This chapter describes key decision points, criteria, and information flows associated with the provision of federal credit and illustrates how a project sponsor could secure credit assistance from the federal government. The administrative structure of a federal credit program should be designed to maximize the likelihood of successful projects, satisfy various federal budgetary requirements, minimize administrative costs, and ensure a timely and transparent application and selection process to encourage private sector participation.
The credit application and review process should result in a formal agreement among DOT, the project sponsor, and the state (or state-designated agent) in which the project is located. Project sponsors eligible to receive federal credit may include state and local governments; government authorities; Metropolitan Planning Organizations (MPOs); private parties, such as corporations, joint ventures, and trusts; and public/private partnerships.
The credit program should be designed to operate through the states or local organizations to which the states delegate authority. As with other transportation programs, there should be state and local flexibility in allocating and managing transportation resources. Although DOT would be responsible for credit review and oversight activities, many of the credit origination and servicing activities could and very well should be undertaken by local servicers. Such activities may include:
Using local servicers would facilitate transportation planning and coordination and help ensure ongoing state and local involvement and support.
A local servicer may reside in a state government agency, such as the Department of Transportation, Department of Revenue, or State Financing Authority. If the state delegates its authority, the role of the local servicer could be filled by a private organization or a public agency (e.g., a SIB, a non-profit organization, or a private contractor which provides the service on an out-sourcing basis).
Some organizations would make better local servicers than others. The best local servicers of federal credit would be organizations with experience in performing financial transactions involving loans, assessing the financial feasibility of complex public/private partnerships, and dealing with different types of project sponsors - state and local governments, transportation authorities, MPOs, and private firms.
Under the National Highway System Designation Act, Congress authorized DOT to create a pilot program of up to ten State Infrastructure Banks. Under the SIB pilot program, states may transfer up to ten percent of most categories of federal surface transportation funding into their SIBs for capitalization purposes.
The 1997 DOT Appropriations Act allowed DOT to expand the SIB pilot program and provided an additional $150 million to be disbursed among the initial ten SIBs and any additional states selected for pilot SIBs. In response to that legislation, 28 more states plus Puerto Rico submitted SIB applications and were accepted into the program.
Though SIBs are hindered in directly assisting large projects by their own capacity limitations resulting from limited capitalization, small portfolios, and a lack of credit history, they could play an important role as local servicers for the credit program. Providing a meaningful role for SIBs would have several strategic advantages:
SIBs would develop in-house financial expertise by participating in the development and financing of projects receiving federal credit assistance, thereby gaining valuable experience in project financing.
SIBs are uniquely positioned to coordinate transportation planning and financing to help ensure that federal credit assistance is effectively used and incorporated into existing state plans and programs.
SIBs could be allowed to collect fees from project sponsors for their servicing activities, which would provide an ancillary source of cash flow to support their own credit activities.
Federal credit would pass through the SIB to the recipient project sponsor, but would not be commingled or cross-collateralized with other SIB resources. Each participating local servicer would need to create a separate account to insulate the federal credit from defaults or other risks associated with its other financial activities (and vice-versa). This would ensure that the budget scoring of the subsidy cost of federal credit is not affected by the local servicer's own portfolio. Figure 3.1 illustrates the potential SIB role.
Figure 3.1 Potential "Pass-through" Role of SIBs in Federal Credit Program
A federal credit program should be designed to assist projects directly rather than fund intermediaries, such as SIBs or other local servicers. It would be undesirable for SIBs to incur long-term liabilities under a credit program because that would inhibit their ability to provide financial assistance on favorable terms to other projects. Moreover, it would complicate the budget scoring process if loan repayments were affected by the SIB's other credit activities. As discussed earlier, the primary purpose of federal credit is to help advance specific projects where assistance is warranted based on national needs. It is not intended to directly assist SIBs, which focus on smaller state and local projects. Over time, SIBs should develop sufficient resources to gain access to markets and ultimately may be in a position to arrange external financing for larger projects.
To receive federal credit assistance, a project sponsor would first submit a preliminary application to a state-authorized local servicer describing the project and providing information to support its designation as a project of national significance. A key element of the application would be a financial plan that identifies the specific type and amount of federal credit applied for; demonstrates the need for and describes the benefits of such assistance; and proposes a timetable for receiving the credit assistance.
The local servicer would then review the preliminary application - working with the sponsor to revise and complete it as necessary - for compliance with federal eligibility guidelines. If the local servicer finds that the project satisfies these guidelines, it would notify DOT and instruct the sponsor to obtain a preliminary credit assessment from a nationally recognized rating agency. This assessment should take the form of a preliminary rating based on the financial plan, including the proposed federal assistance. The credit opinion would provide an expert, independent analysis of the extent and nature of project risk.
