|1.||Current Cost Estimate|
|Cost Estimate by Construction Segment|
|Cost Estimate by Major Project Element|
|3.||Project Financing and Revenues|
|Overall Financial Plan|
|Debt Service/Bonding Detail|
|Overall Revenue Analysis|
|Federal Funds/Advance Construction|
|State Gas Tax|
|Vehicle License Fees|
|Local Sales Taxes|
|6.||Cost and Revenue History|
|7.||Cost and Revenue Trends|
|8.||Revenue Shortfall Mitigation|
|9.||Summary of Significant Cost Reductions|
|10.||Summary of Significant Cost Increases|
This example is not intended to represent the same level of detail or the same depth of analysis as would be expected in an actual Financial Plan. Rather, its primary purpose is to display the format of a Financial Plan and to introduce the types of graphs that should be used in presenting typical Financial Plan data. The example presents numerous exhibits displaying the relevant cost, revenue, financing, and expenditure data that will help document the financial progress of a large, complex project (to best view these exhibits, it is recommended that they be printed in color).
In developing this example, an attempt was made to create a realistic set of circumstances that may actually be encountered in the preparation of a Financial Plan. An example project was created that was in the midst of construction, that had experienced some significant cost changes, and that was dealing with some revenue options; in order to show how to consistently track and illustrate cost and revenue changes throughout the life of a project. In some cases, exhibits are included in both graphical and tabular formats, to show alternative options for displaying similar information.
Throughout this example, comments are included in shaded italics. The numbering system and structure used in this example for the major sections of the narrative and for the exhibits, follows the numbering system for the required sections of the financial plan, as indicated in the Financial Plan Guidance.
The General Roy Stone Memorial Bridge is a $2 billion reconstruction and seismic retrofit of a major highway bridge. The project consists of the bridge and the two major interchanges on either side of the Bridge. The total project length is 5 kilometers. The reconstructed bridge will be widened to include a new HOV lane and a bike lane in each direction, in addition to the seismic retrofit. The interchanges are being reconstructed to add the HOV and bike lanes and improve their resistance to seismic loading.
The federal environmental process under the National Environmental Policy Act (NEPA) was completed when the Record of Decision was signed in 1996, and final design began in May, 1997. The initial financial plan was accepted by FHWA in August, 1998. The first construction contract was approved by FHWA late in FY 1998. This example shows the updated annual financial plan for the third fiscal year of implementation (FY 2000). In accordance with the schedule contained in the Initial Financial Plan, this Annual Update was submitted to FHWA for acceptance in October 2000. Construction of the project is scheduled for completion at the end of FY 2003.
In the 1998 Initial Financial Plan, total project costs were estimated at $1.6 billion. As of this report, the estimated total project cost has risen to $2.0 billion, an increase of $400 million over the original financial plan. Reasons for this increase are discussed in Section 6, "Cost and Revenue History."
Exhibit 1a compares the current total cost estimate to cost estimates from the previous financial plan submissions, as well as the percent of the project completed in each fiscal year. Per FHWA guidance, all cost estimates are in year-of-expenditure dollars that already take inflation into account. As of this report, the project is 44 percent complete.
The table below shows the current cost estimate and the remaining cost to complete by construction segment. The segments on this simplified project coincide with the construction contracts awarded. These contracts include: construction of the east interchange, construction of the west interchange, the seismic retrofit, and widening of the bridge to provide an HOV lane and the bike lane.
