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entitled 'Trends in Federal and State Capital Investment in Highways' 
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Letter June 18, 2003:

The Honorable Harry Reid 
Ranking Member, 
Subcommittee on Transportation and Infrastructure 
Committee on Environment and Public Works 
United States Senate:

Subject: Trends in Federal and State Capital Investment in Highways:

Amid projections that freight traffic will increase 65 percent by 2020 
and that traffic congestion will worsen, many transportation officials 
are concerned about the challenge of maintaining and improving the 
condition and performance of the nation's highway infrastructure. In 
1998, the Transportation Equity Act for the 21ST Century (TEA-21) 
increased funding for highways by 27 percent in real terms over the 
previous surface transportation authorization act--the Intermodal 
Surface Transportation Efficiency Act of 1991 (ISTEA).[Footnote 1] 
Nevertheless, the Federal Highway Administration (FHWA) estimates that 
the nation will need to spend about $76 billion--or 18 percent more 
than it spent in 2000--each year through 2020 to maintain the average 
conditions and performance of the nation's highways and bridges, and 
about $107 billion or 65 percent more than it spent in 2000 to 
efficiently improve the highway system.[Footnote 2] These projections 
raise concerns because both the federal government and state 
governments are facing budget deficits in the years ahead, totaling 
hundreds of billions of dollars.

As you prepare to reauthorize TEA-21 and establish funding levels for 
the next several years, you asked us to provide historical information 
on the nation's investment in its highway infrastructure. In 
particular, you asked that we (1) identify overall trends in the 
nation's capital investment in its highway system over the past 20 
years, particularly since the enactment of TEA-21 in 1998--and compare 
the trends in federal spending with the trends in state and local 
government spending; (2) determine how these trends in highway capital 
investment compare with the fiscal capacity of both the nation and 
individual states to fund these programs, particularly since the 
enactment of TEA-21 in 1998; and (3) provide information on sources of 
funds used by states for their highway programs. On June 10, 2003, we 
briefed your office on the results of our work. Enclosure I presents 
our briefing slides. This report summarizes the briefing, and a 
subsequent report will discuss your request to analyze the fiscal 
effects of federal highway grants on state and local highway 
investment. In addition, a special publication entitled Trends in State 
Capital Investment in Highways, providing spending trends by state, is 
available on the Internet at http://www.gao.gov/cgi-bin/getrpt?gao-03-
915sp.

To respond to your request, we reviewed data from FHWA's Highway 
Statistics for the period from 1982 through 2001, adjusting 
expenditures to 2001 dollars. We also compared expenditures with the 
nation's gross domestic product (GDP) and the gross state products 
(GSP) of individual states[Footnote 3] and interviewed transportation 
officials in 10 states. We performed our work from August 2002 through 
May 2003 in accordance with generally accepted government auditing 
standards. Our scope and methodology is discussed in more detail later 
in this report.

Background:

Although the states, with support from localities, are primarily 
responsible for capital projects on the nation's highways, federal 
funding provides a significant amount of the financing for these 
capital investments. Federal funding is made available to the states 
through apportionments from FHWA at the start of each fiscal year, 
based on formulas provided in law.[Footnote 4] With few exceptions, the 
funds that the federal government provides for highways must be matched 
by funds from other sources--usually state and local governments. The 
funding requirement for most federal highway programs is 80 percent 
federal and 20 percent state funding. In addition to matching federal 
funds, states and localities raise funds to invest in highway capital 
projects as well as to maintain existing roadways.

Summary:

The following summarizes our results.

Capital Investment in the Highway System:

* The nation's capital investment in its highway system has more than 
doubled in real terms over the past 20 years.

* From 1982 through 2001, federal and state and local government 
investment increased 123 percent from $29.6 billion to about $66.0 
billion in 2001 dollars.[Footnote 5] During the period following 
enactment of TEA-21 in 1998, total capital investment increased 19 
percent, from $55.5 billion in 1997, the last year under ISTEA, to 
$66.0 billion in 2001.

* While the nation's total capital investment more than doubled, state 
and local highway capital investment increased at twice the rate of 
federal investment over the past 20 years. Specifically, state and 
local investment increased 166 percent from $14.1 billion to $37.6 
billion in real terms, whereas the federal investment increased 83 
percent from $15.5 billion to $28.3 billion.[Footnote 6] (See fig. 1).

Figure 1: Federal and State and Local Highway Capital Investment, 1982-
2001:

[See PDF for image]

[End of figure]

* During the period following enactment of TEA-21 in 1998, federal 
investment increased faster than state and local investment. Federal 
investment increased 23 percent in real terms from $23.1 billion in 
1997, the last year under ISTEA, to $28.3 billion in 2001, while state 
and local investment increased 16 percent from $32.4 billion to $37.6 
billion during this time.

