Managing transportation financing in an innovative way.
1. INTRODUCTIONIn the United States, traditional transportation financing process, of which the federal-aid grant program is the core, has enabled the construction of an extensive transportation system, especially the Inter-State Highway System. Traditionally, transportation infrastructure has been financed primarily through a combination of federal, state and local taxes and fees. These resources are typically combined to fund projects on a "pay-as-you-go" basis, meaning that projects have often been built in phases or increments as funds become available over a period of years (Source: http://www.transportation-finance.org/funding_financing/financing/). However, the federal-aid grant program's financial limitations are becoming evident in the face of growing investment needs and the lack of available public funding to meet those needs. This funding shortfall is particularly acute for state-level large new investments and major expansions of existing highways, railways and other transportation facilities, the costs of which can amount to hundreds of millions of dollars each. Take Kentucky for example. According to a 2001 report, Kentucky Transportation Cabinet officials estimate that there are some $22 billion in "unscheduled highway needs" beyond the $18.2 billion of highway projects which can be accomplished with anticipated Road Fund revenues over the next 20 years (Hackbart, 2001). The federal-aid program typically reimburses state capital expenditures on transportation infrastructure at prescribed rates (historically, up to 80 or 90 percent), and the remainder of project costs is borne by the states. Nowadays, sole reliance on a grant-based reimbursement program may no longer be the most productive approach for funding certain large infrastructure projects. This traditional transportation financing approach is limited in range, slow to accommodate change, and unable to leverage sufficient private and non-federal capital to meet growing investment needs (Cambridge Systematics, Inc. et al., 1997).
Due to the above limitations, innovative transportation financing strategies came into being in the early 1990s. Though beginning as joint development strategies decades ago, the innovative transportation financing strategies became more popular after the enactment of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA of 1991), and especially after the reconfirmation of the National Highway System Designation Act of 1995 (NHS Designation Act of 1995), the Transportation Equity Act for the 21st Century of '1998 (TEA-21), and the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users of 2005 (SAFETEA-LU). The U.S. Department of Transportation has proposed and implemented a toolbox of project finance techniques and strategies that have been put to use for hundreds of projects nationwide, resulting in the acceleration of critical infrastructure investments and attracting new resources to transportation investment (U.S. Department of Transportation, 2010).
This paper intends to succinctly evaluate different innovative transportation financing strategies by analyzing their characteristics, assessing their funding implications, and exploring inherent relations among different financing strategies. A few empirical examples will be used to illustrate their applications in a real world.
2. KEY INNOVATIVE TRANSPORTATION FINANCING STRATEGIES
Innovative transportation financing broadly refers to methods of transportation infrastructure financing other than relying on traditional highway user fees and taxes. In terms of federal-aid to highways, innovative financing means no longer relying on a single strategy of grant reimbursement. Instead, its focus shifts to a diversified approach that provides new options drawn from the most innovative financing concepts developed from both the public and private sectors. ISTEA of 1991, NHS Designation Act of 1995, TEA-21 of 1998, and SAFETEA-LU of 2005 provide transportation planners with an array of new tools to improve the financial management of transportation investment resources.
Based on their relationships with project development phases, two broad types of innovative transportation financing strategies can be distinguished: the pre-construction financing strategies and the post-construction financing strategies. The pre-construction financing strategies include the new financing tools authorized by ISTEA of 1991, NHS Designation Act of 1995, TEA-21 of 1998, and SAFETEA-LU of 2005, whereas the post-construction financing strategies are commonly known as joint development strategies. These two broad types of financing strategies are inherently related with different funding implications and application circumstances.
2.1. The Pre-Construction Financing Strategies
The federal government participates in transportation projects by providing different kinds of financial assistance. Figure 1 illustrates federal assistance for transportation infrastructure.
[FIGURE 1 OMITTED]
ISTEA of 1991 introduced two major tools for innovative financing: cash flow tools and leverage tools. These tools were reconfirmed and reinforced by NHS Designation Act of 1995 and other subsequent transportation legislations. Both cash flow and leverage financing tools can be implemented during each project development phase (planning, environmental clearance, design, right of way, and construction). Because of this feature, cash flow tools and leverage tools have direct impacts on project delivery speed and can generally accelerate the completion dates of transportation projects. Table 1 shows different cash flow and leverage financing tools and their characteristics.
