Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program Design
Published: 2004-08-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2004, both houses of Congress approved separate legislation to reauthorize the federal-aid highway program to help meet the Nation's surface transportation needs, enhance mobility, and promote economic growth. Both bills also recognized that the Nation faces significant transportation challenges in the future, and each established a National Commission to assess future revenue sources for the Highway Trust Fund and to consider the roles of the various levels of government and the private sector in meeting future surface transportation financing needs. This report (1) updates information on trends in federal, state, and local capital investment in highways; (2) assesses the influence that federal-aid highway grants have had on state and local highway spending; (3) discusses the implications of these trends for the federal-aid highway program; and (4) discusses options for the federal-aid highway program.
section_title: What GAO Found
paragraphs: The Nation's investment in its highway system has doubled in the last 20 years, as state and local investment outstripped federal investment--both in terms of the amount of and growth in spending. In 2002, states and localities contributed 54 percent of the Nation's capital investment in highways, while federal funds accounted for 46 percent. However, as state and local governments faced fiscal pressures and an economic downturn, their investment from 1998 through 2002 decreased by 4 percent in real terms, while the federal investment increased by 40 percent in real terms. Evidence suggests that increased federal highway grants influence states and localities to substitute federal funds for funds they otherwise would have spent on highways. Our model, which expanded on other recent models, estimated that states used roughly half of the increases in federal highway grants since 1982 to substitute for state and local highway funding, and that the rate of substitution increased during the 1990s. Therefore, while state and local highway spending increased over time, it did not increase as much as it would have had states not withdrawn some of their own highway funds. These results are consistent with our earlier work and with other evidence. For example, the federal-aid highway program creates the opportunity for substitution because states typically spend substantially more than the amount required to meet federal matching requirements--usually 20 percent. Thus, states can reduce their own highway spending and still obtain increased federal funds. These trends imply that substitution may be limiting the effectiveness of strategies Congress has put into place to meet the federal-aid highway program's goals. For example, one strategy has been to significantly increase the federal investment and ensure that funds collected for highways are used for that purpose. However, federal increases have not translated into commensurate increases in the nation's overall investment in highways, in part because while Congress can dedicate federal funds for highways, it cannot prevent state highway funds from being used for other purposes. GAO identified several options for the future design and structure of the federal-aid highway program that could be considered in light of these issues. For example, increasing the required state match, rewarding states that increase their spending, or requiring states to maintain levels of investment over time could all help reduce substitution. On the other hand, the ability of states to meet a variety of needs and fiscal pressures might be better accomplished by providing states with funds through a more flexible federal program--this could also reduce administrative expenses associated with the federal-aid highway program. While some of these options are mutually exclusive, others could be enacted in concert with each other. The commission separately approved by both houses of Congress in 2004 may be an appropriate vehicle to examine these options.

section_title: Letter
paragraphs: In 2004, both houses of Congress approved separate legislation to  reauthorize the federal-aid highway program to help meet the Nation’s  surface transportation needs, enhance mobility, and promote economic  growth. Each bill also recognized that the Nation faces significant  transportation challenges in the future. Many transportation experts have  noted that eventually, the introduction of more fuel-efficient vehicles and  clean fuels may undermine the sustainability of financing the Nation’s  surface transportation program through motor fuel taxes. As such, both  bills established a National Commission to assess future revenue sources  for the Highway Trust Fund and to consider the roles of the various levels  of government and the private sector in meeting future surface  transportation financing needs. In the longer term, broader fiscal  challenges face the Nation, including federal and state budget deficits and  the fiscal crisis looming as the baby boomer generation retires, causing  mandatory commitments to Social Security and Medicare to consume a  greater share of the Nation’s resources, squeezing funding available for all  domestic discretionary programs. These challenges require the Nation to  think critically about existing government programs and commitments.
In light of these issues, you asked us to provide information on past trends  in the federal, state, and local capital investment in highways, and on how  federal-aid highway program grants influence the level of state and local  highway spending. We responded to the first part of your request in June  2003. This report (1) updates information on trends in federal, state, and  local capital investment in highways; (2) assesses the influence that  federal-aid highway grants have had on state and local highway spending;  (3) discusses the implications of these trends for the federal-aid highway  program; and (4) discusses options for the structure and design of the  federal-aid highway program that could be considered in light of these  issues. In addition, this report identifies characteristics associated with  differences among states’ levels of effort for highway investment (see app.  III).
To respond to your request, we reviewed data from the Department of  Transportation’s (DOT) Federal Highway Administration (FHWA), the  Bureau of the Census, and other sources for the period from 1982 through  2002. We determined that the data were sufficiently reliable for the  purposes of our analyses. We also reviewed and synthesized the research  literature on the influence that federal highway grants have had on the level  of state and local highway spending. Our literature review revealed a  number of studies that used statistical models developed by the studies’  authors to estimate the influence of federal funding on state spending  choices. These models examined different time periods, employed different  statistical methods, and considered different social, demographic,  economic, and political factors that may affect state highway spending  decisions. None of the models used in the studies we reviewed included the  most recent data now available on highway funding, and none examined  whether the effect of federal grants on state spending changed over the  time period covered in the study. Therefore, based on the models used in  the earlier studies, we developed a statistical model of state highway  spending outcomes to estimate the fiscal effects of federal highway funding  on state highway spending choices. This model included the most recent  data available and examined whether the effect of federal grants on state  spending changed over the time period covered by our data. The purpose of  the statistical model was to isolate the effect that federal grants have on  state highway spending by controlling for other factors that also affect  state spending decisions. The model therefore takes into account changing  state economic conditions, the size and intensity of highway usage, and  other factors that may be associated with states’ willingness to support  highway spending. This statistical model was reviewed by experts in DOT  and peer reviewed by three authors of the earlier studies on the fiscal  effects of federal highway grants. These experts and authors generally  agreed with our methods, and we made revisions based on their comments  as appropriate. A more detailed description of the literature and the  statistical model is contained in appendix II. We conducted our work from  August 2003 through July 2004 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: Federal funding for highways is provided to the states mostly through a  series of formula grant programs collectively known as the federal-aid  highway program. Periodically Congress enacts multiyear legislation that  authorizes the Nation’s surface transportation programs, including  highway, transit, highway safety, and motor carrier programs. This  legislation authorizes the federal-aid highway program and the individual  grant programs that comprise it, and it sets overall funding for it and other  surface transportation programs. In 1991, for example, Congress enacted  ISTEA, which authorized $121 billion for highways for the 6-year period  from fiscal years 1992 through 1997, and in 1998 Congress enacted TEA-21,  which authorized $171 billion for the federal-aid highway program from  fiscal years 1998 through 2003. In 2004, the House and Senate each  approved separate legislation to reauthorize the federal-aid highway  program, the House authorizing $226.3 billion and the Senate authorizing  $256.4 billion for fiscal years 2004 through 2009. These authorizations  provide multiyear “contract authority” that gives the states notice several  years in advance of the size of the federal-aid program and the approximate  amount of federal funding they may expect to receive.
Funding for the federal-aid highway program is provided through the  Highway Trust Fund. Established by the Highway Revenue Act of 1956, the  Highway Trust Fund is a dedicated source of revenues generated by  highway user fees such as taxes on motor fuels, tires, and trucks. TEA-21  established two additional mechanisms to support the dedication of  highway user fees to highways. First, the act established guaranteed  funding for certain highway, transit, and highway safety programs,  including the federal-aid highway program, by protecting them with  “firewalls” from competing for funding with other domestic discretionary  programs through the congressional budget process. Second, the act  provided that the highway program funding authorizations would be  adjusted to reflect changes in estimates of Highway Trust Fund revenue,  ensuring that funding available for the federal-aid highway program  reflected the revenue taken in by the Highway Trust Fund. Both the Senate  and the House have each approved separate legislation to extend the  collection of fuel taxes to the Highway Trust Fund, the Senate through 2009  and the House through 2011. Amid concerns that the introduction of more  fuel-efficient vehicles and clean fuels may undermine the sustainability of  financing the Highway Trust Fund through fuel taxes in the future, both  houses also included provisions to create a National Commission to  examine future revenue sources to support the Highway Trust Fund and to  consider, among other things, the roles of the various levels of government  and the private sector in meeting future surface transportation financing  needs.
Once Congress authorizes funding, FHWA makes federal funding available  to the states annually at the start of each fiscal year through  apportionments based on formulas specified in law for each of the several  formula grant programs that make up the federal-aid highway program.  Ninety-two percent of the funds apportioned to the states in fiscal year  2003 were apportioned by formula. The remaining highway program funds  were distributed through allocations to states with qualifying projects. The  highway programs with apportionments based on formulas are shown in  table 1.
As we reported in 1995, the federal funding formula derives from a  complicated set of calculations and is a complex process in which the  underlying data and factors are ultimately not meaningful because they are  overridden by other provisions that yield a predetermined outcome. One  reason is the presence of “equity provisions” that ensure that states receive  set amounts based on historic funding levels and other considerations.  These equity provisions were strengthened after our 1995 report. For  example, as table 1 shows, TEA-21’s Minimum Guarantee Program ensures  that each state’s share of apportionments from nearly all federal-aid  highway funds is not less than 90.5 percent of that state’s percentage share  of contributions to the Highway Account of the Highway Trust Fund.  Funds from this program accounted for nearly a quarter of all highway  funding in fiscal year 2003. Under separate legislation approved by both the  House and the Senate, each state’s share of apportionments could rise to 95  percent by 2009. Furthermore, as table 1 shows, states receive minimum  apportionments regardless of the formula for several grant programs.
States have broad flexibility to transfer funds between the various grant  programs. For example, states may transfer up to 50 percent of their  Interstate Maintenance and National Highway System Program funds to  other programs, including the Surface Transportation Program, which, as  table 1 shows, has broad eligibility rules. In addition, ISTEA and TEA-21  provided the states broad authority to transfer federal-aid highway funds to  transit projects and vice versa. Between fiscal years 1992 and 2002, 47  states and the District of Columbia transferred about $8.8 billion from  federal-aid highway funds to transit programs to fund rail line  improvements, motor vehicle purchases, new or improved passenger  facilities, and other projects. During that same time, about $40 million was  transferred from FTA to FHWA for highway projects.
Once FHWA apportions funds to the states, funds are available to be  obligated by the states for construction, reconstruction, and improvement  of highways and bridges on eligible federal-aid highway routes and for  other purposes authorized in law. About 1 million of the Nation’s 4 million  miles of roads are eligible for federal aid; however, these roads accounted  for 85 percent of the vehicle miles traveled on the Nation’s roadways in  2001. The roads that are generally ineligible are functionally classified as  local roads or minor collectors. Around 161,000 miles of federally eligible  roadways are on the National Highway System, of which around 47,000  belong to the Interstate Highway System. With few exceptions, federal  funds for highways must be matched by funds from other sources—usually  state and local governments. The matching requirement on most projects is  80 percent federal and 20 percent state or local funding. In addition to  matching federal funds, states and localities spend funds to finance  highway capital projects and to maintain existing roadways.
The federal-aid highway program is administered by FHWA, whose  responsibilities include reviewing periodic transportation improvement  plans prepared by state and local governments, approving projects for  federal aid, apportioning grant funding to the states, providing technical  support, and overseeing federally funded projects. In fiscal year 2004,  FHWA received $334 million to provide these services, with an authorized  staff level of 2,931 positions. FHWA personnel are located in Washington,  D.C., and in 52 field offices located in each state, the District of Columbia,  and Puerto Rico, as well as a regional “resource center” with four offices  across the country that provide specialized technical assistance to the field  offices and the states.
The federal-aid highway program has a considerable regulatory  component. As a condition of receiving federal aid, states agree to apply  and enforce certain federal laws on federally aided projects, such as the  environmental assessment provisions in the National Environmental Policy  Act, the Americans With Disabilities Act, the nondiscrimination protections  found in the Civil Rights Act of 1964, and others. In addition, states are  required to establish goals and to award a set percentage of contracts (the  national goal is 10 percent) on federally aided projects to small businesses  owned and controlled by socially and economically disadvantaged  individuals, including minority and women-owned businesses.  Furthermore, in accepting federal-aid highway funds, states must enact  certain laws to improve highway safety or face penalties in the form of  either withholdings or transfers in their federal grants.In addition to these  penalties, states may apply for and receive highway safety incentive grants  through programs administered outside the federal-aid highway program  by the National Highway Traffic Safety Administration (NHTSA). For  example, states in which the use of seat belts exceeds the national average  or improves over time are eligible for incentive grants based on NHTSA’s  calculation of the annual savings to the federal government in medical  costs that resulted from the increased use.
