oversight

Federal-Aid Highways: States and Local Governments Reported Benefits to Federal Highway Fund Swapping, but Impacts Cannot be Definitively Determined

Published by the Government Accountability Office on 2020-11-19.

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               United States Government Accountability Office
               Report to the Committee on
               Transportation and Infrastructure, House
               of Representatives



               FEDERAL-AID
October 2020




               HIGHWAYS

               States and Local
               Governments Reported
               Benefits to Federal
               Highway Fund
               Swapping, but Impacts
               Cannot be Definitively
               Determined




GAO-21-88
                                               October 2020

                                               FEDERAL-AID HIGHWAYS
                                               States and Local Governments Reported Benefits to
                                               Federal Highway Fund Swapping, but Impacts
Highlights of GAO-21-88, a report to the
                                               Cannot be Definitively Determined
Committee on Transportation and
Infrastructure, House of Representatives




 Why GAO Did This Study                        What GAO Found
 The Federal Highway Administration            In the past 5 years, 15 states reported they had fund swapping programs, which
 (FHWA) provides funding to states             allow local agencies, such as cities and towns, to swap their state’s proposed
 to build and maintain the nation’s            suballocation of federal-aid highway funds for state transportation funds. This
 roadways and bridges. States must             exchange allows local agencies to undertake local projects with state funds,
 follow applicable federal standards           rendering the projects subject to applicable state and local, rather than federal,
 such as laws that require contractors         requirements. For most states, the reported amount of federal funds swapped is
 to pay locally prevailing wages.              a relatively small portion of the state’s overall federal-aid apportionment, ranging
 States can make federal funding               from less than 1 percent to 12 percent. However, Iowa swapped about 18
 available to local agencies for
                                               percent (or about $97 million) of its federal-aid funds in 2019. See figure.
 projects, but the ability of local
 agencies to comply with federal               Percentage of States’ Federal-aid Funds Swapped for State Funds
 requirements is a well-documented
 risk area. Some states have
 established “fund swapping”
 programs where local agencies
 swap proposed federal funding with
 the state in return for state dollars.
 FHWA does not directly oversee
 these programs, and no federal
 statutes or regulations authorize or
 prohibit fund swapping.
 GAO was asked to review swapping
 of federal-aid highway funds and its
 impact. In this report, GAO
 describes: (1) the extent to which
 states and local agencies engage in
 fund swapping; (2) factors affecting
 whether state and local agencies
 engage in federal fund swapping;              Note: Data are for 2019, except for Alabama, Colorado, New Jersey, and Wisconsin where GAO
 and (3) what is known about the               presents the most recent data these state DOT officials had available.
 impact fund swapping has on
 prevailing wages paid to workers              Officials GAO interviewed from state departments of transportation (DOTs) and
 and other federal requirements.               selected local agencies said that they participate in fund swapping because it
 GAO reviewed relevant regulations             increases project flexibility for local agencies and may result in time and cost
 and reports; sent a questionnaire to          savings. Obstacles officials cited included a lack of sufficient state funds to swap
 officials in 50 states; and interviewed       with local agencies and the absence of state law authorizing fund swapping.
 officials from 15 state DOTs that
                                               The impact of fund swapping on wages and other federal requirements cannot be
 reported having swapped funds in
                                               definitively determined because, among other reasons, state DOTs generally do
 the past 5 years and 3 local
 agencies selected for program size            not track data needed to measure these impacts. For example, state officials said
 and other factors.                            that federal funds swapped by local agencies are combined with other federal
                                               funds, so they cannot identify which projects were funded with swapped federal
 The U.S. Department of                        dollars. State officials offered mixed views of the impact of swapping on workers’
 Transportation provided technical             wages and other federal requirements. For example, officials in two states that
 comments, which we incorporated               told GAO their states do not have prevailing wage laws said wages paid were not
 as appropriate.                               impacted by the lack of federal prevailing wage requirements because of
View GAO-21-88. For more information,          economic conditions in their states. Officials in two other states said that the lack
contact Elizabeth Repko at (202) 512-2384 or
repkoe@gao.gov.
                                               of a state prevailing wage law potentially enabled contractors to pay their workers
                                               less than the federal prevailing wage on swapped projects.
                                                                                             United States Government Accountability Office
Contents


Letter                                                                                1
             Background                                                               3
             Since 2016, Fifteen States Reported They Swapped a Portion of
               Federal Funds to Administer Local Road and Bridge Projects             9
             State DOTs and Local Agencies Cited Flexibility and Other
               Anticipated Benefits and Obstacles such as Lack of Funding As
               Influencing Their Participation in Fund Swapping                     13
             Limited Data Exist to Assess the Impacts of Fund Swapping and
               Officials Had Mixed Views on the Impacts                             18
             Agency Comments                                                        21

Appendix I   GAO Contact and Staff Acknowledgments                                  23



Table
             Table 1. FAST Act Federal-aid Highway Core Programs                      4


Figures
             Figure 1: Percentage of States’ Reported Federal-aid Highway
                      Funds Swapped for State Transportation Funds                  10
             Figure 2: Federal-aid Highway Program Funds that Have Been
                      Swapped for State Department of Transportation (DOT)
                      Funds                                                         11




             Page i                                       GAO-21-88 Federal-Aid Highways
Abbreviations

CMAQ              Congestion Mitigation and Air Quality Improvement
FAST Act          Fixing America’s Surface Transportation Act
FHWA              Federal Highway Administration
FTA               Federal Transit Administration
DBE               Disadvantaged Business Enterprise
DOT               Department of Transportation (of a state)
HSIP              Highway Safety Improvement Program
KDOT              Kansas DOT
NHFP              National Highway Freight Program
NHPP              National Highway Performance Program
STBG              Surface Transportation Block Grant
STIP              Statewide Transportation Improvement Program
TMA               Transportation Management Area
U.S. DOT          U.S. Department of Transportation




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Page ii                                                   GAO-21-88 Federal-Aid Highways
                       Letter




441 G St. N.W.
Washington, DC 20548




                       October 20, 2020

                       The Honorable Peter DeFazio
                       Chairman
                       Committee on Transportation and Infrastructure
                       House of Representatives

