Highway Trust Fund: Improved Solvency Mechanisms and Communication Needed to Help Avoid Shortfalls in the Highway Account
Published: 2009-02-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Highway Account within the Highway Trust Fund is the primary mechanism for funding federal highway programs. The account-- administered by the Federal Highway Administration (FHWA) within the Department of Transportation (DOT)--channels about $33 billion in highway user excise taxes annually to states for highway projects. Although DOT and others projected that the account could run out of funds in fiscal year 2009, the balance fell more rapidly than expected and a shortfall became imminent in August 2008. In September, Congress passed legislation to provide $8 billion to replenish the account, but DOT officials anticipate the account could reach a critical stage again in fiscal year 2009. This report (1) describes the events that led to the decline in the account balance, including how DOT responded, and (2) identifies potential improvements in mechanisms to manage account solvency. This report also includes information on strategies GAO has reported on in the past that could be used to better align account outlays and revenues. To conduct this work, GAO analyzed information in legal and budget documents, reviewed account estimates, and interviewed agency officials and stakeholders.
section_title: What GAO Found
paragraphs: The Highway Account balance declined for several reasons. In 2005, estimated outlays from the account specified in legislation exceeded estimated revenues and, if these estimates were realized over the fiscal year 2005 to 2009 authorization period, would draw the account balance down to about $0.4 billion by the end of fiscal year 2009. However, actual revenues for fiscal year 2008 were about $4 billion lower than the estimates due to fewer purchases of trucks and motor fuel--two primary sources of account revenue. In the summer of 2008, DOT received indicators that the Highway Account balance was declining faster than expected and developed cash management practices to slow outlays to states but estimated that the account would remain solvent through the end of fiscal year 2008. Following a large downturn in revenues allocated to the account in August, DOT officials announced on Friday, September 5--three weeks later--that the practices to slow outlays would begin the following Monday, leaving states little time to adjust. DOT officials recognize that communication with stakeholders could be improved and are developing a plan to improve communication. Improving mechanisms intended to help maintain Highway Account solvency could reduce the likelihood of a funding shortfall. First, statutory mechanisms designed to make annual adjustments to the Highway Account could be modified and implemented to perform better. In fact, DOT analyses prepared at GAO's request show that these modifications could have prevented or at least signaled the fiscal year 2008 decline. Second, DOT could monitor additional indicators throughout the year--such as changes in vehicle miles traveled--to help anticipate sudden changes in account revenues. Despite improvements in mechanisms, without either reduced expenditures or increased revenues, or a combination of the two, account shortfalls will likely continue. DOT officials noted that improved solvency mechanisms would be effective only if the authorization act better aligns expenditures from the account with revenues. In the past, GAO has reported on strategies that could be used to align expenditures and revenues.

section_title: Letter
paragraphs: The Highway Account within the Highway Trust Fund is the principal  mechanism for funding federal highway programs. The fund, administered  by the Federal Highway Administration (FHWA) within the Department of  Transportation (DOT), annually channels about $33 billion in highway user  excise taxes—primarily from purchases of motor fuel and truck-related  items—through the account for distribution to states for highway and  related spending. Although DOT, the Congressional Budget Office (CBO),  GAO and others have reported that the Highway Account could  experience a cash shortfall in fiscal year 2009, the balance of the account  dropped more rapidly than anticipated and approached a zero balance in  August 2008. Congress subsequently passed legislation in September 2008  to appropriate $8 billion from the General Fund of the Treasury to  replenish the account. DOT and CBO officials anticipate that the Highway  Account could reach a critical stage again by the fiscal year 2009 end of  the current highway program authorization of the Safe, Accountable,  Flexible, Efficient Transportation Equity Act—A Legacy for Users  (SAFETEA-LU).
