Innovative Financing Initiative: Administrative Policies and Procedures Facilitating Use of Innovative Finance Techniques in Federally-Assisted Transit Project

SUMMARY: This Notice describes innovative financing methods and asset

management tools which may be used in connection with projects

receiving assistance from the Federal Transit Administration (FTA) in

order to facilitate financing, leverage Federal, State and local funds,

and otherwise increase the effectiveness of transit capital projects.

FOR FURTHER INFORMATION CONTACT:

Janette Sadik-Khan, Associate Administrator for Budget and Policy,

(202) 366-4050, or Paul Marx, (202) 366-1675, Room 9310, 400 7th Street

SW., Washington, DC 20590.

SUPPLEMENTARY INFORMATION: The Intermodal Surface Transportation

Efficiency Act of 1991 (ISTEA) encourages more efficient management and

enhancement of our Nation's public transit infrastructure through the

creation of public/private investment partnerships. In addition

Executive Order 12893, ``Principles for Federal Infrastructure

Investments,'' signed by the President on January 26, 1994, directs

each executive department ``to ensure efficient management of

infrastructure * * *'' and ``to encourage private sector investment,

which is a key objective of our efforts to promote innovative

financing.'' Underlying this guidance is the notion that market-

oriented financing and management techniques can be effective tools for

meeting our Nation's needs for infrastructure investment. To further

these directives, on September 12, 1994, FTA published a Notice

regarding its Innovative Financing Initiative in the Federal Register

(59 FR 46878) in which FTA requested information from its grantees

about their use of innovative financing techniques in local transit

projects.

This Notice combines in a single document current innovative

financing methods and assets management tools and indicates, where

appropriate, changes in administrative practice or policy guidance that

may facilitate their use. Grantees and others in the transit community

may find it useful to have in one publication a summary of the

permissible financing and management techniques under FTA's grant

programs. Grantees should, however, refer to the appropriate FTA

regulations, circulars, reports, and publications that explain these

techniques in greater detail, or contact their FTA Regional Office for

further guidance and assistance.

The discussion below is divided into two broad categories,

Innovative Finance Techniques and Asset Management Tools.

FTA Innovative Finance Techniques

This section describes innovative financing techniques which may be

used in connection with Federal transit assistance. In general, the

techniques can be used with new projects financed with the FTA

Urbanized Area Formula Program (49 U.S.C. 5307, formerly Section 9 of

this Federal Transit Act, as amended) funds, as well as with Title 23,

United States Code (e.g., Surface Transportation Program (STP) and

Congestion Mitigation and Air Quality program (CMAQ)) funds transferred

to be used for transit projects. In most cases, the techniques can also

be used with funds from the Capital Program (49 U.S.C. 5309, formerly

Section 3), as well as Nonurbanized Area Formula program (49 U.S.C.

5311, formerly Section 18), and Elderly and Persons and Disabilities

Program (49 U.S.C. 5310, formerly Section 16) funds. Many of the

procedures can also be used with respect to assets previously acquired

with Federal transit assistance. For clarity, each technique is

described separately. Grantees should take note that two or more

techniques may be combined in the same project to generate additional

savings or to further enhance private financing.

FTA generally supports use of innovative financing concepts that

enhance the effectiveness of public transit investment by either

generating increased investment or by reducing overall project costs.

The following techniques and provisions of Federal transit laws are

illustrative of the types of innovation that FTA will support. The list

is not exclusive; grantees interested in pursuing techniques not listed

here should contact their FTA Regional Office. FTA will evaluate

proposals on a case-by-case basis, and where appropriate make further

changes in administrative procedures, or if necessary, revise its rules

and regulations to make such changes.

Leasing. FTA funds may be used to lease, rather than

purchase, transit equipment and facilities. Urbanized Area Formula

Program (49 U.S.C. 5307, formerly Section 9) funds may be used to cover

the costs of new an pre-existing leases, so long as leasing is more

cost effective than a direct purchase. FTA regulations at 49 CFR part

639 prescribe how leasing of transit equipment may be eligible.

