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S. HRG. 107–962

INNOVATIVE FINANCING:

BEYOND THE HIGHWAY TRUST FUND

JOINT HEARING

BEFORE THE

COMMITTEE ON 

ENVIRONMENT AND PUBLIC WORKS 

UNITED STATES SENATE

AND

COMMITTEE ON FINANCE 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

OPTIONS FOR FINANCING FEDERAL TRANSPORTATION PROGRAMS

SEPTEMBER 25, 2002

Printed for the use of the Senate Committee on Environment and Public Works

and the Senate Committee on Finance

(

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

ONE HUNDRED SEVENTH CONGRESS 

SECOND SESSION

JAMES M. JEFFORDS, Vermont, Chairman 

MAX BAUCUS, Montana 

HARRY REID, Nevada 

BOB GRAHAM, Florida 

JOSEPH I. LIEBERMAN, Connecticut 

BARBARA BOXER, California 

RON WYDEN, Oregon 

THOMAS R. CARPER, Delaware 

HILLARY RODHAM CLINTON, New York 

JON S. CORZINE, New Jersey 

BOB SMITH, New Hampshire 

JOHN W. WARNER, Virginia 

JAMES M. INHOFE, Oklahoma 

CHRISTOPHER S. BOND, Missouri 

GEORGE V. VOINOVICH, Ohio 

MICHAEL D. CRAPO, Idaho 

LINCOLN CHAFEE, Rhode Island 

ARLEN SPECTER, Pennsylvania 

PETE V. DOMENICI, New Mexico 

KEN CONNOLLY, Majority Staff Director 

DAVE CONOVER, Minority Staff Director 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

TOM DASCHLE, South Dakota 

JOHN BREAUX, Louisiana 

KENT CONRAD, North Dakota 

BOB GRAHAM, Florida 

JAMES M. JEFFORDS (I), Vermont 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

ROBERT G. TORRICELLI, New Jersey 

BLANCHE L. LINCOLN, Arkansas 

CHARLES E. GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

FRANK H. MURKOWSKI, Alaska 

DON NICKLES, Oklahoma 

PHIL GRAMM, Texas 

TRENT LOTT, Mississippi 

FRED THOMPSON, Tennessee 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

CRAIG THOMAS, Wyoming

JOHN ANGELL, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

(III)

C O N T E N T S 

Page 

SEPTEMBER 25, 2002

OPENING STATEMENTS 

Baucus, Hon. Max, U.S. Senator from the State of Montana .............................. 1

Corzine, Hon. Jon, U.S. Senator from the State of New Jersey .......................... 30

Crapo, Hon. Michael D., U.S. Senator from the State of Idaho ........................... 8

Grassley, Hon. Charles, U.S. Senator from the State of Iowa ............................. 3

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma .................... 9

Jeffords, Hon. James M., U.S. Senator from the State of Vermont .................... 4

Reid, Hon. Harry, U.S. Senator from the State of Nevada .................................. 6

WITNESSES 

Carey, Jeff, managing director, Merrill Lynch & Co., Inc., New York, NY ........ 25

Articles: 

Road to Revolution Coming?, Bond Buyer .............................................. 99

Senate Panel Leaders Lobby DOT to Use Innovation in Its Funding, 

Bond Buyer ............................................................................................. 97

Senate Panel Tells TIFIA Program to Make Do With 2002 Leftovers, 

Bond Buyer ............................................................................................. 98

Transportation for Upcoming Reauthorization of TEA-21, Transportation Watch ........................................................................................... 103

Prepared statement .......................................................................................... 93

Responses to additional questions from: 

Senator Baucus .......................................................................................... 95

Senator Jeffords ......................................................................................... 96

Hahn, Hon. Janice, Councilwoman, City of Los Angeles, Los Angeles, CA, 

on behalf of the Alameda Corridor Transportation Authority ......................... 19

Prepared statement .......................................................................................... 80

Hecker, JayEtta, Director of Physical Infrastructure Issues, General Accounting Office ............................................................................................................... 15

Prepared statement .......................................................................................... 66

Responses to additional questions from: 

Senator Baucus ...................................................................................... 77

Senator Jeffords ..................................................................................... 78

Horsley, John, Executive Director, American Association of State Highway 

and Transportation Officials, Washington, DC ................................................. 23

Prepared statement .......................................................................................... 86

Responses to additional questions from Senator Jeffords ............................. 92

Rahn, Hon. Peter, Secretary, New Mexico Department of Transportation, 

Santa Fe, NM ....................................................................................................... 22

Prepared statement .......................................................................................... 84

Responses to additional questions from Senator Baucus .............................. 85

Scheinberg, Phyllis, Deputy Assistant Secretary for Budget and Programs, 

Department of Transportation ............................................................................ 13

Prepared statement .......................................................................................... 59

Responses to additional questions from Senator Jeffords ............................. 65

Seltzer, David, Distinguished Practitioner, Mercator Advisors, Philadelphia, 

PA, on behalf of the University of Southern California Los Angeles, CA 

National Center for Innovations in Public Finance .......................................... 11

Prepared statement .......................................................................................... 31

Powerpoint slides .............................................................................................. 33

Page

IV

Seltzer, David, Distinguished Practitioner, Mercator Advisors, Philadelphia, 

PA, on behalf of the University of Southern California Los Angeles, CA 

National Center for Innovations in Public Finance—Continued

Report, Findings and Recommendations for Innovative Financing, National Center for Innovations in Public Finance ........................................ 47

Response to additional question from Senator Baucus ................................. 58

Table, Key Drivers on Innovative Finance ..................................................... 57

ADDITIONAL MATERIAL 

Statements: 

American Highway Users Alliance ................................................................. 104

American Society of Civil Engineers ............................................................... 106

Forkenbrock, David J., Public Policy Center, University of Iowa ................ 114

Karnette, Betty, California State Senator ...................................................... 111

National Association of Railroad Passengers ................................................. 109

Texas Transportation Commission .................................................................. 120

Transportation Departments of Montana, Idaho, North Dakota, South 

Dakota and Wyoming ................................................................................... 105

(1)

INNOVATIVE FINANCING: BEYOND THE 

HIGHWAY TRUST FUND 

WEDNESDAY, SEPTEMBER 25, 2002

U.S. SENATE, 

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 9:36 a.m., Hon. 

Max Baucus (chairman of the Committee on Finance) and Hon. 

James M. Jeffords (chairman of the Committee on Environment 

and Public Works) presiding. 

Present for the Committee on Environment and Public Works: 

Senators Jeffords, Reid, Inhofe and Crapo. 

Present for the Committee on Finance: Senator Baucus. 

OPENING STATEMENT OF HON. MAX BAUCUS, U.S. SENATOR 

FROM THE STATE OF MONTANA 

Senator BAUCUS. The joint hearing of the Finance Committee 

and the Environment and Public Works Committee will come to 

hearing. 

This is a unique and quite possibly historic occasion because the 

Environment and Public Works Committee and the Finance Committee are holding a joint hearing in the Finance Committee hearing room, chaired by the chairman of the Environment and Public 

Works Committee. I am sure that all historians will note this. It 

surely will be recorded as a major moment in history. 

Senator JEFFORDS. If you hear a rumbling up there, let me know. 

Senator BAUCUS. But at the very least, I welcome everyone. I will 

make an opening statement, then turn the hearing over to Chairman Jeffords, who will chair the joint hearing. 

First, as a member of this committee and also Environment and 

Public Works Committee, I have spent a lot of time working on 

highway issues and financing highway programs because highways 

are just so important to the State of Montana. 

This joint hearing, clearly, is one that recognizes the joint interests between the two committees: providing the funds to the Finance Committee for a highway program—the trust fund; and second, the authorization of programs by Environment and Public 

Works Committee, deciding which projects will be built and maintained over the life of the authorization law. 

I was also privileged to be a co-author of TEA–21, with Senators 

Warner, Chafee, Byrd, and Graham. There are many others, also, 

who helped to make it a successful bill. 

2

It was a time, frankly, where we all worked very well together. 

I expect the same camaraderie and relationship to prevail among 

the principal members of the Environment and Public Works Committee again this year. 

I am especially pleased that Senator Grassley, the Ranking 

Member of the Finance Committee, has also shown such a great interest in these issues. He, too, will play a very important role during TEA–21 reauthorization. 

The Finance Committee recently held a hearing that explained 

how the Highway Trust Fund is structured to provide funding for 

our highway system. We heard testimony that was quite interesting. The testimony focused on the projections for trust fund income over the next 10 years. 

As successful as the trust fund has been, unfortunately our 

transportation needs far outweigh the resources. In fact, I remember the Department of Transportation mentioning—this has been 

the case over many years—how the needs of our country in developing our highway program provide only about half of the funds 

that are available about 50 percent. My guess is, that figure is not 

going to get any better in the future. 

Today’s hearing is intended to discover how we can get additional 

financing beyond the trust fund for our highway program. We are 

looking at additional means to finance the ordinary way—that is, 

the gasoline tax and fuel taxes that the users pay to the trust 

fund—in order to meet our Nation’s needs. 

In recent years, there has been increased recognition of the 

greater importance of our highways to our country. As we prepare 

to reauthorize the highway program next year, the big question for 

Congress will be how to increase the level of investment for the 

benefit of us all. 

Earlier this year, Senator Crapo and I introduced bipartisan legislation with 12 co-sponsors, S. 2678, the MEGA–TRUST Act, for 

Maximum Economic Growth for America through the Highway 

Trust Fund. 

This bill laid out some ways to increase investment in the highway program without raising taxes. That legislation would allow 

the trust fund to be properly credited with taxes either paid or 

foregone with respect to gasohol consumption. 

We would also reinstate the principal that the highway and mass 

transit accounts of the Highway Trust Fund should be credited 

with the interest on their respective balances. 

As we all know now, the general fund does not go back to the 

respective balances of those two programs. I think that change is 

very important. 

But we must also continue to work out additional ways to enable 

a stronger level of highway investment. Next week, I will introduce 

the MEGA–INNOVATE, Maximum Economic Growth for America 

through Innovative Financing. I do not know where in the world 

we got that name. 

Under this legislation, the Secretary of the Treasury would sell 

bonds, with the proceeds being placed in the highway account of 

the Highway Trust Fund. The Treasury would be responsible for 

the principal and the interest. The bond proceeds would enable the 

3

basic highway program to grow. It would help the citizens of every 

State. 

The administration of this initiative would be simple. No new 

structure is required. It is a new idea that does not raise taxes, but 

would advance our national interest in a strong highway program. 

As this is a new idea for highways, the bill introduces this con- cept at a very modest level, in the range of $3 billion annually in 

bond sales. 

However, when combined with the provisions of the Trust Act 

and the continuation of current resources of revenue, this legislation should enable the highway program to achieve an obligation 

level of approximately $41 to $42 billion by fiscal 2009. 

Many other elected officials and organizations have shown interest in both of these acts, and I would like to enter their statements 

into the record. 

Senator JEFFORDS. Without objection. 

[The prepared statement of Senator Grassley follows:]

STATEMENT OF HON. CHARLES GRASSLEY, U.S. SENATOR FROM THE STATE OF IOWA

I would like to thank Chairmen Baucus and Jeffords for scheduling this joint 

hearing between the Senate Finance Committee and the Senate Environment and 

Public Works Committee. We are here to examine issues of highway finance in anticipation, of the reauthorization of TEA–21. As Senator Baucus indicated, both 

Committees have an interest in providing adequate funding for our nation’s transportation system whether it be through the traditional fuel tax regime or through 

other tax-based financing mechanisms. As I noted in our first hearing on the highway trust fund reauthorization in May, transportation issues are very important to 

Iowa. Accordingly, I look forward to working with Senators Baucus, Jeffords, and 

Smith in reauthorizing TEA–21 during the next Congress. 

On May 9, the Finance Committee held its first hearing to begin evaluating the 

future health of the Highway Trust Fund. In that hearing, we focused largely on 

the flow of taxes into the trust fund and the continued ability of the highway trust 

fund to support transportation needs under reauthorized TEA–21. 

We also began talking about the impact that alternative vehicles and alternative 

fuel sources will have on the trust fund in the years ahead. Finally, we began to 

consider how we would maintain the existing levels of trust revenue for transportation demands without raising taxes. 

Today, we will not focus on trust fund revenue. Instead, we will shift our attention to various financing mechanisms that will supplement transportation needs beyond the dedicated revenues in the trust fund. 

Historically, issuing State and local bonds (which are exempt from Federal taxation) was the principal way States raised capital for transportation needs in excess 

of those currently available with highway trust fund resources. While this works 

well in some States, some including Iowa have decided against using bonds to finance infrastructure projects while others are constitutionally prohibited from doing 

so. 

During the reauthorization of TEA–21, a concerted effort was made to begin using 

Federal resources to encourage private investment in transportation projects. During the reauthorization, the drafters also attempted to expand and make more flexible the resources available to State transportation departments. A number of pilot 

programs were established to achieve those goals including (i) TIFIA Funding 

(named for the Transportation Infrastructure Finance and Innovation Act), (ii) SIBs 

(State Infrastructure Banks), (iii) GARVEES (Grant Anticipation Revenue Vehicles), 

and GANS (Transit Grant Anticipation Notes). Because many of these programs 

rely on State borrowing, they are not viable solutions for all States. In other circumstances, the programs may not have worked as intended. 

Iowa, for example, is in the process of closing out its State infrastructure bank. 

Without the ability to use State and local bonds to increase SIB funding, it was difficult for Iowa to effectively use the concept. In addition, several shortline and regional railroads in my State have tried to use the railroad infrastructure fund administered by the Federal railroad administration. The application process is extremely cumbersome and prevents many railroads from even considering the option. 

Those who have applied have had difficulty coming up with the required credit risk 

4

premium to access funds. The role of the State DOT in these projects has been limited to moral support—a problem that should clearly be fixed. 

Evaluating the successes and failures of previously authorized programs is an important first step in the reauthorization process. I look forward to hearing from the 

witnesses today on how we may improve and further refine existing programs. We 

should particularly examine programs that involve public-private partnerships such 

as TIFIA. Many of the witnesses have commented on the operation of these programs in their testimony, and at least one of our witnesses has suggested program 

modifications. These types of comments are highly instructive, and I look forward 

to hearing additional witness views on these issues. 

As we move into reauthorization, I know we will want to maintain the important 

goals of stretching available resources and inducing private investment into the 

transportation sector. This hearing should help us evaluate alternative financing 

mechanisms for achieving those goals. Specifically, I look forward to learning more 

about the bond proposals offered by the American Association of Highway and 

Transportation Officials (AASHTO) and Senator Baucus. Because these ideas are 

new to the transportation sector, we will want to consider carefully the details of 

those proposals. With respect to each new proposal, I would like to further consider 

whether additional funds should be raised for State apportionment (program finance) or, for the benefit of specific projects (project-finance). In addition, I would 

like to further consider whether leveraged funds should be retired using taxarbitraged escrow funds, repayments from the general fund, or project-specific revenue sources. 

In closing, I would like to reiterate that I look forward to working with my colleagues on the reauthorization of TEA–21. I am anxious to hear from the witnesses 

on how to most effectively finance the important needs of our highway transportation system. Thank you, Mr. Chairmen.

Senator BAUCUS. Concerning other statements for the record, the 

first, is from the Departments of Transportation from the following 

five States: Montana, Idaho, Wyoming, North Dakota, and South 

Dakota, endorsing both the MEGA–TRUST and my forthcoming 

bond proposal. Second, a statement from the American Highway 

Users Alliance, also indicating support for both measures. 

I very much appreciate the support of these groups, as well as 

the support of others, for these two important initiatives. A wellfunded highway program is certainly essential to the economic future of each of our States. I look forward to working with my colleagues on these measures, and on other ways to help our citizens 

benefit from increased levels of highway investment. 

I also look forward to hearing additional proposals on alternative 

means to finance the Nation’s surface transportation program. The 

more we can get the private sector involved and the more we can 

leverage funds, the better we will be able to meet our transportation needs. 

[Additional statements submitted for the record appear at the 

end of the hearing record.] 

Senator BAUCUS. I would now like to turn the hearing over to my 

good friend, Jim Jeffords from Vermont, who will chair the joint 

hearing. 

OPENING STATEMENT OF HON. JAMES M. JEFFORDS, 

U.S. SENATOR FROM THE STATE OF VERMONT 

Senator JEFFORDS. Thank you, Senator Baucus. I appreciate the 

opportunity to sit in your seat here. We work very closely together 

on both committees, and you are doing an excellent job on the Finance Committee. It is appreciated, your hard work that brings us 

here today. 

5

I am pleased this morning to join in this hearing on a very, very 

important subject. Today, we will focus on money, a key to the future of America’s transportation system. 

By some accounts, the annual level of investment needed to just maintain our transportation system is nearly $110 billion per year. 

Our current national program falls well short of that figure. 

Over the last 50 years in our successful campaign to develop the 

Eisenhower Interstate Highway system, we have used Federal 

grants to States in a pay-as-you-go program to build our national 

system. Today, that system is essentially complete. 

We are in a post-interstate era. Our Federal aid programs now 

focus, appropriately, on maintaining, operating, and enhancing the 

highway asset that we have built. But this Federal/State partnership is now being overwhelmed by just its asset management responsibility. Unless we adapt, I foresee a continuing deterioration 

of our transportation system. 

We are a Nation with unlimited potential and boundless possibility. That spirit has propelled a range of achievement unparalleled anywhere else in this world. Our renewal of America’s transportation program must reflect this national heritage in meeting 

the needs of the next generation. 

It should be as bold as President Eisenhower’s vision was in its 

time. Our vision should not be hobbled by artificial constraints or 

narrow thinking which would permit other nations to gain competitive advantages over us. To fully compete in the world markets and 

to offer all American families and businesses the full range of products in international commerce, we need strategic investment in 

key new facilities, while reinvesting in those already built. 

We have explored options to increase revenues to the highway 

fund in previous hearings. I will consider all options for growing 

the trust fund. But today we will look beyond the Highway Trust 

Fund, beyond the grant and aid programs, and beyond the Federal/

State partnership. 

We will hear today from two distinguished panels on a topic that 

has been referred to in the last 10 years as innovative financing. 

We will look at the role of revenue streams, private capital, specialpurpose entities, and intermodal facilities in meeting the needs of 

the next generation. But this is not innovative, radical, or even 

new. In fact, what we will explore today is really the pre-interstate 

approach to financing roads and bridges. It is the standard way 

that our free enterprise system creates our means of production 

through private capital and return on investment. 

I am pleased that Councilwoman Hahn from Los Angeles is here 

to discuss a pioneering effort in modern transportation finance, the 

Alameda Corridor. This prototype project is intermodal in its nature, provides both freight and passenger benefits, draws on new 

revenues to retire debt, and is sponsored by a special-purpose district. 

In my home State of Vermont, we have utilized a finance program called a State Infrastructure Bank, or a SIB. A SIB is a revolving fund mechanism for financing a wide variety of highway 

and transit projects through loans and credit enhancement. 

Vermont has taken hundreds of fuel delivery trucks off our roads 

by financing bulk storage facilities in key rail yards. 

6

Other States have used this mechanism, and others, to provide 

early project financing. In the State of South Carolina, a variety of 

finance techniques, coupled with public/private partnerships, has 

resulted in the construction of 27 years’ worth of projects in a 7-

year timeframe. 

On a smaller scale, the State of Delaware has joined with the 

Norfolk Southern Railroad to renovate historic Shellpot Bridge, 

with the railroad retiring the project’s cost over time through fees 

on its rail cars. 

What we will discuss today is a complement to our traditional 

programs, not a replacement. Private capital represents a realistic 

means to expand our buying capacity. The key is revenue streams. 

When a project is supported by dedicated revenues, whether it is 

tied directly to the use of the facility as in the case of Alameda or 

Shellpot Bridge, or simply earmarked from more general sources 

such as property rentals or operating revenues, then the project 

can retire debt. 

The freight community particularly will benefit from expanded 

use of financing. Today’s freight interests are frustrated by their 

inability to compete when projects are ranked at the State and 

NPO level. 

Through its capacity to generate revenue, the freight sector can 

essentially create its own program. This will also reduce demand 

on the traditional Federal aid grant program. 

Let me close by suggesting a vision for transportation finance. In 

the future, every responsible fund manager, both here and globally, 

will have a fraction of his or her portfolio invested in U.S. transportation infrastructure. They will do so with confidence in the investment and the bold Nation it supports. Over the next few hours, I 

will listen for ways to make this vision a reality. Thank you. 

Now we turn to the hearing, the best parts of it. I would turn, 

also, to the Senator from Nevada for any statement. 

STATEMENT OF HON. HARRY REID, U.S. SENATOR FROM THE 

STATE NEVADA 

Senator REID. I thank you and Chairman Baucus. I commend 

both of you for holding this joint hearing. It is so important. I am 

thankful also, of course, that Ranking Members Smith and Grassley have agreed to do this. 

We are authorizing TEA–21 the legislation to address our Nation’s infrastructure needs is a big job, an important job, and one 

that will take the cooperation of more than one committee. 

Early this month, the Subcommittee on Transportation, Infrastructure, and Nuclear Safety conducted a joint hearing on freight 

issues with Senator Breaux’s Commerce Subcommittee. We need 

more cooperation between committees involved in reauthorizing 

TEA–21. 

We have to work together to ensure that our significant diverse 

transportation needs are addressed. Our highways, transit system, 

and railways are too important to our economic well-being and 

quality of life to ignore. 

I look forward to working with the Finance Committee and other 

committees to see if we can adequately address our transportation 

needs. We are nearing the completion of the Environment and PubVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 H:\DOCS\88460 SENENV1 PsN: DUANE
7

lic Works Committee’s year-long series of 14 hearings and 

symposia addressing the critical issues related to reauthorization. 

It is appropriate that our final two scheduled hearings focus on 

funding issues. 

As we have been told today, we will review opportunities for innovative financing. On Monday, the Transportation Subcommittee 

will examine the state of the infrastructure and the funding necessary to maintain and improve our Nation’s highway system. 

The State of Nevada has been a leader in the field of innovative 

financing and has aggressively sought to leverage private investment through existing Federal financing programs. 

For example, the project that should have taken place 100 years 

ago, the Reno Transportation Rail Access Corridor, RTRAC, is 

seeking to use $70 million in loans under TIFIA to leverage $200 

million in State, local, and private funding to build a below-grade 

rail transportation corridor. This project will increase safety and 

reduce traffic congestion by eliminating 10 at-grade rail crossings. 

That is important, of course. The Las Vegas monorail project is seeking a $120 million TIFIA 

loan to bridge the gap between Federal, State, local, and private financing to build Phase II of what will eventually be an 18-mile regional rail transit system. 

Finally, the State is expediting the critical Hoover Dam Bypass— and we are working with the State of Arizona on this—by using a 

bonding mechanism similar to the GARVEE bonds to allow construction to proceed before Federal funding is completed. 

Each of these vital highway transit rail projects were made possible by innovative financing opportunities provided by the Federal 

Government. In the future, we hope to creatively use new, innovative financing tools to bridge the gap between public and private 

investment to build a high-speed magnetic levitation train between 

Southern California and Las Vegas. 

There is no question that innovative financing must be a critical 

component of next year’s transportation bill. We should encourage 

new public/private partnerships and focus on where Federal resources can creatively be used to leverage State, local, and private 

investment for critical highway transit and rail projects. 

Let me say publicly what I have said privately. I think it is tremendous that the chairman of the Finance Committee, the allpower Finance Committee as we know here, and the former chairman of this committee is working so closely with us. 

I think that we are going to benefit so greatly in the year to come 

from Senator Baucus’ experience as chairman of this committee, 

and his experience as chairman of the Finance Committee, to help 

come up with some of these innovative ways to finance these 

projects. We need this very, very badly. 

I applaud and commend the chairman of the Environment and 

Public Works committee, Senator Jeffords, for his agreeing to do 

these kinds of joint hearings. This is something we do not do here 

very often. We were so protective of our turf here. I think we 

should Senator Baucus for all we can because of his experience. 

[Laughter.] 

I think that we need to understand that we, as the Transportation and Infrastructure Committee, cannot do it alone. We need 

8

to do things differently than we have done in the past. I think this 

is great to have this hearing. I think this is an indication of what 

is to come next year, and coming up with a highway bill. It is going 

to be different than any highway bill we have ever done before. 

I want to apologize to the committee. Senator Inouye is not here 

today, and I have got to help him on a committee beginning at 10 

o’clock. 

Senator JEFFORDS. Well, thank you very much for your excellent 

statement. 

Senator BAUCUS. If I might, Mr. Chairman, also thank Senator 

Reid for his very strong endorsement of the joint hearing. I think 

that we get better legislation here with more joint hearings, as a 

general rule. The legislation is good as it is, but I think joint hearings are very, very helpful. I compliment the Senator for making 

that observation. 

Senator JEFFORDS. There is no subject that a joint hearing is 

more appropriate for than this one right now. 

Senator Crapo? 

STATEMENT OF HON. MICHAEL D. CRAPO, U.S. SENATOR 

FROM THE STATE OF IDAHO 

Senator CRAPO. Thank you very much. I would like to thank both 

of our joint chairmen today and associate myself with the remarks 

of Senator Reid about the importance of the fact that we are working together and having these joint hearings. 

As we work together to put together the next highway bill, it is 

going to be critical that we do a good job, and a prompt job. But, 

even more importantly, we have got to work together to make sure 

that we build the kind of support for the good bill that we will need 

to build. I appreciate the efforts of both of our joint chairmen for 

holding this hearing. Clearly, innovative financing and the funding 

aspects of this are going to be critical. 

In terms of talking about working together, I want to especially 

thank Senator Baucus. He and I, both coming from neighboring 

States out in the Northwest, have similar concerns with regard to 

our States’ issues with regard to transportation. 

We have found an opportunity to work together across party 

lines to put together some innovative approaches of our own to try 

to address the question of how to increase the pot of funding for 

our highway needs in this country. With the two approaches that 

we have come together on, we have done it without raising taxes, 

and I think that that is a very important first step: the MEGA–

TRUST Act, which Senator Baucus already mentioned, and then 

the MEGA–INNOVATE Act that will be introduced soon. 

We have two ideas on the table that are very important. As has 

been indicated by Senator Baucus and Senator Jeffords today, I 

look forward to hearing from people around the country who have 

had a lot of experience with this and who have a lot of ideas about 

how we can accomplish it, to giving us more ideas and more proposals for how we can address the needs for funding our next highway bill. 

So, again, to both of our chairmen, I thank you for this opportunity. I look forward to the information we are going to receive 

today, and working with you as we put together the next bill. 

9

Senator JEFFORDS. Thank you. A very helpful statement. 

Senator Inhofe? 

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM 

THE STATE OF OKLAHOMA 

Senator INHOFE. Thank you, Mr. Chairman. 

As we work together in drafting the reauthorization of TEA–21, 

it is safe to say that all members here recognize that this is a time 

of extraordinary challenge and opportunity for the transportation 

sector. 

The world of surface transportation is changing. It is now our job 

to work together to ensure adequate funding for investment in the 

Nation’s transportation system and preserve State and local government flexibility to allow the broadest application of funds for 

transportation solutions. 

TEA–21 dramatically altered the transportation funding mechanisms, provided greater equity among States in the Federal funding, and record levels of transportation investment. For most Federal aid projects, the law requires that 20 percent of the costs be 

derived from a non–Federal source. 

In order to maximize the use of all available resources, States 

now have a range of options for matching the Federal share of 

highway projects. By providing flexibility in a form that the non– Federal match might take, Federal dollars can be leveraged more 

effectively. 

What we have been taking advantage of in Oklahoma is the toll 

credit match. We apply certain toll revenues/expenditures to build 

and improve our public highway facilities as a credit toward the 

non–Federal matching share of particular projects. 

However, transportation officials at all levels of government still 

face a significant challenge when considering the ways to pay for 

improvements to transportation infrastructure. It is apparent that 

traditional funding sources are insufficient to meet the increasing 

complex needs. 

I remember when I was mayor of Tulsa, we worked diligently 

trying to focus on the public/private partnerships. I recognize that 

the implementation process is a complex undertaking with a wide 

range of organizational and financial options. But it is important 

for public agencies to evaluate all of their alternatives. 

Despite the record levels of investment, funding is not keeping 

pace with the demands for improvement and to maintain the vitality of the Nation’s transportation system. 

I am in a unique position to appreciate this because I spent 8 

years in the House of Representatives on the Transportation Committee and I was really into it. 

When I came to the Senate, I was more on some of the problems 

we were having in the EPA and clean air problems. Until I became 

chairman of the Subcommittee on Transportation and Infrastructure, I was more involved with those issues. 

In that 4-year period, the congestion and other severe problems 

that we are facing are brought home to me in such a way that I 

see that we are going to have to try something new and different. 

That is what we did with TEA–21; that is what we are going to 

continue to do. I am looking forward to working with you. I ask 

10

unanimous consent that my entire statement be made a part of the 

record at this point. 

Senator JEFFORDS. It certainly will. 

[The prepared statement of Senator Inhofe follows:]

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM THE STATE OF

OKLAHOMA

Thank you Mr. Chairman. As we work on the drafting of this reauthorization, I 

think it is safe to say that all the members here recognize that this is a time of 

extraordinary challenge and opportunity in the transportation sector. The world of 

surface transportation is changing. It is now our job to work together to ensure adequate funding for investment in the nations transportation system and preserve 

State and local government flexibility to allow the broadest application of funds to 

transportation solutions. 

TEA–21 dramatically altered transportation funding mechanisms. It provided 

greater equity among States in Federal funding and record levels of transportation 

investment. 

For most Federal-aid projects, the law requires that 20 percent of the costs be derived from a non–Federal source. In order to maximize the use of all available resources, States now have a range of options for matching the Federal share of highway projects. By providing flexibility in the form that the non–Federal match might 

take, Federal dollars can be leveraged more effectively. 

What we have been taking advantage of in Oklahoma is the toll credit match. We 

apply certain toll revenue expenditures to build and improve our public highway facilities as a credit toward the non–Federal matching share on particular projects. 

However, transportation officials at all levels of government still face a significant 

challenge when considering ways to pay for improvements to transportation infrastructure. It is apparent that traditional funding sources are insufficient to meet the 

increasingly complex needs. I remember when I was Mayor of Tulsa, we worked diligently trying to focus on public private partnerships. I recognize that the implementation process is a complex undertaking with the wide range of organizational and 

financing options but its important for public agencies to evaluate all their alternatives. 

Despite the record levels of investment, funding is not keeping pace with demands 

for improvements to maintain the vitality of the nation’s transportation system. 

Some transportation projects are so large that their costs exceed available current 

grant funding or would consume so much of these current funding sources that they 

would delay many other planned projects. 

ARTBA proposed a number of options for enhancing the Highway Account revenues. Some included indexing the motor fuels excise taxes for inflation, crediting the 

Highway Account with gasohol tax revenues that currently go into the General 

Fund, and expanding innovative financing programs. I might also mention that 

since the enactment of TEA–21, interest accrued on any obligation held by the fund 

does not get credited to the Highway Trust Fund, the interest earned goes to the 

General Fund. This is obviously something that we need to rethink during reauthorization. These are all revenue enhancements that would increase the fund substantially. 

With the Energy bill pending in Conference, the Trust Fund will recoup an additional 2.5 cents per gallon of ethanol currently being deposited into the general revenue. The Senator from Montana has been very aggressive at trying to make the 

Trust Fund whole with respect to the current 5.3 cent per gallon ethanol subsidy. 

Although he and I do not agree on how to best address this issue, we are in agreement that the Highway Trust Fund should not pay to subsidize any fuel source. Our 

surface transportation infrastructure needs are such that we cannot afford to forego 

any revenue source. 

Certainly one of the key factors in the economic engine that drives our economy 

is a safe, efficient transportation system. If our economic recovery is going to continue to expand, we cannot ignore the immediate and critical infrastructure needs 

of highways, bridges, and State/local roadway systems. 

Finally, I would encourage our witnesses to address the current issues with funding dilemmas and how the use of innovative finance can generate real economic returns by expediting project construction. 

Thank you Mr. Chairman. I look forward to today’s hearing and want to welcome 

all of our witnesses.

Senator INHOFE. I also want to say, Mr. Chairman, that at the 

same time in the next room we have the Senate Armed Services 

11

Committee that is meeting, so we have required attendance at both 

places and I will be going back and forth. 

Senator JEFFORDS. Thank you very much. 

Now we turn to the important part of the hearing, and that is 

listening to our witnesses. 

Our first witness is David Seltzer, Distinguished Practitioner at 

the National Center for Innovations in Public Finance, University 

of Southern California, Los Angeles. Please proceed. 

STATEMENT OF DAVID SELTZER, PRINCIPAL, MERCATOR ADVISORS, PHILADELPHIA, PA, ON BEHALF OF THE UNIVERSITY OF SOUTHERN CALIFORNIA, LOS ANGELES, NATIONAL 

CENTER FOR INNOVATIONS IN PUBLIC FINANCE 

Mr. SELTZER. Thank you very much, Mr. Chairman and members. I am affiliated with the National Center at USC. It is a professional education and research center in the field of infrastructure finance. As part of the record, I have furnished this copy of 

a report that USC published last year concerning public/private 

partnerships in California. I feel compelled to tell you, this will be 

covered on the final exam. 

[Laughter.] 

Senator JEFFORDS. It will be made a part of the record. Thank 

you. 

Mr. SELTZER. I, too, would like to commend you for holding this 

joint hearing on innovative finance. Because the Nation’s transportation needs require a wide array of tools, it is very valuable that 

both the tax writing and authorizing committees are jointly deliberating this important issue. 

This morning you will be hearing from a distinguished panel of 

individuals from the Federal, State, local, and private sectors on 

various innovative finance tools, including New Mexico’s GARVEE 

bonds, the Alameda Corridor, TIFIA credit instruments, private activity bonds, and tax credit bonds. 

What I would like to do, briefly, is provide a table-setter, giving 

you a framework for evaluating these and other innovative finance 

tools. This may help your committees determine which tools would 

be most effective in filling the funding gap and, in essence, provide 

a context for considering innovative finance. 

To my mind, the central problem in Federal transportation policy 

is that, on the one hand, transportation projects are lumpy investments. They are capital-intensive, long-lived, and very heterogeneous. 

On the other hand, Federal budgetary policy is very short-term 

oriented. It is cash-based and it is focused on costs rather than 

benefits. This treatment is really reflected in Federal budgetary 

scoring, where current outlays are treated the same way as longterm capital investments in transportation infrastructure. That 

mismatch between the period of when costs and benefits are recognized can distort project investment decisions. 

Where innovative finance comes in, is that it can help redress 

some of that imbalance, in my view. Innovative finance tools are 

generally less intrusive than direct Federal grants. They, as you 

pointed out, Mr. Chairman, allow market forces to work by drawVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 H:\DOCS\88460 SENENV1 PsN: DUANE
12

ing on private capital, and can better match the periods of the costs 

and the benefits. 

Your two committees have at their disposal, really, three approaches that may be used to advance infrastructure projects: regulatory incentives, Tax Code incentives, and credit incentives. 

Regulatory incentives are best demonstrated perhaps by New 

Mexico. You will be hearing in the next panel about not just innovative financing using GARVEE bonds, but also innovative procurement using design build procurement and innovative asset 

management, employing long-term warranties. Those three regulatory reforms were put together to advance an important project. 

The second incentive, the Tax Code, includes things like tax-oriented leasing of capital assets, private activity bonds, and tax credit bonds. These tax measures have the benefit of using the pay-go 

scoring methodology, where the tax expenditures are recognized on 

an annual basis, not all up front. That approach represents something more akin to a commercial practice of amortizing costs. 

The third of the three general approaches, Mr. Chairman, is 

credit incentives, as evidenced by Federal loan and loan guarantee 

programs like TIFIA and the Railroad Rehabilitation and Improvement Financing Program. 

For Federal credit instruments, the budget scoring uses a 

present value concept, again akin to commercial practices where 

the time value of money is taken into account. 

Now, for any of these various innovative finance tools to be successful, they must satisfy three groups of stakeholders simultaneously. First is the project sponsor, the public or private entity 

that is developing, advancing, and managing the capital investment. 

The second of the three stakeholders is the investor. You have 

to provide a competitive, risk-adjusted rate of return that an investor can compare to options to invest capital elsewhere. 

The third of the three stakeholders is, of course, Federal policymakers who have to look at both policy objectives and budgetary 

costs. 

Senator Jeffords, you indicated an interest in identifying new 

products for portfolio managers. One interesting example would be 

a way to attract pension funds into infrastructure finance. 

Public, corporate, and union funds represent some $3.6 trillion of 

investment assets, yet today there are virtually no U.S. transportation projects in their portfolios. 

The principal reason for that is that the primary financing vehicle of tax-exempt bonds does not appeal to tax-exempt entities such 

as pension funds. However, something like tax credit bonds, which 

you will be hearing about later, where the principal could be sold 

to, say, a pension fund and the tax credits decoupled and sold to 

other investors, might address some of your objectives. 

In summary, different innovative finance tools are suited to different products and projects. I have submitted also as part of the 

record a methodology for looking at how one can systematically 

compare tools such as GARVEE bonds, tax credit bonds, private activity bonds, and TIFIA instruments in considering reauthorization. 

So, thank you very much for your time. I appreciate it. 

13

Senator JEFFORDS. Thank you for a very helpful statement. 

Our next witness is Phyllis Scheinberg, Deputy Assistant Secretary for Budget and Programs a the U.S. Department of Transportation, right here in Washington, DC. 

Ms. Scheinberg, please proceed. 

STATEMENT OF PHYLLIS SCHEINBERG, DEPUTY ASSISTANT 

SECRETARY FOR BUDGET AND PROGRAMS, U.S. DEPARTMENT OF TRANSPORTATION 

Ms. SCHEINBERG. Thank you, Chairman Jeffords. I want to send 

my appreciation to Chairman Baucus and members of the committees. 

Thank you for holding this hearing today and inviting me to testify on Federal innovative finance initiatives for surface transportation projects. 

These financing techniques, in combination with our traditional 

grant programs, have become important resources for meeting the 

transportation challenges facing our Nation. 

Last January, Secretary Mineta indicated to you his desire to ‘‘expand and improve innovative finance programs in order to encourage greater private sector investment in the transportation 

system.’’ He stated that innovative financing will be one of the Department’s core principles in working with Congress, State, local officials, tribal governments, and stakeholders to shape the surface 

transportation reauthorization legislation. Secretary Mineta remains steadfast in his support for these programs, so we want to 

tell you that we are here to work with you. 

But, first, let us talk about, what is innovative finance? We at 

the Department apply the term to a collection of financial management techniques and debt finance tools that supplement and expand the flexibility of the Federal Government’s transportation 

grant programs. 

We see the primary objectives of innovative finance as leveraging 

Federal resources, improving utilization of existing funds, accelerating construction timetables, and attracting non–Federal investment in major projects. 

There are three major innovative finance programs that I would 

like to talk about today: the Transportation Infrastructure Finance 

and Innovation Program, or TIFIA, Grant Anticipation Revenue 

Vehicles, or GARVEE bonds, and State Infrastructure Banks, or 

SIBs. 

First, the TIFIA credit program. Through the leadership of the 

Senate, and this committee in particular, TIFIA was established to 

provide a direct role for the Department of Transportation to assist 

nationally or regionally significant transportation projects through 

direct loans, loan guarantees, and stand-by lines of credit. 

TIFIA allows the Federal Government to supplement, but not 

supplant, existing capital finance markets for large transportation 

infrastructure projects. We seek to take prudent risks in order to 

leverage Federal resources through attracting private and other 

non–Federal capital projects. 

We have selected 11 projects, representing $15.7 billion in transportation investment, to receive TIFIA credit assistance. The TIFIA 

14

commitments themselves total $3.7 billion in credit assistance, 

with a budgetary impact of only a little bit more than $200 million. 

Highway, transit, passenger rail, and multimodal projects have all 

sought, and received, TIFIA credit assistance. 

We are pleased with the results that we are seeing. The overall 

leveraging effect of the Federal assistance for the TIFIA projects 

has been 5 to 1. Private co-investment has totaled $3.1 billion, or 

about 20 percent of the total project costs. 

We believe that a limited number of large surface transportation 

projects each year will continue to need the types of credit instruments offered under TIFIA. Project sponsors and DOT staff are 

still exploring how best to utilize this credit assistance, and we welcome congressional guidance and dialog during this evolutionary 

program period. 

A second financing tool used by States has been the issuance of 

Grant Anticipation Revenue Vehicles, or GARVEEs. These bonds 

enable States to pay debt service and other bond-related expenses 

with future Federal-aid highway apportionments. 

A GARVEE generates up-front capital for major highway projects 

and enables a State to accelerate project construction, and spread 

the cost of a facility over its useful life. With projects in place sooner, costs are lower and safety and economic benefits are realized 

earlier. In total, six States have issued 14 GARVEE bonds totaling 

more than $2.5 billion to be repaid using a portion of their future 

Federal-aid highway funds. 

A third significant project finance tool is the State Infrastructure 

Bank, or SIB, which is a revolving fund administered by a State. 

Federally capitalized SIBs were first authorized under the provisions of the National Highway System Designation Act of 1995. 

SIBs provide various forms of credit assistance. As loans are repaid, a SIB’s capital is replenished and can be used to support new 

projects. 

As of June 2002, SIBs had entered into almost 300 loan agree- ments, for a total of $4 billion of loans. This level of activity indicates that the SIB program is ready to move beyond its pilot phase 

to become a permanent program. 

Looking ahead, the use of TIFIA, GARVEEs and SIBs are moving from innovative to mainstream. This reflects significant success, but it does not indicate that the needs of project finance have 

been completely met. 

Secretary Mineta has issued a clear challenge to those of us in 

the Department in our development of a reauthorization proposal 

for TEA–21, asking us to expand innovative finance programs to 

encourage private sector investment. 

We are considering options for further leveraging Federal resources for surface transportation. Among these options are enhancing the use of innovative finance in intermodal freight projects 

and adapting the financing techniques used in other public work 

sectors. The challenge is to build on our successes to date, but not 

set unrealistic expectations for the future. 

We look forward to working with our partners in the State DOTs, 

metropolitan planning organizations, and private industry to apply 

innovative funding strategies that extend the financial means of 

our individual stakeholders. 

15

Senator Jeffords, we look forward to working with you and the 

Congress to craft the next surface transportation legislation. 

Thank you for the opportunity to testify today. I will be happy 

to answer any questions. 

Senator JEFFORDS. Well, thank you very much for your excellent 

testimony. I extend my good thoughts to your Secretary. We have 

been friends for over 20 years, and I now have the opportunity to 

work closely with him on this. I am looking forward to it. 

Ms. SCHEINBERG. Thank you. 

Senator JEFFORDS. Next, we have JayEtta Hecker, Director of 

Physical Infrastructure Issues at the GAO. Please proceed. 

STATEMENT OF JAYETTA HECKER, DIRECTOR OF PHYSICAL 

INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE, 

WASHINGTON, DC 

Ms. HECKER. Thank you, Mr. Chairman. I am very pleased to be 

here, and appreciate the historic occasion of the two committees 

working together. As you and others have said, there could be no 

topic that more justifies that kind of collaboration. 

First, the use and performance of innovative financing mechanisms; second, the cost involved in alternative approaches; and finally, selected issues for reauthorization. 

I will skip over the use of the existing programs. I think Phyllis 

clearly described 6 States with GARVEEs, 32 States with SIBs, 

and 9 States with having agreements in TIFIA. 

What I will do, is summarize the key advantages and limitations 

that have been identified in some of the studies and some of our 

own interviews with different States. 

There is no doubt that one of the most significant advantages of 

these new financing and grant management tools is that they accelerate project construction. That is unequivocally a real result for 

many of these projects. 

It is also very clear that they increase the tools in the State, 

local, or regional toolbox. They are financing multi-billion dollar 

long-term investments and you need tools that do that wisely and 

well. 

The third advantage, is they have the potential to leverage Federal investment. Some of our work on the costs will discuss what 

we mean by leveraging and what we are really measuring with 

some of the different approaches. 

The limitations on the use of these tools are real. The biggest 

one, of course, is States’ willingness and authority. You have a lot 

of States that are very cautious about debt financing and financing 

projects in a manner other than on a pay-as-you-go basis. 

There is also a skill issue. At a hearing last week, we talked 

about the skill capability in the DOTs. This is a brand-new kind 

of skill, financing and bond market specialists. It is very different 

than highway engineering. 

Also, it is mostly affected by legislators at the State level or the 

local level and their willingness to look at these different tools. 

There are also limitations in Federal and State law. The application of TIFIA is limited to projects costing over $100 million. Only 

5 States are allowed to use TEA–21 funds to capitalize their SIBs. 

16

Then there are State laws that restrict public/private partnerships and, of course, there are Federal tax policies on private activity bonds. So, there are a whole range of factors that are really behind some of the limitations in the extensive application of these 

new tools. 

Our real contribution today is, in part, to examine options for fi- nancing $10 billion though four different approaches. Basically, we 

compare the Federal grants, similar to the current highway program, with an 80/20 match; a TIFIA-like Federal loan; State tax 

credit bonds that are basically similar to the AASHTO proposal. Of 

course, the credit is from Federal taxes. State-issued tax-exempt 

bonds are again, exempt from Federal taxes. 

I have two charts that I present. One, is about the short-versus 

the long-term costs of the different tools, and they vary quite dramatically. The other chart compares the State versus Federal costs, 

as well as other parties. 

Depending on how the programs are structured and who ends up 

paying can vary considerably not only across the alternatives, but 

even within them. Then the risks vary. 

Looking at the tax credit bond, for example, the total cost of that, in present value terms, is nearly $13 billion compared to $10 billion that it would cost in direct appropriations in the grant program. The tax credit bond also varies quite a bit in its distribution 

of costs between the Federal Government and State and other parties. 

The tax credit bonds, because of the costs of borrowing and are paying investors, cost $12.7 billion, but most of that is borne by the 

Federal Government in a tax credit bond. Compare that with the 

TIFIA direct loan, where most of the costs, with the 33 percent limitation, are borne by the State and other parties. 

The broad overview here is that there is, in fact, only modest 

success in leveraging private investment. We are getting debt financing, new debt to the table, which is significant and has benefits. 

But these approaches have limits in how mu ch they are really 

bringing private equity capital and real investors to the table who 

are absorbing a substantial amount of the risk. 

That goes back to some of the limitations that I cited earlier. 

There are limited projects that really can generate their own revenue. That is in part a reflection of how we finance highways and 

that users tend to view highways as free. There are conflicts with 

the Federal tax-exempt finance rules and the cap on the private activity bonds, and the State laws. 

So, you have got some restrictions inherent in the current system 

that are limiting how much private investment in highways and 

other intermodal facilities you can bring to the table. 

These financing tools are a critical part of reauthorization. They 

decide on whether current users or future users pay, they decide 

on the extent to which we continue to rely on user financing or 

switch toward the use of general revenues, and they have very different results in the use of State and Federal funds. 

We have ongoing work for your committee and are looking forward to being able to provide more detail on this. I think, as you 

and others have said, some of the real opportunities are to provide 

17

new structures or to get broader applicability of these to projects 

of national concern, intermodal needs, and to focus on the effect on 

promoting the efficiency in the transportation sector. 

That concludes my statement, Mr. Chairman. 

Senator JEFFORDS. Thank you very much. 

I think I will ask you the first question. While many States have 

embraced transportation financing techniques, several States seem 

resistant to these tools. 

What precludes some States from the use of innovative financing? 

Ms. HECKER. There is a concern among many States about moving further from pay-as-you-go to debt financing, as well as State 

DOTs unfamiliar with these approaches. 

There are also a range of State laws that could apply, restrictions 

on public/private partnerships that are written into State laws. 

There are State laws that prohibit committing their future apportionment to debt repayment and thus prohibit the use of 

GARVEEs. 

We’ve talked with several of the States who are applying these 

tools and are very excited about it. So it seems once folks get involved, they are pretty enthusiastic. 

Senator JEFFORDS. I want to bring sort of a current situation and 

ask you what difference makes now, when we have had this huge 

downturn in the economy and the threats to various means of financing. How does that impact what may or may not be a better 

way to borrow, or what kind of financing instruments you have put 

on the rockets? 

Ms. HECKER. Well, certainly there is more interest in looking for 

alternative sources with the revenue conditions and budget pressures at both the Federal and State level. So, the impetus of the 

economic downturn actually increases interest in these tools. 

The ultimate financing question, though, is really not the tool 

itself. It is how the debt is going to be paid for. That is really what 

we are looking at, and we encourage the committee to keep very 

transparent. 

If you look at the TIFIA loans where you get over 70 percent at 

the private and State level, most of it is different State taxes that 

get dedicated. In only a few instances do you really have private 

equity. So, there is borrowing going on and new taxes being raised. 

As the instruments are broadened and extended, the issue is the 

extent to which costs are borne by current versus future users, and 

the extent to which costs are borne by general taxpayers versus 

users. 

Senator JEFFORDS. Thank you. 

Mr. Seltzer, in your testimony you state that ‘‘capital is notoriously unsentimental, and finance techniques used for transportation projects must compete for investor demand against other investment products in the marketplace.’’

What conditions need to be in place to make transportation 

projects more attractive when competing for private investment? 

Mr. SELTZER. Well, Senator, you yourself in your statement indicated that the first ingredient or prerequisite is identifying the revenue stream. It has to be stable and reliable enough to attract investors. If it is debt financing, typically there is a watershed investVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 H:\DOCS\88460 SENENV1 PsN: DUANE
18

ment-grade rating category that indicates it is not a speculative 

type of investment. 

Some of the innovative finance tools that your committee will be 

considering could help advance debt financing through providing 

various forms of credit enhancements such as the TIFIA program 

that Ms. Scheinberg mentioned. 

Senator JEFFORDS. Ms. Scheinberg, currently the threshold for projects to be eligible for TIFIA programs is $100 million. How 

would lowering the threshold for projects to $50 million affect the 

program? 

Ms. SCHEINBERG. Senator Jeffords, we are not sure. We have no 

experience with anyone coming in and saying they could not meet 

the $100 million threshold. So, we cannot tell you that that is a 

barrier to this program. 

