Use Innovative Financing Techniques
Giving the Texas Department of Transportation (TxDOT) the ability to use innovative financing tools will speed delivery of new construction projects. The most appropriate tools include both traditional capital market borrowing (general obligation and revenue bonds) and the newly emerging federally-supported leveraging techniques such as Grant Anticipation Revenue Vehicles (GARVEEs) and federal credit.
GARVEE bonds and other innovative financing tools can be used to fund highway construction projects along the state’s North American Free Trade Agreement (NAFTA) corridors of I-35, I-10, and I-69. Issuance costs and debt service would be paid by federal aid funds. GARVEE bond financing is not delayed by a bond referendum, and bonds with their own sources of repayment do not count toward the state’s statutory debt limit.
By easing congestion sooner and improving the ability of businesses to transport goods and services, GARVEEs would have a positive and profound immediate economic impact on the Texas economy. We estimate that if $1.1 billion in GARVEEs were used to immediately construct projects that would otherwise take 15 years to complete, these projects would economically benefit the state some $1.7 billion more, over 30 years, than if they were delayed by the present pay-as-you-go system. This even takes into account debt service payments.
Identified transportation needs in Texas far exceed the availability of state money to pay for them, according to a 1997 study. Needs are projected at an average of over $11 billion annually over the 1997-2006 time period. Based on projections made at the time, funding would only be available to meet 33 percent of the identified transportation system needs. A 2000 update to the study shows TxDOT able to meet an estimated 36 percent of the identified needs.
There are a number of federally supported innovative financing programs focused on increasing states’ ability to meet increasing transportation needs. Two prominent programs are: (1) grant anticipation financing mechanisms backed by future federal funds, referred to specifically by the Federal Highway Administration (FHWA) as Grant Anticipation Revenue Vehicles (or GARVEEs); and (2) access to federal credit assistance via the Transportation Infrastructure Finance and Innovation Act of 1998 (or TIFIA). The primary objectives of these programs are:
- to maximize the ability to leverage federal funds for needed investments;
- to more effectively utilize currently available funding; and,
- to move projects into construction faster than under traditional approaches.
GARVEE bonds and TIFIA borrowing are leveraging techniques that are gaining acceptance among transportation agencies and the public throughout the country and are now being used by a growing number of state departments of transportation.
In addition to federally supported innovative financing techniques, state departments of transportation (DOTs) are increasingly taking advantage of state-initiated and supported debt financing for transportation, including both general obligation bonds and revenue bonds. TxDOT does not have the constitutional and statutory authority to issue either general obligation or revenue debt for transportation projects, although the Texas Transportation Commission (TTC) can issue revenue debt to capitalize the State Infrastructure Bank (or SIB) and on behalf of the Texas Turnpike Authority (TTA).
The issuance of grant anticipation notes (GANs) is a long-standing practice of public infrastructure providers, including for schools, hospitals, and now roads and transit systems. GARVEEs use federal-aid highway funds as the primary source of repayment for the debt. The Federal Highway Administration defines eligible debt instruments as “any bond, note, certificate, mortgage, lease, or other debt financing instrument issued by a state or political subdivision of a state or a public authority, the proceeds of which are used to fund a project eligible for assistance under Title 23.”
Exhibit 1 shows the general process of issuing GARVEE debt. GARVEE debt may be issued in a wide range of specific structures, including as stand-alone (with no implicit or explicit financial backing by the state beyond the standard required state match), insured (by a creditworthy financial institution), or backstopped (whereby a pledge of other revenues such as a state’s gas tax or general obligation authority is provided to enhance the creditworthiness of the bonds). The exact structure is driven by fiscal conditions within an individual state, legal limitations that may exist, and the specific financial characteristics of the intended transaction.
GARVEE Debt Issuance Process
- Identify federal-aid eligible project(s) on the State Transportation Improvement Program (STIP) to be financed. A GARVEE project is authorized in the same manner as any federal-aid project, except the state elects to seek payments for bond issuance costs (principal, interest, and related items) rather than construction invoice costs.
- Get approval for advance construction from FHWA division office, preserving the project’s eligibility for future federal-aid assistance.
- Select method of matching–either up-front match based on state share of project cost or match of each debt service payment over time. For the state portion, states also may choose to issue separate bonds, repaid solely with state funds.
- Issue debt and begin construction, following all relevant federal-aid requirements.
- Apply for partial conversion of advance construction as debt service comes due.
- FHWA division obligates funds for debt service and funds are wired directly to designated trustee.
Source: Federal Highway Administration.
Exhibit 2 provides a side-by-side comparison of the reimbursement process for standard federal-aid projects and for a debt-financed project via GARVEE issuance.
Reimbursement Process under Standard Federal Aid and GARVEE Debt Financing
Standard FederalAid Project Debt-Financed Project under Section 122 (GARVEE) Project Cost Eligible for Federal Reimbursement Total eligible construction costs Total debt service (including principal, interest, and issuance) for bond issue to build eligible federal-aid project Basis for Reimbursement Construction expenditures Debt service payments or obligations Timing of Reimbursement Period of construction (3-5 years, typically) Term of debt (5, 10, 15 or even 20 years) Federal Requirements All applicable All applicable What Shows on State Transportation Improvement Plan (STIP) Total funds needed to reimburse construction expenditures during fiscally-constrained years of STIP Total funds needed for debt service during fiscally-constrained years of STIP
Source: Federal Highway Administration.
