Evolving Debt Finance Practices for Surface Transportation (2017)

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Summary Most states issue debt to help meet transportation infrastructure investment needs. Eighty-three per- cent reported having outstanding debt for transportation investment purposes, and 95% report having the authority to issue debt for such purposes. However, among those states the amounts and types of debt issued vary. States use debt to leverage available resources and accelerate investments when compared with funding projects on a pay-as-you-go basis. Debt does not provide states with new or additional revenues but uses existing revenues to advance projects. A survey of state departments of transportation (DOTs) resulted in responses from 44 states, as shown in Figure 1 (see Appendix B for a list of respondents). Some questions resulted in fewer responses, as noted throughout this report. In addition to conventional debt issuance (e.g., general obligation and user fee- or tax-backed rev- enue debt), states and localities use a variety of debt mechanisms and tools to finance transportation infrastructure investment. These include grant anticipation borrowing such as grant anticipation revenue vehicles (GARVEEs); state infrastructure banks (SIBs); other revolving loan funds (RLFs); federal credit assistance provided through the Transportation Infrastructure Financing and Innova- tion Act (TIFIA) program and the Railroad Rehabilitation Infrastructure Financing (RRIF) program; private activity bonds (PABs); and various public–private partnership (P3) financing arrangements. These tools and associated financing trends offer opportunities to expedite delivery of transpor- tation infrastructure but also add challenges for states in terms of debt management policies and practices. Thus, the purpose of this synthesis is to update and extend the 2009 synthesis study— NCHRP Synthesis 395: Debt Finance Practices for Surface Transportation—by providing infor- mation obtained from relevant literature and an updated survey of state DOTs conducted with the assistance of the AASHTO Subcommittee on Transportation Finance Policy. This report focuses on the debt management practices of state DOTs. Except as specified, the report does not include information on local debt issuance and includes only limited information on debt issuance and practices of other state transportation agencies as reported by the DOT personnel surveyed. The references provide a list of websites for various additional resources related to trans- portation debt financing. In combination with information available in the literature, the survey offers several key findings: • Most states have some amount of debt outstanding for transportation investment (see Figure 2). However, the amount of debt and frequency of issuance vary substantially across states. • In aggregate across all states, the percentage of available funds used for debt service increased modestly during the last decade, as reported to FHWA (see Figure 3). • Although the percentage of resources used for debt service grew, the range across states varies (see Figure 4). Most responding states (27 of 41) used 10% or less of their 2015 transportation revenues for debt service. Three states reported using 25% or more of their 2015 transportation revenues for debt service. evolving Debt Finance PracticeS For SurFace tranSPortation

2 • In most states, provisions included in constitutions or statutes (or combinations of the two) govern the level and form of debt issuance, including revenues that may be used for repayment (see Figure 5). • More states have taken the advice of organizations such as the Government Finance Officers Association (GFOA) to develop formal policies that govern debt issuance and management. When asked if their state provides constitutional or statutory provisions for debt guidance, 37 (of 43) states responding said yes. Sharing states’ experiences, in particular those with a longer history of utilizing debt and related management tools, provides value for all states. However, each state operates within its own legal and institutional frameworks and faces its own financial challenges. Thus, specific practices may not be transferable, and what is appropriate for one state may not be so for others. Recognizing the constraints, states responding to the survey highlighted the following debt practices or policies: • Establish a dedicated fund from which to pay debt service. • Deposit one-sixth interest and 1/12th principal payments into a dedicated fund monthly to secure semiannual interest and annual principal payments. • If affordable, consider level principal rather than level debt service repayment structures to save interest costs and increase speed of repayment. • Consider programs such as TIFIA for large infrastructure projects, to benefit from potential ability to defer repayment and other flexible terms. • Seek flexibility in the enactment of new revenues to facilitate debt repayment. FIGURE 1 Survey respondents. State DOTs that responded to the debt synthesis survey are shaded; nonresponding states are blank. Yes, 37 No, 6 FIGURE 2 States with outstanding debt for highway or roadway investment (n = 43). FIGURE 3 Debt service as a percentage of total disbursements. Source: FHWA Highway Statistics Series Table F-2. Note: Debt service includes interest and bond retirement categories.

3 • Avoid excessively long-term debt issuance (more than 30 years), while considering the useful life of the financed asset(s) and maintenance requirements. • Improve planning processes for determining how capital programs are funded or financed. • Identify optimal projects for bond proceeds and consider suitability before issuing bonds to meet state match requirements. • Recognize P3 financing arrangements in formal debt policies and reporting practices. Responding states highlighted several areas where additional research would be helpful: • State DOT approaches to managing debt affordability and other debt management policies (see Appendix D: Proposed Research Needs Statement). • Advance construction and its relationship to debt financings. • Role of GARVEEs in financing transportation investments. • Institutional capacity building for transportation agency debt management. • Incorporating debt financing into transportation planning processes. • Decision-making processes related to selection of funding and financing options for transporta- tion investments. • Emerging opportunities for revenues. Since publication of the previous synthesis report on this topic, state agencies have increased their understanding of the role that debt and related tools can play in transportation investment. The increase in states with debt programs, the complexity of these programs, and the total level of debt are noteworthy. However, these changes should be considered in the context of the increasing demands of pay-as-you-go funding for federal and state projects, along with the age of transportation infra- structure and need for new capacity and renewal. The advent of increasingly flexible finance tools, including those offered or facilitated by the federal government, is an important development. How- ever, these alternative finance mechanisms remain niche tools relative to the significantly greater role played by conventional debt mechanisms in surface transportation. FIGURE 4 Percent of 2015 transportation revenues used for debt service payments (n = 41). Yes, 37 No, 6 FIGURE 5 States with constitutional or statu- tory provisions for debt guidance (n = 43).