ISTEA authorized over $122 billion for highway programs for fiscal years 1992 through 1997. The authorization was 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. Except for a few minor deductions, such as those for federal administrative expenses, federal highway funds are provided to the states through FHWA, which is part of the U. S. Department of Transportation. The money is generally distributed to the states through various formula calculations. The current formula, established by ISTEA, determines the distribution of funds for 13 funding categories, such as the Interstate Maintenance, the National Highway System, and the Congestion Mitigation and Air Quality (CMAQ) programs. During the ISTEA authorization period, FHWA annually apportioned to the states authority to obligate funds. And, if the Congress took no further action, the states could proceed to obligate all the authority apportioned to them by FHWA. However, the Congress also imposed an annual obligation limitation as part of the appropriation process on most elements of the federal highway program. These limits did not take back spending authority that was already apportioned to the states; rather, the obligation limits acted to control the obligation rate. The congressionally imposed obligation limits acted to control total obligations but left the states with some discretion to decide how they would use their obligation authority across the range of federal-aid programs. For example, in a particular year, a state could obligate all its Interstate Maintenance and National Highway System funds. But the state would then have to compensate by obligating a smaller part of its federal highway funds from other categories. In addition, a few categories of highway funding are exempt from obligation limitations—the two largest are minimum allocation and demonstration projects. Once FHWA approves a project that a state proposes, the federal share of the project’s cost is considered “obligated” against the state’s apportionment. The state then proceeds—doing detailed design engineering, advertising for bids, and selecting a contractor for the construction work. The state incurs costs, pays the bills, and then seeks reimbursement of the federal share from FHWA. Federal outlays—that is, actual expenditures—do not occur until the state is reimbursed. Furthermore, the funds are outlayed over a number of years. At the beginning of fiscal year 1998, the total unobligated federal highway fund balance for all states was $12.1 billion. This unobligated balance came from two sources. First, $9.6 billion in unobligated balances exists because the Congress annually imposed an obligation limit during the ISTEA period to control spending for most federal highway funding categories. Second, another $2.5 billion in unobligated authority remains for a few highway funding categories that were exempt from the obligation limitation. The two largest exempted programs were minimum allocation ($0.65 billion) and demonstration projects ($1.85 billion). From a national perspective, the total unobligated highway balance of $12.1 billion at the beginning of fiscal year 1998 (including program funds exempt from obligation limits) is nearly 1.5 times the $8.1 billion that all states obligated during the first 6 months of fiscal year 1997. This does not mean, however, that each state’s unobligated balance is greater than its obligations during the first 6 months of fiscal year 1997. FHWA’s data show that the unobligated balances for each of 14 states fall short by 1 percent to 30 percent or by $1 million to almost $82 million of its actual obligations during the first 6 months of fiscal year 1997. Several states were in the 20 to 30 percent range. For example, Indiana’s total unobligated balance is over $80 million less than its total highway obligations during the first 6 months of fiscal year 1997. This represents about a 28-percent difference. Similarly, North Carolina’s total unobligated balance is about $94 million less than the amount it obligated during this same period in fiscal year 1997—a difference of about 26 percent. (App. I provides a state-by-state comparison of the fiscal year 1998 unobligated balance of $9.6 billion (from highway programs subject to the obligation limit) to actual state obligations during the first 4 through 7 months of fiscal year 1997. App. II provides a similar comparison based on the combined total unobligated balance of $12.1 billion.) It is important to note that these comparisons imply that the state’s obligation rates for fiscal year 1997 correspond to those for fiscal year 1998, which may or may not be the case for individual states. Furthermore, the total unobligated balance of $12.1 billion includes balances from programs that were not subject to the obligation limitation. As of October 1, 1997, seven states had little or no unobligated balances in these program categories. A number of strategies could help the states get through a short period without a new highway funding authorization. At the federal level, the Congress could provide the states with the flexibility to use their unobligated balances across the range of federal highway programs, rather than keeping the balances generally tied to specific highway programs and demonstration projects. At the state level, some states may be able to obtain state, local, or private resources to begin projects and later seek federal reimbursement for these costs through advance construction authority. The unobligated balance of $9.6 billion (from programs subject to the obligation limit) represents the sum of the unobligated balances remaining from specific programs, such as the Interstate Maintenance, National Highway System, Surface Transportation, and