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Congressional Testimony
September 25, 2002 Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1806 words
COMMITTEE:
SENATE ENVIRONMENT AND PUBLIC WORKS
HEADLINE: SURFACE TRANSPORTATION FINANCING ALTERNATIVES
TESTIMONY-BY: JEFFREY CAREY,, MANAGING DIRECTOR
AFFILIATION: MUNICIPAL MARKETS, MERRILL LYNCH & CO.
BODY: Statement of Jeffrey Carey, Managing Director
Municipal Markets, Merrill Lynch & Co.
Before the Committee on
Senate Environment and Public Works
September 25, 2002
Chairmen,
Ranking Members, members of the Committees, ladies and gentlemen, I am Jeff
Carey, a Managing Director in Municipal Markets at Merrill Lynch. As a 24-year
veteran in public, transportation, and infrastructure finance, I have had the
privilege to work with U.S. Department of Transportation and Federal
Highway Administration officials, as well as our clients, state
transportation officials and other project sponsors, during the last decade on
the development and implementation of "Innovative Finance" mechanisms for
Federal-aid transportation programs. Thank you for inviting me to provide a
wrap-up commentary from a Capital Markets perspective at today's Joint Hearing.
You have heard testimony this morning from two very experienced panels
of U.S. DOT and state transportation officials, a city councilwoman, the GAO,
and Professor Seltzer on the very significant accomplishments of the DOT
Innovative Finance Initiatives. Public finance industry professionals are
pleased to have played a role in creating the strong market reception for the
new transportation
funding tools and expanded flexibility for
public/private partnerships. We commend these panel participants, and the
leadership from DOT and FHwA, other state transportation officials, and private
sponsors for the dramatic evolution from the Eisenhower-era, Federal-aid
funding to the wide array of financing instruments and programs
introduced and utilized over the last eight years. To briefly reflect on the
prior testimony involving program and project finance and case studies, ISTEA,
post-ISTEA initiatives and TEA-21 implementation have produced the following
market- related accomplishments: 1) dramatically increasing bondholder
investment in transportation projects and state programs; 2) new and/or
specially dedicated revenue streams, particularly for the purpose of retiring
debt obligations; 3) broad market acceptance of the use of Federal-aid
funding for debt instrument financing; 4) more coordination
with other
funding partners beyond states, and; 5) lower
financing costs and increased project feasibility through Federal credit
enhancement.
1. Addressing characteristics sought by the Capital Markets
and private sector project sponsors provides efficient market access and
innovative transportation finance opportunities. What do market intermediaries
-- underwriters, rating agencies, bond issuers, project sponsors and
institutional and individual investors want?
Characteristics
Sound, understandable credits
Evidence of government support
Strong debt service payment coverage
Predictability and Federal
program consistency with evolution of new instruments
Market rate
investment returns for bonds, development costs, and equity
Reasonable
and reliable timing of issuer's revenue/grant receipts
Acronyms that
capture the Federal programs' spirit and promote investor familiarity
Diversified range of investment opportunities
Volume, market
profile, and liquidity
For example, the track record and predictability
of the Federal- aid
highway program since the Eisenhower-era
has enabled Grant Anticipation Revenue Vehicles (GARVEE) bonds to be structured
without the double-barrel credit of other state credit backstops, as first used
in New Mexico.
It was the strong issuance history of municipal bond
banks in states such as Vermont, as well as the successful use of state
wastewater and clean water revolving funds, that served as the model for the
development of State Infrastructure Banks (SIBs) in the mid-1990's.
And
it was the broad market acceptance of municipal bond insurance and bank letters
of credit that provided a model for the development of TIFIA credit assistance
and pre-TIFIA successes such as the Alameda Corridor multi-modal project.
As David Seltzer commented in the first panel, are the Federal policy
incentives in Innovative Finance initiatives suitable to attract and expand
capital markets investment? And are the programmatic tools and requirements
balanced to provide the characteristics sought by debt investors and private
sponsors, as well as public entities?
2. How various Innovative
Financing components have been used by public agencies and, in some cases,
private sponsors, and received by the markets provides a roadmap for surface
transportation reauthorization.
When State Infrastructure Banks (SIBs)
were created as part of the NHS Act in 1995, the pilot program for 10 state
transportation revolving funds became very popular in 1996, in part, because of
supplemental Federal
funding for "seed" capitalization matched
with non-Federal funds. As highlighted in FHwA's State Infrastructure Bank
Review from earlier this year, 32 states have active SIBs and have made
different levels of
highway and transit project assistance
primarily through loans, despite widespread under-capitalization and the
curtailment of the program in TEA-21. Limited capitalization has resulted from
the inability to use Federal-aid funds, outside of four states, and the
application of Federal requirements to all moneys deposited in the SIB,
regardless of whether the source was state or private contributions, or repaid
loans. In addition, only two states have leveraged their SIB programs through
the issuance of bonds.
