The Changing Role of State and Local Government Property Management
by Michael Hay
State and local governments have, until recently, not provided
sophisticated measures of their assets. Recent changes in government
practice, and the standards development activities of the new
ASTM Committee E53 on Property Management, will change all that.
The Contrast Between Public and Private Sector Property Management
State and local governments permeate the very fabric of the United
States. They are a diverse network of legislatures, counties,
cities, state-funded colleges and universities, school districts,
community and junior colleges, utility districts, and other governmental
entities that affect our daily lives. Often these governments
are the largest employers in their communities and the most frequent
point of contact between the public and their government. Although
the complexity and structure of these entities may vary somewhat
geographically, most governments have elected or appointed officials
that have policy-making and/or taxing authority over the public.
The business structure of state and local governments is similar
to the private sector in many respects. They hire and fire, budget,
purchase, produce or provide goods and services, and dispose of
unneeded assets. Significant differences do exist, however, between
business and governments regarding the management of their assets.
Corporations and businesses have long understood the importance
of managing their assets in an efficient and cost-effective manner.
They know that their assets are crucial in the production of the
products that generate profits and ultimately determine the success
or failure of their companies; consequently, private sector assets
are managed in a flexible manner assuring their continual contribution
to the bottom line.
State and local governments, on the other hand, typically have
a more rigid administrative structure (a.k.a. bureaucracy) and
are not required to generate a profit. Historically, the primary
focus of asset management by governments has been to defend against
loss. This defensive position stems from the desire to protect
the taxpayer investment in government assets and, not so coincidentally,
avoid negative publicity. As a result, myriad activities have
evolved over time within governments that are intended to assure
stewardship of state and local government property. Auditing,
inventory, and financial recovery of losses due to theft or negligence
have been the primary focuses of governments regarding property
management. Little attention has been given to managing assets
during the utilization phase to assure their highest and best
use. Additionally, governments have often made decisions related
to purchasing or disposing of assets based upon budgetary rather
than business considerations. As a result, reliable asset information
and property management standards are sorely lacking.
Government Changes in Practice
Recent initiatives within the federal government and the Governmental
Accounting Standards Board (GASB) have begun to reverse a long-held
philosophy of governments that if we need more money, well raise
taxes. This spend and tax philosophy began to change within the
federal government in the 1980s and culminated with the National
Performance Review (NPR) in 1993.(1) The NPR analyzed the internal
operations of many of the largest federal agencies and made recommendations
intended to eliminate waste, improve services, and reduce costs.
The federal government began to be seen as a bloated, arrogant
bureaucracy that was inefficient and wasteful. As a result of
the NPR, federal budgets and staff sizes were reduced or eliminated
and federal bureaucrats were required to examine how they could
more efficiently provide services to the public. Once faced with
the distinct possibility of elimination, many federal officials
began adopting business practices that were similar to the private
sector. If a service could be provided more efficiently outside
the government, it was transferred to the private sector. This
concept came to be known as outsourcing. For programs retained
by the federal government, operations were streamlined to deliver
the service at costs comparable to the private sector.
During this process the federal government realized that it needed
accurate costing information in order to make decisions related
to outsourcing. Historically, they had not been required to examine
the true costs of operations and were certainly not required to
measure those costs against similar costs in the private sector.
The lesson learned related to property management was that the
federal government had a significant investment in capital assets
and that their use constituted both a current and continuing cost.
During this same time period, the Internet emerged as another
contributing influence for governmental reform. The public became
accustomed to immediately accessing information and making business
transactions over the Internet. It is only natural that the public
began to expect these same levels of service and information from
These changes in the federal government began to filter down to
state and local governments during this same period of time. Outsourcing,
activity based costing, make vs. buy, sell-offs and several other
long-held private sector concepts were introduced to local governments
for the first time. Then on June 30, 1999, GASB published Statement
No. 34, Basic Financial Statementsand Managements Discussion
and Analysisfor State and Local Governments. In releasing the
new standard, GASB Chairman Tom Allen said: Statement 34 is the
most significant change in the history of governmental accounting.
It represents a dramatic shift in the way state and local governments
present financial information to the public.(2)
Among the new asset information required to be reported by all
state and local governments are the following:
Capital asset and long-term debt activity of the government
for the year;
Depreciation of assets that have not been designated as inexhaustible;
Net gain or loss from sale of assets;
Reporting of infrastructure assets such as roads, bridges, dams,
tunnels, drainage systems, water and sewer systems, lighting systems,
A condition assessment for infrastructure assets considered
part of a network; and
A description of currently known facts, decisions or conditions
that are expected to have a significant effect on financial position
(net assets) or result of operations (revenues, expenses, and
other changes in net assets).(3)
National initiatives in cost accounting are also beginning to
be felt at the local government level. New cost accounting processes,
such as activity based costing, are intended to capture and report
all direct and indirect costs associated with a specific program
or service within a government. Governments that have initiated
cost accounting methodologies have begun to budget and account
for revenues and expenditures at the program level. Allocation
of labor costs, depreciation of assets within a program and other
program-specific expenditures are captured and reported. Cost
accounting has always been used extensively in the private sector
but is a radical departure from the vertical (departmental) budgeting
and expenditure structure normally used by governments. Allocation
of indirect costs for earned asset depreciation at the program
level will require restructuring of government accounting and
asset management systems in order to capture this information.
