Lessons Learned in Fiscal Constraint
August 14, 2006
Key Issues:
- Awareness of State Transportation Funding Levels is Important: Quickly-evolving issues can significantly impact the stability of State funding sources for transportation. Division Offices should be aware of and monitor such situations and engage in early, ongoing dialogue with the States (and MPOs, if necessary) to ensure proactive responses and revisions to financial plans that support metropolitan transportation plans, TIPs, and STIPs.
- Awareness of Funding Issue Deliberations in State Legislatures is Valuable: State Legislatures frequently deliberate on potential State revenue generation actions to support key transportation investments. Division Offices should follow such deliberations and engage in dialogue with the State (and MPOs, if necessary) on the likelihood of these measures being enacted and possible impacts to the State's transportation program.
- Discretionary Funding Levels Can Play a Significant Role in Fiscal Constraint: In recent and emerging cases, projected receipts of Congressionally-designated discretionary/earmark funds have been assumed by some States as a significant, if not exclusive, source of funding to advance major projects. Division Offices must ensure that these projections are reasonable (based on historic discretionary funding levels) and that the information from the major project financial plans/project management plans be reasonably consistent with the revenue/cost information reflected in the financial plans that support metropolitan transportation plans, TIPs, and STIPs.
- Accurate Transit Operations and Maintenance Costs are an Important Variable in Fiscal Constraint: Several recent cases have reiterated the importance of Division Offices to work closely with their respective FTA Regional Offices to ensure that States and/or public transportation operators are providing complete information on the operation and maintenance of transit systems (including associated costs and reasonably available funding sources).
- Program/Process Reviews on Fiscal Constraint Can Be a Valuable Stewardship and Oversight Tool: Division Offices should consider conducting TIP/STIP Development Process Reviews as a stewardship/oversight approach for identifying potential process improvements for the State DOT (and MPOs, where appropriate), as well as to ensure that mechanisms are in place to support the development of fiscally constrained TIPs and STIPs.
Approaches to Establishing and Confirming Fiscal Constraint:
- Be Comprehensive: Review revenue forecasts for capital, operations, and maintenance costs, as well as debt service, system preservation, and major expansion projects.
- Compare to Past Experience: For systems operations and maintenance costs, compare forecasts to previous year factors, such as salaries, equipment costs, and system level of performance (e.g., pavement and bridge conditions), as an indicator of whether these funding forecasts are "adequate."
- Compare "Apples to Apples": Financial forecasts should be consistent, preferably based on "year of expenditure" dollars. The inflation rate(s) chosen for the forecasts should be based on sound financial research and information and agreed to by all parties involved.
- Be Aware of Assumed Funding Levels and Overprogramming: Because State DOTs can only obligate up to the amount of their Obligation Authority, the use contract authority funding levels in the TIP and STIP can lead to overprogramming.
- Include Contingencies: To the extent possible, major projects in a metropolitan transportation plan should include an appropriate cost estimate that includes contingencies for the various stages of the project (e.g., planning, project development/NEPA, design, right-of-way, and construction).
- Update Initial Project Cost Estimates: As a major project advances through the development stages, refined project costs should be reflected back through the transportation planning and programming processes to more accurately reflect the total amount of funds that will be devoted to that project, and which are no longer available for projects identified in the transportation plan and ultimately in the TIP/STIP.
- Phase Project Cost Estimates: To address the uncertainties of project cost estimates for later years in a transportation plan, the financial element can account for project costs in smaller time increments (e.g., the first 10 years and the second 10 years of the transportation plan). This allows for more refined estimates in the "first 10 years" and lesser-refined estimates in the "second 10 years." Also, providing a cost range or band for the "outer years" of the transportation plan is another viable approach.
- Use Various Tools to Review Financial Plans: Rely on existing processes and procedures to review and verify financial constraint through means such as:
- State and MPO "self-certifications" of statewide and metropolitan transportation planning processes and
- FHWA/FTA actions on metropolitan and statewide transportation planning processes (e.g., metropolitan ("3-C") planning findings, statewide planning findings, and TMA certifications).
Addressing Specific Fiscal Constraint Issues and/or Controversies:
- Early Face-to-Face Meetings: Key Division Office, FTA Regional Office, and HEP staff should meet face-to-face early to discuss and understand the issues; jointly agree on the nature of the issues and how to address them; and document key facts and issues/problems, next steps, and the respective roles of the Division, FTA, and HEP. If needed, HEP should involve FTA HQ in gaining full cooperation of the FTA Regional Office. Following the USDOT meeting(s) and as early as possible, the Division Office and FTA Regional Office should convene a face-to-face meeting with the State to clearly explain the fiscal constraint issues and to request, in writing, additional fiscal information from the State (or other parties), as needed.
- Dealing with the State and MPOs: All interactions with the State should be at the field level. If a Governor or Congressional representative insists on meeting with HQ staff, the DA and appropriate Division staff should come to Washington for the meeting, if possible. HEP and the Division should always present a "united front" to the State.
- Letters and Other Documents To be Provided to the State: Be careful with any documents provided to the State. Draft documents should not be provided to the State unless prominently labeled as "DRAFT". Privileged exchanges between FHWA/FTA and the State must not be shared with groups such as the news media or Congressional delegations.
- Fiscal Information and Facts: Early on, all pertinent financial data and assumptions should be clearly identified and verified, including capital, operations, and maintenance revenues and costs for highways and transit.
- Multi-State Urbanized Areas: When multi-State urbanized areas are involved, the issues can get especially complex. Multiple Division Offices, and in some cases, multiple FTA Regions, must communicate and work together closely when more than one State and FTA Region are involved in resolving difficult issues related to fiscal constraint.
- Coordination within the Division: Fiscal constraint issues can cut across Division functions. The DA, ADA, planning staff, financial management staff, and field engineers all should expect to work closely together to resolve fiscal constraint issues.
- Coordination within HQ: HEP is the lead office for HQ and will coordinate with other HQ offices as necessary. If the OIG becomes involved, Division Offices should be responsive to OIG questions, understanding that OIG's perspective is different from ours.
- "Changing the Rules": FHWA/FTA policies and guidance change to meet new challenges. When warranted, it is okay to "change the rules" as long as FHWA/FTA allow a reasonable transition process/period for the State/MPO to make the change. When rules are changed, HEP will communicate the changes to all Divisions so they are aware of the need to revise their process and be more diligent in their reviews.
- Consistency with Other States/Divisions: Be prepared for the State/MPOs to allege that we are not being consistent in applying our rules or we are more stringent with them than their counterparts. Let the State/MPO know we will investigate and that if another State/MPO is doing something that is not allowable, we will be requiring them to change their practices.
- Documenting the Results: Document the results of a fiscal constraint analysis in writing, and do so carefully. In some cases, this may include an agreement between the State and FHWA/FTA on the parameters, procedures, and standards that both FHWA/FTA and the State will follow to satisfy fiscal constraint.
Fundamental Questions to be Posed by Division Administrators:
As an initial "litmus test," Division Administrators should pose the following questions on financial plans/fiscal constraint for metropolitan transportation plans, TIPs, and STIPs:
- Are operations and maintenance costs (highway and transit) reflected in the financial plans?
- Are capital costs (highway and transit) reflected in the financial plan?
- What are the underlying assumptions for the revenue forecasts reflected in the financial plan?
- Are costs in metropolitan transportation plans, TIPs, and STIPs shown as "year of expenditure" dollars?
