In I-bank debate, states provide successful model

In his jobs speech to Congress tonight, President Obama is expected to double down on a pet project that would boost infrastructure spending, create jobs and -- he says -- generate enough revenue to return taxpayer dollars.

Obama first talked about creating a national infrastructure bank on the campaign trail and has not let up on the proposal since taking office. His most recent budget proposal included a $30 billion transportation bank that would offer large loans to regional projects. In a July news conference, he reiterated his support for the idea, which is expected to be part of the jobs package.

In July, Obama said he envisioned "a project where we're rebuilding roads and bridges and ports and schools and broadband lines and smart grids, and taking all those construction workers and putting them to work right now."

While the concept has been discussed repeatedly in both the White House and on Capitol Hill, it is still unclear what a national infrastructure bank would look like. In short, it's a nonpartisan government body that offers loans to large infrastructure projects with the agreement that the money will be repaid and then repurposed for other projects.

The concept of a government-run bank may be toxic to some politicians and experts, but advocates are quick to say it is not exactly like a bank. The scope of the projects it would cover and even how the money would be distributed are still up in the air.


However, state infrastructure banks offer a possible model for how a national bank might look and operate -- and whether it can be successful.

According to the Federal Highway Administration, 32 states and Puerto Rico currently have state-run infrastructure banks, including California, Ohio and Florida. As of 2008, those banks have distributed $6.2 billion across 609 loan agreements, largely covering transportation projects (although some proposals would have the banks extending to energy and water projects as well).

National proposals floating around the House and Senate vary in size, scope and method. One, from Rep. Rosa DeLauro (D-Conn.) would include grants, while another championed by Sen. John Kerry (D-Mass.), would stick purely to loans. The White House has yet to announce what its proposed bank would look like.

"The [Kerry] proposal makes more sense, but it is rather limited in its scope," said Ken Orski, a former transportation official under the Nixon and Ford administrations. "Essentially that means limiting the projects to revenue-producing facilities, such as toll roads and toll bridges and the number of that kind of projects would be quite limited."

And while states cannot offer a great deal of clarity about how a national bank should operate, they do provide a viable model for what might or might not work. Most of the state banks were established under authority from the 2005 federal highway authorization bill, although some were set up as early as the 1990s. Many have seen a relatively modest investment of state and federal money turn into hundreds of millions of dollars in loan guarantees.

"In Kansas, we have communities that are small and couldn't do their projects otherwise. They couldn't get a bank to loan them money because of credit or they couldn't go into the bond market because of their size," explained Danielle Martin, program manager of the Kansas Transportation Revolving Fund. "We can cover huge projects or a small community."

Kansas -- which used $25 million of state money in 2004 for its first equity transfer -- has now funded some 120 projects with the TRF bank. Martin said that as of fiscal 2010, when it stopped loaning off the initial transfer, the bank had approved $135 million in loans off that initial $25 million. That places it among the largest and most successful state banks in the country.

In fact, the success in states like Kansas and the ease of working with state officials has some leaders in Washington convinced that the best approach might not be setting up a structure in D.C., but simply offering more money to the states.

'Like buying a house'

Cam Gilmour, director of the Transportation Department for Oregon's Clackamas County, is one of the hundreds of project managers who have dipped into a state infrastructure bank to help finance a road, bridge or transit development. Gilmour has already tapped the Oregon SIB on two occasions, once for a four-phase, 5-mile road improvement project outside of Portland.

"We didn't have the cash on hand and we didn't want to go to the general bond market because of some front-end costs and the general interest rates," Gilmour said. "We were aware of Oregon's infrastructure bank and we worked out a lot of details with them."

In the end, Gilmour's agency was able to get a sizable share of the project's $20 million price tag from the state bank, which was able to leverage against other sources to fund the project, to widen a key road in the region to seven lanes and another to four. Most importantly, Gilmour said, the state gave him a much better interest rate than he could have gotten through the private market.

That is a purposeful move, said Tom Meek, who runs the Oregon bank.

"We figure out what kind of interest you'd be paying if you had to borrow a loan, and then we try to make ours a bit cheaper, usually around 15 basis points," he said. "We offer the cheap interest rate as an incentive for them to do these types of projects."

For example, Meek said some projects have not been able to net any financing in the private market, but the appeal of an interest rate that low will attract more partners and get things moving.

The strategy has paid off -- since offering its first loan in 1997, the Oregon bank has paid out more than $80 million in loans, based on an initial federal and state investment totaling about $35 million. That has helped the state build everything from a parking facility for buses to large highway expansions.

Gilmour said that working with the state bank was not unlike dealing with a private body, which really made the whole process easier. Once the two sides discussed the possibility of a loan, Gilmour said the next step was a lot of paperwork, "just like buying a house." Among the pieces of information that officials had to provide was a clear source of revenue, which Gilmour said was not hard to find.

"We had already spent quite a bit of time dealing with the cash flow and we had a fairly rigorous analysis," Gilmour said. "We informed ODOT that our source of revenue was ... related to the amount of development," essentially banking that the larger road would bring more business and growth to the region. That normally would set off red flags, Gilmour said.

In fact, those concerns would have been right, since the economic downturn has caused nearby development to stall. However, the state was able to secure a more reliable form of collateral -- the very gas tax dollars that it would distribute to Clackamas County.

"That's as good as gold," Gilmour said. "They have the authority to reduce our monthly service. For us, that works out very favorably."

Meek said that the application review process generally takes about 60 days, including checking to make sure the project is up to both the state and federal code (because some initial money came from the federal government, it must meet those standards). However, most projects with a reliable funding stream will end up getting funded, he said, and there have been few problems with the repayment process.

Some projects, especially those that rely on transit, can even use farebox fees to repay the project, essentially tying the repayment to the success of the project and shielding it from external forces.

In all, Meek said there have been few complaints. And, most importantly, the program has proved a financial success -- not one project has ever defaulted on its loan.

National vs. state level

With successful test cases like those in Oregon and Kansas, it is obvious why the White House would want to create a bank on the national level. The loans can be used to draw in private partners for large projects, putting more people to work.

But some policymakers are wary of the added bureaucracy and political complications the federal government's involvement would carry with it. Under a transportation reauthorization proposal from House Transportation and Infrastructure Chairman John Mica (R-Fla.), a national proposal would be replaced with expanded authority for state infrastructure banks, which Mica said would free up more money faster.

Even some of the recipients of state money agree.

"I don't see any advantage to a national bank," Gilmour said. "I'm concerned that there's been a disconnect at the federal level between those benefiting from transportation investments and those paying for them. ... I can't make my debt payment to ODOT with more debt."

Gilmour, who worked for the Oregon DOT for 26 years, added that he tried to do very little with the federal government because federal red tape can add up to 30 percent of time and cost to a project.

Former transportation official Orski, who now publishes a transportation newsletter, said the national bank has an advantage in that it can help large, multi-state projects. But, he added, those types of projects are rare and might be better handled through existing structures.

"There is a widespread sentiment both in the House and Senate, rather than creating a new federal fiscal bureaucracy, we ought to strengthen and expand existing financial instruments, primarily TIFIA," he said, referring to the popular Transportation Infrastructure Finance and Innovation Act loan program.

Work on the federal level would also eliminate the easy "set-off" of using gas tax funding to back up a loan, since it would go to projects that might not get a stream of federal money.

Still, Kansas' Martin said, a national bank that used the state programs as a reliable model would do plenty of good, especially if it supported the existing state banks.

"It's just a win, I think, for taxpayers," Martin said. "Here's a $25 million investment of taxpayer money and you're able to improve over $135 million in road projects. That's a good return on investment for the taxpayers."

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