Although last fall’s extension to ISTEA bought the Federal

highway and transit programs an extra six months of life, May

1, 1998, marked the final day that states could obligate their

Federal funds until new authorizing legislation is enacted. The

Senate and House passed independent reauthorization bills in

March and April, respectively. Each body now has designated

members participating in the conference committee. At the

time this issue of IFQ went to press, the conferees were hoping

to agree at least in principle on a consensus bill before the

Memorial Day recess. 

Areas of contrast between the Senate and House bills include

proposed funding levels, program structure, and finance provisions. This quarter’s IFQ compares each bill’s approach to

innovative finance. If the conference proceeds in as timely a

fashion as hoped, next quarter’s IFQ will summarize the provisions appearing in the final consensus bill passed by the full

Congress and, we hope, signed by the President.

The innovative finance provisions included in the Senate

and/or House bills fall into five general categories: state infrastructure banks; direct Federal credit; tax incentives for privately-developed highway projects; tolls and other income; and

matching share requirements. A brief description of relevant

provisions within each category appears in the box on page 2. 

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MIRIAM ROSKIN, EDITOR VOL. 4, NO. 2

MAX INMAN, FHWA MANAGING EDITOR SPRING 1998

Also in this issue ...

Transit Case Study

New Orleans RTA

Lease-with-Maintenance

Contract . . . . . . . . . . . . . 3

Technical Corner

Deconstructing Leverage . . 4

Resource Referral

Shadow Tolls . . . . . . . . . . 6

LEGISLATIVE SPOTLIGHT

Innovative Finance Provisions in Senate and House Proposals

for ISTEA Reauthorization

As this issue of IFQ goes to press, the House and Senate are hammering out the

final details on legislation to reauthorize the Federal highway and transit programs, so preliminary information presented on the conferenced version is subject

to change. Following are some highlights of the conference agreement, as publicly reported to date. Readers are cautioned that the conference is still ongoing,

and that even when complete, the bill will require approval by the full House and

Senate, as well as the President’s signature.

The next issue of IFQ will provide details on the reauthorization bill, a discussion

of the implications for state highway programs, and thoughts on how project

sponsors and state officials can adapt to this changing landscape.

Late-Breaking Conference Highlights

continued on page 2

Contributing Authors

Contributors to Vol. 4, No. 2 

of IFQ include:

Ian Carroll, FHWA, 

Western Finance Center

Paul Marx,

Federal Transit Administration

Jennifer Mayer, FHWA

Western Finance Center

Miriam Roskin,

Porter & Associates, Inc.

Funding Level $200 billion

Highways $167 billion

Transit $33 billion

Duration 6 years

Special Highway Projects $9.35 billion for approximately 1,500 projects

(i.e., “demonstration projects”)

Program Structure Fundamental structure would remain similar to ISTEA’s

Budgetary Treatment While the Highway Trust Fund would not be moved

“off-budget,” a firewall may be created within the current discretionary spending caps to ensure that future

receipts to the Highway Trust Fund would be available

only for transportation expenditures.
2

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• State Infrastructure Banks Codification of existing pilot Enables states to capitalize lending

program. institutions with Federal transportation

grant funds

• Direct Federal Credit

Surface New pilot program. (1) Provides direct Federal loans, loan

Transportation Credit guarantees, and lines of credit for large

Program surface transportation projects of national

significance.

Rail Credit Pilot New pilot program. Provides direct Federal loans and loan

guarantees for up to five rail 

and intermodal projects.

• Tax-Exempt Status for New pilot program. (2) Permits up to 15 privately-owned and/or

Private Activity operated highway projects to gain

Highway Bonds eligibility for tax-exempt financing. Total

bonds issued may not exceed $15 billion.

• Tolls and Other Income

Interstate Highways: New pilot program. Up to three Interstate highway segments 

Conversions to Toll may be converted from free to toll as 

part of a reconstruction project.

Right of Way Income Expansion of existing law. Allows income from right-of-way sales and

leases to be used for Title 23 purposes,

as currently allowed for airspace income.

• Matching Share Provisions

Tapered Match Codification of experimental Allows non-Federal share to vary over

strategy. project life, so long as the ultimate

matching share is preserved over time.

Program Level Match Codification of experimental For Surface Transportation Program (STP)

for STP projects strategy. projects, allows Federal funds to be

matched across full program, not on a

project-by-project basis.

