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Suggested Citation:"Chapter 1 - Introduction to Financial Planning." National Academies of Sciences, Engineering, and Medicine. 2019. A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management. Washington, DC: The National Academies Press. doi: 10.17226/25285.
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Suggested Citation:"Chapter 1 - Introduction to Financial Planning." National Academies of Sciences, Engineering, and Medicine. 2019. A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management. Washington, DC: The National Academies Press. doi: 10.17226/25285.
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Page 2
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Suggested Citation:"Chapter 1 - Introduction to Financial Planning." National Academies of Sciences, Engineering, and Medicine. 2019. A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management. Washington, DC: The National Academies Press. doi: 10.17226/25285.
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Suggested Citation:"Chapter 1 - Introduction to Financial Planning." National Academies of Sciences, Engineering, and Medicine. 2019. A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management. Washington, DC: The National Academies Press. doi: 10.17226/25285.
×
Page 4
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Suggested Citation:"Chapter 1 - Introduction to Financial Planning." National Academies of Sciences, Engineering, and Medicine. 2019. A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management. Washington, DC: The National Academies Press. doi: 10.17226/25285.
×
Page 5
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Suggested Citation:"Chapter 1 - Introduction to Financial Planning." National Academies of Sciences, Engineering, and Medicine. 2019. A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management. Washington, DC: The National Academies Press. doi: 10.17226/25285.
×
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Suggested Citation:"Chapter 1 - Introduction to Financial Planning." National Academies of Sciences, Engineering, and Medicine. 2019. A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management. Washington, DC: The National Academies Press. doi: 10.17226/25285.
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1 1.1 Goals and Objectives of Financial Planning The goal of this guidebook is to provide support to transportation executives, managers, and asset management practitioners as they lead the efficient and effective use of transportation assets—from bridges and pavements to intelligent transportation systems (ITS) and fleet equip- ment. This guidebook assists transportation agencies in developing their financial plans as part of a Transportation Asset Management Plan (TAMP). It also can help enhance decision making and business processes in advancing a physically and financially sustainable transportation system. This guidebook is intended to help practitioners of any discipline—planning, engineering, finance—develop a core set of financial planning fundamentals that can supplement and strengthen other components of asset management planning. In addition, this guidebook con- nects the financial plan and investment strategies of transportation asset management (TAM) to other plans and activities within a transportation agency, such as the long-range plan, the strategic plan and the statewide transportation improvement program (STIP). Figure 1-1 offers a visualization of an overall, TAM program. This guidebook provides direction on how to perform the following activities related to devel- oping an asset management financial plan and investment strategies: 1. Identify anticipated funding sources, 2. Estimate funding levels expected to be available to address future work, 3. Estimate the cost of expected future work to implement investment strategies in the TAMP, and 4. Estimate the value of the agency’s pavement and bridge assets and the investment needed to maintain the value of these assets and ensure financial sustainability. Note that the above items are required for state TAMPs developed in compliance with 23 CFR Part 515. However, the guidance provided in this document is intentionally broader than that required strictly for federal compliance and is intended to support financial plans to aid a range of different asset management activities, as well as to support management of a range of physical transportation assets. In the realm of personal financial planning, individuals often draw on the services of pro- fessionals who gather client information, evaluate portfolios against clients’ risk tolerance, establish goals, develop and implement a financial plan, and assess progress within the plan toward the established goals. Likewise, a public agency may require assistance from financial planners as it develops its TAMP to better determine what funds are available for its assets, how existing assets should be valued, and how the financial plan in the overall TAMP should be organized. C H A P T E R 1 Introduction to Financial Planning

