By Nicholas T. Nguyen
LA Consulting, Inc.
Asset management has been generating a lot of public works industry ‘buzz' this year, spurred on by Governmental Accounting Standards Board (GASB) Statement 34. Perhaps one of the most influential policy trends facing public works managers today, asset management deserves a reality check.
What is asset management? How does it affect my agency? How much does compliance cost? How does it relate to my existing agency programs?
Generally defined, asset management (e.g. pavement and building) focuses on making decisions about the development, use, maintenance, repair, and rehabilitation of valuable infrastructure investments. The goal of these various critical decisions is the achievement of a maximum total return on public funds entrusted to the City's stewardship.
Asset management is somewhat analogous to how you manage your stock portfolio -- the objective is to increase your wealth in order to have a comfortable retirement. Timing and quality of your investments are critical. The ultimate goal to is maximize your returns over the long run by careful management of your infrastructure, focusing on the elements that will best enhance the returns.
Asset management, in general terms, is a process of identifying:
1. What you own or are entrusted to,
2. What are your objectives for these assets,
3. What condition are they in, and
4. What do you fix (or maintain) first.
The first step in managing your agency's assets is to "size up the task." This calls for an inventory of all your critical assets. In other words, you must know what you have and how much of it that you have before you can readily undertake their upkeep. How many miles of pavement, number of facilities, and length of sewer line do your agency maintain? GASB guidelines now require that you report these assets at their historical value, which includes "purchase cost," capitalized interest, and ancillary charges. Giving your assets such a value provides you with another critical measure of how important and potentially large your management role will be. Finally, it can provide you with a measure of how to potentially allocate your funds if the valuation of each asset was your sole basis for appropriations. For example, the Federal Facilities Council recommends that you should allocate 2 to 4 percent of a facility's current replacement value for maintenance and repair annually in the absence of any historical data.
The second step in the process is to define what your objectives are for these assets. If your agency has adopted a pavement management system (and a pavement condition index of 60 out of 100 were determined for your network), a plausible policy question would be whether to keep the network condition at its current state, improve it, or let it get worse. By defining your objectives (capital and maintenance), you will also highlight the deferred maintenance levels since no agency typically has enough funds to initiate every project. In this case, deferred maintenance is described as "the cost of the maintenance (and not capital renewal) required to bring the asset to its original potential; typically constituting work that has been postponed or phased for future action" (D.J. Vanier, Innovations in Urban Infrastructure 2000, pg.6).
The third link in the chain is to determine the condition of your agency's infrastructure. Condition assessments are fundamental to the asset management process because they provide decision makers with a viable metric.
Unfortunately, the assessments are often intricate affairs requiring a good deal of labor and commitment because objectivity and repeatability must be maintained while developing condition ratings that are of value. They tend to be highly labor-intensive and hence costly and require a significant commitment from the asset managers to fund and undertake this effort periodically. Condition assessments are either performed manually or computer-assisted. The latter method, which is the most thorough, utilizes specially designed software, in conjunction with some elements of manual data collection activities, to inventory and analyze infrastructure in the most systematic and objective way. The selection of these systems is very critical and should not be taken lightly, considering the value of assets it will eventually maintain.
The final and culminating step in the process is to determine which assets require attention first. Once the condition of the assets are known, managers must undertake the difficult task of balancing available funds with the numerous needs that have now been previously identified. This prioritization of maintenance and renewal work can be frustrating as it requires managers to not only harmonize internal needs but competing interests from the so-called "ribbon-cutting" events. Fortunately, the asset management process is designed to specifically address this issue by identifying the needs and programming for them in a timely fashion. The following charts illustrate the hypothetical funding dynamics.
So what does this mean to an agency? Based on review and initial accounts, the application and requirements for compliance of GASB is still relatively unclear. Although the guidelines are very specific, it leaves one question somewhat open: what and how much should I do to comply? GASB 34 appears to be an accounting rule designed to specifically promote the active documentation and management of valuable public infrastructure assets. The key word here is valuable. Is the very costly data collection of every street sign and marking in your agency's care critical when compared to, for example, your pavement network?
Based on my experience and analysis, an agency's pavement network is arguably the most critical asset, worthy of comprehensive management. Assuming that your road network is comprised of 400 road miles with an average width of 40 feet and an estimate of $4 per square foot for reconstruction, the network's replacement value is close to $350 million. No other agency asset comes close, not even public buildings (a 40,000 unit sign inventory is physically worth no more than $10 million, and a 500,000 square foot public building complex is worth no more than $100 million). Moreover, when you add in the other economic values (e.g. providing a vital link for transportation and commerce) of your roadways, the value increases exponentially. Therefore, compliance should be based on several key assets, consistent with such statistical laws as the 80-20 rule.
