Traditionally, Federal-aid highway funds were provided as grants to reimburse costs for eligible highway projects. Section 129(a)5 allows States to loan some of its Federal-aid funds to pay for projects with dedicated revenue streams. A State may directly lend apportioned Federal-aid funding to projects generating a toll or that have some other dedicated revenue such as excise taxes, sales taxes, property taxes, motor vehicle taxes and other beneficiary fees. The State must receive a pledge from the project sponsor to use those revenues to repay the loans.
=> How do Section 129(a) loans enhance existing Federal funding?
Section 129(a) loans provide States with a means to recycle Federal-aid highway funds by lending them out, obtaining repayments from project revenues, and then reusing the repaid funds on other highway projects. This gives States the opportunity to get more mileage out of the annual apportionments.
=> What are the benefits of Section 129(a) loans?
Private investors find Section 129(a) loans attractive for several reasons.
• The loans can be used to offset up-front capital requirements that might otherwise have to be borrowed in the open market at higher rates.
• Section 129(a) loans can be subordinate to other debt so that other investors in the project, such as bondholders, can have a first or senior lien on project revenues. This allows the State to absorb a share of the risk that revenues will fall short of debt service requirements. The amount of senior debt remaining is now smaller, and therefore less risky, so it is more likely to obtain an investment grade rating and, as a consequence of the higher rating, a lower interest rate.
=> What are the requirements for Section 129(a) loans?
Any Federal-aid highway project is a potential candidate for a Section 129(a) loan, so long as the project sponsor pledges revenues from a dedicated source for repayment of the loan. Loans can be in any amount, up to 80 percent of the project cost, provided that a State has sufficient obligation authority to fund the loan | A $135 million Section 129(a) loan provided Texas with the bonding capacity needed to pay for the $940 million President George Bush Turnpike Project and greatly enhanced the creditworthiness of $446 million in revenue bonds issued for the first four segments of the project |
Proceeds from Section 129(a) loans can fund the costs of engineering, right-of-way acquisition, and physical construction. However, only those costs incurred after the date FHWA authorizes the loan may be funded by the loan; no costs incurred prior to the loan authorization can be reimbursed.
The following are the major requirements for Section 129(a) loans:
• Revenues from a Dedicated Source. The project sponsor must pledge revenue from a dedicated source to repayment of the loan.
• Loan Amount. The loan can be up to 80 percent of the project cost, provided that a State has sufficient obligation authority to fund the loan.
• Commencement of Repayment. Borrowers must begin to repay Section 129(a) loans within five years after the project opened to traffic or was otherwise completed.
• Completion of Repayment. The loan must be wholly repaid within 30 years from the date Federal funds are authorized for the loan.
• Interest Rates. States have discretion to set interest rates, so long as the rates are at or below market rates and improve the financial feasibility of the project receiving the loan.
• Compliance with Federal Requirements. All projects receiving Section 129(a) loans must comply with all Federal regulations that attach to any other Federal-aid highway project. There is one exception to this rule: if the Section 129(a) loan represents the only Federal participation in the project, it is acceptable for the project sponsor to select consultants and contractors consistent with State law; the Brooks Act and Title 23 competition bidding procures do not apply in this instance.
=> How can repayments of Section 129(a) loans be used?
States may use loan repayments to fund (1) any project eligible for funding under Title 23; (2) credit enhancement in the form of bond insurance purchases or as a capital reserve for project debt. These credit enhancement opportunities can improve project sponsors' access to the credit markets or to lower interest rates specifically for projects eligible for funding under Title 23. No Federal requirements attach to projects advanced with loan repayments. This means that, once the Federal funds cycle through the first loan, they no longer retain Federal character and may be used without complying with Federal requirements and laws that attach to Federal-aid highway projects.
For more information on Section 129(a) loans, see Chapter 4 of the Innovative Finance Primer, available at http://www.fhwa.dot.gov/innovativefinance/ifp/credass.htm, and Chapter 2 of the U.S. DOT Report to Congress on Public-Private Partnerships, at http://www.fhwa.dot.gov/reports/pppdec2004/index.htm#2cv1.
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5 The provision of law allowing these types of leases is codified at Section 129(a)(7) of Title 23, United States Code.