2 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management How to Use This Guidebook This guidebook helps the reader build a TAM financial plan, focusing on developing the financial and numerical data that form the backbone of a financial plan. It is targeted toward state departments of transportation (DOTs) but should prove useful for local transportation agencies as well. It can be used to develop financial plans and investment strategies for pavement and bridge assets, as well as for other physical transportation assets. Four core chapters—Transportation Funding Sources and Uses, Financial Forecasting, Investment Strategies and Scenarios, and Asset Valuation—are provided with “how to” instructions to enable the reader to create a TAM financial plan from scratch. Each of these core chapters has sections providing background information, as well as a set of steps to support financial plan development. Chapter 7 describes a web-based tool that one can use to help walk through the steps in the guidance, and in particular to communicate results. To illustrate key points, this guidebook features numerous examples and case studies throughout. Some examples offer current practices of state DOTs, while others highlight applied principles from other industries or other countries. Each example is intended to suggest an alternative for readers to consider rather than a single prescription for the reader’s own financial plan. Guidebook Structure and Sources The first two chapters of this guidebook introduce TAM professionals to financial funda- mentals in the context of transportation. Chapter 2 integrates financial planning concepts with other TAM activities that contribute to, inform, and even draw from the financial plan. Performance management, life-cycle planning, and risk management are all important aspects of asset management that need to be integrated with the financial plan. The next three chapters sequentially develop one—or variations of one—ten-year forecast of revenues and expenditures. Chapter 3 identifies sources and uses of funding and Chapter 4 builds the foundation for a forward-looking financial plan for TAM, though it could reason- ably be applied to many public-sector budgeting and forecasting activities. Chapter 5 provides for variations from a baseline forecast, offering investment strategies and scenarios for asset management. Figure 1-1. Integrated asset management program. TIP! Note the guidebook’s use of tips for the reader in each chapter (designated with the symbol at left) is intended to provide a quick action item for each important section.

Introduction to Financial Planning 3 Chapter 6 moves the reader toward today’s valuation of transportation infrastructure assets, walking through the steps and decisions to properly value an agency’s diverse and numerous capital assets. Finally, Chapter 7 concludes with insight on TAM financial plan communica- tion. This chapter guides the practitioner in assembling two pieces of the financial plan, details what should be included in the TAMP, and recommends visuals for clearly communicating the important information in the financial plan. It also describes how to use the web-based tool (www.tamplanner.com) for generating financial plan summary tables and figures. The development of this guidebook was informed by three resources of particular note: The TAMP Rule published October 24, 2016, now Moving Ahead for Progress in the 21st Century (MAP-21); The AASHTO Transportation Asset Management Guide, Volume 2, A Focus on Imple- mentation (AECOM et al. 2011); and The Federal Highway Administration (FHWA) Planning for Transportation Asset Management: Components of a Financial Plan (Varma and Proctor 2015a). FHWA adopted its TAMP Rule (81 FR 73196) in October 2016 to address the requirement in federal law that states develop risk-based TAMPs for their National Highway System (NHS) assets. This rule is now incorporated in federal regulations as 23 CFR Part 515. The AASHTO Transportation Asset Management Guide, Volume 2 (AECOM et al. 2011) encourages agencies to address strategic questions as they confront the task of managing the surface transportation system. Drawn from both national and international knowledge and experience, the guide assists state DOT, county, and municipal transportation agen- cies in maximizing their resources now and in the future, preserving highway assets, and providing the levels of service expected by customers. The FHWA Asset Management Financial Report Series is a set of five reports that provides a detailed perspective of financial planning for TAM. It discusses the components of a financial plan, explaining how to manage risks and use metrics; integrate financial plans into planning, program- ming, and budgeting processes; and incorporate valuation into TAMPs. The remainder of this introduction answers some basic questions about financial plans for TAM to establish the context for the remain- der of the guidebook. It also includes a brief preview of each of the core chapters should the reader wish to turn directly to one chapter to bolster a plan. What Is a Financial Plan? The federal rule on asset management plans (23 C.F.R. 515), finalized in October 2016, outlines financial plan requirements for State DOT TAMPs. “Financial plan means a long-term plan spanning 10 years or lon- ger, presenting a state DOT’s estimates of projected available financial resources and predicted expenditures in major asset categories that can be used to achieve state DOT targets for asset condition during the plan period, and highlighting how resources are expected to be allocated based on asset strategies, needs, shortfalls, and agency policies.” More broadly, the Certified Financial Planner Board of Standards defines “financial planning” as “the process of determining whether and how an individual can meet life goals through the proper management of financial resources” (Certified Financial Planner Board of Standards). This guidebook adheres closely to the definition of a financial plan from “The financial plan will illustrate and enable agencies to plan the level of investment required to achieve and sustain their asset condition objectives. The financial plan can illustrate the extent of shortfall and the implications of tradeoffs between treating existing assets and adding new assets, as well as the impact of tradeoffs across asset categories and related treatments. It will enable an agency to present a fiscally balanced asset management plan that addresses the performance and condition targets that the agency states in the TAMP. It will engage the public and other stakeholders in getting involved and in supporting the need for adequate investment in infrastructure assets. A fiscally balanced, long-term financial plan will provide transportation officials the tools needed to influence project selection, programming, project delivery, and support of increased funding. It will create a better understanding of the implications of reduced investment and the high cost of postponing action. It will encourage preservation and maintenance activities and create better appreciation of the immense value that exists in the nation’s infrastructure assets” (Varma and Proctor 2015b).

