Section 350 of the National Highway System Designation Act of 1995 (Public Law 104-59) established a pilot program to create up to ten State Infrastructure Banks (SIB). Using Federal dollars, pilot States were permitted to establish a leveraging program or create a simple revolving loan fund, to be administered at the State level. The legislation charged USDOT with the implementation of the pilot program by selecting no more than 10 pilot SIBs and developing cooperative agreements with each participating State. The DOT Appropriations Act of 1997 expanded the SIB program to "at least 10 States," and provided $150 million in general funds to help capitalize the original pilot SIBs and any new SIBs approved by the Department.
State Infrastructure Banks (SIBs) are infrastructure investment funds that are created at the State or multi-state level. Designed to provide States with a new financing capability, they are intended to complement other parts of the U.S. Department of Transportation Program. SIBs:
Are created with Federal seed money (also known as capitalization grants),
Offer a menu of loan and credit enhancement assistance (such as lines of credit), and
Give States/locals maximum flexibility regarding project selection and financial management.
Traditional Federal transportation funding programs offer only one form of financial support -- reimbursement grants -- where the Federal share of a project's costs is set, usually at 80 percent. Unlike private sector construction financing, traditional grant programs do not provide a menu of alternative ways to finance those transportation projects. States currently cannot tailor the financial role of Federal funds to project needs even if, over time, an individual project requires less Federal money, or if it needs support in a form other than a grant. The proposals submitted by States in response to DOT's Innovative Financing Initiative showed that certain projects may only need loans or less direct financial assistance than has been offered traditionally.
States may choose to establish a revolving loan fund ("RLF"), or they may choose to leverage their Federal and local deposits through credit enhancement or bond issuance. An RLF simply converts Federal deposits into direct project loans. While this approach does leverage the Federal funds more effectively than traditional grants, the leveraging is limited by the speed at which loan repayments can be recycled by the RLF into new projects. The nearest model to this is the EPA Revolving Fund program for water and sewer projects. With Federal grants totalling $8 billion by 1994, the RLFs had supported projects valued at $14 billion. This reflects an average leverage ratio of just under two times. The more effective RLF programs achieved a leverage rate of about four times.
The alternative is to use the Federal deposit as a capital reserve as was recommended in the National Performance Review. In this case, the SIB borrows money in the bond market to establish a significantly larger loan fund. Given the magnitude of the infrastructure gap indicated by current needs assessments, DOT believes that leveraged SIBs will better address investment shortfalls than traditional grants or RLFs. However, greater reliance on debt for infrastructure investment is a significant shift in practice for most departments of transportation. It will take time for many of these to become familiar with the risks and benefits of leveraged loan funds.
Existing federally funded projects have a 1:4 ratio (20% local/80% Federal). That is, one new dollar is invested for every four Federal dollars. Simple RLFs would likely achieve a leverage ratio slightly above 1:1. Leveraged SIBs are projected to achieve ratios in the range of 2:1 to 4:1 recognizing that the ratio should increase over time and that local management decisions will affect the actual leverage ratio that is achieved.
To establish these funds, Federal monies would be provided up-front to States and deposited in SIBs. States could then lend that money to sponsors of transportation projects. As loans are repaid, the SIB's funds would be replenished, and the SIB could make new loans to other transportation projects. A SIB is like a private bank, which needs equity capital to get started, and offers customers a range of loan and credit options. SIBs, however, are not "depository institutions" as defined in banking laws.
What types of financial assistance might be available from SIBs?
The NHS legislation allows a broad range of financial assistance to be offered by SIBs, with the exception of grants. From early implementation results, it would appear that State laws will prove more restrictive than the NHS Act in this case. The following are some of the forms of financial assistance that can be offered by SIBs.
Low interest loans for all or part of a project,
Loans with interest-only periods in early years,
Construction period financing,
Lines of credit to support market studies,
Credit enhancement to qualify for private market bond insurance,
Subordinated debt instruments for revenue bonds,
Pooled credit for small issuers of debt, and
Equipment leasing pools.
Who might seek loans and credit from SIBs?
The NHS Act allows SIBs to provide assistance to any public or private entity building public transportation infrastructure. A broad range of entities provide transportation facilities in each State, some or all of which have needs that SIBs could meet. Those entities include:
Transportation districts at the county and local levels,
Transportation authorities (such as airports, toll road and port authorities),
Private project sponsors, and
State DOTs and Highway Departments
How do SIBs Relate to Transit?
