Historical Surface Transportation Program Funding
Staff Paper Prepared for the President's Commission to Study Capital Budgeting

June 19, 1998

Description: Surface transportation programs, which were recently reauthorized from FY1998-FY2003 in the Transportation Equity Act for the 21st Century (TEA-21), include Federal highways, transit, and highway safety programs. The Federal-aid highways program provides grants to States to support capital improvements to Federal-aid eligible highways and bridges, such as the Interstate System. The Federal transit program provides resources to State and local governments to support eligible capital bus and rail projects. Finally, the Federal highway safety program offers formula and incentive grants to States primarily to reduce drunk driving and increase seat belt usage.

Decision-making Process: Historically, the Federal government has reviewed the Nation's transportation needs in the aggregate as one major factor in determining the most appropriate level of Federal funding. (While the Federal government provides significant resources, the States and local governments select the individual projects necessary to meet their transportation needs.) In determining the proper level of funding, this Administration has taken into account the conditions and performance of the surface transportation system. Specifically, the Administration has chosen to focus resources on preserving the existing system's conditions. Recent budget requests have provided Federal resources to maintain the existing system's conditions and provide some additional resources to maintain the system's capacity at existing levels. In recent years, this approach has been successful in improving the surface transportation systems conditions and addressing some performance issues. It is important to remember that the Federal government shares funding responsibility for these projects with State and local governments and the private sector. There is no clear division of funding responsibility among these entities.

The passage of TEA-21, though, represents a new era in transportation funding decision-making in that TEA-21 links highway resource levels to motor fuels tax revenues and establishes a new budget mechanism which guarantees that approximately $200 billion will be reserved exclusively for highways, highway safety, and transit. The Act provides over $217 billion for FY1998-2003 compared to $155 billion in the prior law. With the funding provided in TEA-21, it should be possible to continue to improve the surface transportation system's conditions and address performance issue more fully.

Linkage to Strategic Goals: The lengthy process leading up to TEA-21 has its origins in activity begun earlier in the 1990s. The U.S. Department of Transportation (DOT), in developing its proposal for reauthorization, conducted an extensive outreach to elicit reaction on what was working well and what wasn't under the prior law, the Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991. On the premise that the ISTEA should be the building block for the subsequent iteration, the Administration presented a bill entitled the National Economic Crossroads Transportation Efficiency Act (NEXTEA) to Congress in 1997. It continued successful ISTEA programs and created new ones in response to strategic objectives and identified needs.

The Senate and the House of Representatives authorizing committees incorporated many important features from NEXTEA in their bills, and these features were generally retained in the final act that was signed into law on June 9, 1998. The Act reflects the five U.S. DOT strategic goals: 1) safety, 2) mobility, 3) promotion of economic growth and trade, 4) protection of the national and human environment, and 5) support for national security. For example, TEA-21 has a major new discretionary program focusing on U.S. trade corridors and border infrastructure, which will contribute to strategic goals for mobility and economic growth.

Long-term Planning: The fact that TEA-21 is a six-year bill is important from a planning perspective because it provides multi-year resources to State and local governments from which they can plan the projects required to meet their transportation needs. TEA-21 also continues a tradition that requires State and metropolitan governments to incorporate a planning process into their decision-making process and prepare both short and long-term transportation plans. In addition, DOT will ensure that TEA-21 provisions will be reviewed under the DOT Strategic Plan and the Annual Performance Plan of the Department.

Biases for Program: Because the Federal-aid highway first-year outlay rate is lower than many other discretionary programs and was funded by contract authority and not budget authority, this program received an advantage in the annual appropriations process. Appropriators could provide funding increases with less concern regarding the first-year outlay impact because the majority of the outlays from this program occur in the second-year. However, the guarantee provided for highway, highway safety, and transit programs in TEA-21, makes this advantage moot.

Benefit/Cost Analysis: The 1997 U.S. DOT Report to Congress on the status of the Nation's Surface Transportation System - Conditions and Performance contains both "maintain" and "improve" investment scenarios for highway and transit investment. The highway scenarios were developed using the Highway Economics Requirements System (HERS). The HERS defines highway deficiencies and potential improvements for Federal-aid, State, and local highways and bridges through analysis of marginal benefits and costs. The analysis is performed through a simulation modeling process on a nationwide basis. The 1997 version of the Report found that combined spending by all levels of government would need to increase by 13 percent to maintain highway user costs at their 1995 level. Highway and bridge investments could double and still provide user benefits that exceed costs. Any investments up to the "improve" scenario are estimated to yield marginal benefit/cost of greater than 1.0. The additional funding provided by TEA-21 will provide additional Federal resources to improve the existing highway and transit system, assuming that State and local government funding keeps pace. A similar methodology is used for transit economic benefit analysis. These models address investment analysis through the use of economic analysis, as directed by Executive Order 12893, "Principles for Federal Infrastructure Investment," published January 26, 1994. The economic analysis undertaken is consistent with continued emphasis with transportation agencies toward value engineering, asset management, and greater cost-effectiveness in decision making.

Full Funding/Dedicated Revenue: The highway and transit programs depend on highway user tax receipts as their major funding source. The estimated tax receipts over the 6-year period could support the levels that the Congressional Committees proposed, however, these increases for TEA-21 above the President's Budget had to be offset elsewhere in a manner that protected the Administration's other priorities, such as the environment and health care. This was difficult to satisfy but was ultimately met in a manner acceptable to a majority in the Congress, as well as to the Administration.

In regard to dedicated revenue, TEA-21 makes a major departure from the ISTEA and prior acts. TEA-21 directly ties the user fees or taxes that go into the Highway Trust Fund (HTF) to the program level provided. If tax receipts rise, program spending for highways will increase proportionately. TEA-21 established a Federal budget mechanism which guarantees that approximately $200 billion will be reserved exclusively for highways, highway safety, and transit. This is a spending floor which can also be further increased through the annual budget process if the Congress chooses to dedicate a portion of the general budget allocation to highways and highway safety. For transit the guaranteed funding level assumes that 80 percent will derive from the HTF and the remaining 20 percent from the General Budget. Congress could also raise the transit amount further through the annual budget process.

Spikes or Lumpiness: The overall level of funding in TEA-21 is a dramatic increase over prior law, a 40 percent rise over the ISTEA levels. Under TEA-21 total resource rise over the 6-year period. However, because the contract authority does not lapse on an annual basis, recipients should have time to adjust their capital programs accordingly.

In addition, there are provisions in TEA-21 to help States address the lumpiness problem when funding their projects. These include advance construction, which allows work to be completed with State funds and then subsequently reimbursed by Federal-aid formula funds and innovative financing programs which allow States to spread costs out over several years.

President's Commission to Study Capital Budgeting

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