Federal Transit Administration - Planning & Environment

"Financial forecasting appears to be a science that makes astrology look respectable."

This section describes the projection of revenues and the use of revenue forecasts in the development of the financial plan. Transit agency revenues can be grouped into seven major revenue categories, each with a different policy environment requiring different methods for projecting future revenues. These are:

Forecasting revenues for some sources is a highly structured statistical exercise, while others require only "reasonable" assumptions. Some revenue sources enter long-range plans temporarily, only to be replaced by other sources, or failing that, result in the cancellation of projects. The closer to actual construction, the more certain and committed the revenue source must be. In the long term, the financial plan is just that, a plan. The plan is not to be confused with certainty at one extreme nor a wish list at the other. The financial plan is a reasonable and defensible expectation of the future revenues and expenses of the transit agency.

Operating revenues are revenues collected by the transit agency as a result of being the owner and operator of a transit system. The largest operating revenue category, by far, is fare revenues. However, numerous other operating revenue sources can be observed at various transit agencies, though these sources are generally a small proportion of total revenues. These other operating revenues include parking, advertising, concessions, and contract services.

The fare revenue projection is used to estimate the amount of revenue the transit agency will collect from user fees. Fare revenues are projected based on ridership forecasts and assumptions about fare levels for the existing and proposed system, and the structure of the fare system.

Assumptions about future fare levels and the structure of the fare system are critical to forecasting operating revenues. Traditionally, fares are assumed to increase with the adopted inflation forecast. This assumption is quite likely a good one. Nationwide, increases in base fares have exceeded inflation by a solid margin. Between 1984 and 1999, APTA estimates that base fares have increased 91 percent compared to 60 percent for the Consumer Price Index for urban consumers (CPI-U).

APTA calculates fare revenues per unlinked trip that account for the impact of discounts and better reflect the actual fare structure than base fares. Average fare revenue per unlinked trip increased 80 percent between 1984 and 1999 implying that, on average, the fare structure of APTA members has been moving toward the increased use of fare discounting. Still, growth in fare revenues per unlinked trip exceeds the rate of inflation over much of the past two decades. Figure 8-3.-1 shows that fare revenues per unlinked trip have increased in real terms (adjusted for inflation) with two multi-year periods of declining fares in real terms.

Transit agencies do not generally increase fares every year. Fares may go many years before finally moving in one large adjustment to a new level to compensate for inflation. If the financial plan assumes annual increases to keep pace with inflation, fare revenues will be overestimated. The financial plan should project fare increases at increments that reflect the historic time lag between fare increases for the transit agency in question. For long range financial planning and in the absence of any other plans to the contrary, assuming a constant fare structure and periodic fare increase to keep pace with inflation is likely to be a good assumption.

The degree of detail applied to the revenue forecasting exercise depends on the nature and scope of the change under consideration. Evaluating a change of fare policy, either fare structure, fare levels, or both requires a fairly detailed analysis of the revenue impacts. If the financial plan is supporting the introduction of a new transit capital investment under an existing fare structure, the forecasting of fare revenues can be quite simple.

Evaluating a change in the fare structure or the short run impacts of a fare increase should be supported by a thorough evaluation of the following:

The fare structure defines the target market segments and specifies the relative fare level paid by each group. Cash fares are established for each fare category (e.g. express, peak, off-peak, elderly, etc.) Then a fairly detailed analysis of travel demand is required for each target market segment.

Travel demand must be forecast for the existing and proposed system to derive fare revenue forecasts. Ridership is based on fare policy, service levels, and regional demographic changes. Fare policy and service levels are frequently developed through an iterative process accounting for the expected ridership and revenue impacts and subject to local political and financial considerations.

The regional travel demand model is not run for every year in the forecast period because data on population and employment is not available annually. The regional travel demand model is generally run for some base year, the opening years of any major capital investments, and for a forecast year, typically 20 to 25 years in the future. In some cases, forecasts for 5 or 10-year increments are available. Most regional travel demand models assume riders pay the full cash fare and almost always assume that fares are constant in inflation adjusted terms.

If the agency is interested in long range planning or project level evaluation within an existing fare policy, the financial plan will generally use the output of the regional travel demand model, or the network model used in project planning, to get point estimates of system-wide and project level ridership. Regional network models generally are disaggregated by market sector (usually income or auto ownership is the stratification) so that ridership estimates are available by market sector. The agency then may "fill in the blanks" between the available estimates through trend analysis (interpolation).

If the agency is planning to change the fare structure or level, the transit agency must typically apply a separate model to prepare annual ridership estimates that are sensitive to the projected fare policy changes. Elasticity models are normally used to estimate ridership changes resulting from changes in fare policy. Elasticity models require previous (or current period) ridership and fare policy information to forecast future conditions, unlike network models that "build up" ridership forecasts based on population, employment, land use, and the relative cost of transportation. Elasticity models should be disaggregated by time of day (peak, off-peak), income strata, and mode (bus and rail) if possible, since evidence suggests that fare elasticities are significantly different between these distinct transit markets. Ideally, elasticity estimates will be determined using data from the specific region where they are being applied. A detailed discussion and guide to using fare elasticity models to forecast transit ridership can be found in the APTA report, Fare Elasticity and Its Application to Forecasting Travel Demand (1991).

After fare policy assumptions and annual travel demand estimates are complete, fare revenues forecasts may be prepared. The first step is to project fare revenue based on assumed fare policies and travel demand estimates, preferably disaggregated by travel market (user groups and time periods) to achieve the most accurate forecasts. Gross fare revenue is found by summing across market segments.

Complicating matters is the fact that travel demand models use the actual cash fare to describe the price of a trip rather than the actual revenue per trip. Monthly, weekly or daily passes, student or senior citizen discounts, special promotions, and fare evasion will make the average revenue per trip significantly lower than the cash fare. To account for this effect, the fare revenue forecasts should be multiplied by a "discount factor" calculated from existing revenue and ridership data.

It is possible to develop an average system-wide discount factor that converts the cash fare into average fare paid per rider by dividing existing fare revenues by the revenue that would be generated if all passengers paid full fare for their route. Fare revenue forecasts are calculated by multiplying the projected ridership by the cash fare assumption and multiplying again by the discount factor. This factor can be applied to other alternatives and proposed projects to generate revenue forecasts.

An average discount factor applied across all transit markets could distort fare revenues to the extent that new projects or future services serve travel markets different from base year conditions. If the population is aging, senior citizen discounts may be relatively more important. Low-income travelers making non-work trips tend to use cash fares more frequently than other market sectors. If this market sector becomes more or less important relative to other markets, the average discount factor may introduce added distortions.

For the best results, the financial planner would estimate a set of discount factors for each distinct market sector in the travel demand forecast and explicitly account for changes in the type of trips attracted to future services. These discount factors would be applied to the fare revenue forecasts for each market sector, then summed to calculate fare revenues. The disaggregate method generally requires on board surveys that include detailed fare payment and demographic information.

The operating financial plan should document the base fare, the average fare paid per rider (accounting for the discount factor), and the ridership forecast. Annual fare revenue forecasts are shown as the product of average fare and ridership within the financial plan. Documentation of the methods and procedures used to estimate ridership, average fares, the fare discount factor and the level of disaggregation should be referenced and available.

Other operating revenues, including parking, advertising, concessions and contract services, are generally a small portion of most operating budgets. For example, the New York MTA collects about 2.5 percent of all revenue from non-fare operating revenues. MARTA in Atlanta receives about 1.25 percent of all revenue from non-fare operating revenues. Some of these revenues are generally sensitive to passenger loads, such as parking and some advertising and concessions, while others such as contract services and external vehicle advertising, may be unresponsive to passenger volumes.

Vehicle advertising revenues can be extrapolated from past experience or, in the case of introduction of a new mode, comparable transit agency data may be used. Station advertising can be extrapolated from past experience or peer transit agencies with adjustments for the strength of the local outdoor advertising market. Concession revenues can be estimated from past experience or from peer transit agencies with adjustments for passenger volumes at the concession facilities. Forecasts of contract service revenues should only be based on past agency experience.

