PRESIDENT JEFFREY A. PARKER & ASSOCIATES, INC.
CONSULTANT TO THE AMERICAN PUBLIC TRANSPORTATION ASSOCIATION
BEFORE THE
HOUSE COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE SUBCOMMITTEE ON HIGHWAYS & TRANSIT
PROGRESS REPORT – BENEFITS OF TEA-21 GUARANTEED FUNDING FOR TRANSIT
*****
SUBMITTED BY
Jeffrey A. Parker
President, Jeffrey A. Parker & Associates, Inc.
27 Hewing Field
Chilmark, MA 02535
508-645-8095
japarker@capecod.net
Jeffrey A. Parker & Associates, Inc. is a consultancy specializing in
transportation finance. Established in 1981, the firm is engaged in developing financial
strategies for New Start fixed guideway investments, intermodal programs and toll
facilities. The firm also serves as technical advisor on design/build procurements for
highway and transit "mega-projects" and assists the World Bank on transport
project finance. JPA previously advised the Federal Transit Administration on financial
issues affecting Full Funding Grant Agreements for projects in Los Angeles, San Francisco,
San Juan, Boston, and Houston, and has authored numerous FTA guidebooks and policy studies
on innovative finance, turnkey procurement and financial management oversight.
Thank you for the opportunity to present a progress report on research
sponsored by the American Public Transportation Association to document the benefits of
guaranteed funding for transit under TEA-21.
The results identified so far are significant –
- Billions of dollars of capital investment needed for expansion and state of good repair
is being accelerated,
- More New Start projects have been initiated than would have been possible in the
pre-TEA-21 era of annual funding uncertainty,
- Contracting efficiencies have cut costs and minimized inconvenience to the public during
construction,
- More stable and reliable federal funding has leveraged more stable and reliable state
and local matching revenues,
- Investments in transit assets have been protected by assuring regular funding for
maintenance and capital renewal, and
- Manufacturers and suppliers are able to better meet the public transit industry’s
specialized needs arising from accessibility standards, air quality initiatives and other
federal mandates.
With transit ridership increasing at an annual average of 4.5% since
1997 to reach its highest levels in 40 years, the pace of investment required to sustain
growth, avoid overcrowding, and offer an attractive alternative to highway congestion is
quickening. TEA-21’s funding guarantees provide the stability and predictability
necessary to reduce the backlog of deferred maintenance, establish a state of good repair
and offer consistent service levels. The public has responded by increasing transit usage
over the past six years at almost twice the growth rates of highway and domestic air
travel. Maintaining the state of good repair and increasing capacity to serve growing
demand will require significant funding increases in the years ahead.
Funding guarantees can help the private financial markets make scarce
federal dollars go still further. Even as TEA-21 increased transit resources by an average
rate of nine percent per year, the financial markets used the funding guarantee provisions
to produce an even bigger "bang for the buck."
Today, four examples demonstrating the benefits of guaranteed funding
for transit are reviewed:
- Section 5307 block grants have been leveraged to fund the largest bus procurement in
American history,
- Section 5309 New Start Funds serve as collateral for loans that are allowing more
projects to be initiated than a pay-as-you-go program could support,
- Section 5307 and Section 5309 Fixed Guideway Modernization Program grants are being
programmed over five and ten-year capital investment cycles to optimize the efficiency of
large rail modernization programs, and
- The predictable, reliable TEA-21 funding stream is helping to stabilize the transit
supply industry and justify private investment in research and development.
1. The Largest Bus Procurement in American History
New Jersey Transit has issued approximately $1 billion of Certificates
of Participation (COPS) to fund the purchase of 1,244 buses, 200 passenger rail cars and
24 electric locomotives. The order placed with Motor Coach Industries is reportedly the
largest bus purchase made in the U.S.
