Project Progress Report. Summary. Scope, Objectives, and Methodology. As of July 31, 2002

Transcription

1 Prject Prgress Reprt As f July 31, 2002 Sam M. McCall, CPA, CIA, CGFM City Auditr Implementatin f GASB Statement 34 Basic Financial Statements and Management s Discussin and Analysis fr State and Lcal Gvernments Reprt #0233 August 22, 2002 Summary Accunting Services has made significant prgress in the implementatin f GASB Statement 34 Basic Financial Statements and Management s Discussin and Analysis fr State and Lcal Gvernments. This prgress was facilitated primarily thrugh (1) the restatement f the 2001 fiscal year (FY) financial statements under the new reprting mdel and (2) the identificatin and valuatin f the City s infrastructure (lng-lived capital assets that are nrmally statinary in nature such as rads and bridges). This prgress shuld enhance the preparatin and cmpletin f the City s 2002 FY financial statements, the first year that the City is required t implement the new reprting mdel prescribed by GASB Statement 34. Significant remaining actins, such as final identificatin and valuatin f infrastructure, are currently in prcess. The ultimate success f the City s implementatin f GASB Statement 34 will be determined by the City s external auditrs in their audit f the City s 2002 FY financial statements. Scpe, Objectives, and Methdlgy The Office f the City Auditr is prviding assurance and cnsulting services t assist the Department f Management and Administratin (DMA) in the implementatin f GASB Statement 34 Basic Financial Statements and Management s Discussin and Analysis fr State and Lcal Gvernments. In a previus reprt, Assistance and Guidance n Implementatin f GASB Statement 34 (#0133), dated August 16, 2001, we recmmended specific steps and actins that shuld be cmpleted t ensure a successful and timely implementatin. Our bjectives fr this reprt are t: Shw the verall prject status as f July 31, 2002; Prvide an independent assessment f the prgress in cmpleting the required steps and actins fr implementatin; and Cmmunicate the significant steps and actins remaining t be cmpleted as f July 31, T achieve ur bjectives: we participated in a cnsulting capacity n the DMA implementatin team; reviewed key dcumentatin assimilated and prepared fr implementatin; and interviewed key staff making decisins and prviding infrmatin fr implementatin. This audit was cnducted in accrdance with Generally Accepted Gvernment Auditing Standards and Standards fr the Prfessinal Practice in Internal Auditing, as applicable. 1

2 GASB 34 Prgress Reprt Reprt #0233 Backgrund GASB Statement 34 represents ne f the mst cmprehensive financial reprting standards in the histry f standards setting. The financial reprting mdel prvided by GASB Statement 34 cntains the fllwing elements: Management's Discussin and Analysis (MD&A) Gvernment-wide Funds Financial Financial Statements Statements Ntes t the Financial Statements Required Supplementary Infrmatin (ther than MD&A) The primary purpse f GASB Statement 34 is t revise traditinal gvernment financial statements presentatins t: Reflect the status f nn-current assets such as land, buildings, vehicles, machinery, equipment, and infrastructure (i.e., rads, bridges, strmwater pnds, etc.) (Gvernment-wide Financial Statements); Reflect the status f nn-current bligatins such as amunts wed n bnd issuances, amunts due fr lng-term leases, and amunts t be paid current emplyees in future years fr unused vacatin and sick leave (Gvernment-wide Financial Statements); Present peratins using an ecnmic resurces apprach ( prfit/lss ) in additin t the traditinal current resurces apprach (Gvernment-wide Financial Statements); Demnstrate the degree t which each gvernment prgram/functin is self-financed thrugh fees fr services and prgramspecific grants cmpared t hw much is financed thrugh taxes, transfers, and unrestricted grants and investment earnings (Gvernment-wide Financial Statements); Emphasize individual funds used t accunt fr material r significant financial activity (Funds Financial Statements); Include a cmparisn f the initial funding expectatins (riginal budget) t the final budget and t funds actually received and expended during the fiscal year (Ntes t the Financial Statements r Required Supplementary Infrmatin); and Include a management summary that prvides an verall analysis f the financial statements and identificatin f the significant events, changes, and factrs that impacted r are 2

3 Reprt #0233 GASB 34 Prgress Reprt expected t impact financial psitin and peratins (Management Discussin and Analysis). All state and lcal gvernments are required t implement GASB Statement 34. Based n the implementatin prvisins, the first year that the City must prepare financial statements in accrdance with that standard is the 2002 fiscal year. Prject Prgress and Accmplishments Significant prgress has been made in cmpletin f steps necessary t successfully implement the new reprting mdel prvided by GASB Statement 34. That prgress was facilitated thrugh effrts by Accunting Services t (1) restate the City s 2001 fiscal year financial statements using the GASB Statement 34 reprting frmat and (2) identify and value City infrastructure assets. The fllwing table prvides, by reprting element, a summary f the required steps/actins and prgress made t date. Management s Discussin and Analysis (MD&A) Preparatin f the MD&A will nt be dne until after the basic financial statements and ntes are cmpleted. Hwever, certain steps are being addressed during the implementatin phase: 1. Develp a methd fr capturing data, events, and issues that are expected t be addressed in r impact the MD&A. Accunting Services is maintaining a file f data, events, and issues that will ptentially impact the MD&A. Items cntained in that file may cme frm varius surces including, fr example, review f City Cmmissin minutes, recrds f the Treasurer-Clerk s Office (e.g., Annual Reprt f Bndhlders), internal crrespndence such as s frm and t City management, discussins/meetings with management, and newspaper articles. 2. Determine if prir year financial statements will be restated in the GASB Statement 34 frmat fr purpses f prviding cmparative financial data in the initial MD&A. The FY 2001 financial statements were restated in the GASB 34 frmat. Accunting Services plans t use that restatement t prvide cmparative data fr purpses f cmpleting the MD&A fr the 2002 FY. 3. Establish a planned frmat fr presenting the MD&A. Fr example, preliminary decisins can be made as t whether charts, graphs, and/r tables will be used t supplement the narrative infrmatin. Accunting Services has prepared a shell dcument fr the MD&A. It includes narratives, charts, graphs, and tables. As prvided by GASB 34, the shell dcument is set up t address/prvide the basic financial statements, cndensed financial infrmatin derived frm gvernmental activities, an analysis f verall financial psitin and results f peratins, an analysis f balances and transactins fr individual funds, budget-related variances, descriptins f capital asset and lng-term debt activity, and a descriptin f currently knwn items that are expected t impact financial psitin. 3

