Highway Trust Fund: Options for Improving Sustainability and Mechanisms to Manage Solvency
Published: 2009-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Highway Account within the Highway Trust Fund (HTF) is the principal means for funding federal highway programs. Administered by the Federal Highway Administration (FHWA) within the Department of Transportation (DOT), it channels about $33 billion in highway user excise taxes annually to states for highway and related spending. Estimated outlays from the Highway Account under the Safe, Accountable, Flexible, Efficient Transportation Equity Act--A Legacy for Users (SAFETEA-LU) exceeded estimated receipts throughout the authorization period--fiscal years 2005 through 2009. Furthermore, actual account receipts were lower than had been estimated and the account balance dropped more rapidly than anticipated, approaching zero in August, 2008. Congress subsequently approved legislation in September 2008 to appropriate $8 billion from the General Fund of the Treasury to replenish the account. Agency officials anticipate the account will reach a critical stage again before the end of fiscal year 2009, and estimate that about $15 billion will be needed to ensure account solvency through the end of fiscal year 2010. This statement summarizes GAO's past work on 1) the collection and distribution process for the Highway Account of the HTF, 2) options for improving long-term sustainability of the HTF, and 3) mechanisms to help manage Highway Account solvency.
section_title: What GAO Found
paragraphs: The collection and distribution of funds through the Highway Account is a complex process. Collection involves Treasury receiving excise taxes from business entities, estimating how much should be allocated to the Highway Account, and adjusting the estimated allocation several months later after actual tax receipts are certified. Distribution begins with a multi-year authorization act that provides contract authority and establishes annual funding levels. DOT apportions the contract authority to the states and divides the funding level among federal highway programs and states. DOT then obligates funds for projects and reimburses states as projects are completed. Improving long-term sustainability is one of GAO's key principles for restructuring existing transportation programs, and GAO has reported on options for improving sustainability: (1) improve the efficiency of current facilities, (2) alter existing sources of revenue, (3) ensure users are paying fully for benefits, and (4) supplement existing revenue sources, such as through enhanced private-sector participation. Each of these options has different merits and challenges, and will likely involve trade-offs among different policy goals. Improving existing mechanisms intended to help maintain Highway Account solvency could help DOT better manage the account balance. For example, statutory mechanisms designed to make annual adjustments to the Highway Account have been so modified over time--particularly through changes in SAFETEA-LU--that they either are no longer relevant or are limited in effectiveness. Furthermore, monitoring indicators that could signal sudden changes in revenues could help DOT better anticipate changes in the account balance and communicate with stakeholders on the account's status. DOT is acting on recommendations GAO made in February, 2009 to help improve solvency mechanisms and communication with stakeholders.

section_title: Letter
paragraphs: We appreciate the opportunity to participate in this hearing to discuss  challenges facing the Department of Transportation (DOT) and Congress  in sustaining the Highway Trust Fund (HTF). Surface transportation  financing has been on our High Risk list for several years. The problem is  simple: revenues from motor fuels taxes and truck-related taxes to support  the HTF—the primary source of funds for highway and transit—are not  keeping pace with authorized spending levels. This problem was made  dramatically apparent last summer when the Highway Account within the  trust fund was nearly depleted. Despite an $8 billion infusion from the  General Fund of the Treasury in September 2008 to replenish the account,  we find ourselves in the same predicament a year later. The solution to  this problem, however, is not simple and will require difficult policy  decisions about both the sources and the uses of HTF revenues.
My statement today addresses (1) the collection and distribution process  for the Highway Account of the HTF, (2) options for improving long-term  sustainability of the HTF, and (3) mechanisms to help manage Highway  Account solvency. It is based on work that we have completed over the  past several years on key principles for surface transportation  reauthorization and issues related to the HTF. (A list of related GAO  products appears at the end of this statement.)
subsections: section_title: Background
paragraphs: Congress established the HTF in 1956 to hold and distribute highway user  excise taxes to fund various surface transportation programs. In 1983, the  HTF was divided into two accounts: the Highway Account and the Mass  Transit Account. The Highway Account within the HTF is the principal  mechanism for funding federal highway programs. Administered by the  Federal Highway Administration (FHWA) within DOT, it channels about  $33 billion in highway user excise taxes annually to states for highway and  related spending. Funds from the Highway Account sustain 3 DOT  agencies: FHWA, the Federal Motor Carrier Safety Administration, and the  National Highway Traffic Safety Administration. Funds from the Mass  Transit Account support the Federal Transit Administration.
