Over the next few weeks, I will be highlighting six national transportation policies that need to be changed. 2015 provides a great opportunity to seek these changes because the federal bill that governs surface transportation policy is up for renewal. Republican majorities in the House and the Senate should create a more free-market oriented transportation policy.
Today’s recommendation is to add taxpayer safeguards to the Railroad Rehabilitation and Improvement Financing (RRIF) program. RRIF was created by 1998’s TEA-21 legislation. Under its provisions, the Federal Railroad Administration (FRA) can devote up to $35 billion to loans and loan guarantees for freight and passenger railroad infrastructure. Unlike DOT’s Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program, there are few taxpayer safeguards in RRIF, other than a requirement for recipients to pay a credit risk premium. Loans may be extended for 100% of a project’s estimated cost with no explicit requirement for a dedicated revenue repayment stream.
We recommend adding four taxpayer safeguards similar to those in TIFIA. First, restrict RRIF loans to 33% of the project’s budget. Second, require that senior debt of the project carry an investment-grade rating. Third, require that the loan recipient document the existence of a revenue stream dedicated to retiring the RRIF and other loans. And fourth, require that in the event of project bankruptcy, the RRIF loan moves to equal status with the primary debt (called the “springing lien” provision in TIFIA).
Why are these safeguards needed? The current RRIF program in effect invites applicants to apply for loans for risky, speculative projects. RRIF should be reconceived as providing supplemental, gap-closure financing, like TIFIA, rather than being the primary or sole source of a project’s financing. The speculative XpressWest high-speed rail project was ultimately rejected by the FRA, but only after strong objections were raised by Members of Congress. That project had requested a RRIF loan of $5.5 billion, which was between 80 and 100% of the estimated project budget. Limiting RRIF loans to a maximum of 33% (as in the original TIFIA legislation) would make it clear that projects must demonstrate their economic and financial feasibility by being able to attract primary financing (investment-grade senior debt) from the capital markets, with RRIF providing supplemental, gap-closure financing. Together with the requirement for the applicant to document the existence of a dedicated revenue stream, these reforms would provide significant protections for federal taxpayers, akin to those of the successful TIFIA program.
This change could save taxpayers billions. The taxpayer protection provisions would reduce the number of risky, speculative loan applications, thereby saving FRA time and money in processing them, resulting in modest FRA budgetary savings. More broadly, the provisions would protect taxpayers from future defaults that could result in billions of dollars in unpaid RRIF loans.