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

Chapter: Chapter 5 - Investment Strategies and Scenarios

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Suggested Citation:"Chapter 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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 5 - Investment Strategies and Scenarios." 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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50 Investment strategies are adopted to achieve the asset condition, system performance, and capital expansion goals set by the state DOT in both the short term and the long term. Sound investment strategies maximize the return on investment from both federal and state funds while mitigating risks that interfere with the DOT’s ability to sustain an acceptable level of service. In an integrated TAM program, investment strategies are informed by the needs and challenges of planning and engineering activities, which in turn are guided by the objectives of the financial plan. This chapter describes how to finalize a financial plan and its investment strategies, which requires defining a set of scenarios and detailing projected spending by year for asset management-related uses. 5.1 Fundamentals of Investment Strategies Introduction The forecasts developed based on guidance in the prior chapter detail potential funding for asset management uses for the next 10 years or more. This chapter introduces key concepts regarding how to project future spending for asset management uses, including defining sce- narios, using management systems, allocating resources across asset/investment categories, and other considerations. In personal financial planning, an investment strategy is a plan of action that will help achieve personal financial goals. As goals are established, a financial planner needs to understand the client’s current income and investment situation. “How much do you earn?” “How much do you save?” “What are your current investments?” “When do you intend to retire?” Only once these questions are answered does the planner begin recommending investment strategies. “Set aside this percentage of your income.” “Allocate your investments among stocks, bonds, real estate, and other investments according to these targets.” These strategies are designed to achieve the investor’s goals. Similarly, the TAM professional works with agency forecasters and others to establish goals and to determine a baseline understanding of revenues and expenditures. The TAM professional then must contribute to or lead a process that outlines one or more investment strategies that work toward those agency goals. FHWA defines an investment approach as “a set of strategies that result from evaluating vari- ous levels of funding to achieve state DOT targets for asset condition and system performance effectiveness at a minimum practicable cost while managing risk” (Moving Ahead for Progress in the 21st Century Act 2016). In Model Long-Range Transportation Plans: A Guide for Incorporating Performance-Based Planning (Grant et al. 2014), FHWA points to MnDOT’s SSTIP: 2014–2033 C H A P T E R 5 Investment Strategies and Scenarios

Investment Strategies and Scenarios 51 as an example of using investment strategies to show progress toward a set of agency perfor- mance goals. Figure 5-1 demonstrates how MnDOT communicates three alternative strategies for allocating investments between different categories. Role of Management Systems in Investment Strategies Management systems are used in a variety of ways to support the development of finan- cial plans for asset management, and they are particularly important to help project future conditions that will result from a set of projects and/or specified budget. The importance of management systems is underlined by the FHWA rule on asset management (23 CFR 515.17) that includes a section on the “minimum standards” for bridge and pavement systems for state DOTs. FHWA requires state DOTs to implement management systems for NHS pavement and bridge assets that: • Manage inventory and condition data, • Forecast deterioration, • Determine benefit–cost over the life cycle of assets in order to evalu- ate alternatives, • Identify short- and long-term budget needs for managing the condi- tion of assets, • Determine the strategies for identifying potential projects that maxi- mize overall program benefits with financial constraints, and • Recommend programs and implementation schedules to manage condition of assets. These requirements make management systems powerful tools for asset management and for developing the TAM financial plan. How- ever, a management system need not be a single, monolithic com- puter system. Often the “system” is actually a set of multiple processes, Figure 5-1. Investment approaches developed for scenario planning (TPM Stakeholder Group 2018). FHWA’s “Influences on Investment Strategies”: • Performance gap analysis • Life cycle plans • Risk management analysis • Available funding and costs of con- struction, maintenance, preservation, rehabilitation, and other work types