In general, there are three possible ways that federal grant funding can  influence state spending for a program, as illustrated in figure 1. First,  increased federal funding may stimulate, or leverage, additional spending  from state resources. For example, a state may have to increase its own  spending in order to meet federal matching requirements and obtain  federal funds, thus increasing the overall level of spending by more than  the amount of the federal grant. As the federal-aid highway program in  most cases requires that states must contribute 20 percent of the total cost  of a project in order to receive federal matching funds of 80 percent of the  total cost, the suggestion is that every $1.00 increase in federal funds would  go towards a total spending increase of $1.25 ($1.00 is 80 percent of $1.25),  $0.25 of which would be funded with state and local government funds  ($0.25 is 20 percent of $1.25). The result of a stimulative effect of federal  grant funding is illustrated in the first panel of figure 1, in which an  additional $1.00 of federal aid increases spending from state resources by  25 cents, increasing the overall level of highway spending by $1.25.  Alternatively, increased federal funding may supplement state spending by  adding to what states would otherwise have spent, increasing the overall  level of spending by the amount of the federal grant, as illustrated in the  second panel of figure 1. To the extent that states maintain their own  spending when they receive additional federal funding, either because  federal policy requires that they do so or because they do so voluntarily,  then the additional federal aid supplements state spending. Finally, states  may use increased federal funding to substitute for, or replace, what they  would otherwise have spent from state resources, so that the overall level  of spending increases by less than the amount of the federal grant. This  substitution of federal funds for state funds is illustrated in the third panel  of figure 1, in which an additional $1.00 in federal funding results in only a  50 cent increase to total spending because in response to the influx of  federal funds, the state withdraws 50 cents of its own spending on the  program and uses these funds for other purposes.
section_title: States and Localities Invest More in Highways Than the Federal Government; However, Recent Federal Investment Has Outpaced State and Local Investment
paragraphs: The Nation’s capital investment in its highway system has doubled in the  last 20 years, and during that time period as a whole, state and local  investment in highways outstripped federal investment in highways—both  in terms of the amount of and growth in spending. Between 1982 and 2002,  state and local capital investment in highways increased 150 percent, from  $14.1 billion to $35.7 billion in real terms, whereas the federal investment  increased 98 percent, from $15.5 billion to $30.7 billion in real terms. For  every year after 1986, states and localities invested more in the Nation’s  highways than did the federal government. (See fig. 2.) Most recently, in  2002, states and localities contributed 54 percent of the Nation’s capital  investment in highways, spending $35.7 billion, while the federal  government contributed 46 percent or $30.7 billion in real terms.
In addition to the billions of dollars states and localities invest in capital  highway projects to expand highway capacity or rehabilitate existing  highways, states and localities spend additional funds maintaining and  policing their roadways. For example, in 2001, states and localities spent  about 27 percent of their total capital and maintenance funding on  maintenance activities, including fixing potholes, sealing cracks in bridge  decks, and fixing highway lighting.
Although states and localities still spend more on highway capital  investment than the federal government, recently, state and local highway  investment has increased at a slower pace than federal highway  investment. In addition, state and local investment has decreased in real  terms three times since 1996: between 1996 and 1997, between 1999 and  2000, and between 2001 and 2002. Last year, we reported that since TEA-21  was passed, from 1998 through 2001, federal investment increased faster  than state and local investment. In real terms, federal investment  increased 29 percent, while state and local investment increased 2  percent. This trend of federal investment increasing more quickly than  state and local investment continued in 2002. From 2001 through 2002,  federal investment increased 8.5 percent, while state and local investment  decreased 5 percent in real terms. Thus, from 1998 through 2002, federal  investment increased 40 percent, while state and local investment  decreased by 4 percent. Figure 3 shows the annual federal and state and  local capital expenditures on highways during these years.
The general trend of federal investment in highways increasing at a faster  pace than state and local investment in highways holds over a longer period  of time as well, including the period following the passage of ISTEA in  1991. Although there was some variation on a year-by-year basis, from 1991,  when ISTEA was enacted, through 2002, state and local investment  increased 23 percent, from $29.0 to $35.7 billion in real terms. During that  same time period, federal investment increased 47 percent, from $20.9 to  $30.7 billion in real terms, as shown in figure 4.
Although the reasons for this change in spending patterns by level of  government are unclear, tough economic times, with a majority of states  needing to reduce spending to avoid budget deficits, along with large  increases in federal funds for highways may have influenced these  spending patterns. For example, a recent survey of states by the National  Conference of State Legislatures found that even after the economy began  growing after the March 2001 national recession, 36 states still have budget  shortfalls with a cumulative gap of about $25.7 billion.
section_title: Evidence Suggests Federal Highway Grants Have Increasingly Been Used to Substitute for Rather Than Supplement Spending from States’ Own Resources
paragraphs: The preponderance of evidence suggests that increases in federal-aid  highway grants influence state and local governments to substitute federal  funds for funding they would have otherwise spent on highway projects  from their own resources. We built on earlier studies to develop a model  that analyzed data from 1982 through 2000 to examine whether and to what  extent states have substituted increases in federal highway funds for state  highway funds. Our preferred model analyzes data from 1983 through 2000  because of the statistical techniques we used. Our analysis suggests that  significant substitution has occurred and that the rate of grant substitution  increased significantly over the past two decades, rising from 18 percent in  the early 1980s to about 60 percent during the 1990s—the periods that  ISTEA and TEA-21 were in effect. Three previous studies of this issue also  found that substitution existed, although their estimates of levels of  substitution varied. The structure of the federal grant system as a whole  may encourage substitution. Specifically, the structure of the federal-aid  highway program creates an opportunity for substitution because states  typically spend substantially more in state and local funds than is required  to meet current federal matching requirements. As a consequence, when  federal funding increases, states are able to reduce their own highway  spending and yet obtain the increased federal funds. If states substitute  some of the increase in federal funds for their own funds, then total  highway spending may increase, but not by as much as it would have had  substitution not occurred.
subsections: section_title: Our Statistical Model Suggests Federal Highway Funds Have Increasingly Been Substituted for State Funds That Were Shifted to Nonhighway Uses
paragraphs: Our statistical model, which we developed from previous models,  estimates that states have used a significant portion of increases in federal  highway funding to substitute for state and local funding for highways, and  that the rate of substitution increased during the 1990s. According to our  preferred model, for the entire period from 1983 through 2000, state  governments used roughly half of the increases in federal highway grants to  substitute for funding they would have otherwise spent from their own  resources on highways. When our model examined four separate time  periods from 1983 through 2000 that corresponded to the four  authorization periods for the federal-aid highway program, the results  suggest that the rate of grant substitution increased in the 1990s, during the  periods in which ISTEA and TEA-21 were in effect, in comparison to the  early 1980s. Specifically, our model suggests that states substituted  approximately 18 cents (not statistically significant) of every dollar  increase in federal aid from 1983 to 1986 for funds they would have spent  on highways from their own resources. Our model suggests that the  substitution rate rose to approximately 36 cents of every dollar increase in  federal aid for the period from 1987 to 1991, and that the substitution rates  then rose again to approximately 60 cents for every dollar increase in  federal aid for the two periods examined in the 1990s: 1992 through 1997  and 1998 through 2000. (See fig. 5.)
The rates of grant substitution for the time periods reported in figure 5 are  derived from our statistical model of state spending choices and are subject  to some uncertainty. While these estimates represent our most likely  estimates of the rate at which states substituted federal funds for state and  local funds, the actual substitution may be larger or smaller than these  estimates. The uncertainty surrounding our estimates can be expressed in  terms of a level of confidence that a given range of values encompasses the  actual substitution rate. The range of values surrounding each of our  estimates is shown in table 2 at a 95 percent level of confidence. The size of  each interval provides a sense of the uncertainty associated with our  estimates. The intervals associated with the two time periods during the  1980s contain possible values of zero, meaning that we cannot be 95  percent confident that substitution occurred during these periods. In  contrast, the range of estimates for both time periods in the 1990s does not  encompass zero; therefore, they are statistically different from zero, which  means that our results imply at least a 95 percent level of confidence that  substitution occurred. Our most likely estimates for the two periods we  looked at in the 1990s are in both cases just under 60 percent, and we can  be 95 percent confident that the actual substitution rate was between 21  percent and 97 percent.
These results are roughly consistent with previous studies that, when taken  together, also seem to suggest increasing substitution rates over time. We  made four primary enhancements to the models used in previous studies in  developing our model. First, we used more recent data on highway  expenditures than were available for previous studies. Second, we used a  conservative definition of substitution. Our model defined substitution as  occurring only when, in response to increased federal highway funds, state  and local funds were moved out of highway-related projects altogether. We  did not consider it substitution if in response to increased federal highway  funds, state and local funds were moved from highway projects that were  eligible for federal aid to highway projects that were not eligible for federal  aid. Third, our model is structured to examine substitution rates over time,  rather than being limited to one estimate covering all the years included in  our study. Finally, compared to previous studies, we employed a more  comprehensive collection of factors related to state spending decisions.
Combined, we believe these enhancements increase the ability of our  model to provide a conservative and more reliable estimate of the extent to  which states substitute federal highway aid for spending that would  otherwise have come from state and local resources. However, all  estimates that are based on statistical models, particularly of complex  processes such as the determination of states’ budget choices, are subject  to uncertainty. This uncertainty can derive from both choices about what  factors to include in a model and the inherent impreciseness in estimating  relationships between one factor—in this case federal highway grants— and another, state and local highway spending. While we have attempted to  take many factors affecting state spending decisions into account, there  may be other factors that are not subject to precise measurement, such as  the influence of citizen and interest groups on states’ funding decisions,  that could not be included in our analysis. As a result of the uncertainty in  both the data and the statistical formulation of our model, the precision of  our estimate, or any other estimate, is limited and our estimate should be  considered one point in a range within which the actual extent of  substitution falls, and one piece of a body of evidence on the existence of  substitution. (See app. II for additional details on our statistical model.)
In commenting on a draft of this report, DOT officials said that to the  extent substitution occurred and increased during the 1990s, it was likely  due to a number of factors, including changes in states’ revenues and  priorities. While our analysis specifically took changing economic  conditions into account when assessing state spending choices,  determining specific causes is beyond the scope of our statistical model.  For example, states faced rising demands for health care and education  during the 1980s and early 1990s that they may have funded, in part, by  reducing their own levels of highway funding effort when federal highway  funding increased. Accordingly, our model establishes an association  between substitution and increases in federal highway grants; it does not  identify the specific causes responsible for these rising rates.
section_title: Earlier Studies Found That Federal Grants Reduced States’ Highway Spending, Although Substitution Estimates Varied
paragraphs: Three other studies, including two published in the past 3 years, have  reported that states substituted additional federal highway spending for  state spending. These studies reported a wide range of estimates for the  percentage of federal funds that has been used as a substitute for state and  local funds, from zero to nearly 100 percent. The wide range of estimates is  the result of different time periods examined, different definitions of  substitution, and differences in the statistical methods employed.
A study by Brian Knight, which, of the three studies, included the most  recent data, found that from 1983 through 1997, roughly 90 percent of  increased federal aid was substituted for state highway spending. Knight  used a different definition of substitution than we used in our study. Knight  defined substitution as occurring when, in response to increased federal  highway funds, state funds were moved out of highway-related projects. He  did not take into account local spending on highways, which might possibly  have mitigated the reduction in state funds.
Another study, by Shama Gamkhar, analyzed data from 1976 through 1990  using two different measures of federal grants. Gamkhar reported an  average substitution rate of 63 percent when measuring federal grants  through grant expenditures (the same measure of federal grants used by  the other studies, including our model) and an average substitution rate of  22 percent when measuring federal grants through grant obligations.  Gamkhar defined substitution the same way our model did, as when, in  response to increased federal highway funds, state and local funds were  moved out of highway-related projects altogether.
A study by Harry G. Meyers examined data from 1976 through 1982, and  modeled substitution based on two different definitions of substitution.  Using a definition of substitution similar to the definition employed in our  model, the study found no evidence of substitution during this period.  Meyers also modeled the substitution rate based on a different definition of  substitution, defining substitution as occurring when state funds were  moved out of federal-aid highway projects, even if those funds were used  for highway projects that were ineligible for federal aid. Using this  definition of substitution, the study found a substitution rate of 63 percent.  The findings of these studies and GAO’s results are summarized in figure 6.  In this figure, we placed next to our finding the findings of the three models  that used the same measure of federal grants and the same or a similar  definition of substitution that we did, organizing these chronologically.
