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Transport Issues Still Snarled

DEC 23, 2010 6:35pm ET
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WASHINGTON — Improving economic conditions are likely to put new stresses on the nation’s roads, airports and ports in 2011, but congressional gridlock could stymie efforts to pass already delayed funding packages for capital investments in surface transportation and the air-travel network.

A long-term highway bill could be stuck until 2013, and airport bond proposals that have been circling for years may not be cleared to land in 2011 either, market participants said in recent interviews about the outlook for next year.

The only multi-year transportation reauthorization bill pending was introduced in 2009 by House Transportation Committee chairman James Oberstar, D-Minn., who will leave Congress in January after having lost his reelection bid in November.

Even if Rep. John Mica, R-Fla, who is set to take the reins of the committee in January, or Senate Environment and Public Works Committee chairwoman Barbara Boxer, D-Calif., introduce bills next year, sources said it is unlikely any transformative bill would clear Congress before the next presidential election cycle starts.

The sector will be “in a holding pattern,” said Jack Basso, director of program finance and management for the American Association of State Highway and Transportation Officials.

But a few potential game changers could occur in 2011 for transportation financing.

Mica has indicated he is already working on a bill that could include an extension of the Build America Bond program. Spokesman Justin Harclerode said in an interview last week that Mica may introduce the bill early next year.

Mica said BABs should be considered as a means of providing funds for transportation projects, given that lawmakers are loathe to increase the gas tax, which currently provides revenues for the highway trust fund.

The BAB program, created in 2009, resulted in states and localities borrowing nearly $169 billion as of this month to pay for transportation projects. The funds went toward highways, transit, parking, ports, and airports.

However, BABs became a lightning rod for a few fiscal conservatives this year due to the federal subsidy they provide to issuers, equal to 35% of interest costs.

The top Senate Republican negotiator for the tax law, Jon Kyl of Arizona, railed against the program, claiming it led state and local governments with lower credit ratings to borrow more because they get higher subsidies.

However, issuers and some transportation experts said the program not only revived the municipal bond market but also allowed cash-strapped issuers to get projects done that would have been delayed without BABs.

Even though a BAB reauthorization would have to be approved by the House Ways and Means Committee and House members, including Republican leaders, any support of BABs from the head of a committee that deals primarily with transportation instead of banking is a noteworthy development, according to some market participants.

“When we think about where we’re trending towards in the new year … Mica is the person everyone is looking to for infrastructure now,” said Michael Likosky, senior fellow at New York University’s Institute for Public Knowledge and director of the Center on Law and Public Finance at the Social Science Research Council.

“Regardless of whether the instruments come out of Ways and Means or are administered by [the Treasury Department], we’re talking about things that are at the heart of transportation policy-making,” he said.

“I think this is a very good sign … It’s much easier to bring forward financing programs for infrastructure if people of his ilk support them,” Likosky said of Mica.

“We’ve had a BABs debate that’s been dominated by the cost of capital” instead of focusing on the value of the projects funded by bonding, Likosky said. He added that Mica’s support could steer the dialog on BABs and similar federally subsidized programs more toward job creation and the concrete value of the investments.

But the chronic problem underlying transportation finance this year — the inability of gas tax and airport fee revenues to provide enough money for upkeep and new construction — is not expected to abate in 2011, sources said.

Two major transportation bills are long overdue for reauthorization largely because lawmakers, the administration and stakeholders cannot agree on how to obtain sufficient revenue to fund projects, and market participants are far from optimistic that they will be dealt with next year. Many members of the transportation industry support the idea of raising the gas tax as a short-term solution, but lawmakers do not.

One measure is a multi-year reauthorization bill that would replace the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users, or SAFETEA-LU and provide funds for roads and bridges as well as transit. It is widely expected to propose an overhaul of the nation’s surface transportation infrastructure and its financing system, but lawmakers have postponed that task by approving stopgap measures since Sept. 30, 2009.

The other law, a multi-year reauthorization for the Federal Aviation Administration, could allow airports to charge higher passenger landing fees, which would be used to back the issuance of more airport bonds. But that law is years overdue, with Congress extending the old law more than a dozen times since it expired in 2007.

The core obstacle that is keeping Congress from either changing or augmenting the menu of financing options available to municipalities is “all related to what amount of funding — specifically federal revenues, not credit assistance, not Build America Bonds, not pick-your-financing scheme — will be available to states, communities, and project sponsors,” said one lobbyist who did not want to be identified.

