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Table of Contents

1. Introduction ....................................... 1

2. Risks and Rewards of Financial Plans................ 4

Communicating with a Financial Plan .............. 10

Risks and Rewards of Forecasting ................. 11

Forecasting Risk................................. 13

Inflation Risks ................................... 15

Model Risk...................................... 18

Material Cost and Market Risk.................... 22

Social, Political and External Financial Risks ....... 23

Appropriation Risks............................. 23

Forecasting Bond Capacity ...................... 25

Scope Risks, Uncertainties and Opportunities ...... 26

Climatic or Seismic Risks ........................ 27

Hedging Financial Risks ......................... 28

Updating Forecasts by Monitoring Leading 

Indicators ................................... 28

Strategic Borrowing to “Smooth” Revenues ..... 29

Sound Preservation as a Risk-Mitigation Strategy. . 29

3. The Financial Risk Register......................... 31

Keep it Simple ................................. 36

4. Financial Metrics ................................. 38

Selected Financial Metrics ....................... 39

Percent of System Conditions Meeting Target ...... 40

Asset Sustainability Ratio or Index................ 40

Debt Ratios .................................... 42

General Financial Adequacy Measures ............ 43

5. Summary and Conclusion ......................... 50

6. Endnotes........................................ 53
ii Financial Planning for Transportation Asset Management

Figures 

Figure 1. Actual and compound average annual construction 

inflation 2003-2014..................................... 18

Figure 2. Slight differences in pavement forecasts can 

have major financial implications. ....................... 20

Figure 3. The variability in a key price input, asphalt binder. ... 22

Figure 4. Historic Federal highway expenditures grew 

steadily from 1957 to 2012. ............................. 24

Figure 5. Current apportionments cannot be supported 

with current Trust Fund balances. ....................... 25

Figure 6. Interest payments as a percentage of states’ 

capital and maintenance outlays. ....................... 44

Tables

Table 1. A financial plan summary of sources of funds. ...... 5

Table 2. A financial plan summary of uses of funds ......... 6

Table 3. A financial plan summary of financial gaps, 

condition targets and sustainability index. ................ 7

Table 4. Metrics summarizing the results of the investment 

levels.................................................. 7

Table 5. The effects of differing inflation assumptions on 

an agency’s pavement budget. ......................... 16

Table 6. Example of an inflation risk register ............. 33

Table 7. Example of a Federal-aid risk register ............ 33

Table 8. Example of a pavement model forecasting risk 

register. ............................................. 34

Table 9. Summary of forecasted declines in pavement and 

bridge conditions. .................................... 41

Table 10. An estimate of income and major expenditures 

with the Operating Surplus calculated. .................. 46

Table 11. BART’s Operating Financial Forecast ............ 47

Table 12. BART’s Uses of Funds and Net Result ........... 48
Report 3: Managing Risks and Using Metrics 1

1. Introduction

Transportation agencies have the responsibility and the 

challenging task to maintain, preserve and improve infrastructure assets (assets) for current and future generations. 

While maintaining existing assets is an overriding concern for 

transportation agency officials, most agencies are grappling 

with funding issues. Considering the fact that assets such as 

pavements and bridges have long useful lives, a sound asset 

management practice will necessitate the development of 

long-term asset management plans. Practices and experiences from other countries with mature asset management 

processes and also from transportation agencies within the 

U.S. show that implementing and sustaining the performance 

and condition of assets requires long-term financial plans 

that support and are linked to long-term asset management 

strategies. Comprehensive transportation asset management 

plans (TAMPs) could show the expected and desired projections of asset performance and condition for ten or more 

years into the future. A pragmatic TAMP would address the 

amount of investment required each year for the rehabilitation, preservation and maintenance of assets during their 

useful life. The associated financial plan can be linked to the 

targeted performance and conditions of the assets identified 

in the TAMP. 

The financial plan can show the expected and desired funding projected for the future, often for ten or more years. To 

be useful to decision-makers, the financial plan can establish 

how the agency will address the resources needed to achieve 

and sustain the long-term asset management objectives. It 

could clearly illustrate the financial state of the agency and 

express the financial needs for the plan period, shedding 

light on the gaps, and the funds needed to bridge the gaps 

between the current conditions and those established in the 

asset management plan. The elements of the financial plan 

can succinctly highlight the actions that need to be taken 
over the long-term to maintain the health, performance and 

condition of the assets. The financial plan also can address 

financial risks. It could enable the agency to monitor and 

compare the funding available to the expected funding 

projections throughout the life of the plan, make tradeoffs, 

and take corrective actions to accomplish the agency’s asset 

management objectives. The financial plan is thus critical to 

the successful implementation of the agency’s TAMP. Finally, 

well developed financial plans would allow agencies to 

communicate with the public and the stakeholders the value 

of transportation assets, the current, projected and desired 

performance and condition of assets, the funding required to 

support the projected and desired performance and condition targets, the financial risks and the level of performance 

and condition that stakeholders can expect. It also can 

summarize any changes in strategy that may be required 

to address changing financial realities.

This third installment of the five-part financial report series 

addresses two related components of financial plans. The 

first is how to identify, communicate, manage and perhaps 

capitalize upon the risks inherent in long-term strategies 

for financing complex and aging infrastructure assets. The 

second is how to use financial performance measures to 

illustrate the adequacy of investment levels and the 

magnitude of accumulating backlogs.

This two topics are closely related. How well risks are managed can influence how well the assets perform. Later in this 

report, two tools will be explained that can help explain the 

potential risks and rewards inherent in an agency’s asset 

management and financial plan. A risk register is a simple 

matrix-like document that summarizes the risks, their consequences, likelihood and impact surrounding the financial 

plan. The risk register provides an at-a-glance summation of 

the risks that will determine the success of the financial plan.

2 Financial Planning for Transportation Asset Management
Report 3: Managing Risks and Using Metrics 3

Also, this report will present a series of financial metrics to 

accompany the plans. These metrics provide “shorthand” 

ratios that illustrate the degree of adequacy of the financial 

plan to sustain asset conditions. The metrics are like heuristics or rules of thumb that allow the “body politic” to understand benchmarks of whether the financial plan is adequate 

to sustain assets, and if not, by how much.
4 Financial Planning for Transportation Asset Management

2. Risks and Rewards of Financial Plans

A financial plan is defined here as a component of a transportation asset management plan. It includes forecasts of 

expected revenues, allocations of those revenues, gaps 

between the allocations and the amounts needed to meet 

asset-condition targets and scenarios to address the gaps. 

Although not defined in statue, it is likely that most state 

transportation agencies will adopt a timeframe of approximately 10 years. 

Tables 1-4 represents a possible format for the financial 

summary in a financial plan. This format and these spending 

categories are not required by FHWA but are presented to 

illustrate the concepts important to long-term financial plans 

that support asset management. The first two sections in 

Tables 1 and 2 (see pages 5 and 6) are common in most 

“sources and uses” tables. They illustrate what revenue is 

expected and how it is predicted to be used. The third section in Table 3 (see page 7) captures whether the allocations 

are adequate to meet the asset-investment needs. “Needs” 

would be the amount of investment required to meet the 

asset-condition targets. The need estimate generally would 

be produced by the agency’s bridge, pavement or maintenance management system, or other estimating processes. 

RISK

is the positive or negative 

effects of uncertainty or 

variability upon agency 

objectives.

As can be seen, a financial 

plan with its long-term 

perspective and its capturing 

of need as well as revenues 

can include more than a 

typical budget document. 

Most state budgets are one, 

or two-year documents that 

focus only upon known revenues and how they will be 

allocated. If needs exceed revenues the needs are “off the 

books” and their consequences are not included in the 
Report 3: Managing Risks and Using Metrics

5

Sources 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Totals

State Revenue $800 $808 $816 $824 $832 $841 $849 $858 $866 $875 $884 $9,253

Federal Revenue $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $750 $8,250

Other Revenue $50 $51 $51 $52 $52 $53 $53 $54 $54 $55 $55 $578

Total Sources $1,600 $1,609 $1,617 $1,626 $1,635 $1,643 $1,652 $1,661 $1,670 $1,680 $1,689 $18,082Inflation Adjusted Sources $1,600 $1,544 $1,490 $1,438 $1,388 $1,340 $1,293 $1,248 $1,205 $1,163 $1,123 $14,834

Table 1. A financial plan summary of sources of funds. (All figures in $ Millions)
6 Financial Planning for Transportation Asset Management Uses 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total Bond Payments $160 $161 $162 $163 $163 $164 $165 $122 $119 $120 $100 $1,599 Operating Needs $320 $330 $339 $350 $360 $371 $382 $394 $405 $418 $430 $4,098 Roadway Maintenance $128 $131 $133 $136 $139 $141 $144 $147 $150 $153 $156 $1,558 Pavement Budget $304 $304 $304 $304 $304 $304 $304 $304 $304 $304 $304 $3,344 Bridge Budget $160 $160 $160 $160 $160 $160 $160 $160 $160 $160 $160 $1,760 Safety $64 $65 $65 $66 $67 $67 $68 $69 $69 $70 $71 $740 Traffic/ITS $64 $65 $67 $68 $69 $71 $72 $74 $75 $76 $78 $779 Trans. Alternatives $80 $80 $80 $80 $80 $80 $80 $80 $80 $80 $80 $880 Local Projects $128 $128 $128 $128 $128 $128 $128 $128 $128 $128 $128 $1,408 Mobility/Capacity $192 $186 $179 $172 $165 $156 $149 $184 $179 $171 $182 $1,915 Total $1,600 $1,609 $1,617 $1,626 $1,635 $1,643 $1,652 $1,661 $1,670 $1,680 $1,689 $18,082 Table 2. A financial plan summary of uses of funds. (All figures in $ Millions)
Report 3: Managing Risks and Using Metrics

