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Infrastructure Law Paves The Way For Transportation GARVEE Bonds' Federal Support And A Stable Sector View


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Infrastructure Law Paves The Way For Transportation GARVEE Bonds' Federal Support And A Stable Sector View

On Nov. 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA), which federal agencies refer to as the Bipartisan Infrastructure Law (BIL). The act contains a five-year surface transportation reauthorization through 2026 that replaces the Fixing America's Surface Transportation (FAST) Act, which expired on Dec. 3, 2021.

Over the duration of the IIJA/BIL, the baseline and new money allocations to the U.S. Department of Transportation total $567 billion (see table 1). The law makes available $303.5 billion over five years for the Federal-Aid Highway Program funded from the Highway Trust Fund (HTF) plus $47.3 billion in advanced appropriations from the U.S. Treasury general fund for existing and new highway programs (see charts 1 and 2). The law is also expected to provide $92.8 billion in guaranteed funding (up to $108.0 billion) for the Federal Transit Administration for public transportation over five years under both existing and new programs. Of the $351 billion for federal highway programs, most, including additional money from the U.S. Treasury general fund (see charts 1 and 2), is apportioned or distributed to states based on formulas specified in statute.

The largely reimbursement, formula-based programs allow states or local transit providers to leverage federal transportation funding for capital or operating purposes and advance projects earlier than otherwise would have occurred by issuing grant anticipation revenue vehicle (GARVEE) bonds backed by the anticipated federal dollars to support roadway and transit capital programs. The IIJA/BIL also provides funding through a variety of new and competitive grant programs.

Table 1

IIJA/BIL Total Guaranteed Funding By U.S. Department of Transportation
2022 2023 2024 2025 2026 Total
(Mil. $)
Federal Highways Adminstration 67,000 69,000 70,000 72,000 73,000 351,000
National Highway Traffic Safety Administration 1,000 1,000 1,000 1,000 1,000 5,000
Federal Motor Carrier Safety Administration 1,000 1,000 1,000 1,000 1,000 5,000
Federal Transit Administration 18,000 18,000 18,800 19,000 19,000 92,800
Office of the Secretary (Grant Programs) 4,000 4,000 4,000 4,000 4,000 20,000
Federal Rail Adminstration 13,000 13,000 13,000 13,000 13,000 65,000
Federal Aviation Administration 5,000 5,000 5,000 5,000 5,000 25,000
Maritime Administration/Pipeline Safety 675 650 650 650 650 3,275
Total 109,675 111,650 113,450 115,650 116,650 567,075
Source: Association of Metropolitan Planning Organizations.

Chart 1


Chart 2


S&P Global Ratings has evaluated the 30 grant program ratings for highways and transit in 29 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 and relative stability 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 and liquidity contingency plans, contributing to high investment-grade ratings on related bonds. Exposure to government shutdowns has not historically resulted in rating pressure, and we expect support for transportation infrastructure investment will continue from all levels of government. As a result, our view of the federal-transportation-grant-secured sector is stable.

Very Strong Coverage And Conservative Financial Structures Bolster GARVEE Bonds

S&P Global Ratings evaluates different security structures that leverage federal transportation grants--some which benefit from additional state support. Our criteria "Methodology And Assumptions: Rating U.S. Federal Transportation Grant-Secured Obligations," published May 29, 2009, on RatingsDirect, outlines our analytical approach to the security structure and assessment of the supportive funding and legislative framework. Our fundamental assumption to ratings on GARVEEs is that the supportive legislative framework and congressional appropriations funding transportation grant programs will continue through multiyear authorizations or extensions. This assumption is based on 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 passing extensions to budget authorizations. In addition, we apply our "Federal Future Flow Securitization" criteria, published March 12, 2012, to determine the highest possible rating relative to the U.S. sovereign rating (AA+/Stable/A-1+), after factoring in federal entity and project- or program-specific factors.

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, consistently very strong maximum annual debt service (MADS) coverage, and legal provisions that limit additional leverage. 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. As outlined in our criteria, 'AA' category GARVEE programs generally maintain very strong MADS coverage at more than 3x, and 'A' category GARVEEs generally maintain strong coverage typically above 1.5x.

