Federal-Aid Highways: States Need Guidance on Sales or Leases of Real Property Purchased with Federal Funds
Published: 2002-12-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1998, the Transportation Equity Act for the 21st Century (TEA-21), authorized the states to retain the federal share of proceeds from the sale or lease of real property that had been purchased with federal-aid funds. It also required the states to use the federal share on other highway projects eligible for funding under the federal-aid highway program. GAO determined (1) the extent to which states are selling, leasing, or disposing of real property purchased with federal-aid funds and (2) how the proceeds generated from the sale or lease of real property are being used, including whether they are being used in accordance with TEA-21. GAO issued a related legal opinion in September 2002.
section_title: What GAO Found
paragraphs: All of the 51 state Departments of Transportation GAO surveyed, including the District of Columbia, reported selling, leasing, or disposing of real property, such as unused land purchased with federal-aid funds. From June 1998 through May 2002, 37 states sold, leased, or disposed of at least 5,636 properties that generated about $148 million in proceeds for the states. States varied on whether they tracked and reported this information to DOT; therefore, GAO did not report this information for the other 14 states. State DOT officials view the policy that allowed them to retain the federal share of the proceeds as being positive because it provided states greater flexibility for financing their transportation programs. However, proceeds generated from the sale or lease of property are not currently a major source of revenue for states' transportation programs. GAO determined that the proceeds generated from the sale, lease, or disposal of real property were less than 1 percent of states' transportation revenue from other sources, including federal aid, in 1999 and 2000. States reported using the proceeds generated from the sale or lease of property in different ways; and at least 2 states may have used the proceeds in ways that do not comply with the specific statutory requirements to use the proceeds on projects eligible for federal-aid highway funding. Forty-seven states reported using the proceeds to fund other state transportation projects, and at least 4 states use the proceeds as their match for projects receiving federal funds. GAO issued a legal opinion in September 2002, concluding that Congress did not intend for states to use such proceeds as their match. DOT has interpreted TEA-21 as allowing for the use of the federal share as a state's match. GAO also found that 2 states did not have restrictions on how the federal share of the proceeds should be used; therefore, the proceeds may have been used on projects not eligible for federal-aid. DOT issued some guidance but is considering issuing more guidance to states to ensure proceeds are used for eligible projects under the federal-aid highway program.

section_title: Letter
paragraphs: The Federal Highway Administration (FHWA), within the U.S. Department  of Transportation (DOT), is responsible for the federal-aid highway  program. This program distributes billions of dollars in federal highway  funds to the states. FHWA provides federal assistance to the states from the  Highway Trust Fund for several purposes, including the construction and  maintenance of highways and related activities. Federal-aid highway  projects are typically funded with an 80 percent federal contribution. The  nonfederal share of the cost (typically 20 percent) must come from state,  local, and/or private funds and is commonly referred to as a match. One of  the related activities eligible for federal aid involves the cost of acquiring  necessary real property for a highway project. When such property is no  longer needed, it can be sold or disposed of by the state. Similarly, land  retained by states can be leased to others. The 1998 Transportation Equity  Act for the 21st Century (TEA-21), which authorized DOT highway and  transit programs from 1998 through 2003, provided the states greater  flexibility in connection with selling and leasing real property associated  with federal-aid transportation projects. TEA-21 authorized the states to  retain the federal share of net proceeds from the sale or lease of real  property and to apply the federal share to other projects eligible for funding  under title 23, U.S.C., herein known as federal-aid highway and related  programs.
FHWA has interpreted the statutory provisions governing the federal share  of proceeds from the sale or lease of real property as permitting the states  to use the federal share of the net proceeds without having to follow the  rules and regulations associated with a federal-aid project. FHWA believes  that the federal government’s interest in such funds is satisfied as long as  the proceeds are used for projects eligible for funding under federal-aid  highway and related programs. FHWA has informed the states that they  may treat the proceeds from such transactions as state funds that are not  subject to restrictions that would apply if the funds were treated as federal  highway funds. In a recent legal opinion, we disagreed with FHWA’s  interpretation (see app. II).
As the authorized period under TEA-21 draws to a close in 2003, Congress  will need to make decisions about reauthorizing the surface transportation  programs, including requirements related to selling, leasing, and disposing  of real property. As agreed with your staff, this report discusses (1) the  extent to which states are selling, leasing, or disposing of real property  purchased with federal-aid funds and (2) how the proceeds generated from  the sale or lease of real property are being used, including whether they are  being used in accordance with TEA-21.
