Michael Kay: Good afternoon, and on behalf of the Innovative Program Delivery office, I'd like to welcome everyone to today's Center for Innovative Finance Support Academy Webinar on State Infrastructure Banks. My name is Michael Kay, I'm with the UDSOT's Volpe Center in Cambridge, Massachusetts. I'll be monitoring today's webinar as well as facilitating our question and answer periods and helping to address any technical problems. Before we begin, I just want to point out a couple of key features of our webinar room. First, on the top left hand side, you'll find the audio call-in information, you are welcome to listen through your computer speakers, however, if you do experience any bandwidth issues, I do recommend that you dial in using that number. All lines are open, all phone lines are open so please go ahead and mute your phone lines locally. You also see an attendee list in the presentation download box where you can download a PDF version of the presentation, simply click the file name, click, download files and follow the prompts on your screen. And then on the bottom left is a chat box that you can use to submit questions to our presenters throughout the webinar. I do want to mention that we are recording today's webinar as well. Our presenters for today are Frederick Werner, Project Finance Manager in the Center for Innovative Finance Support and Kevin McDonald, Financial Analyst in Portfolio Management in the TIFIA Joint Program Office. And with that, I'd like to turn the webinar over to Frederick Werner. Fred, please go ahead.
Frederick Werner: Thank you very much, Michael and thank everyone on the line for their time today. I see that we have a relatively small group and that can be very good, very productive. We can get into your concerns and your questions in more detail than if we were to have said 80 or 100 people. So I see this is a good thing. My name is Frederick Werner, I am the Project Finance Manager for the Center for Innovative Finance Support and I have had this position for the last eight years. State infrastructure banks are sort of new for me. Prabhat Diksit, who many of you know, was responsible for SIBs up until his retirement last April and I've taken SIBs over at least on a temporary or interim basis. The last time we presented SIBs, SIB 101 was about two years ago and we felt that this was a good time for a refresh of the SIB 101 presentation especially because the FAST Act has somewhat reinvigorated or reanimated the SIB program which has been a little bit quiet over the last few years. So we thought that we would visit the topic again and the TIFIA folks and Kevin McDonald will be presenting himself shortly, they have some additional information that they plan on presenting on May 24 that is specifically related to the FAST Act and new authorities, new provisions under the FAST Act. So with that, I will turn it over to Kevin. Go ahead Kevin.
Kevin McDonald: Thank you very much Fred. This is Kevin McDonald, I'm on TIFIA's Portfolio Management Team so we are responsible for overseeing TIFIA's loan portfolio which has more than doubled over the past three years. And in the TIFIA program, we've seen the impact of how new transportation bills can reinvigorate programs, allow programs to grow and allow our partners at the state level and local level to facilitate delivery of transportation projects. So I hope that I'll be able to contribute to the dialog and I appreciate the opportunity to present with Fred about how we think that the TIFIA program can help SIBs and the general changes that have been in the FAST Act. So thank you very much, I'm happy to be joining.
Frederick Werner: Thank you, Kevin. And with that, let's proceed to the course outline. We've structured this course into three lessons and those of you who have sat in on prior versions realize that we had sort of a busier format I think five or six lessons previously, but we've tried to boil the SIB 101 webinar down to the essentials and to streamline it, to simplify it, to make it a little bit easier to absorb for new people. Lesson one is a discussion of the state infrastructure bank, what is it, how does it work, why is it useful, when should it be used or when could it be used, why is it helpful to states, why is it helpful to local governments, sort of an orientation, a background module. Lesson two is the evolution of SIBs over the last 20 years. And it's a little bit frightening, I remember as if it were last week when SIBs were rolled out in the mid '90s and here we are in 2016, so we've got more than 20 years of experience with SIBs and this is a great opportunity, a great time to take a look at what SIBs have achieved, what they can achieve, how they've changed, that kind of thing. So what is their record, how do they fit in within the federal aid program? And then lesson three is the FAST Act, is this the reinvigoration or the rebirth of SIBs, what are the new opportunities and there are new opportunities in terms of traditional SIB activity as well as TIFIA credit supported SIB activity. Kevin will be addressing those. And then can't an SIB just be federalized? And that is not specifically related to the FAST Act, but that's something that we, being OIPD, we are not necessarily trying to promote but we're trying to inform folks about the opportunities to de-federalize SIBs that have already been established and de-federalize is a Washington D.C. term for eliminate federal oversight, which can be a good thing or a bad thing depending on your particular point of view, depending on what the SIB is doing in your jurisdiction. So lesson one, what is an SIB? And SIBs basically or essentially are revolving funds created by a state using Federal Transportation dollars and that means that Federal Highway, FTA and FRA grant funds, so we're talking about something that's one DOT, that's an intermodal, multimodal, Federal Highway, FTA, FRA grant funds as well as state matching funds, typically 20 percent can be used for deposit capital. And deposit capital is again, another Washington D.C. sort of a fancy word for cash, can be used for the cash balance at the SIB. The revolving fund is used to provide credit assistance, credit assistance is typically loans, I would say 95 percent of our activity is direct loans but it can also take the form of loan guarantees, lines of credit, interest rate buy-downs and the like for typically local transportation projects. Sometimes there are projects at a state entity other than the state DOT, let's say a state turnpike authority, some other type of state transportation authority, but mostly credit assistance is provided for local transportation projects. Now due to the revolving nature of the funds, repaid loans including principle and interest go back into the bank for further lending and so this establishes a cycle of increasing funds in SIB capital and increasing levels of loans, increasing levels of interest