by David Murray

ISTEA Planner's Workbook


The need to balance expected income with anticipated expenditures is part of running a household. It's part of running a business or a government. In the area of transportation planning, the Transportation Improvement Program is the set of transportation investments (the anticipated expenditures) and the Financial Constraint is the budget limit (the expected income).

With a Financial Constraint, the Transportation Improvement Program (TIP) becomes truly meaningful. With a Financial Constraint, the TIP becomes an expectable program of projects. Planners, project sponsors, and public citizens have a foundation of, and a forum for, public policy debates.

The TIP needs a Financial Constraint to be valid. A spending plan like the TIP is reasonable only to the degree that it is based on reasonable projections of available resources. A Financial Constraint means that a region can't count on more money than can reasonably be expected. It means that the TIP can't be a wish list, but must instead be a practical -- and perhaps austere -- set of projects designed to achieve regional mobility, access, economic, environmental, and community goals.

Before ISTEA: Few things disappoint more than a gift anticipated, but not delivered. Before ISTEA, no outside discipline existed to moderate projections of available resources. Projections were sometimes more political than prudent. Then, as now, pressures existed to include as many projects as possible in the TIP, regardless of cost. Without the discipline of a Financial Constraint regulation it was difficult to resist including any project that had some chance, however slight, of being funded. In the end, including every project but the kitchen sink in the TIP -- whether or not the funds exist to build or operate it -- compromises the integrity of the entire program.

With unrealistic financial assumptions, the overall community vision used to develop the TIP is breached. The integration of the various component elements of the transportation system is disrupted. The environmental conformity determination -- the process used to ensure that transportation projects are in sync with clean air laws -- is invalid. For example, if a metropolitan area says it is going to build a new light rail system to reduce auto emissions, the region had better be able to pay for it.

Without a Financial Constraint, the public process used to develop the TIP is a cheat. Rather than a program of projects, the TIP is a pool of projects from which to choose; not a self-contained investment program sufficient to implement certain regional goals.

After ISTEA: Live within your means. Expect less, but get more. The ISTEA and the new Planning Regulations now require TIPs to be financially constrained to reasonably expected resources.

In developing a TIP now, the first step is deciding how much money can reasonably be expected. The second step is determining transportation priorities within the overall budget constraint.

The Financial Constraint regulation -- the foundation for the TIP -- really comes down to two things:

1) A cooperative institutional context for agreeing to what is reasonable.

2) An appropriate method to project available funds.

The Financial Constraint gives a basis upon which to build a reliable, integrated, transportation investment program. Planning becomes more rational, goals more achievable. Planners and citizens involved in the development of the TIP can have a sense of proportion and purpose. With the Financial Constraint, the TIP becomes truly useful.

The TIP: What is it, anyway: the TIP, or Transportation Improvement Program, is the region's spending plan for transportation improvements. It is the region's transportation investment program, consisting of capital and operating improvements to the Metropolitan Transportation System. The TIP is multimodal. It includes investments in various modes such as transit, highway, and bicycle facilities. The TIP is the means of implementing the goals and objectives identified in long-range Regional Transportation Plans.

The scope of the TIP has expanded over the last few years. It used to include only those projects which had an element of federal funding, and those projects which required a federal action (like an Army Corps of Engineers permit). Now, TIPs are more comprehensive transportation investment programs. With the Clean Air Act Amendments of 1990 (CAAA), regions were required to include in the TIP all significant projects that could affect air quality. The Metropolitan Planning Organization (MPO), the regional transportation agency responsible for preparing the TIP in urban areas, must determine whether the package of proposed transportation investments in the area -- regardless of how they are funded -- results in better air quality. In doing this conformity determination, the Financial Constraint becomes all the more crucial. If the proposed project list is unrealistic, if some projects that improve air quality must be dropped when less funds are available than were anticipated, then the conformity determination of the entire package of investments becomes invalid. To avoid false promises, the TIP needs a Financial Constraint.

Developing the Financial Constraint: the U.S. Department of Transportation issued new Planning Regulations in the October 28, 1993, Federal Register. These regulations, or guidelines, establish a discipline, rationality, and openness in the development of the TIP. One such element of the Planning Regulations is the requirement that all TIPs be financially constrained.The Planning Regulations describe the nature of the Financial Constraint, and how it governs the TIP.