7

Financial Need and Gaps 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total

Pavement Need $304 $316 $329 $342 $356 $370 $385 $400 $416 $433 $450 $4,100

Pavement Gap $0 $12 $25 $38 $52 $66 $81 $96 $112 $129 $146 $756

Bridge Need $160 $163 $166 $170 $173 $177 $180 $184 $187 $191 $195 $1,947

Bridge Gap $0 $3 $6 $10 $13 $17 $20 $24 $27 $31 $35 $187

Roadway Maintenance Gap – 0 0 0 0 0 0 0 0 0 0 0

Table 3. A financial plan summary of financial gaps, condition targets and sustainability index.(All figures in $ Millions)

Investment Results 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Sustainability Gap $0 $15 $31 $48 $65 $83 $101 $120 $140 $160 $181

Asset Sustainability Index 1 0.97 0.94 0.91 0.88 0.85 0.82 0.79 0.77 0.74 0.72

Percent of Pavements Meeting Target 90 90 88 87 85 85 84 82 80 79 78

Percent of Bridges Meeting Target 95 95 95 94.5 94 93 93 92.5 92 91 90

Table 4. Metrics summarizing the results of the investment levels. (All figures in $ Millions)
8 Financial Planning for Transportation Asset Management

financial reports. Asset management financial plans allow 

agencies to put their revenues and expenditures in greater 

context. Because assets are long-lived, the financial plan 

parallels more closely the timeframes in which agencies 

plan ahead for treating highway assets. 

Although long-term revenue and needs forecasts have been 

included in transportation agency long range plans, the asset 

management financial plan can fill a void by focusing specifically on the revenues, expenditures and needs to sustain 

assets at acceptable conditions for the long-term. A long 

range plan captures the estimated costs to meet mobility, 

safety, transportation alternatives and other needs but not 

always the costs to sustain assets to a specific condition. What 

is different about the needs for sustaining assets compared 

to other program categories such as mobility is that assetinvestment needs are not discretionary over the long term. 

Although assets may be underfunded for years, the unmet 

needs accumulate as a long-term liability that eventually must 

be paid. The costs of underfunded pavements, bridges and 

other assets manifest themselves as poor pavements and 

bridges that increase vehicular operating costs, contribute to 

crashes and cost more to repair. These higher future costs 

generally don’t appear in current financial documents such as 

long-range plans, State Transportation Improvement Programs 

(STIPs), and importantly, State budgets. An agency’s State 

budget could be published without any acknowledgement 

of the looming backlog in unmet asset investment need. The 

asset management financial plan can present the agency’s 

assumptions of how it will spend resources to manage these 

assets but it also can illustrate the “off the books” liabilities 

that accrue through deferred maintenance and report them 

as a growing liability that eventually must be paid.

Tables 3 and 4 summarize the amount of unmet need for 

bridges and pavements by year and for the 11-year period. 

They also illustrate the forecasted decline in conditions for 
Report 3: Managing Risks and Using Metrics 9

bridges and pavements and summarize the Sustainability Gap, 

or total unmet need, over the period which is $943 million. 

Also shown in this financial plan is the Asset Sustainability 

Index (ASI.) The Asset Sustainability Index is the ratio of 

what is budgeted to preserve the bridge and pavement 

assets divided by the amount needed to achieve the targets. 

As seen in 2015, pavements and bridges are adequately 

funded to meet target but by 2025 only 72 percent of what 

is needed to sustain them is expected to be allocated. By 

including the funding gaps, the declining conditions and 

Asset Sustainability Index, the financial plan presents a more 

complete picture of the agency’s asset funding than would a 

short-term, two-year budget document that focuses only on 

cash balances. The inclusion of these future financial conditions illustrates what trends, conditions and liabilities will 

accumulate and have to be addressed eventually. 

Financial plans focusing on the costs to sustain assets 

originated in Australia. The statutory concept underlying 

Australian financial plans is that agencies’ budgets are not 

really in balance if they are accumulating a large backlog of 

unmet maintenance needs that are being pushed off upon 

future users. The concept is akin to the current U.S. focus 

of requiring States and municipalities to face their unmet 

pension liabilities. The pension payments may not be large 

enough today to imbalance a one or two-year budget. But 

over the long term, those growing pension liabilities represent a bill coming due that the agencies are not prepared 

to pay. This approach to budgeting is called an “accrual” 

approach. It means the agency is trying to capture its future 

assets and liabilities that are accruing and it is not focused 

only on its short-term cash flow balances.

The scenario presented in Tables 1-4 is not conducive to 

sustaining assets, which is why it is shown here. An examination of this financial plan shows that the agency is not 
10 Financial Planning for Transportation Asset Management

increasing its pavement and bridge expenditures at a time 

when its need to increase pavement expenditures rises by 

4 percent annually. In a typical sources and uses-type document or a typical budget document, the need is not reported, 

only the revenues and expenditures. The financial plan offers 

an opportunity to explain the long-term needs and illustrate 

how they may be accumulating. In this example, the annual 

pavement gap grows from $12 million in 2016 to $146 million 

by 2024. Commensurately, the percent of miles meeting the 

pavement target fall from 90 to 78. Unmet bridge needs are 

less but grow from $3 million in 2016 to $35 million by 2024. 

With the report of the gaps and declining conditions, unmet 

asset liabilities are no longer “off the books” but a prominent 

part of the financial plan. With this information, decision 

makers know the consequences of current budget forecasts 

and know how much revenue they need to generate, or shift 

from other uses, if they are to sustain their assets at targeted 

levels. This information can inform development of future 

budgets and programming decisions.

Communicating with a Financial Plan

By itself, a dense table of numbers such as Tables 1-4 is 

unlikely to be an effective tool to communicate with stakeholders. Most agencies are likely to augment this summary 

table with narratives, trend line charts and even pictures of 

pavements that meets condition targets and ones that don’t. 

However, nearly each line of this summary table can serve as 

the basis for greater discussion of the factors influencing the 

investment tradeoffs. 

The agency can explain how the State Revenue grows only 

by an estimated 1 percent annually because of the slow 

increase in annual fuel consumption and because no increase 

in state fuel tax rates is expected in this forecast. Similarly, 

the forecast assumes no growth in Federal revenue, assuming that at best Congress will maintain current expenditures.
Report 3: Managing Risks and Using Metrics 11

The agency also forecasts a 4 percent inflation rate that 

drops the effective purchasing power of the agency’s budget 

by about 34 percent by the last year of the plan. All of these 

factors influence how much the agency can spend to maintain assets, and how much is left over for discretionary 

programs such as capacity expansion projects. 

A transportation agency needs to communicate with multiple 

stakeholders each with different interests and levels of 

understanding. The public may be best reached with pictures 

of different asset conditions and summary narrative of how 

different funding levels and different investment tradeoffs 

will affect basic highway conditions. Members of MPO boards 

are likely to have a higher level of understanding and may be 

best communicated with by using scenarios that illustrate 

contrasting outcomes from different investment scenarios 

they could make. A small but critical audience is the senior 

legislators, their staff and state budget staff who review 

agency budgets. These staff are disproportionately influential 

in the legislative process and usually knowledgeable of how 

agency budgets have evolved over time. These stakeholders 

often are interested in the level of detail seen in this financial 

plan. Legislators usually rely on a few key members and staff 

to analyze agency budgets. The conclusions of these key 

staff and legislators often will sway an entire House or Senate 

to act. For those stakeholders, detailed and insightful analysis 

of how spending levels affect long-term asset conditions and 

how various scenarios and tradeoffs affect the outcomes 

generally are of significant interest.

Risks and Rewards of Forecasting

A ten year horizon creates risks because it brings both 

threats and opportunities. The threats include inaccurate 

revenue forecasts, inaccurate investment need estimates 

from management systems, incorrect inflation forecasts 

and uncertain asset performance a decade into the future. 
12 Financial Planning for Transportation Asset Management

Agencies are taking a chance when they stake the credibility 

of their financial plan on management system forecasts of 

how thousands of bridges or pavements will perform in 

10 years without having reliable data or forecasting models. 

They also must estimate how much Federal-aid Congress will 

provide, or how weather and traffic loadings years from now 

will impact assets. These risks will be discussed further in 

Forecasting and Model Risks.

However, the rewards of a long-term financial plan can be 

numerous. The first benefit is demonstrating how adequate 

preservation investment today pays future financial 

dividends. Relatively small percentages of underfunding 

of preservation in the early years of a plan stimulates 

compounding growth in backlogs of deferred maintenance 

that create serious future financial liabilities. The effects of 

sound preservation don’t show up in the short-term, but 

only over the longer horizon. With a short-term horizon, an 

agency could “save” money by cutting preservation. Only 

over the long-term do the costs of deferred maintenance 

become apparent.

