Copyright 2002 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
September 25, 2002 Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3743 words
COMMITTEE:
SENATE ENVIRONMENT AND PUBLIC WORKS
HEADLINE: SURFACE TRANSPORTATION FINANCING ALTERNATIVES
TESTIMONY-BY: BRADLEY MALLORY, SECRETARY OF
TRANSPORTATION,
AFFILIATION: STATE OF PENNSYLVANIA
BODY: Statement of Bradley Mallory Secretary of
Transportation, State of Pennsylvania President, American Association of State
Highway and Transportation Officials
Before The Senate
Finance Committee
and Senate Environment and Public Works Committee
September 25, 2002
Mr. Chairmen and members of the Committees,
my name is Bradley Mallory. I am the Secretary of Transportation for the State
of Pennsylvania and the President of The American Association of State
Highway and Transportation Officials (AASHTO). I am here today
to testify on innovative and other financing issues as the Congress begins
consideration of legislation to reauthorize the federal-aid
highway and transit programs.
First, I would like to
thank you both for your leadership in fully restoring
highway
funding for FY 2003 to $
31.8 billion as AASHTO, the
National Governors' Association and many others have urged. As I will discuss
today, RABA needs to be fixed next year to avoid radical swings in
funding levels, but without your help, we would still be facing
a disastrous cutback this year. Senator Baucus, AASHTO would like to commend you
for your leadership in transferring the 2.5 cents per gallon of gasohol tax
revenues from the General Fund to the
Highway Trust Fund where
it belongs and will help greatly.
In addition, I want to thank both
Chairmen for demonstrating their leadership by scheduling this very important
hearing. I am honored to be invited to testify on these important issues and to
offer the views of AASHTO on a variety of financing issues.
Mr.
Chairmen, I would like to begin by providing you with a brief picture of the
Commonwealth of Pennsylvania. Although the Keystone State is not large in
geographic size we are fifth in the nation in population with more than 12
million people. One- third of our people live in rural areas, giving us the
largest non-urban population in the country. By 2025 our population is expected
to grow by 20 percent to 14.3 million and, most significantly, the number of
residents aged 65 and older is expected to grow by 80 percent during that time
period. Pennsylvania also ranks fifth among the states in size of
highway system under its jurisdiction. The Commonwealth owns,
maintains and operates 40,500 miles of
highways -- 34 percent
of the total system -- and 25,000 bridges that are spread across many rural
miles as well as located in metro areas.
HIGHWAY AND
TRANSIT FINANCING HISTORY
Mr. Chairmen, the federal-aid
highway program since 1956, and since 1982 the mass transit
program, have financed critical national transportation investments primarily
from the dedicated depository of revenue the
Highway Trust
Fund. There are a variety of fees deposited in the Trust Fund, but the largest
source of income by far has been fees levied on motor fuels (gasoline and
diesel). Although the needs for
highway and transit investment
have dramatically increased, fuel-related user fees have been adjusted only on a
sporadic basis.
In concert with increases in user fees there was growth
in
funding for both the
highway and transit
programs. The most dramatic growth occurred since 1991 starting with the
enactment of ISTEA and reinforced by TEA-21. However, in spite of this growth,
needs continue -- by anyone's measures -- to far outstrip available federal,
state and local resources. At its completion, TEA-21 will have provided
$
208 billion for
highways, transit and safety,
but the needs as measured by the U.S. Department of Transportation are far
greater than even this record level investment.
In the 1990s, various
innovative financing techniques were piloted and then enacted into law through
the National
Highway System Designation Act and TEA-21. Among
the tools that now are part of many state DOT financing approaches are:
eligibility of federal-
funding to pay debt service for project
financings; grant anticipation notes also known as GARVEE Bonds; tapered match,
which allows states to manage matching shares over the life of a project; and
the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA)
program introduced in TEA-21 that provides secured loans, loan guarantees and
standby lines of credit to surface transportation projects of national or
regional significance. These tools are useful but only fill a niche in the
program and project financing toolkit. We clearly need to do more with
innovative financing in the future to enhance the mechanisms, and apply
innovative financing to more areas of surface transportation. I will provide
ideas for the Committees' consideration later in my testimony.
AASHTO'S
PROPOSED
FUNDING LEVELS FOR REAUTHORIZATION AND FINANCING
OPTIONS.
Mr. Chairmen, we believe the central issue in reauthorization
will be how to grow the program. Huge safety, preservation and capacity needs
exist in every region of the country. AASHTO will release shortly its Bottom
Line Report, which projects needed
highway investment to assure
American mobility and to advance our economy.
