oversight

Transportation Financing: Challenges in Meeting Long-Term Funding Needs for FAA, Amtrak, and the Nation's Highways

Published by the Government Accountability Office on 1997-05-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on Transportation,
                    Committee on Appropriations,
                    U.S. Senate


For Release
on Delivery
Expected at
                    TRANSPORTATION
10 a.m. EDT
Wednesday           FINANCING
May 7, 1997



                    Challenges in Meeting
                    Long-Term Funding Needs
                    for FAA, Amtrak, and the
                    Nation’s Highways
                    Statement of John H. Anderson, Jr.
                    Director, Transportation Issues,
                    Resources, Community, and Economic
                    Development Division




GAO/T-RCED-97-151
    Mr. Chairman and Members of the Subcommittee:

    We appreciate the opportunity to testify on three critical transportation
    financing issues facing the Congress and the administration: meeting the
    long-term funding needs of the Federal Aviation Administration (FAA),
    Amtrak, and the nation’s highways. Each area presents formidable
    challenges that will stretch our limited resources; at the same time,
    pressures remain to reduce the federal budget. Overall, the $38 billion
    proposed in the Department of Transportation’s (DOT) fiscal year 1998
    budget to fund the Department represents about a 1-percent reduction
    from this year’s enacted appropriation. In summary, we have found the
    following:

•   Major financing issues need to be resolved to improve the safety and
    security of our nation’s aviation system. FAA estimates that its needs will
    exceed projected funding levels by about $13 billion over the next 5 years.
    The Congress last year established a national commission to make
    recommendations by August 1997 on how best to finance FAA. Currently,
    FAA receives most of its funding from excise taxes, including a tax on
    domestic airline tickets, but those taxes lapse at the end of fiscal year
    1997. The administration has proposed replacing the current system with
    user fees, and the national commission clearly will be examining this
    option. Developing such fees requires good data for assigning FAA’s costs
    to specific users and policy decisions on such issues as how to allocate
    costs not directly related to any particular user. FAA currently lacks
    sufficient cost data, however, and will not start collecting better data until
    October 1997. As a result, better cost data will not be available before the
    excise taxes lapse or before initial decisions will have to be made about
    how to finance FAA. Deciding among the various financing alternatives
    involves tradeoffs between their (1) ease of administration, (2) impact on
    how efficiently the airport and airway system is used, (3) ability to
    produce an equitable system in which users pay their fair share,
    (4) potential competitive impacts, and (5) other policy goals.
•   Amtrak remains in a very precarious financial position and continues to be
    heavily dependent on federal support to meet its operating and capital
    needs. Amtrak’s passenger rail service has never been profitable and,
    through fiscal year 1997, the federal government has provided Amtrak with
    over $19 billion for operating and capital expenses. Amtrak projects that
    its fiscal year 1997 operating loss could be $783 million. While the
    corporation’s goal is to eliminate the need for federal operating support by
    2002, it is likely that Amtrak will continue to require substantial federal
    financial support—both operating and capital—beyond that time.



    Page 1                                                      GAO/T-RCED-97-151
                        •   DOT  believes that current public spending on the capital needs of highways
                            is inadequate and estimates that $16 billion in additional spending is
                            needed annually just to maintain—not improve—the condition of the
                            nation’s highways. State Infrastructure Banks offer the promise of helping
                            to close the gap between transportation needs and available resources by
                            sustaining and potentially expanding a fixed sum of federal capital.
                            Benefits include expediting the completion of projects, recycling loan
                            repayments to future projects, and obtaining financial support from the
                            private sector and local communities. However, some state officials and
                            industry experts are skeptical that such banks will produce these benefits
                            and believe that (1) the number of projects with a sufficient revenue
                            stream to repay the loans may be insufficient and (2) state infrastructure
                            banks face impediments under state law. Only time will tell. This program
                            is new, and only two states have begun projects under their state
                            infrastructure bank.