TABLE 1 - CHARACTERISTICS OF CASH FLOW AND LEVERAGE FINANCING TOOLS
Type of Strategy Measures Definition
Cash Flow Tools Advance The NHS
(These tools Construction Designation Act of
have something to (AC) 1995 allows a
do with when State to initiate
federal funds a project using
become available non-federal funds,
to States. They and to preserve
are designed to its eligibility
permit federal for future
and non-federal federal-aid.
funds to work in
a more
complementary
fashion)
Partial Partial obligation
Conversion of and partial
Advance reimbursement. For
Construction AC projects, no
federal obligation
is created until
project is
converted to
regular
federal-aid
project.
Matching Credit This provision
for Private allows private
Funds, funds, materials,
Materials, or or assets to be
Services Donated donated to a
to FA Projects specific FA
project and
permits the state
to apply the value
to the states
matching share.
Bonds and Debt States can be
Instruments reimbursed with
federal-aid funds
for bond
principal,
interest costs,
issuance costs,
and insurance.
Leverage Tools ISTEA Section States can loan
(These tools are 1012 Loans federal-aid funds
designed to make to toll and
more funds non-toll projects
available to with dedicated
transportation revenue streams. A
providers) loan can be made
for any phase of a
project including
engineering and
right-of-way
work.
ISTEA Section A State can
1044 Toll receive an
Investment investment credit
Credits for certain toll
revenue
expenditures on
highway, bridge,
ot tunnel
infrastructure.
State A SIB is an
Infrastructure infrastructure
Bank (SIB) investment fund
that can be
created at the
state level to
make loans and
provide other
forms of financial
assistance to
surface
transportation
projects.
Type of Strategy Measures Eligible Conditions
Projects
Cash Flow Tools Advance NHS ( IC/ IM), Except for NHS,
(These tools Construction Interstate IC, and IM, the
have something to (AC) substitutes, following
do with when CMAQ, STP, Metro conditions must
federal funds Planning and be met to
become available others. qualify for AC:
to States. They State has
are designed to obligated all
permit federal the funds
and non-federal apportioned,
funds to work in used its
a more obligation
complementary authority, or
fashion) can demonstrate
that it will use
its obligation
authority by end
of fiscal year.
Partial Same as AC Same as AC
Conversion of
Advance
Construction
Matching Credit Any FA Donations must
for Private projects. be made after
Funds, the date the
Materials, or project is
Services Donated approved by FHWA
to FA Projects and prior to
approval of
final voucher.
Donated
materials and
services must
meet the
eligibility
requirements of
the project.
Bonds and Debt Any FA projects Most projects
Instruments eligible under should be
Title 23, authorized after
U.S.C. November 28,
1995.
Leverage Tools ISTEA Section State may loan Projects must
(These tools are 1012 Loans to public or have dedicated
designed to make private entity. revenue streams,
more funds Amount loaned is including excise
available to considered an taxes, sales
transportation eligible FA taxes, real
providers) project cost. property taxes,
Selection motor vehicle
process is taxes and
governed by others.
State law.
ISTEA Section The State can Amount of credit
1044 Toll apply the credit is based on
Investment towards the revenues
Credits nonfederal generated by the
matching share toll authority
of all program and is based on
authorized by nonfederal
Title 23 and expenditures for
ISTEA. capital
improvements,
excluding
maintenance,
debt service or
costs of
collecting
tolls.
State For any Revenue payments
Infrastructure projects, the must begin
Bank (SIB) following items withint 2 years
must be of project
completed prior completion,
to loan closing: maximum
environmental amortization
clearance, term is 20
preliminary years.
engineering, Prepayment of
have an loans are
identifiable acceptable
revenue stream. without
penalty.
