Highway Funding: Alternatives for Distributing Federal Funds
Released: 1995-11-28T00:00:00

Letter

Introduction

The existing federal-aid highway formula is the vehicle for distributing billions of dollars annually for highway construction and repair and related activities to the 50 states, the District of Columbia, and Puerto Rico (hereafter called the states, unless otherwise noted). Since the mid-1980s, a number of organizations (including GAO) have suggested fundamental changes in the formula for apportioning these federal-aid funds because of perceived problems with the formula, such as its reliance, at least in part, on outdated data. Section 1098 of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) tasked GAO with reviewing the process for distributing highway funds to the states. Chapter 2 of this report evaluates the current apportionment formula. Chapter 3 discusses a process by which the Congress may reconsider the formula during the next reauthorization of the federal-aid highway program and comments on the advantages and disadvantages of several alternative formula options.

ISTEA Authorized Unprecedented Funding

ISTEA authorized funding to sustain and enhance the nation’s surface transportation infrastructure. The act provided an unprecedented authorization of $122 billion for highways, bridges, and related activities for fiscal years 1992-97. Figure 1.1 shows the annual authorization for federal highway funding since 1987 and demonstrates the dramatic increases effected under ISTEA.

Except for a few minor deductions, such as those for federal administrative expenses, federal highway funds are provided to the states through the Federal Highway Administration (FHWA), which is part of the U.S. Department of Transportation (DOT). The money is distributed to the states through various formula calculations and, to a lesser extent, through congressionally designated projects.

ISTEA’s authorization is funded primarily through federal highway user taxes such as those on motor fuels (gasoline, gasohol, and diesel), tires, and trucks. Funds from these sources are collected from users and credited to the Highway Trust Fund for highway and mass transit projects or related activities. The fund is divided into a highway account and a mass transit account. DOT forecasts that the income to the highway account will total $20.5 billion in fiscal year 1996.

ISTEA Revamped the Federal-Aid Highway Systems

Before ISTEA, the federal-aid systems—designated routes on which federal funds may be used—were at the core of the federal-aid highway program. Designation of a road as part of a federal-aid system does not mean the road is owned, operated, or maintained by the federal government. The designation is simply the first step in establishing the eligibility of selected state and local roads for federal assistance. Previously, federal aid was apportioned to Interstate, primary, secondary, and urban highways.

ISTEA, however, discarded this approach by creating only two systems: the National Highway System (NHS) and the Interstate System, which is a component of the NHS. The NHS is the centerpiece of ISTEA, and the system is expected to be the major focus for the federal-aid highway program into the 21st century. In a speech on December 9, 1993, the Administrator of FHWA noted that since the Interstate was begun in 1956, the nation’s population has grown and shifted, the economy has changed, and needs are different. To serve these needs—to extend the benefits of the Interstate system to areas not served directly by it—the NHS was conceived as a way of focusing federal resources on the nation’s most important highways. DOT, working cooperatively with state and local officials as well as the private sector, proposed to the Congress in December 1993 an NHS network of about 159,000 miles. This network is about 17 percent of the approximately 950,000-mile federal-aid network and includes only 4 percent of the approximately 4 million miles of public roads. However, this system would handle about 40 percent of all vehicle miles traveled and accommodate over 70 percent of all commercial truck traffic.

For other roads eligible for federal assistance, a program with the characteristics of a block grant, the Surface Transportation Program (STP), provides financial assistance. In addition, ISTEA continued authorizations for a separate Bridge Replacement and Rehabilitation Program and Interstate Maintenance Program and an array of other separate highway program initiatives as well as funding categories addressing various equity issues, such as each state’s share of funding as compared with what it received in past years.

ISTEA Expanded the Goals of Surface Transportation

ISTEA broadened the overall goals of surface transportation. Previously, the federal-aid highway program had focused on completing and preserving the Interstate Highway system and on maintaining other federal-aid highways as well as bridges eligible for federal funds. While these goals remain a part of the overall surface transportation program, ISTEA broadened the goals and included new programs, planning processes, and management systems that are intended to help ensure that the states’ transportation plans are intermodal (that is, coordinate various modes of transportation), environmentally sound, and energy efficient. For example, the Congestion Mitigation and Air Quality Improvement Program (CMAQ) directs funds to transportation projects in clean air nonattainment areas—areas that have not achieved federal standards for air quality. ISTEA also provides for increased emphasis on mobility for the elderly, disabled, and economically disadvantaged.

ISTEA expanded the use of equity adjustments for the apportionment of federal-aid funds among the states. For example, it modified minimum allocation funding. It also created “hold harmless” funding, which establishes the state’s share of overall federal highway apportionments. These adjustments, which are more fully explained in chapter 2, are generally used to increase the states’ return on their contributions to the Highway Trust Fund.

ISTEA also embodied quality-of-life objectives, stating that the nation’s transportation system should be economically efficient and environmentally sound, provide the foundation for the nation to compete in the global economy, and move people and goods in an energy-efficient manner. Additionally, ISTEA’s emphasis is intermodal—providing links in a seamless intermodal network that will enhance economic growth, international competitiveness, and national security. The NHS is expected to reflect this emphasis.

Objectives, Scope, and Methodology

Section 1098 of ISTEA tasked us with reviewing the process for distributing highway funds to the states. In discussion with the congressional committees identified in section 1098, we agreed to address (1) the way the formula works and the relevancy of the data used for the formula and (2) the major funding objectives implicit in the formula and the implications of alternative formula factors for achieving these objectives.

To understand the evolution of the current formula and assist in clarifying the process by which alternative formula options might be crafted, we reviewed the history of the federal-aid highway programs. Key documents included Development and Evaluation of Alternative Factors and Formulas, published by Jack Faucett Associates in December 1986; Review and Analysis of Federal-Aid Apportionment Factors, a 1969 paper prepared in FHWA’s Policy Planning Division; Alternative Financial Formulas for Allocating Federal Highway Funds, a 1990 report by the American Association of State Highway and Transportation Officials (AASHTO); Moving Ahead—1991 Surface Transportation Legislation, a 1991 report by the congressional Office of Technology Assessment; and a report we published in March 1986.

