Federal-Aid Highways: States Need Guidance on Sales or Leases of Real Property Purchased with Federal Funds
Released: 2003-01-13T00:00:00

Letter

Background

In our recent legal opinion, we reviewed the statutory provisions governing the disposition of the proceeds from the sale or lease of real property acquired with federal highway grant funds and FHWA’s interpretation of that provision. FHWA issued regulations in 1999 implementing real property management policies in conjunction with the federal-aid highway program, which we reviewed. We disagreed with FHWA’s interpretation of the law. We concluded that Congress did not intend for states to convert federal money to state money by buying and selling property and/or use the federal share of recaptured funds to reduce or avoid their obligation to provide matching funds.

DOT’s Inspector General raised similar concerns about FHWA’s interpretation of the federal law governing the proceeds from the sale or lease of real property in its report regarding the finance plan for the Central Artery Tunnel Project in Massachusetts. In its report, the DOT Inspector General questioned whether the proceeds derived from the sale of excess properties purchased with federal-aid highway funds should be counted against the $8.549 billion cap imposed by Congress on federal contributions to the Central Artery Tunnel Project. Further, the DOT Inspector General found that Massachusetts intended to sell land, originally purchased with federal aid, on which it had temporarily located its project headquarters, reinvesting the money in the project as “state funds.” The sale of the project headquarters is expected to generate about $100 million.

All States Report Selling, Leasing, or Disposing of Real Property

All 51 of the state DOTs we surveyed, including the District of Columbia, reported selling, leasing, or disposing of real property purchased with federal-aid funds (see app. IV for responses from state DOTs). We found that from June 1998 through May 2002, 37 states reported they sold, leased, or disposed of at least 5,636 properties that generated about $148 million (2001 dollars) in revenue for the states. We excluded eight states from our calculations of the total number of properties sold, leased, or disposed of because these states either did not distinguish sold, leased, or disposed of properties originally acquired with federal funds from those properties that were acquired without federal funds and/or identify the amount of proceeds generated. We excluded another six states from our calculations for various reasons. In all, we excluded 14 states from our calculations because of these variances. For example, California has an agreement with FHWA that recognizes that the amount of revenue generated from the sales or leases of land purchased with federal-aid funds is substantially less than the state’s expenditures on highways; therefore, the state is not required to track and report the proceeds from the sales. Also, Louisiana state officials reported that they do not track and report federal dollars because their real estate property management database is not designed to distinguish sales of property acquired with federal-aid funds. Nevertheless, these states reported that they sold, leased, or disposed of some real properties originally purchased with federal funds.

States also vary in their policies for retaining the net proceeds they receive from the sale or lease of real property because they have different views of the federal requirements. Most states that we surveyed deposit the proceeds into state transportation accounts to be used at a later date. However, three states reported that they do not follow that procedure but credit an existing federal-aid project within the state. For example, Maryland DOT officials told us that they credit an ongoing federal-aid project within their state. In their opinion, retaining the federal share would require the state to establish special tracking accounts to trace each dollar of revenue from affected property sales or leases from its receipt to its expenditure on a specific eligible federal-aid project which would not be cost effective. The cost to establish these accounts would exceed its current annual state revenue from these properties. Nevada and Texas DOTs also credit existing federal-aid projects within their states because, in their view, it is more efficient not to track the federal share of the proceeds. FHWA officials told us that, in their view, when states credit the federal share of the net proceeds to an existing federal-aid project, they lose the opportunity provided by TEA-21 to use the proceeds for other state highway projects.

For states that retain the federal share of the net proceeds, five state officials that we contacted said they view the current regulations that allow them to retain the federal share of the proceeds generated from the sale or lease of real property as positive because it gives the states greater flexibility to sell or lease real property to support the states’ transportation programs. For example, officials in California and Virginia told us that selling or leasing surplus property and retaining the proceeds provide additional funds to complete more state highway projects. State DOTs and FHWA officials in Illinois, Virginia, and California also told us that the current regulations eliminate the administrative burden of tracking and returning the federal share of the funds to the federal government.

