Minnesota Department of Transportation Innovative Finance in Action El Paso, Texas Inner Loop Spur 601




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Minnesota Department of Transportation
Innovative Finance in Action

El Paso, Texas Inner Loop Spur 601

October 2009


Background
The El Paso, Texas Inner Loop Spur 601 represents one of the first projects developed as a pass-through financing agreement (also known as shadow tolling) in the United States. This approach can involve either a private firm or public agency, which provides up-front capital for project development in return for annual payments based on traffic levels on the facility. For this project, the Camino Real Regional Mobility Authority (CRRMA), a newly-created public agency that supports the development of transportation projects using innovative financing approaches in El Paso, served as the conduit bond issuer on behalf of a private developer. CRRMA will be compensated by the Texas Department of Transportation (TxDOT) through semi-annual payments based on traffic levels.
By using pass-through financing, CRRMA estimates that it has accelerated project development by approximately five to ten years ahead of its programmed delivery in the Statewide Transportation Improvement Plan (STIP). In addition, the Inner Loop Spur 601 is helping to establish CRRMA as an agency for the planning, financing, and implementing of transportation projects in the El Paso area. Other distinguishing features relating to this project include the following:


  • This transaction represents one of the first stand-alone, non-tolled (e.g. pass-through or availability payments) projects using tax-exempt debt. A previous shadow toll transaction implemented in Texas utilized a property tax pledge as the primary security for its debt obligations;




  • This newly-formed, local-government agency, which had never issued debt, was able to issue $233 million in tax-exempt bonds. The bond issue received an A rating from Standard & Poor’s and an A2 rating from Moody’s;




  • Because the project doesn’t involve the direct imposition of user fees, it is more politically acceptable. However, there may be a need to further inform potential users that tolls are not involved; and




  • The project did not require TxDOT to take on debt. However, TxDOT is required to pay CRRMA approximately $312 million in semi-annual pass-through financing payments.

The issuance of debt by the CRRMA has the additional advantage of enabling it to build its financial and administrative capacity so that it can develop other projects in the El Paso area. The approach has also allowed CRRMA to establish itself in the municipal debt market. In this manner, this approach is line with TxDOT’s general policy of supporting the development of RMA throughout the state.


Project Description
Table 1 provides a brief description of the project, including project objectives, estimated costs, the contract agreement between the parties involved, and the potential impact on the public sector agencies involved in the transaction.
Table 1: Project Description

Lead Public Agency

Texas Department of Transportation (TxDOT)

Existing Conditions

The project represents the development of a greenfield facility.

Project Description:

The project will involve the construction of a 4-lane, 7.4 mile divided freeway between US 54 and Loop 375. The project will also involve the construction of 6 interchanges. Portions of the facility will be elevated. In addition, there will also be a two-lane frontage road in each direction, a hike and bike trail for portions, and a tank trail for military vehicles along various locations of the facility. The facility can be expanded to six lanes.

Project Objectives

The project is intended to: (i) provide an alternative route to support the movement of military vehicles to and from Ft. Bliss; (ii) reduce congestion; and (iii) improve safety by providing alternative routes for drivers.

Estimated Cost:

$321 million

Payments to Development

Under the terms of the contract, the developer, J.D. Abrams, will receive up to $275.9 million to cover design and construction costs. The payment structure includes: (1) $55.0 million in direct payments from TxDOT to cover construction, design, utility relocation, and other costs; and (ii) $213 million from the bond proceeds. J.D. Abrams is also eligible to receive $7.9 million from CRRMA in pass-through toll payments.

Contract Type

Design-Build-Finance

Contract Duration

15 years

Start Construction

2008

End Construction

2011

Non-Compete Clause

N/A

Revenue Sharing

N/A

Facility Ownership

TxDOT

Toll Setting Authority

N/A

Public Benefits

The pass-through agreement combined with private debt funding has accelerated the start of the El Paso Spur 601 Project by an estimated five to ten years.

Value-for-Money

No formal value-for-money analysis was undertaken. After the J.D. Abrams submitted an unsolicited proposal, TxDOT issuance a request for competing proposals. One other proposal was received. J.D. Abrams’ unsolicited proposal was found to have the best value.

