The 1995 National Highway System Designation Act (Section 350) established the State Infrastructure Bank (SIB) pilot program. Designed to complement traditional transportation funding programs, SIBs can give states significantly increased flexibility in project selection and financial management. Much like a private bank, a SIB uses seed capitalization funds to get started and offers customers a range of loans and credit enhancement products.
Under the current pilot program, initial funds can be used to finance eligible surface transportation projects, including both highway construction and transit capital projects. Under the pilot program, recycled funds (repayments on initial assistance) can be used for any title 23 eligible purpose.
Figure 1 illustrates the basic structure of a SIB. The structure is designed to allow for SIB funds to revolve (i.e., as loans are repaid to the SIB, the SIB uses repaid funds to make future rounds of loans).
The Federal Highway Administration (FHWA) distributed a SIB Primer at the 1995 State Infrastructure Bank Conference held in Denver, Colorado. This new Primer builds on earlier information and reviews in greater depth the many financing tools that can be made available to transportation projects through a SIB. It also provides information about developing a SIB program that takes full advantage of the project financing flexibility envisioned by the federal pilot program.
Under the initial SIB pilot program, ten states were authorized to establish SIBs (Arizona, California, Florida, Missouri, Ohio, Oklahoma, Oregon, South Carolina, Texas, and Virginia). In September 1996, Congress passed additional SIB legislation that enabled the United States Department of Transportation (US DOT) to designate additional qualified states to participate in the SIB pilot program. In response, US DOT received 26 applications for SIB designation from 29 states (including two multi-state applications). These applications were subsequently approved and 29 new states were selected to participate in the SIB pilot program on June 19, 1997.
Congress also approved the allocation of $150 million in federal general revenue funds for SIB capitalization. These funds may be used to capitalize either highway or transit accounts. The 39 states (including Puerto Rico) were each allocated a portion of the $150 million in amounts ranging from $1.5 million to $12 million. Although the SIB program is still very new and currently only a pilot program, it has attracted widespread interest and over the coming months and years is certain to become a valuable complement to existing federal surface transportation funding programs.
Given budgetary constraints at all levels of government affecting transportation funding, the ability of SIBs to stretch both federal and state dollars to increase transportation infrastructure investment will be a useful tool for a portion of project financing demands. While, in a recently completed survey of fifteen states, most states indicated that SIBs would probably assist less than ten percent of their state transportation projects in the next five years, the flexibility available through SIBs will enable certain projects to be initiated that otherwise would be delayed or not financially feasible.1
The primary benefits of SIBs to transportation investment include:
Flexible project financing. SIBs can assist projects through a variety of innovative financing techniques, including a range of loans and credit options that provide flexibility to tailor financial assistance to meet a project's specific needs. Examples of assistance to be offered by SIBs include low interest flexible term loans, debt service guarantees, lines of credit, and other capital financing support.
"Recycling" of funds. Repaid SIB loans can be "recycled" as a source of funds for future transportation projects. SIBs can offer financial assistance to one set of projects and, as assistance is repaid, funds are replenished enabling assistance to other projects. By preserving the corpus (body of the fund) of the SIB, a state can provide expanded financial assistance to projects in perpetuity.
Accelerated completion of projects. SIBs can enable projects to start sooner by using diverse sources of funds to acquire necessary capital. Combining diverse funds also gives a SIB the flexibility to assemble a financial package for needed projects. Utilizing SIB assistance to finance projects with revenue-producing potential also can free up federal and state funds for non-revenue producing projects.
Increased state and/or local investment. Many communities are willing to dedicate local revenue sources to complete important projects but either do not have well-established credit ratings or lack experience in capital financing. SIBs can be used to help these communities (and the state) by providing both financial and technical assistance. In addition, SIBs can be a mechanism by which localities can pool funds. This pooling of funds would function similarly to a bond bank by lowering the cost of capital through lower interest rates.
Attract private investment. SIBs can enhance private investment in two vital ways. First, by lowering the financial risk, SIBs can help attract private developers wishing to take an equity interest in projects. Second, SIBs can help create a stronger market for transportation bonds. Federal and state funds committed to projects help assure private investors of the likely success of projects. In turn, private investment can help close the transportation funding gap and also attract transportation-related economic development.
The benefits of SIBs to the transportation sector, outlined above, can be maximized by using SIBs in conjunction with traditional finance approaches as well as other innovative funding approaches.