The program, as you probably know, is new to the users and 

there is a fair amount of learning that goes on regarding how to 

engage in the TIFIA program. So its original purpose was for large 

projects that could not find funding in the traditional categories of 

funding that the Federal Government provides—large, intermodal, 

complicated, lumpy projects, as David said. 

I think we still have not tapped out those projects. We are still 

working with folks. We have six letters of interest that have come 

in that are seriously looking at asking for a TIFIA loan. 

We have not seen people who have come in and said, we wish 

it was a lower threshold, so I cannot really tell you what the difference would make. We have a lower threshold for ITS projects of 

$30 million and we have not seen any takers on that. That does 

not seem to have made a difference. 

Senator JEFFORDS. Our next generation effort will place greater 

emphasis on intermodal projects and on project financing. I am 

concerned that U.S. DOT is not adequately staffed or structured to 

accommodate this shift in focus. 

Do you share my concern? I imagine you will say yes. 

Ms. SCHEINBERG. Well, first I would say, yes, we are also very 

focused on intermodal in general, and freight in particular, which 

we believe needs much more attention than it has received in the 

past. 

As far as our staffing, we are looking at this. I can tell you that 

it is a topic of discussion in the Department, organizationally, financially, and with resource attention. 

We are looking at this issue of freight very seriously, both how 

to help the freight sector and how to deal with it internally in 

DOT. 

Senator JEFFORDS. Well, I want to thank you, all three of you, 

for very helpful testimony. I assure you, we will be taking advantage of your expertise as time goes by to assist us as we move forward to try and improve the ability to finance these projects. 

Thank you very much. 

Mr. SELTZER. Thank you, Mr. Chairman. 

Ms. SCHEINBERG. Thank you. 

Ms. HECKER. Thank you, Mr. Chairman. 

Senator JEFFORDS. I want to let everyone know that we are going 

to have votes starting, two votes, in the next few minutes. So we 

will postpone the testimony on the next panel. You can relax and 

19

await my return. Since it takes about 20 minutes for the first vote 

and I have to wait for the second vote, it will probably be about 

25 minutes before we resume. 

So if anybody wants to take a break, take a break. 

[Whereupon, at 10:29 a.m. the hearing was recessed.] 

[At 11:16 a.m. the hearing was reconvened.] 

Senator JEFFORDS. The hearing will come to order. I am sorry for 

the delay, but we are in the process of saving the Nation, so it took 

a little bit longer than we anticipated. 

[Laughter.] 

Welcome, panel No. 2. Our first witness is the Honorable Janice 

Hahn, Councilwoman for the city of Los Angeles, California, on behalf of the Alameda Corridor Transportation Authority. We have 

been waiting anxiously for your testimony because of all the exciting work that you have been involved in. Please proceed. 

STATEMENT OF HON. JANICE HAHN, COUNCILWOMAN, CITY 

OF LOS ANGELES, LOS ANGELES, CA, ON BEHALF OF THE ALAMEDA CORRIDOR TRANSPORTATION AUTHORITY; ACCOMPANIED BY DEAN MARTIN, ALAMEDA CORRIDOR’S CHIEF FINANCIAL OFFICER, AND JOSEPH BURTON, GENERAL COUNSEL. 

Ms. HAHN. Thank you, Mr. Chairman. Good morning. Thank you 

for this opportunity to be here today. Besides being a city councilwoman in Los Angeles, I serve as the chairwoman of the Governing 

Board of the Alameda Corridor Transportation Authority. 

So, on behalf of the city of Los Angeles, the mayor, Jim Hahn, 

my brother, the city of Long Beach, Mayor Beverly O’neill, and the 

Corridor Authority’s Governing Board and our CEO Jim Hankla, I 

am honored to be here today. 

Accompanying me today are Dean Martin, the Corridor 

Authority’s chief financial officer, and Joseph Burton, our general 

counsel. 

The Alameda Corridor Transportation Authority, or ACTA, is a 

joint powers authority created by the Cities of Long Beach and Los 

Angeles in 1989 to oversee the financing, design, and construction 

of the Alameda Corridor. 

The project was monumentally complex, running through eight 

different government jurisdictions in urban Los Angeles County, 

requiring multiple detailed partnerships between public and private entities, and presenting extensive engineering challenges. 

One of the key partnerships that has been vital over the years 

has been with the U.S. Congress. We greatly appreciated the 

strong support you and your colleagues provided to ACTA in developing the innovative loan from the Department of Transportation. Indeed, the Federal Government, by its $400 million Department 

of Transportation loan, became the first financial partner in this 

magnificently successful project. We are particularly thankful for 

the strong leadership demonstrated by many of you in Congress, 

including our two distinguished Senators, Dianne Feinstein and 

Barbara Boxer, along with Congressman Steve Horn and Congresswoman Juanita Millender–McDonald. Without their vision and 

support, it is unlikely the Alameda Corridor would be in operation 

today, strengthening the Nation’s global economic competitiveness. 

20

The $2.4 billion Alameda Corridor, one of the Nation’s public 

works projects, opened on time and on budget on April 15th of this 

year. 

A container train from the ports of Los Angeles and Long Beach 

to the transcontinental rail yards near downtown Los Angeles used 

to take more than 2 hours and wreak havoc to L.A. traffic at dozens of crossings. It now takes about 45 minutes, avoiding traffic 

conflicts. 

As cargo volumes increase, this enhanced speed and efficiency is 

critical. More than 100 trains per day are expected on the Alameda 

Corridor by the year 2020. 

We have demonstrated that governments can work together, and 

they can work with the private sector, putting aside competition for 

the benefit of greater economic and societal good. 

We have proven that communities do not have to sacrifice quality 

of life to benefit from international trade and port and economic activity. The volume of containers doubled in the 1990’s, and last 

year reached more than $10 million 20-foot containers. Last year, 

our ports handled more than $200 billion in cargo, or about onequarter to one-third of the Nation’s waterborne commerce. 

ACTA consolidated four branch lines serving the ports into a 20-

mile freight rail expressway that is completely grade separated, including a 10-mile long 30-foot trench that runs through older, economically disadvantaged industrial neighborhoods south of downtown Los Angeles. 

The linchpin of ACTA’s funding plan was designation of the Alameda Corridor as a high-priority corridor in the 1995 National 

Highway System’s Designation Act. That designation cleared the way for Congress to appropriate $59 million needed to back the 

$400 million loan to the project from the U.S. Department of 

Transportation. 

That was the leverage, if you will, for the biggest piece of our fi- nancing package, more than $1.1 billion in proceeds from revenue 

bonds sold by ACTA. The bond and the Federal loan are being retired by corridor use fees and paid by the railroads. 

The funding breaks down roughly like this: 46 percent from 

ACTA revenue bonds, 16 percent from the U.S. DOT loan, 16 percent from the ports, 16 percent from California’s State and local 

grants, much of it administered by the L.A. County Metropolitan 

Transportation Authority, and 6 percent from other sources. 

There are many reasons why our project stayed on schedule, but 

at the top of the list are permit-facilitating agreements with corridor cities, relocating agreements with utility companies, and our 

decision to use a design-build contract with the Mid–Corridor 

Trench. 

Among the direct community benefits, the Alameda Corridor is 

projected to reduce emissions from idling trucks and automobiles 

by 54 percent, slash delays at railroad crossings by 90 percent, and 

cut noise pollution by 90 percent. 

Disadvantaged firms have earned contracts worth more than 

$285 million, meeting our goal of 22 percent DBE participation. 

The goal of our Alameda Corridor job training and development 

program was to provide job training and placement services to 

1,000 residents of the corridor communities. 

21

We exceeded that goal. Almost 1,300 residents received construction industry-specific job training, and of those, 600 were placed in 

construction trade union apprenticeships. The Alameda Corridor 

Conservation Corps provided the life skill training to 447 young 

people from that community. 

In the future, ACTA and the California DOT are working at an 

innovative, cooperative agreement to develop plans for a truck expressway that would provide a ‘‘life-line’’ link between Terminal Island at the ports and the Pacific Coast Highway at Alameda Street. 

The Alameda Corridor truck expressway is intended to speed the 

flow of containers into the Southern California marketplace. This 

project could be ready for approval as early as March, 2003. 

At ACTA, we believe that by restructuring our Federal loan we 

can undertake this critical truck expressway project without any 

additional Federal financial support. But we need this committee——

Senator JEFFORDS. Would you repeat that, please? 

[Laughter.] 

Ms. HAHN. I am glad you asked for that. Hold my time, Mr. 

Chairman. At ACTA, we believe that by restructuring our Federal 

loan we can undertake this critical truck expressway project without any additional Federal financial support, but we need this committee to help us get Congress to give the approval to DOT to allow 

us to do this. 

Let me just give you a few recommendations for your committee 

as you are looking at reauthorization of TEA–21. We think the 

planning and funding of intermodal projects of national significance 

directly benefiting international trade should be sponsored at the 

highest levels within the Office of the Secretary of Transportation. 

There should be a national policy establishing the linkage between the promotion of free trade and the support for critical intermodal infrastructure, moving goods to every corner of the United 

States. Public-private partnerships do, in fact, work and should be 

promoted and encouraged by Federal transportation legislation. 

We think a specific funding category is needed to support intermodal infrastructure projects and trade connector projects. Consideration should be given to new and innovative funding strategies 

for the maritime intermodal systems, infrastructure improvements 

enhancing good movements. 

The Corridor benefited from the DOT being willing to undertake 

some risks and provide loan terms that were not available on a 

commercial basis. The Federal participation gave private investors 

confidence in the project and made our bond financing possible. 

Most important in my mind is this. The success of the Alameda 

Corridor has shown that Federal investment in trade-related infrastructure can benefit the economy without sacrificing the quality of 

life issues. 

Thank you for inviting me. I am happy to answer any questions. 

Senator JEFFORDS. Thank you very much. 

The Honorable Peter Rahn. Please proceed. 

22

STATEMENT OF HON. PETER RAHN, SECRETARY, NEW MEXICO 

DEPARTMENT OF TRANSPORTATION, SANTA FE, NM 

Mr. RAHN. Good morning, Mr. Chairman. I am Pete Rahn. I am 

the Secretary of the New Mexico State Highway and Transportation Department and I am very pleased to be here today to testify before this very unique joint hearing. 

It seems so important that the two committees work smoothly together in the reauthorization of the National Highway Funding 

bill, which is absolutely critical to the States and their transportation systems. 

Mr. Chairman, I am here to not only urge, but plead, that Congress not only allow, but actually encourage, innovative public-private partnerships. Public-private partnerships draw on the experiences and expertise of both sides to perfect just tremendous success 

in projects like New Mexico 44, which is now called U.S. 550. 

New Mexico traditionally has been a pay-as-you-go State, which 

meant we paid as we went downhill and lost more and more of our 

system. 

New Mexico 44 is, I believe, a national example of a successful 

project that brought together the Federal Government, State government, and private concerns to open up a corridor into northwest 

New Mexico that is providing economic opportunity and greatly improved safety for those people traveling on that roadway. 

New Mexico 44 stretches 141 miles from just north of Albuquerque into northwest New Mexico. Northwest New Mexico did 

not have a four-lane highway for the entire corridor of the State. 

This corridor has opened up economic opportunity in the region 

of Farmington and Bloomfield in which they are now experiencing 

growth at twice the rate of the average of the State of New Mexico. 

The project itself brought together innovative financing, innovative procurement, innovative contracting, and innovative construction. I need to give credit to the Federal Highway Administration 

as a very critical partner in developing this project. 

The project itself was a 118-mile corridor that utilized innovative 

financing in the form of GARVEE bonds. I understand it is not 

very flattering to Jane Garvey that our particular bonds were 

named ‘‘naked’’ GARVEE bonds because they did not have the 

guarantee of the State government, but only the revenue stream of 

future Federal programs to back up the issuance of those bonds. 

The bonds were issued for 15 years. We also utilized the soft match 

provisions of TEA–21. 

Our procurement was unique in that we were able to utilize, not 

design-build, but the traditional low-bid process in a very unique 

way in which we secured a developer, and the developer designed 

the project, provided the designs back to the department, we utilized low bid, selected the contractor, presented the contractor back 

to the developer which managed the construction of it, and then 

warranteed the project for 20 years. Twenty years, to our belief, is 

the longest period of time that a highway has ever been 

warranteed in the United States. 

From concept to contract, the project took us 15 months. From 

contract to construction of a 118-mile long four-lane road was 28 

months. Using traditional methods, we estimate it would have 

taken us 27 years to have built that roadway utilizing the tradiVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 H:\DOCS\88460 SENENV1 PsN: DUANE
23

tional 3-and 5-mile increments that most DOTs undertake in constructing long corridors. 

The warranty is a $114 million guarantee for performance of the 

roadway for 20 years. It is a no-fault guarantee that we estimate 

will save the State $89 million over the life of the warrantee. 

Coke Industries, which was the developer, has $50 million of 

their own assets at risk within the warranty and have produced a 

roadway from their design and management of the contractors that 

is smoother and will last longer than any road built in New Mexico 

today. 

Utilizing the leveraging of Federal revenue streams at very competitive interest rates, our overall bonding program, of which the 

GARVEE bonds are only once piece, has an average interest rate 

of 4.47 percent, when the Federal Highway Administration estimates inflation in the construction industry at 4.5 percent. So the 

value of a road in place today is greater than the value of a road 

in place tomorrow. 

I will close by just saying that I believe it is very important that 

Congress, as it is looking at reauthorization, not only allow the 

DOTs the flexibility to use Federal revenues in the ways best suited for their particular States, but the importance of a stable revenue stream that the States can depend upon is critical to our ability to leverage those dollars through using innovative financing, 

whether it is bonding or any of the other ways. 

The last point I would make, Mr. Chairman, is just simply that 

if Congress wants to encourage private investment in our transportation system, I believe there is going to have to be a mechanism 

for the private sector to invest on par with government tax-free 

bonds in order for that investment to occur. 

Thank you, Mr. Chairman. 

Senator JEFFORDS. Thank you. Excellent presentation. 

Our next witness is John Horsley, executive director of the American Association of State Highway and Transportation Officials 

right here in Washington, DC. Please proceed. 

STATEMENT OF JOHN HORSLEY, EXECUTIVE DIRECTOR, 

AMERICAN ASSOCIATION OF STATE HIGHWAY AND TRANSPORTATION OFFICIALS, WASHINGTON, DC 

Mr. HORSLEY. Thank you, Mr. Chairman. 

First, we want to commend you and Senator Baucus for convening this joint hearing, and commend you, Senator Reid, and 

your colleagues in the Senate for fully restoring highway funding 

for fiscal year 2003 to the $31.8 billion level that Governors, States, 

and many others have been pushing for. It is vital that you succeed, and we want to commend you and the Senate for your leadership. 

We also hope you will convey our thanks to Senator Baucus for 

his leadership in moving the 2.5 cents of gasohol revenues that now 

go to the general fund over to the Highway Trust Fund, and some 

of the other work that he is doing, including pushing for use of the 

interest in the Highway Trust Fund in order to put that into our 

cash-flow and be able to put it to work. 

24

So, I want to thank you both for holding this hearing today. I 

heard a lot of good things so far, and look forward to Jeff’s testimony. 

Pete is one of my bosses, so I will try to represent you well, Pete. 

Mr. Chairman, we believe that the central issue on reauthorization will be how to grow the program. Huge safety, preservation 

and capacity needs exist in every region of the country. 

To fund them, AASHTO believes Congress must find a way to in- crease highway funding from $34 billion in fiscal year 2004 to at 

least $41 billion in 2009, and annual transit funding over the next 

6 years from $7.5 billion to $10 billion. 

The challenge, is how to fashion a funding solution that can 

achieve these goals and garner the bipartisan support needed for 

enactment next year. 

AASHTO has explored a menu of options for generating additional program revenues, including tapping Highway Trust Fund 

reserves, gasohol transfers, indexing, and raising fuel taxes. While 

the program could grow somewhat without raising taxes, it would 

fall short of meeting national needs. 

We also directed our staff to explore the feasibility of leveraging 

new revenues through a federally chartered transportation finance 

corporation which could achieve AASHTO’s goals for highway and 

transit funding in coordination with all of the other proposals, such 

as those proposed by Chairman Baucus. 

They have developed a creative proposal which appears feasible 

and has been well received. Let me describe it for you in brief. 

Under this concept, Congress would be asked to charter a non- profit transportation finance corporation, authorized to issue $60 

billion in tax credit bonds over 6 years. We describe this as program finance rather than project finance. 

Thirty-four billion dollars would go to highways and be appor- tioned to States through Federal highways, and $8.5 billion, 20 percent, would be apportioned to transit agencies; $17 billion of the 

bond proceeds would be invested in government securities which, 

over 25 years, would generate a return sufficient to pay off the 

bond principal. 

The Department of Treasury would be reimbursed for the annual 

cost of the tax credits from the Highway Trust Fund. There would 

be no impact on the Federal deficit. The TFC would leverage approximately $18 billion in new revenues into an increase of nearly 

$43 billion in program funding. 

When we tested this concept with seven Wall Street investment 

banks and two rating agencies, this is what we heard. No. 1, tax 

credit bonds are marketable. Capital markets can absorb the 

amount of bonds being discussed. 

Second, bond marketability and liquidity are enhanced by a central issuer, and there is a broad potential investor base, especially 

if the tax credits could be decoupled from the bond principal. 

Our analysis shows that AASHTO’s funding targets through fiscal year 2009 could be achieved through the Transportation Finance Corporation without indexing or raising taxes. Over the 

longer term, however, the program for the following 4 years would 

slip slightly before it resumed positive growth again in fiscal year 

2013. 

25

When the TFC is combined with indexing, not only does the program continue with healthy growth from fiscal year 2010 on, even 

higher funding levels in the $41 billion for highways and the $10 

billion for transit would be possible. 

We believe this idea has potential, and stand ready to work with 

Congress to find a way to grow the program using this technique, 

or other techniques. 

In addition to this concept for program financing, we also believe 

reauthorization needs to make improvements in several project financing tools such as extending State Infrastructure Bank to all 50 

States, lowering the threshold for TIFIA loans from $100 million 

down to $50 million, and working with you to change the terms of 

the RRIF program. 

I will be glad to submit the balance of my testimony for the 

record. 

Senator JEFFORDS. Thank you. Excellent testimony. 

Our last witness is Jeff Carey, Managing Director of Merrill 

Lynch & Co., New York, NY. 

STATEMENT OF JEFF CAREY, MANAGING DIRECTOR, MERRILL 

LYNCH & CO., INC., NEW YORK, NY 

Mr. CAREY. Mr. Chairman, ladies and gentlemen, I am a managing director in public finance at Merrill Lynch. I have had the 

privilege to work with U.S. DOT, Federal Highway officials, as well 

as our clients, State transportation officials, and other project sponsors during the last decade on the development and implementation of innovative finance mechanisms. 

Thank you for inviting me to provide a wrap-up commentary 

from a capital markets perspective at today’s joint hearings and for 

encouraging private sector participation during your on-ramp to reauthorization. 

Public finance industry professionals are pleased to have played 

a role in creating a strong market reception for the new transportation funding tools and expanded flexibility for public-private partnerships. 

We commend these panel participants, the leadership from DOT 

and Federal Highway, other State transportation officials, and private sponsors for the dramatic evolution from Federal aid funding 

to the wide array of financing vehicles and programs introduced 

and utilized over the last 8 years. 

To briefly reflect on the prior testimony, ISTEA, post–ISTEA initiatives, and TEA–21 implementation have produced many marketrelated accomplishments, dramatically increased bondholder investment in transportation projects and State programs; new and/or 

specially dedicated revenue sources, particularly for the purpose of 

paying off debt obligations; broad market acceptance in the use of 

Federal aid funding for debt instrument financing; more coordination with other funding partners beyond just the States, and lower 

financing costs and increased project flexibility and feasibility 

through Federal credit enhancement. 

Addressing characteristics sought by capital markets and private 

sector project sponsors provides efficient market access and innovative transportation finance opportunities. 

26

Coining an earlier term, the ‘‘unsentimental characteristics’’ sought by capital markets participants include: sound, understandable credits; evidence of government support at the Federal and 

State level; strong debt service payment coverage; predictability in 

Federal programs and a consistency with an evolution of new funding instruments, something that the MEGA–Fund and Trust Acts 

would enhance; market rate investment returns for bonds, development costs, and equity investment; reasonable and reliable timing 

in terms of the receipt of grants and revenues; acronyms that capture Federal programs’ spirit and promote investor familiarity; and 

volume market profile, and liquidity. 

For example, the track record and predictability of Federal aid 

highway programs enabled GARVEE bonds to be structured without the double-barreled credit of other State credit-backed stops, as 

described earlier in New Mexico. It was the strong issuance history 

of municipal bond banks in States like Vermont that served as the 

model for the development of State Infrastructure Banks or SIBs 

in the mid–1990’s. 

Mr. Chairman, I agree that SIBs such as Vermont’s can provide 

an extremely flexible and responsive financing tool. How various 

innovative financing components have been used by public agencies 

and received by the markets provides a strong road map for reauthorization. 

When SIBs were created as part of the 1995 Act, the pilot program for 10 State transportation revolving funds became very popular in 1996, in part because supplemental Federal funding was 

available for seed capitalization. 

Thirty-two States have active SIBs and have made different levels of highway or other project assistance primarily through loans, 

despite widespread under-capitalization and the curtailment of the 

program in TEA–21. 

Limited capitalization has resulted from the inability to use Federal aid funds outside of five States and the application of Federal 

requirements and rules to all moneys deposited in the SIB revolving fund, regardless of whether the source was a State, a public 

contribution, or repaid loan proceeds. In addition, only two States 

have leveraged their SIBs with bonds. 

As a flexible, State-directed tool, SIBs have a greater potential 

to provide loans and credit enhancement that can be realized 

through further modifications as part of Reauthorization. 

Reauthorization should provide incentives for public-private market-based partnerships that finance, develop, operate, and maintain highways, mass transit facilities, high-speed rail and freight 

rail, and intermodal facilities. This could be accomplished by permitting the targeted use of a new class of private activity bonds, 

or by modifying certain restrictions in the Internal Revenue Code 

on tax-exempt bond financing of transportation modes. We commend the Senate and this committee’s earlier consideration of 

HICSA, HIPA, and, most recently, the Multimodal Transportation 

Financing Act. 

Mr. Chairman, my office is across the street from the World 

Trade Center site. As workers in downtown Manhattan, we greatly 

appreciated your passage of Federal legislation creating a Liberty 

Zone for the redevelopment of lower Manhattan and for the creVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 H:\DOCS\88460 SENENV1 PsN: DUANE
27

ation of a new type of tax-exempt private activity bonds, Liberty 

Bonds, for the rebuilding and economic revitalization of New York 

City. Transportation infrastructure financing deserves a bond 

mechanism similar to Liberty Bonds under Reauthorization to attract more private investment, as well as to increase the use of new 

construction techniques, cost controls, performance guarantees, and 

technologies, as also described by the New Mexico Secretary. 

Past ‘‘innovative finance’’ should become mainstream transportation finance under TEA–21 Reauthorization, and the Federal 

Government should provide additional, new financing tools and initiatives, at least on a pilot basis. 

The market’s perception of the integrity of the Federal Highway 

Trust Fund would be greatly enhanced by the MEGA–TRUST Act 

and the MEGA–INNOVATE Act, providing tax-credit bond proceeds to augment gas tax revenues. 

The success of innovative finance places a higher level of responsibility on the Federal reauthorization process to maintain the 

characteristics that attract strong capital markets and private sector participation. 

We want to meet your vision, Mr. Chairman, and your challenge 

to structure and sell U.S. transportation credits to investor portfolios in U.S. municipal markets and in other appropriate markets. 

Thank you. 

Senator JEFFORDS. Well, thank you. Excellent testimony, all of 

you. I am very appreciative, as I think we are going to make some 

good progress this year. 

The first question is for Janice Hahn. Design-build was utilized 

on the Mid–Corridor Trench portion of the Alameda Corridor. How 

important was this approach to project the development in your efforts to finance and build the Alameda Corridor? 

Ms. HAHN. Well, I think design-build was really one of the reasons that this project came in on time and on budget. It was so important, that actually we had to get an ordinance passed by the 

City Council of Los Angeles, because previously that was not allowed under the normal building of projects and the RFP proposals. 

So we estimate that that concept saved the project 18 months in 

terms of streamlining the majority of that project. 

Senator JEFFORDS. Thank you. 

I note that the Alameda project was sponsored by ACTA, a special-purpose entity. Does this institutional arrangement provide 

any advantages? 

Ms. HAHN. Well, certainly the whole structure and the cooperative agreements that we came to, joining together two cities, Los 

Angeles and Long Beach, both rival ports and competing railroads, 

and then with the public entity of ACTA, provided really a very 

unique partnership and agreement. I must say, as chairwoman of 

this Governing Board of ACTA, it is a very small, focused governing board. I think that really is the reason this is so successful. 

Senator JEFFORDS. David Seltzer, in an answer to my earlier 

question, said that one of the keys to attracting private investors 

is a reliable revenue stream. Janice, can you tell us more about 

your project’s revenue stream? 

Ms. HAHN. Well, that really was another huge piece of success, 

is we locked in a great revenue stream, which was the containers 

28

themselves. The containers have been there. They are there now, 

and more are coming every year. 

As a matter of fact, as I mentioned, we have 10 million containers using the Corridor on an annual basis. The charge is about 

$15 per 20-foot container, so you can see that that is an incredible 

revenue stream that we have locked in for a very long time. 

Senator JEFFORDS. Peter, as a member of the AASHTO Board of 

Directors, what are your thoughts on that organization’s funding 

proposal? 

Mr. RAHN. Mr. Chairman, I support their proposal because I believe it is a way for us to get more money into infrastructure today. 

I hope that that was one of the things that was made clear by my 

testimony, was the belief that transportation infrastructure is more 

valuable in place today than it is tomorrow. 

The proposal from AASHTO is a vehicle by which this country 

can invest in more infrastructure, thereby supporting our economic 

activity, as well as quality of life and safety of its citizens. I believe 

it is a very innovative approach. I believe it is workable, and I am 

hopeful that Congress will approve it. 

Senator JEFFORDS. John, in your testimony you state that ‘‘finance tools are useful, but only fill a niche in program and project 

funding.’’

What changes are needed in reauthorization to allow for more financing of transportation projects? 

Mr. HORSLEY. Mr. Chairman, there is need for change at both 

levels. At the Federal legislative level, we think the authority to extend State Infrastructure Banks to all 50 States, for example, 

should be included in your bill. There is, I think, a great interest 

in the success of the five States that are currently authorized. 

We would seek your authority to extend it to all 50 States, but 

with the understanding that all Title 23 requirements come with 

the extension of that authority, including Davis–Bacon, for example. We are willing to continue to advance the program in partnership with a broad base of interests, including labor, that wants the 

Davis–Bacon provision to apply to future funding cycles. 

Many of our smaller States have told us that the $100 million 

restriction in TIFIA is too tight, and they have smaller projects 

that would benefit from either the additional loan security or other 

finance enhancements of TIFIA. So, we’d like to have you take a 

look a dropping that threshold. 

The terms and conditions of RRIF includes restrictions that 

Treasury has put on that are too tight, and we think, if you could 

take a look at flexing the terms of finance for railroad finance, that 

would be helpful. 

Now, let me tell you, at the State level we have a long way to 

go. For example, New Mexico represented by Pete here, California 

and Florida. But we have some very sophisticated States that have 

long track records of innovative finance and are using those tools 

well. 

We have 17 States that we understand are statutorily barred 

from using debt finance. So when it comes to enhancing project finance, we have some change that also needs to take place at the 

State level so they can put to work GARVEEs and some of the 

29

other excellent techniques that you have approved over the last 6 

years. 

Senator JEFFORDS. A major piece of your testimony centers on 

the creation of a Transportation Finance Corporation. Under your 

proposal, the TFC would issue tax credit bonds. We have heard testimony from GAO that these instruments are the most costly longterm to the Federal Government. Why does AASHTO consider this 

to be the most appropriate bonding mechanism for the Federal aid 

program? 

Mr. HORSLEY. Well, Mr. Chairman, we are looking for the art of 

the possible. When we tried to put together a vehicle that, as Pete 

was describing, could leverage revenues that are currently available to achieve the funding targets that we are seeking for fiscal 

years 2004 to 2009, we looked at several options. 

We looked at whether municipal bonds issued at the State level 

would work, and concluded they would not because so many States 

have obstacles, either statutory or constitutional, to the issuance of 

debt and the utilization of GARVEEs in some of the current techniques, so we figured that that would not extend universal help to 

all 50 States. 

We looked at the utilization of municipal bonds at the Federal 

level and figured that would compete directly with Treasury’s, so 

that was not as good a vehicle. We then looked at the appeal of the 

tax credit bonds. It was currently pending in RAIL–21 as a vehicle 

for funding high-speed rail and had been used previously to fund 

schools through so-called QSABs. 

But our conclusion was that the TFC was the most efficient, 

most viable method that would also score well under Federal scoring rules and just in practical terms, would get us, with current 

revenues or revenues enhanced with indexing, to the funding targets that States feel are essential, which is over $40 billion for 

highways and over $10 billion for transit. 

Senator JEFFORDS. Does it make sense to issue bonds to support 

the mainline work of State DOTs, namely system preservation? 

Would it not be more appropriate to reserve debt financing for capital improvements, and particularly for those projects with associated revenue streams? 

Mr. HORSLEY. Mr. Chairman, the Transportation Finance Corporation funding, that we are talking about, we classify as program 

finance, which would then be available to States to use for all of 

those purposes. 

But we are looking for a near-term practical solution that gives 

you a measure you can pass with bipartisan support to boost funding for the next cycle to the funding levels we are after. 

When it comes to the use of the issuance of municipal bond debt 

at the State level, I think each State has to make a judgment 

whether they issue long-term debt, for long-term purposes, such as 

schools, water and sewer plants, and most hospitals. 

Almost every other area of public infrastructure is financed 

through debt. We think that transportation has been slower than 

those other entities to come to the table and use debt finance for 

long-term infrastructure. But we think the time has come. 

As you have from both of these panels, the market is there and 

the transportation agencies are there and are utilizing debt finance 

30

on an increasing basis. But the one differentiation I wanted to 

make was between the program finance, which would flow out to 

States for utilization as if it were cash over the next 6 years, and 

then Pete could leverage it as he saw fit through further leverage 

through GARVEEs and other means, as opposed to project finance, 

which we also support. 

Senator JEFFORDS. Mr. Carey, as I mentioned in my opening remarks, I have a vision that investment in U.S. transportation infrastructure would become a component of every fund manager’s 

portfolio. Based on your experience, what measures should Congress consider to expand private sector investment to assist in 

making transportation a solid investment choice? 

Mr. CAREY. I think it is a focus on the previously stated 

‘‘unsentimental characteristics’’ in terms of maintaining predictability and Federal program consistency in the introduction of new 

instruments. Also, to provide an opportunity for market rate investment returns on transportation project finance. 

Also, as has been described in some of the proposals today, an 

opportunity to look at new taxable instruments, as well as variations on existing tax-exempt instruments, to broaden the existing 

capital markets participation in transportation finance. 

I have to stress, however, that the municipal markets in the 

United States are unique in the world. These markets are incredibly deep, conservative, and provide guidance for Federal credit assistance and other initiatives on the part of the Federal Government under TIFIA. 

Also, these markets provide a lot of examples that have been 

adopted for transportation ‘‘innovative finance’’ over the last 8 

years. They are incredibly easy for States and local governments to 

access, which is not the case in the taxable markets or in foreign 

government markets. 

Senator JEFFORDS. Well, thank you very much, all of you. I find 

that you have done such a wonderful job, I am not even going to 

ask you the final question I had because you have already answered it with all of your testimony. So, you have a grade A+ for 

your participation today. 

[Laughter.] 

I would like you to know that. 

But we will also reserve the right to continue to hound you until 

such time as we come through with a perfect solution. Thank you 

very much. That goes for both panels. This has been a very excellent hearing. I look forward to working with you as we continue 

forward to give our people the best advantages we can to make this 

the best transportation bill that ever occurred. Thank you very 

much. 

[Whereupon, at 11:58 a.m. the hearing was concluded.] 

[Additional statements submitted for the record follow:]

STATEMENT OF SENATOR JON S. CORZINE, U.S. SENATOR FROM THE STATE OF NEW

JERSEY

Thank you, Chairman Jeffords and Chairman Baucus, for holding this joint hearing on the success we have had on expanding the reach of the highway trust fund 

through innovative financing and how we can continue that success in the reauthorization of TEA–21. I look forward to hearing from our witnesses. 

31

Chairman Jeffords and Baucus, it is clear that we need to consider alternative 

means to finance our important highway and mass transit projects. AASHTO estimates that the annual level of investment needed to maintain current conditions 

and performance of our highway systems is $92 billion. For mass transit, the 

amount is $19 billion. We are falling far short of this under the authorized amounts 

of TEA–21. To get even close, we need to look at all sources of funding, including 

financing. 

Congress enacted financing provisions in TEA–21. Under the ‘‘Transportation Infrastructure Finance and Innovation Act’’ (TIFEA), the Department of Transportation may provide secured loans, lines of credit and loan guarantees to public and 

private sponsors of eligible surface transportation projects. $530 million was authorized for this program. 

Chairman Jeffords and Baucus, we need to look at what good has been done 

under TIFEA, what needs to be changed, and what can be done in addition to 

TIFEA. I look forward to working with you both to explore ways to do this. 

STATEMENT OF DAVID SELTZER, DISTINGUISHED PRACTITIONER, THE NATIONAL CENTER FOR INNOVATIONS IN PUBLIC FINANCE, UNIVERSITY OF SOUTHERN CALIFORNIA

A FEDERAL POLICY COMPARATOR FOR PUTTING ‘‘INNOVATIVE FINANCE’’ IN CONTEXT

Good morning, ladies and gentlemen. My name is David Seltzer, and I am a principal at Mercator Advisors, LLC, a consulting firm that advises public, private and 

nonprofit organizations on infrastructure financing issues. I also am affiliated with 

The University of Southern California’s National Center for Innovations in Public 

Finance. The National Center, established 2 years ago, undertakes research and 

helps provide mid-career professional training in the field of infrastructure finance, 

including the growing use of public-private partnerships for project delivery. I would 

like to submit for the record a copy of a report USC published last year on California’s 10-year experience with Innovations in Public Finance, which may prove informative to your Committees. 

Previously, I had the privilege of serving as Capital Markets Advisor for 3 years 

at the U.S. Department of Transportation during TEA–21’s authorization, and before I that spent over 20 years assembling bond issues for transportation and other 

public agencies as an investment banker. So having worked in the public and private sectors, I have clearly violated both ends of the timeless dictum of ‘‘neither a 

borrower nor a lender be.’’

You will be hearing testimony this morning from a distinguished array of Federal, 

State, local and private sector experts in connection with new financing initiatives 

for reauthorization. Since many of the new ideas draw upon tax incentives as well 

as other Federal policy tools, I commend you on making this is a joint hearing of 

both the tax writing and surface transportation authorizing committees. 

I found when in Federal service that the wide array of financial tools, techniques 

and even terminology can be bewildering. If I may, I’d like to put on my academic 

hat for a couple of minutes and try to present an analytic framework that may be 

helpful in comparing so-called ‘‘Innovative Finance’’ options. 

The term ‘‘innovative finance’’ in Federal transportation parlance encompasses not 

only new financing techniques such as State Infrastructure Banks and TIFIA credit 

support, but also new approaches in the areas of project delivery, asset management, and service operations. In many cases, the techniques involve some form of 

public and private sector partnering. Private participation is seen as offering the potential to transfer risks, achieve production or operating efficiencies, and attract additional capital. 

In order to systematically analyze the cost-and policy-effectiveness of an innovative finance proposal, I believe it would be useful to employ a ‘‘Federal Policy Comparator.’’ A comparator is a scientific instrument used for measuring the features 

of different objects. In much the same way, it should be possible to compare various 

innovative finance proposals within an analytic framework to determine which proposals would be most effective. 

The Federal Policy Comparator would seek answers to three central questions: 

1. Which Federal Policy Incentives are most suitable to attaining the proposal’s objectives? 

2. Does the proposal achieve balance among Sponsors, Investors and Policymakers? 

And 

3. What is the Budgetary Treatment of the proposal? 

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1. Which Federal Policy Incentives are Most Suitable? Aside from conventional 

grants, the Federal Government has available to it three major types of incentives 

it can use to stimulate capital investment:

• Regulatory Incentives make existing programs and tools more flexible, in order 

to expand project resources or accelerate project delivery. (GARVEE Bonds are one 

such example, in that they broadened allowable uses for grants to include paying 

debt service on bond issues that fund eligible projects. Other regulatory reforms include design-build contracting, in-kind match and environmental streamlining.) 

• Tax Incentives involve modifying the Internal Revenue Code to attract investors into transportation projects. (Examples include private activity bonds, tax credit 

bonds, and tax-oriented leasing.) 

• Credit Incentives provide Federal assistance in the form of Federal loans or 

loan guarantees to reduce the cost of financing and fill capital gaps. (Examples include Federal credit instruments provided through TIFIA and the Railroad Rehabilitation and Improvement Financing (RRIF) program.)

Generally, there is a tradeoff between the budgetary cost of the incentive and its 

degree of effectiveness in making the desired capital investment feasible. For instance, many regulatory reforms have little or no budgetary cost, but they also generally provide only very incremental assistance in advancing projects. Tax measures 

typically are a ‘‘helpful but not sufficient’’ pre-condition for investment; the project 

must be on the margin of viability to benefit from them. Credit assistance can fill 

funding gaps and attract co-investment, but its uncertain cost depends on risk factors and interest rate subsidies. For instance, a complex and capital-intensive initiative such as Maglev may confer significant mobility, environmental and technology 

benefits. However, it also may well require deeper tax and/or credit subsidies in 

order to bring projects to fruition than that afforded by an incentive such as private 

activity bond eligibility. 

2. Does the Proposal Achieve Balance Among Sponsors, Investors and Policymakers? To be successful, each innovative financing initiative should be designed to 

meet the requirements of three distinct groups of stakeholders. First, the proposal 

must be attractive to project sponsors-the public or private entity responsible for delivering the project. Attractiveness to the project sponsor can be measured in terms 

of its cost-effectiveness, flexibility, and ease of implementation. Second, the proposal 

must make sense to investors-offering them a competitive risk-adjusted rate of return. Capital is notoriously unsentimental, and the innovative finance tool must 

compete for investor demand against other investment products in the marketplace. 

And finally, the concept must make sense to Federal policymakers. This entails not 

only achieving public policy objectives but also being affordable in terms of budgetary cost. These three groups-project sponsors, investors and policymakers—can be 

thought of as the legs of a three-legged stool. If any one leg of the stool has shortcomings, the proposal will wobble, and probably not be supportable. 

For example, dating back to the 1993 Federal Infrastructure Investment Commission, there has been a wide-stated interest in trying to voluntarily attract pension 

fund capital into the infrastructure sector. Public, union and corporate plans represent over $3.6 trillion of assets, yet they have virtually no U.S. transportation 

projects in their portfolios. Why? Because the dominant financing vehicle to date 

has been tax-exempt municipal bonds. While the tax-exempt market will continue 

to be an absolutely critical component of infrastructure financing, pension funds, as 

tax-exempt entities, place no value on the tax-exemption. Pension funds gladly 

would purchase infrastructure debt if it were offered at higher taxable yields, but 

that has limited appeal for the project sponsors who can access the municipal market. Consequently, the three-legged stool is uneven. (I note that various proposals 

have been introduced recently to create a ‘‘win-win’’ security that is both cost-effective for borrowers and competitively priced for pension fund lenders-while at the 

same time satisfying Federal policy drivers.) 

3. Finally, what is the Budgetary Treatment of the proposal? Efficient markets 

rely upon transparent pricing signals to function properly. However, oftentimes 

when Federal proposals are being developed, the key pricing information-budget 

scoring-is at best translucent, if not completely opaque. It seems it is the mysterious 

scoring of a proposal, and not its policy effectiveness, that too frequently drives the 

ultimate policy decision—perhaps a case of the ‘‘tail wagging the dog.’’ Better information on budgetary costs earlier on in the process would benefit the development 

and evaluation of alternative policy options. 

Unlike corporate and State and local entities, the Federal Government makes no 

budgetary distinction between current period operating outlays and long-term capital investments. Nor does it distinguish between full faith and credit general obligations and limited special revenue pledges. From the perspective of infrastructure 

33

advocates, this is both inequitable and inefficient: Inequitable in that costs are not 

shared by future beneficiaries, and inefficient in that there is a bias toward considering those proposals that have the lowest front-end costs, rather than looking at 

cost-effectiveness over the long-term. 

Some Federal innovative finance concepts attempt to overcome this problem by 

drawing upon either credit reform budgetary rules (a rare case where Federal accounting is on an accrual basis and conforms to best commercial practices) or by utilizing the tax code (where the PAYGO rules recognize tax expenditures on an annual basis). 

While some may consider these tools to be unnecessarily complicated attempts to 

circumnavigate cash-based accounting, I believe they offer the benefit of 

rationalizing the budgetary treatment of capital spending and facilitating sound decisionmaking on Federal infrastructure policy. 

In conclusion, I submit that by using this three-part Federal Policy Comparator 

as an analytic framework, policymakers can more systematically compare the budgetary cost with the policy effectiveness of proposals. It would allow comparisons of 

initiatives as varied as private activity bonds for intermodal facilities, shadow tolling for highways, national or regional loan revolving funds for freight rail, tax credit 

bonds for high-speed rail, and reinsurance for long-term vendor warranties. By way 

of illustration, I am including as an attachment a pro-forma Federal Policy Comparator analysis of four current or proposed Federal innovative finance tools for surface transportation—GARVEE Bonds, TIFIA Instruments, Private Activity Bonds 

and Tax Credit Bonds. 

Thank you very much for your time. I would be happy to answer any questions 

you might have. 

ATTACHMENTS

APPENDIX A. FEDERAL POLICY COMPARATOR POWERPOINT SLIDES


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APPENDIX B: FINDINGS & RECOMMENDATIONS: A ROUNDTABLE DISCUSSION OF CALIFORNIA’S EXPERIENCE WITH INNOVATIONS IN PUBLIC FINANCE, THE NATIONAL CENTER FOR INNOVATIONS IN PUBLIC FINANCE, UNIVERSITY OF SOUTHERN CALIFORNIA, 

APRIL, 2001. 

[December 13, 2000] 

FINDINGS AND RECOMMENDATIONS, REPORT PREPARED BY THE UNIVERSITY OF

SOUTHERN CALIFORNIA, NATIONAL CENTER FOR INNOVATIONS IN PUBLIC FINANCE

A ROUNDTABLE DISCUSSION OF CALIFORNIA’S EXPERIENCE WITH INNOVATIONS IN PUBLIC FINANCE: FINDINGS, RECOMMENDATIONS AND PROCEEDINGS: IMPLICATIONS FOR

FINANCING OUR NATION’S INFRASTRUCTURE

(Edited by Daniel V. Flanagan, Jr.; Director, David Seltzer, Distinguished 

Practitioner, USC; Sarah Layton, President, Advancing Infrastructure, LLC) 

UNIVERSITY OF SOUTHERN CALIFORNIA, 

NATIONAL CENTER FOR INNOVATIONS IN PUBLIC FINANCE, 

Los Angeles, CA April 2, 2001.

DEAR FRIENDS: On December 13, 2000, the University of Southern California hosted 

a Roundtable policy discussion at USC’s Sacramento Center entitled ‘‘California’s 

Experience with Innovations in Public Finance.’’ The program was sponsored by a 

grant received from the United States Department of Transportation. The National 

Center for Innovations in Public Finance, located within USC’s School of Policy, 

Planning & Development, served as the host coordinator. 

As the Director of the National Center, it is my pleasure to enclose a summary 

of Findings, Recommendations and Proceedings elicited from the participants at the 

Roundtable. Approximately 75 experts, drawn from governmental, academic and 

business organizations within California and throughout the country, were in attendance. 

The National Center for Innovations in Public Finance is dedicated to exploring 

how new development and financing techniques involving public-private partnerships could contribute to addressing the nation’s infrastructure challenges at the national, State and local levels. We believe sthat many of the ideas and recommendations generated at the Roundtable could serve as important references in future 

public policy decisions. 

For those interested in a more complete record of proceedings, a videotape of the 

conference as well as a summary of each speaker’s remarks may be obtained 

through the National Center. We would welcome any comments you might have on 

the Roundtable. I would like to thank the entire faculty and staff at the USC Sacramento Center for their support of this valuable effort. 

Sincerely, 

DANIEL V. FLANAGAN, JR., Director 

National Center for Innovations in Public Finance 

UNIVERSITY OF SOUTHERN CALIFORNIA

The USC School of Policy, Planning, and Development (SPPD) builds on the 

strengths of two premier professional schools to address the dynamic intersects of 

the public, private and nonprofit sectors. Launched on July 1, 1998, the new School 

combined the former nationally ranked schools of Public Administration and Urban 

Planning and Development and offers degrees in five core areas—public policy, planning, public administration, health administration and real estate development. 

The School’s primary mission is to cultivate leaders—the ethical men and women 

who will design and build our communities, reshape our governmental structures 

and processes and rethink the relationship between government, citizens and business. We accomplish this in three important ways: teaching that prepares students 

to lead, shape and manage in the evolving new 21st century world order; research 

that takes advantage of and contributes to Southern California, the State, the Nation and the world; and action that yields insights and offers solutions to pressing 

societal problems. 

The USC Sacramento Center, located at 1800 I Street, Sacramento, offers Master 

programs in Public Administration, Health Administration, and Planning and Development. The Center also offers leadership training programs. For more information about the Center and additional programs, please visit www.usc.edu/sacto. 

48

The National Center for Innovations in Public Finance was established in 1999 

to promote research and instruction in the field of infrastructure finance. Housed 

within USC’s School of Policy, Planning and Development, the National Center 

draws upon USC academic faculty and distinguished practitioners from the public 

and private sectors to teach courses, conduct research projects and provide advice 

on key public policy issues. The Founder and Executive Director of the National 

Center is Daniel V. Flanagan, Jr. who has been centrally involved in framing national policy in the areas of deregulation of utilities and in transportation finance. 

This report was prepared as part of a project sponsored by the University of 

Southern California with funding from the Federal Highway Administration, under 

the terms of a cooperative agreement. The views expressed herein are those of the 

conference speakers, participants and authors of this report and do not necessarily 

represent the views of the University of Southern California or the Federal Highway 

Administration. 

INTRODUCTION

Ten years have passed since the first toll road franchises were awarded by the 

California Department of Transportation in December 1990, under Assembly Bill 

No. 680 (A.B. 680). To date, only one of the four projects selected through that process-the SR 91 Express toll lanesactually has been built and is operational. Yet this 

landmark legislation and other initiatives across the State for highways, seaports, 

transit, intercity rail, and airports have made California the nation’s leading incubator for using public-private partnerships to develop, finance and manage transportation facilities and services. 

The California experiment with public-private partnerships has seen a number of 

new approaches used to deliver and manage transportation projects. In the highway 

sector, in addition to the SR 91 project, three major new toll roads have combined 

design-build development teams, a project-finance approach, and Federal credit assistance: a second AB 680 franchise—the SR 125 toll road south of San Diego, which 

is scheduled to come to market during 2001—as well as two new toll roads developed in the mid–1990’s by the Orange County Transportation Corridor Agencies. 

In the transit sector, major new capital investments such as the BART Airport 

Extension and the recently awarded Los Angeles-Pasadena light rail line have 

drawn upon novel design-build procurement techniques. The Alameda Corridor 

freight rail project represents a unique joint venture between two major rail carriers, the Ports of Long Beach and Los Angeles, and numerous other local, State 

and Federal stakeholders. Several new private sector initiatives are being pursued 

across the State in the aviation sector. 

Outside of California, one sees unmistakable evidence both in other States and 

at the Federal level of greater willingness to experiment with innovative public-private approaches to address infrastructure investment needs. Taken together, these 

developments indicate that the evolution-if not the revolution—is well underway in 

how large infrastructure investments are being developed and financed. 

With a decade’s experience in California, it is timely to look back and candidly 

assess the strengths and weaknesses of using public-private partnerships for major 

transportation projects. 

Among the questions that need to be explored are:

• What kinds of projects are most suitable for public-private partnerships? 

• Are public policy objectives adequately being served through these public-private approaches? 

• Have there been demonstrable advantages in terms of expedited project completion, greater cost-effectiveness, or reduced public sector risk? 

• What are the appropriate roles for the public and private sectors at various 

stages of each project’s development? 

• Does the current development process properly balance social objectives such 

as environmental considerations and fair labor practices with capital investment 

needs? 

• Which institutional models and capital structures appear to work best in terms 

of both economic efficiency and social equity? 

The lessons learned from California’s experience—as well as that of other States 

and from recent Federal activities—could provide valuable insights into what new 

policies to consider for the upcoming State of California budget considerations and 

for the Federal reauthorization of the TEA–21 transportation bill in 2003. 

49

POLICY DRIVER I: ASSESSING THE STATE OF THE STATE

The State Economy 

California’s economy-really a series of major regional sub-economies-has changed 

dramatically in recent years. The State domestic product is now of similar magnitude to the gross national products of major Western European trading partners 

such as Italy, the United Kingdom, and France. Moreover, California has been the 

epicenter of the e-economy. And yet, as profound as the emergence of e-commerce 

has been, the ‘‘new’’ economy is very much dependent on the infrastructure of the 

‘‘old′′; businesses are increasingly reliant upon timely delivery of goods and services. 

At the same time, the mobility of e-business, which allows employers to locate their 

places of employment ‘‘virtually’’ anywhere, makes good transportation links critical 

if the State is to remain an attractive venue for these high value enterprises. The 

State’s population is expected to grow by another 10 million residents by 2020, placing further burdens on aging transport infrastructure systems to move people and 

goods safely, quickly and cost-effectively. 