4 GASB 34 Prgress Reprt Reprt #0233 Gvernment-wide Financial Statements The fllwing steps shuld be taken fr implementatin f the gvernment-wide financial statements required by GASB 34: 1. Identify the accunts and amunts recrded in the City s existing accunting system (PepleSft Financials) fr which cnversin wrksheets will be necessary t adjust frm the current resurces basis t the ecnmic resurces measurement basis. These cnversins will primarily be required fr general gvernment peratins. Cnversins t the City s business-type activities shuld nt be as significant since thse activities were traditinally accunted fr n the ecnmic resurces basis prir t GASB Statement 34. As part f the restatement f the 2001 FY financial statements in the GASB Statement 34 reprting frmat, Accunting Services (AS) prepared wrksheets cnverting individual fund infrmatin fr general gvernment peratins accunted fr n the mdified accrual (current resurces) basis t the full accrual (ecnmic resurces r prfit/lss) basis. Examples f cnversins included: (1) re-categrizing capital utlay expenditures such that they reflect acquisitins f assets (e.g., equipment, machinery, and buildings) and nt just decreases in current resurces (cash), (2) re-categrizing bnd payments such that they reflected reductins f utstanding bligatins and nt just decreases in current resurces (cash), and (3) recrding depreciatin expenses. AS plans t use cnversin wrksheets similar t these created fr the 2001 FY restatement during the preparatin f the 2002 FY financial statements. 2. Identify the prgrams and functins that shuld be reprted. This shuld include City activities ther than thse that are fiduciary in nature, as defined in GASB Statement 34. Fr thse activities t be reprted, classify them as either (1) gvernmental activities (e.g., public safety and public wrks) r (2) business-type activities (e.g., varius utility peratins). The City s current accunting system already classifies transactins and balances by prgrams/functins. Accrdingly, fr the 2001 FY restatement AS used that system as a starting pint fr determining the prgrams and functins t be reprted n the gvernment-wide financial statements. The identified prgrams/functins were then classified as either gvernmental r business-type activities. The gvernmental activities identified by AS include: (1) general gvernment, (2) public safety, (3) transprtatin, (4) human services, (5) ecnmic develpment, (6) physical envirnment, (7) culture and recreatin, and (8) interest n lng-term debt. The business-type activities include: (1) electric, (2) gas, (3) sewer, (4) water, (5) airprt, (6) transit (Taltran), (7) slid waste, (8) glf (Hilaman), (9) strmwater, and (10) fire services. AS intends t use these same categries fr the 2002 FY financial statements. 3. Fr each prgram/functin t be reprted as a separate line item n the gvernment-wide statement f activities, identify the related prgram revenues. Prgram revenues are intended t represent the prtin f a prgram s funding that is financed thrugh charges fr services (e.g., permit r utility fees) and grants and cntributins restricted specifically fr that prgram. Classify identified prgram revenues int the fllwing categries: (1) charges fr services, (2) prgram-specific perating grants and cntributins, and (3) prgramspecific capital grants and cntributins. As part f the 2001 FY restatement, AS identified and classified revenues by the prgrams/functins nted in the preceding step. The City s current accunting system captured infrmatin in a manner that facilitated thse identificatins and classificatins. AS staff then reviewed the revenues fr each prgram/functin and determined which met the criteria fr prgram revenues. Fr each prgram/functin, thse prgram revenues were classified int (1) charges fr services, (2) prgramspecific perating grants and cntributins, and (3) prgram-specific capital grants and cntributins. Wrksheets were prepared t dcument this prcess. That dcumented apprach will be used in preparing the gvernment-wide financial statements fr the 2002 FY. 4

