[Senate Hearing 107-962]
[From the U.S. Government Publishing Office]
S. Hrg. 107-962
INNOVATIVE FINANCING:
BEYOND THE HIGHWAY TRUST FUND
=======================================================================
JOINT HEARING
BEFORE THE
COMMITTEE ON
ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
AND
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
OPTIONS FOR FINANCING FEDERAL TRANSPORTATION PROGRAMS
__________
SEPTEMBER 25, 2002
__________
Printed for the use of the Senate Committee on Environment and Public
Works
and the Senate Committee on Finance
______
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COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
ONE HUNDRED SEVENTH CONGRESS
second session
JAMES M. JEFFORDS, Vermont, Chairman
MAX BAUCUS, Montana BOB SMITH, New Hampshire
HARRY REID, Nevada JOHN W. WARNER, Virginia
BOB GRAHAM, Florida JAMES M. INHOFE, Oklahoma
JOSEPH I. LIEBERMAN, Connecticut CHRISTOPHER S. BOND, Missouri
BARBARA BOXER, California GEORGE V. VOINOVICH, Ohio
RON WYDEN, Oregon MICHAEL D. CRAPO, Idaho
THOMAS R. CARPER, Delaware LINCOLN CHAFEE, Rhode Island
HILLARY RODHAM CLINTON, New York ARLEN SPECTER, Pennsylvania
JON S. CORZINE, New Jersey PETE V. DOMENICI, New Mexico
Ken Connolly, Majority Staff Director
Dave Conover, Minority Staff Director
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COMMITTEE ON FINANCE
MAX BAUCUS, Montana, Chairman
JOHN D. ROCKEFELLER IV, West CHARLES E. GRASSLEY, Iowa
Virginia ORRIN G. HATCH, Utah
TOM DASCHLE, South Dakota FRANK H. MURKOWSKI, Alaska
JOHN BREAUX, Louisiana DON NICKLES, Oklahoma
KENT CONRAD, North Dakota PHIL GRAMM, Texas
BOB GRAHAM, Florida TRENT LOTT, Mississippi
JAMES M. JEFFORDS (I), Vermont FRED THOMPSON, Tennessee
JEFF BINGAMAN, New Mexico OLYMPIA J. SNOWE, Maine
JOHN F. KERRY, Massachusetts JON KYL, Arizona
ROBERT G. TORRICELLI, New Jersey CRAIG THOMAS, Wyoming
BLANCHE L. LINCOLN, Arkansas
John Angell, Staff Director
Kolan Davis, Republican Staff Director and Chief Counsel
(ii)
C O N T E N T S
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Page
SEPTEMBER 25, 2002
OPENING STATEMENTS
Baucus, Hon. Max, U.S. Senator from the State of Montana......... 1
Corzine, Hon. Jon, U.S. Senator from the State of New Jersey..... 30
Crapo, Hon. Michael D., U.S. Senator from the State of Idaho..... 8
Grassley, Hon. Charles, U.S. Senator from the State of Iowa...... 3
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma... 9
Jeffords, Hon. James M., U.S. Senator from the State of Vermont.. 4
Reid, Hon. Harry, U.S. Senator from the State of Nevada.......... 6
WITNESSES
Carey, Jeff, managing director, Merrill Lynch & Co., Inc., New
York, NY....................................................... 25
Articles:
Road to Revolution Coming?, Bond Buyer................... 99
Senate Panel Leaders Lobby DOT to Use Innovation in Its
Funding, Bond Buyer.................................... 97
Senate Panel Tells TIFIA Program to Make Do With 2002
Leftovers, Bond Buyer.................................. 98
Transportation for Upcoming Reauthorization of TEA-21,
Transportation Watch................................... 103
Prepared statement........................................... 93
Responses to additional questions from:
Senator Baucus........................................... 95
Senator Jeffords......................................... 96
Hahn, Hon. Janice, Councilwoman, City of Los Angeles, Los
Angeles, CA, on behalf of the Alameda Corridor Transportation
Authority...................................................... 19
Prepared statement........................................... 80
Hecker, JayEtta, Director of Physical Infrastructure Issues,
General Accounting Office...................................... 15
Prepared statement........................................... 66
Responses to additional questions from:
Senator Baucus......................................... 77
Senator Jeffords....................................... 78
Horsley, John, Executive Director, American Association of State
Highway and Transportation Officials, Washington, DC........... 23
Prepared statement........................................... 86
Responses to additional questions from Senator Jeffords...... 92
Rahn, Hon. Peter, Secretary, New Mexico Department of
Transportation, Santa Fe, NM................................... 22
Prepared statement........................................... 84
Responses to additional questions from Senator Baucus........ 85
Scheinberg, Phyllis, Deputy Assistant Secretary for Budget and
Programs, Department of Transportation......................... 13
Prepared statement........................................... 59
Responses to additional questions from Senator Jeffords...... 65
Seltzer, David, Distinguished Practitioner, Mercator Advisors,
Philadelphia, PA, on behalf of the University of Southern
California Los Angeles, CA National Center for Innovations in
Public Finance................................................. 11
Prepared statement........................................... 31
Powerpoint slides............................................ 33
Report, Findings and Recommendations for Innovative
Financing, National Center for Innovations in Public
Finance.................................................... 47
Response to additional question from Senator Baucus.......... 58
Table, Key Drivers on Innovative Finance..................... 57
ADDITIONAL MATERIAL
Statements:
American Highway Users Alliance.............................. 104
American Society of Civil Engineers.......................... 106
Forkenbrock, David J., Public Policy Center, University of
Iowa....................................................... 114
Karnette, Betty, California State Senator.................... 111
National Association of Railroad Passengers.................. 109
Texas Transportation Commission.............................. 120
Transportation Departments of Montana, Idaho, North Dakota,
South Dakota and Wyoming................................... 105
INNOVATIVE FINANCING: BEYOND THE HIGHWAY TRUST FUND
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WEDNESDAY, SEPTEMBER 25, 2002
U.S. Senate,
Committee on Environment and Public Works,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 9:36 a.m.,
Hon. Max Baucus (chairman of the Committee on Finance) and Hon.
James M. Jeffords (chairman of the Committee on Environment and
Public Works) presiding.
Present for the Committee on Environment and Public Works:
Senators Jeffords, Reid, Inhofe and Crapo.
Present for the Committee on Finance: Senator Baucus.
OPENING STATEMENT OF HON. MAX BAUCUS, U.S. SENATOR FROM THE
STATE OF MONTANA
Senator Baucus. The joint hearing of the Finance Committee
and the Environment and Public Works Committee will come to
hearing.
This is a unique and quite possibly historic occasion
because the Environment and Public Works Committee and the
Finance Committee are holding a joint hearing in the Finance
Committee hearing room, chaired by the chairman of the
Environment and Public Works Committee. I am sure that all
historians will note this. It surely will be recorded as a
major moment in history.
Senator Jeffords. If you hear a rumbling up there, let me
know.
Senator Baucus. But at the very least, I welcome everyone.
I will make an opening statement, then turn the hearing over to
Chairman Jeffords, who will chair the joint hearing.
First, as a member of this committee and also Environment
and Public Works Committee, I have spent a lot of time working
on highway issues and financing highway programs because
highways are just so important to the State of Montana.
This joint hearing, clearly, is one that recognizes the
joint interests between the two committees: providing the funds
to the Finance Committee for a highway program--the trust fund;
and second, the authorization of programs by Environment and
Public Works Committee, deciding which projects will be built
and maintained over the life of the authorization law.
I was also privileged to be a co-author of TEA-21, with
Senators Warner, Chafee, Byrd, and Graham. There are many
others, also, who helped to make it a successful bill.
It was a time, frankly, where we all worked very well
together. I expect the same camaraderie and relationship to
prevail among the principal members of the Environment and
Public Works Committee again this year.
I am especially pleased that Senator Grassley, the Ranking
Member of the Finance Committee, has also shown such a great
interest in these issues. He, too, will play a very important
role during TEA-21 reauthorization.
The Finance Committee recently held a hearing that
explained how the Highway Trust Fund is structured to provide
funding for our highway system. We heard testimony that was
quite interesting. The testimony focused on the projections for
trust fund income over the next 10 years.
As successful as the trust fund has been, unfortunately our
transportation needs far outweigh the resources. In fact, I
remember the Department of Transportation mentioning--this has
been the case over many years--how the needs of our country in
developing our highway program provide only about half of the
funds that are available about 50 percent. My guess is, that
figure is not going to get any better in the future.
Today's hearing is intended to discover how we can get
additional financing beyond the trust fund for our highway
program. We are looking at additional means to finance the
ordinary way--that is, the gasoline tax and fuel taxes that the
users pay to the trust fund--in order to meet our Nation's
needs.
In recent years, there has been increased recognition of
the greater importance of our highways to our country. As we
prepare to reauthorize the highway program next year, the big
question for Congress will be how to increase the level of
investment for the benefit of us all.
Earlier this year, Senator Crapo and I introduced
bipartisan legislation with 12 co-sponsors, S. 2678, the MEGA-
TRUST Act, for Maximum Economic Growth for America through the
Highway Trust Fund.
This bill laid out some ways to increase investment in the
highway program without raising taxes. That legislation would
allow the trust fund to be properly credited with taxes either
paid or foregone with respect to gasohol consumption.
We would also reinstate the principal that the highway and
mass transit accounts of the Highway Trust Fund should be
credited with the interest on their respective balances.
As we all know now, the general fund does not go back to
the respective balances of those two programs. I think that
change is very important.
But we must also continue to work out additional ways to
enable a stronger level of highway investment. Next week, I
will introduce the MEGA-INNOVATE, Maximum Economic Growth for
America through Innovative Financing. I do not know where in
the world we got that name.
Under this legislation, the Secretary of the Treasury would
sell bonds, with the proceeds being placed in the highway
account of the Highway Trust Fund. The Treasury would be
responsible for the principal and the interest. The bond
proceeds would enable the basic highway program to grow. It
would help the citizens of every State.
The administration of this initiative would be simple. No
new structure is required. It is a new idea that does not raise
taxes, but would advance our national interest in a strong
highway program.
As this is a new idea for highways, the bill introduces
this concept at a very modest level, in the range of $3 billion
annually in bond sales.
However, when combined with the provisions of the Trust Act
and the continuation of current resources of revenue, this
legislation should enable the highway program to achieve an
obligation level of approximately $41 to $42 billion by fiscal
2009.
Many other elected officials and organizations have shown
interest in both of these acts, and I would like to enter their
statements into the record.
Senator Jeffords. Without objection.
[The prepared statement of Senator Grassley follows:]
Statement of Hon. Charles Grassley, U.S. Senator from the State of Iowa
I would like to thank Chairmen Baucus and Jeffords for scheduling
this joint hearing between the Senate Finance Committee and the Senate
Environment and Public Works Committee. We are here to examine issues
of highway finance in anticipation, of the reauthorization of TEA-21.
As Senator Baucus indicated, both Committees have an interest in
providing adequate funding for our nation's transportation system
whether it be through the traditional fuel tax regime or through other
tax-based financing mechanisms. As I noted in our first hearing on the
highway trust fund reauthorization in May, transportation issues are
very important to Iowa. Accordingly, I look forward to working with
Senators Baucus, Jeffords, and Smith in reauthorizing TEA-21 during the
next Congress.
On May 9, the Finance Committee held its first hearing to begin
evaluating the future health of the Highway Trust Fund. In that
hearing, we focused largely on the flow of taxes into the trust fund
and the continued ability of the highway trust fund to support
transportation needs under reauthorized TEA-21.
We also began talking about the impact that alternative vehicles
and alternative fuel sources will have on the trust fund in the years
ahead. Finally, we began to consider how we would maintain the existing
levels of trust revenue for transportation demands without raising
taxes.
Today, we will not focus on trust fund revenue. Instead, we will
shift our attention to various financing mechanisms that will
supplement transportation needs beyond the dedicated revenues in the
trust fund.
Historically, issuing State and local bonds (which are exempt from
Federal taxation) was the principal way States raised capital for
transportation needs in excess of those currently available with
highway trust fund resources. While this works well in some States,
some including Iowa have decided against using bonds to finance
infrastructure projects while others are constitutionally prohibited
from doing so.
During the reauthorization of TEA-21, a concerted effort was made
to begin using Federal resources to encourage private investment in
transportation projects. During the reauthorization, the drafters also
attempted to expand and make more flexible the resources available to
State transportation departments. A number of pilot programs were
established to achieve those goals including (i) TIFIA Funding (named
for the Transportation Infrastructure Finance and Innovation Act), (ii)
SIBs (State Infrastructure Banks), (iii) GARVEES (Grant Anticipation
Revenue Vehicles), and GANS (Transit Grant Anticipation Notes). Because
many of these programs rely on State borrowing, they are not viable
solutions for all States. In other circumstances, the programs may not
have worked as intended.
Iowa, for example, is in the process of closing out its State
infrastructure bank. Without the ability to use State and local bonds
to increase SIB funding, it was difficult for Iowa to effectively use
the concept. In addition, several shortline and regional railroads in
my State have tried to use the railroad infrastructure fund
administered by the Federal railroad administration. The application
process is extremely cumbersome and prevents many railroads from even
considering the option. Those who have applied have had difficulty
coming up with the required credit risk premium to access funds. The
role of the State DOT in these projects has been limited to moral
support--a problem that should clearly be fixed.
Evaluating the successes and failures of previously authorized
programs is an important first step in the reauthorization process. I
look forward to hearing from the witnesses today on how we may improve
and further refine existing programs. We should particularly examine
programs that involve public-private partnerships such as TIFIA. Many
of the witnesses have commented on the operation of these programs in
their testimony, and at least one of our witnesses has suggested
program modifications. These types of comments are highly instructive,
and I look forward to hearing additional witness views on these issues.
As we move into reauthorization, I know we will want to maintain
the important goals of stretching available resources and inducing
private investment into the transportation sector. This hearing should
help us evaluate alternative financing mechanisms for achieving those
goals. Specifically, I look forward to learning more about the bond
proposals offered by the American Association of Highway and
Transportation Officials (AASHTO) and Senator Baucus. Because these
ideas are new to the transportation sector, we will want to consider
carefully the details of those proposals. With respect to each new
proposal, I would like to further consider whether additional funds
should be raised for State apportionment (program finance) or, for the
benefit of specific projects (project-finance). In addition, I would
like to further consider whether leveraged funds should be retired
using tax-arbitraged escrow funds, repayments from the general fund, or
project-specific revenue sources.
In closing, I would like to reiterate that I look forward to
working with my colleagues on the reauthorization of TEA-21. I am
anxious to hear from the witnesses on how to most effectively finance
the important needs of our highway transportation system. Thank you,
Mr. Chairmen.
Senator Baucus. Concerning other statements for the record,
the first, is from the Departments of Transportation from the
following five States: Montana, Idaho, Wyoming, North Dakota,
and South Dakota, endorsing both the MEGA-TRUST and my
forthcoming bond proposal. Second, a statement from the
American Highway Users Alliance, also indicating support for
both measures.
I very much appreciate the support of these groups, as well
as the support of others, for these two important initiatives.
A well-funded highway program is certainly essential to the
economic future of each of our States. I look forward to
working with my colleagues on these measures, and on other ways
to help our citizens benefit from increased levels of highway
investment.
I also look forward to hearing additional proposals on
alternative means to finance the Nation's surface
transportation program. The more we can get the private sector
involved and the more we can leverage funds, the better we will
be able to meet our transportation needs.
[Additional statements submitted for the record appear at
the end of the hearing record.]
Senator Baucus. I would now like to turn the hearing over
to my good friend, Jim Jeffords from Vermont, who will chair
the joint hearing.
OPENING STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM
THE STATE OF VERMONT
Senator Jeffords. Thank you, Senator Baucus. I appreciate
the opportunity to sit in your seat here. We work very closely
together on both committees, and you are doing an excellent job
on the Finance Committee. It is appreciated, your hard work
that brings us here today.
I am pleased this morning to join in this hearing on a
very, very important subject. Today, we will focus on money, a
key to the future of America's transportation system.
By some accounts, the annual level of investment needed to
just maintain our transportation system is nearly $110 billion
per year. Our current national program falls well short of that
figure.
Over the last 50 years in our successful campaign to
develop the Eisenhower Interstate Highway system, we have used
Federal grants to States in a pay-as-you-go program to build
our national system. Today, that system is essentially
complete.
We are in a post-interstate era. Our Federal aid programs
now focus, appropriately, on maintaining, operating, and
enhancing the highway asset that we have built. But this
Federal/State partnership is now being overwhelmed by just its
asset management responsibility. Unless we adapt, I foresee a
continuing deterioration of our transportation system.
We are a Nation with unlimited potential and boundless
possibility. That spirit has propelled a range of achievement
unparalleled anywhere else in this world. Our renewal of
America's transportation program must reflect this national
heritage in meeting the needs of the next generation.
It should be as bold as President Eisenhower's vision was
in its time. Our vision should not be hobbled by artificial
constraints or narrow thinking which would permit other nations
to gain competitive advantages over us. To fully compete in the
world markets and to offer all American families and businesses
the full range of products in international commerce, we need
strategic investment in key new facilities, while reinvesting
in those already built.
We have explored options to increase revenues to the
highway fund in previous hearings. I will consider all options
for growing the trust fund. But today we will look beyond the
Highway Trust Fund, beyond the grant and aid programs, and
beyond the Federal/State partnership.
We will hear today from two distinguished panels on a topic
that has been referred to in the last 10 years as innovative
financing. We will look at the role of revenue streams, private
capital, special-purpose entities, and intermodal facilities in
meeting the needs of the next generation. But this is not
innovative, radical, or even new. In fact, what we will explore
today is really the pre-interstate approach to financing roads
and bridges. It is the standard way that our free enterprise
system creates our means of production through private capital
and return on investment.
I am pleased that Councilwoman Hahn from Los Angeles is
here to discuss a pioneering effort in modern transportation
finance, the Alameda Corridor. This prototype project is
intermodal in its nature, provides both freight and passenger
benefits, draws on new revenues to retire debt, and is
sponsored by a special-purpose district.
In my home State of Vermont, we have utilized a finance
program called a State Infrastructure Bank, or a SIB. A SIB is
a revolving fund mechanism for financing a wide variety of
highway and transit projects through loans and credit
enhancement. Vermont has taken hundreds of fuel delivery trucks
off our roads by financing bulk storage facilities in key rail
yards.
Other States have used this mechanism, and others, to
provide early project financing. In the State of South
Carolina, a variety of finance techniques, coupled with public/
private partnerships, has resulted in the construction of 27
years' worth of projects in a 7-year timeframe.
On a smaller scale, the State of Delaware has joined with
the Norfolk Southern Railroad to renovate historic Shellpot
Bridge, with the railroad retiring the project's cost over time
through fees on its rail cars.
What we will discuss today is a complement to our
traditional programs, not a replacement. Private capital
represents a realistic means to expand our buying capacity. The
key is revenue streams.
When a project is supported by dedicated revenues, whether
it is tied directly to the use of the facility as in the case
of Alameda or Shellpot Bridge, or simply earmarked from more
general sources such as property rentals or operating revenues,
then the project can retire debt.
The freight community particularly will benefit from
expanded use of financing. Today's freight interests are
frustrated by their inability to compete when projects are
ranked at the State and NPO level.
Through its capacity to generate revenue, the freight
sector can essentially create its own program. This will also
reduce demand on the traditional Federal aid grant program.
Let me close by suggesting a vision for transportation
finance. In the future, every responsible fund manager, both
here and globally, will have a fraction of his or her portfolio
invested in U.S. transportation infrastructure. They will do so
with confidence in the investment and the bold Nation it
supports. Over the next few hours, I will listen for ways to
make this vision a reality. Thank you.
Now we turn to the hearing, the best parts of it. I would
turn, also, to the Senator from Nevada for any statement.
STATEMENT OF HON. HARRY REID, U.S. SENATOR FROM THE STATE
NEVADA
Senator Reid. I thank you and Chairman Baucus. I commend
both of you for holding this joint hearing. It is so important.
I am thankful also, of course, that Ranking Members Smith and
Grassley have agreed to do this.
We are authorizing TEA-21 the legislation to address our
Nation's infrastructure needs is a big job, an important job,
and one that will take the cooperation of more than one
committee.
Early this month, the Subcommittee on Transportation,
Infrastructure, and Nuclear Safety conducted a joint hearing on
freight issues with Senator Breaux's Commerce Subcommittee. We
need more cooperation between committees involved in
reauthorizing TEA-21.
We have to work together to ensure that our significant
diverse transportation needs are addressed. Our highways,
transit system, and railways are too important to our economic
well-being and quality of life to ignore.
I look forward to working with the Finance Committee and
other committees to see if we can adequately address our
transportation needs. We are nearing the completion of the
Environment and Public Works Committee's year-long series of 14
hearings and symposia addressing the critical issues related to
reauthorization. It is appropriate that our final two scheduled
hearings focus on funding issues.
As we have been told today, we will review opportunities
for innovative financing. On Monday, the Transportation
Subcommittee will examine the state of the infrastructure and
the funding necessary to maintain and improve our Nation's
highway system.
The State of Nevada has been a leader in the field of
innovative financing and has aggressively sought to leverage
private investment through existing Federal financing programs.
For example, the project that should have taken place 100
years ago, the Reno Transportation Rail Access Corridor, RTRAC,
is seeking to use $70 million in loans under TIFIA to leverage
$200 million in State, local, and private funding to build a
below-grade rail transportation corridor. This project will
increase safety and reduce traffic congestion by eliminating 10
at-grade rail crossings. That is important, of course.
The Las Vegas monorail project is seeking a $120 million
TIFIA loan to bridge the gap between Federal, State, local, and
private financing to build Phase II of what will eventually be
an 18-mile regional rail transit system.
Finally, the State is expediting the critical Hoover Dam
Bypass--and we are working with the State of Arizona on this--
by using a bonding mechanism similar to the GARVEE bonds to
allow construction to proceed before Federal funding is
completed.
Each of these vital highway transit rail projects were made
possible by innovative financing opportunities provided by the
Federal Government. In the future, we hope to creatively use
new, innovative financing tools to bridge the gap between
public and private investment to build a high-speed magnetic
levitation train between Southern California and Las Vegas.
There is no question that innovative financing must be a
critical component of next year's transportation bill. We
should encourage new public/private partnerships and focus on
where Federal resources can creatively be used to leverage
State, local, and private investment for critical highway
transit and rail projects.
Let me say publicly what I have said privately. I think it
is tremendous that the chairman of the Finance Committee, the
all-power Finance Committee as we know here, and the former
chairman of this committee is working so closely with us.
I think that we are going to benefit so greatly in the year
to come from Senator Baucus' experience as chairman of this
committee, and his experience as chairman of the Finance
Committee, to help come up with some of these innovative ways
to finance these projects. We need this very, very badly.
I applaud and commend the chairman of the Environment and
Public Works committee, Senator Jeffords, for his agreeing to
do these kinds of joint hearings. This is something we do not
do here very often. We were so protective of our turf here. I
think we should Senator Baucus for all we can because of his
experience.
[Laughter.]
I think that we need to understand that we, as the
Transportation and Infrastructure Committee, cannot do it
alone. We need to do things differently than we have done in
the past. I think this is great to have this hearing. I think
this is an indication of what is to come next year, and coming
up with a highway bill. It is going to be different than any
highway bill we have ever done before.
I want to apologize to the committee. Senator Inouye is not
here today, and I have got to help him on a committee beginning
at 10 o'clock.
Senator Jeffords. Well, thank you very much for your
excellent statement.
Senator Baucus. If I might, Mr. Chairman, also thank
Senator Reid for his very strong endorsement of the joint
hearing. I think that we get better legislation here with more
joint hearings, as a general rule. The legislation is good as
it is, but I think joint hearings are very, very helpful. I
compliment the Senator for making that observation.
Senator Jeffords. There is no subject that a joint hearing
is more appropriate for than this one right now.
Senator Crapo?
STATEMENT OF HON. MICHAEL D. CRAPO, U.S. SENATOR FROM THE STATE
OF IDAHO
Senator Crapo. Thank you very much. I would like to thank
both of our joint chairmen today and associate myself with the
remarks of Senator Reid about the importance of the fact that
we are working together and having these joint hearings.
As we work together to put together the next highway bill,
it is going to be critical that we do a good job, and a prompt
job. But, even more importantly, we have got to work together
to make sure that we build the kind of support for the good
bill that we will need to build. I appreciate the efforts of
both of our joint chairmen for holding this hearing. Clearly,
innovative financing and the funding aspects of this are going
to be critical.
In terms of talking about working together, I want to
especially thank Senator Baucus. He and I, both coming from
neighboring States out in the Northwest, have similar concerns
with regard to our States' issues with regard to
transportation.
We have found an opportunity to work together across party
lines to put together some innovative approaches of our own to
try to address the question of how to increase the pot of
funding for our highway needs in this country. With the two
approaches that we have come together on, we have done it
without raising taxes, and I think that that is a very
important first step: the MEGA-TRUST Act, which Senator Baucus
already mentioned, and then the MEGA-INNOVATE Act that will be
introduced soon.
We have two ideas on the table that are very important. As
has been indicated by Senator Baucus and Senator Jeffords
today, I look forward to hearing from people around the country
who have had a lot of experience with this and who have a lot
of ideas about how we can accomplish it, to giving us more
ideas and more proposals for how we can address the needs for
funding our next highway bill.
So, again, to both of our chairmen, I thank you for this
opportunity. I look forward to the information we are going to
receive today, and working with you as we put together the next
bill.
Senator Jeffords. Thank you. A very helpful statement.
Senator Inhofe?
STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM THE STATE
OF OKLAHOMA
Senator Inhofe. Thank you, Mr. Chairman.
As we work together in drafting the reauthorization of TEA-
21, it is safe to say that all members here recognize that this
is a time of extraordinary challenge and opportunity for the
transportation sector.
The world of surface transportation is changing. It is now
our job to work together to ensure adequate funding for
investment in the Nation's transportation system and preserve
State and local government flexibility to allow the broadest
application of funds for transportation solutions.
TEA-21 dramatically altered the transportation funding
mechanisms, provided greater equity among States in the Federal
funding, and record levels of transportation investment. For
most Federal aid projects, the law requires that 20 percent of
the costs be derived from a non-Federal source.
In order to maximize the use of all available resources,
States now have a range of options for matching the Federal
share of highway projects. By providing flexibility in a form
that the non-Federal match might take, Federal dollars can be
leveraged more effectively.
What we have been taking advantage of in Oklahoma is the
toll credit match. We apply certain toll revenues/expenditures
to build and improve our public highway facilities as a credit
toward the non-Federal matching share of particular projects.
However, transportation officials at all levels of
government still face a significant challenge when considering
the ways to pay for improvements to transportation
infrastructure. It is apparent that traditional funding sources
are insufficient to meet the increasing complex needs.
I remember when I was mayor of Tulsa, we worked diligently
trying to focus on the public/private partnerships. I recognize
that the implementation process is a complex undertaking with a
wide range of organizational and financial options. But it is
important for public agencies to evaluate all of their
alternatives.
Despite the record levels of investment, funding is not
keeping pace with the demands for improvement and to maintain
the vitality of the Nation's transportation system.
I am in a unique position to appreciate this because I
spent 8 years in the House of Representatives on the
Transportation Committee and I was really into it.
When I came to the Senate, I was more on some of the
problems we were having in the EPA and clean air problems.
Until I became chairman of the Subcommittee on Transportation
and Infrastructure, I was more involved with those issues.
In that 4-year period, the congestion and other severe
problems that we are facing are brought home to me in such a
way that I see that we are going to have to try something new
and different.
That is what we did with TEA-21; that is what we are going
to continue to do. I am looking forward to working with you. I
ask unanimous consent that my entire statement be made a part
of the record at this point.
Senator Jeffords. It certainly will.
[The prepared statement of Senator Inhofe follows:]
Statement of Hon. James M. Inhofe, U.S. Senator from the State of
Oklahoma
Thank you Mr. Chairman. As we work on the drafting of this
reauthorization, I think it is safe to say that all the members here
recognize that this is a time of extraordinary challenge and
opportunity in the transportation sector. The world of surface
transportation is changing. It is now our job to work together to
ensure adequate funding for investment in the nations transportation
system and preserve State and local government flexibility to allow the
broadest application of funds to transportation solutions.
TEA-21 dramatically altered transportation funding mechanisms. It
provided greater equity among States in Federal funding and record
levels of transportation investment.
For most Federal-aid projects, the law requires that 20 percent of
the costs be derived from a non-Federal source. In order to maximize
the use of all available resources, States now have a range of options
for matching the Federal share of highway projects. By providing
flexibility in the form that the non-Federal match might take, Federal
dollars can be leveraged more effectively.
What we have been taking advantage of in Oklahoma is the toll
credit match. We apply certain toll revenue expenditures to build and
improve our public highway facilities as a credit toward the non-
Federal matching share on particular projects.
However, transportation officials at all levels of government still
face a significant challenge when considering ways to pay for
improvements to transportation infrastructure. It is apparent that
traditional funding sources are insufficient to meet the increasingly
complex needs. I remember when I was Mayor of Tulsa, we worked
diligently trying to focus on public private partnerships. I recognize
that the implementation process is a complex undertaking with the wide
range of organizational and financing options but its important for
public agencies to evaluate all their alternatives.
Despite the record levels of investment, funding is not keeping
pace with demands for improvements to maintain the vitality of the
nation's transportation system.
Some transportation projects are so large that their costs exceed
available current grant funding or would consume so much of these
current funding sources that they would delay many other planned
projects.
ARTBA proposed a number of options for enhancing the Highway
Account revenues. Some included indexing the motor fuels excise taxes
for inflation, crediting the Highway Account with gasohol tax revenues
that currently go into the General Fund, and expanding innovative
financing programs. I might also mention that since the enactment of
TEA-21, interest accrued on any obligation held by the fund does not
get credited to the Highway Trust Fund, the interest earned goes to the
General Fund. This is obviously something that we need to rethink
during reauthorization. These are all revenue enhancements that would
increase the fund substantially.
With the Energy bill pending in Conference, the Trust Fund will
recoup an additional 2.5 cents per gallon of ethanol currently being
deposited into the general revenue. The Senator from Montana has been
very aggressive at trying to make the Trust Fund whole with respect to
the current 5.3 cent per gallon ethanol subsidy. Although he and I do
not agree on how to best address this issue, we are in agreement that
the Highway Trust Fund should not pay to subsidize any fuel source. Our
surface transportation infrastructure needs are such that we cannot
afford to forego any revenue source.
Certainly one of the key factors in the economic engine that drives
our economy is a safe, efficient transportation system. If our economic
recovery is going to continue to expand, we cannot ignore the immediate
and critical infrastructure needs of highways, bridges, and State/local
roadway systems.
Finally, I would encourage our witnesses to address the current
issues with funding dilemmas and how the use of innovative finance can
generate real economic returns by expediting project construction.
Thank you Mr. Chairman. I look forward to today's hearing and want
to welcome all of our witnesses.
Senator Inhofe. I also want to say, Mr. Chairman, that at
the same time in the next room we have the Senate Armed
Services Committee that is meeting, so we have required
attendance at both places and I will be going back and forth.
Senator Jeffords. Thank you very much.
Now we turn to the important part of the hearing, and that
is listening to our witnesses.
Our first witness is David Seltzer, Distinguished
Practitioner at the National Center for Innovations in Public
Finance, University of Southern California, Los Angeles. Please
proceed.
STATEMENT OF DAVID SELTZER, PRINCIPAL, MERCATOR ADVISORS,
PHILADELPHIA, PA, ON BEHALF OF THE UNIVERSITY OF SOUTHERN
CALIFORNIA, LOS ANGELES, NATIONAL CENTER FOR INNOVATIONS IN
PUBLIC FINANCE
Mr. Seltzer. Thank you very much, Mr. Chairman and members.
I am affiliated with the National Center at USC. It is a
professional education and research center in the field of
infrastructure finance. As part of the record, I have furnished
this copy of a report that USC published last year concerning
public/private partnerships in California. I feel compelled to
tell you, this will be covered on the final exam.
[Laughter.]
Senator Jeffords. It will be made a part of the record.
Thank you.
Mr. Seltzer. I, too, would like to commend you for holding
this joint hearing on innovative finance. Because the Nation's
transportation needs require a wide array of tools, it is very
valuable that both the tax writing and authorizing committees
are jointly deliberating this important issue.
This morning you will be hearing from a distinguished panel
of individuals from the Federal, State, local, and private
sectors on various innovative finance tools, including New
Mexico's GARVEE bonds, the Alameda Corridor, TIFIA credit
instruments, private activity bonds, and tax credit bonds.
What I would like to do, briefly, is provide a table-
setter, giving you a framework for evaluating these and other
innovative finance tools. This may help your committees
determine which tools would be most effective in filling the
funding gap and, in essence, provide a context for considering
innovative finance.
To my mind, the central problem in Federal transportation
policy is that, on the one hand, transportation projects are
lumpy investments. They are capital-intensive, long-lived, and
very heterogeneous.
On the other hand, Federal budgetary policy is very short-
term oriented. It is cash-based and it is focused on costs
rather than benefits. This treatment is really reflected in
Federal budgetary scoring, where current outlays are treated
the same way as long-term capital investments in transportation
infrastructure. That mismatch between the period of when costs
and benefits are recognized can distort project investment
decisions.
Where innovative finance comes in, is that it can help
redress some of that imbalance, in my view. Innovative finance
tools are generally less intrusive than direct Federal grants.
They, as you pointed out, Mr. Chairman, allow market forces to
work by drawing on private capital, and can better match the
periods of the costs and the benefits.
Your two committees have at their disposal, really, three
approaches that may be used to advance infrastructure projects:
regulatory incentives, Tax Code incentives, and credit
incentives.
Regulatory incentives are best demonstrated perhaps by New
Mexico. You will be hearing in the next panel about not just
innovative financing using GARVEE bonds, but also innovative
procurement using design build procurement and innovative asset
management, employing long-term warranties. Those three
regulatory reforms were put together to advance an important
project.
The second incentive, the Tax Code, includes things like
tax-oriented leasing of capital assets, private activity bonds,
and tax credit bonds. These tax measures have the benefit of
using the pay-go scoring methodology, where the tax
expenditures are recognized on an annual basis, not all up
front. That approach represents something more akin to a
commercial practice of amortizing costs.
The third of the three general approaches, Mr. Chairman, is
credit incentives, as evidenced by Federal loan and loan
guarantee programs like TIFIA and the Railroad Rehabilitation
and Improvement Financing Program.
For Federal credit instruments, the budget scoring uses a
present value concept, again akin to commercial practices where
the time value of money is taken into account.
Now, for any of these various innovative finance tools to
be successful, they must satisfy three groups of stakeholders
simultaneously. First is the project sponsor, the public or
private entity that is developing, advancing, and managing the
capital investment.
The second of the three stakeholders is the investor. You
have to provide a competitive, risk-adjusted rate of return
that an investor can compare to options to invest capital
elsewhere.
The third of the three stakeholders is, of course, Federal
policymakers who have to look at both policy objectives and
budgetary costs.
Senator Jeffords, you indicated an interest in identifying
new products for portfolio managers. One interesting example
would be a way to attract pension funds into infrastructure
finance.
Public, corporate, and union funds represent some $3.6
trillion of investment assets, yet today there are virtually no
U.S. transportation projects in their portfolios.
The principal reason for that is that the primary financing
vehicle of tax-exempt bonds does not appeal to tax-exempt
entities such as pension funds. However, something like tax
credit bonds, which you will be hearing about later, where the
principal could be sold to, say, a pension fund and the tax
credits decoupled and sold to other investors, might address
some of your objectives.
In summary, different innovative finance tools are suited
to different products and projects. I have submitted also as
part of the record a methodology for looking at how one can
systematically compare tools such as GARVEE bonds, tax credit
bonds, private activity bonds, and TIFIA instruments in
considering reauthorization.
So, thank you very much for your time. I appreciate it.
Senator Jeffords. Thank you for a very helpful statement.
Our next witness is Phyllis Scheinberg, Deputy Assistant
Secretary for Budget and Programs a the U.S. Department of
Transportation, right here in Washington, DC.
Ms. Scheinberg, please proceed.
STATEMENT OF PHYLLIS SCHEINBERG, DEPUTY ASSISTANT SECRETARY FOR
BUDGET AND PROGRAMS, U.S. DEPARTMENT OF TRANSPORTATION
Ms. Scheinberg. Thank you, Chairman Jeffords. I want to
send my appreciation to Chairman Baucus and members of the
committees.
Thank you for holding this hearing today and inviting me to
testify on Federal innovative finance initiatives for surface
transportation projects.
These financing techniques, in combination with our
traditional grant programs, have become important resources for
meeting the transportation challenges facing our Nation.
Last January, Secretary Mineta indicated to you his desire
to ``expand and improve innovative finance programs in order to
encourage greater private sector investment in the
transportation system.''
He stated that innovative financing will be one of the
Department's core principles in working with Congress, State,
local officials, tribal governments, and stakeholders to shape
the surface transportation reauthorization legislation.
Secretary Mineta remains steadfast in his support for these
programs, so we want to tell you that we are here to work with
you.
But, first, let us talk about, what is innovative finance?
We at the Department apply the term to a collection of
financial management techniques and debt finance tools that
supplement and expand the flexibility of the Federal
Government's transportation grant programs.
We see the primary objectives of innovative finance as
leveraging Federal resources, improving utilization of existing
funds, accelerating construction timetables, and attracting
non-Federal investment in major projects.
There are three major innovative finance programs that I
would like to talk about today: the Transportation
Infrastructure Finance and Innovation Program, or TIFIA, Grant
Anticipation Revenue Vehicles, or GARVEE bonds, and State
Infrastructure Banks, or SIBs.
First, the TIFIA credit program. Through the leadership of
the Senate, and this committee in particular, TIFIA was
established to provide a direct role for the Department of
Transportation to assist nationally or regionally significant
transportation projects through direct loans, loan guarantees,
and stand-by lines of credit.
TIFIA allows the Federal Government to supplement, but not
supplant, existing capital finance markets for large
transportation infrastructure projects. We seek to take prudent
risks in order to leverage Federal resources through attracting
private and other non-Federal capital projects.
We have selected 11 projects, representing $15.7 billion in
transportation investment, to receive TIFIA credit assistance.
The TIFIA commitments themselves total $3.7 billion in credit
assistance, with a budgetary impact of only a little bit more
than $200 million. Highway, transit, passenger rail, and
multimodal projects have all sought, and received, TIFIA credit
assistance.
We are pleased with the results that we are seeing. The
overall leveraging effect of the Federal assistance for the
TIFIA projects has been 5 to 1. Private co-investment has
totaled $3.1 billion, or about 20 percent of the total project
costs.
We believe that a limited number of large surface
transportation projects each year will continue to need the
types of credit instruments offered under TIFIA. Project
sponsors and DOT staff are still exploring how best to utilize
this credit assistance, and we welcome congressional guidance
and dialog during this evolutionary program period.
A second financing tool used by States has been the
issuance of Grant Anticipation Revenue Vehicles, or GARVEEs.
These bonds enable States to pay debt service and other bond-
related expenses with future Federal-aid highway
apportionments.
A GARVEE generates up-front capital for major highway
projects and enables a State to accelerate project
construction, and spread the cost of a facility over its useful
life. With projects in place sooner, costs are lower and safety
and economic benefits are realized earlier. In total, six
States have issued 14 GARVEE bonds totaling more than $2.5
billion to be repaid using a portion of their future Federal-
aid highway funds.
A third significant project finance tool is the State
Infrastructure Bank, or SIB, which is a revolving fund
administered by a State. Federally capitalized SIBs were first
authorized under the provisions of the National Highway System
Designation Act of 1995. SIBs provide various forms of credit
assistance. As loans are repaid, a SIB's capital is replenished
and can be used to support new projects.
As of June 2002, SIBs had entered into almost 300 loan
agreements, for a total of $4 billion of loans. This level of
activity indicates that the SIB program is ready to move beyond
its pilot phase to become a permanent program.
Looking ahead, the use of TIFIA, GARVEEs and SIBs are
moving from innovative to mainstream. This reflects significant
success, but it does not indicate that the needs of project
finance have been completely met.
Secretary Mineta has issued a clear challenge to those of
us in the Department in our development of a reauthorization
proposal for TEA-21, asking us to expand innovative finance
programs to encourage private sector investment.
We are considering options for further leveraging Federal
resources for surface transportation. Among these options are
enhancing the use of innovative finance in intermodal freight
projects and adapting the financing techniques used in other
public work sectors. The challenge is to build on our successes
to date, but not set unrealistic expectations for the future.
We look forward to working with our partners in the State
DOTs, metropolitan planning organizations, and private industry
to apply innovative funding strategies that extend the
financial means of our individual stakeholders.
Senator Jeffords, we look forward to working with you and
the Congress to craft the next surface transportation
legislation.
Thank you for the opportunity to testify today. I will be
happy to answer any questions.
Senator Jeffords. Well, thank you very much for your
excellent testimony. I extend my good thoughts to your
Secretary. We have been friends for over 20 years, and I now
have the opportunity to work closely with him on this. I am
looking forward to it.
Ms. Scheinberg. Thank you.
Senator Jeffords. Next, we have JayEtta Hecker, Director of
Physical Infrastructure Issues at the GAO. Please proceed.
STATEMENT OF JAYETTA HECKER, DIRECTOR OF PHYSICAL
INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE, WASHINGTON,
DC
Ms. Hecker. Thank you, Mr. Chairman. I am very pleased to
be here, and appreciate the historic occasion of the two
committees working together. As you and others have said, there
could be no topic that more justifies that kind of
collaboration.
First, the use and performance of innovative financing
mechanisms; second, the cost involved in alternative
approaches; and finally, selected issues for reauthorization.
I will skip over the use of the existing programs. I think
Phyllis clearly described 6 States with GARVEEs, 32 States with
SIBs, and 9 States with having agreements in TIFIA.
What I will do, is summarize the key advantages and
limitations that have been identified in some of the studies
and some of our own interviews with different States.
There is no doubt that one of the most significant
advantages of these new financing and grant management tools is
that they accelerate project construction. That is
unequivocally a real result for many of these projects.
It is also very clear that they increase the tools in the
State, local, or regional toolbox. They are financing multi-
billion dollar long-term investments and you need tools that do
that wisely and well.
The third advantage, is they have the potential to leverage
Federal investment. Some of our work on the costs will discuss
what we mean by leveraging and what we are really measuring
with some of the different approaches.
The limitations on the use of these tools are real. The
biggest one, of course, is States' willingness and authority.
You have a lot of States that are very cautious about debt
financing and financing projects in a manner other than on a
pay-as-you-go basis.
There is also a skill issue. At a hearing last week, we
talked about the skill capability in the DOTs. This is a brand-
new kind of skill, financing and bond market specialists. It is
very different than highway engineering.
Also, it is mostly affected by legislators at the State
level or the local level and their willingness to look at these
different tools.
There are also limitations in Federal and State law. The
application of TIFIA is limited to projects costing over $100
million. Only 5 States are allowed to use TEA-21 funds to
capitalize their SIBs.
Then there are State laws that restrict public/private
partnerships and, of course, there are Federal tax policies on
private activity bonds. So, there are a whole range of factors
that are really behind some of the limitations in the extensive
application of these new tools.
Our real contribution today is, in part, to examine options
for financing $10 billion though four different approaches.
Basically, we compare the Federal grants, similar to the
current highway program, with an 80/20 match; a TIFIA-like
Federal loan; State tax credit bonds that are basically similar
to the AASHTO proposal. Of course, the credit is from Federal
taxes. State-issued tax-exempt bonds are again, exempt from
Federal taxes.
I have two charts that I present. One, is about the short-
versus the long-term costs of the different tools, and they
vary quite dramatically. The other chart compares the State
versus Federal costs, as well as other parties.
Depending on how the programs are structured and who ends
up paying can vary considerably not only across the
alternatives, but even within them. Then the risks vary.
Looking at the tax credit bond, for example, the total cost
of that, in present value terms, is nearly $13 billion compared
to $10 billion that it would cost in direct appropriations in
the grant program. The tax credit bond also varies quite a bit
in its distribution of costs between the Federal Government and
State and other parties.
The tax credit bonds, because of the costs of borrowing and
are paying investors, cost $12.7 billion, but most of that is
borne by the Federal Government in a tax credit bond. Compare
that with the TIFIA direct loan, where most of the costs, with
the 33 percent limitation, are borne by the State and other
parties.
The broad overview here is that there is, in fact, only
modest success in leveraging private investment. We are getting
debt financing, new debt to the table, which is significant and
has benefits.
But these approaches have limits in how mu ch they are
really bringing private equity capital and real investors to
the table who are absorbing a substantial amount of the risk.
That goes back to some of the limitations that I cited
earlier. There are limited projects that really can generate
their own revenue. That is in part a reflection of how we
finance highways and that users tend to view highways as free.
There are conflicts with the Federal tax-exempt finance rules
and the cap on the private activity bonds, and the State laws.
So, you have got some restrictions inherent in the current
system that are limiting how much private investment in
highways and other intermodal facilities you can bring to the
table.
These financing tools are a critical part of
reauthorization. They decide on whether current users or future
users pay, they decide on the extent to which we continue to
rely on user financing or switch toward the use of general
revenues, and they have very different results in the use of
State and Federal funds.
We have ongoing work for your committee and are looking
forward to being able to provide more detail on this. I think,
as you and others have said, some of the real opportunities are
to provide new structures or to get broader applicability of
these to projects of national concern, intermodal needs, and to
focus on the effect on promoting the efficiency in the
transportation sector.
That concludes my statement, Mr. Chairman.
Senator Jeffords. Thank you very much.
I think I will ask you the first question. While many
States have embraced transportation financing techniques,
several States seem resistant to these tools.
What precludes some States from the use of innovative
financing?
Ms. Hecker. There is a concern among many States about
moving further from pay-as-you-go to debt financing, as well as
State DOTs unfamiliar with these approaches.
There are also a range of State laws that could apply,
restrictions on public/private partnerships that are written
into State laws. There are State laws that prohibit committing
their future apportionment to debt repayment and thus prohibit
the use of GARVEEs.
We've talked with several of the States who are applying
these tools and are very excited about it. So it seems once
folks get involved, they are pretty enthusiastic.
Senator Jeffords. I want to bring sort of a current
situation and ask you what difference makes now, when we have
had this huge downturn in the economy and the threats to
various means of financing. How does that impact what may or
may not be a better way to borrow, or what kind of financing
instruments you have put on the rockets?
Ms. Hecker. Well, certainly there is more interest in
looking for alternative sources with the revenue conditions and
budget pressures at both the Federal and State level. So, the
impetus of the economic downturn actually increases interest in
these tools.
The ultimate financing question, though, is really not the
tool itself. It is how the debt is going to be paid for. That
is really what we are looking at, and we encourage the
committee to keep very transparent.
If you look at the TIFIA loans where you get over 70
percent at the private and State level, most of it is different
State taxes that get dedicated. In only a few instances do you
really have private equity. So, there is borrowing going on and
new taxes being raised.
As the instruments are broadened and extended, the issue is
the extent to which costs are borne by current versus future
users, and the extent to which costs are borne by general
taxpayers versus users.
Senator Jeffords. Thank you.
Mr. Seltzer, in your testimony you state that ``capital is
notoriously unsentimental, and finance techniques used for
transportation projects must compete for investor demand
against other investment products in the marketplace.''
What conditions need to be in place to make transportation
projects more attractive when competing for private investment?
Mr. Seltzer. Well, Senator, you yourself in your statement
indicated that the first ingredient or prerequisite is
identifying the revenue stream. It has to be stable and
reliable enough to attract investors. If it is debt financing,
typically there is a watershed investment-grade rating category
that indicates it is not a speculative type of investment.
Some of the innovative finance tools that your committee
will be considering could help advance debt financing through
providing various forms of credit enhancements such as the
TIFIA program that Ms. Scheinberg mentioned.
Senator Jeffords. Ms. Scheinberg, currently the threshold
for projects to be eligible for TIFIA programs is $100 million.
How would lowering the threshold for projects to $50 million
affect the program?
Ms. Scheinberg. Senator Jeffords, we are not sure. We have
no experience with anyone coming in and saying they could not
meet the $100 million threshold. So, we cannot tell you that
that is a barrier to this program.
The program, as you probably know, is new to the users and
there is a fair amount of learning that goes on regarding how
to engage in the TIFIA program. So its original purpose was for
large projects that could not find funding in the traditional
categories of funding that the Federal Government provides--
large, intermodal, complicated, lumpy projects, as David said.
