Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects (2015)

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148 Case Study (High-Speed Rail): California High-Speed Rail Program Project Overview There have long been proposals for HSR systems in California, dating as far back as the 1970s. In 1996, the legislature established the California High-Speed Rail Authority (HSRA), and charged it with developing proposals suitable for submissions as a ballot measure.1 The HSRA issued its first comprehensive proposal in the form of the 2000 Business Plan.2 This plan recommended a 703-mile system linking Sacramento, San Francisco, Los Angeles and San Diego, generating about 30 million passengers annually, at a capital cost of $25 billion (2011$). These conclusions formed the basis of “Proposition 1A” (also called Assembly Bill 3034), which was supposed to be put to voters in 2004. It was delayed twice by the legislature before being eventually passed with nearly 53% of the vote in 2008. Proposition 1A established the plans and requirements for the HSR system, and provided up to $9 billion in bonding authority to meet the state’s share of what was expected (or hoped) to be a program funded in conjunction with local, federal and private sources. Based on this legislation, the HSRA issued its 2008 Business Plan for a 520-mile system,3 generating between 39.5 and 54.6 million passengers,4 at a cost of $34.7 billion (2011$). Proposi- tion 1A authorized up to $9 billion in bonding authority to be issued by the state.5 It also required that bond money be matched by 50% from other sources. No such sources were available on any significant scale at the time, and the 2008 collapse of the national economy made the funding situation even more challenging. The passage of the American Recovery and Reinvestment Act of 2009 (ARRA) changed the situa- tion dramatically, with President Obama making HSR a signature initiative and including $8 billion within ARRA specifically to HSR initiatives. Thanks to the ARRA, the HSRA had access to $6 billion A P P E N D I X E Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 1 California allows measures (usually called Propositions) to be taken directly to the people, bypassing the Legislature. 2 CA HSRA, “2000 Final Business Plan,” June, 2000, see pages E-7 and E-14. Business Plans beginning in 2008 are available on the HSRA’s website at http://www.hsr.ca.gov/Newsroom/studies_reports_archives.html. The 2000 Business Plan is apparently no longer available from the Authority, but is available from the author. 3 Links to Sacramento and San Diego were excluded, to be considered in subsequent phases. 4 The demand estimates were based on two approaches. The higher estimates refer to ridership when train fares are 50% of airfares, the lower estimates refer to ridership when train fares are 83% of airfares. The 50% approach in effect produces maxi- mum public benefits but requires more public investment, whereas the 83% approach would increase the possibility of private participation. In fact, a truly private investor might well charge as much as air and would differentiate markets. 5 An additional $950 million in bonding authority was made available for local and intercity rail projects that improved con- nectivity to the HSR system.

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 149 within its sights within a year ($3 billion from ARRA grants,6 and $3 billion from matching Proposi- tion 1A bonds). At this stage, the HSRA issued a 2009 Business Plan, for a 520-mile project costing $36.9 billion with projected demand of between 41–58 million passengers. Despite this potential availability of funding to get the project started, the HSRA did not make much immediate progress. This was due to a number of factors, including the inherent complexity of the project, especially the environmental analysis and clearance process, as well as the guberna- torial political transition from Arnold Schwarzenegger to Jerry Brown in early 2011. After further analysis, the HSRA issued a revised 2012 Business Plan in which expected rider- ship demand was reduced to between 26.4 and 50 million passengers, with capital costs of $57.9 billion. In June 2012, legislation (SB 1029) was passed to permit the HSRA to move ahead with design and contract advertisement. The intention is to award an initial management con- tract to operate early parts of the system and then move to a franchise or concession when the system has increased connectivity. The Final 2014 Business Plan was issued on April 30, 2014 (www.cahsr.ca.gov), in which the project continues to evolve. As currently planned, the system will be built in two phases, each with several stages. These phases/stages are illustrated in Figure E-1. Phase 1 will essentially link Anaheim and San Francisco, while Phase 2 would add links to Sacramento and San Diego (via Riverside). Capital cost for Phase 1—scheduled for completion in 2029—is estimated at $54.9 billion ($2013) with passenger demand of 34.9 million. Funding Requirements The overall capital cost for Phase 1 of the 2014 Business Plan is $54.9 billion ($2013), with three stages broken down in Table E-1. Estimated capital costs of $54.9 billion are in 2013 constant dollars. Taking into consideration inflation over the construction period (to 2029) and assumptions employed in the estimates (+/-10%), the total cost could increase to as much as $75 billion.7 Anticipated Funding Model The funding model for the HSR is still under development, though the intention is ultimately to involve a mixture of public funding and private finance. Currently, against the $54.9 billion cost of Phase 1 of the project, the HSRA now has about $5.9 billion available ($2.6 billion from Proposition 1A and $3.3 billion from ARRA funds and other US DOT sources).8 Proposition 1A has an additional $4.2 billion in borrowing authority pending a match from other sources. Overall, this still leaves a funding gap of about $44.8 billion. There are no other defined or committed sources to fill this gap at present. 6 HSRA originally applied to the US DOT for about $1 billion in funds. When HSR projects in Florida and Wisconsin col- lapsed due to political opposition, an additional $2 billion was granted to the HSRA project. 7 This is why the costs of the project are usually stated both in constant dollars and in year of expenditure (YOE) dollars. Typically, total costs are authorized in dollars of a particular year, while appropriations and borrowing necessarily take place in YOE dollars. 8 The terms of the agreement with FRA require that Federal ARRA money must be matched from state sources (50/50). Although the FRA has agreed to let the state front-load the federal money and match it somewhat later with state money from Proposition 1A or other sources (such as cap-and-trade), the state will still need to bring matching funding sometime in 2014. The state has faced a number of long-standing lawsuits challenging the HSRA’s ability to spend proposition 1A funds, which could delay matching disbursement.

150 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Source of map: 2014 Business Plan (www.cahsr.ca.gov) Figure E-1. High-speed rail in California.

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 151 Potential for Alternative Funding and Financing Mechanisms Table E-2 indicates how the funding and financing mechanisms could apply to support fund- ing of the California HSR system. Case Study (Intercity Rail): Amtrak Virginia—I-81/ Route 29 Corridor Project Overview Highway congestion is a major issue in Virginia, particularly along the corridors connect- ing Northern Virginia with Washington DC. In part as a result of this highway congestion—as well as increasing fuel prices—ridership on intercity (and commuter) rail services has increased Phase 1 Stage Descripon Capital Cost ($2013 billions) Inial Operang Secon (IOS) Central Valley Secon extending into San Fernando Valley just north of Los Angeles, and including early investments in the Caltrain and Metrolink corridors (the “bookends”). 27.8 Bay to Basin Linking Central Valley to San Jose. 14.7 Complete Phase 1 Blended Operaon Complete links from San Francisco through to Los Angeles and Anaheim. 12.4 Total Cost (Phase 1) 54.9 Source: Draft 2014 Business Plan, pages 16, 34 and 35 Table E-1. Capital costs for phase 1 of California HSR (to be completed by 2029). Table E-2. Potential application of alternative funding and financing mechanisms for California HSR. Service or Asset-Related Revenue (Funding) Mechanisms Potenal Applicaon for California HSR Market Pricing to Maximize Fare Box Revenues (6.4.1) This queson is not resolved. The stated intenon of the HSR Authority is to concession the operaon of the HSR system to a private operator. The principles under which the concessionaire's pricing will be regulated have not been decided. High potenal. Premium Services to Increase Service Revenues (6.4.2) Although the exisng demand and revenue studies do not include the impact of premium services, it is clear that California will have a strafied market and that there will be a role for various classes of service. Medium potenal. On-board and In-Staon Retail Concessions (6.4.3) Revenue projecons recognize this strong possibility, but do not include such revenues in the current financial analyses. Lower potenal. Track Access Charges (6.4.4) Since HSRA will own most of the infrastructure, there are not likely to be access charge revenues unless HSRA opts for compeng HSR operators, which seems unlikely. There is a possibility that HSR trains will need to pay access charges in the shared corridor areas such as San Jose to San Francisco. No potenal. (continued on next page)

152 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Table E-2. (Continued). Public Revenue (Funding) Mechanisms Potenal Applicaon for California HSR Incremental Property Tax Revenues (for Tax Increment Financing) (6.5.1) A joint program of the HSRA with local authories to improve local access, develop the property that is improved by HSR access, and maximize the non- passenger values of rail staon areas could generate significant funding, though it will be shared with local authories and thus not fully available for construcon and operaon of the HSR system. Although a Tax Increment Financing approach supported financing of the Bay Area Rapid Transit (BART) system, it is not currently under review for HSR. It is possible that it will be used eventually to raise a part of the state's share of the project costs. Medium potenal. Special Assessment District (SAD) Fees (6.5.2) These are in use for local transit in California, but have not been considered for HSR. Residents and businesses in the area of HSR may not see the day-to- day benefits of the HSR staon necessary to jusfy such fees (for example, in comparison to SAD fees for a new water system). Low potenal. Impact Fees Charged to Property Developers (6.5.3) Not under consideraon as development related to HSR is not fully defined. Future use is possible in specific situaons such as around new HSR staons. Medium potenal. Staon Parking Charges (6.5.4) Staon parking charges are explicitly part of the HSR plans, though no revenue esmates are included in current plans. The issue will be what share of parking investment and revenues will be allocated to local authories as opposed to HSR. Low potenal. Road Tolling/Congeson Charging (6.5.5) Road tolls and road congeson charging are not likely to be used to support HSR investment or operang costs, but they could well increase demand for HSR service and thus support HSR indirectly. High potenal but unlikely. Service or Asset-Related Revenue (Funding) Mechanisms Poten al Applica on for California HSR Selling or Leasing Access to Railroad Rights of Way (6.4.5) (The operator and the owner may be different, which is o„en true of passenger operators. The benefits go to the owner.) No revenue is projected for such leases on the HSR ROW, but it is not precluded and may eventually develop once all of the HSR ROW is actually in hand. Medium poten al. Commercial Property Development/Joint Development (6.4.6) This possibility is explicitly included in HSR planning, though there are as yet no financial projec ons aŽached. One poten al issue is that local authori es may want a significant role in planning and implemen ng local development and, since local authori es will be involved in local access planning and parking provision, they will want a share in the development proceeds. Low poten al. Branding, Sponsorship, and Naming Rights (6.4.7) This source appears to have minimal value for HSR. Low poten al.

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 153 (continued on next page) Table E-2. (Continued). Vehicle Mileage-Based User Fee (6.5.10) A vehicle mileage-based tax could be a feasible way to finance HSR. But, like fuel taxes, there is likely to be significant poli…cal opposi…on. California o‡en is ahead of other states in the applica…on of public policies to reduce conges…on and improve air pollu…on. A vehicle mileage-based tax is regarded as an efficient and effec…ve way to generate revenue for transporta…on projects and offers a mechanism to establish conges…on pricing regimes. It is possible that California could implement such a system. A vehicle mileage user fee could generate large amounts of funding – a 1 cent per mile fee would raise about $3.2 billion annually. High poten…al, uncertain probability. Payroll Taxes Used for Transport (6.5.11) These have not been considered and would have not been of direct relevance to HSR (more relevant for commuter services with defined beneficiaries). Low poten…al and unlikely. Sales Tax (6.5.12) The 2000 Business Plan of the HSRA suggested a 1/4 cent addi…on to the statewide sales tax on all items. This would have been sufficient to finance the full capital cost of the project as then envisioned. Given current projec…ons, this might need to be raised to 1/2 cent. A tax at this rate would finance a major part of the state share of the project. The possibility has not been considered since the 2000 Business Plan. High poten…al but unlikely. Carbon Tax or Credits (Cap-and-Trade) (6.5.13) The 2014 budget allocates $250 million from the state's Cap-and-Trade program to fund the HSR system along with 25% of the proceeds in future years. If the use of such funding conƒnues, it will give the HSRA a dependable source of funding, though not sufficient to fill the gap. The current Cap-and- Trade system will generate a total of $2 billion annually, but this will rise to $4–$5 billion annually when motor fuels are added to the required emission permit market. Also, Cap-and-Trade will not fully finance the building of the $60 billion HSR system unless virtually all of the program receipts are dedicated to this purpose, an outcome that is very unlikely poliƒcally since there are many other claimants for the funding (e.g. solar energy, social programs, etc.). The argument has also been made that HSR is not the most effecƒve way for the Cap-and-Trade Funds to reduce CO2 emissions. High potenƒal but full availability of cap and trade for HSR is unlikely. Public Revenue (Funding) Mechanisms Potenƒal Applicaƒon for California HSR Heavy Goods Vehicle (Truck) Charges (6.5.6) Not applicable. No potenƒal. Gas Tax (6.5.7) Gas taxes would be a feasible way to finance HSR, but poliƒcal opposiƒon to any increase in gas taxes is very strong (at the state and federal level) and may make increases, especially any increase hypothecated to HSR, impossible. For example, a 20-cent increase/gallon (the current price in California is about $3.80/gallon) would raise about $3.4 billion annually. An annual input at this level would fully pay for construcƒon of the system over about a 20-year period. High potenƒal but unlikely. Car Registraƒon Plate Aucƒon (6.5.8) Given California's a›achment to autos, this would be poliƒcally infeasible and has not been considered. High potenƒal but unlikely. Motor Vehicle Registraƒon Fees (6.5.9) Very recently, a well-known group, Transportaƒon California, intended to promote a Proposiƒon in the upcoming 2014 elecƒons that would have raised the vehicle registraƒon fee. The campaign was halted because the prospects for passage were too low. It would be even harder to use such an increase to support HSR. High potenƒal but unlikely.

