Finally…a Plan from Sparks that ISN’T All About the Lottery

Today Ron Sparks announced his proposal for infrastructure in Alabama:

Today, I am proposing the most comprehensive infrastructure program in Alabama history.

I fully support the constitutional amendment being sponsored and backed by a bipartisan coalition in the legislature. However, I feel an infusion of economic activity created by this plan does not do enough fast enough.

In addition to the $100 million per year proposed in the legislative plan, my proposal calls for an additional and an immediate infusion of $400 million in the construction and repair of roads and bridges.

My proposal will be funded through the issue of GARVEE bonds; a bonding program that uses future federal infrastructure grant funds to finance the debt service on the bonds. This type of financing has been utilized successfully by many states, including Alabama and is a proven means of front loading infrastructure investments.

The funding will be dispersed according to a formula that will be developed in close consultation with the Department of Transportation, the Alabama League of Municipalities and the Association of County Commissioners. I am a firm believer that local officials must have an active voice in deciding where this money is spent.

According to the Federal Highway Administration, every dollar spent on road construction and repair, multiplies itself 4 to 5 times in our economy. My road and bridge program will have an annual economic impact of nearly $1 billion.

This proposal will create thousands of jobs, improve highway safety, attract new industry, and literally pull our state out of the greatest economic downturn of our lifetime.

I was so grateful that the latest Sparks proposal wasn’t, “Well it just so happens the lottery will pay for that”, that I had to explore further. So first, what the hell are GARVEE bonds?

For the answer, I turned to a Brookings Institution report on the use of these tools for financing road projects by states. As it turns out, GARVEEs basically allow you to spend tomorrow’s federal transportation dollars today! How much fun is that?

From my brief investigation to this point, the biggest question seems to be what type of GARVEEs Mr. Sparks is intending. Short-term GARVEEs (which only cover the period for which the federal highway bill is currently authorized), or long-term GARVEEs (which are riskier because they depend on the re-authorization of the highway bill at roughly the same or better funding levels for the individual state). As Brooking says there other variations to consider as well,

On the other hand, long term GARVEEs go beyond current authorization periods. For this reason, they are more risky than short term GARVEEs since they depend on Congress reauthorizing the federal highway program—the “authorization risk”—as opposed to just appropriating annual funds. The chances of Congress not reauthorizing the federal highway program have historically been very low. Nevertheless, authorization is certainly not guaranteed. As such, most GARVEEs have certain provisions as “backstop” security.

Backstopped GARVEEs involve a pledge of another revenue source, such as a state’s gas tax, general obligation authority, vehicle registration revenues, or toll revenues to enhance their creditworthiness by covering for any potential shortfall between the federal revenues and the existing debt. The more backstops a GARVEE has, the lower the risk for investors.

Naked GARVEEs, also referred to as stand-alone or non-recourse GARVEEs, are those where the creditworthiness of the bonds is entirely dependent on future federal funds. In other words, no backstops, other resources, or credit from the state or any other entity are involved. In order to enhance the creditworthiness of the GARVEEs, and make them marketable, bond insurance is often purchased. According to the FHWA, bond insurance is the
best way to ensure high scores from the ratings agencies.

In addition to security provisions, GARVEEs vary depending on what types of projects they are to finance.

Direct GARVEEs are those where the federal aid directly reimburses the debt service, or directly repays the debt for a specific project. In such cases, the bonds, the project financed, and the federal reimbursements are closely tied. The projects receive prior approval from the FHWA and the debt service is paid directly with the federal funds for the project. For a project to be eligible, it must be an Advance Construction project, as mentioned earlier, and must be identified in the state’s State Transportation Improvement Plan (STIP). The STIP is a list of all projects (including debt service) for which the state is seeking federal aid over a three-year period.

Indirect GARVEEs on the other hand, do not necessarily have to support specific federal aid projects. Rather, they are repaid indirectly by federal funds from other transportation projects. These indirect bonds do not require federal approval, are free from federal requirements, and can be used to pay the debt service for any number of transportation projects. They are considered to be much more flexible than Direct GARVEEs since the funds can be applied more broadly—on state projects, for example. Technically, Indirect
GARVEEs are not really GARVEEs at all since the debt service is not paid by the federal government in connection with a specific project or federal aid grant in connection with the National Highway System (NHS) Act. Rather, indirect GARVEEs are more properly referred to as RVEEs (reimbursement vehicles) since the projects are not just NHS projects and the debt service can be paid by a variety of federal sources not necessarily linked to the project being constructed.

Given the amount of local involvement Sparks is calling for, I’m not certain which variety he may be proposing or how they would be backed. And that’s as far as I got folks…

Because you know what this already sounds like to me? PACT or the Jefferson County sewer crisis all over again. When you start going down the road of “creative financing” things get really slippery really fast. Again, I’m thankful for Mr. Sparks bringing something to the table other than a lottery, but it’s clear that he wants to invest without raising taxes and that can be a scary proposition. I think it is certainly an idea worth examining and perhaps trying on a small scale, but to propose to immediately spend $400 million worth of federal funding we haven’t gotten yet, backed (most likely) by the oil and gas reserve if the money never materializes sounds like more risk than I’m willing to take.

UPDATE: The Birmingham News fills in a few more details. Sen. Barron’s plan (the $100 million) actually comes straight out of the Oil and Gas fund…and the types of bonds Sparks is proposing would be repaid over 15 years (the riskier, long-term variety).

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