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Banking on Infrastructure
Monday, 13 July 2009 00:00

How would a national infrastructure bank work? The answer may be found in state programs.

In 2006, the Army’s 1st Infantry Division came home from Germany to settle at Fort Riley, Kan. The redeployment touched off a building boom in neighboring communities as developers constructed subdivisions to house soldiers and their families.

Communities were hard-pressed to keep pace with public infrastructure, so they turned to the state’s Transportation Revolving Fund for loans to build new streets.

“This is an extremely useful tool for smaller communities and counties to facilitate highway projects,” said Reed Davis, a financial economist for the Kansas Department of Transportation. “We loan the money to communities, and we provide a minimal subsidy of the interest they pay. Given Kansas’s size, it’s been a very popular program, and I think it’s been very successful for the communities that have used it.”

The fund is the state’s infrastructure bank, by another name. Kansas law prohibits the state government from establishing a “bank.” It’s the kind of institution that’s gaining popularity inside the Beltway as a way of tapping new investment sources for repairing and building transportation infrastructure.

The Obama administration and Rep. James L. Oberstar, D-Minn., have clashed over the timing of a new surface transportation bill, but an infrastructure bank is a prominent part of the vision of the future of transportation finance on both sides of the issue.

Oberstar, chairman of the House Transportation and Infrastructure Committee, is pushing the Surface Transportation Authorization Act of 2009. The bill includes an infrastructure bank to provide grants, loans, loan guarantees, lines of credit, private activity bonds, tax-credit bonds and other financial tools to states for highway, rail, transit projects and projects of national significance.

On July 1, the administration presented Congress with what it would like the infrastructure bank to be, an institution to “fund relatively large and transformative projects currently underfunded by the allocation process.”

The scope is wide, encompassing water, energy and telecommunications, as well as transportation. The bank would offer a combination of grants and credit products such as direct loans and loan guarantees that are most appropriate to the project at hand.

The idea is not new. In 1998, the Transportation Equity Act for the 21st Century authorized a pilot program for state infrastructure banks. In August 2007, Sens. Chris Dodd, D-Conn., and Chuck Hagel, R-Neb., introduced a bill for a national infrastructure bank that would identify, evaluate and help finance infrastructure projects of regional and national significance.

Kansas created its fund in 1999, but it was not until 2004 that the state capitalized it with $25 million from its $500 million transportation budget. Using state money meant all federal money Kansas receives could be dedicated to interstate and state highway projects.

According to the American Association of State Highway and Transportation officials, 35 states have infrastructure banks. Kansas and Georgia are the only states relying solely on state funds to capitalize the programs. The others draw all or part from federal sources.

Bruce Burditt, the Kansas DOT’s chief of financial investment management, said the revolving fund underwrites loans for communities too small to be rated by a national rating service. The first borrower was a county that wanted to resurface its road system.

In fact, the revolving fund provides for projects that wouldn’t be eligible for federal funding to begin with.

The state has issued nearly $89 million in bonds, Burditt said. To ease the pain for local governments, the state charges approximately 3.8 percent interest, some two points below the rate the state pays on its bonds. The fund has about reached its limits, and state Transportation Secretary Deb Miller is considering a new infusion of capital.

Burditt said the state’s fund has been successful because it allows flexibility in the amount that communities borrow, and that communities tailor their own repayment schedule—as long as payment is no longer than the lifespan of the project. To protect lenders against defaults, the state will pay lenders the community’s share of motor fuel tax receipts.

There is one downside, Burditt said: The state Legislature created the fund just for highways and bridges. Railroads and waterways could have benefited as well.

Reed said he would avoid giving infrastructure a dedicated source of revenue. “I would keep it on an as-needed basis,” he said. “If the revenue from a dedicated funding source exceeds your needs, then you get pressure to use it where maybe it’s not the most effective.”

Journal of Commerce, 7/13/2009