[Federal Register Volume 60, Number 89 (Tuesday, May 9, 1995)]
[Notices]
[Pages 24682-24684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11241]



      

[[Page 24681]]

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Part III





Department of Transportation





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Federal Transit Administration



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Innovative Financing Initiative: Administrative Policies and Procedures 
Facilitating Use of Innovative Finance Techniques in Federally-Assisted 
Projects: Notice

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

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.

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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 market-
oriented 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.
    <bullet> 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).
    <bullet> 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).
    <bullet> 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 [[Page 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 transit-related 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 
revenue-producing 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 transit-related project.
    <bullet> 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 transit-supportive development. If the real property is leased, 
the proceeds are considered program income and may be used for any 
transit purpose.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 design-build (``turnkey'') as a method of infrastructure project 
delivery. Grantees can also consider use of vendor-financing 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.''
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 
[[Page 24684]] of the vehicles does not have to be returned to the 
Federal government.
    <bullet> Incidental Non-Transit Use. FTA-funded 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

    <bullet> 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.
    <bullet> 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.
    <bullet> 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