Grant Anticipation Revenue Vehicles (GARVEEs)
Transportation Finance Innovations
GARVEEs are debt-financing instruments repaid with future Federal-aid funds.
As of April 2014, 26 States and 3 territories have issued over $17.6 billion in GARVEEs.
Projects financed with GARVEE proceeds must follow all Federal-aid requirements.
Grant Anticipation Revenue Vehicles (GARVEEs) enable States to pay debt service and
other bond-related expenses with future Federal-aid highway funds. The law authorizing
GARVEEs, however, makes it clear that a debt-financing instrument's eligibility
for reimbursement with future Federal-aid highway funding does not constitute a
commitment, guarantee, or other obligation by the United States, nor does it create
any right of a third party (such as an investor) against the Federal Government
How Do They Work?
A GARVEE is a debt-financing instrument authorized to receive Federal reimbursement
of debt service and related financing costs under Section 122 of Title 23, United
States Code. GARVEEs can be issued by a State, a political subdivision of a State,
or a public authority. States can receive Federal-aid reimbursements for a wide
array of debt-related costs incurred in connection with an eligible debt-financing
instrument, such as a bond, note, certificate, mortgage, or lease. Reimbursable
debt-related costs include interest payments, retirement of principal, and any other
cost incidental to the sale of an eligible debt instrument.
In general, projects funded with the proceeds of a GARVEE debt instrument are subject
to the same requirements as other Federal-aid projects with the exception of the
reimbursement process. Instead of reimbursing construction costs as they are incurred,
the reimbursement of GARVEE project costs occurs when debt service is due. For a
GARVEE, a State may request partial conversion of advance construction project(s)
to coincide with debt-service payments, allowing for effective use of obligation
It is important to note that, in order to issue GARVEE bonds, States or the issuing
entity must have the appropriate State authorizations related to debt issuance.
States have the flexibility to tailor GARVEE financings to accommodate State fiscal
and legal conditions.
What Are the Benefits?
The GARVEE financing mechanism generates up-front capital for major highway projects
at generally tax-exempt rates and enables a State to construct a project earlier
than if using traditional pay-as-you go grant resources. With projects in place
sooner, costs are lower due to inflation savings, and the public realizes safety
and economic benefits. By paying with future Federal highway reimbursements, the
cost of the facility is spread over its useful life, rather than just the construction
period. GARVEEs can expand access to capital markets as a supplement to general
obligation or revenue bonds.
How Is It Used?
Candidates for GARVEE financing are typically large projects (or programs of projects)
that have the following characteristics:
- The costs of delay outweigh the costs of financing.
- Other borrowing approaches may not be feasible or are limited in capacity.
- The project does not have access to a revenue stream, and other forms of repayment
are not feasible.
- The sponsors are willing to reserve a portion of future year Federal-aid highway
funds to satisfy debt-service requirements.
States are finding GARVEEs to be an attractive financing mechanism to bridge funding
gaps and to accelerate construction of major corridor projects.
- Accelerate selected projects and increase number of projects that can be built
with existing revenue.
- Borrow at relatively low interest rates (tax-exempt rates apply).
- Provide mechanism for claiming interest and issuance costs as Federal-aid eligible
- Provide economic and fiscal stimulus as proceeds are expended.
- Enable potential economies of scale in construction.
- Mitigate inflation risk in construction and right-of-way costs.
- Reduce financial, programmatic, and political flexibility for those years in
which debt service consumes a portion of the annual transportation program.
- May cause economic and fiscal drag as debt service is repaid.
- May lead to capacity constraints with respect to availability of contractors,
consultants, construction materials, and labor and public agencies.
- May lead to induced inflation as GARVEE proceeds "goose" market.
- Oversight and reporting responsibilities required for life of GARVEE instrument
and for a reasonable period thereafter.
- Record-keeping and accounting requirements also expanded; procedures must be
documented, especially where they differ from regular Federal-aid process (e.g.,
claiming of reimbursement for debt service, not construction).
- GARVEEs are secured by specific Federal-aid apportionment categories, and proceeds are used to pay for a specific Federal-aid eligible project (or projects). A GARVEE requires FHWA Division Office approval of the project authorization and election to receive project reimbursements based on the debt-service schedule. The FHWA Division Office and the State should be able to identify eligible Federal-aid activities funded by the GARVEE proceeds.
- When GARVEE debt is backed by other State or local revenues (e.g., State fuel tax or toll revenues), in addition to future Federal-aid apportionments, it is known as a backstopped GARVEE. In this case, the State can issue debt at lower interest costs by reducing the risk from the uncertainty of the timing of Federal-aid highway funding.
- Some States, political subdivisions, or public authorities have issued debt and securitized the debt with reimbursements of Federal-aid received for costs incurred for the general program of Federally eligible projects. These reimbursements - once received - are State funds. In many instances, such debt issuances have been referred to as indirect GARVEEs; however, such bonds are not GARVEEs but rather State revenue-backed bonds. These bonds do not require FHWA Division Office approval of the financed projects, and FHWA Division oversight and monitoring throughout the debt repayment process are not required.