Proceeds from Property Sales and Leases Are Not a Major Source of Revenue

The proceeds generated from the state DOTs’ sales or leases of real property do not currently appear to be a major source of revenue for the states’ transportation programs. We compared the proceeds generated, as reported to us in our survey, with the states’ revenues available for highway projects. The ratio between the proceeds generated by the states and the states’ receipts represented less than 1 percent of the states’ revenues in 1999 and 2000 (see apps. V and VI). Figures 1 and 2 show the states with the highest ratio between the proceeds from property sales or leases with the states’ revenues for 1999 and 2000, respectively. We calculated that in 1999, the total ratio of the federal share of proceeds from property sales and leases in comparison with the state revenues was 0.075 percent. Of the 35 states for which we calculated ratios, 8 states had ratios that were greater than or equal to 0.1 percent, and 27 states had ratios that were less than 0.1 percent.

We calculated that in 2000, the total ratio of the federal share of proceeds from property sales and leases in comparison with the state revenues was 0.069 percent. Of the 35 states for which we calculated ratios, 10 states had ratios that were greater than or equal to 0.1 percent, and 25 states had ratios that were less than 0.1 percent.

We noted no particular trend in the amount of proceeds from these types of property sales or leases over the period of our survey. Therefore, it is possible that the proceeds from property sales or leases could increase or decrease in the future. One likely sale of property in the near future by the Massachusetts Highway Department would have a large effect on the total proceeds from the sale or lease of properties purchased using federal highway aid in that state. The Department used federal aid to purchase a substantial amount of property for rights-of-way associated with the Central Artery Tunnel Project. Sale or lease of property associated with this project has already generated nearly $9 million in revenue for the state during the period of our survey (see app. IV for state responses). In addition, the state plans to sell the project’s headquarters building. The federal government contributed 90 percent of the original cost to acquire the building, and federal officials estimate that the sale of the building will generate about $100 million for the state’s transportation program. In 2000, Massachusetts received about $490 million in federal highway aid.

States’ Use of Proceeds Vary and Sometimes May Not Comply with the Statutory Requirements on the Use of the Proceeds

States reported using the proceeds generated from the sale or lease of real property in different ways; and their survey responses indicated that some uses of the proceeds may not comply with specific statutory requirements of only using the proceeds on projects eligible for funding under federal-aid highway and related programs. This use of the proceeds conflicts with FHWA’s interpretation of the statute. For the 51 states we surveyed, 42 states reported that they deposited the proceeds from sales of property originally purchased with federal funds in accounts established to fund state highway projects. Officials from 47 state DOTs reported using the proceeds to fund other state transportation projects eligible for federal aid, and at least four states use the proceeds as their match for projects receiving federal contributions. For example, state DOT officials in Illinois, Louisiana, Nebraska, and North Carolina told us, in our visits or through their survey responses, that they use the proceeds generated from the sale or lease of property for matching purposes. Our legal opinion concluded that the states could not use the proceeds to match contributions, stating that the intent of Congress was not to allow states to “use the proceeds of such transactions to reduce or avoid their matching fund obligations.” FHWA has interpreted the statute as allowing for such use. In eight states, we could not determine from the survey responses how the states were using the proceeds because they do not (1) track property purchased with federal-aid funds separately from other property or (2) separate federal and state proceeds generated from the sale and lease of real property. In these cases, the federal share is commingled with state funds and cannot be accounted for separately.

TEA-21 stated that proceeds must be used for projects eligible for federal aid; and, according to their survey responses, most states have placed such restrictions on the accounts into which the proceeds were placed. FHWA officials said that, in their view, states would be in compliance with TEA-21 if they placed proceeds in accounts restricted for use on projects eligible for funding under federal-aid highway and related programs. However, officials in two states told us that their accounts do not have this type of restriction. Therefore, in at least two cases, it is possible that states have used the proceeds on projects that are not eligible for federal aid. For example, a state DOT official in Indiana told us that the state uses the proceeds to fund state highway projects but does not track whether these projects are eligible federal-aid projects. New Mexico DOT officials reported that the proceeds are not restricted to funding eligible federal-aid projects; therefore, the funds could be used for other transportation projects not eligible for federal aid.

