Was the FAST Act’s 70 Percent Cut in TIFIA Funding Justified?
December 16, 2015
The 2012 MAP-21 transportation law increased funding for the Department of Transportation’s primary surface transportation loan and loan guarantee program, TIFIA, from the $122 million per year the program had been receiving for the previous ten years to $750 million in fiscal 2013 and $1.0 billion in fiscal 2014. At the time, this spending increase (part of the “America Fast Forward” initiative in the MAP-21 legislation) was met with bipartisan acclaim. In a time when the Highway Trust Fund had gone broke and the general fund was constrained by the Budget Control Act, credit programs like TIFIA offered Congress an opportunity to use relatively small amounts of on-budget federal money to leverage support for much larger projects.
Under the terms of the Credit Reform Act of 1990, the face value of federal loans no longer shows up as part of the federal budget. Instead, Congress only has to provide money to cover the “subsidy cost” of the loan (defined in broad terms here and in excruciating detail here). These costs frequently total less than 10 percent of the face value of the federal loan, meaning that $10 million of on-budget federal money could leverage a federal loan of $100 million or more, and when combined with non-federal matching funds, relatively small amounts of on-budget federal money could support huge “megaprojects.”
America has now fast forwarded three years, and Congress just enacted the FAST Act, which cuts new TIFIA funding levels by over 70 percent, from the MAP-21 final level of $1 billion per year down to an average of $287 million per year over the five-year life of the new law.
What happened? Was this massive cut to a popular program justified?
Balance buildup. The first thing to realize about TIFIA is that, from the moment the program was created in 1998 by sections 1501 through 1503 of the TEA21 law, all of the Highway Trust Fund contract authority made available for the TIFIA program (starting with just $80 million in FY 1999) was to “remain available until expended.” This insulated the TIFIA program from the use-it-or-lose-it budget pressures that face offices supported by annual appropriations every September and which states face with their apportioned highway formula contract authority at the end of the fourth year of availability – because use-it-or-lose-it pressure often results in bad decisions.
However, the downside of “no-year” money is that it can cause large unobligated balances to build up to the point that they not only become unspent but unspendable. Over the life of the TEA21 law (FY 1999-2003), Congress provided $522 million in gross contract authority for TIFIA, but USDOT only used less than $200 million of that amount according to estimates by Bryan Grote of Mercator Advisors. This left almost $300 million of unused TIFIA money at the end of the law (after annual deductions for administrative expenses and obligation limitation differentials).
After two years of short-term extensions, Congress enacted the SAFETEA-LU law in summer 2005, which continued TIFIA at an annual funding level of $122 million per year (in addition to almost $500 million left over from TEA21 and its two years of extensions). Under SAFETEA-LU, FHWA was able to obligate just about all of the new money the program received over FY 2006-2009, but was unable to spend down the $500 million balance left over from TEA21 and its extensions. After SAFETEA-LU expired, Congress kept the $122 million per year funding level throughout almost three full years of short-term extensions – and during FY 2011, the use-it-or-lose-it nature of the ARRA highway stimulus money provided during FY 2009 led USDOT to fund all TIFIA subsidies using general fund ARRA money instead of HTF contract authority. This pushed the estimated unobligated balance of the program over the $700 million mark by the time Congress was ready to enact the MAP-21 law.
Funding increase and redistribution. One of the top priorities of Senate Environment and Public Works chairman Barbara Boxer (D-CA) during the drafting of MAP-21 was the “America Fast Forward” proposal, which was supposed to enable Los Angeles to finance Mayor Antonio Villaraigosa’s “30/10” initiative to use a dedicated 30-year sales tax increase to pay for transportation projects that could be build over 10 years (the missing piece being some entity to provide low-interest loans to be repaid with the dedicated sales tax) and to allow other regions to finance similar plans.
Title II of MAP-21 was indeed titled “America Fast Forward” and made several changes to the TIFIA program, most notably the huge increase in contract authority from $122 million in FY 2012 to $750 million in FY 2013 to $1.0 billion in FY 2014 (as well as a provision allowing a TIFIA loan to cover up to 49 percent of a project’s cost instead of the previous maximum of 33 percent).
As the MAP-21 legislation was in its final House-Senate negotiations in June 2012, GAO issued a comprehensive report on the TIFIA program. The report warned that “DOT officials and other stakeholders told us that an increase in funding would need to be accompanied by an increase in administrative resources… Further, DOT officials said that an increase in TIFIA funding may require DOT to reexamine how it manages the program—such as how it selects projects and negotiates credit agreements—and issue new regulations.”