A second benefit is related to the first. The financial plan 

can capture the value of the deferred maintenance and show 

it in “monetized” dollar terms as a growing and unaddressed 

financial liability. The 10-year forecast of needs, expenditures 

and gaps illustrates the backlog of deferred maintenance as 

an unmet cost that the agency carries into the future. This 

“accrual” approach brings into the agency’s financial planning process the liability of unmet asset investment that 

otherwise would not be represented on short-term financial 

statements. With an “accrual” approach, obvious future 

assets and liabilities are recognized and reported. 

A third benefit is a long-term financial plan encourages 

long-term strategic thinking that is needed for the lifecycle 

management of long-lived assets. The lifecycle of a bridge 
Report 3: Managing Risks and Using Metrics 13

or pavement spans decades. Treating that asset at the 

appropriate point with the proper “mix of fixes” requires 

strategic understanding of the asset’s lifecycle. The complexity required for such strategic thinking is multiplied by 

the thousands of assets an agency manages. A financial 

plan provides “advance warning” to decision makers and 

allows them to plan years in advance for investments needed to sustain assets. Legislative efforts to raise new transportation revenue often take years, and sometimes only 

after repeated failures. The long-term perspective of the 

financial plan allows legislators and other decision makers 

long lead times to anticipate how to close financial gaps. Or, 

the agency can decide whether to lower condition targets 

or defer discretionary projects such as ones for congestion 

relief. It also can lead to strategic decisions on how to 

manage revenue sources such as bonds to be timed strategically over a decade to provide revenues when most 

critically needed to sustain asset targets.

Therefore, the longer timeframe for the asset management 

and financial plan is essential for incentivizing and 

documenting good asset management practices and 

for keeping decision makers focused on sustaining assets. 

A longer period of 20 or 30 years is likely to lose credibility 

because agencies lack the data and analytical programs to 

accurately predict asset conditions much beyond 10 years. 

Therefore, the 10 year period is long enough to illustrate 

the benefits of a lifecycle approach but short enough to 

be credible.

Forecasting Risk

Without a thorough statement of the risks, uncertainties and 

assumptions inherent in them, the asset management and 

financial plans could provide a false sense of confidence, or 

be criticized for “crying wolf” if investment gaps are emphasized. As was described in Report 2, Financial Planning for 
14 Financial Planning for Transportation Asset Management

Transportation Asset Management: Components of a 

Financial Plan, the financial plan includes a table of 

revenues, expenditures, projected investment needs and 

investment gaps. Taken at face value, these will be assumed 

to be credible forecasts that the agency expects to occur. 

However, nearly every element of a forecast beyond the first 

or second year of a financial plan will be influenced by 

factors and parties beyond the agency’s control. Federal-aid 

will be determined by Congress. State funding sources will 

be influenced by legislators, commissions and governors. 

Tax receipts are subject to the economy, fuel consumption, 

tax diversions and tax rates. Construction costs will be 

influenced by larger market forces of global materials 

demand, the amount of construction industry competition 

and the availability of key inputs such as aggregates. In 

metropolitan areas, programming decisions are influenced 

by metropolitan planning organization (MPO) boards. 

In short, the agency will be responsible for achieving 

long-term asset conditions when much of its operating 

environment is beyond its control.

Failing to acknowledge these uncertainties aggravates 

several risks and undermines several potential opportunities. 

The negative risks are that stakeholders will question the 

agency’s credibility if its targets are not achieved because 

of factors the agency had not predicted. Conversely, the 

agency could use these same risks as opportunities to 

emphasize to the outside stakeholders their role in 

assisting the agency with achieving the public’s long-term 

asset targets. For instance, if local agencies that own parts 

of the NHS do not adopt preservation and preventive 

maintenance strategies on those sections, the risk of 

higher future costs increases. Also, the forecasted 

investment needs can convince MPO boards to include 

adequate preservation investment in the Transportation 

Improvement Program. (TIP) The asset management 

plan and financial plan can be an opportunity to engage 
Report 3: Managing Risks and Using Metrics 15

legislators, the Congressional delegation and key stakeholders 

such as MPO boards. If all are focused on the same goal of 

striving for sound asset conditions the agency is more likely 

to achieve them. 

Some of the key risks in the financial plan can be categorized 

as forecasting or “model” risk. Model risk is commonly recognized in the financial industry. As investment firms try to pick 

the best portfolio of investments to meet their desired rate of 

return, they model important financial inputs such as the rate 

of future inflation, growth in the economy, currency exchange 

rates and other factors that will influence the performance of 

their portfolio. As is analogous with transportation agencies, 

the amount of nominal or non-adjusted future dollars is 

less important than knowing how much inflation-adjusted 

revenue an agency will have. Therefore, the agency’s models 

for forecasting need, asset performance, inflation and 

revenue are important. One author compared those who 

measure risk with models to pilots who fly by instruments 

in bad weather. If they aren’t confident in their navigational 

instruments they will fly off course.[1]

Transportation agencies that need to extrapolate long-term 

forecasts of revenues, expenditure needs and asset conditions are also “flying by instrument.” In their case, however, 

the instruments are the revenue, bridge, pavement and other 

asset models they use to convert today’s known data points 

into forecasts of where the agency’s revenues and asset 

conditions are heading ten years in the future.

Inflation Risks

Model or forecast risk is particularly important in asset 

management and financial plans for two reasons. First, the 

power of compounding that can be an issue with any forecast 

is particularly acute with the long timeframes and large sums 

included in a financial plan. As in the example in Table 1, if an 
16 Financial Planning for Transportation Asset Management

agency spends $304 million on pavements in year one of its 

10-year plan, the compounding effect of an inflation forecast 

can be significant over a decade. 

As Table 5 shows, the inflation rate that the agency represented in Tables 1-4 assumes for its 10-year forecast can 

have a major bearing on the plan’s outcome. If the agency is 

currently meeting its pavement targets and it assumes that 

an inflation-adjusted expenditure of $304 million for each of 

the next ten years will be adequate to continue meeting its 

asset targets then the inflation-rate forecast will be a critical 

input to the plan. As can be seen in Table 5, the effect of a 

5 percent annual inflation growth rate is significantly different than the effect of a 2 percent annual inflation rate. The 

difference between the 2 percent and 5 percent inflation 

assumptions total nearly $124 million annually by the tenth 

year. For this example state, $124 million would equal all the 

funds passed through to local governments, or the majority 

of the Mobility/Capacity budget. Therefore, the agency faces 

risks with its pavement-inflation forecast. Under estimating 

could mean that in later years of the plan the agency will 

not meet condition targets because it cannot afford all the 

treatments needed. It would then have to defer programmed 

projects in other categories, such as capacity-expansion, and 

transfer money to pavements or accept lower condition 

Base Year 

Pavement 

Budget 

Annual 

Inflation Rate 

Scenarios

Pavement Budget 

Needs at End of 

10 Years

Additional 

Amount Needed 

from Base Year

$304 2% $371 $67 

$304 3% $409 $105 

$304 4% $450 $146 

$304 5% $495 $191

Table 5. The effects of differing inflation assumptions on 

an agency’s pavement budget. (All figures in $ Millions)
Report 3: Managing Risks and Using Metrics 17

levels. Conversely, if it overstates inflation it may not realize 

that it has more pavement budget than it needs. It could 

postpone for several years planning for other projects that 

are important to the safety, mobility and well-being of 

communities which could have been paid for with the 

extra pavement dollars.

The inflation example tries to illustrate the zero-sum nature 

of long-term transportation budgeting. Agencies face 

demands for a virtually unlimited amount of project requests 

from communities, MPOs, businesses and interest groups. If 

the agency overestimates its asset-preservation needs it is 

denying these groups projects they see as important. Underestimating the effects of inflation could lead to reduced asset 

conditions, or the need to re-direct resources later by deferring other projects that are under development. 

The last two rows of Sources of Funds in Table 1 illustrate 

the effects of inflation. The Total Sources line illustrates the 

unadjusted, nominal income forecast. The Inflation Adjusted 

Sources line shows the effect of assuming a 4 percent annual 

inflation rate. By the tenth year, the effective purchasing 

power in 2025 is 34 percent less than the nominal budget. 

The $1.689 billion of 2025 is worth only $1.123 billion in 2015 

dollars. The effects are more acute in this era when revenues 

grow slowly, if at all. 

Figure 1 (see next page) illustrates the potential difficulty 

and risk of predicting construction price trends. These data 

from the FHWA National Highway Construction Cost Index 

only have a compound annual growth rate of 1.16 percent 

between 2003 and 2014. However, at the peak of inflation 

in 2006, prices had risen 36 percent from the base year 

of 2003 before dropping in 2007, rising again in 2008 and 

then falling until late 2009. A construction inflation estimate 

in 2006 probably would look much different than one made 

in 2003 or 2014. This variability illustrates why an agency 
18 Financial Planning for Transportation Asset Management

may want to state its inflation assumptions, express 

the consequences of variability in those assumptions 

and regularly monitor price changes to update its forecast 

through the life of the plan. The agency also could express 

its confidence levels in its forecasts and note they could 

vary substantially above or below the annualized 

average forecast.

Model Risk

In addition to the risk of predicting an accurate inflation rate, 

another significant risk is inherent in the forecasts produced 

by bridge or pavement management systems. The bridge 

and pavement forecasts are central to financial plan assumptions. They provide the estimates of investment needed to 

meet and preferably sustain the asset condition targets over 

the forecast period. 