                            One of the most difficult financing problems confronting the Congress and
Issues Associated           the administration is how to adequately fund FAA to meet its mission over
With Addressing FAA’s       the long term. Over the years, we have issued numerous reports and
Financial Problems          testimonies that identified shortcomings in FAA’s aviation safety and
                            security programs.1 These shortcomings include the insufficient training of
and Determining the         FAA safety inspectors, inaccurate and incomplete aviation safety databases,
Best Funding                and vulnerabilities in our aviation security systems. Similarly, in the wake
                            of the May 1996 crash of Valujet Flight 592 and the July 1996 crash of TWA
Mechanism                   Flight 800, FAA and the White House Commission on Aviation Safety and
                            Security (the Gore Commission) have concluded that a number of actions
                            are needed to improve the safety and security of our aviation system.2
                            However, how to fund these improvements has not been resolved.

                            Deciding how to meet FAA’s funding needs involves not only determining
                            what FAA’s financial requirements are but choosing the best financing
                            mechanism to meet those needs. Recognizing the seriousness of these
                            issues, the Congress directed that a number of studies be completed.
                            Under the Federal Aviation Reauthorization Act, enacted in October 1996,


                            1
                             See, for example, Aviation Safety: New Airlines Illustrate Long-Standing Problems in FAA’s Inspection
                            Program (GAO/RCED-97-2, Oct. 17, 1996), Aviation Safety: Data Problems Threaten FAA Strides on
                            Safety Analysis System (GAO/AIMD-95-27, Feb. 8, 1995), Aviation Security: Additional Actions Needed
                            to Meet Domestic and International Challenges (GAO/RCED-94-38, Jan. 27, 1994), and Aviation
                            Security: Technology’s Role in Addressing Vulnerabilities (GAO/T-RCED/NSIAD-96-262, Sept. 19,
                            1996).
                            2
                             Final Report to President Clinton, White House Commission on Aviation Safety and Security (Feb. 12,
                            1997) and FAA 90 Day Safety Review (Sept. 16, 1996).



                            Page 2                                                                         GAO/T-RCED-97-151
                                    the Congress required (1) an independent assessment of FAA’s financial
                                    needs and costs, which was performed by Coopers & Lybrand; (2) an
                                    assessment by GAO of airports’ capital needs; and (3) an assessment by GAO
                                    of how air traffic control costs are allocated between FAA and the
                                    Department of Defense (DOD). The act established the National Civil
                                    Aviation Review Commission to, among other things, consider these
                                    studies and recommend to the Secretary of Transportation, by
                                    August 1997, how best to finance FAA.3

                                    While its assessment of FAA’s financial needs identified some areas for
                                    potential savings, Coopers & Lybrand concluded that FAA’s estimates of its
                                    needs through 2002 were reasonable.4 Table 1 compares FAA’s estimated
                                    requirements with the agency’s budget estimates for fiscal years 1998-2002,
                                    which were contained in the President’s fiscal year 1998 budget.5 In
                                    addition, FAA officials estimate that the almost $9 billion potential shortfall
                                    shown in table 1 could increase by an additional $4 billion as the agency
                                    tries to address the Gore Commission’s recommendations to accelerate
                                    the modernization of the National Airspace System.

Table 1: FAA’s Projected Budget
Shortfall, Fiscal Years 1998-2002   (Dollars in billions)
                                                                       FAA’s estimated         FAA’s projected             FAA’s budget
                                    Fiscal year                          requirements                  budget                  shortfall
                                    1998                                            $8.46                    $8.46                        $0
                                    1999                                            10.82                     8.68                    (2.14)
                                    2000                                            11.22                     8.91                    (2.31)
                                    2001                                            11.32                     9.15                    (2.17)
                                    2002                                            11.50                     9.39                    (2.11)
                                    Total                                          $53.32                  $44.59                   $(8.73)
                                    Source: FAA and the President’s 1998 budget.



                                    To help meet these financial challenges, the administration has proposed
                                    that the current approach to financing FAA be changed. Generally,
                                    three-quarters of FAA’s funding comes from the Airport and Airway Trust

                                    3
                                     The Secretary of Transportation is required to consult with the Secretary of the Treasury and report to
                                    the Congress by October 1997 on the Secretary’s recommendations for funding FAA through 2002.
                                    4
                                      Federal Aviation Administration: Independent Financial Assessment, Coopers & Lybrand (Feb. 28,
                                    1997).
                                    5
                                     One component of FAA’s requirements is funding a portion of the cost of developing our nation’s
                                    airports. Last month, we reported that estimates of airports’ annual capital needs during 1997-2001
                                    ranged from $1.4 billion to $10.1 billion, depending on how needs are defined. See Airport
                                    Development Needs: Estimating Future Costs (GAO/RCED-97-99, Apr. 7, 1997).



