Grant Anticipation Revenue Vehicles

(GARVEEs) offer states a new way to

assemble up-front capital on the basis

of future Federal funds. The term

GARVEE refers to a debt financing

instrument that permits its issuer to

pledge future Federal highway funds to

repay investors.

What’s New?

Prior to 1995, states could use their

Federal highway grants to repay only

the principal component of debt service on most projects. This restrictive

rule was out of sync with the cash

requirements that stem from realworld bond issues, since the predominant component of debt service during

the early years of debt retirement is

interest expense.

Section 311 of the National Highway

System Designation Act of 1995 changed

the rules by conferring Federal-aid eligibility on a wide array of bond-related

costs. Specifically, a state may use future

obligations of Federal-aid funds to reimburse the retirement of principal and

payment of interest, issuance, insurance,

and other costs incidental to the sale of

an eligible debt financing instrument.

Examples of “other” costs include capitalization of a reserve account or contingency fund. In all cases, the project for

which debt is being issued must be eligible for “regular” Federal-aid funding.

This significant change to the Federal-aid

program was codified into permanent

highway law as an amendment to Section

122 of Title 23 of the U.S. Code.

How Do GARVEEs Work?

Once a project is selected for GARVEE

financing and its costs are estimated,

the project must be approved as an

advance construction (AC) project by

the responsible FHWA Division

Office. The AC designation preserves the

project’s future eligibility for Federal

assistance. The

amount of the AC

designation should

coincide with the

Federal share (typically, 80 percent) of

the debt-related costs

anticipated to be

reimbursed during

the life of the bonds. 

When the GARVEE

is issued, the main

form of security

backing this debt

financing instrument

is the state’s obligation of future

Federal-aid apportionments. FHWA

anticipates that the state would designate an AC amount up-front, and then

obligate funds in each succeeding year

in order to partially convert the designated AC amount. Each year, the

issuer (state, state infrastructure bank,

or other agency) would pay periodic

debt service by receiving payments

from FHWA for the Federal share of

the expenditure. The following diagram illustrates how a very simple version of a GARVEE might work.

The diagram focuses on periodic

Federal obligations (i.e., partial conversions of advance construction) and

payments that occur over the life of

the debt to help retire permanent

financing. This, however, is just one

Quarterly

FHWA's

MIRIAM ROSKIN, EDITOR VOL. 3, NO. 2

MAX INMAN, FHWA MANAGING EDITOR FALL 1997

Also in this issue. . .

Legislative Spotlight

Highway Infrastructure

Privatization Act . . . . . . . .3

End-of-Fiscal-Year Wrap-Up

Selected Innovative 

Finance Statistics . . . . . . .4

SIB Capitalization 

Activity . . . . . . . . . . . . . .5

Resource Referral

Accessing .pdf Files . . . . . .6

TECHNICAL CORNER

“Grant Anticipation Revenue Vehicles”– A New Way to Retire Debt

continued on page 2

Investors

Project

Issuer

Key

1 Proceeds of debt

2 Proceeds of debt

3 Federal payments

4 Non-Federal match

5 Debt service

1

2

5

3

4

Matching

Source

Federal

Highway

Administration
2

application of the GARVEE concept. Another potential use

of this financing vehicle would be to repay short-term borrowing by using a single AC conversion upon project completion,

with the resulting liquidating cash used to help take out construction financing. An entirely different approach would treat

future Federal obligations as a secondary, rather than primary,

source of repayment. The purpose of a “secondary GARVEE”

would be to enhance the creditworthiness of obligations

backed by other revenue sources.

One of the tricky parts of implementing a GARVEE is accurately calculating the Federal and non-Federal contributions.

One possibility is to account for the contributions on a nominal, current-year basis. Alternatively, the state might elect to

provide the non-Federal match up-front, and do so on the basis

of 20 percent of the net present value of the anticipated payment streams. As a third possibility, the project sponsor might

agree to separate the debt financing for the project into two

issues, with one issue for the estimated Federal share and the

other issue for the estimated non-Federal share. The costs associated with the former debt issue would then be reimbursed

with Federal-aid funds; the costs on the latter debt issue would

be reimbursed with non-Federal funds. 

Are GARVEEs Marketable?

Although several states have considered issuing debt backed by

future Federal-aid apportionments, none has yet done so. As a

result, it is not yet certain how rating agencies and investors will

react to GARVEE obligations. One obvious concern for

investors is assessing the likelihood that future Federal funds will

be available for debt service over an extended period of time.

Thus, the term of the GARVEE will be an important criterion

for rating agencies to consider when assessing creditworthiness.

Short-Term GARVEEs

Short-term GARVEEs are defined as notes that are backed by

future obligations of currently-authorized Federal-aid funds.

For example, assuming that a state issued the GARVEEs in the

second year of a five-year authorization period, the term of the

notes – or at least that portion backed by Federal funds – could

not exceed four years. With regard to the adequacy of future

Federal-aid obligations and payments to service the debt, the

only risk presented by a short-term GARVEE is whether the

annual U.S. Department of Transportation (USDOT) appropriations acts will provide sufficient obligation authority to

cover the portion of debt service to be supported by Federal

funds. This is known as appropriations risk. 

Assuming an adequate coverage ratio, short-term GARVEEs

would likely be able to attain an investment grade rating, given

that annual obligation authority amounts typically fall within a

relatively narrow range around authorized funding levels.

Moreover, there is already precedent for this kind of short-term

financing vehicle: grant anticipation notes backed by transit

formula grants for urbanized areas. Thus, it appears unlikely

that issuers would need to pledge a secondary source of revenues

as a backstop in order to achieve an investment grade rating. 

Long-Term GARVEEs

Long-term GARVEEs are debt instruments that are backed by

future obligations of Federal-aid funds for a term that extends

beyond the current authorization period. In addition to

appropriations risk, long-term GARVEEs also present the risk

that the Federal-aid program will not be reauthorized beyond

the end of the current authorization period. This is known as

authorization risk.

The outlook for long-term GARVEEs is less clear-cut.

Although there is an 80-year history of Federal aid for highways, authorization risk appears more problematic than shortterm appropriations risk, especially given recent debates over

gas tax “turnback” and other dramatic contractions of the

Federal-aid program. For long-term GARVEEs to attain an

investment grade rating, it is possible that they would need to

be backstopped by a secondary source of revenues that evidence at least a 1.0x coverage ratio.

Are There Tax Considerations?

Federal tax law presently prohibits tax-exempt bonds from

being directly or indirectly guaranteed by the Federal government. However, there is substantial historic precedent in the

municipal bond market for recipients of Federal Transit

Administration and Environmental Protection Agency grants

to issue grant anticipation notes on a tax-free basis. Moreover,

the Treasury Department in recent months has endorsed the

concept of states using Federal grants to secure tax-exempt

borrowings under the Administration’s NEXTEA credit

enhancement proposal and school bond interest subsidy proposal. Although each state will need to consult with its own

bond counsel, it appears that GARVEE instruments should be

issuable on a tax-exempt basis.

GARVEEs, continued from page 1

Contacts:

David Seltzer, FHWA (202/366-0397) or

Bryan Grote, FHWA (202/366-0673).

GARVEEs in Action

Several states, including Ohio and New Mexico, are currently

planning to put the GARVEE financing strategy into practice. It

is anticipated that at least one of these projects will also involve a

public-private partnership in which a selected contractor will hold

responsibility for both financing and designing the project.

Another project will likely rely on a State Infrastructure Bank to

serve as the implementing agency. 

As these projects’ plans of finance are made final, IFQ will keep

readers up-to-date on their particulars.

Quarterly

FHWA's
3

Quarterly

FHWA's

The previous issue of IFQ provided a description of the

Transportation Infrastructure Finance and Innovation Act of

1997 (TIFIA), which would create a new Federal program to

provide direct loans, loan guarantees, and other types of credit

assistance to large transportation infrastructure projects. The

other major highway financing proposal to emerge from the

Senate this session is the Highway Infrastructure Privatization

Act (HIPA), which would create an opportunity for private

entities to issue tax-exempt debt for the purposes of developing public-purpose highway infrastructure. This quarter, IFQ

describes the problem HIPA seeks to address and outlines

specifics of the proposal. It is expected that as with TIFIA,

HIPA’s basic provisions will be incorporated into the Senate’s

final bill for ISTEA reauthorization. 

HIPA: Background

Early in 1997, Senator John Chafee (R-RI), Chairman of the

Committee on Environment and Public Works, introduced

HIPA to level the playing field between public and private

entities who borrow funds through issuing debt. HIPA was

co-sponsored by Senators Warner (R-VA), Bond (R-MO), and

Moynihan (D-NY). It recently passed the scrutiny of the

Senate Finance Committee. HIPA could be an important step

towards lowering one of the chief barriers to private participation in the provision of the nation’s highway infrastructure.

