Types of Alternative Financing

Loan Programs

In addition to funds provided through earmarks and grants, some Federal government programs disburse funds through direct loans and/or loan guarantees.

A direct loan is a disbursement of funds by the Federal government to a non-Federal borrower under a contract that requires repayment of such funds with or without interest.  A loan guarantee is any guarantee, insurance, or other pledge by the Federal government with respect to the payment of all or a part of the principal or interest on any debt obligation of a non-Federal borrower to a non-Federal lender.

Compared with programs which are fully funded solely through appropriations, loan programs have the advantage of leveraging limited amounts of Federal funds, allowing for programs much larger than those that could be afforded if the entire amount had to be directly appropriated.

The budgetary treatment of loan programs is prescribed in the Federal Credit Reform Act (FCRA). Under the FCRA, the cost of direct loans and loan guarantees, sometimes called the ‘‘subsidy cost,’’ is estimated as the present value of expected disbursements over the term of the loan less the present value of expected collections.  As for most other kinds of programs, agencies can make loans or guarantee loans only if Congress, in annual appropriations acts, has appropriated funds sufficient to cover the subsidy costs or provided a limitation on the amount of direct loans or loan guarantees that can be made.

An example of this leveraging can be seen in the Department of Agriculture’s Rural Water and Waste Disposal Program.  This program provides direct loans to municipalities, counties, special purpose districts, Indian Tribes, and non-profit corporations to develop water and waste disposal systems in rural areas and towns with populations of less than 10,000.  The program also guarantees water and waste disposal loans made by banks and other lenders.  In the budget he submitted to Congress for fiscal year 2009, the President proposed a loan level of $1.3 billion for direct loans and $75 million for guaranteed loans.  The “subsidy cost” that Congress needs to appropriate to cover that amount of loan activity is only $48 million.

A recently enacted loan guarantee program is the Twenty First Century Water Works Act, signed into law on December 22, 2006.  This program authorizes the Secretary of the Interior to guarantee loans made in support of construction of a rural water supply project; an extraordinary operation and maintenance activity or the rehabilitation or replacement of a facility that is authorized by Federal reclamation law and constructed by the United States; or an improvement to water infrastructure directly associated with a Bureau of Reclamation project that, based on a determination of the Secretary improves water management.  Final regulations governing the operation of this program have not yet been released.

Bonds and Notes

State and local governments issue bonds as a means of borrowing money to undertake major infrastructure improvements in their communities.

Tax-Credit Bonds:  The Federal tax code permits the interest on bonds issued by state and local governments to be tax-free.  In the case of tax-credit bonds, bondholders receive a credit against their federal income tax liability instead of cash interest.   Bondholders must report the tax credit as income, but after calculating their tax liability as if they had received that compensation in cash, they can subtract the amount of the credit from the tax due.

An example of a tax-credit bond that has been authorized by the Congress is the Clean Renewable Energy Bond, authorized in section 1303 of Public Law 109-58, the Energy Policy Act of 2005.  Clean renewable energy bonds are available to electric cooperatives to finance qualified energy production projects which include wind facilities, bio-mass facilities, geothermal or solar energy facilities, and other types of projects.  The national limit on the bonds which can be issued through 2008 established by the Act is $1.2 billion of which a maximum of $750 million can be granted to governmental bodies.

General Obligation Bonds: Typically the least risky, and least expensive municipal debt, government obligation bonds are secured by the issuers’ “full faith and credit” — pledging repayment through general tax collections. These bonds are commonly used for projects that don’t generate revenue, such as schools and parks, and in some states require voter approval.

Assessment Bonds: Used for public improvement projects, assessment bonds are repaid by fees or taxes collected from beneficiaries. A common type of assessment bond for sidewalks is repaid through taxes on a neighborhood’s residents.

Revenue Bonds: These long-term bonds are typically repaid with collections from the projects they finance. These bonds are designed to be self-supporting and generally don’t require extra taxes. A bond to build a parking garage might be repaid through parking fees.

Revenue Anticipation Notes: Governments sometimes borrow using revenue anticipation notes when revenue won’t be available for some time, hampering cash flow. They are commonly issued at the start of the fiscal year and mature at year’s end, when the anticipated revenue is collected.

Commercial Paper: Short-term debt called commercial paper matures between one and 270 days. Commercial paper is mostly used by corporations for short-term cash-flow needs, but states and municipalities also use it. New York City, for example, uses this type of debt for water and sewer projects.

Transportation Infrastructure Finance and Innovation Act - TIFIA

The Transportation Infrastructure Finance and Innovation Act (TIFIA), enacted as part of the TEA-21 legislation in 1998, established a federal credit program for eligible transportation projects of national or regional significance under which the U.S. Department of Transportation (DOT) may provide three forms of credit assistance – secured (direct) loans, loan guarantees, and standby lines of credit.  The program's fundamental goal is to leverage federal funds by attracting substantial private and other non-federal co-investment in critical improvements to the nation's surface transportation system.  The DOT awards credit assistance to eligible applicants, which include state departments of transportation, transit operators, special authorities, local governments, and private entities.  The major program requirements for TIFIA are: (1) the total cost of the project must be at least $50 million ($15 million for intelligent transportation systems); (2) the TIFIA contribution is limited to 33 percent of the total cost of the project; (3) the project's senior debt must be rated as investment grade; and (4) the project must have available dedicated revenues for repayment.

Under TIFIA's rolling application process, each sponsor can determine the best timing of a TIFIA application, based on the status of project development and the project's particular needs.  The first step for a project sponsor considering credit assistance to finance the project is to contact the DOT's TIFIA Joint Program Office (JPO) in order to determine the project's potential suitability for TIFIA assistance.  Then to begin the application process, the prospective applicant submits a detailed letter of interest to the TIFIA JPO.  On the basis of the letter of interest, DOT will determine whether the project meets the basic eligibility requirements for participation in the TIFIA program.  Upon DOT's confirmation that the project meets the basic eligibility criteria, the project sponsor may submit a formal application, following published guidelines.  At the time of application, the project sponsor is required to pay a non-refundable application fee, currently $30,000.