STATE OF OHIO FINANCIAL REPORTING APPROACH GASB 34 IMPLEMENTATION ISSUES TRANSPORTATION INFRASTRUCTURE

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1 TRANSPORTATION INFRASTRUCTURE GASB 34 Reporting Requirements (Paragraphs 19 through 26) Paragraph 19 includes infrastructure assets in the definition of capital assets. Infrastructure assets are defined as long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Roads and bridges are cited as examples of infrastructure assets. Paragraphs 21 and 22 discuss the requirement for the depreciation of capital assets as follows: Capital assets should be depreciated over their estimated useful lives unless they are either inexhaustible or are infrastructure assets reported using the modified approach in paragraphs 23 through 25. Inexhaustible capital assets such as land and land improvements should not be depreciated. Depreciation expense should be measured by allocating the net cost of depreciable assets (historical cost less estimated salvage value) over their estimated useful lives in a systematic and rational manner. It may be calculated for (a) a class of assets, (b) a network of assets, (c) a subsystem of a network, or (d) individual assets. Footnote 14 defines a network of assets as being composed of all assets that provide a particular type of service for a government. A network of infrastructure assets may be only one infrastructure asset that is composed of many components. For example, a network of infrastructure assets may be a dam composed of a concrete dam, a concrete spillway, and a series of locks. Footnote 15 defines a subsystem of a network of assets as being composed of all assets that make up a similar portion or segment of a network as assets. For example, all the roads of a government could be considered a network of infrastructure assets. Interstate highways, state highways, and rural roads could each be considered a subsystem of that network. Paragraphs 23 through 26 describe the requirements for using the modified approach for reporting infrastructure assets as follows: 23. Infrastructure assets that are part of a network or subsystem of a network (hereafter, eligible infrastructure assets) are not required to be depreciated as long as two requirements are met. First, the government manages the eligible infrastructure assets using an asset management system that has the characteristics set forth below; second, the government documents that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government. To meet the first requirement, the asset management system should: a. Have an up-to-date inventory of eligible infrastructure assets b. Perform condition assessments of the eligible infrastructure assets and summarize the results using a measurement scale c. Estimate each year the annual amount to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by the government

2 24. Determining what constitutes adequate documentary evidence to meet the second requirement in paragraph 23 for using the modified approach requires professional judgment because of variations among governments asset management systems and condition assessment methods. These factors also may vary within governments for different eligible infrastructure assets. However, governments should document that: a. Complete condition assessments of eligible infrastructure assets are performed in a consistent manner at least every three years. b. The results of the three most recent complete condition assessments provide reasonable assurance that the eligible infrastructure assets are being preserved approximately at (or above) the condition level established and disclosed by the government. 25. If eligible infrastructure assets meet the requirements of paragraphs 23 and 24 and are not depreciated, all expenditures made for those assets (except for additions and improvements) should be expensed in the period incurred. Additions and improvements to eligible infrastructure assets should be capitalized. Additions or improvements increase the capacity or efficiency of infrastructure assets rather than preserve the useful life of the assets. 26. If the requirements of paragraphs 23 and 24 are no longer met, the depreciation requirements of paragraphs 21 and 22 should be applied for subsequent reporting periods. Footnote 17 states that, The condition level should be established and documented by administrative or executive policy, or by legislative action. Governments that choose to use the modified approach for reporting infrastructure must make certain disclosures as required supplementary information. These disclosures are explained in paragraphs 132 and Governments should present the following schedules derived from asset management systems, as required supplementary information (RSI) for all eligible infrastructure assets that are reported using the modified approach: a. The assessed condition, performed at least every three years, for at least the three most recent complete condition assessments, indicating the dates of the assessments. b. The estimated annual amount calculated at the beginning of the fiscal year to maintain and preserve at (or above) the condition level established and disclosed by the government compared with the amounts actually expensed (as discussed in paragraph 25) for each of the past five reporting periods The following disclosures should accompany the schedules required by paragraph 132: a. The basis for the condition measurement and the measurement scale used to assess and report condition. For example, a basis for condition measurement could be distresses found in pavement surfaces. A scale used to assess and report condition could range from zero for a failed pavement to 100 for pavement in perfect condition.

