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Chapter 2.4

Manage Cash Flow More Effectively


Summary

The Texas Department of Transportation’s (TxDOT) ongoing cash balance represents an opportunity for more aggressive fiscal management. The cash balances represent underutilized resources and, in conjunction with other recommendations, could be converted into faster project delivery for the citizens of Texas.


Background

The need to effectively manage cash flow and best use of available resources is as strong as ever. Despite significant increases in transportation dollars associated with passage of the federal Transportation Equity Act for the 21st Century (TEA-21), TxDOT is able to meet only 36 percent of the state’s documented transportation needs.[1]

As always, state agencies need to effectively manage cash flow and maximize the use of available resources. Effective cash management in a public agency is achieved when an organization has the optimal level of cash on hand to meet its obligations without maintaining excessive cash balances. The cash balance is intended to meet near-term obligations and as a cushion against unexpected expenditures.

TxDOT manages a financial operation of nearly $5 billion per year. Construction projects are expected to reach almost $3 billion in fiscal 2000.[2] Exhibits 1 and 2 show the TxDOT receipts and expenditures in fiscal 1999.[3], [4]

Source: Texas Department of Transportation.

Source: Texas Department of Transportation.


Cash Management at TxDOT

Effective management of the transportation department’s fiscal resources depends on comprehensive cash management and forecasting. The purpose is to ensure that TxDOT can meet its financial obligations while optimizing the outputs generated from those resources-in the case of the transportation department, those outputs generally refer to transportation facilities built and maintained.

TxDOT strives to be at an optimal cash position at all times-a delicate balancing act. Given the time required for project delivery and other factors, the agency sometimes has difficulty avoiding having excess cash on hand. In the not-too-distant past, however, TxDOT had to aggressively manage outlays to avoid over drafting funds. According to TxDOT staff, in the 1980s portions of payments to contractors were delayed as TxDOT assembled the needed cash for its obligations. This delay in payments was done with the full cooperation of TxDOT’s contracting community.

TxDOT maintains a cash forecasting system that projects expenditures and revenues on a 10 year basis, used by agency management to project and manage construction projects and other expenditures against fiscal resources. Using its cash forecasting system, TxDOT manages the organization’s cash balance via a target for the lowest ending balance on any given day. The lowest balance generally falls on the 8th, 9th, or 10th day of the month when the majority of payments to vendors and employees are made. The department’s target for the lowest daily balance is currently $75 to $125 million.[5]

Exhibit 3 displays the lowest daily balance, average monthly balance, and for context, the average revenues and expenditures for TxDOT’s Highway Fund 006 for fiscal 1996-1999 (actual) and fiscal 2000–2003 (projected). As Exhibit 3 demonstrates, in each of the years for which actual data is available, the average cash balance exceeded revenues and expenditures for the month. Moreover, the lowest daily balance was well in excess of the $75 to $125 million target.

Source: Texas Department of Transportation Cash Forecasting System, January 2000 Forecast: December 1999 Actual, January 12, 2000.

Exhibit 4 shows the same information for each month of fiscal 1999 and maps results against the target lowest daily balance of $75 million to $125 million.

Source: Texas Department of Transportation Cash Forecasting System, January 2000 Forecast: December 1999 Actual, January 12, 2000.

An offsetting consideration is that the state highway fund accrues interest on state highway fund cash balances.[6] See Exhibit 5 for a display of interest earnings over the 1996–1999 time period.

Exhibit 5
Interest Earnings - Fund 006–1996 through 2000 (est.)

($ in thousands)
1996
1997
1998
1999
2000 (est.)
Interest Earnings
$24,573
$23,792
$27,254
$21,862
$20,098

Source: Texas Department of Transportation.

The variance between target and actual cash balances is due in large part to delays in construction letting due to project readiness based on such factors as weather, plan readiness, legal issues, delays in right-of-way (ROW) acquisition, and environmental and archeological issues. While these factors are beyond the control of the financial managers, knowledge of historical experience with respect to such delays should be used to help fine-tune cash flow forecasting and financial management.