* However spending patterns were not consistent over this period. 
Federal expenditures declined in 1998 despite the substantial increase 
in TEA-21 authorizations because TEA-21 was enacted in June 1998, and 
most of the federal funding authorized under TEA-21 was not expended 
until 1999 or later. As a consequence, federal spending in 2001 was 29 
percent higher than its 1998 level of $21.9 billion. As shown in figure 
2, state and local investment remained relatively constant during this 
time--increasing 2 percent in real terms from $37.0 billion in 1998 to 
$37.6 billion in 2001.

Figure 2: Annual Federal and State and Local Highway Capital Investment 
during TEA-21:

[See PDF for image]

[End of figure]

* The slower rate of increase in state and local investment during 
recent years may continue. The National Governors Association and the 
National Conference of State Legislatures recently reported that states 
face estimated budget shortfalls ranging from $65 billion to $80 
billion (in current dollars) for fiscal year 2004. Transportation 
officials from most of our 10 selected states said that their state's 
declining financial condition could result in decreased spending on 
highways. In addition, a January 2003 survey done for the National 
Association of Counties, found that the local governments are also 
facing revenue shortfalls. Seventy-two percent of the 715 counties 
responding to the survey are experiencing shortfalls in revenues, and 
of that 72 percent, one in four are considering cutbacks in highway 
construction spending to address those shortfalls. Highway construction 
was cited by more counties as a candidate for budget reductions than 
any other category of spending, including health care, schools, law 
enforcement, and parks.

Investment Compared to Fiscal Capacity:

* Although the nation's highway investment has increased, the nation's 
"level of effort" on highway capital spending--that is, investment 
relative to fiscal capacity, as measured by GDP--has remained 
relatively steady.

* This relatively constant level of effort is due to increases in state 
and local investment that offset decreases in federal investment per 
GDP over the past 20 years. As noted previously, however, during the 
TEA-21 period, federal investment increased faster than state and local 
investment.

* There is considerable variation in the level of effort among states. 
During the 1982 to 1986 time period[Footnote 7], state and local 
governments spent an average of $2.96 per $1,000 of GSP on highways, 
but individual state spending ranged from a high of $7.73 to a low of 
$1.21, per $1,000 of GSP. By the 1997 to 2000 time period, the average 
state and local government spending increased to $3.76 per $1,000 of 
GSP, while the range across individual states also widened--to a high 
of $9.96 and a low of $1.11 per $1,000 of GSP.

* In addition, there is wide movement in the states' relative levels of 
effort over time. For example, no state consistently ranks highest in 
level of effort over time. The state with the highest level of effort 
in terms of state and local funding as related to gross state product 
in the 1982 to 1986 time period ranked 12TH in the 1997 to 2000 time 
period. The changes in states' levels of effort occurred, in part, 
because of fluctuations in the funding available for each state's 
highway program. Factors affecting fluctuations in the funding 
available for individual state highway programs include rapid changes 
in revenues stemming from increases in gas tax rates, changes in 
available funds resulting from issuing or retiring debt, and the 
beginning or completion of large capital projects. For example, Utah 
moved from 28TH place in the 1982 to 1986 time period to 1ST place in 
the 1997 to 2000 time period. The funding that the state invested in 
its reconstruction of I-15 for the 2002 Winter Olympics likely 
influenced this large increase in level of effort.

* We have begun to examine what factors, including state demographic 
and other characteristics and the level of federal grants, may affect 
states' levels of effort. For example, our initial analysis comparing 
state characteristics to levels of effort indicates that, over roughly 
the last 20 years, certain characteristics, such as motor fuel tax 
revenues, may be generally related to states' levels of effort, while 
other characteristics, such as the number of licensed drivers and 
registered vehicles, do not appear to be related to states' levels of 
effort.[Footnote 8] Our subsequent report will more closely examine the 
relationship between states' levels of effort and selected demographic 
and other state characteristics, as well as the fiscal effects of 
federal grants.

State Sources of Funding for Highways:

* Taxes on motor fuels, such as gasoline and diesel, have been the 
primary source of state highway funding. In addition to motor fuel 
taxes, states use revenues from other sources for highway projects, 
including vehicle and motor carrier taxes, tolls, and general fund 
appropriations. (See fig. 3).

Figure 3: Percentage of State Highway Funding by Source - National 
Totals:

[See PDF for image]

Note: Excludes federal grants, bond proceeds, and sinking fund interest 
earned.

