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these federal-aid funds because of perceived problems with the formula, such as its reliance, at least in part, on outdated data.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 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. 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 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. 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. 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.