On October 6, 2004, the Federal Highway Administration

(FHWA) announced a new Special Experimental Project (SEP-15)

to encourage tests and experimentation in the entire development process for transportation projects. SEP-15 is aimed

specifically at promoting increased project management flexibility, innovation, efficiency, and timeliness, while simultaneously

promoting new revenue sources. The FHWA plans to use the

lessons learned from SEP-15 to develop more effective approaches

to highway project planning, project development, finance, design,

construction, maintenance, and operations.

SEP-15 will allow FHWA to test project development approaches

that provide the flexibility and timely decision-making often

required to attract private capital while still exercising essential

FHWA stewardship responsibilities. Partnerships between private investors and public transportation agencies can bring not

only greater funding to a project but also more intellectual

capital and innovation. The objective of SEP-15 is to identify

for trial evaluation and documentation public-private partnership

approaches that advance the efficient delivery of transportation

projects while protecting the environment and the taxpayers.

SEP-15 addresses four major components of project delivery –

contracting, compliance with FHWA’s National Environmental

Policy Act (NEPA) process and other environmental requirements, right-of-way acquisition, and project finance. This

experimental authority does require applicants to fully comply

with all requirements of NEPA and other state and Federal

environmental laws and regulations. States will have to follow

the same environmental requirements under SEP-15 as they

would for any other project. In order to meet the objective of

SEP-15, proposals should describe the specific Federal-aid program areas of experimentation and identify proposed performance

measures to evaluate the success of the SEP-15 project.

Information on the SEP-15 program will be available in

January 2005 on FHWA’s public-private partnership web site

at www.fhwa.dot.gov/ppp.

Fiscal year 2004 was a busy year for the

Transportation Infrastructure Finance and

Innovation Act (TIFIA) program. In total,

the TIFIA Joint Program Office (JPO)

received four applications and seven Letters

of Interest in FY 2004 from sponsors considering the use of TIFIA credit assistance.

The four applications received in FY 2004

were from IdleAire Technologies,

Louisiana Transportation Authority, Las

Vegas Monorail Company (LVMC), and

the Central Texas Regional Mobility

Authority (CTRMA). These applications

requested a total of $562 million in TIFIA

credit assistance to support projects valued

at $2.1 billion.

The six FY 2004 Letters of Interest

received from project sponsors spanned

the country from a Truck Tollway project

in Virginia to a Port Expansion project in

Alaska. Along with the Letter of Interest

received from the CTRMA prior to the

submission of its application in July

2004, the TIFIA Credit Program also

received six other Letters of Interest for

the following projects: the OceansideEscondido Sprinter Rail project, the

Transbay Terminal project, the Central

Puget Sound Regional Transit Authority

(Sound Transit), Chicago Transit

Authority (CTA) for the Downtown

Intermodal Terminal project, Safer

Transport and Roadways (Star) Solutions

for the Interstate 81 project in Virginia,

and most recently the Port of Anchorage

for the Port Intermodal Expansion project.

The Port of Anchorage has divided the Port

Intermodal Expansion project into two

major expansion phases: Road and Rail

Development and the Marine Terminal

Redevelopment. The Road and Rail

Development phase will add more than

16,500 feet of new rail in order to provide

on-port ship-to-rail and ship-to-truck

cargo transfer facilities. The Marine

Terminal Redevelopment phase is further divided into two subphases: the

waterside (dock) development and the

backlands intermodal development. The

waterside dock development subphase

TIFIA UPDATE

VOLUME 10, NUMBER 2 FALL 2004

Recap of TIFIA Credit Program Activity for FY 2004

Also in this issue...

Arizona Issues Fifth GANs Series . . . .3

Transit Grants Back Bond Issuances . .5

CTA Sells $250 Million in Grant

Receipt Revenue Bonds . . . . . . . . . . .5

GARVEE Credit Fundamentals . . . . . .6

SIB Highlights . . . . . . . . . . . . . . . . . .8

Value Pricing Reduces Congestion,

Increases Revenue . . . . . . . . . . . . . . .9

Events . . . . . . . . . . . . . . . . . . . . . . .9

FHWA Announces PPP Booklet . . . . .10

NEW INNOVATIONS

SEP-15 Explores Innovations in Project Development

continued on page 2

Contact:

Alla Shaw,

FHWA,

202/366-0740,

alla.shaw@fhwa.dot.gov
2

will expand the existing dock to include 3,000 feet of berthing

space, 8,800 feet of waterside wharf, a new harbor depth of

minus 45 feet, and a 150-foot apron to accommodate gantry

cranes and a mobile crane. The backlands intermodal development subphase, for which the Port of Anchorage is seeking

TIFIA assistance, will expand the intermodal terminal yards

and provide new intermodal terminal facilities. The total cost

of the port expansion project is estimated at $427 million.

The Port of Anchorage is seeking either a loan guarantee or

direct loan of $51 million from the TIFIA program.

