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Consider what our nation's transportation
system would be like if we were still using only technology and ideas developed in
the 1950s!In this imaginary "time warp," great improvements in transportation design, construction processes, improved building materials, planning procedures, safety, and environmental improvements would not be available to the traveling public. Fortunately, this is not the case, and our nation's transportation infrastructure is second to none in its capacity to move goods and people safely while enhancing the environment.
While the way we plan, build, and provide for our nation's transportation services has been improved and modernized continuously, the way we pay for transportation infrastructure has been slower to change. To a large degree, we are still using a single strategy that has not changed since the 1950s to finance transportation infrastructure improvements.
The National Highway System (NHS) Designation Act of 1995 has changed all that with major improvements in the way states may finance NHS and other transportation infrastructure. This historic legislation, signed by President Clinton in November 1995, advances important provisions that enable the states to increase and speed up investment of federal funds in transportation projects - both on and off NHS.
The legislative approval of NHS was a major accomplishment. In the NHS Act, Congress recognized that we must also make improvements in financing so that needed projects can advance, even in a constrained budget environment.
Despite record levels of transportation investment by all units of government and private industry, a significant funding shortfall threatens the vitality of our transportation system and affects the ability of our workers and our companies to compete and prosper in global markets in the 21st century.
A recently submitted report to Congress from the Department of Transportation (DOT), Status of the Nation's Highways, Bridges, and Transit: Conditions and Performance, explains that in 1994, $49.9 billion was required to maintain the overall condition and performance of the nation's highways and bridges. Improving highways and bridges would have required an investment of $68.2 billion in 1994. The actual 1993 investment of $34.8 billion was 70 percent of the amount required to maintain the highways and bridges and only 50 percent of what was needed for improvement.
In recognition of this policy gap, Congress - in the National Highway System Designation Act of 1995 - enacted a number of improvements in the way the states and others may finance NHS and other transportation infrastructure. Collectively, these provisions are termed "Innovative Finance" because almost all had their beginnings in the Federal Highway Administrationƒs (FHWA) Test and Evaluation Program - Innovative Finance (TE-045).
To address the deficit between growing
financing requirements and decreasing financial resources to meet these requirements,
FHWA has sought to increase the financial flexibility available to the states. FHWA's
own NHS legislative proposal, S.775, which was transmitted to Congress in May 1995,
contained important financing options that build on the flexibility made available
under the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). These
included more flexible state matching requirements and voluntary state transportation
infrastructure banks. States would also have increased flexibility to use federal
highway funds for advance construction projects, bond interest and issuance costs,
and loans to ISTEA-eligible projects. The Ohio Department of Transportation will construct a four-lane, 16.5-kilometer road, and extra lanes on the interstate highway to accommodate a proposed interchange. The project, the Butler County Regional Highway, is based on state legislation that established a transportation improvement district in the area. The project costs $132 million. Because of the good prospect of future federal funds, the state can borrow more easily to finance the project. As a result of advance construction eligibility and flexibility, the state can obtain better financing for an intergovernmental loan and/or private bonds for the project.
The South Carolina Department of Transportation plans to build a link between U.S. 17 and other major roads that lead to the Grand Strand/Myrtle Beach area, increasing access to the state's largest tourist area. The link is a limited-access, four-lane and six-lane highway covering almost 46 kilometers. The project, which will cost $412 million, tests a number of innovative finance concepts. The state is applying the ISTEA Section 1012 loan approach to a non-toll facility with a dedicated revenue repayment source. This loan for the estimated construction cost of the project provides cash to service the bonds supporting the project. Bond principal and interest on the project will be repaid using innovative finance flexibility. By combining innovative financing and innovative contracting, this project is expected to save more than $100 million, and construction is being accelerated by 20 years. Local sales tax revenues will also fund a portion of the project.
From its beginning, the Innovative Finance Program had these goals:
The innovative finance techniques that are designed to make more funds available to states and other transportation providers are termed "leveraging tools." And because of the increased flexibility that states now have, most projects will advance to construction years ahead of schedule - some by as much as 20 years! The innovative finance techniques that have to do with when federal funds become available to states are termed "cash-flow tools."
ISTEA Section 1044 allows states to earn credit from toll revenue expenditures. The state can apply the credit towards the non-federal matching share of all programs authorized by Title 23 and ISTEA. To the extent credits are available, a state may use up to 100 percent federal funds on benefiting projects. To earn credits from toll road expenditures, a state must meet a maintenance of effort (MOE) test.