The Certificates of Participation are a mechanism that permits New
Jersey Transit to lease the buses and rail equipment. The lease payments will be made from
Section 5307 block grants. No other credit is pledged. What are the first two reasons why
Fitch gave these transactions an "A" credit rating? TEA-21 funding guarantees:
- "Low variability of federal funding levels for transit through 2003.
- Money allocated to transit cannot be reallocated for any other purpose without repealing
the Transportation Equity Act for the 21st Century (TEA-21)."
In addition to New Jersey Transit, nine California transit systems,
including the Los Angeles County Metropolitan Transportation Authority have issued similar
Section 5307-backed securities, although other revenue sources were also pledged in these
cases. In evaluating the California credits, Moody’s also notes the TEA-21 funding
guarantees:
"Moody’s ratings incorporate legislative risk associated
with the reauthorization and the annual re-appropriation of Section 5307 funding. The
current federal authorizing legislation, the Transportation Equity Act for the 21st
Century (TEA-21), which was enacted in 1998 and expires in FY 2003, authorizes $41 billion
in federal funding for mass transit of which $36 billion is guaranteed."
Fleet replacement and modernization is one of the most costly aspects
of running public transport systems. It is a recurring need and the use of leases and
certificates of participation to spread payments out over the life of the vehicles is a
well-established practice in the financial markets.
In many respects, borrowing against future Section 5307 block grants is
analogous to the Advance Construction and GARVEE borrowings under the federal highway
program. Under TEA-21, the assured funding for highways has permitted nine states to issue
over $4 billion in grant anticipation debt to accelerate major capital projects. In
Colorado, the Southeast Corridor, or T-REX Project, was advanced with a GARVEE and
includes over $1 billion of highway and light rail transit investment in a common
corridor.
Continuation of TEA-21 funding guarantees for formula-based programs
can help the transit industry meet its ongoing bus and rail fleet replacement requirements
in the decades ahead. On the other hand, eliminating the Section 5307 block grant
guarantees will generate concerns in the financial markets:
"The elimination of budgetary firewalls for transit, however,
could significantly decrease the margins of protection under New Jersey Transit
Corporation’s Certificates of Participation….the current "A" rating
level assumes the continuation of budgetary firewalls, the absence of which could have
negative consequences for this credit."
2. TEA-21 Guarantees Help Relieve Pressure on New Starts Funding
A recent APTA analysis identified 155 New Start fixed guideway projects
that have received some discretionary Section 5309 appropriations. Completing these
projects would require almost $70 billion between FY 2004 - 2009. Even maximizing the
non-federal and non-New Start funding shares for this "pipeline" of
Congressionally endorsed projects still leaves a substantial funding gap.
At the same time, the funding guarantees under TEA-21 have enabled
Congress to include more projects in the Section 5309 New Start program by spreading out
the annual allotments for each project over an extended time frame. In today’s world,
annual New Start earmarks typically do not correspond to the actual obligation and pay-out
schedules for the individual projects they fund – in fact, the last federal
appropriations may occur years after the project enters revenue service.
Spreading out the payments for New Start commitments allows more
projects to participate in the Section 5309 program each year.
For example, BART issued $485.4 million of Capital Grant Anticipation
Notes for its $1.48 billion San Francisco Airport Extension using the Full Funding Grant
Agreement (FFGA) as the sole source of security. When revenue service begins later this
year, BART will have received less than one-half of the $750 million Section 5309 funds
committed under the FFGA. The last of the federal revenues are anticipated by FY 2006
– four years after the SFO Extension becomes operational. Had BART received its
Section 5309 grants on more of a "pay-as-you-go" basis, its $750 million
commitment would have consumed a large proportion of the national New Start funding pool
over a four or five year period and limited the number of other projects that could
participate in the New Start program.
