Surface Transportation: Principles Can Guide Efforts to Restructure and Fund Federal Programs
Published: 2008-07-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The nation has reached a critical juncture with its current surface transportation policies and programs. Demand has outpaced the capacity of the system, resulting in increased congestion. In addition, without significant changes in funding levels or planned spending, the Highway Trust Fund--the major source of federal highway and transit funding-- is projected to incur significant deficits in the years ahead. Exacerbating concerns about the solvency of the Highway Trust Fund is the federal government's bleak fiscal condition and outlook. As a result, other federal revenue sources may not be available to help solve the nation's current transportation challenges. This statement is based on a body of work that GAO has completed over the past several years for Congress. This testimony discusses (1) GAO's recent findings on the structure and performance of the current surface transportation program (GAO-08-400), (2) a framework to assess proposals for restructuring of the surface transportation program, (3) potential options to fund investments in the surface transportation system, and (4) our recent findings on the benefits, costs, and trade-offs of using public-private partnerships to help fund transportation investments (GAO-08-44).
section_title: What GAO Found
paragraphs: Since federal fundingfor the interstate system was established in 1956, the federal role in surface transportation has expanded to include broader goals, more programs, and a variety of program structures. Consequently, the goals of current programs are numerous and sometimes conflicting, and the federal role in these programs is unclear. For example, federal programs do not effectively address key transportation challenges, such as increasing congestion and freight demand. Many surface transportation programs are also not linked to performance of the transportation system or of the grantees, and programs often do not employ the best tools and approaches. Finally, the fiscal sustainability of the numerous highway, transit, and safety programs funded by the Highway Trust Fund is in doubt, because spending from the fund has increased without commensurate increases in revenues. A number of principles can help guide the assessment of proposals to restructure and fund federal surface transportation programs. These principles include (1) ensuring goals are well defined and focused on the national interest, (2) ensuring the federal role in achieving each goal is clearly defined, (3) ensuring accountability for results by entities receiving federal funds, (4) employing the best tools and approaches to improve results and emphasize return on targeted federal investment, and (5) ensuring fiscal sustainability. A range of options could be used to fund the growing demand for additional investment in the surface transportation system. There are two revenue sources for these additional investments: taxes and fees. Financing mechanisms, such as bonding and revolving funds, could also be used to fund transportation infrastructure projects when tax and user fee approaches are not sufficient to meet demands. However, these financing mechanisms are all forms of debt that ultimately must be repaid with interest by the general population through tax increases or reductions in government services. Each of these options has different merits and challenges, and the selection of any of them will likely involve trade-offs among different policy goals. Highway public-private partnerships show promise as a viable alternative, where appropriate, to help meet growing and costly transportation demands. The highway public-private partnerships created to date have resulted in advantages from the perspective of state and local governments, such as the construction of new infrastructure without using public funding. However, highway public-private partnerships also entail potential costs and risks including the reality that funds from public-private partnerships are largely a new source of borrowed funds--a form of privately issued debt that must be repaid to private investors. Ultimately the extent to which public-private partnerships can be used to help meet the nation's transportation funding challenges will depend on the ability of states to weigh potential benefits against potential costs and trade-offs to determine whether public-private partnerships are appropriate in specific circumstances--and if so--how best to implement them and protect the public interest.

section_title: Letter
paragraphs: We appreciate the opportunity to testify on surface transportation  financing issues. As you know, the nation has reached a critical juncture  with current surface transportation programs. The current federal  approach to addressing the nation’s surface transportation problems is not  working well. Despite large increases in expenditures in real terms for  transportation, the investment has not commensurately improved the  performance of the nation’s surface transportation system, as congestion  continues to grow and looming problems from the anticipated growth in  travel demand are not being adequately addressed. The economic and  environmental implications are significant, ranging from wasted fuel and  lost time as cars idle in traffic to increased costs for businesses as the  transportation system grows more unreliable.
Since federal funding for the interstate system was established in 1956, the  federal role in surface transportation has expanded to include broader  goals, more programs, and a variety of program structures. However, many  of these programs do not effectively address key transportation  challenges, such as increasing congestion and freight demand, because the  federal goals and roles of the programs are unclear, the programs are  generally not need or performance-based, and the programs often do not  employ the best tools or approaches. In addition, the continued relevance  of some of these programs in the 21st century is unclear. For example, the  Highway Trust Fund was created in 1956 to distribute funds for the  construction of the interstate highway system. That system is now  complete. However, the federal highway program’s funding and delivery  mechanisms have not substantially changed. Furthermore, there is a  growing differential between expected Highway Trust Fund revenue and  planned levels of spending on surface transportation programs. As a  result, without significant changes in funding levels or planned spending,  the Highway Trust Fund is projected to incur significant deficits in the  years ahead. As a result, in 2007, we added financing the nation’s  transportation system to GAO’s High Risk List.
Addressing these challenges is complicated by the breadth of the nation’s  surface transportation network—encompassing highway, transit, and rail  systems and ports that are owned, funded, and operated by both the public  and the private sectors. Moreover, surface transportation policy decisions  are inextricably linked with aviation, economic, environmental, and energy  policy concerns. In addition, exacerbating this challenge is that the federal  government’s financial condition and fiscal outlook are worse than many  may understand. Specifically, the federal budget is on an unsustainable  path—heightening concern about the solvency of the Highway Trust Fund  because other federal revenue sources may not be available to help solve  the nation’s current transportation challenges. Addressing these  challenges requires strategic and intermodal approaches, effective tools  and programs, and coordinated solutions involving all levels of  government and the private sector. Yet in many cases, the government is  still trying to do business in ways that are based on conditions, priorities,  and approaches that were established decades ago and are not well suited  to addressing 21st century challenges. Consequently, we have called for a  fundamental reexamination of the nation’s transportation policies and  programs.