                                    Page 3                                                                           GAO/T-RCED-97-151
Fund, which in turn, receives most of its funding from a 10-percent tax on
the fares paid by passengers. The remainder of FAA’s funding comes from
the General Fund of the U.S. Treasury. In its fiscal year 1998 budget for
FAA, the administration proposed replacing this system with usage-based
fees starting in fiscal year 1999. The administration also proposed, as an
interim step, $300 million in new user fees in addition to the $100 million
in fees on foreign airlines’ overflights of the United States that were
authorized in fiscal year 1997. FAA has subsequently indicated that the new
fees could potentially be charged for business aviation, international air
cargo, and security activities. Similarly, a coalition of the nation’s largest
airlines advocate replacing the airline ticket tax with usage-based fees.
These airlines believe that they pay more than their fair share of the costs
incurred by FAA in running the airport and airway system and that
competing low-fare airlines underpay.6

In our December 1996 report on the coalition’s proposal to replace the
ticket tax and in our February 1997 testimonies before the Senate Finance
Committee and House Aviation Subcommittee, we stated our belief that, to
the extent possible, commercial users of the nation’s airspace should pay
their share of the costs that they impose on the nation’s airport and airway
system.7 We noted that because the airline ticket tax is computed based on
the fares paid and not on factors that directly relate to FAA’s costs for
providing service, the extent to which the tax fairly allocates costs among
system users is open to question. While many factors drive FAA’s costs, we
found that the coalition’s proposal only incorporated factors that would
substantially increase the taxes paid by low-fare and small airlines and
decrease the taxes paid by the seven coalition airlines. We concluded that
determining how best to finance FAA is a complex problem that requires
careful study and good cost data. Our prior work has shown that FAA does
not have an adequate cost-accounting system and, as a result, has limited
capability to accumulate accurate, reliable cost data.8

On February 28, 1997, Coopers & Lybrand reported that despite FAA’s lack
of a cost-accounting system, it is possible, on an interim basis, to attribute
FAA’s costs to broad categories of users such as commercial airlines as a


6
 The coalition comprises the seven largest airlines—American Airlines, Continental Airlines, Delta Air
Lines, Northwest Airlines, TWA, United Airlines, and US Airways.
7
 See Airport and Airway Trust Fund: Issues Raised by Proposal to Replace the Airline Ticket Tax
(GAO/RCED-97-23, Dec. 9, 1996), Issues and Options in Deciding to Reinstate or Replace the Airline
Ticket Tax (GAO/T-RCED-97-56, Feb. 4, 1997), and Issues Related to Determining How Best to Finance
FAA (GAO/T-RCED-97-59, Feb. 5, 1997).
8
 See Air Traffic Control: Improved Cost Information Needed to Make Billion Dollar Modernization
Investment Decisions (GAO/AIMD-97-20, Jan. 22, 1997).



Page 4                                                                          GAO/T-RCED-97-151
group or general aviation. However, Coopers & Lybrand concluded that
FAA did not have sufficiently detailed or reliable cost data upon which to
base a comprehensive system of new fees charged to specific users (e.g.,
particular airlines). It recommended that if FAA is required to adopt a
comprehensive system of user fees, a modern cost-accounting system
should be implemented to reliably assign costs to specific products and
users. FAA is developing a cost-accounting system as required by the
Federal Aviation Reauthorization Act of 1996 and plans to implement the
system by October 1997. However, FAA’s Manager, Cost Accounting System
Division, told us that developing a sufficient amount of data to accurately
assign costs to specific users will take at least 6 to 12 months after the
system is implemented.

