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Panel on How Federal Credit Could Be Used by Project Sponsors
The Alameda Corridor Project
James Preusch, Chief Financial Officer, Port of Los Angeles said that his presentation would focus on the Alameda Corridor Project, one of three surface transportation projects currently benefiting from the provision of Federal credit through special legislation. Mr. Preusch provided an overview of the project and its finance plan. (An Alameda Corridor Project case study is contained in Appendix E.)
The ports of Los Angeles and Long Beach are located 25 miles south of downtown Los Angeles. There are three major rail routes that currently move cargo from the port complex up to and through Los Angeles on its way to major midwest and east coast markets. The purpose of the Alameda Corridor Project is to consolidate port-related freight traffic onto a high speed, high capacity and fully grade-separated transportation corridor linking the ports to the region's rail hub, located near downtown Los Angeles.
Trains carrying cargo from the ports to the region's rail hub are about a mile in length and thus present a substantial barrier to traffic. In addition, over the next 20 to 30 years, the number of trains moving along the corridor is expected to grow substantially because port traffic is projected to more than double.
The Alameda Corridor Project will improve logistics and reduce transportation costs by speeding train traffic, taking vehicular traffic up and over the train tracks, which will be below grade. Thus, the project will reduce congestion, remove impediments to emergency vehicles, lessen the impact of environmental externalities such as noise and vibrations caused by trains, and speed the movement of cargo.
The finance plan includes contributions from private as well as Federal, State and local sources. The total cost of the project is approximately two billion dollars. The $400 million Federal loan is one piece of the finance plan. The Los Angeles and Long Beach port commissions have contributed $411 million. The Los Angeles County Metropolitan Transportation Authority is supplying another $348 million. The project is receiving an additional $109 million from a variety of other sources. Additionally, the Alameda Corridor Transportation Authority (ACTA) plans to issue approximately $785 million of senior revenue bonds in 1998, a portion of which will be tax-exempt and a portion of which will be taxable.
Mr. Preusch said that the $400 million Federal loan was a key component of the project's finance plan. He then reviewed the basic structure of the loan agreement, as follows:
- The $400 million loan is taxable, and amortized over its life.
- The loan must be repaid within 30 years of project completion.
- The interest rate on the loan is the 10-year Treasury rate until project completion or for the first five years of the loan, whichever is earlier, and is converted to the 30-year rate thereafter.
- Proceeds from the loan may be used for general design, engineering, construction or project administration.
- The loan will be drawn down over three years. The first draw of $140 million was made in September 1997.
- The sources of repayment include container charges paid by the railroads using the corridor and port payments.
Mr. Preusch discussed the leveraging potential of Federal credit, and cited the Alameda Corridor Project as a prime example of leveraging at work. As shown in Figure 1, DOT is using a $59 million appropriation to support the "subsidy cost" of making a $400 million loan. The $400 million loan in turn is helping induce other public and private investment for a $2 billion project. That represents a leveraging ratio of 33 to 1, in terms of total transportation investment to Federal budgetary cost for the Federal credit portion.
Figure 1
Alameda Corridor Leveraging Potential
Mr. Preusch concluded that effective leveraging is the key objective of Federal credit. As demonstrated by the Alameda Corridor Project, Federal credit takes limited Federal resources and allocates them more efficiently in order to build infrastructure, move goods, create jobs, and generate tax receipts for the Federal Government.
Transportation Corridor Agencies (TCA) Toll Roads
Mr. Wally Kreutzen, Chief Operating Officer, Transportation Corridor Agencies began his presentation by displaying a map of the TCA toll roads and providing some background information on the Transportation Corridor Agencies and Orange County which is just south of Los Angeles, California.
The Transportation Corridor Agencies are multi-jurisdictional authorities charged with the construction of a 67-mile beltway system around Orange County. By adding an additional 67 miles of highway to the 100 miles of existing freeways, the TCA toll roads will expand regional freeway/tollway mileage by two-thirds.
The San Joaquin Hills Transportation Corridor (SJHTC) toll road is the first new public toll road facility being developed by TCA. The SJHTC is a 15-mile, six-lane limited access highway in southwestern Orange County. The new toll road was opened for traffic in November 1996.
The Eastern Transportation Corridor (ETC) will be a 25-mile limited access toll road consisting of three segments connecting with the northern segment of the Foothill Transportation Corridor. The ETC is currently under construction (a $750 million design-build contract). As originally planned, the ETC was to open to traffic in 1999; however, the project is approximately one year ahead of schedule and should open to traffic by November 1998.
