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Panel on Pending Federal Credit Legislation

Introductory Remarks

David Seltzer, FHWA Senior Advisor, Office of the Administrator, introduced the first panel of the conference as one providing a brief overview of two pieces of pending legislation relating to Federal credit:

• Dan Corbett, of the Senate Committee on Environment and Public Works staff, to describe Senator Chafee's Transportation Infrastructure Finance and Innovation Act (TIFIA) proposal, and

• Andy Garfinkel, of Congresswoman DeLauro's office, to describe the Transportation Infrastructure Credit Act (TICA).

The Transportation Infrastructure Finance and Innovation Act (TIFIA) of 1997 (Subtitle C, Chapter 2 of S. 1173)

Dan Corbett, Professional Staff Member, U.S. Senate Committee on Environment and Public Works began his presentation by stating that the Senate Committee on Environment and Public Works was very interested in pursuing innovative financing techniques for funding transportation investment. With the National Highway System (NHS) Designation Act of 1995, the Committee authorized the State Infrastructure Bank (SIB) pilot program. The Committee had made it a priority to encourage new financing techniques, implement new technologies and find new solutions to difficult problems.

Mr. Corbett noted that TIFIA was a product of the Committee's willingness to explore new ideas. He said the Committee was also interested in advancing legislation that would encourage design-build contracting and expand the SIB program. He added that TIFIA highlighted the Committee's ongoing efforts to encourage innovative finance and stimulate private sector participation in transportation.

Mr. Corbett said that the funding shortfall for large new investments and major expansions of existing highways and other transportation investments is particularly acute. Therefore, the strategic goal of TIFIA is to provide credit assistance to projects of national significance generating major economic benefits through supplemental and subordinate capital.

Mr. Corbett reviewed the general terms of TIFIA. (A copy of TIFIA is contained in Appendix E.) He noted that to be eligible for assistance under TIFIA, projects were required to meet the following threshold criteria:

• Cost at least $100 million, or 50 percent of a State's annual apportionment ($30 million for Intelligent Transportation System projects) of Federal-aid highway funds.

• Be supported at least in part by user charges or other dedicated revenue streams.

• Be included in the State Transportation Plan and the State Transportation Improvement Program.

Projects meeting the initial threshold criteria then would be evaluated by the Secretary of Transportation based on:

• Economic Benefits. The extent to which a project generates national economic and social benefits that exceed costs.

• Credit-worthiness. The likelihood of the credit instrument being supportable by project revenues.

• Public-Private Partnerships. The project's ability to create opportunities for public-private partnerships.

• Project Advancement. The degree to which credit assistance enables the project to move forward at an earlier date and with lower financing costs than would otherwise be possible.

• Innovative Technologies. The extent to which the project uses or promotes innovative technologies in enhancing access, mobility, productivity, and safety.

• Budgetary Cost. The budget cost of the credit instrument, given the need to allocate limited Federal resources among project applicants.

Mr. Corbett stated that $530 million of budget authority was currently reserved for paying the subsidy costs of providing credit assistance under TIFIA. He added that the subsidy costs were the sum of expected default losses and interest rate subsidies. An interest rate subsidy is present when interest rates charged are less than the yields for comparable-term U.S. Treasury securities. He concluded that if the subsidy cost of providing credit assistance under TIFIA is equal to ten percent of the face value of credit offered, the program could support $5.3 billion in face amount of credit instruments.

Mr. Corbett noted that TIFIA offers three types of financial assistance (secured loans, loan guarantees, and standby lines of credit) to project sponsors.

Mr. Corbett reviewed the general terms of secured (direct Federal) loans, which would be provided under TIFIA:

• The loans offer long-term permanent financing.

• The loans are structured with flexible payment provisions (allowing deferrals up to ten years) to match project revenues.

• The loans improve the marketability of the senior debt by funding a portion of project debt on a junior basis.

• The credit program leverages private financing by limiting loans to 33 percent of project costs.

• The interest rate on loans is set at the 30 year Treasury rate (taxable).

• The loans will be secured with rate covenants, additional debt issuance tests, and defined claims on revenues.

He presented the general terms of assistance as they relate to loan guarantees, the second type of assistance offered under TIFIA:

• Loan guarantees would be used to guarantee long-term taxable rate loans funded by pension funds and other institutional investors, thus resulting in AAA ratings for projects receiving assistance.

• Loan guarantees would improve the caliber of the senior debt by securing private junior-lien debt.

