Debt Service Reserve
Debt service reserves are cash reserves set aside by a borrower to ensure full and timely payments to bond holders Debt Service Reserves have been used for many years by private business and public entities to support debt issues.
SAFETEA-LU authorized transit grantees to be reimbursed for up to 80 percent of the deposits in a debt service reserve established for the purpose of financing transit capital projects from 49 U.S.C. 5307 (Urbanized Area Formula Grant program) and 49 U.S.C. 5309 (Bus and Bus Facilities, Fixed Guideway Modernization, New Starts and Small Starts) funds. It is hoped that transit agencies will benefit from cost savings from a higher initial bond rating resulting from the establishment of the reserve fund and reduce grantees’ out of pocket debt service reserve issuance costs.
How Debt Service Reserves Work
To create a debt service fund an agency must first issue bonds, equal to about one year’s worth of debt service payments and to support an eligible transit capital project. The agency can then apply for 80 percent reimbursement.
The Debt Service Reserve Pilot Program
A Federal Register notice announcing on the Debt Service Reserve Pilot Program authorized in SAFETEA-LU was published on December 28, 2006 (71 FR 78267 [HTML] [PDF]), with an amendment notice published on February 13, 2007 (72 FR 6807 [HTML] [PDF]).
In September 2008, FTA transmitted a report to Congress providing information on the agency's implementation of the Debt Service Reserve Pilot Program. The report is available on FTA's website under the Reports to Congress page.