On an actual project, it is likely that each construction segment will have more than one construction contract, and that a project sponsor would need to combine various construction contracts in order to portray the status of a construction segment The key issue for financial plans is defining the segments that will be tracked in the initial plan, and maintaining consistent definitions for each subsequent Annual Update of the plan, to enable comparison.
|Segment||Initial Cost Estimate
(FY 1998 - Base Year)
|Current Cost Estimate
|Net Increase Since Initial Estimate||Cost to Complete
(as of FY 2000)
|West Interchange and Approaches||$262.5||$300.0||$37.5||$0.0 (complete)|
|East Interchange and Approaches||$337.5||$337.5||$0.0||$112.5|
|Seismic Retrofit of Existing Structure||$300.0||$443.0||$143.0||$425|
|Widening of Existing Structure||$300.0||$419.5||$119.5||$419.5
(not started as of FY 2000)
In this example we have chosen to simplify the exhibits by combining the project elements into four broad categories, and including under the category of "project management" activities such as utility relocation, hazard mitigation, etc. This is a project-by-project decision, and it is likely that an actual project sponsor would choose to have a much more detailed breakdown of project elements. As with construction segments, the key point to remember is to be consistent with the definition of project elements in each annual submission, in order to enable comparison from year to year.
|Element||Initial Cost Estimate (FY 1998)||Current Cost Estimate (FY 2000)||Net Increase Since Initial Estimate||Cost to Complete (as of FY 2000)|
Exhibit 2a (next page) shows the project timeline. As of FY 2000, most of the design of the project is complete, construction is underway on the East Interchange and the Seismic Retrofit segments, and the West Interchange segment is now complete. The bridge widening segment contract is scheduled to be let in FY 2001.
Exhibit 2b shows the actual expenditures versus the budgeted expenditures as shown in the Initial Financial Plan for the period of construction (FY 1998 - FY 2003). For example, by FY 1999, the State had spent $600 million on the project, $100 million more than the $500 million originally estimated in the initial financial plan. The level of expenditures is projected to run ahead of initial estimates, in order to meet the increased costs under the revised cost estimate. The project continues to make substantial progress and construction is now estimated to be completed in Sept. 2003, two months later than initially planned.
|Financial Plan||Total Cost Estimates||Work Completed as of End of Fiscal Year Shown||Work Uncompleted||Amount Over Initial Estimates|
|FY 1998 Plan Estimate (Base Year)||$1.6 Billion Initial Cost Estimate||$0.2 (12%)||$1.4|
|FY 1999 Plan Estimate||$1.8 Billion Revised Estimate||$0.6 (33%)||$1.0||$0.2|
|FY 2000 Plan Estimate||$2.0 Billion Current Estimate||$0.9 (44%)||$0.7||$0.4|
(through end of FY 2000 in billions of dollars)
(through end of FY 2003 in billions of dollars)
|FY 1998||FY 1999||FY 2000||FY 2001||FY 2002||FY 2003|
|Expenditure (At or Under Budget)||$0.10||$0.50||$0.90||$1.30||$1.55||$1.60|
|Expenditure (Above Budget)||$0.10||$0.10||$0||$0.10||$0.25||$0.40|
|Budgeted as of FY 1998 Plan (Base Year)||$0.10||$0.50||$0.90||$1.30||$1.55||$1.60|
This section is divided into three components:
The first component provides an overview of how the project will be financed during the six-year construction period. A large part of the plan of financing is an estimated $1.6 billion bond issue, to be repaid from a variety of sources. The second component provides details about the planned borrowing, and shows how future debt service commitments will be met. Finally, the last component presents an analysis of the overall revenue sources that will ultimately pay the costs of the project. This section discusses both the direct project expenditures that will be required during the six-year construction period, and the revenues required for the period after construction to repay project debt.
This sample financial plan includes information that extends beyond the period of project construction, because part of the financial plan incorporates borrowing whose repayments will also extend beyond the period of construction. In order to portray the impact of a project on a State's program, and the actual level of funding that will ultimately be provided to a mega-project, both the construction financing plan and the eventual revenue sources that will repay the financing should be presented.
The entire project will be financed through a combination of direct cash contributions from federal funds (primarily National Highway System (NHS) and bridge apportionments), state gas taxes, vehicle license fees, local sales taxes and bonds. Exhibit 3a compares the initial project financing plan to the current FY 2000 version.