5 Reprt #0233 GASB 34 Prgress Reprt 4. Identify the general revenues that will be presented n the statement f activities. Determine the classificatins fr presentatin f thse general revenues (e.g., prperty taxes, public service taxes, grants and cntributins nt restricted t specific prgrams, etc.). As part f the 2001 FY restatement, AS reviewed all City revenues and identified thse meeting the criteria fr general revenues. General revenues identified fr presentatin were then categrized int the fllwing: (1) taxes, by type, (2) grants and cntributins nt restricted t specific prgrams/functins, and (3) unrestricted investment earnings. Wrksheets were prepared t dcument this prcess. That dcumented apprach will be used in preparing the gvernment-wide financial statements fr the 2002 FY. 5. Fr each prgram/functin t be reprted as a separate line item n the statement f activities identify and determine the related expenses t be reprted. Nte the expenses assciated with a particular prgram r functin may be accunted fr in mre than ne fund. As nted in step 2, expenses (disbursements) are classified within the City s current accunting system in a manner that allws them t be summarized by prgram/functin. As part f the 2001 FY restatement, AS used that accunting system t identify and classify expenses by the prgram/functin identified fr the gvernment-wide financial statements. Wrksheets were prepared t dcument this prcess. That dcumented apprach will be used in preparing the gvernment-wide financial statements fr the 2002 FY. 6. Identify ther increases (r decreases) t net assets that will be presented n the statement f activities. This will include, fr example, any cntributins t permanent funds, special and extrardinary items, and certain transfers. As nted abve, AS prepared wrksheets capturing applicable financial activity within the City s accunting system and recrds during the 2001 FY restatement. Thse wrksheets were used t reclassify that activity as apprpriate int the varius reprting categries required fr the gvernment-wide financial statements. Similar wrksheets will be used fr the preparatin f the 2002 FY gvernmentwide financial statements. During the 2001 FY restatement, the nly identified ther increases (decreases) t net assets cnsisted f net transfers f funds frm business-type activities t the City s gvernmental-type activities (e.g., transfers f funds frm the Electric Utility t the General Fund). 7. Determine whether expenses f general gvernment and supprt services (e.g., legal, executive, and financial/administrative) that, in essence, cnstitute indirect expenses f ther functins will (1) be allcated t benefiting City prgrams/functins (e.g., public wrks, public safety, utility peratins) n the statement f activities r (2) be shwn as a separate line item (e.g., as general gvernment activities) n that statement. Nte GASB Statement 34 allws fr either methd. Fr the gvernment-wide statement f activities cmpleted as part f the 2001 FY restatement, AS allcated expenses f general gvernment services (e.g., City Attrney s Office and City Auditr s Office) benefiting business-type activities t the applicable prgrams/functins (e.g., the varius utilities). Hwever, AS elected nt t allcate expenses f general gvernment activities benefiting ther general gvernmental-type prgrams/functins (e.g., public safety, transprtatin, culture and recreatin). Instead, thse expenses were shwn as a separate line item (general gvernment) n the statement f activities. AS plans t cntinue that apprach fr the 2002 FY. 5

6 GASB 34 Prgress Reprt Reprt # Fr the statement f activities, determine whether all r a part f the depreciatin expense relating t capital assets (ther than infrastructure) can be charged r allcated t direct benefiting prgrams/functins (e.g., public safety, transprtatin, ecnmic develpment, etc.). Fr any depreciatin expense fr which it is impracticable t allcate t direct benefiting functins (e.g., capital assets that essentially serve all City prgrams/functins), a determinatin shuld be made as t whether the amunt shuld be shwn as a separate item r included as part f any general gvernment expenses shwn n the statement (see item 7 abve). In accrdance with gvernmental accunting standards prir t GASB Statement 34, depreciatin expense fr the City s general gvernment capital assets has nt been recrded in the financial statements. Nnetheless, the City s asset management system has been used t recrd depreciatin f thse assets fr internal purpses. That system is designed t assign thse assets and related depreciatin t either the benefiting prgrams/functins r t general gvernment. Using that existing system, AS determined and allcated depreciatin expense fr the 2001 FY restatement. The result was depreciatin expense is shwn n the gvernment-wide financial statements as part f the benefiting prgrams/functins ttal expenses r as part f general gvernment s ttal expenses (i.e., fr assets essentially benefiting all prgrams/functins). AS elected nt t shw depreciatin expense fr nninfrastructure capital assets benefiting all prgrams/functins as a separate item n the gvernment-wide statements. AS plans t use that same apprach fr the 2002 FY. 9. Determine if interest n lng-term liabilities shuld be included as part f the direct expense f a particular prgram/functin, r whether it shuld be shwn as a separate line item n the statement f activities. Nte such interest shuld be included as part f the direct expense f a prgram/functin nly when the related debt is essential t the creatin r cntinued existence f that prgram/functin. AS determined that all lng-term debt relating t gvernmental activities was nt essential t the creatin r cntinued existence f the applicable prgrams. Fr that debt, AS reflected the related interest as a separate line item n the statement f activities fr the 2001 FY restatement. In regard t business-type activities, AS determined that the lng-term debt was essential t the cntinued existence f the applicable prgrams/functins. Accrdingly, AS included the related interest as part f the direct expenses f the applicable prgrams/functins (e.g., electric, water, gas) as part f the 2001 FY restatement. AS plans t cntinue that apprach fr the 2002 FY. 10. Identify nn-current assets and bligatins that are required t be reprted in the gvernment-wide financial statements. This will include, fr example, capital assets (land, buildings, infrastructure) and lngterm debt. Fr thse identified assets and bligatins, determine the values that shuld be reprted. (Als, see the fllwing three steps that specifically address wrks f art, capital assets, and infrastructure.) During the 2001 FY restatement, AS identified and valued all nn-current assets and bligatins t be reprted n the gvernment-wide financial statements (except fr infrastructure see step 13 belw). Capital assets (ther than infrastructure) and their values were identified primarily frm the City s asset management system - see item 12 belw. Other nn-current assets and bligatins identified during the FY 2001 restatement included: (1) receivables fr special assessments, (2) amunts wed between the gvernmental and business-type activities, (3) bnds and lans payable, and (4) liability fr cmpensated absences (i.e., amunts payable t current emplyees in future years fr unused leave). Each f these pertained t amunts t be received r paid in subsequent fiscal years. AS anticipates similar accunts fr the 2002 FY. 6