What’s Ahead for FY 2005

On December 8, the President signed the Consolidated

Appropriations Act of 2005, which includes appropriations and

limitations for the FHWA for FY 2005, including funding for

the TIFIA Credit Program. However, FHWA funding is still

limited by the authorizations included in the eight-month

extension act, the Surface Transportation Extension Act of

2004, Part V. As a result, all of the programs under FHWA –

including the TIFIA program – are limited to roughly eighttwelfths of what would be expected for the full year. Based on

this proportional allocation, the TIFIA program has approximately $1.7 billion in credit assistance available for FY 2005.

In November 2004, the Secretary of Transportation approved

the U.S. 183-A Turnpike Project, which is being advanced by

the CTRMA, for up to $66 million TIFIA credit assistance in

the form of a direct loan. The project, estimated to cost $342

million, is a new 11.6-mile controlled access north-south tolled

highway in central Texas. Located in a growing area of the

country, the project is expected to relieve congestion, improve

safety, reduce fuel consumption, and increase connectivity.

This project is a high priority for the region and a critical link

in the 122-mile Central Texas Turnpike System. The project,

scheduled to open in December 2007, will be constructed as a

four-lane highway, but will accommodate ultimate expansion

of the facility to six lanes. About 75 percent of the project will

be funded via debt proceeds, including an estimated $194 million of tax-exempt senior debt and $66 million of interim construction financing, which is anticipated to be refinanced with

the TIFIA loan proceeds. Other sources of funding include

over $60 million of Texas Department of Transportation (DOT)

equity and $14 million in donated rights-of-way and local government contributions. The TIFIA loan is expected to close in

March 2005, simultaneously with the bond closing.

Also in November, the TIFIA JPO received its first FY 2005 letter of

interest from the Global Rail Consortium (GRC) for the Florida

High-Speed Rail Project. The GRC is seeking $800 million in

TIFIA credit assistance, which would represent no more than

33 percent of eligible project costs for a High-Speed Rail

(HSR) project between Tampa and Orlando International Airport

(OIA) with intermediate stations in Lakeland and the Orlando

Entertainment Area. The Florida High-Speed Rail Authority

(FHSRA) currently envisions the 84-mile mainline alignment

to be located primarily in the median of I-4. State Road 417

right-of-way is currently being reviewed to provide the HSR

alignment from I-4 to OIA.

Given projects in the pipeline, FY 2005 should reflect increased

TIFIA activity, resulting in the leveraging of significant

resources to help meet transportation infrastructure needs.

Contact:

Duane Callender,

TIFIA JPO,

202/366-9644,

duane.callender@fhwa.dot.gov

TIFIA Credit Program Activity, continued from page 1

The Finer Points of TIFIA

The “Finer Points of TIFIA” box provides responses to questions posed by our readers and other observers. We hope you

find this section useful and that you will submit questions to Mark Sullivan, Chief, TIFIA JPO, (202) 366-5785 or

mark.sullivan@fhwa.dot.gov.

Question

What types of projects are eligible for TIFIA assistance?

Answer

There is a common misconception that TIFIA is solely geared toward highway or transit projects. In fact, TIFIA is available

to fund highway, transit, passenger rail, intelligent transportation systems, and intermodal freight facilities. For example, the

Port of Anchorage project featured in this issue of IFQ combines both surface and sea freight transport elements. The U.S.

Department of Transportation’s interpretation of the TIFIA statute as it applies to Federal funding of publicly owned intermodal

surface freight transfer facilities identifies a distinction between the surface freight portion of the facility and the sea freight

portion. Specifically, the portion of the facility that relates to surface freight movement including those facilities necessary to

transfer freight from or to the surface mode would be eligible for funding, while those elements of the facility that focus primarily

on sea side operations would not be eligible. The same interpretation applies to intermodal projects combining both surface

and air freight transport elements.

The specific determination of TIFIA eligible costs will depend upon a case-by-case analysis of any application submitted to

the TIFIA program.
3

The Arizona Transportation Board in October 2004 issued

$104,385,000 of Series 2004B Grant Anticipation Notes

(GANs). This is the fifth series of GANs issued by the Board

and will provide the Arizona Department of Transportation

(ADOT) with $115 million of funding for accelerated completion of the Maricopa County Regional Freeway System. With

this sale, the Board’s GAN debt issuance now totals $487 million of

which $413 million is outstanding as of December 2004.

The Series 2004B GANs have an average life of eight years and

a final maturity of July 1, 2016. The True Interest Cost (TIC)

for the issue is 3.356 percent, the lowest TIC of any of the five

series of GANs issued to date. The GANs are insured by

Ambac and are rated triple-A by all three rating agencies.

Underlying ratings on the GANs are Aa3/AA-/AA from

Moody’s, Standard & Poor’s, and Fitch, respectively.

Over the next several years, Arizona currently plans to issue up

to $190 million of additional GANs to fund projects in the

statewide construction program. This additional debt is

allowed under an additional notes test that provides flexibility

to ADOT, while supporting the high underlying ratings for the

GAN program. Under this test, additional notes can be issued

as long as Federal-aid revenues anticipated to be received by

ADOT in the year of issuance are not less than 150 percent of

the annual debt service in any Federal fiscal year that ends on or

before the expiration date of the Federal-aid authorization. For

a situation such as currently exists where no reauthorization bill

has been passed, the test contains an alternate provision that

still allows the issuance of additional notes. In this case,

Federal-aid revenues in either of the two years prior to the

issuance of the additional notes must exceed 300 percent of the

annual debt service in any Federal fiscal year that ends after the

expiration date of the Federal-aid authorization.

