National Academies Press: OpenBook

Innovative Finance and Alternative Sources of Revenue for Airports (2007)

Chapter: Chapter Two - Financing Mechanisms Airport Practices and Innovations

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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Two - Financing Mechanisms Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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13 This chapter gives a high-level review of capital financing mechanisms used by airport operators. Although certain of these mechanisms may be commonplace at one airport, they may be innovative at another. Specifically, the following are discussed in this chapter: • Airport access to credit, • Types of airport bonds, and • Other forms of airport financing. AIRPORT ACCESS TO CREDIT The cost to airport operators to access the capital markets is a function of several key factors that determine airport invest- ment quality: • Bond ratings, • Interest costs, • Insurability, and • Defaults. Airport operators are major and regular participants in the municipal bond markets. Figure 7 shows the value of state and local transportation-related financing transactions for 2000 through 2004. In addition to the value of financings transacted by airport operators, it shows the value of transactions by oper- ators of toll roads and highways, mass transit, and other modes of transportation such as seaports, bridges, tunnels, and parking facilities. Airport financings are a significant share of the total, second to transactions carried out by operators of toll roads and highways and, in some years, mass transit operators. Airport Bond Ratings Major investor services use rating systems to grade bonds according to investment quality to inform potential investors about the creditworthiness of specific types of bonds at specific airports. Figure 8 shows the distribution of bond credit ratings for airports of all hub sizes as of August 2006, for two types of debt: (1) GARBs and (2) stand-alone PFC bonds. Despite the financial challenges airports have faced since September 11, 2001 (9-11), airports remain financially sound. The three major credit rating agencies—Moody’s Investors Service, Fitch Ratings, and Standard & Poor’s—have concluded that, on the whole, the airport system has performed well under difficult circumstances. Interest Costs The interest paid by airport operators to attract investors rel- ative to what other municipal enterprises pay is a measure of the attractiveness of airport debt in the capital markets. Airport interest costs also reflect whether interest on the bonds is taxable for federal income tax purposes, is subject to the alternative minimum tax (AMT), or is tax-exempt (see Ways of Addressing Alternative Minimum Tax Issues). Insurability The affordability of purchasing bond insurance to improve credit ratings and reduce interest costs is a third factor relat- ing to the cost of airports accessing the capital markets. Bond insurance is an important means by which airports can reduce their interest costs. That airport operators of all size cate- gories can afford insurance is a signal of creditworthiness in the capital markets. Although airport operators do not always buy bond insurance, especially those with strong ratings, the overwhelming majority of the bonds issued since 9-11 have been insured. Defaults The frequency with which airport operators have defaulted on bond issues is the fourth measure of the competitiveness of airports in the capital markets. By this measure, the compet- itiveness of airports is particularly strong. The airport industry never experienced a single default. There have been several instances of airline special facility debt defaults. TYPES OF AIRPORT BONDS Airport sponsors and operators issue various forms of bonds to finance generally large-scale capital projects with long-term debt. This section discusses the following types of bonds: • General obligation (GO) bonds • GARBS • Bonds backed by PFCs • Bonds backed by customer facility charges (CFCs) • Bonds to be paid with future grants • Ways of addressing AMT issues • Potential new tax credit bonds (TCBs) for baggage screening infrastructure. CHAPTER TWO FINANCING MECHANISMS—AIRPORT PRACTICES AND INNOVATIONS

