Transportation Infrastructure
Alternative Financing Mechanisms for Surface Transportation Gao ID: GAO-02-1126T September 25, 2002As 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 at a time when both the federal and state governments are experiencing severe financial constraints. As transportation needs have grown, Congress provided states--in the National Highway System Designation Act of 1995 and TEA-21--additional means to make highway investments through alternative financing mechanisms. A number of states are using existing alternative financing tools such as State Infrastructure Banks, Grant Anticipation Revenue Vehicles bonds, and loans under the Transportation Infrastructure Finance and Innovation Act. 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. 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 that are exempt from federal taxation. Expanding the use of alternative financing mechanisms has the potential to stimulate additional investment and private participation. However, expanding investment in the nation's highways and transit systems raises basic questions of who pays, how much, and when.
GAO-02-1126T, Transportation Infrastructure: Alternative Financing Mechanisms for Surface Transportation
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Testimony:
Before the Committee on Finance and
Committee on Environment and Public Works
U.S. Senate:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 9:30 a.m. EDT Wednesday
September 25, 2002:
Transportation Infrastructure:
Alternative Financing Mechanisms for Surface Transportation:
Statement of JayEtta Z. Hecker
Director, Physical Infrastructure Issues:
GAO-02-1126T:
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.[Footnote 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.
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-1990s, FHWA and the states tested and evaluated a variety of
innovative financing techniques and strategies.[Footnote 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.[Footnote 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.
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 in7 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 of Finance Tools:
Although FHWA‘s innovative financing tools have provided states with
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
1970s and early 1980s 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. [Footnote 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.[Footnote 5] Proposals have
been made to extend the use of this relatively new financing mechanism
to other public investments, including transportation projects.
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
5-year 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.[Footnote 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.
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.[Footnote 7]
Figure 1: Present Value Costs of Financing $10 Billion of Spending on
Transportation, Using Alternative Approaches:
[See PDF for image]
Source: GAO analysis.
[End of figure]
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.[Footnote 8]
Figure 2: Present Value of Federal, State, and Other Costs of Financing
$10 Billion of Spending on Transportation, Using Alternative
Approaches:
[See PDF for image]
Source: GAO analysis.
[End of figure]
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.[Footnote 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.
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.[Footnote
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.
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.
Contact and Acknowledgments:
For further information on this testimony, please contact JayEtta Z.
Hecker (heckerj@gao.gov) or Steve Cohen (cohens@gao.gov).
Alternatively, they may be reached on (202) 512-2834. Individuals
making key contributions to this testimony include Lynn Filla-Clark,
Jennifer Gravelle, Gail Marnik, Jose Oyola, Eric Tempelis, Stacey
Thompson, and Jim Wozny.
[End of section]
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.[Footnote 11] 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.
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% 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.[Footnote 12] 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.[Footnote 13] 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.
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[Footnote 14] 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
one percent of the spending, and the ’other“ sources, which accounted
for about three percent of the spending, were treated as money spend
immediately on the project.
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 1990s. 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.
[End of section]
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 1990s, 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:
State: Alabama; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty].
State: Alaska; Number of agreements: 1; Loan agreement amount: $2,737;
Disbursements to date: $2,737.
State: Arizona; Number of agreements: 37; Loan agreement amount:
$424,287; Disbursements to date: $216,104.
State: Arkansas; Number of agreements: 1; Loan agreement amount: $31;
Disbursements to date: $31.
State: California; Number of agreements:[Empty] ; Loan agreement
amount:
[Empty] ; Disbursements to date: [Empty].
State: Colorado; Number of agreements: 2; Loan agreement amount: $400;
Disbursements to date: $400.
State: Connecticut; Number of agreements: [Empty]; Loan agreement
amount:
[Empty]; Disbursements to date: [Empty].
State: Delaware; Number of agreements: 1; Loan agreement amount:
$6,000; Disbursements to date: $6,000.
State: D.C.; Number of agreements: [Empty]; Loan agreement amount:
[Empty]; Disbursements to date: [Empty].
State: Florida; Number of agreements: 32; Loan agreement amount:
$465,000; Disbursements to date: $98,600.
State: Georgia; Number of agreements: [Empty]; Loan agreement amount:
[Empty]; Disbursements to date: [Empty] .
State: Hawaii; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: Idaho; Number of agreements: ; Loan agreement amount: ;
Disbursements to date: [Empty] .
State: Illinois; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: Indiana; Number of agreements: 1; Loan agreement amount: $3,000;
Disbursements to date: $1,122.
