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37 VERMONT any inquiries or questions from the public, legislature, or other interested parties regarding the new information presented in Interview with Mike Pollica, Phil Cross, its financials? If so, who requested the information and what Mike Aswell, Bob Shadduck kind of information/clarification were they requesting? Has and Renee Lehart. August 20, 2003 the DOT received any feedback from outside parties regard- General Question to Key Stakeholders: Could you give us ing the DOT's use of depreciation or the modified approach your perspective as to how the implementation of the GASB in reporting infrastructure? 34 infrastructure reporting went in your state? What were the major hurdles? How were they resolved? Are you satisfied Response: Since the state government has not yet issued with the results? How has the implementation of GASB 34 the 2002 CAFR under GASB 34, we have not received any affected budgeting or decision making in your state? What inquiries on the new information presented in the finan- would you have done differently? What do you plan to do cials. We believe that the decline in asset balances result- differently for the next cycle and submission? ing from depreciation may raise questions in the future for the AOT. For reasons discussed below we believe this Response: The implementation of the infrastructure pro- would be a positive outcome. visions of GASB 34 went very well. The state government has not yet issued the 2002 CAFR due to the implementa- Topic 3: Basic Decisions (Survey Question Reference 25): tion of a new accounting system. From the Agency of Trans- You indicated that the paramount factor in your agency's portation (AOT) perspective the GASB 34 implemen- decision to select the depreciation approach was inadequate tation took a lot of time because we had to create a new asset management systems. Please elaborate further. What infrastructure database from two sources--a) 19801993 key premises or assumptions did you feel should be reflected project cost ledgers that existed before our current STARS in GASB reporting? How do you see the role of your project cost system and b) 19942001 data from our STARS agency's management systems and data resources in sup- system. This process is further discussed at 41 below. The porting GASB? implementation was made more difficult because we did not report general fixed assets as an account group in the Response: GASB is primarily concerned about financial state's pre-GASB 34 CAFR. If we had this implementa- and accounting issues, and the AOT is primarily con- tion to do over, we probably would have hired a consultant cerned about asset management issues. Depreciation is an given the small size of our staff. accounting concept for allocating the costs of capital assets, but it does not address asset condition. MD&A and RSI are Topic 1: Committee Efforts (Survey Question Reference good places to present asset management data with possible 32): You indicated that a committee was used to implement comparisons with accounting data. An example of such a the GASB 34 infrastructure requirements. Tell us more about comparison might be presenting a schedule showing how that worked. Who was on the committee? How many whether preservation spending is keeping up with depre- times did it meet? Who chaired the committee? Was it effec- ciation. While we believe our asset management system is tive in airing all views and building consensus? adequate for our purposes, it does not meet the specific requirements of GASB 34 to allow us to use the modified Response: Our AOT steering committee consisted of two approach. We are not concerned that our asset manage- directors--the Director of Administration and the Director ment data will not be accounted for under the GASB 34 of Program Development. There was no state-wide GASB umbrella (modified approach) as long as the MD&A 34 implementation committee. We worked directly with includes discussion of asset management where it is a State Finance & Management to obtain approval of our major factor contributing to reported financial statement planned approach. We also notified the State Auditor. All data. We were concerned about the punitive effect of hav- decisions pertaining to infrastructure were made by our ing to change to the depreciation approach if we did not steering committee with final approval of State Finance & meet our condition targets. We felt comfortable letting Management. Options for meeting GASB 34 requirements accounting do its thing (depreciation) while the Agency were presented to the steering committee, which selected focused on managing infrastructure assets. the depreciation approach and launched the effort. An AOT working committee then carried out the work. We attended In a nutshell, we believe that more disclosure makes for a industry meetings such as the AASHTO-sponsored con- better future regardless how it is presented. ference held in Nashville in 2001. Topic 4: Selection of Approach (Survey Question Refer- Topic 2: Outside Inquiries (Survey Question Reference 6): ence 2): You noted that in selecting the depreciation approach, To elaborate further on Question #6, has the DOT received you did give serious consideration to the alternative. Who was