General Obligation Bonds GO bonds may be issued to finance airport capital improve- ments, backed by general tax revenues of the city, county, or state that owns and operates the airport. Specifically, local gen- eral tax revenues such as sales, income, or property taxes may be pledged as a source of repayment for GO bonds, although the airport operator may actually pay debt service from airport sources, or, in rarer instances, general local taxes may directly pay debt service on proceeds used to fund airport projects. Some large airports such as Honolulu International Airport pay debt service on outstanding GO bonds issued on their behalf by their airport sponsor (in this case, by the state of Hawaii); however, the bonds were generally issued decades ago and the outstanding balances are relatively small. GO bonds are currently a key financing tool for many small air- ports for several important reasons: • Stronger credit with lower interest rates—GO bonds are a stronger credit than GARBs, which are discussed later. GO bonds therefore result in lower interest costs for the airport because the bonds are backed by the full faith and credit of a city, county, or state that (1) has a much larger and diverse tax revenue base than an airport’s revenue base, and (2) can typically adjust tax rates often more readily than an airport operator can adjust airport rates and charges. However, in certain states voters must approve tax rate adjustments and/or issuance of bonds, which may make GO debt less attractive than GARBs. • Lower issuance costs—GO bonds do not have the upfront costs of developing a separate indenture/ordinance, getting bond ratings and insurance, and preparing fea- sibility studies that GARBs have. These upfront GARB costs do not generally vary significantly with the size of 14 the bonds being issued, and so constitute a larger per- centage of the GARB for small airports issuing smaller numbers of bonds. This makes GO bonds more attrac- tive the smaller the bond issue is, and because smaller airports typically have smaller capital needs, GO debt is typically more attractive for them. • No coverage requirement—Airport operators are typi- cally required to maintain coverage of 1.25x or 1.35x; that is, the ratio of net revenues after paying operating costs to annual debt service must be at least 125% or 135% to give investors comfort that their debt will be repaid. Because of the strength of GO bond credits, coverage is not required, which can also save airport operators money. General Airport Revenue Bonds GARBs are traditionally the most commonly issued bonds for airport infrastructure. Their credit rating is based on revenues generated at the airport from airline rates and charges, park- ing, rental car operations, terminal concessions, other leases, interest, and any other revenues of the airport. Following the economic downturn in 2000 and the terrorist attacks of 9-11, GARB credit ratings for several airports were downgraded, and 19 of the 31 large-hubs carried negative outlooks (Aviation Infrastructure Innovative Financing 2002). The financial out- look and accompanying credit ratings for airports have sub- sequently steadily improved as airport operators have taken many steps to manage their financial results, and as traffic levels have returned to pre-9-11 levels. The remainder of this chapter discusses other types of bonds that reflect innovations by airport operators and the financial markets. Even within the category of GARBs various innovations can be seen. FIGURE 7 State and local transportation—Related financings. [(a) includes seaports, bridges, tunnels, parking facilities, and other transportation.] Source: Government Accountability Office, Federal Tax Policy, Information on Selected Capital Facilities Related to the Essential Governmental Function Test.

15 • Use of sureties in lieu of funded reserves—Airport oper- ators historically funded required debt service reserves from either available retained earnings (cash) or from bond proceeds. Sureties can be obtained from the finan- cial markets either at the time of, or any time, after bond issuance, to be used in lieu of a funded reserve. Sureties are recognized by the rating agencies, bond insurers, and investors as equivalent security to providing a funded reserve. The airport operator pays a fee at issuance, usu- ally a percentage of the new or outstanding principal, and in the event that it is needed to pay debt service, the surety is drawn on. Use of sureties can reduce the size of a bond issue and therefore annual debt service by elimi- nating the need to fund a debt service reserve account and/or free cash held in a reserve to be used for any allow- able airport purpose (allowable uses may need to be deter- mined by the airport operator’s bond counsel, depending on the provisions of its bond indenture or ordinance). • Use of intermediate and subordinate liens—It is increas- ingly common for airport operators to issue bonds with a lower pledge of airport revenues than its senior debt. Issu- ing intermediate and subordinate debt can reduce cover- age requirements and annual airline rates and charges. The downside is that such liens typically require new bond indentures or ordinances, which can add time and costs to the issuance process (see, for example, Figure 9). • Interest rate swaps—Airports increasingly enter into “over-the-counter” contracts with investment banks to FIGURE 8 Bond credit rating for all hub sizes as of August 2006: (a) General airport revenue bonds; (b) stand-alone PFC bonds. a b