7 Reprt #0233 GASB 34 Prgress Reprt 11. Identify any wrks f art r histrical treasures wned by the City that shuld be capitalized and, fr any capitalized items, whether they shuld be depreciated based n a limited useful life. AS determined that several wrks f art wned by the City were already recrded in the City s asset recrds. The recrded value f thse items was $81,950. Additinal wrks f art wned by the City were identified by AS thrugh the Cultural Resurces Cmmissin (nnprfit entity). Examples f these recently identified items include paintings, phtgraphs, cllages, and sculptures. AS established a plicy t capitalize individual items valued in excess f $750 and, as a result, capitalized the 26 items meeting that criterin. Thse items had a ttal value f $44,200. Wrks f art will nt be depreciated. Thse assets, alng with any new acquisitins (and less any subsequent deletins), will be included as assets in the 2002 and future fiscal year financial statements. 12. In regard t capital assets determine: (1) the initial cst values t be assigned t thse assets, (2) the useful lives f thse assets, (3) estimated salvage values, if any, and (4) the mst equitable and apprpriate depreciatin methd t be applied t thse assets that have a limited useful life. Then, calculate the amunt f accumulated depreciatin t be recrded and presented fr the assets in the initial gvernment-wide financial statements. (Als, see the fllwing steps regarding infrastructure.) This infrmatin was already available and being reprted in the City s financial statements fr capital assets f the previusly existing enterprise funds (i.e., utility peratins, airprt peratins, Taltran, slid waste, and Hilaman Glf). Fr the remaining capital assets (ther than infrastructure) pertaining t general gvernment peratins (e.g., land, buildings, equipment, tangible persnal prperty) and t activities recently classified as enterprise funds (i.e., capital assets relating t Fire Services and Strmwater), the values were btained frm the City s asset management system as part f the 2001 FY restatement. As nted in item 8 abve, the City s asset management system has traditinally been used t accunt fr capital assets and t calculate related depreciatin n a straight-line basis fr internal purpses. The calculated depreciatin has been based n the estimated useful lives and initial csts fr thse capital assets. (Salvage values are nt cnsidered.). AS plans t use this same system and apprach fr the 2002 FY. Apprximately 20% f the capital assets identified fr the 2001 FY restatement were nt maintained n the City s asset management system. Depreciatin has nt been recrded fr thse assets. Depreciatin expense as well as accumulated depreciatin will need t be determined fr thse assets t ensure a fair presentatin fr the 2001 restatement and fr subsequent FY financial statements. Estimated salvage values are nt cnsidered in the determinatin f peridic depreciatin expense. That practice may result in the verstatement f that expense. AS shuld determine the impact f excluding salvage values when calculating depreciatin expense n capital assets. 13. Part 1 In regard t general infrastructure (i.e., lng-lived assets assciated with the City s gvernmental-type activities that are nrmally statinary in nature and which nrmally can be preserved fr perids significantly lnger than mst capital assets. Examples are rads, bridges, sidewalks, etc.): a. Determine whether all r nly majr general infrastructure assets in existence as f the transitin date (Octber 1, 2001, fr the City) will be capitalized and reprted. GASB Statement 34 nly requires that majr general infrastructure assets in existence n the transitin date be capitalized and reprted. (All general infrastructure meeting established capitalizatin threshlds acquired subsequent t the transitin date must be capitalized.) That statement prvides a methd (frmula) t determine what cnstitutes majr general infrastructure assets as f the transitin date. AS has calculated the threshlds fr identifying majr general infrastructure assets as f the transitin date. AS determined that radways exceed thse threshlds and that the City s traffic signal system may 7

