Gap Financing for I-30 Improvements

[US71]

Gap Financingmay pay for improvements to I-30 near downtown Little Rock.
I have 2 concerns: (1) the idea would seem to favor companies with deeper pockets (2) What happens if AHTD can't pay it back in the proposed 5-7 years? Would important projects go on the back burner?

Or am I just being cynical? 

[codyg1985]

A similar financing scheme is being used for I-69 between Bloomington and Indianapolis. I am also skeptical of this method for the reasons you mention. Design-build companies are typically very large companies that are out of state.

[AHTD]

Debt obligations are always met first.

It's no different than what we are doing with the GARVEE-financed Interstate Rehabilitation Program (IRP). The debt service on the bonds are paid first with federal money and the remaining amounts go to projects.

At this time, the anticipated amount for financing is around $140 million. That's $20 million over a seven-year period. By the time that seven-year period begins, the IRP should be wrapping up.

[Rothman]

I can't believe there are states that are actually utilizing GARVEE Bonds.  They must have maxed out their "advanced construction" threshold with FHWA, I guess.  Not even New York has done that.

[codyg1985]

I can't believe there are states that are actually utilizing GARVEE Bonds.  They must have maxed out their "advanced construction" threshold with FHWA, I guess.  Not even New York has done that.

Alabama is using GARVEE bonds to finance resurfacing and bridge replacements across the state's county roads.

[Rothman]

I can't believe there are states that are actually utilizing GARVEE Bonds.  They must have maxed out their "advanced construction" threshold with FHWA, I guess.  Not even New York has done that.

Alabama is using GARVEE bonds to finance resurfacing and bridge replacements across the state's county roads.

Here's why I find it so stupefying that anyone would use GARVEE bonds:  You have to pay back federal funds with interest.  If a state is not three years out AC'd (advance constructed), it simply makes no sense to incur interest on federal funds since advance construction is a free federal loan at no interest.  I can only see it as being beneficial to those states that are really hurting (i.e., hitting FHWA's three-year threshold on AC-ing funding) and only want to hurt themselves more. 

[ARMOURERERIC]

A few years back SANDAG (the San Diego MPO) was asked that same question, turns out they were able get low and no interest federal money which they then kept their own existing money in the bank at a safe 5-8% interest

[Rothman]

A few years back SANDAG (the San Diego MPO) was asked that same question, turns out they were able get low and no interest federal money which they then kept their own existing money in the bank at a safe 5-8% interest

Something tells me the MPO was pulling the wool over people's eyes on this one.  In order to see the gains from this, the MPO would essentially leave capital funding on the table by having it just sit in the bank to collect the interest.  California isn't New York, but here in New York, the Association of General Contractors and Long Island Contractors Association would scream to high heaven about such a scheme (i.e., "Don't you care about jobs?!  Give us our money now!").

[codyg1985]

I can't believe there are states that are actually utilizing GARVEE Bonds.  They must have maxed out their "advanced construction" threshold with FHWA, I guess.  Not even New York has done that.

Alabama is using GARVEE bonds to finance resurfacing and bridge replacements across the state's county roads.

Here's why I find it so stupefying that anyone would use GARVEE bonds:  You have to pay back federal funds with interest.  If a state is not three years out AC'd (advance constructed), it simply makes no sense to incur interest on federal funds since advance construction is a free federal loan at no interest.  I can only see it as being beneficial to those states that are really hurting (i.e., hitting FHWA's three-year threshold on AC-ing funding) and only want to hurt themselves more. 

I am not sure how Alabama did their bond issuance in relation to construction, but I believe they took out the bonds and then financed the majority of the construction costs of the projects over a four year period.

Kentucky also used GARVEE bonds to widen several of its interstates I think in the late 90's and 2000's.

[Rothman]

Kentucky also used GARVEE bonds to widen several of its interstates I think in the late 90's and 2000's.

Makes me wonder what their AC balances are today.  Also makes me wonder if I have access to the KY cost center in FMIS so I could check this myself...

[AHTD]

I can't believe there are states that are actually utilizing GARVEE Bonds.  They must have maxed out their "advanced construction" threshold with FHWA, I guess.  Not even New York has done that.

Alabama is using GARVEE bonds to finance resurfacing and bridge replacements across the state's county roads.

