This is the accessible text file for GAO report number GAO-03-744R entitled 'Trends in Federal and State Capital Investment in Highways' which was released on June 18, 2003. This text file was formatted by the U.S. General Accounting Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. 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 email@example.com or Steve Cohen at firstname.lastname@example.org. 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  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.  FHWA projections are based in 2000 dollars.  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.  For highway programs that do not have apportionment formulas, funds are distributed through allocations to states with qualifying projects.  All dollar figures cited in this report are in 2001 dollars unless otherwise noted.  Unless otherwise noted, investment represents outlays or spending on highway capital investment.  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.  See scope and methodology section for a more complete explanation of the correlation analysis we performed.  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.  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.