Following is a glossary of terms frequently used in discussions of SIBs and related innovative transportation financing. The definitions are targeted to how terms are generally used in the world of SIBs.
Advance capitalization (ACAP). A federal-aid funding procedure that permits each pilot state to notify FHWA when it has identified an amount of federal assistance that it may ultimately convert to a SIB capitalization grant. ACAP simply establishes a baseline from which to calculate the maximum amount of federal funding that may be deposited into a SIB during succeeding years. For example, a state wishes to contribute $10 million of federal-aid funds to its SIB. The declared ACAP amount is recognized at the outset and then funds are deposited to the SIB incrementally per federal disbursement provisions. The ACAP process is not used in capitalizing transit accounts. Instead, a similar process, in which grantees commit an amount of grant funds to SIB capitalization, is employed.
Advance construction. States or local governments independently raise upfront capital required for a federally approved project and preserve eligibility for future federal-aid reimbursement for that project. At a later date, the state can obligate federal-aid highway funds for reimbursement of the federal share. This tool allows states to take advantage of access to a variety of capital sources, including its own funds, local funds, anticipation notes, revenue bonds, bank loans, etc., to speed project completion.
Build/operate/transfer. Public-private partnership arrangement involving private construction, private operation for given period of time, and eventual transfer to public ownership. SIBs can provide assistance to these partnership arrangements.
Capital reserves. Funds that remain in the SIB and are not loaned out. These funds can be used to support a variety of credit enhancement tools. Capital reserves also can be used to leverage the SIB, or borrow against reserves to expand the pool of available loan funds.
Capitalization. Process of depositing various funds as seed capital into the SIB to enable financial services. This pool of money is distributed, through loans and credit enhancements, in such a way to ensure that payments are made back to preserve the corpus of the SIB.
Cooperative agreement. Written consent between a state and the federal government used to define the process of SIB implementation. The agreement outlines the basic structure and purpose of the SIB and roles of each party, and sets forth how the funds of the SIB will be administered.
Corpus. The corpus refers to all initial funds, additional, and subsequent revenue deposited for SIB capitalization. The corpus is essentially a "body" of funds that is available, on a revolving basis, for use in providing financial assistance to borrowers.
Credit enhancement. Financing tools - such as letters of credit, lines of credit, bond insurance, debt service reserves, and debt service guarantees - that improve the credit quality of underlying financial commitments. Credit enhancements, which can be provided through a SIB, have the effect of lowering interest costs and improving the marketability or liquidity of bond issues.
Design/build. Public-private partnership arrangement whereby a single contractor (or team of contractors) is entrusted with both design and construction of a public infrastructure project. This contrasts with traditional procurement where one contract is bid for the design phase and then a second contract is bid for the construction phase of the project. SIB assistance can benefit either arrangement at any eligible project phase. In both instances, ownership of the project remains with the public sector.
Equity. Commitment of money from public or private sources for project finance, with a designated rate of return target.
Fiscal Year 1997 US DOT Appropriations Act. Public Law 104-205 expanded the SIB pilot program beyond the initial 10 states and provided $150 million in federal general revenues as seed capitalization funds for SIBs.
Grant anticipation notes (GANs). Short-term debt that is secured by grant money expected to be received after debt is issued. SIBs may buy anticipation notes on behalf of project sponsors in advance of intergovernmental assistance, to enable a faster project start. Helps project sponsors advance projects, especially when unable to access capital markets. GANs also may be used to speed SIB capitalization.
Guarantee. A contract(s) entered into by the SIB in which the SIB agrees to take responsibility for all or a portion of a project sponsor's financial obligations for a project under specified conditions.
Initial assistance. First round of SIB monies, that must be loaned or used for credit enhancement for purposes limited to highway construction under title 23 or transit capital projects under title 49.
Interest subsidy. SIBs may subsidize interest rates for project sponsors, lowering overall financing costs. With this tool, project sponsors repay loans at less than current market rates. Market rates may be determined by the cost of borrowing through conventional issues of comparable duration.
Letter of credit. A form of loan from the SIB to be used only in the instance of a shortfall in net revenue for debt service (i.e., a contingent loan). A letter of credit is security provided directly to the lender/bondholders (via the trustee), rather than to the borrower/project sponsor.