income, et cetera. Revolving funds are a fairly familiar concept in the water and sewer and clean energy fields. Now I do have a couple of accounting notes for those financial managers who like to study up on their accounting requirements. The revolving funds are accounted for on the state's books, i.e. the state accounting system. For Federal Highway purposes, for FEMA's purposes, there is an obligation for the capitalization money and that means that the SIB capitalization, that is the federal aid funds deposited into the SIB plus the local match is the equivalent of a project for FEMA's purposes. Now how do SIBs work, a state or territory because Commonwealth of Puerto Rico has set up a SIB as well, a state would take federal aid funds, let's say 40 million dollars from any of a set of funding categories, NHFP, NHPP, STP, et cetera. The state provides a local match, if it's a 20 percent local match ratio, that would be 10 million and thereby capitalizes the SIB with 50 million dollars and this just means that the SIB has 50 million dollars in cash available for lending. The initial credit assistance regardless of what form it takes, again, direct loans, loan guarantees, et cetera must be used for projects eligible to be funded under the funding categories used to provide deposit capital. So if deposit capital is provided from NHPP, that means that the initial credit assistance must be provided for projects eligible for funding under the NHPP program. However, subsequent rounds of credit assistance can be used for any Title 23 project giving the state greatly enhanced flexibility. Since SIB assistance on second and subsequent generation funding is not limited to those project types eligible under the original funding categories, capitalized funds are thereby cleansed of the requirements relating to the initial cost categories. For example, while CMAQ funds cannot be used to capitalize SIBs, SIBs can provide assistance to SEMAC projects. So it's a very flexible program and sometimes states and territories appreciate that flexibility. Let's talk about the virtuous cycle of SIB lending. And if we take a look at the left side of the slide, we see federal aid, that is the capitalization of certain funding categories plus the state funds. The federal aid and the state funds are used to capitalize the SIB, looking at the middle, the SIB box, the SIB provides initial loans under number one for initial projects, the repayments, number two go back to the SIB, the SIB provides second round loans for second round projects and the repayments go back into the SIB. Over time, the SIB balance is going to be increasing slowly and more and more projects will be assisted. The products available through this virtuous cycle of repayments are direct loans, loan guarantees, interest rate buy-downs, other kinds of credit assistance. Now what are the advantages of a state creating a SIB? A SIB can be used as a supplement to the state's federal aid grant program or as a replacement. If it's used as a supplement, the SIB can stimulate new and I'm putting that in quotes "new revenue sources" such as local option taxes and fees that borrowers accept in order to repay loans and other credit assistance. To understand this better, think of a city or a county that really, really wants a new bypass and the state says, "Well, you know, it's important to us as a state but it's not quite important to you as a metropolitan area. " Well sometimes folks in a given area will agree to self-impose, self-assess local option taxes in order to borrow money from a SIB and get the project done and then repay the loan with interest over time. So that's how it works as a supplement to the state's grant program. The SIB can also be uses as a replacement to the state's grant program for selected projects. And project sponsors may prefer a large loan at low interest rates to a small grant. And that's a very individual decision, each project sponsor needs to decide whether it can accomplish its project more effectively with a small federal aid grant or whether it would like a larger amount at low interest rates or perhaps a combination of the two. Now why do states provide credit? Well states provide credit through the SIB to help projects which are not of high enough priority for grant assistance, that is second tier projects. That doesn't mean they're not important, it just means that only so many projects can be first tier priority, number one priority in a given year. The states will provide credit to accelerate projects slated for grants in later years of a STIP, let's say a project is on year three but a local area, a city, a county, a turnpike authority, what have you would like that project to be in year one. Well the state will provide credit through the SIB in order to move that project up along the STIP. The state will provide credit to provide gap funding or initial seed funding with difficult to finance projects, projects that need some type of assistance such as a tolling project. It will also provide credit to provide assistance short of federal aid grant assistance to private sector projects for various kinds of private sector enabled projects such as truck stop electrification, truck parking, electric vehicle charging stations, new interchanges only partly funded by the state, et cetera. Now why do local governments request credit? Well it's sort of the flip side of why states provide credit, local governments will request credit where private sector companies won't request credit to advance a project that may not be high on a state grant agenda but it's important to local congestion relief or economic development. The City of Chandler for example, Chandler, Arizona, and I notice that we've got AZDOT on the line, so they can correct me if I'm wrong, the City of Chandler borrowed SIB money to advance a segment of freeway not eligible to receive grants for another three years and that was very important to the folks in Chandler, probably more important to them than the folks in Phoenix at the State Capitol and that's how the folks in Chandler got the project sooner rather than later. Local governments request credit also to borrow funds to enable public, private partnerships or tolling projects. For example, a state loan may be the only way of starting a toll project important to local congestion relief or to economic development. And also to obtain cheaper, easier borrowing than going to the bond markets especially for smaller projects. Now we have an audience poll question that I don't know if Michael asks this question if I do.
Michael Kay: Yeah, I can pull that up Fred. So on everyone's screen now is a poll question, does your state currently have a SIB, and if you don't know, you can check that box as well.
Michael Kay: So we'll give everyone another ten seconds or so.
Michael Kay: We can go ahead and close that out. So about half yes, a quarter no and 20 percent are not sure.
