Private Activity Bonds

Introduction

 How Will This Help?

• Encourages private investment in transportation infrastructure. Since PABs are exempt from taxes, they are more attractive than other privately available bonds. Including the private sector in transportation investments reduces and distributes risk.
• Reduces the need for public funds. Increasing private investment funds in infrastructure projects frees up public funds for other projects.
• Lessens the need for new taxes. Increasing public fund efficiency through PABs reduces the need for expanding or implementing new taxes.
• Reduces the need for borrowing. Texas uses bonds as a way to finance transportation improvements. Texas could help slow a growing trend of using debt to pay for roadway projects by using PABs.

Estimated Funding Yield

• In 2012, the state ceiling for PABs was nearly $2.5 billion.

Implementation Examples

Dallas, TX IH 635 Managed Lanes Project
In 2010, the LBJ Infrastructure Group, LLC, was approved for $700 million in PABs to expand IH 635 and install managed lanes. This project is to relieve congestion north of Dallas on 13 miles of IH 635 (LBJ Freeway).

The project was built under a public-private partnership between the Texas Department of Transportation and the LBJ Infrastructure Group, which will operate and maintain the facility for 52 years. This project is unique because of the extensive use of technology to monitor traffic flow and the finance package used to build it.

Dallas, TX North Tarrant Express Project
NTE Mobility Partners, LLC, was approved for $400 million in PABs in 2009. Funds from the bonds were designated for the construction of the project.

Houston, TX SH 288
FHWA has allocated $600,000 in PABs in 2015.

Issues

• Private investments require returns. Private investors need to generate a return on investment through tolling, pass-through financing, tax increment financing, or other strategies coupled with comprehensive development agreements.
• While PABs free up public funds for other projects, they do not generate long-term public funds for future projects.
• Project selection is tied to private interest. Projects that benefit from PABs are those selected by private investors and may not be the best project for the public overall. Profit motives and private benefits, instead of public good, direct investment funds.
• Current PAB amounts are limited. According to the Federal Highway Administration (FHWA), PABs are limited to $15 billion. The Secretary of Transportation allocates this amount among qualified facilities.
• In general, PAB projects must receive federal assistance under Title 23 or 49 of the United States Code. PABs are limited to only projects that are eligible for federal assistance under Title 23. Project elements funded with federal funds must follow all federal-aid requirements, but not all elements of the PAB project have to follow all federal-aid requirements.
• Financial expertise is required. PAB recipients must retain bond counsel (attorneys and accountants) to comply with Internal Revenue Service requirements.

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