I think we still have not tapped out those projects. We are
still working with folks. We have six letters of interest that
have come in that are seriously looking at asking for a TIFIA
loan.
We have not seen people who have come in and said, we wish
it was a lower threshold, so I cannot really tell you what the
difference would make. We have a lower threshold for ITS
projects of $30 million and we have not seen any takers on
that. That does not seem to have made a difference.
Senator Jeffords. Our next generation effort will place
greater emphasis on intermodal projects and on project
financing. I am concerned that U.S. DOT is not adequately
staffed or structured to accommodate this shift in focus.
Do you share my concern? I imagine you will say yes.
Ms. Scheinberg. Well, first I would say, yes, we are also
very focused on intermodal in general, and freight in
particular, which we believe needs much more attention than it
has received in the past.
As far as our staffing, we are looking at this. I can tell
you that it is a topic of discussion in the Department,
organizationally, financially, and with resource attention.
We are looking at this issue of freight very seriously,
both how to help the freight sector and how to deal with it
internally in DOT.
Senator Jeffords. Well, I want to thank you, all three of
you, for very helpful testimony. I assure you, we will be
taking advantage of your expertise as time goes by to assist us
as we move forward to try and improve the ability to finance
these projects.
Thank you very much.
Mr. Seltzer. Thank you, Mr. Chairman.
Ms. Scheinberg. Thank you.
Ms. Hecker. Thank you, Mr. Chairman.
Senator Jeffords. I want to let everyone know that we are
going to have votes starting, two votes, in the next few
minutes. So we will postpone the testimony on the next panel.
You can relax and await my return. Since it takes about 20
minutes for the first vote and I have to wait for the second
vote, it will probably be about 25 minutes before we resume.
So if anybody wants to take a break, take a break.
[Whereupon, at 10:29 a.m. the hearing was recessed.]
[At 11:16 a.m. the hearing was reconvened.]
Senator Jeffords. The hearing will come to order. I am
sorry for the delay, but we are in the process of saving the
Nation, so it took a little bit longer than we anticipated.
[Laughter.]
Welcome, panel No. 2. Our first witness is the Honorable
Janice Hahn, Councilwoman for the city of Los Angeles,
California, on behalf of the Alameda Corridor Transportation
Authority. We have been waiting anxiously for your testimony
because of all the exciting work that you have been involved
in. Please proceed.
STATEMENT OF HON. JANICE HAHN, COUNCILWOMAN, CITY OF LOS
ANGELES, LOS ANGELES, CA, ON BEHALF OF THE ALAMEDA CORRIDOR
TRANSPORTATION AUTHORITY; ACCOMPANIED BY DEAN MARTIN, ALAMEDA
CORRIDOR'S CHIEF FINANCIAL OFFICER, AND JOSEPH BURTON, GENERAL
COUNSEL.
Ms. Hahn. Thank you, Mr. Chairman. Good morning. Thank you
for this opportunity to be here today. Besides being a city
councilwoman in Los Angeles, I serve as the chairwoman of the
Governing Board of the Alameda Corridor Transportation
Authority.
So, on behalf of the city of Los Angeles, the mayor, Jim
Hahn, my brother, the city of Long Beach, Mayor Beverly
O'neill, and the Corridor Authority's Governing Board and our
CEO Jim Hankla, I am honored to be here today.
Accompanying me today are Dean Martin, the Corridor
Authority's chief financial officer, and Joseph Burton, our
general counsel.
The Alameda Corridor Transportation Authority, or ACTA, is
a joint powers authority created by the Cities of Long Beach
and Los Angeles in 1989 to oversee the financing, design, and
construction of the Alameda Corridor.
The project was monumentally complex, running through eight
different government jurisdictions in urban Los Angeles County,
requiring multiple detailed partnerships between public and
private entities, and presenting extensive engineering
challenges.
One of the key partnerships that has been vital over the
years has been with the U.S. Congress. We greatly appreciated
the strong support you and your colleagues provided to ACTA in
developing the innovative loan from the Department of
Transportation.
Indeed, the Federal Government, by its $400 million
Department of Transportation loan, became the first financial
partner in this magnificently successful project. We are
particularly thankful for the strong leadership demonstrated by
many of you in Congress, including our two distinguished
Senators, Dianne Feinstein and Barbara Boxer, along with
Congressman Steve Horn and Congresswoman Juanita Millender-
McDonald. Without their vision and support, it is unlikely the
Alameda Corridor would be in operation today, strengthening the
Nation's global economic competitiveness.
The $2.4 billion Alameda Corridor, one of the Nation's
public works projects, opened on time and on budget on April
15th of this year.
A container train from the ports of Los Angeles and Long
Beach to the transcontinental rail yards near downtown Los
Angeles used to take more than 2 hours and wreak havoc to L.A.
traffic at dozens of crossings. It now takes about 45 minutes,
avoiding traffic conflicts.
As cargo volumes increase, this enhanced speed and
efficiency is critical. More than 100 trains per day are
expected on the Alameda Corridor by the year 2020.
We have demonstrated that governments can work together,
and they can work with the private sector, putting aside
competition for the benefit of greater economic and societal
good.
We have proven that communities do not have to sacrifice
quality of life to benefit from international trade and port
and economic activity. The volume of containers doubled in the
1990's, and last year reached more than $10 million 20-foot
containers. Last year, our ports handled more than $200 billion
in cargo, or about one-quarter to one-third of the Nation's
waterborne commerce.
ACTA consolidated four branch lines serving the ports into
a 20-mile freight rail expressway that is completely grade
separated, including a 10-mile long 30-foot trench that runs
through older, economically disadvantaged industrial
neighborhoods south of downtown Los Angeles.
The linchpin of ACTA's funding plan was designation of the
Alameda Corridor as a high-priority corridor in the 1995
National Highway System's Designation Act. That designation
cleared the way for Congress to appropriate $59 million needed
to back the $400 million loan to the project from the U.S.
Department of Transportation.
That was the leverage, if you will, for the biggest piece
of our financing package, more than $1.1 billion in proceeds
from revenue bonds sold by ACTA. The bond and the Federal loan
are being retired by corridor use fees and paid by the
railroads.
The funding breaks down roughly like this: 46 percent from
ACTA revenue bonds, 16 percent from the U.S. DOT loan, 16
percent from the ports, 16 percent from California's State and
local grants, much of it administered by the L.A. County
Metropolitan Transportation Authority, and 6 percent from other
sources.
There are many reasons why our project stayed on schedule,
but at the top of the list are permit-facilitating agreements
with corridor cities, relocating agreements with utility
companies, and our decision to use a design-build contract with
the Mid-Corridor Trench.
Among the direct community benefits, the Alameda Corridor
is projected to reduce emissions from idling trucks and
automobiles by 54 percent, slash delays at railroad crossings
by 90 percent, and cut noise pollution by 90 percent.
Disadvantaged firms have earned contracts worth more than
$285 million, meeting our goal of 22 percent DBE participation.
The goal of our Alameda Corridor job training and development
program was to provide job training and placement services to
1,000 residents of the corridor communities.
We exceeded that goal. Almost 1,300 residents received
construction industry-specific job training, and of those, 600
were placed in construction trade union apprenticeships. The
Alameda Corridor Conservation Corps provided the life skill
training to 447 young people from that community.
In the future, ACTA and the California DOT are working at
an innovative, cooperative agreement to develop plans for a
truck expressway that would provide a ``life-line'' link
between Terminal Island at the ports and the Pacific Coast
Highway at Alameda Street.
The Alameda Corridor truck expressway is intended to speed
the flow of containers into the Southern California
marketplace. This project could be ready for approval as early
as March, 2003.
At ACTA, we believe that by restructuring our Federal loan
we can undertake this critical truck expressway project without
any additional Federal financial support. But we need this
committee----
Senator Jeffords. Would you repeat that, please?
[Laughter.]
Ms. Hahn. I am glad you asked for that. Hold my time, Mr.
Chairman. At ACTA, we believe that by restructuring our Federal
loan we can undertake this critical truck expressway project
without any additional Federal financial support, but we need
this committee to help us get Congress to give the approval to
DOT to allow us to do this.
Let me just give you a few recommendations for your
committee as you are looking at reauthorization of TEA-21. We
think the planning and funding of intermodal projects of
national significance directly benefiting international trade
should be sponsored at the highest levels within the Office of
the Secretary of Transportation.
There should be a national policy establishing the linkage
between the promotion of free trade and the support for
critical intermodal infrastructure, moving goods to every
corner of the United States. Public-private partnerships do, in
fact, work and should be promoted and encouraged by Federal
transportation legislation.
We think a specific funding category is needed to support
intermodal infrastructure projects and trade connector
projects. Consideration should be given to new and innovative
funding strategies for the maritime intermodal systems,
infrastructure improvements enhancing good movements.
The Corridor benefited from the DOT being willing to
undertake some risks and provide loan terms that were not
available on a commercial basis. The Federal participation gave
private investors confidence in the project and made our bond
financing possible.
Most important in my mind is this. The success of the
Alameda Corridor has shown that Federal investment in trade-
related infrastructure can benefit the economy without
sacrificing the quality of life issues.
Thank you for inviting me. I am happy to answer any
questions.
Senator Jeffords. Thank you very much.
The Honorable Peter Rahn. Please proceed.
STATEMENT OF HON. PETER RAHN, SECRETARY, NEW MEXICO DEPARTMENT
OF TRANSPORTATION, SANTA FE, NM
Mr. Rahn. Good morning, Mr. Chairman. I am Pete Rahn. I am
the Secretary of the New Mexico State Highway and
Transportation Department and I am very pleased to be here
today to testify before this very unique joint hearing.
It seems so important that the two committees work smoothly
together in the reauthorization of the National Highway Funding
bill, which is absolutely critical to the States and their
transportation systems.
Mr. Chairman, I am here to not only urge, but plead, that
Congress not only allow, but actually encourage, innovative
public-private partnerships. Public-private partnerships draw
on the experiences and expertise of both sides to perfect just
tremendous success in projects like New Mexico 44, which is now
called U.S. 550.
New Mexico traditionally has been a pay-as-you-go State,
which meant we paid as we went downhill and lost more and more
of our system.
New Mexico 44 is, I believe, a national example of a
successful project that brought together the Federal
Government, State government, and private concerns to open up a
corridor into northwest New Mexico that is providing economic
opportunity and greatly improved safety for those people
traveling on that roadway.
New Mexico 44 stretches 141 miles from just north of
Albuquerque into northwest New Mexico. Northwest New Mexico did
not have a four-lane highway for the entire corridor of the
State.
This corridor has opened up economic opportunity in the
region of Farmington and Bloomfield in which they are now
experiencing growth at twice the rate of the average of the
State of New Mexico.
The project itself brought together innovative financing,
innovative procurement, innovative contracting, and innovative
construction. I need to give credit to the Federal Highway
Administration as a very critical partner in developing this
project.
The project itself was a 118-mile corridor that utilized
innovative financing in the form of GARVEE bonds. I understand
it is not very flattering to Jane Garvey that our particular
bonds were named ``naked'' GARVEE bonds because they did not
have the guarantee of the State government, but only the
revenue stream of future Federal programs to back up the
issuance of those bonds. The bonds were issued for 15 years. We
also utilized the soft match provisions of TEA-21.
Our procurement was unique in that we were able to utilize,
not design-build, but the traditional low-bid process in a very
unique way in which we secured a developer, and the developer
designed the project, provided the designs back to the
department, we utilized low bid, selected the contractor,
presented the contractor back to the developer which managed
the construction of it, and then warranteed the project for 20
years. Twenty years, to our belief, is the longest period of
time that a highway has ever been warranteed in the United
States.
From concept to contract, the project took us 15 months.
From contract to construction of a 118-mile long four-lane road
was 28 months. Using traditional methods, we estimate it would
have taken us 27 years to have built that roadway utilizing the
traditional 3-and 5-mile increments that most DOTs undertake in
constructing long corridors.
The warranty is a $114 million guarantee for performance of
the roadway for 20 years. It is a no-fault guarantee that we
estimate will save the State $89 million over the life of the
warrantee.
Coke Industries, which was the developer, has $50 million
of their own assets at risk within the warranty and have
produced a roadway from their design and management of the
contractors that is smoother and will last longer than any road
built in New Mexico today.
Utilizing the leveraging of Federal revenue streams at very
competitive interest rates, our overall bonding program, of
which the GARVEE bonds are only once piece, has an average
interest rate of 4.47 percent, when the Federal Highway
Administration estimates inflation in the construction industry
at 4.5 percent. So the value of a road in place today is
greater than the value of a road in place tomorrow.
I will close by just saying that I believe it is very
important that Congress, as it is looking at reauthorization,
not only allow the DOTs the flexibility to use Federal revenues
in the ways best suited for their particular States, but the
importance of a stable revenue stream that the States can
depend upon is critical to our ability to leverage those
dollars through using innovative financing, whether it is
bonding or any of the other ways.
The last point I would make, Mr. Chairman, is just simply
that if Congress wants to encourage private investment in our
transportation system, I believe there is going to have to be a
mechanism for the private sector to invest on par with
government tax-free bonds in order for that investment to
occur.
Thank you, Mr. Chairman.
Senator Jeffords. Thank you. Excellent presentation.
Our next witness is John Horsley, executive director of the
American Association of State Highway and Transportation
Officials right here in Washington, DC. Please proceed.
STATEMENT OF JOHN HORSLEY, EXECUTIVE DIRECTOR, AMERICAN
ASSOCIATION OF STATE HIGHWAY AND TRANSPORTATION OFFICIALS,
WASHINGTON, DC
Mr. Horsley. Thank you, Mr. Chairman.
First, we want to commend you and Senator Baucus for
convening this joint hearing, and commend you, Senator Reid,
and your colleagues in the Senate for fully restoring highway
funding for fiscal year 2003 to the $31.8 billion level that
Governors, States, and many others have been pushing for. It is
vital that you succeed, and we want to commend you and the
Senate for your leadership.
We also hope you will convey our thanks to Senator Baucus
for his leadership in moving the 2.5 cents of gasohol revenues
that now go to the general fund over to the Highway Trust Fund,
and some of the other work that he is doing, including pushing
for use of the interest in the Highway Trust Fund in order to
put that into our cash-flow and be able to put it to work.
So, I want to thank you both for holding this hearing
today. I heard a lot of good things so far, and look forward to
Jeff's testimony.
Pete is one of my bosses, so I will try to represent you
well, Pete.
Mr. Chairman, we believe that the central issue on
reauthorization will be how to grow the program. Huge safety,
preservation and capacity needs exist in every region of the
country.
To fund them, AASHTO believes Congress must find a way to
increase highway funding from $34 billion in fiscal year 2004
to at least $41 billion in 2009, and annual transit funding
over the next 6 years from $7.5 billion to $10 billion.
The challenge, is how to fashion a funding solution that
can achieve these goals and garner the bipartisan support
needed for enactment next year.
AASHTO has explored a menu of options for generating
additional program revenues, including tapping Highway Trust
Fund reserves, gasohol transfers, indexing, and raising fuel
taxes. While the program could grow somewhat without raising
taxes, it would fall short of meeting national needs.
We also directed our staff to explore the feasibility of
leveraging new revenues through a federally chartered
transportation finance corporation which could achieve AASHTO's
goals for highway and transit funding in coordination with all
of the other proposals, such as those proposed by Chairman
Baucus.
They have developed a creative proposal which appears
feasible and has been well received. Let me describe it for you
in brief.
Under this concept, Congress would be asked to charter a
nonprofit transportation finance corporation, authorized to
issue $60 billion in tax credit bonds over 6 years. We describe
this as program finance rather than project finance.
Thirty-four billion dollars would go to highways and be
apportioned to States through Federal highways, and $8.5
billion, 20 percent, would be apportioned to transit agencies;
$17 billion of the bond proceeds would be invested in
government securities which, over 25 years, would generate a
return sufficient to pay off the bond principal.
The Department of Treasury would be reimbursed for the
annual cost of the tax credits from the Highway Trust Fund.
There would be no impact on the Federal deficit. The TFC would
leverage approximately $18 billion in new revenues into an
increase of nearly $43 billion in program funding.
When we tested this concept with seven Wall Street
investment banks and two rating agencies, this is what we
heard. No. 1, tax credit bonds are marketable. Capital markets
can absorb the amount of bonds being discussed.
Second, bond marketability and liquidity are enhanced by a
central issuer, and there is a broad potential investor base,
especially if the tax credits could be decoupled from the bond
principal.
Our analysis shows that AASHTO's funding targets through
fiscal year 2009 could be achieved through the Transportation
Finance Corporation without indexing or raising taxes. Over the
longer term, however, the program for the following 4 years
would slip slightly before it resumed positive growth again in
fiscal year 2013.
When the TFC is combined with indexing, not only does the
program continue with healthy growth from fiscal year 2010 on,
even higher funding levels in the $41 billion for highways and
the $10 billion for transit would be possible.
We believe this idea has potential, and stand ready to work
with Congress to find a way to grow the program using this
technique, or other techniques.
In addition to this concept for program financing, we also
believe reauthorization needs to make improvements in several
project financing tools such as extending State Infrastructure
Bank to all 50 States, lowering the threshold for TIFIA loans
from $100 million down to $50 million, and working with you to
change the terms of the RRIF program.
I will be glad to submit the balance of my testimony for
the record.
Senator Jeffords. Thank you. Excellent testimony.
Our last witness is Jeff Carey, Managing Director of
Merrill Lynch & Co., New York, NY.
STATEMENT OF JEFF CAREY, MANAGING DIRECTOR, MERRILL LYNCH &
CO., INC., NEW YORK, NY
Mr. Carey. Mr. Chairman, ladies and gentlemen, I am a
managing director in public finance at Merrill Lynch. I have
had the privilege to work with U.S. DOT, Federal Highway
officials, as well as our clients, State transportation
officials, and other project sponsors during the last decade on
the development and implementation of innovative finance
mechanisms.
Thank you for inviting me to provide a wrap-up commentary
from a capital markets perspective at today's joint hearings
and for encouraging private sector participation during your
on-ramp to reauthorization.
Public finance industry professionals are pleased to have
played a role in creating a strong market reception for the new
transportation funding tools and expanded flexibility for
public-private partnerships.
We commend these panel participants, the leadership from
DOT and Federal Highway, other State transportation officials,
and private sponsors for the dramatic evolution from Federal
aid funding to the wide array of financing vehicles and
programs introduced and utilized over the last 8 years.
To briefly reflect on the prior testimony, ISTEA, post-
ISTEA initiatives, and TEA-21 implementation have produced many
market-related accomplishments, dramatically increased
bondholder investment in transportation projects and State
programs; new and/or specially dedicated revenue sources,
particularly for the purpose of paying off debt obligations;
broad market acceptance in the use of Federal aid funding for
debt instrument financing; more coordination with other funding
partners beyond just the States, and lower financing costs and
increased project flexibility and feasibility through Federal
credit enhancement.
Addressing characteristics sought by capital markets and
private sector project sponsors provides efficient market
access and innovative transportation finance opportunities.
Coining an earlier term, the ``unsentimental
characteristics'' sought by capital markets participants
include: sound, understandable credits; evidence of government
support at the Federal and State level; strong debt service
payment coverage; predictability in Federal programs and a
consistency with an evolution of new funding instruments,
something that the MEGA-Fund and Trust Acts would enhance;
market rate investment returns for bonds, development costs,
and equity investment; reasonable and reliable timing in terms
of the receipt of grants and revenues; acronyms that capture
Federal programs' spirit and promote investor familiarity; and
volume market profile, and liquidity.
For example, the track record and predictability of Federal
aid highway programs enabled GARVEE bonds to be structured
without the double-barreled credit of other State credit-backed
stops, as described earlier in New Mexico. It was the strong
issuance history of municipal bond banks in States like Vermont
that served as the model for the development of State
Infrastructure Banks or SIBs in the mid-1990's.
Mr. Chairman, I agree that SIBs such as Vermont's can
provide an extremely flexible and responsive financing tool.
How various innovative financing components have been used by
public agencies and received by the markets provides a strong
road map for reauthorization.
When SIBs were created as part of the 1995 Act, the pilot
program for 10 State transportation revolving funds became very
popular in 1996, in part because supplemental Federal funding
was available for seed capitalization.
Thirty-two States have active SIBs and have made different
levels of highway or other project assistance primarily through
loans, despite widespread under-capitalization and the
curtailment of the program in TEA-21.
Limited capitalization has resulted from the inability to
use Federal aid funds outside of five States and the
application of Federal requirements and rules to all moneys
deposited in the SIB revolving fund, regardless of whether the
source was a State, a public contribution, or repaid loan
proceeds. In addition, only two States have leveraged their
SIBs with bonds.
As a flexible, State-directed tool, SIBs have a greater
potential to provide loans and credit enhancement that can be
realized through further modifications as part of
Reauthorization.
Reauthorization should provide incentives for public-
private market-based partnerships that finance, develop,
operate, and maintain highways, mass transit facilities, high-
speed rail and freight rail, and intermodal facilities. This
could be accomplished by permitting the targeted use of a new
class of private activity bonds, or by modifying certain
restrictions in the Internal Revenue Code on tax-exempt bond
financing of transportation modes. We commend the Senate and
this committee's earlier consideration of HICSA, HIPA, and,
most recently, the Multimodal Transportation Financing Act.
Mr. Chairman, my office is across the street from the World
Trade Center site. As workers in downtown Manhattan, we greatly
appreciated your passage of Federal legislation creating a
Liberty Zone for the redevelopment of lower Manhattan and for
the creation of a new type of tax-exempt private activity
bonds, Liberty Bonds, for the rebuilding and economic
revitalization of New York City. Transportation infrastructure
financing deserves a bond mechanism similar to Liberty Bonds
under Reauthorization to attract more private investment, as
well as to increase the use of new construction techniques,
cost controls, performance guarantees, and technologies, as
also described by the New Mexico Secretary.
Past ``innovative finance'' should become mainstream
transportation finance under TEA-21 Reauthorization, and the
Federal Government should provide additional, new financing
tools and initiatives, at least on a pilot basis.
The market's perception of the integrity of the Federal
Highway Trust Fund would be greatly enhanced by the MEGA-TRUST
Act and the MEGA-INNOVATE Act, providing tax-credit bond
proceeds to augment gas tax revenues.
The success of innovative finance places a higher level of
responsibility on the Federal reauthorization process to
maintain the characteristics that attract strong capital
markets and private sector participation.
We want to meet your vision, Mr. Chairman, and your
challenge to structure and sell U.S. transportation credits to
investor portfolios in U.S. municipal markets and in other
appropriate markets.
Thank you.
Senator Jeffords. Well, thank you. Excellent testimony, all
of you. I am very appreciative, as I think we are going to make
some good progress this year.
The first question is for Janice Hahn. Design-build was
utilized on the Mid-Corridor Trench portion of the Alameda
Corridor. How important was this approach to project the
development in your efforts to finance and build the Alameda
Corridor?
Ms. Hahn. Well, I think design-build was really one of the
reasons that this project came in on time and on budget. It was
so important, that actually we had to get an ordinance passed
by the City Council of Los Angeles, because previously that was
not allowed under the normal building of projects and the RFP
proposals. So we estimate that that concept saved the project
18 months in terms of streamlining the majority of that
project.
Senator Jeffords. Thank you.
I note that the Alameda project was sponsored by ACTA, a
special-purpose entity. Does this institutional arrangement
provide any advantages?
Ms. Hahn. Well, certainly the whole structure and the
cooperative agreements that we came to, joining together two
cities, Los Angeles and Long Beach, both rival ports and
competing railroads, and then with the public entity of ACTA,
provided really a very unique partnership and agreement. I must
say, as chairwoman of this Governing Board of ACTA, it is a
very small, focused governing board. I think that really is the
reason this is so successful.
Senator Jeffords. David Seltzer, in an answer to my earlier
question, said that one of the keys to attracting private
investors is a reliable revenue stream. Janice, can you tell us
more about your project's revenue stream?
Ms. Hahn. Well, that really was another huge piece of
success, is we locked in a great revenue stream, which was the
containers themselves. The containers have been there. They are
there now, and more are coming every year.
As a matter of fact, as I mentioned, we have 10 million
containers using the Corridor on an annual basis. The charge is
about $15 per 20-foot container, so you can see that that is an
incredible revenue stream that we have locked in for a very
long time.
Senator Jeffords. Peter, as a member of the AASHTO Board of
Directors, what are your thoughts on that organization's
funding proposal?
Mr. Rahn. Mr. Chairman, I support their proposal because I
believe it is a way for us to get more money into
infrastructure today. I hope that that was one of the things
that was made clear by my testimony, was the belief that
transportation infrastructure is more valuable in place today
than it is tomorrow.
The proposal from AASHTO is a vehicle by which this country
can invest in more infrastructure, thereby supporting our
economic activity, as well as quality of life and safety of its
citizens. I believe it is a very innovative approach. I believe
it is workable, and I am hopeful that Congress will approve it.
Senator Jeffords. John, in your testimony you state that
``finance tools are useful, but only fill a niche in program
and project funding.''
What changes are needed in reauthorization to allow for
more financing of transportation projects?
Mr. Horsley. Mr. Chairman, there is need for change at both
levels. At the Federal legislative level, we think the
authority to extend State Infrastructure Banks to all 50
States, for example, should be included in your bill. There is,
I think, a great interest in the success of the five States
that are currently authorized.
We would seek your authority to extend it to all 50 States,
but with the understanding that all Title 23 requirements come
with the extension of that authority, including Davis-Bacon,
for example. We are willing to continue to advance the program
in partnership with a broad base of interests, including labor,
that wants the Davis-Bacon provision to apply to future funding
cycles.
Many of our smaller States have told us that the $100
million restriction in TIFIA is too tight, and they have
smaller projects that would benefit from either the additional
loan security or other finance enhancements of TIFIA. So, we'd
like to have you take a look a dropping that threshold.
The terms and conditions of RRIF includes restrictions that
Treasury has put on that are too tight, and we think, if you
could take a look at flexing the terms of finance for railroad
finance, that would be helpful.
Now, let me tell you, at the State level we have a long way
to go. For example, New Mexico represented by Pete here,
California and Florida. But we have some very sophisticated
States that have long track records of innovative finance and
are using those tools well.
We have 17 States that we understand are statutorily barred
from using debt finance. So when it comes to enhancing project
finance, we have some change that also needs to take place at
the State level so they can put to work GARVEEs and some of the
other excellent techniques that you have approved over the last
6 years.
Senator Jeffords. A major piece of your testimony centers
on the creation of a Transportation Finance Corporation. Under
your proposal, the TFC would issue tax credit bonds. We have
heard testimony from GAO that these instruments are the most
costly long-term to the Federal Government. Why does AASHTO
consider this to be the most appropriate bonding mechanism for
the Federal aid program?
Mr. Horsley. Well, Mr. Chairman, we are looking for the art
of the possible. When we tried to put together a vehicle that,
as Pete was describing, could leverage revenues that are
currently available to achieve the funding targets that we are
seeking for fiscal years 2004 to 2009, we looked at several
options.
We looked at whether municipal bonds issued at the State
level would work, and concluded they would not because so many
States have obstacles, either statutory or constitutional, to
the issuance of debt and the utilization of GARVEEs in some of
the current techniques, so we figured that that would not
extend universal help to all 50 States.
We looked at the utilization of municipal bonds at the
Federal level and figured that would compete directly with
Treasury's, so that was not as good a vehicle. We then looked
at the appeal of the tax credit bonds. It was currently pending
in RAIL-21 as a vehicle for funding high-speed rail and had
been used previously to fund schools through so-called QSABs.
But our conclusion was that the TFC was the most efficient,
most viable method that would also score well under Federal
scoring rules and just in practical terms, would get us, with
current revenues or revenues enhanced with indexing, to the
funding targets that States feel are essential, which is over
$40 billion for highways and over $10 billion for transit.
Senator Jeffords. Does it make sense to issue bonds to
support the mainline work of State DOTs, namely system
preservation? Would it not be more appropriate to reserve debt
financing for capital improvements, and particularly for those
projects with associated revenue streams?
Mr. Horsley. Mr. Chairman, the Transportation Finance
Corporation funding, that we are talking about, we classify as
program finance, which would then be available to States to use
for all of those purposes.
But we are looking for a near-term practical solution that
gives you a measure you can pass with bipartisan support to
boost funding for the next cycle to the funding levels we are
after.
When it comes to the use of the issuance of municipal bond
debt at the State level, I think each State has to make a
judgment whether they issue long-term debt, for long-term
purposes, such as schools, water and sewer plants, and most
hospitals.
Almost every other area of public infrastructure is
financed through debt. We think that transportation has been
slower than those other entities to come to the table and use
debt finance for long-term infrastructure. But we think the
time has come.
As you have from both of these panels, the market is there
and the transportation agencies are there and are utilizing
debt finance on an increasing basis. But the one
differentiation I wanted to make was between the program
finance, which would flow out to States for utilization as if
it were cash over the next 6 years, and then Pete could
leverage it as he saw fit through further leverage through
GARVEEs and other means, as opposed to project finance, which
we also support.
Senator Jeffords. Mr. Carey, as I mentioned in my opening
remarks, I have a vision that investment in U.S. transportation
infrastructure would become a component of every fund manager's
portfolio. Based on your experience, what measures should
Congress consider to expand private sector investment to assist
in making transportation a solid investment choice?
Mr. Carey. I think it is a focus on the previously stated
``unsentimental characteristics'' in terms of maintaining
predictability and Federal program consistency in the
introduction of new instruments. Also, to provide an
opportunity for market rate investment returns on
transportation project finance.
Also, as has been described in some of the proposals today,
an opportunity to look at new taxable instruments, as well as
variations on existing tax-exempt instruments, to broaden the
existing capital markets participation in transportation
finance.
I have to stress, however, that the municipal markets in
the United States are unique in the world. These markets are
incredibly deep, conservative, and provide guidance for Federal
credit assistance and other initiatives on the part of the
Federal Government under TIFIA.
Also, these markets provide a lot of examples that have
been adopted for transportation ``innovative finance'' over the
last 8 years. They are incredibly easy for States and local
governments to access, which is not the case in the taxable
markets or in foreign government markets.
Senator Jeffords. Well, thank you very much, all of you. I
find that you have done such a wonderful job, I am not even
going to ask you the final question I had because you have
already answered it with all of your testimony. So, you have a
grade A+ for your participation today.
[Laughter.]
I would like you to know that.
But we will also reserve the right to continue to hound you
until such time as we come through with a perfect solution.
Thank you very much. That goes for both panels. This has been a
very excellent hearing. I look forward to working with you as
we continue forward to give our people the best advantages we
can to make this the best transportation bill that ever
occurred. Thank you very much.
[Whereupon, at 11:58 a.m. the hearing was concluded.]
[Additional statements submitted for the record follow:]
Statement of Senator Jon S. Corzine, U.S. Senator from the State of New
Jersey
Thank you, Chairman Jeffords and Chairman Baucus, for holding this
joint hearing on the success we have had on expanding the reach of the
highway trust fund through innovative financing and how we can continue
that success in the reauthorization of TEA-21. I look forward to
hearing from our witnesses.
Chairman Jeffords and Baucus, it is clear that we need to consider
alternative means to finance our important highway and mass transit
projects. AASHTO estimates that the annual level of investment needed
to maintain current conditions and performance of our highway systems
is $92 billion. For mass transit, the amount is $19 billion. We are
falling far short of this under the authorized amounts of TEA-21. To
get even close, we need to look at all sources of funding, including
financing.
Congress enacted financing provisions in TEA-21. Under the
``Transportation Infrastructure Finance and Innovation Act'' (TIFEA),
the Department of Transportation may provide secured loans, lines of
credit and loan guarantees to public and private sponsors of eligible
surface transportation projects. $530 million was authorized for this
program.
Chairman Jeffords and Baucus, we need to look at what good has been
done under TIFEA, what needs to be changed, and what can be done in
addition to TIFEA. I look forward to working with you both to explore
ways to do this.
__________
Statement of David Seltzer, Distinguished Practitioner, The National
Center for Innovations in Public Finance, University of Southern
California
a federal policy comparator for putting ``innovative finance'' in
context
Good morning, ladies and gentlemen. My name is David Seltzer, and I
am a principal at Mercator Advisors, LLC, a consulting firm that
advises public, private and nonprofit organizations on infrastructure
financing issues. I also am affiliated with The University of Southern
California's National Center for Innovations in Public Finance. The
National Center, established 2 years ago, undertakes research and helps
provide mid-career professional training in the field of infrastructure
finance, including the growing use of public-private partnerships for
project delivery. I would like to submit for the record a copy of a
report USC published last year on California's 10-year experience with
Innovations in Public Finance, which may prove informative to your
Committees.
Previously, I had the privilege of serving as Capital Markets
Advisor for 3 years at the U.S. Department of Transportation during
TEA-21's authorization, and before I that spent over 20 years
assembling bond issues for transportation and other public agencies as
an investment banker. So having worked in the public and private
sectors, I have clearly violated both ends of the timeless dictum of
``neither a borrower nor a lender be.''
You will be hearing testimony this morning from a distinguished
array of Federal, State, local and private sector experts in connection
with new financing initiatives for reauthorization. Since many of the
new ideas draw upon tax incentives as well as other Federal policy
tools, I commend you on making this is a joint hearing of both the tax
writing and surface transportation authorizing committees.
I found when in Federal service that the wide array of financial
tools, techniques and even terminology can be bewildering. If I may,
I'd like to put on my academic hat for a couple of minutes and try to
present an analytic framework that may be helpful in comparing so-
called ``Innovative Finance'' options.
The term ``innovative finance'' in Federal transportation parlance
encompasses not only new financing techniques such as State
Infrastructure Banks and TIFIA credit support, but also new approaches
in the areas of project delivery, asset management, and service
operations. In many cases, the techniques involve some form of public
and private sector partnering. Private participation is seen as
offering the potential to transfer risks, achieve production or
operating efficiencies, and attract additional capital.
In order to systematically analyze the cost-and policy-
effectiveness of an innovative finance proposal, I believe it would be
useful to employ a ``Federal Policy Comparator.'' A comparator is a
scientific instrument used for measuring the features of different
objects. In much the same way, it should be possible to compare various
innovative finance proposals within an analytic framework to determine
which proposals would be most effective.
The Federal Policy Comparator would seek answers to three central
questions:
1. Which Federal Policy Incentives are most suitable to attaining
the proposal's objectives?
2. Does the proposal achieve balance among Sponsors, Investors and
Policymakers? And
3. What is the Budgetary Treatment of the proposal?
1. Which Federal Policy Incentives are Most Suitable? Aside from
conventional grants, the Federal Government has available to it three
major types of incentives it can use to stimulate capital investment:
Regulatory Incentives make existing programs and tools
more flexible, in order to expand project resources or accelerate
project delivery. (GARVEE Bonds are one such example, in that they
broadened allowable uses for grants to include paying debt service on
bond issues that fund eligible projects. Other regulatory reforms
include design-build contracting, in-kind match and environmental
streamlining.)
Tax Incentives involve modifying the Internal Revenue
Code to attract investors into transportation projects. (Examples
include private activity bonds, tax credit bonds, and tax-oriented
leasing.)
Credit Incentives provide Federal assistance in the form
of Federal loans or loan guarantees to reduce the cost of financing and
fill capital gaps. (Examples include Federal credit instruments
provided through TIFIA and the Railroad Rehabilitation and Improvement
Financing (RRIF) program.)
Generally, there is a tradeoff between the budgetary cost of the
incentive and its degree of effectiveness in making the desired capital
investment feasible. For instance, many regulatory reforms have little
or no budgetary cost, but they also generally provide only very
incremental assistance in advancing projects. Tax measures typically
are a ``helpful but not sufficient'' pre-condition for investment; the
project must be on the margin of viability to benefit from them. Credit
assistance can fill funding gaps and attract co-investment, but its
uncertain cost depends on risk factors and interest rate subsidies. For
instance, a complex and capital-intensive initiative such as Maglev may
confer significant mobility, environmental and technology benefits.
However, it also may well require deeper tax and/or credit subsidies in
order to bring projects to fruition than that afforded by an incentive
such as private activity bond eligibility.
2. Does the Proposal Achieve Balance Among Sponsors, Investors and
Policymakers? To be successful, each innovative financing initiative
should be designed to meet the requirements of three distinct groups of
stakeholders. First, the proposal must be attractive to project
sponsors-the public or private entity responsible for delivering the
project. Attractiveness to the project sponsor can be measured in terms
of its cost-effectiveness, flexibility, and ease of implementation.
Second, the proposal must make sense to investors-offering them a
competitive risk-adjusted rate of return. Capital is notoriously
unsentimental, and the innovative finance tool must compete for
investor demand against other investment products in the marketplace.
And finally, the concept must make sense to Federal policymakers. This
entails not only achieving public policy objectives but also being
affordable in terms of budgetary cost. These three groups-project
sponsors, investors and policymakers--can be thought of as the legs of
a three-legged stool. If any one leg of the stool has shortcomings, the
proposal will wobble, and probably not be supportable.
For example, dating back to the 1993 Federal Infrastructure
Investment Commission, there has been a wide-stated interest in trying
to voluntarily attract pension fund capital into the infrastructure
sector. Public, union and corporate plans represent over $3.6 trillion
of assets, yet they have virtually no U.S. transportation projects in
their portfolios. Why? Because the dominant financing vehicle to date
has been tax-exempt municipal bonds. While the tax-exempt market will
continue to be an absolutely critical component of infrastructure
financing, pension funds, as tax-exempt entities, place no value on the
tax-exemption. Pension funds gladly would purchase infrastructure debt
if it were offered at higher taxable yields, but that has limited
appeal for the project sponsors who can access the municipal market.
Consequently, the three-legged stool is uneven. (I note that various
proposals have been introduced recently to create a ``win-win''
security that is both cost-effective for borrowers and competitively
priced for pension fund lenders-while at the same time satisfying
Federal policy drivers.)
3. Finally, what is the Budgetary Treatment of the proposal?
Efficient markets rely upon transparent pricing signals to function
properly. However, oftentimes when Federal proposals are being
developed, the key pricing information-budget scoring-is at best
translucent, if not completely opaque. It seems it is the mysterious
scoring of a proposal, and not its policy effectiveness, that too
frequently drives the ultimate policy decision--perhaps a case of the
``tail wagging the dog.'' Better information on budgetary costs earlier
on in the process would benefit the development and evaluation of
alternative policy options.
Unlike corporate and State and local entities, the Federal
Government makes no budgetary distinction between current period
operating outlays and long-term capital investments. Nor does it
distinguish between full faith and credit general obligations and
limited special revenue pledges. From the perspective of infrastructure
advocates, this is both inequitable and inefficient: Inequitable in
that costs are not shared by future beneficiaries, and inefficient in
that there is a bias toward considering those proposals that have the
lowest front-end costs, rather than looking at cost-effectiveness over
the long-term.
Some Federal innovative finance concepts attempt to overcome this
problem by drawing upon either credit reform budgetary rules (a rare
case where Federal accounting is on an accrual basis and conforms to
best commercial practices) or by utilizing the tax code (where the
PAYGO rules recognize tax expenditures on an annual basis).
While some may consider these tools to be unnecessarily complicated
attempts to circumnavigate cash-based accounting, I believe they offer
the benefit of rationalizing the budgetary treatment of capital
spending and facilitating sound decisionmaking on Federal
infrastructure policy.
In conclusion, I submit that by using this three-part Federal
Policy Comparator as an analytic framework, policymakers can more
systematically compare the budgetary cost with the policy effectiveness
of proposals. It would allow comparisons of initiatives as varied as
private activity bonds for intermodal facilities, shadow tolling for
highways, national or regional loan revolving funds for freight rail,
tax credit bonds for high-speed rail, and reinsurance for long-term
vendor warranties. By way of illustration, I am including as an
attachment a pro-forma Federal Policy Comparator analysis of four
current or proposed Federal innovative finance tools for surface
transportation--GARVEE Bonds, TIFIA Instruments, Private Activity Bonds
and Tax Credit Bonds.
Thank you very much for your time. I would be happy to answer any
questions you might have.
Attachments
Appendix A. Federal Policy Comparator PowerPoint Slides
Appendix B: Findings & Recommendations: A Roundtable Discussion of
California's Experience with Innovations in Public Finance, The
National Center for Innovations in Public Finance, University of
Southern California, April, 2001.
[December 13, 2000]
Findings and Recommendations, Report Prepared by the University of
Southern California, National Center for Innovations in Public Finance
a roundtable discussion of california's experience with innovations in
public finance: findings, recommendations and proceedings: implications
for financing our nation's infrastructure
(Edited by Daniel V. Flanagan, Jr.; Director, David Seltzer,
Distinguished Practitioner, USC; Sarah Layton, President, Advancing
Infrastructure, LLC)
______
University of Southern California,
National Center for Innovations in Public Finance,
Los Angeles, CA April 2, 2001.
Dear Friends: On December 13, 2000, the University of Southern
California hosted a Roundtable policy discussion at USC's Sacramento
Center entitled ``California's Experience with Innovations in Public
Finance.'' The program was sponsored by a grant received from the
United States Department of Transportation. The National Center for
Innovations in Public Finance, located within USC's School of Policy,
Planning & Development, served as the host coordinator.
As the Director of the National Center, it is my pleasure to
enclose a summary of Findings, Recommendations and Proceedings elicited
from the participants at the Roundtable. Approximately 75 experts,
drawn from governmental, academic and business organizations within
California and throughout the country, were in attendance.
The National Center for Innovations in Public Finance is dedicated
to exploring how new development and financing techniques involving
public-private partnerships could contribute to addressing the nation's
infrastructure challenges at the national, State and local levels. We
believe sthat many of the ideas and recommendations generated at the
Roundtable could serve as important references in future public policy
decisions.
For those interested in a more complete record of proceedings, a
videotape of the conference as well as a summary of each speaker's
remarks may be obtained through the National Center. We would welcome
any comments you might have on the Roundtable. I would like to thank
the entire faculty and staff at the USC Sacramento Center for their
support of this valuable effort.
Sincerely,
Daniel V. Flanagan, Jr., Director
National Center for Innovations in Public Finance
university of southern california
The USC School of Policy, Planning, and Development (SPPD) builds
on the strengths of two premier professional schools to address the
dynamic intersects of the public, private and nonprofit sectors.
Launched on July 1, 1998, the new School combined the former nationally
ranked schools of Public Administration and Urban Planning and
Development and offers degrees in five core areas--public policy,
planning, public administration, health administration and real estate
development.
The School's primary mission is to cultivate leaders--the ethical
men and women who will design and build our communities, reshape our
governmental structures and processes and rethink the relationship
between government, citizens and business. We accomplish this in three
important ways: teaching that prepares students to lead, shape and
manage in the evolving new 21st century world order; research that
takes advantage of and contributes to Southern California, the State,
the Nation and the world; and action that yields insights and offers
solutions to pressing societal problems.
The USC Sacramento Center, located at 1800 I Street, Sacramento,
offers Master programs in Public Administration, Health Administration,
and Planning and Development. The Center also offers leadership
training programs. For more information about the Center and additional
programs, please visit www.usc.edu/sacto.
The National Center for Innovations in Public Finance was
established in 1999 to promote research and instruction in the field of
infrastructure finance. Housed within USC's School of Policy, Planning
and Development, the National Center draws upon USC academic faculty
and distinguished practitioners from the public and private sectors to
teach courses, conduct research projects and provide advice on key
public policy issues. The Founder and Executive Director of the
National Center is Daniel V. Flanagan, Jr. who has been centrally
involved in framing national policy in the areas of deregulation of
utilities and in transportation finance.
This report was prepared as part of a project sponsored by the
University of Southern California with funding from the Federal Highway
Administration, under the terms of a cooperative agreement. The views
expressed herein are those of the conference speakers, participants and
authors of this report and do not necessarily represent the views of
the University of Southern California or the Federal Highway
Administration.
introduction
Ten years have passed since the first toll road franchises were
awarded by the California Department of Transportation in December
1990, under Assembly Bill No. 680 (A.B. 680). To date, only one of the
four projects selected through that process-the SR 91 Express toll
lanesactually has been built and is operational. Yet this landmark
legislation and other initiatives across the State for highways,
seaports, transit, intercity rail, and airports have made California
the nation's leading incubator for using public-private partnerships to
develop, finance and manage transportation facilities and services.
The California experiment with public-private partnerships has seen
a number of new approaches used to deliver and manage transportation
projects. In the highway sector, in addition to the SR 91 project,
three major new toll roads have combined design-build development
teams, a project-finance approach, and Federal credit assistance: a
second AB 680 franchise--the SR 125 toll road south of San Diego, which
is scheduled to come to market during 2001--as well as two new toll
roads developed in the mid-1990's by the Orange County Transportation
Corridor Agencies.
In the transit sector, major new capital investments such as the
BART Airport Extension and the recently awarded Los Angeles-Pasadena
light rail line have drawn upon novel design-build procurement
techniques. The Alameda Corridor freight rail project represents a
unique joint venture between two major rail carriers, the Ports of Long
Beach and Los Angeles, and numerous other local, State and Federal
stakeholders. Several new private sector initiatives are being pursued
across the State in the aviation sector.
Outside of California, one sees unmistakable evidence both in other
States and at the Federal level of greater willingness to experiment
with innovative public-private approaches to address infrastructure
investment needs. Taken together, these developments indicate that the
evolution-if not the revolution--is well underway in how large
infrastructure investments are being developed and financed.
With a decade's experience in California, it is timely to look back
and candidly assess the strengths and weaknesses of using public-
private partnerships for major transportation projects.
Among the questions that need to be explored are:
What kinds of projects are most suitable for public-
private partnerships?
Are public policy objectives adequately being served
through these public-private approaches?
Have there been demonstrable advantages in terms of
expedited project completion, greater cost-effectiveness, or reduced
public sector risk?
What are the appropriate roles for the public and private
sectors at various stages of each project's development?
Does the current development process properly balance
social objectives such as environmental considerations and fair labor
practices with capital investment needs?
Which institutional models and capital structures appear
to work best in terms of both economic efficiency and social equity?
The lessons learned from California's experience--as well as that
of other States and from recent Federal activities--could provide
valuable insights into what new policies to consider for the upcoming
State of California budget considerations and for the Federal
reauthorization of the TEA-21 transportation bill in 2003.
policy driver i: assessing the state of the state
The State Economy
California's economy-really a series of major regional sub-
economies-has changed dramatically in recent years. The State domestic
product is now of similar magnitude to the gross national products of
major Western European trading partners such as Italy, the United
Kingdom, and France. Moreover, California has been the epicenter of the
e-economy. And yet, as profound as the emergence of e-commerce has
been, the ``new'' economy is very much dependent on the infrastructure
of the ``old"; businesses are increasingly reliant upon timely delivery
of goods and services. At the same time, the mobility of e-business,
which allows employers to locate their places of employment
``virtually'' anywhere, makes good transportation links critical if the
State is to remain an attractive venue for these high value
enterprises. The State's population is expected to grow by another 10
million residents by 2020, placing further burdens on aging transport
infrastructure systems to move people and goods safely, quickly and
cost-effectively.
Past State Investment Policy
Investment in transportation infrastructure within the State has
not kept pace with either the growth of population or the increase in
travel demand. California's per capita investment in transport has
declined by two-thirds in real terms since the 1960's. Forty years ago,
transportation spending represented 23 percent of the State budget;
today, it comprises about 6 percent. One of the major reasons for
underinvestment has been the fiscal constraints of the tax limitation
measures enacted in the 1960's and 1970's. The current electricity
crisis has also added a new uncertainty as to budgeting for
transportation.
Presently, there is no exclusive dedicated State funding source for
transportation, so it has had to compete with other governmental and
social service programs for annual funding through the political
process. Because of the lengthy lead-time required to develop major
infrastructure projects, such investments are dependent upon stable and
reliable long-term funding commitments. And, as with the electricity
sector, new capital formation has been curtailed because of increased
concerns about environmental issues. As a result, transportation
services have deteriorated dramatically. For example, the time lost by
the average motorist due to freeway delays has doubled over the last
decade. Prospects for the future are problematic: Many of the county
local option sales taxes adopted in the 1980's for transportation
funding expire over the next several years, yet their extension by
voters is uncertain.
Recent Initiatives
The State has taken several positive steps in recent months to
address these concerns. The Governor's Commission on Building for the
21st Century will soon publish the results of its 18month survey of
California's infrastructure investment needs. The final report is
expected to cite that California today has over $100 billion in unmet
transportation investment needs.
