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Executive Summary

Section 350 of the National Highway System (NHS) Designation Act of 1995 (Public Law 104-59) authorized the U.S. Department of Transportation (USDOT) to establish the State Infrastructure Bank (SIB) Pilot Program. A SIB is a State or multistate fund that can offer loans and credit enhancements to a wide variety of project sponsors. SIBs are intended to complement the traditional Federal-aid highway and transit programs by supporting certain projects that can be financed—in whole or in part—with loans, or that can benefit from the provision of credit enhancement. As loans are repaid, or the financial exposure implied by a credit enhancement expires, a SIB’s initial capital is replenished, and it can support a new cycle of projects. In this way, SIBs represent an important new strategy for maximizing the purchasing power of Federal surface transportation funds. Broadly speaking, this expansion of the level of investment that is associated with a strategic contribution of public capital can be termed "leverage."

The authorizing legislation charged USDOT with implementing the pilot program by selecting 10 pilot SIBs and developing cooperative agreements with each participating State. The legislation also required USDOT to review the financial condition of each pilot SIB and transmit to Congress the results of the review, including: (i) an evaluation of the pilot program’s ability to increase public investment and to attract non-Federal capital; and (ii) recommendations as to whether the program should be expanded or made a part of the Federal-aid highway and transit programs. This review responds to the requirement.

The results to date for the 10 SIB pilots suggest that the program will effectively serve its intended niche: locally and regionally significant projects that have access to dedicated revenue streams, but need flexible financial assistance to clear hurdles that would otherwise obstruct or delay their implementation. For now, the demand for SIB assistance is being met in two principal ways: (i) loans to local agencies seeking to close gaps in available project funding; and (ii) loans to larger entities (e.g., turnpike authorities), in which the loan addresses a specific barrier to the sponsor’s ability to obtain external debt financing. The growing demand for SIB assistance, combined with SIBs’ ability to stretch the purchasing power of Federal transportation funding, suggest that the SIB program be included as a standard element of the Federal-aid highway and transit programs. The Administration has proposed continuing the SIB program as part of its reauthorization proposal, the National Economic Crossroads Transportation Efficiency Act (NEXTEA), which was submitted on March 12, 1997.

Opportunities and Constraints Posed by the Enabling Legislation

States may use Federal, State, local, and private funds to assemble the equity capital needed to launch a SIB. However, features of the enabling legislation, combined with certain practical considerations, virtuallyensure that: (i) States will capitalize their SIBs gradually, and (ii) in the near term, SIB assistance will primarily focus on smaller projects, with loans being the predominant form of financial assistance. Four factors influence this outcome:

• The Act effects a relatively slow rate of capitalization, thus constraining the dollar volume of SIB financial assistance that can be made available in the short term.

• The Act’s requirements concerning eligible uses of initial Federal capitalization grants limit a SIB’s short-term portfolio of projects to construction of capital projects eligible for Federal assistance under Titles 23 and 49 of the U.S. Code, and whose sponsors can easily accommodate the Federal regulations that accompany direct Federal financial participation.

• The different types of financial assistance that SIBs are authorized to provide are highly adaptable to the needs of individual projects, and should be of value to projects that can be assisted with loans or a form of credit enhancement.

• The statutory and practical necessity for leveraged SIBs to obtain an investment grade rating will probably delay the rate at which most SIBs issue bonds or offer credit enhancements in an amount exceeding the SIB’s liquid assets. Most SIBs will need to accumulate experience and a credit history before satisfying the rating criteria that would make leveraging possible and/or worthwhile.

Whether by design or chance, the enabling legislation for the pilot program has created a relatively low-risk environment for the first few years of SIB operations. This gradual start-up seems to be well-aligned with the early types of projects that are emerging as strong candidates for SIB assistance.

Progress Toward Implementation and Results to Date

USDOT began implementing the SIB pilot program via a December 1995 Federal Register notice requesting applications from any interested State. By March 1996, 15 States had applied to participate in the SIB pilot. One month later, eight States were selected to be SIB pilots: Arizona, Florida, Ohio, Oklahoma, Oregon, South Carolina, Texas, and Virginia. The two final States—California and Missouri—were selected in June 1996. In the nine months since the SIB pilot States were made final, nine of the ten States have established cooperative agreements with USDOT, and have begun the process of implementing a SIB financial assistance program.

With just 4 months having passed since most States signed cooperative agreements with USDOT for chartering their SIBs, financial activity within the SIBs has been modest. The limited number of financial transactions, however, understates the robust short-term outlook for SIB financial assistance. As of February 28, 1997, Federal outlays to the SIB pilots totaled $65 million. This contrasts with the maximum possible obligation and outlay of $228 million, based on the amount of advance capitalization requested by the 10 pilot States. Two loans—both in Ohio, and totalling $20 million—had been made as of that date. (Subsequent to March 1, 1997, but prior to publication of this report, the Missouri SIB made another loan, for $1.18 million.) In total, five States—Florida, Missouri, Ohio, Oklahoma, and Oregon—intend to make further project loans by the end of fiscal year 1997 (September 30, 1997). Texas and Virginia may also be positioned to offer loans by the end of fiscal year 1997.

