24682 Federal Register / Vol. 60, No. 89 / Tuesday, May 9, 1995 / Notices

DEPARTMENT OF TRANSPORTATION

Federal Transit Administration

Innovative Financing Initiative:

Administrative Policies and

Procedures Facilitating Use of

Innovative Finance Techniques in

Federally-Assisted Transit Project

AGENCY: Federal Transit Administration,

DOT.

ACTION: Notice.

SUMMARY: This Notice describes

innovative financing methods and asset

management tools which may be used

in connection with projects receiving

assistance from the Federal Transit

Administration (FTA) in order to

facilitate financing, leverage Federal,

State and local funds, and otherwise

increase the effectiveness of transit

capital projects.

FOR FURTHER INFORMATION CONTACT:

Janette Sadik-Khan, Associate

Administrator for Budget and Policy,

(202) 366–4050, or Paul Marx, (202)

366–1675, Room 9310, 400 7th Street

SW., Washington, DC 20590.

SUPPLEMENTARY INFORMATION: The

Intermodal Surface Transportation

Efficiency Act of 1991 (ISTEA)

encourages more efficient management

and enhancement of our Nation’s public

transit infrastructure through the

creation of public/private investment

partnerships. In addition Executive

Order 12893, ‘‘Principles for Federal

Infrastructure Investments,’’ signed by

the President on January 26, 1994,

directs each executive department ‘‘to

ensure efficient management of

infrastructure * * *’’ and ‘‘to encourage

private sector investment, which is a

key objective of our efforts to promote

innovative financing.’’ Underlying this

guidance is the notion that marketoriented financing and management

techniques can be effective tools for

meeting our Nation’s needs for

infrastructure investment. To further

these directives, on September 12, 1994,

FTA published a Notice regarding its

Innovative Financing Initiative in the

Federal Register (59 FR 46878) in which

FTA requested information from its

grantees about their use of innovative

financing techniques in local transit

projects.

This Notice combines in a single

document current innovative financing

methods and assets management tools

and indicates, where appropriate,

changes in administrative practice or

policy guidance that may facilitate their

use. Grantees and others in the transit

community may find it useful to have in

one publication a summary of the

permissible financing and management

techniques under FTA’s grant programs.

Grantees should, however, refer to the

appropriate FTA regulations, circulars,

reports, and publications that explain

these techniques in greater detail, or

contact their FTA Regional Office for

further guidance and assistance.

The discussion below is divided into

two broad categories, Innovative

Finance Techniques and Asset

Management Tools.

FTA Innovative Finance Techniques

This section describes innovative

financing techniques which may be

used in connection with Federal transit

assistance. In general, the techniques

can be used with new projects financed

with the FTA Urbanized Area Formula

Program (49 U.S.C. 5307, formerly

Section 9 of this Federal Transit Act, as

amended) funds, as well as with Title

23, United States Code (e.g., Surface

Transportation Program (STP) and

Congestion Mitigation and Air Quality

program (CMAQ)) funds transferred to

be used for transit projects. In most

cases, the techniques can also be used

with funds from the Capital Program (49

U.S.C. 5309, formerly Section 3), as well

as Nonurbanized Area Formula program

(49 U.S.C. 5311, formerly Section 18),

and Elderly and Persons and Disabilities

Program (49 U.S.C. 5310, formerly

Section 16) funds. Many of the

procedures can also be used with

respect to assets previously acquired

with Federal transit assistance. For

clarity, each technique is described

separately. Grantees should take note

that two or more techniques may be

combined in the same project to

generate additional savings or to further

enhance private financing.

FTA generally supports use of

innovative financing concepts that

enhance the effectiveness of public

transit investment by either generating

increased investment or by reducing

overall project costs. The following

techniques and provisions of Federal

transit laws are illustrative of the types

of innovation that FTA will support.

The list is not exclusive; grantees

interested in pursuing techniques not

listed here should contact their FTA

Regional Office. FTA will evaluate

proposals on a case-by-case basis, and

where appropriate make further changes

in administrative procedures, or if

necessary, revise its rules and

regulations to make such changes.