“swap” or exchange a stream of interest payments for another party’s stream. Each swap is a unique contract between the parties and cannot be bought and sold like securities or futures contracts. Interest rate swaps are nor- mally “fixed against floating,” where an airport operator exchanges fixed-rate obligations for floating rate obliga- tions, or “floating to fixed,” where the reverse happens. The principal amounts are not exchanged, and are referred to as the notional principal (with the exception of basis swaps). Swaps are often used to hedge certain risks, for instance interest rate risk (see, for example, Figure 10). By swapping interest rates, an airport operator is able to synthetically alter its interest rate exposures and bring them in line with management’s appetite for interest rate risk. Forms of interest rate swaps include (Market Update and Interest Rate Swaps Presentation, Oct. 18, 2005): – Forward current refunding (synthetic fixed)—A fairly common type of swap transacted by operators of airports such as Charlotte/Douglas International, Jacksonville International, Miami–Dade International, Sacramento International, Salt Lake City Interna- tional, and Wayne County (Detroit). 16 – Advance refunding (synthetic fixed)—Examples include operators of the airports in Atlanta and Man- chester, New Hampshire. – Swaption for refunding—A swaption is a financial instrument granting the owner an option to enter an interest rate swap pursuant to certain agreed upon terms. Examples include the operators of airports serving Philadelphia, Portland (Oregon), Chicago (Midway), and Albany. – Forward hedge for new money—Examples include the Indianapolis Airport Authority and the Metropol- itan Washington Airports Authority. – Synthetic variable—Have been used by the operators of airports serving Boston, Las Vegas, and Orlando. – Basis swap—Also known as “floating to floating” swaps, have been used by the operators of airports in Cleveland, Las Vegas, and New Orleans. Passenger Facility Charge Bonds Airport operators have increasingly issued bonds that either include a pledge of PFC revenues and/or are to be repaid in part or in full from PFC revenues. Approaches to leveraging PFC revenues include: • Combined flow of funds—These bonds are a form of GARB, where the bonds are secured by an underlying pledge of airport revenues. Under this structure, PFC revenues, or certain PFC revenues, are defined as air- port revenues in the bond indenture. Combined airport revenues are then used to pay GARB debt service. This bond structure is used by the airports serving Albuquerque, Guam, and Orlando, among others. – Advantages—it is relatively easy to incorporate into an existing revenue bond indenture, and debt service FIGURE 9 Seattle–Tacoma International Airport. Use of subordinate liens to reduce debt service coverage and airline payments. FIGURE 10 Manchester–Boston Regional Airport. Revenue bonds under a swap agreement. funds to further manage coverage.

