Patrick Collins Business Development Manager 630/705-9282

1. Fixed Asset Management in the Education Environment • Patrick Collins • Business Development Manager • 630/705-9282 • Illinois ASBO’s 56th Annual Conference • May 17, 2007

2. Overview • Why Manage Fixed Assets • Review GASB 34 Reporting Requirements • Common Audit Exceptions • Physical Inventories/Verifications • Insurance Appraisals

3. Why Manage Fixed Assets? • Federal Reporting Requirements • GASB 34 Reporting • Depreciation • Qualified audit • Risk Management • Insurance Placement • Support of Proof of Loss

4. Why Manage Fixed Assets? – Cont. • Maximize the use of district resources • Reutilization • Life cycle management and planning • Management information for decision making • Provide required level of service • Loss, damage, and destruction avoidance • Good stewardship to: School Board, Local Press, Public

5. GASB 34 Reporting Requirements • Timetable • Phase-in approach starting for FY ending June 30, 2003 • By June 30, 2005 all school districts should be compliant • Reporting Requirements • Capital assets reported at historical or estimated original cost • Capital assets are to be depreciated over estimated useful life • Capital asset reported net of accumulated depreciation in Statement of Net Assets • Depreciation expense should be reported in the Statement of Activities

6. GASB 34 Capital Asset Reporting • Report Depreciation by Function: • 1100 Regular Instruction • 1200 Sp. Ed. Instruction • 1300-1900 Other Instruction • 2100 Pupil Services • 2200 Instructional Services • 2300 General Admin. Srvs. • 2400 School Admin. Srvs. • 2500 Business Services • 2550 Transportation Services • 2600 Central Services • 2540 O&M

7. Common Audit Exceptions • Useful life assignment inconsistent with Board Policy/Capital Asset Policy • Depreciation method does not match Board Policy/Capital Asset Policy • Function data not reported • Buildings not reported by Function • Beginning Balance does not match Ending Balance from previous year • Assets fully depreciated at transition • Federal funds not being tracked ($500 level)

8. Common Audit Exceptions – Cont. • Land Account • Often reported with no detail backup • If cost information in lacking, can the assessor provide with confidence, estimates of original cost at the date of acquisition or donation? • Estimating historical land values • Buildings/Construction Costs • Entry for Land/Improvements to land to prepare site (non-depreciable) • Entry for land improvements- parking lots, sidewalks, lighting, landscaping, etc. (useful life shorter) • Entry for building cost

9. Inventory Control vs. GASB 34 Reporting

10. GASB 34 Capitalization Threshold • Issues to Consider • Property Record Maintenance • higher capitalization threshold equates to accounting for big items • easier • sophisticated, recognizable items • less movement • fewer items • economies • efficiencies • auditability

11. Inventory Control Threshold • Items that require special attention to ensure legal compliance • Items that require special attention to protect public safety and avoid potential liability • Items that require special attention to compensate for heightened risk of theft (“walk away” items) • Individuals responsible for controlled capital-type items should prepare and maintain a complete list of those items each year within the department • Departments should certify each to the central accounting function (or other designated finance function) that updated lists of controlled capital-type items are on file and available for inspection • The central accounting function should periodically verify data on controlled capital-type items on file in each department. • GFOA recommending practice on “Ensuring Control over Noncapitalized Items” (2005):

12. Physical Inventory Objectives • To confirm assets in the system are physically exist • Assets are appropriately recorded in the system • Records are accurate as to location, description, accountability, etc. • Identify excess, unserviceable or obsolete property • Assesses Health of the System!