Prudent use of taxpayer dollars is always important. The economic and  social importance of the nation’s transportation system and the current  fiscal environment, make it even more important that federal, state, and  local governments make prudent decisions on how to invest limited  available resources. In making these decisions, governments will face an  array of challenges that include repairing and maintaining aging  infrastructure, making more efficient use of existing infrastructure,  accounting for population growth, and incorporating new technologies in  funding for infrastructure. In this environment, the infrastructure  improvements that all levels of government want may not reflect what  they need or what the nation can afford. Accordingly, decisions about the  appropriate level of spending and distribution on infrastructure are both  difficult and enormously important.
My remarks today focus on (1) our recent findings on the structure and  performance of current surface transportation programs, (2) a framework  to assess proposals for restructuring surface transportation programs, (3)  potential options to fund investments in the surface transportation system,  and (4) our recent findings on the benefits, costs, and trade-offs of using  public-private partnerships to help fund transportation investments. My  comments are based on a body of work that we have completed over the  past several years for Congress. We conducted our work in June 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Current Surface Transportation Programs Do Not Effectively Address Identified Transportation Challenges
paragraphs: Current surface transportation programs do not effectively address the  transportation challenges the nation faces. Collectively, post-interstate-era  programs addressing highway, transit, and safety are an agglomeration  that has been established over half a century without a well-defined vision  of the national interest and federal role. Many surface transportation  programs are not linked to performance of the transportation system or  grantees, as most highway, transit, and safety funds are distributed  through formulas that only indirectly relate to needs and may have no  relationship to performance. In addition, the programs often do not use  the best tools or best approaches, such as using more rigorous economic  analysis to select projects. Finally, the fiscal sustainability of the numerous  highway, transit, and safety programs funded by the Highway Trust Fund  is in doubt, as a result of increased spending from the fund without  commensurate increases in revenues.
subsections: section_title: Federal Goals and Approaches Have Expanded as State and Local Discretion Has Increased
paragraphs: Since the Federal-Aid Highway Act of 1956 funded the modern federal  highway program, the federal role in surface transportation has expanded  to include broader goals, more programs, and a variety of program  structures. Although most surface transportation funds remain dedicated  to highway infrastructure, federal surface transportation programs have  grown in number and complexity, incorporating additional transportation,  environmental, and societal goals. While some of these goals have led to  new grant programs in areas such as transit, highway safety, and motor  carrier safety, others have led to additional procedural requirements for  receiving federal aid, such as environmental review and transportation  planning requirements.
This expansion has also created a variety of grant structures and federal  approaches for establishing priorities and distributing federal funds. Most  highway infrastructure funds continue to be distributed to states in  accordance with individual grant program formulas and eligibility  requirements. However, broad program goals, eligibility requirements, and  authority to transfer funds between highway programs give state and local  governments broad discretion to allocate highway infrastructure funds  according to their priorities. Although some transit formula grant  programs also give grantees considerable discretion to allocate funds, a  portion of transit assistance requires grantees to compete for funding  based on specific criteria and goals. Similarly, basic safety formula grant  programs are augmented by smaller programs that directly target federal  funds to specific goals and actions using financial incentives and penalty  provisions.
section_title: The Goals and Role of the Federal Government Are Not Clear, and Many Programs Are Not Linked to Performance
paragraphs: We have found that many federal surface transportation programs are not  effective at addressing key transportation challenges, such as increasing  congestion and growing freight demand, because federal goals and roles  are unclear, and many programs lack links to needs or performance. The  goals of federal surface transportation programs are numerous and  sometimes conflicting, which contributes to a corresponding lack of  clarity in the federal role. For example, despite statutes and regulations  that call for an intermodal approach (one that creates connections across  modes), only one federal program is specifically directed at intermodal  infrastructure.
Most highway, transit, and safety grant funds are distributed through  formulas that have only an indirect relationship to needs and many have  no relationship to performance or outcomes. The largest safety grants are  more likely than highway grants to be focused on goals rather than  specific transportation systems such as the interstate system, and several  highway safety and motor carrier safety grants allocate incentive funds on  the basis of performance or state efforts to carry out specific safety- related activities. However, since the majority of surface transportation  funds are distributed without regard to performance, it is difficult to  assess the impact of recent record levels of federal highway expenditures.  For example, while the condition of highways showed some improvement  between 1997 and 2004, traffic congestion increased in the same period.  Mechanisms to link programs to goals also appear insufficient because,  particularly within the Federal-aid Highway program, federal rules for  transferring funds between different highway infrastructure programs are  flexible, weakening the distinctions between individual programs   (see fig. 1).
section_title: Surface Transportation Programs Often Do Not Use Best Tools and Approaches
paragraphs: Surface transportation programs often do not employ the best tools and  approaches to ensure effective investment decisions. Rigorous economic  analysis does not generally drive the investment decisions of state and  local governments—in a 2004 survey of state departments of  transportation, 34 of 43 state departments of transportation cited political  support and public opinion as very important factors, whereas 8 said the  same of the ratio of benefits to costs. The federal government also does  not possess adequate data to assess outcomes or implement performance  measures. For example, the Department of Transportation (DOT) does not  have a central source of data on congestion, even though it has identified  congestion as a top priority. While some funds can be transferred between  highway and transit programs, modally stovepiped funding nevertheless  impedes efficient planning and project selection. Additionally, tools to  make better use of existing infrastructure, such as intelligent  transportation systems and congestion pricing, have not been deployed to  their full potential.