GARVEE ROUNDUP

Arizona Issues Fifth GANs Series

Contact:

John Fink,

Arizona Department of Transportation,

602/712-6164,

jfink@azdot.gov

GARVEE Transactions

As of November 2004

With the recent Arizona bond sale, cumulative Grant Anticipation Revenue Vehicle (GARVEE) issues through November reached

$5.1 billion. This activity level represents 28 bond issues sold by 10 states together with Puerto Rico and the Virgin Islands. The

next state planning to sell GARVEE bonds is Maine, whose estimated $50 million issue will be priced in December. The bonds,

to be issued by the Maine Municipal Bond Bank, will help finance the construction of a new cable-stayed, concrete bridge that

will cross the Penobscot River from the Town of Prospect to the Town of Verona. The Winter issue of IFQ will include more

details on the Maine bond issue.

GARVEE Activity Continues to Rise
4

The Finer Points of GARVEEs

Each issue of IFQ features questions and answers on the GARVEE program.

Note that answers to these questions are not regulatory or legislative, but represent FHWA’s current administrative

interpretations. If you have questions or want to confirm any of this information, please contact your local FHWA Division

office. GARVEE guidance is also available at:

http://www.fhwa.dot.gov/innovativefinance/garguid1.htm

Could a GARVEE be issued by a local government?

There is no Federal prohibition or restriction that would prevent a local government issuing a GARVEE, but local governments

may face more legal and financial issues than state governments, as discussed below.

Legal Issues

First, the local government would need to have the authority under the laws of its state to issue debt or otherwise borrow

funds. In many states, obtaining such borrowing authority requires a vote of the local governing body, state legislature,

and/or approval by voter referendum in the affected area.

Second, a local government would have to assure the capital markets that it has the legal authority to determine use of the

Federal-aid funds that are being pledged. Such assurance might take the form of a Memorandum of Understanding (MOU)

between the local government and the applicable state DOT. Even if the local government obtained such an MOU, the

capital markets would probably take into consideration the history of the relationship between the state DOT and the local

government, the process for allocating Federal-aid funds within that state, and the enforceability of any financial commitments

under state law.

Financial Issues

Local governments might have more difficulty issuing GARVEEs backed solely by Federal-aid funds (a “stand-alone”

GARVEE) because a coverage ratio on a local GARVEE is likely to be much lower than for a state debt issuance. For

example, if a local government received (on average) $10 million in Federal funding each year, and proposed to issue a bond

with debt service of $7.5 million per year, its coverage ratio would be only 1.33. In most cases, state-based GARVEEs can

easily achieve higher coverage ratios, because of the high relative size of state Federal-aid programs to the amount of debt

service. With lower coverage ratios, 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. Programs such as state bond banks

or state infrastructure banks could provide credit assistance to local government issuers.

Instead of having local governments issue their own GARVEE debt, some state governments are partnering with local

governments in innovative ways. In California, the state GARVEE program issues bonds on behalf of local governments,

which can seek capital funding for projects if they pledge future allocations of funding toward repayment. This provides

local governments with the benefit of state bonding authority (and its bond rating). In Mississippi, the state bond bank is

assisting local projects by issuing debt repaid by future Federal bridge funding.

Selected Innovative Finance Resources

Federal Highway Administration. Innovative Finance Home Page, containing links to IFQ, SIB and TIFIA program

information, program guidance, and special reports.

www.fhwa.dot.gov/innovativefinance/

American Association of State Highway & Transportation Officials. InnovativeFinance.Org, providing information on

innovations in all areas of surface transportation finance.

http://www.innovativefinance.org/
Notably, these GANs are being issued on a sole pledge basis,

backed only by anticipated Federal Transit Administration (FTA)

grant receipts. In most cases, the agency has no authority to

pledge the full faith and credit of the state, and there are often

restrictions on the use of dedicated local revenues such as sales

taxes. Thus GANs are becoming a valuable tool for public

transportation agencies as they seek to complete major capital

projects as close to on-time and on-budget as possible.

5

In October, the Chicago Transit Authority (CTA) issued $250

million in grant receipt revenue bonds. This is the most recent

transit grant anticipation bond issue. The CTA bonds are secured

by annual Section 5307 formula grant funds provided to CTA

by the FTA. This is the second bond issuance by CTA backed

by FTA grants, with a $207.2 million issuance last year secured

by a Full Funding Grant Agreement (FFGA) for rehabilitation

of the Cermak (Douglas) branch of the CTA’s Blue Line.