FHWA May Issue Additional Guidance on the Federal Share of Property Sales and Leases

FHWA officials said that they may issue additional guidance in 2003 to clarify how states should implement the TEA-21 language regarding property sales and FHWA’s subsequent regulations. They acknowledged that they were not aware of (1) the possibility that states were not complying with the explicit statutory requirements that the federal share of proceeds from property sales or leases be used only on projects eligible for funding under federal-aid highway and related programs and (2) the amount of variation in how states tracked these types of property transactions and the federal share of the proceeds. They also said that FHWA has issued some guidance to the states regarding the proceeds generated from the disposal of properties purchased with federal aid. For example, in meetings with state officials, FHWA officials explained that as a practical matter states should have an accounting system in place that documents (1) the amount of the federal share of the proceeds deposited in the state transportation fund during the fiscal year and (2) the amount of the federal share of net proceeds expended on eligible federal-aid projects during the fiscal year. However, they also noted that TEA-21 does not require states to track and report the federal share. FHWA officials told us they are considering additional guidance to help ensure that states are using the federal share of these proceeds only on projects eligible for funding under federal-aid highway and related programs. As of October 2002, FHWA had not decided on the details of what material to include in the guidance or when to issue it. FHWA officials told us it is likely to focus on how states can demonstrate that they are ensuring that the applicable federal share of proceeds from property sales or leases is being allocated to eligible federal-aid projects.

Conclusions

Most states have taken advantage of the greater flexibility for managing and disposing of real property provided under TEA-21 because it streamlines the process for their highway programs. However, in accordance with our recent legal opinion, those states that used the proceeds from these property sales or leases to match federal-aid highway projects were not complying with the statute governing the sale or lease of real property. In addition, two states did not restrict the use of the proceeds to projects eligible for funding under federal-aid highway and related programs, as explicitly required by the statute. FHWA has an excellent opportunity to clarify its interpretation of TEA-21; and, after considering all relevant factors, provide additional guidance to states regarding how they should cost-effectively treat the proceeds from sales or leases of property originally purchased with federal aid.

Recommendations for Executive Action

To help ensure that states act in accordance with TEA-21 in disposing of real property originally purchased with federal aid, we are recommending that the Secretary of Transportation direct the FHWA Administrator to develop and report on a strategy regarding how FHWA plans to comply with GAO’s legal opinion concerning the statute governing the sale or lease of real property; and provide additional guidance to the state DOTs that will help ensure that states use the proceeds of property sales or leases as required by TEA- 21, including the types of documentation or tracking that would be cost effective and appropriate to demonstrate compliance.

Agency Comments and Our Evaluation

We obtained comments on a draft of this report from DOT officials, including the FHWA Director of the Office of Program Administration and the Division Administrator, FHWA Massachusetts Division Office. They agreed with the facts presented in the draft report regarding states’ sale, lease, and disposal of real property originally purchased with federal funds and with the states’ use of the proceeds. The DOT’s General Counsel is considering GAO’s legal opinion on how the federal share of the proceeds should be used, so the officials did not comment on those sections of the draft report. For the same reason, the officials did not comment on our recommendation that the DOT develop and report on a strategy regarding how it plans to comply with GAO’s legal opinion. The FHWA commented that the report should recognize first, that FHWA’s interpretation of the relevant provisions of TEA-21 was based on a regulation issued in 1999 and secondly, that FHWA has provided extensive guidance on the implementation of these provisions. We made several changes to the report based on these comments. However, we continue to believe that the potential noncompliance with TEA-21 we observed in two states, which FHWA acknowledges conflicts with its interpretation of the statute, and the varying practices we observed in other states suggest the need for clarifying existing guidance or issuing additional guidance, as indicated in our recommendations. Regarding the recommendation to issue additional guidance to help ensure that states use the proceeds from the sale or lease of real property originally purchased with federal funds as required by TEA-21, FHWA officials said they would consider providing additional guidance pending the outcome of the Department’s review of GAO’s legal opinion. The FHWA officials also provided technical comments, which we have incorporated into this report as appropriate.

