Fitch: While Senate Passes Transportation Reauthorization Act, Road Remains Bumpy.

NEW YORK -- On May 17, the U.S. Senate passed its $295 billion version of the federal-aid highway and federal transit program reauthorization bill by a margin of 89-11, adding approximately $11 billion to the President's request and simultaneously garnering a veto threat from the White House. Both the House and Senate have now passed reauthorization bills; a situation that existed last year as well. The numbers are closer than before -- the Administration increased its proposal to $284 billion from $256 billion. The House is currently at $284 billion and the Senate is now at $295 billion. These proposed increases in funding bode well for grant anticipation revenue vehicle (GARVEE) bonds. However, another short-term extension will likely be required to continue the flow of federal grant funds to states while a consensus is worked out.

The next steps required in the nearly two-year saga include the House and Senate appointing members to a conference committee which must then come to a compromise on the two bills. If adopted, the compromise or conference report would then be sent back to the floor of the House and Senate for votes before a bill can be sent to the President. In a recent policy statement, the President's senior advisors have recommended that the President veto any bill providing more than $284 billion in funding. All of this would need to be resolved in the next two weeks, as the most recent short-term extension of the Transportation Equity Act for the 21st Century (TEA-21) expires on May 31, 2005. At this point in time, no extension has been introduced in either the House or Senate.

Fitch maintains ratings on approximately $7 billion in GARVEE bonds, all of which face the same key risk -- the potential for significant changes in federal transportation funding policy with each new authorization period. This does not appear to be a material concern with the current legislation. While an interruption in the flow of federal transportation funding is highly unlikely given the broad-based political support for the program, reauthorization of TEA-21, which expired on Sept. 30, 2003, has been significantly delayed. Protracted reauthorization delays pose some near-term credit risk, as continued gridlock on enacting a multiyear authorization and reliance on short-term multi-month extensions affects long-term transportation planning at the state level and could erode the long-established track record of predictable federal surface transportation funding. In addition, a highly politicized environment could portend some level of political brinksmanship that may have negative implications for GARVEE credit quality. Most GARVEE bonds require obligational authority to be set aside at the beginning of the federal fiscal year (October 1st) in an amount equal to debt service, so debt payments through Sept. 30, 2005 should not be affected.