Flexible Match: Codification of experimental Basically, funds from Federal land

Federal Land strategy. management agencies (e.g., BLM) may

Management Agency count towards the non-Federal matching

Funds share for enhancement projects. The

Senate and House bills differ in specifics

concerning this proposal.

Flexible Match: Codification of experimental Funds from DOT’s Federal Lands Highway

Federal Lands strategy. Program may count towards non-Federal

Highway Program match for projects within or providing

access to Federal or Indian lands.

Flexible Match: Expansion of existing law. Permits donations of publicly-owned

Publicly-Owned Land property to count towards non-Federal

match on all Federal-aid highway projects.

Soft Match: Toll Codification of existing law. Permits certain toll revenues to be used

Credits as a credit toward the non-Federal share of

another highway project.

Category/Provision Status Purpose Senate House

1 This proposal is based on the program outlined in the Transportation Infrastructure Finance and Innovation Act (TIFIA), fully described in IFQ

Vol. 3, No. 1.

2 This proposal reflects the program proposed under the Highway Infrastructure Privatization Act (HIPA), fully described in IFQ Vol. 3, No. 2.

Key Innovative Finance Provisions: Senate and House

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TRANSIT CASE STUDY

New Orleans RTA Lease-with-Maintenance Contract

Federal assistance to cover transit agencies’ operations has steadily declined

since the 1980s. Partially compensating

for this decline, the Congress gradually

expanded the definition of those “capital” expenditures eligible for grant reimbursement. Lease arrangements and

loans for equipment or facility acquisition have long been eligible for capital

grant funding. By 1996, the Federal

Transit Administration (FTA) issued a

final rule that paved the way for

Federally-reimbursable lease-with-maintenance contracts. This contractual

arrangement allowed maintenance,

when incorporated in a capital lease, to

be considered a capital expense eligible

for Federal grant reimbursement.

Other transit properties have financed

bus procurements under capital leasing

rules, but the New Orleans Regional

Transit Authority (RTA) was the first to

avail itself of this dual capability to

finance capital and maintenance costs.

The RTA Experience

The RTA had an old fleet of buses (over

13 years on average), comprising six or

more distinct models. Some of these

could no longer be serviced even with

recycled parts. Replacement of some 90

of these buses would lower the average

fleet age and reduce the number of bus

types, thereby cutting maintenance

costs. However, RTA had access to only

$10 million in Federal grant funds, and

the bus purchase would require at least

$21 million. 

Under these circumstances, RTA began

exploring the potential for acquiring its

buses by lease. As the discussions progressed, RTA staff began to consider

combining the lease with contract maintenance operation. RTA issued a request

for proposals and selected a lessor.

Subsequent discussions indicated that

the optimal transaction size would be

between 100 and 175 buses. RTA also

concluded that available FTA grant

funds and projected annual cash flows

would be sufficient to support this level

of vehicle replacement. With the terms

now finalized, the transaction will result

in a procurement of 175 new buses.

The capital cost is $49 million and will

be amortized pursuant to an annually

renewable lease.

RTA has agreed to commit FTA grant

assistance as a source of repayment, and

plans to meet 80 percent of annual lease

payments with Federal grants and 20 percent of the payments with local matching

funds. In addition, RTA has secured the

lease by giving the lessor a lien on the

buses. The lease contract is set up as a

municipal obligation, so the interest

income is tax-exempt for the investors.

Demonstrated Cost Savings

To approve a lease-with-maintenance

contract, FTA requires agencies like the

RTA to document the potential cost savings in two ways. First, the grantee

must demonstrate on a cost-benefit basis

that the lease is more cost-effective than

a cash purchase. The transit agency does

this by calculating the present value of

the costs and benefits of lease versus purchase, using an Office of Management

and Budget (OMB)-mandated discount

rate of 7 percent. Second, the maintenance component must be more costeffective than maintenance by the

agency’s own personnel. 

For the New Orleans RTA, the lease

component of the deal demonstrated

only modest savings. The expected

annual financing cost is close to 7 percent, and given that the OMB-mandated discount rate is also 7 percent, the

vehicle lease will save RTA no more than

$100,000. However, because the lease is

being privately placed with an institutional lessor, RTA is able to minimize

transactional costs such as ratings

charges, underwriting fees, and printing

expenses normally associated with public

debt issuance. In addition, RTA has

been able to avoid pledging local revenue sources, such as a share of sales tax

receipts, to secure the obligation. 

