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29 TENNESSEE Response: We have received no inquiries from outside parties concerning the GASB 34 information contained in Interview with Neal Ham, Jennifer Herstek, the 2002 CAFR. However, this information represents just Laurie Clark, Jeff Jones, Wayne Seger, a single data point. After these reports have been prepared Terry Leatherwood, Edward Wasserman, Gerald Gregory, Donald Reed for several years and it becomes possible to identify trends and Dianne McKay. using validated data, we would expect there to be increased interest. We have received inquiries from cities and coun- General Question to Key Stakeholders: Could you give us ties seeking assistance in preparing their own reports such your perspective as to how the implementation of the GASB as information about their bridges that we inspect. 34 infrastructure reporting went in your state? What were the major hurdles? How were they resolved? Are you satisfied Topic 3: Basic Decisions (Survey Question Reference 25): with the results? How has the implementation of GASB 34 You indicated that the paramount factor in your agency's deci- affected budgeting or decision making in your state? What sion to select the modified approach was inconsistent esti- would you have done differently? What do you plan to do dif- mated lives and salvage values in the depreciation approach. ferently for the next cycle and submission? Please elaborate further. What key premises or assumptions did you feel should be reflected in GASB reporting? How do Response: Implementation generally went well. A key was you see the role of your agency's management systems and starting early in mid 1999, just before the final version of data resources in supporting GASB? GASB 34 was published. This was essentially a DOT effort, but we met early with the auditor and the Department of Response: The depreciation approach was viewed as not Finance and Administration to secure buy-in. Key hurdles meeting the spirit of GASB 34 since we have systems for included collecting and calibrating historical cost data and managing infrastructure. It also was viewed as not being the establishment of condition targets and related measure- informative. The estimated life of infrastructure assets is ments. We recognized that it might be difficult to change indefinite, or should be. The Tennessee Road Information condition targets, so we wanted to perfect them. Establish- Management System (TRIMS) and the bridge management ing GASB 34's condition information requirements gave system (PONTIS) provided the key inputs. The missing momentum to the ongoing development of management element was road condition data that is now being supplied by the Maintenance Management System (MMS), but that systems, notably the Maintenance Management System is still in its infancy--only one year of data is available. As (MMS) and the Pavement Management System (PMS). noted at 31 below, the Pavement Management System also has condition data that serve as a quality control check. Topic 1: Committee Efforts (Survey Question Reference 32): You indicated that a committee was used to implement Topic 4: Selection of Approach (Survey Question Refer- the GASB 34 infrastructure requirements. Tell us more about ence 2): You noted that in selecting the modified approach, how that worked. Who was on the committee? How many you did not seriously consider the alternative. What was the times did it meet? Who chaired the committee? Was it effec- reason for this? Who was primarily involved in the decision tive in airing all views and building consensus? (e.g., was it an agency decision or was the decision made at the state government level?) In general, what do you see as the Response: A DOT committee with representatives from advantages/disadvantages of each approach? Was the poten- finance, structures, right-of-way, roadway design, planning tial effect on DOT funding a consideration in your selection? and maintenance met quarterly initially, more frequently In what way--please explain. toward the end. The committee worked well and was chaired by Janice Marston, former Director of Finance. We have not Response: We felt that the numbers generated by the depre- found it necessary to continue the committee for the 2003 ciation approach didn't represent anything. There really CAFR preparation. wasn't a decision as such; it was assumed from the begin- ning that we would be using the modified approach. We Topic 2: Outside Inquiries (Survey Question Reference 6): discussed the risk of being forced to convert to deprecia- To elaborate further on Question #6, has the DOT received tion if the targets were not achieved, but did not fear this. any inquiries or questions from the public, legislature, or other If the state had to convert to depreciation, it would find a interested parties regarding the new information presented in way to do it at a high level to minimize the effort. The poten- its financials? If so, who requested the information and what tial effect of the approach selected on funding was not an kind of information/clarification were they requesting? Has explicit consideration, but we did think about it a bit. the DOT received any feedback from outside parties regard- ing the DOT's use of depreciation or the modified approach Topic 5: Perspectives (Survey Question Reference 3 and in reporting infrastructure? 34): You noted no significant difference in perspectives among

