New Act Relaxes Federal Rules

LAST year the federal government dumped decades-old policies limiting how federal funds could be used for infrastructure projects.

The Intermodal Surface Transportation Efficiency Act (ISTEA) dispensed with a longstanding reluctance to combine federal aid with user fees or private-sector funds to build or rehabilitate facilities. The act allocates $151 billion over six years for transportation infrastructure improvements.

"It has created a source of capital that goes beyond the six-year authorization of the legislation," says Joseph Giglio, a managing director of Smith Barney, Harris Upham & Co. in New York. "ISTEA has given state governments the opportunity to take what was formerly grant money and convert it into a loan program."

Instead of spending federal grant money directly and getting a one-time boost for the local or state economy, the ISTEA legislation allows grants to be converted into revolving loan funds. Money can be loaned again and again to sponsor additional projects such as toll roads or bridges.

In February, President Bush ordered federal agencies to assist the sale of public facilities. The proceeds from those sales can now "be recycled into other infrastructure projects," says Roger Feldman of McDermott, Will & Emery in Washington.

Meanwhile, infrastructure issues seem to be intruding on another area of public finance: state bond ratings. "Rating agencies take a look at how much money states are actually investing in preserving and expanding infrastructure," Mr. Giglio says.

Rating agencies consider infrastructure investment to be an indicator of a state's future ability to service its debt.