The balance of the Highway Account within the HTF has been declining in  recent years because, as designed in the Safe, Accountable, Flexible,  Efficient Transportation Equity Act – A Legacy for Users (SAFETEA-LU),  outlays from the account have exceeded expected receipts over the  authorization period. Specifically, when SAFETEA-LU was passed in  2005, estimated outlays from Highway Account programs exceeded  estimated receipts by about $10.4 billion. Based on these estimates, the  Highway Account balance would have been drawn down from $10.8 billion  to about $0.4 billion over the authorization period. This left little room for  error. Assuming all outlays were spent, a revenue shortfall of even 1  percent below what SAFETEA-LU had predicted over the 5-year period  would result in a cash shortfall in the account balance.
In fact, actual Highway Account receipts were lower than estimated,  particularly for fiscal year 2008. Account receipts were lower in fiscal year  2008 because of a weakening economy and higher motor fuel prices that  affected key sources of HTF revenue. For example, fewer truck sales, as  well as fewer vehicle-miles traveled and correspondingly lower motor fuel  purchases, resulted in lower revenues. Consequently, the account balance  dropped more precipitously than anticipated and was nearly depleted in  August 2008—1 year before the end of the SAFETEA-LU authorization  period. In response, Congress approved legislation in September 2008 to  provide $8 billion to replenish the account. However, DOT now estimates  that the account would need an additional infusion of funds—about $15  billion, including $4 billion to ensure sufficient funds for cash management  purposes—to remain solvent through the end of fiscal year 2010. (See fig. 1.)
section_title: Collection and Distribution of Funds through the Highway Account
paragraphs: Receipts for the HTF are derived from two main sources: federal excise  taxes on motor fuels (gasoline, diesel, and special fuels) and truck-related  taxes (truck and trailer sales, truck tires, and heavy-vehicle use). Receipts  from the motor fuels tax constitute the single largest source of HTF  revenue (about 88 percent of total receipts for fiscal years 2005 through  2008); the gasoline tax—a flat rate of 18.4 cents per gallon—is the same  rate as in 1993. Receipts from truck and trailer sales (about 8 percent of  total receipts for fiscal years 2005 through 2008) are the second largest  source of revenue for the fund. (See fig. 2.)
The Highway Account receives the majority of the tax receipts allocated to  the fund. Figure 3 shows the rates for motor fuels and truck-related taxes  levied for the HTF and how receipts from the taxes are allocated between  the Highway and Mass Transit Accounts within the fund.
The collection and distribution of taxes through the Highway Account is a  complex process, as shown in figure 4. The collection process involves  Treasury receiving excise taxes from business entities, estimating how  much should be allocated to the Highway Account, and adjusting the  estimated allocation after the Internal Revenue Service (IRS) certifies the  actual amount that should be allocated. The distribution process begins  with a multiyear authorization act, such as SAFETEA-LU. The act provides  specific amounts of annual contract authority over the authorization  period, and also specifies annual obligation limitations that establish  “guaranteed” funding levels. These guaranteed funding levels are based on  assumptions about future receipts to the Highway Account and can be  modified in subsequent annual appropriations acts. Annually, DOT  apportions (through formula) and allocates to the states the contract  authority provided in the authorization act. DOT also divides the  obligation limitations among the federal highway programs and the states  based on a multistep process provided in the appropriation act. No cash is  actually distributed to the states at this time; instead, states are notified of  the amount of federal funds available for use in that state. DOT then  obligates federal funds for approved projects. An obligation is a legally  binding commitment by the federal government. Once an obligation is  made, the federal government must reimburse the states when they submit  a voucher for completed work, which, depending on how long a project  takes, could be months or years after the obligation is made. As phases of  the projects are completed, states submit vouchers to FHWA to be  reimbursed from the Highway Account. Consequently, DOT cannot  directly control outlays—outlays are determined through limitations on  obligations.
Two mechanisms are intended to help keep the Highway Account solvent  by making annual adjustments to ensure that it has adequate funds to  reimburse states (through the Byrd test) and aligning outlays with actual  revenues (through Revenue Aligned Budget Authority (RABA)).
