This section outlines the Commission's recommendations related to direct federal assistance programs, financing incentives, and tax policy. Together, these recommendations are intended to continue and enhance past and current initiatives on the part of the federal government to facilitate non-federal investment in surface transportation infrastructure.
II-6. Congress should reauthorize the TIFIA program with a larger volume of credit capacity, broadened scope, and greater flexibility. In conjunction with additional credit assistance, Congress should authorize incentive grants for pre-construction feasibility assessments and for capital cost gap funding to further support the development and financing of major user-backed projects. The Commission recommends a total of $1 billion per year in budget authority for these purposes as follows: $300 million per year for credit assistance, $100 million per year for pre-construction feasibility assessment grants, and $600 million per year for capital cost gap funding grants (as detailed below).
II-6a. Credit Assistance ($300 million in budget authority per year)
TIFIA has proved to be a successful niche program to facilitate the financing of major projects with dedicated revenues, especially user-backed projects, by providing important credit enhancement. In order to support states wishing to use this supplemental funding for such investments, and based on the recent increased demand for credit assistance (especially in light of current financial market conditions), TIFIA should be reauthorized and its funding level for core credit activities increased. The proposed $300 million in budget authority would be able to fund about $2-3 billion in annual credit assistance.
The Commission further recommends that the TIFIA program be given greater flexibility in committing resources for credit instruments. This is necessary because of the relatively "lumpy" nature of the development pipeline for major user-backed projects that results in uneven utilization of budgetary resources. This might be addressed, in part, by exempting TIFIA from the annual obligation limitations that apply to most federal highway programs. The TIFIA program would continue to have multi-year budget authority from the HTF that could carry over from one year to the next. Perhaps the annual commitment of program resources could be subject to special credit limits, provided any such limits were set high enough or made flexible to accommodate demand.
II-6b. Pre-Construction Feasibility Assessment Grants ($100 million in budget authority per year)
The Commission recommends that Congress authorize and fund this state incentive grant assistance program to address a key obstacle to advancing user fee-backed projects: the funding of early feasibility assessment costs. The program would provide funding for a portion of the costs that a state or local sponsor must incur to undertake early planning, feasibility studies, environmental clearance, procurement, and other development activities. The selection process for the program would be similar to that of the current TIFIA credit program, with established specific selection criteria. Under this program category, funds provided to selected recipients could be grants. Alternatively, they could be "conditional loans," whereby they would be subject to repayment if the project progresses to implementation and once user-based revenues exceed pre-established targets. Such an early assistance program could create substantial leverage of limited federal funds as a percentage of total construction investment. For example, a $20 million feasibility assessment grant could justify and lay the groundwork for a potential $1 billion highway capacity expansion. To be sure, not all feasibility studies lead to projects, but many likely would. Because pre-construction feasibility assistance grants would assist state and local officials in using direct "user pay" approaches where appropriate, they would help expand the revenue sources available for surface transportation investment.
II-6c. Capital Cost Gap Funding Grants ($600 million in budget authority per year)
The Commission recommends that Congress authorize and fund this state incentive grant assistance program to complement TIFIA credit assistance for major user-backed projects. This new program would help offset the construction costs of TIFIA-eligible projects. It would be designed to provide "gap funding" for projects that are partially but not fully capable of being supported by direct user fee financing. Once a project has achieved environmental clearance and preliminary engineering, this program could provide assistance to help fund a portion of the estimated gap between the amount of capital for construction that can be derived from future user fees and the amount necessary to complete and maintain the facility for its useful life. Capital cost gap funding grants would be allocated to projects through a pre-established selection process like that used for the current TIFIA program. As with the feasibility assessment grant program just described, this program could create substantial leverage of limited federal funds as a percentage of total construction investment. It, too, would help state and local officials use more direct "user pay" approaches and thus expand the revenues available for surface transportation investment and minimize the reliance on tax revenues for, or the continued deferral of, the largest and most expensive capital projects.
II-6d. TIFIA Program Refinements
In addition to the funding enhancements just described, the Commission urges Congress to maintain and enhance the TIFIA program's overall flexibility, which is essential for its successful application to a wide array of important projects around the country. The Commission offers the following suggested TIFIA credit program refinements:
• To maximize the program's effectiveness given limited resources, take steps to give priority to the financing of new capacity projects over the refinancing of existing facilities. Congress should consider imposing several requirements for the use of TIFIA assistance to refinance existing debt, including-as part of the acquisition of an existing facility-requiring that significant new capacity be part of the acquired facility or proposed refinancing, limiting TIFIA assistance to 50 percent of the cost of the new capacity (excluding the acquisition cost of an existing facility), and requiring sponsors of refinancing proposals to pay for some or all of their federal budgetary subsidy cost (capital reserve) so that limited federal resources are preserved for new projects.
• To support viable projects with more constrained capital market access, allow TIFIA credit support to fund up to 50 percent of eligible project costs (TIFIA currently imposes a credit cap equal to 33 percent of eligible project costs).
