Cambridge Systematics, Inc.
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TransTech Managements, Inc.
Special appreciation is extended to each of the State Departments of Transportation and FHWA Division Offices that contributed to the case studies contained in this report. Their effort provided valuable insights and lessons learned about how U.S. DOT's innovative finance tools have helped overcome financing challenges and deliver projects across the country more quickly and effectively.
Thanks are also extended to Miriam Roskin, Roskin Consulting, whose previous evaluation of the TE-045 innovative finance initiative was especially helpful in developing the approach to and conclusions of this performance review; Tamar Henkin and Karin DeMoors, TransTech Management, Inc., for the preparation of the case studies; and Patrick Balducci, for contributions in the early phases of this effort.
In the early 1990s, the U.S. Department of Transportation (DOT), recognizing the need to expand investment in the nation's transportation infrastructure, launched a comprehensive initiative to create new funding tools and expand flexibility of the Federal-aid highway funding program. This "innovative finance" initiative was an attempt to meet the increasing gap between transportation capital needs and available resources, without direct increases in Federal grant funding. The initiative also responded to states' calls for greater flexibility in the use of their Federal-aid funds.
Nearly a decade later, at least $29.1 billion in innovative finance projects have been advanced, which were supported by $8.6 billion in Federal-aid funding. On average, for each Federal dollar invested in an innovative finance project, $3.40 of construction investment has been enabled, which compares quite favorably to the ratio of $1.25 to $1.00 for every dollar invested in the traditional grant program. This "leveraging ratio" is an important indicator of the effectiveness of Federal-aid funding. Simply put, greater leveraging means that each dollar invested has gone further - building more projects for the same amount of Federal-aid funding. Table 1.1 summarizes the leveraging and other quantitative results of this evaluation, which are explained in detail in the rest of this report.
Table 1.1 Summary of Quantifiable Results: Evaluation of Innovative Finance
|Leveraging||$29 billion in projects for $8.6 billion Federal investment; ratio of $3.40 in investment for each Federal dollar (compared to $1.25 for each Federal dollar under traditional Federal-aid program)|
|Private Investment||$48 million from flexible match; $63 million equity contribution. Additional private capital used in financing infrastructure through bonding (Grant Anticipation Revenue Vehicles or GARVEE bonds).|
|New Revenue Streams||$6.3 billion in revenue backed-bonds, $1.8 billion in revenue-backed loans|
|Project Acceleration||Minimum of 50 projects reported acceleration from six months to 24 years over traditional program|
|Economic Impacts||Total employment impacts of $827 million (thousands of job years)
Total output impacts of $91 billion
Total labor income impacts of $30 billion
While these quantitative results are impressive, they represent only a part of the benefits achieved by innovative finance. Many of these benefits are difficult to measure quantitatively. For example, many of the government officials interviewed for this research cited project acceleration as a key advantage of innovative financing techniques. Yet data on project acceleration was not readily available for many projects. Thus, this report quantifies benefits where feasible, and illustrates, through detailed analysis of specific projects, the benefits that are more difficult to measure on a macro level, but have wide-ranging effects across state surface transportation programs.
This analysis provides the first comprehensive evaluation of U.S. DOT's innovative finance program since its inception. The results in this report should help guide both Federal policy makers, as they continue to improve and enhance Federal surface transportation programs, and state and local officials, as they continue to make use of these programs to advance critical transportation projects.
"Innovative finance" for transportation is a broadly defined term that encompasses a combination of specially designed techniques that supplement traditional highway financing methods. While many of these techniques may not be new to other sectors, their application to transportation is innovative.
The emergence of innovative financing approaches over the last decade has complemented a gradual national shift towards a more broad-based and diverse highway funding environment. Table 1.2 illustrates the change in the Federal role by depicting Federal aid to highway capital projects as a percentage of total funding over the last four decades. In 1960, state and local agencies made total capital outlays of $6.1 billion on highways, and received $2.9 billion in revenue transfers (grants) from the Federal government. Thus, Federal revenues represented approximately 48.4 percent of capital outlays in 1960. By the year 2000, capital outlays by state and local agencies had increased to an estimated $62 billion. While Federal revenues provided to states also increased substantially, to $24 billion, the percentage of total funding had declined to under 40 percent. 
While these percentages tend to fluctuate, the general trend has been for greater variety in both revenue sources and leveraging tools used for transportation. Although Federal-aid funding continues to increase, and will continue to be a critical part of highway construction programs, other sources of revenue have become as important and are expected to reflect even greater growth to meet highway needs.
Table 1.2 Highway Finance Statistics: Relative Share
(Dollars in Millions)
|Federal Revenues Transferred to Local||$21||$30||$31||$543||$588||$633|
|Federal Revenues Transferred to States||$2,616||$2,948||$2,628||$20,642||$24,172||$24,757|
|Total Capital Outlay by:|
|Total State and Local Capital Outlay|
|Federal Revenues as a Percentage of Total Outlay|
Transportation investment needs have consistently outpaced available funds, despite increases in funding at both the Federal and state levels. The latest official conditions and performance report from the Federal Highway Administration (FHWA) indicates that transportation investment would have to increase by 19.2 percent just to maintain the system at its current state, and by 92.9 percent in order to produce needed improvements (see Table 1.3).
Table 1.3 Comparison of Transportation Spending and Investment Needs: Quantifying the Gap
|Percent by Which Investment
Requirements Exceed Current
Spending (as of 1999)
|Dollar Amount of Gap|
|Cost to Maintain Highways and
Bridges at Current Conditions
|Costs to Improve||92.9%||$45.3 billion|
Source: Federal Highway Administration, Highway Conditions and Performance Report, 1999.
Federal rules and corresponding state procedures developed under the traditional Federal aid highway program have not always allowed states to combine new revenue sources and funding tools in ways that met their increasing project needs. Restrictions on the obligation of Federal-aid funds required states to manage their Federal funding very differently from their other funds, creating inefficiencies from a cash management perspective. For example, just prior to the end of a state fiscal year, a state DOT might have a significant balance of Federal-aid funds, but no state funding available for a non-Federal share. Prior to innovative finance, a state DOT in that position might lose the Federal funding, because it did not have the ability to match the Federal share of the project, even if the state funding would be available in a matter of weeks or days.
Moreover, while Federal-aid funding may fluctuate as a percentage of total capital outlay by states, its influence reaches far beyond its numerical share. For administrative ease, many states will design most highway projects to satisfy Federal-aid requirements, whether financial, environmental, or legal. This allows them greater flexibility when there is uncertainty about the ultimate source of funding for a project. Yet if state projects, accounting practices, programs, and institutions are based on the model of the historical Federal-aid program, both Federal and non-Federal projects will be affected by any barriers inadvertently created by historical regulatory restrictions. Conversely, increased financial flexibility in Federal programs can have a ripple effect, creating benefits beyond the projects that are actually paid for with Federal-aid funds.
Recognizing the need for change, U.S. DOT and FHWA began to consider ways to remove barriers and transform the Federal role with respect to transportation finance. The traditional model of constructing Federally-assisted projects solely with Federal grant reimbursements of costs incurred by the states, with a standard matching requirement will continue to play a key role. Yet innovative finance has created complementary models to address particular kinds of projects that may benefit from alternative funding approaches, including credit assistance and bond financing. These include projects with revenue potential from user fees or tolls, private equity participation, or national significance.
The impetus for these new approaches to Federal funding strategies lay both in a growing recognition of the gap between resources and investment needs and an improved understanding of the economic value of transportation investment. A series of analyses has consistently demonstrated that each dollar invested in the transportation system pays dividends to the public in many forms, including improved industrial productivity, more efficient freight movement, new jobs, travel time savings, safety improvements, and for some projects, congestion relief and attendant environmental benefits.. Based on these findings, policy-makers recognized that it would be desirable both to accelerate project development, thereby bringing the associated benefits to bear sooner, and to expand investment in transportation infrastructure without additional Federal-aid funding. These objectives shaped the direction of the innovative finance initiative and provide a useful way of looking at the resulting efforts and accomplishments of the past decade.
Recognizing these benefits, FHWA initiated its innovative finance initiative, seeking to:
Table 1.4 aligns these goals to the new tools that have been developed. Eight years after the beginning of this effort in 1994, this report reviews how well the program has met the above goals, and whether additional changes to the tools created could bring even greater results. The report also seeks to identify any areas where the Federal effort has been less successful, in order to provide a guide to direct future investment and policy discussions.
Table 1.4 Innovative Finance Goals
|Accelerate Projects||Identify and reduce inefficiencies/
unnecessary barriers in Federal-aid grants management
|Create and conduct outreach on new models for borrowing to leverage new and existing revenue streams||
|Expand Investment||Reduce barriers to attracting private contributions to Federal-aid projects, including investment of at-risk equity||
|Encourage identification of new revenue streams, in part by creating new borrowing options that facilitate the use of project-based revenues to retire debt obligations||
|Lower cost or more flexible borrowing options.||
The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) laid the ground-work for innovative finance through the introduction of several new concepts designed to increase transportation investment. These included the Section 1012 loan program (later codified as Section 129 of Title 23 of the U.S. Code), which allowed states to use regular Federal-aid apportionments to fund direct loans to projects with dedicated revenue streams; opportunities to levy tolls on Federally-supported highways; and permitting certain toll revenue expenditures to serve as a credit against non-Federal matching requirements.
In 1994, Executive Order 12893 established more cost-effective infrastructure investment as a priority for all Federal agencies. The Executive Order prompted more systematic analysis of the costs and benefits of proposed infrastructure investments; efficient management of infrastructure; encouragement of private sector participation in infrastructure investment; and encouragement of more effective state and local programs. In response to that Executive Order, U.S. DOT and FHWA undertook a major initiative in 1994 to promote and facilitate infrastructure investment.
This initiative was launched with the introduction of an experimental "Test and Evaluation" program, designated as TE-045, to solicit ideas from the states on a range of new financial strategies designed to stretch limited transportation dollars and enhance the flexibility of Federal-aid highway funds. The TE-045 initiative has generated substantial benefits in terms of building more projects with fewer Federal dollars and accelerating project construction. Many of the innovations tested were subsequently approved for general use through administration action or legislative changes made under the National Highway System Designation (NHS) Act of 1995 and the Transportation Equity Act for the 21st Century (TEA-21).
The NHS Act was the next significant milestone in the evolution of innovative finance. The Act enabled a number of innovations:
The inclusion in the NHS Act of provisions to reimburse states for eligible debt-related costs and added flexibility related to advance construction gave rise to the new mechanism referred to as Grant Anticipation Revenue Vehicles (GARVEEs), sometimes referred to as Grant Anticipation Notes or GANs. Further expanding advance construction flexibility, a July 15, 1995 Federal Register notice implemented partial conversion of advance construction, which allowed states to convert an advance constructed project to a Federal-aid project in stages rather than all at once.
TEA-21 was passed in 1998, enacting the Transportation Infrastructure Finance and Innovation Act (TIFIA) to provide up to $10.6 billion in credit assistance to major projects of national significance. While TIFIA is the major finance innovation provided under TEA-21, the legislation also continued the SIB pilot program, although limiting Federal capitalization opportunities to only four states, and provided additional flexibility in non-Federal matching share requirements.
While ISTEA, Executive Order 12893, the TE-045 initiative, the NHS Act, and TEA-21 are generally recognized as the major administrative and legislative milestones in the evolution of Federal innovations in financing strategies, one of the most important - yet least recognized - aspects of the innovative finance effort has been the ongoing Federal effort to provide a forum for discussion about new financing mechanisms and an incubator for their development. Through new publications, conference sponsorships, and myriad roundtable discussions, the Federal efforts have sought to solicit new concepts, disseminate information on how recent innovations can be applied to real-world financing dilemmas, and help project sponsors and other participants in the transportation financing community accurately assess the risks and opportunities central to use of the resulting financing strategies.
This report reviews the performance of U.S. DOT/FHWA's innovative finance initiatives, from TE-045 through the TIFIA Federal credit program. Chapter 2.0 describes the approaches used to measure the performance of these initiatives, which involve both quantitative and qualitative methodologies. Chapter 3.0 presents the quantitative results of the performance review, in terms of the ability of the innovative finance tools to leverage transportation investment, accelerate projects, and yield economic benefits. Chapter 4.0 contains case studies of 11 projects that have used one or a combination of innovative finance tools to overcome a project funding challenge. Finally, Chapter 5.0 offers observations and conclusions on the effectiveness of U.S. DOT/FHWA-sponsored innovative finance initiatives, and suggests ways in which continued experimentation with new tools could afford additional benefits for the nation's surface transportation system. Appendices containing data elements included in the project inventory, selected resources for additional information on innovative finance, and a glossary of terms are provided at the end of this report.
This report is intended to measure the performance of innovative finance tools with respect to the original goals set by the program. As previously noted, the goals of the U.S. DOT innovative financing initiative were to:
The first goal of project acceleration proved difficult to directly measure, particularly over the entire universe of projects. Instead, the quantitative analysis that was developed provided a good proxy for management of Federal funds by measuring leverage. While leverage is more precisely defined below, for this report, it generally represents the ratio of capital project construction to Federal investment. The premise is that if states can construct more projects, with the same amount of Federal funding, innovative finance tools must be reducing constraints and improving their ability to manage Federal funding.
Expanding investment also proved difficult to measure directly for the group of projects analyzed. Instead, case studies were used to illustrate the removal of barriers to investment (and its importance to project development); the introduction of new revenue streams, and cost savings.
As described in the following sections, the overall analysis approach is both quantitative and qualitative. This two-tiered approach first attempts to quantify what can be measured given available data. Next, it attempts to capture less quantifiable aspects of the tools through the analysis of specific projects.
The first step in the quantitative methodology was assembling a detailed inventory of projects that have been advanced under one or more of the U.S. DOT innovative finance initiatives since 1994. The inventory records the available information on the four innovative finance categories, i.e., TE-045, GARVEEs, Federal credit, and state-based credit, as well as relevant information on the capitalization of the SIBs and the GARVEE bonds issued. These tools are defined in the glossary and in the FHWA Innovative Finance Primer (Publication Number FHWA-AD-02-004).
The project information was compiled from readily available data sources, including Federal data collection and reporting systems and through direct contact with the states. Data were collected through the spring of 2001, and represent information current as of that time. Since that time, of course, additional projects have been advanced using innovative finance techniques. For example, a new TIFIA project has now been approved, and the volume of SIB activity has approached $3 billion. While these additional innovative finance projects are not captured in the inventory and performance review, it follows that even greater benefits would be revealed from the larger universe of projects.
The information collected was captured in a single Microsoft Excel workbook. The Excel workbook contains a number of worksheets that track the unique data elements pertaining to each of the four categories of projects - TE-045, GARVEEs, Federal credit, and state-based credit - as well as the capitalization data elements in terms of the SIBs and GARVEEs. Data elements included for each of the project categories are described in Appendix A.
Table 2.1 summarizes information contained in the project inventory by innovative finance category. While a larger number of projects are contained in the database for the TE-045 category, only 62 of the 101 TE-045 projects approved since 1994 were analyzed in this report. The 39 excluded projects fall in the following categories:
For the 62 TE-045 projects, the breakdown by specific tool is shown in Table 2.2.
Table 2.3 summarizes the number and dollar value of projects supported by innovative finance tools by state.
Table 2.1 Summary of Projects by Innovative Finance Category
(Dollars in Millions)
|Innovative Finance Category||Number of Projects||Project Cost|
Note: GARVEES may refer to multiple projects. Does not include $450 million in TIFIA assistance awarded to the San Francisco-Oakland Bay Bridge, which occurred following preparation of this analysis.
Table 2.2 Breakdown of TE-045 Projects by Tool
(Dollars in Millions)
|TE-045 Tool||Number of Projects||Project Cost|
|Section 129 Loan||2||$947.2|
|Section 1044 Toll Credits||1||1.0|
|Partial Conversion of Advance Construction||9||810.4|
|Present Value Match||1||1.1|
Notes: Section 129 project counts and costs include the George Bush Turnpike, which also utilized partial conversion of advance construction as part of its project financing plan. Certain TE-045 tools, such as partial conversion of advance construction and Section 1044 toll credits, became codified into the regular Federal-aid program, and no longer require special approval. These projects are difficult to distinguish from standard Federal-aid projects. Thus, only the projects that were advanced under TE-045 were counted as part of this analysis. If the additional projects were counted, it would probably increase the quantitative results.
Table 2.3 Projects by State
(Dollars in Thousands)
|State||Number of Projects||Project Cost|
|District of Columbia||1||2,324,000|
The second step in the quantitative analysis was determining how to measure the effectiveness of innovative finance, with respect to the goals of the program. Since the primary goal was to increase transportation investment without increasing direct Federal-aid funding, the evaluation first considers the leveraging effect of the program: how much project investment occurred for each Federal dollar invested? Next, the approach considers other ways of defining leverage. Since project acceleration was also a primary goal, available data on project acceleration are gathered and analyzed. Attraction of private investment and new revenue sources are also evaluated. Finally, to show the overall impact of these accelerated projects, economic results are reviewed.
In its broadest sense, financial leverage refers to the use of financial tools to increase the ability of your own resources to meet your project goals - just as you would use a mechanical lever to increase your ability to lift a heavy object.
When applied to specific circumstances, however, the term can mean different things to different people. When applied to debt-financed projects, for example, leverage typically relates to converting (or "monetizing") anticipated future revenues into up-front capital through borrowing. For example, a state might leverage a SIB capitalization of $50 million by issuing $100 million in bonds backed by future loan repayments. In these cases, the greater the degree of borrowing against the anticipated revenue stream, the more highly leveraged is the transaction.
In contrast, public agencies typically speak of "leverage" when referring to the level of co-investment that occurs in conjunction with Federal funds, either through matching requirements or through attraction of new revenue sources. Given limitations on Federal funding, success has often been measured in terms of how many total dollars of construction can be funded for each Federal dollar contributed to a project. In these cases, the higher the level of co-investment, the greater the leverage of the original public funds. From the Federal perspective, the most highly leveraged projects are the ones that involve a higher amount of project construction for the same amount of Federal funding.
