Chapter 5 - FTA's Innovative Financing Initiative

In support of the Presidents Infrastructure Investment Initiative, FTA published a notice in the Federal Register on May 9, 1995, requesting proposals for innovative financing projects. The notice was aimed at transit systems, planning agencies, and municipalities, in the hope of discovering and demonstrating innovative financing techniques that originated in the local communities rather than in the big financial centers or in Washington, D.C. FTA thought it might get a handful of proposals from some of the more aggressive, mid-size transit operations.

Actually, over the next few months FTA received 72 proposals from transit systems, large and small, requesting nearly $1 billion in Federal assistance. Had the funding been available, it would have advanced well over $4 billion in transit projects of all kinds. Proposals ranged from the very small (a few rural bus shelters) to the very large (a rapid rail connection to an international airport). After much winnowing down of projects to fit the funding that was actually available, FTA settled on eight proposals to be funded with a total of $2.68&127million. The following are preliminary results of the eight projects, together with some details of difficulties they faced. The projects demonstrated a wide variety of financing techniques from soft match (in-kind contributions) to pooled procurement and turnkey (Build/Operate/Lease).

Arkansas TransLease

The Arkansas Department of Transportation saw an opportunity to address a growing need in its rural counties for dependable, accessible transportation. It decided to use its existing State authority to provide vanpool vehicles under lease to establish a van leasing program for public and human services transportation. Would the FTA grant program be flexible enough to allow this? FTA had allowed vehicles purchased with Federal grant funds to be used in lease transactions after their purchase, so it was determined to allow Arkansas to buy vehicles in anticipation of a pooled lease.

The Arkansas TransLease program was developed to improve community access for the transportation disadvantaged, and to provide an alternative approach to rolling stock acquisition in State programs. By providing low-cost leases, Arkansas DOT hoped to address increasing capital needs at a time when Federal grant funding appeared to be on the decline. The program would buy all new vans, made accessible for persons with disabilities, then lease them without interest to the transportation providers to the clients of various human services agencies. Ultimately, FTA provided $270,000 in discretionary funds, which Arkansas DOT matched with $330,000 from its FHWA Vanpool program funds, and $150,000 in local funds. All of the funds were used for vehicle purchases, as overhead was covered from the DOT administrative budget.

The following table outlines the first year's cash flows for the revolving loan fund, based on 26 vans at an average van cost of $28,845, and therefore an average monthly lease payment of $600.94. The revolving loan fund is estimated to buy additional buses on an annual cycle, as the funds accumulate. This accrues an average monthly balance of $93,746 which, if invested at 6 percent, yields $5,025 per year.

The initial vehicles purchased by Arkansas DOT were provided to fifteen human services transportation providers around the State via no-interest leases. Thus, in addition to the cost savings generated by the pooled purchases and interest earned on the revolving fund, the DOT was able to save the transportation providers more than $330,000 in accumulated interest costs over the terms of the leases. That is, assuming they could have purchased the vans one at a time, borrowing the cost of the van at an 11&127percent annual interest rate. Given the small size of their operations, many of these transportation providers would not be able to acquire new vans at all. Many of them have operated for years with donated, used vans, modified as required for their service. Mr. Gilbert is awaiting the obligation of State funds to purchase an additional 18 vans to be allocated to 15 transportation providers.

Blue Water Area Transportation Commission

This transit system serves the town of Port Huron, Michigan, a gateway city to the Province of Ontario, Canada. It is one of the many portals for trade that we share with Canada, but the trade brings with it two significant problems--congestion and pollution. Port Huron is in an air quality nonattainment area, and as such has received some Congestion Mitigation and Air Quality (CMAQ) funding. For the transit system to assist with the region's air quality goals required the purchase and use of alternatively fueled buses, which would be purchased with these funds. After internal and public dialogue, BWATC decided its preferred alternate fuel was Compressed Natural Gas (CNG).