To understand how the current formula works and the ramifications of possible changes, we reviewed an FHWA publication, Financing Federal-Aid Highways, published in 1992, and discussed the formula with FHWA’s Office of Fiscal Services, which is responsible for making formula apportionments to the states. We interviewed officials from FHWA’s Legislation and Strategic Planning Division, Office of Highway Information Management, and Bridge Division. We also solicited the states’ views on the current formula and on future apportionment issues in meetings with state transportation officials from 34 states and the District of Columbia at regional or national transportation meetings in Atlanta, Chicago, and Detroit. We also held meetings with state transportation officials in our Washington, D.C., offices. In addition, we met with representatives from various transportation organizations, including the American Association of State Highway and Transportation Officials and the Surface Transportation Policy Project.

While we focused our review on existing, overarching highway objectives, new components could be added to recognize the states’ capacity to fund highway needs from state resources, the states’ level of effort in meeting their own needs, and geographic differences in the cost of maintaining existing highway networks. Although similar factors have been applied in other programs, they have not been applied to highway programs in the past. But FHWA did provide a report to the Congress in 1994 that addresses measures for assessing how much of their available resources the states or local areas devote to surface transportation.

Finally, working with FHWA’s Office of Policy Development, we analyzed the effect of a series of hypothetical changes to the current formula. This analysis was based on comparing the actual fiscal year 1995 funding that the states received with what they would have received under the various alternatives. In this analysis, the states’ contributions to the Highway Trust Fund were based on estimates for fiscal year 1993—the most recent year for which data were available at the time of our analysis.

We performed this review in accordance with generally accepted government auditing standards. We conducted our review from January 1994 through October 1995.

The Current Apportionment Formula Is a Complex Process With a Largely Predetermined Outcome

Although federal-aid highway funds are apportioned among the states in 13 funding categories, four programs—Interstate Maintenance, Bridge Replacement and Rehabilitation, the NHS, and the STP—accounted for 70 percent of the funds apportioned in fiscal year 1995. While each state’s share of funds is calculated annually for each of these separate programs, these separate calculations are essentially meaningless since the total funding for the four programs is fixed over the 6-year authorization period for ISTEA. Consequently, the total funding for the four programs does not respond to changing conditions in a state, such as increased highway use. Furthermore, the factors underlying the distribution of highway funds to the states, such as land area and postal mileage, are generally outdated and often do not reflect the extent or use of the nation’s highway system. Our March 1986 report and a study commissioned by FHWA from a contractor noted that alternative factors, such as lane miles, are more closely aligned with highway needs.

The Congress has used funding adjustments to improve equity among the states. These equity adjustments, which occur towards the end of the 13-step apportionment process, increase the total amount of funds for eligible states. In fiscal year 1995, the equity funding categories increased the amount of federal highway funds apportioned to 41 states and the District of Columbia. The amount of funding that the majority of states received through the highway formula process was therefore ultimately increased by these equity adjustments.

The Congress can further adjust the federal highway funds a state receives by authorizing specific projects, commonly referred to as demonstration projects. Funding for these demonstration projects is not distributed by formula. Rather, the Congress requires that particular projects receive a specified amount of funding. In ISTEA, for instance, the Congress provided $6.2 billion in funds for over 500 demonstration projects over the 6-year authorization period.

The Distribution of Federal-Aid Funds Among the States Is a Complex Process

The formula for apportioning federal-aid highway funds established in ISTEA is a complex arithmetic tool used by FHWA to determine each state’s share of the funds. On the basis of the formula, funding is provided for eight programs, including the NHS and STP, and for five separate mechanisms to raise individual states’ funding levels to achieve certain goals for equity among the states. The calculations that determine the level of funding that each state receives for these various categories occur in a strict sequence, as illustrated in figure 2.1. During the first step of the calculation, for example, funding is provided to complete the construction of the Interstate Highway System. Funding for the other program categories is also based on separate calculations. However, as depicted in figure 2.1 and discussed later in this report, the funding for four programs—Interstate Maintenance, Bridge Replacement and Rehabilitation, the NHS, and the STP—is interdependent since a state’s total share of funding for all four programs is fixed.

Later steps in the formula’s calculation provide additional funding to certain states; these funding categories are legislatively designated as equity adjustments. Equity adjustments generally address the concerns of states that contribute a greater share of highway user taxes than they receive in federal-aid highway funds. Equity adjustments also provide each state with the same relative share of overall funding that it received in the past. In fiscal year 1995, these equity adjustments represented 16 percent of the total funds apportioned. Figure 2.1 outlines the sequence of the equity adjustments and program funding categories (app. I provides additional details). However, DOT has proposed changes to the existing equity adjustments and program categories. The changes, proposed in DOT’s fiscal year 1996 budget justification, were preceded by the statement that if less federal money will be invested in transportation, state and local governments need to have greater authority and flexibility to decide which projects are most important. DOT has stated that it will provide an authorization proposal for such changes at an appropriate time.

While apportionments for highway programs are based on individual calculations, for some programs the dollar amount apportioned by formula has little practical meaning because the states have substantial flexibility to transfer funds from one program category to another. For example, with the Secretary of Transportation’s approval, up to 100 percent of a state’s apportionment for the Interstate Maintenance and NHS programs can be transferred to the state’s surface transportation program. In addition, ISTEA’s flexible funding provisions have allowed decisionmakers at the state and regional level to decide for themselves whether to allocate transportation funds to highway or transit projects. ISTEA provided for a potential $70 billion in such flexible funding for transit or highway projects over 6 years. According to DOT’s preliminary data through the end of fiscal year 1995, $2,160.6 million in highway funds had been transferred to transit projects and $2.2 million in transit funds had gone to highway projects.