Because the airline ticket tax and other taxes that finance the Trust Fund
lapse on September 30, 1997, better cost data will not be available before
the Congress is faced with the lapsing of those taxes. As a result,
regardless of whether the Congress decides to extend the current excise
taxes, modify them, or implement some other financing mechanism, it will
not have assurance that specific users are assigned their fair share of
costs. When more detailed cost data become available sometime in the
future, a determination could be made to reexamine the financing method
that is chosen.

Notwithstanding the limitations of FAA’s cost data, the data that are
currently available indicate that a large portion—55 percent—of FAA’s
costs are “common,” or not directly related to any particular user. In our
congressionally mandated April 1997 report on the allocation of air traffic
control costs, we concluded that the method for allocating common costs
could have a profound impact on the total cost shares assigned to system
users.9 We reported that in allocating common costs, assumptions and
judgments must be made and that different user groups are likely to have
diverging opinions about what constitutes an equitable allocation of those
costs. We also reported that FAA and DOD strongly disagree about how FAA’s
common costs should be allocated.10 In addition, we noted that whether
and to what extent DOD’s costs for providing air traffic services to civil
users should be included in the development of user fees is another issue
that would need to be resolved if the Congress instituted such fees. If

9
 Air Traffic Control: Issues in Allocating Costs for Air Traffic Services to DOD and Other Users
(GAO/RCED-97-106, Apr. 25, 1997).
10
 DOD believes that it should not bear any of FAA’s common costs because the Department is only a
marginal user of FAA’s air traffic services and has a minor impact on FAA’s cost structure. Conversely,
FAA believes that DOD should be assigned some portion of common costs because, like other users,
DOD benefits from FAA’s air traffic control infrastructure.



Page 5                                                                           GAO/T-RCED-97-151
DOD’s costs are included, fees could be collected from civil users for the
services provided by DOD, thereby providing an offset to what DOD may
owe FAA.

In addition to retaining the ticket tax, there are numerous financing
alternatives for the national commission, and ultimately the Congress, to
consider. Possible options include taxing one or more of the general
indicators of system use, such as departures, passenger enplanements,
seats flown, fuel consumed, or a combination of these indicators.
However, the potential competitive impact of using these indicators as a
basis for allocating FAA’s costs varies greatly depending on which indicator
is used. For example, if a tax on passenger enplanements were adopted
and designed to generate about the same amount of revenue as the ticket
tax, the amount paid by the coalition of the nation’s largest airlines would
decline by about $251 million while the amount paid by competing airlines
would increase by $269 million and commuter carriers by $61 million. In
contrast, a fuel tax would keep the amount paid by the largest airlines and
by competing airlines about the same as each paid under the ticket tax,
but the amount paid by individual airlines would vary.

The various potential financing mechanisms for FAA, whether they be the
$400 million in user fees contained in the administration’s fiscal year 1998
budget or the longer-term options for replacing the ticket tax with
usage-based fees, present policy tradeoffs between their ease of
administration, impact on how efficiently the airport and airway system is
used, ability to produce an equitable system in which users pay their fair
share, and other policy goals. For example, a usage-based formula that
combines several of the common system-usage indicators might provide
the most exact method to ensure that all users pay their fair share of
system costs. However, such a formula may also be so complex that it
would be difficult to administer. By contrast, a fuel tax, while generally
correlating to system use, would be less exact than more complex
formulas but would be easier to administer. Likewise, taxing airlines for
their use of the most congested airports may result in a more efficient use
of the nation’s airspace. However, because the coalition airlines are the
primary users of these airports, this approach may not produce the most
equitable result from their point of view.

Such tradeoffs and the potential competitive impacts of new fees will need
to be carefully studied over the next several months by the national
commission, the Secretary of Transportation, and the Congress. The
financing mechanism that is finally selected should be relatively easy to



Page 6                                                      GAO/T-RCED-97-151
                      administer and help ensure that, in the long term, FAA has a secure funding
                      source, the nation’s airports and airways are used as efficiently as
                      possible, commercial users of the system pay their fair share, and a strong,
                      competitive airline industry continues to exist. Ultimately, it is a policy call
                      for the Congress to decide how to achieve these and other goals.