However, the funding available was not sufficient in a critical way. BWATC could buy the buses, or the fueling system, but not both. If it sought to buy some of the buses, the fueling system would be too large, and if it did not buy the fueling system, it would be unable to refuel the buses in time to meet daily service schedules. ⁷ To implement its plan, BWATC needed at least nine buses at nearly $206,000 each. In addition, it needed to build a rapid fueling facility valued at over $500,000. It also needed the ability to expand the facility's capacity to accomodate more buses in subsequent years. BWATC's General Manager, Jim Wilson, began discussions with Southeastern Michigan Gas Enterprises, Inc. He also applied for a grant under FTA's innovative financing initiative. A grant of $335,000 was provided from discretionary funds.

After months of negotiations, BWATC and Southeastern Michigan Gas agreed on a design/build/transfer arrangement. Blue Water would use its CMAQ grant to buy nine CNG buses for $1,853,037. Then, it would share the cost of the rapid fueling facility with Southeastern Michigan Gas. FTA grant funds would be matched with State funds as well as equity contributed by Southeastern Michigan Gas (about $125,000), who would also provide engineering and construction management to fit the fueling center to Blue Water's operations.

Aside from the boost in the transit system's image from new CNG buses, the project will make it possible for some municipal fleet vehicles to be fueled during non-peak hours at the facility. This will accelerate the conversion of these fleets to alternative fuels and provide an enhanced market base for the gas company. Jim Wilson said: "We are very pleased with the project. Clean burning CNG will help reduce our maintenance costs as it helps reduced air pollution in the region. We plan to replace our entire fleet with CNG buses as warranted. This community is proud to be a National leader in public transit." The ribbon cutting ceremony for the rapid fueling facility was held in June of 1997.

This project has worked out so well that Blue Water is considering other joint ventures. Its next project is a possible co-venture with Sarnia, its sister town in Ontario. The two transit systems would provide coordinated service across the Blue Water River Bridge between Port Huron and Sarnia, thus ensuring that congestion reductions made in Port Huron continue into southern Ontario. This would be the first international venture for the Blue Water Area Transportation Commission.

Florida Transit Association Finance Corporation (FTAFC)

Not all innovative financing projects are successful overnight. The Florida Transit Association proposal to establish a Finance Corporation to pool bus and facilities procurements on behalf of its members was well grounded. It followed the example of the California Transit Finance Corporation, and set definite, conservative goals for itself. Nevertheless, FTAFC found that having a great idea is often far easier than turning the idea into reality.

In response to FTA's request for innovative financing proposals, the Florida Transit Association cooperated with the Florida DOT to submit a proposal for the Finance Corporation. A grant was requested in the amount of $300,000 for startup expenses, which FTA awarded. The FTAFC was formed, with a five-member board of Directors appointed by the Florida Transit Association from among its Executive Directors and General Managers. A representative from Florida DOT's Office of Public Transportation sits on the board as an ex-officio member.

The FTAFC began to develop two pooled financial programs. The first is a leasing program based on Certificates of Participation, much like the California program. Florida brings the additional capability of "soft match" toll credits to this program, which will provide increased flexibility for some of the smaller transit properties. The second program is a tax benefit transfer program, to allow transit systems to unlock additional value from their existing base of capital assets through sale-leaseback, lease-leaseback, and cross-border lease transactions.

The first test of the FTAFC came with the opportunity to assist a transit system with its upcoming purchase of rail rolling stock. Several meetings were held to acquaint the Florida Transit Association members with the financial and legal advisors hired by the FTAFC, and to discuss the methods for pooling procurements and realizing sale-leaseback and other benefits from major capital acquisitions. After several exploratory meetings and discussions of methods, the transit system advertised its rolling stock purchase independently, without the partnership of the FTAFC. The Association returned to the drawing board.

On January 9, 1997, the FTAFC met with several transit systems to propose a pooled leasing program for new bus purchases, with HARTline Transit, of Tampa, serving as the prime purchaser. Eight agencies met and agreed to participate, and a ninth property was invited to participate as well. The Engineering firm of ICF Kaiser would develop specifications for the buses that would meet the requirements of all participating transit systems. The Florida Transit Association board approved the proposed pooled transaction on January 23, leaving open the decision whether to undertake a COPs-based lease or a cross-border lease.

