National Academies Press: OpenBook

A Review of DOT Compliance with GASB 34 Requirements (2004)

Chapter: Chapter 5 - Case Study Interview Questions and Responses

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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
×
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
×
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
×
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Suggested Citation:"Chapter 5 - Case Study Interview Questions and Responses." National Academies of Sciences, Engineering, and Medicine. 2004. A Review of DOT Compliance with GASB 34 Requirements. Washington, DC: The National Academies Press. doi: 10.17226/13744.
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21 CHAPTER 5 CASE STUDY INTERVIEW QUESTIONS AND RESPONSES This chapter presents the survey dialog and the responses recorded from each of the six case study interviews con- ducted. The questions are listed in the order they were asked with the response following each question. These interviews were conducted in an informal, open manner to bring to life the details of the processes the DOTs went through to plan and implement the provisions of GASB 34. Thus, for each topic in the following section, several questions may be listed that were not responded to in a “line- by-line” fashion.

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

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

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

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

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

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

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

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

stakeholders as to which approach (depreciation/modified) to use. This is a different answer than what we expected based upon what we were hearing elsewhere (e.g., finance wants depreciation and engineers want modified). Any thoughts or observations as to what generated the consen- sus in your state? Or was it decided by a single office with- out much consultation? Response: TRIMS and PONTIS made the modified approach easier for us; absent these two systems we may have arrived at a different conclusion. Topic 6: Challenges (Survey Question Reference 7): Unlike many states, you didn’t indicate that the modified approach is more challenging to implement. Please explain your reason- ing. How do you see the role of your department’s manage- ment systems and data in supporting the modified approach? Response: We believe that the depreciation approach would have been more complicated and less meaningful. We viewed the establishment of a starting date for road segments as a problem in the depreciation approach. We also were concerned about multiple lives for different seg- ments of roadway and how to handle fully depreciated roadway and bridges still in service. At the same time, the modified approach is challenging because you have to determine the condition assessment targets and measure- ment criteria for which there are no standards and little experience. Topic 7: Modifications to System (Survey Question Ref- erence 14): You indicated minor modifications were neces- sary to your financial management systems to comply with GASB 34. Can you describe to us what these modifications were? What GASB requirement or aspect of GASB reporting necessitated these revisions? Did the level of detail change? Were any new data collection efforts needed because of this change? How would you describe the level of effort devoted to these changes: e.g., in person-months. Response: It was necessary to identify all projects (as noted at 41 below, 4,000–5,000 projects were open at inception) as either capital or maintenance. A column was added to the database and additional reports created. Also, TRIMS needed to be modified to account for retirements from the system, a capability that it did not previously have. Topic 8: Condition Targets (Survey Question Reference 31): GASB requires that you specify annual targets for con- dition and planned budget expenditures for infrastructure assets. How has your agency determined these targets? Are the GASB targets consistent with performance targets used in your asset management? Was a financial check done to see if these targets are feasible given planned program budgets? 30 Response: For bridges, the FHWA National Bridge Index target of 75% of deck area being neither structurally defi- cient nor functionally obsolete was selected. This was judged to be a more stable and intuitive measure than the alternatives (sufficiency rating or PONTIS health index). For roads, condition targeting was a new venture for TDOT. Achievement of the targets was measured by the Mainte- nance Rating Index (MRI) generated by the MMS, with the Pavement Management System serving as a quality control check. The MRI works on a pass/no pass basis and the goal is that 75% of the road segments (segment = 1/10 mile) meet or exceed the standards. 7% of the segments are sampled every year. The MRI is comprised of five elements—pave- ment, shoulder, roadside, traffic and drainage. The first year results in 2002 were unexpectedly high (87.75), indicating that further calibration is required. Currently, there is no link between condition target and expenditures due to the newness of the system. Expendi- ture targets are now based on the budget; in the future they will be derived from the MMS as that system matures. We acknowledge that budget-based targets introduce a dis- crepancy in the comparison with actual figures since the budget year and expenditure year do not always align in our encumbrance-based budget system. That discrepancy could be addressed by a purely cash flow system, but that is not current practice. Also, we believe that the compari- son between targeted and actual conditions is considerably more important and relevant to the public than the com- parison between planned and actual expenditures. Topic 9: Additions and Retirements (Survey Question Reference 1): Your response regarding the difficulty in accounting for additions to and retirements of infrastructure assets is significant. What caused these difficulties? How did you keep track of these additions and retirements before GASB 34? Are any organizational/procedural changes planned to better account for these events? Response: As noted in 14 above, it was necessary to mod- ify TRIMS to account for retirements. This was done man- ually for 2002 and 2003. It is now automated with a report on lane miles removed generated by TRIMS. Topic 10: Categorization of Costs (Survey Question Ref- erence 27): How does your agency characterize the costs included in Capital, Preservation and Maintenance categories? How do you see this distribution relating to the cost cate- gories described in GASB Statement 34 for your department’s selected approach? Response: Based on the nature of the construction, a project is categorized as either capital or preservation/maintenance (we combine preservation and maintenance into a single category). A major reconstruction project is categorized

