Financial Capacity Policy


Printer Friendly C 7008.1A
01-30-02

U.S. Department of Transportation
Federal Transit Administration

  1. PURPOSE. This circular clarifies how the Federal Transit Administration (FTA), when making grants, will conduct its assessments of the financial capacity of grant applicants. In addition, it incorporates by reference guidance on financial capacity assessment in the development of major capital projects exceeding $1 billion in total cost.
  2. CANCELLATION. This circular cancels UMTA Circular 7008.1, "Financial Capacity Policy," dated 3-30-87.
  3. REFERENCES.
    1. Federal Transit Laws, Chapter 53 of Title 49, United States Code.
    2. 49 CFR Part 18, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments, which establishes the basis upon which grantees must develop and report financial information regarding grants.
    3. Section 5303 (f)(1)(B) of 49 U.S.C., "Developing Long-Range Transportation Plans," which requires that such plans include a financial plan that demonstrates how the long-range plan can be carried out.
    4. Section 5304 (b)(2) of 49 U.S.C., "Transportation Improvement Program (TIP)," which requires the Metropolitan Planning Organization, transit agency and the State to develop estimates of funds "that are reasonably expected to be available to support program implementation."
    5. Governmental Accounting Standards Board Statement 34 (GASB-34) "Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments" Norwalk, CT, June 1999, which describes how and when grantees must report their capital management plans and major projects.
    6. FTA Circular 5010.1C, "Federal Transit Administration Project Management Guidelines," dated 10-1-98, which describes how grantees must develop and maintain financial information regarding capital projects.
    7. FTA Guidance for Transit Financial Plans, dated 6-00, which describes how a grantee must prepare and update an annual financial plan to complete a major capital project.
  4. POLICY. This circular defines the basis upon which FTA will make the determination of financial capacity of grantees required under 49 U.S.C. 5309 (including major capital projects costing $1 billion and above) and in reviewing Transportation Improvement Plans (TIPs). For 49 U.S.C. 5307, the circular provides similar guidance for grantees making the required self-certifications of financial capacity and for FTA to determine compliance during Triennial Reviews. Transit grantees should make capital investment plans on the basis of current and projected capability to maintain and operate current assets, and to operate and maintain the new assets on the same basis, providing at least the same level of service, for at least one replacement cycle of such assets or 20 years, as appropriate.

  5. APPLICABILITY. This circular applies to all required determinations of financial capacity regarding projects under the transit Capital Program and the Urbanized Area Formula Program.

  6. DEFINITIONS. All definitions in 49 USC Chapter 53 apply to this circular, as well as the following definitions.

    1. Projected Cash Flow Statement – This is a multi-year projection, back five years (actual) and forward twenty years (projected) of revenues and expenses (and related items such as depreciation) relating to the grantee as an organization. It identifies expected revenues and expenses for each year, incorporating and highlighting the effects of a planned capital project or program of projects.   

    2. There are two basic aspects to financial capacity: (1) the general financial condition of the public transit grantee and its nonfederal funding entities; and (2) the financial capability of the grantee and its nonfederal funding entities. The latter is understood to include an assessment of the grantee’s ability to fund current capital projects as well as ongoing operating needs.

      Financial Condition – This includes historical trends and current experience in the financial ability of the grantee to operate and maintain its transit system at present levels of service. The information supporting the assessment of the financial condition of the grantee is usually provided in audited financial statements and other financial reports. Financial condition is reflected in working capital levels, cash balances, capital reserves, the presence and status of depreciation accounts, debt levels, trends in transit costs as compared to available revenues, and trends in other relevant economic indicators. Satisfactory financial condition means that the grantee can pay its current costs from existing revenues.

      Financial Capability – This refers to the stability and reliability of revenue sources needed to meet future annual capital and operating and maintenance costs. Assessments of financial capability shall cover the greater of the period equivalent to one replacement cycle of the basic system; the retirement of any debt issued to finance the capital project; or 20 years. Financial capability considers the nature of funds pledged to support operating costs and capital replacement programs, as well as forecasted changes in fare and non-fare revenues. Capital costs include both replacement and rehabilitation of existing equipment and facilities as well as new investments. Operating and maintenance costs include those for the present system, as well as increases due to capital investment and service expansion. Satisfactory financial capability means the grantee’s ability to meet its expansion costs in addition to its existing operations from projected revenues.