What does the TIP need to contain?
The TIP is the region's comprehensive spending plan for transportation improvements. The TIP must be, at least, a three-year program of projects. The projects must be listed in priority order. (Footnote: At a minimum, year 1 can be lumped as priority 1.) More than just a list of federally funded projects, or projects requiring federal permit approval, the TIP must be a financially constrained, year-by-year program of all regionally significant1 projects. The TIP must include all transportation projects in the region that need an assessment for conformity with air quality requirements.

The individual project entries in the TIP must contain the following information:
A) Project description, including sufficient detail to identify the project phase; and, in non-attainment or maintenance areas, sufficient description to permit air quality analysis according to EPA conformity regulations;

B) Specific project budget:

o Total project cost

o Federal share and source, by year

o Other funding shares and sources, by year;

C) Identification of the project sponsor and the designated recipient of the funds;

1 Regionally Significant (Federal Register 10/28/93, p 58065) means " a project...that is on a facility which serves regional transportation needs (such as access to and from the area outside of the region, major activity centers in the region, major planned developments such as new retail malls, sports complexes, etc., or transportation terminals as well as most terminals themselves) and would normally be included in the modeling of a metropolitan area's transportation network, including, at a minimum, all principal arterial highway and fixed guideway transit facilities that offer a significant alternative to regional highway travel."

The TIP must be financially constrained by year. This means:

A) The Financial Constraint must be expressed in terms of the dollars available from each fund source, for each year of the TIP;

B) Only projects fundable within the Financial Constraint can be includ- ed in the TIP.

The TIP must clearly identify which projects are funded from existing and committed sources, i.e., continuations of currently available revenue sources, and commitments dedicated in local resolutions or state commitments under the control of the Governor.

In all but years 1 and 2 of the TIPs within non-attainment and maintenance areas (areas with air quality problems), projects can also be proposed for funding from new funding sources -- but only if the MPO includes within the TIP a strategy for ensuring the availability of the new funds.

This means that in years beyond year 3 of TIPs in non-attainment and maintenance areas, and in all years of TIPs in attainment areas, projects may also be proposed for funding using new revenue sources. However, in the case of new funding sources, strategies (i.e., action plan with a schedule) for ensuring their availability must also be identified in the TIP. Any pie-in-the-sky must also be accompanied by a recipe, and a strategy for on-time delivery.

This is the content of the Financial Constraint. As described in the Planning Regulations, the Financial Constraint requirement can be characterized as having two parts:

A) the Process, the institutional framework for agreeing to what is reasonable; and

B) the Technical Projection Method, the method used to project available funds .

The Cooperative Process for Developing the Financial Constraint: the Planning Regulations require an open, cooperative process for developing the Financial Constraint among the MPO, the state, and the transit operators in the region. More than a simple review and comment, the requirement of a cooperative process for developing the Financial Constraint means direct involvement by all parties in the development of the fund estimate, and in the testing of the reasonableness of the projections.

According to the Planning Regulations, the state transportation departments are expected to provide MPOs with estimates of federal and state funds available. To be part of a cooperative process, this estimate cannot be done in a vacuum. The state transportation department must approach MPOs and transit operators early in the process to develop the best technical method for projecting state and federal funds, and to develop a process for reviewing the reasonableness of the projections.

These early meetings can establish a consensus agreement on the assumptions to be used in the Financial Constraint. In turn, MPOs and transit operators would discuss with the state, and with each other, methods for estimating local funds, and regional shares of state and federal funds.

To follow the spirit of the ISTEA, involvement in the development of the Financial Constraint, and the testing of the reasonableness of the projections should include a wider range of participants and an even more open process. Since the Financial Constraint is a key element of the TIP, involvement should include not only the state, MPO, and transit operators, but also federal and state agencies that review the TIP, project sponsors, interested agencies, and the public.

The best institutional forum for these discussions may differ between regions, but it must always include the ability for give-and-take between all participants. This give-and-take applies to the original development of the Financial Constraint and also to the subsequent check that all of the elements of the Financial Constraint are reasonable.

The MPOs are responsible for developing the Financial Constraint, and the MPOs are responsible for developing the cooperative process. Indeed, this cooperative context for the Financial Constraint is, in many ways, a great opportunity -- the first step towards jointly developing a TIP, which also must be established in an open, cooperative forum.

The Financial Constraint: The Technical Projection Method: once the ground rules for a collaborative process have been established, the group must choose between several methods available to project available funds. In projecting economic variables, such as available funds, there are nine commonly used Technical Projection Methods. These are described in Table 1.