In order to address the $400 million increase in the total cost estimate, the state transportation department (STD) increased its borrowing from $1.05 billion to $1.6 billion. While this increased borrowing allowed the state to reduce its up-front (cash) contribution the project, the state will have to increase both Federal and state funding for debt service in future years.
Exhibit 3b presents the breakdown of the current finance plan, and shows the sources of repayment for the bond issuance.
The project sponsors initially planned to issue $1.05 million in bonds to finance part of the $1.6 billion cost. The Initial Financial Plan projected that the bonds would be issued in three series:
However, in response to the cost increases identified early in the first year, and the reduction in annual state spending, the project sponsors increased the bond issuance to $1.6 billion, in the following series:
In some years, the annual debt service required by the additional bonds has increased by nearly $70 million from the initial estimate. However, in the Overall Revenue Analysis below (section C), the state can demonstrate that its available resources are more than adequate to support this level of future debt service.
|Interest Rate 5.4%||This estimate was provided by the State's financial advisers, based on current market conditions as well as the Series 1998 and 2000 bond issues already completed. If interest rates rise or fall substantially prior to bond issuance, interest and issuance costs could change.|
|Bond Term 10 - 15 years||Maximum allowable term is 15 years.|
|Total Borrowing $1.6 billion||Total borrowing was initially capped at $1.2 billion; however, the revised bond legislation also increased the cap on borrowing to $2 billion.|
|Level Debt Service||Standard practice|
The actual revenues used (for FY 1998-2000) and the projected revenues required through FY 2012 are shown by source in a chart listed in the appendix.
The pie chart in Exhibit 3c below shows the relative contribution of the funding partners to this project, including both up-front contributions during the period of project construction, and planned commitments to fund future debt service payments.
Overall, the revenues that will pay for this project will be 37 percent Federal (primarily apportionments, although a small amount of discretionary funding was received in the initial years of the project), 34 percent state (from gas taxes and vehicle license fees), 14 percent from a local sales tax, and 15 percent from a toll that was approved by the Legislature in order to repay some of the additional bonds needed for the project.
Future federal funds are a key aspect of the financial plan for the Roy Stone Bridge. From FY 1998 through FY 2012 (when the project debt will be completely retired) the STD will use an average of $63 million in Federal funds for this project annually, approximately half of which will be used for payment of debt service.
Exhibit 3d compares the amount of Federal funds required for this project to the State's overall apportionment level. Due to high levels of both construction expenditures and debt service repayments in FY 2003, this project will require nearly 2/3 of the State's apportionment in that year. This situation is accounted for in the State's STIP and long-range plan, and is not expected to affect the remainder of the program.
The STD has already put the project under advance construction, and has converted $127.2 million to regular Federal aid to date. This level of AC is considerably below the maximum level permitted and will not have a significant impact on the rest of the Statewide program in any year except FY 2003, when funding needs for the Roy Stone bridge will require nearly 2/3 of the apportionments for the state. The State Transportation Department and legislature are aware of this situation and are prepared to provide additional state funding if necessary to continue the rest of the state program during that year.
Note that the projected annual Federal-aid apportionments remain constant after the point of expiration of TEA-21. In most cases, it is recommended that apportionments from future Federal-aid legislation be assumed to match the estimated apportionment from the last year of the current bill; no increases should be assumed for future projections. If a State receives an unusually high amount of funding in the last year of an authorization (due to, for example, completion of Interstate projects that will not exist in future authorizations), it may not be appropriate to use the funding from that year as a basis for future projections. Whatever projections of Federal funding that are made should be consistent with past apportionments and approved by the appropriate FHWA Division Office under the STD's existing planning process.
STDs should also be aware of the level of OA and annual AC conversion required to meet the cash flow needs of mega-projects. In many cases, STDs will need to maintain a high level of AC balance in order to convert obligations in time to meet project obligations. If a mega-project represents a large component of a state's program, STDs should closely monitor use of both AC and OA to ensure that project obligations can be met.
