This report contains updates on the actual federal spending associated with the Federal-Aid Highway and federal transit programs, and summarizes S&P Global Ratings' rated universe of grant-secured issues outstanding.

On Nov. 15, 2021, President Joe Biden signed into law the Bipartisan Infrastructure Law/Infrastructure Investment and Jobs Act (BIL/IIJA), which contained a five-year surface transportation reauthorization for the Federal-Aid Highway Program and federal transit programs through 2026. Although the law does not address the Highway Trust Fund's (HTF) structural deficit, it did authorize a $118 billion transfer to the trust fund from the U.S. Treasury's general fund ($90 billion to the highway account and $28 billion to the mass transit account), allowing the full funding of grant programs through 2026.

In fiscal 2023, BIL/IIJA funding for the U.S. Department of Transportation totaled $123.3 billion (see chart 1), including all programs and divisions. GARVEE program funding broke down as follows:

• Approximately $59.5 billion for the Federal Highway Administration (FHWA) sourced from the HTF, including $58.8 billion for the Federal-Aid Highway Program--the source of most GARVEE reimbursements to states. Actual funding for the FHWA also included $12.9 billion from the U.S. Treasury general fund for existing and new highway programs, consisting of $9.5 billion from BIL advanced appropriation and $3.4 billion in discretionary funding subject to appropriations (see table 1).
• Approximately $21.2 billion for the Federal Transit Administration (FTA) for public transportation under both existing and new programs, including $17.9 billion in guaranteed funding with $13.6 billion for transit formula grants funded from the mass transit account of the HTF and $4.3 billion from advanced appropriations contained in the BIL (see table 1).

Reimbursements received through the Federal-Aid Highway Program and various transit formula grant programs, such as the Section 5307 Urbanized Area Formula Funding or Section 5337 State of Good Repair programs, secure GARVEE bonds. Most of the $365.1 billion for federal highway programs and $107.2 billion for the FTA, including the Federal-Aid Highway Program and transit formula grant programs, is funded from the HTF through mandatory contract authority that is apportioned or distributed to states based on formulas specified in statute (see charts 2 and 3). The Brookings Institution reported that IIJA formula and direct federal spending totaled $306 billion as of November 2023, with 80% of all competitive funding still to be awarded.

The largely reimbursement- and formula-based programs allow states or local transit providers to leverage federal transportation funding for capital or operating purposes and advance projects (earlier than otherwise would have occurred) by issuing GARVEE bonds backed by the anticipated federal dollars to support roadway and transit capital programs. The BIL/IIJA also provides funding through a variety of new and competitive grant programs in support of roadway and mass transit transportation.

Table 1

Chart 1

Chart 2

Chart 3

Construction Cost Inflation And Other Hurdles Stress Project Budgets And Erode IIJA Benefits

The opportunities created by increased funding from the IIJA has not come without challenges for state and local transportation providers as construction project cost inflation, labor shortages, and other hurdles such as those imposed by the Build America Buy America Act continue to erode much of the benefits of said funding. Many federal grant programs are largely reimbursement-based, so funding of infrastructure projects requires prepayment for the proposed project and matching funds from the state and local governments. This has particularly challenged some transit agencies looking to maximize the billions of dollars in federal competitive funds available under the IIJA. For more information see "Record U.S. Infrastructure Spending Is Colliding With Higher Construction Costs And Other Hurdles," published May 14, 2024, on RatingsDirect.

Chart 4

Robust Coverage And Conservative Financial Structures Bolster GARVEE Ratings

S&P Global Ratings evaluates 31 public and confidential program ratings for highway and transit in 27 states and territories using different security structures that leverage federal transportation grants; some programs benefit from additional state support.

Our ratings on the GARVEE sector range from 'A' to 'AA' where only federal funding is pledged, and are as high as 'AAA' where state agencies blend the federal funding with an additional pledge of state funding. We base the relatively high ratings in this sector on the issuer's pledge of the HTF grants from the federal government, consistently very strong maximum annual debt service (MADS) coverage, and legal provisions that limit additional leverage. As outlined in our criteria "Methodology And Assumptions: Rating U.S. Federal Transportation Grant-Secured Obligations," published May 29, 2009, 'AA' rated GARVEE programs generally maintain very strong MADS coverage at more than 3.0x, and 'A' rated GARVEEs strong MADS coverage at more than 1.5x.