• Leasing. FTA funds may be used to

lease, rather than purchase, transit

equipment and facilities. Urbanized

Area Formula Program (49 U.S.C. 5307,

formerly Section 9) funds may be used

to cover the costs of new an pre-existing

leases, so long as leasing is more cost

effective than a direct purchase. FTA

regulations at 49 CFR part 639 prescribe

how leasing of transit equipment may be

eligible. Moreover, FTA permits on a

case-by-case basis, using slightly

different criteria, such leasing under the

Capital Program (49 U.S.C. 5309,

formerly Section 3), Nonurbanized Area

Formula Program (49 U.S.C. 5311,

formerly Section 18), and Elderly and

Persons with Disabilities Program (49

U.S.C. 5310, formerly Section 16).

• Certificates of Participation (COPs).

Certificates of Participation (COPs) are a

type of leasing arrangement in which

bonds are issued to finance the purchase

of transit assets. Typically, the public

transit agency (lessee) enters into a lease

with a trustee or non-profit entity

(lessor) for the assets it wishes to

acquire. The lessor then transfers its

rights to receive the lease payments

made by the transit agency to the bond

holders. The cash paid by the bond

holders is used to purchase the assets

that will be leased by the transit agency.

The transit agency makes lease

payments from local revenue sources

and FTA grants. Title to the assets is

held by the trustee for the security

interest of the bond holders during the

life of the transaction (usually 7 to 12

years). Use of this technique may allow

transit agencies to use future reserves of

local and federal revenues to accelerate

equipment purchases. Although

historically FTA recipients have

engaged in COPs transactions solely for

the purchase of vehicles, this technique

may also be used to acquire facilities.

Approximately six of these have taken

place with federally funded equipment.

Further guidance on the use of COPs

can be found in FTA Report No. FTA–

MA–90–7005–93–1 (‘‘How to Evaluate

Opportunities for Cross Border Leasing

and COPs,’’ November 1993).

• Joint Development. Under 49 U.S.C.

5309(a)(5) and (f) and 49 U.S.C.

5309(a)(7) (formerly Sections 3(a)(1)(D)

and 3(a)(1)(F)), Capital Program funds

can be used for a variety of joint

development activities, so long as they

are physically or functionally related to

a transit project and they enhance the

effectiveness of the transit project.

Further, consistent with the additional

flexibility in funding and

decisionmaking afforded by ISTEA, FTA

has recently interpreted the Capital

Program (49 U.S.C. 5309) and the

Federal Transit laws (49 U.S.C. 5301 et

seq.) to allow such joint development

projects under the Urbanized Area

Formula Program (49 U.S.C. 5307,

formerly Section 9), as well as the STP

(23 U.S.C. 133) and the CMAQ Program

(23 U.S.C. 149) when these funds are
Federal Register / Vol. 60, No. 89 / Tuesday, May 9, 1995 / Notices 24683

transferred to FTA for a transit project.

Similarly, by this Notice, FTA is also

alerting its grantees to the fact that

assets previously acquired with FTA

funds may be used for such joint

development purposes. For example,

land now used for station parking and

no longer needed for transit purposes

may be converted to use in a transitrelated development project.

Certain cross-cutting Federal

requirements will apply to the activities

supported by Federal transit funds;

however, such requirements would not

apply to the commercial project itself,

since Federal funds cannot be used for

the construction of commercial revenueproducing facilities. FTA program funds

may be used for the overall planning of

a transit project, including the

commercial revenue-producing

facilities, so long as such commercial

facilities are part of an overall transitrelated project.

• Use of Proceeds from Sale of Assets

in Joint Development Projects. To

facilitate joint development activities,

FTA permits the sale of real property

and property rights acquired with FTA

assistance, in the following instances.

Real property that is no longer needed

for transit purposes may be sold and the

proceeds may then be used to purchase

other real property for a transitsupportive development. If the real

property is leased, the proceeds are

considered program income and may be

used for any transit purpose.

• Air rights over transit facilities

constructed with Federal funds may be

sold to developers and the proceeds

retained as program income for future

use in mass transit, rather than returned

to the Treasury.

• Cross Border Leases. A cross border

lease is a mechanism which permits

investors in a foreign country to own

assets in the United States, lease them

to an American entity, and receive tax

benefits under the laws of their own

country. FTA will permit the

encumbrance of federally funded assets

under a cross border lease so long as the

grantee maintains continuing control

and use of the asset in mass transit, and

the benefits of the transaction outweigh

the risks to the grantee. Grantees should

provide FTA with the details of the

transaction for review on a case-by-case

basis. FTA’s policy on Cross Border

Leases is contained in FTA Circular

7020.1 (‘‘Cross Border Leasing

Guidelines’’). Further guidance on cross

border leases is available in FTA Report

No. FTA–MA–90–7005–93–1, cited

previously.

