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

Chapter: Chapter 3 - Phase 1: The Decision Process Planning for Debt Issuance

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Suggested Citation:"Chapter 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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 3 - Phase 1: The Decision Process Planning 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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19   3.1 Overview This chapter discusses statutory restrictions and constraints, agency policies, and transporta- tion investment priorities, which inform debt policies and the types of debt that issuers elect to issue. Planning for debt issuance should be conducted through a collaborative and iterative process with key debt management stakeholders. The decisions made in this phase set the foundation for the remaining phases of debt issuance and management and shape the strategies and tools that support these phases. This chapter discusses these considerations as well as the process of planning and conducting analysis to inform a debt strategy. The chapter is organized as follows: • Section 3.2 discusses considerations for determining the need to issue debt. • Section 3.3 describes the process for developing debt management policies and tools that consider statutory and regulatory parameters and constraints. • Section 3.4 summarizes the various ways of determining debt financing approaches of issuing debt. • Section 3.5 discusses iterative learning and strategy enhancement, including market analysis. 3.2 Determining the Need to Issue Debt Surface transportation debt is issued to enable the financing of surface transportation projects, typically when pay-as-you-go funding is not sufficient to meet state or agency transportation priorities. By borrowing rather than paying with cash, debt financing enables surface transporta- tion programs to advance large infrastructure projects and to maintain financial flexibility by paying for large capital expenses over time, rather than up front. Debt typically helps surface C H A P T E R 3 Phase 1: The Decision Process— Planning for Debt Issuance Individual Transaction Preparation and Development Marketing and Placement of Individual Transactions Post-Issuance Compliance Strategy The Decision Process—Planning for Debt Issuance

20 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt transportation agencies advance program goals and should be aligned with the agency’s long- term plan and, if a state agency, with STIP. State DOTs and other transportation agencies can issue debt for projects ranging from new construction to repairs and maintenance for a variety of modal investments, including bridges, highways, transit, rail, freight, seaports, and airports. Proceeds may support investments in facilities, vehicles (or rolling stock), and other eligible capital expenditures. Given the many financing mechanisms available to state DOTs and other transportation agencies, as well as the variety of state-level debt issuance rules, state-by-state debt programs vary greatly.1 A variety of factors—including state policies and rules, credit ratings, capital needs, and reim- bursement capacity—must be considered when determining whether it is appropriate to issue debt. The California Debt Issuance Primer2 offers useful insights into key considerations for practitioners when determining whether to issue debt. Key considerations include the following: • Balance between the costs of financing and the benefits that can be gained from financing; • Financial needs and limitations of the entity responsible for debt issuance; • Relationship between the life of the asset and the term of the financing; • Potential attractiveness of the issuance to investors; and • Public and political context, including whether there is support for the decision to finance the project or program. After a transportation agency has decided to issue debt, these factors, and others, continue to be important to how the agency issues and manages debt. 3.3 Developing Debt-Management Policies 3.3.1 Key Decision-Making Factors: Debt Issuance Authority and Debt Restrictions Authority to issue debt is typically established in a state’s constitution or statute. State param- eters have implications for two key aspects of debt issuance and management: • Debt issuance authority, by establishing which state entities, municipalities, and public authorities are permitted to issue debt and approve debt issuances; and • The type and amount of allowable debt. As a result, where this authority is placed via state constitution or statute is integral to how issuers establish their debt policies and conduct each issuance, as discussed in the succeeding three phases. For some issuers, the delegation of authority requires collaboration among the relevant network of agencies involved in the debt issuance process. Ohio, for example, distributes authority across several agencies (see Example 1). In other instances, the issuance authority is concentrated in one agency with external oversight, such as in the New York MTA example (see Example 2). State constitutional, statutory, and regulatory restrictions governing debt issuance have impli- cations for the debt structure, the content of debt policies, and the processes and practices adopted by the issuer. These restrictions include the amount of debt and the types of debt that can be issued, which at times limits some innovative project delivery methods. Statutory provi- sions may also include the following: • Identify the revenue pledges; • Establish a debt limit; • Authorize the sale of debt through competitive, negotiated, public, or private means; • Establish the maximum term of a bond issue; and • Identify coverage ratio requirements, additional bonds, tests, and other requirements.