17 coverage requirements can be lower relative to stand- alone PFC bonds (i.e., 1.25x–1.35x instead of 1.5x for stand-alone PFC-backed bonds). – Disadvantages—bonds issued under this approach reduce the airport sponsor’s GARB capacity, and sometimes more importantly, may require airline majority-in-interest approval. • Direct debt service offset—These bonds are another form of GARB secured by airport revenues. PFC revenues are used to pay all or a part of the GARB debt service, but they do not secure the bonds. Debt service may be included in the airline rate base if projected PFC rev- enues are not realized under this structure. This bond structure is used by the airports serving Albany, Austin, Cleveland, Denver, El Paso, Grand Rapids, and Provi- dence, among others. – Advantages—they result in higher demonstrated debt service coverage relative to the combined flow of funds structure, as PFC revenues directly offset debt service (the denominator in the coverage calcula- tion). Also, debt service coverage requirements can be lower relative to stand-alone PFC bonds. – Disadvantages—(1) they do not preserve GARB capacity, (2) they are not applicable to airports where the definition of airport “Revenues” includes PFC revenues, or that pledges airport revenues elsewhere, and/or (3) they may require airline majority-in-interest approval. • Back-up pledge of subordinate airport revenues—These bonds are secured by PFC revenues with a back-up pledge of airport revenue that is subordinate to a more senior lien on airport revenue. This bond structure is used by the airports serving Baltimore, Las Vegas, Nashville, and Sacramento, among others. – Advantages—(1) it enhances the creditworthiness of the bonds versus stand-alone PFC bonds, (2) it keeps the costs out of the airline rate base, (3) debt service coverage requirements can be lower relative to stand- alone PFC bonds (i.e., 1.25x–1.35x), (4) it preserves the senior lien GARB capacity, and (5) it maximizes airport management control over airport financing decisions. – Disadvantages—they are not applicable to airports where the definition of airport “Revenues” includes PFC revenues or that pledges them elsewhere. • Stand-alone PFC bonds—Issuance of bonds backed solely by PFC revenues has evolved since they were first issued in 1994. Stand-alone PFC bonds have been issued by the airports serving Boston, Chicago, Fort Lauderdale, Lee County (Fort Myers, Florida), Little Rock, New Orleans, Palm Springs, Portland (Oregon), Richmond, and Seattle. – Advantages—(1) they preserve GARB capacity, (2) keep costs out of the airline rate base, and (3) max- imize airport management control over airport financ- ing decisions because they do not require airline majority-in-interest approval. – Disadvantages—(1) PFC revenues are completely dependent on passenger volumes; (2) the bonds entail development of a new indenture or ordinance; (3) they require FAA termination protection and approval of the bond indenture; (4) they require more rigorous tests and sensitivity analysis; (5) they have higher required debt service coverage levels, typically 1.5x; and (6) they are not applicable to airports where the definition of airport “Revenues” includes PFC revenues, or that pledges them elsewhere. • Convertible lien PFC bonds—Another concept is to issue bonds initially secured solely by PFC revenues that subsequently convert to GARBs. To date, the only airport to issue such bonds is Broward County, which operates Fort Lauderdale–Hollywood International Air- port (see Figure 11). Bonds Backed by Customer Facility Charges As discussed in chapter three, CFCs are collected by rental car companies from their customers at certain airports to pay operating expenses and debt service for consolidated rental car facilities. As with PFC revenues, CFC revenues can be structured in many of the same ways as the various forms of PFC bonds. • Combined flow of funds—These bonds have the same characteristics, advantages, and disadvantages as PFC bonds structured as a combined flow of funds. Exam- ples include the bonds issued for the consolidated rental car facility at Fort Lauderdale–Hollywood International Airport. • Direct debt service offset—These bonds have the same characteristics, advantages, and disadvantages as PFC bonds structured with a debt service offset. No specific examples of this type of CFC bond have been identi- fied; however, they could be implemented by interested airports. • Back-up pledge of subordinate airport revenues—These bonds have the same characteristics, advantages, and disadvantages as PFC bonds structured as CFC bonds with a back-up pledge of subordinate airport revenues. No specific examples of this type of CFC bond have been identified; however, they could be implemented by interested airports. • Stand-alone CFC bonds—These bonds have the same characteristics, advantages, and disadvantages as stand- alone PFC bonds. Examples include the bonds issued for the consolidated rental car facility at Dallas/Fort Worth International Airport. Single-Tenant Special Facility Bonds Special facility bonds issued by a single tenant are used to finance unit passenger terminals or portions of terminals, hangar and maintenance facilities, cargo buildings, and ground equipment support facilities for the exclusive use of an airline.

