A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management (2019)

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63 The objectives of this Asset Valuation chapter are to: • Describe what asset valuation is and the approach to determining asset values • Consider how to apply accounting standards • Describe the various approaches that may be used to support financial planning • Describe the respective financial and engineering functions • Describe the audience for asset valuation and how it can be used to support the case for investments in highways • Learn lessons from international practice 6.1 Fundamentals of Asset Valuation Introduction Asset valuation is the assignment of a monetary value to property. In everyday life, we value, for example, stocks and bonds, real estate, and used cars. These values are calculated in different ways, but are most meaningful when used to determine the exchange price for the property. Most of us therefore appreciate—if not fully comprehend—the value of a share of stock exchanged on Wall Street or of a single-family home in terms of a fair market price. But unlike stock, transpor- tation infrastructure assets typically do not generate dividends, nor can they be easily and readily exchanged in an open market, even when markets for some assets such as toll facilities do exist. Valuation can mean different things in different contexts and for different disciplines. FHWA discusses valuation in the context of TAM in its report Financial Planning for Transportation Asset Management: Incorporating Asset Valuation into Transportation Asset Management Finan- cial Plans (Proctor and Varma 2016). Volume 2 of the AASHTO Transportation Asset Manage- ment Guide (AECOM et al. 2011) includes a section on asset valuation that includes procurement methods and the impacts of public–private partnerships. Both of these resources provide valu- able information to supplement the materials in this section, the remainder of which discusses different approaches to valuing transportation assets. Calculating transportation asset value is required for TAMPs. 23 CFR 515.7 states that “The financial plan process shall, at a minimum, produce . . . an estimate of the value of the agency’s NHS pavement and bridge assets and the needed investment on an annual basis to maintain the value of these assets.” Supplemental information for the TAMP explains that, “There are many ways to estimate asset value. The FHWA leaves it to the state DOT to select the asset valuation methodology that suits it the best.” In practice there are several common approaches used for valuing transportation assets. The GASB Summary of Statement No. 34 (GASB Statement 34) (GASB 1999) details an C H A P T E R 6 Asset Valuation

64 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management approach for preparing financial statements based on historic costs with two options for calculating depreciation of asset value: the Standard and Modified approaches. An alterna- tive approach termed depreciated replacement cost (DRC) is the current replacement cost of an asset less the depreciated amount due to deterioration and obsolescence. This approach is recommended for use in developing TAM financial plans where it is not a requirement to maintain consistency with the value calculated based on GASB Statement 34 (i.e., the historical value). Other alternatives include determining the economic value of an asset and establishing market value. Regardless of the specific approach used for asset valuation, the end result of a valuation exer- cise is a concise summary that provides a snapshot of current asset conditions, combining data for disparate physical assets into a single measure: asset value. Table 6-1 shows an example of such a calculation for a state DOT. Here, the DOT has used the DRC approach to determine total replacement value for pavements and bridges and then reduced those values by some calculated amount for lost value, or depreciation. The resulting asset value is referred to as “net value.” The DOT also identifies the maintenance and capital costs required to support those assets and calculates the percent of the asset net value for each of the preventive maintenance and capital improvements programs. This helps put the funds required for preserving existing assets in perspective, as these are a fraction of total asset value. Asset Valuation Based on GASB Statement 34 Motivation All U.S. businesses and government agencies are required to produce some form of annual financial report. The Securities and Exchange Commission requires publicly traded companies to produce an income statement, a statement of cash flows, and a balance sheet. Similarly, govern- ment agencies typically prepare an annual Comprehensive Annual Financial Report (CAFR), a publication that provides in-depth information about the operations and financial position of the agency. The prior three chapters of this guidebook focused on the accounting of sources and uses in terms of inflows and outflows or revenues and expenditures. These common components of a CAFR resemble the private sector’s income statement or statement of cash flows, but the private sector must also report a balance sheet, or an accounting of assets, liabilities, and equity (where equity equals assets minus liabilities). Likewise, government agencies typically present some valu- ation of their fixed and tangible assets in the CAFR. In the U.S., GASB provides guidance on accounting principles for public agencies, and Statement 34 describes how to value transportation infrastructure for financial reporting. GASB Statement 34 was first adopted in 1999. This document was notable in that it helped clarify for agencies how to demonstrate the value of public investment and the impact on Pavements Bridges Total Replacement Value $36,000 $19,400 $55,400 Depreciation to date $8,200 $8,800 $17,000 Net Value $27,800 $10,600 $38,400 Preventative Maintenance $127 $95 $222 % of Net Value 0.5% 0.9% 0.6% Capital Improvements $520 $540 $1,060 % of Net Value 1.9% 5.1% 2.8% Table 6-1. Asset valuation at a state DOT ($ millions) (Smadi 2000).

