United States General Accounting Office Testimony GAO For Release Operations of and Outlook for the on Delivery Transportation Trust Funds Expected at lo:00 a.m. EDT Tuesday May 8, 1990 Statement of John W. Hill, ,Jr. Associate Director, Transportation Issues Resources, Community, and Economic Development Division Before the S:Ahcommitte oc InX,Testigations and Oversigh: Committee on Public Works and Transportation tinited States House of Representatives f34&w-l p-/i SC/ GAO/T-RCED-90-78 GAO Form 160 (12/87) Mr. Chairman and Members of the Subcommittee: I am pleased to have this opportunity to testify on the operations of and outlook for the Highway and Airport and Airways trust funds. As your committee examines how best to use the revenues credited to the trust funds, items warranting attention include unexpended balances as well as trust fund revenues that could be made available to meet our burgeoning surface and air transportation needs. As you know, critical needs confront the nation's highway and bridge network. Yet, a $10.6 billion balance exists in the Highway Account of the Highway Trust Fund. Why? The primary reason is that limitations are placed on the amount of funds states are allowed to obligate. In addition, states have not used an estimated $1 billion in the trust fund revenues available to be obligated. State officials told us they do not use these funds primarily because they provide a cushion against an uneven flow in federal funds. Under recent projections, the trust fund balance at the end of its life will exceed outstanding commitments by an estimated $6.4 billion. This means that a one-time increase in authorizations of $3.4 billion is possible while still retaining a safety cushion of $3 billion in the fund--the maximum federal transportation officials believe is required to provide for unforseen disruptions to highway taxes or inaccurate revenue projections. Finally, to prevent future build-ups in the trust 1 fund balance, obligation ceilings should more closely approximate expected income --revenues and interest--to the trust fund. The nation's aviation needs are similarly critical. The administration has proposed raising user fees to fund future Federal Aviation Administration (FAA) equipment and operations costs. However, air traffic control modernization requirements, by themselves, do not necessitate an increase in user fees. In the near-term, the fund can accommodate a greater share of the agency's operations expenses without increasing fees--albeit not at the spending level proposed by FAA. An increase in user fees will be needed in the fiscal year 1994 time frame to support the agency's proposed spending plans for equipment and operations. My testimony today will focus on the operations of each of the trust funds, including yearly revenue and expenditure streams: reasons for the buildups in the two funds' balances: and our observations on the process for drawing down the balances. Unfortunately, the severity of the general fund deficit has made the concept underlying trust funds--that revenues be spent for their intended purpose--quite different in reality, because various trust fund balances are used to mask the deficit. In the current budget environment, the reality is that any accelerated drawdown of the Highway and Aviation Trust Fund balances can be accomplished only by increasing the deficit or at the expense of other federal programs. 2 Starting with the Highway Trust Fund, I will focus first on the Highway Account. HIGHWAY TRUST FUND--THE HIGHWAY ACCOUNT The federal Highway Trust Fund was established in 1956 as a mechanism to support and expand the rapidly growing Federal-Aid Highway Program. The program includes the Interstate, primary, secondary, and urban highway systems, and accounts for over 80 percent of all vehicle miles travelled. The trust fund is funded through user fees such as the federal g-cent per gallon gasoline tax, taxes on tires, heavy vehicle-use taxes, and interest on the trust fund balance. This fund is used to reimburse state governments for money spent improving the federal-aid highway system. The federal government generally pays 75 percent of a project's cost, although for some projects, such as on the Interstate system, the federal share may be as high as 90 percent. The trust fund is reauthorized periodically, most recently in 1987. The 1987 Highway Act authorized roughly $14 billion in funds for the Federal-Aid Highway Program for each year through fiscal year 1991. Most federal programs require congressional authorizations to be followed by appropriations that grant approval for spending or obligating program funds. Programs within the federal-aid highway system, however, generally bypass this two-step process. Rather, federal-aid authorizations are made available for obligation1 without appropriations through what is called 81contract authority." However, not all authorized funds may be available in a given year for states' use. The Congress may impose obligation ceilings on authorized highway funds, which, according to the Department of Transportation (DOT), are part of an overall effort to control ,-federal spending. For instance, while $22.1 billion was available for highway programs in fiscal year 1989, the obligation ceiling was set at $12.2 billion for that year. With the exception of $2.2 billion available for programs exempt from the ceiling, the total of states' commitments for highway projects could not exceed $12.2 billion. Hiahway and Bridue Needs Are Escalatinq Difficult decisions face the Congress on the amount of federal funds that should be directed to highway and bridge needs. For instance, the Interstate Highway System is vital to our transportation network, as it carries slightly more than 20 percent lAn obligation is a commitment of the federal government to reimburse states for the federal share of a project's eligible cost. 4 of vehicle traffic. DOT statistics show that over 40 percent of the Interstate is in barely tolerable or worse condition. Further, the federal Interstate preservation program, commonly known as the Interstate 4R program, is currently funded at $2.8 billion a year, but the Department of Transportation (DOT) estimates $4.2 billion to $5.5 billion will be needed annually through the year 2005 in federal funds for this program, if the federal cost share remains the same. In addition, the number of deficient bridges on the federal- aid system has grown since 1982. Bridge deficiencies on the federal-aid system increased from about 70,000 to 77,000 from 1982 to 1988, according to DOT statistics. Much of this increase is due to the rapid growth in deficient Interstate bridges. Federal transportation statistics show an increase in deficient Interstate bridges from approximately 4,900 in 1982 to almost 8,200 in 1988. Build-up in the Hishwav Trust Fund Balance In the first 12 years of its existence, the trust fund balance remained at $1 billion or less. (See fig. 1.) After a rapid growth in the 197Os, the balance peaked at $12.6 billion in 1979. Through fiscal year 1989 the trust fund has accumulated revenues and interest totaling $219.6 billion and has made available $209 billion to the states. The current trust fund balance is 5 $10.6 billion, with projections estimating a 1991 trust fund balance of $11.6 billion. The effect of trust fund revenues and expenditures on the trust fund balance is illustrated in figure 2. The dashed line represents income to the trust fund. From 1983 to 1989 income to the trust fund has generally increased. The heavy line indicates expenditures from the fund which were at times greater than, equal to, and less than income. The thinner line represents the trust fund balance. The trust fund balance represents the excess of trust fund income over expenditures. Since the beginning of the trust fund in 1956, the interest earned has totaled $14.7 billion through 1989. In recent years, interest earned has ranged from $800 million to $1.1 billion per year. We see no distinction in revenues credited from user receipts and revenues credited as interest income in terms of the amounts to be made available from trust fund balances. Reasons for the Build-up in the Hiqhwav Trust Fund Balance The Highway Trust Fund balance exists, in large part, because of funds that are not obligated for highway projects. These unobligated funds occur for several reasons. (See fig. 3.) A primary reason accounting for the Highway Trust Fund balance is congressionally established obligation ceilings, which constrain 6 the federal funds available for states to spend on highway projects. The funds that are restricted from states' use accumulate in the trust fund, contributing to the growth in the fund's balance. In fiscal year 1989, the Highway Trust Fund balance was $10.6 billion and ceilings accounted for approximately $8 billion of the balance. Another explanation for the trust fund balance is that states did not obligate approximately $1 billion in funds they had accumulated that were exempt from obligation ceilings. State officials said they have held on to these funds primarily to protect themselves against an uneven flow of federal funds. Obliqations Ceilinss Constrain States' Snendinq The authorization of federal-aid highway funds is not a guarantee that those funds will be available for states to use in a given year. In the late 196Os, the administration instituted impoundments, which temporarily forced states to delay obligations. About a decade later, these impoundments were replaced by congressionally set obligation ceilings. The effect was the same-- both restricted states from obligating the total amount of funds authorized. For instance, in 1983 the obligation ceiling, set at $12.4 billion, permitted states to spend close to the amount 7 originally authorized by the Congress. In 1989 the obligation ceiling was set at approximately $2 billion below the original authorization, according to DOT records. To exacerbate the situation, the funds that are restricted from obligation in one year carry over to the next year. Although these unobligated funds could be made available in addition to new authorizations in the next year, newly imposed obligation ceilings restrict states from spending these funds. (See fig. 4.) The result is that the margin between funds which states may obligate as defined by the ceilings, and the funds which could be available for state spending, continues to widen. If the states were permitted to obligate more federal-aid funds, several indicators point to states' ability to provide the necessary matching funds. I would like to make note of two such indicators-- annual requests for additional obligation authority and states' use of a procedure that enables them to start projects without obligating federal funds. A redistribution of obligation authority occurs annually after August, at which time obligation authority released by some states is given to states requesting additional authority. For fiscal years 1987 through 1989, states requested between $2.4 billion and $2.8 billion in additional obligation authority, although approximately $800 million was actually available for redistribution. Over the 3-year period, states' requests totaled nearly $8 billion. 