In a new kind of municipal-revenue bond underwriting deal, Commerce Capital Markets is working on helping large cities fund mass transit improvements without having to wait until the federal grant money has trickled in.

The Cherry Hill, N.J.-based investment bank subsidiary of Commerce Bancorp would underwrite a bond that would be paid off entirely through future federal government grants. The idea is similar to grant anticipation revenue vehicle (Garvee) bonds which have been used in the last year to pay for highways, but not mass transit. Commerce Capital’s methodology on the new bonds would be different, according to Vince Stafford, CEO of the firm. Commerce Capital is proposing that the deals would not need the general obligation bonds that many Garvees require. That would be the case with deals that Commerce Capital is proposing to two major cities–which the firm declined to name until the deals are clinched.

This innovation was made possible last summer in Congress through legislation appropriating $217 billion for highway and mass transit spending over six years, called the Transportation Equity Act for the 21st Century, or Tea-21. This legislation made it a virtual guarantee that the funds will be there for municipalities to use, a change from before. Although three states used Garvee bonds which did not require additional backing from general obligation bonds–known as "naked Garvees"–last year to fund highways, the proceedure had not yet been used for mass transit.

Stafford explained the cities can get their projects started sooner by getting funding this way than getting a grant of a certain number of years and having to wait until nearly the end of that time to start. He said he is expecting a decision from one of the cities sometime this week.