Type of Strategy Measures Procedures
Cash Flow Tools Advance Meet same
(These tools Construction requirements as
have something to (AC) regular FA
do with when project. FHWA and
federal funds State execute a
become available project agreement.
to States. They No federal
are designed to obligation is
permit federal created until
and non-federal project is
funds to work in converted to
a more regular FA
complementary project.
fashion)
Partial Same as AC
Conversion of
Advance
Construction
Matching Credit Project should be
for Private approved in
Funds, advance by FHWA.
Materials, or
Services Donated
to FA Projects
Bonds and Debt Project should be
Instruments approved in
advance by FHWA.
Leverage Tools ISTEA Section Loan may be made
(These tools are 1012 Loans at anytime, for
designed to make any amount
more funds provided the maxim
available to um federal share
transportation is not exceeded
providers) (80% of project
cost). Loan can be
initiated on an
active, eligible
project, but
cannot include
work done prior to
loan
authorization.
ISTEA Section The toll projects
1044 Toll should be approved
Investment by FHWA.
Credits
State SIB fund
Infrastructure capitalization:
Bank (SIB) 80% federal, 20%
non-federal.
Projects are
evaluated based on
their bonus
points, equity
consideration,
revenue potential
and other
factors.
Type of Strategy Measures Other
Requirements
Cash Flow Tools Advance AC projects must
(These tools Construction be included on
have something to (AC) STIP, both in
do with when year of
federal funds authorization
become available and year of
to States. They conversion.
are designed to
permit federal
and non-federal
funds to work in
a more
complementary
fashion)
Partial Same as AC
Conversion of
Advance
Construction
Matching Credit Projects should
for Private be included on
Funds, STIP.
Materials, or
Services Donated
to FA Projects
Bonds and Debt Projects should
Instruments be included on
STIP.
Leverage Tools ISTEA Section Project is
(These tools are 1012 Loans carried out in
designed to make accordance with
more funds Title 23 and
available to other applicable
transportation federal laws,
providers) including any
environmental
and right-of-way
provisions.
Initial toll or
non-toll project
is subject to
same basic
requirements
with FHWA
oversight.
ISTEA Section The projects
1044 Toll should be on
Investment STIP.
Credits
State Revolving loan
Infrastructure operation.
Bank (SIB)
Notes:
AC - Advance Construction IC - Interstate SIB - State
Construction Infrastructure
Bank
CMAQ: Congestion IM - Interstate STP - Surface
Management and Air Quality Maintenance Transportation
Program
FA - Federal Aid ISTEA - Intermodal Surface STIP - State
Transportation Efficiency Transportation
Act Improvement
Program
FHWA - Federal Highway NHS - National Highway U.S.C. - United
Administration System States Code
Source: U.S. Department of Transportation (1998)
Cash flow tools may speed up project delivery process without generating new revenue, whereas leverage tools may generate new non-federal revenue, which will, in turn, accelerate transportation construction process.
As a popular leverage tool, flexible matching requirement is relatively easy to implement because of its low risk involved. TEA-21 of 1998 further removed the requirement that the federal share of project costs be applied to each progress payment. As a result, tapered match is authorized and the established federal share is applied to the total project costs, instead of applying to each progress payment. The use of tapered match, when compared to the use of traditional match procedures, would result in an earlier project completion and a reduced project cost. In addition, tapered match would provide for additional non-federal funds to be leveraged for the project.
The most common method of borrowing is to issue bonds that are purchased by investors. The bond issuance yields an immediate influx of cash in the form of bond proceeds. The borrower then retires the debt obligation by making principal and interest payments to the investors over time. Both the private and public sectors can issue bonds for their capital investment, known as corporate bonds and government bonds. Issuance of debt requires a revenue source pledged for repayment. Bonds and debt instruments should be employed very carefully. Typically, an investment rating and future revenue forecasts should be conducted beforehand. For example, Build America Bonds (BABs) were authorized by the American Recovery and Reinvestment Act, which was enacted in February 2009. BABs are taxable bonds that are eligible for an interest payment subsidy paid directly from the U.S. Department of Treasury. Surface transportation projects are among other public infrastructure projects that are eligible for BAB financing (AASHTO and U.S. Department of Transportation, 2010; U.S. Department of Treasury, 2009). Another example of bond is Grant Anticipation Revenue Vehicles (GARVEE) bond. Many states issue GARVEE bonds to finance their transportation projects. For instance, North Carolina's enabling legislation for GARVEEs was passed in August 2005, authorizing the issuance of $900 million (Federal Highway Administration, 2009).