                      Over the last several years, we have issued a number of reports and
Amtrak’s Financial    testified several times on Amtrak’s financial condition.11 Amtrak’s
Condition and Its     passenger rail service has never been profitable and, through fiscal year
Quest for Operating   1997, the federal government has provided Amtrak over $19 billion for
                      operating and capital expenses. In response to continually growing losses
Self-Sufficiency      and a widening gap between operating deficits and federal subsidies,
                      Amtrak developed its Strategic Business Plan. This plan, which has been
                      revised several times, was designed to increase revenues and control cost
                      growth and, at the same time, eliminate Amtrak’s need for federal
                      operating subsidies by 2002.

                      Our assessment of Amtrak’s financial condition is that, despite some gains,
                      the corporation is still in a very precarious position. It remains heavily
                      dependent on federal support to meet its operating and capital needs.
                      Although actions taken by Amtrak through its business plans have helped
                      reduce Amtrak’s net losses, Amtrak has struggled to reach net loss
                      targets.12 For example, Amtrak’s plans for fiscal years 1995 and 1996
                      included actions to reduce its net loss by $195 million—from about
                      $834 million in fiscal year 1994 (in current year dollars) to $639 million in
                      fiscal year 1996.13 By the end of fiscal year 1996, Amtrak’s loss had
                      declined to about $764 million; however, it was substantially more than
                      planned. In addition, the relative gap between total revenues and total
                      expenses has not significantly closed, and passenger revenues (adjusted
                      for inflation)—which Amtrak has been relying on to help close the
                      gap—have generally declined over the past several years (see apps. I and
                      II). Similarly, the gap between operating deficits and federal operating


                      11
                       See Intercity Passenger Rail: The Financial Viability of Amtrak Continues to Be Threatened
                      (GAO/T-RCED-97-94, Mar. 13, 1997), Amtrak’s Strategic Business Plan: Progress to Date
                      (GAO/RCED-96-187, July 24, 1996), Northeast Rail Corridor: Information on Users, Funding Sources,
                      and Expenditures (GAO/RCED-96-144, June 27, 1996), Amtrak: Early Progress Made in Implementing
                      Strategic Business Plan, but Obstacles Remain (GAO/T-RCED-95-227, June 16, 1995), and Intercity
                      Passenger Rail: Financial and Operating Conditions Threaten Amtrak’s Long-Term Viability
                      (GAO/RCED-95-71, Feb. 6, 1995).
                      12
                        “Net loss” is defined as total revenues minus total expenses.
                      13
                        Net loss for fiscal year 1994 excludes a one-time charge of $244 million for accounting changes,
                      restructuring costs, and other items.



                      Page 7                                                                           GAO/T-RCED-97-151
                           subsidies rose in fiscal year 1996 to $82 million—the highest it had been in
                           the last 9 years.14

                           Amtrak’s continuing financial crisis can be seen in other measures as well.
                           In February 1995, we reported that Amtrak’s working capital—the
                           difference between current assets and current liabilities—declined
                           between fiscal years 1987 and 1994. Although Amtrak’s working capital
                           position improved in fiscal year 1995, it declined again in fiscal year 1996
                           to a $195 million deficit (see app. III). This decline reflects an increase in
                           accounts payable, short-term debt, and capital lease obligations, among
                           other items. A continued decline in working capital jeopardizes Amtrak’s
                           ability to pay immediate expenses. Amtrak’s debt levels have also
                           increased significantly (see app. IV). During fiscal years 1993 through 1996,
                           Amtrak’s debt and capital lease obligations nearly doubled —from about
                           $527 million to about $987 million, in 1996 dollars. These debt levels do not
                           include an additional $1 billion expected to be incurred beginning in fiscal
                           year 1999 to finance 18 high-speed trainsets and related maintenance
                           facilities for the Northeast Corridor and the acquisition of new
                           locomotives.

