Transportation Infrastructure: Flexibility in Federal-Aid Funding Essential to Highway Program Restructuring

Published by the Government Accountability Office on 1990-12-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United Bates   General Accounting Once

                 Flexibility in Federal-aid Funding
                 Essential to Highway Program

                 Kenneth M. Mead
                 Director, Transportation Issues
                 Resources,Community, and Economic
                 Development Division

                 Subcommitteeon Water Resources,Transportation,
                 and Infrastructure
                 Committee on Environment and Public Works
                 United StatesSenate

GAOITRCED-9X-4                                                GAO Form 160 (12/‘37)
Mr. Chairman     and Members of the Subcommittee:

        I am pleased to have this opportunity      to testify      on
transportation       issues of importance  to the nation     and Nevada.   As
you know, GAO is examining        a number of issues for this subcommittee
related     to the federal-aid    highway program reauthorization.       The
testimony      today will   draw upon our ongoing as well as completed
work in this area.

        The U.S. Department      of Transportation      estimates     that about $29
billion    will    be needed annually    by all units of government to
maintain    highways at 1985 levels       and to meet bridge needs.           As you
noted at Nevada's transportation          summit earlier       this year, Nevada
alone will      ne'ed nearly   a half a billion    dollars     annually    to meet
its transportation        needs over the next ten years.           This represents
about $3 billion       more than the $1.6 billion        Nevada expects to have

       It appears,        however, that the nation's          and Nevada's needs are
not likely       to be fully       met for three reasons.          First,     federal
funding      formulas     designed to achieve national           goals are not always
fully    aligned     with state highway and bridge needs.                   Second, recent
budget agreements            dim the prospects      for additional        federal
assistance.         Finally,     the Administration       is presently        drafting  a
reauthorization         proposal     that would shift       more of the financial
responsibility         for highway projects         to the states.

         Given future    financial     constraints,      the congressional
challenge     will  be to design a federal-aid           highway program that
strikes     a balance between national          investment      priorities    and
individual     state needs.        The current     highway program accommodates
individual     state needs, to a certain           degree, by allowing        all states
to (1) transfer      a portion      of their    total   federal      funds among the
four highway systems (Interstate,              primary,    secondary,      and urban
systems),     and (2) use their       own funds in advance of federal
reimbursements.            In addition,     a demonstration         program in five
states       is testing      how states might benefit         from increased         funding
flexibility        through pooling       funds from their         secondary and urban
highway systems and bridge program.                   Our work suggests that any
future       highway program,       at a minimum, should retain             these
flexibilities         to allow states to continue           to meet their         highway and
bridge needs.           Further,    federal   attention     must look beyond single
mode boundaries          to address the escalating          traffic       in the air and on
our roads.

        Our testimony     today will     (1) show how states have used
existing     federal-aid     highway program flexibilities      and other
funding mechanisms to better           meet their   needs and (2) suggest
options    for restructuring       the federal-aid     highway program.   Before
discussing      these topics,     I will    briefly comment on the status of
the nation's       and Nevada's highways.


        Serious deterioration          confronts    the nation's  federal-aid
highway system and bridge network.                 To illustrate,   the Interstate
system represents          only 1 percent       of all roads but carries      over 20
percent     of vehicle      traffic.     In 1988, the Department       of
Transportation        (DOT) estimated        that over 40 percent     of the
Interstate     system was in fair or poor condition.              Appendix I
provides     an illustration         of poor pavement.

        Increasing      congestion    is compounding the problems caused by
deterioration       on the nation's       roadways.     In 1989, about 53 percent
of urban Interstate          travel   occurred    under congested     conditions.
Travel on Nevada's urban Interstate's               was under congested
conditions       46 percent     of the time in 1989.        Congestion's     growing
severity      is also illustrated       by vehicle     miles traveled.
Nationwide,       vehicle    miles traveled     increased    approximately      38
percent between 1980 and 1989.               Appendix II shows that Nevada's
vehicle    miles traveled       increased    more than 50 percent         over this
period --from    just over      6 million    miles to 9.4 million         miles.

        DOT anticipates       that states will        increasingly       rely on the
Interstate      resurfacing,        restoration,    rehabilitation,          and
reconstruction        (I-4R) program to address congestion                 relief through
lane widening.l          In fiscal      year 1989, states        used over 13 percent
of I-4R funds for lane widening.                 DOT projects,       based on state
provided     information,       that about 50 percent           of I-4R funds will      be
used for lane widening            through the year 2005.