Table 1

Method Number 1

Regression: Ordinary Least Squares (OLS): OLS regressions characterize the relationship of one variable to other variables. A cause-effect link is established, and that relationship is used to project future values of one variable based on the other variables.

Advantages: simplicity, flexibility, availability, familiarity, OLS regression options exist on most spreadsheet programs. OLS can be used to characterize a variety of circumstances. Explanations are often contained in the spreadsheet software manuals. Causal variables are often projected by economists in publicly available sources, and by state and federal agencies.

Disadvantages: requires a tight cause-effect relationship. Requires data for trend analysis. Requires assumptions for causal variables. To be used properly, requires a working knowledge of statistical methods and properties.

Appropriateness: this method is best for funds that have a direct relationship to economic trends, for example, household income to purchases of goods and services (and the link to sales tax receipts). Regressions are frequently used to predict gas tax receipts and sales tax receipts. OLS regressions are also used to project total fare revenues from proposed new fare structures.

Method Number 2

Regression: Time Series: a time series regression is a way of projecting a variable based on the past values of that variable alone. Time Series statistical packages have been used for business cycle analyses and are available on many business application software programs.

Advantages: Simplicity.

Disadvantages. Requires special software. Current packages are a bit of a black box method, both in terms of the statistical analysis done by the computer (the packages often just spit out the answer without any statistical justification or support) and in terms of being able to justify why this projection method is better than other regression or algebraic methods.

Appropriateness: a time series method is best for variables that have a constant pattern over time, and no discernible relationship to any other economic variables or political decisions. Some use time series for business cycle variables.

Method Number 3

Input-Output Model: an input-output model is a characterization of an economic system, and the direct and indirect linkages within it, in a matrix form. Some input-output models can calculate fund revenues, or the variables that drive projections of funding resources. For example, if a region is experiencing defense industry cutbacks, an input-output model could also quantify the decline in tax base due to the decline in the industry sectors that provided inputs to the defense factories, or provided service to former defense industry employees.

Advantages. Accuracy, in some cases.

Disadvantages: Complicated for projecting fund sources. Requires an updated, input-output model. Away from academic circles, this is rare. To be used properly, requires a working knowledge of some advanced statistical/mathematical methods and properties.

Appropriateness: Good for analyzing direct and indirect impacts of a toll or tax structure. Not appropriate where updated input-output models are not readily available.

Method Number 4

Geometric, or Exponential Growth Rates: this method uses a trend curve to characterize the behavior of a fund source and to project future values. This can be done on a calculator.

Advantages: simplicity.

Disadvantages: no sensitivity to political or economic forces.

Appropriateness: a geometric formula can be used to characterize funds that have been increasing at a decreasing rate. An exponential formula is sometimes appropriate to project funds that increase at an increasing rate. This is sometimes appropriate for sources driven by population growth. A bridge that is reaching its technical capacity may generate toll revenues that can be characterized by a geometric formula.

Method Number 5

Constant Growth Rates: this method uses a linear trend line to project future values. For example, if vehicle registration fee receipts have increased 3% per year over the past 10 years, it might be reasonable to project an increase of 3% next year.

Advantages: simplicity. This can be done on a calculator, or by hand.

Disadvantages: no sensitivity to independent political or economic forces.

Appropriateness: appropriate to characterize the behavior of some fund sources over time, especially if those fund sources are linked to targets, or have experienced little variation of growth or changes of behavior over time.

Method Number 6

Institutional Formula: some fund sources are easy to predict because they are based on a legislatively determined formula. Sometimes they are set at a certain dollar level, sometimes the values are geared to other (simple or complex) considerations.

Advantages: accuracy. This can be done on a calculator, or by hand.

Disadvantages: only true for some fund sources. Even the ones that are directed by legislative formula are occasionally changed by the legislative body that devised them.

Appropriateness: appropriate only to funds that are determined by legislative formulae.

Method Number 7

Algebraic: some fund sources have strict algebraic relationships to other variables. For instance, the average General Fund contribution to transportation may always be 10% of the budget.

Advantages: simplicity. This can be done on a calculator or by hand.

Disadvantages: only true for some fund sources. Algebraic relationship may change. Other variables, assumptions, political or economic factors are often difficult to predict.

Appropriateness: appropriate only to those certain funds that have this direct algebraic relationship.