                           It is important to note that servicing Amtrak’s increased debt takes away
                           from the federal financial operating support needed to cover future
                           operating deficits. In fact, over the last 4 years, interest expenses have
                           about tripled—from about $20.6 million in fiscal year 1993 to about
                           $60.2 million in fiscal year 1996 (see app. V). Because Amtrak pays interest
                           from federal operating assistance and principal from federal capital grants,
                           this increase has absorbed more of the federal operating subsidy each
                           year. During fiscal years 1993 through 1996, the percentage of federal
                           operating subsidies used to pay interest expenses increased from about 6
                           to about 21 percent. As Amtrak assumes more debt to acquire equipment,
                           the interest payments are likely to continue to consume an increasing
                           portion of federal operating subsidies. Amtrak’s fiscal year 1997 operating
                           losses may be even higher than those in fiscal year 1996. As a result of
                           unanticipated expenses and revenue shortfalls, at the end of the second
                           quarter Amtrak projected that its actual fiscal year 1997 year-end net loss
                           could be about $783 million.


Amtrak Has Large Capital   Amtrak’s goal of eliminating federal operating subsidies by 2002 is heavily
Needs                      dependent on capital investment. Such investment—the modernizing of


                           14
                            Operating deficit is the same as net loss, except noncash items (such as depreciation) and the
                           one-time charge taken in fiscal year 1994 are excluded from total expenses.



                           Page 8                                                                          GAO/T-RCED-97-151
property, plant, and equipment—will not only help Amtrak to retain
revenue by improving the quality of existing service but will potentially
increase revenues by attracting new riders.

Amtrak’s capital investment needs are great—both to replace and
modernize current physical assets and to complete new projects such as
high-speed rail service on the Northeast Corridor. For example, in
May 1996, the Federal Railroad Administration (FRA) and Amtrak
estimated that about $2 billion would be needed over the next 3 to 5 years
to recapitalize the south end of the Northeast Corridor and preserve its
ability to operate in the near-term at existing service levels. FRA and
Amtrak estimate that up to $6.7 billion may be needed over the next 20
years to recapitalize the Northeast Corridor and make improvements
targeted to respond to high priority growth opportunities. Amtrak also
estimates that an additional $1.4 billion will be needed to finish the
high-speed rail project.

Our ongoing work indicates that Amtrak has made some progress in
addressing its capital needs, but the going has been slow and, in some
cases, Amtrak may be facing significant future costs. For example, in
October 1996, about 53 percent of Amtrak’s active fleet of 1,600 passenger
cars averaged 20 years old or more and were at or approaching the end of
their useful life. It is safe to assume that as this equipment continues to
age, it will have more frequent failures and require more expensive repairs.

Finally, Amtrak will continue to find it difficult to take those actions
necessary to further reduce its costs. During fiscal year 1995, Amtrak was
successful in reducing and eliminating some routes and services. For
example, Amtrak reduced the frequency of service on seven routes from
daily to three or four times per week, and on nine other routes various
segments were eliminated. Amtrak estimates that such actions saved
about $54 million. However, Amtrak was less successful in making the
route and service adjustments planned for fiscal year 1997. As a result,
Amtrak estimates that its projected fiscal year 1997 net loss will increase
by $13.5 million. Amtrak has also been unsuccessful in negotiating
productivity improvements with labor unions.

Amtrak has staked its financial future on the ability to eliminate federal
operating support by 2002 by increasing revenues, controlling costs, and
providing customers with high-quality service. Although its business plans
have helped reduce net losses, Amtrak continues to face significant
challenges in accomplishing this goal, and it is likely Amtrak will continue



Page 9                                                     GAO/T-RCED-97-151
                       to require substantial federal financial support—both operating and
                       capital—well into the future.


                       In October 1996, we reported that total public spending on the capital
Innovative Highway     needs for highways and bridges was approximately $40 billion in
Financing Through      1993—the most recent year for which data are available—and that DOT
State Infrastructure   estimated that an additional $16 billion annually is needed just to
                       maintain—not improve—the condition of the nation’s highways at the
Banks                  1993 level.15 Moreover, postponing investment can increase costs; DOT
                       estimated that deferring $1 in highway resurfacing for just 2 years can
                       require spending $4 in highway reconstruction costs to repair the damage.

                       In order to stretch limited federal funds, the Congress in 1995 authorized
                       some innovative uses of federal transportation funds. The National
                       Highway System Designation Act of 1995 established a number of
                       innovative financing mechanisms, including the authorization of a State
                       Infrastructure Bank (SIB) Pilot Program for up to 10 states or multistate
                       applicants—8 states were selected in April 1996, and 2 were selected in
                       June 1996. Under this program, states can use up to 10 percent of most of
                       their federal highway funds for fiscal years 1996-97 to establish their SIBs.
                       This program was expanded by DOT’s fiscal year 1997 appropriations act,
                       which removed the 10-state limit and provided $150 million in new funds.