        DOT's draft     reauthorization           proposal    emphasizes    federal
funding     for interstate        preservation.         However, it also recognizes
the need for increased            federal      assistance      in relieving    congestion.
DOT would require         states     to develop congestion            management systems
and would provide         financial       assistance       for such operational
improvements        as preferential         treatment      of high occupancy vehicles
on certain      highway systems.            This aspect of DOT's proposal           may be a
step in the right         direction       in developing        an effective    approach for
mitigating      congestion.         However, DOT should ensure that its
congestion      relief    strategy      is coordinated         on the federal     and state
levels     and provides       for an evaluation          of program results.

        Now I would like to turn to the matter of how states                     use
federal    funding mechanisms to better meet their needs.


       While federal-aid    highway program funding      levels    must be
aligned    to address national     priorities,   they are not always?in      full
accord with state needs.        States have different      transportation
problems and the magnitude       of any particular    problem varies      among

knder  the I-4R program,           reconstruction       can include      lane   widening
among other activities.
and within     states.    The challenge  to the existing     highway program
is to provide       enough flexibility  so that individual       states can meet
their     high priority   needs while also addressing      national

       The current    federal-aid highway program accommodates
individual    state needs to a certain    degree by allowing   states to
 (1) transfer    funds among programs for the four highway systems, and
 (2) use their     own funds in advance of federal  reimbursements.

States Are Transferrino     Funds
Amoncf Federal-Aid   Hiohwav Proaramq

       Existing    federal     legislation       permits   states  to transfer     a
percentage      of their    federal      highway funds between specified
programs for the four federal-aid                highway systems.       For instance,     a
state may transfer         20 percent       of its Interstate     preservation     (I-4R)
funds to the primary          program.2       A state may also transfer        up to 50
percent    of its federal        urban funds to the primary          system and vice-

         Thirty-five       (35) states have transferred        a total   of over $800
million,       representing     about 2 percent     of total    highway program
obligations,          among programs during    fiscal    years 1988 through       1990.
Nevada also transferred            about $19 million,     or about 8 percent        of
the $233 million          the state obligated     over this period.        Most of
Nevada's funds ($13.5 million)             were transferred       from the I-4R
program to the primary            program.   Nevada state transportation
officials         told us that while substantial       Interstate      needs exist,
even more pressing           needs were on its primary       roads.     Appendix III
shows highway funds transferred             by Nevada during the last several
fiscal      years.

21t should be noted that          the 20 percent limitation  on I-4R
transfers      to the primary     program may be higher with Federal              Highway
Administration       approval.
         Although    current      transferability          between highway programs
helps states better           align     federal      assistance      with their       high
priority       needs, flexibility          may also be needed to allow states to
find intermodal         solutions       to surface       transportation         problems.
According       to DOT, for the most part,               federal     highway funds may not
currently       be used for mass transit              or other transportation              modes.
However, DOT's draft            reauthorization          proposal      includes      provisions
that allow for such flexibilities.                     Nevada also believes             states
should be allowed          to transfer         highway funds to plan for high speed
rail.       As we have previously           reported,       we believe       greater
coordination        and cooperation         among the various            transportation        modes
is needed to ensure the prudent                   investment      of scarce transportation
dollars       and improve mobility.

States Are Usincr Their Own Funds
To Maintain Proaram Continuity

         Since the late 197Os, in an effort                  to control       federal     spending
on the highway program,              the Congress has annually               imposed
limitations--        called   obligation        ceilings--on       the amount of federal-
aid highway funds made available                    to states.       This means that even
though the Congress authorizes                  federal-aid      highway funds there is
no guarantee         that the total        amount authorized          will    be available       for
states      to use in any given year.                  Faced with these limitations,
yet a desire         to maintain       continuity       in their     highway programs,
states      are permitted       to use their          own funds in advance of available
federal       reimbursements       to begin or continue            federal-aid        highway
projects.         At the end of fiscal            year 1990, 38 states            had an advance
construction         balance of approximately              $3.1 billion        outstanding.
States may convert           advance construction            projects      to regular
federal-aid         funding    and receive         reimbursement       in the next year, or
 in later       years,    as federal-aid         funds become available.

       Our work shows that many states are using advance construction
to meet their    important    highway needs and maintain       highway program
continuity.     For example, seven states we have contacted            disclosed
that they have used advance construction         in this way.3        As
Appendix IV shows, Nevada has been active           in advance constructing
projects.     In fact,   as a percentage   of total    federal    highway funds
authorized   annually    to the state,   Nevada's year-end       advance
construction    balances   are some of the highest       in the nation.

