Copyright 2000 Federal News Service, Inc.
Federal News Service
July 25, 2000, Tuesday
SECTION: PREPARED TESTIMONY
LENGTH: 2158 words
HEADLINE:
PREPARED TESTIMONY OF JOLENE M. MOLITORIS ADMINISTRATOR FEDERAL RAILROAD
ADMINISTRATION
BEFORE THE HOUSE COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE SUBCOMMITTEE ON GROUND TRANSPORTATION
SUBJECT - ON H.R. 4746; THE EMERGENCY SMALL RAILROAD PRESERVATION
ACT
BODY:
I am pleased to be here today and
to have this opportunity to report to you on the Railroad Rehabilitation and
Improvement Financing (RRIF) Program and short line railroad infrastructure
needs. I wish to commend the bi-partisan leadership of this Committee and
Subcommittee for its foresight in making the RRIF provision a part of the
Transportation Equity Act for the Twenty First Century (TEA-21). We consider
this to be a very important program that has the potential for facilitating the
implementation of a wide variety of railroad projects. Among other things it
will meet critical financing needs of short line railroads that are not being
met in any other way. We are determined to get the program off to a good start.
As you know, the RRIF program is unique and innovative. Nearly all
Federal credit programs require an appropriation equivalent to the Federal
Government's cost of making the loan or guarantee before the loan is made. The
RRIF program permits the borrower or an infrastructure partner to provide the
equivalent funding in lieu of an appropriation by paying the Department a
"credit risk premium." By permitting recipients or their partners to pay for the
Government's cost of providing them financial assistance, we can fund many
important rail projects which would otherwise not be possible, and at no cost to
the Government. The pioneering nature of this program required thoughtful
discussion within the Administration regarding its implementation. The
resolution of these issues delayed in the issuance of the final regulations.
Those regulations were published in the Federal Register on July 6, and will
become effective on September 5, 2000.
Perhaps the most controversial
provision contained in the proposed regulations was the requirement that
railroad applicants establish their inability to secure funding for their
projects in the private sector. The Notice of Proposed Rulemaking proposed that
applicants demonstrate their efforts to obtain a loan by submitting letters of
rejection from several sources. However, based on significant comments received
on this subject, and after discussions within the Administration, it was decided
that the final rule would require an applicant to submit only one letter of
rejection from a private sector lender of a loan on comparable terms. While I
realize that the enabling legislation did not envision such a provision, its
inclusion is a reasonable way to implement the Administration's policy to
provide needed financial assistance only when it is not available in the private
sector, as already established with other loan programs.
We do not
expect this provision to be of much practical significance, or to pose a
significant obstacle to short line railroads getting RRIF loans. Our study of
credit availability for short line railroads, issued in 1993, and all subsequent
information we have received from lenders and short line railroads, indicate
that loans repayable over a period of longer than seven or eight years are not
available to short line railroads. We are confident that a short line railroad's
application to any lender for a loan with a 25-year repayment term (the longest
term available to short line railroads under the RRIF program) will be rejected.
The short line railroad need only provide us with a copy of its application and
the ensuing rejection in order to satisfy this criterion in the RRIF rule.
The assets that short line railroads are likely to acquire using the
RRIF program are very long-lived - typically up to 30 years. Typically these
assets will not produce revenue streams adequate to cover the periodic payments
required to fully repay a loan in 7 or 8 years. This is a significant market
failure in the private credit markets for short line railroads. The RRIF program
will correct this market failure by providing long term loans of up to 25 years
requiring periodic payments which can be made from the revenue streams generated
by the assets purchased. Additionally, the letters of rejection from banks for
long-term loans will provide a continuing stream of information about this
market failure and the continuing need for the RRIF program.
There were
other changes and clarifications made in the final rule in response to comments
received from the public. The Notice of Proposed Rulemaking did not address how
the interest rate will be calculated. The final rule clarifies that the interest
rate charged will be that for Treasury securities of comparable maturities. The
most recent interest rate on 30-year federal bonds was 5.81 percent. Also
modified was the requirement for the submission of audited financial statements.
Since many small railroads indicated that their annual financial statements are
not audited, we only ask for audited statements if the railroad normally has its
financial statements audited. The railroad need not have its statements audited
solely for the purpose of applying for a RRIF loan. Finally, to help reduce
application costs, the final rule allows an applicant an option in lieu of
paying the full investigation charge of one-half of one percent of the principal
requested. With FRA's approval, an applicant may retain a financial advisor to
independently evaluate the financial viability of the applicant and the proposed
transaction.
Now that the final regulations have been issued, the RRIF
Program will be able to provide direct loans or loan guarantees for eligible
projects "to acquire, improve, or rehabilitate intermodal or rail equipment or
facilities, including track, bridges, yards, buildings, and shops, to refinance
outstanding debt incurred for those purposes, and to develop or establish new
intermodal or railroad facilities." Of the total $3.5 billion
authorized, $1 billion is reserved for railroads other than
Class I. This very broad definition of eligible projects will permit us to fund:
* Many projects to address the short line railroads need to upgrade
their track to carry the 286,000 lb. rail cars which are now becoming the
standard on the Class I railroads and are important to the long term viability
of the short lines. A recent study by the American Association of State Highway
and Transportation Officials found that the lack of sufficient capital and the
advent of the 286,000 lb. cars has created a backlog of unmet needs for small
railroads. Approximately 200 railroads responding to the study survey reported
an estimated 10 year capital need, which could not be privately funded, of
$2.26 billion. * Projects on Class I railroads which may be
very important to States or localities but which may not be part of the
railroad's normal capital program. * Commuter railroads
operating on freight track needing capital improvements. *
Other community projects involving rail improvements, such as grade separations
or upgrades to permit passenger service.