8 GASB 34 Prgress Reprt Reprt #0233 als exceed thse threshlds. Significant infrastructure assets that d nt appear t meet the threshlds include bridges, paved paths, streetlights, and fiber ptic lines. As f July 31, 2002, AS had nt made a final decisin as t whether t nly capitalize thse assets that meet the definitin f majr r t capitalize additinal assets as well. T the extent that sufficient infrmatin is available t accurately capitalize the assets (e.g., bridges), AS is cnsidering recrding assets as f the transitin date even if they d nt meet the definitin f majr. b. Determine if general infrastructure assets that were acquired r cnstructed prir t Octber 1, 1979, will be capitalized and reprted. Nte GASB Statement 34 prvides that infrastructure acquired r cnstructed in fiscal years ending prir t June 30, 1980, des nt have t be capitalized and reprted in the event that adequate recrds are nt available t dcument that infrastructure s histrical cst. Recrds are available t identify applicable infrastructure acquired/cnstructed prir t Octber 1, Accrdingly, AS plans t capitalize that infrastructure regardless f year acquired/cnstructed. c. Determine when general infrastructure in existence as f the GASB Statement 34 transitin date (Octber 1, 2001, fr the City) will be reprted in the gvernment-wide financial statements. Nte GASB Statement 34 prvides that the City des nt have t reprt general infrastructure retractively until fiscal year Hwever, the City will be required t reprt all infrastructure acquired/cnstructed subsequent t the transitin date (Octber 1, 2001) beginning with the FY 2002 financial statements. AS determined that recrds were available t identify and value general infrastructure in existence as f the transitin date. Accrdingly, AS plans t cmmence reprting that existing infrastructure in the 2002 FY financial statements. d. After cmpletin f the abve steps, identify all general infrastructure that shuld be reprted. AS develped a list f ptential infrastructure items and has researched (is researching) thrugh ther City departments (e.g., public wrks, planning, ISS, and utilities) as t their existence, quantity, and values. As nted abve in step 13.a, AS is in the prcess f determining which infrastructure assets in existence as f the transitin date will be capitalized and reprted. At a minimum, the City s radway system will be capitalized at a histrical value f apprximately $720 millin. (That amunt is prir t adjustment fr accumulated depreciatin which has nt been calculated.) In additin, all general infrastructure meeting the capitalizatin threshlds that was acquired/cnstructed subsequent t the transitin date will be reprted in the 2002 and subsequent FY financial statements. e. Determine the initial cst values t be assigned t the applicable general infrastructure items. GASB Statement 34 prvides varius ptins fr determining thse initial values. Fr example, if recrds are nt available shwing the histrical cst, the City may use a reasnable methd t estimate thse csts. AS in cnjunctin with applicable City departments has assigned (is assigning) initial cst values t general infrastructure. Fr example, in regard t rads, the Public Wrks department uses the ICON System t maintain varius infrmatin n the City s radway system. That system was used t identify and classify all City rads by type and length. That system was als used t determine the average cnditin f all rads within each rad type. That cnditin, in cnjunctin with the anticipated life expectancy fr the rads (30 years), was used t determine the average age f each rad type. The average age was then used t determine the year f acquisitin/cnstructin. Then, the current replacement csts (based n linear feet) were determined fr each rad type. Thse csts were then deflated back t the estimated year f acquisitin/cnstructin t determine the estimated histrical csts fr each rad type. Accumulated depreciatin will subsequently be determined fr these rads based n the calculated histrical csts, average age, and anticipated life expectancy. Based n this methdlgy, AS determined a histrical cst f apprximately $720 millin. The accumulated depreciatin fr the rads has nt been calculated. Similar appraches are being used fr ther infrastructure assets. 8

9 Reprt #0233 GASB 34 Prgress Reprt In cnnectin with this prcess, AS accumulated recrds frm applicable departments t dcument the determinatin f initial cst values. Fr example, in regard t the radway system, AS accumulated printuts frm the ICON system, cst infrmatin frm Public Engineering, and deflatin factrs frm the Flrida Department f Transprtatin. In additin, AS is verifying r has verified (thrugh ther City departments) key infrmatin such as mileage f rads and current replacement csts. f. Establish guidelines fr determining when disbursements relating t the infrastructure shuld be capitalized r expensed. Nrmally, disbursements that increase the capacity r efficiency f infrastructure assets shuld be capitalized, while disbursements that represent repair and maintenance shuld be expensed at the time f disbursement. In regard t preservatin csts (utlays that extend the useful life f an asset beynd its riginal useful life, but d nt increase its capacity r efficiency), the capitalizatin plicy will depend n whether the standard (depreciatin) apprach r mdified apprach is selected. (See item g belw that addresses thse tw appraches.) AS has established tentative capitalizatin guidelines fr infrastructure assets. Thse guidelines prvide fr a $100,000 capitalizatin threshld fr radways and a $50,000 threshld fr all ther infrastructure assets. In additin, these tentative guidelines indicate what types f utlays shuld be capitalized and what types shuld be expensed. Fr example, the guidelines state that maintenance csts shuld be expensed while preservatin csts as well as additins and imprvements shuld be capitalized. The guidelines define each f thse terms. g. Perfrm cst-benefit analyses as t whether the standard (depreciatin) apprach r the mdified apprach shuld be applied. Under the depreciatin apprach, the initial cst f the infrastructure and any significant imprvements that extend the infrastructure s useful life r increase the infrastructure s capacity r efficiency are depreciated ver its useful life. Under the mdified apprach, the infrastructure is nt depreciated. Hwever, under that apprach the City must implement a plicy that prvides the infrastructure will be maintained at a certain cnditin level. In additin, the City must assess the cnditin f that infrastructure peridically (at least every three years) and reprt in the financial statements whether it has been maintained at the pre-established cnditin level. Furthermre, each year the City must estimate the annual amunt that must be expended t maintain the infrastructure at the pre-established cnditin level. That estimated amunt and the amunts actually expended t preserve the infrastructure must be disclsed within the annual financial statements. A determinatin was made that the standard apprach wuld be used. That decisin was based, in part, n the fact that the mdified apprach wuld invlve mre City resurces t implement and maintain. Fr example, the requirement under the mdified apprach fr peridic cnditin assessments by the City (i.e., Public Wrks staff) must be met regardless f ther pririties and assignments. Frm a cst-benefit perspective, it appears that the standard apprach is preferable. After determining that the standard apprach will be used, AS elected t use the straight-line methd t depreciate the applicable infrastructure assets. Under that methd, the histrical csts f each infrastructure asset (less the estimated salvage value, if any) will be depreciated equitably ver the expected useful life f the asset. h. If the standard apprach is selected, a determinatin shuld be made as t whether the calculated depreciatin expense (fr general infrastructure assets) shuld be reprted as part f the direct expense fr the applicable functin assciated with capital utlays and maintenance f thse infrastructure assets (e.g., public wrks) r shwn as a separate line item in the statement f activities. Nte Unlike depreciatin expenses fr ther capital assets, depreciatin expense fr general gvernment infrastructure shuld nt be allcated t general gvernment prgrams and functins. Fr the 2002 FY, AS plans t shw depreciatin fr general infrastructure assets as a separate line item n the gvernment-wide statement f activities. 9

