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GARVEE Bonds Benefit From Continuing Federal Government Support; Uncertainty About Future Funding Remains A Risk

Federal transportation infrastructure spending serves a critical need both by providing a public good and by leveraging additional investment by state, local, and regional entities. On Sept. 30, 2020, Congress passed a continuing resolution, extending the FAST Act authorization through Sept. 30, 2021. Although this one-year extension applies to the federal highway contract authority, the obligation authority, which is the actual level of funding to states, is limited to a pro-rated portion of the full-year funding amount through Dec. 11, 2020 (the expiration date of the continuing resolution). The House and Senate are working on extending the funding, as well as on multiyear transportation authorization proposals. State, local, and regional entities continue to issue GARVEE bonds backed by the anticipated federal dollars to support roadway and transit investment. These are largely reimbursement- or formula-based programs that allow states or local transit providers to leverage federal transportation funding for capital or operating purposes and advance projects earlier than they otherwise would have been completed.

S&P Global Ratings has evaluated the 30 grant programs with 31 ratings for highways and transit in 27 states and territories. A primary benefit of federal aid programs in transportation--both for state and local governments, and for bondholders--has been the reliability, relative stability, and predictability of funding. These characteristics provide the certainty needed for long-term planning associated with large transportation projects while protecting grant recipients and bondholders from the risk of congressional appropriations, thereby advancing projects that otherwise might not proceed for several years. Money in the federal HTF secures these grant programs. Issuers have generally had strong coverage levels and liquidity contingency plans, contributing to high investment-grade ratings on related bonds. Despite the sector's vulnerability to government shutdowns, this has historically not resulted in rating pressure and we expect support for transportation infrastructure investment will continue from all levels of government. As a result, our view on the sector is stable.

How We Rate GARVEE Bonds

S&P Global Ratings evaluates different security structures and additional state support that account for the range of ratings. Our criteria, "Methodology And Assumptions: Rating U.S. Federal Transportation Grant-Secured Obligations" (published May 29, 2009) outlines the analytical approach to the security structure and assessment of the supportive funding and legislative framework. In addition, we apply our "Federal Future Flow Securitization" criteria (published March 12, 2012) to determine the maximum possible rating level relative to the U.S. sovereign rating (AA+/Stable/A-1+), after factoring in federal entity and project- or program-specific factors.

The ratings on GARVEEs assume that the supportive legislative framework and congressional appropriations funding transportation grant programs will continue through multiyear authorizations or continuing temporary extensions. This assumption is based on historical precedent, our view of the political and economic importance of national highway and mass transit systems, the broad historical bipartisan political support for transportation spending programs at all levels of government, and Congress' track record of continuing appropriations and extensions to budget authorizations.

Our ratings in this sector range from 'A-' to 'AA' where only federal funding is pledged, and as high as 'AAA' where state agencies blend the federal funding with an additional pledge of state funding. We base the relatively high ratings in this sector on the issuer's pledge of the HTF grants from the federal government. Although we believe the recent congressional action was timely and alleviated immediate pressure on GARVEE issuers, uncertainty regarding continuing resolutions and the ultimate form of the long-term transportation bill reauthorization, funding sources, and funding levels highlight a credit risk.

There is generally congressional consensus to ultimately pass a multiyear funding bill, and we believe the likelihood that federal transportation funding would be discontinued is remote. Nevertheless, we carefully evaluate the risks to state programs that leverage these funds, including the timing of receipts, level of funding, and erosion in dollars due either to lower authorized or appropriated levels or programmatic changes that negatively affect recipients.

In our opinion, both the program's history and its vital role in preserving and expanding the national highway system, as well as the significant funding needs facing surface transportation and the lack of resources to finance them, support continued reauthorization of the program. We will closely monitor the transportation sector to evaluate how individual issuers might adjust their debt or capital spending plans depending on the continued level of federal funding.

Although reauthorization risk cannot be eliminated, it has been minimized through conservative financial structures inherent in all rated GARVEE transactions, which has resulted in the relatively high ratings on these transactions. These include the use of backup credit support, debt service reserves, robust debt service coverage levels, shorter final maturities, and restrictive additional debt provisions. In addition, many nonquantitative credit factors influence the rating, such as funding mechanics and timing; evaluation of state processes for managing and administering the program; history of federal receipts and volatility; each state's donor status, underlying economy, and transportation needs; and each state's respective political representation and congressional influence.