Method Number 8

Constant Value: some fund sources haven't changed much over time. The question here is, "Well, what did we get last year?" and use that value to predict future values.

Advantages: simplicity. About as simple as you can get.

Disadvantages: no consideration of political or economic forces.

Appropriateness: appropriate only to certain funds; those that don't change much from year to year.

Method Number 9

Political Judgment: some fund sources are subject to annual budget battles, or are private dedications that are subject to negotiations. These vary widely depending on the circumstances of the decision.

Advantages: some funds just work like this, and the judgment of experience may be more appropriate than other more technical projection methods for these fund types.

Disadvantages: difficult to justify. Difficult to reach consensus, everyone has their opinion. Relies heavily on open forum for reasonableness check.

Appropriateness: certainly not all fund types are subject to a wide amount of political discretion in the short term. Many fund types projected by the other methods should have the wisdom of a good political judgment as a reasonableness check.


The selection of the most appropriate Technical Projection Method depends on:

1. the past behavior of the funding source, how it has increased and decreased over time, and how it is related to other events or trends;
   
2. expectations about the continuation of those past relationships into the future;
   
3. data that is available, including assumptions where needed, and
   
4. experience in using statistical methods, if necessary.
   

Choosing a Technical Projection Method is really choosing how to systematize, or rationalize, a judgment about the future. Each of the methods above has its advantages and disadvantages. Sometimes, using methods to project past actual values is useful in seeing which comes the closest to that value.

The advantage of choosing one of these methods within an ISTEA- directed process is this: it provides a set of checks and balances. Though occasionally laborious, a democratic process is a good way of getting the truth, or at getting to the best way to proceed. Having an open, cooperative process virtually ensures that all projections will be subject to a reasonableness check.

The Reasonableness Check -- The Open, Cooperative Process Continued: after a Technical Projection Method is chosen -- in the cooperative process -- the projections, the dollars projected to be available each year from each fund source must be reviewed in a reasonableness check. Sometimes, a projection method is chosen by consensus at the start. Other times, one agency is delegated the responsibility for projecting one fund source.

In either case, the set of projections are brought before the broader forum (including the federal reviewing agencies such as Federal Highway Administration (FHWA) and the Federal Transit Administration (FTA) ) for endorsement before being used for the TIP. The projections are scrutinized to make sure the estimates are the most defensible and the most justifiable. The limits that the Financial Constraint dictates on the TIP ensure that each projection will be scrutinized carefully.

In testing projections for reasonableness, three checks are made:

1. Was the correct Technical Projection Method chosen? Was a method used that results in the most statistically probable projection? Is there another method that results in a better projection, or one that fits past experience and future circumstances better?
2. Where assumptions were made, are the assumptions themselves accurate? The OLS regression method, for example, requires assumptions about the causal variables in order to project the effect into the future. These assumptions should be called out specifically in the course of developing the Financial Constraint. If, in the end, the assumptions are suspect, then so are the projections. In that case, either the assumptions or the projection method should change.
3. Where political judgments were made, or where politics were left entirely out of the projection methodology, is this supportable? Political judgments are debatable. The omission of politics in the projection is debatable. It is here that the democracy of the open, cooperative process is especially key. Each member brings an element of experience, and a unique insight, that contributes to reaching a consensus on the best judgments to make in developing the Financial Constraint.

In testing the Financial Constraint for reasonableness, a question is whether the projection is the best and most logical. In this context, the larger forum would reject any projection that is not consistent with past trends. For example, if FTA Section 9 funds are being projected, one would base the future projections on past values. While the Planning Regulations allow the use of Federal Authorization values for the Financial Constraint, this would not pass a reasonableness check. Using the higher Authorization levels (which are much higher than the amounts which have traditionally been available) would be unreasonable.

In this context, the larger forum would reject any projection that is at odds with political reality. In another case, if transportation has always been 10% of the state budget, but if the state is going broke and has not shown an ability to balance a budget, it would be unacceptable to continue to assume the same dollar levels from the state far into the future. Once the Financial Constraint is established, the TIP can be firmly built upon it.

Step Two: Setting Priorities for the TIP: The second step in developing a financially constrained TIP is to decide which projects should be included to the limit of the funds projected to be available. This is done by determining overall priorities, and then strategically assigning projects to the fund source that best fits the project, and the overall goals of the program.

