Uncertainty about federal highway funding is causing some states to turn from Garvee bonds to alternative financings, such as toll-backed debt and public-private partnerships, but issuers should be aware of the risks involved, Fitch Ratings warned Wednesday.
Grant anticipation revenue vehicle bonds are backed with federal funds and states are “looking inward” rather than to the federal government for funds, Fitch said in its report, “U.S. Surface Transportation Funding: Pitted with Potholes?”
“The payment stream for these [alternative financings] is coming sort of from the bottom bucket of the state departments of transportation and, given the financial issues that may exist, lenders need to look carefully at the total operations of the state DOT, not just that they have a two-times debt service coverage from the gas tax,” said Mike McDermott, the Fitch analyst who authored the report.
Fitch said Congress’ failure to pass a multi-year surface transportation reauthorization bill since the previous one expired in September 2009 “is a significant impediment to transportation investment in the U.S.”
Lawmakers instead have approved a series of short-term extensions, but that does not provide long-term certainty for states, which Fitch says typically rely on the federal government for 20% to 30% of their overall funds for transportation projects.
The lawmakers and Obama administration officials have been unable to come up with a fix or alternative to the Highway Trust Fund, the main source of federal transportation funds provided to the states.
The trust fund currently is mostly funded mostly with gas tax revenues that have been flat to declining since 2007 due to the recession and the spike in gasoline prices. Lawmakers have opposed raising gas taxes.
“Dwindling resources and increasing demands have led state departments of transportation to question the reliability and sustainability of the role of the federal government in surface transportation, and consequently the way it funds their asset,” Fitch said.
The report described several examples of states “looking inward to finance the future as opposed to looking to the federal government as a solution.” North Carolina is developing toll roads and pursuing P3s. The Texas Department of Transportation has sponsored a number of toll projects through a concession method and has also agreed to provide a guarantee for the North Texas Tollway Authority’s State Highway 161 and Chisolm Trail toll road projects.
However, Fitch warned: “Lenders should remain cautious as departments of transportation wade into the new paradigm of surface transportation funding and pay close attention to the nature of the pledge they are getting. In cases where the security is equivalent to a general obligation of the DOT with no priority of payment, there is the risk that DOT managers will add leverage that is senior or prioritize other requirements over contractual payments for guarantees and availability payments.”