“Until we know the answer of how much money there will be to work with, it will be hard to have a conversation about what the scope of the programs can be” as well as the federal role in implementing them, the lobbyist said, adding: “I don’t know that there is anybody in the [Obama] administration actively trying to put that together.”

But it is more likely that a reauthorization of SAFETEA-LU would come in 2012, the next big election year, instead of 2011.

“In an election year, a highway and transit bill can be a popular thing to get done,” said one lobbyist for local governments. “It’s something to go home and campaign on.”

Hopes: P3s and a Bank

For the time being, industry sources are pinning their hopes on any steps the Obama administration or Congress may take toward a long-discussed national infrastructure bank or loan programs that could support public-private partnerships.

Most market participants see the infrastructure bank discussion being less about whether a bank can or should be created and more about what form the bank would take.

Lobbyists, infrastructure advocates, and finance experts have said the administration will need to provide a specific plan to follow up on the president’s vague proposals for a national infrastructure bank or fund. The staff of Sen. John Kerry, D-Mass., is working with experts on a set of principles for transportation and possibly a framework for an infrastructure bank, and he may introduce a bill in the new year, several sources said.

“I think the next stage is less whether we’re going to have a push [for a bank or fund] and more a question of what is the bank going to cover, in terms of sectors, and what types of tools is it going to have at its disposal?” said Likosky, who has authored a book on the potential Obama infrastructure bank.

“Will it get enough Republican support?” he asked, adding that this will be key to any legislation.

When discussing the infrastructure bank, most sources said that, along with the multi-year reauthorization, public-private partnerships will be in the forefront of any discussion about infrastructure investment.

Because most elected officials, including the president, have nixed the idea of raising fuel taxes to support transportation investment, they are looking more hopefully to P3s and possible expansion of programs that would assist them.

Mica is a fan of P3s, seeing them as part of the solution to the transportation-funding problem.

Sources said they do not believe such partnerships would be as controversial as a gas-tax increase. However, one expert said some Democrats from sparsely populated states, where P3s such as toll roads are less viable, may need to be persuaded — by earmarks, for example — to support legislation to encourage the development of  public-private partnerships.

Ports: Water and Air

The Dec. 31 expiration of many American Recovery and Reinvestment Act programs will set in motion a push by airports to raise more revenues or to resurrect the act’s temporary exemption of private-activity bonds from the alternative minimum tax. Airports have been pushing for years to increase the passenger facilities charge — landing fees that airports are legally allowed to charge passengers — to $7 or $7.50 from the current $4.50. They argue that a hike would significantly raise their revenues, which continue to be stifled by the economic slowdown and its adverse effect on air travel as well as revenue from sources like terminal concessions.

Though they have been unable to obtain a PFC raise, airports received a substantial boost from ARRA in the form of an AMT holiday and, to a lesser degree, the creation of BABs.

But the temporary AMT exemption, which allowed airports to issue bonds less expensively, is set to expire Dec. 31. It appears unlikely to be extended into 2011.

“Without the PFC increase right now, [the AMT exemption] is one of the only ways we can raise money,” said Jane Calderwood, vice president for government and political affairs at the Airports Council International-North America.

The group had three airport executives pushing in Congress for the AMT exemption to be stretched a little farther than this year, she said. At first, they wanted it made permanent. Then, they decided they would advocate for a four-year extension.

“We’d take a year right now,” Calderwood said. “We’re very disappointed” that the AMT exemption was not extended, she added.

Water ports, too, benefited from the ARRA. The Transportation Investment Generating Economic Recovery program — a competitive discretionary grant program funded at $1.5 billion — and its successor, TIGER II, helped ports by giving them federal grants.

Ports are now angling to make sure TIGER isn’t a one-shot deal. They hope to see it become a permanent, merit-based funding source, according to the American Association of Port Authorities.

Ports “had significant impacts to their revenues due to the economic downturn and the resulting trade downturns,” said Kurt Nagle, president and chief executive officer of AAPA. “Where possible, ports have generally tried to continue moving forward with their capital improvement projects to be able to accommodate the higher levels of trade once the economy rebounded.”

The AMT exemption also helped ports through the downturn, Nagle said, adding that anecdotal information from member ports suggested the AMT was a hindrance to bond issuance and that the temporary exemption removed that disincentive for investors. “We think there is an opportunity to advance that as we look at more long-term” tax legislation, he added.

Another issue on the horizon is the harbor maintenance tax, which has been generating about $1.5 billion a year for ports but has been tapped for other uses related to cutting the deficit. Nagle said port officials would like those revenues to stop being drained from the fund.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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