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An Evaluation of the U.S. Department of Transportation State Infrastructure Bank Pilot Program - SIB Report to Congress

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, virtually ensure 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 totaling $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 to conclude 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.

1. Introduction

A State Infrastructure Bank (SIB) is a State or multistate investment fund that offers loans and other types of financial assistance to surface transportation projects. SIBs operate much like regular commercial lending banks, in that they rely on an initial infusion of equity capital - sometimes referred to as capitalization funds or seed money - to provide financial assistance to their customers. SIBs' customers are typically the sponsors of highway, transit, or intermodal projects, and can either be public entities (such as local governments, special financing districts, and port authorities), private corporations, or public-private partnerships. These customers' repayments of principal and interest on loans, as well as fees paid for other forms of assistance (e.g., letters of credit) are used to replenish the fund. This secondary infusion of funds into the bank permits the SIB to become a self-sustaining financial institution.

Ten States are currently testing the real-world applicability and utility of the SIB concept through a pilot program created under Section 350 of the National Highway System (NHS) Designation Act of 1995. Appendix A to this report provides information on the precedents for the SIB pilot program, its legislative history, and key milestones toward implementation.

The NHS Designation Act did not provide additional Federal funds for the SIBs' capitalization. It instead permitted the pilot States to contribute up to 10 percent of apportioned Federal funds received in fiscal years 1996 and 1997 for most highway and transit programs. The NHS Designation Act also specified an array of eligible uses of funds deposited into the pilot SIBs. These uses fall into two broad categories: loans and credit enhancements. Appendix B to this report describes the many types of assistance that SIBs may offer to project sponsors.

Subsection 350(k) of the NHS Designation Act required that the Secretary of Transportation review the financial condition of each infrastructure bank and transmit a report to Congress on the resulting findings. This reporting requirement also asked for: (i) an evaluation of the pilot program, including commentary on its ability to increase public investment and attract non-Federal capital; and (ii) recommendations on whether the pilot program ought to be expanded or made part of the codified Federal-aid highway and transit programs. This report responds to the Subsection 350(k) requirement for Secretarial review of the pilot program.

The initial 10 States designated under the pilot program form the basis for the evaluation presented herein. However, readers should also be aware that the pilot program will soon be expanded to encompass additional State participants. This program expansion derives from the fiscal year 1997 DOT Appropriations Act (Public Law 104-205), which opened participation in the pilot program to other States, pending approval of their applications by the Secretary of Transportation. The Appropriations Act also provided $150 million in extra funding from the U.S. General Fund for distribution to participating States, again at the discretion of the Secretary. The initial and expanded pilot programs have attracted intense State interest, as detailed in Appendix A.

* * * * *

The balance of this report: (i) describes the ten States' actual and anticipated progress towards capitalization of their SIBs and provision of assistance to project sponsors; and (ii) discusses preliminary indications of the effectiveness of the SIB pilot program in increasing transportation investment levels, reducing project costs, and accelerating projects. The report's appendices provide further information on: (i) the legislative history of the pilot program and major implementation milestones; (ii) the types of financial assistance that SIBs can offer; (iii) sources of capitalization funds; (iv) the current status of the 10 initial pilot SIBs; and (v) several specific projects likely to receive SIB assistance.

2. Status of the Pilot SIBs

As the U.S. General Accounting Office stated in a recent report, the start-up time involved in establishing and funding the pilot SIBs places necessary limits on the amount of information available to report as of March 1997. [ See U.S. General Accounting Office, State Infrastructure Banks: A Mechanism to Expand Federal Transportation Financing , GAO/RCED-97-9, October 1996.] With the most fully developed banks just now starting to acquire seed capital and make decisions as to loan recipients, it appears that a gestation period of about 6 to 12 months represents the minimum time needed to organize, staff, and fund a SIB. As of March 1997, only three to five months have elapsed since most States signed cooperative agreements with USDOT for chartering their SIBs. As a result, modest financial activity has taken place within most of the banks.

The gradual pace of the banks' maturation is apparent both in the States' progress toward depositing equity capital into the SIBs, as well as in the rate at which the States are approving projects to receive loans and other assistance from the banks. From the standpoint of capitalization, 7 of the 10 pilot States had obligated Federal-aid highway funds by February 28, 1997. Of these seven States, five had actually deposited Federal funds, totaling $65 million, into their banks. An additional State (Oklahoma) had deposited State funds in its bank, bringing the total number of capitalized banks to six. As for amounts of assistance offered from the banks, States are just beginning to award loans to project sponsors. As of February 28, 1997, only one State (Ohio) had provided loan assistance ($20 million) to a project. (The Missouri SIB has since made a loan as well.)

The pace of implementation appears to be picking up. For example, capitalization activity was especially heavy during February 1997, with two additional States (Florida and Missouri) depositing Federal funds into their SIBs. On the assistance side, Ohio and at least four additional States anticipate providing further SIB assistance by the end of Federal fiscal year 1997. In short, with start-up activities nearly complete in several of the States, a fairly robust market for SIB assistance is starting to emerge.

SIB Capitalization: ACAP, Obligations, Outlays, and Deposits

In depicting current patterns of States' deposit of Federal-aid funding into their SIBs, four key elements of the capitalization process must be considered: (i) requested advance capitalization levels; (ii) obligations; (iii) Federal outlays; and (iv) actual bank deposits, which combine Federal outlays and non-Federal matching funds.

Exhibit 2.1 provides an overview of States' capitalization of their SIBs as of February 28, 1997. The following sub-sections provide a State-by-State breakdown of each step of the capitalization process along with explanatory material.

Exhibit 2.1: Capitalization of Ten Initial Pilot SIBs as of February 28, 1997
Requested ACAP: $353 million
FY 96: $330 million (max. $465 million) FY 97: $23 million (max. $625 million)
-
Obligations: $79 million (maximum permissible @ 2/28/97: $228 million)
-
Federal Outlays: $65 million
-
Bank Deposits: $106 million
Federal: $65 million Non-Federal: $41 million

Note: the maximum ACAP displayed for fiscal year 1997 is a cumulative number, representing 10 percent of eligible apportionments and allocations for fiscal year 1997, plus $135 million in permissible ACAP from fiscal year 1996 that was not designated that year.

Advance Capitalization

Advance capitalization (ACAP) is a new 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 choose to convert to a SIB capitalization grant. As specified by the Act, each pilot State's maximum potential ACAP amount is keyed to 10 percent of most categories of apportioned and allocated funding for fiscal years 1996 and 1997. [ For highway purposes, the eligible program categories are: Interstate Maintenance, National Highway System, Bridge, Surface Transportation Program, Minimum Allocation, Interstate Reimbursement, Hold Harmless, 90 Percent of Payments Adjustment, and Donor State Bonus. States are explicitly precluded from using apportionments for the Congestion Mitigation and Air Quality Improvement Program and allocations for special projects for the purpose of capitalizing their SIBs. For capitalization of transit accounts, States may draw on up to 10 percent of funds distributed for capital assistance under Section 3 (49 U.S.C. 5309), formula capital assistance for urban transit operators under Section 9 (49 U.S.C. 5307), and formula assistance for non-urban transit operators under Section 18 (49 U.S.C. 5311). Although the amount of ACAP that can be requested and designated in a given year is calculated on the basis of specific years' fund apportionments and allocations, the ACAP amount itself is not tied to any specific program funding category. As a result, the ACAP process imposes no restrictions on a State 's future funding decisions, since ACAP does not result in any kind of set-aside of funds. ACAP simply establishes a baseline from which to calculate the amount of Federal funding that may be deposited into the SIBs during succeeding years. ]

Exhibit 2.2 presents the amount of ACAP that each state requested in fiscal years 1996 and 1997 as of February 28, 1997. No ACAP amount had yet been declared for transit.