• Loan rates would be determined by the borrower and lender, subject to approval by the Secretary of Transportation.

• Guaranteed loans could be structured with flexible repayment terms (with deferrals up to 10 years) to match project revenues.

• Loan guarantees would leverage non-Federal financing by limiting credit to 33 percent of total project costs.

The third, and last, credit mechanism described by Mr. Corbett was the standby line of credit. Under TIFIA, standby lines of credit represent contingent loans to pay debt service, extraordinary repair, and other costs during the project ramp-up phase. These contingent loans have the following features:

• They may be in an amount up to 33 percent of project costs.

• They may be drawn down over a 10-year period after project completion.

• They must be repaid, with interest, within 30 years of project completion.

• The interest rate on any draws is set at the 30-year Treasury rate.

Mr. Corbett noted that the Joint Committee on Taxation (JCT) had unexpectedly scored TIFIA with a tax revenue loss ("tax expenditures"). The argument used by the JCT was that the Federal credit program under TIFIA would result in additional tax-exempt debt issuance, which would deprive the U.S. Treasury of income taxes. The revenue loss estimate assigned by the JCT was $79 million over five years.

Mr. Corbett stated that in response to the JCT decision, TIFIA was altered so that it would not allow DOT to provide assistance to projects issuing tax-exempt debt. This response, he added, could compromise the long-term viability of the program. Thus, the Senate Environment and Public Works Committee would continue working with the Congressional Budget Office and the JCT to address the tax expenditure score. The outcome, he concluded, would be fundamental to the future success of the Federal credit program.

The Transportation Infrastructure Credit Act of 1997 (H.R. 2330)

Andrew Garfinkel, Grants Coordinator, Office of Congresswoman Rosa DeLauro stated that the conference was an excellent forum for bringing together the forces that can advance public investment and business expansion measures, such as Federal credit.

Mr. Garfinkel said that America's future depended on the ability to find creative approaches to paying for infrastructure. He observed that no local, State, or Federal Government could afford to provide the funding needed to meet all current and future infrastructure needs. In fact, after these traditional sources of funds are spent, the Nation still faces as much as an $80 billion funding shortfall.

Mr. Garfinkel said that Congress must bring about increased investment in the Nation's schools, roads, mass transit, airports, ports, water and wastewater systems, and other infrastructure. Only then can businesses perform at full capacity and successfully compete in the global market.

Mr. Garfinkel noted that public-private partnerships are still in the earliest stages of development in the United States. These partnerships enable the populace to make better use of the Nation's limited resources. He concluded that it is imperative that the Nation not fall behind in building the best, most economically productive infrastructure possible.

Mr. Garfinkel provided an overview of the Transportation Infrastructure Credit Act of 1997 (H.R. 2330). (A copy of H.R. 2330 is contained in Appendix E.) The bill was intended to amend the Intermodal Surface Transportation Efficiency Act (ISTEA) reauthorization.

The Transportation Infrastructure Credit Act (TICA) would create financing tools that promote public-private partnerships for highway and mass transit projects. Under TICA, DOT would make loans and provide loan guarantees for transportation projects of national significance.

Mr. Garfinkel reviewed the differences between TIFIA and TICA. (A side-by-side comparison of the two bills is provided in Appendix E.) The two bills are nearly identical with the exception of the development cost program and the funding mechanism.

One of the greatest risks to the private sector for investing in projects of national significance are the preconstruction costs, such as feasibility studies, preliminary engineering and environmental impact studies. Under TICA, projects could be insured for up to 40 percent of these preconstruction costs.

This risk reduction has the potential to attract private capital in a number of nationally significant highway and mass transit projects.

The House and Senate bills also differ in the use of budget authority. The House bill enables States to use their unobligated balances of Federal highway funds to pay the subsidy costs of Federal credit. By using this existing budget authority to support the use of Federal credit, Congress avoids the need to authorize new budget authority to pay for the subsidy costs associated with the provision of credit.

Mr. Garfinkel concluded the comparison by noting that both TICA and TIFIA share a common goal: to reduce the risk for private investors to build public-good transportation projects. Reducing the risk, Mr. Garfinkel added, was key to attracting funds from non-traditional funding sources.

Mr. Garfinkel then reviewed another legislative proposal Rep. DeLauro introduced in 1997: the National Infrastructure Development Act (NIDA). The bill would establish a national revolving fund program to finance schools, roads, rail, ports and airports, and water and wastewater projects. The bill would establish a government corporation infrastructure bank to invest in and insure infrastructure projects in order to reduce public and private investment risk.