Given the important role of the Highway Account in providing funds to  build, operate, and maintain our nation’s roadways, we were asked to  examine why the account balance declined and how to better anticipate  such a decline in the future. Consequently, this report (1) describes the  events that led to the decline in the balance of the Highway Account, as  well as actions DOT took in response, and (2) identifies improvements in  mechanisms to manage Highway Account solvency that Congress and  DOT could consider to better ensure the sustainability of the account. In  addition to improved solvency mechanisms, this report also includes  information on several strategies we have reported on in the past that  could be used to better align expenditures and revenues. To conduct this  work, we reviewed statutes, regulations, budget documents, and reports  related to the Highway Account and analyzed information contained in  those documents. We also reviewed Highway Account estimates  developed by DOT, asked DOT to conduct scenarios of the  implementation of existing mechanisms that are designed to help keep the  Highway Account solvent—the Byrd Test and Revenue Aligned Budget  Authority (RABA)—and analyzed these scenarios. We interviewed officials  from the Department of Transportation’s Office of the Secretary and  FHWA, Department of the Treasury (Treasury), Office of Management and  Budget (OMB), Congressional Budget Office, Congressional Research  Service, and the American Association of State Highway and  Transportation Officials. We performed this work between November 2008  and January 2009 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: Background
paragraphs: Congress established the Highway Trust Fund in 1956 to hold and  distribute highway user excise taxes to fund various surface  transportation programs. In 1983, the Highway Trust Fund was divided  into two accounts: the Highway Account and the Mass Transit Account.  Receipts for the Highway Trust Fund are derived from two main sources:  federal excise taxes on motor fuels (gasoline, diesel, and special fuels  taxes) and truck-related taxes (truck and trailer sales, truck tires, and  heavy-vehicle use taxes). Receipts from the motor fuels tax constitute the  single largest source of revenue for the Highway Trust Fund (about 88  percent of total receipts from fiscal year 2005 to 2008); the gasoline tax—a  flat rate of 18.4 cents per gallon—is the same amount as in 1993, although  the portion of that tax dedicated to the Highway Trust Fund has increased  twice since that year. Receipts from truck and trailer sales (about 8  percent of total receipts from fiscal year 2005 to 2008) are the second  largest source of revenue for the fund. (See fig. 1.)
The Highway Account receives the majority of the tax receipts allocated to  the fund. Figure 2 shows the amount of motor fuels and truck-related  taxes levied for the Highway Trust Fund 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 3. 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. Distribution of funds 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, due to the length of time it takes to  complete projects, 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 there are adequate funds to  reimburse states (through the Byrd Test) and align outlays with actual  revenues (through RABA).
Byrd Test. In 1956, Congress was concerned that the proceeds of the  taxes to be deposited in the Highway Trust Fund 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, 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 Highway Trust Fund,  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  assure 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 upward, when the  account has greater revenues than projected, or downward, when  revenues do not meet projected levels. However, 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 that $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.
Despite these mechanisms, Highway Account revenues were insufficient  to cover outlays, and the balance of the Highway Account has declined  from fiscal year 2000 to 2008. As shown in figure 4, the account  approached a zero balance near the end of fiscal year 2008; legislation on  September 15, 2008—to provide $8 billion to replenish the account—and  the final receipts deposit of about $2 billion for fiscal year 2008 on  October 8, 2008 resulted in a final fiscal year 2008 balance of about $10  billion.
section_title: Several Events Led to the Decline in the Balance of the Highway Account
paragraphs: SAFETEA-LU authorization levels, combined with lower than anticipated  receipts, caused the Highway Account balance to decline over the  authorization period. Although DOT has reported since February 2006 that  the Highway Account balance would be depleted in fiscal year 2009 and  recommended several actions to offset the decline, DOT officials  acknowledge that communication with stakeholders on the status of the  Highway Account could be improved and are developing a plan to improve  communication.
