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INNOVATIVE FINANCE

WILLIAM A. HYMAN, EDITOR
ESTHER STRAWDER, FHWA MANAGING EDITOR
VOL. 1, NO. 1
AUGUST 1996

In This Issue:

Innovative Finance Newsletter Is Launched By FHWA

The FHWA welcomes readers to its first issue of the Innovative Finance newsletter. This newsletter, published bi-monthly, will provide state Departments of Transportation (DOTs) and metropolitan planning organizations (MPOs) with practical, case-oriented information on innovative financing for transportation.

What Is Innovative Finance?

Traditional methods of transportation finance have relied to a significant degree on Federal-aid grant reimbursement programs. Innovative finance, in contrast, is a broadly defined term that refers to non-traditional methods for transportation financing as well as to the use of conventional methods in new ways. A prime objective of innovative finance is to maximize the ability of states to leverage Federal capital for needed investment in our nation's transportation system. A related objective is the more effective use of existing funds.

Innovative financing techniques used by the FHWA and states include leveraging tools, designed to increase the funds available for transportation infrastructure investment, and cash flow tools, which are designed to more quickly advance project construction. Future issues of the Innovative Finance newsletter will focus on these tools and other new ideas in detail.

Why Is Innovative Finance Important?

Recent legislation has stressed the importance of financial management and identifying new sources of transportation funding. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) and the National Highway System Designation Act of 1995 (NHS Act) provided transportation planners and engineers with an array of new tools to improve the financial management of transportation investment resources, including the use of innovative finance. Although financial innovation pre-dates the passage of ISTEA, this landmark legislation created new opportunities to innovate by encouraging multiple financing strategies in addition to new partnerships among Federal, state, local, and private funding sources. The NHS Act contained several innovative finance provisions that built upon the experience of ISTEA and the FHWA's Innovative Finance Test and Evaluation (TE-045) program. The TE-045 program was prepared in response to President Clinton's Executive Order 12983, Principles for Federal Infrastructure Investment, that established infrastructure investment as a priority for each executive department and agency.

But legislative changes are not the only reason that innovative finance for transportation is important. The simple fact is that traditional funding sources cannot provide sufficient funds to meet current transportation infrastructure needs. As a result, new funding partnership approaches and financing mechanisms are needed to ensure that scarce transportation dollars are used more effectively. Innovative financing can help close the current investment gap.

What Will the Newsletter Cover?

The FHWA has created the Innovative Finance newsletter to increase awareness and understanding of innovative finance opportunities through articles that describe the results of U.S. DOT-sponsored research, case studies, announcements of upcoming conferences, meetings, and training programs, and resources, such as reports, guidance, and contacts. The newsletter will serve as a resource for its readers in developing innovative strategies in their own transportation systems. It will also provide a forum for notifying state DOTs and MPOs of best practices nationwide. Individual newsletter issues will highlight topics of current interest in more detail, such as innovative contracting/procurement, public/private partnerships, institutional issues, and value capture mechanisms.

Innovative financing requires creativity and cross-fertilization of ideas. To facilitate this process and create a record of achievement and a base of knowledge about innovative finance, the Editors welcome your feedback on the newsletter and encourage suggestions for future issues.

An image of a telephone Contact: Esther Strawder, FHWA, 202/366-6949.

[Top of Article, In This Issue...]

Innovation Is Key To Texas' George Bush Turnpike

Use of financial and institutional innovation has helped overcome significant obstacles to implementation of the State Highway 190 (George Bush) Turnpike, a $463 million joint project of the Texas Department of Transportation (TXDOT) and Texas Turnpike Authority (TTA). Innovative methods are expected to accelerate project completion by six to ten years, save millions of dollars in escalation and interest costs, and encourage similar innovation on other transportation projects in the state.

The George Bush Turnpike will connect the Dallas metropolitan area to its rapidly growing northern communities. This new roadway is needed to relieve congestion and to support future economic growth in the area. Originally conceived as a freeway when TXDOT began planning the roadway in the 1970s, the project was converted to a tollway in the 1990s after traditional "pay-as-you-go" financing from motor fuel tax receipts and Federal-aid funds proved insufficient.

Under more traditional financing methods, the project's size would have created delays resulting in significant exposure to the costs of inflation. Its size would also jeopardize TXDOT's ability to adequately address the state's other transportation needs. Institutional barriers to the project's implementation included the fact that TXDOT lacks the authority to issue bonds.

To address these obstacles, TXDOT and TTA collaborated in a unique partnership to finance and construct the project as a turnpike. This partnership was supported by a change in Texas legislation in 1991 that allowed greater flexibility in turnpike project financing and the lending of highway funds for turnpike projects. The new legislation allowed the project to take advantage of Federal-aid funds available to TXDOT as well as TTA's bonding authority. Additional collaboration with three counties and seven cities in the North Dallas suburbs resulted in the donation of several locally owned rights-of-way to the project.

