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Appendix D: State-by-State SIB Status
While the quantitative information displayed in Chapter 2 of this report provides a snapshot view of the banks’ current capitalization status and intended outlays, numbers alone do not tell the whole story. Although it is premature to speculate as to how the banks will evolve and what levels of assistance they ultimately will provide, some of the States already have indications as to the direction their SIBs will likely head in the coming few years. The following State-by-State summaries are intended to provide an overview of these perspectives, and to illustrate the States’ latest thinking on the forms and levels of assistance best-suited to individual projects they may be assisting in the early years of the banks’ development.
Arizona
Arizona DOT declared ACAP of $16.3 million in fiscal year 1996, and an additional $22.9 million in fiscal year 1997. To capitalize its SIB, the State obligated and requested reimbursement for the maximum permissible percentage of its ACAP declared in 1996 as well as a share of ACAP requested for fiscal year 1997. As a result, the State has deposited over $16 million in Federal and non-Federal matching funds into an interest-bearing highway account.
Currently, Arizona DOT has implemented the SIB under existing statutes to provide loans and credit enhancements to on-system highway projects. In the future, the State will pursue legislation to expand the SIB’s authority to provide a wider array of financial services to a broader spectrum of eligible recipients, and to issue debt on its own behalf. The State is also evaluating the establishment of a transit account.
Although no projects are designated for SIB assistance as of February 28, 1997, strong interest has been expressed by metropolitan planning organizations across the State. The SIB has requested local and county proposals for evaluation. It is the State’s intent to select one or two public-private partnership projects by the end of fiscal year 1997 and provide SIB assistance during fiscal year 1998.
Like many other States, Arizona is seeking to achieve early successes by starting with a small program centered principally on loan and modest credit enhancement strategies for highway projects. Pending enactment of necessary enabling legislation and providing that there is sufficient demand for SIB assistance, the Arizona SIB may ultimately issue debt to leverage the fund and significantly expand the scope of the program.
California
The California SIB will potentially provide a unique example of how a SIB can improve project sponsors’ access to debt financing without immediate capitalization. The State is currently exploring options for structuring the SIB, but at present the most likely approach will be to offer credit enhancements by using advance construction techniques. Although California does not intend to capitalize its bank with current ISTEA apportionments until a call or default occurs, California officials are not ruling out the possibility of up-front capitalization in the event that additional funding becomes available. The ultimate direction that the California SIB takes will depend on the nature of its cooperative agreement with USDOT and on its ability to secure an investment grade rating. The State is currently in the process of seeking this investment grade rating for its bank, and State officials report that preliminary response has been favorable.
The bank has hired a financial advisor and is in the process of developing a full operating plan. Under this plan, the bank proposes to offer: (i) long-term credit enhancements for project debt, (ii) limited early year debt insurance, (iii) debt service reserve fund surety policies, and (iv) insurance for uncovered residual cost exposure on leveraged leases for public rail facilities and equipment. These offerings will be of most value to project sponsors that are able to obtain financing but need additional support to ensure the financial feasibility of their projects.
Florida
As of February 28, 1997, Florida DOT had obligated $20 million in Federal-aid highway funds for the capitalization of its SIB. State officials believe that the State will also capitalize a transit account in the coming year, as the DOT is currently evaluating selected transit projects for potential SIB participation. However, like officials in other States, Florida officials report that an important barrier to capitalizing a transit account is that the State DOT has limited control over transit funding. As a result, the State DOT will not be able to make a unilateral decision to capitalize the transit account, but will instead have to rely on local transit operators to contribute a portion of funding they control towards SIB capitalization.
The State legislature has already approved funding for two toll road projects, thereby paving the way for SIB loans to both projects. Although Florida currently plans to restrict SIB financial assistance to loans, the State has found a special application for loans that is well-tailored to the unique relationship between the State DOT and the State Turnpike Authority, as well as to State rules that govern use of toll system revenues to retire debt on new projects. Florida will use interest-free loans to cover the interest component of debt service on revenue bonds during the construction period and first five years of operations. Termed an indirect interest cost subsidy, this approach will be used to cover about $11.3 million of interest payments on a $27 million project to construct a major interchange linking State Road 80 to the Florida Turnpike, and an additional $20.5 million of interest payments on a $250 million project to construct the final segment of the Seminole Expressway. A detailed description of this financing strategy is offered in Appendix E to this report.