Impact on State Debt Limits

No direct impact. CRRMA is the agency responsible for the payment of debt obligations.

This project will be important for accommodating the area’s economic and population growth. The most recent Master Transportation Plan for El Paso reported that this area has one of the highest growth rates in the State of Texas. Moreover, the announced closing of military bases around the U.S. will result in the transfer of approximately 21,000 additional troops to Fort Bliss. The project would provide an alternative route to Fort Bliss and the El Paso International Airport as well as support congestion reduction and increase safety.


The project was first included in the El Paso Metropolitan Planning Organization’s list of potential projects in 1992. TxDOT carried out preliminary engineering studies and an environmental assessment in 2000. Project development was accelerated when J.D. Abrams submitted an unsolicited proposal for the project in 2005.
The project is being constructed with four inside lanes, but is expandable to an ultimate six-lane configuration. The ultimate configuration will be able to accommodate a future high-occupancy-vehicle (HOV) or managed lane in each direction. It is also planned to have fully directional access ramps at three interchanges and about two miles of elevated freeway. This facility would follow the existing Fred Wilson Avenue through an underdeveloped area north of and along Founders Boulevard and Walter Jones Boulevard. The project would also traverse the property lines between the airport, Briggs Army Airfield, and the Fort Bliss military base. Figure 1 below provides a map of the project.
Figure 1: Proposed Spur 601 Project



Source: Texas Department of Transportation (TxDOT)

Enabling Legislation
Regional Mobility Authorities. Through the enactment of SB-342 in 2001, the Texas Legislature authorized the creation of Regional Mobility Authorities (RMAs) for the purpose of constructing, operating, and maintaining transportation projects. RMAs are political subdivisions of the State of Texas, created by one or more counties or by certain cities to finance, acquire, design, construct, operate, maintain, and expand toll or non-toll transportation projects. In particular, RMAs are legally authorized to undertake the following responsibilities:


  • Study, evaluate, design, finance, acquire, construct, maintain, repair, and operate transportation projects, individually or as a system. Transportation projects and/or systems can include a highway or turnpike project, a passenger or freight rail facility, ferry services, an airport, pedestrian and bicycle facilities, an intermodal hub, an air quality improvement initiative, a public utility facility, and a transit system.




  • Work with Metropolitan Planning Organizations (MPOs) to increase transportation funds;




  • Develop project financing options, which can include the sale of tax-exempt revenues bonds, private equity, public grants, government credit assistance, commercial loans, and user fees; and




  • Issue bonds backed by toll revenues to develop projects and operate toll roads.

TxDOT is authorized to pay per-vehicle fees or a similar mechanism to help RMAs defray some of the costs incurred in project development. RMA Board members cannot be elected officials and must reside within the county that they represent. To avoid potential conflicts of interest, RMA Board members cannot work for TxDOT or other public agencies. As of mid-2009, seven RMAs have been created in Texas1. Similar entities have been created in Arkansas, Colorado, Massachusetts, and Virginia and are being considered in Ohio and Alabama.


Pass-Through Financing. The enabling legislation for pass-through financing (shadow tolling) is SB-3588, which was enacted in 2003. In Texas, any public entity (e.g. RMA, tollway authority, or local government) or private developer can submit an application to TxDOT to fund a project using pass-through financing. Once TxDOT receives a pass-through financing application, it bases its evaluation and recommendation of the proposal on various criteria, including whether the project serves the public interest, schedule, and cost. In 2005, this legislation was amended by SB-1424, which allowed for the use of sales tax receipts and similar funding sources to cover financing and engineering costs in pass-through financing agreements. In 2007, this statute (Section 222.104) was amended again by SB-792, which placed a two-year moratorium on the development of Comprehensive Development Agreements (CDA) for certain projects that could be financed by a private developer. As a result, CRRMA is precluded from allowing a developer to operate a toll project or collect toll revenues unless the project was in the MPO plan prior to May 1, 2007. However, CRRMA is allowed to contract with a developer to design, construct, and/or operate non-tolled projects.
Project Planning and Delivery Method
Below are some of the major milestones in the development of the Spur 601 project:


  • TxDOT received an unsolicited proposal by J.D. Abrams on December 1, 2005. TxDOT subsequently reviewed the proposal and approved further analysis of the project.




