The purpose of this memorandum is to provide the attached preliminary guidance regarding the provision in Section 1305(b) of TEA-21 requiring a recipient of Federal financial assistance to submit to the Secretary an annual finance plan for a project with an estimated total cost of $1 billion or more.

Preliminary guidance is being issued to provide immediate information to division offices and States for determining if a finance plan is required, when it should be developed and what financial and other information should be included. Final guidance will be issued after additional coordination within the U.S. Department of Transportation.

Preliminary Guidance -- Finance Plans

Background

Section 1305(b) of the Transportation Equity Act for the 21st Century (TEA-21) modified Section 106 of Title 23 by adding subsection "(h)" which requires a recipient of Federal-aid funds to submit to the Secretary an annual finance plan for a project with an estimated total cost of $1 billion or more. The act requires that the plan be based on detailed annual estimates of the cost to complete the remaining elements of the project and on reasonable assumptions of future increases in the cost to complete the project.

Mega projects costing over $1 billion are often implemented over a number of years and may involve numerous individual elements. These elements may or may not have independent utility. Thus a decision to start implementing a mega project may require significant future financial resources in order to achieve the transportation benefits of the initial investment.

The initial finance plan will provide the decision maker with information on the immediate and longer term financial implications resulting from project initiation. The subsequent annual updates of the finance plan provide information on actual cost and funds available in comparison to initial estimates. The annual updates will provide the decision maker with information on the financial implications of completing the project.

Purpose

A finance plan is a document that provides a reasonable assurance that there will be sufficient financial resources available to implement and/or complete the mega project as planned.

In essence, a finance plan provides a description of how a mega project will be implemented over time by identifying project cost elements, financial resources to be utilized, and assumptions about both cost and revenue.

Which Projects Must Have a Finance Plan?

Finance plans are to be prepared for all Federal-aid (Title 23) projects with an estimated total cost of $1 billion or more. This threshold should be measured in year-of-expenditure dollars and be applied to projects reasonably expected to cost at least $1 billion. A "project" would generally be defined as that work described in the environmental document and with independent utility between logical termini, and could comprise several segments.

When Should The Finance Plan Be Prepared?

The Initial Finance Plan

The initial plan should be prepared as early in the project development process as practical. In some cases preparation of the finance plan could be begun during the environmental phase; in others it could await issuance of the record of decision. Nevertheless, the initial plan must be accepted by FHWA before approval of Federal-aid funding for right-of-way acquisition (except hardship cases) or project construction.

Updates

Finance plans must be updated annually and reflect significant changes in total and remaining project cost or available funding. The update is to be submitted to FHWA for acceptance.

The scope of the annual update should be based on a determination of whether cost and/or funding (including cash flow) changes have occurred that are of enough significance to require a full plan update. The State's reassessment is to be coordinated with FHWA to determine if a full update of the plan is necessary.

Content of the Finance Plan

The plan should consist of at least five main sections: (1) the Cost Estimate - in which the total cost and cost-to-complete are presented in current dollars, (2) the Implementation Plan - in which the project schedule is presented and the cost-to-complete is presented in annual increments in inflated dollars, (3) Funding Sources - presented as annual amounts available for project obligations and compared to annual obligation needs, (4) Cash Flow - annualized presentation of cash income and outgo to illustrate how periodic bills will be paid, and (5) Other Factors.

(1) Cost Estimate

The Initial Cost Estimate

The initial finance plan should reflect the total project cost. Project costs can be considered the equivalent of the project purchase price. They should include all costs to obtain the design, right-of-way, construction, project management, etc. Project costs do not include the costs of acquiring revenue (taxation, interest payments, etc.).

All costs must be presented for a single base year so that all costs are reported in comparable dollars. If significant portions of the project are not to be funded with Federal-aid funding, they should be separately identified.

Annual Cost Estimate Updates

Each annual update of the cost estimate should be prepared for a new updated base year and be presented in total cost and cost-to-complete estimates. These estimates should use the same project elements or breakpoints to present the cost as used in the initial estimate.

Any significant change in the total project cost since the last estimate should be clearly presented and major reasons for any significant cost changes should be provided.

(2) Implementation Plan

The implementation plan should reflect the schedule for completing the project and is to be based on the initial (or latest annual updated) base year cost, adjusted to include inflation and costescalation resulting from the latest design or plans.

The methodology (including assumptions for future inflation, cost escalation, etc.) and reasonableness of the cost estimate should be described.

In developing the implementation plan, the sponsor should consider a wide array of sources of potential future cost changes. Cost changes might result from unforeseen environmental and subsurface conditions, inflation, litigation, technology or contractor problems/innovations, overtime costs to adhere to a schedule, changes in governmental rules impacting the project, value engineering savings, etc.

(3) Funding Sources

The plan should describe all funding sources for the project and should clearly describe these funds as committed, or anticipated amounts, with an evaluation of the likelihood of anticipated amounts being realized. The key feature of this section would demonstrate that funds will be available to permit annual project fund obligations as presented in the Implementation Plan.

Federal funds should be described by funding category under existing legislation and as potential amounts under future legislation. Obligations of Federal-aid funds should be constrained by anticipated annual limitations on Federal-aid fund obligations.

If special funding techniques such as advance construction are to be utilized, the plan should include estimated annual conversion amounts.

Any costs which are likely to be funded from sources other than Federal-aid should be presented. The amount and sources of funds for the non-Federal share should be clearly discussed.

The plan should address the potential for unanticipated changes in expected funds and the impact on the project. Such changes might include delays or decreases in receipt of project funding, reductions in user fees earmarked for the project, changes in governmental rules impacting the project, etc.

(4) Cash Flow

The plan must include an annual schedule of cash needs versus available cash to meet those needs. It must demonstrate that the project payout schedule for payments to construction contractors and others can be met.

In addition to addressing sources and uses of funds during the construction period, the finance plan should include a long-term pro-forma cash flow projection showing project operating, maintenance and (if applicable) debt service costs and identify the related funding sources to pay them.

(5) Other Factors

The State's needs for other projects in the rest of the State during the period of analysis covered by the finance plan and the impact of the subject project on the remainder of the State's program, should be evaluated and presented.

All special project cost containment strategies being used or planned for later use should be described. These might include design-to-estimated cost for individual project elements (i.e. limit design so as not to exceed a target construction cost), design build, use of cost control teams, management cost control strategies, vendor participation via warranties or guarantees, value engineering, incentive and disincentive clauses, etc.

The plan should describe the major responsibilities, financial and otherwise, of the various parties involved in the project and contain evidence of agreements or commitments.

The plan should describe any special or unique agreements, laws, rules, or regulations in addition to NEPA and Title 23, to which the project is subject. These could include compliance with Federal or State project-enabling legislation, financial agreements and covenants, accounting system reports and audits, etc.

If pertinent, the plan should discuss the liability for subsequent operation and maintenance costs as segments of the project come on line. On some major projects the opening to traffic of a segment of the project (for example, a tunnel or complex traffic management system) could require significant operational resources while other elements of the project are not complete and still require significant construction expenditures.

Should the plan call for mechanisms other than existing funding sources to meet the non-Federal revenue needs or to meet cash flow demands, the likelihood of implementing the mechanisms must be thoroughly analyzed. This would apply to mechanisms such as new taxes, contributions from third parties, and short or long term borrowing. The analysis must address whether authority exists or must be granted through legislation or other means to pursue the mechanisms. In evaluating finance plans the Federal interest will be in the likelihood of realizing the non-Federal revenues and cash flow as opposed to the choice of mechanism.