Blog Innovative Financing Is No Substitute for New Funding
Hoping to sustain interest in the Committee’s efforts to enact a new multi-year transportation bill during this session of Congress, Reps. James Oberstar (D-MN) and Peter DeFazio (D-OR), leaders of the House Transportation and Infrastructure Committee, convened a hearing on April 14 to explore innovative ways of financing highway and transit investments. But while the hearing provided a useful survey of available financing tools and programs, it produced no new answers to the key question that has bedeviled transportation advocates for many months and remains as the chief obstacle to moving the legislation forward– the question of how to pay for the proposed multi-year surface transportation program.
The Administration’s opposition to increasing the current 18.4 cents/gallon federal gas tax– the most obvious means of generating the needed funds– was reiterated once again at the House hearing by Christopher Bertram, U.S. DOT’s Assistant Secretary for Budget and Programs. The White House has also announced its opposition to any additional taxing of motor fuel as part of the Senate energy legislation. “The Senators don’t support a gas tax, and neither does the White House,” the White House said in a statement, thus squelching any secretly entertained hopes that the energy bill might offer a backdoor way of raising the gas tax in the guise of a ” carbon fee.” (The proposed Kerry-Graham-Lieberman energy plan reportedly would have called for an additional levy of 15 cents/gallon. To fully fund the proposed $500 billion six-year transportation bill would require approximately a 20 cents/gallon increase in the gas tax.)
White House opposition to a gas tax increase is only one of several obstacles standing in the way of an early passage of a multi-year law. Three other factors make passage of the legislation this year unlikely:
1. The Senate faces a crowded legislative agenda that includes confirmation hearings for a Supreme Court justice and consideration of the Finance Reform Bill in addition to the energy bill. The likelihood of taking up a multi-year transportation bill on top of that busy agenda in the 60 legislative days remaining before the pre-election congressional adjournment, appear remote according to congressional observers.
2. Passage of the HIRE Act has taken the pressure off the lawmakers to move the multi-year bill this year. The Act not only has extended the existing law until the end of December 2010; it also has transferred $19.5 billion from the General Fund into the Highway Trust Fund and restored an earlier $8.7 billion rescission of contract authority. The latest projections by the Congressional Budget Office indicate that the General Fund transfer, when added to the projected revenue stream from the gas tax, is expected to support highway and transit programs at the levels authorized for Fiscal Year 2009 through the end of Fiscal Year 2012 and into FY 2013 (Congressional Budget Office, “Highway Trust Fund Projections, March 19, 2010.) Our own reading of the CBO projections suggests that both the Highway Account and the Transit Account of the Trust Fund could remain solvent as long as the second or third quarter of Fiscal Year 2013. With assured funding possibly through mid-2013, the case for passing a multi-year transportation bill this year has become less than compelling. In an unspoken acknowledgment of this state of affairs, many interest groups have quietly dropped their efforts to lobby for enactment of the reauthorization bill this year.
3. Last but not least, there are no signs of a popular outcry about the stalled transportation authorization. Despite extensive documentation of the needs for new infrastructure investments (notably, U.S. DOT’s 2008 Conditions and Performance report and the findings of the two commissions established by Congress to study future transportation funding needs) there seems to be no sense of urgency on the part of the public to embark upon a massive program of infrastructure modernization. Signs of aging infrastructure are kept largely hidden from view thanks to diligent efforts by state and local highway agencies to maintain their assets in good repair. In the absence of any visible signs of system deterioration, warnings by advocacy groups about “crumbling infrastructure” are falling on deaf ears. The recent injection of some $50 billion of federal funding into surface transportation in the form of Recovery Act (ARRA) stimulus funds, TIGER Discretionary Grants and High Speed Rail grants has further weakened the argument that the transportation sector is not receiving adequate attention and that we are vastly under-funding our transportation needs.
Leveraging Future Revenue Streams
Although the House hearing shed no new light on how to generate new revenues for the federal-aid transportation program, it sent a strong message that innovative financing methods can help expedite project delivery and offer other benefits to the public. Under traditional methods of financing, transportation projects are completed on a pay-as-you-go basis: projects are built incrementally as public funds become available over a period of years. Using financing tools, notably tax-free bonds, state and local transportation agencies can gain immediate access to the funds necessary to advance projects into construction, and use their traditional funding or project-generated revenue streams to liquidate the indebtedness over time. While toll revenue is often used as security (collateral) in highway financing, project-generated user fees are not the sole means of backing debt issuances for transportation projects. Other types of security include dedicated sales tax revenue, future federal grants and revenues derived from tax assessment districts, transit-oriented development and other “value capture” projects. As Philip Washington, General Manager of the Denver Regional Transportation District testified, this has enabled transit agencies to gain access to private capital even though transit lacks sufficient project-generated revenue to use it as collateral for long-term debt obligations.