FHWA Construction Inflation Trends

Figure 1. Actual and compound average annual construction 

inflation 2003-2014. SOURCE: FHWA
Report 3: Managing Risks and Using Metrics 19

As with the inflation forecasts, the pavement and bridge 

investment analysis assumptions are influential because of 

the large amount of money involved and the long horizon 

that compounds future cost assumptions. Pavement and 

bridge programs are among the agency’s largest and create 

the largest financial demand when they increase. Differing 

from the inflation assumption, however, is the exponential 

growth in costs created by the non-linear and escalating rate 

of deterioration of assets as they age, particularly for pavements. According to FHWA statistics[2] the average state 

has 6,010 center line miles of rural highways which can 

be assumed to equal 12,020 lane miles. A relatively small 

difference in assumptions of pavement deterioration rates 

produce substantially different forecasts of condition levels 

and needed investments when extended over 10 or 15 years 

as seen in Figure 2. These differences in the amount of 

forecasted deterioration multiplied by a large number of 

lane miles and increased over time by inflation costs can 

create significant differences in pavement-need forecasts 

in the later years of an asset management plan.

In Figure 2 (see next page), the rate of pavement deterioration 

in the High Deterioration Rate Scenario is only about 1 percent 

greater in the early years of the forecast than the assumed 

deterioration rate for the Low Deterioration Rate Scenario. 

Because of the exponential rate of deterioration assumed 

as pavements age, the effects upon network pavement 

conditions are significant over time. Over 20 years, the high 

deterioration rate assumption requires nearly twice as many 

lane miles to need treatment compared to the low deterioration rate assumption. This scenario was conducted assuming the lane miles were all rural, two-lane routes many of 

which are subject to relatively light treatments which can 

deteriorate quickly when not applied at the proper times. 

For a statewide analysis, all pavements would need to 

be included.
20 Financial Planning for Transportation Asset Management

Inherent within the model risks for pavements are several 

contributing risks. One is the quality of data collection. If 

quality assurance/quality control processes are not in place 

the agency may lack confidence in its pavement condition 

data that are foundational to model forecasts. The models 

often are calibrated based upon year-to-year changes in 

pavements. If those changes are not captured correctly 

then the model will be less accurate.

The extent of historic data also contributes to the confidence 

in the forecast. If an agency has many years of data of how 

pavement sections changed over time based upon treatment 

types and costs it is likely to have more confidence in its 

forecasts. This is particularly true for forecasts in the early 

years of the plan. The “input-output” confidence can be high 

if an agency has 20 years of complete data and it is forecasting for the first five years of its asset management plan. Its 

confidence may be lower for the second five years of the 

plan. Alternatively, an agency that is only now developing a 

Figure 2. Slight differences in pavement forecasts can have major 

financial implications. 

Affects of Pavement Deterioration Rate Assumptions
Report 3: Managing Risks and Using Metrics 21

pavement model and lacks extensive pavement treatment, 

expenditure and performance history probably would have 

less confidence in its forecasts of how pavements will 

perform over the next decade. This lack of confidence may 

be compounded when agencies have not tracked program 

expenditures, or when they now are relying on relatively 

new treatment strategies. As more agencies adopt pavement 

preservation strategies, they need to assume how those 

strategies will affect network-level pavement conditions 

for the next decade. 

Two examples based on theoretical but typical state transportation agencies illustrate the differing levels of forecast 

confidence. Agency A has 20 years of data on each pavement section, how it was treated and its performance over 

time with given treatments and traffic loadings. Agency A 

also has a history of using lower-cost preservation treatments and has both historical data of how they performed 

and confidence in how they will perform in the future. With 

a large sample size and a known amount of variance in how 

the pavements performed it could calculate statistically a 

confidence level in its forecast.

Alternatively, Agency B does not have consistent pavement 

performance data. At most its data is eight years old and 

for some years data were not collected. The agency lacks 

historic information on the treatments for each section. 

The agency also has not relied heavily upon preservation 

treatments. Now, as the agency develops its pavement 

management forecast it has less confidence than Agency A. 

Agency B is developing a 10-year treatment plan and 

assumes based upon rules of thumb how each treatment 

will perform. However, its forecast is weighted heavily on 

assumptions of future treatment costs and performance 

and is not as heavily weighted by the historical data such as 

Agency A possesses. Agency B intends to emphasize pavement preservation in its plan but it lacks empirical data on 
22 Financial Planning for Transportation Asset Management

how those treatments will perform given its traffic, climate 

and pavement conditions. Agency B will have less confidence in its pavement forecast which could be significantly 

inaccurate in the later years of its plan. Agency B may want 

to disclose its assumptions of future pavement conditions 

and performance, monitor the performance year-to-year 

and update its forecast annually as it recalibrates its model 

based on actual pavement performance.

Material Cost and Market Risk

While the overall impacts of inflation already have been 

discussed, the impacts of some key materials also can be 

a significant variable in forecasting investment needs. 

Although prices have moderated since the over-heated 

construction cost years of pre-2008, the prices for key inputs 

such as steel, aggregates, cement and asphalt binder are still 

important variables to consider. The agency may benefit 

from noting in its financial plan the assumptions it makes 

regarding these key inputs. As Figure 3 shows, the prices of 

AC Binder Price by Ton

Figure 3. The variability in a key price input, asphalt binder. 

SOURCE: OHIO DOT
Report 3: Managing Risks and Using Metrics 23

key inputs, in this case asphalt binder, can vary considerably 

and are subject to national and international market forces 

beyond an agency’s control. 

Social, Political and External Financial Risks

Model risk is not limited to technical, engineering, performance or empirical cost data. Unit costs assumed for pavements and bridges can vary widely depending on the scope 

elements that an agency anticipates it will need to accommodate, such as curb ramps. The agency also may want to 

consider other external risks such as appropriation risk, or 

the risk that State, Congressional or local officials will not 

approve budget amounts, or budget categories, as assumed 

in the plan. Finally, a broad range of external factors such as 

floods, storms, seismic events or even economic changes can 

influence the assumptions in a plan. This section examines 

some of the most likely external variables that an agency 

may want to consider in its financial plan.

Appropriation Risks

The juxtaposition of Figure 4 and 5 (see pages 24 and 25)

illustrates the uncertainty State agencies will face in forecasting Federal-aid amounts. Figure 4 shows the steadily increasing levels of Federal Highway Trust Fund expenditures from 

1957 through 2012. The trend equates to a 7.1 percent compound annual growth rate. From the 1950s through the early 

2000s, agencies could forecast future State and Federal 

income levels based upon the slow but steady rates of 

growth in their fuel-driven highway tax appropriations. 

However, the declining rates of fuel consumption caused by 

increased vehicle fuel efficiency, increased urbanized and 

greater use of transit has decreased fuel consumption 

growth. At the Federal level and in many states the fuel tax 

rates have remained unchanged. Higher expenditures out of 

the Highway Trust Fund in past years have outpaced receipts
24 Financial Planning for Transportation Asset Management

leading to the results of Figure 5. It shows that the Highway 

Trust Fund would be in a serious deficit if expenditures and 

receipts remained at current levels. Since the trust fund can’t 

operate at a deficit, Figure 5 is a hypothetical illustration of 

the degree current expenditures are not supported by 

projected receipts.

An important variable for agencies to address will be their 

assumptions for Federal-aid and State revenues. The fictional 

agency in Tables 1-4 in 2015 received $750 million in Federalaid and its forecast assumed no growth in that amount for 

10 years. On the other hand, if the agency forecasts that 

Federal-aid growth returns to its historic levels of 7.1 percent 

annually, the fiscal forecast would be substantially different. 

In the tenth year it would be forecasting to receive $1.489 

billion in Federal-aid, instead of $750 million. Therefore, the

Federal Highway Trust Fund Expenditures 

Figure 4. Historic Federal highway expenditures grew steadily from 

1957 to 2012. SOURCE: FHWA HIGHWAY STATICSTICS TABLE FE-21
Report 3: Managing Risks and Using Metrics 25

rate of growth in Federal-aid and State revenue will be an 

important variable for the agency to address. Whether an 

agency forecasts that it will have the revenues to achieve 

its condition targets may hinge upon how much State and 

Federal revenue it forecasts. 

Forecasting Bond Capacity

One benefit of the longer timeframe of an asset management plan is the opportunity to plan for bond issues years 

in advance to help offset forecasted shortfalls. Agencies 

tend to issue bonds for 10 and 20 year periods, with many 

agencies opting for the 10-year horizon because of the 

lower interest costs. When an agency plans 10 years into 

the future, it can anticipate when payments for past bonds 

end, or are “off-loaded” from the balance sheet. As bond 

Highway Trust Fund Balances and Shortfall

Figure 5. Current apportionments cannot be supported with 

current Trust Fund balances.
26 Financial Planning for Transportation Asset Management

payments end, the bond payment amounts become 

available. They can be used as cash for on-going investments or the agency could plan to borrow again and use 

the available cash to pay for a new issuance. As a general 

rule of thumb, borrowing is not advised for short-lived 

assets. The result is the owner is paying interest for an 

asset that is beyond its useful life. However, agencies could 

consider bonding for particularly high-cost and long-lived 

assets such as major bridges, or the reconstruction of 

pavements on major corridors. Strategic issuance of bonds 

during the planning horizon can create several benefits. If 

the bond proceeds bring major bridges or many lane miles 

of pavements to their condition target it helps the agency 

achieve its asset condition targets. A sound asset also 

can reduce maintenance costs. Bonding to replace poorperforming major assets also can reduce risk. If the 

asset were to deteriorate rapidly during the planning 

horizon it could cause resources to be diverted from 

achieving targets for other assets. Strategic issuance 

of bonds can be an effective strategy particularly when 

interest rates are low, future construction costs high 

and asset conditions are poor.

