RS21164 -- Highway Finance: RABA's Double-edged Sword Updated May 19, 2003 Summary The debate over a possible reduction in federal highway program spending duringFY2003 has ended. Congress haschosen to overrule provisions of law that would have reduced the FY2003 spending level to $23.2 billion, and hasinstead settled on $31.8 billion, the same asthe FY2002 level. In early 2002, it appeared that a major reduction in highway program spending was in the offing.An Office of Management and Budgetcalculation in the President's budget indicated that the RABA adjustment for FY2003 would be negative. TheAdministration and Congress were not proposinga cutback. Rather a complex financing mechanism known as Revenue Aligned Budget Authority (RABA) wasproving the famous law of unintendedconsequences. Predictions made at the time RABA was created by the Transportation Equity Act for the21st Century as amended (TEA-21)( P.L. 105-178 & P.L. 105-206 ) saw it as an ever growing source of funding for the highway program, even though RABA was createdwith the possibility of a downwardadjustment. RABA provided the highway program with almost $9 billion in additional financing during the yearsFY2000 through FY2002. Congressionalaction in the 2nd Session of the 107th Congress precluded this downward adjustment,at least in part, and the Consolidated Appropriations Resolution, 2003 ( P.L.108-7 ) guaranteed that funding would remain at the FY2002 level. This report will not be updated. A little understood feature of TEA-21 became a significant policy issue in the 2nd Session of the107th Congress. The Federal Highway Administration(FHWA), State Departments of Transportation, and localities throughout the United States had become used to theidea that the federal-aid highway programobligation level would increase every year as a result of additional funds provided by RABA. The possibility thatRABA could result in a negative adjustmentto the funding level of the highway program had been largely forgotten over the previous 5 years. In fact, the RABAadjustment for FY2003, if it had beenapplied in accordance with TEA-21 provisions, would have required a reduction in the federal highway programsguaranteed obligation limitation by $4.369billion, and a year-over-year adjustment from FY2002 of a negative $8.6 billion. The negative RABA adjustment would have resulted in a 27% decline in new highway contracts (obligations) in FY2003 when compared with FY2002. According to estimates by the highway construction industry this would have translated into a serious reduction inconstruction nationwide with a concomitantloss of some 295,000 jobs. (1) While not all estimatessaw the situation in such negative terms, there was no doubt that an $8.6 billion change in highwayspending would have had far reaching consequences for the industry. This was a problem that wasn't supposed to occur. The concept behind RABA expected growth and saw a so-called "negative RABA" as only a smallpossibility. A downward adjustment of the obligation limitation and authorizations could also occur, but this is improbablegiven the conservative receipt estimates used to set the guaranteed spending levels set in TEA-21. (2) Faced with the unexpected, Congress and the Administration had to decide whether to let the RABA adjustment stand or whether to modify the RABA result insome way. Congress has now considered the issue and decided to overrule the RABA adjustment and retainspending at the FY2002 level. The Transportation Equity Act for the 21st Century (TEA-21) changed the budget framework forthe federal highway and transit programs. It did this in twoways. First, by creating new budget categories, and second, by setting statutory limitations on obligations. The Actamended the Balanced Budget andEmergency Deficit Control Act of 1985 to create two new budget categories: highways and mass transit. The Actfurther amended the budget process bycreating a statutory level for the limitation on obligations in each fiscal year from FY1999 to FY2003. (3) Finally, TEA-21 provided a mechanism, RABA, toadjust the amounts available in the highway account to correspond with increased or decreased receipts in trust funddedicated tax revenues. The transit accountwas not included in the RABA process. The net effect of the creation of these budget categories is a predetermined level of funding for core highway programs, which is referred to in TEA-21 as adiscretionary spending guarantee or the guaranteed level. These categories are separated from the rest of thediscretionary budget in a way that prevents the useof funds assigned to these categories for any other purpose. These so called "firewalls" are viewed, in the TEA-21context, as guaranteed and/or minimumlevels of funding for highway and transit programs. Additional funds above the firewall level can be made availablethrough the annual appropriations process. The RABA process provides a link between the trust fund dedicated tax revenues that flow into the highway account and highway spending. This relationshiphas long been sought by advocates of increased highway spending who have contended that highway user feesshould be available only for highway programs. The Act requires that the Office of Management and Budget (OMB) make an annual evaluation of revenues in the highway account during the year prior to thecurrent fiscal year vis-a-vis predicted levels of revenue cited in TEA-21. This is known as the "look-back"adjustment. The Secretary must then predictrevenues vis-a-vis spending authorized within the highway firewall for the new fiscal year. This is the"look-ahead"adjustment. If revenues go up, programspending is increased. Conversely, spending can go down if revenues go down. This mechanism was employedbeginning in FY2000. If a funding adjustment is required, an apportionment change is applied to the core highway programs in each state. In