Skip to main content


Federal Debt Financing Tools

GARVEE Bond Guidance (March 2004)

Implementing the Provisions of Title 23 Section 122
Reimbursements to States for Bond and Other Debt Instrument Financing Costs


DOT Logo  U. S. Department of Transportation
  Federal Highway Administration


Subject: INFORMATION: Revised GARVEE Bond Guidance

Date: March 25, 2004

From: Sandra L. Weisman
Director, Office of Budged and Finance

In Reply Refer To:

To: Associate Administrators
Chief Counsel
Directors of Field Services
Resource Center Managers
Division Administrators
Federal Lands Highway Division Engineers


We are attaching an update to the GARVEE Bond Guidance replacing the guidance issued in August 2000. The only significant changes are contained in the sections on "Project Approval" clarifying the use of bond proceeds and other Federal funds on the same project, the section on "Eligible Debt Financing Instruments and Bond-Related Costs" removing arbitrage rebates as an eligible cost and adding an explanation regarding the eligibility of a debt service reserve fund and the section on "Transportation Conformity" updating to current policy.

If you have any questions relating to the guidance, please contact Dale Gray, Director of Financial Management, Federal Highway Administration, (202)-366-0978.

GARVEE Bond Guidance (see below)

cc: Resource Center Managers

Table of Contents

  1. Background
  2. Not A Guarantee
  3. Project Approval
  4. Funding Eligibility
  5. Eligible Debt Financing Instruments and Bond-Related Costs
  6. Federal Share
  7. Transportation Conformity
  8. Partial Conversion
  9. Reimbursements of Debt-Related Costs
  10. FMIS Instructions
  11. Project Cost Changes
  12. Close-out of Bond-Financed Project
  13. Using a SIB as a Financing Conduit
  14. Questions

Implementing the Provisions of Title 23 Section 122 Reimbursements to States for Bond and Other Debt Instrument Financing Costs


Section 311 of the National Highway System Designation Act of 1995 (NHS Act) significantly expanded the eligibility of bond and other debt instrument financing costs for Federal-aid reimbursement. This change to the Federal-aid program was codified into permanent highway law as an amendment to section 122 of Title 23, United States Code. This guidance replaces the guidance issued in August 2000.

Section 122 makes bond-related costs eligible for Federal reimbursement on any Federal-aid project eligible under Title 23. The definition of construction is revised in section 101 of Title 23, to include a reference to bond-related costs. A wide array of bond-related costs is eligible for reimbursement, including principal and interest payments, issuance costs, insurance, and other costs incidental to a financing.

Since enactment of the NHS Act, a number of States either have issued or are considering project financing that utilizes bond or other debt instrument financing mechanisms involving the payment of future Federal-aid highway funds to retire debt. These new mechanisms are being called Grant Anticipation Revenue Vehicles or "GARVEE" bonds. Some States are designating these financings backed by future Federal funds as Grant Anticipation Notes or GANs.

These guidelines apply to a bond financing for a single large scale Federal-aid eligible project as well as to a financing which funds multiple Federal-aid eligible projects.

Not a Guarantee

As stated in section 122, the eligibility of a debt financing instrument for reimbursement with future Federal-aid, to the extent such funding may be available, does not constitute a commitment, guarantee, or other obligation by the United States to provide for payment of principal or interest, or create any right of a third party against the Federal Government for payment. Issuers should seek the expert advice of bond counsel regarding the tax status of such debt instruments.

Project Approval

The project must be approved as a Federal-aid debt-financed (bond, certificate, note, or other debt instrument) project in order to receive payments for eligible debt-related costs under section 122. Once a project is selected for bond financing, the project is submitted to the responsible FHWA Division Office for approval as an advance construction (AC) project under section 115 of Title 23. The AC designation will ensure that the project follows Federal-aid procedures and will preserve the eligibility to reimburse debt-related costs with future Federal-aid funds.

At the time the project agreement is signed, the State will make an election to seek reimbursement for debt service and/or related issuance costs in lieu of reimbursement for construction costs. FHWA prefers that each project be reimbursed either on the basis of debt-related costs or on invoice costs (not both). However, FHWA will consider exceptions to this either/or provision, if the State provides assurance that the project costs being reimbursed from the bond proceeds can be identified and tracked. For example, the bond proceeds may used to fund a project phase or a specific activity, or be limited to a dollar amount per project.

If a State elects to receive debt-service reimbursements, a debt service schedule should be included in the project agreement. If multiple projects are funded with the proceeds of a bond issue, each project would have a prorated share of the debt-related costs.

