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Executive Summary
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Since 1994, the U.S. Federal Highway Administration (FHWA) has been spearheading an initiative to introduce new flexibility into the financial characteristics of the Federal-aid highway program. Using a test and evaluation research initiative known as TE-045, the agency has solicited State proposals for alternatives to conventional pay-as-you-go, grant-based funding strategies.
Throughout this process, FHWA has emphasized four overriding objectives: to increase investment, to accelerate projects, to improve the utility of existing financing opportunities, and to lay the groundwork for long-term programmatic changes. Two hallmark characteristics of the initiative have been to accomplish these ends through a State-driven process, and to accomplish them without the commitment of new Federal funds.
The eight major types of financing tools that States have proposed and tested under TE-045 can be generally characterized as investment tools or cash flow tools. These categories respectively reflect the first two stated goals of attracting new sources of funds to the overall pool of funds devoted to transportation investment and of accelerating the construction and completion of projects. The goals are not mutually exclusive, as a number of financing tools can meet both investment and acceleration objectives. Moreover, State transportation officials have also realized powerful synergies in instances where they have combined two or more financing mechanisms to improve an individual projectís viability and benefits.
The following table displays the major categories of financing concepts identified and tested under TE-045. A recap of how the financing tools work, and how they represent a departure from characteristics of the conventional Federal-aid program, is included in the body of this report.
Investment Tools Cash Flow Tools
- Flexible Match*
- Post-ISTEA Advance Construction*
- Title 23, Section 129 Project Loans (expanded interpretation)*
- Partial Conversion of Advance Construction*
- ISTEA Section 1044 Toll Credits (expanded interpretation)*
- Phased Funding
- Reimbursement of Bond Financing Costs*
- Tapered Match
*Asterisked techniques have now been approved as standard features of the Federal-aid program, either by law (National Highway System Designation Act of 1995) or by administrative action.
The Universe of TE-045 Projects
Since its inception, the TE-045 initiative has proven popular with most States and has generated a substantial response. Between April 1994 and July 1996, FHWA approved 88 proposals. As new financing concepts and new applications of existing tools emerge, it is likely that additional projects will be proposed and approved under TE-045. At the same time, however, some projects have dropped out of the initiative due to identification of alternative funding sources or the presence of insurmountable obstacles to the projects' financial or political feasibility. As a result, the total number of projects remaining in the program, as of July 1996, was 74. The number of projects analyzed in this report is 71, which excludes the three "projects" that actually represent groups of projects being administered under a related financing strategy known as Surface Transportation Program (STP) Simplification.
Project Category Number of Projects Completed, ongoing, and active projects 64 On hold, pending resolution of political or legislative issues 7 Subtotal ("active projects") 71 STP Simplification Projects 3 On hold, pending identification of funding source 5 Discontinued or dropped from Federal-aid program 9 Total projects, April 1994 - July 1996 88 For the projects currently being pursued under TE-045, the most popular financing concepts -- advance construction and flexible match -- are those that address immediate cash flow needs or that obviate the need for States to use their own funds to match Federal funds. In contrast, other than flexible match, States have generally exhibited less interest in and use of investment tools designed to leverage public funds. Prime examples of these under-utilized financing tools include Section 129 loans and bond reimbursement.
Although TE-045, by design, provided no new Federal funds to participating States, the initiative has nonetheless supported significant increases in investment levels. Across the 71 active projects advancing under TE-045, Federal funds are expected to cover just over half of the total construction cost of $4.26 billion. Of the remaining existing and anticipated non-Federal contributions, $1.15 billion in additional investment can be directly attributed to the impact of financing concepts pioneered under TE-045. (The $4.26 billion figure excludes funding devoted to the three STP Simplification pilots. Their inclusion would bring the total investment level to $4.51 billion. Previous FHWA testimony has reported rounded figures of $4.5 billion and $1.2 billion, respectively representing total investment for TE-045 projects and additional investment directly attributable to TE-045.)
These increases, sometimes referred to as leveraging effects, have occurred when the purchasing power of existing Federal and State resources is multiplied (or leveraged) through newfound opportunities to attract additional funds to infrastructure projects. In addition, the leverage of existing public funds can occur when non-traditional uses of Federal funds serve to enhance the viability of financing projects partially with debt.