Even prior to the completion of the Commission's report, the State
had started leveraging its available funding through mechanisms such as
the California Infrastructure and Economic Development Bank and Grant
Anticipation Revenue Vehicles (GARVEEs). The Bank is a new $475 million
State loan revolving fund designed to make loans to small and mid-sized
transportation and other infrastructure projects. GARVEE Bonds, which
were authorized by the State legislature last year, are a form of non-
tax backed borrowing in anticipation of future year's grant assistance
from the Federal Department of Transportation. Another important
advance is the enactment of bill A.B. 1473, under which the State would
begin preparing annual Five-year Capital Facilities Plans to better
integrate capital planning and financial policy decisions.
Yet these measures by themselves will not be sufficient to overcome
past years' underinvestment. Simply stated, more resources must be
identified, collected and committed. And the State needs to consider
how best to leverage these finite resources most effectively.
California's recent electricity crisis has underscored the importance
of a comprehensive State strategy that responds to market signals as
conveyed through the pricing mechanism, to ensure a proper balance
between supply and demand. Public-private partnerships (PPP' s) can
play a key role in helping solve the problem-especially for the larger,
more complicated projects.
Issues to be Addressed
Conferees identified the following issues currently confronting
State policymakers:
There is a clear need for better planning of capital
investments-specifically, more closely relating State transportation
spending policy to State land use and housing policy. The State should
integrate its planning and funding strategies for water systems,
drainage, waste management and public buildings with its transportation
investment decisions.
The current allocation formula under S.B. 45 distributes
75 percent of State transportation funding to the metropolitan planning
organizations and retains 25 percent to be administered at the State
level. This regional emphasis, while valuable in vesting investment
decision authority with metropolitan organizations, makes it difficult
to address statewide transportation issues on a comprehensive and
systematic basis. For example, it is difficult to coordinate actions
for inter-regional investments such as intercity high-speed rail or
regional airport systems to relieve congestion at heavily used
facilities.
As zoning is a local matter, the MPO's cannot control land use
policy decisions at the municipal level. Fractionalized zoning policy
at the local level often leads to a disconnect between infrastructure
planning efforts and actual development activities.
The plan of finance for new capital projects should
explicitly identify not only how to finance upfront acquisition costs
but also how to pay yearly operating and maintenance costs over the
projects' useful lives. The financial interdependence between asset
acquisition and asset maintenance must be firmly established at the
outset. The initial capital investment decision should be based upon
Life-Cycle Costing, taking into account the best value for money over
the long-term economic life of the asset.
To the extent tax sources fall short, the State should
explore user fees, since they send a clear market signal about consumer
demand for goods and services. To the extent there are ``free''
transportation alternatives (such as a freeway with tolled express
lanes), the user charge allows individuals to make an economic decision
as to whether the timesavings and convenience of the tolled facility
are worth the cost. User charges also free up limited grant funds for
those projects that are important for reasons of social equity or
public policy, but are not financially self-sustaining. By freeing up
capacity on non-tolled facilities, user charges actually may benefit
those who are not in a position to pay. Ideally, these charges would
reflect the user's actual consumption of transportation services, such
as fees based on weight-distance or vehicle miles traveled. The
challenge in establishing user charges is discerning the benefits that
accrue to society as a whole from the benefits accruing to the
individual user or some narrower group of beneficiaries.
In addition to direct user charges, indirect user charges
such as supplemental gas taxes, capacity charges on Alternative Fuel
Vehicles, and the extension of expiring local option sales taxes also
deserve consideration. Once the underlying funding sources are in
place, policymakers can select which tactical financing techniques
would be most effective.
policy driver ii: defining roles and responsibilities in a public-
private partnership (ppp)
For the overwhelming majority of transportation projects and
services, traditional governmental ownership, operation and financing
will continue to be the most appropriate approach. However for some
types of projects-especially those that are large or complex-a joint
venture between the public and private sectors may prove advantageous.
The non-profit sector may also play a significant role in the
institutional structure.
Reasons to Consider PPP's
State and local governments around the country are turning to joint
ventures with private sector organizations to meet their capital needs.
They are doing so for a variety of reasons, including:
Production Efficiency. Oftentimes, private firms can
build projects faster (if not cheaper), using design-build and other
innovative procurement techniques.
Operating Efficiency. Complex projects may be managed
more efficiently, due to greater expertise with innovation and
technology, the presence of commercial competition, and the incentive
of performance-based compensation.
Risk Transfer. Private firms may be willing to assume
certain risks from the governmental project sponsor as concerns
construction, performance, or demand for the facility. However, the
private sector should not be viewed as the ultimate repository for all
project risks-only for those exposures which are of a business (as
opposed to regulatory or political) nature.
Access to New Sources of Capital. Private firms may be
able to help identify new sources of project revenues that can be
monetized. In addition, the private sector partners may be willing to
invest directly in projects or draw upon other funding sources not
typically employed in conventional municipal financing of projects.
Simplified Project Management. Out-sourcing
responsibilities to third party providers should reduce the
governmental unit's need for staffing up during construction and allow
the organization to maintain its institutional focus on current
operations.
Features that make a Project a Good PPP Candidate The following
project characteristics lend themselves to a PPP:
Size and/or complexity issues, which neither the public
nor the private sector could resolve adequately on their own.
Widely acknowledged need for the project (public
acceptance).
Equilibrium and trust among the various public and
private stakeholders in the project. Central to achieving this goal is
obtaining financial commitments from both public and private
participants, to align their interests (i.e., ensure that both public
and private participants are ``sitting on the same side of the
table'').
A governmental sponsor with the policy and legal
infrastructure to see the process through.
Clear demarcation of responsibilities of different
parties for securing public approvals, environmental clearances, etc.
A dependable and bankable revenue stream.
The ``tummy test''--an intangible sense that the project
``feels right,'' being structured as a PPP.
Key Issues Confronting PPP's
While joint ventures can confer substantial benefits, several
sensitive public policy issues need to be addressed early on in the
project development process:
Labor Policy. At least for larger capital projects in
California, the issue in construction is not labor wage levels, (Davis-
Bacon) but labor availability. There is a dearth of qualified workers
to build and manage complex projects. Concerns about displacement of
governmental workers in PPP's generally can be resolved.
Unsolicited Proposals. The A.B. 680 program of 1990 has
seen one of the four projects built and become operational (SR91 in
Orange County). The second project (SR 125 near San Diego) is expected
to be financed in spring of 2001. A third (Santa Ana Freeway) is still
in the planning stages, and the fourth has been tabled. Each of these
projects was identified and advanced by private development teams, not
by metropolitan planning organizations (MPO's) or the State. Yet
private sector identification and sponsorship of projects is not a
problem per se. What is imperative, however, is that the projects be
placed on State transportation plans and supported by the host
governmental jurisdiction.
Procurement Rules. In California (as in most States),
prevailing law generally does not permit design-build procurement. For
the handful of major projects done thus far in California using design-
build, either special legislation was required or special legal
authority was available. A.B. 680, for example, expressly authorized
design-build for its four pilot highway projects. Two measures enacted
by the legislature last year, A.B 958 and A.B. 2296, allow design-build
to be used by transit agencies and certain counties for larger
projects.
Another approach is to establish a Joint Powers Authority, which
can draw upon the inherent powers of one of its sponsoring local
governmental units to use design-build, as was the case with the
Alameda Corridor freight rail project.
At the Federal level, although TEA-21 has liberalized the
procurement rules for federally assisted projects, contractors under
the National Environmental Protection Act still are prohibited from
having an interest in the ultimate development of a project. This rule
generally prevents construction firms that assist projects in their
environmental review process from continuing to be involved in design
and construction. It results in a loss of continuity and discourages
entrepreneurial efforts in the critical developmental phase of
potential projects.
Environmental Risk. Environmental permitting and
governmental approvals are inherently political processes. Although
private developers can play a valuable role in synthesizing the project
design with the environmental review process, they are ill equipped to
absorb what fundamentally are non-business risks. Moreover, in contrast
to other environmental statutes such as the Clean Air and Clean Water
Acts, there is no statute of limitations governing challenges to
transportation projects under the National Environmental Protection
Act. Unlike a decade ago, developers are now unwilling to assume the
financial risk of public approvals in these early stages (as in SR
125).
Exit Strategy. Most of policymakers' efforts thus far on
PPP have been focused on developing projects and negotiating entrance
strategies for private sector participation. Yet a fundamental
requirement for attracting investment capital is liquidity.
Insufficient attention has been given to the investor's exit strategy
during the life of a franchise, including valuation of the asset or
concession. Although there were a number of political issues
surrounding the proposed sale of the SR91 franchise, at least part of
the controversy was attributable to insufficient local input into
evaluating the concession operator's desired exit strategy.
policy driver iii: selecting tools to guide capital investment
Benefits of Design-Build Procurement
As demonstrated by the two Transportation Corridor Agency toll
roads built thus far (total investment of $3 billion) design-build (vs.
traditional design-bid-build) can provide substantial benefits for
larger projects:
Simplified Project Management for the governmental
project sponsors;
Better Cost controls (reduced exposure to cost overruns);
Faster Completion (a recent university study surveying
major capital projects determined on average that design-build leads to
33 percent faster construction completion); and
Base price of hard costs may be comparable or even
slightly higher, but savings on soft costs and the other benefits
described above often justify it.
Linkage between Investment and Ongoing Asset Management
The relationship between the initial project investment decision
and periodic capital maintenance and renewal must be strengthened to
preserve the value of the investment over time. On toll roads with a
net revenue pledge, the rate covenant covers both capital recovery and
operations and maintenance requirements.
For non-tolled facilities, this full-cost recovery can be achieved
through synthetic mechanisms. For example, long-term performance
warranties from the constructor can require that assets be maintained
at a specified service level in exchange for an up-front or ongoing
warranty fee.
Another approach, used in the United Kingdom and elsewhere
overseas, involves shadow tolling. Under shadow tolls, an operator is
paid a per vehicle fee by the governmental sponsor based on throughput,
to build and maintain an asset at a defined level.
GASB Statement 34, going into effect for governmental units July 1,
2001, mandates more complete disclosure of governmental infrastructure
assets, including recognition of depreciation expense if asset quality
deteriorates. Warranties or shadow tolls would link capital investment
with capital renewal, and help ensure that infrastructure assets are
adequately maintained-both for accounting and transportation purposes.
Special Purpose Entities
California popularized the concept of creating new Special Purpose
Public Agencies (like the Orange County Transportation Corridor
Agencies, Alameda Corridor Transportation Authority, and LA-Pasadena
Rail Construction Authority) to carry out infrastructure development on
a project-finance basis. An alternative approach involves the formation
of a special purpose notfor-profit corporation under Internal Revenue
Service revenue procedure 63-20. For example, two recently opened
several hundred million-dollar toll roads, the Pocahontas Parkway in
Virginia and the Southern Connector in South Carolina, utilized 63-20
corporations to develop and finance the facilities. Having a singular
mission, these entities bring a special focus to completing the
projects.
policy driver iv: comparing different transaction templates
Institutional Models
There are a variety of organizational forms that can be used to
advance infrastructure projects. They can be viewed as stretching along
a continuum, ranging at one end as conventional public projects to the
other end as fully commercialized facilities. The accompanying diagram
illustrates four distinct positions along the spectrum from purely
public to purely private. Projects can be categorized in terms of
whether public or private parties share in the risks and rewards of
development, operation and ownership.
increasingly public--increasingly private
The financing component is a discrete element but also may be
classified as being either public or private. Financing is considered
to be public if either:
a. the capital funding source for the loan or investment is public
tax dollars (e.g. a governmental infrastructure bank, revolving fund or
public pension fund capitalized with public funds); or
b. if the loan repayment source is derived from or guaranteed by
public tax dollars (sales taxes, State Highway Fund moneys, Federal-aid
supported, etc.).
On this basis, a loan funded by a State infrastructure bank, even
if the borrower is a corporate entity, would be deemed ``public
financing.'' Likewise, a privately funded loan for a transit project
developed and operated by a private consortium but payable from or
guaranteed by the State transportation fund, would be considered public
financing. On the other hand, a taxable or tax-exempt revenue bond sold
into the capital markets and backed by user charges would be deemed
``private,'' even though the obligations were issued by a public
conduit (e.g. Transportation Corridor Agencies, Alameda Corridor). The
ultimate determinant is whether public capital is at-risk, either in
terms of the initial funding or the ultimate repayment of the
obligation.
Matrix of Public-Private Transaction Templates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Turnkey Development Warranty/Concession
Governmental Model Model Model Profit-Sharing Model
--------------------------------------------------------------------------------------------------------------------------------------------------------
Examples of Projects............... LACMTA; Caltrans...... TCA; ACTA; BART Hudson-Bergen; NM44.. Las Vegas Monorail; SR 91, Dulles Greenway
Airport; Extn.
Development........................ Public................ Private.............. Private.............. Private
Operation.......................... Public................ Public............... Private.............. Private
Ownership.......................... Public................ Public............... Public............... Private
Financing.......................... Public................ Public or Private.... Public or Private.... Private
--------------------------------------------------------------------------------------------------------------------------------------------------------
Models on the left of the table are increasingly public and models on the right are increasingly private.
The four principal financing templates are:
Governmental Model
Starting on the left side of the chart would be governmentally
developed, owned and operated projects, using public tax dollars.
Examples include Caltrans highway projects or other normal public works
spending, either pay-as-you-go or debt financed, with the governmental
unit responsible for funding operating and maintenance costs. The vast
majority of transportation projects are developed in this fashion.
Turnkey Development Model
Of greater ``private'' character are turnkey financings, where the
projects are developed under a guaranteed maximum price and guaranteed
completion date by a private design-build team and then turned over to
the governmental sponsor. Because of construction risk transfer, there
are financial rewards and penalties to the constructors based upon
performance. In some cases, the facilities are financed principally
with project-generated revenues (project-financing) such as the San
Joaquin Hills and Foothill-Eastern Toll Road projects developed by the
Transportation Corridor Agencies in Orange County. In other cases, such
as the BART airport extension, the projects are funded conventionally
with public grants and local tax dollars.
Warranty/Concession Model
Farther along the spectrum to the right would be projects that are
publicly owned, but use private parties not only for development but
also for operation/maintenance of the facility. Generally, the
compensation is based on a flat fee or a cost-plus basis, rather than a
profit-sharing formula based upon the net revenues or patronage volume.
The new Hudson-Bergen light rail line in New Jersey falls into this
category. Under current tax law, the term and compensation for private
management contracts associated with facilities financed with tax-
exempt debt is severely constrained, diluting any incentives for
superior performance.
Another way to get ongoing private participation without running
afoul of the IRS management contract rules is through long-term
performance warranties on the physical condition of the infrastructure
assets themselves. For example, the New Mexico Corridor 44 road-
widening project has entered into a long-term warranty with a private
firm for the pavement and bridge structures extending up to 20 years.
In both the Hudson-Bergen and the New Mexico 44 projects, the pledged
repayment source for debt service is public moneys, not project
revenues.
Profit-Sharing Model
Finally, at the far right end are fully commercial projects,
involving private development, operation, and even ownership of the
facility. Financing sources are largely or entirely project-based
revenue streams, rather than public or tax-backed sources. Compensation
to the operator is based upon utilization of the facility and/or net
income, resulting in performance-based rewards. Major examples of this
are the SR91 Express Lanes in Orange County, the Dulles Greenway in
Virginia, and the Las Vegas monorail, currently under construction.
No single model or structure can be said to be ``the best"; rather,
the most suitable model will depend on facts and circumstances
surrounding each particular project. Among the factors that will
determine which approach is most appropriate are:
political support for an alternative project delivery
method;
need for project cost and completion date certainty
(which is particularly applicable to project financings);
State law considerations (especially procurement
regulations);
Federal tax code implications (as concerns eligible
financing instruments);
commercial potential of the project, as reflected in
capital markets acceptance; and
degree of risk transfer to the private sector.
As noted above, projects need not be self-liquidating to benefit
from a PPP approach. Concession arrangements for subsidized services
such as public transport have proven successful overseas because
incentivized performance for private operators can produce better
service, lower public subsidy, and greater cost transparency. For
instance, Melbourne, Australia achieved these enhancements in out-
sourcing operations of its commuter rail network.
Nor is a commercial or ``privatized'' approach incompatible with a
cooperative working arrangement with organized labor. In fact, both the
management team and the union work force can benefit from entering into
a project labor agreement at the outset of the project that squarely
addresses prevailing wages, non-disruption of work schedule, and other
features that will facilitate the timely, on-budget completion of a
high-quality project.
Historically, most transportation projects have been funded either
through governmental grants (public equity) or tax-supported municipal
bonds (public debt), since these have represented the lowest cost
sources of capital. However, there are alternative sources of private
sector equity and debt capital that may be drawn upon for
infrastructure projects with steady cash-flows linked to economic
growth. Low tax bracket institutional investors such as life insurance
companies and non-taxable pension funds would benefit from being able
to diversify into a new economic sector that presently is absent from
their portfolios. Because the major financial vehicle for
infrastructure has been tax-exempt bonds, it has not been appropriate
for pension funds as tax-exempt entities to purchase such paper when
higher-yielding corporate bonds of equal quality are available.
However, several recent developments have lowered the relative
funding cost of taxable debt and equity:
The Federal budget surplus has reduced the supply of
Treasury bonds, lowering the benchmark against which taxable paper is
priced, relative to municipal bonds.
Pension funds and insurance companies have gained greater
familiarity with project financings, through investing in debt and
equity in overseas infrastructure projects and domestic power
generation facilities. They are now willing to accept longer term debt
obligations with minimal amortization in the early years, cushioning
the cash-flow impact on project revenues.
New Federal programs such as TIFIA (the Transportation
Infrastructure Finance and Innovation Act of 1998) provide debt capital
on terms which in some cases are even more favorable than those in the
municipal bond market. Other proposed legislation such as tax credit
bonds would allow de-coupling of the principal from the interest
portion, creating a stand-alone taxable debt instrument suitable for
retirement funds.
Finally, even though infrastructure projects are highly
capital intensive, cost savings on the operating side from private
participation may partially offset the higher capital costs of taxable
rate financing.
Taxable Investment Funds. Together, these factors are combining to
reduce the disparity in funding cost between the taxable and tax-exempt
markets. As a result, project sponsors may now find that it is cost-
effective to seek out pension funds and other taxable market investors
to invest equity and debt capital in project financings. As corporate,
union and public retirement systems represent $5 trillion in investment
assets, even allocating a small portion of their portfolios to invest
in U.S. transportation infrastructure could have significant
ramifications. They could invest either directly or through pooled
investment accounts similar to mutual funds.
"Innovative Finance'' Techniques
Innovative approaches that involve PPP's to develop, operate or own
transportation assets will lend themselves toward using innovative
financing techniques. ``Innovative Finance,'' while not a panacea, can
help address these capital investment needs once the underlying payment
source for the project has been identified.
Innovative Finance can be defined as the use of external financing
approaches that draw upon at least one of the four following elements:
1. New Sources of Repayment that haven't previously been used to
secure external financing.
2. New Methods of Service Delivery that offer development,
production or operational efficiencies.
3. New Sources of Investment Capital that broaden the funding
alternatives for transportation projects beyond conventional tools.
4. New Methods of Paying Financial Return to investors, that either
reduce effective financing cost for the project sponsor or shift risks
(such as interest rate and financial risk) to third party investors, or
do both.
Participants at the Roundtable suggested a number of innovative
finance ideas relating to repayment streams, service delivery, funding
sources, and investment return:
new sources of repayment
State & Local Taxes
Extension of Local Option Sales Tax
New Tax on Alternative Fuel Vehicles
Inflation adjusted Gas Tax
Other User-related fees (e.g. weight-distance)
Non-user related Taxes (internet/mail order sales tax,
property transfer tax, etc.)
A defined percentage of State General Fund Revenues
Other
Shared revenue from fiber optics, etc. along State
rights-of-way
Tobacco Funds
State version of GARVEE Bonds (using counties' share of
State Gas tax allocation)
State-aid Intercept mechanism to credit enhance local
bonds
Development Risk Insurance
New Methods of Service Delivery
Broaden application of innovative procurement techniques
such as design-build.
Modify transit requirement 13(c) [consent required of DOL
and local unions to proposed project labor agreements] to make it
easier for transit agencies to out-source existing operations/capital
improvements via tendering routes to concessionaires.
Liberalize the management contract rules or seek tax code
change (private activity bonds for highways) to allow performance-based
compensation to private operators of toll facilities financed with tax-
exempt debt.
Permit outsourcing of highway maintenance activities or
enter into long-term warranties to guarantee defined service standard
levels of State highways under GASB Statement 34.
Change statute of limitations under NEPA for challenges,
so that it is consistent with other environmental statutes (e.g. within
60 days from the Record of Decision).
New Sources of Investment Capital
Public (State and local) Pension Funds and Taft-Hartley
(union) Pension Funds, investing either directly or through pooled
accounts.
Leveraged Leasing (domestic and cross-border tax-oriented
equity).
Extend TIFIA beyond 2003.
Reduce threshold project size below $100 million for
TIFIA assistance, to make it consistent with the lower thresholds in
TEA-21 for using design-build (e.g. $50 million).
New Methods of Paying Financial Return
Tax Credit bonds (interest paid by U.S. Treasury in the
form of a tax credit to the investor).
Shadow Tolls (per vehicle compensation to private
concessionaire).
Variable Rate bonds for State transportation borrowings
to hedge interest rates.
Government Policy Tools
Historically, the public sector has used direct governmental
spending to expand transportation capital investment. However, where
innovative finance and public-private ventures are involved, it may be
possible to generate additional investment through less costly means.
To encourage the foregoing innovative finance techniques, the
government sector may use these policy tools:
1. Regulatory Incentives-streamlining procedures, removing program
restrictions, etc.;
2. Tax Incentives-using the tax code to encourage the free flow of
capital into certain desired investment and operational activities; and
3. Credit Incentives-using fractional credit assistance (direct
loans or loan guarantees) to leverage a larger multiple of private
financing.
Each of the suggestions under the four innovative financing tools
may be addressed through regulatory, tax, or credit policy initiatives.
conclusion: encouraging continued innovation
The following policy recommendations emerged from the Roundtable
discussion:--Process Streamlining. Process reform was recommended in
three areas:
State procurement practices should be simplified for
public-private partnerships;
Regional financing protocols with Federal agencies need
to be supported; and
Environmental review processes should be consolidated
with public agency responsibility.
Environmental Risk. Project-based financings must have time-
certainty and cost-discipline to attract private debt and equity
capital. Because securing environmental and public permitting approvals
is fundamentally a governmental rather than a commercial process, the
private sector is not equipped to assume the financial responsibility
for obtaining the environmental record of decision. The time period for
challenges to projects' environmental impact statements under NEPA
should be made consistent with other environmental statutes.
Co-Investment by Public & Private Sector. User fees can be both an
effective and equitable way of generating project-funding streams.
However, in most cases, project-generated revenues alone will not be
sufficient to fully finance the projects. Some level of public
investment will be required, and it needn't take the form of
contributed capital. For instance, the Alameda Corridor has four
distinct layers of debt investment-first tier capital markets, second
tier TIFIA loan, third tier capital markets, and fourth tier port
loans-as well as lesser amounts of Federal, State and local grant
funding. In addition to reducing the burden on project revenues to
cash-flow the private investment, public co-investment is useful in
that it gives all parties a financial stake in the commercial success
of the enterprise.
Subsidy Level. Even where an external operating subsidy is required
(e.g. public transit or freeway maintenance), the public sector doesn't
have to provide that service. As has been demonstrated overseas, there
may be substantial reductions in public subsidy required and/or
enhancement of service levels through selective outsourcing of
operations to private parties.
Special Purpose Agencies. Major capital projects can benefit by
establishing a special purpose entity to undertake development and
operations, whose sole responsibility is the project. The organization,
which could be a legislatively established new authority, a joint
powers authority formed by several jurisdictions, or a private non-
profit corporation formed by the principal public and private
stakeholders, helps bring a singular institutional focus to completing
the project on-time and within budget.
Design-Build. Larger or more complex projects often can accelerate
completion and reduce construction and performance risk through design-
build procurement. Yet State law may make it difficult to proceed on
any other basis than design-bid-build, with its attendant delays and
lack of accountability. Also, State and Federal law should allow a
contractor to participate in both the environmental analysis of a
project and its subsequent construction, to gain the benefit of their
continued involvement from project inception to project completion.
Linking Investment & Maintenance. Reliable funding of ongoing
project operations and maintenance costs must be identified at the
outset, to ensure the best capital investment decision is made. Among
the institutional arrangements that can foster this Life-Cycle Costing
perspective are long-term franchise agreements (for toll facilities) or
shadow toll agreements (for free facilities); or long-term warranties
stipulating that specific asset quality levels be maintained over the
life of the project.
Role of Innovative Finance. Once a project's revenue stream has
been identified, innovative finance techniques can assist in
capitalizing the value of the future project revenues to fund the
investment today. Federal, State and local policymakers can use
regulatory, tax and credit incentives to encourage the use of new
financial instruments. The financial tools themselves may draw upon one
or more of the following mechanisms: new repayment streams, new
procurement methods, new sources of investment capital, and new methods
of a paying financial return. Given that many of these financing
approaches already are in use in the private sector, a more apt name
for ``innovative finance'' might be ``project-based finance.''
Continuing Education. Presently, there is very little offered in
the way of organized educational programs on the use of PPP's for
infrastructure development. The dearth of relevant training extends
both to entry-level candidates for public or private positions (Masters
programs) and to mid-career corporate and governmental practitioners.
An ongoing university-sponsored program on new project development and
financing techniques could prove highly useful in further developing
both public and private sector management skills in this growing and
dynamic discipline.
______
Table 1: Key Drivers on Innovative Finance Proposals for Project
Sponsors, Investors and Federal Policymakers
perspective key questions project sponsor/borrower
What is the effective financing cost (IRR)?
How high is the Annual Payment Factor?
Is the transaction reported as a direct or contingent
liability on the Sponsor's balance sheet?
What legal steps (State legislation, etc.) must be taken
to utilize it?
How difficult is it for Management to implement it?
Investor
Is the risk-adjusted rate of return competitive?
Is there a secondary market for the product (liquidity)?
Are there other investment risks (tax compliance, call
risk, etc.)?
Will it help diversify the investor's portfolio exposure?
Are there any other strategic reasons for investing aside
from its return?
Federal Policymaker
What is the proposal's budgetary cost?
Is the finance tool cost-effective (how much leveraging
of Federal resources)?
What is the overall economic return (benefit/cost ratio)?
How well does it achieve multiple Federal policy
objectives?
Improve Access
Enhance Mobility
Shift Risks away from the Government
Attract Non-Federal Resources / Private Participation
Accelerate Projects
______
Response of David Seltzer to Additional Question from Senator Baucus
Question. Many of us are concerned about the continued viability of
the Highway Trust Fund. That is, with increased fuel economy and
incentives for alternative fuels, can the Trust Fund continue to meet
our ever-increasing highway needs? In fact, in the MEGA-TRUST Act, I
create a commission to look at the Trust Fund and its continued
sustainability. When we talk about innovative financing for highways
are we talking about a way to supplement the Highway Trust Fund or
replacing the Trust Fund with this ``new way of doing business?"
Response. Perhaps the most accurate answer is ``a new way of doing
certain types of business.''
The vast majority of highway projects are not capable of generating
their own revenue streams, and will continue to be reliant upon grant
funding from Federal and State sources. That is why the findings of the
National Surface Transportation Infrastructure Financing Commission
proposed in S. 2678 will be so vital to policymakers in identifying
ways to sustain the Highway Trust Fund in coming years.
However, the term ``Innovative Finance'' really encompasses a
number of different initiatives that can help promote investment in the
Nation's surface transportation system.
First, it references grant management techniques that give States
greater flexibility in using existing Highway Trust Found resources.
GARVEE Bonds are a good example of this; the total resources committed
to highways are not increased, but projects can be greatly accelerated,
through monetizing future streams of Federal receivables. Another
example is State Infrastructure Banks and section 129 loans, where
States may use Federal-aid apportionments to fund loans and provide
other types of financial assistance.
Second, Innovative Finance connotes innovative procurement methods,
such as design-build contracting, which can expedite projects, transfer
risks to private parties, and/or save the project sponsor money. The
pilot provisions for design-build contracting in TEA-21 provide an
excellent vehicle for evaluating such alternative approaches. Further
refinements, especially as concerns streamlining Federal approvals,
would be beneficial.
Third, the term includes innovative asset management techniques
that provide superior value-for-money over the long-term. Initiatives
that encourage States to make project investment decisions with regard
to the life cycle costing over the economic life of the project should
be encouraged. For example, long-term warranties such as those New
Mexico has used on its Corridor 44 project, or other long-term
performance-based private management contracts, help ensure that the
initial capital investment is maintained adequately to optimize its
value.
Finally, Innovative Finance includes new financial instruments that
either lower the cost of capital obtained from existing sources,
identify new sources of capital, or do both. For instance, Federal
credit programs such as TIFIA establish the Federal Government as a new
source of debt capital on favorable terms for certain types of
projects. This can make it easier for projects with their own revenue
streams, such as toll roads, to access the capital markets for the
balance of their needs. To the extent a project sponsor can more
readily borrow against non-Federal revenue streams, the number of
claimants on a State's apportionments is reduced.
Other new financial instruments, based on tax code incentives, can
reduce the required cash outlays from traditional funding sources by
providing a return to investors in the form of a non-cash tax benefit.
Techniques such as tax credit bonds or tax-oriented leasing serve to
attract debt and equity capital from private sources, again freeing up
traditional revenue sources for other projects.
In summary, the combination of grants management, procurement,
asset maintenance and financing techniques comprising ``Innovative
Finance'' should be viewed as an important element of any national
transportation policy. But it will never replace the need for a long-
term strategy for augmenting Highway Trust Fund resources that are used
to fund grants required by most surface transportation investments.
Ultimately, the political process will determine the types and amounts
of resources directed to the HTF, based on the desired level of
investment activity and the perceived role of the Federal Government
relative to State, local and other funding partners. .
__________
Statement of Phyllis F. Scheinberg, Deputy Assistant Secretary for
Budget and Programs United States Department of Transportation
Chairman Jeffords, Chairman Baucus, Ranking Members Smith and
Grassley, and Members of the Committees: Thank you for holding this
hearing today and inviting me to testify on Federal innovative finance
initiatives for surface transportation projects. These financing
techniques, in combination with our traditional grant programs, have
become important resources for meeting the transportation challenges
facing our Nation. Secretary Mineta, in his testimony last January
before the Environment and Public Works Committee, indicated his desire
to increase their application.
The Secretary stated that ``Expanding and improving innovative
financing programs in order to encourage greater private sector
investment in the transportation system . . .'' will be one of the
Department of Transportation's core principles in working with
Congress, State and local officials, tribal governments and
stakeholders to shape the surface transportation reauthorization
legislation. He remains steadfast in his support for these programs.
Defining ``Innovative Finance''
Perhaps the first issue to address today is ``What is innovative
finance?'' We increasingly hear the term used in the context of
transportation projects, but what does it really mean? We at the
Department apply the term to a collection of management techniques and
debt finance tools available to supplement and expand the flexibility
of the Federal Government's transportation grant programs. We see the
primary objectives of innovative finance as leveraging Federal
resources, improving utilization of existing funds, accelerating
construction timetables, and attracting non-Federal investment in major
projects. The quantifiable successes of such innovative finance are
beginning to mount.
The July 2002 report entitled ``Performance Review of U.S. DOT
Innovative Finance Initiatives'' states that Federal investments of
$8.6 billion have helped to finance projects worth a total of $29
billion, a ratio of $3.40 invested for each Federal dollar. Of this $29
billion, more than 27 percent, or $8 billion, consists of debt that
will be repaid from new revenue sources. Sponsors report that more than
50 projects were accelerated from 6 months to 24 years as a result of
innovative financing compared to transportation grants. The total
economic impacts of $91 billion nationwide represent benefits that have
accrued more rapidly than ever possible using a pay-as-you-go method.
While these achievements demonstrate the value of innovative
finance techniques and tools, they also deserve a realistic assessment
in the context of the grant system, financed by the Highway Trust Fund,
that provides the foundation of Federal financial assistance for
surface transportation projects.
The first assessment in realism is to examine the ``innovative''
nature of the financial tools. Improving the flexibility of fund
administration and creating opportunities to borrow and lend Federal
money have been vitally important initiatives, and we can thank
numerous role models outside the transportation sector for developing
these tools long ago. The ``new'' or ``innovative'' feature of these
tools, then, derives from their application to the Federal
transportation program. Further, these financing techniques have now
become better known and accepted by many State and local transportation
partners. Because the demand for transportation investment throughout
the country consistently exceeds the supply of resources, those regions
facing the greatest challenges to mobility have readily embraced--and
in many cases paved the way for--the opportunities provided by
innovative finance.
The second assessment concerns the potential for innovative finance
to ease demands on the current grant funding distributed each year to
States and local agencies. That doesn't seem likely. The focus of
innovative finance (and perhaps a more appropriate term to designate
these tools) is project finance. The techniques supplement existing
programs on an as-needed, project-by-project basis. Transportation
officials must evaluate each project individually to determine the best
financing approach. The grant programs remain the bulk of Federal
transportation assistance, supplemented by the extra muscle and
flexibility of innovative finance.
The diagram below depicts a pyramid that illustrates the range of
surface transportation projects and the innovative tools available for
financing them. The base represents the majority of projects: those
that rely on grant-based funding, but may benefit from measures that
enhance flexibility and resources. Various Federal funds management
techniques, such as advance construction, tapered match, and grant-
supported debt through Grant Anticipation Revenue Vehicles, or GARVEEs,
can help move these projects to construction more quickly. The mid-
section represents those projects that can be partially financed with
project-related revenues, but may also require some form of public
credit assistance. State Infrastructure Banks (SIBs) can assist State,
regional, and local projects through low-interest loans, loan
guarantees, and other credit enhancements. State loans of Federal grant
funds known as Section 129 loans represent another credit assistance
technique. The Transportation Infrastructure Finance and Innovation Act
(TIFIA) program provides credit assistance to a small number of large-
scale projects of regional or national significance that might
otherwise be delayed or not constructed at all because of risk,
complexity, or cost. The peak of the pyramid reflects the very small
number of projects able to secure private capital financing without any
governmental assistance.
Federal Project Finance Tools for Surface Transportation
The TIFIA Credit Program
Let me begin with the program that, through the leadership of the
Senate during enactment of the Transportation Equity Act for the 21st
Century (TEA-21), provides a direct role for the Federal Government to
assist large transportation projects. In June 2002, the Department
delivered its Report to Congress on the Transportation Infrastructure
Finance and Innovation Act of 1998 (TIFIA), which authorizes the
Department of Transportation (DOT) to provide three forms of credit
assistance--secured (direct) loans, loan guarantees and standby lines
of credit--to surface transportation projects of national or regional
significance.
The public policy underlying the TIFIA credit program asserts that
the Federal Government can perform a constructive role in
supplementing, but not supplanting, existing capital finance markets
for large transportation infrastructure projects. As identified by
Congress in TEA-21,``. . . a Federal credit program for projects of
national significance can complement existing funding resources by
filling market gaps, thereby leveraging substantial private co-
investment.'' Because the TIFIA program offers credit assistance,
rather than grant funding, its potential users are infrastructure
projects capable of generating their own revenue streams through user
charges or other dedicated funding sources.
Identifying a constructive role for Federal credit assistance
begins with the acknowledgement that, compared to private investors,
the Federal Government's naturally long-term investment horizon means
that it can more readily absorb the relatively short-term risks of
project financings. Absent typical capital market investor concerns
regarding timing of payments and financial liquidity, the Federal
Government can become the ``patient investor'' whose long-term view of
asset returns enables the project's non-Federal financial partners to
meet their investment goals, allowing the project's sponsors to
complete a favorable financing package.
The TIFIA program's pragmatic challenge is to balance the objective
of advancing transportation projects with the equally important need to
lend prudently and protect the Federal interest. The DOT must apply
rigorous credit standards as it fashions assistance to improve the
financial prospects of participating projects. The Federal objective is
not to minimize its exposure but to optimize its exposure-that is, to
take prudent risks in order to leverage Federal resources through
attracting private and other non-Federal capital to projects.
The TIFIA program assistance is meant to support expensive, complex
and significant transportation investments. In general, a project's
eligible costs must be reasonably anticipated to total at least $100
million. Credit assistance is available to highway, transit, passenger
rail and multi-modal projects. Other types of eligible projects include
intercity passenger rail or bus projects, publicly owned intermodal
facilities on or adjacent to the National Highway System, projects that
provide ground access to airports or seaports, and surface
transportation projects principally involving the installation of
Intelligent Transportation Systems (ITS), for which the cost threshold
is $30 million. The TIFIA credit assistance is limited to 33 percent of
eligible project costs.
Congress has authorized the DOT to provide up to $10.6 billion of
TIFIA credit assistance through the TEA-21 authorization period of
1998-2003. From the Highway Trust Fund, Congress authorized $530
million, subject to the annual obligation limitation on Federal-aid
appropriations, to pay the subsidy cost of TIFIA credit assistance and
related administrative costs. The subsidy cost calculations establish
the capital reserves which the DOT must set aside in advance to cover
the expected long-term cost to the Government of providing credit
assistance, pursuant to the Federal Credit Reform Act of 1990 (FCRA).
To date, the DOT has selected 11 projects, representing $15.7
billion in transportation investment, to receive TIFIA credit
assistance. The TIFIA commitments total $3.7 billion in credit
assistance at a subsidy cost of about $202 million. The DOT has
received 38 letters of interest and 15 applications from project
sponsors. All major categories of eligible projects--highway, transit,
passenger rail and multi-modal--have sought and received credit
assistance. The TIFIA credit assistance ranges in size for each
project, from $73.5 million to $800 million, mostly in the form of
direct Federal loans from the DOT to the project sponsors. These
projects are summarized in the table below.
TIFIA Commitments as of September 2002
----------------------------------------------------------------------------------------------------------------
Project Project Type Project Cost Instrument Type Credit Amount
----------------------------------------------------------------------------------------------------------------
Miami Intermodal Center......... Intermodal......... $1,349 million.... Direct Loan....... $269 million
Direct Loan $163 million
SR 125 Toll Road................ Hwy/Bridge......... $450 million...... Direct Loan....... $94 million
Line of Credit $33 million
Farley Penn Station............. Passenger Rail..... $800 million...... Direct Loan....... $140 million
Line of Credit $20 million
Washington Metro CIP............ Transit............ $2,324 million.... Guarantee......... $600 million
Tren Urbano (PR)................ Transit............ $1,676 million.... Direct Loan....... $300 million
Tacoma Narrows Bridge........... Hwy/Bridge......... $835 million...... Direct Loan....... $240 million
Line of Credit $30 million
Cooper River Bridge............. Hwy/Bridge......... $668 million...... Direct Loan....... $215 million
Staten Island Ferries........... Transit............ $482 million...... Direct Loan....... $159 million
Central Texas Turnpike.......... Hwy/Bridge......... $3,580 million.... Direct Loan....... $917 million
Reno Rail Corridor.............. Intermodal......... $242 million...... Direct Loan....... $51 million
Direct Loan $5 million
Direct Loan $18 million
SF-Oakland Bay Bridge........... Hwy/Bridge......... $3,305 million.... Direct Loan....... $450 million
-------------------- ------------------
Total....................... $15,711 million... $3,704 million
----------------------------------------------------------------------------------------------------------------
Already limited by statute to 33 percent of total project costs,
actual TIFIA assistance has averaged 23 percent of project costs.
Including grant assistance, total Federal investment in TIFIA projects
amounts to 43 percent of total costs. Investments from other government
and private sources comprise the remaining 57 percent.
Because credit assistance requires a small fraction of the contract
authority needed to provide a similar amount of grant assistance, TIFIA
promotes a cost-effective use of Federal resources to encourage co-
investment in transportation infrastructure. Federal grant funds that
otherwise might be required to support these large projects can then be
redirected toward smaller but critical infrastructure investments.
An explicit goal of the TIFIA program is to induce private
investment in transportation infrastructure. Private co-investment in
the TIFIA project selections totals about $3.1 billion, comprised of
more than $3 billion in debt (including State and local debt held by
private investors) and nearly $100 million in equity. This co-
investment totals approximately 20 percent of the nearly $15.7 billion
in total costs.
The DOT believes that a limited number of large surface
transportation projects each year will continue to need the types of
credit instruments offered under TIFIA. Project sponsors and DOT staff
are still exploring how best to utilize this credit assistance, and we
welcome congressional guidance and dialog during this evolutionary
program period.
As stated in the Conference Report accompanying TEA-21 and TIFIA,
``[a] n objective of the program is to help the financial markets
develop the capability ultimately to supplant the role of the Federal
Government in helping finance the costs of large projects of national
significance.'' The current form of TIFIA administration--within a
Federal agency subject to regular budget oversight--enables
policymakers to monitor program performance as staff, sponsors and the
financial markets gain experience. As current TIFIA projects move into
their construction, operation and repayment phases, and as additional
projects obtain TIFIA assistance, policymakers will acquire better
information with which to determine whether TIFIA should remain within
the DOT, ``spin off'' into a Government corporation or Government
sponsored enterprise, or phaseout entirely and rely on the capital
markets to meet the program's objectives.
The Department also administers a credit assistance program
specifically for the railroad industry: the Railroad Rehabilitation and
Improvement Financing Program (RRIF). Also authorized in TEA-21, the
RRIF program provides direct loans and loan guarantees to railroads and
other public and private ventures in partnership with railroads. The
aggregate unpaid principal amount under the program cannot exceed $3.5
billion, and the subsidy cost is covered by a ``credit risk premium''
paid by or on behalf of the borrower from a non-Federal source. To
date, the Federal Railroad Administration (FRA) has approved four RRIF
loans for a total of more than $200 million, and six more applications
are currently being evaluated.
GARVEE Bonds
Another financing tool among States has been the issuance of Grant
Anticipation Revenue Vehicles (GARVEEs): bonds that enable States to
pay debt service and other bond-related expenses with future Federal-
aid highway apportionments. States are finding GARVEEs to be an
attractive financing mechanism to bridge funding gaps and accelerate
construction of major corridor projects. The GARVEE generates up-front
capital for major highway projects at tax-exempt rates and enables a
State to construct a project earlier than using traditional pay-as-you-
go grant resources. With projects in place sooner, costs are lower due
to inflation savings and the public realizes safety and economic
benefits. Paying via future Federal highway reimbursements spreads the
cost of the facility over its useful life, rather than just the
construction period. GARVEEs expand access to capital markets,
supplementing general obligation or revenue bonds.
A GARVEE is a debt-financing instrument authorized to receive
Federal reimbursement of debt service and related financing costs. In
general, projects funded with the proceeds of a GARVEE debt instrument
are subject to the same requirements as other Federal-aid projects with
the exception of the reimbursement process. Instead of reimbursements
as construction costs are incurred, the reimbursement of GARVEE
projects occurs when debt service is due.
Candidates for GARVEE financing are typically large projects, or a
program of projects, where the costs of delay outweigh the costs of
financing and other borrowing approaches may not be available. In
total, six States have issued 14 GARVEE Bonds, totaling more than $2.5
billion, to be repaid using a portion of their future Federal-aid
highway funds. The table below summarizes this activity.
GARVEE Transactions as of July 2002
----------------------------------------------------------------------------------------------------------------
State Date of Issue Face Amount of Issue Projects Financed
----------------------------------------------------------------------------------------------------------------
Ohio................................. May-98................. $70 million............ Various projects
Aug-99 $20 million including: Spring-
Sep-01 $100 million Sandusky and Maumee
river improvements
New Mexico........................... Sep-98................. $100 million........... New Mexico SR 44
Feb-01 $19 million
Arkansas............................. Mar-00................. $175 million........... Interstate Highways
Jul-01 $185 million
Jul-02 $215 million
Colorado............................. May-00................. $537 million........... Any project financed
Apr-01 $506 million wholly or in part by
Jun-02 $208 million Federal funds
Arizona.............................. Jun-00................. $39 million............ Maricopa freeway
May-01 $143 million projects
Alabama.............................. Apr-02................. $200 million........... County Bridge Program
--------------------------
Total............................ $2,517 million.........
----------------------------------------------------------------------------------------------------------------
State Infrastructure Banks
Another significant project finance tool is the State
Infrastructure Bank (SIB), a revolving transportation investment fund
administered by a State. A SIB functions as a revolving fund that, much
like a bank, can offer loans and other credit products to public and
private sponsors of Title 23 highway construction projects or Title 49
transit capital projects. Federally capitalized SIBs were first
authorized under the provisions of the National Highway System
Designation Act of 1995. The initial infusion of Federal and State
matching funds was critical to the startup of a SIB, but States have
the opportunity to contribute additional State or local funds to
enhance capitalization. SIB assistance may include loans (at or below
market rates), loan guarantees, standby lines of credit, letters of
credit, certificates of participation, debt service reserve funds, bond
insurance, and other forms of non-grant assistance. As loans are
repaid, a SIB's capital is replenished and can be used to support a new
cycle of projects. And, as has been accomplished in Minnesota and South
Carolina, SIBs can also be structured to issue bonds against their
capitalization, increasing the amount of funds available for loans.
SIBs complement traditional funding techniques and serve as a
useful tool to stretch both Federal and State dollars. The primary
benefits of SIBs to transportation investment include:
Flexible project financing, such as low interest loans
and credit assistance that can be tailored to the individual projects;
Accelerated completion of projects;
Incentive for increased State and/or local investment;
Enhanced opportunities for private investment by lowering
the financial risk and creating a stronger market condition; and
Recycling of funds to provide financing for future
transportation projects.
The pilot program was originally available to only 10 States, and
was later expanded to include 38 States and Puerto Rico. TEA-21
established a new pilot program for the States of California, Florida,
Missouri, and Rhode Island. Texas was later authorized to participate
in the TEA-21 program. To date, however, only Florida and Missouri have
elected to revise their agreements in accordance with TEA-21.
The authorizing Federal legislation allows States to customize the
structure and focus of their SIB programs to meet specific
requirements. While a SIB can offer many types of financing assistance,
loans have been the most popular tool. As of June 2002, 32 States had
entered into 294 loan agreements totaling more than $4 billion. This
activity has been largely concentrated within six States. The largest
SIB, the South Carolina Transportation Infrastructure Bank, has
approved financing and begun development of almost $2.4 billion in
projects, helping to condense into 7 years a transportation program
that would have taken 27 years under a pay-as-you-go approach. The
Florida SIB had executed 32 loan agreements through the end of fiscal
year 2001, at a value of $465 million. The Florida SIB has been
augmented with a State appropriation of $150 million, and both Ohio and
Arizona have also contributed additional State funds to their SIBs. The
table below demonstrates the concentration of activity in the six
largest SIBs.
State Infrastructure Banks Transactions as of June 2002
------------------------------------------------------------------------
Number of Loan Agreement
State Agreements Amount
------------------------------------------------------------------------
South Carolina.................... 6 $2,382 million
Florida........................... 32 $465 million
Arizona........................... 37 $424 million
Texas............................. 37 $252 million
Ohio.............................. 39 $141 million
Missouri.......................... 11 $73 million
-------------------------------------
Subtotal...................... 162 $3,738 million
2Other States..................... 132 $318 million
-------------------------------------
Total......................... 294 $4,056 million
------------------------------------------------------------------------
Looking Ahead
Although States and local partners have not adopted them evenly,
the tools of TIFIA, GARVEEs and SIBs have clearly moved from the
innovative to the mainstream. This reflects significant success, but it
doesn't indicate that the needs of project finance have been completely
met. Secretary Mineta has issued a clear challenge to the Department in
our development of a reauthorization proposal for TEA-21, asking us to
expand innovative finance programs to encourage private sector
investment and examine other means to augment existing revenue streams.
As part of our internal reauthorization deliberations, we are
considering options for further leveraging Federal resources for
surface transportation. Enhancing the use of innovative finance in
intermodal projects and examining the financing techniques used in
other major public infrastructure investments are among the areas we
are looking at. The challenge is to build on our successes to date, but
not set unrealistic expectations for the future.
