Greasing the skids: how federal lending programs can move your transportation projects forward.
Surface transportation projects have historically received significant levels of federal grant assistance. This assistance is derived from various user fees, including gasoline, tire, and motor fuel taxes levied at the national level. Despite this funding, many transportation projects face significant financial hurdles prior to and during construction. For example, local governments frequently encounter discrepancies between local fiscal year funding and the availability of federal surface transportation dollars. This timing mismatch can result in project delays. The perennial and unique funding gaps for surface transportation have initiated the inception of several U.S. Department of Transportation lending programs designed to assist projects with both temporary and long-term funding requirements.
This article describes the federal lending programs that have evolved as a result of unmet demand for additional credit facilities for surface transportation projects. As summarized in Exhibit 1, the programs vary by the amount of credit assistance available, the percentage of project costs eligible to receive credit assistance, and the minimum dollar amount of anticipated project expenses. These programs include the Transportation Infrastructure and Finance Innovation Act, state infrastructure banks, Section 129 loans, the Railroad Rehabilitation and Improvement Financing program, and various methods to meet project match requirements.
A SURVEY OF FEDERAL PROGRAMS
Although most project sponsors prefer to receive grant funds instead of loans or other forms of credit assistance, lending programs offer some distinct advantages. Lending facilitates project acceleration. For high priority projects, credit assistance is often preferable to uncertain grant funding that may not materialize for many years in the future. Lending also supports cost efficient project delivery by speeding construction and avoiding construction cost increases due to inflation. For maintenance projects, borrowing funds to perform rehabilitation activities may decrease overall costs by protecting the infrastructure asset before additional deterioration significantly compromises the asset. Lines of credit permit greater flexibility in a project's financial plan, and enable the sponsor to better manage cash flows. Loan guarantees reduce credit risk for lenders and support competitive interest rates. Finally, credit assistance may improve project fiscal discipline and cost containment strategies. The need to competitively apply for and repay funds presents a strong incentive to carefully monitor and control project costs and to meticulously plan all aspects of project financing and delivery.
The sections that follow describe the major federal transportation lending programs and their reauthorization status.
TIFIA. The first example of federal credit assistance occurred in 1993 via legislative appropriations that enabled the Department of Transportation to offer two lines of credit to the Transportation Corridor Agencies of Orange County, California. The lines of credit were used to support the sale of revenue bonds, the proceeds of which were used to construct the Foothill Eastern and San Joaquin Hills toll roads. In 1997, another federal appropriation was used to lend funds to the Alameda Corridor, a project to improve rail and truck access to the Ports of Los Angeles and Long Beach, California (see sidebar). Credit assistance for the Transportation Corridor Agencies and the Alameda Corridor set a precedent in the transportation sector and demonstrated the viability of and market sector demand for a federal credit program designed specifically to assist transportation projects requiring significant financial resources. To provide a more formal program format to meet the growing interest in credit assistance, TEA-21 established a new program known as the Transportation Infrastructure and Finance Innovation Act of 1998, or TIFIA.
The TIFIA program is managed by the Department of Transportation, and it is designed to provide financial assistance to large projects of regional or national significance. Additionally, TIFIA strives to address chronic deficiencies within the capital markets, which historically have been reluctant to lend to financially unproven transportation projects. The program offers applicants direct loans, loan guarantees, and lines of credit for projects with more than $100 million of eligible construction project costs and more than $30 million of eligible transportation system project costs.
The TIFIA program imposes an investment ceiling on the Department of Transportation of no more than one-third of the total project costs. By remaining a minority investor, the Department of Transportation simultaneously limits its risk exposure and encourages significant non-federal public and private participation. In addition, each applicant must submit a credit rating letter affirming an investment grade status for the project's senior debt (the TIFIA instrument can be subordinate to this debt), a financial plan detailing sources and uses of funds, and a formal written response addressing the relevance of the project to the Department of Transportation's strategic goals. Loan terms are negotiated among the Department of Transportation and the other participating parties. For direct loans, the interest rate is set at closing equal to a U.S. Treasury instrument with a similar maturity.