Advance Construction

Advance construction is a technique that allows a state to initiate a project using non-federal (e.g., state or local) funds while preserving eligibility for future federal-aid funds. Eligibility means that the Federal Highway Administration (FHWA) has determined that the project technically qualifies for federal-aid; however, no present or future federal funds are committed to the project.[7] The advantage of this approach is that it allows states to begin projects before they have amassed all of the obligation authority (the total amount of funds that may be obligated in a year) needed to cover the federal share of the project.

States generally use the advance construction approach when they have state funds available prior to the availability of federal funds for a project or set of projects. Often, advance construction authority is applied to high priority projects for which the state is willing to fund (in some instances, through borrowing) a project prior to federal monies becoming available.

The process for using advance construction is very similar to the traditional approach, with the difference being that the FHWA is asked to authorize the project without obligating federal funds. The state may request that FHWA convert the advance construction amount to an obligation at any time, provided the state has sufficient obligation authority and apportionment dollars.[8]

TxDOT generally makes use of its advance construction capability for short-term cash flow, but not for longer-term project advancement. The department will apply advance construction capacity but rarely carry a balance beyond the period from the first quarter to the second in a federal fiscal year. For instance, TxDOT would be likely to apply advance construction in July of a given year and convert those projects to federal funding in October. One example provided by staff to justify the use of advance construction is emergency relief. [9]

TxDOT plans to continue to increase its use of the advance construction cash management tool, based on the availability of state funds. According to TxDOT staff, however, the current cash forecast indicates that state funds will not be available for letting state-funded projects in February 2001. Thus, if the forecasts hold true, without additional state funds, TxDOT would not be able to advance federal projects, without borrowing.[10]


Other States’ Experience

Other states use the advance construction capability more aggressively than Texas does (see Exhibit 6 for a summary of states’ advance construction balances as of year-end in fiscal 1997, 1998, and 1999).[11] The states with the highest advance construction balances are generally those with significant state funding beyond the matching requirement and/or more extensive debt programs, e.g., New Mexico, South Carolina, Massachusetts, Utah, Colorado, and Arizona.

Colorado, for instance, routinely funds projects in advance using available state funds and the advance construction authority. Colorado uses the advance construction technique for a number of reasons, the most critical of which is the ability to use state funds to accelerate the letting schedule prior to the start of a federal fiscal year and associated obligation authority. Colorado’s fiscal year begins and ends three months before the federal fiscal year and thus the state can use state funds available at the start of the state’s fiscal year (July) until federal resources are available.[12]

Advance construction can also be utilized in instances where a state has a project ready to go that meets federal requirements but for which federal funds are not yet available to be obligated. The state can fund the project with its own resources, seek federal funds when obligation authority and apportionments are available, and use these funds for new projects that may or may not meet federal requirements. This provides increased flexibility in the timing of project implementation relative to particular funds availability.

Exhibit 6
Year-End Advance Construction (AC) Balance Relative to Apportionments (1997 - 1999)

Sorted by Ratio of AC: Apportionments in 1999

($’s in Thousands)


1999


1998


1997

State
Advance Construction
Apportion-
ments
Ratio (AC:Apport)
Advance Construction
Apportion-
ments
Ratio (AC:Apport)
Advance Construction
Apportion-
ments
Ratio (AC:Apport)
Massachusetts
2,976,942
493,230
6.04
2,938,504
421,787
6.97
2,277,331
731,537
3.11
New Mexico
497,576
259,591
1.92
471,166
222,221
2.12
21,060
178,801
0.12
South Carolina
691,753
420,849
1.64
386,031
359,903
1.07
64,103
323,090
0.20
Utah
295,555
205,675
1.44
392,857
176,064
2.23
400,200
135,778
2.95
Colorado
347,895
307,304
1.13
164,042
262,993
0.62
89,582
215,613
0.42
Arizona
457,219
429,384
1.06
344,999
350,307
0.98
95,849
299,442
0.32
North Carolina
727,589
743,184
0.98
295,114
636,222
0.46
359,757
538,251
0.67
Maryland
346,112
416,464
0.83
162,441
339,200
0.48
227,373
287,370
0.79
Nebraska
163,630
203,997
0.80
158,914
174,647
0.91
106,010
150,602
0.70
Iowa
223,665
315,665
0.71
172,596
270,245
0.64
169,954
214,109
0.79
Kentucky
290,759
456,049
0.64
77,700
390,416
0.20
87,906
338,641
0.26
Missouri
390,418
645,882
0.60
76,710
532,034
0.14
113,211
441,320
0.26
Michigan
491,570
847,846
0.58
370,169
708,999
0.52
198,256
605,655
0.33
($ in Thousands)