Past State Investment Policy 

Investment in transportation infrastructure within the State has not kept pace 

with either the growth of population or the increase in travel demand. California’s 

per capita investment in transport has declined by two-thirds in real terms since 

the 1960’s. Forty years ago, transportation spending represented 23 percent of the 

State budget; today, it comprises about 6 percent. One of the major reasons for 

underinvestment has been the fiscal constraints of the tax limitation measures enacted in the 1960’s and 1970’s. The current electricity crisis has also added a new 

uncertainty as to budgeting for transportation. 

Presently, there is no exclusive dedicated State funding source for transportation, 

so it has had to compete with other governmental and social service programs for 

annual funding through the political process. Because of the lengthy lead-time required to develop major infrastructure projects, such investments are dependent 

upon stable and reliable long-term funding commitments. And, as with the electricity sector, new capital formation has been curtailed because of increased concerns about environmental issues. As a result, transportation services have deteriorated dramatically. For example, the time lost by the average motorist due to freeway delays has doubled over the last decade. Prospects for the future are problematic: Many of the county local option sales taxes adopted in the 1980’s for transportation funding expire over the next several years, yet their extension by voters is 

uncertain. 

Recent Initiatives 

The State has taken several positive steps in recent months to address these concerns. The Governor’s Commission on Building for the 21st Century will soon publish the results of its 18month survey of California’s infrastructure investment 

needs. The final report is expected to cite that California today has over $100 billion 

in unmet transportation investment needs. 

Even prior to the completion of the Commission’s report, the State had started 

leveraging its available funding through mechanisms such as the California Infrastructure and Economic Development Bank and Grant Anticipation Revenue Vehicles (GARVEEs). The Bank is a new $475 million State loan revolving fund designed 

to make loans to small and mid-sized transportation and other infrastructure 

projects. GARVEE Bonds, which were authorized by the State legislature last year, 

are a form of non-tax backed borrowing in anticipation of future year’s grant assistance from the Federal Department of Transportation. Another important advance 

is the enactment of bill A.B. 1473, under which the State would begin preparing annual Five-year Capital Facilities Plans to better integrate capital planning and financial policy decisions. 

Yet these measures by themselves will not be sufficient to overcome past years’

underinvestment. Simply stated, more resources must be identified, collected and 

committed. And the State needs to consider how best to leverage these finite resources most effectively. California’s recent electricity crisis has underscored the importance of a comprehensive State strategy that responds to market signals as conveyed through the pricing mechanism, to ensure a proper balance between supply 

and demand. Public-private partnerships (PPP’ s) can play a key role in helping 

solve the problem-especially for the larger, more complicated projects. 

Issues to be Addressed 

Conferees identified the following issues currently confronting State policymakers:

50

• There is a clear need for better planning of capital investments-specifically, 

more closely relating State transportation spending policy to State land use and 

housing policy. The State should integrate its planning and funding strategies for 

water systems, drainage, waste management and public buildings with its transportation investment decisions. 

• The current allocation formula under S.B. 45 distributes 75 percent of State 

transportation funding to the metropolitan planning organizations and retains 25 

percent to be administered at the State level. This regional emphasis, while valuable in vesting investment decision authority with metropolitan organizations, 

makes it difficult to address statewide transportation issues on a comprehensive and 

systematic basis. For example, it is difficult to coordinate actions for inter-regional 

investments such as intercity high-speed rail or regional airport systems to relieve 

congestion at heavily used facilities.

As zoning is a local matter, the MPO’s cannot control land use policy decisions 

at the municipal level. Fractionalized zoning policy at the local level often leads to 

a disconnect between infrastructure planning efforts and actual development activities.

• The plan of finance for new capital projects should explicitly identify not only 

how to finance upfront acquisition costs but also how to pay yearly operating and 

maintenance costs over the projects’ useful lives. The financial interdependence between asset acquisition and asset maintenance must be firmly established at the 

outset. The initial capital investment decision should be based upon Life-Cycle Costing, taking into account the best value for money over the long-term economic life 

of the asset. 

• To the extent tax sources fall short, the State should explore user fees, since 

they send a clear market signal about consumer demand for goods and services. To 

the extent there are ‘‘free’’ transportation alternatives (such as a freeway with tolled 

express lanes), the user charge allows individuals to make an economic decision as 

to whether the timesavings and convenience of the tolled facility are worth the cost. 

User charges also free up limited grant funds for those projects that are important 

for reasons of social equity or public policy, but are not financially self-sustaining. 

By freeing up capacity on non-tolled facilities, user charges actually may benefit 

those who are not in a position to pay. Ideally, these charges would reflect the user’s 

actual consumption of transportation services, such as fees based on weight-distance 

or vehicle miles traveled. The challenge in establishing user charges is discerning 

the benefits that accrue to society as a whole from the benefits accruing to the individual user or some narrower group of beneficiaries. 

• In addition to direct user charges, indirect user charges such as supplemental 

gas taxes, capacity charges on Alternative Fuel Vehicles, and the extension of expiring local option sales taxes also deserve consideration. Once the underlying funding 

sources are in place, policymakers can select which tactical financing techniques 

would be most effective. 

POLICY DRIVER II: DEFINING ROLES AND RESPONSIBILITIES IN A PUBLIC-PRIVATE

PARTNERSHIP (PPP)

For the overwhelming majority of transportation projects and services, traditional 

governmental ownership, operation and financing will continue to be the most appropriate approach. However for some types of projects-especially those that are 

large or complex-a joint venture between the public and private sectors may prove 

advantageous. The non-profit sector may also play a significant role in the institutional structure. 

Reasons to Consider PPP’s 

State and local governments around the country are turning to joint ventures 

with private sector organizations to meet their capital needs. They are doing so for 

a variety of reasons, including:

• Production Efficiency. Oftentimes, private firms can build projects faster (if not 

cheaper), using design-build and other innovative procurement techniques. 

• Operating Efficiency. Complex projects may be managed more efficiently, due 

to greater expertise with innovation and technology, the presence of commercial 

competition, and the incentive of performance-based compensation. 

• Risk Transfer. Private firms may be willing to assume certain risks from the 

governmental project sponsor as concerns construction, performance, or demand for 

the facility. However, the private sector should not be viewed as the ultimate repository for all project risks-only for those exposures which are of a business (as opposed 

to regulatory or political) nature. 

51

• Access to New Sources of Capital. Private firms may be able to help identify 

new sources of project revenues that can be monetized. In addition, the private sector partners may be willing to invest directly in projects or draw upon other funding 

sources not typically employed in conventional municipal financing of projects. • Simplified Project Management. Out-sourcing responsibilities to third party 

providers should reduce the governmental unit’s need for staffing up during construction and allow the organization to maintain its institutional focus on current 

operations.

Features that make a Project a Good PPP Candidate The following project characteristics lend themselves to a PPP:

• Size and/or complexity issues, which neither the public nor the private sector 

could resolve adequately on their own. • Widely acknowledged need for the project (public acceptance). • Equilibrium and trust among the various public and private stakeholders in 

the project. Central to achieving this goal is obtaining financial commitments from 

both public and private participants, to align their interests (i.e., ensure that both 

public and private participants are ‘‘sitting on the same side of the table’’). • A governmental sponsor with the policy and legal infrastructure to see the 

process through. • Clear demarcation of responsibilities of different parties for securing public approvals, environmental clearances, etc. • A dependable and bankable revenue stream. • The ‘‘tummy test’’—an intangible sense that the project ‘‘feels right,’’ being 

structured as a PPP. 

Key Issues Confronting PPP’s 

While joint ventures can confer substantial benefits, several sensitive public policy 

issues need to be addressed early on in the project development process:

• Labor Policy. At least for larger capital projects in California, the issue in construction is not labor wage levels, (Davis-Bacon) but labor availability. There is a 

dearth of qualified workers to build and manage complex projects. Concerns about 

displacement of governmental workers in PPP’s generally can be resolved. • Unsolicited Proposals. The A.B. 680 program of 1990 has seen one of the four 

projects built and become operational (SR91 in Orange County). The second project 

(SR 125 near San Diego) is expected to be financed in spring of 2001. A third (Santa 

Ana Freeway) is still in the planning stages, and the fourth has been tabled. Each 

of these projects was identified and advanced by private development teams, not by 

metropolitan planning organizations (MPO’s) or the State. Yet private sector identification and sponsorship of projects is not a problem per se. What is imperative, 

however, is that the projects be placed on State transportation plans and supported 

by the host governmental jurisdiction. • Procurement Rules. In California (as in most States), prevailing law generally 

does not permit design-build procurement. For the handful of major projects done 

thus far in California using design-build, either special legislation was required or 

special legal authority was available. A.B. 680, for example, expressly authorized design-build for its four pilot highway projects. Two measures enacted by the legislature last year, A.B 958 and A.B. 2296, allow design-build to be used by transit agencies and certain counties for larger projects.

Another approach is to establish a Joint Powers Authority, which can draw upon 

the inherent powers of one of its sponsoring local governmental units to use designbuild, as was the case with the Alameda Corridor freight rail project. 

At the Federal level, although TEA–21 has liberalized the procurement rules for 

federally assisted projects, contractors under the National Environmental Protection 

Act still are prohibited from having an interest in the ultimate development of a 

project. This rule generally prevents construction firms that assist projects in their 

environmental review process from continuing to be involved in design and construction. It results in a loss of continuity and discourages entrepreneurial efforts in the 

critical developmental phase of potential projects.

• Environmental Risk. Environmental permitting and governmental approvals 

are inherently political processes. Although private developers can play a valuable 

role in synthesizing the project design with the environmental review process, they 

are ill equipped to absorb what fundamentally are non-business risks. Moreover, in 

contrast to other environmental statutes such as the Clean Air and Clean Water 

Acts, there is no statute of limitations governing challenges to transportation 

projects under the National Environmental Protection Act. Unlike a decade ago, developers are now unwilling to assume the financial risk of public approvals in these 

early stages (as in SR 125). 

52

• Exit Strategy. Most of policymakers’ efforts thus far on PPP have been focused 

on developing projects and negotiating entrance strategies for private sector participation. Yet a fundamental requirement for attracting investment capital is liquidity. 

Insufficient attention has been given to the investor’s exit strategy during the life 

of a franchise, including valuation of the asset or concession. Although there were 

a number of political issues surrounding the proposed sale of the SR91 franchise, 

at least part of the controversy was attributable to insufficient local input into evaluating the concession operator’s desired exit strategy. 

POLICY DRIVER III: SELECTING TOOLS TO GUIDE CAPITAL INVESTMENT

Benefits of Design-Build Procurement 

As demonstrated by the two Transportation Corridor Agency toll roads built thus 

far (total investment of $3 billion) design-build (vs. traditional design-bid-build) can 

provide substantial benefits for larger projects:

• Simplified Project Management for the governmental project sponsors; 

• Better Cost controls (reduced exposure to cost overruns); 

• Faster Completion (a recent university study surveying major capital projects 

determined on average that design-build leads to 33 percent faster construction completion); and 

• Base price of hard costs may be comparable or even slightly higher, but savings on soft costs and the other benefits described above often justify it. 

Linkage between Investment and Ongoing Asset Management 

The relationship between the initial project investment decision and periodic capital maintenance and renewal must be strengthened to preserve the value of the investment over time. On toll roads with a net revenue pledge, the rate covenant covers both capital recovery and operations and maintenance requirements. 

For non-tolled facilities, this full-cost recovery can be achieved through synthetic 

mechanisms. For example, long-term performance warranties from the constructor 

can require that assets be maintained at a specified service level in exchange for 

an up-front or ongoing warranty fee. 

Another approach, used in the United Kingdom and elsewhere overseas, involves 

shadow tolling. Under shadow tolls, an operator is paid a per vehicle fee by the governmental sponsor based on throughput, to build and maintain an asset at a defined 

level. 

GASB Statement 34, going into effect for governmental units July 1, 2001, mandates more complete disclosure of governmental infrastructure assets, including recognition of depreciation expense if asset quality deteriorates. Warranties or shadow 

tolls would link capital investment with capital renewal, and help ensure that infrastructure assets are adequately maintained-both for accounting and transportation 

purposes. 

Special Purpose Entities 

California popularized the concept of creating new Special Purpose Public Agencies (like the Orange County Transportation Corridor Agencies, Alameda Corridor 

Transportation Authority, and LA-Pasadena Rail Construction Authority) to carry 

out infrastructure development on a project-finance basis. An alternative approach 

involves the formation of a special purpose notfor-profit corporation under Internal 

Revenue Service revenue procedure 63–20. For example, two recently opened several 

hundred million-dollar toll roads, the Pocahontas Parkway in Virginia and the 

Southern Connector in South Carolina, utilized 63–20 corporations to develop and 

finance the facilities. Having a singular mission, these entities bring a special focus 

to completing the projects. 

POLICY DRIVER IV: COMPARING DIFFERENT TRANSACTION TEMPLATES

Institutional Models 

There are a variety of organizational forms that can be used to advance infrastructure projects. They can be viewed as stretching along a continuum, ranging at 

one end as conventional public projects to the other end as fully commercialized facilities. The accompanying diagram illustrates four distinct positions along the spectrum from purely public to purely private. Projects can be categorized in terms of 

whether public or private parties share in the risks and rewards of development, 

operation and ownership. 

53

INCREASINGLY PUBLIC—INCREASINGLY PRIVATE

The financing component is a discrete element but also may be classified as being 

either public or private. Financing is considered to be public if either:

a. the capital funding source for the loan or investment is public tax dollars (e.g. 

a governmental infrastructure bank, revolving fund or public pension fund capitalized with public funds); or

b. if the loan repayment source is derived from or guaranteed by public tax dollars 

(sales taxes, State Highway Fund moneys, Federal-aid supported, etc.).

On this basis, a loan funded by a State infrastructure bank, even if the borrower 

is a corporate entity, would be deemed ‘‘public financing.’’ Likewise, a privately 

funded loan for a transit project developed and operated by a private consortium but 

payable from or guaranteed by the State transportation fund, would be considered 

public financing. On the other hand, a taxable or tax-exempt revenue bond sold into 

the capital markets and backed by user charges would be deemed ‘‘private,’’ even 

though the obligations were issued by a public conduit (e.g. Transportation Corridor 

Agencies, Alameda Corridor). The ultimate determinant is whether public capital is 

at-risk, either in terms of the initial funding or the ultimate repayment of the obligation.

Matrix of Public-Private Transaction Templates 

Governmental 

Model 

Turnkey Development Model Warranty/Concession Model Profit-Sharing Model 

Examples of 

Projects.

LACMTA; 

Caltrans.

TCA; ACTA; BART 

Airport; Extn.

Hudson-Bergen; 

NM44.

Las Vegas Monorail; SR 91, Dulles Greenway 

Development Public ................ Private ............... Private ............... Private 

Operation .... Public ................ Public ................ Private ............... Private 

Ownership ... Public ................ Public ................ Public ................ Private 

Financing .... Public ................ Public or Private Public or Private Private 

Models on the left of the table are increasingly public and models on the right are increasingly private. 

The four principal financing templates are: 

Governmental Model 

Starting on the left side of the chart would be governmentally developed, owned 

and operated projects, using public tax dollars. Examples include Caltrans highway 

projects or other normal public works spending, either pay-as-you-go or debt financed, with the governmental unit responsible for funding operating and maintenance costs. The vast majority of transportation projects are developed in this fashion. 

Turnkey Development Model 

Of greater ‘‘private’’ character are turnkey financings, where the projects are developed under a guaranteed maximum price and guaranteed completion date by a 

private design-build team and then turned over to the governmental sponsor. Because of construction risk transfer, there are financial rewards and penalties to the 

constructors based upon performance. In some cases, the facilities are financed principally with project-generated revenues (project-financing) such as the San Joaquin 

Hills and Foothill-Eastern Toll Road projects developed by the Transportation Corridor Agencies in Orange County. In other cases, such as the BART airport extension, the projects are funded conventionally with public grants and local tax dollars. 

Warranty/Concession Model 

Farther along the spectrum to the right would be projects that are publicly owned, 

but use private parties not only for development but also for operation/maintenance 

of the facility. Generally, the compensation is based on a flat fee or a cost-plus basis, 

rather than a profit-sharing formula based upon the net revenues or patronage volume. The new Hudson-Bergen light rail line in New Jersey falls into this category. 

Under current tax law, the term and compensation for private management contracts associated with facilities financed with tax-exempt debt is severely constrained, diluting any incentives for superior performance. 

Another way to get ongoing private participation without running afoul of the IRS 

management contract rules is through long-term performance warranties on the 

physical condition of the infrastructure assets themselves. For example, the New 

Mexico Corridor 44 road-widening project has entered into a long-term warranty 

with a private firm for the pavement and bridge structures extending up to 20 

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years. In both the Hudson-Bergen and the New Mexico 44 projects, the pledged repayment source for debt service is public moneys, not project revenues. 

Profit-Sharing Model 

Finally, at the far right end are fully commercial projects, involving private development, operation, and even ownership of the facility. Financing sources are largely 

or entirely project-based revenue streams, rather than public or tax-backed sources. 

Compensation to the operator is based upon utilization of the facility and/or net income, resulting in performance-based rewards. Major examples of this are the SR91 

Express Lanes in Orange County, the Dulles Greenway in Virginia, and the Las 

Vegas monorail, currently under construction. 

No single model or structure can be said to be ‘‘the best′′; rather, the most suitable 

model will depend on facts and circumstances surrounding each particular project. 

Among the factors that will determine which approach is most appropriate are:

• political support for an alternative project delivery method; • need for project cost and completion date certainty (which is particularly applicable to project financings); • State law considerations (especially procurement regulations); • Federal tax code implications (as concerns eligible financing instruments); • commercial potential of the project, as reflected in capital markets acceptance; 

and • degree of risk transfer to the private sector.

As noted above, projects need not be self-liquidating to benefit from a PPP approach. Concession arrangements for subsidized services such as public transport 

have proven successful overseas because incentivized performance for private operators can produce better service, lower public subsidy, and greater cost transparency. 

For instance, Melbourne, Australia achieved these enhancements in out-sourcing operations of its commuter rail network. 

Nor is a commercial or ‘‘privatized’’ approach incompatible with a cooperative 

working arrangement with organized labor. In fact, both the management team and 

the union work force can benefit from entering into a project labor agreement at 

the outset of the project that squarely addresses prevailing wages, non-disruption 

of work schedule, and other features that will facilitate the timely, on-budget completion of a high-quality project. 

Historically, most transportation projects have been funded either through governmental grants (public equity) or tax-supported municipal bonds (public debt), 

since these have represented the lowest cost sources of capital. However, there are 

alternative sources of private sector equity and debt capital that may be drawn 

upon for infrastructure projects with steady cash-flows linked to economic growth. 

Low tax bracket institutional investors such as life insurance companies and nontaxable pension funds would benefit from being able to diversify into a new economic sector that presently is absent from their portfolios. Because the major financial vehicle for infrastructure has been tax-exempt bonds, it has not been appropriate for pension funds as tax-exempt entities to purchase such paper when higheryielding corporate bonds of equal quality are available. 

However, several recent developments have lowered the relative funding cost of 

taxable debt and equity:

• The Federal budget surplus has reduced the supply of Treasury bonds, lowering the benchmark against which taxable paper is priced, relative to municipal 

bonds. 

• Pension funds and insurance companies have gained greater familiarity with 

project financings, through investing in debt and equity in overseas infrastructure 

projects and domestic power generation facilities. They are now willing to accept 

longer term debt obligations with minimal amortization in the early years, cushioning the cash-flow impact on project revenues. 

• New Federal programs such as TIFIA (the Transportation Infrastructure Finance and Innovation Act of 1998) provide debt capital on terms which in some 

cases are even more favorable than those in the municipal bond market. Other proposed legislation such as tax credit bonds would allow de-coupling of the principal 

from the interest portion, creating a stand-alone taxable debt instrument suitable 

for retirement funds. 

• Finally, even though infrastructure projects are highly capital intensive, cost 

savings on the operating side from private participation may partially offset the 

higher capital costs of taxable rate financing.

Taxable Investment Funds. Together, these factors are combining to reduce the 

disparity in funding cost between the taxable and tax-exempt markets. As a result, 

project sponsors may now find that it is cost-effective to seek out pension funds and 

55

other taxable market investors to invest equity and debt capital in project 

financings. As corporate, union and public retirement systems represent $5 trillion 

in investment assets, even allocating a small portion of their portfolios to invest in 

U.S. transportation infrastructure could have significant ramifications. They could 

invest either directly or through pooled investment accounts similar to mutual 

funds. 

′′Innovative Finance’’ Techniques 

Innovative approaches that involve PPP’s to develop, operate or own transportation assets will lend themselves toward using innovative financing techniques. 

‘‘Innovative Finance,’’ while not a panacea, can help address these capital investment needs once the underlying payment source for the project has been identified. 

Innovative Finance can be defined as the use of external financing approaches 

that draw upon at least one of the four following elements:

1. New Sources of Repayment that haven’t previously been used to secure external 

financing.

2. New Methods of Service Delivery that offer development, production or operational efficiencies.

3. New Sources of Investment Capital that broaden the funding alternatives for 

transportation projects beyond conventional tools.

4. New Methods of Paying Financial Return to investors, that either reduce effective financing cost for the project sponsor or shift risks (such as interest rate and 

financial risk) to third party investors, or do both.

Participants at the Roundtable suggested a number of innovative finance ideas relating to repayment streams, service delivery, funding sources, and investment return: 

NEW SOURCES OF REPAYMENT

State & Local Taxes

• Extension of Local Option Sales Tax 

• New Tax on Alternative Fuel Vehicles 

• Inflation adjusted Gas Tax 

• Other User-related fees (e.g. weight-distance) 

• Non-user related Taxes (internet/mail order sales tax, property transfer tax, 

etc.) 

• A defined percentage of State General Fund Revenues 

Other

• Shared revenue from fiber optics, etc. along State rights-of-way 


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• Tobacco Funds • State version of GARVEE Bonds (using counties’ share of State Gas tax allocation) • State-aid Intercept mechanism to credit enhance local bonds • Development Risk Insurance 

New Methods of Service Delivery

• Broaden application of innovative procurement techniques such as designbuild. • Modify transit requirement 13(c) [consent required of DOL and local unions to 

proposed project labor agreements] to make it easier for transit agencies to outsource existing operations/capital improvements via tendering routes to concessionaires. 

• Liberalize the management contract rules or seek tax code change (private activity bonds for highways) to allow performance-based compensation to private operators of toll facilities financed with tax-exempt debt. 

• Permit outsourcing of highway maintenance activities or enter into long-term 

warranties to guarantee defined service standard levels of State highways under 

GASB Statement 34. 

• Change statute of limitations under NEPA for challenges, so that it is consistent with other environmental statutes (e.g. within 60 days from the Record of 

Decision). 

New Sources of Investment Capital

• Public (State and local) Pension Funds and Taft-Hartley (union) Pension 

Funds, investing either directly or through pooled accounts. 

• Leveraged Leasing (domestic and cross-border tax-oriented equity). 

• Extend TIFIA beyond 2003. 

• Reduce threshold project size below $100 million for TIFIA assistance, to make 

it consistent with the lower thresholds in TEA–21 for using design-build (e.g. $50 

million). 

New Methods of Paying Financial Return

• Tax Credit bonds (interest paid by U.S. Treasury in the form of a tax credit 

to the investor). 

• Shadow Tolls (per vehicle compensation to private concessionaire). 

• Variable Rate bonds for State transportation borrowings to hedge interest 

rates. 

Government Policy Tools 

Historically, the public sector has used direct governmental spending to expand 

transportation capital investment. However, where innovative finance and publicprivate ventures are involved, it may be possible to generate additional investment 

through less costly means. To encourage the foregoing innovative finance techniques, the government sector may use these policy tools:

1. Regulatory Incentives-streamlining procedures, removing program restrictions, 

etc.;

2. Tax Incentives-using the tax code to encourage the free flow of capital into certain desired investment and operational activities; and

3. Credit Incentives-using fractional credit assistance (direct loans or loan guarantees) to leverage a larger multiple of private financing.

Each of the suggestions under the four innovative financing tools may be addressed through regulatory, tax, or credit policy initiatives. 

CONCLUSION: ENCOURAGING CONTINUED INNOVATION

The following policy recommendations emerged from the Roundtable discussion:—

Process Streamlining. Process reform was recommended in three areas:

• State procurement practices should be simplified for public-private partnerships; 

• Regional financing protocols with Federal agencies need to be supported; and 

• Environmental review processes should be consolidated with public agency responsibility.

Environmental Risk. Project-based financings must have time-certainty and costdiscipline to attract private debt and equity capital. Because securing environmental 

and public permitting approvals is fundamentally a governmental rather than a 

commercial process, the private sector is not equipped to assume the financial reVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00060 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
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sponsibility for obtaining the environmental record of decision. The time period for 

challenges to projects’ environmental impact statements under NEPA should be 

made consistent with other environmental statutes. 

Co-Investment by Public & Private Sector. User fees can be both an effective and 

equitable way of generating project-funding streams. However, in most cases, 

project-generated revenues alone will not be sufficient to fully finance the projects. 

Some level of public investment will be required, and it needn’t take the form of 

contributed capital. For instance, the Alameda Corridor has four distinct layers of 

debt investment-first tier capital markets, second tier TIFIA loan, third tier capital 

markets, and fourth tier port loans-as well as lesser amounts of Federal, State and 

local grant funding. In addition to reducing the burden on project revenues to cashflow the private investment, public co-investment is useful in that it gives all parties a financial stake in the commercial success of the enterprise. 

Subsidy Level. Even where an external operating subsidy is required (e.g. public 

transit or freeway maintenance), the public sector doesn’t have to provide that service. As has been demonstrated overseas, there may be substantial reductions in public subsidy required and/or enhancement of service levels through selective 

outsourcing of operations to private parties. 

Special Purpose Agencies. Major capital projects can benefit by establishing a special purpose entity to undertake development and operations, whose sole responsibility is the project. The organization, which could be a legislatively established new 

authority, a joint powers authority formed by several jurisdictions, or a private nonprofit corporation formed by the principal public and private stakeholders, helps 

bring a singular institutional focus to completing the project on-time and within 

budget. 

Design-Build. Larger or more complex projects often can accelerate completion 

and reduce construction and performance risk through design-build procurement. 

Yet State law may make it difficult to proceed on any other basis than design-bidbuild, with its attendant delays and lack of accountability. Also, State and Federal 

law should allow a contractor to participate in both the environmental analysis of 

a project and its subsequent construction, to gain the benefit of their continued involvement from project inception to project completion. 

Linking Investment & Maintenance. Reliable funding of ongoing project operations 

and maintenance costs must be identified at the outset, to ensure the best capital 

investment decision is made. Among the institutional arrangements that can foster 

this Life-Cycle Costing perspective are long-term franchise agreements (for toll facilities) or shadow toll agreements (for free facilities); or long-term warranties stipulating that specific asset quality levels be maintained over the life of the project. 

Role of Innovative Finance. Once a project’s revenue stream has been identified, 

innovative finance techniques can assist in capitalizing the value of the future 

project revenues to fund the investment today. Federal, State and local policymakers can use regulatory, tax and credit incentives to encourage the use of new 

financial instruments. The financial tools themselves may draw upon one or more 

of the following mechanisms: new repayment streams, new procurement methods, 

new sources of investment capital, and new methods of a paying financial return. 

Given that many of these financing approaches already are in use in the private 

sector, a more apt name for ‘‘innovative finance’’ might be ‘‘project-based finance.’’

Continuing Education. Presently, there is very little offered in the way of organized educational programs on the use of PPP’s for infrastructure development. The 

dearth of relevant training extends both to entry-level candidates for public or private positions (Masters programs) and to mid-career corporate and governmental 

practitioners. An ongoing university-sponsored program on new project development 

and financing techniques could prove highly useful in further developing both public 

and private sector management skills in this growing and dynamic discipline. 

Table 1: Key Drivers on Innovative Finance Proposals for Project Sponsors, 

Investors and Federal Policymakers 

PERSPECTIVE KEY QUESTIONS PROJECT SPONSOR/BORROWER

• What is the effective financing cost (IRR)? 

• How high is the Annual Payment Factor? 

• Is the transaction reported as a direct or contingent liability on the Sponsor’s 

balance sheet? 

• What legal steps (State legislation, etc.) must be taken to utilize it? 

• How difficult is it for Management to implement it? 

58

Investor 

• Is the risk-adjusted rate of return competitive? • Is there a secondary market for the product (liquidity)? • Are there other investment risks (tax compliance, call risk, etc.)? • Will it help diversify the investor’s portfolio exposure? • Are there any other strategic reasons for investing aside from its return? 

Federal Policymaker 

• What is the proposal’s budgetary cost? 

• Is the finance tool cost-effective (how much leveraging of Federal resources)? 

• What is the overall economic return (benefit/cost ratio)? 

• How well does it achieve multiple Federal policy objectives? 

• Improve Access 

• Enhance Mobility 

• Shift Risks away from the Government 

• Attract Non–Federal Resources / Private Participation 

• Accelerate Projects 

RESPONSE OF DAVID SELTZER TO ADDITIONAL QUESTION FROM SENATOR BAUCUS

Question. Many of us are concerned about the continued viability of the Highway 

Trust Fund. That is, with increased fuel economy and incentives for alternative 

fuels, can the Trust Fund continue to meet our ever-increasing highway needs? In 

fact, in the MEGA–TRUST Act, I create a commission to look at the Trust Fund 

and its continued sustainability. When we talk about innovative financing for highways are we talking about a way to supplement the Highway Trust Fund or replacing the Trust Fund with this ‘‘new way of doing business?′′

Response. Perhaps the most accurate answer is ‘‘a new way of doing certain types 

of business.’’

The vast majority of highway projects are not capable of generating their own revenue streams, and will continue to be reliant upon grant funding from Federal and 

State sources. That is why the findings of the National Surface Transportation Infrastructure Financing Commission proposed in S. 2678 will be so vital to policymakers in identifying ways to sustain the Highway Trust Fund in coming years. 

However, the term ‘‘Innovative Finance’’ really encompasses a number of different 

initiatives that can help promote investment in the Nation’s surface transportation 

system. 

First, it references grant management techniques that give States greater flexibility in using existing Highway Trust Found resources. GARVEE Bonds are a good 

example of this; the total resources committed to highways are not increased, but 

projects can be greatly accelerated, through monetizing future streams of Federal 

receivables. Another example is State Infrastructure Banks and section 129 loans, 

where States may use Federal-aid apportionments to fund loans and provide other 

types of financial assistance. 

Second, Innovative Finance connotes innovative procurement methods, such as design-build contracting, which can expedite projects, transfer risks to private parties, 

and/or save the project sponsor money. The pilot provisions for design-build contracting in TEA–21 provide an excellent vehicle for evaluating such alternative approaches. Further refinements, especially as concerns streamlining Federal approvals, would be beneficial. 

Third, the term includes innovative asset management techniques that provide 

superior value-for-money over the long-term. Initiatives that encourage States to 

make project investment decisions with regard to the life cycle costing over the economic life of the project should be encouraged. For example, long-term warranties 

such as those New Mexico has used on its Corridor 44 project, or other long-term 

performance-based private management contracts, help ensure that the initial capital investment is maintained adequately to optimize its value. 

Finally, Innovative Finance includes new financial instruments that either lower 

the cost of capital obtained from existing sources, identify new sources of capital, 

or do both. For instance, Federal credit programs such as TIFIA establish the Federal Government as a new source of debt capital on favorable terms for certain types 

of projects. This can make it easier for projects with their own revenue streams, 

such as toll roads, to access the capital markets for the balance of their needs. To 

the extent a project sponsor can more readily borrow against non-Federal revenue 

streams, the number of claimants on a State’s apportionments is reduced. 

Other new financial instruments, based on tax code incentives, can reduce the required cash outlays from traditional funding sources by providing a return to invesVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
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tors in the form of a non-cash tax benefit. Techniques such as tax credit bonds or 

tax-oriented leasing serve to attract debt and equity capital from private sources, 

again freeing up traditional revenue sources for other projects. 

In summary, the combination of grants management, procurement, asset maintenance and financing techniques comprising ‘‘Innovative Finance’’ should be viewed 

as an important element of any national transportation policy. But it will never replace the need for a long-term strategy for augmenting Highway Trust Fund resources that are used to fund grants required by most surface transportation investments. Ultimately, the political process will determine the types and amounts of resources directed to the HTF, based on the desired level of investment activity and 

the perceived role of the Federal Government relative to State, local and other funding partners. . 

STATEMENT OF PHYLLIS F. SCHEINBERG, DEPUTY ASSISTANT SECRETARY FOR BUDGET

AND PROGRAMS UNITED STATES DEPARTMENT OF TRANSPORTATION

Chairman Jeffords, Chairman Baucus, Ranking Members Smith and Grassley, 

and Members of the Committees: Thank you for holding this hearing today and inviting me to testify on Federal innovative finance initiatives for surface transportation projects. These financing techniques, in combination with our traditional 

grant programs, have become important resources for meeting the transportation 

challenges facing our Nation. Secretary Mineta, in his testimony last January before 

the Environment and Public Works Committee, indicated his desire to increase their 

application. 

The Secretary stated that ‘‘Expanding and improving innovative financing programs in order to encourage greater private sector investment in the transportation 

system . . .’’ will be one of the Department of Transportation’s core principles in 

working with Congress, State and local officials, tribal governments and stakeholders to shape the surface transportation reauthorization legislation. He remains 

steadfast in his support for these programs. 

Defining ‘‘Innovative Finance’’

Perhaps the first issue to address today is ‘‘What is innovative finance?’’ We increasingly hear the term used in the context of transportation projects, but what 

does it really mean? We at the Department apply the term to a collection of management techniques and debt finance tools available to supplement and expand the 

flexibility of the Federal Government’s transportation grant programs. We see the 

primary objectives of innovative finance as leveraging Federal resources, improving 

utilization of existing funds, accelerating construction timetables, and attracting 

non–Federal investment in major projects. The quantifiable successes of such innovative finance are beginning to mount. 

The July 2002 report entitled ‘‘Performance Review of U.S. DOT Innovative Finance Initiatives’’ states that Federal investments of $8.6 billion have helped to finance projects worth a total of $29 billion, a ratio of $3.40 invested for each Federal 

dollar. Of this $29 billion, more than 27 percent, or $8 billion, consists of debt that 

will be repaid from new revenue sources. Sponsors report that more than 50 projects 

were accelerated from 6 months to 24 years as a result of innovative financing compared to transportation grants. The total economic impacts of $91 billion nationwide 

represent benefits that have accrued more rapidly than ever possible using a payas-you-go method. 

While these achievements demonstrate the value of innovative finance techniques 

and tools, they also deserve a realistic assessment in the context of the grant system, financed by the Highway Trust Fund, that provides the foundation of Federal 

financial assistance for surface transportation projects. 

The first assessment in realism is to examine the ‘‘innovative’’ nature of the financial tools. Improving the flexibility of fund administration and creating opportunities 

to borrow and lend Federal money have been vitally important initiatives, and we 

can thank numerous role models outside the transportation sector for developing 

these tools long ago. The ‘‘new’’ or ‘‘innovative’’ feature of these tools, then, derives 

from their application to the Federal transportation program. Further, these financing techniques have now become better known and accepted by many State and 

local transportation partners. Because the demand for transportation investment 

throughout the country consistently exceeds the supply of resources, those regions 

facing the greatest challenges to mobility have readily embraced—and in many 

cases paved the way for—the opportunities provided by innovative finance. 

The second assessment concerns the potential for innovative finance to ease demands on the current grant funding distributed each year to States and local agenVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00063 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
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cies. That doesn’t seem likely. The focus of innovative finance (and perhaps a more 

appropriate term to designate these tools) is project finance. The techniques supplement existing programs on an as-needed, project-by-project basis. Transportation officials must evaluate each project individually to determine the best financing approach. The grant programs remain the bulk of Federal transportation assistance, 

supplemented by the extra muscle and flexibility of innovative finance. 

The diagram below depicts a pyramid that illustrates the range of surface transportation projects and the innovative tools available for financing them. The base 

represents the majority of projects: those that rely on grant-based funding, but may 

benefit from measures that enhance flexibility and resources. Various Federal funds 

management techniques, such as advance construction, tapered match, and grantsupported debt through Grant Anticipation Revenue Vehicles, or GARVEEs, can 

help move these projects to construction more quickly. The mid-section represents 

those projects that can be partially financed with project-related revenues, but may 

also require some form of public credit assistance. State Infrastructure Banks (SIBs) 

can assist State, regional, and local projects through low-interest loans, loan guarantees, and other credit enhancements. State loans of Federal grant funds known 

as Section 129 loans represent another credit assistance technique. The Transportation Infrastructure Finance and Innovation Act (TIFIA) program provides credit 

assistance to a small number of large-scale projects of regional or national significance that might otherwise be delayed or not constructed at all because of risk, complexity, or cost. The peak of the pyramid reflects the very small number of projects 

able to secure private capital financing without any governmental assistance. 

FEDERAL PROJECT FINANCE TOOLS FOR SURFACE TRANSPORTATION

The TIFIA Credit Program 

Let me begin with the program that, through the leadership of the Senate during 

enactment of the Transportation Equity Act for the 21st Century (TEA–21), provides 

a direct role for the Federal Government to assist large transportation projects. In 

June 2002, the Department delivered its Report to Congress on the Transportation 

Infrastructure Finance and Innovation Act of 1998 (TIFIA), which authorizes the 

Department of Transportation (DOT) to provide three forms of credit assistance—

secured (direct) loans, loan guarantees and standby lines of credit—to surface transportation projects of national or regional significance. 

The public policy underlying the TIFIA credit program asserts that the Federal 

Government can perform a constructive role in supplementing, but not supplanting, 

existing capital finance markets for large transportation infrastructure projects. As 

identified by Congress in TEA–21,‘‘. . . a Federal credit program for projects of national significance can complement existing funding resources by filling market 

gaps, thereby leveraging substantial private co-investment.’’ Because the TIFIA proVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00064 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE

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gram offers credit assistance, rather than grant funding, its potential users are infrastructure projects capable of generating their own revenue streams through user 

charges or other dedicated funding sources. 

Identifying a constructive role for Federal credit assistance begins with the acknowledgement that, compared to private investors, the Federal Government’s naturally long-term investment horizon means that it can more readily absorb the relatively short-term risks of project financings. Absent typical capital market investor 

concerns regarding timing of payments and financial liquidity, the Federal Government can become the ‘‘patient investor’’ whose long-term view of asset returns enables the project’s non–Federal financial partners to meet their investment goals, 

allowing the project’s sponsors to complete a favorable financing package. 

The TIFIA program’s pragmatic challenge is to balance the objective of advancing 

transportation projects with the equally important need to lend prudently and protect the Federal interest. The DOT must apply rigorous credit standards as it fashions assistance to improve the financial prospects of participating projects. The Federal objective is not to minimize its exposure but to optimize its exposure-that is, 

to take prudent risks in order to leverage Federal resources through attracting private and other non–Federal capital to projects. 

The TIFIA program assistance is meant to support expensive, complex and significant transportation investments. In general, a project’s eligible costs must be reasonably anticipated to total at least $100 million. Credit assistance is available to 

highway, transit, passenger rail and multi-modal projects. Other types of eligible 

projects include intercity passenger rail or bus projects, publicly owned intermodal 

facilities on or adjacent to the National Highway System, projects that provide 

ground access to airports or seaports, and surface transportation projects principally 

involving the installation of Intelligent Transportation Systems (ITS), for which the 

cost threshold is $30 million. The TIFIA credit assistance is limited to 33 percent 

of eligible project costs. 

Congress has authorized the DOT to provide up to $10.6 billion of TIFIA credit 

assistance through the TEA–21 authorization period of 1998–2003. From the Highway Trust Fund, Congress authorized $530 million, subject to the annual obligation 

limitation on Federal-aid appropriations, to pay the subsidy cost of TIFIA credit assistance and related administrative costs. The subsidy cost calculations establish the 

capital reserves which the DOT must set aside in advance to cover the expected 

long-term cost to the Government of providing credit assistance, pursuant to the 

Federal Credit Reform Act of 1990 (FCRA). 

To date, the DOT has selected 11 projects, representing $15.7 billion in transportation investment, to receive TIFIA credit assistance. The TIFIA commitments total 

$3.7 billion in credit assistance at a subsidy cost of about $202 million. The DOT 

has received 38 letters of interest and 15 applications from project sponsors. All 

major categories of eligible projects—highway, transit, passenger rail and multimodal—have sought and received credit assistance. The TIFIA credit assistance 

ranges in size for each project, from $73.5 million to $800 million, mostly in the 

form of direct Federal loans from the DOT to the project sponsors. These projects 

are summarized in the table below.

TIFIA Commitments as of September 2002

Project Project Type Project Cost Instrument Type Credit Amount 

Miami Intermodal Center.Intermodal .................... $1,349 million ............. Direct Loan ..................

Direct Loan 

$269 million 

$163 million 

SR 125 Toll Road ......... Hwy/Bridge ................... $450 million ................ Direct Loan ..................

Line of Credit 

$94 million 

$33 million 

Farley Penn Station ...... Passenger Rail ............. $800 million ................ Direct Loan ..................

Line of Credit 

$140 million 

$20 million 

Washington Metro CIP .. Transit .......................... $2,324 million ............. Guarantee .................... $600 million 

Tren Urbano (PR) ......... Transit .......................... $1,676 million ............. Direct Loan .................. $300 million 

Tacoma Narrows Bridge Hwy/Bridge ................... $835 million ................ Direct Loan ..................

Line of Credit 

$240 million 

$30 million 

Cooper River Bridge ..... Hwy/Bridge ................... $668 million ................ Direct Loan .................. $215 million 

Staten Island Ferries .... Transit .......................... $482 million ................ Direct Loan .................. $159 million

Central Texas Turnpike Hwy/Bridge ................... $3,580 million ............. Direct Loan .................. $917 million 

Reno Rail Corridor ........ Intermodal .................... $242 million ................ Direct Loan ..................

Direct Loan 

Direct Loan 

$51 million 

$5 million 

$18 million 

SF–Oakland Bay Bridge Hwy/Bridge ................... $3,305 million ............. Direct Loan .................. $450 million

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TIFIA Commitments as of September 2002—Continued

Project Project Type Project Cost Instrument Type Credit Amount 

Total .................... $15,711 million ........... $3,704 million 

Already limited by statute to 33 percent of total project costs, actual TIFIA assistance has averaged 23 percent of project costs. Including grant assistance, total Federal investment in TIFIA projects amounts to 43 percent of total costs. Investments 

from other government and private sources comprise the remaining 57 percent. 

Because credit assistance requires a small fraction of the contract authority needed to provide a similar amount of grant assistance, TIFIA promotes a cost-effective 

use of Federal resources to encourage co-investment in transportation infrastructure. Federal grant funds that otherwise might be required to support these large 

projects can then be redirected toward smaller but critical infrastructure investments. 

An explicit goal of the TIFIA program is to induce private investment in transportation infrastructure. Private co-investment in the TIFIA project selections totals 

about $3.1 billion, comprised of more than $3 billion in debt (including State and 

local debt held by private investors) and nearly $100 million in equity. This co-investment totals approximately 20 percent of the nearly $15.7 billion in total costs. 

The DOT believes that a limited number of large surface transportation projects 

each year will continue to need the types of credit instruments offered under TIFIA. 

Project sponsors and DOT staff are still exploring how best to utilize this credit assistance, and we welcome congressional guidance and dialog during this evolutionary program period. 

As stated in the Conference Report accompanying TEA–21 and TIFIA, ‘‘[a] n objective of the program is to help the financial markets develop the capability ultimately to supplant the role of the Federal Government in helping finance the costs 

of large projects of national significance.’’ The current form of TIFIA administration—within a Federal agency subject to regular budget oversight—enables policymakers to monitor program performance as staff, sponsors and the financial markets gain experience. As current TIFIA projects move into their construction, operation and repayment phases, and as additional projects obtain TIFIA assistance, 

policymakers will acquire better information with which to determine whether 

TIFIA should remain within the DOT, ‘‘spin off’’ into a Government corporation or 

Government sponsored enterprise, or phaseout entirely and rely on the capital markets to meet the program’s objectives. 

The Department also administers a credit assistance program specifically for the 

railroad industry: the Railroad Rehabilitation and Improvement Financing Program 

(RRIF). Also authorized in TEA–21, the RRIF program provides direct loans and 

loan guarantees to railroads and other public and private ventures in partnership 

with railroads. The aggregate unpaid principal amount under the program cannot 

exceed $3.5 billion, and the subsidy cost is covered by a ‘‘credit risk premium’’ paid 

by or on behalf of the borrower from a non–Federal source. To date, the Federal 

Railroad Administration (FRA) has approved four RRIF loans for a total of more 

than $200 million, and six more applications are currently being evaluated. 

GARVEE Bonds 

Another financing tool among States has been the issuance of Grant Anticipation 

Revenue Vehicles (GARVEEs): bonds that enable States to pay debt service and 

other bond-related expenses with future Federal-aid highway apportionments. 

States are finding GARVEEs to be an attractive financing mechanism to bridge 

funding gaps and accelerate construction of major corridor projects. The GARVEE 

generates up-front capital for major highway projects at tax-exempt rates and enables a State to construct a project earlier than using traditional pay-as-you-go 

grant resources. With projects in place sooner, costs are lower due to inflation savings and the public realizes safety and economic benefits. Paying via future Federal 

highway reimbursements spreads the cost of the facility over its useful life, rather 

than just the construction period. GARVEEs expand access to capital markets, 

supplementing general obligation or revenue bonds. 

A GARVEE is a debt-financing instrument authorized to receive Federal reimbursement of debt service and related financing costs. In general, projects funded 

with the proceeds of a GARVEE debt instrument are subject to the same requirements as other Federal-aid projects with the exception of the reimbursement process. Instead of reimbursements as construction costs are incurred, the reimbursement of GARVEE projects occurs when debt service is due. 

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Candidates for GARVEE financing are typically large projects, or a program of 

projects, where the costs of delay outweigh the costs of financing and other borrowing approaches may not be available. In total, six States have issued 14 

GARVEE Bonds, totaling more than $2.5 billion, to be repaid using a portion of 

their future Federal-aid highway funds. The table below summarizes this activity.

GARVEE Transactions as of July 2002

State Date of Issue Face Amount of Issue Projects Financed 

Ohio ........................ May–98 ......................................

Aug–99

Sep–01

$70 million ................................

$20 million 

$100 million 

Various projects including: 

Spring–Sandusky and 

Maumee river improvements 

New Mexico ............. Sep–98 ......................................

Feb–01

$100 million ..............................

$19 million 

New Mexico SR 44

Arkansas ................. Mar–00 ......................................

Jul–01

Jul–02

$175 million ..............................

$185 million 

$215 million 

Interstate Highways 

Colorado .................. May–00 ......................................

Apr–01

Jun–02

$537 million ..............................

$506 million 

$208 million 

Any project financed wholly or 

in part by Federal funds 

Arizona .................... Jun–00 .......................................

May–01

$39 million ................................

$143 million 

Maricopa freeway projects 

Alabama ................. Apr–02 ....................................... $200 million .............................. County Bridge Program

Total ............... $2,517 million.

State Infrastructure Banks 

Another significant project finance tool is the State Infrastructure Bank (SIB), a 

revolving transportation investment fund administered by a State. A SIB functions 

as a revolving fund that, much like a bank, can offer loans and other credit products 

to public and private sponsors of Title 23 highway construction projects or Title 49 

transit capital projects. Federally capitalized SIBs were first authorized under the 

provisions of the National Highway System Designation Act of 1995. The initial infusion of Federal and State matching funds was critical to the startup of a SIB, but 

States have the opportunity to contribute additional State or local funds to enhance 

capitalization. SIB assistance may include loans (at or below market rates), loan 

guarantees, standby lines of credit, letters of credit, certificates of participation, debt 

service reserve funds, bond insurance, and other forms of non-grant assistance. As 

loans are repaid, a SIB’s capital is replenished and can be used to support a new 

cycle of projects. And, as has been accomplished in Minnesota and South Carolina, 

SIBs can also be structured to issue bonds against their capitalization, increasing 

the amount of funds available for loans. 

SIBs complement traditional funding techniques and serve as a useful tool to 

stretch both Federal and State dollars. The primary benefits of SIBs to transportation investment include: 

• Flexible project financing, such as low interest loans and credit assistance that 

can be tailored to the individual projects; 

• Accelerated completion of projects; 

• Incentive for increased State and/or local investment; 

• Enhanced opportunities for private investment by lowering the financial risk 

and creating a stronger market condition; and 

• Recycling of funds to provide financing for future transportation projects. 

The pilot program was originally available to only 10 States, and was later expanded to include 38 States and Puerto Rico. TEA–21 established a new pilot program for the States of California, Florida, Missouri, and Rhode Island. Texas was 

later authorized to participate in the TEA–21 program. To date, however, only Florida and Missouri have elected to revise their agreements in accordance with TEA–

21. 

The authorizing Federal legislation allows States to customize the structure and 

focus of their SIB programs to meet specific requirements. While a SIB can offer 

many types of financing assistance, loans have been the most popular tool. As of 

June 2002, 32 States had entered into 294 loan agreements totaling more than $4 

billion. This activity has been largely concentrated within six States. The largest 

SIB, the South Carolina Transportation Infrastructure Bank, has approved financing and begun development of almost $2.4 billion in projects, helping to condense 

into 7 years a transportation program that would have taken 27 years under a payVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
64

as-you-go approach. The Florida SIB had executed 32 loan agreements through the 

end of fiscal year 2001, at a value of $465 million. The Florida SIB has been augmented with a State appropriation of $150 million, and both Ohio and Arizona have 

also contributed additional State funds to their SIBs. The table below demonstrates 

the concentration of activity in the six largest SIBs.

