TE-045 Evaluation - Effects on Investment Levels

Although TE-045, by design, provided no new Federal funds to participating States, the financing initiative has nonetheless supported significant increases in investment levels. Across the 71 active projects advanced under TE-045, Federal funds are expected to cover just over half of the total construction cost of $4.26 billion. Of the remaining existing and anticipated non-Federal contributions, $1.15 billion can be attributed to the impact of financing concepts pioneered under TE-045.

While the additional investment levels enabled through TE-045 are impressive, it is important to note that the vast majority of the extra $1.15 billion in local, private, and other funds to be deployed on these projects are distributed across two large projects in Texas and California. The Texas project combines a Section 129 loan with other innovative financing tools to improve the affordability of a major bond issue. The California project will similarly combine multiple financing tools to expedite and facilitate a bond issue. In this case, the cornerstone of the combination is anticipated to be Federal reimbursement of privately-issued bonds.

The large impact generated by less widely utilized financing tools such as loans and bond reimbursement should not obscure the fact that more modest -- yet more widespread -- returns have been achieved through States' use of flexible matching opportunities first made available under TE-045. Flexible match has helped States meet immediate funding needs by providing an incentive for them to attract over $100 million in additional capital investment, thus freeing up State funds for other uses.

This chapter provides information on funding levels anticipated for the active TE-045 projects and singles out the investment effects wholly attributable to the application of individual financing concepts tested under TE-045. A discussion of how individual investment tools produce increases in investment levels follows. The chapter closes with a discussion of the employment effects associated with the increased investment levels expected to be realized for the active projects.

The combined cost of the active projects currently being pursued under TE-045 is $4.26 billion. Table 3.1 on the following page displays the distribution of funding, by source, that has been committed or stands a reasonable chance of being committed to these projects. Appendix 3 provides a breakdown of multijurisdictional funding levels on a project-by-project basis.

Table 3.1: Funding Profile for All Active TE-045 Projects (71)
(Dollars in thousands)

Funding source	Amount $ and (%)	Form of funding		Remarks
Funding source	Amount $ and (%)	Cash and in-kind contributions	Par Amount of Bonds $ and (# of issues)	Remarks
Federal	$2,272,480 (53%)	$2,272,480	$0 (0)	Approximately $12 million in Federal grants derive from special funds and other Federal agencies (e.g., US Forest Service).
State	386,134 (9%)	374,434	11,700 (1)	Debt service on the bonds in this category will be repaid from State tax revenues.
Local	83,174 (2%)	78,874	4,300 (1)	Debt service on the bonds in this category is expected to be repaid from fees levied by a new port authority.
Private	684,455 (16%)	284,455	400,000 (1)	Approximately $320 million of the bonds issued in this category will be repaid from toll revenues. The remaining $80 million is expected to repaid with Federal-aid and local tax receipts. Debt levels are estimated as financing plans have not yet been finalized.
Toll Authorities	829,500 (19%)	87,100	742,400 (4)	Debt service on the bonds in this category will be repaid from toll revenues. The cash and in-kind contribution includes $67 million in anticipated construction fund earnings.
Total	4,255,743 (99%)	3,097,343	1,158,400 (7)
Note: The sources of bond proceeds are categorized on the basis of the issuing entity. However, it should be noted that the initial influx of capital (i.e., bond proceeds) derives from the private investors who initially purchase the bonds. Thus, even when bonds are issued by a State or toll authority, the up-front cash used to pay for construction may be viewed as private investment. Alternatively, debt financed projects may be categorized according to the source of funds ultimately used to retire debt service. Toll receipts and lift fees might be considered private sources, for example, with general tax revenues considered a public source. Percentages do not add due to rounding.
Source: FHWA quarterly TE-045 project updates and supplementary independent telephone interviews.

