Evolving Debt Finance Practices for Surface Transportation (2017)

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21 IntroductIon For the survey conducted as part of this synthesis project, respondents were asked to identify elements of their own debt management practices likely to be of most interest to other states. This chapter high- lights select survey respondents’ observations in terms of emerging and highlighted debt management practices and policies. Appendix C lists full state-by-state responses to qualitative questions. Emerging debt Management Practices Which State-Level Sources to Utilize for Debt Repayment States use a variety of mechanisms to identify state-level funding sources for debt repayment, includ- ing but not limited to statutory and constitutional provisions. Thirteen states (Alabama, Alaska, Arizona, Kentucky, Minnesota, Mississippi, New Hampshire, New Jersey, South Carolina, Texas, Utah, Virginia, and Wyoming) report the determination regarding debt repayment sources is made by constitutional or statutory dedication. Wyoming elaborates that state law requires that debt repay- ment come from a special levy of state property tax and “other funds available for the purpose,” which are unspecified. Mississippi reports that although some repayment sources are determined by statute, others are determined by the state treasurer’s office. New Hampshire reports the state legis- lature sets policy regarding debt repayment sources based on the use of the bond or loan proceeds. Minnesota’s constitution dictates that Trunk Highway Bonds are repaid from Trunk Highway Funds. Percentages of gas taxes (58.9%), registration taxes (58.9%), and motor vehicle sales taxes (35.3%) are dedicated by constitution and statute in Minnesota to the Trunk Highway Fund; if these revenues are insufficient, the legislature may levy a statewide property tax to cover the shortfall. Kentucky notes that for nonfederally funded debt, all Road Funds are available to pay debt service unless those revenues were directly appropriated to other entities in a budget bill or the funds are dedicated by statute. Road Funds are constitutionally dedicated to road and highway-related uses. West Virginia reports that for general obligation bond issues, any source of revenue in the State Road Fund can be utilized for repayment. Utah reports the state legislature adopts a bill authorizing the issuance of bonds for highways. The authorization includes the total amount of bonds that may be issued and specifies the projects or directs the bond proceeds to be used on projects prioritized by the Transportation Commission. Before authoriz- ing the bonds, the legislature analyzes and identifies the constitutionally and statutorily eligible source of funds for repayment and appropriates those funds annually. New York also reports the state-level sources used for debt repayment are subject to annual budget negotiations with the state legislature. Arizona, Arkansas, and Colorado report other statutory restrictions. In addition, Arkansas and Colo- rado note their sources of repayment can be determined by voters. In Arizona, the repayment source is determined by statute. Deciding to Issue Debt Backed by Federal or State Funding When deciding whether to issue debt backed by federal funding or state funding for transportation pur- poses, some states report no formal process, and 14 states report they do not use GARVEEs. Arizona chapter four HIgHlIgHtEd StatE dEbt PractIcES and PolIcIES