To determine the extent to which states are selling, leasing, or disposing of  real property purchased with federal-aid highway funds, we obtained  information from FHWA officials and surveyed 51 state DOTs, including the  District of Columbia. We then compared fiscal years 1999 and 2000 total  proceeds reported by each state from the sale or lease of real property with  the states’ total highway receipts reported by DOT. We obtained  information from state DOTs about how they use the proceeds generated  from the sale or lease of real property and about any restrictions they  placed on the proceeds, and we compared these responses with our legal  opinion. We also obtained information from officials of the DOT Inspector  General’s office regarding their review of Massachusetts’ Central Artery  Project that had initially raised concerns about FHWA’s interpretation of  TEA-21 changes related to sales and leases of real property. We conducted  our review from June 2002 through December 2002 in accordance with  generally accepted government audit standards.
subsections: section_title: Background
paragraphs: In our recent legal opinion, we reviewed the statutory provisions governing  the disposition of the proceeds from the sale or lease of real property  acquired with federal highway grant funds and FHWA’s interpretation of  that provision. FHWA issued regulations in 1999 implementing real  property management policies in conjunction with the federal-aid highway  program, which we reviewed. We disagreed with FHWA’s interpretation of  the law. We concluded that Congress did not intend for states to convert  federal money to state money by buying and selling property and/or use the  federal share of recaptured funds to reduce or avoid their obligation to  provide matching funds.
DOT’s Inspector General raised similar concerns about FHWA’s  interpretation of the federal law governing the proceeds from the sale or  lease of real property in its report regarding the finance plan for the  Central Artery Tunnel Project in Massachusetts. In its report, the DOT  Inspector General questioned whether the proceeds derived from the sale  of excess properties purchased with federal-aid highway funds should be  counted against the $8.549 billion cap imposed by Congress on federal  contributions to the Central Artery Tunnel Project. Further, the DOT  Inspector General found that Massachusetts intended to sell land,  originally purchased with federal aid, on which it had temporarily located  its project headquarters, reinvesting the money in the project as “state  funds.” The sale of the project headquarters is expected to generate about  $100 million.
section_title: All States Report Selling, Leasing, or Disposing of Real Property
paragraphs: All 51 of the state DOTs we surveyed, including the District of Columbia,  reported selling, leasing, or disposing of real property purchased with  federal-aid funds (see app. IV for responses from state DOTs). We found  that from June 1998 through May 2002, 37 states reported they sold, leased,  or disposed of at least 5,636 properties that generated about $148 million  (2001 dollars) in revenue for the states. We excluded eight states from our  calculations of the total number of properties sold, leased, or disposed of  because these states either did not distinguish sold, leased, or disposed of  properties originally acquired with federal funds from those properties that  were acquired without federal funds and/or identify the amount of  proceeds generated. We excluded another six states from our calculations  for various reasons.  In all, we excluded 14 states from our calculations  because of these variances. For example, California has an agreement with  FHWA that recognizes that the amount of revenue generated from the sales  or leases of land purchased with federal-aid funds is substantially less than  the state’s expenditures on highways; therefore, the state is not required to  track and report the proceeds from the sales. Also, Louisiana state officials  reported that they do not track and report federal dollars because their real  estate property management database is not designed to distinguish sales  of property acquired with federal-aid funds. Nevertheless, these states  reported that they sold, leased, or disposed of some real properties  originally purchased with federal funds.
States also vary in their policies for retaining the net proceeds they receive  from the sale or lease of real property because they have different views of  the federal requirements. Most states that we surveyed deposit the  proceeds into state transportation accounts to be used at a later date.  However, three states reported that they do not follow that procedure but  credit an existing federal-aid project within the state. For example,  Maryland DOT officials told us that they credit an ongoing federal-aid  project within their state. In their opinion, retaining the federal share would  require the state to establish special tracking accounts to trace each dollar  of revenue from affected property sales or leases from its receipt to its  expenditure on a specific eligible federal-aid project which would not be  cost effective. The cost to establish these accounts would exceed its  current annual state revenue from these properties. Nevada and Texas  DOTs also credit existing federal-aid projects within their states because, in  their view, it is more efficient not to track the federal share of the proceeds.  FHWA officials told us that, in their view, when states credit the federal  share of the net proceeds to an existing federal-aid project, they lose the  opportunity provided by TEA-21 to use the proceeds for other state  highway projects.