The Total Funding Share for Major Programs Is Fixed

In fiscal year 1995, 70 percent of the funding under the formula went to the four largest programs—the Interstate Maintenance Program, Bridge Program, NHS, and STP. Separate calculations determine each state’s share of funds for the Interstate Maintenance Program, Bridge Program, and NHS. Nonetheless, these program-specific calculations are essentially meaningless because each state’s ultimate share of funding for all four programs is fixed. With a few minor adjustments, these fixed shares derive from the shares of funds that the states received, on average, during fiscal years 1987-91 for the predecessor programs that ISTEA consolidated into these four new programs. As a result, the states’ funding shares for the four major programs are divorced from current conditions, as the states’ current and future shares of total funding for these programs must equal the adjusted historical shares.

In practice, the states’ funding shares for these programs remain fixed over time because the final program included in the four-part calculation—the STP—behaves as an adjuster. The states’ funding levels for the other three programs—the Interstate Maintenance Program, Bridge Program, and NHS—are independently calculated on the basis of factors specific to each program. After those calculations are completed, however, each state’s STP funding is determined by simply taking the difference between (1) the state’s predetermined share of the total funding available for the four programs and (2) the amount the state is actually scheduled to receive for the three independently calculated programs. This means that any annual increase or decrease in a state’s funding for the Interstate Maintenance Program, Bridge Program, or NHS must be offset by a corresponding, reciprocal change in the STP funds the state receives for that same year.

Figure 2.2 illustrates this zero-sum game through a hypothetical example involving 2 years and two states. In the example, both State A and State B experience shifts in their apportioned funding between fiscal years 1993 and 1994. State A loses funds for the Interstate Maintenance and Bridge programs, while State B gains funds in both of these categories. However, for both states these shifts are rendered irrelevant because they are offset by a corresponding change in the states’ STP funding levels. As a result, State A has 1.9 percent of the total funding available for the four programs in both fiscal years, despite its losses in funding for the Interstate Maintenance and Bridge programs. State B is locked into a 1.75-percent share in both years, despite its gains in funding for the Interstate Maintenance and Bridge programs.

Funding Is Determined in Part by Irrelevant or Outdated Factors

Not only is the total funding for the four major programs fixed over the life of ISTEA, but the funding for the two largest programs—the NHS and STP, together accounting for 40 percent of all the funding apportioned in fiscal year 1995—is based, in part, on underlying factors that are largely irrelevant to the highway system’s needs. As we reported in March 1986,the factors that influenced the historical targets for funding in the federal-aid highway program—land area, postal mileage, and population—are not closely related to the highway system’s needs. Furthermore, our March 1986 report and an FHWA-sponsored study indicated that alternative factors, such as lane miles and annual contributions to the Highway Trust Fund, are more closely aligned with highway needs.

Certain Factors Used to Apportion Highway Funds Are Irrelevant or Outdated

In our March 1986 report, we found that the factors used to apportion certain highway funds—land area, postal mileage, and population—were not closely related to the highway system. At the time of our report, the data on which these factors were based were already between 40 and 70 years old. Specifically, the report detailed the following problems with the factors:

A state’s land area was originally included as a factor in the distribution formula in 1916. Land area was thought to provide a balance for the factor based on population and to reflect a state’s future highway needs. However, this approach resulted in large but sparsely populated states receiving larger apportionments than they otherwise would have. In addition, land area no longer bears a close relationship to future highway needs, namely the need for new construction, since the highway system is no longer growing rapidly throughout the country.

Postal mileage was included as a formula factor in 1916 to provide a constitutional justification for federal involvement in highways (the power to establish post offices and post roads). By 1919, changes to the highway legislation had ended the need for this justification. In addition, since postal mileage is computed on the basis of the distance traveled both on and off the federal-aid highway system, it is unrelated to either the extent of the federal-aid highway network or its use.

Population figures for formula use were derived every 10 years from the census. As a result, changes in the states’ populations were accounted for only at 10-year intervals. This problem has been exacerbated under ISTEA, since the population data underlying the states’ historical shares for ISTEA’s major funding calculations are, in part, based on 1980 population data, not the more current 1990 data.

In our March 1986 report, we also identified those factors previously suggested to the Congress as consistent with basic federal highway programs and for which data were available. Our results supported lane miles as a direct measure of the size of the road network and thus as a reflection of the extent of the system to be preserved. In addition, we found that vehicle miles traveled and motor fuel consumption reflected the extent of highway use. We recognized that each of these factors has its own advantages and disadvantages in establishing a formula. (The advantages and disadvantages of certain formula factors are addressed in ch. 3.)

Finally, we recognized that changing the factors used in certain highway apportionment formulas would result in some states’ receiving more or less funds than they did under the then-current formulas. We suggested that to lessen these impacts, a transition period could be provided during which the full effect of the formulas would be gradually introduced. However, the Congress elected not to change the basic formula structure.

Linkages Exist Between Apportionment Factors and Highway Needs

In December 1986, Jack Faucett Associates, a consultant for FHWA, issued a report evaluating alternative apportionment formulas for highway funds that included correlation analysis. Using this tool, the report showed, for example, that a state with a large number of vehicle miles traveled on the Interstate would also have a high requirement for repairs to the Interstate. Similarly, the states that contributed large amounts of revenue to the Highway Trust Fund, reflecting substantial use of motor fuels, were also shown to require more repairs of the Interstate.

The correlation analysis was reported in terms of values between zero and one. The closer the value is to 1, the closer the correlation between the factor and the need for repairs to the Interstate. Table 2.1 shows the correlation between selected apportionment factors and the states’ need for Interstate repairs, as reported.

As table 2.1 indicates, the highest correlations—at least 0.900—existed for vehicle miles traveled and annual contributions to the Highway Trust Fund. Interstate lane mileage, contributions to the Highway Trust Fund over time, and total motor vehicle registrations also showed fairly strong correlations with the need to repair the Interstate. This was not the case, however, for weather-related variables or per capita income. Furthermore, the strong correlations between certain of these factors and major needs for repair diminished for federal-aid highways other than the Interstate.