Frederick Werner: Okay, so we've got a wide variety of situations here. For those folks who don't know, I guess that we, we being OIPD, we've perhaps neglected this SIB program a little bit more than we should have. If you're at a division office, you really should know whether your state DOT has a SIB, so after this call, you might want to make some calls and find out and for the rest of you, for those who have SIBs, hopefully you will get some information about the FAST Act requirements and for those who do not, may decide that they want to set one up under the traditional program or some of the FAST Act provisions. All right, moving on to lesson two. Ah, do we have any questions? That's important.
Michael Kay: Yes, absolutely.
Frederick Werner: Yeah, I didn't mean to scoot through that so quickly.
Michael Kay: So feel free to submit those questions through the chat box and you can ignore that directive on the phone about star one, you can just un-mute your line if you have a phone question and shout it out. So we'll wait about ten seconds.
Michael Kay: Okay, hearing none, I think we can move on.
Frederick Werner: Well hopefully lesson two will stimulate some questions, it's the more interesting I think of the two, of the first two lesson anyway, the third lessons is really the most interesting and Kevin gets that one. SIBs across the states, 33 states and territories, it's really 32 states and the Commonwealth of Puerto Rico have created SIBs since they were first allowed in 1995. While we have a large number of states clearly that have created SIBs, only about a dozen states have very active SIB programs. In addition to the SIBs that are assisted with federal aid, that is federal aid is used to capitalize the SIB balance, the balance available for lending, a number of states have established state only SIBs as well and that means that state funds regardless of the source are used to establish a state SIB that is free of federal aid requirements. Texas and Florida are among the states that have SIBs that are federal as well as SIBs that are state only and those states have fairly big state SIBs as well. Over the last 20 years, and again, I can't believe it's 20 years but over the last 20 years there have been over 8.7 billion dollars in loans of which 4.8 billion has been dispersed and the rest committed and this information is effective as of December 31, 2015 based on division office self-reporting. This loan activity which is pretty substantial really was enabled by only 678 million dollars in federal aid funds and seven federal aid funds that are capitalized and 716 million dollars in state funds since 1995. So if you take a look at the federal funds, 678 million and compare that to the 8.7 billion in total loans, you're talking about a leverage ratio of perhaps, what would that be, about 12, which is a pretty significant leverage ratio, it's less significant if you throw in state funds, let's say it would be about six but you still get a fairly significant bang for your buck there. Four hundred and thirty-eight loans have been fully repaid and 532 loans are still outstanding. So that's what's going on with SIBs so far, an 8.7 million dollar program to date. Now SIBs has been around as I said for 20 years and four different reauthorization acts have allowed the creation or enabled the creation of SIBs. The NHS and for those of you who are younger, you might not know what that stands for, it's National Highway System Act of 1995, that was the pilot program, the first time that SIBs were enabled. The next authorization was TEA 21, that's Transportation Equity Act for the 21st Century, that was an extension of the pilot program, which I'll explain a little bit later. SAFETYTEA-LU in 2005, and I'm not going to venture a guess, I can't remember what it stands for, that made the SIB program a permanent Title 23 program and then the FAST Act which continues the permanent status of the SIB program, or SIB initiative. The NHS Designation Act of 1995 authorized ten pilot SIBs with additional states authorized to be included in the pilot by the FY '96 DOT Appropriations Act. Each act has somewhat different rules because that's what Washington and Congress like to do and SIB operates under the rules of its authorizing act and uses funds from that authorization. Any new SIB created today, today being post FAST Act would follow the provisions of 23 U.S. Code 610 and the FAST Act and would be considered and treated as a permanent SIB. In addition, when states with existing SIBs utilize FAST Act apportionments to recapitalize their SIB deposit capital they are automatically converting their pilot SIB to a permanent SIB and the requirements for second and subsequent generation lending change and I'll get to that a little bit later, there's a table explaining what federal aid requirements pertain to what type of SIB activity. Permanent SIBs are subject to all federal requirements for new and subsequent generation lending. Now the federal role in SIBs is distinct from the state role, the federal government provides for initial setup and oversight while the state manages SIBs on a day-to-day basis. The federal role is to execute a cooperative agreement with the state to perform general oversight monitoring and reporting on the eligibility of projects and the eligibility of funds used to capitalize the SIB to obtain and review annual reports which should be coming in fairly frequently, sometimes they are, sometimes they're not and then to review SIB periodically to see if legislative requirements are being met. The state role is to, and this is the first bullet's pretty important, to establish the state legislation allowing SIBs. And we've found that sometimes in the state constitution, sometimes in enabling statutes for either the state DOT or for general financial management of a state, there is a prohibition on entering into this type of activity, this type of structure with the federal government. So the number one thing that the state has to do is to ensure that setting up a SIB does not conflict with its constitution or with any of its enabling statutes and if there is a conflict, to make sure that the state legislation is changed. The next state role is to execute cooperative agreement with FHWA then submit the request for funds needed for deposit capital which is the cash in the SIB, request funds to obligated, submit payment request to capitalize the SIB, provide matching funds prior to deposit of federal funds into the SIB, set policy, write operating rules and procedures, staff the SIB. Sometimes we find dedicated staff for the SIB, sometimes it's collateral duty, for the larger SIBs, obviously there can even be an office, there can be two or three or four or five people working on the SIB in the bigger operations. And then review and approve loan applications, which can be somewhat of a process, I mean there can be a board, typically there is a board that will review and evaluate loan applications and there are written evaluation procedures and criteria and there can be an appeal process, that kind of thing. So the reviewing and approving of loan applications can be-- well it is a serious kind of effort and it can be a little politically sensitive as well. Now project