The report will show that
the annual level of investment needed to maintain current conditions and
performance of our
highway systems is $
92
billion. The estimated annual level of investment needed to maintain the current
conditions and performance of the nation's transit systems is
$
19 billion. These investment levels far exceed current
investment and we recognize that the magnitude of increase needed is not likely
to be made available through the federal-aid
highway program.
However, to begin to address these needs, AASHTO is seeking a
substantial increase in
funding over TEA-21 for both the
highway and transit programs. Overall, as compared to TEA-21[1]
obligation levels for
highways and funding for transit, we seek
to grow the program from at least $
34 billion in FY 2004 to at
least $
41 billion in FY 2009 for
highways and,
likewise, from at least $
7.5 billion in FY 2004 to at least
$
10 billion in FY 2009 for transit. These minimum figures
represent 35% and 45% program increases, respectively.
The challenge is
how to fashion a
funding solution that can achieve these goals
and garner the bipartisan support needed for enactment next year.
New
sources of
funding are needed to significantly grow the
program. Without the introduction of new sources of
funding,
growth in the
highway and transit programs will rely on
additional revenues from increased travel and truck sales. Based on the latest
data available to AASHTO, these revenues would translate to about a 10 percent
program increase for
highways over the life of a six year
reauthorization bill.
This increase would not even come close to keeping
up with the loss of purchasing power due to inflation. From 1996 projecting
through 2009, inflation as measured by the Consumer Price Index results in a 26
percent decline in purchasing power. If reauthorization of TEA-21 includes only
"status quo" options for achieving a larger program, we will soon find that the
status quo is actually a rather a dramatic decline in investment due to the
erosion of purchasing power. The following graph illustrates the impact of
inflation on the current user fee rates.
Put another way, based on the
Bureau of Labor Statistics inflation calculator, merely to have maintained the
purchasing power of the three cent gasoline tax as was instituted in 1956, the
gasoline tax today would need to be 20 cents.
Maintaining the status quo
is not an option; however, as I said, the challenge is to develop a solution
that attains at least $
41 billion for
highways
and $
10 billion for transit by 2009 that garners bipartisan
support. The AASHTO Board of Directors is considering a menu of
funding options to create additional revenues that includes
drawing down the
Highway Trust Fund reserves; capturing 2.5
cents per gallon gasohol revenues currently going to the General Fund for the
Highway Trust Fund; transferring the equivalent of 5.3 cents
per gallon of gasohol tax from the General Fund to the
Highway
Trust Fund to make up for the rate differential between gasohol and gasoline;
capturing interest on
Highway Trust Fund reserves; increasing
General Fund support for transit; selling financial instruments; and indexing
and raising federal fuels taxes.
Although the program could grow
somewhat without raising taxes, it would fall short of meeting national needs.
AASHTO recognizes that the Congress needs
funding and financing
options beyond the traditional user fee increase approach. The Board also
directed the AASHTO staff to explore the feasibility of leveraging new revenues
through a Transportation Finance Corporation. While most of AASHTO's
funding options are very straightforward, I would like to take
a few minutes to describe the proposal to create a Transportation Finance
Corporation, which could achieve AASHTO's goals for
highway and
transit
funding without indexing or a tax increase, in more
detail.
TRANSPORTATION FINANCE CORPORATION
In order to help
close the sizable
funding gap between surface transportation
investment needs and projected resources available in the
Highway Trust Fund, AASHTO is exploring including among its
menu of
funding options the concept of establishing a new tax
credit bond program to raise revenue in the capital markets. We describe this
concept as program finance, rather than project finance.
AASHTO proposes
that Congress consider chartering a private, non- profit organization--the
Transportation Finance Corporation--to serve as the centralized issuer of tax
credit bonds. Approximately $
60 billion in bonds would be
issued between 2004 and 2009. From the bond proceeds, approximately
$
34 billion would be distributed to the
highway program through FHWA according to an apportionment
formula determined by Congress (perhaps similar to the current Federal-aid
highway funding formula). About $
8.5 billion
would be made available to transit agencies on a basis to be determined. From a
State (or transit agency) perspective, these funds would essentially be
indistinguishable from regular federal-aid apportionments: states would be
required to comply with all Title 23 requirements to use the funds. In summary,
the TFC would leverage approximately $
18 billion in new
revenues into an increase of nearly $
43 billion in program
funding for FY 2004- 2009.
The States would not in any
way be liable for the repayment of the bonds. A portion of the bond proceeds
(approximately $
17 billion) would be set aside at issuance and
deposited in a sinking fund, which would be invested in Federal agency or other
high-grade instruments. At maturity, the sinking fund will have grown to be
sufficient to repay the bond principal. These taxable bonds would have a term of
20-25 years.