Phase 1: The Decision Process—Planning for Debt Issuance 21   Example 1. Distributed Debt Issuance Authority (Ohio) Ohio is an example of a state with distributed surface transportation debt issuance authority. The Ohio Department of Transportation (ODOT) identifies the needs of three transportation revenue bond programs and works with the Office of Budget and Management (OBM) and the Treasurer’s Office of Debt Management to issue and manage the programs. Once ODOT determines that bond proceeds are needed to finance transportation projects and what type of bond issue is authorized for that purpose, it informs both OBM and the Treasurer’s Office of Debt Management. ODOT proposes the amount, source of debt payment, and other specifics of the issuance. OBM confirms the structure, determines whether the proposed issue affects Ohio’s 5% debt limit, and agrees to the timing of the debt sale. For ODOT debt, the Treasurer’s Office issues the debt once OBM has concurred. The OBM—directed by the Ohio governor’s chief financial officer (CFO)—is responsible for providing statewide financial management oversight for the responsible and pragmatic use of state funding and financing.1 OBM serves as a central debt issuance and management entity for all of the state’s issuers and plays an oversight role in pre- and post-issuance requirements.2 OBM’s debt management functions include reviewing pre-sale information and documentation, including the amount, source of payment, security, structure, maturity schedule, final resolution, or debt authorization, and official statement. OBM also produces and shares a monthly bond sale schedule, which includes the sale dates for all state bond issuing agencies. The Ohio Treasurer’s Office of Debt Management is responsible for issuing Ohio’s general obligation (GO) debt and special obligation direct debt, including GO highway debt and GARVEEs.3,4 The Office of Debt Management is responsible for structuring, document review, pricing, and closing for debt issuances that fall within the office’s jurisdiction. It is also responsible for reporting, debt certification, debt repayment, revenue/disbursement processing, and bond registrar services. 1 Ofce of Budget and Management. “About Us.” https://obm.ohio.gov/w ps/portal/gov/obm/areas-onterest/bonds-and- investors/about-us/ 2 Ofce of Budget and Management. “Investors.” https://obm.ohio.gov/w ps/portal/gov/obm/areas-onterest/bonds-and- investors/bonds-and-investors 3 Ohio Treasurer. “Department in the State Treasurer’s Ofce.” http://treasurer.ohio.gov/departments 4 Other Ohio debt issuing authorities include the Ohio Public Facilities Commission, the Ohio Turnpike and Infrastructure Commission, the Ohio Housing Finance Agency, the Ohio Water Development Authority, and the Petroleum Underground Storage Tank Release Compensation Board. These entities do not play a role in ODOT’s debt issuance and management processes and are not discussed further in this report.

22 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt Figure 5 summarizes the types of statutory and regulatory restrictions that inform surface transportation debt strategies in each of the eight case studies, exemplifying the diversity of restrictions. e examples in Figure 5 are not intended to reect the full extent of restrictions on debt issuances in each of the case study examples. Communication and Coordination Several agencies have identified communication among state DOTs, surface transportation agencies, other state debt issuers (if the DOT or surface transportation agency is not responsible for issuing debt), and the state legislature as essential for practitioners to manage transportation debt successfully and to navigate the statutory and regulatory restrictions. The relationship between legislatures and other governing bodies and transportation agencies will vary based on statutes and regulations, since some legislatures are actively involved in transportation financial planning, while others provide more latitude for transportation agencies to operate independently. The distribution of authority will dictate the level of collaboration necessary. Depending on the agencies involved in the debt issuance process, inter- agency and/or intra-agency coordination may be applicable. 3.3.2 Tool: Debt Management Policies Practitioners use debt policies to organize their debt program around the frameworks and parameters set by state statute, regulation, and policy, while simultaneously meeting an agency’s surface transportation goals. Debt management policies are written procedures and guide- lines that inform debt issuance practices.3 A debt management policy can dene guidelines or requirements for the structure of debt issuances, establish a commitment to rigorous long-term capital and nancial planning, and help improve the quality of decisions. Debt policies vary widely based on the regulatory environment, the capacity of the debt program’s sta, and the lessons learned from a program’s past issuances. Example 2. Centralized Debt Issuance Authority (New York MTA) The New York MTA Board and staff have autonomous debt issuance and management decision- making authority. The MTA Board has oversight authority, with internal checks and balances on decision-making. However, New York state law establishes the MTA’s debt limit. The MTA chief executive officer (CEO) carries out the Board’s policies, directions, and day-to- day management of the “Related Entities,” which include MTA New York City Transit, MTA Bus, Long Island Rail Road, Metro-North Railroad, and MTA Bridges and Tunnels. Each entity has its own management and president who is responsible for day-to-day operations. The MTA CFO and other executive staff support the MTA CEO. The CFO leads the debt management process for all MTA-related entities, with a team of senior finance and debt professionals. The CEO must approve all debt plans and issuances based on the CFO’s recommendations. Certain negotiated sales must be approved by the New York State Comptroller. On an annual basis, the MTA Board approves a not-to-exceed amount for new money issuances.

