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Transportation Funding & Financing

Transit Grant Anticipation Notes (GANS)

Overview

Like highway agencies that utilize GARVEEs, transit agencies can also borrow against future Federal-aid funding. While transit bonding is quite similar to highway bonding, the transit bonds are referred to as GANs. The idea is the same; however, the agency issues bonds secured with a pledge of Federal-aid assistance, thus amassing up-front capital, and pays down the bonds over a period of time as the Federal funds are received. Firewall provisions that separate transportation funding from appropriations for other domestic purposes help make it possible for transit agencies to pledge Federal aid as the sole source of repayment, without having to encumber other transit revenue sources.

Just as the Federal-aid highway program and transit programs have different procedures for receiving funds, the mechanics of transit GANs are different from the GARVEE bonds issued for highway purposes. To aid in an understanding how transit GANs work, a brief review follows of the basic funding mechanisms for transit programs.

Qualified Projects

In contrast to Federal highway funding, most Federal transit funding is provided directly to transit agencies or units of local government, rather than state DOTs.

Two-thirds of Federal-transit funding is apportioned by formula (referred to as "formula funds"), while one-third is allocated on a discretionary basis ("discretionary funds") by Congress and the FTA.

Major FTA funding Categories

Section 5307

http://www.law.cornell.edu/uscode/text/49/5307

Funds may be used for purchase of buses, trains, ferries, vans, and support equipment. As with highway apportionments, these funds are distributed by a formula based on population and transit characteristics and divided between urbanized and non-urbanized areas.

Section 5309

http://www.law.cornell.edu/uscode/text/49/5309

Fixed Guideway Modernization

These funds are for improvement of rail and fixed guideway projects. While technically a part of FTA's discretionary program, these funds are distributed based on a formula that applies only to rail, ferry, and other transit operators.

Buses

These funds may be used for purchase of buses and improvements to bus facilities.

Fixed Guideway New Starts

These funds may be used for new rail systems and line extensions.

The bus and New Starts programs are discretionary and project-specific; no state or local area is guaranteed a specified share of these funds (as is the case with formula funds), and there is no adjustment based on population or other statistical factors. These funds may be legislatively earmarked at the time of the initial authorization (such as in SAFETEA-LU), or the funds may be annually appropriated by Congress to specific projects.

FTA recommends projects to Congress for funding, but Congress ultimately decides which projects will receive funding in the appropriations process.

Process

Transit GANs Backed by Formula Funds

Under the 1982 Surface Transportation Uniform Relocation and Rehabilitation Act (STURRA) interest costs were made eligible for reimbursements for both formula and discretionary programs. Interest reimbursement was limited to the "best available municipal financing rate" for discretionary programs and to the "average current market rate" for formula funds, as determined by FTA.

Although many transit agencies have used Federal reimbursements as one of the sources of funds for repayment of revenue bonds, no agency had issued bonds backed solely or primarily by anticipated Federal formula reimbursements until New Jersey's Certificates of Participation (COPs) issuance in 1998.

States have been increasingly interested in borrowing against Federal-aid funds since TEA-21 has enhanced both the security and amount of transit funding, as well as simplified FTA interest reimbursement provisions. The interest rate allowed in TEA-21, for all capital programs, is the best rate reasonably available at the time of financing.

Transit GANs Backed by Full Funding Grant Agreements

Transit projects that are noted in legislation without specific dollar amounts have are eligible for discretionary funding, but are not guaranteed that they will receive it. For transit New Starts projects that are offered more than one year's worth of funding, FTA is required to enter into multi-year agreements known as Full Funding Grant Agreements (FFGAs). FFGAs indicate FTA's intention to support a project, up to a specified level of funding. An FFGA will typically specify the maximum level of Federal participation and the schedule of funding for the project (e.g., $400 million, at $50 million per year for eight years). However, FFGAs are subject to appropriation (fulfillment of Federal requirements) and FTA priorities. Each fiscal year, FTA makes recommendations on which projects will receive funding and publishes a notice in the Federal Register indicating the level of funding provided to each project.

While transit agencies may use the discretionary funds provided through FFGAs to repay debt, these funds are not guaranteed to arrive on schedule because they are subject to annual appropriations. Because discretionary funds provided under an FFGA are project-specific, there is limited ability to shift funds between projects in the event of a shortfall.

Thus, the credit risks for a transit GAN backed by a discretionary FFGA may be higher than for a transit GAN backed by formula funding at an equivalent coverage level. A grantee can increase coverage levels by borrowing less than the FFGA amount (essentially providing the coverage required for a good rating opinion) so that even if Congress appropriates significantly less than the budget request, there is likely to be enough of an appropriation to at least cover required debt service.

Projects

An example of a past transaction that has explicitly relied on a pledge of future FFGA funding is the Hudson-Bergen Light Rail project in New Jersey. It was supported primarily by a transit GAN, issued against anticipated discretionary funding. As a secondary pledge, the financing was also backed by a pledge from the state's transportation trust fund, in the event that FFGA funds were not forthcoming.