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

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

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

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

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

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

VERMONT Interview with Mike Pollica, Phil Cross, Mike Aswell, Bob Shadduck and Renee Lehart. August 20, 2003 General Question to Key Stakeholders: Could you give us your perspective as to how the implementation of the GASB 34 infrastructure reporting went in your state? What were the major hurdles? How were they resolved? Are you satisfied with the results? How has the implementation of GASB 34 affected budgeting or decision making in your state? What would you have done differently? What do you plan to do differently for the next cycle and submission? Response: The implementation of the infrastructure pro- visions of GASB 34 went very well. The state government has not yet issued the 2002 CAFR due to the implementa- tion of a new accounting system. From the Agency of Trans- portation (AOT) perspective the GASB 34 implemen- tation took a lot of time because we had to create a new infrastructure database from two sources—a) 1980–1993 project cost ledgers that existed before our current STARS project cost system and b) 1994–2001 data from our STARS system. This process is further discussed at 41 below. The implementation was made more difficult because we did not report general fixed assets as an account group in the state’s pre-GASB 34 CAFR. If we had this implementa- tion to do over, we probably would have hired a consultant given the small size of our staff. Topic 1: Committee Efforts (Survey Question Reference 32): You indicated that a committee was used to implement the GASB 34 infrastructure requirements. Tell us more about how that worked. Who was on the committee? How many times did it meet? Who chaired the committee? Was it effec- tive in airing all views and building consensus? Response: Our AOT steering committee consisted of two directors—the Director of Administration and the Director of Program Development. There was no state-wide GASB 34 implementation committee. We worked directly with State Finance & Management to obtain approval of our planned approach. We also notified the State Auditor. All decisions pertaining to infrastructure were made by our steering committee with final approval of State Finance & Management. Options for meeting GASB 34 requirements were presented to the steering committee, which selected the depreciation approach and launched the effort. An AOT working committee then carried out the work. We attended industry meetings such as the AASHTO-sponsored con- ference held in Nashville in 2001. Topic 2: Outside Inquiries (Survey Question Reference 6): To elaborate further on Question #6, has the DOT received 37 any inquiries or questions from the public, legislature, or other interested parties regarding the new information presented in its financials? If so, who requested the information and what kind of information/clarification were they requesting? Has the DOT received any feedback from outside parties regard- ing the DOT’s use of depreciation or the modified approach in reporting infrastructure? Response: Since the state government has not yet issued the 2002 CAFR under GASB 34, we have not received any inquiries on the new information presented in the finan- cials. We believe that the decline in asset balances result- ing from depreciation may raise questions in the future for the AOT. For reasons discussed below we believe this would be a positive outcome. Topic 3: Basic Decisions (Survey Question Reference 25): You indicated that the paramount factor in your agency’s decision to select the depreciation approach was inadequate asset management systems. Please elaborate further. What key premises or assumptions did you feel should be reflected in GASB reporting? How do you see the role of your agency’s management systems and data resources in sup- porting GASB? Response: GASB is primarily concerned about financial and accounting issues, and the AOT is primarily con- cerned about asset management issues. Depreciation is an accounting concept for allocating the costs of capital assets, but it does not address asset condition. MD&A and RSI are good places to present asset management data with possible comparisons with accounting data. An example of such a comparison might be presenting a schedule showing whether preservation spending is keeping up with depre- ciation. While we believe our asset management system is adequate for our purposes, it does not meet the specific requirements of GASB 34 to allow us to use the modified approach. We are not concerned that our asset manage- ment data will not be accounted for under the GASB 34 umbrella (modified approach) as long as the MD&A includes discussion of asset management where it is a major factor contributing to reported financial statement data. We were concerned about the punitive effect of hav- ing to change to the depreciation approach if we did not meet our condition targets. We felt comfortable letting accounting do its thing (depreciation) while the Agency focused on managing infrastructure assets. In a nutshell, we believe that more disclosure makes for a better future regardless how it is presented. Topic 4: Selection of Approach (Survey Question Refer- ence 2): You noted that in selecting the depreciation approach, you did give serious consideration to the alternative. Who was

