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BREAKOUT SESSION 6 Practical Challenges to Putting New Financing Ideas into Place Arthur Guzzetti, American Public Transportation Association (Moderator) D. J. Mitchell, BNSF Mario Espinoza, Central Texas Regional Mobility Authority Wendy Franklin, Mercator Advisors, LLC Jennifer Mayer, Federal Highway Administration Untangling Freight Bottlenecks by Using will require extensive environmental processes. In 2003, Alternative Financing Approaches the cost estimate for the program was $1.5 billion, with private freight railroads contributing $212 million and D. J. Mitchell of BNSF discussed the Chicago (Illinois) Metra providing an additional $20 million. Other fund- Region Environmental and Transportation Efficiency (CRE- ing will be provided from the federal government, the ATE) program. Chicago is a rail hub for the nation and is state of Illinois, and the city of Chicago. located at the nexus of six major rail lines: BNSF, CN, Cana- The cost of the CREATE program was revisited in 2008. dian Pacific, CSX, Norfolk Southern, and Union Pacific; 25 It escalated to $3.05 billion, reflecting such issues as 4.5 percent of all U.S. rail traffic passes through the Chicago percent inflation compounded annually to the year of con- region. The impetus for CREATE was a projected 89 per- struction, improved engineering estimates for grade sepa- cent increase in freight rail trade by 2035 (by value). The ration projects, updated contingency costs, a 5.75 percent region is already experiencing delays to passenger and freight construction management cost, and increased right-of-way movement because of traffic congestion, and there is a desire acquisition costs. Of the total remaining cost, $1 billion to remove impediments to make transportation more effi- has been secured, including $286.5 million in pre-CREATE cient and to mitigate the environmental impacts of freight. funding, $1.9 million in federal rail line relocation funds, The program's strategy has been to start with small projects $90.6 million from the federal Projects of National and that can be completed with known funds, and financing has Regional Significance program, $116 million from rail- come in increments and involves multiple sources. road partners, $10 million from the Illinois Department The CREATE program includes 71 discrete projects: of Transportation (DOT), and $4.2 million from Chicago DOT. The program has also benefited from a $133 million 25 roadrail grade separations, high-speed rail grant and $100 million in Transportation Six passengerfreight rail flyovers, Investment Generating Economic Recovery grants. Next Projects to improve rail infrastructure and upgrade steps include seeking additional authorization funds and technologies, completing work in high-priority corridors. A viaduct improvement program, Grade crossing safety enhancements, and Rail operations and visibility improvements. Role of Tolling and State-Sponsored Initiatives in Addressing Regional Mobility Corridors will be created, and better coordination Challenges will occur. Ten projects have been completed, six are under construction, eight are in final design, and 17 are Mario Espinoza of the Central Texas Regional Mobil- under environmental review. The remaining 30 projects ity Authority (RMA) discussed the background of his 45