Asset Valuation 65 valuation of neglected maintenance and repair. Asset valuation within the financial plan, there- fore, can assist in the following ways: • Determining whether the government’s overall financial position improved or deteriorated; • Evaluating whether the government’s current-year revenues were sufficient to pay for current- year services (e.g., maintenance); and • Understanding the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets. Another notable feature of GASB Statement 34 is that it provides two approaches to assets: Standard and Modified. While GASB Statement 34 offers standardized approaches for asset valuation, there are no statutory or legal requirements in the U.S. that require agencies to undertake asset valuation specific to bridges, pavements, or other asset classes, nor to the NHS. There are therefore no GASB Statement 34 mandates for the valuation of bridges and pavements in their financial decision making. Standard Approach: Capitalizing Highway Assets Using Historic Costs The Standard Approach described in GASB Statement 34 is to value assets based on their historic cost, then calculate and report as an expense the annual depreciation of those assets. The initial capital- ization amount should be based on historical cost, or the actual cost of constructing the asset. If determining historical cost is not practi- cal because of inadequate records, estimated historical cost may be used. This involves estimating the equivalent modern cost, or current replacement cost, and deflating it to the construction date using either the Construction Cost Index or the Consumer Price Index. Capital assets should be depreciated over their estimated account- ing useful lives unless they are either inexhaustible or are infrastruc- ture assets reported using the modified approach described below. Inexhaustible capital assets such as land and land improvements (e.g., earthwork) 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 accounting useful lives. This approach also may assume that there is no residual or salvage value and that the asset is depreciated to zero at the end of its accounting useful life. In reality, a bridge or section of pavement or other asset may often reach the end of its accounting useful life and still have significant value to the highway system. As such the depreciation expense measurement does not fully match how highway infrastructure assets actually perform. Table 6-2 shows an example of the calculation of depreciation. In this case, the annual depreciation for a truck is calculated as $9,000 based on the truck’s historic cost, salvage value, and useful life. When the truck is new its value is $100,000, the historic cost of purchasing the truck. At an age of 7 years, the depreciated value is $37,000 ($100,000 less 7 years of depreciation). Once the truck is 10 years old it is fully depreciated and its value is equal to the salvage value of $10,000. TIP! When historic cost is unknown due to loss of data or bookkeeping practices, replacement cost can be deflated to the year of purchase to estimate historic cost. For instance, if a replacement truck today would cost $200,000, one may estimate (and docu- ment!) the assumption that 10 years ago that truck would have cost $148,819 using an annual inflation assumption of 3% [$200,000 / (1.03^10)]. When using this approach, it is important to consider the cost of replacing the asset “in kind” rather than with an asset that is more expensive because it is larger or has different functional characteristics. TIP! When calculating asset value, it is important to note the approach used for calculating depreciation that has occurred on system bridges, pavements, and other assets. If the GASB Statement 34 Standard Approach is used, depreciation is calculated based on the useful life of those assets, as illustrated in the example in Table 6-2.