Leveraging this partnership was a proposal to use innovative financing tools available under ISTEA and the FHWA's TE-045 program. Innovative tools used by the project are as follows:

  • Partial Conversion of Advance Construction (PCAC): PCAC allows TXDOT to use TTA funds immediately and preserve eligibility for reimbursement of the federal share of the project in the future. This tool provides critical Federal-aid cash inflows timed to meet the project's construction schedule.

  • Section 129 Loan: TXDOT will pass through a $135 million loan of Surface Transportation Program (STP) Federal-aid funds to TTA as part of the project's financing plan. This money gave TTA the bonding capacity needed to cover project costs, and greatly enhanced the creditworthiness of TTA's $450 million in revenue bonds issued for the project. Furthermore, the loan allowed TTA to contribute $20 million to the project from funds that might otherwise have been required as reserves for the debt. TTA's repayment obligation on the Section 129 loan will be subordinate to the repayment of its toll revenue debt service, for which interest is deferred until 2000; repayment of the loan is spread over 25 years and does not begin until 2004. Similarly, interest accrues on the bonds from the date of issuance but is not paid until 2005. Both payment schedules help to protect investors from the risk associated with the project's construction and start-up period. After repayment, Section 129 loan funds may be used to capitalize the Texas State Infrastructure Bank (SIB), which was recently designated under the FHWA's SIB pilot program.

  • Flexible Matching: The counties of Dallas, Collin, and Denton contributed $39.9 million in local rights-of-way to the project. Under the TE-045 program, the value of this contribution will count toward the state's 20 percent non-Federal-match requirement. This provision will allow state funds to be used on other transportation projects.

The project financing plan is summarized in the table below:

Source Amount Description
Section 129 Loan $135,000,000 TXDOT loan to TTA
TTA Revenue Bonds 308,402,058 Out of proceeds $450 million bond issue
TTA Capital Improvement Fund 20,000,000 Funds on hand
Total Cash Sources $463,402,058  
Local Right-of-Way Donations $39,900,000  

Texas' creative use of the opportunities provided by ISTEA and the TE-045 program shows how innovative finance can help states meet their transportation investment infrastructure needs in a timely and affordable way.

An image of a telephone Contact: Esther Strawder, FHWA, 202/366-6949.

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State Infrastructure Bank Status Report

On November 28, 1995, President Clinton signed into law the NHS Act of 1995. Section 350 of P.L. 104-59 authorizes the State Infrastructure Pilot Program under which the U.S. Secretary of Transportation can enter into cooperative agreements with up to ten states to establish state or multi-state infrastructure banks (SIBs). A SIB is capitalized with Federal funds from state apportionments and matched with state funds, and is designed to complement traditional funding programs.

A SIB, like a private bank, needs equity capital to get started and offers a range of loans and credit options to help finance eligible surface transportation projects, including both highway and transit. A total of 15 states submitted applications to the U.S. DOT by the initial March 8, 1996 deadline. Many other states indicated their interest in the pilot through letters and telephone calls. The Secretary designated eight states as part of the pilot program on April 4, 1996. After reviewing the five state applications that were resubmitted, the Secretary selected the final two states on June 21, 1996.

The designated pilot SIBs will be able to provide loans, enhance credit, serve as capital reserves, subsidize interest rates, insure letters of credit, finance purchase and lease agreements for transit projects, provide bond or other debt financing security, and provide other forms of assistance that leverage funds. Through the SIB Pilot Program, the following ten states will test the use of SIBs as a means of increasing and improving both public and private investment in transportation:

  • Eight States Designated on April 4, 1996:

    • Arizona, Florida, Ohio, Oklahoma, Oregon, South Carolina, Texas, and Virginia
  • Two States Designated on June 21, 1996:

    • California and Missouri

A draft cooperative agreement has been sent to each of the ten designated states, to be signed 90 days after the state received the initial draft from the U.S. DOT.

An image of a telephone Contact: Lucinda Eagle, FHWA, 202/366-5057.

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Internet Guide To Innovative Finance Publications And Guidance

The FHWA will soon offer access to innovative finance information through the FHWA home page. The target date is early August to coincide with the release of this first issue of Innovative Finance. To obtain immediate access to materials such as the NHS Guidance on Innovative Finance Provisions, the SIB Primer, SIB fact sheets, Questions and Answers, the Innovative Finance newsletter, training course updates and information, evaluation reports on innovative finance research projects, and much more, follow the procedures described below:

For Netscape Users

Enter the URL "www.dot.gov" to access the U.S. DOT web site. Each U.S. DOT modal agency has its own individual listing. Click on Federal Highway Administration to the FHWA home page. A graphic depicting an interchange will be displayed over a menu of options. Select 'About the FHWA,' and click on Organization Chart. From here, select 'Associate Administrator for Policy - Office of Policy Development.' Click on Legislation and Strategic Planning Division to find various publications related to innovative finance.