eligibility is fairly straightforward, only Title 23 and Title 49 projects are eligible. A SIB, SIB credit assistance can be used to provide loans, credit assistance for any title 23 project giving states greatly enhanced flexibility. The first round of SIB assisted projects must go through a federal review process and meet federal requirements such as NEPA and Buy America. For second and subsequent rounds of lending, more complex rules, depending on the act used to establish the SIB, all federal requirements apply to any SIB assisted by the FAST Act. Where there is lack of clarity, lack of certainty on eligibility then eligibility is determined through consultation and coordination between federal highway division offices, state DOTs, state SIBs and appropriate headquarters offices. Now we've got a little table here, I think it's a two page table if I'm not mistaken, it is and it looks a little bit more intimidating than it is. So let's just go item by item. States, under the NHS Act initially ten states were authorized or were allowed to set up to establish a SIB, this was expanded to 38 states and Puerto Rico, Federal Highway provided 150 million in seed money to these initial states. Under TEA-21, a number of additional states were added, initially California, Florida, Missouri, Rhode Island, Texas added later. Under SAFETEA-LU and the Fast Act we've got all 50 states, the District of Columbia, Puerto Rico and U.S. Territories are eligible to set up an SIB. Under percent of funding categories, under the enabling legislation, under the NHS Act, up to ten percent of funding categories could be used to capitalize SIB. Under TEA-21 there was no limitation and we sort of thought, at first we sort of thought there would be a flood of SIB activity but we were mistaken for something that will become clear on the next slide. For SAFETEA-LU and FAST Act up to ten percent again of the federal aid funding categories can be used to capitalize the SIB. In terms of accounting, not accounting as in debits and credits but accounting in terms of setting up the SIB and tracking activity, the NHS authorized separate highway and transit accounts, there were no separate accounts at all under TEA-21, again, we thought that this might unleash a flood of activity but we were mistaken. Under SAFETEA-LU and FAST Act, we have separate highway, transit and rail accounts, under FAST Act we have the Rural Projects Fund or Rural Projects Account as well, and Kevin will be talking about that. Now the use of repaid funds, this is where NHS differs from TEA-21 and the other laws and this is why we suspect there was not a big burst of activity with TEA-21. Under the NHS Act, non-federal repayments must be used as state monies and follow state requirements only on any Title 23 eligible project. Federally funded repayments into the SIB are considered federal and all Title 23 requirements apply. Under TEA-21 and subsequent, that is what applies today, all repayment funds go back into the SIB for lending to Title 23 and Title 49, that's fine, but federal requirements exist during all rounds of lending. So you are not cleansed of those federal requirements in the second and subsequent rounds, they stick with you, they stick with you like glue like a good friend. And that can be a good thing, Congress obviously feels it's a good thing but it leads to less flexibility in terms of projects that are assisted by TEA-21 SAFETEA-LU and FAST Act SIBs. Annual reports, under the NHS Act they are due 90 days after the end of the federal fiscal year. Under TEA-21 they are due biannually and under SAFETEA-LU and FAST Act, by the end of the federal fiscal year, which is a little bit different than the NHS Act. So reporting requirements are not extreme but they are constant and we would appreciate it if the states would follow them. The maximum loan term is 35 years, which is a very long time, so that means that if you're talking about a fairly substantial project, you make a loan and it can exceed the life of a mortgage in many cases. The interest rate will be at or below the market rates at the discretion of the individual SIB, SIBs do have flexibility to set appropriate rates and can set different rates for different types of projects. Investment grade ratings, any bonds issued by the SIBs and we've got a couple of SIBs that have done this must achieve a BBB- or higher ratings. And allowed investments in temporarily unneeded funds can be made in investment grade securities, interest and other earnings must be used for SIB purposes, for assisting additional projects. Local match is very flexible, it can be provided by state funds or repaid loans. Grants are not allowed in the first round use of SIB capital but there's more flexibility in subsequent rounds of lending. Administrator expenses are capped up to or at two percent of federal aid funds capitalized. Now the use of repaid funds, I wanted to mention this again, for any lending from federal aid fund capitalized under the FAST Act, federal requirements apply to all rounds of lending, again, which is a good thing or a bad thing depending on your point of view. All right, Michael, we've got the question here.
Michael Kay: Sure, Fred, let me just pull that up. So this is a multiple answer question where you can select more than one choice. The question is "Federal requirements apply to SIBs' use of repaid funds under, " and we're looking for you to select the federal legislation that it applies to. Again, "Federal requirements apply to SIBs' use of repaid funds under, " and your choices are, NHS Act, TEA-21, SAFETEA-LU, MAP-21 and the FAST Act. Let's give everyone about 30 seconds.
Michael Kay: And as a reminder, please mute your phone line, thank you. We still have a few people answering, so we'll give it about ten more seconds there.
Michael Kay: And we'll go ahead and close it. I had kept the results private, we'll go ahead and show them to everybody. And Fred, do you want to discuss the answers?
Frederick Werner: Yes, yes. There's perhaps a little confusion here because the requirements are a bit confusing, so that makes sense. The NHS Act which is the act that rolled out the SIB concept requires that federal requirements be used or be followed for the initial round of funding, that is the first set of loans that the SIB makes must follow federal requirements. But then subsequent rounds whether it's the second or third or fourth, don't need to follow federal requirements. For TEA-21 and later, that is TEA-21, SAFETEA-LU and FAST Act, there's no SIB activity under MAP-21, but for TEA-21, SAFETEA-LU and the FAST Act, then federal requirements will apply to repaid funds for all generations. So regardless of when you make the loan, when the SIB makes the loan whether it's the initial loan, the second generation, the third generation, what have you, federal requirements would apply. So most folks got that, only five people didn't get that. But you need to take a look at this presentation and make sure that you understand where your SIB funds were generated whether it's an NHS Act SIB or some other kind and at this point anyway, for FAST Act purposes, assume that federal requirements apply to all rounds of lending, that's the safest assumption that you can make.