FHWA has most often used the term "leverage" in its second sense - that is, as a measure of co-investment. Accordingly, this report, like others that have preceded it, consider various innovative finance tools' leveraging effects in terms of their ability to attract additional non-Federal sources of funding to Federally-assisted transportation projects. At the same time, the report also examines ways in which projects employing innovative finance strategies have further expanded investment levels through attracting new sources of up-front capital, encouraging the development of new revenue streams, and/or generating cost savings.
Leverage of the Federal contribution has traditionally been expressed as a ratio between: 1) the total capital investment for a given project or program of projects, and 2) the Federal grant contribution for this same project or projects. Under this approach, the standard leverage of the Federal investment in conventional Federal-aid highway projects is shown as the ratio of 1.25 to 1. This ratio reflects the relationship between the standard Federal and non-Federal matching shares of 80 percent and 20 percent, respectively. When applying this approach to innovative finance projects, one tends to obtain very high leveraging ratios, especially given the large number of innovative finance projects that employ bond financing. Using this approach, the TE-045 evaluation published in 1996 reported a program-wide leveraging ratio of 1.9 to 1. This figure represented the ratio between the cumulative project cost of $4.26 billion and the cumulative Federal grant contribution of $2.27 billion.
Leverage as a measure of non-Federal co-investment is relatively easy to convert into a ratio, as the calculations rely simply on an accurate breakdown of capital funds by Federal and non-Federal sources. However, the method of calculation differs slightly depending on the category of tools in question.
TE-045 - For all TE-045 funds management projects, leverage is expressed as the sum of total cost of the projects in question, divided by the sum of the Federal contributions toward the same projects.
Example: State Route 520, Seattle, Washington. The total cost of this tapered match project is $57.1 million. The Federal contribution is $48.7 million. The resulting leveraging ratio is calculated as 57.1/48.7 = 1.17 to 1. (Note that this is lower than the standard 1.25 to 1 ratio because Washington has a significant share of Federal lands, and thus is subject to a slightly lower matching requirement).
GARVEE Projects - For a given GARVEE project, leverage is calculated as the total cost of the project in question, divided by the sum of any upfront Federal contributions (e.g., regular grant funds) and the appropriate share of the par value of the GARVEE bond. This appropriate share is determined by the split (if any) between the share of debt service to be covered by future Federal-aid apportionments and non-Federal funds.
Example: Spring-Sandusky Interchange, Ohio. The total project cost is $270 million, and the state of Ohio issued $136 million in GARVEE bonds for which debt service will be wholly repaid from future Federal-aid apportionments. Current Federal-aid highway funds cover an additional $87 million of project costs, yielding a total Federal contribution of $223 million. State and local funds will cover the remaining $47 million. The resulting leveraging ratio is calculated as 270/223 = 1.21 to 1. (Note that for this project, the ratio is lower than the standard 1.25 to 1 ratio because the project involves Interstate reconstruction funds. This funding category carries the lower standard matching ratio of 90 Federal to 10 non-Federal, yielding a leveraging ratio of 1.11 to 1.)
Federal Credit - Leverage of the Federal investment in TIFIA projects and its three predecessor projects is calculated as the total cost of the project in question divided by the sum of the Federal subsidy cost for the project plus any upfront Federal grant contributions.
Example: State Route 125, San Diego County, California. The total project cost is $454.5 million. The project sponsor is scheduled to receive TIFIA assistance in the form of a loan of $94 million and a $33 million line of credit. The estimated subsidy cost for these two instruments is approximately $13.7 million, and no other Federal funds are expected to be directed to this project. The resulting leveraging ratio is calculated as 454.5/13.7 = 33 to 1.
State-Based Federal Credit - When considering the extent of co-investment in the SIB program, this report treats the SIBs themselves as the innovative finance projects, rather than the individual transportation projects that in turn receive financial assistance from the SIBs. The primary reason for calculating leverage at the level of the banks themselves rather than the projects is that Federal assistance conveys to each SIB directly, rather than to the projects that the SIB later supports. Also, the credit assistance subsequently offered by the SIBs to individual transportation projects combines Federal and state capitalization funds; it would not be possible to discern what portions of a $2 million SIB loan, for example, are comprised of Federal and state capitalization grants.
Leverage for the SIB program is thus calculated as the total current capitalization of the SIBs (Federal and state contributions combined) plus any loan repayments to date (representing recycled funds), divided by the amount of Federal outlays employed thus far to capitalize the nation's SIBs.
For projects advanced with Section 129 loans, the calculation resembles that used for funds management tools: the total cost of the project divided by the amount of Federal grant funding that the state subsequently lent to the project.
The traditional model for calculating leverage is one way to describe the power of innovative finance. However, the traditional methodology may, in some cases, over- or under-state the actual benefits achieved from the various innovative finance tools available. It is easiest to illustrate what these limitations are by demonstrating how this model would calculate the leveraging benefits from an example project, if it were assisted by any one of the tools.
Table 2.4 compares the leveraging benefits that would be expected from the different categories of innovative finance, under this theoretical approach. The comparison is achieved by considering a hypothetical bridge project with a total eligible cost of $300 million. Under the traditional Federal-aid program, Federal-aid funds would provide $240 million of the cost, and the state would contribute a non-Federal share of $60 million. For this scenario, the leveraging ratio would be 1.25:1, or each Federal dollar would buy $1.25 worth of capital project.
Table 2.4 Potential Leveraging Ratios for Innovative Finance Tools:
Assisting a Hypothetical $300 million Bridge Project
|Tool Assisting $300 Million
Funds Used over
Life of Project
|Leverage Ratio as Traditionally Calculated||Notes|
|Advance construction, flexible match, tapering||$240 million||1.25:1||Does not show acceleration benefits; does not capture benefit to state of having part of matching funds come from private sector.|
|$300 million Section 129 loan ($240 million Federal-aid funds, plus $60 million non-Federal share||$240 million||1.25:1||Traditional methodology fails to show value of repayments used on other projects (this report considers the SIB itself as the project, rather than individual projects assisted, and includes repayments as well as capitalization).|
|$300 million GARVEE bond issue: debt service 80 percent Federal/ 20 percent state||$240 million (principal) plus Federal share of interest and issuance costs||1.25:1||Does not show acceleration benefits of GARVEE tool, including cost savings due to avoided inflation, economic and safety benefits of having projects in service sooner, etc.|
|$100 million TIFIA loan; remainder toll bonds or other non-Federal||Depends on subsidy rate; as of January 2002, average was 5.30 percent, so $100 million loan would cost $5.30 million||Average leveraging ratio of 56.60:1||Traditional leverage method may overstate benefit of TIFIA credit assistance: is it really accurate to think that the $100 million loan was critical to the project? Or is the real benefit the difference between the financing cost of TIFIA and any higher-cost financing?|
As the table shows, most of the TE-045 projects involve administrative changes affecting cash management, such as partial conversion of advance construction or flexible match, and do not generally reduce the Federal contribution as a share of the overall project costs. Since this methodology measures leverage from the Federal perspective only, this can understate the value to the state of some of the tools. For example, the flexible match tool might enable a private contribution to support a Federal-aid bridge project. Using the traditional leverage calculation, the ratio would not appear any different from a traditional project, but the state would have additional funding to dedicate to other transportation projects.
If the bridge were to be financed with a Section 129 or SIB loan, the state would have to either capitalize a SIB with sufficient state funding (and applicable match) to provide the loan, or directly fund the loan out of their Federal-aid program. In most cases, states have used Federal-aid funding to capitalize SIBs and Section 129 loans. Under these scenarios, the traditional leverage calculation would not show anything different from the standard 1.25:1. In particular, it would not show the benefit of having loan repayments available for future projects. As noted above, in this report, the analysis is done not at the project level, but at the level of the State Infrastructure Bank.
Under the report's methodology, the SIB itself is considered the project, not the individual projects to which it provides assistance, and loan repayments made to date are added to the total capitalization. This level of analysis avoids the limitation identified above. If the bridge were to be financed with a GARVEE bond, again, the Federal and state ratio would probably not vary, and the leveraging ratio would still work out to be 1.25:1.
The tool that shows the highest leveraging potential is the TIFIA credit program. By statute, the credit assistance available under TIFIA is limited to 33 percent of total eligible project costs. Therefore, no TIFIA project can have a leveraging ratio of less than 1:3.03 (based on the TIFIA assistance alone; TIFIA projects with other Federal contributions may have a lower leveraging ratio, based on the other Federal funds involved in the project. Since TIFIA credit assistance is "scored" with a budgetary amount representing the risk of nonpayment, the actual leverage ratio is much higher. As of 2002, the weighted average subsidy rate for TIFIA projects was 5.30 percent. Thus, TIFIA leveraging ratios would be expected to average 56.60:1 (depending on the amount of other Federal funds contributed to the project).
On a theoretical level, therefore, the only tools that should show a higher leveraging ratio than for a traditionally-financed project would be TIFIA and SIBs. This report applies the analysis to all tools, however, for several reasons. First, most of these tools are not used in isolation, but as part of a financing package. Frequently, this package involves greater non-Federal contributions than a traditional project, thereby increasing the leveraging ratio indirectly, if not directly through the tool itself. Using this means of analysis can capture this additional leveraging indirectly. Second, the traditional means of measuring leveraging is a benchmark, for which data are readily available and calculable. Partly for this reason, the leveraging ratio has been used in the past to discuss and evaluate this program, and while its value may be limited, it is useful to examine the data across time, and determine if there are changes or trends of note. Still, as discussed in the following section, innovative finance tools also have the capacity to expand investment in ways that are not easily captured by the traditional comparison of total project costs to grant funds.
As noted above, the traditional approach to calculating leverage characterizes the extent to which non-Federal sources of capital expand the purchasing power of Federal funds. It is also worthwhile to investigate ways in which innovative finance strategies expand the purchasing power of all public funds (Federal, state, or local).
This more subtle form of leverage typically occurs in one of three ways. The first is through attracting new private contributions and equity investment to the mix of funding sources available to fund a given project. The second is by fostering expanded reliance on new project- (or user-) based revenue streams, rather than general taxes, as a means for retiring the given project's debt obligations. And the third mechanism for expanding the purchasing power of existing public resources is by producing cost savings, which in turn free up resources for investment in other projects.
One of the primary purposes of U.S. DOT's innovative finance program is to improve cash flow management and flexibility for transportation agencies. In particular, this involves accelerating the construction and operation of transportation facilities that otherwise would have to wait for pay-as-you-go Federal reimbursements. Advance construction (AC) and partial conversion of advance construction (PCAC) are perhaps the clearest examples of tools that seek to accelerate the completion of a transportation facility.
The simplest way to measure acceleration due to innovative finance is to estimate the timing of a project with a particular innovative finance tool compared to its timing without the tool. The difference can vary significantly - from zero, to two or more years, to the case where a project might not have happened at all without innovative finance.
As noted above, there are two primary economic benefits that can occur because of project acceleration. First, projects with net benefits that occur sooner rather than later will enjoy benefits from the time value of money. Net user benefits typically include travel time savings, reduced operating costs, accident reductions, and environmental impacts.
The second benefit accruing because of project acceleration is the avoidance of costs. The first category of cost savings is due to avoided inflation costs. Project acceleration allows for the purchase of right-of-way and construction services to occur earlier than they would otherwise. To the extent that right-of-way and construction costs are increasing at rates faster than transportation revenues, and inflation in general, there are real economic benefits tied to accelerating transportation projects. In addition, corridor preservation (the purchase of property in anticipation of a future transportation facility) can reduce right-of-way inflation costs to the point where a project may not have occurred otherwise.
The second category of cost avoidance due to acceleration is for rehabilitation projects. It is typically much less expensive to maintain, operate, and rebuild roads in better condition. So, to the extent that acceleration results in earlier road rehabilitation (when roads are still in good shape), costs are reduced. These "life-cycle" costs can also lead to significant savings.
Unfortunately, data to translate the raw information on project acceleration into meaningful information concerning the resulting economic benefits of acceleration described above are not readily available. Project acceleration benefits are thus presented in terms of years, with case studies providing additional qualitative evidence of the types of costs saved and user benefits advanced as a result of constructing projects more quickly than would otherwise be possible.
The construction of new and expanded transportation facilities typically generates two types of economic impacts: short-term and long-term. Short-term economic impacts are related to construction and would be expected to last only as long as the construction period. Long-term economic impacts, on the other hand, are more permanent, typically generated from the translation of travel time savings into productivity and production cost benefits. It should be noted that the short-term economic impacts from highway construction are generally substitution effects in the sense that expenditures on transportation would most likely be spent elsewhere if not for the transportation investment. It is possible, however, that expenditures on transportation construction could have larger economic benefits than would alternative expenditures.
Due to data availability, this report focuses at the aggregate level on the short-term economic impacts. The methodology utilizes the IMPLAN input-output model to estimate total economic impacts from transportation investments related to innovative finance. IMPLAN is the most widely accepted input-output model and offers the benefits of current data and multiple output variables (employment, income, sales/output). Input-out-put models are typically used to capture the multiplier effects of economic activities. The first mechanism through which the multiplier works is by capturing inter-industry purchases. For example, when a new road is built, expenditures are made on many input goods, including materials (cement, steel), engineering services, etc. The second mechanism of the multiplier is induced spending generated by the wages paid to the highway construction workers. For example, wages paid to construction labor will lead to additional spending on food, clothing, transportation, etc.
The measurement of economic impacts demonstrates the magnitude of economic impacts (measured in terms of employment, income, and output) from total construction expenditures on the universe of projects utilizing innovative finance tools. While this measure is important, it should be acknowledged that some of the expenditures would have been made on other transportation projects absent the innovative finance tool.
To supplement the quantitative, macro-level analysis of benefits, case studies show how innovative finance tools have benefited individual projects. These case studies address each of the four major categories of tools, and attempt to capture key aspects of the tools that are difficult to measure, or for which data were not available for the entire group of projects analyzed in this report.
For example, the case studies describe the range of financing approaches and tools that were considered for each project, and the reasons they were rejected in favor of the innovative finance approach. By showing how the new tool or approach proved to be a better choice than traditional methods, the case studies illustrate the value of these tools to state and local governments seeking alternative ways to finance critical transportation projects.
Further, the case studies summarize the benefits accruing from use of the innovative finance tools, in terms of costs and/or time saved (as available from project sponsors) as well as the mobility, safety, environmental, and other benefits of the project's implementation. These case study projects provide real-world documentation of project acceleration and other benefits that were impossible to calculate over the entire universe of projects.
Significant results from the case studies are referenced in Chapter 3.0, while the full case studies are presented in Chapter 4.0 of this report. Table 2.5 summarizes the analysis approach, showing which types of benefits could be measured quantitatively, and which types of benefits were measured qualitatively through the case studies.
Table 2.5 Summary of Analysis Approach by Type of Benefit
|Type of Benefit||Measured Quantitatively
Across Group(s) of Projects
Through Case Studies
|Increased Private Investment||X||X|
|New Revenue Streams||X||X|
|Project Acceleration||X (in years)||X|
Based on the quantitative methodology described in Chapter 2.0, a review of the performance of U.S. DOT's innovative finance initiatives was conducted to measure leveraging, project acceleration, and economic benefits associated with 243 projects supported by innovative finance tools. This section describes those quantitative results, which are summarized in Table 3.1 below.
The dollar value of Federally-assisted innovative finance projects undertaken as of spring 2001 totals over $29 billion, of which $8.6 billion has been funded with Federal-aid grant funding. The remainder has come from other sources, the most significant of which has been bond proceeds. The level of co-investment reveals the extent to which the purchasing power of limited Federal grant funds has been extended by virtue of: (a) new mechanisms to attract other sources of funds to transportation investment, and (b) the Federal government's increased openness towards participation in projects that demand a high level of coordination with other funding partners - and not only the states, FHWA's traditional financial partner. At the same time, innovative finance has played a more subtle role by bringing brand new resources to the table, not only expanding the purchasing power of the Federal dollar but that of all public funds devoted to highway infrastructure investment.
Table 3.1 Summary of Quantifiable Results: Evaluation of Innovative Finance
|Leveraging||$29 billion in projects for $8.6 billion Federal investment; ratio of $3.40 in investment for each Federal dollar (compared to $1.25 for each Federal dollar under traditional Federal-aid program)|
|Private Investment||$48 million from flexible match; $63 million equity contribution. Additional private capital used in financing infrastructure through bonding (Grant Anticipation Revenue Vehicles or GARVEE bonds).|
|New Revenue Streams||$6.3 billion in revenue-backed bonds, $1.8 billion in revenue-backed loans|
|Project Acceleration||Minimum of 50 projects reported acceleration from six months to 24 years over traditional program|
|Economic Impacts||Total employment impacts of $827 million (thousands of job years)
Total output impacts of $91 billion
Total labor income impacts of $30 billion
Federal transportation innovative finance tools were developed both to increase the aggregate level of investment in surface transportation projects and to accelerate the construction of projects that employ these financing techniques. To determine whether these tools have met these objectives, this portion of the report examines the tools' impact on investment levels, commonly characterized as the tools' "leveraging effect."
The term "leverage" has multiple meanings, but FHWA has typically viewed leverage as a measure of the ratio of the federal funds to the total project cost. The sections below first consider the ratio between Federal funds contributed and total investment levels, and then assess any ancillary leveraging benefits produced. These ancillary benefits include attraction of new private investment in surface transportation projects, encouragement of new revenue streams, and generation of cost savings.
As noted above, the concept of "leverage" can be viewed in several ways. The most traditional perspective on leverage focuses on the extent to which Federal funds have been supplemented by other sources of non-Federal capital for a given universe of projects. Under this approach, leverage is defined as the ratio that compares total investment levels (i.e., total project costs) to the amount of Federal grant funding consumed by the project.
By this approach, the standard leveraging (or co-investment) ratio for Federal-aid highway projects is 1.25, reflecting a standard matching requirement under which states may receive Federal reimbursement for 80 cents of every dollar of expenditure.(Note that some states are eligible to receive higher reimbursements due to a large presence of Federal lands within their borders. Also, certain funding categories within the Federal-aid Highway Program permit a higher Federal matching share. These allowances obviously lower the standard leveraging ratio for these states and funding categories to something below 1.25.)