4 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management the federal requirements, while considering the broader importance of financial planning as a good practice for both individuals and organizations. Why Do Agencies Have to Prepare a TAM Financial Plan? Developing a financial plan is a federal requirement for state DOTs preparing their TAMPs. FHWA requires that state DOTs develop risk-based TAMPs that include financial plans and investment strategies. To deliver usable TAMPs, agencies have to integrate perfor- mance gaps, life-cycle planning, risk-management analysis, and other TAM elements into their financial plans. It is good business practice. Financial planning is a key aspect of managing infrastructure assets. It validates and strengthens other parts of the asset management plan and provides the agency with numerous capabilities that can improve overall financial stability and help the agency achieve performance goals. FHWA outlines a variety of benefits of including a financial plan within an asset management plan. In particular, the financial plan (Varma and Proctor 2015b): 1. Allows agencies to clearly identify how much revenue they need to sustain conditions, 2. Enables more sophisticated financial projections, 3. Highlights the gap in funding needs and funding availability, 4. Communicates realistic levels of service, and 5. Demonstrates responsible management of transportation systems. A financially integrated TAM program, therefore, should not only enable agencies to meet minimum federal requirements, but should also enhance decision-making processes that advance a physically and financially sustainable transportation system. How Does the Financial Plan for TAM Relate to Investments in Infrastructure Assets? Finance and investing are inseparable. Whether investing a client’s funds for retirement or investing taxpayer funds in transportation infrastructure assets, a financial planning professional—or transportation asset manager—should understand concepts such as the time value of money, inflation, net present value, return on investment, sources and uses (or revenues and expenses), and income statements, balance sheets, and cash flows. Techniques such as forecasting and scenario planning are invaluable tools for the transportation asset manager. Even if the TAM practitioner is not tasked with mastering these techniques, he or she should possess a fundamental understanding of them in order to pose the right ques- tions to finance professionals in the agency and contribute oversight of key processes such as estimating future costs. How Does the Financial Plan for TAM Relate to Accounting? Before delving into the specifics of this guidebook, it is important to note the relationship of the TAM financial plan to the more general concepts of financial reporting and accounting. For public agencies, like state DOTs, the Governmental Accounting Standards Board (GASB) establishes certain accounting and financial standards. These standards follow the generally accepted accounting principles (GAAP), which are commonly accepted principles in the U.S. for preparing financial statements for public and private sector organizations. GASB acknowl- edges the broader importance of financial reporting by stating, “Financial reporting plays

Introduction to Financial Planning 5 a major role in fulfilling the government’s duty to be publicly accountable in a democratic society” (GASB 1987). In addition to detailing accounting standards, GASB also establishes six basic characteristics of financial reporting. It is crucial that asset managers keep these characteristics in mind when preparing the financial plan as they provide the high level structure for producing a quality financial plan for asset management. Table 1-1 lists each characteristic and provides a brief description from GASB Concepts Statement No. 1. How Does the Financial Plan Relate to the Rest of the TAMP? TAMPs establish the desired and projected performance and condition of assets. The finan- cial plan then links the performance projections to the funding and investment levels needed to reach those future performance targets. This guidebook therefore underscores certain asset management activities that inform the development of the financial plan. It is not, however, intended to include comprehensive guidance on building the entire TAMP. How Does the Financial Plan Relate to Other Planning Documents? Federal requirements related to financial planning for transportation agencies include man- dates to project capital spending four years in the future through the STIP and spending on NHS assets ten years into the future through the TAMP. Long-range transportation plans (LRTPs) include projections 20 or more years into the future. These plans should not be developed in iso- lation from one another. In fact, this guidebook highlights the aspects of other activities within a transportation agency that can inform and strengthen the financial plan for asset management. Reporting Characteristic Description Understandability “Information in financial reports should be expressed as simply as possible . . . [and] be understood by those who may not have a detailed knowledge of accounting principles.” Reliability “Information presented [in a financial report] should be verifiable and free from bias and should faithfully represent what it purports to represent.” Relevance “There must be a close logical relationship between the information provided and the purpose for which it is needed.” Timeliness “If financial reports are to be useful, they must be issued soon enough after the reported events to affect decisions.” Consistency “There is a presumption that once an accounting principle or reporting method is adopted, it will be used for all similar transactions and events.” Comparability “Differences between financial reports should be due to substantive differences in the underlying transactions or the governmental structure rather than due to selection of different alternatives in accounting procedures or practices.” Table 1-1. Characteristics of financial reporting (GASB 1987).