Florida DOT officials note that the State has identified plenty of additional projects that could benefit from SIB assistance. Most of the projects involve expansions to the State’s Turnpike system. Given the fact that multiple projects will likely be vying for a limited amount of capital, however, these officials are not in a position to identify specific projects that are considered leading contenders for additional SIB assistance. The State does not plan to leverage the SIB through debt issuance in the foreseeable future. Instead, leverage of Federal funds will be accomplished indirectly, through debt issuance by the individual project sponsors who receive SIB assistance.
Missouri
Although Missouri has lined up a number of worthy candidates for SIB assistance, its level of capitalization is currently quite low, in part because the State requested just 33 percent of the maximum permissible ACAP amount of apportionments and allocations available for fiscal year 1996. Still, the State plans to request additional ACAP in 1997. Missouri is one of the few States that is actively considering capitalizing a transit account during the current fiscal year, with $1 million in Section 3 discretionary funds that were routed directly to the State DOT. In the future, the State’s ability to contribute additional funding to the transit account will depend on finding transit grants that are not already committed to other uses.
As of February 28, 1997, Missouri DOT had identified five projects likely to receive SIB assistance in the coming few years. [ Subsequent to March 1, 1997, but prior to publication of this report, the Missouri SIB made a $1.18 million loan to the Springfield Transportation Corporation.] In four of the five cases, the SIB will provide loans to the projects at an interest rate keyed to approximately three-quarters of the market rate for tax-exempt "AA" rated debt. Most of the projects are in the $30 million to $40 million range, but together they represent a diversity of project types, including highway improvements, an intermodal center, and bridge construction. For the bridge project, an existing loan previously made by Missouri DOT to Illinois DOT is being rolled into the SIB, offering an immediate opportunity for interest earnings to begin to accrue to the SIB. In addition, the State has identified at least four other projects, including several transit-related projects, that could potentially benefit from SIB assistance.
Like Florida, Missouri has developed a loan strategy that goes beyond simply filling a gap in existing financing sources. In the case of three projects that will be primarily financed with bond proceeds, Missouri DOT intends to offer project sponsors early assistance in the form of a preconstruction loan. This up-front assistance will permit project sponsors to get started on early activities, such as right-of-way acquisition, before bonds are sold. When the bonds are sold, the project sponsor will pay off the initial preconstruction loan and obtain a second loan that will contribute to the required debt service reserve.
Missouri anticipates a healthy demand for SIB assistance, and may issue debt on its own behalf to leverage the fund within the next year or two.
Ohio
The Ohio SIB has the distinction of being the first—and currently, only—bank to have made a loan. Given the State’s rapid progress in setting its SIB in motion, it is noteworthy that Ohio has adopted a go-slow approach to capitalizing its SIB. Ohio has tended to convert ACAP into actual capitalization grants only on an as-needed basis. Another distinguishing feature of the Ohio SIB is the fact that the State has provided matching funds far in excess of the required 20 percent match. In fact, State funds currently comprise 60 percent of the capital so far deposited in the SIB. Like all the other pilot States, Ohio has so far only capitalized its highway account, but it has active plans to establish a transit account and a repayment account within a few years.
At least during the early years of the SIB’s operation, State officials predict that project sponsors’ demand will likely be highest for loans. Loans, they note, are particularly attractive to municipalities, counties, and special districts—entities that have so far accounted for the majority of applicants for SIB assistance. However, State officials also emphasize that larger, more heavily capitalized entities (e.g., port authorities) could probably benefit from certain forms of credit enhancement. In cases where these entities are issuing debt, layering a contingent source of repayment over the revenues already pledged to meet debt service requirements, or increasing the debt service coverage ratio, could ultimately improve the issue’s credit rating and thus lower the interest rate on the bonds.