Reflecting the anticipated amounts and schedule for receipt of

Section 5307 funds from the FTA, the new sale consists of two

fixed-rate series – one for $150 million and the second for $100

million – with maturities that extend through 2015, spanning

two reauthorization periods. Over the last decade, CTA’s

Section 5307 funding has grown from $62.9 million in FY

1994 to $116.3 million in FY 2004. The bonds are projected

to have coverage ratios of 3.6 in the first few years, growing to

3.9 after 2006; CTA’s previous issue has a $10 million claim

on Section 5307 receipts in 2005 and 2006. The new bonds

were rated A2 by Moody’s and A by both Standard & Poor’s

and Fitch. With insurance provided by Ambac, the bonds were

issued with an AAA rating.

CTA has identified $5 billion of capital needs over the next five

years. Proceeds from the $250 million bond sale will be used to

support renovation of the Dan Ryan branch of the Red Line,

expansion of the Brown Line, station and bus garage reconstruction, new rail car procurement, and bus farebox replacement.

CTA Sells $250 Million in Grant Receipt Revenue Bonds

Contact:

Paul Marx, FTA,

202/366-1675,

paul.marx@fta.dot.gov

Grant Anticipation Notes or Bonds (GANs) have been used by

public transportation agencies in the same way as states have used

GARVEEs. The mechanism was first used in the early 1990s,

when the Tri-County Metropolitan Transit District (TriMet) in

Portland, Oregon leveraged a $1 million loan with the anticipation

of a $35 million grant for its new light rail system. Due to its

relatively high cost and complexity, the mechanism was not used

again until the Transportation Equity Act for the 21st Century

(TEA-21) was enacted. Minimum Guaranteed Funding Levels

and mass transit account funding provided the economic security that financial markets demanded. Since 1997, over $2.7

billion in GANs have been issued for mass transportation, as

shown in the table below.

Transit Grants Back Bond Issuances

Transit Grant Anticipation Bond Issues

Issuer Series Amount (Dollars in Millions) Security Underlying Rating Term

New Jersey Transit 1997A 139.0 FFGA – $604 million AA

New Jersey Transit 2000A 284.9 FFGA – $604 million* A- 2000-2004

New Jersey Transit 2000B 450.0 FFGA – $500 million 2004-2011

New Jersey Transit 2000C 110.0 FFGA – $142 million 2002-2005

New Jersey Transit COP1999A 160.0 Section 5307 A, A1 2001-2008

New Jersey Transit COP2000A 234.0 Section 5307 2000-2014

New Jersey Transit COP2000B 493.0 Section 5307 2000-2013

New Jersey Transit COP2002B 94.0 Section 5307 2002-2015

City of Phoenix 2000 18.3 Section 5307 & 5309 AA 2000-2012

Bay Area Rapid Transit (BART) 2001 385.0 FFGA – $750 million

Port Authority Pittsburgh 1999 70.0 Section 5309 Fixed

Guideway Modernization

Chicago Transit Authority 2003A 128.8 FFGA – Blue line A- 2003-2006

Chicago Transit Authority 2003B 78.5 FFGA – Blue line A- 2003-2005

Chicago Transit Authority 2004 250.0 Section 5307 A2, A 2004-2015

Total To Date 2,756.4

* Note: These bonds refinance the 1997A series for Hudson-Bergen LRT. The 1997A bonds are not included in the Total to Date.

Contact:

Paul Marx, FTA,

202/366-1675,

paul.marx@fta.dot.gov
6

Grant Anticipation Revenue Vehicles (GARVEEs) are state

authorized debt instruments issued to advance construction of

certain highway projects or, in the case of transit authorities, to

advance the purchase of rolling stock or other transit facility

improvements. GARVEE debt instruments can supplement

traditional pay-as-you-go and tax supported debt financing

approaches to state surface transportation projects. The primary

security for these debt instruments consists of formula-based

Federal-aid – grants for state highway departments or transit

authorities. Fitch Ratings’ definition of GARVEEs includes both

the direct pay and indirect reimbursement-based structures.

GARVEE debt instruments are special obligations of the issuing

state or transit authority. They do not constitute general obligations of the issuing entity or of the Federal government.

Fitch’s current ratings range for GARVEE debt instruments is

fairly high compared with that of other transportation credits

(‘A’ through ‘AAA’). Coverage by pledged revenues and general strengths associated with the established Federal surface

transportation grant programs are key rating considerations,

but many GARVEE debt programs have additional structural

protections. These can include debt service reserves, self-imposed

debt limits, additional bonds test, a limited maturity profile,

and the pledging of other unencumbered Federal or state

sources for debt service, among others.

A key risk to GARVEE debt instruments is Federal reauthorization, since surface transportation funding typically operates under

multi-year authorization cycles. Upon a reauthorization, Congress

may alter the amount of money available for surface transportation, the amounts allocated between highways and transit, allocations by state, and even the presence or nature of funding firewalls.

The best protections against reauthorization risk are strong debt

service coverage and limited maturities. To the extent that debt

levels increase, debt service coverage weakens, final maturities

lengthen, and security features are eliminated, a lower ratings

profile may result.