subsections: section_title: SAFETEA-LU Authorizations and Lower- Than-Anticipated Receipts Led to the Decline of the Highway Account Balance
paragraphs: Estimated outlays from Highway Account programs under SAFETEA-LU  exceeded estimated receipts throughout the authorization period by about  $10.4 billion. While estimated outlays for fiscal years 2005 through 2009  totaled $182 billion (ranging from $31.3 billion in fiscal year 2005 to $40.7  billion in fiscal year 2009), estimated receipts totaled $171.6 billion  (ranging from $31.6 billion in fiscal year 2005 to $36.2 billion in fiscal year  2009). Based on the estimated outlays and receipts included in SAFETEA- LU, the Highway Account balance would be drawn down from $10.8 billion  to about $0.4 billion over the authorization period, providing more federal  funding for highway projects. 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. Given the inherent uncertainty associated  with estimating receipts and outlays over multiple years, a cash shortfall  was always a real possibility.
In fact, actual Highway Account receipts were lower than had been  estimated in SAFETEA-LU, particularly for fiscal year 2008. As a result, the  account balance dropped more precipitously than had been anticipated  and was nearly depleted in August 2008—1 year earlier than the end of the  SAFETEA-LU authorization period. Account receipts were lower in fiscal  year 2008 due to a weakening economy and higher motor fuel prices that  resulted in fewer truck sales and lower motor fuel purchases—the two  major sources of Highway Account revenue. Revenue associated with  truck, bus, and trailer sales accounted for the largest decline—$2.4 billion  (from $3.8 billion to $1.4 billion)—during fiscal year 2008. In addition,  through September 2008, drivers drove 3.5 percent less compared with the  first 9 months of 2007 as prices rose from $3.02 to $3.71 per gallon for  gasoline and from $3.31 to $4.02 per gallon for diesel for the same period.  Fewer miles driven resulted in fewer gallons of motor fuel purchased,  which, in turn, translated into a decline in tax receipts of about $0.53  billion—about $0.083 billion for gasoline and about $0.45 billion for diesel.  As a result, receipts for the Highway Account for fiscal year 2008 were  $31.3 billion—about $4 billion less than the $35.4 billion estimate for that  year (see fig. 5).
In addition, the effect of the lower receipts on the Highway Account was  not fully recognized until well after the decline began because receipts are  not confirmed until the IRS certifies the actual amount of receipts  allocated to the account—a process that can take about 4.5 months after  the end of each calendar quarter. Thus, the Highway Account operates  using Treasury estimates of tax receipts to be allocated to the account  until certification is completed. Treasury made a downward adjustment to  the Highway Account of about $783 million on May 14, 2008, based on the  difference between certified and estimated receipts from the first quarter  of fiscal year 2008. Another downward adjustment of about $631 million  based on the difference between certified and estimated receipts from the  second quarter of fiscal year 2008 occurred on August 18, which placed the  account in imminent risk of a shortfall. These downward adjustments— which were at least twice as large as other downward adjustments made  during the SAFETEA-LU authorization period—occurred during the  seasonal peak of outlays, the summer months when most highway projects  are under construction and states request reimbursement from DOT.  Quarterly adjustments to the Highway Account have varied during  SAFETEA-LU (see fig. 6).
section_title: DOT Recommended Actions to Offset the Decline and Implemented Cash Flow Management Procedures, but Communication with Stakeholders Could Be Improved
paragraphs: Beginning in February 2006, DOT reported several times that there could  be a shortfall in the Highway Account during fiscal year 2009 and  recommended corrective actions to offset the decline.
In February 2006—based on the President’s fiscal year 2007 budget, which  had lowered forecasted receipts based on a marked increase in crude oil  prices—DOT projected a continuous decline in the Highway Account  balance and a shortfall of $2.3 billion during fiscal year 2009. DOT noted  that two commissions established in SAFETEA-LU would provide  information on potential alternatives to support highway and transit  funding. DOT also stated at that time that the next reauthorization would  need to address whether the Highway Trust Fund has become insufficient  to fund transportation programs.
In February and July 2007, DOT proposed forgoing an anticipated upward  RABA adjustment to the obligation limitation for fiscal year 2008,  estimating a Highway Account shortfall of up to $3.8 billion in fiscal year  2009 with no RABA adjustment. However, instead of forgoing the upward  RABA adjustment, Congress increased the obligation limitation by $1  billion, to be used for bridge construction projects in the wake of a bridge  collapse on August 1, 2007.
