A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management (2019)

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2019 N A T I O N A L C O O P E R A T I V E H I G H W A Y R E S E A R C H P R O G R A M NCHRP RESEARCH REPORT 898 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Spy Pond Partners, LLC Arlington, MA KPMG London, UK University of Texas at Austin Center for Transportation Research Austin, TX Subscriber Categories Finance  •  Planning and Forecasting  •  Policy Research sponsored by the American Association of State Highway and Transportation Officials in cooperation with the Federal Highway Administration

NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM Systematic, well-designed, and implementable research is the most effective way to solve many problems facing state departments of transportation (DOTs) administrators and engineers. Often, highway problems are of local interest and can best be studied by state DOTs individually or in cooperation with their state universities and others. However, the accelerating growth of highway transportation results in increasingly complex problems of wide interest to highway authorities. These problems are best studied through a coordinated program of cooperative research. Recognizing this need, the leadership of the American Association of State Highway and Transportation Officials (AASHTO) in 1962 ini- tiated an objective national highway research program using modern scientific techniques—the National Cooperative Highway Research Program (NCHRP). NCHRP is supported on a continuing basis by funds from participating member states of AASHTO and receives the full cooperation and support of the Federal Highway Administration, United States Department of Transportation. The Transportation Research Board (TRB) of the National Academies of Sciences, Engineering, and Medicine was requested by AASHTO to administer the research program because of TRB’s recognized objectivity and understanding of modern research practices. TRB is uniquely suited for this purpose for many reasons: TRB maintains an extensive com- mittee structure from which authorities on any highway transportation subject may be drawn; TRB possesses avenues of communications and cooperation with federal, state, and local governmental agencies, univer- sities, and industry; TRB’s relationship to the National Academies is an insurance of objectivity; and TRB maintains a full-time staff of special- ists in highway transportation matters to bring the findings of research directly to those in a position to use them. The program is developed on the basis of research needs identified by chief administrators and other staff of the highway and transportation departments, by committees of AASHTO, and by the Federal Highway Administration. Topics of the highest merit are selected by the AASHTO Special Committee on Research and Innovation (R&I), and each year R&I’s recommendations are proposed to the AASHTO Board of Direc- tors and the National Academies. Research projects to address these topics are defined by NCHRP, and qualified research agencies are selected from submitted proposals. Administration and surveillance of research contracts are the responsibilities of the National Academies and TRB. The needs for highway research are many, and NCHRP can make significant contributions to solving highway transportation problems of mutual concern to many responsible groups. The program, however, is intended to complement, rather than to substitute for or duplicate, other highway research programs. Published research reports of the NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM are available from Transportation Research Board Business Office 500 Fifth Street, NW Washington, DC 20001 and can be ordered through the Internet by going to http://www.national-academies.org and then searching for TRB Printed in the United States of America NCHRP RESEARCH REPORT 898 Project 19-12 ISSN 2572-3766 (Print) ISSN 2572-3774 (Online) ISBN 978-0-309-48008-6 Library of Congress Control Number 2019930222 © 2019 National Academy of Sciences. All rights reserved. COPYRIGHT INFORMATION Authors herein are responsible for the authenticity of their materials and for obtaining written permissions from publishers or persons who own the copyright to any previously published or copyrighted material used herein. Cooperative Research Programs (CRP) grants permission to reproduce material in this publication for classroom and not-for-profit purposes. Permission is given with the understanding that none of the material will be used to imply TRB, AASHTO, FAA, FHWA, FMCSA, FRA, FTA, Office of the Assistant Secretary for Research and Technology, PHMSA, or TDC endorsement of a particular product, method, or practice. It is expected that those reproducing the material in this document for educational and not-for-profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission from CRP. NOTICE The research report was reviewed by the technical panel and accepted for publication according to procedures established and overseen by the Transportation Research Board and approved by the National Academies of Sciences, Engineering, and Medicine. The opinions and conclusions expressed or implied in this report are those of the researchers who performed the research and are not necessarily those of the Transportation Research Board; the National Academies of Sciences, Engineering, and Medicine; or the program sponsors. The Transportation Research Board; the National Academies of Sciences, Engineering, and Medicine; and the sponsors of the National Cooperative Highway Research Program do not endorse products or manufacturers. Trade or manufacturers’ names appear herein solely because they are considered essential to the object of the report.

The National Academy of Sciences was established in 1863 by an Act of Congress, signed by President Lincoln, as a private, non- governmental institution to advise the nation on issues related to science and technology. Members are elected by their peers for outstanding contributions to research. Dr. Marcia McNutt is president. The National Academy of Engineering was established in 1964 under the charter of the National Academy of Sciences to bring the practices of engineering to advising the nation. Members are elected by their peers for extraordinary contributions to engineering. Dr. C. D. Mote, Jr., is president. The National Academy of Medicine (formerly the Institute of Medicine) was established in 1970 under the charter of the National Academy of Sciences to advise the nation on medical and health issues. Members are elected by their peers for distinguished contributions to medicine and health. Dr. Victor J. Dzau is president. The three Academies work together as the National Academies of Sciences, Engineering, and Medicine to provide independent, objective analysis and advice to the nation and conduct other activities to solve complex problems and inform public policy decisions. The National Academies also encourage education and research, recognize outstanding contributions to knowledge, and increase public understanding in matters of science, engineering, and medicine. Learn more about the National Academies of Sciences, Engineering, and Medicine at www.national-academies.org. The Transportation Research Board is one of seven major programs of the National Academies of Sciences, Engineering, and Medicine. The mission of the Transportation Research Board is to increase the benefits that transportation contributes to society by providing leadership in transportation innovation and progress through research and information exchange, conducted within a setting that is objective, interdisciplinary, and multimodal. The Board’s varied committees, task forces, and panels annually engage about 7,000 engineers, scientists, and other transportation researchers and practitioners from the public and private sectors and academia, all of whom contribute their expertise in the public interest. The program is supported by state transportation departments, federal agencies including the component administrations of the U.S. Department of Transportation, and other organizations and individuals interested in the development of transportation. Learn more about the Transportation Research Board at www.TRB.org.

