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02/04/2014

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Report Card:
GARVEE Transaction StructuresProvide Smooth Rating Ride DespiteDips In Federal Funding
Primary Credit Analyst:
Mary Ellen E Wriedt, San Francisco (1) 415-371-5027; maryellen.wriedt@standardandpoors.com
Secondary Contacts:
Peter V Murphy, New York (1) 212-438-2065; peter.murphy@standardandpoors.comGeoffrey E Buswick, Boston (1) 617-530-8311; geoffrey.buswick@standardandpoors.com
Table Of Contents
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Report Card:
GARVEE Transaction Structures Provide SmoothRating Ride Despite Dips In Federal Funding
The nation's transportation sector continues to manage the risks associated with the federal government's attempts tocurb the deficit, as well as the overall economic and political climate. Federal general fund transfers supporting theHighway Trust Fund (HTF) are subject to sequestration, and there is little support for raising the federal gas tax, theproceeds of which provide most of the program's funding. Moreover, Moving Ahead for Progress in the 21st CenturyAct (MAP-21), the legislation that governs federal funding for state transportation initiatives, will expire in Septemberof this year.Standard & Poor's Ratings Services will monitor the MAP-21 reauthorization progress and its effect on the states'transportation initiatives. However, we expect that MAP-21 will be extended through short-term continuing resolutionsor reauthorized due to the legislation's longevity and vital role in supporting the national highway system.
Overview
 MAP-21, which governs federal funding for states' transportation initiatives, will expire later this year.
 We anticipate that MAP-21 will likely be extended through short-term continuing resolutions or reauthorizedand would view positively Congress' approval of replacement funding for the gas tax.
 Mitigating reauthorization risk or delay are the conservative financial structures inherent in all rated grantanticipation revenue notes or vehicles (GARVEE) transactions.
The Road To GARVEE Funding In MAP-21
Standard & Poor's maintains public ratings on 27 bond transactions (with 26 obligors) secured by federal aidtransportation grants under Section 122 of Title 23 of the U.S. Code of Law. The source of the pledged funds is thelongstanding Federal Aid Highway Program (FAHP), which has been the primary funding source for the nationalhighway system for the past 50 years. The grants require annual appropriation by Congress and are distributed to eachof the states and territories for reimbursement for various federal qualified highway and transit projects. Since 1995,certain projects have been financed by what are commonly referred to as GARVEEs.Currently, the FAHP is governed and authorized by specific federal legislation: MAP-21, which will expire on Sept. 30,2014. A new multiyear authorizing statute has yet to be introduced in Congress although we anticipate that one ormore bills will be proposed soon. In the past, new authorizing legislation has been slowed by the sheer size andcomplexity of the program, issues related to the federal deficit, tax increases and other funding sources, allocation of HTF resources among the states, and debate concerning its final price tag.
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Federal Approval For Transportation Funding Has Historically BeenBi-Partisan, But Funding Risks Remain
While Standard & Poor's views favorably all proposals that would extend the funding period of MAP-21 or introduce anew surface transportation funding bill, the delay and uncertainty regarding renewal authorizations highlight the keycredit weakness of GARVEE ratings. Although we consider an interruption in future federal transportation funding to be remote, the risk to state programs that leverage these funds are not significant, including the timing of receipts andfuture erosion in dollars either due to lower authorized or appropriated levels or programmatic changes that negativelyaffect recipients. However, Standard & Poor's consider both the history of the program and its vital role in preservingand expanding the national highway system, as well as the significant funding needs facing surface transportation andthe lack of resources to fund those needs, as considerations supporting continued reauthorization of the program forthe foreseeable future. Standard & Poor's will closely monitor the sector both during and after reauthorization in orderto evaluate and monitor how each individual state's debt plans may be adjusted or changed.We believe the transportation sector continues to face economic and financial risks associated with the consequencesof Congress' recent efforts to reduce the federal deficit. The federal gas tax provides the bulk of the program's funding but is not indexed to inflation and has not increased since 1993. As such, the gas tax has not been able to fully fund theappropriation for the past few surface transportation bills. At $19 billion for federal fiscal 2014, general fund transferssupporting the HTF come from the general treasury and, thus, is subject to sequestration or other Congressionalactions. We believe the requirement for a general treasury transfer to make the HTF whole introduces credit risk giventhat there is little support for raising the federal gas tax. In light of the plateau in national vehicle miles traveled (atabout three trillion miles per year), growth in electric vehicles, and increased corporate average fuel economystandards, holding the gas tax as is will continue to erode the tax's purchasing power, especially as material and laborcosts for road construction are increasing. It is with this funding question in mind that MAP-21 was approved with justa 27-month term (which states' department of transportation officials have said is too short to allow for meaningfulplanning for necessary large projects). Nevertheless, the sector's high credit quality and strong coverage provide acushion against the need for frequent reauthorizations and any rating or outlook actions, in our opinion.
The Reauthorization Risk For MAP-21
U.S. Transportation Secretary Anthony Foxx has stated that a priority will be "working on bipartisan solutions tosurface transportation that put us on a long-term sustainable path." Congressman Blumenauer and Chairman Camp, aswell as senators Boxer, Baucus, and Mikulski are working on proposals to fund transportation. Ray LaHood, the formertransportation secretary, has stated that he wants Congress to pass a six-year surface transportation bill with at least$500 million in funding for transportation infrastructure. Standard & Poor's believes that it is more likely that Congresswill continue to fund the future surface transportation bill using primarily the gas tax, but as MAP-21's expirationquickly approaches, Standard & Poor's will be watching to see whether Congress will approve any replacementfunding for the gas tax. Should the gas tax remain the funding source, and should Congress continue to focus onausterity and debt reduction, we believe that general-fund transfers to support transportation funding could be lesslikely to gain bipartisan support, potentially limiting the size of the next surface bill to just what the gas tax can
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Report Card: GARVEE Transaction Structures Provide Smooth Rating Ride Despite Dips In Federal Funding 

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