CIRCULAR
U.S. Department of Transportation
Federal Transit Administration
FTA C 7008.1A
January 30, 2002
Subject: FINANCIAL CAPACITY POLICY
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1. PURPOSE. This circular clarifies how the Federal Transit
Administration (FTA), when making grants, will conduct its assessments
of the financial capacity of grant applicants. In addition, it
incorporates by reference guidance on financial capacity assessment in
the development of major capital projects exceeding $1 billion in
total cost.
2. CANCELLATION. This circular cancels UMTA Circular 7008.1,
"Financial Capacity Policy," dated 3-30-87.
3. REFERENCES.
a. Federal Transit Laws, Chapter 53 of Title 49, United States Code.
b. 49 CFR Part 18, Uniform Administrative Requirements for Grants and
Cooperative Agreements to State and Local Governments, which
establishes the basis upon which grantees must develop and report
financial information regarding grants.
c. Section 5303 (f)(1)(B) of 49 U.S.C., "Developing Long-Range
Transportation Plans," which requires that such plans include a
financial plan that demonstrates how the long-range plan can be carried
out.
d. Section 5304 (b)(2) of 49 U.S.C., "Transportation Improvement
Program (TIP)," which requires the Metropolitan Planning Organization,
transit agency and the State to develop estimates of funds "that are
reasonably expected to be available to support program implementation."
e. Governmental Accounting Standards Board Statement 34 (GASB-34)
"Basic Financial Statements – and Management’s Discussion and Analysis
– for State and Local Governments" Norwalk, CT, June 1999, which
describes how and when grantees must report their capital management
plans and major projects.
f. FTA Circular 5010.1C, "Federal Transit Administration Project
Management Guidelines," dated 10-1-98, which describes how grantees
must develop and maintain financial information regarding capital
projects.
g. FTA Guidance for Transit Financial Plans, dated 6-00, which
describes how a grantee must prepare and update an annual financial
plan to complete a major capital project.
8. POLICY. This circular defines the basis upon which FTA will
make the determination of financial capacity of grantees required under
49 U.S.C. 5309 (including major capital projects costing $1 billion and
above) and in reviewing Transportation Improvement Plans (TIPs). For 49
U.S.C. 5307, the circular provides similar guidance for grantees making
the required self-certifications of financial capacity and for FTA to
determine compliance during Triennial Reviews. Transit grantees should
make capital investment plans on the basis of current and projected
capability to maintain and operate current assets, and to operate and
maintain the new assets on the same basis, providing at least the same
level of service, for at least one replacement cycle of such assets or
20 years, as appropriate.
9. APPLICABILITY. This circular applies to all required
determinations of financial capacity regarding projects under the
transit Capital Program and the Urbanized Area Formula Program.
10. DEFINITIONS. All definitions in 49 USC Chapter 53 apply to
this circular, as well as the following definitions.
a. Projected Cash Flow Statement – This is a multi-year projection,
back five years (actual) and forward twenty years (projected) of
revenues and expenses (and related items such as depreciation) relating
to the grantee as an organization. It identifies expected revenues and
expenses for each year, incorporating and highlighting the effects of a
planned capital project or program of projects.
b. There are two basic aspects to financial capacity: (1) the general
financial condition of the public transit grantee and its
nonfederal funding entities; and (2) the financial capability
of the grantee and its nonfederal funding entities. The latter is
understood to include an assessment of the grantee’s ability to fund
current capital projects as well as ongoing operating needs.
Financial Condition – This includes historical trends and
current experience in the financial ability of the grantee to operate
and maintain its transit system at present levels of service. The
information supporting the assessment of the financial condition of the
grantee is usually provided in audited financial statements and other
financial reports. Financial condition is reflected in working capital
levels, cash balances, capital reserves, the presence and status of
depreciation accounts, debt levels, trends in transit costs as compared
to available revenues, and trends in other relevant economic
indicators. Satisfactory financial condition means that the grantee
can pay its current costs from existing revenues.