Equity Adjustments Benefit Most States

Equity adjustments were designed to address the concerns of the states that contribute a greater share of highway user taxes than they receive in federal-aid highway funds. In addition, another adjustment provides each state with the same relative share of overall funding that it received in the past.

The three equity adjustment categories described below—Minimum Allocation, 90 Percent of Payments Adjustment, and Donor State Bonus—address the concerns of those states that contribute more in highway user taxes than they receive in federal-aid highway funds:

The Minimum Allocation guarantees a state an amount such that its percentage of the total apportionments and prior-year allocations from certain highway funding categories is not less than 90 percent of the state’s estimated percentage of contributions to the Highway Trust Fund’s Highway Account.

The 90 Percent of Payments Adjustment ensures a state that selected apportionments for the fiscal year and allocations in the previous fiscal year will equal at least 90 percent of its contributions to the Highway Trust Fund’s Highway Account.

The Donor State Bonus, as implemented by FHWA, compares each state’s projected contributions to the Highway Trust Fund in the fiscal year with the apportionments that the state will receive in that fiscal year. Starting with the state having the lowest return (apportionments compared with contributions), each state is brought up to the level of return for those states with the next highest level of return. This process is repeated successively for each state until the funds authorized for this funding category in that fiscal year are exhausted.

Finally, a fourth adjustment category, referred to as Hold Harmless, addresses a different objective—preserving the states’ historical funding share, recognizing the legislative compromises embedded in ISTEA. ISTEA established a percentage for selected apportionments and prior-year allocations that each state must receive annually. For example, this legislatively prescribed funding percentage is 1.74 for Alabama, 0.41 for Delaware, 0.69 for Idaho, 3.72 for Illinois, and 4.36 for Massachusetts. These funding percentage shares can result in a state’s receiving an addition to the regular apportionments, so that the state’s total apportionment will equal the established percentage.

As figure 2.1 showed, the calculations that determine the level of funding that each state receives for the various funding categories occur in a strict sequence. All of the equity adjustments come into play late in the sequential calculation. Therefore, these adjustments essentially increase the funding calculated for a state up to that point. For example, if a state is hypothetically entitled to a total apportionment of $500 million on the basis of the Hold Harmless provision, it will receive that amount regardless of whether all the calculations up to that point yielded a total of $200 million, $300 million, or $400 million.

In fiscal year 1995, equity adjustments accounted for $2.8 billion (16 percent) of the approximately $18 billion distributed to the states. Only nine states—Colorado, Connecticut, Hawaii, Maryland, Pennsylvania, Rhode Island, South Carolina, Virginia, and Washington—and Puerto Rico did not receive funding through equity adjustments in fiscal year 1995, as highway apportionments for each of these jurisdictions met all of ISTEA’s stated equity criteria on the basis of the funding for the programs alone. For the other 41 states and the District of Columbia, the total amount of federal highway funding apportioned in fiscal year 1995 was ultimately increased by equity adjustments.

Funding for Demonstration Projects Is Not Governed by a Formula

Funding for demonstration projects is distinct from apportionments to the states in that the authorized funding for such projects is not distributed by formula. Rather, the Congress directs how certain funds are to be distributed by requiring that particular projects receive a specified amount of funding. Funding for such projects is authorized by the congressional committees with jurisdiction over highway appropriations and authorizations.

The amount of federal funds authorized for demonstration projects has grown since 1982. ISTEA alone authorized over $6.2 billion over 6 years for 539 demonstration projects. While some demonstration projects address critical transportation problems and can be considered nationally significant, authorizing a large number of such projects could prove troublesome. As we noted in a 1991 report and testimony in 1993 and 1995 before the Subcommittee on Transportation, House Committee on Appropriations, demonstration projects often cost more than expected. In our 1991 report, we found that for 66 projects reviewed, the federal funding and state matching funds together accounted for only 37 percent of the projects’ total anticipated costs. Future finances could be drained if extra federal funds are needed to cover the cost of completing the projects. Demonstration projects can also yield a low payoff for a variety of reasons, including the fact that they frequently are not aligned with the states’ transportation priorities, can languish in the early stages of project development, or may never get started at all. For instance, in our 1991 report, we found that for 22 of the 66 projects reviewed, none of the authorized funds ($92 million) had been obligated, even though the projects had been authorized 4 years earlier.

Figure 2.3 depicts the funding to each state for highway programs, and, if applicable, any modifications to that funding realized through either equity adjustments or funding for demonstration projects provided under ISTEA in fiscal year 1995.

Conclusions

ISTEA authorized approximately $120 billion for highway construction and repair and related activities over 6 years, emphasized quality-of-life and intermodal objectives, revamped major highway programs, and offered states and localities unprecedented opportunities to use federal highway and mass transit capital funds across modal lines. But the factors underlying the distribution of funds for two of the largest highway programs—the NHS and STP—essentially remained the same, since each state’s funding was to be based on the historical share of funds the state received from major programs before ISTEA was enacted. Locking in the status quo on the basis of historical funding averages has also been supported through two other funding avenues. First, a state’s total funding share for the four largest programs is fixed over the life of ISTEA. Second, the Hold Harmless equity adjustment category serves to raise the states’ ultimate level of annual funding to a predetermined percentage share of the total funding available. These percentage figures, which are spelled out in ISTEA and remain fixed for the act’s duration, were derived primarily from historical averages rather than current circumstances.

For major highway programs, the data underlying the distribution of highway funds to the states are generally outdated, unresponsive to changing conditions, and often not reflective of the nation’s highway system or its usage. Furthermore, as mentioned above, because the percentage share is fixed for the four largest programs, any updated data that are factored into the calculation for two of these programs are negated.

Alternatives for Distributing Federal Highway Funds

On the basis of our analysis and discussions with federal and state transportation officials, ISTEA’s myriad objectives for highways can be placed into four overarching categories: (1) maintaining and improving the highway infrastructure, (2) returning the majority of funds to the state where the revenue was generated, (3) fostering social benefits, and (4) safeguarding the states’ historical funding shares. The first two objectives translate into formula components that are at the core of the distribution process. Addressing the states’ highway needs, such as the miles of highway in need of repair and the deterioration of the highway associated with traffic loads, is a primary objective in the distribution of highway funds. The second component, calling for a return of funds to the state in which they were generated, supports a congressional objective of having the states receive a substantial return on the federal fuel and other tax receipts that they generate and contribute to the Highway Trust Fund.