Since its inception, the TIFIA program has enabled and expedited the construction of more transportation projects by providing critical financial support and by attracting and maximizing private sector involvement. As of March 2004, 11 projects in seven states have received $3.6 billion in TIFIA credit assistance. These projects represent a diverse modal investment portfolio, and include public transportation, highways, intermodal hubs, ferry terminals, rail, and marine cargo. Three additional projects have applied for credit assistance and are under review.
The TIFIA loan repayments are returned to the U.S. Treasury and therefore are unavailable for funding future loans. Consequently, unlike the state infrastructure banks discussed later in this article, TIFIA's continued funding is dependent on the ongoing reauthorization of the Transportation Equity Act for the 21st century, commonly known as TEA-21.
Several changes to the TIFIA program have been proposed in the pending reauthorization legislation named SAFETEA now under consideration by Congress. The legislation is expected to establish program spending levels and define program eligibility constraints for several years. First, the minimum dollar amount of eligible project costs required to meet the threshold value for TIFIA assistance is expected to decrease to $50 million. This would allow smaller projects to access TIFIA assistance and address an existing Department of Transportation lending capacity gap within the $50 to $100 million project range. Second, the types of transportation projects eligible to apply for assistance would be expanded to include freight rail.
Although SAFETEA caps the total annual available TIFIA assistance at the fiscal 2003 level ($2.6 billion per year) throughout the duration of the legislation, the increased flexibility of certain forms of credit assistance would be more useful to future borrowers than was previously permitted during the TEA-21 authorization period. For example, under the current authorizing legislation, lines of credit cannot fund a project until the project has exhausted all available reserves. In contrast, SAFETEA would enable a line of credit to replenish reserve funds, thereby avoiding project default.
State Infrastructure Banks. State infrastructure banks, or SIBs, provide revolving loans and other types of credit assistance to Title 23 and Title 49 defined surface transportation projects. First developed as a pilot program in 1995 with 10 participating states, the program has expanded to include 38 states and Puerto Rico. State infrastructure banks enhance the lending capacity available to transportation projects under the auspices of the Department of Transportation by providing financing to smaller dollar projects that are not eligible for TIFIA assistance. Some SIBs are able to provide credit assistance via state-funded accounts to transportation projects ineligible for assistance under Title 23 and 49. These projects have included facilities for airport improvements.
In contrast with the Department of Transportation-managed TIFIA program, state infrastructure banks are operated individually by each state. The states establish the application criteria, loan terms, and management structure of their programs. To transfer federal funds to capitalize an SIB, a cooperative agreement is required between the federal government and the SIB. This agreement provides the framework for implementation, including the basic structure and purpose of the SIB, the administration of funds, and reporting and audit requirements. In many states, the state legislature must authorize the formation of an SIB. Despite these rigorous and intricate establishment procedures, SIBs offer significant lending flexibility and allow states to tailor the program to their specific needs. For example, SIB management has the discretion to set interest rates based on state transportation goals and the merits of an individual project, regardless of prevailing market interest rates.
State infrastructure banks are not limited to direct loans. For example, they can provide financial security to other types of primary financing. The additional security reduces credit risk and may result in lower interest rate fees, thereby reducing overall project costs. Other types of credit assistance available through SIBs include credit guarantees, interest rate subsidies, bond insurance, and capital reserve funds. The various forms of credit assistance available through the SIB program make it much more flexible than the Section 129 loan program discussed below.
As of September 2003, the SIB program has supported 330 loan agreements and has provided more than $4 billion of project support in 32 states. Loans have included many different types of transportation projects, including public transportation assets, intermodal facilities, roads, and airport facilities. Although TEA-21 placed constraints on the amount of federal capital available to transfer to the SIB program, some SIBs have further augmented their capital by obtaining state appropriations and by issuing debt.