Scope Risks, Uncertainties and Opportunities

Social and political issues also can create financial 

uncertainty. The need to comply with social imperatives can 

influence what scope items are included in pavement and 

bridge projects, particularly in urban areas. An agency may 

face growing needs to address curb ramps and sidewalks. 

The degree to which these costs must be included in pavement forecasts creates a significant variable. In some cases, 

repairing sidewalks, curb ramps and features such as lighting can cost more than the pavement. Societal insistence 

that these elements be included with paving projects 

creates uncertainty over project costs but also over treatment timing. In urban areas, the repair of sidewalks and 
Report 3: Managing Risks and Using Metrics 27

curbs can trigger changes in drainage structures that lead 

to environmental permitting. Although these additional 

project elements have high social value, they significantly 

complicate the forecasting of unit costs and treatment 

timing. As agencies, particularly in urban areas, forecast 

their bridge and pavement unit costs and treatment 

timings these factors may be significant sources of risk 

or uncertainty.

The interface between technical and social issues is likely 

to become more of a variable as both State transportation 

agencies and MPOs increase their cooperation to achieve the 

MAP-21 performance requirements. In the urbanized areas 

because of the cooperative planning process and the expansion of the National Highway System to include more locally 

owned routes, state agencies, local governments and MPOs 

will be sharing many decision-making and planning functions 

related to assets. The need to clarify limits or assumptions 

about project scopes will complicate asset-cost forecasting. 

When bridges and pavements are repaired in urban areas 

the questions of how to include “complete street” and similar 

attributes will be an important variable in estimating the 

costs to repair and rehabilitate aging streets and bridges.

Climatic or Seismic Risks

Another set of risks that agencies may want to note in 

their financial forecasts are those caused by storms, seismic 

events and other natural disasters. The agency’s ability to 

achieve its performance targets is contingent upon not 

having to divert resources or experience higher costs because of these unexpected events. There are few established 

means for accurately forecasting the likelihood of such 

events in the decade of a financial plan. The most an agency 

may be able to do is note that these events could occur, 

would affect the achievement of the targets and that the 

plan will need to be updated should a major event occur. 
28 Financial Planning for Transportation Asset Management

Hedging Financial Risks 

Many of these risks are beyond the agency’s control and 

the agency can only monitor, tolerate and react to them. 

The significant number and potential impact of the risks 

may well lead the agency to monitor them frequently and 

to assess how frequently the plan assumptions should be 

updated. In a mature performance management environment, the agency leadership is likely to be frequently monitoring performance and reviewing the inputs to that performance, such as revenue streams. Although the frequency of 

update of financial plans is not determined, it may behoove 

agencies to update them regularly, such as annually. Some 

may want to consider annually refreshing key assumptions, 

such as income streams and inflation rates based upon 

economic and legislative developments. A rolling 10-year 

plan that is updated annually with a new tenth year added 

could create a dynamic and responsive financial planning 

process.

Updating Forecasts by Monitoring Leading Indicators

A way to monitor key financial assumptions is to track 

leading cost indicators, such as national construction price 

trends, bid prices for key materials and bidding trends. Each 

agency bid letting provides an opportunity to track key price 

inputs such as the price of cement, aggregate, steel and 

labor. A feedback loop from the estimating department to 

the asset management planning office can give the asset 

management unit advance warning when estimators see 

that unit prices are rising. If the prices are rising faster than 

expected in the financial plan, it can serve as an indicator 

that plan assumptions may have to be updated. 

National price-monitoring services also can give insight into 

whether prices are expected to rise. These services track key 

indicators such as the price of “futures” which are financial 

instruments tied to the expected price of key commodities 
Report 3: Managing Risks and Using Metrics 29

such as oil and steel. By tracking futures costs, agencies can 

have some advance warning of trends that industry experts 

believe will eventually affect prices.

Strategic Borrowing to “Smooth” Revenues

All agencies face financial, legal and practical limits to the 

amount they can borrow. Borrowing amounts are often set 

by legislative limits and subject to approval by state treasurers or budget officials. Within fiscally prudent limits, agencies 

can strategically use borrowing to “smooth” out shortfalls in 

a 10-year forecast of revenue. An example would for the 

agency in Tables 1-3. If the agency has the capacity to borrow 

an additional $200 during the next 10 years it could hold that 

in reserve and use it in the later years of the fiscal period if 

the State and Federal revenue streams remain as constrained 

as they are forecast. If additional State or Federal revenue 

materializes above the forecast, the bonding may not 

be needed. As noted earlier, bonding can be prudent 

for high-cost, long-lived assets if their higher conditions 

will remain sound beyond the period of the borrowing. For 

instance, replacing several large, high cost bridges that are 

60 or 70 years old could reduce future maintenance costs for 

decades. The cost saving from eliminating the maintenance 

costs could offset the cost of the bond financing. Each case 

has to be examined individually to ensure that borrowing is 

prudent and allowed under the agency’s appropriations. 

However, the strategic thinking encouraged by the long 

timelines of the financial plan could include the well-timed 

issuance of bonds to lower long-term maintenance costs 

and to improve asset conditions.

Sound Preservation as a Risk-Mitigation Strategy

As noted earlier, the precedent for financial and asset 

management plans originated in Australia. There, the state 

governments require local governments to develop financial 

and asset management plans to ensure that the agencies 

remain fiscally solvent and do not accumulate deficits that 
30 Financial Planning for Transportation Asset Management

will diminish services or require state “bail outs.” Several 

audits of the local government financial plans concluded that 

over time they led to increased spending on preservation 

and maintenance, greater understanding of long-term asset 

liabilities and less tendency to build new assets that create 

future maintenance costs.[3]

Most pavement and bridge management scenarios that 

include significant amounts of preservation tend to demonstrate that higher conditions can be sustained over time for 

lower cost when preservation is emphasized over “worst 

first.” Allocating sufficient funds for preservation and 

ensuring that they are applied appropriately is both an asset 

management strategy and a financial management one. Over 

the longer timeframe of the 10 year asset management plan 

the higher conditions for lower cost become more apparent 

than when analyzed only over the four year period of a state 

transportation improvement program (STIP.)
Report 3: Managing Risks and Using Metrics 31

3. The Financial Risk Register

MAP-21’s requirement for risk-based asset management 

plans leads many agency officials to seek a better understanding of risk, risk management and its applicability to 

asset management. Risk management is defined here as the 

cultures, processes and structures that are directed towards 

the effective management of potential opportunities and 

threats. While risks are events or issues, risk management 

is the organizational architecture to address them.

Risk management evolved from what used to be a narrow 

specialty focusing on reducing insurance claims to a broader, more strategic discipline. In much of the corporate world 

risk management supports the agency’s performance 

management and strategic planning functions. The logic is 

that organizations can’t achieve their objectives if they don’t 

identify and manage the risks to them. Also, organizations 

need to take well-reasoned risks to achieve their objectives. 

The degree of return an organization receives from an 

investment is generally correlated to the degree of risk 

it will accept.

When Congress adopted a performance-based transportation program in MAP-21, it also emphasized risk management. Although not articulated in MAP-21, the linkage 

between risk and performance management is logical. 

The more ambitious and far-reaching are the objectives of 

an organization, the more events or factors could arise to 

impede them. Risk management is a practice that parallels 

performance management. While performance and asset 

management set goals and focus an organization upon their 

accomplishment, risk management serves as a navigational 

aide that helps to identify and avoid risks to the goals. It also 

can help differentiate a threat from an opportunity and allow 

an organization to capitalize upon them. 
32 Financial Planning for Transportation Asset Management

In a performance-based environment it is likely that agencies 

will develop dashboards, track metrics and regularly update 

legislators, commissioners and other stakeholders about 

performance progress. A tool that can complement performance reporting is a risk register. It is a relatively simple 

table that includes a list of the risks facing an agency. The 

summarized format provides at-a-glance information about 

the risks, their likelihood, impact, mitigation strategies and 

to whom their management is assigned. The risk register is 

similar to a dashboard but it focuses upon the issues that 

could impede performance objectives. It helps with the 

tracking of performance by addressing the risks, variability, 

uncertainties, threats and opportunities that face an 

organization’s objectives.

Tables 6, 7 and 8 (see pages 33 and 34) include three 

examples of a risk register populated with three risks to the 

agency’s financial plan. The three risks being monitored in 

this excerpt from a larger risk register are inflation, Federalaid funding levels and risks inherent in the pavement model 

forecasts. Risk registers vary widely and there is not a set 

format. Generally, they are simple table-like documents as 

seen here. The intent is to provide a quick summary of a risk, 

its importance, management strategies for addressing it 

and an update of its status. The risk register accompanies 

other performance-tracking tools. In a mature risk-andperformance environment, an organization is likely to have 

a performance dashboard or repository of metrics that 

is reviewed regularly. The risk register can accompany 

the performance dashboard and be regularly reviewed. 