52 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management spreadsheets, and computer systems. For instance, an agency might use an off-the-shelf pave- ment or bridge management system, but perform supplemental analysis outside the system to establish its asset life-cycle policies, then enter the resulting policies into the computer system. In other cases, an agency may use a computer system to manage inventory and condition data, but address other functionality through a well-documented set of spreadsheet tools. Also, man- agement systems typically, but not necessarily, focus on a small set of asset categories, leaving the process of determining how best to allocate resources across asset/investment categories as a separate issue (described in the next section). Whatever the management system entails, the key function of the system in the context of this chapter is its ability to project future conditions and performance in a variety of ways, as follows: • If future funding is defined, but potential projects are not, then management systems can be used to generate candidate asset treatments, simulate what treatments will be performed given available funding, and simulate the impact of those treatments. This yields a prediction of future conditions and performance, as well as a recommended set of treatments to use for developing projects. • Alternatively, if planned projects are defined well into the future, an agency may use its man- agement system to simulate the conditions and performance that will result from planned work, eschewing the functionality of the system to recommend and simulate treatments. • Often agencies use a hybrid approach in which planned projects are established for the first few years of a given analysis period, but fewer projects are defined in later years. In this case the system is left to “fill in the gaps” and simulate new treatments to the extent that funds are available after funds are set aside for planned projects. Another variant of this approach is to establish planned projects for complex assets that are difficult to model (e.g., landmark bridges), and use a computer system to simulate treatments for other assets more amenable to modeling. To a large extent the strategy an agency employs in using its management system will depend on the detail to which future projects are specified. This in turn will depend on its approach to project prioritization, described further below. Cross-Asset Resource Allocation Another fundamental aspect in developing scenarios and investment strategies is cross-asset resource allocation. This is the process of determining how to allocate funding across multiple types of assets or investments. At a minimum, this process defines how to allocate funds available for asset management uses between distinct asset classes. Agencies can make explicit tradeoffs between assets (e.g., pavement vs. bridge) or between investment types (e.g., system expansion vs. preservation). Likewise, if an agency’s management system partitions the budget for a given asset class, then the process may include allocating resources across investment (e.g., treatment type) or network classification (e.g., NHS and non-NHS) within the asset class. Traditionally cross-asset resource allocation is addressed using informal methods in which a small group of decision makers arrives at a negotiated solution after subjectively reviewing the available data, often relying heavily on past precedent or formula allocations. In recent years transportation agencies have sought to use more structured approaches in an effort to make best use of available data, as well as to improve the documentation and reproducibility of their decisions. NCHRP Report 806: Guide to Cross-Asset Resource Allocation and the Impact on Transportation System Performance describes and classifies different cross-asset resource alloca- tion approaches (Maggiore et al. 2015). Two structured approaches detailed in this report and used increasingly by state DOTs are described further below: multi-objective decision analysis (MODA) and the Delphi method.

Investment Strategies and Scenarios 53 MODA A basic issue that many state DOTs face as they attempt to allocate resources across asset pro- grams (or investments or “uses”) is that they must decide what programs to fund and at what level. Existing systems and processes are often ill-equipped for prioritizing programs filled with a variety of projects, particularly when they involve multiple asset types and address issues outside the scope of any one management system. Consider the following projects: • Improvements to pavement and bridges. • Preservation of existing assets combined with adding acceleration lanes or other minor expan- sion items. • Incorporation of bike lanes and safety upgrades into a roadway rehabilitation project. MODA is an approach for prioritizing resource allocation decisions recognizing that projects satisfy multiple objectives. The basic steps with a MODA approach are to define the agency’s objective function; define how to weight disparate objectives (e.g., comparing the benefit of improving mobility with that of asset preservation); determine the utility or score for each proj- ect; and select projects given a budget to maximize benefit. As an example of a MODA implementation, the Utah Department of Transportation (UDOT) uses a software to rank projects based on their contribution to four performance areas: (1) cur- rent asset condition, (2) planning factors, (3) mobility, and (4) site characteristics. Figure 5-2 provides the outputs of UDOT’s MODA. In this analysis stakeholders set weights on the relative importance of performance areas and data providers measured the anticipated costs and benefits of a group of projects. This analysis could also be run at the program level rather than at the project level, providing an optimized investment strategy. The weightings of the performance areas could be altered to provide alternative strategies. Delphi The Delphi method is a structured approach to achieving group consensus. In the context of transportation resource allocation, this method can be used to arrive at a decision concerning how to allocate resources by viewing a range of potential scenarios for each asset/investment Figure 5-2. UDOT’s project ranking (Utah DOT 2017).