With regard to the proposal to increase the maximum TIFIA share from 33 percent to 49 percent, GAO warned that “increasing the portion of costs covered by TIFIA could decrease the program’s ability to achieve one of its key goals—leveraging federal funds…Currently, DOT estimates that each $10 million in budget authority can provide up to $100 million in TIFIA credit assistance and leverage $300 million in transportation infrastructure investment. If the limit on TIFIA assistance were increased to 49 percent, this same amount of budget authority could leverage about $200 million in transportation infrastructure investment.”
But the large unexpended balances were a problem – in a time of scarce HTF resources, it would have been bad policy to allow potentially billions of dollars to sit around unspent indefinitely. So section 2001 of MAP-21 added this provision to section 608(a)(4) of title 23 U.S.C.: “Beginning in fiscal year 2014, on April 1 of each fiscal year, if the cumulative unobligated and uncommitted balance of funding available exceeds 75 percent of the amount made available to carry out this chapter for that fiscal year, the Secretary shall distribute to the States the amount of funds and associated obligation authority in excess of that amount.” (Legally, “unobligated” means that no legally binding agreement has been executed; “uncommitted” means that DOT has not yet penciled in a future plan to make such obligation.)
At a July 2013 hearing on the implementation of the new TIFIA rules, Sen. David Vitter (R-LA) submitted a question for the record to Transportation Secretary Anthony Foxx asking “Are you concerned with the possible long-term ramifications on the program if some TIFIA funding is apportioned [to states] because of the FY14 deadline?” Foxx replied that “DOT’s efforts to streamline the review process by making credit assistance requirements more transparent, increasing TIFIA staff capacity, and continuing to work with potential borrowers who are considering whether TIFIA credit assistance will help ensure MAP-21 monies are fully subscribed. The Department expects to commit funds to projects over the coming months such that redistribution will not be necessary.”
(Ed. Note: At the hearing, Boxer was still citing the 30 to 1 leverage ratio for TIFIA subsidy contract authority despite the fact that her legislation had lowered the ratio to 20 to 1.)
USDOT did indeed add extra staffers to handle the increased TIFIA demand – the Budget and Programs office within the Office of the Secretary, which administers TIFIA, went from 46 FTEs in fiscal year 2013 to 61 FTEs in FY 2015. And in 2014, $8.4 billion in TIFIA loans were made (including several big ones for California), which cost about a half-billion dollars in federal TIFIA subsidy contract authority. This apparently brought the balance down to the point where an April 1, 2014 redistribution was unnecessary (but just barely) – since new FY14 TIFIA contract authority totaled $1 billion, any unobligated and uncommitted prior year balance over $750 million would have to be given back.
But FY 2015 proceeded under short-term extensions of MAP-21 at the same annualized $1 billion per year TIFIA rate. And according to the USDOT website, in FY15 the Department only made $2.4 billion in TIFIA loans. Depending on whose loan cohort subsidy rate estimates one uses, those loans cost the TIFIA program an amount of subsidy contract authority somewhere in the $110 to $170 million ballpark. As a result, in April 2015, USDOT had to transfer $640 million in pre-FY15 TIFIA contract authority balances to states for their use in formula programs. This left the TIFIA program with a May 2015 unobligated and uncommitted balance of about $500 million in FY13-15 MAP-21 money, to which another $335 million of contract authority was provided via extensions for the remainder of FY 2015. The unobligated and uncommitted balance at the end of FY 2015 was probably close to $800 million – or at least 4 years worth of new spending at the 2015 rates. (This does not count the unknown amount of pre-MAP21 TIFIA money still unobligated and uncommitted.)
A bad budget score. Under MAP-21 and its 2015 extension, USDOT had only used less than half of the money Congress had made available for TIFIA. As a result, when new Senate EPW chairman Inhofe introduced the DRIVE Act reauthorization bill on June 23, 2015, it cut the TIFIA program back from $1.0 billion per year to $675 million per year. That was the level approved by the committee at its June 24 markup, but the Congressional Budget Office then gave the committee some bad news.
In its cost estimate for the EPW-approved version of DRIVE, CBO noted that “Based on the FHWA’s notice of April 24, 2015, which redistributed $640 million from the TIFIA program to states for other projects, the CBO baseline for the TIFIA program in 2015, on an annualized basis, is now $360 million ($1 billion minus $640 million). Consistent with the rules in the Budget Control Act, CBO extends that program at the same level at which it is when the authorization expires. As a result, enacting S. 1647 would increase the authorization for TIFIA above CBO’s baseline projections by $315 million, annually. Because TIFIA is designed to leverage new investments financed (at least in part) by additional tax-exempt debt, [the Joint Committee on Taxation] estimates that increasing the funds authorized for TIFIA would increase the issuance of tax-exempt bonds and would decrease federal revenues by $42 million over the next 10 years.”