A particular focus is on the issue of private investment, an at-
risk contribution to a project with the expectation of repayment from
project revenues--and a return on investment--over time. Unlike much of
the world, the provision of roads and transit systems in the U.S. is
almost completely a public sector responsibility. As has been often
pointed out, our system of tax-exempt financing means that the public
cost of capital is significantly less expensive than for a private
entity. Many public works sectors in the U.S. permit private firms to
gain access to tax-exempt capital for the construction of public
infrastructure. Legislation has been introduced previously to confer
this opportunity to a limited number of highway projects. Before the
Department would consider any proposed amendment to the Internal
Revenue Code, it would first consult with the Department of the
Treasury.
One transportation sector with a high degree of private
participation, which deserves a higher profile among public
transportation planners and policymakers, concerns the movement of
freight. Supporting the efficiency of commercial freight transportation
continues to be a cornerstone of the Department's vision for America's
transportation system. ISTEA and TEA-21 legislation gave us many tools
to bring this vision to reality, and our experience has given us new
ideas for programs that will get us even closer to our goal of a
seamless transportation network. Greater investments in transportation
infrastructure and wider use of information technology will certainly
be required to achieve this goal.
The activity of SIBs in many States indicates that this program is
ready to move beyond its pilot phase to become a permanent feature of
the innovative finance landscape.
The Department looks forward to working with our partners in State
DOTs, metropolitan planning organizations, and private industry to
apply innovative funding strategies that extend the financial means of
our individual stakeholders. And we look forward to working with the
Congress to craft the next surface transportation legislation. Working
together, the Administration, the Congress, States and localities and
the private sector can preserve, enhance, and establish surface
transportation programs that will result in increased mobility, safety
and prosperity for all Americans.
Thank you for the opportunity to testify before you today. I would
be happy to answer any questions you may have.
______
Responses of Phyllis Scheinberg to Additional Questions from Senator
Jeffords
Question 1. State Infrastructure Banks (SIBs) are currently limited
to only a few States. What is the track record of SIBs? Are they
performing as anticipated? Are SIBs a viable option that should be
available to all States? Do you have suggestions which this Committee
should consider to improve the effectiveness of SIBs?
Response. Thirty-nine States, including the Commonwealth of Puerto
Rico, were authorized by the Department of Transportation to establish
a SIB under the National Highway System Designation Act of 1995 (NHS
Act). In addition, the Transportation Equity Act for the 21st Century
(TEA-21) established a SIB pilot program that was limited to only a few
States that already had authorized SIBs under the NHS Act.
Specifically, five States (Florida, Missouri, California, Rhode Island,
and Texas) were authorized to use TEA-21 funds to capitalize their
SIBs. However, only Florida and Missouri have modified their SIB
agreements to comply with the TEA-21 requirements and are currently
eligible to use TEA-21 funds for SIB capitalization. To date, States
have transferred $456 million of Federal funds apportioned in FYs 1996
and 1997 into SIBs and $52.1 million of TEA-21 funds have been
transferred to SIBs.
We believe that SIBs have been a viable tool for States that have
established them. Of the 39 authorized SIBs, 32 remain active even
though only two (Florida and Missouri) are using the additional TEA-21
funds for capitalization. As of June 2002, these States have entered
into 294 SIB loan agreements for a total of $4 billion dollars for
surface transportation projects. Some benefits of SIBs assistance are
flexible project financing, accelerated completion of projects,
recycling of funds, increased State and/or local investment, and
enhanced private investment and economic development opportunities.
There is an important distinction between the SIB provisions in the
NHS Act and TEA-21. For SIBs operating under the provisions of the NHS
Act, all ``first generation'' SIB assisted projects are subject to
Federal requirements. Federal requirements, however, do not apply to
SIB projects funded with ``second and subsequent generation'' SIB
funds--i.e., funds derived from repayment proceeds of the first
generation projects. All SIB projects assisted with TEA-21 funds are
subject to Federal requirements regardless of whether they are first
generation projects or financed from repayment proceeds of previously
assisted projects. Most States seem to prefer the NHS Act provision
that does not expand the application of Federal requirements.
Question 2. In my statement I mentioned that the State of South
Carolina is undertaking what would be 27 years worth of projects using
traditional Federal-aid funding in a span of 7 years. They are able to
accomplish this through various transportation financing mechanisms.
What challenges does a State face if they use this approach to ``jump
start'' project construction? Are programs like those helping or
harming the State's future ability to invest in infrastructure?
Response. One significant challenge involves a State's ability to
manage a sudden increase in the number of projects. Another challenge
relates to the availability of contractors to perform the work. South
Carolina has addressed the first challenge by supplementing its own
staff with consultants. In addition, the State has not, to date,
reported problems with the availability of contractors.
Accelerating the start of transportation infrastructure projects
can result in the twin benefits of (1) cost savings from reduced cost
escalation due to inflation and increases in right-of-way costs and (2)
earlier returns on economic and safety benefits provided by the new
facility.
At this point, we are not aware of instances in which the use of
financing mechanisms to ``jump start'' projects has jeopardized a
State's furture ability to invest in infrastructure. For example,
States that have issued GARVEE bonds thus far have judiciously imposed
coverage tests and dollar limits that they believe are appropriate and
marketable. GARVEE bonds are State-issued bonds whose repayment source
is future Federal-aid highway apportionments.
Question 3. AASHTO is proposing a Transportation Finance
Corporation (TFC) be created in the next reauthorization to increase
the size of the Federal program. The TFC would be involved in various
financing mechanisms such as bonding. Has DOT investigated or
researched similar ideas? What are your thoughts on the viability of
such an approach?
Response. DOT is currently formulating its highway reauthorization
policies, but has not finalized its proposals. DOT has considered a
variety of alternative financing approaches and has solicited input
from all relevant stakeholders.
Question 4. In your statement you mention that DOT is pursuing more
avenues for transportation financing. We are very interested in this
matter including looking at Federal loan guarantees, bonding, tax
incentives to purchasing bonds, and a range of other options. One
concept I heard was ``adapting the financing techniques using other
public works sectors''. Could you give us examples of other public
works techniques? How applicable would they be to transportation
investment? What other innovative financing approaches should we work
with you on? Are there other models which have worked well in other
areas which could be helpful here--for example, the Farm Credit System
sells securities to raise funds to make loans. What existing financing
ideas regarding other Departments, Government Sponsored Enterprises,
Federal or State agencies, or private entities should we at least
consider in terms of the reauthorization?
Response. One mechanism that is currently available for certain
major public infrastructure projects--but not highways--is private
activity bonds. Private activity bonds are tax-exempt financings issued
for certain privately developed and operated public infrastructure.
Examples of projects that are currently eligible for private activity
bonds are airport facilities; docks and wharves; water, wastewater and
solid waste disposal facilities; mass commuting facilities; and high
speed intercity rail facilities. Whether private activity bonds would
be a useful tool for highway financing could be worth investigation.
__________
Statement of JayEtta Z. Hecker Director, Physical Infrastructure
Issues, General Accounting Office
Mr. Chairman and members of the committees: We are pleased to be
here today to discuss alternative financing for surface transportation
infrastructure projects. As Congress considers reauthorizing the
Transportation Equity Act for the 21st Century (TEA-21) in 2003, it
does so in the face of a continuing need for the Nation to invest in
its surface transportation infrastructure and at a time when both the
Federal and State governments are experiencing severe financial
constraints.\1\ Many observers are concerned that a significant gap
exists between the availability of funds and immediate needs. In the
longer term, questions have been raised about the financial capacity of
the Highway Trust Fund to sustain current and future levels of highway
and transit spending. This is of particular concern since Congress has
by law established a direct link between Highway Trust Fund revenues
and surface transportation spending levels.
---------------------------------------------------------------------------
\1\Performance Budgeting: Opportunities and Challenges. (GAO-02-
1106T, Sept.19, 2002).
---------------------------------------------------------------------------
In recent years, as transportation needs have grown, Congress
provided States--in the National Highway System Designation Act of 1995
(NHS) and TEA-21--additional means to make highway investments through
alternative financing mechanisms. These alternative mechanisms included
State Infrastructure Banks (SIBs)--revolving funds to make or guarantee
loans to approved projects; Grant Anticipation Revenue Vehicles
(GARVEEs)--which are State issued bonds or notes repayable with future
Federal-aid; and credit assistance under the Transportation
Infrastructure Finance and Innovation Act (TIFIA)--including loans,
loan guarantees, and lines of credit. All are part of the Federal
Highway Administration's (FHWA's) Innovative Finance Program. As the
time draws nearer to reauthorizing TEA-21, information is needed about
the performance of these tools and the potential for these and other
proposed tools to help meet the nation's surface transportation
infrastructure investment needs.
At the request of your Committees, we are examining a range of
surface transportation financing issues, including FHWA's Innovative
Finance Program and proposed alternative financing approaches. My
testimony today is based on the preliminary results of our work and
discusses (1) the use and performance of existing innovative financing
tools and the factors limiting their use, and (2) the prospective costs
of current and newly proposed alternative financing techniques for
meeting surface transportation infrastructure investment needs. I will
also discuss issues concerning the potential costs and benefits of
expanding alternative financing mechanisms to meet our nation's surface
transportation needs. My testimony is based on our review of applicable
laws, FHWA's evaluation studies and other reports concerning its
Innovative Financing Program, and interviews with FHWA officials,
transportation officials in eight States, and bond rating companies. It
is also based on a cost comparison we conducted of four current and
newly proposed financing techniques.
In summary:
A number of States are using existing alternative
financing tools such as State Infrastructure Banks, GARVEE bonds, and
TIFIA loans. These tools can provide States with additional options to
accelerate projects and leverage Federal assistance--they can also
provide greater flexibility and more funding techniques. However, a
number of factors can limit the use of these tools, including some
States' preference not to use the tools, restrictions in State law on
using them, and restrictions in Federal law on the number of States and
types of projects that can use them.
Federal funding of surface transportation investments
includes Federal-aid highway program grant funding appropriated by
Congress out of the Highway Trust Fund, loans and loan guarantees, and
bonds that are issued by States and that are exempt from Federal
taxation. In addition, the use of tax credit bonds--where investors
receive a tax credit against their Federal income taxes instead of
interest payments from the bond issuers--have been proposed for helping
to finance surface transportation investments. Because each of these
financing mechanisms is structured differently, we determined that the
total cost of providing $10 billion in infrastructure investment using
each of these existing or proposed mechanisms ranges from $10 billion
to over $13 billion (in present value terms). The mechanisms that
involve greater borrowing from the private sector, such as tax-exempt
bonds and tax credit bonds, require the least amount of public outlays
up front. However, those same mechanisms have the highest long-term
costs to the public sector participants in the investments because the
latter must compensate the private investors for the risks that they
assume. With respect to the Federal Government's contribution, tax
credit bonds are the most costly mechanism, while TIFIA loans and tax
exempt bonds are the least costly.
Expanding the use of alternative financing mechanisms has
the potential to stimulate additional investment and private
participation. But expanding investment in our nation's highways and
transit systems raises basic questions of who pays, how much, and when.
How alternative financing mechanisms are structured determines how much
of the needs are met through Federal funding and how much are met by
the States and others. The structure of these mechanisms also
determines how much of the cost of meeting our current needs are met by
current users and taxpayers versus future users and taxpayers.
Background
The Federal-aid highway program is financed through motor fuel
taxes and other levies on highway users. Federal aid for highways is
provided largely on a cash basis from the Highway Trust Fund. States
have financed roads primarily through a combination of State revenues
and Federal aid. Typically, States raise their share of the funds by
taxing motor fuels and charging user fees. In addition, debt
financing--issuing bonds to pay for highway development and
construction--represents about 10 percent of total State funding for
highways, although some States make greater use of borrowing than
others.
Federal-aid highway funding to States is typically in the form of
grants. These grants are distributed from the Highway Trust Fund and
apportioned to States based on a series of funding formulas. Funding is
subject to grant-matching rules--for most federally funded highway
projects, an 80-percent Federal and 20-percent State funding ratio.
States are subject to pay-as-you-go rules where they obligate all of
the funds needed for a project up front and are reimbursed for project
costs as they are incurred.
In the mid-1990's, FHWA and the States tested and evaluated a
variety of innovative financing techniques and strategies.\2\ Many
financing innovations were approved for use through administrative
action or legislative changes under NHS and TEA-21. Three of the
techniques approved were SIBs, GARVEEs, and TIFIA loans.\3\ SIBs are
State revolving loan funds that make loans or loan guarantees to
approved projects; the loans are subsequently repaid, and recycled back
into the revolving fund for additional loans. GARVEEs are any State
issued bond or note repayable with future Federal-aid highway funds.
Through the issuance of GARVEE bonds, projects are able to meet the
need for up-front capital as well as use future Federal highway dollars
for debt service. TIFIA allows FHWA to provide credit assistance, up to
33 percent of eligible project costs, to sponsors of major
transportation projects. Credit assistance can take the form of a loan,
loan guarantee, or line of credit. See appendix II for additional
information about these financing techniques.
---------------------------------------------------------------------------
\2\FHWA uses the term ``innovative finance'' to refer to any
funding measure other than grants to States appropriated from the
Highway Trust Fund. Most of the innovative measures entail debt
financing. The term is used to contrast that approach with traditional
methods of funding highway projects.
\3\FHWA's test and evaluation research initiative (TE-045)
evaluated a number of other innovations, including flexible match, toll
credits, advance construction, partial conversion of advance
construction, and tapered match. Many of these techniques were
subsequently approved for use.
---------------------------------------------------------------------------
According to FHWA, the goals of its Innovative Finance Program are
to accelerate projects by reducing inefficient and unnecessary
constraints on States' management of Federal highway funds; expand
investment by removing barriers to private investment; encourage the
introduction of new revenue streams, particularly for the purpose of
retiring debt obligations; and reduce financing and related costs, thus
freeing up the savings for investments into the transportation system
itself. When Congress established the TIFIA program in TEA-21, it set
out goals for the program to offer sponsors of large transportation
projects a new tool to leverage limited Federal resources, stimulate
additional investment in our nation's infrastructure, and encourage
greater private sector participation in meeting our transportation
needs.
Alternative Financing Mechanisms Offer States Options, But Factors
Limit Their Use
Over the last 8 years, many States have used one or more of the
FHWA-sponsored alternative financing tools to fund their highway and
transit infrastructure projects. As of June 2002:
32 States (including the Commonwealth of Puerto Rico)
have established SIBs and have entered into 294 loan agreements with a
dollar value of about $4.06 billion;
9 States (including the District of Columbia and
Commonwealth of Puerto Rico) have entered into TIFIA credit assistance
agreements for 11 projects, representing $15.4 billion in
transportation investment; and
6 States have issued GARVEE bonds with face amounts
totaling $2.3 billion.
These mechanisms have given States additional options to accelerate
the construction of projects and leverage Federal assistance. It has
also provided them with greater flexibility and more funding
techniques.
Accelerate Project Construction
States' use of innovative financing techniques has resulted in
projects being constructed more quickly than they would be under
traditional pay-as-you-go financing. This is because techniques such as
SIBs can provide loans to fill a funding gap, which allows the project
to move ahead. For example, using a $25 million SIB loan for land
acquisition in the initial phase of the Miami Intermodal Center,
Florida accelerated the project by 2 years, according to FHWA.
Similarly, South Carolina used an array of innovative finance tools
when it undertook its ``27 in 7 program''--a plan to accomplish
infrastructure investment projects that were expected to take 27 years
and reduce that to just 7 years. Officials in the States that we
contacted that were using FHWA innovative finance tools noted that
project acceleration was one of the main reasons for using them.
Leverage Federal Investments
Innovative finance-in particular the TIFIA program-can leverage
Federal funds by attracting additional nonFederal investments in
infrastructure projects. For example, the TIFIA program funds a lower
share of eligible project costs than traditional Federal-aid programs,
thus requiring a larger investment by other, non-Federal funding
sources. It also attracts private creditors by assuming a lower
priority on revenues pledged to repay debt. Bond rating companies told
us they view TIFIA as ``quasi-equity'' because the Federal loan is
subordinate to all other debt in terms of repayments and offers debt
service grace periods, low interest costs, and flexible repayment
terms.
It is often difficult to measure precisely the leveraging effect of
the Federal investment. As a recent FHWA evaluation report noted, just
comparing the cost of the Federal subsidy with the size of the overall
investment can overstate the Federal influence--the key issue being
whether the projects assisted were sufficiently credit-worthy even
without Federal assistance and the Federal impact was to primarily
lower the cost of the capital for the project sponsor.
However, TIFIA's features, taken together, can enhance senior
project debt ratings and thus make the project more attractive to
investors. For example, the $3.2 billion Central Texas Turnpike
project--a toll road to serve the Austin-San Antonio corridor--received
a $917 million TIFIA loan and will use future toll revenues to repay
debt on the project, including revenue bonds issued by the Texas
Transportation Commission and the TIFIA loan. According to public
finance analysts from two ratings firms, the project leaders were able
to offset potential concerns about the uncertain toll road revenue
stream by bringing the TIFIA loan to the project's financing.
Provide Greater Flexibility And Additional Financing Techniques
FHWA's innovative finance techniques provide States with greater
flexibility when deciding how to put together project financing. By
having access to various alternatives, States can finance large
transportation projects that they may not have been able to build with
pay-as-you-go financing. For example, faced with the challenge of
Interstate highway needs of over $1.0 billion, the State of Arkansas
determined that GARVEE bonds would make up for the lack of available
funding. In June 1999, Arkansas voters approved the issuance of $575
million in GARVEE bonds to help finance this reconstruction on an
accelerated schedule. The State will use future Federal funds, together
with the required State matching funds and the proceeds from a diesel
fuel tax increase, to retire the bonds. The GARVEE bonds allow Arkansas
to rebuild approximately 380 miles, or 60 percent of its total
Interstate miles, within 5 years.
Factors Can Limit the Use Finance Tools
Although FHWA's innovative financing tools have provided States
with of additional options for meeting their needs, a number of factors
can limit the use of these tools.
State DOTs are not always willing to use Federal
innovative financing tools, nor do they always see advantages to using
them. For example, officials in two States indicated that they had a
philosophy against committing their Federal aid funding to debt
service. Moreover, not all States see advantages to using FHWA
innovative financing tools. For example, one official indicated that
his State did not have a need to accelerate projects because the State
has only a few relatively small urban areas and thus does not face the
congestion problems that would warrant using innovative financing tools
more often. Officials in another State noted that because their DOT has
the authority to issue tax-exempt bonds as long as the State has a
revenue stream to repay the debt, they could obtain financing on their
own and at lower cost.
Not all State DOTs have the authority to use certain
financing mechanisms, and others have limitations on the extent to
which they can issue debt. For example, California requires voter
approval in order to use its allocations from the Highway Trust Fund to
pay for debt servicing costs. In Texas, the State constitution
prohibits using highway funds to pay the State's debt service. Other
States limit the amount of debt that can be incurred. For example,
Montana has a debt ceiling of $150 million and is now paying off bonds
issued in the late 1970's and early 1980's and plans to issue a GARVEE
bond in the next few years.
Some financing tools have limitations set in law. For
example, five States are currently authorized to use TEA-21 Federal-aid
funding to capitalize their SIBs. Although other States have created
SIBs and use them, they could not use their TEA-21 Federal-aid funding
to capitalize them. Similarly, TIFIA credit assistance can be used only
for certain projects. TIFIA's requirement that, in general, projects
cost at least $100 million restricts its use to large projects.
Costs and Risks of Alternative Financing Mechanisms Vary
We assessed the costs that Federal, State and local governments (or
special purpose entities they create) would incur to finance $10
billion in infrastructure investment using four current and newly
proposed financing mechanisms for meeting infrastructure investment
needs.\4\ To date, most Federal funding for highways and transit
projects has come through the Federal-aid highway grants--appropriated
by Congress from the Highway Trust Fund. Through the TIFIA program, the
Federal Government also provides subsidized loans for State highway and
transit projects. In addition, the Federal Government also subsidizes
State and local bond financing of highways by exempting the interest
paid on those bonds from Federal income tax. Another type of tax
preference--tax credit bonds--has been used, to a very limited extent,
to finance certain school investments. Investors in tax credit bonds
receive a tax credit against their Federal income taxes instead of
interest payments from the bond issuer.\5\ Proposals have been made to
extend the use of this relatively new financing mechanism to other
public investments, including transportation projects.
---------------------------------------------------------------------------
\4\In deriving our comparisons we use current rules and practices
relating to State matching expenditures. Specifically, when computing
the costs associated with grants we assume that States pay for 20
percent of the investment expenditures; we assume a similar matching
rate would be applied if a tax credit bond program were introduced. Our
tax-exempt bond example represents independent investments by the State
or local governments (or special purpose entities) with no Federal
support other than the tax subsidy. In the case of the direct loan
program, we assume that the $10 billion of expenditures is financed by
approximately the same combination of Federal loans, Federal grants,
State, local or special purpose entity bonds, State appropriations, and
private investment as the average project currently financed by TIFIA
loans. (See app. I for further details of our methodology). However, it
is important to note that the current rules and practices could be
revised so that any desired cost sharing between the Federal and State
governments could be achieved through any of the mechanisms.
\5\The only tax credit bonds currently in existence are Qualified
Zone Academy bonds. State or local governments may issue these bonds to
finance improvements in public schools in disadvantaged areas. The
issuance limit for these bonds is set at $400 million for 2002 and is
allocated to the States on the basis of their portion of the population
below the poverty level.
---------------------------------------------------------------------------
The use of these four mechanisms to finance $10 billion in
infrastructure investment result in differences in (1) total costs--and
how much of the cost is incurred within the short term 5-year period
and how much of it is postponed to the future; (2) sharing costs--or
the extent to which States must spend their own money, or obtain
private investment, in order to receive the Federal subsidy; and (3)
risks--which level of government bears the risk associated with an
investment (or compensates others for taking the risk). As a result of
these differences, for any given amount of highway investment, combined
and Federal Government budget costs will vary, depending on which
financing mechanism is used.
Total Costs--And Short-and Long-Term Costs--Differ
Total costs--and how much of the cost is incurred within the short
term 5year period and how much of it is postponed to the future--differ
under each of the four mechanisms. As figure 1 shows, grant funds are
the lowest-cost method to finance a given amount of investment
expenditure, $10 billion.\6\ The reason for this result is that it is
the only alternative that does not involve borrowing from the private
sector through the issuance of bonds. Bonds are more expensive than
grants because the governments have to compensate private investors for
the risks that they assume (in addition to paying them back the present
value of the bond principal). However, because the grants alternative
does not involve borrowing, all of the public spending on the project
must be made up front. The TIFIA direct loan, tax credit bond, and tax-
exempt loan alternatives involve increased amounts of borrowing from
the private sector and, therefore, increased overall costs.
---------------------------------------------------------------------------
\6\We present our results in present value terms so that the value
of dollars spent in the future are adjusted to make them comparable to
dollars spent today.
---------------------------------------------------------------------------
Grants entail the highest short term costs as these costs, in our
example, are all incurred on a pay-as-you-go basis. The tax-exempt bond
alternative, which involves the most borrowing and has the highest
combined costs, also requires the least amount of public money up
front.\7\
---------------------------------------------------------------------------
\7\The results presented in figure 1 were computed using current
interest rates, which are relatively low by historical standards. At
higher interest rates, the combined costs of the alternatives that
involve bond financing would be higher, while the costs of grants would
remain the same. If we had used bonds with 20-year terms, instead of
30-year terms, in our examples, the costs of the three alternatives
that involve bond financing would be lower, but they all would still be
greater than the costs of grants.
Alternatives Result in Different Shares of the Cost
There are significant differences across the four alternatives in
the cost sharing between Federal and State governments. (See fig. 2).
Federal costs would be highest under the tax credit bond alternative,
under which the Federal Government pays the equivalent of 30 years of
interest on the bonds. Grants are the next most costly alternative for
the Federal Government. Federal costs for the tax-exempt bond and TIFIA
loan alternatives are significantly lower than for tax credit bonds and
grants.\8\
---------------------------------------------------------------------------
\8\Using different assumptions could produce different results.
For example, Congress could reduce the Federal cost differences across
the four alternatives by establishing higher State matching
requirements for those programs. In the case of tax credit bonds,
setting the rate of credit to substitute for only a fraction of the
interest that bond investors would demand would require States to pay
the difference.
In some past and current proposals for using tax credit bonds to
finance transportation investments, the issuers of the bonds would be
allowed to place the proceeds from the sales of some bonds into a
``sinking fund'' and, thereby, earn investment income that could be
used to redeem bond principal. This added feature would reduce (or
eliminate) the costs of the bond financing to the issuers, but this
would come at a significant additional cost to the Federal Government.
For example, in our example where States issue $8 billion of tax credit
bonds to finance highway projects, if the States were allowed to issue
an additional $ 2.4 billion of bonds to start a sinking fund, they
would be able to earn enough investment income to pay back all of the
bonds without raising any of their own money. However, this added
benefit for the States could increase costs to the Federal Government
by about 30 percent--an additional $2.7 billion (in present value),
raising the total Federal cost to $11.7 billion.
The Federal Role in Bearing Investment Risk Varies
In some cases private investors participate in highway projects,
either by purchasing ``nonrecourse'' State bonds that will be repaid
out of project revenues (such as tolls) or by making equity investments
in exchange for a share of future toll revenues.\9\ By making these
investments the investors are taking the risk that project revenues
will be sufficient to pay back their principal, plus an adequate return
on their investment. In the case where the nonrecourse bond is a tax-
exempt bond, the State must pay an interest rate that provides an
adequate after-tax rate of return, including compensation for the risk
assumed by the investors. By exempting this interest payment from
income tax, the Federal Government is effectively sharing the cost of
compensating investors for risk. Nevertheless, the State still bears
some of the risk-related cost and, therefore has an incentive to either
select investment projects that have lower risks, or select riskier
projects only if the expected benefits from those projects are large
enough to warrant taking on the additional risk.
---------------------------------------------------------------------------
\9\A nonrecourse bond is not backed by the full faith and credit
of the State or local government issuer. Purchasers of such bonds do
not have recourse to the issuer's taxing authority for bond repayment.
---------------------------------------------------------------------------
In the case of a tax credit bond where project revenues would be
the only source of financing to redeem the bonds and the Federal
Government would be committed to paying whatever rate of credit
investors would demand to purchase bonds at par value, the Federal
Government would bear all of the cost of compensating the investors for
risk.\10\ States would no longer have a financial incentive to balance
higher project risks with higher expected project benefits.
Alternatively, the credit rate could be set equal to the interest rate
that would be required to sell the average State bonds (issued within
the same timeframe) at par value. In that case, States would bear the
additional cost of selling bonds for projects with above-average risks.
---------------------------------------------------------------------------
\10\In the case of Qualified Zone Academy Bonds the statute calls
for the credit rate to be set so that the bonds sell at par. Selling at
par means that the issuer can sell a bond with a face value of $1,000
to an investor for $1,000. If, alternatively, the credit rate were set
at an average interest rate, bonds for riskier projects would have to
be sold below par (e.g., a bond with a $1,000 face value might sell for
only $950), meaning that the issuer receives less money to spend for a
given amount of bonds issued. Conversely, bonds sold for less risky
projects could be sold above par, so that issuers receive more funds
than the face value of the bonds issued.
---------------------------------------------------------------------------
In the case of a TIFIA loan for a project that has private sector
participation, the Federal loan does not compensate the private
investors for their risk; instead, the Federal Government assumes some
of the risk and, thereby, lowers the risk to the private investors and
lowers the amount that States have to pay to compensate for that risk.
In summary, Mr. Chairman, alternative financing mechanisms have
accelerated the pace of some surface transportation infrastructure
improvement projects and provided States additional tools and
flexibility to meet their needs--goals of FHWA's Innovative Finance
Program. FHWA and the States have made progress to attain the goal
Congress set for the TIFIA program--to stimulate additional investment
and encourage greater private sector participation--but measuring
success involves measuring the leverage effect of the Federal
investment, which is often difficult. Our work raises a number of
issues concerning the potential costs and benefits of expanding
alternative financing mechanisms to meet our nation's surface
transportation needs. Congress likely will weigh these potential costs
and benefits as it considers reauthorizing TEA-21.
Expanding the use of alternative financing mechanisms has the
potential to stimulate additional investment and private participation.
But expanding investment in our nation's highways and transit systems
raises basic questions of who pays, how much, and when. How alternative
financing mechanisms are structured determines how much of the needs
are met through Federal funding and how much are met by the States and
others. The structure of these mechanisms also determines how much of
the cost of meeting our current needs are met by current users and
taxpayers versus future users and taxpayers.
While alternative finance mechanisms can leverage Federal
investments, they are, in the final analysis, different forms of debt
financing. This debt ultimately must be repaid, with interest, either
by highway users--through tolls, fuel taxes, or licensing and vehicle
fees--or by the general population through increases in general fund
taxes or reductions in other government services. Proposals for tax
credit bonds would shift the costs of highway investments away from the
traditional user-financed sources, unless revenues from the Highway
Trust Fund are specifically earmarked to pay for these tax credits.
Mr. Chairman this concludes my prepared statement. I would be
pleased to answer any questions you or other members of the Committees
have.
______
Appendix I: Methodology for Estimating the Costs of Transportation
Financing Alternatives
We estimated the costs that the Federal, State or local governments
(or special purpose entities they create) would incur if they financed
$10 billion in infrastructure investment using each of four alternative
financing mechanisms: grants, tax credit bonds, tax-exempt bonds, and
direct Federal loans. The following subsections explain our cost
computations for each alternative. We converted all of our results into
present value terms, so that the value of the dollars spent in the
future are adjusted to make them comparable to dollars spent today.\1\
This adjustment is particularly important when comparing the costs of
bond repayment that occur 30 years from now with the costs of grants
that occur immediately.
---------------------------------------------------------------------------
\1\For example, current interest rates on long-term bonds indicate
that, to the government and investors, the present value of a dollar to
be spent 30 years from now is less than 25 cents.
---------------------------------------------------------------------------
The Cost of Grants
We estimated the cost to the Federal and State governments of
traditional grants with a State match. We assume the State was
responsible for 20 percent of the investment expenditures. We then
found the percentage of Federal grants such that the Federal grant plus
the State match totaled $10 billion. This form of matching resulted in
the State being responsible for $2 billion of the spending and the
Federal Government being responsible for $8 billion.
The Cost of Tax Credit Bonds
We estimated the cost to the Federal and State governments of
issuing $8 billion in tax credit bonds with a State match of $2
billion. The cost to the Federal Government equals the amount of tax
credits that would be paid out over a given loan term.\2\ We estimated
the amount of credit payment in a given year by multiplying the amount
of outstanding bonds in a given year by the credit rate. We assumed
that the credit rate would be approximately equal to the interest rates
on municipal bonds of comparable maturity, grossed up by the marginal
tax rate of bond purchasers.\3\ For the results presented in figures 1
and 2 we assumed that the bonds would have a 30-year term and would
have a credit rating between Aaa and Baa. The cost to the issuing
States would consist of the repayment of bond principal in future
years, plus the upfront cost of $2 billion in State appropriations for
the matching contribution.
---------------------------------------------------------------------------
\2\Although the credits that investors earn on tax credit bonds
are taxable, we assume that any tax the Federal Government would gain
from this source would be offset by the tax that investors would have
paid on income from the investments they would have made if the tax
credit bonds were not available for purchase.
\3\For the tax credit and tax-exempt bond computations we based
our rates on municipal bond interest rates reported in the August 22,
2002 issue of the Bond Buyer.
---------------------------------------------------------------------------
The Cost of Tax-Exempt Bonds
The cost of tax-exempt bonds to the State or local government (or
special purpose entity) issuers would consist of the interest payments
on the bonds and the repayment of bond principal. The cost to the
Federal Government would equal the taxes forgone on the income that
bond purchasers would have earned form the investments they would have
made if the tax-exempt bonds were not available for purchase. For the
results presented in figures 1 and 2 we made the same assumptions
regarding the terms and credit rating of the bonds as we did for the
tax credit bond alternative. We computed the cost of interest payments
by the State by multiplying the amount of outstanding bonds by the
current interest rate for municipal bonds with the same term and credit
rating. We assumed that the pretax rate of return that bond purchasers
would have earned on alternative investments would have been equal to
the municipal bond rate divided by one minus the investors' average
marginal tax rate. Consequently, the Federal revenue loss was equal to
that pretax rate of return, multiplied by the amount of tax-exempt
bonds outstanding each year (in this example), and then multiplied by
the investors' average marginal tax rate.
Direct Federal Loans
In order to have our direct loan example reflect the financing
packages typical of current TIFIA projects, we used data from FHWA's
June 2002 Report to Congress\4\ to determine what shares of total
project expenditures were financed by TIFIA direct loans, Federal
grants, bonds issued by State or local governments or by special
purpose entities, private investment, and other sources. We assumed
that the $10 billion of expenditures in our example was financed by
these various sources in roughly the same proportions as they are used,
on average, in current TIFIA projects. We estimated the Federal and
nonFederal costs of the grants and bond financing components in the
same manner as we did for the grants and tax-exempt bond examples
above. To compute the Federal cost of the direct loan component, we
multiplied the dollar amount of the direct loan in our example by the
average amount of Federal subsidy per dollar of TIFIA loans, as
reported in the TIFIA report. In the results presented in figure 1,
this portion of the Federal cost amounted to $130 million. The
nonFederal costs of the loan component consist of the loan repayments
and interest payments to the Federal Government. We assumed that the
term of the loan was 30 years and that the interest rate was set equal
to the Federal cost of funds, which is TIFIA's policy. The private
investment (other than through bonds), which accounted for less than 1
percent of the spending, and the ``other'' sources, which accounted for
about 3 percent of the spending, were treated as money spend
immediately on the project.
---------------------------------------------------------------------------
\4\U.S. Department of Transportation, TIFIA Report to Congress,
June 2002.
---------------------------------------------------------------------------
Sensitivity Analysis
A number of factors--including general interest rate levels, the
terms of the bonds or loans, the individual risks of the projects being
financed--affect the relative costs of the various alternatives. For
this reason, we examined multiple scenarios for each alternative. In
particular, current interest rates are relatively low by historical
standards. In our alternative scenarios we used higher interest rates,
typical of those in the early 1990's. At higher interest rates, the
combined costs of the alternatives that involve bond financing would be
higher, while the costs of grants would remain the same. If we had used
bonds with 20-year terms, instead of 30-year terms in the examples, the
costs of the three alternatives that involve bond financing would be
lower, but they would still be greater than the costs of grants.
______
Appendix II: States' Use of Innovative Financing Tools
State Infrastructure Banks
One of the earliest techniques tested to fund transportation
infrastructure was revolving loan funds. Prior to 1995, Federal law did
not permit States to allocate Federal highway funds to capitalize
revolving loan funds. However, in the early 1990's, transportation
officials began to explore the possibility of adding revolving loan
fund capitalization to the list of eligible uses for certain Federal
transportation funds. Under such a proposal, Federal funding is used to
``capitalize'' or provide seed money for the revolving fund. Then money
from the revolving fund would be loaned out to projects, repaid, and
recycled back into the revolving fund, and subsequently reinvested in
the transportation system through additional loans. In 1995, the
federally capitalized transportation revolving loan fund concept took
shape as the State Infrastructure Bank (SIB) pilot program, authorized
under Section 350 of the NHS Act. This pilot program was originally
available only to a maximum of 10 States, but then was expanded under
the 1997 U.S. DOT Appropriations Act, which appropriated $150 million
in Federal general funds for SIB capitalization. TEA-21 established a
new SIB pilot program, but limited participation to four States--
California, Florida, Missouri, and Rhode Island. Texas subsequently
obtained authorization under TEA-21. These States may enter into
cooperative agreements with the U.S. DOT to capitalize their banks with
Federal-aid funds authorized in TEA-21 for fiscal years 1998 through
2003. Of the States currently authorized, only Florida and Missouri
have capitalized their SIBs with TEA-21 funds.
Table 1: State's use of SIBs
----------------------------------------------------------------------------------------------------------------
Number of Loan agreement amount Disbursements to date
State agreements ($ 000) ($ 000)
----------------------------------------------------------------------------------------------------------------
Alabama....................................
Alaska..................................... 1 $2,737 $2,737
Arizona.................................... 37 $424,287 $216,104
Arkansas................................... 1 $31 $31
California.................................
Colorado................................... 2 $400 $400
Connecticut................................
Delaware................................... 1 $6,000 $6,000
D.C........................................
Florida.................................... 32 $465,000 $98,600
Georgia....................................
Hawaii.....................................
Idaho......................................
Illinois...................................
Indiana.................................... 1 $3,000 $1,122
Iowa....................................... 2 $2,874 $2,874
Kansas.....................................
Kentucky...................................
Louisiana..................................
Maine...................................... 23 $1,758 $1,478
Maryland...................................
Massachusetts..............................
Michigan................................... 23 $17,034 $13,033
Minnesota.................................. 15 $95,719 $41,000
Mississippi................................
Missouri................................... 11 $73,251 $67,801
Montana....................................
Nebraska................................... 1 $3,360 $3,360
Nevada.....................................
New Hampshire..............................
New Jersey.................................
New Mexico................................. 1 $541 $541
New York................................... 2 $12,000 $12,000
North Carolina............................. 1 $1,575 $1,575
North Dakota............................... 2 $3,565 $1,565
Ohio....................................... 39 $141,231 $116,422
Oklahoma...................................
Oregon..................................... 12 $17,471 $17,471
Pennsylvania............................... 23 $17,403 $17,403
Puerto Rico................................ 1 $15,000 $15,000
Rhode Island............................... 1 $1,311 $1,311
South Carolina............................. 6 $2,382,000 $1,124,000
South Dakota............................... 1 $11,740 $11,740
Tennessee.................................. 1 $1,875 $1,875
Texas...................................... 37 $252,013 $225,461
Utah....................................... 1 $2,888 $2,888
Vermont.................................... 3 $1,023 $1,000
Virginia................................... 1 $18,000 $18,000
Washington................................. 1 $700 $385
West Virginia..............................
Wisconsin.................................. 3 $1,814 $1,814
Wyoming.................................... 8 $77,977 $42,441
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Total...................................... 294 $4,055,578 $2,067,432
----------------------------------------------------------------------------------------------------------------
Source: FHWA, June 2002
Transportation Infrastructure Finance and Innovation Act (TIFIA) credit
assistance
As part of TEA-21, Congress authorized the Transportation
Infrastructure Finance and Innovation Act of 1998 (TIFIA) to provide
credit assistance, in the form of direct loans, loan guarantees, and
standby lines of credit to projects of national significance. The TIFIA
legislation authorized $10.6 billion in credit assistance and $530
million in subsidy cost to cover the expected long-term cost to the
government for providing credit assistance. TIFIA credit assistance is
available to highway, transit, passenger rail and multi-modal project,
as well as projects involving installation of intelligent
transportation systems (ITS).
The TIFIA statute sets forth a number of prerequisites for
participation in the TIFIA program. The project costs must be
reasonably expected to total at least $100 million, or alternatively,
at least 50 percent of the State's annual apportionment of Federal-aid
highway funds, whichever is less. For projects involving ITS, eligible
project costs must be expected to total at least $30 million. Projects
must be listed on the State's transportation improvement program, have
a dedicated revenue source for repayment, and must receive an
investment grade rating for their senior debt. Finally, TIFIA
assistance cannot exceed 33 percent of the project costs and the final
maturity date of any TIFIA credit assistance cannot exceed 35 years
after the project's substantial completion date.
Table 2: State's use of TIFIA credit assistance
--------------------------------------------------------------------------------------------------------------------------------------------------------
Project Project cost ($ Credit amount ($ Primary revenue
State Project name description millions) Instrument type millions) pledge
--------------------------------------------------------------------------------------------------------------------------------------------------------
California...................... SR 125 Toll--1999. Road Highway/ $455.............. Direct loan....... $94.000 User......
Bridge Line of credit $33.000 Charges
Construction of
11 mi 4-lane toll
road in San Diego.
San Francisco- Replacement of SF- $3,305 Direct loan $450.000 Toll
Oakland Bay Oakland Bay surcharge.
Bridge--2002. Bridge east span.
D.C............................. Washington Metro-- Transit capital $2,324 Guarantee.. $600.000 Other....
1999. improvement
program.
Florida......................... Miami Intermodal Multi-modal center $1,349 Direct loan $269.076 Tax
Center--1999. for Miami Direct loan revenue.
Intern'l Airport, $163.676 User
including car charges
rental garage,
intermodal
center, people
mover, and
roadways.
Nevada.......................... Reno Rail Corridor Intermodal........ $280 Direct loan.. $73.500 Other.....
New York........................ Farley Penn Intermodal........ $800 Direct loan..
Station--1999.
$140.000 Other....
Line of credit $20.000 Other
Staten Island Transit........... $482 Direct loan.. $159.068 Other....
Ferries--2000.
Puerto Rico..................... Tren Urbano--1999. Transit rail line. $1,676 Direct loan $300.000 Tax
revenues.
South Carolina.................. Cooper River Replace double $668 Direct loan.. $215.000 Other....
Bridge. bridges over the
Cooper River,
connecting
Charleston and
Mt. Pleasant.
Texas........................... Central Texas Construct 120+ mi. $3,220 Direct loan $917.000 User
Turnpike--2001. toll facilities charges.
to ease I-35
congestion.
Washington...................... Tacoma Narrows Construct new $835 Direct loan.. $240.000 User.....
Bridge--2000. parallel bridge, Line of credit $30.000 charges
toll plaza, and (both)
approach roadways.
---------------------
Total....................... $15,393...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: FHWA, June 2002.
Grant Anticipation Revenue Vehicles (GARVEEs)
Grant anticipation revenue vehicles (GARVEEs) are another tool
States can use to finance highway infrastructure projects. GARVEE bonds
are any bond or note repayable with future Federal-aid highway funds.
The NHS Act and TEA-21 brought about changes that enabled States to use
Federal-aid highway apportionments to pay debt service and other
bondrelated expenses and strengthened the predictability of States'
Federal-aid allocation. While GARVEEs do not generate new revenue, the
new eligibility of bond-related costs for Federal-aid reimbursement
provides States with one more option for repaying debt service.
Candidate projects are typically large enough to merit borrowing rather
than pay-as-you-go grant funding; do not have access to a revenue
stream (such as local taxes or tolls) or other forms of repayment
(State appropriations); and have support from the State's DOT to
reserve a portion of future year Federal-aid highway funds to fund debt
service. In some cases, States may elect to pledge other sources of
revenue, such as State fuel tax revenue, as a backstop in the event
that future Federal-aid highway funds are not available.
Table 3: State's use of GARVEE bonds
----------------------------------------------------------------------------------------------------------------
Face amount of
State Date of issuance issue Projects Backstop financing
----------------------------------------------------------------------------------------------------------------
Alabama......................... Apr-02............ $200 million...... County Bridge All Federal
Program. construction
reimbursements.
Also insured
Arizona......................... Jun-00............ $39.4 million..... Maricopa freeway Certain sub-
May-01 $142.9 million projects. account transfers
Arkansas........................ Mar-00............ $175 million...... Interstate Full faith and
Jul-01 $185 million highways. credit of State,
plus State motor
fuel taxes
Colorado........................ May 00............ $537 million...... Any project Federal highway
Apr-01 $506.4 million financed wholly funds as
Jun-02 $208.3 million or in part by allocated
Federal funds. annually by CDOT;
other State funds
New Mexico...................... Sep-98............ $100.2 million.... New Mexico SR 44.. No backstop; bond
Feb-01 $18.5 million insurance
obtained
Ohio............................ May-98............ $70 million....... Spring-Sandusky Moral obligation
Aug-99 $20 million project and pledge to use
Sep-01 $100 million Maumee River State gas tax
Bridge funds and seek
Improvements. general fund
appropriations in
the event of
Federal shortfall
---------------------
Total....................... $2,301.7 million..
----------------------------------------------------------------------------------------------------------------
Source: FHWA, June 2002
______
Responses by JayEtta Hecker to Additional Questions from Senator Baucus
Question 1. One way of organizing some of these ideas are selling
bonds for project specific financing versus using bond proceeds to
supplement the Highway Trust Fund. Will you comment on the advantages
and disadvantages of each?
Response. Mr. Chairman, in the competition for finite
transportation resources, selling bonds to help finance a specific
project can help advance a project that might otherwise go unfunded or
be delayed. In addition, project-specific financing can be useful for
large-dollar projects that would otherwise take up a large portion of a
State's Federal highway apportioned funds in any given year. However,
as we indicated in our statement, given the restrictions in some State
laws and the views of some State officials, project-specific financing
currently has limited applicability. As a result, not all States can
use project specific financing, nor can it be used for all projects. In
addition, State officials will weigh the risks associated with project-
based bonds against the expected benefits from those projects to
determine whether the added risk is justified.
In the short term, using bond proceeds to supplement the Highway
Trust Fund would increase the available funding, and this additional
funding would then be apportioned to all the States. This approach
could enable a wider range of projects to be advanced. If the Federal
Government sold these bonds, they would be less risky than project-
specific bonds. Consequently, investors would not demand as high an
interest rate as they would for the project-specific bonds. However,
this debt would ultimately have to be repaid--either by the general
population through increases in general fund taxes or reductions in
other government services, or by earmarking funds from the Highway
Trust Fund. If funds were earmarked from the Highway Trust Fund to
repay the bonds in the future, highway funding would not be increased.
Rather, costs would be shifted to future users.
Raising new sources of funding presents Congress with the option of
devising alternatives to the existing formula-based grant program for
delivering funds, in either a project-or program-based fashion. This
could open the possibility of engaging new approaches to deal with
seemingly intractable transportation problems and national priorities.
For example, DOT and FHWA have concluded that the reliability and
effectiveness of the freight transportation system is being constrained
because of increasing demand and capacity limitations. Many observers
have questioned the ability of our surface transportation systems to
keep pace with the growing demands being placed upon them as pressure
continues to build on already congested road and rail connections to
major U.S. seaports and at border crossings. Either a project-based or
a program-based financing approach could target funds to these or other
major national priorities.
______
Responses by JayEtta Hecker to Additional Questions from Senator
Jeffords
Question 1. In your statement you make reference to the lack of
qualified personnel at the Department of Transportation in regard to
financing. How many positions (FTE) does the DOT currently have
invested in finance personnel? What is your best guess as to the
percentage of those FTEs having the necessary skill sets to advance a
more aggressive transportation financing program?
Response. Mr. Chairman, FHWA requested 2,412 FTEs for fiscal year
2003. Of these, 99 were for financial manager and financial specialist
positions. The degree to which staff in these positions are involved in
innovative finance activities varies. They include staff located in
each of FHWA's division offices in every State who have some
involvement with innovative finance, staff located in headquarters and
other locations who specialize in innovative finance, and other staff
who are not directly involved with innovative finance but need some
knowledge of it.
We have not reviewed DOT's staffing profile in sufficient detail to
determine whether the right number of personnel are performing these
functions or to assess their skills. But the department--and indeed all
Federal agencies--face a growing human capital crisis that threatens
their ability to effectively, efficiently, and economically perform
their missions and to ensure maximum government performance and
accountability for the benefit of the American public. For that reason,
as you know, we have designated strategic human capital management as a
high-risk concern governmentwide. As I mentioned in my statement, this
challenge ripples throughout the State and local transportation
agencies that build, maintain, and operate the vast preponderance of
the nation's transportation system. About 50 percent of the people who
plan, develop, and manage the nation's transportation system will
become eligible to retire in the next 5 years. A survey of State
departments of transportation conducted by the New Mexico State Highway
and Transportation Department in 1999 identified the need to attract,
hire, and retain skilled personnel as the greatest human resource
issues facing these departments. In addition, the Transportation
Research Board has cited the impending shortage of skilled personnel as
among our nation's most critical transportation issues.
In our view, addressing human capital challenges requires
comprehensive workforce planning strategies to identify the mix of
skills needed to accomplish an agency's mission, the skill mix the
agency has on hand, whether those employees are expected to retire and
when, and a recruiting and hiring strategy to fill the gaps where needs
exist. For example, any examination of the transportation finance arena
would necessarily reflect the changing nature of the surface
transportation program-from a federally funded formula grant program to
one involving a multiplicity of funding sources and delivery
mechanisms. This change requires people with new skills-for example,
persons skilled in public finance who can navigate the private capital
markets. DOT has made progress addressing its human capital concerns by
publishing its Human Resources Strategic Action Plan for 2001-2003 with
goals that call for increased human capital investments and workforce
planning. In addition, FHWA is actively working with major national and
State transportation organizations and independent experts to identify
human capital needs and innovative ways to meet them. Clearly, it is
important that the needs of financing the nation's transportation
system be part of this assessment. In January 2003, we will be
reporting further on human capital challenges faced by DOT and other
Federal agencies in our biannual high risk and performance and
accountability assessment.
