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Financing Capital Investment

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Financing Capital Investment 6. REPAYMENT SOURCES AND PAYGO CAPITAL 6.1 INTRODUCTION Despite recent advances in the application of debt financing to transit investment, much of the investment in capital by transit properties continues to be made on a pay-as-you-go basis. Transit systems use a combina- tion of federal, state, and local sources, as well as direct system revenues, to fund major capital projects. Alter- REPAYMENT Financing natively, when capital investments are debt financed, STREAMS repayment streams must be identified and secured. Mechanisms This chapter describes sources of revenue for both pay- as-you-go funding and to serve as repayment sources Sources of Capital for debt financing. Categories of revenue addressed in this chapter include I Revenue streams available to back limited recourse tax or special revenue debt obliga- tions and for PAYGO—including sales and other dedicated tax revenues, tax increment financing revenues, and federal and other grant funds; and I Revenue streams available to back system operating (or farebox) pledges and for PAYGO— including farebox revenue, concessions and joint-development revenues, advertising rev- enues, and revenues derived from leasing arrangements. In addition to serving as the source of repayment for debt obligations, each of these revenue streams also may be used to fund capital investments on a pay-as-you-go basis. 6.2 REPAYMENT SOURCES FOR LIMITED RECOURSE OBLIGATIONS SECURED BY REVENUES OTHER THAN SYSTEM OPERATING REVENUES Common sources of revenue for the repayment of limited recourse obligations include I Federal and other grant funds; I State and local dedicated tax revenues, including sales taxes, income taxes, property taxes, tax increment financing, special assessments, and impact fees; and I Other miscellaneous receipts. As noted above, not only may these sources be used for the repayment of debt obligations, they also may be utilized for the funding of capital items on a pay-as-you-go basis. The discussion that follows considers each of these funding sources in the context of its appropriateness as a repay- ment source for debt or lease transactions as well as for direct funding of capital projects. 77 Federal Funding As demonstrated in Chapter 2, federal capital funding has grown substantially since the late 1980s (also see Figure 6-1). There are three key components of the federal program that are par- ticularly important as transit agencies move toward using federal funds to secure debt financings for capital investment. These components are (1) guaranteed funding provisions; (2) FFGAs; and (3) eligibility of bond proceeds as local match. Figure 6-1. Federal Appropriations, Fiscal Years 1995–2002 (Billions of Dollars) 4.0 3.5 3.0 2.5 2.0 $ Billions $ 1.5 1.0 0.5 0.0 1995 1996 1997 1998 1999 2000 2001 2002 Fiscal Year FORMULA PROGRAM MAJOR CAPITAL INVESTMENT PLANNING & RESEARCH Guaranteed Funding and Flexibility TEA-21 provides $41 billion in transit funding between 1998 and 2003, $36 billion of which is guaranteed.1 The trend in federal funding guarantees for transit between 1998 and 2003 is illus- trated in Table 6-1. TEA-21 funds minimal amounts for planning, research, and administration, as well as for operat- ing funding for urban areas with fewer than 200,000 people and non-urbanized areas. The bulk of the federal funding guarantees illustrated in Table 6-1 are dedicated for public transportation capital projects. Increases in funding flexibility also have helped state and local agencies pay for the investments and upkeep of their transit agencies. ISTEA allowed certain highway funds—such as the STP, CMAQ Program, and Interstate Substitution-Highways Program funds—to be used for transit pur- Table 6-1. Total Guaranteed Federal Transit Funding, 1998–2003 (Billions of Dollars)2 1998 1999 2000 2001 2002 2003 Total Guaranteed Funding $4.8 $5.4 $5.8 $6.3 $6.7 $7.2 $36.3 1 www.fhwa.dot.gov/tea21/sumcov.htm 78 CHAPTER 6: Repayment Sources and PAYGO Capital poses (see discussion in Chapter 2). TEA-21 has further increased funding flexibility, particularly in terms of requirements for non-federal match for transit projects. For instance, I The fair market value of land acquired by a state or local government may now be applied to the non-federal share of project costs, I Funds from other federal agencies may now be applied to the non-federal share of trans- portation enhancement projects, and I Funds allocated to federal land management agencies or the federal lands highway pro- gram may now be applied to the non-federal share of certain projects. Advance Construction Authority provisions further support transit systems’ ability to tap into future federal funding to support project commitments and bonding initiatives (see early example of Boston Engine Terminal Project in sidebar). FFGAs A federal program for providing capital funds for new start transit projects has Boston Engine Terminal Advance Construction Project been in existence since 1974. The cur- rent FFGA program is funded through Background: MBTA faced a