Colorado Legislative Council Staff

STATE and LOCAL

CONDITIONAL FISCAL IMPACT

TITLE:            CONCERNING TRANSPORTATION REVENUE ANTICIPATION NOTES.

Background Information

            Section 311 of the National Highway System Designation Act of 1995 changed how states may use federal transportation aid for issuing bonds. Prior to 1995, federal transportation aid could only be used to pay the principal of a bond issue but not the interest or other related financing costs. The 1995 change allowed federal transportation aid to be used for payment of the principal, interest, financing, insurance, and other related bond issue costs. The change also required that projects built utilizing this new funding method would have to be eligible for normal federal aid funding, pre-approved by the federal government as an advanced construction project, and the amount approved would be equal to the federal share of the project (generally 80 percent federal share). It should also be noted that the Transportation Equity Act for the 21^st Century (TEA-21) has a minimum guarantee that states will receive no less than 90.5 percent of their contribution to the Federal Highway Trust Fund. This attempts to minimize the risk of reduced federal funding for the six-year authorization period provided by TEA-21.

Summary of Legislation

            This bill would allow the Colorado Department of Transportation (CDOT) to issue transportation revenue anticipation notes ("TRANs") to finance qualified federal aid transportation projects. The notes, financing, and administrative costs related to issuing the notes would be paid from: federal funds; state highway funds; note proceeds; or funds from political subdivisions that can be used to finance transportation projects; and certain other non-state revenues (insurance, letters of credit, and stand-by credit agreements). Should federal funds not be sufficient to pay principal, interest, and associated costs, state matching funds would be used and would be reimbursed by the federal transportation funds when received. Note proceeds may be pledged for the payment of notes or credited to the State Highway Supplementary Fund. Constitutionally earmarked state funds for highways would be used only to pay for the portion of notes issued for qualified federal aid transportation projects that are highway projects. However, a portion of the sales and use tax diversion could be used to finance other transportation projects.

            The aggregate amount of the annual installment payments for principal and interest on TRANs during any given fiscal year would be limited to fifty percent of the federal transportation funds received in the previous fiscal year. CDOT would be able to refund TRANs, to engage services required to issue TRANs, and to enter into interest rate exchange agreements for TRANs.

            Payment of the notes and the related costs would be subject to annual allocation by the Transportation Commission. The owners or holders of TRANs would not be able to receive payment from any other state revenue source for the payment of the notes. Proceeds from TRANs would not be included in state fiscal year spending. State political subdivisions would be given the ability to assist in the financing, construction, operation, and maintenance of qualified federal aid transportation projects. CDOT would be required to report annually to the General Assembly.

State Revenues

            State HUTF revenues and federal transportation funds received by Colorado would not change as a result of this bill. The bill is permissive and should the Transportation Commission choose to utilize TRANs, designate state funds for this purpose, apply for federal discretionary funds, and enter into agreements with the Regional Transportation District (RTD) and other local governments, there would be a fiscal impact. However, this bill would not result in increased revenues from state taxes, fees, or penalties, nor would the state receive additional federal moneys that are not authorized and appropriated.

            Additional money would be generated from proceeds of the sale of the TRANs should CDOT choose to sell TRANs. It is assumed that CDOT would not be able to issue the TRANs until FY 2000-01. The bill allows CDOT several options on how to handle the proceeds. CDOT could contract with a third party to hold the note proceeds in trust and the third party would pay the costs of projects from the proceeds. The state could also deposit the proceeds into the State Highway Fund or State Highway Supplementary Fund and pay the costs of projects from the proceeds. The bill states that the notes would be contingent upon the Transportation Commission’s annual appropriation and would not constitute a debt or multi-year debt and would not be subject to state fiscal year spending limits.

            The provisions that would allow CDOT to enter into intergovernmental agreements with cities, counties, and other political subdivisions of the state to help finance the costs of construction projects are assessed as having no revenue impact. The number and nature of any agreement are not known. It is assumed that the intergovernmental agreements would involve existing revenues and property that would be used to help finance a project. No additional revenues are anticipated to flow to the state as a result of this provision.