Current Tax Law: A Built-In Bias Against PrivatelyFinanced Highways

Before delving into HIPA’s specifics, it is important to understand the conditions that brought it about. Throughout this

century, public agencies have assumed the lead role in developing highway infrastructure. These public agencies’ ability to

finance the projects was greatly enhanced by the fact that tax

law permitted them to issue debt on a tax-exempt basis. (The

phrase “tax-exempt” refers to the fact that investors who purchase the debt instruments, such as bonds, need not pay taxes

on the interest paid to them by the issuer.) Issuing tax-exempt

debt is less costly to the issuer, because investors are willing to

accept a lower interest rate in exchange for the resulting interest income being tax-free.

While public agencies may issue tax-exempt debt, current tax

law significantly limits the permissibility of tax-exempt debt

for highway projects that are privately owned and/or operated.

This policy is at odds with a budgetary and political environment that is seeking to encourage the private sector to take a

more active role in financing, designing, constructing, and

operating highway facilities. HIPA seeks to address the tax

code’s existing bias against private sector participation in the

provision of highway infrastructure, such as through long-term

operating concessions.

HIPA’s Key Provisions

Key features of the proposed legislation are listed below.

• HIPA would establish a program under which taxexempt debt could be issued for privately-owned and/or

privately-operated projects.

• Tax-exempt financing would be available for no more

than 15 private projects.

• The total face value of bonds issued under this program

could not exceed $15 billion.

• Bond proceeds could not be used to acquire rights-of-way.

• Selected projects would have to serve the general public,

be on publicly-owned rights-of-way, eventually revert to

public ownership, and be included in a state’s 20-year

transportation plan.

• Projects authorized under the program would be selected

by the Secretary of Transportation, in consultation with

the Secretary of Treasury.

The purpose of the aforementioned $15 billion volume cap is

to limit the potential revenue losses under this program. This

is because every dollar of debt issued on a tax-exempt basis

results in forgone tax receipts to the U.S. Treasury. By limiting

the aggregate volume of tax-exempt debt issuance, the potential fiscal impact of this program could be controlled. Bonds

issued under the program would be subject to the Internal

Revenue Code rules that govern private activity bonds, but

they would not count against a state’s tax-exempt volume cap.

LEGISLATIVE SPOTLIGHT

Highway Infrastructure Privatization Act

TRB Workshop Announcement: Transportation Financial Planning

The Transportation Research Board’s (TRB) 77th Annual Meeting will be held January 11–15, 1998, in Washington, DC. The TRB

Committee on Taxation and Finance will sponsor a two-part workshop from 10:00 am to 4:00 pm on Sunday, January 11. The morning session will address capital markets and debt financing; provide an overview of municipal bond markets, including who the buyers are and what

factors influence bond prices; and review recommended best practices for debt issuance. The afternoon session will address Federal-aid innovative financing techniques and statewide financial planning; ISTEA financial planning requirements, including how to perform effective

statewide financial planning; and current and proposed innovative financing techniques that can be used in connection with Federal funds.

Contacts: Jon Williams or Mary DeMinter, TRB (202/334-3205).

Contact: David Seltzer, FHWA (202/366-0397).
Quarterly

FHWA's

4

Total ProjectCreditCreditScoredCash

ProjectCostInstrumentAmountBudgetary CostDisbursements

San Joaquin Hills$1.4 billionStandby line of $120 million$9.6 millionNone

Corridorcredit

Foothill/Eastern$1.8 billionStandby line of$145 million$8.0 millionNone

Transportation credit

Corridor

Alameda Corridor$2.0 billionDirect loan$400 million$58.7 million$140 million

Federal Credit Activity through Fiscal Year 1997

Federal fiscal year 1997 was a busy year in innovative finance. One hub of activity centered on the State Infrastructure Bank

(SIB) Pilot Program: the first 10 banks began to capitalize and finalize loan agreements; an additional 29 participants were

named at a White House briefing, and these states obligated almost $150 million in newly appropriated capitalization grants.

Other activity focused on Federal credit assistance to individual major projects: the first portion of the direct Federal loan to the

Alameda Corridor Transportation Authority was disbursed, and the California Transportation Corridor Agencies’ toll road projects, which previously received standby Federal lines of credit in fiscal years 1993 and 1995, continued to move ahead. The

tables below and on page 5 provide a brief chronicle of financial highlights of the previous fiscal year. 