FTAFC is facing all of the economic uncertainties that are present in the domestic and international leasing markets. By using other organizations' prior experience, and by hiring a good mix of financial and legal experts, it is providing a mechanism for its member agencies to participate in transactions that would otherwise have been unattainable to them. With minimum transaction levels of $8 million to $20 million, debt-based or lease-based transactions would otherwise only be available to the major city transit systems in Florida.

Santee Wateree Regional Transportation Authority

It seemed like such a simple concept--build bus shelters for the transit system and more people will use it. But often, even the simplest concepts run into complex roadblocks.

The Santee Wateree RTA serves a four-county area including Sumter, South Carolina. Until this year, the counties had one bus shelter. The transit system estimates that senior citizens account for 40 percent of trips. The predominantly rural transit system responded to FTA's request for innovative financing methods with a proposal to match Federal funds with in-kind services. The transit operator's concept was designed to produce a "win/win" situation for the counties, the transit system, and the transit riders. The city would provide architecture and engineering services, and local businesses would provide easements for the shelters. A local firm would provide the building materials at cost, and the City of Sumter would waive the building permit fee of $100 per shelter.

FTA's grant rules proved to be the first hurdle, and they could not be overcome. Grants may only be provided to reimburse actual costs. Thus, Santee Wateree could not count any discount provided by the building materials supplier as local match. However, because the city employees and transit operators would share engineering, location and construction of the shelters, grant rules allowed Santee Wateree to recognize nearly $48,000 in soft match for an FTA grant of $50,000. This grant would make possible the construction of 16 bus shelters in the City of Sumter.

The first step, then, was to secure easements for the locations of the bus shelters. That revealed the next, and most significant, hurdles. The State of South Carolina has a rule forbidding encroachment on the State roads by any structure. The City of Sumter requires all structures to be set back from the sidewalk by 30 feet. In order to satisfy these requirements, Santee Wateree would have had to request easements three times larger than necessary to accomodate bus shelters. Few land owners would have agreed. It took nearly eight months for Santee Wateree to arrange for the required permits and variances. However, by January of 1997, construction of the second shelter was under way. Site plans and designs for an additional four shelters were submitted for State approval in January, and four more in February. The 16th shelter was under construction in December of 1997.

Mr. Joe Embler, Human Resources Director and project manager for the bus shelter grant, has already encountered positive reactions to the project. In measuring the first bus shelter for additional work, he was approached by one of the transit system's patrons. She inquired what he might be doing with "our shelter." She was particularly concerned that it not be moved. She went on to explain that she and her friends depended on the RTA for their daily transportation, and that the shelter made their wait for the bus much nicer, especially during the nasty, winter weather.

One reason for the immediate and positive response to the bus shelters is that Mr. Embler rode with the bus drivers to ask their opinions of where to place the shelters. Of course, as they heard this conversation in progress, the passengers did not hesitate to make their opinions known as well. The passengers were even instrumental in shifting the planned location of one shelter, to avoid an insurmountable easement problem in the original location.

The Boston Engine Terminal

Some projects are so big, and so time-intensive, that they must have assurance of funding before the first shovel of dirt is turned. The Massachusetts Bay Transportation Authority (MBTA) faced this difficulty in 1995. Its Boston Engine Terminal needed a complete overhaul, but sufficient funding could not be collected at one time to push the project forward. The facility provides repairs and maintenance for the MBTA's 58 locomotives and 345 commuter railcars. Though it requires multiple steps, involving several buildings, to undertake the project "piecemeal" was not an option. FTA approved MBTA's request for Advance Construction Authority that would make the costs of the project eligible for grant reimbursement in subsequent years.

Once it had the authority, the MBTA was able to issue bonds to raise the funding necessary to proceed with the reconstruction. Under the Advance Construction Authority, the cost of the bonds is reimbursable in the same manner as the cost of the construction. Thus, the MBTA was able to use its bonds as a financing mechanism for the construction project. There was some risk to the MBTA in this method. The Advance Construction Authority cannot last beyond the authorizing legislation that makes it possible, because the section of law under which it was granted might not be reauthorized. ⁸ If MBTA did not complete the bond issuance process, or the subsequent construction, before September 30, 1997, it might have to repay all of the bonding and project costs from its own resources.