The Foothill Transportation Corridor (FTC) will be a 28-mile toll road, connecting the Eastern Transportation Corridor with I-5 near the Orange County and San Diego County line. A 7.5-mile portion of the FTC is currently completed and open for traffic. A portion of the FTC was funded on a pay-as-you-go basis. Another portion under construction is being funded through debt proceeds. The last 16 miles of the project (known as Foothills-South) will be more difficult to complete. That portion of the FTC currently faces environmental challenges, construction difficulties, and financing shortfalls.
Mr. Kreutzen said that the TCA toll roads were put on the Master Plan for Arterial Highways in Orange County in 1976. Within that plan, the toll roads were identified as regional congestion mitigation devices. As a result of this plan, Mr. Kreutzen added, regional growth was allowed to continue. Unfortunately, by the mid-1980's, Caltrans and the Federal Government were overcommitted and unable to provide the funding for these projects.
Mr. Kreutzen stated that as a result of this funding shortfall, TCA began to explore local alternatives. During this time, Mr. Kreutzen added, Orange County was experiencing explosive growth and as a result the freeway system was becoming more and more congested. By the mid-1980's, ten of the 22 most congested interchanges in the Nation were located in California. The Transportation Corridor Agencies were formed in response to the growing problem of regional traffic congestion.
Mr. Kreutzen said that TCA sought and received support from the California State Legislature to allow tolling on the facilities once completed. Generating support for the legislation was quite a challenge because members of the California State Legislature generally viewed California as the land of the freeways.
Mr. Kreutzen said that the TCA toll roads gained the support of local businesses and developers. He added that the local business community clearly understood the benefits of transportation infrastructure, and the negative impacts that were occurring as a result of traffic congestion. As a result, TCA was able to impose development impact fees with their support.
The Transportation Corridor Agencies performed a traffic analysis in order to identify the areas that would benefit most from the new toll roads. The findings of the study suggested that the southern and central portions of Orange County would benefit greatly from the new facilities because there were large tracts of undeveloped land located within those areas.
Mr. Kreutzen explained that the development impact fee for a single home is $3,500 and the fee for commercial buildings is set at four to five dollars per square foot. He added that to date, development impact fees have raised over $200 million for the projects, and are projected to generate in excess of $600 million more in the future. This revenue effectively represented TCA's equity capital in moving the projects forward. Development impact fees were used to fund preliminary engineering, environmental, and right-of-way costs.
Mr. Kreutzen described in detail the evolution of TCA's finance plan for SJHTC. Initially, TCA envisaged a more conventional finance plan. The original plan was to obtain bank loans for short term construction capital over a four- to six-year period, build a project and traffic history, seek an investment grade bond rating for the projects, possibly obtain bond insurance, and do take-out permanent financing. The Transportation Corridor Agencies worked on this strategy for four to five years, but were unable to obtain the financial support necessary for coming to market.
It was at this time, that TCA began investigating a new option: long-term fixed rate project financing. In order to do this, TCA was faced with the challenge of convincing investors that the myriad of potential risks relating to the project could be mitigated. These risks and mitigation techniques are outlined below.
- Environmental Risk. The projects faced environmental opposition in the form of five disclosed lawsuits. In order to mitigate this risk, TCA needed to convince investors that it would prevail in each of the individual lawsuits and that the amount of time it would take to adjudicate these cases would not cause significant construction delays.
- Construction Risk. The projects had to be built on time and within budget. The largest design-build contract in the history of the Nation ($750 million) with a guaranteed maximum price/guaranteed completion date was used to mitigate the risk resulting from construction delays.
- Traffic Risk. After construction there is typically a ramp-up phase, during which the revenue stream is established. Transportation projects are often subject to competing free alternatives, and it is difficult to forecast demand accurately in the early years of operation. A $120 million Federal line of credit for SJHTC allayed investor concerns relating to traffic risk.
Mr. Kreutzen outlined the basic structure of the Federal line of credit as initially enacted in FY 1993. He noted that the line of credit is available over a 10-year period following construction completion. TCA would be allowed to draw down up to 10 percent of the line, or $12 million, in any given year.