• Capital Cost of Contracting. FTA

permits grantees to count a portion of

the costs of a contract with a private

operator for transit service operations as

a capital cost eligible for FTA capital

program funding. This policy is

described in more detail in FTA

Circular 7010.1 (‘‘Capital Cost of

Contracting’’). This policy generally

applies to contracting for providing

transit services where the use of

facilities and equipment is provided as

a part of a transit service contract.

• Innovative Procurement

Approaches. FTA encourages grantees

to use a wide variety of innovative

procurement techniques. These can

include multi-year rolling stock

procurements, forming consortia to

facilitate efficiencies of scale in rolling

stock procurements, or using designbuild (‘‘turnkey’’) as a method of

infrastructure project delivery. Grantees

can also consider use of vendorfinancing in procurements, such as

‘‘super-turnkey,’’ in which the contract

calls for borrowing by the design-build

contractor, with the costs, including

interest, paid off over time using Federal

grant funds. Further information on this

form of procurement is available in FTA

Report No. FTA–MA–08–7001–92–1,

‘‘Turnkey Procurement: Opportunities

and Issues.’’

• State Transit Finance Support. FTA

encourages States and local

governments to develop the capability

to provide support for transit finance

initiatives. Where State law permits,

FTA capital funds can be used to

support transit-related State finance

entities, such as transportation banks.

Such finance entities could provide a

range of financing options, including

cross border leases, certificates of

participation, joint procurements, and

the like, that may not otherwise be

available to the smaller transit agencies.

While FTA capital program funds can

be used to cover the initial

capitalization, they cannot be used to

cover the ongoing operating costs of

such a program.

• Revoling Loan Funds. By this

Notice, FTA announces that Federal

grant funds may be used to support

State or local revolving loan funds

established in accordance with

appropriate State laws. These funds

would be available to provide direct

loans for transit projects, or to acquire

equipment and facilities and lease them

to providers of public transportation in

their States. Payments to retire the loans

or service the leases, including accrued

interest, would be used to fund other

transit projects. Such a revolving loan

fund could be used in combination with

pooled procurements, State or locally

issued bonds, joint development, and

other techniques to generate income for

transit investment or to reduce the

overall cost of transit capital

investment. As with the State Transit

Finance entities, FTA funds can be used

to cover the initial capitalization, but

they cannot be used to cover the

ongoing operating costs of such a

program.

• Deferred Local Match. FTA permits

grantees to defer the payment of the

local share of transit projects. Under this

policy, grantees may, with prior

approval from FTA, draw down 100

percent of the first 80 percent of project

cost of former section 3 (49 U.S.C.

5309), 8 (49 U.S.C. 5303), 9 (49 U.S.C.

5307), 16 (49 U.S.C. 5310), 18 (49 U.S.C.

5311) and 26 (49 U.S.C. 5320) projects,

covering the local share of the costs at

the end of the project. See, ‘‘Policy

Statement on Local Share Issues,’’ 57 FR

30880, July 10, 1992.

• Transfer of Federal Interest. In

order to facilitate the implementation of

certain innovative financing

transactions involving the lease or

encumbrance of an asset, FTA will

permit the concentration of the Federal

interest in a portion of assets acquired

with Federal funds, leaving the

remaining portion unencumbered by

any Federal interest. For example,

where a fleet of 100 vehicles is acquired

with Federal funds with a local share of

20 percent, the Federal interest may be

concentrated in 80 of those vehicles,

leaving the remaining 20—the local

share—of the vehicles without any

Federal interest. Moreover, this

separation of Federal and local interests

allows the grantee to explore other

financing techniques, such as using the

local share for COPs or cross border

leases to leverage additional funds, or

using short-term lending, or debt

subordination, where arbitrage issues

could be involved. For example, the

portion of a fleet or facility without

Federal interest could be mortgaged,

and the proceeds used to earn interest

or act as credit enhancement on a bond

issue supporting a major investment,

thus generating savings for the transit

authority.