• To increase the value of the financial subsidy provided to projects receiving credit assistance and address a demonstrated friction point in the current program construct, eliminate the "springing lien," which hinders the ability of senior project debt to obtain investment grade ratings. The "springing lien" refers to the provision in the TIFIA statute that requires the federal government's claim on a project's pledged revenues or other security to not be subordinated to the claims of other creditors in the event of bankruptcy, insolvency, or liquidation. The federal government's financial participation through TIFIA is limited to 33 percent of the project's capital cost by statute (and to not more than 50 percent as recommended in this section). This limitation is designed to leverage a relatively modest federal investment of "patient capital" with a large amount of private or other non federal capital. This federal financing role can be very cost-effective, but only if the TIFIA investment enhances the ability of the senior debt to gain access to capital markets. When the federal investment is intended to facilitate a significant amount of non-federal financing, the springing lien is inappropriate and counterproductive. Any additional perceived credit risk can and should be reflected in the credit instrument's subsidy cost.
11-7. Congress should continue to allow states to use their federal program funds to further capitalize State Infrastructure Banks. It also should provide additional federal seed capitalization funds for SIBs and/or multi-state revolving loan fund compacts. This recommendation recognizes the value of enabling smaller projects at the state and local level, which otherwise might find market access challenging, to embrace user fees and other dedicated funding sources. The Commission suggests additional capitalization funding of up to $500 million per year for this purpose.
Although states have had the ability to fund their SIBs with a portion of their federal-aid grants, most have not done so to a significant degree because of chronic underfunding to meet capital needs. Providing this level of additional funding to the SIB program could help support a wide range of smaller projects that have the potential to leverage user-backed payments or other new revenue streams but that lack access to the capital markets on a cost-effective basis. The infusion of federal funds may be of particular value in the near term because of recent dislocations in the credit markets-including for even the most "plain vanilla" financings of state and local governments, let alone for more complex project financings.
Following the proposed model for an expanded TIFIA program, states may wish to create their own programs to help fund pre-construction costs and/or capital grants for user-Packed projects as part of these expanded SIB programs. Congress may wish to promote such program activities through specially targeted funding or other means. In this manner, smaller projects could benefit from the same types of additional financial assistance afforded to projects of national interest under federal credit programs.
II-8. Congress should continue the highway / intermodal Private Activity Bond (PAB) program and increase the national volume cap from the current $15 billion to $30 billion. Congress should limit the use of the program to projects that directly provide net new capacity; this tax benefit should not be used to subsidize the acquisition financing of existing assets (i.e., "brownfield monetizations").
The Commission believes that the highway / intermodal PAB program, authorized in SAFETEALU with a $15 Pillion national volume limitation, has the potential to be an important and effective tool for states and local governments. (Highway / intermodal PABs are not subject to the annual state volume caps that apply to certain other PAB categories.) As of December 2008, U.S. DOT had approved allocations totaling nearly $5 Pillion for eight projects. But a year ago there were realistic projections that the currently authorized PAB allocations would be fully subscribed by 2010. The current credit crisis has significantly constrained the tax exempt capital markets generally and this program specifically.
It is anticipated that as the tax-exempt capital markets gradually recover, state and local demand for PAB allocations also will return. The Commission therefore recommends its reauthorization and expansion. State and local project sponsors increasingly will explore the benefits of advancing major projects through public-private partnerships, and their ability to issue tax-exempt debt will be an important tool to help finance investments with major public benefits. The volume of "ready-to-go" projects is expected to grow more quickly in the years ahead for two reasons:
• More states will enact legislation enabling them to take advantage of private-sector financial participation for the development and operation of transportation facilities.
• The turmoil in the financial markets, which has made obtaining project financing difficult (especially for projects relying on direct user revenues), likely will subside, enabling more projects to come to market.
The Commission acknowledges that increasing the volume cap likely will be assessed a budgetary cost (tax expenditure). However, the potential value that PABs can and will have in the future as a method to help address the investment gap for certain types of transportation improvements is significant. Further, other categories of PABs that can be issued to finance transportation infrastructure with public benefits-such as airports, docks and wharves, and government-owned high-speed intercity rail facilities-are not subject to any volume limitation.
In order to better support the financing of important public transportation projects, especially in light of growing energy security and environmental protection concerns, the Commission also recommends that Congress redefine "mass commuting facilities" to include rolling stock and exclude mass commuting facility PABs from the annual state volume caps (as is the case for other categories of PABs that may be issued for infrastructure improvements that significantly benefit the public).4 Finally, the Commission notes that there are certain technical factors that have a limiting effect on the potential use of highway / intermodal PABs; these factors and potential remedies are addressed in Chapter 7.
II-9. The Commission believes that highly targeted tax subsidies (as with incentive grants) can be used to spur state, local, and private investment in the transportation system. In particular, Congress may wish to consider authorizing the issuance of tax credit bonds to subsidize the financing of certain improvements in areas where the public benefits cannot be fully monetized by direct users or other beneficiaries.