154 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects 9 See, for example, Chapulut, Jean Noël and Jean-Pierre Taroux, “Trente Ans de LGV: Comparaison des Prévisions et des Réalisations,” Transports, Number, 462, Juillet-Août, 2010 and Crozet, Yves, “High Speed Rail Performance in France: From Appraisal Methodologies to Ex-post Evaluation,” OECD, ITF Discussion paper 2013–26. Table E-2. (Continued). Financing Mechanisms Potenal Applicaon for California HSR Public-Private Partnerships (PPPs) (6.6.1) The HSRA has argued that the operaon of Phase 1 will generate significant posive cash flow that can be used for project finance or as a way of aƒracng investment from a concessionaire. Experience with HSR in other countries has shown that HSR systems can generate positive operang cash flows, in many cases sufficient to finance rolling stock investments and in some cases sufficient to generate some contribuon to the investment cost of the infrastructure.9 The role of the private sector in California will depend strongly first on the passenger demand and revenues and second on the business model adopted by the HSRA. The more the HSRA can finance at the outset and prove actual demand (as opposed to the demand models that are inevitably speculave for a system not yet in operaon), the more the private sector will be willing to offer services for the right to operate the system; but this obviously limits the investment role of the private sector in building the system inially. At the same me, if the HSRA does build the system with public money, it will necessarily have made a series of technology and design decisions about equipment design, operang speeds, schedules and capacity that might not fully match the market judgments of an experienced commercial operator; this could easily reduce the value to a private franchisee of operang the system. Potenally more important, the HSRA will eventually need to decide whether and how to regulate the fares and services of a concessionaire: low fares and maximum services would maximize the ridership and economic benefits of the project, but would reduce financial performance and the potenal contribuon from the private sector. Giving the concessionaire full control over fares and services would permit the maximum financial performance and financial contribuon, but reduce public benefits from social benefits such as reducon of emissions, congeson and accident costs. If the Authority eventually has the resources to finance the full system from public sources, it might be able to opt for the low fares and maximum services: if it needs to maximize the private investment role, then more control will have to be given to a private operator. This will only become clear as the actual business model evolves, but it is clear that there is a strong interacon between business models and the financial contribuon that can be developed from the private partners in PPPs. High potenal. Equipment Trust Cerficates (available to private companies) (6.6.2) These will almost certainly be used to finance the HSR rolling stock, especially if the rolling stock is provided by a private concessionaire. High potenal. Operang Lease Cerficates (available to private and public companies) (6.6.3) Some part of the HSR system, for example to connect from the 4th and King Caltrain staon to the TransBay Terminal in downtown San Francisco, may be managed under an operang lease. In addion, depending on agreements reached, HSR may lease or own their parts of staons that are also served local operators (Caltrain, ACE and Metrolink). High potenal. by

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 155 in recent years. Amtrak ridership in Virginia grew 77% between 2004 and 2012 (much more than the 24% ridership increase Amtrak experienced on the national system over the same time period).10 The Virginia 2008 Statewide Rail Plan and Statewide Rail Resource Allocation Plan identified the I-81/Route 29 corridor which connects Washington DC and Lynchburg as one of two key corridors11 on which to enhance intercity passenger rail services and help alleviate road conges- tion on the highway network.12 Passenger rail service improvements along this corridor are being implemented through a six-phase program, as follows.13 • Phase I: In 2009, Virginia partnered with Amtrak to provide a new state-supported train ser- vice between Washington DC and Lynchburg (approximately 180 miles).The partnership, Amtrak Virginia, which operates on Norfolk Southern track, currently offers two round trip trains per day. The service has been very successful and is now one of Amtrak’s highest Finance or Capital Leasing (private and public companies) (6.6.4) This approach has been employed in France where the private sector built some TGV secons and then in effect leased them to SNCF. The CA HSRA does not have the authority to enter into such long-term leases that would commit the state for periods well beyond exisng appropriaon authority. High potenal but not possible under current law. Bonds with Public- Sector Backing (6.6.5) This is the essence of the Proposion 1A approach. Under current law, the amount is limited to $9 billion, and it is hard to see how this limit could be increased. The HSR project might qualify for some federal bonding guarantees or sources (RIFF Loans) but no applicaon has been filed, and the HSRA would not have a clear ability to repay such loans from revenues (and has no authority to commit the state to repay). Low potenal. Corporate Bonds (available for private enes) (6.6.6) This form of financing will be available to the private concessionaire operang the system, but not to the HSRA. High potenal if concessioned. Mezzanine Financing (available to both private and public companies/authories) (6.6.7) This may well be used by construcon contractors to finance their outlay between compensaon periods from the Authority. High potenal. Short-Term Corporate Line of Credit Financing (6.6.8) Once construcon has started, many construcon firms will use corporate line-of-credit financing to provide start-up funds for construcon. The use of this source will require either signed contracts for HSR work or other sources of corporate revenue on which lenders can rely for security. Sale of Stock (Ownership Stake) (6.6.9) This might well be a source of financing for a concession operator, or for certain sub-developments similar to Washington DC's Union Staon. Medium potenal. Tax/Investment Credits (6.6.10) Sale of tax loss carry-forwards was used by Amtrak to finance equipment. The HSRA might eventually generate such benefits. Medium potenal. Financing Mechanisms Potenal Applicaon for California HSR Table E-2. (Continued). 10 Virginia Department of Rail and Public Transportation, “2013 Virginia Statewide Rail Plan,” November 2013, page ES-11. 11 The other corridor runs along the I-95 connecting Washington DC to Richmond and beyond. 12 http://drpt.virginia.gov/projects/tdx.aspx 13 2013 Virginia Statewide Rail Plan, November 2013, page 5-13.

156 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects performing routes—ridership levels in 2010 and 2011 surpassed estimates by 260% and 140%, respectively.14 The service is also one of the few Amtrak routes outside of the NEC that covers its direct costs through fares. According to the state’s most recent Six Year Implementation Plan (2014–2019), operating revenues for this service are expected to exceed operating costs every year, generating an operating surplus of $1.5 million by the end of FY2019.15 The actual annual operating profit for Phase I in 2013 was $600,000. No other Amtrak service in Virginia is expected to generate an operating surplus over the same timeframe. • Phase II: A new passenger rail service is being added between Lynchburg and Roanoke (approximately 55 miles).16 This phase of work is now underway, with design and construc- tion work proceeding in order to start services by 2017.17 • Phase III: This phase will involve capacity improvements to extend passenger rail service from Roanoke to Bristol (an additional 150 miles). • Phase IV: Involves capacity improvements and additional train sets to accommodate new roundtrip trains from Washington DC to Lynchburg. • Phase V: Capacity improvements and additional train sets to accommodate two roundtrip trains from Washington DC to Bristol. • Phase VI: Capacity improvements to establish a new east-west passenger service from Lynchburg to Richmond. Figure E-2 illustrates the existing Amtrak services on the corridor as well as planned services: Phase I (yellow), Phase II “near-term” passenger services (green), and Phases III-VI long-range passenger services to be studied (red). Anticipated Funding Requirements The estimated total project cost for Phases I-VI is $513.8 million, per Table E-3. Phase I (new service from Washington DC to Lynchburg) is already fully funded and now operational. Phase II (rail connection from Lynchburg to Roanoke) also has full funding in place.18 Of the estimated $128.4 million in capital costs for Phase II, the Commonwealth of Virginia is contributing $95.7 million, the majority of which is being provided through revenues from the Intercity Passenger Rail Operating and Capital Fund (IPROC). Phases III-VI are not yet under detailed study and are currently unfunded. Anticipated Funding Model Virginia has been at the forefront of implementing intercity passenger rail funding solu- tions. In particular, the state acted quickly to establish funding approaches to enable it to meet 14 Virginia Department of Rail and Public Transportation, “2013 Virginia Statewide Rail Plan,” November 2013, page ES-12. 15 Virginia FY2014 Six Year Implementation Plan, “Intercity Passenger Rail Operating and Capital Program” table. page 74. 16 There has been no Amtrak service between Lynchburg and Roanoke in more than 30 years. Currently, Amtrak operates a con- necting bus service from Lynchburg to Roanoke (55 miles) and Blacksburg (an additional 40 miles). The bus costs $4 each way. 17 In January 2014, State Governor Bob McDonnell announced an agreement between the state and Norfolk Southern to extend Amtrak passenger rail service from Lynchburg to Roanoke. Included in the agreement are track additions and realignments, signal and communication upgrades along the route, clearance adjustments, and a platform and train servicing facility in downtown Roanoke. Design work is beginning immediately, and services are expected to commence by fall 2017. http://www. newsadvance.com/news/local/lynchburg-roanoke-amtrak-rail-service-agreement-announced/article_5e99ad08-7949-11e3- ae46-001a4bcf6878.html 18 The state of Virginia is expected to provide $92.7 million, including $10 million to help the city of Roanoke build a station, platform and track, including terminal train storage and servicing facility. The City of Roanoke is responsible for the station building and parking facilities. Under a separate agreement, Virginia is providing $3 million towards the estimated $6 million cost of a culvert to carry the Trout Run stream beneath the proposed station platform and track facility in Roanoke http://www. newsadvance.com/news/local/lynchburg-roanoke-amtrak-rail-service-agreement-announced/article_5e99ad08-7949-11e3- ae46-001a4bcf6878.html

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 157 Source: Virginia Rail Resource Allocation Plan, 2013, page 43 http://www.drpt.virginia.gov/activities/files/Final%20RAP%202013.pdf Figure E-2. US 29, US 46 and I-81 passenger services and planned improvements. Phase Cost ($2012 esmates) Phase I: New service between Washington DC and Lynchburg VA $2 million operang cost, $103.7 capital cost (total of $105.7 million, between FY 2013 2018) Phase II: Adding a passenger service between Lynchburg and Roanoke $128.4 million in capital; $6.4 million operang Phase III: Capacity improvements will extend passenger service to Bristol $47.7 million (capital) Phase IV: Capacity improvements and addional train sets to accommodate two roundtrip trains to Lynchburg $91.3 million (capital) Phase V: Capacity improvements and addional train sets to accommodate two roundtrip trains to Bristol $110.0 million (capital) Phase VI: Capacity improvements to establish passenger service from Lynchburg to Richmond $24.5 million (capital) Total Cost $513.8 million Source: 2013 Virginia State Rail Plan, Page 5-13. Table E-3. Project phasing and costs, US 29, US 460 and I-81 passenger service.