8 States are able to advance the construction of approved federal projects prior to receiving obligation authority. In essence, under advance construction procedures states use their own funds until additional federal obligation authority becomes available. When it does become available, states convert the projects to the appropriate federal program categories and funds are obligated to cover the federal share of project costs. Since 1987 the advance construction balance ranged between $2 billion and $2.6 billion. Some Hiohway Prosrams Are Exempt From Obliaation Ceilings The Congress also authorizes highway funds which it exempts from the obligation ceilings. When the Congress exempts programs from the obligation ceilings, it permits states to spend 100 percent of the funds authorized for that program. Exempt funds represent a small portion of the entire highway program. For instance, since 1983 the amount of funds not subject to obligation ceilings has ranged annually from approximately $700 million to $2.2 billion. The Congress may designate any number of programs as exempt, and may change the categories from year to year. The most significant exemptions from obligation ceilings, in dollar terms, are the minimum allocation program and demonstration projects. The minimum allocation program guarantees that states 9 receive back at least 85 percent of their revenue contributions to the trust fund. In fiscal year 1990, 19 states received minimum allocation funds. Minimum allocation funds account for approximately 67 percent of the exempt funds, and demonstration projects account for 31 percent. The remaining 2 percent is comprised of a variety of small programs. Although states are free to use all of these funds, the unused amount has grown from $0.2 billion in fiscal year 1983 to the fiscal year 1989 level of approximately $1 billion. (See fig. 5.) The bulk of this $1 billion is composed of minimum allocation funds, which, according to state transportation officials, are held by states as protection against an uneven flow of federal funds. Saving these funds is particularly attractive to states because minimum allocation funds may be used in a variety of program areas, unlike other highway funds, which are generally restricted to use within a specific road system. The Fund Could Support a Hisher Authorization Level A common belief is that the trust fund balance represents a surplus. This view, however, is not accurate since the balance plus projected future revenues will be needed to cover commitments. For instance, the fiscal year 1989 trust fund balance of $10.6 billion is needed to cover commitments (unpaid authorizations), but 10 it is not sufficient to cover all outstanding amounts that were authorized through 1989. The authorized amounts outstanding, including those constrained from state spending through obligation ceilings, totaled about $31.6 billion in fiscal year 1989. Consequently, an apparent shortfall of $21 billion exists. This situation, however, is permitted because when the Congress established the trust fund, it also established a safety mechanism to ensure that sufficient funds would be available to liquidate commitments at the end of each fiscal year. As revised by the Surface Transportation Assistance Act in 1982, the Byrd Amendment now permits the total projected commitments at the end of the fiscal year to exceed the trust fund balance so long as income projected for the following 2 years is sufficient to cover the difference. In a May 1989 report to the Senate Appropriations Committee, we pointed out that the trust fund could support a higher level of program activity because future total revenues over the fund's authorized life are expected to exceed the level of future authorized commitments. At the time of our review, the anticipated amount of funds in excess of all commitments was $7.4 billion. Federal transportation officials, however, believe that a safety cushion of between $1 billion and $3 billion would be necessary to guard against unforeseen disruptions to highway tax 11 revenues or inaccurate revenue projections. Further, since the time of our review, $1 billion in Emergency Relief funds was authorized because of the highway and bridge damage caused by the October 1989 Loma Prieta earthquake in California. Assuming a conservative safety cushion of $3 billion and taking into account the additional $1 billion authorized, the trust fund could support $3.4 billion in additional authorizations. Now I would like to address the Mass Transit Account of the Highway Trust Fund. Hiqhwav Trust Fund --Mass Transit Account The Highway Revenue Act of 1982 established a special Mass Transit Account (MTA) in the Highway Trust Fund to fund several Urban Mass Transportation Administration (UMTA) grant programs, including the Section 3 Discretionary Grants and Section 8 Planning Grants programs. MTA receives revenues from 1 