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33 TEXAS In addition, there was a committee within TxDOT that met through this period. Interview with Duane Sullivan, Robert Snipes, Marios Parpounous, Deborah Weyer, Topic 2: Outside Inquiries (Survey Question Reference 6): John Munoz, Ralph Banks, Sammy Mitchell and Joe Graff. To elaborate further on Question #6, has the DOT received any inquiries or questions from the public, legislature, or other General Question to Key Stakeholders: Could you give us interested parties regarding the new information presented in your perspective as to how the implementation of the GASB its financials? If so, who requested the information and what 34 infrastructure reporting went in your state? What were the kind of information/clarification were they requesting? Has major hurdles? How were they resolved? Are you satisfied the DOT received any feedback from outside parties regard- with the results? How has the implementation of GASB 34 ing the DOT's use of depreciation or the modified approach affected budgeting or decision making in your state? What in reporting infrastructure? would you have done differently? What do you plan to do differently for the next cycle and submission? Response: We have noted very little interest in the GASB 34 infrastructure CAFR data. Most legislators are not even Response: Implementation was a challenge, but generally aware of the data. We are disappointed there has been so everything went well. The way we approached the GASB 34 little inquiry after all of our effort. For example our 2002 infrastructure requirements was the best possible approach CAFR shows an increase in maintenance expenditures for for the state to implement the requirements for reasons interstate highways, as compared with the estimate, but a that will be discussed further below. Much of the data reduction in the overall condition assessment. No one ques- needed for GASB 34 infrastructure requirements had to be tioned this disparity. extracted from our existing systems (principally the Main- There is one exception to our comments. We maintain tenance Management System and BRINSAP for bridges) bridge inventories for local governments (which are not part and re-formatted for GASB 34 purposes. Many Access of the state system) and we perform condition assessments databases, which have not been linked to our asset systems, on those assets. Local governments have made numerous were developed for this purpose. The DOT had been con- inquiries about those records, apparently with regard to their ducting highway condition assessments for several years, own implementation of GASB 34. which made transition to the modified approach relatively smooth. We are generally satisfied with the results, although Topic 3: Basic Decisions (Survey Question Reference 25): we have not yet realized significant benefits. TxDOT is You indicated that the paramount factor in your agency's deci- becoming a performance-based organization, and GASB sion to select the depreciation approach for selected assets 34 will support that trend by enhancing the role of perfor- was the availability of information and the ability to separately mance measures in financial statements. We expect clari- identify assets. However, you selected modified as your basic fications, but not significant changes, for the next cycle. approach because of more useful information. Please elaborate further. What key premises or assumptions did you feel should Topic 1: Committee Efforts (Survey Question Reference be reflected in GASB reporting? How do you see the role of 32): You indicated that GASB 34 was implemented through your agency's management systems and data resources in sup- a collaboration of the DOT, Comptroller and State Auditor. porting GASB? Tell us more about how that worked. How many times did you meet? Who chaired the group? Was it effective in airing Response: With respect to fixed asset subject to deprecia- all views and building consensus? tion, the state's central property management system was generally used for GASB 34 purposes, with certain excep- Response: The Comptroller's office led the state's over- tions, including bridges. This was because the bridge sys- all GASB 34 implementation committee, which consisted tem included a good inventory from which to make depre- of several smaller committees representing many state agen- ciation calculations. The bridge system does not include cies, including a Capital Asset team in which DOT partici- asset management functions, which, by GASB definition, pated. The committees met for about a year and a half (start- precluded use of the modified approach for that class of ing early was key to success) and one important output was infrastructure. The state has not been in a position to imple- a Capital Asset Guide on GASB 34. The Guide includes ment such a system. For highways, the DOT had the asset new capitalization and depreciation criteria, detailed def- management system needed for the modified approach and initions of various asset categories and accounting transac- it has been working very well. Another factor was that we tion guidance. The Guide can be obtained on the internet at: believe that bridges have a more definable life cycle than http://www.window.state.tx.us/comptrol/san/publications/ roadways and thus lend themselves more readily to a depre- pubalpha.html. ciation calculation. We believe use of the modified approach

