Introduction and summary
Building large surface transportation projects typically requires financing because the total cost exceeds what annual state and local budgets can support. The most common source of project financing is the municipal bond market, which currently has more than $4 trillion in outstanding issuances.1 In 1998, Congress authorized the creation of a loan program known as the Transportation Infrastructure Finance and Innovation Act (TIFIA) at the U.S. Department of Transportation to supplement the municipal bond market and to help attract other forms of private capital, including private equity through public-private partnerships.2 According to the authorizing act, a “Federal credit program for projects of national significance can complement existing funding resources by filling market gaps, thereby leveraging substantial private co-investment.”3
The TIFIA program was initially a competitive, discretionary credit facility. Under this approach, the secretary of transportation reviewed candidate projects to determine both their creditworthiness (i.e., the likelihood of repaying the federal loan) and the extent to which projects advanced national policy goals, including environmental sustainability. The original authorization legislation required the secretary to consider the “extent to which the project helps maintain or protect the environment.”4
Unfortunately, the 2012 surface transportation bill, known as Moving Ahead for Progress in the 21st Century (MAP-21) Act, amended the program to issue loans on a first-come, first-served basis to creditworthy projects. This change undermined national transportation and environmental policy goals by requiring the secretary to provide a loan to any project that meets the creditworthiness test. Consequently, even projects that will result in large greenhouse gas emissions and loss of critical habitats, including wetlands, receive a TIFIA loan so long as they are creditworthy.
This approach to project financing is counterproductive. There is no reason for the federal government to subsidize surface transportation projects that will undermine national policy goals with a low-cost, flexible loan. Subsidizing unsustainable projects—especially new highway construction and certain expansion projects—trades modest, short-term travel time savings for large environmental remediation costs later on. This is penny-wise and pound-foolish. Creditworthiness is not the only measure of a transportation project. Congress should make TIFIA a discretionary loan program again, allowing the secretary to assess the full complexity of candidate projects, not simply the strength of the revenue source pledged to repay the federal loan.
This report reviews a recent TIFIA refinancing loan for segments H and I of the Grand Parkway outer beltway—otherwise known as State Highway 99—in the Houston metropolitan area to demonstrate the need to make TIFIA a discretionary credit facility. According to the U.S. Department of Transportation (DOT), the reduced interest rate of the refinancing loan will save the Grand Parkway Transportation Corporation (GPTC) $194 million in interest charges over the life of the loan.5 Yet the completion of segments H and I will spur unsustainable low-density, auto-dependent development, leading to substantial greenhouse gas (GHG) emissions and other environmental harms.
Congress should reform the TIFIA program to become a discretionary credit facility with project selection criteria that account for greenhouse gas emissions, land use, and equitable access to opportunities for diverse communities, among other factors.
The urgent threat of global climate change demands that the right and left hand of the federal government work in concert to advance coherent transportation and land use policy. Congress should reform the TIFIA program to become a discretionary credit facility with project selection criteria that account for greenhouse gas emissions, land use, and equitable access to opportunities for diverse communities, among other factors.
TIFIA rates and flexibility
The two main benefits of a TIFIA loan are the interest rate and repayment flexibility. When a project sponsor applies to the federal government for a loan, DOT offers what is known as the Treasury pass-through rate. This means that borrowers are able to obtain a loan from the federal government at the same interest rate as the Treasury Department is able to sell debt of an equivalent maturity—typically 30 years. The interest rate paid by the Treasury is often referred to as the global risk-free rate because the federal government has never defaulted on its debt obligations.6 Therefore, the TIFIA program allows state and local project sponsors to access financing at the global risk-free interest rate, which is lower than the rates available through the municipal bond market. Currently, the TIFIA program is offering financing at 3.48 percent.7
The attractiveness of the interest rate available through TIFIA increases the weaker the financial outlook of the candidate transportation project becomes because the federal government does not adjust its rates based on borrower risk. By comparison, the municipal bond market charges higher interest rates for investments deemed a greater credit risk. For instance, according to FMSbonds Inc., the average yield or rate on a AAA-rated municipal bond is 3.5 percent, but the rate increases to 4.05 percent on an A-rated municipal bond of equivalent maturity.8
Under the TIFIA program, a candidate project is only required to clear a minimum threshold level of creditworthiness to obtain a loan. Specifically, the project must obtain an “investment-grade rating” on its senior debt obligations, which 23 U.S.C. 601 defines as “a rating of BBB minus, Baa3, bbb minus, BBB (low), or higher assigned by a rating agency to project obligations.”9 Thus, for a candidate project with relatively weak financial fundamentals, the difference between the interest rate on a municipal bond and the TIFIA loan can be substantial. The reduced interest rate can reduce the total financing charges paid by the project sponsor by tens or hundreds of millions of dollars over the life of the loan.