                       The Honorable Abby Finkenauer
                       House of Representatives

                       Each year the Federal Highway Administration (FHWA) provides around
                       $40 billion to the states to build and maintain the nation’s roadway and
                       bridge infrastructure. 1 While states primarily administer federal-aid
                       highway funding through their state departments of transportation
                       (DOTs), states may choose to designate funding for federal-aid projects
                       to be administered by local agencies such as cities, towns, and counties.
                       In these instances, states are responsible for ensuring that local agencies
                       adhere to applicable federal statutes and regulations. These statutes and
                       regulations contain provisions governing design and construction of
                       projects and administration of contracts. Other federal requirements
                       include the Davis-Bacon Act, which requires employers to pay locally
                       prevailing wages to laborers on federally funded construction projects, 2
                       and the “Buy America” provision applicable to federal-aid highway
                       projects. 3 In January 2014 we reported that around 7,000 local public
                       agencies were administering billions of dollars annually for federal-aid
                       projects, according to FHWA. 4

                       We also reported in 2014 that the ability of local public agencies to
                       comply with federal requirements was a well-documented risk area and
                       identified a range of concerns, including issues concerning the quality of

                       1Fixing America’s Surface Transportation Act (FAST Act), Pub. L. No. 114-94,
                       §1101(a)(1), 129 Stat. 1312, 1322 (2015).
                       2Davis-Bacon Act, Pub. L. No. 71-798, ch. 411, 46 Stat. 1494 (1931). (codified as
                       amended at 40 U.S.C. § 3141 et seq.).
                       3The Buy America provision applicable to federal-aid highway projects generally requires
                       that the iron, steel, and manufactured products used in those projects be produced in the
                       United States, subject to a few exceptions. 23 U.S.C. § 313; 23 C.F.R. § 635.410.
                       4GAO,  Federal-Aid Highways: Federal Highway Administration Could Further Mitigate
                       Locally Administered Project Risks, GAO-14-113 (Washington, D.C.: Jan. 16, 2014).




                       Page 1                                                    GAO-21-88 Federal-Aid Highways
construction and administration of contracts on federally funded, locally
administered projects. Our report also discussed efforts to address these
challenges, including a funding exchange, or fund swapping, program
initiated by the Kansas DOT (KDOT). 5 In Kansas, federal-aid was
distributed to cities and counties based on formulas established by the
state. Under the funding exchange program, local agencies were given
the option of swapping their proposed portion of federal funds for state
funds, and KDOT then used the federal funds for projects on the state
highway system. According to KDOT, the funding exchange program
allowed the state DOT to have more federally-funded projects
administered by state officials, who were generally more knowledgeable
about federal requirements than local officials. We reported that other
state DOTs had expressed interest in developing such programs for local
agencies in their states.

You asked us to review the prevalence of federal-aid highway funding
exchange programs and the impact it has on local economies. This report
(1) describes the extent to which state and local agencies engage in
federal fund swapping and the categories of federal funds and types of
projects that tend to be involved; (2) identifies factors officials cited that
affected whether state and local agencies engage in federal fund
swapping; and (3) examines what is known about the impacts fund
swapping has on the payment of prevailing wages and the application of
other selected federal requirements.

To address each of these objectives, we distributed a questionnaire to
each of the 50 state DOTs. 6 We received a 100 percent response rate.
We also conducted semi-structured interviews with officials from 15 state
DOTs that we determined currently swap federal-aid highway funds and
state transportation funds or have done so in the past 5 years. 7 Through
these interviews, we collected testimonial evidence from the state DOT

5The terms “fund exchange program” and “fund swapping program” are commonly used to
describe programs in which state agencies use state aid to fund local projects and reserve
federal aid for state administered projects. We use the terms interchangeably in this
report.
6We did not include the DOTs in Washington, D.C. and Puerto Rico in our survey because
Washington, D.C. does not have any local agencies to which funds can be suballocated,
and Puerto Rico has been responding to damage caused by Hurricane Maria.
7We  reviewed swapping programs in states that swapped at some point since 2016. One
state began a fund swapping pilot initiative in 2016 and also swapped funds in 2017; some
states swapped in 2018, but no longer do, and one state began swapping in 2020.




Page 2                                                   GAO-21-88 Federal-Aid Highways
             officials on the amount of federal funds they swapped. We selected four
             states that swap funds—Connecticut, Ohio, Utah, and Iowa—for a more
             in-depth analysis of how local agencies within those states use swapped
             state funds. We selected the four states to include both states with a
             relatively large and relatively small FHWA annual apportionments
             compared to other states and states that had a state level prevailing wage
             law and those that did not. Within each of those four states, we selected
             one local agency that recently implemented transportation projects
             funded using swapped funds. We interviewed officials from three of the
             local agencies. 8 We also interviewed representatives from construction
             firms and unions involved in fund swapping in our selected states and
             local agencies, as well as representatives from relevant national
             associations representing local agencies and professionals involved with
             fund swapping, and officials from FHWA headquarters and three FHWA
             state Division Offices. In addition, we reviewed relevant federal laws and
             regulations, including federal and state prevailing wage laws; FHWA
             documentation on federal-aid funding; and various state DOTs’
             documentation that explained their fund swapping programs.

             We conducted this performance audit from September 2019 to October
             2020 in accordance with generally accepted government auditing
             standards. Those standards require that we plan and perform the audit to
             obtain sufficient, appropriate evidence to provide a reasonable basis for
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives.

             The Fixing America’s Surface Transportation Act (FAST Act) authorized
Background   about $41.5 billion of formula funding annually for fiscal years 2016
             through 2020 for the federal-aid highway program through which states
             receive federal funding to build and maintain the nation’s roadway and
             bridge infrastructure. 9 The federal-aid highway program is an umbrella
             term encompassing a collection of formula and nonformula grant
             programs. Seven formula grant programs comprise about 92 percent of
             the total funding authorized by the FAST Act for the federal-aid highway



             8Fromthe four selected states, we interviewed three local agencies and obtained relevant
             documentation from a fourth local agency.
             9FAST    Act § 1101(a)(1).




