Financing Surface Transportation in the United States: Forging a Sustainable Future—Now! (2012)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

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

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

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