Citing uncertainties about the health of the federal Highway Trust Fund, Fitch has cut its ratings on state highway bonds in several states from AA- to A+. The bonds being cut are “grant anticipation revenue” or GARVEE bonds, which are supposed to be repaid out of federal grants.
In recent years, Congressional overspending of the Highway Trust Fund has required Congress to periodically appropriate general funds to transportation. Fitch is worried that Congress may fail to provide such funds, and is also concerned that recent passage of a two-year (instead of the traditional six-year) reauthorization of federal transportation programs creates uncertainties about those programs.
Certain transit agencies also saw their ratings cut from A- to BBB+. These include the Chicago Transit Authority, New Jersey Transit, and the Alaska Railroad, all of which receive federal transit funds out of the Highway Trust Fund. The Congressional Budget Office projects that the highway portion of the Highway Trust Fund will run out of money in 2014 and the transit portion will run out in 2015.
Historical note: When Congress created the Interstate Highway System in 1956, it explicitly rejected the idea of states borrowing money against future grants out of that fund, instead insisting that the interstate highways be built on a “pay-as-you-go” basis. Congress only authorized GARVEEs in 1991, when the Interstate Highway System was virtually complete. No state actually issued GARVEE bonds until 1998, and to date only 21 states have issued such bonds.
Proponents of such bonds argue that they are an innovative way to pay for major transportation projects and that it is better to build such projects sooner, before inflation increases their cost, than to wait until funds are available on a pay-as-you-go basis. Opponents decry the extra expense of interest and bond fees, but a bigger problem is that states are likely to overcommit themselves to expensive projects that may not really be needed, and then not have the funds for other programs that turn out to be more important.
The most important message of the downgrade, however, is that Fitch increasingly considers federal programs of any kind to be at risk. Congress’ willingness to spend more transportation dollars out of the trust fund than are going into the fund wouldn’t be a problem if the government had other stable sources of revenue. Of course, it does not; even raising taxes on millionaires is not going to significantly reduce the nation’s debt, which has now reached $16 trillion.