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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2022. Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt. Washington, DC: The National Academies Press. doi: 10.17226/26422.
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2022. Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt. Washington, DC: The National Academies Press. doi: 10.17226/26422.
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Page 2
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2022. Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt. Washington, DC: The National Academies Press. doi: 10.17226/26422.
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2022. Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt. Washington, DC: The National Academies Press. doi: 10.17226/26422.
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Page 4
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2022. Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt. Washington, DC: The National Academies Press. doi: 10.17226/26422.
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Page 5
Page 6
Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2022. Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt. Washington, DC: The National Academies Press. doi: 10.17226/26422.
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2022. Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt. Washington, DC: The National Academies Press. doi: 10.17226/26422.
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1   Objective of this Guidebook This guidebook provides surface transportation debt-financing practitioners with a detailed step-by-step guide to the debt issuance and management process and highlights a diverse suite of effective practices issuers can use to inform their decisions. By using debt, a trans- portation agency can complete a capital project with a repayment schedule that spreads the cost of that project over its useful life, while the purchaser of the debt receives a reasonably reliable source of investment income. Many factors govern debt issuance, including statu- tory authority, project and/or program needs, federal rules and regulations, and the economy. This guidebook describes the federal institutions and tools available to state and regional debt issuers, and provides guidance and effective practices for each phase of the debt issuance and management process, including the following: 1. The decision process—planning for debt issuance 2. Individual transaction preparation and development 3. Marketing and placement of individual transactions 4. Post-issuance compliance strategy These sections are described in more detail in this executive summary. Appendices provide additional reference materials for practitioners. Need for this Guidebook Prior studies identified challenges currently facing surface transportation agency debt management professionals. These challenges include the following: • Accessing complete information about the state’s or agency’s comprehensive debt obligations, making it difficult for issuers to effectively do their jobs; • Responding to economic uncertainty following economic downturns, uncertainty sur- rounding federal funding and new federal tax reforms; and • Technological advances that have impacted traditional revenue sources like the gas tax. To address these challenges this guidebook aims to provide practitioners guidance on how to effectively manage the specific, day-to-day duties of their role (Figure S-1). National Context for Debt Issuance While states, municipalities, and public authorities are the primary issuers of debt for surface transportation, federal agencies and national entities also have roles in the following areas: • Managing administration and oversight for state and local debt financing, • Establishing regulations for all phases of debt issuance, S U M M A R Y Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt

2 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt • Rulemaking, and • Developing and disseminating guidance to issuers and investors. These agencies/entities include the Securities and Exchange Commission (SEC), the Municipal Securities Rulemaking Board (MSRB), the Internal Revenue Service (IRS), the Governmental Accounting Standards Board (GASB), the Financial Industry Regulatory Authority, and the Securities Industry and Financial Market Association (SIFMA). Several federally authorized debt programs administered by the U.S. DOT enable state and municipal issuers to secure credit assistance. These programs include the Transportation Infrastructure Finance and Innovation Act (TIFIA) credit program, the Railroad Rehabilita- tion and Improvement Financing (RRIF) program, and Private Activity Bonds (PABs). In addition, Section 129 Loans, Grant Anticipation Revenue Vehicles (GARVEEs), and Grant Anticipation Notes (GANs) permit issuers to borrow against future federal funds. Phases of Debt Issuance and Management This guidebook uses a phase-based framework to organize the decisions that practitioners must make to issue and manage their debt. Figure S-2 depicts the four phases. Phase 1: The Decision Process—Planning for Debt Issuance Phase 1 addresses the decisions that issuers must make to establish the foundation of their program, including: • Determining the need to issue debt; • Developing debt management policies as well as debt affordability studies to establish guid- ance for debt programs and respond to statutory and regulatory parameters and constraints; Figure S-1. Challenges and solutions addressed in this guidebook. The Decision Process—Planning for Debt Issuance Individual Transaction Preparation and Development Marketing and Placement of Individual Transactions Post-Issuance Compliance Strategy Figure S-2. Phases of debt issuance and management.

