Under the pilot program, a SIB serves essentially as an umbrella under which a variety of innovative finance techniques can be implemented. Much like a bank, a SIB would need equity capital to get started; and equity capital could be provided at least in part through federal highway funds. Once capitalized, the SIB could offer a range of loans and credit options, such as low-interest loans, loan guarantees, or loans requiring repayment of interest-only in early years and delayed repayment of the loan’s principal. For example, through a revolving fund, states could lend money to public or private sponsors of transportation projects; project-based or general revenues (such as tolls or dedicated taxes) could be used to repay loans with interest; and the repayments would replenish the fund so that new loans could be supported. Alternatively, states could use federal capital as a reserve, or as collateral against which to borrow additional funds, usually by issuing bonds. Pilot states can capitalize a SIB in part by depositing in the bank a maximum of 10 percent of most of their federal highway funds for fiscal years 1996-97. States not participating in the pilot program differ in their interest in SIBs and in their willingness and/or ability to use the full range of SIB financing techniques. Eleven of the 15 states we surveyed indicated that they were definitely or probably interested in participating in the SIB Pilot Program. However, only 9 of the 15 states submitted SIB applications to DOT. Four of the states—Arkansas, Louisiana, Montana, and New York—indicated that they were probably or definitely not interested in participating in the pilot program. Because we primarily targeted states that had expressed an interest in innovative financing to DOT, survey respondents indicated a higher interest than would be expected nationwide. Nationwide, only 15 states submitted applications to DOT to take part in the pilot program. While six other states expressed interest in the program to DOT, they did not submit an application. On April 4, 1996, DOT announced that Arizona, Florida, Ohio, Oklahoma, Oregon, South Carolina, Texas, and Virginia had been selected to participate in the pilot program. On June 21, 1996, DOT added California and Missouri. Figure 1 shows the applicant states and those selected to participate in the pilot program. DOT will assess how state SIBs are operating under the pilot program. Specifically, the legislation establishing the pilot program directs DOT to report on the financial condition of each infrastructure bank established under the pilot program. This report is to be transmitted to the Congress by March 1, 1997. Appendix III provides you with information on projects that the pilot participants are considering for financial assistance from SIBs. According to the Federal Highway Administration (FHWA) official responsible for the pilot program, the states are in the process of establishing and capitalizing their SIBs; thus, they have not yet decided on the projects that the SIBs will finance. As figure 1 indicates, more than half of the SIB Pilot Program applicants are southern and western coastal states with large and/or growing populations that necessitate additional highway construction. States with large land areas that have comparatively small populations and most northeastern states generally elected not to apply for a variety of reasons. These reasons might include the states’ and regions’ fiscal capacity, the public’s unwillingness to incur debt to finance highways, and the availability and cost of rights-of-way for start-up projects. In connection with DOT’s fiscal year 1997 appropriation, the administration proposed expanding the SIB Pilot Program to include additional states and to provide $250 million in highway trust fund revenue for capitalizing the banks. The House of Representatives rejected the administration’s proposal on the grounds that the pilot program is still in its very beginning stages and that any further expansion of the program should be considered in the context of the reauthorization of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). The Senate provided $250 million for the SIB Pilot Program and allowed the Secretary of Transportation to distribute SIB funds to more than 10 states on the grounds that SIBs are a promising way of facilitating needed infrastructure investment, especially when all levels of government are facing constrained resources. The conferees agreed to provide $150 million for the SIB Pilot Program, which is to remain available until expended, out of the general fund rather than the Highway Trust Fund. In addition, no distribution of funds is to be made until 180 days from the date of enactment. The conferees also agreed to permit the Secretary of Transportation to approve SIBs for more than 10 states. The President signed the legislation on September 30, 1996. Ten surveyed states provided us with estimates of the extent that their needs may be served by a SIB. Eight states indicated that they would use SIBs to help fund less than 10 percent of their transportation projects. Two of the states indicated a higher expected