Wednesday, January 15, 2014

Perspective: Refining RRIF to include commuter rail

Written by  Barney A. Allison, Nossaman LLP
Barney A. Allison, Nossaman LLP Barney A. Allison, Nossaman LLP
Famed French writer Victor Hugo said, “There is one thing stronger than all the armies in the world, and that is an idea whose time has come.” Repurposing the Railroad Rehabilitation Improvement Financing program (RRIF) is an idea whose time has come.

It’s working for freight rail. Launched in 1998, RRIF authorizes the Federal Railroad Administration (FRA) to lend up to $35 billion for railroad infrastructure improvements, equipment, and facilities development.

A successful model, RRIF has helped primarily short-haul rail companies improve, expand, refinance, and acquire freight rail facilities and equipment. Open to railroads, state and local governments, government-sponsored authorities, and corporations, the program provides direct federal loans and loan guarantees for up to 100% of a project’s cost.

Repayment periods are up to 35 years, and interest rates equal the U.S. Treasury rate for comparable-term securities. Though entities must pay a credit risk premium (CRP), the CRP can be reduced with collateral. And those terms have proven attractive.

To date, 33 loans have been executed in 26 states for more than $1.7 billion, with 72% of those loans executed with Class II and III railroads.

And through RRIF, Amtrak will receive 70 new U.S.-built electric locomotives and upgrade maintenance facilities for Northeast Corridor services.

It is now time to transform RRIF into a source of financing for large commuter rail projects.

According to the American Public Transportation Association’s 2012 Fact Book, “The 10.4 billion boardings on public transportation in 2011 represent ridership levels that have grown back to levels that existed at the start of the Interstate highway era.”

Demand for public transportation is real and growing, but oddly, commuter rail demand lags other modes.

“Commuter rail—which connects city centers with suburbs—had the smallest growth of any transit system in the U.S. at 0.5%,” explains Tyler Falk in his article “U.S. cities are building commuter rail, so where are the riders?” (Smart Planet, 6/18/13).

What’s the key? “More service,” Falk says. Greater frequency and interconnectivity will increase ridership, meeting an untapped demand of currently underserved riders.

Falk is right. And that’s why RRIF could become a powerful tool for commuter rail. But Congress must act. Recently, I attended an invitation-only roundtable organized by FRA Deputy Administrator Karen Hedlund, where she sought ideas for expanding RRIF.

Taking a page from the Transportation Infrastructure Finance and Innovation Act (TIFIA) for highways, Hedlund rightly sees the opportunity to transform RRIF into a source of low-cost debt capital for commuter rail, with some mode-appropriate changes.

For example, RRIF needs to recognize more than just hard assets as collateral, considering, for example, dedicated, creditworthy revenue streams such as sales taxes. In addition, Congress should consider seeding RRIF with funds to pay the CRP, similar to what it did for the TIFIA program.

Also, with the next round of TIGER (Transportation Investment Generating Economic Recovery program) federal funding, entities should be allowed to use TIGER grants to pay the credit risk program a la TIGER TIFIA.

In addition, RRIF should create separate loan approval processes for passenger rail projects vs. short line railroads.

Other possible improvements could include:

• Development of credit criteria for greater predictability.

• Use of credit ratings.

• Technical assistance by the FRA and state agencies.

• Use of TIFIA-type letters of interest.

• Use of TIFIA and RRIF in combination (which was done for Regional Tranportation District’s Denver Union Station project).

• Master credit agreements.

• Subordination of other government liens to RRIF.

• Scheduling of critical path activities. Finally, RRIF would need additional funds for staff—bringing on financial and legal consultants—to expedite credit application processing.

But no matter how it is refined, RRIF can make a very real difference in commuter rail.

Soon the House Transportation and Infrastructure Committee will begin marking up a new rail bill. We should convince them that repurposing the Railroad Rehabilitation Improvement Financing program for commuter rail is an idea whose time has come.

Barney A. Allison, a partner at Nossaman LLP, is a public finance expert recognized for his specialized experience in forming and financing public-private partnerships and other transactions involving private financing to develop infrastructure projects.