At present, Ohio has identified over 15 projects that stand a reasonable chance of advancing to construction with SIB assistance within the next few years. One of these projects is a $120 million highway and interchange project in Butler County that has already received two $10 million loans as part of a relatively complex financing package. Of more modest scope is a $7.8 million construction-period loan to cover the entire cost of constructing a new parking facility to serve the Great Lakes Science Center (this loan is expected to be made in March 1997). Other projects expected to receive SIB assistance in the near future include an Interstate project for which the SIB may issue $100 million in bonds to be repaid with future Federal-aid highway apportionments. [ This approach is enabled by another innovative financing technique known as bond reimbursement, initially tested under FHWA ’s TE-045 innovative financing initiative and subsequently approved under Section 311 of the NHS Designation Act.] Also imminent is a port-related project in Cleveland, which may involve a 20-year, $4.3 million loan to cover the costs of a new storage facility to link highway (truck), rail, and marine freight activity. For this particular project it is possible that the loan will be offered at a 4 percent interest rate. Although the port authority has sufficient authority and financial capacity to issue bonds for this project, it would be substantially more cost-effective to the port authority—and ultimately, to facility users—to supplement bond financing with the low interest loan from the Ohio SIB.
State officials predict that demand for SIB assistance is sufficiently heavy to warrant leveraging the bank with a bond issuance within the next year. This places Ohio on the fastest track of all 10 pilot States for leveraging its bank through a debt issuance, with the SIB itself serving as issuer. State officials emphasize that these plans to leverage the bank in the near future make it especially critical that the State rapidly establish a track record of financial stability within the SIB and a sound history of loan repayments. To this end, State officials report that their primary and immediate goal for the SIB is to award a large number of loans to a solid set of projects that are apt to move to construction within the next 12 months.
Oklahoma
Oklahoma DOT has deposited $2.5 million in non-Federal funds into its SIB, but has held off on obligating any Federal-aid funding due to current uncertainty as to enactment of broadening legislation. While Oklahoma has sufficient enabling legislation to make loans from its SIB, this broadening legislation would permit the State to follow through on an especially innovative approach to SIB financing. Oklahoma’s initial SIB application from May 1996 included a proposed "leaseback" financing structure, which would have involved a creative partnership between the State DOT and Turnpike Authority.
The leaseback strategy likely represented the most original financing concept proposed in the initial round of applications for designation to the SIB pilot program, but it has currently been put on hold due to the State Legislature’s rejection of needed enabling legislation during last year’s legislative session. Legislation to permit this sale-leaseback financing strategy has been reintroduced in the 1997 legislative session. If it passes, State officials expect that up to $25 million may be deposited in the highway account later in fiscal year 1997.
Until the State legislature makes a decision on the leaseback approach, the State DOT intends to use the SIB to support two smaller projects. The first project involves about $60 million worth of at-grade rail crossings across the State. For these projects, the SIB might lend local governments their matching share (10 percent) of costs for these Federally-funded projects. The 5-year loans would carry a 4 percent interest rate and likely be repaid by sales tax receipts generated within each of the local jurisdictions. A second likely candidate for SIB assistance in the coming year is a $32 million extension to an existing turnpike. In this case, the loan amount could be about $4 million, also carry a 4 percent interest rate and a 5-year term, and be repaid with toll receipts.
Oregon
On January 21, 1997, Oregon received nine formal applications for SIB assistance. The total amount of requested assistance was $11.8 million. Projects range from a $781,000 signal prioritization project to minimize transit delays to a $5 million request to help finance highway construction for an Oregon county. SIB staff declined to advance one application for lack of a revenue stream to repay the requested assistance, dropping the total request to $10.5 million.
Among this first set of applications, project sponsors showed the greatest demand for loans, with eight of the nine proposals seeking funds for pre-construction or construction activities. The remaining proposal instead sought partial financing for leasing vehicles to support a statewide rideshare program (described in greater detail in Appendix E). Financing for this request may be accomplished through credit enhancement or through participation in direct loans.
In spite of the overwhelming emphasis on loans, State officials explained that they anticipate that credit enhancement will gain popularity over time, as project sponsors gain more familiarity with the full menu of financial services available from the SIB. At the same time, they note that the SIB’s effectiveness in improving project sponsors’ access to debt and lowering the cost of capital will become clearer as proposals come forward and are successfully implemented.