As can be seen from this figure, generally, those studies with the same or  similar definitions of substitution as our model also suggest that  substitution rates may have increased over time. Specifically, Meyers  reported no evidence of substitution into nonhighway spending from 1976  through 1982; Gamkhar, based on data through 1990, reported higher rates  of substitution; and Knight, based on data through 1997, reported even  higher rates of substitution, although using a somewhat different definition  of substitution. Our model also found evidence of such a trend.
section_title: Structure of the Federal Grant System in General May Encourage Substitution
paragraphs: In 1996, we reported that the federal grant system as a whole does not  encourage states to use federal dollars to supplement their own spending  but rather results in states using federal grants to substitute for their own  spending. In summarizing research over the past 30 years for a wide  variety of federal grant programs, we reported that each additional dollar  of federal grant funding substitutes for between 11 and 74 cents of funding  states otherwise would have spent. On balance, we found that for every  dollar of additional federal aid, states have withdrawn about 60 cents of  their own funding.
Our 1996 study found that federal grant programs produced a variety of  fiscal effects, in part depending on the grant program’s structure. For  example, grants are considered “open-ended” when there is no limit on  federal matching, and “closed-ended” when total federal matching funds  are capped. The influence of federal matching is essentially the same for  both types of grants until a state obtains the maximum federal contribution  for a closed-ended grant. After this point, closed-ended grants no longer  provide additional matching funds in response to additional state spending.  This lack of additional federal matching funds reduces the incentive for  states to increase their own spending on aided activities. As a result, we  found that open-ended grant programs, for example, Foster Care, Adoption  Assistance and Medicaid, generally stimulated additional spending from  state resources because the more states spent of their own resources, the  more federal resources they would obtain. In contrast, closed-ended  matching grant programs, such as the federal-aid highway program, which  place a limit on the total amount of federal funds that states can receive  through meeting matching requirements, as well as programs that do not  require states to contribute matching funds to receive federal funds, were  associated with higher rates of grant substitution and stimulated less  additional spending on the aided activity.
section_title: Structure of Federal-Aid Highway Program Creates an Opportunity for Substitution
paragraphs: The federal-aid highway program is particularly susceptible to substitution  because in general the current matching requirement for states is not high  enough to require states to maintain or increase their spending in order to  receive increases in federal funds. In most cases, the federal-aid highway  program requires that the federal contribution be no more than 80 percent  of the total cost of the project, while the state’s matching contribution be at  least 20 percent. If the federal highway program worked to stimulate state  spending, this might suggest that every $1.00 increase in federal funds  would result in a total spending increase of $1.25 ($1.00 is 80 percent of  $1.25), $0.25 of which would be funded with state and local government  funds ($0.25 is 20 percent of $1.25). However, because in most cases state  funding already exceeds the required state matching contribution, often by  large amounts, states are not required to increase or even maintain their  level of funding for projects in order to receive increases in federal funds.
Several studies have demonstrated that state highway spending  substantially exceeds federal matching requirements. The earliest study we  reviewed found that, during the 1960s, 38 percent of aggregate state capital  spending for noninterstate federal-aid highways was in excess of federal  matching requirements. This study found that for the large majority of  states, state spending on federal-aid highway system projects exceeded  federal matching requirements by more than 10 percent. Another study  found that in 1982, state spending on federal-aid highway system projects  exceeded the required federal match by more than 19 percent. Other  studies that have analyzed the fiscal effects of federal highway aid have  also reported that state spending typically exceeds federal matching  requirements.
In general, states continue to spend more than their required match on  federal-aid highway projects. In 2000, the most recent year for which data  are available for federal-aid highways, states accounted for approximately  49 percent of all federal-aid-eligible highway capital spending, which is  over twice the required 20 percent match on most federal-aid highway  projects. Figure 7 shows the variation among states in their highway  capital spending as a percent of total (federal plus state and local) highway  capital spending during the period from 1997 through 2000. Although these  data include spending on nonfederal-aid-eligible highways and therefore  can not be used to determine precisely to what extent states are exceeding  federal matching requirements, they show that in the majority of states,  state and local spending counts for over half of total capital highway  spending.
section_title: Substitution May Be Limiting the Effectiveness of Strategies to Accomplish the Federal-Aid Highway Program’s Overall Goals
paragraphs: The trends in funding and probable substitution described in this report  imply that substitution may be limiting the effectiveness of strategies  Congress has put into place to help the federal-aid highway program  accomplish its overall goals. Congress and DOT have at various times  enumerated goals for the federal-aid highway program, and, to meet these  goals, Congress has put in place a number of strategies, including  increasing its investment in highways and giving states wide latitude in  deciding how to use and administer federal grants to best meet their  transportation needs. However, because of substitution, the sizable  increases Congress provided in federal funding for highways have not  translated into commensurate increases in the Nation’s overall spending in  its highway system. In part, this is because, while Congress can dedicate  federal funds to highways, it cannot prevent state highway funds from  being used for other purposes. Congress has also sought to meet the goals  of the program through a strategy of emphasizing states’ priorities and  decision-making. However, substitution may be limiting the effectiveness  of this strategy. Although the federal-aid highway program has a  considerable regulatory component, from a funding standpoint, the  program is to some extent functioning as a cash transfer, general purpose  grant program. This raises broader questions about the effectiveness of the  federal investment in highways in accomplishing the program’s goals and  outcomes, for although DOT has created performance measures and  outcomes under GPRA, currently there is no link between the achievement  of these measures and outcomes and federal funding provided to the states.
subsections: section_title: Congress and DOT Have Set Out Goals for the Federal- Aid Highway Program
paragraphs: Congress and DOT have at various times enumerated goals for the federal- aid highway program to, among other things, enhance safe and reliable  travel, promote economic growth, enhance mobility, support interstate and  international commerce, and meet national security needs. According to  DOT’s 2003-08 Strategic Plan, the department’s mission is enumerated in 49  U.S.C. 101, which states that “the national objectives of general welfare,  economic growth and stability, and the security of the United States require  the development of transportation policies and programs that contribute to  providing fast, safe, efficient, and convenient transportation…”. In  establishing the Interstate Highway System, Congress, in the Federal-Aid  Highway Act of 1956, stated that the Interstate system was to serve  principal metropolitan areas and industrial centers, support the national  defense, and connect with routes of continental importance in Canada and  Mexico. Current law defines the primary focus of the federal-aid highway  program as completion and expansion of the National Highway System, of  which the Interstate is a part, to provide interconnected routes that serve,  among other things, major population centers, international border  crossings, commercial ports, airports, and major travel destinations. “…among the foremost needs that the surface transportation system must meet to provide  for a strong and vigorous national economy are safe, efficient, and reliable (i) national and  interregional personal mobility (including personal mobility in rural and urban areas) and  reduced congestion; (ii) flow of interstate and international commerce and freight  transportation; and (iii) travel movements essential for national security.”
To meet the program’s goals, Congress has set out a number of strategies,  including increasing investment in highways and providing states flexibility  to best meet their transportation needs. Furthermore, under Congress’  direction, DOT has established strategic goals and performance measures  and outcomes for the federal-aid highway program to enhance mobility and  economic growth. Among these goals are to reduce the growth of  congestion on the Nation’s highways and improve the condition of the  National Highway System.
section_title: One Strategy to Meet Goals Has Been to Increase Investment and Ensure Federal Highway Funds Go to Highway Program
paragraphs: Since the Federal-Aid Highway Act was enacted in 1956, every time  Congress has reauthorized the highway program it has expanded either the  size or scope, or both, of the federal-aid highway program. Since 1991,  Congress has provided significant increases in federal spending on  highways. ISTEA’s authorization of $121 billion for highways for the 6-year  period from fiscal years 1992 through 1997 was a 73 percent increase over  the $70 billion authorized in the prior 6-year bill, and TEA-21’s  authorization of $171 billion for the federal-aid highway program from  fiscal years 1998 through 2003 represented an increase of 41 percent over  ISTEA’s authorization level. In 2004, the House and Senate each approved  separate legislation to reauthorize the federal-aid highway program,  increases of 32 percent and 50 percent over TEA-21, respectively. Despite  these increases, numerous congressional transportation leaders stated that  these increases were not enough, and that further spending was required to  meet the country’s needs.
Congress has also included features in the design of the federal-aid  highway program to attempt to ensure that funds collected by the federal  government for highways are used for that purpose. Prior to 1956, federal  fuel and motor vehicle taxes were directed to the General Fund of the U.S.  Treasury, and there was no relationship between the receipts from these  taxes and federal funding for highways. Amid concerns that federal taxes  on motor fuel were being used for nontransportation purposes, Congress  established the Highway Trust Fund in 1956 and specifically provided that  revenues from most highway user taxes would be used to finance the  greatly expanded highway program enacted by the Federal-Aid Highway  Act of 1956. Despite having a dedicated source of funding, highways  competed for federal funding with other forms of domestic discretionary  spending through the appropriations process over the years. As a result,  Congress often appropriated less money than was authorized, even though  sufficient funds were being collected in the Highway Trust Fund to support  the authorized levels. So Congress took further action in TEA-21,  establishing guaranteed spending levels for highway programs that  protected highway programs from having to compete for funding through  the congressional budget and appropriations process. It also established  “Revenue Aligned Budget Authority,” directly linking highway revenues  collected into the Highway Trust Fund with the apportionments provided  annually to the states for their highway programs.
Despite congressional efforts to increase the federal investment in the  highway system and to ensure that funds collected by the federal  government for highways are used for that purpose, due to probable  substitution, the sizable increases in dedicated federal funding that  Congress has provided for highways have not translated into  commensurate increases in the Nation’s overall investment in its highway  system. Moreover, the effectiveness of Congress’ strategy to dedicate  federal funds to highways is limited because Congress has no similar ability  to prevent state and local highway funds, where most of the investment  occurs, from being used for other purposes. Therefore, while Congress can  ensure that certain federal moneys are dedicated to highways and given to  the states for that purpose, it cannot ensure that state and local highway  funds are not used for other purposes. When substitution occurs, some  dedicated federal highway funds replace state highway funds, and those  state highway funds are then used for other purposes.
section_title: Another Strategy Has Been to Emphasize Importance of States’ Priorities and Decision-making
paragraphs: Congress has also sought to meet the goals of the program by emphasizing  the importance of states’ priorities and decision-making regarding how to  meet their most pressing transportation needs. One way it has done so is by  incorporating return-to-origin features into the program--returning to the  states more of the money collected in fuel taxes. TEA-21’s Minimum  Guarantee provisions ensure that each state receives back from most  highway programs 90.5 percent of the total estimated percentage share of  contributions to the Highway Account of the Highway Trust Fund from  motor fuel and other taxes collected in that state. Under separate  legislation passed by both the House and Senate in 2004, this amount could  rise to 95 percent by 2009.
In addition, Congress has given the states broad flexibility in the use of its  federal aid grant funds by providing states significant discretion to use  these funds flexibly across highway, bridge, transit, and other  transportation projects. States have, if they choose, broad flexibility in the  use of slightly more than half of their federal-aid highway funds. For  example, the Surface Transportation grant program has broad eligibility  rules, and states can use those funds for highways, bridges, transit capital  projects, bus terminals, and many other uses. States may use some of their  Minimum Guarantee Program grant funds under the same rules; in fiscal  year 2003, the funds apportioned under these two programs accounted for  one third of all federal aid highway funds apportioned nationwide. For  eight states that receive higher levels of Minimum Guarantee grant funds,  these two programs account for more than 40 percent of their funding, and  in one of these eight states, for just over 50 percent. While other federal-aid  highway grant funds have more limited uses, states have the authority to  transfer funds from these limited programs to more flexible programs and  uses. For example, states may transfer up to 50 percent of their National  Highway System and Interstate Maintenance program funds to the Surface  Transportation Program or certain other grant programs, and, in the case of  the National Highway System program, 100 percent under certain  conditions.
Furthermore, states have broad flexibility in deciding which projects to  pick and how to implement them. The projects for which states use federal  funding must be for construction, reconstruction, and improvement on  eligible federal-aid highway routes. Nevertheless, federal law (23 U.S.C.  §145) provides that the authorization or appropriation of federal funds  “shall in no way infringe on the sovereign rights of the States to determine  which projects shall be federally financed.” Moreover, FHWA’s role in  overseeing the design and construction of most projects is limited.  Specifically, only high cost construction or reconstruction projects on the  Interstate Highway System are always subject to “full” oversight in which  FHWA prescribes design and construction standards, approves design  plans and estimates, approves contract awards, inspects construction  progress, and renders final acceptance when projects are completed. For  projects that are not located on the National Highway System, states are  required to assume oversight responsibility for the design and construction  of projects unless a state determines that it is not appropriate for it to do  so. As figure 8 shows, in 2002, about $1 out of every $5 obligated for  federal-aid projects occurred on the Interstate system, while projects off  the National Highway System accounted for about 57 percent, nearly 3  times as much.