[End of figure]

* Over the past 20 years, state revenues for highways have increased 78 
percent from $33.4 billion to $59.4 billion in real terms. State motor 
fuel tax revenues increased 75 percent from $16.4 billion in 1982 to 
$28.7 billion in 2001. Revenues from other funding sources increased at 
a greater rate than motor fuel taxes during this period. For example, 
the use of general funds for highways increased over 220 percent, from 
$1.3 billion to $4.1 billion, while toll revenues increased 83 percent, 
from $2.6 billion to $4.7 billion over the 20-year period. (See fig. 
4).[Footnote 9]

Figure 4: Percentage Increases in Funding Sources for Highways, from 
1982 through 2001:

[See PDF for image]

Note: Excludes federal grants, bond proceeds, and sinking fund interest 
earned.

[End of figure]

* Although gas tax rates are not a complete measure of what a state 
invests in its highways, these rates illustrate the variation that 
occurs over time in a state's sources of highway funding, as well as in 
a state's highway expenditures. Between 1982 and 2001, gas tax rates 
for 39 states increased in real terms, while gas tax rates for 12 
states decreased in real terms--ranging from an increase of 140 
percent, to a decrease of 40 percent. During this time the federal gas 
tax rate increased 176 percent--a greater percentage increase than any 
of the states' increases. However, this information should be viewed 
with caution because results could be different depending on the years 
selected. For example, by selecting 1983 instead of 1982 as the first 
year of the analysis, the federal gas tax rate increase would be about 
28 percent--less than the increases of 14 states--because the federal 
gas tax rate more than doubled in April 1983. These results should also 
be viewed with caution because some states that increased their rates 
substantially may have had low gas tax rates in 1982. For example, 
while Texas had the largest percentage increase among the states, 
having more than doubled its gas tax rate in real terms from 1982 to 
2001, Texas also had the lowest tax rate in 1982.

* Although states primarily pay for highway projects with federal 
grants and state revenues, states have increasingly used debt financing 
to fund highway projects from 1982 through 2001. The funding for 
highways available from bonds increased over 270 percent from about 
$2.5 billion to almost $9.4 billion in real terms during this 20-year 
period.

Scope and Methodology:

To identify trends in highway capital investment for federal, state, 
and local governments, we used data on expenditure and vehicle miles 
traveled from FHWA's Highway Statistics for the period 1982 through 
2001,[Footnote 10] adjusting expenditures to 2001 dollars using the 
state and local highway price index estimated by the Bureau of Economic 
Analysis (BEA) of the Department of Commerce. The adjusted expenditures 
using the BEA index will be slightly different from expenditures 
calculated by FHWA using its bid-price index because BEA adjusts the 
FHWA bid-price index. We used BEA's index because it uses a 12-quarter 
phasing pattern that more consistently captures expenditure patterns 
for capital highway projects. We assessed the reliability of the data 
by electronic testing and by reviewing documentation and reports. 
Although transportation officials consider FHWA's Highway Statistics as 
the best available national source of highway capital expenditure data 
for statistical purposes, it does have some reported limitations. For 
example, according to FHWA officials, states are required to provide 
data for their local governments' highway funding every other year and 
are encouraged to use sampling in developing reported data. Thus local 
data are estimated to some degree by either states estimating reported 
local data or FHWA estimating local data when they are not reported by 
the states. In addition, there is not a standard reporting year. 
Therefore, states report data for different types of years--for 
example, calendar years and state fiscal years. Finally, the types of 
projects that the federal government classifies as capital projects 
have changed over time; hence, there may not be consistency in the 
data. However, we concluded that the data were sufficiently reliable 
for our purposes. Although not a limitation of the collected data, 
direct state and local capital expenditures are not reported 
separately. We therefore subtracted federal funding from total capital 
expenditures to approximate state and local expenditures. In addition, 
although we examined investment or expenditure trends, we did not 
examine what improvements in the condition or performance of the 
highway system resulted from these expenditures.

