SECRETARY OF THE TREASURY

DEPARTMENT OF THE TREASURY                              WASHINGTON, D.C.                       May 6, 1998

The Honorable Bud Shuster
Chairman
Committee on Transportation and Infrastructure
U.S. House of Representatives
Washington, D.C. 20515

Dear Chairman Shuster:

Thank you for your letter requesting the Administration's views on Federal credit provisions included in the Transportation Infrastructure Finance and Innovation Act of 1997 (TIFIA), which is part of the Senate-approved version of the Intermodal Surface Transportation Efficiency Act of 1997 (ISTEA). As laid out in Transportation Secretary Rodney Slater's May 1, 1998, letter to the Conferees on the ISTEA bill, the Administration wishes to work with Congress to address its concerns about the TIFIA credit provisions in the Senate bill. Consistent with my prior discussions with interested Senators, I have directed Treasury staff to work with the conferees towards addressing the issues mentioned below.

The proposed provision in TIFIA of most significant concern to Treasury is the one permitting the subordination of Federal loans. More specifically, the credit provisions in TIFIA would permit the Federal loans to have a subordinate lien on the project revenues that secure the loans. The credit provisions would also allow the Secretary of Transportation to defer repayments on the Federal loans for up to ten years if project revenues were insufficient to simultaneously repay investors and the government. The deferment provision would place our loans, both principal and interest, in jeopardy during the time that transportation construction projects are most at risk. This would increase the government's exposure to loss. Moreover, the proposed credit provision could become an undesirable precedent for other Federal credit programs. Based on my long experience with financial markets, I would expect that, in order to compensate for attendant risk, subordinated financing such as that contemplated in TIFIA would require a significantly higher yield than is presently proposed.

Existing Federal tax law and Federal financing policies prohibit direct or indirect Federal guarantees of tax-exempt obligations. These guarantees are generally an inefficient way of allocating Federal subsidies because Federally guaranteed tax-exempt obligations may compete directly with Treasury securities. In the absence of these restrictions, the TIFIA credit provisions would allow Federal lines-of-credit to be used to pay debt service on tax-exempt project financing or to permit Federally guaranteed loans to be linked or used in conjunction with tax-exempt project financing. Per our discussions with Senate Committee staff, however, we understand that TIFIA is not intended to override the existing prohibitions on such guarantees. Thus, TIFIA Is 2

not intended to allow arrangements that are not currently permissible under the tax law. Rather, TIFIA is intended to be interpreted consistently with the current-law restrictions on direct and indirect Federal guarantees of tax-exempt obligations. Nevertheless, due to the complexity of the issue and the absence of detailed guidance under the Federal tax law restrictions, it may still be unclear in certain circumstances whether the prohibition on indirect Federal guarantees applies to certain financing arrangements otherwise permitted by TIFIA.

We look forward to working with you and the conferees to address Treasury's concerns about this piece of the overall legislation. The Office of Management and Budget has advised that there is no objection from the standpoint of the Administration's program to the presentation of this report.