Liquidity And Program Structure Help Mitigate Risk Of Government Shutdowns Or Delays

During a previous government shutdown, transit was the most-affected transportation sector because almost all employees of the Federal Transit Administration (FTA) are deemed nonessential, including those FTA staff responsible for administering disbursement of grant payments regardless of which fiscal year the funds come from. For example, a transit agency requesting payment or reimbursement for a previously approved and appropriated grant--not just the current federal budget year--would be left in the lurch. Therefore, transit GARVEEs (that is, bonds secured by reimbursements from the FTA) are exposed to possible nonpayment during a government shutdown.

However, issuers of transit grant-secured bonds (transit GARVEEs) that we rate typically have liquidity or structural features--such as prefunding principal or interest payments well in advance of due dates--that help mitigate delays in federal receipts to ensure timeliness of debt service payments. For example, some issuers have lines of credit or have fully funded their next principal and interest payments a year in advance. Federal highway grants that support debt service payments of states that have leveraged this reimbursement program historically were minimally affected by shutdowns since the Federal Highway Administration has a different nonappropriated funding source and was fully staffed during previous shutdowns.

Rated GARVEE bonds consistently demonstrate very strong pro forma maximum annual debt service (MADS) coverage. Pro forma MADS coverage across rated bonds ranges from a low of 1.6x to a high above 100x, with most programs producing coverage from obligated authority and actual federal receipts of at least 4.0x. The strong coverage levels remain a key credit strength for the sector. Our pro forma MADS coverage calculation is based on the GARVEE program's actual obligation authority or federal receipts and pro forma MADS, which includes existing debt service plus debt service from planned issues when known.

In addition to coverage levels and the presence, or lack thereof, of additional security, bond provisions are important in determining GARVEE credit quality. Although most GARVEE programs don't have funded debt service reserves, almost all have tests governing the issuance of additional bonds, and we view these additional bond tests (ABTs) as an important rating factor. ABTs are typically based on projected coverage levels from federal apportionments, including the planned additional bonds, on a MADS basis. Because most GARVEE programs issue debt with level debt service, MADS coverage is a good indicator of a program's ability to cover its obligations, based on current funding levels. Furthermore, we consider ABTs that require stronger coverage levels based on historical federal funding levels better than those based on projected funding levels.

Annual Sector Report Card

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Stable Sector View Reflects Our Expectation Of Ongoing Program Support

The outlook is stable for all 29 GARVEE issuers. The stable outlook on the ratings reflects our expectation that the longstanding federal aid highway program will continue to receive what we consider significant funding and that the states will continue to receive their historical share of annual distributions to provide very strong MADS coverage. Grant-secured obligations are based on the assumption that the HTF will remain solvent, from either federal gas and transportation taxes or transfers from the U.S. Treasury, and federal reimbursements will arrive as anticipated. Although there is always uncertainty regarding the ultimate congressional appropriation levels, we believe near-term federal funding will be close to authorization levels under the FAST Act.