Moreover, FTA permits on a case-by-case basis, using slightly different

criteria, such leasing under the Capital Program (49 U.S.C. 5309,

formerly Section 3), Nonurbanized Area Formula Program (49 U.S.C. 5311,

formerly Section 18), and Elderly and Persons with Disabilities Program

(49 U.S.C. 5310, formerly Section 16).

Certificates of Participation (COPs). Certificates of

Participation (COPs) are a type of leasing arrangement in which bonds

are issued to finance the purchase of transit assets. Typically, the

public transit agency (lessee) enters into a lease with a trustee or

non-profit entity (lessor) for the assets it wishes to acquire. The

lessor then transfers its rights to receive the lease payments made by

the transit agency to the bond holders. The cash paid by the bond

holders is used to purchase the assets that will be leased by the

transit agency. The transit agency makes lease payments from local

revenue sources and FTA grants. Title to the assets is held by the

trustee for the security interest of the bond holders during the life

of the transaction (usually 7 to 12 years). Use of this technique may

allow transit agencies to use future reserves of local and federal

revenues to accelerate equipment purchases. Although historically FTA

recipients have engaged in COPs transactions solely for the purchase of

vehicles, this technique may also be used to acquire facilities.

Approximately six of these have taken place with federally funded

equipment. Further guidance on the use of COPs can be found in FTA

Report No. FTA-MA-90-7005-93-1 (``How to Evaluate Opportunities for

Cross Border Leasing and COPs,'' November 1993).

Joint Development. Under 49 U.S.C. 5309(a)(5) and (f) and

49 U.S.C. 5309(a)(7) (formerly Sections 3(a)(1)(D) and 3(a)(1)(F)),

Capital Program funds can be used for a variety of joint development

activities, so long as they are physically or functionally related to a

transit project and they enhance the effectiveness of the transit

project. Further, consistent with the additional flexibility in funding

and decisionmaking afforded by ISTEA, FTA has recently interpreted the

Capital Program (49 U.S.C. 5309) and the Federal Transit laws (49

U.S.C. 5301 et seq.) to allow such joint development projects under the

Urbanized Area Formula Program (49 U.S.C. 5307, formerly Section 9), as

well as the STP (23 U.S.C. 133) and the CMAQ Program (23 U.S.C. 149)

when these funds are [[Page 24683]] transferred to FTA for a transit

project. Similarly, by this Notice, FTA is also alerting its grantees

to the fact that assets previously acquired with FTA funds may be used

for such joint development purposes. For example, land now used for

station parking and no longer needed for transit purposes may be

converted to use in a transit-related development project.

Certain cross-cutting Federal requirements will apply to the

activities supported by Federal transit funds; however, such

requirements would not apply to the commercial project itself, since

Federal funds cannot be used for the construction of commercial

revenue-producing facilities. FTA program funds may be used for the

overall planning of a transit project, including the commercial

revenue-producing facilities, so long as such commercial facilities are

part of an overall transit-related project.

Use of Proceeds from Sale of Assets in Joint Development

Projects. To facilitate joint development activities, FTA permits the

sale of real property and property rights acquired with FTA assistance,

in the following instances.

Real property that is no longer needed for transit purposes may be

sold and the proceeds may then be used to purchase other real property

for a transit-supportive development. If the real property is leased,

the proceeds are considered program income and may be used for any

transit purpose.

Air rights over transit facilities constructed with

Federal funds may be sold to developers and the proceeds retained as

program income for future use in mass transit, rather than returned to

the Treasury.

Cross Border Leases. A cross border lease is a mechanism

which permits investors in a foreign country to own assets in the

United States, lease them to an American entity, and receive tax

benefits under the laws of their own country. FTA will permit the

encumbrance of federally funded assets under a cross border lease so

long as the grantee maintains continuing control and use of the asset

in mass transit, and the benefits of the transaction outweigh the risks

to the grantee. Grantees should provide FTA with the details of the

transaction for review on a case-by-case basis. FTA's policy on Cross

Border Leases is contained in FTA Circular 7020.1 (``Cross Border

Leasing Guidelines''). Further guidance on cross border leases is

available in FTA Report No. FTA-MA-90-7005-93-1, cited previously.

