Last week, the White House released to Congress its long-awaited infrastructure plan—a 53-page Legislative Outline for Rebuilding Infrastructure in America (the “Outline”)—to accompany its proposed Fiscal Year 2019 budget. The Legislative Outline largely reflects the central themes of the infrastructure “fact sheet” published last May and analyzed in our related client alert—namely, the use of a limited pool of federal dollars to leverage further investment in projects by states, local governments and the private sector, and seeking to incentivize the creation of those projects through targeted grant and loan programs, rather than through general allocations.
However, the Outline is far more descriptive than the broad principles set forth in the fact sheet as to the specific policies and programs the Trump Administration would support in a legislative process. Several of these proposals have received wide press coverage, including the creation of new grant programs to facilitate projects and state and local government funding efforts (the “Incentives Program” and the “Rural Infrastructure Program,” to which $100 billion and $50 billion would be allocated over ten years, respectively) and another grant program to fund riskier projects where funds might otherwise be difficult or impossible to obtain from other sources (the “Transformative Projects Program,” to which $20 billion would be allocated).
To date, relatively little attention has been given to the Administration’s proposed enhancements to existing federal programs. This client alert focuses on four key financing programs benefiting both public and private sector entities: the Transportation Infrastructure Finance and Innovation Act (TIFIA), Railroad Rehabilitation and Improvement Financing (RRIF) and Private Activity Bonds (PABs) programs, all of which are administered by the Build America Bureau of the U.S. Department of Transportation, and the Water Infrastructure Finance and Innovation Act (WIFIA) program, which is administered by the U.S. Environmental Protection Agency. The Administration recognizes these programs are working and proposes to expand both their budget and the scope of projects they are able to support.
The Administration would make available $14 billion over ten years to the federal government’s primary infrastructure financing credit programs: TIFIA, WIFIA and RRIF. The Outline does not specify the allocation per program or whether such funding would supplement or replace each program’s existing budget authority. In any case, the new levels would mean a significant expansion of TIFIA’s current budget authority, currently $285 million in FY 2018 and $300 million in each of FY 2019 and 2020. The TIFIA program is designed to fill market gaps and leverage substantial private (and other non-federal) co-investment by providing supplemental capital to projects of “national or regional significance” that is designed. The program has provided more than $30 billion in credit assistance to 77 projects nationwide, leveraging total project investment of more than $108 billion. Importantly, the Administration would expand the scope of eligible projects beyond surface transportation (i.e., road, rail and related projects) to airport, seaport and non-federal waterway infrastructure.
We have seen increased interest in U.S. rail projects over the last few years, and TIFIA loans have been used to fund a number of them (such as Purple Line in Maryland and Sound Transit in Washington). We have also recently seen a step-up in interest from the private sector in the ports and airports sectors, with more projects coming to market involving new build (such as LAX Automated People Mover and Consolidated Rental Car Facility and Denver Great Hall) and sales or expansions of existing facilities (such as Maher Terminals and Westchester County Airport). We would expect both public and private entities, including those involved in public-private partnerships (P3s), to take advantage of TIFIA eligibility in these sectors, which typically contain steady, long-term revenue streams.
Similar to TIFIA, the Administration would expand the budget authority of the WIFIA program from a baseline of $30 million in FY 2017 (its first year of operations). WIFIA’s requirements and benefits largely replicating the TIFIA model as applied to the water sector. The program’s first 12 projects, which were selected to formally apply for credit assistance last year, are expected to leverage $2.3 billion in loans for $5.1 billion in water infrastructure investment. The Administration would expand the program’s sectoral scope from drinking, storm and wastewater projects, which are traditionally under the jurisdiction of the EPA, to include those designed to mitigate the effects of flood and water scarcity and to improve the infrastructure of navigable waterways—areas which are traditionally under the jurisdiction of the U.S. Army Corps of Engineers. Notably different from the TIFIA program, WIFIA funds would also be made available for acquisitions of existing water systems and in connection with restructurings.
