```

[Senate Hearing 107-962]
[From the U.S. Government Publishing Office]

                                                        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

                                 ______

                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
88-460 pdf

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                      ONE HUNDRED SEVENTH CONGRESS
                             second session

                  JAMES M. JEFFORDS, Vermont, Chairman
MAX BAUCUS, Montana                  BOB SMITH, New Hampshire
HARRY REID, Nevada                   JOHN W. WARNER, Virginia
BOB GRAHAM, Florida                  JAMES M. INHOFE, Oklahoma
JOSEPH I. LIEBERMAN, Connecticut     CHRISTOPHER S. BOND, Missouri
BARBARA BOXER, California            GEORGE V. VOINOVICH, Ohio
RON WYDEN, Oregon                    MICHAEL D. CRAPO, Idaho
THOMAS R. CARPER, Delaware           LINCOLN CHAFEE, Rhode Island
HILLARY RODHAM CLINTON, New York     ARLEN SPECTER, Pennsylvania
JON S. CORZINE, New Jersey           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         CHARLES E. GRASSLEY, Iowa
    Virginia                         ORRIN G. HATCH, Utah
TOM DASCHLE, South Dakota            FRANK H. MURKOWSKI, Alaska
JOHN BREAUX, Louisiana               DON NICKLES, Oklahoma
KENT CONRAD, North Dakota            PHIL GRAMM, Texas
BOB GRAHAM, Florida                  TRENT LOTT, Mississippi
JAMES M. JEFFORDS (I), Vermont       FRED THOMPSON, Tennessee
JEFF BINGAMAN, New Mexico            OLYMPIA J. SNOWE, Maine
JOHN F. KERRY, Massachusetts         JON KYL, Arizona
ROBERT G. TORRICELLI, New Jersey     CRAIG THOMAS, Wyoming
BLANCHE L. LINCOLN, Arkansas

                      John Angell, Staff Director
        Kolan Davis, Republican Staff Director and Chief Counsel

                                  (ii)

  
                            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
    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

          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.
    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 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 concept 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 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 tax-arbitraged 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 well-funded 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.
    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, special-purpose 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.
    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 Public 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 
all-power 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 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.
    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 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 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 long-term 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 drawing 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.
    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 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 
agreements, 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.
    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.
    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 financing $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 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 investment-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 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.
    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 one-quarter 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 financing 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.
    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.

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 
traditional 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.
    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 
increase 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 
nonprofit 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 
apportioned 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.
    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 
market-related 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.
    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 creation 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 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 
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 long-term 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 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.
    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?
    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 
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

  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.
    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.
           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:

      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.
      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 design-build, 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).
      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.
               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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Turnkey Development    Warranty/Concession
                                       Governmental Model            Model                  Model                       Profit-Sharing Model
--------------------------------------------------------------------------------------------------------------------------------------------------------
Examples of Projects...............  LACMTA; Caltrans......  TCA; ACTA; BART        Hudson-Bergen; NM44..     Las Vegas Monorail; SR 91, Dulles Greenway
                                                              Airport; Extn.
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 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 non-taxable 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 
higher-yielding 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 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
      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 design-build.
      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 out-source 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 public-private 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 cost-discipline 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 responsibility 
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 
cash-flow 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 non-
profit 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-bid-build, 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?
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 investors 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 pay-as-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 agencies. 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 grant-
supported 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 program 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 multi-modal--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.......       $269 million
                                                                           Direct Loan              $163 million
SR 125 Toll Road................  Hwy/Bridge.........  $450 million......  Direct Loan.......        $94 million
                                                                           Line of Credit            $33 million
Farley Penn Station.............  Passenger Rail.....  $800 million......  Direct Loan.......       $140 million
                                                                           Line of Credit            $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.......       $240 million
                                                                           Line of Credit            $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.......        $51 million
                                                                           Direct Loan                $5 million
                                                                           Direct Loan               $18 million
SF-Oakland Bay Bridge...........  Hwy/Bridge.........  $3,305 million....  Direct Loan.......       $450 million
                                                      --------------------                    ------------------
    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.