158 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Section 209 of PRIIA,19 which states that Amtrak (effective October 2013) is precluded from operating any regional passenger services unless the required subsidy to operate those services is funded by the state. As a result of this change, Virginia needed to decide how to continue to fund the operating costs of its six existing regional Amtrak services in the state, or risk losing the services altogether. The government moved very quickly (particularly relative to other states) to establish sustainable, dedicated state revenue sources for the continuation and expansion of existing and future regional intercity passenger rail operations. The funding model for Phases I-VI includes a combination of state, federal, private railroad, local jurisdiction and nongovernmental funding sources, as described below. 20 Sources of State-Level Funding • Intercity Passenger Rail Operating and Capital Fund (IPROC): The most significant (and innovative) approach to increase state-level funds for intercity passenger rail services in Virginia was the creation of IPROC in 2011.21 This is a special non-reverting fund (funds never revert back to general fund) within Virginia’s Transportation Trust Fund. IPROC estab- lished a legislative basis to fund Virginia-sponsored regional passenger rail operations and, in 2013, Virginia passed legislation22 to create a sustainable revenue stream for IPROC through allocating a portion of Retail and Sales Use Tax to IPROC. Specifically, in July 2013, the state raised the Retail and Sales Use Tax rate by 0.3% statewide, with an additional 0.7% increase in Northern Virginia and Hampton Roads districts.23 Of this increase, 0.125% was allocated to transportation funding: 40% to IPROC and 60% to the Mass Transit Fund. Committing this portion of Retail Sales and Use Tax revenue to IPROC is expected to yield $44 million for IPROC in 2014, with growth expected to reach $56 million annually by 2018, representing an increase in rail funding of 86% compared to 2013.24, 25 • Rail Enhancement Fund (REF). Created in 2005, the REF is the primary source of state funding for implementing large capital improvement projects for freight and passenger rail (includ- ing commuter rail).26 It is a grant program with funding provided based on a public-benefit analysis. Any funding requires a minimum 30% match from non-state sources. The REF is primarily used for capital funding (though exceptions to subsidize operating costs are possible through special appropriation of the General Assembly).27 The primary source of revenues for the REF is receipt of 3 cents from the vehicle rental tax (currently 10 cents), which generates approximately $27 million annually. The REF also receives some funds from Capital Project Bonds—see below (approximately $12–$13 million/year). 19 PRIIA (Section 209) requires that states must now pay operating and capital costs on a fully allocated basis for intercity rail service on Amtrak routes that are either state requested, on designated high-speed rail corridors (outside of the NEC), short- distance corridors, or routes less than 750 miles. 20 Virginia Statewide Rail Plan, November 2013, Pages 4-2 to 4-7. See also: Commonwealth Transportation Board, “FY 2014 Rail and Public Transportation Improvement Program” (Six Year Implementation Plan). 21 §33.1-221.1:1.3. 22 “Virginia’s Road to the Future” (HB 2313). 23 Retail Sales and Use Tax in the state ranges from 5.3%–6% for most purchases. Virginia Department of Taxation http:// www.tax.virginia.gov/site.cfm?alias=changesandupdates#RetailSalesUse 24 2013 Virginia Statewide Rail Plan, November 2013. Page 4-2. 25 IPROC funds can be used to support capital and operating costs, including: the cost of operating intercity passenger rail service; acquiring, leasing, and/or improving railways or railroad equipment, rolling stock, rights-of-way, or facilities; or assisting other appropriate entities to acquire, lease, or improve railways or railroad equipment, rolling stock, rights-of-way, or facilities for intercity passenger rail transportation purposes. https://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+33.1-221.1C1.3 26 Eligible expenses include: preliminary service, engineering or feasibility studies; final engineering; permitting; acquisition, leading or improvement of rights of way or facilities; environmental mitigation directly related to the project; site preparation; acquisition, lease or improvement of railroad equipment and rolling stock; public involvement expenses. 27 For example, the Virginia-funded Amtrak services were provided with $6 million from the REF in 2010, and $26.1 million of REF funds are also being used in 2013 and 2014 for IPROC.

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 159 • Virginia Shortline Railway Preservation and Development Program (Rail Preservation Program - RPP). This program provides state financial support to preserve, continue and increase the productivity, safety and efficiency of short line railways in Virginia. Though it does not explicitly provide capital funding for passenger rail operations, the funding of infrastructure improvements for the short lines in the state has also benefited passenger rail services (most recently around Lynchburg). The fund requires 30% matching from local juris- dictions and/or the short line railroad. The fund receives $3 million annual allocation of highway construction funds, as well as the interest earned on cash balances to fund short line rail improvement projects.28 • Transportation Capital Bond Fund (Project Bonds): These bonds for capital costs of transit and rail improvements (passenger and freight) were established by the General Assembly in 2007 through HB3202. The bond package includes a minimum of 4.3% of available bond funds specifically for rail transportation. Projects funded with Capital Bonds Pro- ceeds are administered through the REF or RPP. The bonds cannot be used for passenger rail operating costs. Passenger rail projects with capital bond proceeds are administered through the REF. • PPP Financing Options: The state expects the PPP approach to be used more widely for pas- senger rail going forward, particularly for projects such as passenger rail stations or dedicated passenger corridors. This could potentially include Phases III-VI of Amtrak I-81/US29. Federal Level Funding Sources Federal funding for intercity passenger rail services is overseen by the US DOT FRA. PRIIA 2008 authorized more than $3.7 billion to promote improvement of intercity passenger rail operations, facilities and services, as well as high-speed corridors. PRIIA established a number of new competitive grant programs, each of which provides up to 80% of funding from the federal government with the remaining 20% coming from non-federal sources. Potential Application of Alternative Funding Generation and Financing Mechanisms Although Phases I and II of Virginia’s passenger rail improvement program are fully funded, studies to implement Phases III-VI are still under consideration, and presumably additional funding will be required for these phases. The state is already using a number of innovative approaches to supporting intercity pas- senger rail, most notably through allocating a portion of Retail and Sales Use Tax for IPROC. Table E-4 presents potential additional sources for funding which could be used by Virginia to progress in development of the I-81/US 29 corridor. Case Study (Commuter Rail): Virginia VRE Commuter Service Project Overview Established in 1992, Virginia Rail Express (VRE) is the State of Virginia’s only commuter rail service. It includes two routes: The Manassas Line running between Washington DC Union Station and Broad Run/Airport, and the Fredericksburg Line running between Washington DC 28 Report of the Department of Rail and Public Transportation—Commonwealth of Virginia, “Funding Strategies for State Sponsored Intercity and High Speed Passenger Rail [SJR 63 (2010].” Senate Document No. 14. November 2010.

160 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Table E-4. Potential application of alternative funding and financing mechanisms for Amtrak Virginia. Service or Asset-Related Revenue (Funding) Mechanisms Potenal for Amtrak Virginia Services Market Pricing to Maximize Fare Box Revenues (6.4.1) Amtrak already has full control over the fares it collects from passengers, and is free to use market-pricing principles. Whether more revenue can be generated from market-pricing principles (e.g. through yield management approaches) would require further study. Medium potenal. Premium Services to Increase Service Revenues (6.4.2) Amtrak already offers premium services (Business Class) for passengers on the Amtrak Virginia service. Low potenal. On-board and In-Staon Retail Concessions (6.4.3) Given the growing passenger ridership, and the increasing length of the Amtrak Virginia service (in terms of miles traveled), there may be scope to increase revenues through on-board retail concessions. One op
on would be for Amtrak Virginia to look at the November 2013 example that Swiss Railway Company SBB took of partnering with Starbucks Coffee to introduce a coffee and retail shop fully on board an intercity train. With a new sta
on opening in Roanoke (by 2017) there may be scope for Amtrak/State of Virginia to capitalize on in-sta
on retail concessions in and around the sta
on, including from park-and-ride poten
al. Medium poten
al. Track Access Charges (6.4.4) This is not a poten
al source of revenue, as Amtrak Virginia does not own any track infrastructure. No poten
al. Selling or Leasing Access to Railroad Rights of Way (6.4.5) (The operator and the owner may be different, which is o’en true of passenger operators. The benefits go to the owner.) There may be poten
al to generate revenues from selling or leasing access to Amtrak Virginia property around new sta
on developments, though not along the railroad track (which is owned by freight railroads). The poten
al for this mechanism depends on who owns the property around new sta
ons. Medium poten
al. Commercial Property Development/Joint Development (6.4.6) The extent of commercial property development depends very much on how such development could generate profits for developers (whether public or private). The poten
al is likely to be rela
vely low for Amtrak (in comparison to, say, a much busier commuter transit sta
on which could benefit from significant Transit-Oriented Development). Low poten
al. Branding, Sponsorship, and Naming Rights (6.4.7) This source appears to have minimal value for Amtrak. Branding, sponsorship and naming rights are typically most a—rac
ve to private adver
sers in very high traffic areas (e.g., inner city commuter/transit sta
ons). Low poten
al.

(continued on next page) Sales Tax (6.5.12) The IPROC generates significant funds for intercity passenger rail through receipt of a poron of sales tax revenue. This is likely to connue to be the High potenal. Carbon Tax or Credits (Cap-and-Trade) (6.5.13) Cap-and-trade legislaon has been proposed in Virginia in the past, though former bills have not passed and have been opposed by industry (including manufacturers and coal producers). We are not aware of any plans to establish a cap-and-trade system going forward. High potenal. Public Revenue (Funding) Mechanisms Potenal for Amtrak Virginia Services Incremental Property Tax Revenues (for Tax Increment Financing) (6.5.1) Collecon of incremental property tax revenues for use towards financing of the new staons would likely not be polically acceptable given compeng priories at the local level, and the reality that an intercity rail staon would not have a very significant impact on property value (in comparison to commuter / transit staons). Low potenal and unlikely. Special Assessment District (SAD) Fees (6.5.2) This approach would likely not be relevant for the communies being served by an extended Amtrak Virginia service. Residents and businesses in the area of the new staons may not see the necessary day-to-day benefits of the Amtrak staon to jusfy such fees (for example, in comparison to charging of SAD fees for a new water system). Low potenal. Impact Fees Charged to Property Developers (6.5.3) The potenal for such fees depends on the level of interest from private developers, though major property developments around new Amtrak staons seem limited given the relavely low ridership. Low potenal. Staon Parking Charges (6.5.4) Staon parking charges would certainly contribute to supporng the cost of staon construcon and operaon. The issue will be what share of parking investment and revenues will be allocated to local authories as opposed to the state / Amtrak. High potenal. Road Tolling/Congeson Charging (6.5.5) Road tolls and road congeson charging could increase state revenues that could be used to help fund rail improvement. This mechanism would also create a disincenve to use personal vehicles, which could in turn generate increased demand and ridership revenues for passenger rail. This is however a broader transport policy queson, which would need enabling legislaon. This would no doubt be polically sensive. High potenal but unlikely. Heavy Goods Vehicle (Truck) Charges (6.5.6) Not applicable. No potenal. Gas Tax (6.5.7) The state has already increased sales tax to generate funds for intercity passenger rail (through IPROC). An increase in fuel tax could generate addional revenues but may be polically challenging. High potenal. Car Registraon Plate Aucon (6.5.8) We are not aware of any plans for such an aucon, and given the relavely limited geographic area that would be served by new Amtrak services, an aucon seems unlikely to be polically feasible or aracve. High potenal but unlikely. Motor Vehicle Registraon Fees (6.5.9) We are not aware of any plans for such fees. Revenues are already generated for the REF through receipt of 3 cents from the vehicle rental tax (currently 10 cents). High potenal but unlikely. Vehicle Mileage-Based User Fee (6.5.10) A vehicle mileage-based user fee could raise significant sums – a 1 cent per mile user fee would have raised about $800 million in 2012. The state has already approved many toll roads and is praccing congeson pricing in the Washington area using an EZPass system. A vehicle mileage-based user fee system is possible but polically difficult. High potenal but unlikely. Payroll Taxes Used for Transport (6.5.11) These have not been considered and would have not been of direct relevance to Amtrak given the relavely limited use of Amtrak for the majority of the populaon in any given area. Low potenal. primary stream of funding (a˜er passenger fares) for the foreseeable future. Table E-4. (Continued).