The leveraging ratios discussed below are presented by category of tool - TE-045 (multiple tools), GARVEE bonds, SIBs, and direct Federal credit (TIFIA and predecessor projects). Arranging the discussion of co-investment levels by category of tool helps indicate which tools are most effective at achieving high degrees of leveraging, and which tools are most effective at achieving project acceleration.
As shown in Table 3.2, the overall leveraging ratio for all projects appearing in the inventory of innovative finance projects is 3.40 - nearly three times the standard ratio of 1.25. Not surprisingly, the bulk of the co-investment derives from projects supported by indirect or direct Federal credit offered either through the SIB program or the TIFIA program, respectively. These programs aim specifically to extend the purchasing power of limited Federal grant funds, whereas tools like GARVEE bonds seek principally to accelerate construction of projects financed using traditional ratios of Federal and non-Federal funding sources.
Table 3.2 Non-Federal Co-Investment (Leveraging) Results
(Dollars in Thousands)
|Total Investment||Federal Funding||Leveraging Ratio|
The remainder of this section explains how the preceding figures were derived.
The leveraging ratio shown in Table 3.1 for TE-045 projects was derived by summing project costs and then dividing this figure by Federal grant contributions. This calculation was performed for 62 of the 101 TE-045 projects approved since 1994. As described previously in Section 1.1, the 39 excluded projects fall in the following categories:
For the non-Federally-funded portion of these 62 projects, bond proceeds served as the most significant funding source (almost $933.0 million, most of which is attributable to one project - Texas' George Bush Turnpike, which received a Section 129 loan). Other funding sources include over $500.0 million in state funds, $48.0 million in local funds, and $105.0 million in private funds.
Table 3.3 displays the figures used to calculate co-investment levels for the five projects financed with GARVEE bonds as of spring 2001. The key inputs to the leverage calculation are shown in bold print. The leveraging ratio is calculated by dividing total project costs ($3.313 billion) by the sum of the Federal contributions toward these projects ($2.238 billion). The Federal contributions comprise any grant funding made available through the standard Federal-aid Highway Program as well as the Federal share of GARVEE bond proceeds. This Federal share reflects the projected share of total debt service that the issuer will pay using future Federal-aid apportionments. The across-the-board leveraging ratio for these projects is 1.48 to 1, slightly over the standard Federal leveraging ratio of 1.25 to 1.
Table 3.3 Funding Profile for GARVEE Projects
(Dollars in Millions)
|Project||Total Cost||Federal Funds||Non-Federal Funds||Co-Investment Ratio|
|Federal Share of GARVEE Proceeds||Other Federal Funds||Total Federal Funds|
|I-10 Access Ramps (Arizona)||$42||$39||$0||$39||$3||1.08|
|Interstate System Reconstruction and Rehabilitation (Arkansas)||952||518||313||831||121||1.15|
|Southeast Corridor (Colorado)*||1,674||292||525||817||857||2.05|
|State Route 44 (New Mexico)||375||102||226||328||47||1.14|
|Spring-Sandusky Interchange (Ohio)||270||136||87||223||47||1.21|
* This is part of a larger program of planned issues. A certain amount is being allocated to the Southeast Corridor.
The above figures reflect the plans of finance for the specified projects, meaning that they do not necessarily equal the amounts actually committed to date. (For example, as of summer 2001, Arkansas had issued only $175 million of its total planned GARVEE issuance of $575 million.) Showing the full planned (rather than actual) amount of GARVEE financing is necessary to ensure that the comparison between full project cost and the portion that will ultimately be Federally-funded yields the correct leveraging ratio.
As noted above, the Federal contribution to these projects comprises two potential components:
Non-Federal funds comprise:
The fact that debt service for some GARVEE bond issues is repaid from both Federal and non-Federal sources demonstrates states' alternative strategies for satisfying non-Federal matching requirements. Two states (Arkansas and Colorado) have elected to match Federal funds devoted to debt service on a payment-by-payment basis. The remaining three states (Arizona, New Mexico, and Ohio) are instead repaying obligations to GARVEE bondholders with nothing but Federal funds and satisfying matching requirements through up-front capital contributions from non-Federal sources.
As shown in Table 3.3, the overall leveraging ratio for the five GARVEE projects is 1.48 to 1, which is a bit over the standard Federal matching ratio of 1.25 to 1. However, only one of the five states - Colorado - accounts for this overmatch. The fact that this case of over-match is an aberration in the universe of GARVEE projects affirms that the GARVEE strategy aims primarily to accelerate the construction of projects rather than encourage states to devote new or additional sources of capital to Federal-aid projects.
The remaining four states, in fact, show a combined leveraging ratio of 1.15 to 1 (with a range from 1.08 through 1.21). This "undermatch" occurs for three main reasons. First, one state (Ohio) is using toll credits partially to satisfy its matching requirement. Second, one state (Arkansas) is using Federal apportionments from the Interstate Maintenance program to pay debt service; this program carries a non-Federal statutory matching requirement of 10 percent rather than the more typical 20 percent. Third, the projects in New Mexico and Arizona carry lesser non-Federal matching requirements due to the large amount of Federal lands within the states. In Arizona, for example, Federal funds are reimbursed approximately 93 percent of eligible highway expenditures.
The leveraging ratio of 8.9 shown for SIBs compares the total cost of the 164 SIB-assisted projects for which cost information is available ($4.063 billion) to the Federal contribution to the banks supporting these projects (approximately $457 million). This figure represents the sum of all Federal outlays to the banks. Outlays in turn represent the actual Federal cash payments that are ultimately deposited in the banks in order to fund loans to individual projects.
While the 8.9 leveraging ratio shown for SIBs is the highest ratio shown for any of the categories of innovative finance tools, it may be somewhat overstated because of incomplete information on the Federal contribution. The $457 million figure noted above does not capture any Federal grant funding directed to the individual SIB-assisted projects; if significant amounts of Federal-aid grant funding are also helping to round out the SIB-assisted projects' sources of funds, the leveraging ratio associated with the SIBs could be substantially lower.
The 5.13 leveraging ratio shown for Federal credit compares total project costs of $17.784 billion to Federal funding of $3.468 billion for 13 projects. Ten of these projects have been approved for TIFIA loans, loan guarantees, and/or lines of credit since the inception of the program in fiscal year 1999; the remaining three projects received special legislative approval for Federal credit support prior to enactment of the TIFIA legislation. The Federal contribution of $3.468 billion represents the sum of the subsidy cost of these credit instruments ($289 million) plus the sum of all other Federal grant support directed toward these projects ($3.179 billion), as shown in Table 3.4.
While measuring the level of non-Federal co-investment in Federal-aid projects helps to illustrate the extent to which certain tools position Federal transportation funds to serve as a "helping hand" within larger and more diverse plans of finance, this leveraging ratio itself does not reveal the extent to which specific financing tools have induced greater overall investment in the surface transportation sector. The following discussion of expanded resources provides an assessment of the ways in which innovative finance can attract or otherwise free up new resources for investment in the nation's transportation infrastructure.
Table 3.4 Federal Funding Sources for Direct Federal Credit Projects
(Dollars in Thousands)
|Project||Total Cost||Federal Funds||Co-Investment Ratio|
|Subsidy Estimate||Other Federal Funds||Total Federal Funds|
|San Joaquin Hills Toll Road (California)||$1,456,000||$9,600||$0||$9,600||151.67|
|Foothill/Eastern Toll Road (California)||1,808,000||8,000||0||8,000||226.00|
|Alameda Corridor (California)||2,432,000||59,000||371,000||430,000||5.66|
|SR 125 Toll Road (California)||454,481||13,724||0||13,724||33.12|
|Washington Metro Capital Improvement Program (D.C.)||2,324,000||11,940||1,547,000||1,558,940||1.49|
|Miami Intermodal Center (Florida)||1,348,752||8,856||46,000||54,856||24.59|
|Farley Building/New Pennsylvania Station (New York)||748,800||19,882||268,400||288,282||2.60|
|Tren Urbano Transit Project
|Reno Transportation Corridor (Nevada)||241,130||5,907||18,100||24,007||4.46|
|Staten Island Ferries (New York)||465,824||7,366||97,000||104,366||4.46|
|Tacoma Narrows Bridge (Washington)||888,000||24,498||0||24,498||36.25|
|Cooper River Bridge (South Carolina)||650,000||5,569||123,000||128,569||5.06|
|Central Texas Turnpike (Texas)||3,220,000||88,880||0||88,880||36.23|
Note: This roster of projects excludes a $450 million loan awarded to sponsors of a project to replace and renovate the San Francisco-Oakland Bay Bridge. U.S. DOT awarded TIFIA assistance to the project following preparation of this analysis.
When considering the leverage ratio attributable to Federal credit instruments, it is also possible to compare the budgetary cost of the credit instruments themselves (i.e., the cumulative subsidy cost for all loans, lines of credit, and loan guarantees awarded to date) to the total cost of the projects they support. By this analysis, the leveraging ratio achieved by the TIFIA Federal credit program and its three predecessor projects is 62:1, reflecting the comparison of a total investment of $17.784 billion to the combined Federal budgetary cost of $289 million that has been charged to the Federal credit instruments assisting those projects. The comparison of total Federal investment (rather than simply the subsidy cost of the credit instrument) to total project cost gives the most accurate view of the ultimate leveraging effect of the credit instrument.
To take an extreme example, if the Federal credit instrument assisted a project for which all supplementary funding derived from Federal sources, calculating leverage by comparing the cost of the credit instrument to the total Federal investment would show a high leveraging of Federal funds, even if no non-Federal funds were involved in the project. In this example, it would be difficult to argue that the availability of Federal credit played any meaningful role in reducing project sponsors' reliance on Federal funds, or effectively "leveraged" the Federal contribution.
In contrast, considering all Federal funds (grants and the Federally-funded share of credit instruments combined) when calculating leverage helps to isolate the effect of all Federal sources on total investment levels, and create a clearer picture of how the Federal funds are being leveraged in practice.
Experience since 1994 shows that innovative finance strategies can expand investment in at least three ways:
Cash from the private sector can add to the funding mix for a given project in several ways. First, it can serve as an outright contribution in cases where a private entity provides funds to a project with no expectation of repayment. This happens most often in cases where the private donor expects that the project will create a direct benefit by, for example, improving employees' or customers' access to the donor's facilities. Second, private capital can take the form of an investment in cases where the private investor anticipates receiving a return over time. In these cases, private investment behaves like any form of debt financing, with some form of revenue expected to ultimately be available to provide the return on investment.
Contributions - Looking first at the former case, the main innovative finance tool designed to facilitate private donations is flexible match, which allows states to apply such funds directly to the non-Federal matching requirement. Among the universe of TE-045 projects, 16 flexible match projects attracted private contributions of approximately $48 million. (Additional private contributions of over $55 million have been directed to projects employing other tools, notably advance construction, but these funds' availability for these projects cannot be attributed to the use of the innovative finance technique.)
State officials interviewed for the original TE-045 evaluation in 1996 reported that the availability of the flexible match opportunity clearly influenced the states' ability to undertake these projects. While it is doubtful that any state would turn down an offer of private funding simply for lack of the opportunity to substitute that contribution for the state match, the opportunity to use private contributions as a substitute for public matching funds creates an extra incentive to actively pursue these partnerships. This is especially true in cases where a state faces an extreme shortage of matching funds and would be obliged to defer or forgo the entire project - and the private contribution - in the absence of the flexible match opportunity.
The 16 flexible match projects receiving the $48 million in private contributions represent only those projects that advanced under the TE-045 research project. Flexible match gained approval as a standard Federal-aid practice with enactment of the NHS Act in 1995, it can reasonably be assumed that these 16 projects represent but a fraction of the total number of projects ultimately using private contributions to satisfy non-Federal matching requirements.
Investment - Private investment occurs when a private firm makes an at-risk contribution to a project with expectation of repayment from project revenues - and a return on investment - over time. The primary Federal innovative finance tool aimed at increasing private equity investment is Federal credit assistance; by strengthening a project's overall risk profile, Federal credit is positioned to mitigate the financial uncertainties that can inhibit private investment.
Federal credit assistance, as implemented through the TIFIA program, has yet to demonstrate conclusively its ability to lower barriers to private investment in this fashion, although the proposed financing plan for one TIFIA project (State Route 125 in California) includes an expected equity component of $63 million. With only a few years of experience to date, it is too early to tell whether Federal credit assistance can produce measurable effects on the level of private equity investment in the United States transportation system.
The predecessor projects to the TIFIA program, however, included additional developer financing and/or other equity funding. Plans of finance for the San Joaquin and Foothill/
Eastern toll roads included $69 million and $24 million in developer financing, respectively, and the financial plan for the Alameda Corridor included $411 million provided by the railroads that will use this new grade-separated corridor.
Innovative finance can also expand the level of investment in transportation projects by lowering barriers to debt financing in cases where the principal revenue pledged to repay the borrowed funds derives from new user-based charges and/or is generated from the project itself. Table 3.5 summarizes those innovative finance projects that are anticipated to be financed at least partially from project-based revenues. The table is arranged by category of tool. The dollar amounts shown represent the amount of anticipated debt financing that borrowers expect to repay from project-based fees or other new user charges. These figures are subdivided into two components: bond financing (generally representing revenue bonds to be sold by the project sponsor) and public lending (representing SIB loans, Section 129 loans, or Federal loans provided under the TIFIA program or through predecessor stand-alone legislation).
While innovative finance tools seek principally to accelerate projects or attract new resources to transportation investment, their ability to expand investment by reducing project costs is often not addressed. Innovative finance can generate cost savings in a number of ways, as shown in Table 3.6.
Starting at the top of Table 3.6, any tool designed to accelerate a project's ability to get underway - and reach completion - sooner than otherwise possible helps that project's sponsor avoid costs associated with inflation. However, in cases where a project that would otherwise be funded on a pay-as-you-go basis is accelerated by virtue of a debt financing, the present value of financing costs, including interest expense, must be deducted from the present value of any savings associated with avoided inflation.
Table 3.5 User- or Project-Based Revenue Pledges
|Innovative Finance Tool Category||Estimated Revenue-Backed Financing Amount||Fee Type|
|Bonds (Millions)||Public Loans (Millions)|
|State Infrastructure Banks1||Data not available||$160||Various|
|Section 129 Loan (George Bush Turnpike)||$446||135||Tolls|
|Federal Credit (projects itemized below)|
|Alameda Corridor (California)||1,161||400||Cargo fees|
|Foothill/Eastern Toll Road (California)||1,545||-||Tolls|
|San Joaquin Hills Toll Road (California)||1,170||-||Tolls|
|State Route 125 (California)||247||94||Tolls|
|Miami Intermodal Center (Rental Car Facility only) (Florida)||-||164||Rental car fees|
|Tacoma Narrows Bridge (Washington)||531||240||Tolls|
|Texas Turnpike (Texas)||1,210||800||Tolls|
1 The volume of loans represented in the SIB project inventory totals $761 million, with actual disbursements as of early 2001 totaling $460 million. The repayment sources identified by the states indicate that approximately 20 percent of SIB loan repayments are expected to derive from new and/or specially dedicated revenue streams such as tolls, tax increment financing, special fees, and private payments. The remaining 80 percent would be paid from existing general taxes (such as sales or property taxes) or from existing transportation funding sources (such as existing fuel or motor vehicle registration taxes). While it is expected that the entire $761 million in committed loans will eventually be recycled back into the banks once they are repaid, 20 percent of this total - or $160 million - is expected to derive from new user fees or other project-based revenue streams.
Table 3.6 Alternative Sources of Cost Savings
|Form of Cost Savings||Mechanism to Produce Cost Savings||Relevant Tools|
|Avoided inflation||Project acceleration||All|
|Avoided interest expense||Credit enhancement||SIBs and Federal credit assistance, including Section 129 loans|
|Avoided financing cost||Lower-cost borrowing||SIBs and Federal credit assistance, including Section 129 loans|
The Colorado GARVEE program provides a good example of the discussion that can attend the question of avoided inflation. In 1999, Colorado voters approved a ballot question authorizing the use of GARVEEs to finance a system of 24 corridor projects. At the time of the public vote, one of the key arguments centered on the inflation rate for highway construction. The Colorado Department of Transportation estimated that interest rates on the GARVEEs would range from 4.0 to 5.5 percent. It was estimated that over a 10-year period, interest payments of 5.0 percent plus issuance costs would add $66 to the costs of repaying each $100 increment of bond proceeds. Proponents compared this figure favorably with the costs of inflation if future inflation rates for highway construction activity were to average approximately 8.9 percent. Opponents believed that the projected 8.9 percent inflation rate was too high and noted that lower inflation rates would not only erase any cost advantage associated with the pay-as-you-use financing strategy but indeed render it a more costly option. Actual interest rates on the Colorado GARVEEs issued to date range from 4.61 percent to 5.81 percent, and state DOT officials expect that with sustained inflation rates this debt will produce net savings. However, in Colorado as everywhere else, the capacity of debt financing to lower net costs on projects originally intended to be funded on a pay-as-you-go basis is highly dependent on economic variables that are both hard to predict and far beyond decision-makers' control.
Moving down to the second entry on Table 3.6, the interest cost of debt-financed projects can also be reduced through lower interest innovative financing tools, or through credit enhancement from innovative finance tools.
For example, the Bi-State Development Agency in Missouri received a low-interest loan from the Missouri SIB (the Missouri Transportation Finance Corporation) for a fleet of new buses. The interest rate reduction will save the agency approximately $300,000 over the life of the loan, which will be applied to operating costs for the public transit system (see Missouri SIB case study, page 4-24).
The Puerto Rico Highway and Transportation Authority (PRHTA) also estimated that use of an innovative finance tool reduced their overall financing costs. Without the TIFIA loan provided to the project, PRHTA would have been forced to issue additional revenue bonds, with less favorable overall terms and at higher overall cost (see TIFIA case study, page 4-32).