Reauthorization proposals now pending before Congress seek to open the program to all 50 states and to permit the transfer of federal money to the SIBs. The future of the SIB program and the availability of federal funding will depend on the final reauthorization language.
Section 129 Loans. Section 129 loans allow states to use regular federal-aid highway apportionments to fund direct loans to projects with dedicated revenue streams such as tolls, property taxes, sales taxes, and other beneficiary fees. The loan provisions, as amended, are codified as Section 129(a)(7) of Title 23, which is why loans under this program are commonly referred to as "Section 129" loans.
A key advantage of this program, like most credit assistance programs, is the opportunity to finance more projects by using specific receipts to repay the loan, thereby enabling other projects to be funded with the replenished Section 129 accounts. Section 129 loans are typically offered at or below prevailing market rates, which helps enhance the financial feasibility of transportation projects. Additionally, Section 129 loans may play a credit enhancement function by accepting a subordinate repayment position, thereby reducing the cost of other debt needed for the project.
Apportionments from any federal transportation program category may be committed to a Section 129 loan if the project receiving the loan is eligible for funding from that particular program category. Loans can he in any amount, up to 80 percent of the project cost, provided that a state has sufficient obligation authority to fund the loan. Loans must begin repayment within five years after the project is opened to traffic, and must be fully repaid within 30 years from the date federal funds are authorized for the loan.
The number of completed Section 129 loans has been limited. in part because of the subsequent availability of TIFIA credit assistance for similar types of projects. However, for projects unable to meet the cost threshold or other application criteria required for TIFIA assistance, Section 129 loans are a good alternative. Section 129 loans complement the SIB program by providing the opportunity to lend funds external to a formal bank loan process. This feature is important to states unable to utilize or participate in the SIB program.
No proposed changes to the Section 129 language are anticipated at this time.
Railroad Infrastructure Finance. The Railroad Rehabilitation and Improvement Financing program established under TEA-21 offers direct loans and other credit assistance of up to $3.5 billion to eligible freight rail transportation projects. Funding may be used to acquire, improve, or rehabilitate intermodal rail equipment or facilities, to develop new railroad infrastructure, or to finance outstanding debt incurred for rail improvement projects.
Unlike the TIFIA program, direct loans may fund 100 percent of a project, with repayment terms of up to 25 years. As of March 2004, the program has completed six loans totaling more than $352 million. The level of available funding permits the consideration of applicants using a non-competitive selection process; however, each application is reviewed based on the merits of the proposed project and the underlying financial strength of the repayment arrangements.
The authorizing statute permits the program to either asses a credit fee on each completed loan or to offset the risk of a potential loss with other funding sources. Since there is no available appropriation for this requirement, a credit risk fee is levied on each completed loan.
The RRIF program does not expire and is not subject to TEA-21 reauthorization.
Project Match Management. Project match refers to the mandatory portion of transportation project expenditures met by non-federal sources. The payment of this expense is typically anticipated and reconciled when an invoice is submitted for completed work. Although project match flexibility is not a formal lending program, its use enables improvements in project cash flow management, and can mimic elements of a short-term loan. For example, a typical project match ratio specifies an 80 percent federal share and 20 percent local share ratio. However, if the local share funds are unavailable, the project may be delayed until sufficient funds accumulate to meet project match requirements. Flexible match terms enable the project sponsor to vary the timing and amount of match payments, provided that the appropriate percentage and dollar amount is fulfilled at the conclusion of the project. The impact of this temporary payment postponement is important because it enables projects to commence construction in a timely fashion. No proposed changes in project match requirements are anticipated at this time.
Surface transportation infrastructure is an important component to community development goals and economic growth expectations. However, funding levels are finite and infrastructure investments such as surface transportation must compete for local funding with many other types of public projects and services. Increasing the available financing options by introducing lending opportunities offers local sponsors the diversity of options and the financial flexibility to meet infrastructure investment financing needs, thus complementing and augmenting traditional grant funding.