Oregon DOT officials are enthusiastic about the level of demand for SIB assistance, and note that project sponsors are starting to assemble new applications. If the level of demand for assistance begins to exceed available funds, the State may consider leveraging the bank by issuing bonds. A number of other factors will also play into the decision, however. Chief among them will be the history of a strong credit quality among the recipients of SIB loans.
South Carolina
Although South Carolina DOT has obligated a small amount of funding ($2 million) for capitalizing its SIB’s highway account, the State has not yet deposited funds in the SIB. State officials are still in the process of defining what role the SIB will play in the State’s overall transportation financing strategy, and as a result, it will likely be some time before the DOT selects projects to receive SIB assistance. The State DOT has so faridentified one likely candidate: a $550,000 road improvement project in Rock Hill, SC. It is not known when the project will move forward to construction, but State officials believe that the financing plan will be finalized by the end of fiscal year 1997. The project would receive a $300,000 loan for a two-year term at a negotiated interest rate.
State legislation prohibits the bank from offering any forms of assistance other than loans. Policies and procedures for the South Carolina SIB are still under development, and the State does not yet have much indication as to the level of demand for SIB assistance. Recently, however, the Governor of South Carolina has raised the profile of the SIB by proposing that it support several major bond-financed projects, including a $400 million bridge in Charleston and $450 million worth of road projects in Horry County.
Texas
In 1995, Texas earned a reputation as a leader in innovative highway finance by becoming the first State ever to employe loan provisions permitted under 23 U.S.C. 129 to provide Federal-aid reimbursement for a State loan to a toll project. This $135 million loan was awarded to the Texas Turnpike Authority for State Highway 190 (George Bush Turnpike), a $700 million toll road in the Dallas area. The State DOT initially considered transferring this loan to the SIB, but as of now, it appears that the Section 129 loan will remain outside the SIB. Other project candidates for SIB assistance are still being identified, but one frequently mentioned possibility is a new cross-border bridge in Laredo. The bridge’s estimated construction cost is approximately $53 million, with Federal funds, potentially comprised of a SIB loan, accounting for $11 million of this total.
Although the State has already obligated over $12 million for SIB capitalization, the State Transportation Commission has not yet authorized the DOT to obtain Federal-aid reimbursement for this obligation. As a result, the Texas SIB is currently not capitalized. The State has no immediate plans to capitalize anything other than a highway account.
One of the barriers to rapid deployment of the Texas SIB has been the fact that existing State legislation only permits the SIB to offer loans to the Texas Turnpike Authority. Comprehensive legislation to expand the eligible recipients of SIB assistance is currently before the Texas State Legislature. Similar to the pending legislation in Arizona, Texas’ proposed legislation would expand the SIB’s authority to provide a wider array of financial services to a broader spectrum of eligible recipients, and to issue debt on its own behalf (i.e., leverage the fund). Until the legislation passes, it is unlikely that the SIB will be in a position to offer assistance to any projects. If the legislation does pass, the State has identified about a half-dozen projects, including the aforementioned Laredo bridge, that could possibly benefit from SIB assistance, although the appropriate form of assistance has not yet been established. Construction costs for these projects range from $33 million to about $600 million. Until such time as project sponsors’ demand for SIB assistance is better known—and pending enactment of necessary enabling legislation—the State will defer any decision as to whether to leverage the bank through issuing debt.
Virginia
The Virginia SIB has yet to be capitalized and will likely not receive any deposits until 1998. The State is currently establishing policies for the SIB and is not actively soliciting projects until the bank’s procedures are determined.
Like South Carolina, Virginia law prohibits the Commonwealth from lending its faith and credit to any other jurisdiction. This requirement effectively prohibits the Virginia SIB from offering credit enhancements. As a result, State officials currently plan only to offer loans from the SIB.
While no project sponsors have yet submitted formal applications to Virginia DOT, a few projects are considered potential candidates for loan assistance. Possibilities include a low-interest loan to help finance a new $10 million parking facility at the Vienna Metrorail station and a $15 million loan to help finance a $250 million toll road connector in the Richmond area that has been proposed by a private consortium. Details on these and other possible projects remain vague, and it is likely that the bank will not finalize any loans for another year or more.