Other operating revenues are generally a consistently growing, yet small amount of revenue. The financial plan should break out each revenue category and forecast growth separately for each if significant revenues are anticipated from one of these sources in the future. However, if these revenues are expected to remain generally trivial amounts, they may be aggregated into a single category and inflated based on historical growth patterns.

Dedicated taxes and user fees are an increasingly common way to fund transit operations and projects. Examples include general sales taxes, property taxes, targeted taxes (gas tax, rental car tax, hotel tax, etc.), vehicle license fees, and tolls. These types of funding sources can provide a great deal of revenue that can be stable and grow with regional population and economic activity. The transit agency can have a good deal of confidence in yearly funding levels in comparison to depending on annual appropriations from state or local governments. In general, the broader the tax, the more dependable and predictable the revenue stream. General sales taxes are the most stable and dependable widely used tax revenue source.

Dedicated taxes and user fees are usually major revenue generators for the agencies that have them. These revenues can support pay-as-you-go financing for major projects, serve as collateral for bonds issued to fund major projects, and provide a large percentage of the operating budget of many transit agencies. The importance of these revenues to the financial structure and health of many transit agencies demands a detailed and defensible forecast of future revenues.

Tax and user fee forecasts are generally produced using trend analysis or regression analysis. Trend analysis is easy to understand and apply, requires little data beyond historical revenue figures, and is relatively accurate for short range forecasting. Trend analysis is performed by calculating past revenue growth rates, preparing some assumptions about likely future revenue growth based on past experience, and using these growth assumptions to estimate future revenues.

Multiple regression models are more complex but produce better long range forecasts and provide a much deeper understanding of the factors that drive revenue growth. Regression analysis is a statistical technique that allows the analyst to estimate the sensitivity of various revenue streams to regional economic conditions or other factors that influence revenues. Financial analysts not already familiar with multivariate regression techniques are directed to other guidance or a good econometrics textbook. The Technical Addendum to this chapter provides a detailed example of the development of a regression model and forecasts for retail sales.

Collect historical data on regional economic indicators and revenues;
Develop or purchase long term economic forecasts for the region to serve as the base assumptions for revenue forecasts;
Estimate the relationship between some of the economic indicators and the tax base of the revenue source using statistical techniques (multiple regression analysis) and historical economic and revenue data; and
Calculate the resulting tax revenue for each year in the analysis period using the estimated statistical relationships and the forecasted regional economic indicators.
While not prohibiting the use of trend analysis for financial planning, the US Department of Transportation has long cautioned against using trend analysis in long range forecasts in transportation plans.

"Because trend analysis is unable to objectively account for changes in trends and ultimately in turning points, its usefulness (accuracy) deteriorates with the length of the forecast….While this criticism actually applies to all forecasting techniques, it particularly applies to straight line extrapolations. The forecaster then is advised to be extremely careful in applying this technique to any long term forecast." Page 5-8 in Transportation Revenue Forecasting Guide, FHWA/UMTA, US Department of Transportation, 1987.

In choosing a forecasting method, the financial analyst should consider the importance of the funding source to the financial success of the agency and the importance of forecast accuracy to supporting the financial plan. If the revenue source is not a critical element of the financial plan or if even the most pessimistic assumptions regarding revenue trends still produce revenue forecasts that easily exceed planned expenditures, trend analysis may be sufficient.

In cases where a tax or user fee is a critical element of the long term health of the transit agency and the success of the transit agency’s financial plan hinges on realizing continued growth in that revenue source, regression analysis is the preferred method for forecasting these revenues. Regression analysis allows the forecaster to understand the factors that drive revenue growth and can use this information to inform the financial planning process.

In the past, some areas have experienced wide variations in their revenues from sales taxes. Understanding the impact of economic conditions on local tax and user fee revenues can provide advance information about the expected change in revenues in the short term and help agencies plan accordingly. For instance, some transit agencies rely on taxes linked to visitor travel (such as hotel taxes or car rental surcharges). If trend analysis is used to forecast these revenues, the financial analyst will most likely not have a good idea about how much revenues would decline if visitor travel declined suddenly due to economic or other factors. A regression model would allow the financial analyst to anticipate the magnitude of the expected revenue decline much more rapidly and accurately because the causal link between visitor travel and tax revenues would be known.

Regardless of the method used, there is a good deal of inherent uncertainty in any forecasting exercise. The economic forecasts that serve as the drivers of the tax revenue forecasts are uncertain. The statistical relationships between tax revenues and economic indicators are uncertain. Future policy changes, such as changes to the tax rate or tax base, can also cause actual revenues to deviate from expectations. The financial plan should include a detailed sensitivity analysis to understand the impact of the range of economic and policy scenarios on the expected revenue stream.

Economic indicators are external to the transit operator, but affect service needs and revenues. Forecasts of economic conditions are used for planning future service levels, for generating travel demand forecasts, for preparing revenue forecasts, and for estimating certain future costs. Useful economic indicators include interest rates, inflation rates, employment and population growth and their spatial distribution, income growth, and certain types of economic activity. Service levels and travel demand forecasts depend on the level and distribution of population and employment. Labor costs depend on service levels and inflation forecasts. Debt service costs depend on interest rate forecasts. Tax and user fee revenues depend on some or all of these economic variables.

Economic forecasts come from a variety of sources. They may be purchased from economic forecasting firms, or obtained from economists at local universities or government agencies. Any reputable, unbiased source is acceptable.

Regardless of the source chosen, transit agencies should follow three basic principles in their use of economic forecasts:

The benefit of using a complete set of economic forecasts from a single source is that all of the data will be consistent. A set of economic forecasts will be based on a single economic forecasting model and all the economic indicators will at least be related to each other in ways that make theoretical sense. Higher inflation means that interest rates will be higher, labor costs may rise faster with low unemployment, while rapid employment growth usually accompanies rapid population growth. Using a consistent set of economic indicators ensures that forecasts based on different indicators are economically coherent.

The transit agency must also ensure that all areas of transit planning make use of the same set of forecasts. If the service plans use different economic forecasts than the regional travel demand forecasts, decisions could be made based on contradictory information. The transit financial plan must be based on the same information used to develop ridership forecasts and service plans. These forecasts should be consistent with the forecasts used in the metropolitan planning process to prepare the long-range transportation plan.

Economic forecasting firms and universities will usually provide a set of economic scenarios to represent a range of possibilities. These scenarios almost always include a high growth and a low growth scenario. These alternative scenarios should be the basis on which sensitivity analysis is performed with respect to economic conditions. These scenarios are superior to simply altering economic indicators on an ad hoc basis since they present coherent sets of economic information with a firm theoretical foundation.

Federal formula funds provide a significant amount funding for the capital maintenance and project funding needs of transit agencies. Depending on the transit agency, federal formula funds can provide more than half the total capital budget. Projecting the revenues from federal formula programs can go a long way toward nailing down the revenue forecasts for the transit agency. Since these funds are subject to annual appropriations and not directly tied to economic conditions, the methods used to forecast revenues from these sources is much more ad hoc.

Moreover, the revenues from the formula programs cannot be projected only by projecting the future size of the federal program. The recipient must also ascertain the relative standing of the region compared to other regions around the country. Figure 8-4 displays the change in transit formula funding for a selection of metropolitan areas and total formula program growth between 1996 and 2001. The characteristics of the metropolitan area and the transit system have a major impact on the growth in federal formula funding to specific regions.

The following sections describe the funding programs and the methods used to develop funding assumptions for the future. The focus is federal programs for urbanized areas, though transit agencies in non-urbanized areas could apply the principles contained here to develop funding assumptions for the Section 5311 Non-Urbanized Area Formula program.