As a flexible, state-directed tool, SIBs have
greater potential to provide loans and credit enhancement that can be realized
through further modification as part of Reauthorization:
- Extend the
program to included all states;
- Expand capitalization to meet demands
with supplemental Federal appropriations and by permitting the use of future
Federal-aid funds to capitalize SIBs;
- Rollback the imposition of
Federal requirements on SIB-funded projects, or, at least, exempt "recycled"
loan repayments and state contributions, as permitted under the 1995 NHS Act
Pilot Program;
- Encourage states to expand capitalization by leveraging
their SIB program through the issuance of bonds; and
- Remove "pilot"
moniker from the SIB Pilot Program to send strong signal of on-going Federal
support.
Reauthorization should provide incentives for public/private,
market-based partnerships that finance, develop, operate, and maintain
highways, mass transit facilities, high-speed rail and freight
rail, and inter-modal facilities. This could be accomplished by permitting the
targeted use of $
15-20 billion of a new class of private
activity bonds, and/or by modifying certain restrictions in the Internal Revenue
Code on tax-exempt bond financing of transportation modes. We commend the
members of the Senate and the Finance Committee for your prior consideration of
the
Highway Innovation and Cost Savings Act (HICSA, 1999), the
Highway Infrastructure Privatization Act (HIPA, 1997), and,
most recently, the Multi-Modal Transportation Financing Act (Multitrans).
My office is across West Street from the World Trade Center site. As
workers in downtown Manhattan, we greatly appreciated your passage of Federal
legislation creating a "Liberty Zone" for the redevelopment of lower Manhattan
and for the creation of a new type of tax-exempt private activity bonds, Liberty
Bonds, for the rebuilding and economic revitalization of New York City.
Existing tax law discourages private investment in transportation
projects, prohibiting lower cost tax-exempt financing for projects involving
private equity investment and incentive-based, private sector operating
contracts. Transportation infrastructure financing deserves a bond mechanism
similar to Liberty Bonds under Reauthorization to attract more private
investment, as well as increase the use of new construction techniques, cost
controls, performance guarantees and technologies. A new class of private
activity bonds for qualified
highway infrastructure, mass
commuting vehicles, and other transportation projects would expand the
application of the tax-exempt financing and lower the cost of capital, making
public- private partnerships more attractive to public sector sponsors than
conventional approaches.
3. Past "Innovative Finance" should become
mainstream transportation finance under TEA-21 reauthorization and the Federal
government should provide new financing tools and initiatives, at least on a
pilot basis. From a financial markets perspective, Congress should use this
opportunity to make refinements to more clearly articulate transportation
financial assistance goals and send a consistent message as to how the Federal
government is going to act toward investors, project sponsors and all program
participants.
- TEA-21's
funding guarantees and
firewalls--that permit the flexible use of GARVEE Bonds beyond multiple
reauthorization periods--should be maintained, and radical swings in budgetary
funding from RABA (Revenue Aligned Budgetary Authority) should
be avoided. Similarly, transit
funding guarantees should also
be preserved.
- Examine the creation of a government corporation,
perhaps in a form discussed by AASHTO, to provide a focus on transportation
infrastructure finance, possibly administer a portion of DOT's financing
programs, and provide a basis for new financing tools, such as tax credit bonds.
Federal government corporations have helped the capital markets create strong
and liquid markets to fulfill other policy and programmatic objectives.
The creation and implementation of U.S. DOT Innovative Financing
Initiatives over the last eight years has prompted an even more vigorous debate
about transportation financing issues, challenges, and future innovation with
the coming year's surface transportation reauthorization. This ongoing debate,
coupled with past and current Program successes, will encourage a further
willingness to look beyond Federal-aid grant reimbursement, introduce additional
players in transportation finance and enlarge the spectrum of instruments and
programs to attract additional private and capital markets investment. The
success of Innovative Finance places a higher level of responsibility on the
Federal reauthorization process to maintain the characteristics attracting
strong capital markets participation. Municipal Markets participants will
continue to work with Congress, DOT, states, local governments, and private
sector sponsors to maximize leverage and investment levels in transportation
infrastructure over the coming authorization period and beyond.
I am
pleased to have the opportunity to participate in today's Joint Hearing with
such knowledgeable witnesses. Thank you, again, for the opportunity to testify.
I look forward to responding to any questions you may have.
LOAD-DATE: September 26, 2002