Savings to the RTA are particularly

noteworthy for the maintenance component of the deal. For the first three

years at least, the maintenance contract

is expected to produce large benefits,

saving the RTA over $2 million per

year. In addition, the lessor is expected

to retain RTA’s maintenance crew, and

renegotiate their labor agreement every

three years, as RTA has done in the past.

The cost savings will result from standardization of parts inventories, simplified maintenance techniques and training requirements, and management efficiencies to be instituted by the lessor.

New Orleans

Contacts:

Paul Marx, Federal Transit

Administration, 202/366-1675, or

William J. Deville, Deputy General

Manager, New Orleans Regional Transit

Authority, 504/248-3733.
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4

This issue’s technical corner considers the term “leverage,”

which is cited so often, and in connection with so many different types of financial arrangements, that it is easily misunderstood. In its broadest sense, financial leverage refers to the

use of financial tools to increase the ability of your own

resources to meet your project goals – just as you would use a

mechanical lever to increase your ability to lift a heavy object. 

Different communities use the term differently. For example,

in the case of state revolving funds and state infrastructure

banks, leverage is typically construed as a model for leveraging

the entire fund by borrowing against the contributed capital

(reserve fund model) or against interest payments made on

individual project loans (direct loan model). In contrast,

leverage can also be measured in relation to an individual project financing. This article focuses solely on leverage as

applied to specific projects. 

In terms of a project financing, leverage generally relates to

monetizing a project’s revenue stream through a debt financing. Thus, leveraging generally involves using a tool such as a

bond or loan to borrow capital which is secured by a projected

stream of revenues. In some cases, the borrowed capital supplements an up-front grant or equity investment. The greater

the degree of borrowing against the defined revenue stream,

the more highly leveraged is the transaction. 

Quantifying the Leverage 

Leverage is typically quantified as a ratio. This ratio compares

the value of a total investment (i.e., project cost) to the initial

equity contribution. Example 1 shows a typical borrowing for

a revenue-generating project, where a state leveraged a

$100,000 initial equity contribution by borrowing $400,000

from the private capital markets. The $400,000 is eventually

repaid to investors, with interest, from revenues associated

with the project (e.g., receipts from dedicated taxes, impact

fees, or tolls).

Example 1: $500,000 State Route Simple

The Subject and The Object

From Whose Perspective is the Leverage Calculated?

It is important to understand from whose perspective the

degree of leverage is being calculated. When multiple entities

contribute to a truly leveraged project (that is, a project for

which a share of the funding is borrowed), the leveraging ratio

can be considered from a variety of perspectives. Consider

Example 2, a $4 billion transit project.

Example 2: $4 Billion Transit Project

TECHNICAL CORNER

Deconstructing Leverage

Who’s Doing What to Whom? And By How Much?

The leveraging tool enables the up-front 

equity and revenue to meet capital requirements

Equity/Revenue Stream

Capital Requirements

continued on page 5

Facts of the Case, Dollars in Thousands

Project Cost 500

Equity 100

Debt 400

Leveraging Ratio

500/100= 5.0

Plain English

From the perspective of the state sponsoring the project, the equity

contribution is leveraged at a ratio of 5:1.

Or:

Use of debt leverages a $100,000 contribution by borrowing an

additional $400,000, for a total investment of $500,000.

Facts of the Case, Dollars in Millions

Project Cost 4,000

Federal Grants 700

Local Funds 2,300

Debt 1,000

Leveraging Ratio, Federal Perspective

4,000/700= 5.7

Plain English, Federal Perspective

The Federal contribution is leveraged at a ratio of 5.7:1.

Or:

Local commitments and debt leverage a $700 million Federal contribution with an additional $3.3 billion in local and borrowed

funds, for a total investment of $4 billion.

Leveraging Ratio, Federal Perspective

4,000/2,300= 1.7

Plain English, Federal Perspective

The Federal contribution is leveraged at a ratio of 1.7:1.

Or:

Federal contributions and debt leverage a $2.3 billion local commitment for a total investment of $4 billion.
Quarterly

FHWA's

5

Can You Leverage Without Borrowing? 