Leverage. A financial mechanism used to increase SIB funds through debt issuance, for example. A SIB is considered leveraged if its total potential liabilities exceed its equity. A SIB may be leveraged in two ways: 1) by issuing debt (typically bonds) on its own behalf; or 2) by guaranteeing or otherwise assuming liability for others' debt in an amount greater than the SIB's cash balances.
Line of credit. A form of loan from the SIB to be used only in the instance of a shortfall in net revenue for debt service or other financial commitments (i.e., a contingent loan). A line of credit, while similar to a letter of credit, is security available directly to the borrower/project sponsor with flexibility in use of the funds.
Loan. Any form of direct financial assistance from the SIB, subject to repayment, which is provided to a project sponsor for all or part of project costs.
Non-federal match. The commitment of state or other non-federal funds required to receive federal contributions. The SIB program requires a non-federal match for capitalization funds, which is 25 percent of the amount of federal funds. The match may be lower in states which have a sliding scale rate based on the percentage of federal land in the state.
Obligations. Conversion of a state's declared ACAP amount into a SIB deposit. Obligated funds represent an official commitment to capitalize the SIB.
Outlays. An outlay represents an official payment of funds from FHWA to a SIB account in response to a SIB's submission of a voucher for reimbursement. Capitalization funds must first be obligated, then outlayed, resulting in a deposit of funds to a SIB.
Project revenues. All rates, rents, fees, assessments, charges, and other receipts derived by a project sponsor from a project. Generally, the source of SIB assistance repayment.
Recycled funds. Second and future generation(s) of SIB assistance, resulting from repayment of prior assistance.
Revolving loan fund. Financing tool that recycles funds by providing loans, receiving loan repayments, and then providing further loans. A SIB is a revolving loan fund, but with credit options a SIB can be more than a simple revolving loan fund.
Section 350 of National Highway System Designation Act of 1995. Public Law 104-59, dated November 28, 1995, that created SIB Pilot Program.
Soft loan. Loan provided to a project sponsor with flexible repayment terms. Soft loans, which can be provided through a SIB, are generally subordinate to other debt, can have variable repayment schedules and extended terms, and subsidized interest rates.
SIBs are intended to give state and local officials new flexibility. This flexibility is possible, however, only if a SIB takes advantage of the innovative financing tools that are available through the SIB program. As Table 1 outlines, each of these tools can be applied at any project stage. This section describes the spectrum of innovative financial assistance a SIB may provide. The discussion is not meant to be exhaustive; more detailed variations on these tools exist. Instead, the tools presented in Table 1 and discussed here demonstrate the range of approaches that are feasible through the SIB structure.
|Preconstruction||Highway Construction||Transit Capital Acquisition|
|*Under current law (Public Law 104-59), initial SIB assistance from federal funds may be used for highway construction as broadly defined in title 23 or transit capital projects as defined in title 49.|
Loans are expected to be the most popular form of SIB assistance. A loan, provided to a project sponsor, is any form of direct financial assistance, for all or part of the project cost and subject to repayment terms. During the first round of assistance, a loan may be provided for any phase of an eligible project, including before and during construction of a highway or transit capital acquisition.
Ohio's SIB made three loans in the amounts of $10, $10, and $15 million to the Butler County Transportation Improvement District (BCTID). BCTID expects to issue $136 million in construction bonds in 1997. Through this bond issuance, BCTID will repay all SIB loans. This type of structure prevents postponing the preconstruction project phases until the bonds are issued.
Since demand for SIB assistance may be high, it is important to strategically use the SIB to assist as many projects as possible. To do so, the SIB could assist projects during the phases that are least likely to receive financing from another source. Often, this is the preconstruction phase, where project revenues have not yet been realized and the estimates of future revenues are uncertain. A SIB loan for part or all of the preconstruction phase could, for instance, make the difference between an unfinanceable and a financeable project. This reduced risk encourages private equity investment and debt issuance at lower interest rates.
Once the project phase and amount of the loan have been determined, there are still a variety of alternative structures for a SIB loan to take. The interest rate on the loan and the timing of loan repayment can be structured to meet the needs of a specific project. Loans with flexible repayment terms are often termed "soft" loans. A SIB loan can carry a subsidized or market interest rate and the timing of repayment can be structured to accommodate the repayment source (i.e., user fees, tolls, gas taxes, other state and local taxes) for the project.2
The primary benefit of providing loans to projects (rather than grants) is that loan repayments are recycled for future generations of projects, furthering the development of transportation (see figure 2).