Michael Kay: Great. And I think we'll pause for a moment to see if we have any questions. Again, feel free to submit them through the chat box or over the phone.
Michael Kay: Okay, I think we're set to move on.
Frederick Werner: And I believe this is where I hand it over to Kevin McDonald. So Kevin, go ahead.
Kevin McDonald: Great. Thank you, Fred and hopefully this is exciting, we're getting close to the present day. So I'm going to talk briefly about the FAST Act and the implications of the bill that passed and was signed into law on December 5th of last year. So we'll get started. So under MAP-21 which was the Transportation Act that went from June of 2012 until the end of the federal fiscal year of 2015, states were not permitted to utilize their federal aid grant funds to capitalize state infrastructure banks or introduce additional capital to increase on-lending. Under the FAST Act, Congress restored the authority and hopefully that can have some profound impacts to how states and their partners approach the SIB program. So under the FAST Act, the act reinstates the provisions that allow states to use their federal aid apportionments from fiscal 2016 through 2020 to capitalize SIBs. When states capitalize using a FAST Act apportionment, they automatically convert their pilot SIB, so that would be a SIB under those previous acts that Fred's discussed into a permanent SIB. States that have permanent SIBs as Fred has sort of pointed out so clearly, all federal requirements for new second and subsequent generations of lending so from those funds that were repaid need to follow federal aid requirements. The FAST Act allows states to utilize a few different categories of funding under the act, the NHPP funds, what is now called the Surface Transportation Block Grant Program, formerly STP, and the new National Highway Freight Program, which is a new apportioned freight program that is a new creation in the FAST Act. It's important to note that capitalizations utilizing federal aid grant funds cannot exceed ten percent of the funds apportioned to the state under each one of those programs that I just mentioned. So part of the reason that I'm participating here today and I think it's rather exciting for the TIFIA office is that the FAST Act created something called a Rural Projects Fund and that's created in our portion, the TIFIA's portion of Title 23. And I think that the goal of Congress here was to increase the ability for small projects that may not have been targeted to utilize TIFIA credit assistance for whatever reason to try to be able to access credit assistance and avoid some of the hurdles that project sponsors might face when utilizing TIFIA assistance. And for those on the phone that aren't familiar with the TIIFA credit program, if there are any, I'll just give a brief overview. The TIFIA credit program has been around since 1998 and we provide direct loans, loan guarantees and other forms of credit assistance but I will point out that all of our loans save for one have been direct loans. Typically our loans are greater than about 100 million dollars and we can fund up to 33 percent of eligible project costs, so we're typically funding significant loans for major infrastructure projects. And I think Congress has had the goal of trying to increase on-lending to smaller projects and under MAP-21 we had a portion of our apportionment that we utilize to make loans to try to facilitate use for rural projects, a reduced interest rate. And we had a few project sponsors that were able to utilize that but I think that the hope was that by creating this rural projects fund in the FAST Act, you would facilitate additional use for a considerable number of projects beyond just a few that we were able to serve under MAP-21. So under this Rural Projects Fund, this is a separate account from your highway transit and rail accounts that may already exist, the projects must be outside an urbanized area of 150,000 so that's as the census designates an urbanized area, so that's sort of what that means. This is important, project costs must be anticipated to be between 10 and 100 million and for rural projects that are going to seek assistance under this Rural Projects Fund, SIBs may issue loans to public or private entities, so that's another important point there. And as Fred mentioned before again, loans may not exceed 80 percent of project costs. So the important reason that TIFIA's involved here is that Congress wanted to increase on-lending and try to facilitate, as I described, these rural projects that may not be great candidates for TIFIA credit assistance given the amount of diligence, effort that we require in order to execute a loan and the cost associated and the timeframe. Really there isn't a tremendous amount of alignment there with small projects, so the hope was that by capitalizing rural projects via secured loan to a SIB, you may be able to facilitate additional projects that otherwise wouldn't be able to utilize credit assistance. So under this Rural Projects Fund, the TIFIA credit program would in essence capitalize or loan to a SIB utilizing the flexible terms that we can provide to sponsors including very low interest rates, the flexibilities on repayment schedules, the ability to accept pledges that are relatively low investment grade and there's a significant number of flexibilities that come from accessing TIFIA credit assistance. In addition, we have very long repayment terms, so we could on-lend and capitalize a rural SIB, Rural Projects Fund at a SIB and that loan may not have to be repaid up to 35 years later, so there's significant flexibilities also with our repayment terms in terms of the tenor of the loan that we're providing. In addition, other terms of the TIFIA program apply to this Rural Projects Fund. SIBs are a new concept to the TIFIA program, we have never done on-lending before to a SIB. I think that from the TIFIA offices perspective, we have grown quite comfortable with lending to the broad array of types of projects we have from accepting a general obligation pledge from the state of New Hampshire to facilitate the construction of an interstate widening project to very risky non-recourse P3 project finance toll road. So we run the gamut and our program has developed underwriting and processes that allow us to facilitate loans to that whole collection of projects. And SIBs with us serving as an on-lender create a whole new field of opportunity but also a challenge to try to wrap our hands around how we could actually prove helpful to facilitate the delivery of these rural projects that Congress and the administration has seen fit to facilitate. And so to that end, we are in the process of developing a framework for capitalizing these Rural Projects Funds and we are going to be holding a webinar/listening session on May 24th and we'll be sending out more information soon about the exact time on the 24th and details on how to register soon. But the goal is to outline our initial conceptual framework on how we would actually capitalize these Rural Projects Funds, we would seek feedback from financial managers and folks at state DOTs that are familiar with the SIB process and potentially could provide some feedback on how we're approaching this opportunity and just generally solicit some feedback on how our approach whether it makes sense, whether we need to consider different options and outline any potential problems that might hinder successful implementation of capitalization of this fund. So we think there's a lot of promise and to be honest, we are all ears and we are very excited about the potential to try to facilitate the delivery of these projects and to the extent that you can put your thinking cap on now, between now and the 24th, the better. I will turn it back over to Fred unless there-- do we want to hold questions until the end, Fred for this portion?
