3.7 Cash Flows

One last, but very important financing issue to consider is that of cash flows – both for the capital project and for the ongoing operations. For the capital project, as mentioned, you typically must have all funding in place before commencing construction. I mentioned above that other governments (the feds and state) will not execute a grant agreement or distribute funds to a project until the sponsoring government (the city) can prove that it has collected all other required funds for the project. (The Commons in Minneapolis is an example of a project where this was not the case. Because it was PPP and developed and built by a private developer as a part of a larger private development project using a combination of public and private funds, the construction started while fundraising was ongoing. Because the fundraising fell short of its target, several features of the design had to be deferred in real time, during design and construction, to reflect changing and diminished expectations for fundraising – an ever changing “Plan B”.)

The capital project will also require seed capital or start-up funding of some sort – usually city dollars – to hire the designer and develop a vision, concept design, and conceptual budget. This capital is at risk similar to a private developer’s early capital investment. If the project does not go forward these spent funds are lost. A recent example is the first Peavey Plaza redesign, where the city funded full design (completed in 2012) of about $1.0M, only to have the project end in a lawsuit. That money was a total loss and a “sunk cost” for the city. The city paid another $1.0M for an all new design that was completed in 2018 and the plaza was finally opened in 2019.

Another cash flow challenge is a “timed gift” when, for example, a donor (for their own tax or cash flow reasons) makes a gift of one million dollars – spread over five years at $200,000 per year. The problem is that you need the whole $1M the first year. In this case the City (or a commercial lender to the city) may need to make a “bridge loan” – loaning the funds to the project on a short-term basis so there is enough money to pay the contractor, then collecting the funds in the future years and repaying itself.

Cash flows also matter on the operating budget because every year the operator must solicit funds from the government and private donors to ensure that it can continue to operate at a certain minimum level. Cash flows matter when it comes to paying staff and contracting with service providers and vendors.