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30 stakeholders as to which approach (depreciation/modified) Response: For bridges, the FHWA National Bridge Index to use. This is a different answer than what we expected target of 75% of deck area being neither structurally defi- based upon what we were hearing elsewhere (e.g., finance cient nor functionally obsolete was selected. This was wants depreciation and engineers want modified). Any judged to be a more stable and intuitive measure than the thoughts or observations as to what generated the consen- alternatives (sufficiency rating or PONTIS health index). sus in your state? Or was it decided by a single office with- For roads, condition targeting was a new venture for TDOT. out much consultation? Achievement of the targets was measured by the Mainte- nance Rating Index (MRI) generated by the MMS, with the Response: TRIMS and PONTIS made the modified Pavement Management System serving as a quality control approach easier for us; absent these two systems we may check. The MRI works on a pass/no pass basis and the goal have arrived at a different conclusion. is that 75% of the road segments (segment = 1/10 mile) meet or exceed the standards. 7% of the segments are sampled Topic 6: Challenges (Survey Question Reference 7): Unlike every year. The MRI is comprised of five elements--pave- many states, you didn't indicate that the modified approach is ment, shoulder, roadside, traffic and drainage. The first year more challenging to implement. Please explain your reason- results in 2002 were unexpectedly high (87.75), indicating ing. How do you see the role of your department's manage- that further calibration is required. ment systems and data in supporting the modified approach? Currently, there is no link between condition target and Response: We believe that the depreciation approach expenditures due to the newness of the system. Expendi- would have been more complicated and less meaningful. ture targets are now based on the budget; in the future they We viewed the establishment of a starting date for road will be derived from the MMS as that system matures. We segments as a problem in the depreciation approach. We acknowledge that budget-based targets introduce a dis- also were concerned about multiple lives for different seg- crepancy in the comparison with actual figures since the ments of roadway and how to handle fully depreciated budget year and expenditure year do not always align in roadway and bridges still in service. At the same time, the our encumbrance-based budget system. That discrepancy modified approach is challenging because you have to could be addressed by a purely cash flow system, but that is not current practice. Also, we believe that the compari- determine the condition assessment targets and measure- son between targeted and actual conditions is considerably ment criteria for which there are no standards and little more important and relevant to the public than the com- experience. parison between planned and actual expenditures. Topic 7: Modifications to System (Survey Question Ref- Topic 9: Additions and Retirements (Survey Question erence 14): You indicated minor modifications were neces- Reference 1): Your response regarding the difficulty in sary to your financial management systems to comply with accounting for additions to and retirements of infrastructure GASB 34. Can you describe to us what these modifications assets is significant. What caused these difficulties? How did were? What GASB requirement or aspect of GASB reporting you keep track of these additions and retirements before necessitated these revisions? Did the level of detail change? GASB 34? Are any organizational/procedural changes planned Were any new data collection efforts needed because of this to better account for these events? change? How would you describe the level of effort devoted to these changes: e.g., in person-months. Response: As noted in 14 above, it was necessary to mod- ify TRIMS to account for retirements. This was done man- Response: It was necessary to identify all projects (as noted ually for 2002 and 2003. It is now automated with a report at 41 below, 4,0005,000 projects were open at inception) on lane miles removed generated by TRIMS. as either capital or maintenance. A column was added to the database and additional reports created. Also, TRIMS Topic 10: Categorization of Costs (Survey Question Ref- needed to be modified to account for retirements from the erence 27): How does your agency characterize the costs system, a capability that it did not previously have. included in Capital, Preservation and Maintenance categories? How do you see this distribution relating to the cost cate- Topic 8: Condition Targets (Survey Question Reference gories described in GASB Statement 34 for your department's 31): GASB requires that you specify annual targets for con- selected approach? dition and planned budget expenditures for infrastructure assets. How has your agency determined these targets? Are Response: Based on the nature of the construction, a project the GASB targets consistent with performance targets used is categorized as either capital or preservation/maintenance in your asset management? Was a financial check done to see (we combine preservation and maintenance into a single if these targets are feasible given planned program budgets? category). A major reconstruction project is categorized

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31 as capital even if the number of lanes remains the same Response: For construction, costs are accumulated as because such projects inevitably include capacity and safety construction-in-progress; capitalization is triggered by a improvements based on current design standards. On the completion notice that accepts the project. For the most part other hand, a resurfacing project might have safety bene- this is the same time as "open to traffic," although not fits due to the removal of potholes, but it would still be cat- always. Transfer of costs to capital is made once a year for egorized as maintenance. We do not allocate costs within all projects with this completion notice. Right-of-way a project to the two categories--that is not practical with costs are transferred once a year in the year of acquisition. over 1,500 new projects a year. Topic 15: Historical Cost (Survey Question Reference 41): Topic 11: Estimating Costs of Preservation (Survey Ques- You indicated "AASHO: The First 50 Years" and financial tion Reference 29): You indicated difficulty in estimating statements as your basis for