3 b. The condition level at which the government intends to preserve its eligible infrastructure assets reported using the modified approach. c. Factors that significantly affect trends in the information reported in the required schedules, including any changes in the measurement scale, the basis for the condition measurement, or the condition assessment methods used during the periods covered by the schedules. If there is a change in the condition level at which the government intends to preserve eligible infrastructure assets, an estimate of the effect of the change on the estimated annual amount to maintain and preserve those assets for the current period also should be disclosed. GASB 34 makes a distinction in the reporting of infrastructure assets that were acquired prior to the implementation of the Statement (retrospective reporting), and those that were acquired subsequent to the implementation of GASB 34 (prospective reporting). Paragraph 148 discusses the implementation dates for retrospective and prospective reporting of infrastructure assets. Prospective reporting of general infrastructure assets in the statement of net assets is required beginning at the effective dates of this statement. Retroactive reporting of all major general infrastructure assets is encouraged at that date. Phase 1 governments as described in paragraph 143 should retroactively report all major general infrastructure assets for fiscal years beginning after June 15, Phase 2 governments should retroactively report all major general infrastructure assets for fiscal years beginning after June 15, Phase 3 governments are encouraged but not required to report major general infrastructure assets retroactively. Paragraph 149 discusses the use of estimated historical costs for the retrospective reporting of infrastructure assets. If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, governments should report the estimated historical cost for major general infrastructure assets that were acquired or significantly reconstructed, or that received significant improvements, in fiscal years ending after June 30, (See paragraphs 155 through 166 for a more complete discussion of methods of estimating the cost of infrastructure assets and, if appropriate, accumulated depreciation on infrastructure assets.) Paragraph 158 provides a discussion regarding an acceptable methodology for estimating historical costs of infrastructure assets. A government may estimate the historical cost of general infrastructure assets by calculating the current replacement cost of a similar asset and deflating this cost through the use of price-level indexes to the acquisition year (or estimated acquisition year if the actual year is unknown). There are a number of price-level indexes that may be used, both private- and public-sector, to remove the effects of price-level changes from current prices

4 Exercise #8 on page 244 of Guide A provides an example of how historical cost may be estimated using current replacement cost deflated by a price-level change factor. For governments that choose to use the modified approach for the reporting of infrastructure assets, paragraphs 152 and 153 describe the disclosure requirements in the year of implementation Governments may begin to use the modified approach for reporting eligible infrastructure assets (as described in paragraphs 23-25) as long as at least one complete condition assessment is available and the government documents that the eligible infrastructure assets are being preserved approximately at (or above) the condition level the government has established and disclosed The three most recent complete condition assessments and the estimated and actual amounts to maintain and preserve the infrastructure assets for the previous five reporting periods required by paragraph 132 may not available initially. In these cases, the information required by that paragraph should be presented for as many complete condition assessments and years of estimated and actual expenses as are available. GASB 34 makes a distinction in the reporting of major and nonmajor infrastructure assets, as described in paragraphs 154 through At the applicable general infrastructure transition date, phase 1 and 2 governments are required to capitalize and report major general infrastructure assets that were acquired (purchased, constructed, or donated) in fiscal years ending after June 30, 1980, or that received major renovations, restorations, or improvements during that period The approaches in paragraphs 158 through 160 may be used to estimate the costs of existing general infrastructure assets when actual historical cost data are not available. These approaches are examples only; governments may use any approach that complies with the intent of this Statement. General infrastructure assets acquired after the effective date of this Statement should be reported using historical costs The determination of major general infrastructure assets should be at the network or subsystem level and should be based on these criteria: a. The cost or estimated cost of the subsystem is expected to be at least 5 percent of the total cost of all general capital assets reported in the first fiscal year ending after June 15, 1999, or b. The cost or estimated cost of the network is expected to be at least 10 percent of the total cost of all general capital assets reported in the first fiscal year ending after June 15, Reporting of nonmajor networks is encouraged but not required.