54 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management category. The Delphi process is a method of group decision making and forecasting that requires the subject-matter experts and decision makers to work toward a consensus decision through iterations of objective analysis and discussion. During multiple rounds of voting and iterative discussions, decision makers defend their analysis and hear others’ perspectives. In the end, a tighter result (i.e., lower standard deviation) is then achieved. The CDOT has used the Delphi process for several years to determine staff recommended program spending for a number of assets at multiple funding levels. As Figure 5-3 depicts, staff developed a baseline request in the first scenario, and then developed a second and third scenario that allocated among programs an added $150 million and $165 million of funding. The additional funding was provided from a program known as the Responsible Acceleration of Maintenance and Partnerships (RAMP). Other Considerations in Selecting Investment Strategies and Scenarios There are many additional issues and considerations in defining investment scenarios and strategy. This section discusses three additional critical areas: scenario planning; organizing investment categories; and addressing the underlying complexities of asset projects. Scenario Planning This guide suggests defining investment scenarios for three basic reasons: 1. Good practice—and FHWA requirements—dictate that in developing a TAMP it is necessary to establish what funds are needed to meet an agency’s targets, establish what funds are rea- sonably expected to be available, then evaluate the gap between the two. This requires defining at least two basic scenarios and comparing them. FHWA requirements also imply definition of an additional scenario to maintain asset value, as described in the step-by-step instructions in the next section. 2. Considering a range of different scenarios is an effective approach for evaluating situations with “deep uncertainty.” To the extent there may be significant uncertainty of future revenues, an agency may wish to evaluate multiple scenarios to better account for potential future events. 3. Even if future funding for asset management uses is known, an agency has discretion concern- ing how to allocate resources between different uses. Thus, within the envelope of an overall funding level, an agency may wish to define scenarios reflecting different investment strate- gies that differ in how they allocate resources between asset/investment categories. Figure 5-3. CDOT Delphi workshop results (Johnson 2013).

Investment Strategies and Scenarios 55 The FHWA Scenario Planning Guidebook offers an extended description of scenario planning and some of the benefits of the practice within a state DOT: “Scenarios combine the trends and variables identified [in a baseline analysis] and values, goals, and aspirations identified [for the agency] with appropriate policy and investment responses, creating plausible and distinct alternative pictures of how the community, region, or study area might look and function in the future. These alternatives translate broad concepts and possibilities into compelling narratives or stories that can help planners, politi- cians, the public, and others to weigh and consider transportation choices and priorities. The scenarios provide a common framework for all parties to discuss the costs and benefits of transportation decisions while taking future uncertainties into consideration.” FHWA further describes that scenario planning can help plan for future events, and can provide a “frame- work for developing a shared version of the future” (FHWA and Volpe National Transporta- tion Systems Center 2011). The process of scenario planning to select a preferred alternative may take many shapes. It may involve a daylong workshop with agency staff and other stakeholders who each contrib- utes a perspective in developing various scenarios, or it may involve computer-programmed algorithms that enable the output of a preferred scenario. Whatever form scenario plan- ning might take at a particular DOT, it provides a helpful look into the future in the face of uncertainty. Organizing Investment Categories The reader may note that many different approaches are used for organizing invest- ment categories in this guidebook. For instance, in some cases investments are organized by high-level asset class (e.g., pavement vs. bridge), while in others, investments are further broken down by roadway network, district/region, and/or type of work. In truth there is no one way that investment categories should or need to be represented, and an agency has to consider how best to structure its investment categories as part of the process of developing its TAMP. Figure 5-4 and Figure 5-5 show how the North Carolina DOT and UDOT, respectively, have divided the state-owned network for purposes of setting targets and communicating investment levels. In these figures different approaches are used to portray the impact of decisions to split the network into divisions. Large groups of assets can be subdivided in ways other than func- tional classification or system tier. Applying a measure of risk analysis, an agency may assign levels of “criticality” to assets such as signs or ITS. The sign manager may decide that stop and speed limit signs hold higher criticality than street name or no parking signs and may implement an investment strategy that replaces the critical signs on a more frequent basis. The ITS manager may determine that ramp meters and communication fiber are more critical than variable mes- sage signs and video cameras and may dedicate more resources to the monitoring of more important equipment. Project Types and Project Complexity FWHA’s Financial Planning for Transportation Asset Management: Components of a Financial Plan states, “A pragmatic TAMP would address the amount of investment required each year for the reha- bilitation, preservation and maintenance of assets during their useful TIP! However the agency or TAM professional decides to group and prioritize the large inventory of agency- owned assets—by system tier, asset subgroup, geography, or otherwise— these decisions ultimately involve prioritization and tradeoff analysis. A TAM professional should make certain the subsets and priorities expressed in the TAM financial plan align with the priorities of the organization as communicated in a strategic plan, long-range plan, or other tactical documents.

56 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Figure 5-4. North Carolina DOT structure condition targets and scores (Varma and Proctor 2013). Figure 5-5. Projected budgets and overall condition index of pavement in Utah (Varma and Proctor 2013).