ISTEA Section 1012 loans and ISTEA Section 1044 Toll Investment Credits mainly impact toll-related highway projects. Toll projects can take the form of either build-operate-transfer (BOT) or build-transferoperate (BTO), depending on particular circumstances. Toll projects are normally located along those corridors that are most congested, lack alternative routes and are economically wealthy. This may be conducive to attaining both efficiency and equity goals.
State Infrastructure Bank (SIB) can help fund small-scale and short-term projects based on the revolving loan operation concept. Typically, state/regional projects will be funded through loans, loan guarantees, standby lines of credit and other financing tools. For example, Texas was one of the 10 States chosen to test the SIB pilot program created under the 1995 NHS Act. In 12 years, the SIB has helped fund and expedite more than $3.4 billion in transportation projects through 88 loans with a total dollar value of $374.6 million. Over 21 percent of approved SIB loans in Texas are for transportation improvements in the Texas-Mexico border region (Texas Department of Transportation, 2010).
2.2. The Post-Construction Financing Strategies
The post-construction financing strategies referred to in this paper include commonly-known joint development strategies, which are typically implemented after the project construction is completed. Because of this feature, joint development strategies generally do not have direct impacts on project delivery speed. However, they may generate a substantial amount of revenue to back some pre-construction financing strategies. Joint development, which falls under the category of value capture, has been an important financing tool since the 1980s with many highway and transit applications. Table 2 lists the most important joint development strategies and their characteristics.
TABLE 2 - CHARACTERISTICS OF KEY JOINT DEVELOPMENT STRATEGIES
Type of Measures Definition
Strategy
Connector These are charges
Fees/Service to owners or
Charges developer of
buildings adjacent
to a
transportation
facility, for
being connected to
it.
Assessments Special Benefit A special benefit
Assessments assessment is a
tax or fee on all
properties within
a special benefit
district to pay
for all or a part
of the cost of
specific
improvements made
within the
district.
Tax Increment This is a method
Financing of financing
public involvement
with dedicated
property tax
revenues.
Transit Impact These are fees
Requirements and/or obligations
imposed upon
developers to
mitigate the
impact of their
new projects on
transit services.
Negotiated Land These are
Leases agreements between
private
developers/land
owners and transit
agencies, under
which land is
leased to the
agency in exchange
for construction
of a transit
facility.
Use of Property Leasing/Selling Transit agencies
and Property Development may capture
Rights Rights partial to full
value of their
land holdings by
leasing or selling
development rights
associated with
space above, below
or adjacent to
their facilities.
Leasing/Selling Transit agencies
of Existing may be overlooking
Facilities vacant or
underutilized
properties as a
source of revenue,
such as transit
terminals, park
and ride lots and
others.
Contracted Turnkey Process This process
Services permits transit
agencies to
contract with one
developer for
delivery of a
fully-completed
and operational
project.
Voluntary Private The private
Participation Donations donations, cash or
in-kind, are
usually related to
capital
improvements which
in some way
benefit the
donor.
Type of Measures Financial
Strategy Results
Connector This measure can
Fees/Service pay for either
Charges capital costs or
operating costs
of transportation
projects.
Assessments Special Benefit Special benefit
Assessments assessments can
be used to pay
for up to 100% of
the capital and
operating costs
of transit
facilities or
services within
the district.
Tax Increment This has the
Financing potential of
generating
significant
revenues,
depending on the
local ad valorem
tax rate, the
size of district
and others.
Transit Impact The revenue
Requirements potential can be
significant.
However, overly
stringent
requirements may
cause developers
to locate their
developments
elsewhere.
Negotiated Land Transit agencies
Leases benefit from not
having to condemn
and buy needed
land and possibly
from receipt of
actual funding
for operating or
capital
purposed.
Use of Property Leasing/Selling This is a way of
and Property Development generating
Rights Rights substantial
amounts of
revenue for
transit
agencies.