5 GASB 34 also requires that certain disclosures relating to capital assets, including infrastructure, be presented in the notes to the financial statements. Paragraphs 116 and 117 discuss these disclosures Governments should provide detail in the notes to the financial statements about capital assets and long-term liabilities of the primary government reported in the statement of net assets. The information disclosed should be divided into major classes of capital assets and long-term liabilities as well as between those associated with governmental activities and those associated with business-type activities. Capital assets that are not being depreciated should be disclosed separately from those that are being depreciated. (See paragraph 20.) 117. Information presented about major classes of capital assets should include: a. Beginning-and end-of-year balances (regardless of whether beginning-of-year balances are presented on the face of the government-wide financial statements), with accumulated depreciation presented separately from historical costs b. Capital acquisitions c. Sales or other dispositions d. Current-period depreciation expense, with disclosure of the amounts charged to each of the functions in the statement of activities. Additional guidance regarding the reporting of infrastructure assets can be found in the first GASB 34 Implementation Guide (Guide A) and in the second GASB 34 Implementation Guide (Guide B). Question 32 of Guide A asks, Should construction-in-progress (C-I-P) be included in capital assets? The answer given is Yes. Construction-in-progress should be included with capital assets in the statement of net assets Question 36 of Guide A indicates that buildings that are considered to be an ancillary part of a network of infrastructure assets can be reported as infrastructure. Buildings, except those that are an ancillary part of a network of infrastructure assets, should not be considered infrastructure assets. Question 37 of Guide A lists Rest area facilities associated with a turnpike as an example of the types of buildings that may be an ancillary part of a network or subsystem. Question 57 of Guide A states that under the modified approach, costs for both maintenance and preservation of an asset should be expensed in the period incurred. Question 58 of Guide A further explains, preservation costs generally are considered to be those outlays that extend the useful life of an asset beyond its original estimated useful life, but do not increase the capacity or efficiency of the asset. With regard to establishing minimum acceptable condition levels when using the modified approach, Question 70 of Guide A states that GASB 34 does not establish a minimum condition level. Question 71 of Guide A further explains, The government reporting the subsystem or network of infrastructure assets sets the condition level. This decision should be documented by administrative policy or by legislative action and be disclosed in the notes to RSI...

6 The reporting of land associated with infrastructure assets is addressed in Question 276 of Guide A. Land, including that associated with infrastructure, should be reported as land at cost, estimated cost, or estimated fair value at date of acquisition. Question 32 of Guide B asks, Streets comprise both the infrastructure and the right-of-way or land upon which the infrastructure sits. The infrastructure should be reported at the fair value at the date of donation. Should an additional amount be reported for the right-of-way associated with the donated infrastructure? The answer given is Yes. The right-of-way should be reported at fair value at the time of acquisition in accordance with paragraph 18. Question 286 of Guide A addresses the question of which government should report infrastructure assets whose ownership is unclear by saying that the government with primary responsibility for managing an infrastructure asset should report the asset. Question 29 of Guide B offers additional guidance on this matter by adding, the government that maintains the asset is the one that has responsibility for managing the asset, and, therefore, should report the asset. Question 27 of Guide B asks, The federal government often retains a reversionary interest in capital assets purchased by state and local governments with federal awards. Should state and local governments report these capital assets? The answer given is Yes. Although property records may indicate that the capital assets were acquired with federal funds and the federal government retains a reversionary interest in the salvage values of the assets, the state or local government is the party that uses the assets in its activities and makes the decisions regarding when and how the assets will be used and managed. The historical cost of these assets should be reported in the state or local government s statement of net assets Question 40 of Guide B asks, Governments that apply the modified approach should report as required supplementary information (RSI) the estimated amounts needed to maintain and preserve the asset at (or above) the established condition level and the amounts actually expensed for each of the past five reported periods. Are these amounts required to be based on accrual standards? The answer given is Actual expenses should be reported on the accrual basis of accounting. The estimated amounts produced by the asset management system could be on a nonaccrual basis. If estimated maintenance and preservation information is not based on the accrual basis of accounting, that basis may be disclosed in a note to required supplementary information. State s Approach for Meeting GASB 34 Reporting Requirements The State has elected to capitalize its transportation infrastructure assets, defined as bridges, general highways, and priority highways, using the modified approach. Under this approach, the infrastructure assets are not depreciated because the State has committed itself to maintaining the assets at a condition level that the Ohio Department of Transportation (ODOT) has determined to be adequate to meet the needs of the citizenry. Costs of maintaining the bridge and highway infrastructure are not capitalized. New construction that represents additional lanemiles of highway or additional square-footage of bridge deck area and improvements that add to the capacity or efficiency of an asset are capitalized. ODOT maintains an inventory of its transportation infrastructure capital assets, and conducts annual condition assessments to establish that the condition level that the State has committed itself to maintaining is, in fact, being achieved. ODOT also estimates the amount that must be spent annually to maintain the assets at the desired condition level.