The Section 5307 Urbanized Area Formula Program makes Federal resources available to urbanized areas and to Governors for transit capital and operating assistance in urbanized areas and for transportation related planning. Eligible purposes include planning, engineering design and evaluation of transit projects and other technical transportation-related studies; capital investments in bus and bus-related activities such as replacement of buses, overhaul of buses, rebuilding of buses, crime prevention and security equipment and construction of maintenance and passenger facilities; and capital investments in new and existing fixed guideway systems including rolling stock, overhaul and rebuilding of vehicles, track, signals, communications, and computer hardware and software. All preventive maintenance and some Americans with Disabilities Act complementary paratransit service costs are considered capital costs.

The preferred method for estimating future revenues from federal formula allocations would begin with the agency’s past formula allocation and related growth. An estimate of the future growth of the federal transit program should be prepared based on growth trends of past funding levels. The formula used to distribute funds should be assumed to remain constant.

The funding is not distributed evenly among transit agencies as shown in Figure 8-3. Dallas increased its Section 5307 apportionments by 70 percent between 1996 and 2001, while Philadelphia’s allocation increased less than 45 percent. The Section 5307 formula program is based primarily on fixed guideway vehicle revenue and route miles, bus revenue vehicle miles, population, and population times density. The growth of a given metropolitan area’s transit service levels, population and population density relative to all other metropolitan areas of a certain size, largely determines the magnitude of the allocation of Section 5307 formula funds. For example, Dallas, with a rapidly growing transit system and region, received a growing share of the Section 5307 formula program while Philadelphia, with a slowly growing transit system and region, lost ground. The development of reasonable forecasts for future Section 5307 formula allocations requires some idea of the relative growth of a given region and its transit system relative to the national average.

Generally speaking, transit agencies in rapidly growing cities with rapidly growing transit systems will find that their formula funding grows slightly faster than the projected growth in the federal program, while slower growing metropolitan areas with large, established transit systems may find that their formula funding grows slower than the projected growth in the federal program.

A "fixed guideway" refers to any transit service that uses exclusive or controlled rights-of-way or rails, entirely or in part. The term includes heavy rail, commuter rail, light rail, monorail, trolleybus, aerial tramway, inclined plane, cable car, automated guideway transit, ferryboats, that portion of motor bus service operated on exclusive or controlled rights-of-way, and high-occupancy-vehicle (HOV) lanes.

Eligible purposes for Section 5309 Fixed Guideway Modernization funds are capital projects to modernize or improve existing fixed guideway systems, including purchase and rehabilitation of rolling stock, track, line equipment, structures, signals and communications, power equipment and substations, passenger stations and terminals, security equipment and systems, maintenance facilities and equipment, operational support equipment including computer hardware and software, system extensions, and preventive maintenance.

These funds are allocated by a statutory formula to urbanized areas with rail systems that have been in revenue service for at least seven years. The formula is based on the revenue vehicle miles and route miles of the fixed guideway transit system that have been in operation for at least seven years.

Transit agencies that have built large transit systems and extensions to existing systems in the last seven years will continue to take an increasing percentage of future rail modernization funding as the recently build sections reach seven years of age. The larger the recent investments that an agency makes relative to the size of the previously existing system, the greater the annual percent growth in formula allocations from Section 5309 Fixed Guideway Modernization, which is clearly evident in Figure 8-3.

Los Angeles, Dallas, Washington DC, and Atlanta all had very large gains in Section 5309 Fixed Guideway Modernization allocations while Philadelphia and New York were below the national average. These allocations result from the relative size of the transit systems and the relative growth in service. New York Metropolitan Transit Authority (NY MTA) operates over 1,600 fixed guideway route miles compared to 103 for the Washington Metropolitan Area Transit Authority (WMATA). A 10-mile extension would increase NY MTA’s system by just over 0.5 percent while the same 10-mile extension would increase WMATA’s system by nearly 10 percent.

Traditionally, financial plans have assumed that federal formula funds grow at the rate of inflation. Under TEA-21, the funding levels for all major transportation programs were "guaranteed", providing a level of certainty in the annual funding stream that had previously been lacking. Federal program funding levels throughout TEA-21 exceeded the rate of inflation. Funding levels for authorization periods after TEA-21 are usually assumed to continue growing at the rate of inflation.

Every Metropolitan Planning Organization (MPO) prepares a Transportation Improvement Program (TIP) and a Long-Range Transportation Plan. The TIP describes the funding levels, sources and construction schedules for projects to be constructed over the next three to five years. The Long Range Transportation Plan describes the proposed projects and assumed funding levels from all sources over the next 20 years. The TIP and Long Range Plan are reviewed by FHWA and FTA to ensure that they are "fiscally constrained", which means that they are based on reasonable assumptions for all project costs, schedules and funding sources including federal formula funds. The financial plan for the transit agency should assume the same formula funding levels as those found in the local MPO’s TIP and Long Range Plan.

Capital grants are provided to fund some percentage of a planned project. The federal government provides capital grants in the form of Full Funding Grant Agreements (FFGAs) through the Section 5309 New Starts program. The Section 5309 Bus program provides capital grants for bus purchases and other bus related projects. Sometimes, state or local governments provide capital grants as lump sum appropriations to fund some share of planned transit projects. State and local governments rarely have dedicated grant programs, though there are exceptions. Consequently, state and local grants are generally secured as separate appropriations.

This program provides funds for construction of new fixed guideway systems or extensions to existing fixed guideway systems. Eligible purposes are light rail, rapid rail (heavy rail), commuter rail, monorail, automated fixed guideway system (such as a "people mover"), ferries, busway/high occupancy vehicle (HOV) facilities, or an extension of any of these. Projects become candidates for funding under this program by successfully completing the appropriate steps in the major capital investment planning and project development process.

Major new fixed guideway projects or extensions to existing systems financed with New Starts funds, typically receive these funds through a FFGA that defines the scope of the project and specifies the total multi-year federal commitment to fund the project. Funding allocation recommendations are made in a report to Congress called the Annual Report on New Starts.

Theoretically, an agency planning a rail project could assume that 80 percent of the capital cost of the project will be funded by the federal government through the Section 5309 New Starts program. Project sponsors are generally required to fund at least 20 percent of the project cost with non-federal funds. However, very few project sponsors receive a FFGA for 80 percent of the cost of a project. Proposed New Starts funding averages about 50 percent of total project costs with state, local, or other federal funding comprising the other half (see Table 8-13). Various proposals to legislate a maximum share of between 50 and 60 percent have been put forward.

Current trends suggest continued pressure to reduce the share of project costs borne by the Section 5309 New Starts program so that more projects can be supported within federal resource constraints. Realistic financial planning will acknowledge these federal financial pressures and plan accordingly. Project sponsors should not generally assume 80 percent New Starts funding.

Even if a FFGA is signed specifying the funding amounts to be provided by the Section 5309 New Starts program, Congress does not always provide appropriations exactly according to the schedule set forth in the FFGA. To date, Congress has always provided the total federal share specified in the FFGA, but often does not provide those funds as planned by the project sponsor and set out in Attachment 6 (payout schedule) of the FFGA (see Table 8-14).

Table 8-14 clearly shows that funds do not always flow according to the payout schedule of a negotiated FFGA. Transit agencies need to expect and plan for deviations in the annual funding stream. Financial planners should note that several of these projects have a final FFGA payment year of FY 2002, yet do not receive the amount of the final payment. In particular, the Los Angeles North Hollywood extension was completed and operating during 2001, yet has about $40 million remaining to be paid in FY 2003 and beyond.

