TE-045 Evaluation - The States Respond

Since its inception, the TE-045 initiative has proven popular with most States and has generated a substantial response, with FHWA approving 88 proposals between April 1994 and July 1996. As new financing concepts and new applications of existing tools emerge, it is likely that additional projects will be proposed and approved under TE-045. At the same time, however, some projects have dropped out of the initiative due to identification of alternative funding sources or the presence of insurmountable obstacles to the projects' financial or political feasibility. As a result, 74 projects remain active in the program, as of July 1996. The number of projects analyzed in this report is 71, which excludes the three "projects" that actually represent groups of projects being administered under STP Simplification.

For the projects currently being pursued under TE-045, the most popular financing concepts are those that address immediate cash flow needs or that obviate the need for States to use their own funds to match Federal funds. In contrast, outside of flexible match, to date States have generally exhibited less interest in and use of leveraging tools such as Section 129 loans and bond reimbursement, despite these toolsí large leveraging potential. This chapter describes the status of the projects accepted into TE-045 as of July 1996 and provides initial observations on the States' relative interest in the eight principal financing concepts tested to date.

Between the summer of 1994 and the initial December 1995 deadline for TE-045 project proposals, 35 States submitted over 70 innovative financing proposals to FHWA. On the basis of this strong response, FHWA extended the initiative and continues to accept proposals. As of July 1996, the total number of approved proposals had grown to 88 projects in 37 States. The combined cost of these projects exceeds $6 billion.

Because TE-045 is an ongoing initiative, any overview of its component projects necessarily represents a snapshot of those projects' status at a given point in time. The complete universe of 88 projects can be subdivided into categories that represent the status of individual projects. The full universe of the 88 projects accepted into TE-045, along with the projects' status as of July 1996, is summarized in Table 2.1, and detailed in Appendix 1.

Project category	Number of projects
Completed, ongoing, and anticipated projects	64
Presently on hold, pending resolution of political, legislative, or related issues	7
Subtotal ("active projects")	71
Anticipated STP Simplification projects	3
On hold indefinitely, pending identification of additional funding	5
Discontinued or pursued without Federal-aid	9
Total projects, April 1994 - July 1996	88
Source: FHWA quarterly TE-045 project updates and supplementary independent telephone interviews.

As shown in the table, 64 individual projects are completed or in progress. Seven additional projects stand a reasonable chance of moving forward, pending resolution of political or legislative issues through, for example, enactment of required State enabling legislation. STP Simplification pilots are also planned in three States. Taken together, these 74 projects represent the large subset of projects that remain active in the program, and testify to the States' ongoing commitment to innovative finance.

Although TE-045 offered States mechanisms to address some of the financial and institutional obstacles that can hinder project development, in about 15 cases, certain real world complexities of public finance have nonetheless proven potent barriers to project development. As a result, States have withdrawn nine projects from the TE-045 initiative and another five are on hold indefinitely. In general, these outcomes have arisen from voter rejection of bond referenda, a lack of funding, State identification of alternative funding arrangements, State legislative conditions, or other external circumstances. The need to discontinue projects that encounter such impediments is not uncommon in the Federal-aid program. The presence of these impediments is even more understandable for the subset of Federal-aid projects advanced under TE-045, for those projects tended to offer special challenges that made them strong candidates for innovative approaches in the first place. Appendix 2 details the status of the discontinued TE-045 projects.

For the purposes of this evaluation and for the remainder of this report, the first two categories of projects displayed in the preceding table comprise the subset of projects for which a quantitative assessment of benefits has been prepared. This subset captures 71 projects, representing a total of $4.26 billion in construction and related costs. Throughout the remainder of this report this subset of projects is referred to as "active projects." It includes completed projects, ongoing projects, imminent projects, and the seven projects that are currently on hold but appear to have a reasonable chance of moving forward in the foreseeable future. (Although active, the three anticipated STP Simplification projects are excluded from the analysis because of their fundamentally different structure from the remainder of the TE-045 project universe. Their inclusion would bring the total investment level to $4.51 billion, as reported in previous FHWA testimony.)

As anticipated, States proposed a wide range of innovative financing techniques under TE-045, creating a financial toolbox suited to diverse needs. FHWA's dissemination of information on concepts approved during the early stages of the initiative helped create momentum for even broader experimentation with the various financing concepts. However, even given these efforts to disseminate information on the various tools, there has been wide variation in States' level of interest in the tools.

