Grant Anticipation Revenue Vehicles (GARVEE Bonds) are a financing mechanism used by many states to finance highway projects. The investment bonds are secured by federal transportation funds from the federal highway trust fund, which is funded from motor fuel taxes that are levied on a federal level. Currently there are about $13.2 billion in GARVEE Bonds outstanding.
Around 20 states have issued GARVEE Bonds. Most states have the ability but have not utilized it.
There have been some negative headlines around GARVEE Bonds which have been driven by two factors:
- The lack of long term reauthorization of the program. There has been a lot of disagreement around the program so a lot of the extensions have been short term.
- The other area is the fact that for many years the highway trust fund has been generating less revenue than it has been spending. Infrastructure needs have been increasing, while at the same time revenues coming into the funds have been decreasing.
The lack of inflows is driven by the fact that the highway trust fund is funded mainly from a gas tax that fluctuates with the economy. The tax is based on the number of gallons of gas pumped so if people drive less then fewer gallons are pumped. Cars becoming more efficient has also been a factor. In order to get back into balance, about 35% of current expenditures would have to be cut.
There are a few things being discussed to solve these problems:
- Raising the motor fuels tax would be one way, iit has not been increased at the federal level since 1993.
- Implement a pumpage fee. Flat fee of some sort anytime you pump.
- Charge electric and hybrid cars as well. These cars make use but are not paying to maintain.
Many people are not worried however, because there are a lot of other things which back the program up including:
- Strong federal and state support. Transportation infrastructure is absolutely essential. On the state level there is also a lot of focus, so politicians in dc have some skin in the game.
- There is not a lot of leverage here. Last year they did $31 billion which compares to about $3 billion in debt service so they are at 10 times coverage.
There are covenants which are also in place to protect bondholders.
For more definitions and explanations please visit the Learn Bonds glossary where we give the meaning of many additional bond terms.