Project	FY 2002 Proposed Budget	Final FFGA Payment Year	Final FY02 Approp-riations	Difference from FFGA Payout Schedule
BART Extension to the SFO Airport	80,610,000	FY 2006	75,673,790	(4,936,210)
Los Angeles- North Hollywood	49,686,469	FY 2002	9,289,557	(40,396,912)
Sacramento- LRT Extension	328,810	FY 2002*	328,000	(810)
San Diego-Mission Valley East LRT Extension	65,000,000	FY 2005	60,000,000	(5,000,000)
San Jose Tasman West LRT Project	113,336	FY 2002*	113,336	0
Denver- Southeast Corridor LRT	71,800,000	FY 2008	55,000,000	(16,800,000)
Denver- Southwest Corridor LRT	192,492	FY 2002*	192,492	0
Ft. Lauderdale-Tri-Rail Commuter Rail Upgrade	84,829,566	FY 2002	27,000,000	(57,829,566)
Atlanta- North Springs	25,072,274	FY 2003	25,000,000	(72,274)
Chicago- Douglas Branch Reconstruction	35,000,000	FY 2006	32,750,000	(2,250,000)
Boston- S. Boston Piers Transitway	11,203,169	FY 2002*	10,631,245	(571,924)
Washington, DC/MD- Largo Extension	60,000,000	FY 2005	55,000,000	(5,000,000)
Minneapolis- Hiawatha Corridor LRT	50,000,000	FY 2005	50,000,000	0
St. Louis- Metrolink St. Clair Extension	31,088,422	FY 2002	28,000,000	(3,088,422)
Hudson-Bergen MOS-1	151,327,655	FY 2003	141,000,000	(10,327,655)
Hudson-Bergen LRT MOS-2	0	FY 2008	0	0
Newark Rail Link (MOS-1)	20,000,000	FY 2004	20,000,000	0
Portland-Interstate MAX LRT Extension	80,085,904	FY 2005	64,000,000	(16,085,904)
Pittsburgh- Stage II LRT Reconstruction	20,000,000	FY 2004	18,000,000	(2,000,000)
San Juan- Tren Urbano	50,159,703	FY 2004	40,000,000	(10,159,703)
Memphis- Medical Center Extension	20,000,000	FY 2003	19,170,000	(830,000)
Dallas- North Central LRT Extension	71,200,000	FY 2004	70,000,000	(1,200,000)
Houston- Regional Bus Plan	95,459	FY 2002*	0	(95,459)
Salt Lake City- CBD to University LRT	15,000,000	FY 2003	14,000,000	(1,000,000)
Salt Lake City-South LRT	718,006	FY 2002*	0	(718,006)
Seattle- Central Link LRT-MOS-1	0	FY 2006	0	0
Total	$993,511,265		$815,148,420	($178,362,845)

Delays in receiving anticipated funding can cause delays during construction, cost overruns, and financial uncertainty for the project sponsor. For this reason, a solid financial plan will specify how the project sponsor will move the project forward even if federal funding is delayed. Short-term borrowing is one mechanism for smoothing out the funding stream. Other options include a locally funded construction reserve large enough to handle delays in receiving federal funds.

Many project sponsors worry that demonstrating they have adequate financial resources to fund a proposed project, even when federal funds are less than anticipated, may signal that they do not "need" the federal funding to construct the proposed project. Some grantees worry that this demonstration of strong financial position will ultimately result in lower federal funding for their projects. However, TEA-21 requires FTA to evaluate the financial capacity and capability of project sponsors to minimize risks to the completion and operation of federally funded projects. The determination of financial capacity and capability often depends on the ability of the project sponsor to demonstrate access to resources in excess of those required to fund planned construction costs.

Section 5309 New Starts funding for a planned project should enter the financial plan according to three basic elements which are initially defined in alternatives analysis: the planned funding sources; the amount required from each source; and the anticipated project construction schedule. Early in project planning, these items may be uncertain, but cost estimates, implementation schedules, and the rough outline of the funding strategy will be complete at the end of alternatives analysis since this information is required before a project can be included in a regional Long Range Transportation Plan.

The assumed Section 5309 New Starts funding (as well as other sources) should be included in the financial plan in the manner in which it is anticipated to be available. Often, only a rough idea of the funding amount is known early in the planning process. In this case, the percentage of total project costs anticipated to be borne by Section 5309 New Starts funding is calculated and applied to the annual construction expenses developed during capital cost estimation as shown in Table 8-15.

As details about each funding source become known and precise amounts are committed, the annual funding stream from each source is adjusted. For instance, the CMAQ funding might be available in a constant annual payment of $30 million between FY 01 and FY 07. The demands for funding from the other sources must be balanced to reflect what is known about available CMAQ funding.

When an FFGA is signed, these funding amounts are set in the agreement. The Section 5309 New Starts payout should be included in the financial plan precisely as stated in the FFGA. As annual appropriations come in, the financial plan is updated to reflect actual receipts and funding amounts form other sources adjusted to maintain the project schedule.

Eligible project expenses for Section 5309 Bus funds include acquisition of buses for fleet and service expansion, construction of bus maintenance and administrative facilities, transfer facilities, bus malls, transportation centers, intermodal terminals, park-and-ride stations, acquisition of replacement vehicles, bus rebuilds, bus preventive maintenance, passenger amenities such as passenger shelters and bus stop signs, accessory and miscellaneous equipment such as mobile radio units, supervisory vehicles, fareboxes, computers, shop and garage equipment, and costs incurred in arranging innovative financing for eligible projects. Congress has allocated most of the Section 5309 Bus funds to specific states, localities, and transit agencies.

Section 5309 Bus funding is allocated to specific projects or to states for "statewide bus and bus facilities" in the annual FTA appropriation. Project sponsors have three years to obligate the Section 5309 Bus allocation or the funds revert to the federal government. Like other federal transportation programs, these funds require a minimum 20 percent local match. Transit agencies should include Section 5309 Bus funding in their financial plan if they have specified a project that can reasonably be expected to receive such funds and the transit agency has identified the source of the local match required to receive the Section 5309 Bus funds. The financial plan incorporates the federal funding and specifies the source and amount for the local match on an annual basis according to the project implementation schedule.

The large sums of money needed to fund major transit investments can make securing appropriated funds very difficult due to intense competition for limited resources. However, many projects have been constructed using non-federal capital grants for a significant share of project costs. For operating revenue, transit agencies without dedicated funding sources beyond fares and other operating revenues usually need to seek annual appropriations from state or local governments.

Many transportation projects are paid for using state or local appropriations rather than dedicated funding sources. Sometimes, states or local governments have transportation improvement funds, transportation trust funds, or other entities set up to provide local funding for projects on a discretionary basis. These funds are usually appropriated for specific projects through the state or local political process. Generally, the project must be included in a state or local budget that directs spending from various transportation funds. These funds must be legislatively approved or included in an approved capital improvement program before they can be considered committed to a specific project.

Good examples of state and local appropriated funding sources include the Maryland Transportation Trust Fund, which has been used to fund the local share of numerous transportation projects in Maryland, including the WMATA Largo Extension, the Maryland Mass Transit Administration’s Central Light Rail Double Track Project, and numerous others. Another example of this type of funding source is California’s Traffic Congestion Relief program funded from a sales tax on gasoline. The law that enabled this program was enacted in July 2000, and will sunset in July 2006. The funding source was established because of large budget surpluses for the State of California, which enabled additional transportation investments. The San Fernando Valley BRT and San Diego Mission Valley East LRT are two of the many projects proposed to be funded through this source.

The financial plan identifies all state and local appropriations and incorporates them into the financial plan according to the anticipated annual funding amounts. Specific project funding is a line item in the capital plan. During planning and early project development, these funds are usually un-committed.

Every state and local government is different and funds transportation projects in a different way. The financial plan accounts for these local funding realities. Financial plans should include both committed and planned funds as long as the funds can "reasonably" be expected to be available and committed in the years for which they are required. If the state or local funding for the proposed project is not committed, the source should be identified and a strategy to secure the funding described. If the state or local capital grant is committed, evidence and details of the commitment agreement must be referenced and should be included as an attachment to the financial plan.

Most all transit agencies receive state or local assistance to cover operating expenses. Sometimes that assistance is from a dedicated tax as described in section 8.5.2. In many cases, the state or local assistance is provided on an annual basis through a direct appropriation. The New Jersey Transit Corporation, the Massachusetts Bay Transportation Authority in Boston, and WMATA in Washington DC among many others, depend on state or local appropriations to cover annual operating deficits (sometimes including debt service). Often the funding burdens are distributed by statutory formulas to the jurisdictions that benefit from the transit service. The funding jurisdictions typically have representatives that serve on the regional transit governing board giving them significant influence over how the transit system is operated.

