Transportation Financing: Challenges in Meeting Long-Term Funding Needs
for FAA, Amtrak, and the Nation's Highways (Testimony, 05/07/97,
GAO/T-RCED-97-151).

Overall, the $38 billion proposed in the Department of Transportation's
fiscal year 1998 budget represents about a one-percent reduction from
the agency's current appropriation. This testimony focuses on three
critical transportation financing issues facing Congress and the
administration: meeting the long-term funding needs of the Federal
Aviation Administration, Amtrak, and the nation's highways. Each area
presents formidable challenges that will stretch limited resources in a
time of continuing pressure to reduce the federal budget.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-97-151
     TITLE:  Transportation Financing: Challenges in Meeting Long-Term 
             Funding Needs for FAA, Amtrak, and the Nation's
             Highways
      DATE:  05/07/97
   SUBJECT:  Air transportation operations
             Railroad transportation operations
             Public roads or highways
             Transportation safety
             Financial management
             Future budget projections
             Federal aid for transportation
             Revolving funds
             User fees
             Capital
IDENTIFIER:  Airport and Airway Trust Fund
             Amtrak Strategic and Business Plan
             Amtrak Northeast Corridor
             DOT State Infrastructure Bank Pilot Program
             Ohio
             Missouri
             
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Cover
================================================================ COVER


Before the Subcommittee on Transportation,
Committee on Appropriations,
U.S.  Senate

For Release
on Delivery
Expected at
10 a.m.  EDT
Wednesday
May 7, 1997

TRANSPORTATION FINANCING -
CHALLENGES IN MEETING LONG-TERM
FUNDING NEEDS FOR FAA, AMTRAK, AND
THE NATION'S HIGHWAYS

Statement of John H.  Anderson, Jr.
Director, Transportation Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-151

GAO/RCED-97-151


(340646)


Abbreviations
=============================================================== ABBREV

  FAA -
  DOT -
  DOD -
  FRA -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify on three critical
transportation financing issues facing the Congress and the
administration:  meeting the long-term funding needs of the Federal
Aviation Administration (FAA), Amtrak, and the nation's highways. 
Each area presents formidable challenges that will stretch our
limited resources; at the same time, pressures remain to reduce the
federal budget.  Overall, the $38 billion proposed in the Department
of Transportation's (DOT) fiscal year 1998 budget to fund the
Department represents about a 1-percent reduction from this year's
enacted appropriation.  In summary, we have found the following: 

  Major financing issues need to be resolved to improve the safety
     and security of our nation's aviation system.  FAA estimates
     that its needs will exceed projected funding levels by about $13
     billion over the next 5 years.  The Congress last year
     established a national commission to make recommendations by
     August 1997 on how best to finance FAA.  Currently, FAA receives
     most of its funding from excise taxes, including a tax on
     domestic airline tickets, but those taxes lapse at the end of
     fiscal year 1997.  The administration has proposed replacing the
     current system with user fees, and the national commission
     clearly will be examining this option.  Developing such fees
     requires good data for assigning FAA's costs to specific users
     and policy decisions on such issues as how to allocate costs not
     directly related to any particular user.  FAA currently lacks
     sufficient cost data, however, and will not start collecting
     better data until October 1997.  As a result, better cost data
     will not be available before the excise taxes lapse or before
     initial decisions will have to be made about how to finance FAA. 
     Deciding among the various financing alternatives involves
     tradeoffs between their (1) ease of administration, (2) impact
     on how efficiently the airport and airway system is used, (3)
     ability to produce an equitable system in which users pay their
     fair share, (4) potential competitive impacts, and (5) other
     policy goals. 

  Amtrak remains in a very precarious financial position and
     continues to be heavily dependent on federal support to meet its
     operating and capital needs.  Amtrak's passenger rail service
     has never been profitable and, through fiscal year 1997, the
     federal government has provided Amtrak with over $19 billion for
     operating and capital expenses.  Amtrak projects that its fiscal
     year 1997 operating loss could be $783 million.  While the
     corporation's goal is to eliminate the need for federal
     operating support by 2002, it is likely that Amtrak will
     continue to require substantial federal financial support--both
     operating and capital--beyond that time. 

