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25 SOUTH CAROLINA Response: There have been no such inquiries or feedback. Interview with Robert Wilkes, Angela Feaster, Topic 3: Basic Decisions (Survey Question Reference 25): Barbara Heavenor, Betsy Lawson, You indicated that the paramount factor in your agency's and Barry Laban. August 12, 2003 decision to select the depreciation approach was inadequate General Question to Key Stakeholders: Could you give us asset management systems. Please elaborate further. What key your perspective as to how the implementation of the GASB premises or assumptions did you feel should be reflected in 34 infrastructure reporting went in your state? What were the GASB reporting? How do you see the role of your agency's major hurdles? How were they resolved? Are you satisfied management systems and data resources in supporting GASB? with the results? How has the implementation of GASB 34 affected budgeting or decision making in your state? What Response: The systems we use for secondary roads (which would you have done differently? What do you plan to do represent a significant portion of our infrastructure) do not differently for the next cycle and submission? meet the requirements that would allow us to use the mod- ified approach. The state probably would not have a prob- Response: Overall, the implementation went well. We lem switching to the modified approach if we had a GASB began 11/2 years in advance and followed the Tennessee 34 qualifying asset management system for secondary roads. methodology as to valuation of the infrastructure assets. We are in the process of modifying the road valuation sys- Using the depreciation approach somewhat simplified tem for secondary roads and have three field groups work- the implementation process because we needed less non- ing on it, but this will require three years due to the size of accounting involvement (e.g. paving, engineering) than we the secondary system. We also chose not to use the modi- would have needed if we had used the modified approach. fied approach for other infrastructure for which the asset The Comptroller General (CG) supported the depreciation management systems qualify for the modified approach. approach from the beginning for reasons discussed further See 2 below for further discussion. at 15a and 2 below. The state's primary objective was GASB 34 compliance in the most efficient and effective way. We Topic 4: Selection of Approach (Survey Question Refer- believe we accomplished this objective. ence 2): You noted that in selecting the depreciation approach, you did not seriously consider the alternative. What was the Topic 1: Committee Efforts (Survey Question Reference reason for this? Who was primarily involved in the decision 32): You indicated that the auditors and state comptroller (e.g., was it an agency decision or was the decision made at general assisted in the decision-making process used to the state government level?) In general, what do you see as implement the GASB 34 infrastructure requirements. Tell us the advantages/disadvantages of each approach? Was the more about how that worked. How many times did you meet? potential effect on DOT funding a consideration in your selec- Who chaired the group? Was it effective in airing all views tion? In what way--please explain. and building consensus? Response: Even though we are moving towards the modi- Response: The GASB 34 implementation process began in fied approach, we were concerned about the concept. There 2000 and was overseen by a statewide GASB 34 imple- are political issues to be concerned about with respect to not mentation committee in which the DOT participated. This meeting the condition targets. For example, we were con- was a very formal process that was coordinated with KPMG and that required quarterly progress reporting and involved cerned about the effect not meeting the targets might have training. The committee issued formal policies for account- on funding and allocations. Depreciation seemed like a safer ing for capital assets, including infrastructure. Notwith- route in this regard. The advantage we see to the modified standing the statewide nature of the process, over 95% of approach is that it provides more meaningful information to the assets were DOT's, and only DOT assets were classified the financial statement reader that is consistent with how as infrastructure. We believe this was an effective process. we manage infrastructure. Even though the depreciation approach is easier to implement, unfortunately it presents Topic 2: Outside Inquiries (Survey Question Reference 6): less meaningful information because it is inconsistent with To elaborate further on Question #6, has the DOT received any our preservation program and the nature of infrastructure inquiries or questions from the public, legislature, or other assets. See further comments at 52 below. interested parties regarding the new information presented in its financials? If so, who requested the information and what Topic 5: Perspectives (Survey Question Reference 3 and kind of information/clarification were they requesting? Has 34): You noted a significant difference in perspectives the DOT received any feedback from outside parties regard- among stakeholders as to which approach (depreciation/ ing the DOT's use of depreciation or the modified approach modified) to use. Please describe the nature of these differ- in reporting infrastructure? ences and how they were resolved.

