Federal Funding Flexibility: Use of Federal-Aid Highway Fund Transfers by State DOTs (2022)

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A-1   A P P E N D I X A Literature Review A.1 Interactions Between Federal Funding Apportionment Method and Transferability: Impacts on State Practices Transferability, coupled with the funding apportionment method, has an impact on states’ ability and incentive to use federal funds to achieve state goals versus national goals. Under the Fixing America’s Surface Transportation Act (FAST Act), annual apportionment of the federal-aid highway funds is based on a formula, which considers mainly the historical funding level (FFY2015 apportionments) and Highway Trust Fund contribution by state (FHWA, 2016a). Granting fund transfer authority to states acknowledges that Congressional authorizations and formulas may not distribute funding perfectly to meet states’ actual needs or to achieve states’ policy goals; transferability provides states the flexibility to better match funding levels to their priorities (Eno Center for Transportation, 2019). Since the apportionment distribution methodology under the FAST Act is not tied to any policy goals, this flexibility does not really have an effect on the program’s ability to achieve its goals. The Eno Center for Transportation analyzed this issue in one of its 2019 publications (Eno Center for Transportation, 2019). Formulaic funding distribution based on traditional factors, such as population, vehicle miles traveled, and center-lane miles, is simple to implement but does not relate to or incentivize achieving national performance goals. Such formula effectively rewards population growth and building more highways, benefits more driving, but does not incentivize operational improvement. In this case, transferability provides states the flexibility to better match funding levels to their priorities (Eno Center for Transportation, 2019). Tying funding to performance will encourage states to improve highway conditions and operational performance, but it may have unintended consequences, such as hurting states hit by natural disaster or leading states to set easily attainable metrics. Transferability in this case may incentivize states to spend federal funds where it can most effectively achieve national performance goals, but not state goals (Eno Center for Transportation, 2019). The report pointed out that the Moving Ahead for Progress in the 21st Century (MAP-21) Act made significant steps toward requiring the federal programs to develop and implement metrics

A-2 Federal Funding Flexibility: Use of Federal-Aid Highway Fund Transfers by State DOTs distribution method that is targeted to specific goals, the allowable transferability does not really have an effect on the program’s ability to achieve national goals. The report continues to comment that: “…if the programs were more targeted and emphasized distributing funding to problem areas, transferability might play a role in a state’s ability or incentive to improve a particular problem that has been defined as a national goal, but not as a state goal. If the distribution were to be performance-based and reward states for achieving national goals, it would be irrelevant how a state chooses to spend its funding as long as it continued to improve” (Eno Center for Transportation, 2019). A.1.1 Congressional Research Service Analyses In April 2020, the Congressional Research Service published Reauthorization of Federal Highway Programs. The brief highlights what should be key issues to be addressed in the upcoming surface transportation reauthorization act. The brief notes that recent surface transportation bills have reduced the number of discretionary programs, but Congress could choose to create new ones to address specific issues, for example, bridge conditions. In reauthorization, Congress could increase the share of highway funding that is distributed by formula, diminishing the role of discretionary programs, or expand discretionary programs rather than formula funding (CRS, 2020). A.2 Positions on Flexibility Across Surface Transportation Programs As summarized in the history section, the trend has been increasing flexibility in highway funding programs in recent legislations. However, the latest Congressional actions suggest that Congress may try to maintain a balance between providing more flexibility while pursuing national policy goals. There have been legislative attempts to increase flexibility in certain areas while tightening transfer authority to reinforce certain policy priorities. States, as recipients of FAHP funds, are generally in favor of greater flexibility in the federal highway funding programs so that they can decide how to best meet their transportation needs with available funds. Local governments and industry groups are generally in favor of expanding flexibility but advocate for new programs dedicated to specific policy goals. This section reviews the various positions on flexibility across surface transportation programs and summarizes the bills proposed by the Senate and the House of Representatives. A.2.1 AASHTO In its August 8, 2019, Policy Recommendations for Surface Transportation Reauthorization, AASHTO (2019a) set forth a series of policy resolutions that included improved flexibility. The resolution, AASHTO Reauthorization Policy Theme 4: Improve Flexibility, specifically called on Congress, through the next surface transportation reauthorization act, to: based variables are not tied to the actual distribution formulas to states. Because the current Federal-Aid Highway Program (FAHP) apportionment distribution methodology does not use a for evaluating performance, which was continued in the FAST Act; however, the performance-