For states that retain the federal share of the net proceeds, five state  officials that we contacted said they view the current regulations that  allow them to retain the federal share of the proceeds generated from the  sale or lease of real property as positive because it gives the states greater  flexibility to sell or lease real property to support the states’ transportation  programs. For example, officials in California and Virginia told us that  selling or leasing surplus property and retaining the proceeds provide  additional funds to complete more state highway projects. State DOTs and  FHWA officials in Illinois, Virginia, and California also told us that the  current regulations eliminate the administrative burden of tracking and  returning the federal share of the funds to the federal government.
subsections: section_title: Proceeds from Property Sales and Leases Are Not a Major Source of Revenue
paragraphs: The proceeds generated from the state DOTs’ sales or leases of real  property do not currently appear to be a major source of revenue for the  states’ transportation programs. We compared the proceeds generated, as  reported to us in our survey, with the states’ revenues available for  highway projects. The ratio between the proceeds generated by the states  and the states’ receipts represented less than 1 percent of the states’  revenues in 1999 and 2000 (see apps. V and VI). Figures 1 and 2 show the  states with the highest ratio between the proceeds from property sales or  leases with the states’ revenues for 1999 and 2000, respectively. We  calculated that in 1999, the total ratio of the federal share of proceeds from  property sales and leases in comparison with the state revenues was 0.075  percent. Of the 35 states for which we calculated ratios, 8 states had ratios  that were greater than or equal to 0.1 percent, and 27 states had ratios that  were less than 0.1 percent.
We calculated that in 2000, the total ratio of the federal share of proceeds  from property sales and leases in comparison with the state revenues was  0.069 percent. Of the 35 states for which we calculated ratios, 10 states had  ratios that were greater than or equal to 0.1 percent, and 25 states had  ratios that were less than 0.1 percent.
We noted no particular trend in the amount of proceeds from these types of  property sales or leases over the period of our survey. Therefore, it is  possible that the proceeds from property sales or leases could increase or  decrease in the future. One likely sale of property in the near future by the  Massachusetts Highway Department would have a large effect on the total  proceeds from the sale or lease of properties purchased using federal  highway aid in that state. The Department used federal aid to purchase a  substantial amount of property for rights-of-way associated with the  Central Artery Tunnel Project. Sale or lease of property associated with this  project has already generated nearly $9 million in revenue for the state  during the period of our survey (see app. IV for state responses). In  addition, the state plans to sell the project’s headquarters building. The  federal government contributed 90 percent of the original cost to acquire  the building, and federal officials estimate that the sale of the building will  generate about $100 million for the state’s transportation program. In 2000,  Massachusetts received about $490 million in federal highway aid.
section_title: States’ Use of Proceeds Vary and Sometimes May Not Comply with the Statutory Requirements on the Use of the Proceeds
paragraphs: States reported using the proceeds generated from the sale or lease of real  property in different ways; and their survey responses indicated that some  uses of the proceeds may not comply with specific statutory requirements  of only using the proceeds on projects eligible for funding under federal-aid  highway and related programs. This use of the proceeds conflicts with  FHWA’s interpretation of the statute. For the 51 states we surveyed, 42  states reported that they deposited the proceeds from sales of property  originally purchased with federal funds in accounts established to fund  state highway projects. Officials from 47 state DOTs reported using the  proceeds to fund other state transportation projects eligible for federal aid,  and at least four states use the proceeds as their match for projects  receiving federal contributions. For example, state DOT officials in Illinois,  Louisiana, Nebraska, and North Carolina told us, in our visits or through  their survey responses, that they use the proceeds generated from the sale  or lease of property for matching purposes. Our legal opinion concluded  that the states could not use the proceeds to match contributions, stating  that the intent of Congress was not to allow states to “use the proceeds of  such transactions to reduce or avoid their matching fund obligations.”  FHWA has interpreted the statute as allowing for such use. In eight states,  we could not determine from the survey responses how the states were  using the proceeds because they do not (1) track property purchased with  federal-aid funds separately from other property or (2) separate federal and  state proceeds generated from the sale and lease of real property. In these  cases, the federal share is commingled with state funds and cannot be  accounted for separately.