In February 2008, DOT projected a shortfall of about $3.1 billion in the  Highway Account in fiscal year 2009 and proposed a downward RABA  adjustment of $1 billion as well as a further $800 million reduction in  obligation limitations for fiscal year 2009. DOT also requested legislative  authority for repayable advances from the Mass Transit Account to cover  the projected Highway Account shortfall through fiscal year 2009. In July  2008, Congress proposed legislation to appropriate $8 billion from the  General Fund of the Treasury to address the projected shortfall. Although  DOT initially opposed the legislation, in part because the $8 billion would  come from the General Fund of the Treasury, the agency requested that  Congress pass the legislation in September so that states would not be  adversely affected.
Indicators throughout the spring and summer of 2008—such as the  downward adjustment to the Highway Account in May, the weakening  economy, evidence of fewer vehicle miles traveled, and a reduction in  Treasury receipts—pointed toward a continuing decline in the account  balance. According to DOT officials, based on the Mid-Session review  released in July 2008, they estimated that the Highway Account balance  would still be positive—about $4.3 billion—at the end of fiscal year 2008.  However, DOT officials told us that after the August downward  adjustment based on certified tax receipts, they realized that the account  might reach a zero balance before October 2008.
In preparation for an anticipated decline in the Highway Account in fiscal  year 2009, DOT explored options for keeping the account solvent to avoid  violating the Antideficiency Act, which prohibits FHWA from reimbursing  states unless there are sufficient funds available in the Highway Account.  Since DOT cannot decrease outlays that have been obligated, the agency  focused on slowing down the rate of outlays—payments made to states  twice each day—to better match Treasury semimonthly deposits of  receipts to the Highway Account. DOT also asked all DOT agencies that  receive Highway Account funds to turn in excess cash. As DOT does not  have statutory authority to borrow, DOT recognized that once the cash in  the Highway Account was depleted, the agency would have been unable to  cover outlays until the next Treasury payment was deposited to the  account. DOT officials consulted with Treasury officials on whether the  frequency of receipt deposits to the account could be increased; Treasury  officials responded that they could temporarily increase the frequency of  deposits, but that there would be little benefit. On September 5, 2008, DOT  announced that FHWA would begin reimbursing states on a weekly basis  (rather than twice daily) on the following Monday and that the agency  supported draft legislation to appropriate $8 billion from the General Fund  of the Treasury to the Highway Account. DOT also considered making  prorated payments to states—based on the percentage of funds available  to cover all reimbursements—if the account balance dropped below $1  billion. Although the account balance dropped from $8.1 billion at the  beginning of fiscal year 2008 to below $1 billion on August 22, FHWA  ultimately did not implement this measure because the cash balance rose  above $1 billion the next business day—August 25—when Treasury semi- monthly receipts were deposited.
In light of the indicators throughout the spring and summer of 2008 that  the Highway Account balance was approaching a zero balance faster than  previously anticipated, we believe DOT officials could have communicated  with state DOT agencies and Congress in a more timely manner on the  status of the account and their efforts to keep it solvent. In a letter to state  DOT agencies dated July 8, 2008, FHWA stated that, in the event of a  shortfall in the Highway Account—still anticipated in fiscal year 2009— reimbursements to states would be delayed. DOT officials knew that the  account’s solvency was in question after the August downward adjustment  and anticipated changing its cash management procedures, but did not  publicly inform state DOT agencies until Friday, September 5 that prorated  payments could go into effect the following Monday, September 8. If DOT  were to implement prorated payments, state DOT agencies would then  need to fund the difference between the DOT prorated payment and their  obligations to contractors. State DOTs, particularly those with scheduled  Grant Anticipation Revenue Vehicles (GARVEE) bond payments, were  concerned of the potential impact on their ability to pay their debt  service. More timely communication could have allowed states to plan  for changing circumstances. DOT officials acknowledge that earlier  communication is desirable and are developing a plan—including a  framework for notifying the Secretary of Transportation, Congress, OMB,  state DOT agencies, and other stakeholders of a pending shortfall—to  improve communications in the future.
