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January/February 2000· Vol. 63· No. 4

Recent Developments in Federal Project Finance

by David Seltzer

In May 1998, the Transportation Equity Act for the 21st Century (TEA-21) dramatically increased the funding levels for surface transportation projects, and it also added a number of new tools to be used by sponsors of highway and transit projects to advance their programs.

Many of TEA-21's new provisions offer greater flexibility in meeting federal regulatory requirements. For example, states now have greater latitude to satisfy the matching funds requirements for projects. They can use design-build contracting for larger (greater than $50 million) procurements, and ultimately, they may draw upon streamlined procedures for multi-agency federal environmental review.

TEA-21 also continued the trend of introducing "innovative finance" techniques, giving project sponsors new ways to go about financing their surface transportation projects. Two prominent financing programs that have attracted particular attention are "GARVEE bonds" and "TIFIA." Although the two programs differ, they share the concept of financing projects by leveraging federal assistance and accessing the public capital markets.
 

GARVEE Bonds

Colored concrete medians divide the lanes of New Mexico state Route 44 near San Ysidro. This is part of the state's Corridor 44 project, using GARVEE bonds.

One recent mechanism for the long-term financing of federally assisted highway projects is GARVEE bonds. GARVEE is an acronym for Grant Anticipation Revenue Vehicles. The grants refer to federal-aid assistance that states receive in the form of annual apportionments from the Federal Highway Administration (FHWA). States borrow in anticipation of applying such revenues to pay debt service on long-term obligations (financing vehicles) that are used to finance highway projects. (It was happenstance that the FHWA staff came up with an acronym that sounds the same as the name of then-acting Federal Highway Administrator Jane Garvey, who was a major proponent of innovative financing.)

GARVEE bonds actually spring from a provision of the National Highway System Designation Act of 1995, which, for the first time, expressly authorized states to apply federal-aid to reimburse principal, interest, and other financing costs they incurred in connection with debt-financed highway projects.

In the past, virtually all of FHWA's financial assistance took the form of reimbursing states on a "pay-as-you-go" basis for the federal share (generally 80 percent) of construction costs. Under this approach, the states would drawdown obligated federal funds as monthly contractor invoice payments were presented during the construction period. With each payment, the states would meet the typical 20-percent matching requirement from their state highway fund or other non-federal sources. However, as project sizes have grown, states have found it increasingly difficult to fund major capital investments in this fashion without displacing their smaller, ongoing improvement projects.

It is a widely accepted principle of public finance to fund long-lived assets with debt repaid over a similar term. This cushions the annual impact on available cash flow. This approach -- called "pay-as-you-use," as opposed to "pay-as-you-go" -- is more equitable because it shares the costs in the form of debt service payments among both current and future beneficiaries/users. And although the interest payments can double or even triple the total nominal dollars paid out, the true cost in financial terms is really no greater because future years' dollars are worth less than today's. Moreover, the state gains from accelerated project completion by avoiding cost inflation and by realizing the project's benefits sooner.

To date, four states -- Massachusetts, Mississippi, New Mexico, and Ohio -- have elected to finance more than $1 billion of projects this way. The proceeds generally have been used in connection with single, large construction projects, such as the Boston Central Artery and New Mexico's Corridor 44 project.

New Mexico used GARVEE bonds to finance their Corridor 44 project, expanding state Route 44 in northwest New Mexico from two to four lanes.

In some cases, the backing of the bond issue has been "double-barreled," with the state pledging either its full faith and credit or state highway funds, as in Mississippi and Ohio. In other cases, such as in New Mexico, the bond issue has been structured as a stand-alone credit with no state backstop (the so-called "naked GARVEEs"), insulating the state's general credit from the financing.

Several other states, including Arizona, Arkansas, California, and Colorado, in recent months have passed legislation authorizing the issuance of hundreds of millions of dollars of additional GARVEE bonds. This technique appears to be becoming an increasingly standard feature that states can use to help manage their federal-aid programs.

TIFIA
Whereas GARVEE bonds offer a way to debt finance projects that will be repayable from future federal-aid streams, TIFIA is designed to provide assistance to projects possessing their own non-federal repayment streams, such as direct user fees or other dedicated funding sources.