66 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management It is important to note that in GASB Statement 34 there is no spe- cial treatment for pavements, bridges, or other assets. GASB State- ment 34 views a 20-year pavement or 75-year bridge as part of a network or system of assets providing an overall service. Further, no specific breakdown of value by individual asset or system is required. Consequently, one can value assets at an aggregate level using the Standard Approach. Performing the GASB Statement 34 asset valu- ation at an aggregate level is referred to as the “Wooster Method” named for the City of Wooster, Ohio, where it was first used. This method is favored by many agencies as it allows for compliance with a significantly reduced cost of operation compared to the alternative of valuing individual assets or roadway segments. Given that the Standard Approach relies on historic costs, assumes straight-line depreciation, and is often applied at an aggregate level, it may be difficult to match the value calculated using this approach with one based upon calculations performed using more detailed asset data and more refined estimates of asset costs. Modified Approach: Integrating TAM Analysis and Systems Using GASB Statement 34’s Modified Approach, assets are capitalized in the same manner as in the Standard Approach. However, in this case, infrastructure assets that are part of a network or subsystem of a network need not be depreciated as long as two requirements are met. First, the agency must manage the eligible infrastructure assets using an asset management system that has the following characteristics: • Has an up-to-date inventory of eligible infrastructure assets. • Supports condition assessments of the eligible infrastructure assets and summarizes the results using a measurement scale. The assessments should be updated every 3 years. • Estimates each year the annual amount to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by the government. Second, the agency must document that the eligible infrastructure assets are being preserved approximately at (or above) an established and disclosed condition level. In short, with the Modified Approach, it is assumed that an agency’s assets maintain their value provided the agency determines the requirements for maintaining asset condition at a given level, and then succeeds in doing so. The basic advantage of the Modified Approach is that it is more real- istic given that the agency establishes the actual cost to maintain its assets rather than approximating Valuation Parameter Value Historic cost of truck $100,000 Salvage value of truck ($10,000) Depreciable cost of truck $90,000 Useful life of truck (years) 10 Annual depreciation $9,000 Age of truck (years) 7 Accumulated depreciation $63,000 Depreciated value of truck $37,000 Table 6-2. Example of depreciation using a truck. TIP! Many transportation agencies use the GASB Statement 34 Standard Approach for preparing financial state- ments independent of their TAM program. The asset value calculated using this approach can be a useful reference for asset managers. However, particu- larly when this value is calculated using an aggregate approach, it may not align with the results of an asset value calcula- tion performed at the asset level using information from an asset management system.

Asset Valuation 67 this cost assuming straight-line depreciation. However, the disadvantage of the approach is that it is more computationally intensive. Also, it can be used only as long as the agency succeeds in maintaining asset conditions at the established level. Alternative Valuation Approaches DRC The GASB Statement 34 Standard Approach calculates asset value in a manner that is consistent with best practices in accounting, but it may not yield a value that helps support investment decisions. NCHRP Report 608 describes that DOTs typically calculate asset value using GASB Statement 34 “on a routine basis as just one more administrative task” (Parsons Brinkerhoff et al. 2008). A basic concern with the approach is that its reliance on historic costs yields a value that provides little insight into future investment needs for an asset and may understate value from the perspective of the asset manager. One way to address this is to use the Modified Approach, which yields an accurate cost to main- tain a system regardless of any issues related to use of historic costs. However, in practice most agencies use the Standard Approach despite its limitations as it requires less time and effort to implement and support (Parsons Brinkerhoff et al. 2008). Internationally it is common to value assets based on the current cost of replacing an asset rather than on its historic cost. International Accounting Standard 16 (IAS 16) allows for use of two dif- ferent models in valuing assets: a Cost Model based on historic costs and a Revaluation Model in which an asset is periodically re-valued and its current value is deemed to be its fair value at the date of revaluation less depreciation [International Financial Reporting Standards (IFRS Foundation 2014). The Revaluation Model described in this standard is typically used for asset valuation in the United Kingdom, Australia, and elsewhere. To implement the approach, Gross Replacement Cost (GRC) is calculated at today’s cost of replacing the asset. Asset Consumption (AC) is the loss of value resulting from deterioration of the asset. The DRC is the difference between GRC and AC, and is used to represent the asset’s fair value. DRC can thus be represented as: DRC GRC AC= − Using this approach, AC for an asset is generally calculated by first determining the percentage of useful life of the asset remaining, then multiplying this percentage by the GRC. The value of AC represents the amount an agency must invest in any one year to maintain asset value, and by extension, to maintain the current level of service of its assets. However, it is important to note that in reality, management systems should be used to calculate the actual cost of maintaining asset conditions, which may yield a different cost to maintain conditions than the calculated AC. This difference results from the fact that management systems consider other factors beyond those considered in calculating AC, such as the range of treatments that may be performed on an asset and their effectiveness in extending asset life. Economic Value The foregoing approaches to asset valuation are accounting approaches that relate the value of an asset to either current or historic cost of constructing or replacing the asset. In contrast, the economic value of an asset is a measure of the net agency and social benefits yielded by the asset. One might argue (particularly if one is an economist rather than an accountant) that the eco- nomic value thus represents the true value of a physical asset. For instance, the economic value of a bridge would include consideration of the road users accessing the bridge and the extra detour TIP! To the extent an agency elects to use the Modified Approach, it merits consideration as the primary TAM valuation method given its reliance on asset management system analyses. The TAM professional should work with the agency’s accounting staff to understand the agency’s approach for supporting GASB Statement 34, and recognize that the approach may vary with asset type. The determination of whether an agency uses the GASB Statement 34 Standard or Modified approach is often made based on consideration of a range of issues separate from the agency’s TAM program.