Once the local servicer has received the preliminary credit assessment and any other relevant information in the applicant checklist (see Appendix C for a description of the types of information used in evaluating projects), it would forward the completed application to DOT. This completed application would include a written summary of the project, the financial plan, the form and amount of requested federal credit, the rating agency credit opinion, and the expected time frame in which the credit assistance would be needed.
After the application is received, DOT would request that the local servicer and project sponsor schedule a formal lender's briefing to summarize the project, present the financial plan in detail (including the rating agency's credit analysis), and discuss any other relevant issues. The briefing should help the parties to fully understand the project and the federal role and to identify any outstanding issues that need to be addressed. After the lender's briefing, DOT would formally evaluate the project and notify the local servicer and project sponsor of its selection decision.
The first step in the evaluation process would be to determine whether the project meets certain objectively measurable criteria. These initial threshold criteria would cover eligibility for authorized transportation purposes, project size, whether benefits exceed costs, evidence of state and local support, and the potential for user charges or non-federal revenues.
To qualify for federal credit assistance, a project would have to meet the following minimum criteria:
Qualified projects meeting the initial threshold eligibility requirements would then be evaluated and selected according to additional quantitative and qualitative criteria. The factors would be determined by the DOT through program guidelines, but might include the following:
Once a project is selected, DOT would make an initial estimate of the budgetary cost of the requested credit based on its type, amount, and preliminary rating agency opinion letter. (See Chapter 4 for a complete description of how the budgetary cost would be determined.) DOT would then notify the local servicer and project sponsor that it has either reserved an appropriate amount of budget authority - to the extent available - or created a placeholder for future resources. Sponsors of eligible projects not selected would be notified of the status of their applications and the likelihood of future consideration, which would depend significantly on the amount of budget authority available for the federal credit program. Allocation of a limited amount of budget authority among selected projects should be based on the degree to which competing project proposals meet or exceed eligibility and selection criteria. Projects might be selected and allocated funding on a rolling basis throughout the year or at specified times within the year. The allocation method would be the subject of DOT guidance or other public notice.
After a project has been selected and its budgetary cost has been estimated, the local servicer and project sponsor would need to enter into a formal credit agreement with DOT. It is anticipated that a single joint agreement would be negotiated and signed by all three parties. DOT would prepare a generic agreement for the SIB or other local servicer and project sponsor. The preliminary subsidy cost estimate would be revised when the agreement is finalized and the credit is committed, based on prevailing market rates and final loan terms. If a negotiated agreement cannot be reached in a timely manner, then DOT may wish to withdraw its reservation of budget authority and move on to other candidate projects.
Congress recognized the need for a predictable source of funds for multi-year surface transportation projects, and has legislated the use of contract authority for the federal-aid highway program since 1921. Under contract authority, sums authorized are available for obligation without annual appropriation actions. To facilitate the planning and structuring of large project financing arrangements involving federal credit assistance, program funding levels should be known in advance. Providing specified amounts of contract authority, rather than annual appropriations of budget authority, would ease market concerns about the availability of future funding to support federal assistance. DOT would be better able to allocate limited funding and avoid costly delays as selected projects awaited future appropriation actions to determine whether the negotiated federal assistance could be committed. The commitment of federal credit assistance requires stable funding levels known in advance even more than traditional grant reimbursements; the projects would tend to be larger, the financing would be more complex, the federal assistance frequently would be the initial capital component, and the majority of the financing - much of it private capital - would hinge on the timely and assured provision of federal funds.
The credit application and review process must generate the information needed to provide accurate and timely input for the annual federal budget process. DOT must have an early indication of the type of credit support envisioned, the amount of support needed, and the timeframe in which that support could be provided. More precise subsidy cost estimates must await finalization of the terms in each project's credit agreement, but an early indication of credit amounts and associated costs is needed for DOT to gauge the overall level of budgetary resources required. This would allow DOT to prepare estimates of the expected demand, compare them with available resources, and help manage expectations of potential sponsors and states.
Timely submission of applications, evaluation of projects, and estimation of subsidy costs would be essential for allocating a limited amount of budget authority among alternative projects. The time needed to complete the process described in this Chapter - from the initial submission of an application to the finalization of an agreement - may take well over a year for a typical project, as shown in Figure 3.2. The size, complexity, and heterogeneity of these infrastructure investments cause the necessary credit transactions to vary greatly. Given the long lead times needed to thoroughly plan, structure, review, and score these project financing arrangements, any budget authority provided to cover the subsidy costs of credit assistance must be "no-year" funding (available until expended). This approach would allow DOT to reserve budget authority for a selected project and still have sufficient time to negotiate a suitable agreement, revise the subsidy estimate, and obligate the necessary funds.
Figure 3.2 Illustrative Timeline for Project Application, Review, Selection and Agreement
1 Based on fiscal year 1997 apportionments, 18 states would have project - size thresholds below $100 million - with Puerto Rico having the smallest at approximately $41 million.