Frederick Werner: Actually, I mean that's the way it's structured but I think that it would be an appropriate time to ask questions now, if there are questions on the FAST Act and what the TIFIA office is planning on doing, this is a good time.
Michael Kay: Yep, absolutely. So if everyone can please submit any questions you have through the chat box or again, direct over the phone, just make sure your un-muted and shout it out.
Frederick Werner: Perhaps folks are waiting until the 24th.
Kevin McDonald: <laughs>
Michael Kay: That may be.
Frederick Werner: Kevin, you might have to give away toasters to get some questions.
Michael Kay: Well, all right, hearing none, I guess we can move on.
Frederick Werner: Okay. We've got something that, it's not exactly related to FAST but it is an innovation and it's something that some folks have not heard about. Our SIB guidance which is the next slide talks about the de-federalization of SIBs and that term is a little bit confusing to some folks so we decided to call it elimination of federal oversight of SIBs. And as a point of background, the NHS Act legislation allows SIBs which have leant out their federal aid funds, their federal aid capital or funds from federal aid capital, capitalization and are making new loans only with state monies or with repaid loans to be free of federal requirements. They are still allowed to lend only to Title 23 projects but there is no required federal reviews. So Federal Highway has decided to use this provision or to recognize the fact that this provision has been used to allow such SIBs to eliminate federal oversight and/or to close. And once the federal oversight is eliminated or the SIBs close, they would then be considered state SIBs. So South Carolina and Utah have eliminated federal oversight and chosen to become state SIBs, the District of Columbia and New York have decided to close their SIBs. Now with the attractive features of the FAST Act, I don't know whether they might want to reopen them but at this point, these SIBs are closed. In 2014, Federal Highway produced new SIB guidance after extensive outreach with the division offices as well as headquarters offices and it pays particular attention to quote, "de-federalization" issues, that is the elimination of Federal Highway oversight. So let me just say, NHS Act SIBs which is the lion's share of SIBs can de-federalize when certain conditions are met. All federal capitalization monies are leant out, at that point, a SIB can convert to a state SIB with a general promise that lending will be kept to surface transportation projects. Alternatively the SIB can be closed and balances granted to Title 23 projects. So I just wanted to let you know that this opportunity exists, this is an option that you all have although again with the additional provisions, the additional flexibility of the FAST Act, I'm not really certain that states will want to do this, if they'll want to close the SIBs or they really might want to beef them up instead. So with that, let's move to the next section which is questions. If there are any questions, that's fine. I think we sort of addressed that at the end of Kevin's presentation, but again, if people have questions, please submit them using the chat box or just shout them out. And hearing none, let me just recap the course. Lesson one was to describe state infrastructure banks in general, what are they, how they work, why are they useful, what makes sense, what doesn't make sense in their use. The evolution of SIBs over the last 21 years, what is their record in terms of lending, in terms of numbers of loans assisted, that type of thing, how do they fit in within federal aid. And then lesson three is the FAST Act, rebirth of SIBs, what are the new opportunities and then can't a SIB just de-federalize. So we covered a lot of information but we tried to make it fairly simple. We do have a page here of SIB resources and the TIFIA office will be providing some links I imagine on May 24 to its websites. Contact information, Frederick Werner, I am your contact on SIBs for the next year or so. And then with respect to the TIFIA assisted SIB programs, Jorianne Jernberg is the team leader and both Amit and Kevin work for her and will be working on the TIFIA SIB program. And I believe that's it.
Frederick Werner: Michael or Kevin, do you have any additional comments to make?
Michael Kay: Well I did want to open the floor for questions one more time and address the question about a recording of the presentation. We will make the recording available via the IPD website. And again, if you would like to download a copy of the presentation, simply click on the file name in the presentation download box, click download file and follow the prompts on your screen. Do we have any questions? I don't see any in the chat box but you're welcome to ask them over the phone, again, just un-mute your line.
Leah Demers: Hi. This is Leah Demers from South Dakota. I have a question, are you there? Okay. Well here's the deal, I wasn't here unfortunately when the SIB was established however I believe we were part of, oh gosh, the seed money if you will, we received some of that and established our SIB and then perhaps, I think it was shortly later on, again, this is all, I'm trying to remember conversations from other folks that we had added additional funding. But the question is, is now the idea about de-federalizing which again, correct me if I'm wrong but that terminology means no federal oversight.
Frederick Werner: Correct. This is Fred, that is correct.