Several factors contribute to the current financial condition of the SIB pilots. Some States (notably Missouri, Ohio, Oregon, and Florida) have been more effective in establishing their SIBs and soliciting interest from a variety of project sponsors. Loans are being made or are imminent. Other States have encountered barriers to full implementation of their SIBs. Oklahoma, South Carolina, and Texas have observed limitations in their State enabling legislation for SIBs and are actively seeking remedies. [ Subsequent to March 1, 1997, but prior to publication of this report, Oklahoma, South Carolina, and Texas passed new legislation to broaden the types of financial assistance their SIBs may provide.] Arizona and Virginia are developing procedures for SIB operations and project selection, and do not expect to request Federal capitalizing funds until late in fiscal year 1997 or fiscal year 1998. California is exploring structural options for its SIB, including the possibility of solely providing third-party credit enhancements, which would not trigger immediate outlays. This strategy would require California to obtain an investment grade rating for its SIB. The process to do so is underway, but not yet completed.

Although the SIBs are exhibiting different rates of progress in getting underway, a 2-year outlook signals a healthy level of activity within the initial 10 pilot States. Thirty-two projects, with a total construction cost of $1.60 billion, are expected to receive SIB assistance. The SIBs will provide various types of loans totaling $324 million. Thus, the total value of projects to be supported by SIBs is almost five times greater than the anticipated SIB capital outlays. Practically all of this assistance is devoted to local or regional highway projects. The primary sponsors of these projects include municipalities, local improvement districts, and local non-profit corporations. The following exhibit summarizes this report’s key quantitative findings.

Summary: Status of the SIB Pilot Program as of 2/28/97
SIBs established under pilot program	10
Signed cooperative agreements	9
Federal-aid obligations for SIB capitalization at 2/28/97	$ 79 million
Federal outlays (expenditures) for SIB capitalization at 2/28/97	$ 65 million
Total bank deposits (Federal outlays and non-Federal matching funds) at 2/28/97	$ 106 million
Loans made to date and value at 2/28/97	2 loans to 1 project; total value of $20 million
Projected combined value of projects to be assisted through FY 1997	$940 million
Projected amount of SIB assistance to be offered through FY 1997	$260 million
Estimated combined value of projects to be assisted through FY 1998	$1.60 billion
Estimated amount of assistance through FY 1998	$324 million
Estimated transportation investment per dollar of SIB assistance through FY 1998	$4.94
Anticipated types of projects through FY 1998	75% highway; 25% other
Projected recipients through FY 1998	75% local entities; 25% DOTs, toll authorities, and other

 

Conclusions

The results to date for the SIB pilots suggest that the program will effectively serve its intended niche: locally- and regionally-significant projects that have access to a dedicated revenue stream, but need flexible financial assistance to clear hurdles that would otherwise obstruct or delay their implementation. SIBs can accomplish this task by offering:

• lower-cost financing than may otherwise be available to a project sponsor;

• flexible repayment terms that can be tailored to a project’s revenue stream; and

• credit enhancements that improve a project sponsor’s access to external debt financing.

Assessed in light of three main performance indicators, the SIB pilot program is demonstrating a strong potential to promote the more efficient use of public resources. First, a relatively modest infusion of SIB capital is projected to produce additional investment by attracting other forms of financing. Second, the presence of a SIB credit enhancement or, under certain circumstances, a SIB loan, can reduce the costs borne by project sponsors, and ultimately, by users of SIB-assisted facilities. And third, SIB assistance is already helping projects move to construction sooner. The fact that SIB capital is largely self-replenishing ensures that these benefits can be realized repeatedly. The long-term productivity of SIB capitalization grants will also be enhanced as project sponsors’ mindset shifts from a sole reliance on grant-based funding to an increasing appreciation for credit-based financing. While grant-based funding will almost certainly remain the mainstay of the Federal-aid highway and transit programs, SIBs expand project sponsors’ choices in how they wish to finance those transportation projects, and create an incentive for project sponsors to identify new revenue streams that are linked to the benefits that the projects confer.

The effectiveness of the SIB pilot will likely increase due to the upcoming program expansion. The 1997 DOT Appropriations Act (Public Law 104-205) opened participation in the pilot program to, potentially, every State, pending approval of the States’ applications by the Secretary of Transportation. Twenty-nine States, including 6 States that submitted proposals as part of multistate compacts, responded to the most recent call for applications. This response underscores: (i) the breadth and depth of the market for the financial services that SIBS can offer; and (ii) the States’ interest in developing a renewable source of transportation funding.

Given that 39 States show a strong interest in the SIB concept, and given the promising results of the pilot program to date, it is reasonable toconclude that the program should be continued as a standard, funded, element of the Federal-aid highway and transit programs. The Administration’s reauthorization proposal, NEXTEA, proposes continuation of the SIB program, including annual capitalization funding at $150 million.

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an evaluation of the u.s. department of transportation state infrastructure bank pilot program

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