Recommendations of the Texas Comptroller

Expand the Reach of the State

Infrastructure Bank

Summary

The Texas Department of Transportation’s (TxDOT) State Infrastructure Bank (SIB) opened for business in 1997 and is developing a comprehensive lending program. As with any new program, there are significant opportunities to further the impact of the program, in particular to support local and private investment in transportation infrastructure. As of August 2000, the Texas SIB had disbursed about $39 million and made additional loan commitments of nearly $26 million. As of August 1, 2000, the SIB had a cash balance of roughly $197 million, of which $171.5 million was not yet committed to projects.[1]

Background

The federal National Highway System Designation Act of 1995 (the NHS Act) spurred the creation of state infrastructure banks (SIBs). The NHS Act authorized the use of federal-aid highway funds and federal transit funds to capitalize a revolving loan fund. Thirty-nine states were approved to use federal funds to capitalize SIBs. Subsequently, the Transportation Equity Act for the 21^st Century (TEA-21) limited the SIB program by allowing only four states (California, Florida, Missouri and Rhode Island) to use TEA-21 funds to continue capitalizing their SIBs.

Exhibit 1 provides a summary of the status of loan activity among participating states as of August 2000. As the exhibit shows, Texas is among the top four states in terms of the number of loan commitments and among the top five in terms of the dollar value of those commitments.

Exhibit 1

State Infrastructure Bank Loan Agreements by State, as of August 2000

(in order of money value of loan agreements, $000’s)

Exhibit 1 continued

State Infrastructure Bank Loan Agreements by State, as of August 2000

(in order of money value of loan agreements, $000’s)

Source: FHWA's Innovative Finance Quarterly, Volume 6, Number 2, Summer 2000.

The Texas State Infrastructure Bank

The State of Texas was a pioneer in establishing a state infrastructure bank. The Texas Legislature created the SIB in 1997 via Senate Bill 370 and the Texas Transportation Commission (TTC) approved administrative rules that govern the program in December 1997.

The stated purposes of the Texas SIB are:

• to encourage public and private investment in transportation facilities, including facilities that contribute to the multimodal and intermodal transportation capabilities of the state;
• to expand the availability of funding for transportation projects and reduce direct state costs; and
• to improve the efficiency of the state transportation system.[2]

Eligible applicants include any public or private entity authorized by law to construct, maintain, or finance an eligible transportation project. By the provisions of Section 350 of the National Highway System Designation Act of 1995, federal funds in the highway account of a SIB may be used only to provide assistance with respect to construction of federal-aid highways.[3]

Financial assistance may be granted in the form of loans as well as a variety of credit enhancements such as lines of credit, letters of credit, bond insurance, and capital reserves. Loans may be funded from available SIB resources or through the sale of revenue bonds by the Texas Transportation Commission. The SIB is not authorized to provide grant funding.

Applications to the Texas SIB are accepted on an ongoing basis. Should the Texas Transportation Commission determine that bank funding is fully committed or other constraints on funding exist, the application acceptance process may be suspended.[4]

Experience in Other States

As shown in Exhibit 1, Texas is among the top five states in terms of loan commitments. Arizona, Florida, and Ohio have committed significantly more dollars and have deposited state funds into their SIBs beyond the required non-federal match. In the 2000 legislative session, the Florida legislature enacted legislation that will provide $150 million ($50 million annually over three years) of state funds to the Florida SIB.[5] The Arizona SIB has secured $60 million in general revenue funds ($20 million over three years) and $20 million from the state’s highway fund. In addition, the Arizona SIB may issue “board funding obligations” (BFOs) in support of the SIB. The Arizona legislature has authorized up to $300 million in BFOs to be issued to the state treasurer, to be repaid with transportation program funds. The first issue of BFOs was authorized in October 1999 and will provide $100 million for loans to advance urban freeway projects. It is estimated that over the next eight years, the new state funding sources will support $600 million in loans for highway projects throughout Arizona. Ohio also funded its SIB with $30 million in additional state funds.[6] In contrast, the Texas Transportation Commission has not issued revenue bonds to capitalize the SIB, although it is authorized to do so.

A number of states have used their SIB programs to provide a vehicle for localities and private interests to accelerate funding projects and to encourage project development beyond the state program. The Missouri SIB, for example, routinely lends funds to localities to advance state projects. The locality ultimately bears only the interest cost associated with the SIB borrowing and the state pays for the project at its normally scheduled time. Oregon has taken an aggressive approach to allowing localities to accelerate funding projects that will ultimately be funded with federal and state dollars. For instance, Oregon gave local project sponsors the opportunity to advance High Priority Projects as designated in TEA-21 with loan repayments scheduled to match TEA-21 disbursements.[7]

Texas’ SIB

As shown in Exhibit 2, as of August 1, 2000, the Texas SIB had $171.5 million available in uncommitted funds.[8]

Exhibit 2

Texas SIB Financial Status (as of August 1, 2000)

Exhibit 2 continued

Texas SIB Financial Status (as of August 1, 2000)

Source: Monthly TxDOT Commission Report, August 2000.

At the outset, the Texas SIB was used predominantly by localities to borrow their local participation requirement for ongoing projects rather than use local funds to advance high-priority projects in their jurisdictions. According to TxDOT program staff, however, localities are now turning to the SIB to advance projects. For instance, Laredo and El Paso have borrowed funds to complete important bridge projects that were not considered state highway improvements. Sugar Land and Corpus Christi borrowed funds that were pledged as additional participation in order to advance important local projects.[9]

TxDOT markets the SIB primarily through its district offices and targets state highway system projects, reasoning that there is already greater need in the state system than the SIB could address without expanding to off-system projects. TxDOT is not planning to expand its marketing efforts at this time because, considering the amount of money available, funds are being committed at an adequate pace.[10] The Texas Transportation Commission also is working at the Congressional level to reestablish a source of federal dollars. TxDOT will include SIB data for the first time when the fiscal 2000 District and County Statistics (DISCOS) report is published, to increase awareness of the SIB.[11]

Among concerns regarding local access to the program is the manner by which counties must borrow from the SIB should they choose to do so. Pursuant to a ruling by Texas’ attorney general (Op. Tex. Atty Gen. No. JC-0139 [1999]), a county may borrow from the SIB using traditional statutory financing methods. These methods include issuing debt instruments such as tax anticipation notes, bonds, and certificates of obligation. Rather than entering into a direct loan agreement with the SIB, the county sells the debt instruments it issues using available traditional statutory financing methods to the SIB in exchange for funds.[12]

According to TxDOT personnel, this form of borrowing is a fairly cumbersome process and more expensive for localities than a direct loan approach. Only one county, Lavaca, has issued tax notes to the SIB in lieu of a direct loan agreement. According to TxDOT staff, Lavaca incurred costs for a bond counsel and financial advisor that would not otherwise have been required and most likely spent additional time implementing the tax note approach.[13]

Recommendations

1. The Texas Department of Transportation (TxDOT) should maximize the impact of currently available State Infrastructure Bank (SIB) funding.

The Texas Department of Transportation should monitor the SIB's progress over the next three to six months and conduct additional marketing activities if the uncommitted fund balance of $171.5 million does not adequately diminish. The marketing efforts should include stepped-up outreach and technical support for localities considering participating in the SIB program. Some states have dedicated staff to manage the SIB and others have designated staff for whom the SIB is one of several responsibilities. In Texas, much of the marketing effort is shared with highway district staff. Thus, the level of increased effort can be absorbed by existing staff.

In addition, up to two percent of federal capitalization may be used for administrative expenses. Alternatively, the state can charge administrative fees or use state funds to pay for these expenses. However, the increased cost would be very minor relative to the overall program.

1. State law should be amended to give counties the authority to borrow via direct loan agreements with the SIB.

Currently, counties are forced to issue traditional forms of indebtedness, such as tax anticipation notes or bonds, to sell to the SIB. This is a cumbersome and more expensive approach to borrowing than entering into a direct loan agreement and may result in certain market effects associated with tax-backed debt obligations. The issuance of tax notes generally requires the services of a bond counsel and financial advisor and carries with it administrative burdens not associated with the simpler SIB loan agreement process. The current approach may have the effect of discouraging potential applicants and slowing the process of financing projects. Resolution of this legal barrier will facilitate more streamlined borrowing by county governments.