In 2023, pro forma MADS coverage across rated bonds ranged from 1.99x to more than 100.00x, with most programs producing coverage of at least 4.00x from obligated authority and actual federal receipts. As a result, approximately 70% of our GARVEE public ratings are in the 'AA' category (see chart 4). Our pro forma MADS coverage calculation is based on the GARVEE program's actual obligation authority or federal receipts and pro forma MADS, which includes existing debt service plus debt service from planned issuances when known.

Most federal highway aid programs are rated within our 'AA' category because they often maintain stronger coverage as a result of a higher absolute amount of federal receipts, while most federal transit programs are rated within our 'A' category given their higher likelihood of variability in receipts and discretionary funding formulas. The Southeastern Pennsylvania Transportation Authority's Section 5307 and 5337 GARVEE bonds are the only 'AA' rated category federal transit programs in our rated universe.

GARVEE Methodology And Link To U.S. Government Rating

Our fundamental assumption about ratings on GARVEEs is that the supportive legislative framework and the congressional appropriations funding transportation grant programs will continue through multiyear authorizations or extensions. This assumption is based on precedent, including our view of the political and economic importance of national highway and mass transit systems, the broad historical bipartisan political support for transportation spending programs at all levels of government, and Congress' track record of continuing appropriations and passing extensions to budget authorizations.

In addition, we apply our "Federal Future Flow Securitization" criteria, published March 12, 2012, to determine the highest possible rating relative to the U.S. sovereign rating (AA+/Stable/A-1+), after factoring in federal entity and project- or program-specific factors. (See "U.S. 'AA+/A-1+' Sovereign Ratings Affirmed; Outlook Remains Stable," published March 16, 2023.) For GARVEEs backed solely by federal revenue, also called stand-alone GARVEEs, these criteria establish a cap of the U.S. government rating; backstopped GARVEE ratings that benefit from an additional pledged security such as state-level taxes/fees can exceed this rating cap. In this instance, our "Ratings Above The Sovereign--Corporate And Government Ratings--Methodology And Assumptions" criteria, published Nov. 19, 2013, would also apply. Changes in the U.S. sovereign rating could result in rating actions in our GARVEE universe.

Although reauthorization risk is not fully eliminated, in our view, it has been minimized through conservative financial structures inherent in all rated GARVEE transactions, further supporting very strong ratings. Examples include the use of backup credit support, debt service reserves, robust debt service coverage, shorter final maturities, and restrictive additional debt provisions. In addition, the rating is subject to many nonquantitative credit factors, such as funding mechanics and timing; evaluation of state processes for managing and administering the program; history of federal receipts and volatility; each state's donor status, underlying economy, and transportation needs; and each state's respective political representation and congressional influence.

Liquidity And Program Structure Mitigate Government Shutdowns Or Delays

During a previous government shutdown, transit was the most affected transportation sector because almost all FTA employees were deemed nonessential, including those staff responsible for administering disbursement of grant payments. For example, a transit agency requesting payment or reimbursement for a previously approved and appropriated grant in a prior federal budget year would be left in the lurch. Therefore, we view transit GARVEEs (bonds secured by reimbursements from the FTA) as more exposed to possible nonpayment during a government shutdown.

However, issuers of transit GARVEEs that we rate typically have liquidity or structural features--such as prefunding principal or interest payments well in advance of due dates--that mitigate delays in federal receipts to ensure timeliness of debt service payments. For example, some issuers have lines of credit or have fully funded their next principal and interest payments a year in advance. Shutdowns have minimally affected federal highway grants that support debt service payments of states that have historically leveraged this reimbursement program, given that the FHWA has a different nonappropriated funding source and was fully staffed during previous shutdowns.

In addition to coverage and the presence or lack of additional security, bond provisions are important in determining GARVEE credit quality. Although most GARVEE programs lack funded debt service reserves, almost all have additional bonds tests (ABTs), which we view as an important rating factor. ABTs are typically based on projected coverage from federal apportionments, including the planned additional bonds, on a MADS basis. Because most GARVEE programs issue debt with level debt service, MADS coverage serves to indicate a program's ability to cover obligations, based on current funding. Furthermore, we consider ABTs that require stronger coverage based on historical federal funding better than those based on projected funding.

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Table 2