The third and fourth objectives discussed in this chapter could be met through formula components that would distribute funds set aside from the regular apportionment process. A portion of formula funding could be devoted to social goals by, for example, directing a portion of funding to selected purposes such as improving air quality and conserving energy. Finally, a share of funding could be set aside and used to protect the states’ historical funding shares. The formula objectives may be used singly or in combination and may further be targeted to specific program categories—such as the NHS—that are deemed to merit special attention.

While we focus in this report on the existing, overarching highway objectives, new components could be added to recognize the states’ capacity to fund highway needs from state resources, the states’ level of effort (LOE) in meeting their own needs, and geographic differences in the cost of maintaining existing highway networks. Although similar factors have been applied in other programs, they have not been applied to highway programs in the past. But FHWA did provide a report to the Congress in 1994 that addresses measures for assessing how much of their available resources the states or local areas devote to surface transportation. (App. III provides additional details on FHWA’s study.)

The task of revising the formula for distributing highway funds will be difficult because needs vary across the country and objectives conflict among themselves. For example, relief of congestion is more pressing in urban areas of the country, whereas connecting rural areas is more pressing in sparsely populated areas. The analysis presented in this report is intended to provide the Congress with formula alternatives that reflect the key objectives governing the current federal-aid highway formula.

Component 1: Distribution of Funds Based on Indicators of Need

Many individual factors making up a formula are capable of supporting the principle of distributing funds on the basis of the states’ relative needs. One possibility would be to use factors that relate to the states’ actual needs, such as the states’ miles of poor pavement or number of deficient bridges. In this approach, the states with the poorest highway conditions would be granted a larger share of the funds than the states with better highway and bridge conditions.

However, a formula based on direct measures of need could prove problematic. The use of actual needs can foster a perverse incentive by potentially encouraging the states to permit their highway infrastructure to worsen in order to capture a greater share of federal highway funds.Moreover, this approach would reward the states with the poorest highway and bridge conditions while penalizing the states that have maintained these structures. In addition, the condition of highways and bridges varies considerably among the states. For instance, as of December 1993 the percentage of deficient bridges on the NHS ranged from a low of 8 percent in North Dakota to a high of 64 percent in Massachusetts.

The disadvantages of basing a formula on actual needs can be remedied through the use of proxies of need, such as those reflecting the extent or usage of a highway system, or more highway-neutral measures such as population. Such proxies have the advantage of being relatively objective and neutral. However, there is debate among the states and other transportation experts on what factors can appropriately serve as proxies for distributing highway funds. Some insight can be gained from the Faucett study performed for FHWA in 1986 and discussed in chapter 2. This study indicated a strong correlation, particularly for repairs of the Interstate, between highway needs and lane miles and vehicle miles traveled. The following sections discuss the advantages and disadvantages of certain proxies in more detail.

Extent of a System Is Reflected in the Number of Miles Covered

The primary measures of the extent of the federal-aid highway network are center-line miles and lane miles. Center-line miles reflect the length of the system, whereas lane miles represent the number of lanes per section multiplied by the actual length of the section. For example, a four-lane section that is 2 miles long would equal 2 center-line miles or 8 lane miles.

Some states believe that center-line miles, not lane miles, are a more appropriate factor for distributing highway funds. For instance, transportation officials from Idaho, Montana, North Dakota, South Dakota, and Wyoming told us that to the extent that road mileage is considered in a formula, center-line miles more accurately reflect interconnectivity on a national and regional basis. However, while center-line miles accurately depict overall connections though a linear measurement of highways, this measure does not capture any information on the various widths of highways, because a two-lane highway and an eight-lane highway are considered equal under this measure.

The width and length of highways is reflected in lane miles, and as we noted in our 1986 report, lane miles are a good measure of the extent of the highway system (capital stock) to be preserved. In addition, using lane miles as a factor for apportioning highway funds was endorsed by a Policy Review Committee of the American Association of State Highway and Transportation Officials (AASHTO) in fiscal year 1991. As the committee noted, lane miles are a direct measure of the extent of public roads in both rural and urban areas. The committee further noted that a measure of lane miles is probably the simplest and most efficient potential apportionment factor on which to obtain accurate information and that annual data are generally available within 6 to 9 months of the close of the calendar year.

Regardless of whether center-line miles or lane miles are used to indicate the extent of a system, some observers criticize the use of mileage for apportioning future highway funds because such usage could reward expansion of the system. Thus, this type of apportionment factor would tend to encourage more highway construction, to the possible detriment of adequately preserving the existing network and of considering air quality. Several actions could be taken to counterbalance such tendencies. First, as part of the third component of the formula framework discussed later in this chapter, set-asides could be established to reward those states that meet certain preservation or maintenance goals. Second, greater use of performance measures geared to preserving the existing infrastructure would help FHWA ensure that the states do not neglect needed preservation and maintenance. As we noted in our July 1994 testimony before the Senate Committee on Environment and Public Works, performance expectations need to be established for preservation and maintenance and other important goals for the NHS. A well-maintained system is the necessary foundation for pursuing the myriad goals for the system, which include economic development, enhanced mobility, and improved air quality. Without such a foundation, system enhancements such as alleviating congestion and improving the efficient movement of goods may not be fully realized.

Use of the System Is Also an Indicator of Highway Needs

While measures of a system’s extent provide part of the story on highway needs, the condition of the road is also an important element. Condition can be captured by measures of the use of a system, as distinct from the extent of the system. A system’s usage is typically gauged using factors such as vehicle miles traveled or consumption of motor fuel.