  • TxDOT issued a notice of request for competing proposals on January 26, 2006. Only one competing proposal was received. Upon reviewing the proposals, TxDOT determined that J.D. Abrams’ proposal provided the best value. Subsequently, TxDOT awarded the project to J.D. Abrams.




  • CRRMA was established on June 26, 2006.




  • A pass-through agreement was executed between J.D. Abrams and TxDOT on August 30, 2007. The agreement was amended on January 14, 2008 to include CRRMA. In effect, CRRMA assumed financing responsibilities on behalf of the developer and became eligible to receive the pass-through payments from TxDOT.


Project Financing
The project is being financed by CRRMA, which is the conduit bond issuer on the behalf of the private developer, J.D. Abrams. CRRMA is responsible for $233.5 million in bonds and a $16.0 million original issue premium. These bonds are tax-exempt with an interest rate of 5 percent during most of the lending period (the interest rate increases to 5.25 percent from 2018 to 2020). The bonds have a 15-year maturity with a roughly 4.5 year grace period. Standard and Poor’s gave the bonds an A rating, while Moody’s gave the bonds an A2 rating. TxDOT will reimburse CRRMA based on facility usage with semi-annual payments that range from $15.65 million to $17.50 million. Overall, CRRMA will receive a total of $312,450,000 from TxDOT. Table 2 summarizes the sources of funds for the project.
Table 2: Project Sources of Funds

Source

Amount

TxDOT

$55.0 million

Tax-Exempt Bonds

$233.5 million

CRRMA Pass-Through Payments

7.9 million

Original Issue Premium

16.0 million

Interest Earnings

8.9 million

Total

$321.3 million

Source: Official Statement for the Issue of $233.5 million in bonds, January 24, 2008

J.D. Abrams’ Requirements
The project developer is responsible for obtaining financing for the project, design, right-of-way (ROW) acquisition, utility relocation, project construction and project management of Segment A-1 and Segment A-2. To cover design and construction costs, J.D. Abrams will be paid from the following sources of funds: (i) up to $55 million directly from TxDOT. (This amount includes up to $10 million in bonus payments for early completion.); and (ii) $213 million from the bond proceeds. J.D. Abrams is also eligible to receive $7.9 million from CRRMA in pass-through toll payments. However, CRRMA cannot pay the Developer until it has completely paid off the interest and principal from the bonds. TxDOT will own, operate, and maintain the project upon completion and final acceptance.
TxDOT’s Requirement
TxDOT has agreed to provide $367,450,000 to finance the development of the project as well as carry out related works needed to complete the Spur 601 Project. Of this amount, TxDOT will pay J.D. Abrams $55,000,000 for project design and construction, and $312,450,000 to CRRMA in pass-through toll payments during the duration of the contract. It should be highlighted, however, that TxDOT and other state agencies are not responsible for the repayment of debt obligations for the project. In addition, TxDOT will not collect tolls on the facility nor will the project be converted to a toll road.
After substantial completion of the project is achieved, TxDOT will pay CRRMA semi-annual payments of at least $15.65 million but not more than $17.50 million during the contract period. Payments will be based on vehicle-miles traveled. As delineated in the contract, vehicle-miles traveled is not based on point to point travel or on the entrance and exit of vehicles at specific locations, but on actual traffic counts of two classes of vehicles. Table 3 summarizes the vehicle classifications used for the pass-through payments. TxDOT is also responsible for installing the equipment to count vehicles. If there is an equipment failure, then TxDOT will estimate traffic levels using its standard practices. Furthermore, TxDOT will be responsible for maintaining the facility.
Table 3: Shadow Toll Vehicle Classification