Although the project has received discretionary funding in the past, it is not assumed that this level of funding will continue. If discretionary funds are received in the following 3 fiscal years, the contribution from tolls and other sources of revenue will be reduced.
Note that while this example project did receive discretionary funding in two of the first three years, no discretionary funds are included as projected revenue for the remainder of the project. A financial plan should never assume that discretionary Federal funds will constitute a part of future revenue.
Over the years FY 1998 - FY 2012, an average of $33.5 million in state gas tax funds will be used for this project. The state gas tax in this State is constitutionally dedicated for use in transportation projects, and provides more than $200 million per year. These funds must be designated for use on a project by project basis each year by the State Transportation Department; however, the Department has a policy of prioritizing support for projects with debt issuances associated with them. In the event that the legislature fails to continue the vehicle license fee, or there is a decrease in state gas tax revenues, the amount of bond proceeds dedicated to this project can be increased.
The State will use between $10 million and $50 million per year of a state-imposed vehicle license fee applied to the county where the project is being constructed. The fee, which will bring in an estimated $50 million per year, is dedicated by its enabling legislation to transportation. It is scheduled to expire in FY 2003; however, the legislature has never failed to reauthorize this fee and it is anticipated that it will again take action to continue this source of revenue. If the legislature fails to do so, the financial plan assumes that the STD will use additional state gas tax funds to replace the missing revenue.
The county in the area around the General Roy Stone Bridge has pledged to use a portion of their local sales tax, which is dedicated to transportation, for the project. Each year the county commissioners will have to appropriate this funding; however, due to the strong county support for the retrofit, the State anticipates no difficulty in appropriations. This tax is scheduled to expire in 2003. To replace it, the county and the state have tentatively agreed to levy a toll on the reconstructed bridge; however, the voters will have the option to choose between extending the sales tax or approving the tolls. If the county voters failed to approve either tolls or extension of the sales tax, the county commissioners have committed to appropriating the funds from the General Fund of the county. If the county failed to appropriate its share of funding for the project, the state would explore options to divert state transportation funding currently planned to be used for other projects in this county. The county and the STD have signed an MOU to this effect.
Once the local sales tax expires, the county has agreed to seek authority to levy tolls on the bridge. If enacted, starting in FY 2004, tolls will generate between $30 and $50 million in annual revenues, according to the most conservative estimates provided in the toll road feasibility study prepared by an independent consultant to the STD (attached).
The inclusion of a future revenue source based on an anticipation of legislative action must be weighed very carefully and will generally not be accepted. This will be a project by project decision, which will only be made after considering the political climate and the legislative history of the State. To aid in this decision; if a revenue source is scheduled to expire during the life of the financial plan, the plan should disclose the expiration date and legal action required to continue its use. Any available documentation showing intent to continue the revenue source should also be provided.
|Revenue Source||Assumptions & Justification||Discussion / Potential Risks||Risk Mitigation|
|Federal Funds - Apportionments||Continued funding at current apportionment levels. This is the level of funding FHWA permits us to plan for in our approved, fiscally-constrained STIP, and is consistent with our Long-Range plan.||The project is scheduled for completion in FY 2003, at the end of the TEA-21 authorization. Subsequent authorization lapses could affect debt service repayments.||The STD will maintain a continuous balance of AC program-wide that will cover one year's worth of project costs.|
|Federal Funds - Discretionary||No further discretionary funding assumed; State intends to apply for bridge discretionary.||No risk since funds are not part of current financing plan.|
|State Funds - Gas Tax||Assumes an average of $38.7 million per year will be made available by the STD to this project. This is out of a total gas tax fund of approximately $200 million per year.||STD controls use of gas tax fund (without legislative action); no appropriations risk.||STD does not believe any risk mitigation is necessary.|
|Vehicle License Fee||Assumes $10 - $50 million per year in funding out of $50 million total.||Fee expires in FY 2003.||The STD is prepared to supplement with additional state gas tax funding in the event that the legislature fails to reauthorize the vehicle license fee.|
|Local Sales Taxes||Assumes $60 million per year through FY 2003.||Sales tax must be appropriated to project annually by county commissioners.||The State is prepared to withhold other funding from county if county fails to appropriate adequate funds for this project. MOU signed between county and STD reflects this understanding.|
|Tolls||Assumes $40-$50 million per year from FY 2004 - FY 2012.||Legislative authority not yet in place||County has pledged to either renew local sales tax or ensure that toll authority is enacted; if it fails to do so, MOU permits the STD to withhold funding for other transportation projects.|
The revenue projections in the Initial Financial Plan were quickly shown to be inadequate due to construction overruns during the first year of construction. At that time, project officials realized that the originally planned revenue sources would not support the project expenditures and decided to significantly increase their bond offerings. Exhibit 4a presents the anticipated sources and uses of funds for this project.