The bank, called the National Infrastructure Development Corporation (NIDC), could make loans, provide certain loan guarantees, and insure certain project debt for both public and private development entities. The NIDC would be capitalized with an initial $3 billion Federal investment provided over a three-year period. This three billion dollars could leverage up to $30 billion in both public and private loans and to eventually insure certain project debt.

Mr. Garfinkel then analyzed the comparative advantages of the national bank and Federal credit concepts. The advantages of the NIDC are that (1) there is a special purpose corporation whose sole mission is to help finance infrastructure, and (2) as loans are repaid to the NIDC, the repaid funds can then be loaned to other projects without the need for further appropriation. The advantages of the Federal credit concept are that (1) it is not necessary to establish a new government entity and (2) the budgetary cost of capitalizing a federal credit program is a fraction of the amount needed to capitalize a similar scale program through the NIDC, due to the subsidy cost.

Mr. Garfinkel said that Congresswoman DeLauro was also interested in advancing a measure authorizing project sponsors to offer bonds to pension fund 401(k) plans for infrastructure development in the U.S. He added that there are few opportunities for pension funds and other private entities to invest in infrastructure projects, and these important U.S. funds are currently being invested overseas in markets such as Asia. This provision of NIDA would enable institutional investors to invest in the building of roads, water and wastewater projects, airports and schools here in the U.S. at rates comparable to tax-exempt bonds.

Mr. Garfinkel added that the bonds, called Public Benefit Bonds, would be an attractive investment for 401(k) plans because the bonds enable them to pass on tax free interest to their pensioners at retirement. A preliminary analysis showed that they would likely raise revenue for the U.S. Treasury. In addition, the legislation would enable the pension community and other institutional investors to invest a portion of their $4.5 trillion in assets in infrastructure projects in the U.S.

Innovative finance, Mr. Garfinkel said, is about good government. American businesses benefit from improved infrastructure, American workers benefit from good paying jobs, and American taxpayers benefit from better infrastructure built with fewer tax dollars.

Mr. Garfinkel concluded by saying that it is essential that the credit enhancement bills are recognized as industry-backed financial tools. He also stated that industry commitment to infrastructure development and industry efforts to develop and expand public-private partnerships will make the difference in establishing Federal credit programs.

Discussion

A member of the audience said that the JCT decision to score TIFIA with a tax revenue loss is troubling. This decision could have implications for other Federal financial assistance programs. If the JCT assigns a tax revenue loss to TIFIA, will it do the same for all assistance programs?

Mr. Corbett responded that the decision to score non-tax legislation with tax revenue losses represents a new way of doing business and challenges several long-standing scoring principles. This sets a new precedent, and the decision will have a widespread effect.

An audience member asked whether the Senate Environment and Public Works Committee had plans to provide offsetting budgetary resources to pay for these tax revenue losses.

Mr. Corbett responded that the Senate Environment and Public Works Committee does not have the resources to offset this provision. This, unfortunately, places the entire program in jeopardy. The Senate Environment and Public Works Committee is concerned because the JCT is now scoring an authorizing piece of spending legislation with a tax revenue loss. Similar provisions appearing in appropriations bills, however, have not been scored. This seems like unequal treatment. There is also a question of consistency. The JCT has to date never scored tax expenditures against grant programs that induce additional tax-exempt debt, yet is now scoring a revenue loss against credit programs. What the JCT is doing is creating an entirely new set of ground rules for scoring Federal initiatives.

A member of the audience commented that there is too much focus on budget scoring. The focus should be on getting more projects funded. Access to capital is not an issue for good projects, he noted. There are two main barriers to transportation investment: political feasibility and development cost. Debt financing and tolling are often not politically feasible on the local level. Thus, the Federal Government should be providing incentives for local entities to debt finance projects and build toll facilities. One solution could be found in an incentive program that provides Federal funds to States based on toll collections. In fact, this participant opined that the budget authority reserved for Federal credit could be better utilized by creating such a program. The other issue is up-front development costs, which is addressed to some extent in the House bill.

Mr. Corbett responded that by covering the risk subsidy, TIFIA would be providing an incentive to debt finance and build toll facilities.

Mr. Garfinkel responded that in addition to Federal credit, State Infrastructure Banks (SIBs) are encouraging debt financing at the local level. Innovative finance initiatives illustrate the Federal Government's willingness to be creative and create incentives for debt financing.