Surface Transportation Infrastructure

From toll roads to TIFIA, issuers across the country are exploring innovative ways of bringing in revenue and understanding road usage to fill funding gaps. How much can issuers rely on the highway trust fund and Congress' willingness to fill the continuing holes in it? What's in store for the next transportation reauthorization legislation in 2026?

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Andrew Mendelson (00:08):
Thank you. So they asked me to jump right in. Since we have a large panel and only 60 minutes to discuss a very interesting topic, I'll start with the most popular guy in the room. Tez, that's you. As you can imagine, the entire industry is very excited about applying the 49% of eligible project costs for TIFIA sizing across the broad range of all projects that TIFIA is eligible for. Can you please comment on the initial response you're seeing, the forward-looking pipeline, and how the Build America Bureau expects to work with project owners and sponsors to efficiently negotiate, conduct the due diligence process, and achieve timely financial close?

Dr. Morteza Farajian (00:48):
Sure. Thank you and good afternoon everyone. I'm a little bit concerned because I'm sitting here without any notes and I'm looking all around me full of paper and notes. Also a little bit concerned because Michael and his panel probably covered 90% of what I wanted to talk about, so I've just got to make things up now, but that's one of the good things of being transparent and sharing information. One of the things that maybe some of you have noticed recently is the fact that we are trying to be as transparent as possible and as communicative as possible in terms of sharing information about the different programs that we have. We do have a bulletin that on a quarterly basis provides updates on our website. Now we have the list of not just the projects that we have closed a loan for, but also projects that are in active underwriting and projects that are in the project development phase. Those are projects that we have received a letter of interest from. We have deemed those letters of interest to be complete, or for the ones where we have received a draft letter of interest that isn't complete yet, we are working with them to try to get them past that first gate so we can start the rest of the process.

(02:09):
One of the other things that we have done is sharing information about our portfolio and the loans that we have closed in the past. I have a very good, sophisticated team in place—our risk management team—that didn't exist before in the way that we have it now. Their job is to look at those loans and look at the market similar to what many investors and banks do. We want to be on top of things, not only getting information and data about what is going on in the market, but also looking at some of the loans that we have closed in the past to look at the performance of those loans and try to figure out if we were right when we underwrote them. In terms of projections for revenue lines or cost estimates, were we on point?

(03:02):
Did we miss it? Were we a little bit aggressive or maybe conservative? There was a report that we just published—actually, I think there was another report on our website published about a month ago—that specifically focused, for example, on one sector: the managed lane and toll road sector. We provided some information about projects that we have financed over the last couple of years in that sector. I believe it's about 10, maybe a little bit more or less. As a result of all of that, we have been able to identify areas where we could actually make improvements, and one of those areas is that TIFIA 49% announcement. Based on legislation, we had that authority for quite a long time—more than a decade—to go to 49%, but by policy, it was always capped at 33% except for some categories like rural projects less than $100 million.

(04:09):
It was used a few times here and there, but not widely used for understandable reasons. However, with that new change that Secretary Buttigieg authorized to allow all projects that are TIFIA eligible to apply for a loan up to 49%, we still need to go through our normal due diligence and underwriting to see if we can close that loan based on the specifics of the deal and its metrics. But if everything adds up, now we can close loans at 49% instead of 33%, which is a huge boost. I can tell you there are a lot of projects that can benefit from that because in the past we were about a one-third lender to these projects, and now we are almost at half. Given the fact that some of these projects may have other grants, some of them might not even need more financing.

(05:04):
So instead of getting financing from two different lenders, they can just focus on our financing. It makes the whole process a little bit easier, as credit agreements sometimes have challenges and slow down the process. Some projects still need financing, but because of the flexibilities that TIFIA provides—for example, being subordinate to senior lenders or having a specific payment curve where in many cases we don't require any payment during construction or even the first five years of operation—we're very flexible. Because of those flexibilities, being at 50% gives folks more opportunities to come up with a financial model that could save them more and potentially attract more senior lenders to the table as well.

(06:07):
Overall, it has been received very well. Anyone that I have talked to, even before releasing it, was in support of it. We didn't really hear much criticism. There was a little criticism here and there focused on the additional risk that TIFIA might take by going to 49%. But again, the results that we shared and the track record that TIFIA has should address some of those concerns. TIFIA has been very healthy across the board. If you look at the loans we closed over time, they've been upgraded. The last TIFIA loan that went into default is probably SH 130, which I believe was underwritten around 2008 or 2009.