After experiencing cost overruns in the first year of project construction, officials decided to establish a contingency fund for the remainder of the project. The fund, which will be a dedicated account within the State's highway trust fund, will grow to a maximum of $102 million, and gradually be reduced if not required. Interest earned on this fund will not be counted as a funding source but will be applied to other state projects, if available.
Exhibit 4b shows the actual and anticipated cumulative annual revenues, compared to required expenditures. In this illustration, the balance of the contingency fund is added in each year, to demonstrate the true coverage levels available to the state. As the contingency fund is reduced, the expenditures and revenues match more closely. This coincides with the substantial reduction in project risk after construction.
As estimated in the Initial Financial Plan the project cost was shown to be $1.6 billion. This was fully consistent with the STIP and long range plan figures. However the increase in project cost, now up to an additional $400 million, had the potential to impact the planned program of projects in the remainder of the state. For that reason, State officials decided to rely more heavily on bonds to support the additional $400 million in construction costs, and at the same time to reduce their dependence of State gas tax revenue dedicated to this project. This allowed them to increase the state gas tax revenue available to the statewide program and retain the relative balance in funding between the subject project and the remainder of the STIP.
Actual annual expenditures almost immediately began running ahead of estimates on this project. Both design and ROW overran initial estimate. Design costs were higher due primarily to the need for additional subsurface investigation and the resulting revisions to the bridge substructure and retrofit plans as well as the structures in the interchange contract. These design revisions resulted in the need for additional ROW in the areas of both the East and the West interchanges. Also, as the project ROW limits were expanded into a heavily developed area, the needed ROW parcels were more expensive than anticipated.
Exhibit 6a shows the net effects of scope and cost changes on the costs for each construction segment. Sections 9 and 10 provide further detail on these changes.
|Project||Initial Estimate||Scope Increases||Cost Increases||Scope Reductions||Cost Reductions||Current Estimate|
|West Interchange||$262.5||$50.5||$10.0||$20.0||$3.0||$300.0 (complete)|
In summary, total projected increases in the cost to complete the project as of the end of FY 2000 are $400 million over the Initial Estimate as shown below:
In the analysis of the project history it is important to distinguish between cost changes due to scope or design revisions to the project and cost changes due to actual costs being different from initial assumptions.
Inflation has remained steady at 3 percent throughout the life of the project, as estimated in the Initial Financial plan. However, the project has been impacted by unanticipated increases in the price of some construction materials. Both the price of reinforcing steel and the price of cement have increased dramatically due to a shortage of these materials caused buy several large private sector construction projects in the immediate area. It is anticipated that these shortages, and thus the higher prices, will endure throughout the remainder of Project construction. Future estimates have been adjusted upward to reflect this reality. Exhibit 7a illustrates the actual cost of reinforcing steel compared to the estimate upon which the initial financial plan was based, and shows the revised projections for future costs.