Investment Strategies and Scenarios 57 life. The associated financial plan can be linked to the targeted performance and conditions of the assets identified in the TAMP” (Varma and Proctor 2015a). Ultimately, the TAM financial plan should at least discuss, if not quantify, the benefits of proactive investment strategies. Transportation projects are often complex undertakings. The reality is that they often involve multiple types of work on multiple physical assets over a period of months or years. Paying for these projects often utilizes multiple funds or revenue streams, and the decisions concerning when and how to fund a project may need to be adjusted over the life of a project, particularly if the project budget fluctuates. While transportation agency staff are accustomed to this complexity, it is important not to take this for granted in defining scenarios and deter- mining how best to allocate resources. At a minimum the inherent complexity of transportation projects has the following implications on scenario planning: • Humans, not management systems, drive transportation projects and make final decisions concerning project timing and funding. • A significant amount of effort is involved in project development. Thus, it is imperative that guidance related to asset management practice, such as an agency’s preferred life-cycle strategies for main- taining assets, be incorporated early in the development stage to avoid rework and/or suboptimal decisions. • Given the effort involved in developing projects, it may be dif- ficult to justify the effort to define a large number of candidate projects that are unlikely to be funded simply to support scenario analysis. 5.2 Steps for Investment Strategies and Scenarios At this stage, you should be equipped with a list of sources and uses, as well as the forecasting results for revenues and non-asset management uses over the next 10 years. The following steps guide you in finishing the financial plan by developing investment scenarios to define how you will allocate asset management funds to the uses you have identified. Comparing alternative scenarios is a powerful tool for supporting investment decisions, particularly when a decision maker must contend with significant uncertainty and investment objectives that are difficult to weigh against each other. Step 1: Define Investment Scenarios To begin the process of defining investment scenarios, start with a working assumption about available funding for asset management activities. This information should be readily available from the work you have done on the TAM financial plan up to this point. The ques- tion should be asked, what is this year’s budget and how might it change in the future? From here you can determine the scenarios that will be evaluated. The federal requirements for state DOT TAMPs call for the development of at least three scenarios. These are listed first below followed by additional scenarios. • Funding that is estimated to be reasonably available. Section 515.7(d)(1) of the federal rule on TAMPs states that the financial plan process shall produce, “The estimated funding levels that are expected to be reasonably available, by fiscal year, to address the costs of future work types” [23, United States Code (U.S.C.)]. Thus this scenario involves planning for the TIP! It can be valuable to use manage- ment systems to generate candidate projects for the purpose of analyzing scenarios. Where this approach is used, care should be taken to try to align costs and assumptions concerning candidate projects with actual practice where possible, and to make sure that system- generated candidate projects are not treated as actual projects for other purposes.

58 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management future based on expected funding levels. Again, you should have established the funding levels in the steps leading up to this point; this scenario is where you will test your assumptions and projections. • Funding required to achieve targets. In the development of your asset management plan you set targets for the condition and performance of NHS pavements and bridges. This scenario captures the funding levels needed to achieve these targets. It is likely that this scenario will help you describe the funding necessary to address gaps in performance. (See Step 9 for more details on gap analysis.) • Funding required to maintain asset value. In Section 515.7(d)(4), the federal rule indicates that the financial plan process shall produce, “An estimate of the value of the agency’s NHS pavement and bridge assets and the needed investment on an annual basis to maintain the value of these assets” (23 U.S.C.). This scenario paints a picture of funding and activities that would be required to maintain the asset value of the agency’s pavement and bridge assets. Additional scenarios: • Current funding level. This scenario assumes that your funding levels will stay the same indefinitely. As the needs and costs continue to rise and assets continue to deteriorate, this will likely mean that your conditions and performance will decline. • Funding required to maintain current asset conditions and performance. This scenario describes the funding required to maintain the status quo. As many state DOTs have a backlog of investment needs, maintaining current asset conditions is generally a less ambitious goal than achieving your targets or a state of good repair. In many cases this scenario may be the same as the scenario to maintain asset value. • Alternative funding levels. If there is a great deal of uncertainty in your future funding levels, it may be a good idea to have scenarios that outline a variety of funding levels. This will help you prepare for the future in the face of uncertainty. • Consideration of selected risks. If there is a great deal of uncertainty regarding specific risks, then consideration may be warranted of additional scenarios to test the impact of selected risks. For instance, an agency may wish to test a scenario in which asset deterioration rates are accelerated, or a different rate of traffic growth is assumed to better incorporate risk into asset management planning. You will need to do the following steps for each of the investment scenarios you have defined. An exception may be for the achieving targets scenario. For that scenario, it is clearly defined what work and projects you need to achieve targets so you should not need to go through all the iteration described in the steps below. Step 2: Identify Current and Planned Projects Determine the projects you are performing currently, the projects you are committed to in the future, and the projects you are expecting in the coming years. In this context “committed” means that a source of funding has been identified for the project, while “expected” means the project is planned, but no funds have been identified. This may be the same list of projects in your STIP, but there could be some differences. For instance, projects in the final years of an STIP may be more conceptual, and an agency may or may not want to treat them as “planned” for the purpose of performing the steps described here. You will use planned projects as an input in the management system used to predict future conditions in the next step. Depending on the manner in which the agency scopes its projects and uses management sys- tems, the list of planned projects could be very short or very long. If your agency relies heavily on the management system to generate projects for pavements and bridges, you may not have a long

