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Transportation Funding & Financing

Grant Anticipation Revenue Vehicles (GARVEEs)

Overview

A GARVEE is a designation applied to a debt financing instrument that has a pledge of future Federal-aid for debt service and is authorized for Federal reimbursement of debt service and related financing costs. This financing mechanism generates up front capital for major highway projects that a state may be unable to construct in the near term using traditional pay-as-you-go funding approaches.

States can receive Federal-aid reimbursements for a wide array of debt-related costs incurred in connection with an eligible debt financing instrument, such as a bond, note, certificate, mortgage, or lease; the proceeds of which are used to fund a project eligible for assistance under Title 23. Bond-related costs eligible for Federal-aid reimbursement include interest payments, retirement of principal, and any other cost incidental to the sale of an eligible bond issue. The issuer may be a state, political subdivision, or a public authority.

The use of advance construction or partial conversion of advance construction also facilitates state issuances of GARVEEs. They are generally used in conjunction with advance construction to enable using Federal-aid funds for future debt service payments. The GARVEE bond technique enables a state to accelerate construction timelines and spread the cost of a transportation facility over its useful life rather than just the construction period. The use of GARVEEs serves to expand access to capital markets as an alternative or in addition to potential general obligation or revenue bonding capabilities.

Transit agencies are using similar mechanisms to borrow against future Federal-aid funding. While transit financings are quite similar to the GARVEE type instruments, the transit debt mechanisms are know as Grant Anticipation Notes (GANs).

Qualified Projects

A qualified project must be approved as a Federal-aid debt-financed (bond, certificate, note, or other debt instrument) project in order to receive payments for eligible debt-related costs under Section 122 of Title 23. Once a project is selected for bond financing, the project is submitted to the responsible FHWA Division Office for approval as an advance construction (AC) project. The AC designation will ensure that the project follows Federal-aid procedures and will preserve the eligibility to reimburse debt-related costs with future Federal-aid funds. To be authorized as AC, the project must be eligible for Federal-aid funding under one or more program categories as set forth in Title 23, section 115 (e.g. NHS, STP, etc.). Any reimbursements of debt-related costs must be made with obligations of eligible categories of Federal-aid funds. The AC amount designated at the time of project approval must consist of some combination of eligible funding categories, although the State each year retains the flexibility to decide which category(ies) to obligate for AC conversion. The State retains the right to use non-Federal funds in lieu of Federal-aid for debt service costs.

Projects

From 1997 through 2008, 20 states plus Puerto Rico and the Virgin Islands have issued GARVEE bonds, totaling $9.3 billion as shown in the table below. States that have issued GARVEEs are also shown on the Project Finance State by State Interactive Map. A total of 54 individual transactions have taken place.

State No. of
Issues
Total Issuance (millions) Projects Financed
Alabama 1 $200.0 County bridge program
Alaska 1 $102.8 Eight road and bridge projects
Arizona 6 $528.4 Maricopa freeway projects
Arkansas 3 $575.0 Interstate highways
California 2 $712.5 Eight road projects
Colorado 5 $1,665.6 Any project financed wholly or in part by Federal funds
Georgia 2 $840.0 Various transportation projects
Idaho 2 $367.3 Various expansion projects
Kentucky 2 $417.5 Three Interstate widening and rehabilitation projects
Maine 2 $98.4 Replacement of the Waldo-Hancock Bridge
Maryland 2 $750.0 InterCounty Connector
Montana 2 $167.5 44 miles of US 93 improvements
New Jersey 1 $131.6 Route 52 Causeway Replacement Project
New Mexico 2 $118.7 New Mexico SR 44, US 70 Corridor Reconstruction
North Carolina 1 $287.6 38 projects around the state
North Dakota 1 $51.4 Highway and bridge projects
Ohio 9 $1,303.1 Various projects including Spring-Sandusky and Maumee River improvements
Oklahoma 4 $290.4 Projects in 12 corridors
Puerto Rico 1 $139.8 Various transportation projects
Rhode Island 2 $401.4 Highway, bridge, and freight rail improvement projects
Virgin Islands 1 $20.8 Enighed Pond Port Project and Red Hook Passenger Terminal Building
West Virginia 2 $109.2 Route 35 enhancements
Total 54 $9,279.0

The following graph illustrates a steady increase in total GARVEE activity since the program's inception.

The following case studies highlight projects that have used GARVEE bonds:

InterCounty Connector (Prince George's County, MD)
T-REX Transportation Expansion Project (Denver, CO)

Process

Once a project agreement is signed granting approval for AC designation, a State will make an election to seek reimbursement for debt service and/or related issuance costs in lieu of reimbursement for construction costs. FHWA prefers that each project be reimbursed either on the basis of debt-related costs or on invoice costs (not both). However, FHWA will consider exceptions to this either/or provision, if the State provides assurance that the project costs being reimbursed from the bond proceeds can be identified and tracked. For example, the bond proceeds may used to fund a project phase or a specific activity, or be limited to a dollar amount per project.

If a State elects to receive debt-service reimbursements, a debt service schedule should be included in the project agreement. If multiple projects are funded with the proceeds of a bond issue, each project would have a prorated share of the debt-related costs.

To comply with the intent of the fiscally constrained planning process, the Federal share of the debt-related costs (e.g., interest and principal payments, associated issuance costs, and on-going debt servicing expenses) anticipated to be reimbursed with Federal-aid funds over the life of the bonds should be designated as AC. The planned amount of Federal-aid reimbursement for debt service (AC conversion) should be included in the State Transportation Improvement Program (STIP) in accordance with FHWA procedures relating to STIP preparation.

