Trends in Federal and State Capital Investment in Highways
Gao ID: GAO-03-744R June 18, 2003Amid 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 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). Nevertheless, the Federal Highway Administration 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. 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 the Subcommittee on Transportation and Infrastructure, Senate Committee on Environment and Public Works prepares to reauthorize TEA-21 and establish funding levels for the next several years, it asked us to provide historical information on the nation's investment in its highway infrastructure. In particular, the Subcommittee 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.
The nation's capital investment in its highway system has more than doubled in real terms over the past 20 years. 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 Gross Domestic Product--has remained relatively steady. Taxes on motor fuels, such as gasoline and diesel, have been the primary source of state highway funding. In addition to motor fuel taxes, state use revenues from other sources for highway projects, including vehicle and motor carrier taxes, tolls, and general fund appropriations.
E-supplements Trends in State Capital Investment in HighwaysGAO-03-744R, 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.