Financing Mechanisms Potenal for Amtrak Virginia Services Public-Private Partnerships (PPPs) (6.6.1) Virginia’s 2005 Public-Private Transport Act (PPTA) is the legislave framework to enable public enes to enter into PPP agreements with private companies. State-level financing for PPPs can include the Transportaon Partnership Opportunity Fund (administered by Virginia DOT), the Virginia Transportaon Infrastructure Bank (managed by VDOT and the Virginia Resources Authority), and the REF (administered by the Virginia Department of Rail and Public Transportaon, or DRPT). The grant funds of the REF have already been used to leverage private finance in PPP projects in the state, including for the Norfolk Southern Heartland Corridor, Crescent Corridor and CSX Naonal Gateway Corridor (though not the Amtrak Virginia services specifically). High potenal. Equipment Trust Cerficates (available to private companies) (6.6.2) This financing approach (e.g. for new rolling stock) is not likely to be an opon for Amtrak Virginia, as such cerficates are typically restricted in terms of availability to private companies. Low potenal. Operang Lease Cerficates (available to private and public companies) (6.6.3) It is unlikely that any parts of the Amtrak system would be financed under an operang lease, given the current “public” structure, ownership and operaon of the system. Low potenal. Finance or Capital Leasing (private and public companies) (6.6.4) Amtrak and the State of Virginia have the authority to enter into long-term financing mechanisms (including capital leases). However, in some cases, if the financing mechanism results in a long-term obligaon to a state or federal agency, the financing may require special approval and even a special Act (this was done for the mulple sets of high-speed Acela trains). On the other hand, VRE was able to acquire some second-hand, stainless-steel, double- deck commuter rail cars and refurbish them under its exisng budget authority from the State of Virginia (through a capital lease structure). High potenal. Bonds with Public- Sector Backing (6.6.5) The State of Virginia already makes use of capital project bonds for capital costs of transit and rail improvements (passenger and freight), as described above. Corporate Bonds (available for private en es) (6.6.6) This form of financing is not likely for the Amtrak Services, as there are no private concessionaires opera ng the system, and Amtrak currently has limits on any corporate borrowing ability. Low poten al. Mezzanine Financing (available to both private and public companies/authori es) (6.6.7) This could be used by construc on contractors at new sta ons to finance their outlay between compensa on periods from local authori es / Amtrak. Medium poten al. Short-Term Corporate Line of Credit Financing (6.6.8) Contractors to Amtrak do make use of corporate line-of-credit financing. The financing is usually secured by the contract with Amtrak. Amtrak may also be able to use short-term credit lines to shore up its balance sheet when revenue and expenditures are lumpy. Such sources provide short-term funding only when long-term funding is already secure. Low poten al. Sale of Stock (Ownership Stake) (6.6.9) We do not see this as being applicable so long as Amtrak remains a not-for- profit corpora on owned en rely by the government. No poten al. Tax/Investment Credits (6.6.10) Sale of tax loss carry-forwards have been used by Amtrak to finance equipment in the past and could possibly be used for purchase of addi onal equipment going forward. Medium poten al. Table E-4. (Continued).

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 163 and Fredericksburg. Together, these services operate 30 trains over 90 route miles with 18 sta- tions, carrying an average of 19,000 passengers daily. Trains are operated over the track of freight railroads (CSX for Fredericksburg Line, Norfolk Southern for Manassas Line). From 1992 to 2010, VRE was operated under contract by Amtrak.29 Services are currently operated by Keolis Rail Services America (a private company owned partly by SNCF) under a five-year contract (2011–2016). Ridership on the system has grown more than three-fold since 1993 (see Figure E-3). The existing system is operating at full capacity, including parking and midday train storage at the northern terminus. The 2013 Virginia Statewide Rail Plan identified capacity as a major concern, as VRE ridership is predicted to grow between 63% to 85% by 2025.30 To address congestion issues on both the north-south I-95 (Fredericksburg Line) and east- west I-66 (Manassas Line) corridors and provide alternative/enhanced services to travelers, the state is planning a two-phase program of investments to improve and expand VRE commuter operations, as follows. • Phase I: Extending the north-south Fredericksburg line to a new greenfield station in Spotsylvania. This involves designing and building a 2.6-mile third-track project adjacent to the CSX mainline in Spotsylvania County between Crossroads and Hamilton. The project will enable operation of additional daily VRE Fredericksburg Line trains that originate at the VRE Crossroads yard. The VRE Spotsylvania County station enabled by this project is expected to increase VRE ridership by 2,000 daily trips by 2015 and 3,000 trips by 2025.31 • Phase II: Extending the east-west Manassas Line to Haymarket, with additional stops in Sudley Manor and Gainesville. This will involve constructing new stations and expanding rail 29 2013 Virginia Statewide Rail Plan, November 2013. Page 3-25. 30 2013 Virginia Statewide Rail Plan, November 2013. Page 3-25. 31 2013 Virginia Statewide Rail Plan, November 2013. Source: 2013 Virginia Statewide Rail Plan, Figure 3-16, page 3-27. Figure E-3. VRE ridership (FY1993-FY2012).

164 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects infrastructure, station access and parking amenities, constructing train storage and mainte- nance facilities, and increasing rolling stock.32 These extensions are illustrated in Figure E-4. Funding Requirements The estimated capital costs of Phase I (extension of Fredericksburg line to Spotsylvania) are $32.5 million. Work is underway and fully funded. Funding is coming from the following sources:33 • $12.4 million (38%) in federal funding from FTA Urbanized Area grants (Section 5307), which provide up to 80% federal funding for planning, engineering design, evaluation of transit projects, and capital investments in fixed assets and rolling stock. • $13.9 million (43%) from the state Rail Enhancement Fund (REF) grant program. As noted above, the primary source of revenue for the REF is receipt of 3 cents from the vehicle rental tax (currently 10 cents), which generates approximately $27 million annually. The REF also receives some funds from rail bond revenues. • $6.2 million (19%) from other public and private matching funds, including from FTA, state transit capital, local gas tax revenues, REF, and CSX (CSX will benefit in the crossovers that they are participating in funding with REF). Figure E-4. VRE existing commuter rail lines and proposed improvements. Source: 2013 Rail Resource Allocation Plan, page 39. http://www.drpt.virginia.gov/activities/files/Final%20RAP%202013.pdf 32 Virginia Rail Resource Allocation Plan: Complement to the Virginia Statewide Rail Plan. November 2013. Page 39. 33 Six Year Implementation Plan, Page 69. Line items under “VRA Third Track Spotsylvania Extension.”

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 165 The capital costs for Phase II (expanding service on Manassas Line) are estimated at $1,009.8 million and are currently unfunded.34 Anticipated Funding Model Currently, VRE operations and capital projects are financed from a combination of federal, state, local grants and fare box revenues. It is anticipated that these will continue to be the pri- mary sources for ongoing operations and future investments. Total revenues in FY2012 were $92,648,071, of which: 37.5% was from operating revenues (farebox revenues), 49.5% from non-operating revenues (subsidies from state, federal and local sources), and 13% from capital grants and assistance (state, federal and local sources). These sources and figures are summarized in Table E-5 for FY2007–FY2012. A more detailed breakdown of the key funding sources for VRE is presented below. Federal Funding Sources Federal funds for VRE are apportioned annually to DRPT from the Federal Transit Admin- istration (FTA). VRE services are eligible under two FTA funding programs for transit capital projects: • FTA Urbanized Area Grants (Section 5307), which provide up to 80% federal funding for planning, engineering design, evaluation of transit projects and capital investments in fixed assets and rolling stock. • FTA Fixed Guideway Capital Investment Grants (Section 5309), which provide capital fund- ing for any fixed guideway system that utilizes and occupies a separate right of way or rail line, for the exclusive use of mass transportation. Federal operating subsidies are provided from the Surface Transportation Program (STP) and the Congestion Mitigation and Air Quality Improvement (CMAQ) Program. Source: Virginia Statewide Rail Plan 2013, page 4-6. Table E-5. Annual expenses for Virginia Railway Express (FY2007 to FY2012). 34 Virginia Rail Resource Allocation Plan, November 2013, Page 39.

166 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects State Funding Sources • Rail Enhancement Fund (REF). As described. • Commonwealth Mass Transit Trust Fund. This is a multi-source-funded transportation fund that provides funding to a range of transportation services, including commuter rail,35 airports, ports and highways. It is capitalized primarily from gas tax and sales and use tax revenues. • Transportation Capital Bond Fund (Project Bonds). As described. Local Funding Sources Some northern jurisdictions use local general funds to support VRE commuter operations, and some have gone as far as levying a 2% motor fuels tax to assist in the implementation and ongoing operations of VRE services.36 However, local jurisdictions often have many competing priorities for funding and are increasingly looking for alternative financing vehicles for com- muter rail operating and capital costs (e.g., PPP, value capture, etc.). “. . . New legislation [in place since July 1, 2013] enables the state to raise transportation funds for Planning Districts that meet population, transit ridership and other thresholds” [2013 Virginia Statewide Rail Plan, page 4-11]. Potential for Alternative Funding and Financing Mechanisms Table E-6 illustrates the potential for alternative funding and financing mechanisms for addressing future funding gaps for new VRE services (e.g., Phase II onwards). Case Study (Shared Rail Corridor): New Orleans Rail Gateway Program Project Overview37 Transport infrastructure in the New Orleans area is constrained by local geographic features (including the Mississippi River and tributaries, lakes and bayous, and ultimately the ocean) as well as by man-made features designed to protect the city from flooding and control the flow and route of the Mississippi. New Orleans is a large, busy and important rail hub. The New Orleans area is served by a number of rail lines connecting ports, railways, industrial areas and intermodal terminals. Rail lines from the east and west connect across the Huey P Long Bridge. It is home to six of the seven largest US railroads as well as a number of short line and terminal railroads. It is the fourth-largest US rail gateway (a place where rail freight is interchanged between railroads)38 and one of the largest rail crossings of the Mississippi River39 connecting eastern and western rail systems. See Figure E-5 for a visual depiction. New Orleans is also home to the country’s eighth-busiest port, serving not only river traffic but also international ocean shipping (it serves both bulk agriculture and minerals traffic as well as container and merchandise traffic). The New Orleans Rail Gateway (NORG) is a rail corridor running through New Orleans con- necting the US east and west rail networks across the Mississippi River. The corridor traverses 35 The Mass Transit Trust Funds cannot be used for intercity passenger rail. 36 Virginia Department of Rail and Public Transportation. “Funding Strategies for State Sponsored Intercity and High Speed Passenger Rail [SJR 63 (2010)]. Senate Document No. 14. 2010. Page 21. 37 Information taken from combination of interview with DOTD staff and “New Orleans Rail Gateway Public Scoping Meeting Presentation, February 7 and 8, 2012” http://www.dotd.la.gov/administration/public_info/projects/norg/Public_Meeting_ Materials/Scoping_Meeting_Presentation.pdf 38 Other major east-west gateways are Chicago (#1), Kansas City (2), St. Louis (3) and Memphis (5). 39 The other major cross-Mississippi River interchanges are in St. Louis and Memphis.