22 notes the state considers cash flow and the ability to service the debt, as well as the length of time remaining in the current federal aid program authorization, rating agency, and market outlook regarding Congressional action and the length of time remaining on any voter- approved tax, which may be the secondary pledge. Pennsylvania’s process for deciding whether to support debt with state or federal funding is done through discussions with the governor’s Office of Budget. The considerations include the amount of the debt service payments, the length of time for payment, and whether it is more beneficial than using current revenues for projects. Several states observe their process is largely driven by proj- ect type and funding eligibility because funding used on federal (GARVEE) bonds is more restrictive. Kentucky elaborates that the state uses GARVEEs for federal projects identified in the biennial highway plan and approved by FHWA and the state’s General Assembly. Kentucky’s Road Fund Bonds are issued for state-funded projects, identified in the state’s biennial highway plan, and approved by Kentucky’s General Assembly. Alabama specifies that the state bases the decision pri- marily on the level of state funding and whether funding is sufficient to support the proposed debt service pledge. Arkansas reports that the state General Assembly refers the matter to a vote of the people, which has approved GARVEE bonds and the Connecting Arkansas Program (CAP) bonds. As noted in the discussion on GARVEE debt in chapter three, the market appetite and cost, based in part on rating agency perspectives, hinges on the status of the federal program and certainty of future program outlays. At times when Congress has not authorized the federal aid highway program on a long-term basis, issuance of GARVEE debt has been challenged and rating downgrades of outstanding GARVEE debt have occurred (National Conference of State Legislatures 2010–2011). HIgHlIgHtEd StatE dEbt PractIcES and PolIcIES Some survey respondents offer highlighted practices and policies for consideration by other state DOTs. Vermont recommends a dedicated fund for transportation bond issuance debt service. Illinois adopts a level principal, as opposed to level debt service, repayment structure, which has saved interest expense over the life of the bonds because principal is repaid faster. Washington pays the state’s entire GARVEE debt service for the fiscal year at the beginning of the fiscal year. The state also directly deposits its state bond debt service, one-sixth of annual debt service, into the Bond Service Fund each month from September to February to ensure debt service principal and interest are available on the due dates. Arizona Highlighted Practices Factors to Consider in Determining Issuance of State versus Federal Backed Debt • Cash flow • Ability to find source to service the debt • Length of time remaining in current federal authorization • Rating agency market outlook regarding Congres- sional action • Length of time remaining on any voter-approved tax, which may be the secondary pledge Highlighted Practices General Debt Management • 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 provide for semiannual interest and annual principal payments. • If affordable, consider level principal versus level debt service repayment structures to save interest costs. • Consider TIFIA for large infrastructure projects to benefit from deferred repayment and other flex- ible terms. • Seek flexibility when enacting new revenues related to debt service repayment. States also note that they use a variety of financing mechanisms to enable management of inter- est costs relative to project needs. For example, New Hampshire is preparing to enter into a TIFIA loan to complete a major infrastructure project. The New Hampshire DOT has benefited from using

23 the available deferment period under TIFIA, using funds that otherwise would go toward principal repayment to fund paving and bridge projects that would have been delayed significantly without such deferment. The low interest rate also is favorable to the projected inflation that would have increased costs on the projects. Highlighted Practices Case Example Highlights from North Carolina’s GARVEE Legislation and FHWA Agreement • In accordance with North Carolina’s Memorandum of Agreement with FHWA, North Carolina may issue additional series of GARVEE bonds as long as the following conditions are met: – Project is programmed in the State Transportation Improvement Program (STIP) as a potential GARVEE project; and – Total outstanding principal will not exceed the total federal transportation funds authorized to the State in the prior fiscal year; or – Maximum annual principal and interest does not exceed 15% of the expected average annual federal revenue shown in the most recently adopted STIP. • Under North Carolina’s GARVEE legislation: – North Carolina is not obligated to pay GARVEE debt service, except from federal transportation revenues. – North Carolina and its political subdivisions do not pledge their full faith and credit or the taxing power to the payment of GARVEE debt service. Florida reports the state uses statutory practices of prior approval from the Executive Office of the Governor before entering into any P3 contracts and includes debt obligations in finance plans and cash forecasts. As a result of the recommendations by a Joint Study Committee, Georgia passed the Transportation Funding Act of 2015, which increased revenues while also giving flexibility in how fees generated can be used to offset debt. This allows Georgia DOT to maintain a manageable debt level while delivering a bigger program. Wisconsin’s informal practice is to maintain the debt- service-to-revenue ratio below 20%. Six states (Florida, Georgia, Illinois, Louisiana, Maryland, and Nevada) report that their DOT imple- mented noteworthy changes in their debt management practices in the last 3 to 5 years. Some states also report increasing revenues to reduce debt. Changes to revenue streams included recovering revenues from unclaimed property and increasing transportation tax rates. The noted debt management changes included the following: • Changing laws to allow for debt terms to 30 years; • Increasing the legislative cap on debt outstanding; • Enhancing postissuance compliance tracking and reporting on the use of tax-exempt bond pro- ceeds for complying with Internal Revenue Service regulations, resulting in the issuance of taxable bond proceeds to be used in situations in which tax-exempt proceeds would not be appropriate; and • Requiring a debt and contractual obligations report submitted by the DOT to state executive and legislative leadership in an effort to ensure the fiscal integrity of state transportation funds. States continue to advance their practices for debt management as the mix of debt mechanisms and fiscal challenges necessitate.