TEA-21 stated that proceeds must be used for projects eligible for federal  aid; and, according to their survey responses, most states have placed such  restrictions on the accounts into which the proceeds were placed. FHWA  officials said that, in their view, states would be in compliance with TEA-21  if they placed proceeds in accounts restricted for use on projects eligible  for funding under federal-aid highway and related programs. However,  officials in two states told us that their accounts do not have this type of  restriction. Therefore, in at least two cases, it is possible that states have  used the proceeds on projects that are not eligible for federal aid. For  example, a state DOT official in Indiana told us that the state uses the  proceeds to fund state highway projects but does not track whether these  projects are eligible federal-aid projects. New Mexico DOT officials  reported that the proceeds are not restricted to funding eligible federal-aid  projects; therefore, the funds could be used for other transportation  projects not eligible for federal aid.
subsections: section_title: FHWA May Issue Additional Guidance on the Federal Share of Property Sales and Leases
paragraphs: FHWA officials said that they may issue additional guidance in 2003 to  clarify how states should implement the TEA-21 language regarding  property sales and FHWA’s subsequent regulations. They acknowledged  that they were not aware of (1) the possibility that states were not  complying with the explicit statutory requirements that the federal share of  proceeds from property sales or leases be used only on projects eligible for  funding under federal-aid highway and related programs and (2) the  amount of variation in how states tracked these types of property  transactions and the federal share of the proceeds. They also said that  FHWA has issued some guidance to the states regarding the proceeds  generated from the disposal of properties purchased with federal aid. For  example, in meetings with state officials, FHWA officials explained that as  a practical matter states should have an accounting system in place that  documents (1) the amount of the federal share of the proceeds deposited in  the state transportation fund during the fiscal year and (2) the amount of  the federal share of net proceeds expended on eligible federal-aid projects  during the fiscal year. However, they also noted that TEA-21 does not  require states to track and report the federal share. FHWA officials told us  they are considering additional guidance to help ensure that states are  using the federal share of these proceeds only on projects eligible for funding under federal-aid highway and related programs. As of October  2002, FHWA had not decided on the details of what material to include in  the guidance or when to issue it. FHWA officials told us it is likely to focus  on how states can demonstrate that they are ensuring that the applicable  federal share of proceeds from property sales or leases is being allocated to  eligible federal-aid projects.
section_title: Conclusions
paragraphs: Most states have taken advantage of the greater flexibility for managing  and disposing of real property provided under TEA-21 because it  streamlines the process for their highway programs. However, in  accordance with our recent legal opinion, those states that used the  proceeds from these property sales or leases to match federal-aid highway  projects were not complying with the statute governing the sale or lease of  real property. In addition, two states did not restrict the use of the proceeds  to projects eligible for funding under federal-aid highway and related  programs, as explicitly required by the statute. FHWA has an excellent  opportunity to clarify its interpretation of TEA-21; and, after considering all  relevant factors, provide additional guidance to states regarding how they  should cost-effectively treat the proceeds from sales or leases of property  originally purchased with federal aid.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that states act in accordance with TEA-21 in disposing of  real property originally purchased with federal aid, we are recommending  that the Secretary of Transportation direct the FHWA Administrator to  develop and report on a strategy regarding how FHWA plans to comply  with GAO’s legal opinion concerning the statute governing the sale or  lease of real property; and  provide additional guidance to the state DOTs that will help ensure that  states use the proceeds of property sales or leases as required by TEA- 21, including the types of documentation or tracking that would be cost  effective and appropriate to demonstrate compliance.
section_title: Agency Comments and Our Evaluation
paragraphs: We obtained comments on a draft of this report from DOT officials,  including the FHWA Director of the Office of Program Administration and  the Division Administrator, FHWA Massachusetts Division Office. They  agreed with the facts presented in the draft report regarding states’ sale,  lease, and disposal of real property originally purchased with federal funds  and with the states’ use of the proceeds. The DOT’s General Counsel is  considering GAO’s legal opinion on how the federal share of the proceeds  should be used, so the officials did not comment on those sections of the  draft report. For the same reason, the officials did not comment on our  recommendation that the DOT develop and report on a strategy regarding  how it plans to comply with GAO’s legal opinion. The FHWA commented  that the report should recognize first, that FHWA’s interpretation of the  relevant provisions of TEA-21 was based on a regulation issued in 1999 and  secondly, that FHWA has provided extensive guidance on the  implementation of these provisions. We made several changes to the report  based on these comments. However, we continue to believe that the  potential noncompliance with TEA-21 we observed in two states, which  FHWA acknowledges conflicts with its interpretation of the statute, and the  varying practices we observed in other states suggest the need for  clarifying existing guidance or issuing additional guidance, as indicated in  our recommendations. Regarding the recommendation to issue additional  guidance to help ensure that states use the proceeds from the sale or lease  of real property originally purchased with federal funds as required by  TEA-21, FHWA officials said they would consider providing additional  guidance pending the outcome of the Department’s review of GAO’s legal  opinion. The FHWA officials also provided technical comments, which we  have incorporated into this report as appropriate.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this letter. At that time, we will send copies of this report to the  cognizant congressional committees, the Secretary of Transportation, and  the Administrator, Federal Highway Administration. In addition, this report  will also be available on GAO’s Web site for no charge at  http://www.gao.gov.
