Future ISTEA reauthorization requires greater federal role.

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The Intermodal Surface Transportation Efficiency Act of 1991 represents the most dramatic change in national transportation policy in nearly 40 years. The act provides a formal framework for municipal financing trends that have been underway for years, and encourages other financing methods that are relatively new.

The legislation, however, cannot work as a stand-alone effort. While the act authorized a dramatic increase in federal spending for state transportation matters, after adjusting for inflation, and a variety of other factors, it provides a marginal increase at best. Broadly, the prospects for significant increases in direct federal funding in the near future are nonexistent unless linked with tax increases.

That's why the interested parties, such as the federal government and the municipal bond community, must encourage state and local governments to use their funding from the act more effectively, The upshot will be the availability of millions of dollars of additional funding for transportation projects throughout the country.

Here's where outside parties can help. I believe the federal government can encourage the formation of state transportation banks or other variations of revolving loan funds. Properly structured, such funds can take advantage of the many direct and indirect innovations that Congress provided in the act, such as the use of federal funds as loans and the use of federal funds as support toll facilities, whether developed by the public or private sectors.

Revolving loan funds have been a tried-and-true tool of infrastructure finance for more than 30 years. While transportation agencies have yet to try revolving loan funds on a significant scale, several states such as Texas and Washington have created these funds. Other states, such as California, Florida, and Minnesota, are considering the move.

How do revolving loan funds work? Very simply. Existing transportation funds (either federal or state and local) are leveraged. Leverage is generated in two ways: by using federal or state and local funds as seed capital in a reserve, and by issuing bonds secured by the stream of future tolls and other revenues. As these payments are received, the bonds are paid off and additional resources are provided to support new projects. The speed with which new funds are generated depends on the terms behind each loan - the shorter the loan term and the higher the rate of interest, the greater will be the funds generated. The fund, however, can have considerable flexibility in the loan terms it offers.

The key characteristics of such loan funds are that they are market or demand driven, they provide the resources needed to support large-scale projects and they represent a flexible financial institution that can provide continuity.

These financing techniques can offer significant help in reducing the backlog and meeting overall investment needs. For example, by making it possible to leverage existing streams of funding, they can, in turn, generate new funds. These funds can come from tolls and related user fees or from private equity. The user fees can also be used to back bonds.

Simulation runs show that as much as a billion dollars a year in loans could be supported with only about $350 million a year in federal outlays for the start-up capital. Loans would be at market rates and as repayments were made to the fund, additional projects could be funded.

Perhaps the most important benefit provided by these additional resources is to speed the construction of worthy projects. Remember, the largest cost in most projects is the cost of deferred benefits due to delayed construction. These benefits will, in turn, generate jobs, private sector income, and general tax receipts.

Does current legislation provide adequate support for these techniques? The simple answer is yes. But leadership from the federal government and the municipal bond community is needed to help reorient existing transportation professionals to these new financial methods.

For one, I would like to see some technical changes and clarification of what Congress intended the act to do. Congress should also change the act to incorporate a broad definition of tolls that includes other dedicated user fees such as impact fees based on land development and legally dedicated sales taxes.

States have used some form of revolving loan funds of infrastructure for more than 30 years. Currently, virtually every state has such a fund to provide loans to build waste water treatment facilities. As a result, a variety of operating models have been tried.

In transportation, several states have enacted loan fund legislation. More states have begun to make use of toll financing. California's AB 680 process stands out with the SR 91 project under development in southern California. Also in southern California, the $1.2 billion San Joaquin Hills toll road used tolls and development fees to fund its construction. (A backup federal line of credit provided important psychological support.)

Most ambitious perhaps is Washington's SHB 1006 program. This effort asked for private sector bids to build, finance, and/or operate transportation facilities in the state. Bidders were allowed to combine public and private funds. Fourteen bids were received with a combined value of $4.8 billion. These ranged from new toll bridges and highways, to urban tunnels, to area-wide congestion pricing, to ferries, to airport people movers. The state is in the midst of evaluating these proposals with up to six projects allowed under the legislation.

While I believe the focus of financial decision making should be at the state and local level, there is a clear and important role for the federal government. In addition to its current programs. The U.S. Department of Transportation can serve as a key source of seed capital for state loan funds. In doing so however, these funds should be provided in as flexible a manner as possible. Federal Highway Administration also has an important role as cheerleader and facilitator in traversing historical practices.

State and local governments are the logical choices to execute these projects and will have long-term responsibility to ensure that they are effective. Private firms provide equity and help generate new ideas and implement new technology. As with many things in life, success requires a series of ever-changing partnerships.

In looking back over recent federal policy toward infrastructure, I find my optimism growing. The recent efforts by the Federal Highway Administration and many state transportation departments to implement new financing techniques should be encouraged by Congress. Such encouragement can be given indirectly through kind words or more tangibly trough report language and perhaps incentive funds. It also could take more permanent form when the transportation act is reauthorized.

Joseph M. Giglio Jr. is chairman of Apogee Research Inc., an economics consulting firm specializing in public works. Giglio is former chairman of the U.S. Senate budget committee infrastructure commission and former chairman of the National Council on Public Works Improvement.

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