END-OF-FISCAL-YEAR WRAP-UP

Selected Innovative Finance Statistics

BEYOND FY 1997: FY 1998 SIB ACTIVITY

Immediately following the close of federal fiscal year 1997, several SIBs registered new activity: 

• On October 10, the Oregon SIB made two loans of $300,000 and $800,000, respectively, to the Tualatin-Sherwood

Highway and Newberg-Dundee Bypass projects. These two projects have a combined value of almost $200 million.

• In Ohio, the Butler County Transportation Improvement District (TID) is repaying its combined $35 million loan for the

Butler Regional Highway, with interest. The TID repaid the loan with proceeds from $155 million in bonds issued on

November 1, 1997. Ohio SIB officials expect to lend $20 million of the repaid funds as a so-called “second-generation”

loan to the City of Cincinnati to assist a $120 million Interstate relocation project. Ohio is also putting the finishing

touches on an agreement to lend $6.9 million to a transit project in Cleveland. 

• Arizona has completed two loan agreements. The loans are expected to be $26 million and $24 million, respectively, for

construction of segments of the Price Freeway (Chandler, AZ) and the Red Mountain Freeway (Mesa, AZ).

• Missouri has executed two additional loan agreements for up to $6 million and $28 million, respectively, for Highway

179 in Cole County and the Cape Girardeau Bridge. The combined value of these projects is approximately $127 million. In addition, it is expected that an additional loan of approximately $1.7 million will be made to the Springfield

Transportation Corporation in 1999.

Please see the next issue of IFQ for more detail on all of these projects.
Quarterly

FHWA's

5

Federal 

State Outlays

Obligations: 

Regular Highway Funds Highway Obligations: 

FY97 Appropriations Transit Obligations: FY97 Appropriations

Alaska $0

Arizona 14,519,799

Arkansas 0

California 0

Colorado 0

Delaware 0

Florida 20,077,605

Indiana 0

Iowa 0

Maine 0

Michigan 0

Minnesota 0

Missouri 13,000,000

Nebraska 0

New Jersey 0

New Mexico 0

New York 0

North Carolina 0

North Dakota 0

Ohio 35,000,000

Oklahoma 0

Oregon 8,973,000

Pennsylvania 0

Rhode Island 0

South Carolina 0

South Dakota 0

Tennessee 0

Texas 75,211,476

Utah 0

Vermont 0

Virginia 0

Washington 0

Wisconsin 0

Wyoming 0

Puerto Rico 0

Total $166,781,880

$2,490,000

6,700,000

1,500,000

3,000,000

1,500,000

1,500,000

8,650,000

3,390,000

870,000

2,540,000

11,050,000

3,960,000

0

2,830,000

1,500,000

8,140,000

12,000,000

1,500,000

2,540,000

5,100,000

4,700,000

5,510,000

1,000,000

1,500,000

3,000,000

2,830,000

1,500,000

12,000,000

2,310,000

1,500,000

3,000,000

1,500,000

1,500,000

2,510,000

1,500,000

$133,520,000

$0

0

0

0

0

0

0

0

630,000

0

0

0

7,410,000

0

0

0

0

0

0

6,900,000

0

0

2,390,000

0

0

0

0

0

0

0

0

0

0

0

0

$10,430,000

$0

14,519,799

0

0

0

0

20,077,604

0

0

0

0

0

8,500,000

0

0

0

0

0

0

35,000,000

0

8,973,000

0

0

0

0

0

75,211,476

0

0

0

0

0

0

0

$162,281,879

Status of Accounts for Fiscal Years 1996 and 1997, Cumulative

(Data cover October 1, 1995 through September 30, 1997)

END-OF-FISCAL-YEAR WRAP-UP

State Infrastructure Bank Pilot Program: Capitalization Activity

As of September 30, 1997, the 29 participants in the SIB pilot program had declared a total of $2.1 billion in advance capitalization of regular Federal-aid highway funds. Total obligations exceeded $310 million, including regular Federal-aid highway funds

and the additional funds appropriated under the USDOT Fiscal Year 1997 Appropriations Act. The following table provides a

state-by-state breakdown of obligations and Federal outlays that represent the actual deposit of Federal funds into a SIB.
A REMINDER TO READERS