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34 for roadways was therefore most appropriate from both opment of new accounts to track types of expenditures and information gathering and reporting perspectives. We might creation of inventories in an Access database. Was this the consider a shift to the modified approach for bridges if we extent of the modifications? What GASB requirement or implement a bridge management system that would gen- aspect of GASB reporting necessitated these revisions? Did erate the necessary information. the level of detail change? Were any new data collection efforts needed because of this change? How would you Topic 4: Perspectives (Survey Question Reference 3 and describe the level of effort devoted to these changes: e.g., in 34): You noted no significant difference in perspectives person-months? among stakeholders as to which approach (depreciation/ modified) to use. This is a different answer than what we Response: Again, we had to re-format our information for expected based upon what we were hearing elsewhere (e.g., GASB 34 purposes. Our highway data is on a project finance wants depreciation and engineers want modified). basis, which we had to convert to an asset by year of con- Any thoughts or observations as to what generated the con- struction basis for GASB 34 purposes. Our bridge data is sensus in your state? Or was it decided by a single office on an asset by year of construction basis but we had to without much consultation? amplify it with cost data. It was necessary to allocate expenses among capital, preservation and maintenance Response: There was general agreement between the per- categories and to compute the value of the assets. We used spectives of all stakeholders, based primarily on the nature Access databases and Excel spreadsheets for these pur- of the systems we used. See our response to questions 15a poses (the exercise would have been very difficult without and 25a above. There was some concern about how the these tools). This required 20% of three or four staff mem- information would be used, but that didn't influence the bers' time for 11/2 years. decision on approach. Topic 7: Condition Targets (Survey Question Reference Topic 5: Challenges (Survey Question Reference 7): You 31): GASB requires that you specify annual targets for con- indicated that the modified approach is more challenging to dition and planned budget expenditures for infrastructure implement. Please explain your reasoning. How do you see assets. How has your agency determined these targets? Are the role of your department's management systems and data the GASB targets consistent with performance targets used in supporting the modified approach? in your asset management? Was a financial check done to see if these targets are feasible given planned program budgets? Response: The difficulty of approach depends on the asset system used by the DOT. Notwithstanding this fact, our Response: The DOT's development of targets started well highway and bridge asset systems contain most of the data before the implementation of GASB 34 and is a continu- in formats that differ from those required by GASB 34. ing effort based upon historical expenditures and condi- The re-formatting involves the use of Access databases and Excel spreadsheets, the extent of which initially seemed tion levels. A condition assessment system for roadways greater for the modified approach than for the depreciation was implemented the previous year and was used, without approach. This is because for the modified approach there modification, for GASB 34. It's based on a sample size of are more factors to consider than the life, salvage value 5% for highways and 10% for Interstates with 15 scor- and depreciation calculation considerations for the depre- ing. Scoring is aggregated by district, by highway type and ciation approach. However, we now believe that if the state by asset type. The Commissioners approve the targets, in had to switch to the depreciation approach because it did a formal process. The targets are fiscally constrained. The not achieve the required condition targets, computing depre- most difficult aspect of the exercise is the weak correlation ciation might be a nightmare. This is because of the high between expenditures and outcomes--this will require fur- level at which highway data now is accumulated. Lower ther development over the next few years. However, we levels of accumulation would likely be necessary for depre- believe that the comparison between targeted and actual ciation purposes. For example, new roadway may have condition levels, as opposed to the comparison between different sections that require differing depreciation cal- planned and actual expenditures, is the more meaningful culations because the sections have differing estimated aspect of the exercise. lives. In summary, the real answer to question #7 is "that depends." Topic 8: Additions and Retirements (Survey Question Ref- erence 1): Unlike many states, Texas did not indicate diffi- Topic 6: Modifications to System (Survey Question Ref- culty in accounting for additions to and retirements of infra- erence 14 and 43): You indicated that both minor and major structure assets. How did you keep track of these additions modifications were necessary to your financial and asset man- and retirements? Was this the same process as used before agement systems to comply with GASB 34, including devel- GASB 34?