Experience of Other States with GARVEE Debt
New Mexico, Ohio, and Massachusetts were early pioneers in the issuance of GARVEEs or grant anticipation notes for transportation, followed more recently by Arizona, Arkansas, Colorado, Mississippi, and New Jersey (for transit). A number of other states have recently gained or confirmed their legal authority to issue GARVEEs, including Alabama, California, Florida, Nevada, and Oklahoma. Many other states are finding that they have the legal authority in place to pursue GARVEEs without further legislative action.
Exhibit 3 provides a summary of the GANs/GARVEE issuance by other states. For the most part, these states will use grant anticipation mechanisms for large-scale, critical projects that require quicker action than that provided by a traditional funding approach and that have economic and other benefits that further outweigh the potential debt issuance costs.
GARVEE and GANs Issuance by Other States
GARVEE Issuance State Date(s) Of Issue Money AmountIssued To Date($ millions) ProjectsFinanced Rating Agency Ratings (Moody’s/S&P/Fitch) Backstop Provisions New Mexico Sep-98 $100 New Mexico State Route 44 A3/A-/na (underlying ratings, with insurance: Aa3 No state backstop; bond insurance Ohio May-98, Aug-99 $70, $20 Spring-Sandusky Project Aa3/AA-/AA- Moral obligation pledge to use state gas tax funds and seek general fund appropriations in the event of federal shortfall Arkansas Mar-00 $175 Interstate highways Aa2/AA/na Full faith and credit of state, plus state motor fuel taxes Colorado May-00 $537 Any project financed in whole or in part by federal funds Aa3/AA/AA Federal highway funds as allocated annually by CDOT; other state funds subject to annual appropriation Arizona Jun-00 $39 Acceleration of freeway projects/federally eligible projects Aa3/AA-/AA- Highway funds Other Transportation GANs Issuance State Date(s) Of Issue Money AmountIssued To Date($ millions) ProjectsFinanced Rating Agency Ratings (Moody’s/S&P/Fitch) Backstop Provisions Massachusetts Jun-98 $600 Central Artery Project Aa3/na/AA- Special obligations backed by federal reimbursements (already accumulated advance construction balances), designated state funds, and backstop pledge of gasoline excise tax Mississippi Jun-99 $200 Statewide four-lane construction program na/na/AAA State gas tax
Source: Federal Highway Administration, Presentation to Transportation Research Board
Innovative Finance Conference, Scottsdale, Arizona, August 20, 2000.
The start of GARVEE issuance in 1998 is attributable to several legislative changes. First, until passage of the National Highway System Designation Act of 1995 (or NHS Act), federal laws and regulations inhibited the issuance of debt backed directly by federal-aid transportation funding. The Transportation Equity Act for the 21st Century (TEA-21) further encouraged debt issuance by incorporating several legislative procedures that reduce appropriations risk for securing funding. For instance, TEA-21 provides $198 billion in guaranteed surface transportation funding for the six-year period from 1998 to 2003. In addition, a minimum guarantee provision provides added security for donor states that they will actually receive a pre-established minimum level of funding. Both the overall level of federal funding and the new additional certainty surrounding it is unprecedented and facilitates financing backed by future federal dollars.
Benefits of GARVEE Debt
The primary benefits of GANs (and, more specifically, GARVEEs) include:
- Accelerated project delivery–by accumulating needed capital funding for a construction project in a lump sum rather than having to build up funding obligation over a great many years.
- Better funds management–facilitated funding of larger projects without adversely affecting smaller projects. New Mexico, for example, boasts significant cost savings by employing GARVEEs to bundle construction projects that would otherwise be strung out over many years.
- Avoidance of construction and right-of-way cost inflation–with current construction and real estate inflation factors and historically low interest rates, there can be significant net cost savings of project acceleration, even accounting for interest and other financing costs.
- Realization of economic development benefits, as well as safety and environmental benefits, as early as possible.
States are considering the use of GARVEEs rather than other types of debt financing for a number of reasons:
- The state may be unwilling or unable to support a particular bond issue with its full-faith and credit or taxing authority as often required for highly rated bonds. Most states face legislated or constitutional limits on how much general obligation (GO) debt can be outstanding at any time.
- Some states may achieve higher ratings (and thus lower interest costs with GARVEEs) than with GO bonds.
- Project-specific revenue streams may be unavailable, eliminating the possibility of issuing state-supported revenue bonds.
Potential Limitations of GARVEEs
The following are limitations of GARVEEs cited by critics and responses to these criticisms:
- Long-term commitment for repayment means that future federal funds (and, in some instances, future state funds beyond the standard required matching funds) must be used for debt payment for many years in the future. This could lessen a department’s ability to meet a state’s changing transportation needs. This would be more of a concern if the state was not already falling behind in meeting its current transportation needs.
- A department may need to increase staff and resources to manage an increased construction program. TxDOT has proven its ability to ramp up its construction program implementation of TEA-21. Implementing recommendations made elsewhere in this review will further enhance the agency’s readiness.
- Potential short-term limitations on contractor availability may limit the expanded construction program. This has been recognized as a potential barrier with the expansion of TEA-21, but in recent years, Texas has proven its ability to significantly increase its construction program, and with effective outreach to the construction industry should be able to do so again. The Association of General Contractors (AGC) is on record as saying that they are now fully prepared and ready for increased construction activity due to TEA-21. AGC members are responsible for 90-95 percent of transportation construction in Texas.