The tools most closely associated with credit enhancement are Federal credit assistance and Section 129 loans. (SIBs were originally expected to provide credit enhancement as well, but to date few SIB loans have been made in conjunction with larger financings, and thus generally do not serve to improve the issuers' credit standing in the eyes of other co-investors.) One example of such savings is the Section 129 loan made to the President George Bush Turnpike in Texas. The loan enhanced the creditworthiness of the project's $446 million revenue bond issue, saving an estimated $180 million in debt service costs, and allowing the recipient of the loan, the North Texas Turnpike Authority, to free up $20 million that would otherwise have been required for debt reserves (see President George Bush Turnpike case study, page 4-28).
With TIFIA still in its early years, it is too soon to say whether the secondary and subordinate capital provided via TIFIA loans and lines of credit have improved ultimate credit ratings on senior debt obligations and thus yielded the project sponsors lower interest rates on those obligations. Due to its junior lien status and flexible repayment terms, investors may perceive TIFIA assistance as effectively a form of credit enhancement, shielding the senior investors from some types of default. Project sponsors and rating analysts do conjecture that the presence of a standby facility (such as a line of credit) or a junior-lien loan does help alleviate perceived risk and improves both the ratings and the marketability of the senior debt. While it is doubtful that the "light touch" of Federal credit assistance has yet been significant enough to tip the balance in a project's financial feasibility, improved coverage ratios on senior debt as well as the confidence-building presence of the Federal government as a fellow junior investor has likely saved sponsors millions of dollars in interest expense.
Finally, SIB loans and TIFIA credit instruments generally offer a lower-cost borrowing alternative when compared to commercial loans or market-rate taxable bond issues. Of 164 SIB loans contained in the project inventory, 56 are interest-free, 18 carry interest rates of at least 0.5 percent but less than 4.0 percent, 52 carry rates of at least 4.0 percent but less than 5.0 percent, and 13 carry rates of 5.0 percent or more (rates for the remaining projects are either unknown or variable). While these rates are generally lower than commercial rates, it is unlikely that any of these projects would have sought market-rate financing in the absence of the SIB borrowing option. In most cases, the alternative for these projects would have been construction on a pay-as-you-go basis, in many cases necessitating a delay.
As for Federal credit assistance, statute requires that interest rates for TIFIA loans cannot be less than the yield on marketable U.S. Treasury securities of a similar maturity. This language provides a floor, not a ceiling, for the interest rate, but all TIFIA credit agreements executed to date have set the interest rate at this "floor" level. Since the program began, this floor level has been above the interest rate that would be required for a similarly-sized municipal bond issuance.
This does not necessarily mean that TIFIA loans are higher cost than other options available to borrowers. Some TIFIA projects that consider applying for TIFIA either would not be able to obtain this lower-cost municipal interest rate, due to debt limits or ineligibility for tax-exempt financing. Other projects might accept a higher interest rate on the TIFIA component of the financing, because the other terms (such as lower issuance costs) were more attractive, or because the subordination with the Federal government as a reliable junior lien holder made the senior financing available at a lower rate than would otherwise be possible.
The associated savings cannot be determined, due to the difficulty of knowing how individual transactions would have been structured had project sponsors not sought a TIFIA loan, but as long as there exists a differential in interest rates and transaction costs, the TIFIA borrowing option will prove comparatively attractive in a cost comparison. At the same time, however, the extent to which TIFIA borrowers are obtaining interest rate savings by meeting a share of their capital needs through the TIFIA program also represents the extent to which TIFIA loans are merely substituting for other borrowing options, rather than filling financing gaps that actively inhibit access to the capital markets.
Information on the project acceleration effects of innovative finance tools has been difficult to obtain. This is in large part due to the fact that detailed analyses of how projects might be built - and when they might be built - under a traditional scenario versus an innovative approach have not generally been prepared by project sponsors. This kind of "what if" analysis would be speculative in any case. Results presented in this section, therefore, reflect available data contained in the project inventory, but should not be viewed as a complete discussion of the acceleration benefits of innovative finance tools. In fact, it is surmised that such benefits exceed what is quantifiable, given available data. Supporting information of project acceleration effects of innovative finance tools is also highlighted in case studies presented in Chapter 4.0.
Of the universe of 62 TE-045 projects, 50 reported acceleration effects (81 percent). A frequency distribution of the range of acceleration effects is shown in the Figure 3.1. The average project that reported a specific duration of acceleration was advanced by 2.7 years. There were also projects that reported acceleration effects, but did not indicate a specific amount of time of acceleration:
A scatter plot of project acceleration in years compared to project cost is shown in Figure 3.2. Only projects that reported a specific number of years of acceleration are included on this chart. There are no discernible patterns that relate project size to acceleration benefits.
Acceleration benefits were also examined by each finance method tested under TE-045. A summary of characteristics is provided in Table 3.7.
Table 3.7 Summary of TE-045 Innovative Finance Methods and Acceleration Benefits
|Method||Projects with Acceleration/Total Projects||Range of Years of Acceleration|
|Section 129 Loan||1/2||6|
|Section 1044 Toll Investment Credits||1/1||Undefined amount of acceleration|
One would not have occurred without method, one had schedule preservation
Six projects would never have occurred without this funding mechanism one project had undefined acceleration
One would not have occurred, one was undefined
|Partial conversion of advance construction||9/9||0.75-5
Two were undefined
|PV Federal Match||1/1||Project would not have occurred without this funding mechanism|
|Tapered Match||4/7||All were 0.5 years, except for one that indicated that delay was avoided|
The Miami Intermodal Center (MIC) case study (page 4-21) indicates that the MIC Core Initial Phase was accelerated by two years through a loan from the Florida SIB, resulting in an estimated cost savings of $178 million. Other SIBs have reported similar results. For example, the $30 million Ohio SIB loan provided to the Butler County Transportation Improvement District for the $150 million improvement to State Route 129 enabled purchase of right-of-way and other preconstruction activities to occur before the bond sale for the project. As a result, the loan accelerated the $150 million project by at least three years. In addition, South Carolina's SIB, among other tools, is assisting its "27 in 7" program, which will complete 27 years of projects in just seven years. By leveraging its SIB through bonding, South Carolina has been able to advance a significant amount of construction work in a relatively short period of time. More than $2.4 billion worth of projects have begun development and construction as part of the 27 in 7 program, all of which are financed in part by funds from the SIB.
Of the five GARVEE projects, all but one indicated project acceleration. These projects were accelerated by:
Eight of the 13 Federal credit projects indicated acceleration benefits (62 percent). The benefits ranged from two to 26 years, and averaged 12.0 years. However, four out of the eight that indicated acceleration benefits did not estimate the extent of those benefits. With such a small sample, it was not possible to discern any patterns related to the correlation between the amount of acceleration and the project size.
Estimation of the economic effects related to transportation projects funded with the support of innovative finance tools is based on total project costs, regardless of the source of funding (Federal, state, local, private, etc.) or the amount of leverage provided by those tools. Project costs are used as the basis for representing the economic impacts of construction spending for all dollars accounted for in the project inventory. It should be recognized that these impacts do not take into account the opportunity cost of the spending. In other words, most of the direct spending for these projects would have been spent elsewhere in the economy if not for the innovative financing tools. This analysis thus captures the economic contribution of total innovative finance project costs and the related economic activity on the aggregate United States economy. In addition, this analysis provides a breakdown of the economic effects associated with the four primary categories of innovative finance projects: TE-045, SIBs, GARVEEs, and Federal credit projects.
To estimate these economic effects, project costs were first separated by highway, rail/transit, and water ferry spending based on the transportation improvement type; this separation by mode is needed to identify the most appropriate multipliers for the specific type of project. Most of the spending is clearly for highway-oriented projects, but some spending is for transit, and a few projects involve intermodal centers or water ferries. For intermodal centers, construction spending was split into highway and rail/transit. Again, this is an important step because economic impacts vary depending on the type of project (highway, rail, ferry, etc.) due to industry differences in purchasing patterns and wages.
The next step was to take the direct spending impacts by innovative finance category and run the spending impacts through the IMPLAN economic model. IMPLAN is a widely used input-output model used for analyzing the multiplier effects of economic events. The multiplier effects are composed of two primary impacts: indirect and induced effects. Indirect effects are generated as the result of direct spending on construction, which requires supplier inputs such as cement, wood, engineering services, etc. Induced effects refer to the re-spending of income created by direct and indirect job creation.
Economic impact results from the analysis are presented in two tables. Table 3.8 presents economic impacts for each of the four categories. Table 3.9 examines impacts by mode. Key findings include:
Table 3.8 Economic Effects by Innovative Finance Category
|Employment Impacts (Thousands of Job Years)|
|Output Impacts (Millions of Dollars)|
|Labor Income Impacts (Millions of Dollars)|
Source: IMPLAN input-output model; Cambridge Systematics, Inc.
Table 3.9 Economic Effects by Mode
|Employment Impacts (Thousands of Job Years)|
|Output Impacts (Millions of Dollars)|
|Labor Income Impacts (Millions of Dollars)|
Source: IMPLAN input-output model; Cambridge Systematics, Inc.
The Federal effort to respond to transportation funding needs throughout the nation has resulted in the creation of new financing programs and prompted more vigorous debate about financing issues and challenges. Through this debate, greater willingness to look beyond traditional Federal-aid grant reimbursement has been encouraged, and new players and new viewpoints have been introduced to the field of transportation finance. In addition, pilot programs not captured in traditional lists of innovative finance tools, such as the value pricing pilot program, and new Federal flexibility with respect to innovative contracting strategies can also help incubate new partnerships and spark new cost-effective approaches to project delivery.
The results presented in Chapter 3.0 quantify the significant benefits afforded by Federally sponsored innovative finance tools. Other benefits not easily quantified but equally important can be inferred from examining the experience of state and local transportation agencies that have used innovative tools to solve a specific project financing problem.
The case studies presented in this section spotlight the experiences of 11 project sponsors that have successfully developed financing packages that include Federally sponsored innovative finance tools. The projects advanced with the help of these tools range from relatively small undertakings, such as a $6.7 million interchange in Salina, Kansas, to Colorado's $1.67 billion Southeast Corridor project. Each major innovative finance tool is represented in these case studies, and most of them feature a combination of tools. For example, the $1.4 billion Phase I Miami Intermodal Center has received two TIFIA direct loans backed by rental car fees and motor fuel tax revenues and other loans from Florida's SIB.
Eleven projects were examined in detail to assess the financing challenges faced by transportation agencies across the country, the options available to address funding shortfalls, the selected financing approach, and the benefits of the project made possible through Federally supported innovative financing tools. Case studies are presented for projects that have utilized tools in each of the four major financing categories:
In each case study, the project is briefly described, followed by a discussion of the financing challenge it faced. The innovative financing approach selected to solve the financing problems is then summarized, as well as other approaches considered and the key reasons for their rejection. Finally, the benefits of each project are highlighted to illustrate the cost savings and project acceleration impacts, as well as the mobility, environmental, and other outcomes afforded in part by the innovative finance tools.
The following case studies are presented in the remainder of this chapter:
In 1994, the U.S. DOT and FHWA undertook a major initiative to promote and facilitate infrastructure investment. This initiative was launched with the introduction of an experimental "Test and Evaluation" program, designated as TE-045, to test and evaluate a range of new financial strategies designed to stretch limited transportation dollars and enhance the flexibility of Federal-aid highway funds. The TE-045 initiative has generated substantial benefits in terms of building more projects with fewer Federal dollars and accelerating project construction. Many of the innovations tested have been codified by the National Highway System Designation (NHS) Act of 1995 and the Transportation Equity Act for the 21st Century (TEA-21). To date, this program has supported over 100 projects in 41 states with a total construction value of nearly $7 billion.
The four TE-045 case studies represent projects or programs of projects that have utilized advance construction (California), flexible match (Isaac's Canyon in Boise, Idaho), tapered match (Magnolia Road/Interstate 135 interchange in Salina, Kansas), and Section 1044 toll credits (Rhode Island's Interstate 195 relocation). Unlike the other TE-045 case studies, which represent projects either already completed or underway, the Rhode Island case study represents prospective use of an innovative finance tool. These case studies illustrate the flexibility and leverage afforded by Federal funds management tools developed through the TE-045 initiative.
California - Advance Construction
The California Department of Transportation (Caltrans) uses advance construction extensively to maintain project schedules and accelerate projects prior to the availability of Federal-Aid Highway Program funds. The technique is especially useful near the end of the Federal fiscal year when Federal funds may be exhausted. Caltrans is able to use funds from the state's highway account, while reserving the ability to receive Federal funds when additional funds are available in the following Federal fiscal year. Through the use of advance construction and a variation of the technique, partial conversion of advance construction, Caltrans is able to acquire right-of-way and let construction contracts for critical projects based on project readiness rather than Federal funding cycles.
Another use of the advance construction technique has been the ability to respond to increased funding provided by TEA-21. Through a combination of Federal requirements and state statutes, local agencies share in about 40 percent of the annual Federal funds allocated to California. As a result of the significant increase in Federal funds available to California with the passage of TEA-21 and associated matching fund requirements, local agencies were unable to respond immediately to the increased funds. Instead, to continue to fully utilize the state's obligation authority, Caltrans converted previous advance construction authorizations and received Federal funds as reimbursement. In this way, California did not forego any Federal funding allocated to the state.
Caltrans funds approximately 50 percent of its annual Federal-aid formula funds via the advance construction technique - predominantly for construction, right-of-way acquisition, and preliminary engineering efforts. The Department's goal is to limit use of this technique, however, to no more than one year of Federal funding. Table 4.1 displays Caltrans' use of advance construction for Federal fiscal years 1995 through 2000.
Table 4.1 State of California Advance Construction Balance - 1995 Through 2000
(Dollars in Millions)
|Federal Fiscal Year||Advance Construction Balance 1||Change in Balance 2|
1 Dollar amount of Federal-eligible projects authorized (costs prior to conversion from advance construction are paid with state funds).
2 Denotes net change in advance construction authorized (new and converted) during the year.
Source: California Department of Transportation.
Under the partial conversion of advance construction technique, funds may be obligated in a phased fashion rather than obligating funds for an entire project in a lump sum. If a project is multi-year in nature, Caltrans will assess the timing of the project relative to the timing of Federal-Aid Highway Program funds authorization and use partial conversion of advance construction, as needed, to prevent project delays.
California uses advance construction for a majority of its preliminary engineering, construction, and right-of-way acquisition. It has been particularly beneficial for High-Priority Projects, right-of-way acquisition, and emergency response projects, among other purposes. A brief example of each of these applications is provided below.
TEA-21 authorizes High-Priority Project (HPP) funding. Over the course of TEA-21, however, only a certain amount of the HPP funding is available each year. The percentage of funds made available in each of the six years of TEA-21 is provided in Table 4.2.
Table 4.2 High-Priority Project Funding Annual Allocation Percentages
|Federal Fiscal Year||Percentage Allocated|
TEA-21 granted the State of California a $10.5 million High-Priority Project to build a freeway extension on Route 41 crossing Madera and Fresno counties. In July 1999, the local agencies responsible for constructing this project were ready to advertise the project. At that time, however, because of the spend-out provisions for HPP projects, only $4.6 million of the $10.5 million in HPP funds were available. The total $10.5 million would not be available until October 2002, resulting in a potential project delay of three years.
Using advance construction, however, Caltrans was able to authorize work as soon as the project was ready to be advertised. Caltrans obligated the available HPP funds ($4.6 million) and authorized the difference ($5.9 million) using advance construction procedures. Each October, when another allocation of HPP funds is made, Caltrans converts the appropriate amount from advance construction balances and is reimbursed for expenditures of state funds with Federal dollars.
Federal authorization is required prior to contacting property owners in the right-of-way acquisition process and, under traditional funding, Federal funds are obligated with authorization. Using partial conversion of advance construction, California is able to contact property owners early on in the project while preventing authorized funds from being tied up while in negotiation with property owners. As some complicated right-of-way acquisitions can take two to three years, without this technique, authorized funds could be tied up for long periods of time.
Caltrans has used advance construction for Emergency Response projects - such as those resulting from earthquake damage - in cases where Emergency Response funds were not available at the time of need. Emergency Response projects totaling approximately $80 million to $90 million have been constructed using the advance construction tool. Once Emergency Response funds became available, advance construction balances were converted and Federal funds were used to reimburse the state for its costs.
The benefits of advance construction and, in particular, partial conversion of advance construction to the Caltrans construction program include the following:
California Department of Transportation. Correspondence with Dick Petrie. May, June, and July 2001.
Project in Brief
The Isaac's Canyon Interchange is located on Interstate 84 east of Boise, Idaho. The interchange was constructed primarily to accommodate growth in traffic forecasted to result from the expansion of a local technology firm. Prior to construction of the Isaac's Canyon Interchange, vehicles traveling to the technology firm from Boise on I-84 would exit at the Gowen Road Interchange. During peak hours, this traffic would back up onto the freeway and slow traffic and create safety problems. The new interchange at Isaac's Canyon provided an alternative to the Gowen Road Interchange and improved traffic flow and safety conditions on I-84.
The Isaac's Canyon Interchange was built through a partnership of the Idaho Transportation Department (ITD) and the technology firm. The total project cost was $10.5 million (1998 dollars). The interchange was dedicated in December 1997.
Concerned about the impact that its expansion would have on traffic in the area and access to its offices, the technology firm approached ITD about constructing a new interchange on I-84. At this point, ITD did not have plans for an additional interchange in that region. Other significant project needs throughout the state had prevented a new interchange, such as the Isaac's Canyon Interchange, from being included in the State Transportation Improvement Program, and ITD did not have funds allocated for the project.
Selected Innovative Finance Approach(es)
Under the Federal-Aid Highway Program, a matching ratio must be provided by the state for all projects that receive Federal funds. In this case, for the $10.5 million total project cost, the Federal share would typically be $9.7 million (approximately 92.0 percent) and the non-Federal match would be just over $0.8 million (approximately 8.0 percent). ITD, however, did not have funds allocated to the project.