Alternative forms of loans, such as grant anticipation notes (GANs) and similar short-term debt instruments, can be issued in anticipation of certain future revenues, including federal reimbursement of state transportation expenditures and state appropriations. Such notes can be issued to provide financing in advance of conventional funding flows. Use of such instruments often requires additional credit backstops such as lines of credit, letters of credit, or other guarantees.
A SIB could purchase such notes from eligible project sponsors - e.g., state departments of transportation, transit agencies, and turnpike authorities - to complete projects earlier than through the traditional reimbursement basis. Alternatively, the SIB could issue GANs in the private capital markets on behalf of project sponsors or as a method of capitalizing the SIB.
Credit enhancement products offered through a SIB can provide additional security or credit support to transportation projects that are funded primarily through other means, such as through the municipal bond market or private participation. This additional security results in bolstered confidence of private investors (both private developers and potential bondholders), which in turn creates lower interest rates, improved marketability of bonds, and lower overall project financing costs.
In general, credit enhancement is third-party financial support -the lender and the borrower are the first and second parties -that makes a loan, bond, or other financial instrument more creditworthy, provides access to better borrowing terms, and can mean the difference between a project being feasible or not.
From a statewide perspective, providing credit enhancement through a SIB can be more advantageous than providing direct loans because fewer resources are tied up, and as a result, more projects can be assisted. Credit enhancement leverages limited resources and, if properly managed, results in more "bang for the buck" and an increased number of feasible and completed projects.
The following sections describe the types of credit enhancement that could be made available through a SIB. They include lines and letters of credit, debt service guarantees, and debt service reserves, and bond insurance. SIBs' potential use of certificates of participation as well as financing of purchase and lease agreements also are described.
Lines of credit are forms of credit enhancement sought by borrowers (project sponsors) to assure lenders (other investors, bondholders, etc.) of their ability to meet their financial commitments on the project and also serve to secure a higher debt rating (and lower interest rate) for the borrowing. Essentially, a line of credit is a form of loan to be used only in the instance of a shortfall in net revenue for debt service or other financial commitments (i.e., a contingent loan).
A line of credit is a mechanism available directly to the borrower/issuer with flexibility (as defined in the line's agreement) in the use of funds. A SIB could offer its resources to provide lines of credit to eligible project sponsors.
The provision of debt service guarantees - generally of loans, bonds, and leases - through a SIB can help minimize risk of outside investors through secondary support of the project. Private investors, accordingly, could be more inclined to invest in the project. Debt service guarantees generally lower the interest cost of issuing debt and improve the marketability of particular issues.
Guarantees to meet debt service payment requirements can be offered as letters of credit or bond insurance. In either case, the guarantee represents an irrevocable, direct commitment of the guarantor to the bondholders to cover debt service payments in the event that project revenues are insufficient to meet debt service. In this way, they are like lines of credit, except that the commitment runs directly to the lender/bondholder (via a trustee), rather than through the borrower.
Commercial bond insurers typically require an investment grade rating (BBB or above) before they will insure a project. Projects that purchase private bond insurance therefore are already of investment grade and would be financeable, although possibly at significant cost. The advantage of obtaining bond insurance is that the rating on a commercially insured bond issue is normally improved to the rating of the insurer, generally AAA, thus saving the project significant interest costs and increasing the marketability of the supporting debt.
A SIB could provide bond insurance directly to projects. The SIB, however, would likely need to be established with a significant and stable capital reserve in order to provide meaningful bond insurance independent of a state commitment. Providing bond insurance could be advantageous when commercial bond insurers will not insure a project or project phase. Insurance of project debt that would otherwise be rated below investment grade could facilitate the completion of a number of important projects. Bond insurance differs from a letter of credit because it is typically in effect for the entire life of a debt issuance, whereas letters of credit usually are not.
Missouri's SIB provided the Springfield Transportation Corporation (STC) with a $1.2 million loan to fund a debt service reserve fund required to back two STC revenue bond issues totaling $33 million. A second SIB loan is likely to be made prior to the second bond issuance. The SIB loans will expedite the funding, design, and construction of several important highway projects.
