SUBJECT:	Adopt a Policy to Maintain the Street Pavement Condition Index at an Average Of 75 for the Implementation of GASB Statement No. 34 and the Adoption of the Modified Approach for Infrastructure Reporting. (RTC#02-472)

REPORT IN BRIEF
The City of Sunnyvale is required to implement the Governmental Accounting Standards Board Statement (GASB) No. 34 for the FY 2001/2002 annual financial report. Per this statement, the adoption of this policy is necessary for reporting of infrastructure assets using the Modified Approach as defined below. This report recommends that Council adopt a policy to set the street Pavement Condition Index (PCI) at an average of 75 which is identified as a "Very Good" condition. The PCI is a numerical index from 0 to 100 which represents the pavement's functional condition, based on the quantity, severity, and type of visual distress. The PCI was developed by the U.S. Army Corps of Engineers and is further verified and adopted by American Public Works Association.
BACKGROUND
In 1999 the Governmental Accounting Standards Board (GASB) adopted Statement No 34. This statement requires all State and Local Governmental Agencies to report infrastructure assets on their financial statements. The statement gives agencies a choice on this reporting requirement. Agencies can use the Basic approach whereby infrastructure assets are capitalized and depreciated along with all other assets of the agency. Alternately, if agency determines that the infrastructure asset in question is maintained such that it virtually has a perpetual life, it can be reported using the Modified Approach. Under the Modified Approach no depreciation expense is recorded and all maintenance costs are designed to maintain the asset at a predetermined condition. In order to use this approach, the agency must have an effective asset management system in place for the particular asset in question, a condition assessment must be performed every three years, and a condition level must be adopted by the governing body.
EXISTING POLICY
The following document contains policy direction on this issue: Fiscal Sub-Element 7.1B.2 - Capital Improvements Maintenance and Replacements: Provide for optimal maintenance of capital improvements and schedule equipment for future replacement at the most cost-effective time.
DISCUSSION
Pursuant to the requirements of the Governmental Accounting Standards Board (GASB) Statement No. 34, the City of Sunnyvale must report its infrastructure assets on its financial statements. The City has an effective asset management system for its Street Pavement Infrastructure subsystem and a condition assessment of the Street Subsystem is performed on a routine basis. The City’s intention is to manage this asset as a perpetual asset and as a result, staff has determined that this subsystem should be reported using the Modified Approach. By using this approach no depreciation expense is recorded and all repairs and maintenance costs are designed to maintain the asset at a predetermined condition level. In order to use the Modified Approach for reporting an average Pavement Condition Index (PCI) must be adopted. The PCI index is calculated by awarding an index number to each street segment, after it is inspected in the field by trained evaluators, which identifies the condition level of that segment. An average index is determined from all of the individual index values to be able to have an overall evaluation system of the City system. The average PCI must be maintained or exceeded in the future and can only be changed by Council action. For financial reporting purposes, the PCI index numbers as defined by the Engineering New Record are broken into ranges. It is important to note that the scale and ranges used by the City for the department’s outcome measures are not the same as the one used for financial reporting purposes. The scale used for financial reporting purposes and our street ratings are as follows:
	Condition	PCI Rating	% of City Streets
	Excellent	86-100	35%
	Very Good	71-85	63%
	Good	56-70	2%
	Fair	41-55	0%
	Poor	26-40	0%
	Very Poor	11-25	0%
	Substandard	0-10	0%
The average PCI rating for the fiscal year ended June 30, 2002 was 86, which is in the highest possible ("Excellent") condition category, though at the lower end of that range. Adopting a goal for an average PCI of 75 would ensure that our streets are maintained at the "Very Good" rating. Program 116 Pavement Operations (previously a portion of Program 115 Transportation Operations) has several outcome measures dealing with the condition of our streets. Outcome Measure number 3 of program 116 is "90% of city streets are rated ‘good’ based on regional standards." This is not directly comparable to the average score and the use of the Engineering News Record scale we are recommending for GASB purposes.  The measure will continue to be the goal of pavement operations, based upon the regional standard where "good" is a rating of 80-90.  Therefore, our street infrastructure should never deteriorate to an average as low as 75. One important consideration is the impact of selecting too high a number for GASB reporting. If we fail to meet our chosen average there can be ramifications impacting the availability of grants and pressure could be put on the City to improve our asset’s condition. We have been in contact with other jurisdictions that are selecting a PCI number from 60 to 75. We want to hold ourselves to the highest of standards, but not jeopardize our competitive position in funding future projects by being over-optimistic in our evaluation of our streets and our ability to maintain their top notch condition.
FISCAL IMPACT
There is no fiscal impact in adoption of this policy. Maintenance of our street system is included in the FY 2002/2003 Adopted Budget and 20-Year Resource Allocation Plan.
PUBLIC CONTACT
Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s Office.
ALTERNATIVES
Adopt a policy of an average PCI of 75 for the Streets Infrastructure Subsystem. Do not adopt alternative 1 and direct staff to propose another average PCI.
RECOMMENDATION
Staff recommends adoption of alternative 1