Depending on the institutional arrangements, local funding formulas can ensure operating funding stability for transit systems. While dedicated taxes or user fees usually provide a higher level of funding stability, this is not universally true. Many states and localities provide consistent funding levels using annual appropriations. However, absent specific guarantees, local funding levels can fall victim to the budget pressures of state or local governments.

Operating assistance provided by state or local governments is a line item under operating revenues determined by the specific relationship established between the local funding partners and the transit agency. The financial plan should document the history of state and local operating assistance levels and track the annual growth in funding to support the assumptions about future levels of operating assistance. Generally speaking, operating assistance should not be assumed to grow faster than historical experience unless an agreement to increase operating assistance has been completed. In addition, if one funding source is assumed to take a significantly higher proportion of total operating expenses in future years, the soundness of the financial plan may be questionable.

A transit system with insufficient cash flow to cover the cost of capital projects as well as operating and maintenance expenses must generally incur debt to advance its capital program on a reasonable schedule (see Figure 8-5). Assuming that the transit agency is capable of paying the debt service after paying for all operating and maintenance expenses, the agency must determine the level and form of debt that is most appropriate. Generally, the transit agency should maximize the net present value of the financing arrangement within the budgetary constraints imposed on the transit agency. The methods used to evaluate financing strategies are discussed in Section 8-5.

As demands for transportation improvements have grown, the use of debt financing has also increased to fund additional projects. Debt financing can be used to advance projects that otherwise would take much longer to construct using pay as you go funding. For agencies with dependable and growing existing revenue sources that would experience deficits only during construction of proposed major capital investments, debt financing may be the solution to funding needed capital projects. If an agency expects operating deficits after completion of the proposed project (s), the bond market will generally demand high interest costs or the agency may be unable to market the bonds at all.

Tax-free municipal bonds are usually preferred mechanisms for municipal finance since the yields are lower than almost any other debt instrument (see Figure 8-7) presuming the bonds are rated investment grade. In some instances, vendor financing or leasing arrangements may offer terms advantageous to the transit agency. The TIFIA program offers another potential source of credit that may be used for major capital investments and can be competitive with some investment grade municipal debt (see Section 8.5.7.2).

The tax-exempt bond market has become a major funding source for transportation investments. The amount of debt issued fluctuates by multiple billions of dollars based on market conditions and investment needs, but the trend over the last two decades has been of increasing reliance on the municipal bond market to fund the local share of major investments (see Figure 8-9). State and local governments have increasingly utilized the tax-free municipal bond market to fund needed projects far in advance of when they could be constructed using the pay-as-you-go approach.

Long-term bond repayment schedules typically require a principal and interest payment in the range of 8 percent to 11 percent of the par (face value) of the bonds issued. The repayment of any bond issue and any outstanding debt must be factored into the transit agency financial plan. Debt service costs may be accounted for as an agency operating expense or as a debt service payment in a separate capital plan. The latter treatment is more common since most debt service has a dedicated funding source outside of the revenues from operations. Investors in the bond market will examine the agency’s financial statements and plan in great detail to judge the financial capability of the agency, and consequently, the likelihood of being paid on time.

One of the primary factors in the evaluation of any bond issuance is the coverage ratio and the security of the bonds. The coverage ratio is the annual pledged revenues divided by the debt service payment. The coverage ratio measures the ability of the historical, current, and future revenues to meet debt service requirements. Security is the funding source pledged as collateral for repayment of the bonds.

A coverage ratio of 1.0 means that revenues pledged to pay debt service are equal to the debt service payment, which would not be looked at favorably by the bond market because any unexpected adverse occurrence would make the debt service levels too high to pay. The bond market generally requires a debt coverage ratio greater than one by a margin large enough to ensure that there will remain (within tolerable risk levels) enough revenue to pay the debt service regardless of the economic conditions affecting the issuer. Coverage ratios may be based on only those revenues pledged as security for the bonds (a gross coverage ratio), or may include all revenues available to the issuer net of operating expenses (a net coverage ratio).

Historical coverage ratios calculate the measure based on known quantities from previous years. For a new bond issue, prospective coverage ratios must be forecasted into the future. Debt service requirements are quite well known in advance since the terms of the bond are specified at the issuance. Revenue projections must be prepared, either by a respected private forecasting firm, or internally using well documented and state of the practice forecasting methods as described in Section 8.5.2.

Selling bonds requires that the seller pledge a stream of revenues for repayment of the bonds. These revenues are the collateral that must provide the bondholder with reasonable certitude that the bonds will be repaid according to the debt service schedule provide at issuance. Whatever revenue source is provided, it must be stable and committed to debt service over the full term of the bonds. Usually, a sales tax, income tax, property tax, fuel tax, or the full faith and credit of the state or federal government are required as collateral for municipal bonds. After the passage of TEA-21, the added stability of the federal funding sources has allowed the development and use of bonds backed by anticipated federal grants, adding a new and important way to service municipal debt. Tax increment financing and farebox revenues have been successfully used as collateral on rare occasions.

Debt issuance limitations may be imposed on bond issuers by state or local governments. Typically, local debt limitations require conservative debt ratios, often 2.0 or greater, to ensure the long-term creditworthiness of local government entities. In many cases, the debt limit is a preset debt level that the issuer is legally required to remain below. Similarly, some bond covenants require that additional bonds maintain both historical and prospective debt ratios, usually 1.5 and 2.0 respectively.

The net coverage ratio, based on all revenues net of expenses, reflects the issuers financial capability more accurately that the gross coverage ratio, which is based only on pledged revenues. The gross coverage ratio ignores non-pledged revenues and the ongoing operating and maintenance expense of the transit system. While technically, only the pledged revenues are relevant to the ability to make debt service payments, a system that cannot cover both operations and maintenance and debt service is not likely to remain financially viable. For this reason, bond rating agencies and potential bondholders will carefully inspect agency financial statements and financial plans to ensure the financial capability of all agency revenues to meet all projected financial obligations.

General obligation securities are bonds backed by the "full faith and credit" of state or local governments. The taxing authority used to service GO bonds is not subject to constitutional or statutory limitations. Consequently, GO bonds are the most secure credit instruments among municipal securities. These bonds tend to receive the highest credit ratings available to a particular municipal agency and, if the agency is credit worthy, can carry exceptionally low yields.

GO bonds often require voter approval in a public referendum. These bonds take two particular forms with different levels of financial security. The most secure type is the unlimited tax (ULT) general obligation bond, which is secured by a tax that is not limited in rate or amount. A less secure GO bond is the limited tax (LT) general obligation bond, which is backed by a specific tax such as a sales tax, fuel tax or an income tax. The limitation on the revenue source securing the bond results in higher risk to the bondholders, lower bond ratings, and higher yields. Limited tax general obligation bonds have been used in numerous cities to fund transportation investments after the successful passage of dedicated transportation taxes.

Revenue bonds help to finance infrastructure projects such as bridges, toll roads, water and sewer facilities, airports, subsidized housing, and occasionally public transit projects. Revenue bonds are generally payable from specific revenue sources related to the operation of the facility being constructed. For instance, toll road and bridge bonds would be paid by the resulting tolls. Revenue bonds are not backed by the full faith and credit of the issuer. Rather, revenue bonds are secured by a specific revenue pledge to assure the adequacy of the revenue source. Since the payment sources are limited, a financial feasibility study that analyzes the projected revenues and operations of the facility to be financed is required to market the bonds.

Since no transit agency collects enough in fare revenue to pay even the operating expenses of the systems, there are generally not enough revenues net of costs to dedicate toward debt service. However, some transit agencies have other revenue sources to fund operations such that fare revenues can be dedicated to pay off revenue bonds. New York MTA was a regular issuer of fare-backed bonds during the 1980’s and 1990’s.