             Page 3                                                  GAO-21-88 Federal-Aid Highways
                                                               program (see table 1 for the five core, that is, highest-funded formula
                                                               grant programs). 10

Table 1. FAST Act Federal-aid Highway Core Programs

 Federal-Aid Highway Programs                                   Description
 National Highway Performance Program                           NHPP is the largest of the federal-aid highway programs and supports improvement of
 (NHPP)                                                         the condition and performance of the National Highway System, including interstates and
                                                                nearly all other major highways.
 Surface Transportation Block Grant                             STBG has the broadest project eligibility and can be used on any federal-aid highway,
 Program (STBG)                                                 bridge projects on any public road, transit capital projects, and on routes for
                                                                nonmotorized transportation.
 Highway Safety Improvement Program                             HSIP supports projects that improve the safety of road infrastructure by correcting
 (HSIP)                                                         hazardous road locations or making road improvements.
 Congestion Mitigation and Air Quality                          CMAQ funds projects and programs that may reduce emissions of transportation-related
 Improvement Program (CMAQ)                                     pollutants.
 National Highway Freight Program                               NHFP funds freight-related projects to help states remove impediments to the movement
 (NHFP)                                                         of goods.
Source: GAO analysis of Congressional Research Service information | GAO-21-88

                                                               Note: Fixing America’s Surface Transportation Act (FAST Act), Pub. L. No. 114-94, 129 Stat. 1312
                                                               (2015).



                                                               The Surface Transportation Block Grant Program (STBG) is one of the
                                                               largest and the most flexible of the federal-aid highway formula programs,
                                                               according to FHWA. Apportioned at nearly $12 billion per year, STBG
                                                               funds can be used on any federal-aid highway, bridge projects on any
                                                               public road, transit capital projects, and on routes for nonmotorized
                                                               transportation, among other things. 11 State DOTs are required to
                                                               suballocate between 51 and 55 percent of their STBG funding among
                                                               areas of the state based on their population relative to the total state
                                                               population. 12 Specifically, these funds must be suballocated among three
                                                               area categories based on population: (1) areas with a population of 5,000
                                                               or less, (2) areas with a population of 5,001 to 200,000, and (3) areas

                                                               10Theother two formula grant programs are the Metropolitan Planning and the Railway-
                                                               Highway Crossing Programs.
                                                               1123   U.S.C. § 133(b)-(c), (f).
                                                               1223 U.S.C. § 133(d). The exact percentage is set by statute and depends on the year. Id.
                                                               § 133(d)(6). However, before the amount of suballocated funding is calculated for each
                                                               year, state DOTs are required to set aside a certain amount of funds for State Planning
                                                               and Research and Transportation Alternatives (e.g., pedestrian and bicycle paths). Id.
                                                               §§133(h), 505(a).




                                                               Page 4                                                         GAO-21-88 Federal-Aid Highways
with a population greater than 200,000, which are also called
Transportation Management Areas (TMAs). 13 For the first two population
categories, the funds do not have to be allocated to particular recipients,
such as cities or counties, as long as the required amount of funds is
expended in each of the population categories. Therefore, if a state has
four areas with a population of between 5,001 and 200,000, the state may
expend the funds in any one of those areas, in all four, or anything in
between. However, for the third category, each individual TMA in a state
must receive a portion of the TMA category’s suballocation in proportion
to its relative share of the aggregate population of all of the TMAs in the
state. 14 The remaining STBG funds that are not suballocated among
areas of the state based on population may be expended in any area of
the state, and are sometimes referred to as STBG discretionary funds. 15

Under federal law, states select which projects will be federally
financed. 16 There are several requirements that states and local agencies
must satisfy for their projects to be eligible for federal-aid highway funds.
For example, state and local agencies must provide matching funds,
which are usually 20 percent of a project’s cost. Also, at least every 4
years, each state is required to prepare a Statewide Transportation
Improvement Program (STIP), which lists the surface transportation
projects within the state for the next four years; the proposed categories
of funding, both federal and non-federal, for each of those projects; and
which agency, state or local agency, will administer those projects. 17 The
STIP must include both capital and non-capital surface transportation
projects proposed for federal funding and all regionally significant projects
requiring an action by the FHWA as well as all regionally significant
projects proposed to be funded with non-federal funds. FHWA is to review
and approve the STIP to ensure the proposed projects are “fiscally
constrained” – that is, that sufficient federal, state, and local funds are

13Id.   §§ 133(d)(1)(A), 134(k)(1)(A); 23 C.F.R. §450.104.
1423    U.S.C. § 133(d)(4).
15Id. § 133(d)(1)(B). The state must set aside from these remaining funds that may be
expended in any area of the state a fixed amount for off-system bridges (i.e., highway
bridges located on public roads that are not federal-aid highways). Id. § 133(f). After this
set-aside, the remaining STBG funds may be expended at the state DOT’s discretion on
any eligible activity or project anywhere in the state.
1623    U.S.C. § 145(a).
1723    U.S.C. § 135(g); 23 C.F.R. §§ 450.104, 450.218.




Page 5                                                       GAO-21-88 Federal-Aid Highways
available to undertake proposed projects. 18 Once approved, the state
generally selects which projects in the STIP will be subsequently
scheduled and implemented. 19

When using federal-aid, state DOTs must also comply with federal
statutes and regulations applicable to federal-aid highway projects,
including ensuring that projects adhere to applicable design and
construction standards, and follow applicable requirements regarding the
advertisement of competitive bids, awarding of contracts, acquisition of
property, construction administration, and others. One of these
requirements is the Davis-Bacon Act, which requires construction
contractors on federally funded highway projects to pay their on-site
workers at least the locally prevailing wage. 20 Another is the Buy America
provision that generally requires that the iron and steel used in federal-aid
highway projects are produced in the United States. 21 Also, states must
comply with disadvantaged business enterprise (DBE) program
requirements, which generally require states to set and meet overall goals
for the use of small businesses owned and controlled by socially and
economically disadvantaged individuals in DOT-assisted contracts. 22

While states primarily administer their federal-aid highway funding, they
may choose to designate funding for federal-aid projects to be
administered by local agencies such as cities, towns, and counties. 23
According to FHWA, each state handles federal highway funds based on
its own procedures. Some states provide federal funds to local agencies
by formula or other means while, in other states, the state DOT
administers most of the federal funds. When local agencies receive
federal funds, these agencies must follow all applicable federal and state

1823 C.F.R. §§ 450.218(m), 450.220(b). The Federal Transit Administration (FTA) also
reviews and jointly approves the STIP with FHWA. 23 C.F.R. § 450.220(a)).
19Id.   § 450.222(b)-(d).
2040 U.S.C. § 3142(a)-(b). A prevailing wage is the sum of an hourly wage rate plus the
amount of fringe benefits that is prevailing for on-site laborers and mechanics working on
similar projects in the same local agency. Id. §§ 3141-3142; 29 C.F.R. § 1.1(a). Prevailing
wages determined under the Davis-Bacon Act are not the federal minimum wage set
under the Fair Labor Standards Act.
2123    U.S.C. § 313; 23 C.F.R. § 635.410.
22FAST     Act § 1101(b) (codified as amended at 23 U.S.C. § 101 note); 49 C.F.R. pt. 26.
23For   more information, see GAO-14-113.