situation in 1995 in which it needed to the Mass Transit Account of the High- undertake a project that was too big and too resource-intensive to way Trust Fund. Under Section 5309, begin without assurances of funding for the entire project. The facility Congress allocates 40 percent of funds provides repairs and maintenance for MBTA’s locomotives and appropriated for capital programs to new commuter railcars. “New Start” projects. Advance construction request: FTA approved MBTA’s request for The annual appropriation is part of the Advance Construction Authority, making the facility’s overhaul federal budget process, with funding for eligible for grant reimbursement in subsequent years. individual projects appropriated on a line- item basis. Following the appropriation, a Financing: With FTA approval, MBTA was able to issue bonds to Notice of Award is granted to the grantees proceed with the project. The cost of the bonds is reimbursable in the by FTA, and each year the grantees sub- same way as construction, including interest costs. mit applications for funds. Benefits: The project was completed in 1997, at least 4 years prior to An FFGA is a multi-year federal funding when it would have otherwise been completed. Based on an annual arrangement under which FTA spreads its inflation rate of 5 percent, there was a $34 million savings. The facility grant commitment over a 6- to 10- year or also is saving MBTA millions in vehicle maintenance and repair costs longer time period, to reduce the annual based on the more efficient facility. In addition to financial benefits, burden of funding large capital projects. there were environmental benefits based on soil remediation activities FTA’s funding schedule is not an irrevo- and on ending years of oily runoff into Boston Harbor. cable pledge but rather a best efforts tar- Source: FTA presentation on Innovative Financing Initiative, get, subject to annual appropriations by www.fta.dot.gov/library/policy/inifr/strcl.htm Congress. In recent years, FFGA grantees have begun borrowing against their grants receivable to meet current project construction and acquisition requirements (refer back to dis- cussion of grant anticipation financing in Chapter 5). 2 www.fhwa.dot.gov/tea21/ 79 Every approved FFGA-funded project ultimately has received the total amount of federal funds (with the exception of two canceled projects). The funds, however, have been delayed in a few instances. Annual appropriations may vary from the initial FFGA schedule, but the total amount of federal funding has never been amended (see Chapter 5 and Technical Annex 2 for a discussion of the credit evaluation of FFGA-backed financings). Federal Bond Provisions TEA-21 allows transit operators to issue bonds secured with transit system revenues and to use the proceeds from the sale of bonds as part of local matching funds for a transit capital project. This increases flexibility and local funding for transit capital projects. Any transit capital project funded under Sections 5307 and 5309 is eligible (see Chapter 5 for further discussion of system- based transit revenue bonds). State and Local Dedicated Taxes and Fees Despite greater federal funding and broader eligibility, transit agencies are increasingly supple- menting federal funds with other revenue sources to help meet growing capital needs. Accord- ingly, state and local dedicated transit funding has increased significantly; in 2000, these funds totaled $2.5 billion and, together, represented 26 percent of all transit system capital funding (also see Figure 6-2).3 Dedicated funding can come from many sources, including sales and use taxes, utility taxes, prop- erty taxes, motor fuel taxes, mortgage recordation taxes and fees, and business taxes. Some juris- dictions also impose impact fees, special assessments, or tax increment financing approaches to raise needed revenues. Others have experimented with more unconventional sources, such as lottery revenues, revenues from the settlements with the tobacco companies, and the like. The range of funding sources used around the country is extremely diverse, and new techniques are developed on an ongoing basis. The key for transit systems is to understand the circumstances in the locality and state within which the transit system operates and Example Mix of Dedicated to develop strategies to take advantage of the strongest opportu- Revenue Streams: nities. This requires working closely with local and state officials Tri-Met (Oregon) to articulate the needs of the transit system and to help identify N Federal Funds the strongest and most secure revenue streams possible. N Employer Payroll Tax Following is a brief introduction to the more common state and N Lottery Revenues local dedicated taxes and charges that have been made avail- N Employer Payroll Tax able to transit systems to date. It is important to remember, however, that the relevant set of options is driven most by local circumstances (e.g., constitutional and statutory provisions, public preferences, and current finan- cial conditions) and that plans must be developed and pursued with those conditions firmly in mind.
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