To compare trends in capital investment with the fiscal capacity of the 
nation and individual states, we compared expenditures with GDP and GSP 
for 1982 through 2001, adjusting expenditures and GSP as appropriate. 
We also used data from the Bureau of the Census on state and local 
government finances to compare highway expenditures with other state 
expenses. FHWA officials state that the Census Bureau uses a narrower 
definition of what is included in highway expenditures than the FHWA. 
However, Census data provides a basis for comparing state and local 
governments' highway expenditures to their other program expenditures 
over time. To obtain examples of how state departments of 
transportation determine their highway expenditures levels, we 
conducted telephone interviews with officials from 10 state highway 
transportation offices--Alaska, California, Illinois, Montana, Nevada, 
New Mexico, Oklahoma, Vermont, West Virginia and Wisconsin. We selected 
these states on the basis of a variety of factors, including their 
level of highway capital expenditures per gross state product, 
geographic location, population, vehicle miles traveled, and percentage 
of federally owned land area. Furthermore, to identify state 
characteristics that are linked with levels of effort across all 
states, we performed a correlation analysis that examined the linear 
relationship between level of effort and individual state 
characteristics in concurrent years. Our analysis considered these 
associations singly. However, there may be more complex interactions 
that exist when considering the relationships simultaneously.

Finally, to identify state sources of funds used for highway 
investments from 1982 through 2001, we reviewed data from FHWA's 
Highway Statistics on sources of revenue and adjusted the revenues to 
2001 dollars using the general GDP index estimated by the BEA of the 
Department of Commerce.

We performed our work from August 2002 through May 2003 in accordance 
with generally accepted government auditing standards.

Agency Comments and Our Evaluation:

We provided a draft of this report to DOT for its review and comment. 
DOT officials generally agreed with the information in the report, and 
they also provided technical comments, which we incorporated in the 
report as appropriate.

This is the first of two reports responding to your request concerning 
federal and state and local investment in our nation's surface 
transportation system. We plan to issue a second report in early 2004 
addressing your remaining question on how federal funding influences 
state and local investment in our nation's highway system.

:

As we agreed with your office, unless you publicly announce the 
contents of this report earlier, we plan no futher distribution of it 
until 30 days from the date of this letter. We will send copies of this 
report to cognizant congressional committees; the Secretary of 
Transportation; and the FHWA Administrator. The report will also be 
available on GAO's home page at http://www.gao.gov. In addition, a 
special publication entitled Trends in State Capital Investment in 
Highways, providing spending trends by state, is available on the 
Internet at http://www.gao.gov/cgi-bin/getrpt?gao-03-915sp.

If you or your staff have any questions about this report, please 
contact me at heckerj@gao.gov or Steve Cohen at cohens@gao.gov. 
Alternatively, we can be reached at (202) 512-2834. Major contributors 
to this report were 
Jay Cherlow, Catherine Colwell, Gregory Dybalski, Jerry Fastrup, Donald 
Kittler, Alexander Lawrence, John Mingus, Sara Ann Moessbauer, and Eric 
Tempelis.

Sincerely yours,

Signed by:

JayEtta Z. Hecker 
Director, Physical Infrastructure Issues:

Enclosure:

[See PDF for image]

[End of section]

FOOTNOTES

[1] Based on a comparison of authorization levels for Title 1 programs 
in ISTEA and TEA-21 shown in FHWA's Financing Federal-Aid Highways. We 
adjusted the authorizations to 2001 dollars using gross domestic 
product (GDP) deflators.

[2] FHWA projections are based in 2000 dollars.

[3] GDP is a measure of all income earned within the domestic economy, 
providing a convenient measure of the nation's aggregate purchasing 
power, including the ability to fund public services such as highways. 
GSP provides a similar measure of income earned within individual state 
economies. In evaluating other "formula-based" programs, GAO has used 
the Department of Treasury's Total Taxable Resources (TTR) as a measure 
of states' funding ability because it provides a more comprehensive 
measure of potentially taxable income by including both state GSP and 
income earned by state residents from out-of-state sources. However, we 
did not use Treasury's TTR because it was not consistently available 
for all the years in our trend analysis.

[4] For highway programs that do not have apportionment formulas, funds 
are distributed through allocations to states with qualifying projects.

[5] All dollar figures cited in this report are in 2001 dollars unless 
otherwise noted.

[6] Unless otherwise noted, investment represents outlays or spending 
on highway capital investment.

[7] To analyze 50 states over a 19-year period, we broke down the 19 
years from 1982 through 2000 into four time periods. The early part of 
the time period covers 1982 through 1986. The most current time period 
covers 1997 through 2000. This analysis does not include 2001 data 
because 2001 local expenditure data are not yet available at the state 
level.

[8] See scope and methodology section for a more complete explanation 
of the correlation analysis we performed. 

[9] We did not include debt financing in this figure because bonds are 
not a source of additional funds; rather, they are repaid from the 
sources of funds shown in this figure.

[10] In a few instances, FHWA's Highway Statistics does not provide 
capital expenditure data for state or local governments for certain 
states and years. In these instances, we estimated capital expenditures 
based on the trend in expenditures over time for those state or local 
governments.