Five Myths About the TIFIA Credit Program
The Transportation Infrastructure Finance and Innovation Act (TIFIA) credit program received a major boost in authorized funding in MAP-21. While there is now potential for this program to meet a greater share of the nation’s infrastructure investment needs through direct loans, standby lines of credit, and loan guarantees from the federal government, the transportation community should place realistic expectations on exactly what TIFIA can achieve, and what it is not meant to remedy. Such an understanding will allow project sponsors to better assess how to fit TIFIA in their financing plans without leaving disappointed. (With apologies to the Five Myths feature at the Washington Post.)
1. TIFIA is a critical source of funding for new projects.
While MAP-21 has provided stable funding for highway and transit programs through FY 2014, the Highway Trust Fund yet again faces a solvency problem upon its expiration in two years due to its projected imbalance between receipts and outlays. Also, many states are facing the same downward pressure on their own motor fuel taxes that have befallen the federal gas tax—namely erosion of purchasing power, decline in per-capita vehicle miles traveled, and introduction of alternative-fueled vehicle fleet. Furthermore, many technically feasible alternative revenue options for surface transportation face the same political barriers that have prevented consideration of increasing or even just indexing the gas tax to inflation.
As the transportation industry continues grappling with the question of how to deliver adequate amount of dollars to maintain current investment levels, let alone providing a significant funding increase to meet actual needs, eyes have turned to TIFIA as a major piece of the funding puzzle. However, as TIFIA is a subsidized loan program that needs to be paid back over time, it is not like traditional grant dollars (e.g., Federal-aid Highway Program, federal transit formula program, etc.). It falls in the realm of financing tools like bonding, which are used to leverage transportation funding and allow transportation agencies to raise the high upfront costs needed to build projects, and expedite the implementation of transportation improvements. In order to utilize TIFIA, funding sources such as taxes, fees, and user charges—the very same revenues that are in short supply—must be pledged for repayment over decades. Similar to other forms of debt, this will reduce the amount of future year revenues available to meet future capital program needs.
Therefore, while TIFIA’s budget authority increase in MAP-21 from $122 million last year to $1 billion by FY 2014 is significant, it has never been and will not be dispensed as formula apportionments or discretionary grants. It serves as a backstop to cover possible losses on loans due to defaults and nonpayment. This $1 billion subsidy can support about $10 billion in loan disbursements, which is where the highly-touted leveraging potential of TIFIA is realized.
2. TIFIA’s most important feature is its attractive interest rate.
There is no question that TIFIA’s interest rate of 2.93 percent (as of October 24, 2012) for a 35-year loan is a great deal, on par with long-term U.S. Treasury debt. This feature has enabled project sponsors in recent years to save millions of dollars in interest payments over the life of their loans, thereby reducing taxpayer contribution.
Applying for TIFIA financing simply to make this “rate play”, however, would fail to recognize many unique qualities of the program that have been tailor-made for transportation projects. For example, TIFIA offers flexible repayment terms and the ability to combine construction and permanent financing of capital costs. Furthermore, in addition to the long-term loan duration of up to 35 years, it allows repayments to start up to five years after substantial completion to allow time for facility construction and ramp-up. These are terms that can only be offered by an entity like the federal government as the degree of various risks involved—design and construction, lack of toll revenue during construction, and slow ramp-up period, for example—in the early phases of a project’s life cannot be borne by traditional providers of subordinate debt in private capital markets at a reasonable rate. Furthermore, from the public policy perspective, using TIFIA solely for its historically low rates (which will not last once the broad interest rate environment changes) can crowd out other sources of capital that do not receive similar federal subsidy. Such adverse impact may introduce inefficiencies and distortions to the flow of capital for transportation infrastructure.
3. TIFIA is a key ingredient for public-private partnership (P3) deals.
In a severely constrained fiscal environment, many states have explored various financing opportunities available through public-private partnerships (P3) to induce investment capital in the form of debt and equity from non-public sources. According to the National Conference of State Legislatures, 33 states now have legislation that allows a state entity to engage in some form of P3s. Given the complexity and risk that tend to accompany P3 projects, TIFIA has played a crucial role in the financing plans of the largest P3 projects in recent years like I-635 Managed Lanes in Texas, Capital Beltway HOT Lanes in Virginia, and I-595 corridor improvements in Florida. In addition, given the attractive features of TIFIA, many pending P3 projects such as Mid-Currituck Bridge in North Carolina and Northwest Corridor in Georgia have submitted letters of interest to USDOT.
However, TIFIA has been a key ingredient not just for P3 projects but for many other large projects that have utilized more traditional forms of procurement such as design-bid-build and design-build, and Intercounty Connector in Maryland and LA-1 improvements in Louisiana. Regardless of the procurement approach used, TIFIA tends to be most effectively utilized when it is successful in attracting co-investment for much-needed transportation projects from non-federal entities to maximize the leverage of each federal dollar used to support the program. With TIFIA now authorized to cover up to 49 percent of the total project cost thanks to MAP-21 (compared to 33 percent prior), it could play a larger role in determining a project’s financial feasibility than ever before.
4. TIFIA is only for big new highway projects.
Eighteen of 29 TIFIA projects to date have been major highway improvements since the program’s inception in 1998, which is roughly reflective of the relative modal share of transportation expenditures. However, when looking at the overall portfolio of active and retired activities, TIFIA’s application has been quite versatile, ranging from intermodal centers in Miami; Reno, NV; Warwick, RI; and Denver to various transit projects like Tren Urbano in Puerto Rico, Transbay Transit Center in San Francisco, and Crenshaw/LAX transit corridor in Los Angeles, among others. Given transit’s indispensible role in larger urban areas where many of the megaprojects take place, it is well-positioned to receive continued consideration for TIFIA assistance in the coming years.
Furthermore, as part of MAP-21’s expansion of TIFIA, there is now a provision to encourage access to the program in rural areas that have traditionally been underserved. For example, 10 percent of TIFIA’s budget authority is now set aside specifically for rural infrastructure projects. In addition, these projects must meet an eligible minimum project cost threshold of $25 million rather than the $50 million prior to MAP-21 that discouraged the use of TIFIA in rural areas. Rural TIFIA project loans are eligible to receive one-half of the treasury rate on interest, which would allow for even greater savings compared to conventional forms of TIFIA assistance.
5. We don’t have a National Infrastructure Bank.
As part of the national debate to encourage economic growth through infrastructure investments, the notion of establishing a national infrastructure bank (NIB) has garnered many headlines. However, there has been little consensus on what services such an entity would provide, how it would operate, and where it would receive its seed capital. Perhaps somewhat cynically, for individual observers, the NIB has been a Rorschach test onto which one’s preferred vision for infrastructure development is neatly grafted.
There has certainly been no shortage of proposals to define exactly what a NIB would look like, including the Dodd-Hagel plan in 2007 and the President’s budget releases since 2009. As an example, such an entity could be governed by an independent board free from Congressional interference to award either grants or credit assistance (or both) to worthwhile water, transportation, and energy projects of major significance to the entire country or region.
If one simply defines the NIB by its ability to make informed decisions on extending federal credit facilities (largely based on the underrated Federal Credit Reform Act of 1990) for infrastructure improvements, TIFIA in its current form would easily qualify. In addition, if a NIB is chasing after ways to more effectively finance transportation projects than a traditional mix of grants and municipal debt, then TIFIA has already been successfully achieving that role for the last 14 years.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Eno Center for Transportation or the American Association of State Highway and Transportation Officials.