Exhibit 2.2: Advance Capitalization Activity as of February 28, 1997
  Fiscal Year 1996 Fiscal Year 1997
State Maximum ACAP Requested ACAP Maximum ACAP Requested ACAP
Arizona 20,228,526 16,297,410 27,946,377 22,917,000
California 123,969,453 50,000,000 157,293,839 -
Florida 60,489,955 30,750,000 84,072,345 -
Missouri 32,113,243 12,500,000 42,200,147 -
Ohio 51,989,563 51,989,563 62,676,827 -
Oklahoma 20,692,294 20,692,294 28,302,303 -
Oregon 19,807,925 19,807,294 21,554,805 -
South Carolina 20,446,173 12,900,000 31,246,743 -
Texas 82,243,562 82,243,562 125,510,218 -
Virginia 32,979,025 32,979,025 44,688,236 -
PROGRAM WIDE 464,959,719 330,159,148 625,491,840 22,917,000

Note: The maximum ACAP figures displayed above apply onto to highway apportionments and allocations.

Additional amounts are available for the capitalization of transit accounts.

Obligations

Obligations occur when a State decides to convert some portion of its requested ACAP amount into an actual bank deposit. It is only at the point of obligation that States must declare from which program category (e.g., Bridge Program, National Highway System) they are drawing SIB capitalization funds. States do not have to align the programs they tap for SIB capitalization with the specific types of projects to be assisted by the SIB. The fact that program funds lose their identity once deposited in a SIB is critical to the program's flexibility.

The amount of Federal funding available for deposit is governed by a statutory disbursement limitation which is imposed on the pilot program for budgetary purposes. Even though the average outlay rate for individual highway projects bears no resemblance to the types of outlays likely to be experienced by a SIB, the disbursement limitation for highway accounts is keyed to the standard 9-year outlay rate assumed for the rest of the highway program, as shown in Exhibit 2.3. [This outlay rate derives from the recognition that within the standard Federal-aid program, something considerably less than a dollar is actually expended for each dollar obligated for a project in any given year. The 9-year outlay rate shown in Exhibit 2.3 represents the expenditure assumptions used by the Office of Management and Budget when calculating the impact of obligations of Federal-aid highway funds on actual annual Federal expenditures.]

Exhibit 2.3: Outlay Rate for Federal-aid Highway Programs
Year 1 2 3 4 5 6 7 8 9
Percent available for obligation and outlay 15% 53% 16% 5% 3% 3% 2% 2% 1%

Exhibit 2.4, shown on the facing page, presents an annual view of States' obligations as compared to the maximum amount of ACAP available for obligation. The information is presented both by State and as a national aggregate. For the purposes of ensuring the States' compliance with the disbursement limitation shown in Exhibit 2.3, note that the disbursement limitation governs on a program wide basis, not for each State. Appendix C displays the Federal-aid programs from which these obligations have been drawn.

Exhibit 2.4: Obligation of Federal Funds for SIB Capitalization, as of February 28, 1997
    OBLIGATIONS Obs as percent of ACAP Max allowable,
    FY 1996 FY 1997 SUBTOTAL FY 1996 FY 1997 SUBTOTAL FY96+FY97
Arizona
FY 1996 ACAP: 16,297,410 2,444,611 8,637,627 11,082,238 15% 53% 68%  
FY 1997 ACAP: 22,917,000 - 2,716,231 2,716,231   12% 12%  
  Total obligations-> 2,444,611 11,353,858 13,798,469        
California
FY 1996 ACAP: 50,000,000 - - - - - -  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> - - -        
Florida
FY 1996 ACAP: 30,750,000 - 20,000,000 20,000,000 0% 65% 65%  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> - 20,000,000 20,000,000        
Missouri
FY 1996 ACAP: 12,500,000 - 1,875,000 1,875,000 0% 15% 15%  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> - 1,875,000 1,875,000        
Ohio
FY 1996 ACAP: 51,989,563 10,000,000 10,000,000 20,000,000 19% 19% 38%  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> 10,000,000 10,000,000 20,000,000        
Oklahoma
FY 1996 ACAP: 20,692,294 - - - - - -  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> - - -        
Oregon
FY 1996 ACAP: 19,807,925 2,971,189 6,001,811 8,973,000 15% 30% 45%  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> 2,971,189 6,001,811 8,973,000        
South Carolina
FY 1996 ACAP: 12,900,000 - 1,848,046 1,848,046 0% 14% 14%  
FY 1997 ACAP: - - - -        
  Total obligations-> - 1,848,046 1,848,046        
Texas
FY 1996 ACAP: 82,243,562 12,336,534 - 12,336,534 15% 0% 15%  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> 12,336,534 - 12,336,534        
Virginia
FY 1996 ACAP: 32,979,025 - - - - - -  
FY 1997 ACAP: - - - -   - -  
  Total obligations-> - - -        
PROGRAM WIDE
FY 1996 ACAP: 330,159,779 27,752,334 48,362,484 76,114,818 8% 15% 23% 68%
FY 1997 ACAP: 22,917,000 - 2,716,231 2,716,231   12% 12% 15%
  Total obligations-> 27,752,334 51,078,715 78,831,049        

Outlays

Although an obligation represents a commitment on the part of the State to capitalize its SIB, a SIB is not truly capitalized until a State actually deposits funds into one or more accounts. These cash deposits occur when the Federal government makes a cash outlay from the Federal Treasury in response to a State's submission of a voucher for reimbursement. Again, as of February 28, 1997, four of the seven States having made obligations for SIB capitalization had sought reimbursement from FHWA. The resulting total Federal outlay was $65 million.

Although most States refrain from making obligations and seeking reimbursement for SIB capitalization until they have projects that are ready to receive assistance, under some circumstances a State might anticipate such heavy future draws on SIB assistance that early capitalization is necessary. This is particularly true in cases where capitalizing a bank in a single future year would consume an unacceptably high portion of that year's obligational authority. If, for example, it is expected that demands on the SIB's equity capital will be $30 million, but that these demands will not materialize until fiscal year 1998, it may make sense for a State to begin capitalizing its bank at allowable levels several years earlier. In this example, early capitalization would permit a State to spread its obligations for SIB capitalization out over several years, thereby obviating the need to "charge" the full $30 million to fiscal year 1998 obligational authority.

Deposits

Exhibit 2.5 displays the amount of obligated funding that has actually been outlayed (expended) by the Federal government as reimbursement for vouchers submitted by the States for SIB capitalization grants. The exhibit also shows how much funding the States have provided as non-Federal match. Taken together, these figures provide a snapshot view of total deposits to the banks as of February 28, 1997. The figures are combined to capture outlay and matching activity for fiscal years 1996 and 1997.

The five States that have capitalized their SIBs with Federal funds have deposited a total of $103 million into their SIBs. In addition, one other State (Oklahoma) has already deposited State matching funds of $2.5 million into its SIB, bringing total SIB deposits to $106 million as of February 28, 1997.

Exhibit 2.5: Total SIB Deposits, as of February 28, 1997
    BANK DEPOSITS
  Obligations Combined FY96+FY97 Federal Outlays Combined FY96+FY97 Match (Non-Federal Contribution) Total Bank Deposits FY96+FY97
Arizona 13,798,469 13,798,469 2,370,334 16,168,803
California - - - -
Florida 20,000,000 20,000,000 5,000,000 25,000,000
Missouri 1,875,000 1,875,000 473,996 2,348,996
Ohio 20,000,000 20,000,000 30,000,000 50,000,000
Oklahoma - - 2,500,000 2,500,000
Oregon 8,973,000 8,973,000 1,028,000 10,001,000
South Carolina 1,848,046 - - -
Texas 12,336,534 - - -
Virginia - - - -
 
PROGRAM WIDE 78,831,049 64,646,469 41,372,330 106,018,799
Percent of total deposits   61% 39%  

Procedures for Capitalizing Transit Accounts

The process by which transit accounts are to be capitalized is very similar to the ACAP process by which States capitalize highway accounts. It is important to note, however, that the NHS Designation Act requires that initial Federal capitalization grants for highways and transit be kept wholly separate; no intermingling of these funds is permitted.

For transit capitalization grants, the SIB, as an eligible transit grant recipient, will be allowed to commit, obligate, and disburse (or draw) funding. When the funding is available, therefore, the SIB will first commit a designated funding level through a grant application. This will reserve 100 percent of the designated capitalization amount. Then, each year, the SIB will obligate the allowed percentage of the available funds, in accordance with the transit outlay rate displayed in Exhibit 2.6. [ In the fiscal year 1997 Appropriations Act, the Congress designated the highway outlay rate, shown in Exhibit 2.3, as the rate applicable to the extra $150 million provided from the U.S. General Fund for SIB capitalization.] At the same time, the SIB will draw down the allowed amount.

Exhibit 2.6: Outlay Rate for Federal Transit Programs
Year 1 2 3 4 5
Percent available for obligation and outlay 15% 30% 30% 20% 5%

Despite these similarities in the capitalization process, there is a significant difference in the way that highway and transit grants flow to their respective SIB accounts. Highway grants customarily flow to the State DOT, which then supports individual projects. Transit grants flow directly to transit providers, under both formula and discretionary programs. Thus, if the State DOT wishes to capitalize a transit account, it must go to each transit provider in turn to reserve the necessary funding. This process is likely to slow the rate of capitalization of SIB transit accounts in the near term.

Anticipated SIB-Assisted Projects through Fiscal Year 1997

The types of financial assistance that may be provided by SIBs can be divided into two broad categories: loans and credit enhancements. Appendix B provides details and commentary on the forms of SIB assistance permitted under the NHS Designation Act.

With only three States having capitalized their SIBs with Federal funding as of February 28, 1997, it is not surprising that as of the same date, only two loans had yet been made. The Ohio SIB made both loans, each for $10 million, to a highway and interchange project in Butler County. To date, this $20 million represents the only withdrawal from any SIB. [ Subsequent to March 1, 1997, but prior to publication of this report, the state of Missouri made a $1.18 million loan for a debt service reserve fund to support a $16.6 million revenue bond issue. The loan was made to a non-profit transportation corporation in Springfield.]

For the remaining nine States, specific plans as to which projects to assist, and how, remain a work in progress. Exhibit 2.7, shown on the facing page, displays the projects currently expected to receive SIB assistance by the close of Federal fiscal year 1997 (September 30, 1997). The projects listed in this summary table were named by State officials responsible for implementation of each of the 10 pilot SIBs.

Looking beyond the end of fiscal year 1997, the initial 10 pilot States have already identified a series of additional projects that are likely to receive SIB assistance. Exhibit 2.8, shown on the two following pages, presents a preliminary list of 32 projects that State officials currently expect to receive SIB assistance by the end of fiscal year 1998. Appendix D provides narrative describing the current status of each of the initial ten pilot States' SIB and outlining State officials' latest thinking on the forms and levels of assistance that the SIBs are likely to offer.

Exhibit 2.7: Anticipated Levels of SIB Assistance through September 30, 1997
State Number of Projects Combined Value of Projects ($millions) Form(s) of Assistance Combined Amount of Assistance ($millions)
Arizona - - - -
California - - - -
Florida 2 278 Loans for interest cost subsidy 322
Missouri 4 197 Preconstruction loans converted to loans for debt service reserve or permanent external financing 652,3
Ohio 7 355 Preconstruction loans and permanent loans 1463
Oklahoma 2 92 Loans 10
Oregon 7 18 Construction and permanent loans 7
South Carolina - - - -
Texas - - - -
Virginia - - - -
TOTAL 22 940   260

Source: U.S. Federal Highway Administration and relevant State DOTs.

  1. For States showing blanks, loans or other assistance to be provided during fiscal year 1997 are still undefined.

  2. Because these loans probably will be offered over a span of years, rather than as a single lump sum, only a fraction of the displayed amount will actually be expended from the respective SIBs by the end of fiscal year 1997.

  3. In cases where one loan will be paid off and subsequently converted into a different type of loan (e.g., to provide a debt service reserve), the cumulative value of both loans is reflected.

  4. Project values shown for two projects in Oregon reflect only preconstruction costs. The full value of the projects is reflected in Exhibit 2.8.

  5. Subsequent to this report's cut-off date (February 28, 1997), officials from Texas and Virginia also indicated plans to make loans by the end of fiscal year 1997. Specifics on these planned loans are currently being defined.