estimating historical costs. Please the costs of preservation for purposes of GASB disclosures. describe the process used in making this calculation. How What exactly were these difficulties? How did you go about detailed are your inventory records with respect to costs? What overcoming them? Did your agency apply management sys- are the details of deleting items and costs? tems (e.g., PMS, BMS, MMS) to estimate these costs? Were you concerned about the impact of these disclosures? Response: We had three tiers of historical cost information: Response: The linkage between targeted conditions and The AASHO report for 1914 to 1964, with annual con- required expenditures in our management systems is weak. struction costs allocated among roads, bridges and Neither the MMS nor PONTIS as deployed is currently right-of-way based upon current replacement cost. mature enough to generate reliable estimates. We hope to High level appropriation codes for 1964 to 2001 costs. achieve that capability in MMS, but not in PONTIS. For Project level information on costs beginning in 2001, 2002 and 2003, the estimated costs were projections based may be allocated between roads and bridges (4,000 upon historical funding patterns. 5,000 open projects). Topic 12: Asset Classes (Survey Question Reference 28): Topic 16: Book and Replacement Value (Survey Question You indicated three asset classes. Please describe the rea- Reference 50): Your department reported an overall book soning in reaching this determination. Do you expect that the value of $15 billion and a replacement value of $45 billion. number of asset classes might vary in the future? Please describe how these estimates were calculated. Response: DOT utilized roads, bridges and right-of-way as Response: Book value is the historical cost as described in our three asset classes. The division between roads and 41 above. Replacement value was derived from statewide bridges was due to different condition rating systems. average unit costs for lane miles and acres. For bridges, a We gave some thought to a single infrastructure class, but formula (a step more sophisticated than a per-square-foot decided against it. Roads and bridges were rolled up into of bridge deck estimate) produced an estimate of the cost infrastructure in the CAFR for the balance sheet, but the to replace all of the Department's bridges. road and the bridge categories were needed for MD&A and RSI purposes, as well as audit and control purposes. We do Topic 17: Usefulness of GASB 34 Information (Survey not anticipate changing the number of classes in the future. Question Reference 52): Your response to question 52 of the survey as to usefulness of the GASB 34 information is Topic 13: Asset Threshold (Survey Question Reference interesting (useful in preparing budgeting & funding requests 39): You reported that no capitalization thresholds were used and in strategically allocating resources). Tell us more about to determine whether assets were significant enough to report. why you feel this way. In your opinion, what areas are at the Are unofficial "rules of thumb" employed? greatest risk of misstatement when considering the new information and disclosures required to be reported under Response: A project-by-project determination regarding GASB 34? capitalization is made based upon the nature of the con- struction, with no "rule of thumb." Even a very small proj- Response: The usefulness of the information is more poten- ect might be capitalized if warranted. tial than realized at this point. However, this was the first year of implementation. Over time as the accuracy of the Topic 14: Capitalization (Survey Question Reference information improves and as a time series of validated data 38): You indicated that project costs are capitalized upon becomes available and trends can be observed, these ben- approval of construction. Please describe how the DOT defines efits may be realized and the general level of interest may capitalization. increase.

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32 Topic 18: Condition Targets (Survey Question Reference further? Could no improvement be because resource alloca- 44): In response to question #44, you indicated that condition tion was already good or is it that the GASB 34 implementa- assessments will be used in budgeting & funding requests tion process simply resulted in no improvement? and in strategically allocating dollars. Do condition targets influence the size of the preservation budget? Response: Hopefully, that will occur in the future, but, as discussed above, our systems are not sufficiently mature Response: The condition assessments will be used in the to achieve improved resource allocation today. indicated manner in the future as the systems become more mature; they are not today. Topic 21: Implementation Costs (Survey Question Refer- ence 12): You didn't provide an estimate of costs or staff time Topic 19: Communications (Survey Question Reference associated with GASB 34 implementation. Has there been an 35): You indicated significant improvement in communi- cations among the various offices within DOT. Could you increase in time and cost of the financial audit as a result of describe further? GASB 34? Please provide as much detail as possible. Response: The implementation process provided a better Response: The most time-consuming activity for finance insight into how others work and what their priorities are. was the classification of all open projects into capital or This improved understanding has carried over into other maintenance. That required 25% of eight accountants' time activities. for a month. Overall, the staff effort was perhaps 1,000 hours for finance, 200 for structures. Maintenance devoted Topic 20: Resource Allocation (Survey Question Refer- approximately one man year to the effort, but most of that ence 35): However, you indicated no significant improve- would have occurred anyway; only about 5% was due to ment in resource allocation within DOT. Could you explain GASB 34.