- “Artificial” inflation may increase construction costs due to excess demand relative to supply. As noted above, most likely this would be a short-lived phenomenon while construction firms ramped up to meet demand. This temporary situation can be outweighed by other factors, in particular the economic gains associated with early construction.
- Appropriation of federal funds may be uncertain. TEA-21 includes a minimum guarantee provision by which each state is assured to receive a certain allocation of funding for the period of TEA-21. The minimum is tied to receipts of the highway account of the Highway Trust Fund, roughly guaranteeing that each state receive annual appropriations of no less than 90.5 percent of its contribution. TEA-21 also establishes “firewalls” whereby funds not appropriated to transportation cannot be used for any other purpose, thus reducing the likelihood of not appropriating the funds to transportation.
- Authorization of federal funds may be uncertain. There is a risk that the federal-aid highway program will not be reauthorized beyond the current period ending in fiscal 2003. As evidenced by recent GARVEE issuances by other states that go well beyond the current authorization period and even into the one beyond that, this does not appear to be of great concern to investors.
- Funds are limited by category, and by the Clean Air Act and conformity restrictions. Because the issuance of GARVEEs is premised on an advance construction/reimbursement process, this concern is overstated. According to recently issued federal guidance, if a state has issued bonds for an advance construction project before the notice of a conformity lapse and FHWA has approved the project under Section 122 of TEA-21, FHWA will continue to reimburse the state during a conformity lapse with limited exception. For a construction project, both debt service payments and project costs remain eligible for reimbursement, as long as the bonds were issued prior to the date of the conformity lapse and bond proceeds may be spent on the project without interruption., 
- Because Texas’ highway funds are only meeting 30-40 percent of transportation needs, some argue that these monies should not be used as backstop for debt. This is valid only to the extent that the projects to be constructed using GARVEE financing are not high-priority projects included in the calculation of the funding gap.
Best Practices in Other States
Based on recent research regarding other states’ approaches and knowledge of past attempts at gaining legislative approval for GARVEEs in Texas, key attributes of a GARVEE initiative include:
- Broad project eligibility–Arizona, California, Colorado, Florida, and Oklahoma are examples of states with broad eligibility established in authorizing statutes.
- A basic set of eligibility and selection criteria to be implemented by the transportation department and/or transportation commission. Examples of this approach include Oklahoma and Colorado.
- Limits to the percentage of the state’s federal-aid funds that may be obligated at any given time. Florida has a 10 percent limit. Colorado has a two part limit: overall, no more than $1.7 billion in principal can be issued and the aggregate debt service on all issuances in any fiscal year cannot exceed 50 percent of the aggregate amount of federal transportation funds paid to the department in the prior fiscal year. Other legislatures have chosen to set limitations on the total principal amount issued; examples include Arkansas ($575 million) and Mississippi ($500 million).
- Limits to the maximum term of bonds. All else being equal, longer term issuances will face the potential of lower credit ratings due to the relative uncertainty of federal funds beyond one or two authorization cycles. A number of states have imposed or are considering a maximum of 15 years. Other examples include Arkansas (12 years), Florida (12 years), and Mississippi (10 years).
- The ability to issue both stand-alone and backstopped debt based on the specific circumstances and credit ramifications, with the type of available backstop clearly articulated. Examples of states whose authorizing legislation includes a provision for a state backstop include Arkansas, Arizona, Colorado, and Mississippi. Backstops include alternate funding sources or revenue streams such as state appropriations, state motor fuel taxes, and highway funds.
- The ability to secure bond insurance as an alternative means of credit support. New Mexico has taken advantage of this approach.
According to Standard and Poor’s, highly rated GARVEE programs (ranging from AA to AAA) typically have broad security pledges with a back-up or alternative revenue, such as a gas tax or other available funds, pledged in addition to federal funds. Alternatively, statewide programs secured solely by the receipt of federal highway revenues but with debt service coverage of at least 1.5 times are likely to receive minimum ratings in the ‘A’ category. Factors that can help boost ratings include the use of short bond maturities and debt service reserve funds and eliminating some of the uncertainties regarding the timing and nature of future reauthorization of the federal program.
Another tool available to support expanded project financing is the Transportation Infrastructure Finance and Innovation Act (or TIFIA) program. TIFIA was enacted as part of TEA-21 to help advance projects that have dedicated revenues, including tolls and a wide range of other user charges, as well as state and local dedicated funds. The US Department of Transportation (DOT) interprets the term “dedicated revenue sources” to include “tolls, user fees, special assessments, tax increment financing, and any portion of a tax or fee that produces revenues that are pledged for the purpose of retiring debt on the given project.” The US DOT also may accept general obligation pledges and other pledges on a case-by-case basis. TIFIA is intended to address market gaps in completing project plans of finance.
TIFIA assistance may be provided in the form of direct loans, loan guarantees, or standby lines of credit. It can be used for projects that are at least $100 million in size ($30 million for Intelligent Transportation Systems (ITS) projects) and can support up to one-third of project costs. Projects receiving TIFIA assistance must be on the state transportation plan and the approved State Transportation Improvement Program (STIP).
TIFIA funding is provided under TEA-21 and is completely separate from individual states’ apportionments. Participation in this program will not adversely affect a state’s receipt of formula-based funding.
