Determining the real cost of growth and development and who should pay.(Best Practices)

Capital Improvement Plans. Governments often use capital improvement plans to identify infrastructure and other capital assets needed to support future growth. A capital improvement plan helps to ensure that projected future costs are fully integrated into the government's overall financial plan. The Government Finance Officers Association (GFOA) recommends that a capital improvement plan include a general time frame for purchase or construction, a summary of the asset's impact on service delivery an analysis of the life-cycle costs associated with the asset, and a list of alternative methods to finance the purchase or construction of the asset given the community's fiscal capacity. (5)

Life-Cycle Costing and Asset Management. An analysis of the lifecycle costs should be incorporated into the capital improvement plan. The lifecycle cost of a capital asset is defined as acquisition cost, plus the sum of the present values of future costs over the asset's life, less the present value of any residual value at the end of the asset's life. Life-cycle costing acknowledges that infrastructure assets pass through a number of phases over their long life spans, and that costs are incurred in each phase of the asset's life. These costs include not only acquisition cost but operations, maintenance, and repair costs as well.

The Federal Highway Administration considers asset management to be a systematic process of maintaining, upgrading, and operating capital assets in a cost-effective manner. (6) The primary objective of infrastructure asset management is to minimize the total lifecycle cost while maintaining a desired service level. (7) Effective asset management practices can reduce life-cycle costs of infrastructure, resulting in assets that are better planned, designed and constructed. (8)

GASB Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, requires state and local governments to capitalize all capital assets, including infrastructure, at historical cost and depreciate those assets over their estimated useful lives. However, governments do not have to depreciate infrastructure assets if they use the "modified" approach, in which case the costs associated with maintaining infrastructure assets at a particular service level are substituted for depreciation expense. Governmental entities choosing the modified approach must implement an asset management system that includes an up-to-date inventory of infrastructure assets, performance condition assessments, and estimates of the condition level of the infrastructure assets. GASB Statement 34 requires governments to perform a condition assessment on infrastructure assets at least every three years, and the results of the three most recent assessments must show that assets are being preserved at or above the condition level established by the government. By focusing on long-range preventative maintenance and continuously assessing the condition of infrastructure assets over their lifecycles, asset management enhances accountability and fiscal stewardship for infrastructure assets.

Calculating the Cost of Growth and Development. Lifecycle costing is useful when trying to determine the total cost of a particular asset. However, growth and development can impose future costs on a community that are incidental but not trivial. For example, growth may eventually require upgrading, expanding or constructing public schools, public libraries, parks and recreation facilities, police stations, and fire stations. Additional fire trucks, police cars, and garbage trucks may also become necessary. Public officials must plan for these infrastructure and capital outlays. Furthermore, these additional infrastructure and capital assets will require additional personnel such as teachers and librarians; fire fighters and police; vehicle maintenance personnel; streets, parks, and recreation personnel; water and sewer workers; etc. Public officials need to take these additional personnel costs into account when preparing their comprehensive plan.

CONCLUSIONS

The infrastructure costs associated with a particular development may actually extend beyond the infrastructure located within that development. That is, public officials must look at the long-term impact of growth and development when evaluating the cost of a particular development. In addition, public officials need to be cognizant of the potential future costs that may be necessitated by growth and development. It is only by thoughtful comprehensive planning that public officials can truly determine how to best maintain interperiod equity when faced with current and future growth and development.

Alternate Financing Method

Voters in California, Colorado, and Florida have set limits on property tax increases, forcing public officials in those states to turn to development impact fees as an alternative method of financing infrastructure. *

* City of Cannon Beach, Oregon, Comprehensive Plan, September 2006, pp. 4-6.

The City of Cannon Beach, Oregon

The Comprehensive Plan of the City of Cannon Beach, Oregon, requires the city to establish a three-year capital improvement program for maintaining and upgrading the water system and the sewer system, both of which must be reviewed annually. The city also reviews the capacity of the sewage treatment system at 5-7 year intervals to determine the remaining capacity and the need for improvements. Subdivisions, planned developments, motels, or other uses can be approved only if sufficient sewage capacity is available. Sewer lines in proposed developments must be adequately sized to meet future development needs, and plans for sewer line extensions and treatment plant improvements must comply with all state and federal regulations. *

* City of Cannon Beach, Oregon, Comprehensive Plan, September 2006, pp. 4-6.

Notes

(1.) Arthur C. Nelson, "Development Impact Fees: The Next Generation," The Urban Lawyer 26, no. 3 (1994): 542.

(2.) Michael H. Granof, Government and Not-for-Profit Accounting: Concepts and Practices (New York: John Wiley & Sons, Inc., 2007), 5-6.

(3.) Ibid., 231.

(4.) Wes Clarke and Jennifer Evans, "Development Impact Fees and the Acquisition of Infrastructure," Journal of Urban Affairs 21, no. 3 (1999): 281.

(5.) Joseph P. Casey and Michael J. Mucha, eds., Capital Project Planning and Evaluation: Expending the Role of the Finance Officer (Chicago: Government Finance Officers Association, 2007), 41-43.

(6.) Asset Management Primer (Washington: U.S. Department of Transportation, December 1999), 1.

(7.) Comprehensive Asset Management Has Potential to Help Utilities Better Identify Needs and Plan Future Investments, GAO-04-461 (Washington: Government Accountability Office, March 19, 2004), 2.

(8.) Patrick McNamee, Daniel Dornan, Daniel Bajadek, and Edward Chait, Understanding GASB 34's Infrastructure Reporting Requirements (New York: PriceWaterhouseCoopers, October 1999), 2-3; and U.S. Department of Transportation, Asset Management Primer, pp. 7-10.

RICHARD C. BROOKS, Ph.D., is the Dean's Professor of Accounting at the College of Business and Economics at West Virginia University. DAVID B. PARISER, Ph.D., CPA, CGFM, CFE, is professor of accounting at the College of Business and Economics at WestVirginia University.

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