Table 3.1 indicates that for the active TE-045 projects, funds contributed from non-Federal sources of funds (including bond proceeds) account for almost $2 billion (or 47 percent) of current and expected investment. This is more than double the standard non-Federal matching share of 20 percent that is required for projects within most Federal-aid program categories. (Selection of a 20-percent match as the standard minimum non-Federal share is recognized as a potentially arbitrary cut-off point for indicating circumstances of non-Federal "overmatch" of the Federal contribution. In one sense, assuming a 20 percent non-Federal matching share might set a high standard for conditions of overmatch, given that (i) for some States with large quantities of Federally-owned lands, required Statewide matching ratios are somewhat lower than 20 percent, and (ii) certain Federal programs (e.g., Interstate Maintenance) require only a 10 percent non-Federal match. On the other hand, States tend regularly to overmatch Federal funds for certain projects within their programs. Viewed in this light, the 47-percent average non-Federal share on TE-045 projects may represent a less noteworthy case of overmatch than it would at first appear. Even so, on the basis of average Federal and State capital expenditures across all programs, a 47 percent non-Federal share likely represents a stronger situation of overmatch than is the case in the Federal-aid program generally.)

A consideration of aggregate levels of investment across the active TE-045 projects provides but one perspective on investment levels realized under the initiative. A more rigorous analysis of TE-045's impacts singles out the financing tools' incremental, or net, effect on patterns of investment for the participating projects. The rationale for focusing on net effects stems from the fact that, arguably, some level of local or private investment in these projects would have occurred even in the absence of TE-045.

Even under this more restrictive interpretation of TE-045's effects on investment levels, the initiative still registers impressive results. On the basis of reports prepared by officials closest to these projects, and assuming that the active projects move forward as anticipated, the net increase in current and expected investment that is wholly attributable to TE-045 totals $1.15 billion. This represents over two-thirds of the combined local, private, and other contributions ($1.61 billion) invested in TE-045 projects. It also represents 27 percent of the combined cost of the active projects included in this analysis.

Of the $1.15 billion in increased investment, about $593 million is attributable to private investment. The majority of this total ($482 million) is attributable to bond proceeds and equity contributions anticipated to support a large highway project in California. The remaining $111 million in increased private investment is distributed among 14 other projects. An additional $557 million of the $1.15 billion derives from funds provided or obtained by non-Federal public entities. The majority of this total is attributable to a single toll authority, but funds committed by local governments also contribute to the total amount of additional public investment. The following table summarizes the mix of funds that comprise the net investment effects realized under TE-045.

	Local	Private		Toll Agency	Total
Amount of investment	$24	$111	$482^a	$533.5^b	$1,150
Number of projects	8	14	1	1	21^c
Financing tools	primarily FM	primarily FM	Bond reimb. w/PCAC	Section 129 loan w/PCAC
^aThis $482 million contribution is comprised of private equity and proceeds from privately-issued debt that will ultimately be retired with a combination of toll receipts, Federal aid, and local sales tax receipts. The TE-045 financing techniques used on this project apply only to an $82 million component of two linked projects. However, completion of that $82 million project is responsible for the financial feasibility of private financing and construction of the related $400 million facility in San Diego County, California. ^bThe $533.5 million contribution is comprised of $446.4 million in proceeds from bonds issued by the Texas Turnpike Authority for the George Bush Turnpike (SH 190) as well as $67.1 million in interest earnings and a $20 million cash contribution from the Texas Turnpike Authority. ^cThe number of projects experiencing net gains in investment is non-additive because for three projects, local and private contributions were simultaneously directed to same project.
Source: FHWA quarterly TE-045 project updates and supplementary independent telephone interviews.