primarily involved in the decision (e.g., was it an agency deci- sion or was the decision made at the state government level?)? In general, what do you see as the advantages/disadvantages of each approach? Was the potential effect on DOT fund- ing a consideration in your selection? In what way—please explain. Response: See comments in 15a above. While potential effects on funding were considered in the GASB 34 method selection purposes, the key selection consideration was how good the information is that is being used by the legisla- ture for funding decisions. We came to the conclusion that the type of information needed by the legislature comes from our asset management system. We believe asset man- agement data is more important because, unlike deprecia- tion, it is future oriented. Integration of this data with the financial statements, while nice, was not the guiding fac- tor in method selection. Depreciation might help make a case for additional funding if it exceeds spending levels, thus leading to a declining asset value. Topic 5: Perspectives (Survey Question Reference 3 and 34): You noted no significant difference in perspectives among stakeholders as to which approach (depreciation/modified) to use. This is a different answer than what we expected based upon what we were hearing elsewhere (e.g., finance wants depreciation and engineers want modified). Any thoughts or observations as to what generated the consensus in your state? Or was it decided by a single office without much consultation? Response: Vermont is a small state. All infrastructure GASB 34 deliberations occurred within the AOT among no more than four people. Thus, there was not much debate on the issues. Topic 6: Challenges (Survey Question Reference 7): You indicated that the modified approach is more challenging to implement. Please explain your reasoning. How do you see the role of your department’s management systems and data in supporting the modified approach? Response: Under the modified approach we would have been dealing with more databases, people and interfaces to develop and obtain the required data and disclosures required by GASB 34. Under the depreciation approach we basically dealt with one database and fewer people and functions because less new information (lives, salvage value, computed depreciation) was required. While we had to retrofit our current system for GASB 34, this process was separate and apart from and did not affect our contin- uing asset management program. 38 Topic 7: Modification to Systems (Survey Question Ref- erence 14): You indicated minor modifications were neces- sary to your financial management systems to comply with GASB 34. Can you describe to us what these modifications were? What GASB requirement or aspect of GASB reporting necessitated these revisions? Did the level of detail change? Were any new data collection efforts needed because of this change? How would you describe the level of effort devoted to these changes: e.g., in person-months? Response: We did not track hours for the GASB 34 mod- ifications. An educated guess would be we spent about 2,000 hours for the modifications. We had to determine estimated lives, which information basically came from our engineers. We had to break down project costs from the cumulative amounts recorded in our STARS system and prior project cost ledgers into asset classes. For this purposes we calculated weighted average costs and applied them to physical asset classes. Forms were used by our engineers to develop this data. Topic 8: Additions and Retirements (Survey Question Ref- erence 1): Your response regarding the difficulty in account- ing for additions to and retirements of infrastructure assets is significant. What caused these difficulties? How did you keep track of these additions and retirements before GASB 34? Are any organizational/procedural changes planned to better account for these events? Response: The additions and deletions by asset class had to be identified by the engineers on the forms discussed at 14 above. We did not have this data prior to the imple- mentation of GASB 34. The form indicated whether the project costs by asset class were for new or replacement infrastructure. So far, for GASB 34 purposes we have not experienced a project that included both new and replace- ment costs. If we should experience such a project, we would probably apply a percentage to the project to deter- mine what is new versus replacement (i.e., what is capital versus maintenance). Topic 9: Categorization of Costs (Survey Question Ref- erence 17): How does your agency characterize the costs included in Capital, Preservation and Maintenance categories? How do you see this distribution relating to the cost cate- gories described in GASB Statement 34 for your department’s selected approach? Response: As our response to the written questionnaire indicates, we followed the GASB criteria without excep- tion. This characterization had no impact on our decision to use the depreciation approach.

