Introduction

Introduction

The Federal Transit Administration has approved a broad spectrum of innovative financing techniques for use by transit systems in managing their capital and operating programs. Transit systems nationwide have realized significant benefits from these techniques, but this experience has been neither uniform nor widespread. Some of the techniques may have application limited by transit system size, by State law, or a specific aspect of the technique. External factors (such as interest rates) may enhance or reduce the usefulness of some techniques. Some innovative methods may only be in their infancy. This handbook is intended to provide a snapshot of the innovative financing techniques that are available to transit systems today, as well as a prospective look at techniques that may become increasingly important over the next five years. The handbook will summarize FTA's experience to date and provide detailed examples of the more complex transactions.

The purpose of this handbook is to encourage transit systems to examine innovative financing methods in support of their capital and operating programs. The techniques included in this handbook only represent the transactions that FTA has reviewed and approved. Future tax law changes, the general business environment, or unique local conditions may create additional opportunities for new financing mechanisms. FTA will review any innovative financing techniques proposed by grantees, whether they match the ones in this handbook or not.

Public investment in urban mass transportation is not new in America. State and local governments began such programs in the late nineteenth century. Passage of the Urban Mass Transportation Assistance Act of 1964 made the Federal government a major partner in the overall effort. From the late 1970's onward, various forms of innovative financing have been available that promise to leverage these public resources and help bring the Nation's urban and rural mass transportation systems up to a common standard of public service.

Innovative financing techniques first developed around efforts to use provisions of the tax code to save money in fleet acquisitions. These provisions allowed transit systems to establish "safe harbor" leases with private investors. Until they were effectively outlawed by the Tax Simplification Act of 1986, Safe Harbor leases allowed tax-exempt municipal entities to transfer depreciation on their capital assets to a taxable entity, through a lease structure. The assets would then be leased back from the investor at a rate that reflected the investor's tax benefit from depreciation on the rolling stock--a cost saving to the transit system of between 5% and 10% of the equipment's value. The cost savings allowed the transit systems to purchase additional rolling stock, thus helping to modernize their fleets, while making regular and predictable payments for their rolling stock purchases.

Another area that was explored was Joint Development. Large transit systems sometimes held land adjacent to passenger facilities that could be used to build shopping centers or office buildings; they were encouraged to sell or lease such properties to generate revenue for the transit system. While this was essentially limited to the largest, rail-based transit systems serving dense urbanized areas (such as New York, Philadelphia, or Washington, D.C.), it also proved to be effective in new "Edge Cities" like Rosslyn, Virginia, and Bethesda, Maryland. In exchange for a cash payment, the transit system either provided direct access to a development for its patrons, or sold or leased the property required to make a development possible. A sharp downturn in land values in the 1980's severely limited joint development activities. However, FTA has revised its Joint Development Policy to encourage such developments and to minimize Federal barriers to the process. FTA's new policy will be discussed in Chapter 3 of this handbook.

Changes in U.S. tax laws and cycles in the general economy coincided with increasing pressures on the Federal budget. By extension, this pressure was reflected in reduced transit capital programs during most of the 1980's, reviving interest in the concept of Innovative Finance. By the end of the 1980's, transit systems had begun to experiment with cross-border leases--a form of safe-harbor lease, but one involving foreign investors. Because the depreciation rights were being exercised under the tax codes of other countries, while remaining tax-neutral in the U.S., FTA was able to approve these transactions. Cross-border leases and other lease structures will be explained in greater detail below.

The President's Infrastructure Investment Initiative of 1992 pressed for the development and dissemination of even more innovations in infrastructure finance. The Secretary of Transportation, therefore, initiated the Partnership for Transportation Infrastructure, a national program to develop and demonstrate public/private partnerships in the design, construction and financing of transportation projects of all kinds. Under this initiative, FTA issued a Federal Register Notice in May of 1995, seeking proposals for innovations in transit finance. Over 72 proposals were received in reply to the Notice. FTA funded eight of these projects with a total of $2.6 million in Federal funds. That funding was leveraged three times over through matching funds, borrowing, and project revenues, resulting in non-Federal investment of over $7.3 million. These projects are summarized in Chapter 6.

The latest innovation in transportation investment was made possible through the National Highway System Designation Act of 1995. That Act authorized the State Infrastructure Bank (SIB) pilot program. It created a new entity that would be allowed to receive Federal grant funds and use them to make loans and loan guarantees for transportation projects. The entity would function at the State level, and would be allowed to support both publicly and privately managed highway and transit projects. This program was opened up to all fifty states and Puerto Rico in the FY 1997 Appropriations Act. SIBs will be discussed in detail in Chapter 5.

Over the years, Innovative Financing in transit has grown as a concept from simply taking advantage of opportunities presented by others to actively seeking new partners and methods for structuring long-term capital programs. Thus major investments are being planned today with the use of Grant Anticipation Notes, Foreign Exchange Arbitrage, Lease-backed Bonds, and other mechanisms that were barely on the transit horizon just ten years ago. This handbook will conclude with brief descriptions of transactions that were under way as it went to print. While not yet common, these transactions are examples of the degree of sophistication that is rapidly becoming the norm in transit finance. They may point the way to a lasting, mutually beneficial relationship between the private capital markets and cities and their public transit authorities across our Nation.