Memorandum

City of Lawrence

City Auditor

 

TO:

Members of the City Commission

 

FROM:

Michael Eglinski, City Auditor

 

CC:

David L. Corliss, City Manager

Charles Soules, Director of Public Works

 

Date:

December 23, 2009

 

RE:

Comparison of accumulated infrastructure depreciation ratio for Lawrence and similar communities

 

 

Results in brief

 

Lawrence’s infrastructure compares favorably when compared to similar cities in terms of accumulated depreciation.  That means that Lawrence is less likely than many of the similar cities to face significant expenditures to replace infrastructure in the near term.  Indirectly, it suggests that the condition of Lawrence’s infrastructure compares favorably to the other cities.

 

I calculated the ratio of accumulated infrastructure depreciation to the value of infrastructure; compared it to a group of similar cities; and found that the city’s ratio is favorable.  Infrastructure is made up primarily of streets (83 percent).[1]

 

Table 1 Summary of financial measures

Measure

Value

Infrastructure assets (primarily streets)

$159,484,381

Accumulated depreciation of infrastructure assets

$ 50,876,893

Lawrence accumulated depreciation to infrastructure

31.9 percent

 

The ratio measures the relative age of capital assets compared to their useful lives; a lower number is more favorable and suggests that the city is less likely to face significant replacement costs in the near future.

 

Direct measures of infrastructure condition – such as the city’s pavement condition measures – provide more detailed and specific information about infrastructure conditions, but are harder to compare with other cities.  The ratio presented in this memo provides an indirect measure that is easy to compare to other jurisdictions.

 

Discussion

 

This memo compares Lawrence’s accumulated depreciation for infrastructure (which is primarily streets) with a group of 15 cities with similar characteristics.  It provides general information about the likelihood that the city will need to make significant expenditures to replace infrastructure in the near term and indirectly measures the general condition of the city’s infrastructure.  It also puts the city’s information in context, by comparing with similar cities.

 

Streets make up most (83 percent) of the value of the city’s infrastructure and have a value of over $133 million.  The city’s street system consists of over 300 miles of streets.  The Public Works Department measures the condition of city streets using a pavement condition index.  Pavement Condition Measures Performance Audit (October 2008) found:

 

The city’s pavement condition measures provide reliable information on the condition of city streets.  Reliable information helps the city identify pavement maintenance and repair projects, evaluate design standards, and determine appropriate maintenance.  With appropriate maintenance, the overall condition of the city’s streets should improve in a cost effective manner.

 

The performance audit included recommendations to strengthen the system for measuring conditions.

 

Streets age and depreciate and the city adds infrastructure as new streets are built.  The city also adds to infrastructure through programs that extend the life of streets, such as mill and overlay work and crack sealing.  By policy, infrastructure assets are expected to last over two years and cost more than $50,000.  The city depreciates infrastructure assets over time; from 50-80 years depending on the type of asset.

 

To compare accumulated depreciation, I calculated:

 

Accumulated depreciation of infrastructure as a percent of infrastructure for governmental activities

 

The ratio measures the amount of infrastructure that has depreciated.  While this doesn’t directly measure the condition of the infrastructure, it provides information about the useful life and the extent to which the city expects to face significant replacement costs in the near term.  A high depreciation percentage would generally be associated with older infrastructure and the likelihood of making significant expenditures in the near future to replace that old infrastructure.  A lower ratio is generally more favorable.

 

Lawrence has a ratio of 31.9 percent.

 

The ratio for a city can be categorized by comparing it to the group of cities that have similar characteristics and seeing where Lawrence fits in that group.  I created categories for the accumulated depreciation ratios so that 4 cities fit into each category.  Lawrence, with a ratio of 31.9 percent, fits into the “more favorable” category.

 

Table 2 Categories for depreciation ratio

Description

Accumulated depreciation/depreciable infrastructure assets

Most favorable

up to 30.1

More favorable

30.2 to 44.0

Less favorable

44.1 to 56.6

Least favorable

79.9 and up

 

Direct measures of infrastructure condition – such as the city’s pavement condition index – provide more detailed and specific information about infrastructure conditions, but are harder to compare with other cities.  The ratio presented in this memo provides an indirect measure that is easy to compare to other jurisdictions.  The table below summarizes some key strengths and weaknesses of the accumulated depreciation ratio as a way of looking at infrastructure conditions.

 

Table 3 Strengths and weaknesses of ratio method

Strengths

Weaknesses

Based on audited financial statements compiled under consistent accounting principles and audited under Government Auditing Standards

 

Easy to compile data from other cities since it is reported in comprehensive annual finance reports

 

Supplements detailed pavement condition information

 

Easy to put into context by comparing to other cities

 

Information updated on an annual basis

 

Not a direct measure of conditions/quality of the streets

 

Includes some non-street infrastructure

 

Doesn’t reflect local expectations about street conditions

 

Analysis provides a broad overview rather than detailed analysis

 

Excludes external factors, such as demographic and economic trends, that may affect financial indicators.

 

 

Scope, method and objectives

 

Members of the City Commission asked city staff about comparisons of the condition of city streets with other communities.  The objective of this project was to provide the City Commission with information that provides a broad overview of the relative condition of infrastructure, relying on information in comprehensive annual financial reports from Lawrence and similar communities.  The specific objective was:

 

 

To complete the work, I calculated the ratio:

 

Governmental activities accumulated depreciation for infrastructure at the end of year to governmental activities infrastructure capital assets being depreciated at the end of year

 

I calculated the median of the ratio for Lawrence and 15 similar communities, using the communities identified in Financial Indicators Performance Audit (July 2009).  Those 15 communities are similar to Lawrence in terms of population of urbanized area; portion of residents under the age of 18; per capita income; and median year of construction of housing.  The 15 communities are: Athens, GA; Bellingham, WA; Bloomington, IN; Champaign, IL; Charlottesville, VA; Chico, CA; Columbia, MO; Davis, CA; Gainesville, FL; Grand Junction, CO; Iowa City, IA; Johnson City, TN; Missoula, MT; Norman, OK; and St. Cloud, MN.

 

Comprehensive annual financial reports for Lawrence and the similar cities provide the financial data used in this performance audit.  The information comes from the capital assets footnote to the financial statements for each city.

 

RubinBrown LLP analyzed local government financial indicators in their report, Public Sector Stats 2009, and included the accumulated depreciation ratio and interpretations of the ratio.

 

I conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require planning and performing the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for the findings and conclusions based on the audit objectives. I believe that the evidence obtained provides a reasonable basis for the findings and conclusions based on the audit objectives.

 

I provided the City Manager with a draft of this memo on December 17, 2009.  Because the memo includes no recommendations, a written response was not requested.



[1] Infrastructure includes streets and some storm sewer assets; it does not include buildings, other improvements, machinery and equipment, or assets of the enterprise operations.