While financing the project with bonds is already somewhat complex, the construction itself added its own complexity. The existing buildings will be either removed or refurbished, resulting in a 380,000 square foot, state-of-the-art maintenance facility that includes a 3-track service and inspection section, a 2-track periodic inspection section, a 10-track intermediate repair section, truck shop, electronics shop, 4 shops for bridges and buildings, stores, administrative spaces, and a wastewater treatment building.

The project will include an exemplary soil remediation program. Years of deferred maintenance and neglect had allowed the site to become contaminated with oils and sediment. Working with the Environmental Protection Agency and the State's Department of Environmental Protection, the MBTA developed a remediation plan for the site. Every bit of contaminant is being removed, and the collected materials are being separated and cleaned for recycling or disposal, as appropriate. The water used in this process is being filtered and reused.

Once all the oily subsoil is removed, a state-of-the-art remediation system will maintain the site so that not one drop will leak back into the soil. This will improve the environment for the workers who for years worked in dark, poorly ventilated areas of the maintenance terminal. It will also end years of oily runoff into Boston Harbor.

Under Massachusetts authority the MBTA, unlike most transit systems, is able to issue General Obligation bonds in support of specific projects. However, the long-term nature of this project was sure to exceed the current (ISTEA) period of authorization. MBTA needed some assurance that costs, (such as interest) incurred with regard to this project would be eligible for grant reimbursement when the transit grant program was reauthorized. The Advance Construction Authority provided this assurance. As a result, most of the facility rehabilitation/reconstruction was completed in the summer of 1997, and the site work--including environmental--was completed by November 30, 1997. The most optimistic previous estimate of project completion was "late in 2001." The practical effect of this project acceleration was significant.

Based on an annual inflation rate of just 5 percent, this project will cost $34 million less than it otherwise might have. In addition, each major repair or maintenance task will take 20 percent less time than it does now, and more tasks will be undertaken concurrently due to the enhancements made to the facility. In the first few years after construction, the MBTA will save additional millions in vehicle maintenance and repair costs.

Delaware Metroform

Not all transportation projects benefit from speed. In the case of new development, excessive speed may actually prove to be a hindrance to progress. New Castle County and Delaware DOT faced this reality in their Metroform project.

This project is an attempt to weave a long-term partnership between Delaware DOT, New Castle County, Amtrak, and the residents surrounding a developable site known as Churchman's Crossing. The hope was to design and implement a "sustainable community" on the land surrounding an existing Amtrak station along the Northeast Corridor, about 10 miles south of Wilmington. This development would be anchored by a multimodal transfer center at the Amtrak station, providing an interface with the local transit system, and would include residential and retail space as well as office space.

The project began with a vision process at Churchman's Crossing. The second phase, which led New Castle County to apply for an innovative financing grant, was begun in the summer of 1995. It followed on from the initial Vision of the community, which guided the effort with the following principles:

• Enhance the area's quality of life
• Plan for sustainable growth and development; and
• Provide opportunities for multiple transportation choices.

Phase II involved technical data collection in support of the vision process, and it led to a second public workshop on February 15, 1996. It was here that land use and transportation options were presented to the public for discussion. This discussion resulted in a draft recommendation for land use and transportation improvements for Churchman's Crossing. The draft plan included project phasing and preliminary cost estimates, which were presented for public discussion once more on November 20, 1996. Without sufficient time, and lacking repeated public input, it would be quite possible for Delaware DOT to produce an entire development plan, then be unable to implement it due to public opposition.

Bi-State Development CNG Conversion

The Bi-State Development Agency is the transit provider for the Metropolitan area of St.&127Louis, Missouri, and its service area extends across the State boundary into St. Clair County, Illinois. In 1991, Bi-State committed itself to a leadership position to improve air quality in the St. Louis region. It, therefore, undertook a test of CNG technology for buses with Laclede Gas Company, the local natural gas supplier. The test was so successful that Bi-State purchased 36 new CNG buses to kick off a conversion to CNG for a third of its bus fleet. To complete this conversion would require the modification of its Brentwood Bus Facility to maintain and fuel CNG buses. Fire prevention, electrical, maintenance and other systems need very specific enhancements to properly manage CNG in daily use.