A striking characteristic of the additional investment stimulated by TE-045 is that the vast majority -- $1 billion -- is distributed between just two projects: the Bush Turnpike in Dallas, Texas, and the San Miguel Connector and linked State Route 125 in San Diego County, California. Both projects involve large debt financings that were supported or otherwise facilitated through simultaneous use of several TE-045 financing techniques. In the case of the Bush Turnpike, a Section 129 loan was combined with post-ISTEA advance construction, partial conversion of advance construction, and flexible match to support this $696 million tollway. The majority of the total project costs, $533.5 million, derives from non-Federal, non-State public sources, with their provision being wholly attributable to the flexibilities permitted under TE-045. In the case of the San Miguel Connector, Federal reimbursement of bond financing costs will be combined with post-ISTEA advance construction and partial conversion of advance construction, all within the context of a public-private partnership. This financing strategy is expected to facilitate private provision not only of the $82 million Connector, but also of a $400 million toll road (State Route 125).

Although these two projects account for the bulk of additional investment being realized under TE-045, increased investment levels have also been realized in the case of 19 additional projects. In addition to serving as the most widely-used investment tool tested under TE-045, flexible match is responsible for most of this remaining $135 million in additional investment attributable to TE-045. While the $135 million pales in comparison to the approximately $1.0 billion in extra investment attracted through the debt financings in Texas and California, it is evident that at the margin, flexible match can offer a noteworthy infusion of additional funds to States that are struggling to bridge severe funding shortfalls within their transportation programs.

Flexible match, Section 1044 toll credits, Section 129 loans, and bond reimbursement achieve leveraging effects in different fashions, and under different circumstances. Moreover, as seen in both the Texas and California projects, combining these financing strategies with cash flow tools can yield especially strong leveraging effects. The following paragraphs explain how these tools function and what they have achieved in the context of specific TE-045 projects.

From an analytic standpoint, the need to single out TE-045's incremental effect on investment levels, as distinct from investment that would likely have occurred in any event, is particularly pronounced in the case of flexible match. In some cases, private contributions to transportation projects derive directly from the flexible matching opportunities pioneered under TE-045. In these cases, the result is an absolute increase in the amount of resources directed toward transportation investment.

The investment effects attributed to flexible match in this report exclude any private or local contributions that likely would have been donated to the individual projects in the absence of TE-045. The determination as to whether funds would have been donated to projects even without the flexible match provision is based on reports from Federal and State officials most familiar with the individual flexible match projects advanced under TE-045.

In contrast, there are also instances where a private partner would likely have contributed funds to a project even in the absence of flexible match. In this case, flexible match does not increase the amount of investment in transportation infrastructure over what would have been the case in the absence of TE-045. (About $91 million in additional private investment contributed to the 71 active TE-045 projects would likely have been contributed to these projects even in the absence of flexible match.) It should be noted, however, that even in cases of no net increase in investment levels, flexible match still has bearing on the Federal and State shares of the remaining project costs. This is because under flexible match, the entire value of a private (or local) contribution directly offsets the State's share of project costs.

States earn ISTEA Section 1044 toll credits when the State, a toll authority, or a private entity funds capital highway investment with toll revenues earned on existing toll facilities. (The toll revenues eligible for treatment as Section 1044 credits must be net of existing draws for debt service, return to investors, or the operation and maintenance of toll facilities.) The earned credits may be used as a soft match to substitute for the required State share on a new Federal-aid project. As a result, the Federal share effectively rises to 100 percent on the recipient project when the State match is offset with toll credits.

A State may only use toll credits in this fashion if it demonstrates a ìmaintenance of effort,î or MOE, in its aggregate highway investment. (If States wish, they may also consider transit expenditures in the MOE calculation.) Under TE-045, FHWA granted States access to a more flexible MOE test. Previously, the test required that capital expenditures in the preceding year equal or exceed the average annual investment level for the three prior years. The flexible MOE test permits States to consider projected expenditures that extend as far as one year into the future. To date, only two States, Maryland and Michigan, have proposed TE-045 projects involving this prospective MOE test.

