Grant Anticipation Revenue Vehicle (GARVEE) Bonds - PowerPoint Presentation

1. Grant Anticipation Revenue Vehicle (GARVEE) BondsEssentials of Innovative Finance WorkshopPuerto Rico and U.S. Virgin Islands

2. Grant Anticipation Revenue Vehicle (GARVEE) BondsFrederick WernerProject Finance Program ManagerOffice of Innovative Program DeliveryFederal Highway AdministrationVivian GutierrezFinancial Manager Team LeaderPuerto Rico DivisionFederal Highway Administration

3. OutlineLesson 1 Introduction to GARVEE BondsLesson 2 Types and Features of GARVEEsLesson 3 GARVEE ProcessLesson 4 Examples of GARVEE ProgramsLesson 5 Summary

4. ObjectivesDescribe the various types and characteristics of GARVEEsIdentify project eligibility and appropriate uses of GARVEEsUnderstand the pros and cons of different types of GARVEEsExplain FHWA’s and States’ respective roles and responsibilities related to GARVEEsBecome familiar with examples of State GARVEE program and related projects

5. Lesson 1Introduction to GARVEE Bonds

6. Grant Anticipation Revenue VehiclesDefinition: Bonds, generally tax-exempt, sold by States and backed by and repaid with specific Federal-aid fundsPurpose: Issued to provide new funding to an eligible project or to refinance existing bondsKey Provisions:No Federal guarantee of repayment; any pledges or obligations must come from State legislation and/or executive authorityLocal match is required with every debt service repaymentAdvantages: Acceleration of construction; low interest rates for new money bonds and re-financings; leveraging of Fed fundsDisadvantages: Cost of interest; loss of future flexibility Administration: FHWA establishes rules on GARVEEs; States issue the debt and establish the terms of the bonds

7. Advantages of GARVEEsAccelerate the construction programAvoid costs of inflationFacilitate large project financingPromote efficient resource allocation by matching debt term with life of asset Provide economies of scaleProvide benefit of relatively low interest rates

8. Provide economic and fiscal stimulus Leverage Federal funds Increase State’s borrowing capacity Reduce use of General Obligation (GO) Bonds Possibly avoid State’s GO Bond debt limits and bond referendaPreserve State’s general credit ratingAllow claim of interest and issuance costs as eligible Federal-aid costs Advantages of GARVEEs (cont.)

9. Disadvantages of GARVEEs Debt service reduces financial, programmatic and political flexibility May lead to capacity constraints May lead to induced inflation May limit opportunities for smaller contractorsFederal-aid used for interest and issuance costs rather than construction costs May require enabling State legislation and policyPeriodic reauthorization risk Significant stewardship, oversight and reporting responsibilities for FHWA

10. Candidate Projects Large-scale capital projects with economic life lasting longer than the bondProjects whose costs of delay outweigh the costs of financingProjects with significant economic development potentialProjects must be eligible for Federal-aid highway funding and included in the State Transportation Improvement Plan (STIP)

11. GARVEEs by State (as of Dec. 2012)CT MAGARVEE EnablingLegislation Issued GARVEEBondsConsidering GARVEEEnabling LegislationVI Northern Mariana Islands Guam American Samoa AK RI ND VT HI DE NH SD WY ID ME UT NE NV MT IA NM NJ KS OR WV MDMN AR IN CO WI OK LA VA AZ KY MI MS AL IL MO NY TN OH SC GA NC PA FL TX CA WADC PRGARVEE Enabling Legislation for sub-State level entities

12. GARVEE RatingsFactors that affect GARVEE bond ratings:Uncertainty regarding Federal-aid Highway Program funding levelsSecondary pledge of State revenues to cover debt serviceBond insuranceLevel of pre-existing GARVEE debt service as proportion of Federal-aid programState’s overall credit profileHistory of timely debt service payments

13. Lesson 2Types and Features of GARVEEs

14. GARVEE Bond OptionsBond Type: Direct or indirect GARVEEsSecurity: Standalone, backstopped, and/or insuredInterest Rate: Fixed or variableMaturity: Long term or short termUses: New money or refundingEligibility of debt-related expenses: Assessed in coordination with HQ

15. Direct vs. Indirect GARVEEsDirect GARVEEsIndirect GARVEEsSecured by specific future Federal-aid apportionmentsBond proceeds pay for specific project(s)Require FHWA Division approval & oversightTotal debt service costs (including interest & issuance costs) are eligible for reimbursementBetter term: “non-GARVEE” debtNo FHWA role Secured by anticipated Federal-aid reimbursements on eligible projects paid with State fundsInterest & issuance costs not eligible for Federal reimbursement

16. GARVEE Security OptionsStandalone or non-recourse GARVEEsFuture Federal-aid funds serve as the only security backing the Federal share of the obligation to investorsNo pledge of State funding other than required matchBackstopped GARVEEsAdditional State revenues pledged in case Federal-aid highway funds prove insufficientOften lower interest costs on the bondsInsured GARVEEsGuarantees payment of bonds for lifeComes at a cost (premium charged)

17. Traditional Financing vs. GARVEE Bonds Cash Flowswith GARVEE bondswith Traditional Financing

18. GARVEE Maturity Options In the past, GARVEEs have been structured to be repaid over one or more traditional reauthorization cycles (6, 12, 18 years)However, GARVEE term can be selected to:Reflect expected life of asset or improvementTake advantage of interest rate environment at issuance dateCurrently, 10- to 15-year term is common