Phase 1: The Decision Process—Planning for Debt Issuance 23   Figure 5. Examples of restrictions on debt issuance. Elements typically addressed in a debt policy include the following:4 • Debt limits, such as state statutory restrictions; • Debt structuring practices, such as the average maturity, the debt structure, and any credit enhancements; • Debt issuance practices, such as identifying and selecting bond counsel, FAs, and the type of sale; and • Debt management practices, such as continuing disclosure and arbitrage. However, a review of the debt policies for each of the case studies suggests that there is no single way for agencies to articulate their approach to debt management. e case studies (available online) provide examples of eective debt management policies that are tailored to the state’s context, including examples from Ohio, Colorado, and New York MTA (see Exam- ples 3, 4, and 5). e determination of types of debt varies further depending on how the authority to issue surface transportation debt is distributed across state agencies. e case of Ohio highlights the policies produced by a central debt issuing body for its agencies. Meanwhile, large municipal issuers like New York MTA maintain issuance-specic management policies. e extent of debt management policies will dier across agencies; particularly, agencies that operate within strict scal constraints will likely have shorter debt management policies because the policies are issued less frequently and require fewer decisions to be made for each issuance.

24 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt Other examples of eective or robust debt policies include the Texas Department of Trans- portation (TxDOT) Debt Management Policy.5 e TxDOT policy is comprehensive since it includes guidance and policies for each aspect of the debt issuance and management process: • Decision Process—Planning and Analysis: High-level debt policy objectives and philosophy, outlines the ten currently authorized nancing programs for transportation and allowable purposes of debt issuance, and approaches for selection of a range of outside professionals. • Individual Transaction Preparation and Development: Refunding procedures and practices, permissible types of debt and factors to be considered for each, including variable rate debt, commercial paper, xed-rate debt, derivatives, and hedging products. e policy also outlines Example 3. Comprehensive Debt Policies (Ohio) Ohio’s statewide debt management program relies on well-documented policies and procedures to share information, and to provide a consistent approach across the various entities that issue debt at the state level. These range from documentation requirements to make certain each debt issuance does not exceed state-level limits to guidance documents that provide practitioners with an overview of key considerations for each stage of the debt management process. This suite of policies is foundational to Ohio’s successful debt management program, including the transportation debt management program. The Ohio Office of Budget and Management (OBM) manages statewide debt policies that are not exclusive to transportation, including a debt and interest rate risk management policy, municipal securities disclosure policy and procedures, post-issuance compliance procedures and training, and an arbitrage policy. ODOT, like other state agencies, is required to follow these policies. The debt and interest rate risk management policy is updated every fourth fiscal year and provides an overview of key considerations and requirements for Ohio state debt issuances to provide consistency across state departments.1 The policy is comprehensive: it establishes allowable types of debt and OBM’s responsibility for managing relations with credit rating agencies; it lists criteria to consider when making decisions regarding structuring the issuance, including credit enhancements, maturity, payment structure, and method of sale; and it provides guidance on refinancing and restructuring bonds, as well as considerations for interest rate swaps and derivatives. The municipal securities disclosure policy and procedures is a statewide policy to make certain that Ohio’s debt issuing agencies comply with municipal security disclosure requirements established by the Securities and Exchange Commission (SEC).2 The policy was jointly developed by OBM, the Treasurer of State, and others to provide consistency across the agencies in adhering to federal disclosure and debt management requirements. The policy outlines the SEC requirements and establishes an OBM disclosure process, which addresses annual disclosure requirements, audited financial statements, material event disclosure, and voluntary disclosure. This policy is aligned with OBM’s post-issuance compliance procedures and training, which is discussed in depth in Chapter 6 on post-issuance compliance strategy. 1Ofce of Budget and Management, Treasurer of State, Ohio Public Facilities Commission, 2019. “Debt and Interest Rate Risk Management Policy.” https://obm.ohio.gov/wps/portal/gov/obm/areas-of-interest/bonds-and-investors/resources/policies- procedures-guidelines. 2 Ofce of Budget and Management, 2015. “Municipal Securities Disclosure Policy and Procedures.” https://obm.ohio.gov/ wps/portal/gov/obm/areas-of-interest/bonds-and-investors/resources/policies-procedures-guidelines

Phase 1: The Decision Process—Planning for Debt Issuance 25   the objectives of the debt structure, including term length, debt service reserve fund, and redemption provisions. • Marketing and Placement of Individual Transactions: Conditions for pursuing each of the three types of methods of sale are competitive sale, negotiated sale, and private placement. e policy also includes underwriting procedures, such as transaction marketing activities. • Post-Issuance Requirements Compliance: Compliance with Securities and Exchange Com- mission requirements and arbitrage rebate is required. e TxDOT policy helps the agency sustain institutional knowledge and processes over time. 3.3.3 Tool: Debt Affordability Studies A debt aordability study, also known as a debt capacity study, is a valuable tool to measure a program against state debt limits. A state- or agency-wide debt aordability study isolating transportation debt communicates where the transportation debt program has been, where it is going, and where the program ts within an agency’s debt management landscape. Further, a statewide debt aordability study that breaks down transportation debt enables practitioners to see the full picture of state debt and have complete information about a state’s obligations— a challenge identied in previous studies. A debt aordability study can help transportation agen- cies set the agenda for future debt issuances, particularly when there are many restrictions and constraints on the amount of debt available to issue. Debt aordability studies may be required by statute, regulations, or an issuer’s debt policy, and may be produced as a stand-alone report or be included in an issuer’s annual nancial report. Figure 6 provides an overview of the foundational components of a debt aordability study, even Example 4. Limited Debt Policies (Colorado) The Colorado Tax Payer Bill of Rights (TABOR) places strict restrictions on new debt issuances by the Colorado Department of Transportation (CDOT), stating that new debt must be approved by voter referendum. To meet the state’s surface transportation goals and to sustain infrastructure for the state’s growing population, the Funding Advancement for Surface Transportation and Economic Recovery Act (FASTER) was passed in 2009 to increase annual revenues dedicated to transportation and establish a new authority structure to increase Colorado’s financial capacity to meet transportation needs. FASTER established both the Colorado Bridge Enterprise (CBE) and the High Performance Transportation Enterprise (HPTE). The CBE and the HPTE are government-owned businesses that are not restricted by the limits established by, and thus exempt from, TABOR. For the purposes of this Guidebook, the primary focus is on the practices of CDOT and HPTE. Due to these restrictions and the dispersion of authority for debt issuance, neither CDOT nor HPTE currently has a formal debt policy. Given the constraints established by the TABOR, CDOT and HPTE have limited debt capacity to finance projects without the support from private partners. Thus, CDOT and HPTE often turn to innovative project finance approaches, such as public-private partnerships (P3s), as a means of financing the transportation needs of the state of Colorado. CDOT and HPTE have developed a comprehensive P3 Management Manual, which governs how these two entities work together to identify, implement, and manage P3 projects. With respect to identifying the necessary financing for a project, this manual serves as a decision-making framework for CDOT and HPTE to determine the financing structure and subsequently the appropriate type of debt to issue.

26 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt Figure 6. Foundational components of a debt affordability study. Example 5. Detailed Debt Management Policies (New York MTA) New York MTA has established detailed financial management policies that guide MTA’s use of debt and derivatives to mitigate risk and to maintain adequate fund balances and proper investment of available funds. These policies are specific to transportation debt, given that MTA maintains autonomy to issue and manage debt and the board maintains oversight authority. MTA Debt Obligation Policies1 POLICY SUMMARY OF POLICY MTA and Triborough Bridge & Tunnel Authority (TBTA) Municipal Financial Disclosure Policies and Procedures Specific rules regarding the following: • General disclosure practices • Ongoing disclosure • Official statement review and disclosure processes • Annual disclosure statement (Rule 15c2-12)2 • Role of disclosure counsel • Disclosure practices training • Disclosure-related document retention practices • General principles relating to disclosure TBTA Policy, Rate Covenant TBTA must maintain a ratio of net revenues to debt senior lien debt service of 1.75 times. MTA and TBTA Variable Rate Debt Policy MTA may issue Variable Rate Debt to provide funding for Capital Programs or to refund existing obligations. Specifically, the principal amount of unhedged Variable Rate Debt that is outstanding cannot exceed 25% of the aggregate principal amount of all outstanding obligations. MTA and TBTA Swap Guidelines This policy provides guidelines related to the use of Payment Agreements in connection with the issuance of synthetic fixed- rate debt. MTA and TBTA Refunding Policy This bond and other debt obligations refunding policy establishes conditions precedent to any issuance of fixed-rate bonds for the purposes of refunding fixed-rate bonds previously issued by the MTA or any of the Related Entities. MTA Investment Guidelines These guidelines cover several areas related to overall investment, including the following: • General guidelines • Custodian • Repurchase agreements • Security purchases and sales • Reporting requirements • Portfolio managers 1 Debt Obligations Policies. MTA. http://web.mta.info/mta/investor/new/policies-guidelines.htm 2 “Securities and Exchange Commission (SEC) Rule 15c2-12 requires dealers, when underwriting certain types of municipal securities, to ensure that the state or local government issuing the bonds enters into an agreement to provide certain information to the Municipal Securities Rulemaking Board (MSRB) about the securities on an ongoing basis.”

