Chapter 2.5: The Cash Flow Analysis

The overall objective of project sponsor financial plans is to demonstrate that the agency has the financial resources to successfully construct the proposed project while adequately operating, maintaining, and recapitalizing the existing and planned transit system. The cash flow statement combines the results of the capital plan and the operating plan to summarize the year-by-year financial condition of the project sponsor throughout the 20-year analysis period.

Cash flow analysis is a valuable tool for project planning. Its application permits project sponsors to develop and test funding strategies, test alternative assumptions, and conduct risk analysis as part of the agency's continuing financial planning activities. The cash flow statement includes at least five prior years of actual costs and revenues to provide a clear picture of the historical financial position of the agency and to substantiate the growth rates assumed in future years. Table 12 is an example of a 20-year cash flow summary.

The example is not meant to mandate how a transit agency accounts for agency cash flow. The agency in the example carries a large cash balance that is available for operating shortfalls as well as capital projects. Operating surpluses are available for capital expenditures. Capital and operating shortfalls can be funded through cash balances. This is not legally possible for some agencies that must maintain separate funds for operations and capital. In the example, the primary non-federal funding source is the sales tax, which is divided equally between operating and capital expenses. Some transit agencies have the freedom to use dedicated funding sources for any transit activity while others are restricted to using them for a particular purpose or to allocate them between purposes based on a formula. The agency's financial plan identifies and reflects all of the restrictions and covenants that determine how funds are allocated and used.

The cash flow projection can be structured in several possible formats. The cash flow statements are structured in a way that reflects the agency's restrictions on operating and capital funds. Many agencies have restrictions on the use of cash balances such as debt retirement, contractual obligations, lease deposits, uninsured losses or reserve accounts for specific projects. If an agency is subject to any of these restrictions, balances in these restricted accounts are identified in the cash flow statement and not included as "available" cash.

2.5.1 Financial Evaluation

The cash flow projection demonstrates that the agency has adequate resources to complete the project as planned and continue to operate the existing transit service. Evidence of this financial capacity could be cash balances or debt service ratios. In general, cash balances should be sufficient to fund at least three months of operations. In the example cash flow projection, the transit agency maintains a working capital fund adequate to fund about one year of operations. The bond market typically requires gross debt service ratios to exceed 150 percent, which means that revenues pledged to cover debt service must exceed 150 percent of annual debt service. Many transit agencies are subject to more stringent debt ratio requirements.

The cash flow projection is often evaluated to determine the sensitivity of an agency's financial health to changes in the assumptions underlying the financial plan. If small changes in the financial planning or economic assumptions, such as economic growth, transit ridership or interest rates, result in financial difficulties for the agency, the financial capacity of the agency may be questionable.

Table 12: Twenty-Year Cash Flow Projection, Year-of-Expenditure Dollars (Millions)