C O O P E R A T I V E R E S E A R C H P R O G R A M S CRP STAFF FOR NCHRP RESEARCH REPORT 898 Christopher J. Hedges, Director, Cooperative Research Programs Lori L. Sundstrom, Deputy Director, Cooperative Research Programs Andrew C. Lemer, Senior Program Officer Sheila A. Moore, Program Associate Eileen P. Delaney, Director of Publications Natalie Barnes, Associate Director of Publications Scott E. Hitchcock, Senior Editor NCHRP PROJECT 19-12 PANEL Field of Administration—Area of Finance Timothy M. McDowell, Wyoming DOT, Cheyenne, WY (Chair) William G. Johnson, IV, Colorado DOT, Denver, CO Chad A. Allen, Vermont Agency of Transportation, Montpelier, VT Kirby B. Becker, Minnesota DOT, St. Paul, MN Ronald L. Epstein, New York State DOT, Albany, NY Tamara P. Haas, New Mexico DOT, Santa Fe, NM Jessie X. Jones, Arkansas DOT, Little Rock, AR Pramen P. Shrestha, University of Nevada Las Vegas, Las Vegas, NV Nastaran Saadatmand, FHWA Liaison Matthew Hardy, AASHTO Liaison Thomas Palmerlee, TRB Liaison

NCHRP Research Report 898: A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management presents guidance for state departments of transportation (DOTs) and other agencies conducting financial analyses and developing financial plans to support efficient and effective management of the agency’s transporta- tion assets. The guide addresses fiscal and programmatic constraints associated with federal and state legislation; methodologies for valuing assets, forecasting and allocating financial resources; financial performance measures and targets; and practical concerns related to financial markets and accounting requirements. While DOT asset portfolios are generally weighted heavily toward highway facilities, the guide is intended to be generally applicable to all public-sector transportation assets. DOTs and other agencies are responsible for development, maintenance, and preserva- tion of a complex portfolio of physical assets that provide services to support the economy and quality of life. Some of these assets are supported at least partially by federal programs; others are developed and managed entirely with state and local resources. Some of the assets for which a DOT is responsible are managed in partnership with metropolitan planning organizations or local government agencies. The DOTs use a variety of transportation asset management (TAM) principles and practices to inform their management decision making, and DOT implementation of TAM varies from state to state. Regardless of the particular characteristics of organization and implementation, TAM requires financial resources. Many of the revenue sources available to a DOT have restric- tions limiting how the funds may be spent. Challenges facing anyone responsible for developing financial plans to support TAM include attribution of expenditures to asset management activities (for example, maintenance, repair, or preservation), projection of agency multi-year needs for financial resources, and forecasting of future revenues from various sources. The objective of NCHRP Project 19-12, “Guide for Financial Planning and Management in Support of Transportation Asset Management,” was to produce a guidebook for trans- portation agency executives, managers, and practitioners. This guide describes issues to consider and procedures that may be used in conducting financial analyses and developing financial plans that support efficient and effective management of the state’s transportation assets while meeting federal and other program requirements. The research team was led by the Spy Pond Partners, LLC, and included KPMG and the University of Texas at Austin Center for Transportation Research. The research team reviewed the literature and applicable federal rules and guidelines, interviewed F O R E W O R D By Andrew C. Lemer Staff Officer Transportation Research Board

practitioners, and drew on their own experience with leading practices in the United States and internationally. This guide, the product of the team’s work, is intended to help DOT staff and other practitioners to apply the agency’s financial resources effectively to support sound TAM practice. An online tool, the TAMP Financial Planner, created to assist planners is available on the AASHTO TAM Portal at http://www.tam-portal.com/resource/tamp-financial-planner/.

1 Chapter 1  Introduction to Financial Planning 1 1.1 Goals and Objectives of Financial Planning 8 Chapter 2  Integrating Financial Plans into TAM 8 2.1 The Financial Context of Asset Management 9 2.2 Performance Measures and Gaps 14 2.3 Life-Cycle Planning 20 2.4 Risk Management 24 2.5 From Asset Management into Financial Planning 25 Chapter 3  Transportation Funding Sources and Uses 25 3.1 Fundamentals of Sources and Uses 34 3.2 Steps to Identify and Document Sources and Uses 41 Chapter 4  Financial Forecasting 41 4.1 Fundamentals of Forecasts 47 4.2 Steps for Forecasting Revenues and Expenditures 50 Chapter 5  Investment Strategies and Scenarios 50 5.1 Fundamentals of Investment Strategies 57 5.2 Steps for Investment Strategies and Scenarios 63 Chapter 6  Asset Valuation 63 6.1 Fundamentals of Asset Valuation 70 6.2 Asset Valuation: Follow These Steps 79 Chapter 7  Communicating the Results 79 7.1 Introduction 80 7.2 Sources and Uses 83 7.3 Forecasting and Investment Strategies 88 7.4 Asset Value 90  Bibliography 94 Appendix A  Case Studies 94 A.1 Highways England 96 A.2 Thames Water 99 A.3 Texas Department of Transportation C O N T E N T S