Phase 1: The Decision Process—Planning for Debt Issuance 27   though there is not one correct way to develop a debt aordability study. Issuers can elect a variety of metrics to leverage for the analysis conducted for a debt aordability study, including debt service per capita, debt as a percentage of personal income, or debt as a percentage of annual revenues. Some debt aordability studies provide additional details, including peer benchmarking data. Some studies consider all types of debt that are held under the state or issuer’s jurisdiction and incorporate multiple metrics beyond debt service as a share of revenue. Some debt policies even require that debt aordability studies are produced. Virginia oers one such example of a detailed debt aordability study.6 Debt aordability studies can assist practitioners in developing transportation debt manage- ment strategies. A debt aordability study serves as a decision-making tool that analyzes cash ows, revenues, coverage requirements, and other data points selected by the state or transpor- tation agency. is tool enables practitioners to analyze whether a debt issuance is (1) necessary and (2) viable and how existing debt should be managed. Further, debt aordability studies can be used to communicate surface transportation program needs along with the state’s available debt capacity to legislators and policymakers to advocate for transportation debt issuances. By establishing a data-based understanding of debt needs and capacity, debt aordability studies can provide insights into debt management, enabling issuers to select debt-nancing mecha- nisms that meet their goals while being scally prudent. Debt aordability studies might not provide the same value for all issuers. Issuers facing very signicant constraints on uses of funds or issuers that make regular issuances tend to rely on a comprehensive nancial plan that is regularly updated rather than a debt aordability study. is is not to say that debt aordability studies can replace nancial plans but that robust nancial plans may eliminate the need for a separate debt aordability study. e PTC is an example of an issuer that applies robust nancial planning practices (see Example 6) while the Virginia case highlights the components of a detailed debt aordability study (see Example 7). 3.4 Determining Financing Approaches and Debt Types 3.4.1 Key Decision-Making Factors: Debt Issuance Approaches Practitioners should identify which approach, type of debt, and nancing mechanisms are best suited to support their transportation goals, including determining the use of proceeds, revenue sources, and debt, which is discussed in more detail in Chapter 4. ese strategic deci- sions can benet from insights from FAs and consultants. Example 6. Effective Use of Financial Planning (PTC) The Pennsylvania Turnpike Commission (PTC) has managed strict financial requirements through careful financial planning and execution, clear disclosure policies, regular contact with rating agencies and investors, and detailed market intelligence. PTC develops a 10-year capital plan to establish the agency’s goals and financial objectives. To accompany the PTC financial planning process, the agency has a series of financial management policies to guide practitioners through the planning process, including a swap policy, a liquidity standard policy, a debt policy, and an investment policy and guidelines. External factors have also assisted PTC in meeting financial requirements, including (prior to the COVID-19 pandemic) a generally strong economy, lower gas prices, and favorable interest rates. The organizational alignment and practices have made for a supportive financing program.

