Federal-Aid Highways:

FHWA Has Improved Its Risk Management Approach, but Needs to Improve Its Oversight of Project Costs

GAO-09-751: Published: Jul 24, 2009. Publicly Released: Jul 24, 2009.

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The federal-aid highway program provides about $33 billion a year to states for highway projects. The federal government provides funding for and oversees this program, while states largely choose and manage the projects. As requested, GAO reviewed the Federal Highway Administration's (FHWA) implementation of several requirements in the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU): (1) oversight of states using a risk management approach; (2) efforts to develop minimum standards for estimating project costs, and periodically evaluate states' cost estimating practices; and (3) reviews of states' financial management systems. GAO also reviewed FHWA's policy on presenting an estimate of financing costs in financial plans for major projects (i.e., projects estimated to cost over $500 million). GAO reviewed FHWA plans, risk assessments, reviews, and other documents; visited five FHWA field offices and reviewed financial management reviews in an additional five field offices; and interviewed FHWA officials.

FHWA has improved its approach to managing risks to the federal-aid highway program by requiring field offices to identify risks, assess them on the basis of the potential impact and the likelihood they will occur, and develop response strategies for key risks in their planned oversight activities. For fiscal years 2007 through 2009, most of the field offices GAO visited had oversight activities to address a majority of the key risks. However, most of the field offices that GAO visited were not fully tracking risk mitigation activities, thereby limiting the effectiveness of FHWA's efforts to mitigate risks to the federal-aid highway program. FHWA has made limited progress in meeting SAFETEA-LU's requirement to develop minimum standards that states must follow when estimating project costs. GAO has reported that project cost estimates typically have not been reliable predictors of project costs or financing needs. While FHWA has efforts under way, it is unlikely to issue standards until 2011, at the earliest. In addition, FHWA has not established a process to periodically evaluate states' cost estimating practices, and four of the five field offices GAO visited were doing little in this regard. However, for major projects, FHWA has established a process for evaluating the credibility of states' cost estimates. Establishing standards for cost estimates and periodically evaluating states' cost estimating practices could help to ensure that highway projects are effectively and efficiently managed. FHWA's guidance and documentation for reviews of state departments of transportation's financial management systems and practices generally meet key federal standards and principles, but they lack specific steps and documentation in some key areas. For example, FHWA's guidance does not require reviewers to provide certain specific information on improper payments. In addition, while the 10 field offices that GAO reviewed generally covered the required areas in their financial management reviews in 2008, their documentation sometimes lacked information on the specific procedures performed or issues identified by reviewers. Without this information, it is difficult for FHWA to monitor and follow up on field offices' and states' progress in correcting deficiencies. FHWA does not require states' financial plans for major projects to present an estimate of the projects' financing costs. According to a senior FHWA official, this is partly because it is difficult to develop accurate estimates. While uncertainty about a major project's financing cost can exist, and presenting estimates of financing costs for all projects could be impractical, financing costs on major projects can represent a significant cost to a state, and can, when combined with payments on the principal portion of the debt, tie up large shares of future federal transportation funding. Presenting an estimate of a project's financing costs would help ensure that decision makers who approve funding for these projects have key information that is relevant to such decisions.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To help ensure effective and efficient management and oversight of the federal-aid highway program, the Secretary of Transportation should direct the Administrator, FHWA, to supplement FHWA's guidance for reviewing improper payments by including information on the specific steps reviewers are supposed to complete, such as identifying the causes of improper payments and actions taken to correct those causes. In addition, enhance FHWA's reporting template for its reviews of states' financial management systems by requiring reviewers to document the specific procedures performed.

    Agency Affected: Department of Transportation

    Status: Open

    Comments: DOT agreed with this recommendation.

    Recommendation: To help ensure effective and efficient management and oversight of the federal-aid highway program, the Secretary of Transportation should direct the Administrator, FHWA, to develop and implement a process to periodically evaluate states' cost estimating practices.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: In 2009, GAO reported that FHWA had made limited progress in developing minimum standards that states must follow when estimating project costs, and to periodically evaluate states' practices for estimating project costs, as required by legislation enacted in 2005. GAO concluded that because of this limited progress FHWA lacked assurance that states' estimates are credible or that highway projects are effectively and efficiently managed and recommended that FHWA develop and implement a process to periodically evaluate states' cost estimating practices. In FY 2013, FHWA required its division offices in each state undertake a review of the project cost estimating procedures used by their State and to complete this review by September 30, 2014. FHWA provided guidance to assist its offices conduct these reviews in the form of a report prepared by the American Association of State Highway and Transportation Officials in 2013 entitled "Practical Guide to Cost Estimating", which included guidance on key cost-estimating techniques and strategies for containing costs. As a result of GAO's work, Congress has greater assurance that that states' estimates are credible and that federally-funded highway projects are effectively and efficiently managed.

    Recommendation: To help ensure effective and efficient management and oversight of the federal-aid highway program, the Secretary of Transportation should direct the Administrator, FHWA, to develop the capability for all field offices to uniformly track the status of their efforts to mitigate risks to the federal-aid highway program.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: In July 2009, GAO found that the Federal Highway Administration's (FHWA) field offices were not fully tracking their efforts to mitigate risks to the federal-aid highway program. Therefore, GAO recommended that FHWA develop the capability for its field offices to uniformly track these efforts. In response, in February 2011 FHWA rolled out to its field offices a new information system for this purpose. As a result, FHWA is in a better position to obtain complete and consistent tracking information from its field offices, which should facilitate aggregation of national-level information and help to ensure that risks to the federal-aid highway program have been addressed.

    Recommendation: To help ensure effective and efficient management and oversight of the federal-aid highway program, the Secretary of Transportation should direct the Administrator, FHWA, to require all field offices to use the agency's planned new system for tracking states' progress in addressing FHWA's review recommendations.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: In July 2009, GAO found that the Federal Highway Administration's (FHWA) field offices were not fully tracking states' progress in addressing FHWA's recommendations to the states aimed at addressing risks to the federal-aid highway program. To improve the situation, FHWA planned to develop a new information system to track states' progress, but the agency had not yet decided whether it would require its field offices to use the system. To ensure field office use of the planned new system, GAO recommended that FHWA include such a requirement when it implemented the system. In response, FHWA did include such a requirement when it rolled out the new system to its field offices in December 2011. As a result, FHWA is in a better position to obtain complete and consistent tracking information from its field offices, which should facilitate aggregation of national-level information and help to ensure that risks to the federal-aid highway program and related recommendations to the states have been addressed.

    Recommendation: To help ensure effective and efficient management and oversight of the federal-aid highway program, the Secretary of Transportation should direct the Administrator, FHWA, to require states to present an estimate of financing costs in the project's financial plan for major projects.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: In 2009, GAO reported that FHWA did not require states to present an estimate of the costs of financing a project in the financial plans it requires for major highway projects (those estimated to cost more than $500 million). GAO reported that financing costs on major projects can represent a significant cost to a state and tie up large shares of federal funding, and that absent such information, a financial plan may not provide a reasonable assurance that a project's impact on the state's transportation capital improvement program has been assessed. GAO recommended that FHWA require states to present an estimate of financing costs in a project's financial plan. In response to GAO's recommendation, FHWA published a Notice in the Federal Register in September 2013 with proposed revisions to its financial plan guidance that would require states to present an estimate of financing costs in a project's financial plan. As a result, decision makers who approve funding for these projects would have the key information to make informed decisions about whether to approve the substantial investment of public funds that major projects require.

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