        As Appendix V shows, the unobligated               balance of the Highway
Trust Fund-- funds not available               to states   to meet highway needs--
has increased         from $6.7 billion        to $8.1 billion     between 1987 and
1990.      Obligation       ceilings    on the federal-aid      highway program have
contributed       <o increases        in this balance.       The Federal Highway
Administration          projects     a drop in the unobligated        balance to $6.2
billion     by the end of fiscal           year 1991 due to an increase       in the
obligation      ceiling       over fiscal    year 1990.

       We have previously          reported     that the federal-aid       highway
program could sustain            a higher    level of program activity         of at
least $3 billion.4            However, the Omnibus Budget Reconciliation                Act
of 1990 and Budget Enforcement               Act of 1990 make it unlikely          that
new revenues credited            to the Highway Trust Fund, such as those
generated      from increases        in the federal      excise tax on gasoline,
will    be fully     available     in the immediate       future.      This is the case
because the legislation            imposes an annual spending cap on all
federal     domestic     discretionary       spending programs which includes            the
federal-aid       highway program.          The federal-aid       highway program will
have to compete with other domestic programs such as aviation                         and
the Coast Guard for funds within                these annual spending caps.           In

3California,      Georgia,    Maryland,     Missouri,     Nevada,      Tennessee,     and
4Hiahwav Trust F nd Condition              and Outlook     for   the    Highway     Account,
(GAO,RCED-89-136; M:y 1989).

the current budget environment,     the reality is that any drawdown of
the Highway Trust Fund balance can only be accomplished     at the
expense of other federal   programs.

Poolina Allows For Better
Taraetina  of Federal Funds

        In 1987 Congress authorized      a demonstration      to test the
feasibility    of giving  state officials       greater   responsibility       in
administering    portions   of the federal-aid       highway program.         The
demonstration    permits  five states--California,         Minnesota,       New York,
Rhode Island,    and Texas --to pool money from the urban, secondary
and bridge programs and use the funds on any one or a combination
of the three programs.       However, other federal-aid          highway funds,
such as the I-4R and primary       programs,      are not eligible       for

         We reported    in June 1990 that three states participating                   in
the demonstration         program had taken advantage of the funding
flexibility       and targeted     a substantial       portion   of their   pooled
funds towards needs within           a single     system.5      The remaining      two
states,     which began participating          later     than the others,     also
expect to realize         benefits   during the remainder         of the
demonstration.         To maximize funding        flexibility     provided    by the
demonstration        and to more closely       approximate      a block grant
concept,      we recommended that the Congress consider               expanding      the
number of programs eligible           for pooling.

       The Administration      is currently    considering     expanding     the
pooling     concept by restructuring       the existing    highway program.
Federal-aid      would be focused on two basic tiers,          or essentially      two
block grants-- a national        highway system and an urban/rural           system.

5Transnortation       Infrastructure:       States Benefit        From Block     Grant
Flexibilitv,       (GAO/RCED-90-126,       June 1990).
The national        highway system would consolidate            the Interstate     and a
portion     of the primary       highway program and allow funds to be used
interchangeably          between the programs.        The balance of the primary
program and most of the other highway programs would be
consolidated        into the urban/rural        system.6      The Administration's
proposal      does not delineate        what criteria     will    be used to decide
which primary         roads will    be included     in the national       highway and
urban/rural       highway systems.        As discussed     below, this decision
will    be critical       in determining     how much additional        financial
responsibility          a state would have to assume.

       A fundamental      difference     between the demonstration         and the
Administration's       proposed program restructuring           is that the
demonstration     did not change the federal           share for projects
undertaken.      The Administration's         proposal   generally     provides   for      a
reduced federal       share on most highway projects.             This means that
under the Administration's           proposal    state and local governments
will   have to assume up to about 15 percent more of the financial
responsibility      for most highway projects.

       States such as Nevada that have relatively          high excise taxes
on gasoline,     yet smaller   populations,    may face difficulties         in
assuming this responsibility.           On the average,   states     finance    the
construction     and maintenance    of 78 percent    of the nations
highways.      Nevada bears the cost for 88 percent        of its road
network,     as shown in Appendix VI.

