Capital Asset Assessment, Maintenance and Replacement Policy (2007 and 2010)

Commentary on the GFOA Best Practices Part 2

Part 1 of our commentary focused on what information needs to be gathered to facilitate Capital Asset Assessment best practice.  This week’s analysis focuses on recommendation number 2 covering condition measures and performance standards.  These measures and standards define the meaning of information that is gathered in response to recommendation number 1. Together recommendation one and two create the lens thru which capital policy will be set.

GFOA Recommendation

  • 2. Establishing condition/functional performance standards to be maintained for each type of capital assets.  The condition measures and related standards should be understandable and reliable. Such standards may be dictated by mandated safety requirements, federal, state, or provincial funding requirements or applicable engineering and other professional standards,including available software models. Use these standards and a current condition assessment as a basis for multi-year capital planning and annual budget funding allocations for capital asset maintenance and replacement. Assets near high risk areas such as hospitals may require a higher standard of performance and require a higher frequency of condition assessment.
  • 2 These measures include state government-established standards, bridge sufficiency ratings, Pavement Quality Index (PQI) or Pavement Condition Index (PCI), Facility Condition Index (FCI), etc. Indirect measures such a water main breaks sewage overflows, etc., are also available for certain asset types.

Commentary

Condition Policy not Standard

Have you seen those financial planning commercials with the arrow and the green path to retirement plan success?  You know the one that you magically get when you sit down with your financial advisor and share your retirement goals?  The one that keeps steering you around that new boat or sports car you simply must have?  Too bad local governments do not have one of those plans.

The standards adopted for long term performance measurement of an agencies assets is an evolving process setting the long term goals of a government. Our recommendation would be that the standards of measurement be adopted as a policy at the Board level for each asset class in the capital plan.

Just like adoption of a debt or investment policy the guidelines and justifications for spending need to be fully defined in an open discussion and not left to ad hoc decisions.  Like creating an annual personal financial path, an agency is confronted with choices that will either keep them on their current path, or could lead them astray from their long term goals.  Unfortunately for local governments, many haven’t identified a blinking roadmap for guiding them on making the right choices.  However, many agencies actually have that investment map but are unaware of its existence.

We believe that many local government agencies have many if not all of the tools required to help them make these decisions.  For instance, GIS and asset management systems contain much of the raw data but lack the lens of a policy of standards and measures with which to interpret the asset condition and define a path toward their capital asset goals. By establishing a policy, the three perspectives of capital project prioritization will be brought together: empirical, financial and political.

Engineering/Public Works departments will make sure that driving the empirical information regarding condition is properly included and balanced.  As an example, airports conditions and performance levels really drives this home.  There are four ratings: excellent, good, fair and poor. The airport has four runways.

  • Runway one is in excellent condition
  • Runways two and three are in good condition
  • Runway four is in poor condition.

Which runway gets done first?   From the engineering perspective you might say runway four is the obvious choice.  But in a collaborative performance standard or goal setting policy where you might start with the condition rating, you will press the engineer to gather additional factors.  In the case of the airport these factors might be:

  • How many planes take off and land on each runway?
  • Does runway direction have an effect on capacity?
  • If one runway is being replaced, what is the capacity of the others to compensate without a reduction of service?

Additional financial factors that might be asked of Finance may be:

  • What is the landing fees associated with each runway?
  • How much federal funding is available for the projects?

Additional factors with political impact that might be asked of the Board may be:

  • What level of flight delays is acceptable during construction?

Once all of these factors are added as criteria to establishment of a policy for the agency, one could see different opinions as to what gets done first.  Runway four which is in the poorest condition is short and has an average of fifteen planes a year take off and land on it, and thus produces limited revenue and has limited impact on the overall airport landing/take off capacity.  For the three other busier runways, only one can be closed at a time for construction in order for the airport to maintain an acceptable capacity for take offs and landing.  Therefore the best result of this policy would be runway two or three.

By setting this at a policy level, all elements are considered in turn and a good map to the agreed upon service level can be maintained.  We see policy setting with the Board participation having a greater driving effect than a simple adoption of a standard.

Capacity is as important as condition

One element missing from this recommendation is a measurement of capacity as part of the creation of a standard or as we argue ‘policy’.  This can be as straight forward as in the capacity of the airport example above.  However, with wastewater systems, capacity can be more complex.  The capacity of the pipe to meet day to day demand and peak load demands are important considerations. In this way capacity is an important dimension of level of service.

Social Impact

The social impact or risk as a component of the establishment of a standard is mentioned in the recommended practice, but primarily as a driver of the frequency of assessment due to a higher standard of performance.  We feel that this underplays the importance of the social impact as an essential condition factor in determining the condition assessment.  For example, the sewer main under Boston’s Fenway Park should be replaced in the off season when it slips to a good condition rating or a capacity rating whereas as other parts of the system may be slated for replacement as they approach the poor condition rating.

Tips and Tricks

  • A good resource for finding the policy level type of condition and capacity criteria by asset class is “Capital Project Planning and Evaluation: Expanding the Role of the Finance Officer” by Joseph Casey and Michael J. Mucha.
  • A good template for policy adoption by asset class is The City of Dallas criteria.
  • When adopting condition assessment standards and performance measurements make sure to include your GIS department into the discussion.  The capabilities of GIS make it possible to understand visually over time the impact of changing one of the factors that are identified in the standards.