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26 Response: There really was not a difference in the per- closing for GASB 34 purposes. We modified our proce- spectives of the stakeholders, primarily because the users dures so that for GASB purposes the closing occurs when of the modified approach type data do not ordinarily relate the project is complete as to project expenditures. This dif- to the CAFR. It would be nice if the CAFR presented infor- fers from when closing occurs for management pur- mation that was consistent with how we manage infrastruc- poses--i.e., when the road is open to traffic. Retirements ture, but frankly we do not have the resources to be con- are recorded at replacement value deflated to year of cerned if it does otherwise. acquisition using the consumer price index. Additions and retirements are recorded once per year by journal entry. Topic 6: Challenges (Survey Question Reference 7): You indicated that the modified approach is more challenging to Topic 9: Categorization of Costs (Survey Question Ref- implement. Please explain your reasoning. How do you see erence 27): How does your agency characterize the costs the role of a department's management systems and data in included in Capital, Preservation and Maintenance categories? supporting the modified approach? How do you see this distribution relating to the cost categories described in GASB Statement 34 for your department's Response: Condition assessment information is more com- selected approach? plex than depreciation information and requires the involve- ment of several non-accounting disciplines of the DOT. Response: As a depreciation state, we group capital and There are more transactions to consider, more calculations preservation projects together. Capital/Preservation proj- to perform each year. ect costs expected to be in excess of $500,000 are capital- ized in the financial statements. Topic 7: Modifications to System (Survey Question Ref- erence 14 and 43): You indicated minor modifications were Topic 10: Asset Classes (Survey Question Reference 28): necessary to your financial and asset management systems to You indicated four asset classes. Please describe the reason- ing in reaching this determination. Do you expect that the comply with GASB 34. Can you describe to us what these number of asset classes might vary in the future? modifications were? What GASB requirement or aspect of GASB reporting necessitated these revisions? Did the level of Response: There are really just two classes of infrastruc- detail change? Were any new data collection efforts needed ture assets--roads and bridges. Roads and bridges were because of this change? How would you describe the level of separated due to different depreciation rates. We should effort devoted to these changes: e.g., in person-months? not have checked in the questionnaire buildings or ROW (which is included as part of land in the CAFR). Response: We had to do a lot of re-programming to account for additions and retirements in the format required by Topic 11: Asset Threshold (Survey Question Reference GASB 34 (see 1 below). In connection with GASB 34, the 39): You reported that a capitalization threshold of over $125K state, through the Comptroller General's Office, elected to was used to determine whether assets were significant enough establish new capitalization thresholds, and we had to delete to report. Were different thresholds applied to different asset from the system all assets that fell under the new thresh- classes? old. We had been reporting infrastructure as an asset in the DOT's internally generated (not external) financial Response: As we noted, the threshold is $500,000 for infra- statements from about the mid 1960s into the early 1990s structure, which we determined jointly with the Comp- (also see 41 below). This made the implementation of troller General's Office. Our construction planning activ- GASB 34 infrastructure provisions in the state's and the ities, as well as our organizational structure, for some time DOT's CAFRs somewhat easier. This information updated have naturally divided our maintenance efforts from our to the date of the GASB 34 implementation was used as construction (capital) efforts. Our budget has been devel- the basis for historical cost and depreciation. oped for years around this natural separation. In a rare instance, our maintenance workforce may complete a pro- Topic 8: Additions and Retirements (Survey Question Ref- ject which could be classified as capital (increased capac- erence 1): Your response regarding the difficulty in account- ity/service or extended the design life), and this is reported ing for additions to and retirements of infrastructure assets is to finance. Likewise, a very few construction projects significant. What caused these difficulties? How did you keep may cost less than a million dollars. We use the $500,000 track of these additions and retirements before GASB 34? threshold as a reasonable point to capitalize in these Are any organizational/procedural changes planned to better unusual circumstances. For buildings, the threshold was account for these events? $100,000, for equipment $5,000. Response: The closing of "construction in progress" asset Topic 12: Asset Lives (Survey Question Reference 20): categories for management purposes differs from such You indicated you used the advice of the state comptroller