cent of the motor fuel tax. Through fiscal year 1991, MTA is expected to receive income of about $13.5 billion. However, about 28 percent, or $3.8 billion, of the MTA funds have either not been authorized to be obligated ($3.1 billion) or not been obligated by UMTA because of appropriations limitations ($.7 billion). Of the approximately $13.5 billion MTA received in income, the Congress has provided permanent contract authority to obligate 12 $10.4 billion through fiscal year 1991. However, the annual appropriations process has placed limitations on obligations of the MTA funds to about $9.7 billion. Consequently, UMTA is not authorized to obligate about $3.8 billion. UMTA is expected to obligate all of the $9.7 billion MTA funds authorized to be obligated and to incur expenditures totaling about $5.7 billion through fiscal year 1991. Therefore, about $4 billion of the obligations are not expected to be funded at the end of fiscal year 1991. This occurs because obligated funds remain available until expended, and expenditures for some projects, such as construction of new transit systems, are incurred over a number of years. Finally, the MTA balance at the end of fiscal year 1991 is expected to be $7.8 billion. However, about $4.0 billion of this balance is committed to prior years' obligations that have not been funded. As previously discussed, the remaining MTA balance consists of the $3.8 billion funds not authorized to be obligated. Now I would like to address the Aviation Trust Fund. AIRPORT AND AIRWAY TRUST FUND The Airport and Airway Trust Fund, also known as the Aviation Trust Fund, was established in 1970. The trust fund is financed by 13 excise taxes levied on air passengers, air cargo, and general aviation fuel. The fund supports all airport grants and capital improvements, such as new radars and traffic control towers. Within certain limits set by the Congress, some of the remaining money can be used to cover the FAA’s operations expenses. That portion of FAA's operations expenses not paid from trust fund revenues must be financed from the general funds of the U.S. Treasury. The income generated by the trust fund--revenues and interest-- is shown in figure 6. Use of the Trust Fund Generally, receipts have exceeded trust fund spending. The current $14.6 billion balance exceeds outstanding commitments by more than $7.6 billion, and, in that sense, the fund has a surplus. (See fig. 7.) This surplus traces to congressional restrictions on spending for FAA operational expenses and to slower spending on air traffic control modernization than authorized by the Congress because of delays in project development. Trust fund expenditures for operations have been restricted since 1971. Although the Congress has allowed FAA to spend aviation user fees to cover operations expenses since 1976, there are limits on how much the trust fund can contribute for operations. The overall cap on trust fund spending for operations 14 is much less than the burden created by the system's users.2 The maximum allowable amount that may be spent for operations is further reduced if spending targets for capital programs are not met. If it were not for these limitations, there would be no surplus. In fact, if the users paid for all the costs occasioned by their use, then the trust fund would be running a deficit of more than $1 billion annually. In a 1988 study the Congressional Budget Office concluded that private aviation (commercial and general) operations are responsible for about 85 percent of the costs of FAA's aviation programs, while public aviation (primarily military) operations are responsible for the remaining 15 percent. In 1988 three- fourths of FAA's operations expenses were paid by the General Fund. Had private sector users covered all of the costs associated with their use, only one-fourth would have been paid by the General Fund.3 Reasons for Build-Uv in Trust Fund Balance In addition to the overall cap on spending for FAA's operations, there is also a penalty provision that reduces the 2Trust fund spending for operations is currently capped at an amount equal to 50 percent of the total amounts available for airport grants, facilities and equipment, and research and development. 3 The Status of the Airport and Airway Trust Fund, Congressional Budget Office, Washington, D.C., Dec. 1988. 15 maximum amount that can be spent for operations in proportion to any shortfall in spending on capital programs.4 If not for this penalty clause, the trust fund, rather than general revenues, would have been used to fund $6.6 billion for FAA operations between 1983 and 1990.5 These unspent funds plus their accrued interest--92.1 billion--equal $8.7 billion. This exceeds the estimated fiscal year 1990 surplus of $7.6 billion surplus by over $1 billion. The Congress responded to the growing trust fund balance by adopting the trigger tax provision of the Airport and Airway Safety and Capacity Expansion Act of 1987. While the spending cap limits trust fund outlays for FAA's operations costs, the trigger tax provision reduces trust fund taxes, and therefore income to the fund, by 50 percent, if capital spend ing fa ils to meet congressional targets.6 The Congress chose to postpone activating the trigger tax until next year. 41n the Airport and Airway Safety and Capacity Expansion Act of 1987, the penalty clause reduced the amount of FAA's operating costs that could be covered by the trust fund. The annual maximum amount for operations is reduced by twice the amount by which the actual amounts made available for these programs fall short of levels specified in the law. 5Furthermore, aviation excise tax revenues of $1.18 billion in fiscal year 1981 and $1.04 billion in fiscal year 1982 were not credited to the trust fund, but remained in the general fund. 6The trigger provision reduces aviation excise taxes by 50 percent if the sum of the obligation limits for airport grants and appropriations for facilities and equipment acquisition and research and development for 1988 and 1989 is less than 85 percent of the total amounts the Congress authorized. 