10 GASB 34 Prgress Reprt Reprt #0233 i. If the mdified apprach is selected, establish an asset management system that: (1) maintains an up-t-date inventry f eligible infrastructure assets, (2) prvides fr dcumented, replicable cnditin assessments f the infrastructure assets, and (3) estimates each year the annual amunt needed t maintain and preserve the eligible infrastructure assets at the established cnditin level. Als, determine the cnditin level at which the eligible infrastructure assets are t be maintained and hw that level will be established. Nte GASB Statement 34 prvides that the cnditin level shall be established in a frmal, dcumented manner thrugh apprpriate administrative r executive plicy, r by legislative actin (e.g., by the City Cmmissin). As the mdified apprach was nt selected, this issue is n lnger applicable. j. Determine if and/r hw general infrastructure assets shuld be classified, such as in netwrks r netwrk subsystems, fr purpses f (1) calculating depreciatin if the standard apprach is selected r (2) establishing an asset management system if the mdified apprach is selected. Nte A netwrk f assets is cmpsed f all assets that prvide a particular type f service fr a gvernment. Fr example, the City s rad netwrk might cnsist f streets, curbs, sidewalks, street signs, and drainage ditches. A netwrk subsystem is all assets that make up a similar prtin r segment f a netwrk f assets. Fr example, the City s rad netwrk culd be further classified int subsystems, such as residential rads, minr cllectrs, majr cllectrs, and principal arterials. As nted abve, AS is in the prcess f determining which infrastructure assets will be capitalized and reprted. The applicable classificatins fr depreciatin purpses are being made as thse determinatins are cmpleted. Fr example, the City s rad system has been classified as a netwrk that cnsists f pavement, curbs, gutters, rad drainage facilities, line striping, sidewalks, and traffic signs. AS plans t calculate depreciatin fr the rads at the netwrk level. Other infrastructure assets that AS is cnsidering, such as bridges, traffic signal system, and paved paths, may be classified as individual subsystems separate frm the rad netwrk. In the event thse infrastructure assets are capitalized, AS plans t calculate the related depreciatin at the subsystem level. 13. Part 2 In regard t infrastructure assciated with business-type activities (i.e., utility peratins, Airprt peratins, Taltran, Hilaman Park Glf Curse, Slid Waste, Fire Services, and Strmwater): a. Ensure that all infrastructure assets are identified and prperly valued. Infrastructure assciated with all business-type activities (ther than Fire Services and Strmwater) has traditinally been reprted within the City s financial statements as part f fixed assets f the prprietary funds. Accrdingly, t cmply with GASB Statement 34, AS nly had t reclassify thse assets int the infrastructure categry. AS cmpleted that task by establishing an infrastructure categry within the City s asset management system and then placing the applicable assets int that categry. Examples f assets reclassified as infrastructure included electric transmissin and distributin systems, water and gas mains, and airprt runways, taxiways, and aprns. Thse reclassified items will be reprted as infrastructure within the business-type activities fr the 2002 FY financial statements. Fire Services and Strmwater activities were classified as business-type activities fr purpses f GASB Statement 34. As these activities were traditinally nt accunted fr in enterprise funds, infrastructure relating t these activities had t be identified and valued. Fr Fire Services, n infrastructure was identified. Fr Strmwater activities, pnds used t accumulate strm runff (strmwater pnds) have been classified as infrastructure. Recrds have been prepared by Public Wrks that shw fr each pnd the identificatin number, lcatin, size (acreage), and current cnstructin csts. In additin, Public Wrks has determined the average age f these pnds. The average age f the pnds was used t determine an average year f acquisitin/cnstructin. The current cnstructin csts were then deflated back t that average year f acquisitin/cnstructin t determine the estimated histrical csts. AS des nt intend t depreciate these strmwater pnds as they are earthen in nature and nt expected t deterirate as lng as they are maintained. Based n this prcess, strmwater pnds will be recrded at a value (as f Octber 1, 2001) that apprximates $48 millin. 10