To comply with the intent of the fiscally constrained planning process, the Federal share of the debt-related costs (e.g., interest and principal payments, associated issuance costs, and on-going debt servicing expenses) anticipated to be reimbursed with Federal-aid funds over the life of the bonds should be designated as AC. The planned amount of Federal-aid reimbursement for debt service (AC conversion) should be included in the State Transportation Improvement Program (STIP) in accordance with FHWA procedures relating to STIP preparation.

It is important to note that FHWA approves only the project to be debt-financed in order to receive debt service reimbursements, not the bond issue which is under State authority.

Funding Eligibility

To be authorized as AC, the project must be eligible for Federal-aid funding under one or more program categories as set forth in Title 23, section 115 (e.g. NHS, STP, etc.). Any reimbursements of debt-related costs must be made with obligations of eligible categories of Federal-aid funds. The AC amount designated at the time of project approval must consist of some combination of eligible funding categories, although the State each year retains the flexibility to decide which category(ies) to obligate for AC conversion. The State retains the right to use non-Federal funds in lieu of Federal-aid for debt service costs.

Eligible Debt Financing Instruments and Bond-Related Costs

As defined in section 122, an eligible debt financing instrument is a bond, note, certificate, mortgage, lease, or other debt financing instrument issued by a State or political subdivision of a State or a public authority, the proceeds of which are used to fund a project eligible for assistance under Title 23. For purposes of these guidelines, the term "bond" is used generically to mean an eligible debt financing instrument.

A current or advance refunding issue would also be considered an eligible debt financing instrument, if the issue was a refunding of an outstanding bond issue approved under the provisions of section 122. A refunding is usually performed to achieve interest rate savings for the issuer. If the refunding results in higher debt service costs in either nominal or present value terms, the State must send justification for the refinancing in a form acceptable to the FHWA Division Office. A project agreement modification with a new repayment schedule will be required to ensure the continued eligibility of reimbursements of bond costs.

Bond-related costs eligible for reimbursement include:

  1. interest payments and retirement of principal under an eligible debt financing instrument (including any capitalized interest);

  2. issuance costs and credit enhancement fees; and

  3. any other cost incidental to the sale of an eligible debt financing instrument (as determined by the Secretary). These can include on-going paying agent/trustee fees and audit costs.

Issuance costs include the following: underwriters discount; rating agency fees, printing, publication, or advertising expenses with respect to the bonds; all fees, expenses, and costs of registrars and paying agents; and all fees, expenses, and costs of attorneys, financial advisors, bond counsel, accountants, feasibility consultants, computer programmers, or other experts employed to aid in the sale and issuance of bonds. Credit enhancement fees include bond insurance, premiums, and letter or line of credit fees.

The capitalization from bond proceeds of a debt service reserve account or contingency fund required by (incidental to) the debt issuance is considered an eligible Federal-aid expense. The funds deposited in such an account, along with any interest earnings, must be used for project costs--either on a current basis (including interest) or as a final payment to the bondholders. They cannot be released and disbursed to any other party for any other purpose. If the reserve account is to be liquidated to make the final debt service payment it will not be eligible for Federal-aid reimbursement. Likewise, if unused bond proceeds are applied to pay principal and/or interest, such payments will not be eligible for reimbursement.

If a debt service reserve fund is used to make timely debt service payments due bondholders because of an interruption or insufficiency of pledged Federal-aid funds, the State may request reimbursement for the debt service payment when Federal-aid funds become available in order to replenish the debt service reserve directly, consistent with sections 122(b) and 121(c) of Title 23. If a surety provider, including a bond insurer, makes the debt service payment under the surety agreement, reimbursement of the debt service payment depends upon the terms and conditions of the surety agreement between the surety and issuer. To the extent that an issuer is required to repay the debt service payment to the surety, reimbursement with Federal-aid is a cost incurred relating to a principal and interest payment. In such case, reimbursement may be made either to the State or the surety provider consistent with 23 U.S.C. 122(b) and 121(c). To the extent that the surety simply insures the risk of non-payment or late payment and makes a third party payment to the bond trustee, and the State issuer does not have a legal obligation to reimburse the surety, there is no cost incurred. In either case, any interest or penalties associated with the surety payment are not reimbursable under section 122 of Title 23 because the risk of nonpayment or interrupted payment of Federal-aid funds lies with the State.

Federal Share

The maximum Federal share of the cost of a bond issue project approved under section 122 is the share as defined under section 120 of Title 23 (or other statutory reference). This constitutes the legal pro rata share in effect at the time of execution of the project agreement. For any bond issue, the Federal share eligible for reimbursement depends on the amount of bond proceeds applied to approved Federal-aid projects, including payment of "soft" costs such as capitalized interest, issuance expenses, and credit enhancement fees.