One advantage of using data on the vehicle miles traveled as a formula factor is that they tend to be quite reliable. The AASHTO Policy Review Committee observed that data on vehicle miles traveled have been statistically designed for a high level of measurable accuracy and are relevant as an indicator of both capital and system preservation needs. Also, in the Faucett study, vehicle miles traveled garnered one of the highest correlation values, 0.913, of all the factors related to Interstate repair needs. That is, a state with a high number of vehicle miles traveled would also likely have high needs for repair of the Interstate.

Another proxy of system use is motor fuel consumption. Motor fuel consumption reflects travel on all roads, not just on the federal-aid system or on roads under a state’s jurisdiction. Therefore, it would not be a precise measure for apportioning funds to specific groups of roads. These data are reported by states monthly and adjusted at year’s end. Annual data are generally available within 6 to 9 months of the close of the calendar year. Fuel consumption patterns may differ across states because of the urban-rural population mix, the amount of travel done under congested conditions, differences in physical terrain, and fuel purchases by transients in those states with lower fuel taxes, among other things.

While vehicle miles traveled and motor fuel consumption correlate well with system usage, they do have some drawbacks. For example, vehicle miles traveled measure the vehicles moved rather than the people and do not account for different vehicle classifications. Moreover, both factors are largely at odds with air quality objectives, and the principle of rewarding motor fuel consumption with more highway funding also conflicts with the goal of encouraging energy conservation. New Jersey transportation officials, for instance, noted that such factors reward energy consumption and air pollution and penalize those who successfully enact measures to reduce the use of single-occupant vehicles. Similarly, transportation officials from several other states noted that the Congress has previously rejected the notion of giving vehicle miles traveled greater weight in apportioning funds, in part because of the strong environmental objections raised. As in the case of the factors related to the system’s extent, the disadvantages associated with measures of the system’s usage could be at least partially counteracted by building incentives into the formula or by creating appropriate performance standards.

Other Proxies Are Linked Less Directly to Extent and Usage of Highway System

A host of other factors—such as population, climatic conditions (daily mean temperature, annual snowfall, and annual precipitation), and per capita income—could also be used to determine how highway funds are distributed. Yet, as the Faucett study demonstrated, a low correlation exists between highway needs as reported by FHWA and climatic variables and per capita income.

The Executive Director of the Surface Transportation Policy Project supports the use of population levels for distributing highway funds. The Executive Director stated that to the extent that the formula uses factors such as vehicle miles traveled, lane miles, and fuel consumption, it encourages behavior that runs counter to the objectives of reducing congestion and improving air quality. In his view, population and population density would be preferable alternatives as proxies. These proxies were recommended because they were perceived as avoiding the perverse effects tied to a system’s extent and usage, and because the data are sound.

Population data, however, also have limitations. As noted by the Executive Director of AASHTO, the link between population and the states’ highway needs is questionable. First, while funds would be targeted to congested urban areas, the approach would do little to accommodate the needs of rural areas. Second, the approach does not recognize that goods produced in sparsely populated areas ultimately must be transported to dense areas. And some state transportation officials from sparsely populated states believe that much of the traffic that occurs in densely populated areas is local. Officials from these states maintain that the promotion of interstate commerce should be a principal objective of the federal-aid highway program and that federal funds should target the highways that tend to carry national, not local, traffic.

A Combination of Proxies for Need Could Be Employed

As we reported in March 1986, factors reflecting a system’s extent and use in isolation do not provide a complete picture on the states’ needs. Combining such factors helps to round out the formula’s capacity to reflect the states’ total needs. Introducing neutral factors, such as population, into the formula further diversifies the mix of factors and alters the amounts the states receive. The analysis that follows focuses on two possible blends of proxies for need. Table 3.1 provides an outline of the factors to be considered in the two alternatives.

The first alternative assumes that 100 percent of total highway funds are distributed to the states based equally on total lane miles and total vehicle miles traveled. Under this alternative, 13 percent of the overall highway funds would be redistributed. Twenty-three states and Puerto Rico would receive more funds than they were apportioned in fiscal year 1995. The average dollar gain would be $102 million; $643 million would be the high end of the range (California), and $7 million would be the low end (North Carolina). Twenty-seven states and the District of Columbia would receive less funding. For these recipients, the average loss would be $87 million; the greatest loss would be $417 million (Pennsylvania), and the smallest loss would be $5 million (Oklahoma). (State-by-state details are provided in app. IV.)

The second alternative assumes that 100 percent of the total highway funds are returned to the states based equally on total lane miles, vehicle miles traveled on the Interstate, and state population. Under this approach, 10 percent of overall highway funds would be redistributed. Twenty-six states and Puerto Rico would receive more funds than they were apportioned in fiscal year 1995. The average dollar gain would be $73 million; the high end of the range would be $366 million (California), and the low end would be $2 million (Nevada). Twenty-four states and the District of Columbia would receive less funding. For these states, the average loss would be $79 million; the greatest loss would be $359 million (Pennsylvania), and the smallest loss would be $1.6 million (Alabama). (State-by-state details are provided in app. V.)

Component 2: Return of Funds to the Source

One indicator of need that we intentionally omitted from the above discussion is that of the states’ contributions to the federal Highway Trust Fund. As a formula factor, these contributions have a special status because they align with two key objectives of the highway program. Not only do contributions to the Trust Fund correlate strongly with highway needs, particularly for major highways, but the states’ returns on these contributions have also been considered a key measure of equity. For years, the highway apportionment formula has endorsed, through one or more equity adjustments, the principle that the states ought to receive back a substantial portion of what they deposit into the Trust Fund. If the formula were restructured to encompass a pure return-to-origin approach, each state’s contribution to the Trust Fund would simply be returned to that state. This does not currently occur. FHWA’s data indicate that in 1993, federal highway apportionments as a percentage of the states’ contributions to the Highway Trust Fund’s highway account ranged from 83 percent for South Carolina to 707 percent for Hawaii.

FHWA estimates the states’ contributions to the Trust Fund, which derive from various federal excise taxes such as the gasoline and diesel tax. Because the majority of revenues credited to the Trust Fund derive from the federal fuel tax, the states’ contributions to the Trust Fund tend to be quite closely linked with fuel consumption. As a potential formula factor, these contributions therefore offer the same kinds of advantages and disadvantages as fuel consumption does.