While the additional investment levels enabled through TE-045 are impressive, it is important to note that the vast majority of the extra anticipated $1.15 billion in local, private, and other funds to be deployed on these projects is distributed across two large projects located in Texas and California. The Texas project combines a Section 129 loan with other innovative financing tools to improve the affordability of a major bond issue. The California project will also combine multiple financing tools to expedite and facilitate a bond issue. In this case, the cornerstone of the combination is anticipated to be Federal reimbursement of bond financing costs, including principal and interest. The remainder of the additional investment ($135 million) is distributed among 19 additional projects, and derives principally from Statesí use of new matching opportunities.
On the basis of the standard ratios used by FHWA to estimate the employment effects of investment in highway construction, the 71 active TE-045 projects are expected to generate direct, indirect, and induced employment of over 175,000 jobs. Considering only the employment effects associated with the $1.15 billion net increase in investment attributable to TE-045, it is estimated that anticipated direct employment effects of about 10,000 additional highway construction jobs can be attributed to use of the financing tools tested under TE-045.
Sixty of the 71 active TE-045 projects have been or will be accelerated through use of one or more of the financing tools. Across the 43 projects for which the number of years of acceleration can be estimated, the average amount of expected project acceleration is 2.2 years. In some cases, cash flow tools such as partial conversion of advance construction have offered States the opportunity to pursue multiple projects concurrently; in the absence of these tools, States would have been required to pursue a sequenced development of these projects over a number of years. In other cases, use of investment tools such as flexible match and Section 129 loans has resulted in additional funding being available to accelerate high priority projects that would otherwise have been deferred, or used to advance projects that likely would never have been constructed in the absence of TE-045.
Expediting project construction generates real economic returns to highway users and other project beneficiaries by bringing direct and social benefits on line sooner. Typical highway construction projects provide direct benefits in three dimensions: (i) travel time savings, (ii) safety improvements, and (iii) reduced vehicle operating costs. In addition, certain projects also offer environmental and other social benefits that accrue not only to road users, but also to communities more generally. Assuming that a project's discounted benefit-to-cost ratio is positive, the opportunity to pursue projects sooner rather than later permits States to realize higher net benefits than would be the case had they been required to defer that project for several years.
Legislative and Regulatory Implications of TE-045
The two final objectives of the TE-045 initiative centered on (i) facilitating use of financing tools introduced under ISTEA, and (ii) building a base of experience from which to develop future legislation to improve the financial characteristics of the Federal-aid highway program. TE-045 has facilitated the States' use of ISTEA financing tools to varying degrees, with certain features of the program made significantly more attractive and others still encountering substantial barriers to implementation. TE-045's final objective of establishing a framework for future legislative action has been partially realized through Congressional enactment of financial provisions contained in the National Highway System (NHS) Designation Act of 1995, as well as through recent administrative actions. While TE-045's programmatic effects often receive less attention than its quantitative impacts on investment levels and project acceleration, the initiative's support for fundamental changes to the Federal-aid program is noteworthy given that these policy impacts were largely influenced by an initiative that offered no new Federal funding.
Opportunities for Continued Research and Legislative Action
States' experience under TE-045 to date indicates that the innovative finance tools designed to foster interactions between Federal assistance and major debt financings tend to offer the greatest potential to leverage Federal funds by attracting other forms of investment. Ironically, however, under TE-045, States have demonstrated relatively less interest in the very strategies best-suited to facilitating debt financings. Explanations for States' more muted response to leveraging tools such as reimbursable project loans are varied, but a few of the more likely reasons include the facts that: (i) using Federal aid to reimburse State-initiated loans draws from a fixed sum of obligational authority that may already have been programmed several years in advance; (ii) loans can only be deployed on projects that can support a dedicated revenue stream; and (iii) loans tend to be most applicable to complex project financings that require favorable State legislative conditions, depend on cooperative institutional relationships, and entail lengthy preconstruction phases. Similar considerations have also tended to minimize States' use of the bond reimbursement opportunities pioneered under TE-045 and subsequently authorized under the NHS Designation Act.
While no single strategy is likely to respond to all of the barriers that impede States' use of Section 129 loans and bond reimbursement, continued and expanded outreach efforts by FHWA will be an important catalyst to further use of these tools. In addition, continued research and potential legislative consideration of additional TE-045 project proposals can broaden the appeal of these and other leveraging strategies. Expansion of the State infrastructure bank pilot program established under the NHS Designation Act, changes to certain matching requirements, creation of opportunities for States to access direct Federal loans and credit enhancement, development of new opportunities for States to identify and tap new revenue streams, and identification of potential linkages between innovative financing and procurement strategies, all represent important areas for continued research and possible consideration under the 1997 reauthorization of the Federal-aid highway program.
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| an evaluation of the te-045 innovative
finnance research initiative prepared for the u.s. federal highway administration |
