DALLAS – The $305 billion Fixing America's Surface Transportation (FAST) Act is credit positive for $11 billion of rated state road and transit debt secured by federal transportation grants, Moody's Investors Service said in an analysis of the measure that was signed into law by President Obama on Dec. 4.
"Enactment of the measure … increases debt service coverage and mitigates the risk of a disruption in the flow of federal funds over the next five years," said Moody's analyst Julius Vizner.
Twenty-four states have issued GARVEE bonds for highway or transit projects over the last 15 years, according to the Federal Highway Administration. Issuers include Arizona, Arkansas, California, Maryland, Ohio, Virginia, and Puerto Rico.
The new funding law (P.L. 114-94), which increases total federal transportation funding by 15% through fiscal 2020 with an 18% boost for mass transit, is supported with $70 billion of general fund transfers to supplement the $208 billion of revenue expected through 2020 from federal motor fuel taxes and other levies dedicated to the Highway Trust Fund.
The transfer is expected to take place before Dec. 20, when the $8.1 billion of general revenues transferred to the HTF by a short-term extension in May will run out. The cash balance was expected to hit a critical threshold at that point, requiring a slowdown in state reimbursements.
"We expect the transfer to occur soon, forestalling the risk that the Transportation Department would delay or haircut the funds flowing to states and transit agencies as a result of the HTF's low balance," Vizner said.
Congress transferred a total of $72 billion of general revenues into the HTF from fiscal 2008 through fiscal 2015 as expenditures from the fund outstripped gasoline tax revenues, he said.
The use of revenue offsets to compensate for the general fund transfers required by the FAST Act does not resolve the HTF's ongoing structural imbalance, Vizner said.
"To maintain current grant funding levels over the median GARVEE maturity of 12 years, Congress will eventually need to add funds over and above what federal motor fuels taxes bring in," he said. "Increasing motor vehicle fuel efficiency will further erode the structural balance by depressing gas tax revenues, while a growing U.S. population and economy will continue to pressure transportation spending upward."
The operational challenges faced by bus and rail systems will be eased by the increased federal funding for public transit, Vizner said.
Federal funds account for 18% of the revenues reported by agencies that have issued $36 billion in enterprise revenue-backed mass transit debt, according to the Moody's report.
Fitch said the FAST Act will stabilize the GARVEE sector but the revenue woes remain.
"The recent passage of a five-year transportation bill by Congress is a step forward after years of short-term patches," it said. "Fitch sees long-term challenges continuing to exist as the funding plan relies on $70 billion of transfers to cover the projected revenue gap."
Fitch affirmed its ratings on 12 GARVEE issuers in August, with 10 at A-plus and two at BBB.
Standard & Poor's ratings of 25 GARVEE issuers are not affected by the FAST Act, analyst Peter Murphy said Tuesday.
"We believe FAST generally supports the sector's credit quality, due to a longer period of funding certainty and the increased funding levels that the act provides," he said.
S&P's ratings in the GARVEE sector range from A to AA for debt secured only by federal funding to as high as triple-A if state agencies bolster federal grants with an additional pledge of state revenues, he said.
"We base the relatively strong ratings in the sector on the issuers' pledge of HTF grants from the federal government," Murphy said. "States and local transportation agencies that receive distributions from the HTF can confidently move forward with complex multiyear transportation projects because the questions surrounding federal funding no longer loom."
