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

Stable Performance Of GARVEE Programs Supported By Anticipated Reauthorization In 2026

The Biden administration's 2021 legislation, the Infrastructure Investment and Jobs Act (IIJA, also known as the Bipartisan Infrastructure Law [BIL]) is the five-year surface transportation reauthorization for the Federal-Aid Highway Program and Federal Transit Program running through Sept. 30, 2026. The law also authorized spending for many new programs in addition to existing highway and transit programs funded from HTF. However, it did not address the HTF's long running and reoccurring structural deficit, which is the source of funding for GARVEE programs. As a result, the HTF continues to rely on periodic transfers from the U.S. Treasury general fund to meet spending outflows and is currently expected to run out in mid-2028.

Since the passage of the IIJA/BIL, topline grant announcements for federal highway and transit funding have largely progressed as envisioned in the authorization. As of March 31, 2025, publicly announced grants--including both formula grants apportioned or allocated to recipients and discretionary grants --totaled $403 billion of the authorized $405 billion for all U.S. Department of Transportation operating administrations. For the Federal Highway Administration (FHWA) and the Federal Transit Administration (FTA), $322.8 billion of the $305.2 billion (adjusted, subject to fiscal 2025 obligation limitations) in grants were announced. Obligations have lagged and the actual share of adjusted budget authority laid out is about 50% for FHWA and only 24% for FTA (see table 1).

Although we do not anticipate future reductions in HTF-supported GARVEE programs for highways and transit, we believe some programs identified in the IIJA in support of Biden administration policies are unlikely to receive appropriations in fiscal 2026 while others could see rescissions of advanced appropriations. Furthermore, it is also possible that some authorized but unobligated budget authority will not be rolled into the successor surface transportation bill when the IIJA expires in September 2026.

Table 1

Fiscal 2024 IIJA authorization totaled $132 billion (see chart 1). GARVEE program funding was broken down as follows:

• Approximately $60.7 billion was sourced from the HTF for the FHWA. This included $54.6 billion for the Federal-Aid Highway Program, which is the source of most GARVEE reimbursements. A further $12.4 billion of actual FHWA funding came from the U.S. Treasury general fund, consisting of $9.5 billion from IIJA advance appropriations and $2.9 billion in discretionary funding subject to appropriations. Total authorization was $73.1 billion for the year.
• Under both new and existing funding programs, about $21.6 billion in budgetary resources was available to the FTA for public transportation, and $17.4 billion of the funding was guaranteed, with $13.6 billion for transit formula grants funded from HTF's mass transit account and $4.3 billion of BIL advanced appropriations.

GARVEE bonds are secured by reimbursements from the Federal-Aid Highway Program and various transit formula grant programs. Most of the total $365.5 billion for federal highway programs and $108.2 billion for the FTA is funded from the HTF through mandatory contract authority (see charts 2a and 2b). 

Chart 1

Chart 2a

Chart 2b

We believe the next transportation funding law, beginning in October 2026, will reflect the policy priorities of the new federal administration and, while program specifics and funding levels are months away, there could be efforts to more closely align HTF revenues with expenditures by levying fees on hybrid or electric vehicles, shifting more funding obligations for capital improvements to U.S. states, increasing the for formula funding of road projects in lieu of discretionary funding, and de-emphasizing transit programs.

Freezes Delay Funds For Some, But There Are Contingency Plans For Many

On Jan. 20, 2025, President Trump signed an Executive Order directing federal agencies to pause disbursements of funds associated with the Inflation Reduction Act and the IIJA pending a review of the funding processes, policies, and programs to ensure alignment with the new administration's priorities. Nothwithstanding guidance from the Office of Management and Budget that the funding pause primarly applies to climate change spending along with the ongoing legal challenges to the freeze, there have been limited impacts on our GARVEE issuers to date. None of our issuers have reported a cancellation or interruption of reimbursements for highway or transit GARVEEs, nor indicated they expect to encounter any.

Strategies of different management teams include:

• Not allocating grant funds into their capital improvement plans until the grant agreement is approved and the funds are obligated, meaning the federal government legally must disburse the grant funds.
• Not moving forward with a project if federal discretionary funding were cancelled, unless they could identify alternative funding sources.
• Reintegrating projects in state-of-good repair program (or an equivalent) and fund these projects based on prioritization if discretionary funding are cancelled.