While this transaction, and several earlier ones involving New Jersey
Transit received investment-grade ratings based upon stable, guaranteed funding for the
Mass Transit Account of the Highway Trust Fund and the history of fulfilling FFGA
commitments, all three rating agencies are concerned that variations in annual
appropriations relative to FFGA commitment schedules could cause credit concerns in the
future:
"Weaknesses of the program are largely political in nature. The
FTA’s contractual obligation is subject to congressional appropriation, and
congressional intervention at the project level can significantly affect the timeliness of
grant payments."
"Other FTA program funds are based on formulas, while the New
Starts funds are more discretionary. An analysis of the funding history compared to the
FFGA schedule indicates a lag, which is sometimes substantial."
"While every approved project has received the scheduled amount
of federal funds (with the exception of two canceled projects), the money has not always
been received as scheduled, pursuant to the FFGA. The primary cause for the delays has
been congressional intervention in the annual budget process."
How do the transit agencies see the issue? Today, many systems are
using design/build procurement methods to accelerate construction and share the risks of
cost overruns and delays with the private sector. With large design/build contracts
outstanding, it is not possible to delay contract lettings or progress payment schedules
to mitigate shortfalls in cash flow caused by year-to-year federal funding fluctuations.
As Scott Schroeder, Controller/Treasurer of BART notes:
"Make no mistake, however, falling short on an FFGA annual New
Start commitment could be disastrous – most financing alternatives are not too
flexible when it comes to changing cash flows midstream. If there is a loud and clear
message, it should be that once an FFGA is awarded, the projected cash flows must be
maintained or the financing vehicle is in danger of collapse. Once that occurs, I think
the market will lose its appetite for FFGA-backed financings and all the benefits that go
with it."
3. Multi-Year Capital Programming Increases Efficiency and Customer
Service
To clear back-logs of deferred maintenance caused by pre-TEA-21 budget
constraints, remain current with fleet replacement and overhaul cycles, and fulfill
commitments to supporting a state of good repair, public transit systems across the
country must constantly reinvest in their rolling stock and fixed facilities. Section 5307
block grants and Section 5309 fixed guideway modernization formula programs are the
funding base for these efforts.
Previously, annual funding fluctuations made it difficult for agencies
to develop multi-year programs that sequenced capital projects efficiently in order to
minimize cost, as well as inconvenience to customers during the construction period.
Large, complex projects frequently had to be broken down into small components in order to
fit available budget resources, stretching-out implementation periods and increasing
costs. In some cases, grant resources had to be "warehoused" for several years
in order to have sufficient cash in hand to let the necessary contracts.
TEA-21’s multi-year funding guarantees are revamping past
practices. Comprehensive asset inventories are being undertaken and periodic renewal
programs are being let according to the most time and cost-efficient schedules, rather
than being constrained by the annual budget process. Contracts are being timed to take
advantage of windows of opportunity in the marketplace. The guarantees are allowing block
grant and fixed guideway modernization funds to be managed in support of multi-year
capital programming and the benefits are reduced costs and accelerated project delivery.
Pittsburgh’s Port Authority of Allegheny County, programmed more
than ten years of its Section 5309 fixed guideway modernization funds in support of a
$127-million reconstruction of the existing light rail system and a $386-million
restoration of a former light rail corridor. Almost $130 million, one-third of the funding
for the Stage II Light Rail System is coming from commitments of Section 5309 fixed
guideway modernization formula grants. Almost 71 percent of the funding for the
modernization of the Stage I system, including electrical power distribution,
signalization and a $70 million overhaul of the existing fleet of rail cars, is Section
5309 fixed guideway modernization-funded. The ability to integrate the Stage I
Rehabilitation and the Stage II Light Rail programs financially and programmatically
through the TEA-21 funding guarantees has allowed contracts to be let on a system-wide
basis that will reduce costs, avoid systems compatibility issues and permit increases in
throughput capacity on lines that are standing-room only today. At the same time, the
funding package has permitted all of this work, including the rail car overhaul, to be
scheduled with no disruption of vital rail service.