The second major benefit of a TIFIA loan is flexibility. Project sponsors may choose to delay the start of loan repayment for up to five years following substantial completion of the transportation facility.10 For certain long-lived assets, the loan amortization period can extend for the lesser of “75 years after the date of substantial completion” or “75 percent of the estimated useful life of the capital asset.”11 Additionally, the sponsor can sculpt the loan to backload repayment. In both cases, the federal government is allowing for travel demand to build over time. For a new or expanded toll highway, delayed repayment and backloaded payments reduce the risk of insolvency since the additional time allows for population and economic growth, which generates more trips and toll revenues.
Project sponsors may use a low-cost, flexible TIFIA loan as part of either a traditional procurement or a public-private partnership. Since its creation, the program has provided $34.5 billion in financing to transportation projects with a total cost of more than $120 billion.12 According to the Congressional Research Service, the average TIFIA-supported project has had a total cost of $1.5 billion and a federal loan of $430 million (both in 2018 dollars).13
Collectively, these loans have saved project sponsors significant sums in interest charges. Given the depth of the subsidy, it’s important to ask if the federal government is effectively advancing its national economic, social, and environmental goals. While there is no counterfactual to determine which of the projects that have received a TIFIA loan would have been completed in the absence of federal financing, it’s fair to assume that at least some of these projects would have remained plans on a shelf. At a minimum, federal financing has increased total megaproject construction since 1998. Yet projects such as the Grand Parkway indicate that the credit subsidy embedded in TIFIA is flowing to projects that will undermine national policy goals.
The Grand Parkway
The initial vision for the Grand Parkway dates back to the early 1960s.14 The Grand Parkway—including completed and planned segments—is a 184-mile outer loop highway around the Houston metropolitan area that stretches across seven counties: Harris, Brazoria, Fort Bend, Chambers, Galveston, Liberty, and Montgomery.15 According to the GPTC, the primary purpose of the Grand Parkway is to:
[P]rovide an outer loop around the Houston metropolitan area to improve connectivity within the existing network, reduce transportation congestion and enhance mobility and travel options, reduce unsafe “stop and go” conditions and accommodate demographic and economic growth.16
For the GPTC, accommodating “demographic and economic growth” means reinforcing automobility with large-scale highway expansion surrounded by low-density land use. Auto-dominant growth is the financial underpinning of the entire Grand Parkway system. This is not a minor point. In fact, the need to maximize driving that generates toll-paying trips on the Grand Parkway influences numerous transportation system design choices beyond the parkway itself. For instance, the GPTC states that “Frontage roads are limited to specified intermittent distances to prevent adverse effects on toll revenues.”17
A frontage road is an at-grade highway that runs parallel to a limited-access highway such as an interstate or the Grand Parkway. The purpose of a frontage road is to provide access to land parcels that border the limited-access highway. From a toll revenue standpoint, however, frontage roads represent a challenge because they offer drivers a free alternative. While a frontage road does not provide the same speed or travel times as a parallel limited-access facility, the fact that it is free offers many drivers an appealing alternative. Limiting the extent of the frontage roads that run parallel to the Grand Parkway is an attempt to push more drivers onto the tolled highway.