To complete this project required solving several problems simultaneously: the facility modification would have to be completed; 205 buses would have to be bought over a period of 12 years; and the Brentwood facility would have to be equipped with a rapid fueling unit that could grow over that period of time. Since FTA could not provide grant funding for more fueling capacity than was needed at any point in time, the additional complication of how to pay for the fueling equipment was added. Bi-State decided to try a mechanism promoted by the Natural Gas industry, known as "Vendor Financing."

The ideal solution to its difficulties would have been to have its long-term partner, Laclede Gas Company, provide this financing, but State regulations governing public utilities prevented this. After issuing Requests for Proposal, and discussions with several potential facility builders and fuel suppliers, Bi-State came to realize that its lowest-cost alternative would be to use Federal funding for the facility modification and bus purchases, and to seek financing for the fueling facility itself.

In May of 1995, Bi-State received a $550,000 grant under the Innovative Financing Initiative to test its vendor financing project. This would add to the $2 million grant for the Brentwood Facility modification. However, time was running short. The new CNG buses were scheduled to arrive in spring of 1997. The fueling capability at least would have to be substantially in place by then. After some months of evaluating proposals, Bi-State prepared to issue a final Request for Proposals to Design/Build/ Maintain and Operate a rapid fueling CNG unit. Laclede Venture Corporation, a non-utility subsidiary of Laclede Gas Company, bid on the project, and Bi-State accepted the bid.

The preceding table summarizes the basics of Bi-State's arrangement with Laclede Venture Corporation. To meet all of Bi-State's requirements, Laclede Venture proposed to install and maintain the fueling facility in four stages, over a 7-year period. Thus, as Bi-State purchased additional buses, there would be adequate fueling ability to keep them on the road. To pay for the fueling equipment service, Bi-State and Laclede agreed to a service fee structure over 15 years. The payments under the lease are based on an imputed interest rate of just under 14 percent. The lease payments are eligible for grant reimbursement as capital expenditures. None of the figures in this table include possible revenues to Bi-State or Laclede from selling incidental quantities of natural gas to other municipal fleets.

The rapid fueling facility was brought online in July of 1997, and went into immediate service to fuel the first 36 CNG buses delivered. The remaining replacement buses will be delivered over the next year-and-a-half.

Mississippi Regional Transportation Centers

In many areas of our States there are small communities doing the best they can with limited resources. Mississippi DOT tried to help two multi-county areas better meet   the transportation needs of their citizens. While Federal and local transit dollars were

were forecasted to decline, these counties were expecting a significant increase in demand for transit due, in part, to significant growth in the number of persons commuting to job sites, as well as a growing population of elderly residents. Mississippi DOT wanted to implement best practices identified in FTA research and demonstration results with Regional Transit Centers, allowing transportation providers to offer more service without increasing costs. This might be done by coordinating services for multi-county areas in "one-stop shopping" Regional Transportation Centers.

Madison County Regional Transportation Center

The grant application requested $1.5 million, which would have been sufficient to rebuild two buildings that were deemed appropriate for the project. However, FTA was only able to approve $781,000--just over half the amount needed. This forced a revision in plans and schedules, and it initiated a search for additional funding. Mississippi DOT enlisted the aid of the Community Transportation Association of America (CTAA) to assess the feasibility of completing the project with a reduced budget. CTAA determined that, with some modifications, both regional centers could proceed.

The original proposal was for two Regional Transportation Centers, the Aaron E. Henry Center and the Madison County facility, to be created from existing properties owned by the respective counties. These centers would allow the coordination of dispatching, vehicle storage and maintenance for rural and specialized transit providers in eight counties. These transportation providers each had separate contracts with fuel suppliers, maintenance garages and service organizations; and they often would provide service in overlapping areas. The new transportation coordination centers would allow these transit providers to increase daily service by up to 20 percent with their existing staff and equipment, and within their existing levels of funding.

The Madison County facility design and funding proceeded through 1996, while it seemed that the Aaron E. Henry center might not have sufficient funding. However, by aggressively pursuing other funding sources such as a grant from the USDA, and a Southern Cooperative Development Loan, Mississippi DOT and the project sponsors were able to free some of the FTA funding for the Aaron E. Henry Center, which is now in the design stage. The Madison County facility will proceed to construction in the spring of 1998.

