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76 T R A N S P O RTAT I O N F I N A N C E Many of the innovative finance initiatives undertaken been a significant enabler. Since 1995, several changes by the federal government in recent years involve admin- have been made to the federal-aid highway program istrative or legislative changes to ease those restrictions. that facilitate bond financing by state departments of Some of the changes allow states to manage when and transportation and other recipients of federal aid: how federal-aid reimbursements are obligated. Others broaden the range of options for meeting the nonfederal Interest and certain costs associated with issuing matching share requirements. Though the changes do debt were made eligible for federal-aid reimbursement. not increase the total amount of federal aid available to Restrictions on the amount and timing of advance the states, they create opportunities to expedite certain construction authorizations were eliminated. projects and to leverage state and local resources. Title 23 of the United States Code was amended to clarify that a pledge of federal aid as a source of repayment for a bond issue does not represent a federal Where Is This Strategy Leading Us? guarantee of the debt. Funding guarantees and budgetary firewalls in the The federal funds management tools have been well Transportation Equity Act for the 21st Century (TEA- received (most were actually requested by states under 21) enhanced investor confidence that future federal-aid the TE-045 Innovative Finance Test and Evaluation apportionments can be a reliable source of repayment Project) and are generally noncontroversial because for bond issues. they do not create a bias toward or against any partic- ular type of project. In addition, they are relatively easy These changes have led to the creation of Grant to implement and usually do not require any legislative Anticipation Revenue Vehicle (GARVEE) bonds, securi- action at the state level. ties that are backed primarily by future federal highway The major issue with this approach is where to draw grant reimbursements. Between 1998 and 2001, 10 the line. If giving state and local officials greater states issued approximately $5.2 billion of GARVEE- authority and flexibility in funding transportation is type debt to finance various highway and bridge pro- such a good idea, why not reduce the scope of the fed- jects and transit equipment. Several other states are eral-aid highway program and give the federal taxes on actively considering bonding or seeking legislative motor fuels back to the states? While that may seem authority to issue GARVEEs. extreme, bills supporting devolution have been intro- duced in Congress. A more likely scenario, though, may be a continuing effort to reduce the federal influ- Where Is This Strategy Leading Us? ence in transportation development. Proposals that may be considered include increasing the minimum Leveraging future federal aid increases reliance on a rev- guaranteed apportionments to states, collapsing vari- enue stream that many argue will decline over time with ous funding categories into block grants, streamlining the introduction of alternative fuels and technological federal environmental reviews, reducing or waiving advances in vehicle fuel mileage. To date, state legislatures state match requirements, and eliminating required set- (and rating agencies) have limited the amount and term of asides for enhancement projects (bicycle and pedes- the GARVEE-type debt that has been issued. As highway trian facilities, historic preservation, and landscape and travel demand and congestion increase, however, the beautification). temptation to overleverage may be more difficult to resist. The challenge for states is to use bonding in ways that complement other innovative finance initiatives, such as Debt Financings Payable from Federal Aid investing in revenue-generating assets. What Is This Strategy Intended to Accomplish? Development of Toll Facilities Debt is primarily used to accelerate construction of major projects. By expediting construction, states can What Is This Strategy Intended to Accomplish? avoid cost escalation due to inflation and realize the safety and economic benefits of projects sooner. In addi- Interest in facilitating the development of toll facilities tion, bonding against future federal-aid reimbursements reflects a desire to create new revenue sources to sup- spreads the cost of a facility over its expected useful life. port transportation investment by public and private Although it is probably not fair to say that the fed- entities. When the federal-aid highway program was eral government is advocating debt financing, it has created in 1916, Congress explicitly prohibited the