Exhibit 2.8: Anticipated Projects for SIB Assistance through Fiscal Year 1998
State Project Name Type Cost Amt of Assistance Type of Assistance Bonds Repayment Source Sponsor(s) Est. Start Date
Arizona candidate projects are still being determined.                
California candidate projects are still being determined.              
Florida SR 80 Interchange H 27,100 11,300 loan (interest cost subsidy) 30,000 tolls & state transp. tax revs. FDOT turnpike district Aug-03
Seminole II Expressway H 250,600 20,500 loan (interest cost subsidy) 55,000 tolls & state transp. tax revs. FDOT turnpike district Jun-03
Missouri Springfield Transportation Corporation H 33,000 3,035 debt service reserve loan 33,000 tax increment financing and state highway funds for SIB loan; local sales tax revs. for debt svc. non-profit transportation corporation Apr-01
Gateway Multimodal Center MM 31,000 18,000 preconstruction loan & permanent loan tbd local sales tax revs. for SIB loan; parking & other project revs. for debt svc. city Sep-01
Cape Gireardeau Bridge H 96,000 28,000 loan 0 state highway tax revs. Missouri DOT May-01
Highway 179 H 31,000 6,000 preconstruction loan & debt service reserve loan tbd tax increment financing and state highway funds for SIB loan; local sales tax revs. for debt svc. non-profit transportation corporation Jul-01
Fulton Interchange H 6,000 1,200 preconstruction loan & debt service reserve loan 0 tax increment financing and state highway funds for SIB loan; local sales tax revs. for debt svc. non-profit transportation corporation Oct-01
Ohio Butler Regional Highway H 120,000 20,000 construction period loan 120,000 tolls, via rev. bond takeout county transp. improvement district Jun-01
Wilmington Bypass H 20,000 6,000 construction period & permanent loan 0 various city Oct-01
SR 250 Widening (Erie Cty) H 19,500 4,300 construction period & permanent loan tbd lodging fees county ??-99
Mink Road/SR16 Improvements H 28,300 16,500 loan 0 property tax (tax increment financing) county transp. improvement district ??-02
Great Lakes Science Center Parking Facility MM 7,800 7,800 construction period & permanent loan 0 parking & other fees, via permanent financing takeout city Jun-01
Muskingum Intermodal Facility MM 3,500 3,500 loan 0 lift (cargo) fees & county tax revs. county transp. improvement district ??-98
I-71 Improvements H 41,000 15,000 permanent loan tbd vehicle license fees county ??-98
Emerald Corp. Park Access Road H 2,500 2,500 permanent loan 0 office park assessment fees city Apr-01
Cleveland Business Dev. Park Access Road H 5,000 5,000 permanent loan 0 business assessments and rental car charges city Apr-01
Cleveland Passenger Rail Bridge Rehab. T 25,000 7,000 permanent loan 0 county sales tax revs. transit authority Mar-01
Spring-Sandusky Interchange H 190,000 100,000 permanent loan of proceeds from SIB-issued revenue bonds 100,000 future federal-aid apportionments Ohio DOT Jul-01
Cleveland Port Authority MM 4,300 4,300 permanent loan tbd dock fees and storage rental fees port authority Jun-01
Oklahoma At-Grade Highway- Rail Crossings MM 60,000 6,000 loan 0 sales tax revs. multiple local governments Jul-01
Creek Turnpike Extension H 32,000 4,000 loan 0 tolls OK turnpike authority Oct-01
Oregon Cedar Hill Blvd Ext. H 1,032 1,032 loan 0 property tax (tax increment financing) county ??-97
Van Pool Lease T 10,000 500 loan (subsidization of commercial bank loans) 0 private lease payments private borrowers ??-97
Newberg-Dundee Tollway H 105,000 800 preconstruction loan 0 state highway revs. Oregon DOT ??-97
Tualatin-Sherwood Tollway H 92,000 300 preconstruction loan 0 state highway revs. Oregon DOT ??-97
Marion County Road Projects H 3,100 3,100 loan 0 highway and public works funds county ??-97
Signal Preemption H 781 781 loan 0 payroll tax receipts transit district ??-97
Hood River Maintenance Facility H 208 169 loan 0 city water & sewer tax revs. county tbd
Dixie Mountain Road H 1,321 721 loan 0 property tax (tax increment financing) & state/local road funds county ??-97
South Carolina Crawford Road Improvement H 550 300 loan 0 HUD community development block grant city tbd
Texas Laredo Bridge No. 4 H 53,000 11,000 loan tbd tbd city ??-97
Virginia I-895 Connector H 297,000 15,000 loan 0 tbd tbd ??-97
TOTALS 32 projects H: 25 MM: 5 T: 2 1,597,592 323,638   338,000      

Additional projects may receive SIB assistance by the end of fiscal year 1997, but in some cases, their financing plans are not yet sufficiently developed to assure the utility of SIB assistance. In other instances, multiple projects may be vying for a limited sum of SIB capital, and State officials are understandably reluctant to offer opinions as to which projects are considered most likely to obtain SIB assistance from the limited amount of equity capital currently available for distribution. As a result, the preceding and following tables are intentionally conservative in their presentation of anticipated projects, and may thus understate the full extent to which States will provide loans or other assistance to project sponsors by the end of the current Federal fiscal year. At the same time, State officials caution that unanticipated delays in certain prerequisites to the projects' advancement (e.g., environmental clearances) may postpone some of these loans.

Effects of SIB Financial Assistance

SIBs' progress toward promoting more efficient use of public resources can be measured in terms of three main performance indicators. These measures center on the extent to which the presence of SIB financial assistance: (i) attracts additional investment by serving as an enabler of projects that otherwise may not have been financeable; (ii) reduces cost to project sponsors and to users of the facilities or equipment that are financed in part from a SIB; and (iii) brings beneficial projects to completion earlier than would have been the case with traditional financing. A definitive assessment of the SIB pilot program's outcomes would be premature at this point, as this type of evaluation is usually done by looking at past or current projects for which financing plans are complete. However, as will be seen later in this section, the pilot program's early results are promising.

Although an assessment of the effects of SIB assistance must be limited to a prospective view, some general observations can be drawn by classifying SIB projects in accordance with the role, or function, that SIB assistance is expected to play. These functions are evident in four areas:

  • serve as an alternative to pay-as-you-go financing. SIBs can accelerate projects and attract new sources of funds by providing low-cost flexible financing that fills a gap in the capital needed to get a project underway.

  • replace higher interest debt. Because SIBs can offer low-interest or interest-free loans, SIB capital can be used to partially or fully replace tax-exempt debt that would carry a higher interest cost to the project sponsor.

  • improve sponsors' access to external debt financing. A SIB can help smaller jurisdictions or infrequent borrowers obtain debt financing by pooling their bond issues, thus spreading the risk and reducing the cost of capital. SIBs can also provide subordinated loans or credit enhancements that help a project attain an investment grade rating for debt it issues on its own behalf.

  • reduce interest rate for external debt financing. SIBs can target their financial assistance to debt-financed projects in a way that improves the project's credit rating and thus reduces the overall cost of capital. This can be done by covering a specific element of risk (e.g., shortfalls in toll receipts), or by financing the early, high-risk stage of a project.

By serving these functions, SIB assistance can produce benefits in three ways: by (i) attracting additional investment, (ii) reducing project cost, and (iii) accelerating projects.

Attract Additional Investment

SIBs can attract additional investment to Federal-aid eligible projects by filling a funding gap that derives from temporary cash shortfalls or an inability to access the capital markets. The effect of this role can be measured by comparing the extent to which Federal capital is being matched by other sources of funds, including State, local, and private sector contributions, as well as proceeds from bond issues. An expansion of the level of infrastructure investment that results from a given contribution of public resources can be termed "leverage," under a broad definition of the term. The concept of leverage is more fully explored in Appendix B.

SIBs appear to be attracting a substantial amount of additional investment. Drawing from the anticipated 32-project list appearing in Exhibit 2.8, every dollar of SIB assistance (loan or otherwise) is expected to be reflected in $4.94 of project investment, from private and non-Federal public sources. The resulting multiplier ratio of almost 5:1 clearly exceeds the typical 1.25 ratio associated with 80/20 Federal-aid projects. Two main reasons for this strong multiplier effect are that SIB assistance can: (i) broaden the financing choices available to project sponsors, and (ii) create an incentive for project sponsors to identify new revenue streams that are linked to the benefits that the projects confer.

A second way to look at SIBs' role in promoting increased transportation investment is to single out the fractional amount of total investment that was directly induced by the provision of SIB assistance. This perspective focuses attention on the amount of new capital, and therefore new investment, that is directly attributable to the pilot program. Until more transactions have taken place, this type of evaluation will be wholly speculative. However, certain individual projects are already indicating how SIBs can induce additional investment.

The interest cost subsidies to be provided by the Florida SIB, which are made available to turnpike improvements that are financed by revenue bonds, provide a particularly compelling example. The SIB interest subsidies will help two Florida turnpike projects to satisfy statutory financial feasibility criteria. For a loan of approximately $30 million, the Florida SIB will enable these two projects, having a value of $278 million, to proceed. Many of the projects anticipated to be funded by SIBs appear to be using the SIB financial assistance to climb beyond a real financial constraint.