Topic 10: Asset Classes (Survey Question Reference 18): You indicated five asset classes. Please describe the reason- ing in reaching this determination. Do you expect that the number of asset classes might vary in the future? Response: We actually have 15 classes of infrastructure assets representing functional categories in the STARS system. The 2002 CAFR, when published, will roll this up to one asset class for infrastructure. Topic 11: Asset Threshold (Survey Question Reference 39): You reported that a capitalization threshold of over $25K to $75K was used to determine whether assets were signifi- cant enough to report. Were different thresholds applied to different asset classes? Response: For all classes of infrastructure assets we use a capitalization threshold of $50k with an estimated life of three years or more. Topic 12: Asset Lives (Survey Question Reference 20): You indicated you used outside appraisers and engineers to estimate asset lives. Could you expand on that with specific examples? Response: Outside appraisers were NOT used for the GASB 34 implementation. We used only agency engineers. Since we have only 70–80 projects per year, the agency engineers estimated the lives of assets produced by each project using general industry guidelines from AASHTO and their own experience. Typical asset lives for infra- structure range from 45 to 70 years. Topic 13: Capitalization (Survey Question Reference 38): You indicated that project costs are accrued and capitalized each year. Please describe how the DOT defines capitalization. Response: All project costs are initially expensed. We then make monthly entries to record the costs in “construction in progress.” We move the costs from “construction in progress” to the various asset classes for each individual project at the time of project completion, as evidenced by a “project acceptance memorandum” (approximately 40–50 projects per year) This memorandum indicates when final acceptance has been received by FHWA, the agency, and the chief engineer. At acceptance there still could be future payments and legal settlements to be completed, which could amount to as much as 10%–20% of total project costs. These additional costs are subsequently captured. Topic 14: Historical Costs (Survey Question Reference 41): You indicated the department’s project cost system as your basis for estimating historical costs. Please describe the process used in making this calculation. How detailed are 39 your inventory records with respect to costs? What are the details of deleting items and costs? Response: For the period 1980–1993 we used data from our previous project ledger and for the period 1994–2001 we used data from the detailed object codes in our current STARS project cost system. Some maintenance activities had to be eliminated from these costs and we had to mas- sage the data from their project perspectives to arrive at asset classes. Previously, the 1980–1993 period data had been summarized only by preliminary, ROW, and con- struction costs “phases.” The 1994–2001 period data had been summarized at a detailed object cost level, making the conversion to asset class costs somewhat easier. Topic 15: Book and Replacement Value (Survey Question Reference 50): Your department reported an overall book value of $760 million. Please describe how this estimate was calculated. Response: See Topic 14 above. Topic 16: Usefulness of GASB 34 Information (Survey Question Reference 52): Your response to question 52 of the survey as to usefulness of the GASB 34 information is inter- esting (useful in preparing budgeting and funding requests, developing long range plans and making the case for infra- structure funding). Tell us more about why you feel this way. In your opinion, what areas are at the greatest risk of mis- statement when considering the new information and disclo- sures required to be reported under GASB 34? Response: See our prior comments at 15a and 2 above. The GASB 34 modified approach information would be useful for showing trends and effort, which is helpful in preparing budgeting and funding requests, developing long range plans, and making the case for infrastructure fund- ing. Some of this type of supporting information might be developed under the depreciation approach from MD&A. There is a risk in relying upon any single measure. Topic 17: Communications (Survey Question Reference 35): You indicated significant improvement in communi- cations among the various offices within DOT. Could you describe further? Response: This is significant. Before the GASB 34 imple- mentation effort, engineering and accounting personnel within AOT seldom communicated. GASB 34 caused more interaction between these groups to develop GASB 34 information that was not readily available in STARS. These two groups continue the increased interaction as a result of getting to know each other’s objectives better.

Topic 18: Resource Allocation (Survey Question Refer- ence 35): You indicated significant improvement in resource allocation within DOT. Could you describe further? Response: More in depth discussions about resource alloca- tion issues have developed as a result of the improved com- munications discussed at 35 above. These kinds of discus- sions rarely occurred before the GASB 34 implementation. Topic 19: Implementation Costs (Survey Question Refer- ence 12): You didn’t provide an estimate of costs or staff time 40 associated with GASB 34 implementation. Has there been an increase in time and cost of the financial audit as a result of GASB 34? Please provide as much detail as possible. Response: As noted at 14 above, we incurred about 2,000 hours of work to modify our systems for GASB 34 infra- structure requirements. We created a new full time position and that person spends about half time maintaining the sys- tems modifications made by GASB 34. Due to our limited staff resources, we needed this additional position in order to comply with GASB 34 requirements in a timely manner.