1999


1998


1997

State
Advance Construction
Apportion-
ments
Ratio (AC:Apport)
Advance Construction
Apportion-
ments
Ratio (AC:Apport)
Advance Construction
Apportion-
ments
Ratio (AC:Apport)
Illinois
508,673
888,176
0.57
296,620
760,350
0.39
263,572
713,442
0.37
Florida
640,081
1,222,861
0.52
349,830
1,038,172
0.34
232,505
892,626
0.26
Delaware
60,577
116,197
0.52
35,164
99,464
0.35
59,498
83,849
0.71
New York
684,523
1,355,893
0.50
259,133
1,160,749
0.22
398,327
1,128,779
0.35
South Dakota
83,358
191,312
0.44
44,680
163,345
0.27
45,949
120,316
0.38
Indiana
284,290
661,804
0.43
59,605
530,327
0.11
103,904
489,263
0.21
Virginia
271,319
673,768
0.40
363,634
576,720
0.63
208,133
478,227
0.44
Connecticut
155,147
398,830
0.39
190,184
341,426
0.56
93,383
380,807
0.25
Ohio
323,179
976,403
0.33
356,558
770,198
0.46
588,212
687,487
0.86
California
717,204
2,419,068
0.30
604,228
2,070,435
0.29
1,017,021
1,770,527
0.57
Texas
561,503
1,983,452
0.28
2,836
1,623,366
0.00
172,714
1,382,779
0.12
Mississippi
86,075
320,033
0.27
400
273,977
0.00
23,479
226,920
0.10
Kansas
81,717
307,726
0.27
31,799
263,432
0.12
7,734
222,064
0.03
Rhode Island
40,157
157,224
0.26
27,500
134,503
0.20
31,326
86,616
0.36
Washington
119,930
478,931
0.25
65,394
401,882
0.16
32,520
346,920
0.09
Pennsylvania
318,359
1,325,155
0.24
346,946
1,132,606
0.31
454,613
765,866
0.59
Wisconsin
120,711
523,044
0.23
53,906
447,770
0.12
25,049
402,916
0.06
New Hampshire
29,736
136,339
0.22
4,243
114,186
0.04
12,136
92,425
0.13
Oregon
65,390
325,626
0.20
4,616
277,210
0.02
19,674
226,603
0.09
Minnesota
62,051
393,742
0.16
59,234
337,087
0.18
10,797
262,706
0.04
Wyoming
28,223
183,303
0.15
17,374
156,829
0.11
0
119,945

Alabama
79,971
534,564
0.15
24,871
457,357
0.05
7,394
383,690
0.02
West Virginia
34,757
297,258
0.12
16,936
254,484
0.07
8,720
170,824
0.05
Idaho
23,559
203,441
0.12

174,073

0
117,365

Maine
13,565
139,726
0.10
6,035
119,428
0.05
12,041
98,603
0.12
Vermont
6,451
120,086
0.05
821
102,814
0.01
0
84,897

