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Innovative financing may hold answer for roads

The US Department of Transportation, Federal Highway Administration has responded to Rep. Larry Sanitoa’s request for more information in reference to a Federal Highway Administration provision which would allow a territory to borrow or advance its annual allocation, as long as it meets all of the necessary requirements.


Sanitoa’s request was outlined, in a Jan. 11, 2013 letter, to the US DOT- FHWA’s lead civil engineer Pat Phung. His letter was the result of a meeting held with FHWA officials last month to discuss current road problems and different avenues of federal funding for the territorial highway program. Also discussed was the importance of the territory's economy and how it correlates to its infrastructure.


Present at the meeting were Sanitoa, along with fellow Representatives Taotasi Archie Soliai and Pulelei’ite Tufele Li'amatua Jr. and Department of Public Works director Faleosina Faiai Voigt and FHWA officials.


In response to Sanitoa's letter, FHWA territorial representative Clifford Chew explained that the FHWA provision mentioned regarding the possibility of a US territory borrowing federal funds in advance of its annual allocation is a form of innovative financing.


Chew clarified that this method of financing must be authorized through enabling legislation by the American Samoa Government. He added that their division office will continue to assist the Civil Highway Division of Public Works in "managing its established annual allocation and finding ways to best utilize obligated funds."


As of September last year, 24 states and 3 territories have been issued $16 billion under the FHWA Innovative Funding Program to finance their infrastructure through a program called Grant Anticipation Revenue Vehicles (GARVEEs), which enables states to pay debt service and other bond-related expenses with future federal-aid highway funds.


Yesterday, Sanitoa wrote to Gov. Lolo M. Moliga informing him of the GARVEEs program, explaining that the GARVEEs financing mechanism generates up-front capital for major highway projects at generally tax-exempt rates and enables a State or Territory to construct a project earlier than if using traditional pay-as-you go grant resources. 


"An early start to getting projects in place allows for lower costs due to inflation savings, and the public realizes safety and economic benefits," Sanitoa wrote."These benefits in my opinion would be advantageous to American Samoa's transportation needs given the current conditions of our infrastructure."


Sanitoa reminded Lolo that this method of financing as required by Title 23 of the United States Code must be authorized through enabling legislation by ASG and "since American Samoa currently receives $4 million annually from the Federal Highway Administration, the American Samoa Government can conceivably apply for an up-front of $40 million to accelerate our most critical highway projects. Furthermore, the most important aspect of this potential funding program is that it will provide an economic and fiscal stimulus which is something that we are in dire need of for our territory."


Sanitoa referred to last December when the Department of Public Works advertised and held a public hearing on the Territorial Transportation Improvement Program, (TTIP) for FY 2013 and FY 2014. The TTIP listed all of the most critical and urgently needed road improvement projects throughout the island. As required by GARVEEs, the American Samoa TTIP could be used to identify highway projects that can be funded under this program.


Enclosed with Sanitoa's letter to Lolo were all of the necessary brochures and information on GARVEEs, in addition to Guam's legislation in regards to GARVEEs, and the latest communication from Clifford Chew.


The Tualauta faipule has already asked the Fono legal team "to seriously look into this excellent viable funding option to immediately address our aging infrastructure."


GARVEEs Program


Projects financed with GARVEEs proceeds must follow all federal-aid requirements. The law authorizing GARVEEs makes it clear that a debt-financing instrument's eligibility for reimbursement with future federal-aid highway funding does not constitute a commitment, guarantee, or other obligation by the United States, nor does it create any right of a third party (such as an investor) against the federal government for payment.


GARVEEs can be issued by a state, a political subdivision of a state, or a public authority. In general, projects funded with the proceeds of a GARVEE debt instrument are subject to the same requirements as other federal-aid projects with the exception of the reimbursement process. Instead of reimbursing construction costs as they are incurred, the reimbursement of GARVEE project costs occurs when debt service is due. For a GARVEE, a state may request partial conversion with debt-service payments, allowing for effective use of obligation authority.


According to the FHWA, in order to issue GARVEE bonds, states or the issuing entity must have the appropriate state authorization related to debt issuance. States have the flexibility to tailor GARVEE financing to accommodate state fiscal and legal conditions.


Under GARVEE, by paying with future federal-aid funds, the cost of the facility is spread over its useful life, rather than just the construction period. GARVEEs can expand access to capital markets as a supplement to general obligation or revenue bonds.


Candidates for GARVEE financing are typically large projects (or programs of projects) that have the following characteristics:


*            The costs of delay outweigh the costs of financing,


*            Other borrowing approaches may not be feasible or are limited in capacity,


*            The project does not have access to a revenue stream, and other forms of repayment are not feasible, and


*            The sponsors are willing to reserve a portion of future year federal-aid highway funds to satisfy debt-service requirements.


States are finding GARVEEs to be an attractive financing mechanism to bridge funding gaps and to accelerate construction of major corridor projects.


As with any program, there are limitations. GARVEEs can reduce financial, programmatic, and political flexibility for those years in which debt service consumes a portion of the annual transportation program.


It may also cause economic and fiscal drag as debt service is repaid. Furthermore, the program may lead to capacity constraints with respect to availability of contractors, consultants, construction materials, and labor and public agencies.