Given the lack of interruptions to date and issuers' ability to adapt to changes at the federal level, we believe the sector is broadly equipped to manage this period of uncertainty.

We continue to monitor GARVEE issuers' experience with reimbursements and potential federal policy changes. We believe federal agencies will continue to support highway and transit grant programs funded from the HTF as required in the current law and this will continue in subsequent surface transportation authorizations.

Conservative Financial Management And Structural Features Support GARVEE Credit Quality

S&P Global Ratings evaluates 31 program ratings for highway and transit in 26 states and territories that use a variety of security structures with their federal grant-backed debt. When only federal funding is pledged, our ratings range from 'A-' to 'AA'. However, ratings reach the 'AAA' level with the availability of a state backstop from other revenue sources.

Specifically, the high ratings in the sector are based on the issuer's pledge of the HTF grants from the federal government, legal provisions restricting additional leverage on the grants, and robust MADS coverage. The 'A' rating category GARVEE programs generally maintain strong MADS coverage of at least 1.5x, compared with the 'AA' rating category GARVEEs, which generally maintain very strong coverage above 3x. In 2024, MADS coverage in our rated universe ranged from 1.51x to nearly 125x, with approximately 90% of issuers producing coverage of at least 4x (see charts 3 and 4).

Chart 3

Chart 4

GARVEE ratings for highway programs typically maintain stronger coverage than do their peers in the transit subsector because these programs have higher absolute amounts of federal receipts and the federal transit programs are exposed to more variation in receipts and funding formulas.

In addition to coverage, we examine other bond provisions when assessing GARVEE credit quality. Most GARVEEs do not have funded debt service reserves, but almost all have additional bond tests (ABTs), which limit issuers' ability to leverage the pledged grant revenue stream. ABTs are typically based on coverage with the proposed additional bonds on a MADS basis. Although in many cases the coverage calculation can use projected federal apportionments, we consider an ABT based on historical actual funding to be stronger.

While no issuers we rate have faced material delays or interruptions to obligated funds, many implement integrate structural features into their legal documents or risk mitigation strategies to abate the impact of potential nonpayment exclusively from federal funds. For example, some issuers pre-fund their debt service payments a year in advance, while others have lines of credit available to draw on in case of emergency.

The fundamental assumption underlying our GARVEE ratings is that the framework and congressional appropriations funding the transportation grant programs will continue to be renewed or otherwise extended. This opinion is informed by our view of the essentiality of national highway and mass transit systems, and historical patterns of bipartisan political support for transportation spending. 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. The U.S. sovereign credit rating is linked to both stand-alone GARVEE ratings and those backstopped GARVEE ratings that benefit from an additional pledged security, such as state gas taxes. We then apply our "Rating U.S. Federal Transportation Grant-Secured Obligations” criteria, published May 29,2009, to incorporate our opinion of credit quality based on transaction- and issuer-specific features, including an issuer's funding history, ability to manage and administer its capital program, grant compliance and reimbursement, and security provisions, including legal protections and any structural protections.

Although reauthorization risk is always a possibility, we believe that the broadly conservative nature and structuring of GARVEE transactions serves to minimize the threat to credit quality. Healthy coverage metrics, the majority of which sit at 4x or above, restrictive ABTs, and shorter tenors all support our general view of the very strong ratings for the sector.

Construction Cost Increases Ease Yet Inflation And Potential Tariffs Could Erode Purchasing Power

While the rate of construction cost inflation has eased since the double-digit percentage increases in 2021-2024, increases in construction wages and material costs could weaken the potential benefit of the additional funding provided by the IIJA. S&P Global Market Intelligence (S&PGMI) projects an average annual growth rate of 3.5% in construction wages over 2025 and 2026, combined with 1.9% growth in topline construction machinery prices and 2.4% year-over-year price increases in construction materials. This could further strain capital programming budgets and, in some cases, cause cost overruns (see chart 5). S&PGMI believes this growth is driven by the new administration's tariffs, rather than underlying supply and demand fundamentals.

Simultaneously, S&PGMI expects a contraction in overall construction spending in the U.S. in 2025, which could temper the impact of rising prices on construction inputs such as steel and lumber. Although this could raise project costs connected to GARVEE funding, given the financial health of most GARVEE issuers, S&P Global Ratings does not expect this will lead to a material deterioration in credit quality. 

Chart 5a

Chart 5b

Chart 6

Table 2