7 A more detailed discussion on the State s approach for valuing and reporting its transportation infrastructure assets follows. Transportation Infrastructure Assets Defined ODOT has pavement and bridges, as well as associated rest stops and appurtenances that are of sufficient cost to qualify as major infrastructure assets. Land associated with these infrastructure assets also must be reported, which has not been done in the past. Beginning with the fiscal year ended June 30, 2002, the State reported these infrastructure assets retrospectively, since ODOT was capable of providing estimated historical costs for its infrastructure assets by that time. The State opted to report the estimated historical costs of all of ODOT s infrastructure assets in existence at June 30, 2001, regardless of date of construction or last major renovation, and without attempting to apply a dollar threshold to individual assets. While the federal government has provided significant funding for the construction of pavement and bridge infrastructure assets throughout the years, these infrastructure assets are owned by the State, and by counties, cities, and other units of government. The State reports those infrastructure assets that ODOT clearly owns, as well as those that ODOT is required by the Ohio Revised code to maintain. The State also reports all infrastructure assets that ODOT may be required to maintain based on the request of other governments. This would occur when villages with a population of less than 5,000 request ODOT to maintain pavement and bridges residing in or crossing through their boundaries. The State does not report infrastructure assets that ODOT may elect to maintain but cannot be required to maintain. An example of this would be when ODOT voluntarily performs maintenance on pavement and bridges residing in or crossing through the boundaries of cities with a population of greater than 5,000, because such cities cannot legally require ODOT to maintain these infrastructure assets. The State has opted to report bridges as one network of infrastructure assets, while pavement is reported as a separate network of infrastructure assets. The pavement network is further subdivided into two subsystems: 1) general pavement (which comprises less than four-lane routes outside of cities), and 2) priority pavement (which comprises interstate highways, freeways, and multi-lane portions of the National Highway System). Land associated with these infrastructure assets, including associated right-of-ways and easements, (which has not previously reported by the State) is added to the value of land reported by the State, while roadside rest stops and appurtenances such as signage, lighting, guardrails, noise walls and retaining walls are reported as part of the cost of pavement or bridges. Also, the cost of land improvements associated with pavement and bridges is included in the cost of pavement and bridges. Retrospective Reporting Estimated Cost Valuation for Transportation Infrastructure Acquired before July 1, 2001 Although ODOT has a comprehensive inventory of all of its bridges and lane miles of pavement, as well as associated rest stops and appurtenances, ODOT did not have historical costs for these assets nor for land associated with infrastructure. Accordingly, ODOT has estimated the historical costs of these assets. For land and associated right-of-ways and easements, ODOT computed an average number of acres for each type of highway, including interchanges, using 2,300 samples. This average was multiplied by the length of each highway type to arrive at the total number of acres associated with infrastructure. The acres were then identified by district and classified as either rural or urban. ODOT s Real Estate Department then estimated the current value per acre of rural and

8 urban acres in each district, as of December 31, 2000, and computed the current replacement cost for each district. This value was added for all districts and divided by the total number of acres to arrive at a statewide cost per acre average. ODOT has inventories of land and associated right-of-ways and easements that were used in support of pavements and bridges for the years ended December 31, 2000, 1990 and The December 31, 2000 value for land acquired between 1990 and 2000 was indexed back to 1995, which is assumed to be the average year that such land was put into service, using the consumer price index. The December 31, 2000 value for land acquired between 1980 and 1990 was indexed back to 1985, which is assumed to be the average year that such land was put into service, using the consumer price index. The value for the remainder of land that was acquired before 1980 was indexed back to the year that infrastructure was first built on that land, which could range anywhere from 1914 to 1979, using the consumer price index. Land associated with rest areas is included in the cost of land. ODOT determined the number of acres per rest area. The average current cost of land in each district was then applied to the rest area acres in that district, and indexed back to the year of acquisition, using the consumer price index. The actual cost of land acquired from December 31, 2000 through June 30, 2001 was added to the estimated historical cost of land determined, as described above, to derive the cost reported for July 1, ODOT maintains the pavement inventory in an inventory system that includes identification of lane miles by less than four-lane and four or more lane miles. ODOT estimated current replacement cost per lane mile for both less than four-lane and four or more lane pavement, exclusive of appurtenance and design costs. The estimated cost per lane mile differs for less than four-lane pavement as opposed to four or more lane pavement, but does not differ for priority pavement versus general pavement. The estimated current replacement cost per lane mile for both less than four-lane and four or more lane pavement is then multiplied by the number of lane miles of less than four-lane and four or more lane pavement, respectively, to obtain the total estimated current replacement cost for all pavement before appurtenant and design costs. ODOT then derived an estimate of appurtenant and design costs that were expressed, as a percentage of pavement costs for less than four-lane and four or more lane pavement, and applied this percentage to the pavement cost described above to obtain total estimated current replacement cost. This total estimated current replacement cost for pavement was then indexed back to 1983 using the consumer price index. The year 1983 was chosen based on the assumption that since pavement has a design life of 35 years before requiring replacement, the average age of pavement, as of June 30, 2001 would be one-half of the design life, or 17.5 years; hence the year Finally, the historical cost of rest areas was estimated by indexing the current estimated replacement cost back to the year the facility was put into service, which is known for each rest area, using the consumer price index. These costs were then added to the cost of pavement derived as described above to yield the total estimated historical cost of pavement. (Rest areas are reported as part of pavement infrastructure instead of buildings because they are considered to be an ancillary part of pavement.)

9 The actual cost of pavement constructed from December 31, 2000 through June 30, 2001 was added to the estimated historical cost of pavement as described above to derive the cost reported for July 1, ODOT maintains an inventory of all bridges that includes the deck area of each bridge and the year placed into service, but does not include the cost of the bridge. For the bridges built from 1986 to 1999, ODOT calculated the actual cost by square foot of deck area, exclusive of design costs, for bridges built in each of these years. The costs for each of these years were then indexed to 1999 using the consumer price index, and divided by the total square feet of deck area of all bridges built during those years to obtain a current average replacement cost per square foot of deck area, exclusive of design costs. ODOT then multiplied the average cost per square foot of deck area by the total deck area of all bridges to obtain current estimated replacement cost, exclusive of design costs. These costs were then indexed using the consumer price index based on the percentage of total deck area that was put into service in each year. ODOT then derived an estimate of design costs expressed as a percentage the construction costs described above, and applied this percentage to the total of the costs indexed for each year to obtain total estimated current replacement cost. Prospective Reporting of Transportation Infrastructure After June 30, 2001 The State is also required to report ODOT s capitalizable infrastructure assets that are acquired prospectively, that is, after June 30, ODOT prospectively reports these infrastructure assets using actual costs. ODOT classifies every construction project, on a percentage basis, into the categories of bridge, pavement, and other. The costs of land, easements, and right-of-way are not considered to be infrastructure, and are classified as other. The other category includes projects not directly related to pavement or bridges, or projects that the Department is not responsible for reporting or maintaining. Certain county and township roads and bridges are not the responsibility of ODOT and must be reported by the responsible political subdivision. Projects pertaining to such roads and bridges should be classified as other. ODOT subsequently identifies land, easements, and right-of-way classified as other through various queries of ODOT s Appropriation Accounting System. ODOT capitalizes all land, easements, and rightof-way