Evolving Debt Finance Practices for Surface Transportation (2017)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

16 IntroductIon This chapter focuses on special topics identified for the current synthesis study as follow-ons to pre- vious research. It highlights new developments since the previous synthesis on this topic and newly emerging issues and practices. Appendix C presents full responses provided by state DOTs to qualita- tive questions. The chapter discussion highlights select responses. The topic areas addressed include: • SIBs and other revolving loan funds; • P3 authority and use; • GARVEE debt; • Treatment of evolving payment tools in debt capacity measures; • Contractor financing arrangements; and • Private activity bonds. SpecIal debt ISSuance State Infrastructure banks and revolving loan Funds According to state responses and as shown in Figure 19, most (36 of 40) responding states have not issued debt to capitalize a SIB, similar bank, or revolving loan fund for transportation-related lending. States that have issued debt to capitalize a SIB or similar program include Florida, New York, South Carolina, and Vermont. public–private partnership authority and use The increased role of P3s and concession agreements provides new opportunities for financing trans- portation infrastructure but also adds new complexities for states to grapple with when formulating their debt management programs and policies. Most (64%) responding states report that their state has the authority to use P3s for transportation infrastructure. Connecticut, Vermont, and Wyoming report uncertainty regarding whether P3s are permitted. Wyoming clarified that P3s are not specifi- cally authorized under state law and the uncertainty has been an impediment in proceeding to date. No specific P3 concepts have been put forth in Wyoming to test the legality. As shown in Figure 20, of the 26 DOTs reporting their states have authority to use P3 approaches, most report that authority was not granted for a single project or purpose but was more broadly provided. Twenty states (77% of respondents) report broad authority, four states (Alaska, Illinois, Massachusetts, and Texas) report single-project or purpose authority, and two states report uncer- tainty regarding the matter. Of the 26 states reporting the authority to use P3s for transportation infrastructure, 16 (61%) report the authority has been used, as shown in Figure 21. Grant antIcIpatIon revenue vehIcle debt States’ responses in the survey are mixed on how GARVEE debt is treated in debt capacity measures (e.g., debt per capita, net tax-supported debt, etc.). Twelve states report GARVEE debt is addressed separately, nine states report it is included in debt capacity measures, and five states (Arizona, Georgia, chapter three SpecIal debt ISSuance and ManaGeMent topIcS

17 Kentucky, West Virginia, and Wyoming) report it is excluded (see Figure 22). Some states pro- vided additional information on how GARVEE debt is managed. Of note, Georgia looks at its debt capacity including and excluding GARVEE debt but explains that GARVEE debt is not guaranteed by the state. Other states, including Idaho, New Hampshire, Ohio, and Virginia, say they limit the amount of GARVEE debt service relative to their anticipated federal funding. The rating agencies offer some guidance on the treatment of GARVEE debt. Fitch Ratings issued updated rating criteria in December 2015 (see Additional Resources, References, and Links for State Debt Management Policies). The other rating agencies offer similar criteria as guidance to potential GARVEE issuers as well as issue-specific evaluations. treatment of availability payments in debt capacity Measures Of the 26 states that report being authorized to use P3s, 13 (48%) employ or have considered the use of availability payments in the context of P3s (see Figure 23). Availability payments are those made to concessionaires for their performance under a contract regardless of the specific demand for or use of the built facility (i.e., payment is made regardless of through traffic, including in the FIGURE 19 States that issued debt to capitalize a state infrastructure bank (SIB) (n = 40). No, 36 Yes, 4 FIGURE 20 Extent of P3 authority (n = 26). FIGURE 21 States with the authority to use public–private partnerships and states that have used their P3 authority. Note: States that appear blank on the map did not respond to the survey question.