State Infrastructure Banks Transactions as of June 2002

State Number of Agree- ments 

Loan Agreement Amount 

South Carolina ............................................................................................................. 6 $2,382 million 

Florida .......................................................................................................................... 32 $465 million 

Arizona ......................................................................................................................... 37 $424 million 

Texas ............................................................................................................................ 37 $252 million 

Ohio .............................................................................................................................. 39 $141 million 

Missouri ....................................................................................................................... 11 $73 million

Subtotal ..................................................................................................... 162 $3,738 million

Other States ................................................................................................................. 132 $318 million

Total ........................................................................................................... 294 $4,056 million 

Looking Ahead 

Although States and local partners have not adopted them evenly, the tools of 

TIFIA, GARVEEs and SIBs have clearly moved from the innovative to the mainstream. This reflects significant success, but it doesn’t indicate that the needs of 

project finance have been completely met. Secretary Mineta has issued a clear challenge to the Department in our development of a reauthorization proposal for TEA– 21, asking us to expand innovative finance programs to encourage private sector investment and examine other means to augment existing revenue streams. As part 

of our internal reauthorization deliberations, we are considering options for further 

leveraging Federal resources for surface transportation. Enhancing the use of innovative finance in intermodal projects and examining the financing techniques used 

in other major public infrastructure investments are among the areas we are looking at. The challenge is to build on our successes to date, but not set unrealistic 

expectations for the future. 

A particular focus is on the issue of private investment, an at-risk contribution 

to a project with the expectation of repayment from project revenues—and a return 

on investment—over time. Unlike much of the world, the provision of roads and 

transit systems in the U.S. is almost completely a public sector responsibility. As 

has been often pointed out, our system of tax-exempt financing means that the public cost of capital is significantly less expensive than for a private entity. Many public works sectors in the U.S. permit private firms to gain access to tax-exempt capital for the construction of public infrastructure. Legislation has been introduced 

previously to confer this opportunity to a limited number of highway projects. Before 

the Department would consider any proposed amendment to the Internal Revenue 

Code, it would first consult with the Department of the Treasury. 

One transportation sector with a high degree of private participation, which deserves a higher profile among public transportation planners and policymakers, concerns the movement of freight. Supporting the efficiency of commercial freight transportation continues to be a cornerstone of the Department’s vision for America’s transportation system. ISTEA and TEA–21 legislation gave us many tools to bring 

this vision to reality, and our experience has given us new ideas for programs that 

will get us even closer to our goal of a seamless transportation network. Greater 

investments in transportation infrastructure and wider use of information technology will certainly be required to achieve this goal. 

The activity of SIBs in many States indicates that this program is ready to move 

beyond its pilot phase to become a permanent feature of the innovative finance landscape. 

The Department looks forward to working with our partners in State DOTs, metropolitan planning organizations, and private industry to apply innovative funding 

strategies that extend the financial means of our individual stakeholders. And we 

look forward to working with the Congress to craft the next surface transportation 

legislation. Working together, the Administration, the Congress, States and localities and the private sector can preserve, enhance, and establish surface transportation programs that will result in increased mobility, safety and prosperity for all 

Americans. 

65

Thank you for the opportunity to testify before you today. I would be happy to 

answer any questions you may have. 

RESPONSES OF PHYLLIS SCHEINBERG TO ADDITIONAL QUESTIONS FROM SENATOR

JEFFORDS

Question 1. State Infrastructure Banks (SIBs) are currently limited to only a few 

States. What is the track record of SIBs? Are they performing as anticipated? Are 

SIBs a viable option that should be available to all States? Do you have suggestions 

which this Committee should consider to improve the effectiveness of SIBs? 

Response. Thirty-nine States, including the Commonwealth of Puerto Rico, were 

authorized by the Department of Transportation to establish a SIB under the National Highway System Designation Act of 1995 (NHS Act). In addition, the Transportation Equity Act for the 21st Century (TEA–21) established a SIB pilot program 

that was limited to only a few States that already had authorized SIBs under the 

NHS Act. Specifically, five States (Florida, Missouri, California, Rhode Island, and 

Texas) were authorized to use TEA–21 funds to capitalize their SIBs. However, only 

Florida and Missouri have modified their SIB agreements to comply with the TEA–

21 requirements and are currently eligible to use TEA–21 funds for SIB capitalization. To date, States have transferred $456 million of Federal funds apportioned in 

FYs 1996 and 1997 into SIBs and $52.1 million of TEA–21 funds have been transferred to SIBs. 

We believe that SIBs have been a viable tool for States that have established 

them. Of the 39 authorized SIBs, 32 remain active even though only two (Florida 

and Missouri) are using the additional TEA–21 funds for capitalization. As of June 

2002, these States have entered into 294 SIB loan agreements for a total of $4 billion dollars for surface transportation projects. Some benefits of SIBs assistance are 

flexible project financing, accelerated completion of projects, recycling of funds, increased State and/or local investment, and enhanced private investment and economic development opportunities. 

There is an important distinction between the SIB provisions in the NHS Act and 

TEA–21. For SIBs operating under the provisions of the NHS Act, all ‘‘first generation’’ SIB assisted projects are subject to Federal requirements. Federal requirements, however, do not apply to SIB projects funded with ‘‘second and subsequent 

generation’’ SIB funds—i.e., funds derived from repayment proceeds of the first generation projects. All SIB projects assisted with TEA–21 funds are subject to Federal 

requirements regardless of whether they are first generation projects or financed 

from repayment proceeds of previously assisted projects. Most States seem to prefer 

the NHS Act provision that does not expand the application of Federal requirements.

Question 2. In my statement I mentioned that the State of South Carolina is undertaking what would be 27 years worth of projects using traditional Federal-aid 

funding in a span of 7 years. They are able to accomplish this through various 

transportation financing mechanisms. What challenges does a State face if they use 

this approach to ‘‘jump start’’ project construction? Are programs like those helping 

or harming the State’s future ability to invest in infrastructure? 

Response. One significant challenge involves a State’s ability to manage a sudden 

increase in the number of projects. Another challenge relates to the availability of 

contractors to perform the work. South Carolina has addressed the first challenge 

by supplementing its own staff with consultants. In addition, the State has not, to 

date, reported problems with the availability of contractors. 

Accelerating the start of transportation infrastructure projects can result in the 

twin benefits of (1) cost savings from reduced cost escalation due to inflation and 

increases in right-of-way costs and (2) earlier returns on economic and safety benefits provided by the new facility. 

At this point, we are not aware of instances in which the use of financing mechanisms to ‘‘jump start’’ projects has jeopardized a State’s furture ability to invest in 

infrastructure. For example, States that have issued GARVEE bonds thus far have 

judiciously imposed coverage tests and dollar limits that they believe are appropriate and marketable. GARVEE bonds are State-issued bonds whose repayment 

source is future Federal-aid highway apportionments.

Question 3. AASHTO is proposing a Transportation Finance Corporation (TFC) be 

created in the next reauthorization to increase the size of the Federal program. The 

TFC would be involved in various financing mechanisms such as bonding. Has DOT 

investigated or researched similar ideas? What are your thoughts on the viability 

of such an approach? 

66

1Performance Budgeting: Opportunities and Challenges. (GAO–02–1106T, Sept.19, 2002). 

Response. DOT is currently formulating its highway reauthorization policies, but 

has not finalized its proposals. DOT has considered a variety of alternative financing approaches and has solicited input from all relevant stakeholders.

Question 4. In your statement you mention that DOT is pursuing more avenues 

for transportation financing. We are very interested in this matter including looking 

at Federal loan guarantees, bonding, tax incentives to purchasing bonds, and a 

range of other options. One concept I heard was ‘‘adapting the financing techniques 

using other public works sectors’’. Could you give us examples of other public works 

techniques? How applicable would they be to transportation investment? What other 

innovative financing approaches should we work with you on? Are there other models which have worked well in other areas which could be helpful here—for example, 

the Farm Credit System sells securities to raise funds to make loans. What existing 

financing ideas regarding other Departments, Government Sponsored Enterprises, 

Federal or State agencies, or private entities should we at least consider in terms 

of the reauthorization? 

Response. One mechanism that is currently available for certain major public infrastructure projects—but not highways—is private activity bonds. Private activity 

bonds are tax-exempt financings issued for certain privately developed and operated 

public infrastructure. Examples of projects that are currently eligible for private activity bonds are airport facilities; docks and wharves; water, wastewater and solid 

waste disposal facilities; mass commuting facilities; and high speed intercity rail facilities. Whether private activity bonds would be a useful tool for highway financing 

could be worth investigation. 

STATEMENT OF JAYETTA Z. HECKER DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE

Mr. Chairman and members of the committees: We are pleased to be here today 

to discuss alternative financing for surface transportation infrastructure projects. As 

Congress considers reauthorizing the Transportation Equity Act for the 21st Century (TEA–21) in 2003, it does so in the face of a continuing need for the Nation 

to invest in its surface transportation infrastructure and at a time when both the 

Federal and State governments are experiencing severe financial constraints.1 Many 

observers are concerned that a significant gap exists between the availability of 

funds and immediate needs. In the longer term, questions have been raised about 

the financial capacity of the Highway Trust Fund to sustain current and future levels of highway and transit spending. This is of particular concern since Congress 

has by law established a direct link between Highway Trust Fund revenues and surface transportation spending levels. 

In recent years, as transportation needs have grown, Congress provided States— in the National Highway System Designation Act of 1995 (NHS) and TEA–21—additional means to make highway investments through alternative financing mechanisms. These alternative mechanisms included State Infrastructure Banks (SIBs)— revolving funds to make or guarantee loans to approved projects; Grant Anticipation 

Revenue Vehicles (GARVEEs)—which are State issued bonds or notes repayable 

with future Federal-aid; and credit assistance under the Transportation Infrastructure Finance and Innovation Act (TIFIA)—including loans, loan guarantees, and 

lines of credit. All are part of the Federal Highway Administration’s (FHWA’s) Innovative Finance Program. As the time draws nearer to reauthorizing TEA–21, information is needed about the performance of these tools and the potential for these 

and other proposed tools to help meet the nation’s surface transportation infrastructure investment needs. 

At the request of your Committees, we are examining a range of surface transportation financing issues, including FHWA’s Innovative Finance Program and proposed alternative financing approaches. My testimony today is based on the preliminary results of our work and discusses (1) the use and performance of existing innovative financing tools and the factors limiting their use, and (2) the prospective costs 

of current and newly proposed alternative financing techniques for meeting surface 

transportation infrastructure investment needs. I will also discuss issues concerning 

the potential costs and benefits of expanding alternative financing mechanisms to 

meet our nation’s surface transportation needs. My testimony is based on our review 

of applicable laws, FHWA’s evaluation studies and other reports concerning its Innovative Financing Program, and interviews with FHWA officials, transportation officials in eight States, and bond rating companies. It is also based on a cost comparison we conducted of four current and newly proposed financing techniques. 

67

2FHWA uses the term ‘‘innovative finance’’ to refer to any funding measure other than grants 

to States appropriated from the Highway Trust Fund. Most of the innovative measures entail 

debt financing. The term is used to contrast that approach with traditional methods of funding 

highway projects. 3FHWA’s test and evaluation research initiative (TE–045) evaluated a number of other innovations, including flexible match, toll credits, advance construction, partial conversion of advance construction, and tapered match. Many of these techniques were subsequently approved 

for use. 

In summary: 

• A number of States are using existing alternative financing tools such as State 

Infrastructure Banks, GARVEE bonds, and TIFIA loans. These tools can provide 

States with additional options to accelerate projects and leverage Federal assistance—they can also provide greater flexibility and more funding techniques. However, a number of factors can limit the use of these tools, including some States’ preference not to use the tools, restrictions in State law on using them, and restrictions in Federal law on the number of States and types of projects that can use 

them. • Federal funding of surface transportation investments includes Federal-aid 

highway program grant funding appropriated by Congress out of the Highway Trust 

Fund, loans and loan guarantees, and bonds that are issued by States and that are 

exempt from Federal taxation. In addition, the use of tax credit bonds—where investors receive a tax credit against their Federal income taxes instead of interest payments from the bond issuers—have been proposed for helping to finance surface 

transportation investments. Because each of these financing mechanisms is structured differently, we determined that the total cost of providing $10 billion in infrastructure investment using each of these existing or proposed mechanisms ranges 

from $10 billion to over $13 billion (in present value terms). The mechanisms that 

involve greater borrowing from the private sector, such as tax-exempt bonds and tax 

credit bonds, require the least amount of public outlays up front. However, those 

same mechanisms have the highest long-term costs to the public sector participants 

in the investments because the latter must compensate the private investors for the 

risks that they assume. With respect to the Federal Government’s contribution, tax 

credit bonds are the most costly mechanism, while TIFIA loans and tax exempt 

bonds are the least costly. • Expanding the use of alternative financing mechanisms has the potential to 

stimulate additional investment and private participation. But expanding investment in our nation’s highways and transit systems raises basic questions of who 

pays, how much, and when. How alternative financing mechanisms are structured 

determines how much of the needs are met through Federal funding and how much 

are met by the States and others. The structure of these mechanisms also determines how much of the cost of meeting our current needs are met by current users 

and taxpayers versus future users and taxpayers. 

Background 

The Federal-aid highway program is financed through motor fuel taxes and other 

levies on highway users. Federal aid for highways is provided largely on a cash 

basis from the Highway Trust Fund. States have financed roads primarily through 

a combination of State revenues and Federal aid. Typically, States raise their share 

of the funds by taxing motor fuels and charging user fees. In addition, debt financing—issuing bonds to pay for highway development and construction—represents 

about 10 percent of total State funding for highways, although some States make 

greater use of borrowing than others. 

Federal-aid highway funding to States is typically in the form of grants. These 

grants are distributed from the Highway Trust Fund and apportioned to States 

based on a series of funding formulas. Funding is subject to grant-matching rules— for most federally funded highway projects, an 80-percent Federal and 20-percent 

State funding ratio. States are subject to pay-as-you-go rules where they obligate 

all of the funds needed for a project up front and are reimbursed for project costs 

as they are incurred. 

In the mid–1990’s, FHWA and the States tested and evaluated a variety of innovative financing techniques and strategies.2 Many financing innovations were approved for use through administrative action or legislative changes under NHS and 

TEA–21. Three of the techniques approved were SIBs, GARVEEs, and TIFIA loans.3

SIBs are State revolving loan funds that make loans or loan guarantees to approved 

projects; the loans are subsequently repaid, and recycled back into the revolving 

fund for additional loans. GARVEEs are any State issued bond or note repayable 

with future Federal-aid highway funds. Through the issuance of GARVEE bonds, 

projects are able to meet the need for up-front capital as well as use future Federal 

68

highway dollars for debt service. TIFIA allows FHWA to provide credit assistance, 

up to 33 percent of eligible project costs, to sponsors of major transportation 

projects. Credit assistance can take the form of a loan, loan guarantee, or line of 

credit. See appendix II for additional information about these financing techniques. 

According to FHWA, the goals of its Innovative Finance Program are to accelerate 

projects by reducing inefficient and unnecessary constraints on States’ management 

of Federal highway funds; expand investment by removing barriers to private investment; encourage the introduction of new revenue streams, particularly for the 

purpose of retiring debt obligations; and reduce financing and related costs, thus 

freeing up the savings for investments into the transportation system itself. When 

Congress established the TIFIA program in TEA–21, it set out goals for the program 

to offer sponsors of large transportation projects a new tool to leverage limited Federal resources, stimulate additional investment in our nation’s infrastructure, and 

encourage greater private sector participation in meeting our transportation needs. 

Alternative Financing Mechanisms Offer States Options, But Factors Limit Their 

Use 

Over the last 8 years, many States have used one or more of the FHWA-sponsored 

alternative financing tools to fund their highway and transit infrastructure projects. 

As of June 2002:

• 32 States (including the Commonwealth of Puerto Rico) have established SIBs and have entered into 294 loan agreements with a dollar value of about $4.06 billion; • 9 States (including the District of Columbia and Commonwealth of Puerto 

Rico) have entered into TIFIA credit assistance agreements for 11 projects, representing $15.4 billion in transportation investment; and • 6 States have issued GARVEE bonds with face amounts totaling $2.3 billion.

These mechanisms have given States additional options to accelerate the construction of projects and leverage Federal assistance. It has also provided them with 

greater flexibility and more funding techniques. 

Accelerate Project Construction 

States’ use of innovative financing techniques has resulted in projects being constructed more quickly than they would be under traditional pay-as-you-go financing. 

This is because techniques such as SIBs can provide loans to fill a funding gap, 

which allows the project to move ahead. For example, using a $25 million SIB loan 

for land acquisition in the initial phase of the Miami Intermodal Center, Florida accelerated the project by 2 years, according to FHWA. Similarly, South Carolina used 

an array of innovative finance tools when it undertook its ‘‘27 in 7 program’’—a plan 

to accomplish infrastructure investment projects that were expected to take 27 years 

and reduce that to just 7 years. Officials in the States that we contacted that were 

using FHWA innovative finance tools noted that project acceleration was one of the 

main reasons for using them. 

Leverage Federal Investments 

Innovative finance-in particular the TIFIA program-can leverage Federal funds by 

attracting additional nonFederal investments in infrastructure projects. For example, the TIFIA program funds a lower share of eligible project costs than traditional 

Federal-aid programs, thus requiring a larger investment by other, non-Federal 

funding sources. It also attracts private creditors by assuming a lower priority on 

revenues pledged to repay debt. Bond rating companies told us they view TIFIA as 

‘‘quasi-equity’’ because the Federal loan is subordinate to all other debt in terms of 

repayments and offers debt service grace periods, low interest costs, and flexible repayment terms. 

It is often difficult to measure precisely the leveraging effect of the Federal investment. As a recent FHWA evaluation report noted, just comparing the cost of the 

Federal subsidy with the size of the overall investment can overstate the Federal 

influence—the key issue being whether the projects assisted were sufficiently creditworthy even without Federal assistance and the Federal impact was to primarily 

lower the cost of the capital for the project sponsor. 

However, TIFIA’s features, taken together, can enhance senior project debt ratings and thus make the project more attractive to investors. For example, the $3.2 

billion Central Texas Turnpike project—a toll road to serve the Austin-San Antonio 

corridor—received a $917 million TIFIA loan and will use future toll revenues to 

repay debt on the project, including revenue bonds issued by the Texas Transportation Commission and the TIFIA loan. According to public finance analysts from 

two ratings firms, the project leaders were able to offset potential concerns about 

the uncertain toll road revenue stream by bringing the TIFIA loan to the project’s 

financing. 

69

4In deriving our comparisons we use current rules and practices relating to State matching 

expenditures. Specifically, when computing the costs associated with grants we assume that 

States pay for 20 percent of the investment expenditures; we assume a similar matching rate 

would be applied if a tax credit bond program were introduced. Our tax-exempt bond example 

represents independent investments by the State or local governments (or special purpose entities) with no Federal support other than the tax subsidy. In the case of the direct loan program, 

we assume that the $10 billion of expenditures is financed by approximately the same combination of Federal loans, Federal grants, State, local or special purpose entity bonds, State appropriations, and private investment as the average project currently financed by TIFIA loans. (See 

app. I for further details of our methodology). However, it is important to note that the current 

rules and practices could be revised so that any desired cost sharing between the Federal and 

State governments could be achieved through any of the mechanisms. 

Provide Greater Flexibility And Additional Financing Techniques 

FHWA’s innovative finance techniques provide States with greater flexibility 

when deciding how to put together project financing. By having access to various 

alternatives, States can finance large transportation projects that they may not have 

been able to build with pay-as-you-go financing. For example, faced with the challenge of Interstate highway needs of over $1.0 billion, the State of Arkansas determined that GARVEE bonds would make up for the lack of available funding. In 

June 1999, Arkansas voters approved the issuance of $575 million in GARVEE 

bonds to help finance this reconstruction on an accelerated schedule. The State will 

use future Federal funds, together with the required State matching funds and the 

proceeds from a diesel fuel tax increase, to retire the bonds. The GARVEE bonds 

allow Arkansas to rebuild approximately 380 miles, or 60 percent of its total Interstate miles, within 5 years. 

Factors Can Limit the Use Finance Tools 

Although FHWA’s innovative financing tools have provided States with of additional options for meeting their needs, a number of factors can limit the use of these 

tools.

• State DOTs are not always willing to use Federal innovative financing tools, 

nor do they always see advantages to using them. For example, officials in two 

States indicated that they had a philosophy against committing their Federal aid 

funding to debt service. Moreover, not all States see advantages to using FHWA innovative financing tools. For example, one official indicated that his State did not 

have a need to accelerate projects because the State has only a few relatively small 

urban areas and thus does not face the congestion problems that would warrant 

using innovative financing tools more often. Officials in another State noted that because their DOT has the authority to issue tax-exempt bonds as long as the State 

has a revenue stream to repay the debt, they could obtain financing on their own 

and at lower cost. • Not all State DOTs have the authority to use certain financing mechanisms, 

and others have limitations on the extent to which they can issue debt. For example, 

California requires voter approval in order to use its allocations from the Highway 

Trust Fund to pay for debt servicing costs. In Texas, the State constitution prohibits 

using highway funds to pay the State’s debt service. Other States limit the amount 

of debt that can be incurred. For example, Montana has a debt ceiling of $150 million and is now paying off bonds issued in the late 1970’s and early 1980’s and plans 

to issue a GARVEE bond in the next few years. • Some financing tools have limitations set in law. For example, five States are 

currently authorized to use TEA–21 Federal-aid funding to capitalize their SIBs. Although other States have created SIBs and use them, they could not use their TEA– 21 Federal-aid funding to capitalize them. Similarly, TIFIA credit assistance can be 

used only for certain projects. TIFIA’s requirement that, in general, projects cost at least $100 million restricts its use to large projects. 

Costs and Risks of Alternative Financing Mechanisms Vary 

We assessed the costs that Federal, State and local governments (or special pur- pose entities they create) would incur to finance $10 billion in infrastructure investment using four current and newly proposed financing mechanisms for meeting infrastructure investment needs.4 To date, most Federal funding for highways and 

transit projects has come through the Federal-aid highway grants—appropriated by 

Congress from the Highway Trust Fund. Through the TIFIA program, the Federal 

Government also provides subsidized loans for State highway and transit projects. 

In addition, the Federal Government also subsidizes State and local bond financing 

of highways by exempting the interest paid on those bonds from Federal income tax. 

Another type of tax preference—tax credit bonds—has been used, to a very limited 

extent, to finance certain school investments. Investors in tax credit bonds receive 

a tax credit against their Federal income taxes instead of interest payments from 

70

5The only tax credit bonds currently in existence are Qualified Zone Academy bonds. State 

or local governments may issue these bonds to finance improvements in public schools in disadvantaged areas. The issuance limit for these bonds is set at $400 million for 2002 and is allocated to the States on the basis of their portion of the population below the poverty level. 6We present our results in present value terms so that the value of dollars spent in the future 

are adjusted to make them comparable to dollars spent today. 7The results presented in figure 1 were computed using current interest rates, which are relatively low by historical standards. At higher interest rates, the combined costs of the alternatives that involve bond financing would be higher, while the costs of grants would remain 

the same. If we had used bonds with 20-year terms, instead of 30-year terms, in our examples, 

the costs of the three alternatives that involve bond financing would be lower, but they all would 

still be greater than the costs of grants.

the bond issuer.5 Proposals have been made to extend the use of this relatively new 

financing mechanism to other public investments, including transportation projects. 

The use of these four mechanisms to finance $10 billion in infrastructure investment result in differences in (1) total costs—and how much of the cost is incurred 

within the short term 5-year period and how much of it is postponed to the future; 

(2) sharing costs—or the extent to which States must spend their own money, or 

obtain private investment, in order to receive the Federal subsidy; and (3) risks—

which level of government bears the risk associated with an investment (or compensates others for taking the risk). As a result of these differences, for any given 

amount of highway investment, combined and Federal Government budget costs will 

vary, depending on which financing mechanism is used. 

Total Costs—And Short-and Long-Term Costs—Differ 

Total costs—and how much of the cost is incurred within the short term 5year 

period and how much of it is postponed to the future—differ under each of the four 

mechanisms. As figure 1 shows, grant funds are the lowest-cost method to finance 

a given amount of investment expenditure, $10 billion.6 The reason for this result 

is that it is the only alternative that does not involve borrowing from the private 

sector through the issuance of bonds. Bonds are more expensive than grants because 

the governments have to compensate private investors for the risks that they assume (in addition to paying them back the present value of the bond principal). 

However, because the grants alternative does not involve borrowing, all of the public 

spending on the project must be made up front. The TIFIA direct loan, tax credit 

bond, and tax-exempt loan alternatives involve increased amounts of borrowing from 

the private sector and, therefore, increased overall costs. 

Grants entail the highest short term costs as these costs, in our example, are all 

incurred on a pay-as-you-go basis. The tax-exempt bond alternative, which involves 

the most borrowing and has the highest combined costs, also requires the least 

amount of public money up front.7

Alternatives Result in Different Shares of the Cost 

There are significant differences across the four alternatives in the cost sharing 

between Federal and State governments. (See fig. 2). Federal costs would be highest 

under the tax credit bond alternative, under which the Federal Government pays 

the equivalent of 30 years of interest on the bonds. Grants are the next most costly 

alternative for the Federal Government. Federal costs for the tax-exempt bond and 


88460_02.eps
71

8Using different assumptions could produce different results. For example, Congress could reduce the Federal cost differences across the four alternatives by establishing higher State 

matching requirements for those programs. In the case of tax credit bonds, setting the rate of 

credit to substitute for only a fraction of the interest that bond investors would demand would 

require States to pay the difference. 9A nonrecourse bond is not backed by the full faith and credit of the State or local government 

issuer. Purchasers of such bonds do not have recourse to the issuer’s taxing authority for bond 

repayment. 10In the case of Qualified Zone Academy Bonds the statute calls for the credit rate to be set 

so that the bonds sell at par. Selling at par means that the issuer can sell a bond with a face 

value of $1,000 to an investor for $1,000. If, alternatively, the credit rate were set at an average 

interest rate, bonds for riskier projects would have to be sold below par (e.g., a bond with a 

Continued

TIFIA loan alternatives are significantly lower than for tax credit bonds and 

grants.8

In some past and current proposals for using tax credit bonds to finance transportation investments, the issuers of the bonds would be allowed to place the proceeds 

from the sales of some bonds into a ‘‘sinking fund’’ and, thereby, earn investment 

income that could be used to redeem bond principal. This added feature would reduce (or eliminate) the costs of the bond financing to the issuers, but this would 

come at a significant additional cost to the Federal Government. For example, in 

our example where States issue $8 billion of tax credit bonds to finance highway 

projects, if the States were allowed to issue an additional $ 2.4 billion of bonds to 

start a sinking fund, they would be able to earn enough investment income to pay 

back all of the bonds without raising any of their own money. However, this added 

benefit for the States could increase costs to the Federal Government by about 30 

percent—an additional $2.7 billion (in present value), raising the total Federal cost to $11.7 billion. 

The Federal Role in Bearing Investment Risk Varies 

In some cases private investors participate in highway projects, either by purchasing ‘‘nonrecourse’’ State bonds that will be repaid out of project revenues (such 

as tolls) or by making equity investments in exchange for a share of future toll revenues.9 By making these investments the investors are taking the risk that project 

revenues will be sufficient to pay back their principal, plus an adequate return on 

their investment. In the case where the nonrecourse bond is a tax-exempt bond, the 

State must pay an interest rate that provides an adequate after-tax rate of return, 

including compensation for the risk assumed by the investors. By exempting this 

interest payment from income tax, the Federal Government is effectively sharing 

the cost of compensating investors for risk. Nevertheless, the State still bears some 

of the risk-related cost and, therefore has an incentive to either select investment 

projects that have lower risks, or select riskier projects only if the expected benefits 

from those projects are large enough to warrant taking on the additional risk. 

In the case of a tax credit bond where project revenues would be the only source 

of financing to redeem the bonds and the Federal Government would be committed 

to paying whatever rate of credit investors would demand to purchase bonds at par 

value, the Federal Government would bear all of the cost of compensating the investors for risk.10 States would no longer have a financial incentive to balance higher 


88460_03.eps
72

$1,000 face value might sell for only $950), meaning that the issuer receives less money to spend 

for a given amount of bonds issued. Conversely, bonds sold for less risky projects could be sold 

above par, so that issuers receive more funds than the face value of the bonds issued. 1For example, current interest rates on long-term bonds indicate that, to the government and 

investors, the present value of a dollar to be spent 30 years from now is less than 25 cents. 

project risks with higher expected project benefits. Alternatively, the credit rate 

could be set equal to the interest rate that would be required to sell the average 

State bonds (issued within the same timeframe) at par value. In that case, States 

would bear the additional cost of selling bonds for projects with above-average risks. 

In the case of a TIFIA loan for a project that has private sector participation, the 

Federal loan does not compensate the private investors for their risk; instead, the 

Federal Government assumes some of the risk and, thereby, lowers the risk to the 

private investors and lowers the amount that States have to pay to compensate for 

that risk. 

In summary, Mr. Chairman, alternative financing mechanisms have accelerated 

the pace of some surface transportation infrastructure improvement projects and 

provided States additional tools and flexibility to meet their needs—goals of FHWA’s 

Innovative Finance Program. FHWA and the States have made progress to attain 

the goal Congress set for the TIFIA program—to stimulate additional investment 

and encourage greater private sector participation—but measuring success involves 

measuring the leverage effect of the Federal investment, which is often difficult. Our 

work raises a number of issues concerning the potential costs and benefits of expanding alternative financing mechanisms to meet our nation’s surface transportation needs. Congress likely will weigh these potential costs and benefits as it considers reauthorizing TEA–21. 

Expanding the use of alternative financing mechanisms has the potential to stimulate additional investment and private participation. But expanding investment in 

our nation’s highways and transit systems raises basic questions of who pays, how 

much, and when. How alternative financing mechanisms are structured determines 

how much of the needs are met through Federal funding and how much are met 

by the States and others. The structure of these mechanisms also determines how 

much of the cost of meeting our current needs are met by current users and taxpayers versus future users and taxpayers. 

While alternative finance mechanisms can leverage Federal investments, they are, 

in the final analysis, different forms of debt financing. This debt ultimately must 

be repaid, with interest, either by highway users—through tolls, fuel taxes, or licensing and vehicle fees—or by the general population through increases in general 

fund taxes or reductions in other government services. Proposals for tax credit 

bonds would shift the costs of highway investments away from the traditional userfinanced sources, unless revenues from the Highway Trust Fund are specifically earmarked to pay for these tax credits. 

Mr. Chairman this concludes my prepared statement. I would be pleased to answer any questions you or other members of the Committees have. 

APPENDIX I: METHODOLOGY FOR ESTIMATING THE COSTS OF TRANSPORTATION

FINANCING ALTERNATIVES

We estimated the costs that the Federal, State or local governments (or special 

purpose entities they create) would incur if they financed $10 billion in infrastructure investment using each of four alternative financing mechanisms: grants, tax 

credit bonds, tax-exempt bonds, and direct Federal loans. The following subsections 

explain our cost computations for each alternative. We converted all of our results 

into present value terms, so that the value of the dollars spent in the future are 

adjusted to make them comparable to dollars spent today.1 This adjustment is particularly important when comparing the costs of bond repayment that occur 30 years 

from now with the costs of grants that occur immediately. 

The Cost of Grants 

We estimated the cost to the Federal and State governments of traditional grants 

with a State match. We assume the State was responsible for 20 percent of the investment expenditures. We then found the percentage of Federal grants such that 

the Federal grant plus the State match totaled $10 billion. This form of matching 

resulted in the State being responsible for $2 billion of the spending and the Federal 

Government being responsible for $8 billion. 

73

2Although the credits that investors earn on tax credit bonds are taxable, we assume that 

any tax the Federal Government would gain from this source would be offset by the tax that 

investors would have paid on income from the investments they would have made if the tax 

credit bonds were not available for purchase. 3For the tax credit and tax-exempt bond computations we based our rates on municipal bond 

interest rates reported in the August 22, 2002 issue of the Bond Buyer. 4U.S. Department of Transportation, TIFIA Report to Congress, June 2002. 

The Cost of Tax Credit Bonds 

We estimated the cost to the Federal and State governments of issuing $8 billion in tax credit bonds with a State match of $2 billion. The cost to the Federal Government equals the amount of tax credits that would be paid out over a given loan 

term.2 We estimated the amount of credit payment in a given year by multiplying 

the amount of outstanding bonds in a given year by the credit rate. We assumed 

that the credit rate would be approximately equal to the interest rates on municipal 

bonds of comparable maturity, grossed up by the marginal tax rate of bond purchasers.3 For the results presented in figures 1 and 2 we assumed that the bonds 

would have a 30-year term and would have a credit rating between Aaa and Baa. 

The cost to the issuing States would consist of the repayment of bond principal in 

future years, plus the upfront cost of $2 billion in State appropriations for the 

matching contribution. 

The Cost of Tax-Exempt Bonds 

The cost of tax-exempt bonds to the State or local government (or special purpose 

entity) issuers would consist of the interest payments on the bonds and the repayment of bond principal. The cost to the Federal Government would equal the taxes 

forgone on the income that bond purchasers would have earned form the investments they would have made if the tax-exempt bonds were not available for purchase. For the results presented in figures 1 and 2 we made the same assumptions 

regarding the terms and credit rating of the bonds as we did for the tax credit bond 

alternative. We computed the cost of interest payments by the State by multiplying 

the amount of outstanding bonds by the current interest rate for municipal bonds 

with the same term and credit rating. We assumed that the pretax rate of return 

that bond purchasers would have earned on alternative investments would have 

been equal to the municipal bond rate divided by one minus the investors’ average 

marginal tax rate. Consequently, the Federal revenue loss was equal to that pretax 

rate of return, multiplied by the amount of tax-exempt bonds outstanding each year 

(in this example), and then multiplied by the investors’ average marginal tax rate. 

Direct Federal Loans 

In order to have our direct loan example reflect the financing packages typical of 

current TIFIA projects, we used data from FHWA’s June 2002 Report to Congress4

to determine what shares of total project expenditures were financed by TIFIA direct loans, Federal grants, bonds issued by State or local governments or by special 

purpose entities, private investment, and other sources. We assumed that the $10 

billion of expenditures in our example was financed by these various sources in 

roughly the same proportions as they are used, on average, in current TIFIA 

projects. We estimated the Federal and nonFederal costs of the grants and bond financing components in the same manner as we did for the grants and tax-exempt 

bond examples above. To compute the Federal cost of the direct loan component, we 

multiplied the dollar amount of the direct loan in our example by the average 

amount of Federal subsidy per dollar of TIFIA loans, as reported in the TIFIA report. In the results presented in figure 1, this portion of the Federal cost amounted 

to $130 million. The nonFederal costs of the loan component consist of the loan repayments and interest payments to the Federal Government. We assumed that the 

term of the loan was 30 years and that the interest rate was set equal to the Federal cost of funds, which is TIFIA’s policy. The private investment (other than 

through bonds), which accounted for less than 1 percent of the spending, and the 

‘‘other’’ sources, which accounted for about 3 percent of the spending, were treated 

as money spend immediately on the project. 

Sensitivity Analysis 

A number of factors—including general interest rate levels, the terms of the bonds 

or loans, the individual risks of the projects being financed—affect the relative costs 

of the various alternatives. For this reason, we examined multiple scenarios for each 

alternative. In particular, current interest rates are relatively low by historical 

standards. In our alternative scenarios we used higher interest rates, typical of 

those in the early 1990’s. At higher interest rates, the combined costs of the alternatives that involve bond financing would be higher, while the costs of grants would 

74

remain the same. If we had used bonds with 20-year terms, instead of 30-year terms 

in the examples, the costs of the three alternatives that involve bond financing 

would be lower, but they would still be greater than the costs of grants. 

APPENDIX II: STATES’ USE OF INNOVATIVE FINANCING TOOLS

State Infrastructure Banks 

One of the earliest techniques tested to fund transportation infrastructure was revolving loan funds. Prior to 1995, Federal law did not permit States to allocate Federal highway funds to capitalize revolving loan funds. However, in the early 1990’s, 

transportation officials began to explore the possibility of adding revolving loan fund 

capitalization to the list of eligible uses for certain Federal transportation funds. 

Under such a proposal, Federal funding is used to ‘‘capitalize’’ or provide seed 

money for the revolving fund. Then money from the revolving fund would be loaned 

out to projects, repaid, and recycled back into the revolving fund, and subsequently 

reinvested in the transportation system through additional loans. In 1995, the federally capitalized transportation revolving loan fund concept took shape as the State 

Infrastructure Bank (SIB) pilot program, authorized under Section 350 of the NHS 

Act. This pilot program was originally available only to a maximum of 10 States, 

but then was expanded under the 1997 U.S. DOT Appropriations Act, which appropriated $150 million in Federal general funds for SIB capitalization. TEA–21 established a new SIB pilot program, but limited participation to four States—California, 

Florida, Missouri, and Rhode Island. Texas subsequently obtained authorization 

under TEA–21. These States may enter into cooperative agreements with the U.S. 

DOT to capitalize their banks with Federal-aid funds authorized in TEA–21 for fiscal years 1998 through 2003. Of the States currently authorized, only Florida and 

Missouri have capitalized their SIBs with TEA–21 funds.

Table 1: State’s use of SIBs 

State Number of agree- ments 

Loan agreement amount ($ 

000) 

Disbursements to date ($ 

000) 

Alabama.

Alaska ................................................................... 1 $2,737 $2,737

Arizona .................................................................. 37 $424,287 $216,104

Arkansas ............................................................... 1 $31 $31

California.

Colorado ................................................................ 2 $400 $400

Connecticut.

Delaware ............................................................... 1 $6,000 $6,000

D.C..

Florida ................................................................... 32 $465,000 $98,600

Georgia.

Hawaii.

Idaho.

Illinois.

Indiana .................................................................. 1 $3,000 $1,122

Iowa ....................................................................... 2 $2,874 $2,874

Kansas.

Kentucky.

Louisiana.

Maine .................................................................... 23 $1,758 $1,478

Maryland.

Massachusetts.

Michigan ............................................................... 23 $17,034 $13,033

Minnesota .............................................................. 15 $95,719 $41,000

Mississippi.

Missouri ................................................................. 11 $73,251 $67,801

Montana.

Nebraska ............................................................... 1 $3,360 $3,360

Nevada.

New Hampshire.

New Jersey.

New Mexico ........................................................... 1 $541 $541

New York ............................................................... 2 $12,000 $12,000

North Carolina ....................................................... 1 $1,575 $1,575

75

Table 1: State’s use of SIBs—Continued

State Number of agreements 

Loan agreement amount ($ 

000) 

Disbursements to date ($ 

000) 

North Dakota ......................................................... 2 $3,565 $1,565

Ohio ....................................................................... 39 $141,231 $116,422

Oklahoma.

Oregon ................................................................... 12 $17,471 $17,471

Pennsylvania ......................................................... 23 $17,403 $17,403

Puerto Rico ............................................................ 1 $15,000 $15,000

Rhode Island ......................................................... 1 $1,311 $1,311

South Carolina ...................................................... 6 $2,382,000 $1,124,000

South Dakota ........................................................ 1 $11,740 $11,740

Tennessee .............................................................. 1 $1,875 $1,875

Texas ..................................................................... 37 $252,013 $225,461

Utah ...................................................................... 1 $2,888 $2,888

Vermont ................................................................. 3 $1,023 $1,000

Virginia .................................................................. 1 $18,000 $18,000

Washington ........................................................... 1 $700 $385

West Virginia.

Wisconsin .............................................................. 3 $1,814 $1,814

Wyoming ................................................................ 8 $77,977 $42,441

Total ...................................................................... 294 $4,055,578 $2,067,432

Source: FHWA, June 2002

Transportation Infrastructure Finance and Innovation Act (TIFIA) credit assistance 

As part of TEA–21, Congress authorized the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) to provide credit assistance, in the form 

of direct loans, loan guarantees, and standby lines of credit to projects of national 

significance. The TIFIA legislation authorized $10.6 billion in credit assistance and 

$530 million in subsidy cost to cover the expected long-term cost to the government 

for providing credit assistance. TIFIA credit assistance is available to highway, transit, passenger rail and multi-modal project, as well as projects involving installation 

of intelligent transportation systems (ITS). 

The TIFIA statute sets forth a number of prerequisites for participation in the 

TIFIA program. The project costs must be reasonably expected to total at least $100 

million, or alternatively, at least 50 percent of the State’s annual apportionment of 

Federal-aid highway funds, whichever is less. For projects involving ITS, eligible 

project costs must be expected to total at least $30 million. Projects must be listed 

on the State’s transportation improvement program, have a dedicated revenue 

source for repayment, and must receive an investment grade rating for their senior 

debt. Finally, TIFIA assistance cannot exceed 33 percent of the project costs and the 

final maturity date of any TIFIA credit assistance cannot exceed 35 years after the 

project’s substantial completion date.

Table 2: State’s use of TIFIA credit assistance 

State Project name Project description Project cost ($ 

millions) 

Instrument 

type 

Credit amount 

($ millions) 

Primary 

revenue 

pledge 

California ............ SR 125 Toll—1999 ........ Road Highway/ 

Bridge Construction of 11 mi 4-

lane toll road in 

San Diego.

$455 .......... Direct loan

Line of 

credit 

$94.000 

User.

$33.000 

Charges 

San Francisco-Oakland 

Bay Bridge—2002.

Replacement of SFOakland Bay 

Bridge east span.

$3,305 Direct loan.$450.000 

Toll surcharge.

D.C ...................... Washington Metro—

1999.

Transit capital improvement program.

$2,324 

Guarantee.

$600.000 

Other.

76

Table 2: State’s use of TIFIA credit assistance—Continued

State Project name Project description Project cost ($ 

millions) 

Instrument type Credit amount 

($ millions) 

Primary 

revenue 

pledge 

Florida ................. Miami Intermodal Center—1999.Multi-modal center 

for Miami Intern’l 

Airport, including 

car rental garage, 

intermodal center, 

people mover, 

and roadways.

$1,349 Direct loan.

Direct loan 

$269.076 

Tax revenue.

$163.676 

User 

charges 

Nevada ................ Reno Rail Corridor ......... Intermodal ............... $280 Direct 

loan.

$73.500 

Other.

New York ............. Farley Penn Station—

1999.

Intermodal ............... $800 Direct 

loan.

Line of credit 

$140.000 Other ..............

$20.000 Other 

Staten Island Ferries—

2000.

Transit ..................... $482 Direct 

loan.

$159.068 

Other.

Puerto Rico ......... Tren Urbano—1999 ....... Transit rail line ....... $1,676 Direct loan.$300.000 

Tax revenues.

South Carolina .... Cooper River Bridge ....... Replace double 

bridges over the 

Cooper River, 

connecting 

Charleston and 

Mt. Pleasant.

$668 Direct 

loan.

$215.000 

Other.

Texas ................... Central Texas Turnpike—2001.Construct 120+ mi. 

toll facilities to 

ease I–35 congestion.

$3,220 Direct loan.$917.000 

User 

charges.

Washington ......... Tacoma Narrows 

Bridge—2000.

Construct new parallel bridge, toll 

plaza, and approach roadways.

$835 Direct 

loan.

Line of 

credit 

$240.000 

User.

$30.000 

charges 

(both)

Total ........... $15,393.

Source: FHWA, June 2002. 

Grant Anticipation Revenue Vehicles (GARVEEs) 

Grant anticipation revenue vehicles (GARVEEs) are another tool States can use 

to finance highway infrastructure projects. GARVEE bonds are any bond or note repayable with future Federal-aid highway funds. The NHS Act and TEA–21 brought 

about changes that enabled States to use Federal-aid highway apportionments to 

pay debt service and other bondrelated expenses and strengthened the predictability 

of States’ Federal-aid allocation. While GARVEEs do not generate new revenue, the 

new eligibility of bond-related costs for Federal-aid reimbursement provides States 

with one more option for repaying debt service. Candidate projects are typically 

large enough to merit borrowing rather than pay-as-you-go grant funding; do not 

have access to a revenue stream (such as local taxes or tolls) or other forms of repayment (State appropriations); and have support from the State’s DOT to reserve 

a portion of future year Federal-aid highway funds to fund debt service. In some 

cases, States may elect to pledge other sources of revenue, such as State fuel tax 

revenue, as a backstop in the event that future Federal-aid highway funds are not 

available.

77

Table 3: State’s use of GARVEE bonds 

State Date of 

issuance Face amount of issue Projects Backstop financing 

Alabama ............... Apr–02 .... $200 million ................. County Bridge Program .......... All Federal construction reimbursements. Also insured 

Arizona .................. Jun–00 ....

May–01

$39.4 million ................

$142.9 million 

Maricopa freeway projects ..... Certain sub-account transfers 

Arkansas ............... Mar–00 ...

Jul–01

$175 million .................

$185 million 

Interstate highways ............... Full faith and credit of State, 

plus State motor fuel taxes 

Colorado ............... May 00 ...

Apr–01

Jun–02

$537 million .................

$506.4 million 

$208.3 million 

Any project financed wholly or 

in part by Federal funds.

Federal highway funds as allocated annually by CDOT; 

other State funds 

New Mexico ........... Sep–98 ...

Feb–01

$100.2 million ..............

$18.5 million 

New Mexico SR 44 ................. No backstop; bond insurance 

obtained 

Ohio ...................... May–98 ...

Aug–99

Sep–01

$70 million ...................

$20 million 

$100 million 

Spring-Sandusky project and 

Maumee River Bridge Improvements.

Moral obligation pledge to 

use State gas tax funds 

and seek general fund appropriations in the event 

of Federal shortfall

Total ............ $2,301.7 million.

Source: FHWA, June 2002

RESPONSES BY JAYETTA HECKER TO ADDITIONAL QUESTIONS FROM SENATOR BAUCUS

Question 1. One way of organizing some of these ideas are selling bonds for project 

specific financing versus using bond proceeds to supplement the Highway Trust 

Fund. Will you comment on the advantages and disadvantages of each? 

Response. Mr. Chairman, in the competition for finite transportation resources, 

selling bonds to help finance a specific project can help advance a project that might 

otherwise go unfunded or be delayed. In addition, project-specific financing can be 

useful for large-dollar projects that would otherwise take up a large portion of a 

State’s Federal highway apportioned funds in any given year. However, as we indicated in our statement, given the restrictions in some State laws and the views of 

some State officials, project-specific financing currently has limited applicability. As 

a result, not all States can use project specific financing, nor can it be used for all 

projects. In addition, State officials will weigh the risks associated with projectbased bonds against the expected benefits from those projects to determine whether 

the added risk is justified. 

In the short term, using bond proceeds to supplement the Highway Trust Fund 

would increase the available funding, and this additional funding would then be apportioned to all the States. This approach could enable a wider range of projects to 

be advanced. If the Federal Government sold these bonds, they would be less risky 

than project-specific bonds. Consequently, investors would not demand as high an 

interest rate as they would for the project-specific bonds. However, this debt would 

ultimately have to be repaid—either by the general population through increases in 

general fund taxes or reductions in other government services, or by earmarking 

funds from the Highway Trust Fund. If funds were earmarked from the Highway 

Trust Fund to repay the bonds in the future, highway funding would not be increased. Rather, costs would be shifted to future users. 

Raising new sources of funding presents Congress with the option of devising alternatives to the existing formula-based grant program for delivering funds, in either a project-or program-based fashion. This could open the possibility of engaging 

new approaches to deal with seemingly intractable transportation problems and national priorities. For example, DOT and FHWA have concluded that the reliability 

and effectiveness of the freight transportation system is being constrained because 

of increasing demand and capacity limitations. Many observers have questioned the 

ability of our surface transportation systems to keep pace with the growing demands 

being placed upon them as pressure continues to build on already congested road 

and rail connections to major U.S. seaports and at border crossings. Either a projectbased or a program-based financing approach could target funds to these or other 

major national priorities. 

78

RESPONSES BY JAYETTA HECKER TO ADDITIONAL QUESTIONS FROM SENATOR

JEFFORDS

Question 1. In your statement you make reference to the lack of qualified personnel at the Department of Transportation in regard to financing. How many positions (FTE) does the DOT currently have invested in finance personnel? What is 

your best guess as to the percentage of those FTEs having the necessary skill sets 

to advance a more aggressive transportation financing program? 

Response. Mr. Chairman, FHWA requested 2,412 FTEs for fiscal year 2003. Of 

these, 99 were for financial manager and financial specialist positions. The degree 

to which staff in these positions are involved in innovative finance activities varies. 

They include staff located in each of FHWA’s division offices in every State who 

have some involvement with innovative finance, staff located in headquarters and 

other locations who specialize in innovative finance, and other staff who are not directly involved with innovative finance but need some knowledge of it. 

We have not reviewed DOT’s staffing profile in sufficient detail to determine 

whether the right number of personnel are performing these functions or to assess 

their skills. But the department—and indeed all Federal agencies—face a growing 

human capital crisis that threatens their ability to effectively, efficiently, and economically perform their missions and to ensure maximum government performance 

and accountability for the benefit of the American public. For that reason, as you 

know, we have designated strategic human capital management as a high-risk concern governmentwide. As I mentioned in my statement, this challenge ripples 

throughout the State and local transportation agencies that build, maintain, and operate the vast preponderance of the nation’s transportation system. About 50 percent of the people who plan, develop, and manage the nation’s transportation system 

will become eligible to retire in the next 5 years. A survey of State departments of 

transportation conducted by the New Mexico State Highway and Transportation Department in 1999 identified the need to attract, hire, and retain skilled personnel 

as the greatest human resource issues facing these departments. In addition, the 

Transportation Research Board has cited the impending shortage of skilled personnel as among our nation’s most critical transportation issues. 

In our view, addressing human capital challenges requires comprehensive workforce planning strategies to identify the mix of skills needed to accomplish an agency’s mission, the skill mix the agency has on hand, whether those employees are 

expected to retire and when, and a recruiting and hiring strategy to fill the gaps 

where needs exist. For example, any examination of the transportation finance 

arena would necessarily reflect the changing nature of the surface transportation 

program-from a federally funded formula grant program to one involving a multiplicity of funding sources and delivery mechanisms. This change requires people 

with new skills-for example, persons skilled in public finance who can navigate the 

private capital markets. DOT has made progress addressing its human capital concerns by publishing its Human Resources Strategic Action Plan for 2001–2003 with 

goals that call for increased human capital investments and workforce planning. In 

addition, FHWA is actively working with major national and State transportation 

organizations and independent experts to identify human capital needs and innovative ways to meet them. Clearly, it is important that the needs of financing the nation’s transportation system be part of this assessment. In January 2003, we will 

be reporting further on human capital challenges faced by DOT and other Federal 

agencies in our biannual high risk and performance and accountability assessment.