Page 6                                                      GAO-21-88 Federal-Aid Highways
laws, 24 and states are responsible for overseeing and ensuring that the
local agencies’ expenditure of federal-aid complies with those laws. 25
Also, federal law requires a state to determine that a local agency to
which it is providing funds has adequate project delivery systems to
perform the project it is undertaking and sufficient accounting controls to
properly manage project funding. 26 In contrast, when state DOTs provide
state funds to local agencies for transportation projects, local agencies
must comply with applicable state and local laws rather than the federal
laws that would have applied if they had used federal-aid highway funds.

Federal fund swapping programs are arrangements in which state DOTs
allow local agencies to exchange their state’s proposed suballocation of
federal-aid highway funds for state transportation funds. By swapping
funds, local agencies complete a project with state funds instead of the
federal funds that state DOTs have traditionally given local agencies.
When swapping occurs, local agencies must comply with applicable state
and local requirements, and not federal requirements, which, as we have
reported, may be less or more stringent than the federal requirements. 27
Concurrently, the state DOT applies the swapped federal funds to
projects administered by the state, and, as a result, the state administers
a greater amount of federal funds apportioned to it than it would have
before the swapping occurred. As we reported in 2014, state DOTs tend
to be more familiar with federal-aid requirements than local agencies
since states regularly administer federal-aid projects. 28

Fund swapping programs generally share a number of common
characteristics. For instance, to establish a fund swapping program,
states generally have enacted legislation that authorizes fund swapping
or developed guidelines and policies governing fund swapping in the
state, or both. 29 States must also ensure they have sufficient state funds

242   C.F.R. § 200.101(b)(1); 23 C.F.R. § 1.9.
2523   U.S.C. § 106(g)(4); 2 C.F.R. § 200.331(d).
2623   U.S.C. § 106(g)(4).
27GAO, Federal-Aid Highways: Federal Requirements for Highways May Influence
Funding Decisions and Create Challenges, but Benefits and Costs Are Not Tracked,
GAO-09-36 (Washington, D.C.: Dec. 12, 2008).
28GAO-14-113.

29Some states have also developed a pilot project or signed a memorandum of
understanding to establish a fund swapping program.




Page 7                                                 GAO-21-88 Federal-Aid Highways
to provide local agencies in exchange for the local agency’s proposed
suballocation of federal-aid. Many states have large state-funded highway
programs that provide sufficient funds for swapping. 30 Additionally, states
generally establish an exchange rate to swap state funds with federal
funds. For example, some states provide local agencies 90 cents of state
funds in exchange for $1 of federal funds, while others have a dollar-for-
dollar exchange rate.

According to FHWA, because no federal statute or regulation expressly
authorizes or prohibits fund swapping programs, the agency does not
play an active role in fund swapping programs or directly oversee these
programs. 31 States determine which projects will be federally financed
and must include this information in their STIPs because only the projects
in an approved STIP are eligible for federal-aid highway funding. 32 After a
state’s STIP is approved, the state submits the plans and cost estimates
for projects from the STIP to FHWA for its formal approval of federal-aid
highway funding. FHWA then executes a project agreement with the state
that constitutes its legal obligation to pay the state for the federal share of
the approved project’s cost. 33 FHWA remains accountable for ensuring
that the federal-aid highway program is efficient and effective, and
administered consistent with applicable statutes, regulations, and policies.




30According to FHWA, in 2013, the latest year for which data are available, the federal
government funded 45 percent of highway capital expenses, and the remainder was
funded through state and local sources.
31There is pending legislation that would authorize states to implement fund swapping
programs, provided that they have state laws comparable to the Davis-Bacon Act and
federal Buy America requirements and that those comparable state laws apply to the
projects that would have been federally funded if not for the fund exchange. H.R. 2, 116th
Cong. § 1106(b) (2020). Furthermore, the bill would require the U.S. DOT to publish on its
website the amount and type of program funds swapped each year. Id. § 1106(a).
3223   U.S.C. § 145(a); 23 C.F.R. §§ 450.218(i)(3), 450.222(a).
3323   U.S.C. § 106(a) (b).




Page 8                                                     GAO-21-88 Federal-Aid Highways
                       From 2016 through 2020, 15 states reported they swapped federal-aid
Since 2016, Fifteen    highway and state transportation funds. In 2019, the amounts of federal
States Reported They   funds the state reported swapping for state funds to be given to local
                       agencies ranged from about $4.5 million to about $97 million. 34 Officials
Swapped a Portion of   from five state DOTs told us that individually they swapped about the
Federal Funds to       same amount of federal funds annually. However, officials from four state
                       DOTs said their swapped amounts varied from year to year. 35 For
Administer Local       example, officials from Indiana DOT told us that while they swapped
Road and Bridge        funds in 2016, for two consecutive years after that, they did not swap at
Projects               all, because sufficient state funds were not available. Also, officials from
                       Connecticut said they swap about $45 million to $74 million in federal
                       funds annually. 36 Swapped federal funds constituted a relatively small
                       percentage of a state’s total federal-aid apportionment in 2019, ranging
                       from less than one percent to about 12 percent, according to state DOT
                       officials and FHWA data. However, one state, Iowa, swapped about 18
                       percent (or about $97 million) of its federal-aid funds in 2019, its first year
                       of swapping. This is about 50 percent more than the next closest state,
                       Connecticut, which swapped about 12 percent of its federal-aid funds
                       (about $64 million) in 2019. 37 See figure 1.