As a result, a majority of our 'AA' category ratings are associated with federal highway aid programs and most of our 'A' category ratings are associated with federal transit programs, with the Southeastern Pennsylvania Transportation Authority's Section 5307 and 5337 GARVEE bonds being the only 'AA' category federal transit programs in our rated universe. This is because federal highway aid programs typically maintain stronger coverage as a result of a higher absolute amount of federal receipts compared with transit programs, which have a higher likelihood of variability in receipts and discretionary funding formulas. Pro forma MADS coverage across rated bonds ranges from 1.23x to more than 100x, with most programs producing coverage from obligated authority and actual federal receipts of at least 4x. As a result, 70% of our GARVEE ratings are in the 'AA' category (see chart 3).

Although reauthorization risk cannot be eliminated, it has been minimized through conservative financial structures inherent in all rated GARVEE transactions, further supporting very strong ratings. Examples include the use of backup credit support, debt service reserves, robust debt service coverage, 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 are deemed nonessential, including those staff responsible for administering disbursement of grant payments. For example, a transit agency requesting payment or reimbursement for a previously approved and appropriated grant in a prior federal budget year would be left in the lurch. Therefore, we view transit GARVEEs (that is, bonds secured by reimbursements from the Federal Transit Administration) as more 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. Shutdowns minimally affected federal highway grants that support debt service payments of states that have historically leveraged this reimbursement program given that the Federal Highway Administration has a different nonappropriated funding source and was fully staffed during previous shutdowns.

In addition to coverage 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 from federal apportionments, including the planned additional bonds, on a MADS basis. Because most GARVEE programs issue debt with level debt service, MADS coverage serves to indicate a program's ability to cover obligations, based on current funding. Furthermore, we consider ABTs that require stronger coverage based on historical federal funding better than those based on projected funding.

Annual Sector Report Card

Chart 3


Stable Sector View Reflects Our Expectation Of Ongoing Program Support

The outlook is stable for 29 out of 30 GARVEE ratings, with one rating on positive outlook (see table 2). The stable outlook on the ratings reflects our expectation that the long-standing 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 that federal reimbursements will arrive as anticipated.

Table 2

2021 Grant Anticipation Notes Overview
Issuer Rating 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) Additional supporting information
Alabama Federal Aid Highway Finance Authority AAA/Stable 1,321 Yes 3 2037 851 116 7.34 An additional pledge of the state's share of net gasoline tax proceeds further enhances the 2015, 2016, 2017, and 2021 bonds. Similar to many GARVEE programs, the bonds do not have a DSRF.
Arizona Transportation Board AA+/Stable 204 Yes 3 2034 766 31 24.71 Pro forma MADS coverage includes planned $255 million in additional debt. In addition, under some circumstances, the grant anticipation notes are payable from other federal aid revenue as well as from other lawfully available money, including available funds on deposit in the state highway fund and eligible Regional Area Road Fund money.
Delaware Transportation Authority AA/Stable 217 No 3 2035 196 11 17.82 Pro forma MADS reflects essentially level annual debt service requirements and no additional debt plans. We view the bond provisions as strong for a stand-alone GARVEE structure. Provisions include the funding of a supplemental debt service account and supportive legal framework provided by the enabling legislation, the MOA, the financing and pledge agreement between the authority and the Delaware Department of Transportation, and the master trust agreement.
District of Columbia AA/Stable 357 No 3 2034 181 28 6.46 All federal highway revenue that the district receives is pledged to the bonds' payment; in addition, the 2011 bonds outstanding have a DSRF equal to MADS. The series 2012 and 2020 bonds do not have a DSRF. Bond provisions include a MOA between the district and the FHWA 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.
Florida AA/Stable 239 No 5 2032 1,862 83 22.43 Po forma MADS coverage includes the state's GARVEE borrowing plans of approximately $495 million through fiscal 2023 to address the funding needs of its current work program. The state has a very strong ABT, while current state statutes are more restrictive, requiring that annual debt service on all bonds issued to fund projects eligible to receive federal aid highway funds does not exceed 10% of the Florida Department of Transportation's annual apportionments of federal highway aid. The bonds do not have a DSRF.
Georgia State Road & Tollway Authority AA/Stable 607 No 3 2032 1,250 142 8.80 ABT requires obligation authority in the current federal fiscal year equals at least 3x MADS. The bonds do not have a DSRF. There are no near-term additional debt plans.
Kentucky Asset Liability Commission AA/Stable 395 No 4 2027 821 79 10.39 There is no backup pledge of state general fund or road fund revenue or DSRF. However, the commonwealth reserves the first portion of obligation authority received to debt service. 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.
Louisiana AA/Stable 340 No 3 2031 748 68 11.07 Pro forma MADS coverage, includes the issuance of $310 million in unissued authorized debt in 2023 and again in 2028. ABT is based on historical federal aid receipts. 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. The bonds do not have a DSRF.
Maine Municipal Bond Bank (Title 23) AA/Stable 129 No 1.5 2030 210 23 9.13 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. Legislative restrictions 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 ABT that is relatively low compared with that of similarly rated GARVEEs.
Massachusetts AAA/Stable 662 Yes 4 2027 733 140 5.24 An additional pledge of excess Commonwealth Transportation Fund revenues funded from gas taxes and vehicle-registration fees secures the bonds. In addition, debt payments must be funded with the trustee a year in advance. Although there are no proposed plans to issue additional grant anticipation notes, there is legislation that, if approved, could authorize $1.25 billion.
Michigan AA/Stable 542 No 3 2027 895 130 6.88 The state does not plan to issue additional debt secured by Title 23 funds.
Missouri Highways and Transportation Commission AA+/Stable 550 Yes 5 2033 1,092 66 16.55 GARVEE bonds have a strong subordinate backup pledge of dedicated state transportation funds. ABT requires current estimated or average annual reimbursement revenue during an authorization period to provide 5x MADS coverage. The commission has no plans to issue debt for transportation funding in the near term.
Montana Department of Transportation AA/Stable 11 No 3 2023 461 15 30.73 No additional GARVEE debt planned, with a restrictive overall debt limit imposed by the Montana Highway Revenue Bond Act.
New Hampshire AA/Stable 91 No 3 2026 180 19 9.47 An MOA between 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. ABT requires obligation authority in the most recent fiscal year to be at least 3.0x pro forma MADS, and a restrictive internal policy requires no less than 3.5x coverage. There is no DSRF.
New Jersey Transportation Trust Fund Authority A+/Stable 1,735 No 3 2031 1,137 339 3.35 There is a reimbursement revenue funding agreement between the New Jersey Transportation Trust Fund Authority and the New Jersey Department of Transportation commissioner, whereby the commissioner sends the first federal highway reimbursement revenue that the department receives to the trustee until the debt service for the GARVEE notes for that fiscal year has been fully funded, before any other state entity can receive the funds for any other purpose. There are no additional new money debt plans. The bonds do not have a DSRF.