  DOT believes that current public spending on the capital needs of
     highways is inadequate and estimates that $16 billion in
     additional spending is needed annually just to maintain--not
     improve--the condition of the nation's highways.  State
     Infrastructure Banks offer the promise of helping to close the
     gap between transportation needs and available resources by
     sustaining and potentially expanding a fixed sum of federal
     capital.  Benefits include expediting the completion of
     projects, recycling loan repayments to future projects, and
     obtaining financial support from the private sector and local
     communities.  However, some state officials and industry experts
     are skeptical that such banks will produce these benefits and
     believe that (1) the number of projects with a sufficient
     revenue stream to repay the loans may be insufficient and (2)
     state infrastructure banks face impediments under state law. 
     Only time will tell.  This program is new, and only two states
     have begun projects under their state infrastructure bank. 


   ISSUES ASSOCIATED WITH
   ADDRESSING FAA'S FINANCIAL
   PROBLEMS AND DETERMINING THE
   BEST FUNDING MECHANISM
---------------------------------------------------------- Chapter 0:1

One of the most difficult financing problems confronting the Congress
and the administration is how to adequately fund FAA to meet its
mission over the long term.  Over the years, we have issued numerous
reports and testimonies that identified shortcomings in FAA's
aviation safety and security programs.\1 These shortcomings include
the insufficient training of FAA safety inspectors, inaccurate and
incomplete aviation safety databases, and vulnerabilities in our
aviation security systems.  Similarly, in the wake of the May 1996
crash of Valujet Flight 592 and the July 1996 crash of TWA Flight
800, FAA and the White House Commission on Aviation Safety and
Security (the Gore Commission) have concluded that a number of
actions are needed to improve the safety and security of our aviation
system.\2 However, how to fund these improvements has not been
resolved. 

Deciding how to meet FAA's funding needs involves not only
determining what FAA's financial requirements are but choosing the
best financing mechanism to meet those needs.  Recognizing the
seriousness of these issues, the Congress directed that a number of
studies be completed.  Under the Federal Aviation Reauthorization
Act, enacted in October 1996, the Congress required (1) an
independent assessment of FAA's financial needs and costs, which was
performed by Coopers & Lybrand; (2) an assessment by GAO of airports'
capital needs; and (3) an assessment by GAO of how air traffic
control costs are allocated between FAA and the Department of Defense
(DOD).  The act established the National Civil Aviation Review
Commission to, among other things, consider these studies and
recommend to the Secretary of Transportation, by August 1997, how
best to finance FAA.\3

While its assessment of FAA's financial needs identified some areas
for potential savings, Coopers & Lybrand concluded that FAA's
estimates of its needs through 2002 were reasonable.\4 Table 1
compares FAA's estimated requirements with the agency's budget
estimates for fiscal years 1998-2002, which were contained in the
President's fiscal year 1998 budget.\5 In addition, FAA officials
estimate that the almost $9 billion potential shortfall shown in
table 1 could increase by an additional $4 billion as the agency
tries to address the Gore Commission's recommendations to accelerate
the modernization of the National Airspace System. 



                                Table 1
                
                FAA's Projected Budget Shortfall, Fiscal
                            Years 1998-2002

                        ((Dollars in billions))

                                     FAA's         FAA's
                                 estimated     projected  FAA's budget
Fiscal year                   requirements        budget     shortfall
----------------------------  ------------  ------------  ------------
1998                                 $8.46         $8.46            $0
1999                                 10.82          8.68        (2.14)
2000                                 11.22          8.91        (2.31)
2001                                 11.32          9.15        (2.17)
2002                                 11.50          9.39        (2.11)
======================================================================
Total                               $53.32        $44.59       $(8.73)
----------------------------------------------------------------------
Source:  FAA and the President's 1998 budget. 