acquired for use with infrastructure subsequent to June 30, 2001, regardless of the cost of the land. Construction project costs identified in the bridge and pavement categories, as described above, are further categorized, on a percentage basis, into the sub-categories added capacity and maintenance. ODOT capitalizes costs in the added-capacity sub-category, while the Department does not capitalize costs in the maintenance sub-category. Prospectively, ODOT capitalizes work performed on pavements and bridges when the total capitalizable costs for a project are at least $500,000. Projects with a total cost less than $500,000 are expensed even though they may otherwise meet the capitalization criteria. Preservation costs are those costs that extend the useful life of an asset beyond its original useful life but do not increase its capacity or efficiency. The modified approach requires that such costs be expensed. Routine maintenance costs are also expensed. Project costs that increase lane miles or deck area are considered to be increases in capacity and efficiency to the respective network, and therefore are capitalized. Other improvements resulting in increases to capacity and efficiency that can be reasonably quantified or estimated are also capitalized.

10 Work related to rest areas is classified as pavement and is capitalized or expensed in accordance with the other provisions of this document (i.e., costs associated with the construction of new rest areas where none existed previously are capitalized, while the costs associated with the replacement of existing rest areas are expensed). The original costs of appurtenances are capitalized, while replacements and repairs of appurtenances are expensed. Examples of appurtenances include signage, lighting, guardrails, noise walls, and retaining walls. Bridges, pavement, associated rest stops and appurtenances, and related land assets that are removed from service, because of transfer of ownership or abandonment, must have their associated costs removed from the State s inventory of infrastructure and land assets. From the inventory, ODOT removes the estimated historical cost of bridges, whether acquired before or after June 30, 2001, when retired. Estimated historical cost for bridges for the purpose of retirement is defined as total retrospective cost of bridges, derived as described previously, divided by the total number of square feet of deck surface area acquired retrospectively, to yield an average cost per square foot of deck area. ODOT multiplies the average cost per square foot of deck area by the number of square feet of deck area retired in the fiscal year to yield the estimated historical cost of the bridge deck area retired. From the inventory, ODOT removes the estimated historical cost of pavement, both general and priority, whether acquired before or after June 30, 2001, when retired. Estimated historical cost for pavement for the purpose of retirement is defined as total retrospective cost of pavement, derived as described previously, divided by the total number of lane miles of pavement acquired retrospectively, to yield an average cost per lane mile. ODOT multiplies the average cost per lane mile by the number of lane miles retired in the fiscal year to yield the estimated historical cost of the less than four-lane and four or more lane miles retired. ODOT needs to perform this calculation for less than four-lane and four or more lane pavement separately, since each has its own cost per lane mile. From the inventory, ODOT removes the estimated historical cost of rest areas, which are associated with pavement, whether acquired before or after June 30, 2001, when retired. Estimated historical cost for rest areas for the purpose of retirement is defined as estimated replacement cost in 2000, derived as previously described, and indexed back to the year that the rest area was placed into service. Rest areas can be identified individually; thus the estimated historical cost of each individual rest area can be retired. From the inventory, ODOT removes the estimated historical cost of land assets, whether acquired before or after before June 30, 2001, when retired. Estimated historical cost for land for the purpose of retirement is defined as total retrospective cost reported for land, derived as described previously, divided by the total number of acres of land acquired retrospectively, to yield an average cost per acre. ODOT multiplies this average cost per acre by the number of acres retired in the fiscal year to yield the estimated historical cost of the land acreage retired. ODOT must also report C-I-P for capitalizable ODOT infrastructure assets. Costs associated with C-I-P include those identified in ODOT s Appropriation Accounting System, ODOT s Transportation Management System, and through the coding of last receipt date on vouchers processed through the Construction Management System.