Risk registers are required for many local and state 

governments in Australia and Canada. 

In those agencies, the risk register is included with annual 

budgets, asset management and performance reports. In 

many agencies, they are reviewed at regular meetings of the 

board or commission managing the agency. The concept is 
Report 3: Managing Risks and Using Metrics 33 Inflation Risk Likelihood Impact Value Comments Action Required Status Construction inflation could exceed 4 percent annually which could impact our ability to deliver the projects and maintenance activities anticipated in our asset manage- ment plan. Moderate Significant High To date, construc- tion inflation has not exceeded 4 percent. It has stayed at less than 3 percent on an annualized basis. Predicted continued low oil prices are viewed as a positive inflationationary factor. Continued diligence on monitoring con- struction prices and being prepared to adjust the program if needed. Good Table 6. Example of an inflation risk register. Federal Funding Risk Likelihood Consequence Value Comments Action Required Status Federal-aid funding could fall below pro- jected levels which would necessitate re- ductions in the asset management funding levels and require reducing treatment targets or diverting resources from other programs. Moderate Significant High No certainty exists for if and when trans- portation appropriations will be re-authorized or at what level. Continued monitoring and outreach to keep stakeholders ap- prised of status and potential consequences. Requires continuous monitoring

Table 7. Example of a Federal-aid risk register.
34 Financial Planning for Transportation Asset Management Pavement Model Risk Likelihood Consequence Value Comments Action Required Status The new pavement model may not produce accurate forecasts of investment need which cause us to over or un- der estimate adequate funding levels. Low Low Low So far the model has been calibrated and its forecasts comport with expected values. Continued refine- ment of deterioraton curves. QA/QC of data collection. Inte- gration of pavement model in the GIS system. Good Table 8. Example of a pavement model forecasting risk register.
Report 3: Managing Risks and Using Metrics 35

that the performance reports track progress on the agency’s 

objectives. The risk reports serve as a monitoring system of 

the issues that could affect that performance.

In these three examples, the agency could be tracking the 

expected rate of inflation to determine if this key assumption 

in its asset management plan is evolving as expected. The 

risk owner is the asset management lead and the chief 

estimator. They could be monitoring bid prices and following 

the industry’s estimates of how key input prices are changing 

nationally and internationally. Prices such as for steel, oil, 

binder and cement are influenced by international demand. 

As the economies in China, India, Europe and elsewhere 

expand and contract the price pressures on these commodities change. The price spikes seen from 2005-2008 were 

caused by the U.S. housing bubble and double-digit economic growth in China and to a lesser extent India. That put 

pressure on commodities such as cement, steel and binder 

that are traded internationally. Tracking bid prices and 

futures prices can provide an agency insights into whether 

its long-term inflation forecast remains realistic.

The Federal-aid funding risk is more affected by political 

decisions than economic ones. The tracking of this risk is 

assigned to the asset manager and to the agency’s Federal 

liaison. They would be expected to follow Washington 

developments and apprise the agency of any likely Federal 

appropriation or re-authorization issues that could affect 

the agency’s estimate of its Federal-aid.

The third example addresses the agency’s new pavement 

management system. It provides the estimates of overall and 

by-district funding needs for the pavement program that is 

the largest component of the agency’s asset management 

and financial plan. As such, the pavement management system 

forecast is one of the most critical assumptions in the asset 

management plan. If it over-estimates or under-estimates the 
36 Financial Planning for Transportation Asset Management

amount needed to achieve the pavement targets, the entire 

10-year program will be imbalanced. The risk surrounding 

the pavement forecast is assigned to the pavement program 

owner who is expected to inform the leadership if the 

pavement forecast needs to be adjusted. 

The value highlight the agency’s estimates of the likelihood 

and impact, or consequence, of the different risks. The 

likelihood is multiplied by consequence to generate a score, 

or “expected value.” Generally, once an agency embraces risk 

management it produces standardized scales that staff use 

to estimate the likelihood and consequence. They use standardized values to estimate those two factors, generate a 

score and rank order the risks. A risk with a low rating may 

be tolerated and only monitored. A risk with a high rating 

may be actively managed with mitigation taken to reduce 

its effect.

The risk register is designed assuming the agency has an 

active, ongoing and dynamic performance environment. 

Both performance and risk are tracked and decision makers 

focus their attention on achieving the performance and 

managing the risks.

Keep it Simple 

The risk management process does not have to be complex. 

“Keep it simple” is the advice from the participants in an 

FHWA International Technology Scanning Program study 

tour of transportation agencies with active risk management 

programs.[4] The identification of risks, the assessment of 

their likelihood and impact were done by agency staff based 

upon their experience and professional judgment. Complex 

predictive models are not required. Although Wall Street 

uses complicated models of risk compared to expected 

returns such models are not common for most risk management programs. The agencies in Australia, England and 
Report 3: Managing Risks and Using Metrics 37

the Netherlands that were studied on the scan tour relied 

upon the insights of their staff to compile the risks, their 

likelihood and impact. The benefits of a comprehensive risk 

program are that staff are solicited to anticipate what issues 

could affect their objectives and how those issues should be 

addressed. One Australian official described risk as “what 

keeps us up at night.” They are the factors that knowledgeable staff realize must be managed to achieve the agency’s 

objectives.
38 Financial Planning for Transportation Asset Management

4. Financial Metrics

Another set of tools for monitoring risks and the adequacy 

of investments are financial metrics. These metrics are not 

commonly used by U.S. transportation agencies but are 

common in Australia, and are essential for private sector 

businesses. As international and corporate practices such 

as risk management and asset management become more 

common with U.S. transportation agencies they may want 

to also adopt financial performance metrics. They provide 

transparency and predictive insights into trends of past, 

current and future performance.

If transportation agencies were to use forecasted financial 

performance measures they would be adopting best 

practices that U.S. and international regulators have required for banks, insurers, publicly held corporations and 

other organizations that affect the public’s and nation’s 

financial well-being. After a series of corporate collapses 

such as the failure of Enron and WorldCom, Congress 

enacted the Sarbanes-Oxley Act (SOX) that increased the 

degree of financial reporting required of publicly traded 

companies to give investors more insights into companies’ 

financial strengths.[5],[6] Similar reforms were adopted in 

Europe for banks, insurers and corporations there.[7] A series 

of assessments of Australian local governments documented in the early 2000s that they were accruing backlogs of 

unfunded maintenance that threatened their future service 

levels and financial strength. Those led to new statutes 

such as the Queensland Local Government Act of 2009 

that require communities to adopt asset management plans, 

financial plans and risk management. The Act says a government is financially sustainable if it is able to maintain its 

financial capital and infrastructure capital over the long 

term. Short-term budgets that focus on short-term cash 

balances are insufficient to provide insights into the longterm sustainability of asset conditions and service levels. 
Report 3: Managing Risks and Using Metrics 39

Included in the financial plans are financial metrics that 

illustrate how solvent the agency will be and how well it 

can finance its asset conditions.

An advantage of financial metrics generated by a 10 year 

plan is they are leading measures, with predictive ability. 

Many performance measures such as current pavement or 

bridge conditions are lagging measures. They indicate what 

has happened to date but not what is likely to occur in the 

future. Leading measures allow decision makers to change 

course, or to at least understand what is likely to occur if 

current trends continue. Additionally, the leading financial 

measures provide insights into whether the actions of 

today’s decision makers will create financial burdens and 

deteriorated asset conditions for future users. The need to 

consider the sustainability of assets for future users has been 

referred to as “inter-generational equity” by some Australian 

and British planners. The concept is that current users should 

not consume assets essential for future users. A “pay as you 

go” approach is to replace the assets “consumed” by current 

users, such as replacing the bridges and pavements that 

deteriorated based on the use by the current generation. 

Financial metrics based upon projected income and investment need can assess the degree to which financial plans 

will sustain assets for future users.

Selected Financial Metrics

The following is a partial list of possible financial sustainability metrics that could be included in a financial plan. A 

review of a basic business finance textbook would provide 

dozens of business financial metrics that could be relevant 

to transportation agencies if they were slightly altered for 

public agency circumstances. Nearly all the metrics are 

ratios. Ratios provide insight into the relative financial 

strength of organizations. The amount of outstanding 

debt or need for Rhode Island may be significant to it but 
40 Financial Planning for Transportation Asset Management

insignificant if held by California. Like volume to capacity 

ratios (V/C) or benefit-cost (B/C) ratios that transportation 

officials are familiar with, these financial ratios generally 

divide some type of demand or need volume by some type 

of income or asset-condition measure. The result is a financial strength or adequacy measure that provides insights 

into future direction.

Percent of System Conditions Meeting Target

A set of measures that assess both condition and risk are 

ones that forecast the percentage of assets that meet 

condition targets into the future based on projected funding 

levels. Table 9 is excerpted from the Table 4 financial plan. 

It shows the percentage of the theoretical state’s bridge 

and pavement conditions expected to meet condition 

targets for the each of the next 10 years. This forecast 

indicates steady decline in conditions. This forecast indicates that either future users can expect lower conditions 

and higher vehicular operating costs or the future users will 

need to raise new revenues to replace the assets consumed 

by earlier users.