To help meet these financial challenges, the administration has
proposed that the current approach to financing FAA be changed. 
Generally, three-quarters of FAA's funding comes from the Airport and
Airway Trust Fund, which in turn, receives most of its funding from a
10-percent tax on the fares paid by passengers.  The remainder of
FAA's funding comes from the General Fund of the U.S.  Treasury.  In
its fiscal year 1998 budget for FAA, the administration proposed
replacing this system with usage-based fees starting in fiscal year
1999.  The administration also proposed, as an interim step, $300
million in new user fees in addition to the $100 million in fees on
foreign airlines' overflights of the United States that were
authorized in fiscal year 1997.  FAA has subsequently indicated that
the new fees could potentially be charged for business aviation,
international air cargo, and security activities.  Similarly, a
coalition of the nation's largest airlines advocate replacing the
airline ticket tax with usage-based fees.  These airlines believe
that they pay more than their fair share of the costs incurred by FAA
in running the airport and airway system and that competing low-fare
airlines underpay.\6

In our December 1996 report on the coalition's proposal to replace
the ticket tax and in our February 1997 testimonies before the Senate
Finance Committee and House Aviation Subcommittee, we stated our
belief that, to the extent possible, commercial users of the nation's
airspace should pay their share of the costs that they impose on the
nation's airport and airway system.\7 We noted that because the
airline ticket tax is computed based on the fares paid and not on
factors that directly relate to FAA's costs for providing service,
the extent to which the tax fairly allocates costs among system users
is open to question.  While many factors drive FAA's costs, we found
that the coalition's proposal only incorporated factors that would
substantially increase the taxes paid by low-fare and small airlines
and decrease the taxes paid by the seven coalition airlines.  We
concluded that determining how best to finance FAA is a complex
problem that requires careful study and good cost data.  Our prior
work has shown that FAA does not have an adequate cost-accounting
system and, as a result, has limited capability to accumulate
accurate, reliable cost data.\8

On February 28, 1997, Coopers & Lybrand reported that despite FAA's
lack of a cost-accounting system, it is possible, on an interim
basis, to attribute FAA's costs to broad categories of users such as
commercial airlines as a group or general aviation.  However, Coopers
& Lybrand concluded that FAA did not have sufficiently detailed or
reliable cost data upon which to base a comprehensive system of new
fees charged to specific users (e.g., particular airlines).  It
recommended that if FAA is required to adopt a comprehensive system
of user fees, a modern cost-accounting system should be implemented
to reliably assign costs to specific products and users.  FAA is
developing a cost-accounting system as required by the Federal
Aviation Reauthorization Act of 1996 and plans to implement the
system by October 1997.  However, FAA's Manager, Cost Accounting
System Division, told us that developing a sufficient amount of data
to accurately assign costs to specific users will take at least 6 to
12 months after the system is implemented. 

Because the airline ticket tax and other taxes that finance the Trust
Fund lapse on September 30, 1997, better cost data will not be
available before the Congress is faced with the lapsing of those
taxes.  As a result, regardless of whether the Congress decides to
extend the current excise taxes, modify them, or implement some other
financing mechanism, it will not have assurance that specific users
are assigned their fair share of costs.  When more detailed cost data
become available sometime in the future, a determination could be
made to reexamine the financing method that is chosen. 

Notwithstanding the limitations of FAA's cost data, the data that are
currently available indicate that a large portion--55 percent--of
FAA's costs are "common," or not directly related to any particular
user.  In our congressionally mandated April 1997 report on the
allocation of air traffic control costs, we concluded that the method
for allocating common costs could have a profound impact on the total
cost shares assigned to system users.\9 We reported that in
allocating common costs, assumptions and judgments must be made and
that different user groups are likely to have diverging opinions
about what constitutes an equitable allocation of those costs.  We
also reported that FAA and DOD strongly disagree about how FAA's
common costs should be allocated.\10 In addition, we noted that
whether and to what extent DOD's costs for providing air traffic
services to civil users should be included in the development of user
fees is another issue that would need to be resolved if the Congress
instituted such fees.  If DOD's costs are included, fees could be
collected from civil users for the services provided by DOD, thereby
providing an offset to what DOD may owe FAA. 

