Fitch: Federal Highway Trust Fund running on fumes

New York — The Federal Highway Trust Fund (HTF) is unsustainable and a long-term funding solution is unlikely anytime soon, according to a Fitch Ratings report. Combined, the highway and transit subaccounts began Federal Fiscal Year 2014 at $6.3 billion and currently stand at $11.8 billion through March, including the injection of $11.7 billion in general fund revenues. Under MAP-21, the transfers were originally intended to total $12.6 billion; however, it was reduced by $907.2 million due to sequestration.

“The severity of the HTF imbalance is highlighted by the U.S. Department of Transportation's recent projection that the Highway Account of the HTF will run out of money as soon as this summer,” said Scott Zuchorski, Senior Director in Fitch's Global Infrastructure and Project Finance Group. “The future of the program beyond 2014 is hard to predict. It is Fitch's view that significant changes are needed either on the expenditure side or on the revenue side to place the program on a sustainable trajectory.”

Fitch notes that the bipartisan budget agreement for 2014 and 2015 requires transfers to the HTF to be fully offset, making future transfers more problematic.

Grant Anticipation Revenue Vehicles (GARVEES) are increasingly dependent on state resources for stability and current GARVEE bonds retain investment-grade characteristics largely because states have elected not to leverage federal funds to a critical degree.

Fitch's on-going discussions with state department of transportation officials indicates that the flexibility states retain from their locally generated taxes and fees, though unpledged, would most likely be used to cover liquidity issues with respect to GARVEE payments as a result of a disruption in federal funding.

Although there has been little activity at the federal level with respect to transportation funding, state governments have been quite active and creative in developing new approaches to fill the policy void despite their own stagnating resources. In addition to increasing existing sources of revenue or creating new revenue streams to fund transportation a number of states have pursued P3 projects. Two-thirds of states currently have P3-enabling legislation in place, and, given the size of future capital needs, a steady stream of P3 projects is likely to continue for the foreseeable future.

For more information, a special report, “Federal Highway Trust Fund,” is available on the Fitch Ratings web site at www.fitchratings.com.