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35 Response: We have always kept track of additions and Topic 12: Asset Threshold (Survey Question Reference deletions in our highway and bridge systems. With the 39): You reported asset thresholds of $500K for infrastruc- implementation of GASB 34 we now annually enter the ture, $5K for personal property and $100K for other real amounts into the state's accounting system for both con- property. Do these limits work well for Texas? struction in progress and fixed asset classes. The threshold for an addition is when 85% of anticipated expenditures Response: The capitalization thresholds were determined have occurred. by the state's Capital Asset Team discussed in 32 above. We believe these thresholds work well for our DOT. Topic 9: Categorization of Costs (Survey Question Ref- erence 17 and 27): How does your agency characterize the Topic 13: Estimating Asset Lives (Survey Question Ref- costs included in Capital, Preservation and Maintenance cat- erence 20): You indicated you used comparison with lives egories? How do you see this distribution relating to the cost used by others to estimate asset lives. Could you expand on categories described in GASB Statement 34 for your depart- that with specific examples? ment's selected approach? Response: The bridge division arrived at lives that were Response: The Capital Asset Guide discussed in question different (longer) than those lives actually used to compute 32 above provides the specifics of the elements of capital depreciation in the CAFR, so our response is moot. The asset costs. As a practical matter we consider the complete State Comptroller used the American Appraisal Associa- reconstruction of a roadway and overlay of existing lanes tion to estimate lives for classification of assets and these located next to newly constructed lanes all to be capital were used for purposes of computing depreciation in the costs. We do not attempt to separate such projects between financial statements. their maintenance and capital components because the effort would be extensive and cost prohibitive. (Note: the Topic 14: Capitalization (Survey Question Reference 38): preceding represents DOT's perspective. The State Comp- You indicated that project costs are capitalized at the time of troller's Office and the State Auditor's Office both indi- 85% project completion. Please describe how the DOT defines cated that this subject warranted further consideration and capitalization. perhaps a more sophisticated approach.) Response: It is not always practical for us to determine Topic 10: Estimating Costs of Preservation (Survey Ques- "substantial completion" of a project. For example, when tion Reference 29): You indicated difficulty in estimating the is a two-part project that includes new lanes as well as costs of preservation for purposes of GASB disclosures. What asphalt over existing lanes substantially complete? Fur- exactly were these difficulties? How did you go about over- ther, as noted in question 17/27 above, it is not always coming them? Did your agency apply management systems (e.g., PMS, BMS, MMS) to estimate these costs? Were you practical to separate capital and maintenance costs so we concerned about the impact of these disclosures? consider all of these costs to be capital. Thus, the 85% fac- tor was designed to approximate the time of "substantial Response: Our estimates of the costs of maintenance and completion" by allowing for the lag time in final payments preservation have to be determined independently of bud- to contractors after completion. The policy in the Capital geted amounts. The budgetary system may reflect certain Asset Guide provides that costs are capitalized (i.e., maintenance costs as construction (capital) simply because moved from construction in progress to infrastructure) at of differences in definitions. We use Access databases and the earlier of substantial completion of the project or when Excel spreadsheets to make these estimates. We believe 85% of the anticipated expenditures have been made to the that for internal control purposes a reconciliation of the contractor. As a practical matter, the DOT only uses the amounts we estimate to budgetary amounts should peri- 85% measurement. odically be prepared. Bridges--we believe we would be able to readily determine preservation and maintenance Topic 15: Historical Costs (Survey Question Reference costs if we were to switch to the modified approach. 41): You indicated "AASHO: The First 50 Years" and finan- cial statements as your basis for estimating historical costs. Topic 11: Asset Classes (Survey Question Reference 18 Please describe the process used in making this calculation. and 28): You indicated five asset classes. Please describe the How detailed are your inventory records with respect to reasoning in reaching this determination. Do you expect that costs? What are the details of deleting items and costs? the number of asset classes might vary in the future? Response: Highways: We developed the historical cost of Response: The classes of assets were determined by the the highways through a combination of AASHO figures state's Capital Asset Team discussed in question 32 above. ("AASHO: The First 50 Years") and TxDOT's past finan- We do not expect the asset classes to vary in the near future. cial reports. Since reported "construction" expenditures