Example 2 raises an interesting question. Traditionally speaking, the term leverage has been applied only to cases in which

funds are borrowed against a pledged future stream of revenues. Is it correct, then, to include grant funds contributed

by another party when calculating a leveraging ratio? While it

may not be technically correct to portray simple matching

requirements as a case of leverage, as a practical matter, grants

are considered part of the overall financial package – even in

an instance where no borrowing has occurred. The essential

premise of leveraging is to increase the effectiveness of an 

initial investment without adding more funds directly.

Therefore, in a broader sense, one can talk about “leveraging”

funds by attracting other sources of funding, so long as the

additional funds do not come from the same sources as the

original investment. 

Thus, you will occasionally hear that the regular Federal-aid

highway program has an implicit leveraging ratio of 1.25:1,

assuming the standard 80-to-20 Federal-to-non-Federal matching ratio. Example 3 displays the calculation. 

Example 3: $100,000 Standard Federal-Aid Project

Internal vs. External Leverage

The Case of Direct Federal Credit

A most interesting case arises when one considers the comparative leveraging effect of Federal credit (e.g., a direct loan, a loan

guarantee, or standby line of credit) to that of a Federal grant.

Recall that even under the broadest definition of leverage, the

Federal investment is leveraged at only a 1.25 ratio under the

traditional Federal-aid highway grant program. To illustrate

the case of Federal credit as opposed to grants, consider the

Alameda Corridor. This $2 billion project is receiving a $400

million loan from the U.S. DOT. Example 4 presents ballpark

figures outlining the project’s plan of finance, including a $400

million equity contribution from the Ports of Los Angeles and

Long Beach.

Example 4: Alameda Corridor (Simplified)

What if the $400 million Federal contribution had been a

grant, and not a loan? In this case, the leveraging ratio perceived by the Federal government would be coincidentally the

same as that perceived by the Ports and the combined state and

local governments: 2,000 divided by 400, or 5:1. However,

because the $400 million is disbursed as a loan that will be

repaid with interest by the project sponsor, the budgetary cost

(or “score”) of the $400 million loan is actually much smaller

than $400 million. As readers familiar with the Alameda

Corridor know, under Federal budgetary rules, the loan was

assessed a present value budgetary cost of only $59 million,

with that fractional score primarily representing the estimated

risk of non-payment of the obligation. In other words, the

$400 million loan actually required an appropriation of only

$59 million. Thus we see that the actual leveraging ratio realized by the Federal government on the Alameda Corridor is

calculated as 2,000 divided by 59, or 34:1! 

Therein lies the power of leveraging. And within the context

of a constrained Federal budget, therein also lies the distinct

advantage that credit arrangements, such as loans, can enjoy

over conventional grant funding.

LEVERAGE, continued from page 4

Facts of the Case, Dollars in Thousands

Project Cost 100

Federal Grants 80

State Funds 20

Leveraging Ratio, Federal Perspective

100/80= 1.25

Leveraging Ratio, State Perspective

100/20= 5.0

Facts of the Case, Dollars in Millions

Project Cost 2,000

Federal Loan 400

State/Local Funds 400

Ports (Equity Contribution) 400

Capital Markets Debt 800

Leveraging Ratio, Ports’ Perspective

2,000/400= 5.0

Leveraging Ratio, State and Local Perspective

2,000/400= 5.0

Leveraging Ratio, Federal Perspective

2,000/59 (see below)= 34.0

• The project sponsor agrees to accept traffic risk associated with a variable usage-based payment, and

• Projects identified have already proven traffic demand, such as an extension to an existing road and not a start-up facility.

FHWA expects to have a copy of the report available through its website by early summer.