use of SIBs: Ohio estimated 10 to 25 percent of its projects could be financed through a SIB, and Michigan estimated that 25 to 50 percent of its projects could be financed through a SIB. Seven surveyed states expressing interest in creating a SIB indicated that they would probably use the funding for direct loans. Six states indicated that they would probably use the funding for reserves for bonds or loans. The states’ responses are shown in figure 2. In discussing their views, the 11 responding states seemed open to using a variety of financing tools as part of their SIB. For example, 6 of the 11 states that answered this question told us that their SIB would probably use more than one financing tool, and only 2 states said that they probably would not use a particular tool. Michigan and California, for example, said that they would probably use some combination of all the tools. Furthermore, Michigan and Ohio indicated that their SIBs would probably use other finance tools, such as letters of credit, in addition to those listed in figure 2. The SIB concept is intended to complement traditional funding programs and provide states with increased flexibility to offer many types of financial assistance tailored to fit a project’s specific needs. As a result, projects could be completed more quickly, some projects could be built that would otherwise be delayed or infeasible if conventional federal grants were used, and private investment in transportation could be increased. Furthermore, a longer-term anticipated benefit is that repaid SIB loans can be “recycled” as a source of funds for future transportation projects. Thus projects with potential revenue streams will be needed to make a SIB viable. Yet this could also serve as a drawback, and some state and industry officials question whether a sufficient number of revenue-generating projects can sustain a SIB and whether debt financing will prove acceptable to state and local politicians as well as the general public. Traditional federal transportation funding programs generally consist of grants, where the federal share of a project’s cost is set, usually at 80 percent, and the state pays the remaining 20 percent. Until recently, states have generally not been able to tailor federal funding to a form other than a grant. Under the pilot program, a SIB is essentially an umbrella under which a variety of innovative financing techniques could be implemented. Much like a bank, a SIB would need equity capital to get started. This capital could come partially from federal funds. Once capitalized, the SIB could offer a range of loans and credit options. For example, through a revolving fund, states could lend money to public or private sponsors of transportation projects. Although new for federal transportation projects, revolving funds have been used for other infrastructure investment, such as wastewater treatment facilities required by the Environmental Protection Agency (EPA). EPA’s state revolving funds are structured in two different ways and can be used to illustrate how a transportation SIB might be set up. The first model is a basic revolving loan fund. Under this model, a state SIB would lend capital directly to projects; project-based revenues (such as tolls or dedicated taxes) would be used to repay loans with interest. The repayments would replenish the fund so that a new generation of loans could be made. The second model is a leveraged revolving fund. In this instance, states would use federal capital as reserves or collateral against which to borrow additional funds, usually by issuing bonds. The SIB would pay interest on the bonds but would in turn lend out the bond proceeds to individual projects. With this type of model, leveraging would increase the pool of capital available to support project loans. Furthermore, like the basic revolving fund, repayment of project loans plus interest would support the SIB’s repayment of its bonds as well as provide funds for the SIB to loan to future projects. For example, Ohio plans to initially capitalize a SIB with $65.5 million, and issue $87 million in revenue bonds. As a result, the SIB could loan out a total of $152 million to projects. SIB funds could also be used to provide credit enhancements for transportation projects. Credit enhancements, such as loan guarantees or bond insurance, provide additional security to commercial lenders or private investors who may be providing funds as part of an overall financing package. Credit enhancements can also result in lower interest costs or greater borrowing power for a project. Some states view SIBs as complementary to their existing innovative financing efforts. For instance, Ohio’s SIB application notes that as a result of numerous funding requests coming from the state transportation department’s long-range multimodal transportation program, state law was modified to allow the state’s Director of Transportation to make loans to agencies, organizations, and persons to acquire, develop, and/or construct transportation facilities. The law also authorized the director to deposit payments from such loans into a revolving fund for subsequent loans.