Service or Asset-Related Revenue (Funding) Mechanisms Potenal for VRE Services Market Pricing to Maximize Fare Box Revenues (6.4.1) VRE’s fare structure is based on different fares for different geographic “zones” in the system, and offers riders discounts for mul-ride cket packages (single-ride, 10-ride, five-day or monthly pass). One opon for VRE to increase revenues (and ridership) might be to implement a variaon in cket prices based on me of day to reflect market pricing. Ticket prices could be slightly higher in heavily congested peak travel periods, and slightly lower in quieter periods. On average, some peak passengers may need to pay more, but would benefit from less crowded services and would have the opon to pay less by changing their travel mes. High potenal. Premium Services to Increase Service Revenues (6.4.2) Commuter rail services in the US do not offer a premium rail service, though there are internaonal examples (e.g. many UK commuter rail operators offer First Class service. The Dubai metro offers a “Gold Class”). The extent to which this could generate significant addional revenue is unclear. Medium potenal. On-board and In-Staon Retail Concessions (6.4.3) Given the construcon of new commuter rail staons, there will likely be scope to generate revenues from in-staon retail concessions. Commuter rail services do not typically offer on-board retail services, so this is unlikely to be a revenue-generang tool. Low potenal. Track Access Charges (6.4.4) This is not a potenal source of revenue, as VRE does not own track infrastructure. No potenal. Selling or Leasing Access to Railroad Rights of Way (6.4.5) (The operator and the owner may be different, which is o¡en true of passenger operators. The benefits go to the owner.) There may be potenal to generate revenues from selling or leasing access to VRE-owned property around new staon developments, though not along the railroad track (which is owned by freight railroads). Medium potenal. Commercial Property Development/Joint Development (6.4.6) VRE will soon (2017) be opening a new staon in Spotsylvania, with longer- term plans for three new staons on the Manassas Line. These new staons will provide opportunies for VRE to engage in commercial property development with the objecve of obtaining some form of commercial revenues from the development (e.g., retail, office buildings, parking, etc.). Joint development between the land-owning public enty (state or local government) and a private developer to develop certain assets could also be an opon. Such an approach takes a commercial mindset, polical will and legislave ability to partner with the private sector, all of which appear to be in place in Virginia. Staon development is one area where local agencies can benefit from being parcularly acve and involved in passenger rail funding; it typically improves staon design and facilies, and also provides very visible economic development opportunies for their cizens. High potenal. Branding, Sponsorship, and Naming Rights (6.4.7) Private sector companies could also be approached to pay for adversing and sponsorship at the new staons, even going as far as naming a staon a¡er a corporate sponsor (e.g., a mall). The extent of financing potenal is significant, depending on the locaon and number of ancipated viewers of the branding (e.g., number of passengers who will pass through the staon pla¨orm). Low- Medium potenal. Table E-6. Potential application of alternative funding and financing mechanisms for expanded VRE services. (continued on next page)

168 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Public Revenue (Funding) Mechanisms Potenal for VRE Services Incremental Property Tax Revenues (for Tax Increment Financing) (6.5.1) Tax Increment Financing could be used if properes around the new VRE staon property development are expected to increase significantly in value, a prospect that in turn may depend on the level of commercial property development around the staon. Under such an approach, as new funds are invested (e.g. new retail, new commuter train staon), property values increase and so do property tax revenues. The incremental increases in property tax could be ring fenced and used to finance the capital costs of building the staon. Most US states have TIF-enabling legislaon, though this legislaon typically requires tesng of a “but for” requirement to establish a TIF district; this consists of proving that the area would not develop “but for” the creaon of the TIF district. Whether or not this would be the case for the three new staons on the Manassas Line (Haymarket, Sudley Manor and Gainesville) would need to be studied. High potenal. Special Assessment District (SAD) Fees (6.5.2) Special Assessment District fees could be applied to residents/businesses that will stand to benefit directly from the construcon of a new commuter rail facility. This is a tradional method of financing local improvements whereby individuals in a special “district” pay a disnct levy, tax or fee for local infrastructure investments which will directly benefit them (and typically only them). Large sums of revenue can be generated from SADs, though their relave contribuon to cover costs varies depending on the overall capex requirements for the project. SAD revenues have the benefit of being highly stable, as they are usually fixed at the me of the SAD formaon, with fees collected upfront or annually. Establishing a SAD typically requires enabling state-level legislaon, as well as a local SAD authorizing ordinance. High potenal. Impact Fees Charged to Property Developers (6.5.3) In the case of the new VRE staons, charging impact fees to developers could work if there is already a market in place for property and retail development. Like other types of value capture, these fees are more suitable for rapidly growing jurisdicons with a high demand for property and increasing real estate values. Without such demand, developers need incenves (not disincenves such as addional fees) to develop property. High potenal. Staon Parking Charges (6.5.4) Staon parking charges would certainly contribute to supporng the cost of staon construcon and operaon for new VRE staons. High potenal. Road Tolling/Congeson Charging (6.5.5) Road tolls and road congeson charging are not likely to be used to support VRE investment or operang costs, but they could increase demand for VRE service and increase revenues that could be used to help fund VRE. This could however be polically challenging. High potenal but unlikely. Heavy Goods Vehicle (Truck) Charges (6.5.6) Not applicable. No potenal. Gas Tax (6.5.7) Some northern jurisdicons already levy a 2% motor fuels tax to assist in the implementaon and ongoing operaons of VRE services. This could potenally be extended to new jurisdicons that will be served by VRE in future, as a means to generate revenues for investment and operaons. High potenal. Table E-6. (Continued).

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 169 (continued on next page) Table E-6. (Continued). Public Revenue (Funding) Mechanisms Potenal for VRE Services Car Registraon Plate Aucon (6.5.8) We are not aware of any plans for such an aucon, though this could be a significant potenal source of revenue that could be used for supporng VRE. High potenal. Motor Vehicle Registraon Fees (6.5.9) We are not aware of any plans for such fees to be implemented. The state already taxes car users through a 3-cent poron of the vehicle rental tax (currently 10 cents). High potenal but unlikely. Vehicle Mileage-Based User Fee (6.5.10) A vehicle mileage-based user fee could raise significant sums – a 1 cent per mile user fee would have raised about $800 million in 2012. The state has already approved many toll roads and is praccing congeson pricing in the Washington area using an EZPass system. A vehicle mileage-based user fee system is possible but polically difficult. High potenal but unlikely. Payroll Taxes Used for Transport (6.5.11) Not likely to be applicable for VRE’s new staons. Low potenal. Sales Tax (6.5.12) It is unlikely that a statewide sales tax could be used for VRE services that provide benefits to residents in northern jurisdicons only. Ongoing (and potenally increased) use by northern jurisdicons of the 2% motor fuels tax to assist in the implementaon and ongoing operaons of VRE appears like a more feasible (and polically acceptable) opon. High potenal but unlikely. Carbon Tax or Credits (Cap-and-Trade) (6.5.13) Cap-and-trade legislaon has been proposed in Virginia in the past, though former bills have not passed and have been opposed by industry (including manufacturers and coal producers). We are not aware of any plans to establish a cap-and-trade system going forward. High potenal. Financing Mechanisms Potenal for VRE Services Public-Private Partnerships (PPPs) (6.6.1) PPPs are possible in Virginia and may provide a model for the implementaon of VRE. High potenal. Equipment Trust Cerficates (available to private companies) (6.6.2) Private operators of the VRE services (currently Keolis) could potenally make use of equipment trust cerficates, but this would not have an impact on the funding gap for VRE per se. Medium potenal. Operang Lease Cerficates (available to private and public companies) (6.6.3) The private operators of VRE services could potenally enter into operang leases with providers of rolling stock (e.g. Bombardier), though this would not directly affect the funding gap from the perspecve of the state of Virginia/VRE. Medium potenal. Finance or Capital Leasing (private and public companies) (6.6.4) This is not likely to be a feasible opon for VRE capital investments, in part because access to such finance is largely based on the creditworthiness of the lessee, and VRE requires both capital and operang subsidies. Capital leases must be specifically approved by the Virginia Treasurer and may require specific authorizaon if large enough. Low potenal. Bonds with Public- Sector Backing (6.6.5) The State of Virginia already makes use of capital project bonds for capital costs of transit and rail improvements (passenger and freight), as described above. High potenal. Corporate Bonds (available for private enes) (6.6.6) This form of financing could possibly be used by private operators of the system, though would likely not be used by the public owners (VRE) of the system. Medium potenal.

170 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Source: New Orleans Rail Gateway Program, “The Right Track: Official Program Newsletter,” June 2012, Vol. 1, No. 1. http://www.dotd.la.gov/administration/public_info/projects/norg/newsletters/Volume%201,%20Number%201%20-%20June%202012.pdf Figure E-5. Map of New Orleans Rail Gateway program area. Financing Mechanisms Potenal for VRE Services Mezzanine Financing (available to both private and public companies/authories) (6.6.7) This could be used by construcon contractors at new staons to finance their outlay between compensaon periods from local authories / State of Virginia. Medium potenal. Short-Term Corporate Line of Credit Financing (6.6.8) Contractors to VRE do make use of corporate lines-of-credit financing. The financing is usually secured by the contract with VRE or the State of Virginia. VRE may also be able to use short-term credit lines to shore up its balance sheet when revenue and expenditures are lumpy. Such sources provide short- term funding only when long-term funding is already secure. Medium potenal. Sale of Stock (Ownership Stake) (6.6.9) We do not see this as being applicable so long as VRE remains under ownership by the government. Low potenal. Tax/Investment Credits (6.6.10) Not applicable. No potenal. Table E-6. (Continued).

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 171 Jefferson and Orleans Parishes from the West Bank of the Mississippi River near the St. Charles/ Jefferson Parish line and ending in New Orleans East at Industrial Parkway near the Michoud Assembly Center. The primary current interchange line is shown in Figure E-6. The gateway handles approximately 35 freight trains per day (about 1.7 million freight cars in 2011). The current volume of rail freight traffic routinely causes congestion and higher costs for rail carriers and impacts local community road users. Freight demand is projected to grow by 48% by 2038 (from about 13.1 million tons in 2010 to 19.5 million tons in 2038).40 Road traffic is also projected to increase substantially. So, both road and rail capacity must be expanded for this growth to take place. There are also three Amtrak trains a day through the gateway. Improvements to the rail infrastructure are needed to address the following: • Current freight demand routinely impacts both rail and road traffic, and NORG would not be able to accommodate future freight demand. • Antiquated rail control systems and interlockings, and local speed regulations lead to slow travel times through the Gateway (trains passing through the NORG are limited to 20 mph for both physical and regulatory reasons). • Some of the busiest rail lines go through residential and commercial areas at grade so that stopped trains block local traffic, including ambulances, school buses and normal vehicular traffic. • Flood gates limit emergency responsiveness (flood gates at various locations are closed up to 24 hours prior to and following storm events, limiting railroads’ ability to transport evacuees and emergency supplies). • Almonaster Bridge, owned by the Port of New Orleans Commission, is over 80 years old, subject to frequent unscheduled maintenance and is a source of delay. A series of studies are underway to identify rail and roadway improvement projects to upgrade the NORG and other infrastructure in Jefferson and Orleans Parish to increase regional com- petitiveness and enhance economic growth. Similar studies on improvements in the NORG have been studied multiple times over the past 35 years, though no effort has progressed as far as the current series of studies (environmental assessment stage). The program of study was expected to take three years to complete (2011–2014), though as a result of some delay, the studies are now expected in mid-2015. A number of alternative routes are being studied. Figure E-6 shows the major route alternatives and the location of major bridges in the impacted area. Potential Investments include • Improve alternative routes through the cities to 1) increase separation of rail and road traffic, 2) increase permitted train speeds, 3) provide additional spaces for staging train movements through the corridor and across the Huey P Long Bridge. • Provide improved train control systems and automate interlocking systems to reduce delays to trains. • Replacement or overhaul of the Almonaster road/rail Bridge (owned by the Port Authority Commission and carrying both a two-lane road and a double-track CSX rail line) over the industrial canal at the east end of the rail corridor (shown as a large dot in Figure E-6). The use of the New Orleans Public Belt rail line (shown as “Inner Belt” in Figure E-6) has been eliminated for various reasons (including difficult rail and highway traffic impacts, flood protec- tion issues, environmental and other concerns). The major route options under consideration in current studies include • Improvement of the middle-belt line and constructing a connection in the northwest quad- rant. This option requires acquiring new land along the route and is constrained by the sharp 40 http://fsjna.org/wp-content/uploads/2014/01/S38_New-Orleans-Rail-Gateway-Program_LTC2013.pdf