In lieu of interest, the bond holders would receive taxable
tax credits that could be applied against the holder's Federal income tax
liability. There is a cost to the U.S Treasury for this type of tax credit
program. The Treasury would be reimbursed for the budgetary cost of the program
(arising from tax expenditures) by additional
Highway Trust
Fund receipts derived from a new net source of revenue. Thus, there would be no
impact on the federal deficit.
This summer, AASHTO met with seven major
bond underwriting firms (investment banks), two ratings agencies, and a bond
insurer to assess the viability of the Transportation Finance Corporation
proposal from the perspective of the financial community. In our due diligence
we investigated the ability of the capital markets to absorb an additional
$
60 billion in investment; overall marketability of the bonds,
including necessary and preferred characteristics of the financial instruments;
potential investors; and credit assessment.
In addition, the TFC
proposal contemplates up to $
5 billion of federal
funding being used to fund a Capital Revolving Fund, which
would make available direct loans, loan guarantees and standby lines of credit
to a variety of surface transportation projects not readily fundable under
existing Federal programs. This fund would be a catalyst to leverage capital for
an expanded list of transportation to include,
highways,
transit, freight rail, passenger rail and security infrastructure. This
funding would assist in promoting public private partnerships
and attract new private capital to transportation projects.
Overall, we
found a high level of interest in the program due to the equity and efficiency
advantages of using debt proceeds to finance long-term infrastructure
investments. Our key findings:
Tax credit bonds are marketable. The
Corporation should be authorized to de-couple the principal from the stream of
tax credits, and market each portion of the financing instrument to different
groups of buyers on a discounted basis. For example, the principal component is
likely to appeal to pension funds, and tax credits should be attractive to
financial institutions & corporations. Major individual investors
anticipating federal income tax liability in future years are also potential
purchasers of the tax credits, as are individual investors interested in safe,
long-term investments. Securities firms would maintain an active and continuous
secondary market in both the principal and tax credit portions to assure their
liquidity.
Capital markets can absorb TFC paper. The proposed size of
the program (an average of $
10 billion per year over 6 years)
equals 0.2% (two tenths of one percent) of the U.S. bond markets'
$
4.6 trillion debt issuance volume in 2001.
Marketability and liquidity are enhanced by a central issuer. Larger,
more homogenous issues than the fragmented Qualified Zone Academy Bond (QZAB)
school construction program should result in a more efficient secondary market
and reduced transactions fees as well as centralized investor information
leading to price transparency. A centralized issuer also mitigates tax
compliance risk and ensures that all states benefit from the program rather than
only states using debt financing.
There is a broad potential investor
base. Decoupling tax credits from principal will be more efficient and result in
a broader investor base. The principal component should appeal to pension funds;
tax credits are likely to be attractive to financial institutions and
corporations; and allowing individuals to buy credits will broaden the market.
The TFC will need to mount an investor education program to develop an efficient
market.
Other aspects of the due diligence show that tax credit bonds
are likely to be investment grade and, of course, that specific terms of the
legislation will be critical to the success of the program.
Our analysis
shows that AASHTO's
funding targets through FY 2009 could be
achieved through the Transportation Finance Corporation without indexing or
raising fuel taxes. However, the program level would drop below FY 2009 slightly
for the following three years before it resumes positive growth in 2013. In our
modeling, when the TFC concept was combined with indexing, the program continues
healthy growth from FY 2010 on. As you can see, the AASHTO staff and our
Financial Issues Work Team have developed a creative proposal that appears
feasible and has been well received. We commend it to you for your
consideration.
Potential Program Growth Summary
The following
charts illustrate potential sources of growth in
highway and
transit program
funding. "Incremental" represents
revenues from travel growth, 2.5 cent per gallon gasohol transfer, and drawing
down the
Highway Trust Fund.
Text Box: $ billions
Transportation Finance Corporation
General Fund Contribution
Transit Share of HTF
Growing the Transit Program
Year
FY 2009
FY 2008
FY 2007
FY 2006
FY 2005
FY 2004
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
2.6
5.4
1.8
2.4
5.3
1.6
2.2
5.2
1.3
2.1
5.1
1.0
2.0
5.0
0.8
1.9
4.8
$
7.5
$
8.0
$
8.5
$
9.0
$
9.5
$
10
Innovative Financing Options
In
addition to the menu of
funding options, AASHTO wants to work
with the Congress to enhance and strengthen current Innovative Financing tools.
These changes include enacting legislation to extend the legislative authority
in TEA-21 for State Infrastructure Banks to all states, assuring the continuance
of the current innovative financing provisions and making improvements to the
TIFIA program. Specifically, regarding TIFIA we recommend that the current
$
100 million threshold be reduced to $
50
million which will serve to expand the universe of projects that can take
advantage of this financing tool. In addition we urge the Congress to make clear
the intent of the program is to be a minority investor and thus to demonstrate
more flexibility in taking credit actions under TIFIA. This is not to suggest
that care should not be taken in transactions involving taxpayer money but
rather to meet the program goals which are to round out financing of projects
with federal assistance.
