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HomeMy WebLinkAbout7/31/2002 - STAFF REPORTS (2) DATE: July 31, 2002 TO: City Council FROM: Director of Finance & Treasurer; Director of Procurement & Contracting RE: Amendment to Conrad and Associates, LLP contract for GASB 34 Implementation Services RECOMMENDATION: It is recommended that the City Council approve an amendment to the audit service contract with Conrad and Associates, LLP for Government Accounting Standards Board Statement 34 (GASB 34) implementation services in an amount not-to-exceed $43,900. SUMMARY: In order to meet generally accepted accounting principles, the City is required to implement GASB 34 by June 30, 2003. The major changes required by Statement 34 affect the presentation of the City's (and its related entities) annual financial report, and the valuation of the City's infrastructure. The City's outside auditors, Conrad and Associates, are in the best position to perform these services, and have presented an offer at a fixed rate of$43,900. BACKGROUND: The Government Accounting Standards Board was formed in 1984 as a nonprofit, private organization to establish and improve accounting and financial reporting standards for state and local governments. It came about in response to the default of tax exempt bond issued by the Washington Public Power Supply System (aptly nicknamed Whoops), which cost bondholders $2.25 billion. Although GASB pronouncements don't have the force of law, it is the agency responsible for setting generally accepted accounting principles (GAAP). Failure to adhere to GAAP would make it difficult to have the City's financial reports certified by outside auditors, and could result in a lower bond rating and higher interest costs. The 277-page Statement 34 (copy not attached) was approved by GASB in June, 1999. It requires state and local government to report information about assets on entity-wide financial statements including historical cost or estimated historical cost of infrastructure and capital assets. The new accounting standards are intended to serve two purposes: • Enhance the usefulness of financial reports by conveying the information in an understandable format • Provide accurate information regarding a government's ability to repay its debt obligations The proposed contract for GASB 34 implementation services is with Conrad & Associates, LLP, the City's outside auditors since 1986. Because of their unique knowledge and experience of the City's accounting system, staff asked them to prepare a Page 2 proposal. The attached proposal details Conrad's qualifications, technical approach, references and cost. It is expected to take 12 weeks to complete the infrastructure valuation. The cost is a fixed fee of$43,900, inclusive of all travel and out of pocket expenses. A survey conducted by the California Society of Municipal Finance Officers elicited responses on costs ranging from $15,000 to $120,000, with the average cost slightly over$74,000. Obviously, the cost of the valuations will vary significantly depending on the size and complexity of the city. Palm Springs, with an area of 92 square miles, is one of the largest cities in California by that measure. As part of the infrastructure valuation, the City must decide two technical issues: whether to use the Depreciation Method or the Modified Approach; and whether to value all assets or limit the review to assets acquired after June 30, 1980. The first issue, the question is whether to depreciate the assets on a standard schedule, or to review all assets each year (the "Modified Approach") to determine the relative value. The Modified Approach will have considerable on-going costs, either in staff time or consultants fee, and require subjective judgments on the conditions of such assets as streets, sidewalks, and street lights. The depreciation method is essentially an accounting function that will be relatively easy to calculate each year, and is not subject to interpretation. Staff is recommending the depreciation method. GASB allows agencies to only capitalize those infrastructure assets acquired or constructed after June 30, 1980, as opposed to capitalizing all infrastructure assets. Although a limited review of assets typically costs less and reduced the number of assets that need to be tracked for improvements, it can create reporting problems for the City in the future. As a result, we are recommending that all assets be capitalized. Attached is a Minute Order that amends Conrad's contract. It is anticipated that, if approved, the infrastructure valuation could be completed by mid-December, 2002. The changes in the accounting treatment of the City's CAFR would be effective for Fiscal Year 2002-03, and would appear in that year's audit report in December, 2003. This expense is budgeted in the current year in the Finance Department account 001-1300-43240. Submitted by Thomas M. Kanarr Harold E. Good Director of Finance &Treasurer Director of Procurement & Contracting Approved David H. Ready City Manager Attachments: Proposal for Services Minute Order TECHNICAL APPROACH There are two primary approaches to conducting an infrastructure valuation in accordance with the provisions of GASB 34. Those approaches would be to either conduct a complete physical inventory of all infrastructure assets, or to utilize existing records as the basis for the inventory, and estimate the data that is missing. In our experience, a combination of both of these approaches provides the best alternative. The benefit of performing a complete physical