A GARVEE is a designation applied to a debt financing instrument that has a pledge of future Federal-aid for debt service and is authorized for Federal reimbursement of debt service and related financing costs. This financing mechanism generates up front capital for major highway projects that a state may be unable to construct in the near term using traditional pay-as-you-go funding approaches.
States can receive Federal-aid reimbursements for a wide array of debt-related costs incurred in connection with an eligible debt financing instrument, such as a bond, note, certificate, mortgage, or lease; the proceeds of which are used to fund a project eligible for assistance under Title 23. Bond-related costs eligible for Federal-aid reimbursement include interest payments, retirement of principal, and any other cost incidental to the sale of an eligible bond issue. The issuer may be a state, political subdivision, or a public authority.
The use of advance construction or partial conversion of advance construction also facilitates state issuances of GARVEEs. They are generally used in conjunction with advance construction to enable using Federal-aid funds for future debt service payments. The GARVEE bond technique enables a state to accelerate construction timelines and spread the cost of a transportation facility over its useful life rather than just the construction period. The use of GARVEEs serves to expand access to capital markets as an alternative or in addition to potential general obligation or revenue bonding capabilities.
Transit agencies are using similar mechanisms to borrow against future Federal-aid funding. While transit financings are quite similar to the GARVEE type instruments, the transit debt mechanisms are known as Grant Anticipation Notes (GANs).
Additional information on GARVEEs is available from the FHWA Center for Innovative Finance Support: