States and Localities Invest More in Highways Than the Federal Government; However, Recent Federal Investment Has Outpaced State and Local Investment

The Nation’s capital investment in its highway system has doubled in the  last 20 years, and during that time period as a whole, state and local  investment in highways outstripped federal investment in highways—both  in terms of the amount of and growth in spending. Most recently, in  2002, states and localities contributed 54 percent of the Nation’s capital  investment in highways, spending $35.7 billion, while the federal  government contributed 46 percent or $30.7 billion in real terms. Thus, from 1998 through 2002, federal  investment increased 40 percent, while state and local investment  decreased by 4 percent. Evidence Suggests Federal Highway Grants Have Increasingly Been Used to Substitute for Rather Than Supplement Spending from States’ Own Resources

The preponderance of evidence suggests that increases in federal-aid  highway grants influence state and local governments to substitute federal  funds for funding they would have otherwise spent on highway projects  from their own resources. Specifically, the structure of the federal-aid  highway program creates an opportunity for substitution because states  typically spend substantially more in state and local funds than is required  to meet current federal matching requirements. If states substitute  some of the increase in federal funds for their own funds, then total  highway spending may increase, but not by as much as it would have had  substitution not occurred. These results are roughly consistent with previous studies that, when taken  together, also seem to suggest increasing substitution rates over time. Substitution May Be Limiting the Effectiveness of Strategies to Accomplish the Federal-Aid Highway Program’s Overall Goals

The trends in funding and probable substitution described in this report  imply that substitution may be limiting the effectiveness of strategies  Congress has put into place to help the federal-aid highway program  accomplish its overall goals. In part, this is because, while Congress can dedicate  federal funds to highways, it cannot prevent state highway funds from  being used for other purposes. Despite congressional efforts to increase the federal investment in the  highway system and to ensure that funds collected by the federal  government for highways are used for that purpose, due to probable  substitution, the sizable increases in dedicated federal funding that  Congress has provided for highways have not translated into  commensurate increases in the Nation’s overall investment in its highway  system. Adopting such an option could also be seen as  recognizing that the ability of states to meet a variety of needs and fiscal  pressures might be better accomplished by providing states with federal  funding for highways through a more flexible federal program. While some options are mutually exclusive, others could be  enacted in concert. The opportunity to better align the federal-aid highway  program with performance goals and outcomes comes at a time when both  houses of Congress have already approved separate legislation to create a  National Commission to examine future revenue sources to support the  Highway Trust Fund and to consider the roles of the various levels of  government and the private sector in meeting future surface transportation  financing needs. Thus, this commission may be an appropriate  vehicle through which to examine these options for the future structure  and design of the federal-aid highway program. This report (1) updates  information on trends in federal, state, and local capital investment in  highways; (2) assesses the influence that federal-aid highway grants have  had on state and local highway spending; (3) discusses the implications of  these issues on the federal-aid highway program; and (4) discusses options  for the federal-aid highway program that could be considered in light of  these issues.
Why GAO Did This Study

In 2004, both houses of Congress approved separate legislation to reauthorize the federal-aid highway program to help meet the Nation's surface transportation needs, enhance mobility, and promote economic growth. Both bills also recognized that the Nation faces significant transportation challenges in the future, and each established a National Commission to assess future revenue sources for the Highway Trust Fund and to consider the roles of the various levels of government and the private sector in meeting future surface transportation financing needs. This report (1) updates information on trends in federal, state, and local capital investment in highways; (2) assesses the influence that federal-aid highway grants have had on state and local highway spending; (3) discusses the implications of these trends for the federal-aid highway program; and (4) discusses options for the federal-aid highway program.

What GAO Found

The Nation's investment in its highway system has doubled in the last 20 years, as state and local investment outstripped federal investment--both in terms of the amount of and growth in spending. In 2002, states and localities contributed 54 percent of the Nation's capital investment in highways, while federal funds accounted for 46 percent. However, as state and local governments faced fiscal pressures and an economic downturn, their investment from 1998 through 2002 decreased by 4 percent in real terms, while the federal investment increased by 40 percent in real terms. Evidence suggests that increased federal highway grants influence states and localities to substitute federal funds for funds they otherwise would have spent on highways. Our model, which expanded on other recent models, estimated that states used roughly half of the increases in federal highway grants since 1982 to substitute for state and local highway funding, and that the rate of substitution increased during the 1990s. Therefore, while state and local highway spending increased over time, it did not increase as much as it would have had states not withdrawn some of their own highway funds. These results are consistent with our earlier work and with other evidence. For example, the federal-aid highway program creates the opportunity for substitution because states typically spend substantially more than the amount required to meet federal matching requirements--usually 20 percent. Thus, states can reduce their own highway spending and still obtain increased federal funds. These trends imply that substitution may be limiting the effectiveness of strategies Congress has put into place to meet the federal-aid highway program's goals. For example, one strategy has been to significantly increase the federal investment and ensure that funds collected for highways are used for that purpose. However, federal increases have not translated into commensurate increases in the nation's overall investment in highways, in part because while Congress can dedicate federal funds for highways, it cannot prevent state highway funds from being used for other purposes. GAO identified several options for the future design and structure of the federal-aid highway program that could be considered in light of these issues. For example, increasing the required state match, rewarding states that increase their spending, or requiring states to maintain levels of investment over time could all help reduce substitution. On the other hand, the ability of states to meet a variety of needs and fiscal pressures might be better accomplished by providing states with funds through a more flexible federal program--this could also reduce administrative expenses associated with the federal-aid highway program. While some of these options are mutually exclusive, others could be enacted in concert with each other. The commission separately approved by both houses of Congress in 2004 may be an appropriate vehicle to examine these options.