In our recent legal opinion, we reviewed the statutory provisions governing the disposition of the proceeds from the sale or lease of real property acquired with federal highway grant funds and FHWA’s interpretation of that provision. FHWA issued regulations in 1999 implementing real property management policies in conjunction with the federal-aid highway program, which we reviewed. We disagreed with FHWA’s interpretation of the law. We concluded that Congress did not intend for states to convert federal money to state money by buying and selling property and/or use the federal share of recaptured funds to reduce or avoid their obligation to provide matching funds. DOT’s Inspector General raised similar concerns about FHWA’s interpretation of the federal law governing the proceeds from the sale or lease of real property in its report regarding the finance plan for the Central Artery Tunnel Project in Massachusetts. In its report, the DOT Inspector General questioned whether the proceeds derived from the sale of excess properties purchased with federal-aid highway funds should be counted against the $8.549 billion cap imposed by Congress on federal contributions to the Central Artery Tunnel Project. Further, the DOT Inspector General found that Massachusetts intended to sell land, originally purchased with federal aid, on which it had temporarily located its project headquarters, reinvesting the money in the project as “state funds.” The sale of the project headquarters is expected to generate about $100 million. All 51 of the state DOTs we surveyed, including the District of Columbia, reported selling, leasing, or disposing of real property purchased with federal-aid funds (see app. IV for responses from state DOTs). We found that from June 1998 through May 2002, 37 states reported they sold, leased, or disposed of at least 5,636 properties that generated about $148 million (2001 dollars) in revenue for the states. We excluded eight states from our calculations of the total number of properties sold, leased, or disposed of because these states either did not distinguish sold, leased, or disposed of properties originally acquired with federal funds from those properties that were acquired without federal funds and/or identify the amount of proceeds generated. We excluded another six states from our calculations for various reasons. In all, we excluded 14 states from our calculations because of these variances. For example, California has an agreement with FHWA that recognizes that the amount of revenue generated from the sales or leases of land purchased with federal-aid funds is substantially less than the state’s expenditures on highways; therefore, the state is not required to track and report the proceeds from the sales. Also, Louisiana state officials reported that they do not track and report federal dollars because their real estate property management database is not designed to distinguish sales of property acquired with federal-aid funds. Nevertheless, these states reported that they sold, leased, or disposed of some real properties originally purchased with federal funds. States also vary in their policies for retaining the net proceeds they receive from the sale or lease of real property because they have different views of the federal requirements. Most states that we surveyed deposit the proceeds into state transportation accounts to be used at a later date. However, three states reported that they do not follow that procedure but credit an existing federal-aid project within the state. For example, Maryland DOT officials told us that they credit an ongoing federal-aid project within their state. In their opinion, retaining the federal share would require the state to establish special tracking accounts to trace each dollar of revenue from affected property sales or leases from its receipt to its expenditure on a specific eligible federal-aid project which would not be cost effective. The cost to establish these accounts would exceed its current annual state revenue from these properties. Nevada and Texas DOTs also credit existing federal-aid projects within their states because, in their view, it is more efficient not to track the federal share of the proceeds. FHWA officials told us that, in their view, when states credit the federal share of the net proceeds to an existing federal-aid project, they lose the opportunity provided by TEA-21 to use the proceeds for other state highway projects. For states that retain the federal share of the net proceeds, five state officials that we contacted said they view the current regulations that allow them to retain the federal share of the proceeds generated from the sale or lease of real property as positive because it gives the states greater flexibility to sell or lease real property to support the states’ transportation programs. For example, officials in California and Virginia told us that selling or leasing surplus property and retaining the proceeds provide additional funds to complete more state highway projects. State DOTs and FHWA officials in Illinois, Virginia, and California also told us that the current regulations eliminate the administrative burden of tracking and returning the federal share of the funds to the federal government. The proceeds generated from the state DOTs’ sales or leases of real property do not currently appear to be a major source of revenue