Question 2. One of the outcomes of reauthorization should be the ability to allow 

for more meaningful investment by the private sector into transportation. Current 

transportation bonding techniques do not seem to provide the income that the private sector is seeking since we primarily use tax-exempt mechanism. Can you provide more insights on how we can ‘‘decouple’’ the bonding process to make it more 

attractive to these types of investors? Are there examples where such activity is occurring? 

Response. Mr. Chairman, proponents of tax credit bonds have advocated ‘‘decoupling’’ as you suggested. These proponents contend that if the bonds are sold as two 

separate components-the right to receive the tax credits and the right to receive the 

principal repayment when the bond comes due-then the bond issuer could receive 

larger proceeds for selling a bond with a given face value. This practice is known 

as ‘‘stripping.’’ The reason this result is expected is that each component of the bond 

would be better tailored to suit the requirements of different types of investors. For 

example, some investors may prefer to receive the periodic benefit of the tax credit 

and may be less interested in receiving a principal repayment in the distant future. 

Other investors, such as pension funds or taxpayers setting up individual retirement 

accounts, have no need for current income or tax benefits and may simply prefer 

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to receive a certain amount of money at a specified future date. Therefore, the sum 

that the two different types of investors would be willing to pay for the two components is likely to be larger than the sum that either type of investor would be willing to pay for an ‘‘unstripped’’ bond. 

The practice of ‘‘stripping’’ is prevalent in the sale of interest-bearing securities. 

For example, Treasury bonds with maturities of 10 years or longer generally can 

be sold as two separate components. However, under current law, no existing tax 

credit bonds can be stripped. A Treasury department official told us that the monitoring of tax compliance would be more complicated if tax credit bonds were allowed 

to be stripped. For example, if the tax credits ever had to be recaptured because 

of noncompliance on the part of issuers, it might be difficult to track down the recipients of the credits if those credits had been resold separately in the secondary 

market.

Question 3. It seems that our current transportation financing mechanisms work 

well for large-scale projects. What avenues are available for smaller scale projects? 

Are there other models which have worked well in other areas which could be helpful here—for example the Farm Credit system sells securities to raise funds to make 

loans. What existing financing ideas regarding other Departments, Government 

Sponsored Enterprises, Federal or State agencies, or private entities should we at 

least consider in terms of the reauthorizations? 

While our current transportation financing mechanisms are—for the most part—

geared toward larger scale projects, Mr. Chairman, at least one mechanism, SIBs, 

have effectively supported smaller projects. TIFIA, as you know, is limited by statute to projects with an estimated cost of $100 million or more, and States that have 

used GARVEEs have generally done so to support the financing needs of large 

projects. Although SIBs have also been used to fund some large projects-such as the 

projects in South Carolina’s ‘‘27 in 7’’ program-they also support smaller projects in 

those States that have SIBs. For example, loans in Missouri have averaged $7 million per project, while loans from Maine’s SIB have averaged $76,000 per project. 

FHWA officials told us that SIBs have been effectively used for smaller projects that 

might otherwise have received a lower priority for funding. However, these projects 

have required some type of revenue stream in order for the borrower-often a municipality-to repay the loan. 

I agree with you, Mr. Chairman, that a variety of financing mechanisms exist in 

different sectors to bring private participation and investment to the table in support of public goals and purposes. For example, as you pointed out, the Congress 

has created government-sponsored enterprises (GSE) such as the Farm Credit System-as well as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System—to provide support for agricultural and home lending beyond what the financial markets would provide in their absence. These GSEs are sophisticated financial 

institutions with Federal charters that grant them benefits so that they can help 

achieve their public missions. Among these benefits, GSEs can issue debt in the capital markets at favorable interest rates to help finance a wide range of lending to 

farmers and homeowners. Our work has shown that these institutions often have 

unique flexibilities and play a key role in providing services and options that are 

beyond the capacity of public agencies or financial markets to provide. 

However, the Congress did not decide to create these entities lightly. Because of 

the sophistication of their financial operations, the risks they face, and the requirements of their missions, GSEs require public oversight mechanisms to ensure their 

safety and soundness, and to ensure that the public purposes for which they were 

created are being carried out. As such, a decision to create a GSE might best follow 

a conclusion that one was uniquely positioned to fulfill unmet national needs and 

priorities and that the benefit of government sponsorship and the role of such an 

institution in fulfilling those needs and priorities exceeded the costs of creating and 

operating it. To date, GSEs have not been used for financing public facilities, such 

as highways. We have completed an extensive body of work on this subject and 

would be pleased to work with you and the committee staff to examine more specifically the potential application of these and other financing mechanisms to meeting 

our surface transportation needs.

Question 4. I am interested in attracting private capital to supplement the Highway Trust Fund in meeting the nation’s transportation needs. The key consideration 

for private investors is the availability of a reliable revenue stream to retire debt. 

Where might we turn to secure such revenue streams? 

Response. Mr. Chairman, probably the most prevalent and reliable revenue 

stream is the user fee. User fees can be in the form of tolls, fuel taxes, or license 

and vehicle fees—and States have turned to a variety of user fees to finance transportation projects. For example, Arkansas imposed a diesel fuel tax to partially pay 

80

for the GARVEE bonds issued to reconstruct the State’s interstate highways, while 

Illinois increased its vehicle registration fees to finance bonds for its ‘‘Illinois First’’ project—which included a number of significant highway renovations. User fees are 

increasingly taking less conventional forms—Florida intends to repay part of its 

TIFIA loan for the Miami Intermodal Center from fees levied on rental cars while 

New York’s Farley Penn Station TIFIA loan is to be repaid from lease payments 

from the Port Authority of New York and New Jersey, revenues from Amtrak, and 

rents paid from planned station retail facilities. In addition to highway user fees, 

many States and localities have tapped property-based sources of financing, including general property taxes, real estate transfer taxes, and developer impact fees to 

finance surface transporttion projects. 

As we discussed in our March 2000 report (Port Infrastructure: Financing of Navigation Projects at Small and Medium-Sized Ports), some States allow local sponsors 

of Corps of Engineers’ navigation projects to levy property taxes or issue general obligation or revenue bonds. General obligation bonds issued to support projects are 

generally paid for through taxes implemented by State or local governments. Revenue bonds issued to support a particular project are typically paid for out of the 

revenues generated by that project. 

STATEMENT OF JANICE HAHN, MEMBER, LOS ANGELES CITY COUNCIL CHAIRWOMAN, ALAMEDA CORRIDOR TRANSPORTATION AUTHORITY

Mr. Chairmen, and members of the joint Committees, good morning, and thank 

you for inviting me here today. My name is Janice Hahn. I am a Los Angeles City 

Councilwoman and serve as Chairwoman of the Governing Board of the Alameda 

Corridor Transportation Authority. The Alameda Corridor Transportation Authority 

is a joint-powers authority created by the Cities of Long Beach and Los Angeles in 

1989 to oversee the financing, design and construction of the Alameda Corridor. The 

Governing Board of the Alameda Corridor Transportation Authority is a seven-member board representing the cities of Los Angeles and Long Beach, the ports of Los 

Angeles and Long Beach and the Los Angeles County Metropolitan Transportation 

Authority (MTA). 

On behalf of city of Los Angeles Mayor James Hahn, city of Long Beach Mayor 

Beverly O’Neill, the Corridor Authority’s Governing Board, and our CEO Jim 

Hankla, I am honored to be here. 

INTRODUCTION

We are commonly called ACTA. ACTA is the public agency that built the Alameda 

Corridor, a 20-mile-long freight rail expressway linking the Ports of Los Angeles and 

Long Beach to the rail yards near downtown Los Angeles. The project was monumentally complex, running through eight different government jurisdictions in 

urban Los Angeles County, requiring multiple detailed partnerships between public 

and private entities, and presenting extensive engineering challenges. 

One of the key partnerships that has been vital over the years has been with the 

U.S. Congress. We greatly appreciate the strong support you and your colleagues 

provided to ACTA in developing the innovative loan from the Department of Transportation. We are particularly thankful for the strong leadership demonstrated by 

many of you in Congress including our two distinguished Senators, Dianne Feinstein and Barbara Boxer along with California Congressman Stephen Horn and 

Congresswoman Juanita Millender–McDonald. Without their vision and support it 

is unlikely the Alameda Corridor would be in operation today, strengthening the nation’s global economic competitiveness. 

Over the years there were many who doubted the Corridor project could be built, 

let alone on time and on budget. But after more than 15 years of planning and 5 

years of constructing the $2.4 billion Alameda Corridor, one of the nation’s largest 

public works projects opened on time and on budget on April 15. Today, more than 

35 freight trains per day use the Alameda Corridor, handling containers loaded with 

shoes, clothing, furniture and other products bound for store shelves throughout the 

United States. They also deliver to the ports U.S. goods such as petroleum products, 

machine parts, and agricultural products for shipment to worldwide markets. 

A trip from the Ports of Los Angeles and Long Beach to the transcontinental rail 

yards near downtown Los Angeles used to take more than 2 hours. It now takes 

about 45 minutes. As cargo volumes increase, this enhanced speed and efficiency 

will be critical; more than 100 trains per day are expected on the Alameda Corridor 

by the year 2020. It is important to note that ACTA is collecting revenue from these 

rail shipments in amounts sufficient to meet its current and future financial obligations. 

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MODEL FOR SUCCESS

Because of our success, the Alameda Corridor is considered a model for how major 

public works projects should be constructed. The Corridor illustrates the significance 

of intermodalism to the future of our economic and transportation systems. Among 

those praising the Alameda Corridor have been Transportation Secretary Norman 

Mineta—a long time supporter and friend of the Corridor project—and three of his 

predecessors, one from the first Bush Administration and two from the Clinton Administration. 

At our grand opening ceremony last April, Secretary Mineta said this about the 

Alameda Corridor: ‘‘Its successful completion demonstrates what we can accomplish 

with innovative financing and public-private cooperation, and it provides a powerful 

paradigm for the kinds of intermodal infrastructure investment we want to encourage as we begin working with the Congress to develop legislation reauthorizing 

America’s surface transportation programs.’’ We were also pleased to see that just 

this month in testimony before a joint hearing of the Environment and Public Works 

and Commerce Committees, Associate Deputy Secretary of Transportation Jeff 

Shane praised the Corridor project as a national model. The project, he said, ‘‘will 

have far-reaching economic benefits that extend well beyond Southern California.’’ Similarly, in an article written for TrafficWorld, former U.S. Department of Transportation Secretaries Federico Pena and Samuel Skinner said: ‘‘The Alameda Corridor is of national significance not only because of its direct economic impact on 

jobs, taxes and commodity prices but because the corridor serves as a model of how 

our country can and must expand and modernize our freight transportation system 

if we are to remain a world-class trading partner.’’ In addition, former U.S. Department of Transportation Secretary Rodney Slater has also been a supporter of the 

Alameda Corridor project. 

We are flattered by the accolades and pleased and proud to share our experience 

with those who hope to benefit from it. In fact, one of the goals of the ACTA Governing Board is to support other projects that promote international trade and the 

efficient movement of cargo. 

The key to our success can be attributed to two major themes that guided us 

throughout the planning, financing and construction of the project: First is multijurisdictional cooperation. The Alameda Corridor is built on the partnerships forged 

between competitive public agencies and between those agencies and the private 

sector. We have demonstrated that governments can work together, and they can 

work with the private sector, putting aside competition for the benefit of greater economic and societal good. Second is direct and tangible community benefits. The Alameda Corridor provided direct community benefits in the form of significant traffic 

congestion relief, job training and other programs. We have proven that communities don’t have to sacrifice quality of life to benefit from international trade and 

port and economic activity. 

PROJECT NEED AND PLANNING

The roots of our multi-jurisdictional cooperation began to take hold in the early 

1980’s, when a committee was formed by the Southern California Association of 

Governments to study ways to accommodate burgeoning trade at the Ports of Los 

Angeles and Long Beach. The panel included representatives of the ports, the railroad and trucking industries, the Army Corps of Engineers as well as local elected 

officials and others. The ports had projected—accurately, it turns out—massive 

cargo increases driven by the growing use of intermodal containers transferred directly from ships to rail cars and trucks. The volume of containers crossing the 

wharves doubled in the 1990’s and last year reached more than 10 million 20-foot 

containers per year. That figure is expected to exceed 36 million by the year 2020. 

Last year, the ports handled more than $200 billion in cargo, or about one-quarter 

to one-third of the nation’s waterborne commerce. This has had huge ripple effects 

in Southern California and across the country in the form of jobs, tax revenues and 

general economic activity. 

In the early 1980’s, there was growing concern about the ability of the ground 

transportation system to accommodate increasing levels of trade-related rail and 

truck traffic in the port area. By 1989, the cities and ports of Los Angeles and Long 

Beach had joined forces to form a joint powers authority that later became the Alameda Corridor Transportation Authority. The agency then selected a preferred 

project: consolidating four branch lines serving the ports into a 20-mile freight rail 

expressway that is completely grade-separated, including a 10-mile-long 30-foot-deep 

trench that runs through older, economically disadvantaged industrial neighborhoods south of downtown Los Angeles. The project would eliminate traffic conflicts 

at more than 200 street-level railroad crossings. 

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PROJECT FINANCING AND FUNDING

Our broad base of cooperation is also evident in the project’s unique finance plan, 

which draws revenue from a range of both public and private sources. 

The linchpin of this funding plan was designation of the Alameda Corridor as a ‘‘high-priority corridor’’ in the 1995 National Highway System Designation Act. That designation cleared the way for Congress to appropriate $59 million needed to back 

a $400 million loan to the project from the U.S. Department of Transportation. As 

mentioned previously, Senators Boxer and Feinstein, along with California Congressman Stephen Horn and Congresswoman Juanita Millender–McDonald and 

other members of our congressional delegation, were instrumental in helping to 

form a bipartisan congressional coalition to support this effort. It is important to 

point out that this financing arrangement preceded the passage of TEA–21, and the 

associated provisions known as TIFIA. ACTA was pleased to work cooperatively 

with Department of Transportation officials and congressional staff, to be a ‘‘trailblazer’’ with the Office of Management and Budget and forge an innovative arrangement to finance an intermodal project of national significance. 

Similarly, at the State level, ACTA worked closely with both Republican and 

Democrat members of the Legislature, Governor Pete Wilson along with the California Business, Transportation and Housing Agency, the California Transportation 

Commission and the Department of Transportation to include the project in shortand long-range plans and to expedite State funding. At the local level, ACTA coordinated closely with Mayor Beverly O’Neill of Long Beach and then–Mayor Richard 

Riordan of Los Angeles for support of the project, and ACTA worked closely with 

the Los Angeles County Metropolitan Transportation Authority to set aside State 

and Federal grant funds and local transportation sales tax revenues for use on the 

Alameda Corridor. And, of course, the ports provided almost $500 million in startup 

funding and for the purchase of rights-of-way. 

The collective assistance offered by Federal, State and local agencies and elected 

officials provided the base funding—the leverage, if you will—for the biggest piece 

of our financing package—more than $1.1 billion in proceeds from revenue bonds 

sold by ACTA. The bonds and the Federal loan are being retired by use fees paid 

by the railroads. The Use and Operating Agreement between ACTA and Burlington 

Northern and Santa Fe Railway and Union Pacific Railroad, approved in October 

1998, is truly unprecedented. Never before had the competitive railroads cooperated 

on a project to the extent that they did on the Alameda Corridor. Like the ports, 

the BNSF and the UP put aside their rivalry to cooperate on a project with positive 

economic implications at the national, regional and local levels. 

In the end, funding for the Alameda Corridor came from multiple public and private sources and resulted from bipartisan support. The funding breaks down roughly like this: 46 percent from ACTA revenue bonds; 16 percent from the U.S. Department of Transportation loan; 16 percent from the ports; 16 percent from California 

State and local grants, much of it administered by the Los Angeles County Metropolitan Transportation Authority, and 6 percent from other sources. 

PROJECT CONSTRUCTION

As with project planning and funding, construction also required extensive cooperation and coordination among multiple entities. 

The Alameda Corridor included, among other elements, construction of 51 separate bridge structures, relocation of 1,700 utilities, pouring of 27,000 concrete pilings 

and removal of 4 million cubic yards of dirt excavated to make way for the Mid–

Corridor Trench. More than 1,000 professionals from 124 engineering and construction management firms, as well as more than 8,000 construction workers, contributed to the project. Moreover, construction occurred in eight different government 

jurisdictions. Any project of the Alameda Corridor’s size and scope inevitably encounters hurdles in the construction process that can lead to delays. There are many 

reasons why our project stayed on schedule, but at the top of the list are our permit 

facilitating agreements with corridor communities and utility providers, and our decision to use a design-build contract for the Mid–Corridor Trench. 

ACTA saved an estimated 18 months on project delivery by utilizing the designbuild approach for our largest contract, the Mid–Corridor Trench. The design-build 

approach allows for the overlapping of some design and construction work and provides greater control over cost and scheduling. Design-build authority was obtained 

through an ordinance approved by the Los Angeles City Council. This enabled 

ACTA to subject the contractor to significant liquadative damages if the contract 

was not completed by a fixed date at a fixed price. 

Before construction began, ACTA negotiated separate Memoranda of Understanding with each city along the route, detailing expedited permitting processes, 

83

haul routes for construction traffic and the protocol for lane closures and temporary 

detours. By agreeing in advance on these and other issues, we streamlined a complex construction process and saved time and money. 

DIRECT COMMUNITY BENEFITS

One key to securing the MOUs and additional community cooperation and support 

was to deliver on our promises of direct community benefits. 

By eliminating more than 200 at-grade railroad crossings, the Alameda Corridor 

is projected to reduce emissions from idling trucks and automobiles by 54 percent, 

slash delays at railroad crossings by 90 percent and cut noise pollution by 90 percent. The project also reduces traffic congestion through improvements to Alameda 

Street. But from the start, the ACTA Governing Board wanted to leave a lasting 

legacy beyond construction of a public works project. This was accomplished by creating several community-based programs. 

Through its contractors and various community partnerships, ACTA administered 

several programs designed to provide local residents and businesses with direct benefits that would long outlive construction. For example: 

• The Alameda Corridor Business Outreach Program offered technical assistance, networking workshops and aggressive outreach to provide disadvantaged business enterprises with the tools they need to compete for work on the project. Disadvantaged firms—known as DBEs—have earned contracts worth more than $285 

million, meeting our goal for 22 percent DBE participation. 

• The goal of our Alameda Corridor Job Training and Development Program was 

to provide job training and placement services to 1,000 residents of corridor communities. We exceeded that goal—almost 1,300 residents received construction industry-specific job training, and of those 637 were placed in construction-trade union 

apprenticeships. 

• The Alameda Corridor Conservation Corps provided life skills training to 447 

young adults from corridor communities, exceeding the goal of 385. While studying 

for high school class credits, these young adults completed dozens of community 

beautification projects in corridor communities, including graffiti eradication, treeplanting and debris pickup. After completing the 3-month program, recruits had the 

option to join the Los Angeles or Long Beach conservation corps chapters full time, 

phase into a city college program or enroll in a business, vocational, trade school 

or apprenticeship program. 

• And finally, in partnership with the World Trade Center Association Los Angeles–Long Beach, the Alameda Corridor Transportation Authority International 

Trade Development Program has provided technical training and international 

trade-specific job skills to 30 entry-level job seekers in local communities. In addition, some 600 local companies seeking inroads into the import or export business 

have been identified for one-on-one technical assistance. That assistance is being 

provided throughout this year. This unique program is helping local residents and 

businesses capitalize on international trade. 

These community-based programs ensured that local residents and businesses did 

not get left behind, that they would receive direct and long-lasting benefits from the 

project. 

THE FUTURE

The efficient movement of cargo through our nation’s ports and on our rail lines 

and highways is a critical issue not only in Southern California—which has the nation’s two busiest ports—but the Nation as a whole. The Alameda Corridor is truly 

the backbone of an emerging trade corridor program in Southern California. Already, others are following our lead, including governmental agencies in Los Angeles, Orange, San Bernardino, and Riverside Counties who are building grade-separation projects. 

In addition, ACTA and the California Department of Transportation are working 

under an innovative cooperative agreement to develop plans for a Truck Expressway 

that would provide a ‘‘life-line’’ link between Terminal Island at the Ports and the 

Pacific Coast Highway at Alameda Street. The Alameda Corridor Truck Expressway 

is intended to speed the flow of containers into the Southern California marketplace. 

Environmental reports are being prepared, and the project could be ready for approval as early as March 2003. At ACTA, we believe that by restructuring our Federal loan we can undertake this critical Truck Expressway project without any additional Federal financial support. 

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IMPLICATIONS AND RECOMMENDATIONS

The Alameda Corridor not only creates a more efficient way to distribute cargo, 

but it also boosts the regional and national economies by keeping the ports competitive and capable of generating additional economic growth. Moreover, it provides direct, long-lasting benefits to local residents and companies, benefiting the entire region with a legacy well beyond actual construction. In short, the Alameda Corridor 

has demonstrated the benefit of investment in well-planned and well-executed intermodal transportation infrastructure. 

As your committees, the full Congress, and the U.S. Department of Transportation begin the TEA–21 reauthorization process, including the formulation of policies to address growing freight rail and truck traffic congestion and other challenges 

posed by international trade, we respectfully offer these policy recommendations, 

based on our experience with the Alameda Corridor: • The planning and funding of intermodal projects of national significance, directly benefiting international trade, should be sponsored at the highest levels within the Office of the Secretary of Transportation. There should be a national policy 

establishing the linkage between the promotion of free trade and support for the 

critical intermodal infrastructure moving goods to every corner of the United States. 

Public-private partnerships do in fact work and should be promoted and encouraged 

by Federal transportation legislation. • A specific funding category is needed to support intermodal infrastructure 

projects, and trade connector projects. Consideration should be given to new and innovative funding strategies for the maritime inter-modal systems, infrastructure improvements enhancing goods movement. • The Alameda Corridor project benefited from a Department of Transportation 

willing to undertake risk and provide loan terms that were not available on a commercial basis. This Federal participation gave private investors confidence in the 

project and made bond financing possible. 

Most important, in my mind, is this: The success of the Alameda Corridor has 

shown that Federal investment in trade-related infrastructure can benefit the economy without sacrificing quality-of-life issues. 

Mr. Chairmen, once again, thank you for inviting me here today. That concludes 

my remarks. I would be happy to address any questions. 

STATEMENT OF PETER RAHN, CABINET SECRETARY, NEW MEXICO STATE HIGHWAY

AND TRANSPORTATION DEPARTMENT

INNOVATIVE FINANCE: LEVERAGING ORDINARY RESOURCES INTO EXTRAORDINARY

SUCCESSES

Mr. Chairman and Members of the committee, I appreciate this opportunity to 

submit testimony concerning the positive benefits that the State of New Mexico has 

received through innovative financing for transportation, and how our State has leveraged ordinary resources into extraordinary successes. 

Flexible and stable revenue from Congress has enabled the New Mexico State 

Highway and Transportation Department the ability to deliver dramatic results for 

our citizens through improvement and enhancement of our transportation system. 

We have developed and implemented new ways to finance and contract highway 

construction projects. 

Since 1998 we have used innovative financing techniques to bond $1.2 billion that 

advance highway construction projects by as much as 27 years. We are building 

quality projects that provide enormous returns on investment for the taxpayers and 

deliver economic benefits today. 

New Mexico’s strategy is to connect our communities to regional and national economic opportunities by building four-lane corridors. This access has historically been 

limited to our Interstate system, serving less than 70 percent of our population. 

Today we have added 653 miles of new four-lane highways that link 96.7 percent 

of our citizens to these vital economic opportunities. 

As well as adding 653 miles of four-lane highways, we have built 4 urban relief 

routes, 15 interstate interchanges and the Big I, which is the intersection of the 

Interstates 25 and Interstate 40-that serves as a bridge for regional, national and 

global commerce. Our efficiency, combined with stable and flexible Federal funding, 

provides a seamless regional transportation system to serve this commerce and continue the movement of products to market. Our urban citizens are moving more 

quickly and safely to work, school and medical care. 

Innovative finance enabled us to use Grant Anticipation Revenue Vehicle Bonds 

(GARVEE Bonds) to construct four-lanes on NM 44 from central to northeast New 

85

Mexico. Because of Federal revenue stability, both Standard and Poor’s and Moody’s 

rated our bonding proposals at ‘‘A’’ level investment grade. We were able to construct a 118-mile four-lane highway corridor in 28 months with a 20-year warranty 

that will save the taxpayer $89 million in maintenance costs. This 118-mile corridor 

would have taken 27 years to construct under traditional methods. 

We have also improved the road quality of our Interstate and State Highway system through our innovative financing program. We have reversed a 20 5-year trend 

in our deteriorating State and interstate highways. Since 1998, we have improved 

3,035 miles highways—a 51 percent decrease in our deficient status highway miles. 

In 1999 only 81.8 percent of our Interstate highway system was rated in good condition—today 98.7 percent of this system is in good condition. 

In addition to major improvements to our system, our citizens have benefited 

through economies of scale. In 1995 New Mexico’s cost per mile of four-lane construction was $1.3 million. In 2002, through our large bonding program, we reduced 

that cost to $740 million per mile. This economy of scale construction saves our 

State over $182 million in four-lane corridor construction. 

Investment in the nations transportation infrastructure yields high returns. 

Based on information generated by the National Highway Users Alliance, the Big 

I will save personal and commercial users $8.1 billion in time; $870 million in fuel; 

$460 million in safety; and another $670 million in environmental impacts. This 

$286 million investment by Congress will realize a $10.1 billion return on investment. This $10.1 billion return on investment for one project is 34 times greater 

than the interest paid on our entire bonding program. 

It is critically important that we understand and acknowledge our innovative financing program would not be the success that it is without the provision for flexible, stable and reliable funding. States across the country have invested in the national infrastructure based on the guaranteed funding levels. These guarantees have 

enabled us to program and deliver projects in a predictable financial climate. In 

fact-based on the FHWA highway construction inflation rate of 4.5 percent—our entire bonding program, with an interest rate of 4.47 percent, delivers $1.2 billion of 

transportation improvements to New Mexico at a lower cost and the benefit of being 

used today rather than years in the future. 

We can assure our citizen’s that all user fees directed to the Highway Trust Fund 

are being spent for its designated purposes, and we can speak with confidence about 

the Federal transportation-financing picture over a multi-year period. Strong budgetary mechanisms, balanced planning and streamlining program delivery have made 

innovative finance work for New Mexico. 

RESPONSES OF PETER RAHN TO ADDITIONAL QUESTIONS FROM SEN. BAUCUS

Question 1. I have some concerns about Garvee bonds. I understand the advantage using future apportionments to guarantee bonds, so you can enjoy the additional capital today. But what is going to happen tomorrow when you need to use 

your future apportionments to build and maintain highways, but the money already 

been spoken for as repayment for the project you did today? 

Response. States have to be adept at what they utilize GARVEE bonds for. Critical projects that produce major returns on investment in the areas of economic development opportunities, safety and congestion relief are most suitable for bonding, 

especially when the cost of the project is outside the bounds of what can be accommodated within the normal STIP process. By this I mean, that a single project 

would take an inordinate percentage of the annual construction program to construct. Three of our bonded projects would have each exceeded the total annual construction dollars available to New Mexico and three more would have each exceeded 

50 percent. 

To utilize GARVEE bonds, or any bonds for that matter, to pay for maintenance 

activities would be a mistake. Maintenance should be accommodated within existing 

budgets, as we have provided for in our future plans. However, the notion that new 

construction projects will be on hold until the issued bonds are retired—and therefore bonds should not be used at all—is flawed. If bonds had not been issued in New 

Mexico, not only would those other projects be waiting, so would the projects now 

in place. 

The economic benefits of bonding must also be factored into the decision. Building 

large projects at one time can produce many millions of dollars in savings from 

economies of scale. Additionally, current low interest rates are attractive when compared to nearly identical inflation costs within the highway construction sector. The 

true costs are practically the same, but the benefits of use are available today.

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Question 2. Why didn’t the State just issue State general obligation bonds or private activity bonds? Why chose Garvees? 

Response. New Mexico chose to issue GARVEE bonds rather than general obligation bonds due to the ease and speed with which GARVEES could be taken to market versus the lengthy process required by the State constitution to utilize GO 

bonds. Private activity bonds do not enjoy the same tax advantages as GARVEE 

bonds. 

STATEMENT OF JOHN HORSLEY, EXECUTIVE DIRECTOR, THE AMERICAN ASSOCIATION

OF STATE HIGHWAY AND TRANSPORTATION OFFICIALS

Mr. Chairmen and members of the Committees, my name is John Horsley. I am 

the Executive Director of The American Association of State Highway and Transportation Officials (AASHTO). I am here today to testify on innovative and other financing issues as the Congress begins consideration of legislation to reauthorize the 

Federal-aid highway and transit programs. 

First, I want to thank you both for your leadership in fully restoring highway 

funding for fiscal year 2003 to $31.8 billion as AASHTO, the National Governors’

Association and many others have urged. As I will discuss today, RABA needs to 

be fixed next year to avoid radical swings in funding levels, but without your help, 

we would still be facing a disastrous cutback this year. 

Senator Baucus, AASHTO would like to commend you for your leadership in 

transferring the 2.5 cents per gallon of gasohol tax revenues from the General Fund 

to the Highway Trust Fund and for your efforts to credit interest to the Highway 

Trust Fund where it belongs and will help greatly. 

In addition, I want to thank both Chairmen for demonstrating their leadership 

by scheduling this very important hearing. I am honored to be invited to testify on 

these important issues and to offer the views of AASHTO on a variety of financing 

issues. Mr. Chairmen, I would like to begin by recognizing the contribution that 

TEA–21 has made to address the nation’s need to invest in our highway and transit 

systems. We have seen record level investment made possible by that legislation 

and we at AASHTO commend the Congress and these two Committees for your contributions to achieving that result. However, as much as that investment has contributed ($208 billion), the national needs continue to far outstrip the available resources. Your holding this hearing gives us the opportunity to recognize those needs 

and to suggest ways that working together we can increase investment in surface 

transportation as part of the reauthorization bill while maintaining fiscal discipline. 

HIGHWAY AND TRANSIT FINANCING HISTORY

Mr. Chairmen, the Federal-aid highway program since 1956, and since 1982 the 

mass transit program, have financed critical national transportation investments 

primarily from the dedicated depository of revenue the Highway Trust Fund. There 

are a variety of fees deposited in the Trust Fund, but the largest source of income 

by far has been fees levied on motor fuels (gasoline and diesel). Although the needs 

for highway and transit investment have dramatically increased, fuel-related user 

fees have been adjusted only on a sporadic basis. The following chart provides a history of changes in rates since the creation of the Trust Fund in 1956.

Changes in Gasoline Tax: 1956–Present 

Year Total Tax Highway Account 

Mass Transit 

Account 

Deficit Reduction 

Leaking Underground Storage 

Tank 

1956 .................................................................. 3 3

1959 .................................................................. 4 4

1983 .................................................................. 9 8 1

1987 .................................................................. 9.1 8 1 0.1

1990 .................................................................. 14.1 10 1.5 2.5 0.1

1993 .................................................................. 18.4 10 1.5 6.8 0.1

1995 .................................................................. 18.4 12 2 4.3 0.1

1997 .................................................................. 18.4 15.44 2.86 0.1

Source: FHWA, ‘‘Financing Federal Aid Highways,’’ 1999

In concert with increases in user fees there was growth in funding for both the 

highway and transit programs. The most dramatic growth occurred since 1991 starting with the enactment of ISTEA and reinforced by TEA–21. However, in spite of 

87

1Growth calculations: Highway baseline of $168.7 billion includes TEA-21 obligation limitation, exempt and RABA. Transit baseline includes guaranteed funding of $36.35 billion. 

this growth, needs continue—by anyone’s measures—to far outstrip available Federal, State and local resources. At its completion, TEA–21 will have provided $208 

billion for highways, transit and safety, but the needs as measured by the U.S. Department of Transportation are far greater than even this record level investment. 

In the 1990’s, various innovative financing techniques were piloted and then enacted into law through the National Highway System Designation Act and TEA–21. 

Among the tools that now are part of many State DOT financing approaches are: 

eligibility of Federal-funding to pay debt service for project financings; grant anticipation notes also known as GARVEE Bonds; tapered match, which allows States to 

manage matching shares over the life of a project; and the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) program introduced in TEA–

21 that provides secured loans, loan guarantees and standby lines of credit to surface transportation projects of national or regional significance. These tools are useful but only fill a niche in the program and project financing toolkit. We clearly need 

to do more with innovative financing in the future to enhance the mechanisms, and 

apply innovative financing to more areas of surface transportation. I will provide 

ideas for the Committees’ consideration later in my testimony. 

AASHTO’S PROPOSED FUNDING LEVELS FOR REAUTHORIZATION AND FINANCING OPTIONS

Mr. Chairmen, we believe the central issue in reauthorization will be how to grow 

the program. Huge safety, preservation and capacity needs exist in every region of 

the country. AASHTO will release shortly its Bottom Line Report, which projects 

needed highway investment to assure American mobility and to advance our economy. 

The report will show that the annual level of investment needed to maintain current conditions and performance of our highway systems is $92 billion. The estimated annual level of investment needed to maintain the current conditions and 

performance of the nation’s transit systems is $19 billion. These investment levels 

far exceed current investment and we recognize that the magnitude of increase 

needed is not likely to be made available through the Federal-aid highway program. 

However, to begin to address these needs, AASHTO is seeking a substantial increase in funding over TEA–21 for both the highway and transit programs. Overall, 

as compared to TEA–211 obligation levels for highways and funding for transit, we 

seek to grow the program from at least $34 billion in fiscal year 2004 to at least 

$41 billion in fiscal year 2009 for highways and, likewise, from at least $7.5 billion 

in fiscal year 2004 to at least $10 billion in fiscal year 2009 for transit. These minimum figures represent 35 percent and 45 percent program increases, respectively. 

The challenge is how to fashion a funding solution that can achieve these goals 

and garner the bipartisan support needed for enactment next year. 

New sources of funding are needed to significantly grow the program. Without the 

introduction of new sources of funding, growth in the highway and transit programs 

will rely on additional revenues from increased travel and truck sales. Based on the 

latest data available to AASHTO, these revenues would translate to about a 10 percent program increase for highways over the life of a 6-year reauthorization bill. 

This increase would not even come close to keeping up with the loss of purchasing 

power due to inflation. From 1996 projecting through 2009, inflation as measured 

by the Consumer Price Index results in a 26 percent decline in purchasing power. 

If reauthorization of TEA–21 includes only ‘‘status quo’’ options for achieving a larger program, we will soon find that the status quo is actually a rather a dramatic 

decline in investment due to the erosion of purchasing power. The following graph 

illustrates the impact of inflation on the current user fee rates.

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Put another way, based on the Bureau of Labor Statistics inflation calculator, 

merely to have maintained the purchasing power of the three cent gasoline tax as 

was instituted in 1956, the gasoline tax today would need to be 20 cents. 

Maintaining the status quo is not an option; however, as I said, the challenge is to develop a solution that attains at least $41 billion for highways and $10 billion 

for transit by 2009 that garners bipartisan support. The AASHTO Board of Directors is considering a menu of funding options to create additional revenues that includes drawing down the Highway Trust Fund reserves; capturing 2.5 cents per gallon gasohol revenues currently going to the General Fund for the Highway Trust 

Fund; transferring the equivalent of 5.3 cents per gallon of gasohol tax from the 

General Fund to the Highway Trust Fund to make up for the rate differential between gasohol and gasoline; capturing interest on Highway Trust Fund reserves; increasing General Fund support for transit; selling financial instruments; and indexing and raising Federal fuels taxes. 

Although the program could grow somewhat without raising taxes, it would fall 

short of meeting national needs. AASHTO recognizes that the Congress needs funding and financing options beyond the traditional user fee increase approach. The 

Board also directed the AASHTO staff to explore the feasibility of leveraging new 

revenues through a Transportation Finance Corporation. While most of AASHTO’s 

funding options are very straightforward, I would like to take a few minutes to describe the proposal to create a Transportation Finance Corporation, which could 

achieve AASHTO’s goals for highway and transit funding without indexing or a tax 

increase, in more detail. 

TRANSPORTATION FINANCE CORPORATION

In order to help close the sizable funding gap between surface transportation investment needs and projected resources available in the Highway Trust Fund, 

AASHTO is exploring including among its menu of funding options the concept of 

establishing a new tax credit bond program to raise revenue in the capital markets. 

We describe this concept as program finance, rather than project finance. 

AASHTO proposes that Congress consider chartering a private, non-profit organization-the Transportation Finance Corporation-to serve as the centralized issuer of 

tax credit bonds. Approximately $60 billion in bonds would be issued between 2004 

and 2009. From the bond proceeds, approximately $34 billion would be distributed 

to the highway program through FHWA according to an apportionment formula determined by Congress (perhaps similar to the current Federal-aid highway funding 

formula). About $8.5 billion would be made available to transit agencies on a basis 

to be determined. From a State (or transit agency) perspective, these funds would 

essentially be indistinguishable from regular Federal-aid apportionments: States 

would be required to comply with all Title 23 requirements to use the funds. In 

summary, the TFC would leverage approximately $18 billion in new revenues into 

an increase of nearly $43 billion in program funding for fiscal year 2004–2009. 

The States would not in any way be liable for the repayment of the bonds. A portion of the bond proceeds (approximately $17 billion) would be set aside at issuance 


88460_04.eps
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and deposited in a sinking fund, which would be invested in Federal agency or other 

high-grade instruments. At maturity, the sinking fund will have grown to be sufficient to repay the bond principal. These taxable bonds would have a term of 20– 25 years. 

In lieu of interest, the bond holders would receive taxable tax credits that could 

be applied against the holder’s Federal income tax liability. There is a cost to the 

U.S Treasury for this type of tax credit program. The Treasury would be reimbursed 

for the budgetary cost of the program (arising from tax expenditures) by additional 

Highway Trust Fund receipts derived from a new net source of revenue. Thus, there 

would be no impact on the Federal deficit. 

This summer, AASHTO met with seven major bond underwriting firms (investment banks), two ratings agencies, and a bond insurer to assess the viability of the 

Transportation Finance Corporation proposal from the perspective of the financial 

community. In our due diligence we investigated the ability of the capital markets 

to absorb an additional $60 billion in investment; overall marketability of the bonds, 

including necessary and preferred characteristics of the financial instruments; potential investors; and credit assessment. In addition, the TFC proposal contemplates up to $5 billion of Federal funding 

being used to fund a Capital Revolving Fund, which would make available direct 

loans, loan guarantees and standby lines of credit to a variety of surface transportation projects not readily fundable under existing Federal programs. This fund 

would be a catalyst to leverage capital for an expanded list of transportation to include, highways, transit, freight rail, passenger rail and security infrastructure. 

This funding would assist in promoting public private partnerships and attract new 

private capital to transportation projects. 

Overall, we found a high level of interest in the program due to the equity and 

efficiency advantages of using debt proceeds to finance long-term infrastructure investments. Our key findings: 

Tax credit bonds are marketable. The Corporation should be authorized to de-couple the principal from the stream of tax credits, and market each portion of the financing instrument to different groups of buyers on a discounted basis. For example, the principal component is likely to appeal to pension funds, and tax credits 

should be attractive to financial institutions & corporations. Major individual investors anticipating Federal income tax liability in future years are also potential purchasers of the tax credits, as are individual investors interested in safe, long-term 

investments. Securities firms would maintain an active and continuous secondary 

market in both the principal and tax credit portions to assure their liquidity. 

Capital markets can absorb TFC paper. The proposed size of the program (an average of $10 billion per year over 6 years) equals 0.2 percent (two tenths of 1 percent) of the U.S. bond markets’ $4.6 trillion debt issuance volume in 2001. 

Marketability and liquidity are enhanced by a central issuer. Larger, more homogenous issues than the fragmented Qualified Zone Academy Bond (QZAB) school construction program should result in a more efficient secondary market and reduced 

transactions fees as well as centralized investor information leading to price transparency. A centralized issuer also mitigates tax compliance risk and ensures that 

all States benefit from the program rather than only States using debt financing. 

There is a broad potential investor base. Decoupling tax credits from principal will 

be more efficient and result in a broader investor base. The principal component 

should appeal to pension funds; tax credits are likely to be attractive to financial 

institutions and corporations; and allowing individuals to buy credits will broaden 

the market. The TFC will need to mount an investor education program to develop 

an efficient market. 

Other aspects of the due diligence show that tax credit bonds are likely to be investment grade and, of course, that specific terms of the legislation will be critical 

to the success of the program. 

Our analysis shows that AASHTO’s funding targets through fiscal year 2009 could 

be achieved through the Transportation Finance Corporation without indexing or 

raising fuel taxes. However, the program level would drop below fiscal year 2009 

slightly for the following 3 years before it resumes positive growth in 2013. In our 

modeling, when the TFC concept was combined with indexing, the program continues healthy growth from fiscal year 2010 on. As you can see, the AASHTO staff 

and our Financial Issues Work Team have developed a creative proposal that appears feasible and has been well received. We commend it to you for your consideration. 

Potential Program Growth Summary 

The following charts illustrate potential sources of growth in highway and transit 

program funding.

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‘‘Incremental’’ represents revenues from travel growth, 2.5 cent per gallon gasohol 

transfer, and drawing down the Highway Trust Fund.

Innovative Financing Options 

In addition to the menu of funding options, AASHTO wants to work with the Congress to enhance and strengthen current Innovative Financing tools. These changes 

include enacting legislation to extend the legislative authority in TEA–21 for State 

Infrastructure Banks to all States, assuring the continuance of the current innovative financing provisions and making improvements to the TIFIA program. Specifically, regarding TIFIA we recommend that the current $100 million threshold be reduced to $50 million which will serve to expand the universe of projects that can 

take advantage of this financing tool. In addition we urge the Congress to make 

clear the intent of the program is to be a minority investor and thus to demonstrate 

more flexibility in taking credit actions under TIFIA. This is not to suggest that care 

should not be taken in transactions involving taxpayer money but rather to meet 


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the program goals which are to round out financing of projects with Federal assistance. 

The Board of Directors will be making final decisions on AASHTO’s reauthorization financing recommendations in the late fall and I note that Chairman Baucus 

has included a number of items similar to those on the menu of options in legislation he recently introduced. 

OTHER FINANCING ISSUES

Guaranteed Spending 

One of the key features of TEA–21 is guaranteed spending. The assurance of stable, predictable funding has made it much easier for States to plan and carry out 

programs. AASHTO has adopted as a top priority ensuring the continuation of funding guarantees. Funding guarantees are essential to meeting our commitment to the 

traveling public, which pays the dedicated user fees for highways and transit programs, that they are receiving the benefits of their fees. The return on this investment in transportation programs is ensuring a competitive economy with hundreds 

of thousands of high-paying American jobs. 

RABA Calculations 

Another key feature of TEA–21 is the budgetary mechanism known as Revenue 

Aligned Budget Authority (RABA). This mechanism was designed to ensure that the 

receipts coming into the Highway Trust Fund Highway Account are fully utilized 

by the program. This mechanism added over $9 billion to the program thorough fiscal year 2002. However, due to the downturn in the economy, the look-ahead provision of RABA substantially overestimated fiscal year 2001 revenues; thus the RABA 

adjustment for fiscal year 2003 would have reduced the obligation levels for the 

highway program by $8.6 billion or 26 percent. AASHTO is pleased that the Congress is moving to restore this much needed investment funding. 

AASHTO believes that it is necessary to preserve a RABA mechanism. However, 

action is necessary to ensure a more stable and predictable outcome. Therefore, we 

offer an option that would eliminate the look-ahead provision of current law and replace it with a provision that retains the look-back part of the calculation. This likely will make the program funding more stable but also will cause a buildup of revenue in the Highway account. Therefore to ensure full use of the revenue we also 

recommend including a provision that would reduce the cash balance in the Highway Account to a fixed minimum by raising the program level in the last year of 

the authorization bill to a level sufficient to reduce the balance. 

Long-term Financing 

Given the advent of more fuel efficient vehicles and the increasing use of alternative fuels, income to the Highway Trust Fund may be significantly reduced. In 

order to prepare for future reauthorizations AASHTO recommends that Congress 

create a Blue Ribbon Commission to study financing options and report its findings 

prior to the next reauthorization cycle. 

CONCLUSIONS

The Federal-aid highway and transit programs have a long history of strong partnership with the States and have made major contributions to creating surface 

transportation systems that are among the best and safest in the world. However, 

by all measures surface transportation needs far outstrip investment resources. 

AASHTO recognizes the need for additional investment and has proposed program increases of 35 and 45 percent for highways and transit. This increased investment is vital to the nation’s economy and assures the continuance of high paying 

jobs in the transportation sector. 

Recognizing the need to offer creative solutions for revenue generation, AASHTO 

is considering including a proposal for the creation of a Transportation Finance Corporation in its menu of funding options. This federally chartered non-profit corporation would leverage funds for the program and take advantage of the private capital 

markets for bringing revenue into the program. In addition, the TFC would include 

a Capital Revolving Fund that could leverage as much as $30 billion in credit support for a variety of transportation programs including, highways, transit, freight, 

and passenger rail and security infrastructure. This fund will likely serve as a catalyst for generating public/private partnerships and thus further expand investment 

in transportation programs. 

Guaranteed spending is a key feature of TEA–21. It provides predictable funding 

so that States can plan with a greater degree of certainty. It assures that dedicated 

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user fees are spent on the programs for which they were collected in a timely manner. One of AASHTO’s reauthorization goals is to preserve guaranteed spending. 

RABA has served to ensure that increased revenue is utilized for programs without having to wait until the next reauthorization cycle to increase program levels 

in highways. There needs to be adjustments to the RABA mechanism to make the 

results more predictable and AASHTO has offered a solution that could accomplish 

that end. 

In the long-term, consideration needs to be given to possible new sources of income and way to collect income to ensure that there is sufficient income to make 

the investments in transportation necessary to meet the nation’s needs in the future. 

We look forward to working with the Congress to enact legislation that will ensure continuing maximum possible investment in our transportation system. 1 

Growth calculations: Highways baseline of $168.7 billion includes TEA–21 obligation 

limitation, exempt and RABA. Transit baseline includes guaranteed funding of 

$36.35 billion. 

RESPONSES OF JOHN HORSLEY TO ADDITIONAL QUESTIONS FROM SENATOR JEFFORDS

Question 1. A major piece of your testimony centers on the creation of a Transportation Finance Corporation. Under your proposal, the TFC would issue tax credit 

bonds. We have heard testimony from GAO that these instruments are the most 

costly long-term to the Federal Government. Why does AASHTO consider this to be 

the most appropriate bonding mechanism for the Federal-aid program? 

Response. I think GAO’s testimony points out how difficult it is to compare these 

disparate financing tools on an ‘‘apples-to-apples’’ basis. 

On the one hand, it shows that financing transportation improvements by issuing 

debt—whether through TIFIA credit instruments, tax credit bonds or tax exempt 

bonds—entails a cost (interest expense) that could be avoided if sufficient grant 

funds were on hand in the first place. But the problem, of course, is that grant moneys often are not available up front. And obtaining the benefits of accelerating infrastructure investment through debt financing techniques, while perhaps not the least 

costly method, may in fact be the most cost effective approach taking into account 

the benefits as well as the costs. 

On the other hand, GAO’s testimony reveals the different ways in which certain 

financing tools are used and the different levels of Federal subsidy conferred by 

those techniques. GAO’s cost assumptions attempt to capture the various financial 

profiles of ‘‘typical’’ transportation projects that might benefit from the different financing tools. For example, under the normal Federal-aid grant reimbursement scenario, the Federal share is 80 percent. Compared to that traditional payas-you-go 

approach, the various debt financing techniques tend to leverage Federal resources 

and induce greater non-Federal investment. The average Federal share ranges from 

about 20 percent for projects funded with tax-exempt bonds to about 25 percent for 

TIFIA-funded projects to somewhere between 50 and 70 percent for projects funded 

with tax credit bonds (depending on several underlying assumptions). hi all cases, 

however, the relative Federal share is less than that of the base case of grant reimbursements. 

The important point, I think, is that these different tools may be most cost-effective for different types of projects that require different levels of Federal assistance. 

If critical infrastructure investments need to be made, and up-front grant funding 

is not available, then project sponsors simply must look at other financing options. 

And depending on a particular project’s costs, benefits and access to revenues, the 

use of one or more of the financing tools examined by GAO may prove cost effective. 

Mr. Chairman, we are looking for the art of the possible. When we tried to put 

together a vehicle that, as Pete Rahn was describing, could leverage revenues that 

are potentially available to achieve the overall funding targets we are seeking for 

fiscal years 2004–2009, we looked at several options. 

We looked at whether simply relying on tax-exempt municipal bonds issued at the 

State level would work, and concluded it would not—because so many States have 

obstacles, either statutory or constitutional, to the issuance of debt and the utilization of GARVEEs and some of the other financing techniques. So we figured that 

simply proposing what is currently allowed would not extend universal help to all 

50 States with regard to raising overall transportation funding levels. 

We looked at the possible utilization of tax-exempt bonds at the Federal level and 

figured that would compete directly with Treasury securities, so that was not a good 

vehicle. We then looked at the appeal of the tax credit bond concept. It was currently pending in RIDE–21 (the Rail Infrastructure Development and Expansion Act 

93

for the 21St Century) as a vehicle for funding high-speed rail, and has been used 

to help fund schools through the so-called QZAB (Qualified Zone Academy Bond) 

program. 

Our conclusion was that the TFC (Transportation Finance Corporation) was the 

most efficient, most viable method for boosting surface transportation funding. It 

would score well under the Federal budgetary scoring rules and, just in practical 

terms, would get us with current or likely revenues—or revenues enhanced with indexing—to the overall funding targets that the States feel are essential: more than 

$40 billion annually for highways and more than $10 billion annually for transit.