section_title: The Fiscal Sustainability of Surface Transportation Programs Is Threatened
paragraphs: The solvency of the federal surface transportation program is at risk  because expenditures now exceed revenues for the Highway Trust Fund,  and projections indicate that the balance of the Highway Trust Fund will  soon be exhausted. According to the Congressional Budget Office (CBO),  the Highway Account will face a shortfall in 2009, the Transit Account in  2012. The rate of expenditures has affected its fiscal sustainability. As a  result of the Transportation Equity Act for the 21st Century (TEA-21),  Highway Trust Fund spending rose 40 percent from 1999 to 2003 and  averaged $36.3 billion in contract authority per year. The upward trend in  expenditures continued under the Safe, Accountable, Flexible, Efficient  Transportation Equity Act: A Legacy for Users (SAFETEA-LU), which  provided an average of $57.2 billion in contract authority per year. While  expenditures from the trust fund have grown, revenues into the fund have  not kept pace. The current fuel tax of 18.4 cents per gallon has been in  place since 1993, and the buying power of the fixed cents-per-gallon  amount has since been eroded by inflation. The reallocation to the  Highway Trust Fund of 4.3 cents of federal fuel tax previously dedicated to  deficit reduction provided an influx of funds beginning in 1997. However,  this influx has been insufficient to sustain current spending levels.
Furthermore, while federal funding for transportation has increased, the  total funding for transportation may not increase to the same extent  because federal funds may be substituted for state and local funds. Thus,  added federal funds may not lead to a commensurate increase in the total  investment in highways because state and local governments can shift  nonfederal funds away from highways to other purposes. Increases in  federal funding do appear to reduce state spending for the same purpose,  reducing the return on the federal investment. Research estimates that  about 50 percent of each additional federal grant dollar for the highway  program displaces funds that states would otherwise have spent on  highways.
As we have previously reported, this situation argues for a fundamental  reexamination of the federal approach to surface transportation problems  and a restructuring of federal programs to create more focused,  performance-based, and sustainable programs. In cases for which there is  a significant national interest, maintaining strong federal financial support  and a more direct federal involvement in the program may be needed. In  other cases, functions may best be carried out by other levels of  government or not at all. There may also be cases for which federal  financial support is desirable but a more results-oriented approach is  appropriate. In addition, depending on the transportation issue and the  desired goals, different options and approaches may be appropriate for  different problems. Restructuring the current approach to transportation  problems will take time, but a vision and strategy are needed to begin the  process of transforming to a set of policies and programs to effectively  address the nation’s transportation needs and priorities.
section_title: Framework to Assess Proposals for Restructuring and Funding Surface Transportation Programs
paragraphs: Through our prior analyses of existing programs, we identified a  framework of principles that could help drive an assessment of proposals  for restructuring and funding federal surface transportation programs.  These principles include (1) creating well-defined goals based on  identified areas of national interest, (2) establishing and clearly defining  the federal role in achieving each goal, (3) incorporating performance and  accountability into funding decisions, (4) employing the best tools and  approaches to improve results and emphasize return on investment, and  (5) ensuring fiscal sustainability. We have also developed a series of  illustrative questions that can be used to determine the extent to which  restructuring and funding proposals are aligned with each principle. We  developed these principles and illustrative questions based on prior  analyses of existing surface transportation programs as well as a body of  work that we have developed for Congress, including GAO’s High-Risk,  Performance and Accountability, and 21st Century Challenges reports. The  principles do not prescribe a specific approach to restructuring or funding,  but they do provide key attributes that will help ensure that restructured  surface transportation programs address current challenges.
subsections: section_title: Create Well-defined Goals Based on Identified Areas of National Interest
paragraphs: Our previous work has shown that identifying areas of national interest is  an important first step in any proposal to restructure and fund surface  transportation programs. In identifying areas of national interest,  proposals should consider existing 21st century challenges and how future  trends could affect emerging areas of national importance—as well as how  the national interest and federal role may vary by area. For example,  experts have suggested that federal transportation policy should recognize  emerging national and global imperatives, such as reducing the nation’s  dependence on oil and minimizing the impact of the transportation system  on global climate change. Once the various national interests in surface  transportation have been identified, proposals should also clarify specific  goals for federal involvement in surface transportation programs. Goals  should be specific and outcome-based to ensure that resources are  targeted to projects that further the national interest.
The following illustrative questions can be used to determine the extent to  which proposals to restructure and fund surface transportation programs  create well-defined goals based on identified areas of national interest.
To what extent are areas of national interest clearly defined?
To what extent are areas of national interest reflective of future trends?
To what extent are goals defined in relation to identified areas of national  interest?
section_title: Establish and Clearly Define the Federal Role in Achieving Each Goal
paragraphs: After the various national interests and specific goals for federal  involvement in surface transportation have been identified, the federal  role in working toward each goal should be established. The federal role  should be defined in relation to the roles of state and local governments,  regional entities, and the private sector. Where the national interest is  greatest, the federal government may play a more direct role in setting  priorities and allocating resources as well as fund a higher share of  program costs. Conversely, where the national interest is less evident,  state and local governments and others could assume more responsibility.  For example, efforts to reduce transportation’s impact on greenhouse gas  emissions may warrant a greater federal role than other initiatives, such as  reducing urban congestion, since the impacts of greenhouse gas emissions  are widely dispersed, whereas the impacts of urban congestion may be  more localized.
The following illustrative questions can be used to determine the extent to  which proposals to restructure and fund the surface transportation  programs establish and clearly define the federal role in achieving each  goal.
To what extent is the federal role directly linked to defined areas of  national interest and goals?
To what extent is the federal role defined in relation to the roles of state  and local governments, regional entities, and the private sector?