The prolonged delay in enacting a successor authorization to

TEA-21 is another dimension of reauthorization risk. The

series of interim authorizations now extending 20 months from

the expiry of TEA-21 on September 30, 2003 have substantially narrowed the 24-month window between the expiry of

TEA-21 and the expiry of the Federal motor-fuel (gas) tax on

September 30, 2005. While surface transportation funding

retains broad support and the potential for an interruption in

funding is remote, as evidenced by the timely enactment of

interim bills to ensure continued flow of funding, and because

Congress has the ability to act relatively quickly to ensure continued inflow of the gas tax and funding, the protracted policy

debate could begin to insert near-term reauthorization risk,

particularly for standalone GARVEEs.

Leveraged Federal Funds

Fitch considers the dedicated pledge of Federal highway grants

for GARVEE debt programs to be state money, since this represents Federal grant moneys apportioned or allocated to the

states. GARVEE debt program ratings are not directly linked

to the credit quality of the U.S. government or to the general

credit of the state. Although the source of revenues originates

as Federal transportation grants, the flow of funds is dependent

on state compliance with Federal regulations, and funds flow

either through the state treasury or its DOT. By dedicating this

portion of its transportation revenue stream, a GARVEE bond is

a special obligation of the state or its transportation authority.

The long and solid track record of the Federal government’s

surface transportation grants to states is a positive credit consideration, as is the demonstrated ability of states to maintain

the flow of eligible transportation grants to their highway and

transit programs. The reauthorization risk for Federal surface

GARVEE Credit Fundamentals – A Viewpoint from Fitch

GARVEE Program Strengths and Risks

Strengths

• Long history of Federal grant funding to the states for highway and transit projects, including contract authority that

permits continued obligation of funds even in the absence

of a new appropriation bill.

• Generally favorable history by the states in managing

Federal funds for highway construction and transit programs.

• Broad base of Federal motor fuel and truck-related taxes that

provide transportation funding to the states.

• Direct payment method represents a contractual obligation

of the FHWA or FTA, if revenues are available.

• Bonds that are over-collateralized with additional state funds

can mitigate reauthorization risk.

• Direct-pay GARVEEs that have strong legal covenants to

obligate adequate Federal transportation funds well in

advance of debt service due dates partially mitigate the lack

of advance segregation on a cash basis.

• Firewalls provide additional protection, particularly for

credits with constrained coverage levels.

• Extension of highway user tax levy two years beyond the

end of the authorization period provides considerable

cushion for delays in reauthorization.

• Structural elements, such as debt service reserves, debt limits,

and a medium-term maturity profile that limits reauthorization risks, can also enhance the rating.

Risks

• GARVEEs maturing beyond a current Federal transportation

funding cycle face reauthorization risk.

• During reauthorization cycles, Congress may alter total

funding to surface transportation, the allocation between

highways and transit, allocations by state, and even the

presence or nature of funding firewalls.

• In some cases, debt service payments on GARVEE bonds

are also subject to state appropriation.

continued on page 7
7

transportation grants becomes a negative credit consideration

to the extent that GARVEE debt maturities extend into more

reauthorization cycles. GARVEE bond ratings are also driven

by structural considerations, such as debt service coverage, the

ability of states to budget for and adequately segregate funds

dedicated for the bonds, and other structural protections such

as reserves, additional bonds tests, debt limits, and the like.

Highway Reimbursement GARVEEs

Some states, like Massachusetts, Virginia, Michigan, and

Mississippi, issued GARVEES secured by the flow of Federal

highway grant reimbursements from other grant eligible construction projects. The GARVEE bond proceeds finance the

construction of new projects, and debt service payments are

secured by the Federal grant reimbursement flow to the state

under its portfolio of grant-eligible projects. As mentioned,

the pledge is actually a dedicated portion of the state’s own

transportation revenues, since the Federal reimbursements are

already mixed in the pool of state transportation revenues.

Fitch takes a program rating approach to reimbursement

GARVEEs, which means that the rating assignment is based on

expected or authorized debt issuance under the program.

States inform Fitch as to the authorized size of the debt program, the number of planned debt issuances, and the expected

annual debt service requirements under the program. The latter is based on when proceeds will be needed for approved capital projects, and estimates of prevailing interest rates at the

time of sale. Fitch compares both historical and projected

Federal grant reimbursement cash flows with the expected debt

service requirements to determine the sufficiency of cash flow.

Credit quality for highway reimbursement GARVEEs is a function of coverage by dedicated revenues, the ability of states to

spend money (i.e., to regulate the reimbursement cash flow relative to upcoming GARVEE debt service requirements), and

the expected number of reauthorization periods. Debt service

requirements can either mean first dollars in to segregate in

advance for an upcoming debt service payment or monthly

segregations for debt service sized according to the payment

schedule. In certain instances, there is a reliance on highly

rated states to pay on the date due, even without any legal early

segregation; in such a case, the state’s ability to dip into

broader resources, even if they are not pledged, to mitigate any

timing concerns is a rating consideration.

Direct Payment Highway GARVEES

Leveraging of Federal funds under the direct payment program

dates back more than two decades. Prior to 1995, Federal

sources could only be used to repay the principal component of

debt. A few states issued instruments partially backed by

Federal funds, as well as state sources. More recently, with the

passage of legislation in the mid-1990s, bond-related costs are

eligible costs of construction, and states such as Arizona,

Colorado, New Mexico, Ohio, California, and Rhode Island

issued direct payment GARVEES. Under this structure, states

elect to have a direct payment agreement with FHWA to cover

amounts in accordance with a GARVEE bond debt service

schedule and in lieu of construction grant reimbursements.