SIBs were intended to support transportation infrastructure projects that had a strong income base from which to repay loans. At first it appeared that toll roads and bridges, and possibly ferry boats, would be the primary clients of SIBs. However, as implementation of the SIBs progressed, it became evident that potential benefits were sufficient to attract other projects, including transit rolling stock and facilities acquisitions or reconstructions. While transit systems do not charge fares sufficient to cover all operating expenses, much less contribute toward capital costs, they may have access to other sources of funding. These may include benefit assessment districts, special appropriations, dedicated tax increments of various kinds, and joint development revenues. Real cost savings from project acceleration and project finance will justify the use of these sources of funding to repay SIB support. The following case study provides an example of a SIB-supported transit project.
Gateway Multimodal Transportation Center
The financing strategy for this multimodal project in St. Louis, Missouri, illustrates how two SIB loans can be sequenced to achieve substantial project acceleration and interest cost savings for a debt-financed project. The projects are being sponsored by the City of St. Louis. The overall project comprises eight related component projects to serve customers accessing urban buses, intercity buses, light rail, intercity rail, and an international airport, as well as to provide parking and commercial space. The projects consist of: the addition of a light rail platform and pocket track for the Metrolink line; a street extension to serve the project; land acquisition for and development of a 600-space parking lot; a concourse building with amenities for intermodal customers; an Amtrak/Greyhound Bus terminal; a Greyhound Bus deck; Amtrak commuter trackwork; and pedestrian linkages.
The combined cost of this project will be $31.4 million. The City was able to secure $22.2 million in project financing from three sources: $6.4 million from an ISTEA demonstration project; $7 million from the state highway fund; and $8.8 million from a local sales tax. The Missouri SIB (known officially as the Missouri Transportation Finance Corporation, or MTFC) will provide two loans to the City: construction period financing to bridge the project funding gap; and a debt service reserve upon issuance of local bonds.
The first loan, for $18 million, will be made prior to the issuance of bonds. The City will use this loan as project construction capital. The loan will be repaid in four annual payments from the $8.8 million in local sales tax. Additionally, the net project income during years one through six will be applied toward MTFC principal repayment. The parking operations and the terminal building/concourse will be refinanced by the City in year six. The remaining $7.5 million loan will be repaid in a lump sum (a "take out") once the City sells bonds for the projects.
As the first loan is being retired, the Missouri SIB will provide the City with a second loan, this time for approximately $750,000. This will be used as a debt service reserve, to secure payment of principal and interest on the bonds to be issued by the City, thus avoiding the need to use some of the bond proceeds for the purpose. 6 The presence of this reserve fund will also help reduce the interest rate on the bonds.
The benefits of SIB assistance to the City, and to the residents of Missouri are two-fold. First, use of a SIB loan to cover construction costs means that the project can be undertaken right away, with up-front capital. Secondly, the construction period financing is being provided interest-free, thus reducing the average cost of capital for the entire project significantly, as follows.
Interest on the debt service reserve loan is expected to be set at 75% of market rates for tax-exempt, AA rated bonds of comparable term. In today's market this translates into a SIB interest rate of about 4.5%, versus 6%. Because SIB assistance is, in effect, substituting for external debt financing, savings of about 25% in the later years of the project will be realized for the interest component of the debt service reserve. Assuming a $7.5 million, 15-year bond issue with a $750,000 SIB debt service reserve, the SIB would reduce financing costs by over $1.687 million. This is in addition to cost avoidance from project acceleration.
The SIB program is very much in its infancy. The DOT Appropriations Act for 1997 provided $150 million in capitalization funding for the ten pilot SIBs, as well as for any additional SIBs the Secretary may designate. DOT received 26 new SIB proposals from 29 States. These included a Tennessee/Arkansas multi-state SIB and a Northern Plains (ND, SD, NE, WY) multi-state SIB. The Secretary designated all of the applicants as SIBs, with the proviso that seven of these--Illinois, Vermont, Minnesota, Rhode Island, Georgia, Massachusetts and Louisiana--would receive only provisional designation until they secure the necessary State-level authority to function as SIBs. With these designations, it is safe to say that the SIB concept itself is now a factor in transportation planning and financing.