The Board of Directors will be making final
decisions on AASHTO's reauthorization financing recommendations in the late fall
and I note that Chairman Baucus has included a number of items similar to those
on the menu of options in legislation he recently introduced.
OTHER
FINANCING ISSUES
Guaranteed Spending
One of the key features of
TEA-21 is guaranteed spending. The assurance of stable, predictable
funding has made it much easier for states to plan and carry
out programs. AASHTO has adopted as a top priority ensuring the continuation of
funding guarantees.
Funding guarantees are
essential to meeting our commitment to the traveling public, which pays the
dedicated user fees for
highways and transit programs, that
they are receiving the benefits of their fees. The return on this investment in
transportation programs is ensuring a competitive economy with hundreds of
thousands of high-paying American jobs.
RABA Calculations
Another key feature of TEA-21 is the budgetary mechanism known as
Revenue Aligned Budget Authority (RABA). This mechanism was designed to ensure
that the receipts coming into the
Highway Trust Fund
Highway Account are fully utilized by the program. This
mechanism added over $
9 billion to the program thorough FY
2002. However, due to the downturn in the economy, the look-ahead provision of
RABA substantially overestimated FY 2001 revenues; thus the RABA adjustment for
FY 2003 would have reduced the obligation levels for the
highway program by $
8.6 billion or 26 percent.
AASHTO is pleased that the Congress is moving to restore this much needed
investment
funding. AASHTO believes that it is
necessary to preserve a RABA mechanism. However, action is necessary to ensure a
more stable and predictable outcome. Therefore, we offer an option that would
eliminate the look-ahead provision of current law and replace it with a
provision that retains the look-back part of the calculation. This likely will
make the program
funding more stable but also will cause a
buildup of revenue in the
Highway account. Therefore to ensure
full use of the revenue we also recommend including a provision that would
reduce the cash balance in the
Highway Account to a fixed
minimum by raising the program level in the last year of the authorization bill
to a level sufficient to reduce the balance.
Long-term Financing
Given the advent of more fuel efficient vehicles and the increasing use
of alternative fuels, income to the
Highway Trust Fund may be
significantly reduced. In order to prepare for future reauthorizations AASHTO
recommends that Congress create a Blue Ribbon Commission to study financing
options and report its findings prior to the next reauthorization cycle.
CONCLUSIONS
The federal-aid
highway and transit
programs have a long history of strong partnership with the States and have made
major contributions to creating surface transportation systems that are among
the best and safest in the world. However, by all measures surface
transportation needs far outstrip investment resources.
AASHTO
recognizes the need for additional investment and has proposed program increases
of 35 and 45 percent for
highways and transit. This increased
investment is vital to the nation's economy and assures the continuance of high
paying jobs in the transportation sector.
Recognizing the need to offer
creative solutions for revenue generation, AASHTO is considering including a
proposal for the creation of a Transportation Finance Corporation in its menu of
funding options. This federally-chartered non-profit
corporation would leverage funds for the program and take advantage of the
private capital markets for bringing revenue into the program. In addition, the
TFC would include a Capital Revolving Fund that could leverage as much as
$
30 billion in credit support for a variety of transportation
programs including,
highways, transit, freight, and passenger
rail and security infrastructure. This fund will likely serve as a catalyst for
generating public/private partnerships and thus further expand investment in
transportation programs.
Guaranteed spending is a key feature of TEA-21.
It provides predictable
funding so that States can plan with a
greater degree of certainty. It assures that dedicated user fees are spent on
the programs for which they were collected in a timely manner. One of AASHTO's
reauthorization goals is to preserve guaranteed spending.
RABA has
served to ensure that increased revenue is utilized for programs without having
to wait until the next reauthorization cycle to increase program levels in
highways. There needs to be adjustments to the RABA mechanism
to make the results more predictable and AASHTO has offered a solution that
could accomplish that end.
In the long-term, consideration needs to be
given to possible new sources of income and way to collect income to ensure that
there is sufficient income to make the investments in transportation necessary
to meet the nation's needs in the future.
We look forward to working
with the Congress to enact legislation that will ensure continuing maximum
possible investment in our transportation system.
[1] Growth
calculations:
Highways baseline of $
168.7
billion includes TEA-21 obligation limitation, exempt and RABA. Transit baseline
includes guaranteed
funding of $
36.35 billion.
LOAD-DATE: September 26, 2002