WASHINGTON Interview with Marcy Yates, Greg Lippincott, Aaron Butters, Mark Finch, Charles Fletcher, Lou Baker, Siva Sivaneswaran, Linda Pierce, DeWayne Wilson, Wendy Jarrett. July 29, 2003 General Question to Key Stakeholders: Could you give us your perspective as to how the implementation of the GASB 34 infrastructure reporting went in your state? What were the major hurdles? How were they resolved? Are you satisfied with the results? How has the implementation of GASB 34 affected budgeting or decision making in your state? What would you have done differently? What do you plan to do differently for the next cycle and submission? Response: The GASB 34 Infrastructure implementation project was a different experience for all of us from the per- spective of the interaction of asset management, account- ing and finance personnel. We believe it went smoothly and we will not significantly change our approach in the next cycle. Many different sources of information (some- times conflicting), particularly for lane miles, additions and deletions, and historical costs, increased the require- ment for coordination among all state personnel. We tried for GASB 34 consistency with our ongoing program of reporting performance measures to the public and the leg- islature. There was minimal effect on budget decision making since WSDOT already practiced asset manage- ment, particularly in the areas of pavements and bridges. This project did cause us to look at our responsibilities not only from a physical accounting and reporting perspective, but also from a costing perspective (bridges) and to do additional work on inventories. Handling additions was a challenge—our improvement type codes were not always fully descriptive; we needed to restructure to make divi- sion between capital and preservation/maintenance clear. Topic 1: Committee Efforts (Survey Question Reference 32): You indicated that a committee was used to implement the GASB 34 infrastructure requirements. Tell us more about how that worked. Who was on the committee? How many times did it meet? Who chaired the committee? Was it effec- tive in airing all views and building consensus? Response: The Department’s Executive Board (consist- ing of high level program personnel, divisional directors, regional administrators, assistant secretaries, etc.) set the initial direction and we then used several informal com- mittees throughout the GASB 34 infrastructure implemen- tation project, mostly on an ad hoc basis. This included an executive committee that was primarily informational, a work committee consisting of Marcy Yates and Jodie Stanton (see titles below following table) that executed the detail (further comments at question 12 below), and a com- mittee from the Office of Financial Management (OFM) 41 that was established mostly for quarterly informational pur- poses. In the end, a committee of two, Assistant Secretary John Conrad and Don Nelson, Director of Environmental and Engineering Programs, made the final DOT decisions pertaining to GASB 34 infrastructure requirements. We met quarterly with OFM officials and they generally agreed with DOT decisions. From the beginning there was little disagreement among all DOT and state finance parties. OFM—While OFM participated in preliminary planning and NASACT conference calls, it felt comfortable with DOT’s knowledge of the GASB’s requirements. Also, in consideration of the expected close auditor review of this DOT project (largest state asset), OFM let the DOT run the show. There was never any disagreement about the deci- sion to use the modified approach. Everyone felt that this approach was the best way to collect and present relevant state data. Topic 2: Outside Inquires (Survey Question Reference 6): To elaborate further on Question #6, has the DOT received any inquiries or questions from the public, legislature, or other interested parties regarding the new information pre- sented in its financials? If so, who requested the information and what kind of information/clarification were they request- ing? Has the DOT received any feedback from outside par- ties regarding the DOT’s use of depreciation or the modified approach in reporting infrastructure? Response: Only one legislator made some inquires, mostly from the perspective of future planning requirements as opposed to the detail of the infrastructure data. The Depart- ment of Revenue made inquiries pertaining to the valuation of infrastructure in an attempt to determine the value of lost property taxes to local jurisdictions. Some methodology inquiries have been made by local jurisdictions related to their concerns over the value of jurisdictional swaps of roadway. And of course there was significant auditor inter- est in and testing of infrastructure information, for exam- ple contract records to make sure that the inventory of lane miles was up to date and included all relevant costs. See further comments at question 44 below. Topic 3: Basic Decisions (Survey Question Reference 25): You indicated that the paramount factor in your agency’s decision to select the modified approach was more useful information. Please elaborate further. What key premises or assumptions did you feel should be reflected in GASB report- ing? How do you see the role of your agency’s management systems and data resources in supporting GASB? Response: We already had a good asset management sys- tem in place and the modified approach follows the same basic asset management requirements. The state did not want to use a different methodology for GASB 34 purposes. We relied heavily upon existing pavement management