State: Iowa; Number of agreements: 2; Loan agreement amount: $2,874;
Disbursements to date: $2,874.
State: Kansas; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: Kentucky; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: Louisiana; Number of agreements: [Empty] ; Loan agreement
amount:
[Empty] ; Disbursements to date: [Empty] .
State: Maine; Number of agreements: 23; Loan agreement amount: $1,758;
Disbursements to date: $1,478.
State: Maryland; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: Massachusetts; Number of agreements: [Empty] ; Loan agreement
amount:
[Empty] ; Disbursements to date: [Empty] .
State: Michigan; Number of agreements: 23; Loan agreement amount:
$17,034; Disbursements to date: $13,033.
State: Minnesota; Number of agreements: 15; Loan agreement amount:
$95,719; Disbursements to date: $41,000.
State: Mississippi; Number of agreements: [Empty] ; Loan agreement
amount:
[Empty] ; Disbursements to date: [Empty] .
State: Missouri; Number of agreements: 11; Loan agreement amount:
$73,251; Disbursements to date: $67,801.
State: Montana; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: Nebraska; Number of agreements: 1; Loan agreement amount:
$3,360; Disbursements to date: $3,360.
State: Nevada; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: New Hampshire; Number of agreements: [Empty] ; Loan agreement
amount:
[Empty] ; Disbursements to date: [Empty] .
State: New Jersey; Number of agreements: [Empty] ; Loan agreement
amount:
[Empty] ; Disbursements to date: [Empty] .
State: New Mexico; Number of agreements: 1; Loan agreement amount:
$541; Disbursements to date: $541.
State: New York; Number of agreements: 2; Loan agreement amount:
$12,000; Disbursements to date: $12,000.
State: North Carolina; Number of agreements: 1; Loan agreement amount:
$1,575; Disbursements to date: $1,575.
State: North Dakota; Number of agreements: 2; Loan agreement amount:
$3,565; Disbursements to date: $1,565.
State: Ohio; Number of agreements: 39; Loan agreement amount: $141,231;
Disbursements to date: $116,422.
State: Oklahoma; Number of agreements: [Empty] ; Loan agreement amount:
[Empty] ; Disbursements to date: [Empty] .
State: Oregon; Number of agreements: 12; Loan agreement amount:
$17,471; Disbursements to date: $17,471.
State: Pennsylvania; Number of agreements: 23; Loan agreement amount:
$17,403; Disbursements to date: $17,403.
State: Puerto Rico; Number of agreements: 1; Loan agreement amount:
$15,000; Disbursements to date: $15,000.
State: Rhode Island; Number of agreements: 1; Loan agreement amount:
$1,311; Disbursements to date: $1,311.
State: South Carolina; Number of agreements: 6; Loan agreement amount:
$2,382,000; Disbursements to date: $1,124,000.
State: South Dakota; Number of agreements: 1; Loan agreement amount:
$11,740; Disbursements to date: $11,740.
State: Tennessee; Number of agreements: 1; Loan agreement amount:
$1,875; Disbursements to date: $1,875.
State: Texas; Number of agreements: 37; Loan agreement amount:
$252,013; Disbursements to date: $225,461.
State: Utah; Number of agreements: 1; Loan agreement amount: $2,888;
Disbursements to date: $2,888.
State: Vermont; Number of agreements: 3; Loan agreement amount: $1,023;
Disbursements to date: $1,000.
State: Virginia; Number of agreements: 1; Loan agreement amount:
$18,000; Disbursements to date: $18,000.
State: Washington; Number of agreements: 1; Loan agreement amount:
$700; Disbursements to date: $385.
State: West Virginia; Number of agreements: [Empty] ; Loan agreement
amount:
[Empty] ; Disbursements to date: [Empty] .
State: Wisconsin; Number of agreements: 3; Loan agreement amount:
$1,814; Disbursements to date: $1,814.
State: Wyoming; Number of agreements: 8; Loan agreement amount:
$77,977; Disbursements to date: $42,441.
State: Total; Number of agreements: 294; Loan agreement amount:
$4,055,578; Disbursements to date: $2,067,432.
Source: FHWA, June 2002:
[End of table]
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:
State: California; Project name: SR 125 Toll Road - 1999; Project
description: Highway/ Bridge Construct-ion of 11 mi 4-lane toll road in
San Diego; Project cost: $455; Instrument type: Direct loan
Line of credit; Credit amount: $94.000
$33.000; Primary revenue pledge: User
Charges.
