Creative financing in the Ehrlich administration's plan to pay for a $1.7 billion Washington-area highway could add more than $100 million to the cost of the project, according to the General Assembly's top policy analyst.
Warren G. Deschenaux, director of the Office of Policy Analysis, said the state would pay higher interest rates on up to $1 billion worth of the bonds for the proposed Intercounty Connector because they would be unlikely to qualify for the high bond ratings Maryland transportation projects usually enjoy.
At issue are so-called GARVEE bonds, which are backed by a promise of repayment out of expected increases in future federal transportation aid. Such bonds, an acronym for "grant anticipation revenue vehicles," were created by Congress in 1995 and have become an increasingly popular way for states to pay for big road and transit projects.
Deschenaux said the bonds carry added risk because they depend on the future generosity of Congress in delivering transportation aid to the states despite rising federal deficits.
"You're betting on Congress, and that's a bad thing to bet on," he said.
Gov. Robert L. Ehrlich Jr. has identified the ICC, a road connecting Interstate 270 in Montgomery County with Interstate 95, as his No. 1 transportation priority. However, concerns about the financing are prompting legislators to consider holding up the project until they are sure the state has enough money to pay for other transportation needs.
The administration has been assuring lawmakers that ICC funding is "taken care of" and that it should be insulated from the expected debate next year over a possible gas tax increase and other revenue measures.
An important element of that strategy is the GARVEE bonds: The General Assembly authorized the transportation authority last year to issue them without its approval.
Under a "conceptual" plan circulated by Treasury Secretary Robert L. Flanagan, tolls and conventional bonds could pay for just less than half the $1.7 billion. For the rest, the state would issue $900 million to $1 billion in 30-year GARVEE bonds and repay them at a rate of about $60 million a year out of federal transportation aid.
Flanagan noted that Maryland has issued bonds with 30-year maturities and longer to pay for such projects as the Kennedy Highway, the harbor tunnels and the Bay Bridge.
But GARVEE bonds are different from traditional toll-backed bonds. Congress reauthorizes federal transportation aid on a six-year cycle. That means the bondholders could be exposed four or five times to possible congressional decisions to cut such aid -- the last time in the early 2030s.
According to Scott Trommer, senior director of Fitch Rating Services, no other state has issued a GARVEE bond with a 30-year term. He said the longest term is about 15 years and is exposed to two reauthorization cycles. "The longer the debt is, the more risk there is," he said. Consequently, investors will expect higher interest rates.
Maryland enjoys a sterling reputation among the three bond-rating houses and is one of the few states to earn a Triple A top rating. But Trommer said GARVEE bonds are evaluated on their own merits and that the credit rating on Maryland's overall rating would not help it.
Flanagan has emphasized that the plan is a work in progress, but the version he has circulated makes no mention of any back-up revenues, which could bolster the bond's rating and save on interest rates.
Legislative analysts said the 30-year bond Flanagan has described could be rated below "A," which could add $109 million to the project's debt service costs. The transportation chief said that the 30-year proposal is under consideration but that he is looking at other options.
"There's no sense in taking anything off the table at this point," he said. "We certainly are aware of the point of view that 30-year GARVEE bonds may encounter some problems in the marketplace."
The most obvious alternatives could be equally unpalatable.
If the amount of GARVEE financing is cut, the state would have to find money from other sources. The amount financed by tolls might be limited by market forces, and a greater percentage of conventional Maryland Transportation Authority financing could cut into what's available for other projects.
If the GARVEE maturities were cut to 15 years, analysts say, the annual payments on $1 billion in bonds would claim more than $100 million a year -- about 20 percent -- of the state's federal transportation aid.
Even before Deschenaux presented his analysis, lawmakers had been complaining that the $60 million a year in debt service envisioned in the original concept was too much to devote to one project.
"We're watering down the state's transportation policy for a single road -- and it's wrong," said Del. Peter Franchot, chairman of the House Appropriations subcommittee. The Montgomery County Democrat called GARVEE bonds "the ultimate credit-card government."
Franchot suggested the legislature might want to curb the administration's authority to issue GARVEE bonds, but Flanagan said he was not sure if it could do so constitutionally.
But Del. Mary-Dulany James, vice chairwoman of the subcommittee, expressed no doubt.
"If we give it, we can take it away -- or we can modify it," the Harford County Democrat said.