Some transportation projects or programs of projects are so large that their costs exceed available current grant funding and tax receipts, or would consume so much of these current funding sources as to delay many other planned projects. For this reason, when states and local agencies consider ways to pay for these large projects, they often look to financing the projects through borrowing. The most common method of borrowing is to issue municipal bonds. The bond issuance yields an immediate influx of cash in the form of bond proceeds. The state or local agency then retires its obligation by making principal and interest payments to the investors over time.
Although bond financing imposes interest and other debt related costs, bringing a project to construction more quickly than otherwise possible can sometimes offset these costs. Delaying projects can impose costs that derive from a variety of sources: inflation, lost travel time, freight delays, wasted fuel, and forgone or deferred economic development.
More recently, two innovative debt instrument tools - Grant Anticipation Revenue Vehicles (GARVEEs) and Private Activity Bonds (PABs) - provide further opportunities to issue debt. GARVEEs are backed by money sources not previously used to secure debt and PABs permit private involvement in tax-exempt municipal bonds. USDOT and FHWA approve projects for GARVEE financing and administer the allocation of PABs.
Grant Anticipation Revenue Vehicles (GARVEEs)
A GARVEE is a term for a debt financing instrument - such as a bond, note, certificate, mortgage, lease, or other debt financing technique - that has a pledge of future Title 23 Federal-aid funding.
Private Activity Bonds (PABs)
Private Activity Bonds (PABs) are debt instruments authorized by the Secretary of Transportation and issued by a conduit issuer on behalf of a private entity for highway and freight transfer projects, allowing a private project sponsor to benefit from the lower financing costs of tax-exempt municipal bonds.
Other Bonding and Debt Instruments
USDOT and FHWA participate in several other types of bonding and debt instrument tools administered at the state and local level. In addition, Build America Bonds (BABs), new tax credit bonds available to surface transportation, are administered by the Treasury Department. The Build America Bond program is designed to provide a federal subsidy for a larger portion of the borrowing costs of state and local governments than traditional tax-exempt bonds to stimulate the economy and encourage investments in capital projects in 2009 and 2010.
Build America Bonds (BABs) FACT SHEET