section_title: Improved Mechanisms Could Help Maintain Highway Account Solvency
paragraphs: Improving the mechanisms that DOT uses to monitor the Highway  Account balance—including improving existing mechanisms to make  annual adjustments to the account and developing additional indicators to  help DOT monitor and manage the account balance throughout the year— could help maintain the solvency of the account. Ultimately, however,  without either reduced expenditures or increased revenues, or a  combination of the two, Highway Account shortfalls will continue.
subsections: section_title: Modifying and Implementing Existing Mechanisms Could Help DOT Make Annual Adjustments to the Highway Account
paragraphs: 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 to unpaid commitments in the  coming year. This modification made it more difficult for the test to signal  a decline in the Highway Account balance. According to a DOT analysis— prepared at GAO’s request—of the impact on the Highway Account had  the test remained at 2 years rather than 4, the account would have failed  the Byrd Test annually for fiscal years 2005 through 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, but triggering 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  apportioned contract authority. For example, DOT’s analysis of the effect  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 states were able to obligate.
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 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 for fiscal years 2003 to 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 we spoke with stated that RABA could be an effective  mechanism if obligation limitations are better aligned with outlays and  receipts. However, 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 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 was not  implemented because the Highway Account balance was greater than $6  billion as a result of the $8 billion appropriation from the General Fund.  However, DOT officials said that, although they currently project a balance  of about $2.7 billion in the account at the end of fiscal year 2009 (using  Treasury receipt estimates released in July), the account could reach a  zero balance prior to the end of the fiscal year if receipts continue to be  lower than anticipated and that the RABA adjustment could help delay or  reduce the magnitude of such a shortfall.
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 in legislation months or years prior to when states  are reimbursed from the account. Without such mechanisms, the account  balance runs the risk of declining to a level at which it may not be able to  withstand a sudden drop in revenues. DOT officials agree that both of the  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.
section_title: Monitoring Additional Indicators throughout the Year Could Help DOT Anticipate Sudden Declines in the Highway Account Balance
paragraphs: In addition to modifying existing mechanisms that are applied annually,  monitoring indicators throughout the year that could signal sudden  changes in the Highway Account revenues could help DOT better manage  the account balance and anticipate changes. Monitoring the account  balance is particularly important during times when the account balance  drops to a level at which a sudden decline in revenues or increase in  outlays could 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 vehicle miles traveled (VMT) data from FHWA.  According to DOT officials, as a result of the decline in account revenues  last summer, they are more experienced in cash management for the  account and are exploring additional indicators that could be used to  monitor the account balance on a daily basis. Regular monitoring of  indicators that affect revenue flowing into the Highway Account would  improve DOT’s ability to anticipate whether a downward adjustment might  occur when receipts are certified by IRS.
Monitoring additional indicators would also enhance DOT’s plan for  communicating with stakeholders on the status of the Highway Account.  Specifically, establishing trigger points for key indicators would 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. However, since the account balance  typically varies throughout the year—building up during winter months  when states are not able to work on road projects and drawing down  during summer months as projects are implemented and states submit  vouchers for reimbursement—the trigger could vary accordingly.   According to DOT officials, they are closely monitoring the account  balance and plan to communicate regularly with stakeholders.
section_title: Although Improving Mechanisms Could Help Maintain Highway Account Solvency, Other Measures Are Needed to Ensure Long-Term Fund Sustainability
paragraphs: Although improved mechanisms could help maintain the solvency of the  Highway Account, ultimately, without either reduced expenditures or  increased revenues, or a combination of the two, shortfalls will continue.  In the past, we have reported that the following strategies could be used to  better align expenditures and revenue:    Ensure current revenue sources (i.e., fuel taxes) are aligned with  outlays. The Highway Account’s current source of revenue could be  better aligned with actual outlays. According to CBO and others, the  existing fuel 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 it 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)—may better recoup costs.