Substitution may be limiting the effectiveness of Congress’ strategy of  emphasizing the role of states’ priorities and decision-making regarding  how to meet their most pressing transportation needs. The program does  have a substantial regulatory component that requires states to enact and  follow certain laws as a condition of receiving federal funds; for example,  states are required to enact drunk-driving laws, such as .08 blood alcohol  laws, and to contract with disadvantaged business enterprises. However,  from a funding standpoint, the federal-aid highway program’s return-to- origin features and flexibility, combined with substitution and the use of  state and local highway funds for other purposes, means that the program  is, to some extent, functioning as a cash transfer, general purpose grant  program. This raises broader questions about the effectiveness of the  federal investment in highways in accomplishing the program’s goals and  outcomes.
section_title: Broader Questions Exist about the Program’s Goals and Outcomes
paragraphs: Our findings on substitution lead to broader questions about whether the  federal-aid highway program is effective in meeting its goals. As required  by the Government Performance and Results Act (GPRA), DOT has  articulated goals for the department’s programs, including the federal-aid  highway program, to achieve by establishing measurable performance  goals, measures, and outcomes. One of the purposes of GPRA is to provide  decisionmakers a means of allocating resources to achieve desired results.  Linking resources and results will become even more important than it is  today in the years ahead, as the Nation faces a fiscal crisis in which  mandatory commitments to Social Security and Medicare will consume a  greater share of the Nation’s resources, squeezing the funding available for  discretionary programs, potentially including highways. These challenges  require the Nation to think critically about all existing government  programs and commitments.
Among its performance goals, DOT has articulated goals for mobility and  economic growth, including to improve the condition of the transportation  system, reduce travel times, and increase access to and reliability of the  transportation system. Two major performance measures related to the  federal-aid highway program are to (1) improve the percentage of travel on  the National Highway System meeting pavement performance standards  for acceptable ride and (2) slow the growth of congestion--in particular, to  limit the annual growth of urban area travel time under congested  conditions to one-fifth of 1 percent below the growth that has been  projected. These goals are shown in figure 9.
Although DOT has articulated performance measures, the federal-aid  highway program does not have the mechanisms to link funding levels with  the accomplishment of specific performance-related goals and outcomes.  In contrast, NHTSA has some incentive grant programs that link funding to  particular outcomes, such as increasing the use of seat belts within states.  As we have reported, although a variety of tools are available to measure  the costs and benefits of transportation projects, they often do not drive  investment decisions, and many political and other factors influence  project selections. For example, the law in one state requires that most  highway funds, including federal funds, be distributed equally across all the  state’s congressional districts. Consequently, there is currently no way to  measure how funding provided to the states is being used to accomplish  particular performance-related results such as reducing congestion or  improving conditions.
section_title: We Identified Several Options for the Design and Structure of the Federal-Aid Highway Program
paragraphs: We identified several options for the design and structure of the federal-aid  highway program that could be considered in light of the issues raised by  our findings. On the one hand, there are options that have been used in  other federal programs that could limit substitution. Another option to  consider may be to simplify the program towards a more flexible approach.  Another option would be to consider whether a different program structure  and different financing mechanisms could be used to target funding and  more closely align resources with desired results.
subsections: section_title: Reduce Substitution
paragraphs: To increase the extent to which federal-aid highway program funds are  used to supplement state highway funds rather than substitute for them,  several options exist to re-design the program to limit substitution. These  include:  Revising federal matching requirements to increase the percentage of  projects’ costs that must be paid for with state and local funds.
Instituting the use of funding formulas that reward states that increase  state and local highway funding by increasing their federal funding,  while reducing the federal funding of those states that do not.
Adding a requirement that states maintain their own level of highway  spending effort over time in order to receive additional federal funds.
All three options are designed to reduce or eliminate substitution. The first  two options are designed to stimulate additional state spending on  highways, while the third option is designed so that increased federal  funding will supplement state spending rather than replace it. These  objectives may not be perfectly achieved because models of substitution,  like any models, produce estimates that are subject to uncertainty. As such,  there is no way to objectively determine with certainty what states would  have spent in the absence of increased federal funding. Table 3 summarizes  the options, along with possible approaches that could be taken in  implementing them.
Each of these options and approaches would be likely to have somewhat  different effects and would require careful consideration of various factors.  Some possible effects are summarized below; see appendix IV for  additional discussion of these options.
The likely effect of revising the matching requirement would depend on  the magnitude of the change. For example, if the requirement was  changed so that states generally had to provide 60 percent of the total  funding for eligible projects, states currently spending less than 60  percent of total highway funds for eligible projects would have an  incentive to increase their spending in order to obtain the maximum  federal match, while those spending more than 60 percent would not  have an incentive to increase their spending. A few states with a low  state/federal spending ratio might have to more than double their  current spending in order to receive additional federal funds. Setting the  required match at 40 percent would give fewer states an incentive to  increase their spending and would generally require less of an increase  in spending from those states with low state/federal spending ratios. An  advantage of continuing to set the state match at 20 percent but  counting only state spending in excess of what each state spent during a  base time period towards the match is that it would stimulate state  spending in all states to a similar degree.
Using funding formulas that link federal funds to states’ highway  funding effort could also be achieved through various approaches. For  example, providing federal funds to states proportionally based on their  effort in comparison to the average effort of all states would put states  in competition with each other, rewarding states whose funding effort is  already high and penalizing states whose funding effort is currently low.  On the other hand, providing federal funds to states proportionally  based on each state’s own effort during an initial base time period would  put each state in competition with the funding effort it made in the base  period, rewarding states whose spending grew more quickly in  comparison to their spending during the base period and penalizing  states whose spending stayed the same or dropped when compared to  their spending during the base period. Such provisions could be  designed so they could be suspended in a recession or severe economic  downturn in order to prevent states from having to make  disproportionate reductions in other state services to maintain highway  funding.
Instituting a maintenance of effort provision would require each state to  continue to spend what it spent in a defined base period, plus inflation,  in order to obtain increased federal funds. Therefore, it would not  stimulate state spending, but it would attempt to ensure that states used  federal funds to supplement rather than replace state and local funds. In  previous work, we concluded that, to be effective, maintenance of effort  provisions need to define a minimum level of state spending effort that  can be objectively quantified and updated to keep pace with inflation in  program costs so that the maintenance of effort provision ensures a  continued level of activity when measured in inflation adjusted dollars.  This could be achieved by defining a state’s base spending level as the  amount spent per year during a recent historical period and then  adjusting that base spending level for inflation.
section_title: Increase Flexibility in States’ Use of Funds and Reduce Administrative Expenses
paragraphs: Another potential option would be to build on trends giving states greater  flexibilities and discretion with their federal-aid highway program funds. In  contrast to changes in program designs that would limit substitution,  adopting such an option could be seen as recognizing substitution as an  appropriate response on the part of states to increasing fiscal challenges  and competing demands. Adopting such an option could also be seen as  recognizing that the ability of states to meet a variety of needs and fiscal  pressures might be better accomplished by providing states with federal  funding for highways through a more flexible federal program.
Such an option would also recognize the changing nature of FHWA’s role  and the federal-aid highway program. Currently, FHWA reviews and  approves transportation plans and environmental reviews, and—on some  projects—designs, plans, specifications, estimates, and contract awards.  FHWA also has duties related to the program’s considerable regulatory  component. To carry out these responsibilities, FHWA has among the  largest field office structure in DOT, and a larger field structure than many  other federal agencies. FHWA has personnel in over 50 field offices,  including one office in each state, and has had a field office in each state  since 1944. However, the federal-aid highway program has changed  considerably in 60 years. In 2004, the program’s return-to-origin features  and flexibility, combined with substitution and the use of state and local  highway funds for other purposes, means that from a funding standpoint,  the federal-aid highway program is, to some extent, functioning as a cash  transfer, general purpose grant program. Devolving funding responsibilities  to the states in a manner consistent with that function would build on the  flexibilities already present and obviate much of the need for FHWA’s  extensive field organization, allowing it to be greatly reduced in scope. This  could produce budgetary savings of some portion of FHWA’s $334 million  annual budget.
Adopting such an option would involve weighing numerous factors,  including FHWA’s role and value. But devolving funding responsibilities to  the states would not require abandoning the program’s regulatory  component. Some federal laws and requirements in place originated  outside the transportation program and would doubtless remain in force,  such as civil rights compliance. Others that are currently part of the  transportation program could also remain in effect. Depending on  priorities, these could continue to be overseen by FHWA directly or a  process could be established through which states certify their compliance  with the requirements, as is done in other programs. In this manner, it  would be possible to enforce these laws and requirements without an  extensive field structure, as other federal agencies and programs do.
Devolving authority to the states could also take the form of devolving not  only the federal programs, but the revenue sources that support it.  Considerable federal effort goes into collecting and accounting for motor  fuel taxes and other highway user fees. One argument for maintaining a  federal fuel tax is that this tax may be a useful public policy to prevent tax  competition between states to avoid the disinvestment in the highway  system that could potentially result. Such a “turnback” provision was  considered in the form of an amendment to TEA-21 in the House of  Representatives in 1998, but it did not pass.
Devolving federal responsibilities to the states is not dissimilar to the  Surface Transportation System Performance Pilot Program that was  proposed in the administration’s reauthorization proposal, but which was  not included in either the House or Senate version of the bill. Up to five  states could have participated in the program, which would have allowed a  state to assume some or all of FHWA’s authorities and responsibilities  under most federal law or regulations.Once approved to participate, a  state would have had to identify annually what goals it wanted to achieve  with its federal funds and what performance measures it would use to  gauge success. A state would also have had to agree to a maintenance of  effort requirement that it maintain its total combined state and federal  highway program expenditures at the level of at least the average level of  the three previous years. A state’s participation in the pilot program would  have been terminated if that state did not achieve the agreed performance  for two consecutive years.
section_title: Link Federal-Aid Highway Funding with Program Goals
paragraphs: Another option could be to consider whether a different program structure  and different financing mechanisms could be used to target funding and  more closely align resources with desired results. Restructuring the  program in this way could take several forms. For example, the program  could be reoriented to function more like a competitive discretionary grant  program, in which program sponsors justify projects seeking federal aid  based on an assessment of their potential benefits. This is not dissimilar to  the program used by DOT to fund large transit capital projects. The  program could also be revised to include the use of incentive grant  programs similar to those that NHTSA has to link funding to particular  outcomes, such as increasing the use of seat belts within states.
Adopting such an option would require asking the following questions:   What policy goals have been established by Congress for the  performance of the federal-aid highway program, what outcomes and  results have been articulated in DOT’s strategic plans to fulfill those  goals, and are they the right goals and outcomes?
What is the appropriate role of each level of government? Would the  roles need to be redefined in order to align federal spending more  closely with a greater performance and outcome orientation? In  particular, what refocusing of federal involvement (e.g., interstate  commerce, homeland security, national defense) would need to occur?
How could the design of the federal-aid highway program’s grants and  funding mechanisms best support accomplishment of agreed-upon  performance goals and outcomes? What funding incentives are needed  to introduce a greater performance and outcome orientation?
What type of departmental administrative structure for the federal-aid  highway program would best ensure that the performance goals  established by Congress and articulated in DOT’s strategic plans and  outcomes are measured and accomplished?
Can a greater performance and outcome orientation to the federal-aid  highway program be reconciled with congressional and state legislative  policies and preferences toward providing at least some transportation  funding in the form of specific project earmarks?
section_title: Conclusions
paragraphs: Addressing the issues raised in this report would require weighing  competing and sometimes conflicting options and strategies. If, for  example, reducing the level of grant substitution is an important concern,  then design changes in the current program, including adopting features  that have been used in other federal programs, may be warranted. If, on the  other hand, preserving states’ flexibility, including their ability to meet a  variety of needs and fiscal pressures is a higher priority, then design  changes in the direction of a different, more flexible program may be  warranted. While some options are mutually exclusive, others could be  enacted in concert. For instance, an option to limit substitution could be  combined with efforts to align resources with desired results, and returning  program authorities and resources to the states could be accompanied by  adding performance measures.