Leasing/Selling Transit agencies
of Existing need special
Facilities authority to
purchase and
dispose of land
or facilities no
longer needed for
transit
purposes.
Contracted Turnkey Process This is usually
Services adopted as a
time-saving
device, but it
often has the
benefit of saving
money, relative
to the standard
capital
improvement
process.
Voluntary Private Projects suitable
Participation Donations for private
donations are
characterized by
factors that
influence the
perceived value
of the proposed
service or
improvement.
Type of Measures Legal
Strategy Issues
Connector Transportation
Fees/Service agencies must have
Charges the legal authority
to negotiate
connector fees and
service charges.
Assessments Special Benefit Special state
Assessments enabling legislation
and
intergovernmental
agreement authority
are normally
required.
Tax Increment State enabling
Financing legislation and
subsequent local
ordinances are
required to
establish Tax
Increment Financing
District.
Transit Impact For requirements
Requirements specified by law,
local ordinances are
necessary.
Negotiated Land Transit agencies
Leases need authority to
contract with
private property
owners.
Use of Property Leasing/Selling Property owners
and Property Development question if local
Rights Rights eminent domain
powers permit public
entities to acquire
the air and
subsurface rights
associated with
condemned land
parcels.
Leasing/Selling This measure rarely
of Existing generates political
Facilities opposition.
Contracted Turnkey Process Agencies will need
Services authority to acquire
improved real estate
through proposal and
negotiation. This
process is
ineligible for
federally funded
projects because it
deviates from
federal bidding and
labor requirements.
Voluntary Private Usually an agreement
Participation Donations between the two
parties is signed in
acknowledgement of
the donation.
Type of Measures Political
Strategy Issues
Connector This measure does
Fees/Service not have apparent
Charges political
oppositions.
Assessments Special Benefit This does not
Assessments create a new
community-wide tax
and therefore may
be politically
desirable method
of raising
revenues to
address a specific
need.
Tax Increment Resistance comes
Financing from other taxing
jurisdictions,
such as school
districts or
hospital
districts, which
rely heavily on
property tax
revenues.
Transit Impact Developers may
Requirements object to
requirements,
arguing that they
discourage growth
and impose unfair
economic burdens
on their
businesses.
Negotiated Land Transit agencies
Leases rarely encounter
public opposition
to land leases.
Political
considerations are
more important
during negotiation
of the lease
terms.
Use of Property Leasing/Selling The public may
and Property Development complain that the
Rights Rights lease/sale
agreement benefits
the private
developers more
than the public
sector.
Leasing/Selling Utilization by
of Existing transit agencies
Facilities has been limited,
although leasing
facilities is not
new to
municipalities.
Contracted Turnkey Process Political problems
Services may arise if
contrators try to
enlist political
support for their
projects.
Voluntary Private Persuasive
Participation Donations presentations
about project
related benefits
and politically
sensitive
negotiations with
potential donors
may be the key to
successful
solicitation of
contributions.
Source: Rice Center (1985)
Joint development strategies are generally applied to large-scale transit projects, such as subways and other major investment projects, due to their large magnitude, time permanency, and profound impacts on adjacent land uses.
Transit agencies can benefit from monetary or land donations from commercial retailers, whereas commercial retailers can also benefit from increasing customers due to their geographic adjacency to transit projects. Therefore, both public and private parties are mutually beneficial.
Besides transit projects, highway projects can also benefit from joint development strategies. For example, gas station is normally located near freeway exit. Highway agency can reasonably charge connector fee on gas station owner upon being legally authorized. Likewise, motorists can also be charged a fee for using rest areas along freeways.
Implementation of joint development strategies requires legislative supports and legal authorities granted. Joint development strategies, such as special assessment districts, can sometimes generate millions of dollars to support urban mass transit projects, supplementing traditional funding sources. However, each strategy has its own restrictions and eligible uses. For example, public/private joint development revenue can only be used on development of company property and rental property to increase revenue from tenant rent.