(06:59):
Don't quote me on that, I'm just going from memory. It did go into bankruptcy, not necessarily because of the TIFIA loan issue, but because of some of the other challenges that project had. And by the way, that project is doing very well right now, so I don't think TIFIA is going to lose any money on that loan. We are an equity investor in that project right now. Overall, that opportunity was great. Secretary Buttigieg and his team, after looking at everything we presented, made that decision to make that policy call. It's not just the 49%; there are other areas you will notice in recent loans we are closing. For example, SR 400 in Georgia. If you look at the terms and conditions of that loan compared to, let's say, I-66 in Virginia, which closed back in 2017 or 18, you will see that a lot of terms are different.

(08:00):
All of this is because of the excellent work my risk team is doing, looking back at our terms and conditions and making sure we're not just adding them because they have been in every single agreement before. We are understanding why those terms were there 10 or 20 years ago and seeing if we still need to apply them or if we should modify them to adopt to the new reality. That exercise has been ongoing for the last two or three years, and we are seeing the outcomes now.

(08:47):
And finally, the diversity of the TIFIA program is also growing. It's not just toll roads and managed lanes anymore. Now we have airport loans and transit projects. Transit has improved significantly, and those transit loans are very safe because most of them are A-rated. If you look at the overall composition of our TIFIA portfolio and pipeline, you will see a healthy balance. This allows us to be more flexible, ensuring we generate as much efficiency as possible and not unnecessarily add to the financing costs of the projects.

Andrew Mendelson (09:59):
Thanks, that's very helpful and insightful information. Susan, what are AASHTO and the state DOTs' key surface transportation reauthorization principles when it comes to financing and funding?

Diana Hamilton (10:15):
Thanks so much for including AASHTO. For those of you who aren't familiar, we are the national trade association that represents the state DOTs—all 50 states plus DC and Puerto Rico. We run the whole gamut, working on policy, engineering, operations, safety, and mobility to advocate for solutions that work best for the states. Obviously, the reauthorization of the surface transportation bill is huge for AASHTO and our members. It's hard to believe we're already a year away from expiration, but when it comes to federal priorities, the funding piece is huge.

(11:08):
The core formula programs that state DOTs depend on to deliver projects is the nexus of the federal aid program supported by the Highway Trust Fund. We need federal funding stability both in terms of a long-term bill and consistent funding year over year. That's going to be tough. IIJA was a very large bill—a trillion dollars—and it's going to be hard to replicate that. But we believe that federal investment paired with state contributions is the model for direct investment in transportation. We're looking for funding levels to be at the levels of the final year of the IIJA as the baseline.

(12:04):
You don't want to go backwards. Inflation has had a lot of impact, with 20% to 30% project cost increases just from inflation. It's important that the bill meets us where we are now. Flexibility is also vital. Projects in Massachusetts look very different than they do in California or Idaho. We rely on the flexibility of the federal aid program to allow states the ability to program federal dollars where they most make sense.

Andrew Mendelson (12:51):
Susan, as a follow-up, many folks in the P3 industry have their eye on PABs (Private Activity Bonds) and how much new availability there will be, especially when you look at projects that are now $3.5 billion a pop. If they were to increase the authorization by the $15 billion they did last time, it doesn't cover many projects. What are you hearing? Do you feel it's going to be $15 billion or $30 billion?

Diana Hamilton (13:28):
At least 30, I would say. There's definitely a desire within Congress and the stakeholder community to raise the limit on PABs. I don't know what that ultimate number will be. There were some attempts to have it addressed through reconciliation which did not come to fruition, so we will look for the next vehicle, whether that be surface reauthorization or something else. Everyone recognizes that the cap is not meeting the current need, and I anticipate a big push to have it raised.

Andrew Mendelson (14:07):
Any other insights on the PABs cap?

Dr. Morteza Farajian (14:11):
I can't speak about what Congress is going to do, but when Private Activity Bonds for surface transportation projects were initiated and we got the $30 billion, the goal was to attract private investment. I don't tell people we are running out of capacity because that sounds like a negative thing. I turn it around and say we achieved that goal a couple of years ahead of schedule. We have had $29 billion of private investment through this program two years ahead of schedule. The program has been very successful.

Andrew Mendelson (15:18):
Great. Thank you. Scott, from a credit rating agency perspective, how do you view the fiscal sustainability of the Highway Trust Fund model and what should local governments be thinking about long-term?