As a result of an April 1995 FHWA policy change made as a direct result of TE-045, a state can now pass the MOE requirement by demonstrating that it is keeping up its commitment to non-federal transportation investing prospectively or retrospectively. Up to this time, only the single retrospective test had been available. The new test gives more states the opportunity to earn these credits and to free up state funds - that would otherwise have been required to meet matching requirements - for use on other projects.
As a direct result of TE-045, FHWA regulations were changed in July 1995 to allow an advance construction project to be converted to a regular federal-aid project in increments over a series of years. The ability to partially convert advance construction allows positive cash flow to be realized as needed throughout the life of the project. Under traditional funding, a state would have been required to wait until it had funds and obligational authority available for the full federal share before converting an advance construction project.
The favorable response by the
states, local governments, and private sector to FHWA's initial financing concepts
prompted Congress to include a number of these techniques in the National Highway
System Designation Act of 1995. By attracting new sources of capital to transportation
infrastructure and by enabling projects to move ahead more quickly, the new financing
techniques provided in this legislation will support vital NHS and other transportation
projects. The innovative finance provisions, as well as an innovative finance case
study that tested the tool, follow: The Ohio Department of Transportation has constructed an intermodal facility that enables the loading and unloading of truck trailers and freight containers onto railroad flat cars. The overall development cost was $35.2 million. The truck off-loading fees function as a dedicated revenue stream in order to qualify the project for a loan under that innovative finance concept. The loan will be paid back by a special fee on trucks using the facility. The loan will also enable the state to establish a revolving fund. The project leverages $24 million in private funds and saves or creates about 1,000 manufacturing jobs in the state.
The Maine Department of Transportation will construct an intermodal truck-to-rail transfer facility near Fairfield. Located less than two kilometers from the interstate highway, the facility will provide for the transfer of truck freight from major U.S. highways to key rail lines, both in Maine and throughout New England. Under the innovative financing effort, a private rail company is contributing material, equipment, and services for use in the project. The state is crediting the value of the rail contributions toward the state's share of project costs. The rail contribution saves the state $1.57 million, which can be used elsewhere for transportation.
Based on the outcome of the SIB Pilot Program, SIBs may factor prominently in the future of transportation financing. Because SIBs offer varied leveraging tools, such as loans and credit enhancement, they hold promise to many states, multistate entities, and other providers. Some estimates are that SIBs may leverage federal funds by a ratio of 4-to-1.
The NHS Act significantly modernizes transportation financing. The legislation makes transportation financing more flexible and more adaptable to the many challenges that exist in the states. In some ways, transportation financing can now work more like the way a good family budget works!
While the 1956 legislation was accompanied by the creation of the Federal Highway Trust Fund and a federal motor-fuel tax, no new special federal revenues are available for NHS. However, the innovative finance provisions in the NHS legislation help leverage additional dollars for NHS and other projects by making better use of modern financing techniques.
Together the corridors issued nearly $3 billion in revenue bonds for new toll facilities in Orange County. The San Joaquin Hills and Foothills/Eastern Corridor Projects received a federal line of credit through provisions in the 1994 and 1995 federal appropriations bills to cover perceived risk if actual traffic levels fall short of projected levels. If traffic levels do not meet projections and revenue shortfalls occur, the agency can borrow a predetermined amount of funds from the federal government to pay debt service on the bonds.
Infrastructure banks and credit enhancement could be even more powerful tools when combined with the design/build techniques of innovative contracting.
FHWA is exploring ways that the federal credit concepts used to support these toll projects might be made available on a programmatic basis and might be available to provide credit enhancement to infrastructure banks.
Bold, new, next-generation financing ideas are likely to come on line as FHWA, the states, and other transportation providers continue to seek to meet public demand for transportation projects. For example, FHWA is testing the use of direct federal credit enhancement concepts with two toll road projects in California.
These innovative finance tools pioneered by FHWA and the states over the past two years are not the end of the road. As we look ahead to ISTEA reauthorization, we will seek ways to push into new territory, to leverage new funds, expedite project delivery, and provide state and local governments with new flexibility.
Jane F. Garvey is the deputy FHWA administrator. From 1991 to spring 1993, she was the director of aviation at Logan International Airport in Boston, directing airport management and capital planning. In 1988, after serving five years as the associate commissioner, she became the commissioner of the Massachusetts Department of Public Works, the agency responsible for construction and maintenance of the state's highways, bridges, and roadside areas.
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