Capital Cost of Contracting. FTA permits grantees to count

a portion of the costs of a contract with a private operator for

transit service operations as a capital cost eligible for FTA capital

program funding. This policy is described in more detail in FTA

Circular 7010.1 (``Capital Cost of Contracting''). This policy

generally applies to contracting for providing transit services where

the use of facilities and equipment is provided as a part of a transit

service contract.

Innovative Procurement Approaches. FTA encourages grantees

to use a wide variety of innovative procurement techniques. These can

include multi-year rolling stock procurements, forming consortia to

facilitate efficiencies of scale in rolling stock procurements, or

using design-build (``turnkey'') as a method of infrastructure project

delivery. Grantees can also consider use of vendor-financing in

procurements, such as ``super-turnkey,'' in which the contract calls

for borrowing by the design-build contractor, with the costs, including

interest, paid off over time using Federal grant funds. Further

information on this form of procurement is available in FTA Report No.

FTA-MA-08-7001-92-1, ``Turnkey Procurement: Opportunities and Issues.''

State Transit Finance Support. FTA encourages States and

local governments to develop the capability to provide support for

transit finance initiatives. Where State law permits, FTA capital funds

can be used to support transit-related State finance entities, such as

transportation banks. Such finance entities could provide a range of

financing options, including cross border leases, certificates of

participation, joint procurements, and the like, that may not otherwise

be available to the smaller transit agencies. While FTA capital program

funds can be used to cover the initial capitalization, they cannot be

used to cover the ongoing operating costs of such a program.

Revoling Loan Funds. By this Notice, FTA announces that

Federal grant funds may be used to support State or local revolving

loan funds established in accordance with appropriate State laws. These

funds would be available to provide direct loans for transit projects,

or to acquire equipment and facilities and lease them to providers of

public transportation in their States. Payments to retire the loans or

service the leases, including accrued interest, would be used to fund

other transit projects. Such a revolving loan fund could be used in

combination with pooled procurements, State or locally issued bonds,

joint development, and other techniques to generate income for transit

investment or to reduce the overall cost of transit capital investment.

As with the State Transit Finance entities, FTA funds can be used to

cover the initial capitalization, but they cannot be used to cover the

ongoing operating costs of such a program.

Deferred Local Match. FTA permits grantees to defer the

payment of the local share of transit projects. Under this policy,

grantees may, with prior approval from FTA, draw down 100 percent of

the first 80 percent of project cost of former section 3 (49 U.S.C.

5309), 8 (49 U.S.C. 5303), 9 (49 U.S.C. 5307), 16 (49 U.S.C. 5310), 18

(49 U.S.C. 5311) and 26 (49 U.S.C. 5320) projects, covering the local

share of the costs at the end of the project. See, ``Policy Statement

on Local Share Issues,'' 57 FR 30880, July 10, 1992.

Transfer of Federal Interest. In order to facilitate the

implementation of certain innovative financing transactions involving

the lease or encumbrance of an asset, FTA will permit the concentration

of the Federal interest in a portion of assets acquired with Federal

funds, leaving the remaining portion unencumbered by any Federal

interest. For example, where a fleet of 100 vehicles is acquired with

Federal funds with a local share of 20 percent, the Federal interest

may be concentrated in 80 of those vehicles, leaving the remaining 20--

the local share--of the vehicles without any Federal interest.

Moreover, this separation of Federal and local interests allows the

grantee to explore other financing techniques, such as using the local

share for COPs or cross border leases to leverage additional funds, or

using short-term lending, or debt subordination, where arbitrage issues

could be involved. For example, the portion of a fleet or facility

without Federal interest could be mortgaged, and the proceeds used to

earn interest or act as credit enhancement on a bond issue supporting a

major investment, thus generating savings for the transit authority.