When a transportation project is financed through the issuance of debt (such as bonds), an amount in addition to the project cost -typically equivalent to one year of debt service or 10 percent of the total debt issue - must be set aside in a debt service reserve fund. This fund is drawn upon in the event that the project is unable to make debt service (principal and interest) payments to bondholders.
SIB assistance could be used to provide the debt service reserve fund for individual projects. The primary benefit to the project is the reduction in the amount of debt that must be issued upfront, thus reducing the level of debt service, particularly if the issue's interest costs are high. If the reserve is drawn upon, repayment of the draw to the SIB can be structured with flexible terms. This would not be possible if additional debt were issued to fund the reserve.
Certificates of participation
Certificates of participation (COPs) are tax-exempt obligations secured with a specified revenue source such as an equipment or facilities lease. COPs are an alternative to traditional loan structures and provide project sponsors access to the tax-exempt market. A SIB could issue such tax-exempt debt with maturities (i.e., dates on which the debt principal is to be repaid) that match the lease term of assets that would be purchased by the SIB with the proceeds from the bond issue. The SIB would then lease the equipment or facility to an operating entity, such as a transit operator. The resulting lease payments, most likely made with a combination of formula grant funds and local matching share, would then be "passed through" to the bondholders by the SIB (see figure 3). The ability to make bulk purchases on behalf of multiple smaller operators through the use of COPs could significantly reduce capital costs associated with vehicle acquisition.3
Finance purchase and lease agreements
Purchase and lease agreements are agreements between two parties whereby one project sponsor purchases and/or leases the project from another sponsor. A SIB may provide finance support to such agreements in a number of ways.
For example, a state needs to build a highway to reduce congestion, but cannot finance the project through traditional financing. The SIB could purchase the road and lease it back to the DOT. The DOT as lessee could use a mixture of federal-aid highway funds, state motor fuel tax funds, and possibly local contributions or funds from a tax increment district or special assessment district to fund its lease payments. The lease payments will become the revenue stream used by the SIB to repay bonds that will be issued to raise the funds to begin construction. Upon completion of the lease payments, highway ownership will revert to the DOT. SIB capitalization will provide funds to loan for completion of preliminary engineering. Once lease-backed revenue debt is issued it will be used to first take out the SIB loan as well as to finance construction, thus revolving SIB funds quickly.
Numerous decisions need to be made before a SIB program can be implemented. Figure 4 depicts the decisions necessary in the program development phase and the actions that follow during program implementation. This section discusses these decisions and actions.
To take advantage of the full range of innovative financing tools available through a SIB, a state must consider and integrate into its SIB's structure and policies various institutional, financial, and managerial issues.
The structure of a SIB is largely determined by the institution in which the SIB's accounts are housed. The experiences of SIB pilot states, as well as Clean Water State Revolving Funds (SRFs) and state bond banks, suggest that a SIB's accounts can be placed in various places within state government.
The most common choices implemented thus far in the SIB program have been to house the SIB's accounts within the state's department of transportation or within another transportation agency, such as a turnpike authority. Housing the SIB within a department of transportation can be attractive if the department has the financing expertise necessary to run the SIB. The transportation authority option also is feasible if such an organization exists that has the necessary managerial as well as financial expertise. Other options for institutional settings include housing the SIB's accounts within the SIB's own single purpose finance authority or within another state agency, such as the state's treasury department, economic development agency, or department of commerce.
Housing the SIB's accounts in one state entity while sharing managerial responsibilities with another state entity, also is feasible. This requires that the functions of the SIB be unambiguously divided - for instance, with the state department of transportation responsible for all programmatic issues and a state finance agency concerned with financial managerial matters. The decision of where to house both the SIB's accounts as well as the SIB's managerial responsibilities depends largely on specific situations within a state. Many viable options exist.
In nearly all states, the institution responsible for a SIB's daily operations will be overseen by an oversight body, such as an appointed transportation commission. The existence of an oversight body helps ensure consistency with state transportation priorities and state policies regarding financial management. Additional groups may be called upon for various needs such as financial and legal expertise.
Among the numerous financial issues that must be addressed when developing a SIB, capitalization and leveraging are the foremost decisions.
A SIB begins with an initial infusion of federal funds and non-federal matching contributions. Currently, states can deposit a maximum 10 percent of certain FY 1996 and FY 1997 federal-aid highway and federal transit funds (sections 3, 9, and 18) into the SIB's highway and transit accounts, respectively.4 The amount of federal funding available for capitalization is subject to a disbursement limitation.5 The state is required to contribute from non-federal sources 25 percent of the federal contribution (which effectively equals 20 percent of the total deposit). The required match may be lower in states which have a sliding scale rate based on the percentage of federal land in the state. States, of course, may choose to contribute additional funds beyond the required non-federal match.
