Public-Private Partnerships Potential for Arizona-Mexico Border Infrastructure Projects

Final Report

Chapter 10 - Traditional Funding Mechanisms

Most of today's infrastructure has been built utilizing a design, bid, build delivery mechanism. With this delivery approach the public sector remains responsible for design and construction risks in the form of cost overruns, funding and finance risks, and operational and maintenance risk. Toward the end of last century, there was an increasing acceptance and utilization of a design-build approach for project delivery, thus increasingly transferring design and construction risk to the private sector.

Under both of these delivery models, the public sector retained the responsibility for raising the necessary funding to pay for the capital costs necessary to delivery an infrastructure facility or support a financing to pay for these projects. A number of sources are utilized to provide the required funding for infrastructure projects. A brief over view of the main sources are discussed below.

These traditional funding sources can be used to support or enhance public-private partnership projects depending upon the specifics of a public-private partnership project and the public-private partnership model being utilized. The amount of public contribution or support for a project is often a critical factor in analyzing the appropriateness of a specific public-private partnership model. It is also important to understand the amount of required public funding support when selecting whether a public-private partnership procurement method should be used for a specific project.

10.1 Federal, State or Local Appropriation and Grant Funds

These funding sources include typical transportation funding programs along with potential one-time programs such as the stimulus funds provided by the American Recovery and Reinvestment (ARRA) funds.

Federal Funds: The federal funding sources related to transportation are predominantly those that are related to the Federal Highway Trust Fund and authorized via a transportation authorization act such as SAFETEA-LU, which expires in September of 2009. Discussions on a reauthorization bill are underway but the nature, priorities, and amounts of funding are uncertain. Arizona's federal transportation funding has ranged in the $600 to $650 million dollar per year range over the last few years, not including the approximately $600 million in ARRA funds in 2009. Federal transportation programs funded in Arizona include:

• Interstate Maintenance (IM) Funds
• National Highway System (NH) Funds
• Surface Transportation Program (STP) Funds
• Enhancement (TEA) Funds
• Highway Safety Improvement Program (HSIP) Funds
• Bridge Program (BR) Funds
• Congestion Management and Air Quality (CM) Funds
• Planning and Research (SPR) Funds
• Metropolitan Planning Funds
• Equity Bonus Funds
• Recreation Trail Funds
• Public Lands Highways Funds
• Coordinated Border Infrastructure Program
• Safe Routes to Schools Program Funds
• Federal Transit Agency Section 5310 and 5311 Funds

The largest funding pools are the Interstate Maintenance, National Highway System, and Surface Transportation Program Funds. While the Coordinated Border Infrastructure Program may sound like a strong potential source of funding for border related transportation improvements, Arizona only received $8.9 million from that fund in 2008. A significant share of the federal dollars is passed directly through ADOT to local governments or metropolitan planning organizations for use on local projects.

State Funds: Arizona also has state transportation funding provided directly from state taxes on motor fuels, vehicle license taxes, and state lottery proceeds. Many of these funds are distributed directly to local units of government for use on local transportation projects. State transportation funding includes:

• Highway User Revenue Fund (HURF) - motor fuels and vehicle licenses
• Additional non HURF Vehicle License Tax Funds
• Local Transportation Assistance Funds (LTAF 1 and LTAF 2) - lottery funds
• Regional Area Road Fund (RARF) - Maricopa County only but administered by ADOT - transportation excise tax in Maricopa County only

The state also has programs allowing for bonding against these funds as discussed in some of the sections below.

Local Funds: Most of the local funds and grants for transportation are related to the federal and state funding discussed above. Local funding participation in Arizona Border Crossing related transportation improvements is more likely for crossings in urbanized areas and areas with metropolitan planning organizations where there are greater amounts of federal and state transportations dollars flowing directly to the local community.

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10.2 General Obligation Bonding

General Obligation Bonds are the most common form of debt issuance by state and local governments. These bonds require a pledge of the "full faith and credit" of the issuing jurisdiction. Principal and interest payments are made from general revenues of the issuing jurisdiction. General Obligation Bonds provide a low, tax-exempt rate of interest for the borrowers and create an opportunity to proceed with a project immediately once the bonds are approved.