    3. "Mega-project" – This is a project with an estimated total cost of $1 billion or more, as described in Section 5327 (f). In addition to meeting other financial capacity requirements, such projects are required to annually file a financial plan with the Secretary. Such plan shall be based on detailed annual estimates of the cost to complete remaining elements of the project, as well as reasonable assumptions, as determined by the Secretary during the project development process, of future increases in cost to complete the project. Mega-projects also include any projects supported with a loan or loan guarantee from the Transportation Infrastructure Financing and Innovation Act (TIFIA), regardless of project cost.

  7. BACKGROUND. Since the last issuance of a circular on Financial Capacity (March 30, 1987), several factors have changed the environment for financing public transportation service. Federal funding for public transportation investment has more than doubled, as has State and local funding. Laws have changed, providing greater local flexibility in transportation investment decisions, but also requiring a more rigorous framework for these decisions. Furthermore, with rising flexibility in the use of Federal and local funding has come an increase in the use of debt to meet the rising demand for public transportation service.

    Section 5307(d)(1)(A) of Title 49, Chapter 53, requires a grantee receiving FTA assistance under the Urban Formula Program to certify that it "has or will have the legal financial and technical capacity to carry out the program [of projects]." Section 5309(e)(1)(C) requires the grantee receiving assistance under the Capital Grant Program to demonstrate that the project is "supported by an acceptable degree of local financial commitment, including evidence of stable and dependable financing resources to construct, maintain, and operate the system or extension." Taken together, these two requirements cover the financial capacity concept – How well have you managed until now, and how will you manage in the future? These issues are examined through triennial reviews, annual audits, and other periodic evaluations as required in Section 5307(i).

    In addition, Section 5307(g)(3) states "The cost of carrying out part of a project includes the amount of interest earned and payable on bonds issued by the State or local governmental authority to the extent proceeds of the bonds are expended in carrying out the part." This capability allows the grantee to repay interest costs of lease or debt financing with Federal grants funds. [See also Section 5309(n)(2) which includes similar language, as well as a requirement that the grantee only issue debt at then reasonably available market interest rates.] As debt is used to advance capital replacement or service expansion projects, it becomes increasingly important for the grantee to address the effects of such debt on its current and projected ability to operate its system. A decline in projected revenues may force delays or elimination of planned capital improvements in order to meet mandatory principal and interest payments. The sensitivity of a grantee’s income to such fluctuations should be clearly outlined in supporting documentation of financial reports and projections.

    Finally, GASB-34 requires State and local governments (transit grantees, including statewide transit operators, come under the definition of State and local governments) to: identify and value assets for inclusion in annual balance sheet reports; report infrastructure depreciation annually; and select asset management methods for consistent reporting from year to year. These requirements dovetail with FTA’s financial capacity policy, which requires that a 1999 baseline for the value of capital assets and total annual revenues be established. Beginning in 2001, GASB-34 also requires governments to report prospectively on new infrastructure for States and local governments collecting $100 million or more in annual revenues. Beginning in 2002, local governments collecting less than $100 million in annual revenues must also develop such reports. Local governments will report retroactively on all existing major infrastructure from 2003 onward. The reporting methods required to satisfy GASB-34 will be considered sufficient to satisfy the requirements of this circular as well.

  8. REQUIREMENTS.
    1. Financial Capacity Assessments. A determination of financial capacity is required at the stage where commitments to finance projects are made by the grantee and FTA. For Capital Investment grants, FTA will assess financial capacity both at the stage when TIPs are approved and when selecting projects for Full Funding Grant Agreements (FFGA). For Urbanized Area Formula grants, FTA will assess financial capacity at the TIP approval stage, and grantees will be required to self-certify at the grant application stage. The documentation supporting these self-certifications will be examined during triennial reviews.