If you or your staff have any questions about this report, please call me at  (202) 512-2834. Key contributors to this report were Sally Gilley, Octavia  Parks, and Jobenia Odum.
section_title: Objectives, Scope, and Methodology
paragraphs: The Committee on Commerce, Science, and Transportation requested that  we determine (1) the extent to which states are selling, leasing, or  disposing of real property purchased with federal-aid funds and (2) how the  proceeds generated from the sale or lease of real property are being used in  accordance with the intent of TEA-21. We drew from our legal opinion  regarding FHWA’s interpretation of the federal law governing the sale or  lease of real property.
To determine the extent to which the states are selling, leasing, or  disposing of real property purchased with federal-aid funds, we obtained  information from FHWA officials and surveyed 51 state DOTs, including the  District of Columbia, to identify the number of properties and value of real  properties that were sold, leased, or otherwise disposed of from June 1998  to May 2002. Before we submitted the survey to the 51 state DOTs, we  obtained input from FHWA officials in developing our survey because they  recently attempted to collect the same type of information from the state  DOTs. We pretested the survey with Georgia DOT. We obtained and  analyzed responses from all 51 states, including the District of Columbia,  and conducted follow-up interviews as necessary. We compared each  state’s 1999 and 2000 total proceeds generated from the sale or lease of real  property with the states’ total receipts obtained for highway projects  reported by DOT. We did not independently verify the data provided by the  state DOTs or assess the reliability of the data reported by DOT. We  obtained preliminary data regarding real property sales and leases from  FHWA and selected five states (California, Georgia, Illinois, Texas, and  Virginia), based primarily on—among other reasons—high property sales  and leases and how these states’ were dispersed throughout the United  States. We selected California and Texas because they had the highest  income from property sales; Illinois was selected because of its geographic  location, and it was one of the states that had a high number of property  sales and income. Georgia was selected because FHWA’s preliminary data  of states property sales indicated that Georgia had not taken advantage of  the provisions of title 23, section 156 of U.S.C. Finally, Virginia was selected  because FHWA’s preliminary data indicated total income from property  sales or leases, but the number of properties was not reported. We  interviewed state and federal officials at these states, regarding their  opinions about the benefits of the current regulations relative to the states’  transportation programs among other reasons.
To determine how the proceeds generated from the sale or lease of real  property are used, we contacted states DOT officials responsible for the  right-of-way programs and obtained information regarding (1) how they  use proceeds generated from the sale or lease of real property, (2) any  restrictions on the use of the proceeds, and (3) the states’ sources for  matching federal contributions. We also obtained and reviewed state right- of-way disposal procedures and other documentation related to the sale or  lease of real property. We obtained and reviewed documentation regarding  FHWA’s division office and headquarters oversight roles related to the sale  or lease of real property. We also interviewed officials of the U.S. DOT  Inspector General’s office and reviewed documentation regarding their  review of the Massachusetts’ Central Artery Tunnel Project that had  initially raised concerns about FHWA’s interpretation of TEA-21 changes  related to sales and leases of real property.
section_title: GAO Legal Opinion
section_title: GAO Letter and Survey to State DOTs
section_title: Fiscal Year 1999 Proceeds Information
paragraphs: To analyze the significance of the proceeds from the sale or lease of real  property purchased with federal-aid funds with other states’ revenues  available for highway purposes, we compared states’ property proceeds  with states’ total receipts. Table 4 shows the result of our analysis.
section_title: Fiscal Year 2000 Proceeds Information
paragraphs: To analyze the significance of the proceeds from the sale or lease of  real property purchased with federal-aid funds with other states’  revenues available for highway purposes, we compared states’  property proceeds with states’ total receipts. Table 5 shows the  result of our analysis.
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