Cost Accounting in Local Government

Achieving the Potential of GASB 34

Statement 34 was adopted with much fanfare by the Governmental Accounting Standards Board (GASB) in June of 1999. By the end of 2004, more than 84,000 governmental units were required to include the (estimated) historical cost of infrastructure in their comprehensive annual financial reports.

This statement had been circulating in various forms almost since the inception of the Board in 1984. By that time, Management Services Institute (MSI), the predecessor to RCS, had been preparing cost of services studies for over six years to assist California local governments with the twin body-blows of Proposition 13 and Proposition 4.

Fortunately, the authors of Proposition 4, which was sold to voters as finishing the job of Proposition 13, opined that an appropriate cost of government was “…reasonable allocations for capital replacement.”  Since these authors were members of the California Chamber of Commerce and the California Board of Realtors, they would have assumed that everyone knew that you replace assets at their current cost and not their historical cost. In an attempt to influence GASB’s research, MSI sent a voluminous packet of information that showed the significant difference that we had found between historical cost and current replacement cost for clients to that date.

In defense of the Board, we accepted the fact that historical cost was a traditional element of financials in the private sector and that changing to replacement cost for government financials would be a hard sell, especially as representatives of the Governmental Finance Officers Association (GFOA) were already opposed to incurring the cost to provide information of no demonstrative value.  Although “replacement cost” has demonstrative value, the GFOA was mum on the concept at the time and only recently has discussed it as a budgetary best practice.

Today, governments have a GASB 34 report. The Statement’s authors expect that people will want to compare the current maintenance of infrastructure groups with the depreciation of those groups as would be done in the private sector. The problem is that few private companies have infrastructure that is between 50 and 100 years old. Unfortunately, that “problem” is too common for governments.  This will allow you to determine if your agency’s maintenance effort is adequate.

Most GASB 34 reports prepared by professional consultants have an estimated replacement cost.  Therefore, it is possible to calculate the average age of an infrastructure category using the historical information and apply that factor to the estimated replacement cost.  Most of you will have to do this on your own as I have not seen any reports that take that next step of comparing current maintenance expenditures with the annual expiration of infrastructure value. If there is any interest among the readers of this article, I will post or email a simple spreadsheet that demonstrates this calculation.

Intergenerational Equity is the reason that this is an issue. To the extent that governments are blithely going on their way, sure that compliance with GASB 34 is the last word, they are spending too much on current operations and not enough on infrastructure maintenance. Our kids and grandkids are the ones who will have to pay the piper for poor decisions made today.

Historically, our cost of services studies included estimated infrastructure replacement cost and showed the annual “expiration of infrastructure value” as a tax expense. This was very helpful for managers and council members as fee for service increases could be justified to free tax revenues to partially cover that expense.

Unfortunately, Gresham’s Law also applies to cost of services studies. Due to asymmetry of information, our potential clients did not understand the value of the infrastructure information and chose consultants who provided a less expensive product. Therefore, we also stopped providing this information. Now, governmental staff are facing the question of why fees should be increased.  The answer is to pull out your GASB 34 report and compare current maintenance expenditures with the annual amount of infrastructure expiration at current cost, thereby achieving the full potential of GASB 34.

Please contact Rick Kermer at rick@revenuecost.com with comments and questions.

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