Financial Capability – This refers to the stability and
reliability of revenue sources needed to meet future annual capital and
operating and maintenance costs. Assessments of financial capability
shall cover the greater of the period equivalent to one replacement
cycle of the basic system; the retirement of any debt issued to finance
the capital project; or 20 years. Financial capability considers the
nature of funds pledged to support operating costs and capital
replacement programs, as well as forecasted changes in fare and
non-fare revenues. Capital costs include both replacement and
rehabilitation of existing equipment and facilities as well as new
investments. Operating and maintenance costs include those for the
present system, as well as increases due to capital investment and
service expansion. Satisfactory financial capability means the
grantee’s ability to meet its expansion costs in addition to its
existing operations from projected revenues.
c. "Mega-project" – This is a project with an estimated total cost of
$1 billion or more, as described in Section 5327 (f). In addition to
meeting other financial capacity requirements, such projects are
required to annually file a financial plan with the Secretary. Such
plan shall be based on detailed annual estimates of the cost to
complete remaining elements of the project, as well as reasonable
assumptions, as determined by the Secretary during the project
development process, of future increases in cost to complete the
project. Mega-projects also include any projects supported with a loan
or loan guarantee from the Transportation Infrastructure Financing and
Innovation Act (TIFIA), regardless of project cost.
4. BACKGROUND. Since the last issuance of a circular on
Financial Capacity (March 30, 1987), several factors have changed the
environment for financing public transportation service. Federal
funding for public transportation investment has more than doubled, as
has State and local funding. Laws have changed, providing greater local
flexibility in transportation investment decisions, but also requiring
a more rigorous framework for these decisions. Furthermore, with rising
flexibility in the use of Federal and local funding has come an
increase in the use of debt to meet the rising demand for public
transportation service.
Section 5307(d)(1)(A) of Title 49, Chapter 53, requires a grantee
receiving FTA assistance under the Urban Formula Program to certify
that it "has or will have the legal financial and technical capacity to
carry out the program [of projects]." Section 5309(e)(1)(C) requires
the grantee receiving assistance under the Capital Grant Program to
demonstrate that the project is "supported by an acceptable degree of
local financial commitment, including evidence of stable and dependable
financing resources to construct, maintain, and operate the system or
extension." Taken together, these two requirements cover the financial
capacity concept – How well have you managed until now, and how will
you manage in the future? These issues are examined through triennial
reviews, annual audits, and other periodic evaluations as required in
Section 5307(i).
In addition, Section 5307(g)(3) states "The cost of carrying out part
of a project includes the amount of interest earned and payable on
bonds issued by the State or local governmental authority to the extent
proceeds of the bonds are expended in carrying out the part." This
capability allows the grantee to repay interest costs of lease or debt
financing with Federal grants funds. [See also Section 5309(n)(2) which
includes similar language, as well as a requirement that the grantee
only issue debt at then reasonably available market interest rates.] As
debt is used to advance capital replacement or service expansion
projects, it becomes increasingly important for the grantee to address
the effects of such debt on its current and projected ability to
operate its system. A decline in projected revenues may force delays or
elimination of planned capital improvements in order to meet mandatory
principal and interest payments. The sensitivity of a grantee’s income
to such fluctuations should be clearly outlined in supporting
documentation of financial reports and projections.
Finally, GASB-34 requires State and local governments (transit
grantees, including statewide transit operators, come under the
definition of State and local governments) to: identify and value
assets for inclusion in annual balance sheet reports; report
infrastructure depreciation annually; and select asset management
methods for consistent reporting from year to year. These requirements
dovetail with FTA’s financial capacity policy, which requires that a
1999 baseline for the value of capital assets and total annual revenues
be established. Beginning in 2001, GASB-34 also requires governments to
report prospectively on new infrastructure for States and local
governments collecting $100 million or more in annual revenues.
Beginning in 2002, local governments collecting less than $100 million
in annual revenues must also develop such reports. Local governments
will report retroactively on all existing major infrastructure from
2003 onward. The reporting methods required to satisfy GASB-34 will be
considered sufficient to satisfy the requirements of this circular as
well.
5. REQUIREMENTS.
a. Financial Capacity Assessments. A determination of financial
capacity is required at the stage where commitments to finance projects
are made by the grantee and FTA. For Capital Investment grants, FTA
will assess financial capacity both at the stage when TIPs are approved
and when selecting projects for Full Funding Grant Agreements (FFGA).
For Urbanized Area Formula grants, FTA will assess financial capacity
at the TIP approval stage, and grantees will be required to
self-certify at the grant application stage. The documentation
supporting these self-certifications will be examined during triennial
reviews.