Like Kind Exchange. FTA permits the transfer of the

remaining Federal interest in an asset to be transferred to a new asset

in order to facilitate the early replacement of such assets. For

example, under the FTA Like Kind Exchange policy (described in more

detail in 57 FR 39328, August 28, 1992), buses which have reached only

one-half their expected useful life may be sold and the proceeds may be

used to pay part of the cost of like-kind replacement vehicles, so long

as the remaining Federal interest in the vehicles which are sold is

applied to the new vehicles. In such cases, the proceeds of the sale

[[Page 24684]] of the vehicles does not have to be returned to the

Federal government.

Incidental Non-Transit Use. FTA-funded facilities may also

be used for limited non-transit purposes. For example, FTA funds may be

used for acquisition of a Compressed Natural Gas fueling facility which

will be used both by the transit operator's vehicles as well as other

public vehicles. In such a case, FTA will participate in the capital

costs of the facility proportionate to the needs for transit

operations, including any designed-in reserve capacity necessary to

assure reliable transit service. However, non-transit use should be

incidental, i.e., not detract from or interfere with the mass transit

use of the facility. FTA will determine what use is incidental on a

case-by-case basis. It should be noted that 49 CFR parts 604 and 605

prohibit the use of FTA-funded facilities for charter and schoolbus

purposes.

FTA Asset Management Tools

Transfer of Federally-Assisted Assets. 49 U.S.C. 5334(g)

allows existing, federally supported assets to be transferred for

another public use when they are no longer required for transit

purposes. For example, if a bus garage is no longer needed for transit

purposes, it may be transferred to local municipal ownership for use in

support of general public services. This new provision may also have

application in support of innovative financing techniques, for example,

by permitting transfer of ownership of assets acquired with Federal

funds to local public use in return for other local support for

transit. These transfers are subject to very specific statutory

conditions and must be approved in advance in writing by FTA.

Coordinated Urban and Rural Services. Assets acquired with

FTA funds may be used for any purpose which is eligible for FTA

funding. Thus, assets acquired with Urbanized Formula Program funds (49

U.S.C. 5307, formerly Section 9) or Capital Program (49 U.S.C. 5309,

formerly Section 3) funds may be used in a rural setting together with

assets acquired under the Nonurbanized Area Formula Program (49 U.S.C.

5311, formerly Section 18), as part of a coordinated rural/urban

system. Likewise, assets acquired for service in non-urbanized areas

can be used in urbanized areas as part of such a coordinated rural/

urban system.

Corridor Preservation/Advance Right of Way Acquisition. In

limited circumstances, FTA program funds can be used to acquire and

preserve existing transportation corridors and rights of way for future

use in transit fixed guideway projects, or existing corridors and

rights of way acquired with local funds can be used as local match for

FTA grants. Indeed, should there be an increase in the market value of

an existing corridor or right of way acquired with local funds only

before the use of that property for a transit project, the property

would be accepted as a local match for an FTA grant at its increased

value. Acquisitions of existing corridors and rights of way with FTA

funds are subject to two important constraints: (1) The FTA/Federal

Highway Administration (FHWA) requirement for completion of a Major

Investment Study before a major investment project can be programmed

for construction funding; and (2) the prohibition on advance land

acquisition that would prejudice the ultimate decisions on mode and

alignment for any transportation project prior to completion of the

National Environmental Policy Act (NEPA) studies for that project.

The preceding are example only. FTA welcomes all ideas and projects

that have the potential to leverage existing or planned infrastructure

investment, or that will help to reduce public transportation costs

over time. Grantees interested in pursuing these and other options

should refer to the appropriate FTA regulations or publications

referenced in this Notice or contact their FTA regional office to

discuss their plans in more detail.

FTA will continue to make full use of its regulatory and statutory

flexibility in fostering innovative financing proposals for transit.

However, in all cases, projects must comply with all other statutory

and regulatory requirements such as the NEPA, Civil Rights Acts,

Americans with Disabilities Act, the Clean Air Act, and the

Administrative Procedures Act.

Issued on: May 2, 1995.

Gordon J. Linton,

Administrator.

[FR Doc. 95-11241 Filed 5-8-95; 8:45 am]

BILLING CODE 4910-57-M