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-1990s, FHWA and the states tested and evaluated a variety of innovative financing techniques and strategies. 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. 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. 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. 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. 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 in7 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. 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. 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. Although FHWA’s innovative financing tools have provided states with 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 1970s and early 1980s 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. 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. 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.