Question 2. Does it make sense to issue bonds to support the mainline work of 

State DOTs, namely system preservation? Would it not be more appropriate to reserve debt financing for capital improvements, and particularly for those projects 

with associated revenue streams? 

Response. Mr. Chairman, the Transportation Finance Corporation we are talking 

about we classify as program financing, which would be available to all States to 

use for those purposes. TFC proceeds, in our proposal, would be available for the 

same types of capital outlays eligible under title 23 and title 49 as are Federal-aid 

grants and GARVEE bonds today. Maintenance and system preservation would still 

be the responsibility of the States. 

We are looking for a near-term practical solution that gives you a measure you 

can pass with bipartisan support to boost funding for the next cycle to the levels 

we are after. 

When it comes to the issuance of municipal bonds at the State level, I think each 

State has to make a judgment about whether they should issue long-term debt for 

long-term purposes, such as schools, water and sewer plants, and hospitals. 

Almost every other area of public infrastructure is financed significantly through 

debt. We think that transportation has been slower than those other sectors to come 

to the table and use debt financing for long-term infrastructure. But we think the 

time has come. 

As you have heard from both of these panels, the market is there and the transportation agencies are there and are utilizing debt financing on an increasing basis. 

But the one differentiation I wanted to make was between program finance, which 

would generate grants from bond proceeds that flow out to all the States as cash 

over the 6-year reauthorization period—and then State DOTs could leverage it further by issuing GARVEEs or through other means—as opposed to project finance 

(bonds earmarked for a particular project), which States can do today and which we 

also support. 

STATEMENT OF JEFFREY CAREY, MANAGING DIRECTOR, MUNICIPAL MARKETS, 

MERRILL LYNCH & CO. 

MAINSTREAMING INNOVATIVE FINANCE: A CAPITAL MARKETS PERSPECTIVE

Chairmen, Ranking Members, members of the Committees, ladies and gentlemen, 

I am Jeff Carey, a Managing Director in Municipal Markets at Merrill Lynch. As 

a 24-year veteran in public, transportation, and infrastructure finance, I have had 

the privilege to work with U.S. Department of Transportation and Federal Highway 

Administration officials, as well as our clients, State transportation officials and 

other project sponsors, during the last decade on the development and implementation of ‘‘Innovative Finance’’ mechanisms for Federal-aid transportation programs. 

Thank you for inviting me to provide a wrap-up commentary from a Capital Markets perspective at today’s Joint Hearing. 

You have heard testimony this morning from two very experienced panels of U.S. 

DOT and State transportation officials, a city councilwoman, the GAO, and Professor Seltzer on the very significant accomplishments of the DOT Innovative Finance Initiatives. Public finance industry professionals are pleased to have played 

a role in creating the strong market reception for the new transportation funding 

tools and expanded flexibility for public/private partnerships. We commend these 

panel participants, and the leadership from DOT and FHwA, other State transportation officials, and private sponsors for the dramatic evolution from the Eisenhower-era, Federal-aid funding to the wide array of financing instruments and programs introduced and utilized over the last 8 years. 

To briefly reflect on the prior testimony involving program and project finance and 

case studies, ISTEA, post–ISTEA initiatives and TEA–21 implementation have produced the following market-related accomplishments: 1) dramatically increasing 

bondholder investment in transportation projects and State programs; 2) new and/

or specially dedicated revenue streams, particularly for the purpose of retiring debt 

94

obligations; 3) broad market acceptance of the use of Federal-aid funding for debt 

instrument financing; 4) more coordination with other funding partners beyond 

States, and; 5) lower financing costs and increased project feasibility through Federal credit enhancement. 

1. Addressing characteristics sought by the Capital Markets and private sector 

project sponsors provides efficient market access and innovative transportation finance opportunities. What do market intermediaries underwriters, rating agencies, 

bond issuers, project sponsors and institutional and individual investors want? 

Characteristics 

• Sound, understandable credits 

• Evidence of government support 

• Strong debt service payment coverage 

• Predictability and Federal program consistency with evolution of new instruments 

• Market rate investment returns for bonds, development costs, and equity 

• Reasonable and reliable timing of issuer’s revenue/grant receipts 

• Acronyms that capture the Federal programs’ spirit and promote investor familiarity 

• Diversified range of investment opportunities 

• Volume, market profile, and liquidity

For example, the track record and predictability of the Federal-aid highway program since the Eisenhower-era has enabled Grant Anticipation Revenue Vehicles 

(GARVEE) bonds to be structured without the double-barrel credit of other State 

credit backstops, as first used in New Mexico. 

It was the strong issuance history of municipal bond banks in States such as 

Vermont, as well as the successful use of State wastewater and clean water revolving funds, that served as the model for the development of State Infrastructure 

Banks (SIBs) in the mid–1990’s. 

And it was the broad market acceptance of municipal bond insurance and bank 

letters of credit that provided a model for the development of TIFIA credit assistance and pre–TIFIA successes such as the Alameda Corridor multi-modal project. 

As David Seltzer commented in the first panel, are the Federal policy incentives 

in Innovative Finance initiatives suitable to attract and expand capital markets investment? And are the programmatic tools and requirements balanced to provide 

the characteristics sought by debt investors and private sponsors, as well as public 

entities? 

2. How various Innovative Financing components have been used by public agencies and, in some cases, private sponsors, and received by the markets provides a 

roadmap for surface transportation reauthorization. 

When State Infrastructure Banks (SIBs) were created as part of the NHS Act in 

1995, the pilot program for 10 State transportation revolving funds became very 

popular in 1996, in part, because of supplemental Federal funding for ‘‘seed’’ capitalization matched with non–Federal funds. As highlighted in FHwA’s State Infrastructure Bank Review from earlier this year, 32 States have active SIBs and have 

made different levels of highway and transit project assistance primarily through 

loans, despite widespread under-capitalization and the curtailment of the program 

in TEA–21. Limited capitalization has resulted from the inability to use Federal-aid 

funds, outside of four States, and the application of Federal requirements to all 

moneys deposited in the SIB, regardless of whether the source was State or private 

contributions, or repaid loans. In addition, only two States have leveraged their SIB 

programs through the issuance of bonds. 

As a flexible, State-directed tool, SIBs have greater potential to provide loans and 

credit enhancement that can be realized through further modification as part of Reauthorization:

• Extend the program to included all States; 

• Expand capitalization to meet demands with supplemental Federal appropriations and by permitting the use of future Federal-aid funds to capitalize SIBs; 

• Rollback the imposition of Federal requirements on SIB-funded projects, or, at 

least, exempt ‘‘recycled’’ loan repayments and State contributions, as permitted 

under the 1995 NHS Act Pilot Program; 

• Encourage States to expand capitalization by leveraging their SIB program 

through the issuance of bonds; and 

• Remove ‘‘pilot’’ moniker from the SIB Pilot Program to send strong signal of 

on-going Federal support.

Reauthorization should provide incentives for public/private, market-based partnerships that finance, develop, operate, and maintain highways, mass transit faciliVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00098 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
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ties, high-speed rail and freight rail, and inter-modal facilities. This could be accomplished by permitting the targeted use of $15–20 billion of a new class of private 

activity bonds, and/or by modifying certain restrictions in the Internal Revenue 

Code on tax-exempt bond financing of transportation modes. We commend the members of the Senate and the Finance Committee for your prior consideration of the 

Highway Innovation and Cost Savings Act (HICSA, 1999), the Highway Infrastructure Privatization Act (HIPA, 1997), and, most recently, the Multi–Modal Transportation Financing Act (Multitrans). 

My office is across West Street from the World Trade Center site. As workers in 

downtown Manhattan, we greatly appreciated your passage of Federal legislation 

creating a ‘‘Liberty Zone’’ for the redevelopment of lower Manhattan and for the creation of a new type of tax-exempt private activity bonds, Liberty Bonds, for the rebuilding and economic revitalization of New York City. 

Existing tax law discourages private investment in transportation projects, prohibiting lower cost tax-exempt financing for projects involving private equity investment and incentive-based, private sector operating contracts. Transportation infrastructure financing deserves a bond mechanism similar to Liberty Bonds under Reauthorization to attract more private investment, as well as increase the use of new 

construction techniques, cost controls, performance guarantees and technologies. A 

new class of private activity bonds for qualified highway infrastructure, mass commuting vehicles, and other transportation projects would expand the application of 

the tax-exempt financing and lower the cost of capital, making public-private partnerships more attractive to public sector sponsors than conventional approaches. 

3. Past ‘‘Innovative Finance’’ should become mainstream transportation finance 

under TEA–21 reauthorization and the Federal Government should provide new financing tools and initiatives, at least on a pilot basis. From a financial markets perspective, Congress should use this opportunity to make refinements to more clearly 

articulate transportation financial assistance goals and send a consistent message 

as to how the Federal Government is going to act toward investors, project sponsors 

and all program participants. 

• TEA–21’s funding guarantees and firewalls that permit the flexible use of 

GARVEE Bonds beyond multiple reauthorization periods should be maintained, and 

radical swings in budgetary funding from RABA (Revenue Aligned Budgetary Authority) should be avoided. Similarly, transit funding guarantees should also be preserved. 

• Examine the creation of a government corporation, perhaps in a form discussed 

by AASHTO, to provide a focus on transportation infrastructure finance, possibly 

administer a portion of DOT’s financing programs, and provide a basis for new financing tools, such as tax credit bonds. Federal Government corporations have 

helped the capital markets create strong and liquid markets to fulfill other policy 

and programmatic objectives. 

The creation and implementation of U.S. DOT Innovative Financing Initiatives 

over the last 8 years has prompted an even more vigorous debate about transportation financing issues, challenges, and future innovation with the coming year’s 

surface transportation reauthorization. This ongoing debate, coupled with past and 

current Program successes, will encourage a further willingness to look beyond Federal-aid grant reimbursement, introduce additional players in transportation finance 

and enlarge the spectrum of instruments and programs to attract additional private 

and capital markets investment. The success of Innovative Finance places a higher 

level of responsibility on the Federal reauthorization process to maintain the characteristics attracting strong capital markets participation. Municipal Markets participants will continue to work with Congress, DOT, States, local governments, and private sector sponsors to maximize leverage and investment levels in transportation 

infrastructure over the coming authorization period and beyond. 

I am pleased to have the opportunity to participate in today’s Joint Hearing with 

such knowledgeable witnesses. Thank you, again, for the opportunity to testify. I 

look forward to responding to any questions you may have. 

RESPONSES OF JEFFREY CAREY TO ADDITIONAL QUESTIONS FROM SENATOR BAUCUS

Question 1. The Capital Markets would positively view and receive a Tax Credit 

bond proposal where the proceeds of the bonds are deposited directly into the Trust 

Fund. First, raising and depositing additional funds to the Trust Fund will supplement and diversify the sources of Trust funding, adding to the proposed sources 

from the MEGA–TRUST Act, and further address characteristics sought by the capital markets, as noted in my testimony. This additional, predictable funding will furVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00099 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
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ther strength GARVEE credits and other Federal aid highway derived project financing. 

Response. In your question, you correctly acknowledge that QZABs, as the only 

existing tax credit bonds, provide little guidance for the market’s receptivity due to 

relatively small issuance volume, disparate issuers, and credit considerations. The 

proposed year sale of $3 billion, Qualified Highway Bonds by Treasury under the 

MEGA–INNOVATE Act responds to some tax credit bond marketability concerns by 

providing larger issuance volume over the Reauthorization period by a centralized 

issuer. Market participants continue to believe that the centralized issuance of tax 

credit bonds where the tax credit can be decoupled, or stripped, from the principal 

repayment stream could attract major buyer interest, as well as active trading by 

securities dealers. Decoupling would broaden the market for the bonds since tax 

credit bonds are hybrids, with a tax-advantaged non-cash piece (the credits) and a 

cash-on-cash piece (the principal), attracting different types of investors. This follows the Senate Finance Committee Chairman’s goal to attract new and different 

taxable bond and tax credit investors to supplement the current, dominant buyers 

of tax-exempt transportation bonding.

Question 2. The advantages and disadvantages of using some of the proposed Tax 

Credit bond proceeds to go into a sinking fund to repayment bond principal closely 

relate to using a centralized issuer, either Treasury or dedicated national transportation issuer. 

Response. 

Advantages of a Sinking Fund: 

• Should result in very low risk of default of principal, if sinking fund investments are limited to highly rated instruments; 

• Homogenizes the creditworthiness of different series of bonds, enhancing marketability/liquidity (no local issuer variances); and 

• Overcomes disparities among States in terms of their legal ability to incur debt 

or their political willingness to do so. 

Disadvantages of a Sinking Fund: 

• Somewhat inefficient from a tax viewpoint, in that 30 percent (plus or minus) 

of the tax expenditures are for bonds that are funding the retirement of principal 

rather than funding new transportation projects. 

• At some point, it may be difficult to find attractively priced, highly rated, longterm defeasance investments in sufficient volume. 

RESPONSES OF JEFFREY CAREY TO ADDITIONAL QUESTIONS FROM SENATOR JEFFORDS

Question 1. As many in the Senate will recall, Private Activity Bond (PABs) rules 

were historically an outgrowth of the perceived overuse of industrial development 

bonds, where purely corporate investments were nominally financed through a State 

or local industrial development authority to gain tax exemption without adequately 

serving governmentally perceived, economic development or service objectives. As a 

result of successive Federal tax acts and IRS regulations, we now have a patchwork 

of inconsistent tax rules—i.e., seaports and airports can issue PABs not subject to 

volume cap; transit systems can finance infrastructure with PABs, but subject to 

volume cap. Neither transit rolling stock nor highways can be financed with taxexempt bonds at all if there is what is termed ‘‘private use’’ and a so-called ‘‘private 

security interest.’’ Within TEA–21 Reauthorization, the Senate should consider providing a new concept centered on whether the transportation project is of ‘‘public 

benefit.’’ If a highway (or transit line) is publicly available to any user, what difference should it make if there is incidental private management of the asset? The 

State or local political subdivision would already have determined that the public 

(and taxpayers) would benefit from private sector participation 

Response. Private participation is not just applicable to the development of toll 

roads. Even greater potential application is outsourcing the asset maintenance of expressways and freeways to private firms which agree to maintain roads to publicly 

required standards, in compliance with GASB 34. Current IRS ‘‘Qualified Management Contract’’ provisions do not permit incentive, performance-based compensation. Allowing the financial interests of the private sector developer/manager (in 

combination with private equity) to be aligned with the tax-exempt bond investors 

(i.e., maximize net revenues) should facilitate the financing for additional transportation projects. Tolls and private sponsor or participant returns can be regulated 

using a rate covenant (governmental utility model) or regulated return on capital 

(investor-owned utility model) mechanics. The Multimodal Transportation Financing 

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Act (‘‘MultiTRANs’’, S. 870) would achieve most of the aforementioned, desired tax 

law or regulatory reforms.

Question 2. One of the outcomes of reauthorization should be the ability to allow 

for more meaningful investment by the private sector into transportation. There 

seems to be barriers for participation for numerous large investment sectors. One 

example is pension plans or retirement investment sector. Current transportation 

bonding techniques do not provide the income this sector is seeking since we primarily use tax-exempt mechanisms. Can you provide more insights on how we can 

‘‘decouple’’ the bonding process to make it more attractive to these types of investors? Are there examples where such activity is occurring? Are there changes that 

need to be made to statue to assist this type of activity? 

Response. As your question correctly recognizes, pension funds represent one of 

the largest sources of capital in the economy—for the 1,000 largest plans in the 

U.S., the total assets are $3.6 trillion in defined benefit plans and $1.2 trillion in 

defined contribution plans (2001). Pension funds are invested in multiple asset 

classes (including overseas infrastructure) with the exception of domestic infrastructure. Yet, as tax-exempt entities they have no demand for lower returns on tax-exempt securities. An objective going back to the 1993 Infrastructure Investment Commission—develop an investment product that is cost-effective to the transportation 

project sponsor (overwhelmingly, a public sector entity eligible to issue tax-exempt 

bonds), while at the same time providing competitive, pre-tax returns to the pension 

funds. One possibility, highlighted above, is decoupled tax credit bonds. The tax 

credits could be sold to taxable investors, leaving a zero coupon, taxable bond with 

a sufficient credit rating to be marketed to pension funds—providing a secure longterm asset to offset long-term liabilities (retirement benefits). It is important to note 

that decoupling routinely occurs with other market instruments, including U.S. 

Treasury bonds (since 1985) and the mortgage-backed securities market. 

[From The Bond Buyer, Wednesday, June 12, 2002, Vol. 340] 

SENATE PANEL LEADERS LOBBY DOT TO USE INNOVATION IN ITS FUNDING

(By Humberto Sanchez) 

WASHINGTON—Leaders of the Senate Finance and Environment and Public 

Works committees urged the Department of Transportation yesterday to investigate 

new ways to leverage Federal funds to finance the construction of needed infrastructure, including using a centralized entity to fund loans and issue taxable tax-credit 

bonds. 

In a letter sent to Transportation Secretary Norman Y. Mineta, Sens. James M. 

Jeffords, I-Vt., chairman of the public works panel, Max Baucus, D-Mont., chairman 

of the finance committee, and 11 other senators said they want the DOT to look 

closer at ‘‘ways to leverage limited Federal resources through so-called ’innovative 

finance’ techniques.’’

The senators also said they believe that additional research into the matter 

‘‘would benefit the administration and the Congress as we develop’’ reauthorization 

proposals for the Transportation Equity Act for the 21st Century, which expires 

Sept. 30, 2003. 

The senators—including public works ranking member Robert C. Smith, R-N.H., 

and finance ranking member Charles E. Grassley, R-Iowa—said they are interested 

in exploring the possibility of ‘‘using a centralized entity to fund loans and provide 

credit enhancement, and the use of tax credit bonds as a financing vehicle for transportation infrastructure,’’ according to the letter. 

The letter comes as the American Association of State Highway and Transportation Officials is floating a similar proposal in which a federally chartered corporation would be authorized to sell taxable tax-credit bonds in order to provide funds 

to States for construction of roads, mass transit, and rail. 

Under the AASHTO plan, the transportation finance corporation would use new 

or increased Federal funds to back a $60 billion tax-credit bond issue that, over 6 

years, would increase funding for highways by $34 billion, $8.5 billion for transit, 

and $5 billion for other needs, including rail. 

The senators wrote that ‘‘a detailed examination of some of these fairly complex 

financial tools and vehicles is warranted.’’ They also said that they look forward to 

‘‘close coordination regarding the continuation of’’ State infrastructure banks—which 

provide low-interest loans to local governments to build transportation infrastructure—and the TIFIA program, which provides direct loans, loan guarantees, and 

98

lines of credit for up to 33 percent of the construction cost of transportation projects 

costing at least $100 million. 

A joint public works and finance committee hearing on innovative finance is being 

planned for late September. 

[From the Bond Buyer, Thursday, August 1, 2002, Vol. 341, No. 31440] 

SENATE PANEL TELLS TIFIA PROGRAM TO MAKE DO WITH 2002 LEFTOVERS

(By Humberto Sanchez) 

Because the TIFIA program has only awarded funds to 11 transportation projects 

since it was launched in 1998, the Senate Appropriations Committee has decided 

not to provide any more funds to the slow-starting financing program in fiscal 2003. 

Under the $64.6 billion fiscal 2003 transportation funding bill that was approved 

by the committee last week, the $130 million that was authorized under the Transportation Infrastructure Finance and Innovation Act to provide credit assistance to 

large transportation projects would be shifted to three other programs in the fiscal 

year that starts Oct. 1. Those are the transportation and community and system 

preservation pilot program, the national corridor planning and development program, and the coordinated border infrastructure and safety program. 

The proposed diversion of funds means that any transportation projects selected 

for TIFIA loans, loan guarantees, or lines of credit in fiscal 2003 would have to 

make do with the $96.million that program administrators estimate is left over from 

the $120 million authorized in the current fiscal year. 

So far, in fiscal 2002—which ends Sept. 30—the Department of Transportation 

has designated just one project for TIFIA assistance—a subsidy to back a $450 million loan for a $3.3 billion plan to fortify and rebuild parts of. the San FranciscoOakland Bay Bridge that was severely damaged by an earthquake 12 years ago. Although the Texas Turnpike Authority closed on a $916.76 million TIFIA loan Monday, that aid was actually approved in 2001. 

‘‘We think we’ll have enough to finance any projects that we anticipate,’’ said Max 

Inman, acting head of the DOT office that oversees the TIFIA program. ‘‘Hopefully 

it won’t have an impact. But you never know what might happen later in the year. 

Currently, we are not seeing anything that would be beyond the anticipated need.’’. 

Documents accompanying the transportation appropriations bill—which was approved last Thursday and is currently awaiting consideration by the full Senate—

explain that the committee diverted the funds because it believes that demand for 

credit assistance has not kept pace with the amount of subsidy available under the 

program. Meanwhile, the House Appropriations Committee has not started work on 

its bill and has not decided whether to follow the Senate panel and transfer TIFIA 

funds to other projects. 

While TIFIA program administrators agree that the program has more funds than 

it will likely use, they contend that the program could assist more projects after 

project sponsors and TIFIA administrators get used to the subtleties of the program. 

Despite the diversion of funds, the program has strong support. ‘‘The committee 

believes that TIFIA is an important part of the Federal Government’s overall infrastructure investment effort—one that is likely to grow in importance and size in the 

future,’’ the Senate Appropriations Committee said in the report accompanying the 

2003 transportation bill. 

Last month Transportation Secretary Norman Y. Mineta lauded the program and 

noted that it will be included in the Bush Administration’s plan to reauthorize the 

Transportation Equity Act for the 21st Century, or TEA–21, which expires on Sept. 

31, 2003. Mineta will unveil the proposal in the fiscal 2004 budget, which is due 

to be sent to Congress in February. 

The Senate Environmental and Public Works Committee and the Finance Committee plan to hold a hearing in September on innovative finance where ways of 

making the program more efficient will be explored. 

To date, the DOT has selected 11 projects in eight States, the District of Columbia, and Puerto Rico to receive TIFIA assistance. At a budgetary cost of slightly 

more than $200 million to the Federal Government, the projects have provided $3.7 

billion in credit assistance that has backed transportation investments worth more 

than $15 billion. The program provides direct loans, loan guarantees, and lines of 

credit—in lieu of traditional grants—and can cover up to 33 percent of the cost of 

major surface transportation projects that cost at least $100 million. 

99

[From The Bond Buyer, Tuesday, September 3, 2002, Vol. 341, No. 31462] 

ROAD REVOLUTION COMING? 

(By Humberto Sanchez) 

WASHINGTON—First of a two-part series. 

FANNIE MAE AND FREDDIE MAC REVOLUTIONIZED THE MORTGAGE BUSINESS. 

Now a plan being floated by the American Association of State Highway and 

Transportation Officials wants to copy that success by establishing the Transportation Finance Corporation, a centralized, federally chartered entity that would 

issue taxable tax-credit bonds to finance transportation infrastructure projects. 

Fannie Mae and Freddie Mac are publicly held corporations that were established 

by the Federal Government to increase the availability of home mortgages by establishing a liquid, well-functioning home loan secondary market. The corporations, 

known as government-sponsored enterprises, or GSES, purchase mortgages from 

banks and financial firms and package them into securities that are sold to investors. The banks’ financial firms use the money from the sale of the home loans to 

make more loans. 

But the TFC, whose name some believe will be shortened by lobbyists and congressional staffers to Trannie Mae or Trans Mac, would be designed to increase Federal investment in transportation infrastructure by establishing an active market 

for tax-credit bonds. 

The plan, calls for Congress to charter the TFC as a new, private, nonprofit organization that would be authorized to sell about $60 billion in tax-credit bonds over 

6 years. The bond proceeds would be given as grants to States primarily to help finance highway and transit projects, and the Treasury would provide a tax credit 

to investors in lieu of interest payments. 

AASHTO—the lobbying group representing State departments of transportation—

is currently shopping the proposal around to Congress, investment bankers, and rating agencies to assess its viability. Depending upon the level of interest in the plan, 

the association will vote later this fall on whether to adopt the proposal as part of 

its lobbying campaign to reauthorize the 1998 Transportation Equity Act for the 

21st Century, which expires Sept. 30, 2003. 

But while AASHTO maintains that preliminary responses to the proposal have 

been positive, the success of the plan rests on its ability to balance Congress’ cost 

concerns with the transportation finance interests of States and the interest of investors. 

HOW THE TFC WOULD WORK

Under AASHTO’s plan, the TFC would issue the $60 billion in tax-credit bonds 

over 6 years, starting the year TEA–21 is reauthorized and extending through the 

transportation act’s proposed 6-year life span. 

‘‘The bonds would have a 20-to 25-year life,’’ said Jack Basso, AASHTO’s director 

of management and business development. ‘‘We would cycle them out so that we 

have a 25-year level of activity because of the way the bonds are issued over time.’’

Of the $60 billion in bond proceeds, about $17 billion would be set aside in a sinking fund that would be used to pay back the principal. The sinking fund would invest in Treasuries or other similarly safe instruments that, over time, should yield 

enough to pay back the principal. 

‘‘We are assuming that we will get about a 6 percent return on our investment, 

and our market research says that that is perfectly reasonable,’’ Basso said. ‘‘At the 

end of that 25-year cycle, that $17 billion will have grown sufficient to pay off the 

principal of the bonds—the $60 billion.’’

The plan also calls for repaying the Federal Government for the income tax credits—which go to bondholders in lieu of debt service payments—through one or more 

strategies that are currently being explored by the association. 

States would be required to provide a 20 percent match to receive their share of 

the bond proceeds, which would be distributed to States through apportionment formulas similar to the ones currently used to redistribute gas tax receipts collected 

into the highway trust fund. States would not be liable for repayment of the bonds 

because a portion about 30 percent of the bond proceeds would be invested in a sinking fund that would raise the money to pay back the bond principal, and the tax 

credits would be paid by the Treasury. 

However, the plan calls for the tax credits—which AASHTO estimates will cost 

the Federal Government roughly $19 billion—to be repaid by one or more methods 

100

from a list of possible strategies. The list includes drawing down reserves in the 

highway trust fund, collecting the interest on fund reserves, a gas tax increase, or 

indexing the gas tax. 

Other possibilities AASHTO is exploring to generate funds to pay for the tax credits include capturing the 2.5 cents for each gallon of ethanol sold that now goes into 

the general fund rather than the highway trust fund, and the 5.3 cents per gallon 

subsidy that encourages the use of ethanol and ethanol blended fuels, such as gasohol. 

The highway trust fund—a pool of money created by gasoline and highway user 

taxes and tapped to finance the nation’s highway and transit projects—is the primary funding source for highway and transit construction. Transportation infrastructure advocates are concerned that increased use of ethanol would deplete the 

trust fund. 

Ethanol is currently taxed at 13.1 cents per gallon—5.3 cents a gallon less than 

gasoline. However, 2.5 cents of the 13.1 cents goes into the Treasury’s general fund, 

rather than the highway trust fund. AASHTO believes that the trust fund could 

gain an additional $3 billion to $4 billion over 6 years by capturing that 2.5 cents. 

AASHTO would also like to have an amount equal to the 5.3 cents per gallon ethanol subsidy paid into the trust fund, a move the group estimates would add $6 billion to $7 billion to the trust fund over 6 years. 

Diverting the 2.5 cents per gallon in ethanol taxes into the trust fund has a good 

chance of becoming law, the group believes, because it has support in the House and 

Senate and is included in the energy bill that is currently being negotiated by the 

two chambers. If the energy bill fails to become law, which many observers expect, 

Sen. Max Baucus, D-Mont., who heads the Senate Finance Committee, is expected 

to push legislation he introduced in June to get both the 2.5 cents and the equivalent of the 5.3 cents in reduced taxes per gallon of ethanol paid into the trust fund. 

in addition to the ethanol-related funds, the group anticipates that the highway 

trust fund will grow by an additional $17 billion over 6 years due to an estimated 

3 percent increase in travel. 

‘‘There is this menu of several possible options,’’ said Bryan Grote, a principal 

with Mercator Advisors, which is working on the plan with the group. ‘‘AASHTO 

is not advocating any particular option at the moment, they are just saying that 

from one or more of those menu items, you could possibly raise additional revenues 

that would off set the budget costs of the tax credits of this proposal.’’

POLITICS

The inclusion of a device to repay the $19 billion in tax credits gives the measure 

a significant advantage in gaining approval from Congress, the plan’s proponents 

believe. 

‘‘In order for this to have any kind of realistic consideration, they have to propose 

some budgetary offset to the cost of those tax credits,’’ said Grote, a former official 

with the Department of Transportation. 

There are currently two tax-credit bond measures pending in Congress, and 

AASHTO believes that the TFC proposal has an advantage over both. The pending 

measures include a bill in the House that would authorize States to issue $12 billion 

in taxable tax-credit bonds and $12 billion in tax-exempt bonds over 10 years for 

high-speed rail projects and legislation in the Senate that would authorize Amtrak 

to issue $12 billion in tax-credit bonds over 10 years for high-speed rail projects. 

‘‘What makes this proposal unique, as opposed to other proposals of this nature, 

like the high-speed rail bill or the Amtrak bill, is that we propose a way to raise 

revenue to pay the tax-credit costs,’’ said AASHTO’s Basso. ‘‘Our strategies will 

allow us to raise the money and reimburse the Treasury for the cost of those tax 

credits. That’s a very significant and distinguishing feature in this matter,’’ he said. 

Despite any advantages the plan may have, Members of Congress still need to be 

convinced. 

One objection Congress may have to the plan, according to a staffer, is that the 

proposal would, in effect, take the funds out of Congress’ control and put it in the 

hands of the board that would run the TFC. 

However, AASHTO maintains that the TFC board would just administer the operation of the entity and the issuing of the bonds. The bond proceeds would be distributed to the States according to a congressionally approved formula. 

‘‘The board’s purpose would be to administer the bonds; do the fiduciary work 

that’s necessary from an investor’s standpoint,’’ Basso said. ‘‘But principally the decisions on money would work exactly as they do now because the bulk of the highway and transit funding, almost all of it, would go out under congressionally mandated formulas. The program, from the State’s perspective, would look and feel and 

101

work pretty much as it does today; the difference is where the money’s coming 

from,’’ he said. 

The principal committees that would need convincing are the two tax-writing committees—the Senate Finance Committee and the House Ways and Means Committee. 

The transportation authorizing committees—the House Transportation and Infrastructure Committee and the Senate Environment and Public Works Committee—

would also have jurisdiction. The Senate Banking Committee, in addition, would 

have a say in the legislation because it oversees the nation’s transit program. 

While it’’s early in the process of selling the plan to Congress, AASHTO officials 

maintain the reception to it so far has been favorable. 

‘‘It’s important that we work with the Congress to help find some way to increase 

transportation funding,’’ said Pennsylvania Transportation Secretary Bradley L. 

Mallory, who is also AASHTO’s president. And ‘‘the political reception to the plan 

has been good.’’

But that does not surprise AASHTO officials, since some of the chairmen of these 

committees are very amenable to innovative finance ideas for transportation 

projects. 

For example, Sens. James M. Jeffords, I-Vt., chairman of the public works panel, 

and Baucus plan to hold a joint Environment and Public Works and Finance committee hearing on innovative finance as soon as this month. 

The two, along with 11 other senators, sent a letter on June 11 to Transportation 

Secretary Norman Y. Mineta, asking him to investigate new ways to leverage Federal funds to finance the construction of needed infrastructure, including using a 

centralized entity to fund loans and issue taxable tax-credit bonds. 

The senators—including Robert C. Smith, R-N.H., and Charles E. Grassley, RIowa, the top Republicans on the public works and finance committees—said they 

are interested in exploring the possibility of ‘‘using a centralized entity to fund loans 

and provide credit enhancement, and the use of tax credit bonds as a financing vehicle for transportation infrastructure,’’ according to the letter. 

In the House, Rep. Thomas E. Petri, R-Wis., chairman of the Transportation and 

Infrastructure Committee’s highways and transit subcommittee, has shown interest 

in the plan, noting at a hearing in May that AASHTO had ‘‘stepped up to bat.’’

Officials in the Bush Administration are also exploring the plan, but have not endorsed it. 

At a hearing in May, Federal Highway Administration chief Mary E. Peters told 

a congressional panel that she had met with AASHTO representatives and is reviewing their initiatives. 

‘‘We are actively working at a number of the options but have not yet taken an 

administration position on any,’’ Peters said. 

STATES’ NEEDS

States have long argued that increasing traffic congestion around the Nation has 

resulted in a pressing need to build additional roads and highways, as well as to 

maintain and improve aging ones. According to the DOT, an annual investment of 

$56.6 billion is needed over the next 20 years just to maintain the physical condition 

of existing highways and bridges. 

To meet these needs, AASHTO wants to increase funding each year to $41.4 billion for highways and to $10 billion for transit by the end of the 6-year life span 

of the successor to TEA–21. By comparison, the Federal Government in fiscal 2002 

provided $31.8 billion for highway programs and $6.8 billion for transit. 

The TFC, the proceeds of which would work in conjunction with the highway trust 

fund, would play a crucial role in achieving those funding levels and would increase 

funding by $34 billion over 6 years for highways and $8.5 billion for transit, 

AASHTO officials maintain. The plan also would provide $5 billion for a capital revolving fund that would help finance other needs, such as freight rail, intermodal 

projects, passenger rail, and transportation security infrastructure. The $5 billion 

could be generated, over 6-years, from the menu of revenue-generating options, but 

the association has not specified where the funds would come from. The revolving 

fund would provide direct loans, lines of credit, and loan guarantees. 

‘‘The dollars that we have in the system just don’t come anywhere near meeting 

the needs at the State, city, and county level,’’ said John Horsley, AASHTO executive director. ‘‘When we look at what is needed out there and where we stand in 

the current program, it is clear that we need to substantially grow the program.’’

Previously, it was a gas tax increase that provided additional funding for road 

construction. During the administrations of Presidents George Bush and Bill ClinVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00105 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
102

ton, highway trust fund revenues—which are made up of gas-tax receipts—were 

doubled. 

But, ‘‘this time we are not seeing a willingness, or an openness, or an appetite, 

in Congress or the administration to enact a substantial fuel-tax increase,’’ Horsley 

said. 

The TFC would allow all States to benefit from debt leveraging and innovative 

finance and meet the funding goals, AASHTO contends. 

Horsley noted that bonding and innovative finance ‘‘have enabled many States to 

do substantially more than they could with just current cash-flows or current Federal allocations,’’ and he cited the issuance of Garvees, the use of State infrastructure banks, and the Transportation Infrastructure Finance and Innovation Act in 

particular. 

Grant anticipation revenue vehicles, or Garvees, are backed by annual Federal 

transportation grants, while State infrastructure banks provide low-interest loans to 

local governments to build transportation infrastructure. The TIFIA program provides direct loans, loan guarantees, and lines of credit for up to 33 percent of the 

construction cost of transportation projects costing at least $100 million. 

‘‘But we’ve also seen some States that are restricted by constitution, restricted by 

statute, or simply haven’t, as a matter of practice, gone to debt financing to extend 

what they could do,’’ Horsley said. 

In addition, the primary funding mechanism for highway and transit financing, 

the highway trust fund, is under fire because gas tax receipts have been down and 

subsidies for alternative fuels have reduced the fund. 

Under TEA–21, receipts going into the highway trust fund were tied to Federal 

highway and transit funding levels so that the funds could only be used to finance 

highway and transit projects. 

As a result, TEA–21 provided specified funding amounts for highway and transit 

programs for fiscal 1999 through 2003 and included a provision that the funding 

levels would be recalculated annually to reflect actual and projected increases and 

decreases in tax receipts over the 6-year life of the law. 

States were initially pleased with this arrangement, and the adjustment, referred 

to as the revenue aligned budget authority, has added over $9 billion to the nation’s 

highway programs, due primarily to the booming economy of the late 1990’s. 

But as the economy stalled and estimates of gas-tax receipts turned out to be too 

optimistic, funding for highways in fiscal 2003 under TEA–21 was set at $23.3 billion—$8.5 billion below the fiscal 2002 funding amount. The cut was included in the 

president’s fiscal 2003 budget, which sought $23.3 billion for highway programs. 

But highways will get at least $27.7 billion in 2003 after $4.4 billion was included 

in the emergency supplemental spending measure approved this summer. In addition, the Senate Appropriations Committee recently approved a $64.6 billion transportation-spending package for fiscal 2003, which included $31.8 billion for highway 

construction. Most observers believe that fiscal 2003 highway finding will fall somewhere in this range. 

State departments of transportation are anxiously watching to see how much 

highway funding they’ll get, because a cut from the $31.8 billion could adversely affect the ability of States to use bonds to finance transportation projects. 

‘‘I think what we are doing with the TFC proposal is expanding substantially on 

the concept of innovative finance,’’ Basso said. 

While programs such as TIFIA and State infrastructure banks boosted the number of transportation projects, AASHTO maintains that they are niche programs and 

don’t help finance the most projects in the most States. 

Under TIFIA, a project has to cost at least $100 million, a threshold that 

AASHTO contends is too high to help many States. Also, due to the manner in 

which TIFIA was authorized, State infrastructure banks finance projects in only a 

limited number of States. Thirty-nine States are authorized to operate State infrastructure banks, but under TEA–21, only four States—California, Florida, Missouri, 

and Rhode island—are permitted to augment their funds with new Federal transportation grants. As a result, most State programs have failed to take off to the extent many observers had expected.The TFC proposal, AASHTO maintains, is a 

broader form of innovative finance and will help more States and finance more 

projects. 

‘‘They work for certain types of projects, but they aren’t universal,’’ Basso said. 

‘‘What we are proposing here is a very centralized, universal attempt to raise 

money.’’

Next: How a market for tax credit transportation bonds can be created. 

103

[From Transportation Watch, Thursday, September 26, 2002] 

FOR UPCOMING REAUTHORIZATION OF TEA–21 SENATORS EYE EXPANDING INNOVATIVE

FINANCE

Senators interested in alternative financing methods for highway and transit 

projects learned Sept. 25 that while existing programs have accelerated project construction, limitations cause States to continue to look for traditional pay-as-you-go 

financing. 

As Congress prepares for the 2003 reauthorization of the Transportation Equity 

Act for the 21st Century (TEA–21), lawmakers are looking for ways to boost revenues to the Highway Trust Fund and to develop project financing mechanisms beyond the trust fund that would encourage greater private sector investment. ‘‘As successful as the trust fund has been, our transportation needs far outweigh 

our resources,’’ Senate Finance Committee Chairman Max Baucus (D-Mont.) said at 

a rare joint hearing of his committee and the Senate Environment and Public Works 

Committee. 

The three main innovative financing methods currently in use to make highway 

investments are State Infrastructure Banks (SIBs), Grant Anticipation Revenue Vehicles (GARVEEs) and the Transportation Infrastructure Finance and Innovation 

Act (TIFIA). 

Innovative financing techniques give States additional options to accelerate 

projects, leverage Federal investments, and increase the ‘‘tools in the toolbox’’ of 

States and local or regional governments, according to JayEtta Z. Hecker, the General Accounting Office’s director of physical infrastructure issues. 

According to the Federal Highway Administration, as of June 2002, six States have issued GARVEE bonds that are repayable with future Federal aid totaling $2.3 

billion; 32 States have SIBs including 294 loan agreements worth $4.06 billion, that 

once the loans are repaid, the money will recycle back to the revolving fund; and 

9 States have TIFIA credit assistance agreements for 11 projects representing $15.4 

billion in investment. 

Downsides Noted 

With the advantages, however, come a wide array of disadvantages, Hecker said. 

State DOTS that are comfortable and used to traditional funding methods are not 

always willing to use innovative financing nor do they always see the advantage. 

‘‘States are very cautious about debt financing,’’ Hecker said. In her written testimony, she said two States said they have a philosophy against committing their 

Federal dollars to debt service, rendering themselves unable to partake in new funding methods. 

There also are a number of limitations in State and Federal law that do not give 

States the authority to use these funding methods. For example, California requires 

voter approval to use its trust fund allocations to pay for debt servicing costs, 

Hecker said. Other States have laws that restrict public-private partnerships. 

The TIFIA program has a requirement that projects cost at least $100 million, 

which limits it to large projects. 

In response to a question by Senate environment committee Chairman James M. 

Jeffords (I-Vt.), Phyllis F. Scheinberg, DOT’s deputy assistant secretary for budget 

and programs, said it was unclear if lowering the TIFIA threshold to $50 million 

would make a difference. 

‘‘No one has come in and said they can’t meet the $100 million threshold,’’

Scheinberg said. ‘‘We have a $30 million threshold for ITS and don’t have takers 

on that.’’

Looking to Reauthorization 

States also need to determine the short and long-term costs associated with various financing mechanisms to determine which best fits their needs and abilities. 

They also must decide which form of debt financing is best, with it being repaid by 

highway users or by the general population, Hecker said. 

One public finance industry professional told senators that TEA–21’s successor 

should provide incentives for public/private, market-based partnerships that finance, 

develop, operate, and maintain highways, mass transit facilities, high-speed and 

freight rail and inter-modal facilities. 

‘‘This could be accomplished by permitting the targeted use of $15-$20 billion of 

a new class of private activity bonds, and/or by modifying certain restrictions in the 

Internal Revenue Code on tax-exempt bond financing of transportation modes,’’ said 

Jeffrey Carey, managing director in Municipal Markets at Merrill Lynch. 

Carey also supported a proposal by the American Association of State Highway 

and Transportation Officials to create the Transportation Finance Corporation, a 

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federally chartered, nonprofit corporation that would provide increased investment 

resources through the leveraging of existing resources. ‘‘Federal Government corporations have helped the capital markets create strong 

and liquid markets to fulfill other policy and programmatic objectives,’’ Carey said. 

Even if lawmakers refine some of these innovative finance tools to make them 

more mainstream, they will not supplant existing funding methods. ‘‘What we discuss today is a complement to our traditional programs, not a replacement,’’ Jeffords said. 

Upcoming Highway Hearings 

The House Highways and Transit Subcommittee will hold a hearing Sept. 26 on 

capital and maintenance needs of the highway and transit system. The Senate 

Transportation, Infrastructure, and Nuclear Safety Subcommittee will hold a hearing Sept. 30 to examine the conditions and performance of the Federal-aid highway 

system. 

The Federal Highway Administration’s long-awaited Conditions and Performance 

Report remains tied up at the Office of Management and Budget and DOT’s Office 

of the Secretary and will not be available until October, a spokesman said. However, 

it will be discussed at both hearings. 

AMERICAN HIGHWAY USERS ALLIANCE

September 24, 2002.

The Honorable MAX BAUCUS, 

Chairman, Committee on Finance, 

The Honorable JAMES JEFFORDS, 

Chairman, Committee on Environment and Public Works, 

U.S. Senate, 

Washington, D. 20510.

RE: Joint Hearing of September 25, 2002

DEAR CHAIRMEN BAUCUS AND JEFFORDS: The Highway Users Alliance (AHUA) takes 

this opportunity to briefly address issues regarding the Federal highway program 

and asks that this letter be included in the record of the hearing of the Finance 

and Environment and Public Works Committees on this subject. 

Your committees are to be commended for holding this hearing on how the Federal Government can finance an increases level of Federal investment in highways— an investment that will provide important benefits country. 

As the nation’s broadest-based highway advocacy organization and the organization that represents the motorists, truckers, and businesses that pay the taxes that 

fully fund and rely on our nation’s highway and bridge investments, The Highway 

Users is particularly interested in your joint efforts to improve revenue collection 

and increase investments. 

America’s roads have serious and documented funding needs—too many Americans are dying or being injured on roads suffering from outmoded design—traffic 

congestion is worsening, threatening safety, slowing air quality progress, increasing 

tailpipe greenhouse gas emissions, wasting fuel, slowing product deliveries, and taking commuters away from their families and other productive exercises. 

Some have called for increasing Federal fuel taxes. If there are demonstrated 

needs and current funding is being invested appropriately, highway users will seriously consider that option. But we believe that your committees must first improve 

where today’s taxes are going, prevent further erosion of available resources, and 

examine all means available to boost highway revenues without raising taxes. 

Thus, we take this opportunity to support S. 2678, the ‘‘Maximum Economic 

Growth for America Through the Highway Trust Fund Act,’’ bi-partisan legislation 

introduced earlier this year by Chairman Baucus. The 12 co-sponsors of that bill include the following members of the Finance or Environment and Public Works Committees: Senators Daschle, Reid, Graham, Warner, Bond, Thomas, and Crapo. We 

thank all the supporters of that legislation for their leadership in advancing the provisions of that bill. 

Among other provisions, S. 2678 would provide that the 2.5 cents per gallon of 

tax on gasohol that currently is directed to the General Fund of the Treasury would 

be deposited in the Highway Account. 

In addition, S. 2678 would deposit into the Highway Account an amount equal to 

the fuel taxes not imposed on gasohol due to the gasohol tax preference. This is in 

keeping with historical precedence of funding agricultural programs, like ethanol, 

from the general fund. The bill would not raise the tax imposed on gasohol. This 

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means that the Highway Account would receive treatment on gasohol comparable 

to the treatment currently given to the Mass Transit Account. That account, unlike 

the Highway Account, already receives the same amount of funding for a gallon of 

gasohol as it does for a gallon of regular gas. 

S. 2678 would also resume the practice of crediting the Highway and Mass Transit Accounts of the Highway Trust Fund with interest on their respective balances. 

While we would prefer that Congress invest those surpluses, the trust fund should 

receive interest on highway use taxes collected, but not invested. 

Increased revenues for the highway program can also come from improved collections. We ask that the two committees work to achieve greater compliance with our 

tax laws that support the Highway Trust Fund. We have heard, for example, that 

changing the point of collection of aviation fuel taxes could add billions to the Trust 

Fund over the life of a reauthorization. Other enforcement steps could be beneficial 

as well. We urge the Congress to take appropriate steps to achieve the highest possible rate of collection of the taxes due to the Highway Trust Fund. 

In addition, we understand that Senator Baucus is exploring additional legislation 

that would allow the Secretary of the Treasury to sell tax credit bonds. The proceeds 

would go into the Highway Trust Fund and the General Treasury would be responsible for the principal and interest. We are eager to see this approach advance as 

an additional means of increasing highway investment. 

Mssrs. Chairmen, the American Highway Users Alliance commends the Committees for holding this hearing and urges enactment of legislation, in accord with the 

points outlined above, to finance increased Federal highway investment. Thank you 

for your consideration of our views on this important matter. 

Respectfully submitted, 

WILLIAM D. FAY, President and CEO, 

American Highway Users Alliance. 

STATEMENT OF THE TRANSPORTATION DEPARTMENTS OF MONTANA, IDAHO, NORTH

DAKOTA, SOUTH DAKOTA, AND WYOMING

The transportation departments of Montana, Idaho, North Dakota, South Dakota, 

and Wyoming submit this brief statement for the record of the joint hearing held 

on this date by the Committee on Finance and the Committee on Environment and 

Public Works. 

We are extremely pleased that, today, there is a consensus in the country that 

a well funded highway program makes an important and positive contribution to 

our nation’s economic prosperity and quality of life. But we urge the Congress not 

to rest on that consensus, but to buildupon it and increase today’s level of Federal 

investment. As the Congress receives testimony and prepares to shape legislation 

to reauthorize federally assisted surface transportation programs, it is important to 

keep foremost in mind that increased transportation investments will truly advance 

the public interest and help all citizens and all States. 

The two Committees are to be commended for holding this hearing. The nation’s 

ability to achieve increased transportation investment requires increased funding. It 

requires an answer to the question of how the Federal Government will finance its 

contribution to such an increase. 

A very important part of the answer is already before you. Earlier this year, 

Chairman Baucus, with the co-sponsorship of Senators Crapo, Daschle, Thomas, 

Craig, Enzi, Johnson, Warner, Reid, Graham, Bond, Harkin, and Carnahan, introduced bi-partisan legislation, S. 2678, that would increase receipts into the Highway 

Trust Fund without raising taxes. 

We support every provision of that legislation. 

That legislation would allow the Highway Account of the Highway Trust Fund, 

which has foregone very significant revenue due to increased gasohol consumption, 

to be properly credited. The bill would ensure that the 2.5 cents per gallon of tax 

on gasohol that currently is directed to the General Fund of the Treasury would be 

deposited in the Highway Account. In addition, the bill would credit the Highway 

Account with funds equal to the amount of fuel taxes not imposed on gasohol due 

to the gasohol tax preference (currently 5.3 cents per gallon). The bill would not 

raise the tax imposed on gasohol. This approach would make the Highway Account 

whole with respect to taxes either paid or foregone with respect to gasohol consumption. It would allow the Highway Account to finally receive treatment on this issue 

comparable to the treatment on this issue currently given to the Mass Transit Account which, unlike the Highway Account, already receives the same funding for a 

gallon of gasohol as it does for a gallon of regular gas. 

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S. 2678 also properly would reinstate the principle that the Highway and Mass 

Transit Accounts of the Highway Trust Fund should each be credited with interest 

on their respective balances. The bill also includes a thoughtful provision requiring 

a commission to look at long-term issues in financing the surface transportation program. 

So, while witnesses today may be emphasizing various innovative ways of financing increased Federal surface transportation investment, we wanted to emphasize 

our support for the important and straightforward provisions included in S. 2678, 

the ‘‘Maximum Economic Growth for America Through the Highway Trust Fund 

Act.’’

As to additional financing mechanisms, at this time we will limit ourselves to a 

brief positive comment on a concept that we understand to be under development 

by Senator Baucus. The approach would be for the Secretary of the Treasury to sell 

bonds with the proceeds being deposited in the Highway Trust Fund. The General 

Treasury would be responsible for the principal and interest. We welcome the development of this additional approach as a means of serving our national interest in 

increased investment in highways and transportation. 

In closing, we commend Chairman Baucus and Ranking Member Grassley of the 

Finance Committee and Chairman Jeffords and Ranking Member Smith of the Environment and Public Works Committee for holding this hearing on the important 

issues of finding ways to finance increased Federal transportation investment. That 

investment is certainly essential to the economic future of our States and we appreciate this opportunity to offer views on how that might be achieved. 