and bridge management systems; without those in place we might have considered the depreciation approach. OFM was happy to leave all DOT GASB 34 infrastructure reporting decisions to the DOT. Also, see comments at 32 above. Topic 4: Selection of Approach (Survey Question Refer- ence 2): You noted that in selecting the modified approach, you did not seriously consider the alternative. What was the reason for this? Who was primarily involved in the decision (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 advantages/disadvantages of each approach? Was the potential effect on DOT funding a consideration in your selection? In what way—please explain. Response: See previous comments at question 25a and 32. While we have not discussed advantages and disadvan- tages of the depreciation approach, we perceive no advan- tage to such an approach as it is a mathematical exercise, unrelated to the way we manage infrastructure assets. The staff recommendation to use the modified approach was accepted by the Executive Board with little discussion. The potential effect of funding was not a consideration in our decision to use the modified approach. Of course, we hope that the information will positively affect future legislative infrastructure funding decisions and that even more atten- tion will be paid to the state’s infrastructure needs, but that effect is more potential than real at this point. Topic 5: Perspectives (Survey Question Reference 3 and 34): You noted no significant difference in perspectives among stakeholders as to which approach (depreciation/ modified) to use. This is a different answer than what we expected based upon what we were hearing elsewhere (e.g., finance wants depreciation and engineers want modified). Any thoughts or observations as to what generated the con- sensus in your state? Or was it decided by a single office without much consultation? Response: Our state is preservation oriented, as reflected in our existing asset management system. The use of the depreciation approach would have required the creation of yet another new methodology, primarily extensive spread- sheets or a modification of our system, to track lives, sal- vage values and depreciation expense. Again, this informa- tion seems unrelated to our asset management approach. Using our existing management systems to obtain data for the requirements of the modified approach of GASB 34 seemed to be more logical. Topic 6: Challenges (Survey Question Reference 7): You indicated that the modified approach is more challenging to implement. Please explain your reasoning. How do you see the role of your department’s management systems and data in supporting the modified approach? 42 Response: See our response to questions 3 and 34 in the preceding paragraph. The most difficult aspect of this approach was for us to identify additions and deletions of infrastructure for GASB 34 reporting purposes. Our accounting system was not set up for us to easily do this. In the end we used DOT improvement codes for this pur- poses, but these required some further analysis. Using a depreciation approach would have required us to start from scratch. Notwithstanding our response to question 14 below, we believe the depreciation approach could have been more difficult because it would have required additional infor- mation that is unrelated to our asset management system (lives, salvage value, depreciation). Pavement Manage- ment section—the key challenge was getting the finance group to understand the Pavement Management system and what it does. Topic 7: Modifications to Systems (Survey Question Ref- erence 14 and 43): You indicated minor modifications were necessary to your financial management systems to comply with GASB 34. Can you describe to us what these modifica- tions were? What GASB requirement or aspect of GASB reporting necessitated these revisions? Did the level of detail change? Were any new data collection efforts needed because of this change? How would you describe the level of effort devoted to these changes: e.g., in person-months? Response: We had to develop much ad hoc reporting from our existing asset management system to accommodate the requirements of GASB 34. We developed spreadsheets for the different data, such as additions to and retirements of infrastructure assets. We had to re-label transactions to fit the requirements of GASB 34 reporting. In short, we had the data; we just had to re-package it to make it under- standable. See our response to question 1 below regarding linkage of our system with the financial statements. See our response to question 12 below regarding level of effort devoted to these changes. See our response to question 41 below regarding examples of ad hoc reporting. Topic 8: Condition Targets (Survey Question Reference 31): GASB requires that you specify annual targets for con- dition and planned budget expenditures for infrastructure assets. How has your agency determined these targets? Are the GASB targets consistent with performance targets used in your asset management? Was a financial check done to see if these targets are feasible given planned program budgets? Response: The Transportation Commission presents fund- ing recommendations that are derived from assets that are due and past due for preservation work. The actions of leg- islators as reflected in budget allocations and appropria- tions, hopefully in accord with the recommendations, deter- mine the targets. In other words, we take the budgeted amounts and translate them into condition targets. This

