GARVEEs a route to sensible TDOT budget
(Note: The information below is intended as support material for a column published in the March 14 issue of Nashville City Paper, and we recommend you read that column first.)

A long article on recent developments in federal project finance, published two years ago by the Turner Fairbank Highway Research Center, is as good a guide to GARVEE bond financing as you'll find anywhere. The article is written by Dave Seltzer, a a former senior adviser to the federal highway administrator on project finance finance, and who also worked as an investment banker in public finance and has served as a lecturer at the Fels Center of Government at the University of Pennsylvania.

GARVEE bonds (it stands for "Grant Anticipation Revenue Vehicles") were created by the National Highway System Designation Act of 1995, which, for the first time, expressly authorized states to apply federal-aid to reimburse principal, interest, and other financing costs incurred in connection with debt-financed highway projects. Seltzer explains that prior to that act, virtually all federal highway funding reimbursed states on a "pay-as-you-go" basis for the federal share, generally 80 percent, of construction costs.

"It is a widely accepted principle of public finance to fund long-lived assets with debt repaid over a similar term... This approach - called 'pay-as-you-use,' as opposed to 'pay-as-you-go' - is more equitable because it shares the costs in the form of debt service payments among both current and future beneficiaries/users," Seltzer says. While interest payments on bonds can double or even triple the total dollars paid out, Seltzer says, "the true cost in financial terms is really no greater because future years' dollars are worth less than today's (and) the state gains from accelerated project completion by avoiding cost inflation and by realizing the project's benefits sooner."

FYI: The Turner Fairbank Research Center is an agency of the U.S. Department of Transportation's Federal Highway Administration.

GARVEE vs. Pay-as-you-go - The Federal Highway Administration offers a primer on financing road projects using GARVEEs to finance bonds. FHA also offers a helpful comparison of the advantages and disadvantages of both pay-as-you-go financing and bond financing for major road projects. While pay-as-you-go financing avoid interest costs, is simple, and keeps a state's debt ratio down, the disadvantages include large projects typically are built in multi-year segments so current users are burdened with both the entire project cost and long years of orange construction cones and traffic delays, while project delays may result in cost over-runs and cost inflation. The advantages of bond financing include earlier project completion, no inflation delays, quicker economic development impact, higher user satisfaction and spreading the cost of the project over its useful life.

InnovativeFinance.org - InnovativeFinance.org is an information clearinghouse about innovations in all areas of surface transportation finance. The site, sponsored by the National Cooperative Highway Research Program, is funded by research monies from the U.S. Government. The web site has a trove of information on traditional and cutting-edge tools for financing new roads and other transportation infrastructure such as GARVEEs, TIFIA, and SIBs.

Paving the Way: A review of the Texas Department of Transportation - I especially recommend Chapter 2, Section 1, which explores in great detail how a state can use innovative financing techniques such as GARVEEs to leverage federal dollars to pay off bonds, enabling the state to accelerate needed road projects without resorting to higher taxes that a pay-as-you-go system would require.

Two advantages of GARVEE bonds over regular bonds:
1. GARVEE bond financing does not require a bond referendum. 2. GARVEE bonds have their own sources of repayment and therefore do not count toward a state’s statutory debt limit.

Texas' comptroller calculates that GARVEEs would accelerate projects, easing congestion sooner and improving the ability of businesses to transport goods and services, and thus "have a positive and profound immediate economic impact on the Texas economy." In fact, the comptroller estimates that by issuing $1.1 billion in GARVEEs to immediately construct projects that, under a pay-as-you-go system would otherwise take 15 years to complete, "these projects would economically benefit the state some $1.7 billion more, over 30 years, than if they were delayed by the present pay-as-you-go system." Amazingly, the positive economic benefit "even takes into account debt service payments."