The selection criteria for the program include (as specified under 23 USC 182(b)(2)):
- extent to which the project is nationally or regionally significant, in terms of generating economic benefits, supporting international commerce, or otherwise enhancing the national transportation system;
- creditworthiness of the project;
- extent to which assistance would foster innovative public-private partnerships and attract private debt or equity investment;
- likelihood that assistance would enable the project to proceed at an earlier date than the project would otherwise be able to proceed;
- extent to which the project uses new technologies, including intelligent transportation systems, that enhance the efficiency of the project;
- amount of budget authority required to fund the federal credit instrument made available;
- extent to which the project helps maintain or protect the environment; and,
- extent to which assistance would reduce the contribution of federal grant assistance to the project.
TIFIA Program Experience to Date
Following a competitive solicitation process, five projects were selected in TIFIA’s first round. The projects are valued at a combined total cost of nearly $6.5 billion, with TIFIA providing approximately $1.6 billion in credit assistance. Examples of projects benefiting from the TIFIA program include:
- two transit programs, the Washington, DC Metro system and Tren Urbano in Puerto Rico;
- the Miami Intermodal Center, a $1.3 billion project designed to improve access to and within Miami International Airport;
- Farley-Pennsylvania Station in New York City, a $749 million project to expand and refurbish the Farley Post Office building and the existing Penn Station as an intermodal transportation and commercial facility; and,
- State Route 125 in San Diego, California, a critical transportation link to provide improved access to the Otay Border Mesa Crossing, the principal commercial border crossing in southern California between the US and Mexico. This $397 million project includes a nine-mile toll facility.
Six applications for the second round (fiscal 2000) of TIFIA assistance were received in July 2000. Three were selected for fiscal 2000 funding and two deferred to fiscal 2001. Letters of interest and applications also have been received for fiscal 2001 assistance.
The Texas Turnpike Authority (TTA) submitted an application on behalf of the Central Texas Turnpike Project in and around Austin. Other Texas projects that have been identified to date as potentially benefiting from TIFIA assistance include the west section of the I-635 corridor in Dallas, to “a high occupancy (HOT) lane (that allows lower occupancy vehicles) project on the LBJ Freeway,” and I-10 in Houston. The program also could be beneficial to a number of border investment projects, especially given the emphasis on trade and regional benefits in the federally established eligibility and selection criteria.
General Obligation and Revenue Bond Financing
The Texas Department of Transportation does not have the ability to issue general obligation debt for transportation. Revenue bonds may be issued by the Texas Transportation Commission on behalf of the State Infrastructure Bank (SIB) and the Texas Turnpike Authority but not for the State Highway Fund.
General obligation and revenue bond financing capability would share many of the benefits of GARVEEs and federal credit, and would have the potential to be issued at lower interest cost, depending on the specific nature and structure of the transaction. Revenue debt would require project-specific revenue streams or the dedication of state-level financial resources and thus generally would bear slightly higher interest costs than general obligation debt. General obligation bonds have a lower interest rate because they are secured by funds in the state treasury that are not constitutionally dedicated for other purposes.
Experience of Other States with Debt Financing
As reported in a recent survey of state transportation departments, at least 33 of 48 surveyed make use of debt financing (see Exhibit 4).
Use of Debt Finance by State DOTs
State Use of Debt Finance State Use of Debt Finance Alabama Yes Montana Yes Alaska No Nebraska No Arizona Yes Nevada Yes Arkansas* Yes New Hampshire Yes California Yes New Jersey Yes Colorado* Yes New Mexico Yes Connecticut No response New York Yes Delaware Yes North Carolina Yes Florida Yes North Dakota No Georgia Yes Ohio Yes Hawaii Yes Oklahoma* Yes Idaho No Oregon Yes Indiana Yes Pennsylvania No Iowa No Puerto Rico Yes Kansas Yes Rhode Island Yes Kentucky Yes South Carolina Yes Louisiana Yes South Dakota No response Maine Yes Tennessee No Maryland Yes Texas No Massachusetts Yes Utah Yes Michigan Yes Vermont No Minnesota Yes Virginia Yes Mississippi Yes West Virginia Yes Missouri No Washington Yes
Source: American Association of State Highway and Transportation Officials, The Changing State DOT, 1998, pp. 78 – 81.
*Updated to include recent GARVEE bond transactions in 1999 and 2000.
Recent Texas Bond Proposal
A proposal currently under discussion by the Transportation Excellence for the 21st Century Coalition (TEX-21) recommends authorizing the issuance of general obligation and/or revenue bonds for transportation purposes by the Texas Department of Transportation. The proposal calls for a constitutional amendment to create a new transportation revolving fund to hold all new transportation dollars identified in the 2001 and later legislative sessions; allow either revenue or general obligation bonds to be issued periodically based on the revenues statutorily dedicated to the revolving fund; allow future legislatures to add revenues to the fund and raise the debt limit accordingly; allow bond proceeds to be used for any project for which the state’s Highway Fund can be invested; and require distribution of bond funds to be in accordance with the same calculated percentage TxDOT uses in assessing its annual allocations to the 25 districts in the Unified Transportation Program.
The success of such an approach is inherently dependent upon the ability to dedicate net new revenues to transportation purposes. While this specific proposal focuses on new revenues as the resources to be leveraged via debt financing, the mechanics for issuance would be very similar whether backed by existing or new revenues.