In addition to retaining the ticket tax, there are numerous financing
alternatives for the national commission, and ultimately the
Congress, to consider.  Possible options include taxing one or more
of the general indicators of system use, such as departures,
passenger enplanements, seats flown, fuel consumed, or a combination
of these indicators.  However, the potential competitive impact of
using these indicators as a basis for allocating FAA's costs varies
greatly depending on which indicator is used.  For example, if a tax
on passenger enplanements were adopted and designed to generate about
the same amount of revenue as the ticket tax, the amount paid by the
coalition of the nation's largest airlines would decline by about
$251 million while the amount paid by competing airlines would
increase by $269 million and commuter carriers by $61 million.  In
contrast, a fuel tax would keep the amount paid by the largest
airlines and by competing airlines about the same as each paid under
the ticket tax, but the amount paid by individual airlines would
vary. 

The various potential financing mechanisms for FAA, whether they be
the $400 million in user fees contained in the administration's
fiscal year 1998 budget or the longer-term options for replacing the
ticket tax with usage-based fees, present policy tradeoffs between
their ease of administration, impact on how efficiently the airport
and airway system is used, ability to produce an equitable system in
which users pay their fair share, and other policy goals.  For
example, a usage-based formula that combines several of the common
system-usage indicators might provide the most exact method to ensure
that all users pay their fair share of system costs.  However, such a
formula may also be so complex that it would be difficult to
administer.  By contrast, a fuel tax, while generally correlating to
system use, would be less exact than more complex formulas but would
be easier to administer.  Likewise, taxing airlines for their use of
the most congested airports may result in a more efficient use of the
nation's airspace.  However, because the coalition airlines are the
primary users of these airports, this approach may not produce the
most equitable result from their point of view. 

Such tradeoffs and the potential competitive impacts of new fees will
need to be carefully studied over the next several months by the
national commission, the Secretary of Transportation, and the
Congress.  The financing mechanism that is finally selected should be
relatively easy to administer and help ensure that, in the long term,
FAA has a secure funding source, the nation's airports and airways
are used as efficiently as possible, commercial users of the system
pay their fair share, and a strong, competitive airline industry
continues to exist.  Ultimately, it is a policy call for the Congress
to decide how to achieve these and other goals. 


--------------------
\1 See, for example, Aviation Safety:  New Airlines Illustrate
Long-Standing Problems in FAA's Inspection Program (GAO/RCED-97-2,
Oct.  17, 1996), Aviation Safety:  Data Problems Threaten FAA Strides
on Safety Analysis System (GAO/AIMD-95-27, Feb.  8, 1995), Aviation
Security:  Additional Actions Needed to Meet Domestic and
International Challenges (GAO/RCED-94-38, Jan.  27, 1994), and
Aviation Security:  Technology's Role in Addressing Vulnerabilities
(GAO/T-RCED/NSIAD-96-262, Sept.  19, 1996). 

\2 Final Report to President Clinton, White House Commission on
Aviation Safety and Security (Feb.  12, 1997) and FAA 90 Day Safety
Review (Sept.  16, 1996). 

\3 The Secretary of Transportation is required to consult with the
Secretary of the Treasury and report to the Congress by October 1997
on the Secretary's recommendations for funding FAA through 2002. 

\4 Federal Aviation Administration:  Independent Financial
Assessment, Coopers & Lybrand (Feb.  28, 1997). 

\5 One component of FAA's requirements is funding a portion of the
cost of developing our nation's airports.  Last month, we reported
that estimates of airports' annual capital needs during 1997-2001
ranged from $1.4 billion to $10.1 billion, depending on how needs are
defined.  See Airport Development Needs:  Estimating Future Costs
(GAO/RCED-97-99, Apr.  7, 1997). 

\6 The coalition comprises the seven largest airlines--American
Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines,
TWA, United Airlines, and US Airways. 

