From Crain’s Detroit Business
Detroit Mayor Dave Bing’s administration has crafted a plan to divert some of the city’s annual federal capital transportation grant funding to back bonds that will pay for Detroit’s share of a $500 million light-rail system on Woodward Avenue.
The deal, which has federal approval, allows the cash-strapped city to arrange required local-match funding without actually using local money.
The plan is to issue up to $125 million in Capital Grant Receipts Revenue Bonds to reach the 40 percent local funding match threshold required to trigger federal payment of the remainder of the rail project.
The 40 percent will be composed of the proceeds from the bond sale, a $25 million federal grant awarded last year and $100 million assembled by the private sector and foundations. The 60 percent would be specially designated federal transportation grant funding.
The city has worked out an agreement with the Federal Transit Administration that allows the Detroit Department of Transportation to use about 30 percent of the $26 million to $28 million it gets annually from the FTA’s Section 5307 grants to be used instead for debt service payments on the bonds. The grants normally are for capital purchases such as buses.
DDOT has other funding in place for capital purchases, so earmarking some of the 5307 program money for the rail bonds won’t interfere with other needs, said Norm White, the city’s CFO and lead on the rail project.
The city won’t know how much the debt service payments will be until the bonds are sold, but the estimate now is $9 million to $10 million annually. White said they could be 15-year or 20-year bonds.
Federal backing of the bonds is expected to make them more attractive.
“Once we get into the market, we’ll understand the interest,” White said. “It’s very minimal risk, so we assume we’ll get a lower rate.”
The federal government allows municipalities to use some federal funding as local match money for transportation projects.
“In order to pay for a project like this, it requires a 20 percent local pure match. The remaining 20 percent can be other funding except New Starts funding,” he said. “Any other federal sources can be used for that 20 percent.”
New Starts is the FTA’s funding program aimed at new surface transportation projects, such as commuter and light rail, and is expected to be the primary source of federal funding for the non-local match.
New Starts funding requires a 20-year plan from the city that outlines not only how it will fund the rail line but how it will ensure that the system’s costs don’t cannibalize funding for other parts of the local transportation department.
It’s unclear how much the Woodward line’s operational costs will be or how they will be funded. White said he intends to discuss operational funding with the city council.
The bond sale is on the City Council’s agenda for 2:30 p.m. Thursday. The sale requires council approval, but it’s not clear when a formal vote will happen.
Because the city doesn’t have the financial capacity to pay for the rail project, backers have been seeking alternative financing methods.
“Our strategy was not to place a burden on the city at all,” White said.
To that end, the project last year became a joint effort by the city and the private investor consortium M1 Rail, which has assembled $100 million in cash and tax credits for the project. A deal worked out last year in Congress allows DDOT to use the private money as local match funding.
The line is a 9.3-mile loop that will run from Hart Plaza to Eight Mile Road. Construction could begin this year or early 2012, and the line would be completely operational by 2016.
“We could have a groundbreaking this year, but more of the ceremonial type,” said Matt Cullen, M1 Rail’s CEO, with serious construction beginning once weather allows early next year.
A federally required Final Environmental Impact Statement is expected by the end of the month, and preliminary engineering and design will begin after that.
FTA staff has been working in Detroit on the rail project to expedite the environmental study process, White said.