172 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects curve required for the connection, which would limit train speeds to 20 mph or less. This alternative would involve trackage owned by CSX and the New Orleans Public Belt Railway. • Reconstruction of the “Outer Belt,” the current major connection, to separate it from neigh- borhood road traffic and increase train speeds. This option, which involves raising the rail line and sinking streets, might create more physical barriers in a politically active upscale community. This alternative involves trackage owned by CSX and Norfolk Southern railroads. • Improve rail signaling and control systems to integrate train management, reduce trains wait- ing for clearance to proceed and reduce the time that trains are stopped in the urban area. This improvement involves facilities owned and operated by nearly all rail systems. Replacement of the Almonaster Bridge was an urgent local priority and has moved ahead, independent of the NORG project. While many options for replacing the bridge with a dif- ferent design (to improve horizontal clearances) were considered, the Commission decided to replace the Bascule design bridge in kind (similar to the one shown in Figure E-7). The cost for alternative designs was considered too high but Bascule bridge designs need to be lowered when there are no high winds. The Almonaster Bridge was lowered during Hurricane Katrina and was damaged by flood waters. Expected to cost about $160 million, financing for the replacement of this bridge was arranged by the Port Authority Commission, using some highway funds and with some contribution by CSX. The program of studies for the NORG project is funded in partnership between public and private entities. Partners in the program are the Federal Railroad Administration (FRA) and the Louisiana Department of Transportation and Development (DOTD), in coordination with the New Orleans Regional Planning Commission (RPC), and the railroads operating in the New Orleans metropolitan area41 through the Association of American Railroads (AAR). Source: NORG Program, “The Right Track: Official Program Newsletter,” June 2012, Vol. 1, No. 1. http://www.dotd.la.gov/administration/public_info/projects/norg/newsletters/Volume%201,%20Number%201%20-%20June%202012.pdf Inner Belt Middle Belt Outer Belt Almonaster Bridge Huey P Long Bridge Figure E-6. Map of NORG alternative routes.

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 173 Project Issues In addition to political and social issues related to the route alternatives, the project is also dealing with a proposal to increase passenger rail service dramatically—from the current three passenger trains per day to as many as 64—a tremendous increase (some would be “high-speed” trains, some conventional and commuter services to Baton Rouge, the state capital, and maybe other places—they would all travel through the NORG corridor to a passenger station in the cen- ter of New Orleans). While there are currently no firm plans for such dramatic increases in rail passenger services, the FRA is asking NORG to plan for the higher figure over the next 20 years. This level of rail passenger services will require substantial increases in rail capacity, more than is available in any alternative currently being considered. If it is necessary to provide capac- ity to more than triple the number of train movements, current estimates are that project costs could more than double. Political issues are likely to play a significant role in the NORG project for several reasons. First, the Inner Belt route (the current major route for east-west through traffic) runs through a higher-income neighborhood while the middle belt runs through a lower-income neighborhood and an industrial area. Several local and state politicians live in the higher-income neighborhood, so the route selection is likely to draw more than the usual political attention. Another political issue will be the availability of state funding. The state’s limited resources are still stretched by recovery from the effects of the hurricane. In addition, the state legisla- ture has been more than passively anti-rail, passing legislation that required any state-match in federal programs be paid by the railroads, not by the state. This prohibition on the use of state funds for freight rail projects persists in current legislation. There is also political opposition to high-speed rail projects that have been mooted in the area, including the FRA’s forecast of large increases in passenger rail service. Many politicians think the state has many other issues to address (e.g., education, health, highways) before they can consider rail passenger services. Finally, while the freight railroads have indicated that they are ready to participate in the project, each project would have to pass internal rate-of-return hurdle tests and must compete with other railroad projects. The participating freight railroads have contributed to the cost of the current feasibility studies but say that participation in actual projects will be related to the benefits they perceive to be generated by the project. The freight railroads do have a lot to gain from reduced operating costs, improved reliability and faster movement through the gateway, but they also recognize that many of the benefits from these projects will accrue to the public in reduced congestion, lower noise and environmental impacts, and improved public safety. 41 Railroads participating in the project are: Northern Santa Fe Railway (BNSF), CN, CSX, Kansas City Southern Railway (KCS), Norfolk Southern Railroad (NS), Union Pacific (UP), Amtrak, and the terminal switching railroad—owned by the City of New Orleans—the New Orleans Public Belt Railroad (NOPB). Figure E-7. Bascule design bridge.

174 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Anticipated Funding Requirements The NORG projects (excluding replacement of Almonaster Bridge) are expected to cost about $750 million and will involve rail, highway, flood protection and community-related elements. Current estimates are that there is less than 5% difference in total project costs between the two primary alternatives. But if the project has to cater to the projected 20-year growth in passenger traffic, both alternatives and additional investment may be needed. Since route alternatives have not been determined yet, funding proportions by participants have not been determined. It is expected that the railroads will participate in proportion to the benefits they receive, but accounting methods for determining those benefits have not been agreed. Currently, of the $750 million (excluding investment to meet the high passenger pro- jections), it is estimated that the railroads will provide about $115 million (15%) of the overall funding, the Parishes are expected to provide about $115 million (15%) with the remaining funding coming from other sources. Considering the likely categories of investment needed to increase capacity, reduce rail/highway interfaces and cater to the physical characteristics (flood control) of New Orleans, it is likely that the investments will include spending for (in order of likely investment size): 1. Changes to highways and streets, including overpasses and underpasses, and perhaps eleva- tion or depression of main roads and for flood control and environmental facilities; 2. Land acquisition for additional trackage, and land related to cuts and fills needed to accom- plish vertical separation of rail and road networks; 3. New rail infrastructure and facilities; 4. Signaling and train control equipment, including electrically operated interlockings, wayside sensors and related facilities; 5. Office or headquarters equipment and computers to manage rail routes and control inter- lockings, and provide supervisory capabilities; 6. Signal and train control equipment on rolling stock. In this list, Items 1, 2 and 3 can be related to a specific location; train signaling investments (Item 4) can also be location related but must operate as a part of a system, so this investment can be staged but would cover the entire route. It is likely that the freight railroads will want to control investments for Items 4, 5 and 6. Government bodies would likely be responsible for Items 1 and 2 and the cost of investments in Item 3 (new tracks) might be shared. Anticipated Funding Model Since a package of investments to achieve the desired objectives for NORG has not been devel- oped, the funding model to be used has not been determined. It is anticipated that the freight railroads will pay for some improvements, the parishes for some, and the rest will be derived from federal and as yet undetermined sources. State participation seems problematic for rail facilities but may be politically acceptable for highway, environmental, flood protection and perhaps land acqui- sition investments. It is anticipated that the investments will be divided into packages of $10 mil- lion to $50 million each and financing for those packages will be determined as they are agreed. There are currently no plans to form an authority to acquire and revamp rail facilities in the New Orleans area, as was done for the Alameda Corridor in California, though these could evolve over time. Potential for Alternative Funding and Financing Mechanisms Table E-7 shows how the funding and financing mechanisms could apply to support funding of the New Orleans Railroad Gateway project.

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 175 Service or Asset-Related Revenue (Funding) Mechanisms Potenal for NORG Market Pricing to Maximize Fare Box Revenues (6.4.1) Freight railroads already use market pricing for the most part. Rail prices are typically quoted across railroads and interchanges. Railroads have longstanding and o„en elaborate interchange and cost agreements where detailed cost accounng provides the basis for charges between each other for interchange services, including switching. Market pricing for interchange movements (e.g., higher prices for more urgent or valuable train movements or penales for delayed movements) would require changes in these agreements. Such changes might be facilitated by formaon of a NORG authority or enterprise unit (e.g., by forming an Alameda Corridor-like authority or perhaps expanding the role of the New Orleans Public Belt Railway) to operate the gateway on a fee basis. In this type of structure, a new enty (say, the NORG Authority) would acquire all the trackage necessary to implement the proposed investment program, then sell bonds, make improvements and set up service contracts with each railway. At the present me, this alternave appears unlikely, in part because the authority or enterprise would have to be capitalized in some way to acquire the private tracks of many different rail companies. It is difficult for the private railroads to meet to reach agreement to set up a jointly owned private enterprise and liŽle reason to do so absent a commitment from government for substanal contribuons in the way of land and road, flood control and other investments that contribute to social benefits. Potenal unlikely. Premium Services to Increase Service Revenues (6.4.2) For freight, this is simply an expansion of market-based pricing – charging higher prices for special service (e.g., expedited service for container trains) or for charging different prices for certain types of trains or commodi­es (e.g., for unit coal trains, unit oil trains, or unit grain trains). This is discussed above in market pricing. Poten­al unlikely. On-board and In-Sta­on Retail Concessions (6.4.3) The freight equivalent is selling addi­onal services, usually through specialized facili­es. This source of revenue is already available to private freight services. Private railroads can set up specialized terminals for containers and bulk commodi­es. It is possible that the forma­on of an overall NORG authority or jointly owned private enterprise could expand the opportunity to set up new facili­es in what are now NOPB lines and Port of New Orleans land. Such capabili­es could provide some incen­ve for the private railroads to form such authori­es/enterprises. Public par­cipa­on may be poli­cally difficult. Medium poten­al. Track Access Charges (6.4.4) Depending on how the improvements are made, they will probably be paid for through some sort of track-access charging system, possibly similar to Alameda. Railroads typically charge an access-type fee for the use of key facili­es. If a NORG Authority or Enterprise were established, it would likely base its charges on track-access fees. With the notes about the poten­al for market pricing above (e.g., for expedited service), and a project that provided sufficient capacity to be able to offer such expedited services, pricing could be both cost based and compe­­ve. High poten­al. Table E-7. Potential application of alternative funding and financing mechanisms for NORG. (continued on next page)

176 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Service or Asset-Related Revenue (Funding) Mechanisms Potenal for NORG Selling or Leasing Access to Railroad Rights of Way (6.4.5) (The operator and the owner may be different, which is o†en true of passenger operators. The benefits go to the owner.) See note about revenue from selling addional services above. Most freight railroads currently sell easements to their right of way for electrical power, fiber opcal lines and other uses. Most of the lines in the NORG have associated with them either public-use roads that share the right of way, or access roads for the use of authorized vehicles. Recent work on the Huey P Long Bridge expanded the combined rail and highway bridge to three highway lanes each way. The bridge has two railway lines. High potenal. Commercial Property Development/Joint Development (6.4.6) Railroads are commercial enes and already rent/sell and develop property they own. NPBR does the same thing. It might be argued that formaon of a New Orleans Railway Authority or joint enterprise might permit greater development of land resources; this is not likely unless NOPBR lines and port- side facilies were included, and that this inclusion permied more intensive development. A final consideraon is that the rail lines in queson go through high-value urban neighborhoods, which are already developed, so lile addional money is likely to be raised from this source. Low potenal. Branding, Sponsorship, and Naming Rights (6.4.7) This source appears to have minimal value for NORG rail lines, even if an authority or joint private enterprise were formed. Low potenal. Public Revenue (Funding) Mechanisms Potenal for NORG Incremental Property Tax Revenues (for Tax Increment Financing) (6.5.1) Railroad property is already subject to property taxes; addional tax revenue may drive rail traffic to other gateways. Other private property taxes could be increased in the parishes to fund public transport investments. By the state’s constuon, the State of Louisiana sets the property valuaon rate for the state; local parishes approve the “mill-rate” or the tax rate based on the valuaon through a ballot iniave. Few parishes in Louisiana have approved such iniaves over the past 15 years (two out of six a†empts). Low potenal. Special Assessment District (SAD) Fees (6.5.2) Formaon of an authority or private enterprise would allow the authority to sell bonds or raise fees. The state could help in the formaon of the enterprise or authority by the formaon of a special assessment district. Medium potenal. Impact Fees Charged to Property Developers (6.5.3) Not under consideraon. Low potenal. Staon Parking Charges (6.5.4) Generally not applicable for NORG. Railroads and rail customers are already charged extra for delays and storing cars in key facilies. Low potenal. Road Tolling/Congeson Charging (6.5.5) Road tolls and road congeson charging could be used to support shared facilies. High potenal. Heavy Goods Vehicle (Truck) Charges (6.5.6) For facilies over which trucks operate, a special heavy goods vehicle charge could help increase available funds. High potenal. Table E-7. (Continued).