68 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management cost they would incur if the bridge were not in service. With this approach, if a given asset fails to yield a social benefit (e.g., a road or bridge carries no traffic) then it has no economic value. Calculating economic value of an asset may be warranted if one is trying to characterize the overall benefits of an asset class, or alternatively, if one is trying to quantify whether a given asset should be replaced in the event it is removed from service. A number of tools and techniques have been developed in the realm of benefit–cost analysis for calculating economic value. NCHRP Research Report 866 describes how to apply benefit–cost techniques to determine the overall return on investment for TAM system and process improvements (Spy Pond Partners et al. 2018). Market Value In the simplest term, market value is the price something can be bought and sold at in the market. For many discrete goods and services that are commonly traded, market value is simply the price of a product. Examples would be a new car, a used car, a box of cereal, etc. In terms of asset valuation, this would refer to the monetary compensation of the assets when liquidated at fair market value. Generally speaking, transportation agencies resell their assets. Thus, for transportation infra- structure the concept of market value is highly notional. For this reason, market value is not recommended as the approach for valuing assets in a TAM financial plan. However, in some cases it may be possible to calculate a market value, and this figure may be of value to support certain decisions. For instance, in the case of toll roads market value can be estimated by deter- mining how much investors would be willing to pay to purchase or lease the road. Like a stock or a bond investor, toll road investors pay an amount based on the discounted present value of the expected stream of income they generate. Particularly, when a relatively large number of inves- tors want to purchase a relatively small supply of available investments, investors may be willing to pay a premium for the stock, or bond, or toll road, driving up the market value relative to the economic value and/or other measures of asset value. Applications of Asset Value All of the above approaches to asset valuation are relevant for TAM. An accounting value is easily reproduced and understood and can help put the magnitude of an agency’s TAM investments into perspective. Economic or non-market value is used extensively for justifying construction of new assets, as well as for supporting project prioritization and other applications. Market value, though frequently notional, can be relevant for the evaluation of privatization strategies. The following sections describe two primary applications of asset value: evaluation of risk and sustainability, and communication of TAM investment needs to stakeholders. Evaluating Risk and Sustainability Asset valuation can play a role in evaluating the risks associated with financial liability. It demonstrates the risk of not investing sufficient funds through greater long-term costs and potential impairments of the asset due to asset failures such as bridge closures and embankment failures. As an example of using asset value to evaluate risk, UDOT has developed a risked-based finan- cial plan that identifies four types of risk: financial, information, operational, and safety, and it groups risk into three tiers. Asset value plays an important role in risk assessment by informing the financial risk of the asset. Higher-valued assets tend to occupy a higher risk tier and vice versa. UDOT’s asset management model shows that even the most rudimentary form of asset valuation can yield critical information that supports financial planning. Figure 6-1 shows how

