Urban Natural Resources as Capital Assets Dudley R. Hartel Technology Transfer Specialist Southern Center for Urban Forestry Research & Information Southern Research Station, RWU 4901 USDA Forest Service Athens, Georgia Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Definitions Introduction GASB 34 Urban Forestry & GASB Accounting & Trees GASB 34 & Trees Conclusions Integrating trees, and other natural resources, into a communities accounting framework takes more than just renaming them as “green infrastructure”. It requires a knowledge of accounting concepts on the part of urban foresters, and knowledge of urban forestry on the part of accountants. Some of this cross-training may have already taken place, but changes in accounting procedures for many cities may help facilitate these discussions. I’ll start with a few, important accounting definitions, lay the urban forestry groundwork for this discussion, and then talk specifically about the connection between these new accounting procedures and urban forestry. Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Definitions: Capitalize consider expenditures as assets rather than expenses Capital Assets Roads & Bridges Water & Sewer Systems Buildings In accounting… Asset: anything owned fixed current Fixed assets: purchases for continued and long-term use Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Definitions: Depreciation The rate at which assets are “used up” The amount of the investment which is “expensed” each year of the asset’s life Capital Expenses Expenses that benefit more than one financial period Improvements that extend the useful life or utility of the asset Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Introduction: Urban forestry goal improve local programs & increase benefits enumerate value of benefits communicate these values to the public “Green Infrastructure” used by residents as important as gray infrastructure value of service can be determined 2 points… In communities with or without an urban forest management plan in effect, the stated (or unstated) goals and objectives usually include: maintenance or improvement in the UF program monitor & improve the health of trees increase UF benefits communicate these values to public The concept of “green infrastructure” can be visualized, communicated & understood; with important points: used by residents as important as gray infrastructure value of service can be measured (e.g. shade a house and reduce AC costs) Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Introduction: Valuing nature Daily (Editor) 1997 – Nature’s Services Costanza 1997 – Nature (Journal of Science) Biogenic Public Utility Hudson 2000 California Trees “subsidize” other utilities In 1997, some of the most publicized (and less publicized) work on valuing nature occurred… In 2000, Bailey O. Hudson worked on the concept in California of the Biogenic Public Utility. That is, the service produced by trees that supply the general public with an essential commodity or service such as cooling, clean air, flood control and carbon sequestration and storage. In addition to the idea that trees produce services on their own, he discussed these in terms of the subsidy that trees provide for other utilities. So, as an example, the retention of rainfall benefits the local Stormwater Utility. Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets GASB 34: Government Accounting Standards Board Accounting practices for infrastructure and capital investments (assets) In the past, gov’ts used cash accounting Now required to use accrual methods Purpose is to report the full cost of providing gov’t services and analyze their financial performance We have recent attempts to establish the value of nature and trees that produce, measurable benefits… Even more recently, enter GASB 34; some UF enthusiasts thought that this may be an opportunity to incorporate UF more completely into community financial management… GASB is …. Issued a statement (rule, guideline) #34 When dealing with capital assets, communities should be using accrual instead of cash accounting. The purpose was… Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Urban Forestry & GASB 34: Potential benefits to UF programs Programs would become more visible if “value” was on the books Under one GASB approach, there is a requirement for maintaining the asset at a specified condition level This process may result in a higher level of management UF may enjoy a more favorable position in the local budget process What are some of the potential benefits of GASB 34 to UF programs… Programs would become more visible if “value” was on the books Under one GASB approach, there is a requirement for maintaining the asset at a specified condition level This process may result in a higher level of management And therefore, UF treated equably in the budget process. Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Accounting & Capital Assets: Asset value is based on cost Example Bridge built for $10,000,000 Useful life is set at 20 years Depreciation $500,000 per year At end of 10 years, asset value is $5,000,000 Make capital expense of $2,000,000 in year 10 Asset value at year 10 is now $7,000,000 Value = Cost–Depreciation+capital expenses When a durable structure is built, the expenditure is not an expense, but becomes an asset. The value of the asset is the cost of construction. A useful or expected life is determined for the structure. And, the expenditure is then depreciated over the life of the asset. Capital expenses can offset depreciation, and are themselves depreciated. Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Accounting & Trees: Extending this analogy to trees Cost of installing the “infrastructure” is low The “infrastructure”, in most cases appreciates in value (i.e. it grows) “negative depreciation” is not an accounting term Even if trees are considered assets, tree maintenance may not be a a capital expense With our tree asset, we have a completely different situation… Low initial cost Appreciates in value Tree maintenance may not be a capital expense Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Accounting & Trees: Example 2” caliper tree planted for $380 Useful life is set at 40 years Make an argument for 0 depreciation At end of 10 years, asset value is $380 Make capital expenses annually (e.g. water, prune, mulch, fertilize) Asset value at year 10 may be $645 Improvements that extend the useful life The tree analogy… To use this method, 0 depreciation Capital expenses Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Accounting & Trees: Cost, less depreciation methodology even with capital expenses will not result in “value” from current models At planting, a 2” caliper tree minimal environmental services value as it grows, the value of services increases Value based on “environmental services” Accrual accounting (cost, less depreciation) does not get us to the “value” defined by models like UFORE, Stratum or Citygreen. Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets GASB 34, another approach: To avoid “cost, less depreciation” Modified Approach - Asset Management assess the physical condition of the asset describe the criteria used for this assessment identify the target condition level desired report actual expenses with estimated expenses needed to maintain the asset Another approach that is acceptable within GASB 34 is the use of an asset management program. It requires, Inventory (assessment) for condition Description of criteria used for the assessment Set a target condition Report actual vs. estimated expenses to maintain the condition Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Asset Management Intensive level of management periodic tree inventory use standardized condition rating methods maintain at desired condition level report results (management plan) For trees this means… Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets As improvements to other assets Hudson (California) Support for other infrastructure Improvements that extend the useful life Examples: shade parking lots to extend pavement life watershed riparian zones reduce sediment to reservoirs ????? Support for urban forestry program If the UF assets don’t meet GASB 34 requirements, then an additional way to look at trees is as “support” for other infrastructure… And then a way to build support for the UF program. Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets GASB 34 & Trees: 3 ways that trees can fit into GASB 34 As a capital asset, with capital expenses Under the modified approach assess physical condition of the asset describe the criteria used to measure condition identify the desired condition level compare estimated expenses with actual As improvements to other assets capital expenses Three possibilities for trees within GASB 34… Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets To Incorporate Trees into GASB 34: Must continue to make the case for trees as a capital asset “green infrastructure” Document that tree care extends the life of the asset Pursue depreciation/appreciation issues To make inroads to GASB 34, these are important points, Trees are along-term assets Must demonstrate that tree care is a capital expense (the asset value is affected) Must continue to demonstrate that appreciation is the “norm” < Next Slide> Trees extend the useful life of other infrastructure (capital expenses) Adopt or develop a standard tree condition rating system Develop or formalize an asset management program for UF for GASB 34 Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets To Incorporate Trees into GASB 34: Continue to research & demonstrate that trees can extent the useful life of other assets Develop or adopt a standard for tree condition (ISA, ANSI) Develop or formalize an asset management program for urban forests that meets GASB 34 standards Engineering Green San Antonio, Texas September 18, 2003

Engineering Green San Antonio, Texas Urban Natural Resources as Capital Assets Conclusions: Trees do not “fit” easily into current accounting practices The asset value of trees is not the “value” of the environmental service provided There are at least 2 opportunities where trees can be treated as assets under GASB 34 that may be beneficial to local UF programs Continued research, field implementation of that research, and development of standards are needed to support trees as productive assets Concluding… Engineering Green San Antonio, Texas September 18, 2003