Scott Monroe (15:31):
Thank you. First, I'd like to thank Andrew and the Bond Buyer for having me. There are red flags about the sustainability of the Highway Trust Fund. Earlier this year, the Congressional Budget Office issued a report showing that outlays will exceed revenues by about $20 billion, and that gap will grow. The trust fund is highly dependent on gas tax revenues, and with increasing fuel efficiency, the transition to electric vehicles, and the fact that Congress has not increased the gas tax since 1993, there's a growing gap.

(16:24):
The CBO projects the Highway Trust Fund will be depleted by 2028. Before that happens, there's a good possibility the federal government will step in and top it up, as they have done since 2008. But the cost of operating under this model is getting more expensive; the CBO projects this will cost a quarter of a trillion dollars over the next 10 years. While the federal government has strong credit quality (AA+), it has its own fiscal challenges. Our Fitch economists project the budget deficit will be 7% this year and 8% in the following years, which is historically high for a time of peace.

(17:23):
We are also projecting national debt to rise to 124% of GDP. There are also entitlement issues, with the Social Security and Medicare trust funds projected to run out of money in the early 2030s. Given these challenges, it is a matter of prudence that state and local governments consider what options would be available if the federal government shifts more funding obligations to the states. There are several options: some states have already raised their own gas taxes, and those in high-growth areas might consider conventional toll roads.

(19:25):
Over the last 15 years, we've seen an incredible amount of managed lanes and P3 projects come online with great success. Indiana is acting as a pioneer right now; they passed a law that would authorize tolling across all of its interstates. If the FHWA grants the waiver, that could be a game changer. Lastly, the mileage-based user fee (VMT) could eventually replace the gas tax. While current technological costs for VMT are high—about 10 times the administration cost of gas taxes—advancements could make it feasible in the future.

Andrew Mendelson (21:07):
Thanks, Scott. Ryan, is the rollout of electric vehicles still a credible threat to the revenue side of the Highway Trust Fund, and what insights can you share?

Ryan Hazard (21:29):
Yes, it is definitely a threat, though it's a small slice of the pie—around 6% of revenues could be at risk. This presents a unique opportunity for issuers to deploy EV infrastructure alongside their rights of way and rest plazas. For example, platforms like EVgo have seen success. SMBC led a first-of-its-kind project financing for EVgo, raising $300 million for 15,000 chargers. These are fast chargers—20 minutes and you're good for another 300 miles—which are quite lucrative for private capital.

(22:29):
State DOTs and issuers can use this to attract more capital. Companies like EVgo have reported increased throughput in their high-speed charging networks. However, the difficulty is that about 80% of charging occurs at home. It's a small slice of the pie that we can actually recover from the typical EV driver. It's hard to say that internal combustion users won't be subsidizing electric vehicles for much longer, but EVs do represent some opportunities for issuers.

Andrew Mendelson (23:55):
Thanks, Ryan. Diana, what do you think are the most significant transit issues local governments face and how do these differ from state governments?

Scott Monroe (24:09):
I have a variety of clients including Chicago and the MTA in New York. Coming from New York to Indiana, where I bought my first car in my thirties, I saw the transition. 50% of the population now lives in suburban or exurban areas which typically do not have transit systems. I am concerned about smaller towns that lack resources. The deferred backlog is substantial.

(26:23):
No one would disagree that the need is unbelievable. I think when you talk about risks for transit systems, political uncertainty is the biggest risk, followed by the ability to accurately project costs and labor availability. Whether it's transit or water utilities, everyone is looking for operators. Congestion pricing is working in some places—I made it to Newark in 35 minutes—but it's controversial.

(27:26):
There is concern about privacy with things like VMT. One thing I'd like to see with TIFIA is a more programmatic approach as opposed to a project-by-project approach. This was a big transformation for WIFIA. Indiana was one of the first to experiment with a programmatic approach for water and sewer with a WIFIA loan. It would be nice to see that done on a regional basis for transportation.

Andrew Mendelson (29:04):
On that topic, Morteza, everyone typically thinks of TIFIA and PABs when they think of the Bureau. But can you tell us about the grant programs you have that are mostly used by smaller local governments?

Dr. Morteza Farajian (29:34):
There are a few areas under TIFIA where we can have a programmatic approach, such as giving loans to state transportation infrastructure banks. However, we have never closed one of those because we still tend to look at them on a project-by-project basis. The legislation makes it hard to have a programmatic view. That could be a good suggestion for Congress to look at giving us more flexibility for programmatic loans.