       The majority     of federal  funds transferred      in the last three
fiscal    years has been from the Interstate         and secondary    systems to
the primary     system.    Because the primary     road system accounts       for
nearly    30 percent    of vehicle  miles traveled,     caution   should be
exercised     in making significant     reductions    in the federal     cost

6There   would   also   be a separate      bridge   program.

share   on this and other systems that states                    have identified         as
being   in need of additional  resources.


       Given a potential            increase     in state responsibility             for
federal-aid        highways and insufficient               federal      funds, toll      financing
may be an effective            alternative       for raising         highway funds.
Existing      federal       law generally       prohibits      toll     charges on roads
built    with federal-aid           highway funds.           However, the DOT
reauthorization          proposal      offers    states      an opportunity        to generate
toll   revenues and to use such revenues to help meet federal-aid
highway needs.           Under the proposal,            states may improve or construct
non-Interstate         toll    roads at a federal            matching       share of 35
percent.        Increased      reliance       on toll     revenue is consistent            with the
national     transportation           policy    of allowing         greater     use of toll
financing       on federal-aid         highways.

         In response to a request               from your subcommittee,            we have
evaluated     the demonstration            Toll Facilities         Pilot    Program
authorized      in the Surface Transportation                 and Uniform Relocation
Assistance      Act of 1987.          Our forthcoming         report     finds that toll
financing     will    provide      participating        states with additional            revenue
sources to construct            roads and to maintain            the roads once they are
completed.         Funding federal-aid            highway maintenance          with tolls     is a
significant       development       sin&      states have traditionally             financed
maintenance       without     federal      assistance.

        We also found that by keeping the federal               financial
participation     low-- such as 35 percent       of total       funding--
participating     states had the incentive         of selecting        high traffic
volume roads for tolls.         This contributes       to reduced congestion                    in
other transportation      corridors.     Through the use of innovative
techniques,     such as automated vehicle        identification           equipment,
congestion      may also be reduced at toll  collection                  plazas--a       problem
considered      to be one of the major disadvantages                   of tolls.


       While the federal-aid           system must address national                  priorities
such as preservation          of the interstate,         individual          state needs must
also be accommodated through program funding                     flexibilities.               We
have previously         endorsed the benefits         derived      through        federal
funding    flexibility       such as through pooling           of highway funds.                In
addition,     burgeoning      transportation       problems such as traffic
congestion      require    the federal       government to be open to intermodal

        The Administration,             however, is proposing             restructuring        the
entire    federal-aid           highway program into essentially                  two broad block
grants that would be accompanied by a substantial                              reduction     in the
federal     share for most federal-aid                highway projects.              Therefore,
states'     abilities         to meet their       highest    priorities         may be
jeopardized         in the future         given a potentially           significant       and
sudden reduction            in federal       support.     Because of the additional                   .
financial      responsibility           that states will        have to assume, caution
should be exercised               in reducing     the cost share on those systems,
such as the primary               system, that states have identified                   as being in
need of additional              resources.       Further,    any efforts          to expand the
use of toll         financing        should consider      setting       the maximum federal
share below that set for non-toll,                    federal-aid         highway

       This    concludes  my testimony.             I will    be glad     to answer      any
questions      at this time.

Pavement in Poor Condition

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Acn   .-E
         Nevada’s Transfer                                         of Highway Fu rids*
                         (October            1, 1987 - September                      30, 1990)
          Dollars   in Millions




   0 --

  -5 -


                                               Primary                    Secondary           Urban
             *Excludes    Rail-Highway   Crossings   & Hazard      Elimination.
             Source:     U.S. DOT, Federal   Highway   Administration.
                  Nevada’s                         Advance            Construction                Balances*
                          Dollars    in Millions

        $60                                          /-----7
        $50 l/---T



        $10                                                                               r

         $0       L   -                                                                                    L

                                A7                       19bs                 I&                   19bO

 I-4R                           $0                         $0              $10.6                   $12.6

LPr imarl     I                $51.6                     $56.6             $41.6                   $26.6

                                                     m          Primary   m        I-4R
  *Figures    represent  fiscal  year-end   balances.
   Source:     U.S. DOT, Federal    Highway    Administration.
                     Federal-Aid Highway Program
              Unobligated Balances (FY 19870 FY 1991)
           Dollar8    in Millions
                                                             $8           $8.1

                                                                                     /          /



 $0                                                                       I 1 I L/
                                                                                 -                      -

          *Balance      for 1991 is an estimate.
            Source:      U.S. DOT, Federal    Highway   Administration.