Turning TIFIA into a first-come-first-served funding pool means it will no longer prioritize projects that provide the most public benefits.

TIFIA has been vastly oversubscribed in past years, mostly with applications from private toll roads. Many of these applications, previously rejected because they couldn’t compete based on broader performance criteria, can now be quickly resubmitted. Newly eligible transit systems like LA’s, by contrast, must navigate new rules for public revenue sources and grouped project applications, and may wind up being too late to receive a penny. When next year’s project list is announced, TIFIA may come to stand for “Tolling Is Faster In Applications.”

There are downsides to converting TIFIA into a financing pool for the first applications that show they can generate a profit. Transportation systems are interconnected and create externalities that aren’t reflected in the bottom line of each individual project. The benefits of the FasTracks light rail system in Denver, for instance, include encouraging more efficient compact development and reducing the number of cars on the road at peak commuting hours. That added value is nowhere expressed on the ledger of its credit worthiness. A new toll road, while generating profits, may also generate more pollution and asthma. It may leave poorer drivers who can’t pay higher tolls stranded. A new toll highway in Seattle will reportedly divert large volumes of toll-avoiding traffic onto overburdened downtown streets. The point isn’t that new toll roads are necessarily bad – they’re not – but that none of the externalized costs or benefits will be considered under the new rules.

A program that ignores externalized costs and benefits will be biased toward projects that impose their true costs on the general public. Projects that include public benefits that can’t be monetized and transferred to creditors will be at a disadvantage. It is a win for the investment banks and law firms that lobbied for these provisions, but a loss for the public interest.

Various smart growth and transit groups are upset about the changes Congress made to the federal TIFIA program, in particular changing the criteria for TIFIA loans from a laundry list of factors (including livability and sustainability) to primarily financial feasibility. But these changes restore TIFIA to what it was originally intended to be—not an all-purpose transportation loan program but a way to leverage limited federal dollars to support big-ticket infrastructure improvements.

The large increase in TIFIA’s budget (from $122 million per year to $750 million next year and $1 billion the following year) is a response to demand from state DOTs greatly exceeding the program’s capacity in recent years. And the streamlined criteria will make U.S. DOT’s decisions about which projects to fund more straightforward and less subject to politicization based on inherently subjective factors introduced by the Obama administration that Congress has now deleted.

I had to laugh at the suggestion by Tri-State Transportation Campaign’s Steven Higashide that the reformed TIFIA program will likely fund “roads to nowhere.” Most state DOTs these days are so strapped for funding that they are hardly building any new roads. And the ones that they hope to build with TIFIA assistance are anything but boondoggles. That is thanks to the basic financial feasibility requirements that are unchanged in the expanded program. Specifically, a project can only qualify for a TIFIA loan if it has (1) a dedicated revenue stream, and (2) an investment-grade rating on its senior debt.

Most of the highway projects TIFIA is funding are either new toll roads or the addition of congestion-priced express toll lanes to existing expressways (such as those nearing completion on the Capital Beltway outside Washington, DC). The projected toll revenue stream is intended to pay back the investment-grade senior debt and the TIFIA loan, and (if there is any revenue beyond that) to provide a return to the equity investors in the project.

This kind of revenue-based financing is something of a revolution in highway funding, compared with the historic tax-and-grant system that is increasingly becoming unsustainable, as fuel tax revenues lag ever further behind the costs of building, maintaining, and modernizing highways. And TIFIA is now poised to spread this revolution, thanks to the increased budgetary authority Congress has provided.

My only real concern about Congress’s changes is that they increased the fraction of a project’s budget that can be funded by a TIFIA loan from the previous 33% to 49%. The purpose of TIFIA has been to provide “gap financing” for economically and financially sound projects that could not quite make their budget numbers work with conventional debt. Upping that fraction to nearly half may well reduce the pressure on state DOTs and MPOs to commit their own resources to candidate projects, potentially reducing such projects’ financial soundness and thereby increasing the risk to federal taxpayers. Were I a part of the U.S. DOT credit council reviewing TIFIA applications, I would give preference to projects requesting loans at or below 33%.

At a time when the handwriting is on the wall for conventional fuel tax-based highway grants, the shift to loans and financial soundness criteria is an important step in the right direction.