Finance Tools. Surface Transportation Funding, Finance, and Leadership. Joung Lee Wendy Franklin Deb Miller

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1 Finance Tools Surface Transportation Funding, Finance, and Leadership Joung Lee Wendy Franklin Deb Miller

2 AASHTO Center for Excellence in Project Finance (CEPF) One of four Centers of Excellence authorized by SAFETEA-LU Cooperative effort between AASHTO and USDOT; currently in 5th program year Program activities Wharton Transportation Executive Program Technical workshops Project finance seminars Research Ventures with other transportation-focused organizations Comprehensive funding and financing website at: Mission: To provide support to State transportation departments in the development of finance plans and project oversight tools and to develop and offer training in state-of-the-art financing methods to advance projects and leverage funds. SAFETEA-LU Section 5309(c)(4) 2

3 Presentation Outline Reauthorization of the Federal Program Transportation Needs and Trends Funding Sources and Finance Tools Lessons on Leadership: Funding and Program Delivery in Lean Times Questions and Discussion 3

4 Reauthorization of the Federal Program 4

5 Current Challenges America is at a crossroads in transportation Political challenges to reauthorization Not enough money No earmarks Increased partisanship in general and in transportation Presidential politics Reexamination of the federal role and interest Lack of public understanding on transportation issue 5

6 Where We Are Now Congress acted to keep the Trust Fund Solvent September 2008: $8.017 billion General Fund transfer to the Highway Trust Fund August 2009: $7 billion General Fund transfer to the Highway Trust Fund September 30, 2009: SAFETEA-LU expired March 1, 2010: Highway Trust Fund shutdown for two days March 18, 2010: $19.5 billion in foregone interest payments credited to the Highway Trust Fund June 30, 2012: Ninth and current SAFETEA-LU extension expires Fiscal Year 2013: Highway Trust Fund projected to become insolvent 6

7 The View From Congress Senate has passed a two-year bill (S 1813) at $109B Passed Identified $14 billion in offsets House Transportation and Infrastructure Committee has passed a 90-day extension (HR 4348) Passed Includes Keystone XL provision Conference is key 7

8 8 Other Considerations Devolution of the Federal program? 30 votes in the Senate for DeMint amendment California, Kansas, Nevada, Oklahoma, and Tennessee have automatic adjustment provisions to state gas tax Chairman Paul Ryan s Budget Resolution $43 billion (45.5%) reduction in 2013 outlays for Function 400 Transportation Could include greater cuts for Highway Trust Fund programs

9 9

10 10 Transportation Needs and Trends

11 2009 Capital Spending ($ Millions) Highways Transit Local $21,414 23% Federal $40,562 43% Local and Agency Funds $7,929 44% Federal $7,686 42% State $32,549 34% State $2,615 14% Source: FHWA Highway Statistics, Table HF-10 Source: APTA Fact Book, Table 44 11

12 Sources of Funding for Highway Spending (Capital and O&M) (All Levels of Government, 2009) Investment Income and Other Receipts 7% Other Taxes and Fees 5% Bond Proceeds 13% General Fund Appropriations 22% Motor-Fuel and Vehicle Taxes 43% 12 Source: FHWA Highway Statistics, Table HF-10 Property Taxes and Assessments 4% Tolls 5%

13 Billions of Dollars Combined Highway and Transit Spending ($ Billions, ) Total Spending Total Capital Spending Total Federal Spending

14 Percent of Nominal GDP Combined Highway and Transit Spending (Percent of GDP, ) 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Sources: Congressional Budget Office, Spending on Transportation and Water Infrastructure, Table W-1 and Bureau of Economic Analysis GDP tables 14

15 Annual Federal Investment Gap by Sector Highways Energy generation Mass transit Passenger rail Airports Water Freight rail Ports Dams and levees Inland waterways Level of New Investment (Billions of Dollars) Meeting the Infrastructure Imperative, Center for American Progress 15

16 Needs Nationally, meeting only about 1/3 of roughly $200 billion required each year to maintain and improve the system At federal level, also meeting only about 1/3 of needs we face a $400 billion federal funding gap over next 6 years under current policies and revenues 16