FHWA DOES NOT MAINTAIN A MAILING

LIST AND DOES NOT DISTRIBUTE IFQ

DIRECTLY. IFQ IS AVAILABLE AS AN

INSERT TO THE AASHTO JOURNAL,

AND IS AVAILABLE ELECTRONICALLY

THROUGH:

• FHWA Federal-Aid Financial

Management Division’s WWW

Home Page:

“http://www.fhwa.dot.gov” 

(select “Major Program Areas” and

then “Innovative Finance”)

IFQ IS ALSO PROVIDED TO THE FOLLOWING ORGANIZATIONS FOR REDISTRIBUTION AND/OR AS INFORMATION FOR

THEIR MEMBERSHIP:

• National Association of Regional 

Council’s (NARC’s) Association of 

MPOs (AMPO)

• ITS America

• American Public Transit 

Association (APTA)

• Surface Transportation Policy 

Project (STPP)

• State & Territorial Air Pollution 

Program Administrators/Association of Local Air Pollution 

Control Officials 

(STAPPA/ALAPCO)

• Association for Commuter 

Transportation (ACT)

• International Bridge, Tunnel, and

Turnpike Association

MIRIAM A. ROSKIN, EDITOR

PORTER & ASSOCIATES, INC.

206/441-9808

FAX: 206/441-9852

MROSKIN@PORTER-INC.COM

LAURIE L. HUSSEY, CS MANAGING EDITOR

CAMBRIDGE SYSTEMATICS, INC.

617/354-0167

FAX: 617/354-1542

LLH@CAMSYS.COM

MAX INMAN, FHWA MANAGING EDITOR

202/366-0673

FAX: 202/366-7493

Reproduction (in whole or in part) and

broad distribution of IFQ is strongly

encouraged. Permission from FHWA, the

editor, or any other party is not necessary.

Quarterly

FHWA's

Quarterly

FHWA's

6

CONTRIBUTING AUTHORS

Contributing authors to articles in Vol. 3, Nos. 1 and 2 of IFQ include:

Patrick Balducci, Cambridge Systematics, Inc.

Bryan Grote, FHWA

Laureen Hartnett, Cambridge Systematics, Inc.

Ben Porter, Porter & Associates, Inc.

Miriam Roskin, Porter & Associates, Inc.

David Seltzer, FHWA

RESOURCE REFERRAL Accessing .pdf Files

One of the best ways to obtain IFQ and other publications is via agencies’ and associations’ home pages. An increasing number of documents appear as portable document format (.pdf ) files; last quarter’s IFQ, for example, can be found as a file

named ifqv3n1.pdf on FHWA’s home page (http://www.fhwa.dot.gov/innovativefinance/). These .pdf files are nice because they are essentially a snapshot of the document: same formatting, same layout, same graphics. To retrieve and download the

files, however, you need a software program called Adobe Acrobat Reader.

Fortunately, it is free and easy to obtain. Simply go to http://www.adobe.com, scroll

down to the yellow box that says “Get Acrobat Reader,” click on the box, and follow

Adobe’s instructions for retrieval and installation. It only takes a few minutes to

install the reader. 

Once it is installed, open the program called Acrobat Reader, and open any .pdf file

you have downloaded from the Internet in the same way you would open a file in a

word processing program. The document should appear on the screen in full layout.

When you print the document, you will have a print-quality version that looks like

something you would receive in the mail. A warning however: some documents are

too complex for certain printers to handle. If this happens, your printer will likely

display the message “Print Overrun.” If that happens, try reducing the resolution

(e.g., by decreasing the dots-per-inch from 600 to 300), or find a colleague who

seems to know his or her way around a printer.

Finance Seminar for Transportation Executives

FHWA and the Institute of the Americas are hosting a seminar December 3-5, 1997

entitled Financing the Bridge to the 21st Century: A Policy Workshop for Senior

Transportation Executives. FHWA has invited state and Federal transportation executives to attend the seminar, which will be held on the Institute’s campus in La Jolla,

CA. The seminar will focus on policy issues relating to the use of innovative publicprivate strategies for financing transportation projects. It will feature senior DOT

officials and transportation finance experts who will make presentations, lead discussion groups, and facilitate teams analyzing case studies of actual projects.

The Institute of the Americas is part of the University of California at San Diego. It

is an independent, inter-American institution devoted to finding effective responses

to some of the major challenges facing the countries of the Western Hemisphere.

The Institute is considered a leading institution of its kind and serves as an important location for leaders to define and refine the economic, political, and social agenda for the Americas.

Contact: Max Inman, FHWA (202/366-0673).