For Firefox Users

Go to Mosaic to access the U.S. DOT web site and enter "http://www.fhwa.dot.gov" as the URL. A graphic depicting an interchange will be displayed over a menu of options. Follow the same procedure as described above for Netscape users.

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FHWA Offers Innovative Finance And Statewide Financial Planning Course

FHWA's Innovative Finance and Statewide Financial Planning Course continues to be offered to states and MPOs. Upcoming sessions through September 1996 include the following:

  • August 5-6, Washington, DC

  • August 7-8, Phoenix

  • August 26-27, Pierre, SD

  • August 28-30, Austin, TX

  • September 5-6, Austin, TX

  • September 10-11, Little Rock, AR

  • September 12-13, Juneau, AK

  • September 19-20, Columbus, OH

  • September 24-25, Austin, TX

  • September 26-27, Springfield, Illinois

An image of a telephone Contact: For more information on this course or session dates and locations, contact Larry Dwyer, FHWA, 202/366-8560.

[Top of Article, In This Issue...]

FHWA Plans For ISTEA Reauthorization

ISTEA reauthorization provides an opportunity to incorporate additional innovative financing techniques into law. In the area of innovative finance, the successor to ISTEA should build upon efforts, such as the Partnership for Transportation Investment and transportation infrastructure banks, that have begun to create new ways of paying for the transportation systems that America needs.

The U.S. DOT has been holding outreach forums on ISTEA reauthorization topics, including innovative finance, to obtain information, views, and recommendations from many different sources. This outreach will help inform decisionmaking about the contents and focus of the reauthorization proposal. Development of the reauthorization proposal will follow three key phases:

  1. Analysis and Outreach. Through September 1996, the FHWA and other agencies in the U.S. DOT will be gathering information, conducting outreach, and taking stock of how well ISTEA has worked.

  2. Decisionmaking. Based on the outcome of Phase I, the FHWA will begin to develop a proposal and coordinate it with other parts of the Executive Branch that also have an important stake in ISTEA reauthorization.

  3. Transmittal to Congress. A legislative proposal is expected to be transmitted to Congress early in 1997. At that time, the U.S. DOT will work closely with Congress, the states, local governments, and other stakeholders to ensure that a worthy successor to ISTEA is passed by October 1997.

An image of a telephone Contact: For more information on ISTEA reauthorization and outreach forum dates and locations, contact Esther Strawder, FHWA, 202/366-6949.

[Top of Article, In This Issue...]

Public Works Financing Offers Private Sector Perspective

Public Works Financing is a newsletter devoted to bringing the private sector into the development, ownership, and operation of the nation's infrastructure. In 15 annual issues, this newsletter offers a behind-the-scenes look at case studies, emerging projects, and key industry players. In every issue, detailed information is provided on market, credit, and investor trends across a broad spectrum of infrastructure projects around the globe. For the public sector, the newsletter provides an important glimpse into the challenges and issues facing potential private industry partners. Over the year, some issues are focused entirely on a topic of current interest, such as public/private partnerships or privatization. Every issue contains a directory of service providers who are experts on the issues of infrastructure finance. Included in the subscription fee is an annual index of PWF issues. Using that index, case studies and focus articles may be ordered from the archive. PWF is a key resource that helps to bridge the gap between public infrastructure practice and the international world of stand-alone project finance.

For more information on this newsletter, contact William Reinhardt at:

Public Works Financing
145 Harrison Ave
Westfield, NJ 07090
908/654-0397
908/654-0436 (fax)

[Top of Article, In This Issue...]

INNOVATIVE FINANCE

William A. Hyman, Editor
Laurie L. Hussey, CS Managing Editor Cambridge Systematics, Inc.
617/234-0531
FAX: 617/354-1542
wah@camsys.com
llh@camsys.com

Esther Strawder, FHWA Managing Editor
202/366-6949 FAX: 202/366-3297
esther.strawder@fhwa.dot.gov

Reproduction (in whole or in part) and broad distribution of IF is strongly encouraged. Permission from FHWA, the editor, or any other party is not necessary.

A REMINDER TO READERS

FHWA DOES NOT MAINTAIN A MAILING LIST AND DOES NOT DISTRIBUTE IF DIRECTLY. IF IS AVAILABLE AS AN INSERT TO THE ITE JOURNAL AND AASHTO JOURNAL, AND IS AVAILABLE ELECTRONICALLY THROUGH:

IF IS ALSO PROVIDED TO THE FOLLOWING ORGANIZATIONS FOR REDISTRIBUTION AND/OR AS INFORMATION FOR THEIR MEMBERSHIP:

  • National Association of Regional Council's (NARC's) Association of MPOs (AMPO)

  • ITS America

  • American Public Transit Association (APTA)

  • Surface Transportation Policy Project (STPP)

  • State & Territorial Air Pollution Program Administrators/Association of Local Air Pollution Control Officials (STAPPA/ALAPCO)

  • Association for Commuter Transportation (ACT)