Let us consider the most critical asset, the pavement network. A first time implementation of a pavement management system (PMS) is approximately $250,000 for a 500-mile road network (less for subsequent updates). An experienced part time manager of the PMS will add another $40,000. Considering other peripheral costs, the upper range of performing effective asset management to your pavement network is approximately $370,000 every three years (average typical assessment cycle). This averages out to be $123,000 annually. Is there a net positive economic effect for managing the network? Assume the following hypothetical case:
· A typical road segment is approximately 500 feet long and 40 feet wide.
· The cost to chip seal a typical segment is $2,000 ($0.10 per square feet)
A PMS system is not employed at an agency where its road managers apply a chip seal to rural roads (120 total miles) every three years no matter what the conditions were. Under this cycle, a third of its rural roads are rehabilitated at a cost of about $840,000 every year. After establishing a proper inventory, objectively assessing the conditions of the roads, developing improvement strategies, and setting priorities, it was determined that two-third of the roads did not required the treatment every three years but every six. Under this new cycle, the annual expenditures decreased to $560,000 with no ill effect in pavement serviceability. The net annual savings is $280,000, resulting in considerable payback to the implementation of effective asset management. And this is only for a portion of this hypothetical network.
Linkage to Maintenance Management
So where does asset management fit within an agency? GASB 34's modified approach waives an agency's requirement to depreciate its assets; in essence allowing it to have a stronger balance sheet. However, to adopt this approach you have to develop an annual maintenance plan for the assets. This plan should not only include capital needs but also maintenance level needs as well.
Although establishing capital renewal needs is extremely critical, developing maintenance level needs is just as important (and perhaps more difficult as they relate to your in-house maintenance staff). An annual maintenance plan is required because capital work is conducted only over a long period of time whereas maintenance is typically performed daily. This daily maintenance needs to be clearly defined so that a logically effective and efficient work plan can be put formulated.
Public Sector Success Stories
Both the City of Fremont, CA and Hernando County, FL have implemented successful maintenance management programs.
Over the years, Fremont has implemented a pavement management system to manage the City's 460 road-mile pavement network and to assist managers in budgeting rehabilitation work. It has also implemented a comprehensive maintenance management approach that actively plans and controls maintenance work within the City by involving staff and holding them more accountable for the work activities that is performed. One example of the many benefits include a 15 percent efficiency improvement of its street sweeping program, resulting in possible recurring savings of close to $75,000 annually. Recently, direction was given to move to a fully integrated system approach to maintenance management which will incorporate GIS, asset management together with work management utilizing the latest in technology (i.e. handheld PDAs and high-end software) and business processes.
Similarly, Hernando County has implemented an effective asset management program. The Public Works Department has initiated a PMS system to standardize reviewing and programming capital roadway renewal work. Even more impressive, the county designed, programmed, and implemented its own MMS with the assistance of a consultant. Not only does the entire approach work, the maintenance supervisors and senior managers now actively adopt it. In the Parks Division, where MMS was also implemented, substantial operating savings was found. Through a combination of annual maintenance planning, proper resource allocation, and effective control, a minimum of $90,000 (3 full-time-equivalents) in operating savings was achieved in the first year with a likelihood of it recurring annually.
In sum, asset management is playing an ever-increasing role for public works agencies. New standards from GASB and increased public scrutiny of agency expenditures on infrastructure maintenance are now requiring public works managers to take a more active and decisive stance on managing infrastructure. Asset management cannot be accomplished solely by a computerized inventory and work tracking system. It is a systematic process of identifying the assets, the work desired and required to maintain them, the condition that they are in, and finally, determining the priority of the maintenance work to be programmed and performed. Linked to an effective maintenance management approach, the combination can provide a powerful solution to an agency's infrastructure improvement needs and important information that public officials can act upon.
EDITOR'S NOTE: Nicholas T. Nguyen is a Senior Associate with LA Consulting, Inc. and is a member of the Southern California APWA Engineering and Technology Committee. LA Consulting, established in 1993, provides a wide variety of planning, systems and technology services applied to public agencies and municipalities, with an emphasis on systems implementation and technical support for public works operations and maintenance. The firm's corporate headquarters is in El Segundo, CA, about 20 miles west of Los Angeles. Contact Mr. Nguyen at (310) 416-9697; e-mail is firstname.lastname@example.org