Question 2. One of the outcomes of reauthorization should be the
ability to allow for more meaningful investment by the private sector
into transportation. Current transportation bonding techniques do not
seem to provide the income that the private sector is seeking since we
primarily use tax-exempt mechanism. Can you provide more insights on
how we can ``decouple'' the bonding process to make it more attractive
to these types of investors? Are there examples where such activity is
occurring?
Response. Mr. Chairman, proponents of tax credit bonds have
advocated ``decoupling'' as you suggested. These proponents contend
that if the bonds are sold as two separate components-the right to
receive the tax credits and the right to receive the principal
repayment when the bond comes due-then the bond issuer could receive
larger proceeds for selling a bond with a given face value. This
practice is known as ``stripping.'' The reason this result is expected
is that each component of the bond would be better tailored to suit the
requirements of different types of investors. For example, some
investors may prefer to receive the periodic benefit of the tax credit
and may be less interested in receiving a principal repayment in the
distant future. Other investors, such as pension funds or taxpayers
setting up individual retirement accounts, have no need for current
income or tax benefits and may simply prefer to receive a certain
amount of money at a specified future date. Therefore, the sum that the
two different types of investors would be willing to pay for the two
components is likely to be larger than the sum that either type of
investor would be willing to pay for an ``unstripped'' bond.
The practice of ``stripping'' is prevalent in the sale of interest-
bearing securities. For example, Treasury bonds with maturities of 10
years or longer generally can be sold as two separate components.
However, under current law, no existing tax credit bonds can be
stripped. A Treasury department official told us that the monitoring of
tax compliance would be more complicated if tax credit bonds were
allowed to be stripped. For example, if the tax credits ever had to be
recaptured because of noncompliance on the part of issuers, it might be
difficult to track down the recipients of the credits if those credits
had been resold separately in the secondary market.
Question 3. It seems that our current transportation financing
mechanisms work well for large-scale projects. What avenues are
available for smaller scale projects? Are there other models which have
worked well in other areas which could be helpful here--for example the
Farm Credit system sells securities to raise funds to make loans. What
existing financing ideas regarding other Departments, Government
Sponsored Enterprises, Federal or State agencies, or private entities
should we at least consider in terms of the reauthorizations?
While our current transportation financing mechanisms are--for the
most part--geared toward larger scale projects, Mr. Chairman, at least
one mechanism, SIBs, have effectively supported smaller projects.
TIFIA, as you know, is limited by statute to projects with an estimated
cost of $100 million or more, and States that have used GARVEEs have
generally done so to support the financing needs of large projects.
Although SIBs have also been used to fund some large projects-such as
the projects in South Carolina's ``27 in 7'' program-they also support
smaller projects in those States that have SIBs. For example, loans in
Missouri have averaged $7 million per project, while loans from Maine's
SIB have averaged $76,000 per project. FHWA officials told us that SIBs
have been effectively used for smaller projects that might otherwise
have received a lower priority for funding. However, these projects
have required some type of revenue stream in order for the borrower-
often a municipality-to repay the loan.
I agree with you, Mr. Chairman, that a variety of financing
mechanisms exist in different sectors to bring private participation
and investment to the table in support of public goals and purposes.
For example, as you pointed out, the Congress has created government-
sponsored enterprises (GSE) such as the Farm Credit System-as well as
Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System--to
provide support for agricultural and home lending beyond what the
financial markets would provide in their absence. These GSEs are
sophisticated financial institutions with Federal charters that grant
them benefits so that they can help achieve their public missions.
Among these benefits, GSEs can issue debt in the capital markets at
favorable interest rates to help finance a wide range of lending to
farmers and homeowners. Our work has shown that these institutions
often have unique flexibilities and play a key role in providing
services and options that are beyond the capacity of public agencies or
financial markets to provide.
However, the Congress did not decide to create these entities
lightly. Because of the sophistication of their financial operations,
the risks they face, and the requirements of their missions, GSEs
require public oversight mechanisms to ensure their safety and
soundness, and to ensure that the public purposes for which they were
created are being carried out. As such, a decision to create a GSE
might best follow a conclusion that one was uniquely positioned to
fulfill unmet national needs and priorities and that the benefit of
government sponsorship and the role of such an institution in
fulfilling those needs and priorities exceeded the costs of creating
and operating it. To date, GSEs have not been used for financing public
facilities, such as highways. We have completed an extensive body of
work on this subject and would be pleased to work with you and the
committee staff to examine more specifically the potential application
of these and other financing mechanisms to meeting our surface
transportation needs.
Question 4. I am interested in attracting private capital to
supplement the Highway Trust Fund in meeting the nation's
transportation needs. The key consideration for private investors is
the availability of a reliable revenue stream to retire debt. Where
might we turn to secure such revenue streams?
Response. Mr. Chairman, probably the most prevalent and reliable
revenue stream is the user fee. User fees can be in the form of tolls,
fuel taxes, or license and vehicle fees--and States have turned to a
variety of user fees to finance transportation projects. For example,
Arkansas imposed a diesel fuel tax to partially pay for the GARVEE
bonds issued to reconstruct the State's interstate highways, while
Illinois increased its vehicle registration fees to finance bonds for
its ``Illinois First'' project--which included a number of significant
highway renovations. User fees are increasingly taking less
conventional forms--Florida intends to repay part of its TIFIA loan for
the Miami Intermodal Center from fees levied on rental cars while New
York's Farley Penn Station TIFIA loan is to be repaid from lease
payments from the Port Authority of New York and New Jersey, revenues
from Amtrak, and rents paid from planned station retail facilities. In
addition to highway user fees, many States and localities have tapped
property-based sources of financing, including general property taxes,
real estate transfer taxes, and developer impact fees to finance
surface transporttion projects.
As we discussed in our March 2000 report (Port Infrastructure:
Financing of Navigation Projects at Small and Medium-Sized Ports), some
States allow local sponsors of Corps of Engineers' navigation projects
to levy property taxes or issue general obligation or revenue bonds.
General obligation bonds issued to support projects are generally paid
for through taxes implemented by State or local governments. Revenue
bonds issued to support a particular project are typically paid for out
of the revenues generated by that project.
__________
Statement of Janice Hahn, Member, Los Angeles City Council Chairwoman,
Alameda Corridor Transportation Authority
Mr. Chairmen, and members of the joint Committees, good morning,
and thank you for inviting me here today. My name is Janice Hahn. I am
a Los Angeles City Councilwoman and serve as Chairwoman of the
Governing Board of the Alameda Corridor Transportation Authority. The
Alameda Corridor Transportation Authority is a joint-powers authority
created by the Cities of Long Beach and Los Angeles in 1989 to oversee
the financing, design and construction of the Alameda Corridor. The
Governing Board of the Alameda Corridor Transportation Authority is a
seven-member board representing the cities of Los Angeles and Long
Beach, the ports of Los Angeles and Long Beach and the Los Angeles
County Metropolitan Transportation Authority (MTA).
On behalf of city of Los Angeles Mayor James Hahn, city of Long
Beach Mayor Beverly O'Neill, the Corridor Authority's Governing Board,
and our CEO Jim Hankla, I am honored to be here.
introduction
We are commonly called ACTA. ACTA is the public agency that built
the Alameda Corridor, a 20-mile-long freight rail expressway linking
the Ports of Los Angeles and Long Beach to the rail yards near downtown
Los Angeles. The project was monumentally complex, running through
eight different government jurisdictions in urban Los Angeles County,
requiring multiple detailed partnerships between public and private
entities, and presenting extensive engineering challenges.
One of the key partnerships that has been vital over the years has
been with the U.S. Congress. We greatly appreciate the strong support
you and your colleagues provided to ACTA in developing the innovative
loan from the Department of Transportation. We are particularly
thankful for the strong leadership demonstrated by many of you in
Congress including our two distinguished Senators, Dianne Feinstein and
Barbara Boxer along with California Congressman Stephen Horn and
Congresswoman Juanita Millender-McDonald. Without their vision and
support it is unlikely the Alameda Corridor would be in operation
today, strengthening the nation's global economic competitiveness.
Over the years there were many who doubted the Corridor project
could be built, let alone on time and on budget. But after more than 15
years of planning and 5 years of constructing the $2.4 billion Alameda
Corridor, one of the nation's largest public works projects opened on
time and on budget on April 15. Today, more than 35 freight trains per
day use the Alameda Corridor, handling containers loaded with shoes,
clothing, furniture and other products bound for store shelves
throughout the United States. They also deliver to the ports U.S. goods
such as petroleum products, machine parts, and agricultural products
for shipment to worldwide markets.
A trip from the Ports of Los Angeles and Long Beach to the
transcontinental rail yards near downtown Los Angeles used to take more
than 2 hours. It now takes about 45 minutes. As cargo volumes increase,
this enhanced speed and efficiency will be critical; more than 100
trains per day are expected on the Alameda Corridor by the year 2020.
It is important to note that ACTA is collecting revenue from these rail
shipments in amounts sufficient to meet its current and future
financial obligations.
model for success
Because of our success, the Alameda Corridor is considered a model
for how major public works projects should be constructed. The Corridor
illustrates the significance of intermodalism to the future of our
economic and transportation systems. Among those praising the Alameda
Corridor have been Transportation Secretary Norman Mineta--a long time
supporter and friend of the Corridor project--and three of his
predecessors, one from the first Bush Administration and two from the
Clinton Administration.
At our grand opening ceremony last April, Secretary Mineta said
this about the Alameda Corridor: ``Its successful completion
demonstrates what we can accomplish with innovative financing and
public-private cooperation, and it provides a powerful paradigm for the
kinds of intermodal infrastructure investment we want to encourage as
we begin working with the Congress to develop legislation reauthorizing
America's surface transportation programs.'' We were also pleased to
see that just this month in testimony before a joint hearing of the
Environment and Public Works and Commerce Committees, Associate Deputy
Secretary of Transportation Jeff Shane praised the Corridor project as
a national model. The project, he said, ``will have far-reaching
economic benefits that extend well beyond Southern California.''
Similarly, in an article written for TrafficWorld, former U.S.
Department of Transportation Secretaries Federico Pena and Samuel
Skinner said: ``The Alameda Corridor is of national significance not
only because of its direct economic impact on jobs, taxes and commodity
prices but because the corridor serves as a model of how our country
can and must expand and modernize our freight transportation system if
we are to remain a world-class trading partner.'' In addition, former
U.S. Department of Transportation Secretary Rodney Slater has also been
a supporter of the Alameda Corridor project.
We are flattered by the accolades and pleased and proud to share
our experience with those who hope to benefit from it. In fact, one of
the goals of the ACTA Governing Board is to support other projects that
promote international trade and the efficient movement of cargo.
The key to our success can be attributed to two major themes that
guided us throughout the planning, financing and construction of the
project: First is multi-jurisdictional cooperation. The Alameda
Corridor is built on the partnerships forged between competitive public
agencies and between those agencies and the private sector. We have
demonstrated that governments can work together, and they can work with
the private sector, putting aside competition for the benefit of
greater economic and societal good. Second is direct and tangible
community benefits. The Alameda Corridor provided direct community
benefits in the form of significant traffic congestion relief, job
training and other programs. We have proven that communities don't have
to sacrifice quality of life to benefit from international trade and
port and economic activity.
project need and planning
The roots of our multi-jurisdictional cooperation began to take
hold in the early 1980's, when a committee was formed by the Southern
California Association of Governments to study ways to accommodate
burgeoning trade at the Ports of Los Angeles and Long Beach. The panel
included representatives of the ports, the railroad and trucking
industries, the Army Corps of Engineers as well as local elected
officials and others. The ports had projected--accurately, it turns
out--massive cargo increases driven by the growing use of intermodal
containers transferred directly from ships to rail cars and trucks. The
volume of containers crossing the wharves doubled in the 1990's and
last year reached more than 10 million 20-foot containers per year.
That figure is expected to exceed 36 million by the year 2020. Last
year, the ports handled more than $200 billion in cargo, or about one-
quarter to one-third of the nation's waterborne commerce. This has had
huge ripple effects in Southern California and across the country in
the form of jobs, tax revenues and general economic activity.
In the early 1980's, there was growing concern about the ability of
the ground transportation system to accommodate increasing levels of
trade-related rail and truck traffic in the port area. By 1989, the
cities and ports of Los Angeles and Long Beach had joined forces to
form a joint powers authority that later became the Alameda Corridor
Transportation Authority. The agency then selected a preferred project:
consolidating four branch lines serving the ports into a 20-mile
freight rail expressway that is completely grade-separated, including a
10-mile-long 30-foot-deep trench that runs through older, economically
disadvantaged industrial neighborhoods south of downtown Los Angeles.
The project would eliminate traffic conflicts at more than 200 street-
level railroad crossings.
project financing and funding
Our broad base of cooperation is also evident in the project's
unique finance plan, which draws revenue from a range of both public
and private sources.
The linchpin of this funding plan was designation of the Alameda
Corridor as a ``high-priority corridor'' in the 1995 National Highway
System Designation Act. That designation cleared the way for Congress
to appropriate $59 million needed to back a $400 million loan to the
project from the U.S. Department of Transportation. As mentioned
previously, Senators Boxer and Feinstein, along with California
Congressman Stephen Horn and Congresswoman Juanita Millender-McDonald
and other members of our congressional delegation, were instrumental in
helping to form a bipartisan congressional coalition to support this
effort. It is important to point out that this financing arrangement
preceded the passage of TEA-21, and the associated provisions known as
TIFIA. ACTA was pleased to work cooperatively with Department of
Transportation officials and congressional staff, to be a
``trailblazer'' with the Office of Management and Budget and forge an
innovative arrangement to finance an intermodal project of national
significance.
Similarly, at the State level, ACTA worked closely with both
Republican and Democrat members of the Legislature, Governor Pete
Wilson along with the California Business, Transportation and Housing
Agency, the California Transportation Commission and the Department of
Transportation to include the project in short-and long-range plans and
to expedite State funding. At the local level, ACTA coordinated closely
with Mayor Beverly O'Neill of Long Beach and then-Mayor Richard Riordan
of Los Angeles for support of the project, and ACTA worked closely with
the Los Angeles County Metropolitan Transportation Authority to set
aside State and Federal grant funds and local transportation sales tax
revenues for use on the Alameda Corridor. And, of course, the ports
provided almost $500 million in startup funding and for the purchase of
rights-of-way.
The collective assistance offered by Federal, State and local
agencies and elected officials provided the base funding--the leverage,
if you will--for the biggest piece of our financing package--more than
$1.1 billion in proceeds from revenue bonds sold by ACTA. The bonds and
the Federal loan are being retired by use fees paid by the railroads.
The Use and Operating Agreement between ACTA and Burlington Northern
and Santa Fe Railway and Union Pacific Railroad, approved in October
1998, is truly unprecedented. Never before had the competitive
railroads cooperated on a project to the extent that they did on the
Alameda Corridor. Like the ports, the BNSF and the UP put aside their
rivalry to cooperate on a project with positive economic implications
at the national, regional and local levels.
In the end, funding for the Alameda Corridor came from multiple
public and private sources and resulted from bipartisan support. The
funding breaks down roughly like this: 46 percent from ACTA revenue
bonds; 16 percent from the U.S. Department of Transportation loan; 16
percent from the ports; 16 percent from California State and local
grants, much of it administered by the Los Angeles County Metropolitan
Transportation Authority, and 6 percent from other sources.
project construction
As with project planning and funding, construction also required
extensive cooperation and coordination among multiple entities.
The Alameda Corridor included, among other elements, construction
of 51 separate bridge structures, relocation of 1,700 utilities,
pouring of 27,000 concrete pilings and removal of 4 million cubic yards
of dirt excavated to make way for the Mid-Corridor Trench. More than
1,000 professionals from 124 engineering and construction management
firms, as well as more than 8,000 construction workers, contributed to
the project. Moreover, construction occurred in eight different
government jurisdictions. Any project of the Alameda Corridor's size
and scope inevitably encounters hurdles in the construction process
that can lead to delays. There are many reasons why our project stayed
on schedule, but at the top of the list are our permit facilitating
agreements with corridor communities and utility providers, and our
decision to use a design-build contract for the Mid-Corridor Trench.
ACTA saved an estimated 18 months on project delivery by utilizing
the design-build approach for our largest contract, the Mid-Corridor
Trench. The design-build approach allows for the overlapping of some
design and construction work and provides greater control over cost and
scheduling. Design-build authority was obtained through an ordinance
approved by the Los Angeles City Council. This enabled ACTA to subject
the contractor to significant liquadative damages if the contract was
not completed by a fixed date at a fixed price.
Before construction began, ACTA negotiated separate Memoranda of
Understanding with each city along the route, detailing expedited
permitting processes, haul routes for construction traffic and the
protocol for lane closures and temporary detours. By agreeing in
advance on these and other issues, we streamlined a complex
construction process and saved time and money.
direct community benefits
One key to securing the MOUs and additional community cooperation
and support was to deliver on our promises of direct community
benefits.
By eliminating more than 200 at-grade railroad crossings, the
Alameda Corridor is projected to reduce emissions from idling trucks
and automobiles by 54 percent, slash delays at railroad crossings by 90
percent and cut noise pollution by 90 percent. The project also reduces
traffic congestion through improvements to Alameda Street. But from the
start, the ACTA Governing Board wanted to leave a lasting legacy beyond
construction of a public works project. This was accomplished by
creating several community-based programs.
Through its contractors and various community partnerships, ACTA
administered several programs designed to provide local residents and
businesses with direct benefits that would long outlive construction.
For example:
The Alameda Corridor Business Outreach Program offered
technical assistance, networking workshops and aggressive outreach to
provide disadvantaged business enterprises with the tools they need to
compete for work on the project. Disadvantaged firms--known as DBEs--
have earned contracts worth more than $285 million, meeting our goal
for 22 percent DBE participation.
The goal of our Alameda Corridor Job Training and
Development Program was to provide job training and placement services
to 1,000 residents of corridor communities. We exceeded that goal--
almost 1,300 residents received construction industry-specific job
training, and of those 637 were placed in construction-trade union
apprenticeships.
The Alameda Corridor Conservation Corps provided life
skills training to 447 young adults from corridor communities,
exceeding the goal of 385. While studying for high school class
credits, these young adults completed dozens of community
beautification projects in corridor communities, including graffiti
eradication, tree-planting and debris pickup. After completing the 3-
month program, recruits had the option to join the Los Angeles or Long
Beach conservation corps chapters full time, phase into a city college
program or enroll in a business, vocational, trade school or
apprenticeship program.
And finally, in partnership with the World Trade Center
Association Los Angeles-Long Beach, the Alameda Corridor Transportation
Authority International Trade Development Program has provided
technical training and international trade-specific job skills to 30
entry-level job seekers in local communities. In addition, some 600
local companies seeking inroads into the import or export business have
been identified for one-on-one technical assistance. That assistance is
being provided throughout this year. This unique program is helping
local residents and businesses capitalize on international trade.
These community-based programs ensured that local residents and
businesses did not get left behind, that they would receive direct and
long-lasting benefits from the project.
the future
The efficient movement of cargo through our nation's ports and on
our rail lines and highways is a critical issue not only in Southern
California--which has the nation's two busiest ports--but the Nation as
a whole. The Alameda Corridor is truly the backbone of an emerging
trade corridor program in Southern California. Already, others are
following our lead, including governmental agencies in Los Angeles,
Orange, San Bernardino, and Riverside Counties who are building grade-
separation projects.
In addition, ACTA and the California Department of Transportation
are working under an innovative cooperative agreement to develop plans
for a Truck Expressway that would provide a ``life-line'' link between
Terminal Island at the Ports and the Pacific Coast Highway at Alameda
Street. The Alameda Corridor Truck Expressway is intended to speed the
flow of containers into the Southern California marketplace.
Environmental reports are being prepared, and the project could be
ready for approval as early as March 2003. At ACTA, we believe that by
restructuring our Federal loan we can undertake this critical Truck
Expressway project without any additional Federal financial support.
implications and recommendations
The Alameda Corridor not only creates a more efficient way to
distribute cargo, but it also boosts the regional and national
economies by keeping the ports competitive and capable of generating
additional economic growth. Moreover, it provides direct, long-lasting
benefits to local residents and companies, benefiting the entire region
with a legacy well beyond actual construction. In short, the Alameda
Corridor has demonstrated the benefit of investment in well-planned and
well-executed intermodal transportation infrastructure.
As your committees, the full Congress, and the U.S. Department of
Transportation begin the TEA-21 reauthorization process, including the
formulation of policies to address growing freight rail and truck
traffic congestion and other challenges posed by international trade,
we respectfully offer these policy recommendations, based on our
experience with the Alameda Corridor:
The planning and funding of intermodal projects of
national significance, directly benefiting international trade, should
be sponsored at the highest levels within the Office of the Secretary
of Transportation. There should be a national policy establishing the
linkage between the promotion of free trade and support for the
critical intermodal infrastructure moving goods to every corner of the
United States. Public-private partnerships do in fact work and should
be promoted and encouraged by Federal transportation legislation.
A specific funding category is needed to support
intermodal infrastructure projects, and trade connector projects.
Consideration should be given to new and innovative funding strategies
for the maritime inter-modal systems, infrastructure improvements
enhancing goods movement.
The Alameda Corridor project benefited from a Department
of Transportation willing to undertake risk and provide loan terms that
were not available on a commercial basis. This Federal participation
gave private investors confidence in the project and made bond
financing possible.
Most important, in my mind, is this: The success of the Alameda
Corridor has shown that Federal investment in trade-related
infrastructure can benefit the economy without sacrificing quality-of-
life issues.
Mr. Chairmen, once again, thank you for inviting me here today.
That concludes my remarks. I would be happy to address any questions.
__________
Statement of Peter Rahn, Cabinet Secretary, New Mexico State Highway
and Transportation Department
innovative finance: leveraging ordinary resources into extraordinary
successes
Mr. Chairman and Members of the committee, I appreciate this
opportunity to submit testimony concerning the positive benefits that
the State of New Mexico has received through innovative financing for
transportation, and how our State has leveraged ordinary resources into
extraordinary successes.
Flexible and stable revenue from Congress has enabled the New
Mexico State Highway and Transportation Department the ability to
deliver dramatic results for our citizens through improvement and
enhancement of our transportation system. We have developed and
implemented new ways to finance and contract highway construction
projects.
Since 1998 we have used innovative financing techniques to bond
$1.2 billion that advance highway construction projects by as much as
27 years. We are building quality projects that provide enormous
returns on investment for the taxpayers and deliver economic benefits
today.
New Mexico's strategy is to connect our communities to regional and
national economic opportunities by building four-lane corridors. This
access has historically been limited to our Interstate system, serving
less than 70 percent of our population. Today we have added 653 miles
of new four-lane highways that link 96.7 percent of our citizens to
these vital economic opportunities.
As well as adding 653 miles of four-lane highways, we have built 4
urban relief routes, 15 interstate interchanges and the Big I, which is
the intersection of the Interstates 25 and Interstate 40-that serves as
a bridge for regional, national and global commerce. Our efficiency,
combined with stable and flexible Federal funding, provides a seamless
regional transportation system to serve this commerce and continue the
movement of products to market. Our urban citizens are moving more
quickly and safely to work, school and medical care.
Innovative finance enabled us to use Grant Anticipation Revenue
Vehicle Bonds (GARVEE Bonds) to construct four-lanes on NM 44 from
central to northeast New Mexico. Because of Federal revenue stability,
both Standard and Poor's and Moody's rated our bonding proposals at
``A'' level investment grade. We were able to construct a 118-mile
four-lane highway corridor in 28 months with a 20-year warranty that
will save the taxpayer $89 million in maintenance costs. This 118-mile
corridor would have taken 27 years to construct under traditional
methods.
We have also improved the road quality of our Interstate and State
Highway system through our innovative financing program. We have
reversed a 20 5-year trend in our deteriorating State and interstate
highways. Since 1998, we have improved 3,035 miles highways--a 51
percent decrease in our deficient status highway miles. In 1999 only
81.8 percent of our Interstate highway system was rated in good
condition--today 98.7 percent of this system is in good condition.
In addition to major improvements to our system, our citizens have
benefited through economies of scale. In 1995 New Mexico's cost per
mile of four-lane construction was $1.3 million. In 2002, through our
large bonding program, we reduced that cost to $740 million per mile.
This economy of scale construction saves our State over $182 million in
four-lane corridor construction.
Investment in the nations transportation infrastructure yields high
returns. Based on information generated by the National Highway Users
Alliance, the Big I will save personal and commercial users $8.1
billion in time; $870 million in fuel; $460 million in safety; and
another $670 million in environmental impacts. This $286 million
investment by Congress will realize a $10.1 billion return on
investment. This $10.1 billion return on investment for one project is
34 times greater than the interest paid on our entire bonding program.
It is critically important that we understand and acknowledge our
innovative financing program would not be the success that it is
without the provision for flexible, stable and reliable funding. States
across the country have invested in the national infrastructure based
on the guaranteed funding levels. These guarantees have enabled us to
program and deliver projects in a predictable financial climate. In
fact-based on the FHWA highway construction inflation rate of 4.5
percent--our entire bonding program, with an interest rate of 4.47
percent, delivers $1.2 billion of transportation improvements to New
Mexico at a lower cost and the benefit of being used today rather than
years in the future.
We can assure our citizen's that all user fees directed to the
Highway Trust Fund are being spent for its designated purposes, and we
can speak with confidence about the Federal transportation-financing
picture over a multi-year period. Strong budgetary mechanisms, balanced
planning and streamlining program delivery have made innovative finance
work for New Mexico.
______
Responses of Peter Rahn to Additional Questions from Sen. Baucus
Question 1. I have some concerns about Garvee bonds. I understand
the advantage using future apportionments to guarantee bonds, so you
can enjoy the additional capital today. But what is going to happen
tomorrow when you need to use your future apportionments to build and
maintain highways, but the money already been spoken for as repayment
for the project you did today?
Response. States have to be adept at what they utilize GARVEE bonds
for. Critical projects that produce major returns on investment in the
areas of economic development opportunities, safety and congestion
relief are most suitable for bonding, especially when the cost of the
project is outside the bounds of what can be accommodated within the
normal STIP process. By this I mean, that a single project would take
an inordinate percentage of the annual construction program to
construct. Three of our bonded projects would have each exceeded the
total annual construction dollars available to New Mexico and three
more would have each exceeded 50 percent.
To utilize GARVEE bonds, or any bonds for that matter, to pay for
maintenance activities would be a mistake. Maintenance should be
accommodated within existing budgets, as we have provided for in our
future plans. However, the notion that new construction projects will
be on hold until the issued bonds are retired--and therefore bonds
should not be used at all--is flawed. If bonds had not been issued in
New Mexico, not only would those other projects be waiting, so would
the projects now in place.
The economic benefits of bonding must also be factored into the
decision. Building large projects at one time can produce many millions
of dollars in savings from economies of scale. Additionally, current
low interest rates are attractive when compared to nearly identical
inflation costs within the highway construction sector. The true costs
are practically the same, but the benefits of use are available today.
Question 2. Why didn't the State just issue State general
obligation bonds or private activity bonds? Why chose Garvees?
Response. New Mexico chose to issue GARVEE bonds rather than
general obligation bonds due to the ease and speed with which GARVEES
could be taken to market versus the lengthy process required by the
State constitution to utilize GO bonds. Private activity bonds do not
enjoy the same tax advantages as GARVEE bonds.
__________
Statement of John Horsley, Executive Director, the American Association
of State Highway and Transportation Officials
Mr. Chairmen and members of the Committees, my name is John
Horsley. I am the Executive Director of The American Association of
State Highway and Transportation Officials (AASHTO). I am here today to
testify on innovative and other financing issues as the Congress begins
consideration of legislation to reauthorize the Federal-aid highway and
transit programs.
First, I want to thank you both for your leadership in fully
restoring highway funding for fiscal year 2003 to $31.8 billion as
AASHTO, the National Governors' Association and many others have urged.
As I will discuss today, RABA needs to be fixed next year to avoid
radical swings in funding levels, but without your help, we would still
be facing a disastrous cutback this year.
Senator Baucus, AASHTO would like to commend you for your
leadership in transferring the 2.5 cents per gallon of gasohol tax
revenues from the General Fund to the Highway Trust Fund and for your
efforts to credit interest to the Highway Trust Fund where it belongs
and will help greatly.
In addition, I want to thank both Chairmen for demonstrating their
leadership by scheduling this very important hearing. I am honored to
be invited to testify on these important issues and to offer the views
of AASHTO on a variety of financing issues. Mr. Chairmen, I would like
to begin by recognizing the contribution that TEA-21 has made to
address the nation's need to invest in our highway and transit systems.
We have seen record level investment made possible by that legislation
and we at AASHTO commend the Congress and these two Committees for your
contributions to achieving that result. However, as much as that
investment has contributed ($208 billion), the national needs continue
to far outstrip the available resources. Your holding this hearing
gives us the opportunity to recognize those needs and to suggest ways
that working together we can increase investment in surface
transportation as part of the reauthorization bill while maintaining
fiscal discipline.
highway and transit financing history
Mr. Chairmen, the Federal-aid highway program since 1956, and since
1982 the mass transit program, have financed critical national
transportation investments primarily from the dedicated depository of
revenue the Highway Trust Fund. There are a variety of fees deposited
in the Trust Fund, but the largest source of income by far has been
fees levied on motor fuels (gasoline and diesel). Although the needs
for highway and transit investment have dramatically increased, fuel-
related user fees have been adjusted only on a sporadic basis. The
following chart provides a history of changes in rates since the
creation of the Trust Fund in 1956.
Changes in Gasoline Tax: 1956-Present
----------------------------------------------------------------------------------------------------------------
Mass Leaking
Year Total Tax Highway Transit Deficit Underground
Account Account Reduction Storage Tank
----------------------------------------------------------------------------------------------------------------
1956......................................... 3 3
1959......................................... 4 4
1983......................................... 9 8 1
1987......................................... 9.1 8 1 0.1
1990......................................... 14.1 10 1.5 2.5 0.1
1993......................................... 18.4 10 1.5 6.8 0.1
1995......................................... 18.4 12 2 4.3 0.1
1997......................................... 18.4 15.44 2.86 0.1
----------------------------------------------------------------------------------------------------------------
Source: FHWA, ``Financing Federal Aid Highways,'' 1999
In concert with increases in user fees there was growth in funding
for both the highway and transit programs. The most dramatic growth
occurred since 1991 starting with the enactment of ISTEA and reinforced
by TEA-21. However, in spite of this growth, needs continue--by
anyone's measures--to far outstrip available Federal, State and local
resources. At its completion, TEA-21 will have provided $208 billion
for highways, transit and safety, but the needs as measured by the U.S.
Department of Transportation are far greater than even this record
level investment.
In the 1990's, various innovative financing techniques were piloted
and then enacted into law through the National Highway System
Designation Act and TEA-21. Among the tools that now are part of many
State DOT financing approaches are: eligibility of Federal-funding to
pay debt service for project financings; grant anticipation notes also
known as GARVEE Bonds; tapered match, which allows States to manage
matching shares over the life of a project; and the Transportation
Infrastructure Finance and Innovation Act of 1998 (TIFIA) program
introduced in TEA-21 that provides secured loans, loan guarantees and
standby lines of credit to surface transportation projects of national
or regional significance. These tools are useful but only fill a niche
in the program and project financing toolkit. We clearly need to do
more with innovative financing in the future to enhance the mechanisms,
and apply innovative financing to more areas of surface transportation.
I will provide ideas for the Committees' consideration later in my
testimony.
aashto's proposed funding levels for reauthorization and financing
options
Mr. Chairmen, we believe the central issue in reauthorization will
be how to grow the program. Huge safety, preservation and capacity
needs exist in every region of the country. AASHTO will release shortly
its Bottom Line Report, which projects needed highway investment to
assure American mobility and to advance our economy.
The report will show that the annual level of investment needed to
maintain current conditions and performance of our highway systems is
$92 billion. The estimated annual level of investment needed to
maintain the current conditions and performance of the nation's transit
systems is $19 billion. These investment levels far exceed current
investment and we recognize that the magnitude of increase needed is
not likely to be made available through the Federal-aid highway
program.
However, to begin to address these needs, AASHTO is seeking a
substantial increase in funding over TEA-21 for both the highway and
transit programs. Overall, as compared to TEA-21\1\ obligation levels
for highways and funding for transit, we seek to grow the program from
at least $34 billion in fiscal year 2004 to at least $41 billion in
fiscal year 2009 for highways and, likewise, from at least $7.5 billion
in fiscal year 2004 to at least $10 billion in fiscal year 2009 for
transit. These minimum figures represent 35 percent and 45 percent
program increases, respectively.
---------------------------------------------------------------------------
\1\Growth calculations: Highway baseline of $168.7 billion
includes TEA-21 obligation limitation, exempt and RABA. Transit
baseline includes guaranteed funding of $36.35 billion.
---------------------------------------------------------------------------
The challenge is how to fashion a funding solution that can achieve
these goals and garner the bipartisan support needed for enactment next
year.
New sources of funding are needed to significantly grow the
program. Without the introduction of new sources of funding, growth in
the highway and transit programs will rely on additional revenues from
increased travel and truck sales. Based on the latest data available to
AASHTO, these revenues would translate to about a 10 percent program
increase for highways over the life of a 6-year reauthorization bill.
This increase would not even come close to keeping up with the loss
of purchasing power due to inflation. From 1996 projecting through
2009, inflation as measured by the Consumer Price Index results in a 26
percent decline in purchasing power. If reauthorization of TEA-21
includes only ``status quo'' options for achieving a larger program, we
will soon find that the status quo is actually a rather a dramatic
decline in investment due to the erosion of purchasing power. The
following graph illustrates the impact of inflation on the current user
fee rates.
Put another way, based on the Bureau of Labor Statistics inflation
calculator, merely to have maintained the purchasing power of the three
cent gasoline tax as was instituted in 1956, the gasoline tax today
would need to be 20 cents.
Maintaining the status quo is not an option; however, as I said,
the challenge is to develop a solution that attains at least $41
billion for highways and $10 billion for transit by 2009 that garners
bipartisan support. The AASHTO Board of Directors is considering a menu
of funding options to create additional revenues that includes drawing
down the Highway Trust Fund reserves; capturing 2.5 cents per gallon
gasohol revenues currently going to the General Fund for the Highway
Trust Fund; transferring the equivalent of 5.3 cents per gallon of
gasohol tax from the General Fund to the Highway Trust Fund to make up
for the rate differential between gasohol and gasoline; capturing
interest on Highway Trust Fund reserves; increasing General Fund
support for transit; selling financial instruments; and indexing and
raising Federal fuels taxes.
Although the program could grow somewhat without raising taxes, it
would fall short of meeting national needs. AASHTO recognizes that the
Congress needs funding and financing options beyond the traditional
user fee increase approach. The Board also directed the AASHTO staff to
explore the feasibility of leveraging new revenues through a
Transportation Finance Corporation. While most of AASHTO's funding
options are very straightforward, I would like to take a few minutes to
describe the proposal to create a Transportation Finance Corporation,
which could achieve AASHTO's goals for highway and transit funding
without indexing or a tax increase, in more detail.
transportation finance corporation
In order to help close the sizable funding gap between surface
transportation investment needs and projected resources available in
the Highway Trust Fund, AASHTO is exploring including among its menu of
funding options the concept of establishing a new tax credit bond
program to raise revenue in the capital markets. We describe this
concept as program finance, rather than project finance.
AASHTO proposes that Congress consider chartering a private, non-
profit organization-the Transportation Finance Corporation-to serve as
the centralized issuer of tax credit bonds. Approximately $60 billion
in bonds would be issued between 2004 and 2009. From the bond proceeds,
approximately $34 billion would be distributed to the highway program
through FHWA according to an apportionment formula determined by
Congress (perhaps similar to the current Federal-aid highway funding
formula). About $8.5 billion would be made available to transit
agencies on a basis to be determined. From a State (or transit agency)
perspective, these funds would essentially be indistinguishable from
regular Federal-aid apportionments: States would be required to comply
with all Title 23 requirements to use the funds. In summary, the TFC
would leverage approximately $18 billion in new revenues into an
increase of nearly $43 billion in program funding for fiscal year 2004-
2009.
The States would not in any way be liable for the repayment of the
bonds. A portion of the bond proceeds (approximately $17 billion) would
be set aside at issuance and deposited in a sinking fund, which would
be invested in Federal agency or other high-grade instruments. At
maturity, the sinking fund will have grown to be sufficient to repay
the bond principal. These taxable bonds would have a term of 20-25
years.
In lieu of interest, the bond holders would receive taxable tax
credits that could be applied against the holder's Federal income tax
liability. There is a cost to the U.S Treasury for this type of tax
credit program. The Treasury would be reimbursed for the budgetary cost
of the program (arising from tax expenditures) by additional Highway
Trust Fund receipts derived from a new net source of revenue. Thus,
there would be no impact on the Federal deficit.
This summer, AASHTO met with seven major bond underwriting firms
(investment banks), two ratings agencies, and a bond insurer to assess
the viability of the Transportation Finance Corporation proposal from
the perspective of the financial community. In our due diligence we
investigated the ability of the capital markets to absorb an additional
$60 billion in investment; overall marketability of the bonds,
including necessary and preferred characteristics of the financial
instruments; potential investors; and credit assessment.
In addition, the TFC proposal contemplates up to $5 billion of
Federal funding being used to fund a Capital Revolving Fund, which
would make available direct loans, loan guarantees and standby lines of
credit to a variety of surface transportation projects not readily
fundable under existing Federal programs. This fund would be a catalyst
to leverage capital for an expanded list of transportation to include,
highways, transit, freight rail, passenger rail and security
infrastructure. This funding would assist in promoting public private
partnerships and attract new private capital to transportation
projects.
Overall, we found a high level of interest in the program due to
the equity and efficiency advantages of using debt proceeds to finance
long-term infrastructure investments. Our key findings:
Tax credit bonds are marketable. The Corporation should be
authorized to de-couple the principal from the stream of tax credits,
and market each portion of the financing instrument to different groups
of buyers on a discounted basis. For example, the principal component
is likely to appeal to pension funds, and tax credits should be
attractive to financial institutions & corporations. Major individual
investors anticipating Federal income tax liability in future years are
also potential purchasers of the tax credits, as are individual
investors interested in safe, long-term investments. Securities firms
would maintain an active and continuous secondary market in both the
principal and tax credit portions to assure their liquidity.
Capital markets can absorb TFC paper. The proposed size of the
program (an average of $10 billion per year over 6 years) equals 0.2
percent (two tenths of 1 percent) of the U.S. bond markets' $4.6
trillion debt issuance volume in 2001.
Marketability and liquidity are enhanced by a central issuer.
Larger, more homogenous issues than the fragmented Qualified Zone
Academy Bond (QZAB) school construction program should result in a more
efficient secondary market and reduced transactions fees as well as
centralized investor information leading to price transparency. A
centralized issuer also mitigates tax compliance risk and ensures that
all States benefit from the program rather than only States using debt
financing.
There is a broad potential investor base. Decoupling tax credits
from principal will be more efficient and result in a broader investor
base. The principal component should appeal to pension funds; tax
credits are likely to be attractive to financial institutions and
corporations; and allowing individuals to buy credits will broaden the
market. The TFC will need to mount an investor education program to
develop an efficient market.
Other aspects of the due diligence show that tax credit bonds are
likely to be investment grade and, of course, that specific terms of
the legislation will be critical to the success of the program.
Our analysis shows that AASHTO's funding targets through fiscal
year 2009 could be achieved through the Transportation Finance
Corporation without indexing or raising fuel taxes. However, the
program level would drop below fiscal year 2009 slightly for the
following 3 years before it resumes positive growth in 2013. In our
modeling, when the TFC concept was combined with indexing, the program
continues healthy growth from fiscal year 2010 on. As you can see, the
AASHTO staff and our Financial Issues Work Team have developed a
creative proposal that appears feasible and has been well received. We
commend it to you for your consideration.
Potential Program Growth Summary
The following charts illustrate potential sources of growth in
highway and transit program funding.
``Incremental'' represents revenues from travel growth, 2.5 cent
per gallon gasohol transfer, and drawing down the Highway Trust Fund.
Innovative Financing Options
In addition to the menu of funding options, AASHTO wants to work
with the Congress to enhance and strengthen current Innovative
Financing tools. These changes include enacting legislation to extend
the legislative authority in TEA-21 for State Infrastructure Banks to
all States, assuring the continuance of the current innovative
financing provisions and making improvements to the TIFIA program.
Specifically, regarding TIFIA we recommend that the current $100
million threshold be reduced to $50 million which will serve to expand
the universe of projects that can take advantage of this financing
tool. In addition we urge the Congress to make clear the intent of the
program is to be a minority investor and thus to demonstrate more
flexibility in taking credit actions under TIFIA. This is not to
suggest that care should not be taken in transactions involving
taxpayer money but rather to meet the program goals which are to round
out financing of projects with Federal assistance.
The Board of Directors will be making final decisions on AASHTO's
reauthorization financing recommendations in the late fall and I note
that Chairman Baucus has included a number of items similar to those on
the menu of options in legislation he recently introduced.
other financing issues
Guaranteed Spending
One of the key features of TEA-21 is guaranteed spending. The
assurance of stable, predictable funding has made it much easier for
States to plan and carry out programs. AASHTO has adopted as a top
priority ensuring the continuation of funding guarantees. Funding
guarantees are essential to meeting our commitment to the traveling
public, which pays the dedicated user fees for highways and transit
programs, that they are receiving the benefits of their fees. The
return on this investment in transportation programs is ensuring a
competitive economy with hundreds of thousands of high-paying American
jobs.
RABA Calculations
Another key feature of TEA-21 is the budgetary mechanism known as
Revenue Aligned Budget Authority (RABA). This mechanism was designed to
ensure that the receipts coming into the Highway Trust Fund Highway
Account are fully utilized by the program. This mechanism added over $9
billion to the program thorough fiscal year 2002. However, due to the
downturn in the economy, the look-ahead provision of RABA substantially
overestimated fiscal year 2001 revenues; thus the RABA adjustment for
fiscal year 2003 would have reduced the obligation levels for the
highway program by $8.6 billion or 26 percent. AASHTO is pleased that
the Congress is moving to restore this much needed investment funding.
AASHTO believes that it is necessary to preserve a RABA mechanism.
However, action is necessary to ensure a more stable and predictable
outcome. Therefore, we offer an option that would eliminate the look-
ahead provision of current law and replace it with a provision that
retains the look-back part of the calculation. This likely will make
the program funding more stable but also will cause a buildup of
revenue in the Highway account. Therefore to ensure full use of the
revenue we also recommend including a provision that would reduce the
cash balance in the Highway Account to a fixed minimum by raising the
program level in the last year of the authorization bill to a level
sufficient to reduce the balance.
Long-term Financing
Given the advent of more fuel efficient vehicles and the increasing
use of alternative fuels, income to the Highway Trust Fund may be
significantly reduced. In order to prepare for future reauthorizations
AASHTO recommends that Congress create a Blue Ribbon Commission to
study financing options and report its findings prior to the next
reauthorization cycle.
conclusions
The Federal-aid highway and transit programs have a long history of
strong partnership with the States and have made major contributions to
creating surface transportation systems that are among the best and
safest in the world. However, by all measures surface transportation
needs far outstrip investment resources.
AASHTO recognizes the need for additional investment and has
proposed program increases of 35 and 45 percent for highways and
transit. This increased investment is vital to the nation's economy and
assures the continuance of high paying jobs in the transportation
sector.
Recognizing the need to offer creative solutions for revenue
generation, AASHTO is considering including a proposal for the creation
of a Transportation Finance Corporation in its menu of funding options.
This federally chartered non-profit corporation would leverage funds
for the program and take advantage of the private capital markets for
bringing revenue into the program. In addition, the TFC would include a
Capital Revolving Fund that could leverage as much as $30 billion in
credit support for a variety of transportation programs including,
highways, transit, freight, and passenger rail and security
infrastructure. This fund will likely serve as a catalyst for
generating public/private partnerships and thus further expand
investment in transportation programs.
Guaranteed spending is a key feature of TEA-21. It provides
predictable funding so that States can plan with a greater degree of
certainty. It assures that dedicated user fees are spent on the
programs for which they were collected in a timely manner. One of
AASHTO's reauthorization goals is to preserve guaranteed spending.
RABA has served to ensure that increased revenue is utilized for
programs without having to wait until the next reauthorization cycle to
increase program levels in highways. There needs to be adjustments to
the RABA mechanism to make the results more predictable and AASHTO has
offered a solution that could accomplish that end.
In the long-term, consideration needs to be given to possible new
sources of income and way to collect income to ensure that there is
sufficient income to make the investments in transportation necessary
to meet the nation's needs in the future.
We look forward to working with the Congress to enact legislation
that will ensure continuing maximum possible investment in our
transportation system. 1 Growth calculations: Highways baseline of
$168.7 billion includes TEA-21 obligation limitation, exempt and RABA.
Transit baseline includes guaranteed funding of $36.35 billion.
______
Responses of John Horsley to Additional Questions from Senator Jeffords
Question 1. A major piece of your testimony centers on the creation
of a Transportation Finance Corporation. Under your proposal, the TFC
would issue tax credit bonds. We have heard testimony from GAO that
these instruments are the most costly long-term to the Federal
Government. Why does AASHTO consider this to be the most appropriate
bonding mechanism for the Federal-aid program?
Response. I think GAO's testimony points out how difficult it is to
compare these disparate financing tools on an ``apples-to-apples''
basis.
On the one hand, it shows that financing transportation
improvements by issuing debt--whether through TIFIA credit instruments,
tax credit bonds or tax exempt bonds--entails a cost (interest expense)
that could be avoided if sufficient grant funds were on hand in the
first place. But the problem, of course, is that grant moneys often are
not available up front. And obtaining the benefits of accelerating
infrastructure investment through debt financing techniques, while
perhaps not the least costly method, may in fact be the most cost
effective approach taking into account the benefits as well as the
costs.
On the other hand, GAO's testimony reveals the different ways in
which certain financing tools are used and the different levels of
Federal subsidy conferred by those techniques. GAO's cost assumptions
attempt to capture the various financial profiles of ``typical''
transportation projects that might benefit from the different financing
tools. For example, under the normal Federal-aid grant reimbursement
scenario, the Federal share is 80 percent. Compared to that traditional
payas-you-go approach, the various debt financing techniques tend to
leverage Federal resources and induce greater non-Federal investment.
The average Federal share ranges from about 20 percent for projects
funded with tax-exempt bonds to about 25 percent for TIFIA-funded
projects to somewhere between 50 and 70 percent for projects funded
with tax credit bonds (depending on several underlying assumptions). hi
all cases, however, the relative Federal share is less than that of the
base case of grant reimbursements.
The important point, I think, is that these different tools may be
most cost-effective for different types of projects that require
different levels of Federal assistance. If critical infrastructure
investments need to be made, and up-front grant funding is not
available, then project sponsors simply must look at other financing
options. And depending on a particular project's costs, benefits and
access to revenues, the use of one or more of the financing tools
examined by GAO may prove cost effective.
Mr. Chairman, we are looking for the art of the possible. When we
tried to put together a vehicle that, as Pete Rahn was describing,
could leverage revenues that are potentially available to achieve the
overall funding targets we are seeking for fiscal years 2004-2009, we
looked at several options.
We looked at whether simply relying on tax-exempt municipal bonds
issued at the State level would work, and concluded it would not--
because so many States have obstacles, either statutory or
constitutional, to the issuance of debt and the utilization of GARVEEs
and some of the other financing techniques. So we figured that simply
proposing what is currently allowed would not extend universal help to
all 50 States with regard to raising overall transportation funding
levels.
We looked at the possible utilization of tax-exempt bonds at the
Federal level and figured that would compete directly with Treasury
securities, so that was not a good vehicle. We then looked at the
appeal of the tax credit bond concept. It was currently pending in
RIDE-21 (the Rail Infrastructure Development and Expansion Act for the
21St Century) as a vehicle for funding high-speed rail, and has been
used to help fund schools through the so-called QZAB (Qualified Zone
Academy Bond) program.
Our conclusion was that the TFC (Transportation Finance
Corporation) was the most efficient, most viable method for boosting
surface transportation funding. It would score well under the Federal
budgetary scoring rules and, just in practical terms, would get us with
current or likely revenues--or revenues enhanced with indexing--to the
overall funding targets that the States feel are essential: more than
$40 billion annually for highways and more than $10 billion annually
for transit.