Asset Valuation 69 Figure 6-1. UDOT financial plan summary excerpt (Utah DOT 2017). the plan makes the connection between risk, relative asset priority, and asset valuation. Further, it helps support the case for good stewardship through investment. The ASI is discussed in prior chapters as a financial performance metric for measuring fund- ing needs and availability. FHWA notes that it “represents a complementary mirror image of the GASB Statement 34 reporting process. While [the Sustainability Index] is forward looking, the GASB Statement 34 reports are backward looking. They report upon past changes in highway asset values, conditions, and expenditures. If the two were reported in a coordinated fashion, they could provide a long-term perspective on where infrastructure conditions have been and where they are heading. The GASB reports would provide a 10-year summary of changes in asset values and expenditures, while the ASI forecasts would provide a similar projection into the future” (Proctor et al. 2012). Figure 6-2, reproduced from this source, shows a pavement sustainability ratio (PSR) declining over the decade and the corresponding impact to asset valuation. Customer and Stakeholder Communication The FHWA supplement to the TAMP Rule states that “asset valuation also serves as an impor- tant tool for effectively communicating to the public, legislators, and other stakeholders the value of assets and the consequences of inadequate funding levels to maintain and preserve infrastructure assets. Without an understanding of the value of infrastructure assets, the public may be unable to appreciate their importance and the need for their long-term management” (Proctor and Varma 2016).

70 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Asset valuation plays a key role in international financial plans as well, demonstrating the sustainability of investment and the needed investment to maintain newly constructed assets. Further, the FHWA Asset Management Financial Report Series (Report 5) discusses domestic examples in which GASB Statement 34 is effectively used and compared to Australian deprecia- tion valuation methods (Proctor and Varma 2016). FHWA also notes that, “Sound asset management allows an agency to document that it is lowering depreciation rates and conserving the public’s equity. A vigorous bridge or pavement preservation program can extend asset life, which decreases the amount of depreciation that an asset experiences. By discussing the role of sound asset management in extending asset life and decreasing depreciation [or deterioration], an agency can demonstrate that it is not only providing a higher level of service but also helping to preserve the public’s massive investment” (1). In short, through communicating asset value—and what invest- ments are needed to maintain value—an agency can help demonstrate the need and build support for its TAM program. The appendix to this report offers several examples describing how asset value is determined and applied. The TAM professional should review those in determining how to construct the narrative that surrounds the asset valuation calculations in his or her financial plan. 6.2 Asset Valuation: Follow These Steps This section details the steps required to calculate asset value for a TAM financial plan. As noted in the following steps, the basic approach suggested for asset valuation is to use the DRC method described above, as it is based on current replacement cost and is most closely related to projections of TAM investment costs. However, if an agency has elected to use the GASB Statement 34 Modified Approach for its financial reporting (for the assets addressed in the TAM program), this guide suggests using the cost to maintain value, calculated based on GASB State- ment 34. If the GASB Statement 34 Standard Approach is used for financial reporting, the asset manager should obtain the results of the GASB Statement 34 calculation for reference purpose. TIP! Asset valuation affords the transportation agency the opportu- nity to make the case to the financial stakeholders for adopting a prudent approach to funding future needs and for not growing future liabilities. Policy makers and asset managers need to work together closely and understand the respective needs and challenges presented by their roles. Figure 6-2. Theoretical pavement sustainability index (Proctor et al. 2012). PSR = pavement sustainability ratio.

Asset Valuation 71 In the TAM financial plan it may be worthwhile to show this valuation, together with the DRC valuation, and document why the values are different. Step 1: Obtain (or Calculate) the GASB Statement 34 Value At a state DOT, the lead accountant (i.e., controller, comptroller, chief financial officer) will likely be the keeper of CAFRs and therefore of asset values for the state’s transportation system. Sit down with that person and review their methodology for measuring this value each year. • Is the state highway system separated by asset type (bridge, pavement, and other assets)? • Can the NHS owned by the state be delineated from the rest of the state system? • Assuming the answers to the first two questions are “No,” can the lead accountant work with you to develop a defendable methodology? • Does the lead accountant utilize a Depreciation Approach, a Modified Approach, or a com- bination of the two? • Can the lead accountant provide historic annual values? • How far in history does the lead accountant track historic costs and to what degree are historic costs estimated? • Can the lead accountant walk you through the CAFR and show how last year’s value is increased by new projects and decreased by depreciation? • What costs get capitalized and what get expensed? Reference the Capital vs. Operating discus- sion in the chapter on Sources and Uses. • Can the lead accountant help tie accumulated depreciation and the assumptions used to calculate depreciation to some measure of useful life? If your agency uses a Modified Approach for the assets addressed in the TAM program, you should use the asset value and cost to maintain value computed using this approach for your TAM financial plan. In this case, you can skip to the step below for Vetting Your Method. If not, this guidebook offers the DRC as an alternative approach. If you work for a local agency and must develop the annual GASB Statement 34 value for the first time, then you should start by reviewing GASB Statement 34 and the supplemental materi- als GASB provides on its web site (GASB 1999). Step 2: Calculate DRC If your agency does not use the GASB Statement 34 Modified Approach, it is recommended that you calculate DRC for the TAM financial plan. For this step, you will need to work with the engineers that manage the programs of the assets you include in your financial plan, and with the providers of inventory and condition data. Identify Asset Categories and Organize the Asset Register to Fit your Financial Plan The TAMP Rule requires inventory and condition information for, at a minimum, the bridges and pavement on the NHS. We’ll refer to the list of assets you wish to include in the TAMP as your “asset register,” which should serve as a repository for all your highway asset data. This should include inventory location and performance linked to a network referencing system. It is possible that some agencies may also operate discrete asset registers for different types of assets such as pavements and telecommunications, but more mature asset management agencies may have a single repository for all their assets. In either situation, the asset register should be the single source of truth for highway authorities for each of its different asset types and should therefore form the basis for valuing their assets.

