Once a project is selected for debt financing, the project is submitted to the responsible FHWA Division Office for approval as an advance construction (AC) project. Since the passage of SAFETEA-LU, all categories of Federal-aid funding under Title 23 are eligible for AC. In the case of a GARVEE, the AC designation will ensure that the project follows Federal-aid procedures, including complying with the intent of the fiscally constrained planning process, and will preserve the eligibility to reimburse debt-related costs with future Federal-aid funds. 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.
Once a project agreement is signed granting approval for AC designation, a 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.
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 itself, which falls under a state's authority. From a Federal perspective, the primary requirement for a state to issue GARVEEs is the execution of a project agreement with FHWA, approving a project (or group of eligible projects) for Federal-aid reimbursement of debt service (as well as advance construction) and agreeing to pro-forma debt service schedule. However, a recommended, but optional arrangement between FHWA and a state DOT is to also enter into a Memorandum of Agreement (MOA) or Memorandum of Understanding (MOU) to describe future procedures used to process GARVEE transactions, including the budgeting of bond proceeds and managing debt service payments and billing. A sample MOA is provided (PDF).