The bonds are backed solely by an airline corporate pledge to repay the debt. According to a study by the FAA Office of Pol- icy and Plans, however, this form of financing has come under significant scrutiny as a result of recent airline bankruptcies and defaults (Aviation Infrastructure Innovative Financing 2002). For example, one airline rejected payment of its special facility bond obligations and discontinued use of its mainte- nance facility at an airport. Another airline closed its mainte- nance facility that had been funded with special facility bonds. Multi-Tenant Special Facility Bonds Special facility bonds have been issued to fund multi-tenant terminals, fuel storage and distribution facilities, and consol- idated rental car facilities, as discussed in chapter four. These bonds have greater credit strengths than single-tenant special facility bonds because of the more diverse revenue base from multiple tenants and users. 18 Ways of Addressing Alternative Minimum Tax Issues Under current tax rules, interest on private-activity bonds, including most airport debt, is subject to the AMT, which was introduced in 1969 to ensure that top income earners paid their share of income taxes. Despite the public nature of most airport facilities and the public benefit derived from their use, more than 60% of airport bonds currently can only be sold as private-activity bonds rather than as tax-exempt governmental purpose bonds. Historically, the interest rate penalty for inter- est on bonds for which interest earnings are subject to the AMT ranges from 16 basis points (0.16%) to 49 basis points (0.49%), depending on the status of tax reform proposals that would affect the AMT (“Airline Agreement Paves Way for Non-AMT O’Hare Bonds” 2005) (see Figure 12). Another key problem with AMT debt is that under current law, governmental pur- pose bonds may be advance-refunded once and only once, at any time 10 years after issuance, but airport private-activity bonds are prohibited from being advance refunded. This elim- FIGURE 11 Fort Lauderdale–Hollywood International Airport. Passenger facility charge convertible lien bonds for airport expansion.

19 inates the ability of airport operators to realize interest savings by refunding AMT debt when interest rates are lower. Two key developments relating to AMT restrictions and associated interest rate penalties are: • Multi-purpose allocation refundings—Historically, it has been possible for airport operators to issue “non-AMT” (i.e., tax-exempt) debt with lower interest rates for park- ing facilities (as long as the airport’s bond counsel con- curs), because such facilities are used by the public and not private companies. A ruling by the Internal Revenue Service a number of years ago clarified that airfield proj- ects could be financed on a non-AMT (tax-exempt) basis, which triggered multipurpose allocations to allocate prior bond proceeds between airfield projects (to be refunded with non-AMT debt with lower interest rates) and termi- nal projects that are still considered not open to the pub- lic and therefore are to remain AMT funded. Many airports carried out multipurpose allocations to refund the portions of prior bonds associated with air- field projects that could be changed to non-AMT debt with lower interest rates. Denver International Airport is an example. However, some operators at airports with residual airline agreements were unable to get bond counsel concurrence because net revenues go back to signatory airlines, and the airports have differential rates for signatory and nonsignatory airlines. The city of Chicago addressed this problem by changing its airline agreement, as described in Figure 12. • Reform of the federal tax treatment of airport bonds— Airport operators have, for some time, discussed the need to reclassify airport private activity bonds that directly benefit the general public as governmental pur- pose bonds, similar to the way GO debt is treated under the tax code. The change in status would eliminate the AMT penalty that increases interest rates on the bonds and allow advance refundings of airport bonds. Potential New Tax Credit Bonds for Baggage Screening Infrastructure A recent Baggage Screening Investment Study conducted on behalf of TSA resulted in the recommendation that Congress adopt new legislation authorizing the use of a federal tax credit bond program for the capital costs of a baggage han- dling system and related infrastructure. Tax credit bonds (TCBs) involve the issuance of taxable debt by state and local governments or other non-federal enti- ties for designated capital purposes. As shown on Figure 13, bondholders receive annual tax credits that can be applied against their federal income tax liability instead of cash inter- est payments. The tax credit itself represents taxable income to the bondholder. Principal is repayable by the issuer from nonfederal sources. The bonds are generally structured as FIGURE 12 Chicago O’Hare International Airport. Interest savings using non-alternative minimum tax bonds. FIGURE 13 Tax credit bond mechanisms—Investor perspective (TSA).