Transit agencies can borrow against future Federal-aid funding using Grant Anticipation Notes (GANs), sometimes called Grant Anticipation Revenue Vehicles (GARVEEs). The agency issues bonds secured with a pledge of federal-aid assistance, thus amassing up-front capital, and pays down the bonds over a period of time as the federal funds are received. The agency is not able to make an enforceable pledge of future federal grants since there can be no guarantee that those funds will arrive. The bond market seems to be willing to accept this pledge, assuming that the likelihood of continuing federal grant is very high. GANs are short term notes usually used to initiate construction prior to the receipt of federal grants.

TEA-21 contained certain provisions that enhanced transit agencies’ ability to borrow against future federal aid. For example, the additional security of TEA-21 "firewall" provisions (separating transportation funding from appropriations for other domestic purposes) was one factor that helped make it possible for transit agencies to pledge federal aid as the sole source of repayment, without having to encumber other transit revenue sources.

While transit agencies may use the discretionary funds provided through FFGAs to repay debt, these funds are not guaranteed to arrive on schedule because they are subject to annual appropriations. Because discretionary funds provided under an FFGA are project-specific, there is limited ability to shift funds between projects in the event of a shortfall. Thus, the credit risks for a transit GAN backed by a discretionary FFGA may be higher than for a transit GAN backed by formula funding at an equivalent coverage level. A grantee can increase coverage levels by borrowing less than the FFGA amount (essentially providing the coverage required for a good rating opinion) so that even if Congress appropriates significantly less than the budget request, there is likely to be enough funding appropriated to at least cover required debt service.

The Hudson-Bergen Light Rail project in Northern New Jersey explicitly relied on a pledge of future FFGA funding to secure construction financing. The project was supported primarily by a transit GAN, issued against anticipated discretionary funding. As a secondary pledge, the financing was also backed by a pledge from the state’s Transportation Trust Fund, in the event that FFGA funds were not forthcoming. New Jersey Transit re-financed the initial debt with new GAN’s to allow them to shed the added security of the Transportation Trust Fund. Market conditions allowed both reduced interest costs and additional bonding capacity for the New Jersey Treasury.

Tax-exempt commercial paper is a mechanism that provides a short-term (maximum maturity of 270 days) tax-free debt instrument to fund working capital for a transit agency. Transit agencies may receive the bulk of their operating subsidies at specific times of the year, which may require them to use short term financing to pay for ongoing operations. The terms available to transit agencies through tax-exempt commercial paper are generally better than could be obtained via a private line of credit from a bank. Usually, liquidity for a tax-exempt commercial paper program is provided through a letter of credit, a revolving credit agreement, or a line of credit.

The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) established a new federal credit program under which the U.S. Department of Transportation (DOT) may provide three forms of credit assistance – secured (direct) loans, loan guarantees, and standby lines of credit – for surface transportation projects of national or regional significance. TIFIA credit assistance can be more advantageous than tax fee municipal debt.

One benefit of the TIFIA instrument is that the maximum maturity of all TIFIA credits is 35 years after a project’s substantial completion. Municipal bonds usually have a 20-year term. At the end of the 20-year period, new bonds can be issued to pay the old ones, but there are costs associated with this transaction and the associated annual payment is somewhat higher for shorter-term debt instruments. If the interest rates are "close", it is quite possible that the net present value of the financing arrangement under a TIFIA loan could be more advantageous than the municipal bond market.

Another benefit is that the TIFIA credit instrument may be junior (i.e., subordinate) to the project’s capital market debt in its priority claim on the project’s cash flow. In some circumstances, this feature will allow the borrower to maintain a higher credit rating on senior project debt than would otherwise be possible.

A TIFIA loan, loan guarantee, or line of credit could be a cost saving strategy for funding the local share for some projects. TIFIA is a credit program rather than a grant program so it does not provide incremental funding other than the potential savings associated with TIFIA credit terms compared to the terms available to project sponsors in the tax-free municipal bond market. If an agency’s revenue bonds are rated BBB+, the yield in November 2001 was a little under 6 percent. The interest rate floor for TIFIA loans was 5.25 percent at that time. While the interest rate difference is not great, the judicious use of TIFIA loans could reduce interest expenses by significant sums if the financing period is long.

Vendor financing refers to credit offered to a transit system from an equipment vendor with the potential for advantageous payment terms for equipment or services. Vendor financing is most commonly used for vehicle purchases, but could be used for the purchase of vehicle control systems, fare collection, security or any other major equipment type. Vendor financing is usually either an extended payment schedule, or when the vendor acts as a conduit for financing through a third party. Extended payment schedules imply that the vendor defers sales revenue while third party financing means that a financial institution is providing the credit to the transit agency through the vendor.

At one time, vendor financing was a major part of the purchase decision since numerous vendors competed by offering the most generous (i.e. below market) interest rates. The low rates offered by the vendors reduced the total cost of procuring the various equipment packages and improved the net present value of the financial arrangement. However, domestic vendors complained that below market financing was an unfair trade practice and persuaded Congress in 1986 to prohibit the offering of below market interest rates. Now, the interest rates depend solely on the credit rating of the vendor. The market rates available to private vendors will very likely be higher than the terms available through a municipal bond issuance. The use of vendor financing has declined markedly since 1986.

Today, the primary benefit of vendor financing is the simplicity of the transaction. Equipment features, price, financing arrangements, and payment schedules are all negotiated with a single entity. This financing mechanism is usually applicable only to purchases of vehicles and other equipment so it can only be a relatively small part of the financing strategy for a major investment.

Leasing provides for the use of an asset without the need to make a large cash payment that most purchase agreements require. A lease is a rental agreement where a lessee (transit agency) agrees to make rental payments to the lessor (owner) in exchange for the use of the asset. Leasing allows the transit agency to reduce current year expenditures on new equipment by spreading the cost over a number of years as specified in the lease. Lease obligations are considered a form of municipal debt and can be tax-exempt if structured properly.

There are two main lease types: operating leases and capital leases. Operating leases are generally short term and cancelable. The risks and rewards of ownership of the leased asset are not transferred to the lessee. The lessor does not generally expect to recover the whole cost of the asset during the lease period which is generally much shorter than the useful life of the asset. Operating leases are generally confined to assets for which an established secondary market exists.

Capital leases are financing arrangements for acquiring assets and are generally non-cancelable financial obligations that are a form of debt. To be a capital lease, a lease agreement must meet one of the following criteria:

Transit vehicles and specialized building and plant assets used by the transit agency are often accounted for as capital leases. Short term leasing of buses for special events, for instance, would be accounted for as operating leases. Rental of office space for the transit agency could be accounted for as a capital lease or and operating lease depending on the terms of the lease.

There are a variety of leasing arrangements commonly used by transit agencies for structuring capital leases. The two primary options are certificates of participation (or COPs) and sale-leaseback arrangements. The cross-border lease is a complicated form of the sale-leaseback arrangement designed to take advantage of foreign tax laws to improve the lease terms for the lessee. The reader interested in cross-border lease arrangements should refer to Introduction to Public Finance and Public Transit, Federal Transit Administration, US Department of Transportation, 1993.

COPs are used to finance equipment purchases by dividing the cost of the asset among many investors. Each investor owns some percentage of the asset and agrees to lease that percentage back to the transit agency. The transit agency uses COPs though a trustee bank that issues the debt and holds title to the equipment on behalf of the investors and administers the lease arrangement with the transit agency. Lease payments made by the transit agency to the trustee bank are "passed though" to the investors as principal and interest payments. COPs generally have 10-year terms, though the terms can be much longer.

The key to a COP arrangement is the marketability of the shares to investors. The interest rates offered on the certificates must be competitive in order to attract investors. The debt is usually structured as tax-exempt, but the lease obligations may not have the same level of security as revenue or GO bonds. Some transit agencies have offered a guaranteed repurchase price for the assets (vehicles normally), which has the effect of guaranteeing the principal amount of the certificates. Financially weak agencies would generally enter into these agreements for buses rather than rail vehicles since there is a more established secondary market for used buses.