6 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management These plans all involve forecasting of revenue and expenditures, and it is important to under- stand each plan in order to be consistent in reporting across the organization. Consistent report- ing will enable financial data to be connected across all three plans. Revenues and expenditures should be allocated so that the financial plan does not appear in direct conflict with other budget-related documents from within the agency or even from sister agencies within the same state. Figure 1-2 presents an example statement of revenues and expenditures, adapted from GASB (GASB 2007). This sample is offered here to demonstrate that certain terms (e.g., “Debt Service”) may be universally applied across multiple agencies within a state or other jurisdiction. The “Income Statement” concept is used in this guidebook to build 10-year forecasts, invest- ment strategies, and scenarios. Worth noting in the above example of fund accounting is that sources (revenues) and uses (expenditures) are listed in rows, common among most financial statements. However, rather than displaying years by column, this statement uses columns to show the breakdown of programs within a single year. This matrix format enables the reader to see two splits of the available budget in a single snapshot. Accountants rely on a different financial statement to gauge their agency’s current financial position. This is the balance sheet, where an organization’s current assets and liabilities are accounted for. Figure 1-3 shows a sample balance sheet adopted from GASB (GASB 2007). For a state jurisdiction, transportation assets will generally be balanced within the capital asset section of the balance sheet. Transportation assets can in fact comprise more than half of the value of a state’s capital assets. Chapter 6 discusses approaches to asset valuation, and reasons why agencies may value assets differently for asset management than they do for other financial reports. ($ in 000's) General Special Projects Total Governmental Funds REVENUES Fuel taxes $501 $501 Toll revenue 414 Registration fees 76 76 Other state revenue 49 34 83 Total revenues 1,040 34 1,074 EXPENDITURES Operating and maintenance 271 271 Salaries 255 255 Admin 137 Capital: Asset preservation 64 64 Safety 44 44 Expansions 88 27 115 Other 35 4 39 Debt service: Principal 39 39 Interest and other charges 97 97 Total expenditures 1,030 31 1,061 Excess (deficiency) of revenues over expenditures 10 3 13 Figure 1-2. Example statement of revenues, expenditures, and changes in fund balances.

Introduction to Financial Planning 7 Primary Government ($ in 000's) Governmental Activities Business-type Activities Total ASSETS Cash and cash equivalents $1,223 $1,140 $2,363 Investments 2,451 248 2,699 Receivables (net) 808 338 1,146 Internal balances 24 (24) 0 Inventories 50 37 87 Capital assets: 0 Land, improvements and construction in progress 6,357 3,559 9,916 Other capital assets, net of depreciation 4,420 1,770 6,190 Total capital assets 10,777 5,329 16,106 Total assets 15,333 7,068 22,401 LIABILITIES Accounts payable and accrued expenses 1,581 302 1,883 Deferred revenue 488 59 547 Long-term liability 0 Due within one year 801 761 1,562 Due in more than one year 3,421 3,265 6,686 Total liabilities 6,291 4,387 10,678 NET ASSETS Invested in capital assets, net of related debt 14,924 5,154 20,078 Restricted for: 0 Capital projects 283 169 452 Debt service 146 28 174 Other purposes 989 755 1,744 Unrestricted (deficit) (1,009) 962 (47) Total net assets 15,333 7,068 22,401 Figure 1-3. Example statement of net assets.

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TRB's National Cooperative Highway Research Program (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 transportation 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.

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