Add Taxpayer Protections to FRA’s RRIF Loan Program

Commentary

Add Taxpayer Protections to FRA’s RRIF Loan Program

Federal Railroad Administration program ripe for abuse without needed protections

RECOMMENDATION FOR THE CONGRESS

Add Taxpayer Protections to the Federal Railroad Administration’s RRIF Loan Program

Issue. The Railroad Rehabilitation and Improvement Financing (RRIF) program was created by 1998’s TEA-21 legislation. Under its provisions, the Federal Railroad Administration (FRA) can devote up to $35 billion to loans and loan guarantees for freight and passenger railroad infrastructure. Unlike DOT’s Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program, there are few taxpayer safeguards in RRIF, other than a requirement for recipients to pay a credit risk premium. Loans may be for as much as 100% of a project’s estimated cost and there is no explicit requirement for a dedicated revenue stream to pay off the loan.

Action Requested. Revise the RRIF program to add four taxpayer safeguards similar to those in TIFIA. First, restrict RRIF loans to 33% of the project’s budget. Second, require that senior debt of the project carry an investment-grade rating. Third, require that the loan recipient document the existence of a revenue stream dedicated to retiring the RRIF and other loans. And fourth, require that in the event of project bankruptcy, the RRIF loan moves to equal status with the primary debt (called the “springing lien” provision in TIFIA).

Justification. The current RRIF program in effect invites applicants to apply for loans for risky, speculative projects. RRIF should be reconceived as providing supplemental, gap-closure financing, like TIFIA, rather than being the primary or sole source of a project’s financing. The speculative XpressWest project was ultimately rejected by the FRA, but only after strong objections were raised by Members of Congress. That project had requested a RRIF loan of $5.5 billion, which was between 80 and 100% of the estimated project budget. Limiting RRIF loans to a maximum of 33% (as in the original TIFIA legislation) would make it clear that projects must demonstrate their economic and financial feasibility by being able to attract primary financing (investment-grade senior debt) from the capital markets, with RRIF providing supplemental, gap-closure financing. Together with the requirement for the applicant to document the existence of a dedicated revenue stream, these reforms would provide significant protections for federal taxpayers, akin to those of the successful TIFIA program.

Benefits and Costs of the Change. The taxpayer protection provisions would reduce the number of risky, speculative loan applications, thereby saving FRA time and money in processing them, resulting in modest FRA budgetary savings. More broadly, the provisions would protect taxpayers from future defaults that could result in billions of dollars in unpaid RRIF loans.

Likely Support: Taxpayer and good-government organizations.

Likely Opposition: Federal Railroad Administration, American Public Transportation Association, possibly short-line railroads and high-speed rail organizations.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation.