The scope of the nation’s transportation system is vast and increasingly congested. Two key components of the transportation network are the nation’s highways and transit system. There are approximately 4 million miles of highway in the United States, which serve to provide mobility to millions of passengers and millions of tons of freight each day. In addition, over 600 transit agencies provide a range of transit services to the public, including rail and bus service. Each workday, about 14 million Americans use some form of transit. Over the last 20 years, all levels of government, including the federal government, have spent hundreds of billions of dollars on the nations’ highways and transit systems to enhance mobility as well as meet other needs. Despite these expenditures, increasing passenger and freight travel has led to growing congestion. For instance, annual delays per traveler during rush hour have almost tripled, increasing from 16 hours in 1982 to 46 hours in 2002. According to DOT forecasts, passenger and freight travel will continue to increase in the future.There are a number of strategies, such as preventive maintenance, improving operations and system management, and managing system use through pricing or other techniques, which can be taken to help address the nation’s mobility challenges. One of the key strategies is to invest in new physical capacity in the transportation system. While such investment is the subject of this report, as we have noted in the past, a targeted mix of these strategies is needed to help control congestion and improve access. (See app. IV for additional information about the level of usage of and investment in the nation’s highway and transit systems.) The funding for new transit and highway projects comes from a variety of sources, including federal, state, and local governments; special taxing authorities and assessment districts; and user fees and tolls. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) and TEA-21 continued the use of the federal Highway Trust Fund as the mechanism to account for federal highway user-tax receipts that fund various highway and transit programs. Once Congress authorizes funding, FHWA makes federal-aid highway funds available to the states annually, at the start of each fiscal year, through apportionments based on formulas specified in law for each of the several formula grant programs. Ninety-two percent of the federal-aid highway funds apportioned to the states in fiscal year 2003 were apportioned by formula.According to DOT officials, the majority of federal-aid highway funds are used for maintenance purposes, not new investments. FTA also uses formulas to distribute federal urbanized and nonurbanized funds for capital and operating assistance to transit agencies and/or states. FTA also has discretionary transit programs, including the New Starts program. The New Starts program provides funds to transit providers for constructing or extending certain types of transit systems and is the primary source of funding for new transit capacity. FTA generally funds New Starts projects through full-funding grant agreements, which establish the terms and conditions for federal participation in a project, including the maximum amount of federal funds available for the project. To compete for a full-funding grant agreement, a transit project must emerge from a regional planning process. The first two phases of the New Starts process—systems planning and alternatives analysis—address this requirement. The systems planning phase identifies the transportation needs of a region, while the alternatives analysis phase provides information on the benefits, costs, and impacts of different corridor-level options, such as rail lines or bus routes. The alternatives analysis phase results in the selection of a locally preferred alternative— which is intended to be the New Starts project that FTA evaluates for funding. After a locally preferred alternative is selected, the project is eligible for entry into the New Starts process. FTA oversees the management of projects from the preliminary engineering phase through construction and evaluates the projects for advancement into each phase of the process, as well as annually for the New Starts report to Congress. FTA’s New Starts evaluation process assigns ratings on the basis of a variety of statutorily defined criteria, such as mobility improvements, and determines an overall rating. FTA uses the evaluation and ratings process, along with its consideration of the state of development of the New Starts projects, to decide which projects to recommend to Congress for a full- funding grant agreement. ISTEA and TEA-21 also established an overall approach for transportation planning and decision making that state, regional, and local transportation agencies must follow to receive federal funds. This approach includes involving numerous stakeholders, identifying state and regional goals, developing long- and short-range state and regional planning documents, and ensuring that a wide range of factors are considered in the planning and decision-making process. For example, transportation officials must consider safety, environmental impacts, system connectivity, and accessibility, among other things. While the federal requirements specify a wide range of factors that must be considered when selecting a project from alternatives, they generally do not specify what analytical tools, such as benefit-cost analysis, transportation officials should use to evaluate these factors. Instead, local, regional, and state agencies are largely responsible for selecting the methods used to analyze these factors. Federal requirements also do not mandate that local, regional, and state agencies choose the most cost-beneficial project. Rather, transportation officials at these agencies have the flexibility to select projects on the basis of their communities’ priorities and needs. Even in the more structured New Starts program, state, regional, and local agencies have discretion in selecting the preferred alternative, although, according to FTA, these agencies are likely to consider New Starts requirements in the decision making process. Various analytical approaches, including benefit-cost, cost-effectiveness, and economic impact analyses, have been refined over time to better calculate the benefits and costs of transportation investments and provide decision makers with tools to make better-informed decisions. (Table 1 describes the purposes of the different economic analyses.) The Office of Management and Budget (OMB), DOT, and GAO have identified benefit- cost analysis as a useful tool for integrating the social, environmental, economic, and other effects of investment alternatives and for helping decision makers identify projects with the greatest net benefits. In addition, the systematic process of benefit-cost analysis helps decision makers organize and evaluate information about, and determine trade-offs between, alternatives. Because the federal-aid highway program is funded under a formula program and projects are therefore not subject to an evaluation process at the federal level, there are no federal requirements for economic evaluation of highway investment costs and benefits—except that FHWA does ensure that federal highway funding is being spent on an eligible roadway for eligible purposes. In contrast, FTA’s New Starts program is discretionary, and FTA is authorized to establish various requirements that sponsors of transit capital investments need to meet in estimating a project’s benefits and costs, including calculating the cost-effectiveness of a proposed project and providing information on expected land-use effects, to obtain federal funding. However, transit agencies are not required to conduct a formal benefit-cost analysis, and FTA is prohibited by TEA-21 from considering the dollar value of mobility improvements in evaluating projects, developing regulations, or carrying out any other duties. FTA officials noted that the New Starts evaluation process results in greater federal oversight and scrutiny for New Starts projects, compared with the level of federal oversight for federally funded highway projects. The types of direct benefits that transit and highway projects may produce include user benefits, such as travel-time savings, and benefits that accrue to users and nonusers alike, such as reductions in the adverse environmental impacts of transportation. These direct benefits can in turn produce indirect benefits, such as economic development and employment that affect the regional or local economy; however, these indirect benefits may constitute transfers of economic activity from one area to another or are a result of the direct benefits filtering through the economy. Although these indirect benefits represent real benefits for the jurisdiction making the transportation improvement, they represent transfers and not real economic benefits, from a national perspective. Transportation investments also produce costs, including the direct costs to construct, operate, and maintain the project as well as other potential social costs resulting from the construction and use of the facility, such as unmitigated environmental effects. The potential benefits and costs of any specific highway or transit investments will depend on the specifics of the project being considered and the local economic and transportation conditions. However, measuring all the potential benefits and costs of proposed highway and transit investments can be challenging and subject to several limitations and sources of error. For example, in current practice, benefit- cost analysis and economic impact analysis may not include all potential benefits. In addition, there are many limitations in being able to accurately predict changes in traveler behavior, land use, or the use of nearby roadways or alternative travel options resulting from a new investment. Sources of error can also include double counting of benefits and not comparing a project to a viable alternative or improperly defining the “do- nothing” case for comparison. The key categories of potential direct user benefits from highway investments include travel-time savings, reductions in accidents, and reductions in vehicle operating costs. These user benefits are historically included in benefit-cost analysis of such investments. The User Benefit Analysis for Highways Manual developed by the American Association of State Highway and Transportation Officials (the AASHTO Manual) provides guidance on how these benefits should be estimated. In addition to benefits that accrue solely to users, social benefits such as reductions in environmental costs—including reduced emissions, noise, or other impacts—are also potential sources of direct benefits of highway projects. However, these benefits are more difficult to quantify and value; and as a result, they are less often included in benefit-cost analyses of transportation investments.