Question 2. Does it make sense to issue bonds to support the
mainline work of State DOTs, namely system preservation? Would it not
be more appropriate to reserve debt financing for capital improvements,
and particularly for those projects with associated revenue streams?
Response. Mr. Chairman, the Transportation Finance Corporation we
are talking about we classify as program financing, which would be
available to all States to use for those purposes. TFC proceeds, in our
proposal, would be available for the same types of capital outlays
eligible under title 23 and title 49 as are Federal-aid grants and
GARVEE bonds today. Maintenance and system preservation would still be
the responsibility of the States.
We are looking for a near-term practical solution that gives you a
measure you can pass with bipartisan support to boost funding for the
next cycle to the levels we are after.
When it comes to the issuance of municipal bonds at the State
level, I think each State has to make a judgment about whether they
should issue long-term debt for long-term purposes, such as schools,
water and sewer plants, and hospitals.
Almost every other area of public infrastructure is financed
significantly through debt. We think that transportation has been
slower than those other sectors to come to the table and use debt
financing for long-term infrastructure. But we think the time has come.
As you have heard from both of these panels, the market is there
and the transportation agencies are there and are utilizing debt
financing on an increasing basis. But the one differentiation I wanted
to make was between program finance, which would generate grants from
bond proceeds that flow out to all the States as cash over the 6-year
reauthorization period--and then State DOTs could leverage it further
by issuing GARVEEs or through other means--as opposed to project
finance (bonds earmarked for a particular project), which States can do
today and which we also support.
__________
Statement of Jeffrey Carey, Managing Director, Municipal Markets,
Merrill Lynch & Co.
mainstreaming innovative finance: a capital markets perspective
Chairmen, Ranking Members, members of the Committees, ladies and
gentlemen, I am Jeff Carey, a Managing Director in Municipal Markets at
Merrill Lynch. As a 24-year veteran in public, transportation, and
infrastructure finance, I have had the privilege to work with U.S.
Department of Transportation and Federal Highway Administration
officials, as well as our clients, State transportation officials and
other project sponsors, during the last decade on the development and
implementation of ``Innovative Finance'' mechanisms for Federal-aid
transportation programs. Thank you for inviting me to provide a wrap-up
commentary from a Capital Markets perspective at today's Joint Hearing.
You have heard testimony this morning from two very experienced
panels of U.S. DOT and State transportation officials, a city
councilwoman, the GAO, and Professor Seltzer on the very significant
accomplishments of the DOT Innovative Finance Initiatives. Public
finance industry professionals are pleased to have played a role in
creating the strong market reception for the new transportation funding
tools and expanded flexibility for public/private partnerships. We
commend these panel participants, and the leadership from DOT and FHwA,
other State transportation officials, and private sponsors for the
dramatic evolution from the Eisenhower-era, Federal-aid funding to the
wide array of financing instruments and programs introduced and
utilized over the last 8 years.
To briefly reflect on the prior testimony involving program and
project finance and case studies, ISTEA, post-ISTEA initiatives and
TEA-21 implementation have produced the following market-related
accomplishments: 1) dramatically increasing bondholder investment in
transportation projects and State programs; 2) new and/or specially
dedicated revenue streams, particularly for the purpose of retiring
debt obligations; 3) broad market acceptance of the use of Federal-aid
funding for debt instrument financing; 4) more coordination with other
funding partners beyond States, and; 5) lower financing costs and
increased project feasibility through Federal credit enhancement.
1. Addressing characteristics sought by the Capital Markets and
private sector project sponsors provides efficient market access and
innovative transportation finance opportunities. What do market
intermediaries underwriters, rating agencies, bond issuers, project
sponsors and institutional and individual investors want?
Characteristics
Sound, understandable credits
Evidence of government support
Strong debt service payment coverage
Predictability and Federal program consistency with
evolution of new instruments
Market rate investment returns for bonds, development
costs, and equity
Reasonable and reliable timing of issuer's revenue/grant
receipts
Acronyms that capture the Federal programs' spirit and
promote investor familiarity
Diversified range of investment opportunities
Volume, market profile, and liquidity
For example, the track record and predictability of the Federal-aid
highway program since the Eisenhower-era has enabled Grant Anticipation
Revenue Vehicles (GARVEE) bonds to be structured without the double-
barrel credit of other State credit backstops, as first used in New
Mexico.
It was the strong issuance history of municipal bond banks in
States such as Vermont, as well as the successful use of State
wastewater and clean water revolving funds, that served as the model
for the development of State Infrastructure Banks (SIBs) in the mid-
1990's.
And it was the broad market acceptance of municipal bond insurance
and bank letters of credit that provided a model for the development of
TIFIA credit assistance and pre-TIFIA successes such as the Alameda
Corridor multi-modal project.
As David Seltzer commented in the first panel, are the Federal
policy incentives in Innovative Finance initiatives suitable to attract
and expand capital markets investment? And are the programmatic tools
and requirements balanced to provide the characteristics sought by debt
investors and private sponsors, as well as public entities?
2. How various Innovative Financing components have been used by
public agencies and, in some cases, private sponsors, and received by
the markets provides a roadmap for surface transportation
reauthorization.
When State Infrastructure Banks (SIBs) were created as part of the
NHS Act in 1995, the pilot program for 10 State transportation
revolving funds became very popular in 1996, in part, because of
supplemental Federal funding for ``seed'' capitalization matched with
non-Federal funds. As highlighted in FHwA's State Infrastructure Bank
Review from earlier this year, 32 States have active SIBs and have made
different levels of highway and transit project assistance primarily
through loans, despite widespread under-capitalization and the
curtailment of the program in TEA-21. Limited capitalization has
resulted from the inability to use Federal-aid funds, outside of four
States, and the application of Federal requirements to all moneys
deposited in the SIB, regardless of whether the source was State or
private contributions, or repaid loans. In addition, only two States
have leveraged their SIB programs through the issuance of bonds.
As a flexible, State-directed tool, SIBs have greater potential to
provide loans and credit enhancement that can be realized through
further modification as part of Reauthorization:
Extend the program to included all States;
Expand capitalization to meet demands with supplemental
Federal appropriations and by permitting the use of future Federal-aid
funds to capitalize SIBs;
Rollback the imposition of Federal requirements on SIB-
funded projects, or, at least, exempt ``recycled'' loan repayments and
State contributions, as permitted under the 1995 NHS Act Pilot Program;
Encourage States to expand capitalization by leveraging
their SIB program through the issuance of bonds; and
Remove ``pilot'' moniker from the SIB Pilot Program to
send strong signal of on-going Federal support.
Reauthorization should provide incentives for public/private,
market-based partnerships that finance, develop, operate, and maintain
highways, mass transit facilities, high-speed rail and freight rail,
and inter-modal facilities. This could be accomplished by permitting
the targeted use of $15-20 billion of a new class of private activity
bonds, and/or by modifying certain restrictions in the Internal Revenue
Code on tax-exempt bond financing of transportation modes. We commend
the members of the Senate and the Finance Committee for your prior
consideration of the Highway Innovation and Cost Savings Act (HICSA,
1999), the Highway Infrastructure Privatization Act (HIPA, 1997), and,
most recently, the Multi-Modal Transportation Financing Act
(Multitrans).
My office is across West Street from the World Trade Center site.
As workers in downtown Manhattan, we greatly appreciated your passage
of Federal legislation creating a ``Liberty Zone'' for the
redevelopment of lower Manhattan and for the creation of a new type of
tax-exempt private activity bonds, Liberty Bonds, for the rebuilding
and economic revitalization of New York City.
Existing tax law discourages private investment in transportation
projects, prohibiting lower cost tax-exempt financing for projects
involving private equity investment and incentive-based, private sector
operating contracts. Transportation infrastructure financing deserves a
bond mechanism similar to Liberty Bonds under Reauthorization to
attract more private investment, as well as increase the use of new
construction techniques, cost controls, performance guarantees and
technologies. A new class of private activity bonds for qualified
highway infrastructure, mass commuting vehicles, and other
transportation projects would expand the application of the tax-exempt
financing and lower the cost of capital, making public-private
partnerships more attractive to public sector sponsors than
conventional approaches.
3. Past ``Innovative Finance'' should become mainstream
transportation finance under TEA-21 reauthorization and the Federal
Government should provide new financing tools and initiatives, at least
on a pilot basis. From a financial markets perspective, Congress should
use this opportunity to make refinements to more clearly articulate
transportation financial assistance goals and send a consistent message
as to how the Federal Government is going to act toward investors,
project sponsors and all program participants.
TEA-21's funding guarantees and firewalls that permit the
flexible use of GARVEE Bonds beyond multiple reauthorization periods
should be maintained, and radical swings in budgetary funding from RABA
(Revenue Aligned Budgetary Authority) should be avoided. Similarly,
transit funding guarantees should also be preserved.
Examine the creation of a government corporation, perhaps
in a form discussed by AASHTO, to provide a focus on transportation
infrastructure finance, possibly administer a portion of DOT's
financing programs, and provide a basis for new financing tools, such
as tax credit bonds. Federal Government corporations have helped the
capital markets create strong and liquid markets to fulfill other
policy and programmatic objectives.
The creation and implementation of U.S. DOT Innovative Financing
Initiatives over the last 8 years has prompted an even more vigorous
debate about transportation financing issues, challenges, and future
innovation with the coming year's surface transportation
reauthorization. This ongoing debate, coupled with past and current
Program successes, will encourage a further willingness to look beyond
Federal-aid grant reimbursement, introduce additional players in
transportation finance and enlarge the spectrum of instruments and
programs to attract additional private and capital markets investment.
The success of Innovative Finance places a higher level of
responsibility on the Federal reauthorization process to maintain the
characteristics attracting strong capital markets participation.
Municipal Markets participants will continue to work with Congress,
DOT, States, local governments, and private sector sponsors to maximize
leverage and investment levels in transportation infrastructure over
the coming authorization period and beyond.
I am pleased to have the opportunity to participate in today's
Joint Hearing with such knowledgeable witnesses. Thank you, again, for
the opportunity to testify. I look forward to responding to any
questions you may have.
______
Responses of Jeffrey Carey to Additional Questions from Senator Baucus
Question 1. The Capital Markets would positively view and receive a
Tax Credit bond proposal where the proceeds of the bonds are deposited
directly into the Trust Fund. First, raising and depositing additional
funds to the Trust Fund will supplement and diversify the sources of
Trust funding, adding to the proposed sources from the MEGA-TRUST Act,
and further address characteristics sought by the capital markets, as
noted in my testimony. This additional, predictable funding will
further strength GARVEE credits and other Federal aid highway derived
project financing.
Response. In your question, you correctly acknowledge that QZABs,
as the only existing tax credit bonds, provide little guidance for the
market's receptivity due to relatively small issuance volume, disparate
issuers, and credit considerations. The proposed year sale of $3
billion, Qualified Highway Bonds by Treasury under the MEGA-INNOVATE
Act responds to some tax credit bond marketability concerns by
providing larger issuance volume over the Reauthorization period by a
centralized issuer. Market participants continue to believe that the
centralized issuance of tax credit bonds where the tax credit can be
decoupled, or stripped, from the principal repayment stream could
attract major buyer interest, as well as active trading by securities
dealers. Decoupling would broaden the market for the bonds since tax
credit bonds are hybrids, with a tax-advantaged non-cash piece (the
credits) and a cash-on-cash piece (the principal), attracting different
types of investors. This follows the Senate Finance Committee
Chairman's goal to attract new and different taxable bond and tax
credit investors to supplement the current, dominant buyers of tax-
exempt transportation bonding.
Question 2. The advantages and disadvantages of using some of the
proposed Tax Credit bond proceeds to go into a sinking fund to
repayment bond principal closely relate to using a centralized issuer,
either Treasury or dedicated national transportation issuer.
Response.
Advantages of a Sinking Fund:
Should result in very low risk of default of principal,
if sinking fund investments are limited to highly rated instruments;
Homogenizes the creditworthiness of different series of
bonds, enhancing marketability/liquidity (no local issuer variances);
and
Overcomes disparities among States in terms of their
legal ability to incur debt or their political willingness to do so.
Disadvantages of a Sinking Fund:
Somewhat inefficient from a tax viewpoint, in that 30
percent (plus or minus) of the tax expenditures are for bonds that are
funding the retirement of principal rather than funding new
transportation projects.
At some point, it may be difficult to find attractively
priced, highly rated, long-term defeasance investments in sufficient
volume.
______
Responses of Jeffrey Carey to Additional Questions from Senator
Jeffords
Question 1. As many in the Senate will recall, Private Activity
Bond (PABs) rules were historically an outgrowth of the perceived
overuse of industrial development bonds, where purely corporate
investments were nominally financed through a State or local industrial
development authority to gain tax exemption without adequately serving
governmentally perceived, economic development or service objectives.
As a result of successive Federal tax acts and IRS regulations, we now
have a patchwork of inconsistent tax rules--i.e., seaports and airports
can issue PABs not subject to volume cap; transit systems can finance
infrastructure with PABs, but subject to volume cap. Neither transit
rolling stock nor highways can be financed with tax-exempt bonds at all
if there is what is termed ``private use'' and a so-called ``private
security interest.'' Within TEA-21 Reauthorization, the Senate should
consider providing a new concept centered on whether the transportation
project is of ``public benefit.'' If a highway (or transit line) is
publicly available to any user, what difference should it make if there
is incidental private management of the asset? The State or local
political subdivision would already have determined that the public
(and taxpayers) would benefit from private sector participation
Response. Private participation is not just applicable to the
development of toll roads. Even greater potential application is
outsourcing the asset maintenance of expressways and freeways to
private firms which agree to maintain roads to publicly required
standards, in compliance with GASB 34. Current IRS ``Qualified
Management Contract'' provisions do not permit incentive, performance-
based compensation. Allowing the financial interests of the private
sector developer/manager (in combination with private equity) to be
aligned with the tax-exempt bond investors (i.e., maximize net
revenues) should facilitate the financing for additional transportation
projects. Tolls and private sponsor or participant returns can be
regulated using a rate covenant (governmental utility model) or
regulated return on capital (investor-owned utility model) mechanics.
The Multimodal Transportation Financing Act (``MultiTRANs'', S. 870)
would achieve most of the aforementioned, desired tax law or regulatory
reforms.
Question 2. One of the outcomes of reauthorization should be the
ability to allow for more meaningful investment by the private sector
into transportation. There seems to be barriers for participation for
numerous large investment sectors. One example is pension plans or
retirement investment sector. Current transportation bonding techniques
do not provide the income this sector is seeking since we primarily use
tax-exempt mechanisms. Can you provide more insights on how we can
``decouple'' the bonding process to make it more attractive to these
types of investors? Are there examples where such activity is
occurring? Are there changes that need to be made to statue to assist
this type of activity?
Response. As your question correctly recognizes, pension funds
represent one of the largest sources of capital in the economy--for the
1,000 largest plans in the U.S., the total assets are $3.6 trillion in
defined benefit plans and $1.2 trillion in defined contribution plans
(2001). Pension funds are invested in multiple asset classes (including
overseas infrastructure) with the exception of domestic infrastructure.
Yet, as tax-exempt entities they have no demand for lower returns on
tax-exempt securities. An objective going back to the 1993
Infrastructure Investment Commission--develop an investment product
that is cost-effective to the transportation project sponsor
(overwhelmingly, a public sector entity eligible to issue tax-exempt
bonds), while at the same time providing competitive, pre-tax returns
to the pension funds. One possibility, highlighted above, is decoupled
tax credit bonds. The tax credits could be sold to taxable investors,
leaving a zero coupon, taxable bond with a sufficient credit rating to
be marketed to pension funds--providing a secure long-term asset to
offset long-term liabilities (retirement benefits). It is important to
note that decoupling routinely occurs with other market instruments,
including U.S. Treasury bonds (since 1985) and the mortgage-backed
securities market.
______
[From The Bond Buyer, Wednesday, June 12, 2002, Vol. 340]
Senate Panel Leaders Lobby DOT To Use Innovation in Its Funding
(By Humberto Sanchez)
WASHINGTON--Leaders of the Senate Finance and Environment and
Public Works committees urged the Department of Transportation
yesterday to investigate new ways to leverage Federal funds to finance
the construction of needed infrastructure, including using a
centralized entity to fund loans and issue taxable tax-credit bonds.
In a letter sent to Transportation Secretary Norman Y. Mineta,
Sens. James M. Jeffords, I-Vt., chairman of the public works panel, Max
Baucus, D-Mont., chairman of the finance committee, and 11 other
senators said they want the DOT to look closer at ``ways to leverage
limited Federal resources through so-called 'innovative finance'
techniques.''
The senators also said they believe that additional research into
the matter ``would benefit the administration and the Congress as we
develop'' reauthorization proposals for the Transportation Equity Act
for the 21st Century, which expires Sept. 30, 2003.
The senators--including public works ranking member Robert C.
Smith, R-N.H., and finance ranking member Charles E. Grassley, R-Iowa--
said they are interested in exploring the possibility of ``using a
centralized entity to fund loans and provide credit enhancement, and
the use of tax credit bonds as a financing vehicle for transportation
infrastructure,'' according to the letter.
The letter comes as the American Association of State Highway and
Transportation Officials is floating a similar proposal in which a
federally chartered corporation would be authorized to sell taxable
tax-credit bonds in order to provide funds to States for construction
of roads, mass transit, and rail.
Under the AASHTO plan, the transportation finance corporation would
use new or increased Federal funds to back a $60 billion tax-credit
bond issue that, over 6 years, would increase funding for highways by
$34 billion, $8.5 billion for transit, and $5 billion for other needs,
including rail.
The senators wrote that ``a detailed examination of some of these
fairly complex financial tools and vehicles is warranted.'' They also
said that they look forward to ``close coordination regarding the
continuation of'' State infrastructure banks--which provide low-
interest loans to local governments to build transportation
infrastructure--and the TIFIA program, which provides direct loans,
loan guarantees, and lines of credit for up to 33 percent of the
construction cost of transportation projects costing at least $100
million.
A joint public works and finance committee hearing on innovative
finance is being planned for late September.
______
[From the Bond Buyer, Thursday, August 1, 2002, Vol. 341, No. 31440]
Senate Panel Tells TIFIA Program to Make Do With 2002 Leftovers
(By Humberto Sanchez)
Because the TIFIA program has only awarded funds to 11
transportation projects since it was launched in 1998, the Senate
Appropriations Committee has decided not to provide any more funds to
the slow-starting financing program in fiscal 2003.
Under the $64.6 billion fiscal 2003 transportation funding bill
that was approved by the committee last week, the $130 million that was
authorized under the Transportation Infrastructure Finance and
Innovation Act to provide credit assistance to large transportation
projects would be shifted to three other programs in the fiscal year
that starts Oct. 1. Those are the transportation and community and
system preservation pilot program, the national corridor planning and
development program, and the coordinated border infrastructure and
safety program.
The proposed diversion of funds means that any transportation
projects selected for TIFIA loans, loan guarantees, or lines of credit
in fiscal 2003 would have to make do with the $96.million that program
administrators estimate is left over from the $120 million authorized
in the current fiscal year.
So far, in fiscal 2002--which ends Sept. 30--the Department of
Transportation has designated just one project for TIFIA assistance--a
subsidy to back a $450 million loan for a $3.3 billion plan to fortify
and rebuild parts of. the San Francisco-Oakland Bay Bridge that was
severely damaged by an earthquake 12 years ago. Although the Texas
Turnpike Authority closed on a $916.76 million TIFIA loan Monday, that
aid was actually approved in 2001.
``We think we'll have enough to finance any projects that we
anticipate,'' said Max Inman, acting head of the DOT office that
oversees the TIFIA program. ``Hopefully it won't have an impact. But
you never know what might happen later in the year. Currently, we are
not seeing anything that would be beyond the anticipated need.''.
Documents accompanying the transportation appropriations bill--
which was approved last Thursday and is currently awaiting
consideration by the full Senate--explain that the committee diverted
the funds because it believes that demand for credit assistance has not
kept pace with the amount of subsidy available under the program.
Meanwhile, the House Appropriations Committee has not started work on
its bill and has not decided whether to follow the Senate panel and
transfer TIFIA funds to other projects.
While TIFIA program administrators agree that the program has more
funds than it will likely use, they contend that the program could
assist more projects after project sponsors and TIFIA administrators
get used to the subtleties of the program.
Despite the diversion of funds, the program has strong support.
``The committee believes that TIFIA is an important part of the Federal
Government's overall infrastructure investment effort--one that is
likely to grow in importance and size in the future,'' the Senate
Appropriations Committee said in the report accompanying the 2003
transportation bill.
Last month Transportation Secretary Norman Y. Mineta lauded the
program and noted that it will be included in the Bush Administration's
plan to reauthorize the Transportation Equity Act for the 21st Century,
or TEA-21, which expires on Sept. 31, 2003. Mineta will unveil the
proposal in the fiscal 2004 budget, which is due to be sent to Congress
in February.
The Senate Environmental and Public Works Committee and the Finance
Committee plan to hold a hearing in September on innovative finance
where ways of making the program more efficient will be explored.
To date, the DOT has selected 11 projects in eight States, the
District of Columbia, and Puerto Rico to receive TIFIA assistance. At a
budgetary cost of slightly more than $200 million to the Federal
Government, the projects have provided $3.7 billion in credit
assistance that has backed transportation investments worth more than
$15 billion. The program provides direct loans, loan guarantees, and
lines of credit--in lieu of traditional grants--and can cover up to 33
percent of the cost of major surface transportation projects that cost
at least $100 million.
______
[From The Bond Buyer, Tuesday, September 3, 2002, Vol. 341, No. 31462]
Road Revolution Coming?
(By Humberto Sanchez)
WASHINGTON--First of a two-part series.
fannie mae and freddie mac revolutionized the mortgage business.
Now a plan being floated by the American Association of State
Highway and Transportation Officials wants to copy that success by
establishing the Transportation Finance Corporation, a centralized,
federally chartered entity that would issue taxable tax-credit bonds to
finance transportation infrastructure projects.
Fannie Mae and Freddie Mac are publicly held corporations that were
established by the Federal Government to increase the availability of
home mortgages by establishing a liquid, well-functioning home loan
secondary market. The corporations, known as government-sponsored
enterprises, or GSES, purchase mortgages from banks and financial firms
and package them into securities that are sold to investors. The banks'
financial firms use the money from the sale of the home loans to make
more loans.
But the TFC, whose name some believe will be shortened by lobbyists
and congressional staffers to Trannie Mae or Trans Mac, would be
designed to increase Federal investment in transportation
infrastructure by establishing an active market for tax-credit bonds.
The plan, calls for Congress to charter the TFC as a new, private,
nonprofit organization that would be authorized to sell about $60
billion in tax-credit bonds over 6 years. The bond proceeds would be
given as grants to States primarily to help finance highway and transit
projects, and the Treasury would provide a tax credit to investors in
lieu of interest payments.
AASHTO--the lobbying group representing State departments of
transportation--is currently shopping the proposal around to Congress,
investment bankers, and rating agencies to assess its viability.
Depending upon the level of interest in the plan, the association will
vote later this fall on whether to adopt the proposal as part of its
lobbying campaign to reauthorize the 1998 Transportation Equity Act for
the 21st Century, which expires Sept. 30, 2003.
But while AASHTO maintains that preliminary responses to the
proposal have been positive, the success of the plan rests on its
ability to balance Congress' cost concerns with the transportation
finance interests of States and the interest of investors.
how the tfc would work
Under AASHTO's plan, the TFC would issue the $60 billion in tax-
credit bonds over 6 years, starting the year TEA-21 is reauthorized and
extending through the transportation act's proposed 6-year life span.
``The bonds would have a 20-to 25-year life,'' said Jack Basso,
AASHTO's director of management and business development. ``We would
cycle them out so that we have a 25-year level of activity because of
the way the bonds are issued over time.''
Of the $60 billion in bond proceeds, about $17 billion would be set
aside in a sinking fund that would be used to pay back the principal.
The sinking fund would invest in Treasuries or other similarly safe
instruments that, over time, should yield enough to pay back the
principal.
``We are assuming that we will get about a 6 percent return on our
investment, and our market research says that that is perfectly
reasonable,'' Basso said. ``At the end of that 25-year cycle, that $17
billion will have grown sufficient to pay off the principal of the
bonds--the $60 billion.''
The plan also calls for repaying the Federal Government for the
income tax credits--which go to bondholders in lieu of debt service
payments--through one or more strategies that are currently being
explored by the association.
States would be required to provide a 20 percent match to receive
their share of the bond proceeds, which would be distributed to States
through apportionment formulas similar to the ones currently used to
redistribute gas tax receipts collected into the highway trust fund.
States would not be liable for repayment of the bonds because a portion
about 30 percent of the bond proceeds would be invested in a sinking
fund that would raise the money to pay back the bond principal, and the
tax credits would be paid by the Treasury.
However, the plan calls for the tax credits--which AASHTO estimates
will cost the Federal Government roughly $19 billion--to be repaid by
one or more methods from a list of possible strategies. The list
includes drawing down reserves in the highway trust fund, collecting
the interest on fund reserves, a gas tax increase, or indexing the gas
tax.
Other possibilities AASHTO is exploring to generate funds to pay
for the tax credits include capturing the 2.5 cents for each gallon of
ethanol sold that now goes into the general fund rather than the
highway trust fund, and the 5.3 cents per gallon subsidy that
encourages the use of ethanol and ethanol blended fuels, such as
gasohol.
The highway trust fund--a pool of money created by gasoline and
highway user taxes and tapped to finance the nation's highway and
transit projects--is the primary funding source for highway and transit
construction. Transportation infrastructure advocates are concerned
that increased use of ethanol would deplete the trust fund.
Ethanol is currently taxed at 13.1 cents per gallon--5.3 cents a
gallon less than gasoline. However, 2.5 cents of the 13.1 cents goes
into the Treasury's general fund, rather than the highway trust fund.
AASHTO believes that the trust fund could gain an additional $3 billion
to $4 billion over 6 years by capturing that 2.5 cents.
AASHTO would also like to have an amount equal to the 5.3 cents per
gallon ethanol subsidy paid into the trust fund, a move the group
estimates would add $6 billion to $7 billion to the trust fund over 6
years.
Diverting the 2.5 cents per gallon in ethanol taxes into the trust
fund has a good chance of becoming law, the group believes, because it
has support in the House and Senate and is included in the energy bill
that is currently being negotiated by the two chambers. If the energy
bill fails to become law, which many observers expect, Sen. Max Baucus,
D-Mont., who heads the Senate Finance Committee, is expected to push
legislation he introduced in June to get both the 2.5 cents and the
equivalent of the 5.3 cents in reduced taxes per gallon of ethanol paid
into the trust fund.
in addition to the ethanol-related funds, the group anticipates
that the highway trust fund will grow by an additional $17 billion over
6 years due to an estimated 3 percent increase in travel.
``There is this menu of several possible options,'' said Bryan
Grote, a principal with Mercator Advisors, which is working on the plan
with the group. ``AASHTO is not advocating any particular option at the
moment, they are just saying that from one or more of those menu items,
you could possibly raise additional revenues that would off set the
budget costs of the tax credits of this proposal.''
politics
The inclusion of a device to repay the $19 billion in tax credits
gives the measure a significant advantage in gaining approval from
Congress, the plan's proponents believe.
``In order for this to have any kind of realistic consideration,
they have to propose some budgetary offset to the cost of those tax
credits,'' said Grote, a former official with the Department of
Transportation.
There are currently two tax-credit bond measures pending in
Congress, and AASHTO believes that the TFC proposal has an advantage
over both. The pending measures include a bill in the House that would
authorize States to issue $12 billion in taxable tax-credit bonds and
$12 billion in tax-exempt bonds over 10 years for high-speed rail
projects and legislation in the Senate that would authorize Amtrak to
issue $12 billion in tax-credit bonds over 10 years for high-speed rail
projects.
``What makes this proposal unique, as opposed to other proposals of
this nature, like the high-speed rail bill or the Amtrak bill, is that
we propose a way to raise revenue to pay the tax-credit costs,'' said
AASHTO's Basso. ``Our strategies will allow us to raise the money and
reimburse the Treasury for the cost of those tax credits. That's a very
significant and distinguishing feature in this matter,'' he said.
Despite any advantages the plan may have, Members of Congress still
need to be convinced.
One objection Congress may have to the plan, according to a
staffer, is that the proposal would, in effect, take the funds out of
Congress' control and put it in the hands of the board that would run
the TFC.
However, AASHTO maintains that the TFC board would just administer
the operation of the entity and the issuing of the bonds. The bond
proceeds would be distributed to the States according to a
congressionally approved formula.
``The board's purpose would be to administer the bonds; do the
fiduciary work that's necessary from an investor's standpoint,'' Basso
said. ``But principally the decisions on money would work exactly as
they do now because the bulk of the highway and transit funding, almost
all of it, would go out under congressionally mandated formulas. The
program, from the State's perspective, would look and feel and work
pretty much as it does today; the difference is where the money's
coming from,'' he said.
The principal committees that would need convincing are the two
tax-writing committees--the Senate Finance Committee and the House Ways
and Means Committee.
The transportation authorizing committees--the House Transportation
and Infrastructure Committee and the Senate Environment and Public
Works Committee--would also have jurisdiction. The Senate Banking
Committee, in addition, would have a say in the legislation because it
oversees the nation's transit program.
While it''s early in the process of selling the plan to Congress,
AASHTO officials maintain the reception to it so far has been
favorable.
``It's important that we work with the Congress to help find some
way to increase transportation funding,'' said Pennsylvania
Transportation Secretary Bradley L. Mallory, who is also AASHTO's
president. And ``the political reception to the plan has been good.''
But that does not surprise AASHTO officials, since some of the
chairmen of these committees are very amenable to innovative finance
ideas for transportation projects.
For example, Sens. James M. Jeffords, I-Vt., chairman of the public
works panel, and Baucus plan to hold a joint Environment and Public
Works and Finance committee hearing on innovative finance as soon as
this month.
The two, along with 11 other senators, sent a letter on June 11 to
Transportation Secretary Norman Y. Mineta, asking him to investigate
new ways to leverage Federal funds to finance the construction of
needed infrastructure, including using a centralized entity to fund
loans and issue taxable tax-credit bonds.
The senators--including Robert C. Smith, R-N.H., and Charles E.
Grassley, R-Iowa, the top Republicans on the public works and finance
committees--said they are interested in exploring the possibility of
``using a centralized entity to fund loans and provide credit
enhancement, and the use of tax credit bonds as a financing vehicle for
transportation infrastructure,'' according to the letter.
In the House, Rep. Thomas E. Petri, R-Wis., chairman of the
Transportation and Infrastructure Committee's highways and transit
subcommittee, has shown interest in the plan, noting at a hearing in
May that AASHTO had ``stepped up to bat.''
Officials in the Bush Administration are also exploring the plan,
but have not endorsed it.
At a hearing in May, Federal Highway Administration chief Mary E.
Peters told a congressional panel that she had met with AASHTO
representatives and is reviewing their initiatives.
``We are actively working at a number of the options but have not
yet taken an administration position on any,'' Peters said.
states' needs
States have long argued that increasing traffic congestion around
the Nation has resulted in a pressing need to build additional roads
and highways, as well as to maintain and improve aging ones. According
to the DOT, an annual investment of $56.6 billion is needed over the
next 20 years just to maintain the physical condition of existing
highways and bridges.
To meet these needs, AASHTO wants to increase funding each year to
$41.4 billion for highways and to $10 billion for transit by the end of
the 6-year life span of the successor to TEA-21. By comparison, the
Federal Government in fiscal 2002 provided $31.8 billion for highway
programs and $6.8 billion for transit.
The TFC, the proceeds of which would work in conjunction with the
highway trust fund, would play a crucial role in achieving those
funding levels and would increase funding by $34 billion over 6 years
for highways and $8.5 billion for transit, AASHTO officials maintain.
The plan also would provide $5 billion for a capital revolving fund
that would help finance other needs, such as freight rail, intermodal
projects, passenger rail, and transportation security infrastructure.
The $5 billion could be generated, over 6-years, from the menu of
revenue-generating options, but the association has not specified where
the funds would come from. The revolving fund would provide direct
loans, lines of credit, and loan guarantees.
``The dollars that we have in the system just don't come anywhere
near meeting the needs at the State, city, and county level,'' said
John Horsley, AASHTO executive director. ``When we look at what is
needed out there and where we stand in the current program, it is clear
that we need to substantially grow the program.''
Previously, it was a gas tax increase that provided additional
funding for road construction. During the administrations of Presidents
George Bush and Bill Clinton, highway trust fund revenues--which are
made up of gas-tax receipts--were doubled.
But, ``this time we are not seeing a willingness, or an openness,
or an appetite, in Congress or the administration to enact a
substantial fuel-tax increase,'' Horsley said.
The TFC would allow all States to benefit from debt leveraging and
innovative finance and meet the funding goals, AASHTO contends.
Horsley noted that bonding and innovative finance ``have enabled
many States to do substantially more than they could with just current
cash-flows or current Federal allocations,'' and he cited the issuance
of Garvees, the use of State infrastructure banks, and the
Transportation Infrastructure Finance and Innovation Act in particular.
Grant anticipation revenue vehicles, or Garvees, are backed by
annual Federal transportation grants, while State infrastructure banks
provide low-interest loans to local governments to build transportation
infrastructure. The TIFIA program provides direct loans, loan
guarantees, and lines of credit for up to 33 percent of the
construction cost of transportation projects costing at least $100
million.
``But we've also seen some States that are restricted by
constitution, restricted by statute, or simply haven't, as a matter of
practice, gone to debt financing to extend what they could do,''
Horsley said.
In addition, the primary funding mechanism for highway and transit
financing, the highway trust fund, is under fire because gas tax
receipts have been down and subsidies for alternative fuels have
reduced the fund.
Under TEA-21, receipts going into the highway trust fund were tied
to Federal highway and transit funding levels so that the funds could
only be used to finance highway and transit projects.
As a result, TEA-21 provided specified funding amounts for highway
and transit programs for fiscal 1999 through 2003 and included a
provision that the funding levels would be recalculated annually to
reflect actual and projected increases and decreases in tax receipts
over the 6-year life of the law.
States were initially pleased with this arrangement, and the
adjustment, referred to as the revenue aligned budget authority, has
added over $9 billion to the nation's highway programs, due primarily
to the booming economy of the late 1990's.
But as the economy stalled and estimates of gas-tax receipts turned
out to be too optimistic, funding for highways in fiscal 2003 under
TEA-21 was set at $23.3 billion--$8.5 billion below the fiscal 2002
funding amount. The cut was included in the president's fiscal 2003
budget, which sought $23.3 billion for highway programs.
But highways will get at least $27.7 billion in 2003 after $4.4
billion was included in the emergency supplemental spending measure
approved this summer. In addition, the Senate Appropriations Committee
recently approved a $64.6 billion transportation-spending package for
fiscal 2003, which included $31.8 billion for highway construction.
Most observers believe that fiscal 2003 highway finding will fall
somewhere in this range.
State departments of transportation are anxiously watching to see
how much highway funding they'll get, because a cut from the $31.8
billion could adversely affect the ability of States to use bonds to
finance transportation projects.
``I think what we are doing with the TFC proposal is expanding
substantially on the concept of innovative finance,'' Basso said.
While programs such as TIFIA and State infrastructure banks boosted
the number of transportation projects, AASHTO maintains that they are
niche programs and don't help finance the most projects in the most
States.
Under TIFIA, a project has to cost at least $100 million, a
threshold that AASHTO contends is too high to help many States. Also,
due to the manner in which TIFIA was authorized, State infrastructure
banks finance projects in only a limited number of States. Thirty-nine
States are authorized to operate State infrastructure banks, but under
TEA-21, only four States--California, Florida, Missouri, and Rhode
island--are permitted to augment their funds with new Federal
transportation grants. As a result, most State programs have failed to
take off to the extent many observers had expected.The TFC proposal,
AASHTO maintains, is a broader form of innovative finance and will help
more States and finance more projects.
``They work for certain types of projects, but they aren't
universal,'' Basso said. ``What we are proposing here is a very
centralized, universal attempt to raise money.''
Next: How a market for tax credit transportation bonds can be
created.
______
[From Transportation Watch, Thursday, September 26, 2002]
for upcoming reauthorization of tea-21 senators eye expanding
innovative finance
Senators interested in alternative financing methods for highway
and transit projects learned Sept. 25 that while existing programs have
accelerated project construction, limitations cause States to continue
to look for traditional pay-as-you-go financing.
As Congress prepares for the 2003 reauthorization of the
Transportation Equity Act for the 21st Century (TEA-21), lawmakers are
looking for ways to boost revenues to the Highway Trust Fund and to
develop project financing mechanisms beyond the trust fund that would
encourage greater private sector investment.
``As successful as the trust fund has been, our transportation
needs far outweigh our resources,'' Senate Finance Committee Chairman
Max Baucus (D-Mont.) said at a rare joint hearing of his committee and
the Senate Environment and Public Works Committee.
The three main innovative financing methods currently in use to
make highway investments are State Infrastructure Banks (SIBs), Grant
Anticipation Revenue Vehicles (GARVEEs) and the Transportation
Infrastructure Finance and Innovation Act (TIFIA).
Innovative financing techniques give States additional options to
accelerate projects, leverage Federal investments, and increase the
``tools in the toolbox'' of States and local or regional governments,
according to JayEtta Z. Hecker, the General Accounting Office's
director of physical infrastructure issues.
According to the Federal Highway Administration, as of June 2002,
six States have issued GARVEE bonds that are repayable with future
Federal aid totaling $2.3 billion; 32 States have SIBs including 294
loan agreements worth $4.06 billion, that once the loans are repaid,
the money will recycle back to the revolving fund; and 9 States have
TIFIA credit assistance agreements for 11 projects representing $15.4
billion in investment.
Downsides Noted
With the advantages, however, come a wide array of disadvantages,
Hecker said.
State DOTS that are comfortable and used to traditional funding
methods are not always willing to use innovative financing nor do they
always see the advantage.
``States are very cautious about debt financing,'' Hecker said. In
her written testimony, she said two States said they have a philosophy
against committing their Federal dollars to debt service, rendering
themselves unable to partake in new funding methods.
There also are a number of limitations in State and Federal law
that do not give States the authority to use these funding methods. For
example, California requires voter approval to use its trust fund
allocations to pay for debt servicing costs, Hecker said. Other States
have laws that restrict public-private partnerships.
The TIFIA program has a requirement that projects cost at least
$100 million, which limits it to large projects.
In response to a question by Senate environment committee Chairman
James M. Jeffords (I-Vt.), Phyllis F. Scheinberg, DOT's deputy
assistant secretary for budget and programs, said it was unclear if
lowering the TIFIA threshold to $50 million would make a difference.
``No one has come in and said they can't meet the $100 million
threshold,'' Scheinberg said. ``We have a $30 million threshold for ITS
and don't have takers on that.''
Looking to Reauthorization
States also need to determine the short and long-term costs
associated with various financing mechanisms to determine which best
fits their needs and abilities. They also must decide which form of
debt financing is best, with it being repaid by highway users or by the
general population, Hecker said.
One public finance industry professional told senators that TEA-
21's successor should provide incentives for public/private, market-
based partnerships that finance, develop, operate, and maintain
highways, mass transit facilities, high-speed and freight rail and
inter-modal facilities.
``This could be accomplished by permitting the targeted use of $15-
$20 billion of a new class of private activity bonds, and/or by
modifying certain restrictions in the Internal Revenue Code on tax-
exempt bond financing of transportation modes,'' said Jeffrey Carey,
managing director in Municipal Markets at Merrill Lynch.
Carey also supported a proposal by the American Association of
State Highway and Transportation Officials to create the Transportation
Finance Corporation, a federally chartered, nonprofit corporation that
would provide increased investment resources through the leveraging of
existing resources.
``Federal Government corporations have helped the capital markets
create strong and liquid markets to fulfill other policy and
programmatic objectives,'' Carey said.
Even if lawmakers refine some of these innovative finance tools to
make them more mainstream, they will not supplant existing funding
methods.
``What we discuss today is a complement to our traditional
programs, not a replacement,'' Jeffords said.
Upcoming Highway Hearings
The House Highways and Transit Subcommittee will hold a hearing
Sept. 26 on capital and maintenance needs of the highway and transit
system. The Senate Transportation, Infrastructure, and Nuclear Safety
Subcommittee will hold a hearing Sept. 30 to examine the conditions and
performance of the Federal-aid highway system.
The Federal Highway Administration's long-awaited Conditions and
Performance Report remains tied up at the Office of Management and
Budget and DOT's Office of the Secretary and will not be available
until October, a spokesman said. However, it will be discussed at both
hearings.
__________
American Highway Users Alliance
September 24, 2002.
The Honorable Max Baucus,
Chairman, Committee on Finance,
The Honorable James Jeffords,
Chairman, Committee on Environment and Public Works,
U.S. Senate,
Washington, D. 20510.
Re: Joint Hearing of September 25, 2002
Dear Chairmen Baucus and Jeffords: The Highway Users Alliance (AHUA)
takes this opportunity to briefly address issues regarding the Federal
highway program and asks that this letter be included in the record of
the hearing of the Finance and Environment and Public Works Committees
on this subject.
Your committees are to be commended for holding this hearing on how
the Federal Government can finance an increases level of Federal
investment in highways--an investment that will provide important
benefits country.
As the nation's broadest-based highway advocacy organization and
the organization that represents the motorists, truckers, and
businesses that pay the taxes that fully fund and rely on our nation's
highway and bridge investments, The Highway Users is particularly
interested in your joint efforts to improve revenue collection and
increase investments.
America's roads have serious and documented funding needs--too many
Americans are dying or being injured on roads suffering from outmoded
design--traffic congestion is worsening, threatening safety, slowing
air quality progress, increasing tailpipe greenhouse gas emissions,
wasting fuel, slowing product deliveries, and taking commuters away
from their families and other productive exercises.
Some have called for increasing Federal fuel taxes. If there are
demonstrated needs and current funding is being invested appropriately,
highway users will seriously consider that option. But we believe that
your committees must first improve where today's taxes are going,
prevent further erosion of available resources, and examine all means
available to boost highway revenues without raising taxes.
Thus, we take this opportunity to support S. 2678, the ``Maximum
Economic Growth for America Through the Highway Trust Fund Act,'' bi-
partisan legislation introduced earlier this year by Chairman Baucus.
The 12 co-sponsors of that bill include the following members of the
Finance or Environment and Public Works Committees: Senators Daschle,
Reid, Graham, Warner, Bond, Thomas, and Crapo. We thank all the
supporters of that legislation for their leadership in advancing the
provisions of that bill.
Among other provisions, S. 2678 would provide that the 2.5 cents
per gallon of tax on gasohol that currently is directed to the General
Fund of the Treasury would be deposited in the Highway Account.
In addition, S. 2678 would deposit into the Highway Account an
amount equal to the fuel taxes not imposed on gasohol due to the
gasohol tax preference. This is in keeping with historical precedence
of funding agricultural programs, like ethanol, from the general fund.
The bill would not raise the tax imposed on gasohol. This means that
the Highway Account would receive treatment on gasohol comparable to
the treatment currently given to the Mass Transit Account. That
account, unlike the Highway Account, already receives the same amount
of funding for a gallon of gasohol as it does for a gallon of regular
gas.
S. 2678 would also resume the practice of crediting the Highway and
Mass Transit Accounts of the Highway Trust Fund with interest on their
respective balances. While we would prefer that Congress invest those
surpluses, the trust fund should receive interest on highway use taxes
collected, but not invested.
Increased revenues for the highway program can also come from
improved collections. We ask that the two committees work to achieve
greater compliance with our tax laws that support the Highway Trust
Fund. We have heard, for example, that changing the point of collection
of aviation fuel taxes could add billions to the Trust Fund over the
life of a reauthorization. Other enforcement steps could be beneficial
as well. We urge the Congress to take appropriate steps to achieve the
highest possible rate of collection of the taxes due to the Highway
Trust Fund.
In addition, we understand that Senator Baucus is exploring
additional legislation that would allow the Secretary of the Treasury
to sell tax credit bonds. The proceeds would go into the Highway Trust
Fund and the General Treasury would be responsible for the principal
and interest. We are eager to see this approach advance as an
additional means of increasing highway investment.
Mssrs. Chairmen, the American Highway Users Alliance commends the
Committees for holding this hearing and urges enactment of legislation,
in accord with the points outlined above, to finance increased Federal
highway investment. Thank you for your consideration of our views on
this important matter.
Respectfully submitted,
William D. Fay, President and CEO,
American Highway Users Alliance.
__________
Statement of the Transportation Departments of Montana, Idaho, North
Dakota, South Dakota, and Wyoming
The transportation departments of Montana, Idaho, North Dakota,
South Dakota, and Wyoming submit this brief statement for the record of
the joint hearing held on this date by the Committee on Finance and the
Committee on Environment and Public Works.
We are extremely pleased that, today, there is a consensus in the
country that a well funded highway program makes an important and
positive contribution to our nation's economic prosperity and quality
of life. But we urge the Congress not to rest on that consensus, but to
buildupon it and increase today's level of Federal investment. As the
Congress receives testimony and prepares to shape legislation to
reauthorize federally assisted surface transportation programs, it is
important to keep foremost in mind that increased transportation
investments will truly advance the public interest and help all
citizens and all States.
The two Committees are to be commended for holding this hearing.
The nation's ability to achieve increased transportation investment
requires increased funding. It requires an answer to the question of
how the Federal Government will finance its contribution to such an
increase.
A very important part of the answer is already before you. Earlier
this year, Chairman Baucus, with the co-sponsorship of Senators Crapo,
Daschle, Thomas, Craig, Enzi, Johnson, Warner, Reid, Graham, Bond,
Harkin, and Carnahan, introduced bi-partisan legislation, S. 2678, that
would increase receipts into the Highway Trust Fund without raising
taxes.
We support every provision of that legislation.
That legislation would allow the Highway Account of the Highway
Trust Fund, which has foregone very significant revenue due to
increased gasohol consumption, to be properly credited. The bill would
ensure that the 2.5 cents per gallon of tax on gasohol that currently
is directed to the General Fund of the Treasury would be deposited in
the Highway Account. In addition, the bill would credit the Highway
Account with funds equal to the amount of fuel taxes not imposed on
gasohol due to the gasohol tax preference (currently 5.3 cents per
gallon). The bill would not raise the tax imposed on gasohol. This
approach would make the Highway Account whole with respect to taxes
either paid or foregone with respect to gasohol consumption. It would
allow the Highway Account to finally receive treatment on this issue
comparable to the treatment on this issue currently given to the Mass
Transit Account which, unlike the Highway Account, already receives the
same funding for a gallon of gasohol as it does for a gallon of regular
gas.
S. 2678 also properly would reinstate the principle that the
Highway and Mass Transit Accounts of the Highway Trust Fund should each
be credited with interest on their respective balances. The bill also
includes a thoughtful provision requiring a commission to look at long-
term issues in financing the surface transportation program.
So, while witnesses today may be emphasizing various innovative
ways of financing increased Federal surface transportation investment,
we wanted to emphasize our support for the important and
straightforward provisions included in S. 2678, the ``Maximum Economic
Growth for America Through the Highway Trust Fund Act.''
As to additional financing mechanisms, at this time we will limit
ourselves to a brief positive comment on a concept that we understand
to be under development by Senator Baucus. The approach would be for
the Secretary of the Treasury to sell bonds with the proceeds being
deposited in the Highway Trust Fund. The General Treasury would be
responsible for the principal and interest. We welcome the development
of this additional approach as a means of serving our national interest
in increased investment in highways and transportation.
In closing, we commend Chairman Baucus and Ranking Member Grassley
of the Finance Committee and Chairman Jeffords and Ranking Member Smith
of the Environment and Public Works Committee for holding this hearing
on the important issues of finding ways to finance increased Federal
transportation investment. That investment is certainly essential to
the economic future of our States and we appreciate this opportunity to
offer views on how that might be achieved.
__________
Statement of the American Society of Civil Engineers
The American Society of Civil Engineers (ASCE) is pleased to
provide this statement for the record on financing alternatives for the
nation's surface transportation programs.
ASCE, founded in 1852, is the country's oldest national civil
engineering organization representing more than 125,000 civil engineers
in private practice, government, industry and academia who are
dedicated to the advancement of the science and profession of civil
engineering. ASCE is a 501(c)(3) non-profit educational and
professional society.