CMAQ programs. These balances may now generally be obligated in accordance with the individual program categories. Throughout the ISTEA period, the obligation limits acted to control “total” obligations, thus leaving the states discretion to decide how they would use their obligation authority across the range of specific federal-aid highway programs. For example, in a particular year, a state could have opted to obligate all of its available National Highway System funds, but it would have had to make up for its full use of these funds by obligating less in another funding category, such as the CMAQ program. Differences in the priorities that the states assigned to different highway programs are now reflected in significant variances in the unobligated balances that remain from ISTEA authorizations for these programs. For example, the National Highway System had a total unobligated balance of over $426 million at the beginning of fiscal year 1998, which represents only about 13 percent of the total fiscal year 1997 apportionment for this program. In comparison, the Surface Transportation program started fiscal year 1998 with an unobligated balance of $4.2 billion, or nearly half of the fiscal year 1997 apportionment for this program. Furthermore, the CMAQ program had an unobligated balance of $1 billion, or 108 percent of the fiscal year 1997 apportionment for this program. Because of the variances in the unobligated balances remaining across federal highway programs, these balances may not be consistent with state funding priorities or projects that the states planned for this year. To identify any problems that the states might have in using their unobligated balances and to identify strategies that the states may use to help them respond to the absence of new federal highway funds in the short term, we contacted nine states—Arkansas, Connecticut, Indiana, Iowa, Missouri, New York, North Carolina, North Dakota, and South Dakota. These differed in the extent to which they expected that their unobligated federal highway balances would help them respond to any short-term absence of new federal highway funds. Several of the states did note that the usefulness of these unobligated balances will be somewhat limited because they are tied to specific programs. For instance, a Missouri transportation finance and budget manager estimated that in early fiscal year 1998, the state will be able to use only $50 million of its total of $169 million in unobligated funds because the balance of the money is for categories such as CMAQ or transportation enhancements in which the state does not have projects ready to go. Similarly, the Transportation Director of Program Management for New York commented that it is very difficult to say exactly when the state will use its unobligated balance because some of this money is limited to programs that (1) are not a state priority or (2) do not have projects that are ready to go. If the Congress were to enact legislation that would give the states the flexibility to use unobligated balances interchangeably among federal highway programs, then some states would be better positioned to more fully use their unobligated federal highway funds. In addition, while minimum allocation funding can be used for numerous federal highway programs, demonstration project funds must be used only for the specific projects for which the funds were authorized under current law. These demonstration project funds, which generally were not subject to the obligation limits, ended fiscal year 1997 with a total unobligated balance of about $1.9 billion. If the Congress were to provide the states with the flexibility to use program as well as demonstration project funds to meet other highway program needs, a later reauthorization could provide for reimbursement to the borrowed fund account. Federal highway funding represents one of the many financial sources used to support the nation’s highways. The Department of Transportation’s statistics indicate that the revenue available for highways totaled $92.5 billion in 1995, the latest year for which data are available. About $59.6 billion of this revenue came from highway user taxes—$18.3 billion from federal highway user taxes, $39.3 from state highway user taxes, and $2 billion from local highway user taxes. The balance came from a variety of sources, such as $5.1 billion from property taxes and assessments and $7.6 billion from bond receipts. To compensate for the lack of new federal highway funds being available for part of fiscal year 1998, some states may be able to fund a proportionately larger share of their planned highway projects in early fiscal year 1998 with state funds. Later in fiscal year 1998, these states could use the federal funds made available to them. This assumes that at some unspecified time in fiscal year 1998, new federal highway funds will be available; however, this uncertainty poses problems for some states. A few of the nine states we contacted noted that they would be postponing highway projects if new federal funds are not available within the next few months. The states also differ in their ability to provide greater funding in fiscal year 1998. For instance, the Commissioner of North Dakota’s Department of Transportation stated that the disastrous flood this year left North Dakota without any additional state funds to pay for highway projects. In contrast, Indiana’s Deputy Commissioner for Finance stated that the state does not face a financial crisis in early fiscal year 1998. He noted that Indiana’s Department of Transportation has, if necessary, the ability to use $600 million in bonding authority to begin projects in fiscal year 1998. However, if the states draw on their own