Chapter 2.3: The Capital Plan

The first component of the financial plan is the capital plan, which documents the transit agency's capital spending plans and funding sources and describes in detail the strategy to fund the construction of the proposed project. The capital plan is composed of two elements: (1) the capital plan for the proposed project and, (2) the agency's 20-year capital plan. The project sponsor first develops the capital plan for the project, then inserts the project into the agency-wide capital plan. The capital plan documentation confirms the stability, reliability, and availability of all capital funding sources and describes the transit agency's capital spending plans 20 years into the future.

2.3.1 Proposed Project Capital Plan

The project plan provides a high level of detail regarding the agency's plan to fund the construction of the proposed project. The project plan includes the cost estimate and schedule for the proposed project, describes the amount and commitment of non-federal funding sources, describes contingencies for cost increases and federal appropriations shortfalls, and details the debt burden on the project sponsor at a level of detail appropriate to the phase of project development.

The components of the project capital plan change considerably as the project moves from alternatives analysis to signing a FFGA and construction. As the project moves from PE to final design, capital costs become increasingly detailed as the project scope and precise alignment are finalized, non-federal funding sources are committed, environmental mitigation activities and other cost escalation risk areas are more accurately specified and changes to the original design and cost estimates become apparent. By the time a FFGA is signed, all local funds are committed to the project and cost estimates and schedule are known with a high level of certainty.

Capital Costs and Schedule

A cost estimate and schedule is required at each phase of project development, but the format of the cost estimate changes. In alternatives analysis and PE, project cost estimates and schedules are presented as increasingly detailed unit cost breakdowns of the proposed project. When a project is admitted to final design and seeks to receive a FFGA, the cost estimates are broken into individual contract units that specify the escalated annual cost and schedule for each contract. These cost estimates are updated periodically and tracked as the project is constructed.

Capital cost submissions describe the cost estimation process and segment costs by major cost category (e.g., guideway, facilities, systems, and vehicles). Cost estimates include soft-costs such as PE, final design and construction management as well as set-asides for contingencies. The cost estimate and schedule provide detail to back up the proposed project cost items in the agency-wide capital plan.

The project sponsor documents the current engineering cost estimate for the proposed project, describing each major cost component. A simple project cost estimate is developed in alternatives analysis. This cost estimate, typically including high contingencies to reflect uncertainties in scope and alignment, is used for the financial plan before a project enters PE. During PE, the scope and exact alignment of the project is determined and additional detail added to the cost estimate. As the project moves toward implementation, confidence in the capital cost estimates and schedules increase while cost contingencies decrease. Table 1 provides an example cost estimate for a project in PE.

Table 1: Detailed Project Cost Estimate in PE, Constant 1999 Dollars (Millions)

The capital cost estimates are initially produced in constant dollars and escalated to the year-of-expenditure. Costs are typically escalated based on distinct inflation forecasts for, at a minimum, construction costs, right-of-way acquisition, labor cost, and general price inflation to account for the wide variability in the inflation characteristics of certain cost components. Costs in constant dollars are budgeted according to the estimated construction schedule. These costs are then escalated to the year-of-expenditure. Table 2 is an example of a cost estimate and schedule for a project in PE.

Table 2: Cost Estimate and Schedule, Year-of-Expenditure Dollars (Millions)

Cost estimates for projects in final design that are ready to sign a FFGA are broken into contract units. Each of the contract units is a separate contract with a distinct schedule and cost estimate. Each contract is awarded and tracked by the grantee throughout the construction phase. The contracts may contain the project contingency individually or a separate project reserve may be set aside to account for unexpected costs. The initial escalated cost estimate divided into contract units is called the Baseline Project Budget and is developed by the grantee before a FFGA is signed. This estimate may be derived from estimated contract costs escalated to year-of-expenditure or mid-point of construction. An example is provided in Table 3.


1 Year of expenditure cost estimates are derived by multiplying the constant dollar cost estimate for a particular year by the inflation factor calculated for that year. The inflation factor for an expenditure in year t is derived by :
i sub t is equal to the product of t terms of the form of one plus i sub n
where i is the inflation rate in percent for year n.


Table 3: Example Baseline Cost Estimate, Escalated Dollars (Millions)

The cost estimate changes as bids for each of the contracts come in higher or lower than the baseline and changes to project scope lead to contract amendments. These changes in project costs are tracked on a separate schedule that provides the current budget forecast for the project. Table 4 is an example of the project cost-tracking schedule. As the current budget forecast changes, the project sponsor revises the capital plan to ensure that the grantee maintains a sound financial position. Grantees are subject to financial spot reviews by FTA to ensure they have the capacity to complete the project according to the terms of the FFGA as well as operate and maintain the existing transit system and service levels.

Funding Sources

The project capital plan identifies the proposed sources of funds for constructing the proposed project and details the non-federal share of project costs. The information submitted regarding funding sources provides documentation for FTA to determine the degree of commitment of each funding source and helps ensure that local match requirements are met. As the project advances in the development and implementation process, the level of commitment of non-federal funds increases. To enter PE, a financial plan must identify a "realistic" funding strategy for providing the local share. During PE, the project sponsor is expected to secure committed funds so that the majority of non-federal funds are committed before the project may advance to final design. All non-federal funds must be formally approved and programmed to fund the non-federal share of the proposed project before FTA will recommend or approve a project for a FFGA.