    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.................  $70 million............  Various projects
                                       Aug-99                   $20 million               including: Spring-
                                       Sep-01                   $100 million              Sandusky and Maumee
                                                                                          river improvements
New Mexico...........................  Sep-98.................  $100 million...........  New Mexico SR 44
                                       Feb-01                   $19 million
Arkansas.............................  Mar-00.................  $175 million...........  Interstate Highways
                                       Jul-01                   $185 million
                                       Jul-02                   $215 million
Colorado.............................  May-00.................  $537 million...........  Any project financed
                                       Apr-01                   $506 million              wholly or in part by
                                       Jun-02                   $208 million              Federal funds
Arizona..............................  Jun-00.................  $39 million............  Maricopa freeway
                                       May-01                   $143 million              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 pay-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
------------------------------------------------------------------------
                                        Number of        Loan Agreement
               State                    Agreements           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

2Other 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.
    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?
    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.
---------------------------------------------------------------------------
     \1\Performance Budgeting: Opportunities and Challenges. (GAO-02-
1106T, Sept.19, 2002).
---------------------------------------------------------------------------
    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.
    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 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.
---------------------------------------------------------------------------
     \2\FHWA 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.
     \3\FHWA'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.
---------------------------------------------------------------------------
    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 credit-worthy 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.
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 purpose 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 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.
---------------------------------------------------------------------------
     \4\In 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.
     \5\The 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \6\We 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \7\The 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.

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 TIFIA 
loan alternatives are significantly lower than for tax credit bonds and 
grants.\8\
---------------------------------------------------------------------------
     \8\Using 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.

    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.
---------------------------------------------------------------------------
     \9\A 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.
---------------------------------------------------------------------------
    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 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.
---------------------------------------------------------------------------
     \10\In 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 $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.
---------------------------------------------------------------------------
    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 user-financed 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.
---------------------------------------------------------------------------
     \1\For 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.
---------------------------------------------------------------------------
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.
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.
---------------------------------------------------------------------------
     \2\Although 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.
     \3\For 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.
---------------------------------------------------------------------------
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 Congress\4\ 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.
---------------------------------------------------------------------------
     \4\U.S. Department of Transportation, TIFIA Report to Congress, 
June 2002.
---------------------------------------------------------------------------
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 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
----------------------------------------------------------------------------------------------------------------
                                                 Number of       Loan agreement amount    Disbursements to date
                   State                         agreements             ($ 000)                  ($ 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
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Project         Project cost ($                        Credit amount ($     Primary revenue
              State                  Project name         description          millions)        Instrument type        millions)            pledge
--------------------------------------------------------------------------------------------------------------------------------------------------------
California......................  SR 125 Toll--1999.  Road Highway/       $455..............  Direct loan.......  $94.000 User......
                                                       Bridge                                 Line of credit      $33.000 Charges
                                                       Construction of
                                                       11 mi 4-lane toll
                                                       road in San Diego.
                                  San Francisco-      Replacement of SF-  $3,305 Direct loan  $450.000 Toll
                                   Oakland Bay         Oakland Bay                             surcharge.
                                   Bridge--2002.       Bridge east span.
D.C.............................  Washington Metro--  Transit capital     $2,324 Guarantee..  $600.000 Other....
                                   1999.               improvement
                                                       program.
Florida.........................  Miami Intermodal    Multi-modal center  $1,349 Direct loan  $269.076 Tax
                                   Center--1999.       for Miami          Direct loan          revenue.
                                                       Intern'l Airport,                      $163.676 User
                                                       including car                           charges
                                                       rental garage,
                                                       intermodal
                                                       center, people
                                                       mover, and
                                                       roadways.
Nevada..........................  Reno Rail Corridor  Intermodal........  $280 Direct loan..  $73.500 Other.....
New York........................  Farley Penn         Intermodal........  $800 Direct loan..
                                   Station--1999.
                                  $140.000 Other....
Line of credit                    $20.000 Other
                                  Staten Island       Transit...........  $482 Direct loan..  $159.068 Other....
                                   Ferries--2000.
