1. Water/Wastewater Infrastructure and GASB 34
TGFOA 10/12/17
Water/Wastewater Infrastructure and GASB 34

2. Water and Wastewater Finance Act of 1987
In 1987, the state passed the Wastewater Facilities Act creating the Wastewater Finance Board (WFB).
That board was charged with assuring that Cities in Tennessee, with Wastewater Funds, operate in a sound financial manner.

3. Water and Wastewater Finance Act of 1987 (cont.)
If a city’s wastewater fund losses money for three consecutive years, it was considered financially distressed.
Having a negative net position or defaulting on debt were also violations of the Act.

4. Water and Wastewater Finance Act of 1987 (cont.)
Any city in violation of the Act would have to come before the WFB and agree to a plan that would get their Wastewater Fund profitable within three years.

5. Wastewater Finance Board
Board members, appointed by the governor, hear cases brought by the comptroller’s office.
The board has broad powers to effect the adoption of user rates, issue subpoenas, and so forth. T.C.A. §§ –1010.

6. Exemptions to the Water and Wastewater Facilities Act of 1987
Originally, the Act only covered Wastewater Systems or combined Water and Wastewater Systems.
Wastewater systems with less than 900 customers did not have to fund depreciation from grant acquired assets - ever.

7. Exemptions to the Water and Wastewater Facilities Act of 1987
The general fund could subsidize the wastewater fund as long as the amounts were budgeted.
If a wastewater system has total equity at least 4 times greater that total debt, no depreciation expense shall be considered in determining a loss or deficit.

8. Exemptions to the Water and Wastewater Facilities Act of 1987
By 1996, another depreciation exemption was created. No depreciation expense would be considered for the first 7 years of wastewater system operations.

10. Changes to the Water and Wastewater Facilities Act of 1987
Separate water systems were added to the Act.
The small system exemption, 900 or fewer customers, for excluding depreciation on grant acquired assets is gone.
The General Fund is no longer permitted to subsidize a water, wastewater, or combined system.

11. Changes to the Water and Wastewater Facilities Act of 1987
The new system exemption, where depreciation is excluded for 7 years, is gone.
The exemption to exclude all depreciation if a wastewater system has total equity at least 4 times greater that total debt is gone.

12. Changes to the Water and Wastewater Facilities Act of 1987
Grant revenue will no longer be considered in determining a net loss or fund balance deficit.
The time frame for determining whether financial distress has dropped from 3 to 2 years.
The name is changed to the Water and Wastewater Finance Board.

13. Water Loss
The Water and Wastewater Financing Board now issues rules defining excessive water losses by public water systems, investigates systems with excessive losses, and require them to reduce water losses to acceptable levels.

14. Water Loss
If the water system fails to take appropriate actions to reduce losses, the board may petition the chancery court to require these actions.
Public water systems must include in their annual audits the annual average unaccounted-for water losses in the manner prescribed by the comptroller.

15. CAPITAL ASSETS and the MODIFIED APPROACH For REPORTING INFRASTRUCTURE ASSETS

16. What Are The Classes Of Capital Assets?

17. The Classes Of Capital Assets
Land
Buildings
Improvements Other Than Buildings
Equipment
Construction Work In Progress
Infrastructure

18. Infrastructure

19. Infrastructure

20. What are Infrastructure Assets?
Infrastructure assets are 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.

21. What are Infrastructure Assets?
Examples of infrastructure assets include roads, tunnels, drainage systems, water and sewer systems, and dams.

22. What Is Depreciation?
Depreciation is an accounting concept, and valid expense, that indicates that capital assets are being consumed.
Depreciation is calculated in any financial statement prepared with accrual accounting.

23. What Is Depreciation? (cont)
Depreciation expense is simply calculated by dividing the cost of an asset(less any salvage value) by its number of useful years resulting in the annual depreciation amount.
Depreciation is the allocation of the cost of a capital asset over its estimated useful life.

24. The Modified Approach For Reporting Infrastructure Assets

25. What is the Modified Approach For Reporting Infrastructure Assets ?
The modified approach substitutes depreciation expense for the actual expense of preserving the assets.
Managerially, the information developed through condition assessments is far superior to any information provided through depreciation.