Here's why I find it so stupefying that anyone would use GARVEE bonds:  You have to pay back federal funds with interest.  If a state is not three years out AC'd (advance constructed), it simply makes no sense to incur interest on federal funds since advance construction is a free federal loan at no interest.  I can only see it as being beneficial to those states that are really hurting (i.e., hitting FHWA's three-year threshold on AC-ing funding) and only want to hurt themselves more.

Advanced Construction is not a free federal loan.  Listed below is a description of the Advanced Construction from FHWA's website.  Advanced Construction is non-Federal Funds (State Funds or Bonds).  To use Advanced Construction, a DOT must have non-Federal funds available to spend to construct the project and then at a later date it can recoup Federal Funds equal to the federal share of the project's cost. 

Advance construction (AC) allows states to begin a project even in the absence of sufficient Federal-aid obligation authority to cover the Federal share of project costs. It is codified in Title 23, Section 115. Advance construction eliminates the need to set aside full obligational authority before starting projects. As a result, a state can undertake a greater number of concurrent projects than would otherwise be possible. In addition, advance construction helps facilitate construction of large projects, while maintaining obligational authority for smaller ones. At some future date when the state does have sufficient obligation authority, it may convert an advance-constructed project to a Federal-aid project by obligating the permissible share of its Federal-aid funds and receiving subsequent reimbursements. Advance construction allows a state to conserve obligation authority and maintain flexibility in its transportation funding program.

There is no obligation or guarantee on either side. If Federal funds are not available, the state will not be able to convert the project to a Federal-aid project. In some cases, the state may choose not to convert the project, if state funds are sufficient.

Partial conversion of advance construction (PCAC) is a somewhat different approach in which the state converts, obligates, and receives reimbursement for only a portion of the Federal share of project costs. This removes any requirement to wait until the full amount of obligational authority is available. The state can therefore convert an advance-constructed project to a Federal-aid project in stages, based on cash flow requirements and availability of obligational authority, rather than all at once on a single future date. This flexibility enables a state to begin some projects earlier, delivering the benefits to the public sooner. PCAC is used in conjunction with GARVEE bonds when Federal funds are obligated for debt service payments over a period of time.

Increased advance construction flexibility was provided in Section 308 of the NHS Act (1995). FHWA can approve construction for reimbursement after the final year of an authorization period, provided the project is on the state's transportation improvement program (STIP).

Process
An AC project application may only be approved if it is included in a state's transportation improvement program (23 U.S.C. 115(c)). The AC approval process includes the following steps:

1.   State identifies project(s) and requests AC designation.
2.   FHWA Division Office ensures state meets financial preconditions for AC.
3.   FHWA reviews and approves AC designation for project. Project agreement executed.
4.   State constructs project following Federal-aid requirements.
5.   State requests conversion to Federal-aid project full or partial and project agreement is modified.
6.   FHWA obligates Federal-aid funds per modified project agreement.
7.   State requests reimbursement for costs incurred full or partial as needed.
8.   FHWA reimburses Federal-aid share of costs of state.

[Rothman]

AHTD:

As your text says: "Advance construction (AC) allows states to begin a project even in the absence of sufficient Federal-aid obligation authority to cover the Federal share of project costs."  In other words it is indeed a loan of future obligation limitation to within the current FFY.

Yes, a state has to put up first-instance funding for it (as it does for projects using regular OL!), but that simply doesn't change the fact that despite being given a set amount of obligation limitation for a particular year that when a state uses it up, it can literally tap into three years of obligation limitation without needing to pay any sort of interest on it -- that's how availability of federal funding is determined when requests are processed.  The state ends up getting reimbursed as usual through federal funds with no penalty for AC-ing, either.  The state is borrowing obligation limitation from future years to use in the current year and is not needing to pay any interest on that borrowing whatsoever -- the contractors just submit a bill, the AC is converted, and the bulldozers keep bulldozing.  In that sense, it's a no-interest federal loan.

State funding and federal funding are totally separate monsters.  If a state can't support using AC in the end because it isn't willing to put up the first-instance funding -- that's its own problem and, as I've said before, in NY it's politically infeasible since the Association of General Contractors comes a-knockin' with their baseball bats in hand.  So, that's why GARVEE bonds in NY are a rarity (I dare say they've never been used but I'm sure someone would be able to dig up one example).  NYSDOT utilizes AC and leverages available federal OL, including the AC threshold to make arguments for releases of increased state first instance funding ("Don't leave federal funds on the table!").  That's why I keep saying that incurring interest on federal funds is just a head-scratcher otherwise.