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Virginia Stays in the Fast Lane

BRADENTON, Fla. — For the second year in a row, Virginia Gov. Bob McDonnell plans an aggressive strategy to keep the state’s transportation projects moving forward at a fast clip.

McDonnell’s ideas include using innovative funding tactics, such as tax-increment finance, to raise revenues. They must be approved by the General Assembly.

The 2012 legislative plan was unveiled at the Governor’s Transportation Conference last week, and followed the announcement of major milestones in several of Virginia’s biggest projects being advanced through public-private partnerships.

The P3s will be financed through a combination of public- and private-activity bonds, low-interest federal loans and private equity.

“Whether it’s the infrastructure needed to move people and goods, or certain transportation-related industries poised for major growth and job creation, we must continue to make progress in improving our transportation networks if Virginia is to remain economically competitive,” McDonnell said.

McDonnell highlighted his 2012 transportation plan, which focuses on revenue enhancements that could potentially be leveraged, and policies that will be considered during next year’s legislative session from Jan. 11 through March 10.

One element of the plan would authorize the Commonwealth Transportation Board to implement a version of tax-increment financing.

When the state funds a new, major transportation infrastructure project, it would receive a portion of the growth in state tax revenues that result from economic development surrounding the project.

“These revenues will be reinvested in additional projects that can help spur additional development,” McDonnell said.

Toby Rittner, president of the Council of Development Finance Agencies, said he has not seen TIF used at the state level like McDonnell is proposing.

“This is an innovative approach,” Rittner said. “Most prevailing TIF statutes consider the tool strictly local.”

Generally, TIF is used by a local community to pay debt service on the needed infrastructure. Some projects have used special-assessment based financing for specific transportation improvement districts and transit-oriented development projects.

“I think it is interesting that the state wants to capture its own state tax revenue,” Rittner said.

“I don’t fully understand how the state would capture tax revenue that is already theirs for transportation projects that they initiate.”

Rittner said if the TIF was associated with a specific project, then it could work, though local governments might object if they stand to lose their share of taxes.

McDonnell said he would unveil more details about his transportation package in the coming weeks.

Other proposals in the governor’s plan would increase the amount of state revenues directed toward transportation projects.

One plan would increase the amount that the transportation department receives from year-end surpluses. Another plan would increase the sales tax dedicated to transportation to .75% from .5% over the next 8 years.

In another strategy, the governor is proposing that the first 1% in revenue growth over 5% each year be dedicated to transportation.

This year, McDonnell spirited through the legislature a massive overhaul of the state’s transportation program designed to fund $4 billion of road, rail, and transit projects. His program opened increased state bonding capacity, new financing programs, and the expedited use of grant anticipation vehicle revenue bonds, or Garvees.

The funding also enabled the state to advance major public-private partnership initiatives such as a new tunnel and related roadway improvements in order to relieve severe congestion in the Hampton Roads region.

The Virginia Department of Transportation last week completed a comprehensive agreement with a consortium known as the Elizabeth River Crossings, or ERC, as the private partner.

ERC will build the $2.1 billion project that includes a new Midtown Tunnel under the Elizabeth River. Other project elements call for the rehabilitation of the existing Midtown Tunnel and the Downtown Tunnels, as well as an extension of the Martin Luther King Freeway to improve mobility in the cities of Norfolk and Portsmouth.

ERC is a joint venture between primary participants Skanska Infrastructure Development Inc. and Macquarie Financial Holding Ltd.

“The Midtown Tunnel project has been at the top of the region’s priorities for many years,” said Transportation Secretary Sean Connaughton.

“The state’s use of a public-private partnership structure will enable VDOT to attract approximately $1.7 billion in private investment to a project that yields tangible long-term benefits to the region and the state,” Connaughton said.

Under the comprehensive agreement, VDOT will maintain ownership of the infrastructure and will oversee ERC’s activities. ERC will finance, build, operate and maintain the facilities under a 58-year concession contract.

ERC will also assume risk of delivering the project on a performance-based, fixed-price, fixed-date contract, designed to protect users and taxpayers from cost overruns and delays, according to state officials.

“The state is contributing $350 million from Garvee bonds and $12 million in state funds from the district maintenance fund,” said VDOT spokeswoman Tamara Rollison. The state’s funding is designed to lower tolls, which will be electronically collected.

ERC is contributing $1.3 billion through a mix of private-activity bonds, equity, and a federal low-interest loan from the Transportation Infrastructure Finance and Innovation Act program. The state and ERC expect to reach financial close on the project early next year.

VDOT last week also announced that an agreement was reached on the commercial terms of a nearly $1 billion project on Interstate 95 in northern Virginia, which includes the construction of high-occupancy vehicle and high-occupancy toll lanes, known as HOV/HOT.

The principal terms of the agreement were negotiated between Fluor-Transurban, VDOT, and Virginia’s new Office of Transportation Public-Private Partnerships. The project is being financed with $843 million from Fluor-Transurban and $97 million from the state.

While the exact financing sources are not yet available, Rollison said some bonding will be used, and a TIFIA loan is being sought.

The project will expand existing HOV lanes on I-95 to create 29 miles of HOV/HOT lanes in Fairfax and Stafford counties as well as improve access to major Virginia employment centers and military sites.

Under the agreement, Fluor-Transurban will enter a fixed-price contract to finance, design and build the facility as well as operate and maintain it for 73 years after construction is completed. Financial close on the HOV/HOT contract is expected in mid-2012.

The Midtown Tunnel and HOV/HOT are just two of the major projects in development, and many of the specific financing elements have yet to be determined, said Tony Kinn, who became director of the state’s P3 program in July.

“The state is going to be very aggressive with P3s, and do what we can to advance a lot of transportation projects,” Kinn said. “State funding has to match up with the private sector and their funding capabilities.”

The state plans to supplement traditional forms of financing soon with funding from the recently developed Virginia Transportation Infrastructure Bank, he said.

The bank is a revolving loan program in the Transportation Trust Fund that has been created to provide loans and grants to localities, certain private entities, and other eligible borrowers to finance transportation projects.

An announcement is expected soon detailing another round of major projects that are in the pipeline, Kinn said.

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