“bullet” term bonds, where the principal is repaid in a lump sum at bond maturity. TCBs are generally structured as bullet term bonds to maximize the value of the tax credit, and the issuer makes periodic deposits to a sinking fund to provide for principal retirement at maturity. Figure 14 shows the issuer perspective. Unlike other fed- eral tax credit programs oriented to equity capital (such as tax credits for investments in low-income housing), TCBs do not require the project sponsor to be the “consumer” of the tax credit. Instead, this form of tax subsidy encourages private investment in desired infrastructure through lower-cost debt capital for the issuer. As shown on Figure 15, TCBs provide a substantial sub- sidy to the issuer, as the interest expense can represent 50% to 80% of the effective cost of long-term borrowing. The extent of the subsidy depends on the term (maturity) of the bonds and the interest (credit) rates. The longer the term and the higher the interest rates the greater the sub- sidy level. 20 The TCBs could be on parity with an airport’s traditional revenue bond indebtedness or issued on a subordinate or stand-alone basis. Possible pledged revenue streams include one or more of the following: • General airport revenues from airline rents and fees and nonairline sources, as is the case for traditional GARBs. • PFC revenues, as is the case for stand-alone PFC-backed bonds and double-barrel bonds backed by PFC revenues and general airport revenues. • General local governmental resources such as sales and property taxes, as is the case for general obligation municipal bonds issued to fund airport projects (more common for small- and non-hub airports than large- and medium-hub airports) Airport participation in the TCB program would be entirely voluntary. It is anticipated that large- and medium-hub air- ports, which frequently access the capital markets to raise FIGURE 14 Tax credit bond mechanics—Airport issuer perspective (TSA). FIGURE 15 Tax credit bond mechanics—Airport sinking fund (TSA).

21 capital, would be the most likely issuers of TCBs. Although smaller airports would not be excluded, the resource demands on smaller airports for this type of issuance would be relatively high compared with their smaller borrowing needs. OTHER FORMS OF AIRPORT FINANCING Airport operators use many other financial instruments to access and use the capital markets, including: • Commercial paper, • Bond anticipation notes (BANs), • Grant anticipation notes (GANs), • Pooled credit, and • Capital leases. Commercial Paper Commercial paper is a money market security that is gener- ally not used to finance long-term investments, but rather to manage cash flow. It is commonly bought by money funds, and is generally regarded as a very safe investment. As a rel- atively low-risk option, commercial paper interest rates are low. Commercial paper can only be “out” for 270 days, but can be “taken out” with more commercial paper and ultimately is taken out typically with bond proceeds. Commercial paper is used on a routine basis at some air- ports, particularly large airports and airports that operate independently as authorities, but is much more difficult at some airports, particularly those that operate as enterprise funds of a city, county, or state that have centralized financial management. Airport operators that routinely use commercial paper to manage cash flow include the operators of airports in Boston, Seattle, and San Francisco (see Figure 16). Bond Anticipation Notes BANs are short-term financing mechanisms that provide cap- ital in advance of issuing long-term bonds. Various airports around the country have issued BANs, although commercial paper may be a more cost-effective way of managing cash flow for some airports. Grant Anticipation Notes GANs are short-term financing mechanisms that provide capital in advance of receiving expected grants. Pooled Credit Pooled credit is attractive for airport operators that have dif- ficulty accessing the credit markets; however, few airport operators are actually in that situation, as most at a minimum can work with the city, county, or state that is the airport sponsor to issue GO debt. There are several examples of pooled credit for airports. • American Association of Airport Executives (AAAE) Airport Capital Projects Loan Program—In December 2000, AAAE and the Capital Projects Finance Authority issued $300,000,000 of Variable Rate Demand Rev- enue Bonds to fund the AAAE Airport Capital Projects Bond Loan Program. AAAE established the program to make low-cost, tax-exempt loans to eligible airports to finance improvements and equipment that constitute non-AMT governmental use projects under federal tax law. The program offered airport operators a flexible and low-cost method of financing capital needs (Airport Capital Projects Loan Program 2001). No loans were made under the program owing to sev- eral factors, including (1) changes in airport priorities away from capital development immediately after 9-11; (2) a limited number of projects that meet the eligibility criteria for tax-exempt financing (as mentioned in chap- ter four, terminal projects do not qualify and until a few years ago airfield projects did not qualify); and (3) the lack of difficulty that airport operators have in access- ing the capital markets. According to AAAE staff, the program was never formally ended, but is not active. • Virginia Resources Authority’s (VRA) Airport Revolv- ing Revenue Fund—The VRA airport revolving fund pool includes 12 borrowers as of January 31, 2007. Approximately 65% of the $70 million in outstanding debt is tied to the Capital Region Airport Commission, which runs the airport in Richmond, Virginia; there- fore, Richmond’s credit rating drives that of the entire pool. In August 2006, the credit rating for the VRA pool was upgraded by Fitch Ratings, based on Rich- mond International Airport’s improved operating performance and enhanced stability in the overall air- port sector since 2001 (“Virginia: VRA Airport Pool Upgraded” 2006). FIGURE 16 San Francisco International Airport—Use of commercial paper to provide low-cost cash flow.