State: ; Project name: San Francisco-Oakland Bay Bridge - 2002;
Project description: Replacement of SF-Oakland Bay Bridge east span;
Project cost: $3,305; Instrument type: Direct loan; Credit amount:
$450.000; Primary revenue pledge: Toll
surcharge.
State: D.C.; Project name: Washington Metro - 1999; Project
description: Transit capital improvement program; Project cost: $2,324;
Instrument type: Guarantee; Credit amount: $600.000; Primary revenue
pledge: Other.
State: Florida; Project name: Miami Intermodal Center - 1999; Project
description: Multi-modal center for Miami Intern‘l Airport, including
car rental garage, intermodal center, people mover, and roadways.;
Project cost: $1,349; Instrument type: Direct loan
Direct loan; Credit amount: $269.076 $163.676; Primary revenue pledge:
Tax revenue
User charges.
State: Nevada; Project name: Reno Rail Corridor; Project description:
Intermodal; Project cost: $280; Instrument type: Direct loan; Credit
amount: $73.500; Primary revenue pledge: Other.
State: New York; Project name: Farley Penn Station - 1999; Project
description: Intermodal; Project cost: $800; Instrument type: Direct
loan Line of credit; Credit amount: $140.000 $20.000; Primary revenue
pledge: Other
Other.
State: ; Project name: Staten Island Ferries - 2000; Project
description: Transit; Project cost: $482; Instrument type: Direct loan;
Credit amount: $159.068; Primary revenue pledge: Other.
State: Puerto Rico; Project name: Tren Urbano - 1999; Project
description: Transit rail line; Project cost: $1,676; Instrument type:
Direct loan; Credit amount: $300.000; Primary revenue pledge: Tax
revenues.
State: South Carolina; Project name: Cooper River Bridge - 2000;
Project description: Replace double bridges over the Cooper River,
connecting Charleston and Mt. Pleasant; Project cost: $668; Instrument
type: Direct loan; Credit amount: $215.000; Primary revenue pledge:
Other.
State: Texas; Project name: Central Texas Turnpike - 2001; Project
description: Construct 120+ mi. toll facilities to ease I-35
congestion; Project cost: $3,220; Instrument type: Direct loan; Credit
amount: $917.000; Primary revenue pledge: User
charges.
State: Washington; Project name: Tacoma Narrows Bridge - 2000; Project
description: Construct new parallel bridge, toll plaza, and approach
roadways.; Project cost: $835; Instrument type: Direct loan
Line of credit; Credit amount: $240.000 $30.000; Primary revenue
pledge: User
charges
(both).
State: Total; Project name: [Empty]; Project description: [Empty];
Project cost: $15,393; Instrument type: [Empty]; Credit amount:
[Empty]; Primary revenue pledge: [Empty].
Source: FHWA, June 2002.
[End of table]
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 bond-
related 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:
State: Alabama; Date of issuance: Apr-02; Face amount: $200 million;
Projects: County Bridge Program; Backstop financing: All federal
construction reimbursements. Also insured.
State: Arizona; Date of issuance: Jun-00 May-01; Face amount: $39.4
million
$142.9 million; Projects: Maricopa freeway projects; Backstop
financing: Certain sub-account transfers.
State: Arkansas; Date of issuance: Mar-00
Jul-01; Face amount: $175 million
$185 million; Projects: Interstate highways; Backstop financing: Full
faith and credit of state, plus state motor fuel taxes.
State: Colorado; Date of issuance: May 00
Apr-01
Jun-02; Face amount: $537 million
$506.4 million
$208.3 million; Projects: Any project financed wholly or in part by
Federal funds; Backstop financing: Federal highway funds as allocated
annually by CDOT; other state funds.
State: New Mexico; Date of issuance: Sep-98
Feb-01; Face amount: $100.2 million
$18.5 million; Projects: New Mexico SR 44; Backstop financing: No
backstop; bond insurance obtained.
State: Ohio; Date of issuance: May-98 Aug-99 Sep-01; Face amount: $70
million
$20 million
$100 million; Projects: Spring-Sandusky project and Maumee River Bridge
Improvements; Backstop financing: Moral obligation pledge to use state
gas tax funds and seek general fund appropriations in the event of
federal shortfall.
State: Total; Date of issuance: [Empty]; Face amount: $2,301.7 million;
Projects: [Empty]; Backstop financing:
Source: FHWA, June 2002:
FOOTNOTES
[1] Performance Budgeting: Opportunities and Challenges. (GAO-02-
1106T, Sept.19, 2002).
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[11] 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.
[12] 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.
[13] 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.
[14] U.S. Department of Transportation, TIFIA Report to Congress, June
2002.