• Like Kind Exchange. FTA permits

the transfer of the remaining Federal

interest in an asset to be transferred to

a new asset in order to facilitate the

early replacement of such assets. For

example, under the FTA Like Kind

Exchange policy (described in more

detail in 57 FR 39328, August 28, 1992),

buses which have reached only one-half

their expected useful life may be sold

and the proceeds may be used to pay

part of the cost of like-kind replacement

vehicles, so long as the remaining

Federal interest in the vehicles which

are sold is applied to the new vehicles.

In such cases, the proceeds of the sale
24684 Federal Register / Vol. 60, No. 89 / Tuesday, May 9, 1995 / Notices

of the vehicles does not have to be

returned to the Federal government.

• Incidental Non-Transit Use. FTAfunded facilities may also be used for

limited non-transit purposes. For

example, FTA funds may be used for

acquisition of a Compressed Natural Gas

fueling facility which will be used both

by the transit operator’s vehicles as well

as other public vehicles. In such a case,

FTA will participate in the capital costs

of the facility proportionate to the needs

for transit operations, including any

designed-in reserve capacity necessary

to assure reliable transit service.

However, non-transit use should be

incidental, i.e., not detract from or

interfere with the mass transit use of the

facility. FTA will determine what use is

incidental on a case-by-case basis. It

should be noted that 49 CFR parts 604

and 605 prohibit the use of FTA-funded

facilities for charter and schoolbus

purposes.

FTA Asset Management Tools

• Transfer of Federally-Assisted

Assets. 49 U.S.C. 5334(g) allows

existing, federally supported assets to be

transferred for another public use when

they are no longer required for transit

purposes. For example, if a bus garage

is no longer needed for transit purposes,

it may be transferred to local municipal

ownership for use in support of general

public services. This new provision may

also have application in support of

innovative financing techniques, for

example, by permitting transfer of

ownership of assets acquired with

Federal funds to local public use in

return for other local support for transit.

These transfers are subject to very

specific statutory conditions and must

be approved in advance in writing by

FTA.

• Coordinated Urban and Rural

Services. Assets acquired with FTA

funds may be used for any purpose

which is eligible for FTA funding. Thus,

assets acquired with Urbanized Formula

Program funds (49 U.S.C. 5307, formerly

Section 9) or Capital Program (49 U.S.C.

5309, formerly Section 3) funds may be

used in a rural setting together with

assets acquired under the Nonurbanized

Area Formula Program (49 U.S.C. 5311,

formerly Section 18), as part of a

coordinated rural/urban system.

Likewise, assets acquired for service in

non-urbanized areas can be used in

urbanized areas as part of such a

coordinated rural/urban system.

• Corridor Preservation/Advance

Right of Way Acquisition. In limited

circumstances, FTA program funds can

be used to acquire and preserve existing

transportation corridors and rights of

way for future use in transit fixed

guideway projects, or existing corridors

and rights of way acquired with local

funds can be used as local match for

FTA grants. Indeed, should there be an

increase in the market value of an

existing corridor or right of way

acquired with local funds only before

the use of that property for a transit

project, the property would be accepted

as a local match for an FTA grant at its

increased value. Acquisitions of existing

corridors and rights of way with FTA

funds are subject to two important

constraints: (1) The FTA/Federal

Highway Administration (FHWA)

requirement for completion of a Major

Investment Study before a major

investment project can be programmed

for construction funding; and (2) the

prohibition on advance land acquisition

that would prejudice the ultimate

decisions on mode and alignment for

any transportation project prior to

completion of the National

Environmental Policy Act (NEPA)

studies for that project.

The preceding are example only. FTA

welcomes all ideas and projects that

have the potential to leverage existing or

planned infrastructure investment, or

that will help to reduce public

transportation costs over time. Grantees

interested in pursuing these and other

options should refer to the appropriate

FTA regulations or publications

referenced in this Notice or contact their

FTA regional office to discuss their

plans in more detail.

FTA will continue to make full use of

its regulatory and statutory flexibility in

fostering innovative financing proposals

for transit. However, in all cases,

projects must comply with all other

statutory and regulatory requirements

such as the NEPA, Civil Rights Acts,

Americans with Disabilities Act, the

Clean Air Act, and the Administrative

Procedures Act.

Issued on: May 2, 1995.

Gordon J. Linton,

Administrator.

[FR Doc. 95–11241 Filed 5–8–95; 8:45 am]

BILLING CODE 4910–57–M