The technology firm offered to contribute $5 million to the project. As an alternative to ITD providing matching funds from their own resources, the $5 million contribution served as the non-Federal match and also provided extra funding beyond the required match. Through this use of flexible match, construction of the Isaac's Canyon Interchange was advanced from not even being on the state's priority list to being accelerated by at least one year.
The Isaac's Canyon Interchange project is the first public-private partnership in the state and the contribution from the local technology firm is the single largest contribution by a private corporation to the state highway system in Idaho's history. A summary of the project funding is provided in Table 4.3.
Table 4.3 Isaac's Canyon Interchange Project Funding Summary
(Dollars in Millions)
|Federal-Aid Highway Program Funds||$5.5||Preliminary Engineering||$1.3|
|Private Technology Firm||5.0||Construction Engineering||1.0|
|Total Sources||$10.5||Total Uses||$10.5|
Other Finance Tools Considered
ITD had not included the construction of a new interchange at this location on I-84 in their State Transportation Improvement Program at the time the technology firm approached them proposing the Isaac's Canyon Interchange project. Due to other priorities in the state, if the private firm had not offered the $5 million contribution, this project would not have been built for several years at least and may never have been built at all.
Benefits of the Finance Approach
By providing an alternative to the existing I-84 interchange, the Isaac's Canyon Interchange alleviated traffic congestion and thereby improved safety conditions and traffic flow. It is anticipated that the Isaac's Canyon Interchange also will be able to handle projected growth in the area.
Use of the private contribution as matching funds on the Isaac's Canyon Interchange enabled ITD to use its own funds as matching funds on other projects throughout the state.
Project in Brief
The Rhode Island Department of Transportation (RIDOT) is relocating Interstate 195 (I-195) to replace an aging six-lane facility built in the 1950s. The relocation of I-195 requires the construction of an eight-lane, 1.5-mile segment of highway and bridge crossing over the Providence River to join I-95 and I-195. The current facility is experiencing structural deficiencies and has inadequate capacity to meet future traffic demand.
As of July 2001, the relocation of I-195 is anticipated to cost $447 million. The project began in 1999 and is planned to be complete in 2012.
The proposed financing plan for the relocation of I-195 calls for the allocation of $20 million in FY 1999, $30 million in each of FY 2000 and FY 2001, and an average of $33.8 million per year in FY 2002 through FY 2012 for a total of $452 million (includes a $5 million reserve over estimated project costs of $447 million). While these allocations will provide sufficient levels of Federal and matching funding to complete the project, there will be short-term cash flow shortages during the peak of construction. The cash flow problems are due, in large part, to the issuance of three major contracts for the project during 2003 and 2004. The anticipated cash deficit is shown in Figure 4.1.
A possible solution to the cash flow gap would be to delay the start dates of major elements of this project. The condition of the existing facility, however, does not make this a viable option. Any delays in opening of the new Providence River Bridge will increase the costs of maintaining the existing structure and require additional funding to extend the life of the existing bridges. In addition, the project elements are interdependent and a delaying approach would have an adverse impact on the entire relocation project.
Selected Innovative Finance Approach(es)
To resolve the cash flow deficit and maintain the project schedule, RIDOT is proposing the use of several innovative finance techniques. It is anticipated that the project will employ Section 1044 toll credits in combination with advance construction and GARVEE bonds.
The State of Rhode Island has been amassing up to $20 million in toll credits for use as soft match on projects and portions of other long-term projects such as the relocation of I-195. The state anticipates managing some of the cash flow concerns by making the I-195 relocation project 100 percent Federally funded and using the toll credits as match money as needed.
Rhode Island is beginning to authorize many projects, such as the I-195 relocation, that are long-term in nature. These projects that span many years have not been typical in the state in the past. The use of toll credits will enable the state to authorize such long-term Federal projects without having to set aside significant cash balances as matching funds. A summary of the project funding is provided in Table 4.4.
Table 4.4 Summary of I-195 Relocation Project Funding
(Dollars in Millions)
|Total Sources||$447||Total Uses||$447|
*Includes some State Match.
The other innovative finance techniques to be utilized for this project are described in the section below.
Other Finance Tools Considered
In combination with the Section 1044 toll credits, RIDOT plans to employ advance construction and GARVEE bonds to finance the relocation of I-195. Use of these two innovative finance tools is described below.
To meet the project schedule, RIDOT will need to use advance construction for project authorizations. The authorization level will outpace the scheduled Transportation Improvement Program allocation for the project significantly. Figure 4.2 shows the amount of authorizations required and the potential advance construction balance that will need to be carried during construction.
GARVEE bonds would assist RIDOT in maintaining the desired construction schedule despite the cash flow constraints in years 2006 to 2011. There are numerous ways to structure a GARVEE bond issue for this project. At this point, the most feasible option is the issuance of $250 million of bonds in 2005 with a 10-year repayment schedule beginning in 2006. This scenario would decrease the annual Federal authorization requirement for 2006 through 2012 by $16 million. It would, however, extend the payments out four additional years. By issuing $250 million in GARVEE bonds prior to 2006, the state would be in a position to actually accelerate construction where technically feasible. This could result in savings due to avoidance of construction-related inflation.
Benefits of the Finance Approach
Overall benefits of the relocation of I-195 include the replacement of 19 of the state's 199 structurally deficient bridges and provision of a facility that will adequately meet future traffic demand.
Project in Brief
The Magnolia Road and Interstate 135 (I-135) Interchange, located in Salina, Kansas, was developed to improve traffic flows in the South Salina area. The interchange improves access to the Central Mall, reduces traffic at a nearby interchange, and reduces traffic volumes and thereby the need to widen local streets in the vicinity of the Interchange. The new interchange also is expected to encourage economic development and growth in the area by providing direct access to and from I-135.
The final project cost was $6.7 million. Construction began in April 1996 and was completed in June 1998.
The Magnolia Road/I-135 Interchange was financed with a combination of Federal-Aid Highway Program funding and local funds from the City of Salina. Under the Federal-Aid Highway Program, typically a standard matching ratio is maintained throughout the life of a project's construction. That is, every voucher a state submits for Federal reimbursement would be limited to a set percentage of the actual reimbursable expenses incurred on the project. In the case of the Magnolia Road and I-135 Interchange, $2.6 million of Federal-Aid Highway Program funds were available for the project (approximately 40 percent of project costs). The remaining $4.1 million of project costs (approximately 60 percent) was to be paid by the City of Salina. The City of Salina, however, requested to initially not put up the full 60 percent share of project costs at the start of the project, but to pay the 20 percent match and progress payments.
Selected Innovative Finance Approach(es)
The City of Salina was responsible for all project costs in excess of Federal-Aid Highway Program funding and they wanted to delay issuing the full amount of bonding and draw interest on already issued temporary notes as possible. As a result, the Kansas Department of Transportation employed tapered match to reduce the burden on the city in the early stages of the project.
Under tapered match, the matching ratio is permitted to vary over the life of the project. Federal reimbursement of expenditures can be as high as 100 percent in the early project phases, so long as by the time the project is complete, the overall Federal contribution does not exceed the Federal-Aid Highway Program limit.
For the interchange project, a payment schedule for the City of Salina was established that allowed the matching ratio to be 80 percent Federal-Aid Highway Program funding and 20 percent local funding (as opposed to 40 percent Federal and 60 percent local), until the Federal share of $2.6 million was expended. This tool enabled the City of Salina to accumulate funding for the project, and use Federal funds to bring the project through the critical early stages of construction. At the end of the project, however, the ratio of Federal to local funds expended was 40 percent Federal to 60 percent local.
In addition to tapered match, the city used temporary notes and kept local project funds in an interest bearing account until those funds were needed. As a result, the use of tapered funding enabled the project to be advanced while the city was accruing funds for the local share.
Other Finance Tools Considered
The Kansas Department of Transportation considered using conventional matching that would have required a 60 percent local match throughout the project. Sufficient local funds were not available, however, in the early stages of the project and using this option could have delayed the project. Also, due to the city's request, the Kansas Department of Transportation considered the tapered financing and use of progress payments.
Benefits of the Finance Approach
Tapered match reduces the need for a local government, like the City of Salina, to fully accumulate their share of project costs prior to construction providing more flexibility to meet funding goals. The construction of the Magnolia Road and I-135 Interchange was able to proceed and meet the City of Salina's goals and Kansas Department of Transportation's needs for local match.
Depending on the specific financial situation of a given locality, the following benefits may result from the use of tapered match:
Grant Anticipation Revenue Vehicle (GARVEE) bonds generate up-front capital for major highway projects that a state would be unable to construct in the near-term using traditional pay-as-you-go funding sources. GARVEEs are innovative, in that they allow states to issue bonds that are repaid from future Federal-aid funds. The NHS Act further expanded the eligibility of debt financing costs for Federal-aid reimbursement. This provision was later codified into permanent highway law as an amendment to Section 122 of Title 23 U.S.C.
GARVEEs are typically used in conjunction with advance construction, to enable using future Federal-aid funds beyond the current authorization period for debt service payments. The GARVEE bond technique enables a state to accelerate construction timelines and spread the cost of a transportation facility over its useful life rather than the construction period.
To date, five states have issued $1.8 billion in GARVEEs to supplement traditional "pay-as-you-go" financing methods. Two of these states - Colorado and New Mexico - are highlighted in the case studies below. Both states are combining GARVEEs with innovative partnerships and project delivery approaches to build more needed projects sooner and at lower cost.
Project in Brief
The Southeast Corridor is a joint project between the Colorado Department of Transportation (CDOT) and the Regional Transportation District (RTD). The project is the largest surface transportation project undertaken to date in the State of Colorado. State officials chose a unique contracting approach for the project, employing a single design-build contract for both transit and highway components. The highway improvements consist of reconstructing and widening 14 miles of I-25 and four miles of I-225. The light rail portion of the project is 19 miles in length, will be grade-separated and double-tracked, and will include 13 light rail stations and park-and-ride facilities. The multimodal project is expected to cost approximately $1.67 billion and be completed in five years, with a planned substantial completion date in 2008.
The Southeast Corridor, one of Colorado's highest priority travel corridors, will link the two largest employment centers in the Denver region - the Southeast Business District and the Central Business District. In 1992, the Denver Regional Council of Governments conducted a study of the Corridor and determined that traffic control tools alone were not sufficient to alleviate the congestion and that capital improvements were needed.
Given the Southeast Corridor's estimated $1.67 billion cost and the short timeframe desired for project completion, Colorado faced a substantial financing challenge. The level of funding available to the project under a pay-as-you-go approach would not have been sufficient to provide needed funding for the project or resolve the congestion and safety concerns within a satisfactory timeframe. CDOT would have had to dedicate almost 40 percent of its annual $300 million in Federal apportionments over seven years to fund the highway portion ($795 million) of the project under a pay-as-you-go approach. As an alternative to pay-as-you-go funding, CDOT obtained voter approval for the issuance of GARVEE bonds in November 1999.
Selected Innovative Finance Approach(es)
The project is being financed through a combination of a GARVEE bonding program, Federal Transit Administration discretionary funds via a Full Funding Grant Agreement (FFGA), a local bonding program, and state and local funds. The complete project funding is detailed in Table 4.5.
Table 4.5 Southeast Corridor Project Funding
(Dollars in Millions)
|FFGA (RTD)||$525||Preliminary Engineering||$18|
|GARVEE Bonds (CDOT)||680||RFP Development||141|
|Sales Tax Bonds (RTD)||324||Design-Build Contract||1,187|
|Sales and Use Tax Revenue (CDOT)||115||Additional Construction Activities||328|
|Local Funds (RTD)||30|
|Total Sources||$1,674||Total Uses||$1,674|
In May 2000 and April 2001, CDOT sold $536 million and $539 million of GARVEE bonds, respectively. A portion of these funds will be used for improvements to the I-25 Southeast Corridor. The 15-year bonds, which received ratings of Aa3/AA/AA from the three rating agencies, are to be repaid with future Federal funds, sales and use tax matching funds, bond proceeds, and interest earnings. These bonds represent CDOT's first two GARVEE issues of a planned $1.7 billion program for high-priority projects financed in whole or in part by Federal funds. Per legislative mandate, CDOT's annual GARVEE debt service may not exceed 50 percent of CDOT's aggregate Federal transportation dollars reimbursed in the prior state fiscal year.
Other Finance Tools Considered
CDOT considered various other funding alternatives for the Southeast Corridor project. These alternatives and the reasons for not using them are described briefly below:
Benefits of the Finance Approach
The Southeast Corridor's unique financing plan enables both the highway and transit elements of the project to be built in the desired timeframe without requiring increased or new taxes. The financing plan shows strong debt coverage and generates substantial working capital. These factors combine to both enhance the placement of debt and provide a cash-flow cushion.
The integration of the highway and transit elements in both the design-build implementation and financing plans facilitates project acceleration. In turn, the project acceleration achieves cost savings for the project based on current assumptions regarding inflation. Through partnerships, innovative delivery, and leveraging Federal resources with GARVEEs, CDOT and RTD are building the Southeast Corridor years earlier and at a lower cost than possible under traditional approaches.
The Southeast Corridor is expected to provide many benefits to its riders and the community at large. These benefits include improvement of transit travel time and reliability, attraction of additional transit riders, enhancement of safety for motorists, replacement of aging infrastructure, reduction in travel time and congestion on freeway segments and nearby arterial streets, and support for rapidly growing residential and commercial areas.
Project in Brief
The New Mexico State Highway and Transportation Department (NMSHTD) reconstructed and expanded 123 miles of State Route 44 (NM 44) from two lanes into four lanes. The total estimated project cost was $364 million and the project was completed in November 2001.
NM 44 (now renamed U.S. Highway 550), which runs northwest from Bernalillo to just outside of Bloomfield, is the primary trade and tourist route into the northwest quadrant of the state. It is considered to be of central importance to improving economic development in northwest New Mexico. The Corridor also has a history of high accident rates and is in need of enhancement.
A private sector developer, Mesa, PDC, owned by Koch Performance Roads, Inc., worked with NMSHTD to deliver the project through an innovative public-private approach that relied upon GARVEE and State Highway Commission bonds as the primary financing mechanisms. Further, the road carries with it a 20-year warranty - the first of its kind in the United States - saving the state significant maintenance costs. Under a lump sum performance-based contract, Mesa, PDC designed, managed construction, and warranted the project. The project took three years to complete - an estimated 24 years earlier than it would have taken under a traditional approach.
Based upon concerns about public safety and the desire to provide economic development opportunities to northwestern New Mexico, the state determined that construction on NM 44 could not be delayed. The substantial project cost of $364 million coupled with the short timeframe desired for project completion presented the state with a significant financing challenge. Given New Mexico's estimated average annual highway apportionments throughout TEA-21 of $256 million, if the project were to be built over five years under a pay-as-you-go approach, it would take more than a quarter of the state's apportionment in each of those five years.
Selected Innovative Finance Approach(es)
To finance the reconstruction and expansion of NM 44, the state determined that GARVEE debt would be feasible and that such debt would not count against the state's statutory debt ceiling. The New Mexico Finance Authority issued approximately $102 million of GARVEE bonds in September 1998. Average annual debt service is approximately $9.5 million and the bonds will reach maturity in 18 years. The GARVEE debt received credit ratings of Aaa (Moody's) and AAA (Standard & Poors) - made possible by bond insurance.
To complement the GARVEE debt, NMSHTD is meeting the requirement to match Federal-Aid Highway Program funds through a "soft match." By constructing a separate portion of the facility utilizing state funds, New Mexico has leveraged those funds into the match for the project. In addition, the state is utilizing the waiver of match that is available where the corridor crosses Federal lands. New Mexico also received approval to provide the non-Federal match for a program of projects instead of project-by-project match. New Mexico will be allowed to use tapered net present value to calculate non-Federal match and the state will bill FHWA based on the principal and interest costs for the bonded portion of the construction program. These innovations were approved under the TE-045 program.
In 1998, subsequent to the decision to issue GARVEE debt, the New Mexico Legislature also granted the State Highway Commission authority to issue bonds for 17 corridors throughout the state. The bonds authorized by the Legislature are commonly known as CHAT (Citizens Highway Advisory Task Force) bonds. The State Highway Commission has issued four CHAT bond series beginning in October 1998, with $214 million of the proceeds and a portion of the interest and bond premium budgeted for NM 44. The CHAT bonds are being retired with FHWA funds on a reimbursement basis. FHWA has allowed the excess state match credited to the GARVEE bonds to be applied to the CHAT bonds.
In addition to the GARVEE and CHAT bonds, the NM 44 project is utilizing a warranty. For a one-time cost of $66 million, Mesa, PDC is guaranteeing the performance of the pavement for 20 years from the date of completion and the bridges, drainage, and erosion control features of the highway for 10 years. Table 4.6 summarizes NM 44 project funding.
Table 4.6 Summary of NM 44 Project Funding
(Dollars in Millions)
|GARVEEs (Proceeds & Premium)||$102||Construction||$249|
|CHATs (Proceeds & Premium)||226||Construction Management||49|
|GARVEEs (Proceeds & Premium)||8||Debt Service 1||9|
|CHATs (Proceeds & Premium)||17||Bond Sale Expense||2|
|State Road Fund||22||Total Other||$11|
|Total State||$47||Total Uses||$375|
1. Capitalized interest from GARVEE proceeds; future debt service will be paid with FHWA funds.
Other Finance Tools Considered
NMSHTD considered various other financing alternatives for the NM 44 project. These alternatives and the reasons for not using them are noted below:
Benefits of the Finance Approach
GARVEE and CHAT bonds in conjunction with the public-private partnership will save New Mexico almost 24 years in project delivery schedule and at least $89 million in maintenance costs over 20 years. In addition, the issuance of the GARVEE debt will have a limited effect on the state's credit rating or borrowing capacity. This project exemplifies how innovative financing, design/construction management, and roadway warranty can be combined to develop a project on an unusually fast schedule with notable cost savings and improved performance.
|Financing Approach||Start Date||Completion Dates|
A State Infrastructure Bank (SIB) is a state (or multistate) revolving fund that, much like a private bank, uses "seed" money provided in this case by Federal-aid funds matched with non-Federal funds. Projects are then selected for SIB financial assistance, which can include loans, loan guarantees, standby lines of credit, letters of credit, certificates of participation, debt service reserve funds, and bond insurance.