As noted previously, in 1997 Congress approved the allocation of an additional $150 million in federal general revenue funds for pilot SIB capitalization. These, as well as any future additional appropriations approved by Congress, are outside of a state's obligation limit. Such appropriations, however, also are subject to historical federal-aid outlay rates and require a non- federal match.
In the world of SIBs, the term leveraging has two related meanings. First, leveraging refers broadly to the expansion of funding for a particular project through SIB support by attracting private, local, and additional state financial resources. For instance, if SIB assistance were to provide credit enhancement for a project that enabled the issuance of debt to finance the project, then the small amount of SIB assistance would have been leveraged to facilitate a larger dollar investment.
The alternative, and more technical, uses of the term refer to either 1) the ability to use a portion of capitalization funds as collateral to borrow in the bond market or 2) guaranteeing or otherwise assuming liability for others' debt in an amount greater than the SIB's cash balances. Bond issuance can be used to increase the pool of available funds for projects (potentially on the order of 2 to 4 times the capitalization reserve) or to establish a guarantee reserve fund (see figure 5).
It is clear by the basic mathematics of leveraging that more funds can be made available earlier through leveraging than by an unleveraged program. Leveraging provides funds now that would take years to obtain through the simple revolving of loaned funds.
Decisions regarding the management of the SIB are crucial to successful program development. How the SIB corpus is managed will determine the ability of the SIB to benefit transportation investment. A primary focus should be to maintain the SIB over the long-term. While it is important to provide the maximum amount of assistance the SIB is capable of, this should not be done at the expense of the SIB's long-term viability.
Once the overall design of a SIB has been established, managers can turn their attention to the business of implementation. Various actions must be taken on an ongoing basis by a SIB's management team to implement the program. They include:
Seeking enabling legislation or defining existing authority;
Establishing cooperative agreements;
Capitalizing the SIB;
Defining project selection and terms;
Leveraging the SIB/issuing debt (optional); and
Making project loans/commitments.
The specific implementation approach will, of course, vary given each state's unique circumstance and resulting unique SIB structure.
Ensuring the legal authority at the state level to achieve the intended scope of the program is a crucial step in SIB implementation. The need for new legislation will vary from state to state, but based on the experience of the first pilot states, many may benefit from at least some broader legislative authority. In addition to considering the need for new legislation, any barriers that may exist in current law, regulations, or policy (related to bonding, making loans or other financial assistance, project eligibility, etc.) need to be assessed. Once these steps have been taken, the timetable for any required legislative actions or legal opinions should be estimated.
Any new legislation should be as flexible as possible to allow for potential future uses of the SIB, and also should consider any legislative needs of SIB customers, for example, in accepting SIB support or dedicating revenue streams to repayment. FHWA has prepared model legislation that provides the full range of legislative language that may be required. SIB managers should engage their legal counsel early in the process to determine their specific legislative needs - and the extent to which steps can or cannot be taken with existing authority.
Following designation as a SIB state, one of the first actions to be taken is completion of a cooperative agreement between FHWA and/or FTA and the state institution(s) responsible for the SIB. This agreement outlines the structure of the SIB, including the administering agency, financial assistance policies, accounting and audit procedures, and sanctions and compliance. It is important to consider both the SIB's current financing plans, as well as any plans for future refinements to the program.
Following this initial cooperative agreement, it will be necessary for the SIB to meet reporting requirements both of federal agencies and state oversight groups. These requirements are still in formative stages, given the newness of the program, but the SIB's managerial team should be aware of their potential requirements.
Outreach regarding the SIB program should be geared toward three groups - state and local policy makers, project sponsors, and the public.
To avoid applications that do not meet the eligibility criteria and to solicit applications from desired projects, it is necessary to perform outreach as early in the process as possible. While potential applicants to the SIB for assistance exist in most states, it is important to inform project sponsors about the program.
To ensure support from policy makers, it is beneficial to inform these individuals on the intent of the program (e.g., eligible project types and forms of assistance), as well as the program's successes as projects are completed. This outreach also will help with any beneficial legislative action.