This approach could be complementary to both GARVEE and TIFIA financing and in no way are these financing techniques mutually exclusive. Implemented together, they afford the state the greatest flexibility to maximize the impact of its available revenue streams at the lowest cost based on the specific circumstances at the time.
TxDOT’s authority and experience with respect to each of the techniques introduced above can be summarized as follows:
- GARVEE Debt–efforts have been made to enhance the leveraging capability of TxDOT through authorization of the issuance of grant anticipation debt. To date, these efforts have failed.
- Federal Credit (TIFIA)–TxDOT is well aware of the federal credit program and the opportunity it presents to advance projects. The Texas Turnpike Authority submitted a proposal for the fiscal 2000 selection round, which, due to procedural issues, is being considered by US DOT in the first TIFIA fiscal 2001 round. A number of TxDOT districts have begun to consider applications for future selection rounds. The extent to which the state has full legal authority to borrow funds from the federal government via TIFIA may need to be clarified through legislation. According to TxDOT personnel, the agency, through TTA, has statutory authority to borrow from the federal government via a TIFIA application. There is, however, no official position on whether the agency has the legal authority, other than through TTA, to participate in the program.
- General Obligation and Revenue Bond Financing–TxDOT has no authority to issue general obligation bonds for transportation. The Texas Transportation Commission may issue revenue bonds on behalf of the State Infrastructure Bank and the Texas Turnpike Authority, but not for the benefit of the State Highway Fund. This presents an impediment to leveraging future resources to accelerate project completion.
Providing the Texas Department of Transportation with the ability to apply currently available innovative financing tools to leverage existing resources will support other recommendations that focus on improving the capacity of the department to speed delivery of new construction projects. The most appropriate financial leveraging tools include both more traditional capital market borrowing via general obligation and/or revenue bond financing and newly emerging federally supported leveraging techniques such as GARVEEs and federal credit.
The following recommendations would enhance Texas’ leveraging capacity and thus its ability to deliver critical transportation projects.
A. The Texas Department of Transportation (TxDOT) should secure authority to issue Grant Anticipation Revenue Vehicles (GARVEE) debt.
TxDOT should be granted authority to issue GARVEE debt for transportation investments. Taking into account both the general attributes of successful GARVEE programs in other states and lessons learned from past attempts in Texas at gaining legislative approval for GARVEE financing, following are specific recommendations:
A.1. Amend Article III of the Texas Constitution to allow the Legislature to authorize the Texas Transportation Commission (TTC) or its successor to issue bonds and enter into bond enhancement agreements that are payable from revenue received from the Federal Highway Trust Fund and other revenue deposited to the credit of the State Highway Fund.
A.2. Amend Subchapter B, Chapter 222 of the Transportation Code to allow for the issuance of grant anticipation revenue bonds.
A.3. The authorizing legislation for GARVEEs issuance should establish criteria for the use of bond proceeds that guides the TTC but allows as much flexibility as feasible.
The eligibility and selection criteria should be implemented by the TTC in conjunction with the Bond Review Board, especially in those instances where state funds are committed. Eligibility and selection criteria should include consideration of potential cost savings associated with project advancement, anticipated economic, environmental, and other benefits of early delivery, the impact (both positive and negative) on the remainder of the state’s transportation program, and any potential impact on the state’s overall credit evaluation. Legislation should provide guidance as to the criteria to be considered while giving TTC authority to apply and weight the general criteria based on the particular circumstances.
A.4. The authorizing legislation should establish a reasonable limit on the percentage of the state’s federal-aid funds that may be obligated at any given time.
The limit can be either on the annual payments of principal and interest or on total outstanding principal. Given the overall magnitude of Texas’ federal funding, a reasonable limit for Texas using the latter approach could be 10 percent.
A.5. The authorizing legislation should establish a reasonable limit on maximum maturity for bonds issued.
In general, longer-term issuances will have lower credit ratings due to the relative uncertainty of federal funds beyond one or two authorization cycles. A number of states have imposed or are considering a maximum of 15 years, which would be appropriate for Texas as well. The legislation could establish 15 years as a limit, with specific terms to be established by TTC on a case-by-case basis.
A.6. The authorizing legislation should give the TTC authority to issue both stand-alone and backstopped debt based on the specific circumstances and credit ramifications, with the type of available backstop clearly articulated.
If necessary, the legislation could impose limitations on the maximum level of state backstop. Alternatively, TTC could be required to gain approval from the Bond Review Board and the Comptroller prior to any issuance including a state financial backstop.
A.7. The authorizing legislation should establish a set of revenues that can be used to repay GARVEE debt, including funds available for the payment of bonds and bond-related costs under 23 USC Section 122 and subsequent amendments and other revenue deposited in the State Highway Fund.
Examples of state revenues that can be made available as funds available for a state backstop include state motor fuels tax revenues, license fees, and miscellaneous receipts of the state’s highway fund. Any and all highway fund revenues not otherwise pledged can be used as a backstop to federal sources of repayment. In this way, the state can improve the creditworthiness of bond issuances in certain circumstances and increase TxDOT’s flexibility. Having such a backstop has been a critical ingredient in securing superior credit ratings in the GARVEEs issued by other states.
B. State law should authorize the Texas Department of Transportation to borrow under the federal Transportation Infrastructure Finance and Innovation Act (TIFIA) program.