Investment Strategies and Scenarios 59 list of projects to include at this point other than those projects currently underway. However, if your agency has a robust prioritization process and has defined planned work in some detail, then you may already have an extensive list of projects at this stage. In either case, you should consider whether your management systems are well-equipped to predict future needs, and at this stage you may need to define additional projects to address needs not well addressed by your management systems. For instance, in developing its asset management plan, the Connecticut DOT (CTDOT) separately estimated the needs for 60 major bridges outside of its management system (CTDOT 2018). Note that under no circumstances should referencing the projects in the STIP be viewed as an alternative to developing an asset management plan. As FHWA describes in the Transpor- tation Asset Management Plan Development Processes Certification and Recertification Guid- ance (FHWA 2018), a TAMP must describe a methodology for “ensuring the process for using information from the state DOT’s STIP in the development of the State DOT’s TAMP is consistent with TAMP process and data requirements. This means that the STIP may be used to provide background information, but cannot be used as a substitute for carrying out the required analyses, or be used to override the results of the required independent analyses of relevant data when developing investment strategies.” Also note that the projects in a TAMP may differ from those in a STIP given that the STIP is required to be based on a balanced budget. Step 3: Use Management Systems to Predict Future Conditions Run your management system simulation to predict future condition and performance of assets. Do this for each of your investment scenarios, factoring in the current and planned work that you identified in the previous step. It is best to run the system for a range of different budgets and get predicted conditions over time. Even when future budgets are reasonably predictable, this effort gives an agency the opportunity to investigate different funding allocations between the various asset categories. As noted previously, your management system may be a specific computer system or a set of processes, spreadsheets, or the like, and may involve a discussion among decision makers. Whatever your system is, this task is easier said than done, and it may require significant effort to obtain the predictions. Step 4: Perform Initial Budget Allocation In this step you will determine how to split the budget by allocating money to different categories. To do this you first need to define investment categories. You could categorize by asset class, network, functional classification, investment type (e.g., preservation, rehabilitation), and/or by geographic location. However, you should generally define the smallest set of meaningful categories required to support resource allocation. Once your categories are established, you determine how to allocate the budget between them. The complexity of this step will depend upon the number of categories and your approach to project prioritization. If you have a small number of categories and/or a well-defined project prioritization approach then this step may amount to a straightforward application of your pri- oritization approach. However, if you have a large number of categories and tend to prioritize only within each category (e.g., you set a budget for pavement and bridge projects by district and each district prioritizes its own projects) then establishing the budget by category will be more complex. For such cases the Delphi approach described above is recommended for achieving group consensus on how to prioritize budgets between investment categories.

