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Appendix A: Legislative History and Milestones
Until recently, the Federal-aid highway and Federal transit programs were guided solely by the principle of grant reimbursement, whereby Federal funds could only be used to reimburse direct State or local expenditures on individual eligible projects. [ Federal-aid reimbursement of State-initiated loans has been permitted since 1991 under Section 129 of Title 23 of the U.S. Code. However, even this use of Federal assistance still adhered to the principle of Federal moneys reimbursing a project-specific expenditure, rather than providing up-front equity to help capitalize a fund that could offer assistance to multiple projects. SIBs, therefore, offer State DOTs and other project sponsors unprecedented flexibility to choose among alternative strategies for solving specific transportation financing dilemmas.] The SIB pilot program departs from this principle by permitting States to use Federal-aid assistance to capitalize a self-sustaining fund offering loans and other forms of non-grant financial assistance. Because loans are ultimately repaid (and because most other forms of assistance do not necessitate a direct outlay from the fund), a fixed sum of Federal-aid funding deposited into a SIB can assist more projects over a longer period of time than would be the case if that same funding were used as a one-time grant.
The idea of applying the revolving loan fund concept to Federal transportation programs was first introduced over a decade ago. In 1985, a Congressionally appointed panel began exploring the concept of direct Federal capitalization of State-level infrastructure funds. The panel developed a recommendation calling for creation of "an Infrastructure Trust Fund to capitalize infrastructure state banks and revolving loan funds." [ United States Senate, Report of the Private Sector Advisory Panel on Infrastructure Financing to the Committee on the Budget . S. Prt. 100-40, August 1987.] The recommendationalso stipulated that to assure the revolving nature of the State funds or banks, local governments would be required to repay at least the principal amount of all loans. The panel concluded that "[p]roperly structured, the state banks or funds would replenish themselves, serving as continuing sources of investment capital." Thus, while the SIB pilot program was only recently enabled, via the NHS Designation Act, its conceptual roots date back for at least a decade, as explained in the following section.
Conceptual Roots
Three key institutional precedents for State-level assistance to major infrastructure investment heavily influenced the design of the SIB pilot program. They are: State revolving funds for wastewater treatment facilities, State-level transportation revolving funds, and State bond banks.
State revolving loan funds (SRFs), authorized in the 1980s to finance wastewater treatment facilities, serve as the SIBs’ most prominent conceptual antecedent. SRFs were established under the 1987 Amendments to the Clean Water Act. Although the SRF model is an important precedent for SIBs, the genesis of the SRF program differed markedly from the SIB pilot program in that it wholly replaced an existing grant program with capitalization of a loan program. The transportation SIBs, in contrast, are established as a supplement to, not a replacement of, the existing Federal-aid highway and Federal transit grant programs. The fact that SIBs are and will remain a complement to ongoing grant funding marks the most crucial difference between the SRF and SIB programs.
SRFs do not provide a blueprint for implementing SIBs for other reasons, as well. First, wastewater facilities tend to be locally owned and functionally similar. In contrast, the transportation projects eligible for SIB assistance span a broad range of ownership and purposes, including highways, transit, and intermodal facilities. Second, wastewater facilities have a history of being financed with revenue bonds that are secured by user fees. While user-financed transportation facilities exist, transportation projects are more commonly financed on a pay-as-you-go basis, with revenues derived from a variety of taxes. And third, the market for wastewater facilities is greatly influenced by regulations which both stipulate capital investment levels to conform to environmental standards and confer a monopoly to the provider. The demand for and supply of transportation facilities is more market-dependent.
A consequence of these differences is that the SIB program must be extremely flexible, so that it can be tailored to individual needs that vary both across and within the States. Accordingly, the legislative and administrative course charted for SIBs is designed: (i) to accommodate a wider array of project types, (ii) to offer assistance to a more varied set of project sponsors, and (iii) potentially to offer a broader array of financial services.