The Administration NEXTEA surface transportation reauthorization proposal contains a request for $150 million per year for six years in continuing capitalization for SIBs, and it would expand the SIB program to all States of the Union, provided they have the requisite local authority to use the mechanism. If the funding level is authorized and SIBs achieve an average leverage ratio of three or more through loans, credit enhancement and other mechanisms comparable to the Missouri SIB, this could result in over $2.7 billion in new transportation infrastructure projects during the next 10 years.
How will States manage this new capability? Under whose jurisdiction will SIBs reside? These are thorny issues for some States. If, as has happened with some of the pilot SIBs, the new entity is formed under the State DOT, then financial expertise will have to be contracted for or employed. If the SIB is formed under the State Treasurer, then transportation expertise will have to be brought in. And, if the new SIB is formed independently from either, then both financial and transportation expertise will have to be arranged. This may be more easily decided than implemented.
At first, the SIB will be highly dependent upon existing administrative and regulatory institutions. It will have insufficient capital and revenue sources to act without direct and substantial cooperation from the State Treasurer and DOT. However, as it accumulates experience and capital, the SIB may (will) become increasingly independent. The State Treasurer will observe a new entity able to maintain a distinct credit rating, potentially able to issue its own bonds, and possibly even enjoying its own dedicated source of tax or other revenue. The State DOT will also note a new funding source in transportation infrastructure--one that can advance projects in accordance with, or even against the wishes of, the DOT. As the SIB accrues ever greater funding capabilities, it will become an alternate resource to the tax-funded State DOT.
What does this mean to transportation planning in a fiscally constrained Transportation Improvement Plan? As capital in the SIB increases, the SIB is able to make loans and loan guarantees to more and larger projects. However, as the projects mature, they must begin to repay the SIB loans--presumably this will require the use of toll revenues and user charges, or dedicated local funding streams. This is a radically different process than simple grant reimbursement. It will force a State-level reassessment at some point in the next few years, to determine whether the SIB is to be a short-term tool or a long-term institutional shift in transportation planning and implementation.
The Short Term
Those States and transit systems believing that Federal grant support will decline only for a short time will most likely implement SIBs as a stop-gap measure to address a one-time capital shortfall. Once Federal grant funding returns to ISTEA levels (or higher) these States will quietly phase out their SIBs and return (or so they believe) to direct grant reimbursement of infrastructure investment. To keep this process as simple and reversible as possible, their SIBs are unlikely to engage in more than the simplest revolving loans or interest subsidies, generating less than a 2-to-1 leverage ratio.
The Long Term
Many States have recognized that any reduction in Federal grant funding must be viewed as a permanent reduction, for the following reason. There is already an annual investment shortfall of $5 billion per year in transit, and a $20 billion shortfall in highways. Thus, any reduction in Federal investment simply adds to this annual shortfall. States and localities have already boosted their levels of investment to make up for prior reductions in Federal investment, so that in 1991, for the first time, the State and local share of transit investment exceeded the Federal share.
In such an environment, many states will treat their SIBs as long-term additions to the funding mix. For those projects with both public and private benefits, the SIB may be reimbursed from user fees or other non-tax revenues. For projects with entirely public benefits, the funding source may be a dedicated local tax, an addition to property taxes, or some other appropriated revenue. The assistance provided by the SIBs is likely to include the full range of capabilities, such as subordinated debt, loan guarantees, SIB-issued bonds, or lease-backed securities. In this instance, the State will have every incentive to leverage its capitalization, achieving ratios of 4-to-1 or higher.
The SIB program is too new to write a "conclusion" for it. As NEXTEA progresses through the rauthorization process and is ultimately implemented, the SIB concept will be fully tested. Based on current restrictions in some State constitutions and other laws, there may only be 40 or so SIBs formed in the first few years. However, the capability of SIBs to fundamentally alter the way States and communities think of transportation, and how it is funded, may ultimately result in the establishment of SIBs in every State, including Puerto Rico and the Virgin Islands. This will not create success--it will merely provide a promising environment for it. The actual success will depend entirely on the interaction between the newly-formed SIBs, their State governments, municipalities and their transit systems.
6. With many bond issues, the issuer is required to retain some portion of the proceeds from sale of the bonds, sometimes as much as 10%, as a reserve fund. This increases significantly the imputed interest cost of the bonds. A 5% face value issue might actually cost the issuer 5.5% apr due to the cost of the reserve.