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

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

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

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

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45 Do condition targets influence the size of the preservation Topic 20: Resource Allocation (Survey Question Refer- budget? ence 35): You indicated significant improvement in resource allocation within DOT. Could you describe further? Response: See our response to question 6 above. We note that more detailed data is being requested by legislative Response: This is not completely fulfilled yet, but there is committees. While this can result in information over- increased awareness by Department executives. We are get- load, additional data help legislators understand the fac- ting better information from our asset management system tors necessary for budgetary decisions. The information and GASB 34 information to help us make trade-off deci- has always been there and the increased requests for data sions. This results in better resource allocation. may not be a result of GASB 34. Our systems have always supported funding requests. In the future, new questions Topic 21: Implementation Costs (Survey Question Refer- may arise because of GASB 34. However, GASB 34 dis- ence 12): You didn't provide an estimate of costs or staff time closures do not provide the level of detail needed for bud- associated with GASB 34 implementation. Has there been an getary decisions. increase in time and cost of the financial audit as a result of GASB 34? Please provide as much detail as possible. Topic 19: Communications (Survey Question Reference 35): You indicated significant improvement in communi- Response: All costs of implementing the infrastructure cations among the various offices within DOT. Could you provisions of GASB 34 were absorbed by DOT. It required describe further? about 1025% of Marcy's time for about one and one half years overseeing the implementation. Jodie Stanton spends Response: More infrastructure data is being requested from about 25% of her time for three to four months in the sum- multiple sources. Program Management--It is hard to judge mer of each year working on the detail. This is Daren whether this is a result of GASB 34. Bridges--We now Guyant's first year with major involvement with infrastruc- have more contact with finance and that is good. ture reporting, so we do not yet have figures on his time.