As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the cognizant congressional committees, the Secretary of Transportation, and the Administrator, Federal Highway Administration. In addition, this report will also be available on GAO’s Web site for no charge at http://www.gao.gov.

If you or your staff have any questions about this report, please call me at (202) 512-2834. Key contributors to this report were Sally Gilley, Octavia Parks, and Jobenia Odum.

Objectives, Scope, and Methodology

The Committee on Commerce, Science, and Transportation requested that we determine (1) the extent to which states are selling, leasing, or disposing of real property purchased with federal-aid funds and (2) how the proceeds generated from the sale or lease of real property are being used in accordance with the intent of TEA-21. We drew from our legal opinion regarding FHWA’s interpretation of the federal law governing the sale or lease of real property.

To determine the extent to which the states are selling, leasing, or disposing of real property purchased with federal-aid funds, we obtained information from FHWA officials and surveyed 51 state DOTs, including the District of Columbia, to identify the number of properties and value of real properties that were sold, leased, or otherwise disposed of from June 1998 to May 2002. Before we submitted the survey to the 51 state DOTs, we obtained input from FHWA officials in developing our survey because they recently attempted to collect the same type of information from the state DOTs. We pretested the survey with Georgia DOT. We obtained and analyzed responses from all 51 states, including the District of Columbia, and conducted follow-up interviews as necessary. We compared each state’s 1999 and 2000 total proceeds generated from the sale or lease of real property with the states’ total receipts obtained for highway projects reported by DOT. We did not independently verify the data provided by the state DOTs or assess the reliability of the data reported by DOT. We obtained preliminary data regarding real property sales and leases from FHWA and selected five states (California, Georgia, Illinois, Texas, and Virginia), based primarily on—among other reasons—high property sales and leases and how these states’ were dispersed throughout the United States. We selected California and Texas because they had the highest income from property sales; Illinois was selected because of its geographic location, and it was one of the states that had a high number of property sales and income. Georgia was selected because FHWA’s preliminary data of states property sales indicated that Georgia had not taken advantage of the provisions of title 23, section 156 of U.S.C. Finally, Virginia was selected because FHWA’s preliminary data indicated total income from property sales or leases, but the number of properties was not reported. We interviewed state and federal officials at these states, regarding their opinions about the benefits of the current regulations relative to the states’ transportation programs among other reasons.

To determine how the proceeds generated from the sale or lease of real property are used, we contacted states DOT officials responsible for the right-of-way programs and obtained information regarding (1) how they use proceeds generated from the sale or lease of real property, (2) any restrictions on the use of the proceeds, and (3) the states’ sources for matching federal contributions. We also obtained and reviewed state right- of-way disposal procedures and other documentation related to the sale or lease of real property. We obtained and reviewed documentation regarding FHWA’s division office and headquarters oversight roles related to the sale or lease of real property. We also interviewed officials of the U.S. DOT Inspector General’s office and reviewed documentation regarding their review of the Massachusetts’ Central Artery Tunnel Project that had initially raised concerns about FHWA’s interpretation of TEA-21 changes related to sales and leases of real property.

GAO Legal Opinion

GAO Letter and Survey to State DOTs

Fiscal Year 1999 Proceeds Information

To analyze the significance of the proceeds from the sale or lease of real property purchased with federal-aid funds with other states’ revenues available for highway purposes, we compared states’ property proceeds with states’ total receipts. Table 4 shows the result of our analysis.

Fiscal Year 2000 Proceeds Information

To analyze the significance of the proceeds from the sale or lease of real property purchased with federal-aid funds with other states’ revenues available for highway purposes, we compared states’ property proceeds with states’ total receipts. Table 5 shows the result of our analysis.

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