process involves the additional consideration of needs, pri- ority and accident data. In 2001, this process yielded a tar- get of 91% of pavements in fair or better condition. (How- ever, even if funding wasn’t a constraint the target wouldn’t rise above, say, 97% due to poor condition in short seg- ments that are uneconomic to address). Our methodology was developed years ago and basically tries to identify the lowest life cycle cost. Preservation requirements for pave- ments are derived from an index (Pavement Structural Condition) comprised of cracking (10% or more with medium severity alligator cracking), rutting (10-mm max- imum to avoid ponding and hydroplaning) and ride quality (International Roughness Index). The lowest criterion deter- mines the index ranking, and in 90% of the cases that is cracking since this is an aggressive target, calling for earlier interventions than in most states. Yes, a financial check was performed—that, in fact, governs the allocation. This is a fiscally constrained procedure, rather than a 20-year plan. Topic 9: Additions and Retirements (Survey Question Reference 1): Your response regarding the difficulty in accounting for additions to and retirements of infrastructure assets is significant. What caused these difficulties? How did you keep track of these additions and retirements before GASB 34? Are any organizational/procedural changes planned to better account for these events? Response: Before the adoption of GASB 34 there was no need to link asset management data with the financial state- ments. Our records reported asset information and cost data was not classified by asset. As noted in our response to question 14 above, we had to develop ad hoc reporting to link the information from our asset management system with the financial statements. In the future we anticipate automating this linkage when funding or programming resources become available. OFM—like all other depart- ments, DOT is required to complete disclosure forms to classify information from its systems to the GASB 34 requirements. While OFM is unable to comment on the DOT responses to questions 14 and 1, it understood that the DOT had to do much more “tweaking” of its data than other state departments. This was probably because DOT records are maintained on a project basis and accordingly are not linked to or part of the statewide accounting system. Topic 10: Categorization of Costs (Survey Question Ref- erence 27): How does your agency characterize the costs included in Capital, Preservation and Maintenance categories? How do you see this distribution relating to the cost cate- gories described in GASB Statement 34 for your department’s selected approach? Response: We have considerable difficulty with the way GASB has combined the terms maintenance and preser- 43 vation. We have a preservation program which, is a capi- tal program, separate from our maintenance program, which is an operating program. Consequently, we do quite a bit of analysis of the activities in our preservation program to determine if they increase capacity or improve efficiency. We do not believe one can be as explicit on this characteri- zation as the GASB suggests. For example, consider the complete reconstruction of a roadway that increases life but does not result in readily identifiable increases in the capac- ity or efficiency of the roadway (improvements). For asset management purposes, we consider this to be a new asset that should be capitalized. The reconstruction inevitably results in improvements reflecting current standards (for example, improved pavement design and consequent increase in load carrying capacity) even though we have not specified what those improvements are. Identification of that portion of the expenditures that represent improve- ments versus preservation, as suggested by question/ answer 59 of GASB’s first GASB 34 implementation guide, is impractical considering the hundreds of new projects each year. Further, OFM has suggested that the dollar amount of preservation costs capitalized would be imma- terial from an overall financial statement perspective. For efficiency purposes, we capitalize all infrastructure system expenditures over $100,000 in the financial statements. Most important, we coordinate our definitions and capital- ization policies with Federal requirements. We suggest that GASB evaluate a more sophisticated structure for catego- rizing capital, preservation and maintenance costs and that federal (FHWA) definitions be considered. Topic 11: Estimating Costs of Preservation (Survey Ques- tion Reference 29): You indicated difficulty in estimating the costs of preservation for purposes of GASB disclosures. What exactly were these difficulties? How did you go about over- coming them? Did your agency apply management systems (e.g., PMS, BMS, MMS) to estimate these costs? Were you concerned about the impact of these disclosures? Response: See our response to question 27 above. Also, our asset management system is organized by program and only a portion of the system represents preservation costs. The differences in definitions (question 27 above) caused many questions to be raised on the GASB 34 requirements and they generated much discussion. The pavement man- agement system (developed in-house) doesn’t generate costs; these are derived from actual bids. BRIDGET is the bridge management system. The preservation costs of bridges are based on unit costs per square foot of bridge deck for four types of bridges, updated annually for plan- ning purposes. The financial statement disclosures for planned versus actual maintenance and preservation were derived from budgetary information for the programs, less amounts capitalized in the preservation program.

