The America Fast Forward (AFF) Bond Program will appeal to a Congress concerned about the federal deficit and a Highway Trust Fund that is running on empty:

Congress will begin consideration of the next big transportation reauthorization bill in May or June, but concerns about the budget, the federal deficit, and the pending insolvency of the Highway Trust Fund will stand in the way of a robust transportation funding program. The Trust Fund, which is funded by the national gas tax and is the major source of federal transportation funding, has been depleted due to the greater fuel efficiency of cars, the fact that Americans are driving less, and because the gas tax was set at 18.4 cents per gallon in 1993 and does not rise with gas prices, and because it was not indexed to inflation. Whereas the gas tax represented 17 percent of the price of a gallon of gas in 1993, today it represents just 5 percent. The Trust Fund is projected to be running on empty in 2014 and has required transfusions of about $10 billion a year from the General Fund. This is not sustainable but neither does this Congress appear willing to increase the gas tax.

Financing strategies are easier to support than increased funding for grant programs because they require less money up front and leverage significantly more money from state and local governments and the private sector:

These federal financial constraints make all transportation funding requests more difficult but they make financing strategies particularly attractive because federal funding for transportation would leverage additional investment from state and local governments and private investors. A loan program, for example, can serve more applicants than a grant program because the principle is paid back, making the money available to more applicants. A bond program would allow state and local governments (such as LA Metro) to issue bonds secured by a revenue stream (such as the Measure R sales tax) that would be bought by private investors. The federal government’s role would be to provide these investors with federal income tax credits in lieu of interest payments. This enables the federal government to use a relatively small amount of funding — for the tax credits — to leverage significant additional investment from state or local governments and private investors. This makes the bond program appealing to both conservatives who want to stretch federal dollars and New Deal Democrats who want to invest in infrastructure.

The AFF bond program would enable LA County to complete its ambitious 30-10 Plan and to encourage similarly transformative transportation infrastructure improvements in other regions:

The bond program would provide LA Metro with the ability to complete Measure R funded projects now and pay back the principle over time using Measure R sales tax revenues. By providing state and local governments with this financing capacity the federal government would incentivize other regions to do what voters did in Los Angeles County — step up and vote to tax themselves to modernize their transportation systems by creating a revenue stream that can be used to secure financing. This allows the federal government to stretch federal dollars by leveraging additional investment at the state and local levels where in the aggregate there is significantly more money. The U.S. has fallen behind other countries in investing in infrastructure, especially China and India, which are investing aggressively in transportation. Now is the time to make these investments, while interest rates and construction costs are at historic lows and while unemployment remains stubbornly high in many states including California. The AFF bond program is estimated to create 500,000 private sector jobs nationally, and these are good jobs that can support families. Grant programs will remain an essential part of the federal transportation program, but in this time of federal budget constraints financing programs will be key to leveraging additional investment.

The proposed $45 billion AFF bond program will actually cost the federal government only $7.5 billion over ten years while attracting $100 billion in investment:

It is proposed that the bond program be authorized at $4.5 billion a year over 10 years for a total investment of $45 billion. This 10-year $45 billion program is projected to cost the federal government just $7.5 billion since the federal government is only providing tax credits in lieu of interest to investors, while state and local governments would pay back the principle. Since the bonds are only a part of the revenue stream that would be attracted to these investments, this financing program is expected to leverage transportation infrastructure investments worth about $100 billion over 10 years.

The AFF bond program is the third of three parts to the 30-10 Plan to accelerate LA County transit projects:

•  #1: Applications to the Federal Transit Administration’s New Starts funding program for grants for the Westside subway and the Regional Connector — which were recently recommended for funding in President Obama’s 2014 budget;

•   #2: Applications to the U.S. Department of Transportation’s recently expanded TIFIA low-interest loan program. California Senator Barbara Boxer, working with LA Mayor Antonio Villaraigosa and LA Metro, provided the leadership needed to increase funding for this program ten-fold — making TIFIA the largest transportation infrastructure financing fund in U.S. DOT history. LA Metro has applied for a loan.

•  #3: The proposed bond program. It should be noted that this bond program is unlike the bond program that President Obama is called “America Fast Forward” in so far as he is proposing an interest subsidy of only 35 percent, compared to the 100 percent subsidy that Los Angeles is requesting.

Policy precedents for the AFF bond program:

Congress has recently enacted similar tax subsidies for other sectors of the economy but not for large-scale transportation investments. Congress has enacted half a dozen tax credit bond programs since 1997 for purposes such as public education, disaster recovery, clean renewable energy, forestry conservation and energy conservation. These tax credit bonds provide federal buy-downs of 70 to 100 percent of the interest. Each program has a volume cap and maturity limitation.

How the bond program would be structured:

1)      This program would amend section 54 of the Internal Revenue Code to establish a new class of tax credit bonds specifically designed to stimulate greater investment in surface transportation infrastructure projects.
2)      It would authorize the issuance of $45 billion of AFF bonds by state and local governments over a 10-year period. It would be phased in over 10 years ($4.5 billion/ year) to meet the needs of multi-year capital programs, to incentivize states and local governments to create local transportation revenue sources (like Measure R in LA), and reduce the impact of the tax credits.
3)      The Secretary of Transportation would allocate a portion of the total volume cap to sponsors of “major transportation projects” that meet certain goals, such as providing significant regional and national benefits including mobility, safety, economic competitiveness, livability and environmental sustainability. The secretary would allocate the remaining volume cap to the states according to some equitable formula such as each state’s share of the national population.
4)      AFF bonds would be authorized to have a maximum maturity of 35 years, which is longer than other bonds and would therefore require a greater federal subsidy.

Why transportation investments require a special bond program:

While Congress has recently enacted similar tax subsidies for other sectors of the economy it has not done so for large-scale transportation investments such as LA’s transformational Measure R-funded “portfolio” of projects. Current tax law sets a maximum bond term of approximately 15-25 years, which limits the present value benefit of the federal subsidy to 50 percent of debt-financed project costs. However the long life of transportation improvements and the benefits that these investments (especially transit investments) engender above and beyond increased mobility —economic development, jobs, congestion relief and transportation efficiency, emission reductions, energy self-sufficiency, improved livability and safety — provide a strong argument for a longer bond maturity and higher subsidy. We are proposing a maximum maturity of 35 years.


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