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GARVEE Bonds

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The Transportation Trust Fund provides funding for New Jersey's transportation system

Grant Anticipation Revenue Vehicle (GARVEE) Bonds


The New Jersey Department of Transportation (NJDOT) is facing a critical need to fund a series of high cost bridge replacement projects over the next several years. Most of these projects cost more than $100 million. They are all eligible for federal aid but the cost would consume a major portion of the federal capital program in the year they are ready for contract award.

Furthermore, all federal aid projects must be budgeted and approved by the three metropolitan planning organizations (MPOs) that cover the state. These "mega-projects" are likely to exceed the budget of the MPO where the project is located. If the project is financed in a traditional manner, the other MPOs would have to agree to release funding for their projects to cover it.

The Federal Highway Administration (FHWA) provides various types of innovative financing techniques to address this type of problem. One popular option used in 22 states across the country is Grant Anticipation Revenue Vehicle (GARVEE) bonds. Under this mechanism, FHWA authorizes a project agreement that reimburses the state for annual project debt service over a number of years rather than construction outlays. Charging only project debt service costs against the annual federal appropriation allows the high cost projects to advance without negatively impacting all the other critical projects that are ready for delivery and without requiring major reallocations of federal funding between MPOs.

Under the GARVEE program, a state agency issues the GARVEE bonds that provide the funds to cover initial construction outlays. Future federal appropriations are pledged to pay debt service on the GARVEE bonds. The state can decide whether additional revenues beyond federal appropriations will be pledged to provide security to the GARVEE bond holders. GARVEE bond maturities are flexible. A typical payback period is 12 years, that corresponds to two standard six-year federal authorization programs.

An example of the problem posed by high-cost federal aid projects was the Route 52 Causeway Reconstruction (Contract A). NJDOT's federal funding level at the time this contract was issued was $743 million of which $159.6 million was specifically allocated to the Bridge Replacement and Rehabilitation program. The Route 52 project contract was awarded at $141 million. This project alone could have absorbed almost the entire federal bridge allocation to NJDOT for one year.

The project also happened to be located in the state's smallest MPO region, represented by South Jersey Transportation Planning Organization (SJTPO). The entire annual allocation of federal funds to the SJTPO was only $65 million, $30 million of which was available for bridge projects. The SJTPO had no capacity to advance the Route 52 bridge project using traditional pay-as-you-go financing.

For the above mentioned reasons, NJDOT elected to use GARVEE bond funding for the Route 52 Contract A project. However, the Authority could only issue those bonds under a number of conditions. First, the Authority could only pledge future federal appropriations for repayment of the GARVEE bond debt service. No state funds could be pledged in any way. Most other states that have issued GARVEE bonds have pledged other state revenues in the event that federal appropriations are not received. Second, NJDOT was required to include the project and debt financing in the State Transportation Improvement Program (STIP) and to secure approval of that project from the South Jersey Tranportation Planning Organization. Third, the project debt payments had to be authorized in the federal section of New Jersey's annual Appropriation Act. Fourth, the TTFA had to authorize the bonding with concurrence from both the State Treasurer and Governor. Finally, NJDOT had to secure the Legislature's Joint Budget Oversight Committee's approval of a multi-year agreement between the NJDOT and TTFA which pledged timely NJDOT debt service payments to the Authority.

The TTFA secured all the above mentioned approvals and in June 2006 issued $131.5 million in GARVEE bonds to finance the Route 52 Causeway Replacement Contract A project. Subsequently, the Department of Transportation entered into an Advance Construction Project Agreement with FHWA. This agreement authorized NJDOT to bill FHWA for GARVEE bond debt service payments rather than construction disbursements. As each debt service payment becomes due, NJDOT partially converts the Advance Construction Project Agreement to a specific Federal Systems Project Agreement. NJDOT then bills FHWA for the debt service payment and reimburses the TTFA.

The Department of Transportation and Transportation Trust Fund Authority have no current plans to issue GARVEE Bonds for additional projects.

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