Topic 12: Asset Classes (Survey Question Reference 28): You indicated three asset classes. Please describe the rea- soning in reaching this determination. Do you expect that the number of asset classes might vary in the future? Response: The state actually uses the modified approach to account for two asset classes that appear to fit the GASB definition of infrastructure—the state’s highway system and its emergency airfields. The state’s short rail line is actually depreciated and, therefore, should not have been checked in question #28 of the written survey. The state has no current plans to add to either our airfields or short rail line, but those plans could change. We would expect that neither the emergency airfields nor the rail lines will become significant infrastructure assets of the state. Also, when the question was answered initially, we were proba- bly thinking of the 3 components of the condition rating disclosure (pavements, bridges and air fields). Topic 13: Asset Threshold (Survey Question Reference 39): You reported that a capitalization threshold of from $75K to $125K was used to determine whether assets were signif- icant enough to report. Were different thresholds applied to different asset classes? Response: As noted in our response to question 27 above, $100,000 is the general capitalization threshold. DOT accounting and program management make other judg- mental decisions based on all aspects of the construction. Topic 14: Capitalization (Survey Question Reference 38): You indicated that project costs are capitalized based upon construction costs accrued each year. Please describe how the DOT defines capitalization. Response: We capitalize our costs for accounting purposes only once per year. We do not use a “construction in process” account for infrastructure purposes. OFM—DOT infrastructure is not included in “construction in process” in the CAFR. Topic 15: Historical Cost (Survey Question Reference 41): You indicated financial records on construction costs as your basis for estimating historical costs. Please describe the process used in making this calculation. How detailed are your inventory records with respect to costs? What are the details of deleting items and costs? Response: We took the actual capital outlay costs in our construction programs for the years 1980 through 2001. While we have cost data by project in our system for some of the years, this information was difficult to pull together because of differing phases of work for our various proj- ects, which are not necessarily easily connected. The his- torical cost data came from different accounting and asset 44 management data sources and was generally summarized by Program Identification Number (PIN). This is just one example of the need for ad hoc reporting discussed in ques- tion 14 above. A reason for immediately reporting histori- cal cost rather than taking advantage of the deferred imple- mentation date was to avoid reporting a deficit for the State of Washington, although we were not pressured to do so. Topic 16: Book and Replacement Value (Survey Question Reference 50 and 51): Your department reported an overall book value of $11 billion and a replacement value of $99 bil- lion. Please describe how these estimates were calculated. Response: The book value was derived from actual costs from 1980 to the present, as discussed in question 41 above. We did not use replacement costs and a deflator to arrive at book value. Right-of-way was not reported separately, but much of it was captured in the construction costs. Replacement costs, as reported to you in this survey, were based on the premise of a complete current re-building of the assets—$99 billion represented the mid-point in a range of $90 billion to $110 billion. Right-of-way was not included on the premise that it would survive even if the road network were destroyed. We have provided you the detail of our replacement cost calculations and you may publish this in your report. Topic 17: Usefulness of GASB 34 Information (Survey Question Reference 52): Your response to question 52 of the survey as to usefulness of the GASB 34 information is interesting (useful in making the case for funding infrastruc- ture). Tell us more about why you feel this way. In your opin- ion, what areas are at the greatest risk of misstatement when considering the new information and disclosures required to be reported under GASB 34? Response: Increased usefulness of this information is our hope for the future. As we noted in the general comment at the end of the questionnaire, we would like to see GASB consider removing the requirement to use the depreciation approach if planned condition levels are not met over a period of time. Condition levels provide decision makers and the public better information than depreciation does. Disclo- sure information could be similar to that for unfunded pen- sion liabilities. The current GASB requirement to switch to depreciation implies that the depreciation method is superior to the modified approach, a position we disagree with. Dis- closure about all the considerations necessary for the modi- fied approach is far more meaningful. Most of all, we believe depreciation is meaningless in this environment. Topic 18: Condition Targets (Survey Question Reference 44): In response to question #44, you indicated that condition assessments will be used in budgeting & funding requests and in performance reporting through accountability reports.

Do condition targets influence the size of the preservation budget? Response: See our response to question 6 above. We note that more detailed data is being requested by legislative committees. While this can result in information over- load, additional data help legislators understand the fac- tors necessary for budgetary decisions. The information has always been there and the increased requests for data may not be a result of GASB 34. Our systems have always supported funding requests. In the future, new questions may arise because of GASB 34. However, GASB 34 dis- closures do not provide the level of detail needed for bud- getary decisions. Topic 19: Communications (Survey Question Reference 35): You indicated significant improvement in communi- cations among the various offices within DOT. Could you describe further? Response: More infrastructure data is being requested from multiple sources. Program Management—It is hard to judge whether this is a result of GASB 34. Bridges—We now have more contact with finance and that is good. 45 Topic 20: Resource Allocation (Survey Question Refer- ence 35): You indicated significant improvement in resource allocation within DOT. Could you describe further? Response: This is not completely fulfilled yet, but there is increased awareness by Department executives. We are get- ting better information from our asset management system and GASB 34 information to help us make trade-off deci- sions. This results in better resource allocation. Topic 21: Implementation Costs (Survey Question Refer- ence 12): You didn’t provide an estimate of costs or staff time associated with GASB 34 implementation. Has there been an increase in time and cost of the financial audit as a result of GASB 34? Please provide as much detail as possible. Response: All costs of implementing the infrastructure provisions of GASB 34 were absorbed by DOT. It required about 10–25% of Marcy’s time for about one and one half years overseeing the implementation. Jodie Stanton spends about 25% of her time for three to four months in the sum- mer of each year working on the detail. This is Daren Guyant’s first year with major involvement with infrastruc- ture reporting, so we do not yet have figures on his time.

Next: Chapter 6 - Information Gaps and Research Needs »
A Review of DOT Compliance with GASB 34 Requirements Get This Book
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TRB’s National Cooperative Highway Research Program (NCHRP) Report 522: A Review of DOT Compliance with GASB 34 Requirements examines approaches taken by state departments of transportation to comply with the requirements of Governmental Accounting Standards Board (GASB) Statement No. 34. GASB 34 is the accounting standard that requires general infrastructure assets to be reported together with related depreciation or preservation costs in the comprehensive financial statements of state and local governments. This report documents how the requirements set by GASB 34 were met and catalogs the various approaches that were implemented in the first year. Appendices to this report were published as NCHRP Web Document 63: A Review of DOT Compliance with GASB 34 Requirements—Final Report: Appendices A through G.

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