STATEMENT OF THE AMERICAN SOCIETY OF CIVIL ENGINEERS

The American Society of Civil Engineers (ASCE) is pleased to provide this statement for the record on financing alternatives for the nation’s surface transportation 

programs. 

ASCE, founded in 1852, is the country’s oldest national civil engineering organization representing more than 125,000 civil engineers in private practice, government, 

industry and academia who are dedicated to the advancement of the science and 

profession of civil engineering. ASCE is a 501(c)(3) non-profit educational and professional society. 

ASCE believes the reauthorization of the nation’s surface transportation programs 

should focus on three goals: 

• Expanding infrastructure investment 

• Enhancing infrastructure delivery 

• Maximizing infrastructure effectiveness 

ASCE’s 2001 Report Card for America’s Infrastructure graded the nation’s infrastructure a ‘‘D+’’ based on 12 categories, including roads with a grade of ‘‘D,’’ bridges 

with a grade of ‘‘C,’’ and transit with a grade of ‘‘C-.’’ Roads, bridges and transit 

have benefited from an increase in Federal and local funding currently allocated to 

ease road congestion, to repair decaying bridges, and to add transit miles. However, 

with 29 percent of bridges still ranked as structurally deficient or obsolete and nearly a third of major roads considered to be in poor or mediocre condition, engineers 

warn that Congress cannot afford to allow promised funding for transportation to 

lapse. Transit ridership has increased 15 percent since 1995, adding a strain despite 

unprecedented growth in transit systems and increased funding. 

Establishing a sound financial foundation for future surface transportation improvements is an essential part of reauthorization. TEA–21 provided record funding 

levels to the States and significant improvements have been made to our nation’s 

infrastructure. In spite of these notable efforts, the nation’s surface transportation 

system will require an even more substantial investment. United States Department 

of Transportation (DOT) data reflect the fact that an investment of $50 billion per 

year would be needed just to preserve the system in its current condition. With 

funding as the cornerstone of any attempt to reauthorize TEA–21 it is imperative 

that a variety of funding issues be advanced as part of ASCE’s overall strategy. 

Sustaining Infrastructure Investment 

ASCE supports the following goals for infrastructure investment. 

• A 6-cent increase in the user fee with one cent dedicated to infrastructure safety and security. These new funds should be distributed between highways and transit using the formula approved in TEA–21. 

• The user fee on gasoline should be indexed to the Consumer Price Index (CPI) 

to preserve the purchasing power of the fee. 

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• The Transportation Trust Fund balances should be managed to maximize investment in the nation’s infrastructure. 

• Congress should preserve the current firewalls to allow for full use of trust 

fund revenues for investment in the nation’s surface transportation system. 

• The reauthorization should maintain the current funding guarantees. 

• Congress should stop diverting 2.5 cents of the user fee on ethanol to the General Fund, and put it back into the Highway Trust Fund. 

• Make the necessary changes to alter the Revenue Aligned Budget Authority 

(RABA) to decrease the volatility in the estimates from year to year and ensure a 

stable user fee based source of funding. 

• The current flexibility provisions found in TEA–21 should be maintained. The 

goal of the flexibility should be to establish a truly multi-modal transportation system for the Nation. 

ASCE supports a reliable sustained user fee approach to building and maintaining 

the nation’s highways and transit systems. While ASCE supports a wide variety of 

innovative approaches to finance surface transportation projects, ASCE feels strongly that the current user fee arrangement is the most equitable and efficient means 

of ensuring stable transportation funding. 

First to be addressed is the issue of raising the user fee on motor fuels. While 

the gas tax is an important element of the current revenue stream feeding the Federal Highway Trust Fund, it continues to erode in value due to its inherent inelastic 

nature. Two strategies must be advanced to remedy this condition. First, raise the 

gasoline user fee by six cents. This would provide a much needed infusion of funding 

toward the $50 billion per year need. In tandem with raising the motor fuel tax, 

ASCE believes that it is important to shore up the weakness of the motor fuel tax 

and its inability to retain value over the long term by adding a provision to the law 

that would index it based on the Consumer Price Index (CPI). This would allow the 

rate to adjust and reflect the current economic conditions of the Nation. 

Innovative Financing 

ASCE supports the innovative financing programs and advocates making programs available to all States where appropriate. Additionally, the Federal Government should make every effort to develop new programs. 

ASCE supports the following changes to enhance the existing programs: 

Transportation Infrastructure Finance and Innovation Act (TIFIA) 

• The TIFIA process for review, approval and negotiation is regarded as burdensome, and could be streamlined. 

• TIFIA projects have a minimum eligibility threshold of $100 million and consideration could be given to lowering this to $50 million to expand the pool of 

projects. 

• TIFIA loans could be ‘‘fully subordinated’’. Current TIFIA legislation is written 

to subordinate TIFIA loans to other creditors. However, in the event of liquidation/

default, the TIFIA loan advances to parity status with other creditors. This is 

known as the ‘‘springing lien’’ provision. It is thought by some that this has limited 

the availability of other credit. The issue is controversial, with pros and cons on 

both sides, but reform should be seriously considered. 

State Infrastructure Banks (SIBs) 

• With the exception of five States (Texas, Rhode Island, Florida, Missouri, and 

California), TEA–21 did not permit further capitalization of SIBs with Federal 

funds. It is felt that this has suppressed SIB activity. 

• Federal regulations still apply to loan funds that are repaid to the bank, encumbering SIB funded projects with Federal regulatory requirements. 

Grant Anticipation Revenue Vehicles (GARVEEs) 

• Increase the flexibility of GARVEE bond repayment methods. For example, utilize the total apportionment amount as a source of repayment (i.e., all funding categories), so that no particular funding category is overburdened. 

New programs for consideration as part of the next reauthorization are: 

• Increased use of user fees, tolls, value pricing, and HOT lanes. 

• Possible indexing of highway trust fund motor fuels tax to inflation. 

• Establishing a true multimodal funding program (i.e., funds can be used interchangeably for rail, highway, freight, intermodal facilities, etc.). 

• Tax credit bonds, private activity bonds, and tax-exempt bonds for privately 

developed projects. 

Tax-based revenues are not sufficient to keep pace with the nation’s transportation needs. 

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There is a compelling need for enhanced funding, to a large extent through useroriented fees that have been demonstrated to be a well-accepted and equitable 

source of infrastructure financing. In the case of surface transportation, federally 

sponsored studies demonstrate the need for higher levels of investment. An additional challenge is to convince our citizens and our elected leaders that we must either ‘‘pay now’’ or ‘‘pay later’’, and that paying now is much more cost-effective and 

prudent in the long run. 

Innovative financing techniques can greatly accelerate infrastructure development 

and can have a powerful economic stimulus effect compared to conventional methods. This is the current approach in South Carolina, Georgia, Louisiana, Florida, 

and Texas, where expanded and accelerated transportation investment programs 

have been announced. Innovative financing techniques, including toll road-based 

funding, figure heavily in several of these State programs. 

The innovative programs in TEA–21 have been a good start, but more needs to 

be done to expand their scope, and new programs or approaches must be introduced. 

We must find new and innovative ways to finance the critical transportation infrastructure needs of the Nation. 

Life Cycle Cost & Surface Transportation Design 

The use of Life-Cycle Cost Analysis (LCCA) principles will raise the awareness 

of clients of the total cost of projects and promote quality engineering. Short-term 

design cost savings which lead to high future costs will be exposed as a result of 

the analysis. In the short-term the cost of projects will increase; however, the useful 

life of a project will increase, and there may be cost savings in operations and maintenance over the long term. 

When the cost of a project is estimated only for design and construction, the longterm costs associated with maintenance, operation, and retiring a project, as well 

as the cost to the public due to delays, inconvenience and lost commerce are overlooked. The increasing use of bidding to select the design team has resulted in a 

pattern of reducing engineering effort to remain competitive, with the result of higher construction and life cycle costs. 

ASCE encourages the use of Life-Cycle Cost Analysis (LCCA) principles in the design process to evaluate the total cost of projects. The analysis should include initial 

construction, operation, maintenance, environmental, safety and all other costs reasonably anticipated during the life of the project, whether borne by the project 

owner or those otherwise affected. 

Long-term Viability of Fuel Taxes for Transportation Finance 

ASCE supports the need to address impacts on future surface transportation 

funding and believes that provision should be made in the next surface transportation authorizing legislation to explore the viability of the most promising options 

to strengthen this funding. In particular, the impacts of fuel cell technology should 

be studied as well as how to create a mileage based system for funding our nation’s 

surface transportation system as this technology comes to market and lessens the 

nation’s dependence on gasoline as a fuel source for automobiles. 

Fuel taxes have long been the mainstay for transportation infrastructure finance, 

but their future is now uncertain. In many States, there is a strong reluctance to 

raise fuel taxes, and some State legislatures have even reduced taxes to compensate 

for the sharp increase in average gasoline prices over the last 2 years. Many localities and States are supplementing or replacing fuel taxes with other sources, such 

as sales taxes and other general revenue sources. There is also a growing trend to 

use additives to gasoline for environmental reasons, and the most prominent additive, ethanol, enjoys a Federal exemption from fuel taxes that reduces Federal and 

State trust fund revenues by some several billion dollars annually. Looking ahead, 

a slow but steady increase in fleet efficiency—perhaps due to increased market penetration by electric, fuel cell, or hybrid technologies—would reduce the revenue per 

mile of use generated by users. Whereas cleaner-burning fuels and increased fuel 

efficiency are desirable policy goals in their own right, particularly in regard to global warming, they may reduce the ability to rely on fuel taxes in the future. 

A helpful first step in this process will be the Transportation Research Board’s 

recently initiated Study on Future Funding of the National Highway System, which 

will describe the current policy framework of transportation finance and evaluate 

options for a long-term transition to sources other than fuel taxes. The goals of the 

study are to: (1) determine the extent to which alternatives to fuel taxes will be 

needed in the next two decades or so; (2) analyze the pros and cons of different alternatives in terms of political feasibility, fairness, and cost; (3) suggest ways in 

which barriers to these alternatives might be overcome; (4) recommend ways in 

which the efficiency and fairness of the fuel tax could be enhanced, and (5) recVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00112 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
109

ommend, as necessary, a transition strategy to other revenue sources. The study’s first task, to be summarized in an interim report, will provide one or more scenarios 

to illustrate the time span during which petroleum-based gasoline availability and 

cost might reduce fuel tax revenues. The interim report has been requested to provide insight to those parties involved in the development of the surface transportation reauthorization legislation, particularly with regard to projections of fuel tax 

revenues during the next reauthorization cycle. The study will also provide estimates of trends in expenditures for transportation infrastructure from sources other 

than the fuel tax. 

STATEMENT OF ROSS B. CAPON, EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF

RAILROAD PASSENGERS

Thank you for the opportunity to present this information. Our non-partisan organization has worked since 1967 in support of more and better passenger trains of 

all types in the U.S. Our vision of the future includes an intercity rail passenger 

network that connects all regions and metropolitan areas of the country and serves 

all important transportation routes. Such a vision would be similar to the one adopted with the authorization of the Eisenhower Interstate Highway system in 1956. 

It is critical that TEA–3 Reauthorization finally resolve the chronic under-funding 

of passenger and freight rail transportation by establishing a Federal program that 

encourages States to invest in both passenger and freight rail development. 

At a time of unprecedented highway congestion, the freight railroads are reducing 

infrastructure improvement projects due to decreasing rates of return on capital investments. Meanwhile, for 31 years, we have subjected Amtrak to unpredictable 

funding levels that have left our national passenger rail system with a $5 billion 

backlog in needed capital investments. In California alone, over $100 million in 

intercity passenger rail investment plans that also would benefit freight operations 

have been shelved until more Federal funding becomes available. A strong rail system serving both passengers and freight is a national necessity. 

Individual States will never fulfill rail funding needs on their own, nor will they 

sustain the national vision for an efficient freight and intercity passenger rail network beyond their own borders. To realize the national vision, the Federal Government must lead. The traveling public wants intercity passenger rail. The rules for 

success are simple: Give people half decent service, and they will ride; give them 

great service, and they will come in droves. Very modest investments in service 

have brought substantial returns in patronage. To name just a few: 

• Downeaster (Portland, Maine to Boston): Inaugurated in December 2001, this 

new route exceeded all revenue projections for the entire year in only 6 months. 

Through the summer, the trains often had standees even though third and fourth 

coaches were added to the original consists (which had one combined cafe/coach/

Coastal Club Service car and two coaches). Although driving is an hour faster (without traffic), New Englanders are choosing the train for its convenience and comfort. 

August ridership was 30,700. With four daily round-trips, that is an average of 

about 124 passengers per trip. 

• Long Distance Sleepers: In the January-March, 2002, quarter, sleeping-car revenues increased 18 percent and travel (measured in passenger-miles) 11 percent 

above year-earlier levels. Airline revenues were still down about 20 percent. 

• Amtrak carries more passengers between New York and Washington than all 

airlines, and Acela Express/Metroliner service is a big factor in that. When all citypair combinations between New York and Washington are included, Amtrak’s market share of the air-rail segment surpasses 70 percent. Premium Acela Express and 

Metroliner service has experienced a ridership surge of 35 percent since 2001. 

• Amtrak’s share of the Boston-Philadelphia air-rail market was 8 percent before 

Acela and Boston-New Haven electrification, but that rose to 26 percent in the January-March, 2002, quarter (most recent available). This means that, in spite of Amtrak running-times of almost five or 6 hours (Acela Express and Acela Regional, respectively), there is more than one Amtrak customer for every three airline passengers. * In the Pacific Northwest, new Talgo trains helped boost ridership from 

226,000 in 1993 to 658,000 in 2001. (Passenger-miles rose 2 percent during the first 

11 months of fiscal 2002 in spite of the travel recession.) The overall growth from 

1993 was based on marginal increases in frequency and speed (with the best Seattle-Portland schedules now taking 31/2 hours, a 53 mph average). 

• Capitol Corridor: Since 1998, ridership on this bustling Sacramento-San Jose 

route has climbed 132 percent, surpassing one million annual passengers. 

On the freight side, the Alameda Corridor in the Los Angeles area has improved 

over 200 grade crossings, reduced truck traffic, and tremendously enhanced the flow 

110

of freight trains between Los Angeles and Long Beach. Not long before, freight-passenger interference was reduced with construction of a rail-over-rail flyover in Los 

Angeles. 

To make similar success stories possible elsewhere in California and the rest of 

the Nation, the Federal Government must create a partnership with States that 

supports and encourages investment in passenger and freight rail. Several bills in 

the House and Senate, such as RIDE–21 and S. 1991, laudably set the framework 

for a Federal rail infrastructure program, where money should be spent, and how 

tax-exempt bonds, tax-credit bonds, and expanding the Rail Rehabilitation and Infrastructure (RRIF) program will provide the needed capital. However, none of these 

bills outline where the cash needed to support these Federal programs will come 

from. 

Thus, the National Association of Railroad Passengers strongly supports the creation of a Rail Trust Fund, similar to those used so effectively for the highway and 

aviation modes. 

While the Rail Trust Fund might eventually derive significant revenue from user 

fees, user-based revenue sources would not generate much revenue initially. In 

order for a rail trust fund to reach critical mass, the Federal Government must first 

‘‘prime the pump’’ by earmarking revenue from other sources. Highways and aviation systems were already relatively mature before creation of their trust funds. 

Some possible Rail Trust Fund sources already exist in the form of taxes levied 

on the railroads, which, unlike highway and aviation taxes, do not benefit further 

investment in their respective mode. 

This counter-productive precedent has hindered development of both passenger 

and freight rail for decades. Between 1941 and 1962, the Railroad Ticket Tax raised 

billions in revenue, none of which went toward enhancing development of the freight 

or passenger rail service; some revenues actually went toward highway development. Today, through taxes levied on railroads on infrastructure and fuel, we continue to discourage investments in rail by funneling these revenues into the general 

treasury. 

We believe rail should receive a portion of any future increase in gasoline or aviation taxes. We support many State DOTs in the view that they should be allowed 

to spend flexible gasoline-tax dollars on intercity passenger rail. We do not believe 

the Nation or the cause of balanced transportation benefits from an ’ironclad’ modespecific approach to trust funds, but in the present context we certainly agree that 

taxes levied on railroads (including Amtrak) should benefit railroads—passenger 

and freight. 

We know that freight railroads are very sensitive to the possibility that creation 

of a trust fund would alter the competitive balance among the railroads, or result 

in rail tax payments cross-subsidizing passenger projects. We believe these challenges can be addressed. General guidelines about overall project balance between 

competing freight railroads and how improvements must benefit both freight and 

passenger service could establish a fair process of disbursement for all parties. 

Other stipulations about the share of allowable projects whose benefits are judged 

to be ‘‘passenger only’’ could be negotiated. If Congress does not repeal the 4.3 cent 

diesel tax which Amtrak and the freight railroads currently pay toward general deficit reduction, then the $170 million raised annually from this tax should be directed into a Rail Trust Fund, and no longer be set aside for deficit reduction. This 

precedent has already been set, as similar airline and highway taxes were redirected into their respective trust funds in 1997. Since 1997, the railroads have paid 

approximately $1 billion in diesel taxes to general revenue; this money should be 

retroactively rebated at its present value to the Rail Trust Fund and set aside for 

rail infrastructure development. 

Other revenue sources being considered for the Rail Trust Fund include taxes on 

equipment sales, and passenger ticket taxes on commuter and Amtrak trains. Any 

new taxes levied on the freight railroad industry and passengers must not be viewed 

as a panacea, and be implemented with restraint. Raising taxes on equipment will 

increase startup costs for new services as well as decrease an already diminished 

rate of return for capital investments. An equipment tax will be pointless if railroads simply reduce their capital investments further because they are now paying 

a tax on new equipment. A net gain for capital investments infrastructure must accompany any tax levied on new equipment purchases. 

With respect to passenger tickets, again, NARP believes these taxes must not be 

seen as a panacea, and be implemented cautiously (perhaps not at all, or only after 

the results of meaningful capital projects have become apparent in service improvements). Unfortunately, the vast reservoir of patronage that made the railroad ticket 

tax so successful (at raising general revenues!) between 1941 and 1962, is much 

smaller, and cannot generate nearly as much revenue as before. A passenger ticket 

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tax must not try to make up this difference by imposing a much higher tax rate; 

taxing passengers too much would stifle ridership to the point that nobody rides the 

train. Amtrak already tries to set fares to maximize revenues, and many fares already are very expensive. Also, Amtrak, as noted above, already pays the 4.3 cent 

fuel tax. 

Polls over the years have consistently shown public support for faster, more frequent, and reliable passenger trains, including two national polls this summer. A 

poll conducted by CNN/Gallup/USA Today near the height of Amtrak’s June cash 

crisis (June 21–23) found that 70 percent of the public support continued Federal 

funding for Amtrak. Similarly, The Washington Post found that 71 percent of Americans support continued or increased Federal funding for Amtrak (August 5 article 

reporting on July 26–30 poll). 

If we provide quality service, the public will ride the trains. If the Federal Government provides States a meaningful match, the States will drive the needed investments. At the same time, the public also will realize a tremendous benefit from 

an improved freight rail network. Again, the key to realizing these benefits will be 

a long term Federal partnership with States, and an adequately supported Rail 

Trust Fund that would bring balance into national transportation policy, and ultimately benefit the users of every mode of transportation. 

The web site of the National Association of Railroad Passengers is 

<www.narprail.org>. 

STATEMENT OF STATE SENATOR BETTY KARNETTE, CALIFORNIA STATE CAPITOL, 

SACRAMENTO, CA 

Thank you for having this important hearing to discuss the security and infrastructure needs of trade-based transportation throughout this great country of ours. 

Clearly, America’s long-term economic growth depends on our ability to move 

goods safely and efficiently. Throughout the Nation, we see how freight movement 

brings our trade economy to life. We can be proud of how we work as a nation to 

stay competitive in the global economy. 

However, there are serious obstacles to our nation’s freight security and mobility 

that could significantly reduce the safe and efficient movement of goods in the immediate future. Unless we address these problems in an innovative, systematic fashion—without delay—we risk America’s ability to provide the type of transportation 

infrastructure on which the goods movement industry has come to rely. 

Before 9/11/01, our freight mobility issues were already challenging enough. But 

today, we must also ensure that our nation’s freight movement system is as secure 

as it is efficient. Clearly, our present challenge is to insure the security, efficiency 

and sustainability of the nation’s freight movement system. 

It is awe-inspiring to see how the various regions of this nation collaborate in 

manufacturing, selling and moving goods to each other and to our trading partners 

throughout the world. For example, nearly $650 billion in domestic and international trade flows between California and other regions of the United States. 

What would happen if the goods movement between the east coast, west coast and 

points in between were to collapse? Clearly, our economy—and those who rely on 

it—would be in serious trouble, and that day may not be far away. Rail lines and 

rail yards in California are expected to reach maximum capacity within five to 7 

years. Moving a freight container from one side of Chicago to the other can often 

take up to 4 days. 

There are countless examples of problems just like these that demonstrate the importance of developing a systematic strategy to meet the challenges that confront 

us. If we fail to act, our competitors in the global economy will be the only beneficiaries. 

I would like to focus my testimony on how we can ensure that our nation’s freight 

transportation network can keep pace with the demands of economic growth. 

First, we need a comprehensive strategy for increasing capacity and improving the 

efficiency of goods movement in the United States. The strategy must be complete 

and it must include private sector participation. 

As I have indicated in my attached report, National Freight Security and Infrastructure Bank, we can simultaneously meet the needs of both government and industry by creating an organization that focuses on public/private finance and project 

selection. A public/private partnership is the only sensible approach we can take. 

We must make sure that the two major stakeholders of the nation’s freight system—

government and industry—have a forum to collaborate and to solve national goods 

movement problems. 

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Second, as Congress rightfully confronts the issue of freight security, it is essential that any such effort include an innovative and comprehensive financing strategy 

to address it. We do not have sufficient financial support from existing Federal programs to guarantee the freight security and mobility in the way we would like. 

Therefore, I have developed an innovative finance proposal for freight projects. 

My proposal for a National Freight Security and Infrastructure Bank demonstrates how to develop an innovative funding base and how to deliver freight 

transportation projects with public/private collaboration, while conforming to transportation programming requirements at the Federal, State and local levels. 

While there may be some concern that user fees may not be the best way to fund 

freight security and mobility, we simply cannot lose sight of the option. Security and 

mobility are key elements of America’s ability to remain competitive in the global 

economy. 

These are the same considerations that led President Dwight David Eisenhower 

to create the Interstate Highway System. Creation of the Interstate Highway System was primarily driven by security concerns during the cold war years of the 

1950’s and 1960’s (i.e., the need to quickly, safely and efficiently deploy troops and 

material). 

Today we face similar security concerns that must be addressed as we aggressively pursue goods movement infrastructure development. Many of our present 

challenges may seem insurmountable. But our nation’s history is rich with examples 

of how Americans can rise above the challenges of the day. 

The bottom line is that a comprehensive approach will simultaneously enhance 

America’s economic development and mitigate environmental and safety issues—

while at the same time addressing national security. 

National Freight Security and Infrastructure Bank 

The National Freight Security and Infrastructure Bank (NFSIB), a stand-alone 

Federal agency, would be funded by a new uniform NFSIB security and infrastructure fee, administered by U.S. Customs, and based in part upon a percentage of the 

existing duties on all imported cargo through border crossings and through the nation’s seaports. The NFSIB would establish security and infrastructure fees for certain commodities, which at present have no existing U.S. Customs duty, but which 

have security or infrastructure impacts. The amount of the NFSIB security and infrastructure fee would be adjusted annually based upon the change in the Consumer 

Price Index (CPI). 

U.S. Customs would be responsible for collecting the NFSIB security and infrastructure fee. US Customs would receive compensation from NFSIB for providing 

this administrative service. Fees would flow to the National Freight Security and 

Infrastructure Trust Fund, which would be administered by the NFSIB. The 

NFSIB’s staff and administrative costs would be funded by fees paid by project 

sponsors (from non-NFSIB import cargo fee resources). The NFSIB’s Board of Directors would consist of 15 representatives from the public and private sectors, including the U.S. Department of Transportation, U.S. Customs, ports, steamship lines, 

shippers, trucking and railroad industries. 

85 percent of the Trust Fund would be available as cash, or pledgable revenue 

to support project financings of eligible freight security and infrastructure projects. 

Project sponsors would be responsible for developing financing plans for individual 

projects. Project sponsors could choose direct funding, and/or use of leveraging strategies, including issuing debt, or a combination of funding strategies, in which the 

project sponsor would rely on cash or pledgable revenue provided by the NFSIB. 10 

percent of the Trust Fund would be remanded to the U.S. Department of Transportation for grants for discretionary freight security and infrastructure projects, and 

5 percent would be available to the U.S. Customs Service for administering the collection of fees. 

Project sponsors/applicants may include any of the following: States; cities; regional and local public agencies; port authorities; joint powers authorities; and joint 

applicants involving public agencies and private transportation firms or associations. 

All eligible projects must address security and transportation needs of imported 

cargo through seaports located in specified Global Gateway Regions of the United 

States, or through selected border crossings, or through selected inland cargo interchange points, or through the area of jurisdiction of the local Metropolitan Planning 

Organization. Projects nominated for funding must be included in the Regional 

Transportation Plan adopted by the Metropolitan Planning Organization. Regardless of their distance from the seaport, border crossing, or interchange point, all 

nominated projects must address one or more of the following goals associated with 

the movement of imported cargo: 1) increase national or homeland security, 2) expeVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00116 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
113

dite shipments of imported cargo by increasing capacity, improving communications 

and information sharing, reducing delay or increasing speed or efficiency of shipment, and 3) relieve traffic congestion, reduce air and noise pollution or mitigate 

other environmental impacts. 

The Board of Directors of the NFSIB will determine which projects will receive 

funding. Funds will flow directly from the NFSIB to project sponsors. Project sponsors must provide 25 percent matching funds from any source. The U.S. Department 

of Transportation shall approve projects recommended for funding by the NFSIB, 

and shall have veto power over any project funding recommended by the NFSIB. 

Global Gateway Regions shall include: 

1) Southern California, including ports of Los Angeles, Long Beach, Hueneme and 

San Diego; 

2) Northern California, including the Port of Oakland, Port of Stockton; 3) Pacific 

Northwest, including the Ports of Portland, Seattle and Tacoma; 

4) Gulf Coast, including the Ports of Galveston, Houston, Corpus Christi, New Orleans, Mobile, Tampa; 

5) Southeast, including Jacksonville, Miami, Everglades, Palm Beach, Charleston, 

Charlotte, and Savannah; 

6) Northeast and Mid-Atlantic, including the Ports of New York/New Jersey, 

Philadelphia, Boston, Wilmington, Baltimore and Norfolk; 

Border Crossings shall include: 

1) Laredo, TX 

2) El Paso, TX 

3) Bellingham, WA 

4) Portal/Northgate, ND 

5) International Falls, ND 

6) Sault Ste Marie, MI 

7) Detroit/Port Huron, MI 

8) Niagara Falls, NY 

9) Plattsburg, NY 

10) Otay Mesa 

11) Calexico

Inland interchange points shall include: 

1) Chicago, IL 

2) Memphis, TN 

3) Kansas City, MO 

4) Washington, DC 

5) Richmond, VA 

6) Charleston, WV 

7) Ft Worth, TX 

8) Chattanooga, TN 

9) Denver, CO 

10) Little Rock, AR 

11) Minneapolis/St. Paul, MN 

12) St. Louis, MO 

13) Albany, NY 

14) Syracuse, NY 

15) Cincinnati, OH 

16) Columbus, OH 

17) Pittsburgh, PA 

18) Hattiesburg, MS 

19) Atlanta, GA 

20) Lexington, KY 

21) Birmingham, AL 

22) Nashville, TN 

23) Cairo, IL 

24) Louisville, KY 

25) Indianapolis, IN 

26) Charlotte, NC 

27) Raleigh/Durham, NC

Examples of projects that would be eligible for funding include: 

1) California Global Gateways 

Accounting for 40 percent of all U.S. waterborne commerce, California represents 

the largest trading complex in the United States. Freight transport capacity, however, has not kept up with demand. Although the Alameda Corridor opened in April 

of 2002, serious deficiencies in railroad track and yard capacity and freeway capacity still exist in the L.A. area. California is facing explosive growth in international 

114

trade through its ports and border crossings over the next 20–25 years. Grade separations and other mitigations are needed to relieve freight-related congestion in 

local communities. Examples of specific projects that could apply for NFSIB funding 

include: 

Alameda Corridor-East (extension of the Alameda Corridor through the San Gabriel Valley, Orange County, San Bernardino County, and Riverside County);—Gerald Desmond Bridge replacement in the Port of Long Beach;—Oakland Joint Intermodal terminal at the Port of Oakland. 

2) Florida’s Gateway Project: The Americas Corridor 

Florida is the fourth largest container handling State in the Nation, with the 

State’s South Florida seaports handling an important share of the international 

goods flowing through the State to and from global markets. The goal of the Americas Corridor is to optimize the movement of international cargo and domestic 

freight among seaports, rail lines and State highways in South Florida. In particular, the 60 linear miles of the intermodal transportation system linking South 

Florida’s three seaports is of critical concern. The containers moving across the 

docks of three South Florida seaports, each of which is also a premier cruise port 

and located adjacent to a busy downtown center, must traverse the choked streets 

of urban neighborhoods to access the Interstate highway system, impeding mobility, 

productivity and compromising the nation’s security. Double tracking of the rail system between Jacksonville and Miami is another specific project that will be required 

in the future. 

3) Chicago Cross Town Highway and Rail Improvements 

In Chicago six Class I railroads converge at some 18 major intermodal terminals 

ringing the city. 1,500 trains per day approach these terminals and 3,500 cross-town 

container moves occur daily. The stress on the region’s roadways is enormous, and 

the delay to cargo delivery is increasingly inefficient. A series of improvements to 

this fragmented infrastructure would add capacity and velocity to the rail and 

trucking systems. 

4) New York/New Jersey Port Access Projects 

The Port of NY/NJ is the largest port complex on the east coast, and the second 

largest in the Nation. Significant environmental concerns hamper overall freight investment. New highway building is constrained by land availability and environmental concerns. 15,000 trucks move in and out of the port area each day, but each 

truck trip faces an average of 30–50 minutes of delay due to increasing congestion 

in the area. The port has devised a series of port access improvements and intermodal connectors needed in the region. 

STATEMENT OF PROFESSOR DAVID J. FORKENBROCK, DIRECTOR, PUBLIC POLICY

CENTER, UNIVERSITY OF IOWA

A New Approach to Assessing Road User Charges 

This testimony describes a major study in progress to develop a new approach for 

charging vehicles that travel on public roadways. The new approach applies intelligent transportation system (ITS) technology to the problem of assessing road user 

charges, enabling these charges to be fairer, more stable, and more flexible. Though 

very simple in concept, the new approach has required that a number of institutional and technological issues be resolved. It is to resolve both types of issues that 

we are undertaking this research. 

Phase I of this research was concluded in September 2002, and a final report is 

available from Professor Forkenbrock. The first phase of this research was funded 

through a special consortium comprised of the Federal Highway Administration and 

15 State departments of transportation: California, Connecticut, Iowa, Kansas, 

Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, South Carolina, 

Texas, Utah, Washington, and Wisconsin. If funded in the transportation reauthorization bill, Phase II will field-test the concepts developed, so that by the time implementation is considered, the new approach will be ready to implement by State 

legislatures and Congress. It is vital that it be fully tested because nationally the 

amount of revenue generated by road user charges is substantial-the motor fuel tax 

alone generates upwards of $50 billion annually. 

PROBLEMS WITH CURRENT METHODS FOR CHARGING ROAD USERS

At both the State and Federal level in the United States, the primary method for 

charging road users is the motor fuel tax. In many ways this tax has served quite 

115

well. Road users are charged roughly on the basis of the amount of travel on the 

public road system. As such, motor fuel taxes have the desirable attribute of being 

a ‘‘pay-as-you-go’’ form of user charge. There are, however, several major shortcomings with motor fuel taxes including: • first and foremost, an inability to generate the necessary revenue to provide 

quality transportation services in future years as hydrogen fuel cell vehicles and 

those with other new propulsion systems become more commonplace; • high evasion, perhaps up to 10 percent for diesel fuel under some circumstances; • increased fuel efficiency meaning lower receipts per mile traveled; • no relationship to the type or cost of the facility being used or the level of service provided; and • a weak relationship to the relative costs of particular trips such that some vehicle operators pay user charges that exceed the costs they impose, while others pay 

substantially less than their costs. 

From the standpoint of public policy, motor fuel taxes are not entirely satisfactory. 

Vehicle operators are not given price signals to make them aware of the costs a particular trip may imposes on society. With motor fuel taxes, it is not possible for government agencies to provide incentives to vehicle operators to change the nature of 

their road use, such as traveling on higher-standard roads or during off-peak hours. 

The move away from State and Federal motor fuel taxes must be accomplished 

with great care. Combining fuel tax receipts at both levels of government, this tax 

accounts for almost two-thirds of all road user charges. In short, a very large 

amount of road financing capability is at stake. 

STUDY OBJECTIVES

The purpose of Phase I of this research has been to design a system for charging 

road users that embodies as many attributes of an ideal user charge system as possible. Among the key attributes of an ideal system are that it enables: 

• A low cost of collection for both agency and user. 

• A stable revenue stream. 

• An ability to assess higher user charges for users who impose higher costs 

(e.g., contributions to congestion delays by autos and road damage by heavy vehicles). 

• A low evasion rate. 

• Incentives for users to travel on appropriate roads and to spread their trips 

across time periods. 

• Any form of vehicle propulsion to be accommodated. 

The approach to charging road users must not be burdensome, and it must be 

tamperproof, highly reliable, and a useful tool for achieving a variety of policy objectives. Of paramount importance, it certainly must not diminish the privacy of road 

users. 

Fortunately, newly emerging ITS technology makes it possible to design an approach to charging road users that avoids the problems and shortcomings of current 

mechanisms and that embodies the desirable attributes listed above. 

To progress closer to an ideal system of road user charges, our research is leading 

to a new approach that is practical and cost-effective. The new approach will enable 

a real-time assessment of road user charges that is based on mileage accrual and, 

in the case of heavy vehicles, also on actual vehicle operating weights and configuration, as well as the type of road being traveled. 

SKETCH OF THE NEW APPROACH

Key to the new approach is a simple on-board computer. The computer stores a 

record of actual road use charges. Periodically, this record is uploaded and transmitted to a data processing center; we refer to it as the collection center. The center 

bills a vehicle owner and reimburses the States, counties, and cities operating the 

roads on which the vehicle has traveled. The on-board system is simple, secure, and 

capable of protecting the user’s privacy. Importantly, the on-board system enables 

a variety of user charge conventions. In its simplest form, this approach can be used 

to assess a vehicle-miles-traveled (VMT) tax. With a VMT tax, the computer would 

calculate road mileage actually traversed; it compares this mileage with that obtained through an odometer feed. It then applies appropriate user charge rates to 

the mileage traveled within each jurisdiction (typically each State). Only data on 

user charges due are stored in the on-board computer (i.e., where travel has occurred is not stored). Periodically, the vehicle owner uploads these stored data to 

a collection center. The collection center operates much like a credit card billing center. 

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Charging Autos 

Inputs to the computer can be quite simple for autos, involving only a global positioning system (GPS) receiver, a geographic information systems (GIS) data file, and 

the vehicle’s odometer (for back-up data on distance traveled). The GIS file contains 

data polygons that define boundaries of the respective States. A receiver on-board 

the auto uses GPS signals to determine the vehicle’s position. The computer reconciles this position with the stored data polygons to determine the State in which 

travel has occurred; the miles traveled within that data polygon are used to compute 

user charges, which in turn are stored. When a vehicle crosses into another State, 

it enters a different data polygon, and travel within that polygon is used to compute 

user charges. Of course, sub-State polygons, such as those defining a metropolitan 

area, also are feasible. The GIS file that defines polygons is stored in the on-board 

computer and is readily updateable. Periodically, the collection center transmits updates of the GIS file to the vehicle using a smart card as a ‘‘messenger.’’ A smart 

card is a small credit card-sized plastic device that contains an internal embedded 

computer chip in the form of a microprocessor and/or a memory module. This technology was developed in France more than 20 years ago. Smart cards are very durable and should serve a typical user for the life of the vehicle. If the smart card is 

lost or destroyed, it can easily be replaced at a small cost to the user (a typical 

smart card costs less than $5). 

Communication via a smart card is done using a reader that closely resembles the 

credit card readers found in nearly all businesses. 

Normally, the smart card occupies a slot in the vehicle’s dash panel. The on-board 

computer continuously updates the smart card regarding total user charges owed to 

each State or other jurisdiction that is defined by a polygon. Data transferred to the 

smart card, then, are in units of dollars, the on-board computer having (1) measured 

the distance traveled within each polygon, (2) applied the appropriate per-mile user 

charge as established by the applicable jurisdiction, and (3) calculated the user 

charges owed to each jurisdiction. Thus, the vehicle operator can remove the smart 

card at any time and insert into a reader to transmit the charges due to the collection center. 

Why would a vehicle owner want to upload billing data very often? A simple display on the instrument panel during vehicle startup displays the current user 

charges stored in the on-board computer. Each jurisdiction can choose to levy an interest charge for road use that occurred more than, say, 30 or 45 days in the past. 

The instrument panel display can show both current user charges and interest accrued. As the interest charges mount, the display will serve to encourage the person 

to upload the billing data. Failing to upload data at all may result in a requirement 

to pay all user charges in arrears before receiving the next year’s vehicle registration. 

During the data uploading process, the smart card authenticates the user and 

then anonymously uploads the road use information. When the collection center 

identifies the user, it checks for fraudulent behavior or malfunctions. If there is a 

problem, the smart card is notified to prompt the user to go to a service center, and 

the system flags that particular vehicle. During this communication, the collection 

center updates the vehicle’s rate schedule through the smart card, if the stored 

schedule is not current. The center also provides a one-time encryption key to the 

smart card to facilitate anonymously uploading how much of the user charge arose 

from travel in each jurisdiction. Once the collection center receives the information 

on how much of the mileage occurred in which jurisdictions, the center correctly apportions the funds to the appropriate jurisdictions in which travel has occurred. 

We stress that the apportionment data would be anonymous. It is not necessary 

to know which vehicle generated a particular sum of user charges for each jurisdiction; what is necessary is the amount to be apportioned. In every case, the total 

amount for all jurisdictions taken together equals the single value uploaded in the 

initial contact made by the vehicle via the smart card. Thus, all of the necessary 

data are transmitted, but the only figure that can be tied to a particular vehicle 

is a single dollar amount for total user charges and interest, if applicable, due. This 

approach maximizes user privacy. 

User acceptance of the new approach to assessing user charges could be increased 

if other benefits result. For example, navigation displays, now a costly option on luxury autos, could become standard equipment or a low-cost option. Nearly all of the 

components needed for such displays would be on-board the auto; adding them in 

a mass-production manner would be simple. Note, too, that looking a few years into 

the future, regardless of how user charges are assessed, traveler information displays are likely to become commonplace (their costs already are beginning to fall). 

In that case, adding the capacity to store road use information would be easy and 

inexpensive. 

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Another user benefit of the GPS/GIS system would be emergency location notification. The Advanced Collision Notification System, which is beginning to receive national attention, uses cellular transmissions to relay a vehicle’s exact location to the 

appropriate service provider in the event of a crash, health problem, or mechanical 

breakdown. The protection this sort of system offers motorists is likely to be valuable to many people, but it would be especially beneficial to elderly drivers and 

those who travel in remote areas or unsafe parts of cities. It should be stressed, 

however, that it is not the GPS system that transmits any form of location data. 

GPS satellites only send radio waves that the vehicle’s GPS receiver uses to calculate its location. GPS satellites are unable to receive any form of information from 

a vehicle. 

Charging Heavy Vehicles 

In the case of large trucks and other heavy vehicles, the on-board computer system could be very simple, enabling only a per-mile user charge to be levied, or it 

may be slightly more complex. Like autos, heavy vehicles will have a GPS receiver 

and stored GIS information on data polygons. Because privacy is much less of an 

issue with commercial vehicles, the polygon data could be supplemented with several levels of road classes. In this way, user charges for road use by heavy vehicles 

can be varied according to the standard of road traveled. For example, a State may 

choose to levy a lower per-mile charge for travel by heavy vehicles on interstate 

highways and other facilities that are capable of withstanding high axle loads without being damaged. The road user charges uploaded to the collection center can easily be made to reflect several different per-mile rates that vary with the standard 

of road used. Likewise, combination trucks with additional axles could be assessed 

lower per-mile user charges because they damage roads less. Optionally, an onboard weight indicator could be included, which would be activated each time the 

cargo doors are closed (in the case of a freight semi-trailer truck). The weight indicator, which is a simple strain gauge attached to the trailer’s suspension, transmits 

information to the on-board computer, indicating the current weight. A code informs 

the computer about the configuration of the trailer, especially the number of axles. 

The computer then takes into account vehicle weight and configuration, along with 

type of road being traveled, in calculating the road use charges that are due. 

It is noteworthy that the new approach eliminates the pitfalls of such methods 

as weight-distance taxation: the uniform per-mile rate (regardless of current weight) 

of that approach is replaced with a much more flexible approach, and evasion will 

cease to be a problem. Of course, individual States can determine the extent to 

which they levy user charges based on the type of road being traveled or on vehicle 

weight and configuration. 

With the new approach, motor carriers will benefit by the elimination of tollbooths, and interstate permitting can be automated. Also, opportunities that do not 

exist today become available; for example, by adding axles and traveling on higherstandard roads, operators could minimize their user charges. 

Related Advantages 

At least two related advantages would accrue to State departments of transportation in addition to the inherent benefits of the new approach. One advantage is 

that the expensive weigh-in-motion (WIM) scales used by many States can be eliminated. Another advantage is that toll facilities on roads and bridges no longer will 

be necessary. With segment-specific user charges, adjustments can be made for 

what are now toll roads and bridges. Privately owned highways, similar to SR 91 

in California, will become highly feasible. 

PROGRESS TO DATE-PHASE I

Phase I of the effort to design and test the new approach to assessing road user 

charges was recently completed. In Phase I, we accomplished the following: 

• Developed the basic concept of using intelligent vehicle technology to assess 

road user charges. 

• Refined the concept to absolutely maximize road user privacy. 

• Incorporated features to ensure system security, robustness, and user convenience. 

• Ensured that for the States, road use revenue will be stable, evasion will be 

extremely difficult, and fairness among both road users and taxing jurisdictions will 

be maximized. 

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Research Process Followed 

Dr. David Forkenbrock, principal investigator of this research, formed a research 

team comprised of several groups, each of which has had specific responsibilities. 

The groups studied: • Legal aspects of privacy as it relates to road use. • The most promising computer and electrical engineering approaches to collecting, storing, and transmitting road use data. • Economic and policy needs, desirable attributes, and practical considerations 

in assessing road user charges. • Technological capabilities existent today and likely to become available in the 

coming few years related to GPS, GIS files, on-board computers, data transmission, 

and other key components. 

Work completed by the respective groups has been published in the form of a report that is accessible to a layperson. The research leading to publication of this report was reviewed in a series of meetings with representatives of the 15 participating States and the Federal Highway Administration. Throughout the 2-year 

Phase I effort, one-to 2-day meetings have been held every 6 months. The States 

and FHWA have been kept fully apprised of research progress, emerging issues, and 

intended research directions. Attendance in these meetings by the States and 

FHWA has been excellent, nearly 100 percent. 

Where the Research Effort Currently Stands 

Phase I has led to the conclusion by the research team and the funding agencies 

that the new approach as described above is conceptually sound and operationally 

practical. It is highly flexible, so that each State can embody a variety of public policies regarding road user charges. The new approach will enable fair, stable user 

charges to be levied, even when hydrogen fuel cell vehicles and other vehicles that 

burn less or even no fossil fuels become commonplace, as they surely will. Many 

other limitations of current motor fuel taxes can be eliminated with the new approach, and essentially all of the attributes of an ideal user charge system listed 

at the beginning of this discussion paper can be incorporated. 

Even though the concept and features of the new approach are technologically and 

practically feasible, a great deal of testing and refinement is needed before it is 

ready for national implementation. We need to study how best to integrate the onboard equipment with emerging vehicle technologies, the best way to operate the 

collection center, and how the States would prefer to structure their road user 

charges, given the advances possible with the new approach. Choices need to be 

made regarding the sorts of data storage and uploading features to adopt. The bottom line is that before a gradual replacement of the motor fuel tax can be implemented, all parties must be very certain that the new approach works very well and 

does what policymakers want it to. Extensive testing is the only way to be sure that 

the on-board equipment is reliable under widely varied weather and operating conditions, tamperproof, and convenient for diverse groups of drivers whose needs are 

quite different. 

THE NEXT STEP-PHASE II

Phase II is needed to fully test and demonstrate the basic concepts just discussed, 

to refine the working features of the new approach to assessing road user charges, 

and to develop working specifications for the applicable components. 

Context for the Research 

This is an opportune time to develop the new approach to assessing road user 

charges. Auto manufacturers are making rapid advances in the electrical systems 

of their products. Soon, many of the systems needed to deploy the new approach will 

become standard equipment on most if not all autos. It is especially significant that 

several auto manufacturers intend to incorporate on-board computers to carry out 

various functions that now rely on mechanical switches, gauges, and linkages. These 

on-board computers will afford much greater user flexibility, and they will include 

such features as GPS receivers to facilitate emergency location and navigation, as 

well as electronic odometers. Such odometers are an important back-up system in 

the event that the GPS receiver should fail or be denied signals. In the same vein, 

major trucking companies are making widespread use of GPS to pinpoint the location of freight shipments. 

This is a propitious time to begin collaborating with motor vehicle manufacturers 

as they dramatically change their on-board electrical systems and include advanced 

new features. Specifically, we propose to work closely with these manufacturers to 

find the best means for incorporating the components needed to support the new 

approach. Early cost estimates are highly favorable in that the additional expense 

119

of adding the data storage and uploading capabilities will not be at all large, less 

than $100. Features like electronic odometers that cannot be tampered with are 

forthcoming, as vehicle manufacturers protect the limits of their mileage-based 

warrantees. 

Phase II Work Plan 

Before State legislatures can pass the necessary enabling legislation, a comprehensive demonstration program must be carried out. As mentioned earlier, Federal and State motor fuel taxes generate over $50 billion annually. One must be 

very sure that the replacement approach is completely sound before implementing 

it. Following are key components of the Phase II work plan: 

• Systematically test the security and reliability of on-board computers and data 

uploading methods. 

• Evaluate the acceptability of the approach by diverse user groups. These user 

groups include both operators of autos and various types of trucks. 

• Carry out a well-designed operational test program. Five geographic areas 

across the United States will be selected as test sites, and several hundred autos 

and trucks will be outfitted with the required on-board equipment. Prototype 

uploading facilities will be established, and a prototype collection center will be developed cooperatively with a selected private firm. 

• Work with several national interstate trucking firms to test the feasibility of 

assessing a mileage-based user charge system across numerous States. A key objective will be to make the new approach integrate well with trucking firm needs. Certainly, the greatest cost of Phase II will be outfitting participating autos and trucks 

with the necessary equipment to carry out a meaningful test of system robustness, 

security, and user convenience. Also significant will be the expenses related to establishing a prototype collection center. The center probably can be established cooperatively with a credit card processing company because the necessary capabilities 

are very similar. 

Funding Requested in the Transportation Reauthorization Bill 

As we have discussed, Phase II of this multi-year research program is critically 

important. It will enable the technology and implementation strategies to be fully 

refined before State legislatures debate a major change in transportation financing. 

Technological advances in cleaner, less fossil-fuel consuming vehicle propulsion systems mean change is inevitable; the issue is how best to charge vehicles with a 

range of propulsion systems for travel on public roads and highways. 

Our research team estimates that funding Phase II of this university-based research program at the level of $3 million per year for the duration of the forthcoming transportation reauthorization bill will enable a full operational test of this 

promising approach. We stress that most of these funds will be used to outfit private 

vehicles for the operational test. The remainder will be used to design the test, work 

with equipment manufacturers on detailed specifications for the on-board gear, recruit participants, and analyze the results. 

The specific request is for an authorization of $3 million per year to the Iowa Department of Transportation to commission a demonstration of the intelligent transportation system (ITS) approach to assessing road user charges based on on-board 

computerized systems. The Iowa DOT will in turn commission the University of 

Iowa Public Policy Center to carry out the demonstration. 

The Research Team 

Leading Phase I and the proposed Phase II is the Public Policy Center at the University of Iowa. The Center is an interdisciplinary research unit in the Office of the 

Vice President for Research. Director of the Center and Principal Investigator for 

this research is Dr. David Forkenbrock, who originally conceived the new approach. 

Dr. Forkenbrock has an international reputation as a scholar in the area of transportation policy and finance. He is assisted by a team of engineers, policy analysts, 

and social scientists from various universities and firms, who collectively are 

uniquely qualified to carry out this national study. New members with technical 

evaluation skills will be added to the research, and more active communications 

with vehicle designers within the auto and truck manufacturing industry will be established. 

We foresee a continuing role for the 15 State departments of transportation that 

have worked closely with the research team during Phase I of this project. The representatives of these DOTs are knowledgeable about the new approach being developed, and they have offered many useful suggestions as our work has progressed. 

Together with the equally valuable representatives of FHWA, we propose to continue our association with them. 

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Importance of Phase II Research 

Evidence of the importance of this issue may be found in the recent efforts by several European nations to implement some form of distance-based user charges. For 

example, the Netherlands’ parliament has passed legislation calling for this type of 

user charges to be implemented within the next several years. The United Kingdom 

and Germany are evaluating similar proposals. The study team has been actively 

collaborating with senior staff in these countries. 

The United States’ energy security and environmental quality both will benefit by 

the exciting new vehicle propulsion technologies soon to be made operational. The 

need is to ensure that these vehicles can be charged for road use in a fair, costeffective, and convenient way that protects the privacy of road users. At the same 

time, the inherent problems with the motor fuel tax can be eliminated. 

