The reserve funds provide additional security for a bond indenture, which ultimately reduces the risk premium, or amount of interest desired by investors. If the bond is rated by an independent agency, the additional repayment security provided by the reserve fund will be reflected in a higher rating, which correlates with a lower risk of default. The higher bond rating resulting from the establishment of the reserve fund may reduce grantees’ out of pocket debt issuance costs.
To create a debt service fund an agency must first issue bonds. The debt service reserve fund may be financed as part of the bond issuance proceeds, or via a deposit made by the issuer. The typical reserve fund amount is usually equal to about one year’s worth of debt service payments. Once the agency funds the reserve, the agency can then apply to FTA for 80 percent reimbursement.
With the enactment of the Moving Ahead for Progress in the 21st Century Act (MAP-21) legislations on October 1, 2012, the section 5307 DSRF pilot program under section 5323(d)(4) was repealed. However, MAP-21 continues to allow the use of section 5309 funds for DSRFs, but it repeals the Bus and Bus Facilities and Fixed Guideway Modernization categories under that section and creates a new Fixed Guideway Capital Investment Grant Program under which New Starts, Small Starts, and Core Capacity Improvement projects are eligible for funding. Beginning on October 1, 2012, therefore, section 5309 funds directed to these types of projects also may be used to reimburse a public transportation agency for establishing a DSRF.
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.