72 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Assets should be broken down into identifiable components with a calculable unit cost for each component. You should then calculate depreciation for each component separately. For this exercise, assume that you have two components: bridges and pavements. You may in fact also have traffic and safety assets, ITS, fleet, buildings, and other identifiable components. A sophisticated bridge or pavement program may further divide into Interstate, non-Interstate NHS, and non-NHS. They may divide bridges by structure type and pavements as either flexible or rigid. TAM professionals should also recognize that some of these assets will be more material to the valuation than others. For example, pavement assets may contribute between 50 percent and 70 percent of the overall asset value and structures anywhere between 10 percent and 30 percent. Other assets such as ITS may be less than 10 percent of the valuation. Other assets may be even less material to the valuation (drainage, for example) and may be considered as part of the road system for valuation purposes. Still other assets such as earthwork may have a high construction cost but because of their nature they will not depreciate. The transit industry provides an example of how to display the relative value of transit assets. Figure 6-3 shows the distribution of asset conditions by replacement value and across major asset categories for the entire U.S. transit industry. You may alternatively wish to develop a pie chart that aligns to the sources within your financial plan, such as that reported by the CDOT in subsequent steps and Figure 6-6 on page 77. Determine Unit Counts and Costs to Calculate GRC GRC assumes every asset in the valuation will be replaced today at full cost. Where agen- cies propose to develop an approach to valuation with the objective of determining the value of the highway asset in modern equivalent terms, as opposed to historic cost, determination of reliable and robust unit rates for construction and maintenance treatments is an impor- tant aspect. These unit costs would normally be obtained from construction contracts or bids. They should also be relevant to the year in which they are applied. If they are out of date these would need to be indexed appropriately using an accepted method. Your engi- neers should be able to provide unit costs for each component of your asset valuation. If they cannot, you must determine whether you have to restructure your reporting of asset 4.8–5.0 Excellent 4.0–4.7 Good 3.0–3.9 Adequate 2.0–2.9 Marginal 1.0–1.9 Poor $0 $20 $40 $60 $80 $100 $120 $140 $160 Guideway Elements B ill io ns o f D ol la rs Facilities Systems Stations Vehicles Figure 6-3. Distribution of asset physical conditions by asset type (U.S. DOT 2013).