Beyond these options, our work raises broader and more fundamental  issues given the challenges the Nation faces in the 21st Century. The fact  that both the federal and state governments face budget deficits totaling  hundreds of billions of dollars and a growing fiscal crisis requires  policymakers to think critically about existing government programs and  commitments and make tough choices in setting priorities and linking  resources to results to ensure that every federal dollar is wisely and  effectively spent. The opportunity to better align the federal-aid highway  program with performance goals and outcomes comes at a time when both  houses of Congress have already approved separate legislation to create a  National Commission to examine future revenue sources to support the  Highway Trust Fund and to consider the roles of the various levels of  government and the private sector in meeting future surface transportation  financing needs. The proposed commission is to consider how the program  is financed and the roles of the federal and state governments and other  stakeholders in financing it; the appropriate program structure and  mechanisms for delivering that funding are important components of  making these decisions. Thus, this commission may be an appropriate  vehicle through which to examine these options for the future structure  and design of the federal-aid highway program.
section_title: Matter for Congressional Consideration
paragraphs: In light of the issues raised in this report and the fiscal challenges the  Nation faces in the 21st Century, Congress may wish to consider expanding  the proposed mandate of the National Commission to assess possible  changes to the federal-aid highway program to maximize the effectiveness  of federal funding and promote national goals and strategies. Consideration  could be given to the program’s design, structure, and funding formulas; the  roles of the various levels of government; and the inclusion of greater  performance and outcome-oriented features.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided DOT a draft of this report for review and obtained comments  from departmental officials, including FHWA’s Director of Legislation and  Strategic Planning. These officials said that our analysis raised interesting  and important issues regarding state funding flexibility and the federal-aid  highway program that merit further study. DOT officials also stated that  while they recognize that federal-aid highway grants can influence state  and local governments to substitute federal funds for state and local funds  that otherwise might have been spent on highways, they believe that this  substitution is likely due to numerous factors. Specifically, the officials said  that to the extent substitution occurred and increased during the 1990s, it  was also likely due to changes in states’ revenues and priorities. DOT  officials also emphasized that regardless of changes in the availability of  state funds for highway programs, the overall federal share of capital  spending on highways declined during the period we studied, from over 55  percent in the early 1980s to around 45 percent today. DOT officials also  emphasized that there is no evidence that the substitution discussed in our  report resulted in the diversion of federal-aid highway funds apportioned to  the states. They further stated that substitution may reflect appropriate  resource allocations by states and that preserving states’ flexibility has  been a priority of the federal-aid highway program and is a goal of DOT’s  reauthorization proposal. Finally, regarding options for changes in the  design of the federal-aid highway program, officials emphasized that FHWA  adds considerable value to the federal-aid highway program by providing  program oversight and sharing its expertise with states to ensure states  uniformly address key areas of national concern including safety and  environmental protection.
We agree with DOT’s characterization of the importance of the issues  raised in this report, including the effect that federal-aid highway grants  have on state spending decisions and states’ funding flexibility. We also  agree with DOT officials that many factors influence state budgetary  decisions, including changing state budget priorities and the availability of  state revenues. It was for this reason that we used a statistical model that  specifically took changing economic conditions and revenues into account  in order to better isolate the effect of federal grants on state spending  choices. We believe that our model has reasonably distinguished between  the effects of changing economic conditions and revenues and the effect of  federal grants, and, consistent with earlier models and studies, we found  the relationship between federal grants and state spending, indicating  substitution, to be statistically significant, particularly during the 1990s.  However, determining specific causes of substitution is beyond the scope  of our statistical model. For example, while states faced rising demands for  health care and education during the 1980s and 1990s that could have  resulted in states reducing their highway spending when federal highway  funding increased, our model does not identify the specific causes  responsible for rising substitution rates. Although DOT officials said that  the overall federal share of capital spending on highways declined during  the period we studied, these relative shares do not affect our findings on  substitution since substitution can occur when the federal share of funding  is either rising or falling; if substitution occurs when state funding is rising  it simply means that state spending increased less than the increase that  might have occurred had there been no substitution. While DOT officials  stated that there is no evidence that substitution resulted in the diversion of  federal-aid highway funds, there are important differences between  diversion and substitution. In the context in which DOT officials raised it,  diversion is the transfer of federal funds for purposes other than those  authorized by law, while substitution, as we have reported it, is the transfer  of state funds that would have otherwise been spent on highways. States  can both use federal funds for the purposes authorized by law and at the  same time substitute federal funds for state funds. Thus, while we agree  that there is no evidence that substitution resulted in the diversion of  federal-aid highway funds, we do not believe our report suggests the  existence of such evidence.
Finally, we agree with DOT officials that states’ flexibility and FHWA’s role  are important factors in the federal-aid highway program; however, we  believe that options for changing the design, structure, and funding  mechanisms of the federal-aid highway program should be considered in  light of substitution and the issues raised in this report, and that a variety of  factors, including but not limited to these two, should be weighed when  considering such changes. While the department took no position on the  matter for congressional consideration to expand the mandate of the  proposed National Commission, officials did state that they believe these  issues merit further study. We continue to believe that Congress has the  opportunity to maximize the effectiveness of federal funding and promote  national goals and strategies by expanding the proposed mandate of the  National Commission to consider these issues.
We are sending copies of this report to the Honorable Norman Mineta,  Secretary of Transportation. We will also make copies available to others  upon request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at  heckerj@gao.gov, or (202) 512-2834, or contact Jerry Fastrup at  fastrupj@gao.gov or (202) 512-7211, or Steve Cohen at cohens@gao.gov or  (202) 512-4864. GAO contacts and acknowledgments are listed in   appendix V.
section_title: Objectives, Scope, and Methodology
paragraphs: In light of the increasing federal-aid highway program funding and  concerns over future federal revenues for highways, you asked us to  provide information on past trends in the federal, state, and local capital  investment in highways, and how federal-aid highway program grants  influence the level of state and local highway spending. We responded to  the first part of your request in June 2003. This report (1) updates  information on trends in federal, state, and local capital investment in  highways; (2) assesses the influence that federal-aid highway grants have  had on state and local highway spending; (3) discusses the implications of  these issues on the federal-aid highway program; and (4) discusses options  for the federal-aid highway program that could be considered in light of  these issues. In addition, this report identifies characteristics associated  with differences among states’ levels of effort for highways (see app. III).
To update information on federal, state, and local capital investment in  highways, we obtained 2002 (the most recent year available) expenditure  data from the Federal Highway Administration. We converted these  expenditure data to 2001-year dollars to coincide with the data in our  previous report, which presented data from 1982 through 2001.
To assess the influence that federal-aid highway grants have had on all state  and local highway spending, we reviewed and synthesized the research  literature on this issue. Our literature review revealed a number of studies  that used statistical models to estimate the influence of federal funding on  state spending. These models examined different time periods, employed  different statistical methods, and considered different potential social,  demographic, economic, and political factors that may affect state highway  spending decisions. None of the models used in the studies we reviewed  included the most recent data now available on highway funding, and none  examined whether the effect of federal grants on state spending changed  during the time period covered in the study. Therefore, based on the  models used in the earlier studies, we developed our own statistical model  of state highway capital and maintenance outcomes to estimate the fiscal  effects of federal highway funding on state highway spending. The purpose  of our statistical model was to isolate the effect of federal grants on  highway spending in states by controlling for other factors that affect state  spending decisions. Our model therefore considered a wide range of  potential factors such as economic conditions and the size of a state’s  highway system, that may affect state spending choices. In addition, our  model included the most recent data available and examined whether the  effect of federal grants on state spending changed during the time period.  A more detailed description of the literature and our statistical model is  contained in appendix II. Finally, our model was reviewed by experts in the  Department of Transportation (DOT) and peer reviewed by three authors  of the earlier studies on the fiscal effects of federal highway grants. These  experts and authors generally agreed with our methods, and we made  revisions based on their comments as appropriate.
To address the implications of the effect of federal highway grants on state  and local highway spending and options raised by these implications, we  reviewed pertinent legislation and congressional actions affecting the  federal-aid highway program, including goals, funding trends, program  features, and financing mechanisms. We reviewed the Government  Performance and Results Act and DOT’s strategic and performance plans  and reports for 2003 and 2004. We then evaluated how our model results  and other analysis on the existence of substitution affect the design and  performance of the federal-aid highway program.
Finally, to identify state characteristics associated with their effort to fund  highways from state resources, we defined a state’s level of effort broadly  to include both a state’s and its local governments’ spending for highway  maintenance and capital construction relative to the personal income of  state residents. We determined a multivariate analysis is required so that  other factors, in addition to the state characteristic under consideration,  can be taken into account and held constant. (See app. III for results.)
To perform this multivariate analysis, we utilized the same statistical model  of state highway spending used to analyze the fiscal effect of federal  highway grants (see app. II). The variables expected to affect state highway  spending fall into four broad categories: (1) fiscal capacity, (2) the cost of  transportation services to the representative voter/consumer (tax price),  (3) federal grants, and (4) indicators of state preferences for highway  spending. The specific variables we considered are listed in   table 6.
We conducted our work from August 2003 through July 2004 in accordance  with generally accepted government auditing standards.
section_title: Description of Grant Substitution Model, Statistical Methods, and Results
paragraphs: This appendix presents a thorough description of the statistical analysis  that we conducted to estimate the extent to which states substitute federal  highway grants for funds that would have been spent on highways from  their own resources. The first section summarizes the literature on this  topic because we built upon models from previous studies in developing  our model. The next section describes the model that we developed. The  final section describes the statistical tests that we used and presents the  results of those tests.
subsections: section_title: Summary of Previous Studies
paragraphs: We reviewed a number of studies on substitution and relied most heavily on  the models used in three of them in developing our statistical model. The  three studies are similar in that each draws upon economic models that  explain states’ highway spending in terms of the demand for mobility that  flows from the construction and maintenance of a highway network. Within  the context of these models, the potential for grant substitution arises in  the response of state highway spending to changes in federal grant funding.  However, these models differ in key details, such as the statistical methods  used to estimate the extent of substitution, the definition of state highway  expenditures, and the control variables used in the model. They also differ  in their estimation of substitution rates.
subsections: section_title: Conceptual Framework
paragraphs: The models in each of the key studies are built upon the premise that the  political process responds to the preferences of voters/consumers for  highway transportation services. As a result, the models characterize the  demand for and supply of highway spending as depending on four types of  factors: 1. Fiscal capacity (FC), which is the ability of states to fund services using  2. The tax price (TP) faced by the typical voter/consumer of highway  services, which can be thought of as the cost of an additional unit of  mobility;  3.
Intergovernmental grant funding (G), including both grants intended  for highways and grants for other public services; and  4. Differences in voter/consumer preferences (P) for highway  transportation services.
This relationship can be summarized in the following relationship: State Highway Expenditure = f(FC,TP, G, P)
In these models, greater tax paying capacity is expected to result in a  higher demand for mobility that in turn increases the demand for a larger  highway network. Similarly, more grant funding (both for highways as well  as for other public services) increases the resources available to states and  is expected to increase total highway spending. Differences in political  culture are also expected to result in different preferences for  transportation services relative to other public services, such as health and  education. Finally, if the typical voter/consumer faces a higher unit cost of  transportation services, also called the tax price of highway services, the  demand for transportation services is likely to be lower.
The tax price of highway services is, in turn, dependent upon several  factors:  1. A higher cost of inputs (labor, building materials, supplies, etc.) used to  build and maintain highways results in more expensive transportation  services. A higher unit cost of mobility is expected to reduce the  demand for transportation services, but will increase highway spending  as long as the demand for transportation services is price inelastic. 2. Economies and/or diseconomies of scale may also affect the unit cost  of mobility. A required minimum facility size may result in more lane  miles per resident in smaller states, which may result in a higher unit  cost for the typical voter/consumer. Similarly, very low lane miles per  resident may be associated with more intensive usage, which may also  result in a higher unit cost as well. Thus, unit cost may be U-shaped.  3. A greater number of voter/consumers with whom the cost of highway  services may be shared is expected to reduce unit cost to the typical  state voter, increasing the demand for transportation services. This will  result in higher total highway spending and lower spending per voter so  long as demand is price inelastic.  4. More highway users may lead to greater deterioration in the quality of  highways and greater congestion, raising the unit cost of transportation  services to the typical voter/consumer, reducing the demand for  highway services. The effect on spending is expected to be positive if  demand is price inelastic. In addition to cost considerations, more  users could also be thought of as reflecting a stronger preference for  highway services relative to other goods and services. 5. Matching grants on the marginal dollar of highway spending reduce the  unit cost of services to the typical voter/consumer. To the extent that  matching requirements apply to additional state spending the typical  voter/consumer pays a smaller share of additional spending, lowering  the cost of additional spending to the typical voter/consumer and  raising the demand for highway services.