Return-to-Origin Approach Offers Advantages and Disadvantages

Returning the states’ contributions to the Highway Trust Fund to their source is a relatively simple and direct way of distributing these funds. Some state transportation officials could be expected to support this approach because it would guarantee that all or a substantial amount of the revenues collected in their states would be returned to them. An advantage of returning funds to their source is that, as the 1986 Faucett study shows, contributions to the Highway Trust Fund tend to correlate highly with highway needs, particularly for major highways.

However, the return-to-origin approach would not be universally attractive, as a number of states would lose funds. For instance, those states whose fuel usage is low relative to their land area and extent of highway network would be financially hurt. A prime argument made by officials from these states is that the national interest requires highways to span the wide expanses of large, sparsely populated states that are the source of goods for citizens in the population centers, but the financial resources of those states are often insufficient to construct, maintain, and operate such networks.

Two additional arguments are made against the return-to-origin approach. First, as New York transportation officials noted, formulas based on returning contributions to the Trust Fund to the state where they are raised meet neither federal or state transportation goals nor national policy as set forth in ISTEA. If the primary goal of federal apportionment formulas is to return revenues from motor fuel taxes to the place they were earned, these officials questioned whether there was a need for a federal program. Second, state officials have questioned the wisdom of selecting a formula factor that is geared predominantly to fuel use. They argue that such an approach rewards greater use of motor fuel and as such contradicts federal goals of improving air quality and conserving energy.

Finally, this approach would not necessarily preclude congressional direction of the use of those funds. Legislation could still specify that the returned funds be used in certain proportions for certain programs, such as the NHS. Moreover, the return could function as (1) a simple return of funds, in which states would be exempt from any or most federal oversight, or (2) a distribution of funds, in which FHWA would oversee the programs for which the funds were returned.

Return-to-Origin Approach Also Yields Winners and Losers

Under a return-to-origin approach, we considered three different alternatives, which are summarized in table 3.2.

Under the first alternative, $17.8 billion of the total $19.1 billion would be returned to the source. This amount would represent all the funds (including ISTEA’s funds for demonstration projects) distributed to the states in fiscal year 1995, except funds for Interstate Construction. These funds were excluded since the Interstate Construction program’s final apportionment was made at the beginning of fiscal year 1995, and only 14 states and the District of Columbia received funds in the program’s last year. Under this alternative, 24 states would receive more funds than they were apportioned in fiscal year 1995, while the remaining states, along with the District of Columbia and Puerto Rico, would lose funds. The average dollar gain would be $67 million; the average loss would be $58 million. (State-by-state details are presented in app. VI.)

Under the second alternative, the total amount of funds ($18.1 billion) apportioned to the states in fiscal year 1995 would be returned, including funds for Interstate Construction funds but excluding those for demonstration projects. Funds for demonstration projects are excluded from this analysis because these funds are not distributed by formula. Rather, the Congress directs how certain funds are to be distributed by requiring that particular projects receive a specified amount of funding. Under this alternative, 27 states would receive more funds than they were apportioned in fiscal year 1995. The average dollar gain would be about $68 million; 23 states, along with the District of Columbia and Puerto Rico, would receive less funding. For these recipients, the average loss would be $73 million. (State-by-state details are provided in app. VII.)

Under the third alternative, all funds would be returned to the states, including funds for Interstate Construction and demonstration projects along with other program funding. Thus, this alternative recognizes the full $19.1 billion distributed to the states in fiscal year 1995. Under this alternative, 24 states would gain an average of $86 million, while 26 states along with the District of Columbia and Puerto Rico would lose an average of $74 million. (State-by-state details are provided in app. VIII.)

Needs-Based and Return-Based Components Can Be Combined

As mentioned previously, the first two formula components discussed above—based on needs and based on returning funds to the source—can be combined. A significant advantage of blending these components is that programs of particular concern (notably, the NHS) could receive special attention through the use of carefully targeted formula factors. In contrast, a return-to-origin approach might be more appropriate for the STP, which already has characteristics that resemble those of a block grant program and which would thus lend itself well to an approach under which funds are returned to the states.

For purposes of illustration, the following two hypothetical distributions blend needs-based and return-to-origin approaches along the existing split between the STP and two other primary highway programs—Interstate Maintenance and the NHS. The current funding level for the STP represents about 40 percent of the total funds authorized for these programs. The two alternatives outlined in table 3.3 and described below maintain this distribution of funding.

Under the first alternative, 33 states would receive an average of $64 million more than they were apportioned in fiscal year 1995, while 17 states, along with the District of Columbia and Puerto Rico, would lose $111 million on average. Overall, 11 percent of highway funds would be redistributed. (State-by-state details are presented in app. IX.)

Under the second alternative, a slightly different redistribution pattern would emerge. The average dollar gain for 30 states would be $60 million; 20 states, along with the District of Columbia and Puerto Rico, would receive less funding than they did in fiscal year 1995. For these recipients, the average loss would be $82 million. In total, about 9 percent of the highway funds would be redistributed. (State-by-state details are presented in app. X.)

Component 3: Set-Asides to Foster Improvements

While many social objectives are probably best addressed through means other than the highway apportionment formula, a portion of highway funds might nonetheless be retained to advance specific objectives and/or to counterbalance some of the potential disadvantages of the principal formula factors. For instance, a certain percentage of funds—10 percent, for example—could be set aside before the remaining funds were distributed to the states. Payments drawn from this set-aside could be used to provide bonuses to advance quality-of-life objectives, to reward improvements in the condition of highway infrastructure above a certain defined floor, and to advance highway safety. These and similar objectives are all laudable; however, constraint in selecting the objectives may be warranted to prevent the dilution of funds that could result from attempting to meet numerous objectives.