This section of the Financial Plan may necessitate several exhibits like 7a to compare actual with estimated costs
The 1998 revenue shortfall and the steps taken to deal with that shortfall have been discussed in section 4, "Cash Flow," and were dealt with more fully in the 1999 Annual update. As the project design is now virtually 100 percent, complete and construction is well underway, the potential for future large cost increases is very diminished. As the project has progressed now into its 3rd year the revenue sources have also become more predictable, and thus future revenue shortfalls are considered unlikely. In the event of a relatively small revenue shortfall (i.e., less than $100 million), gas tax revenues can be shifted to cover the shortfall. If a substantial revenue shortfall occurs (over $100 million), additional bond proceeds and federal-aid apportionments will be used to cover the shortfall.
|Redesign landscaping plan (West Interchange)||$18||$15||$3||Use native plants / reduce irrigation|
|Value engineer storm drainage (East Interchange)||$60||$58||$2||Change pipe sizes / materials|
|Steel piling (Seismic Retrofit)||$32||$25||$7||Actual length was less than estimated|
|Miscellaneous Cost Changes (Widening)||$2||Miscellaneous changes under $1 million|
|Total Cost Reductions||$14|
|Eliminate pier (West Interchange)||$40||$20||$20||Use high-strength concrete to lengthen spans.|
|Miscellaneous Changes (East Interchange)||$0||$1||$1|
|Eliminate utility conduit||$10||$0||$10||Actual length was less than estimated|
|Total Scope/Design Changes Resulting in Reduced Cost||$31|
|Earthwork (West Interchange)||$35||$45||$10||Disposal of contaminated soil|
|Earthwork (East Interchange)||$36||$37||$1||Disposal of contaminated soil|
|Seismic Retrofit Composite Wrap (Seismic Retrofit)||$90||$120||$30||Underestimated quantity required|
|Substructure Construction (Seismic Retrofit)||$125||$160||$35||Encountered undetected clay strata|
|Reinforcing Steel (Seismic Retrofit)||$45||$55||$10||Bid price over estimate|
|Reinforcing Steel (Widening)||$50||$60||$10||Bid price over estimate|
|Concrete paving (Widening)||$120||$150||$30||Escalation in concrete unit price|
|Work Zone Traffic Control||$20||$30||$10||Due to construction delays|
|Miscellaneous Cost Increases (Widening)||$9|
|Total Cost Increases||$145|
|Add interchange lighting (West Interchange)||$0||$25||$25||Improve night- time safety|
|Add pedestrian overpass (West Interchange)||$0||$26||$26||Connect bike path to recreation area|
|Miscellaneous changes (East Interchange)||$0||$2||$2|
|Re-design (Seismic Retrofit)||$60||$145||$85||Meet new state safety standards|
|Widen bike and ped path; extend (Widening)||$0||$85||$85||Meet new state requirements for disabled access|
|Total Scope Increases/Design Changes||$200|
|A-Ia||Pie with Smaller Pie||Distribution of $400 million net increase|
|A-Ib||Table||Cost Estimate Data|
|A-Ic||Pie with Smaller Pie||Cost Increase Pie/Bar|
|A-Id||Table||Implementation Plan Data|
|A-IIIa||Line||Cumulative Debt Service Requirements: Initial Estimate vs. Current|
|A-IIIb||Stacked Column||Revenues by Source & Year|
|A-IIIc||Table||Project Financing Data|
|A-IIId||Table||Summary of Bond Financing Plans and Assumptions|
|A-IIIe||Table||Sources of Repayment for Debt Service|
|A-IIIf||Table||Overall Revenue Sources|
|A-IIIg||Table||Apportionments Required by Project|
|A-Ivb||Stacked Column||Total Potentially-Available Revenues vs. Est. Annual Costs|
|A-Ivc||Table||Background data on available revenues.|
|A-Ivd||2 Pie Graphs||Sources and Uses of Funds|
|A-Vih||Table||Cost Changes Data Table|
|A-VIIa||Table||Cost Estimate Data for Steel|
Cost Estimate - Section 1
Implementation - Section 2
Project Financing and Revenues - Section 3
Cash Flow - Section 4