Often states and local governments require voter approval of General Obligation Bonds or at a minimum legislative approval. Careful planning is required to analyze the condition of the community and their financial position in order for rating agencies to rate and ultimately place these bonds. Many communities have successfully linked major development and infrastructure project with a long-term bonding strategy, allowing them to complete important public projects that enhance the quality of life in the community and attract high quality private development as well.

10.3 Revenue Bonding

Revenue bonds are used for the construction of infrastructure projects when a revenue stream can be identified that could be pledged to repay the bonds in the future. Revenue bonds are limited liability instruments that are generally "off balance sheet" finance tools for local governments or authorities. The revenue stream may be anticipated grant or appropriation funding from another unit/level of government.

The Arizona State Transportation Board issues Highway User Revenue Bonds to accelerate the construction of highway construction projects throughout the state. The pledged revenue for the bonds is the HURF funds deposited in the State Highway Fund. The bonds are an obligation of the State Transportation Board and are not obligations of the State of Arizona.

Grant Anticipation Notes or GANs allow a governmental entity to borrow against future grants from another governmental entity. These are used when a grant is pledged over a series of fiscal years. Arizona currently issues Grant Anticipation Notes to expedite certain transportation project. GANs allow the state to pay the federal share of transportation projects in advance of the actual receipt of Federal highway funding. Local communities may participate by paying the cost of interest on the notes. In 2008, ADOT issued $68 million in GANs.

A Grant Anticipation Revenue Vehicle, or GARVEE Bonds, is typically issued by state governments to finance the construction of transportation projects. GARVEES are typically repaid with apportionments from future federal highway transportation bills. Like GANs, GARVEEs allow projects which will be funded in future years to be constructed prior to the actual grants being funded. Unlike GANs which borrow against grants that have already been authorized by current federal transportation authorization bills, GARVEES borrow against future transportation bills which have not been authorized.

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10.4 Special Local Taxation Districts or Taxes

Local governments have several special taxation tools at their disposal for use in funding transportation projects. The availability of specific local finance options for local border crossing projects will depend on the legislative and regulatory mandates for the local community with regards to these finance options. Potential local taxation measures and districts could include:

• Special Districts: A special district allows a local government to deliver specific public services within a defined boundary and assess a special tax to cover the cost of these services. Many special districts are created to serve a single purpose such a wastewater treatment but there are multi-function districts that provide a range of special services including transit, roadways, parking, streetscapes, and other services determined to be beneficial to the property within the district. Special districts are governed by state law and are generally established by property owners within the district.
• Tax Increment Financing: Tax increment financing allows a community to capture, for a specific period of time, the tax revenues generated from the increased value of properties within an established "TIF" district. The "TIF" allow communities to capture increased property taxes that result from development or redevelopment of an area. The increased revenue increment is used to repay the financing that funded the improvements creating the increased value within the district. Several Arizona communities use TIF districts after being grandfathered into the system, but they are not currently allowed in Arizona.
• Dedicated Sales or Excise Taxes: A dedicated tax is placed on the sale of goods and/or services within a jurisdiction or special district. This can be a tax on the sale of all goods, or is a targeted tax on specific goods or services, such as on hotel rooms. The proceeds from the tax are dedicated to pay for a specific improvement project, including transportation improvements. Implementation of this type of tax typically requires approval of the voters within the geographic boundaries subject to the tax. In Arizona, Maricopa County collects a ½ sales tax for the whole county which is dedicated to transportation although not to a specific project. The revenue for this task coordinated with the ADOT through the Regional Area Road Fund.
• Dedicated Property Taxes: Similar to a dedicated sales tax but in this case a dedicated property tax is placed on property within an entire community or district similar to a millage for other services. The proceeds from the tax are dedicated to pay for a specific improvement project, including transportation improvements. Implementation of this type of tax also typically requires approval of the local or district voters that would be subject to the tax. Typically the tax has a sunset provision that ends the tax collection after a certain number of years.

10.5 Federal, State, Local or Private Sector Donations and Matches

The Federal-Aid Highway Program statutorily requires recipients of Federal assistance to contribute toward the total cost of any given project. In traditional Federal-aid financing, the State typically must provide matching State funds in order to receive Federal funds for a project. Historically, only cash contributed by State and local governments could satisfy the matching requirements. Currently donations can be made in cash, land, materials, and services can be counted toward the non-Federal match of Federal-aid projects. This flexible match provides new opportunities for private investors to participate in highway projects.

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