Asset Sustainability Ratio or Index

The asset sustainability ratio calculated here is a conceptually simple metric in which the amount budgeted for an asset 

category is divided by the amount needed to sustain its 

condition at the targeted level over the forecast period. It 

was first described by FHWA in July of 2012.[8] While conceptually simple, the credible calculation of needed investment 

can be complex when the variables of forecasting error and 

inflation error are considered, as was described earlier. This 

ratio was proposed to be a simple measure that gives decision makers a relative idea of the degree to which assets, or 

classes of assets, are adequately funded to achieve desired 

condition targets. As seen in Table 9, the ratio in 2015 was 
Report 3: Managing Risks and Using Metrics 41

Investment Results 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Sustainability Gap $0 $15 $31 $48 $65 $83 $101 $120 $140 $160 $181

Asset Sustainability 

Index 1 0.97 0.94 0.91 0.88 0.85 0.82 0.79 0.77 0.74 0.72

Percent of 

Pavements Meeting 

Target

90 90 88 87 85 85 84 82 80 79 78

Percent of Bridges 

Meeting Target 95 95 95 94.5 94 93 93 92.5 92 91 90

Table 9. Summary of forecasted declines in pavement and bridge 

conditions. (All figures in $ Millions)

1.0 which indicates the agency believes there is no funding 

gap for those assets and the level of investment is adequate 

to meet condition targets. The ratio steadily declines and 

falls to .72, or 72 percent of needed investment levels, by 

2025. In this example, the total need to meet bridge and 

pavement conditions is divided into the budget for bridges 

and pavements to produce the ratio. The metric can be 

either a ratio or an index. If only one asset class is measured, 

the FHWA report proposed producing a Sustainability Ratio 

for that class of assets. When the ratios for several asset 

classes are combined, they can be totaled into an Asset 

Sustainability Index. In this case, the assets that are combined into the Asset Sustainability Index are the bridge and 

pavement assets. If an agency had confidence in its forecasts 

of need for other assets, such as signs and lighting, they 

could be included in the index.

The sustainability index is assumed to serve several functions. If decision makers assume that sustaining existing 

assets at acceptable levels is a fundamental objective of 

transportation planning, then the asset sustainability index 

can be a baseline, or core, metric. It can be developed early 
42 Financial Planning for Transportation Asset Management

in the financial planning process and used to guide later 

decisions regarding how much to allocate to important, 

but optional, categories such as mobility/capacity. 

Conversely, if an agency decides for political or economic 

reasons that it has to fund other categories at higher levels, 

the ASI can “keep track of” the amount of future revenue 

that will needed to restore the assets to their targeted 

condition level. The name, asset sustainability index, also 

intends to emphasize the policy objective of maintaining 

assets at acceptable levels for future users, or ensuring 

financial sustainability.

The U.S. asset sustainability index is derived from a similar 

index successfully used in Australia. That index, however, is 

based on the amount needed to restore or maintain assets 

at their current valuation. Valuation means assigning monetary value to an asset based on its age and condition. For 

instance, a new bridge built for $2 million has a valuation of 

$2 million. As it ages and deteriorates, it valuation declines. 

Australian investment levels are determined in part by the 

amount needed to maintain a desired valuation for a network of assets. In Australia, agencies devote considerable 

effort to valuing their assets and capturing the estimates of 

depreciation and impairment that are needed to estimate 

the current monetary value of an older asset. In the U.S, 

asset valuation is conducted differently and is not used for 

investment decision making. While the term “asset sustainability index” was borrowed from Australian practice the 

U.S. version is calculated differently.

Debt Ratios

Another ratio that could provide insight for financial 

decision making is a debt ratio. It could be calculated in 

various ways such as total debt divided by total income, or 

state debt divided by state income or federal debt divided 

by Federal income. Or, an agency could set a percentage 
Report 3: Managing Risks and Using Metrics 43

limit it deems prudent, such as debt should not exceed 

10 percent or some other percentage of State or Federal 

income. Whether an agency selects a dollar limit of debt, or 

a percentage, having a limit can serve the purpose of advising decision makers of the prudence of adopting additional 

debt to allow increased investment to sustain asset conditions. Five states report no debt. This provides their decision 

makers with many fiscally responsible options should the 

State face an economic or funding crisis. The agency could 

assume some prudent level of debt to carry its highway 

investments through a temporary downturn. Agencies 

with low debt levels can be considered to be economically 

resilient. Other States have high debt levels as seen in 

Figure 6. Because the size of States vary so much, the total 

amount of debt per State may be less important than the 

amount of debt compared to the agency’s resources. Figure 

6 (see next page) is derived from FHWA statistics of the 

amount of interest paid by each state as a percentage of 

its expenditures on capital and maintenance. It shows that 

for some states interest payments are high relative to the 

amount they have to spend on capital and maintenance. 

For others, debt is a relatively small percentage of outlays. 

Tracking debt levels and their impact on future ability to 

sustain assets can be an important financial metric. 

General Financial Adequacy Measures

A typical business would produce measures such as the 

operating ratio, which is a measure of how much of its 

total income is required to meet its basic business expenses. 

The higher the ratio, generally the less profitable is the 

business because a high percentage of its income is 

consumed just to meet basic business costs and the 

less remains for profits. 

Similarly, some agencies in the public transportation sector 

are reporting some of these general types of metrics that
44 Financial Planning for Transportation Asset Management

indicate how well the agency will be able to cover its desired 

investment levels into the future. First is an example from 

Australia of an operating surplus.

The operating surplus is an indicator of how resilient an 

agency is expected to be. It measures how much revenue is 

left over after basic needs are met. This can be reported as 

an absolute amount, which would be the operating surplus. 

Or it can be a ratio of the amount of surplus as a percentage 

of total income. Either way, it captures the degree of flexibility or resiliency an agency’s finances may have. If it is forecasting that all dollars will be allocated without any surplus, 

then any change in financial circumstances will require the 

agency to cut spending in some other category. Table 10 

comes from a typical Australian local government financial 

plan, this for the Council of Barossa in South Australia. It is 

Interest Payments on Debt As Percent of State Capital,

Maintenance Expenditures 

Figure 6. Interest payments as a percentage of states’ capital 

and maintenance outlays. SOURCE: FHWA TABLE SF2
Report 3: Managing Risks and Using Metrics 45

a collection of small communities united through a common 

Council government. As seen in Table 10 (see page 46), this 

summary table captures major income and expenditures 

highly consolidated down to a few categories. The depreciation and impairment category consolidates several more 

detailed expenditure estimates of the amounts needed to 

sustain assets in good condition after accounting for age, 

depreciation, impairment or the “wear and tear” that assets 

incur over time. As seen, this small community is forecasting 

it will need to allocate $6.364 million annually to offset asset 

depreciation and impairment in 2013 growing to $9.308 

million by 2022. After it plans for other expenses such as 

employee costs, finance costs or debt, materials and contracts it will have an operating surplus of $210,000 in 2013 

rising to $2.682 million by 2022. This estimate informs 

community decision makers of the latitude, or lack of 

latitude, they have in adding services or new assets without 

having to cut some already planned service or investment 

in an existing asset. 

A similar analysis but on a much larger scale is evident in 

the Short-Range Transit Plan and Capital Improvement Plan 

for the Bay Area Rapid Transit (BART) for FY 2015-2024. 

Its 138-page plan includes extensive documentation of the 

financial state and evolution of its agency from the past 

decade and forecasts of its revenues, needs and shortfalls 

for the upcoming one. It includes extensive tabular 

summaries of need and expenditures but also substantial 

interpretive narrative explaining the trends, policies, 

priorities and plans upon which it bases its future forecasts. 

Table 11 (see page 47) includes a summary of BART’s Operating Financial Forecast. In the financial plan, a few summary 

paragraphs explain each line of the estimated revenues 

and expenses. The bottom line, as shown in Table 12 (see 

page 48), is that the total estimated expenditures over 10 

years exceed estimated income by about 5 percent in total. 