As displayed in Table 2.2, flexible match and certain cash flow tools have proven most popular under TE-045. For a variety of reasons explored later in this report, most investment tools (other than flexible match) have been of lesser immediate appeal. Table 2.2 illustrates each instance in which each of the eight financing concepts has been employed on an active TE-045 project.

Table 2.2: States' Use of Innovative Financing Concepts in Stand-Alone and Combined Fashion

Tool	Number of Projects
Flexible Match	28
Post-ISTEA Advance Construction	15
Partial Conversion of Advance Construction	14
Phased Funding	9
Tapered Match	5
Section 129 Loan	5
ISTEA Section 1044 toll credits	3
Bond reimbursement	2
Other (e.g., studies of alternative innovative financing strategies)	2
Source: FHWA quarterly TE-045 project updates and supplementary independent telephone interviews. As previously noted, phased funding is no longer being tested. Tapered match continues to be tested, but only on an experimental basis.

The number of projects displayed in Table 2.2 sums to more than 71 because two or more financing tools were used in combination on 12 projects. Partial conversion of advance construction was the tool most commonly used in conjunction with other tools (11 instances). Post-ISTEA advance construction and flexible match were also commonly teamed with other financing concepts.

A number of factors contributes to States' varying degrees of interest in the individual financing techniques that comprise TE-045's financial toolbox. One important influence on the use of a particular tool is the extent of its applicability to a wide range of situations. Some tools hold nearly universal appeal, while other tools instead offer targeted remedies to unique funding dilemmas. For example, transportation investment needs outstrip available resources in most States; flexible match is one tool that can help offset these common shortfalls by allowing States to offset their required matching share on transportation projects with other sources of funds. Some of the less commonly used tools, such as Section 1044 toll investment credits, have a narrower scope of applicability, and therefore a lower incidence of use.

Another factor affecting the use of individual financing concepts is the level of effort associated with the use of a particular tool. Some tools, such as post-ISTEA advance construction, can be employed quite readily. This is in part because advance construction is not a new concept to transportation planners nor one that requires any special action to enable its use. As a result, extending its applicability beyond the end of the ISTEA authorization period is not likely to entail any special administrative complexities. In contrast, tools such as Section 129 loans and bond reimbursement represent new concepts that often require States to overcome complex legal and institutional impediments such as the lack of required State enabling legislation; State-imposed limitations on State agencies' authority to issue debt; and the lack of well-developed models for sharing the risks and rewards of project development among diverse project partners, such as State DOTs, toll authorities, and private developers.

Another critical factor that constrains States' interest in loans and bond reimbursement is the fact that there is no new Federal funding available to support the use of these tools. When States use Federal aid to reimburse project loans or bond financing costs, the action consumes part of their annual obligational authority. (As later discussed in chapter 5, certain combinations of tools, such as Section 129 loans and partial conversion of advance construction, can mitigate the impact of loan reimbursement on annual obligational authority.) Given the fact that deficit reduction efforts may prevent any growth in annual Federal funding levels made available for obligation, many State officials are reluctant to part with any obligational authority that they originally intended to distribute on a grant basis. Even though State planning horizons shift forward each year, most States maintain a full pipeline of projects that are ready to consume future obligational authority for years to come.

While the individual financing concepts' applicability to a wide range of situations, their ease of use, and their impact on State budgets are three of the leading factors that determine their relative popularity, experience gained under the TE-045 initiative also points toward other factors that may limit States' use of Section 129 loans and bond reimbursement. These additional limiting factors -- and a series of strategies to help overcome them -- are explored in the fifth and sixth chapters of this report.

While the eight financing concepts described above represent the bulk of the financing concepts tested under TE-045, States also proposed several strategies that FHWA considered, but ultimately rejected. Some of these strategies focused on using unobligated balances to provide credit enhancement on State-issued debt. (The term "unobligated balance" refers to contract authority that has been distributed to the States but not made available for obligation, principally due to annual Congressionally-established limitations on obligations.) A few other proposals centered on a strategy generically known as income generation, in which States could generate revenues by leasing certain commercial rights alongside Federal-aid highways. FHWA's rejection of these concepts arose from the fact that both concepts reached far beyond the statutory authority currently available under Title 23. However, as discussed in Chapter 6 of this report, States' strong interest in these strategies suggest that they are good candidates for continued research efforts and/or consideration during reauthorization.