Financing SDOT’s Capital Programs: 

Taking Proactive Steps to Ensure the City’s Cash Flow Needs are Aligned with Issuance of Debt

The Seattle Department of Transportation (SDOT) manages an annual capital budget, supported in part by bond proceeds.  The amount of debt issued by the City annually on behalf of SDOT increased substantially beginning in 2007 and 2008, as the City began work on a number of very large projects, including the Spokane Street Viaduct and the Mercer corridor.  Between 2008 and 2011, the City issued bonds totaling approximately $68 million annually to support SDOT’s capital program.

By 2011, it was clear that SDOT was not spending bond proceeds at the pace assumed when the bonds were issued. This is not optimal and we knew we needed to make changes.  By better aligning the amount of debt issued and SDOT’s cash flow needs, the City could either reduce borrowing costs or do more projects faster.  We could not continue accumulating the balances that had built up beginning in 2008. 

In 2012, the City took action by reducing substantially the amount of debt issued for SDOT projects -- $15.9 million as compared to an average of $68 million in each of the four prior years.  This allowed SDOT to spend down the accumulated balances by 43 percent by the end of 2012.  We still have more work to do.  For 2013, the Mayor submitted legislation to Council that would reduce even further the amount of bonds the City will issue on behalf of SDOT to only $6.2 million – the amount required for work on the seawall replacement project.  SDOT will use the remaining bond proceed balance at 2012 year-end to cover its remaining $28.1 million in 2013 capital needs.

These efforts to better align the amount of debt issued with SDOT’s cash flow needs by lowering the size of the bond sales for 2012 and 2013 are just the start of the changes we will make to more aggressively manage project resources. 

The Mayor directed the City Budget Office (CBO) to conduct an extensive review of SDOT’s spending practices on a project-by-project basis going back to 2009.  The analysis revealed a number of systemic factors that we will take action to address. 

SDOT accumulated the bond proceed balances since 2008 as a result of a number of factors that are inherent in an organization responsible for completing major, multi-year capital projects.  The process of completing these projects from start-to-finish is dynamic.  Costs are constantly being refined based on a multitude of factors – soil conditions, prices of raw materials, design adjustments, the availability of outside funding sources.  Furthermore, the schedule can also fluctuate based on weather conditions and how fast partner agencies, such as the Washington State Department of Transportation, can issue permits or other work components.  All of these variables can lead to adjustments in when and how much cash is needed to complete a project.  In fact, CBO’s analysis revealed that 47 percent of the bond proceeds accumulated over the 2009 through 2012 period were the result of schedule shifts.  Another 42 percent is the result of SDOT securing other non-City funding (i.e. Federal grants); lower than anticipated bids; lower cost assumptions; or savings in planned contingencies.  In managing its bond proceeds, SDOT has traditionally managed projects longitudinally based on the life cycle of each project.  This has benefits in that SDOT has a strong track record of completing projects on time and under budget.  However, this conservative approach also has its drawbacks in that the City has been missing opportunities on an annual basis to more aggressively manage the accumulation of proceeds by either reprogramming the funds to meet other needs or by lowering the amount of debt issued to match what SDOT can actually spend in a given year.  While it is never practical – or advisable – to spend the proceeds down to zero each year – the City does have an obligation to more actively use the funds than has been the case since 2008.

CBO, working with the Department of Finance and Administrative Services can balance SDOT’s conservative, project-by- project focus by providing centralized oversight and reconciliation of SDOT’s spending practices at more frequent intervals (i.e. not at project completion, but every step along the way) on a more global basis.  This is not a practice that the City has instituted in recent memory.  Instead, the City has a long-standing practice dating back many years of relying on departments to manage its capital programs in a decentralized manner.  Decisions about how capital projects are financed are typically left to the departments to manage.  Debt is typically issued based on the recommendations of department project managers and capital finance professionals.  In making these recommendations, it is clear that there is a tendency to err on an overly conservative approach with the objective of ensuring that there is more than enough funding to cover costs – seen and unforeseen – over the life cycle of each project.  However, this predisposition toward conservatism has compounding effects when you look at this across many projects, creating a situation where a department may be holding on to more funds than are necessary.  Increased external oversight by CBO and FAS – departments with responsibilities for taking broader, Citywide views – is essential in creating a balanced review and decision-making dynamic in how the City manages its capital programs.

Based on these findings, the CBO is recommending the following changes:

1. Establish a stringent, centralized semi-annual reconciliation process whereby CBO will review SDOT’s actual spending on a project-by-project basis as compared to spending plans.
1. One review will be initiated as part of the proposed budget process to inform the proposed budget.  We will share the results of this analysis with the Council as part of the materials we transmit with the proposed budget.
2. The second review would take place in the first quarter of the year taking into account changes that may have occurred since the budget was prepared and the previous year’s results.  This analysis would inform the structure of the City’s annual bond sale which typically takes place in late spring.  We will share the results of this analysis with the Council as they consider the bond sale ordinance.
   
   
2. Establish quarterly reporting metrics to allow CBO to monitor SDOT’s actual spending against cash flow plans.
1. This would complement the semi-annual reconciliation processes described above and will document planned versus actual spending, identify where funding assumptions may have changes, and allow for more deliberate discussions about how to make course-corrections on the use of bond proceeds.
   
   
3. Conduct a similar review of bond proceed balances in other City funds with debt-supported capital programs, including Parks and Finance and Administrative Services (FAS).
1. The first priority will be funds with capital programs that are backed by the General Fund or Real Estate Excise Tax (REET) .
2. The goal is to complete this analysis as part of the 2014 budget process.
   
   
4. Establish policies to allow for the use of the cash pool to cover capital contingency costs.
1. Currently, the City practice is to cover contingency costs with bonds.  The City could have an opportunity to reduce borrowing costs by making available the cash pool – under strict policy guidance – for at least some project contingency costs.
2. CBO and FAS will examine these opportunities and develop policies for Council consideration in advance of transmitting the 2014 budget.

Last updated: March 14, 2013