To what extent does the proposal consider how the transportation system  is linked to other sectors and national policies, such as environmental,  security, and energy policies?
section_title: Incorporate Performance and Accountability into Funding Decisions
paragraphs: Our previous work has shown that an increased focus on performance and  accountability for results could help the federal government target  resources to programs that best achieve intended outcomes and national  transportation priorities. Tracking specific outcomes that are clearly  linked to program goals could provide a strong foundation for holding  grant recipients responsible for achieving federal objectives and  measuring overall program performance. In particular, substituting  specific performance measures for the current federal procedural  requirements could help make the program more outcome-oriented. For  example, if reducing congestion were an established federal goal, outcome  measures for congestion, such as reduced travel time, could be  incorporated into the programs to hold state and local governments  responsible for meeting specific performance targets. Furthermore,  directly linking the allocation of resources to the program outcomes  would increase the focus on performance and accountability for results.  Incorporating incentives or penalty provisions into grants can further hold  grantees and recipients accountable for achieving results.
The following illustrative questions can be used to determine the extent to  which proposals to restructure and fund surface transportation programs  incorporate performance and accountability into funding decisions.
Are national performance goals identified and discussed in relation to  state, regional, and local performance goals?
To what extent are performance measures outcome-based?
To what extent is funding linked to performance?
To what extent does the proposal include provisions for holding  stakeholders accountable for achieving results?
section_title: Employ the Best Tools and Approaches to Improve Results and Emphasize Return on Investment
paragraphs: We have previously reported that the effectiveness of any overall federal  program design can be increased by promoting and facilitating the use of  the best tools and approaches to improve results and emphasize return on  investment. Importantly, given the projected growth in federal deficits,  constrained state and local budgets, and looming Social Security and  Medicare spending commitments, the resources available for discretionary  programs will be more limited—making it imperative to maximize the  national public benefits of any federal investment through a rigorous  examination of the use of such funds. A number of specific tools and  approaches can be used to improve results and return on investment  including using economic analysis, such as benefit-cost analysis, in project  selection; requiring grantees to conduct post-project evaluations; creating  incentives to better utilize existing infrastructure; providing states and  localities with greater flexibility to use certain tools, such as tolling and  congestion pricing; and requiring maintenance-of-effort provisions in  grants. Using these tools and approaches could help surface  transportation programs more directly address national transportation  priorities.
The following illustrative questions can be used to determine the extent to  which proposals to restructure and fund surface transportation programs  employ the best tools and approaches to improve results and emphasize  return on investment.
To what extent do the proposals consider how costs and revenues will be  shared among federal, state, local, and private stakeholders?
To what extent do the proposals address the need better to align fees and  taxes with use and benefits?
To what extent are trade-offs between efficiency and equity considered?
Do the tools and approaches align with the level of federal involvement in  a given policy area?
To what extent do the proposals provide flexibility and incentives for state  and local governments to choose the most appropriate tool in the toolbox?
section_title: Ensure Fiscal Sustainability
paragraphs: Our previous work has shown that transportation funding, and the  Highway Trust Fund in particular, faces an imbalance of revenues and  expenditures and other threats to its long term sustainability.  Furthermore, the sustainability of transportation funding should also be  seen in the context of the broader, governmentwide problem of fiscal  imbalance. The federal role in transportation funding must be reexamined  to ensure that it is sustainable in this new fiscal reality. A sustainable  surface transportation program will require targeted investment, with  adequate return on investment, from not only the federal government but  also state and local governments and the private sector.
The following illustrative questions can be used to determine the extent to  which proposals to restructure and fund surface transportation programs  ensure fiscal sustainability.
To what extent do the proposals reexamine current and future spending  on surface transportation programs?
Are the recommendations affordable and financially stable over the long- term?  To what extent are the recommendations placed in the context of  federal deficits, constrained budgets, and other spending commitments,  and to what extent do they meet a rigorous examination of the use of  federal funds?
To what extent are recommendations considered in the context of trends  that could affect the transportation system in the future, such as  population growth, increased fuel efficiency, and increased freight traffic?
Current concerns about the sustainability and performance of existing  programs suggest that this is an opportune time for Congress to more  clearly define the federal role in transportation and improve progress  toward specific, nationally defined outcomes. Given the scope of the  needed transformation, it may be necessary to shift policies and programs  incrementally or on a pilot basis to gain practical lessons for a coherent,  sustainable, and effective national program and funding structure to best  serve the nation for the 21st century.
section_title: Various Options Are Available or Have Been Proposed to Fund Investments in the Nation’s Infrastructure
paragraphs: Absent changes in planned spending, a variety of funding and financing  options will likely be needed to address projected transportation funding  shortfalls. Although some of the demand for additional investment in  transportation could be reduced, there is a growing consensus that some  level of additional investment in transportation is warranted. A range of  options—from altering existing or introducing new funding approaches to  employing various financing mechanisms—could be used to help meet the  demand for additional investments. Each of these options has different  merits and challenges, and the selection of any of them will likely involve  trade-offs among different policy goals. Furthermore, the suitability of any  of these options depends on the level of federal involvement or control  that policymakers desire for a given area of policy. However, as we have  reported, when infrastructure investment decisions are made based on  sound evaluations, these options can lead to an appropriate blend of  public and private funds to match public and private costs and benefits.
subsections: section_title: Existing Strategies Can Help Reduce the Demand for Additional Investment
paragraphs: Estimates from multiple sources indicate that additional investment in the  transportation system could be warranted. For example, in its January  2008 report, the National Surface Transportation Policy and Revenue  Study Commission (Policy Commission) recommended an annual  investment of about $225 billion from all levels of government in the  surface transportation system—an increase of about $140 billion from  current spending levels. Similarly, the Congressional Budget Office  recently estimated that an annual investment of about $165 billion in  surface transportation could be economically justifiable. In addition, in  its February 2008 interim report, the National Surface Transportation  Infrastructure Financing Commission (Financing Commission) noted that  one of its base assumptions is that there is a gap between current funding  levels and investment needs.