In table 4, we summarize three studies that are representative of the variety  of models that have been considered in the literature and upon which we  base our analysis.
section_title: Statistical Methods
paragraphs: The three studies employ a variety of statistical methods in estimating the  substitution effect of federal highway grants. All use simultaneous  equations estimators, but they treat different variables as endogenous.  Knight and Gamkhar treat federal grant expenditures and state own-source  highway expenditures as jointly determined and therefore use an  instrumental variable estimator for their per capita federal grant variable to  remove the endogenous component associated with this variable. In  contrast, Meyers does not treat per capita federal highway grants as an  endogenous variable and may have a biased estimate of the substitution  rate. He does, however, treat the effective matching rate associated with  highway grants (i.e., the ratio of highway grants to total highway spending)  as endogenous and uses an instrumental variable procedure to correct for  potential bias in that variable.
Both Gamkhar and Meyers find autocorrelation in their error terms and,  therefore, make an adjustment for autocorrelation. The Knight study does  not correct for autocorrelation. Finally, both Knight and Gamkhar use a  fixed effect estimating procedure to control for unique circumstances  across states that are not captured by the other control variables included  in their models. Neither study reports the significance of fixed effects in  their model. In addition, Gamkhar also includes time dummy variables to  capture systematic effects over time that the other control variables do not  capture. Knight does not include a time adjustment in his model. Meyers  includes neither a fixed effects nor time adjustment.
section_title: Differing Definitions of State Highway Expenditures
paragraphs: Each of the three studies define state highway spending differently, which  has important implications regarding how grant substitution is measured  and influences the interpretation of the studies’ results. The earliest study,  by Meyers, includes state capital spending only for projects eligible under  the federal-aid highway program, excluding spending for interstate  highways. Measuring the dependent variable in this way means the  highway grant coefficient measures only the response of state capital  spending on federal-aid highway projects to changes in federal funding. As  a consequence, Meyers counts increased state or local spending for  maintenance on federal-aid highway projects, or increased state or local  capital and maintenance on nonfederal-aid highway spending, as grant  substitution in the same way as increased spending for other state services  such as education and health or increased state taxpayer relief would be  counted as substitution.
In contrast, Knight defines state highway spending more broadly to include  all highway spending by state governments, whether for federal-aid  highways or for other state highway projects. However, Knight does not  include local spending on highways in his definition of state highway  spending. As a consequence, increased state maintenance spending on  federal-aid highway projects or spending on state government highway  projects that are not part of the federal-aid system is not considered grant  substitution in his study, even though such spending is not eligible for  federal assistance. However, increased highway spending by local  governments is considered to be grant substitution in the same way that  increased state or local spending for other state services and increased tax  relief are considered substitution. Finally, the Gamkhar study defines  highway spending to include both capital and maintenance spending by  both state and local governments. This study, therefore, counts only  increased state or local spending for nonhighway purposes, including  increased tax relief, as representing grant substitution.
section_title: The Estimated Effect of Federal Highway Grants on State Highway Spending
paragraphs: All three studies use federal grants expenditures to measure federal grants  received by states. This variable is statistically significant in all studies. In  addition to grant expenditures, Gamkhar also considers grant obligations  as an alternative measure. Since obligated funds are available for  expenditure for several years, she included this variable with lagged  values.
The reported estimates of substitution rates associated with federal  highway grants vary across the three studies. These differences are, in part,  due to differences in the time periods studied, the definitions of state  highway spending, and the statistical methods employed. Among the  highlights of the studies were the following:   Knight’s study reports a grant substitution rate of over 90 percent for the  period from 1983 to 1997. Knight defines substitution as the reduction in  state (but not local) government spending on all highway-related  projects.
Gamkhar reports a substitution rate of 63 percent for the period 1976  through 1990. Gamkhar defines substitution as the reduction in state  and local government spending on all highway-related projects;  Gamkhar measured federal grants using grant expenditures. When  grants were measured using obligations rather than actual grant  expenditures, a lower substitution rate of 22 percent is reported.
Meyers also reports a 63 percent substitution rate for the period 1976  through 1982. Meyers defines the substitution rate as the reduction in  state and local government spending on federal-aid eligible highway  projects net of spending on the Interstate Highway Systems; federal  grants are measured using grant expenditures. However, when he  defined substitution as the increase in state and local government  nonhighway spending, he reports no substitution.
Table 5 summarizes the definitions used and findings of these three studies.
section_title: Controls for Other Factors Associated with State Spending Choices
paragraphs: To isolate the effect of federal highway grants on state highway spending,  these studies include additional variables in their models to control for  other factors also related to state spending. Some of the control variables  are similar across the studies, but others differ.
subsections: section_title: Fiscal Capacity
paragraphs: All three studies use per capita personal income to represent states’  funding capacity, and in each study the variable is found to be statistically  significant.
section_title: Tax Price
paragraphs: All three studies include a wide variety of variables that are intended to  capture various components of the tax price faced by the typical  voter/consumer.
section_title: Input prices
paragraphs: All three studies measure financial variables in real dollars by adjusting for  price level differences over time but otherwise do not explicitly include an  input cost adjustment as a tax price proxy, except to the extent that the  fixed effects procedure employed by Knight and Gamkhar capture these  differences.
section_title: Highway System Size
paragraphs: Only Meyers uses an indicator of highway system size: lane miles on  federal-aid highways. While this variable has the expected positive sign it is  statistically insignificant. However, a quadratic term to capture a possible  U-shaped functional form was not used.
section_title: Highway usage
paragraphs: All studies use the number of registered vehicles as a measure of highway  usage. In addition, Knight uses the number of drivers, whereas Meyers  includes vehicle miles traveled. Gamkhar includes several additional  proxies for highway use that are not included in the other studies: the  percentage of light motor vehicles, population density, and percentage of  population living in metropolitan areas. However, none of these factors was  statistically significant. In general, only one of the use variables is  statistically significant in each study and no one measure is statistically  significant across studies. In several instances the coefficient has a  negative sign, although a positive relationship between highway usage and  state spending would be expected.
section_title: Highway matching rates
paragraphs: Although highway grants require state matching, Knight and Gamkhar do  not include highway matching rates as part of their models because they  found that states’ highway spending exceeds the amounts required for their  federal grant allotments and, therefore, have only an income effect but no  price effect. Meyers, in contrast, does include the effective matching rate  (highway grants as a percentage of highway expenditures) and reports a  price elasticity of one.
section_title: Nonhighway matching rates
paragraphs: Other grants may also have a price effect because programs such as  Medicaid, Foster Care, and Adoption Assistance are all open-ended  matching grants. Including the effective matching rate associated with  other grant spending (i.e., other grants as a percent of  nonhighway spending) captures the potential price effect of other grants.  The sign on the effective matching rate is expected to be negative because  higher demand for other state services would reduce the demand for  highway spending. These variables are statistically significant in both  studies. The Knight study does not consider the tax price effect of  nonhighway grant funding.
section_title: Cost sharing
paragraphs: Only Knight, by including population in his model, includes a factor that  could be interpreted as reflecting the cost-reducing effect of having more  taxpayers sharing the cost of highway services. Neither Gamkhar nor  Meyers includes such a factor.
section_title: Other Grant Funding
paragraphs: In addition to the tax price effect of nonhighway grant funding, the studies  may also have income effects. Both Meyers and Gamkhar include other  nonhighway grants per capita in their models to capture the income effect  of these grants. The income effect is expected to have a negative effect on  own-source spending as some of these grants may be substituted into  highway spending and supplant funding from state resources. The Knight  study does not consider either price or income effects associated with  nonhighway grant funding.
section_title: Political Culture/Preferences
paragraphs: Only Knight includes variables that are intended to reflect differences in  state preferences for highway spending that may be associated with the  political party of the state governor and the partisan representation in the  state legislature. He finds the party of the state governor to be statistically  significant at the 10 percent level, while the other political variables are not  statistically significant.
section_title: Description of GAO’s Statistical Model
paragraphs: Consistent with previous studies, we model state spending choices as being  conditioned on states’ fiscal capacities, the tax price faced by state voters,  federal grant funding for highways and for other state services, and  preferences of state voters for highway spending. Because both theory and  the results of previous studies suggest that federal grants and state  spending decisions are jointly determined, we use an instrumental  variables (IV) approach to estimate the fiscal effect of federal grants.
To capture other factors that may be systematically associated with  differences in state spending choices, we estimate the model using a fixed  effects estimating procedure. The fixed effects procedure is intended to  capture factors such as topographical differences and weather conditions  across states that do not change over time and to capture other  unmeasured factors with large cross-state variation that exhibit relatively  little change over time. In addition, we include a time trend to capture  trend changes in state spending that may not be captured by the other  variables included in our model.
The specific variables considered for our model are listed in table 6.
subsections: section_title: Testing the Stability of the Substitution Rate
paragraphs: With each time period, various rules and regulations change that may affect  the ability of states to substitute federal grants for state spending. Given  the range of estimates over different time periods reported in past  research, we also want to test whether the rate of grant substitution, if  found, systematically differ across the time periods included in our data. To  see if the substitution rate differs over time, we introduce dummy variables  for each of the time periods covered in our study into our model. We then  multiply these dummy variables by the grants variables and included these  interaction variables in the model. If statistically significant, these variables  would provide evidence that substitution has varied from one time period  to another.
section_title: Definition of State Highway Spending
paragraphs: The estimated effect of federal highway grants on state highway spending  is measured by the regression coefficient associated with federal highway  grants. As a consequence, the interpretation of that coefficient is directly  affected by how the dependent variable, state expenditures, is defined. If  we defined state highway spending narrowly as only capital expenditures  on federal-aid highway projects, the federal grants coefficient in our model  would be interpreted as the response of state capital spending to changes  in federal highway aid. This approach, taken by Meyers, represents a  definition of state spending that is consistent with the requirements of the  federal-aid highway program, which restricts federal grants to authorized  uses, such as capital investment on eligible federal-aid highway routes.  Under this approach, grant funds that are used for purposes that are not  eligible for federal aid, would represent grant substitution in the same way  that increased spending for health and education and for state tax relief  would represent grant substitution. Some policymakers may not view this  as substitution, perhaps arguing that state transportation officials are  better positioned to determine the best use of available funding for  highway-related projects. Our analysis uses this broader definition of state  highway spending. Thus, our measure of grant substitution considers only  state grant funds that are effectively used for nonhighway purposes as  substitution.
We adopt this approach for two reasons. First, we want to be conservative  in our definition of grant substitution. A broader definition of state highway  spending that includes state and local spending on highway projects not  eligible for federal funding would yield a lower estimate for the substitution  rate because some types of adjustments would not be treated as grant  substitution. Second, an estimate of grant substitution that is based only on  state (but not local) government spending would be affected by cross-state  differences in the extent to which highway spending is centralized at the  state level. Since there are large differences across states in the extent to  which highway spending is centralized, we include local as well as state  government spending so that our measure of highway spending would be  comparable across states.
section_title: Definition of Federal Highway Grants and Specification of the Federal Grants Equation
paragraphs: Because federal highway grants are provided on a reimbursement basis, we  obtained from FHWA federal highway grant expenditures that are  contemporaneous with states’ reported own-source highway spending. As  with state spending, we express federal grants in real per capita dollars,  using the BEA chain-price index for state and local government streets and  roads. Because federal grant expenditures, by definition, represent formula  grant allotments from current and prior years, any lagged response in state  spending to federal highway grant funds is already included in our grants  variable. We therefore do not include lagged values of federal highway  grants in our model.
Knight provides an economic argument explaining that state highway  spending and federal grant funding are jointly determined because elected  officials reflect the preferences of state voter/consumers both in state  legislatures and in Congress. His study tests for and finds confirming  evidence for his theoretical argument. Based on these findings, we also  employ an IV estimator that provides a consistent estimate of the federal  grant coefficient to measure the fiscal effect of federal grants. Using this  approach, we estimate a first stage instrumental variable equation that  models federal highway funding in terms of exogenous variables that are  expected to influence the distribution of federal grants. The instrumental  variables include the exogenous variables from the state expenditure  equation (e.g., fiscal capacity, the individual components of tax price, and  preferences) and variables that are highly correlated with federal grants  but uncorrelated with state highway spending (e.g., variables included in  federal grant formulas and those that may affect the distribution of  discretionary grants). Predicted values of federal grants, derived from the  instrumental variables (highway grants) equation, are then used in lieu of  actual grant values to correct for the bias in ordinary least squares (OLS)  estimates of the federal grants coefficient in the state expenditure  equation.
The excluded exogenous variables we consider include state contributions  to the highway trust fund and variables that are intended to reflect the  influence of state representatives on the distribution of federal highway  grants: tenure in Congress, state representation on transportation  committees, and state representation in the majority party. The exogenous  variables we consider are summarized in table 7.