                       A SIB serves essentially as an umbrella under which a variety of innovative
                       finance techniques can be implemented. Much like a bank, a SIB needs
                       equity capital to get started, and equity capital can be provided at least in
                       part through federal highway funds. Once capitalized, the SIB can offer a
                       range of loans and credit options, such as loan guarantees and lines of
                       credit. For example, through a revolving fund, states can lend money to
                       public or private sponsors of transportation projects. Project-based
                       revenues such as tolls or general revenues such as dedicated taxes can be
                       used to repay loans with interest, and the repayments replenish the fund
                       so that new loans can be supported. Thus, projects with sufficient
                       potential revenue streams are needed to make a SIB viable.

                       Expected assistance for projects in the 10 states selected for the pilot
                       program include loans, credit enhancement to support bonds, and lines of
                       credit. In some cases, large projects that are already under way may be
                       helped through SIB financial assistance. Examples of projects that the

                       15
                        State Infrastructure Banks: A Mechanism to Expand Federal Transportation Financing
                       (GAO/RCED-97-9, Oct. 31, 1996).



                       Page 10                                                                    GAO/T-RCED-97-151
    initial 10 pilot states are considering for financial assistance include the
    following:

•   In Orange County, California, a $713 million project that includes
    construction of a 24-mile tollway may receive SIB assistance in the form of
    a $25 million line of credit that would replace an existing contingency
    fund. If the line of credit is used, plans are for it to be repaid through
    excess toll revenues.
•   In Orlando, Florida, a $240 million project that will construct a 6-mile
    segment to complete a 56-mile beltway may receive a SIB loan in the
    amount of $20 million. Repayment of the loan would come from a mix of
    project-related and systemwide toll receipts and state transportation
    funds.
•   In Myrtle Beach, South Carolina, a SIB loan is being considered to help
    construct a new $15 million bridge to Fantasy Harbor. The source for
    repaying the loan would be proceeds from an admission tax at the Fantasy
    Harbor entertainment complex.

    SIB assistance is intended to complement, not replace, traditional
    transportation grant programs and provide states with increased flexibility
    to offer many types of financial assistance. As a result, projects could be
    completed more quickly, some projects could be built that would
    otherwise be delayed or infeasible if conventional federal grants were
    used, and private investment in transportation could be increased.
    Furthermore, a longer-term anticipated benefit is that repaid SIB loans can
    be “recycled” as a source of funds for future transportation projects. If
    states choose to leverage SIB funds, DOT has estimated that $2 billion in
    federal capital provided through SIBs could be expected to attract an
    additional $4 billion for transportation investments.

    For some states, barriers to establishing and effectively using a SIB still
    remain. One example is the low number of projects that could generate
    sufficient revenue to repay loans made by SIBs. Officials from six of the
    states that we surveyed told us that an insufficient number of projects with
    a potential revenue stream would diminish the prospects that their state
    would participate in the SIB pilot program. Officials from 10 of 11 states
    that we talked to about this issue said they were considering tolls as a
    revenue source. However, state officials also told us that tolls would likely
    generate considerable negative reaction from political officials and the
    general public.




    Page 11                                                      GAO/T-RCED-97-151
Some states expressed uncertainty regarding their legal or constitutional
authority to establish a SIB or use some financing options that would
involve the private sector. Michigan, for instance, said that it does not
currently have the constitutional authority to lend money to the private
sector. Another impediment can arise if the SIB exposes the state to debt.
Backing SIB assistance with the full faith and credit of the state is not
legally permitted in some states. Without that guarantee, SIBs will have to
rely on the strength of their project portfolio and initial capitalization as
the basis for borrowing. As such, they are likely to experience higher
borrowing costs than if their portfolio was backed by the full faith and
credit of the state. Bond-rating agencies will have to assess each portfolio
on a case-by-case basis.