inventory of all of the infrastructure assets is that this approach will provide the most accurate information. However, this approach is also the most costly to complete. GASB 34 is broad in its allowances of estimates and judgments in compiling infrastructure data. As such, most governments that have implemented GASB 34 have not chosen this approach as it can represent overkill in relation to the benefit received. This approach would only be recommended if the City had some other need or use for the complete physical inventory. The approach of utilizing existing infrastructure inventory records from which the inventory will be compiled is by far the most cost effective. Additionally, utilizing this approach also meets the spirit of GASB 34. The disadvantage of this approach is that some of the infrastructure data may not be exact. As long as the City is not using this data for future planning purposes, i.e. budgeting for construction of missing sidewalks based upon this report, then the exactness of the report can be estimated. This is the approach we would recommend for the City of Palm Springs. Our approach is described in detail in the section entitled Detailed Work Plan (see page 6). In order to value the infrastructure assets, we would first review for actual cost data. It has been our experience that due to the age of the assets, actual cost data is often times not available. Under these circumstances, we would value the infrastructure asset at its current replacement cost, and trend it back through the use of indexes to the date of acquisition. The City will need to make three other decisions as part of their implementation of the infrastructure provisions of GASB 34. Those decisions are: • Whether to depreciate the infrastructure assets, or account for them using the modified approach; • Whether to include all infrastructure assets in the inventory, or only those acquired after June 30, 1980; and • Whether to track the assets individually or in networks and subsystems. Depreciation vs. Modi aed Approach This issue has been the source of much debate between finance departments and public works departments. Most finance departments prefer to depreciate the infrastructure assets, whereas most public works departments would prefer to account for them using the modified approach. Of the eleven (11) cities we have assisted with their GASB 34 infrastructure valuations, each city has elected to Conrad and Associates,L.L.P. 4 TECHNICAL APPROACH (CONTINUED) depreciate its infrastructure assets. This election has been based primarily upon the additional cost required for the modified approach. Regardless of whether depreciation or the modified approach is selected, the City still needs to perform an infrastructure valuation. Depreciation is the easiest method to implement. In most cases, cities are already set up to depreciate assets, especially if they have water and/or sewer funds as they are already performing depreciation calculations. Under this method, the City will need to enter all of its infrastructure assets into its asset management system in order for depreciation to be calculated. There is generally no other work required. Under the modified approach, the City will need to establish a condition level to which it will maintain its infrastructure assets. This initial condition level must be adopted by the City Council. The City will conduct an initial condition assessment to determine whether or not it is in compliance with the established condition level. This initial condition assessment will result in an additional cost to the City if the City does not have the capability of performing the assessment in house. Additionally, a condition assessment must be performed every three years to ensure that the City is maintaining its infrastructure assets at the prescribed condition level. This will also result in an additional cost to the City. The modified approach also requires additional disclosures in the Comprehensive Annual Financial Report. It is acceptable for the City to elect the modified approach for some, but not all, of its infrastructure assets. This split in methods is acceptable provided an entire network of assets is tracked similarly. For example, the City may choose to track its streets under the modified approach, and depreciate all other infrastructure assets. Conrad and Associates, L.L.P. does not endorse one method over the other. Some of the agencies we have assisted have initially adopted the depreciation method, but have indicated they may convert to the modified approach for some of their infrastructure assets. All Assets versus Infrastructure Acquired/Constructed after June 30 1980 In a compromise effort, the GASB allows agencies to only capitalize those infrastructure assets acquired or constructed after June 30, 1980, as opposed to capitalizing all infrastructure assets. The City will need to make a decision regarding,this issue early in the implementation. The advantage of only capitalizing those infrastructure assets acquired/constructed after June 30, 1980 is the cost of consultant time will be less. Additionally, fewer assets will need to be tracked for improvements. The disadvantages to this are that in most cases, the City will need to review the asset anyway in order to determine whether it was pre or post-June 30, 1980. Furthermore, as improvements are made, the City will have to analyze whether the item being improved was originally capitalized or not. By capitalizing all assets, this guesswork/analysis will be minimized. One additional factor