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34 T R A N S P O RTAT I O N F I N A N C E Bryan Grote courages private investment in highway and transit proj- ects. She posited that this is really a historical accident Bryan Grote introduced the session by presenting three rather than a deliberate effort. questions that will figure in the upcoming reauthorizations: Hedlund described a limited number of private equity transportation projects, including the Dulles How big is the pie? Greenway in Virginia, SR-91 express lanes in California What are the ingredients? (although they have now been sold to the Orange How does it get sliced up? County Transportation Authority), SR-57 (a franchise since terminated), and SR-125 in Southern California, Grote described the provisions of reauthorization as which goes to financing after a 10-year environmental being mostly regulatory but somewhat spending process. related. He pointed out that tax incentives are generally Hedlund offered as the primary reason that trans- less common in transportation than in other areas or portation fails to attract more private investment is that sectors, noting that transportation advocates are begin- the use of tax-exempt financing precludes private ning to look to certain tax incentive approaches to investment in highways and transit. She explained that increase overall transportation investment. when exemptions were written into federal law, state laws did not allow for private investment in highways and transit. While exemptions exist to varying degrees Use of Tax-Oriented Leasing to Promote for airports, solid waste, docks and wharves, water and Investment in Transit wastewater, and high-speed rail, no such exemptions exist for highways and transit. In addition, Internal Dennis Anosike Revenue Service (IRS) rules strictly limit the ability of private companies to enter into long-term management Dennis Anosike addressed the use of leveraged leasing as a contracts for facilities financed with tax-exempt bonds. funding mechanism for transit. He described leveraged leas- As a result, Hedlund explained, "private" projects ing as a supplemental mechanism to public funding of tran- have been converted to "63-20" tax-exempt deals imple- sit systems and noted that these transactions can be quite mented by nonprofit organizations. (Such 63-20 corpo- complex. As Anosike described it, leveraged leasing provides rations are enabled by IRS Ruling 63-20, which allows capital investment through secondary leveraging of assets. for the creation of nonprofit financing conduits and use The Chicago Transit Authority has leveraged $1.7 billion in of such entities for an array of publicprivate projects.) assets, generating over $100 million to reinvest in the system. Public investment is necessary to achieve lower interest Anosike described a number of concerns of the transit costs and to access a more favorable bond market with system asset lessor, one being that the equity investor is look- longer maturities and less stringent covenants. There is a ing at the profit motive, issues related to limited use prop- general comfort level with government as the bond issuer. erty, and issues of government agency performance risk. He Hedlund suggested that a solution to the current mentioned a number of issues for the transit agency board, predicament is for Congress to create a level playing including the external perception that public assets are being field for private investment. She stated that we almost sold to private investors and internal issues relating to the got there through the 1999 Highway Innovation and need to manage expectations about the level of revenue that Cost Savings Act, which was in a tax bill vetoed by can be generated from leveraged lease transactions. President Bill Clinton. Former Senator Bob Smith's He described the ways that the Chicago Transit Multimodal Transportation Financing Act (May 2001) Authority has managed risk--by capping transaction fees also contained a provision. As with other transporta- and establishing net present value benefit floors, negoti- tion finance programs, DavisBacon labor provisions ating incentive and broken deal fees, and using AAA- could be a stumbling block, according to Hedlund. rated institutions and deposits collateralization for credit downgrades. Tax Credit Bonds to Finance Infrastructure: Theory and Practice Potential Use of Private Activity Bonds for Highways and Multimodal Transportation Facilities James (Rocky) Query Karen Hedlund Speaking to the topic of tax credit bonds, James (Rocky) Query provided a technical overview of the Karen Hedlund spoke about the barriers and opportuni- concept. He explained that tax credit bonds are com- ties for private investment in transportation. She posed of two components: principal and interest in the described the manner in which the federal tax code dis- form of an income tax credit. The credit quality of such