11 ODOT s Appropriation Accounting System tracks all payments made to vendors for construction projects by PID. The total amount of payments made through June 30 against projects in C-I-P is analyzed to identify the amount of payments that apply to capitalizable costs or maintenance for bridges and pavement or other. In addition to payments to vendors, capitalizable C-I-P costs include internal ODOT labor costs for design work and contract administration. ODOT tracks these costs through the Transportation Management System, which matches the costs against construction projects by PID. Capitalizable C-I-P also includes amounts owed to vendors for work performed by June 30 that remained unpaid at June 30. These costs are identified through the coding of last receipt date on vouchers for C-I-P payments that are processed in CAS after June 30 through the cutoff date. The cutoff date is a date in early July (usually on or about July 10) that is agreed upon by ODOT and OBM every year as representing the date after which it is estimated that no further material payables would exist for C-I-P. OBM provides ODOT with electronic downloads from CAS of all vouchers processed after June 30 through the cutoff date that were coded with a last receipt date that falls in the prior fiscal year (thus indicating that the payment was for a liability that existed at June 30), and were paid from object category 7, the category used for capital disbursements. ODOT analyzes the vouchers and matches payments with projects, and applies the percentage of each voucher that relates to capitalizable disbursements for bridges, pavement, and land, and then adds these costs to C-I-P. Finally, ODOT reconciles the costs obtained from these three systems to costs reported in CAS. The State includes the disclosures for its highway and bridge infrastructure in the notes to the State s financial statements, as required under paragraphs 116 and 117 of GASB 34. Required Supplementary Information Paragraphs 132 and 133 of GASB 34 require governments using the modified approach to disclose, as RSI, condition assessment data of their infrastructure assets and the actual and estimated maintenance costs of preserving those assets at or above the condition level established by the government. ODOT s policies for reporting condition assessment data for pavement and bridge infrastructure assets and estimated and actual maintenance costs for maintaining those assets are discussed below. The State has opted to report bridges and pavement infrastructure assets using the modified approach, instead of reporting depreciation for these assets. ODOT has a comprehensive inventory of all of its bridges and lane miles of pavement, as well as their associated rest stops and appurtenances. ODOT performs condition assessments of all bridges and pavement annually, and ODOT is capable of providing estimates of the amounts needed annually to maintain its infrastructure assets at the minimum acceptable condition level established by ODOT for financial reporting purposes. ODOT manages its pavement system by means of annual, visual inspections by trained pavement technicians of all pavements owned or managed by ODOT. Technicians rate the pavement using a scale of 1 (minimum) to 100 (maximum) based on a Pavement Condition Rating (PCR). This rating examines items such as cracking, potholes, deterioration of the pavement, and other factors. It does not include a detailed analysis of the pavement s subsurface conditions. For the priority subsystem, it is ODOT s policy to maintain at least 75 percent of the pavement at a PCR level of at least 65, and to allow no more than 25 percent to fall below a

12 PCR level of 65. For the general subsystem, it is ODOT s policy to maintain at least 75 percent of the pavement at a PCR level of at least 55, and to allow no more than 25 percent of the pavement to fall below a PCR level of 55. ODOT also conducts annual inspections of all of the bridges owned or managed by ODOT. The inspections cover major structural items, such as piers and abutments, and assign a general appraisal condition rating from 0 (minimum) to 9 (maximum) based on a composite measure of these major structural items. It is ODOT s policy to maintain at least 85 percent of the square feet of deck area at a general appraisal condition rating level of at least five, and to allow no more than 15 percent of the square feet of deck area to fall below a general appraisal condition rating level of five. ODOT obtains actual disbursements of cash for noncapitalizable infrastructure projects from its Appropriation Accounting System. The Appropriation Accounting System tracks all payments made to vendors for construction projects by project identification number (PID). The total amount of payments made through June 30 against projects in C-I-P is analyzed to identify the amount of payments that apply to capitalizable costs or maintenance for pavement and bridges. Construction project costs identified in the pavement and