Private activity bonds (PABs) allow private parties to issue tax exempt debt based on the investment purpose of the bond proceeds and subject to a series of limitations. (See Box 7-6.) Federal law generally prohibits debt issuers from financing highway and transit programs by combining tax-exempt debt or its proceeds with long-term private management contracts or private equity investment. This prohibition, written into the 1986 Tax Reform Act, includes exceptions for airports, solid waste facilities, and high speed rail because those infrastructure classes were attracting or expected to attract private-sector investment and management.
Given the potential application of PABs to surface transportation, Congress created a limited PABs demonstration program for highway/intermodal projects. Authorized by SAFETEA-LU, the program permits U.S. DOT to allocate up to $15 billion in PABs among qualified highway and surface freight transfer facilities. PAB designation allows the bonds to retain tax-exempt status despite a greater level of private involvement than is ordinarily allowed for these types of bonds. This allows projects with private-sector financial participation to obtain lower financing rates, eliminating one barrier to private sector participation in transportation investment. PABs are intended to make private infrastructure investment eligible for the same federal tax exemption that state and local governments enjoy if they assume debt directly.
The current credit crisis that has disrupted the tax-exempt markets could not have come at a more inopportune time for the new PABs program. As of late 2007, U.S. DOT had received applications and expressions of interest for PAB allocations that suggested full utilization of the authorized $15 billion by mid-2010. While one significant PAB transaction has closed its financing, the effective withdrawal of monoline credit enhancement necessary for tax-exempt debt has forced other project finance plans to turn instead to the commercial bank markets or to delay projects altogether. Nevertheless, it is anticipated that as the tax-exempt credit markets return generally, state and local transportation agency demand for PAB allocations should return as well.
BOX 7-4: STATE INFRASTRUCTURE BANK PROGRAM |
State Infrastructure Bank lending was first authorized by the National Highway System (NHS) Act of 1995, although federal rules have permitted states to use federal aid to fund loans in addition to direct expenditures (i.e., Section 129 loans) since ISTEA. All states, territories, and the District of Columbia are authorized to enter into cooperative agreements with the Secretary of Transportation to establish infrastructure revolving funds. In addition to initial capitalization grants, states may add up to 10 percent of their federal transportation funds for fiscal years 2005 to 2009 in several major program funding categories. As of December 2008, 33 states and Puerto Rico had established SIB programs, with an aggregate amount of 609 loan agreements representing just over $6 billion in loan commitments. Five states (Arizona, Florida, Ohio, South Carolina, and Texas) account for approximately half of the total number of loan agreements and nearly 90 percent of the total loan amounts. This statistic, however, does not accurately reflect the extent of federal-aid deposited into the loan revolving accounts. The SIBs in some states, such as Arizona and South Carolina, rely principally on borrowing through the tax-exempt bond market rather than federal apportionments to obtain lendable funds. Loan repayments then are used to retire the debt that has been issued rather than being recycled into a "second round" of project loans. SIBs operating in this fashion are more properly viewed as state financing conduits rather than loan revolving funds. |
Source: Federal Highway Administration.