8.2 Contents of a Financial Plan

The primary result of a financial plan is an agency-wide 20-year cash flow projection that includes the capital and operating plans for the agency as a whole and for any proposed projects. The 20-year cash flow projection begins with the current year. The remaining content of a financial plan is the information to support all the assumptions and inputs that contribute to the cash flow projection and the financial analysis of agencies assumptions, capital and operating plans and financial strategies.

The 20-year cash flow projection is the summary of several elements of a financial plan that includes:

• Funding sources and revenue forecasts;
• Proposed project capital budget (if the plan is designed to support analysis of a particular project);
• Other planned capital projects; and
• Annual operating and maintenance (O&M) expenses for the proposed project and the existing system.

The plan is constructed by bringing several plan elements together into an integrated financial model. Figure 8-1 summarizes the relationships among the plan components.

The plan is constructed by bringing several plan elements together into an integrated financial model. Figure 8-1 summarizes the relationships among the plan components.

Figure 8-1: Components of a Financial Plan

The tables and schedules that constitute the financial plan demonstrate how financial and economic assumptions and project cost estimates have been derived, how the resulting forecasts of capital and operating costs of the proposed project fit into the agency-wide capital and operating plans, whether funds have been committed to the project, how the revenue forecasts are developed, and finally, how capital and operating plans impact projected agency cash flow.

8.2.1 Introduction to the Financial Plan

The financial plan begins with a description of the project sponsor and major funding partners. The introduction includes the following elements:

• a description the current transit system and discusses the project sponsor’s and partner’s capability to fund the construction and operation of the proposed project;
• a description of the proposed project including an explanation of the purpose and need for the project and how it fulfills the project sponsor’s objectives;
• a description of the strategy to provide the local share of project funding; and
• a summary of the projected financial position of the project sponsor and the ability of the sponsor to fund planned capital improvements and continue to operate and maintain the existing transit system.

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, and 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.

8.2.2.1 Proposed Project Capital Plan

The project capital plan provides a high level of detail regarding the agency’s plan to fund the construction of the proposed project. The project capital 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 full funding grant agreement (FFGA) and construction. As the project moves from preliminary engineering (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 8.1 provides an example cost estimate for a project in PE.

Table 8-1: 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 costs, 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 Error! 8-3 is an example of a cost estimate and schedule for a project in PE.

Table 8-2: 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 8-5.

Table 8-3: 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 8-7 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 8-4 : 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 Error! 8-9 presents an example of this type of summary. 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 8-5: 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 provides 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 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 8-11 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 identifies 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.

Table 8-6: Example Funding Source Forecast, Current Dollars (Millions)

* The tax rate increase of 0.5% approximately doubles the revenue from this source.

** Source: Standard and Poors DRI, The US Economy - Winter 2000

Federal Funding Shortfalls

In some cases, project sponsors may assume a higher federal share than is actually provided 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.

8.2.2.2 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 8-13) 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 8-15 is an example of a 20-year agency capital plan projection.

Table 8-7: Schedule of Capital Funding Sources, Year-of-Expenditure Dollars (Millions)

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

8.2.3 The Operating Plan

The project sponsor supplies an operating plan to document how the agency intends to fund and operate the proposed project and the existing transit system. The operating plan documents five years of historical data and presents 20 years of projected system operating revenues and operating and maintenance (O&M) costs to demonstrate the capability of the agency to operate and maintain the proposed project while providing existing levels of transit service.

Projections of operating costs, ridership, and fares for the proposed project and existing system are often estimated as part of the alternatives analysis and refined in the DEIS/FEIS. The values reported for ridership and service levels are consistent with the forecasts documented in the MPO’s constrained long-range plan. The number of rail vehicles and buses in service, vehicle retirements, acquisitions and overhauls and the associated annual costs are documented in the bus and rail fleet management plans. Information unavailable from any of these sources is generated specifically for the financial plan.

8.2.3.1 Operating Revenues

The operating plan demonstrates the ability to rely on non-federal funding sources to operate and maintain the entire transit system after the proposed project is in revenue service. The operation and maintenance of the proposed project is likely to place additional burden on the agency’s local funding sources. Transit agencies usually need to develop new funding sources if they do not have existing sources that provide sufficient extra operating revenues to fund the proposed project.

The operating plan incorporates fare revenue forecasts for the proposed project and the existing transit system. Fare revenue forecasts are based on ridership forecasts and assumptions regarding fare levels. The project sponsor should include a summary of prior fare increases and characterize the fare increase approval process. For simplicity of presentation, the project sponsor may develop the fare revenue forecasts as a separate schedule as shown in Table 8-17.

The plan also provides historical revenue figures and forecasts for all other operating revenue sources and the assumptions used to develop the revenue forecasts. Inflation assumptions are critical to revenue forecasts and are explicitly documented in the financial plan. Often, a source such as a local sales tax that is used for local capital funding may also be used for O&M expenses. In the example provided in this guidance, sales tax revenue is divided equally between capital and operations so that the forecast given in Table 8-11 is adequate to document the revenue forecast. The plan includes documentation proving that the proposed operating funds are committed to their intended purpose.

Table 8-9: Fare Revenue Forecasts for Proposed Project and Existing System, Current Dollars (Millions)

8.2.3.2 Operating Costs

System-wide O&M expenses typically increase after a transit project goes into revenue service requiring additional subsidies to continue operating and maintaining the transit system. FTA needs to determine whether the project sponsor has the financial capacity to fund these additional subsidies without reducing existing service levels. Consequently, the operating plan clearly identifies how existing operations will be affected by the proposed project. Fixed guideway projects often result in significant service realignments. The operating plan details:

• How the project will impact existing operations, revenues and O&M costs;
• How bus routes will be realigned;
• What bus routes will be dropped; and
• What new feeder routes are planned?

Presents an example of a schedule of O&M costs for the proposed project and the existing transit system with supporting service statistics. 

The accompanying text documents the O&M cost estimation methodology, preferably resource cost build-up, and describes the service plans for the proposed project and existing transit system.  The cost estimation documentation provides details regarding operating labor, maintenance labor, fuel, supplies, administration and other relevant cost categories.

Changes in O&M costs have three components: (1) inflation for labor and materials, (2) service/operating changes, and (3) changes in productivity.  The plan documents the inflation assumptions, the planned system-wide operating and service characteristics, and productivity assumptions to demonstrate that the agency is not paying for the proposed project’s O&M costs through reductions in service or deferred maintenance on the existing system.

8.2.3.3 Agency-Wide Operating Plan

The operating revenues and O&M cost estimates are combined in the agency-wide operating plan.  The operating plan demonstrates that adequate additional funds are available to operate and maintain the proposed project and the rest of the transit system.  The operating plan calculates the additional subsidy required to operate and maintain the proposed project.  The operating plan shows the availability of additional operating revenues to cover the additional expenses. Table 8-11 presents an example of an operating plan.  In this example, the transit agency forecasts operating surpluses large enough to easily absorb the subsidy using existing funding sources.

Table 8-10: Operating and Maintenance Expenses, Year-of-Expenditure Dollars (Millions)

Table 8-11: Operating Plan, Year-of-Expenditure Dollars (Millions)

8.2.4 The Cash Flow Analysis

The overall objective of preparing a financial plan 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 8-12 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 while operating surpluses can be used for capital expenditures.  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 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.

8.2.4.1   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 8-12: Twenty-Year Cash Flow Projection, Year-of-Expenditure Dollars (Millions)