TIFIA is an acronym for the Transportation Infrastructure Finance and Innovation Act of 1998, enacted as Subtitle E, Chapter 1 of TEA-21. TIFIA was designed to provide assistance in the form of credit, rather than grants, to major surface transportation capital investments. Eligible projects that can be funded include highway and transit projects, intercity passenger rail and bus facilities, publicly owned intermodal freight facilities, and border-crossing infrastructure. (Another new federal credit program, the Railroad Rehabilitation and Improvement Financing Program, was authorized by TEA-21 to provide credit assistance exclusively to rail passenger and freight projects.)

These large-scale projects often hae their own revenue sources, which can be used to help defray costs. However, due to their scale and complexity, these major investments sometimes have trouble accessing the capital markets on their own.

TIFIA's purpose is to fill market gaps and to leverage additional non-federal resources by providing supplemental and subordinate capital. The federal share is limited to one-third of project costs.

TIFIA offers three credit products: direct federal loans, federal loan guarantees, and standby federal lines of credit. These instruments, in tandem with private sector financing, can help advance important, capital-intensive facilities at various stages throughout their life cycles -- projects that otherwise might be delayed or not built at all because of market uncertainty. The federal government is in a unique position to take a broader view and serve as a "patient investor" in these projects.

To qualify, projects must cost at least $100 million or an amount equal to one-half of a state's total federal-aid apportionments, whichever is less. (A lower threshold of $30 million applies to intelligent transportation system projects.) The projects also must be supported by user charges or other non-federal dedicated revenue streams and must have the potential to achieve an investment grade rating (BBB or higher). By addressing the market's concerns about undertaking large projects lacking a financial track record, this program is designed to enhance their ability to access private financing.

Federal credit programs generally have two monetary caps -- an overall credit assistance limitation and an authorized amount of budget authority. The budget authority covers the federal government's potential losses if a loan is not fully repaid. For TIFIA, the credit assistance limit is $10.6 billion, and the authorized budget authority is $530 million. Each project is evaluated to determine the amount of budget authority assigned to the project. Therefore, the total volume of TIFIA activity will be a function of the specific projects and their credit-worthiness.

Secretary of Transportation Rodney E. Slater announced the first round of TIFIA assistance for fiscal year (FY) 1999 in late September 1999. Following a competitive solicitation last summer, five projects seeking $1.6 billion in credit support were selected based on criteria set forth in the TIFIA statute. The projects represent total capital investment (including other funding sources) of nearly $6.5 billion. The FY 1999 selected projects are the Miami (Fla.) Intermodal Center; Farley-Pennsylvania Station in New York City; state Route 125 in San Diego, Calif.; Tren Urbano in San Juan, Puerto Rico; and Washington (D.C.) Metro Capital Program.

Miami (Fla.) Intermodal Center

The Miami Intermodal Center (MIC) is a $1.3 billion project being sponsored by the Florida Department of Transportation. It is designed to improve access to and within Miami International Airport, one of the nation's busiest airports and the biggest in terms of handling commercial air freight. In addition, Miami ranks second nationally in international passenger departures.

The project involves the construction of a multimodal transportation center for car rental, transit, commuter rail, Amtrak, and intercity bus services. MIC is scheduled to be completed by 2005. Subsequent project phases call for substantial commercial development.

The U.S. Department of Transportation (DOT) will be funding two loans at the U.S. Treasury rate: (1) $269 million -- backed by a regional gas tax allocation of state funds -- to fund right-of-way and design and engineering elements, and (2) $167 million -- backed by daily car rental fees -- to fund the consolidated rental car facility.

Farley-Pennsylvania Station (New York City)

This $748 million project expands and refurbishes the historic Farley Post Office Building and the adjacent, existing Penn Station complex in midtown Manhattan as a key intermodal transportation and commercial facility. The current station, which is the nation's busiest transportation facility, already serves more than half a million people daily, and that number is increasing.

The project will increase station capacity by 30 percent, improve passenger safety and circulation, and provide a grand new gateway into New York. It is a cooperative venture involving the Pennsylvania Station Redevelopment Corporation, Amtrak, and the U.S. Postal Service, which will continue to occupy a portion of the Farley Building. Upon finalization of all project funding sources, DOT has agreed to provide a $140 million direct junior lien loan and a $20 million line of credit supporting an issue of senior bonds. Because the project revenues are first applied to the repayment of the senior bonds and then to junior bonds, a junior (or subordinate) TIFIA loan will help to strengthen the project's senior debt. Both the loan and credit are backed by lease payments from retail and other tenants at the new station.

State Route 125 (San Diego, Calif.)