The entire development of the Grand Parkway hinges on how the proposed highway facility will “perform.” In this context, however, performance only has a financial meaning. The federal government and other potential investors are really only asking one question: Will this highway generate enough toll revenue to repay its debt obligations? This is a woefully insufficient basis for judging the merits or demerits of a multi-billion-dollar highway or any other major transportation facility. The long-term social, environmental, and economic consequences of building major highway projects are profound. The idea that a megaproject could be reduced to a spreadsheet calculation comparing expected revenues against financial liabilities would be funny if it weren’t so tragic.
Creditworthiness is only one of the many assessments the federal government should undertake before providing project financing. This is especially true when considering that a poorly conceived project can create harms that are of a greater financial magnitude than any outstanding loan balance. The federal government would be better served by providing low-cost financing to projects that will create large, long-term positive externalities that are not captured through a user fee, rather than underwriting a financially solvent facility that would produce downstream harms.
The TIFIA program helps to underwrite a depressing cycle where auto-dependent, low-density growth is both the cause and outcome of major highway construction.
Many of the ecological harms and barriers to opportunity created by major new highways come down to low-density sprawl. Sprawl is both a necessary precondition and a consequence of highway expansion. To meet the creditworthiness test, the outlying portion of the metropolitan area targeted for a new highway segment must reach a critical mass of auto-dependent development. Failure to clear a threshold level of low-density, auto-dependent growth causes the traffic and toll revenue estimate to show that the proposed highway is not financially viable—essentially, that revenues are too low to meet debt obligations.
Thus, elected officials and planners must induce initial auto-dependent growth with a constellation of smaller highway projects and improvements. Early land subdivision justifies government agencies such as the Texas Department of Transportation (TxDOT) and county road departments expanding two-lane rural highways—often labelled as farm-to-market roads in Texas—into divided four-lane highways, along with other more incremental roadway network improvements.
The initial smattering of housing, offices, and retail businesses that crop up around the ex-urban fringe create the basis to call for a major controlled-access highway such as the Grand Parkway. Once in place, the controlled-access highway facilitates still more low-density, auto-dependent growth. The TIFIA program helps to underwrite a depressing cycle where auto-dependent, low-density growth is both the cause and outcome of major highway construction.
Grand Parkway Corporation
The Grand Parkway Corporation was created by the state of Texas with the authority to issue debt and to incur other financial obligations, including loans from the U.S. Department of Transportation’s TIFIA program. These debts are limited obligations of the corporation and not a general obligation of the state of Texas or any of the local governments through which the parkway travels. Should tolls prove insufficient to repay bondholders and the federal government, this would not trigger a requirement for the state or local authorities to expend general tax dollars to repay these obligations. Even though insolvency of the highway would not result in a financial obligation on the state or local governments, there is still a risk that defaulting on the bonds or TIFIA loan would scare off investors when it comes time to issue bonds for future transportation projects.
Once the toll highway is in place, an alternative growth pattern centered around density and mixed-use development supported by public transit, biking, and walking represents a threat to the financial solvency of the highway. Aggressively pursuing sustainable land use runs counter to the assumption by investors and the federal government—stated explicitly within the third-party traffic and revenue forecast by CDM Smith Inc.—that the Houston metropolitan region will continue to grow in an auto-dependent manner for decades to come.
For instance, the 2017 traffic and revenue (T&R) study notes that “Liberty and Chambers counties near Segments H and I, are anticipated to experience significant population growth in households at average annual rates of 4.2 percent and 3.4 percent respectively between 2015 and 2035.”18 This represents truly rapid population growth compared with the long-run U.S. average annual population growth rate of roughly 1.2 percent.19 Next, the T&R shifts from broadly empirical claims about the pace of population growth around metropolitan Houston to normative claims about how this growth should occur.
Specifically, the T&R states, “This growth has resulted in ever-increasing traffic demands and the need for additional capacity and highway improvement projects particularly outside the City of Houston.”20 This is not a statement of fact—though its tone attempts to make it seem like one. The reality is that communities may grow in many different ways. Adding highway capacity to support low-density, auto-dependent land use is just one option.