17 Billions of Miles 3,050 Vehicle Miles Traveled - Jan 2004 to Jan 2012 (Moving 12 Month Total) 3,000 2,950 2,900 2,850 2,800 SLIDE 17

18 Millions of Dollars (2011 Constant) Truck, Buses, and Trailer Retail Tax Receipts ( ) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, SLIDE 18

19 19

20 ($ billions) Highway Trust Fund: Receipts and Outlays Discrepancy Total Outlays Total Receipts $ $ SLIDE 20 Note: Excludes $8.017 billion transfer from General Fund to Highway Account of HTF in September 2008; $7 billion transfer fro m General Fund to Highway Account of HTF in August 2009; $19.5 billion transfer from General Fund to Highway and Mass Transit Accounts of HTF in March SLIDE 20

21 ($ billions) Estimation of Federal Highway and Transit Obligations Through 2022 Maintaining current services through FY 2012; Assuming Maintaining minimum current services prudent through balance FY 2012; of $4 billion in Highway Account and $1 billion in Assuming "minimum prudent balance" of $4 billion in Highway Account and $1 billion in Mass Transit Account; Mass Transit Account; Assumes historical General Fund appropriations for transit. Assumes historical General Fund appro Federal-aid Highway Highway Safety Transit $40.7 $41.2 $40.8 $38.9 $32.3 $32.8 $33.3 $33.9 $34.6 $35.3 $36.0 $36.7 $ $11.9 $11.3 $ $9.4 $8.1 $7.7 $7.8 $7.9 $8.0 $8.1 $9.0 $9.0 $9.2 $ $7.7 $1.3 $1.3 $1.3 $1.2 $1.2 $1.3 $1.3 $1.3 $1.3 $1.3 $1.4 $1.4 $1.4 $

22 22 Funding Sources and Finance Tools

23 Revenue Sources for Investment in Surface Transportation Assets Federal-aid highway program Federal General Fund State funds Motor vehicle fuel taxes, license fees, registration fees, sales taxes State general funds Local funds Tolls Fare box receipts; value capture revenue Availability payments 23 Funding vs. Financing

24 Federal Infrastructure Policy Tools Funding (Grant) Programs Finance-Related Programs Credit Assistance (TIFIA, RRIF) Tax Incentives Tax-exempt Bonds (Governmental, PABs) Tax-credit Bonds (BABs, QTCBs, TRIPs?) Regulatory Initiatives Permitted uses of federal funds (GARVEEs, SIBs, Sec 129 Loans) Tolling authority Institutional Arrangements / Program Delivery National Infrastructure Bank (NIB) Proposals 24

25 25 Selected USDOT Finance-Related Programs TIFIA credit (loans / guarantees, lines of credit) for surface transportation projects o 26 credit commitments totaling $8.7 billion since 1999 ($335 million avg size); PV financial benefit of 15-30% RRIF credit (loans / guarantees) for railroad projects o 32 credit commitments totaling $1.6 billion since 2002 ($50 million avg size); PV financial benefit of 10-20% Private Activity Bonds (PABs) for highway-intermodal / Title 23 projects o $2.2 billion issued (5 projects); $5.9 billion allocated (8 projects); $6.9 billion remaining volume cap; PV financial benefit of 10-15% Build America Bonds (BABs) for governmental purposes o Over $180 billion issued during (ARRA initiative) for all governmental purposes (about 25% for transportation); estimated $20 billion savings to state/local issuers (PV financial benefit of 10-15%) GARVEE Bonds for highway projects o 25 states plus DC and VI have issued over $14 billion since 1998 State Infrastructure Bank (SIB) assistance for surface transportation projects o 32 states have SIBs; few are active; about $700 million of federal funds have been used to capitalize SIBs, which have made over 700 loans totaling about $4 billion since 1997