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46 F I NA NC I NG S U R FA C E TR A NSPOR TA TION IN T HE U NIT ED ST A T ES agency, which is a bicounty entity created in 2002. RMA private activity bonds (PABs) and BABs, can help state works closely with the Capital Area Metropolitan Plan- DOTs deliver new projects. ning Organization as well as with transit agencies, local She acknowledged a large gap in what is required to governments, and the Texas DOT. fund a project. With transit projects, for example, the With an aging roadway network, a growing popula- federal government typically provides 44 percent of the tion, and decreased gas tax revenue due to better fuel funding, 13 percent comes from the state, and 43 per- efficiency and the use of alternative-fuel vehicles, Texas cent comes from local sources. One critical distinction is is facing funding challenges. As a start-up agency with no the difference between funding, which comes from rev- project history, the Central Texas RMA has had to over- enue sources, and financing, which involves techniques come a number of additional challenges, including the to leverage funding. Transportation funding sources lack of a dedicated revenue stream, unknown capabili- include the following: motor fuel taxes, vehicle registra- ties, and a local population that originally demonstrated tion fees, sales taxes, general fund money, tolls, transit an "I already paid for that road" mentality. fares, value capture, and even naming rights. The authority's first project was the 183A Turnpike, Ms. Franklin said that there is a long-established an 11.6-mile northsouth toll highway northwest of Aus- municipal bond market in the United States that has tin constructed as a four-lane facility with the ability to evolved over time. The market is made up primarily of expand to six lanes. It is being implemented in two sec- general obligation bonds and revenue bonds, and BABs tions. The first 6 miles opened for service in March 2007, became a large presence in 2009. Today, there is an active and the remaining portion to the north is expected to refinancing market due to attractive interest rates. Tax- be completed in 2012. The initial section was completed exempt bonds make up 79 percent of the market, and the on time and below budget. Financing included $167 remaining 21 percent involves taxable debt. Transporta- million in senior bonds, $66 million in Build America tion represents 12 to 13 percent of the municipal bond Bonds (BABs), a $64 million contribution from Texas market. Historically, interest rates on taxable bonds DOT, and an $18 million local right-of-way contribu- have been higher than tax-exempt facilities. tion. Construction costs for the northern extension are The municipal bond market is supplemented by estimated to be $105 million. The project involves con- a variety of debt instruments and credit tools. They struction of a tolled roadway in the median of existing include highway, toll road, and transit revenue bonds, frontage roads, which were constructed at the same time Grant Anticipation Revenue Vehicle (GARVEE) bonds as the initial section. It is being paid for out of financing and Grant Anticipation Notes, TIFIA, PABs, BABs, and provided by a $140 million bond issue that includes $95 availability payments, which are to be provided by a gov- million in senior lien toll revenue bonds and $45 million ernment owner under agreement with a private entity. in subordinate BABs directly placed with an Australian These payments can come from a variety of sources such pension fund, of which $35 million is at a fixed rate and as state funds, local funds, and toll revenues or other $10 million at a variable rate linked to the consumer user fees. price index with a floor and cap. The Central Texas RMA plans to build the Manor Expressway, a 6.2-mile, six-lane toll facility extending Bridging the Gap: The Role of Federal and from US-183 to SH-130 estimated to cost $420 million. State Financing Programs and Subsidies Environmental approval for the project was received in March 2009. Proposed sources of financing include toll Jennifer Mayer of the Federal Highway Administration revenue bonds, the Transportation Infrastructure Finance discussed the role that public-sector financing programs and Innovation Act (TIFIA), federal stimulus funding, and subsidies can play in implementing transportation support from the Texas State Infrastructure Bank, and a improvements. The goal is to facilitate transportation Texas DOT toll equity grant. A year ago, banks were not investment from different investors by using programs willing to extend interim financing to support transporta- such as PABs, BABs, and GARVEE bonds. tion projects, but now they are assisting, and the project The problem is that the United States faces a revenue has received other commitments for financing. shortage for infrastructure investment. Many states do not have a finance problem: they have a revenue prob- lem. Financing cannot create revenue, but financial Navigating the Capital Markets: tools can catalyze new sources of revenue by making it How Much Can New Credit possible to tap into future revenue or into less predict- Instruments Help? able sources, such as tax increments or special taxing districts. Lowering the costs of financing lowers project Wendy Franklin of Mercator Advisors, LLC, discussed costs, and more dollars go toward construction. In addi- the ways in which new credit instruments, including tion, some revenue tools (such as pricing) have incentive

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PRA CT I C A L C H A L L E NGE S T O PU T T ING NEW F INA NC ING IDEA S INT O PLAC E 47 effects that can generate greater efficiency, reduce the enues are not predictable, federal tools like TIFIA pro- need for greater capacity, or even reduce emissions. vide flexibility, and they can be made available to private Challenges that need to be navigated to advance proj- development partners. ects include jurisdictional issues, project-related risks, Market factors may change many times during the and revenue constraints. Projects need to compete for life cycle of a long-range transportation plan. Part of the funding. Factors influencing the financial market include goal of U.S. DOT financing programs is to facilitate a the availability of bond insurance, the performance of variety of tools and enable credit enhancements that will similar projects, and rating agency findings. Often, juris- allow state and local governments to finance projects dictional issues need to be managed, particularly when even in the midst of market disruption. projects extend across multiple jurisdictions and have Over the past two decades, the tools created by con- multiple sponsors, stakeholders, and beneficiaries. There gressional and publicprivate partnership activity have are also project-related issues such as construction risk, enabled different kinds of capital to flow into transporta- ramp-up and traffic risks, revenue risk, and the risks of tion projects. Through BABs, taxable investors can invest future regulations. in publicly procured projects that used to be the domain These issues have a variety of solutions. For example, of tax-exempt investors. Through PABs, tax-exempt when a project extends across many jurisdictions and no investors can invest in privately procured projects that single entity wants to assume the debt, the debt can be used to be the domain of equity investors. Market- and held by a special-purpose entity. When governments are project-related factors will determine which tools make limited in borrowing capacity, federal tools can expand sense in each case. The point is that the federal and state the amount of debt they are able to assume. If future rev- tools have opened up new pathways for investment.

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