\7 See Airport and Airway Trust Fund:  Issues Raised by Proposal to
Replace the Airline Ticket Tax (GAO/RCED-97-23, Dec.  9, 1996),
Issues and Options in Deciding to Reinstate or Replace the Airline
Ticket Tax (GAO/T-RCED-97-56, Feb.  4, 1997), and Issues Related to
Determining How Best to Finance FAA (GAO/T-RCED-97-59, Feb.  5,
1997). 

\8 See Air Traffic Control:  Improved Cost Information Needed to Make
Billion Dollar Modernization Investment Decisions (GAO/AIMD-97-20,
Jan.  22, 1997). 

\9 Air Traffic Control:  Issues in Allocating Costs for Air Traffic
Services to DOD and Other Users (GAO/RCED-97-106, Apr.  25, 1997). 

\10 DOD believes that it should not bear any of FAA's common costs
because the Department is only a marginal user of FAA's air traffic
services and has a minor impact on FAA's cost structure.  Conversely,
FAA believes that DOD should be assigned some portion of common costs
because, like other users, DOD benefits from FAA's air traffic
control infrastructure. 


   AMTRAK'S FINANCIAL CONDITION
   AND ITS QUEST FOR OPERATING
   SELF-SUFFICIENCY
---------------------------------------------------------- Chapter 0:2

Over the last several years, we have issued a number of reports and
testified several times on Amtrak's financial condition.\11 Amtrak's
passenger rail service has never been profitable and, through fiscal
year 1997, the federal government has provided Amtrak over $19
billion for operating and capital expenses.  In response to
continually growing losses and a widening gap between operating
deficits and federal subsidies, Amtrak developed its Strategic
Business Plan.  This plan, which has been revised several times, was
designed to increase revenues and control cost growth and, at the
same time, eliminate Amtrak's need for federal operating subsidies by
2002. 

Our assessment of Amtrak's financial condition is that, despite some
gains, the corporation is still in a very precarious position.  It
remains heavily dependent on federal support to meet its operating
and capital needs.  Although actions taken by Amtrak through its
business plans have helped reduce Amtrak's net losses, Amtrak has
struggled to reach net loss targets.\12 For example, Amtrak's plans
for fiscal years 1995 and 1996 included actions to reduce its net
loss by $195 million--from about $834 million in fiscal year 1994 (in
current year dollars) to $639 million in fiscal year 1996.\13 By the
end of fiscal year 1996, Amtrak's loss had declined to about $764
million; however, it was substantially more than planned.  In
addition, the relative gap between total revenues and total expenses
has not significantly closed, and passenger revenues (adjusted for
inflation)--which Amtrak has been relying on to help close the
gap--have generally declined over the past several years (see apps. 
I and II).  Similarly, the gap between operating deficits and federal
operating subsidies rose in fiscal year 1996 to $82 million--the
highest it had been in the last 9 years.\14

Amtrak's continuing financial crisis can be seen in other measures as
well.  In February 1995, we reported that Amtrak's working
capital--the difference between current assets and current
liabilities--declined between fiscal years 1987 and 1994.  Although
Amtrak's working capital position improved in fiscal year 1995, it
declined again in fiscal year 1996 to a $195 million deficit (see
app.  III).  This decline reflects an increase in accounts payable,
short-term debt, and capital lease obligations, among other items.  A
continued decline in working capital jeopardizes Amtrak's ability to
pay immediate expenses.  Amtrak's debt levels have also increased
significantly (see app.  IV).  During fiscal years 1993 through 1996,
Amtrak's debt and capital lease obligations nearly doubled --from
about $527 million to about $987 million, in 1996 dollars.  These
debt levels do not include an additional $1 billion expected to be
incurred beginning in fiscal year 1999 to finance 18 high-speed
trainsets and related maintenance facilities for the Northeast
Corridor and the acquisition of new locomotives. 