The Federally capitalized SRFs for wastewater treatment facilities represent the most prominent institutional precedent for SIBs, but other important precedents exist as well. For example, as of 1995, over a dozen States had established State-level transportation revolving funds. These funds provide loans for a wide range of transportation activities, ranging from major toll road projects to relatively small equipment purchases. For example, Florida has operated a Toll Facilities Revolving Trust Fund since 1986, to offer loans to municipal governments who are contributing toward locally-significant segments of the State’s turnpike system. The Utah Van Pool Revolving Loan Fund offers loans to both public and private entities that wish to purchase or refinance vehicles used for vanpooling. In Iowa, the RISE (Revitalize Iowa’s Strong Economy) program offers grants and loans to transportation and other infrastructure projects that offer the potential to stimulate economic growth by attracting or retaining development. The California Transit Finance Corporation permits transit operators to combine what would otherwise be individual financial transactions for equipment leases, or vehicle purchases, to achieve cost savings. The Corporation’s "pooling" of small transactions can permit individual transit operators to realize significant economies of scale for ordinary procurements. And in Ohio,three revolving funds are being capitalized with operating revenues from an intermodal facility. As the funds’ seed capital grows, they will be used to make grants or loans to intermodal projects that may not fit under the traditional funding categories established by the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA).
State bond banks form another key precedent for SIBs. A bond bank is typically a State-level agency that provides local governments with assistance in borrowing money, and uses debt issuance as its primary tool in meeting this goal. Bond banks give local governments cost-effective access to the tax-exempt bond market by combining several small issues into one large issue. Another common feature is State credit support of the bond bank through provision of reserve funds and other similar mechanisms. As with the California Transit Finance Corporation, pooling of the bond issues allows participants economies of scale in covering issuance costs. Also, interest rates are lower for all pool borrowers as the default risk is diversified among several issuers. These benefits are especially valuable to smaller local governments, infrequent issuers, and those which have a low or poor credit rating or small borrowing needs. [ USDOT, State Infrastructure Banks: A Primer, November 1995.] When capitalized with public funds, as is the case with SIBs, a bond bank can be a very effective tool for assisting local infrastructure projects. In Oregon, for example, a State bond bank has issued $52 million in bonds, leveraged another $52 million in local funds, and made $30 million in grants. Lottery and loan dollars are used as collateral or a back-stop in case of default. The Oregon Bond Bank has secured an A rating from Moody’s and Fitch rating services. [ USDOT, State Infrastructure Bank Conference, November 1996.]
The NHS Designation Act
On the basis of the States’ experiences with wastewater treatment SRFs and State-level transportation revolving funds, transportation experts and policy makers vetted the SIB concept for almost a decade before it converted into a specific legislative proposal. Federal capitalization of SIBs was first proposed under USDOT’s fiscal year 1996 budget request, which called for annual capitalization funds of $2 billion per year to be distributed by formula to all 50 States. While the proposal did not win Congressional approval as part of the fiscal year 1996 Appropriations Act, it did, however, place concrete language on the table for further consideration.
Throughout 1995, the SIB proposal was reshaped and refined in response to concerns about its magnitude and scope. By the end of the year, the Congress had passed the landmark National Highway System (NHS) Designation Act of 1995 (Public Law 104-59, passed November 28, 1995). In addition to designating the NHS, the legislation also included an array of new financial provisions to expand States’ opportunities to leverage Federal-aid funding and to accelerate project development. Probablythe most ambitious of these financial provisions was embodied in Section 350 of the Act, which established the SIB Pilot Program under which the Secretary of Transportation could approve up to ten States’ creation of SIBs. The legislation did not provide additional Federal funding for the SIBs’ capitalization, but instead permitted each of the selected States to contribute to the SIB up to 10 percent of apportioned Federal funding received in fiscal years 1996 and 1997 for most highway and transit programs.
The NHS Designation Act also specified an array of eligible uses of the pilot SIBs. These uses fall into two broad categories: loans and credit enhancement. Chapter 2 of this report provides greater detail on the mechanics of the capitalization process. Appendix B provides detail on the eligible uses of SIB assistance.
Major Milestones in SIB Implementation
Since the NHS Designation Act was adopted in late November 1995, USDOT has accomplished three major steps toward full implementation of the SIB Pilot Program:
- issuing a Federal Register notice, specifying how States were to apply to participate in the pilot program (December 1995)
- receiving applications from 15 States (through March 1996), and selecting the ten pilot States, (completed in June 1996); and
- establishing cooperative agreements with nine of the ten pilot States (since August 1996).