The T&R is written for two audiences: elected officials responsible for programming highway expansion projects and investors. Note, for instance, how the T&R analysis provides both reassurance that past toll roads have performed well, along with an observation about the political acceptance of tolling by local residents more broadly:
A review of the historical performance of these toll facilities illustrates the widespread acceptance of toll roads by the local population through the high ownership of toll transponders and rapid observed growth that has and continues to materialize along each of the respective facility corridors. Almost all of the regional tolled facilities/segments experienced a doubling of full first-year traffic within about ten years, and in some cases almost a tripling of the full first-year traffic. 21
Political acceptance is not a trivial issue. The long-term solvency of a tolled highway is contingent on residents’ acceptance of paying a toll and supporting a long-term land use and development pattern that reinforces driving and requires frequently paying tolls.
The truly narrow financial view of the T&R comes into focus a few sentences later while reviewing the performance of other toll roads in the Houston region, including the Westpark Tollway, which stretches southwest from Interstate 69 within Harris and Fort Bend counties. According to the analysis, “The original Westpark Tollway, however, began reaching capacity during peak hours within a few years of opening due to the economic growth that continues to occur within the region.” 22 [emphasis added]
The combination of low-density population growth with driving growth from induced demand—the increase in overall driving that occurs as a result of new highway capacity that would not happen in its absence—quickly filled the Westpark Tollway during the morning and evening peak periods. This example conveys a fatal weakness of highway-based development. Beyond the deep unsustainability of cannibalizing vast areas of greenfield lands for highways and the surrounding low-density development, this mobility strategy quickly fails because highways cannot scale in response to rising demand the way that public transit can by quickly adding capacity.
Once in place, a dedicated transit line can either increase the frequency of service (i.e., reduce headways) or expand the rolling stock (i.e., purchase larger articulated buses or run longer multicar trains). Yet the policy failure of highways that quickly fill after opening is the foundation of financial success from the perspective of a potential investor. Locking people into driving ensures a steady stream of customers and the revenues necessary to repay bondholders and meet any other financial liabilities. Stated differently, the more congested the highway, the greater the financial solvency and security for investors.
But the counterintuitive nature of toll highway finance doesn’t end there. Every T&R analysis must make assumptions about the willingness to pay on the part of drivers. For the Grand Parkway, the T&R relied on extensive data collection, including on “speed and delay studies, market research on willingness-to-pay, local values-of-time (VOT),” among other factors. 23 In the simplest terms, the more residents value their own time—represented by area median wages—and the more congestion and delay on signalized arterial roadways and non-tolled highways, the greater the likelihood that a driver will choose to pay for the proposed toll highway. The cost of choosing the highway is outweighed by the implicit value of time savings. Indeed, “Motorists’ willingness-to-pay tolls is influenced by a combination of their perceived value-of-time (VOT) and their expected travel time savings.” 24 Thus, the inefficiency that stems from congestion and delay brought about by low-density, auto-dependent land use is the source of demand for the toll highway.
The long-term impact of highway expansion in service of auto-dependent, low-density growth is more highway expansion and driving. Highways beget more highways. According to the T&R,
All of the H-GAC region will experience increased vehicular travel over the next 25 years (from 2015 to 2040). In the region vehicular travel is projected to increase 64 percent, from 170 million vehicle miles of travel on an average weekday to 285 million vehicle miles. Travel to, from, or within the area outside of Beltway 8 will represent 70 percent of the trips.
The area outside of Beltway 8 is the ex-urban fringe served by the Grand Parkway. The extension of the Grand Parkway will contribute to staggeringly large amounts of driving in the coming decades.
The effects don’t stop with direct vehicle emissions. The parkway will induce loss of pristine land that serves as a carbon sink—an area that absorbs more carbon than it releases—along with wetlands that provide critical habitats for wildlife. The past 20 years offer a guide for what to expect over the next 20 years and beyond. According to federal government data on land use, from 2001 to 2019, the total developed area of the Houston region increased by 35.2 percent.25 This translates to an average annual growth rate of 2 percent. 26 If this rate of growth were to continue—which is all but a certainty because of projects such as the Grand Parkway—developed land within the metro area would increase by an additional 55 percent from 2022 to 2050. 27
Segments H and I-1 of the Grand Parkway traverse a corridor that includes a large number of wetlands that provide a critical habitat for many different species as well as a natural source of flood protection. According to the environmental impact statement, the Parkway extension directly affected “approximately 283 ac of adjacent agricultural wetlands, 16 ac of non-forested wetlands, and 39 ac of forested wetlands.”28 Yet it’s important to understand that the impacts to natural habitats extend beyond the borders of the highway right of way. Over time, the expanded Grand Parkway will induce low-density development, resulting in further habitat loss. Converting these wetlands to commercial and residential development will push out many species and increase the risk of flooding. Therefore, the wetlands losses enumerated in the environmental impact statement from highway construction fall short of the true total losses from the project.