2020 Grant Anticipation Notes Overview
Issuer Rating Rationale Program debt outstanding (mil. $) Backup pledge ABT (x) Maturity Obligation authority/federal reimbursements (mil. $) Pro forma MADS (mil. $) Pro forma MADS coverage OA/federal (x)
Highway
Alabama Federal Aid Highway Finance Authority AAA/Stable The rating reflects our view of pro forma MADS coverage and sound bond provisions. A pledge of Alabama's share of Title 23 federal aid transportation grants secures all bonds. An additional pledge of the state's share of net gasoline tax proceeds further enhances the 2015, 2016, and 2017 bonds. Similar to many GARVEE programs, the bonds do not have a debt service reserve fund. 1,370 Yes 3 2037 743 114 6.52
Alabama Federal Aid Highway Finance Authority AA/Stable The rating reflects our view of similar characteristics as above. However, the state's share of net gasoline tax proceeds does not further support the series 2012 bonds. 1,370 No 3 2037 743 114 6.52
Arizona Transportation Board AA+/Stable The rating reflects our view of pro forma coverage of MADS, including planned $255 million in additional debt. In addition, under some circumstances, the grant anticipation notes are payable from other federal aid revenues, as well as other lawfully available money, including available funds on deposit in the state highway fund and eligible Regional Area Road Fund money. 223 Yes 3 2034 712 31 22.97
Delaware Transportation Authority AA/Stable The rating reflects our view of very strong MADS coverage based on historical federal grant receipts, and a sound bond structure. Federal grants that the state receives are the only security for bondholders--there is no additional pledge of state general fund revenues or trust fund money that secures other rated debt. 245 No 3 2035 185 19 9.74
District of Columbia AA/Stable The rating reflects our view of strong DSC based on historical federal grant receipts, and a sound bond structure. All federal highway revenues the district receives are pledged to the bonds' payment; in addition, the 2011 bonds outstanding have a debt service reserve account equal to MADS. The series 2012 and 2020 bonds do not have a debt service reserve account. Bond provisions include a MOA between the district and the Federal Highway Administration that approves using federal aid for debt service and directs payments to the trustee at the beginning of each federal fiscal year without requiring appropriation. 356 No 3 2034 169 28 6.04
Georgia State Road & Tollway Authority AA/Stable The rating reflects our opinion of the strength of the Georgia GARVEE program, including strong DSC that is likely to remain strong. Sound bond provisions prohibit GARVEE issues, unless the obligation authority in the current federal fiscal year equals at least 3x MADS for both existing and proposed bonds. Offsetting these strengths is the narrow pledge of FHWA reimbursements to the state, combined with the lack of a debt service reserve. 607 No 3 2032 1212 142 8.54
Kentucky Asset Liability Commission AA/Stable The rating reflects our view of very strong MADS coverage and a sound bond structure. There is no backup pledge of state general fund or road fund revenues or debt service reserve account. However, the commonwealth reserves the first portion of obligation authority received to debt service. Following issuance of the series 2020 federal Highway Trust Fund (HTF) first refunding series A bonds, the state estimates $389.5 million of GARVEE debt outstanding. There is no additional GARVEE debt authorized at this time and none for planning purposes, but that is subject to change by the General Assembly. 395 No 4 2027 821 79 10.39
Louisiana AA/Stable The rating reflects very strong pro forma MADS coverage, assuming issuance of another $465 million over several years based on the $650 million in bond authorization provided by Louisiana's GARVEE act. We view bond provisions favorably. An additional bonds test requires historical federal aid receipts to be at least 3x MADS on all existing and proposed bonds. Furthermore, Louisiana's GARVEE act legislation limits debt capacity because debt service cannot exceed 10% of annual obligation authority in any year. In addition, an MOA between the FHWA and the department outlines a well-defined process for assuring annual deposits of pledged revenue into the bond payment fund and details approval of each project, as authorized for federal reimbursement of debt service payments. There is no debt service reserve fund. 185 No 3 2031 768 641 11.99
Maine Municipal Bond Bank (Title 23) AA/Stable The rating reflects our view of very strong MADS coverage and a sound bond structure. Maine plans to issue approximately $50 million in additional debt secured by Title 23 funds every other year to fund improvements to the state's highway system. We expect continued conservative oversight through the capital plan, which will result in MADS coverage remaining very strong. The rating also reflects the legislative restrictions that require that a rolling three-year average ratio of GARVEE debt service to available federal funds not exceed 15%, which tempers a 1.5x historical additional bonds test that is relatively low compared with that of other similarly rated GARVEEs. 145 No 1.5 2030 187 22 8.5
Massachusetts AAA/Stable The rating reflects our view of pro forma MADS coverage, sound bond provisions, and a strong security structure including an additional pledge in the form of excess Commonwealth Transportation Fund revenues funded from gas taxes and vehicle-registration fees. In addition, debt payments must be funded with the trustee a year in advance. Although there are no proposed plans to issue additional GANs, there is legislation that, if approved, could authorize $1.25 billion. 685 Yes 4 2027 662 122 5.43