It is important to note that servicing Amtrak's increased debt takes
away from the federal financial operating support needed to cover
future operating deficits.  In fact, over the last 4 years, interest
expenses have about tripled--from about $20.6 million in fiscal year
1993 to about $60.2 million in fiscal year 1996 (see app.  V). 
Because Amtrak pays interest from federal operating assistance and
principal from federal capital grants, this increase has absorbed
more of the federal operating subsidy each year.  During fiscal years
1993 through 1996, the percentage of federal operating subsidies used
to pay interest expenses increased from about 6 to about 21 percent. 
As Amtrak assumes more debt to acquire equipment, the interest
payments are likely to continue to consume an increasing portion of
federal operating subsidies.  Amtrak's fiscal year 1997 operating
losses may be even higher than those in fiscal year 1996.  As a
result of unanticipated expenses and revenue shortfalls, at the end
of the second quarter Amtrak projected that its actual fiscal year
1997 year-end net loss could be about $783 million. 


--------------------
\11 See Intercity Passenger Rail:  The Financial Viability of Amtrak
Continues to Be Threatened (GAO/T-RCED-97-94, Mar.  13, 1997),
Amtrak's Strategic Business Plan:  Progress to Date (GAO/RCED-96-187,
July 24, 1996), Northeast Rail Corridor:  Information on Users,
Funding Sources, and Expenditures (GAO/RCED-96-144, June 27, 1996),
Amtrak:  Early Progress Made in Implementing Strategic Business Plan,
but Obstacles Remain (GAO/T-RCED-95-227, June 16, 1995), and
Intercity Passenger Rail:  Financial and Operating Conditions
Threaten Amtrak's Long-Term Viability (GAO/RCED-95-71, Feb.  6,
1995). 

\12 "Net loss" is defined as total revenues minus total expenses. 

\13 Net loss for fiscal year 1994 excludes a one-time charge of $244
million for accounting changes, restructuring costs, and other items. 

\14 Operating deficit is the same as net loss, except noncash items
(such as depreciation) and the one-time charge taken in fiscal year
1994 are excluded from total expenses. 


      AMTRAK HAS LARGE CAPITAL
      NEEDS
-------------------------------------------------------- Chapter 0:2.1

Amtrak's goal of eliminating federal operating subsidies by 2002 is
heavily dependent on capital investment.  Such investment--the
modernizing of property, plant, and equipment--will not only help
Amtrak to retain revenue by improving the quality of existing service
but will potentially increase revenues by attracting new riders. 

Amtrak's capital investment needs are great--both to replace and
modernize current physical assets and to complete new projects such
as high-speed rail service on the Northeast Corridor.  For example,
in May 1996, the Federal Railroad Administration (FRA) and Amtrak
estimated that about $2 billion would be needed over the next 3 to 5
years to recapitalize the south end of the Northeast Corridor and
preserve its ability to operate in the near-term at existing service
levels.  FRA and Amtrak estimate that up to $6.7 billion may be
needed over the next 20 years to recapitalize the Northeast Corridor
and make improvements targeted to respond to high priority growth
opportunities.  Amtrak also estimates that an additional $1.4 billion
will be needed to finish the high-speed rail project. 

Our ongoing work indicates that Amtrak has made some progress in
addressing its capital needs, but the going has been slow and, in
some cases, Amtrak may be facing significant future costs.  For
example, in October 1996, about 53 percent of Amtrak's active fleet
of 1,600 passenger cars averaged 20 years old or more and were at or
approaching the end of their useful life.  It is safe to assume that
as this equipment continues to age, it will have more frequent
failures and require more expensive repairs. 

Finally, Amtrak will continue to find it difficult to take those
actions necessary to further reduce its costs.  During fiscal year
1995, Amtrak was successful in reducing and eliminating some routes
and services.  For example, Amtrak reduced the frequency of service
on seven routes from daily to three or four times per week, and on
nine other routes various segments were eliminated.  Amtrak estimates
that such actions saved about $54 million.  However, Amtrak was less
successful in making the route and service adjustments planned for
fiscal year 1997.  As a result, Amtrak estimates that its projected
fiscal year 1997 net loss will increase by $13.5 million.  Amtrak has
also been unsuccessful in negotiating productivity improvements with
labor unions. 

Amtrak has staked its financial future on the ability to eliminate
federal operating support by 2002 by increasing revenues, controlling
costs, and providing customers with high-quality service.  Although
its business plans have helped reduce net losses, Amtrak continues to
face significant challenges in accomplishing this goal, and it is
likely Amtrak will continue to require substantial federal financial
support--both operating and capital--well into the future. 