13. Working with outside firm to verifycapital asset schedule • Existing data file • Physical verification of equipment • Tagging • Inspection of buildings and improvements (for insurance?) • Review client data for non-tagged assets • Reconciliation • Report preparation • Capital Asset Reports • Exception Reports

14. Property Insurance Appraisals • Used to establish Cost of Reproduction New for insurance placement • Buildings • Insurable Land Improvements • Contents • Every 5 years • Support of Proof-of-Loss • In conjunction with “verification” or accounting services

15. Property Insurance Appraisals -cont. • Cost of Reproduction New - Estimated amount required to reproduce a duplicate or a replica of the entire property at one time in like kind and materials in accordance with current market prices for materials, labor, and manufactured equipment, contractors' overhead and profit, and fees, without provision for overtime, bonuses for labor, or premiums for material or equipment. Synonymous with the insurance industry term “replacement cost”. VS. • Replacement Cost New-the estimated amount required to replace the entire property at one time with a modern new unit using the most current technology and construction materials that will duplicate the production capacity and utility of an existing unit at current market prices for materials, labor, and manufactured equipment, contractors’ overhead and profit, and fees, but without provision for overtime, bonuses for labor, or premiums for material or equipment.

16. Property Insurance Appraisals -cont. • Property Insurance Update 2001-2005 • Post 9/11/01 hardening of the property insurance market • Historical underwriting losses were attributable to significant valuation issues for the insured properties. • Valuation issues were attributable to the lack of accuracy and completeness of data obtained from the insured. • Increased scrutiny of the insurance industry by Federal and State regulators • Significant losses related to the hurricanes in the gulf coast. • Difficulty placing coverages in certain sectors • Reinsurance market is beginning to dictate changes in the underwriting process

17. Property Insurance Appraisals -cont. – changes in insurance market • Improved underwriting discipline dictated by the reinsurance markets • Increased emphasis on a consistent disciplined approach to underwriting: • Exposure data analysis (COPE data) • Loss experience analysis • Management assessment • Increased market specialization for carriers • Increased focus on geography • Discontinuance of blanket coverage • Appraisal requirements for insured properties • Discontinuance of contingent broker commissions • Increased financial transparency (Sarbanes-Oxley)

18. Property Insurance Trends 2006-2007 • Natural Catastrophe (Wind, Quake & Flood) Exposures: • Increased pricing • Increased windstorm deductibles • Decreased coverage capacity • Tightening of underwriting guidelines • Closer attention to aggregate geographic risks • Increased emphasis on portfolio catastrophe modeling • New catastrophe models have increased expected losses • Non-Cat. Property • Decreases • Time to get appraisal

19. Inflation: What’s Happening in Construction Cost Trends? • Moderate construction inflation over the last fifteen years (1% - 3%). • Significant construction inflation in 2004 (10.5%). • Slowing but not back to normal in 2005 (5.5 – 6.5%) • Slowing again 2006 (4.4%) 20%+ Inflation in 3 years!!!!!!!!

20. Inflation: What’s Happening in Equipment Cost Trends? • Equipment Inflationary Increases, 1990 – January 2006: Sources cited: Marshal Valuation Service - Marshall & Swift Quarterly Cost Index, industrial Equipment Average of All FM Global – Industrial Cost Trends, Industrial Equipment Composite U.S. Department of Labor, Bureau of Labor Statistics - Producer Price Index, Finished Goods Seasonally Adjusted - Table WPSSOP3000

21. Inflation: What’s Happening in Equipment Cost Trends? Equipment Inflationary Increases, 2004 – January 2006: Sources cited: Marshal Valuation Service - Marshall & Swift Quarterly Cost Index, industrial Equipment Average of All FM Global – Industrial Cost Trends, Industrial Equipment Composite U.S. Department of Labor, Bureau of Labor Statistics - Producer Price Index, Capital Equipment - Table WPUSOP3200

22. Benefits of Insurance Appraisal • Determine the adequacy of insurance coverage: • completeness of property listing • accuracy of property values • Improved risk management • Improved marketability to underwriters • Serves as a basis for the allocation of premiums • Serves as a basis for the preparation of a proof-of-loss

23. Now what? Set guidelines for property management • Capital asset/insurance reporting policies • Capitalization Threshold • Useful Life Schedule • Set forth specific procedures • Acquisition • Retirement • Transfers • Tagging • Inventory

24. Reports • Capital Asset Reporting for GASB 34 • Summary Reports by Account • Summary Report by Function • Detailed Record • Insurance Appraisals • Summary Report (Statement of Values) • Buildings, land improvements, contents • Detailed Reports