Reduce Project Costs

SIBs can reduce project costs by reducing the cost of borrowing. In most cases, the savings that can be attributed to a SIB derive from reductions in interest costs. These savings are initially realized by project sponsors (e.g., local governments), and ultimately, by individuals who pay the taxes or fees that support the investment.

SIBs will provide below-market interest loans, and other favorable terms (e.g., minimal fees for loan origination), to the benefit of project sponsors. The project examples detailed in Appendix E illustrate how a SIB can reduce interest cost, either in absolute terms (as in the Oregon and Missouri examples), or on a discounted cash-flow basis (as in the Florida example).

Although the full extent of SIBs' effectiveness in reducing project cost is yet to be seen, the experience with State environmental revolving funds (SRFs) lends credence to this expectation. In its 1995 survey of SRFs, the Council of Infrastructure Financing Authorities found that interest rates for SRF loans were, on average, 300 basis points below the 20-year General Obligation Bond Index (3.15 percent for SRFs, versus 6.26 percent for general obligation bonds). For a $25 million project, this interest rate differential translates to a savings of $525,000 in annual debt service costs, accruing to a savings of $10.5 million over the term of the loan.

Accelerate Project Delivery

SIBs can accelerate the implementation of a project by providing financial assistance that is otherwise unavailable in the short-term. For 10 of the 32 projects displayed in Exhibit 2.8, State officials provided estimates indicating that on average, those 10 projects would move to construction four years sooner than would have been the case without SIB assistance. (Project acceleration could not be estimated for the remaining 22 projects.)

Several particularly good examples of project acceleration appear in the SIB project list. The two toll road projects in Oregon, for example, are relying on the SIB to fund preconstruction costs, which will eventually enable construction to occur earlier than planned. And in Ohio, two loans, totaling $20 million, are enabling early construction activities to occur while permanent financing is still being secured.

Project acceleration provides benefit primarily to the users of a transportation facility, by bringing the facility's mobility and related benefits to those users sooner. Acceleration may also help reduce a project's cost. This may be accomplished by the avoidance of escalation in unit costs (e.g., by taking advantage of a short-term surplus in the availability of labor and materials), or by avoiding conditions which tend to complicate right-of-way acquisition or construction staging. In several respects, project acceleration provides one of the most compelling reasons, from a project sponsor's perspective, to turn to SIB assistance. While grant funding, sometimes augmented through other innovative financing techniques, is expected to remain the cornerstone of the Federal-aid highway and transit programs, SIBs offer States the opportunity to offer a broader menu of financing choices to those project sponsors that wish to construct an improvement now, with a loan or other credit-enhanced external debt financing, rather than wait several years for sufficient grant funding to come available.

* * * * *

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 dedicated revenue streams, but need flexible financial assistance to clear hurdles that would otherwise obstruct or delay their implementation.

SIBs can attain this effect by providing low-interest loans, providing credit enhancements for third party debt, and by pooling small borrowers together. For now, project sponsors' demand for SIB assistance is strongest in the first two of these three areas, as evidenced by the fact that most planned assistance consists of: (i) low-interest loans to local agencies seeking to close gaps in financing for local projects; and (ii) loans to larger entities (e.g., turnpike authorities), in which the loan behaves similarly to a credit enhancement by helping the sponsor overcome a specific barrier to its ability to obtain external debt financing.

The growing demand for SIB assistance, combined with SIBs' ability to stretch the amount of investment supported by Federal capital grants, suggest that the SIB program be included as a standard element of the existing Federal-aid highway and transit programs, with a specific source of funding identified for provision of ongoing capitalization grants.

Appendix A: Legislative History and Milestones

Until recently, the Federal-aid highway and Federal transit programs were guided solely by the principle of grant reimbursement, whereby Federal funds could only be used to reimburse direct State or local expenditures on individual eligible projects. [ Federal-aid reimbursement of State-initiated loans has been permitted since 1991 under Section 129 of Title 23 of the U.S. Code. However, even this use of Federal assistance still adhered to the principle of Federal moneys reimbursing a project-specific expenditure, rather than providing up-front equity to help capitalize a fund that could offer assistance to multiple projects. SIBs, therefore, offer State DOTs and other project sponsors unprecedented flexibility to choose among alternative strategies for solving specific transportation financing dilemmas.] The SIB pilot program departs from this principle by permitting States to use Federal-aid assistance to capitalize a self-sustaining fund offering loans and other forms of non-grant financial assistance. Because loans are ultimately repaid (and because most other forms of assistance do not necessitate a direct outlay from the fund), a fixed sum of Federal-aid funding deposited into a SIB can assist more projects over a longer period of time than would be the case if that same funding were used as a one-time grant.

The idea of applying the revolving loan fund concept to Federal transportation programs was first introduced over a decade ago. In 1985, a Congressionally appointed panel began exploring the concept of direct Federal capitalization of State-level infrastructure funds. The panel developed a recommendation calling for creation of "an Infrastructure Trust Fund to capitalize infrastructure state banks and revolving loan funds." [ United States Senate, Report of the Private Sector Advisory Panel on Infrastructure Financing to the Committee on the Budget . S. Prt. 100-40, August 1987.] The recommendation also stipulated that to assure the revolving nature of the State funds or banks, local governments would be required to repay at least the principal amount of all loans. The panel concluded that "[p]roperly structured, the state banks or funds would replenish themselves, serving as continuing sources of investment capital." Thus, while the SIB pilot program was only recently enabled, via the NHS Designation Act, its conceptual roots date back for at least a decade, as explained in the following section.

Conceptual Roots

Three key institutional precedents for State-level assistance to major infrastructure investment heavily influenced the design of the SIB pilot program. They are: State revolving funds for wastewater treatment facilities, State-level transportation revolving funds, and State bond banks.

State revolving loan funds (SRFs), authorized in the 1980s to finance wastewater treatment facilities, serve as the SIBs' most prominent conceptual antecedent. SRFs were established under the 1987 Amendments to the Clean Water Act. Although the SRF model is an important precedent for SIBs, the genesis of the SRF program differed markedly from the SIB pilot program in that it wholly replaced an existing grant program with capitalization of a loan program. The transportation SIBs, in contrast, are established as a supplement to, not a replacement of, the existing Federal-aid highway and Federal transit grant programs. The fact that SIBs are and will remain a complement to ongoing grant funding marks the most crucial difference between the SRF and SIB programs.

SRFs do not provide a blueprint for implementing SIBs for other reasons, as well. First, wastewater facilities tend to be locally owned and functionally similar. In contrast, the transportation projects eligible for SIB assistance span a broad range of ownership and purposes, including highways, transit, and intermodal facilities. Second, wastewater facilities have a history of being financed with revenue bonds that are secured by user fees. While user-financed transportation facilities exist, transportation projects are more commonly financed on a pay-as-you-go basis, with revenues derived from a variety of taxes. And third, the market for wastewater facilities is greatly influenced by regulations which both stipulate capital investment levels to conform to environmental standards and confer a monopoly to the provider. The demand for and supply of transportation facilities is more market-dependent.