3. LINKAGES AMONG DIFFERENT TRANSPORTATION FINANCING STRATEGIES
There are different kinds of linkages among transportation financing strategies. This paper focuses on two linkages: linkages between the pre-construction financing strategies and the post-construction financing strategies; and linkages between the traditional financing strategies and the innovative financing strategies.
3.1. Linkages between the Pre-Construction Strategies and the Post-Construction Strategies
At first glance, it appears that the pre-construction strategies and the post-construction strategies are unrelated. But in actuality, they are still related in the following ways:
1) Before any debt-related financing strategies are implemented, transportation agencies need to assure lenders that principals plus interests will be repaid with future revenue. Though traditional funding sources such as sales taxes will provide a lion share of stable revenue stream, joint development can also generate a substantial portion of revenue to back debt-related financing strategies;
2) Different modes have different pre-construction and post-construction relationships. For toll facilities, loan amounts will be repaid by expected tolls. But for transit projects, bonds may be repaid through any combination of special benefit assessment revenue and traditional funding sources; and
3) There exists a somewhat overlapping between the pre-construction strategies and the post-construction strategies. For example, private donations may belong to both the pre-construction strategies and the post-construction strategies.
3.2. Linkages between the Traditional Financing Strategies and the Innovative Financing Strategies
Both the traditional transportation financing strategies and the innovative transportation financing strategies are integral components of entire transportation financing strategies.
At present, traditional funding sources remain dominant, while innovative funding sources are merely supplemental. Both financing strategies should better be integrated to enhance their synergistic effects.
Traditional financing strategies and innovative financing strategies are closely related in the following ways:
1) Cash flow tools and leverage tools are actually integrated into traditional financing process. For example, advance construction (AC) projects must be included in State Transportation Implementation Program (STIP); AC projects must meet the same requirements as regular federal aid projects. Flexible match represents a leverage tool, but local match requirement itself is a key feature of traditional financing process. In other words, cash flow tools and leverage tools simply relax some rigid requirements of traditional financing process without fundamentally reforming them;
2) Bonds and other innovative debt instruments can be repaid by expected sales taxes and other traditional financial resources; and
3) Innovative financing strategies simply refine but cannot replace traditional financing strategies. Traditional financing strategies provide more stable revenue streams.
4. EXAMPLES OF INNOVATIVE TRANSPORTATION FINANCING
4.1. Capital Beltway/I-495 High Occupancy Toll (HOT) Lanes, Virginia
As illustrated in Figure 2, the Capital Beltway/I-495 HOT Lanes Project in Virginia includes the construction of four HOT lanes (two in each direction) added to the Capital Beltway/I-495 between the Springfield Interchange and just north of the Dulles Tollway. The HOT lanes will use electronic tolling technology and dynamic pricing to continuously adjust toll rates to manage traffic flow.
[FIGURE 2 OMITTED]
The project is being advanced under an 85-year concession agreement (5-year construction period, plus 80-year operating concession) with the Virginia Department of Transportation (VDOT) and Capital Beltway Express, LLC (private concessionaire).
Financing for the nearly $2-billion project includes $585.6 million in Private Activity Bonds (PABs) and $585.5 million from a Transportation Infrastructure Finance and Innovation Act (TIFIA) direct loan, combined with a State grant ($409 million), private equity ($349), and interest income ($69 million) (Source: http://www.transportation-finance.org/projects/i495_capital_beltway_hotlanes.aspx). This is the first project to issue PABs of the eight projects that were approved to issue PABs under the $15-billion SAFETEA-LU allocation [Note: PABs are debt instruments issued by State or local governments in which bond proceeds are used to finance a public use project developed by a private entity (National Surface Transportation Policy and Revenue Study Commission, 2007)].
The PABs were issued by a newly created not-for-profit entity in compliance with provisions of Internal Revenue Service Revenue Ruling 63-20, which allows certain private entities to issue tax-exempt debt on behalf of a unit of government. Construction began in Spring 2008, and the project is scheduled for completion by 2013(Sources: FHWA IPD Web site: http://www.fhwa.dot.gov/ipd/;case_studies/va_capital_beltway.htm; AASHTO's Center for Excellence in Project Finance: http://www.transportation-finance.org/projects/i495_capital_beltway_hotlanes.aspx; Virginia Mega Projects: http://www.vamegaprojects.com/about-megaprojects/i495-hot-lanes/).