Since October 1996, USDOT has also been accepting State applications under an expansion of the pilot program that was provided for in the DOT appropriations act for fiscal year 1997. Exhibit A.1 illustrates selected milestones that have occurred since November 1995.
Exhibit A.1: Chronology of the SIB Pilot Program, November 1995 through January 1997
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December 1995: Federal Register Notice
While the NHS Designation Act established the broad parameters of the pilot program, a December 28, 1995, Federal Register notice provided further details on the process for designating the ten pilot States, qualifications for participation, and procedures for application. USDOT adopted a flexible approach to the pilot program, noting in the Federal Register that the agency was:
receptive to non-traditional as well as traditional approaches to establishing a SIB and defining the types of assistance that might be offered. Subject to the limitations of the [NHSDesignation] Act, USDOT has no preconceived concept of how SIBs should be implemented and seeks to work in cooperation with the States to define the implementation program.
This "bottom-up" approach, in which States themselves identify and experiment with various innovative financing strategies, has been a hallmark of USDOT’s innovative finance initiative ever since it was first launched in 1994.
While encouraging the States to explore the SIB models that would work best for their specific needs, USDOT also took steps to ensure that the application process requested sufficient information to permit the Department to make an informed decision among the applicants. The Federal Register notice, and subsequent application guidelines, specified the essential elements of a complete SIB application, including, among others:
- the types of assistance to be offered;
- projects proposed for SIB assistance;
- status of enabling legislation; and
- how the SIB would be capitalized.
march - june 1996: application and selection of the sib pilot states
By March 1996, 15 States had submitted applications to the Department. The applications were evaluated in accordance with criteria set forth in the Federal Register notice and subsequent guidance. On April 4, 1996, eight States were named: Arizona, Florida, Ohio, Oklahoma, Oregon, South Carolina, Texas, and Virginia. On June 21, 1996, the Department announced the two final designations of California and Missouri. Exhibit A.2 displays the complete pool of applicants and designees for the 10 slots authorized in the NHS Designation Act.
Exhibit A.2: Initial Round of Applicants and Designees
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july - december 1996: cooperative agreements and other start-up activities
After naming the pilot States, the Department set to work on drafting cooperative agreements with each of the designated States. Nine of the 10 agreements were signed between August and December of 1996; as of March 1997, the cooperative agreement between the USDOT and the California Department of Transportation (Caltrans) was still being finalized. The cooperative agreements are required by the authorizing legislation and spell out the general rules governing the administration and management of the funds within each bank.
subsequent expansion of the pilot program
The 1997 DOT Appropriations Act (Public Law 104-205) opened participation in the pilot program to all States, pending the Secretary of Transportation’s approval of their applications. Twenty-nine States submitted applications in response to the program expansion, which was advertised in the Federal Register in November 1996. These 29 States submitted a total of 26 applications, comprised of 24 applications for single-State designation and 2 applications proposing multi-State compacts. [ One State, Tennessee, submitted applications both for a single-State designation and as part of a multi-State compact.] Exhibit A.3 illustrates the pool of applicants for the second round of designations. It is expected that the Secretary will make any further designations in the summer of 1997.
Exhibit A.3: Applicants for Second Round Designations
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The fiscal year 1997 Appropriations Act also provided $150 million in extra funding from the U.S. General Fund for distribution to participating states, again at the discretion of the Secretary of Transportation. All designees, including the initial ten participants and any subsequent designees, would be eligible to receive a portion of these funds. Distribution of the $150 million cannot be made before April 1, 1997, and will be governed by the same disbursement rate limitation that was required by the NHS Designation Act, as described in Chapter 2 of this report. Thus, $22.5 million (15 percent) of the new $150 million will actually be available for deposit into the SIBs during fiscal year 1997. An additional 53 percent of the $150 million, or $79.5 million, will be available for deposit in the SIBs during fiscal year 1998, and the balance over the following seven years.
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