SHADOW TOLLING, continued from page 6

For more information about shadow tolls, contact Max Inman, FHWA,

202/366-0673 or Ray Tillman, URS/Greiner, 212/736-4444.
A REMINDER TO READERS

FHWA DOES NOT MAINTAIN A MAILING

LIST AND DOES NOT DISTRIBUTE IFQ

DIRECTLY. IFQ IS AVAILABLE AS AN

INSERT TO THE AASHTO JOURNAL,

AND IS AVAILABLE ELECTRONICALLY

THROUGH FHWA’s WWW HOME

PAGE:

http://www.fhwa.dot.gov/

innovative finance/

IFQ IS ALSO PROVIDED TO THE FOLLOWING ORGANIZATIONS FOR REDISTRIBUTION

AND/OR AS INFORMATION FOR THEIR

MEMBERSHIP:

• National Association of Regional 

Council’s (NARC’s) Association 

of MPOs (AMPO)

• ITS America

• American Public Transit 

Association (APTA)

• Surface Transportation Policy 

Project (STPP)

• State & Territorial Air Pollution 

Program Administrators/

Association of Local Air Pollution

Control Officials 

(STAPPA/ALAPCO)

• Association for Commuter 

Transportation (ACT)

• International Bridge, Tunnel, 

and Turnpike Association

MIRIAM A. ROSKIN, EDITOR

PORTER & ASSOCIATES, INC.

206/441-9808

FAX: 206/441-9852

MROSKIN@PORTER-INC.COM

LAURIE L. HUSSEY, CS MANAGING EDITOR

CAMBRIDGE SYSTEMATICS, INC.

617/354-0167

FAX: 617/354-1542

LLH@CAMSYS.COM

MAX INMAN, FHWA MANAGING EDITOR

202/366-0673

FAX: 202/366-7493

Reproduction (in whole or in part) and broad

distribution of IFQ is strongly encouraged.

Permission from FHWA, the editor, or 

any other party is not necessary.

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FHWA's

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6

RESOURCE REFERRAL

Shadow Tolling in the U.S.

A Viable Financing Approach?

A recent report commissioned by the

Federal Highway Administration, and

prepared by URS/Greiner in association

with Public Financial Management,

Inc., describes the United Kingdom’s

experience with shadow tolls, analyzes

shadow toll-related financial and capital

market issues, and explores the potential

applicability of this technique in the

U.S. The report, entitled The Selective

Use of Shadow Tolls in the United States,

draws no firm conclusions, but its

analysis can help communities determine whether this financing approach

can enhance their transportation programs.

Not a Revenue Source, But a Payment

Structure 

Shadow tolls are payments, based on

traffic levels, that are made by a government to a contractor or operator for the

construction, operation, or both, of a

highway facility. The payments are

termed “shadow” tolls because although

they are directly based on traffic levels,

they are not paid directly by users, and

users see no toll booths or other visible

evidence of the payments.

Because the payments are termed

“tolls,” many assume that shadow tolls

are an alternative revenue source. But

from the perspective of a public sponsor, it is more accurate to consider

shadow tolls as a type of payment structure where governments may use any

kind of tax or fee revenue as revenue

sources for the shadow toll payments.

As with conventional tolling, shadow

tolls can amortize capital costs over the

useful life of the investment and can

create early completion and other

incentives by sharing traffic and other

risks with the private partners. 

Shadow Toll Agreement Structure

A typical shadow toll agreement would

be made between a government and a

private contractor/operator for a specific

construction or reconstruction project.

Under a Design-Build-Finance-Operate

(DBFO) arrangement, the contractor/operator might agree to provide

some or all of the financing for the project by raising independent capital. The

private partner would have a set period,

possibly 30 years, to recover costs and

earn a reasonable return on investment

from shadow tolls. The road would

then revert to public ownership, and the

shadow toll payments would cease.

Incentive Effects of Shadow Tolls

An important advantage of a shadow toll

structure is its creation of incentives for

the contractor to construct a road

quickly and with high quality. Payments

to the contractor are based on traffic

volume, so the contractor benefits by

completing the project early, avoiding

construction delays, and ensuring a

long-lived road.

Effect of Shadow Toll Structure on

Financing Costs

The report notes that it is difficult to

evaluate the effect of a shadow toll payment structure on net public sector

financing costs, particularly if tax-exempt

debt is available through a government

agency or non-profit conduit. In general, the security of shadow toll debt is

directly related to the perceived security

of the underlying revenue source that a

government pledges for repayment.

However, contractor incentives and limits on financial risk provided by the

shadow toll structure may lower the

financing costs for shadow toll debt, in

comparison to an issue that does not

involve a shadow toll structure. 

Conclusions

Analysis contained in the report concludes that shadow tolls will work best

under the following conditions:

• The project has access to non-taxable 

debt,

• Underlying repayment source(s) are 

stable and creditworthy,

continued on page 5