4.2. Pocahontas Parkway (Initial Construction Financing), Virginia
The Pocahontas Parkway (Route 895) is an 8.8-mile tolled highway, located 7 miles south of Richmond, Virginia. The four-lane road connects Chippenham Parkway at 1-95 in Chesterfield County with 1-295 south of the Richmond International Airport in Henna County. See Figure 3.
[FIGURE 3 OMITTED]
Construction began in the Fall of 1998, and the Parkway was opened to traffic in stages beginning in May 2002. The project was the first unsolicited proposal for a highway project developed under Virginia's Public Private Transportation Act of 1995. The project was delivered through a design-build contract and included the creation of a nonprofit 63-20 corporation, the Pocahontas Parkway Association (PPA), which had the authority to issue tax-exempt bonds to provide a share of the project financing. The initial design and construction were funded through: Tax-exempt toll revenue bonds - 354 million; Federal funding--$9 million for design costs; SIB loan--$18 million (Source: http://www.fhwa.dot.gov/ipd/p3/case_studies/case_study_pocahontas.htm).
4.3. Benefit Assessment Districts Program of the Los Angeles Metro Red Line Subway System
In addition to its traditional funding sources (local, state and federal), the Los Angeles County Metropolitan Transportation Authority (LACMTA) has been using the following innovative financing strategies to generate transportation revenues:
* Benefit Assessments;
* Other (Advertising, Auxiliary & Charter);
* Public/Private Joint Development;
* Certificates of Participation;
* Commercial Paper;
* Cross Border Lease;
* Senior Lien Bonds; and
* Subordinated Bonds.
This section only highlights LACMTA's Benefit Assessment Districts Program of the Los Angeles Metro Red Line Subway System. Benefit assessment is a fee on properties used to pay part or all of the cost of capital improvements enhancing the value of property receiving service from or located near and benefiting from the capital improvements.
The LACMTA Board of Directors has established benefit assessment districts and levy assessments along the Metro Red Line subway system stations. See Figure 4 for station details.
[FIGURE 4 OMITTED]
The Los Angeles Metro Red Line System has 16 stations, 15 of which have established benefit assessment districts:
* Segment I (5 stations): Union Station, Civic Center/Tom Bradley, Pershing Square, 7th St/Metro Center, and Westlake/McArthur Park;
* Segments II & III (10 stations): Wilshire/Vermont, Wilshire/Normandie, Wilshire/Western, Vermont/Beverly, Vermont/Santa Monica/LACC, Vermont/Sunset, Hollywood/Western, Hollywood/Vine, Hollywood/Highland, North Hollywood.
Total Segment I benefit assessment revenue is $130.3 million or roughly 10% of the Segment I construction costs. The benefit assessment rate for Segment I is 30 cents per square foot of gross building area per year, which can vary to a maximum of 42 cents per square foot per year, depending on the bond repayment schedule and the level of real estate growth that occurs.
Segments II & III alone will provide benefit assessment revenues in the amount of $66.75 million in station costs, which comprise 2.5% of total construction cost ($2.76 billion) for Segments II & III (North Hollywood Extension). And an "in-lieu" contribution will be made at Universal City station.
Assessable properties include: offices, retail stores, hotels/motels, other commercial properties, and freestanding parking garages not used to meet zoning requirements of an associated use. Assessable parcels with non-assessable improvements include: wholesale, manufacturing, industrial, improvements vacant due to regulatory requirements, parking (except in Segments II and III for freestanding parking garages), and vacant land. Exempt properties include: residential, non-profit owned and used, and publicly owned and used.
Each property owner subject to assessment has three payment options:
* Option One: pay in one lump sum discounted from the scheduled opening date of the transit station (cost to owner ranges from a one-time $0.86 to $1.06 per an assessable square foot);
* Option Two: pay in five annual installments with amount due discounted and then annualized with annuity over the five year (cost to owner ranges from $0.21 to $0.26 per one assessable square foot annually over the five years); and
* Option Three: pay over a 29 year period beginning when the transit station nearest the property opens after the sale of bonds (cost to owner ranges from $0.09 to $0.19 per one assessable square foot annually and averaging approximately $0.15).