26 State Transportation Finance General obligation or revenue bonds (47 states + DC + PR) GARVEE Bonds (33 states + DC + PR) Private Activity Bonds (PABs) (6 states) Build America Bonds (BABs) (25 states) TIFIA federal credit assistance (12 states + PR) State Infrastructure Banks (SIBs) (34 states + PR) Design-build (authorized in 38 states + PR) Public-private partnerships (PPPs or P3s) (authorized in 32 states + PR) 26

27 Municipal Bonds Debt obligations sold by states, cities, and other governmental entities to raise capital Borrower (issuer) agrees to pay the lender (investor) interest over time and to repay borrowed principal at a specified time Issued to leverage future revenues, accelerate project development, and match project costs with project life and associated revenues Generally tax-exempt interest income received by investors is exempt from federal income tax; in addition, interest income is usually exempt from state and local taxes on in-state bonds In the surface transportation sector, municipal bonds leverage: state motor fuels taxes and other state/local transportation-related revenues, Federal-aid highway funds, tolls, transit system revenues, and state and local sales taxes 27

28 Volume (Dollars in Billions) Municipal Bond Market Volume Forecast 2012 New Money Refunding Combined Municipal bond market volume increased 116 percent from to a decade high of $433 billion 2009 and 2010 volume included $181 billion of Build America Bonds ( BABs ) 2011 volume down 32% from volume forecast at $303 billion Sources: Historical data from The Bond Buyer; 2012 est. from SIFMA Municipal Issuance Survey 28

29 2011 Municipal Market ($297 billion) Credit Purpose General Obligation 36% Revenue 64% New Money 52% Combined 17% Refunding 31% Interest Rate Mode Tax Status Variable Rate 12% Fixed Rate 88% Tax- Exempt 86% AMT 3% Taxable 11% 29 Source: The Bond Buyer

30 Municipal Market Sectors Environmental Facilities 3% Electric Power 3% Municipal Market 2000 Municipal Market 2011 Public Facilities 5% Housing 10% Health Care 9% Education 24% Transportation 13% Utilities 7% General Purpose 22% Development 4% Public Facilities 2% Housing 3% Environmental Facilities 1% Electric Power 4% Transportation 11% Health Care 9% Education 25% Utilities 11% General Purpose 29% Transportation issuance averaged 11% of market volume over the last decade $32.8 billion was issued in 2011 to fund transportation projects Note: Transportation includes: airports, seaports, marine terminals, toll roads, highways, streets, bridges, tunnels, parking facilities, and mass transit. Source: The Bond Buyer Development 5% 30

31 Transportation Market Sectors Transportation Market 2000 Transportation Market 2011 Mass Transportation 19% Bridges 6% Seaports/Marine Terminals 4% Source: SDC Other Transportation 2% Airports 28% Parking Facilities 2% Toll roads, highways, and streets 38% Tunnels 1% Mass Transportation 30% Bridges 4% Seaports/Marine Terminals 6% Airports 26% Parking Facilities 2% Toll roads, highways, and streets 32% 31

32 32 States Have P3 Enabling Legislation Sources: NCSL-AASHTO, 2011; NCSL,

33 The PPP (P3) Option PPPs cover as many as a dozen types of innovative contracting, project delivery and financing arrangements between public and private sector partners. Design / Build / Finance / Operate / Maintain In PPPs, the private sector performs functions and takes on certain risks normally undertaken by the government. For more information, see the NCSL PPP toolkit: 33

34 Potential of the PPP (P3) Option Can advance large complex transportation projects with revenue streams Can provide greater leveraging of revenue streams (access to private sources of investment capital) Can create cost savings and production / operating efficiencies Can transfer construction, financing and other risks from the public sector to private partner(s) BUT PPPs themselves do not create new money for state/local project sponsors. The private investment must be repaid with general revenue (taxes) or project-specific revenue (tolls). In other words, PPPs are project delivery and financing approaches, they are not funding sources. 34

35 PPPs (P3) in Perspective ( ) Highways 76 projects, $40.8 billion contract value, $540 million avg size Transit / Rail 20 projects, $13.2 billion contract value, $660 million avg size Buildings (schools, courthouses, prisons) 158 projects, $9.5 billion contract value, $60 million avg size Water / Wastewater 141 projects, $14.1 billion, $100 million avg size Source: CBO Report Using Public-Private Partnerships to Carry Out Highway Projects, January