Similar to flexible match, use of ISTEA Section 1044 toll credits can result in a net increase in investment levels only if use of the concept attracts new capital to transportation investment, most likely by prompting greater use of tolling. To date, however, there is no evidence to suggest that ISTEA Section 1044 has generated a greater emphasis on tolling and toll financing. Even so, use of toll credits has still offered benefits by helping States overcome immediate shortages in the availability of matching funds and assisting certain States in streamlining the management of their Federal-aid funding. Thus, while Section 1044 toll credits, coupled with increased flexibility in the MOE test, have apparently not met the primary goal of increasing investment levels, this form of flexible match has offered distinct advantages when treated as a cash flow tool, as further discussed in Chapter 5.

As the only TE-045 mechanism that permits States to obtain Federal-aid reimbursement for State-initiated loans to public or private entities, Section 129 loans offer two primary means of increasing overall levels of investment. First, use of loan repayments to help other projects move forward allows a fixed sum of capital to be re-used on other projects. Under a basic Section 129 loan, a State initiates a loan to public, quasi-public, or private project sponsors. The project in question must have a means of generating revenues with which to repay the loan for up to 80 percent of the project cost. The State then obtains Federal-aid reimbursement for the loaned funds. Ultimately, the State also receives loan repayments from the project sponsor. As the loan is repaid, the State can recycle the repaid loan principal for other Title 23-eligible transportation projects, thus providing a mechanism to increase overall investment levels. In addition, interest accruing and payable while the loan is outstanding also adds to the capital available for future transportation investment. When loan repayments are used to capitalize a fund designed to make new project loans, the repayment from the first loan and the resulting initial capitalization of a revolving loan fund can be allocated among several new projects and the leveraging effects can extend well into several generations of projects.

The second method by which a Section 129 loan generates leveraging effects relates to its capacity to support a debt issue. Loans can play a critical role in improving projects' financial feasibility by, for example, reducing the amount of debt that must be issued in the capital markets. In addition, if repayment of the loan is made subordinate to payment of the debt service on revenue bonds, the bonds may be able to secure a higher rating and better investor acceptance. Improved ratings and investor acceptance are important because they can reduce the cost of financing by lowering the interest rate payable on the bonds. The following example helps explain the process by which loans can improve the affordability of a debt issue.

George Bush Turnpike, Dallas, Texas. The President George Bush Turnpike in Texas provides an excellent example of how a Section 129 loan was integrated into a debt financing plan that included, among other sources of funds, publicly sold toll revenue bonds. In order to obtain investment grade ratings and investor acceptance, issuers of toll revenue bonds are generally expected to demonstrate that toll revenues are sufficient to provide a minimum debt service coverage ratio on outstanding bonds. (Debt service coverage is typically calculated by dividing net toll revenues (gross operating revenues net of operating and maintenance expenditures) by annual debt service. Typically, bond covenants associated with a toll revenue bond issue require that a minimum, the prescribed level of coverage can be maintained while debt is outstanding. Additionally, municipal credit analysts and bond investors evaluate coverage in determining the credit quality and perceived risks of a debt issue; strong coverage levels, together with other factors, will support investment grade credit ratings which translate into lower interest rates for the borrower.)

In this case, toll revenues were not expected to be sufficient to provide the 1.20x level of debt service coverage required by the Texas Turnpike Authority's bond resolution on a $700 million bond issue (the total cost of the project). However, by using a Section 129 loan equal to $135 million, together with other sources of funds, the bond issue size could be reduced to $443 million, a more affordable level that would generate required coverage levels while maintaining toll rates at an acceptable level. In addition, the loan also had a subordinate claim on toll revenues, allowing toll revenues to be available first and foremost to provide coverage of debt service on the revenue bonds. As a result, the Section 129 loan and its repayment features played a critical role in assuring the feasibility of the project financing plan and enabling the larger bond issue at practical, affordable levels.