Several of the 10 original SIB designee states have developed effective outreach strategies to inform both project sponsors and policy makers on the SIB program as well as to promote the advantages of seeking SIB assistance. Sample outreach materials are available from FHWA, upon request.
In addition to outreach, most programs will require "inreach" to educate transportation department personnel on the potential of the SIB to enhance current activities.
Projects initially should be screened based on general eligibility guidelines and the extent to which they are sponsored by eligible recipients of SIB assistance. Examples of broad eligibility guidelines include:
The existence/strength of identified revenue streams for loan or other SIB assistance repayment;
Eligibility of project for SIB assistance;
Consistency with the STIP;
Consistency with local and regional plans and programs; and
Support of construction or improvement of federal-aid highways or transit capital projects if federal (and associated matching) funds are to be used (other project types may be funded by state resources).
Each SIB will need to determine the level of initial capitalization that is appropriate given the SIB's role in transportation financing and other competing demands for funds. The following factors should be considered when capitalizing a SIB:
Estimated cost of identified first round projects;
Estimated cost of potential future projects;
Forms of assistance to be provided;
Available federal and non-federal sources of capitalization; and
Degree to which the SIB and/or projects will be leveraged.
States also will need to be aware of competing demands for potential state and federal capitalization funds.
Following initial project screening and capitalization decisions, eligible projects must be subjected to a more detailed project selection procedure based on specific evaluation criteria. Examples of potential criteria include:
The transportation problem the proposed project addresses;
Impact of the proposed project on public mobility and safety;
Ability to leverage new funding sources;
Ability to accelerate completion of a high priority transportation project;
Technical and financial strength of the proposed project sponsor and the viability of the proposed financial plan; and
Status of necessary environmental and construction approvals.
Following the selection of a project to receive SIB assistance, terms of that assistance must be agreed upon by the SIB and the project sponsor. It is important for the SIB to establish certain guidelines and standards for these terms.
Interest rates charged on SIB loans as well as on draws on credit enhancement tools are likely the most important of these terms. Although subsidized interest rates represent a cost reduction to assisted projects, they will, over time, result in reduced growth of the SIB corpus and its ability to assist other projects. It is thus important to determine appropriate, affordable interest rates for projects without sacrificing the SIB's long-term viability.
The repayment timing of SIB assistance also has important effects on the corpus of the SIB. Section 350 of the NHS Act states that repayments on a loan must commence no later than 5 years after the project has been completed, or in the case of a highway project, when the facility has opened to traffic (whichever is later). Repayments must be completed within 30 years after they commence.
In most cases, it would be beneficial to the stability of the SIB to set loan repayment terms that begin and complete repayment sooner than the maximum stated in the NHS Act. Quicker repayment of SIB assistance will enable the SIB to provide assistance to more projects more rapidly and also will reduce the interest costs to the project sponsor.
Of course, each project assisted by the SIB will be unique and repayment terms should be structured to best meet the needs of the project without sacrificing the stability of the SIB. Within this, repayment can be structured to accommodate a project's anticipated revenue stream. For example, the structure could defer payments during the preconstruction phases, postponing the repayment of principal and interest until after the project is anticipated to generate revenues.
A repayment account receives project repayments which may then be recycled for new projects - title 23 eligible projects. If a SIB credit enhancement tool has not been drawn upon after the terms of the project agreement have been exhausted, the amount of funds supporting the credit enhancement tool may be transferred into a repayment account.
A SIB may be leveraged in two ways: 1) by issuing debt on its own behalf, or 2) by guaranteeing or otherwise assuming liability for others' debts in an amount greater than the SIB's own cash. Whether leveraging is deemed advantageous by a particular state will depend on that state's assessment of overall loan demand, as well as the timing of needs. In particular, SIBs will differ in their need for and willingness to employ debt financing.
Although most states do not intend to initially have their SIB issue debt, many SIBs do anticipate that they will leverage through the issuance of debt as well as through the provision of guarantees and other credit enhancements in the future. This is consistent with developments in the Clean Water State Revolving Fund program, where, over time, states have added debt issuance to their programs.