bridge categories, as described above, are further categorized, on a percentage basis, into the sub-categories - added capacity (i.e., additional lane miles of pavement, additional square footage of bridge deck area, and other reasonably estimated increases in capacity and efficiency) and maintenance. Paving costs are further identified as belonging to the priority or general subsystems, for RSI disclosure purposes. ODOT capitalizes costs in the added-capacity sub-category, while the Department does not capitalize costs in the maintenance sub-category. Maintenance costs include preservation costs, which are those costs that extend the useful life of an asset beyond its original useful life, but do not increase its capacity or efficiency. The modified approach requires that such costs be expensed. Routine maintenance costs are also expensed. GASB 34 requires that actual costs of maintenance be reported on the accrual basis. Accordingly, maintenance also includes amounts owed to vendors for work performed on or before June 30 that remained unpaid at June 30. These costs are identified through the coding of last receipt date information on vouchers for C-I-P payments that are processed in CAS after June 30 through the payable cutoff date. The cutoff date is a date in early July (usually on or about July 10) that is agreed upon by ODOT and OBM every year as representing the date after which it is estimated that no further material payables would exist for C-I-P. For analysis, OBM provides ODOT with electronic downloads from CAS of all vouchers processed after June 30 through the cutoff date that were coded with a last receipt date that falls in the prior fiscal year (thus indicating that the payment was for a liability that existed at June 30), and were paid from object category 7, the category used for capital disbursements. ODOT reviews the voucher transactions and matches payments with projects; ODOT applies the percentage of each voucher that relates to noncapitalizable disbursements for bridges and pavement, and then adds these costs to the cash basis disbursements for maintenance identified previously. Finally, ODOT subtracts the costs for maintenance payables identified in the analysis of voucher transactions recorded through the previous fiscal year s payable cutoff date from the noncapitalizable disbursements for bridges and pavement, to obtain the actual costs of maintenance on the accrual basis.

13 ODOT calculates the estimated maintenance costs of preserving its infrastructure assets at or above the established acceptable condition level on the accrual basis using budgeted disbursement data established for its preservation program, allocated between the categories of priority pavement, general pavement, and bridge, including in-house costs and accounts payable identified as being applicable to maintenance projects. From the appropriation accounting system, the average percentage of project completion per year is obtained for all types of maintenance-related construction projects, as well as the percentage that each type of maintenance-related construction comprises of the total budgeted maintenance for the current fiscal year. Using these percentages, one global weighted average percentage of project completion per year is derived that is applied to all projects, whether priority pavement, general pavement, or bridge. This average reflects the percentage of each maintenance project s encumbered amount that is estimated to be disbursed in the first, second, third, and fourth years of construction. The weighted average is recalculated every fiscal year. The weighted average is multiplied by the amount of actual encumbrances associated with maintenance projects that had disbursements in the current fiscal year. The percentage applicable to each year is applied to the amount of the total encumbrances on projects having disbursements in that year. For example, if the project has a disbursement in the current fiscal year and it was encumbered in the prior fiscal year, then the total encumbrance (which is recorded in the prior fiscal year) and the percentage expected to be disbursed in the second year of the project, which would correspond to current fiscal year in this example, is applied to obtain the budgeted amount for the current fiscal year. ODOT currently estimates that four years is the average length of a construction project. The sum of the estimated disbursements for these four years are then totaled to obtain estimated maintenance costs for the current fiscal year in the categories of priority pavement, general pavement, and bridge. In-house labor costs (which are tracked through the Transportation Management System, and thus are not encumbered) that are allocated to maintenance projects and disbursed in the current fiscal year are then added to the estimate. Accounts payable that are identified in CAS for maintenance projects are also added to obtain an estimate, on the accrual basis, of total maintenance costs for the fiscal year.