In situations where 100 percent of project costs are debt financed through one bond issue, the bond-related costs may be measured on a nominal, current-year basis (e.g. 80 percent of each payment will be payable from Federal-aid and 20 percent from State match.) This will simplify both STIP planning and the calculation of reimbursement amounts and shares. However, this may not always be the case. The Federal and non-Federal share may be financed separately. For example, the Federal share may be debt financed, while the State share is funded on a pay-as-you-go basis or satisfied with "in-kind" match such as donated property or toll credits.

Transportation Conformity

Bond-financed projects approved by FHWA under the provisions of section 122 are subject to the Clean Air Act Amendments of 1990 and transportation conformity regulations (40 C.F.R. parts 51 and 93) and guidance. Consistent with the Revised Guidance for Implementing the March 1999 Circuit Court Decision Affecting Transportation Conformity issued on January 2, 2002 (67 FR 5882), if a State has issued bonds for an AC project phase before a conformity lapse and FHWA has approved the project phase in accordance with section 122, FHWA will continue to reimburse the State during a conformity lapse. Both debt service payments and project costs remain eligible for reimbursement, provided the bonds were issued prior to the date of the conformity lapse. Bond proceeds can continue to be spent on the project phase, but subsequent phases of the project for which FHWA has not taken an approval action may not proceed in the absence of conformity.

Partial Conversion

Periodic debt service payments (Federal-aid reimbursements) on the bonds would represent partial conversions of designated AC amounts to Federal-aid. The State could obligate such Federal-aid annually over the life of the bonds to help retire permanent financing or the State could make the conversion in one lump sum upon project completion to help take out construction financing. The State would follow the normal procedures for conversion of an AC project.

Reimbursements of Debt-Related Costs

The State may seek Federal-aid reimbursements for eligible bond-related costs as these costs are incurred. Issuance costs, debt service payments, and incidental costs represent costs incurred that may be reimbursed with Federal-aid funds to the extent such costs are deemed eligible, without regard to the construction status of the project. Tapered match will not be permitted on debt-related reimbursements.

The State may make arrangements with the FHWA Division Office regarding the procedures under which it would submit a billing to FHWA for debt-related costs. A request for payment can be timed so that reimbursements could be received just prior to or on the debt service payment date, so that the State does not need to advance its own funds to pay the Federal share. If the State is required to make sinking fund deposits to a trustee prior to the actual debt service payment dates, the State would be responsible for working with the U.S. Department of Treasury to determine compliance with its agreement under the Cash Management Improvement Act.

The amount of the billing to be processed for debt service payments would be the sum of prorated debt-related costs for each project approved under section 122 and submitted for AC conversion.

By obligating each year's debt service payments as soon as obligation authority is available after the beginning of the Federal fiscal year, the State may be able to avoid the need for early deposits of moneys into a sinking fund account.

The State may designate a trustee or other depository to receive Federal-aid debt service payments directly from FHWA.

FMIS Instructions

The debt-related projects will be entered into the Fiscal Management Information System (FMIS) like any other AC Federal-aid project using existing AC appropriation codes. The AC designation will ensure that the project follows Federal-aid procedures and will preserve the eligibility to reimburse debt-related costs through future Federal-aid fund obligations.

To identify GARVEE bonds in the FMIS, a detail line item using work type "DEBT" will be included on each project. The debt-related costs will be shown on this line, which will include interest, issuance costs, insurance, and other costs incidental to the financing. The costs relating to preliminary engineering, right-of-way, and construction will be shown as separate line items using the appropriate coding.

Project Cost Changes

If there are cost under-runs on the project, there may be excess proceeds in the Construction Account. The financing agreement (bond resolution or trust indenture) may direct that these excess funds be applied to the next debt service payment on the bonds following completion of construction, if the proceeds are not reallocated to another project. The Federal reimbursable share of any payment that is reduced by excess proceeds will be reduced in a like amount.

If there are cost over-runs that exceed the available bond proceeds, Federal funds may be used to reimburse the Federal share of the over-run.

Close-out of Bond-Financed Project

For accounting purposes, the bond project will remain active until the bonds have been fully retired (i.e. the last debt service payment has been made) and any adjustments to the Federal share of project costs have been finalized.

Using a SIB as a Financing Conduit

If a State Infrastructure Bank (SIB) is serving as issuer of GARVEE Bonds on behalf of a project, the reimbursement of debt service with Federal-aid would not be treated as SIB capitalization grants under the NHS Act, section 350 or TEA-21, section 1511. For Federal purposes, any public agency (including a SIB) could serve as the issuer of the bonds (financing conduit) without affecting the eligibility of Federal-aid reimbursements under section 122.


Questions concerning these guidelines should be directed to Dale Gray, Director of Financial Management, Federal Highway Administration, (202)-366-0978.

Federal Highway Administration | 1200 New Jersey Avenue, SE | Washington, DC 20590 | 202-366-4000
To view PDF files download the Adobe Acrobat Reader®