While it is clear that TTC can participate on behalf of the Texas Turnpike Authority, there is no official opinion as to whether TxDOT can take advantage of the borrowing program beyond TTA projects. In December 2000, the Comptroller of Public Accounts requested an Attorney General’s Opinion to clarify the state’s legal authority to borrow under the TIFIA program.
C. The Texas Department of Transportation should coordinate TIFIA application submission and timing among TxDOT districts.
In the early stages of the TIFIA program, TxDOT’s approach has been fairly disjointed with districts apparently making their own determinations about making federal TIFIA applications. As with all competitive selection processes, there is a certain element of “market timing” and a risk of saturation in TIFIA applications. To maximize statewide benefits, efforts by TxDOT should be well coordinated.
D. The Texas Department of Transportation should consider, perhaps as part of a longer-term effort, seeking legislative authorization to issue transportation-related revenue debt and/or general obligation debt.
Given the current focus on securing authorization for GARVEEs, it may be difficult to also secure authorization for debt backed solely by state resources. TxDOT should begin to develop a strategy for obtaining such authorization in the 2003 legislative session in which GARVEE authority will be a focus. Alternatively, TxDOT could package these debt-related initiatives together in a way that would maximize the department’s flexibility to obtain the lowest cost and most efficient source of financing based on particular circumstances. Other states have taken on these initiatives in tandem and separately, based on the political circumstances.
The advantage of obtaining authority to issue state-secured debt in addition to GARVEE debt is the potential to secure the lowest cost financing at various points in time and for varying projects. In addition, some vocal opponents to GARVEE debt have stated their relative acceptance of state-backed revenue debt.
Since borrowing money is featured in the methods discussed in this paper, it is important to note that Texas has one of the lowest debt burdens among the states. In 1999, Texas ranked 36th among all states and 10th among the 10 largest states in state tax-supported debt per capita, according to Moody’s Medians 1999. Texas had $296 in net tax-supported debt per capita, compared to the national median of $505 per capita and a median of $679 per capita among the 10 largest states. State debt service payable from general revenue has grown as the state issues more bonds. At the end of fiscal 1999, the state owed $3.4 billion payable from general revenue. During fiscal 1999, annual debt service payable from general revenue, including authorized but unissued debt, accounted for 2.20 percent of average general revenue collections for the previous three fiscal years. This is well below the constitutional debt limit, approved by Texas voters in November 1997, of 5 percent of the average amount of general revenue for the three preceding years.
While Texas’ transportation decision makers are examining all possible financing options, issuing bonds merits increased attention. Most other major infrastructure projects, such as the construction of state office buildings and prisons and the purchase of mainframe computers, are financed with bonds and short-term notes. Texas state agencies and institutions of higher education issued $2.78 billion in bonds in fiscal 1998 and had $11.79 billion in debt outstanding as of August 31, 1998.
E. The Texas Department of Transportation should develop a comprehensive approach to managing innovative finance approaches.
To the extent that TxDOT is granted authority to participate in federal innovative finance programs, such as GARVEE issuance and TIFIA and/or given authority to issue general obligation and/or revenue debt for transportation purposes, a comprehensive approach to the use of these techniques will be required. A number of states have begun to establish review or oversight committees and multi-year financing programs to support the decision-making process.
These approaches are in their infancy, but have promise for the management of integrated innovative finance programs. Such an approach would be beneficial to Texas and would help manage the tradeoffs between traditional pay-as-you-go financing and the various financing approaches discussed.
F. The Texas Department of Transportation should issue $1.1 billion in GARVEE bonds for highway construction projects.
Issuing GARVEE bonds would provide TxDOT with funding for urgently needed state highway construction in 2002-03 and beyond. Implementing a bond issue program for eligible projects would be a way to expedite road construction programs that are part of an estimated $1.8 billion of needed work to maintain the current level of services. For example, if TxDOT were to issue $1.1 billion in GARVEE bonds covering a 15-year term, the proceeds could be used to fund highway construction projects along the state’s NAFTA corridors of I-35, I-10, and I-69. Issuance costs and debt service on the bonds would be paid by federal aid funds. GARVEE bond financing is not delayed by a bond referendum, and bonds with their own sources of debt repayment do not count toward Texas’ statutory debt limit.
The fiscal impact of any combination of these recommendations includes both inflation savings associated with accelerated project completion and better project bundling (net of financing costs) and the economic benefit of having the projects in place earlier.
A few examples that have been identified as projects that could benefit include SH 130, a $1.6 billion project that is a strong candidate for TIFIA; I-35 from Waco to Hillsboro, a $700 million project; the I-10 project in Houston; and major interchange projects throughout the state. Another potential project is the proposed outer-loop Northeast Parkway in El Paso. This project would redirect commercial truck traffic from the Zaragoza port-of-entry and west-bound traffic around the city into New Mexico. The proposal is in the very preliminary planning stages.
Exhibit 5 provides an example of the potential fiscal impact of a GARVEE program at varying levels of the state’s annual federal-aid apportionment. The exhibit demonstrates the amount that can be leveraged and the required debt service payments over time.