Exhibit 1: Summary of Federal Transportation Lending Programs Lending Limit as Minimum Percent of Project Program Project Cost Cost TIFIA $100 million for 33% http://tifia.fhwa.dot.gov construction, 49 CFR 80 $30 million for intelligent transportation systems State Infrastructure Bank Set by SIB Set by SIB www.fhwa.dot.gov/ (up to 100%) innovotivefinance/sib.htm Section 129 Loans None 80% www.fhwa.dot.gov/innovative- finance/ifp/credass.htm Tapered Match None Local match percent www.fhwa.dot.gov/innovative- for type of project finance/ifp/innomon.htm RRIF None 100% www.fra.dot.gov 49 CFR 260 Repayment Program Interest Rate Period TIFIA Tied to similar 35 years http://tifia.fhwa.dot.gov maturity U.S. from 49 CFR 80 Treasury substantial completion State Infrastructure Bank Set by SIB Set by www.fhwa.dot.gov/ (usually below within federal innovotivefinance/sib.htm market rates) limitations Section 129 Loans Set by state 30 years from www.fhwa.dot.gov/innovative- authorization date finance/ifp/credass.htm of loan Tapered Match None Project completion www.fhwa.dot.gov/innovative- date finance/ifp/innomon.htm RRIF Tied to similar 25 years www.fra.dot.gov maturity U.S. 49 CFR 260 Treasury
TIFIA AND THE ALAMEDA CORRIDOR
Opened on time and within budget in April 2002, the Alameda Corridor comprises railroad and highway investments that have significantly improved freight traffic access to the Ports of Los Angeles and Long Beach, California. The Ports of Los Angeles and Long Beach together comprise the largest shipping complex in the United States, handling more than 40 percent of the nation's imports in terms of dollar value.
On May 6, the Alameda Corridor Transportation Authority paid, in full, the balance of a 1997 loan from the U.S. Department of Transportation for this project. This loan was a precursor to and model for the TIFIA credit assistance program. The authority repaid the $400 million federal loan with the proceeds from a new sale of subordinate lien taxable and tax-exempt revenue bonds. The interest rates on the new tax-exempt bonds are more than 100 basis points less than the 6.79 percent interest rate on the federal loan.
The Alameda Corridor Transportation Agency's prepayment of the federal loan demonstrates the utility of federal lending programs. The loan enabled the completion of a nationally significant project, on time and within budget, that facilitates the growth of international trade. The federal government's willingness to assume early project risk resulted in a critical infrastructure investment with the bonus of full repayment of the loan 28 years ahead of schedule.
TAPERED MATCH AND NEW YORK STATE
In 2001, the New York State Department of Transportation decided to avail itself of tapered match, a cash management tool enabled by the Transportation Equity Act for the 21st Century. NYSDOT applied the tapered match provision to 12 projects throughout the state totaling $330.9 million, of which the federal government's share was $271.6 million. The use of tapered match allowed New York to vary its share of the costs over the life of the 12 projects, so that the state could better manage the near-term gap in state matching funds.
Two years later, economic conditions in the state continue to be troubled, and the availability of state matching funds continues to be very limited. To help meet current funding needs, the U.S. Department of Transportation in March 2003 approved NYSDOT's second request to use the tapered match provision on 24 federal-aid projects. The total estimated cost of these projects is $696.9 million, of which the federal government's share is $525 million. To date, New York has authorized six of these projects using tapered match.
Without the use of tapered match, these projects would have been delayed until at least the second half of the state fiscal year. This would have meant that the actual construction would have been delayed until the 2004 construction season, resulting in a later completion date and potentially increased project costs. Using tapered match, New York expedited the completion and reduced the costs of the 24 projects, enabling the delivery of needed transportation projects throughout the state.
ROBENA REID is a financial economist for the Federal Transit Administration, one of II modal administrations at the U.S. Department of Transportation. She is a member of GFOA's Committee on Economic Development and Capital Planning.
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|Publication:||Government Finance Review|
|Date:||Jun 1, 2004|
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