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Keynote Presentation on Federal Policies and Administrative Issues Relating to Federal Credit
Introductory Remarks
David Seltzer, FHWA Senior Advisor, Office of the Administrator stated that the last discussion of the conference would focus on key Federal policy issues relating to Federal credit and administrative procedures for executing a Federal credit program. He introduced Peter J. Basso, Acting Assistant Secretary for Budget and Programs, United States Department of Transportation (DOT), as a keynote presenter and noted that he would be providing conference participants with a view from the tenth floor of the Nassif Building: the location of the Office of the Secretary of Transportation.
Key Federal Policies and Administrative Issues Relating to Federal Credit
Peter J. Basso, Acting Assistant Secretary for Budget and Programs, United States Department of Transportation, began his presentation by noting the importance of vetting the issues relating to Federal credit. He stated that his presentation would focus on the credit-related issues deemed most relevant by the Office of the Secretary of Transportation.
Mr. Basso noted that Federal credit has historically been a very sensitive issue. The main point of contention is related to the appropriate role of government, both in terms of its taxing power and its ability to influence fiscal policy through tax rules.
Mr. Basso said that the Nation's economy relies substantially on the private capital markets to finance its activities. That being the case, both Federal and State governments are beginning to recognize the role that the private markets could play in the financing of transportation infrastructure.
Mr. Basso stated that in recent years, a new era of public-private partnerships and financial arrangements involving credit have evolved. New financial arrangements and programs have provided both shining and disastrous moments for the Federal Government. He credited the Federal Housing Administration and Student Loan Program with making a huge difference in the standard of living of Americans during the post-World War II era. The savings and loan debacle provided a good example of how Federal involvement in the credit market may be harmful. Thus, it is not surprising that many are skeptical about the prospect of expanding Federal involvement in the credit market.
Mr. Basso said that traditionally the Federal role in funding transportation infrastructure has almost exclusively involved grant programs. Grant programs were viewed favorably for three main reasons:
- Grant programs are easier to administer.
- Grant programs involve stable, long-term trust funds.
- Grant programs involve a clearly defined flow of funds.
In recent years, the Federal Government has responded to the shortfall in conventional public funding sources by tinkering at the margins: relaxing burdensome Federal restrictions and regulations and providing incentives to leverage new sources of capital. Congress incorporated some of the new Federal financing innovations (e.g., grant management techniques and State Infrastructure Banks) into the National Highway System Designation Act of 1995. In addition, the Administration's National Economic Crossroads Transportation Efficiency Act proposal sought to expand the role of innovative finance by expanding the State Infrastructure Bank (SIB) program to all States and providing $900 million in additional seed funding for the program, establishing a Federal Credit Enhancement Program in order to leverage non-Federal and private resources for projects of national significance, and codifying two more grant management concepts.
Though the Federal Government has in recent years made great progress in fiscal policy, Mr. Basso noted that DOT still prefers to minimize risk. With that said, DOT is considering the following questions:
- Is there a Federal transportation role in the private financial markets?
- If there is such a Federal role, how best can it assist project sponsors without interfering with the private capital markets?
Mr. Basso stated that the Alameda Corridor was a prime example of how a project can benefit from the provision of Federal credit assistance. In the case of the Alameda Corridor, a $400 million loan was secured with a $59 million subsidy appropriation.
Mr. Basso suggested that scoring was the name of the game, and that scoring rules allow the Federal Government to use minimal budget authority to achieve significant goals through cost assistance. He cautioned that the scoring process was quite difficult to understand. However, the Federal credit scoring process is based in principles relating to revenue streams, timing of repayments, and credit-worthiness.
Mr. Basso noted that the scoring process also included a component dealing with tax revenue losses. Though there are a number of practical issues yet unresolved, it is clear that programs which induce tax-exempt debt will be scored with a tax revenue loss.
Mr. Basso stated that the Administration supports investigating Federal credit enhancement concepts. The Administration's original ISTEA reauthorization bill contained provisions that would have expanded the SIB program and established a Federal credit enhancement program.
He said that the SIB program is best suited for assisting portfolios of smaller, relatively homogenous, shorter-term projects that are regional or local in scope. Federal credit, however, was designed to provide assistance to large-scale projects of national significance. Though the term "national significance" is difficult to define, projects deemed nationally significant would most likely have the following features:
- Be difficult for State and local entities to fund with traditional grant-based financing.
- Involve a matter that the Federal Government deems to be of national interest.
- Provide economic benefits that extend beyond one region.
Mr. Basso said that the Alameda Corridor is a good example of a nationally significant project. The Alameda Corridor will generate economic activity throughout the entire Nation. He noted that the Woodrow Wilson Bridge was another good example of a nationally significant project. The Woodrow Wilson Bridge is the only Federally owned bridge on the Interstate system. The current facility, which is located on the Capital Beltway surrounding Washington D.C., is a structural bottlekneck and a major contributor to regional congestion. Current plans involve replacing the deteriorating I-95/495 drawbridge across the Potomac River with an expanded-capacity facility consisting of twin six-lane drawbridges spanning 70 feet above the Potomac. At a total cost of over $1.7 billion, the Woodrow Wilson Bridge is a prime candidate for innovative finance and credit assistance.
Mr. Basso posed and provided responses to a number of key Federal policy and program administration questions.
- What's to prevent DOT from making a loan to a bad project? No matter how good or scientific the methodology is for scoring loans, a percentage of projects in a portfolio will always fail. Thus, he said the key for the Federal Government is to minimize risk by engaging private sector experts, performing careful analysis and budgeting for the expected losses.
- How can DOT most effectively monitor a portfolio of nationally significant projects? Projects receiving credit assistance would be required to meet payment schedules, pass practical examinations, and demonstrate credit-worthiness. The U.S. Department of Transportation has been successfully monitoring grant programs for over 90 years. Thus, he was confident that DOT could competently monitor a Federal credit program.
- Should DOT gain more experience before establishing a nationwide Federal credit program? He noted the paradoxical nature of the issue. On one hand, DOT should gain more experience before establishing a nationwide Federal credit program. On the other, DOT cannot gain experience if it does not offer Federal credit assistance. The answer may be to establish a credit program, assess its progress carefully, and use lessons learned to improve the program over time.
Mr. Basso closed his presentation by stating that DOT plans to work closely with Congress to overcome barriers standing in the way of innovative programs. He noted, however, that DOT and Congress would need to strike a balance between innovation and prudence.
Discussion
An audience member stated that DOT's innovative finance initiative has helped change the way in which America's transportation decision-makers and professionals think about transportation investment strategy. Increasingly, extended partnerships involving multi-agency and public-private collaboration are being seen as keys to funding strategy and implementation.
An audience member noted that the Federal budget approach to capital issues was less than intuitive. What is the likelihood of capital budget reform, or of simplifying budget scoring issues?
Mr. Basso responded that there is a capital budgeting commission currently studying the issue. The jury, however, is still out on capital budgeting. There are policy and practical concerns over how capital projects could best be budgeted.
An audience member asked about the timing for the ISTEA reauthorization.
Mr. Basso responded that there are three major issues yet to overcome. The first, "how much money is there to spend on authorization bills given the need to balance the budget?" The second, "what are the latest economic projections?" The third and last involves the multiple factions currently debating distribution formulae. These factions must come together before a bill can be passed.
