Item No. 9a
Meeting Date: October 8, 2019

Financial Policy Update
October 8, 2019

1

Overview
Background
Motion 2018-14
Purpose of Financial Policies
Financial Policy Process
1. Capital Investment Program (CIP) Reserves
2. Non-Airport Debt Service Coverage

2

Motion 2018-14 Section 6
Identify financial policies to be reviewed and updated
Review management of capital contingencies and reserves
2020 Budget document to include a policy on capital
contingencies and reserves


3

Purpose of Financial Policies
The primary purpose is prudent financial management
Provides for financial sustainability to achieve Port's objectives
Promotes stewardship of public resources
Provides flexibility to withstand adverse circumstances
Manages risk
A secondary purpose is to maintain the Port's access to credit
Policies support the Port's strong credit ratings
Enables the Port to get competitive rates on debt (lower costs)

4

Financial Policy Process
Port develops financial policies and tools based on holistic approach
Best practices
Government Finance Officers Association (GFOA) develops and publishes best practices
and guidelines
Other industry groups: ACI, AAPA, AICPA, GASB
General financial management theory from academia and industry associations like
Association of Financial Professionals
Peer review
Survey finance colleagues at other airports and seaports
Outreach to other large local governments
Port specifics
Analyze Port data trends
Consult with outside experts, e.g. financial advisor, external consultants
Adapt as appropriate to best ensure Port financial sustainability

5

1. CIP Reserves
Best Practices and Peer Review insights
Recommended as part of a conservative budget process
No standard approach
Provides flexibility to manage the unknown
Use to smooth cash flows within five-year CIP
Internal Analysis
Port staff reviewed twenty years of historical CIP data
Insights help inform development of a CIP Reserve

6

Capital Spending Trends
Normal range (1) has varied by $1.2 billion            Spending fluctuates depending on capital cycle
Average spending has been 80% of CIP            and unknowns





(1) Within one standard deviation

7

Correlation: The More "Committed" Projects in a CIP,
the More Accurate the CIP Forecast
During the planning
periods of the capital
cycle fewer projects have a
"Committed" status
A higher percentage of
"Business Plan
Prospective" projects in a
CIP, the more opportunity
for course correction

Business Plan Prospective = Status 2
Each dot represents a 5-year CIP                               Committed = Status 3 - 5

8

Reserve Development Practice
Staff will take the trend analysis into account to develop
CIP reserves
This may include a cash flow adjustment to better reflect more
achievable levels of capital spending
This year's CIPs will incorporate this practice
In addition to CIP Reserves, individual projects will continue
to include project contingencies
Established by project management based on best practices
No change recommended at this time
9

CIP Reserve Policy Applied
Central Services CIP ($ million)
Original CIP - Presented Sept. 24       2020      2021      2022      2023      2024       TOTAL
Projects                               20.0        5.9           4.4           4.8           5.0          40.2
CIP Reserve                           -          3.5           5.0           5.0           5.0          18.5
Total CIP                               20.0        9.4           9.4           9.8          10.0       58.7
Revised CIP
Projects                               20.0        5.9           4.4           4.8           5.0          40.2
CIP Reserve                           -          -          1.0           1.0           1.0           3.0 
CIP Cash Flow Adjustment              (5.0)       2.0           1.0           1.0           1.0           -
Total CIP                               15.0        7.9           6.4           6.8           7.0          43.2
Trend and project status analysis resulted in both a reduction in CIP Reserve
amount and a cash flow adjustment

10

Staff Recommendation
Add the following policy to the 2020 Preliminary Budget:
"Capital Improvement Plan (CIP) Reserve: The Capital Improvement Plan may
include one or more CIP reserves to ensure funding capacity for unspecified
projects (e.g. renewal and replacement), new initiatives and unforeseen
needs. However, CIP reserves are not intended to anticipate all potential
future spending and amounts will be determined by considering the data on
historical capital trends, existing asset conditions, the status (level of
certainty) of CIP forecasts, and any contingent risks that may require
funding. The use of CIP reserves will be reviewed with the Commission
annually during the budget process."

11

2.  Non-Airport Debt Service Coverage
Review conducted in 2018
Management coverage targets last revised in 2005
Measure of net income divided by revenue bond debt service
Airport: 1.25x
Non-Airport: 1.50x
Difference reflects the relative business risk
Management target is not the Port legal requirement
promised to investors
12

Best Practices and Peer Review
Debt service coverage is a significant measure of financial
resiliency
Important to investors and credit rating agencies
Survey of other seaports:
Targets generally range from 1.8  2.0x
Port of Tacoma uses 2.0x

13

Seaport Business Risk Has Increased Since 2005
Changes in the container terminal business have put
pressure on net income
Trend analysis shows that net income for non-Airport
businesses has fluctuated in recent years from
A low of $49 million in 2013 to
A high of $69 million in 2016
A higher coverage target would provide stronger cash flow
to withstand adverse conditions and better manage risk
14

Staff Recommendation
Change Non-Airport revenue bond debt service coverage
from 1.50x to 1.80x
Consistent with large peer ports
Shifts available funding from debt to cash
Reduces funding capacity in the short term; increases it in the
long term
No funding impact until 2023, first year of capacity for new bonds
No recommended change to Airport coverage at this time
Change will be included in the 2020 Preliminary Budget
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