19. Uses of GARVEE Bond ProceedsNew money: Bonds issued to provide new or additional funding for a projectGross funded – Deposit exact amount required to pay for projectNet funded – Amount deposited plus interest earnings sufficient to pay for projectRefunding: Bonds issued to refinance certain existing bonds (proceeds used to repay old GARVEEs) Produce interest cost savingsRestructure debt serviceRelease issuer from restrictive operating covenants

20. Lesson 3GARVEE Process

21. GARVEEs – Flow of FundsTax-Exempt Debt InvestorsIssuer(State DOT or Issuing Authority)Debt-FinancedProject(s)Debt ProceedsFederal-Aid EligibleProject CostsFederal Apportionments (80%)Non-Federal Match (20%)Debt ServiceFederalHighwayAdministrationMatchingSource

22. GARVEE Bonds Issuance: 8 StepsState seeks approval for Advance Construction (AC) of GARVEE project(s)State makes election to receive reimbursements for construction or debt serviceFHWA (Division Office) approves project as debt-financed project and negotiates project Memorandum of Understanding (MOU) between FHWA and the StateState issues GARVEE bonds and uses proceeds for construction of Federal-aid eligible projects

23. State requests partial conversion of AC project(s) for semiannual/annual debt service paymentsFHWA (Division Office) obligates Federal funds for requested debt service paymentState claims reimbursement for Federal share of debt service, and FHWA pays State or trustee account directlyState uses Federal-aid reimbursement for debt service on bondsGARVEE Bonds Issuance: 8 Steps

24. Who Controls GARVEE Bonds?FHWA sets the rules on GARVEEs:Project eligibilityExpense eligibilityOversight & monitoring State, however, issues the debt and establishes the terms of the bonds

25. State RoleAuthorize through enabling legislationPlace limits on the volume of GARVEE debt that can be issuedStructure revenue pledgeStates (bond issuers) and credit markets determine:Coverage ratiosInterest ratesTerm of the obligationLevel of debt service reservesUse of bond insurance

26. Provide AC project approvalEnsure Federal project and process requirements are metNegotiate MOUAdvise on eligibility of debt-related expensesEnsure matching requirements are met for debt service paymentsEnsure annual debt-service payments are included in STIP/TIPPeriodically report on GARVEE activities for information purposesFederal Role

27. Lesson 4Examples of GARVEE Programs

28. AlabamaInitially issued in 2002 = $200 millionRefunding in 2011 = $91 million County bridge programReplacement of 1,300 weight-restricted bridges across 67 counties$50 million match from G.O. bonds, approved by votersChallenges – significant administrative requirementsUsing GARVEEs at the program vs. project level

29. Alabama (cont.)New bond issuance: Alabama Transportation Rehabilitation and Improvement Program (ATRIP)ATRIP will be used for the rehabilitation and improvement of local transportation infrastructure. Projects are submitted to an Advisory committee and selected based on criteria such as safety, economic impact, industrial impact, education impact, connectivity, project delivery, innovation, and partnershipSold as of Dec. 19, 2012 for a life of 13 yearsBonds are rated ‘A’ by Standard & Poor’sTotal bond sale of $327,935,000Goldman Sachs has calculated that True Interest Cost to be 2.27%There are to be multiple issuances under the ATRIP program for a $1 billion total bond program

30. OhioFirst State to issue GARVEEsBonds issued by the Treasurer of State on behalf of ODOT14 issuances as of 2012 = $1.9 billionDebt service < 20% of Federal-aid fundsFederal Funding is set aside off-the-top for forecasted debt serviceAdditional Covenant – Other Lawfully Available FundsState gas tax and other state highway appropriationsIssued to increase the size of the Construction ProgramNot for specific projects

31. Ohio (Cont.)BenefitsGenerates up-front capital by leveraging future federal fundsBuild now at historically low borrowing rates, reducing inflation costs on needed projectsNovember 2012 issuance 2.08%Able to spread the cost over the useful life of assetConstruction costs onlyChallengesAdministration – Proceeds used on multiple projectsAssigning proceeds and debt service to each individual project Records RetentionVaries depending on length of project, could be up to 20–30 years

32. Ohio (Cont.)Best PracticesMaturity – (Term of Bond) – Stay within 2 Federal Reauthorization periods. 10 -12 years.Spending of Proceeds: How quickly will bond proceeds spend out?Ensure we stay within 18 to 24 months due to IRS arbitrage issues.Detailed spreadsheet maintained to assign bond proceeds to each individual project, and to then prorate debt service for reimbursement by FHWA, on a project-by-project basis.

33. Ohio (Cont.)

34. Lesson 5Session Summary

35. Review of ObjectivesDescribe the various types and characteristics of GARVEEsIdentify project eligibility and appropriate uses of GARVEEsUnderstand the pros and cons of different types of GARVEEsExplain FHWA’s and States’ respective roles and responsibilities related to GARVEEsBecome familiar with examples of State GARVEE program and related projects

36. GARVEE ResourcesInnovative Program Delivery Officewww.fhwa.dot.gov/ipdAASHTO Center for Excellence in Project Financewww.transportation-finance.orgTitle 23 Section 122www.access.gpo.gov/uscode/title23/title23.html

37. Frederick WernerProject Finance ManagerOffice of Innovative Program DeliveryFederal Highway Administration(404) 562-3680Frederick.Werner@fhwa.dot.govContact Information

38. Vivian GutierrezFinancial Manager Team LeaderPuerto Rico DivisionFederal Highway Administration(787) 771-2512Vivian.Gutierrez@dot.govContact Information