CIRCULAR UMTA C 7008.1, March 30, 1987
U.S. Department of Transportation
Urban Mass Transit Administration
Subject: URBAN MASS TRANSPORTATION FINANCIAL CAPACITY POLICY
1. PURPOSE. This circular clarifies how the urban Mass Transportation Administration (UMTA), when making grants, will conduct its assessments of the financial capacity of applicants. In addition, it re-emphasizes the need for local officials to strengthen financial capacity assessment throughout the transit project development process.
a. Section 3 (a) (2) (A) (i) of the Urban Mass Transportation Act of 1964, as amended (UMT Act) which requires that the Secretary determine that the applicant has "the legal, financial and technical capacity to carry out the proposed project."
b. Section 9 (e) (3) (A) of the UMT Act which requires an applicant to make a self-certification that it has or will have the legal, financial and technical capacity to carry out the proposed program of projects under Section 9
c. Section 3 (a) (2) (A) (ii) of the UMT Act which requires that UMTA find that the applicant will exert "satisfactory continuing control over the use of the facilities and equipment."
d. Section 9 (e) (3) (B) of the UMT Act which requires grantees to make self-certifications of continuing control.
e. Section 8 (c) of the UMT Act which requires the Secretary to review and approve a program of projects.
f. Section 9 (g) (2) which requires Triennial Reviews of recipients compliance with statutory and administrative requirements.
g. Section 19 of the UMT Act which requires nondiscrimination in any activity funded under the Act.
h. 23 CFR 450.204 (b) (4) of the Joint Federal Highway Administration (FHWA)/UMTA regulations governing the planning process which requires that the Transportation Improvement Program (TIP) include "a realistic estimate of the total costs and revenues for the program period."
i. 23 CFR 450.204 (b) (3) which requires a description of the proposed sources of Federal and nonfederal funds.
j. The UMTA Major Capital Investments policy of 5-18-84, which anticipates an assessment of financial capacity at several stages of the project development process for such investments.
k. UMTA circular 9030.1, "Section 9 Formula Grant Application Instructions," dated 6-27-83.
3. POLICY. This document defines the basis upon which UMTA will make the determinations of financial capacity of grantees required under section 3 of the UMT Act and in reviewing TIP's. For Section 9, it provides similar guidance for grantees making the required self-certifications of financial capacity and for
UMTA to determine compliance during Triennial Reviews. The provisions of this circular will be applied without regard to race, color, creed, national origin, sex or age.
4. SCOPE AND DEFINITION. The policy is applicable to all required determinations of financial capacity under section 3 of the UMT Act and self-certifications of financial capacity under Section 9 of the UMT Act.
There are two aspects to financial capacity: the general financial condition of the public transportation operating enterprise and its nonfederal funding entities; and the financial capability of the agency and its funding entities which includes
the sufficiency of their funding sources to meet future operating deficits and capital costs.
a. Financial condition includes historical trends and current experience in financial factors affecting the ability of a transit agency to operate and maintain the transit system at present levels of service. The information supporting the assessment of financial condition of the agency is usually documented in audited annual financial statements and other financial reports. Financial condition i reflected in working capital levels, current assets versus current liabilities, capital reserves and the presence and status of depreciation accounts, debt levels, trends in transit costs compared to available revenues and trends in relevant economic indicators.
b. Financial capability refers to the stability and reliability of revenue sources to meet future annual capital and operating costs. Assessments of financial capability should cover the period of the TIP. Financial capability considers the nature of funds pledged to support operating deficits and capital programs and 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 and increases due to capital investments and service expansion.
5. DELEGATIONS OF AUTHORITY. This Circular does not impact UMTA delegations of authority.
6. BACKGROUND. Triennial Review reports indicate that the certifications of financial capacity made by grantees are too often made only with a cursory review of the present financial status of the grantee and not with a sufficient tonal review by the grantees of their financial capacity as defined above Typically, there is no recorded forecast of future operating, maintenance and capital costs associated with continued operation at the existing transit system or incremental costs resulting from new transit capital projects. Nor is there typically a financial plan for covering future costs.
General Accounting Office (GAO) reviews and a number of other studies conducted for UMTA have also found inadequacy in those instances where financial plans were available. For instance, only one of the proposed new rail transit system projects reviewed in a study of eleven systems was judged to have an adequate financial plan.
Serious problems can result when financial planning is not adequately performed. Cases include the many "New Start" cities which have been forced to reduce overall service levels in order to afford putting new lines into service and, as been the case far too often, rail lines originally intended to save operating funds but which increased the cost. In other cities, investments have been made on rail lines neither operated at their originally intended level of service nor having the originally intended feeder bus services. Transit agencies with fleets well in excess of peak requirements are widespread in the transit industry, again reflecting the serious miscalculations of the financial requirements to maintain desired service levels.
These factors indicate that improvements in the decisionmaking process and the quality of financial capacity assessments are needed to ensure that transit service is not interrupted due to a lack of financial capacity. When projects are programmed and grants are made, facilities and equipment should remain in service and be maintained and operated as originally specified in the grant contract. This can be assured when there is a high level of financial scrutiny to ensure efficient and effective use of scarce transit funds before the funds are actually committed.
7. EFFECTIVE DATE. This policy is effective as of March 30, 1987. Reviews of financial capacity after this date made by UMTA will take account of the criteria outlined herein. In addition, self-certifications of financial capacity made after this date should account for the criteria herein described. White these guidelines are effective Immediately, grantees will be given the opportunity to reassess financial intonation, develop new financial plans and implement their provisions before these More stringent criteria are applied to grant approval decisions. UMTA will work with grantees to identify any deficiencies and the steps needed to remedy them.
8. ASSESSMENT OF FINANCIAL CAPACITY
a. Financial Capacity Reviews. A determination at financial capacity is required at the stage where commitments to finance projects are made b the grantee and UMTA. For Section 3 grants, UMTA will assess financial capacity both at the stage when TIP's are approved and when selecting projects for Section 3 funds. For Section 9 grants, UMTA will assess financial capacity at the TIP approval stage and grantees will be required to make their own self-certifications at the grant application stage. The documentation supporting these self-certifications will then be reviewed during the Triennial Reviews.
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. Thus, while all grantees should closely scrutinize the financial implications of their capital commitments, UMTA will give special attention to proposals for major service level expansions, as well as proposals for maintaining present levels of service which require major capital investments such as rail modernization, large scale bus replacement or development of new or new required documentation. Reviews at financial capacity will utilize information contained in the TIP's, short-range transit plans, capital budgets and reports on financial operations such as periodic financial statements and audit reports. Reviews conducted locally and by UMTA will provide an opportunity for local officials to understand the financial condition of the transit system and the need to develop financial plans to meet future costs reflected in the investments proposed.
If it is determined that the grantee does not meet the financial capacity requirements as outlined in this circular (e.g., no means exist to meet unfunded operating deficits or if operating and maintenance costs could not be covered by projected revenue sources, etc.), the grantee will be informed of the deficiencies. The grantee would then provide further information or propose how the deficiencies will be remedied. Technical assistance will be available to aid in developing plans for addressing the problems identified. Grants will not be awarded for capital investments until an accord on a plan for remedial action has been reached.
Since the focus of this circular is on the longer term financial implications of capital programs, for the purpose of operating assistance, self-certifications of financial capacity and reviews of these certifications may be made on the basis of only the current financial condition of the operator. Nevertheless, grantees should consider the interrelationship between capital costs and operating costs, including amounts of assistance from Federal, State and local governments, in assessing financial capacity with respect to operating assistance.
Full Funding Contracts for major investments will not be entered into until the plans for financing have been made final. Information shall be provided on the steps which have been taken to put the plan into operation.
By giving early consideration to reviews of financial capacity in the planning and programming process, grantees can greatly facilitate the conduct of the financial capacity assessments needed to meet grant approval requirements. In preparing TIP's, local officials are encouraged to scrutinize proposed programs of projects for sufficiency of funds to cover total capital, operating and maintenance costs over the life of the projects. UMTA will review TIP's along these lines. Where TIP's 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.
b. Planning and Project Development
(1) Unified Planning Work Program. Transportation planning activities such as data base development and the development of analytical revenue and cost forecasting techniques needed to perform financial capacity assessments should be included in the urbanized area's Unified Planning Work Program, required by the UMTA/FHWA joint planning regulations. However, activities carried out by the transit agency as part of its normal budget development and financial analysis process need not be so documented, unless Section 8 funds are used. In addition, when states and metropolitan planning organizations certify that the planning process is being carried out in accordance with Federal requirements they should take into account the region's process for balancing the cost of approved plans and programs with financial capacity.
(2) Major Systems Investment Policy. An assessment of financial feasibility should be a major component of studies conducted under UMTA's Major Investments Policy Statement of May 1984. Such studies should incorporate or update as appropriate the results of the systemwide financial capacity analyses in defining alternative transportation improvements and related financing options during Alternatives Analysis. However, approval to enter Alternatives Analysis will not be given it the financial condition of the transit implementing agency and its funding sources, and their capability to successfully undertake major investments while continuing to operate, maintain and reinvest in the existing transit system, is tenuous based on then-existing information.
Approval to enter the preliminary engineering step of the process defined by the Major Investments Policy will be predicated, in part, on the quality of the proposed financing plan for the locally preferred alternative emerging from Alternatives Analysis. This will, be measured on the basis of the region's capability to implement, operate and maintain the project, as well as the remainder of the region's transit system, over the preferred project's useful life.
c. Program Management and Compliance. Conventional grant monitoring will place additional emphasis on 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 retained by UMTA, routine audits and reviews and, for Section 9 projects, the Triennial Reviews required by Section 9 (g) (2) of the UMT Act. They provide UMTA the opportunity to review compliance with the requirement that the recipient have financial capacity to carry out the proposed program of projects. During these reviews, UMTA will assess the basis used by the grantee to certify financial capacity, consistent with the criteria for such self-certifications as described above.
9. TIMING AND IMPLEMENTATION/TECHNICAL ASSISTANCE. Some grantees
may require time to structure procedures and reviews to strengthen their assessment capabilities. In such cases, UMTA will take into consideration the grantee's pledge to remedy deficiencies within a reasonable period of time.
As further support of this policy, UMTA has made analyses of financial capacity a National Emphasis Area in its Section 8 Planning and Technical Studies Program. In addition, supplemental technical guidance describes the elements of financial capacity analysis. It includes detailed guidance on analysis techniques and provides criteria and standards which could be applied in a self-rating of financial capacity. Training and technical assistance will also be available to grantees.
S/ Ralph L. Stanley, Administrator
UMTA Headquarters (U-W-2)
UMTA Regional Offices (U-X-2)
OPI: Office of Budget