The NHS Act requires that a SIB maintain "an investment grade rating on its debt issuances or has a sufficient level of bond or debt financing instrument insurance sufficient to maintain the viability of the bank.6 Investment grade means a rating of BBB or Baa or higher. This statutory requirement applies in instances where banks are leveraged either through issuing bonds or by guaranteeing others' debt in excess of the SIB's own liquid assets. Even if the NHS Act did not include this requirement, leveraged SIBs would probably have to obtain a rating anyway as a practical matter. This would certainly be true if the SIB were issuing debt and wished to ensure market acceptance of its issuances. It also would hold true if the SIB were guaranteeing outside debt, for the value of the SIB's guarantee to back project sponsors' debt will only be as strong as the creditworthiness of the SIB itself.
Program implementation finally reaches fruition when SIB assistance is provided to a project. The provisions of this assistance should include a binding contract between the project sponsor and the SIB in the form of a loan agreement or other documentation for the assistance being provided. This contract should outline the decisions made in negotiations with the project sponsor (e.g., interest rates and timing of repayments). The decisions made during the program development stages should set the guidelines for SIB managers in those negotiations. In this way, the success of the SIB program will be borne out through its dealings with its customers and its ability to structure agreements that build on project sponsor willingness to actively participate in the financing of transportation investments.
In addition to being an excellent financing tool for transportation projects, individually, a SIB also can complement other innovative approaches. These approaches include:
Leveraging tools (e.g., flexible match provisions, ISTEA Section 1044 Toll Investment Credits, 23 U.S.C. 129 loans, 23 U.S.C. 122 debt service reimbursement, and federal credit initiatives);
Related financing mechanisms (e.g., bond issuance, GANs);
Cash flow tools (e.g., partial conversion of advance construction); and
A host of innovative revenue-generating tools, including, for instance, improvement districts and impact fees, public-private partnerships, and shared resource initiatives.
Today, transportation providers face a difficult challenge: they must build more with less. To meet this challenge FHWA, FTA, states, and local governments must do business in a new way. Taking advantage of the new financing opportunities available through a SIB exemplifies exactly the type of creativity that is needed to meet this challenge.
The following provides additional resources on the SIB pilot program and innovative financing for transportation. All printed material is available at no charge from FHWA.
Innovative Finance Quarterly. A newsletter prepared quarterly by FHWA that includes updates on SIB activity.
State SIB Enabling Legislation. Sample state legislation that provides for the establishment of a SIB, at the AASHTO Center for Excellence in Project Finance.
US Department of Transportation Report to Congress. An evaluation of the US DOT SIB Pilot Program mandated by subsection 350(k) of the National Highway System Designation Act of 1995.
GAO Report. United States General Accounting Office. State Infrastructure Banks: A Mechanism to Expand Federal Transportation Financing. Report to Congressional Requesters. October 1996. Call GAO at (202) 512-6000 or fax (301) 258-4066.
FHWA Regional Finance Center Representatives. For further information please contact the representative for your state.
Eastern Finance Center
Mike Fazioli (518) 431-4224 x216. CT, MA, ME, NH, NJ, NY, RI, VT, Puerto Rico
Audrey Davis (410) 962-0077 x3042. DE, MD, PA, VA, WV
John Jeffers (404) 347-4071. AL, FL, GA, KY, MS, NC, SC, TN
Mike Rosenstiehl (708) 283-3515. IL, IN, MI, MN, OH, WI
Western Finance Center
Sue Kiser (916) 498-5009. AR, IA, KS, LA, MO, NB, NM, OK, TX
Jennifer Mayer (415) 744-2634. CO, MT, ND, SD, UT, WY
Russ Fosha (415) 744-2655. AZ, CA, HI, NV
Leslie Harris (503) 326-5953. AK, ID, OR, WA
2 According to Section 350 of the 1995 National Highway System Designation Act, loan repayments must begin no later than five years after the project has been completed, or in the case of a highway project, when the facility has opened to traffic (whichever is later). The term of the loan may extend to 30 years.
4 Federal-aid highway apportionments may be transferred to the SIB program from the following categories: Interstate Maintenance, National Highway System, Bridge Replacement and Rehabilitation, Interstate Reimbursement, Hold Harmless, 90% Pay Adjustment, Surface Transportation Program, Donor State Bonus, and Minimum Allocation.
5 The disbursement limitation for highway accounts is keyed to the standard nine-year outlay rate (e.g., 15, 53, 16, 5, 3, 3, 2, 2, and 1 percent) and the transit account is keyed to the standard five-year outlay rate (e.g., 15, 30, 30, 20, and 5 percent).