Leveraging Capacity of Texas’ Federal Apportionments
(Dollars in thousands)
Estimated Annual Apportionments Based on Average Annual Apportionments Under TEA-21 Percent Annual Apportionments Allocated to GARVEE Repayment Maximum Annual Debt Service Payment Estimated Principal Borrowing Leveraged $2,150,107 1% $21,501 $225,012 $2,150,107 5% $107,505 $1,125,059 $2,150,107 10% $215,011 $2,250,118 $2,150,107 15% $322,516 $3,375,178
Methodology based on FHWA GARVEEs Fact Sheet, www.wfc.fhwa.dot.gov/GARVEE.HTM Assumptions:
5 percent average annual interest rate
Bonds repaid over 15 years with level debt service, semiannual payments Issuance costs subsumed in interest rate calculation
A GARVEE bond program would significantly increase funding available now for highway projects. After deducting issuance costs (fees for underwriters, bond counsel, financial advisors, and other administrative costs), an estimated $562 million would be available in fiscal 2002 and 2003 to finance highway construction projects (see Exhibit 6 ). This estimate assumes that the bonds would be issued in two $570 million installments—one in fiscal 2002 and the other in fiscal 2003. Debt service would be paid from future federal-aid obligations and state matching funds.
If the Texas Public Finance Authority (TPFA) issues $570 million in GARVEE bonds for highway construction each year in 2002 and 2003, a net $562 million would be available for highway construction each year of the biennium. The first issuance and debt service payment in 2002 would be $63 million. Issuance and debt service costs for the second year would total $118 million. The amount of debt service incurred to be deducted from 2003 and beyond from federal aid obligations and state matching funds would be approximately $109.8 million every year thereafter for 15 years. Because of the state fund structure, issuance of bonds would not increase the amount of revenue available for certification by the Comptroller of Public Accounts for general spending.
Cash Flow for Highway Funding From GARVEE Bond Sale, 2002-2006
FY2002 FY2003 FY2004 FY2005 FY2006 Bond Issue $570,000,000 $570,000,000 $0 $0 $0 Cost of issuance (est.) $8,200,000 $8,200,000 $0 $0 $0 Bond proceeds $562,000,000 $562,000,000 $0 $0 $0 Principal and interest $54,900,000 $109,800,000 $109,800,000 $109,800,000 $109,800,000 Gain/(Cost) to State Highway Fund $506,950,000 $452,050,000* ($109,800,000) ($109,800,000) ($109,800,000)
*Includes estimated $52,970,000 for debt service in 2003.
Sources: Texas Comptroller of Public Accounts and Texas Bond Review Board.
GARVEEs have broader economic implications beyond the state’s immediate fiscal implications. Roads have a large effect on productivity in our economy with one comprehensive study indicating that every dollar spent on road construction yields 29 cents in increased productivity. Increased productivity represents real monetary savings to businesses which can, in turn, increase investment and other business spending in the state, resulting in an even more profound economic effect. These effects persist as long as a road exists, as well.
Two GARVEE issues of $570 million each, with $8.2 million in bond issuance costs, result in a total of $1.1 billion in advanced road construction. This example assumes that construction is completed in two years and each GARVEE issue is fully repaid in 15 years at 5.21 percent interest. Due to issuance and interest costs, over time fewer total dollars are spent on roads using GARVEE financing than under a pay-as-you-go system. Nevertheless, the net economic effect is positive due to the fact that roads are in place and in use, benefiting users much earlier than they otherwise would be.
Over the sixteen years that elapse from bond issuance to completion of debt service, new roads are constructed early but road construction is sacrificed in later years in order to service the debt. The economic activity gain due to accelerated road construction is less than the lost economic activity from future road construction. These net costs, however, are more than offset by the productivity benefits mentioned above, and by the non-monetary benefits that accrue to drivers as a result of time savings. Using all the assumptions above, the net present value (the value in today’s dollars of the future economic benefits of the project, after adjusting for general and construction inflation), over 30 years, of issuing $1.1 billion in GARVEEs over two years is a positive $1.billion.
During the 1990s, road construction costs increased at a yearly rate that averaged about 2 percentage points higher than the general rate of inflation. If this trend persists, project costs will continue to increase over time: the value, in today’s dollars, of financing immediate road construction is increased. In the hypothetical example above, with construction inflation 2 percent higher than general inflation, over thirty years, the net present value of issuing $1.1 billion in GARVEEs over two years is just under $1.8 billion.
The net present value calculations presented here are very sensitive to changes in the interest rate and the discount rate. These calculations depend on current bond and treasury rates. Due consideration must therefore be given to prevailing interest rates in considering a road bond issue.
FiscalYear Bond Proceeds Net of Issuance Costs to the State Highway Fund Debt Service Costs to the State Highway Fund Net Gain/(Cost) to the State Highway Fund 2002 $562,000,000 ($54,900,000) $506,900,000 2003 $562,000,000 ($109,800,000) $452,000,000 2004 $0 ($109,800,000) ($109,800,000) 2005 $0 ($109,800,000) ($109,800,000) 2006 $0 ($109,800,000) ($109,800,000)
[1 ] Texas Department of Transportation, Transportation Needs Revenue Assessment Report (Austin, Texas, January 1997).
[2 ] E- mail from Max Proctor, Texas Department of Transportation, to Craig Secrest, Trans Tech Management, Inc., August 10, 2000.
[3 ] Federal Highway Administration, Federal Innovative Finance Tools Fact Sheet (Washington, DC).