addition, apportionments are made toother allocated federal aid highway and highway safety programs. Finally, funds are reserved on a proportional basisfor programs allocated by the FederalHighway Administration (FHWA), such as the federal lands highway program. At the time TEA-21 was enacted, both the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) predicted that revenues tothe highway account would grow at a level that exceeded the highway authorization provided within the highwayfirewall. The OMB estimated somewhat moregrowth than that projected by CBO. By one analysis, looking at a best case scenario (best case from the perspectiveof an analysis that favors additionalspending) the revenue alignment provisions of the bill could have provided as much as $3.5 billion in additionalcontract authority for core highway programsduring the life of the legislation. We now know that these estimates were dramatically wrong. RABA increasesfar exceeded these modest expectations duringthe period FY2000 - FY2002. Also unexpected, however, was the strong downward turn in revenues driving thecurrent debate. Table1: RABA and TEA-21 Guaranteed Funding (thousands of dollars) P.L. 105-178 P.L. 105-206 http://www.fhwa.dot.gov/tea21/ P.L. 108-7 In a nutshell, the revenue stream for the highway trust fund responded to the direction of the domestic economy. For much of the four decade plus history of thetrust fund, Americans almost always drove more each year than the previous year and used more fuel in the process. With the exceptions of the fuel shocks ofthe 1970s, this pattern has continued, albeit at a slower level, even during recessionary periods. The boom years of the late 1990s were especially lucrative for the trust fund. As the economy started to slow down in 2000 and 2001 (this equates to theFY2001 look back period used in the FY2003 calculation), trust fund revenues also began to decline. This appearsto have been especially true for the truckingindustry where new vehicle sales dropped off dramatically. At the same time, gasohol use was increasing, primarilybecause of its use as a substitute for thecontroversial additive MTBE. Gasohol is taxed at a lower rate than other highway fuels. So even thoughautomobile use seems to have been fairly constant,revenue to the trust fund decreased, with a concomitant reduction in the look-back factor described in the previoussection. With the Nation in a recession early in 2002, the budget scorekeepers at OMB and Treasury were required to reduce their previous estimates about how well theeconomy would do in FY2003. As a result, the look-ahead element of the RABA calculation also came up negative. Added together, these factors resulted inthe negative $4.369 billion RABA adjustment included in the President's FY2003 budget proposal. The federal-aid highway program is a slow spending program. This reflects the nature of capital infrastructure projects, which often are multi-yearundertakings. The federal-aid program is also slow spending because it is a reimbursable program. That is, statesreceive no federal payments until theyactually accomplish some agreed upon type of work. Funds, therefore, scheduled for obligation in FY2003 mightnot actually be scored as outlays for severalyears. The Administration's FY2003 budget suggested that they viewed the slow spending nature of the program as protection against any serious economicconsequences from a reduction in highway obligations; ... in 2003 actual spending on highway construction, including the continuation of prior-year projects, will fall lessthan three percent from its all-time high in 2002. (4) The highway construction industry and the states did not share the Administration's view that a one-year drop in highway obligations would have a limitedeffect. They took the position that the proposed year-over-year reduction would have a dramatic effect and that therewas no guarantee that the program wouldcontract for only one year. (5) Further, these groupswere specifically concerned that a decline in new highway spending would have had a deleterious effect on arecovery from the then ongoing recession. There were several options for dealing with the RABA situation available to Congress. The first of these, andthe one tacitly supported by the BushAdministration initially, was to maintain the status quo. From this perspective the downward RABA adjustmentis what Congress agreed to allow when itpassed TEA21 in 1998. RABA, in this view, had provided significantly more benefit than expected over time, anda down year should be expected fromtime-to-time. The budget assumptions contained in the President's FY2003 budget submission were predicated onthe downward RABA adjustment. Additional spending for highways could have the effect of raising the overall deficit figure in the President's budget,notwithstanding the separate budgetcategory for the highway trust fund and a significant unobligated balance in the trust fund. An option pursued by some legislators in the 2nd Session of the 107th Congress was legislation that restored FY2003 funding to the guaranteed level contained inTEA-21. H.R. 3694 and S. 1917 , the "Highway Funding Restoration Act," were simultaneouslyintroduced on February 7, 2002. These bills were identical. The bills directed that the limitation on obligations for FY2003 be raised to theguaranteed level. In other words they raisedspending by $4.369 billion by drawing from the unexpended balance in the Highway Trust Fund. The bills wereintroduced by the leadership of the HouseCommittee on Transportation and Infrastructure and the Senate Committee on Environment and Public Worksrespectively. A majority of both the House andSenate signed on as cosponsors of this legislation. An amended version of H.R. 3694 was reported out of theHouse Committee on Transportationand Infrastructure on May 1st. S. 1917 as reported to the Senate on June 17thallowed