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Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt (2022)

Chapter: Chapter 2 - National Context for Debt Issuance

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Suggested Citation:"Chapter 2 - National Context for Debt Issuance." 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:"Chapter 2 - National Context for Debt Issuance." 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 14
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Suggested Citation:"Chapter 2 - National Context for Debt Issuance." 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.
×
Page 15
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Suggested Citation:"Chapter 2 - National Context for Debt Issuance." 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.
×
Page 16
Page 17
Suggested Citation:"Chapter 2 - National Context for Debt Issuance." 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.
×
Page 17
Page 18
Suggested Citation:"Chapter 2 - National Context for Debt Issuance." 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 18

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13   2.1 Overview This chapter provides an overview of the national context for state surface transportation debt finance. While states, municipalities, and public authorities are the primary issuers of debt for surface transportation, federal agencies and national entities have a role in establishing and overseeing regulations, issuing guidance, and administering financing programs. First, this chapter describes the entities that regulate state and local debt financing for surface transportation, who are responsible for the following: • Managing administration and oversight for state and local debt financing, • Establishing regulations for all phases of debt issuance, • Rulemaking, and • Developing and disseminating guidance to issuers and investors. This chapter focuses each entity’s authority, rather than on the specific compliance rules these agencies issue. Second, this chapter describes federal loan programs and federally authorized debt instruments. This chapter provides issuers with an understanding of the federal landscape for surface trans- portation debt issuance and management, and directs issuers to additional information about specific financing programs. The chapter is organized as follows: • Section 2.2 discusses the responsibilities of national entities involved in issuing, overseeing, and providing guidance on the laws, regulations, and guidelines for municipal surface trans- portation finance. • Section 2.3 discusses the U.S. DOT financing programs, including federal loans and federally authorized debt instruments. 2.2 Laws, Regulations, and Guidelines This section describes the national agencies that establish laws, regulations, and guidelines that municipal issuers are responsible for following. The Securities and Exchange Commission (SEC), the Municipal Securities Rulemaking Board (MSRB), and the Internal Revenue Service (IRS) issue requirements for municipal securities. The U.S. DOT and the Governmental Accounting Standards Board (GASB) both issue rules for issuers, regarding specific debt programs and with respect to post-issuance reporting. The Financial Industry Regulatory Authority (FINRA) and the Securities Industry and Financial Markets Association (SIFMA) are both non-governmental bodies that advocate for fair markets and provide oversight. The roles these authorities perform are described in greater detail in the sections below. C H A P T E R 2 National Context for Debt Issuance

14 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt 2.2.1 Securities and Exchange Commission SEC is an independent federal agency. The SEC Office of Municipal Securities (OMS) performs two noteworthy roles: (1) it oversees MSRB and (2) it administers the rules pertaining to municipal securities. As an overseer of MSRB, OMS reviews MSRB filings and works closely with MSRB to coordinate rulemaking and enforcement. The rules that OMS issues and administers cover a wide range of topics that are important for how state DOTs and other transportation agencies report and disclose relevant information to investors about their debt. Topics include municipal advisors, municipal issuers, municipal securities brokers and dealers, and investors in municipal securities. Municipal issuers are subject to regulation by SEC with respect to disclosure. SEC has published a report on the municipal securities market that includes more in-depth information about the detailed roles of each institution.1 2.2.2 Municipal Securities Rulemaking Board MSRB is a self-regulatory organization that serves as the principal regulator in the municipal securities market and establishes rules that must be followed by municipal securities firms, banks, and municipal advisors that participate in municipal securities and advisory activities. The rules established by MSRB govern transportation agency debt issuance and management. Under the Securities Exchange Act of 1934 (Section 15B), MSRB is charged with designing rules that establish standards for professional qualifications, prevent fraudulent acts and practices, and support market transparency. MSRB is subject to oversight by SEC and may provide guid- ance and assistance to FINRA in the enforcement of MSRB rules. MSRB issues several important rules and information for issuers, including the following: • Rules, of which there are three types:2 – General rules mostly apply to the responsibilities of financial and municipal advisors; – Administrative rules mostly apply to MSRB itself, although some rules apply to financial and municipal advisors as well as dealers; and – Definitional rules cover definitions of key terms. • Information Facilities describe key resources such as the Electronic Municipal Market Access (EMMA) website—an open-source resource for practitioners to access published information about bond sales on the municipal market. • Notices update or provide interpretations of rules.3 • SEC Filings are proposed changes to rules that MSRB files with SEC for review and approval.4 Since MSRB rules are intended to protect investors, state and local governments, and other municipal entities, state debt managers should understand the general structure and principles of the MSRB Rule Book.5 A basic understanding of current rules can also help debt managers comprehend the intent and ramifications of new rules as they progress through the rulemaking process until SEC action. The MSRB Rule Book is a living document that is updated quarterly. While the specific contents of the rule book may change over time, the general framework and categories are relatively constant. Both the definitional rules and the administrative rules provide the high-level framework for MSRB operations but are of limited use beyond the MSRB structure. The general rules category includes rules that would be of greatest interest to state debt managers. In recent editions of the rule book, the general rules category has been organized into a series of subcategories. Table 2 presents these five subcategories, which help understand the relationship between various rules and the application of the rule book. 2.2.3 Internal Revenue Service An agency of the U.S. Department of the Treasury, IRS manages and issues rules for main- taining tax compliance with the Internal Revenue Code and serves as the nation’s federal tax