Summary 3   • Determining financing approaches and debt types in addition to aligning the type of debt with surface transportation priorities and policies; and • Incorporating iterative learning from previous transactions to inform the debt strategy, including market analysis. Each of these decisions is described below. Determining the Need to Issue Debt Debt typically helps surface transportation agencies advance program goals and should be aligned with an agency’s long-term plan and, if a state agency, the agency’s statewide transportation improvement program. A variety of factors, including state policies and rules, credit ratings, capital needs, and reimbursement capacity, must be considered when deter- mining whether it is appropriate to issue debt. Developing Debt Management Policies Issuers should consider how statutory and regulatory parameters determine (1) roles and responsibilities for debt issuance within the agency or state and (2) allowable debt limits. The distribution of roles and responsibilities for debt issuance and the allowable debt limits or restrictions will inform the methods and tools issuers utilize to establish the foundation of their debt program. Methods include establishing processes for collaboration and commu- nication within and across agencies and developing analytical tools such as debt affordability studies. Debt policies serve as a valuable framework for organizing a debt program and should be tailored to the program’s needs, regulatory constraints, and long-term surface transporta- tion priorities. Debt policies vary greatly across surface transportation agencies. Determining Financing Approaches and Debt Types A variety of debt-financing mechanisms are available to surface transportation agen- cies. Practitioners should evaluate what debt and financing mechanisms are best suited to achieve their goals. The spectrum of approaches to defining a debt strategy ranges between programmatic and project-driven approaches: • In a project-based approach, debt is issued to finance a specific project. Approaches will vary greatly across states and agencies, depending on, among other things, availability of funding alternatives and reliability of sources of payment. • In a programmatic approach, issuers regularly issue debt to finance their programmatic needs—issuances are not tied to specific projects. • A hybrid approach is defined as a state DOT or other agency regularly issuing con- solidated transportation debt to finance a broad suite of programmatic needs while the proceeds for each issuance are utilized for specific projects. Implementing Iterative Learning Debt strategies do not remain static over time as they continually evolve based on learning from past experience and market analysis. Through each experience, debt management staff can learn ways to improve each stage of the process and subsequently redefine their strategy, method, and tools to produce better outcomes to meet the goals of the program. To learn from issuances and integrate the lessons learned into a debt management strategy, issuers can seek guidance from outside professionals, particularly financial advisors (FAs), to provide insights and propose new ways of working through the four phases of debt issuance and management. Market analysis is also integral to programmatic learning and helps the issuer continue to refine the program’s debt strategy to meet their goals. Market analysis is an iterative process, which allows practitioners to gain a sense of where their agency fits within the wider municipal securities market.

4 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt Phase 2: Individual Transaction Preparation and Development Phase 2 addresses the following decisions that issuers must make to prepare an issuance, which will be influenced by the outcomes of Phase 1: • Determining timing and amount of the issuance, • Determining the method of sale, • Confirming the debt approach, • Soliciting and utilizing professional support, • Selecting and engaging with credit rating agencies, and • Developing relevant debt documents. Determining Timing and Amount of the Issuance Two important factors influence the timing of debt issuance: (1) when the debt proceeds are needed to finance programs or projects and (2) market conditions, which affect the total interest cost. The amount of the debt issuance will be determined both by the available capacity, based on legal or policy limitations and the project and/or programmatic needs. The approach for determining the timing and amount of an issuance will vary based on the characteristics of the debt program. Collaboration and communication have been identified as effective practices for determining the timing and amount of issuance, and debt calendars and other information sharing tools like databases and web-based forecasting tools have been identified as effective tools to support this process. Determining the Method of Sale When issuing debt, practitioners must consider which method of sale to use for the bond offering to maximize the value to the issuer. Practitioners can elect two primary sale methods: competitive (when underwriting firms submit bids for the bond offering and the agency gen- erally selects the firm with the bid with the lowest interest rate) or negotiated (when the issuer selects an underwriter prior to formalizing the terms and conditions of the offering). Prior to the offering of the bonds to potential purchasers, the underwriter and issuer agree on a proposed pricing scale and after the order period closes, both parties review and possibly adjust the pricing. The strategy for determining the method of sale varies based on statutory and or policy parameters of the program and type of debt, among other factors. The evaluation of historical issuances and market research can help determine the method of sale. FAs can assist in this decision process. Issuers can also utilize the MSRB’s Electronic Municipal Market Access platform to find useful resources for market research. Confirming the Debt Approach The debt approach comprises the type of debt, the revenue pledge, the interest rate structure (fixed or variable), and the tax status (tax-exempt or taxable). Methods for implementing the debt approach strategy greatly vary across programs. Effective practices are typically based on efficient internal communication, internal research on historical issuances, and market analysis to determine the appropriate debt type, security, and debt structure. Soliciting and Utilizing Professional Support Support from outside professionals is critical to effective debt management and can be valuable at all phases of the debt issuance and management process. Outside professionals include but are not limited to FAs and bond counsel. Surface transportation debt practitio- ners may choose to solicit outside professionals to support specific issuances (or a certain debt series within their program) or to provide support to a program in general.