GARVEE proceeds advance the financing and construction of

state and Federally approved highway projects. The timing of

debt service payments depends on the annual Federal and state

budget appropriation processes and the timely fulfillment of

Federal government requirements by the state. However, states

have some flexibility given their discretion to reprogram obligation authority as funding categories are not project specific. In

addition, once funds are obligated, they are available for at least

two years. The contractual obligation on the part of the

Federal government is to meet the payment schedule to the

extent that revenues are available. Nevertheless, there is no

Federal pledge to cover debt service on the GARVEE bonds.

Credit Considerations under the Direct Payment Method

Although Fitch takes a program rating approach to direct payment GARVEEs, there are some key differences with reimbursement GARVEEs. Most importantly, the project

agreement in conjunction with the state match provides sumsufficient coverage of debt service. From this investment-grade

ratings threshold, credit quality can be progressively strengthened by the layering in of an additional bonds test, the supplemental pledge of other Federal or state transportation moneys,

and covenants to obligate funds for debt service well in advance

of due dates, among other security measures. Weaknesses

shared by both GARVEE programs are maturities that stretch

into more Federal reauthorization periods. Overleveraging of

Federal grants for direct payment GARVEEs carries the same

risk to the flexibility of the state’s highway capital program.

Transit GARVEES – Formula 5307

Transit GARVEEs share some of the rating considerations with

their highway counterpart, including the established nature of

Federal grant funding, debt service coverage by pledged revenues, Federal reauthorization risk, state appropriation risk,

and the transit authority’s ability to spend money on projects

qualified for FTA reimbursement. A rating consideration that

may be unique to transit authorities given the use of leaseleaseback arrangements for transit rolling stock, is the bankruptcy remoteness of the structure to that of private sector

manufacturers and servicers. Subsequent Federal reauthorizations that change the nature of funding firewalls or formula

allocations could also change the credit profile of transit

GARVEEs. As with highway GARVEEs, a key disadvantage to

the transit authorities is how the GARVEE debt service payments restrict the flexibility of their capital budgets.

Federal Reauthorization Risk

The major risk under the GARVEE debt programs is Federal

reauthorization risk for debt maturities beyond the current

Federal transportation funding cycle. Congress during its reauthorization cycles may alter total funding for surface transportation programs, the allocation between highway and

transit programs, allocations among states, and even the presence or nature of funding firewalls. Shifts in any of these variables could pose a credit risk to debt under the GARVEE

programs. Ironically, interim Congressional delays in adopting

GARVEE Credit Fundamentals, continued from page 6

continued on page 8
8

GARVEE Credit Fundamentals, continued from page 7

a transportation reauthorization (as occurred between the end

of the Intermodal Surface Transportation Efficiency Act

[ISTEA] and the beginning of TEA-21, and so far since the

expiration of TEA-21) will not, as an isolated event, affect

these variables. However, extended delays could affect assumed

growth rates in Federal grants available for GARVEE payments

and, indirectly, the pace of debt issuance under these programs.

While the established nature of Federal support for surface

transportation and statutory authority helps to facilitate a

pledge of Federal grants, an equally important factor is the

Federal budgetary firewall established under TEA-21 that

largely protects surface transportation funding from competing

for annual Federal funding with most other domestic programs.

These firewalls were easier to maintain under TEA-21 and during the Federal government’s period of budgetary surplus. With

a return of deficit financing and greater competition for revenues, there is the risk that over the next few reauthorization

periods these firewalls may be modified, or eliminated. In such

an event, high debt service coverage will serve as the primary

protection for existing GARVEE programs. Least affected will

be states that continue prudent debt limitation measures and

forms of supplemental revenues for debt service.

Contacts:

Cherian George,

Fitch Ratings,

212/908-0519,

cherian.george@fitchratings.com

Scott Trommer,

Fitch Ratings,

212/908-0678,

scott.trommer@fitchratings.com

SIB HIGHLIGHTS

The third quarter of FY 2004 saw a nine percent increase

in State Infrastructure Bank (SIB) loan agreements. Ohio

led with 18 new agreements, valued at $18 million.

Pennsylvania’s activity also increased, with nine new agreements. The Pennsylvania Infrastructure Bank (PIB) has

introduced three new accounts over the past year, supporting aviation, rail freight, and municipal projects. The PIB

is the first in the nation to establish loan accounts for all

major transportation modes. After implementing a new

structure for administration and operation of its

Transportation Finance Bank, the California DOT

(Caltrans) has executed its first two SIB loans In total, as

of June 2004, 33 states have entered into 407 loan agreements, valued at over $4.8 billion (see table to right).

Leveraging Florida’s SIB: A Preview

Florida ranks second among states in terms of the dollar

volume of SIB loans, with total loan agreement amounts

reaching $741 million at the end of June 2004. The state’s

SIB program has been enhanced by two legislative actions

in recent years. In 2002, Florida enacted legislation that

expanded the scope of projects eligible for state SIB funding

to include airports, seaports, and railways. The following

year, Governor Bush signed legislation authorizing the

state SIB to leverage existing loan portfolios through

issuance of revenue bonds.

The SIB’s initial bond issuance is planned for early 2005.

The Florida Department of Transportation (FDOT) plans

a conservative start to its SIB bond initiative, with the

objective to build to an “acceptable” level while maintaining a

strong credit rating. FDOT’s leveraging approach should conservatively generate up to $50M in annual loan capacity.

Bonds that will be issued will be payable primarily from a prior

and superior claim on all state-funded infrastructure bank

repayments. FDOT has received Cabinet approval to issue up

to $300 million in SIB bonds. In addition, underwriter and

bond counsel selections have been made, and SIB loans for projects to be funded with the bond proceeds have been awarded.

Florida’s expansion of its SIB program through bonding will

enable the program to grow and evolve as a long-term financial

resource for FDOT.

SIB Loan Agreements Jump Nine Percent

Contact:

Phyllis Jones, FHWA,

202/366-2854,

phyllis.jones@fhwa.dot.gov

State Infrastructure Bank Loan Agreements by State

As of June 30, 2004

Loan 

Number of Agreement Disbursements

State Agreements Amount ($000) to Date ($000)

Alaska 1 $2,737 $2,737

Arizona 45 521,442 418,825

Arkansas 1 31 31

California 2 1,120 1,120

Colorado 4 4,400 1,900

Delaware 1 6,000 6,000

Florida 46 741,337 256,675

Indiana 2 5,715 5,715

Iowa 2 2,879 2,879

Maine 23 1,635 1,635

Michigan 33 22,207 22,207

Minnesota 15 95,719 77,013

Missouri 15 92,557 82,770

Nebraska 2 6,792 6,792

New Mexico 2 14,600 14,600

New York 10 27,700 27,700

North Carolina 2 1,713 1,713

North Dakota 2 3,891 3,891

Ohio 59 203,132 130,953

Oregon 15 19,846 18,396

Pennsylvania 47 31,000 27,000

Puerto Rico 1 15,000 15,000

Rhode Island 1 1,311 1,311

South Carolina 8 2,605,000 1,765,000

South Dakota 3 28,776 28,776

Tennessee 1 1,875 1,875

Texas 46 259,260 250,683

Utah 1 2,888 2,888

Vermont 2 1,975 1,300

Virginia 1 18,000 17,985

Washington 3 2,376 487

Wisconsin 3 1,813 1,813

Wyoming 8 77,977 42,441

TOTAL 407 $4,822,704 $3,240,111
9

TOOLS IN THE TOOLBOX

Value pricing is a way of harnessing the power of the market to

reduce traffic congestion. Tolls are charged electronically while

traffic moves at free-flow speeds, so no tollbooths are needed.

Tolls vary by the level of traffic demand to ensure demand is in

balance with the supply of available road space, thus ensuring free

flow of traffic. Tolls generate revenues that can be used to pay for

new highway capacity or other transportation improvements.

Pricing encompasses a variety of market-based approaches such as:

• HOT Lanes, i.e., High-Occupancy Toll lanes, on which variable tolls charged to drivers of low-occupancy vehicles who

choose to use High-Occupancy Vehicle (HOV) lanes, such as

the “FasTrak” Lanes on I-15 in San Diego.

• New variably tolled express lanes on existing toll-free facilities,

such as the “91 Express Lanes” on State Route 91 in Orange

County, California.

• Variable tolls on existing or new toll roads, such as the bridges

and tunnels operated by the Port Authority of New York and

New Jersey.

• Usage-based vehicle pricing, such as mileage-based vehicle taxation being explored by the State of Oregon.

HOT Lanes on I-15

Under San Diego’s I-15 “FasTrak” pricing program, customers

in single-occupant vehicles pay a per-trip fee each time they use

the I-15 HOV lanes. The unique feature of this pilot project is

that tolls vary “dynamically” with the level of traffic demand

on the HOV lanes. Fees vary in 25-cent increments as often as

every six minutes to help maintain free-flow traffic conditions

on the HOV lanes. The project is self-sufficient, generating

$1.2 million in revenue annually, about one-half of which is

used to support transit service in the corridor.

91 Express Lanes

One effective way to improve freeway operations is to manage

demand for use of specific lanes or the entire freeway through

the use of variable tolls. The 91 Express Lanes, four lanes in

the median of the 12-lane SR 91 Freeway in Orange County,

California, are a good example of the use of value pricing to

ensure efficient flow of traffic and maximize vehicle throughput and travel speeds. In 2004, speeds are 60 to 65 mph on

the SR 91 express lanes while congestion on the free lanes

reduced average peak hour speeds to no more than 15 to 20

mph. Moreover, during the peak hour, which occurs on Friday

afternoon (5:00-6:00 p.m.) in the eastbound direction, the two

“managed” express lanes each carry almost twice as many vehicles per lane than the free lanes, because of the effect of severe

congestion on vehicle throughput in the free lanes.

