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Managing transportation financing in an innovative way.

1. INTRODUCTION

In 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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