Ohlone Chynoweth Joint Development - a "Transit Village"

When Santa Clara Valley Transportation Authority (VTA) solicited bids from developers in 1995 for its joint development project near the Ohlone-Chynoweth light rail station in San Jose, its objective was clear: to attract a qualified developer who could plan and construct a new, medium-high density residential neighborhood that met VTA's goals. These goals, adopted in 1993, are straightforward: 1) to enhance the quality of the station environment; 2) to improve linkages between transit and the community; 3) to improve system patronage; and 4) to generate revenues for the transit system. When Eden Housing, Inc. was selected as the developer, VTA got even more -- a commitment to integrate social service and quality of life amenities into the project in such a way as to maximize the livability of the neighborhood.

Eden Housing, Inc. is a non-profit development corporation, one of only two non-profits to respond to VTA's proposal. Since 1986, Eden Housing has evolved from being primarily a non-profit, affordable-housing developer to managing property and, most recently, to coordinating a variety of social support services for the residents in projects that it manages. According to the developer, Eden takes a "holistic approach to creating affordable residential communities."

The Ohlone-Chynoweth joint development project is taking place on a parcel of 11.6&127acres on the west side of the station. At present, only 20-25 percent of the existing 1,166 park-and-ride spaces are being used regularly, and the transit agency has projected the maximum demand for future spaces to be between 500 and 600 spaces. The joint development project will be designed to accomodate at least 200 park-and-ride spaces (to supplement 300 spaces on the east side of the station), as well as 3 bus bays and a spur track for Light Rail. The development site is not presently constrained by roadway capacity, nor is it expected to be constrained in the medium term. However, it will have to accomodate transit parking, bus circulation to and from the station, and access to the land parcel next to the station which is owned by the Cilker family. This 10.6-acre lot will, by agreement with the Cilker family, be developed in the same way as the Ohlone-Chynoweth Station.

The transit authority will maintain ownership of the transit land used for the development, leasing it out to the developer for between $200,000 and $300,000 per year in ground rent. At current discount rates, this will produce an aggregate income for the transit system of more than $3 million over the next 20 years. However, it is anticipated that the term of the lease will be for 99 years. The development will include 195 units of townhouse and apartment dwellings, over 4,000 square feet of retail space, a child care center for use by residents and non-resident transit riders, a spacious community building, and a variety of recreational amenities, including a swimming pool, basketball court, tot lots, and a bicycle/walking path. The likely benefits of this project are many.

Access to Jobs - The Guadalupe Line, which runs by this station, connects the residential areas of South San Jose to the large and growing employment centers to the north. The development of housing, particularly affordable housing, adjacent to this and other stations will significantly improve the jobs-housing linkage and provide a real commuting alternative for moderate-income workers.

Access to Services - Joint development at this and other stations in the system will strongly encourage the inclusion of both convenience retail and day care in the projects. This will also indirectly enhance access to jobs by saving time and eliminating vehicle trips for increasingly time-constrained workers.

Transit Experience - A major goal of joint development is to enhance the quality of the transit experience and thus to promote ridership. One of the greatest benefits of well-planned joint development is the improvement in real and perceived security for transit patrons. Not only can new lighting and other security features be incorporated into the project, but the on-site presence of residents and economic activity around the station will be significant deterrents to crime.

In order to assess the development potential of the joint development site, three alternative scenarios were developed for analysis and critique. As a result of this process, the transit agency produced a "Framework Plan" that includes both the transit site as well as the Cilker family site. The plan defines the general organization of land use on the two sites; a system of access and internal circulation to serve both sites; and a new layout for the transit operations. It also includes a site development plan, with specifics on roadway widths and curbs, rail lines and platforms, bus stops, a general pattern for public landscaping, and building setbacks for the residential parcels.

The intended outcome is an architectural concept that emphasizes pedestrian-friendly character, an active and secure public realm, and a sense of community. Residential units face, and have direct access to, streets and courtyards. The retail area faces the station and creates an active interface for residents and transit patrons. The clubhouse and recreational facility will be located at the center of the housing complex. The plan will ensure a mutually-beneficial relationship between the transit system and the community it will help to create.