A Variety of Financial Tools and Programs
Testimony by Assistant Secretary Bertram showed that there is no scarcity of federally-assisted financial tools and programs to leverage available funds and expedite delivery of transportation projects. They include the TIFIA Program (authorized by the Transportation Infrastructure Finance and Innovation Act of 1998) offering direct loans, loan guarantees and lines of credit for surface transportation projects of “regional and national significance;” tax-exempt Private Activity Bonds (PAB), issued by state and local governments to aid in financing privately funded transportation projects; taxable Build America Bonds (BAB) whose interest rates are subsidized by the Federal government, thus lowering the net borrowing costs (by 35%) for state and local government issuers of the bonds; State Infrastructure Banks (SIBs) which provide credit assistance in the form of loans, loan guarantees and letters of credit and serve as revolving infrastructure investment funds for state-sponsored surface transportation projects; and Grant Anticipation (GARVEE) bonds, debt instruments secured by a pledge of future Title 23 (highway) and Title 49 (transit) Federal-aid funding.
The latest addition to this arsenal of financing instruments is the proposed National Infrastructure Innovation and Finance Fund (I-Fund). As Assistant Secretary Bertram testified, this entity, capitalized with an initial $4 billion General Fund contribution ($25 billion over 5 years), would serve as a one-stop clearinghouse for financing and funding high-value multi-modal transportation projects of regional or national significance. A portion of the annual capital contribution would be handed out in grants rather than loans. The Fund could eventually fold in TIFIA, RRIF (The Railroad Rehabilitation and Improvement Financing program) and other federally-assisted transportation financing programs into a single loan and grant dispensing entity, housed in the Transportation Department. Congressional support for this proposal is uncertain, competing as it does with broader proposals for a National Infrastructure Bank (NIB). The latter is being advanced by several congressional sponsors as an independent stand-alone entity that would support infrastructure investments across a broad range of sectors. However, for the NIB to qualify as a genuine bank, its loan portfolio would need to be confined to revenue-generating projects and to projects secured by other sustainable revenue streams.
Another financing method given prominent mention at the House hearing was the technique of “availability payments.” This relatively new financing method has received wide publicity because of its use in two recent concession-based transportation projects: the $900 million Port of Miami Tunnel and Florida’s $1.65 billion I-595 express lanes/reconstruction project. Availability payments also will be used in financing the reconstruction of Doyle Drive in San Francisco and are being considered by a number of other public agencies .
Availability payment concessions are used where the facility in question is not intended, for policy reasons, to generate its own stream of toll revenue or where toll revenue alone may not be sufficient to cover the full cost of building, operating and maintaining the facility. Instead, the public authority pays the private concessionaire periodic payments out of its regular budget over a fixed term of the concession. Payments are made only once the project is completed and upon certification that the concessionaire is meeting certain performance requirements. Availability payments can be supplemented by “milestone” payments tied to the attainment of specific construction milestones and a “final acceptance payment” due upon completion of the project, as incentives for timely completion and avoidance of cost overruns. Because private concessionaires receive fixed payments regardless of the volume of traffic generated by the facility, they do not assume the revenue risk as in the case of a classic long-term toll concession.
Innovative Financing Is No Substitute for New Funding
In the final analysis, innovative financing is no substitute for new funding. As Eugene Conti, Secretary of the North Caroline DOT concluded in his testimony, “while these [financing] tools can be valuable, the effectiveness of any of these finance techniques depends on the establishment of a reliable and substantial source of funding, as innovative financing generally assumes an associated revenue stream to support credit activity. There is no doubt as to its usefulness when combined with grant funding which still remains as the core of the federal-state partnership. We need to pass a long-term and well-funded bill that will allow for much greater funding and program certainty to meet transportation investment needs.”
The question of where the money for such a “well-funded” bill is to come from remains unanswered. Until the political will and public support are found to either: (1) raise federal fuel taxes, (2) permit the tolling of Interstate highways, (3) phase in distance-based (VMT) charges in lieu of fuel taxes, or (4) accept the notion of funding the federal surface transportation program out of General Fund revenues, the future of a multi-year transportation bill will remain shrouded in uncertainty.
Innovation Briefs, now in their 20th year of publication, are published by Ken Orski. Cascadia Prospectus reprints them with permission.