It is important to note that FHWA approves only the project to be debt-financed in order to receive debt service reimbursements, not the bond issue which is under State authority.

GARVEE PROCESS DETAILS

The following details about GARVEEs have been taken from the "Finer Points of GARVEEs," a recurring feature of FHWA's Innovative Finance Quarterly. They represent FHWA's current administrative interpretation of the program.

Can Regular Federal-aid funds and GARVEE proceeds be used on the same project?

FHWA's GARVEE Guidance issued in 2004 clarifies that both types of financing can be used on the same project, as long as there is only one type of reimbursement for each expenditure.

Can a GARVEE be issued by a local government?

There is no Federal prohibition or restriction that would prevent a local government from issuing a GARVEE, but local governments may face more legal and financial issues than state governments. Local governments would need authority under state law to issue debt and assure capital markets it has the legal authority to determine use of the Federal-aid funds being pledged. Also, because of likely lower coverage ratios for a local GARVEE than for state debt, local governments may need backstop pledges, bond insurance, or credit assistance from the Federal or state government to achieve acceptable bond ratings and low interest rates.

Is a state required to enter into a Memorandum of Agreement (MOA) or Memorandum of Understanding (MOU) with FHWA in order to issue a GARVEE bond?

No MOU or MOA is required under legislation, regulations, or guidance. States are only required to notify FHWA Divisions that they plan to seek reimbursement for debt service costs rather than construction costs, provide a pro-forma debt service schedule, and seek approval under regular Federal-aid procedures for projects that will be financed with proceeds from the GARVEE bond issuance. Because GARVEEs have long tenures (15 years or more), some states have voluntarily entered into MOUs or MOAs with FHWA Division offices in order to describe future procedures that will be used to process GARVEE transactions.

How can the State Infrastructure Bank (SIB) program be used in conjunction with GARVEEs?

A SIB can: 1) be the source of financing for a loan repaid with Federal-aid funds; 2) provide a line of credit, interest rate buy-down, or other form of credit assistance to the GARVEE debt; and 3) be a subordinate loan that will also assist the credit rating of the GARVEE.

Can GARVEEs be issued by Tribal Governments?

Under Section 122 of Title 23, Federal-aid funds, including tribal allocations from the Indian Reservation Roads (IRR) program, may be used to pay the interest and issuance costs of bonds issued to advance eligible IRR projects. While tribal governments may use Federal-aid funds to repay debt service, the Federal government does not guarantee the tribally issued bonds.

Legislation

Section 122 of Title 23
Codifies into permanent law the 1995 NHS Act provisions that make bond-related costs eligible for Federal reimbursement on any Federal-aid project eligible under Title 23.

Section 115 of Title 23
Codifies the designation of advance construction.

Enabling legislation is required at the state level in order for state DOTs to issue GARVEE debt. Additional information on the different options and issues addressed in state GARVEE legislation is available in the State Legislation section of the Clearinghouse website, together with onward links to actual GARVEE legislation enacted in states around the country.

State GARVEE Enabling Legislation

Before being able to issue GARVEE bonds, state legislatures must enact legislation authorizing GARVEE bonding authority. States must designs their GARVEE enabling legislation to meet their own constitutional and statutory restrictions on debt. As a result there is a great amount of variety within this body of legislation from state to state. The following discussion highlights the variety of approaches that can be used with a number of issues when enacting GARVEE legislation.

Project Specific vs General Authorization

Some states enact project-specific legislation - that can be less flexible, but specific projects can garner better support, especially if it's a statewide program of projects or one large project - such as the Inter-County Connector (ICC) in Maryland, a $2.4 billion, 18-mile, limited access, toll road linking U.S. 1 in Prince George's County to I-270/I-370 in Montgomery County. In April 2005, the Maryland General Assembly authorized the issuance of up to $750 million in GARVEE bonds to finance the ICC,. The financing package for this facility also includes toll revenue bonds and earmarked funding from SAFETEA-LU.

California uses a different type of project specific approach. Here the legislation requires that local areas apply for GARVEE authority on a project-specific basis. The state then issues the debt on their behalf, but then the local Metropolitan Planning Office (MPO) has to pledge future Federal-aid to cover the payments.

Limits on Issuance

Some states authorize up to a specific level of GARVEE issuance in authorizing legislation, and the DOT has to obtain legislative approval in order to exceed the cap.

California's GARVEE legislation requires a "capacity analysis" where the Treasurer examines the markets and revenues, so it's a dynamic cap.

Colorado allowed issuance of up to 50% of apportionments but later dropped it to a lower amount.

Pledge/Limit on Source of Repayment

Arkansas's GARVEEs were to be repaid solely with Interstate Maintenance funds. Other states specify a broader pledge (all Federal funds) and some even permit a pledge of state funding as backstop.

Term of GARVEEs

Some states set a term in the legislation, others let the DOT set it based on market conditions, or it may already be limited by state issuance.

Resources

GARVEE Bond Guidance
In March 2004, FHWA updated its GARVEE Bond Guidance, replacing earlier guidance issued in August 2000.

Chapter 2 of FHWA's Project Finance Primer
Published in 2010; discusses GARVEEs in depth.

What Every Transportation Manager Should Know about GARVEEs.pdf (633 KB)
An FHWA Resource Center Presentation, May 2007.

Today's Roads with Tomorrow's Dollars: Using GARVEE Bonds to Finance Transportation Projects
A Brooking Institution publication from March 2005.

California's GARVEE Program Website