Michigan AA/Stable The rating reflects our view of Michigan Department of Transportation's track record of pro forma MADS coverage and our expectation that MADS coverage will remain at similar levels. The state has a strong additional bonds test and does not have plan to issue additional debt secured by Title 23 funds. The GARVEEs are not further secured by a backup state pledge. 595 No 3 2027 911 130 7.01
Missouri Highways and Transportation Commission AA+/Stable The rating reflects our of strong MADS coverage, a strong subordinate backup pledge of dedicated state transportation funds, and sound bond provisions. Bond provisions include an additional bonds test requiring current estimated or average annual reimbursement revenue during an authorization period to provide 5x MADS coverage on existing and proposed GARVEE debt. The commission has no plans to issue debt for transportation funding in the near term. 593 Yes 5 2033 1032 67 15.4
Montana Department of Transportation (MDOT) AA/Stable The rating reflects our view of MADS coverage on GARVEE debt and a good additional bonds test. MDOT has no additional GARVEE debt planned, with a restrictive overall debt limit imposed by the Montana Highway Revenue Bond Act. Partially offsetting credit factors include our opinion of the narrow pledge of FHWA reimbursements to the state given there is not a backup pledge. 25 No 3 2023 432 15 28.8
New Hampshire AA/Stable The rating reflects our view of pro forma MADS coverage and sound bond provisions. In addition, an MOA among the state, the New Hampshire Department of Transportation (NHDOT), and FHWA that directs the department to use first-available obligation authority to pay debt service and allows the state to seek reimbursement payments from FHWA should the U.S. Treasury suspend, reduce, or discontinue the federal subsidy associated with recovery zone economic development bonds. 105 No 3 2026 162 19 8.53
New Jersey Transportation Trust Fund Authority A+/Stable The rating reflects our view of the authority's long-standing practices of receiving reimbursements from the FHWA; the substantial federal obligation authority the state receives; the notes' programmatic weaknesses compared with that of other rated transportation grant-secured transactions; and New Jersey's significant long-term highway funding needs, which could result in additional demands or federal fund leveraging, diluting the pledge. 2938 No 3 2031 1091 339 3.22
North Carolina AA/Stable The rating reflects our opinion of strong pro forma MADS coverage inclusive of additional borrowing plans over the next several years. Sound bond provisions include a strong additional bonds test as well as the state's own GARVEE legislation's restrictions on debt capacity. In addition, an MOA between the FHWA and the department outlines a well-defined process for assuring annual deposits of pledged revenue into the bond payment fund and details approval of each project, as authorized for federal reimbursement of debt service payments. The GARVEEs are not further secured by a backup state pledge. 1,047 No 3 2034 1,254 132 9.5
Ohio AA/Stable The rating reflects our view of MADS coverage and an additional, subordinate pledge of state transportation funds. The issuer has sound bond provisions, which include an additional bonds test of 5x MADS on the state's existing and proposed GARVEE bonds. We expect that the state will continue to maintain very strong MADS coverage including additional planned GARVEE bond issuances. 852 Yes 5 2030 1,562 187 8.35
Oklahoma Department of Transportation (ODOT) AA/Stable The rating reflects our view of strong bond provisions and a track record of extremely strong MADS coverage based on obligation authority, which we expect to continue despite additional debt borrowing plans. The GARVEEs are not further secured by a backup state pledge. 59 No 5 2032 669 6 111.5
Rhode Island Commerce Corp. (Rhode Island Department of Transportation [RIDOT]) AA-/Stable The rating reflects our view of strong MADS coverage that we expect will remain at similar levels. In addition, the corporation has a strong additional bonds test requiring 3x MADS coverage, including the additional bonds to be issued. RIDOT has plans to issue additional debt to fund projects outlined in the state's transportation improvement plan. 442 No 3 2035 227 66 3.44
Virgin Islands Public Finance Authority (VIPFA) A/Stable The rating reflects our view of strong MADS coverage assuming the continued availability of VIPFA's Transportation Trust Fund (TTF) revenues. The TTF revenue provides a backup pledge on the bonds, which mitigates any funding disruptions at the federal level, however there is potential for declines in the TTF revenues given a history of severe weather events in the territory. Bond provisions include a closed lien with no additional bonds permitted and a fully funded debt service reserve fund. 76 Yes 0 2033 15 8 1.88
Commonwealth Transportation Board, Virginia AA+/Stable The rating reflects our view of very strong pro forma MADS coverage that we expect will remain consistent based on reasonable projected federal receipts and additional GARVEE issuances through 2023. The bonds have a discretionary backup pledge of the transportation board to pay debt service from the Transportation Trust Fund. Additional credit strengths include restrictive additional debt provisions, including a 4.0x additional bonds test, a 20-year rolling final bond term restriction; a $1.2 billion debt cap; and a transportation board-adopted policy that restricts additional debt unless the six-year average of past federal reimbursements is at least 4.0x MADS. 874 Yes 4 2035 992 172 5.77