The ability to use Federal funds to reimburse not just the principal component of debt service payments, but also interest payments, issuance costs, and insurance premiums, is a technique that has been proposed but not fully tested under TE-045. Two TE-045 projects have proposed to use bond reimbursement coupled with advance construction and partial conversion to support public-private development of costly projects. In addition, bond reimbursement is being considered as part of the financing plan for two additional projects. None of these projects, however, has progressed to the point where final results are available and can be used to quantify the capacity of this tool to increase investment.

Federal reimbursement of bond financing costs has potential to produce the same kind of high impact results that Section 129 loans have demonstrated. Chapter 6 explores this potential and the latest thinking in the transportation financing industry regarding the future applicability of bond reimbursement. The following example illustrates how bond reimbursement is anticipated to function in support of a private entity's capacity to finance over $400 million worth of new highway infrastructure in California.

San Miguel Connector, San Diego County, California. For this project, bond reimbursement is being combined with partial conversion of advance construction to facilitate construction of a 1.5-mile free road known as the San Miguel Connector. The Connector is a critical link to a planned 10-mile segment of State Route 125, which is to be financed and constructed as a toll facility by a private consortium. In the near term, the region's metropolitan planning organization (San Diego Association of Governments, or SANDAG) lacks the funds needed to construct the $82 million Connector in time to allow the linked toll road to be constructed on schedule. Absent construction of the Connector, the private consortium would likely decline the opportunity to finance and construct the $400 million State Route 125 project.

The anticipated solution to this impasse will involve a recently approved TE-045 project, under which the private consortium plans to issue debt to construct the Connector as a free road, and will subsequently obtain reimbursement for the costs of servicing the debt from SANDAG over a period of 10 years. SANDAG, in turn, will obtain Federal reimbursement, on a partial conversion basis, at the standard Federal matching rate. SANDAG will likely be required to secure the debt with its own dedicated sales tax revenues, meaning that if future Federal-aid apportionments and obligational authority are for some reason not forthcoming, the private consortium (and, ultimately, investors in the project) will still be assured of payments from SANDAG. The details of the financing arrangement remained uncertain, and the role that Federal participation will eventually play in enhancing the credit worthiness of the bond issue remained similarly undefined. However, as of July 1996, indirect Federal support for private provision of the $82 million Connector, obtained through a blend of TE-045 concepts, were expected to serve as the dealmaker for private development of the $400 million State Route 125 tollway.

A corollary benefit to the increases in transportation investment being generated through TE-045 is the creation of new construction and related jobs. FHWA typically captures job creation stemming from highway investment in three dimensions:

The standard ratio used by FHWA to estimate the employment effects of investment in highway construction is that every $1 billion of investment generates 42,100 jobs, including direct, indirect, and induced employment. (The job creation ratios employed for this analysis derive from FHWA�s latest research on employment impacts attributable to highway construction, and may differ from previously reported estimates.) Application of the relevant multipliers to the combined $4.26 billion in highway and related projects indicates that jobs created as a result of these projects will ultimately number 176,400, subdivided as follows:

A finer estimation of TE-045's net effect on job creation finds that direct employment effects of about 9,950 jobs are being generated from the $1.15 billion in incremental investment resulting from TE-045. To accomplish this closer look, information on the net increase in highway funding directly attributable to TE-045, stratified by Federal region and project type, was entered into a newly created FHWA job creation model. The model is designed to estimate the direct employment effects of Federal-aid highway projects.(FHWA has developed a PC model (HIGHWAY1) that analyzes direct employment impacts of highway construction at the regional level. The model uses a price deflator to reflect current dollar figures. For this analysis the price deflator was set to reflect 1996 dollars for all projects. The HIGHWAY1 model does not reflect the temporal or time-sensitive relationship between project expenditures and direct employment generation.) It should be noted that in the absence of TE-045, the additional public and private funds being applied to TE-045 projects would likely have been directed to alternative investments. These alternative investments may also have resulted in direct employment effects. However, highway construction tends to be a comparatively labor-intensive activity, meaning that from the perspective of job creation, highway construction tends to yield a greater positive impact on employment than do many alternative uses for these funds.