North Dakota
8,258
172,110
0.05

147,331

0
110,336

New Jersey
27,220
678,000
0.04
138,981
580,419
0.24
39,410
516,319
0.08
Nevada
7,291
190,358
0.04
18,500
162,956
0.11
19,362
112,815
0.17
Georgia
32,872
947,234
0.03
34,793
789,241
0.04
26,250
657,227
0.04
Oklahoma
10,232
406,905
0.03
6,722
347,214
0.02
7,473
293,796
0.03
Arkansas
3,577
350,045
0.01
0
299,289

58,462
251,782
0.23
Tennessee
5,924
605,304
0.01
0
509,148

86,446
424,498
0.20
Louisiana
3,996
445,260
0.01
0
357,479

12,326
293,258
0.04
Alaska
0
312,921

0
267,884

0
215,763

District of Columbia
0
103,890

0
88,942

0
87,548

Hawaii
0
135,962

0
116,394

0
131,439

Montana
0
260,763

0
223,233


158,606

Total
12,987,222
19,883,335
0.65
9,103,903
16,749,947
0.54
7,980,667
14,734,035
0.54

Sources:
1997 Apportionments: Highway Statistics 1996, Form FA4, Apportionment of Federal Funds Administered by the FHWA for Fiscal Year 1997.
1998 and 1999 Apportionments: TEA-21 Funding Tables, FHWA, HABF-30, Actual Apportionment Pursuant to TEA-21 as Amended after Distribution of Minimum Guarantee Funds 1997-1999 Advance Construction, FHWA.


Recommendations

TxDOT could make better use of its cash resources and lower its average cash balance through improvements to project readiness and project delivery. Recommendations related to these elements are addressed in other parts of this performance review.

While TxDOT’s average cash balances has declined in recent years, even amid substantial program increases, it continues to represent an opportunity for more aggressive fiscal management. These extra balances represent underutilized resources.

A. The Texas Department of Transportation (TxDOT) should expand use of its advance construction capability to accelerate projects and maximize the effect of its cash position.

To the extent that TxDOT has non-federal cash in hand and projects ready to go, it can leverage these fiscal resources via an expanded advance construction program. Expanding the application of advance construction could result in more effective use of the Department’s cash resources and a lower average cash balance. As a side benefit, use of advance construction authority increases the state’s flexibility. For instance, if the agency has a project that meets all necessary federal requirements but for which there is not currently federal funds available, TxDOT can fund the project with state funds. When the state converts the advance construction balance to federal funding, those funds can be used for any project without regard to federal eligibility since the original project met the federal requirements.

B. State law should be amended to provide TxDOT with the authority to borrow on a short-term basis from the State Treasury or, alternatively, from commercial banks.

In addition to improvements in project readiness and speed of delivery, TxDOT would benefit from the ability to borrow funds on a short-term basis, either from the State Treasury or from outside capital markets. Provision of short-term borrowing capacity would allow TxDOT to manage its cash position more aggressively. For instance, if the department had the ability to borrow on a short-term basis, it could be less focused on managing to the lowest daily balance, i.e., less concerned about spending beyond day-to-day available cash.

According to the Comptroller’s office, TxDOT would face constitutional and/or statutory obstacles if allowed to borrow funds on a short-term basis or to overdraft its account. This authority would require a constitutional amendment and legislative action.[13]


Fiscal Impact

The overall fiscal impact of these recommendations cannot be estimated. The potential impact of more aggressive management of TxDOT’s cash position is best measured by the value–both in terms of cost savings and economic benefits – of quicker project starts and accelerated project delivery. Potential costs are the foregone interest earnings on the Department’s cash balances and/or new borrowing costs associated with short-term borrowing. This can be outweighed by gains from cost savings and economic gains from faster project delivery (Exhibit 7).

For example, Exhibit 7 illustrates the estimated cost savings and economic impact of accelerating the completion of a hypothetical $100 million highway construction project by six months. If the $100 million project is built as originally scheduled, $2.7 million in simple interest is earned on the $100 million cash balance during the last six months of the project. Whereas, if the project is accelerated, the project costs less ($95.7 million) and the resulting cost savings ($4.3 million) earns interest. In addition, the estimated economic benefit of completing the project six months early is $4.7 million. If the project is delayed, the cash balance increases.