Capital Leases Leasing capital equipment or facilities may also facilitate acquisition for airports that do not have adequate funding up front or cannot get the necessary approvals to issue bonds (see Figures 17 and 18). LEVERAGING FUTURE GRANTS Airport operators occasionally issue GARBs that are intended to be repaid with future federal grant funds. Leveraging FAA Letters of Intent FAA issues multiyear LOIs to provide AIP grant funding to certain airports for airfield projects. Grants scheduled to be received under an LOI are not always received when project costs are incurred. For large-scale capital projects a majority of the expenditures typically occur in the first few years, whereas the duration of an LOI is usually between 5 and 10 years. To address the resulting cash-flow shortage over the initial years, some airport sponsors have leveraged grants scheduled to be received in an LOI to obtain upfront funding. Approaches to leveraging an LOI include: • Bonds—Airport sponsors have long used LOI grants to pay debt service on outstanding bonds on a double-barrel basis. The investment community has identified credit concerns related to pledging future LOI grants as security for debt, including that an LOI is not a binding obligation of the government and LOIs are dependent on appro- priations by Congress, LOI entitlement payments are dependent on enplanements levels, LOI payments are dependent on actual expenditures, and LOI payments may decrease owing to a change in hub status or PFC amount collected. However, a few airport operators have actually pledged the funds as security for the bonds. Two examples are the Airport Authority of 22 Washoe County (Reno, Nevada) in 1993 and the city of St. Louis in 2000. • Commercial paper—The Minneapolis–St. Paul Metro- politan Airports Commission issued subordinated com- mercial paper notes in 2000 to be repaid by LOI grants to be received over the next 10 years. The commission considered issuing LOI-secured debt, but decided instead to pledge general airport revenues. If LOI receipts do not materialize, the commercial paper could be repaid from subordinated airport revenues. Leveraging Security Grants from TSA TSA grants have been available on a limited basis since FFY 2003, funded, in part, by federal user fees. Grants have been issued as multiyear LOIs as well as 1-year grants called Other Transaction Agreements (OTAs) to fund baggage screening infrastructure. Through FFY 2004, TSA executed eight LOIs to provide grant funding to each of nine airports over a 3- or 4-year period. The last payment related to these LOIs is scheduled to be issued in FFY 2007, subject to annual Con- gressional appropriations. In FFY 2003 and FFY 2004, TSA issued LOIs to the following airport operators, in the order in which they were granted: • Massachusetts Port Authority (BOS) • Dallas/Fort Worth International Airport Board (DFW) • Port of Seattle (SEA) • City and county of Denver, Department of Aviation (DEN) • Clark County (Nevada) Department of Aviation (LAS) • Los Angeles World Airports (LAX and ONT) • City of Phoenix, Aviation Department (PHX) • City of Atlanta, Department of Aviation (ATL). Six of the eight airport operators issued debt to be repaid with annual TSA LOI grant funds and used the bond proceeds to build infrastructure for in-line systems. The bonds were generally issued as short-term variable-rate bonds FIGURE 17 Denver International Airport—Capital equipment leases. FIGURE 18 Fort Wayne International Airport—Capital lease paid with operating funds.