A consequence of these differences is that the SIB program must be extremely flexible, so that it can be tailored to individual needs that vary both across and within the States. Accordingly, the legislative and administrative course charted for SIBs is designed: (i) to accommodate a wider array of project types, (ii) to offer assistance to a more varied set of project sponsors, and (iii) potentially to offer a broader array of financial services.

The Federally capitalized SRFs for wastewater treatment facilities represent the most prominent institutional precedent for SIBs, but other important precedents exist as well. For example, as of 1995, over a dozen States had established State-level transportation revolving funds. These funds provide loans for a wide range of transportation activities, ranging from major toll road projects to relatively small equipment purchases. For example, Florida has operated a Toll Facilities Revolving Trust Fund since 1986, to offer loans to municipal governments who are contributing toward locally-significant segments of the State's turnpike system. The Utah Van Pool Revolving Loan Fund offers loans to both public and private entities that wish to purchase or refinance vehicles used for vanpooling. In Iowa, the RISE (Revitalize Iowa's Strong Economy) program offers grants and loans to transportation and other infrastructure projects that offer the potential to stimulate economic growth by attracting or retaining development. The California Transit Finance Corporation permits transit operators to combine what would otherwise be individual financial transactions for equipment leases, or vehicle purchases, to achieve cost savings. The Corporation's "pooling" of small transactions can permit individual transit operators to realize significant economies of scale for ordinary procurements. And in Ohio, three revolving funds are being capitalized with operating revenues from an intermodal facility. As the funds' seed capital grows, they will be used to make grants or loans to intermodal projects that may not fit under the traditional funding categories established by the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA).

State bond banks form another key precedent for SIBs. A bond bank is typically a State-level agency that provides local governments with assistance in borrowing money, and uses debt issuance as its primary tool in meeting this goal. Bond banks give local governments cost-effective access to the tax-exempt bond market by combining several small issues into one large issue. Another common feature is State credit support of the bond bank through provision of reserve funds and other similar mechanisms. As with the California Transit Finance Corporation, pooling of the bond issues allows participants economies of scale in covering issuance costs. Also, interest rates are lower for all pool borrowers as the default risk is diversified among several issuers. These benefits are especially valuable to smaller local governments, infrequent issuers, and those which have a low or poor credit rating or small borrowing needs. [ USDOT, State Infrastructure Banks: A Primer, November 1995.] When capitalized with public funds, as is the case with SIBs, a bond bank can be a very effective tool for assisting local infrastructure projects. In Oregon, for example, a State bond bank has issued $52 million in bonds, leveraged another $52 million in local funds, and made $30 million in grants. Lottery and loan dollars are used as collateral or a back-stop in case of default. The Oregon Bond Bank has secured an A rating from Moody's and Fitch rating services. [ USDOT, State Infrastructure Bank Conference, November 1996.]

The NHS Designation Act

On the basis of the States' experiences with wastewater treatment SRFs and State-level transportation revolving funds, transportation experts and policy makers vetted the SIB concept for almost a decade before it converted into a specific legislative proposal. Federal capitalization of SIBs was first proposed under USDOT's fiscal year 1996 budget request, which called for annual capitalization funds of $2 billion per year to be distributed by formula to all 50 States. While the proposal did not win Congressional approval as part of the fiscal year 1996 Appropriations Act, it did, however, place concrete language on the table for further consideration.

Throughout 1995, the SIB proposal was reshaped and refined in response to concerns about its magnitude and scope. By the end of the year, the Congress had passed the landmark National Highway System (NHS) Designation Act of 1995 (Public Law 104-59, passed November 28, 1995). In addition to designating the NHS, the legislation also included an array of new financial provisions to expand States' opportunities to leverage Federal-aid funding and to accelerate project development. Probably the most ambitious of these financial provisions was embodied in Section 350 of the Act, which established the SIB Pilot Program under which the Secretary of Transportation could approve up to ten States' creation of SIBs. The legislation did not provide additional Federal funding for the SIBs' capitalization, but instead permitted each of the selected States to contribute to the SIB up to 10 percent of apportioned Federal funding received in fiscal years 1996 and 1997 for most highway and transit programs.

The NHS Designation Act also specified an array of eligible uses of the pilot SIBs. These uses fall into two broad categories: loans and credit enhancement. Chapter 2 of this report provides greater detail on the mechanics of the capitalization process. Appendix B provides detail on the eligible uses of SIB assistance.

Major Milestones in SIB Implementation

Since the NHS Designation Act was adopted in late November 1995, USDOT has accomplished three major steps toward full implementation of the SIB Pilot Program:

  • issuing a Federal Register notice, specifying how States were to apply to participate in the pilot program (December 1995)

  • receiving applications from 15 States (through March 1996), and selecting the ten pilot States, (completed in June 1996); and

  • establishing cooperative agreements with nine of the ten pilot States (since August 1996).

Since October 1996, USDOT has also been accepting State applications under an expansion of the pilot program that was provided for in the DOT appropriations act for fiscal year 1997. Exhibit A.1 illustrates selected milestones that have occurred since November 1995.

Exhibit A.1: Chronology of the SIB Pilot Program, November 1995 through January 1997

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December 1995: Federal Register Notice

While the NHS Designation Act established the broad parameters of the pilot program, a December 28, 1995, Federal Register notice provided further details on the process for designating the ten pilot States, qualifications for participation, and procedures for application. USDOT adopted a flexible approach to the pilot program, noting in the Federal Register that the agency was:

receptive to non-traditional as well as traditional approaches to establishing a SIB and defining the types of assistance that might be offered. Subject to the limitations of the [NHS Designation] Act, USDOT has no preconceived concept of how SIBs should be implemented and seeks to work in cooperation with the States to define the implementation program.

This "bottom-up" approach, in which States themselves identify and experiment with various innovative financing strategies, has been a hallmark of USDOT's innovative finance initiative ever since it was first launched in 1994.

While encouraging the States to explore the SIB models that would work best for their specific needs, USDOT also took steps to ensure that the application process requested sufficient information to permit the Department to make an informed decision among the applicants. The Federal Register notice, and subsequent application guidelines, specified the essential elements of a complete SIB application, including, among others:

  • the types of assistance to be offered;

  • projects proposed for SIB assistance;

  • status of enabling legislation; and

  • how the SIB would be capitalized.

March - June 1996: application and selection of the sib pilot states

By March 1996, 15 States had submitted applications to the Department. The applications were evaluated in accordance with criteria set forth in the Federal Register notice and subsequent guidance. On April 4, 1996, eight States were named: Arizona, Florida, Ohio, Oklahoma, Oregon, South Carolina, Texas, and Virginia. On June 21, 1996, the Department announced the two final designations of California and Missouri. Exhibit A.2 displays the complete pool of applicants and designees for the 10 slots authorized in the NHS Designation Act.

Exhibit A.2: Initial Round of Applicants and Designees

 

July - December 1996: cooperative agreements and other start-up activities

After naming the pilot States, the Department set to work on drafting cooperative agreements with each of the designated States. Nine of the 10 agreements were signed between August and December of 1996; as of March 1997, the cooperative agreement between the USDOT and the California Department of Transportation (Caltrans) was still being finalized. The cooperative agreements are required by the authorizing legislation and spell out the general rules governing the administration and management of the funds within each bank.

subsequent expansion of the pilot program

The 1997 DOT Appropriations Act (Public Law 104-205) opened participation in the pilot program to all States, pending the Secretary of Transportation's approval of their applications. Twenty-nine States submitted applications in response to the program expansion, which was advertised in the Federal Register in November 1996. These 29 States submitted a total of 26 applications, comprised of 24 applications for single-State designation and 2 applications proposing multi-State compacts. [ One State, Tennessee, submitted applications both for a single-State designation and as part of a multi-State compact.] Exhibit A.3 illustrates the pool of applicants for the second round of designations. It is expected that the Secretary will make any further designations in the summer of 1997.