ASCE believes the reauthorization of the nation's surface
transportation programs should focus on three goals:
Expanding infrastructure investment
Enhancing infrastructure delivery
Maximizing infrastructure effectiveness
ASCE's 2001 Report Card for America's Infrastructure graded the
nation's infrastructure a ``D+'' based on 12 categories, including
roads with a grade of ``D,'' bridges with a grade of ``C,'' and transit
with a grade of ``C-.'' Roads, bridges and transit have benefited from
an increase in Federal and local funding currently allocated to ease
road congestion, to repair decaying bridges, and to add transit miles.
However, with 29 percent of bridges still ranked as structurally
deficient or obsolete and nearly a third of major roads considered to
be in poor or mediocre condition, engineers warn that Congress cannot
afford to allow promised funding for transportation to lapse. Transit
ridership has increased 15 percent since 1995, adding a strain despite
unprecedented growth in transit systems and increased funding.
Establishing a sound financial foundation for future surface
transportation improvements is an essential part of reauthorization.
TEA-21 provided record funding levels to the States and significant
improvements have been made to our nation's infrastructure. In spite of
these notable efforts, the nation's surface transportation system will
require an even more substantial investment. United States Department
of Transportation (DOT) data reflect the fact that an investment of $50
billion per year would be needed just to preserve the system in its
current condition. With funding as the cornerstone of any attempt to
reauthorize TEA-21 it is imperative that a variety of funding issues be
advanced as part of ASCE's overall strategy.
Sustaining Infrastructure Investment
ASCE supports the following goals for infrastructure investment.
A 6-cent increase in the user fee with one cent dedicated
to infrastructure safety and security. These new funds should be
distributed between highways and transit using the formula approved in
TEA-21.
The user fee on gasoline should be indexed to the
Consumer Price Index (CPI) to preserve the purchasing power of the fee.
The Transportation Trust Fund balances should be managed
to maximize investment in the nation's infrastructure.
Congress should preserve the current firewalls to allow
for full use of trust fund revenues for investment in the nation's
surface transportation system.
The reauthorization should maintain the current funding
guarantees.
Congress should stop diverting 2.5 cents of the user fee
on ethanol to the General Fund, and put it back into the Highway Trust
Fund.
Make the necessary changes to alter the Revenue Aligned
Budget Authority (RABA) to decrease the volatility in the estimates
from year to year and ensure a stable user fee based source of funding.
The current flexibility provisions found in TEA-21 should
be maintained. The goal of the flexibility should be to establish a
truly multi-modal transportation system for the Nation.
ASCE supports a reliable sustained user fee approach to building
and maintaining the nation's highways and transit systems. While ASCE
supports a wide variety of innovative approaches to finance surface
transportation projects, ASCE feels strongly that the current user fee
arrangement is the most equitable and efficient means of ensuring
stable transportation funding.
First to be addressed is the issue of raising the user fee on motor
fuels. While the gas tax is an important element of the current revenue
stream feeding the Federal Highway Trust Fund, it continues to erode in
value due to its inherent inelastic nature. Two strategies must be
advanced to remedy this condition. First, raise the gasoline user fee
by six cents. This would provide a much needed infusion of funding
toward the $50 billion per year need. In tandem with raising the motor
fuel tax, ASCE believes that it is important to shore up the weakness
of the motor fuel tax and its inability to retain value over the long
term by adding a provision to the law that would index it based on the
Consumer Price Index (CPI). This would allow the rate to adjust and
reflect the current economic conditions of the Nation.
Innovative Financing
ASCE supports the innovative financing programs and advocates
making programs available to all States where appropriate.
Additionally, the Federal Government should make every effort to
develop new programs.
ASCE supports the following changes to enhance the existing
programs:
Transportation Infrastructure Finance and Innovation Act (TIFIA)
The TIFIA process for review, approval and negotiation is
regarded as burdensome, and could be streamlined.
TIFIA projects have a minimum eligibility threshold of
$100 million and consideration could be given to lowering this to $50
million to expand the pool of projects.
TIFIA loans could be ``fully subordinated''. Current
TIFIA legislation is written to subordinate TIFIA loans to other
creditors. However, in the event of liquidation/default, the TIFIA loan
advances to parity status with other creditors. This is known as the
``springing lien'' provision. It is thought by some that this has
limited the availability of other credit. The issue is controversial,
with pros and cons on both sides, but reform should be seriously
considered.
State Infrastructure Banks (SIBs)
With the exception of five States (Texas, Rhode Island,
Florida, Missouri, and California), TEA-21 did not permit further
capitalization of SIBs with Federal funds. It is felt that this has
suppressed SIB activity.
Federal regulations still apply to loan funds that are
repaid to the bank, encumbering SIB funded projects with Federal
regulatory requirements.
Grant Anticipation Revenue Vehicles (GARVEEs)
Increase the flexibility of GARVEE bond repayment
methods. For example, utilize the total apportionment amount as a
source of repayment (i.e., all funding categories), so that no
particular funding category is overburdened.
New programs for consideration as part of the next reauthorization
are:
Increased use of user fees, tolls, value pricing, and HOT
lanes.
Possible indexing of highway trust fund motor fuels tax
to inflation.
Establishing a true multimodal funding program (i.e.,
funds can be used interchangeably for rail, highway, freight,
intermodal facilities, etc.).
Tax credit bonds, private activity bonds, and tax-exempt
bonds for privately developed projects.
Tax-based revenues are not sufficient to keep pace with the
nation's transportation needs.
There is a compelling need for enhanced funding, to a large extent
through user-oriented fees that have been demonstrated to be a well-
accepted and equitable source of infrastructure financing. In the case
of surface transportation, federally sponsored studies demonstrate the
need for higher levels of investment. An additional challenge is to
convince our citizens and our elected leaders that we must either ``pay
now'' or ``pay later'', and that paying now is much more cost-effective
and prudent in the long run.
Innovative financing techniques can greatly accelerate
infrastructure development and can have a powerful economic stimulus
effect compared to conventional methods. This is the current approach
in South Carolina, Georgia, Louisiana, Florida, and Texas, where
expanded and accelerated transportation investment programs have been
announced. Innovative financing techniques, including toll road-based
funding, figure heavily in several of these State programs.
The innovative programs in TEA-21 have been a good start, but more
needs to be done to expand their scope, and new programs or approaches
must be introduced. We must find new and innovative ways to finance the
critical transportation infrastructure needs of the Nation.
Life Cycle Cost & Surface Transportation Design
The use of Life-Cycle Cost Analysis (LCCA) principles will raise
the awareness of clients of the total cost of projects and promote
quality engineering. Short-term design cost savings which lead to high
future costs will be exposed as a result of the analysis. In the short-
term the cost of projects will increase; however, the useful life of a
project will increase, and there may be cost savings in operations and
maintenance over the long term.
When the cost of a project is estimated only for design and
construction, the long-term costs associated with maintenance,
operation, and retiring a project, as well as the cost to the public
due to delays, inconvenience and lost commerce are overlooked. The
increasing use of bidding to select the design team has resulted in a
pattern of reducing engineering effort to remain competitive, with the
result of higher construction and life cycle costs.
ASCE encourages the use of Life-Cycle Cost Analysis (LCCA)
principles in the design process to evaluate the total cost of
projects. The analysis should include initial construction, operation,
maintenance, environmental, safety and all other costs reasonably
anticipated during the life of the project, whether borne by the
project owner or those otherwise affected.
Long-term Viability of Fuel Taxes for Transportation Finance
ASCE supports the need to address impacts on future surface
transportation funding and believes that provision should be made in
the next surface transportation authorizing legislation to explore the
viability of the most promising options to strengthen this funding. In
particular, the impacts of fuel cell technology should be studied as
well as how to create a mileage based system for funding our nation's
surface transportation system as this technology comes to market and
lessens the nation's dependence on gasoline as a fuel source for
automobiles.
Fuel taxes have long been the mainstay for transportation
infrastructure finance, but their future is now uncertain. In many
States, there is a strong reluctance to raise fuel taxes, and some
State legislatures have even reduced taxes to compensate for the sharp
increase in average gasoline prices over the last 2 years. Many
localities and States are supplementing or replacing fuel taxes with
other sources, such as sales taxes and other general revenue sources.
There is also a growing trend to use additives to gasoline for
environmental reasons, and the most prominent additive, ethanol, enjoys
a Federal exemption from fuel taxes that reduces Federal and State
trust fund revenues by some several billion dollars annually. Looking
ahead, a slow but steady increase in fleet efficiency--perhaps due to
increased market penetration by electric, fuel cell, or hybrid
technologies--would reduce the revenue per mile of use generated by
users. Whereas cleaner-burning fuels and increased fuel efficiency are
desirable policy goals in their own right, particularly in regard to
global warming, they may reduce the ability to rely on fuel taxes in
the future.
A helpful first step in this process will be the Transportation
Research Board's recently initiated Study on Future Funding of the
National Highway System, which will describe the current policy
framework of transportation finance and evaluate options for a long-
term transition to sources other than fuel taxes. The goals of the
study are to: (1) determine the extent to which alternatives to fuel
taxes will be needed in the next two decades or so; (2) analyze the
pros and cons of different alternatives in terms of political
feasibility, fairness, and cost; (3) suggest ways in which barriers to
these alternatives might be overcome; (4) recommend ways in which the
efficiency and fairness of the fuel tax could be enhanced, and (5)
recommend, as necessary, a transition strategy to other revenue
sources. The study's first task, to be summarized in an interim report,
will provide one or more scenarios to illustrate the time span during
which petroleum-based gasoline availability and cost might reduce fuel
tax revenues. The interim report has been requested to provide insight
to those parties involved in the development of the surface
transportation reauthorization legislation, particularly with regard to
projections of fuel tax revenues during the next reauthorization cycle.
The study will also provide estimates of trends in expenditures for
transportation infrastructure from sources other than the fuel tax.
__________
Statement of Ross B. Capon, Executive Director, National Association of
Railroad Passengers
Thank you for the opportunity to present this information. Our non-
partisan organization has worked since 1967 in support of more and
better passenger trains of all types in the U.S. Our vision of the
future includes an intercity rail passenger network that connects all
regions and metropolitan areas of the country and serves all important
transportation routes. Such a vision would be similar to the one
adopted with the authorization of the Eisenhower Interstate Highway
system in 1956.
It is critical that TEA-3 Reauthorization finally resolve the
chronic under-funding of passenger and freight rail transportation by
establishing a Federal program that encourages States to invest in both
passenger and freight rail development.
At a time of unprecedented highway congestion, the freight
railroads are reducing infrastructure improvement projects due to
decreasing rates of return on capital investments. Meanwhile, for 31
years, we have subjected Amtrak to unpredictable funding levels that
have left our national passenger rail system with a $5 billion backlog
in needed capital investments. In California alone, over $100 million
in intercity passenger rail investment plans that also would benefit
freight operations have been shelved until more Federal funding becomes
available. A strong rail system serving both passengers and freight is
a national necessity.
Individual States will never fulfill rail funding needs on their
own, nor will they sustain the national vision for an efficient freight
and intercity passenger rail network beyond their own borders. To
realize the national vision, the Federal Government must lead. The
traveling public wants intercity passenger rail. The rules for success
are simple: Give people half decent service, and they will ride; give
them great service, and they will come in droves. Very modest
investments in service have brought substantial returns in patronage.
To name just a few:
Downeaster (Portland, Maine to Boston): Inaugurated in
December 2001, this new route exceeded all revenue projections for the
entire year in only 6 months. Through the summer, the trains often had
standees even though third and fourth coaches were added to the
original consists (which had one combined cafe/coach/Coastal Club
Service car and two coaches). Although driving is an hour faster
(without traffic), New Englanders are choosing the train for its
convenience and comfort. August ridership was 30,700. With four daily
round-trips, that is an average of about 124 passengers per trip.
Long Distance Sleepers: In the January-March, 2002,
quarter, sleeping-car revenues increased 18 percent and travel
(measured in passenger-miles) 11 percent above year-earlier levels.
Airline revenues were still down about 20 percent.
Amtrak carries more passengers between New York and
Washington than all airlines, and Acela Express/Metroliner service is a
big factor in that. When all city-pair combinations between New York
and Washington are included, Amtrak's market share of the air-rail
segment surpasses 70 percent. Premium Acela Express and Metroliner
service has experienced a ridership surge of 35 percent since 2001.
Amtrak's share of the Boston-Philadelphia air-rail market
was 8 percent before Acela and Boston-New Haven electrification, but
that rose to 26 percent in the January-March, 2002, quarter (most
recent available). This means that, in spite of Amtrak running-times of
almost five or 6 hours (Acela Express and Acela Regional,
respectively), there is more than one Amtrak customer for every three
airline passengers. * In the Pacific Northwest, new Talgo trains helped
boost ridership from 226,000 in 1993 to 658,000 in 2001. (Passenger-
miles rose 2 percent during the first 11 months of fiscal 2002 in spite
of the travel recession.) The overall growth from 1993 was based on
marginal increases in frequency and speed (with the best Seattle-
Portland schedules now taking 31/2 hours, a 53 mph average).
Capitol Corridor: Since 1998, ridership on this bustling
Sacramento-San Jose route has climbed 132 percent, surpassing one
million annual passengers.
On the freight side, the Alameda Corridor in the Los Angeles area
has improved over 200 grade crossings, reduced truck traffic, and
tremendously enhanced the flow of freight trains between Los Angeles
and Long Beach. Not long before, freight-passenger interference was
reduced with construction of a rail-over-rail flyover in Los Angeles.
To make similar success stories possible elsewhere in California
and the rest of the Nation, the Federal Government must create a
partnership with States that supports and encourages investment in
passenger and freight rail. Several bills in the House and Senate, such
as RIDE-21 and S. 1991, laudably set the framework for a Federal rail
infrastructure program, where money should be spent, and how tax-exempt
bonds, tax-credit bonds, and expanding the Rail Rehabilitation and
Infrastructure (RRIF) program will provide the needed capital. However,
none of these bills outline where the cash needed to support these
Federal programs will come from.
Thus, the National Association of Railroad Passengers strongly
supports the creation of a Rail Trust Fund, similar to those used so
effectively for the highway and aviation modes.
While the Rail Trust Fund might eventually derive significant
revenue from user fees, user-based revenue sources would not generate
much revenue initially. In order for a rail trust fund to reach
critical mass, the Federal Government must first ``prime the pump'' by
earmarking revenue from other sources. Highways and aviation systems
were already relatively mature before creation of their trust funds.
Some possible Rail Trust Fund sources already exist in the form of
taxes levied on the railroads, which, unlike highway and aviation
taxes, do not benefit further investment in their respective mode.
This counter-productive precedent has hindered development of both
passenger and freight rail for decades. Between 1941 and 1962, the
Railroad Ticket Tax raised billions in revenue, none of which went
toward enhancing development of the freight or passenger rail service;
some revenues actually went toward highway development. Today, through
taxes levied on railroads on infrastructure and fuel, we continue to
discourage investments in rail by funneling these revenues into the
general treasury.
We believe rail should receive a portion of any future increase in
gasoline or aviation taxes. We support many State DOTs in the view that
they should be allowed to spend flexible gasoline-tax dollars on
intercity passenger rail. We do not believe the Nation or the cause of
balanced transportation benefits from an 'ironclad' mode-specific
approach to trust funds, but in the present context we certainly agree
that taxes levied on railroads (including Amtrak) should benefit
railroads--passenger and freight.
We know that freight railroads are very sensitive to the
possibility that creation of a trust fund would alter the competitive
balance among the railroads, or result in rail tax payments cross-
subsidizing passenger projects. We believe these challenges can be
addressed. General guidelines about overall project balance between
competing freight railroads and how improvements must benefit both
freight and passenger service could establish a fair process of
disbursement for all parties. Other stipulations about the share of
allowable projects whose benefits are judged to be ``passenger only''
could be negotiated. If Congress does not repeal the 4.3 cent diesel
tax which Amtrak and the freight railroads currently pay toward general
deficit reduction, then the $170 million raised annually from this tax
should be directed into a Rail Trust Fund, and no longer be set aside
for deficit reduction. This precedent has already been set, as similar
airline and highway taxes were redirected into their respective trust
funds in 1997. Since 1997, the railroads have paid approximately $1
billion in diesel taxes to general revenue; this money should be
retroactively rebated at its present value to the Rail Trust Fund and
set aside for rail infrastructure development.
Other revenue sources being considered for the Rail Trust Fund
include taxes on equipment sales, and passenger ticket taxes on
commuter and Amtrak trains. Any new taxes levied on the freight
railroad industry and passengers must not be viewed as a panacea, and
be implemented with restraint. Raising taxes on equipment will increase
startup costs for new services as well as decrease an already
diminished rate of return for capital investments. An equipment tax
will be pointless if railroads simply reduce their capital investments
further because they are now paying a tax on new equipment. A net gain
for capital investments infrastructure must accompany any tax levied on
new equipment purchases.
With respect to passenger tickets, again, NARP believes these taxes
must not be seen as a panacea, and be implemented cautiously (perhaps
not at all, or only after the results of meaningful capital projects
have become apparent in service improvements). Unfortunately, the vast
reservoir of patronage that made the railroad ticket tax so successful
(at raising general revenues!) between 1941 and 1962, is much smaller,
and cannot generate nearly as much revenue as before. A passenger
ticket tax must not try to make up this difference by imposing a much
higher tax rate; taxing passengers too much would stifle ridership to
the point that nobody rides the train. Amtrak already tries to set
fares to maximize revenues, and many fares already are very expensive.
Also, Amtrak, as noted above, already pays the 4.3 cent fuel tax.
Polls over the years have consistently shown public support for
faster, more frequent, and reliable passenger trains, including two
national polls this summer. A poll conducted by CNN/Gallup/USA Today
near the height of Amtrak's June cash crisis (June 21-23) found that 70
percent of the public support continued Federal funding for Amtrak.
Similarly, The Washington Post found that 71 percent of Americans
support continued or increased Federal funding for Amtrak (August 5
article reporting on July 26-30 poll).
If we provide quality service, the public will ride the trains. If
the Federal Government provides States a meaningful match, the States
will drive the needed investments. At the same time, the public also
will realize a tremendous benefit from an improved freight rail
network. Again, the key to realizing these benefits will be a long term
Federal partnership with States, and an adequately supported Rail Trust
Fund that would bring balance into national transportation policy, and
ultimately benefit the users of every mode of transportation.
The web site of the National Association of Railroad Passengers is
.
__________
Statement of State Senator Betty Karnette, California State Capitol,
Sacramento, CA
Thank you for having this important hearing to discuss the security
and infrastructure needs of trade-based transportation throughout this
great country of ours.
Clearly, America's long-term economic growth depends on our ability
to move goods safely and efficiently. Throughout the Nation, we see how
freight movement brings our trade economy to life. We can be proud of
how we work as a nation to stay competitive in the global economy.
However, there are serious obstacles to our nation's freight
security and mobility that could significantly reduce the safe and
efficient movement of goods in the immediate future. Unless we address
these problems in an innovative, systematic fashion--without delay--we
risk America's ability to provide the type of transportation
infrastructure on which the goods movement industry has come to rely.
Before 9/11/01, our freight mobility issues were already
challenging enough. But today, we must also ensure that our nation's
freight movement system is as secure as it is efficient. Clearly, our
present challenge is to insure the security, efficiency and
sustainability of the nation's freight movement system.
It is awe-inspiring to see how the various regions of this nation
collaborate in manufacturing, selling and moving goods to each other
and to our trading partners throughout the world. For example, nearly
$650 billion in domestic and international trade flows between
California and other regions of the United States.
What would happen if the goods movement between the east coast,
west coast and points in between were to collapse? Clearly, our
economy--and those who rely on it--would be in serious trouble, and
that day may not be far away. Rail lines and rail yards in California
are expected to reach maximum capacity within five to 7 years. Moving a
freight container from one side of Chicago to the other can often take
up to 4 days.
There are countless examples of problems just like these that
demonstrate the importance of developing a systematic strategy to meet
the challenges that confront us. If we fail to act, our competitors in
the global economy will be the only beneficiaries.
I would like to focus my testimony on how we can ensure that our
nation's freight transportation network can keep pace with the demands
of economic growth.
First, we need a comprehensive strategy for increasing capacity and
improving the efficiency of goods movement in the United States. The
strategy must be complete and it must include private sector
participation.
As I have indicated in my attached report, National Freight
Security and Infrastructure Bank, we can simultaneously meet the needs
of both government and industry by creating an organization that
focuses on public/private finance and project selection. A public/
private partnership is the only sensible approach we can take. We must
make sure that the two major stakeholders of the nation's freight
system--government and industry--have a forum to collaborate and to
solve national goods movement problems.
Second, as Congress rightfully confronts the issue of freight
security, it is essential that any such effort include an innovative
and comprehensive financing strategy to address it. We do not have
sufficient financial support from existing Federal programs to
guarantee the freight security and mobility in the way we would like.
Therefore, I have developed an innovative finance proposal for freight
projects.
My proposal for a National Freight Security and Infrastructure Bank
demonstrates how to develop an innovative funding base and how to
deliver freight transportation projects with public/private
collaboration, while conforming to transportation programming
requirements at the Federal, State and local levels.
While there may be some concern that user fees may not be the best
way to fund freight security and mobility, we simply cannot lose sight
of the option. Security and mobility are key elements of America's
ability to remain competitive in the global economy.
These are the same considerations that led President Dwight David
Eisenhower to create the Interstate Highway System. Creation of the
Interstate Highway System was primarily driven by security concerns
during the cold war years of the 1950's and 1960's (i.e., the need to
quickly, safely and efficiently deploy troops and material).
Today we face similar security concerns that must be addressed as
we aggressively pursue goods movement infrastructure development. Many
of our present challenges may seem insurmountable. But our nation's
history is rich with examples of how Americans can rise above the
challenges of the day.
The bottom line is that a comprehensive approach will
simultaneously enhance America's economic development and mitigate
environmental and safety issues--while at the same time addressing
national security.
National Freight Security and Infrastructure Bank
The National Freight Security and Infrastructure Bank (NFSIB), a
stand-alone Federal agency, would be funded by a new uniform NFSIB
security and infrastructure fee, administered by U.S. Customs, and
based in part upon a percentage of the existing duties on all imported
cargo through border crossings and through the nation's seaports. The
NFSIB would establish security and infrastructure fees for certain
commodities, which at present have no existing U.S. Customs duty, but
which have security or infrastructure impacts. The amount of the NFSIB
security and infrastructure fee would be adjusted annually based upon
the change in the Consumer Price Index (CPI).
U.S. Customs would be responsible for collecting the NFSIB security
and infrastructure fee. US Customs would receive compensation from
NFSIB for providing this administrative service. Fees would flow to the
National Freight Security and Infrastructure Trust Fund, which would be
administered by the NFSIB. The NFSIB's staff and administrative costs
would be funded by fees paid by project sponsors (from non-NFSIB import
cargo fee resources). The NFSIB's Board of Directors would consist of
15 representatives from the public and private sectors, including the
U.S. Department of Transportation, U.S. Customs, ports, steamship
lines, shippers, trucking and railroad industries.
85 percent of the Trust Fund would be available as cash, or
pledgable revenue to support project financings of eligible freight
security and infrastructure projects. Project sponsors would be
responsible for developing financing plans for individual projects.
Project sponsors could choose direct funding, and/or use of leveraging
strategies, including issuing debt, or a combination of funding
strategies, in which the project sponsor would rely on cash or
pledgable revenue provided by the NFSIB. 10 percent of the Trust Fund
would be remanded to the U.S. Department of Transportation for grants
for discretionary freight security and infrastructure projects, and 5
percent would be available to the U.S. Customs Service for
administering the collection of fees.
Project sponsors/applicants may include any of the following:
States; cities; regional and local public agencies; port authorities;
joint powers authorities; and joint applicants involving public
agencies and private transportation firms or associations.
All eligible projects must address security and transportation
needs of imported cargo through seaports located in specified Global
Gateway Regions of the United States, or through selected border
crossings, or through selected inland cargo interchange points, or
through the area of jurisdiction of the local Metropolitan Planning
Organization. Projects nominated for funding must be included in the
Regional Transportation Plan adopted by the Metropolitan Planning
Organization. Regardless of their distance from the seaport, border
crossing, or interchange point, all nominated projects must address one
or more of the following goals associated with the movement of imported
cargo: 1) increase national or homeland security, 2) expedite shipments
of imported cargo by increasing capacity, improving communications and
information sharing, reducing delay or increasing speed or efficiency
of shipment, and 3) relieve traffic congestion, reduce air and noise
pollution or mitigate other environmental impacts.
The Board of Directors of the NFSIB will determine which projects
will receive funding. Funds will flow directly from the NFSIB to
project sponsors. Project sponsors must provide 25 percent matching
funds from any source. The U.S. Department of Transportation shall
approve projects recommended for funding by the NFSIB, and shall have
veto power over any project funding recommended by the NFSIB.
Global Gateway Regions shall include:
1) Southern California, including ports of Los Angeles, Long Beach,
Hueneme and San Diego;
2) Northern California, including the Port of Oakland, Port of
Stockton; 3) Pacific Northwest, including the Ports of Portland,
Seattle and Tacoma;
4) Gulf Coast, including the Ports of Galveston, Houston, Corpus
Christi, New Orleans, Mobile, Tampa;
5) Southeast, including Jacksonville, Miami, Everglades, Palm
Beach, Charleston, Charlotte, and Savannah;
6) Northeast and Mid-Atlantic, including the Ports of New York/New
Jersey, Philadelphia, Boston, Wilmington, Baltimore and Norfolk;
Border Crossings shall include:
1) Laredo, TX
2) El Paso, TX
3) Bellingham, WA
4) Portal/Northgate, ND
5) International Falls, ND
6) Sault Ste Marie, MI
7) Detroit/Port Huron, MI
8) Niagara Falls, NY
9) Plattsburg, NY
10) Otay Mesa
11) Calexico
Inland interchange points shall include:
1) Chicago, IL
2) Memphis, TN
3) Kansas City, MO
4) Washington, DC
5) Richmond, VA
6) Charleston, WV
7) Ft Worth, TX
8) Chattanooga, TN
9) Denver, CO
10) Little Rock, AR
11) Minneapolis/St. Paul, MN
12) St. Louis, MO
13) Albany, NY
14) Syracuse, NY
15) Cincinnati, OH
16) Columbus, OH
17) Pittsburgh, PA
18) Hattiesburg, MS
19) Atlanta, GA
20) Lexington, KY
21) Birmingham, AL
22) Nashville, TN
23) Cairo, IL
24) Louisville, KY
25) Indianapolis, IN
26) Charlotte, NC
27) Raleigh/Durham, NC
Examples of projects that would be eligible for funding include:
1) California Global Gateways
Accounting for 40 percent of all U.S. waterborne commerce,
California represents the largest trading complex in the United States.
Freight transport capacity, however, has not kept up with demand.
Although the Alameda Corridor opened in April of 2002, serious
deficiencies in railroad track and yard capacity and freeway capacity
still exist in the L.A. area. California is facing explosive growth in
international trade through its ports and border crossings over the
next 20-25 years. Grade separations and other mitigations are needed to
relieve freight-related congestion in local communities. Examples of
specific projects that could apply for NFSIB funding include:
Alameda Corridor-East (extension of the Alameda Corridor through
the San Gabriel Valley, Orange County, San Bernardino County, and
Riverside County);--Gerald Desmond Bridge replacement in the Port of
Long Beach;--Oakland Joint Intermodal terminal at the Port of Oakland.
2) Florida's Gateway Project: The Americas Corridor
Florida is the fourth largest container handling State in the
Nation, with the State's South Florida seaports handling an important
share of the international goods flowing through the State to and from
global markets. The goal of the Americas Corridor is to optimize the
movement of international cargo and domestic freight among seaports,
rail lines and State highways in South Florida. In particular, the 60
linear miles of the intermodal transportation system linking South
Florida's three seaports is of critical concern. The containers moving
across the docks of three South Florida seaports, each of which is also
a premier cruise port and located adjacent to a busy downtown center,
must traverse the choked streets of urban neighborhoods to access the
Interstate highway system, impeding mobility, productivity and
compromising the nation's security. Double tracking of the rail system
between Jacksonville and Miami is another specific project that will be
required in the future.
3) Chicago Cross Town Highway and Rail Improvements
In Chicago six Class I railroads converge at some 18 major
intermodal terminals ringing the city. 1,500 trains per day approach
these terminals and 3,500 cross-town container moves occur daily. The
stress on the region's roadways is enormous, and the delay to cargo
delivery is increasingly inefficient. A series of improvements to this
fragmented infrastructure would add capacity and velocity to the rail
and trucking systems.
4) New York/New Jersey Port Access Projects
The Port of NY/NJ is the largest port complex on the east coast,
and the second largest in the Nation. Significant environmental
concerns hamper overall freight investment. New highway building is
constrained by land availability and environmental concerns. 15,000
trucks move in and out of the port area each day, but each truck trip
faces an average of 30-50 minutes of delay due to increasing congestion
in the area. The port has devised a series of port access improvements
and intermodal connectors needed in the region.
__________
Statement of Professor David J. Forkenbrock, Director, Public Policy
Center, University of Iowa
A New Approach to Assessing Road User Charges
This testimony describes a major study in progress to develop a new
approach for charging vehicles that travel on public roadways. The new
approach applies intelligent transportation system (ITS) technology to
the problem of assessing road user charges, enabling these charges to
be fairer, more stable, and more flexible. Though very simple in
concept, the new approach has required that a number of institutional
and technological issues be resolved. It is to resolve both types of
issues that we are undertaking this research.
Phase I of this research was concluded in September 2002, and a
final report is available from Professor Forkenbrock. The first phase
of this research was funded through a special consortium comprised of
the Federal Highway Administration and 15 State departments of
transportation: California, Connecticut, Iowa, Kansas, Michigan,
Minnesota, Missouri, North Carolina, Ohio, Oregon, South Carolina,
Texas, Utah, Washington, and Wisconsin. If funded in the transportation
reauthorization bill, Phase II will field-test the concepts developed,
so that by the time implementation is considered, the new approach will
be ready to implement by State legislatures and Congress. It is vital
that it be fully tested because nationally the amount of revenue
generated by road user charges is substantial-the motor fuel tax alone
generates upwards of $50 billion annually.
problems with current methods for charging road users
At both the State and Federal level in the United States, the
primary method for charging road users is the motor fuel tax. In many
ways this tax has served quite well. Road users are charged roughly on
the basis of the amount of travel on the public road system. As such,
motor fuel taxes have the desirable attribute of being a ``pay-as-you-
go'' form of user charge. There are, however, several major
shortcomings with motor fuel taxes including:
first and foremost, an inability to generate the
necessary revenue to provide quality transportation services in future
years as hydrogen fuel cell vehicles and those with other new
propulsion systems become more commonplace;
high evasion, perhaps up to 10 percent for diesel fuel
under some circumstances;
increased fuel efficiency meaning lower receipts per mile
traveled;
no relationship to the type or cost of the facility being
used or the level of service provided; and
a weak relationship to the relative costs of particular
trips such that some vehicle operators pay user charges that exceed the
costs they impose, while others pay substantially less than their
costs.
From the standpoint of public policy, motor fuel taxes are not
entirely satisfactory. Vehicle operators are not given price signals to
make them aware of the costs a particular trip may imposes on society.
With motor fuel taxes, it is not possible for government agencies to
provide incentives to vehicle operators to change the nature of their
road use, such as traveling on higher-standard roads or during off-peak
hours.
The move away from State and Federal motor fuel taxes must be
accomplished with great care. Combining fuel tax receipts at both
levels of government, this tax accounts for almost two-thirds of all
road user charges. In short, a very large amount of road financing
capability is at stake.
study objectives
The purpose of Phase I of this research has been to design a system
for charging road users that embodies as many attributes of an ideal
user charge system as possible. Among the key attributes of an ideal
system are that it enables:
A low cost of collection for both agency and user.
A stable revenue stream.
An ability to assess higher user charges for users who
impose higher costs (e.g., contributions to congestion delays by autos
and road damage by heavy vehicles).
A low evasion rate.
Incentives for users to travel on appropriate roads and
to spread their trips across time periods.
Any form of vehicle propulsion to be accommodated.
The approach to charging road users must not be burdensome, and it
must be tamperproof, highly reliable, and a useful tool for achieving a
variety of policy objectives. Of paramount importance, it certainly
must not diminish the privacy of road users.
Fortunately, newly emerging ITS technology makes it possible to
design an approach to charging road users that avoids the problems and
shortcomings of current mechanisms and that embodies the desirable
attributes listed above.
To progress closer to an ideal system of road user charges, our
research is leading to a new approach that is practical and cost-
effective. The new approach will enable a real-time assessment of road
user charges that is based on mileage accrual and, in the case of heavy
vehicles, also on actual vehicle operating weights and configuration,
as well as the type of road being traveled.
sketch of the new approach
Key to the new approach is a simple on-board computer. The computer
stores a record of actual road use charges. Periodically, this record
is uploaded and transmitted to a data processing center; we refer to it
as the collection center. The center bills a vehicle owner and
reimburses the States, counties, and cities operating the roads on
which the vehicle has traveled. The on-board system is simple, secure,
and capable of protecting the user's privacy. Importantly, the on-board
system enables a variety of user charge conventions. In its simplest
form, this approach can be used to assess a vehicle-miles-traveled
(VMT) tax. With a VMT tax, the computer would calculate road mileage
actually traversed; it compares this mileage with that obtained through
an odometer feed. It then applies appropriate user charge rates to the
mileage traveled within each jurisdiction (typically each State). Only
data on user charges due are stored in the on-board computer (i.e.,
where travel has occurred is not stored). Periodically, the vehicle
owner uploads these stored data to a collection center. The collection
center operates much like a credit card billing center.
Charging Autos
Inputs to the computer can be quite simple for autos, involving
only a global positioning system (GPS) receiver, a geographic
information systems (GIS) data file, and the vehicle's odometer (for
back-up data on distance traveled). The GIS file contains data polygons
that define boundaries of the respective States. A receiver on-board
the auto uses GPS signals to determine the vehicle's position. The
computer reconciles this position with the stored data polygons to
determine the State in which travel has occurred; the miles traveled
within that data polygon are used to compute user charges, which in
turn are stored. When a vehicle crosses into another State, it enters a
different data polygon, and travel within that polygon is used to
compute user charges. Of course, sub-State polygons, such as those
defining a metropolitan area, also are feasible. The GIS file that
defines polygons is stored in the on-board computer and is readily
updateable. Periodically, the collection center transmits updates of
the GIS file to the vehicle using a smart card as a ``messenger.'' A
smart card is a small credit card-sized plastic device that contains an
internal embedded computer chip in the form of a microprocessor and/or
a memory module. This technology was developed in France more than 20
years ago. Smart cards are very durable and should serve a typical user
for the life of the vehicle. If the smart card is lost or destroyed, it
can easily be replaced at a small cost to the user (a typical smart
card costs less than $5).
Communication via a smart card is done using a reader that closely
resembles the credit card readers found in nearly all businesses.
Normally, the smart card occupies a slot in the vehicle's dash
panel. The on-board computer continuously updates the smart card
regarding total user charges owed to each State or other jurisdiction
that is defined by a polygon. Data transferred to the smart card, then,
are in units of dollars, the on-board computer having (1) measured the
distance traveled within each polygon, (2) applied the appropriate per-
mile user charge as established by the applicable jurisdiction, and (3)
calculated the user charges owed to each jurisdiction. Thus, the
vehicle operator can remove the smart card at any time and insert into
a reader to transmit the charges due to the collection center.
Why would a vehicle owner want to upload billing data very often? A
simple display on the instrument panel during vehicle startup displays
the current user charges stored in the on-board computer. Each
jurisdiction can choose to levy an interest charge for road use that
occurred more than, say, 30 or 45 days in the past. The instrument
panel display can show both current user charges and interest accrued.
As the interest charges mount, the display will serve to encourage the
person to upload the billing data. Failing to upload data at all may
result in a requirement to pay all user charges in arrears before
receiving the next year's vehicle registration.
During the data uploading process, the smart card authenticates the
user and then anonymously uploads the road use information. When the
collection center identifies the user, it checks for fraudulent
behavior or malfunctions. If there is a problem, the smart card is
notified to prompt the user to go to a service center, and the system
flags that particular vehicle. During this communication, the
collection center updates the vehicle's rate schedule through the smart
card, if the stored schedule is not current. The center also provides a
one-time encryption key to the smart card to facilitate anonymously
uploading how much of the user charge arose from travel in each
jurisdiction. Once the collection center receives the information on
how much of the mileage occurred in which jurisdictions, the center
correctly apportions the funds to the appropriate jurisdictions in
which travel has occurred.
We stress that the apportionment data would be anonymous. It is not
necessary to know which vehicle generated a particular sum of user
charges for each jurisdiction; what is necessary is the amount to be
apportioned. In every case, the total amount for all jurisdictions
taken together equals the single value uploaded in the initial contact
made by the vehicle via the smart card. Thus, all of the necessary data
are transmitted, but the only figure that can be tied to a particular
vehicle is a single dollar amount for total user charges and interest,
if applicable, due. This approach maximizes user privacy.
User acceptance of the new approach to assessing user charges could
be increased if other benefits result. For example, navigation
displays, now a costly option on luxury autos, could become standard
equipment or a low-cost option. Nearly all of the components needed for
such displays would be on-board the auto; adding them in a mass-
production manner would be simple. Note, too, that looking a few years
into the future, regardless of how user charges are assessed, traveler
information displays are likely to become commonplace (their costs
already are beginning to fall). In that case, adding the capacity to
store road use information would be easy and inexpensive.
Another user benefit of the GPS/GIS system would be emergency
location notification. The Advanced Collision Notification System,
which is beginning to receive national attention, uses cellular
transmissions to relay a vehicle's exact location to the appropriate
service provider in the event of a crash, health problem, or mechanical
breakdown. The protection this sort of system offers motorists is
likely to be valuable to many people, but it would be especially
beneficial to elderly drivers and those who travel in remote areas or
unsafe parts of cities. It should be stressed, however, that it is not
the GPS system that transmits any form of location data. GPS satellites
only send radio waves that the vehicle's GPS receiver uses to calculate
its location. GPS satellites are unable to receive any form of
information from a vehicle.
Charging Heavy Vehicles
In the case of large trucks and other heavy vehicles, the on-board
computer system could be very simple, enabling only a per-mile user
charge to be levied, or it may be slightly more complex. Like autos,
heavy vehicles will have a GPS receiver and stored GIS information on
data polygons. Because privacy is much less of an issue with commercial
vehicles, the polygon data could be supplemented with several levels of
road classes. In this way, user charges for road use by heavy vehicles
can be varied according to the standard of road traveled. For example,
a State may choose to levy a lower per-mile charge for travel by heavy
vehicles on interstate highways and other facilities that are capable
of withstanding high axle loads without being damaged. The road user
charges uploaded to the collection center can easily be made to reflect
several different per-mile rates that vary with the standard of road
used. Likewise, combination trucks with additional axles could be
assessed lower per-mile user charges because they damage roads less.
Optionally, an on-board weight indicator could be included, which would
be activated each time the cargo doors are closed (in the case of a
freight semi-trailer truck). The weight indicator, which is a simple
strain gauge attached to the trailer's suspension, transmits
information to the on-board computer, indicating the current weight. A
code informs the computer about the configuration of the trailer,
especially the number of axles. The computer then takes into account
vehicle weight and configuration, along with type of road being
traveled, in calculating the road use charges that are due.
It is noteworthy that the new approach eliminates the pitfalls of
such methods as weight-distance taxation: the uniform per-mile rate
(regardless of current weight) of that approach is replaced with a much
more flexible approach, and evasion will cease to be a problem. Of
course, individual States can determine the extent to which they levy
user charges based on the type of road being traveled or on vehicle
weight and configuration.
With the new approach, motor carriers will benefit by the
elimination of tollbooths, and interstate permitting can be automated.
Also, opportunities that do not exist today become available; for
example, by adding axles and traveling on higher-standard roads,
operators could minimize their user charges.
Related Advantages
At least two related advantages would accrue to State departments
of transportation in addition to the inherent benefits of the new
approach. One advantage is that the expensive weigh-in-motion (WIM)
scales used by many States can be eliminated. Another advantage is that
toll facilities on roads and bridges no longer will be necessary. With
segment-specific user charges, adjustments can be made for what are now
toll roads and bridges. Privately owned highways, similar to SR 91 in
California, will become highly feasible.
progress to date-phase i
Phase I of the effort to design and test the new approach to
assessing road user charges was recently completed. In Phase I, we
accomplished the following:
Developed the basic concept of using intelligent vehicle
technology to assess road user charges.
Refined the concept to absolutely maximize road user
privacy.
Incorporated features to ensure system security,
robustness, and user convenience.
Ensured that for the States, road use revenue will be
stable, evasion will be extremely difficult, and fairness among both
road users and taxing jurisdictions will be maximized.
Research Process Followed
Dr. David Forkenbrock, principal investigator of this research,
formed a research team comprised of several groups, each of which has
had specific responsibilities. The groups studied:
Legal aspects of privacy as it relates to road use.
The most promising computer and electrical engineering
approaches to collecting, storing, and transmitting road use data.
Economic and policy needs, desirable attributes, and
practical considerations in assessing road user charges.
Technological capabilities existent today and likely to
become available in the coming few years related to GPS, GIS files, on-
board computers, data transmission, and other key components.
Work completed by the respective groups has been published in the
form of a report that is accessible to a layperson. The research
leading to publication of this report was reviewed in a series of
meetings with representatives of the 15 participating States and the
Federal Highway Administration. Throughout the 2-year Phase I effort,
one-to 2-day meetings have been held every 6 months. The States and
FHWA have been kept fully apprised of research progress, emerging
issues, and intended research directions. Attendance in these meetings
by the States and FHWA has been excellent, nearly 100 percent.
Where the Research Effort Currently Stands
Phase I has led to the conclusion by the research team and the
funding agencies that the new approach as described above is
conceptually sound and operationally practical. It is highly flexible,
so that each State can embody a variety of public policies regarding
road user charges. The new approach will enable fair, stable user
charges to be levied, even when hydrogen fuel cell vehicles and other
vehicles that burn less or even no fossil fuels become commonplace, as
they surely will. Many other limitations of current motor fuel taxes
can be eliminated with the new approach, and essentially all of the
attributes of an ideal user charge system listed at the beginning of
this discussion paper can be incorporated.
Even though the concept and features of the new approach are
technologically and practically feasible, a great deal of testing and
refinement is needed before it is ready for national implementation. We
need to study how best to integrate the on-board equipment with
emerging vehicle technologies, the best way to operate the collection
center, and how the States would prefer to structure their road user
charges, given the advances possible with the new approach. Choices
need to be made regarding the sorts of data storage and uploading
features to adopt. The bottom line is that before a gradual replacement
of the motor fuel tax can be implemented, all parties must be very
certain that the new approach works very well and does what
policymakers want it to. Extensive testing is the only way to be sure
that the on-board equipment is reliable under widely varied weather and
operating conditions, tamperproof, and convenient for diverse groups of
drivers whose needs are quite different.
the next step-phase ii
Phase II is needed to fully test and demonstrate the basic concepts
just discussed, to refine the working features of the new approach to
assessing road user charges, and to develop working specifications for
the applicable components.
Context for the Research
This is an opportune time to develop the new approach to assessing
road user charges. Auto manufacturers are making rapid advances in the
electrical systems of their products. Soon, many of the systems needed
to deploy the new approach will become standard equipment on most if
not all autos. It is especially significant that several auto
manufacturers intend to incorporate on-board computers to carry out
various functions that now rely on mechanical switches, gauges, and
linkages. These on-board computers will afford much greater user
flexibility, and they will include such features as GPS receivers to
facilitate emergency location and navigation, as well as electronic
odometers. Such odometers are an important back-up system in the event
that the GPS receiver should fail or be denied signals. In the same
vein, major trucking companies are making widespread use of GPS to
pinpoint the location of freight shipments.
This is a propitious time to begin collaborating with motor vehicle
manufacturers as they dramatically change their on-board electrical
systems and include advanced new features. Specifically, we propose to
work closely with these manufacturers to find the best means for
incorporating the components needed to support the new approach. Early
cost estimates are highly favorable in that the additional expense of
adding the data storage and uploading capabilities will not be at all
large, less than $100. Features like electronic odometers that cannot
be tampered with are forthcoming, as vehicle manufacturers protect the
limits of their mileage-based warrantees.
Phase II Work Plan
Before State legislatures can pass the necessary enabling
legislation, a comprehensive demonstration program must be carried out.
As mentioned earlier, Federal and State motor fuel taxes generate over
$50 billion annually. One must be very sure that the replacement
approach is completely sound before implementing it. Following are key
components of the Phase II work plan:
Systematically test the security and reliability of on-
board computers and data uploading methods.
Evaluate the acceptability of the approach by diverse
user groups. These user groups include both operators of autos and
various types of trucks.
Carry out a well-designed operational test program. Five
geographic areas across the United States will be selected as test
sites, and several hundred autos and trucks will be outfitted with the
required on-board equipment. Prototype uploading facilities will be
established, and a prototype collection center will be developed
cooperatively with a selected private firm.
Work with several national interstate trucking firms to
test the feasibility of assessing a mileage-based user charge system
across numerous States. A key objective will be to make the new
approach integrate well with trucking firm needs. Certainly, the
greatest cost of Phase II will be outfitting participating autos and
trucks with the necessary equipment to carry out a meaningful test of
system robustness, security, and user convenience. Also significant
will be the expenses related to establishing a prototype collection
center. The center probably can be established cooperatively with a
credit card processing company because the necessary capabilities are
very similar.
Funding Requested in the Transportation Reauthorization Bill
As we have discussed, Phase II of this multi-year research program
is critically important. It will enable the technology and
implementation strategies to be fully refined before State legislatures
debate a major change in transportation financing. Technological
advances in cleaner, less fossil-fuel consuming vehicle propulsion
systems mean change is inevitable; the issue is how best to charge
vehicles with a range of propulsion systems for travel on public roads
and highways.
Our research team estimates that funding Phase II of this
university-based research program at the level of $3 million per year
for the duration of the forthcoming transportation reauthorization bill
will enable a full operational test of this promising approach. We
stress that most of these funds will be used to outfit private vehicles
for the operational test. The remainder will be used to design the
test, work with equipment manufacturers on detailed specifications for
the on-board gear, recruit participants, and analyze the results.
The specific request is for an authorization of $3 million per year
to the Iowa Department of Transportation to commission a demonstration
of the intelligent transportation system (ITS) approach to assessing
road user charges based on on-board computerized systems. The Iowa DOT
will in turn commission the University of Iowa Public Policy Center to
carry out the demonstration.
The Research Team
Leading Phase I and the proposed Phase II is the Public Policy
Center at the University of Iowa. The Center is an interdisciplinary
research unit in the Office of the Vice President for Research.
Director of the Center and Principal Investigator for this research is
Dr. David Forkenbrock, who originally conceived the new approach. Dr.
Forkenbrock has an international reputation as a scholar in the area of
transportation policy and finance. He is assisted by a team of
engineers, policy analysts, and social scientists from various
universities and firms, who collectively are uniquely qualified to
carry out this national study. New members with technical evaluation
skills will be added to the research, and more active communications
with vehicle designers within the auto and truck manufacturing industry
will be established.
We foresee a continuing role for the 15 State departments of
transportation that have worked closely with the research team during
Phase I of this project. The representatives of these DOTs are
knowledgeable about the new approach being developed, and they have
offered many useful suggestions as our work has progressed. Together
with the equally valuable representatives of FHWA, we propose to
continue our association with them.
Importance of Phase II Research
Evidence of the importance of this issue may be found in the recent
efforts by several European nations to implement some form of distance-
based user charges. For example, the Netherlands' parliament has passed
legislation calling for this type of user charges to be implemented
within the next several years. The United Kingdom and Germany are
evaluating similar proposals. The study team has been actively
collaborating with senior staff in these countries.
The United States' energy security and environmental quality both
will benefit by the exciting new vehicle propulsion technologies soon
to be made operational. The need is to ensure that these vehicles can
be charged for road use in a fair, cost-effective, and convenient way
that protects the privacy of road users. At the same time, the inherent
problems with the motor fuel tax can be eliminated.