Sale-leaseback arrangements are usually used to raise capital by basically selling assets to private investors who then lease the equipment back to the transit agency. The transit agency uses the arrangement to reduce their asset base in exchange for up front capital while still maintaining use of the asset. Sale-leaseback arrangements are much like a secured loan using the equipment itself as collateral.

The tax treatment of sale-leaseback arrangements is complex, but can provide terms competitive with tax-free municipal debt. A sale-leaseback can be structured in two ways:

Tax-free financing cannot be combined with accelerated depreciation. However, if structured properly, sale-leaseback arrangements can offer attractive terms to the lessee. It may be advisable to seek the advice of a tax attorney on structured leasing transactions due to the complex nature of the financial arrangements required to execute a sale-leaseback financing.

Leasing has proven to be a valuable financing alternative for state and local governments generally and transit agencies in particular. A variety of benefits have driven the expanded use of lease obligation financing, including:

Leasing has become a widespread approach to financing equipment and facility procurement by public entities, as it has for private firms. Though leasing can take several forms, they all provide some benefits over bond financing at similar interest rates. The most important advantages over bond financing are the ability to secure financing without voter approval and the ability to leverage existing assets. Transit agencies should note that FTA will not reimburse for more than the depreciated value of a leased asset in a given period. For example, on a ten-year lease of a bus with a twelve-year useful life, FTA will only reimburse 80 percent of 1/12th of the asset’s value each year rather than 80 percent of the lease payment. This may require the grantee to front-load the lease by several months, which reduces the benefit to the grantee.

xisting debt is incorporated into the financial plan as stipulated in the debt agreement. Municipal bonds are sold based on a pre-determined payout schedule. The proceeds from the bond issuance vary with the willingness of bond buyers to pay for the right to receive the payments pledged by the issuer. The annual debt service on any existing bond is specified in the debt service schedule. Existing TIFIA loans or credits, vendor financing, or leasing arrangements also have well defined payment schedules, which are included in the financial plan.

Transit agencies with significant debt must provide financial details of their debt program (including lease obligations) within the financial plan. The purpose of the debt analysis is to define the long-term cash requirements of the agency. The ability to cover these long-term recurring obligations will be reflected in the agency’s ability to provide consistent level of transit service.

The financial plan should include the following items to allow the close monitoring of the agency’s debt load:

Other long-term obligations that require monitoring are employee benefits for pensions and accrued vacation or other benefit time. These accounts should be treated on an accrual basis to recognize the potential liability. If these liabilities are un-funded, the agency’s finances could face severe disruption in the future.

With the declining share of project costs for major transit investments borne by the New Starts program, along with the added flexibility in some of the other federal funding sources, many transit agencies have secured funds from a much wider array of sources than in the past. Since the passage of ISTEA, the Congestion Mitigation Air Quality (CMAQ) program and the Surface Transportation Program (STP) have been available to provide funds for transit investments. A recent trend to extend fixed guideway service to airports has allowed transit projects to use airport passenger facility charges for transit access improvements. Property development and other innovative financing mechanisms have also been used to generate additional funding for transit operations and capital projects. Lastly, direct private sector participation can provide funding in certain cases. This section describes these other sources and provides guidelines for incorporating these revenues into the transit agency financial plan.

Flexible funds are federal transportation funds that may be used either for transit or highway purposes. The flexible funding provision was first included in the Intermodal Surface Transportation Efficiency Act of 1999 (ISTEA) and continued with the Transportation Equity Act for the 21st Century (TEA-21). A local area can choose to use certain Federal surface transportation funds based on local planning priorities, not on a restrictive definition of program eligibility. Flexible funds include Federal Highway Administration (FHWA) Surface Transportation Program (STP) funds and Congestion Mitigation and Air Quality Improvement Program (CMAQ) and Federal Transit Administration (FTA) Urban Formula Funds. In addition, some transit related projects are eligible to be funded through the FHWA’s National Highway System (NHS) program.

Since the enactment of ISTEA, FHWA funds transferred to the FTA have provided a substantial new source of funds for transit projects. When FHWA funds are transferred to FTA they can be used for any eligible expense identified in the FTA program that receives the funds. When FHWA funds are transferred to FTA they are transferred to one of the following three programs:

Once they are transferred to FTA, the funds are administered as FTA funds and take on all the requirements of the FTA program.

The trends in the use of flexible funding indicate that it is a popular mechanism for funding local transportation priorities. Since the beginning of ISTEA when the flexible funding mechanism was established, local transportation agencies have transferred $6.5 billion from FHWA to FTA, and $20.2 million from FHWA to FTA. After a downturn in the use of flexible fund in FY1997 and FY1998, local transportation agencies have dramatically increased their use of this funding mechanism in recent years. Annual flexible funds transfers to FTA reached the highest level ever at $1.6 billion in FY 2000 (see Figure 8-11).

About 80% of funds transferred have been used for capital projects. The most common type of capital project (about 1/3 of the total) has been for vehicle purchases. Other common capital projects include: major capital investments (New Starts, etc.), station improvements, parking expansion, bicycle racks on buses, and bus stop shelters. Flexible funds have also been used for operations and planning/engineering. The types of operations funded include new or demonstration services, air quality mitigation services, and shuttle services. Flexible funds have been used for planning and engineering of many different types of projects, from Environmental Impact Statements to design of pedestrian malls around stations.

Flexible funds are incorporated into transit agency financial plans like any other federal capital grant. The financial plan must document the agreement between the project sponsor, the MPO and the state department of transportation to initiate and complete the funding transfer. The funding amounts and schedule are negotiated among these various agencies and included as a line item in the transit agency capital plan.

Transit agencies have increasingly partnered with local airport authorities to fund rail transit projects that directly serve airports. Airport revenues from passenger facilities charges (PFCs) are the primary source of funds. Some of the projects recently completed or currently under construction using Airport funds for a portion of their construction costs are:

The difficulty with using funding provided by the airport authority is the restrictions imposed on the projects. PFCs can only be used for funding facilities on airport property or for transit facilities that only serve passengers whose origin or destination is the airport. The Federal Aviation Administration (FAA) must make a determination of eligibility to use airport PFCs for transit projects.

Securing airport funding can be difficult because of the incentive structure of airport revenues. Airports make money on parking revenues. Therefore, every added transit rider means lower airport revenues. Transit access can also use valuable airport space that could be used as parking or curbside taxi space, which is rented and provides the airport authority with additional revenue. In essence, the airport may look at funding transit access as paying millions of dollars for the privilege of reducing airport revenues. On the other hand, airports with significant congestion or that lack space for additional parking may value transit access as a means to bring in more passengers that could not otherwise be accommodated. That said, PFCs are a very large, growing and attractive revenue source that count toward local match required for federal funding.

Transit agencies can and do generate revenue through the lease, development or sale of property or property rights, otherwise known as the all-encompassing term "joint development". The air rights over a station, yard or terminal, or other real estate procured in the process of constructing a transit project, may be sold or leased to a private developer who agrees to construct a building or collection of buildings. The rent can be a contractually fixed fee or a percentage of the gross lease income produced by the tenants. Joint development projects have included hotels, office space, apartment buildings, homes, and shopping areas.

Joint development near transit stations can also increase transit ridership and operating revenues. When transit agencies weigh development proposals for their property, the additional ridership generated by the uses should be explicitly considered. Even if a proposal for a warehouse was the highest bid for a transit owned parcel near a rail station, apartments may provide the higher total return if significant numbers of additional transit riders result.

Another potential arrangement through which a transit agency could realize benefits from its real estate holdings is to establish a real estate development subsidiary to develop land directly. The subsidiary’s profits would then flow to the transit agency as other operating income. The benefits of this approach would be the shorter time to develop the properties as well as the ability to specifically direct the type of development activities that take place on agency-owned land.

Property development projects can provide a one time cash gain or provide a dependable stream of income that helps to offset the operating losses of the transit operation. While these revenues will probably not amount to more than a small percentage of the total operating budget, the revenue can amount to millions of dollars per year, which can be used for a variety of capital or operating needs.