Summary 5   Selecting and Engaging with Credit Rating Agencies The purpose of engaging with credit rating agencies (CRAs) is to obtain one or more credit ratings, which are used by investors to gauge the credit risk of a debt issuance. The credit rating is the most important factor in determining the interest rate on bonds relative to other issuances sold at the same time. Communication with CRAs can maximize the credit- worthiness of the issuance. Approaches to communicating with CRAs range from robust and frequent communication (which is often adopted by frequent issuers) to providing a presentation to CRAs in advance of an upcoming issuance (which is often employed by infrequent issuers or for new credits). Developing Relevant Debt Documents Issuers are responsible for memorializing these pre-issuance decisions in the official statement and other relevant debt documents, such as the presale documents and the master bond indenture. An effective method for developing relevant debt documents is to leverage expertise from outside professionals solicited to support the development of the transaction. In many cases, debt documents used for previous, similar issuances can be used as models for developing new debt documents. Phase 3: Marketing and Placement of Individual Transactions Phase 3 addresses the following steps that issuers take to communicate the value of the issuance and close the transaction: • Developing a bond pricing strategy, • Developing a strategy for marketing individual transactions, and • Meeting closing requirements and guidelines. Developing a Bond Pricing Strategy Bond pricing strategies differ depending on whether issuers choose a competitive or negotiated sale. However, outside professionals—including FAs, bond counsel, rating agen- cies, auditors, trustees, and underwriters—offer valuable resources at this stage regardless of the sale type. To facilitate the pricing process, issuers must effectively communicate the needs of the program and purpose of the issuance and continue to negotiate the bond pricing structure to yield the optimal result. Tools to facilitate effective communication include hosting presentations to potential investors and CRAs about the bond pricing structure and working group meetings. Developing a Strategy for Marketing Individual Transactions A key prerequisite for successful negotiated and competitive sales is the issuer’s ability to educate the market about the value of their bonds. Outside professionals and publicly avail- able resources are helpful to inform marketing techniques and content. Issuers have several valuable tools at their disposal to communicate upcoming issuances, including presenta- tions, roadshows, and investor webpages. Meeting Closing Requirements and Guidelines Issuers must adhere to prescribed federal and state legal requirements when issuing debt in the municipal market. Key to successfully meeting closing requirements, regardless of the type of program, is to effectively track the information about the issuance after the issuance has been marketed and placed. This information needs to be documented to meet

6 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt state or federal requirements. To manage this information and this process, issuers often use templates and checklists. Phase 4: Post-Issuance Compliance Strategy Phase 4 addresses the following post-issuance compliance requirements and the steps issuers take to meet them: • Understanding post-issuance compliance requirements, • Managing post-issuance compliance based on the structures of different organizations (issuer-managed compliance versus state-managed or centralized compliance), • Managing capacity and resources, • Collecting and managing data, • Implementing strategies to track and adjust to changes, and • Establishing a repeatable and reliable process. Understanding Post-issuance Compliance Requirements When closing a transaction, issuers or trustees are responsible for making debt service pay- ments, appropriately utilizing bond proceeds for projects and programs, adhering to federal and state compliance requirements, and reporting on these requirements on an ongoing and regular basis. Most government-issued bonds are tax-exempt, meaning bond holders are exempt from paying federal—and in some cases state and local—income taxes on interest earnings, which yield a lower cost of financing for issuers. State and municipal issuers are required to adhere to the IRS rules to maintain tax-exemption. Issuers are required to file annual updated financial and statistical information and periodic notices of material events, and to pay arbitrage rebate payments periodically, if applicable. For the most complete view of federal disclosure requirements, practitioners should refer to resources from the SEC, MSRB, GASB, and the Government Finance Officers Association. Managing Post-issuance Compliance Based on Organization Structures In some instances, post-issuance compliance for surface transportation debt is managed by a centralized agency, particularly when there is a central state authority for debt issuance. In other instances, post-issuance compliance is entirely managed by the surface transportation agency, sometimes with oversight from outside agencies. Regardless of the structure of roles and responsibilities, collaboration and communication are essential to successfully meeting post-issuance requirements. Practitioners can benefit from using process-oriented tools at their disposal, including creating a cadence for meetings and appropriately managing calendars to effectively communicate deadlines. Managing Capacity and Resources Post-issuance compliance is an ongoing process, requiring issuers to dedicate the neces- sary time and resources to meet requirements over the life of the debt. The following effective methods allow most issuers with the capacity and resources to meet post-issuance compli- ance requirements: • Establish clear policies and procedures so employees have a path to follow during this process; • Leverage the time and expertise of outside professionals who have experience supporting issuers to meet tax, disclosure, and state-level requirements; and • Train staff to periodically update their policies and procedures (checklists, templates, and trainings can serve to streamline this process).

Summary 7   Collecting and Managing Data Issuers are expected to track relevant information and to succinctly report on data to meet compliance obligations. The following primary categories of data need to be tracked and reported: (1) investment earnings and rebate of arbitrage earnings to the U.S. Treasury and (2) use of bond proceeds and of bond-financed facilities. To effectively track data, issuers can leverage Excel-based tools; utilize a dissemination agent, a private firm that submits dis- closure documents to the IRS and Electronic Municipal Market Access (EMMA) for municipal issuers; or develop a database. Issuers are also required to annually disclose information relevant to their credit, which is reported to EMMA. Implementing Strategies to Track and Adjust to Changes Because federal, national, and state-level regulations dictate post-issuance compliance requirements, issuers need to be aware of changes to the requirements. With respect to tracking changes, issuers can rely on outside professionals and advisors to provide them with the necessary information on proposed and realized changes. With respect to adjusting to changes, issuers can adopt proactive steps, such as developing robust policies and proce- dures that standardize their program’s compliance process and make it easier for issuers to respond to regulatory changes. Establishing a Repeatable and Reliable Process To maintain an effective strategy for post-issuance compliance requirements, issuers should continue to revise their processes to not only respond to the changing regulatory environment but also to learn from past errors and missteps. Many issuers rely on post- issuance compliance policies to memorialize processes and continue to refine this phase of debt issuance and management. Following clearly established policies and procedures is the most effective defense to regulatory enforcement actions. Conclusion This research concludes that issuers can successfully navigate the phases of debt issuance and management and respond appropriately to the changing municipal finance landscape by adopting effective practices that are appropriate for their program and needs. Issuers’ prac- tices differ based on the frequency of issuances, the policies that govern debt issuance and management, and the available resources that practitioners must manage and meet require- ments, among many other factors. By adopting an issuer-oriented and phase-by-phase approach, the findings from this research as documented in this guidebook help issuers navigate the various decisions they must make and the alternatives available to them throughout the process by prompting them to reflect on which strategies, methods, or tools will help them meet their goals. The results of this research offer diverse and nuanced guidance on what practices add value in different contexts.

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The passage of Dodd-Frank and the COVID-19 pandemic are among the factors that have made the environment for tax-exempt debt issuers increasingly challenging and complex.

The TRB National Cooperative Highway Research Program's NCHRP Research Report 990: Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt is designed to help surface transportation agencies improve the development and execution of debt management policies, procedures, and practices.

Supplemental to the report are Case Studies, a Guidebook Presentation, and a Technical Memorandum on Implementation of Research Findings and Products.

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