      By giving early consideration to financial capacity in the planning and programming process, grantees can greatly facilitate the financial capacity assessments needed to meet grant approval requirements. In preparing TIPs, local officials are encouraged to examine proposed programs of projects (as contained in Long Range Plans) for sufficiency of funds to cover total capital, operating and maintenance costs over the lives of the projects, as well as the operating and maintenance costs of the current system. FTA will evaluate TIPs based on these factors. Where TIPs provide evidence of satisfactory financial capacity, the reviews made at the time of grant approval will be limited to assuring the continued validity of assessments made at the TIP review stage.

      1. Level of information required - The level of detail of the financial capacity assessments and subsequent reviews shall be consistent with the size of the transit system being considered and the scale of any capital investments being proposed. The level of detail is developed in consultation with the relevant FTA Regional Office. While all grantees should closely scrutinize the financial implications of their capital commitments, FTA will give special attention to proposals for major service level expansions, as well as proposals to maintain present levels of service that require major capital investments such as rail modernization, large scale bus replacements, or development of new or replacement maintenance facilities. These investments often have a significant impact on the financial condition of transit agencies and their funding sources.  

      2. Sources of information - Reviews of financial capacity will use information contained in the Long Range Transportation Plans, Transportation Improvement Plans, short range transit plans, capital budgets, financial plans (for grantees seeking New Starts funding) as defined in "Guidance for Transit Financial Plans" dated June 2000, and reports on financial operations such as periodic financial statements or single audit reports. Reviews conducted locally and by FTA will provide an opportunity for local funding officials to understand the financial condition of the transit system and how it will meet the future costs reflected in proposed investments. 

      3. Corrective action - If FTA determines that the grantee does not meet the financial capacity requirements as outlined in this circular, the grantee will be informed of the deficiencies. The grantee will then be required to provide further information or propose how the deficiencies will be addressed. Technical assistance will be available to help in developing plans to address the problems identified. Additional grants will not be awarded for capital investments until an agreement on a plan for corrective action has been reached. 

      4. FFGA limitation - FTA will not enter into FFGAs until the plans for financing have been completed and a Financial Capacity Assessment has been performed by the Financial Management Oversight Contractor (FMOC) retained by FTA. The plans for financing must demonstrate that the grantee can complete the FFGA project and continue to operate its existing service with available resources. The grantee will provide information on the steps that have been taken to put the financial plan into operation.

    2. Planning and Project Development.

      1. Unified Planning Work Program. Transportation planning activities, such as database development and the development of analytical revenue and cost forecasting techniques needed to assess financial capacity, must be included in the urbanized area’s Unified Planning Work Program of the Metropolitan Planning Organization. In addition, when States and metropolitan planning organizations certify that the planning process is being carried out in accordance with Federal requirements, they must describe the region’s public involvement process for balancing the cost of approved plans and programs with current and projected revenues.  

      2. New Starts Capital Investment Policy. FTA must find that a proposed project is supported by an acceptable degree of local financial commitment, as required by Section 5309 (e)(1)(C), in order to proceed with a FFGA. The local financial commitment to a proposed project will be evaluated based on: the stability and reliability of the proposed local share of the project’s capital costs; the strength of the proposed capital financing plan; and the ability of the local transit agency to fund operation of the system as planned, once the project is built. 

    3. Program Management and Compliance. Regular grant monitoring will emphasize whether the findings and self-certifications of financial capacity made at the grant approval stage retain their validity. The instruments for this monitoring include periodic progress reports and meetings, activities performed by Project Management Oversight (PMO) contractors and Financial Management Oversight Contractors (FMOCs) retained by FTA, routine audits and reviews, and, for Section 5307 projects, the Triennial Reviews required by Section 5307 (i)(2). These instruments provide FTA the opportunity to review compliance with the requirement that the recipient have financial capacity to carry out the proposed program of projects. During regular grant monitoring, FTA will assess the basis used by the grantee to certify financial capacity, consistent with the criteria for such self-certifications as described in this Section.

Jennifer L. Dorn
Administrator