[4 ] Federal Highway Administration, GARVEE Bond Guidance – Implementing the Provisions of Title 23 Section 122 Reimbursements to States for Bond and Other Debt Instrument Financing Costs (Washington, DC, August 2000), p. 4.
[5 ] Federal Highway Administration, GARVEEs Fact Sheet (http://www.wfc.fhwa.dot.gov/GARVEE.htm). (Internet document.)
[6 ] Federal Highway Administration, The GARVEE Goldrush: Tracking the States’ Use of Debt, a presentation to Transportation Research Board Innovative Finance Conference, Scottsdale, Arizona, August 20, 2000.
[7 ] The Federal Highway Administration distinguishes between GARVEEs – debt instruments backed directly by federal-aid funds and other forms of indebtedness whereby debt is repaid indirectly by federal project reimbursements. The primary distinctions are that under a GARVEE structure, all debt-related costs are eligible for reimbursement, including interest and issuance costs, whereas under the latter structure, interest and issuance costs are not eligible for reimbursement; and the degree to which federal requirements apply. The debt issued by Massachusetts and Mississippi is not characterized by FHWA as GARVEE debt. Source: Jennifer Mayer, Western Finance Center, Federal Highway Administration, August 17, 2000.
[8 ] Federal Highway Administration, The GARVEE Goldrush: Tracking the States’ Use of Debt, a presentation to Transportation Research Board Innovative Finance Conference, Scottsdale, Arizona, August 20, 2000.
[9 ] Federal Highway Administration, A Summary: Transportation Equity Act for the 21st Century, July 15, 1998 (http://www.fhwa.dot.gov/tea21/sumcov.htm). (Internet document.)
[10 ] Based in part on Federal Highway Administration, GARVEEs Fact Sheet (http://www.wfc/fhwa.dot.gov/GARVEE.htm). (Internet document.)
 Testimony by Tom Johnson, Associated General Contractors, before the State Border Affairs and State Affairs Committees, Houston, Texas, April 2000.
[12 ] There are some limitations for design and right-of-way projects such that the state cannot continue with active design and ROW acquisition until conformity is reestablished. A state may, however, substitute allowable projects within the area in conformity lapse or projects outside that area, as long as federal requirements have been met.
[13 ] Federal Highway Administration, GARVEE Bond Guidance – Implementing the Provisions of Title 23 Section 122 Reimbursements to States for Bond and Other Debt Instrument Financing Costs (Washington, DC, August 2000), p. 4.
[14 ] Federal Highway Administration, Western Finance Center, Comparison: GARVEE Legislation (Draft) (San Francisco, California, June 11, 1999).
[15 ] Federal Highway Administration, Western Finance Center, Comparison: GARVEE Legislation (Draft) (San Francisco, California, June 11, 1999).
[16 ] Federal Highway Administration, Western Finance Center, Comparison: GARVEE Legislation (Draft) (San Francisco, California, June 11, 1999).
[17 ] Federal Highway Administration, Western Finance Center, Comparison: GARVEE Legislation (Draft) (San Francisco, California, June 11, 1999).
[18 ] Standard & Poor’s, Commentary: Grant Anticipation Revenue Bond Rating Criteria,June 19, 2000 (http://www.standardandpoors.com/ratings/infrastructurefinance/index.htm). (Internet document.)
 Federal Highway Administration, Transportation Infrastructure Finance and Innovation Act Program Guide (Washington, DC, May 2000), pp. 3-7.
 Federal Highway Administration, Transportation Infrastructure Finance and Innovation Act Program Guide (Washington, DC, May 2000).
 Federal Highway Administration, Transportation Infrastructure and Finance Innovation Act, “TIFIA Projects,” (http://tifia.fhwa.dot.gov/tifia/). (Internet document.)
 Federal Highway Administration, Transportation Infrastructure and Finance Innovation Act, “TIFIA Projects, TIFIA Applications - July 2000,” (http://tifia.fhwa.dot.gov/tifia/). (Internet document.)
 Telephone interview with Thomas Doebner, director, Funds Management, Budget and Finance Division, Texas Department of Transportation, Austin, Texas, June 9, 2000.
 Proposal submitted by Lee F. Jackson, County Judge, to the Honorable Rick Perry, Lieutenant Governor, State of Texas, June 5, 2000.
 Telephone interview with Thomas Doebner, director, Funds Management, Budget and Finance Division, Texas Department of Transportation, Austin, Texas, June 9, 2000.
 Testimony by Tom Johnson, Associated General Contractors, before the State Border Affairs and State Affairs Committees, Houston, Texas, April 2000.
 Texas Bond Review Board, 1999 Annual Report (Austin, Texas, November 1999), p. 7.
 Texas Bond Review Board, 1999 Annual Report (Austin, Texas, November 1999), pp. 9-10.
 Texas Bond Review Board, Texas State and Local Government Fiscal 1997 Debt Report (Austin, Texas, April 1999), p. A-6.
 Vernon’s Ann. Civ. St. art. 717k-7, §8.
[31 ] M. Ishaq Nadiri and Theofanis Mamuneas, Federal Highway Administration, “Contributions of Highway Capital to Output and Productivity Growth in the U.S. Economy and Industries,” August 1998, (http://www.fhwa.dot.gov//////policy/gro98cvr.htm). (Internet document.) A summary is also available at (http://www.fhwa.dot.gov//////policy/nadiri2.htm). (Internet document.)