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 177 (continued on next page) Public Revenue (Funding) Mechanisms Potenal for NORG Gas Tax (6.5.7) Gas taxes could be used to support both road and rail investments but are polically difficult to increase. The NORG is a local investment. Increasing state or federal gas taxes to support local investment efforts, especially those oriented to improving rail freight traffic flows, even if there are large and even overwhelming local public benefits, is problemac. High potenal but unlikely. Car Registraon Plate Aucon (6.5.8) Like increases in gas taxes, increases in registraon fees could be used to support both road and rail infrastructure investments. It is polically difficult to increase taxes, car ownership costs and other mechanisms to support local infrastructure investments. Medium potenal but unlikely. Motor Vehicle Registraon Fees (6.5.9) See comments above. Difficult to pass for a locally oriented investment. Medium potenal but unlikely. Vehicle Mileage-Based User Fee (6.5.10) Vehicle mileage-based user fees could be used to support these and other rail and transit-related projects. A one cent per vehicle mile user fee in Louisiana would raise about $465 million in revenue that could be used to finance not only the NORG project but also transit and road maintenance projects throughout the state. Implementaˆon of such user fees or tax structures is poliˆcally difficult. High potenˆal but unlikely. Payroll Taxes Used for Transport (6.5.11) Local payroll taxes could be used to raise general funds for transport projects. These have not been considered for the NORG project. Low potenˆal and unlikely. Sales Tax (6.5.12) Similar to the other tax-related issues. Not likely to be applicable for a local project that improves rail performance, even if there are large road transport and other social benefits. Low potenˆal and unlikely. Carbon Tax or Credits (Cap-and-Trade) (6.5.13) Not applicable in New Orleans or Louisiana and not appropriate for reasons given above. Low potenˆal and unlikely. Financing Mechanisms Potenˆal for NORG Public-Private Partnerships (PPPs) (6.6.1) The NORG projects will be some type of public-private partnership. The private rail systems have already commi—ed to fund their share of the investments required. It is expected that the public share of necessary investments will be funded by convenˆonal sources. The final form of the package of improvements and routes will have to be approved before the parˆes will be able to invesˆgate how these investments are to be structured. High potenˆal. Equipment Trust Cerˆficates (available to private companies) (6.6.2) Private railroads may use this mechanism to finance equipment that operates over the NORG lines. Railway rolling stock is not really a significant part of the NORG effort. Low potenˆal. Operaˆng Lease Cerˆficates (available to private and public companies) (6.6.3) The parˆcular form of financing the investments needed for the rail improvements to NORG will depend on the route selected and the mechanism developed to structure the investment program. It is likely that some equipment (e.g., construcˆon and maintenance equipment) will be leased for the work. Some faciliˆes could be constructed on an operaˆng lease basis but it would depend on who owned the faciliˆes and the structure of how they were controlled. Medium potenˆal. Table E-7. (Continued).

178 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Financing Mechanisms Potenal for NORG Finance or Capital Leasing (private and public companies) (6.6.4) Capital or finance leases might be used, as with operang leases, depending on how the project is structured. Some elements of the project could be paid for by private railroads and leased to a public enty (e.g., an authority or other private enterprise) for joint operaon. This could be the best way to make improvements that will be financed in part by public grants but where the underlying property is privately owned. Medium potenal. Bonds with Public- Sector Backing (6.6.5) This is a likely source of investment funds for the project. The primary issue will be what authority or public agency is authorized to sell the bonds. High potenal. Corporate Bonds (available for private enes) (6.6.6) If the NORG project is structured as a private enterprise that could be capitalized by land and off-take contracts with the private railroads and perhaps some revenue stream commitment from state or local governments, the private enterprise could sell corporate bonds to finance necessary investments. High potenal if project structured as private enterprise. Mezzanine Financing (available to both private and public companies/authories) (6.6.7) This may well be used by construcon contractors to finance their outlay and by any closely owned joint private enterprise set up to facilitate the construcon of the set of investments needed to implement the NORG gateway improvements. Medium potenal. Short-Term Corporate Line of Credit Financing (6.6.8) It is likely that contractors will use short-term line-of-credit type financing to mobilize construcon acvies for the projects that will become part of the NORG improvement program. Low Potenal. Sale of Stock (Ownership Stake) (6.6.9) This could be the source of funding for a joint private enterprise or public/private authority where land transfers (either via tle or via leases) would be compensated by interest in the joint private enterprise. The joint private enterprise would use these assets to raise capital through the issuance of corporate bonds. Medium potenal. Tax/Investment Credits (6.6.10) Tax credits and investment tax credits would be used to reduce the cost of investments by the private railroads. They would not be useful to public agencies that do not pay taxes. Potenal depends on structure. Table E-7. (Continued). Case Study (Shared Rail Corridor): CREATE Program Project Overview Chicago is the nation’s primary rail hub—more rail traffic is interchanged between US rail- roads in Chicago than at any other location. Some 40,000 rail freight cars go through the region every day. It has also been and remains an important rail passenger center with many commuter, suburban intercity and long-distance trains providing more than 70 million passenger trips annually. The railroads and the city have grown up together over the past 150 years; its 3,000 miles of tracks are woven into the fabric of the region. In recent years (since about 1990) increased rail traffic, more container trains, more commuter trains and increasing population density have combined to form near gridlock during rush hours. Freight trains wait for commuter trains to complete their trips, blocking streets and causing congestion. Projections of future freight and passenger rail services have shown that something has to be done to prevent regional gridlock.

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 179 Private railroads, commuter authorities, and state and regional transportation authorities came together starting in the late 1990s to seek solutions to common problems. The Chicago Regional Environmental and Transportation Efficiency (CREATE) Program resulted from this effort. After extensive analysis, paid for jointly, a complex program under the CREATE umbrella was agreed. CREATE is a unique program formed by all of Chicago’s transportation stakeholders. CREATE’s stakeholders include the eight private freight railroads serving the region,42 Amtrak and METRA (the commuter rail carrier), all of which are represented by the AAR. They also include about 500 local community governments, represented by the Illinois Department of Transportation, and the City of Chicago, represented by CDOT. Figure E-8 provides information on CREATE projects. Working together, a program to enhance road and rail transportation performance was developed. The program includes the creation of low-interference rail corridors, changes in train routings, clearing a corridor for passenger trains, eliminating rail/rail and rail/road cross- ing bottlenecks—more than 70 projects in all—and a chronology or order for completing the 42 BRC, BNSF, CP, CN, CSX, IHB, NS, UP. Figure E-8. CREATE Projects.

180 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects projects. At the same time, the railroads formed a joint office, the Chicago Transportation Coor- dination Office (CTCO), to jointly manage and coordinate train movements and to analyze and respond to changes as the projects were implemented. The projects that make up the overall pro- gram were optimized in rail and highway traffic simulation models to ensure that each project and proposal contributed to the creation of capacity and improvement in train and vehicle flows, reduced congestion and improved air quality. Once the set of projects had been agreed, costs and benefits were estimated: capital costs were estimated at $1.534 billion. Based on the distribution of benefits received and the types of projects, the railroads agreed to invest $232 million. An important feature of the program is the role of IDOT/FHWA in developing an enhanced method to complete necessary environmental studies and expedite approvals. The Systematic Project Expediting Environmental Decision Making strategy (SPEED Strategy) is a way to han- dle the environmental impact analyses for all projects in an integrated way, allowing common assumptions about changes in emissions, traffic levels and other environmental impacts for the whole program. This approach reduced a common problem for individual project evaluations— segmenting the approval process does not recognize the combined effects of all projects. The SPEED Strategy allowed these combined benefits to be identified, computed and allocated to each project. This set of projects, projected costs and expected benefits was codified in a Feasibility Report, which also included a set of agreements and undertakings that defined how the projects would be implemented and managed as well as ownership and maintenance responsibility for the invest- ments when completed. The agreements outlined a stringent mechanism for changes in the project list, and defined a governance structure for the program. This structure, which is defined in joint statements of understanding and related legal agreements, includes: • The CREATE project governance structure is headed by a three-member Stakeholder Com- mittee whose chairman is appointed by the railroads, and other members include the Com- missioner of CDOT and the Secretary of IDOT. All decisions by the Stakeholder Committee must be unanimous. All projects fall to one of three CREATE program Managers—one for railroad components; one for rail passenger components (e.g., METRA and Amtrak); the third for public components (e.g., rail/road grade separations, rail/road grade crossings). It is the responsibility of the Program Manager for changes and refinements in scope, sequence and other changes. • The Chicago Transportation Coordination Office is responsible for reviewing and updating rail operating assumptions as the projects are implemented and for coordinating train opera- tions in the region. They also advise on the impacts of changes in scope and any changes in the project structure. • A Project Office, retained by the AAR and responsible to the Stakeholder Committee, approves all final designs and provides accounting, engineering and schedule management skills to the Program Managers. • A Management Committee, composed of 11 members (all the railroads, AAR, IDOT, CDOT, and the CTCO), is responsible for approving any changes to the CREATE project list. All its decisions must be unanimous but can be appealed to the Stakeholder Committee. • A Public Information Working Group (with 11 members, as described for the Management Committee) is responsible for working with public groups, individual cities and others seek- ing information and changes in the CREATE project plan. The Joint Statement of Understanding describes how changes must be evaluated and when new environmental and other approvals are needed. It generally describes the responsibilities of the various parties and the authority of the governance organizations. Combined, the agree- ments and undertakings define a network of working arrangements without forming a legal entity (e.g., an authority or a private corporation). Given the number of entities involved and

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 181 the very special interests of all the parties, the requirement for unanimous agreement is probably one part of the structure that keeps all the parties talking with each other. Since the CREATE Program was created in 2003 or so, individual projects have proceeded and several revised “Feasibility Study” reports issued reflecting the changes. The text box below shows project progress as of the beginning of 2012. Project Issues The CREATE project is quite complicated and the project list is a result of many trade-offs between communities, railroads, passenger transport needs and highway departments. Some critical projects are relatively small and can be done with “conventional” state and railroad financing. Others are more comprehensive and need federal funding. So far, the funding has come from a number of state and federal sources, some through TIGER grants, others through line-item inclusion in federal transportation programs (e.g., SAFETEA-LU and ARRA-high-speed rail programs). Future funding is expected to come from similar sources. Chicago CREATE program At a revised estimated cost of $3.8 billion, CREATE aims to decrease vehicle con- gestion caused by the movement of freight trains through grade separations along busy corridors, and to improve the efficiency of rail traffic on four vital freight rail corridors and one passenger corridor, through the completion of 70 infrastructure improvement projects. The breakdown includes 25 overpasses or underpasses, six flyovers, 36 projects focused on upgrading the tracks, signal- ization and control switches, and three other projects. Upon completion, CREATE is estimated to result in benefits of $28.3 billion over 30 years after project com- pletion. As shown below, funding received by January 2014 had amounted to $1.2 billion, leaving a funding gap of about $2.6 billion yet to be filled. Breakdown of Funding Received by CREATE as of January 2014 Partners Funding (millions) Private Railroads $234 Chicago DOT $10.1 Illinois DOT $410 Federal Sources American Recovery and Reinvestment Act: High Speed Rail $133 TIGER IV Grant $10.4 TIGER I Grant $100 SAFETEA LU Projects of Naonal and Regional Significance $100 Federal Rail Line Relocaon Funds $1.9 Pre CREATE funding (various sources) $236.6 Total $1,236 Source: CPCS analysis of CREATE Program Overview, January 2014. Available at: http://www. createprogram.org/linked_files/2014_1_16_CREATE%20Overview.pdf