SIBs allow states to leverage additional transportation resources, accelerate construction timelines for projects with dedicated revenue sources, and recycle assistance to traditional non-revenue-generating projects. Further, the credit enhancement techniques offered through SIBs demonstrate public acceptance for projects, enhance the coverage margin on outstanding debt, and improve the credit quality of projects receiving SIB assistance.
As of September 2001, 32 states have entered into 250 SIB loan agreements with a dollar value over $2.8 billion. The Florida and Missouri SIBs are highlighted below.
Another type of state-based credit are Section 129 loans. Authorized under Section 129 of Title 23 U.S.C., states may use Federal aid to fund loans to projects with dedicated revenue streams. Such streams may include either toll or non-toll revenues. States have the flexibility to negotiate interest rates and other terms of these loans. When a loan is repaid, the state must use the funds to make loans or grants to other Title 23-eligible projects. Section 129 loans thus allow states to leverage additional transportation resources and recycle assistance to projects that are not in a position to support debt. Texas is the only state to date that has elected to use a Section 129 loan, for the President George Bush Turnpike.
The following sections describe the Florida and Missouri SIBs and a Section 129 Loan used in Texas.
Florida State Infrastructure Bank and the Miami Intermodal Center Project
The Florida Department of Transportation (FDOT) - one of 10 state transportation departments authorized under the initial State Infrastructure Bank (SIB) pilot program - has operated a SIB since 1996. TEA-21 gave Florida (along with California, Missouri, and Rhode Island) the opportunity to expand its SIB program by using Federal transportation funds authorized for fiscal years 1998 through 2003.
In addition to its Federally authorized and funded SIB, in June 2000, FDOT created a separate state-funded SIB, capitalized with $150 million in state funds ($50 million per year over three years). FDOT has developed a single application process and program guide-lines for the state-funded and Federally funded components of its SIB program.
The Florida SIB has been quite active since inception. As of October 2000, $158 million has been capitalized (including interest earnings) in the combined SIB ($107 million in the Federally funded SIB, $51 million in the state-funded). Planned additional capitalization through 2010 will bring the SIB up to $542 million ($288 million in the Federally funded SIB, $254 million in the state-funded SIB).
As shown in Table 4.7, as of October 2000, the combined Florida SIB had approved 29 loans totaling $424 million, leveraging nearly $2.8 billion in total project investment. The SIB has been able to approve this significant amount of loans with the existing $158 million in capitalization via a combination of funds recycling on short-term loans and the ability to commit planned future capitalization funds.
Table 4.7 Summary of Florida SIB Projects - as of October 2000
(Dollars in Millions)
|Project Type||Number of Projects||Amount of Loan Commitments||Total Project Cost|
The Miami Intermodal Center (MIC), located in Miami-Dade County next to the Miami International Airport (MIA), is a major project receiving assistance from the Florida SIB. The MIC will serve as a central transfer point to a wide variety of other transportation modes including to light, commuter, and heavy rail lines; to the Airport/Seaport Connector bus; and to private automobiles and bicycles. The MIC also will become an extension of the airport, accommodating airline ticketing, baggage claim, rental car services, limousine services, and parking.
Approximately 75,000 passengers per day are expected to use the MIC. Of these, 60 per-cent or 45,000 would be traveling to or from the Airport on the automated people mover.
The capital cost of the MIC is estimated to be $1.35 billion (in 1999 dollars). Construction of the various components of the MIC will be phased over a 12- to 15-year span based on current projections of patronage demand, the need for increased capacity, and funding availability.
The SIB loan is being used specifically for design and construction of the MIC Core Initial Phase. The MIC Core will be the intermodal transfer hub of the entire project. It is anticipated that construction of the MIC Core will take five years and be completed in 2005.
The Florida SIB made a $25 million loan for design and construction of the MIC Core Initial Phase. The SIB loan, with a zero percent interest rate and a term of 10 years, is being used to fill a cash flow gap in the initial phase of the MIC financing program.
In addition to the SIB loan, the MIC will receive funding from a variety of Federal, state, and local sources. In addition to a variety of state and local funding, two Federal loans will be provided to the project via the TIFIA program (one loan of $269 million, secured by state fuel tax revenues, and the other $164 million, secured by rental car fees). The MIC's complete project funding plan is summarized in Table 4.8.
As it has done for nearly 30 projects to date, the Florida SIB has facilitated acceleration of the MIC project and associated cost savings. Specifically, the MIC Core Initial Phase was accelerated by two years, resulting in estimated cost savings of $178 million. These savings were achieved through the avoidance of construction cost inflation and the ability to accelerate land acquisition and thereby minimize the upward cost pressures caused by real estate speculation in the area.
As a significant component of the region's transportation network, the MIC is expected to help solve mobility problems that plague the growing South Florida area. The MIC also should enhance the long-term viability of the Miami International Airport by incorporating certain landside functions and consolidating rental car functions, thereby relieving traffic congestion. In sum, it is expected that the MIC will alleviate congestion, improve air quality, improve road designs and pedestrian access, and consolidate rental car activity.
Table 4.8 Miami Intermodal Center Project Funding
(Dollars in Millions)
|Federal Funds||Right-of Way/Environmental||$379|
|TIP/LRTP & Prior 1||$92||Initial MIC Core||81|
|Miami-Dade Transit Authority||15||Road Improvements||143|
|Subtotal, Federal Grants||$107||MIC/MIA Connector||400|
|Non-Federal Funds||Rental Car Facility||162|
|Other State||130||Rental Car Facility Reserves and Costs||6|
|Airport Capital Improvement Plan||399||Other 2||118|
|Rental Car Facility Revenues||25|
|Miami-Dade Expressway Auth. Tolls||87|
|Miami-Dade Transit Authority||15|
|Subtotal, Non Federal||$720|
|TIFIA Loans + Capitalized Interest||498|
1. Transportation Improvement Program/Long-Range Transportation Plan funding.
2. Includes general program administration, finance contingency on FDOT elements, and prior outlays for planning, engineering, and NEPA studies.
Missouri State Infrastructure Bank and the Bi-State Development Agency Bus Acquisition
The Missouri Department of Transportation (MoDOT) - one of 10 state transportation departments authorized under the initial State Infrastructure Bank (SIB) pilot program - has operated a SIB since 1996. Missouri's SIB is a non-profit entity, designated as the Missouri Transportation Finance Corporation (MTFC). TEA-21 gave Missouri the opportunity (along with California, Florida, and Rhode Island) to expand its SIB program by using Federal transportation funds authorized for fiscal years 1998 through 2003. MTFC's goal is to accelerate project completion through low-cost loans, thereby adding priority local transportation projects to the state's transportation system.
MTFC has provided assistance to a wide range of projects including highway, transit, and aviation, as well as multimodal facilities. Examples of projects that have received assistance include the Springfield-Branson Regional Airport (canopy replacement, loop road improvements, baggage claim expansion, and intermodal facility construction), the Cape Girardeau Bridge (demolition and replacement), the Gateway Multimodal Center, and various interchange improvements. An MTFC loan that assisted the Bi-State Development Agency in the acquisition of buses is detailed below.
As shown in Table 4.9, MTFC had signed 10 loan agreements, totaling just over $69 million, as of May 2001, facilitating a system wide investment of $281 million. Loan disbursements as of that date were $45 million.
Table 4.9 Summary of MTFC Projects - as of May 2001
(Dollars in Millions)
|Project||Amount of Assistance||Total Project Cost|
|I-55 Overpass Replacement||$6||$6|
|St. Roberts/I-44 Ramp Improvements||1||1|
|Highway 54 - Route HH Interchange||1||9|
|Springfield-Branson Regional Airport||2||11|
|Bi-State Bus Acquisition||11||58|
|Highway 179 Extension||6||40|
|Cape Girardeau Bridge||28||96|
|Parking Area Overlay, Highway 13||0.03||0.03|
|Gateway Multimodal Center||11||26|
The Bi-State Development Agency of the Missouri-Illinois Metropolitan District operates the St. Louis area's network of light rail, bus, and paratransit van transportation. Bi-State has a fleet of 600 buses, 41 light rail vehicles, and 63 Call-A-Ride paratransit vans. The fiscal year 2001 operating budget for the Bi-State Transit System is $145 million and its capital budget totals $455 million. Bi-State carried over 52 million passengers on MetroLink buses and Call-A-Ride vans during fiscal year 2000.
Bi-State needs financing for 217 buses to replace overage vehicles in its fleet. Transit coaches are designed to achieve a useful life of 12 years. Currently, the average age of the Agency's bus fleet is 16 years, with the oldest 99 buses at 20 years of age. Replacing this number of buses represents a significant short-term financial strain for the Agency.
The total cost of the 217 buses is $58 million and Bi-State needs $12 million to meet the required 20 percent local match.
The Bi-State Development Agency is receiving an $11 million direct loan from MTFC to finance the local match required to receive Federal Transit Administration grants. The loan was made in three disbursements of $5.2 million, $5.5 million, and $0.4 million in June 2000, June 2001, and October 2001, respectively. Each loan disbursement has a term of 10 years and interest rates ranging from 4.64 percent to 5.49 percent.
As it has done for nine other projects, MTFC is providing up-front capital through a loan so this critical transportation need may be met earlier than would be possible with traditional pay-as-you-go financing. An additional benefit of the MTFC loan is that it spreads payment over a period of years, linking passenger usage with paying down the debt. For Bi-State, the interest rate reduction available through MTFC also approximates a savings of $300,000 over the life of the loan. These savings will be applied to meeting operating costs for the public transit system.
The new buses, engineered to meet current air quality standards, will reduce the impact of Bi-State's buses on air quality. The St. Louis metropolitan area is rated as a moderate non-attainment area for ozone.
President George Bush Turnpike, Texas - Section 129 Loan
The President George Bush Turnpike (State Highway 190) is a 30-mile, four-lane limited access tollway which, when completed, will extend from State Highway 78 in Garland, Texas to Belt Line Road in Irving, Texas. The Turnpike is the northern section of the outer highway loop around the Dallas metropolitan area, linking four freeways (I-635, I-35E, U.S. 75, and SH 78), the Dallas North Tollway, and numerous thoroughfares, streets, and roads in the rapidly growing seven cities and three counties in the area served. The Turnpike also is designed to improve access to the Dallas/Fort Worth International Airport.
A joint effort of the Texas Department of Transportation (TxDOT) and the North Texas Tollway Authority (NTTA, formerly Texas Turnpike Authority), the project consists of five major segments and has been under construction since 1996. As of December 2000, 45 percent of the Turnpike was complete. Construction of the Turnpike is expected to be substantially complete in July 2004 and fully complete by December 2006. The total estimate of project costs for all five segments is $941 million.
Due to the project's high construction cost, traditional pay-as-you-go financing from motor fuel tax receipts and Federal-Aid Highway Program funds proved insufficient. It is estimated that utilizing pay-as-you-go financing would have delayed construction completion by 11 to 20 years and raised project costs due to inflation. In addition, dedicating such extensive resources to a single project would have prevented TxDOT from adequately addressing the state's other transportation needs. TxDOT's lack of statutory authority to issue bonds placed additional financing constraints on the project. As a result, the project, originally conceived as a freeway, was converted to a tollway and innovative financing approaches were utilized.
TxDOT and NTTA formed a unique partnership to finance and construct the President George Bush Turnpike. Leveraging the capabilities of the partnership, the project utilized the following innovative finance tools:
Cost estimates for the project were revised in January 2001 (see Table 4.10 for a summary of the updated financial plan). While the exact plan for meeting the increased costs has not been determined, NTTA states that it has since built up some cash reserves and now also has the borrowing capacity to cover the increased construction costs.
Table 4.10 President George Bush Turnpike Project Financing
(Dollars in Millions)
|Section 129 Loan||$135||Segment I||$135|
|NTTA Revenue Bonds||446||Segment II||92|
|NTTA Capital Improvement Fund||20||Segment III||210|
|TBD (Cash reserves/borrowing capacity)||339||Segment IV||418|
|Total Sources||$940||Total Uses||$940|
Prior to selecting the chosen finance approach, other financing options were considered. Each financing option and the reasons for not using it are described below:
The benefits of the overall finance approach are described below. Specific benefits of the contributing financial tools also are listed.
The overall benefits of the President George Bush Turnpike include relieved congestion, improved air quality, and support for economic growth. The project will provide important environmental benefits to its immediate area and the overall Dallas Metroplex. Traffic diversion to the Turnpike is expected to dampen the rate of growth of demand upon IH 635 by providing new direct access for commuters traveling east or west through the cities north of Dallas. The Turnpike also will provide less congested and direct access to the Dallas/Fort Worth International Airport, a substantial area traffic generator.
The Transportation Infrastructure Finance and Innovation Act (TIFIA) - which was authorized in Sections 1501-1504 of TEA-21 and codified in Sections 181-189 of Title 23 U.S.C. - authorizes the U.S. DOT to provide direct (secured) loans, loan guarantees, and standby lines of credit to public and private sponsors of eligible transportation projects.
To date, U.S. DOT has provided $3.1 billion of TIFIA credit assistance to 10 projects that total nearly $12 billion in costs. Two of these projects are highlighted in the case studies below. The Tren Urbano project in Puerto Rico, which received a $300 million TIFIA loan, is being developed through a turnkey contract with a private sector consortium using state-of-the-art technology. A $90 million loan guarantee and a $37 million line of credit will both improve access along State Route 125 in San Diego to the principal commercial border crossing in southern California between the U.S. and Mexico and relieve existing congestion and accommodate growth in San Diego County.
Tren Urbano, Puerto Rico - TIFIA
Tren Urbano - a venture of the Puerto Rico Highway and Transportation Authority (PRHTA) - is a 17-kilometer rapid rail line that will serve Metropolitan San Juan and be closely integrated with the local bus system. The system, estimated to cost $1.68 billion, is scheduled to be completed by June 2004.
The population of the San Juan Metropolitan Area (SJMA) generates about 3.2 million trips per day and an estimated 4,206 vehicles per square mile in the central SJMA create one of the most congested roadway networks in the world. Tren Urbano will have 16 stations and carry approximately 100,000 trips per day in the first year of operation, resulting in a significant reduction in congestion and pollutant emissions in Metropolitan San Juan.
PRHTA is implementing a "turnkey" development strategy with private sector consortia and will enter into separate operating agreements with a private sector entity to run the system. Turnkey development is an innovative procurement technique in which the sponsoring organization contracts with a single private entity to deliver a complete and operational project. Tren Urbano is the first and only heavy rail system in the United States to be both developed and operated by private entities.
PRHTA identified a need for additional financial capacity to construct the public portions of Tren Urbano's five-year Construction Investment Program (CIP), while, simultaneously, advancing the public-private portions of the CIP. Project sponsors recognized that the extra debt capacity that could be provided by TIFIA would provide greater financial flexibility in the event that Federal appropriations of Section 5309 New Start capital program funds were delayed, as has happened over the last few years.
A direct Federal TIFIA loan of $300 million to Tren Urbano provided the PRHTA with new capital to accelerate the public portions of the CIP, while freeing up financial capacity to advance the public-private portions of the CIP. The TIFIA loan carries a 35-year term and an interest rate based on a 35-year Treasury rate. Principal repayment will be deferred until five years following the anticipated substantial completion date. The repayment source for the loan is a junior lien on the Authority's fuel tax receipts, motor vehicle registration fees, and farebox receipts. A summary of the project funding sources and uses is provided in Table 4.11.
In addition to the TIFIA loan, Tren Urbano - a designated Federal Transit Administration Turnkey Demonstration Project - is being completed under an innovative turnkey strategy that divides the project into six design-build contracts for civil facilities and a systems and test track turnkey contract.
Table 4.11 Tren Urbano Project Funding
(Dollars in Millions)
|Section 5307 Formula||141||Systems & Test Track||656|
|Other Federal||272||Bayamon Alignment||78|
|Total Federal||$713||Rio Bayamon||42|
|Authority Funds||Villa Nevarez||78|
|Section 5307 Formula Match||32||Rio Piedras||279|
|Other Authority (bond proceeds, costs incurred, future revenues)||930||Hato Rey||134|
|CDC Lab Replacement||4|
|Total Authority||$962||Transit Enhancements||5|
|Total Sources||$1,676||Total Uses||$1,676|
Without TIFIA financing, PRHTA would have been forced to issue additional revenue bonds, with less favorable terms and at higher overall cost. This also would have consumed debt capacity that could be used for other project elements. It was thus determined that, by improving Tren Urbano's cash flow and preserving debt capacity, the TIFIA financing approach was the preferred financing option.
The TIFIA loan provided PRHTA important financing flexibility. Beyond the financial benefits, the TIFIA loan enabled PRHTA to capture a number of non-financial benefits. For instance, Tren Urbano's design-build-operate-maintain program will reduce project costs by an estimated 30 percent and cut nearly two years off the project timeline. The Federal Transit Administration has deemed Tren Urbano among the most cost-effective projects in the nation.
The project will reduce - by nearly 50 percent - the number of intersections in the corridor expected to operate at Level of Service F ( Level of Service F occurs when traffic is characterized by unstable stop-and-go movement and significant delay). The increase in transit ridership and congestion relief, when combined with the restructuring of the bus net-works, will result in an estimated travel time savings of 8.78 million hours annually. It is estimated that over half of the ridership would not have used mass transit if it were not for Tren Urbano. These reductions in congestion and increases in ridership also will result in a significant reduction in pollutant emissions in Metropolitan San Juan.
Finally, it is estimated that Tren Urbano construction and operation will generate approximately $2.4 billion in gross economic output during project construction and in excess of $340 million annually during system operation.