Leah Demers: Okay. So no federal oversight and without dissolving your SIB per se, is that right?
Frederick Werner: Correct. Well I mean you have two options, I mean, you can go the de-federalization route and I use that term because it's part of our 2014 guidance and it's an unfortunate term but that's the term that we use. You can de-federalize and choose to close or you can de-federalize and choose to become a state only, a state managed SIB. The one question that I had and I don't think I have an answer is if South Dakota chooses to de-federalize and then decides to participate in the TIFIA flexibilities, the TIFIA assisted activity, I'm not sure that they would be able to do unless they turned around and re-federalized. So if the state is undecided, I mean perhaps they haven't even thought about it but if the state could be interested in the TIFIA credit angle, then it would be perhaps premature to de-federalize.
Leah Demers: Could you go back to the TIFIA credit slide. Unfortunately, I apologize, I don't know if there's people beating down your door for questions but I going to ask these.
Frederick Werner: Oh no, I think we can probably manage the onslaught.
Leah Demers: Okay, well good. All right. So let's just say we have several I guess South Dakota large projects that are definitely more 10 million dollars but I doubt they're more than 100 million, the question is that we could establish a rural project fund for rural infrastructure projects.
Kevin McDonald: Do you want me to...
Leah Demers: Yeah, roll through that, would you?
Kevin McDonald: Sure. So I mean that's perfect, let's just talk about, let's say you have ten bridge projects that are each 10 million dollars apiece that the state is planning to do in the next two years and you were planning to borrow let's say for instance issue bonds, what TIFIA can do is you can come to us and you can borrow up to 80 percent of the project cost for those projects, we would capitalize the Rural Projects Fund and you would go out and you would lend to the municipalities, let's say there's a local entity that wants to build each one of these bridge across the state, lend to those local entities and at favorable rates and the State of South Dakota would for instance repay us with either a pledge of revenues like a gas tax or some sort of credit worth stream to repay that loan at very favorable rates. And then in addition, the state would receive the repayment stream from the entities that they are on-lending to. I think that the important point to note is that loans that the-- the lending that we do to the SIB is at one-half the treasury rate for these rural projects. So for instance, we're about to execute a loan to the State of New Hampshire to finish widening of I-93, they're going to receive a 25 year loan at 1.2 percent, so the interest rate on that loan would be similar to the interest rate that the SIB would be capitalized with for a similar tenor. So you get to borrow at very advantageous terms and we have the ability to structure our repayment terms for that lending. Let's say you have a very lumpy capital program that you're addressing all of your bridge needs now and then in tern years' time you're going to have additional cash flow to in essence pay back those bridge costs, you could structure the SIB on-lending, the flow of the repayment would in essence nest into your capital program very nicely. So we have a lot of flexibilities and you get to borrow at that very affordable half of the treasury rate for a similar type of tenor of note. So we're trying to figure out how we can do this quickly and how it might help so we haven't fully fleshed out all the details but that's just sort of potentially one option that we're thinking about of a way to make it work. Does that make sense?
Frederick Werner: Kevin, would I be correct in concluding that it would be easier for you all to be working with a state that has a SIB rather than a state that needs to set up a SIB. I mean I'm not saying that you wouldn't work with a state that doesn't have a SIB but having one, does that speed things up for you?
Kevin McDonald: Absolutely because then there isn't any issues with actually having to get authorizing legislation, making sure that-- because I think another important point to note is that generally speaking the rules that apply to Chapter 610 which is the SIB section of Title 23 apply, so we have to make sure that all the ground work is in place in order to do our capitalization. But we're eager to talk with whoever's interested in potentially utilizing this because Congress has said it's a priority, the administration said it's a priority and we think it can be quite successful if we have the right folks that are interested in thinking and coming up with new ways to potentially utilize SIBs and TIFIA credit assistance.
Frederick Werner: And a couple of states, I don't know if South Dakota was one of them, but a couple of states over the last couple of months have made inquiries to me about de-federalization and I've said, "Well, we can work with you, we're happy to do it, I mean it's a fairly simple process but you might want to wait a little bit because you don't want to close the door and then have to open the door six months later, that just doesn't make any sense to me."
Leah Demers: This is Leah again, I highly doubt that would have been our state just because we rarely use our SIB and the last time we did I think it was right around the times where the reimbursements from Federal Highway were being cut and so we wrote ourselves a SIB, had another 20 million in the bank to use at that point and were able to pay contractors. So that's how we used it. We have other grant programs for local entities so we traditionally haven't used our SIB very much, but...
Frederick Werner: But think about the provisions of this new authority, if you're talking about between 10 and 100 million over 35 years, gosh, and at very, very low interest rates, you might want to take another look.
Leah Demers: Yeah, that would be something quite interesting and again, it's not like-- let's be honest, we wouldn't be dissolving our SIB any time soon, so we wouldn't have to worry about that, but again, in my mind's eye, I know of at least two larger projects for our state that it would be interesting to know how other folks around here are thinking of paying for them and have they thought of this option. So I appreciate it, thanks for the help guys.
Frederick Werner: Okay, no problem. And I know that Kevin has a boarding pass already to Pierre so he's ready to go.
Leah Demers: You even said Pierre right, that's great. <laughs> Usually it's Pierre.
Frederick Werner: I'm from the Upper Midwest, we try to stick together.
Leah Demers: Thank you, appreciate it.
Frederick Werner: You're welcome.
Kevin McDonald: That was a great question, thank you so much.