for an additional $1.3 billion in spending over the $27.7billion level. From the perspective of some Governors and highway interest groups these bills represented a good start, but didn't make the program whole. They continue toseek a larger increase in spending, perhaps to the $8.6 billion level that would provide the same level of highwayspending as FY2002. Congress has nowagreed with this argument. Also at issue for such an increase was the willingness of Congress to potentially raisethe overall unified budget deficit. This issuewas particularly important for the appropriations committees, who must weigh a number of other transportationfunding needs and work them into the annualappropriations process. Also important in this regard was the issue of the intent of RABA's authors. As mentionedearlier, the expectation of RABA was that itwould provide additional money to the highway program. It is not clear that the authors ever considered that peakRABA levels should become standard forhighway program funding. Rather, it appears that the authors expected that the highway program should benefitin bonus years, but also feel some pain in downyears. As a result of a provision included in the second FY2002 emergency supplemental appropriations bill ( P.L. 107-206 )(August 2, 2002) the downward RABAadjustment proposed for FY2003 was blocked. The net effect of this provision was to set the program at itsauthorized $27.7 billion level. Later in the Session,the Senate Committee on Appropriations reported S. 2808 which would have increased spending to theFY2002 level. Ultimately Congress hasdecided to retain funding at the FY2002 level passing the Consolidated Appropriations Resolution, 2003 ( P.L.108-7 ) early in the 108th Congress. All of the fixes to the RABA adjustment were predicated on spending at least some portion of the unexpended balance in the Highway Trust Fund. Thosesupporting an increase in the FY2003 limitation on obligations all pointed to the $18 billion plus unexpendedbeginning of year balance estimate for the trustfund as the likely source of additional highway funds. (6) While this was the logical place to look for highway funds, not all of this balance is actuallyavailable. At any given time a significant portion of the fund is reserved to meet future obligations. A device created earlyin the history of the trust fund, known as the"Byrd Rule" (for Senator Harry Byrd, Virginia) requires that the trust fund meet an ongoing fiduciary test. Anyfailure to meet this test requires an immediatereduction in highway spending. TEA-21 must be reauthorized prior to FY2004 for the program to continue. Many observers are suggesting that the RABA debate will alert Congress and thehighway industry to the fact that long-standing trust fund revenue sources need to be reviewed. This is especiallytrue in terms of gasohol. Gasohol use isexpected to increase, but with lower tax levels on gasohol, this actually means that trust fund revenues for the sameamount of fuel use could decrease. Also atissue is the ongoing push for the automobile industry to find alternative fuel sources that are not taxed. When TEA-21 was signed in late 1998 the highway trust fund had a growing unexpended balance that was expected to exceed $24 billion by the end ofFY1999. One of the principal rationales behind the higher spending levels in TEA-21 and the creation of the RABAspending mechanism was to preventcontinued growth in this balance. Going into 2003 it now appears that the unexpended balance in the trust fund willbe trending downward in size. Should thistrend continue it could create a dynamic in which it could be difficult to find support for significant growth in theprogram during the reauthorization debatewithout new funding sources. 1. (back) http://www.transportation.org/aash...fd9e86256b4500776347f?OpenDocument 2. (back) U.S. Department of Transportation. Transportation Equity Act for the 21st Century: A Summary. 1999. p. 3. 3. (back) A limitation on obligations is a restrictionon the amount of federal assistance that may be promised (obligated) during a specific time period (fiscal year). 4. (back) U.S. Government. Budget of theUnited States FY2003, Analytical Perspectives. February 2002. p. 241. 5. (back) Rothman, Heather and Ferguson, Brett. Governors Ask Congress, President to Spend Down Highway Trust Fund. Daily Report for Executives. February 26,2002. p. A-23. 6. (back) The unexpended balance is sometimes andinappropriately referred to as "the surplus".

Summary: The debate over a possible reduction in federal highway program spending duringFY2003 has ended. Congress haschosen to overrule provisions of law that would have reduced the FY2003 spending level to $23.2 billion, and hasinstead settled on $31.8 billion, the same asthe FY2002 level. In early 2002, it appeared that a major reduction in highway program spending was in the offing.An Office of Management and Budgetcalculation in the President's budget indicated that the RABA adjustment for FY2003 would be negative. TheAdministration and Congress were not proposinga cutback. Rather a complex financing mechanism known as Revenue Aligned Budget Authority (RABA) wasproving the famous law of unintendedconsequences. Predictions made at the time RABA was created by the Transportation Equity Act for the21st Century as amended (TEA-21)( P.L. 105-178 & P.L. 105-206 ) saw it as an ever growing source of funding for the highway program, even though RABA was createdwith the possibility of a downwardadjustment. RABA provided the highway program with almost $9 billion in additional financing during the yearsFY2000 through FY2002. Congressionalaction in the 2nd Session of the 107th Congress precluded this downward adjustment,at least in part, and the Consolidated Appropriations Resolution, 2003 ( P.L.108-7 ) guaranteed that funding would remain at the FY2002 level. This report will not be updated.