182 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Railroad contributions are complicated by changes in ownership that continue to occur and by new legislation that requires new safety investments: railroads are required to install PTC train control capabilities, for example. This may change the mix of investment responsibilities. The length of the program may lead to public exhaustion (i.e., “another big construction proj- ect” or closure of a road crossing that has become a part of a favorite “shortcut”). The State of Illinois budget and its ability to finance new highway projects may also become an issue unless the state budget can be relieved of some of its pension obligations. Economic growth would certainly help increase funding sources but growth has been lower than expected. As a result, political issues are likely to continue to play a significant role in the CREATE project and may delay implementation. The railroads appear to be keen to keep the project moving and improvements from invest- ments made to date have helped increase capacity and ease flow restraints. Just the formation of CTCO (prior to CREATE) helped improve coordination and lead to improved routings for some trains through the Chicago railway network on a day-to-day basis. Anticipated Funding Requirements The CREATE project still needs an estimated $2.5 billion to complete the initial (and modi- fied) set of investments. Many of the project investment needs will continue to be funded through existing federal and state transportation programs and from the participating railroads. Some of the projects will require additional federal funding, which is anticipated to come from TIGER Grants, and from specific funding in line-item budgets in US DOT transportation bud- gets (extensions to the SAFTEA-LU-type bills). State funding is expected to continue to come from existing IDOT spending authority. While the state’s ability to issue transportation bonds may be limited in the future by budgeting issues, the amounts required for most projects are expected to fit into the overall state budget. The participants in the CREATE program have committed to be responsible for future main- tenance and operating costs for projects they own—the owner of each infrastructure element is responsible for its maintenance and operation. This was an important consideration in the willingness of government authorities (FHA, IDOT, and CDOT) to pursue many road- and rail- related projects. The railroads committed to be responsible for maintaining and operating the projects on their property. Anticipated Funding Model The state has implemented a number of changes to its tax laws, including increases in income taxes, extra excise taxes, higher corporate taxes, changes in inheritance taxes, increased licens- ing fees and “sin” taxes. More changes in the tax code are anticipated but the shape and form of Illinois tax structures is a larger political issue than the CREATE program. CREATE does not rely on any specific funding mechanism and is not limited by these issues. The railroads pro- vide their own funding as a part of normal financing operations. CREATE is not authorized to issue any debt instruments or use any financing mechanisms. These are the responsibility of the participants. Potential for Alternative Funding and Financing Mechanisms Table E-8 indicates how the funding and financing mechanisms could apply to support fund- ing of the CREATE project.

Service or Asset-Related Revenue (Funding) Mechanisms Potenal for CREATE Market Pricing to Maximize Fare Box Revenues (6.4.1) Freight railroads already use market pricing for the most part. Rail prices are typically quoted across railroads and interchanges. Railroads have longstanding and o„en elaborate interchange and cost agreements where detailed cost accounng provides the basis for charges between each other for interchange services, including switching. Market pricing for interchange movements (e.g., higher prices for more urgent or valuable train movements or penales for delayed movements) would require changes in these agreements. Such changes fall outside the scope of the CREATE program because the railroad contribuon has been defined by project and for the program as a whole. Commercially viable projects within the CREATE program that involve private freight railroads will likely proceed under private railroad financing with revenue from commercial acvies. Low potenal. Premium Services to Increase Service Revenues (6.4.2) For freight, this is simply an expansion of market-based pricing – charging higher prices for special service (e.g., expedited service for container trains) or for charging different prices for certain types of trains or commodies (e.g., for unit coal trains, unit oil trains, or unit grain trains). This is not likely to affect funding of those CREATE projects that involve significant public benefits. Low potenal. On-board and In-Staon Retail Concessions (6.4.3) These revenues are not expected to affect much the ability of METRA and Amtrak to finance projects that are designated as their responsibility. Low potenal. Track Access Charges (6.4.4) Depending on how the improvements are made, they will probably be partly paid for through some sort of track-access charging system. Railroads typically charge an access-type fee for the use of key facilies. The Huey P Long Bridge, owned by the New Orleans Public Belt Railroad (itself owned by the City of New Orleans through the Public Belt Railroad Commission) charges access fees based on train movements and the tonnage of freight movements. If a CREATE authority or enterprise were established, it would likely raise revenue through track-access fees. With the notes about the potenal for market pricing above (e.g., for expedited service), and a project that provided sufficient capacity to be able to offer such expedited services, pricing could be both cost based and compeve. High potenal. Selling or Leasing Access to Railroad Rights of Way (6.4.5) (The operator and the owner may be different, which is o“en true of passenger operators. The benefits go to the owner.) See note about revenue from selling addional services above. Most freight railroads currently sell easements to their right of way for electrical power, fiber opcal lines and other uses. Most of the lines in the Chicago area already have easements and sales. Passenger operators (METRA and Amtrak) already lease out space in staons. Medium potenal. Commercial Property Development/Joint Development (6.4.6) Railroads are commercial enes and already rent/sell and develop property they own. Not expected to be a crical source of funding for CREATE projects. Low potenal. Branding, Sponsorship, and Naming Rights (6.4.7) This source appears to have minimal value for CREATE rail lines, even if an authority or joint private enterprise were formed. Low potenal. Table E-8. Potential application of alternative funding and financing mechanisms for CREATE. (continued on next page)

184 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Public Revenue (Funding) Mechanisms Potenal for CREATE Incremental Property Tax Revenues (for Tax Increment Financing) (6.5.1) Railroad property is already subject to property taxes; addional tax revenue may drive rail traffic to other gateways. Low potenal. Special Assessment District (SAD) Fees (6.5.2) This is a possibility for the public poron of funding needs. Polical issue involved in greater Illinois budget problems. Medium potenal. Impact Fees Charged to Property Developers (6.5.3) Not under consideraon. Low potenal. Staon Parking Charges (6.5.4) Staon parking charges could be increased by METRA and Amtrak and serve as a source of funding for the projects that affect them. Medium potenal. Road Tolling/Congeson Charging (6.5.5) Road tolls and road congeson charging could be used to support shared facilies. High potenal. Heavy Goods Vehicle (Truck) Charges (6.5.6) Heavy vehicles taxes may provide funding for public investments. High potenal. Gas Tax (6.5.7) Gas taxes could be used to support both road and rail investments but are polically difficult to increase. The CREATE project is a set of local investments. Increasing state or federal gas taxes to support local investment efforts, especially those oriented to improving rail freight traffic flows, even if there are large and overwhelming local public benefits, is problemac. High potenal but unlikely. Car Registraon Plate Aucon (6.5.8) Like increases in gas taxes, increases in registraon fees could be used to support both road and rail infrastructure investments. It is polically difficult to increase taxes, car ownership costs and other mechanisms to support local infrastructure investments. Medium potenal and unlikely. Motor Vehicle Registraon Fees (6.5.9) See comments above. Difficult to pass for a locally oriented investment. Medium potenal and unlikely. Vehicle Mileage-Based User Fee (6.5.10) Vehicle mileage-based user fees could be used to support these and other rail and transit-related projects. A one cent per vehicle mile user fee in Illinois would raise over $1 billion in revenue that could be used to finance not only the CREATE project but also transit and road maintenance projects throughout the state. Implementaon of such user fees or tax structures is polically difficult. High potenal but unlikely. Payroll Taxes Used for Transport (6.5.11) Local payroll taxes could be used to raise general funds for transport projects. These have not been considered for the CREATE project. Low potenal and unlikely. Sales Tax (6.5.12) Similar to the other tax-related issues. Not likely to be applicable for a local project that improves rail performance, even if there are large road transport and other social benefits. Low potenal and unlikely. Carbon Tax or Credits (Cap-and-Trade) (6.5.13) Not applicable in Chicago or Illinois at this me. Low potenal. Table E-8. (Continued).

Case Studies on Potential Application of Alternative Funding and Financing Mechanisms 185 Financing Mechanisms Potenal for CREATE Public-Private Partnerships (PPPs) (6.6.1) CREATE is a public-private partnership. In this case, it is defined by a set of contractual agreements, legally binding statements of understanding, and a set of oversight structures established by agreement. It does not have its own financing mechanisms. Rather, financing is provided by the parcipants as required by each project. High potenal. Equipment Trust Cerficates (available to private companies) (6.6.2) Railway rolling stock is not really a significant part of the CREATE effort. Private railroads may use this mechanism to finance equipment that operates over CREATE-developed facilies but this mechanism is not available to finance CREATE projects themselves. Low potenal. Operang Lease Cerficates (available to private and public companies) (6.6.3) The par cular form of financing the investments needed for the rail improvements to CREATE will depend on the project and the mechanism developed to structure the investment program. It is likely that some equipment (e.g., construc on and maintenance equipment) will be leased for the work. Some facili es could be constructed on an opera ng lease basis but it would depend on who owned the facili es and the structure of how they were controlled. Medium poten al. Finance or Capital Leasing (private and public companies) (6.6.4) Capital or finance leases might be used, as with opera ng leases, depending on how individual project elements are structured. Some elements of the project could be paid for by private railroads and leased to a public en ty (e.g., an authority or other private enterprise) for joint opera on. This could be the best way to make improvements that will be financed in part by public grants but where the underlying property is privately owned. Medium poten al. Bonds with Public- Sector Backing (6.6.5) This is a likely source of investment funds for the project. The primary issue will be the IDOT bonding authority. High poten al. Corporate Bonds (available for private en es) (6.6.6) Not applicable to CREATE. The individual railroads use corporate bonds (and stock sales) as a part of their overall financing strategy. Low poten al. Mezzanine Financing (available to both private and public companies/authori es) (6.6.7) This may well be used by construc on contractors to finance their outlay and by any closely owned joint private enterprise set up to facilitate the construc on of the set of investments needed to implement the CREATE improvements. Medium poten al. Short-Term Corporate Line of Credit Financing (6.6.8) It is likely that contractors have and will con nue to use short-term line-of- credit type financing to mobilize construc on ac vi es for the projects that are part of the CREATE process. It is not a significant por on of the railroad financing mechanism for CREATE. Low poten al. Sale of Stock (Ownership Stake) (6.6.9) Not applicable to CREATE. No poten al. Tax/Investment Credits (6.6.10) Tax credits and investment tax credits would be used to reduce the cost of investments by the private railroads. They would not be useful to public agencies that do not pay taxes. Medium poten al. Table E-8. (Continued).

Abbreviations and acronyms used without definitions in TRB publications: A4A Airlines for America AAAE American Association of Airport Executives AASHO American Association of State Highway Officials AASHTO American Association of State Highway and Transportation Officials ACI–NA Airports Council International–North America ACRP Airport Cooperative Research Program ADA Americans with Disabilities Act APTA American Public Transportation Association ASCE American Society of Civil Engineers ASME American Society of Mechanical Engineers ASTM American Society for Testing and Materials ATA American Trucking Associations CTAA Community Transportation Association of America CTBSSP Commercial Truck and Bus Safety Synthesis Program DHS Department of Homeland Security DOE Department of Energy EPA Environmental Protection Agency FAA Federal Aviation Administration FHWA Federal Highway Administration FMCSA Federal Motor Carrier Safety Administration FRA Federal Railroad Administration FTA Federal Transit Administration HMCRP Hazardous Materials Cooperative Research Program IEEE Institute of Electrical and Electronics Engineers ISTEA Intermodal Surface Transportation Efficiency Act of 1991 ITE Institute of Transportation Engineers MAP-21 Moving Ahead for Progress in the 21st Century Act (2012) NASA National Aeronautics and Space Administration NASAO National Association of State Aviation Officials NCFRP National Cooperative Freight Research Program NCHRP National Cooperative Highway Research Program NHTSA National Highway Traffic Safety Administration NTSB National Transportation Safety Board PHMSA Pipeline and Hazardous Materials Safety Administration RITA Research and Innovative Technology Administration SAE Society of Automotive Engineers SAFETEA-LU Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (2005) TCRP Transit Cooperative Research Program TEA-21 Transportation Equity Act for the 21st Century (1998) TRB Transportation Research Board TSA Transportation Security Administration U.S.DOT United States Department of Transportation