However, some of the demand for additional investment in transportation  infrastructure could be reduced. We have previously reported that the  ways in which revenue is generated and distributed can influence the  decisions made by users as well as decision-making and programs at the  state and local levels. In particular, our previous work has shown that  current funding and decision-making processes provide a built-in  preference for projects that build or maintain transportation infrastructure  rather than try to use existing infrastructure more efficiently—which  would reduce the overall demand for additional investments. CBO also  recently reported that some of the demand for additional spending on  infrastructure could be met by providing incentives to use existing  infrastructure more efficiently. In its February 2008 interim report, the  Financing Commission noted the need to use new approaches and  technologies to maximize the use of current capacity.
We have also previously reported that increased federal highway grants  influence states and localities to substitute federal funds for funds they  otherwise would have spent on highways for other purposes.
Consequently, additional federal investments in transportation do not  necessarily translate into commensurate levels of spending by the states  and localities on transportation. Addressing this “leakage” with such tools  as maintenance-of-effort requirements could maximize the effectiveness of  federal investments.
The principles we have identified for restructuring the surface  transportation programs can also be used as a framework for considering  levels of investment and the funding and financing options described  below. For example, in defining the federal role in funding transportation,  we have previously reported that where the national interest is greatest,  having the federal government fund a higher share of program costs could  be appropriate. Conversely, where the national interest is less evident,  state and local governments, and others could assume more responsibility.  In addition, incorporating incentives or penalty provisions into different  funding and financing approaches can help ensure performance and  accountability.
section_title: Funding Approaches Can Be Altered or Developed to Help Fund Infrastructure Investments
paragraphs: Various existing funding approaches could be altered or new funding  approaches could be developed, to help fund investments in the nation’s  infrastructure. These various approaches can be grouped into two  categories: taxes and user fees.
A variety of taxes have been and could be used to fund the nation’s  infrastructure, including excise, sales, property, and income taxes. For  example, federal excise taxes on motor fuels are the primary source of  funding for the federal surface transportation program. Fuel taxes are  attractive because they have provided a relatively stable stream of  revenues and the collection and enforcement costs are relatively low.  However, fuel taxes do not currently convey to drivers the full costs of  their use of the road—such as the costs of wear and tear, congestion, and  pollution. Moreover, federal motor fuel taxes have not been increased  since 1993—and thus the purchasing power of fuel tax revenues has  eroded with inflation. As CBO has previously reported, the existing fuel  taxes could be altered in a variety of ways to address this erosion,  including increasing the per-gallon tax rate and indexing the rates to  inflation. Some transportation stakeholders have suggested exploring the  potential of using a carbon tax, or other carbon pricing strategies, to help  fund infrastructure investments. In a system of carbon taxes, fossil fuel  emissions would be taxed, with the tax proportional to the amount of  carbon dioxide released in its combustion. Because a carbon tax could  have a broad effect on consumer decisions, we have previously reported  that it could be used to complement Corporate Average Fuel Economy  standards, which require manufacturers meet fuel economy standards for  passenger cars and light trucks to reduce oil consumption. A carbon tax  would create incentives that could affect a broader range of consumer  choices as well as provide revenue for infrastructure.
Another funding source for infrastructure is user fees. The concept  underlying user fees—that is, users pay directly for the infrastructure they  use—is a long-standing aspect of many infrastructure programs. Examples  of user fees that could be altered or introduced include fees based on  vehicle miles traveled (VMT) on roadways; freight fees, such as a per- container charge; congestion pricing of roads; and tolling.
VMT fees. To more directly reflect the amount a vehicle uses the road,  users could be charged a fee based on the number of vehicle miles  traveled. In 2006, the Oregon Department of Transportation conducted a  pilot program designed to test the technological and administrative  feasibility of a VMT fee. The pilot program demonstrated that a VMT fee  could be implemented to replace the fuel tax as the principal source of  transportation revenue by utilizing a Global Positioning System (GPS) to  track miles driven and collecting the VMT fee ($0.012 per mile traveled) at  fuel pumps that can read information from the GPS. As we have  previously reported, using a GPS could also track mileage in high  congestion zones, and the fee could be adjusted upward for miles driven in  these areas or during more congested times of day such as rush hour—a  strategy that might reduce congestion and save fuel. In addition, the  system could be designed to apply different fees to vehicles, depending on  their fuel economy. On the federal level, a VMT fee could be based on  odometer readings, which would likely be a simpler and less costly way to  implement such a program. A VMT fee—unless it is adjusted based on the  fuel economy of the vehicle—does not provide incentives for customers to  buy vehicles with higher fuel economy ratings because the fee depends  only on mileage. Also, because the fee would likely be collected from  individual drivers, a VMT fee could be expensive for the government to  implement, potentially making it a less cost-effective approach than a  motor fuel or carbon tax. The Oregon study also identified other  challenges including concerns about privacy and technical difficulties in  retrofitting vehicles with the necessary technology.
Freight fees. Given the importance of freight movement to the economy,  the Policy Commission recently recommended a new federal freight fee to  support the development of a national program aimed at strategically  expanding capacity for freight transportation. While the volume of  domestic and international freight moving through the country has  increased dramatically and is expected to continue growing, the capacity  of the nation’s freight transportation infrastructure has not increased at  the same rate as demand. To support the development of a national  program for freight transportation, the Policy Commission recommended  the introduction of a federal freight fee. The Policy Commission notes that  a freight fee, such as a per-container charge, could help fund projects that  remedy chokepoints and increase throughput. The Policy Commission also  recommended that a portion of the customs duties, which are assessed on  imported goods, be used to fund capacity improvements for freight  transportation. The majority of customs duties currently collected,  however, are deposited in the U.S. Treasury’s general fund for the general  support of federal activities. Therefore, designating a portion of customs  duties for surface transportation funding would not create a new source of  revenue, but rather transfer funds from the general fund.
Congestion pricing. As we have previously reported, congestion pricing,  or road pricing, attempts to influence driver behavior by charging fees  during peak hours to encourage users to shift to off-peak periods, use less  congested routes, or use alternative modes. Congestion pricing can also  help guide capital investment decisions for new transportation  infrastructure. In particular, as congestion increases, toll rates also  increase, and such increases (sometimes referred to as “congestion  surcharges”) signal increased demand for physical capacity, indicating  where capital investments to increase capacity would be most valuable.  Furthermore, these congestion surcharges can potentially enhance  mobility by reducing congestion and the demand for roads when the  surcharges vary according to congestion to maintain a predetermined level  of service. The most common form of congestion pricing in the United  States is high-occupancy toll lanes, which are priced lanes that offer  drivers of vehicles that do not meet the occupancy requirements the  option of paying a toll to use lanes that are otherwise restricted for high- occupancy vehicles.
section_title: Various Financing Mechanisms Can Also Help Fund Infrastructure Projects
paragraphs: Financing mechanisms can provide flexibility for all levels of government  when funding additional infrastructure projects, particularly when  traditional pay-as-you-go funding approaches, such as taxes or fees, are  not set at high enough levels to meet demands. The federal government  currently offers several programs to provide state and local governments  with incentives such as bonds, loans, and credit assistance to help finance  infrastructure. Financing mechanisms can create potential savings by  accelerating projects to offset rapidly increasing construction costs and  offer incentives for investment from state and local governments and from  the private sector. However, each financing strategy is, in the final  analysis, a form of debt that ultimately must be repaid with interest.  Furthermore, since the federal government’s cost of capital is lower than  that of the private sector, financing mechanisms, such as bonding, may be  more expensive than timely, full, and up-front appropriations. Finally, if  the federal government chooses to finance infrastructure projects, policy  makers must decide how borrowed dollars will be repaid, either by users  or by the general population either now or in the future through increases  in taxes or reductions in other government services.
A number of available mechanisms can be used to help finance  infrastructure projects. Examples of these financing mechanisms follow.
Bonding. A number of bonding strategies—including tax-exempt bonds,  private activity bonds, Grant Anticipation Revenue Vehicles (GARVEE)  bonds, and Grant Anticipation Notes (GAN)—offer flexibility to bridge  funding gaps when traditional revenue sources are scarce. For example,  state-issued GARVEE or GAN bonds provide capital in advance of  expected federal funds, allowing states to accelerate highway and transit  project construction and thus potentially reduce construction costs.  Through April 2008, 20 states and two territories issued approximately $8.2  billion of GARVEE-type debt financing and 20 other states are actively  considering bonding or seeking legislative authority to issue GARVEEs.  Furthermore, SAFETEA-LU authorized the Secretary of Transportation to  allocate $15 billion in tax-exempt bonds for qualified highway and surface  freight transfer facilities. To date, $5.3 billion has been allocated for six  projects. Several bills have been introduced in this Congress that would  increase investment in the nation’s infrastructure through bonding. For  example, the Build America Bonds Act would provide $50 billion in new  infrastructure funding through bonding. Although bonds can provide up- front capital for infrastructure projects, they can be more expensive for  the federal government than traditional federal grants. This higher  expense results, in part, because the government must compensate the  investors for the risks they assume through an adequate return on their  investment.
Loans, loan guarantees, and credit assistance. The federal  government currently has two programs designed to offer credit  assistance for surface transportation projects. The Transportation  Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorized the  Federal Highway Administration to provide credit assistance, in the form  of direct loans, loan guarantees, and standby lines of credit for projects of  national significance. A similar program, Railroad Rehabilitation and  Improvement Financing (RRIF), offers loans to acquire, improve, develop,  or rehabilitate intermodal or rail equipment and develop new intermodal  railroad facilities. To date, 15 TIFIA projects have been approved totaling  over $4.8 billion in credit assistance and the RRIF program has approved  21 loan agreements worth more than $747 million. These programs are  designed to leverage federal funds by attracting substantial nonfederal  investments in infrastructure projects. However, the federal government  assumes a level of risk when it makes or guarantees loans for projects  financed with private investment.
Revolving funds. Revolving funds can be used to dedicate capital to be  loaned for qualified infrastructure projects. In general, loaned dollars are  repaid, recycled back into the revolving fund, and subsequently reinvested  in the infrastructure through additional loans. Such funds exist at both the  federal and the state levels and are used to finance various infrastructure  projects ranging from highways to water mains. For example, two federal  funds support water infrastructure financing, the Clean Water State  Revolving Fund for wastewater facilities, and the Drinking Water State  Revolving Fund for drinking water facilities. Under each of these  programs, the federal government provides seed money to states, which  they supplement with their own funds. These funds are then loaned to  local governments and other entities for water infrastructure construction  and upgrades and various water quality projects. In addition, State  Infrastructure Banks (SIBs)—capitalized with federal and state matching  funds—are state-run revolving funds that make loans and provide credit  enhancements and other forms of nongrant assistance to infrastructure  projects. Through June 2007, 33 SIBs have made approximately 596 loan  agreements worth about $6.2 billion to leverage other available funds for  transportation projects across the nation. Furthermore, other funds— such as a dedicated national infrastructure bank—have been proposed to  increase investment in infrastructure with a national or regional  significance. A challenge for revolving funds in general is maintaining their  capitalized value. Defaults on loans and inflation can reduce the  capitalized value of the fund—necessitating an infusion of capital needed  to continue the fund’s operations.
section_title: Highway Public- Private Partnerships Hold Promise, But Also Raise A Number of Issues to Consider
paragraphs: Another important and emerging vehicle for funding investments in  transportation is public-private partnerships. In February 2008 we  reported on highway public-private partnerships. These arrangements  show promise as a viable alternative, where appropriate, to help meet  growing and costly transportation demands and have the potential to  provide numerous benefits to the public sector. The highway public- private partnerships created to date have resulted in advantages from the  perspective of state and local governments, such as the construction of  new infrastructure without using public funding, and obtaining funds by  extracting value from existing facilities for reinvestment in transportation  and other public programs. For example, the state of Indiana received $3.8  billion from leasing the Indiana Toll Road and used those proceeds to fund  a 10-year statewide transportation plan. Highway public-private  partnerships potentially provide other benefits, including the transfer or  sharing of project risks to the private sector. Such risks include those  associated with construction costs and schedules and having sufficient  levels of traffic and revenues to be financially viable. In addition, the  public sector can potentially benefit from increased efficiencies in  operations and life-cycle management, such as increased use of innovative  technologies. Finally, through the use of tolling, highway public-private  partnerships offer the potential to price highways to better reflect the true  costs of operating and maintaining them and to increase mobility by  adjusting tolls to manage demand, as well as the potential for more cost  effective investment decisions by private investors.
Highway public-private partnerships also entail potential costs and risks.  Most importantly, there is no “free” money in public-private partnerships.  While highway public-private partnerships can be used to obtain financing  for highways, these funds are largely a new source of borrowed funds—a  form of privately issued debt that must be repaid to private investors  seeking a return on their investment by road users over what potentially  could be a period of several generations. Though concession agreements  can limit the extent to which a concessionaire can raise tolls, it is likely  that tolls will increase on a privately operated highway to a greater extent  than they would on a publicly operated toll road. To the extent that a  private concessionaire gains market power by control of a road where  there are not other viable travel alternatives, the potential also exists that  the public could pay tolls that are higher than tolls based on the cost of the  facilities, including a reasonable rate of return. Additionally, because large  up-front concession payments have, in part, been used to fund immediate  needs, it remains to be seen whether these agreements will provide long- term benefits to future generations who will potentially be paying  progressively higher toll rates throughout the length of a concession  agreement. Highway public-private partnerships are also potentially more  costly than traditional public procurement—for example, there are costs  associated with the need to hire financial and legal advisors.
In short, while highway public-private partnerships have promise, they are  not a panacea for meeting all transportation system demands. Ultimately  the extent to which public-private partnerships can be used as a tool to  help meet the nation’s transportation financing challenges will depend on  the ability of states to effectively manage and implement them. For  example, states must have appropriate enabling legislation in place and  the institutional ability to manage complex contractual mechanisms— either in the form of in-house expertise or through contractors. Most  importantly, the extent to which public-private partnerships can be used  as a tool to help meet the nation’s transportation funding challenges will  depend on how well states are able to weigh public interest  considerations. The benefits of public-private partnerships are potential  benefits—that is, they are not assured and can only be achieved by  weighing them against potential costs and trade-offs through careful,  comprehensive analysis to determine whether public-private partnerships  are appropriate in specific circumstances and, if so, how best to  implement them, and how best to protect the public interest.
In considering the numerous issues surrounding the protection of the  public interest, we reached the following conclusions in our February 2008  report on highway public-private partnerships:    First, consideration of highway public-private partnerships could benefit  from more consistent, rigorous, systematic, and up-front analysis. While  highway public-private partnerships are fairly new in the United States,  and although they are meant to serve the public interest, it is difficult to be  confident that these interests are being protected when formal  identification and consideration of public and national interests has been  lacking, and where limited up-front analysis of public interest issues using  established criteria has been conducted. Partnerships to date have  identified and protected the public interest largely through terms  contained in concession contracts, including maintenance and expansion  requirements, protections for the workforce, and oversight and monitoring  mechanisms to ensure that private partners fulfilled their obligations.  While these protections are important, governments in other countries,  including Australia and the United Kingdom, have developed systematic  approaches to identifying and evaluating public interest before agreements  are entered into, including the use of public interest criteria, as well as  assessment tools, and require their use when considering private  investments in public infrastructure. For example, a state government in  Australia uses a public interest test to determine how the public interest  would be affected in eight specific areas, including whether the views and  rights of affected communities have been heard and protected and  whether the process is sufficiently transparent. While similar tools have  been used to some extent in the United States, their use has been more  limited. Using up-front public interest analysis tools can also assist public  agencies in determining the expected benefits and costs of a project and  an appropriate means to deliver the project. Not using such tools may lead  to certain aspects of protecting public interest being overlooked.
Second, fresh thinking is needed on the appropriate federal approach.
DOT has done much to promote the benefits, but comparatively little to  either assist states and localities in weighing potential costs and trade-offs,  nor to assess how potentially important national interests might be  protected in highway public-private partnerships. This is in many respects  a function of the design of the federal program as few mechanisms exist to  identify potential national interests in cases where federal funds have not  or will not be used. For example, although the Indiana Toll Road is part of  the Interstate Highway System and most traffic on the road is interstate in  nature, federal officials had little involvement in reviewing the terms of  this concession agreement because minimal federal funds were used to  construct it, and those funds were repaid to the federal government. The  historic test of the presence of federal funding may have been relevant at a  time when the federal government played a larger role in financing  highways but may no longer be relevant when there are new players and  multiple sources of financing, including potentially significant private  money. Reexamining the federal role in transportation provides an  opportunity to identify the emerging national public interests in highway  public-private partnerships and determine how highway public-private  partnerships fit in with national programs.