Supplement existing revenue sources. We have also reported on  strategies to supplement existing revenue sources. A number of alternative  financing mechanisms—such as enhanced private-sector participation— can be used to help state and local governments finance surface  transportation. These 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.
Improve the efficiency of current facilities. Finally, better managing  existing system capacity and improving performance of existing facilities  could minimize the need for additional expenditures. We have reported  that the efficiency of the nation’s surface transportation program is  declining and that the return on investment could be improved in a  number of ways, including creating incentives to better utilize existing  infrastructure.
Furthermore, sustainable surface transportation programs require targeted  investment with adequate return on investment from not only the federal  government but also state and local governments and the private sector.  Many current surface transportation programs are not effective at  addressing key challenges because federal goals are numerous and  sometimes conflicting; roles are unclear; programs lack links to the  performance of the transportation system or of the grantees; and some  programs do not use the best goals and approaches—such as rigorous  economic analysis—to ensure effective investment decisions.  Consequently, GAO has called for a fundamental re-examination of the  surface transportation program.
section_title: Conclusions
paragraphs: Drawing down the account balance over the SAFETEA-LU authorization  period provided additional federal funding for state highway projects, but  it also reduced the account balance to a level at which it was not able to  withstand the sudden downturn in revenues in fiscal year 2008. While  DOT’s cash management efforts in August kept the account solvent until  Congress could approve the $8 billion appropriation from the General  Fund of the Treasury, such ad hoc efforts should not be part of a fiscally  sound, sustainable funding approach. If Congress’s goal is to maintain the  Highway Account at a minimum balance in order to maximize funding  provided to states, then improved mechanisms are needed to help keep  the account solvent. Specifically, modifying and implementing existing  mechanisms that help DOT annually evaluate account solvency and  propose adjustments is important because adjusting obligation limitations  is DOT’s only option for managing the amount of funds that eventually are  distributed to states. Furthermore, monitoring indicators throughout the  year—such as VMT—could help DOT better anticipate changes in account  revenues. In addition to improved solvency mechanisms, another critical  aspect of maintaining the account balance at a minimum level is  communicating with stakeholders on the status of the account. Acting on  “lessons learned” from the summer of 2008, DOT is developing a  communication plan to augment existing communication channels. In light  of another potential shortfall in the account in fiscal year 2009, monitoring  the account balance and communicating regularly with Congress are  particularly relevant.  It is also important to note that without either  reduced expenditures or increased revenues, or a combination of the two,  Highway Account deficits will likely continue.
section_title: Recommendations for Executive Action
paragraphs: To improve DOT’s communication with stakeholders on the status of the  Highway Account and the mechanisms the agency uses to help maintain  account solvency, we are recommending that the Secretary of  Transportation take the following three actions:  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.
Monitor additional indicators that can impact the account balance  throughout the year to better anticipate sudden changes in the balance.
Include in its proposed communication plan a periodic reporting schedule  that includes information on the status of the Highway Account balance— based, in part, on information gained from monitoring additional  indicators—and actions that may be needed to maintain account solvency.
section_title: Agency Comments and Our Evaluation
paragraphs: DOT officials reviewed a draft of this report and provided comments  through e-mail. The officials generally agreed with the report’s findings  and recommendations and provided technical corrections, which we  incorporated as appropriate.  While they agreed that the account’s  solvency mechanisms could be improved, they noted that even improved  mechanisms would be effective only if the account balance is at a  sufficient level to withstand sudden declines in receipts, and future  program levels are set to match estimated program receipts.
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section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Sara Vermillion (Assistant  Director), Richard Calhoon, Jay Cherlow, Patrick Dudley, Carol Henn,  Hannah Laufe, Maureen Luna-Long, and Amy Rosewarne made key  contributions to this report.