36 PPPs (P3) in Perspective 11 projects have included significant private financing & traffic forecasting risk (DBFOM or concession approach), worth $12.4 billion 4 projects have been asset privatizations, worth $6.9 billion P3 market share of total U.S. capital investment in highways by all levels of government since 2008 is about 2 percent P3 market share of total annual spending on new highway capacity is about 11 percent What s the potential future volume of P3 projects and associated level of private financing for highway / other capital improvements? P3 developers expect deal flow to be 2 to 4 projects a year 36 Source: ARTBA Report on The Role of Private Investment in Meeting U.S. Transportation Infrastructure Needs, by William Reinhardt, publisher and editor of Public Works Financing, May 2011

37 Transportation and Regional Infrastructure Project (TRIP) Bonds Bipartisan tax credit bonding legislation introduced by Senator Wyden (D-OR), Hoeven (R-ND), and Begich (D-AK) in Senate Rep. Whitfield (R-KY1) and Boswell (D-IA3) in House Provides new transportation infrastructure funding through one-time bonding program Eligibility includes roads, bridges, transit, rail, and waterways More info at: 37

38 U.S. Treasury How TRIPs Work Annual Tax Credits in lieu of Interest Purchase of TRIPS Bonds State Infrastructure Banks Bond Proceeds Distributed Bond Investors Repayment of Principal Sinking Fund Annual Deposits to Sinking Fund Bond Proceeds Provided to Every State State Contributions 38

39 Lessons on Leadership: Funding and Program Delivery in Lean Times 39

40 Leadership and Funding: An On The Ground View There is no difference in leading in lean times than during any other time. The key is to lead which is unfortunately, too rarely done Leadership isn t just for the boss, it can and must be done at all levels for an organization to thrive 40

41 Leadership and Funding: An On The Ground View (continued) The money components at a state DOT What they have to do with leadership Resources How to get them How to keep them Leadership lessons 41

42 Transportation is not about planes, trains, and automobiles It s about getting people where they need to go in order to live their lives It s about moving commerce so we can earn a living today It s about moving future goods and services so we can be competitive in the world economy 42

43 Money Components Budget 43

44 Money Components (continued) Construction program 44

45 Money Components (continued) Revenue 45

46 Have We Kept Up With Changing Expectations? Technological advances Shifting societal expectations Public expects to be informed and involved Diminished role of experts Outcomes focus 46

47 47 Technology

48 Public Expectation Command and control or service approach 48

49 Services Decentralized Centralized Does it matter maybe 49

50 One Way Communication versus Engagement 50

51 51 Responsive versus Responsible

52 Focus on Outcomes Lengthened runways at 10 airports or connected 200,000 citizens to air ambulance services Added 2,000 miles of rumble strips or reduced run-off-the-road accidents by an estimated 20 percent per year 52

53 53 Outcomes versus Process

54 54 Performance Measures

55 55 Economic Impact

56 No Shortcuts There are no shortcuts to getting additional revenue. Your agency must have credibility to be successful and gaining credibility and keeping it is work. The building blocks of credibility include transparency, accountability, and working collaboratively Ask yourself, is my agency relevant? When a community discusses transportation do they want us at the table or hope we won t show up? 56

57 57 Leadership

58 Make No Mistake, Leadership is Hard Real leadership the kind that surfaces conflict, challenges long-held beliefs, and demands new ways of doing things causes pain. And when people feel threatened, they take aim at the person pushing for change. As a result, leaders often get hurt both personally and professionally. Source: Leadership on the Line by Ronald Heifetz and Marty Linsky 58

59 59 Communicate Early and Often

60 60 Get to Mom First

61 Decisions Just For Media Splash Sink Credibility 61

62 62 Say Yes Often So No Has Meaning

63 Final Thoughts We need leaders at all levels Change is hard; but progress depends on it Providing accountability to the public creates credibility for the agency Create collaborative environments Have a passion for what you do; it makes all the difference 63

64 64 Questions/Discussion