Grant Anticipation Revenue Vehicle (GARVEE) Bonds
The New Jersey Department of Transportation (NJDOT) and the New Jersey Transportation Trust Fund Authority from time to time face a critical need to fund high cost road and bridge
replacement projects over a span of several years. Most of these projects cost more than $100 million and are
eligible for federal aid, but the costs 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 a number of states across the country is through the use of Direct Grant Anticipation Revenue Vehicle (Direct 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,
typically having a 12 year payback 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 Project. 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 would 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 and the TTFA elected to use Direct GARVEE bond funding for the Route 52 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 Transportation 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 NJTTFA which pledged timely NJDOT debt service payments to the Authority.
The TTFA secured all the above mentioned approvals in June 2006 and issued, under the 2006 Series A Grant Anticipation Revenue Bond, $131.5 million in Direct GARVEE bonds to finance the Route 52 Causeway Replacement 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 billed FHWA for the debt service payment reimbursement. The 2006 Series A Garvee bond matures in Fiscal Year 2018.
At its October 14th, 2016 meeting, the Transportation Trust Fund Authority approved the issuance of $3.2 billion of Federal Highway Reimbursement Revenue Notes. . This included $2.7 billion in indirect GARVEE bonds (2016 Series A) and a $.5 billion bank loan (2016 Series B). Indirect GARVEE bonds are used to finance to be determined authorized projects. Direct GARVEE bonds, as explained above, are used to finance a specific project(s). In both instances the issuer submits eligible project expenditures to the Federal Highway Administration for reimbursement and a portion of such reimbursements is used to pay debt service on the Direct and Indirect GARVEEs.