Consistent with the state highway spending equation, we include real per  capita income, real nonhighway grant funding, registered vehicles, licensed  drivers, and vehicle miles traveled—including 1- and 2-year lagged values  for each of these variables—and use a fixed effects estimating procedure.  Fixed effects are intended to capture factors that have substantial variation  across states with little variation over time. Examples would be factors  such as state land area—a factor that has been part of highway funding  formulas and that does not change over time—and constraints that are  applied to funding formulas, such as the ½-of 1 percent minimum state  grant that is included in highway funding formulas (see table 1).
section_title: State Funding Capacity
paragraphs: Consistent with previous studies, we use real per capita personal income to  measure states’ taxing capacities. Unlike previous studies, we also include  the squared value of per capita income to capture the possibility that  demand for highways does not increase in proportion to increases in  income, perhaps signifying that as basic transportation needs are met,  increases in income are increasingly allocated to other uses such as health  and education. Personal income is published by the BEA in the Department  of Commerce. We include 1- and 2-year lagged values of real per capita  income in the model to allow for lagged responses to changes in income  and also to reflect cyclical changes affecting the level of state revenues.
section_title: Tax Price
paragraphs: The tax price faced by state voters/consumers is reflected in a number of  variables included in the model. Highway usage is reflected by vehicle  miles traveled on state highways, and by registered vehicles and licensed  drivers in the state, as reported by FHWA. We include 1- and 2-year lagged  values in each of these variables to allow for lagged responses in spending  to changes in highway usage.
Consistent with prior studies, we do not include the matching rate on  highway grants because states spend more than the required federal match,  and therefore, states pay 100 percent of the cost of funding additional  highway projects, and because highway matching rates vary little both over  time and across states. However, we do include the effective match rate on  other grant funding to capture the price effect of other grant funding.  Medicaid, Foster Care, and Adoption Assistance, for example, are open- ended matching programs with price effects that may encourage states to  spend less on highways in order to provide matching funds for these and  possibly other matching programs. We include 1- and 2-year lagged values  to capture these effects. Using data from the Census Bureau, we measure  the effective matching rate for nonhighway spending by deducting states’  federal highway grants from their total federal grants and expressing the  net amount (nonhighway grants) as a proportion of each state’s  nonhighway spending, also calculated by deducting highway spending from  total spending.
Although previous studies do not include the size of the highway network  to be maintained, we expect the per capita cost of maintaining an existing  highway network to be higher in states with more miles of road per capita.  Therefore, we include this variable in our model along with its squared  value to test for evidence of per capita costs varying with the scale of the  road network—that is, economies or diseconomies of scale. We obtained  data on total lane miles of state highways from FHWA.
section_title: Other Federal Grants
paragraphs: In addition to federal highway grants, states receive federal grants for a  variety of other purposes, including health, education, and welfare. While it  is possible that state highway funds may be substituted into spending for  other state services, it is also possible that some state funds that would  have otherwise been used for other purposes may be redirected into  highways. For this reason, we also include other federal grant funding in  our model to capture the income effect of these grants and their potential  substitution into highway spending. While some of this aid is provided on a  reimbursement basis (Medicaid, for example) other grants can remain  eligible for expenditure in subsequent years. For this reason, we include 1-  and 2-year lagged values of other federal grants to capture these potential  effects. Other federal grants are also expressed in real per capita dollars.
section_title: State Preferences
paragraphs: The political culture of states may affect both the overall level of spending  on public services, as well as spending priorities for different types of  services, such as highways, versus education and health care. Differences  in political culture and spending priorities may be relatively stable over  time, in which case the fixed effects adjustment may adequately control for  cross-state differences in these spending preferences. Nonetheless, in  addition to including fixed effects, we have also included variables that  may be associated with differences in political culture. For this purpose,  we have included dummy variables that are equal to one if the state  governor is Democratic and zero otherwise, and the percentage of the state  Senate and state House that is represented by the Democratic Party. With  the exception of some independents, office holders are either Democratic  or Republican. Therefore, the choice of using the percentage Democrats or  Republicans is arbitrary and has no effect on the statistical results except  to change the sign of the regression coefficient. We obtained these data  from the Elections section of the Census Bureau’s Statistical Abstract.
section_title: Other Variables
paragraphs: To capture trend changes in state spending that cannot be captured by the  other variables included in our model, while allowing for a possible  curvilinear trend, we have also included time, time squared, and the inverse  of time. Finally, we include a dummy variable for the state of Utah that was  equal to 1 during the years 1997 through 2000 and zero otherwise to  account for the unusually large increase in highway spending in that state  just prior to the 2002 Winter Olympics.
The means and standard deviations for the variables included in our  statistical model are shown in table 8.
section_title: Statistical Methods
paragraphs: Because we use time series and cross-section data to estimate the model,  we expect autocorrelation to bias the estimates of the standard errors  associated with variables in our model. To reduce the problem of  heteroscedasticity, we normalize variables by expressing them on a per  capita basis (except for those already expressed in ratio or percentage  terms). We conducted statistical tests to determine if our data are affected  by autocorrelation and found statistical evidence of its presence.  Therefore, we estimate all our models using a correction for  autocorrelation. As noted above, we use a fixed effects procedure that  allows for a separate constant term associated with each state to represent  differences in state funding that are unique to each state and independent  of the other variables included in the model.
section_title: Additional Analysis of Fixed Effects
paragraphs: The fixed effects coefficients of our model represent state differences in  highway spending, after controlling for the other explanatory variables in  our model. They are intended to capture the effect of variables that have  comparatively little variation over time but are systematically associated  with differences in spending across states. To identify those state  characteristics that are systematically related to the fixed effects  associated with state highway expenditures, we perform an additional  stepwise regression analysis that regresses the following explanatory  variables on our estimated fixed effects, using the following:   Lane miles per capita,  Percentage of Democrats in state House,  Percentage of Democrats in state Senate,  Federal nonhighway grants per person, and  Ratio of federal nonhighway grants per person to state nonhighway  We use the mean value of 21 observations from 1980 to 2000 per state to  represent each variable in explaining our estimated fixed effects.
section_title: Statistical Results
subsections: section_title: Displacement Effect of Federal Highway Grants
paragraphs: We report the results for the second stage expenditure equation without a  correction for autocorrelation in table 10. Again, regression results for  variables that are statistically significant at the 5-percent level appear in  bold in the table. The model explains 78 percent of the variation in state  own-source highway spending and fixed effects alone account for 69  percent of the variation. The estimated substitution rate associated with  federal grants is 84 percent and is statistically significant. That is, other  things being equal, a dollar increase in federal highway grants is associated  with an 84-cent reduction in highway spending from state own-source  revenues. Alternatively, the coefficient also implies that states replace 84  cents of each dollar decline in federal funding. These results are similar to  the findings reported by Knight, who reported a substitution rate of 91  percent, higher than the substitution rates reported by Gamkhar.
However, the model also indicates the presence of autocorrelation (ρ=0.53,  shown in the last row of table 10). As a consequence the standard error for  the grants coefficient is biased downward, which raises the prospect that  the grants coefficient may not be statistically significant. We therefore re- estimated the model adjusting for autocorrelation using two methods:  Cochrane-Orcutt and Newey-West. The results are reported in table 11.    The Cochrane-Orcutt procedure produces a feasible generalized-least  squares estimate of the grants coefficient and its standard error. With this  procedure, the point estimate of the substitution rate drops from 84 to 39  percent and is statistically insignificant (shown in the second column of  tables 10 and 11). The Newey-West correction for autocorrelation does not  involve re-estimating the grants coefficient, so the estimated substitution  rate remains at 84 percent. The coefficient continues to be statistically  significant after correcting for the bias in its standard error.
section_title: The Effect of Removing Statistically Insignificant Variables
paragraphs: The full model includes over 30 variables when all the lags are included and  many of these variables are statistically insignificant. To simplify the  model, we performed F- tests for the statistical significance of variables  and removed variables with a statistical significance level below 10  percent. We tested variables that were included with 1- and 2-year lags as a  group and removed them as a group if found insignificant. We summarize  the results of these tests in table 12. The primary result is that neither the  highway usage variables nor the variables intended to capture state  differences in preferences are statistically significant. The only variables  that are systematically associated with differences in state highway  spending are the variables reflecting financial resources that could be used  to fund highways.
The result of removing statistically insignificant variables is shown in table  13. With the Cochrane-Orcutt method for autocorrelation correction, the  grant substitution coefficient is 0.50 and with the Newey-West correction  the coefficient is 0.58; both estimates are statistically significant at the 1  percent significance level. Thus, the difference in estimated substitution  rates under the two methods narrowed with the simplified model. To be  conservative in our findings regarding grant substitution, we are using the  lower estimate of 0.50, based on the Cochrane-Orcutt method, as our  preferred estimate. The 95 percent confidence interval ranges from 12 to 88  percent, which includes Gamkhar’s estimate of 63 percent but not Knight’s  higher estimate of 91 percent. Because the Cochrane-Orcutt method does  not include the first observation for each state, these estimates are based  on observations from 1983 through 2000.
section_title: Analysis of Remaining Explanatory Variables
paragraphs: The full model includes per capita income squared to test for nonlinear  effects of income on state spending. However, the squared term is  statistically insignificant. We conclude that state spending is proportional  to income, which implies that both high- and low-income states respond to  changes in income in roughly the same proportion, once other factors  affecting state spending choices are taken into account. The lag structure  on per capita income indicates that the largest increase occurs in the first  year, but prior year changes in income also affect state expenditures (see  table 13).
The effect of nonhighway grants enters into the model in two ways: the  absolute size of other grant funding, measured in per capita terms,  representing the income effect of other-grant funding; and the ratio of the  nonhighway grants to state nonhighway spending, representing the tax  price effect of other-grant funding. The net income effect of other grants is  small but positive. The coefficients on the nonhighway grant variables sum  to a small positive effect with a statistically significant positive effect in the  current year and a statistically significant negative effect in year 2. This  result is contrary to expectations in that the net effect would be expected  to result in some of the funding from other federal grants to be used as a  substitute for states’ own highway spending.
In contrast, the tax price effect of other grants is strongly negative  indicating that matching requirements associated with other federal  programs, such as Medicaid, result in states spending less of their own  resources on highways. For every dollar spent by a state, the federal  government reimburses the state for a percentage of the cost, reducing the  tax price of these services to the state. The lower price for other public  services raises the demand for those services and reduces the demand for  highways, suggesting that highways and other public services are  substitute goods.
We enter the time trend variable into the model in linear, quadratic, and  inverse form to provide a flexible functional form. The inverse term was  statistically insignificant and we dropped it from the model. The  coefficients on the linear and quadratic term indicate a negative trend for  most of the years in state highway spending when other factors affecting  state spending are taken into account.
section_title: Varying Substitution Rates Over Time
paragraphs: As we noted in our summary of previous studies, Meyers reports no  evidence of substitution into nonhighway spending during the 1976 to 1982  time period. Gamkhar, based on data from 1976 through 1990, reports  higher rates of substitution, and Knight’s study, based on data from 1983  through 1997, reports even higher rates of substitution. We therefore tested  for evidence of increasing substitution rates using the Cochran-Orcutt  method, which, as discussed earlier, uses the estimation period 1983 to  2000. The results are shown in table 14.
To test whether the substitution rate has increased over the period of our  sample data, we divided our sample into four time estimation periods,  corresponding with the authorization periods for the federal-aid highway  program. 1991 to 1997, and   1998 to 2000.
Allowing the substitution rate to vary over time improves the explanatory  power of the model, increasing the RWhen the substitution rate is allowed to vary over time, the time trend  coefficients become statistically insignificant. This lack of significance  suggests that there is no negative time trend in state spending once the  increasing substitution rate associated with different time periods is taken  into account.
We use an IV estimator because we assume federal grants and state  spending are jointly determined. To test the reliability and validity of the IV  estimator we ran three additional statistical tests: (1) a weak instruments  test, (2) a test for exogeneity of excluded exogenous instruments, and (3) a  test for endogeneity of federal grants.
The weak instruments test is intended to verify that the excluded  exogenous instrumental variables included in the grants equation are  correlated with federal grants. If they are not, the IV estimator provides no  advantage to a simple (and more efficient) OLS estimator. To test the  significance of the excluded exogenous variables, we calculated the partial  R This test  compares the estimated federal grant coefficients for each time period  using the full set of excluded exogenous variables with coefficients derived  from using a subset of instruments composed of predetermined variables  that can safely be assumed to be exogenous. A finding that the set of grant  coefficients from the two models are not statistically different from one  another lends support for the hypothesis that the full set of excluded  exogenous instruments are independent of the error term in the second  stage expenditure equation. For this test, we used a subset of excluded  exogenous variables. Differences between the grant coefficients for each  time period using all instruments, and the coefficients using the subset of  exogenous instruments, were not statistically significant and are  quantitatively very similar to one another. Thus, we found no evidence that  our excluded exogenous instruments were correlated with the error term  of the expenditure equation.