23 expected to be fully repaid once the final LOI payments are received (FFY 2007). The operators of the airports in Los Angeles and Phoenix used the grant funds and did not issue debt. Owing to concerns about making multiyear commit- ments without the safeguards of a trust fund or other form of guaranteed future year funding, and because the funding stream has not supported additional long-term grant agree- ments, TSA has provided only 1-year grants since FFY 2004 through OTAs. To date, approximately 33 OTAs have been issued by TSA. Federal and State Credit Assistance for Airport Access Projects Credit assistance to facilitate development of surface trans- portation projects, and in some cases airport access projects, is available at the federal and state levels. The Transportation Infrastructure Finance and Innovation Act (TIFIA), created in 1998 as part of the Transportation Equity Act for the 21st Century (TEA-21), allows U.S. DOT to provide direct credit assistance to sponsors of major transportation projects. The TIFIA credit program offers three distinct types of financial assistance—direct loans, loan guar- antees, and standby lines of credit—to public and private sponsors of large surface transportation projects that meet certain eligibility criteria: • The project must be included in a state transportation plan, and before an agreement is made for federal credit assistance, must be in an approved State Transportation Improvement Program. • The entity undertaking the project must submit a proj- ect application. • A credit rating or preliminary opinion letter from a rat- ing agency indicating that the project’s senior debt obligations have the potential of being investment grade is required with the application. • Eligible project costs must equal and exceed the lesser of $100 million or 50% of the amount of federal-aid highway funds apportioned to the states for the most recently completed fiscal year. • Project financing must be repayable in part or in whole from tolls, user fees, or other dedicated revenue sources. • If the project is not undertaken by a state or local gov- ernment or an agency or instrument of a state or local government, the project must be included in both the state transportation plan and an approved State Trans- portation Improvement Plan. TIFIA credit assistance backed by a regional gas tax and rental car fees helped complete the financing for a $1.3 bil- lion Miami Intermodal Center, designed to improve access to and within Miami International Airport (Innovative Finance Brochure—Credit Assistance 2006). Seven credit assistance programs are state-directed pro- grams enabled through federal-aid funding. The best point of contact is the relevant state department of transportation (DOT). • State Infrastructure Bank (SIB)—The National High- way System Designation Act of 1995 (NHS Act) enabled states to capitalize transportation credit assis- tance banks modeled on wastewater State Revolving Loan Funds. The SIB program provides loans, credit enhancement, and other forms of assistance (such as bond banks) to eligible surface transportation projects. Thirty-nine states participated in the NHS pilot. In TEA-21, Congress allowed only four states—California, Florida, Missouri, and Rhode Island—to use new TEA- 21 funding for capitalization. Because program imple- mentation and capitalization levels vary from state to state, the best source of information about SIB assis- tance is the state DOT (see Figure 19). • Section 129 loan—These loans allow states to use regular federal-aid highway apportionments to fund loans to projects with dedicated revenue streams. A state may direct lend federal-aid highway funds to toll and non-toll projects that must have a pledge of a dedicated repayment source to secure the loan. Section 129 loans must be paid beginning 5 years after construction is completed and payment must be completed within 30 years of the date federal funds were authorized for the loan. States have the flexi- bility to negotiate interest rates and other terms of Section 129 loans. FIGURE 19 Fort Lauderdale–Hollywood International Airport—SIB loans.

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TRB’s Airport Cooperative Research Program (ACRP) Synthesis 1: Innovative Finance and Alternative Sources of Revenue for Airports explores alternative financing options and revenue sources currently available or that could be available in the future to airport operators, stakeholders, and policymakers in the United States. The report examines common capital funding sources used by airport operators, a reviews capital financing mechanisms used by airports, describes various revenue sources developed by airport operators, and a reviews privatization options available to U.S. airport operators.

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