the City should consider when determining whether to capitalize all assets or only those acquired/constructed after June 30, 1980, is the amount of liabilities being brought onto the Statement of Net Assets. If the City is highly leveraged, and chooses to capitalize only the post-June 30, Conrad and Associates,L.L.P. 5 TECHNICAL APPROACH (CONTINUED) 1980 infrastructure assets, the Statement of Net Assets may result in a deficit. All of the agencies we have assisted to date have elected to capitalize all assets,just to avoid this potential reporting issue. Track Infrastructure Assets Individually versus Networks/Subsystems A final decision the City will need to make is whether it will track assets individually in its records, or group the assets into networks and subsystems. Generally, tracking assets individually means at the same level as replacements occur. For example, if the City has broken its streets down into segments for its pavement management system, then the City may want to capitalize the streets by those same segments. The rationale being that as replacements/improvements occur, they are generally performed to the segment as a whole. This makes the recordkeeping easier. Some of the larger cities we have assisted have opted to capitalize assets by network or subsystem due to the large volume of individual assets. The difficulty of this election comes with calculating the amount of asset replaced, and thus what amount should be removed from the books. Detailed Work Plan • Project kick-off— we would meet with appropriate City Finance and Public Works staff, and other department staff as determined necessary by the City, to discuss the timing of the project, records required and expectations of City staff. During the project kick-off, we will discuss in 1 more detail the types of infrastructure assets that may be owned by the City, and attempt to refine this list. As previously described, the expectations of City staff will be minimal, and only require designation of an overall project liaison with decision-making authority, and designation of a contact for each infrastructure type to answer technical questions that may arise during the course of the project. Our project team is committed to be as minimally disruptive to ongoing City operations as possible. a1 • Fieldwork — during this task, we would refine and agree on the major classes of infrastructure assets to be inventoried and valued. We would use the existing records to compile the inventory and determine what data needed for valuation purposes is missing. Our approach to developing an inventory of infrastructure is to first identify all sources of existing inventory records that the City may have. These records often times take the form of a pavement management system, assessor's parcel maps, construction plans, zoning maps, detailed listings maintained by departments responsible for a type of asset, etc. Once we have identified the inventory records, we test the records to ensure they are accurate and complete. This will include random field visits to verify that assets exist and are at the locations l specified in the records. After we are confident that the records are accurate and complete, we J compile the inventory of infrastructure and identify any missing data that is necessary in order for us to value the assets. When existing inventory information is not available, we would create the inventory through whatever means necessary. This could include working from aerial maps, Conrad and Associates,L.L.P. 6 TECHNICAL APPROACH (CONTINUED) assessor's parcel maps, or driving the City and physically inspecting the assets. In the City of Temple City, records did not exist for sidewalks. In order to gather the inventory, we drove all streets within the City and documented where sidewalks did and did not exist. In the City of La Quinta, records did not exist for storm drains. To gather the data, we worked from as-built construction plans to determine the location of the storm drains, size, length and when they were constructed. We will inquire as to whether the City has actual cost data relative to the infrastructure items. If the City does, we would need to review whatever documentation the City has to support the historical cost. This documentation may include summary spreadsheets, capital projects ledgers, City Council agenda reports, or actual invoices. It has been our experience, however, that the actual cost data is generally not available. Other historical information required includes access to the various existing inventory records maintained by the City. Copies are not required at the outset of the project. We will determine which specific documents we plan to use and make copies of just those documents for our files. ' During this task, we will also coordinate with the City's independent auditors to ensure that the final product will be acceptable from an audit perspective. Our approach and methodology has previously proven to be acceptable by independent auditors. • Determination of assumptions — this task would involve determining and documenting certain assumptions to be made in order to complete the data required for each infrastructure asset for valuation purposes. GASB 34 allows for estimations and assumptions to be made in gathering prior infrastructure data. It has been our experience that due to the age of many of the infrastructure assets, and the condition of records, assumptions are an integral part of the infrastructure valuation process. All assumptions made will be presented to the City's project