Attachment D - Sample Financial Plan

General Roy Stone Memorial Bridge

October 2000

Table of Contents

• Introduction
  • Project Description
  • Project Timeline

1. Current Cost Estimate
   • Cost Estimate by Construction Segment
   • Cost Estimate by Major Project Element
2. Implementation Plan
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
     • Tolls
4. Cash Flow
   • Contingency Fund
5. Other Factors
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

• Appendices
  • Appendix A: Additional Examples of Graphics/Supporting Data
  • Appendix B: List of Potential Attachments (Organized by Section)

Introduction

Project Description

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.

Project Timeline

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.

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1. Current Cost Estimate

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.

Cost Estimate by Construction Segment

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.

Cost Estimate by Major Project Element

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2. Implementation Plan

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.

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3. Project Financing and Revenues

This section is divided into three components:

• Overall Financial Plan
• Bond and Debt Service Detail
• Overall Revenue Analysis

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.

Overall Financial Plan

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.

Debt Service/Bonding Detail

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:

• $400 million in Series 1998 bonds (15-year term)
• $450 million in Series 2000 bonds (10-year term)
• $200 million in Series 2002 bonds (10-year term)

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:

• $450 million in Series 1998 bonds (15-year term)
• $770 million in Series 2000 bonds (10-year term)
• $380 million in Series 2002 bonds (10-year term)

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.

Overall Revenue Analysis

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.

Federal Funds/Advance Construction

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.

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.

State Gas Tax

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.

Vehicle License Fees

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.

Local Sales Taxes

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.

Tolls

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).

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4. Cash Flow

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.

Contingency Fund

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.

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5. Other Factors

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.

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6. Cost and Revenue History

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.

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:

• 5/22/2000
• $5 million in design costs (actual)
• $20 million in Right-of-way costs (actual)
• $325 million in construction costs (projected)
• $75 million in management costs (projected)

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7. Cost and Revenue Trends

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.

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8. Revenue Shortfall Mitigation

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 3^rd 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.

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9. Summary of Significant Cost Reductions

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10. Summary of Significant Cost Increases

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Appendices

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Appendix B: List of Potential Attachments (Organized by Section)

Cost Estimate - Section 1

• Engineering Reports/Independent Verification (if available)

Implementation - Section 2

• Progress Reports
• Documentation of Project Completion (i.e., any more details regarding construction)

Project Financing and Revenues - Section 3

• Official Statement for Past and Proposed Bond Issues Associated With Project
• Rating Agency Reports for Bond Issues
• MOU between County and STD regarding local sales tax/toll revenue stream
• Toll revenue feasibility study

Cash Flow - Section 4

• Cash balance summary/report of fund balances

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