16 Finally, the trust fund balance is large because FAA has experienced delays in modernizing the nation's air traffic control system. Initiated in 1981, FAA's National Airspace System (NAS) Plan was designed to replace computer, radar, and communication equipment. Our prior work has found that the delays have resulted primarily from unrealistic initial schedules and problems in developing new technologies.7 System development delays are related to FAA's underestimating (1) the complexity of highly automated systems, (2) the time needed to develop system software, and (3) the interdependencies among systems. In addition, contractors have been unable to perform on schedule. Major systems whose schedules suffered major delays include the $4.4 b illion Advanced Automation System, the $892 million Vo ice Switching and Control System, and the $495 million Mode S Communications System. Modernization problems have led to the accumulation of unspent balances in the trust fund. In addition, initial cost estimates are rising. This will significantly impact future trust fund expenditures. FAA now projects that the NAS Plan will cost $4 billion more than the original $12 billion estimated. Furthermore, because more projects are being added, total air traffic control modernization costs will be even greater. Indeed, if the costs of all associated projects to modernize the system are included, the total will be about $27 billion through the year 71ssues Related to an Indevendent FAA (GAO/T-RCED-88-45, June 2, 1988). 17 2000.8 FAA now acknowledges that modernization will need continuous funding, and not end in 1991 as its preliminary cost- benefit analysis for the NAS Plan indicated. This year, the administration is proposing that the trust fund be used to cover 85 percent of FAA's total budget beginning with fiscal year 1991 --thereby eliminating the general fund subsidy. In fiscal year 1990, the trust fund is expected to pay for only about 58 percent of FAA expenditures. To meet this expanded use of the trust fund and to pay for modernization, the administration has proposed raising passenger ticket taxes, which form a large bulk of such fees, from 8 to 10 percent. Increased modernization costs and expanded use of the trust fund to pay for operations expenses--albeit not at the level desired by the administration--do not necessarily require an immediate increase in user fees. Figure 8 illustrates how current trust fund user fee revenues combined with existing uncommitted balances could be used to cover 75 percent of the entire FAA budget. Fees must be increased only if the fund is relied on to cover 85 percent of the FAA budget. Indeed, the surplus would be depleted by fiscal year 1994 if fees are not increased and proposed expenditures are maintained. On the other hand, if the trust fund's share of FAA's expenses is maintained at the current level of about 58 percent and if user fees continue at the existing 8FAA Aooronriation Issues (GAO/T-RCED-89-20), Apr. 4, 1989). 18 levels, the surplus could rise to about $11 billion in fiscal year 1995. This concludes my testimony. I will be glad to answer any questions at this time. 19 Figure 1 Highway Trust Fund Balance Growth Highway Account-FY 1957-91* Dollars in Billions - 14 10 a 6 4 2 0 Change in Highway 7 lust Fund Balance Highway Accoun -FY 1983-91 Billions of Dollars i1 16 14 12 IO a 6 / ,‘ / / / ’ -- 4 I I I I I I 1986 1987 1988 1989 1990* 1991’ 1983 1984 __-. 1985 I----I Balance m Expenditures a Income *Represents FHWA PrOjeCtiOnS Figure 3 - -.-_-- -.. ~-__~- ~~- Total Unobligated Highway Funds Fiscal Years 19834989 /Dollars in Billions $10 / 1I $8 $7.6 $8 $6.9 /.----. -71 $6.2 / $6 $4.6 /---- / $3.6 -. $4 $2 _L $0 1983 1984 States’ Expenditures of Available Funds* Fiscal Years 1983-1989 $19.8 $19.2 $19.3 ,’ ,.- -----Tl r--- / 1984 1985 1986 1987 1988 1989 19’83 .____-_-. ___-___ _ m State Obligations @%%k! Funds Available l Funds Subject to Obligation Ceiling Figure 5 Obligation of Exempt Funds* Fiscal Years 1983-1989 Dollars in Billions ,/,’ $2.5 $2 $1.5 $1 $0.5 / $0 1983 1984 1985 1986 1987 1988 1989 m Obligated Funds @@# Funds Available* l Funds Exempt from Obligation Ceiling r i (d m z 3 LL 5 I= t c 3 .-0 3 k Impact of Fee Increases and Recovery Factors on the Aviation Trust Fund Surplus in Billions of Dollars 12 r--- 10 I //-e-------- Fiscal Years - Fee Increase, 85% RF + No Increase, 58% RF Note: The Recovery Factor (RF) is the percentage of FAA’s needs paid by the Aviation Trust Fund.
Operations of and Outlook for the Transportation Trust Funds
Published by the Government Accountability Office on 1990-05-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)