On a more massive scale, the Washington Metropolitan Area Transit
Authority (WMATA) is undertaking a 10-year, $2.3 billion capital renewal program to
maintain a state of good repair as assets reach the end of their expected lives. These
programs include bus replacement and overhauls, escalator and elevator replacement, tunnel
and station maintenance, bus garage and rail shop improvements, track and structure
rehabilitation and systems upgrades. WMATA’s engineering analysis showed that if the
program could be enlarged in the first few years to include purchase of new rail vehicles
and the overhaul of existing rail cars, service levels could be improved and costs reduced
because of economies of scale.
Accelerating the rail car elements required additional funding in the
early years of the program to let the contracts and meet cash flow requirements. WMATA was
able to draw on its experience building the system to devise a financing strategy for the
needed funding. To complete construction of the original, 103-mile system WMATA undertook
a Fast Track Program based upon an optimal construction schedule, rather than letting
contracts based upon year-to-year appropriations. A $600 million line of credit from
commercial banks was arranged to support the accelerated schedule. Fast Track ultimately
permitted fifteen years of construction to be compressed into less than eight years. The
accelerated segments were originally budgeted at $2.7 billion and a $600 million cost
savings was expected. In fact, the financing allowed WMATA to take advantage of favorable
conditions in the construction market during the mid-1990’s and realize a savings of
$1.1 billion.
To support accelerating the renewal program now underway, WMATA has
secured another +$600 million credit line, this time under the TIFIA Program created in
TEA-21. The TIFIA loan structure is built upon TEA-21’s guaranteed funding levels for
Section 5307 block grants, Section 5309 fixed guideway modernization, TEA-21 flexible
funding, and the related matching funds from the local jurisdictions. Similar benefits to
those achieved under Fast Track are anticipated.
4. Stable Transit Markets Encourage Private Investment
TEA-21’s stable funding provides transit industry suppliers with
an important incentive to invest in new products and technologies that will improve the
quality, safety and cost effectiveness of public transportation, as well as helps agencies
comply with mandates for Buy America, clean air and access for the disabled.
An important example identified in research thus far involves a major
bus manufacturer:
"NABI has spent about $10 million in R&D to date on its
CompoBus program. It is a revolutionary product incorporating a composite unitized body
and chassis taken from the FTA-funded Advanced Technology Transit Bus Project. While the
company has been very high on this project, NABI would not have undertaken the aggressive
development had it not been for the stable and healthy funding levels TEA-21 has
guaranteed. Such stability and predictability is critical to assessing the business risk
of undertaking R&D projects in any industry, but particularly in U.S. public transport
where it has been so lacking for so many years."
Bus and railcar manufacturers participating in a recent APTA-sponsored
forum noted that stable, predictable funding is a key factor in avoiding the "boom
and bust" cycles that have undermined the financial stability of key transit industry
suppliers and left many operating agencies with "orphan fleets" that are costly
and difficult to maintain.
The Bottom-Line
Guaranteed funding has allowed scarce federal dollars for public
transit to be stretched further and provided spin-off benefits by accelerating
construction and leveraging new sources of state and local matching funds. Although not
directly within the scope of the current research effort, documentation examined thus far
confirms that the TEA-21 "firewalls" are yielding similar benefits in the
federal highway program.
Continuing the transit funding guarantees strengthens the case for
innovative finance and will allow the maturity of future grant anticipation debt to be
extended in order to better match the life expectancies of the assets being acquired. The
longer the history of stable appropriations, the lower the perceived risk of
reauthorization and the lower the interest rates premiums the financial markets will
require for transit borrowings incorporating federal grants. The alternative of forgoing
the guarantees will undermine the credit of outstanding securities and potentially create
a negative image for transit as being unable to sustain a Congressional consensus in
support of the program.
Thank you for the opportunity to share these preliminary findings
regarding the benefits of guaranteed federal funding for public transit. The final report
is anticipated in June 2002 and will be furnished to the Committee for the record.
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