28 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt With respect to what types of debt are issued, surface transportation agencies have dierent debt approaches that are largely based on the legal authority of their debt programs as described earlier in this chapter, the history of their debt program, how the program has evolved, and constraints to debt issuance, among other factors. e spectrum of approaches to dening a debt strategy or overarching decision-making approach ranges between programmatic approaches and project-driven approaches. Program- matic approaches incur debt to nance broad programmatic objectives, while project-driven approaches are structured to meet discrete project-specic purposes. In many cases, debt issuers adopt a hybrid approach. ese terms will be illustrated through examples in this chapter. • In a programmatic approach (Figure 7), issuers regularly issue debt to nance the program- matic needs and issuances are not tied to specic projects. • In a project-based approach, debt is issued to nance a specic project. e Colorado example in Section 5.3.2 illustrates one way of adopting a project-specic approach. Approaches vary greatly across states and agencies. Figure 7. Example of programmatic debt approach. Example 7. Effective Debt Affordability Study (Virginia) Virginia’s transportation debt program offers an example of an effective debt affordability study. The States’ Fiscal Health Project of the Pew Charitable Trust recognized Virginia as one of nine leading states in preparing debt affordability studies.1 The Virginia debt affordability study, produced annually by the Commonwealth’s Debt Capacity Advisory Committee, presents a recommendation to the Governor and General Assembly regarding the amount of tax-supported debt Virginia can responsibly issue in the succeeding two years. The Virginia debt affordability study is not limited to information related to the transportation debt program. The Virginia debt affordability study has the following several strengths: • Produced annually; • Visible to senior state leadership; • Uses multiple metrics to assess debt capacity, including debt per capita, total debt compared to state personal income, and debt service compared against revenue; • Compares Virginia’s net tax-supported debt with the amount held by other comparable states; and • Assesses market trends and potential risks associated with debt issuance. 1Huh, Kil, Saira Farooqui, Stephen Fehr, Adam Levin, Frances McGaffey, Mary Murphy, and Robert Zahradnik. 2017. “Strategies for Managing State Debt: Affordability studies can help states decide how much to borrow.” The Pew Charitable Trust.

Phase 1: The Decision Process—Planning for Debt Issuance 29   • A hybrid approach is when a state DOT or other agency regularly issues consolidated trans- portation debt for a wide range of needs, and the use of proceeds for each issuance is tied to specic projects. Whether an agency employs programmatic and/or project-driven strategic approach depends on both external constraints (state regulations on debt issuance) and internal constraints (the surface transportation program’s debt management policies), which are discussed in the previous section. e transportation needs of the agency (uses of funds) and the availability of certain long-term resources to address those needs (sources of funds) also inuence the approach. Some agencies have exibility in uses and sources while others are restricted based on policies and program goals. e following examples illustrate the approaches implemented by selected transportation agencies. e Arizona case study is an example of a hybrid approach to debt issuance (see Example 8) while the Colorado example highlights a project-based approach to debt issuance (see Example 9). Project-specic debt may be utilized as part of a more complex funding and nancing structure, which could also include a public-private partnership delivery method. Project-specic debt may be issued against the future revenues of the project being funded, but this is not always the case. Ohio also has a hybrid approach, issuing Social Impact Bonds (SIBs) for specic project loans. SIBs are issued by the Ohio State Treasurer’s Oce on a project-by-project basis and are secured by a system of pooled debt service and reserve accounts. As of September 30, 2019, Ohio had issued 12 series of bonds, totaling $94.4 million, ranging in size from $3 to $30 million. Bonds are rated AA+ by S&P. Example 8. Hybrid Approach to Debt Issuance (Arizona) Arizona Department of Transportation (ADOT) uses a hybrid approach for its highway user revenue fund (HURF) and regional area road fund (RARF) bonds. However, ADOT uses a project approach for its grant anticipation notes (GANs), which are almost always used for project- based financing. ADOT conducts an annual programming process in which future HURF, RARF and GAN issues are determined on a 5-year rolling basis. Every fall, forecasts are developed for HURF and RARF revenues. These forecasts, along with estimates of federal aid, are used by ADOT’s CFO to develop the annual funding available for the department’s capital program, including the planned debt issues. Each February, ADOT presents an update to the State Transportation Board that includes the tentative 5-year program of projects and the planned issues for this time period. The following informs the value of the bonds in the 5-year program: • Annual revenue forecasts and the amount available after debt service, transfers, and applicable administrative/operating expenses are covered. • The amount of additional debt service the cash flow for each of the respective funding programs (HURF, RARF and GANs) can support, based on the updated annual revenue forecasts and under their respective additional bonds tests. • The anticipated timing of expenditures in the 5-year program and the impact of these expenditures on the ending balance of the applicable cash flows. Public hearings are scheduled each spring on the 5-year program, followed by formal State Transportation Board approval of the program and planned debt issues. Throughout the term of the approved program, the cash flow is closely monitored by the CFO to determine the appropriate time to issue the debt.