By giving early consideration to financial capacity in the planning and
programming process, grantees can greatly facilitate the financial
capacity assessments needed to meet grant approval requirements. In
preparing TIPs, local officials are encouraged to examine proposed
programs of projects (as contained in Long Range Plans) for sufficiency
of funds to cover total capital, operating and maintenance costs over
the lives of the projects, as well as the operating and maintenance
costs of the current system. FTA will evaluate TIPs based on these
factors. Where TIPs provide evidence of satisfactory financial
capacity, the reviews made at the time of grant approval will be
limited to assuring the continued validity of assessments made at the
TIP review stage.
1. Level of information required - The level of detail of the financial
capacity assessments and subsequent reviews shall be consistent with
the size of the transit system being considered and the scale of any
capital investments being proposed. The level of detail is developed in
consultation with the relevant FTA Regional Office. While all grantees
should closely scrutinize the financial implications of their capital
commitments, FTA will give special attention to proposals for major
service level expansions, as well as proposals to maintain present
levels of service that require major capital investments such as rail
modernization, large scale bus replacements, or development of new or
replacement maintenance facilities. These investments often have a
significant impact on the financial condition of transit agencies and
their funding sources.
2. Sources of information - Reviews of financial capacity will use
information contained in the Long Range Transportation Plans,
Transportation Improvement Plans, short range transit plans, capital
budgets, financial plans (for grantees seeking New Starts funding) as
defined in "Guidance for Transit Financial Plans" dated June 2000, and
reports on financial operations such as periodic financial statements
or single audit reports. Reviews conducted locally and by FTA will
provide an opportunity for local funding officials to understand the
financial condition of the transit system and how it will meet the
future costs reflected in proposed investments.
3. Corrective action - If FTA determines that the grantee does not meet
the financial capacity requirements as outlined in this circular, the
grantee will be informed of the deficiencies. The grantee will then be
required to provide further information or propose how the deficiencies
will be addressed. Technical assistance will be available to help in
developing plans to address the problems identified. Additional grants
will not be awarded for capital investments until an agreement on a
plan for corrective action has been reached.
4. FFGA limitation - FTA will not enter into FFGAs until the plans for
financing have been completed and a Financial Capacity Assessment has
been performed by the Financial Management Oversight Contractor (FMOC)
retained by FTA. The plans for financing must demonstrate that the
grantee can complete the FFGA project and continue to operate its
existing service with available resources. The grantee will provide
information on the steps that have been taken to put the financial plan
into operation.
e. Planning and Project Development.
1. Unified Planning Work Program. Transportation planning activities,
such as database development and the development of analytical revenue
and cost forecasting techniques needed to assess financial capacity,
must be included in the urbanized area’s Unified Planning Work Program
of the Metropolitan Planning Organization. In addition, when States and
metropolitan planning organizations certify that the planning process
is being carried out in accordance with Federal requirements, they must
describe the region’s public involvement process for balancing the cost
of approved plans and programs with current and projected revenues.
2. New Starts Capital Investment Policy. FTA must find that a proposed
project is supported by an acceptable degree of local financial
commitment, as required by Section 5309 (e)(1)(C), in order to proceed
with a FFGA. The local financial commitment to a proposed project will
be evaluated based on: the stability and reliability of the proposed
local share of the project’s capital costs; the strength of the
proposed capital financing plan; and the ability of the local transit
agency to fund operation of the system as planned, once the project is
built.
c. Program Management and Compliance. Regular grant monitoring will
emphasize whether the findings and self-certifications of financial
capacity made at the grant approval stage retain their validity. The
instruments for this monitoring include periodic progress reports and
meetings, activities performed by Project Management Oversight (PMO)
contractors and Financial Management Oversight Contractors (FMOCs)
retained by FTA, routine audits and reviews, and, for Section 5307
projects, the Triennial Reviews required by Section 5307 (i)(2).
These instruments provide FTA the opportunity to review compliance with
the requirement that the recipient have financial capacity to carry out
the proposed program of projects. During regular grant monitoring, FTA
will assess the basis used by the grantee to certify financial
capacity, consistent with the criteria for such self-certifications as
described in this Section.
Jennifer L. Dorn
Administrator