Asset Valuation 73 valuation or achieve agreement with the engineers on cost estimation to fit your report. Careful consideration should also be given to understanding how design, environmental, right-of-way, and traffic management costs have all been included in the unit rates. Refer- ence the fixed vs. variable cost discussion in the chapter on sources and uses to determine how to calculate unit costs. Unit rates should be built based on the type of asset and its components to estimate a unit rate that can be used for the purpose of determining the GRC. In the example shown in Table 6-3, unit cost of a concrete pavement used for valuation could include the earthwork. In this example, only the concrete pavement would depreciate and the value for the earth- work would not. When the concrete pavement reached the end of its serviceable life, it had a depreciated value of $0. The earthwork would represent the residual or salvage value. The depreciable amount would therefore be the cost of an asset less residual value. Replacement costs therefore need to be net of any residual or salvage value of the asset or component in order to estimate depreciation. Determine AC to Calculate DRC From the calculation of GRC you will now need to determine DRC by reducing the GRC value by the portion of the asset “consumed.” Depreciation is not necessarily the amount of accumu- lated depreciation on the balance sheet for GASB Statement 34 reporting; rather, it represents some loss of or impairment to value due to age, deterioration, functional obsolescence, casualty from an event, or other factor. The decision on how to calculate AC—if not already made by your agency—will likely have the largest dollar impact on your entire asset valuation. This guide- book offers you two approaches to calculating AC. Percent of Useful Life (or Other Performance Index) The first approach has you reduce each asset or each asset category by a percent that corre- sponds to its lost life or its reduced performance. This approach requires little additional data collection as long as an up-to-date and complete inventory is already in place and includes important date and condition information about the assets. In some states, sufficiency ratings or bridge health indices are used as measures of bridge condition on a scale from 0 (worst condition) to 100 (best condition). Assume your Interstate bridges have an average systemwide health index of 80. You may decide to deduct 20% from Residual or salvage value of Interstate (20%) $20,000,000 Depreciable amount of Interstate (80%) $80,000,000 Estimated Interstate life with no capital repair 20 years Depreciation (AC) per year $4,000,000 Valuation Parameter Value Reconstruct cost per centerline mile Interstate $1,000,000 System centerline miles of Interstate 100 GRC of Interstate $100,000,000 Earthwork as % of GRC 20% Table 6-3. Example depreciation of reconstructed Interstate.

74 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Figure 6-4. Colorado DOT DRC example (CDOT Division of Accounting and Finance 2016a) cv = current value, rv = replacement value. the modern equivalent replacement cost—net of land, residual life, and other non-depreciable costs—to derive at a DRC. CDOT offers a variation in Figure 6-4. Now let’s look at a percent reduction based on age. If a bridge was built to last 60 years and it is 40 years old, you would reduce the GRC—net of land, residual life, and other non-depreciable costs—by 67% (40/60) to determine its DRC. Treatments that have occurred since its construc- tion may have added to its useful life, so you will consult with your bridge engineers to develop a consistent methodology. Transport Scotland focuses on asset performance over the course of its useful lifespan and provides insight into how domestic organizations may benefit from monitoring an asset’s physical and financial performance as that asset wears out over time (Transport Scotland 2016). Transport Scotland also describes how to calculate DRC using a financial reporting manual standard. Asset valuation is the calculation of the current monetary value of an asset, in this case the trunk road network. The current monetary value is evaluated as the DRC, where DRC = GRC – AC. The GRC for the trunk road network is determined through a procedure using standardized construction unit rates that are indexed to the year of valuation and by GRC models that represent the cost of reconstructing the asset. Assets are consumed during service due to aging, usage, deterioration, damage, a fall in the level of service, and/or obsolescence. The asset value of the road network is calculated by the Roads Authority Asset Valuation System (RAAVS) as shown in Figure 6-5. Unit rates are re-valued every 5 years. Cost to Restore or Repair Alternatively, you may wish to reduce the value by the cost needed to bring the asset from its current condition or performance to either a “like new” condition or a targeted condition. For this calculation, task your asset managers with calculating a reconstruction cost and a repair cost for the same assets. The difference is the amount by which you will reduce GRC to obtain DRC. Though it is not realistic to produce an itemized engineer’s cost estimate for every single asset, statistical analysis of past projects can yield defensible estimates, provided that inventory is up-to-date with conditional assessment and deterioration model and that cost is updated to reflect changes in price level.