National Context for Debt Issuance 15   collection agency. Given that most transportation debt is tax-exempt, practitioners must be aware of IRS-issued rules and must continue to monitor the IRS webpage to be alerted when new rules are issued. Practitioners must adhere to these rules to maintain their tax-exempt status, which is important because tax-exemption enables issuers to finance infrastructure projects with lower-cost debt. Section 6.2.1 further discusses IRS rules and guidance relevant to transportation debt, and directs issuers to other resources that can help them meet IRS requirements. Due to the complexity of IRS rules, issuers rely on bond counsel and, if necessary, tax counsel specializing in compliance. 2.2.4 U.S. Department of Transportation Agencies of the U.S. DOT have published specific rules and guidance regarding certain trans- portation debt and financial assistance mechanisms authorized by federal law. FHWA issues guidance and rules on Grant Anticipation Revenue Vehicles (GARVEEs), which are securities issued in advance of and in anticipation of receiving future Title 23 federal- aid funding. FHWA rules on GARVEEs define the following: • What projects are eligible, • What costs can be paid for with the GARVEE proceeds, and • Reporting. The U.S. DOT Build America Bureau manages the following financing programs: • Transportation Infrastructure Finance and Innovation Act (TIFIA) credit assistance, • Railroad Rehabilitation and Improvement Financing (RRIF) loans, and • Private Activity Bonds (PABs) Center for Innovative Finance Support. Appendix A provides additional resources about these programs. 2.2.5 Governmental Accounting Standards Board GASB is an independent private-sector organization that issues rules for reporting and accounting compliance requirements. Governments, the accounting industry, and the capital markets recognized GASB as the official source of generally accepted accounting principles (GAAP) for state and local governments. States comply with GASB standards because through the audit process, auditors render opinions on the fairness of the financial statement presenta- tion in conformity with GAAP. Further, federal financing programs like TIFIA require financial reporting in accordance with GAAP even for private entities such as a concessionaire. Prac- titioners comply with GASB standards when providing audited financial statements in official statements; however, most GASB standards compliance activity occurs primarily during post- issuance (Phase 4 of this guidebook). Rule Subcategory Objective Professional qualification rules Establishes qualifications for conducting business Fair practice rules Protects investors, municipal entities, obligated persons, and the general public Uniform practice rules Provides for consistent behavior of regulated entities in the marketplace Market transparency Provides for full and timely flow of information to the marketplace Regulated entity administration Sets internal requirements for firms Source: Municipal Securities Rulemaking Board. “MSRB Rules & Guidance.” http://www.msrb.org/Rules-and-Interpretations/ MSRB-Rules.aspx Table 2. Municipal Securities Rulemaking Board—rules subcategories.