Byrd Test. In 1956, Congress was concerned that the proceeds of the taxes  to be deposited in the HTF might not be sufficient to reimburse states  when the states submitted their claims. To address this concern, Congress  amended the bill under consideration to require DOT to compare current  and projected resources with existing and projected unpaid authorizations  and to adjust the amounts apportioned to the states if the two were out of  balance. This comparison was referred to as the Byrd Amendment or the  Byrd Test. Under the Byrd Test, as modified by SAFETEA-LU, unpaid  commitments in excess of amounts available in the Highway Account at  the end of the fiscal year in which the apportionment is to be made must  be less than the revenues anticipated to be earned in the following 4-year  period. If a shortfall is projected using this test, then all or part of the  apportionments to the states from the Highway Account would be  deferred proportionately until a recalculation shows that some or part of  the deferred apportionments can be released without triggering the Byrd  Test. Prior to SAFETEA-LU, estimated unpaid commitments at the end of  the year were required to be less than revenues anticipated to be earned in  the following 24-month period. In the history of the HTF, the Byrd Test has  twice triggered adjustments to apportionments: 1961 and 2004.
RABA. Established in the Transportation Equity Act for the 21st Century  (TEA-21) in 1998 and modified in SAFETEA-LU, RABA was designed to  align Highway Account program levels with actual revenues and help  ensure that the account is used to fund highway programs instead of  accumulating large balances. RABA provisions require DOT, as part of the  annual budget submission process, to compare current revenue estimates  with revenue estimates in the multiyear authorization act, most recently  SAFETEA-LU. Based on these comparisons, DOT is required to adjust  both contract authority and obligation limitations either upwards when the  account has greater revenues than projected or downwards when  revenues do not meet projected levels. However, as revised under  SAFETEA-LU, no downward adjustments will be made in a fiscal year if,  as of October 1 of that fiscal year, the balance in the Highway Account is  more than $6 billion. SAFETEA-LU also modified how the RABA  adjustments were calculated in order to smooth out the effects of the  adjustment over 2 fiscal years, and added the provision concerning the $6  billion balance.
section_title: Principles for Restructuring Transportation Programs, Including Improving Long-term Sustainability of the HTF
paragraphs: While infusing more money into the HTF would help keep the Highway  Account solvent, such action would not ensure the long-term sustainability  of the HTF nor address the need for improved performance of our nation’s  surface transportation programs. We have previously reported that current  surface transportation programs—authorized in SAFETEA-LU—do not  effectively address the transportation challenges the nation faces. As a  result, we have called for a fundamental reexamination of the nation’s  surface transportation programs to follow several key principles: (1) have  well-defined goals with direct links to an identified federal interest and role,  (2) establish more performance-based links between funding and program  outcomes to enhance grantee accountability, (3) institute tools and  approaches that emphasize the return on the federal investment, and (4)  ensure fiscal sustainability and bring revenues and expenditures into  balance. Such a reexamination would include reviewing the results of  existing transportation programs, policies, and activities relative to the  national interests and testing their continued relevance and relative priority.
To address long-term sustainability, we have reported on several options  that could be used to better align revenues and expenditures. Each of  these options has different merits and challenges, and the selection of any  option will likely involve trade-offs among different policy goals.
Improve the efficiency of current facilities. Better managing existing  system capacity and improving the performance of existing facilities could  minimize the need for additional expenditures. We have reported that the  efficiency of the nation’s surface transportation programs is declining and  that the return on investment could be improved in a number of ways,  including creating incentives to better use existing infrastructure.
Alter existing sources of revenue. The Highway Account’s current sources of  revenue—motor fuels taxes and truck-related taxes—could be better aligned  with actual outlays. According to the Congressional Budget Office and others,  the existing fuels taxes could be altered in a variety of ways to address the  erosion of purchasing power caused by inflation, including increasing the per- gallon tax rate and indexing the rates to inflation.
Ensure users are paying fully for benefits. Revenues can also be designed  to more closely follow the user-pay concept—that is, require users to pay  directly for the cost of the infrastructure they use. This concept seeks to  ensure that those who use and benefit from the infrastructure are charged  commensurately. Although current per-gallon fuel taxes reflect usage to a  certain extent, these taxes are not aligned closely with usage and do not  convey to drivers the full costs of road use—such as the costs of  congestion and pollution. We have reported that other user-pay  mechanisms—for example, charging according to vehicle-miles traveled,  tolling, implementing new freight fees for trucks, and introducing  congestion pricing (pricing that reflects the greater cost of traveling at  peak times)—could more equitably recoup costs.