30 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt Example 9. Project-Specic Approach to Debt Issuance (Colorado) The U.S. 36 managed lanes and bus rapid transit project, which was completed in two phases, highlights the complexity of project finance and the collaboration between CDOT, Colorado Bridge Enterprise, and HPTE to deliver projects. The project’s intent was to renovate the stretch of U.S. 36 between Boulder and Denver by incorporating express lanes and high-occupancy toll lanes and replacing several bridges along the route. Phase I was a design-build bus rapid transit and managed lanes project that began operation in 2012.1 The financing for this project consisted of a Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to the HPTE and cash funding from federal, state, and regional sources. Phase II began construction in 2014 and was a public-private partnership design-build-operate-finance-maintain project that extended the Phase I express lanes facility an additional 5 miles.2 Phase II financing (see figure below) depicts the various forms of finance the project leveraged, including a TIFIA loan to HPTE, private equity, and Private Activity Bonds, to augment cash funding from CDOT, highlighting how CDOT and HPTE identify and utilize different sources to finance specific projects. In summary, specific projects identified as priorities for CDOT and HPTE dictate what forms of funding and financing the agencies will utilize. 1Build America Bureau. 2011. “U.S. 36 Managed Lane/Bus Rapid Transit Project: Phase 1.” U.S. Department of Transportation. https://www.transportation.gov/tia/nanced-projects/us-36-managed-lane-bus-rapid-transit-project-phase-1 2Build America Bureau. 2014. “U.S. 36 Managed Lane/Bus Rapid Transit Project: Phase 2.” U.S. Department of Transportation. https://www.transportation.gov/tia/nanced-projects/us-36-managed-lane-bus-rapid-transit-project-phase-2 Figure 8 summarizes programmatic approaches to debt issuance as identied in the case study examples. 3.4.2 Tool: Types of Debt A variety of debt instruments and types of debt are available for surface transportation projects. Which debt instruments and debt types are appropriate depends on factors such as purpose of the debt, legal and policy parameters, and debt capacity. As dened in the glossary, a debt instrument is a mechanism by which debt is issued, such as bonds, notes, and loans. A debt type is a category of debt dened by the security (or the revenue pledged for repayment), such as general obligation, revenue-backed, or tax-backed. Specic examples of debt types include general obligation bonds,

Phase 1: The Decision Process—Planning for Debt Issuance 31   Figure 8. Programmatic approaches to surface transportation debt.

32 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt toll revenue bonds, GARVEEs, and lease revenue bonds. Loans and federal credit programs, such as TIFIA, can be used as bonds. Debt management policies and an agency’s debt strategy are two key factors in determining which types of debt are appropriate to employ. This is an aspect of decision-making that can benefit from insights from FAs. The tables in Appendix B list the primary debt types, which describe how the mechanism is administered, the key objectives, eligibility requirements, candi- date projects, and main advantages and disadvantages. The primary types of debt include gen- eral obligation bonds, toll revenue-backed bonds, tax-supported debt, GARVEEs, and GANs. Debt can be issued through different vehicles, including private financing via public-private partnerships, state infrastructure banks, and federal loan programs such as TIFIA. The information on each debt type in Appendix B, however, is general, and each issuer ought to consider the reason for issuing, the context of their own state, and the needs of the program overall when determining which vehicle is most well suited for the issuance. Each case study, published online, demonstrates the variety of ways in which mechanisms are leveraged, how they are secured, and whether these mechanisms are employed to meet programmatic needs or to finance a specific project. 3.5 Implementing Iterative Learning Integral to developing a successful debt issuance and management strategy is iteratively learning from each prior issuance and adjusting the debt strategy accordingly. Through each experience, debt management staff can learn ways to improve each stage of the process to produce better outcomes to meet the goals of the program. Figure 9 demonstrates that the debt issuance and management strategy for a specific agency is not meant to be static. On the contrary, practitio- ners should continue to improve their approach and program. If a debt approach is documented in a debt management policy, that document should be considered a living document that is updated in response to lessons learned, as demonstrated in Example 10. The Decision Process— Planning for Debt Issuance Individual Transaction Preparation and Development Marketing and Placement of Individual Transactions Post-Issuance Compliance Strategy For reported/regular issuances Figure 9. Iterative learning to define a debt strategy. Communication and Coordination To learn from issuances and integrate the lessons learned into a debt management strategy, issuers can seek guidance from outside professionals, particularly FAs, to provide insights and propose new ways of working through the four phases of debt issuance and management. Other considerations in refining debt management strategies include changes in revenues and federal and state law impacting debt issues. Further, simply communicating the challenges and improving communication between agencies involved in the debt issuance and management process can provide for better outcomes and management practices.