One approach to distributing the set-aside moneys would be to direct set-aside funds to those states suffering from unique or concentrated needs in certain areas. A prime example of this approach is the existing Congestion Mitigation and Air Quality Improvement (CMAQ) program, which directs funds to states with particularly severe problems in air quality. ISTEA provided CMAQ with a $6 billion authorization— approximately $1 billion annually for 6 years. CMAQ is focused on investment in air quality improvements and provides funds for projects that expand or initiate transportation services that benefit air quality. It is directed to those states that are classified as nonattainment areas for ozone and carbon monoxide (although every state, regardless of its air quality status, is guaranteed an annual minimum apportionment of 0.5 percent of the program’s total funding.) The advantage of such a program is that it focuses funding on precisely those areas with the greatest needs. The disadvantage is that, as occurs with the needs-based formula factors discussed earlier in this chapter, directing funding to states with specific needs can foster a perverse incentive. In the case of the CMAQ program, questions have been raised about the wisdom of essentially rewarding states for their nonattainment status, particularly given that a state loses CMAQ funding if it makes “too much progress” in improving air quality.

A second approach to directing set-aside funding towards specific goals is to treat the funds as incentive payments. Incentive payments, as the name implies, do not redress shortcomings, but instead reward desired behaviors or accomplishments. For example, shared set-aside funding could be used to reward states that make notable and measurable improvements in the percentage of the state’s pavement condition rated as “good” under FHWA’s classification system. To emphasize the condition of the nation’s most heavily traveled highways, such rewards could be further refined to focus on improvements in the condition of the NHS.

One concern with providing incentives for improvements in highway conditions, however, is that the data from the states on the condition and performance of their roadways are not always reliable, making it more difficult to equitably distribute such incentive payments. In subcommittee hearings for the House Committee on Appropriations in fiscal year 1994, FHWA was questioned on significant swings in the percentage of Interstate pavement rated in poor condition, as illustrated by table 3.4.

FHWA explained that the data on the condition of the pavement were based on the use of an index, referred to as the Present Serviceability Index. This index, however, represents a subjective measure of the pavement’s ride quality and can be arrived at by a variety of procedures. Furthermore, FHWA noted that from time to time the states have attempted to improve their estimation of this measure, thus invalidating comparisons with data from previous years. As a result, until the reliability of these data is improved, their use as an indicator for distributing federal highway funds would be suspect and arbitrary. An alternative measure, the International Roughness Index, is a more objective measure of pavement condition (roughness), and FHWA expects this data source to play a more prominent role in the future. In 1993, the most recent year for which data are available on pavement condition, 37 states used the International Roughness Index to measure pavement condition on Interstate highways, while the remaining 13 states continued to rely on the Present Serviceability Index. For other major highways, the proportion of states using the International Roughness Index dropped to about half the states. An FHWA official noted that some states do not use the International Roughness Index because they do not have the money to purchase the necessary equipment. Another impediment to using the International Roughness Index is that the equipment must be operated at a speed of 35-55 miles per hour, thus making in infeasible for use on certain major highways in urban areas because of the presence of other traffic, traffic signals, and other disruptions.

Component 4: Safeguards to Mitigate Against Sudden Losses

Altering the existing formula would undoubtedly cause shifts in the states’ relative shares of annual highway funding. Under a number of the scenarios presented in this chapter, more states would gain funds than would lose funds, but this overall result would be of little comfort to the states whose relative position worsened. Some individual states such as Alaska and Hawaii could lose 50 percent or more of their highway funds under any of the scenarios derived from the approaches based on needs and return to origin. Sudden and significant losses would likely play havoc with the states’ planning processes and programs, and it is doubtful that the affected states would be prepared to cope with losses of this magnitude.

In addition, the effect that a change in the formula would have on any state would depend on the percentage of the state’s highway revenue provided by federal funds. Figure 3.1 depicts federal funds as a percentage of the states’ total highway revenue.

To help temper the effects of changes in the formula, any new formula might include a component designed to place a cap on the maximum percentage of loss that any individual state would be expected to bear as a result of the changes. For example, a maximum-loss cap of 20 percent might be established. Thus, if a new formula calculation caused a given state’s funding to fall by 50 percent from the level it would otherwise be, the cap would come into effect and funding for the state in question would be reinstated to 80 percent of what the state would otherwise have received. The cap could be either permanent or established for a set period of time during the transition to a new funding amount.

Finding the funds to shield the states from severe losses might not be as difficult as it would first appear. If the existing, intricate equity adjustments were replaced with a single, simple cap, the funds devoted to these equity adjustments in fiscal year 1995—$2.8 billion—would more than offset the states’ combined losses in that year under all of the scenarios discussed in this report. The scenario resulting in the greatest adverse impact on the states—alternative 1 of the needs proxy approach—produced a combined loss of $2.4 billion. Alternatively, other categories of funding, such as those supporting highway demonstration projects (currently commanding about $1 billion per year), could be redirected to provide safeguards against sudden losses.

Conclusions

Reauthorization of the federal-aid highway program presents the Congress with the opportunity to review the objectives associated with providing federal highway funds and the accompanying formula for distributing the funds. A review of the program’s objectives could be structured to recognize differences among highways and the federal role associated with important highways, such as those included in the NHS.

There are no perfect factors that embrace the breadth of ISTEA’s diverse objectives as well as the states’ different needs. Regardless of the factors chosen, some states will experience disadvantages that the construction of a formula may not be able to compensate for. Which states are negatively affected changes with the factors chosen and the percentage weights assigned to various factors. Moreover, as noted in chapter 2, DOT has proposed changes in the system for delivering grants.

Whether DOT’s proposed changes are adopted or other scenarios for delivering grants are developed, the Congress will have to reach a consensus on the national objective(s) that are critical for the highway program to address; decide whether a formula is the appropriate vehicle for addressing these objective(s); and for those objectives that the formula can best address, determine the most representative factors and corresponding weight to be assigned to those factors. If an alternative formula is adopted for distributing highway funds in the future and this formula would result in dramatic funding losses for certain states, ways could be considered to reduce the magnitude of the losses—by, for example, providing for a cap on the maximum percentage of loss that any one state would be expected to bear.