 State Expenditures

            Should CDOT choose to sell TRANs, CDOT would have additional costs of issuing the notes and the interest charged for the use of the proceeds. The costs of issuing the notes, insurance, and the interest charged is not known. However, the bill would limit the annual payment for principal and interest that can be made to half of the previous year’s total federal transportation funds received.

            The following information is provided for illustrative purposes only. Should CDOT issue notes to generate $1.0 billion for construction over a 15-year period, CDOT would have to issue approximately $1,114,460,000 in notes. A reserve fund would require approximately $101,924,547. The costs of issuance, underwriter’s fee, and bond insurance would be approximately $12,535,453. The following scenario assumes a level gross debt service with level monthly draws on the construction fund. The annual payment required to pay the principal and interest is estimated to be between $97 and $102 million annually depending on whether interest earnings on the reserve fund (approximately $2.3 million annually) would be used to help pay off the notes. This would assume a Aa equivalent rating on the notes with interest charges ranging from 3.2 percent to 4.8 percent. The average interest charge would be estimated at 4.6 percent. The total interest paid over the 15 year period would be approximately $438,109,597.

            Under this scenario, CDOT may contract with a third party to handle the proceeds from the sale of the bonds or put the proceeds in the State Highway Supplementary Fund. Should CDOT choose the third party, there would be an additional cost of managing the proceeds. The minimum estimated cost of managing the proceeds is a one-time cost of approximately $110,000. The amount of interest earned on the proceeds would be governed by the federal rules of arbitrage. Any excess arbitrage earnings would be returned to the federal government. However, if CDOT spends the proceeds faster than the arbitrage time constraints, the State Treasury may be able to generate more interest earnings at 6.0 percent than the private sector may generate at approximately 4.5 percent.

            The table on the following page provides a ten-year picture of the highway funds that would have been available for annual payments since FY 1994-95 if this bill had been in effect at that time. The table contains:

            •   actual figures FY 1994-95 to 1997-98 and estimates from FY 1998-99 to 2004-05;

            •   federal appropriations to Colorado for highways under ISTEA and TEA-21;

            •   formula allocations from FY 1998-99 to 2004-05 increased at 12.2 % annually;

            •   discretionary funds that are not guaranteed under TEA-21; and

            •   discretionary estimates from FY 1998-99 to 2004-05 increased at 1.2 % annually.

Highway Funds Available for Annual Payments had HB 99-1325 been in effect in FY 1994-95

($ in millions)

            This table does not include an estimate of the possible transit funds and discretionary transit funds that may be available through an intergovernmental agreement with RTD. The transit funds that may be available are in addition to the highway funds CDOT may provide. The table below provides an indication of the amount of transit funds that may be available for payments should RTD and CDOT sign an intergovernmental agreement. The table contains:

         •  actual figures from FY 1994-95 to 1998-99 and estimates for FY 1999-00 to 2004-05;

         •  federal appropriations to RTD for transit under ISTEA and TEA-21;

         •  formula allocations for FY 2003-04 to 2004-05 increased at 7.0 % annually;

         •  fixed guideway funds that are not guaranteed under TEA-21; and

         •  fixed guideway estimates for FY 2003-04 to 2004-05 increased at 18.3 % annually.

Transit Funds Available for Annual Payments had HB 99-1325 been in effect in FY 1994-95

($ in millions)

Local Government Impact

         The intergovernmental agreements which CDOT may reach with local governments are not known at this time. It is assumed that the agreements would use existing resources and revenues to fund projects under this bill and that there would be no fiscal impact to local governments. This bill would allow local governments to use existing resources for purposes other than what current law allows. This bill is assessed as having no fiscal impact to local government revenues or expenditures. It does allow local governments to use existing resources for different purposes.

State Appropriations

         This fiscal note implies that no appropriation is required to implement this bill in FY 1999-00.

Departments Contacted

Transportation Revenue State Treasure OSPBRTD