The Net Result line shows a growing forecasted “deficit” 
46 Financial Planning for Transportation Asset Management Sources and Uses Categories 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total Income $31,737 $33,141 $33,811 $35,577 $37,271 $39,128 $40,820 $42,689 $44,633 $46,776 Employee costs $10,836 $11,277 $11,668 $12,143 $12,637 $13,152 $13,688 $14,247 $14,828 $15,432 Materials, Contracts $12,985 $13,411 $13,864 $14,584 $15,288 $16,135 $16,650 $17,500 $18,186 $19,021 Depreciation, Impairment $6,364 $6,734 $7,016 $7,335 $7,613 $7,953 $8,282 $8,620 $8,958 $9,308 Finance Costs $1,342 $1,224 $1,112 $1,007 $898 $735 $613 $502 $399 $333 Total Expenses $31,527 $32,646 $33,660 $35,069 $36,436 $37,975 $39,233 $40,869 $42,371 $44,094 Operating Surplus $210 $495 $151 $508 $835 $1,153 $1,587 $1,820 $2,262 $2,682 Table 10. An estimate of income and major expenditures with the Operating Surplus calculated. (All figures in $ Thousands)
Report 3: Managing Risks and Using Metrics 47 Income Sources FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Fare Revenue 421.2 435 448.8 459.7 475.4 488.1 497.9 507.9 515.7 523.7 Fare Increase for Priority Capital 18.8 27.1 36 45.1 55.1 64.9 74.8 85.7 96.7 108 ADA Passenger Revenue 0.8 0.8 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 Parking Revenue 26.2 26.8 27.4 28 28.6 29.2 29.8 30.5 31.2 31.9 Advertising Revenue 8.7 9.2 10 10.8 11.5 11.5 11.6 11.6 11.6 11.6 Other Operating Revenue 11.4 11.5 11.6 11.7 11.8 11.9 12.1 12.2 12.3 12.4 Sales Tax 228.7 235.6 242.6 249.9 257.4 265.1 273 281.3 289.7 298.4 Property Tax 33.7 34.7 35.7 36.8 37.9 39.1 40.2 41.4 42.7 44 State Transit Assistance 21.9 22.5 23.1 23.7 24.3 25 25.7 26.3 27 27.8 Local and Other Assistance 3.7 8.7 2.8 2.8 2.9 2.9 3 3 3.1 4.6 Rail Swap Assistance 77 0 0 0 0 0 0 0 0 0 Total Sources 852.1 811.9 838.9 869.4 905.8 938.6 969 1000.8 1030.9 1063.3 Table 11. BART’s Operating Financial Forecast. (All figures in $ Millions)
48 Financial Planning for Transportation Asset Management Debt Service & Allocations FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Bond Debt 56 56.3 56.5 56.8 56.9 57.1 57.2 57.4 57.6 57.7 Priority Capital Projects 63.8 72.1 81 90.1 55.1 64.9 74.8 85.7 96.7 108 Capital Renovation 37 33.8 26.6 25.2 25.7 24.7 25.3 25.8 26.4 27 Additional Renovation 6 11 6 1 26 25 25 25 25 25 Operating Reserve 0 0.3 2.1 3.2 2.2 1.4 1.2 1.2 1.3 1.3 SFO Operations 8.7 10 11.1 11.2 12.7 14.2 15.1 16 16.8 9.5 Parking Fees 4.3 4 4 4.2 4.4 4.6 4.9 5.1 5.4 5.7 Other Leases 2.7 1.5 1.5 1.5 1.5 1.6 1.6 1.6 1.6 3.1 Total Debt Service and Uses 178.5 189 188.8 193.2 184.5 193.5 205.1 217.8 230.8 237.3 Total Uses 854.6 820.2 861.5 929.4 965.8 1003.1 1038 1074.8 1112.8 1145.3 Unfunded Pension Liability 2.4 2.5 2.6 2.6 2.7 2.8 2.9 3 3.1 3.2 Net Result -0.1 -5.8 -20 -57.4 -57.3 -61.7 -66.1 -71 -78.8 -78.8 Table 12. BART’s Uses of Funds and Net Results. (All figures in $ Millions)
Report 3: Managing Risks and Using Metrics 49

starting at $5.8 million in 2016 increasing to $78.8 million by 

2024. The document notes that the negative Net Results line 

indicates the amount by which revenues will have to be 

increased or costs decreased to balance the plan over its life.

The BART capital improvement plan then goes into detail 

on an additional $9.6 billion in capital investment needs 

to expand service, replace rolling stock and rehabilitate 

aging stations and other facilities. It described the growing 

population and ridership demand in its region and how it 

will be hard pressed to serve that demand with existing 

facilities. It provides types of facilities that need to be 

rehabilitated and replaced and additional service extensions 

needed to meet demand. It reports, however, that while 

$9.6 billion in capital expansion needs exist it can identify 

only $4.5 billion in “committed” funds, or the funds likely 

to be available.

The BART Short-Range Transit Plan and Capital Improvement 

Plan provides a reader with:

 A summary of the expected revenues for 10 years

 Forecasts of on-going operating and capital expenses 

needed to maintain existing services

 A realistic estimate of its operating shortfall and its 

growth over 10 years

 A list of needed capital improvement and expansion 

projects

 The gap between the available sources and the desired 

capital improvements the region needs to keep pace 

with ridership and service demands.
50 Financial Planning for Transportation Asset Management

5. Summary and Conclusion 

The addition of financial sustainability and performance 

metrics along with risk analysis can provide even greater 

insights to those already existing in a financial plan. The 

metrics and risk register provide succinct descriptions of 

the adequacy of investment and the major risks that must 

be addressed if the expected revenues are to materialize. 

The metrics and risk analysis also clarify the costs that must 

be controlled if resources are to be available to meet the 

agency’s capital needs.

Transportation agencies are often one of the largest in State 

government and as a result some stakeholders assume they 

have excess resources for new projects to support mobility, 

economic development or community enhancement. The 

financial plan, risk register and metrics can illustrate that 

while revenues may be large, the massive size of the existing 

transportation network generally requires more revenue than 

the agency reasonably can expect over the next decade. 

The risk analysis and the description of uncertainties can 

emphasize the tenuous nature of agency revenues. The close 

linkage of agency revenues to State and Federal fuel taxes 

creates vulnerability because of slow growth, or actual 

decline, in fuel consumption. The financial plan and metrics 

can illustrate the slow growth in State taxes and the significant uncertainties in Federal resources that are likely to 

confront agencies for many years. 

The financial plan, its metrics and risk analysis can be used 

to communicate to multiple audiences. The trend lines of 

declines in purchasing power and asset conditions can make 

convincing graphics that can communicate to the public and 

key local decision makers. The more detailed spreadsheets 

and sources and uses tables will be of interest to state 

budget agencies and legislative staff who play a critical role 

in State budgeting. The state budget officials and legislative 
Report 3: Managing Risks and Using Metrics 51

staff need to be convinced of the imperative of sustaining 

adequate asset investments if they are to convey that 

message to governors and legislators. 

One of the most important roles of metrics and risk analysis 

is to emphasize the tenuous nature of revenue forecasts. 

Although asset deterioration brought on by traffic, age and 

climate are inevitable, agency revenues are not. Agencies 

control very few of the inputs that determine their revenues. 

Factors such as political decisions, economic growth, and 

market forces will determine how much their income will 

change and how much their costs may increase. The financial plan can emphasize the truly uncertain nature of agencies’ future costs and how much revenue they may have to 

meet them.

Audits of local governments concluded 

that after several years of developing 

financial plans and examining investment 

risks, appropriators better understood the 

need to invest in asset management

and preservation of assets. 

Finally, the financial plan and risk analysis can help create an 

ethos of financial sustainability. In Australia the development 

of financial plans gradually led to an increasing number of 

government officials thinking strategically about how to 

manage long-lived transportation assets. Audits of local 

governments concluded that after several years of developing financial plans and examining investment risks, appropriators better understood the need to invest in asset management and preservation of assets. The audits concluded 

that while financial plans did not eliminate all backlogs of 

investment needs they led to increased investments in assets 

and a better understanding of whole life costs.
52 Financial Planning for Transportation Asset Management

The evolution of financial plans, risk registers and financial 

performance metrics can represent a further evolution of 

State transportation practices. These practices that are 

expected of private sector asset managers can also lend 

transparency and credibility to the public sector. 
Report 3: Managing Risks and Using Metrics 53

6. Endnotes

[1] Crouhy, Michel, Dan Galai, Robert Mark, The Essentials of 

Risk Management, McGraw-Hill, 2006, pp. 397.

[2]FHWA Highway Statistics 2014 Table HM 16 rural “Other” 

highways owed by States, divided by 52.

3] New South Wales Division of Local Government, Local 

Government Infrastructure Audit, June 2013.

[4]Braceras, Carlos, Robert Tally et al US DOT FHWA Office of 

International Programs, April 2010, pp. 2, 36-38, 44.

[5]United States Securities and Exchange Commission, 2009, 

Study of the Sarbanes-Oxley Act of 2002 Section 404 

Internal Controls over Financial Reporting Requirements, 

Office of Economic Analysis.

[6]Coates, J. IV, 2009, The Goals and Promise of the SarbanesOxley Act, The Journal of Economic Perspectives, Volume 

21, Number 1, Winter 2007, pp. 91-116.

[7]Rittenberg, L, 2012, White Paper: COSO 2012—Updated, 

Principles-Based, and More Guidance, The American 

Institute of Certified Public Accountants.

[8]FHWA, The Asset Sustainability Index, A Proposed Measure 

for Long-Term Performance, accessed at http://www.fhwa.

dot.gov/planning/processes/statewide/practices/asset_

sustainability_index/assetsustainabilityindex.pdf
Nastaran Saadatmand

Asset Management Program Manager

Office of Asset Management, Pavements, and Construction

Federal Highway Administration

1200 New Jersey Avenue, SE

Washington, DC, 20590

(202) 366-1337

nastaran.saadatmand@dot.gov

Stephen Gaj

Leader, System Management & Monitoring Team

Office of Asset Management, Pavements, and Construction

Federal Highway Administration

1200 New Jersey Avenue, SE

Washington, DC 20590

(202) 366-1336

stephen.gaj@dot.gov

Prepared by:

Gordon Proctor

Gordon Proctor & Associates, Inc. 

and

Shobna Varma

StarIsis Corporation

Administrative and Contract Support by:

Greenman Pedersen Inc. 

Office of Asset Management, Pavements and Construction

Federal Highway Administration

1200 New Jersey Avenue, SE • Washington, DC 20590

FHWA-HIF-15-020

ASSET MANAGEMENT FINANCIAL REPORT SERIES