60 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Step 5: Identify Candidate Projects Once the budget is established by investment category you can now identify candidate projects to include in your investment scenarios. These are the projects you may perform given available funding. It is assumed that identifying candidates may involve a combination of manual and auto- mated processes, and thus it may be prudent to define candidate projects only once the expected budget has been established. However, if you are considering a wide range of potential budgets you may need to rely heavily on management systems to define candidate projects, particularly for later years (also called the “out years”) of a scenario. You may want to leverage the planning process when identifying candidate projects, either by aligning data with planning partner needs, or by using the long-range plan and other lists of needs. Also, projects intended to address specific risks outside those modeled by a management system may need to be added at this stage. Step 6: Select Projects From your list of candidate projects, select projects to include in your investment scenarios. This selection is typically performed within each of the investment categories identified in Step 2. The level of detail at which projects selected at this stage are actually defined will necessarily vary between scenarios. For the scenario representing expected funding it is important that projects be defined at an appropriate level of detail to support specification of spending by use. For other scenarios it may be necessary only to project future conditions, and thus it may not be necessary to have a high level of definition for the selected projects. It may be sufficient to rely more heavily on automated approaches to simulate project selections. Project selection can be performed using different approaches. Ideally projects should be selected to maximize progress toward agency targets and maximize user benefits while minimiz- ing life-cycle agency costs subject to a budget constraint. However, determining a mathematical optimum may be difficult or impossible unless the selection is performed within more narrowly defined categories. If the budget is set for fewer, more broadly defined categories then the MODA approach discussed above can be used to find the best solution weighing different agency objec- tives. In other cases, an agency may wish to pursue a more decentralized approach, and allow districts or regions to select projects incorporating their knowledge of localized factors, while using guidance on agency objectives and life-cycle policies as they make their selections. There is no single, correct approach to selecting projects and most agencies employ a hybrid of different approaches. In any event, the outcome of this step is a set of selected projects for each scenario. When selecting projects, consider their timing—when will they occur relative to other projects? The following questions related to risk tolerance, performance gaps, and life cycles can aid you thinking about the timing aspect. • Assess risk tolerance. Is a single bridge failure more catastrophic than public relations back- lash over reduced levels of maintenance? Can the public withstand the occasional detour due to a culvert washout, but not the frequent potholes on the daily commute to work? • Evaluate performance gaps. What set of projects enables your agency to meet all of its asset performance targets over the 10-year period? Has your leadership continually emphasized one asset over another? Is your agency leadership comfortable with the 10-year performance forecasts for ancillary assets? Have you prioritized Interstate spending over other classes of the system? • Plan for life cycles. Look for looming waves of aging assets. Seldom does an entire state DOT’s inventory of assets in a single asset category deteriorate uniformly over time. Can you forego spending on aging assets today that will soon require full replacement in order to move more funding to preventive maintenance of good assets? Should you be evenly allocating all uses over 10 years or do some assets merit greater investment today?

Investment Strategies and Scenarios 61 Step 7: Revise Prediction of Future Conditions At this point, you may have a new set of projects than those you identified in Step 2. With the new list of projects, repeat Step 3 to re-run your management systems to obtain revised predic- tions of future conditions for each scenario. Step 8: Finalize Funding Levels by Use In this step, revisit your initial budget allocation from Step 4 and finalize the allocation based on your selected projects and revised prediction of future conditions. You only need to do this for the scenario of funding that is reasonably expected to be available. Now you have a set of selected projects to correspond to each investment scenario and a finalized budget for each scenario. Next, return to the sources and uses list you developed, and look particularly at the uses. Since the uses list is not project specific, aggregate the costs from the projects to correspond to the uses you have listed. You should be able to populate the remaining uses in your financial plan related to asset management for the current year and the 10-year projections. The outcome of this step is the table of sources and asset management uses for funding that is reasonably expected to be available, as well as for other scenarios if desired. Step 9: Perform Gap Assessment In this step, you will compare two scenarios: (1) funding level reasonably expected to be avail- able and (2) funding levels needed to achieve targets. This will show the dollar amount, or gap, between likely expenditure and the funding needed to reach a target and may provide a case for increasing funding. Figure 5-6 and Figure 5-7 illustrate two different ways to represent the results of a gap assessment. Figure 5-6 shows how two different scenarios match up compared to maintaining conditions and improving them. Figure 5-7 illustrates how you might include the need and the gap in your spreadsheet of uses. Figure 5-6. Graphical representation of gap assessment results (Cambridge Systematics Inc. et al. 2006).

62 A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management Step 10: Document Assumptions and Investment Strategies Now document all the work you have done to develop the scenarios, utilize the management system, and allocate funding. This documentation will detail your investment strategy and how you arrived at it. Items you should be sure to include in your documentation are as follows: • Investment scenarios. Document the investment scenarios you defined in Step 1. Note the level of funding each one assumes and why you decided to include the scenario in the analysis. • Projects. Document the current and planned projects you identified in Step 2. Also, describe the projects you selected for inclusion in each of the investment scenarios. • Management system use. Document how you used the management system. What param- eters and settings were important? What inflation rate did you assume? Did you use it to generate candidate projects or just for analysis of future conditions and performance? • Allocation approach. Document how you allocated funding. Did you categorize in terms of asset class, investment type, or location? Who were the decision makers in the allocation process? • Prioritization approach. Document how you prioritized projects and funding within each category. Does your agency use a MODA technique or the Delphi method? Figure 5-7. Performance gap identification (Varma and Proctor 2015b).

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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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