Financing Federal-Aid Highways

Oxford dictionary defines "finance" as "the management of large amounts of money, especially by governments or large companies". So whatever it is, it is related to the management of money; that is, for my case, how the federal fund (money) is received, proportioned, programmed, spent, and so on. Federal-Aid Highways includes the National Highway System (NHS), Interstate highways, and all public roads that are not classified as local or rural minor collectors.

Every financing cycle starts with a legislation; that is, a law that is proposed and/or enacted by the Congress. These legislation are usually specified for a period of time (several years maybe). The law not only determines the different programs for spending the money, but also establishes annual spending limits. These programs direct the states on how or where they would want the funds to be spent. Two examples of such legislation are:

• • The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU)

  • Moving Ahead for Progress in 21st Century (MAP-21)

There are many terminologies in this process that might seem confusing in the beginning but as we go forward in the process everything becomes clearer. One of these terms is "Budget authority" meaning the amount of money each agency is authorized to spend by the Congress. "Appropriation" is another legislative term that means to allocate money for particular purposes. Annual appropriations process determines the budget authority or the amount of money that can be spent on different categories in each fiscal year. The process is similar to family budget plan where at the beginning of the month, the available money is appropriated for categories such as groceries, travel, fun, etc.

Then the budget authority form is sent to the federal agency (Federal Highway Administration-FHWA) which is called the "Contract authority". Next, the federal agency used the contract authority to distribute the appropriated funds across the states based on some criteria (formula). These national statutory formula are called "Apportionment". That is, to distribute the fund in proper shares. Federal aid apportionment in MAP-21 Act includes several categories including the followings as some examples:

• • Interstate Maintenance (IM)

  • National Highway System (NHS)

  • Highway Safety Improvement Program (HSIP)

  • Railway-Highway Crossings (RHC)

  • Equity Bonus (EB)

In addition to the apportionment there are other procedures as well that can be used to distribute money throughout the states which are called "Allocations". Allocations do not have statutory formula. The procedures of apportionment and allocations are fully determined by the law. some example categories of allocations under MAP-21 includes:

• • Public Lands Highway Program (PLHP)

  • Transportation Improvements (TI)

The law also determines some spending limits for the distributed funds that are called "Obligation limitation". The question may arise that first what the obligation is, and then we can talk about its limitations. "Obligation" is a commitment or promise by the federal government to pay the States for the federal share of the costs of any eligible project. So if we say the fund is obligated, that means the federal government is now obliged to pay for its share. For the case of a transportation project, the obligation of a project can occur before the actual construction of the project when the project's design is approved and right of way acquired by the State DOT. After the fund is obligated, then the project can be advertised for the prospective bidders and then will be awarded to the lowest bidder. If all the apportioned/allocated funds for a purpose is not obligated (considering the limitations), the remaining fund has to be returned to the federal agency for redistribution, and the state will not receive any more funds! 

"Obligation authority" acts as a maximum limit of the sum of all the obligations that can be made within a fiscal year. That is the total annual commitment of the federal government for the obligations. This amount includes the "Obligation limitation" and those programs that are exempt from this limitation. The obligation limitation (the amount available to obligate) is a maximum limit for the federal assistance that can be obligated; it is determined by the congress so that the expenditures of the federal government can be controlled. This means that not all the annual apportionment fund given to a state can be obligated in that fiscal year. This results in a balance of apportionment (which is informally called "Impounded funds" that can not be obligated. For example: DOT of the State XY receives obligation authority ($45 million) of 90% of the total amount in contract authority ($50 million) for a fiscal year's apportionment and allocations. In this case, 10% of the contract authority (impounded fund of $5 million) is remained and cannot be obligated. This impounded funds increases each year as a result of obligation limitations and is reflected in the fund balance of the state but it is frozen and cannot be obligated unless additional authority is received.

Some of these obligation limitations are for specific programs (e.g. for IM) that are called "formula limitation". This limitation does not carry over to the next year (has to be spent within a given fiscal year). Some other limitations (e.g. TI) are available until spent. 

Sometimes, the funds that are previously appropriated can be taken back by the Congress because of some other funding needs. Such actions are called "Rescission", that are usually taken from the impounded funds.