Contact Information
For further information, please contact: David J. Forkenbrock
Director and Professor Public Policy Center 227 South Quad University
of Iowa Iowa City, IA 52242-1192 Phone: (319) 335-6800; Fax: (319) 335-
6801 Email: [email protected] URL: http://ppc.uiowa.edu
October 2002
__________
Statement of Ric Williamson, Member, Texas Transportation Commission
introduction
My name is Ric Williamson, a member of the Texas Transportation
Commission, and I am pleased to provide this testimony on behalf of the
commission and the Texas Department of Transportation (TxDOT) regarding
transportation financing innovations in Texas. This testimony will
provide information on Texas' current use of available State and
Federal transportation financing mechanisms and our plans to implement
new tools. I will also suggest changes to the existing Federal
transportation financing tools that will help Texas take better
advantage of them in our continuing effort to meet our State's
tremendous mobility and access needs as effectively and efficiently as
possible.
texas' experience with existing federal finance tools
The Federal Government has traditionally financed highways through
80 percent reimbursement grants but the last three major pieces of
Federal transportation legislation--ISTEA, the NHS Act of 1995, and
TEA-21--have produced alternative forms of ``non-grant'' assistance.
Over that same timeframe (since the early 1990's), Texas has slowly
accrued complementary authority on the State level to enable us to
begin to use these new Federal financing tools for transportation.
Positioning TxDOT to utilize innovative financing where it is
determined to be appropriate serves the users of the State's
transportation system by accelerating construction of select projects
of significance, delivering customer benefits ahead of schedule, and
augmenting stretched revenues. While this section describes our
experience to date, it also represents only the beginnings of a new era
in transportation financing for Texas.
State Infrastructure Banks
Background. In November 1995, the President of the United States
signed Public Law 104-59, known as the 1995 National Highway System
Designation Act (NHS Act). Section 350 of that law allowed the United
States Secretary of Transportation to designate a maximum of ten States
as pilot projects for the State Infrastructure Bank program. Texas was
selected as one of the initial pilot States for an NHS Act SIB. About
30 States eventually elected to participate.
A State Infrastructure Bank, or a SIB, operates chiefly as a
revolving loan fund and may provide a wide range of financial
assistance in addition to loans. The purpose of the pilot program is to
attract new funding into transportation, to encourage innovative
approaches to transportation problems, and to help build needed
transportation infrastructure. The NHS Act provides that each
designated State may transfer up to 10 percent of certain Federal
dollars, match those funds with State funds, and deposit them into a
State Infrastructure Bank. The greatest benefit of this program may
well be the creation of a self-sustaining, growing, revolving loan
fund.
In 1997, the 75th Texas Legislature passed Senate Bill 370, which
created the State Infrastructure Bank to be administered by the Texas
Transportation Commission, the governing body of the Texas Department
of Transportation. In September 1997, the Texas Transportation
Commission approved the administrative rules that govern the State
Infrastructure Bank. The SIB allows cities and counties to access
capital at lower-than-market rates. Since its creation, interest in the
SIB program has been strong. TxDOT has approved 41 loans totaling more
than $252 million to cities, counties, and toll authorities around the
State. The loans are helping fund more than $1 billion in
transportation projects in Texas.
TEA-21 Changes. Section 1511 of the Transportation Equity Act for
the 21st Century (TEA-21) created a new State Infrastructure Bank (SIB)
Pilot Program allowing the establishment of TEA-21 SIBs in only four
States: California, Florida, Missouri, and Rhode Island. California,
Florida, and Missouri also had NHS Act SIBs. Texas was not included.
Pre-existing SIBs created pursuant to Section 350 of the NHS
Designation Act of 1995 (NHS Act SIBs) continue to exist, but Federal
funds authorized for fiscal year 1998 or later may not be used to
capitalize them.
Through language in the fiscal year 2002 Department of Defense
Appropriations Act, Texas Senator Kay Bailey Hutchison and Texas
Congressmen Tom DeLay and Chet Edwards were instrumental in adding
Texas to the list of TEA-21 SIB Pilot Program States. With this change,
Texas may now use up to 10 percent of its NHS, STP, IM, Bridge, Seat
Belt Incentive Grant, and Minimum Guarantee funds to capitalize its
SIB. Without Federal funds, future loan applications--and any large
single loan--would likely have little chance of being considered. The
SIB has been our single most important financial tool in accelerating
the delivery of projects. The ability to capitalize the SIB with future
Federal funds will keep it an effective program for years to come.
Texas supports the continuation of the TEA-21 SIB authority Texas
now enjoys. In addition, we recommend that the reauthorization
legislation shorten the time limits on the ability to draw down the
Federal funds to capitalize our SIB. Finally, we encourage you to
clarify that repayments to the SIB are cleansed of Federal requirements
to ensure that future lendees (mainly cities and counties in Texas) are
able to access the funds without Federal restrictions. Cities and
counties, who are currently not subject to Federal requirements on
their own projects, may not have access to SIB funds if they must
follow Federal rules to use those funds.
The Transportation Infrastructure Finance and Innovation Act of 1998
According to FHWA, the Transportation Infrastructure Finance and
Innovation Act of 1998 (TIFIA, sections 1501-1504 of TEA-21) is
intended to provide Federal credit assistance to major transportation
investments of critical national importance, such as intermodal
facilities, border crossing infrastructure, expansion of multi-State
highway trade corridors, and other investments with regional and
national benefits. The TIFIA credit program is designed to fill market
gaps and leverage substantial private and other non-Federal co-
investment by providing supplemental and subordinate capital. Through
three types of financial assistance products, TIFIA offers credit
assistance of up to 33 percent of total project costs. The three types
of products, designed to address projects' varying requirements
throughout their life cycles, include:
Secured loans, direct Federal loans to project sponsors
offering flexible repayment terms and providing combined construction
and permanent financing of capital costs;
Loan guarantees, providing full-faith-and-credit
guarantees by the Federal Government to institutional investors such as
pension funds which make loans for projects; and
Standby lines of credit as secondary sources of funding
in the form of contingent Federal loans that may be drawn upon to
supplement project revenues, if needed, during the first 10 years of
project operations.
The kinds of projects specifically listed as eligible for TIFIA
support include international bridges and tunnels, inter-city passenger
bus and rail facilities and vehicles (including Amtrak and magnetic
levitation systems), and publicly owned intermodal freight transfer
facilities (except seaports or airports) on or adjacent to the National
Highway System. However, any type of highway, intermodal, or transit
project eligible for Federal assistance through surface transportation
programs under Title 23 or chapter 53 of Title 49 U.S.C. is also
eligible for TIFIA support, assuming it meets program criteria. Those
criteria include: (a) project cost of at least $100 million or 50
percent of the State's annual apportionment of Federal-aid funds,
whichever is less, except that for intelligent transportation system
projects, the minimum cost is $30M; (b) project support in whole or in
part from user charges or other non-Federal dedicated funding sources;
and (c) inclusion in the State's transportation plan and the statewide
Transportation Improvement Program (STIP).
Qualified projects meeting those criteria are evaluated by USDOT
and selected based on the extent to which they generate economic
benefits, leverage private capital, promote innovative technologies,
and meet other program objectives. Each project must receive an
investment grade rating on its senior debt obligations before its
Federal credit assistance may be fully funded.
History of the Central Texas Turnpike Project TIFIA Loan
The $916.76 million TIFIA loan for the Central Texas Turnpike
Project is the largest such loan in the history of the program. The
TIFIA loan funds will help fund the $3.6 billion first phase of the
Central Texas Turnpike Project, which is a toll highway facility
through central Texas.
The commission will use the loan proceeds to partly finance design
and construction of the first phase of the Central Texas Turnpike
Project, which is composed of three distinct elements: Loop 1, SH 45
North, and the northern segment of SH 130. Loop 1, a 3.5-mile element,
will serve as a major north-south route in the Austin vicinity. SH 45
North, about 13.2 miles in length, will serve as a connector between
the cities of Austin, Round Rock, and Pflugerville. SH 130, a 49-mile
element, will be an eastern bypass for Austin, Texas, and is parallel
to and east of I-35, one of the more congested urban parts of the
interstate.
The Texas Turnpike Authority Division of TxDOT is managing the
project. TxDOT has retained a general consultant engineer and two
engineering firms to assist with management of the construction
project. The Loop 1 extension and SH 45 will be constructed using the
traditional design-bid-build process, and SH 130 is under an exclusive
development agreement with Lone Star Infrastructure. The first phase of
the turnpike project will be open in segments and the final phase will
open to traffic in December 2007.
The entire 65-mile project is expected to be complete and open to
traffic by December 2007.
SH 130: From IH 35 south to US 71--September 2007
SH 130: From SH 71 south to US 183--December 2007
SH 130: From US 183 south to IH 10: to be determined
based on future project financing
SH 45: From Ridgeline East to three-quarters of a mile
west of Loop 1 interchange--December 2007
SH 45: From three-quarters of a mile west of Loop 1
interchange to SH 130--September 2007
Loop 1: From Parmer Lane to one quarter mile south of SH
45 interchange: September 2007
Central Texas needs relief from traffic congestion as soon as
possible and tolls are the fastest way to accomplish it. By selling
bonds and using tolls to pay off the bonds, these roads will be
completed and open to traffic years ahead of schedule compared to using
traditional transportation funds. In addition, toll roads help stretch
limited transportation dollars. In this case, the State is getting a
$2.9 billion project for only an initial $700 million equity injection.
The four elements of the funding package include local
contributions, State highway dollars, a Federal loan and the sale of
bonds, which will be paid for through the collection of tolls. In
addition to the TIFIA loan, the commission has issued $1.2 billion in
revenue bonds and $900 million in bond anticipation notes. The
remainder of the project will be financed through contributions from
TxDOT and contributions of right-of-way by the surrounding
jurisdictions.
The TIFIA loan is an example of a Federal program helping us bring
these needed highway projects on-line. We could not have put this
financial package together without the TIFIA loan. To maximize the use
of the loan--and save taxpayers approximately $75 million--we are using
the TIFIA loan as a possible backstop to sell Bond Anticipation Notes
(BANs) to finance construction and take advantage of current low short-
term interest rates. The interest rate we get on the BANs is lower than
the TIFIA loan. The full TIFIA loan may be used later, but only if
interest rates make it a good deal for taxpayers.
The 65 miles of new toll roads in central Texas will cost $2.9
billion. This covers right of way acquisition, utility adjustments,
design, and construction for SH 45 North, Loop 1 and the first 49 (most
needed) miles of SH 130. With the addition of required reserve funds,
interest, insurance and issuance costs, the total estimated costs are
$3.6 billion.
Conservatively, it is estimated it would take at least 20 years to
build these roads using traditional funding sources. By selling bonds,
these roadways will be completed and open to traffic in 5 years.
Advance Construction/Partial Conversion of Advance Construction
Advance construction (AC) and partial conversion of advance
construction (PCAC) are cash-flow management tools that allow States to
begin projects with their own funds and later convert these projects to
Federal assistance.
AC allows a State to construct Federal-aid projects in advance of
the apportionment and/or obligation limitation. Under normal
circumstances, States can ``convert'' advance-constructed projects to
Federal-aid at any time sufficient Federal-aid apportionments and
obligation authority are available. States may convert and obligate the
entire eligible amount, based on funding availability or, using PCAC
may obligate funds in stages.
PCAC allows States to obligate only the Federal funds necessary for
the amount of expenditures anticipated in a year. This process thereby
eliminates a major single year ``draw down'' of Federal funds in one
fiscal year. PCAC may be used in conjunction with GARVEE bonds when
Federal funds are obligated for debt service payments over a period of
time.
Using this technique affords the availability of Federal-aid funds
to support a greater number of projects. The partial conversion
technique can enable completion of a project earlier than under the
conventional approach, avoiding construction cost inflation, and
bringing the benefits of a completed facility to the public at an
earlier date. To date, TxDOT has utilized the PCAC financing tool on
approximately 170 projects.
Tapered Match
Tapered match enables the project sponsor to vary the non-Federal
share of a Federal-aid project during development and construction so
long as the total Federal contribution toward the project does not
exceed the Federal-aid limit.
Under the tapered match approach, the non-Federal matching ratio is
imposed on projects rather than individual payments. Therefore, Federal
reimbursements of State expenditures can be as high as 100 percent in
the early phases of a project provided that, by the time the project is
complete, the overall Federal contribution does not exceed the Federal-
aid limit established when the project was authorized. To ensure
effective management of Federal funds, FHWA limits the use of tapered
match to situations that result in expediting project completion,
reducing project costs, or leveraging additional non-Federal funds.
TxDOT has used tapered match to expedite project completion on
approximately 880 projects.
Tapered match may be most useful in cases where the project sponsor
of a Federal-aid project lacks sufficient funds to match Federal grants
at the start of the project, but expects to accumulate the match in
time for project completion. Tapering may also be beneficial when a
project sponsor needs to overcome a near-term gap in State matching
funds, thereby avoiding delays in getting the project underway.
Tapering also allows a sponsor to advance a project before fully
securing capital market financing.
This technique may be used to facilitate a project when a new local
transportation tax has been enacted, but revenue collections have yet
to accumulate sufficient matching funds. Using tapered match, the
project can move forward immediately with 100 percent Federal funds,
allowing time for the tax revenues to accumulate. The locally generated
revenues would be used to fund the final 20 percent share of project
costs.
Toll Credits
States may apply toll revenues used for capital expenditures to
build or improve public highway facilities as a credit toward the non-
Federal share of certain transportation projects. Toll credits are
earned when a State, a toll authority, or a private entity funds a
capital highway investment with toll revenues from existing facilities.
The amount of toll revenues spent on non-Federal highway capital
improvement projects earns the State an equivalent dollar amount of
credits to apply to the non-Federal share of a Federal-aid project. To
utilize this tool, the State must certify that its toll facilities are
properly maintained and must pass an annual maintenance of effort test
to earn credits. By using toll credits to substitute for the required
non-Federal share on a Federal-aid project, Federal funding can
effectively be increased to 100 percent.
Toll credits provide States with more flexibility in financing
projects. For example, by using toll credits, 1) Federal-aid projects
can be advanced when matching funds are not available, 2) State and
local funds normally required for matching may then be directed to
other transportation projects, or 3) project administration may be
simplified when a single funding source is used. States wishing to take
advantage of the toll credit provision must apply toll revenues to
capital improvements and meet the maintenance of effort test that may
result in an increased investment in transportation infrastructure. At
this time, TxDOT has utilized toll credits on 34 construction projects.
Toll credits have also been used on certain transit projects.
Flexible Match
Flexible match allows a wide variety of public and private
contributions to be counted toward the non-Federal match of Federal-aid
projects. The NHS Act and TEA-21 introduced new flexibility to the
matching requirements for the Federal-aid program by allowing certain
public donations of cash, land, materials, and services to satisfy the
non-Federal matching requirement. These matching options include:
The value of private and certain State and local
contributions, including publicly owned property;
Funds from other Federal agencies may count toward the
non-Federal share of recreational trails and transportation enhancement
projects;
Funds from the Federal Lands Highway Program may be
applied as non-Federal match for projects within or providing access to
Federal or Indian lands; and
Funds from Federal land management agencies may be used
as the match for most Federal-aid highway projects.
Also States may seek program-wide approval for Surface
Transportation Program (STP) projects. The matching requirement would
then apply to the program instead of individual projects.
Flexible match provisions increase a State's ability to fund its
transportation programs by:
Accelerating certain projects that receive donated
resources;
Allowing States to reallocate funds that otherwise would
have been used to meet Federal-aid matching requirements; and
Promoting public-private partnerships by providing
incentives to seek private donations.
To date, TxDOT has been unable to use this financing mechanism. The
main reasons are that it is limited to certain programs within the
Federal-aid highway program and that the program implementation
requirements are cumbersome. While we are not currently using this
financing option, we believe that the flexible match concept should be
continued and indeed expanded in the TEA-21 reauthorization. We
recommend that Congress expand the flexible match provision for use, at
the State's discretion, in all of the existing Federal-aid highway
programs.
Section 129 Loans
Section 129 loans allow States to use regular Federal-aid highway
apportionments to fund loans to projects with dedicated revenue
streams.
A State may directly lend apportioned Federal-aid highway funds to
toll and non-toll projects. A recipient of a Section 129 loan can be a
public or private entity and is selected according to each State's
specific laws and process. A dedicated repayment source must be
identified and a repayment pledge secured.
The Federal-aid loan may be for any amount, up to the maximum
Federal share of 80 percent of the total eligible project costs. A loan
can be made for any phase of a project, including engineering and
right-of-way acquisition, but cannot include costs prior to loan
authorization. A State can obtain immediate reimbursement for the
loaned funds up to the Federal share of the project cost.
Loans must be repaid to the State, beginning 5 years after
construction is completed and the project is open to traffic. Repayment
must be completed within 30 years from the date Federal funds were
authorized for the loan. States have the flexibility to negotiate
interest rates and other terms of Section 129 loans. The State is
required to spend the repayment funds for a project eligible under
Title 23.
States can use Section 129 loans to assist public-private
partnerships, by enhancing startup financing for toll roads and other
privately sponsored projects. Because loan repayments can be delayed
until 5 years after project completion, this mechanism provides
flexibility during the ramp-up period of a new toll facility.
Loans can also play an important role in improving the financial
feasibility of a project by reducing the amount of debt that must be
issued in the capital markets. In addition, if the Section 129 loan
repayment is subordinate to debt service payments on revenue bonds, the
senior bonds may be able to secure higher ratings and better investor
acceptance.
If a project meets the test for eligibility, a loan can be made at
any time. Federal-aid funds for loans may be authorized in increments
through advance construction procedures, and are obligated in
conjunction with each incremental authorization. The State is
considered to have incurred a cost at the time the loan, or any portion
of it, is made. Federal funds will be made available to the State at
the time the loan is made.
The President George Bush Turnpike Project in Texas exemplifies how
a Section 129 loan can play an essential role in the total financing
package. This project links four freeways and the Dallas North Tollway
to form the northern half of a circumferential route around the city of
Dallas. Primary funding for this $940 million project included a low
interest, long-term Section 129 loan and revenue bonds. This $135
million loan was critical in ensuring the affordability of the
project's senior bonds. Completion of this important beltway extension
will be accomplished at least a decade sooner than would have been
possible under traditional pay-as-you-go-financing.
Summary of Texas Project Financing Mechanisms
Texas has only recently begun to use the variety of Federal project
financing mechanisms made available in ISTEA, the NHS Designation Act,
and TEA-21. However, we have found their use to be beneficial and will
continue their use in the future. Generally, as we've applied these
financing options to our projects, we've found that they are most
beneficial for projects that will take longer than 2 years to pay out,
thereby allowing us to stretch our available funding and maintain a
steady letting schedule from year to year. We typically consider using
one of these financing options on projects over $5 million and
sometimes on smaller projects at the end of the fiscal year.
We encourage Congress to continue, expand, and enhance these
Federal transportation financing mechanisms for use at the State's
discretion. As we set a new course for a 21st century transportation
system for Texas, we will continue to consider the use of all financing
tools available to us to meet the transportation mobility needs of the
State.
new texas financing tools
In the statewide election on November 6, 2001, 68 percent of Texans
voted in favor of the constitutional amendment known as Proposition 15.
The passage of Proposition 15 provided TxDOT with three new tools to
establish innovative financing for Texas State highways. With these
tools TxDOT can begin to improve mobility and safety for all Texans by
building more highways faster, thus keeping up with the population
growth in the State and preparing for the opening of the border in
June.
The three financing tools provided to TxDOT with the passage of
Proposition 15 are the creation of the Texas Mobility Fund, the
authority for the Texas Transportation Commission to approve the
creation of Regional Mobility Authorities by counties, and the
authorization for TxDOT to use State highway fund moneys for equity in
toll roads.
Texas Mobility Fund
By voting to create the Texas Mobility Fund, Texas voters approved
a funding mechanism to supplement the traditional pay-as-you-go method
of financing highway construction in the State of Texas. Money in the
Texas Mobility Fund must be appropriated by the State legislature and
cannot include revenue from the gas tax, vehicle registrations or other
dedicated funds. The legislature can provide revenue support to the
Mobility Fund without raising taxes by committing general revenue to
the fund.
Currently there is no money in the Texas Mobility Fund. Once money
has been appropriated to the Texas Mobility Fund, however, it can be
used to finance road construction on the State-maintained highway
system, publicly owned toll roads, and other public transportation
projects. It is estimated that for every $100 million placed in the
fund, $1 billion in bonding for road projects will be created. The
issuance of debt to pay for public works projects is well established
at the local level. The Texas Mobility Fund now allows this method of
funding to be used for State highway projects, on and off the State
system, and allows a combination of both revenue and general obligation
bonds.
In working to meet the States' transportation needs, the Texas
Mobility Fund will help the department accomplish two things:
Preserve the funds currently used for highway
construction under the pay-as-you-go system; and
Allow any new funding sources made available to highways
to be used for payment of debt service on bonds issued to finance
projects.
Toll Equity
Toll Equity, the second financing option made possible by the
passage of Proposition 15, will make potential toll projects more
viable, speeding up congestion relief, while stretching limited State
transportation funds. Toll Equity allows, for the first time, State
highway funds to be used on toll roads without requiring repayment of
the funds. Before the passage of Proposition 15, TxDOT could loan
highway funds for toll projects but they had to be repaid. The loan
increased the initial borrowing costs for toll road projects, impacting
the overall viability of the project. Having to repay the department
from tolls generated from the project often resulted in higher tolls
and larger up front contributions from TxDOT.
Toll equity has made future toll projects more attractive to
investors because it allows the projects to accelerate debt retirement
and hasten production of toll revenues. If a community decides to go
with a toll equity approach on a project in an existing toll authority,
the commission must approve the project to be constructed by that toll
authority. If the community and/or the project are outside an existing
authority, the commission will consider creating a regional mobility
authority, the third tool created by the passage of Proposition 15.
Regional Mobility Authority
A regional mobility authority (RMA) would be created for the
purpose of constructing, maintaining, and operating a turnpike project
in a region of the State. A RMA will allow local officials to exercise
more responsibility, thus encouraging local innovation and better
responses to the particular needs and desires of the local community.
In order for a RMA to be created, one or more counties must petition
the commission for authorization to create a RMA. The petition must
contain certain information, such as a resolution from the
commissioners court of each county and a description of how a RMA would
improve mobility in that particular region. If TxDOT finds that the
petition meets all the requirements it will notify the county(ies) and
conduct one or more public hearings that conform to the criteria set
forth in the rules adopted by the commission.
If and when the commission gives approval, the county that
petitioned the authorization of the RMA will create a RMA by resolution
of each county to be a part of the RMA. Each county resolution must
appoint directors consistent with the rules adopted by the commission.
A board of directors, appointed by the county commissioner's courts
where the proposed turnpike project is, representing political
subdivisions, would govern each RMA. The Governor will appoint the
presiding officer.
Each TxDOT district will identify currently programmed projects
that, from an engineering standpoint, could be developed as tolled
facilities. These projects will be limited to new location or major
capacity expansions. For each project selected with local support, any
funds released from the State transportation plan through the issuance
of revenue bonds for toll projects will be replaced by an equal amount
of project funding in the same district and with the same programming
authority as the original funds held.
In most cases, projects selected to be developed as toll projects
will be accelerated due to the issuance of toll bonds as opposed to
waiting for programmed dollars. In addition, major projects will be
developed as one project instead of being segmented, for the same
reason. Surplus revenues from an RMA toll project can be used for other
transportation purposes within the authority, if needed.
The Trans Texas Corridor
Currently the department is focusing on how to use the Texas
Mobility Fund, the toll equity concept, the authority of counties to
create RMAs, and the exclusive development agreement concept to
implement Governor Rick Perry's Trans Texas Corridor proposal.
The Trans Texas Corridor will be a multi-use, statewide
transportation corridor that will move people and goods safely and
efficiently. The Trans Texas Corridor will include toll roads, high-
speed passenger and freight rail, regional freight and commuter rail,
and underground transportation for water, petroleum, gas and
telecommunications. The Corridor, as envisioned, is a 50-year plan for
addressing the long-range transportation needs of Texas.
Governor Perry established the Trans Texas Corridor concept as the
vision of the future of transportation in Texas. He has directed TxDOT
to develop and refine the concept and come up with an implementation
process. TxDOT has established a preliminary map showing where the
Trans Texas Corridor should be developed. These corridors were selected
based on the existing and forecasted infrastructure needs of the State.
The current location of the State trunk system and congressional high
priority corridors were also taken into account when developing the
Corridors. In terms of a starting point, the Governor has asked the
Commission to focus on developing routes that are already part of the
States long-range plan. For example, SH 130 is a new location highway
that eventually will run from Seguin to Georgetown and parallel to I-
35. SH 130 is already a part of TxDOT's plans, therefore it is logical
that SH 130 be a starting point for development of the Corridor.
Ultimately, it will be the commission that will make the final decision
about which projects are built and when.
Building the Trans Texas Corridor will provide Texans with more and
better transportation options. The Corridor will improve mobility and
safety by reducing traffic congestion on current highways. The reduced
congestion will have environmental benefits such as a reduction in the
volume of air pollution in our urban areas. It will provide a fast,
safe and reliable rail system, allowing Texans and their business to
move, if they so choose, by rail instead of road, further reducing
congestion and air pollution. The Corridor will move hazardous
materials away from urban centers, and off heavily traveled highways,
providing safer transport of such materials. The State will also
benefit from economic development opportunities as a result of a
faster, safer, and more comprehensive transportation system.
TxDOT delivered The Trans Texas Corridor Plan to the Governor this
summer. The plan outlines the basic design of the system and identified
four routes as priority corridor segments. Under the action plan
approved by the commission, TxDOT has designated its Texas Turnpike
Authority Division as the central office to oversee the development of
the corridor. Although it is a process that could take up to 50 years,
the corridor report's action plan sets forth a series of first steps to
be undertaken over the next year. Estimated total cost of the corridor
ranges from $145.2 billion to $183.5 billion. The report discusses a
variety of funding possibilities, although planners generally envision
a public-private effort paid for with tolls, bonds, and other financing
tools.
The goal, at TxDOT, is to begin construction on the most
appropriate segment as soon as practical. TxDOT envisions the build-out
of the Trans Texas Corridor to take approximately 50 years. However,
based upon our 85 years of experience in the business, TxDOT projects
that most of the Corridor could be under construction or finished
within 25 years and perhaps less. To a great degree, the time required
to build the Corridor is dependent upon the interested parties and
their proposals.
As mentioned previously, the Trans Texas Corridor will utilize
three types of financing tools (the Texas Mobility Fund, RMAs, and toll
equity) combined with a project delivery mechanism known as exclusive
development agreements. The Texas Mobility Fund will be used, if
properly capitalized, to help build the segments of the Corridor that
are less toll viable. If the Corridor is attractive enough, the
legislature may commit a portion of general revenue funds toward the
construction. These funds would be released to the commission to pay
debt service on bonds issued to finance the Corridor.
With regard to RMAs, certain high growth areas of the State are
uniquely situated to help themselves and the State through the creation
of a RMA. If we use the example of SH 130 and Travis, Williamson, and
Hays Counties, you can see the benefit of RMAs to the Trans Texas
Corridor. A RMA in Travis, Williamson, and Hays Counties would generate
revenue to pay for local transportation goals much sooner while
allowing the State to spread scarce State revenue over other important
projects in the area--projects such as the segment of the Corridor east
of I-35. In addition, a successful RMA could ultimately invest in light
rail linked to a regional commuter rail that is part of the Trans Texas
Corridor. The rules governing a RMA are flexible in nature and are
intended to foster partnerships between local governments and the State
in the development of transportation facilities that provide an
efficient delivery of the end product.
Toll Equity, as mentioned before, is the phrase used to depict the
amount of State Highway Funds that may be used to construct a toll road
without the requirement that the funds be repaid. The law limits
TxDOT's annual toll equity contributions to a percentage of the Federal
funds it receives each year. TxDOT will use toll equity funds on those
proposals that generate the maximum total funding on the most
appropriate segments and routes identified during the planning stages.
With toll equity, any segment of the Corridor could be made toll
viable. However, TxDOT will create and construct the Corridor based on
a plan that identifies the most financially viable segments and routes
and constructs them first, providing cash-flow to pay for the next
logical segments and so on.
An Exclusive Development Agreement is a contract and construction
method that allows any organization to propose a transportation
project, including design, construction, maintenance, and operation
and/or financing to TxDOT. If TxDOT determines the concept is viable
and it supports the long-range Transportation plan of the State, the
concept is approved and put to the public for competing proposals.
TxDOT will review all proposals and select the best one for negotiation
and final contract. TxDOT must also determine a project is compatible
with existing and planned transportation facilities before a concept
may be approved.
For the Corridor, it is anticipated that interested parties will
make proposals for the Corridor, resulting in permission to operate
part, or the entire Corridor. For those parties that used this method
to win a contract from TxDOT, the right for the Commission to assume
control of any part of the Corridor will be negotiated into the
contract. This will protect the public's investment into the future.
By State statute, TxDOT can use the Exclusive Development Agreement
method for four projects only. Therefore, unless State law is changed,
this will be a minor tool in the creation of the Corridor--unless, of
course, one party proposed to build the entire Corridor or a major part
of the Corridor and the Commission believed it to be in the best
interest of the public.
All of the tools mentioned here (the Texas Mobility Fund, RMAs,
toll equity, and Exclusive Development Agreements) can be used on any
TxDOT project, not just the Corridor. No matter where these tools are
used they will benefit the public. They will help us build more
highways faster and continue to expand our infrastructure to keep up
with growing population and increasing traffic.
helping states take advantage of financing tools
Texans need to have a full array of financial and project
development choices available to us, so that we can move forward to
meet our transportation needs. Innovation and flexibility have become
essential to enabling State and local governments to solve today's
transportation challenges. The recently approved tolling authority for
the I-10 (Katy Freeway) corridor is an example of the types of flexible
financing and project development processes we now need for
transportation projects. Reauthorization of Federal surface
transportation programs and funding in 2003 will present many
opportunities for releasing the creative powers of Texas and other
States.
Tolling of Interstate Routes
In March 2002, the FHWA approved a toll road proposal that calls
for the construction of four toll lanes in the median of the I-10 Katy
Freeway in the Houston region. The toll lanes will generate up to $500
million in revenue toward the reconstruction of I-10, thus completing
funding for the project and potentially cutting construction time in
half.
Despite the ultimate approval of the Katy Freeway tolling mechanism
under Section 1216(a) of TEA-21, our experience with the process
reveals some areas for improvement that, if implemented, would
encourage more States to use this important financing option. In
particular, the Harris County Toll Road Authority (HCTRA), one of our
major partners in the Katy Freeway expansion project, had some initial
concerns about certain requirements in the Section 1216(a) program that
would have required a review and reapplication for the tolling
authority every 3 years. This type of requirement often threatens the
viability of the underlying bonding mechanism that the applicant is
using to support the overall project. For the Katy Freeway project,
HCTRA (the bonding authority in the project) was ultimately given a
waiver of the reapplication process and HCTRA, TxDOT, and the Houston
Metropolitan Transit Authority moved forward with our application under
Section 1216(a).
TEA-21 also provided a pilot program under Section 1216(b) that
allows States to toll portions of the interstate system. Thus far, no
State has successfully applied for this authority. TxDOT initially
applied for tolling authority under Section 1216(b) for the Katy
Freeway project. However, we were unsuccessful in this application
mainly because the program requires an analysis to demonstrate that the
facility could not be maintained or improved from the State's
apportionments and allocations. This analysis is not time restrictive,
i.e., projects can be funded over long periods of time, and therefore
it is very difficult to demonstrate the funding shortfalls required to
obtain Section 1216(b) authority. For the Katy Freeway project
application (and frankly for any other application we may attempt),
TxDOT of course could choose to use any of its $2.2 billion in annual
Federal apportionments for the project instead of funding another
project, so we couldn't pass the ``funding shortfall'' test. What we
need is the ability to use this tolling authority to supplement our
existing funding, not replace it. This situation is a major reason, we
think, why this pilot program has never had a project approved for
implementation. As currently written, this program appears too
restrictive to go forth with a meaningful project.
While the States have not successfully pursued the interstate
tolling authority provided in Section 1216(b) for a variety of reasons
(including political opposition from those who would ultimately pay the
tolls), we in Texas would like to see it continue as an option for
States. At the time Texas first considered using this provision, we did
not have the various State-supported financing mechanisms and authority
that we have recently acquired to help us take a new look at ways to
finance our transportation needs. Also, we now have the Trans Texas
Corridor plan that could benefit from the potential use of the Section
1216(b) authority. As a result, we recommend that the Congress
continue, expand, and improve the flexible application of the Section
1216(a) and Section 1216(b) provisions in the reauthorization of TEA-
21.
Buying Back Portions of the Interstate to Allow Tolling. With the
except of the Section 1216 provisions mentioned above, Federal law
generally prohibits imposing tolls on Interstate highways for which
Federal funds have been used. In several situations, however, Congress
has enacted specific legislation to allow States to reimburse the
Federal Government for Federal funds applied to a highway segment,
thereby relieving a highway segment of the prohibition against tolls.
The FHWA has provided TxDOT staff with six examples of legislation
authorizing such repayment of Federal funds for highways in
Connecticut, Delaware, Maryland, Michigan, New Hampshire, and New
Jersey. Texas would like to pursue this option in the development of
the Trans Texas Corridor and other needed improvements. Your efforts to
make this option as easily accessible as possible will greatly assist
our future endeavors as we seek new ways to fund our tremendous
transportation needs in Texas.
Despite the availability of this option to buy back portions of the
Interstate, we believe that the Congress needs to take a new look at
the issue of residual Federal investment. For the most part, the
Federal investment in the interstates has essentially been depreciated,
leaving only increasing costs to maintain the aging system--costs that
often are taken up by the States. We believe that States should be
given the option to toll their interstates without the requirement of
reimbursement of long-ago Federal funding so that we can improve and
maintain the interstates to meet the mobility and access needs of our
citizens and business communities.
Since the beginning of the Interstate era in 1956, Texas has
contributed more in Federal motor fuels tax payments than the State has
received in Federal highway program funds, including its share of the
Interstate Construction and Interstate Maintenance program funds. When
these interstate program funds were originally distributed to Texas, we
did not get a 100 percent return on our contributions. Now, if we were
to repay a portion of the Federal funding it would be redistributed to
all States. Since Texas continues to get less than a dollar for dollar
return, Texas would suffer twice in the distribution of those funds.
Therefore, we recommend that donor States (those that received less
than 100 percent of their share of contributions to the Highway Trust
Fund compared to their share of distributions through the Federal-aid
highway programs) be allowed to toll portions of the interstate system
without Federal reimbursement. This approach would partially compensate
the donor States for their contributions to the national system and
allow them extra flexibility in handling the mobility needs in their
States.
Allow Toll Credits to be Derived from federally Funded Projects
Currently if a project utilizes any Federal funding then all costs
of the project are ineligible to be counted as toll credits by the
State. In today's environment where fewer and fewer projects are 100
percent toll-viable and require a mix of funding sources it is becoming
more unlikely that a toll project will be built without some form of
Federal assistance.
We believe the non-Federal expenditures on these projects should be
eligible as toll credits on a pro-rata basis. We consider toll credits
to be a valuable tool in Texas and have distributed these primarily to
small transit providers who might otherwise have to turn down Federal
assistance due to a lack of matching funds.
Privatizing Rest Areas
In a review of the Texas rest area system in the late 1980's, an
internal TxDOT task force concluded that an innovative method of
improving rest area quality without increasing costs appeared to be the
concept of contracting with private developers to create joint
development facilities. In other words, a commercialized rest area.
Commercialization could transform selected rest areas into ``travel
service centers,'' which would offer the traveling public facilities
and services beyond those available at our existing sites. In addition
to restrooms and picnic tables, commercialized rest areas could provide
the public with food and fuel facilities and expanded travel
information. These facilities could also provide expanded truck
parking, a need that was only recently reaffirmed by a July 2002 FHWA
Report on Truck Parking Facilities. One of the recommendations for
State action in the FHWA report was to encourage the formation of
public-private partnerships to address the nation's truck parking
needs. At the same time, commercializing a rest area could reduce or
eliminate the cost to the TxDOT of constructing and maintaining the
facilities.
In 1990, the Center for Transportation Research (CTR) at the
University of Texas began a study to determine the feasibility of rest
area commercialization in Texas. This study found that
commercialization would be feasible and could turn many rest areas
sites into revenue generators. However, as the study points out, Title
23 USC, Section 111 prohibits the commercialization of rest areas with
direct access to an interstate highway. It should be noted that this
concept is supported by AASHTO. A 1989 AASHTO Task Force that studied
commercialization recommended that the Federal restriction be lifted.
Language lifting the ban on rest area commercialization on the
interstate system was included in an initial draft of ISTEA; however,
interests opposed to the concept defeated the provision. Tourist
industry interests, truck-stop interests (National Association of Truck
Stop Owners), and other private sector interests view rest area
commercialization as unwanted competition, even though they can
participate in such development.
As we explore ways to maximize available funds to meet our
transportation needs, Congress should allow States to use this concept
on interstate routes.
Continue and Improve Access to Railroad Rehabilitation and Improvement
Financing Act Funds
The Railroad Rehabilitation and Improvement Financing program
(authorized in TEA-21) offers $3.5 billion in loans and guarantees to
public or private sponsors of intermodal and rail projects, with $1
billion reserved for projects benefiting freight railroads other than
Class I carriers. Projects can include acquisition, development,
improvement, or rehabilitation of intermodal or rail equipment or
facilities. The program is intended to make funding available through
loans and loan guarantees for railroad capital improvements. No direct
Federal funding is authorized in TEA-21; however, the Secretary is
authorized to accept a commitment from a non-Federal source to fund the
required credit risk premium.
Texas to date has had little opportunity to use the financing tools
made available by the RRIF. In 2001 Amtrak approached the States of
Mississippi, Louisiana, and Texas for assistance with the credit risk
premium for a RRIF loan. The loan would have allowed one of the freight
railroads in the region to upgrade its tracks to allow an extension of
Amtrak's Crescent line to run between Meridian, Mississippi and Dallas/
Fort Worth. The Texas Constitution prohibits the use of dedicated State
Highway Fund dollars for non-highway purposes; therefore TxDOT was
unable to participate in the opportunity to bring additional passenger
rail service to our State. However, supporters of the rail proposal
approached the Texas Legislature and garnered an appropriation of $1.7
million in other State funds for Texas' share of the credit risk
premium. Unfortunately, Amtrak later announced that it was postponing
its plans for the extension, known as the Crescent Star.
Despite TxDOT's and Texas' limited involvement to date in railroad
financing, as we begin development of the Trans Texas Corridor (which
includes a freight rail, a commuter rail, and a high speed passenger
rail component), the continued availability of financing from the RRIF
will prove important. We encourage Congress to continue the program and
to provide additional funds in the TEA-21 reauthorization.
Changes to the TIFIA Program
The Transportation Infrastructure Financing and Investment Act
(TIFIA) program has been possibly the single most important benefit for
public-private partnerships in transportation and has provided
opportunities both to fill the gaps in finance plans and to make
finance plans more efficient and cost effective. While the program may
end the current authorization period undersubscribed, this is not a
reflection on the program's value or its potential utility. Rather, it
reflects the very long lead times required for project sponsors to
design finance plans and adapt, often only with new State legislation,
to new financing methods.
The clear benefit from TIFIA is flexibility in structuring
repayment and deferral of interest. This feature enhances cash-flow
from the projects during the initial construction period to pay for
senior debt and fill rate stabilization and debt services reserve
funds. Another benefit comes from the ability to leverage revenues from
a ``startup'' toll road project. For a tax-exempt borrower such as
TxDOT, the subordinate TIFIA loan produces savings in both interest
rate costs and costs of bond issuance.
Our experience suggests several potential drawbacks from TIFIA.
Resolving some of these concerns may require changes to the TIFIA law;
others might be corrected within the existing statutory and regulatory
framework.
Encourage Equity Investments in Projects Supported with TIFIA
Credit. Congress should reauthorize the TIFIA program and refine it to
encourage more private investment in projects supported with TIFIA
credit. More thought should be given to the blending of private
investment and TIFIA credit. Several of the current applicants for
TIFIA credit, including TxDOT, are requiring private contractors to
contribute subordinated debt or equity investments to the financing
plan. Indeed, rating agencies and bond insurers have come to expect
contractors to take part of their fee in the form of a project
investment. Congress should encourage this expectation.
The good news is that the contracting community is increasingly
able to make these investments. The bad news is that, if the owner is
using TIFIA credit, TEA-21 currently offers the owner a Hobson's
choice: either the contractor's credit must be investment grade
according to rating agency criteria (a result more favorable to the
contractor than the owner wants or needs to allow) or the contractor's
investment must be subordinate to TIFIA in right of payment (a risk the
contractors cannot accept when TIFIA credit is large). This challenge
can be cured by refining TIFIA to rank a developer's claim senior to
TIFIA's without requiring that the developer's credit be investment
grade and to allow the developer to receive payment of equity returns
and subdebt payoff as long as the entity receiving TIFIA funds meets
all its debt service obligations and coverage ratios. To allay concerns
about diluting TIFIA credit quality, TIFIA could limit subdebt or
private equity payoff to a specified percentage of project costs.
Minimize Impact of TIFIA Loan ``Springing Up.'' Legal advisors to
FHWA have been reluctant to interpret the TIFIA statute to limit the
event under which the TIFIA loan would ``spring'' to parity to a
bankruptcy filing or similar proceeding that results in an abandonment,
liquidation, or dissolution of the project. We are concerned that
insolvency is defined broadly, resulting in the TIFIA loan
``springing'' to parity with senior bond indebtedness. This could
adversely affect the ability to attract credit enhancement (e.g.,
insurance) for the bonds and result in higher interest cost. Credit
enhancers consider the ``worst case scenario'' when evaluating their
desire to guarantee bonds and the risk of doing so. The benefit of
subordinating the TIFIA loan could be eroded if the credit enhancers
evaluate their risk by assuming they will be sharing in revenues and
other assets on parity with FHWA.
Following receipt of TxDOT's TIFIA commitment letter, FHWA
announced it would apply the ``Mega Project'' finance plan and
reporting requirements to all TIFIA projects. As interpreted by FHWA,
these requirements are more burdensome than the capital markets or SEC
disclosure rules require. Furthermore, it's unclear how FHWA will use
this information.
More Liberal Terms in TIFIA Loan Agreements. To leverage new
project revenue streams, reduce transactional costs, and attract
private debt capital, FHWA must consider more liberal terms in the
financial covenants in the TIFIA loan agreement. For example, we
believe that there should be no debt service reserve requirement for
the TIFIA loan. Also, FHWA must be willing to subordinate its debt to
that issued to design/build contractors as payment for their work.
The Central Texas Turnpike Project is a multi-phased capital
program with multiple funding sources. TIFIA loan draw requirements/
priorities as well as provisions relating to repayment and final
maturity of the TIFIA loan must give consideration to the complexity of
the projects.
As mentioned earlier, Governor Perry is exploring large-scale
corridor development in Texas. We certainly expect TIFIA to be an
important financing tool in this effort. Critical to this would be the
ability to subordinate TIFIA to equity returns as well as senior debt
service payments.
Change Internal Revenue Code Private Activity Rules. Congress
should modernize the Internal Revenue Code rules on private activity
and management contracts as they apply to surface transportation.
Project sponsors are now actually forced to turn down true private
equity for important public projects if they expect to issue tax-exempt
debt. This is not the result Congress intended when it adopted these
restrictions in 1986. Inexplicably, these same restrictions do not
apply to other public works such as airports and solid waste
facilities. During the 106th Congress, Senator Smith authored a bill to
cure these exact problems. Both houses of Congress ultimately passed
this important curative legislation as part of a larger tax bill that
year, but President Clinton vetoed the larger bill.
TxDOT is embarking on an ambitious program that has the potential
for attracting significant private equity. Curing this anomaly in the
tax code would allow sorely needed private equity and innovation to be
incorporated into surface transportation development without
sacrificing access to the lower interest rates in the tax exempt
financing markets.
Modernize Internal Revenue Code Advance Refunding Rules. Congress
should modernize the IRS rules applicable to surface transportation to
permit two advance refundings. Most conventional transportation
projects are funded on a pay as you go model or with bonds backed by
tax revenues. As such, sponsoring agencies issue bonds only to advance
funds as needed for construction. To finance a public-private
partnership dependent in part on the project's own revenues, the bond
markets require 100 percent of all capital costs be funded up front, at
the time they invest. This means that the sponsor is issuing bonds many
years removed from the economic conditions that will affect the project
when it has opened.
If interest rates become more favorable over time, IRS rules
prevent the sponsor from refunding the bonds more than once, even
though doing so would help reduce tolls, pay off debt quicker, and
leverage dollars more efficiently. Other businesses aren't so
restricted. These rules are even more puzzling because there is no loss
to the Treasury from advance refundings.
Encourage Design-Build and DBOM Contracting. Congress should
continue to encourage Design-Build and Design-Build-Operate-Maintain
(DBOM) contracting for federally funded projects and remove regulatory
barriers to State DOT use of procurement processes. Private section
financing frequently requires certainty early in the design phase for
capital and long-term maintenance and rehabilitation costs. In
effectively providing such certainty, these forms of contracts are an
essential building block for project financing.
TEA-21 required FHWA to issue a rule governing procurement. While
the rule is not final, the problems identified in the published draft
have been documented in comments submitted by AASHTO and others. Unless
FHWA incorporates the recommended revisions into its final rule, this
critical tool will have been undermined unless Congress intervenes.
Allow Selection of Contractor Prior to ROD to Enhance Financial
Benefits of Construction Acceleration. Congress should make clear to
the USDOT modal administrations that it did not intend NEPA to prevent
procurement activity from being completed prior to issuance of records
of decision (ROD). One of the key values of effective project financing
is construction acceleration. We recognize the major contribution to
environmental planning that NEPA has brought to major Federal actions.
No one suggests that construction should commence before a ROD. But
FHWA is reading NEPA to prevent the issuance of an RFP, the selection
of a contractor, and the award of a contract pending a final ROD. None
of these actions affects the selection of a project alternative or even
the decision not to build. For a State DOT to use its own funds to
accelerate contractor selection so that it is prepared to move quickly
if a ``build'' alternative is selected is acting in parallel rather
than in sequence. This does not prejudice the NEPA process.
Modify Existing Transportation Programs to Enhance Funding Flexibility
ISTEA and TEA-21 provided improved flexibility for States in
addressing their varied transportation needs by allowing greater levels
of transferability among the existing highways and transit funding
categories. For example, States can transfer up to 50 percent of their
National Highway System apportionments to the Interstate Maintenance,
Surface Transportation Program, Congestion Mitigation and Air Quality
Improvement Program, and Bridge Replacement and Rehabilitation Program.
In addition, up to 100 percent of NHS apportionments may be transferred
to STP if approved by the Secretary of Transportation. Similar
transferability provisions are available for the other Federal-aid
highway programs listed above. In addition, States have the option to
use their Federal transit formula program funds for a highway project
and vice versa. This type of transferability should be expanded, at
State discretion, among the entire array of transportation programs.
ISTEA and TEA-21 also enhanced flexibility by expanding the list of
eligible activities that can be funded with highway program funds. For
example, STP funds can be used for highways, bridges, transit capital
projects, and intracity and intercity bus terminals and facilities.
However, this is an area where additional flexibility will help States
in finding funding solutions to meet their varied transportation needs.
When you consider a concept as complex as the Trans Texas Corridor, it
becomes obvious that having the flexibility to address multimodal
funding issues is essential. We encourage Congress to consider
expanding the eligibility of existing highway, transit, and rail
programs to allow, at the State's discretion, the use of any of these
funds for a broader range of transportation activities. At the same
time, it will be essential for Congress to either consolidate or
simplify the program procedures of the various modal programs or allow
States to use the simplest procedures among them so that the
flexibility of expanded eligibility is not negated by regulatory
differences among the modal programs. This flexibility will better
enable us in Texas to pool our available resources to tackle multimodal
transportation projects. This is the future of transportation in Texas;
Federal funding programs should facilitate our efforts, not provide
roadblocks to efficient and effective use of Federal transportation
dollars.
conclusion
As you can see, Texas has indeed entered a new era in planning,
building, and financing needed transportation systems. We can no longer
afford to rely solely on the traditional pay-as-you-go method of
finance for needed transportation systems. We are committed to taking
advantage of every available transportation finance and project
development mechanism. We will need your assistance to enable us to
fully and flexibly use the complete range of tools to meet our growing
transportation demands. We look forward to working with you to make our
launch into the new century of transportation financing a continuing
success for Texas and the Nation.
If you have any questions about the information provided here,
please contact Tonia Ramirez in TxDOT's Federal Legislative Affairs
Section at 512-463-9957.
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