Finally, we conducted a Hausman test for the endogeneity of the federal  grant variable. This test consists of comparing the IV estimate of the grant  coefficient for each time period with the corresponding grant coefficient  based on the OLS estimate. If the differences were not statistically  significant there would be little justification for using the IV estimator. This  test yielded statistically significant differences between the two sets of  estimates, lending support for the assumption that federal grants and state  spending are jointly determined. The results of each of the three tests are  summarized in table 15.
section_title: Additional Tests for Varying Substitution Rates
paragraphs: We also estimated alternative models that allow the substitution rate to  vary according to state size (measured by population), per capita income,  and state per capita spending on mass transit to test for a varying  substitution rate related to these factors. The results of these models were  negative. Overall we found no evidence that substitution rates  systematically differ by either population size or the level of mass transit  spending. We did obtain higher estimates of substitution rates in states with  higher per capita income (56-66 percent in high income states compared to  just over 30 percent in lower income states), but these differences were not  statistically different from the average substitution rate of 50 percent found  for the period from 1983 to 2000.
section_title: State Characteristics Associated with Fixed Effects
paragraphs: In the models reported above, state fixed effects account for most of the  variation in state highway spending. Based on our preferred model (the  model in table 12 using the Cochrane-Orcutt autocorrelation correction  method), differences in state spending associated with these fixed effects  can be as much as $400 per capita. However, these fixed effects are difficult  to interpret since they represent all factors that are systematically related  to cross-sectional differences in state spending not included in the model  (e.g., geography, weather, and other variables that have substantial cross- sectional variation).
To determine if the differences in state spending measured by the fixed  effects of our model are systematically associated with particular state  characteristics, we performed a step-wise regression using the fixed effects  from our preferred model as the dependent variable. Of the 12 variables we  considered, 3 are statistically significant: per capita highway lane miles, per  capita income, and heating degree days (see table 16). In the first step, lane  miles account for 51 percent of the cross-state variation in our fixed  effects, the second step equation added per capita income, and increases  the explained variation to 68 percent. The third step equation adds heating  degree-days, raising the variation explained to 77 percent. The remaining  variables are statistically insignificant and provide little additional  explanatory power.
section_title: State Characteristics Associated with States’ Level of Effort to Fund Highways from State Resources
paragraphs: Based on our model of state highway spending, we found a number of  factors that are systematically related to state highway spending and, in  turn, a state’s level of effort to fund highway from state resources. Perhaps  most importantly, more federal highway aid is associated with less state  effort to fund highways from state resources once other factors related to  state spending are taken into account. Our conservative estimate of grant  substitution suggests that about half the increase in federal highway grants  is used to reduce states’ level of highway spending effort.
Increases in federal grant funding for nonhighway purposes, such as health,  education, and welfare, are also associated with reduced effort on the part  of states to fund highways. Based on our model of state highway spending,  we found that states with a higher percentage of their nonhighway  spending funded by federal grants reduced their effort to fund highways,  presumably, to provide matching funds for programs like Medicaid, which  is an open-ended matching program.
In addition to federal grants, we found two cost factors that are  systematically related to states’ levels of highway spending effort, other  things being equal. States with large highway networks, as measured by the  number of highway lane miles, systematically spend more per capita.  Presumably, a larger road network is more expensive to maintain and  states must therefore devote a larger share of their funding capacity to  maintaining their highway network. In addition, we found that colder than  average temperatures, as measured by heating degree days, are associated  with higher state spending, suggesting that colder weather creates more  wear and tear on the highways and hence the need for states to make a  greater spending effort to maintain their highway network, other things  being equal.
Finally, we found that high per capita income states make less effort than  states with lower incomes. This result is, perhaps, not surprising since the  same effective tax rate, (level of effort), generates more revenues in high- income states than in states with lower incomes. Thus, the same level of  highway spending can be funded with less effort in high-income states and  low-income states compensate by undertaking a greater effort to fund  highways from state resources.
section_title: Program Options Designed to Reduce Substitution
paragraphs: One program option that could be designed to reduce substitution would  be to modify the matching requirement to leverage additional state highway  spending. While the use of matching requirements as an economic tool is  designed to leverage additional spending, the federal-aid highway  program’s current matching requirements, which typically call for 20  percent state funding and 80 percent federal funding of eligible projects,  permit substitution because most states’ highway funding is already higher  than 20 percent of their total highway funds. The matching requirement,  therefore, does not provide states with an incentive to increase or even  maintain their level of funding in order to receive additional federal funds.  Instead, states are free to substitute federal funds for funds they would  have spent from their own resources and to use their own funds in other  ways.
For the matching requirement to leverage additional state spending, the  states’ matching portion would have to be set high enough so that states  would not receive additional federal funds without spending beyond what  they would have otherwise spent without additional federal assistance.  This objective cannot be perfectly achieved because models of  substitution, like any models, produce estimates that are subject to  uncertainty, and there is no way to objectively determine with certainty  what states would have spent in the absence of increased federal funding.  However, the likelihood that increased federal funding will leverage  additional state highway spending can be achieved in several ways.
subsections: section_title: Increase State Matching Requirements
paragraphs: The most direct approach would be to change the current 80 percent  federal/20 percent state match ratio to a matching ratio closer to the 45  percent federal/55 percent state division of funding in fiscal year 2002. This  would likely mean that some states (those whose spending is less than 60  percent of combined federal and state spending) would be required to  increase their highway spending in order to qualify for any increased  federal funding, while other states whose spending is already over 60  percent of combined federal and state spending would not have to increase  or maintain their spending in order to receive increased federal funds.
Increasing the required state match from 20 percent to 60 percent might  require a few states, whose state highway funding levels are currently a  comparatively small proportion of their total highway spending, to more  than double their current level of highway spending to avoid losing federal  funds. If increases of this magnitude were deemed too extreme, a more  moderate increase in the state match could be established. For example,  raising the state matching share to 40 percent instead of 60 percent would  require smaller funding increases in states whose state and local spending  is currently a smaller proportion of the total highway spending, but it  would also reduce the number of states that would be required to increase  their level of funding in response to increased federal funding.
Another drawback of simply increasing state matching requirements is that  even substantial increases in the requirements (raising the required state  match from 20 percent to 60 percent) would not be likely to leverage  additional state spending in all states. An alternative that would increase  the likelihood of leveraging additional state spending in all states would be  to continue with the 80 percent federal/20 percent state matching ratio but  stipulate that only state spending in excess of what the state had spent for  highways in an appropriate base time period be counted against its federal  matching requirement. This approach has the advantage of maintaining the  current 20 percent state matching rate, yet provides a leveraging incentive  in all states rather than in only those states with below average spending.  However, it might have the effect of making it easier for those states that  were not spending much in the base time period to increase their spending  and receive increased federal funds than it would be for those states whose  spending was already high.
section_title: Modify Funding Formulas to Reward State Highway Funding Effort
paragraphs: Another approach that would reduce substitution by creating an incentive  for states to increase their own highway spending would be to directly link  the level of federal highway aid to each state’s level of highway funding  effort. This link could be achieved by setting aside a fixed percentage of  formula grant funding to be distributed in accordance with states’ highway  funding efforts. As stated in the text, to avoid penalizing low income states,  each state’s highway funding effort could be defined as the state’s highway  spending compared to some measure of the state’s taxing capacity. There  are a variety of indicators that could serve as a measure of states’ funding  capacity. The most comprehensive that is available annually is Total  Taxable Resources (TTR), which is produced annually by the Department  of the Treasury and used to distribute substance and mental health block  grants. Less comprehensive measures would include Gross State Product  (GSP) and Personal Income (PI), both published annually by the  Department of Commerce.
This approach could be implemented in a variety of ways. One approach  would be to compare each state’s funding effort to the average effort of all  states. If, for example, $100 per capita were set aside and distributed in this  way, states whose highway spending efforts were above the average  spending effort would receive funding proportionally above the $100 per  capita average and states whose effort was below the average spending  effort would receive funding proportionally below the $100 per capita  average.
Initially, those states with an above-average highway funding effort would  be rewarded with higher per capita funding, and those states with a below- average highway funding effort would be penalized with lower per capita  funding. In following years, each state’s highway spending effort would  continue to be compared to the average state highway spending effort, so  that states whose funding effort rose relative to the national average would  automatically be rewarded with higher per capita funding, while states  whose effort fell relative to the national average would automatically be  penalized. Distributing the set aside in this fashion would, in effect, put all  states in competition with one another, automatically rewarding states  whose effort rose compared to the national average and penalizing states  whose effort fell compared to the national average.
The approach just described would reward those states whose funding  effort is currently high and penalize those whose effort is currently low.  However, this approach could be modified to avoid rewarding or penalizing  states based on their current level of effort. Instead, the linking of federal  funds to state effort could be based only on future changes in each state’s  level of highway funding effort. In this approach, each state’s highway  funding effort would be compared to its own effort during an initial time  period, such as the year (or an appropriate average of years) prior to  initiation of the set aside. For example, all states could be awarded the  same per capita grant amount in the first year of the set-aside program.  Then, in future years, each state’s funding effort would be compared to its  own funding effort in the first year of the set aside program and adjusted  accordingly. Each state whose funding effort increased compared to the  initial base year would receive an increase in federal funding proportionate  to the increase in its own spending. Such an approach would, in effect, put  each state in competition with the effort it made in the base period. If both  approaches to rewarding state highway funding effort were deemed  desirable, a combination of the two approaches could be employed. The  strength of the incentive would depend on the amount of total formula  funding distributed through the set aside program; the greater the amount  of funding distributed in this manner, the larger the financial consequences  to states of changing their level of highway funding effort.
section_title: Introduce a State Maintenance of Effort Requirement
paragraphs: If, instead of seeking to stimulate additional state spending on highways,  the goal of federal policy makers is for federal grants to supplement state  spending on highways, then instituting a maintenance-of-effort (MOE)  provision may be a more appropriate approach. MOE provisions require  states to maintain existing levels of state spending on an aided program as  a condition of receiving federal funds. As a tool, MOE requirements are  designed not to stimulate additional state spending but to guard against  grant substitution so that increased federal spending will supplement  rather than replace states’ own spending.
As with matching requirements, this objective cannot be perfectly achieved  because models of substitution, like any models, produce estimates that  are subject to uncertainty and there is no way to objectively determine with  certainty what states would have spent in the absence of increased federal  funding. However, the likelihood that increased federal funding will not be  used as a substitute for state spending can be strengthened if MOE  requirements are designed appropriately. In previous work, we concluded  that, to be effective, MOE provisions should define a minimum level of  state spending effort that can be objectively quantified based on reasonably  current expenditures on the aided activity. Adjusting the MOE  requirement for inflation in program costs would ensure the minimum  spending level is maintained when measured in inflation adjusted dollars.
This could be achieved by defining a state’s base spending level as the  amount spent per year during a recent historical period and then adjusting  that base spending level for inflation.
One drawback of an MOE provision is that basing it on historical spending  period could result in a base spending period for the MOE provision that  represents an unusually high spending level for some states, effectively  locking them into continued high spending in future years. This could be  ameliorated however by establishing waivers for states that are able to  demonstrate that spending in the base period chosen is unusually high, to  allow a more “typical” spending level for purposes of the MOE provision.
Developing an indicator of state highway spending effort to link federal  funding to state spending or establishing a state’s base spending level to  design an MOE requirement would require careful consideration. Among  other issues, in defining these indicators, consideration would have to be  given to whether to measure:  Capital expenditures for highways or capital plus maintenance   Expenditures on all state roads or for federal-aid roads only;  State government expenditures only, or spending by state and local   Total expenditures, or expenditures normalized on a per capita, per lane  mile, or other basis.
In addition, an indicator of state funding effort or a state’s base funding  level for an MOE provision should, to the extent possible, be established by  measuring spending levels that are typical rather than unusually high or  low. Highway capital expenditures in a state can increase or decrease  dramatically from year to year and may be unusually high or low for variety  of reasons (e.g., Utah’s unusually high spending during preparations for the  2002 Winter Olympics, or a state particularly hard hit by recession that  drops spending below its usual effort). To some extent, such factors can be  taken into account by defining a state’s funding effort or base level of  spending for an MOE provision using multi-year averages so that such  unique circumstances are averaged out.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Jay Cherlow, Catherine Colwell, Gregory  Dybalski, Edda Emmanuelli-Perez, Scott Farrow, Donald Kittler, Alex  Lawrence, Sara Ann Moessbauer, Robert Parker, Paul Posner, Teresa  Renner, Stacey Thompson, and Alwynne Wilbur made key contributions to  this report.
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