If one accepts the old adage that if it doesnt get measured,
it doesnt get done, it is obvious that all governments will
be paying far closer attention to their assets in the future.
Governments will need to know where their assets are, how they
are being used, what they are worth and how much they cost and/or
contribute to the organization.
The simultaneous changes in public expectations and the issuance
of GASB Statement 34 have created significant compliance problems
for governments throughout the nation. Historically, the primary
tool used in communicating the results of governmental operations
to the public has been the issuance of financial statements. These
financial reports did a respectable job of disclosing many costs
of operation but did little to provide the public with meaningful
information regarding the true net worth of that government and
true costs of providing services. With infrastructure and depreciation
not being reported on the balance sheet, the public received partial
information regarding the actual value of governmental assets.
Since reporting infrastructure was not a requirement, many governments
chose not to track them. As a result, critical information regarding
their original cost, purchase date, length of service, improvements,
and disposals was lost. For those assets that were required to
be reported, historical costs (original amount paid to purchase
and render to service) was the only required basis of measurement.
Although GASB Statement No. 34 continues to require governments
to report asset value at historical cost, a gradual movement toward
reporting the market value of assets may occur over time. This
is anticipated due to the relatively meaningless asset information
reported by historical cost.
The current controversy raging within government is how best to
identify and value infrastructure. Many governments have chosen
to take this task upon themselves while others have chosen to
hire outside firms to identify and value their infrastructure.
Either way, this has proven to be a monumental effort. Once done,
however, governments will have property records of their roads,
bridges, dams, utility networks and other infrastructure assets.
These records can be used to track maintenance and upkeep of these
important assets and report their value to the public.
Since governments have historically made purchase, replacement,
and disposal decisions based more on availability of funding than
need, little accurate information exists on how long government
assets should last or what they would be worth if sold at the
optimum time. Useful life and residual value (the estimated value
remaining after the asset is fully depreciated) are two of the
three critical informational items needed to calculate and report
depreciation. In order to implement the new GASB requirements,
some governments have chosen to conduct their own studies to determine
lives and values for their assets. Others have chosen to use external
standards such as the Financial Accounting Standards Board (FASB)
Statement No. 93 or equipment depreciation tables issued by the
Internal Revenue Service (IRS). While FASB and the IRS provide
a beginning point for determining life of assets, they do little
to reflect the actual life of the assets for any particular government.
Extensive record keeping and asset tracking will be required to
accumulate information on actual life of assets and actual amounts
received from sale in order for governments to develop a realistic
picture of their current asset values.
It is interesting to note that the same formula that drives calculation
of straight-line depreciation (historical cost residual value
÷ estimate useful life) can be modified to forecast when the asset
should logically be replaced (in service date + anticipated useful
life = anticipated replacement date). This information could be
used to prepare budgets for replacement of assets and will provide
much needed information to government officials for long range
In the past, realizing maximum revenue from sale of assets has
not been a priority for most governments. Recently, several governments
have begun offering their assets to other governmental entities
and to the public over the Internet. Still others have begun allowing
the public to bid on their assets and sell them to the highest
bidder. These efforts are beginning to reveal that the government
has long undervalued its assets at disposal. This may have cost
the public millions of dollars in lost revenue over time.
The role of the government property manager is changing. Opportunities
are abundant for improving the management of assets held by governments.
Movement toward a full lifecycle approach for asset management
is inevitable. Additionally, technology will allow an increasingly
closer working relationship between the federal government and
the individual states in sharing assets. Increased cooperation
between state and local governments also has the potential to
save taxpayer dollars.
In the future, property managers will be required to track all
government assets, their age, condition, and use within the organization.
They will be expected to assure that assets are passed on to other
governmental entities when they are no longer needed within their
own organization. When not needed by other governments, realizing
maximum revenue from sale of assets to the public will also become
In order to achieve these higher expectations and performance
levels, government property managers must educate themselves and
be able to use effective property management techniques. The move
to full life cycle asset management will also demand higher performance
and accountability. This movement toward accountability is already
being experienced through the development of ASTM standards for
property management through new Committee E53 on Property Management
Systems. Standards for asset management definitions, acceptable
loss ratios, and acceptable inventory methods are currently under
development by ASTM in cooperation with key elements of the National
Property Management Association, including representatives from
13 federal government agencies, four state government agencies,
14 colleges and universities, and 58 members of corporate America.
Once approved, these standards will become the benchmarks for
determining adequacy of property management programs within individual
governments. Government property managers, as with other associated
professions, may eventually be required to prove their individual
competence by obtaining certification in the property management
The new goals for the property manager at the state and local
levels will be to minimize asset costs and maximize functional
and financial value received. If they are successful in the transition,
we will all benefit from this improved asset management process.
A great deal of light will continue to be shed on the subject
of government asset management; however, and as any physics student
readily understands, with light comes heat. The responsibilities
of the government property manager will continue to become increasingly
complex and inter-relational with other disciplines such as procurement,
accounting, and risk management. Implementation of change is and
will always be challenging; however, with great challenges come
great opportunities. //
1 A Brief History of the National Performance Review.
2 About GASB Statement 34, National Association of State Auditors, Controllers and Treasurers
3 Governmental Accounting Standards Board, Statement No. 34Basic
Financial Statements and Managements Discussion and Analysis
for State and Local Governments, No. 171-A, June, 1999.
Copyright 2000, ASTM