WASHINGTON — Fitch Ratings warned on Wednesday that grant anticipation revenue vehicle bonds, known as Garvees, face heightened uncertainty as Congress struggles to reauthorize transportation spending.
With federal gas-tax revenue failing to keep pace with spending, Fitch revised its outlook for stand-alone Garvee bonds — those that lack a back-up pledge from a state — to negative from stable. The outlook change applies to Garvee debt issued in 13 states.
Stand-alone Garvees are secured solely by federal highway grants made to the issuing states, and those grants are subject to congressional appropriation.
Fitch said in its five-page report that the inaction on transportation policy does not mean Garvee bonds risk losing their investment-grade ratings. But short-term fixes for Garvee funding have exposed the program to political whims and that could lead to “diminishing funding levels in the future.”
Garvees allow issuers to leverage federal highway and transit funding to accelerate infrastructure projects. The federal funding for Garvees comes from the highway trust fund, which collects most of its revenue from an 18.4-cent-per-gallon federal gasoline tax. That tax is set to expire on Sept. 30 with the rest of the funds authorized by the law known as the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users, or SAFETEA-LU. The highway fund has needed cash infusions from the Treasury Department three times since 2008, totaling $34.5 billion, according to Fitch.
The ongoing debate for fiscal 2011 and 2012 spending has diminished the chances for a long-term reauthorization bill. With some members aiming for transportation spending cuts, “any progress on a longer-term reauthorization of the highway program appears unlikely, and additional transfers from the general fund may be necessary” to fund the Garvee program, the report said.
House Transportation Committee chairman John Mica, R-Fla., and Transportation Secretary Ray LaHood have said they believe a six-year reauthorization bill can be approved this year. However, both have said an increase in the gas tax is politically impossible.
Given short-term budget fixes, Garvee issuers could face delays in federal payments and such delays are “more of a possibility now than at any time during the past decade,” according to the report.
Michael McDermott, managing director at Fitch and an author of the report, said investors need to know “there is the potential for changes” to Garvee ratings based on the realities in Washington.
Garvees are not an obligation of the federal government and are subject to appropriation, he noted. This means “the federal component is not something [states] can control,” McDermott said.
Still, one state issuer expressed confidence in the program.
Mark Foster, chief financial officer at the North Carolina Department of Transportation, said the Fitch report “is really sending a message” to members of Congress to “get your act together”. North Carolina issued Garvees in 2007 and 2009 and has $373 million outstanding, Foster said. The state’s Garvees are stand-alone.
Foster said the chances of a funding collapse to the Garvee program are “minute,” adding that the state expects to issue a third round of Garvees later this year.