Exhibit A.3: Applicants for Second Round Designations

 

The fiscal year 1997 Appropriations Act also provided $150 million in extra funding from the U.S. General Fund for distribution to participating states, again at the discretion of the Secretary of Transportation. All designees, including the initial ten participants and any subsequent designees, would be eligible to receive a portion of these funds. Distribution of the $150 million cannot be made before April 1, 1997, and will be governed by the same disbursement rate limitation that was required by the NHS Designation Act, as described in Chapter 2 of this report. Thus, $22.5 million (15 percent) of the new $150 million will actually be available for deposit into the SIBs during fiscal year 1997. An additional 53 percent of the $150 million, or $79.5 million, will be available for deposit in the SIBs during fiscal year 1998, and the balance over the following seven years.

Appendix B: Perspectives on Forms of SIB Assistance

This appendix considers the means by which SIBs can provide assistance to project sponsors. It describes the forms of assistance (e.g., loans, credit enhancements) that SIBs may offer and the mechanisms by which SIBs' equity may be leveraged.

Eligible Forms of Assistance

The types of financial assistance that may be provided by SIBs can be divided into two broad categories: loans and credit enhancements. The NHS Designation Act gives SIBs a high degree of flexibility in providing loans and credit enhancements to project sponsors, as explained below. This flexibility should enable SIBs to tailor their programs to individual projects, subject only to the practical constraints on cash availability and leverage.

Loans

A loan is a form of financial assistance made available by the SIB to a project sponsor, with the provision that the loan principal be repaid, subject to terms and conditions (e.g., interest rate, loan term) agreed to at the time the loan is made. Loans are repaid from revenues available to the project sponsor. Most commonly, the revenue stream used to repay the loan consists of tax revenues or project-related user charges (e.g., tolls), but could also include Federal funds made available to the project sponsor.

The NHS Designation Act established three distinguishing features of SIB loans that should be attractive to project sponsors:

Low interest rates. The Act specifies that any SIB loans bear interest at or below market interest rates. Within this limitation, each SIB is free to structure interest rates in any way it chooses.

Flexible repayment terms. The Act allows the repayment of SIB loans to be deferred up to 5 years after the project has been completed or opened. Further, the term of the loan can extend to 30 years following the date of the first payment. These features allow a loan to be tailored to the income stream available to the project sponsor.

Subordination to other forms of debt. If a project sponsor is also using other sources of borrowed funds to finance a portion of the projects, a SIB loan may be made on a junior-lien basis. A subordinated loan has a second claim on the net revenues used to secure the debt (i.e., the senior lien has a first claim). Use of a subordinated loan provides the project sponsor two benefits: (i) a lower overall cost of capital, which is a product of a lower interest rate on the senior lien debt (since the senior lender's risk is reduced) and the potentially below-market interest rate of the SIB loan; and (ii) the ability to leverage more debt from the project's income stream, since the overall debt service coverage ratio can be minimized.

Direct loans provide the simplest form of assistance that a SIB can offer. These loans typically fill a gap in a project's financial plan, and can thus permit a project to move forward sooner than would otherwise have been the case. Use of a loan can also encourage identification of a new source of revenue with which the loan is ultimately repaid.

In addition to filling a gap in financing, SIB loans may offer special benefits that are specific to a SIB's ability to absorb risks that other commercial lenders may not be willing or able to absorb. For example, a SIB can enhance the feasibility of revenue-generating projects by making loans during the earlier, and thus riskier, phases of project development. This could improve and/or expedite the project sponsor's access to permanent financing than would otherwise be the case. As an example, the Gateway Multimodal Center in Missouri, described in Appendix E, will be using this approach.

A SIB loan can also provide an interest rate subsidy, either directly or in combination with another form of debt. In their simplest form, interest rate subsidies are achieved through the provision of below-market interest rates. Most of the SIB projects identified to date are anticipated to receive a concessionary rate on their loans. SIB loans can also be used in combination with other loans to lower the overall cost of capital for a project. In Oregon, for example, SIB loans may be used in combination with bank loans to fund the purchase of vans, thus achieving a lower blended cost of capital than would otherwise have been the case. In Florida, the Turnpike Authority is using a SIB loan to reduce the present value of debt service payments on a $30 million revenue bond, and to create a more advantageous timing of debt repayment. Additional details on the Oregon and Florida projects are also provided in Appendix E.

Another eligible use of SIB capital, funding lease-purchase agreements, is functionally similar to the SIB loans described above. Capital leases are a form of debt financing used widely within the transit industry for the acquisition of rolling stock (e.g., buses and rail cars). A lease typically provides for a lessee's use of rolling stock owned by the lessor, with the term of the lease payments approximating the useful life of the equipment (e.g., 12 years for buses). A SIB may finance such equipment leases from its own capital, or may issue bonds that are secured by the lease payments. In either case, the infrastructure bank may provide economic benefits to transit systems by: (i) providing interest rate subsidies on lease agreements that would lower the cost of the lease for the transit system; or (ii) providing for the pooled acquisition of rolling stock, thereby achieving lower costs than could be achieved by smaller, independent purchases.

In summary, SIB loans provide a flexible means to provide financial assistance to projects, either as a major or supplemental source of funds. In some cases, a SIB loan's flexible terms, including its potentially subordinate status when combined with other debt, can improve a project sponsor's ability to obtain other external financing and reduce the overall cost of capital. While these roles do not, strictly speaking, constitute credit enhancement as discussed in the next section, they do demonstrate loans' capacity to serve similar ends through alternative means.

Credit Enhancements

When a project sponsor borrows funds from investors (e.g., bond purchasers or another lender), a SIB can offer a credit enhancement by guaranteeing, either entirely or partially, the sponsor's repayment of principal and/or interest to its investors. Credit enhancements thus improve the credit worthiness of a debt issue by reducing the risk borne by investors. As a result, a project sponsor may either gain access to external financing that it could not have obtained otherwise, or may be able to obtain that financing at a lower rate of interest.

Credit enhancements are theoretically a more effective use of SIB capital than loans, in that they hold much more potential to "multiply" the SIB's capital by assisting a larger dollar volume of projects. Whereas loans require a SIB to make outlays at the origination date of a loan, most forms of credit enhancement require a SIB to make outlays only if triggered by an unfavorable event (e.g., a loan or bond issue that is guaranteed by the SIB is in default). The dollar value of projects that can be supported from credit enhancements is generally a function of a SIB's capital, the expected default rate of its project portfolio, and the coverage that is required on the expected value of payouts. The ability of SIBs to realize this potential, however, will be determined by market demand for SIB credit enhancements, and by the capital markets' perception of the strength of these credit enhancements.

The NHS Designation Act refers to credit enhancements in broad terms. Several types of credit enhancement are commonly used in municipal finance, including capital reserves, lines of credit, and debt services guarantees (alternatively provided as letters of credit and bond insurance). A SIB may provide these forms of credit enhancement to project sponsors at a lower cost than would be the case if arranged through a private financial institution, or may be willing to provide credit enhancement when other sources would not.