Phase 1: The Decision Process—Planning for Debt Issuance 33   Example 10. Inter-Agency Coordination (Virginia) Virginia Department of Transportation (VDOT) successfully learned from hurdles faced in past grant anticipation revenue vehicles (GARVEE) issuances and adopted new practices as a result. Since GARVEE debt must be tied to specific projects eligible for federal funding, VDOT must understand how projects are progressing to estimate project cash flow needs. In addition, VDOT must navigate FHWA oversight for GARVEE debt. Complexities with the GARVEE disclosure process arise when project financing changes or when a project financed by GARVEEs is cancelled. In these instances, VDOT staff must receive approval from FHWA to reallocate the GARVEE bond proceeds to different projects. The Financial Planning Office must continuously coordinate with project managers for their GARVEE program, a new practice adopted to administer the GARVEE program. Further, VDOT has built a relationship with Virginia FHWA division office to make this process as efficient as it can be within federal constraints. 3.5.1 Tool: Market Analysis Market analysis is also integral to programmatic learning and continuously rening the pro- gram’s debt strategy to meet the issuer’s goals. Once the type of debt and nancing mechanism have been determined, transportation agency practitioners should consider assessing the market and performing historical research. Market analysis is an iterative process and at the decision process phase, it is important for practitioners to understand where their state ts within the wider municipal securities market. According to Lockwood-McCall, Mortensen, and Huestis, market analysis should commence with a review of a bond issuer’s historical results.7 e research also suggests that practitioners along with their FA analyze primary market pricing, results of recent sales, and review available as well as current secondary market activity at this phase. Practitioners are encouraged to analyze the pricing of recent comparable entities’ issuances. A benchmarking exercise can be a useful guide for the bond pricing strategy. Other eective practices for conducting market analysis include the following: • Reviewing comparable pricings; • Determining how the state/issuer compares with other comparable issuers; • Identifying economic/nancial information releases, such as monthly job reports, which impact the market; and • Understanding retail and institutional bond buyers. To perform market analysis, debt nance practitioners can use the MSRB EMMA website. EMMA provides open-source information about all prior bond sales and oers a wealth of infor- mation for debt nance practitioners. Practitioners can assess how bond transactions are faring in the market and research how treasury market and municipal market data have evolved. ese market analysis practices can be included in an issuers’ debt strategy and/or debt poli- cies. In Phase 1 issuers establish their overarching strategy for their program to approach market research, and in Phase 2 they apply this strategy and available resources for the specic issuance. 3.6 Summary In Phase 1, the decision process, plans establish a foundation for the remaining phases of the debt issuance and management process. Program needs, and legal constraints established by statute and regulation, are the key forces in determining a program’s overall approach to debt issuance. e transportation program’s need to deliver capital projects or rehabilitate existing

34 Guidebook for Effective Policies and Practices for Managing Surface Transportation Debt systems shape decisions to meet surface transportation goals. Further, state constitutions or statutes establish which state agencies are authorized to issue debt, and in many cases, set limits on the amount of debt that can be issued on an annual or debt authorization basis. The sur- face transportation priorities and regulatory constraints also inform which strategies and tools are effective for each particular debt program. The differences between strategies and tools are described in examples in the following chapters. 3.7 Endnotes 1. Rall, Jaime, and American Association of State Highway and Transportation Officials. 2016. Transportation Governance and Finance: A 50-State Review of State Legislatures and Departments of Transportation. American Asso- ciation of State Highway and Transportation Officials. 2. California Debt and Investment Advisory Commission. California Debt Issuance Primer. 2005. https://www. treasurer.ca.gov/cdiac/debtpubs/primer.pdf 3. Government Finance Officers Association. “Debt Management Policy.” 2018. https://www.gfoa.org/materials/ debt-management-policy 4. Government Finance Officers Association. “Debt Management Policy.” 2018. https://gfoa.org/materials/debt- management-policy 5. Texas Department of Transportation, Debt Management Policy. 2020. http://ftp.dot.state.tx.us/pub/txdot-info/fin/ investor/policies/debt.pdf 6. Commonwealth of Virginia Debt Capacity Advisory Committee. Report to the Governor and General Assembly. December, 2018. https://www.virginiabonds.com/commonwealth-of-virginia-va/documents/ downloads/i33?docTypeId=13102 7. Lockwood-McCall, Laura, Jocelyn Mortensen, and Tom Huestis. 2016. “The Ins and Outs of Negotiated Bond Pricing.” April 20, 2016. https://bondcasebriefs.com/2016/04/19/events/webinar-the-ins-and-outs-of- a-negotiated-bond-pricing/?print=pdf

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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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