resources, they may have to delay other planned projects. Also, this short-term solution could have a defined payback period. For instance, a Missouri transportation official noted that the state expects to award highway contracts through December 1997, using $100 million of state funds. He noted that this state money will be borrowed from other state programs and must be returned to the other accounts by June 30, 1998, the end of the state’s fiscal year. One financial tool that may help some states is advance construction. Under advance construction, a state can begin a highway project by obtaining capital from a variety of sources, including its own funds and private capital, and later receive reimbursement through federal highway obligations. Indiana’s Deputy Commissioner for Finance stated that without new federal funds, Indiana will begin its highway program using advance construction with state funding. New York also indicated that it would turn to advance construction to help with its highway financing. The New York Transportation Director of Program Management remarked that he expects to keep the state’s planned highway projects on schedule in early fiscal year 1998 through the use of advance construction. He stated that New York will use state money to keep the projects on schedule and then backfill with federal funds once a new authorization is passed. In July 1997, the American Association of State Highway and Transportation Officials (AASHTO) conducted a survey to determine the possible effects of a delay in the reauthorization of the federal surface transportation program on state transportation programs. Many states reported to AASHTO that they would use advance construction to continue operations and project schedules. However, AASHTO noted that advance construction will not help some states that have already heavily relied on this technique. Mr. Chairman, this concludes my testimony. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. Difference between unobligated balance and FY 1997 7-month (continued) Note 1: Bold type indicates that previous obligations exceed the unobligated balance. Note 2: The comparison represents data for the states only and does not include data for the District of Columbia, American Samoa, Puerto Rico, the Virgin Islands, Guam, and the North Marianas. Not available. Difference between unobligated balance and FY 1997 7-month (continued) Note 1: Bold type indicates that previous obligations exceed the unobligated balance. Note 2: The comparison represents data for the states only and does not include data for the District of Columbia, American Samoa, Puerto Rico, the Virgin Islands, Guam, and the North Marianas. Not available. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Summary: GAO discussed the status of federal surface transportation programs in the absence of funding from a new federal highway reauthorization act, focusing on a comparison of unobligated federal highway fund balances at the beginning of fiscal year (FY) 1998 with the highway funds that the states obligated during the first part of FY 1997. GAO noted that: (1) the total unobligated highway fund balance available at the beginning of FY 1998 equals $12.1 billion and exceeds the total actual obligations of $8.1 billion, made by the states during the first 6 months of FY 1997; (2) a comparison of the unobligated balances of individual states with their actual FY 1997 obligations reveals that some state highway programs may experience financial difficulties by the middle of FY 1998 if their obligation rates for this year are comparable to those for FY 1997; (3) while most states have unobligated balances that are greater than their actual federal highway obligations in the first 6 months of FY 1997, 14 states have an unobligated balance that is lower than their actual obligations during the same period; (4) the nine states that GAO contacted identified various strategies that they would use to try to continue their highway operations, such as relying more extensively on state funds; (5) some of these states also noted that they would soon be postponing highway projects if new federal funds are not available within the next few months; (6) the rates at which states obligated funds in FY 1997 may not correspond to their plans for obligating federal highway funds in FY 1998; (7) some states may be limited in their ability to use available unobligated balances because of restrictions on the specific types of highway programs that the funds can be used for; (8) the comparisons indicate that while many states may be able to continue financing highway projects for some time, some states may have difficulty dealing even in the short term with the absence of new federal highway funds; (9) a number of strategies could help the states respond to the absence of new federal funds in the short term; (10) for example, Congress could provide the states with the flexibility to use their unobligated balances across the range of federal highway programs, rather than keeping the balances tied to specific highway funding categories and demonstration projects; (11) Congress could then reimburse appropriate funding categories after reauthorization; (12) individual states could also consider a number of strategies, such as temporarily substituting state funds for federal highway funds; (13) states could also begin highway projects by using advance construction, which enables a state to access capital from a variety of sources and later receive reimbursements through federal highway obligations; (14) such strategies, however, may delay other planned projects within individual states; and (15) these strategies may not be feasible for some states or for an extended period of time.