16 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt Per SEC’s report on the municipal securities market, “GASB is part of the not-for-profit Finan- cial Accounting Foundation (FAF) and was established by agreement of the FAF and ten national associations of state and local government officials in order to establish standards of financial accounting and reporting for state and local governmental entities. The FAF’s trustees are respon- sible for selecting the members of GASB and its Advisory Council, funding their activities and exercising general oversight—with the exception of GASB’s resolution of technical issues.” 2.2.6 Financial Industry Regulatory Authority FINRA—an independent, non-governmental, not-for-profit regulatory body—is authorized by Congress to safeguard investors through oversight of the broker-dealer industry. FINRA publishes and enforces rules governing the ethical activities of all U.S. registered brokers and broker-dealer firms as well as and fair practices in the securities market. 2.2.7 Securities Industry and Financial Market Association SIFMA is a trade association for broker-dealers, investment banks, and asset managers that advocates for fair and effective markets.6 SIFMA advocates for legislation, business policy, and regulation to improve the securities market. Issuers can utilize SIFMA resources (such as guidance and fact sheets) to stay aware of potential and pending regulatory changes. SIFMA members can join committees on specific topics (such as swaps) to learn from peers. 2.3 Federal Transportation Financing Programs Several agencies within the U.S. DOT, including the Build America Bureau, FHWA, and FTA, administer and oversee the rules and guidance for specific surface transportation financing pro- grams. This section provides an overview of these programs, emphasizing the different types of federal financing opportunities available to state issuers, which offer advantageous terms and low interest rates for borrowers. 2.3.1 Federal Credit and Loans (TIFIA/RRIF) The Build America Bureau, which promotes and supports transportation infrastructure devel- opment projects across the United States, provides management and oversight of the TIFIA and RRIF programs.7 TIFIA is a federal credit assistance program that finances transportation projects of national or regional significance.8 TIFIA provides credit assistance in the form of guarantees and lines of credit in addition to direct loans. TIFIA supports projects across the United States that provide public benefit and stimulate capital market investment, including transit-oriented development projects and rural infrastructure projects. For projects to be eligible for TIFIA credit assistance, projects must be included in the State Trans- portation Improvement Program (STIP); estimated costs must meet the minimum anticipated cost thresholds, which range from $10 million for transit-oriented development to $50 million for urban highway projects; and senior debt must receive a minimum of one investment-grade credit rating. Projects can be for transit, rail, highway and bridges, railroads, pedestrian and bicycle infrastructure, surface transportation elements of port projects, and state infrastructure bank financing. Some of the primary advantages of TIFIA credit assistance include low interest rates, long-term upfront and fixed financing, and flexible repayment terms, including allowing bor- rowers to make repayment up to 35 years after issuance. The RRIF loan program is also administered by the Build America Bureau and finances development of railroad infrastructure.9 Railroads, government-sponsored authorities and