Mr. Kreutzen described the tax implications of the Federal line of credit. He noted that the Internal Revenue Code prohibits Federal guarantees of tax-exempt debt. Because of uncertainty as to whether the line would be deemed an indirect Federal guarantee, TCA informed bond holders it would not utilize the line unless it obtained an unqualified legal opinion from bond counsel. A provision in the Fiscal Year 1996 DOT Appropriations Act subsequently broadened the purposes for which the line could be used. The Federal line of credit is available in the event toll revenues and standard reserves are not sufficient to cover debt service, costs of extraordinary repair and replacement, costs of complying with unexpected Federal or State environmental restrictions, and operation and maintenance expenses.
Mr. Kreutzen stressed that public acceptance for the project was key. The Transportation Corridor Agencies could demonstrate State and local support for the project by virtue of the development impact fees and State grants dedicated to the project. The Federal line of credit, he concluded, demonstrated the final component: Federal support for the project.
Mr. Kreutzen closed his presentation with a discussion of the leveraging potential of Federal credit for both toll road projects. He noted that Congress used a $17.6 million subsidy appropriation to support two lines of credit totaling $240 million (Figure 2). The $240 million in lines of credit are being used to support $2.7 billion in projects. That represents a leveraging ratio of 153 to 1, in terms of total transportation investment to Federal budgetary cost.
Figure 2
Transportation Corridor Agencies Toll Roads Leveraging Potential and Economic Impact
In addition to the economic impact, he concluded, the projects would have a major impact on air quality, mobility, and regional livability.
Discussion
A member of the audience asked how does the Alameda Corridor Project generate incremental trade benefits throughout the Nation.
Mr. Preusch responded that shipping is a very cost-sensitive business. The project will generate trade by reducing costs and attracting cargo that would have otherwise been shipped overseas or not produced at all. Because half the cargo passing through the San Pedro Bay Seaports terminates in other areas of the country, the entire Nation will realize substantial economic benefits from this project.
A member of the audience said that based on these presentations, it seemed apparent that the Federal Government could actually receive additional tax receipts as a result of the economic benefits generated by these projects. Is this fact addressed in the scoring analysis performed by the Joint Committee on Taxation (JCT)?
Mr. Kreutzen responded that the Federal scoring process is very difficult to understand; however, it appears that the process does not account for future financial benefits derived from the project in question. In addition, the scoring process does not account for other, less quantifiable benefits such as mobility or air quality.
A member of the audience said that TIFIA would use $500 million to support $5 billion to $10 billion in projects. Given the current funding gap for transportation infrastructure, why is there opposition to a bill that could achieve such substantial leverage?
Mr. Kreutzen responded that it is all a question of responsibility. The Federal Highway Administration is in the business of building and maintaining the Nation's highway system. The Office of Management and Budget, the Treasury, and the Congressional Budget Office have a different perspective. These agencies are more concerned with balancing the Federal budget.
A JCT representative responded that the JCT has no agenda against tax-exempt debt or Federal loans. The JCT is charged with assessing legislative proposals and estimating their potential impact on Federal tax receipts. The scoring process is driven by the principle that tax-exempt debt attracts capital that would have been otherwise used to purchase taxable debt. As a result, programs that have the potential to induce additional tax-exempt debt are being scored with a tax revenue loss. In addition, programs that accelerate the issuance of tax-exempt debt are also being scored with a tax revenue loss.
A member of the audience asked if the TCA would have considered paying the estimated budgetary costs (subsidy risk and tax revenue loss) of the Federal lines of credit up-front as an administration fee when it sought Federal assistance.
Mr. Kreutzen responded that TCA would have paid the estimated budgetary cost. It would have been considered a cost of doing business.
An audience member commented that it could be argued that Federal credit assistance could reduce the cost of capital for projects and thus the size of tax-exempt debt issued. This would actually result in a net reduction in the volume of tax-exempt debt issued. The JCT should include this in their analysis.
An audience member asked: Are there market gaps which the Federal Government could or should address through credit?
Mr. Preusch responded that the $400 million Federal loan provided to the Alameda Corridor Project was at a taxable rate. Tax-exempt debt from the capital markets would have been more cost-effective; however, the capital markets could not accommodate the flexibility, subordination, and other issues that were necessary to make the Alameda Corridor Project feasible. Thus, it would seem that there is a market gap that could be filled by the Federal Government through credit.
A member of the audience commented that the State of Arizona has identified $9 billion dollars in needs over the next ten years. There is a lack of available funding through traditional funding sources to meet those needs. Arizona does have a State Infrastructure Bank. As a start-up financial institution, however, the Arizona SIB will be limited in the amount of assistance it can provide in the near-term. Arizona has identified three projects that are too large for the traditional Federal-aid or SIB program. For these projects, Federal credit could play a significant role in their development.