Supplement existing revenue sources. A number of alternative financing  mechanisms—such as enhanced private-sector participation, bonds, loans,  and credit assistance—can be used to help state and local governments  finance surface transportation. These financing mechanisms, where  appropriate, could help meet growing and costly transportation demands.  However, these potential financing sources are forms of debt that must  ultimately be repaid.
section_title: Mechanisms to Help Manage Highway Account Solvency
paragraphs: Improving existing mechanisms that are intended to help maintain  Highway Account solvency could help DOT better monitor and manage  the account balance, and improve the agency’s ability to identify the  potential for a funding shortfall. Although the Byrd Test was intended to  help the federal government ensure there were sufficient funds in the  Highway Account when states submitted their claims, under SAFETEA- LU, the test has no effect. First, SAFETEA-LU expanded the interval over  which future estimated receipts are included in the calculation from 2 to 4  years, thereby increasing the amount of receipts that would be compared  with unpaid commitments in the coming year. This modification made it  less likely for the test to signal a decline in the Highway Account balance.  According to a DOT analysis of the impact on the Highway Account had  the test remained at 2 years rather than at 4, the account would have failed  the Byrd Test annually from fiscal year 2005 through fiscal year 2008. In  other words, the existing account balance each year plus the amount of  receipts anticipated to be received over the next 2 years would have been  insufficient to offset unpaid commitments in the next year. According to  DOT officials, it would be nearly impossible for the Highway Account to  fail the Byrd Test using a 4-year window under current levels of spending,  but failing a 2-year Byrd Test provides one of the first tangible indicators  that a shortfall is imminent.
Second, even if the Highway Account had failed the Byrd Test, the  resulting adjustment prescribed by the test—deferring the amount of  contract authority apportioned to states—would not have curtailed future  outlays from the account because the guaranteed funding levels  (obligation limitations) for states in SAFETEA-LU are already lower than  the apportioned contract authority. For example, DOT’s analysis of the  impact of a 2-year Byrd test on the Highway Account balance showed that  the account would have failed the test in fiscal year 2005 because the  amount of anticipated receipts fell short of anticipated outlays by $1.2  billion, indicating that $1.2 billion in apportioned contract authority to  states should be deferred. However, because the amount of contract  authority as of fiscal year 2005 exceeded the guaranteed funding level by  more than $1.2 billion, adjusting contract authority would have not  affected the amount that DOT was able to obligate and states eventually  draw from the account.
In contrast, RABA is designed to affect obligation limitations and, if  implemented as originally intended, could help align Highway Account  spending with actual revenues. For example, in 2003, the RABA  calculation called for a negative adjustment in obligation limitations of  about $4.4 billion—from about $27 billion down to about $23 billion—but  Congress waived the negative RABA adjustment for that year as part of a  supplemental appropriations act. Congress chose instead to increase the  obligation limit to $31.8 billion. We asked DOT to run a simulation to  estimate the Highway Account balance from fiscal year 2003 through fiscal  year 2008, assuming the calculated downward RABA adjustment in 2003  had not been waived. According to the simulation, the account balance at  the end of fiscal year 2008 would have been about $6 billion if no other  changes had been made. Under this scenario, the account balance would  have been sufficient to reimburse states without the $8 billion infusion  from the General Fund of the Treasury.
DOT officials told us that RABA could be an effective mechanism if  obligation limitations were better aligned with outlays and receipts, but  they said that the provision enacted in SAFETEA-LU requiring no negative  adjustments in a fiscal year if the Highway Account balance is greater than  $6 billion as of October 1 of that fiscal year should be examined because  that particular amount may not provide a sufficient cushion to offset a  possible shortfall. For example, a negative RABA adjustment of about $1  billion for fiscal year 2009—after the $8 billion was appropriated from the  General Fund of the Treasury—was not implemented because the  Highway Account balance was greater than $6 billion. According to DOT  officials, the RABA adjustment could have helped delay or reduce the  magnitude of a shortfall in fiscal year 2009.
Effective mechanisms to annually evaluate the solvency of the Highway  Account and make appropriate adjustments are important to maintaining  account solvency because DOT has no control over revenues and can  manage outlays only indirectly through annual obligation limitations,  which are determined months or years before states are reimbursed from  the account. Without such mechanisms, the account balance runs the risk  of dropping too low to withstand a sudden drop in revenues. DOT officials  agree that both existing solvency mechanisms have their roles in helping  to maintain Highway Account solvency, although RABA has the greater  potential to affect spending. They also noted that solvency mechanisms— even with improvements—would be effective only if the authorization act  sets account outlays in proportion to estimated program receipts, and that  neither mechanism is designed to deal with near-term shortfalls in the  Highway Account balance. For example, RABA adjustments to obligation  limitations have the largest impact the year after the adjustment is made  because a significant portion of the Highway Program outlays are in the  year following obligation.
In February 2009, we recommended that DOT identify changes to existing  solvency mechanisms designed to make annual adjustments to the  Highway Account and communicate to Congress the potential benefits and  limitations of these changes. In response, DOT officials told us they plan to  work with Congress to identify improvements to existing solvency  mechanisms.
In addition to modifying these existing mechanisms that are applied  annually, monitoring indicators throughout the year that could signal  sudden changes in Highway Account revenues could help DOT better  manage the account balance and anticipate changes. Monitoring the  account balance is particularly important when the account balance drops  low enough for a sudden decline in revenues or increase in outlays to put  the account at risk of reaching a zero balance. Indicators that DOT could  monitor throughout the year include data from Treasury’s monthly  statements and from FHWA on vehicle-miles traveled. Monitoring  additional indicators could also enhance DOT’s communication with  stakeholders on the status of the Highway Account. Specifically,  establishing trigger points for key indicators could prompt DOT to report  to stakeholders on potential problems. For example, one indicator could  be the account balance, and the trigger could be when the balance drops  below a certain level.
In February 2009, we recommended that DOT monitor additional  indicators that can impact the account balance throughout the year to  better anticipate sudden changes in the balance, and improve  communication with stakeholders—Congress, state agencies, and others— on the status of the account balance and action that may be needed to  maintain account solvency. In response, DOT now tracks deposits and  cash withdrawals on a weekly basis to monitor the account balance, and  DOT has determined that at least a $4 billion balance is needed in the  Highway Account to manage cash flows and help avoid shortfalls. DOT  officials have also proactively communicated with Congress about the  anticipated Highway Account shortfall for fiscal year 2009.
Chairmen and Ranking Members, this concludes my prepared statement. I  would be pleased to respond to any questions that you or other Members  of the Subcommittees might have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information on this statement, please contact Phillip R. Herr at  (202) 512-2834 or herrp@gao.gov. Contact points for our Congressional  Relations and Public Affairs offices may be found on the last page of this  statement. Individuals making key contributions to this testimony were  Sara Vermillion, Assistant Director; Matthew Cook, Patrick Dudley,  Elizabeth Eisenstadt, Carol Henn, Hannah Laufe, and Maureen Luna-Long.
section_title: Related GAO Products
paragraphs: Transportation Programs: Challenges Facing the Department of  Transportation and Congress. GAO-09-435T. Washington, D.C.: March 10,  2009.
Highway Trust Fund: Improved Solvency Mechanisms and  Communication Needed to Help Avoid Shortfalls in the Highway  Account. GAO-09-316. Washington, D.C.: February 6, 2009.
High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January  2009.
Surface Transportation Programs: Proposals Highlight Key Issues and  Challenges in Restructuring the Programs. GAO-08-843R. Washington,  D.C.: July 29, 2008.
Physical Infrastructure: Challenges and Investment Options for the  Nation’s Infrastructure. GAO-08-763T. Washington, D.C.: May 8, 2008.
Surface Transportation: Restructured Federal Approach Needed for More  Focused, Performance-Based, and Sustainable Programs. GAO-08-400.  Washington, D.C.: March 6, 2008.
Highlights of a Forum: Transforming Transportation Policy for the 21st  Century. GAO-07-1210SP. Washington, D.C.: September 19, 2007.
Surface Transportation: Strategies Are Available for Making Existing  Road Infrastructure Perform Better. GAO-07-920. Washington, D.C.: July  26, 2007.
Performance and Accountability: Transportation Challenges Facing  Congress and the Department of Transportation. GAO-07-545T.  Washington, D.C.: March 6, 2007.
Highway Trust Fund: Overview of Highway Trust Fund Estimates.  GAO-06-572T. Washington, D.C.: April 4, 2006.
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