11 Reprt #0233 GASB 34 Prgress Reprt b. Establish capitalizatin guidelines. AS has established tentative capitalizatin guidelines fr infrastructure assets. Thse guidelines prvide fr a $100,000 capitalizatin threshld fr radways and a $50,000 threshld fr all ther infrastructure assets. In additin, these tentative guidelines indicate what types f utlays shuld be capitalized and what types shuld be expensed. Fr example, the guidelines state that maintenance csts shuld be expensed while preservatin csts as well as additins and imprvements shuld be capitalized. The guidelines define each f thse terms. The finalizatin f these guidelines is pending a determinatin f their impact n utilities. Specifically, the current capitalizatin threshld fr utility assets (that are nw classified as infrastructure) is $750. AS is in the prcess f determining what impact, if any, revising that threshld t $50,000 wuld have n utility rate studies and structures. c. Perfrm cst-benefit analyses as t whether the standard (depreciatin) r mdified apprach shuld be applied. As similarly nted abve fr general infrastructure assets, a determinatin was made t use the standard apprach. That decisin was made because (1) the mdified apprach wuld require mre City resurces t implement and maintain and (2) the majrity f these assets were already bked (i.e., as fixed assets) and being depreciated prir t GASB Statement 34. d. Determine if the infrastructure assets will be classified int classes, netwrks, r netwrk systems fr depreciatin purpses. Fr the reprtable infrastructure, 45 separate classes f assets were established within the asset management system. Examples f thse classes are (1) verhead cnductrs and devices, (2) line transfrmers, and (3) water mains. A useful life has been established within the system fr each class. Each asset placed in a given class is being depreciated based n the standard useful life fr that class. New classes will be added as needed. 14. Fr the statement f net assets, classify net assets int the fllwing three cmpnents: (1) invested in capital assets, net f related debt, (2) restricted (distinguishing between majr categries f restrictins), and (3) unrestricted. This step will require a determinatin f what prtin f the City s utstanding debt was used t finance existing capital prjects. It will als require a determinatin f the majr categries f restrictins applicable t the City s net assets. As part f the 2001 FY restatement, AS analyzed the cmpsitin f the restated net assets. Based n that analysis, net assets were classified int the three required cmpnents. The restricted net assets classificatin was further categrized by majr type f restrictin (e.g., restricted fr capital prjects, fr debt service, and fr ther purpses). 15. Identify the internal service funds (e.g., central warehuse and human resurces) that must be incrprated int the gvernment-wide statements. Determine fr each internal service fund whether it shuld be incrprated as a gvernmental activity r a business-type activity based n which City prgrams/functins participate in that internal service fund activity. Additinally, fr each internal service fund determine the type f cnslidating adjustments that will be required. Fr example, if an internal service fund nly serves City gvernment prgrams/functins, cnslidating adjustments will be made t exclude the fund s net prfit/lss frm the statement f activities. This will be dne by making pr rata adjustments t the benefiting prgrams /functins revenues/expenses that will be presented n the statement f activities. Hwever, if an internal service fund als serves entities external t the City, then the prtin f that fund s net prfit/lss applicable t the external entities will nt be eliminated frm the gvernment-wide statement f activities. During the 2001 FY restatement, internal service funds (ISFs) were identified and incrprated. ISF 11

12 GASB 34 Prgress Reprt Reprt #0233 activities incrprated as gvernmental activities included, fr example, accunting, central warehuse, garage, human resurces, and infrmatin system services (ISS). ISF activities incrprated as businesstype activities included whlesale energy, utility services, and meter reading/billing/cllectin services. During that prcess, apprpriate adjustments were made t reflect the ISF s balances and activities within the gvernment-wide financial statements, including the exclusin f the prper amunts f each ISFs prfit/lss. ISF activities that prvided services t entities external t the City were whlesale energy (utside sales f energy) and the 800 MHz radi system (services t the cunty sheriff). Prfit/lss attributable t thse external services was prperly nt eliminated n the gvernment-wide statement f activities. In thse instances where prfit/lss was eliminated fr thse ISFs serving bth gvernmental and business-type activities, this adjustment prcess resulted in balances wed between the gvernmental and business-type activities. Fr example, the prtin f the net lss fr ISS attributable t utility peratins resulted in a balance wed by the business-type activities (utilities) t the gvernmental activities (includes ISS) fr that pr rated lss. Thse balances were recrded and reflected n the restated 2001 FY statement f net assets when material. Wrksheets were prepared t dcument this cnslidatin/adjustment prcess. AS plans t fllw this same prcess fr the 2002 FY. 16. In additin t incrprating internal service fund activity, determine what internal balances shuld be eliminated r reclassified. Fr example, balances wed between individual funds shuld be eliminated t preclude grssing up assets and liabilities that are reprted n the statement f net assets. Only the residual amunts due between gvernmental and business-type activities shuld be reflected n that statement. During the 2001 FY restatement, AS identified and eliminated internal balances within the gvernmental activities and within the business-type activities. These eliminated balances included, fr example, (1) transfers f funds within gvernmental activities and transfers f funds within business-type activities and (2) balances wed between funds that were classified as gvernmental activities and balances wed between funds that were classified as business-type activities. Hwever, transfers between and amunts due between the gvernmental and business-type activities were prperly reflected as activity and balances n the gvernment-wide financial statements. Wrksheets were prepared that dcumented these eliminatins and reclassificatins. AS plans t fllw this same prcess fr the 2002 FY. 17. Determine the presentatin frmat fr the statements. Nte GASB Statement 34 specifies the infrmatin and certain parameters fr presenting that infrmatin. Hwever, certain presentatin ptins are available. A presentatin frmat allwed by GASB Statement 34 was used fr the 2001 FY restatement. Fr bth the statement f net assets and the statement f activities, the selected frmat (1) prperly distinguishes between the gvernmental activities and the business-type activities and (2) prperly distinguishes the primary gvernment frm the City s ne cmpnent unit. In regard t the statement f net assets: (1) the classified apprach was used t present assets and liabilities in rder f their liquidity and (2) the difference between assets and liabilities was prperly reflected as net assets. In regard t the statement f activities the selected frmat (1) prperly presented the net (expense) revenue f each individual functin (i.e., shws the degree t which each functin is self-financing thrugh charges, grants and cntributins restricted t that functin, etc.), (2) prperly presented general revenues (e.g., taxes, unrestricted grants and cntributins, unrestricted investment earnings, etc.) and transfers separately after the ttal net (expenses) revenues f the varius functins, and (3) prperly reflected the sum f all activity as the change in net assets. AS plans t use the same frmat fr the 2002 FY. 12

