Transportation project finance utilizes a wide variety of revenue and funding from federal, state, local, and private sources. Laws and regulations that govern transportation financing also extend from the federal level to the state and local level, where notable differences are found among authorized mechanisms or those that are regularly employed by a particular institution.

Traditional Finance

Traditionally, transportation infrastructure has been financed primarily through a combination of state and local taxes and fees and-for major projects-Federal grants funded by national motor fuels taxes. These resources are typically combined to fund projects on a “pay-as-you-go” basis, meaning that projects have often been built in phases or increments as funds become available over a period of years. Project funding has been tied closely to Federal and state cash management policies, with nearly exclusive responsibility for the process vested in state and local public transportation agencies.

Motor fuel and vehicle taxes are deposited into the Federal Highway Trust Fund (HTF) from which Federal-aid grants are provided, typically on an 80-20 federal-to-state matching ratio. However, state and local funding provides the majority of revenue available to highway projects through state motor fuels and vehicle taxes, tolls, local property taxes, sales taxes and other special assessments, general fund appropriations, and bond issue proceeds. Tax-exempt municipal bond issues have a long history of helping to finance public infrastructure, including local transportation improvements.

Federal aid for transit projects, through formula funds and discretionary grants, is also provided by the HTF, as well as from general fund appropriations. Again, most of the funding is non-Federal, with a majority derived from local sources, including various taxes, public funds, and fare revenues.

Innovative Finance

Innovative finance for surface transportation is a broadly defined term that encompasses a combination of techniques and specially designed mechanisms to supplement traditional financing sources and methods. Innovative finance for surface transportation includes such measures as:

  • New financing mechanisms designed to leverage resources
  • New fund management techniques
  • New institutional arrangements

The Federal Government has had a long history of funding surface transportation infrastructure through grants from the HTF. Innovative finance provides an array of tools and institutional arrangements as alternatives or augmentations to traditional, grant-based funding strategies. Innovative finance techniques have been designed to enhance the effectiveness of grant management and bridge investment gaps between available resources and infrastructure needs. They are intended to maximize the ability of states to leverage Federal capital, attract new sources of funds to transportation investment, accelerate project completion dates, and more effectively utilize existing funds. Often, debt issuance or other forms of credit enhancement have helped facilitate access to a wider range of capital or leverage future revenue streams.

Several of these techniques may not be new or particularly innovative outside of the transportation sector. It is important to recognize that the benefits associated with these tools are not mutually exclusive and that there is potential synergy in combining multiple tools on a single project.

Innovative finance has evolved at the Federal level as a product of dialogue between policy officials in Congress and the executive branch with their partners at the state and local levels. Most of the programs and tools have been enabled by legislative changes to the U.S. Code, Title 23. As transportation finance needs evolve, new tools and programs are likely to add to the field of innovative finance.

Private Finance

The involvement of the private sector in developing, constructing, and operating transportation facilities also introduces additional sources of capital to leverage through project finance mechanisms. Through a public-private partnership, a contractual agreement between a public agency and a private sector entity allows for greater private sector participation in the delivery and financing of transportation projects. To this end, recent legislation and finance mechanisms have helped projects leverage private capital and redistribute project risk.

Sections

  • Other Finance Mechanisms

    Two mechanisms for a public agency to compensate a private entity for their project responsibilities (design, construction, finance, operations and/or maintenance) under a concession arrangement are availability payments and shadow tolls. Availability Payments Availability payments are made to a private concessionaire by a public project sponsor based on project milestones or facility performance standards in […]

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  • Mechanisms to Leverage Federal Aid

    Federal-aid fund management tools are designed to provide states with greater flexibility in managing Federal-aid highway funds. Typically state and local governments must provide 20 percent of the funding for projects benefiting from Federal aid. The principal objective of the management techniques described here is to ease restrictions on the timing of obligations and reimbursements […]

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  • Federal Credit Assistance

    The United States Department of Transportation has developed a number of financial tools to help project sponsors access credit to expedite the implementation of needed transportation improvement. Federal credit assistance can take one of two forms: loans, where project sponsors borrow Federal highway funds directly from a state DOT or the Federal government; and credit enhancements, where a state DOT or the Federal government makes Federal funds available on a contingent (or standby) basis. Credit enhancements help reduce risk to investors and thus allow project sponsors to borrow at lower interest rates. Loans can provide the capital necessary to proceed with a project, reduce the amount of capital borrowed from other sources and may also serve a credit enhancement function by reducing the risk borne by other investors.

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Flexible Funding for Transit and Highway Improvements

Federal law (23 U.S.C. § 104(f); 49 U.S.C. § 5334(i)(1)) allows Federal-Aid Highway Program funding made available for public transportation projects to be flexed (or transferred) to be administered by FTA for public transportation projects. Potentially eligible products include, but are not limited to: Congestion Mitigation and Air Quality (CMAQ) program, Surface Transportation Block Grant (STBG), Tribal Transportation Program, and Flexible Funding for Transit Access.

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