Lack of Multi-Year Bill Could Hurt Garvee Bond Ratings, Fitch Says

Fitch Ratings warned it may have to lower ratings on Garvee bonds if Congress only approves more short-term extensions of a surface transportation bill through 2012 instead of a multi-year bill. The current extension gives legislators until March 31 to close a gaping hole between House and Senate proposals.

“Continued short-term extensions through 2012 without any progress on a longer-term program could lead Fitch to lower its opinion of the strength of the federal program and downgrade the ratings on grant anticipation revenue vehicle bonds lacking a state back-up pledge,” the rating agency said Thursday.

Fitch already revised its outlook for Garvee bonds to negative in March. About 25% of Garvee issues come without a state reserve fund or some other form of payment backup, according to the American Association of State Highway and Transportation Officials.

The last multi-year surface transportation bill, the Safe, Accountable, Flexible, Efficient Transportation Equity Act, or SAFETEA-LU, expired on Sept. 30, 2009, and the continuing reliance on extensions presents a mismatch between short-term revenue and long-term debt.

Garvee bonds are backed with the allotted portion of federal highway funds that each state gets every year, based on future projections of federal-aid transportation funding.

Garvees allow states to immediately finance projects instead of waiting for grants to arrive.

“The growing shift towards short-term extensions heightens the reauthorization risk and erodes the multi-year aspect of prior years,” Fitch said. “A continued lack of progress towards a sustainable multi-year program could lead Fitch to view the strength of the [federal highway] program as mid-range, thus resulting in a downgrade of Garvee bonds lacking a state backup pledge.”

Jack Basso, a financial expert at AASHTO, said he wonders what has really changed. “It’s taking us a long time to get a reauthorization, but if you look at SAFETEA-LU, it took us two years to get that done and there was no talk of downgrades and so forth then,” he said.

According to Fitch, “the likelihood of the passage of a multi-year extension before 2013 is increasingly low.”

Fitch managing director Michael McDermott said there is more than just money making for uncertainty. “There’s a real debate about what the role of the government should be,” he said.

A Morningstar analysis published earlier this week said: “The gap between the two parties has never been wider, which may mean another round of wrangling or even another extension.”

The federal gasoline tax of 18.4 cents per gallon and the diesel tax of 24.4 cents are no longer bringing in enough money to pay for current levels of spending from the Highway Trust Fund, which provides the grants that Garvees anticipate.

In the Senate, Environment and Public Works Committee chairwoman Barbara Boxer, D-Calif., has agreed with the ranking Republican, James Inhofe of Oklahoma, on a two-year, $109 billion proposal which still needs $12 billion more in financing above the trust fund revenue.

In the House, Transportation Committee chairman John Mica, R-Fla., originally proposed a six-year, $230 billion plan limiting spending to the trust fund’s income.

Now, the Republican leadership has told Mica he can look for $15 billion a year more — but not raise the gas tax — to boost spending in his bill.

That would bring the House close to the current annual $50 billion surface transportation spending.

That might make bargaining easier, but House Speaker John Boehner, R-Ohio, has hinted at wanting the money to come from leasing more federal land and offshore rights to oil drilling, which Democrats may oppose.

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Transportation industry Washington
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