Various tax incentive approaches have been proposed over the years, especially for targeted improvements that do not benefit from existing grants or other forms of financial assistance and for which there is a potential argument for some form of federal subsidy. Consistent with its focus on the "user pays principle," the Commission believes that such general subsidies should be limited and be justified by significant public, as opposed to private, benefits. In the context of transportation investment, this means that tax incentives should be structured narrowly to facilitate specific improvements that benefit the public. This recommendation applies to existing incentives, such as private activity bonds, as well as to proposed incentives, including investment tax credits and tax credit bonds. Tax credit bonds, in particular, may be effective in providing federal financial support to major projects that benefit the public. Intercity passenger rail and goods movement projects are specific investments with broad national benefits that may be good candidates for this type of federal subsidy.
II-10. If Congress chooses to create a national infrastructure financing organization (e.g., National Infrastructure Bank or National Infrastructure Reinvestment Corporation) that includes transportation as part of its core mission, such an entity should be structured to address actual funding and credit market gaps. It should target assistance to projects that are essential to the national network that do not have access to sufficient resources through existing programs or other sources. Congress also should ensure that any such entity is properly integrated with or a logical extension of current federal funding and financing programs, most notably TIFIA and other federal credit programs currently housed within U.S. DOT.
Some policy makers and industry participants have proposed creating a national infrastructure bank or investment corporation in order to help address pressing infrastructure investment needs. These proposals are driven by two primary objectives:
• To accelerate investment in critical infrastructure (through debt financing mechanisms and/or General Fund transfers)
• To improve the allocation of limited resources by the federal government to investments that are essential to improving the national transportation system
Although improving project selection and accelerating investment are desirable goals, policy makers differ on how best to accomplish this. The Commission believes that proposals to create a new special-purpose financing entity need to adequately address key questions about how the stated objectives would be achieved and why the proposed mechanism(s) would be the best way to achieve those objectives. These questions deal with:
• The critical infrastructure improvements being targeted: which ones are nationally significant and warrant federal assistance from the new entity?
• The types of financing assistance necessary or helpful in accelerating the investments: how would any financing assistance provided by the entity be different from that available through existing governmental programs or private sources?
• The sources of revenue used to fund the investments and repay any financing assistance: how much of the entity's assistance would be in the form of grants for non-revenue projects, how would such assistance be funded-from the General Fund, the Highway Trust Fund, or other sources-and how much would fund projects that provide a repayment stream back to the entity, paid for by, among other sources, user fees?
• The control over resource allocation: how would projects be selected and how would the entity acquire expertise and use methods leading to a superior allocation of resources compared with existing agencies and programs?
• The federal budgetary impact and other policy issues: how cost-effective is the proposal compared with existing agencies and programs, and what are the long-term federal liabilities associated with it?
In order to justify the creation of a new special-purpose entity, the Commission believes the case must be made that it would provide necessary financing that is unavailable through government programs or the private markets and that it would be more effective in delivering the financial subsidies than current programs are. Implicit in these proposals is an assumption that a new entity, independent of the U.S. DOT and having a narrower mission focused on certain kinds of infrastructure investment, would be more effective in selecting projects and managing resources. It would be important for any new entity to acquire the expertise necessary to evaluate financing proposals from across modes or even among infrastructure sectors. Congress also must consider how a new entity would coordinate its activities with the U.S. DOT and other existing agencies and programs.
It should be noted that the Commission's finance-related recommendations can be achieved with existing agencies and programs (e.g., the TIFIA credit assistance program) and do not require the creation of a new national-level entity. Either way, the Commission urges that important steps be taken (through fundamental reform of existing programs and/or proper structuring of a new entity) to support the infrastructure investment that provides the highest societal returns while leveraging limited tax dollars with private sector investment and new sources of revenue-particularly direct user fees. Any existing or new federal financing for targeted investments should offer one or more of the following benefits:
• Lower cost financing and more flexible terms than available from other sources
• Credit enhancement to help projects gain access to private capital markets
• Financial assistance for major projects of national importance that cannot be fully funded with identified revenues
The Commission stresses that the potential role of a new infrastructure financing entity should be examined in the context of long-term funding needs and not just as a short-term measure designed primarily to address the current disruption of the credit markets. If any new entity simply substitutes for capital available in the private markets, it will not significantly address the nation's long-term investment needs. In contrast, if it focuses instead on identified funding gaps and market failures in order to spur greater use of private capital in conjunction with the financing of user-backed projects, it can play a meaningful role in expanding surface transportation infrastructure.
The Commission also emphasizes that the focus on new or enlarged funding programs and financing techniques should not be seen as a substitute for generating revenue by raising taxes, expanding tolling, or developing other sources. The institutional mechanisms being proposed, whatever their merit, will not in and of themselves directly address the core problem of insufficient revenue to support needed investment. Finally, in line with the Commission's general principle that system funding should be paid for by system users, the Commission believes that any new infrastructure entity should not be funded primarily with general tax revenues or General Fund borrowing.
In Chapter 7, the Commission offers further discussion of the potential design of a new national financing entity, including consideration of available capital sources (both debt and equity) and financing techniques as well as potential incentives to help project sponsors move toward a system that relies more heavily on user-based revenue mechanisms.