Infrastructure Financial Sustainability Reporting

By Silbert Barrett, BAA

Affiliated Member of the American Society of Civil Engineers (ASCE)

http://brittenwoods.com/index.html

Public Sector Accounting Board (PSAB) is part of the Canadian Institute of Chartered Accountants which introduces and proposes new accounting rules and guidelines affecting how municipalities in Canada prepare their annual financial reports.  In 2009 the Public Sector Accounting Board (PSAB) under rules 3150, required all local government in Canada to report infrastructure assets in their annual financial statements. What should have been a deliberate exercise in adopting fundamental changes to how municipalities plan for and manage their capital assets turns out to be a slight adjusting in their statements to report depreciation unrelated to the economic consumption of major infrastructure assets and long-term financial management planning.

Nevertheless, it would be unfair to make any judgments about local government commitment to sustainable infrastructure management since; PSAB 3150 was implemented with little or no legislative framework and hardly any resources from the Federal and Provincial Governments. However, we can all agree that this was perhaps an initial first step in what can be characterized as the "long and winding" road to sustainable management of our major infrastructure assets.

The development of an asset management plan for key infrastructure assets is fundamental to municipalities having a comprehensive long-term and strategic view of the financial plans needed to support the planning and decision-making processes of council. The decision to removed the reference to "deferred maintenance" as supplementary notes to the financial statement in the first exposure draft of PSAB 3150 was unfortunate, but more importantly, that the decision was not subjected to a vote in council.

Capital asset accounting was adopted in almost all Canadian municipalities without local councils knowing that key aspects of PSAB 3150 accounting guidelines relating to the long-term financial management of the nation’s major infrastructure assets were deleted without a vote in council. The section would have required municipalities to report on the condition of major assets as supplementary information to the financial statement. On the other hand the implementation of GSAB 34 in the United States in 2001 saw a compromise in dealing with the same issue where governments were allowed to adopt the modified approach. This too was not implemented in the proper manner, as we can see that major bond rating firms are expressing their concerns.

Reporting of General Infrastructure Assets under GASB Statement No. 34

GASBS No. 34 represents a dramatic shift in the way state and local governments report and present general infrastructure assets. Using Comprehensive Annual Financial Reports for the 50 states, Puerto Rico, and the District of Columbia, we find that financial statement users are unable to determine the extent of retroactive capitalization of these assets due to the lack of detailed disclosures provided by these governments. Comparing the status of infrastructure assets among the governments is also extremely difficult because governments using depreciation accounting have significant variation in the maximum useful lives of these assets and governments choosing the modified approach use different measurement methods and baselines. Given the need for comparability across governments and Standard & Poor's concern about how governments identify capital assets and their depreciation assumptions and processes, we suggest the GASB explicitly require governments to disclose the extent that infrastructure assets are capitalized and consider whether it is feasible to provide a list of acceptable measurement scales and condition levels for the modified approach. We also suggest that government officials and auditors further examine whether governments are meeting the requirements of the modified approach and whether the useful lives adopted for depreciation accounting are consistent with the physical lives of these assets. By enhancing the reporting transparency for infrastructure assets, governments can significantly increase the usefulness of these disclosures.-by Thomas E. Vermeer, Terry K. Patton, and Alan K. Styles

This strategic approach to infrastructure planning and development would have allows council to understand the extent and nature of future financial commitments, and to develop policy framework to address issues such as service levels, debt financing and revenue capture. These are important elements of the budget process for which municipalities for most part have either ignored or allow the political process to shape the budget outcomes.

Therefore, the mandate to implement sustainability reporting of major local government infrastructure assets should be supported within the context of a national framework to ensure long-term planning. The key components would be the requirement to prepare strategic asset and financial management plans both at the official planning and community planning levels. What is at stake is the viability of local governments and need to lessen the burden on the property tax base and preventing the transfer of our current obligations for the up-keep of assets consumed to create wealth today onto future generations.

This planning should be integrated with the Development Charges Act in which asset depreciation or consumption in it economic terms serves to provide the basis for allocating development charges and would imply that municipalities are financially sustainable if they are able to maintain their financial capital and infrastructure capital over the long-term. These changes to support sustainability reporting would also allow local governments to development long-term financial forecasts with a clear picture of the long-term infrastructure funding needs and opportunities for revenue capture in order to match service levels to operational planning and asset renewals needs.

Prime Minister Kevin Rudd talks Asset Management‏

It is a big development when we now have the Prime Minister talking of the need for improving asset management and financial management.

"We must improve asset management and financial management. Councils that plan and manage their assets effectively are councils that can deliver value for money to their communities."

This extract from a recent address by Prime Minister Kevin Rudd, to the new Australian Council of Local Governments, highlights the critical importance of asset management in the provision of the nation's infrastructure – and the need to get your house in order immediately.

Some of the key points in the Prime Minister’s message included:

• Recognition that infrastructure is under strain
• Recognition that long term reform is needed in the management of infrastructure
• Implementation of asset management and financial management has been patchy to date
• The Government will consider making resources available for a long term reform fund to support councils as they improve their asset management and financial plans

It would be wise for local government to heed the Prime Minister’s message.-source:www.ipwea.org.au/namsplus


While PSAB 3150 was a necessary first step towards the financial sustainability reporting, it should by now allow for the confidence building at senior levels of government to undertake the policy choice of developing the framework in which there is a clear and consistent focus on asset management and long-term financial planning.

—Silbert Barrett
 These are the author’s personal opinions and do not reflect those of his employer. Nor is the author making inferences about how infrastructure assets are managed. The author bases his opinions on his involvement in the pilot implementation of capital asset accounting as a project manager for the City of Hamilton and the Ontario Benchmarking Initiatives (OMBI).