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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, we’ll 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 their government.

The Effect

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 Statements—and Management’s Discussion and Analysis—for 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, etc.;

• 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 doesn’t get measured, it doesn’t 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 Challenge

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 planning.

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 Future

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 a priority.

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 field.

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. //

References

1 ”A Brief History of the National Performance Review.”

2 “About GASB Statement 34,” National Association of State Auditors, Controllers and Treasurers Web site.

3 Governmental Accounting Standards Board, “Statement No. 34—Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments,” No. 171-A, June, 1999.

Copyright 2000, ASTM

Michael Hay is the manager of the State Property Accounting System for the State of Texas. He currently serves as vice president for Administration and director of State and Local Government for the National Property Management Association. Hay is an author of the National Property Management Association’s The Standard Property Book—Asset Management for the New Millennium.

For additional information regarding Committee E53, please contact Pat Picariello (610/832-9720). Individuals interested in joining E53 may complete an application.