Federal Support for Freight Infrastructure: Policy Issues & Program Design

1. Federal Support for Freight Infrastructure: Policy Issues & Program Design A Briefing Paper for the I-95 Corridor Coalition December 9, 2008

2. Several recent proposals to create a federal or national-level Special Purpose Entity (SPE) to help finance critical infrastructure, including: National Infrastructure Bank Act (S. 1926, “Dodd-Hagel”) Build America Bonds Act / Transportation Finance Corporation (S. 2021, “Wyden-Thune”) Stated purpose of such proposals: Help finance important infrastructure, like freight, currently not receiving needed governmental assistance. Target large “projects of national or regional significance.” Pool public and private resources, including better allocation of resources across sectors and within modes. Improve project selection at the federal level. I. Background

3. Do the targeted investments lack financing (i.e., they need leveraging tools due to “market failure” in the nation’s capital markets)? Do the targeted investments lack funding (i.e., they really need a deeper subsidy – such as that provided by grants or tax credit bonds – that significantly reduces their revenue requirements)? What is the appropriate timeframe for federal assistance? Near-term effort to overcome current market problems & stimulate the economy? Longer-term shift in federal funding role for surface transportation? II. What problem are we trying to fix?

4. Perception of improved “objective” project selection. Scale, complexity, externalities and high economic returns associated with freight projects warrant special emphasis. Fill in eligibility gaps under existing Federal programs, while offering “one-stop” shopping for project sponsors. Align singular focus of SPE on Freight Infrastructure Investment with dedicated revenue streams. Only handle largest projects; complement states’ continuing role advancing projects with assistance from formula funds. Why consider forming a Special Purpose Entity (SPE){as opposed to simply expanding existing programs?}

5. IV. Should it be a Regional or a National entity? Drawbacks of Capitalizing a Regional “Bank” • More difficult for States to put in “contributed capital” on a blind pool basis. • Organizational delays as each state would need legislative authorization. • Many projects may have national impacts beyond the I-95 Corridor states. Advantages of a Federal Entity • National scope brings economies of scale, avoids duplication of effort with multiple regional organizations. • Allows access to direct federal credit support: • Lower-cost source of financing. • Greater budgetary efficiency through fractional “scoring.” • Projects of truly national significance should have national funding responsibility. Recommendation: Structure States’ participation based on funding each project, not on capitalizing a “bank.” Every project will have its own set of sponsors and stakeholders, and each state’s financial contribution should reflect its perceived benefits.

6. AASHTO Freight Authorization Policy Statement recommends: $42 billion additional funding for Goods Movement Infrastructure over 6 years (in addition to existing freight-related funding): $21 billion in Formula Funding to States $21 billion in Discretionary Allocations (the subject of this briefing paper) Increases in existing freight-related sources such as: Diesel Fuel Tax Heavy Vehicle Use Tax New sources of dedicated freight-related fees such as: 5% of Customs Duties Container Tax Other? V. Where should the program get its funding?

7. VI. What organizational form should the program take? Governmental Private Owned and controlled by Owned and controlled by the public sector the private sector Government Private Government Government Sponsored Non-Profit Dept./Agency Corporation Enterprise Corporation Governing Board n Shareholder-owned n Membership n Funded by U.S. n Fully or partially n For-profit n organization govt. funded by U.S. govt. Implied federal n Not for profit n On-budget May be on- or n n backing off-budget. Rural Telephone Transportation Dept. of Fannie Mae Bank, Finance Corp. Transportation Freddie Mac FDIC . (proposed) Special Purpose Entity’s Relationship to the Federal Government More Federal Less Federal

8. Why does organizational status matter? • CBO uses 5 factors to determine whether an entity is part of the Federal Government: • Ownership of organization • Source of capital • Selection of managers • Degree of ongoing federal control • Use of proceeds • If deemed “Federal,” the entity’s borrowing and spending are on budget – scored as budget authority and federal outlays – tantamount to traditional grant funding for budgetary purposes.

9. VII. What types of assistance should be offered?

10. 1. Discretionary Grant Assistance • $3 billion/year in contract authority ($18 billion over 6 years). • Limited to governmentally-owned projects. • Minimum capital cost of $[250] million; selection criteria consistent with I-95 Coalition comment on PNRS rule. • Maximum Federal Grant share (NFIDC & USDOT) = 50%. • Combined with Federal Credit or Tax Credit Bonds < 75%.

11. 2. Federal Credit Assistance • $500 million/year in contract authority ($3 billion over 6 years). • Anticipated to support about $25 billion of credit assistance. • Most will be direct loans, but loan guarantees & lines of credit also available. • For governmentally- or privately-owned projects. • Other selection criteria similar to discretionary grant program. • Maximum Amount (as share of eligible project costs): • For Senior Loans: 50% of eligible project costs. • For Junior Loans: 33%, with true subordination. • Debt service must be payable from non-federal revenue stream. • Migrate TIFIA, RRIF and MARAD Title IX programs to NFIDC.

12. 3. Tax Code Incentives • NFIDC would allocate volume cap for state/local and private project sponsors but would not issue debt itself. • Tax Credit Bonds for any eligible freight projects • State/local governments could issue up to ~$25 billion for 30 years. • Zero interest cost provides up to 75% subsidy in Present Value terms. • Non-federal repayment streams for bond principal. • New nationwide conduit issuer -- Transportation Finance Corporation (TFC). • TFC is Federally chartered but a private, non-profit entity (Wyden-Thune). • Tax-Exempt Private Activity Bonds for Highways & Rail-Truck Intermodal Facilities • State/local governments would borrow. • Increase current volume cap from $15 billion to $20 billion. • Allow capital appreciation bonds (deferred interest during ramp-up.)

13. VIII. Why not create a SIB-like National Revolving Fund? $ • Would need to be capitalized with grants or zero-interest loans (both very costly compared to Federal Credit). • Revolving funds are best suited to portfolios of smaller, homogeneous loans (housing, agriculture, water & sewer). • Would revolve verrry slowly due to long-term nature of loans. • Federal Credit offers superior budgetary leverage – can provide greater assistance at lower scored cost.

14. IX. Recommendation • Establish a new Government Entity: The National Freight Infrastructure Development Corporation • Receives $3.5 billion/year [$21 billion total] of new revenues from new freight fees and increases in existing freight-related fees (credited to Freight Infrastructure Trust Fund). • Would not need to “build a balance sheet” or issue its own debt securities. • Avoids Federal Policy tripwires. • NFIDC selects projects > $[250] million for: • New Discretionary Grant program for publicly-owned projects. • Expanded Federal Credit Program (including TIFIA, RRIF and MARAD Title IX). • Allocates Volume Cap under new $25 billion Tax Credit Bond program and expanded $20 billion Private Activity Bond program. • Authorize States to establish the Transportation Finance Corporation • Federally-chartered private non-profit corporation created to serve as nationwide non-federal issuing conduit for Tax Credit Bonds. • Possibly could be used to assist Intercity Rail Passenger as well

15. Appendix: Comparison of Dodd-Hagel & Wyden-Thune

16. Comparison of Dodd-Hagel & Wyden-Thune (cont’d.)

17. Comparison of Dodd-Hagel & Wyden-Thune (cont’d.)

18. Federal Budgetary Assessment of the Proposals