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27 general to estimate asset lives. Could you expand on that with the greatest risk of misstatement when considering the new specific examples? information and disclosures required to be reported under GASB 34? Response: The committee established by the CG (see 32 above) looked at lives used by other states based on infor- Response: See our response to 2 above. Infrastructure mation received from the National Association of State assets are unique--they are not readily marketable and far Auditors, Comptrollers and Treasurers. outlive other capital assets. In this environment, what is the point of depreciation? The modified approach presents Topic 13: Capitalization (Survey Question Reference 38): disclosures about how well infrastructure actually is main- You indicated that project costs are accrued and capitalized tained, and it is future oriented. We believe this would be each year. Please describe how the DOT defines capitalization. more meaningful information for the readers of financial statements. The risk, of course, is that under the modified Response: This is a once a year calculation to move com- approach it is easier for the DOT to look bad compared pleted projects from construction in progress to fixed assets. with other DOTs or budgets. For this reason we would like As noted in 1 above, for GASB 34 purposes this occurs to see more detailed standards developed for condition when the project is complete as to expenditures. assessments and disclosures to minimize the possibility of unfair disclosures caused by inconsistencies. Topic 14: Historical Cost (Survey Question Reference 41): You indicated "AASHO: The First 50 Years" and financial Topic 17: Condition Targets (Survey Question Reference statements as your basis for estimating historical costs. Please 44): In response to question #44, you indicated that condition describe the process used in making this calculation. How assessments will be used to aid in budgeting & funding detailed are your inventory records with respect to costs? requests, strategically allocate dollars and develop long range What are the details of deleting items and costs? plans. Do condition targets influence the size of the preser- vation budget? Response: The AASHO publication provided actual annual construction expenditures for our highways for the period Response: We believe that condition assessments provide starting in 1914 continuing to the mid 1960s. We used the significant detail that provide (or should provide) support current replacement value to allocate AASHO's historical for making budgetary and funding decisions. However, costs among roads, bridges and right-of-way. As noted the general practice has been to match whatever Federal- at 14 and 43 above, we reported actual expenditures in aid is available for capital projects and devote the remain- the Department's financial statements for the period start- der to maintenance. ing in the mid 1960s to the early 1990s which together with current expenditure records, allowed us to determine the historical costs of our highways. Topic 18: Communications (Survey Question Reference 35): You indicated significant improvement in communi- Topic 15: Book and Replacement Value (Survey Question cations among the various offices within DOT. Could you Reference 50): Your department reported an overall book describe further? value of $9 billion and a replacement value of $42 billion. Please describe how these estimates were calculated. Response: The GASB 34 implementation project brought everyone to the table to explore GASB 34 issues. Working Response: Book value as reported in the DOT's finan- together we were able to quickly make more informed deci- cial statements was determined using historical costs as sions and find solutions. Since completion of the GASB 34 described at 41 above. For replacement cost, our engineers implementation project, contacts between the program and determined the cost to reconstruct our systems currently finance staff are more frequent. based on average current cost per mile. Replacement cost includes right-of-way (based upon average cost per acre in Topic 19: Resource Allocation (Survey Question Reference each county), construction in progress, and the Southern 35): However, you indicated no significant improvement in Connector, and the total amount has not been reduced by resource allocation within DOT. Could you explain further? accumulated depreciation. Could no improvement be because resource allocation was already good or is it that the GASB 34 implementation process Topic 16: Usefulness of GASB 34 Information (Survey simply resulted in no improvement? Question Reference 52): Your response to question 52 of the survey as to usefulness of the GASB 34 information is inter- Response: Simply, we believe the depreciation approach esting (comparability with other states). Tell us more about has no effect on resource allocation, which was already why you feel this way. In your opinion, what areas are at adequate.

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28 Topic 20: Implementation Costs (Survey Question Refer- Other Issues: You indicated that South Carolina is consider- ence 12): You provided a $55,000 cost estimate ($5,000 for ing a shift from depreciation to the modified approach because training and $50,000 additional cost for the audit for GASB the latter more closely matches what really occurs in infra- 34 implementation). Are these essentially estimated costs of structure management. However, the department is concerned staff time? Do the costs include development of new or mod- that a) its asset management system is not yet complete for ified asset management systems? Please provide as much secondary roads and b) the modified approach will reveal the detail as possible. cost to preserve. Please discuss the process that will be used to reach a decision on this matter. Response: We did not track the time and expenses of our staff for the GASB 34 implementation. Roughly, three per- sons spent about 15% of the time on this project for about Response: As noted in 15 above, we are modifying our 18 months (approximately 2/3 of a person year), so our esti- valuation system for secondary roads. When completed, mate of $5,000 staff time is low. As noted, we incurred an we will consider what a change in the modified approach additional $50,000 in audit costs for additional work needed will mean to us. We will consider the informational bene- to verify our infrastructure calculations and to help refor- fits (which we now believe will be useful), the risks of mis- mat our departmental financial statements to a GASB 34 understanding, and the costs of developing the required presentation. GASB 34 disclosures.