Finally, a principal federal barrier to attracting private capital is the fact
that the Internal Revenue Code, with some exceptions, restricts private
involvement in tax-exempt debt. In the case of state and local bonds,
bondholders’ interest earnings are exempt from federal taxes. However,
the tax exemption does not apply to a bond issue if (1) the private sector
uses more than 10 percent of the proceeds and finances more than 10
percent of the debt or (2) more than 5 percent of the proceeds or
$5 million (whichever is less) is used to make loans to the private sector. A
number of federal and state officials and academic experts told us that
states that choose to leverage their banks will likely do so with tax-exempt
debt because bondholders are willing to accept lower interest rates in
exchange for the bonds’ tax-exempt status.

The SIB program has been slow to start up. Only two states—Ohio and
Missouri—have actually begun projects under their SIB. Nevertheless,
since $150 million was provided and the 10-state restriction was lifted in
DOT’s fiscal year 1997 appropriations act, the agency has received
applications from 28 states and Puerto Rico. The program will need time
to develop and mature before a comprehensive assessment of SIBs’ impact
on meeting transportation needs can be assessed. In our October 1996
report, we suggested that once SIBs begin operating, the Federal Highway
Administration could disseminate information on states’ successes and
failures with various financing options and thus help states use SIBs more
effectively and educate other states on the pros and cons of a SIB.


Mr. Chairman, that concludes our prepared statement. We would be happy
to respond to any questions that your or other members might have.




Page 12                                                     GAO/T-RCED-97-151
Page 13   GAO/T-RCED-97-151
Appendix I

Amtrak’s Revenues and Expenses, Fiscal
Years 1988-96


              2700   Dollars in Millions

              2500

              2300

              2100

              1900

              1700

              1500

              1300

              1100

               900

               700

               500

                 1988          1989        1990    1991   1992   1993   1994        1995     1996

                 Fiscal Year


                                Expenses
                                Revenues



              Note: Amounts are in 1996 dollars.

              Source: Amtrak.




              Page 14                                                          GAO/T-RCED-97-151
Appendix II

Amtrak’s Passenger Revenues, Fiscal Years
1989-96


              Dollars in Millions



              1000




               800




               600




               400




               200

                  1989              1990   1991          1992   1993   1994       1995      1996

                  Fiscal Year



              Note: Amounts are in 1996 dollars.

              Source: GAO’s analysis of Amtrak’s data.




              Page 15                                                         GAO/T-RCED-97-151
Appendix III

Amtrak’s Working Capital Surplus/Deficit,
Fiscal Years 1987-96


               Dollars in Millions
               125     113           112
               100                           84
                75
                50
                                                     27
                25
                  0
                -25
                -50
                                                               -36
                -75
               -100                                                     -67

               -125                                                               -100
               -150
               -175                                                                                  -149
               -200
               -225                                                                                           -195

               -250                                                                         -227

                         1987         1988    1989    1990    1991      1992      1993     1994      1995     1996
                         Fiscal Year



               Notes: Working capital is the difference between current assets and current liabilities.

               Amounts are in current year dollars. In 1996 dollars, working capital declined from $149 million in
               fiscal year 1987 to a deficit of $195 million in fiscal year 1996.

               Source: GAO’s analysis of Amtrak’s data.




               Page 16                                                                         GAO/T-RCED-97-151
Appendix IV

Amtrak’s Outstanding Debt/Capital Lease
Obligations, Fiscal Years 1987-96


              1000   Dollars in Millions

               900

               800

               700

               600

               500

               400

               300

               200

               100

                 0

                        1987     1988      1989    1990    1991   1992   1993   1994   1995   1996
                        Fiscal Year



              Note: Amounts are in current year dollars.

              Source: Amtrak.




              Page 17                                                              GAO/T-RCED-97-151
Appendix V

Amtrak’s Interest Expense, Fiscal Years
1987-96


                    Dollars in Millions
               70


               60


               50


               40


               30


               20


               10


                0

                      1987       1988     1989     1990     1991   1992   1993   1994      1995    1996
                      Fiscal Year



               Note: Amounts are in current year dollars.

               Source: Amtrak.




(340646)       Page 18                                                                  GAO/T-RCED-97-151
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