National Context for Debt Issuance 17   corporations, state and local governments, limited-option freight shippers, and joint ventures with any of these entities are eligible to receive RRIF loans. RRIF financing loans can be used to finance 100 percent of the development of new rail facilities, improvements, rehabilitation and acquisition of rail or intermodal facilities and equipment, transit-oriented development, reimbursement of planning and design expenses, and refinancing of outstanding debt. Much like the TIFIA credit assistance, RRIF enables municipal issuers to finance with repayment up to 35 years and at low interest rates equal to the federal government’s borrowing costs. 2.3.2 Federally Authorized Private Activity Bonds In 2005, highways and freight transfer facilities were added to the types of projects that can be financed with PABs, which are tax-exempt. The Build America Bureau oversees the alloca- tion of PABs for these transportation purposes. The amount of PABs that can be allocated to highways and freight transfer facilities by the U.S. DOT is limited to the $15 billion authorized by Congress for eligible surface transportation projects. As of fall 2020, $13.27 billion in PABs have been issued for qualified projects. A municipal issuer, which does not need to be the state transportation agency, issues the PABs, and in turn the debt proceeds are loaned and used by private entities to complete a project.10 PABs provide access to lower-cost financing to facilitate increased private-sector involvement in financing and delivering transportation infrastructure. The Build America Bureau enforces additional rules for PABs, such as making sure that the funds are utilized for eligible projects, allowing TIFIA credit assistance holders to receive tax-exempt bonding authority under PABs, and making sure that 95 percent of the net proceeds of bond issues are expended on the identified qualified projects. 2.3.3 Grant Anticipation Revenue Vehicles and Notes GARVEEs and Grant Anticipation Notes (GANs) are financing tools that leverage fed- eral transportation funds. FHWA offers guidance and technical assistance to state issuers for GARVEEs and GANs.11,12 Both are debt vehicles by which states issue debt and pay debt service, which is reimbursed to the state transportation agency using Title 23 (highway) and Title 49 (transit) federal-aid funds, respectively. The financed project must be eligible for federal-aid highway funding and be part of STIP. States may issue GARVEEs. There is significant flexibility in the use of GARVEEs because a state transportation agency can work with FHWA to authorize GARVEEs for specific projects (known as a Direct GARVEE) or use the bonds for any authorized project as the need arises (known as an Indirect GARVEE). GARVEEs can result in project acceleration and improve the state’s ability to obligate its federal highway apportionments each year. Similar to GARVEEs, GANs are authorized for transit project use in anticipation of future Title 49 federal-aid transit funds that are allocated by formula (Section 5307) or by project (Sec- tion 5309). These transit debt mechanisms are known as GANs because they utilize federal-aid funding under Title 49, not Title 23, and do not include debt-related financing costs such as interest and issuance costs. Further, because Title 49 formula funds are subject to the annual appropriation process, GANs are issued for no more than 2 years. GANs with a maturity longer than 2 years can be secured if a full funding grant agreement exists between FTA and the issuer. 2.3.4 Section 129 Loans FHWA administers the Section 129 loan program, which operates similarly to a state infra- structure bank and supports projects that have identified and dedicated revenue streams, such as tolls, sales taxes, and excise taxes.13 The benefit of the Section 129 loan program is that it provides

18 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt direct loans to state projects and provides states with the ability to negotiate the interest and terms of the loans. After the loan has been repaid, state authorities are required to use the funds for credit enhancement activities or for a Title 23 eligible project. 2.4 Endnotes 1. U.S. Securities and Exchange Commission. 2012. “Report on the Municipal Securities Market.” U.S. Securities and Exchange Commission. 2. Municipal Securities Rulemaking Board. “MSRB Rules & Guidance.” http://www.msrb.org/Rules-and- Interpretations/MSRB-Rules.aspx 3. Municipal Securities Rulemaking Board. “MSRB Notices.” http://www.msrb.org/Rules-and-Interpretations/ Regulatory-Notices.aspx 4. Municipal Securities Rulemaking Board. “Recent SEC Filings.” http://www.msrb.org/Rules-and-Interpretations/ SEC-Filings.aspx 5. Municipal Securities Rulemaking Board. 2018. “Municipal Securities Rulemaking Board Rule Book.” Municipal Securities Rulemaking Board. 6. Securities Industry and Financial Market Association. “About.” https://www.sifma.org/about/ 7. U.S. Department of Transportation. “Build America Bureau.” https://www.transportation.gov/content/build- america-bureau 8. TIFIA Risk Management and Financial Operations Team and TIFIA Joint Program Office. 2016. “Credit Assistance Overview.” May 24. 9. U.S. Department of Transportation. “RRIF.” https://www.transportation.gov/buildamerica/programs- services/rrif 10. Municipal Securities Rulemaking Board. “Private Activity Bonds.” http://www.msrb.org/Glossary/Definition/ PRIVATE-ACTIVITY-BOND-_PAB_.aspx 11. Frederick Werner, and Vivian Gutierrez. 2015. “Grant Anticipation Revenue Vehicles (GARVEE) Bonds: Essentials of Innovative Finance Workshop Puerto Rico and U.S. Virgin Islands.” 12. U.S. Department of Transportation, Federal Highway Administration. 2014. “GARVEE Guidance (Grant Anticipation Revenue Vehicles).” 13. Federal Highway Administration. “Section 129 Loans.” 2019. https://www.fhwa.dot.gov/ipd/finance/tools_ programs/federal_credit_assistance/section_129/

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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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