                       34The figures listed are the federal funds that state DOTs swapped from local agencies.
                       Unless there is a dollar for dollar exchange rate with the local agency, the federal dollar
                       amount that state DOTs received will be higher than the state dollar amount that local
                       agencies received in exchange.
                       35The  other six state DOTs reported differing experiences. One state DOT began
                       swapping funds in 2016 for 14 projects under a pilot program; a second state DOT ended
                       its fund swapping program in 2018 after swapping funds for 1 year; a third state DOT has
                       two fund swapping programs—swapping the same average amount of federal funds
                       annually in one program and swapping varying amounts annually in the other program; a
                       fourth state DOT began swapping funds in 2019 but says it intends to swap about $125
                       million in federal funds annually; a fifth state DOT began swapping in the first quarter of
                       2020 but says it intends to swap about $35.7 million annually. We were unable to confirm
                       whether one state DOT’s annual amount swapped was about the same each year or
                       varied.
                       36Connecticut  DOT officials said they attempt to make swapped amounts equal to federal
                       funds suballocated to urbanized areas with population over 200,000 and areas with
                       population of 5,001 to 200,000.
                       37We present 2019 data (see exceptions in the note to figure 1 below) as it was the most
                       recent data available when we began interviewing some state DOT officials.




                       Page 9                                                      GAO-21-88 Federal-Aid Highways
Figure 1: Percentage of States’ Reported Federal-aid Highway Funds Swapped for State Transportation Funds




                                        Note: The data presented are for 2019, except for Alabama, Colorado, New Jersey, and Wisconsin
                                        where we are presenting the most recent data these state DOT officials had available.



                                        Of the 15 states that swapped federal funds over the past 5 years,
                                        officials in two states, New Jersey and Wisconsin, told us that they ended
                                        their fund swapping programs in 2018. 38 Additionally, 37 states reported
                                        that they do not currently have a fund swapping program; however, seven
                                        of those states responded that they were or may be interested in
                                        establishing one. 39

Each of the 15 States                   The primary source of federal funds used in state fund swapping
Swapped STBG Funds                      programs is the portion of each state’s STBG program funds that must be
                                        suballocated to areas of a state based on population. Officials from each
                                        of the 15 state DOTs that swapped funds said that they swapped STBG

                                        38New Jersey state DOT officials said the reasons they ended their swap program
                                        included insufficient funds and lack of projects. Wisconsin state DOT officials said they
                                        ended their swap programs because the state’s authorizing legislation ended.
                                        39The total number of states is 52 because New Jersey and Wisconsin are included
                                        among the 15 states that have swapped in the past 5 years and the 37 that currently do
                                        not swap.




                                        Page 10                                                       GAO-21-88 Federal-Aid Highways
                                       funds. Nine of the 15 states swapped STBG suballocated funds, three
                                       states swapped STBG discretionary funds, and three states swapped
                                       both, according to state DOT officials we interviewed. In addition to
                                       swapping STBG funds, officials from four state DOTs said they also
                                       swapped federal funds in three of the four other core highway programs.
                                       One state, Oregon, swapped funds using funding from four of the five
                                       federal-aid highway core programs and was the only state to swap funds
                                       in as many core programs. An Oregon DOT official told us that they swap
                                       funds from four federal-aid highway funding programs because having
                                       local agencies develop projects with state instead of federal funds
                                       reduces the amount of state resources needed for oversight. Figure 2
                                       shows the federal-aid highway funding categories involved in the 15 state
                                       DOTs fund swapping programs.

Figure 2: Federal-aid Highway Program Funds that Have Been Swapped for State Department of Transportation (DOT) Funds




                                       Page 11                                            GAO-21-88 Federal-Aid Highways
Local Agencies Used      According to state DOT officials and documentation, local agencies
Swapped Funds to         primarily chose to administer road and bridge projects with swapped
                         funds. According to officials and documentation, about half of the 15 state
Primarily Develop Road
                         DOTs, local agencies used swapped state funds to develop some
and Bridge Projects in   combination of road and bridge projects, while officials for the remaining
Rural Areas              state DOTs said local agencies used swapped funds to develop other
                         projects in addition to road and bridge projects.

                         Local agencies that used swapped state funds undertook roads and
                         bridge projects such as road resurfacing and maintenance or bridge
                         rehabilitation. For example, DOT officials in one state said local agency
                         officials used swapped funds on bridge projects because many bridges
                         on the local system needed replacement or rehabilitation. The officials in
                         this state explained that using swapped state funds enables them to more
                         easily develop the bridge projects because state requirements apply,
                         which officials thought were less stringent than federal requirements.
                         Among the states where local agencies developed other types of projects,
                         an official in one state told us that in addition to including road and bridge
                         projects, local agencies developed Americans with Disabilities Act-
                         compliant projects and projects for signage and lighting. Another state
                         DOT’s official also mentioned road maintenance projects. Other less
                         common project types that local agencies developed with swapped state
                         funds included bike lanes, pedestrian crosswalks, and sidewalks,
                         according to some state DOT officials.

                         According to about half of the state DOT officials we interviewed, local
                         agencies tended to use swapped state funds to develop projects in rural
                         areas. Officials from one state DOT explained that its fund swapping
                         program is limited to counties, and 92 percent of the state’s county roads
                         are located in rural areas. Another local agency official told us that most
                         swapping occurs in rural areas because these projects are smaller and
                         less complex, and that developing them in conformance with federal
                         requirements would unnecessarily increase their cost. While about half of
                         officials cited projects in rural areas, some state DOT officials told us that
                         local agencies developed projects in both urban and rural areas, or in
                         urban areas only.




                         Page 12                                           GAO-21-88 Federal-Aid Highways
                             Officials GAO interviewed from state DOTs and selected local agencies
State DOTs and Local         said that they choose to participate in fund swapping because it reduces
Agencies Cited               the risk that local agencies will not comply with federal requirements,
                             increases project flexibility and control for local agencies, and may result
Flexibility and Other        in project delivery time and cost savings. The obstacles officials cited to
Anticipated Benefits         participating in fund swapping included a lack of sufficient state funds to
                             swap with local agencies, as well as the absence of state law authorizing
and Obstacles such           fund swapping.
as Lack of Funding
As Influencing Their
Participation in Fund
Swapping
Officials Cited Mitigating   State DOTs and selected local agency officials identified several potential
Noncompliance Risks,         benefits that factored into their decision to establish or participate in a
                             fund swapping program.
Increasing Flexibility for
Local Agencies, and
Potential Savings as
Among Anticipated
Benefits
Reduces the Risk of          According to state and local officials, state DOTs and local agencies may
Noncompliance with Federal   choose to swap funds because swapping has the potential to reduce the
Requirements                 risk of noncompliance with federal requirements. When using swapped
                             state funds, local agencies must comply with applicable state and local
                             requirements instead of federal requirements. According to officials from
                             12 of the 15 state DOTs and some of the local agencies we interviewed,
                             local agencies tend to be better equipped to comply with state rather than
                             federal requirements. The local agency officials we interviewed said they
                             find their state’s process more streamlined and better suited to local
                             projects.

                             Moreover, as we previously reported, noncompliance with federal
                             requirements by local agencies is a well-documented risk area. Many
                             local agency officials have experienced challenges administering federal-
                             aid projects and complying with applicable federal requirements. 40 Also,
                             many of the state DOT officials we interviewed said some local agencies
                             have limited resources or expertise with the federal-aid process, which

                             40GAO-14-113.




                             Page 13                                          GAO-21-88 Federal-Aid Highways
can make complying with federal requirements challenging. Officials from
two state DOTs added that this was particularly true in rural areas, and,
as noted above, many local agencies develop swapped projects in rural
areas. Fund swapping concurrently puts more federal-aid in state DOT
hands, and officials from most of the state DOTs we interviewed said the
state tends to be more familiar with the federal-aid process since they
regularly administer federal-aid projects.

Provides Agencies Greater Flexibility and Control over Local
Projects

According to officials from six state DOTs and some local agencies, fund
swapping can provide local agencies greater flexibilities in the use of
state funds when compared to their use of federal funds. In addition,
officials from four state DOTs and some local agencies reported that their
state’s fund swapping programs better met the local agencies’ needs. For
example, officials from two state DOTs told us that their fund swapping
programs allow local agencies to pursue projects with state funds that
they could not otherwise pursue with federal funds due to eligibility
requirements. An official from Alabama DOT said the state’s fund
swapping program expands project eligibility to all county roads classified
as minor collectors, which have limited eligibility under the federal STBG
program. According to the official, 36 percent of Alabama’s county roads
eligible for STBG funds are minor collectors and the mileage on these
roads is much greater than the percentage of federal-aid allowed to be
spent on them. In addition, a few state DOT officials reported their state’s
fund swapping program allows more local agencies to take advantage of
available funding. For example, an official from Idaho DOT said some
local agencies may not have the required matching funds to be able to
use federal funds, which, as mentioned previously, generally is 20
percent of a project’s cost. The official added that fund swapping could fill
a gap for local agencies unable to provide the required matching funds to
pursue federal-aid projects, since Idaho’s swapping program does not
require local agencies to provide matching funds to use swapped state
funds. 41

Officials from several of the local agencies and state DOTs we
interviewed also said that swapping funds and the resulting need to follow

41The Idaho Transportation Department prefers to call its program a fund exchange
program. As noted previously, we use the terms “fund exchange program” and “fund swap
program” interchangeably in this report.




Page 14                                               GAO-21-88 Federal-Aid Highways
state and local requirements instead of federal requirements provides
local agencies more control over their projects. For example, several
states allow local agencies to preference local contractors when using
state funds, which is prohibited when using federal funds. 42 According to
an Arizona DOT official, some local agencies requested establishing a
fund swapping program so they could hire local contractors and reinvest
in their communities. The official added that some local agencies in rural
areas also benefit by not paying for state contractors to travel long
distances for small projects that local contractors could complete.
Additionally, according to a Kansas DOT official, local agencies can
design projects better suited to their needs when following state
requirements.

However, a local agency may choose not to participate in fund swapping
because it prefers to maintain the state’s involvement that accompanies
the state DOT’s oversight over the use of federal-aid, according to a few
state DOT officials. Officials from two state DOTs said that some local
agencies, such as in smaller communities, may struggle or lack the
capacity to complete even state funded projects. For example, an official
from Indiana DOT said smaller communities without an engineer on staff
might prefer the state DOT to administer the project with federal-aid.

Puts Agencies in Better Position to Save Time and Money on Project
Delivery

Officials from all selected local agencies and 13 of 15 state DOTs we
interviewed said a benefit or potential benefit of fund swapping is that
local agencies can complete projects in a shorter amount of time. This is
in part due to the requirements attached to state funds, which tend to be
less stringent than federal requirements, according to most state DOT
officials. Some of the local agency officials also said they tend to be more
familiar with state requirements and more capable of administering state
projects, which they say streamlines the process and helps projects move
faster. An official from one local agency we interviewed estimated that
swapped projects saved 1 year on average based on early program




42Generally, certain services, such as engineering, for a project using federal-aid highway
program funds must be procured using the qualification-based selection method described
in the Brooks Act, 40 U.S.C. §§ 1101-1104. 23 U.S.C. § 112(b)(2). Under this method,
state DOTs are prohibited from considering in-state or local preference when evaluating,
ranking, or selecting a firm competing for the contract. 23 C.F.R. § 172.7(a)(1)(iii)(C).




Page 15                                                   GAO-21-88 Federal-Aid Highways
analysis, because local agencies have more control over projects when
funded with swapped state funds.

In addition to time savings, officials from 10 of the 15 state DOTs
interviewed said a potential benefit of fund swapping is that local
agencies can experience cost savings on projects funded with swapped
funds. For example, one state DOT official said that local agencies could
save money because they would not have to hire consultants to prepare
formal reviews that would otherwise be needed to comply with certain
federal requirements. As we have previously reported, local agency
officials have noted that federal-aid projects cost more than comparable
locally or state-funded projects due to compliance with federal
requirements. 43 Further, as we have reported, because federal
requirements apply to all projects regardless of scope and size—the
amount of effort and costs for meeting such requirements for lower-cost
projects can be disproportionate to the overall project costs. 44

Some state DOT officials reported that since fund swapping creates
efficiencies, local agencies may get more value by using state funds
rather than federal funds. Even with an exchange rate for swapped funds
at less than dollar-for-dollar, officials from five state DOTs said that local
agencies can experience cost savings on projects. According to a local
agency official speaking through a national association, a $0.75 on the
dollar exchange rate is a good deal in Alabama, because local agencies
no longer have to pay additional administrative costs to the state DOT
and contractors that they require when local agencies use federal funds. 45

Most state DOT officials also identified ways in which the state frees up
resources by fund swapping. According to most state DOT officials
interviewed, fund swapping reduces the amount of state oversight of local
agencies, because local agencies are administering fewer federal-aid
projects. When local agencies use federal funds, the state DOT is
responsible for overseeing those projects and ensuring federal
requirements are met, and officials from about half of state DOTs
interviewed said this can be a strain on the state’s resources. For
example, an Iowa DOT official said that prior to fund swapping there

43GAO-14-113.