   INNOVATIVE HIGHWAY FINANCING
   THROUGH STATE INFRASTRUCTURE
   BANKS
---------------------------------------------------------- Chapter 0:3

In October 1996, we reported that total public spending on the
capital needs for highways and bridges was approximately $40 billion
in 1993--the most recent year for which data are available--and that
DOT estimated that an additional $16 billion annually is needed just
to maintain--not improve--the condition of the nation's highways at
the 1993 level.\15 Moreover, postponing investment can increase
costs; DOT estimated that deferring $1 in highway resurfacing for
just 2 years can require spending $4 in highway reconstruction costs
to repair the damage. 

In order to stretch limited federal funds, the Congress in 1995
authorized some innovative uses of federal transportation funds.  The
National Highway System Designation Act of 1995 established a number
of innovative financing mechanisms, including the authorization of a
State Infrastructure Bank (SIB) Pilot Program for up to 10 states or
multistate applicants--8 states were selected in April 1996, and 2
were selected in June 1996.  Under this program, states can use up to
10 percent of most of their federal highway funds for fiscal years
1996-97 to establish their SIBs.  This program was expanded by DOT's
fiscal year 1997 appropriations act, which removed the 10-state limit
and provided $150 million in new funds. 

A SIB serves essentially as an umbrella under which a variety of
innovative finance techniques can be implemented.  Much like a bank,
a SIB needs equity capital to get started, and equity capital can be
provided at least in part through federal highway funds.  Once
capitalized, the SIB can offer a range of loans and credit options,
such as loan guarantees and lines of credit.  For example, through a
revolving fund, states can lend money to public or private sponsors
of transportation projects.  Project-based revenues such as tolls or
general revenues such as dedicated taxes can be used to repay loans
with interest, and the repayments replenish the fund so that new
loans can be supported.  Thus, projects with sufficient potential
revenue streams are needed to make a SIB viable. 

Expected assistance for projects in the 10 states selected for the
pilot program include loans, credit enhancement to support bonds, and
lines of credit.  In some cases, large projects that are already
under way may be helped through SIB financial assistance.  Examples
of projects that the initial 10 pilot states are considering for
financial assistance include the following: 

  In Orange County, California, a $713 million project that includes
     construction of a 24-mile tollway may receive SIB assistance in
     the form of a $25 million line of credit that would replace an
     existing contingency fund.  If the line of credit is used, plans
     are for it to be repaid through excess toll revenues. 

  In Orlando, Florida, a $240 million project that will construct a
     6-mile segment to complete a 56-mile beltway may receive a SIB
     loan in the amount of $20 million.  Repayment of the loan would
     come from a mix of project-related and systemwide toll receipts
     and state transportation funds. 

  In Myrtle Beach, South Carolina, a SIB loan is being considered to
     help construct a new $15 million bridge to Fantasy Harbor.  The
     source for repaying the loan would be proceeds from an admission
     tax at the Fantasy Harbor entertainment complex. 

SIB assistance is intended to complement, not replace, traditional
transportation grant programs and provide states with increased
flexibility to offer many types of financial assistance.  As a
result, projects could be completed more quickly, some projects could
be built that would otherwise be delayed or infeasible if
conventional federal grants were used, and private investment in
transportation could be increased.  Furthermore, a longer-term
anticipated benefit is that repaid SIB loans can be "recycled" as a
source of funds for future transportation projects.  If states choose
to leverage SIB funds, DOT has estimated that $2 billion in federal
capital provided through SIBs could be expected to attract an
additional $4 billion for transportation investments. 

For some states, barriers to establishing and effectively using a SIB
still remain.  One example is the low number of projects that could
generate sufficient revenue to repay loans made by SIBs.  Officials
from six of the states that we surveyed told us that an insufficient
number of projects with a potential revenue stream would diminish the
prospects that their state would participate in the SIB pilot
program.  Officials from 10 of 11 states that we talked to about this
issue said they were considering tolls as a revenue source.  However,
state officials also told us that tolls would likely generate
considerable negative reaction from political officials and the
general public. 