These projects clearly demonstrate that financing is not the greatest obstacle to building or rebuilding infrastructure--at least at the local level. However, even at the local level financing remains one of a handful of impediments. These innovative proposals adapted available methods within the Federal grant program to overcome local difficulties ranging from insufficient local funding to operating inefficiencies. They also, however, addressed some difficulties related to the Federal grant process itself, as with the Bi-State CNG Facility lease.

The two projects that appear to make the greatest strides in reshaping the way in which America plans and finances public transit are the Ohlone-Chynoweth and Delaware Metroform joint development projects. They will provide an opportunity to demonstrate how the transit system helps to shape land use and "livability" at the neighborhood level. These projects will also make the direct financial link between the transit facility and the community that it serves. In an age of increased local public involvement in transportation, zoning, economic development and other municipal issues, this link must be recognized and addressed at the local level.

In many communities the voters have spoken clearly and concisely--in state after state, referenda to increase rates of taxation or to expand the basis for taxation for general expenditures have been roundly defeated. Yet, in the same elections, targeted tax increases for specific purposes, such as a new school, police station, or transit service, have been passed with 60/40 majorities. This includes bond provisions to finance some of these capital investments. It is a message that States and localities cannot ignore.

As this handbook goes to press, New Orleans Regional Transit Authority (RTA) is putting the finishing touches to a new transaction, allowed in FTA's Final Leasing Regulations -- a "lease with maintenance." RTA needed to replace at least 100 buses in its fleet, but it only had $10 million in grant funds available. A lease would enable it to acquire the needed buses. It seemed possible, however, that RTA might also reduce some of its maintenance costs through a lease/maintenance contract. All RTA needed to do was honor its existing labor agreements, order the buses, and undertake the transaction in conformance with Louisiana laws.

After evaluating responses to its request for proposals, RTA entered into negotiations with a lessor and a lease financing arranger. The lessor would honor existing labor agreements, renegotiating these every three years, and would use one of RTA's bus maintenance facilities. RTA would order up to 175 buses, with a maximum annual lease cost of $3.6 million (an excellent 7% apr). As the buses were delivered to the lessor, the annual lease payment would rise incrementally.

Each year, RTA would also make a maintenance payment to the lessor. This part of the payment would be subject to labor negotiations every three years, rising and falling with wage rates. In the first three years of this transaction, RTA will save over $6&127million in maintenance costs. And, while the "up-front" cost of 175 buses would have represented nearly one-half of RTA's annual cash flow, the annual lease cost is less than 4 percent of RTA's annual cash flow.

The benefits of this transaction for RTA are substantial. Rather than having to wait as long as four years to upgrade a superannuated fleet (average age of 13 years), RTA was able to replace between 100 and 175 buses within two years. RTA's fleet composition will go from over 6 bus types to two, and it will be able to reduce spare parts inventories by over one-third. The available grant funds will make it possible for RTA to make the first four years' payments from available resources. RTA plans to use its local matching funds as a reserve fund to help reduce the interest cost of the bus lease. This will earn the RTA another $500,000 over three years to support the transaction.

FTA is looking forward to widespread implementation of the lease-with-maintenance capability. It may provide significant cost savings for smaller transit operators, particularly if several small operators can agree to combine transactions under one contract of economic size. The major benefit of this transaction comes from being able to replace assets in a similar manner to an installment purchase. For many small transit providers, this is not usually a possibility because they cannot afford the interest cost. However, acting together, several transit operators can reduce the lessor's risk while presenting a transaction of economically efficient size.

Footnotes

7. The buses could be "slow fueled" without the fueling facility, but this would not have been feasible for more than four or five buses in one night.

8. The section of the FTA laws under which this Advance Construction was approved is very likely to be reauthorized, as it is one of the keystones of the transit capital program.

9. Vendors indicated that the cost of financing the fueling facility by itself would be lower, because it could be differentiated from the realty, whereas modifications to the Brentwood garage could not. That is, the vendor would have a better security in all of the fueling equipment than in part of the garage.