Table 4: Project Cost Tracking Schedule, Escalated Dollars (Millions)

The capital plan summarizes the non-federal and federal shares of project costs and references evidence of funding commitment. Evidence of commitment may include legislative documentation, resolutions approving funding, account balances, a bonding prospectus and agency debt covenants, signed joint development agreements or legally binding agreements with state/local agencies committing funds. Table 5 presents an example of this type of schedule. In the example, the project sponsor would attach legislation or signed local agreements authorizing the dedicated sales tax, MPO commitments for use of Congestion Mitigation Air Quality (CMAQ) funds, the bonding prospectus and evidence of authority to issue debt in the amount planned.

Table 5: Sources of Capital Funds, Year-of-Expenditure Dollars (Millions)

The accompanying text clearly identifies all local, state, federal and private funding sources, including the name, originating level of government, total dollar amount anticipated, amount currently expended, and the share of total project capital costs in year-of-expenditure dollars. The total dollar amount across funding sources sums to the project's total capital cost.

Funding Source Forecasts

For each funding source, the plan clearly indicates whether the source is an existing source, such as an active local tax from which revenues are currently collected, or a new source requiring legislative approval, referendum, or other governmental action. For existing sources, the plan outlines the conditions of the funding agreement (e.g., funding formula, percent share of total revenues, etc.) and at least five years of historical revenue data including the amount available for transit uses. For major funding sources , the plan includes 10 years of historical revenue


2 Defined as sources that contribute more than 25% of agency-wide or New Starts capital or operating funds. The purpose of evaluating ten years of revenue data is to ensure that the forecasts account for a full range of economic conditions.


data. For new sources, the plan indicates when legislative approval or public referendum is expected and the date the source would become effective. For all sources, the plan contains a 20-year revenue forecast, documentation of any sunset clauses, and provisions to cover project funding beyond the sunset date.

For all revenue projections, the financial plan uses conservative rates of growth that do not exceed historical experience for that source. Table 6 presents an example of a forecast for a dedicated local sales tax.

Borrowing, Debt Levels and Ratings

If the financial plan includes debt, a debt proceeds and service plan is included in the financial plan documentation. This schedule presents outstanding debt levels, the gross amount of each debt issuance, net proceeds from each issuance, bond rating for each issuance, debt service requirements, and interest rates, for the past five years and 20 years into the future. This schedule monitors on a yearly basis the most restrictive debt covenant of the agency, such as debt service ratio requirements, outstanding debt ceiling, or limits on debt expenditures during a specific time period. In addition, the most recent bonding prospectus is included as supporting documentation.

Contingencies

Cost contingencies provide reserves against any risks of cost increases in the development of the project. These contingencies are separately identified in the project's financial plan and included in the capital cost estimates. The capital cost documentation includes a description of all the cost escalation risks and identify the range of potential project costs. As a project moves through the engineering and design process, the likelihood of cost increases, and consequently, the contingency declines. After a FFGA is signed, the project sponsor is responsible for any cost increases and for fulfilling the terms of the FFGA. Reduced service, delayed construction, or reductions in project scope are not acceptable contingency plans.

Federal Funding Shortfalls

In some cases, project sponsors may assume 80 percent federal funding in PE, but only receive 60 percent of project costs after the congressional appropriations process. Project sponsors should be prepared to move the full scope of the project forward even if federal funds are less than expected. Evidence of financial capacity to provide additional non-federal funds could be in the form of cash balances, additional debt capacity or commitments of additional funds from new or existing funding sources. Service reductions and deferred maintenance are not acceptable methods of freeing up additional funds.

After a FFGA has established the federal share, federal appropriations may fall short on an annual basis. For instance, the federal commitment to the FFGA funding levels may be satisfied over six years rather than the planned four-year period. The capital plan presents strategies for implementing the project if the annual appropriations are less than planned including short term financing to cover annual funding shortfalls. The capital plan should show adequate cash reserves, construction reserves or debt capacity to complete the full scope of the proposed project if annual appropriations are lower than expected. Service reductions on the existing system, construction delays or reducing the scope or features of the project are not acceptable methods of providing additional funds.

Table 6: Example Funding Source Forecast, Current Dollars (Millions)

2.3.2 Agency-Wide Capital Plan

The components of the project capital plan are summarized and incorporated into the agency-wide capital plan. The agency plan presents capital funding and spending for each individual funding source and each individual capital project for the past five years and planned during the next 20 years. Capital plan documentation includes project names and descriptions, total capital costs and schedules, and proposed federal funding contributions for each existing, proposed, or planned project. Projects included in the long-range plan and transportation improvement program for the metropolitan area are identified. The agency-wide capital plan also includes bus and rail fleet acquisitions, replacement, and major rehabilitation consistent with the fleet management plans prepared by the transit agency.

All capital funding and expenditures are combined into an agency-wide capital plan projection. Agencies with large numbers of transit projects and funding sources may present detailed funding sources or capital projects on a separate schedule (as in Table 7) to provide a clearer presentation of the capital funding information. The major funding categories can then be summarized in the agency-wide capital plan projection. Table 8 is an example of a 20-year agency capital plan projection.

Table 7: Schedule of Capital Funding Sources, Year-of-Expenditure Dollars (Millions)

Table 8: Twenty-Year Capital Plan, Year-of-Expenditure Dollars (Millions)

Notes:

  1. Funded with FFGA Attachment 6 plus local funds.
  2. Proposed to be funded with Section 5309 New Starts, federal CMAQ funds, and local funds.
  3. Funded with Section 5309 Rail Modernization and local funds.
  4. Funded with Section 5309 Bus and local funds.
  5. Funded with Section 5307 Formula grants and local funds.