States Rethink Highways

WASHINGTON - States are weighing whether to modify their long-term transportation finance plans because of questions about the future sustainability of the beleaguered federal highway trust fund, after some already were forced to shelve $1 billion of grant anticipation bond deals due to unfavorable market conditions.

Grant anticipation revenue vehicles, or Garvee bonds, typically are issued by state governments to finance the construction of transportation projects and are repaid primarily with money from the federal highway trust fund. If that money is delayed or withheld, states might have to stop or postpone infrastructure projects or even use state funds to repay the debt service.

Last month, the U.S. Department of Transportation's announcement that the federal highway trust fund was running out of money almost brought state projects and bond sales to a screeching halt.

The fund is furnished almost entirely by gasoline tax revenues, which diminished rapidly alongside record drops in vehicle miles driven throughout the country. Officials warned that trust fund reimbursements, apportioned to states based on a formula, would have to be rationed weekly instead of daily, on an as-available basis.

Spooked by the announcement, at least one state, Maryland, postponed a $425 million issuance of Garvees, and other states said they would have to cut or delay transportation projects.

But the panic subsided after Congress approved a transfer of $8.017 billion of general funds into the trust account, expecting the cash infusion to last until legislators create a transportation reauthorization bill to replace the current law, dubbed the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users, which expires Sept. 30, 2009.

"People right now are not ready to give up on this," Jack Basso, director of management and business development for the American Association of State Highway and Transportation Officials, said about Garvees . "Marketing them [right now] is extremely difficult, if possible at all. And looking at the rates, if you can market them at all, you're going to pay a premium on those bonds."

Stable revenue from federal highway grants drove healthy Garvee sales in the past, he said, but "what is going to be the situation on revenue after this fiscal year?"

Market participants contend Congress will have to seek new revenue sources, raise the gasoline tax, or take other measures to attract more private investment in infrastructure.

"They have options, but it's going to require supplemental funding," said Mike McDermott of Fitch Ratings, which issued a special report on the funding challenges of Garvees bonds last week.

Estimates vary on how long the current federal highway trust fund balance will last before another cash infusion is needed or the Federal Highway Administration makes the switch to pay-as-you-go reimbursements. Cash-flow problems are likely to return by the end of this fiscal year or early next fiscal year "barring a major move by a new Congress and administration to enact successor legislation," Fitch said in its report.

Fitch projected that outlays from the trust fund will become restrained beginning in 2010 when the trust fund again reaches a zero balance. Cash to state departments of transportation will subsequently drop by more than 20%, Fitch said.

Slowed reimbursement cycles would expose direct-pay Garvees to more timing risk than other types of Garvees, Fitch said. State departments of transportation with Garvee bonds "will need to make adjustments in their cash flow management," the report added.

In addition, because of poor market conditions, Garvee deals that were ready to sell in Maryland, Missouri, Ohio and Oklahoma this fall are already on hold.

The Maryland Transportation Authority was on track to sell $425 million of Garvees to finance the ongoing construction of the state's Intercounty Connector, a $2.4 billion, 18.8-mile toll-road project. The sale was postponed indefinitely last month.

Missouri's Highway and Transportation Commission decided last month to use $700 million of Garvees, instead of private-activity bonds, to finance the rebuilding and repair of 802 bridges. The state plans to sell the bonds as soon as next year, said Ben Reeser, finance administrator for the state DOT. But the state is "in a holding pattern right now" on a $150 million sale that was planned for mid-October to reconstruct Interstate 64 in St. Louis, he said.

"Knowing that there is this potential risk in the Garvee program, we have a backup supporting pledge of state revenue as well," Reeser said. The department planned for a 39% drop in 2010 of federal funds for highway and bridge construction, he said. The Garvee sale delay is due to market conditions, not federal funding.

Ohio had planned to sell $375 million of Garvees early this week but is "going day to day on them now," said Holly Hollingsworth, a spokeswoman for the Ohio state treasurer. "We've got quite a good window [of about 30 to 60 days] and don't need to generate the revenue right away."

Jake Wozniak, director of debt management for the treasurer, said he is not worried about Ohio's Garvee repayments, partly because the state carries a debt coverage ratio of more than five times.

"Our DOT is working very actively in the midst of uncertainty on the federal level to plan ... conservatively in budgeting their future projects," Wozniak said. "Should there be changes with future federal reauthorizations they will adjust their plans accordingly," he said, adding that could mean downsizing the Garvee program. "We think they're an important funding tool, and we plan to continue to use them."

Oklahoma Treasurer Scott Meacham said the state is waiting to bring to market $100 million Garvees because of the lack of liquidity. However, he added that he plans to meet with the DOT to assess the future of Garvee issuances in light of the problems with the highway trust fund. The state could use its road funds for Garvee debt service if it had to, he said.

"We just have to look at what the alternatives are, and see if the market really responds unfavorably to the Fitch report or others like it," Meacham said.

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