44GAO-14-113.

45For example, Alabama DOT requires local agencies pay the state a 13 percent fee to
cover costs associated with bid letting when local agencies use federal funds according to
a state official.




Page 16                                                   GAO-21-88 Federal-Aid Highways
                             might have been as many as 150 locally administered federal-aid projects
                             at one time, which was challenging for the state to oversee. Iowa DOT
                             officials, along with officials from several other state DOTs, reported less
                             involvement by state staff in local projects as a result of fund swapping.
                             An Arizona DOT official added that fund swapping can free up state staff
                             to work on other highway projects.

Officials Cited Lack of      Lack of sufficient state funds was the most frequently reported obstacle to
Sufficient State Funds and   fund swapping. In response to our questionnaire, officials from 10 of the
                             50 state DOTs said that their state did not have sufficient state funds to
State Laws Preventing
                             exchange for local agencies’ federal funds. Moreover, some of these
Fund Swapping as Among       officials noted that their state DOT struggled to find enough state funds
Obstacles                    for the required 20 percent match to accept federal-aid for state
                             administered projects alone. In addition, New Jersey and Michigan ended
                             their fund swapping programs, in part, because they lacked sufficient
                             state funds to swap or there was uncertainty regarding the sufficiency of
                             state funds, according to state DOT officials. And as noted above, Indiana
                             DOT officials reported swapping funds only in years when sufficient state
                             funding is available.

                             Officials from eight state DOTs identified state law or budget process as
                             an obstacle to implementing a fund swapping program. For example,
                             Missouri law prohibits the use of state road funds on roads not owned by
                             the state. 46 According to the Missouri DOT, this effectively prohibits fund
                             swapping since local agencies would be using state funds on their own
                             local projects, likely involving non-state owned roads. Several other state
                             DOT officials reported similar restrictions on how state funds may be
                             used. In addition, Washington DOT noted that the state’s two-year budget
                             cycle does not allow for the flexibility to swap funds.

                             Officials from seven state DOTs characterized features of their
                             transportation programs that would make fund swapping impractical in
                             their state. In Delaware and several other states, state DOT officials told
                             us that local agencies do not regularly receive federal-aid, which would be
                             necessary for fund swapping. According to the North Carolina DOT, the
                             state maintains a vast majority of North Carolina’s major roads, so the
                             state DOT administers most of the federal-aid projects. In addition, local
                             agencies in North Carolina are largely responsible for administering
                             federal transportation alternatives funds on bicycle and pedestrian

                             46Mo.   CONST. art. IV, § 30(b); Mo. ANN. STAT. § 226.220.




                             Page 17                                                 GAO-21-88 Federal-Aid Highways
                        projects; however, North Carolina law prohibits the use of state funds on
                        bicycle and pedestrian projects. 47 For these reasons, according to the
                        North Carolina DOT, fund swapping would be impractical.

                        The impact of fund swapping on the payment of prevailing wages and the
Limited Data Exist to   application of other federal requirements cannot be definitively
Assess the Impacts of   determined due to limited data availability and for other reasons. As part
                        of measuring the impact of swapping, one might want to compare the
Fund Swapping and       number and type of project each of the 15 state DOTs administered with
Officials Had Mixed     swapped federal dollars to the number and type of projects local agencies
                        administered with swapped state dollars. For example, using fund
Views on the Impacts    swapping, a state could initiate additional projects with the federal funds
                        swapped from local agencies, resulting in more projects being subject to
                        federal requirements. Alternatively, a state could be increasing the federal
                        share on the same number of federal-aid projects, which could result in
                        fewer projects being subject to federal requirements.

                        However, data to assess these impacts are limited because officials from
                        the 15 states we interviewed generally do not track which state
                        administered projects were funded with swapped federal funds. 48 For
                        example, officials from most of these states said that within the STBG
                        program, the federal funds swapped by the local agencies are combined
                        by the state DOT with the other federal funds from that same federal-aid
                        highway program. The suballocated STBG funds swapped by local
                        agencies are combined with the other suballocated STBG funds that the
                        state already has and plans to use on state administered projects.
                        According to state DOT officials, the swapped federal funds are not
                        delineated as having been swapped when mixed with the rest of the
                        suballocated STBG funds. Therefore, because of the way state DOT’s
                        track these data, it is not possible to know which specific projects were
                        funded either in whole or part with swapped federal dollars versus non-
                        swapped federal dollars.

                        Moreover, assessing the impacts of fund swapping is further complicated
                        because it is not possible to know if a local agency would have
                        implemented the same number and type of projects with state DOT funds

                        47N.C.   GEN. STAT. ANN. § 136-189.11(d)(3)(c).
                        48Officialsfrom two states said they could track at least some of the federal-aid swapped
                        back to the state from the local agencies. However, an official from Connecticut said that
                        one project may receive federal-aid from several federal aid programs over multiple fiscal
                        years, making it challenging to isolate and assess the impact associated with the swapped
                        federal funds.




                        Page 18                                                  GAO-21-88 Federal-Aid Highways
that it implemented with federal-aid funds. For example, two local
agencies said the benefit of swapping was the increased flexibility to do
projects that may not be eligible for federal-aid, so local agencies may be
developing different projects with swapped state funds than they might
have done with federal funds. Consequently, it is not possible to
determine whether and to what extent any potential impacts would have
occurred in the absence of swapping.

Without the information discussed above, it is not possible to compare the
number of projects in a given state subject to federal requirements with
and without swapping. Thus, the impact of swapping on project delivery,
as well as the number of projects subject to federal requirements, such as
the Davis-Bacon Act and the Buy America requirement, cannot be
definitively determined. Even if such data were available, an analysis
comparing the number of projects in a given state subject to federal
requirements with and without swapping is difficult because one project
might receive federal-aid from several federal-aid programs over multiple
fiscal years, making it challenging to isolate and assess the impact
associated with the swapped federal funds, even within one project.
Moreover, about half the states engaging in fund swapping do so with
less than 6 percent of their federal-aid funds, which may limit the extent of
potential impacts such an analysis might find.

