Analyses of GARVEE Bonding Capacity 2008
Executive Summary
These analyses are provided to the California Transportation Commission (Commission) to assist in its compliance with the provisions of Government Code Sections 14550 through 14555.9 requiring the Commission to prepare, in conjunction with the State Treasurer’s Office (STO), an annual analysis of California’s bonding capacity for issuing Grant Anticipation Revenue Vehicles (GARVEE) bonds and notes. GARVEE bonds which are capital market borrowings repaid by federal transportation funds deposited into the State Highway Account. The analyses for 2008 show a bonding capacity ranging from a low of $1.51 billion to a high of $2.73 billion. The bonding capacity takes into account the current maximum annual debt service of the Series 2004A bonds.
Legislation was enacted to ensure California had the necessary state legislative authority to make use of this financing tool for accelerating high priority transportation projects. The legislation became effective January 1, 2000, and was further amended by AB 438 (Chapter 113, Statutes of 2001), AB 3026 (Chapter 438, Statutes of 2002), SB 1098 (Chapter 212, Statutes of 2004), and SB 1507 (Chapter 793, Statutes of 2004).
The issuance of additional GARVEE bonds is subject to Government Code Section 14553.4, which states the Treasurer may not authorize the issuance of the bonds if the annual debt service on all outstanding GARVEE obligations would exceed 15 percent of the total amount of federal transportation funds deposited into the State Highway Account in the State Transportation Fund for any consecutive 12-month period within the preceding 24 months. Thus, current and future bonding capacity analyses must take place in the context of this “cap.”
There are other factors which also affect bonding capacity, such as maturity structures, interest rates, and policy decisions. As a result, these analyses continue the practice of prior analyses by providing “sensitivity analyses” under different scenarios, with varying assumptions for maturity dates and interest rates. This approach should continue to assist the Commission in examining and responding to future applications under the context of alternative scenarios.
In December 2003, the Commission adopted policy guidelines that stipulate the intent not to issue additional GARVEE obligations where the annual debt service on all outstanding obligations would exceed 15 percent of the total amount of federal transportation funds deposited into the State Highway Account in the State Transportation Fund for any consecutive 12-month period within the preceding 24 months. SB 1507 amended the statutory cap to align it with the Commission’s 15 percent cap. The analyses in this report are based on the 15 percent cap set forth in both the policy guidelines and statutory requirements.
On March 10, 2004, the State issued $614,850,000 State of California (California Department of Transportation) Federal Highway Grant Anticipation Bonds Series 2004A, the first and only issuance of GARVEE obligations to date. As of April 1, 2008, there is $425,285,000 principal amount of Series 2004A Bonds outstanding. The Series 2004A Bonds are structured with a level debt solution with serial maturities from 2005 through 2015. The maximum annual debt service of the Series 2004A Bonds is $72,901,444 in Fiscal Year (FY) 2013. The current outstanding Series 2004A Bonds are insured by MBIA and FGIC. MBIA was recently downgraded from the AAA category to ratings of A3 by Moody’s, A by Standard & Poor’s, and AA by Fitch Ratings. FGIC was also downgraded from the AAA category to ratings of Baa3 by Moody’s, BB by Standard & Poor’s, and BBB by Fitch Ratings. These downgrades were due to the weakening financial strength of MBIA and FGIC. There is no change to the underlying ratings of the Bonds, which are rated Aa3, AA-, and AA by Moody’s, Standard & Poor’s, and Fitch Ratings, respectively.
The analyses of 2008 show that the bonding capacity is increased by 4.70 percent for a 6-year final maturity amortization period when compared with the same analyses of 2007, and increased by 2.22 percent for a 12-year final maturity amortization period when compared with the same analyses of 2007. Primary factors contributing to the changes in the bonding capacity from 2007 include an increase in federal deposits in the State Highway Account over the past two years. In addition, the increase in bonding capacity for the longer amortization period is less than the increase of the bonding capacity for the shorter amortization period due to a steeper yield curve over the prior year.
These analyses demonstrate that a wide range of circumstances, including policy, revenues, and market factors, can affect the existing capacity for future State GARVEE financings. Therefore, the analyses should be used as a tool for understanding the implications of alternative project applications and the related potential GARVEE bond structures that the Commission may be asked to consider over the coming year.