On the basis of these conclusions, we recommended that Congress direct  the Secretary of Transportation to develop and submit objective criteria  for identifying national public interests in highway public-private  partnerships, including any additional legal authority, guidance, or  assessment tools that would be appropriately required. We are pleased to  note that in a recent testimony before the House, the Secretary indicated a  willingness to begin developing such criteria. This is no easy task,  however. The recent Policy Commission report illustrates the challenges  of identifying national public interests as the Policy Commission’s  recommendations for future restrictions—including limiting allowable toll  increases and requiring concessionaires to share revenues with the public  sector—stood in sharp contrast to the dissenting views of three  commissioners. We believe any potential federal restrictions on highway  public-private partnerships must be carefully crafted to avoid undermining  the potential benefits that can be achieved. Reexamining the federal role  in transportation provides an opportunity for DOT we believe, to play a  targeted role in ensuring that national interests are considered, as  appropriate.
section_title: Concluding Observations
paragraphs: The nation’s surface transportation programs are no longer producing the  desired results. The reliability of the nation’s surface transportation  system is declining as congestion continues to grow. Although infusing  surface transportation programs with additional funding, especially in light  of the projected shortfalls in the Highway Trust Fund, could be viewed as  a quick and direct solution, past experience shows that increased funding  for the program does not necessarily translate into improved performance.  Furthermore, the nation’s current fiscal outlook may make such solutions  fiscally imprudent. In addition, before additional federal funds are  committed to the nation’s surface transportation programs, we believe a  fundamental reexamination of the program is warranted. Such a  reexamination would require reviewing the results of surface  transportation programs and testing their continued relevance and relative  priority. Appropriate funding sources and financing mechanisms can then  be tailored for programs that continue to be relevant in today’s  environment and address a national interest, such as freight movement.
Over the coming months, various options to restructure and fund surface  transportation programs will likely be put forward by a range of  transportation stakeholders. Ultimately, Congress and other federal  policymakers will have to determine which option—or which combination  of options—best meets the nation’s needs. There is no silver bullet that  can solve the nation’s transportation challenges, and many of the options,  such as allowing greater private-sector investment in the nation’s  infrastructure, could be politically difficult to implement both nationally  and locally. The principles that we identified provide a framework for  evaluating these various options. Although the principles do not prescribe  a specific approach to restructuring and funding the programs, they do  provide key attributes that will help ensure that a restructured surface  transportation program addresses current challenges. We will continue to  assist the Congress as it works to evaluate the various options and develop  a national transportation policy for the 21st century that improves the  design of transportation programs, the delivery of services, and  accountability for results.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other Members of the Committee  might have.
section_title: GAO Contact and Staff Acknowledgement
paragraphs: For further information on this statement, please contact JayEtta Z.  Hecker at (202) 512-2834 or heckerj@gao.gov. Individuals making key  contributions to this testimony were Robert Ciszewski, Nikki Clowers,  Steve Cohen, Barbara Lancaster, Matthew LaTour, and Nancy Lueke.
section_title: Related GAO Products
paragraphs: Federal User Fees: A Design Guide, GAO-08-386SP. Washington, D.C.: May  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.
Highway Public-Private Partnerships: More Rigorous Up-front Analysis  Could Better Secure Potential Benefits and Protect the Public Interest,  GAO-08-44. Washington, D.C.: February 8, 2008.
Surface Transportation: Preliminary Observations on Efforts to  Restructure Current Program, GAO-08-478T. Washington, D.C.: February  6, 2008.
Congressional Directives: Selected Agencies’ Processes for Responding to  Funding Instructions, GAO-08-209. Washington, D.C.: January 31, 2008.
Long-Term Fiscal Outlook: Action Is Needed to Avoid the Possibility of a  Serious Economic Disruption in the Future, GAO-08-411T. Washington,  D.C.: January 29, 2008.
Federal-Aid Highways: Increased Reliance on Contractors Can Pose  Oversight Challenges for Federal and State Officials, GAO-08-198.  Washington, D.C.: January 8, 2008.
Freight Transportation: National Policy and Strategies Can Help  Improve Freight Mobility. GAO-08-287. Washington, D.C.: January 7, 2008.
A Call For Stewardship: Enhancing the Federal Government’s Ability to  Address Key Fiscal and Other 21st Century Challenges. GAO-08-93SP.  Washington, D.C.: December 17, 2007.
Transforming Transportation Policy for the 21st Century: Highlights of  a Forum. 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.
Intermodal Transportation: DOT Could Take Further Actions to Address  Intermodal Barriers. GAO-07-718. Washington, D.C.: June 20, 2007.
Performance and Accountability: Transportation Challenges Facing  Congress and the Department of Transportation. GAO-07-545T.  Washington, D.C.: March 6, 2007.
High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January  2007.
Highway Finance: States’ Expanding Use of Tolling Illustrates Diverse  Challenges and Strategies. GAO-06-554. Washington, D.C.: June 28, 2006.
Highway Congestion: Intelligent Transportation Systems’ Promise for  Managing Congestion Falls Short, and DOT Could Better Facilitate Their  Strategic Use. GAO-05-943. Washington, D.C.: September 14, 2005.  21st Century Challenges: Reexamining the Base of the Federal  Government. GAO-05-325SP. Washington, D.C.: February 1, 2005.
Highway and Transit Investments: Options for Improving Information  on Projects’ Benefits and Costs and Increasing Accountability for  Results. GAO-05-172. Washington, D.C.: January 24, 2005.
Federal-Aid Highways: Trends, Effect on State Spending, and Options  for Future Program Design. GAO-04-802. Washington, D.C.: August 31,  2004.
Marine Transportation: Federal Financing and a Framework for  Infrastructure Investments. GAO-02-1033. Washington, D.C.: September 9,  2002.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. This published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.