Washington AA/Stable The rating reflects our view of strong MADS coverage along with essentially level annual debt service requirements given the lack of debt plans. The state has good bond provisions, including a sound additional bonds test of 3.5x MADS, as well as a more restrictive state policy that includes a 3.75x multiple for additional debt. In our opinion, partially offsetting credit factors include the narrow pledge of federal transportation funds to the state given there is not a backup pledge. 517 No 3.5 2024 715 102 7.01
West Virginia Commissioner of Highways AA/Stable The rating reflects our view of the very strong pro forma coverage of MADS that we expect to continue including additional borrowing plans. A legislature-approved debt cap further limits the total amount of GARVEE bonds outstanding to no more than $500 million. 284 No 3 2033 449 32 14.03
Transit
Alaska Railroad Corp. A/Stable The rating reflects our view of pro forma MADS coverage for the company's GARVEE program. Management has demonstrated strong financial management of the capital grant receipts. Alaska Railroad is important to the state's economy, providing passenger and freight rail services. 73 No 1.5 2023 48 17 2.82
Chicago Transit Authority (CTA) - 5307 A/Stable The rating reflects our view of MADS coverage, which we expect to continue given the lack of debt plans. The CTA is the second-largest mass transit system in the nation. We view the system as highly essential to the local and regional economy. The 5307 grant disbursements to the CTA secure the bonds, with no additional backup pledge. 354 No 1.5 2029 128 50 2.56
Chicago Transit Authority (CTA) - 5337 A+/Stable The rating reflects our view of MADS coverage, which we expect to continue, given the lack of debt issuances. The 5337 grant disbursements to the CTA secure the bonds, with no additional backup pledge. With the new 5337 program leading to higher apportionments and MADS coverage compared with the 5307 program, we have rated the Section 5337 secured bonds one notch higher than the section 5307-backed bonds. 193 No 1.5 2026 171 38 4.5
New Jersey Transit Corp. (NJT) A/Stable The ratings reflects our view of NJT's MADS coverage and essential nature as one of largest providers of mass transit services in the nation and a historical precedent demonstrating federal commitment to federal mass transit programs, as well as political and popular support. 200 No 1.5 2021 304 74 4.11
San Diego Association of Governments Grants - 5337* A-/Stable The rating reflects our view of pro forma MADS coverage and sound legal provisions, highlighted by a closed lien that prohibits issuance of additional new money parity debt and a debt service reserve fund (DSRF) funded to maximum annual interest payment. The Mid-Coast Corridor Transit Project is proceeding on schedule and on budget with many of the most technically challenging aspects of the project already completed. 331 No 0 2027 231 188 1.23
Southeastern Pennsylvania Transp. Auth. - 5307* AA/Stable The rating reflects our view of very strong pro forma MADS coverage for the for the Section 5307-backed bonds, no additional debt plans, and SEPTA's essential nature to the Philadelphia metropolitan area given its role as a provider of broadly used public transportation services. However, the security pledge of Section 5307 grants to SEPTA is stand-alone, with no additional state or federal funds pledged as a backstop to the federal grant funds. 100 No 1.5 2032 101 11 9.18
Southeastern Pennsylvania Transp. Auth. - 5337 AA-/Stable The ratings reflects our view of very strong MADS coverage for the section 5337-backed bonds, no additional debt plans, and SEPTA's essential nature to the Philadelphia metropolitan area given its role as a provider of broadly used public transportation services. However, the security pledge of Section 5337 grants to SEPTA is stand-alone, with no additional state or federal funds pledged as a backstop to the federal grant funds. 122 No 1.5 2029 131 17 7.71
Tri-County Metropolitan Transportation District A/Stable The ratings reflects our view of the TriMet system's essential nature to the Portland metropolitan area and a history of federal commitment to mass transit programs. In addition, a pledge of Regional Flexible Funds provides additional security through an intergovernmental agreement with the local metropolitan planning organization. 248 Yes 1.5 2037 69 22 3.14
MADS--Maximum annual debt service. DSC--Debt service coverage. GARVEE--Grant anticipation revenue vehicle. ABT--additional bonds test. *New GARVEE programs with projected data in the table. SEPTA 5307 reflects 2021 projections and SANDAG is 2027 projections.

This report does not constitute a rating action.

Primary Credit Analysts:Kayla Smith, Centennial + 1 (303) 721 4450;
kayla.smith@spglobal.com
Todd R Spence, Farmers Branch + 1 (214) 871 1424;
todd.spence@spglobal.com
Secondary Contacts:Sussan S Corson, New York + 1 (212) 438 2014;
sussan.corson@spglobal.com
Kurt E Forsgren, Boston + 1 (617) 530 8308;
kurt.forsgren@spglobal.com
Joseph J Pezzimenti, New York + 1 (212) 438 2038;
joseph.pezzimenti@spglobal.com

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