The 91 Express Lanes opened in December 1995. Toll revenues

have been adequate to pay for construction and operating costs.

In fact, in 2003 the private company that had the franchise to

build and operate the facility sold the franchise to the Orange

County Transportation Authority for a profit.

Value Pricing Reduces Congestion, Increases Revenues

Contact:

Patrick DeCorla-Souza, FHWA,

202/366-4076,

patrick.decorla-souza@fhwa.dot.gov

EVENTS

Innovations in Project Delivery and Financing for

Surface Transportation Infrastructure

On Sunday, January 9, 2005, the FHWA and the Transportation

Research Board’s (TRB) Taxation and Finance Committee are

sponsoring a two-part workshop focusing on new developments

in project delivery and financing approaches to meet transportation infrastructure needs. The workshop will be held

from 8:30 a.m. to 5:00 p.m. in Washington, D.C. at the Hilton

Washington Hotel, Jefferson East.

In today’s constrained fiscal environment, transportation agencies at all levels of government are actively seeking new ways to

deliver their infrastructure needs, ranging from greater involvement of the private sector through partnerships to alternative

financing mechanisms. The first part of the workshop focuses

on the potential use of public-private partnerships (PPPs) to

improve the efficiency of constructing, operating, and maintaining highways and other transportation facilities. Speakers

will explore what is needed to make PPP ventures work from the

perspective of both the private and public sectors. What factors

have contributed to successful projects and what has been

learned from efforts that have not been viewed as successful?

Case studies will highlight the experiences in states that have

implemented PPPs, identifying critical success factors. The

second part of the workshop focuses on how innovative finance

mechanisms can facilitate PPPs. A range of topics will be

addressed, including new state initiatives to expand the project

finance toolbox and the leveraging potential of innovative

finance. The emphasis of the workshop is on sharing experiences of successful strategies from the perspectives of both project sponsors and the private sector. This all-day workshop is

intended to build a better understanding of PPPs and non-traditional financing methods. It is structured in an interactive

format with time set aside for questions and dialogue with

transportation experts.

For more information, visit the TRB Annual Meeting web site

at http://www.trb.org/meeting/.

TRB 2005 Annual Meeting
10

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’s WWW HOME PAGE:

http://www.fhwa.dot.gov/

innovative finance/

IFQ IS ALSO PROVIDED TO THE FOLLOWING

ORGANIZATIONS FOR REDISTRIBUTION

AND/OR AS INFORMATION FOR THEIR

MEMBERSHIP:

❖ American Public Works

Association (APWA)

❖ Surface Transportation Policy

Project (STPP)

❖ National Governor’s Association

(NGA)

❖ National Association of State

Treasurers (NAST)

❖ National Association of State

Auditors, Controllers, and

Treasurers (NASACT)

❖ National Association of Regional 

Council’s (NARC’s) Association

of MPOs (AMPO)

SUZANNE H. SALE, FHWA

CO-MANAGING EDITOR

602/379-4014

FAX: 602/379-3608

SUZANNE.SALE@FHWA.DOT.GOV

MAX INMAN, FHWA

CO-MANAGING EDITOR

202/366-2853

FAX: 202/366-7493

LAURIE L. HUSSEY, CS MANAGING EDITOR

CAMBRIDGE SYSTEMATICS, INC.

617/354-0167

FAX: 617/354-1542

LHUSSEY@CAMSYS.COM

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.

Contributors to Vol. 10, No. 2 of IFQ include:

Roger Berg, Cambridge Systematics, Inc.

Duane Callender, TIFIA JPO

Patrick DeCorla-Souza, FHWA

John Fink, Arizona Department of Transportation

Cherian George, Fitch Ratings

Max Inman, FHWA

Phyllis Jones, FHWA

Jim March, FHWA

Jennifer Mayer, FHWA National Resource Center

Paul Marx, Federal Transit Administration

Suzanne H. Sale, TIFIA JPO

Alla Shaw, FHWA

Mark Sullivan, TIFIA JPO

FHWA Announces New Publication on Highway Finance

and Public-Private Partnerships

In January 2005 at the Transportation Research Board’s Annual Meeting, the FHWA

will be releasing a new booklet, “Highway Finance and Public-Private

Partnerships: New Approaches to Delivering Transportation Services.” The

booklet provides trend information on highway revenues and highlights activities

underway at the FHWA to address the highway finance issues facing Federal,

state, and local highway officials. The booklet is intended as a starting point for

important discussions regarding how highways will be financed, operated, and

maintained in the future. It features the FHWA’s new public-private partnership

initiatives to promote innovation in the financing and management of our highway

systems. These initiatives include workshops, conferences, issues papers, research,

and the development of analytical tools to assess alternative financing mechanisms.

Supporting innovation is central to the FHWA’s mission. By sharing information on its efforts to explore new ways of doing business, the FHWA hopes to

engage stakeholders in a meaningful discourse on innovation that will lead to

improvements in how future highway programs will be financed and delivered.

Contacts:

Jim March, FHWA,

202/366-9237,

jim.march@fhwa.dot.gov

Julie Zirlin, FHWA,

202/366-1905,

julie.zirlin@fhwa.dot.gov