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36 include types of construction that would not be capitalized requests and strategically allocating dollars. Do condition tar- under GASB 34, we looked at the composition of these gets influence the size of the preservation budget? expenditures over a 10 year period, 1991 through 2000, and derived a factor which we could apply to total construc- Response: There had been a seven year decline in pavement tion expenditures to arrive at what should be capitalized. condition scores, but now the `fix it first' philosophy is tak- This factor was applied to the total "construction" costs ing hold with a 60% increase in funding from FY1997 to according to AASHO figures and TxDOT's past finan- FY2002. Thus, the use of condition assessments is influ- cial statements. encing the budget process. However, this shift in priorities was in effect prior to GASB 34. Bridges: When determining historical bridge costs, we used the current year replacement cost ($/ft2 deck area) for Topic 19: Communication (Survey Question Reference each category of bridge and indexed the cost back to each 35): You indicated significant improvement in communi- bridge's year of construction. cations among the various offices within DOT. Could you describe further? Topic 16: Book and Replacement Value (Survey Question Reference 50 and 51): Your department reported an overall Response: Very simply, we believe that the GASB 34 proj- book value of $33 billion (+12.9 for bridges) and a replace- ect forced the different offices to work more closely, result- ment value of $225 billion (+21.8 for bridges). Please describe ing in joint efforts to find better solutions. For example, the how these estimates were calculated. relative weightings of the various asset types in the main- tenance management system were revised to place a more Response: These estimated values excluded assets reported appropriate (greater) emphasis on pavements at the sug- under the depreciation approach (principally bridges). Add- gestion of the State Auditor's Office. ing bridges, the overall book value is $46 billion and the replacement value is $247 billion. For bridges we used Topic 20: Resource Allocation (Survey Question Refer- year 2000 per square foot costs applied against inventory ence 35): You indicated significant improvement in resource to arrive at replacement costs. For bridge historical costs allocation within DOT. Could you describe further? we applied FHWA factors to deflate the replacement costs to historical costs. For current replacement costs for road- Response: The question we responded to relates to the ways, we used our current number of lane miles for each future. We believe that the improvements in the lines of road type (freeway, non-freeway, etc.) and multiplied it by communications discussed at question 35 will improve how the current estimated construction costs per lane mile for dollars are allocated in the future because such allocations each road type. will be based on more informed decisions. Topic 17: Usefulness of GASB 34 Information (Survey Topic 21: Implementation Costs (Survey Question Refer- Question Reference 52): Your response to question 52 of ence 12): Let's talk about the GASB implementation costs. the survey as to usefulness of the GASB 34 information is You indicated $239,000 and 6,200 staff hours. Do these costs interesting (useful in preparing budgets & funding requests, include only staff time needed to develop the required GASB strategically allocating resources and making the case for reports? Does this staff time include managerial staff only, or funding infrastructure). Tell us more about why you feel this IT/data or other staff as well? Do the costs include develop- way. In your opinion, what areas are at the greatest risk of ment of new or modified asset management systems? What misstatement when considering the new information and dis- has been the increase in time and cost of the financial audit closures required to be reported under GASB 34? as a result of GASB 34? Please provide as much detail as possible. Response: Actually, we believe these are potential uses that have not yet been realized. Response: These are the costs to prepare the GASB 34 documents only, excluding system costs and other IT sup- Topic 18: Condition Targets (Survey Question Reference port. With respect to the audit, there was increased time in 44): In response to question #44, you indicated that condi- FY 2002 due to initial implementation. We expect this will tion assessments will be used to aid in budgeting & funding decline in the future.