Literature Review A-3   • Enable transferability from federal program categories with unobligated balances to allow for use of those funds. • Allow for increased flexibility within and transferability between highway and transit program categories. • Focus federal funding increases in the most flexible formula funding categories. • Reduce existing limitations and constraints of how states can use and transfer funds from each of the FAHP categories; for example: — Reduce required Surface Transportation Block Grant Program (STBG) suballocation to local areas. — Expand National Highway Freight Program (NHFP) eligibility by including the National Highway Freight Network (NHFN) and the Primary Highway Freight System. — Increase flexibility and decrease restrictions on the use of Congestion Mitigation and Air Quality Improvement Program (CMAQ) funds for Intelligent Transportation System and transit operations as long as such investments continue to demonstrate net air quality benefits. • Authorize a pilot program that allows a limited number of states the option to treat all federal funds they receive during the pilot program years as having been apportioned to that state under the most flexible of the existing federal funding categories, where the purpose of the pilot program is to demonstrate how states produce results toward state goals and needs using a flexible needs-based and outcome-oriented project prioritization and programming process. A.2.2 National Association of Counties National Association of Counties’ (NACO’s) position on flexibility focuses on two aspects: • First, the reauthorization should increase the amount and flexibility of STBG dollars suballocated to counties, so that local decision-makers can prioritize projects that best serve their communities (NACO, 2019). They encourage Congress to increase the amount of federal funding infused into the local share of the STBG program to provide communities with populations between 50,000 and 200,000 access to more dedicated federal funds; they also support increasing local decision-making authority for STBG project selection for communities of under 50,000 (NACO, 2020). • Second, maintain and increase the set-aside for off-system bridges. Amending the basis for the set-aside to a more contemporary appropriation level would provide the funding increase needed for counties to safely maintain and operate these often-compromised structures (NACO, 2020). • Increase the transferability of the current core formula highway programs.

A-4 Federal Funding Flexibility: Use of Federal-Aid Highway Fund Transfers by State DOTs Increasing the suballocated amount of STBG funds will expand local governments’ authority in how to spend the federal funds, but that limits the amount of funds that states have discretion over. Increasing the amount set aside for off-system bridges will ensure more resources will be directed to improve bridge conditions, which is a key policy goal, but that also means fewer flexible funds that can be invested where states deem most needed based on their circumstances. A.2.3 American Road and Transportation Builders Association American Road and Transportation Builders Association (ARTBA) believes state and local governments should be given the flexibility to allocate their share of federal funding within the framework of the FAHP as they see fit, providing that national highway needs within their state are met. Providing flexibility to transfer highway program funds to non-highway activities, however, raises concern. Shifting limited highway funds to other purposes delays needed highway and bridge capital improvements. With the U.S. DOT reporting $836 billion in backlogged highway and bridge investment needs, Highway Trust Fund Highway Account dollars should be earmarked exclusively for highway and bridge improvements (ARTBA, 2022). A.2.4 National Conference of State Legislatures Extensive categorization of programs reduces the flexibility of states and insular areas in addressing transportation needs and arbitrarily encourages expenditures according to the availability of federal funding. Categories should be reduced and states’ and insular areas’ flexibility increased. Barriers to transferability of funding should be eliminated (NCSL, 2011). A.2.5 Institute of Transportation Engineers The ITE generally supports continuation of programs that consist of a limited number of broad categories, with flexibility to transfer funds between categories based on state or local priorities. It recommends expanding flexibility in certain areas, including: • The flexibility to spend funds for either capital or operational/maintenance improvements. • Restoring the flexibility to use Highway Safety Improvement Program (HSIP) funds on any safety project (infrastructure-related or non-infrastructure) that meets the overarching requirement that “the funds be used for safety projects that are consistent with the state’s strategic highway safety plan (SHSP) and that correct or improve a hazardous road location or feature or address a highway safety problem” (ITE, n.d.). The ITE’s recommendation of maintaining and expanding flexibility is coupled with a recommendation of requiring performance-based funding investments; transportation initiatives should be assessed through a set of broad-based performance indicators, reflecting benefits delivered and documented with before and after data while accounting for economic, environmental, and social costs. This approach should provide affected agencies with the flexibility on how best to meet their economic improvement, health, equity, and other national goals (ITE, n.d.).

Literature Review A-5   The ITE also recommends new research and training programs that serve specific policy goals; for example: • Establishing strategic research programs for reducing surface transportation fatalities and injuries and for transformational technologies in surface transportation. • Appropriating additional funds for a permanent transportation operations discipline and program at the U.S. DOT. Establishing a federal program to help fill the skills gap in the transportation workforce will enable the nation to pursue new priorities to address a changing transportation landscape (ITE, n.d.). A.2.6 American Public Transportation Association In its recommendations on surface transportation authorization, APTA pointed out that for funds transferred to FTA from FHWA, the administrative requirement to develop and submit separate grants adds additional review and approval, resulting in project delay and increased costs (APTA, 2019). APTA recommends that U.S. DOT review its policies on requiring separate grants for STBG or CMAQ funds to provide greater flexibility to agencies for transfers from FHWA to FTA programs. Any policy to provide greater flexibility to combine transferred funds should be an option, not a requirement, and should not result in delaying fund availability or slowing project delivery (APTA, 2019). A.2.7 Congressional Research Service Analyses In April 2020 the Congressional Research Service published Reauthorization of Federal Highway Programs. The brief highlights what should be key issues to be addressed in the upcoming surface transportation reauthorization act. The brief notes that recent surface transportation bills have reduced the number of discretionary programs, but Congress could choose to create new ones to address specific issues, for example, bridge conditions. In reauthorization, Congress could increase the share of highway funding that is distributed by formula, diminishing the role of discretionary programs, or expand discretionary programs rather than formula funding (CRS, 2020). A.2.8 Congressional Reauthorization Proposals Both the Senate and the House of Representatives proposed reauthorization bills in anticipation of the expiring FAST Act. The Senate Environment and Public Works Committee introduced the America’s Transportation Infrastructure Act, and the House Transportation and Infrastructure Committee introduced the Investing in a New Vision for the Environment and Surface Transportation (INVEST) in America Act. This section provides a brief summary of the impacts on highway program flexibility features in the proposed bills. Both measures will need to be reintroduced in the 117th Congress. Their content, however, as well as their titles, will be guided by the policy positions of the next administration and Congress.