(31:50):
One of the biggest challenges is that about half of the states have never borrowed from us after three decades. It's not about them not knowing about the programs—I visited almost every state to talk about them. It's about a lack of organizational capacity or political will. We have grant programs to address this. One is the Regional Infrastructure Accelerator program, which provides $1 million to $2 million grants to build capacity at the regional level.

(34:30):
The other is our Innovative Finance and Asset Concession grant program under IIJA. This allows entities to hire advisors to scan their assets and identify those that can be monetized. We also have a rural and tribal technical assistance program. The interest in these has been so high that our site crashed when it launched. We had $54 million available and received over $600 million in applications in the first few minutes.

(37:15):
Cities like Tampa, Fort Lauderdale, Jacksonville, and Charlotte have used these grants to build institutional capacity. We don't dictate the outcome; we just want to make sure they have all the tools in the toolbox to analyze their projects and get them to the finish line. I hope these programs continue because we are seeing folks who got grants a few years ago now knocking on our door for TIFIA and RRIF loans.

Andrew Mendelson (38:45):
That's great. Susan, the Highway Trust Fund hasn't been self-sufficient for years. What appetite is there in Congress to address its solvency?

Diana Hamilton (39:04):
This has been a perennial issue since 2008. We saw some signs of movement earlier this year during budget reconciliation when the House Transportation Committee looked at a fee for electric and hybrid vehicles. It didn't make the final package, but it's a barometer for the possibility of a new mechanism for all users to pay into the trust fund. It could garner about $64 billion over 10 years.

(40:14):
We will need a fix or another general fund transfer for the next bill. While there was movement toward a national VMT pilot in the IIJA, it hasn't really taken off, and I don't know if it's ready for primetime yet.

Andrew Mendelson (41:43):
Looking forward to the reauthorization needed by September of next year, what are the biggest policy challenges?

Diana Hamilton (42:06):
Funding is the biggest challenge. Because of narrow margins in the House and Senate, the bill will have to be bipartisan. In the House, you'll need Democratic votes to make up for Republicans who won't vote for any spending. On the Senate side, the 60-vote threshold is very real. I think we will see a moderate bill where no one gets exactly what they want.

(42:59):
The IIJA was a "plus plus" bill for all types of infrastructure. This time, it will likely be more narrowly focused on surface transportation. There may be an attempt to streamline discretionary grant programs and provide more flexibility within formula programs to do more with less.

Andrew Mendelson (44:20):
Diana, as local governments look to supplement federal funding, which new revenue sources seem most promising?

Scott Monroe (44:53):
Transit-oriented districts (TODs) have proven very effective. Chicago and Indianapolis have used them to create hubs that facilitate retail activity and connect the "last mile," which is often the most expensive portion to cover. I was concerned about federal registration fees because states and local governments already rely on those.

(47:05):
Congestion pricing works in urban areas but not suburban ones. Electronic tolling has been successful, especially because it allows for indexing fees to inflation, which makes a huge difference over time.

Andrew Mendelson (48:14):
Scott, as you look at the increased use of managed lanes, how has Fitch's view of their creditworthiness shifted?

Scott Monroe (48:41):
It's shifted positively due to very strong performance. Last year, our managed lane portfolio exceeded our base case revenue expectations by an average of 10%. We have also been able to back off on some of our forecasting conservatism because we now have actual operational history to validate our models.

(50:33):
Thirdly, we took a new look at gearing risk. We used to hold back ratings at the BBB level, but after observing actual behavior, we became comfortable rating them higher. These factors have resulted in over seven upgrades in the last 12 months alone.

Dr. Morteza Farajian (51:17):
From a policy perspective, managed lanes are delivering results. On I-66 in Virginia, they promised a reliable trip and choice. Now folks have the choice to pay a toll, carpool, or take a bus. Carpooling and HOV usage have gone up, and travel times on the free lanes have improved compared to before the managed lanes opened. Telling these stories of successful outcomes is key for the industry.

Andrew Mendelson (53:54):
Ryan, with tightening federal spending, should private capital take a more active role in shaping the future of infrastructure funding?

Ryan Hazard (54:10):
Yes, I think there is a huge opportunity. We are facing a trillion-dollar backlog to get highways to a state of good repair. We see an administration that seeks to increase investment from both domestic and foreign sources. Managed lanes are a great example of where private capital can get involved—not only funding the express lanes but often providing benefits to general users as well. We like to see PABs as a resource for bringing in private capital, even for projects like bridge rehabilitation. SMBC looks forward to the flexibility of TIFIA and the future of these programs.

Andrew Mendelson (56:12):
With three minutes remaining, we open it up to questions. Thank you very much.