Putting infrastructure in view, on the books

Andrew C. Lemer, Ph.D.
President
The MATRIX Group, LLC

A few weeks ago, I hired a real-estate appraiser to estimate the value of my home. She used recent house sales in my area, retail construction costs for new housing, her assessment of my home's current condition, and other information to give me a range for the price that I might expect to get if I were to put my house up for sale.

Now, I have no plans to move, but the appraisal has been very useful. First, it saved me some money by giving me a sound basis for appealing my local government's overly aggressive tax assessment. Second, my appraisal has given me confidence that my mortgage lender will be responsive to a refinancing request when I am ready to build the addition to my house that my wife and I have been discussing. Third, I am using the estimate to monitor the effectiveness of my maintenance spending compared to a rule of thumb my facilities-manager neighbor gave me: You need to spend on average about two percent of current replacement cost annually to keep up with normal aging, wear, and tear.

I could have gotten along without the appraisal, and left it to the city appraiser, the bank, and providence to take care of the decision making. Instead, I am convinced, my own decisions have been improved on what is reasonable for my tax bill, my expansion plans, and my maintenance program. My home is one of my most substantial assets, of course, and the appraisal is helping me manage it better. Having a current estimate of my home's market value puts it "on the books" with my other investments that I hope to use to keep my family comfortable, provide for my retirement, and even leave a legacy for my children. Having this value in plain sight allows me-even forces me-to think of it in the same terms as my other assets. The appraisal is now part of the information system that helps me manage.

My appraisal came to mind at a meeting I had recently when the subject of the Government Accounting Standards Board's (GASB) Statement 34 came up. Statement 34 requires that governments put a value on the books for their infrastructure. This value must then be depreciated, creating an annual expense, or the jurisdiction may adopt a modified approach that suggests depreciation expenses are not being incurred. Under this modified approach, the jurisdiction may first set up an asset management system to estimate the annual maintenance spending needed to keep up the infrastructure to a standard set by the community, and then certify in the annual financial statement that this amount or more is being spent and the infrastructure's condition is being maintained.

A lot of public works officials seem to feel that dealing with GASB 34 should be left to the finance officers. I believe, however, that the objectives guiding the management of my community's public works assets ought to be not that different from those I use to manage my own assets-that is, getting a high return and protecting my investment. I view GASB Statement 34 as an incentive for public officials to improve their asset management practices.

I can suggest at least two reasons why public works professionals should want their communities to adopt GASB's modified approach. First, depreciation using generally accepted accounting principles has no relationship to the processes of aging and wear that cause deterioration and necessitate maintenance and rehabilitation. A condition monitoring and cost estimating system of the type GASB 34 envisions, on the other hand, can be a practical tool for asset management. Second, the amount of money needed for maintenance in the coming year is determined by how facilities are designed and constructed as well as by usage, weather, and past maintenance practices. Nobody understands this better than the public works staff, and they should be the ones making the estimates of how much is needed for maintenance and how much the system is likely to deteriorate if the maintenance is not performed.

In other words, GASB 34's modified approach is an opportunity for the public works administrator to put in place a management system that not only will help the public works department manage the community's assets more effectively, but also will produce information that can improve the community's overall financial management.

In simplest terms, the asset management system will have two major parts: (1) a complete inventory of the community's infrastructure and its current condition; and (2) a model for estimating how condition will change in response to various maintenance activities.

The inventory will include at least a description of facilities and their value. Value may be measured by original cost, current replacement cost, or another method, probably adjusted for condition. Many communities already have a good inventory, possibly accessible through a computer-based geographic information system.

The model could be a simple spreadsheet that pulls together the staff's estimates of costs for a maintenance program that will keep infrastructure condition at acceptable levels and how condition may change if maintenance efforts are reduced. Again, many communities already have more sophisticated tools in place, for example models for predicting the life of street signs, and pavement and bridge management systems such as APWA's PAVER or the PONTIS model sponsored by the Federal Highway Administration. The range and capability of commercially-available public works asset management tools are growing rapidly.

There is no good excuse, in my view, for a public works director not to want to take advantage of GASB 34 and put into place at least a rudimentary asset management system. Convincing the finance officer and chief executive to adopt GASB 34's modified approach may be challenging, but the benefits are worth the effort. We often complain that infrastructure is "out of sight, out of mind," but here is an opportunity to put public works on the books and in plain view. That is why APWA's Board adopted its policy encouraging our members to work with their counterparts in finance to do the right thing.

Andrew Lemer can be contacted at 410-235-3307 or by e-mail at matrixgr@aol.com.