An additional way for public agencies to issue debt to help fund PPPs is for public agencies to form "63-20 corporations." These projects refer to IRS Rule 63-20, allowing not-for-profit corporations to issue tax-exempt debt on behalf of public agencies and private firms that are engaged in PPP deals, by leveraging future toll revenues, farebox revenues, or future lease payments.5 The Pocahontas Parkway project in Virginia utilized this type of financing; where over $350 million in revenue-backed tax-exempt bonds were sold by a not-for-profit corporation set up for the sole purpose of funding the project. The use of these 63-20 funds was approved by the state of Virginia and had no impact on the state's bond credit ratings.6 While states will be limited by their bonding capacity to the number of PPP projects they can finance with 63-20 corporations, this setup still provides a way to fund transportation projects without advancing scarce public funds.
New Jersey, a state with no current PPP program, is exploring the possibility of creating public nonprofit corporations to issue debt instead of full privatization of the state's toll roads, which was politically unpopular (Barlas 2007). Currently, Missouri, Texas, and Washington prevent the use of 63-20 corporations. Texas explicitly excludes nonprofits from issuing debt in this way, and Washington requires that any PPP-related debt be issued by the State Treasurer. Only Colorado, Georgia, South Carolina, and Virginia explicitly allow for non-profits to issue debt.
Considering the IRS support of this way of issuing debt, it is somewhat surprising that a state would prohibit the use of 63-20 corporations. It is a process by which states can generate funding to update infrastructure without impacting their bond credit ratings or detracting from the budget. Fifteen states have not put an express provision in their legislature regarding whether the public sector can form non-profits and issue debt, leaving the option open. States should enable their public agencies to take advantage of this IRS ruling as a way to limit direct public funding of a project, especially given the success of Virginia in its Pocahontas Parkway. For successful use of 63-20 financing, it must be understood that the nonprofit corporation will not just be a passive financing conduit, but will have long-term construction and operating responsibilities. Contracts should grant the 63-20 corporation an appropriate measure of supervision and control throughout the life of the project.7
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5 http://www.fhwa.dot.gov/PPP/defined_dbfo_6320.htm (last accessed on June 19, 2009.)
6 http://www.fhwa.dot.gov/innovativefinance/ifq62.htm#tech (last accessed on June 19, 2009.)
7 For further discussion of 63-20 corporations, see Hedlund (2007).