North Carolina AA/Stable 1,129 No 3 2037 1,163 155 7.50 Pro forma MADS coverage includes potential issuance of $250 million to $280 million in 2023 and 2025. The state has its own GARVEE legislation's restrictions on debt capacity, where MADS cannot exceed 20% of the expected average annual federal transportation funds or principal outstanding might not exceed the total federal transportation funds authorized in the prior fiscal 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.
Ohio AA/Stable 882 Yes 5 2030 1,566 134 11.69 There is an additional, subordinate pledge of state transportation funds. Ohio plans to issue additional GARVEE debt annually in fiscal years 2022 to 2025. We expect MADS coverage at or above 10x, including additional debt issuances.
Oklahoma Department of Transportation AA/Stable 56 No 5 2033 612 6 102 No additional debt plans
Rhode Island Commerce Corp. (Rhode Island Department of Transportation) AA-/Stable 535 No 3 2035 240 66 3.64 Potential additional borrowing plans will likely keep MADS coverage near historical levels.
Virgin Islands Public Finance Authority A/Stable 71 Yes 0 2033 15 8 1.88 The Transportation Trust Fund revenue provides a backup pledge on the bonds, which mitigates any funding disruptions at the federal level, but such revenue may decline 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 DSRF.
Commonwealth Transportation Board, Virginia AA+/Stable 977 Yes 4 2035 953 172 5.54 Pro forma MADS coverage includes expected GARVEE issuance 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 4x ABT, 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 4x MADS.
Washington AA/Stable 440 No 3.5 2024 764 99 7.72 Pro forma MADS coverage is supported by essentially level annual debt service requirements given the lack of debt plans. The state has an ABT requiring 3.5x MADS, as well as a more restrictive state policy that includes a 3.75x multiple for additional debt.
West Virginia Commissioner of Highways AA/Stable 265 No 3 2033 489 53 9.23 A legislature-approved debt cap further limits total GARVEE bonds outstanding to $500 million. Pro forma MADs includes additional debt plans, leveraging the full amount of the $500 million cap. The bonds do not have a DSRF.
Alaska Railroad Corp. A/Stable 60 No 1.5 2023 44 20 2.20 Relatively level debt service supports pro forma MADS coverage for the company's GARVEE program. The 2015 bonds do not have the benefit of a DSRF, although the corporation is required to fund its debt service account 12 months in advance. Alaska Railroad is important to the state's economy, providing passenger and freight rail services.
Chicago Transit Authority - 5307 A/Positive 195 No 1.5 2026 132 54 2.44 The positive outlook reflects our expectation that MADS coverage could improve to levels we would consider strong if projected federal receipts are realized and no additional debt is issued, as the authority is not planning to issue any additional GARVEE bonds. The authority is the second-largest mass transit system in the nation. We view it as highly essential to the local and regional economy.
Chicago Transit Authority - 5337 A+/Stable 143 No 1.5 2026 158 29 5.45 There are no additional debt plans. 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.
San Diego Assn. of Governments Grants - 5337* A-/Stable 331 No 0 2027 231 188 1.23 A closed lien prohibits issuance of additional new money parity debt and a DSRF funded to maximum annual interest payment. The Mid-Coast Corridor Transit Project added 11 miles to the UC San Diego Blue Line Trolley, extending service from Downtown San Diego to the University Community. Construction began in fall 2016 and the line was placed into service on Nov. 21, 2021.
Southeastern Pennsylvania Transportation Authority - 5307 AA-/Stable 101 No 1.5 2029 102 11 9.27 There are no additional debt plans. The series 2020 bonds do not have a DSRF. We considter the authority essential to the Philadelphia metropolitan area given its role as a provider of broadly used public transportation services.
Southeastern Pennsylvania Transportation Authority - 5337 AA-/Stable 111 No 1.5 2029 124 17 7.29 There are no additional debt plans. The series 2011 bonds benefit from a DSRF equal to 50% of MADS for the series 2011 obligations. However, the authority did not establish a DSRF to provide additional support for its series 2017 bonds.
Tri-County Metropolitan Transportation District A/Stable 212 Yes 1.5 2037 71 22 3.23 Regional Flexible Funds provide additional security through an intergovernmental agreement with the local metropolitan planning organization. We consider the system's essentiality to the Portland metropolitan area and a history of federal commitment to mass transit programs.
*New GARVEE program with projected data in the table. SANDAG reflects 2027 projections. ABT--additional bonds test. DSC--Debt service coverage. DSRF--Debt service reserve fund. FHWA--Federal Highway Administration. GARVEE--Grant anticipation revenue vehicle. MADS--Maximum annual debt service. MOA--Memorandum of agreement.

This report does not constitute a rating action.

Primary Credit Analysts:Kayla Smith, Centennial + 1 (303) 721 4450;
Kurt E Forsgren, Boston + 1 (617) 530 8308;
Secondary Contacts:Sussan S Corson, New York + 1 (212) 438 2014;
Joseph J Pezzimenti, New York + 1 (212) 438 2038;
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Scott Shad, Centennial (1) 303-721-4941;
Kenneth P Biddison, Centennial + 1 (303) 721 4321;
David G Hitchcock, New York + 1 (212) 438 2022;
Ladunni M Okolo, Dallas + 1 (212) 438 1208;
Seth Evans, New York;
Kevin R Archer, San Francisco + 1 (415) 3715031;
Thomas J Zemetis, New York + 1 (212) 4381172;
Oscar Padilla, Dallas + 1 (214) 871 1405;
Jillian Legnos, Hartford + 1 (617) 530 8243;
Valentina Protasenko, Chicago;
Andrew J Stafford, New York + 212-438-1937;

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