Asset Valuation 75 Equipped with up-to-date inventory, measurable condition assessments, and—most central to this step—an estimate of need (e.g., a cost to restore or repair), you can now defend a calcula- tion of the reduced value or AC to derive a DRC. Step 3: Vet the Methods The work you have done to get to this point now should make you the agency expert on calculating asset value. But check with your senior management, TAMP committee, or stake- holder group to review the different estimates of asset value the agency has prepared, including the calculations you have performed, and others that appear in agency documents, most notably the agency financial report. If different asset values have been computed, you should determine which to include in the TAM financial plan and how best to document the differences between the varying methods. Even if only one method is reported in the financial plan, you would be wise to keep any results and calculations used to support other approaches calculated by the agency handy, as they may be put to use outside your financial plan. Check with your controller and have him or her double check your methodologies and rep- resentation of the calculations. Ask him or her to look for alignment with the CAFR. Without proper explanation, an auditor could reveal a discrepancy between the CAFR and the TAMP Financial Plan on the next annual audit. Recall from earlier in this chapter that other methods may be at your disposal. Some agen- cies may choose to offer an economic value for their system. Other agencies, such as toll authorities, may report something that resembles a market value for purposes of demonstrat- ing return of shareholder investment. Whichever method you select, make certain you can Figure 6-5. Transport Scotland’s roads asset valuation system (Transport Scotland 2007).

76 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management explain the source of the calculation and that you can repeat the exercise when the financial plan is updated. Step 4: Document the Calculation Using the Preferred Method Next you need to actually document the calculation of asset value. Figure 6-6 is an example of how CDOT communicates asset value. In 2016, CDOT conducted the valuation of nine classes of its transportation assets (bridges, buildings, culverts, fleet, ITS, pavement, signals, tunnels, and walls). The valuation effort was for the purpose of supporting TAM and was done in addition to, and apart from, the GASB Statement 34 reporting requirement. The model of CDOT asset valuation is based in part on the Australian model and on recent asset valuation literature from civil engineer academics. In order to minimize data collection effort and the burden on the asset management team, the department uses only existing data and current data. As a result, the methodology uses asset conditions and ages as proxies for deprecia- tion and renewal accounting factors for major fixed assets (pavement, bridges, culverts, tunnels, walls) and uses straight-line depreciation for supporting structures (fleet, ITS, signals). Unit cost is determined by estimating current cost of replacement for all except fleet and ITS, for which the unit cost is the inflation-adjusted acquisition cost. CDOT estimates both GRC and DRC. The valuation is performed on an individual asset level (individual as defined by the asset class’s respective inventory system) and each value is specifi- cally tied to other characteristics of the asset, such as location, condition, size, unit cost, etc. This configuration allows rich layers of analysis (Figure 6-6) as various performance metrics can be broken down at asset class, region, county, cluster, and other levels. It also allows later integra- tion into the department’s asset management optimization system by incorporating asset value in MODA and in cross-asset resource allocation. Step 5: Incorporate into the 10-Year Financial Plan Because asset valuation is a “balance sheet” and not an “income statement” calculation, you may be tempted to put the asset valuation calculation in a box and report it separately from all of the other analysis within your financial plan, but asset value can be valuable for a number of reasons. Below are some applications of asset value that you may wish to explore in the TAM financial plan: • Calculating the cost to maintain. FHWA requires that the financial plan prepared for a TAMP must include “. . . an estimate of the value of the agency’s NHS pavement and bridge assets and the needed investment on an annual basis to maintain the value of these assets.” If you are using the GASB Statement 34 Modified Approach, then calculating the cost to main- tain value is an explicit part of the calculation. If you are using a different approach, then you can obtain an estimate of the cost to maintain value using the annual depreciation of the asset inventory. Alternatively, you can perform a supplemental analysis using your management systems to determine the cost to maintain value using the basic steps described in Chapter 5. • Risk. Financial risks are but one category of risks in the TAMP. Determining relative values of assets can help assign criticality to assets and determine which assets should be funded and which risks should be mitigated before others. • Comparison to needs and backlogs. It can be valuable to compare the asset value to invest- ment needs or the backlog of needs. For instance, Transportation Scotland connects the asset valuation calculations from Figure 6-5 to the maintenance backlog graph in Figure 6-7. Note the backlog shown in this figure is in British pounds. • Sustainability ratios. Figure 6-2 presented earlier in this chapter ties pavement asset valua- tion to PSR and showed how values fell as funding fell short of need over a 10-year horizon. FHWA’s guidance on the ASI also describes a related AC measure for illustrating the percent of asset value “consumed” over time (AECOM et al. 2011).

Asset Valuation 77 Figure 6-6. Excerpt from Colorado DOT asset value report (CDOT Division of Accounting and Finance 2016a).

78 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Figure 6-7. Trunk road maintenance backlog (Transport Scotland 2016).