Some states expressed uncertainty regarding their legal or
constitutional authority to establish a SIB or use some financing
options that would involve the private sector.  Michigan, for
instance, said that it does not currently have the constitutional
authority to lend money to the private sector.  Another impediment
can arise if the SIB exposes the state to debt.  Backing SIB
assistance with the full faith and credit of the state is not legally
permitted in some states.  Without that guarantee, SIBs will have to
rely on the strength of their project portfolio and initial
capitalization as the basis for borrowing.  As such, they are likely
to experience higher borrowing costs than if their portfolio was
backed by the full faith and credit of the state.  Bond-rating
agencies will have to assess each portfolio on a case-by-case basis. 

Finally, a principal federal barrier to attracting private capital is
the fact that the Internal Revenue Code, with some exceptions,
restricts private involvement in tax-exempt debt.  In the case of
state and local bonds, bondholders' interest earnings are exempt from
federal taxes.  However, the tax exemption does not apply to a bond
issue if (1) the private sector uses more than 10 percent of the
proceeds and finances more than 10 percent of the debt or (2) more
than 5 percent of the proceeds or $5 million (whichever is less) is
used to make loans to the private sector.  A number of federal and
state officials and academic experts told us that states that choose
to leverage their banks will likely do so with tax-exempt debt
because bondholders are willing to accept lower interest rates in
exchange for the bonds' tax-exempt status. 

The SIB program has been slow to start up.  Only two states--Ohio and
Missouri--have actually begun projects under their SIB. 
Nevertheless, since $150 million was provided and the 10-state
restriction was lifted in DOT's fiscal year 1997 appropriations act,
the agency has received applications from 28 states and Puerto Rico. 
The program will need time to develop and mature before a
comprehensive assessment of SIBs' impact on meeting transportation
needs can be assessed.  In our October 1996 report, we suggested that
once SIBs begin operating, the Federal Highway Administration could
disseminate information on states' successes and failures with
various financing options and thus help states use SIBs more
effectively and educate other states on the pros and cons of a SIB. 


--------------------
\15 State Infrastructure Banks:  A Mechanism to Expand Federal
Transportation Financing (GAO/RCED-97-9, Oct.  31, 1996). 


-------------------------------------------------------- Chapter 0:3.1

Mr.  Chairman, that concludes our prepared statement.  We would be
happy to respond to any questions that your or other members might
have. 


AMTRAK'S REVENUES AND EXPENSES,
FISCAL YEARS 1988-96
=========================================================== Appendix I



   (See figure in printed
   edition.)

Note:  Amounts are in 1996 dollars. 

Source:  Amtrak. 


AMTRAK'S PASSENGER REVENUES,
FISCAL YEARS 1989-96
========================================================== Appendix II



   (See figure in printed
   edition.)

Note:  Amounts are in 1996 dollars. 

Source:  GAO's analysis of Amtrak's data. 


AMTRAK'S WORKING CAPITAL
SURPLUS/DEFICIT, FISCAL YEARS
1987-96
========================================================= Appendix III



   (See figure in printed
   edition.)

Notes:  Working capital is the difference between current assets and
current liabilities. 

Amounts are in current year dollars.  In 1996 dollars, working
capital declined from $149 million in fiscal year 1987 to a deficit
of $195 million in fiscal year 1996. 

Source:  GAO's analysis of Amtrak's data. 


AMTRAK'S OUTSTANDING DEBT/CAPITAL
LEASE OBLIGATIONS, FISCAL YEARS
1987-96
========================================================== Appendix IV



   (See figure in printed
   edition.)

Note:  Amounts are in current year dollars. 

Source:  Amtrak. 


AMTRAK'S INTEREST EXPENSE, FISCAL
YEARS 1987-96
=========================================================== Appendix V



   (See figure in printed
   edition.)

Note:  Amounts are in current year dollars. 

Source:  Amtrak. 


*** End of document. ***