1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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”
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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

18. 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

19. 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