26. What is the Modified Approach For Reporting Infrastructure Assets ?
When maintenance is needed, all expenditures for eligible infrastructure assets should be expensed in the period incurred.

27. What Authority Allows Tennessee Cities To Use The Modified Approach?
The Governmental Accounting Standards Board (GASB) makes Generally Accepted Accounting Principles (GAAP) for cities.
GASB Statement 34 created the modified approach.
The State of Tennessee has adopted GAAP and requires its cities to use GAAP

28. GASB Statement 34 (Basic Financial Statements-and Management’s Discussion and Analysis-for State and Local Governments)
Introduced the concepts of infrastructure assets and the modified approach for reporting infrastructure assets in 1999.

29. What Assets Are Eligible?
Wastewater systems are long-lived capital assets, which are also called eligible infrastructure assets.
A network of assets is composed of all assets providing a special type of service (sewer system).
A subsystem of a network of assets is composed of all assets that make up a segment of a network of assets (sewer lines).
All or part of a water or wastewater system are eligible infrastructure assets that can use the modified approach for reporting.

30. How to Implement the Modified Approach?

31. Two Requirements when Using the Modified Approach
The government manages the eligible infrastructure assets using an asset management system.
The government documents that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government.

32. Characteristics of The Asset Management System
Must have an up-to-date inventory of eligible infrastructure assets.
Perform condition assessments of the eligible infrastructure assets and summarize the results using a measurement scale.
Estimate each year the annual amount to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by the government.”

33. Steps To Implement the Modified Approach
Develop an asset management system.
The city must develop condition levels.
Perform condition assessments.
Estimate the annual amount to maintain and preserve the eligible infrastructure.
The government must spend that amount of money established by the condition assessment.

34. Take Inventory

35. A. Develop an Asset Management System
Take a physical inventory of all eligible infrastructure assets.
Establish the actual historical cost or value for all capital assets.
Complete an individual property record for each capital asset.
Label or tag all capital assets marking them as “city property”.

36. B. Condition Level

37. B. The City Must Develop Condition Levels
The city must decide on the minimum level of acceptable condition for its eligible assets.
This requires a rating system or measurement scale (which could be co-developed with an engineer) that is replicable and well documented.
A replicable assessment is one where another person, using the same assessment approach, would have substantially similar results.

38. C. Perform Condition Assessment

39. C. Perform Condition Assessment
A condition assessment measures the condition of assets within a subsystem or network based on your measurement scale.
A condition assessment must be done by trained individuals every three years. They do not have to be licensed engineers.
The condition assessment documents the condition level at which the eligible infrastructure assets are being maintained.

40. C. Perform Condition Assessment (cont.)
A key part is an estimate each year for the annual amount necessary to maintain the assets at the condition level established and disclosed by the government.
The government must spend the amount of money established by the condition assessment and correct the deficiency.
In this manner, the eligible infrastructure assets are preserved as the governing body intended.

41. D. Estimate the Annual Amount to Maintain and Preserve the Eligible Infrastructure

42. D. Estimate the Annual Amount to Maintain and Preserve the Eligible Infrastructure
Every year an estimate of the annual amount to maintain and preserve the eligible infrastructure should be budgeted to spend.

43. E. The Government Must Spend that Amount of Money Established by the Condition Assessment

44. E. The Government Must Spend that Amount of Money Established by the Condition Assessment
Every year, the amount of money established by the condition assessment should be budgeted and spent accordingly.

45. WHAT ELSE IS REQUIRED WITH THE MODIFIED APPROACH?
Additional information is required in the audited financial report.
The MD&A has a special section to report on the assessed condition of infrastructure assets.
Additional information must be presented in the Required Supplemental Information (RSI) section of the audit report.

46. THE END

47. GASB Statement 34 (Basic Financial Statements and MD&A for State and Local Governments)
Introduced the concepts of infrastructure assets and the modified approach for reporting infrastructure assets in 1999.

48. Implementing the Modified Approach
Develop an asset management system.
Develop condition levels.
Perform condition assessments.
Estimate the annual amount to maintain and preserve the eligible infrastructure.
Must spend that amount of money established by the condition assessment.