The Administration would make certain technical adjustments to increase flexibility for borrowers under the program. These include reducing the number of ratings opinions required for approval of a WIFIA loan from two to one, increasing administrative resources to a level that is commensurate with a larger project portfolio, and removing the “springing lien” requirement which mandates that the WIFIA loan’s lien be on parity with senior debt in the case of a bankruptcy-related event. These adjustments would likely further increase already significant interest in the program from public and private borrowers.
The RRIF program, which has a maximum total lending limit of $35 billion, provides loans and guarantees to railroad infrastructure development. RRIF has made 37 loans totaling $5.4 billion to date and is currently reviewing five new applications. Unlike TIFIA or WIFIA, the federal government does not fund the program’s credit subsidy. Instead, each RRIF borrower is required to bear the credit-risk premium, calculated as a percentage of the loan amount, which is kept in reserve for the term of the loan.Borrowers have cited this requirement as a primary deterrent for usage of RRIF, which has only approved four loans since 2012. In the Outline, the Administration proposes that the federal government to bear the cost of the premium for passenger rail and short-line freight rail projects, each of which are attracting increased interest among stakeholders. This modification would likely be viewed as significant by potential borrowers and, accordingly, could lead to more interest in RRIF.
The Administration would make available $6 billion to increase the availability of PABs, the federally-backed program that allows the raising of tax-exempt debt to fund private uses of public projects. The use of PABs for highway and freight transfer projects was authorized in 2005 with a total cap of $15 billion. Since then, $8.2 billion in PABs have been issued on 23 transportation projects, and an additional $2.1 billion has been allocated to four new projects. The Administration’s suggestions include raising the program’s volume caps and expanding the types of facilities PABs can fund, particularly the water and broadband fiber sectors. This proposal is notable given that, in connection with the development of tax reform legislation at the end of 2017, the House of Representatives passed a bill that included a full repeal of the PABs program, although it was retained in the conference committee bill ultimately signed into law. Industry lobbied hard to maintain the program, which has frequently been used alongside TIFIA credit assistance on large transportation projects, including recently Maryland’s Purple Line light rail project ($313 million) and Virginia’s I-66 Outside the Beltway project ($737 million). If they become law, the proposed enhancements described in the Outline could set the stage for increased use of this financing tool, in particular for P3s.
Additional Funding Sources
The Administration also proposes significant changes that could increase access to funds by states (or private entities) that could be used to repay borrowings under federal credit instruments or otherwise pay for infrastructure improvements. These include:
- Giving states more options to implement tolling on existing Interstate highways—currently prohibited with the exception of a small set of toll roads that were grandfathered in when Congress created the Interstate Highway System in 1956—so long as they reinvest the proceeds in infrastructure improvements, and to commercialize Interstate rest areas, with revenues reinvested in the corridor in which they are generated;
- Expanding and reducing barriers to participation in the Federal Aviation Administration’s Airport Privatization Pilot Program (which, as of December 2017, has one approved airport and three additional preliminary applications accepted) by removing the current cap of 10 airports, including one large hub airport, and decreasing the percentage of airlines needed to approve privatization from 65 percent to a majority vote; and
- Requiring states and local governments to use “value capture” financing (i.e., using tax revenues generated by increased property values due to investments in transportation to support such investments) as a condition for receiving certain discretionary Capital Investment Grants, which provide funding for fixed-guideway rail and corridor-based bus rapid transit projects.
White House officials and lawmakers have been candid since the release of the Outline that its content is the start of a negotiation rather than a line in the sand on infrastructure funding, which is, at its core, a bipartisan matter. We expect the Outline to galvanize discussion among stakeholders (within governments—federal, state and local—and outside, including the private sector) regarding ways to close the nation’s infrastructure gap. The Outline leaves several questions unanswered, including (1) the source of the federal dollars to pay for the proposed initiatives, which could include, as suggested by President Trump last week, an increase in the federal gas tax, (2) whether there are sufficient non-federal revenues available at the state and local levels to unlock access to the proposed programs and (3) the interrelationship between the Outline and the proposed FY 2019 budget, which reduces budgets of certain federal agencies involved in, and proposes reductions in certain programs that have been used to support, infrastructure development. Like other stakeholders, we will be looking to see how the discussion unfolds in the coming weeks and months and will provide further updates on the legislative proposals and other initiatives that emerge.