Annual assessment income goes directly to cover interest and principal payments on approximately $162 million in assessment district bonds which were sold in 1992.
5. FINDINGS AND RECOMMENDATIONS
The Federal-Aid Highway Program (FAHP), which represents the traditional transportation financing program, is no longer able to meet new transportation financing demand, its rigid structure, slowness to accommodate new change, and inherent funding inflexibility have become barriers to accelerate transportation projects throughout the nation.
In contrast, innovative transportation financing presents new opportunities and advantages: more revenues can be generated through private sources, public/private partnership and others; project delivery process can be accelerated through advance construction, flexible match and new project implementation process. Because of these advantages, innovative transportation financing strategies will become more popular in the future.
This paper holds that, in the foreseeable future, loan-based financing mechanism will be gradually replacing grant-based financing mechanism. This will make more transportation projects self-supporting, which, in turn, calls for a higher revenue-generating capability and a lower operating cost. Meanwhile, the existing rigid eligibility requirements for different funding sources may further be relaxed, similar to the relaxation of flexible match requirement. More innovative transportation financing strategies, including congestion tolls, are expected to be introduced to accommodate for new funding challenges.
While it is necessary to introduce more innovative transportation financing strategies, we still cannot totally get rid of traditional transportation financing strategies because most transportation dollars still come from traditional sources, such as sales taxes, gasoline taxes and other miscellaneous fees. Because of this fact, innovative transportation financing strategies can only supplement but cannot replace most of traditional transportation financing strategies in the years to come, though some inadequate traditional financing mechanisms will gradually be phased out. For a particular region, due to its unique circumstances, the most appropriate mix of traditional and innovative transportation financing measures should be carefully laid out.
REFERENCES
AASHTO and U.S. Department of Transportation (2010). Finance. Retrieved February 29, 2012 from: http://www.transportation-finance.org.
Cambridge Systematics, Inc., Apogee Research, Inc., and Fitch Investors Service, L.P. (1997). Federal Credit for Surface Transportation: Exploring Concepts and Issues. Prepared for the Federal Highway Administration.
Federal Highway Administration (2009). North Carolina Takes Flexible Approach to GARVEE Bond Issuance,. Innovative Finance Quarterly, 14(1).
Hackbart, M. M. (2001). Innovative Financing Options for Kentucky's Transportation Infrastructure. Lexington, KY: University of Kentucky.
Los Angeles County Metropolitan Transportation Authority (1997). Benefit Assessment Districts Program Overview. Los Angeles, CA: Los Angeles County Metropolitan Transportation Authority.
Rice Center (1985). A Guide to Innovative Financing Mechanisms for Mass Transportation. Washington, DC: US Department of Transportation.
Texas Department of Transportation (2010). State Infrastructure Bank (SIB). Retrieved February 29, 2012 from: http://www.txdot.gov/business/governments/sib.htm.
U.S. Department of Transportation (1998). Innovative Finance and Statewide Financial Planning Course Manual. Washington, DC: US Department of Transportation.
U.S. Department of Transportation (2010). Project Finance Primer 2010. Washington, DC: U.S. Department of Transportation. Retrieved February 29, 2012 from: http://www.fhwa.dot.gov/ipd/pdfs/finance/ProjectFinancePrimerREV4.pdf.
U.S. Department of Treasury (2009). Guidance on Build America Bonds Washington, DC: U.S. Department of Treasury. Retrieved February 29, 2012 from: http://www.irs.govipub/irs-drop/n-09-26.pdf.
Xueming CHEN
Virginia Commonwealth University, 923 West Franklin Street, Richmond, VA 23284 United States of America xchen2@vcu.edu
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| Author: | Chen, Xueming |
|---|---|
| Publication: | Management Research and Practice |
| Article Type: | Report |
| Geographic Code: | 1USA |
| Date: | Sep 1, 2012 |
| Words: | 5492 |
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