The argument that highways beget more highways, driving, and low-density development is not theoretical. The Houston area provides a powerful example of this point. The Woodlands is a community located on the northern fringe of the Houston metropolitan area. The development is located north of the Grand Parkway and to the west of Interstate 45, which runs north-south.29 The community’s rapid growth in recent years has placed pressure on the existing roadway and highway network. In response, TxDOT has developed a $40 million project to widen State Highway 242 (SH 242), which cuts across the northern portion of the Woodlands, by adding one new lane in each direction along with a 10-foot shoulder on each side.30 State Rep. Steve Toth (R) has proposed an alternative to widening SH 242: build a loop or beltway around the Woodlands.31 The idea builds on a 2017 study commissioned by local officials to deal with rising congestion.
Building beltways on top of beltways may sound like the punchline to a bad joke, but it’s the predictable outcome from an auto-dependent development strategy. Whether or not TxDOT builds the SH 242 project or adopts the loop concept, the result will be the same: The new highway will quickly become congested, and the cycle of expansion and greenfield land cannibalization will continue.
Greenhouse gas rulemaking
In 2016, transportation became the single-largest source of greenhouse gas emissions in the United States, surpassing electricity production.32 Surface transportation is the largest emitter within the transportation sector, with light-duty vehicles and medium- and heavy-duty vehicles accounting for 57 percent and 26 percent of emissions, respectively.33
In July 2022, the Federal Highway Administration released a proposed rulemaking that would require state departments of transportation (DOTs) and metropolitan planning organizations (MPOs) to “establish declining carbon dioxide (CO2) targets and to establish a method for the measurement and reporting of greenhouse gas (GHG) emissions associated with transportation” as part of the federal government’s surface transportation performance management framework under 23 U.S.C. 150.34
The proposed rule by the Federal Highway Administration recognizes that the surface transportation sector must rapidly reduce emissions and ultimately achieve net-zero greenhouse gas emissions by midcentury if the United States is to meet its global climate commitments. This presents an enormous challenge. The proposal notes that the “transportation sector is expected to remain the largest source of U.S. CO2 emissions through 2050, increasing at an average annual rate of 0.3 percent per year” even with efficiency improvements.35
The financial subsidy and repayment flexibility offered by the TIFIA loan program should be reserved for sustainable transportation projects that support inclusive and equitable economic growth.
The proposed rule would require DOTs and MPOs to set declining GHG reduction targets that conform to the administration’s 2030 and 2050 goals, develop transportation plans that would achieve those targets, and report their progress every two years.
Yet, under current law, the Federal Highway Administration is prohibited from considering the GHG emissions that would result from highway construction financed with a TIFIA loan. This means that the credit subsidy and flexible repayment terms provided by the TIFIA program will continue to flow to highway projects that undermine the GHG reduction targets set in the proposed rule. This is the definition of counterproductive policy dissonance. The financial subsidy and repayment flexibility offered by the TIFIA loan program should be reserved for sustainable transportation projects that support inclusive and equitable economic growth.
Given the scale and duration of social, economic, and environmental effects created by transportation megaprojects, it’s essential that the federal government comprehensively evaluate candidate projects for financial assistance through the TIFIA loan program. Narrowing the assessment of candidate projects to merely creditworthiness undermines the federal government’s ability to direct its credit subsidies in an effective and coherent manner. Congress should make the TIFIA loan program a discretionary credit facility again, empowering the secretary of transportation to underwrite only those projects that will deliver sustainable, inclusive, and equitable growth for decades to come.