A-6 Federal Funding Flexibility: Use of Federal-Aid Highway Fund Transfers by State DOTs A.2.9 Reauthorization Proposals: America’s Transportation Infrastructure Act of 2019 In August 2019, the Senate Environment and Public Works Committee introduced S.2302, America’s Transportation Infrastructure Act of 2019.1 Among its provisions are amendments that affect the flexibility and eligible uses of formula funds provided by the Highway Trust Fund. While maintaining the current formula programs, the bill introduced new programmatic features for increased focus on safety (beyond the existing HSIP), wildlife crossing mitigation, resiliency, greenhouse gas emission reductions, and bridge investment. These new programs include highly targeted eligibilities even for formula portions (AASHTO, 2019b). Is its analysis of the proposed bill, AASHTO identified several major amendments that will significantly restrict program flexibility, including: • The number of U.S. DOT-administered discretionary grant and pilot programs is greatly expanded, placing more project selection control with U.S. DOT and creating greater administrative demands. • Suballocation is increased for the following programs, taking funding discretion away from states: — Increased STBG set-aside (Transportation Alternatives) from 50 percent in FAST Act to 57.5 percent ($1.2 billion in 2021). — New formula carbon reduction program at 65 percent of $600 million per year. — New formula safety incentive program at 65 percent of $500 million per year (AASHTO, 2020b). A committee report on the measure, S. Rept. 116-200, was filed on January 8, 2020, but no further action has been taken in the Senate on the measure. A.2.10 Reauthorization Proposals: Investing in a New Vision for the Environment and Surface Transportation in America Act In early June 2020, the House Transportation and Infrastructure Committee released its proposed surface reauthorization bill, the INVEST in America Act.2 The measure offers opportunities for flexing FAHP funds among several current and new programs, and it requires several 1 America’s Transportation Infrastructure Act of 2019, S.2303—116th Congress (2019–2020). Full text at https://www.congress.gov/bill/116th-congress/senate-bill/2302/text. 2 H.R. 116-437, 116th Congress (2019–2020), Investing in a New Vision for the Environment and Surface Transportation in America (INVEST in America) Act. Full bill text at https://transportation.house.gov/imo/media/doc/Final%20Bill%20Text%20of%20the%20INVEST%20in%20Am erica%20Act.pdf.

Literature Review A-7   adjustments to current accountability provisions contained in previous surface transportation reauthorizations as well as new provisions and reforms that provide both flexibility and increased accountability. Among the provisions of the proposed bill was Sec. 1109, transferability of federal-aid highway funds,3 which amends 23 U.S.C. § 126 to increase limitations to states’ fund transfer authority: • “Limit the transferability of Transportation Alternatives Program (TAP) funds unless the state runs a competition and is unable to distribute the suballocated funds.” • “Limit the transferability of railway crossing program funds unless the state demonstrates that it has met all its needs for the installation of protective devices at railway-highway grade crossings.” • “Limit transfer out of programs related to carbon pollution reduction and air quality but maintain flexibility by allowing up to 50 percent of apportioned contract authority per year to be transferred between the Carbon Pollution Reduction Program and CMAQ.” AASHTO summarizes the major impacts on program flexibility of the House proposed bill based on its analysis, which concludes that “[t]ransferability between core formula programs is drastically restricted” (AASHTO, 2020a). Major restrictions of program flexibility include: • Sets a new requirement that each state must obligate no less than 20 percent of its cumulative annual National Highway Performance Program (NHPP) and Surface Transportation Program (STP) apportionment (in any combination of the two), excluding STP funds suballocated by population and TA set-aside funds, on bridge projects or bundles of bridge projects. • A large number of new discretionary grant programs are carved out from the Highway Trust Fund, taking away dollars from core formula programs and increasing the administrative bottleneck at U.S. DOT. • Suballocation is increased for STP set-aside (TA) from 50 percent in the FAST Act to 66 percent of total program dollars. • Creates a new Carbon Pollution Reduction Program in the FAHP that expands eligibility for transit and passenger rail projects out of the Highway Account of the Highway Trust Fund. 3 H.R. 116-437, 116th Congress (2019–2020), Investing in a New Vision for the Environment and Surface Transportation in America (INVEST in America) Act, Section-by-Section Summary, June 2, 2020, https://www.congress.gov/116/crpt/hrpt437/CRPT-116hrpt437.pdf