Puerto Rico.....................  Tren Urbano--1999.  Transit rail line.  $1,676 Direct loan  $300.000 Tax
                                                                                               revenues.
South Carolina..................  Cooper River        Replace double      $668 Direct loan..  $215.000 Other....
                                   Bridge.             bridges over the
                                                       Cooper River,
                                                       connecting
                                                       Charleston and
                                                       Mt. Pleasant.
Texas...........................  Central Texas       Construct 120+ mi.  $3,220 Direct loan  $917.000 User
                                   Turnpike--2001.     toll facilities                         charges.
                                                       to ease I-35
                                                       congestion.
Washington......................  Tacoma Narrows      Construct new       $835 Direct loan..  $240.000 User.....
                                   Bridge--2000.       parallel bridge,   Line of credit      $30.000 charges
                                                       toll plaza, and                         (both)
                                                       approach roadways.
                                                                         ---------------------
    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.

                                      Table 3: State's use of GARVEE bonds
----------------------------------------------------------------------------------------------------------------
                                                        Face amount of
              State                Date of issuance          issue             Projects       Backstop financing
----------------------------------------------------------------------------------------------------------------
Alabama.........................  Apr-02............  $200 million......  County Bridge       All Federal
                                                                           Program.            construction
                                                                                               reimbursements.
                                                                                               Also insured
Arizona.........................  Jun-00............  $39.4 million.....  Maricopa freeway    Certain sub-
                                  May-01              $142.9 million       projects.           account transfers
Arkansas........................  Mar-00............  $175 million......  Interstate          Full faith and
                                  Jul-01              $185 million         highways.           credit of State,
                                                                                               plus State motor
                                                                                               fuel taxes
Colorado........................  May 00............  $537 million......  Any project         Federal highway
                                  Apr-01              $506.4 million       financed wholly     funds as
                                  Jun-02              $208.3 million       or in part by       allocated
                                                                           Federal funds.      annually by CDOT;
                                                                                               other State funds
New Mexico......................  Sep-98............  $100.2 million....  New Mexico SR 44..  No backstop; bond
                                  Feb-01              $18.5 million                            insurance
                                                                                               obtained
Ohio............................  May-98............  $70 million.......  Spring-Sandusky     Moral obligation
                                  Aug-99              $20 million          project and         pledge to use
                                  Sep-01              $100 million         Maumee River        State gas tax
                                                                           Bridge              funds and seek
                                                                           Improvements.       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 project-
based 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 project-based or 
a program-based financing approach could target funds to these or other 
major national priorities.
                                 ______
                                 
   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 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 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.
                           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 multi-jurisdictional 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.
                     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 short-and 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 design-build 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, 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, tree-planting 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.
                    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 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.

    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
----------------------------------------------------------------------------------------------------------------
                                                                              Mass                     Leaking
                     Year                        Total Tax     Highway      Transit      Deficit     Underground
                                                               Account      Account     Reduction   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 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-21\1\ 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.
---------------------------------------------------------------------------
     \1\Growth calculations: Highway baseline of $168.7 billion 
includes TEA-21 obligation limitation, exempt and RABA. Transit 
baseline includes guaranteed funding of $36.35 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.
    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.

    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 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.

    ``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 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 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 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 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 facilities, 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 
further 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, long-term 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 tax-exempt 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 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 long-term 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 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 Francisco-Oakland 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.
                                 ______
                                 
 [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 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 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, R-Iowa, 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 Clinton, 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.
                                 ______
                                 
       [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 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 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.
    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.
      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.
    There is a compelling need for enhanced funding, to a large extent 
through user-oriented 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 long-term 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) 
recommend, 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 city-pair 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 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' mode-specific 
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 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 
.
                               __________
 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.
    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) expedite 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 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 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.
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.
    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 on-board 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 higher-standard 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.
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 on-board 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 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.
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, cost-effective, 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: [email protected] 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 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 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.
    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 non-Federal 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.
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 non-toll 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. Federal-aid 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 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-as-you-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 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 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.
    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.
    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, 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, rating 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, TEA-21 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. 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 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.

                                   - 

```