Exhibit 7 Accelerate Use of Cash Balance Funds for Highway Construction
through Advance Construction


Project
Cost
State Funds
on Hand
in Cash Balance
Amount Available after 6 months Interest earned at 5.5 percent
Amount Interest Earned
Total
  1. Federally-approved Project
$100,000,000




Original Project Schedule
  1. 2. Funds earn interest in Cash Balance Account until project is completed as originally Scheduled.

$100,000,000
$102,713,193
$2,713,193
$2,713,193
Accelerated Project Schedule
  1. 3. Cost of Project if Accelerated 6 months*
$95,694,875
-
-
-

  1. 4. Cost Savings (difference between original Cost and accelerated cost:
    #1-#3)
$4,305,125




  1. 5. Invested Cost Savings (savings earn Interest at 5.5 percent)

$4,305,125

$116,806
$4,421,931
  1. 6. Net Savings (Cost savings less 6 months interest on $100 million)




$1,708,738
  1. 7. Economic Return of Early Project Delivery at 10 percent (6 months)**




$4,670,757
* Accelerated project cost based on 9.2 percent inflation.
**Economic return of $95,694,875 project at end of 6 month at 10 percent per year.

Sources: TransTech Management Consultants and Texas Comptroller of Public Accounts.


Endnotes

[1] Texas Department of Transportation, Transportation Needs Revenue Assessment (Austin, Texas, January 1997), updated per correspondence from Max Proctor, director, Programming and Scheduling Division, Texas Department of Transportation, August 10, 2000.

[2] Texas Department of Transportation, “Cash Forecasting System, January 2000 Forecast: December 1999 Actual, ” Austin, Texas, January 12, 2000. (Computer printout.)

[3] Testimony by David Laney, “Federal Finance: SIB, TIFIA, GARVEE,” before the Texas Senate Committees on Border Affairs and State Affairs, January 11, 2000.

[4] Texas Department of Transportation, “Cash Forecasting System, January 2000 Forecast: December 1999 Actual,” Austin, Texas, January 12, 2000. (Computer printout.)

[5] Interview with James Bass, director, Finance Division, and Finance Division staff, Texas Department of Transportation, Austin, Texas, February 16, 2000; and letter from Cathy J. Williams, PHR, assistant executive director for Support Operations, Texas Department of Transportation, to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, October 18, 2000.

[6] Letter from Cathy J. Williams, PHR, assistant executive director for Support Operations, Texas Department of Transportation, to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, October 18, 2000.

[7] Federal Highway Administration, Guidance on Section 308 of the NHS Act – Advance Construction of Federal-Aid Projects (Washington, DC, May 10, 1996) <http://www.fhwa.dot.gov/innovativefinance/sc308510.htm>. (Internet document.)

[8] Apogee/Hagler Bailly, Federal-aid Highway Funding: Implications for Massachusetts (Denver, Colorado, 1999). (Consultant’s report.)

[9] Interview with James Bass, director, Finance Division, and Finance Division staff, Texas Department of Transportation, Austin, Texas, February 16, 200; and memorandum from Kirby W. Pickett, P.E., deputy executive director, Texas Department of Transportation, to Clint Winters, Texas Comptroller of Public Accounts, regarding the study of the Texas Department of Transportation, Austin, Texas, September 29, 2000.

[10] Memorandum from Kirby W. Pickett, P.E., deputy executive director, Texas Department of Transportation to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, regarding the study of the Texas Department of Transportation, Austin, Texas, September 29, 2000.

[11] Looking only at a single point in time can provide skewed information based on the timing of a conversion of advance construction balances, but this table provides a snapshot of states’ relative use of the advance construction mechanism.

[12] Telephone interview with Heather Dugan, director, Finance Division, Colorado Department of Transportation, Denver, Colorado, October 11, 2000.

[13] Information received from James LeBas, chief revenue estimator, Texas Comptroller of Public Accounts, Austin, Texas, June 26, 2000.