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Weekly UpdatesSurface transportation plays a critical role in community and regional economic development. It enables the safe and efficient delivery of goods and services, and provides citizens with the ability to access tangible and intangible resources external to their community. Reductions in travel times, transportation costs, and inventory control expenses are among the many economic benefits of improved transportation systems. It is also postulated that diverse and accessible transportation links improve property values and invite additional economic development investments. Indirectly, transportation investment decisions can enhance tourism, improve land use options, complement community planning programs, and buttress community aesthetic improvement efforts.
Surface transportation projects have historically received significant levels of federal grant assistance. This assistance is derived from various user fees, including gasoline, tire, and motor fuel taxes levied at the national level. Despite this funding, many transportation projects face significant financial hurdles prior to and during construction. For example, local governments frequently encounter discrepancies between local fiscal year funding and the availability of federal surface transportation dollars. This timing mismatch can result in project delays. The perennial and unique funding gaps for surface transportation have initiated the inception of several U.S. Department of Transportation lending programs designed to assist projects with both temporary and long-term funding requirements.
This article describes the federal lending programs that have evolved as a result of unmet demand for additional credit facilities for surface transportation projects. As summarized in Exhibit 1, the programs vary by the amount of credit assistance available, the percentage of project costs eligible to receive credit assistance, and the minimum dollar amount of anticipated project expenses. These programs include the Transportation Infrastructure and Finance Innovation Act, state infrastructure banks, Section 129 loans, the Railroad Rehabilitation and Improvement Financing program, and various methods to meet project match requirements.
A SURVEY OF FEDERAL PROGRAMS
Although most project sponsors prefer to receive grant funds instead of loans or other forms of credit assistance, lending programs offer some distinct advantages. Lending facilitates project acceleration. For high priority projects, credit assistance is often preferable to uncertain grant funding that may not materialize for many years in the future. Lending also supports cost efficient project delivery by speeding construction and avoiding construction cost increases due to inflation. For maintenance projects, borrowing funds to perform rehabilitation activities may decrease overall costs by protecting the infrastructure asset before additional deterioration significantly compromises the asset. Lines of credit permit greater flexibility in a project's financial plan, and enable the sponsor to better manage cash flows. Loan guarantees reduce credit risk for lenders and support competitive interest rates. Finally, credit assistance may improve project fiscal discipline and cost containment strategies. The need to competitively apply for and repay funds presents a strong incentive to carefully monitor and control project costs and to meticulously plan all aspects of project financing and delivery.
The sections that follow describe the major federal transportation lending programs and their reauthorization status.
TIFIA. The first example of federal credit assistance occurred in 1993 via legislative appropriations that enabled the Department of Transportation to offer two lines of credit to the Transportation Corridor Agencies of Orange County, California. The lines of credit were used to support the sale of revenue bonds, the proceeds of which were used to construct the Foothill Eastern and San Joaquin Hills toll roads. In 1997, another federal appropriation was used to lend funds to the Alameda Corridor, a project to improve rail and truck access to the Ports of Los Angeles and Long Beach, California (see sidebar). Credit assistance for the Transportation Corridor Agencies and the Alameda Corridor set a precedent in the transportation sector and demonstrated the viability of and market sector demand for a federal credit program designed specifically to assist transportation projects requiring significant financial resources. To provide a more formal program format to meet the growing interest in credit assistance, TEA-21 established a new program known as the Transportation Infrastructure and Finance Innovation Act of 1998, or TIFIA.
The TIFIA program is managed by the Department of Transportation, and it is designed to provide financial assistance to large projects of regional or national significance. Additionally, TIFIA strives to address chronic deficiencies within the capital markets, which historically have been reluctant to lend to financially unproven transportation projects. The program offers applicants direct loans, loan guarantees, and lines of credit for projects with more than $100 million of eligible construction project costs and more than $30 million of eligible transportation system project costs.
The TIFIA program imposes an investment ceiling on the Department of Transportation of no more than one-third of the total project costs. By remaining a minority investor, the Department of Transportation simultaneously limits its risk exposure and encourages significant non-federal public and private participation. In addition, each applicant must submit a credit rating letter affirming an investment grade status for the project's senior debt (the TIFIA instrument can be subordinate to this debt), a financial plan detailing sources and uses of funds, and a formal written response addressing the relevance of the project to the Department of Transportation's strategic goals. Loan terms are negotiated among the Department of Transportation and the other participating parties. For direct loans, the interest rate is set at closing equal to a U.S. Treasury instrument with a similar maturity.
Since its inception, the TIFIA program has enabled and expedited the construction of more transportation projects by providing critical financial support and by attracting and maximizing private sector involvement. As of March 2004, 11 projects in seven states have received $3.6 billion in TIFIA credit assistance. These projects represent a diverse modal investment portfolio, and include public transportation, highways, intermodal hubs, ferry terminals, rail, and marine cargo. Three additional projects have applied for credit assistance and are under review.
The TIFIA loan repayments are returned to the U.S. Treasury and therefore are unavailable for funding future loans. Consequently, unlike the state infrastructure banks discussed later in this article, TIFIA's continued funding is dependent on the ongoing reauthorization of the Transportation Equity Act for the 21st century, commonly known as TEA-21.
Several changes to the TIFIA program have been proposed in the pending reauthorization legislation named SAFETEA now under consideration by Congress. The legislation is expected to establish program spending levels and define program eligibility constraints for several years. First, the minimum dollar amount of eligible project costs required to meet the threshold value for TIFIA assistance is expected to decrease to $50 million. This would allow smaller projects to access TIFIA assistance and address an existing Department of Transportation lending capacity gap within the $50 to $100 million project range. Second, the types of transportation projects eligible to apply for assistance would be expanded to include freight rail.
Although SAFETEA caps the total annual available TIFIA assistance at the fiscal 2003 level ($2.6 billion per year) throughout the duration of the legislation, the increased flexibility of certain forms of credit assistance would be more useful to future borrowers than was previously permitted during the TEA-21 authorization period. For example, under the current authorizing legislation, lines of credit cannot fund a project until the project has exhausted all available reserves. In contrast, SAFETEA would enable a line of credit to replenish reserve funds, thereby avoiding project default.
State Infrastructure Banks. State infrastructure banks, or SIBs, provide revolving loans and other types of credit assistance to Title 23 and Title 49 defined surface transportation projects. First developed as a pilot program in 1995 with 10 participating states, the program has expanded to include 38 states and Puerto Rico. State infrastructure banks enhance the lending capacity available to transportation projects under the auspices of the Department of Transportation by providing financing to smaller dollar projects that are not eligible for TIFIA assistance. Some SIBs are able to provide credit assistance via state-funded accounts to transportation projects ineligible for assistance under Title 23 and 49. These projects have included facilities for airport improvements.
In contrast with the Department of Transportation-managed TIFIA program, state infrastructure banks are operated individually by each state. The states establish the application criteria, loan terms, and management structure of their programs. To transfer federal funds to capitalize an SIB, a cooperative agreement is required between the federal government and the SIB. This agreement provides the framework for implementation, including the basic structure and purpose of the SIB, the administration of funds, and reporting and audit requirements. In many states, the state legislature must authorize the formation of an SIB. Despite these rigorous and intricate establishment procedures, SIBs offer significant lending flexibility and allow states to tailor the program to their specific needs. For example, SIB management has the discretion to set interest rates based on state transportation goals and the merits of an individual project, regardless of prevailing market interest rates.
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