. How detailed are your inven- Topic 19: Resource Allocation (Survey Question Refer- tory records with respect to costs? What are the details of ence 35): However, you indicated no significant improve- deleting items and costs? ment in resource allocation within DOT. Could you explain further? Could no improvement be because resource alloca- Response: All costs were indexed back to the average year tion was already good or is it that the GASB 34 implementa- of construction. In the survey we should not have checked tion process simply resulted in no improvement? bond and budget records and financial statements. Response: As noted above, so far GASB 34 has had no Topic 15: Book and Replacement Value (Survey Question Reference 50): Your department reported an overall book influence over allocations. It might be an influence if we value of $15 billion. Please describe how this estimate was do not meet the condition assessment targets. calculated. Topic 20: Implementation Costs (Survey Question Refer- Response: See discussion above. ence 12): You didn't provide an estimate of costs or staff time associated with GASB 34 implementation. Has there been an Topic 16: Usefulness of GASB 34 Information (Survey increase in time and cost of the financial audit as a result of Question Reference 52): Your response to question 52 of the GASB 34? Please provide as much detail as possible. survey as to usefulness of the GASB 34 information is inter- esting (useful in preparing budgeting & funding requests and Response: DOT did not assign costs to the GASB 34 infra- in making the case for funding infrastructure). Tell us more structure implementation. about why you feel this way. In your opinion, what areas are at the greatest risk of misstatement when considering the new Other Issues: You questioned the usefulness of the RSI information and disclosures required to be reported under table as currently structured because of the limitation to GASB 34? maintenance/preservation cost and the potential discrepancy between budgeted and actual costs due to multi-year projects. Response: Our survey response reflected the Director's We would like to discuss this further with you. comment about the GASB 34 information potentially sup- porting the case for increased funding. However, federal Response: RSI doesn't tell the whole story. See response money and its requirements are far more important to us. above regarding Cost Estimation (topic 10).