The statutory authority for the U.S. Department of Transportation (USDOT) Private Activity Bonds (PABs) Program comes from Section 142(m) of the Internal Revenue Code (IRC) or Title 26 U.S.C. §142(m).¹ Section 142(a) provides a general list of the qualified facilities for which PABs can be issued. States administer PAB allocations for all listed facilities except for one category of facilities: qualified surface transportation projects, international bridge or tunnel projects, and rail-truck/truck-rail freight transfer facilities. USDOT administers PAB allocations for this category of qualified facilities. States administer their PABs allocation programs, subject to state volume caps set up by the Internal Revenue Service. Congress determines USDOT's administered PAB allocation authority cap.

The IRC defines a private activity bond as a bond issue that meets (i) the private business use test and the private security or payment test or (ii) the private loan financing test as detailed in Title 26 U.S.C. §141.¹ PABs applicants are advised to consult with their bond counsel on whether they meet these criteria. Determination on whether the PABs issuance meets all IRC criteria is the role of the bond counsel advising the project sponsor.

Qualified facilities for which USDOT can allocate PAB include:

• Any surface transportation project which receives Federal assistance under Title 23, United States Code
• Any project for an international bridge or tunnel for which an international entity authorized under Federal or State law is responsible and which receives Federal assistance under Title 23, United States Code
• Any facility for the transfer of freight from truck to rail or rail to truck (including any temporary storage facilities directly related to such transfers) that receives Federal assistance under Title 23 or Title 49

Most PAB applications cite eligibility based on Title 23 assistance provided directly to the project (i.e., formula or discretionary grants awarded for design, preliminary engineering, and advisory services to develop the project, NEPA studies, feasibility studies, and project construction costs). There are a few examples of approved PAB applications for projects that did not receive Title 23 funds directly but rather derived a benefit from another Title 23-funded project. This benefit came in the form of cost savings or avoided costs that would have otherwise needed to be incurred by the project seeking a PAB allocation.

Examples of projects that have received PAB allocation from USDOT include North Tarrant Expressway (NTE), a system of tolled managed lanes in Tarrant County, Texas. The project created new managed lanes for faster mobility and improved the existing general-purpose lanes and auxiliary infrastructure for better traffic flow. This NTE-managed lanes system benefited from several PAB allocations supporting its full build-out over more than a decade. USDOT's recent approval of a PAB allocation for the Louisiana I-10 Calcasieu River Bridge replacement project will finance the demolition of the 70+-year-old bridge and the construction of a new one built to modern standards. Both projects qualified based on Title 23 assistance provided directly to the project.

Brightline Florida is another example of a project financed by PABs. The new inter-city passage rail service extending from Miami to Orlando is expected to reinvent mobility along the Florida coast, creating opportunities for transit-oriented and denser development around the stations and taking cars off the roads. The eligibility here was based on the indirect benefit the project received from another Title 23-funded project that resulted in savings to the Brightline Florida project. Title 23 funds were expanded for the rail-highway crossings along the corridor in preparation for future rail traffic growth. Any project seeking eligibility based on indirect support by another Title 23 funded project must demonstrate, in monetary terms, the amount of benefit that resulted in savings or avoided costs and that savings were exclusive or targeted to the project seeking PABs. USDOT contacts its field offices located in the states to verify this information.

USDOT PABs contributed to financing the transportation elements of the Fargo-Moorhead Flood Reduction project. The new flood diversion channel under construction along the Red River in North Dakota and Minnesota will disrupt the existing road network, including two interstate highways. The PAB allocation will finance new bridges over the interstates, as well as local roads and rail lines, to ensure the continued operation of the transportation infrastructure. The Fargo Moorhead metro area has been frequently flooded for the past 30 years during spring thaw and periods of heavy rainfall, resulting in damages to the local transportation infrastructure, economy, and people. The project qualified based on Title 23 assistance that helped design the flyover bridges.

Located about forty miles southwest of Chicago, the CenterPoint Intermodal Center, North America's largest inland port, is also a beneficiary of the USDOT PAB Program. This inland port includes surface freight transfer facilities from truck to rail and rail to truck, with intermodal rail yards and temporary storage facilities. It provides links to major railroads and interstate highways. The project qualified based on Title 23 assistance in improving and adding capacity to road access in and out of the facility.

Private Activity Bonds and TIFIA

Any surface transportation project that receives Title 23 assistance is qualified to benefit from private activity bonds. Because the TIFIA is a Federal credit assistance program authorized in Title 23, projects receiving TIFIA loans are also eligible for PAB allocations. This provision extends PAB eligibility to any TIFIA-assisted privately delivered, financed, and operated projects. These may include public transportation, intercity bus or rail, Amtrak, seaports, airports, and public infrastructure.

A project seeking PABs eligibility based on receiving a TIFIA loan must demonstrate that the loan has been secured. Examples of such projects may include a segment of a highway corridor that received a TIFIA loan in the past and now plans to extend or expand the corridor using PAB financing. A privately operated light rail transit line receiving TIFIA may be eligible for PABs to expand capacity or rehabilitation costs to bring the line to the State of Good repair. 

Expending Bond Proceeds

The legislation requires that at least 95 percent of the net proceeds of bond issues be expended for qualified highways or surface freight transfer facilities within five years from the issue date. If this does not occur, the issuer must use all unspent proceeds to redeem bonds of the issue within 90 days after the conclusion of the five years. Alternatively, the issuer may request an extension of the five-year period if it can establish that the failure to expend the funds was due to circumstances beyond its control.

¹26 USC 142: Exempt facility bond (house.gov)