The Planning Regulations require the prioritization of projects in the TIP. The minimum level of prioritization is to call every project in year 1 (fund constrained) a priority 1, every project in year 2 (also fund constrained, of course) as priority 2, and so on. Practically, however, all projects must be prioritized. In almost every region, more projects are proposed than can be funded. Project selection requires a priority order, and a criteria for project ranking.

Again, the method of setting priorities must be developed in an open forum, and to be successful, must include all transportation interests. The priority-setting process must be multimodal, and incorporate the various elements and factors described in the ISTEA. It must also incorporate the operations and maintenance priority called out in the Planning Regulations.

In developing evaluation criteria, it is useful to make a distinction between screening, scoring, and programming. Some criteria are screening factors -- threshold eligibility requirements. Some criteria are ranking factors -- the values upon which priorities are decided. And some criteria are programming strategies -- dictating the principles used to best match projects to particular fund sources.

It is also wise to establish certain principles to formulate the ranking criteria. The first is to tie the solution proposed by the project to the local problem it is intended to solve. The second is to use measures (in differentiating project worth) that can apply to all modes fairly. The third is to incorporate data available from the new Management Systems and to incorporate performance-based standards into the criteria. The fourth principle is to rely upon and strengthen existing plans and programs.

The criteria used to evaluate projects are developed in an open, cooperative context, just like the Financial Constraint that binds the selection of projects. These criteria differ from region to region, being more complex for more varied and large metropolitan areas. In each case, nonetheless, the projects selected for the TIP are multimodal, and based on the goals that the community is trying to achieve with their transportation system.

Step 3: Getting the TIP Approved Under the Financial Constraint: each region (through the MPO) prepares a TIP. The states also prepare a statewide TIP, often incorporating the regional TIPs and adding statewide projects in rural areas outside the MPO jurisdictions. The FHWA and FTA approve the statewide TIP. In reviewing the regional TIPs, the federal agencies make two findings: approval of the air quality conformity determination, and approval of the Financial Constraint.

If the federal agencies have been involved in the development of the Financial Constraint, approval of this aspect of the TIP is perfunctory. By the same token, if the federal agencies have been involved in the development of the Financial Constraint, and have endorsed it in the open, cooperative forum, they cannot reject that Financial Constraint when the TIP is submitted.

While it is true that the Planning Regulations allow all of year 1 to be called priority 1, and also allow federal funds to be programmed at the Authorization level, neither of these tacks is wise for the MPOs to adopt. The priority-setting process must be project-specific in developing the TIP, and the use of the Authorization level could result in false promises and that would not pass a Financial Constraint reasonableness check.

For those who contend that the Financial Constraint inhibits project delivery by prohibiting over-programming, remember that the Planning Regulations allow the movement -- without a TIP amendment -- of a project from year 2 or year 3 into the slot of the project in year 1 which is incurring unexpected project delays. (Planning Regulations, s450.332 (c), Federal Register, 10/28/93, p. 58078.) Thus the TIP can be both financially constrained and efficiently managed.

Another spurious criticism of the Financial Constraint is that by prohibiting over programming, it limits the ability to strong-arm funding agents. Obviously, a rational plan is desirable in its own right, and instead of limiting the ability to get more funding, the Financial Constraint actually delineates the funding issue more clearly, and sets the stage to make the argument for increased funding more persuasively. For instance, the region could say, "If we received $X, we would be able to do Y projects (specifically), resulting in Z benefits." Following the Financial Constraint cleanly maintains the integrity of the planning and programming activities, and results in the opportunity to make a responsible and compelling case to the funding agency, or the public.

Summary: the Financial Constraint enables the TIP to be a meaningful document for implementing the region's transportation goals. The TIP becomes useful for community planning purposes, for meeting environmental protection laws, and for projecting economic, transportation access and mobility performance. The TIP as the regional transportation spending plan is reasonable only to the degree that it is based on reasonable projections of available resources.

The Financial Constraint has two parts: 1) the Process -- the open, cooperative context for agreeing to what is reasonable, and 2) the Technical Projection Method -- the mathematical/statistical technique, or systematized judgment, used to most accurately project future levels of a funding source.

Proper use of the Financial Constraint rationalizes and democratizes the planning process and the program which implements the region's visionary goals. The region can have a proper sense of purpose and proportion through the Financial Constraint. By forcing us to live within our means, the TIP with a Financial Constraint becomes a truly meaningful transportation priority-setting investment plan.

After all, you can't have everything. Where would you put it? (Attributed to Steven Wright.)