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

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4 Introduction The Federal-Aid Highway Program (FAHP) represents one of the largest grant programs in the federal domestic budget. It is an umbrella term that refers to the combination of individual categorical and discretionary grant programs that have evolved over time since 1916 and is codified under Title 23 of the United States Code (U.S.C.). This study investigates recent experience with statutory features that allow recipients of formula grants to shift the authority to use federal funds from one FAHP category to another, and even into other modes. The purpose of this research is to provide an understanding of how and why these features have been used, describe the benefits to state departments of transportation (DOTs) and metropolitan planning organizations (MPOs), and identify opportunities for optimizing their use. The FAHP’s features are unique. The program operates within a federalism model, with a combination of shared program stewardship delegated to state and local grantees, while many of its articulated program eligibilities are intended to achieve national goals under federal rules. Among its features are its combination of budget and funding structures that result from the dedication of federal user fees to the Federal Highway Trust Fund. Annual obligations control the rate at which the grants are executed, but multiyear authorizations typically give much latitude to grantees to manage their sizable programs, and contract authority reimburses states for expenditures as needed. This sets this program apart from many that can only operate through appropriated budget authority on an annual basis. The flexibilities that are written into the FAHP’s authorizing legislation can be traced to the programs that were defined and structured to address issues of national interest (e.g., construct- ing the Interstate Highway System, fixing unsafe bridges, and planning and improving post roads). However, in time, as more transportation needs have been elevated to national interest, individual program categories proliferated, in part to raise the profile of such issues and assure supporters that they would be addressed. Considering that the share of most of these programs is calculated by formula, apportioned based on statutory factors, the ultimate mix of the distribu- tion by program does not always fit the conditions and priorities of an individual state. A basic tenet of the FAHP, and a policy position that state DOTs have consistently argued for, is that flexibility is critically important to states’ ability to use these funds in their jurisdictions to carry out their goals. States administer their programs and manage how they use the FAHP. It was clearly recognized that there are significant differences in transportation needs across the country, a reflection of the diversity of states and communities (including many aspects such as legacy transport systems, land use patterns, demographics, modal use) and their values and goals. Thus, in constructing the federal assistance by categorical grant, there is an inherent balance between addressing national problems and tailoring the available funding to fit the jurisdiction. Features that provide additional flexibility to the grantees have been relied on to address this balance. Over time, one can argue that the eligibility of activities has broadened as the C H A P T E R 1

Introduction 5   programs have evolved, creating flexibility. With changes to the definition of “construction,” for example, many more project purposes and features can be addressed within core program categories. For those who manage the nuts and bolts of FAHP funding, the ability to transfer between provisions is not new. However, as the structure of the components of the FAHP has changed over time, it is reasonable to see that the individual and national uses of these techniques have changed. This research explored the factual and institutional questions that can build a better under- standing of the current use and effectiveness of the statutory fund transfer authority, including: • How much do states use the fund transfer authority (individually and collectively)? • Why is that the case? Are those responsible for programming funding aware of the provisions? Are the levels of overall federal funding small enough for some states (compared to their overall program) that transfers are not worth the effort? • What is the pattern of usage for those who take advantage of the fund transfer authority? Which categories are affected, and in which direction? How frequently is fund transfer done? • Why do states transfer FAHP funds? Is it part of an overall effort to optimize federal fund management? Is it a reaction to uneven funding compared to needs? Is it protection against federal rescissions? Is it a tool to tailor programs that are structured nationally to individual state needs? • Are there barriers in administration or strategy that limit the effectiveness of FAHP fund transfer authority from the point of view of grantees? This research took advantage of the available FHWA accounting records to document and update the use of these flexibility features across states with an appreciation for the variety of situations that contribute to such use. It also took advantage of interaction with senior state DOT officials and MPOs to seek a better understanding of the current dynamics that underpin the answers to these questions and identify additional relevant influences. This report documents the objectives, approach, and key findings of this research. The report is organized as follows: • Chapter 1 provides the background and objectives of this research and introduces the overall structure of this report. • Chapter 2 documents the approach taken to accomplish the research objectives, including desktop research and analysis as well as industry outreach to states, MPOs, and major industry groups. • Chapter 3 provides an overview of the transfer authority under the 2012 Moving Ahead for Progress in the 21st Century (MAP-21) and the 2015 Fixing America’s Surface Transportation Act (FAST Act). • Chapter 4 documents the key findings regarding transfer of funds among FAHP categories. This chapter presents the historical trends of funding transfers by state, analyzes the consid- erations that drive transfer decisions, and identifies the trade-offs, barriers, and opportunities for states and MPOs in relation to the authority to transfer funds among FAHP categories. • Chapter 5 documents the key findings regarding transfer of FAHP funds to programs admin- istered by the Federal Transit Administration (FTA). Similar to Chapter 4, Chapter 5 presents the historical trends of funding transfers by state, analyzes the considerations that drive transfer decisions, and identifies the trade-offs, barriers, and opportunities for states and MPOs in relation to the authority to transfer funds to other modal administrations, in particular the FTA. • Chapter 6 is a summary of the main conclusions from this research. • Appendixes A through F provide research tools and interim research products for reference.