The statute and the final rule
also give guidance on the types of projects which should receive priority. These
include projects that enhance:
* Public safety, * The environment, *
Economic Development, * International Competitiveness, * Service to small
communities and rural areas, and also * Projects included in state rail plans.
Let me cite some examples of the types of applications that may be able
to take advantage of RRIF:
We anticipate many applications from
shortline and regional railroads for track rehabilitation and bridge
improvements. Several States are seeking State appropriations to cover Credit
Risk Premiums for their small railroads for these purposes.
Local
communities, such as Buffalo, NY, and Moorhead, Minnesota, are considering
partnerships with Class 1 railroads to fund the construction of connections and
the replacement of a bridge that will eliminate the current rail congestion
their communities are experiencing. Jonesboro, Arkansas is also pursuing a track
relocation project that would facilitate grade separation; and
The
Washington Department of Transportation has received an authorization of
$500,000 in State funding to provide the credit risk premium
for a RRIF loan to purchase refrigerator cars to ship apples on Amtrak's Empire
Builder route to New York. The State estimates that this project will eliminate
18,900 truck loads per year.
The next steps in our plan for the
implementation of this program include outreach to inform all potential
applicants of the existence of the program as well as the procedures to follow
in order to submit an application. We are issuing a press release announcing the
final rule. We have sent letters with copies of the final rule to those who
commented on the notice of proposed rulemaking and to other interested
organizations such as the High Speed Ground Transportation Association and
Operation Lifesaver. During August we will hold four regional workshops
sponsored by the American Shortline and Regional Railroad Association. We will
be giving a presentation at the Transportation Research Board's National
Conference on Transportation Finance in August, at the annual meeting of the
Standing Committee on Rail Transportation of the American Association of State
Highway and Transportation Officials in September, and at the Transportation
Research Board's annual meeting in January.
I want to emphasize that we
are trying to make the application process as simple as possible, and we have
asked each applicant to communicate with us well in advance of when the loan is
needed. Applicants may come in to a pre-application meeting to clarify the next
steps in the process. The applicant can bring along certain financial
information listed in the final rule, and even before any investigation fee is
paid, a preliminary estimate of the required credit risk premium can be assessed
so the applicant could confer with any infrastructure partner and decide whether
to go ahead with the application.
Alleged "Secret Agreement" with
Treasury
In a hearing last week, Congressman Rahall asked for a copy of
a "secret agreement" alleged in the press to exist between FRA and the
Department of the Treasury. No such agreement exists, secret or otherwise. Upon
reviewing the press reports, we concluded that the reporter had received garbled
information about the administrative procedures agreed to by the Administration.
These procedures are recorded in a memorandum from Peter J. Basso, Assistant
Secretary for Budget and Programs of DOT, to Michael Deich, Program Associate
Director of the Office of Management and Budget. I am submitting a copy of that
memorandum for the record.
As you will see when you read the memorandum,
the press report was replete with inaccuracies. There are good reasons for the
procedures contained in the memorandum that were not explained in the press. I
want to share them with you.
This very innovative program provides us
the ability to make direct loans and loan guarantees based on either
Congressional appropriations, credit risk premiums paid by applicants or
infrastructure partners on behalf of applicants, or a combination of the two.
The program also provides that obligations issued under this program will be
grouped and included in cohorts to enable the credit risk premiums collected in
the aggregate for each cohort to be available to cover any losses suffered from
obligations in that cohort. After all the obligations in a cohort are satisfied,
any remaining credit risk premiums are to be returned to borrowers.
If
losses within a cohort exceed the amounts of credit risk premiums collected, the
Federal Government will have to bear the loss. On other hand, if losses are less
than expected in a cohort, the remaining credit risk premiums will be returned
to the borrowers.
In order to reduce the overall risk to the Federal
Government, given the one-sided nature of the loss, certain administrative
provisions have been established. These procedures would limit the size of loans
to 6% of the remaining authorized amount and also ensure that no single loan
will be larger than 10% of the total loans in any cohort of loans. By limiting
both the actual size of the largest loans as well as their size relative to the
entire cohort, the probability of a default has been reduced so that no one
large loan will cause a loss larger than the credit risk premiums in its cohort.
The memorandum recited FRA's long-standing policy of seeking adequate collateral
(up to 100%) to secure its loans and loan guarantees, thereby also reducing the
size of the applicant's credit risk premium. The memorandum also stated the
Department's commitment to review periodically and revise, as may be
appropriate, the model used to calculate credit risk premiums.
I am
happy that the FRA is finally in a position to begin providing this financial
assistance to complete worthy projects which would not otherwise have been
possible. I appreciate your attention and would be happy to answer any questions
you may have.
END
LOAD-DATE: July 26,
2000 