Capital reserves. Capital reserves are funds set aside for future contingencies that could affect the repayment of debt service on revenue bonds. One definition of this type of assistance would be reserves that are kept on deposit to protect against default on debt service payments. Alternatively, capital reserves can take the form of special funds used to finance future repairs that are material to a project's revenue stream (e.g., resurfacing a toll road).

Under the simplest approach to SIB provision of capital reserves, the SIB would lend a project sponsor the funds needed to establish a capital reserve. Given a SIB's ability to offer flexible terms and subsidized interest rates to the project sponsor, the sponsor might find it more attractive to acquire the capital reserve from a SIB rather than relying on a larger bond issuance. Alternatively, the cash associated with the reserve might not actually change hands via a loan, but instead remain within the SIB as a contingency fund.

An important distinction when considering capital reserves is whether they are fully-funded or fractional. When offering fully-funded capital reserves, a SIB limits its capital reserve commitments to its cash on hand; thus, if all entities obtaining capital reserves needed to access those reserves to meet debt service payments or other commitments, the SIB would have cash available to satisfy all calls on the reserve funds. If a SIB opts for this approach, the SIB does not need to obtain a credit rating, since there is no risk that commitments will exceed available resources. A fractional reserve, in contrast, amounts to a leveraging strategy wherein the bank provides a number of projects with capital reserves in an amount that exceeds its cash on hand. The fractional amount of funding set aside in the bank is determined in accordance with the expected value of anticipated draws on the various projects' reserves. In this instance, a SIB would need to obtain a credit rating to ensure that its provision of a reserve would convey a benefit (i.e., an enhancement) to the borrower.

Lines of credit. A line of credit is a type of revolving loan which allows a borrower to draw funds up to a predetermined amount, over a specified period of time, and to repay or redraw these funds as circumstances permit or require. While essentially a loan, a line of credit takes the form of a credit enhancement when used as a contingency to address cost or revenue risks associated with a project. For example, a line of credit can be used to cover unanticipated construction expenses (which would not have been covered by a construction loan), or to cover temporary revenue shortfalls once a project is operational. It thus provides a type of safety valve that reduces the risk to lenders or bond holders.

Assuming that contingent commitments do not exceed available cash, SIBs could provide lines of credit without having to obtain their own credit rating. However, as with capital reserves, it would be possible for a SIB to leverage its cash on hand by having outstanding lines of credit in excess of its immediate resources. Again, this leveraging strategy would necessitate that a SIB obtain a credit rating.

Debt service guarantees. Guarantees to meet debt service payment requirements are currently offered both by commercial banks, as letters of credit, and by bond insurance companies, as bond insurance. In both cases, 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, letters of credit (and bond insurance) are like a line of credit, except that it runs directly to the lender/bondholder rather than through the borrower (in this case, the project sponsor). Bond insurance differs from letters of credit because it is in effect for the entire life of a debt issuance; letters of credit typically extend for no more than eight years. It is likely that when offering debt service guarantees, SIBs would issue letters of credit to project sponsors. Regardless of terminology, provision of any kind of multi-year debt service guarantee in excess of available assets would almost certainly require a SIB to obtain a credit rating. The criteria applied by rating agencies to entities providing debt service guarantees are stringent (e.g., a minimum of $200 million in capital, and a diversified insurance portfolio of investment-grade bonds, for bond insurance companies).

Leveraging SIB Funds

Leveraging can have a powerful effect on the amount of assistance that can be generated from a given level of SIB capitalization grants. A bank is considered leveraged if its total potential liabilities exceed its liquid assets. Leverage thus increases the amount of assistance a SIB may offer well beyond its cash-on-hand. It is for this reason that the leveraging of SIBs draws a good deal of attention - leveraging can make scarce Federal capitalization grants go further.

A SIB may be leveraged in two ways: (i) by issuing debt (typically, bonds) on its own behalf; or (ii) by guaranteeing or otherwise assuming liability for others' debts in an amount greater than the SIB's own cash.

Leveraging a SIB by issuing debt means that a SIB uses its existing assets plus anticipated project revenues to provide security for the issue. The proceeds from the debt issuance can then be provided to project sponsors as either loans or credit enhancements. This approach can make sense if demand for SIB assistance outstrips the amount of cash immediately available for outlays.

If a SIB were leveraged through assuming liability for others' debts in excess of the SIB's own cash on hand, the likely means of doing so would involve provision of some of the forms of credit enhancement discussed in the previous section. Under this model, leverage is derived from the fact that the debt service thus guaranteed is substantially greater than the reserves set aside to meet expected payouts.

Both forms of leverage would require the inspection of the SIB by rating agencies, since paragraph 350(e)(2) of the NHS Designation Act requires that a SIB maintain an investment grade rating on its debt issuances or obtain bond or other debt financing instrument insurance sufficient to maintain the viability of the bank. 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 Designation 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 under the first model, in which the SIB itself is issuing debt and would wish to ensure market acceptance of its issuances. It would also hold true under the second leveraging model, for the value of the SIB's guarantee to back project sponsors who themselves issue debt will only be as strong as the credit worthiness of the SIB itself.

Rating criteria normally applied to leveraged institutions appear to exceed the current capabilities of most SIBs. The aforementioned SRFs for wastewater treatment facilities serve as a useful model. Without external credit support, SRF bonds are rated on the credit quality of the borrowers, the additional liquidity provided through reserve funds, and additional coverage provided by the excess of loan repayments over bond debt service payments. To attain a rating that is higher than the least creditworthy participant, SRFs with 20 or more borrowers must present liquidity or excess coverage that provides an adequate cushion in the event of an interruption in payments from borrowers over a period of time. If the loan pool is smaller, or if the repayment stream is dominated by a few borrowers, more stringent liquidity and coverage requirements will apply. Since SIB loan pools are fairly small and new, SIBs will probably have to provide healthy liquidity and/or coverage ratios to attain an investment grade rating, thus constraining the remaining amount of cash available to offer to project sponsors.

Exhibit C.1: Obligations of ACAP, by Federal-Aid Highway Program, as of February 28, 1997
Dollars in thousands
  IM Bridge NHS STP MA Total
Arizona 5,167 - 3,471 - 2,445 11,082
Florida 13,000 - 7,000 - - 20,000
Missouri 1,875 - - - - 1,875
Ohio 1,000 8,000 1,000 10,000 - 20,000
Oregon 2,498 2,971 3,504 - - 8,973
South Carolina - - 1,848 - - 1,848
Texas - 9,007 3,330 - - 12,337
Total, by Program 23,540 19,978 20,152 10,000 2,445 76,115
Percent of Total 30% 26% 26% 13% 3%  

Source: U.S. Federal Highway Administration and relevant State DOTs.

This table reflects only obligations associated with ACAP declared in fiscal year 1996.

Most State officials note that they chose which categories to tap on the basis of the availability of reasonably large unobligated balances of apportioned funding in those categories. The presence of these balances indicated that there was sufficient "room" in the apportionment for that category to support additional obligations of associated funds. Most State officials report that there is little or no linkage between the Federal-aid highway categories used to capitalize the SIBs and the highway projects ultimately expected to be supported by the SIB.

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 far identified 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 employ 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.