for the states’ transportation programs. We compared the proceeds generated, as reported to us in our survey, with the states’ revenues available for highway projects. The ratio between the proceeds generated by the states and the states’ receipts represented less than 1 percent of the states’ revenues in 1999 and 2000 (see apps. V and VI). Figures 1 and 2 show the states with the highest ratio between the proceeds from property sales or leases with the states’ revenues for 1999 and 2000, respectively. We calculated that in 1999, the total ratio of the federal share of proceeds from property sales and leases in comparison with the state revenues was 0.075 percent. Of the 35 states for which we calculated ratios, 8 states had ratios that were greater than or equal to 0.1 percent, and 27 states had ratios that were less than 0.1 percent. We calculated that in 2000, the total ratio of the federal share of proceeds from property sales and leases in comparison with the state revenues was 0.069 percent. Of the 35 states for which we calculated ratios, 10 states had ratios that were greater than or equal to 0.1 percent, and 25 states had ratios that were less than 0.1 percent. We noted no particular trend in the amount of proceeds from these types of property sales or leases over the period of our survey. Therefore, it is possible that the proceeds from property sales or leases could increase or decrease in the future. One likely sale of property in the near future by the Massachusetts Highway Department would have a large effect on the total proceeds from the sale or lease of properties purchased using federal highway aid in that state. The Department used federal aid to purchase a substantial amount of property for rights-of-way associated with the Central Artery Tunnel Project. Sale or lease of property associated with this project has already generated nearly $9 million in revenue for the state during the period of our survey (see app. IV for state responses). In addition, the state plans to sell the project’s headquarters building. The federal government contributed 90 percent of the original cost to acquire the building, and federal officials estimate that the sale of the building will generate about $100 million for the state’s transportation program. In 2000, Massachusetts received about $490 million in federal highway aid. States reported using the proceeds generated from the sale or lease of real property in different ways; and their survey responses indicated that some uses of the proceeds may not comply with specific statutory requirements of only using the proceeds on projects eligible for funding under federal-aid highway and related programs. This use of the proceeds conflicts with FHWA’s interpretation of the statute. For the 51 states we surveyed, 42 states reported that they deposited the proceeds from sales of property originally purchased with federal funds in accounts established to fund state highway projects. Officials from 47 state DOTs reported using the proceeds to fund other state transportation projects eligible for federal aid, and at least four states use the proceeds as their match for projects receiving federal contributions. For example, state DOT officials in Illinois, Louisiana, Nebraska, and North Carolina told us, in our visits or through their survey responses, that they use the proceeds generated from the sale or lease of property for matching purposes. Our legal opinion concluded that the states could not use the proceeds to match contributions, stating that the intent of Congress was not to allow states to “use the proceeds of such transactions to reduce or avoid their matching fund obligations.” FHWA has interpreted the statute as allowing for such use. In eight states, we could not determine from the survey responses how the states were using the proceeds because they do not (1) track property purchased with federal-aid funds separately from other property or (2) separate federal and state proceeds generated from the sale and lease of real property. In these cases, the federal share is commingled with state funds and cannot be accounted for separately. TEA-21 stated that proceeds must be used for projects eligible for federal aid; and, according to their survey responses, most states have placed such restrictions on the accounts into which the proceeds were placed. FHWA officials said that, in their view, states would be in compliance with TEA-21 if they placed proceeds in accounts restricted for use on projects eligible for funding under federal-aid highway and related programs. However, officials in two states told us that their accounts do not have this type of restriction. Therefore, in at least two cases, it is possible that states have used the proceeds on projects that are not eligible for federal aid. For example, a state DOT official in Indiana told us that the state uses the proceeds to fund state highway projects but does not track whether these projects are eligible federal-aid projects. New Mexico DOT officials reported that the proceeds are not restricted to funding eligible federal-aid projects; therefore, the funds could be used for other transportation projects not eligible for federal aid. FHWA officials said that they may issue additional guidance in 2003 to clarify how states should implement the TEA-21 language regarding property sales and FHWA’s subsequent regulations.