State Route (SR) 125 is being developed to provide improved access to the Otay Mesa border crossing, the principal commercial border crossing in California between the United States and Mexico. The toll road should also relieve existing congestion and accommodate growth in burgeoning San Diego County. The SR 125 project involves about 18 kilometers of new four-lane highway, expandable to eight lanes should demand warrant.

The $397 million project is being developed under a private consortium, California Transportation Ventures (CTV), whose three principal investors are the firms of Parsons Brinckerhoff, Egis Projects, and Koch Industries.

Because the project will not receive its final environmental clearance for several months, DOT's assistance is being structured as a conditional commitment, pending the issuance of the final record of decision.

The TIFIA assistance consists of a $90 million loan guarantee on subordinated toll revenue bonds and a $37 million line of credit supporting a series of senior toll revenue bonds. The project is scheduled to be completed in 2002.

Tren Urbano (San Juan, Puerto Rico)

The Puerto Rico Highway and Transportation Authority is developing a 17-kilometer rapid-transit line to serve metropolitan San Juan. The $1.7 billion project is expected to handle 100,000 trips per day in 2002, its first year of operation. A private sector consortium using state-of-the-art technology is responsible for the project design and construction. In addition, the highway and transportation authority plans to enter into an operating agreement with a private sector entity to run the new system.

DOT has agreed to provide a $300 million loan secured by a junior lien on the authority's revenue stream, which includes petroleum and fuel tax receipts, motor vehicle registration fees, and farebox revenues.

Washington (D.C.) Metro Capital Program

The Washington Metropolitan Area Transit Authority (WMATA) initiated a 20-year capital improvement program to rehabilitate and replace vehicles, facilities, and equipment on its Metrorail system, portions of which date back to 1976. The entire capital program costs $2.3 billion and is being funded by a combination of federal, state, and local sources.

WMATA has been approved for $600 million of federal credit assistance in the form of a loan guarantee. The guarantee will enable WMATA to satisfy its legal requirement that it demonstrate assured funding prior to awarding contracts for its accelerated procurement schedule. The faster schedule is expected to result in substantial cost savings on subway-car overhauls and other items. The loan guarantee is secured by projected capital contributions from the District of Columbia, Maryland, Virginia, and eight participating local government jurisdictions, as well as a junior pledge on the authority's general revenues.

These five projects will consume approximately $61 million of budget authority to support $1.6 billion in the face amount of federal credit assistance and an aggregate capital investment of $6.5 billion. This translates to a very effective leveraging ratio of more than 100 to 1 in total investment-to-budget cost.

DOT expects to announce the schedule for applying for the FY 2000 TIFIA assistance in December 1999 with an application deadline likely to be in March 2000. A total of up to $9.0 billion of additional credit may be made available over the next four fiscal years through FY 2003.

Conclusion
GARVEE bonds and TIFIA each offer techniques through which sponsors of surface transportation projects may access the capital markets in connection with federal assistance.

For GARVEE bonds, that assistance takes the form of the state's anticipated stream of federal-aid grants to be received in future years. FHWA plays no direct role in backing the financing, other than consenting to the state's use of its apportioned funds to help pay debt service on long-term bonds.

In the case of TIFIA, DOT is directly involved as a lender or guarantor for up to 33 percent of project costs. Unlike GARVEE bonds, TIFIA requires that the projects be supported by an independent non-federal revenue stream -- either a direct user charge, such as a toll or farebox stream, or a dedicated revenue source, such as state transportation trust fund receipts.

Both GARVEE bonds and TIFIA allow states to leverage limited federal resources to help expand the level of capital investment in transportation projects.

"TIFIA is a catalyst for creating jobs and continuing our nation's record economic growth," President Clinton said. "This innovative financing program turns a $61 million commitment into $1.6 billion in funding to support $6.5 billion in transportation projects of critical national importance."

"TIFIA is a new and better way of doing business," said Secretary Slater. "By working smarter for the American people, we are making possible major transportation investments that might otherwise not have received financing."

David Seltzer recently completed a three-year assignment with the Federal Highway Administration as senior advisor to the federal highway administrator on project finance. Over that time, he worked on both general initiatives contained in TEA-21 and other legislation and on specific project financing, including New Mexico's GARVEE bonds and the Alameda Corridor. Prior to joining FHWA in 1996, he worked as an investment banker in public finance, most recently at Lehman Brothers. Mr. Seltzer also serves as lecturer at the Fels Center of Government at the University of Pennsylvania.

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