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

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39 Topic 10: Asset Classes (Survey Question Reference 18): your inventory records with respect to costs? What are the You indicated five asset classes. Please describe the reason- details of deleting items and costs? ing in reaching this determination. Do you expect that the number of asset classes might vary in the future? Response: For the period 19801993 we used data from our previous project ledger and for the period 19942001 Response: We actually have 15 classes of infrastructure we used data from the detailed object codes in our current assets representing functional categories in the STARS STARS project cost system. Some maintenance activities system. The 2002 CAFR, when published, will roll this up had to be eliminated from these costs and we had to mas- to one asset class for infrastructure. sage the data from their project perspectives to arrive at asset classes. Previously, the 19801993 period data had Topic 11: Asset Threshold (Survey Question Reference been summarized only by preliminary, ROW, and con- 39): You reported that a capitalization threshold of over $25K struction costs "phases." The 19942001 period data had to $75K was used to determine whether assets were signifi- been summarized at a detailed object cost level, making cant enough to report. Were different thresholds applied to the conversion to asset class costs somewhat easier. different asset classes? Topic 15: Book and Replacement Value (Survey Question Response: For all classes of infrastructure assets we use a Reference 50): Your department reported an overall book capitalization threshold of $50k with an estimated life of value of $760 million. Please describe how this estimate was three years or more. calculated. Topic 12: Asset Lives (Survey Question Reference 20): Response: See Topic 14 above. You indicated you used outside appraisers and engineers to estimate asset lives. Could you expand on that with specific Topic 16: Usefulness of GASB 34 Information (Survey examples? Question Reference 52): Your response to question 52 of the survey as to usefulness of the GASB 34 information is inter- Response: Outside appraisers were NOT used for the esting (useful in preparing budgeting and funding requests, GASB 34 implementation. We used only agency engineers. developing long range plans and making the case for infra- Since we have only 7080 projects per year, the agency structure funding). Tell us more about why you feel this way. engineers estimated the lives of assets produced by each In your opinion, what areas are at the greatest risk of mis- project using general industry guidelines from AASHTO statement when considering the new information and disclo- and their own experience. Typical asset lives for infra- sures required to be reported under GASB 34? structure range from 45 to 70 years. Topic 13: Capitalization (Survey Question Reference 38): Response: See our prior comments at 15a and 2 above. You indicated that project costs are accrued and capitalized The GASB 34 modified approach information would be each year. Please describe how the DOT defines capitalization. useful for showing trends and effort, which is helpful in preparing budgeting and funding requests, developing long Response: All project costs are initially expensed. We then range plans, and making the case for infrastructure fund- make monthly entries to record the costs in "construction ing. Some of this type of supporting information might be in progress." We move the costs from "construction in developed under the depreciation approach from MD&A. progress" to the various asset classes for each individual There is a risk in relying upon any single measure. project at the time of project completion, as evidenced by a "project acceptance memorandum" (approximately 4050 Topic 17: Communications (Survey Question Reference projects per year) This memorandum indicates when final 35): You indicated significant improvement in communi- acceptance has been received by FHWA, the agency, and cations among the various offices within DOT. Could you the chief engineer. At acceptance there still could be future describe further? payments and legal settlements to be completed, which could amount to as much as 10%20% of total project costs. Response: This is significant. Before the GASB 34 imple- These additional costs are subsequently captured. mentation effort, engineering and accounting personnel within AOT seldom communicated. GASB 34 caused more Topic 14: Historical Costs (Survey Question Reference interaction between these groups to develop GASB 34 41): You indicated the department's project cost system as information that was not readily available in STARS. These your basis for estimating historical costs. Please describe the two groups continue the increased interaction as a result of process used in making this calculation. How detailed are getting to know each other's objectives better.

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