Contact Information 

For further information, please contact: David J. Forkenbrock Director and Professor Public Policy Center 227 South Quad University of Iowa Iowa City, IA 52242–

1192 Phone: (319) 335–6800; Fax: (319) 335–6801 Email: davidforkenbrock@uiowa.edu URL: http://ppc.uiowa.edu October 2002

STATEMENT OF RIC WILLIAMSON, MEMBER, TEXAS TRANSPORTATION COMMISSION

INTRODUCTION

My name is Ric Williamson, a member of the Texas Transportation Commission, 

and I am pleased to provide this testimony on behalf of the commission and the 

Texas Department of Transportation (TxDOT) regarding transportation financing 

innovations in Texas. This testimony will provide information on Texas’ current use 

of available State and Federal transportation financing mechanisms and our plans 

to implement new tools. I will also suggest changes to the existing Federal transportation financing tools that will help Texas take better advantage of them in our continuing effort to meet our State’s tremendous mobility and access needs as effectively and efficiently as possible. 

TEXAS’ EXPERIENCE WITH EXISTING FEDERAL FINANCE TOOLS

The Federal Government has traditionally financed highways through 80 percent 

reimbursement grants but the last three major pieces of Federal transportation legislation—ISTEA, the NHS Act of 1995, and TEA-21—have produced alternative 

forms of ‘‘non-grant’’ assistance. Over that same timeframe (since the early 1990’s), 

Texas has slowly accrued complementary authority on the State level to enable us 

to begin to use these new Federal financing tools for transportation. Positioning 

TxDOT to utilize innovative financing where it is determined to be appropriate 

serves the users of the State’s transportation system by accelerating construction of 

select projects of significance, delivering customer benefits ahead of schedule, and 

augmenting stretched revenues. While this section describes our experience to date, 

it also represents only the beginnings of a new era in transportation financing for 

Texas. 

State Infrastructure Banks 

Background. In November 1995, the President of the United States signed Public 

Law 104–59, known as the 1995 National Highway System Designation Act (NHS 

Act). Section 350 of that law allowed the United States Secretary of Transportation 

to designate a maximum of ten States as pilot projects for the State Infrastructure 

Bank program. Texas was selected as one of the initial pilot States for an NHS Act 

SIB. About 30 States eventually elected to participate. 

A State Infrastructure Bank, or a SIB, operates chiefly as a revolving loan fund 

and may provide a wide range of financial assistance in addition to loans. The purpose of the pilot program is to attract new funding into transportation, to encourage 

innovative approaches to transportation problems, and to help build needed transportation infrastructure. The NHS Act provides that each designated State may 

transfer up to 10 percent of certain Federal dollars, match those funds with State 

funds, and deposit them into a State Infrastructure Bank. The greatest benefit of 

this program may well be the creation of a self-sustaining, growing, revolving loan 

fund. 

In 1997, the 75th Texas Legislature passed Senate Bill 370, which created the 

State Infrastructure Bank to be administered by the Texas Transportation Commission, the governing body of the Texas Department of Transportation. In September 

1997, the Texas Transportation Commission approved the administrative rules that 

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govern the State Infrastructure Bank. The SIB allows cities and counties to access 

capital at lower-than-market rates. Since its creation, interest in the SIB program 

has been strong. TxDOT has approved 41 loans totaling more than $252 million to 

cities, counties, and toll authorities around the State. The loans are helping fund 

more than $1 billion in transportation projects in Texas. 

TEA-21 Changes. Section 1511 of the Transportation Equity Act for the 21st Century (TEA-21) created a new State Infrastructure Bank (SIB) Pilot Program allowing the establishment of TEA-21 SIBs in only four States: California, Florida, Missouri, and Rhode Island. California, Florida, and Missouri also had NHS Act SIBs. 

Texas was not included. Pre-existing SIBs created pursuant to Section 350 of the 

NHS Designation Act of 1995 (NHS Act SIBs) continue to exist, but Federal funds 

authorized for fiscal year 1998 or later may not be used to capitalize them. 

Through language in the fiscal year 2002 Department of Defense Appropriations 

Act, Texas Senator Kay Bailey Hutchison and Texas Congressmen Tom DeLay and 

Chet Edwards were instrumental in adding Texas to the list of TEA-21 SIB Pilot 

Program States. With this change, Texas may now use up to 10 percent of its NHS, 

STP, IM, Bridge, Seat Belt Incentive Grant, and Minimum Guarantee funds to capitalize its SIB. Without Federal funds, future loan applications—and any large single loan—would likely have little chance of being considered. The SIB has been our 

single most important financial tool in accelerating the delivery of projects. The ability to capitalize the SIB with future Federal funds will keep it an effective program 

for years to come. 

Texas supports the continuation of the TEA-21 SIB authority Texas now enjoys. 

In addition, we recommend that the reauthorization legislation shorten the time 

limits on the ability to draw down the Federal funds to capitalize our SIB. Finally, 

we encourage you to clarify that repayments to the SIB are cleansed of Federal requirements to ensure that future lendees (mainly cities and counties in Texas) are 

able to access the funds without Federal restrictions. Cities and counties, who are 

currently not subject to Federal requirements on their own projects, may not have 

access to SIB funds if they must follow Federal rules to use those funds. 

The Transportation Infrastructure Finance and Innovation Act of 1998

According to FHWA, the Transportation Infrastructure Finance and Innovation 

Act of 1998 (TIFIA, sections 1501–1504 of TEA-21) is intended to provide Federal 

credit assistance to major transportation investments of critical national importance, such as intermodal facilities, border crossing infrastructure, expansion of 

multi-State highway trade corridors, and other investments with regional and national benefits. The TIFIA credit program is designed to fill market gaps and leverage substantial private and other non-Federal co-investment by providing supplemental and subordinate capital. Through three types of financial assistance products, TIFIA offers credit assistance of up to 33 percent of total project costs. The 

three types of products, designed to address projects’ varying requirements throughout their life cycles, include: 

• Secured loans, direct Federal loans to project sponsors offering flexible repayment terms and providing combined construction and permanent financing of capital 

costs; 

• Loan guarantees, providing full-faith-and-credit guarantees by the Federal 

Government to institutional investors such as pension funds which make loans for 

projects; and 

• Standby lines of credit as secondary sources of funding in the form of contingent Federal loans that may be drawn upon to supplement project revenues, if needed, during the first 10 years of project operations. 

The kinds of projects specifically listed as eligible for TIFIA support include international bridges and tunnels, inter-city passenger bus and rail facilities and vehicles 

(including Amtrak and magnetic levitation systems), and publicly owned intermodal 

freight transfer facilities (except seaports or airports) on or adjacent to the National 

Highway System. However, any type of highway, intermodal, or transit project eligible for Federal assistance through surface transportation programs under Title 23 

or chapter 53 of Title 49 U.S.C. is also eligible for TIFIA support, assuming it meets 

program criteria. Those criteria include: (a) project cost of at least $100 million or 

50 percent of the State’s annual apportionment of Federal-aid funds, whichever is 

less, except that for intelligent transportation system projects, the minimum cost is 

$30M; (b) project support in whole or in part from user charges or other non-Federal 

dedicated funding sources; and (c) inclusion in the State’s transportation plan and 

the statewide Transportation Improvement Program (STIP). 

Qualified projects meeting those criteria are evaluated by USDOT and selected 

based on the extent to which they generate economic benefits, leverage private capital, promote innovative technologies, and meet other program objectives. Each 

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project must receive an investment grade rating on its senior debt obligations before 

its Federal credit assistance may be fully funded. 

History of the Central Texas Turnpike Project TIFIA Loan 

The $916.76 million TIFIA loan for the Central Texas Turnpike Project is the 

largest such loan in the history of the program. The TIFIA loan funds will help fund 

the $3.6 billion first phase of the Central Texas Turnpike Project, which is a toll 

highway facility through central Texas. 

The commission will use the loan proceeds to partly finance design and construction of the first phase of the Central Texas Turnpike Project, which is composed of 

three distinct elements: Loop 1, SH 45 North, and the northern segment of SH 130. 

Loop 1, a 3.5-mile element, will serve as a major north-south route in the Austin 

vicinity. SH 45 North, about 13.2 miles in length, will serve as a connector between 

the cities of Austin, Round Rock, and Pflugerville. SH 130, a 49-mile element, will 

be an eastern bypass for Austin, Texas, and is parallel to and east of I–35, one of 

the more congested urban parts of the interstate. 

The Texas Turnpike Authority Division of TxDOT is managing the project. 

TxDOT has retained a general consultant engineer and two engineering firms to assist with management of the construction project. The Loop 1 extension and SH 45 

will be constructed using the traditional design-bid-build process, and SH 130 is 

under an exclusive development agreement with Lone Star Infrastructure. The first 

phase of the turnpike project will be open in segments and the final phase will open 

to traffic in December 2007. 

The entire 65-mile project is expected to be complete and open to traffic by December 2007. 

• SH 130: From IH 35 south to US 71—September 2007

• SH 130: From SH 71 south to US 183—December 2007

• SH 130: From US 183 south to IH 10: to be determined based on future project 

financing 

• SH 45: From Ridgeline East to three-quarters of a mile west of Loop 1 interchange—December 2007

• SH 45: From three-quarters of a mile west of Loop 1 interchange to SH 130—

September 2007

• Loop 1: From Parmer Lane to one quarter mile south of SH 45 interchange: 

September 2007

Central Texas needs relief from traffic congestion as soon as possible and tolls are 

the fastest way to accomplish it. By selling bonds and using tolls to pay off the 

bonds, these roads will be completed and open to traffic years ahead of schedule 

compared to using traditional transportation funds. In addition, toll roads help 

stretch limited transportation dollars. In this case, the State is getting a $2.9 billion 

project for only an initial $700 million equity injection. 

The four elements of the funding package include local contributions, State highway dollars, a Federal loan and the sale of bonds, which will be paid for through 

the collection of tolls. In addition to the TIFIA loan, the commission has issued $1.2 

billion in revenue bonds and $900 million in bond anticipation notes. The remainder 

of the project will be financed through contributions from TxDOT and contributions 

of right-of-way by the surrounding jurisdictions. 

The TIFIA loan is an example of a Federal program helping us bring these needed 

highway projects on-line. We could not have put this financial package together 

without the TIFIA loan. To maximize the use of the loan—and save taxpayers approximately $75 million—we are using the TIFIA loan as a possible backstop to sell 

Bond Anticipation Notes (BANs) to finance construction and take advantage of current low short-term interest rates. The interest rate we get on the BANs is lower 

than the TIFIA loan. The full TIFIA loan may be used later, but only if interest 

rates make it a good deal for taxpayers. 

The 65 miles of new toll roads in central Texas will cost $2.9 billion. This covers 

right of way acquisition, utility adjustments, design, and construction for SH 45 

North, Loop 1 and the first 49 (most needed) miles of SH 130. With the addition 

of required reserve funds, interest, insurance and issuance costs, the total estimated 

costs are $3.6 billion. 

Conservatively, it is estimated it would take at least 20 years to build these roads 

using traditional funding sources. By selling bonds, these roadways will be completed and open to traffic in 5 years. 

Advance Construction/Partial Conversion of Advance Construction Advance construction (AC) and partial conversion of advance construction (PCAC) are cash-flow 

management tools that allow States to begin projects with their own funds and later 

convert these projects to Federal assistance. 

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AC allows a State to construct Federal-aid projects in advance of the apportionment and/or obligation limitation. Under normal circumstances, States can ‘‘convert’’

advance-constructed projects to Federal-aid at any time sufficient Federal-aid apportionments and obligation authority are available. States may convert and obligate 

the entire eligible amount, based on funding availability or, using PCAC may obligate funds in stages. 

PCAC allows States to obligate only the Federal funds necessary for the amount 

of expenditures anticipated in a year. This process thereby eliminates a major single 

year ‘‘draw down’’ of Federal funds in one fiscal year. PCAC may be used in conjunction with GARVEE bonds when Federal funds are obligated for debt service payments over a period of time. 

Using this technique affords the availability of Federal-aid funds to support a 

greater number of projects. The partial conversion technique can enable completion 

of a project earlier than under the conventional approach, avoiding construction cost 

inflation, and bringing the benefits of a completed facility to the public at an earlier 

date. To date, TxDOT has utilized the PCAC financing tool on approximately 170 

projects. 

Tapered Match 

Tapered match enables the project sponsor to vary the non-Federal share of a 

Federal-aid project during development and construction so long as the total Federal 

contribution toward the project does not exceed the Federal-aid limit. 

Under the tapered match approach, the non-Federal matching ratio is imposed on 

projects rather than individual payments. Therefore, Federal reimbursements of 

State expenditures can be as high as 100 percent in the early phases of a project 

provided that, by the time the project is complete, the overall Federal contribution 

does not exceed the Federal-aid limit established when the project was authorized. 

To ensure effective management of Federal funds, FHWA limits the use of tapered 

match to situations that result in expediting project completion, reducing project 

costs, or leveraging additional non-Federal funds. TxDOT has used tapered match 

to expedite project completion on approximately 880 projects. 

Tapered match may be most useful in cases where the project sponsor of a Federal-aid project lacks sufficient funds to match Federal grants at the start of the 

project, but expects to accumulate the match in time for project completion. Tapering may also be beneficial when a project sponsor needs to overcome a near-term 

gap in State matching funds, thereby avoiding delays in getting the project underway. Tapering also allows a sponsor to advance a project before fully securing capital market financing. 

This technique may be used to facilitate a project when a new local transportation 

tax has been enacted, but revenue collections have yet to accumulate sufficient 

matching funds. Using tapered match, the project can move forward immediately 

with 100 percent Federal funds, allowing time for the tax revenues to accumulate. 

The locally generated revenues would be used to fund the final 20 percent share of 

project costs. 

Toll Credits 

States may apply toll revenues used for capital expenditures to build or improve 

public highway facilities as a credit toward the non-Federal share of certain transportation projects. Toll credits are earned when a State, a toll authority, or a private 

entity funds a capital highway investment with toll revenues from existing facilities. 

The amount of toll revenues spent on non-Federal highway capital improvement 

projects earns the State an equivalent dollar amount of credits to apply to the nonFederal share of a Federal-aid project. To utilize this tool, the State must certify 

that its toll facilities are properly maintained and must pass an annual maintenance of effort test to earn credits. By using toll credits to substitute for the required non-Federal share on a Federal-aid project, Federal funding can effectively 

be increased to 100 percent. 

Toll credits provide States with more flexibility in financing projects. For example, 

by using toll credits, 1) Federal-aid projects can be advanced when matching funds 

are not available, 2) State and local funds normally required for matching may then 

be directed to other transportation projects, or 3) project administration may be simplified when a single funding source is used. States wishing to take advantage of 

the toll credit provision must apply toll revenues to capital improvements and meet 

the maintenance of effort test that may result in an increased investment in transportation infrastructure. At this time, TxDOT has utilized toll credits on 34 construction projects. Toll credits have also been used on certain transit projects. 

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Flexible Match 

Flexible match allows a wide variety of public and private contributions to be 

counted toward the non-Federal match of Federal-aid projects. The NHS Act and 

TEA-21 introduced new flexibility to the matching requirements for the Federal-aid 

program by allowing certain public donations of cash, land, materials, and services 

to satisfy the non-Federal matching requirement. These matching options include: • The value of private and certain State and local contributions, including publicly owned property; • Funds from other Federal agencies may count toward the non-Federal share 

of recreational trails and transportation enhancement projects; • Funds from the Federal Lands Highway Program may be applied as non-Federal match for projects within or providing access to Federal or Indian lands; and • Funds from Federal land management agencies may be used as the match for 

most Federal-aid highway projects. 

Also States may seek program-wide approval for Surface Transportation Program 

(STP) projects. The matching requirement would then apply to the program instead 

of individual projects. 

Flexible match provisions increase a State’s ability to fund its transportation programs by: • Accelerating certain projects that receive donated resources; • Allowing States to reallocate funds that otherwise would have been used to 

meet Federal-aid matching requirements; and • Promoting public-private partnerships by providing incentives to seek private 

donations. 

To date, TxDOT has been unable to use this financing mechanism. The main reasons are that it is limited to certain programs within the Federal-aid highway program and that the program implementation requirements are cumbersome. While 

we are not currently using this financing option, we believe that the flexible match 

concept should be continued and indeed expanded in the TEA-21 reauthorization. 

We recommend that Congress expand the flexible match provision for use, at the 

State’s discretion, in all of the existing Federal-aid highway programs. 

Section 129 Loans 

Section 129 loans allow States to use regular Federal-aid highway apportionments 

to fund loans to projects with dedicated revenue streams. 

A State may directly lend apportioned Federal-aid highway funds to toll and nontoll projects. A recipient of a Section 129 loan can be a public or private entity and 

is selected according to each State’s specific laws and process. A dedicated repayment source must be identified and a repayment pledge secured. 

The Federal-aid loan may be for any amount, up to the maximum Federal share 

of 80 percent of the total eligible project costs. A loan can be made for any phase 

of a project, including engineering and right-of-way acquisition, but cannot include 

costs prior to loan authorization. A State can obtain immediate reimbursement for 

the loaned funds up to the Federal share of the project cost. 

Loans must be repaid to the State, beginning 5 years after construction is completed and the project is open to traffic. Repayment must be completed within 30 

years from the date Federal funds were authorized for the loan. States have the 

flexibility to negotiate interest rates and other terms of Section 129 loans. The State 

is required to spend the repayment funds for a project eligible under Title 23. 

States can use Section 129 loans to assist public-private partnerships, by enhancing startup financing for toll roads and other privately sponsored projects. Because 

loan repayments can be delayed until 5 years after project completion, this mechanism provides flexibility during the ramp-up period of a new toll facility. 

Loans can also play an important role in improving the financial feasibility of a 

project by reducing the amount of debt that must be issued in the capital markets. 

In addition, if the Section 129 loan repayment is subordinate to debt service payments on revenue bonds, the senior bonds may be able to secure higher ratings and 

better investor acceptance. 

If a project meets the test for eligibility, a loan can be made at any time. Federalaid funds for loans may be authorized in increments through advance construction 

procedures, and are obligated in conjunction with each incremental authorization. 

The State is considered to have incurred a cost at the time the loan, or any portion 

of it, is made. Federal funds will be made available to the State at the time the 

loan is made. 

The President George Bush Turnpike Project in Texas exemplifies how a Section 

129 loan can play an essential role in the total financing package. This project links 

four freeways and the Dallas North Tollway to form the northern half of a circumferential route around the city of Dallas. Primary funding for this $940 million 

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project included a low interest, long-term Section 129 loan and revenue bonds. This 

$135 million loan was critical in ensuring the affordability of the project’s senior 

bonds. Completion of this important beltway extension will be accomplished at least 

a decade sooner than would have been possible under traditional pay-as-you-go-financing. 

Summary of Texas Project Financing Mechanisms 

Texas has only recently begun to use the variety of Federal project financing 

mechanisms made available in ISTEA, the NHS Designation Act, and TEA-21. However, we have found their use to be beneficial and will continue their use in the future. Generally, as we’ve applied these financing options to our projects, we’ve found 

that they are most beneficial for projects that will take longer than 2 years to pay 

out, thereby allowing us to stretch our available funding and maintain a steady letting schedule from year to year. We typically consider using one of these financing 

options on projects over $5 million and sometimes on smaller projects at the end 

of the fiscal year. 

We encourage Congress to continue, expand, and enhance these Federal transportation financing mechanisms for use at the State’s discretion. As we set a new 

course for a 21st century transportation system for Texas, we will continue to consider the use of all financing tools available to us to meet the transportation mobility needs of the State. 

NEW TEXAS FINANCING TOOLS

In the statewide election on November 6, 2001, 68 percent of Texans voted in 

favor of the constitutional amendment known as Proposition 15. The passage of 

Proposition 15 provided TxDOT with three new tools to establish innovative financing for Texas State highways. With these tools TxDOT can begin to improve mobility and safety for all Texans by building more highways faster, thus keeping up 

with the population growth in the State and preparing for the opening of the border 

in June. 

The three financing tools provided to TxDOT with the passage of Proposition 15 

are the creation of the Texas Mobility Fund, the authority for the Texas Transportation Commission to approve the creation of Regional Mobility Authorities by counties, and the authorization for TxDOT to use State highway fund moneys for equity 

in toll roads. 

Texas Mobility Fund 

By voting to create the Texas Mobility Fund, Texas voters approved a funding 

mechanism to supplement the traditional pay-as-you-go method of financing highway construction in the State of Texas. Money in the Texas Mobility Fund must be 

appropriated by the State legislature and cannot include revenue from the gas tax, 

vehicle registrations or other dedicated funds. The legislature can provide revenue 

support to the Mobility Fund without raising taxes by committing general revenue 

to the fund. 

Currently there is no money in the Texas Mobility Fund. Once money has been 

appropriated to the Texas Mobility Fund, however, it can be used to finance road 

construction on the State-maintained highway system, publicly owned toll roads, 

and other public transportation projects. It is estimated that for every $100 million 

placed in the fund, $1 billion in bonding for road projects will be created. The 

issuance of debt to pay for public works projects is well established at the local level. 

The Texas Mobility Fund now allows this method of funding to be used for State 

highway projects, on and off the State system, and allows a combination of both revenue and general obligation bonds. 

In working to meet the States’ transportation needs, the Texas Mobility Fund will 

help the department accomplish two things: 

• Preserve the funds currently used for highway construction under the pay-asyou-go system; and 

• Allow any new funding sources made available to highways to be used for payment of debt service on bonds issued to finance projects. 

Toll Equity 

Toll Equity, the second financing option made possible by the passage of Proposition 15, will make potential toll projects more viable, speeding up congestion relief, 

while stretching limited State transportation funds. Toll Equity allows, for the first 

time, State highway funds to be used on toll roads without requiring repayment of 

the funds. Before the passage of Proposition 15, TxDOT could loan highway funds 

for toll projects but they had to be repaid. The loan increased the initial borrowing 

costs for toll road projects, impacting the overall viability of the project. Having to 

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repay the department from tolls generated from the project often resulted in higher 

tolls and larger up front contributions from TxDOT. 

Toll equity has made future toll projects more attractive to investors because it 

allows the projects to accelerate debt retirement and hasten production of toll revenues. If a community decides to go with a toll equity approach on a project in an 

existing toll authority, the commission must approve the project to be constructed 

by that toll authority. If the community and/or the project are outside an existing 

authority, the commission will consider creating a regional mobility authority, the 

third tool created by the passage of Proposition 15. 

Regional Mobility Authority 

A regional mobility authority (RMA) would be created for the purpose of constructing, maintaining, and operating a turnpike project in a region of the State. 

A RMA will allow local officials to exercise more responsibility, thus encouraging 

local innovation and better responses to the particular needs and desires of the local 

community. In order for a RMA to be created, one or more counties must petition 

the commission for authorization to create a RMA. The petition must contain certain 

information, such as a resolution from the commissioners court of each county and 

a description of how a RMA would improve mobility in that particular region. If 

TxDOT finds that the petition meets all the requirements it will notify the county(ies) and conduct one or more public hearings that conform to the criteria set forth 

in the rules adopted by the commission. 

If and when the commission gives approval, the county that petitioned the authorization of the RMA will create a RMA by resolution of each county to be a part of 

the RMA. Each county resolution must appoint directors consistent with the rules 

adopted by the commission. A board of directors, appointed by the county commissioner’s courts where the proposed turnpike project is, representing political subdivisions, would govern each RMA. The Governor will appoint the presiding officer. 

Each TxDOT district will identify currently programmed projects that, from an 

engineering standpoint, could be developed as tolled facilities. These projects will be 

limited to new location or major capacity expansions. For each project selected with 

local support, any funds released from the State transportation plan through the 

issuance of revenue bonds for toll projects will be replaced by an equal amount of 

project funding in the same district and with the same programming authority as 

the original funds held. 

In most cases, projects selected to be developed as toll projects will be accelerated 

due to the issuance of toll bonds as opposed to waiting for programmed dollars. In 

addition, major projects will be developed as one project instead of being segmented, 

for the same reason. Surplus revenues from an RMA toll project can be used for 

other transportation purposes within the authority, if needed. 

The Trans Texas Corridor 

Currently the department is focusing on how to use the Texas Mobility Fund, the 

toll equity concept, the authority of counties to create RMAs, and the exclusive development agreement concept to implement Governor Rick Perry’s Trans Texas Corridor proposal. 

The Trans Texas Corridor will be a multi-use, statewide transportation corridor 

that will move people and goods safely and efficiently. The Trans Texas Corridor 

will include toll roads, high-speed passenger and freight rail, regional freight and 

commuter rail, and underground transportation for water, petroleum, gas and telecommunications. The Corridor, as envisioned, is a 50-year plan for addressing the 

long-range transportation needs of Texas. 

Governor Perry established the Trans Texas Corridor concept as the vision of the 

future of transportation in Texas. He has directed TxDOT to develop and refine the 

concept and come up with an implementation process. TxDOT has established a preliminary map showing where the Trans Texas Corridor should be developed. These 

corridors were selected based on the existing and forecasted infrastructure needs of 

the State. The current location of the State trunk system and congressional high 

priority corridors were also taken into account when developing the Corridors. In 

terms of a starting point, the Governor has asked the Commission to focus on developing routes that are already part of the States long-range plan. For example, SH 

130 is a new location highway that eventually will run from Seguin to Georgetown 

and parallel to I–35. SH 130 is already a part of TxDOT’s plans, therefore it is logical that SH 130 be a starting point for development of the Corridor. Ultimately, 

it will be the commission that will make the final decision about which projects are 

built and when. 

Building the Trans Texas Corridor will provide Texans with more and better 

transportation options. The Corridor will improve mobility and safety by reducing 

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traffic congestion on current highways. The reduced congestion will have environmental benefits such as a reduction in the volume of air pollution in our urban 

areas. It will provide a fast, safe and reliable rail system, allowing Texans and their 

business to move, if they so choose, by rail instead of road, further reducing congestion and air pollution. The Corridor will move hazardous materials away from urban 

centers, and off heavily traveled highways, providing safer transport of such materials. The State will also benefit from economic development opportunities as a result of a faster, safer, and more comprehensive transportation system. 

TxDOT delivered The Trans Texas Corridor Plan to the Governor this summer. 

The plan outlines the basic design of the system and identified four routes as priority corridor segments. Under the action plan approved by the commission, TxDOT 

has designated its Texas Turnpike Authority Division as the central office to oversee 

the development of the corridor. Although it is a process that could take up to 50 

years, the corridor report’s action plan sets forth a series of first steps to be undertaken over the next year. Estimated total cost of the corridor ranges from $145.2 

billion to $183.5 billion. The report discusses a variety of funding possibilities, although planners generally envision a public-private effort paid for with tolls, bonds, 

and other financing tools. 

The goal, at TxDOT, is to begin construction on the most appropriate segment as 

soon as practical. TxDOT envisions the build-out of the Trans Texas Corridor to 

take approximately 50 years. However, based upon our 85 years of experience in the 

business, TxDOT projects that most of the Corridor could be under construction or 

finished within 25 years and perhaps less. To a great degree, the time required to 

build the Corridor is dependent upon the interested parties and their proposals. 

As mentioned previously, the Trans Texas Corridor will utilize three types of financing tools (the Texas Mobility Fund, RMAs, and toll equity) combined with a 

project delivery mechanism known as exclusive development agreements. The Texas 

Mobility Fund will be used, if properly capitalized, to help build the segments of the 

Corridor that are less toll viable. If the Corridor is attractive enough, the legislature 

may commit a portion of general revenue funds toward the construction. These 

funds would be released to the commission to pay debt service on bonds issued to 

finance the Corridor. 

With regard to RMAs, certain high growth areas of the State are uniquely situated to help themselves and the State through the creation of a RMA. If we use 

the example of SH 130 and Travis, Williamson, and Hays Counties, you can see the 

benefit of RMAs to the Trans Texas Corridor. A RMA in Travis, Williamson, and 

Hays Counties would generate revenue to pay for local transportation goals much 

sooner while allowing the State to spread scarce State revenue over other important 

projects in the area—projects such as the segment of the Corridor east of I–35. In 

addition, a successful RMA could ultimately invest in light rail linked to a regional 

commuter rail that is part of the Trans Texas Corridor. The rules governing a RMA 

are flexible in nature and are intended to foster partnerships between local governments and the State in the development of transportation facilities that provide an 

efficient delivery of the end product. 

Toll Equity, as mentioned before, is the phrase used to depict the amount of State 

Highway Funds that may be used to construct a toll road without the requirement 

that the funds be repaid. The law limits TxDOT’s annual toll equity contributions 

to a percentage of the Federal funds it receives each year. TxDOT will use toll equity funds on those proposals that generate the maximum total funding on the most 

appropriate segments and routes identified during the planning stages. With toll equity, any segment of the Corridor could be made toll viable. However, TxDOT will 

create and construct the Corridor based on a plan that identifies the most financially viable segments and routes and constructs them first, providing cash-flow to 

pay for the next logical segments and so on. 

An Exclusive Development Agreement is a contract and construction method that 

allows any organization to propose a transportation project, including design, construction, maintenance, and operation and/or financing to TxDOT. If TxDOT determines the concept is viable and it supports the long-range Transportation plan of 

the State, the concept is approved and put to the public for competing proposals. 

TxDOT will review all proposals and select the best one for negotiation and final 

contract. TxDOT must also determine a project is compatible with existing and 

planned transportation facilities before a concept may be approved. 

For the Corridor, it is anticipated that interested parties will make proposals for 

the Corridor, resulting in permission to operate part, or the entire Corridor. For 

those parties that used this method to win a contract from TxDOT, the right for 

the Commission to assume control of any part of the Corridor will be negotiated into 

the contract. This will protect the public’s investment into the future. 

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By State statute, TxDOT can use the Exclusive Development Agreement method 

for four projects only. Therefore, unless State law is changed, this will be a minor 

tool in the creation of the Corridor—unless, of course, one party proposed to build 

the entire Corridor or a major part of the Corridor and the Commission believed 

it to be in the best interest of the public. 

All of the tools mentioned here (the Texas Mobility Fund, RMAs, toll equity, and 

Exclusive Development Agreements) can be used on any TxDOT project, not just the 

Corridor. No matter where these tools are used they will benefit the public. They 

will help us build more highways faster and continue to expand our infrastructure 

to keep up with growing population and increasing traffic. 

HELPING STATES TAKE ADVANTAGE OF FINANCING TOOLS

Texans need to have a full array of financial and project development choices 

available to us, so that we can move forward to meet our transportation needs. Innovation and flexibility have become essential to enabling State and local governments to solve today’s transportation challenges. The recently approved tolling authority for the I–10 (Katy Freeway) corridor is an example of the types of flexible 

financing and project development processes we now need for transportation 

projects. Reauthorization of Federal surface transportation programs and funding in 

2003 will present many opportunities for releasing the creative powers of Texas and 

other States. 

Tolling of Interstate Routes 

In March 2002, the FHWA approved a toll road proposal that calls for the construction of four toll lanes in the median of the I–10 Katy Freeway in the Houston region. The toll lanes will generate up to $500 million in revenue toward the reconstruction of I–10, thus completing funding for the project and potentially cutting 

construction time in half. 

Despite the ultimate approval of the Katy Freeway tolling mechanism under Section 1216(a) of TEA-21, our experience with the process reveals some areas for improvement that, if implemented, would encourage more States to use this important 

financing option. In particular, the Harris County Toll Road Authority (HCTRA), 

one of our major partners in the Katy Freeway expansion project, had some initial 

concerns about certain requirements in the Section 1216(a) program that would 

have required a review and reapplication for the tolling authority every 3 years. 

This type of requirement often threatens the viability of the underlying bonding 

mechanism that the applicant is using to support the overall project. For the Katy 

Freeway project, HCTRA (the bonding authority in the project) was ultimately given 

a waiver of the reapplication process and HCTRA, TxDOT, and the Houston Metropolitan Transit Authority moved forward with our application under Section 

1216(a). 

TEA-21 also provided a pilot program under Section 1216(b) that allows States 

to toll portions of the interstate system. Thus far, no State has successfully applied 

for this authority. TxDOT initially applied for tolling authority under Section 

1216(b) for the Katy Freeway project. However, we were unsuccessful in this application mainly because the program requires an analysis to demonstrate that the facility could not be maintained or improved from the State’s apportionments and allocations. This analysis is not time restrictive, i.e., projects can be funded over long 

periods of time, and therefore it is very difficult to demonstrate the funding shortfalls required to obtain Section 1216(b) authority. For the Katy Freeway project application (and frankly for any other application we may attempt), TxDOT of course 

could choose to use any of its $2.2 billion in annual Federal apportionments for the 

project instead of funding another project, so we couldn’t pass the ‘‘funding shortfall’’

test. What we need is the ability to use this tolling authority to supplement our existing funding, not replace it. This situation is a major reason, we think, why this 

pilot program has never had a project approved for implementation. As currently 

written, this program appears too restrictive to go forth with a meaningful project. 

While the States have not successfully pursued the interstate tolling authority 

provided in Section 1216(b) for a variety of reasons (including political opposition 

from those who would ultimately pay the tolls), we in Texas would like to see it 

continue as an option for States. At the time Texas first considered using this provision, we did not have the various State-supported financing mechanisms and authority that we have recently acquired to help us take a new look at ways to finance 

our transportation needs. Also, we now have the Trans Texas Corridor plan that 

could benefit from the potential use of the Section 1216(b) authority. As a result, 

we recommend that the Congress continue, expand, and improve the flexible application of the Section 1216(a) and Section 1216(b) provisions in the reauthorization 

of TEA-21. 

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Buying Back Portions of the Interstate to Allow Tolling. With the except of the 

Section 1216 provisions mentioned above, Federal law generally prohibits imposing 

tolls on Interstate highways for which Federal funds have been used. In several situations, however, Congress has enacted specific legislation to allow States to reimburse the Federal Government for Federal funds applied to a highway segment, 

thereby relieving a highway segment of the prohibition against tolls. The FHWA has 

provided TxDOT staff with six examples of legislation authorizing such repayment 

of Federal funds for highways in Connecticut, Delaware, Maryland, Michigan, New 

Hampshire, and New Jersey. Texas would like to pursue this option in the development of the Trans Texas Corridor and other needed improvements. Your efforts to 

make this option as easily accessible as possible will greatly assist our future endeavors as we seek new ways to fund our tremendous transportation needs in 

Texas. 

Despite the availability of this option to buy back portions of the Interstate, we 

believe that the Congress needs to take a new look at the issue of residual Federal 

investment. For the most part, the Federal investment in the interstates has essentially been depreciated, leaving only increasing costs to maintain the aging system—

costs that often are taken up by the States. We believe that States should be given 

the option to toll their interstates without the requirement of reimbursement of 

long-ago Federal funding so that we can improve and maintain the interstates to 

meet the mobility and access needs of our citizens and business communities. 

Since the beginning of the Interstate era in 1956, Texas has contributed more in 

Federal motor fuels tax payments than the State has received in Federal highway 

program funds, including its share of the Interstate Construction and Interstate 

Maintenance program funds. When these interstate program funds were originally 

distributed to Texas, we did not get a 100 percent return on our contributions. Now, 

if we were to repay a portion of the Federal funding it would be redistributed to 

all States. Since Texas continues to get less than a dollar for dollar return, Texas 

would suffer twice in the distribution of those funds. Therefore, we recommend that 

donor States (those that received less than 100 percent of their share of contributions to the Highway Trust Fund compared to their share of distributions through 

the Federal-aid highway programs) be allowed to toll portions of the interstate system without Federal reimbursement. This approach would partially compensate the 

donor States for their contributions to the national system and allow them extra 

flexibility in handling the mobility needs in their States. 

Allow Toll Credits to be Derived from federally Funded Projects 

Currently if a project utilizes any Federal funding then all costs of the project are 

ineligible to be counted as toll credits by the State. In today’s environment where 

fewer and fewer projects are 100 percent toll-viable and require a mix of funding 

sources it is becoming more unlikely that a toll project will be built without some 

form of Federal assistance. 

We believe the non-Federal expenditures on these projects should be eligible as 

toll credits on a pro-rata basis. We consider toll credits to be a valuable tool in 

Texas and have distributed these primarily to small transit providers who might 

otherwise have to turn down Federal assistance due to a lack of matching funds. 

Privatizing Rest Areas 

In a review of the Texas rest area system in the late 1980’s, an internal TxDOT 

task force concluded that an innovative method of improving rest area quality without increasing costs appeared to be the concept of contracting with private developers to create joint development facilities. In other words, a commercialized rest 

area. 

Commercialization could transform selected rest areas into ‘‘travel service centers,’’ which would offer the traveling public facilities and services beyond those 

available at our existing sites. In addition to restrooms and picnic tables, commercialized rest areas could provide the public with food and fuel facilities and expanded travel information. These facilities could also provide expanded truck parking, a need that was only recently reaffirmed by a July 2002 FHWA Report on 

Truck Parking Facilities. One of the recommendations for State action in the FHWA 

report was to encourage the formation of public-private partnerships to address the 

nation’s truck parking needs. At the same time, commercializing a rest area could 

reduce or eliminate the cost to the TxDOT of constructing and maintaining the facilities. 

In 1990, the Center for Transportation Research (CTR) at the University of Texas 

began a study to determine the feasibility of rest area commercialization in Texas. 

This study found that commercialization would be feasible and could turn many rest 

areas sites into revenue generators. However, as the study points out, Title 23 USC, 

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Section 111 prohibits the commercialization of rest areas with direct access to an 

interstate highway. It should be noted that this concept is supported by AASHTO. 

A 1989 AASHTO Task Force that studied commercialization recommended that the 

Federal restriction be lifted. Language lifting the ban on rest area commercialization on the interstate system was included in an initial draft of ISTEA; however, 

interests opposed to the concept defeated the provision. Tourist industry interests, 

truck-stop interests (National Association of Truck Stop Owners), and other private 

sector interests view rest area commercialization as unwanted competition, even 

though they can participate in such development. 

As we explore ways to maximize available funds to meet our transportation needs, 

Congress should allow States to use this concept on interstate routes. 

Continue and Improve Access to Railroad Rehabilitation and Improvement Financing Act Funds 

The Railroad Rehabilitation and Improvement Financing program (authorized in 

TEA-21) offers $3.5 billion in loans and guarantees to public or private sponsors of 

intermodal and rail projects, with $1 billion reserved for projects benefiting freight 

railroads other than Class I carriers. Projects can include acquisition, development, 

improvement, or rehabilitation of intermodal or rail equipment or facilities. The program is intended to make funding available through loans and loan guarantees for 

railroad capital improvements. No direct Federal funding is authorized in TEA-21; 

however, the Secretary is authorized to accept a commitment from a non-Federal 

source to fund the required credit risk premium. 

Texas to date has had little opportunity to use the financing tools made available 

by the RRIF. In 2001 Amtrak approached the States of Mississippi, Louisiana, and 

Texas for assistance with the credit risk premium for a RRIF loan. The loan would 

have allowed one of the freight railroads in the region to upgrade its tracks to allow 

an extension of Amtrak’s Crescent line to run between Meridian, Mississippi and 

Dallas/Fort Worth. The Texas Constitution prohibits the use of dedicated State 

Highway Fund dollars for non-highway purposes; therefore TxDOT was unable to 

participate in the opportunity to bring additional passenger rail service to our State. 

However, supporters of the rail proposal approached the Texas Legislature and garnered an appropriation of $1.7 million in other State funds for Texas’ share of the 

credit risk premium. Unfortunately, Amtrak later announced that it was postponing 

its plans for the extension, known as the Crescent Star. 

Despite TxDOT’s and Texas’ limited involvement to date in railroad financing, as 

we begin development of the Trans Texas Corridor (which includes a freight rail, 

a commuter rail, and a high speed passenger rail component), the continued availability of financing from the RRIF will prove important. We encourage Congress to 

continue the program and to provide additional funds in the TEA-21 reauthorization. 

Changes to the TIFIA Program 

The Transportation Infrastructure Financing and Investment Act (TIFIA) program has been possibly the single most important benefit for public-private partnerships in transportation and has provided opportunities both to fill the gaps in finance plans and to make finance plans more efficient and cost effective. While the 

program may end the current authorization period undersubscribed, this is not a reflection on the program’s value or its potential utility. Rather, it reflects the very 

long lead times required for project sponsors to design finance plans and adapt, 

often only with new State legislation, to new financing methods. 

The clear benefit from TIFIA is flexibility in structuring repayment and deferral 

of interest. This feature enhances cash-flow from the projects during the initial construction period to pay for senior debt and fill rate stabilization and debt services 

reserve funds. Another benefit comes from the ability to leverage revenues from a 

‘‘startup’’ toll road project. For a tax-exempt borrower such as TxDOT, the subordinate TIFIA loan produces savings in both interest rate costs and costs of bond 

issuance. 

Our experience suggests several potential drawbacks from TIFIA. Resolving some 

of these concerns may require changes to the TIFIA law; others might be corrected 

within the existing statutory and regulatory framework. 

Encourage Equity Investments in Projects Supported with TIFIA Credit. Congress 

should reauthorize the TIFIA program and refine it to encourage more private investment in projects supported with TIFIA credit. More thought should be given to 

the blending of private investment and TIFIA credit. Several of the current applicants for TIFIA credit, including TxDOT, are requiring private contractors to contribute subordinated debt or equity investments to the financing plan. Indeed, ratVerDate 0ct 09 2002 15:21 Aug 27, 2003 Jkt 088460 PO 00000 Frm 00134 Fmt 6633 Sfmt 6621 H:\DOCS\88460 SENENV1 PsN: DUANE
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ing agencies and bond insurers have come to expect contractors to take part of their 

fee in the form of a project investment. Congress should encourage this expectation. 

The good news is that the contracting community is increasingly able to make 

these investments. The bad news is that, if the owner is using TIFIA credit, TEA21 currently offers the owner a Hobson’s choice: either the contractor’s credit must 

be investment grade according to rating agency criteria (a result more favorable to 

the contractor than the owner wants or needs to allow) or the contractor’s investment must be subordinate to TIFIA in right of payment (a risk the contractors cannot accept when TIFIA credit is large). This challenge can be cured by refining 

TIFIA to rank a developer’s claim senior to TIFIA’s without requiring that the developer’s credit be investment grade and to allow the developer to receive payment 

of equity returns and subdebt payoff as long as the entity receiving TIFIA funds 

meets all its debt service obligations and coverage ratios. To allay concerns about 

diluting TIFIA credit quality, TIFIA could limit subdebt or private equity payoff to 

a specified percentage of project costs. 

Minimize Impact of TIFIA Loan ‘‘Springing Up.’’ Legal advisors to FHWA have 

been reluctant to interpret the TIFIA statute to limit the event under which the 

TIFIA loan would ‘‘spring’’ to parity to a bankruptcy filing or similar proceeding that 

results in an abandonment, liquidation, or dissolution of the project. We are concerned that insolvency is defined broadly, resulting in the TIFIA loan ‘‘springing’’

to parity with senior bond indebtedness. This could adversely affect the ability to 

attract credit enhancement (e.g., insurance) for the bonds and result in higher interest cost. Credit enhancers consider the ‘‘worst case scenario’’ when evaluating their 

desire to guarantee bonds and the risk of doing so. The benefit of subordinating the 

TIFIA loan could be eroded if the credit enhancers evaluate their risk by assuming 

they will be sharing in revenues and other assets on parity with FHWA. 

Following receipt of TxDOT’s TIFIA commitment letter, FHWA announced it 

would apply the ‘‘Mega Project’’ finance plan and reporting requirements to all 

TIFIA projects. As interpreted by FHWA, these requirements are more burdensome 

than the capital markets or SEC disclosure rules require. Furthermore, it’s unclear 

how FHWA will use this information. 

More Liberal Terms in TIFIA Loan Agreements. To leverage new project revenue 

streams, reduce transactional costs, and attract private debt capital, FHWA must 

consider more liberal terms in the financial covenants in the TIFIA loan agreement. 

For example, we believe that there should be no debt service reserve requirement 

for the TIFIA loan. Also, FHWA must be willing to subordinate its debt to that 

issued to design/build contractors as payment for their work. 

The Central Texas Turnpike Project is a multi-phased capital program with multiple funding sources. TIFIA loan draw requirements/priorities as well as provisions 

relating to repayment and final maturity of the TIFIA loan must give consideration 

to the complexity of the projects. 

As mentioned earlier, Governor Perry is exploring large-scale corridor development in Texas. We certainly expect TIFIA to be an important financing tool in this 

effort. Critical to this would be the ability to subordinate TIFIA to equity returns 

as well as senior debt service payments. 

Change Internal Revenue Code Private Activity Rules. Congress should modernize 

the Internal Revenue Code rules on private activity and management contracts as 

they apply to surface transportation. Project sponsors are now actually forced to 

turn down true private equity for important public projects if they expect to issue 

tax-exempt debt. This is not the result Congress intended when it adopted these restrictions in 1986. Inexplicably, these same restrictions do not apply to other public 

works such as airports and solid waste facilities. During the 106th Congress, Senator Smith authored a bill to cure these exact problems. Both houses of Congress 

ultimately passed this important curative legislation as part of a larger tax bill that 

year, but President Clinton vetoed the larger bill. 

TxDOT is embarking on an ambitious program that has the potential for attracting significant private equity. Curing this anomaly in the tax code would allow sorely needed private equity and innovation to be incorporated into surface transportation development without sacrificing access to the lower interest rates in the tax 

exempt financing markets. 

Modernize Internal Revenue Code Advance Refunding Rules. Congress should 

modernize the IRS rules applicable to surface transportation to permit two advance 

refundings. Most conventional transportation projects are funded on a pay as you 

go model or with bonds backed by tax revenues. As such, sponsoring agencies issue 

bonds only to advance funds as needed for construction. To finance a public-private 

partnership dependent in part on the project’s own revenues, the bond markets require 100 percent of all capital costs be funded up front, at the time they invest. 

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This means that the sponsor is issuing bonds many years removed from the economic conditions that will affect the project when it has opened. 

If interest rates become more favorable over time, IRS rules prevent the sponsor 

from refunding the bonds more than once, even though doing so would help reduce 

tolls, pay off debt quicker, and leverage dollars more efficiently. Other businesses 

aren’t so restricted. These rules are even more puzzling because there is no loss to 

the Treasury from advance refundings. 

Encourage Design-Build and DBOM Contracting. Congress should continue to encourage Design-Build and Design-Build-Operate-Maintain (DBOM) contracting for 

federally funded projects and remove regulatory barriers to State DOT use of procurement processes. Private section financing frequently requires certainty early in 

the design phase for capital and long-term maintenance and rehabilitation costs. In 

effectively providing such certainty, these forms of contracts are an essential building block for project financing. 

TEA-21 required FHWA to issue a rule governing procurement. While the rule is 

not final, the problems identified in the published draft have been documented in 

comments submitted by AASHTO and others. Unless FHWA incorporates the recommended revisions into its final rule, this critical tool will have been undermined 

unless Congress intervenes. 

Allow Selection of Contractor Prior to ROD to Enhance Financial Benefits of Construction Acceleration. Congress should make clear to the USDOT modal administrations that it did not intend NEPA to prevent procurement activity from being 

completed prior to issuance of records of decision (ROD). One of the key values of 

effective project financing is construction acceleration. We recognize the major contribution to environmental planning that NEPA has brought to major Federal actions. No one suggests that construction should commence before a ROD. But 

FHWA is reading NEPA to prevent the issuance of an RFP, the selection of a contractor, and the award of a contract pending a final ROD. None of these actions affects the selection of a project alternative or even the decision not to build. For a 

State DOT to use its own funds to accelerate contractor selection so that it is prepared to move quickly if a ‘‘build’’ alternative is selected is acting in parallel rather 

than in sequence. This does not prejudice the NEPA process. 

Modify Existing Transportation Programs to Enhance Funding Flexibility 

ISTEA and TEA-21 provided improved flexibility for States in addressing their 

varied transportation needs by allowing greater levels of transferability among the 

existing highways and transit funding categories. For example, States can transfer 

up to 50 percent of their National Highway System apportionments to the Interstate 

Maintenance, Surface Transportation Program, Congestion Mitigation and Air Quality Improvement Program, and Bridge Replacement and Rehabilitation Program. In 

addition, up to 100 percent of NHS apportionments may be transferred to STP if 

approved by the Secretary of Transportation. Similar transferability provisions are 

available for the other Federal-aid highway programs listed above. In addition, 

States have the option to use their Federal transit formula program funds for a 

highway project and vice versa. This type of transferability should be expanded, at 

State discretion, among the entire array of transportation programs. 

ISTEA and TEA-21 also enhanced flexibility by expanding the list of eligible activities that can be funded with highway program funds. For example, STP funds 

can be used for highways, bridges, transit capital projects, and intracity and intercity bus terminals and facilities. However, this is an area where additional flexibility will help States in finding funding solutions to meet their varied transportation needs. When you consider a concept as complex as the Trans Texas Corridor, 

it becomes obvious that having the flexibility to address multimodal funding issues 

is essential. We encourage Congress to consider expanding the eligibility of existing 

highway, transit, and rail programs to allow, at the State’s discretion, the use of 

any of these funds for a broader range of transportation activities. At the same time, 

it will be essential for Congress to either consolidate or simplify the program procedures of the various modal programs or allow States to use the simplest procedures 

among them so that the flexibility of expanded eligibility is not negated by regulatory differences among the modal programs. This flexibility will better enable us 

in Texas to pool our available resources to tackle multimodal transportation 

projects. This is the future of transportation in Texas; Federal funding programs 

should facilitate our efforts, not provide roadblocks to efficient and effective use of 

Federal transportation dollars. 

CONCLUSION

As you can see, Texas has indeed entered a new era in planning, building, and 

financing needed transportation systems. We can no longer afford to rely solely on 

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the traditional pay-as-you-go method of finance for needed transportation systems. 

We are committed to taking advantage of every available transportation finance and 

project development mechanism. We will need your assistance to enable us to fully 

and flexibly use the complete range of tools to meet our growing transportation demands. We look forward to working with you to make our launch into the new century of transportation financing a continuing success for Texas and the Nation. 

If you have any questions about the information provided here, please contact 

Tonia Ramirez in TxDOT’s Federal Legislative Affairs Section at 512–463–9957.

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