Transit agencies should not assume that property development activities will provide significant funds. The Washington Metropolitan Area Transportation Authority (WMATA) is generally regarded as one of the most aggressive practitioners of transit joint development. WMATA received $6.4 million in joint development revenues for FY 2000 out of a total $684 million budget. While property development revenues provide valuable additional resources for WMATA and, importantly, ensure the type of development that supports the transit system, property development activities bring WMATA less than 1 percent of their system operating expenses. Most other transit agencies are unlikely to generate much more revenue than WMATA.

"Innovative finance" for transit is a broadly defined term that encompasses a combination of techniques and specially designed mechanisms to supplement traditional financing sources and methods. Most of the programs and tools of innovative finance have been enabled by ISTEA and TEA-21. Many of the financing mechanism already described, such as TIFIA, GANs (GARVEEs), and leasing, are considered "innovative finance". While these mechanisms are not much more "innovative" than the techniques used by average citizens to buy a house or lease an automobile, their use in the funding of transportation projects, where pay-as-you-go funding is the norm, is relatively innovative.

Traditionally, the government has financed transportation infrastructure primarily through a combination of state and local taxes and fees, and federal grants. These resources typically funded projects on a "pay-as-you-go" basis, meaning that projects were built in phases or increments as funds became available over a period of years. Project funding has been tied closely to Federal and state funding availability. While the pay-as-you-go approach has the benefit of simplicity and avoids interest costs associated with indebtedness, it involves the hidden costs associated with inflation and foregone economic development, especially for projects delayed several years. In addition, delaying projects that provide significant public benefits, reduce emissions or eliminate safety hazards also has obvious negative political and economic effects.

This section only addresses those "innovative" financing techniques not previously discussed. These include the use of State Infrastructure Banks (SIBs) and advance construction.

The National Highway System (NHS) Act established the SIB pilot program. A SIB is a state (or multi-state) revolving fund that, much like a private bank, can offer a range of loans and credit assistance enhancement products to public and private sponsors of highway or transit capital projects. Under the initial pilot program, states were authorized to use a portion of their FY 1996 and FY 1997 federal funds as "seed" money, matched with non-federal funds. The 1997 USDOT appropriations act provided $150 million in Federal general revenue funds for SIB capitalization. TEA-21 extended Federal funding for SIBs in four states - California, Florida, Missouri, and Rhode Island - by allowing them to capitalize their banks with funds authorized by TEA-21 through FY 2003. As of October 2001, 32 states have entered into 245 loan agreements with a dollar value of nearly $2.9 billion.

The types of assistance that may be provided by SIBs include loans (which may be at or below market rates), loan guarantees, lines of credit, letters of credit, certificates of participation, debt service reserve funds, bond insurance, and other forms of non-grant assistance. As loans or other credit assistance forms are repaid, a SIBs initial capital is replenished and can be used to support a new cycle of projects.

By obtaining SIB support for a project, the sponsor may be able to attract private, local, and additional state financial resources. Alternatively, SIB capital can be used as collateral to borrow in the bond market or to establish a guaranteed reserve fund. Loan demand, timing of needs, and debt financing considerations are factors to be considered by states in evaluating a leveraged SIB approach.

While the state SIBs authorized by the USDOT under the pilot program began with an initial infusion of federal funds and non-federal matching contributions, states have the opportunity to contribute additional state or local funds beyond the required non-federal match.

Under advance construction, a grantee may use non-federal funds to advance a federally supported project while preserving its eligibility to receive Federal reimbursements in the future. Advance construction eliminates the need to set aside full obligation authority before starting projects. As a result, a grantee can undertake a greater number of concurrent projects than would otherwise be possible. In addition, advance construction helps facilitate construction of large projects, while maintaining obligation authority for smaller ones. Advance construction allows a grantee to conserve obligation authority and maintain flexibility in its transportation funding program. For transit facilities, a "letter of no prejudice" (LONP) follows similar procedures to advance construction, but also applies to non-construction-related activities (e.g., vehicle procurement).

Partial conversion of advance construction is a somewhat different approach, in which the grantee converts, obligates, and receives reimbursement for only a portion of the federal share of project costs. This removes any requirement to wait until the full amount of obligation authority is available. The grantee can therefore convert an advance-constructed project to a federally funded project in stages, based on cash flow requirements and availability of obligation authority, rather than all at once on a single future date. This flexibility enables a grantee to begin some projects earlier, delivering the benefits to the public sooner.

For example, the Massachusetts Bay Transportation Authority (MBTA) used advance construction authority to fund the Boston Engine Terminal project. The Federal Transit Act requires agencies to resubmit proposals to FTA for advance construction authority with every subsequent transit authorizing legislation (i.e., ISTEA, TEA-21, etc.). In addition, agencies using advance construction must apply each year for federal funds to pay for the project.

The flow of funds under advance construction authority is quite complex. In the case of the MBTA project, the contractor invoices the transit agency. MBTA pays for the local share and submits receipts to FTA for reimbursement of the federal share. Because each year's invoices exceed the total local and federal share, MBTA issues short- term debt to cover the remainder. Twice a year, MBTA issues long- term general obligation bonds to retire this short- term debt. These bonds are not specific to the Boston Engine Terminal project, but are for the entire capital program.

In calculating the federal share of interest expenses, MBTA employs a weighted average. MBTA tracks the progress payments from FTA and ties them to specific bond issues.

MBTA notes several key advantages to advance construction authority over traditional funding methods for large, expensive projects:

With advance construction authority, a transit agency can spend the money necessary for a major contract immediately. Thus for projects that exceed an agency's annual FTA capital allocation, a transit agency can build them immediately without having to wait to collect multiple years of allocations and realize the benefits of the project sooner. If MBTA had to wait until it had cash on hand for the $235 million Boston Engine Terminal renovation, the facility would have been out of service for 19 years. Under advance construction authority, the Boston Engine Terminal was rebuilt in 6 years, but the financing is accomplished through 19 years of debt service repayment. After completing the Engine Terminal, MBTA refinanced the bonds at more favorable interest rates, using the proceeds for other capital needs.

Advance construction authority allowed MBTA to consolidate its large construction project into one contract and incur all expenses up-front. Otherwise, multiple small contracts, and therefore numerous procurements, would have been necessary. The single contract saves time and eases project management by eliminating quality control issues related to multiple contracts.

The disadvantages to advance construction are: 1) if FTA funds were discontinued, the agency would be responsible for all project expenses; 2) a portion of future capital grants must be dedicated to paying off the interest for the project. Between FY 2000 and 2013, MBTA must dedicate $16 million in federal capital grants and $4 million of its own revenues to pay the principal and interest on bonds for the Boston Engine Terminal project.

Since no US public transit projects actually produce enough revenue to offset their operating costs let alone cover the cost of capital, private sector funding will not usually be forthcoming. The exception is when private firms can benefit from the public investment and may be willing to contribute to the cost of the transit project. Two types of situations lend themselves to private sector participation:

Investments in rail infrastructure to provide capacity for commuter rail on existing freight lines usually produces some benefit for the freight operator, either in terms of higher quality infrastructure, higher capacity, or more operating flexibility, especially during the hours when the commuter rail service is not running. In a few instances, transit agencies have been able to secure private sector contributions from private railroads for capacity expansion and rail upgrades that benefit freight railroads.

Private sector contributions from property owners are another possibility. In cases where property values will clearly increase significantly from direct access to the transit project, property owners may be willing to offer significant amounts of funding. Examples include two recent projects. The Las Vegas monorail project is being partially funded by local property owners through the Las Vegas Monorail Corporation. Another example is the New York Avenue infill station in Washington DC. This project is receiving $25 million in private sector funding through a special assessment district made up of several large property owners within a half-mile of the station.

Private sector funding is incorporated into the financial plan according to the terms of the agreement. The funds are not considered committed until a signed contract between the funding partners is executed. The agreement will stipulate the funding arrangement, which will be incorporated into the financial plan as a line item in the capital budget with supporting documentation.

8.5 Forecasting Revenue