The State Route 125 South project will consist of 11.5 miles of new highway in San Diego County, California, from SR 905 near the United States-Mexico border to State Route 54 near Sweetwater Reservoir. SR 125 South will open as a four-lane limited access highway. The project includes a two-mile non-tolled segment known as the San Miguel Connector and a 9.5-mile toll road with electronic toll collection. Construction of SR 125 South is estimated to cost $417 million (October 2001). The project was initiated in 1991 with the signing of a franchise agreement, and design and construction are expected to begin in 2002. The toll road portion is anticipated to open by 2005. Further, expansion of SR 125, which could include a six- to eight-lane highway, carpool lanes, and/or transit facilities in the median, may be pursued if it is determined that it would increase equity returns of the private developer.
Cross-border commerce in the San Diego region has experienced notable growth, in part fueled by the North American Free Trade Agreement (NAFTA) and the limiting of all commercial border traffic in the area to the Otay Mesa crossing by the United States and Mexican governments. Existing and approved residential and commercial development in southern San Diego County creates additional demand for the highway. SR 125 South also is vital to reducing out-of-direction travel by providing an inland alternative to Interstates 5, 15, and 805 that serve central San Diego and points north and south. Given the projected growth of the region, combined with the increased trade and traffic across the border, SR 125 South is anticipated to provide congestion relief, reduced emissions, improved traffic flow, and access to border area employment centers.
SR 125 South is being designed and constructed under a franchise agreement between the State of California and a private sector consortia, the California Transportation Ventures (CTV). The private sector consortia will operate and maintain the toll road for 35 years at which time control will revert back to the California Department of Transportation (Caltrans).
Due to the high cost of the SR 125 South project, Caltrans lacked the financial resources to complete the project in a timely manner. In addition, the San Diego Association of Governments (SANDAG) has identified a $12 billion shortfall in transportation funding over the 20-year period from 1999 to 2020, assuming that San Diego's one-half-cent transportation sales tax is not extended when it expires in 2008. As a result of these funding shortfalls, without private financing and TIFIA credit support, project completion would have been delayed an estimated 15 years.
To attract private capital to highway projects and build roads faster, California passed legislation in 1989 that allowed the state to enter into partnerships with private firms for the development of privately financed transportation projects. SR 125 South is one of four demonstration projects approved under the legislation.
SR 125 South is being financed with private debt and equity investment coupled with TIFIA financing. CTV is combining the San Miguel Connector and the toll road into one design-build arrangement. The San Miguel Connector, including the freeway-to-freeway interchange between SR 54 and SR 125 will be funded by a mix of Federal-Aid Highway Program funds and local funds from San Diego's one-half-cent transportation sales tax. This portion of the project, once constructed, will be operated and maintained by Caltrans.
As shown in Table 4.12, the 9.5-mile SR 125 South toll facility will be financed on a "project financing" basis with the private capital markets and sponsor equity providing approximately two-thirds of the funding for the project. The return on equity was regulated by a negotiated ceiling and set at 18.5 percent of total invested capital. In addition, the project will receive TIFIA assistance in the form of a $94 million direct loan and a $33 million line of credit that will back subordinated bonds. Toll revenues will be the primary source of repayment for the senior debt and TIFIA direct loan.
Table 4.12 SR 125 Project Funding Summary
(Dollars in Millions)
|Senior Bond Proceeds||$247||Development, Design and Construction||$365|
|TIFIA Loan*||94||Gross Capitalized Interest||70|
|Equity||63||Debt Service Reserve||13|
|Donated Land||18||Financing Fees||9|
|Total Sources||$455||Total Uses||$455|
*The project also is supported by TIFIA credit assistance in the form of a $33 million line of credit.
Note: Estimates as of date of term sheet July 2000.
Funding constraints under pay-as-you-go financing would have necessitated lengthy project delays (estimated at over 15 years). Such delays could have increased project costs due to inflation over time.
The planned financing approach will expedite delivery of the project and thus facilitate the acceleration of the following benefits:
During the 1990s, the Federal role in highway investment broadened to encompass alter-native approaches that complemented traditional grant funding. Through a combination of administrative and legislative changes, a new array of grant management tools such as partial conversion of advance construction, tapered match, and flexible match provided states greater ease in administering Federal obligation authority and offered them the opportunity to satisfy matching requirements under more flexible terms. Additional statutory changes allowed Federal-aid funds to be used to facilitate debt financing, thus accelerating project construction by many years and potentially expanding the overall level of investment in the nation's surface transportation infrastructure.
The case studies contained in Chapter 4.0 reviewed project sponsors' real world experience with these innovative finance tools. Based on these case studies, Table 5.1 evaluates the capacity of each tool to achieve some of the benefits attributed to innovative finance. This table is intended only as a relative comparison of how likely a tool is to provide a particular benefit; each state's experience may differ based on individual legal environment and project conditions.
The capacity of innovative finance tools to produce the benefits shown in Table 5.1 lies principally in their ability to help states - or other project sponsors - surmount various financial hurdles that could otherwise lead to project delays or limit access to capital. Since 1994, sponsors have employed innovative finance strategies to help advance hundreds of highway projects. How were these advances achieved, and could these tools be further improved? To answer this question, it is helpful to examine how successfully the tools helped project sponsors overcome the impediments that these financial strategies were originally intended to address.
Under the TE-045 initiative, states proposed three separate tools intended to ease the strict project-by-project, payment-by-payment nature of the matching requirements that accompany almost all categories of Federal highway assistance. Flexible match and toll credits allow states to substitute other fund sources or credits from prior expenditures in lieu of state funding typically used to satisfy the non-Federal matching requirement; tapered match offers states new latitude to adjust the timing of such matching contributions. These tools have proven very popular, helping states address near-term shortfalls in the availability of non-Federal matching funds and thereby accelerating the construction of projects that otherwise might have to wait for a future state appropriations cycle.
Table 5.1: Benefit Potential of Federal Innovative Finance Tools
|Tool||Acceleration Benefits||Attraction of Private Investment||Expansion of Revenue Sources||Cost Savings to Project Sponsor|
|Partial Conversion of Advance Construction||High||Low||Low||Low|
|Multi-Authorization Advance Construction||High (especially as a support to GARVEE issuance)||Low||Low||Low|
|GARVEEs||High||None||None||Moderate (when projected interest and inflation rates render borrowing more cost-effective than pay-as-you-go funding)|
|Section 129 Loans||Moderate||Moderate||Moderate||High (when loan serves as credit enhancement and when alternative but higher-cost borrowing options are available)|
|Federal Credit (TIFIA)||High||Moderate||High (when credit instrument enhances credit-worthiness of senior debt issuance)||High (when credit instrument enhances credit-worthiness of senior debt issuance and when alternative but higher-cost borrowing options are available)|
|State Infrastructure Banks||Moderate||Low||Moderate|
Another common target of those states proposing new grant management tools under TE-045 was the longstanding requirement for states to commit all necessary Federal obligation authority for a given project up-front. A need for more flexibility in managing the consumption of Federal obligation authority over the life of a project led to the development of two tools, one of which was later disallowed following a legal review. First, for projects constructed using advance construction, partial conversion of advance construction allows states to commit Federal obligation authority funds (i.e., "convert" the project to Federal-aid) in stages rather than all at one for the entire reimbursable amount. States also sought to address up-front consumption of obligation authority for projects that are not advance constructed through the development of a tool called phased funding. Seven states tested this tool on approximately 11 projects, but FHWA subsequently disallowed phased funding because it represented an up-front commitment to the Federal share of the project costs. Under advance construction, the Federal government makes no such commitment of funds until the time of a project's conversion to regular Federal-aid status.
GARVEE bonds, and supporting changes to advance construction that allow conversions to occur in multiple authorization periods, address one of the most significant barriers to debt finance generally: the need to identify a source of revenue to repay debt obligations. While GARVEEs do not generate new revenue, the new eligibility of bond-related costs for Federal-aid reimbursement provides states with one more option for repaying debt service. GARVEEs have been especially effective in accelerating large projects that would otherwise have completely dominated state construction programs or else have experienced substantial delays. GARVEEs' instrumental role in New Mexico's and Colorado's corridor programs provides an especially compelling case in point, with bond proceeds backed by future Federal-aid apportionments accelerating projects by as many as 25 years over pay-as-you-go options. Like all powerful tools, however, GARVEEs must be used judiciously. Although the issuance of GARVEE bonds produces a near-term infusion of new capital, the issuance also places a prospective claim on future Federal-aid apportionments. States must remain fully cognizant of the implications (both positive and negative) of incurring new debt obligations through the use of GARVEEs.
While the GARVEE mechanism provides the opportunity to retire debt using future Federal-aid apportionments, Federal credit initiatives lower barriers to revenue-backed debt financing by providing a new source of secondary and subordinate capital, potentially reducing senior investors' risk exposure. Both Section 129 loans and the loans, lines of credit, and loan guarantees offered under the TIFIA Federal credit program were designed to provide credit enhancement, absorbing just enough risk to allow projects on the cusp of financial feasibility to access the capital markets for the remainder of their borrowing needs.
Federal credit has enjoyed some success in this area; the subordinate capital provided through the Section 129 loan to the George Bush Turnpike improved debt service coverage on senior debt obligations and thus improved the affordability of these borrowings. For TIFIA-assisted projects like the improvements to Penn Station in New York and State Route 125 in San Diego, improved coverage ratios that will be created through the provision of subordinate TIFIA loans will similarly improve the risk profile and associated costliness of senior debt obligations.
Despite these successes, many observers believe that most projects obtaining credit assistance were already sufficiently creditworthy to have obtained financing even without this form of credit enhancement. As a result, credit support has likely not played a "make or break" role in the financing of these projects, but rather has managed to reduce financing costs by making the projects marginally less risky by virtue of Federal co-investment.
Finally, SIBs are geared to creating a new borrowing opportunity for projects that for reasons of scale or scope are not well suited to bond financing or to direct Federal credit. The volume of loans made as of the end of fiscal year 2001 approached $3 billion. Many of these loans have turned around quickly, however, suggesting that in some states, the program is functioning at least as much as a cash flow regulator as a debt financing strategy. Also, with about 70 percent of the loan activity concentrated in just four states, some of the less active states have held back on SIB implementation due to concerns about diverting Federal-aid apportionments from project grants to capitalization grants, and a lack of authority to use TEA-21 funds to capitalize. Still, those states that have committed to active SIB programs have valued the flexibility to use these funds for capitalization as well as for outright grants.
The range of tools that states and other project sponsors have tested since 1994 can significantly expand the nation's transportation financing capacity. Yet not all tools will be suited to every project, or can be applied in every state or local area. In addition, in order to apply these tools, states may need to develop administrative capabilities and policies to manage them. As formerly innovative practices become more fully integrated into the standard Federal-aid program, some of the major administrative and policy steps will include:
As innovative finance becomes increasingly more of a standard practice, decision-makers also will need to consider which tool(s) are best suited to the circumstances of the unique financing challenges they face. To help in this effort, Table 5.2 displays some criteria that may be used to match tools to projects. The criteria include major project characteristics such as size, revenue potential, and public or private sponsorship, and can help narrow down which tools might be appropriate for a given project.
Many different tools can apply to a single project, and in fact, the tools can and should be used in combination. For example, flexible match options such as toll credits may facilitate the use of Section 129 loans; TIFIA assistance could be used on a project that also received a SIB loan; and advance construction is a necessary component of the GARVEE bond approach. The optimal combination of tools depends on the circumstances of each project and the particular situation in each state.
The financing strategies developed and tested throughout the 1990s have proven particularly successful in accelerating projects; tools that focus on debt financing have typically advanced projects' completion by 10 years or more. Although the dividends yielded by project acceleration are not always readily measurable, the economic benefits associated with better mobility, reduced congestion, faster and more reliable freight movement, and improved safety underscore the value of prompt project delivery. These benefits also indicate the very real costs imposed by project delays attributable to avoidable financial constraints.
Grant management tools have been particularly beneficial in overcoming state difficulties with non-Federal share requirements. However, despite their benefits, these tools remain ad hoc solutions to state difficulties with these matching requirements. The broad interest in funding strategies designed to make matching requirements less onerous suggests that there may be value in a comprehensive review of the role of the matching requirement and the advisability of retaining or altering existing provisions.
Some states have welcomed the flexibility under the SIB program to use part of their Federal-aid funding to capitalize state banks providing credit assistance. In the future, continuation of this program would allow continued experimentation, on a voluntary basis, that might permit additional benefits to be achieved by more projects in more states.
Table 5.2 Matching Tools to Projects
|Size||Requires Revenue Potential?||Private Sponsor Eligible||Cash Flow or Leveraging Tool?||Notes and Examples|
|AC/PCAC||Any size||No||No||Cash Flow||Standard Federal-aid projects; particularly useful in conjunction with GARVEEs.|
|Tapered Match||Any size||No||No||Cash Flow||Useful for revenue streams that may take a while to develop (for example, a dedicated sales tax in an area around a new interchange). Cannot be used with AC or with GARVEEs.|
|Flexible Match||Any size||No||Cash Flow||Can attract/make use of partnerships with the private sector and with other public agencies.|
|Toll Credits||Any size||Yes (Tolling)||Yes||Cash Flow||Does not provide additional revenue, but simplifies accounting/provides flexibility. Cannot be used in states with no tolling.|
|GARVEEs||Generally sized for large projects ($10 million or greater)||No||No||Leveraging||Good for long-term capital projects with broad support.|
|Section 129||Any size||Yes||Yes, if state decides||Leveraging||Good for capital projects with non-Federal revenue potential.|
|SIB||Any size, generally up to $100 million depending on state capitalization||No, but restrictions apply to Federal-aid repayments||Yes, if state decides||Leveraging||Regionally and locally significant projects with some form of dedicated revenue source.|
|TIFIA||Minimum $100 million or 1/2of state apportionments||Yes||Yes||Leveraging||Major projects of national or regional significance.|
The Federal highway financing innovations of the 1990s, particularly in the form of Federal credit initiatives, also have shown promise in leveraging existing resources through three primary methods: attraction of capital investment from new financial partners, encouragement of new revenue sources, and generation of cost savings. Success in these areas has been less uniform than in the area of project acceleration, and the causal relationship between Federal policies and project sponsors' financial decisions has been more obscure.
Still, private investment in Federally assisted highway projects has increased under innovative finance initiatives; prior to the 1990s, such a blending of public and private capital in Federally supported highway projects was virtually unheard of. Several good examples of this form of public-private partnership have emerged under the TIFIA Federal credit program and its predecessor projects, but co-investment of private capital in publicly sponsored projects continues to be thwarted by several factors, including uncertain returns on investment, private investors' reluctance to assume the political risks associated with the earliest stages of project development, and the comparative expense of private versus public financing given the tax-exempt status of interest earned on publicly issued debt.
While public-private partnerships have typically been taken to indicate co-investment in projects' up-front capital costs, another promising form of partnership is innovative contracting, or reconfiguring the apportionment of responsibility for project development and operations between public and private sectors. This approach has been implemented with increasing regularity overseas, but long-term management contracts are rare in the U.S. While innovative contracting has been used in conjunction with projects that also use innovative finance tools, it has largely remained a separate phenomenon, untouched by Federal innovative finance initiatives. Future efforts may consider how to facilitate the use of innovative contracting in conjunction with these tools.
Increasing investment levels through the identification and collection of new revenues depends on choices of a decidedly local nature, and the Federal government has little direct influence over such determinations. Several of the innovations of the 1990s sought to reduce indirect institutional barriers to these decisions, however. For example, prior to the NHS Act, states would be expected to increase their share of funding on any Federally aided toll projects from 20 percent to 50 percent. By equalizing the non-Federal matching share required on both toll and non-toll road projects, Congress eliminated a disincentive that might have discouraged state or local governments from considering tolls as a potential revenue option. This change did not, however, require or even facilitate the actual levying of tolls or any other new revenue source.
Similarly, by creating new financial institutions that would offer new borrowing opportunities for revenue-generating projects, and using Federal credit instruments to improve the creditworthiness and resulting market access of revenue-backed projects, Federal policy-makers reduced the barriers associated with the use of new revenue sources, while keeping the decision to seek new revenue sources firmly in the hands of state and local governments. Despite these efforts, expansion of the resource base through development of revenue-generating transportation infrastructure remains a challenge given public resistance to user facility charges. Continued experimentation with strategies to identify and reduce any Federal impediments to user charges could help increase overall investment levels, while keeping the decision-making power at the state and local level.
Finally, the opportunity to generate cost savings through the financial innovations developed to date depends largely on the effectiveness of Federal loans and other credit products in enhancing the creditworthiness of other borrowings. The Federal credit program has shown potential in this area, but the volume of projects that could benefit from credit assistance in this manner is uncertain. Savings also accrue when borrowing opportunities through SIBs or GARVEE issuances offer a cost-effective means to avoid inflation expense. However, it is unlikely that innovative financing tools alone offer the most effective mechanism for lowering project costs; improved technologies, maintenance practices, and streamlined approaches to project delivery offer at least as much promise in this area. As innovative finance continues to develop, these other cost-saving strategies will likely be used in combination on projects. For example, the first standalone GARVEE project, New Mexico State Route 44/U.S. Route 550, features both an innovative contracting tool (a long-term warranty) and a new innovative finance tool. Together, the tools accelerate the project and provide cost savings. While it would have been possible to complete the project with the use of either tool alone, the combination created a package which created significant benefits for both the contractor and the state DOT.
Since its inception, a hallmark characteristic of the innovative finance initiative has been the acceleration of projects and expansion of available resources without the commitment of new Federal funds. While annual funding for the Federal-aid highway program has grown as a result of legislative actions such as the creation of the guaranteed funding and revenue-aligned budget authority provisions in TEA-21, the financial innovations discussed in this report have addressed the states' call for greater flexibility while consuming a minimal amount of Federal resources.
The enthusiastic response to the innovative finance test and evaluation research program established in 1994 demonstrated states' significant need for greater flexibility in the Federal-aid highway program; the subsequent implementation of the strategies identified during this effort has demonstrated the capacity to build greater flexibility into the program at minimal cost. The accomplishments in project acceleration and leverage of existing funding sources clearly show the sizeable returns generated through a near decade of Federal commitment to financial innovation, with a relatively small Federal outlay.