liaison for approval. At the completion of the project, we will document all assumptions and ask the City to represent that the assumptions are logical and reasonable. • Valuation of infrastructure assets — this task would involve reviewing accounting records to determine if historical cost data is available. If historical cost data is not available, then we will estimate historical cost by determining current replacement cost and trending it back to the date of acquisition through the use of indexes. We will establish the current replacement cost by using a combination of recent bids or contract awards for similar projects within the City, and data we have gathered by performing infrastructure valuations for other municipalities. The indexes to be used will include the Construction Cost Index for all constructed assets, and the Consumer Price Index for all purchased assets. 1 In valuing the infrastructure assets, Conrad and Associates, L.L.P. also values the right-of-way beneath the streets. We believe that this service sets us apart from the other GASB 34 valuation firms. It has been noted by both GASB and the Government Finance Officers Association (GFOA) that land and land rights should be recorded on the City's books as capital assets. Conrad and Associates,L.L.P. 7 TECHNICAL APPROACH (CONTINUED) 1 Easements upon which a street is constructed, although not City-owned, are land rights and should be valued. Conrad and Associates, L.L.P. values the right-of-way utilizing comparable land sales within and adjacent to the City, which are of a similar zoning. For purposes of valuation, we view the zoning of the adjacent property with the highest and best use to be the zoning of the land and land rights to be valued. • Preparation of draft report — a draft report would be prepared and submitted to Finance and Public Works staff for their review and comment. • Preparation of final report — any comments received from Finance and Public Works staff on the draft report will be incorporated into the final report. The final report will be issued in both hard copy and electronic format(Excel based). Our proposed timeline for completion of the tasks is as follows. Task Estimated Duration Project kick-off Within two weeks after contract award. 1 Fieldwork One week after project kick-off, and lasting approximately I six weeks. Determination of assumptions Performed immediately after the completion of fieldwork, and lasting approximately one week. Valuation of infrastructure assets Performed immediately after the assumptions are determined, and lasting approximately three weeks. Preparation of draft report Performed immediately after the valuation of infrastructure assets, and lasting approximately two weeks. Preparation of final report Performed immediately after receipt of City comments on draft report, and lasting less than one week. Based upon our analysis, total elapsed time to provide GASB 34 infrastructure valuation services would be approximately 12 weeks. Conrad and Associates,L.L.P. 8 i KEY PERSONNEL Conrad and Associates, L.L.P. proposes to use the following key personnel on this engagement. 1 City of Palm Springs 1 1 Marcus D. Davis, CPA i Partner 1 1 Carol Jacobs Project Manager Staff As Assigned See attached resumes of key individuals for individual experience. The staff to be assigned will be primarily responsible for assisting with the physical inventory of the fixed assets and the compilation of the infrastructure inventories. Specific staff individuals will be assigned at the time the project commences. As illustrated in the section entitled Qualifications (see page 1), Conrad and Associates, L.L.P. has a pool of twelve (12) staff employees to assign to this engagement. All staff assigned will be 1 under the direct supervision of the Project Managers. STATEMENT OF RESTRICTIONS ON KEY PERSONNEL Conrad and Associates, L.L.P. states that the key personnel will be available to the extent proposed for the duration of the project, and no person designated as "key" to the project will be removed or replaced without the prior written concurrence of the City of Palm Springs. Conrad and Associates,L.L.P. 9 COST OF SERVICES Conrad and Associates, L.L.P., Inc. will provide fixed asset inventory and GASB 34 infrastructure valuation services to the City of Palm Springs for a fixed fee of$43,900. This fixed fee is inclusive of all travel and out-of-pocket expenses. We will invoice the City monthly for services throughout the life of the project. Should the scope of the project change, or should additional work be required that is beyond the scope of the RFP and this proposal, Conrad and Associates, L.L.P. will invoice for these additional services at the following hourly rates. No work that is beyond the scope of the RFP or this proposal will be performed without the prior written consent of the City of Palm Springs. Classification Hourly Rate 1 Partner $145 Project Manager 115 Staff 85 I 1 i I� Conrad andAssociales,L.L.P.. tg MINUTE ORDER NO. OF THE CITY COUNCIL OF PALM SPRINGS, CALIFORNIA AMENDING THE AUDIT SERVICES CONTRACT WITH CONRAD & ASSOCIATES, LLP TO INCLUDE GASB 34- RELATED INFRASTRUCTURE EVALUATION SERVICES FOR AN AMOUNT NOT TO EXCEED $43,900. I HEREBY CERTIFY that this Minute Order, amending the Audit Services Contract with Conrad and Associates, LLP to include GASB 34-related Infrastructure Evaluation Services for an Amount Not to Exceed $43,900 was adopted by the City Council of the City of Palm Springs, California in a meeting thereof held on July 31, 2002. PATRICIA A. SANDERS City Clerk