However, the federal-aid highway program requirements suggest the
following:

•   First, the same amount of federal-aid highway funds — the
    expenditure of which is subject to federal requirements and is made
    available to the state by law — should be expended statewide with
    fund swapping as would be expended without swapping. Further,
    according to state DOT officials in states with fund swapping
    programs, they ensure that federal funds are expended in compliance
    with federal requirements.
•   Second, even with fund swapping, the amount of suballocated STBG
    funds in areas with populations exceeding 200,000 (TMAs) should
    remain the same. This is because, according to STBG program
    requirements, each TMA should have its formula amount of the TMA
    suballocation expended within it. Officials we interviewed from the
    Kansas DOT said that they do not swap TMA funds for that reason.
•   Third, for areas with a population of 200,000 or less, fund swapping
    could increase or decrease the amount of suballocated STBG funds
    expended in a given area. This is because for these non-TMA



Page 19                                          GAO-21-88 Federal-Aid Highways
    population categories, federal law requires that those STBG
    suballocated funds be expended in each population category, not in
    all areas or individual local agencies in that category. Thus, for
    example, if a local agency swaps some of its federal funds, the state
    may choose to spend the federal-aid on a project in another area of
    the state in the same population category. Should a state make this
    decision, fewer projects in the original local area may be subject to the
    federal prevailing wage and other federal requirements, depending on
    what state laws are applicable in that state. In contrast, the area that
    received the swapped funds would experience an increase in the
    number of projects subject to these requirements.

We attempted to collect data from the 15 state DOTs to determine what is
known about the impact fund swapping has on project delivery, the use of
local contractors, and wages. However, no state DOT we contacted
collected this type of information. In the absence of available data, state
DOT officials offered mixed opinions on the impact of swapping in their
states. For example, state DOT officials were split in their opinions about
the impact of swapping on the number of projects subject to federal
requirements. Officials from five state DOTs that engage in fund
swapping stated they believed that swapping did not reduce the number
of projects subject to federal requirements, while officials in five states
thought it did. Officials in five states said they did not know. The state
DOT officials that thought that swapping might reduce the number of
projects subject to federal requirements explained that projects funded
with swapped state dollars tend to be smaller and more numerous,
whereas the federally funded projects tended to be larger and fewer.
Further, officials from the state DOT in Utah said that when they engage
in swapping, they do so to consolidate federal funds on existing federal-
aid projects. They noted they would not initiate a swap that would put
federal funds on a project that was not already planning to use them,
which could potentially result in fewer projects in Utah subject to federal
requirements.

Most, but not all, state officials stated that the impact on prevailing wages
is minimal. Just under half of the states that swap funds told us that they
have a state prevailing wage laws, applicable to non-federally funded
projects. 49 Officials in four states that told us they do not have state

49State prevailing wage laws vary, according to the U.S. Department of Labor. For
example, one state DOT official said the locally prevailing wages determined under the
law of its state was higher than the locally prevailing wages determined under the Davis-
Bacon Act.




Page 20                                                   GAO-21-88 Federal-Aid Highways
                  prevailing wage laws said that the wages paid on their state-funded
                  swapped projects were not impacted by the lack of federal prevailing
                  wage requirements under the Davis-Bacon Act. Officials from two of
                  these four states elaborated that they paid local wages in line with the
                  federal prevailing wages because of economic conditions in their states.
                  However, officials from two other states said that because the state did
                  not have a prevailing wage law that applied in absence of the Davis-
                  Bacon Act, it potentially lowered the cost because contractors and local
                  agencies could pay on-site workers’ wages lower than the federal
                  prevailing wage, particularly in rural areas. An organization representing
                  labor groups in Iowa similarly said that swapping in states that do not
                  have a prevailing wage law may result in lower wages paid to workers.

                  State DOT officials said that the potential impact of swapping programs
                  on other federal requirements varied depending on what requirements
                  each state had in place. Officials from a few states, for example, stated
                  that they have laws similar to federal requirements such as Buy America,
                  while officials from a few other states said they do not. Ohio state DOT
                  officials said that their state has a law similar to Buy America. 50 Opinions
                  on swapping programs’ potential impact on federal Disadvantaged
                  Business Enterprise (DBE) program requirements similarly varied. In
                  Connecticut, state DOT officials said that the state has a similar small
                  business enterprise rule, which local agencies are required to follow when
                  implementing a state-funded transportation project. 51 Connecticut officials
                  said that the state law may increase opportunity for these businesses.
                  Officials from Utah DOT said that the state does not have requirements
                  similar to those under the federal DBE program. They also said they were
                  not aware of how, if at all, using swapped state funds may have affected
                  the project participation of small businesses owned and controlled by
                  socially and economically disadvantaged individuals.

                  We provided a draft of this product to the U.S. Department of
Agency Comments   Transportation for comment. The U.S. Department of Transportation
                  provided technical comments, which we incorporated as appropriate.

                  As agreed with your office, unless you publicly announce the contents of
                  this report earlier, we plan no further distribution until 30 days from the
                  report date. At that time, we will send copies to the appropriate
                  congressional committees, the Secretary of the U.S. Department of

                  50OHIO    REV. CODE ANN. §§ 153.011, 5525.21
                  51CONN.    GEN. STAT. ANN. § 4a-60g.




                  Page 21                                          GAO-21-88 Federal-Aid Highways
Transportation, relevant state Departments of Transportation, and other
interested parties. In addition, the report will be available at no charge on
the GAO website at https://gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-2384 or RepkoE@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made key contributions to this report
are listed in appendix I.




Elizabeth Repko
Acting Director
Physical Infrastructure




Page 22                                           GAO-21-88 Federal-Aid Highways
Appendix I: GAO Contact and Staff
                   Appendix I: GAO Contact and Staff
                   Acknowledgments


Acknowledgments

                   Elizabeth Repko, 202-512-2384 or repkoe@gao.gov
GAO Contact
                   In addition to the contact named above, Steve Cohen (Assistant Director);
Staff              Sarah Jones (Analyst-in-Charge); Jennifer Clayborne, Sarah Green,
Acknowledgements   Delwen Jones, Ned Malone, Mary-Catherine P. Overcash, and Malika
                   Rice made key contributions to this report.




(103805)
                   Page 23                                       GAO-21-88 Federal-Aid Highways
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