18 FIGURE 22 How GARVEE debt is treated in debt capacity measures for transportation debt (n = 26). FIGURE 23 States that have used or considered availability payments (n = 27). No, 14 Yes, 13 instance of tolling). Availability payments are an option for projects that are not feasible under a user-fee based concession. An emerging issue relates to whether availability payments are included in debt capacity and afford- ability measures of the state, with variations occurring from state to state (see Figure 24). Colorado reports the state’s availability payments are included in calculations for outstanding debt for debt capacity measurement and explains that any capital component of an availability payment is included to calculate coverage ratios and is treated the same as a bond obligation as it relates to debt limitations with respect to other parity financial obligations. Pennsylvania reports that a private entity holds the debt for a $1.8 billion P3 project to replace 558 bridges. Thus, PennDOT’s payments are considered to be capital and operating payments for the agency. Pennsylvania, Washington, Georgia, and Maryland report they exclude availability payments from debt capacity measures, and the remaining states report their policies vary from project to project. Ohio reports it has informal state guidelines by which the construction portion of a P3 availability payment is considered in debt capacity measurements. Con- necticut reports the DOT has begun looking into this and related issues but has not made a formal determination. Florida reports it includes availability payments for the capital costs associated with construction of P3 projects as debt. In Florida, P3 debt is subject to a statutory limitation by which no more than 15% of the total federal and state funding in the Florida Transportation Trust Fund in any year can be used for debt payments. In October 2015, Fitch Ratings published its Rating Criteria for Availability-Based Projects. The report is an update to the Exposure Draft: Rating Criteria for Availability-Based Projects (Fitch Ratings, June 17, 2015) and reflects feedback from market participants. The main change from the FIGURE 24 Availability payments treated as outstanding debt for debt capacity measurement (n = 12).

19 FIGURE 25 States with the authority to enter into contractor financing arrangements. Note: States that appear blank on the map did not respond to the survey question. exposure draft is the inclusion of break-even calculations as part of the analysis of availability pay- ment projects; previously Fitch had not provided specific guidance. The revised criteria also modi- fied debt service coverage ratios. Implementation of the new criteria was expected to result in limited upward rating migration for some availability payment-based projects (see the full report Rating Criteria for Availability-Based Projects at www.fitchratings.com). contractor Financing arrangements Design–build is a project delivery method that encompasses project design and construction under one contract. One firm or team is responsible for the design and construction of a project in its entirety. Design–build contracts can have many different forms, but the key element is a single source of responsibility for design and construction under one contract. There are numerous reasons owners choose to use design–build contracts, but the primary reasons are the potential for shortened project duration and more integrated design and delivery. Coordination of efforts between the designers and the builders can enable construction to begin before the completion of construction documents. A 2014 study from FHWA reports “design–build delivery has been steadily increasing in the U.S. public building sector for more than 10 years, but it is still termed experimental in transportation. To date, under Special Experimental Project 14 (SEP-14) FHWA has approved the use of design–build in more than 150 projects, representing just over half of the States.” Largely in combination with design–build arrangements, some states have made use of contractor financing arrangements by which the contractor provides financing by deferring receipt of payment for services. As shown in Figure 25, 21 states (54% of respondents) report they have the authority to enter into contractor financing arrangements (e.g., design–build–finance). Fourteen states report they do not have that authority, and five states report uncertainty with regard to the matter. As shown in Figure 26, of the states that report having the authority to enter into contractor financing arrangements, four (Ohio, Florida, Missouri, and North Carolina) report that associated contractor pay- ments count as debt in debt capacity measures. Ohio reports this as an informal policy. Florida includes contractor financing arrangements associated with construction of P3 projects as debt but does not include the amount in the overall benchmark debt ratio calculation. P3 debt is subject to a statutory limitation such that no more than 15% of the total available federal and state funding in the state’s Transportation Trust Fund in any given year can be obligated to required debt payments. Seven states

20 (Alabama, Alaska, Arizona, Arkansas, Kentucky, Massachusetts, and Mississippi) report uncertainty about whether contractor payments are counted as debt for debt capacity measurement. Alabama notes that its legislature recently passed a law allowing Alabama DOT to consider various project delivery methods, but no current policies or practices describe this measure. Alaska notes the state has not used this method because it is able to secure financing at a lower cost than does the private sector. private activity bonds A private activity bond (PAB) is a municipal security for which the proceeds finance a project of a private user. When asked if their state has issued PABs for transportation purposes, 68% (26) of responding states said no (see Figure 27). Georgia, Michigan, New York, and Wisconsin report uncertainty regarding the matter, and eight states report PAB issuance for transportation purposes. Alaska reports certain airport improvements in the state require funding with PABs. Florida notes PABs have been used by two firms with whom the state partnered on design–build–finance projects, but the Florida DOT was not involved with the issuance. Texas DOT and Maryland DOT report that PABs are issued through a conduit issuing entity. Colorado notes that although PABs are permitted, the state has no policy on how PAB issuance and oversight are conducted. Instead, decisions regarding whether PABs are an efficient method for any particular capital financing are made on a case-by-case basis. FIGURE 26 States in which associated contractor payments count as debt in debt capacity measures (n = 21). FIGURE 27 States in which private activity bonds have been issued (n = 38).