13 Reprt #0233 GASB 34 Prgress Reprt Funds Financial Statements The fllwing steps are necessary fr implementatin f the funds financial statements as prvided by GASB 34: 1. Reclassify existing funds int the classificatins prescribed by GASB Statement 34. Fr example, the City s expendable and nn-expendable trust funds will need t be reclassified t the apprpriate fund types, as GASB Statement 34 eliminated thse tw classificatins. Als, City activities currently accunted fr in nnenterprise funds shuld be evaluated t determine if they are required t be reprted in an enterprise fund as prescribed by GASB Statement 34. AS reviewed all funds t determine the prper classificatins pursuant t GASB Statement 34. Resulting changes included: The cemetery perpetual care fund, frmerly a nn-expendable trust fund, was reclassified as a permanent trust fund. The nuclear decmmissining trust fund, frmerly an expendable trust fund, was reclassified as a private-purpse trust fund. The deficiencies and schlarship funds, frmerly expendable r nn-expendable trust funds, were cnslidated with the general fund. During this review prcess AS made additinal reclassificatins fr reasns ther than GASB Statement 34. These changes were made t prvide a mre accurate presentatin f the nted activities. This included: Strmwater management and fire services were changed frm special revenue funds t enterprise funds. The 800 MHz Cmmunicatins fund changed frm a special revenue fund t an internal service fund. The classificatins determined frm that review were used by AS in the preparatin f funds financial statements as part f the restatement f 2001 FY financial statements. Wrksheets dcumenting that prcess were prepared. AS plans t cntinue the same classificatins fr the 2002 FY. 2. Fr gvernmental funds and enterprise funds, determine which individual funds will cnstitute majr funds fr separate presentatin n the statements. This will invlve (1) applying the frmula established in GASB Statement 34 and (2) subjective evaluatins t identify ther funds that shuld be presented as majr funds because f their significance. Criteria that shuld be applied in making thse subjective evaluatins includes, fr example: plitical sensitivity f the activity reprted in a fund, high public interest in a fund s activity, knwn majr uses f a fund s financial data by rating agencies and analysts, and year-t-year cnsistency. As prvided by GASB Statement 34, the City s general fund (primary perating fund) will autmatically be classified as a majr fund. As part f the 2001 FY restatement, AS prepared wrksheets that enabled an applicatin f the mathematical frmula established in GASB 34 fr determining any ther majr funds frm a quantitative perspective. The frmula shwed the City s sales tax fund, electric fund, and sewer fund t be majr funds. In additin t thse funds, AS has pted t shw the gas, water, and airprt funds as majr funds because f their utstanding debt. AS intends t use this same apprach in determining majr funds fr the 2002 FY. 13

14 GASB 34 Prgress Reprt Reprt # Establish a plicy that defines what will cnstitute perating revenues and expenses (i.e., in cmparisn t nnperating revenues and expenses) fr the funds financial statements prepared fr prprietary funds (i.e., business-type activities). As part f the 2001 restatement AS classified revenues/expenses int perating and nn-perating categries. Thse classificatins were the same classificatins traditinally used fr the City s financial statements. Examples f perating revenues and expenses included charges fr services and expenses fr fuel. Examples f nn-perating revenues and expenses included interest and investment earnings and interest expenses. AS intends t cntinue this plicy fr the 2002 FY. The plicy is t be disclsed within the ntes t the financial statements. (See subsequent sectin within this reprt titled Ntes t the Financial Statements. ) 4. Determine the classificatins and required reprting fr interfund activities within and amng the three fund categries (gvernmental, prprietary, and fiduciary). As part f the 2001 restatement AS classified interfund activities within the funds financial statements. Fr example: (1) interfund lans/advances were reprted as receivables and payables within the applicable funds, (2) interfund services (e.g., services prvided by internal service funds) were reprted as revenues in the seller funds and expenditures r expenses in purchaser funds, and (3) interfund transfers nt invlving a requirement fr repayment were reprted as ther financing surces/uses within the gvernmental funds and as part f the capital cntributins and perating transfers categry within prprietary funds. 5. Fr the prprietary funds statement f net assets, classify net assets int the fllwing three cmpnents: (1) invested in capital assets, net f related debt, (2) restricted (distinguishing between majr categries f restrictins), and (3) unrestricted. The cmpsitin f net assets within the prprietary funds was evaluated during the 2001 FY restatement. Based n that evaluatin, net assets were classified int the required cmpnents and categries. Similar evaluatins and classificatins will be perfrmed fr the 2002 FY financial statements. 6. Determine any ther required classificatins and presentatins fr specific accunts. Fr example, GASB Statement 34 prvides that when certain restrictins are applicable t prprietary fund assets, thse assets shuld be reprted as restricted assets n the prprietary funds statement f net assets. During the 2001 FY restatement AS identified and made the apprpriate classificatins and presentatins fr applicable accunts. Fr example, assets restricted fr debt service and fr capital asset replacement were identified as such n the restatement. AS intends t make similar required classificatins and presentatins fr the 2002 FY. 7. Determine what cnversins will need t be made t recncile the funds financial statements t the gvernment-wide financial statements. This will include a determinatin f the wrksheets and recrds that shuld be prepared and maintained fr this cnversin prcess. During the FY 2001 restatement, AS prepared wrksheets t cnvert financial infrmatin maintained in the City s accunting system t a gvernment-wide presentatin. The data n thse wrksheets was used t present a recnciliatin f the funds financial statements t the gvernment-wide financial statements. This same apprach is planned fr the 2002 FY. 14