These returns represent the fruits of a decade of fresh thinking within Congress, U.S. DOT, and most important, the state, local, and private sponsors of the projects employing these financing tools. These partners played the pivotal role in generating most of the concepts profiled in this report and were also instrumental in converting the concepts into real-world test cases.
Now that these innovative finance tools have been created, the next frontier for innovative finance will be for States to determine how best to use them, in the context of their overall financing programs. For example, states will need to develop policies to determine what level of long-term borrowing is acceptable, and how projects will be selected. As innovative finance programs continue to evolve, FHWA anticipates that states, local governments, and the private sector will continue to be the primary engine for creativity as the nation enters a second decade of commitment to innovative transportation finance.
A detailed inventory has been compiled of projects that have been advanced under one or more of the U.S. DOT innovative finance initiatives since 1994. The inventory records the available information on the four categories of innovative finance tools, i.e., TE-045, GARVEEs, Federal credit, and state-based credit, as well as relevant information on the capitalization of the SIBs and the GARVEE bonds issued. The inventory was compiled from readily available data sources, including Federal data collection and reporting systems and through direct contact with the states. Data were collected through the spring of 2001, and represent information current as of that time.
The gathered information was captured in a single Microsoft Excel workbook. The Excel workbook contains a number of worksheets that track the unique data elements pertaining to each of the four categories of projects - TE-045, GARVEEs, Federal credit, and state-based credit - as well as the capitalization data elements in terms of the SIBs and GARVEEs.
Data elements included for each of the project categories are described below.
Additional sources of information on innovative financing techniques for transportation projects are available through a wide range of web sites, publications, and contacts. These include general innovative financing resources and resources specific to each of the techniques described in this primer.
Federal Highway Administration. Innovative Finance Home Page.
Federal Highway Administration. Innovative Finance Newsletter (October 1996 - June 1997) and Innovative Finance Quarterly (September 1997 - present).
Federal Highway Administration. An Evaluation of the TE-045 Innovative Finance Research Initiative, October 1996.
National Cooperative Highway Research Program. Innovative Financing Clearinghouse.
www.innovativefinance.org (website discontinued)
Transportation Research Board, Transportation Finance for the 21st Century, Proceedings of a Conference, Dallas, Texas, April 23-25, 1997, 1997.
Federal Transit Administration. "Innovative Finance Handbook." May 1996.
Federal Transit Administration. "Innovative Finance Techniques for America's Transit Systems." September 1998.
Federal Highway Administration, Federal-Aid Financial Management Division
400 7th Street, S.W., Room 4313
Washington, DC 20590
TIFIA Joint Program Office
400 7th Street, S.W., Room 4301
Washington, DC 20590
Federal Highway Administration, Southern Resource Center
61 Forsyth Street, S.W., Suite 17T26
Atlanta, GA 30303
Federal Highway Administration, Western Resource Center
210 Mission Street, Suite 2100
San Francisco, CA 94105
Federal Highway Administration, Midwestern Resource Center
19900 Governors Drive, Suite 301
Olympia Fields, IL 60461
Innovative Management of Federal Funds
Federal Highway Administration, Federal-Aid Policy Guide, Subpart G - Advance Construction of Federal-Aid Projects, May 25, 2000.
Federal Highway Administration. Guidance on Section 308: Advance Construction of Federal-aid Projects, May 1996.
Federal Highway Administration. "Memorandum: Tapered Match on Federal-aid Projects." July 1999. http://www.fhwa.dot.gov/legsregs/directives/policy/tapered20091229.htm
Inman, Max. "Grant Management Techniques: Tapered Match May Provide a Better Fit." Innovative Finance Quarterly (Summer/Fall 1999).
http://www.fhwa.dot.gov/innovativefinance/ifq52.htm, or http://www.fhwa.dot.gov/innovativefinance/ifq52.pdf (pdf version)
Federal Highway Administration. Fact Sheet: Federal Matching Flexibility, September 14, 1998.
Federal Highway Administration. "Guidance on Section 322: Third Party Donations of Funds, Materials, or Services for Federally Assisted Projects." May 1996.
Federal Highway Administration. "Memorandum: Toll Credit for Non-Federal Share, Section 1111(c) of TEA-21, Implementing Guidance." August 1998.
Federal Highway Administration. GARVEE Bond Guidance. August 2000.
Federal Highway Administration. Guidance on Section 313(b) of the NHS Act: Loan Provisions under Section 129(a)(7) of Title 23. May 1996.
Federal Highway Administration, SIB web site, including guidance and best practices.
Federal Highway Administration. State Infrastructure Bank Primer. September 1997.
Federal Highway Administration. FHWA Guidance for Administering the State Infrastructure Bank Pilot Program. October 1997.
Federal Highway Administration. TIFIA web site, including legislation and regulations, a program guide and application, TIFIA Times, and links to TIFIA credit enhancement projects.
Federal Highway Administration. Guidance on Section 313(a) of the NHS Act: Toll Facilities Under Section 129 of Title 23. May 1996.
Federal Highway Administration. "Memorandum: Interstate Highway Reconstruction/
Rehabilitation Pilot Program Section 1216(b) of TEA-21 Solicitation for Candidate Proposals," December 24, 1998. http://www.fhwa.dot.gov/tea21/tollpilt.htm
The State and Local Policy Program of the Hubert H. Humphrey Institute of Public Affairs within the University of Minnesota hosts a web page for the value pricing pilot program.
Federal Highway Administration. Value Pricing Pilot Program web site, including program information, best practices, newsletters, reports, and outreach activities.
Federal Highway Administration. Value Pricing Pilot Program: Notice of Grant Opportunities. Updated March 2000.
U.S. Department of Transportation. TEA-21, Value Pricing Pilot Program Fact Sheet. September 1998.
6320 Corporations - Corporations established under IRS Revenue Rule 63 which permits nonprofit corporations other than solely governmental bodies to issue tax exempt debt.
Advance Capitalization (ACAP) - Relates to the SIB pilot program only. A Federal aid funding procedure that permits each SIB pilot state to notify FHWA when it has identified an amount of Federal assistance that it may ultimately convert to a SIB capitalization grant. ACAP simply establishes a baseline from which to calculate the maximum amount of Federal funding that may be deposited into a SIB during succeeding years. The ACAP process is not used in capitalizing transit accounts. Instead, a similar process, in which grantees commit an amount of grant funds to SIB capitalization, is employed.
Advance Construction (AC) - States or local governments independently raise up front capital required for a Federally approved project and preserve eligibility for future Federal aid reimbursement for that project. At a later date, the state can obligate Federal aid highway funds for reimbursement of the Federal share. This tool allows states to take advantage of access to a variety of capital sources, including its own funds, local funds, anticipation notes, revenue bonds, bank loans, etc., to speed project completion.
Authorization Act - Basic substantive legislation that establishes or continues Federal programs or agencies and establishes an upper limit on the amount of funds for the program(s) for a certain period (historically, four to six years). The current authorization act for surface transportation programs is the Transportation Equity Act for the 21st Century (TEA21).
Bond Counsel - A lawyer or law firm, with expertise in bond law, retained by the issuer to render an opinion upon the closing of a municipal bond issue regarding the legality of issuance and other matters, including the description of security pledged and an opinion as to the tax exempt status of the bond.
Bond Insurance - A financial guarantee provided by a major insurance company (usually AAA rated) as to the timely repayment of interest and principal of a bond issue.
Budget Authority - Authority provided by law to enter into financial obligations that will result in immediate or future outlays of Federal government funds. Budget authority includes the credit subsidy costs for direct loan and loan guarantee programs. Basic forms of budget authority include appropriations, borrowing authority, contract authority, and authority to obligate and expend offsetting receipts and collections.
Capitalization - Process of depositing various funds as seed capital into a SIB to enable financial assistance.
Capitalized Interest - A specified portion of the original bond proceeds which will be used to pay interest on the bonds until revenue from planned sources becomes available upon completion of construction.
Cooperative Agreement (SIB) - Written consent between a state and the Federal government used to define the process of SIB implementation. The agreement outlines the basic structure and purpose of the SIB and roles of each party, and sets forth how the funds of the SIB will be administered.
Credit Enhancement - Financial guarantees or other types of assistance that improve the credit of underlying debt obligations. Credit enhancement has the effect of lowering interest costs and improving the marketability of bond issues.
Credit Ratings - Credit quality evaluations of bonds and notes made by independent rating services. A higher bond rating generally lowers the interest rate that the borrower must pay and, therefore, overall capital costs.
Debt Service - The amount of money necessary to pay principal and interest on a debt instrument.
Debt Service Coverage - The margin of safety for payment of debt service on a revenue bond, reflecting the number of times (e.g.,1.2) by which annual revenues after operations and maintenance costs exceed annual debt service.
Equity - Commitment of money from public or private sources for project finance, with a designated rate of return target.
Flexible Match - Any nonFederal match that is allowed under FHWA laws and regulations other than state and local cash contributions to a project. Flexible matches permitted under new regulations include use of private cash and in kind contributions, publicly owned right-of-way, and funds from other Federal agencies.
Full Faith and Credit - The pledge of the full taxing and borrowing powers of a government to pay its debt obligations.
General Obligation (G.O.) Bond - A security backed by the full faith and credit of a state, locality, or other governmental authority. In the event of a default, holders of general obligation bonds have the right to compel a tax levy, other borrowing, or legislative appropriation in order to satisfy the debt obligation.
Grant Anticipation Notes (GAN) - Short term debt that is secured by grant money expected to be received after debt is issued. A GARVEE is a special type of GAN that is repaid with Federal highway funds (see GARVEE).
Grant Anticipation Revenue Vehicle (GARVEE) - A GARVEE is any bond or other form of debt repayable, either exclusively or primarily, with future Federal aid highway funds under Section 122 of Title 23 of the United States Code. Although the source of payment is Federal aid funds, GARVEEs cannot be backed by a Federal guarantee, but are issued at the sole discretion of, and on the security of, the state issuing entity.
Intelligent Transportation Systems - The application of advanced electronics and communication technologies to enhance the capacity and efficiency of surface transportation systems, including traveler information, public transportation, and commercial vehicle operations.
Interest Subsidy - The net present value cost of providing credit assistance (e.g., direct loans or loan guarantees) at a rate below the rate of U.S. Treasury securities issued for a comparable term.
Investment Grade - Describes the top four rating categories of relatively secure bonds suitable for a conservative investor. Standard & Poor's rating service looks upon all bonds between the AAA and BBB ratings as investment grade. Generally speaking, any bonds rated below BBB are considered to have speculative features and are deemed sub-investment grade or junk bonds.
Junior Debt - Debt having a subordinate or secondary claim on an underlying security or source of payment for debt service, relative to another issue with a higher priority claim. (See Subordinate Claim).
Letter of Credit - An instrument or document issued by a bank guaranteeing debt holder payment by enabling the bond trustee to draw from the bank the full amount of principal and interest due on each debt payment date.
Long Range Transportation Plan - The transportation plan covers a 20-year period and includes both short and long term actions that develop and maintain an integrated, intermodal transportation system. The plan must conform to regional air quality implementation plans.
Municipal Bonds - Interest bearing obligations issued by state or local governments to finance operating or capital costs. The principal characteristic that has traditionally set municipal bonds apart from other capital market securities is the exemption of interest income from Federal income tax.
NonFederal Match - The commitment of state or other nonFederal funds required to receive Federal funds.
Obligation - The Federal government's legal commitment (promise) to pay or reimburse the states or other entities for the Federal share of a project's eligible costs.
Outlay - Actual cash payment made to the states or other entities. Outlays are provided as reimbursement for the Federal share for approved highway program activities.
Parity Debt - Debt obligations issued or to be issued with an equal claim to other debt obligations on the source of payment for debt service.
Partial Conversion of Advance Construction (PCAC) - Process allowing states to begin a project with their own source of funding, and then incrementally obligate Federal funds.
Pay-As-You-Go Financing - Describes government financing of capital outlays from current revenues or grants rather than by borrowing.
Preliminary Rating - A credit opinion from a rating agency based on a preliminary assessment assigned to a proposed bond issue.
Ramp-up Phase - The phase in a project's life cycle immediately following construction. It is during this phase, the early years of operation, that a project's revenue stream is established.
Rate Covenant - A contractual agreement in the legal documentation of a bond issue requiring the issuer to charge rates or fees for the use of specified facilities or operations at least sufficient to achieve a stated minimum debt service coverage level.
Rating Agency - An organization that assesses and issues opinions regarding the relative credit quality of bond issues.
Revenue Bonds - Bonds whose principal and interest are payable exclusively from earnings of a public enterprise.
Revolving Fund - Financing tool that recycles funds by providing loans, receiving loan repayments, and then providing further loans.
Section 129 Loan - Section 129 of Title 23 of U.S. Code permits states to use Federal aid funds to make loans to any Federally eligible project. The loans must be repaid with a dedicated, nonFederal source.
Senior Debt - Debt obligations having a priority claim on the source of payment for debt service.
Startup Project - A separate, freestanding and new facility dependent on its own revenue stream to generate earnings to cover operating and capital costs.
State Infrastructure Bank - A state or multi-state revolving fund that provides loans, credit enhancement, and other forms of financial assistance to surface transportation projects.
State Transportation Improvement Program (STIP) - A short term transportation planning document covering at least a three year period and updated at least every two years. The STIP includes a priority list of projects to be carried out in each of the three years. Projects included in the STIP must be consistent with the long term transportation plan, must conform to regional air quality implementation plans, and must be financially constrained (achievable within existing or reasonably anticipated funding sources).
Subordinate Claim - A claim on an underlying source of payment for debt service which is junior or secondary to that securing another debt obligation. (See Junior Debt).
Subsidy Cost - The estimated long term cost to the Federal government of providing credit assistance (e.g., direct loans or loan guarantees), calculated on a net present value basis at the time of disbursement and excluding administrative costs.
Tapered Match - Permitting the Federal/nonFederal share of payments to vary over the life of a project, as long as the appropriate matching ratio is achieved by the end of the project.
TE045 Innovative Finance Initiative - A research program begun by FHWA in 1994 in response to Executive Order 12893. This finance initiative is designed to increase investment, accelerate projects, promote the use of existing innovative finance provisions, and establish the basis for future initiatives by waiving selected Federal policies and procedures, thus allowing specific transportation projects to be advanced through the use of nontraditional finance mechanisms.
Title 23 of the United States Code - Highway title that includes many of the laws governing the Federal Aid Highway Program. The title embodies substantive provisions of law that Congress considers permanent and need not be reenacted in each new highway authorization act.
Title 49 of the United States Code - Transportation title that includes laws governing various transportation related programs and agencies, including the Department of Transportation, general and intermodal programs, interstate commerce, rail and motor vehicle programs, aviation programs, pipelines, and commercial space transportation.
Toll Credits - Section 1044 of the Intermodal Surface Transportation Efficiency Act permitted states to apply the value of certain highway expenditures funded with toll revenues toward the required state match on current Federal aid projects. States may only substitute toll credits for state match if they demonstrate a "maintenance of effort" (MOE). The MOE test requires that a state's prior year highway spending equaled or exceeded the average of the previous three years' expenditures.
Transportation Infrastructure Finance and Innovation Act (TIFIA) - A new Federal transportation credit program authorized as part of TEA21 that provides direct Federal loans, lines of credit, and loan guarantees provided through U.S.DOT to large projects of national significance, under criteria developed by Congress.
Value Pricing - Using pricing of parking and road usage to manage congestion; encouraging users to vary usage by increasing user costs during peak periods.
 Since capital outlays and revenue transfers do not necessarily occur in the same calendar year for individual projects, these percentages are not exact but are reasonably good indicators of the relative share of Federal, state, and local funding. Source: Highway Statistics, Table HR-210, April 1997 (for historical figures), HF-10B, Table 1, February 2001 (for recent estimates).
 More information about the impact of highway investment on the economy can be found at http://wwwcf.fhwa.dot.gov/policy/12a-faq.htm.
 Federal law sets slightly lower non-Federal matching requirements for states with a significant share of Federal or tribal lands; also, non-Federal matching requirements are lower for a few categories of Federal highway funding.
 The three predecessor projects comprise the Alameda Corridor, the San Joaquin Hills Toll Road, and the Foothill/Eastern Toll Road. These projects received special authorization to receive Federal credit support prior to enactment of the Transportation Infrastructure Finance and Innovation Act. The subsidy cost represents the Federal Government's expected credit risk.
 Economists call this concept the opportunity cost. The opportunity cost of an action (or expenditure) is the next best action (expenditure) that one would take. For example, the opportunity cost of spending money going to a baseball game may be the money that one would spend going to a musical concert.
 The ratio is calculated as $100 of total investment divided by a Federal contribution of $80, yielding the standard ratio of 1.25 to 1.
 Application of toll credits to the required non-Federal match effectively reduces the non-Federal matching requirement to zero.
 The sliding-scale matching requirements are codified at 23 U.S.C. 120(b).
 The "subsidy cost" refers to the Federal government's estimated future losses associated with potential defaults on the credit instruments. This subsidy estimate is also the amount that actually converts to a Federal expenditure at the time that the Federal government enters into a credit agreement with a recipient of TIFIA assistance.
 More information about the IMPLAN input-output model can be found at www.implan.com.
 Project costs are assumed to be in 1998 dollars, the base year of the IMPLAN model. Project cost collections from government sources occurred from 1996 to 2001. Since these cost estimates do not capture the likely increases in costs associated with transportation construction inflation, the economic impacts are likely to be conservative estimates.
 This analysis does not imply that total long-run U.S. employment is higher due to innovative finance projects. Long-run U.S. employment is determined by the labor force and unemployment rates. While, it is possible that construction spending impacts could help lower unemployment in the short run, it is more appropriate to view this impact as a 'contribution' to the aggregate economy.
 This information presented as of September 2001 reflect data collected by the U.S. DOT on SIB loan agreements as of the end of Federal fiscal year 2001. Data used for purposes of analysis presented in this report are current as of spring 2001, and differ somewhat from the more current September 2001 data.
 Where more than one innovative finance tool was utilized to fund a particular project, the financing tool was classified as "multiple tools." Four "tool" columns were included in which the different finance tools can be specified up to a maximum of four.