This caused a point of order under the Statutory PAYGO Act to lie against the EPW bill on the Senate floor, potentially killing the measure and drawing the opposition of the Budget Committee to the overage. As a result, when Majority Leader McConnell (R-KY) started introducing revised versions of the DRIVE Act on the Senate floor, the amount of TIFIA money kept decreasing as needed to fill needs in other parts of the bill (notably mass transit) – from $675 million per year down to $500 million in the first version of the substitute, to $450 million per year in the third version, to $300 million per year in the fourth version (a level that was kept in the version that finally passed the Senate).
The House T&I Committee had to draft its reauthorization bill to a lower overall budget total than their Senate counterparts. The House bill as reported from committee cut TIFIA down to $200 million per year and tried to restrict the mechanism for redistributing unused balances in the future by moving the annual redistribution to August 1 instead of April 1 beginning in FY 2016 and by adding a proviso preventing a redistribution if it “would adversely impact the receipt of credit assistance by a qualified project.” However, the CBO score of the original House bill noted that the bill “would then let states, after approval by DOT, transfer certain highway funds distributed by formula to pay subsidy and administrative costs of a loan to an eligible entity. Because states would have to use funds that they could have otherwise used for other transportation projects, CBO projects that there would be slightly less budget authority used under the provisions of H.R. 3763 than under CBO’s baseline.”
During the House debate on the bill, Congresswoman Eddie Bernice Johnson (D-TX) offered an amendment to strike the TIFIA redistribution provisions from title 23 entirely. During the debate, Johnson noted the $640 million April 2015 redistribution and said that “This reduced capacity for project financing will have serious consequences…Make no mistake, this funding capacity has not been lost because of a lack of demand for the program, but because of the inability to commit budget authority in a timely manner…Allowing a redistribution clause to remain in place could result in further cuts to the program.” No one spoke in opposition to the amendment, and it passed the House by voice vote.
Endgame. After the House-Senate conference negotiations, the final version of the bill enacted into law split the difference on the money – $275 million in FY 2016 and 2017, rising to $285 million in 2018 and $300 million in both 2019 and 2020. It also followed the House’s lead and repealed the TIFIA redistribution language entirely, meaning that DOT can keep the estimated $800+ million in pre-FAST carryover balances indefinitely, plus use the $1.4 billion in new money provided over five years by the new law. If one uses the subsidy cost estimated for FY 2016 in the President’s Budget of 7.71 percent, $2.2 billion in subsidy CA could support direct federal TIFIA loans with a face value of about $36 billion. (Actual results may vary.)
However, that $2.2 billion only represents the contract authority provided directly for TIFIA credit subsidy costs. Section 1106 of the FAST Act also allows states to use their NHPP formula apportionments to pay for the subsidy and administrative costs of TIFIA credit assistance – and NHPP apportionments to states average a total of $23.3 billion per year over the life of the FAST Act. If any state over the life of the FAST Act decides to use, say, $20 million of its NHPP money for a TIFIA loan, then at the FY16 subsidy rates in the President’s Budget, that money could leverage a TIFIA loan of about $250 million to leverage a project of $500 million or more.
And general fund money is available for TIFIA subsidies as well. The TIGER discretionary grant program provides that a certain amount of each year’s TIGER appropriation can be used to pay the subsidy costs for TIFIA loans if USDOT decides to do so. In FY 2015 and in the new FY 2016 omnibus appropriations bill, USDOT has the authority to use up to $100 million of each year’s TIGER money for TIFIA subsidies (though they usually don’t use anywhere near that much, because TIGER is a popular program).
Beyond that, the public discussion of the TIFIA program suffers from a major fallacy – the assumption that every TIFIA applicant is both (a.) a good credit risk that meets all the criteria of the program and (b.) is ready to move forward at the time the application is processed. The TIFIA office does a good job of listing all TIFIA applications and summarizing the projects, and it shows plenty of projects submitted after the enactment of MAP-21, in 2012 and 2013, which have yet to receive their final environmental reviews or which have otherwise dropped out of the process (so even if USDOT had hired six dozen investment bankers to run TIFIA in summer 2012, those projects still wouldn’t have TIFIA loans by now).
In summary, it appears that the $1 billion per year TIFIA program under MAP-21 provided money far in excess of DOT’s ability to process TIFIA applications, and quite possibly was more subsidy cash than needed to fund the entirety of all ready-to-go, credit-worthy projects that met the statutory criteria written into MAP-21. If USDOT can process and commit anywhere close to their $2.2+ billion in TIFIA subsidy contract authority over the life of the FAST Act (between now and September 2020), then a return to annual spending levels closer to the MAP-21 peak might be justified.