Frederick Werner: Yeah. Yeah. I think it's either the smallest or the second smallest state capital.
Michael Kay: Montpelier I believe is the smallest.
Frederick Werner: Ah, okay.
Leah Demers: Yeah, we don't have a whole lot of folks here but hey, we try to get it done.
Kevin McDonald: You've got a lot of space, that's nice.
Leah Demers: Yes, we like space.
Frederick Werner: I have an old timetable from Western Airlines that shows several jet flights into Pierre in the
1960s and 1970s.
Leah Demers: Yeah, I don't think that's happening anymore.
Frederick Werner: Well no, you weren't even alive but I collect strange things.
Leah Demers: No, that's okay. Oh funny.
Frederick Werner: Okay, any more questions particularly to Kevin, Mr. TIFIA is what we call him in OIPD?
Frederick Werner: Well in encourage you all to plan on attending the May 24th webinar, it's-- well Kevin, you can promote it better than I.
Kevin McDonald: Yeah, I think it'll-- we're going to have some useful guidance about the TIFIA program and the different approaches that we think that this capitalization of these rural project funds might potentially function and work and I would encourage you all to think about how the-- particularly what we would seek guidance on is for folks that have SIBs already, what sort of book you have and whether you're looking for the Rural Projects Fund to in essence help increase your activity or for folks that are new, how we might be able to step into that role. One point that I want to make that Fred mentioned before, it's not entirely clear under the FAST Act whether on-lending for Rural Project Funds once the initial round of project has been funded, whether the repayment stream would be subjected to federal requirements. So for folks that are going to plan on coming to the 24th webinar, please think about federalization of subsequent rounds of SIB lending might impact your decision whether to pursue TIFIA capitalization of a rural project fund, I think that...
Frederick Werner: That's good to know, Kevin, thank you.
Kevin McDonald: There is some discussion about that so I think that there's a strong push to make this work, make this be helpful and we want to hear feedback on that point particularly on the 24th.
Frederick Werner: And to promote the traditional SIB program, don't forget that you have new authority or reinstated authority to capitalize up to ten percent of most of your federal aid to increase deposit capital available for a traditional SIB lending. So I'm not saying you should do it but I'm saying that you might want to look at that opportunity and see if you have borrowers at the local level including private sector borrowers who would be interested in a reinvigorated SIB at this time. So think about that option as well.
Leah Demers: This is Leah again, you brought up a good point, so let's say I'm a state that wanted to start a SIB, I'm...
Frederick Werner: Start or recapitalize a SIB that already exists?
Leah Demers: Okay, let's recapitalize. So if I decided, okay, for South Dakota, let's add, oh, I don't know, ten million of our NHPP funding, I'm assuming again, we would create a project in FMIS just like we have for our super old one and at that point, you take your NHPP and your formula obligation authority obligate it, capitalize your SIB with your let's say state match and you're done.
Frederick Werner: Yes and no. Well, I would say, yes. Take a look at slide 17 because we tried to capture that process but you might want to talk to whoever you ordinarily communicate with on FEMIS issues just to make sure that's quote "cool" unquote from the perspective of OCFO. Because we haven't done this for a while and the people who are sitting in certain positions of responsibility may not have ever done it, so we just have to sort of take baby steps again to make sure that everything is done to everyone's satisfaction.
Leah Demers: Okay. All right, well, yeah, no, don't get me wrong, it was just a question of basically yes, you need to have the apportionment in an eligible fund source as well as the obligation authority in your match all together then let's move on. Obviously if you-- and again, you've got to have your legislation knocked out, blah, blah, blah, but we already have that part done.
Frederick Werner: But I assume that you do if you have a SIB already, I mean...
Leah Demers: Right, right, right, which is not a problem but if you're brand new then that's a whole different story. So, okay, well, cool, you answered my question, thanks.
Frederick Werner: All right, very good.
Michael Kay: Any other questions?
Michael Kay: All right. Well any concluding remarks from Fred or Kevin?
Frederick Werner: This is Fred, I would like to say that you, at the division offices might want to touch base with your state contacts, your state partners and find out whether they're even aware of the SIB program, because we all have turnover and there was a burst of SIB activity in the late '90s through about 2000 and gosh, that was a long time ago. So you might just want to call your states and find out what they know, if anything and then we have a couple of state DOTs on the phone, you might want to take a look at this slide, take a look at the provisions, the authorities that are newly available and think about whether they would help you assist what you're trying to do. And I guess that's my concluding remark. Kevin, do you have anything?
Kevin McDonald: Yes, I think that my concluding remark is if your state or for the state DOTs that are on the phone, if you all are planning to issue debt to finance the delivery of rural projects in the next few years, this TIFIA on-lending program could be potentially very useful to reduce your debt service costs and facilitate the delivery of those projects. So please think about that and I if you're planning to do that, we're here to have as many conversations as you'd like to be able to facilitate this process and make sure that it's a success. So please put your thinking caps on and we're here to talk and bounce ideas off, so we look forward to you joining us on the 24th of May with your ideas as well but if you have any questions in the ensuing period, please call me, please call Jorianne whose name is also on this slide deck or Amit whose name is just before mine on the slide deck as well. Be happy to talk, answer any questions you might have and hopefully we can put this capital to use. And thank you to Fred for allowing me to join and sort of piggyback on the traditional SIB program, appreciate it.
Frederick Werner: Thanks to you, Kevin. I'm so tired of listening to myself talk, I would welcome your participation at any time on any webinar. So, thank you
