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Grant Anticipation Revenue Vehicles (GARVEEs)

Overview

In the broadest sense, a GARVEE is a type of anticipation vehicle, which are securities (debt instruments) issued when moneys are anticipated from a specific source to advance the upfront funding of a particular need. In the case of transportation finance the anticipation vehicles' revenue source is expected Federal-aid grants.

Specific to highways, a GARVEE is used as a term for a debt instrument that has a pledge of future Title 23 Federal-aid funding. Significantly, it is authorized for Federal reimbursement of debt service and related financing costs. States can thus 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; the proceeds of which are used to fund a project eligible for assistance under Title 23. Each of these instruments is considered a GARVEE when backed by future Federal-aid highway funding, but most frequently, a bond is the debt instrument used. Specifically, as stated in Section 122 of Title 23, debt financing instrument-related costs eligible for Federal-aid reimbursement include interest payments, retirement of principal, and any other cost incidental to the sale of an eligible debt issue. The issuer may be a state, political subdivision, or a public authority.

GARVEEs enable a state to accelerate construction timelines and spread the cost of a transportation facility over its useful life rather than just the construction period. The use of GARVEEs expands access to capital markets as an alternative or in addition to potential general obligation or revenue bonding capabilities. The upfront monetization benefit of these techniques needs to be weighed against consuming a portion of future years' receivables to pay debt service. This approach is appropriate for large, long-lived, non-revenue generating assets.

The use of advance construction and partial conversion of advance construction facilitates state issuances of GARVEEs. GARVEEs are used in conjunction with advance construction to enable using Federal-aid funds for future debt service payments. Prior to the NHS Act in 1995 that introduced GARVEEs, it would have been necessary to obligate the Federal share of debt service payments within the bounds of obligation authority available during the current authorization period. With the changes brought about by the NHS Act, it became possible to obligate Federal funds for debt service expenses over a longer period bond to fund a Federal-aid eligible project and annually convert the Federal share of the debt service payment as a reimbursable cost through the partial conversion of advance construction.

Grant Anticipation Notes (GANs)

Under the general concept of anticipation vehicles, transit agencies also use similar mechanisms to borrow against future Federal-aid funds (Federal Transit Administration Title 49 grants) that are allocated by formula (Section 5307) or by project (Section 5309). These transit debt mechanisms are known as Grant Anticipation Notes (GANs), but are not officially termed GARVEEs because they utilize Federal-aid funding under Title 49, not Title 23, and do not include debt-related financing costs such as interest and issuance costs. Additional discussion of transit GANs is provided on AASHTO's Center for Excellence in Project Finance.

One additional point of clarification is that the term "note" is often used for shorter-term debt issuances. This is the reason transit GANs are referred to as such, as Federal transit formula funds can only be anticipated in the short term (one or two years) because they are subject to the annual Congressional appropriation process. Nonetheless, somewhat confusingly, some states also refer to their longer-term GARVEE bonds as "notes." For example, in Arizona, they are known as GANs, and in Colorado, as Transportation Revenue Anticipation Notes (TRANs).

Direct GARVEE Bonds vs. Indirect GARVEE Bonds

An additional point of nomenclature is the difference between "Direct" and "Indirect" GARVEE bonds. Direct GARVEE bonds are those in which Federal assistance directly reimburses debt service paid to investors in a debt-financed Federal-aid project or program, as permitted under Section 122 of Title 23 and described above.

However, because many states receive substantial amounts of Federal-aid reimbursements for construction of eligible projects, they may choose to issue bonds (or other debt instruments), without Federal authorization, that are backed by the anticipated reimbursements for projects. While any project for which a reimbursement is to be received must follow Federal-aid requirements, once the project is constructed, the reimbursement for that construction is considered state funding. Bonds backed by these construction reimbursements are called Indirect GARVEEs and are not codified in Title 23 and are not considered a Federal financing tool. Rather, a state may simply pledge its Federal-aid construction reimbursements when issuing its debt. Interest and issuance costs are not covered, but reimbursements are not tied to specific projects.

Other terms used for Indirect GARVEEs include Reimbursement Vehicle (RVee) and Federal Reimbursement Anticipation Note (FRAN).

Why Would a State Issue an Indirect GARVEE Bond Rather Than a Direct GARVEE Bond and Vice Versa?

Depending on state laws, a state might be able to issue either type of vehicle. Some states might prefer to issue a Direct GARVEE bond in order to claim interest and issuance costs and to preserve a direct link between the project and the funds used to repay its debt service. Other states may forgo the additional eligibility for interest and issuance and issue an Indirect GARVEE bond because it may allow them to use construction reimbursements from a variety of projects for debt service. However, some states may find it difficult to issue Indirect GARVEE bonds because construction reimbursements become subject to appropriation by the state legislature when received, or are otherwise restricted by state law. In both cases, a state does not receive any additional Federal-aid by using either vehicle; it simply elects to use its Federal aid funds in different but equally legitimate ways.

Direct GARVEE Bond vs. Indirect GARVEE Bond
  Eligible Project FHWA Approval Regulations Flexibility in Using Bond Proceeds Interest and Issuance Costs Reimbursable
Direct GARVEE Bond Federal Yes Federal No - Bond proceeds used for specified projects(s) Yes
Indirect GARVEE Bond Federal and State No State Yes - Bond proceeds used for any eligible project No
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