Classification

Toll Rate

Vehicles less than 20 feet

$0.25

Vehicles equal to or greater than 20 feet

$0.85

Source: Texas Department of Transportation
Another element of the project is that it appears to involve an implicit guarantee between TxDOT and CRRMA. Pursuant to the contract, TxDOT will pay CRRMA a minimum of $15.65 per each semi-annual payment, regardless if traffic counts and rate charged by vehicle classification do not total this amount. In this manner, TxDOT is carrying the traffic risk on this project. In addition, the contract also has a traffic ceiling in that CRRMA cannot receive more than $17.50 million during a single six-month period, even if actual traffic levels exceed this amount. Because of the guaranteed minimum payments, CRRMA is expected to be repaid within nine to ten years, enabling it to fully service its debt obligations for the project.
CRRMA Requirements
Under this arrangement, CRRMA is serving as a conduit bond issuer for the project. This approach has allowed the project to obtain tax-exempt financing, which is less expensive relative to taxable debt. Although TxDOT has oversight responsibilities for the project, CRRMA can review and comment on design, construction, and quality. In the event of a developer default, CRRMA has the option to assume the developer’s responsibilities.
Complexity
This contract involves a couple of complex elements, including the repayment formula, partial payments, and the involvement of multiple parties. The repayment formula includes a guaranteed payment requirement (minimum and maximum amounts) with payments based on an assessment of vehicle-counts. It is further complicated by the use of the term vehicle-miles travel to describe actual traffic counts and vehicle classifications. Due to the guaranteed minimum and maximum payments, these elements may ultimately be consequential only within a very narrow band.
In addition, the contract makes an accommodation for a partial payment to CRRMA, if the facility opens in the middle of a six-month period, it may involve a partial payment to CRRMA. For example, if the facility opens 57 days into the first semi-annual period, then CRRMA would be paid the following percentage: 123/180* $17.5 million or $11.95 million. The remainder would likely have to be applied at the end of the contract to ensure that CRRMA receives the full aggregate amount agreed to in the contract.

The other complex element of the project is that it involves multiple parties with independent and interdependent responsibilities. While the contract agreement appears to adequately delineate the roles, responsibilities, and risks for party involved, this type of arrangement can create challenges, possibly during design and construction.


Project Challenges
Due to the project’s unique location, ROW acquisition for the project has required coordination with several public agencies and private entities. ROW acquisitions include: (i) the purchase of military housing leases, which are owned by the federal government. (ii) a license agreement with the Union Pacific Railroad to construct bridges over the railroad; (iii) the donation of an easement for land owned by the federal government for use at Fort Bliss; (iv) the transfer of land by the El Paso International Airport, which is a department of the City of El Paso, and (v) the donation of land by El Paso Public Service Board (water and wastewater), and Sun Metro (public transit).
Project Successes

The pass-through agreement combined with private debt funding has accelerated the start of the El Paso Spur 601 Project by an estimated five to ten years. The project will improve access to and from Fort Bliss, improve access to and from the City of El Paso, facilitate growth in the area, and facilitate military movements.


Moreover, this project represents one of the first pass-through (or shadow toll) agreements in the United States. A critical advantage of this approach is that it provides a mechanism for financing project development without the imposition of direct user fees, which is subject to greater political and public sensitivity.
Finally, the project has been successful in establishing CRRMA as an agency for planning, financing, and implementing transportation projects in El Paso. Along these lines, the project was also an important mechanism for the establishing CRRMA in the debt markets. As a result of the pass-through agreement, CRRMA was able to able to issue over $230 million in bonds at competitive lending terms despite being a first-time issuer. In going forward, this project supports CRRMA’s ability to develop additional transportation projects in the area as well as potentially take on additional debt obligations, if necessary.


    Contact: Brad Larsen 651-366-4821/ brad.larsen@state.mn.us

    Mn/DOT’s Innovative Finance Website: www.dot.state.mn.us/funding/innovative



1 Other Texas RMAs include the Central Texas RMA (Austin), Alamo RMA (San Antonio), North East Texas RMA (Tyler, Longview), Cameron County RMA (Brownsville-Harlingen), Grayson County Regional RMA (Sherman, Denison), and Hidalgo County RMA (McAllen)





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