1. Once the SIB resolves any issues associated with its uncommitted balances, the Texas Transportation Commission (TTC) should consider issuing revenue bonds to expand the financing capacity of the SIB program.
   

The TTC has the authority to issue revenue bonds on behalf of the SIB. Such authority should be utilized once the demand for SIB resources can be demonstrated to exceed available funds.

1. The Texas Department of Transportation should conduct a study on the benefits of providing state funding for the SIB program.

The study should report to the 2005 Legislature the benefits of providing state financing for local projects both on and off the state system, and how state funds could be used to create SIB accounts for non-highway modes (e.g., transit and port investments).

This recommendation would facilitate using the SIB as an incentive for increased local investment and to promote private investment. Expansion of the SIB focused on providing incentives for local and private investment also could support other recommendations of shifting project responsibility to the local level, where appropriate.

1. Texas should continue to work with other states and national interests to seek expansion of the federal SIB program under Transportation Equity Act for the 21^st Century (TEA-21) to include more than the four currently designated states.

Efforts are ongoing among the states, including Texas, and other interested parties to seek a technical correction or other form of legislation to expand the SIB program by allowing all states to use TEA-21 funds in their SIBs. Texas would benefit from such a revision and, as one of the biggest states and early supporters of the SIB program, should continue to serve as a leader in seeking such program expansion.

Fiscal Impact

By encouraging local and private funding of transportation investments through the SIB, more projects can be built faster and at lower overall cost to TxDOT. While the fiscal impact cannot be determined without project-specific information, all recommendations can be accomplished with existing staff resources. The fiscal impact of recommendations A, B, and E relate to the cost savings associated with early project delivery. With SIB borrowers bearing the interest costs associated with financing the projects in most instances, TxDOT benefits from the reduced project costs. The fiscal impact of recommendations C and D relate predominantly to the advancement of high-priority projects. These also can be accomplished with existing personnel.

[1] Texas Department of Transportation, Monthly Texas Department of Transportation Report (Austin, Texas, August 2000).

[2] Texas Department of Transportation, Budget and Finance Division, State Infrastructure Bank Applicant Handbook, Version 1.0, (Austin, Texas, October 1997) (www.dot.state.tx.us/revexp/sib). (Internet document.)

[3] U.S. Congress, Senate, National Highway System Designation Act of 1995, S. 440, Title III, Section 350, Paragraph (d) (www.fhwa.dot.gov/legsregs/title3.html). (Internet document.)

[4] Texas Department of Transportation, Budget and Finance Division, State Infrastructure Bank Applicant Handbook, Version 1.0, (Austin, Texas, October 1997) (www.dot.state.tx.us/revexp/sib). (Internet document.)

[5] Federal Highway Administration, FHWA’s Innovative Finance Quarterly, Summer 2000, p. 6 (www.fhwa.dot.gov/innovativefinance/ifq62.htm). (Internet document.)

[6] Federal Highway Administration, FHWA’s Innovative Finance Quarterly, Winter/Spring 2000, p 6. (www.fhwa.dot.gov/innovativefinance/ifq61.htm). (Internet document.)

[7] Federal Highway Administration, FHWA’s Innovative Finance Quarterly, Summer 2000, p. 6 (www.fhwa.dot.gov/innovativefinance/ifq62.htm). (Internet document.)

[8] Texas Department of Transportation, Monthly Texas Department of Transportation Report (Austin, Texas, August 2000).

[9] Interview with Texas Department of Transportation Finance Division staff, Austin, Texas, February 16, 2000; and letter from Kirby W. Pickett, P.E., deputy executive director, Texas Department of Transportation, to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, September 14, 2000.

[10] Telephone interview with Thomas Doebner, director, Funds Management, Budget and Finance Division, Texas Department of Transportation, Austin, Texas, June 9, 2000.

[11] Letter from Kirby W. Pickett, P.E., deputy executive director, Texas Department of Transportation, to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, September 14, 2000.

[12] Letter from Kirby W. Pickett, P.E., deputy executive director, Texas Department of Transportation, to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, September 14, 2000.

[13] Information received from Jefferson Grimes, manager, State Legislative Affairs, Texas Department of Transportation, in response to an information request, August 21, 2000.

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

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