Grant Anticipation Revenue Vehicles (GARVEE Bonds) are a financing mechanism used by many states to finance highway projects. The 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 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:
Many people are not worried however, because there are a lot of other things which back the program up including:
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.