The road industry -- state and local public agencies, and private contractor and supplier sectors alike -- reeled early this year as the Bush administration proposed a 27 percent cut in federal surface transportation funding from the previous fiscal year.

Stating that existing federal law gave it no choice -- but obliged to enhance federal cash flow to pay for defense enhancements in the War on Terror -- the Bush administration's budget proposal for fiscal year 2003 decreased surface transportation funding by $8.6 billion, to $23.3 billion, down from a record $31.7 billion in FY 2002. The industry reacted with alarm when the news was announced in January.

But at the annual meetings of both the American Road & Transportation Builders Association (ARTBA) and the Associated General Contractors (AGC), held in conjunction with Conexpo/ConAgg '02 in Las Vegas in late March, Federal Highway Administrator Mary Peters gave the glad tidings that the administration no longer would oppose full funding of the FY 2003 obligation ceiling as authorized under TEA-21, the Transportation Equity Act for the 21st Century.

Peters announced that the Bush administration will support restoring $4.4 billion in federal highway funding to states in its 2003 budget. While that would bring funding up to the full amount permitted under TEA-21, it still would represent a shortfall from the $4.6 billion extra for FY 2002 from the operative element, the Revenue Aligned Budget Authority (RABA) feature of TEA-21.

"The White House recognizes the impact on the economy and local economies and transportation projects," Peters said. "That has to be good news to you."

Earlier, in remarks Feb. 7 before the House Subcommittee on Highways and Transit, Peters said RABA adjustments provided significant additional highway spending over the past three years. "Thus far, states have received $9 billion more than they would have received under guaranteed levels. That's $9 billion that is already working in the economy," she said.

"Unfortunately, due to the recent economic slowdown and current projections of future highway trust fund receipts, the adjustment for FY 2003 will be a negative $4.369 billion," Peters told Congress, adding even with the negative calculation, over the life of TEA-21, RABA will have provided a net gain of $4.6 billion in highway spending.

Nonetheless, Peters strongly endorsed RABA and called it a fundamental principle for reauthorization of TEA-21 in 2003.
 "The calculation of the [RABA] adjustment is not a policy call," Peters said. "It is a budget calculation based in law. As we discuss the reauthorization of TEA-21, we need to look for ways to smooth out current positive and negative swings that result from the adjustments in order to make it more predictable. However, linking highway spending to receipts is a fundamental principle of TEA-21 and should not be abandoned on the eve of reauthorization."
 

Restoring RABA shortfall

The administration's response came as a mid-March U.S. House budget resolution sought to fund 2003 surface transportation at TEA-21's $27.7 billion, and a late-March U.S. Senate budget resolution sought to fund it at an even higher level, $1.2 billion above the $27.7 billion proposed by the House and Bush administration, to $28.9 billion.

That's less than FY 2002's record funding, but a record amount in any other year.

But even as these funding issues were being resolved, some oil exporting nations -- specifically Iran and Iraq -- threatened to cut off petroleum shipments to nations which supported Israel's spring military action against Arafat and the Palestinian Authority, presumably the United States.

Such a boycott -- while extremely unlikely, as these oil exporting nations desperately need the hard currency petroleum exports provide -- would drive U.S. gasoline prices up, depressing consumer demand and receipts of fuel taxes to the Highway Trust Fund, with future impacts on highway funding.
 

A drop after surpluses

After of a surfeit of federal surface transportation funds through the late 1990s, a sudden drop in funding for FY 2003 was necessitated by the same law that made the surpluses possible, the Revenue Aligned Budget Authority (RABA).

As contained in TEA-21, RABA is a statutory annual adjustment calculation of fuel and tire excise tax revenues that finance the Highway Trust Fund. RABA allows capture and allocation to states of Highway Trust Fund revenues in excess of the TEA-21 annual obligation ceiling for the following fiscal year.

Preceding surface transportation legislation -- such as the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), or the Surface Transportation Assistance Act of 1987 (STAA) -- typically would set high levels of annual "budget authority" or obligation ceilings, only to have significantly lower obligation ceilings set each year by budget appropriation committees.

This budgetary sleight-of-hand would enhance the federal budget cash flow at the expense of the highway program. Instead of all gas taxes going for surface transportation (including transit), a Certificate of Indebtedness (I.O.U.) would be written by Treasury for the difference and placed in the Highway Trust Fund account for future collection. RABA was conceived as a way to make sure all funds collected at the gas pump would be spent on surface transportation, as required by law.
 

The RABA bonus

President Bush's budget for FY 2002 fully funded the $27.2 billion guaranteed for highway programs under the TEA-21. It also invested $4.6 billion in RABA resulting from the higher than anticipated federal motor fuel tax revenues. With $739 million of additional Minimum Guarantee and Emergency Relief funds, the core highway program was funded at approximately $32 billion in FY 2002, a $2 billion increase from the fiscal year before.

Extraordinarily high levels of gasoline consumption in recent years, and low fuel prices, caused more gasoline to be consumed by American drivers than in the previous years, resulting in even more federal gas tax revenue to the Highway Trust Fund than was anticipated by TEA-21. RABA utilized that added income and federal surface transportation spending rose to unprecedented levels.

But RABA turns out to be two-edged sword. To oversimplify, if gas and tire excise tax income drops in a fiscal year, next fiscal year's RABA, if any, drops by the same amount. And if excise tax income in a fiscal year drops below the funding obligation limits contained in the authorizing legislation (TEA-21), that pound of flesh has to come out of the guaranteed authorized amount.

U.S. Department of Treasury officials who calculate Highway Trust Fund revenue attribute the negative-RABA to a decline in sales of gasoline, tires, trucks and trailers.

Also, the general economic recession acted as a catalyst for driving down HTF-related sales. Yet another contributing factor is the overestimation of HTF receipts for 2001, where actual receipts were well below projections. Congress has asked for a General Accounting Office (GAO) audit of Treasury's accounting of HTF related receipts, which is anticipated for release in May.
 

Ethanol hurts RABA

Also cutting into Highway Trust Fund revenue is the impact of the ethanol tax break. Now, ethanol (or gasohol, gasoline containing ethyl alcohol) is taxed federally at 13.1 cents per gallon, compared to 18.4 cents per gallon for regular gasoline. In addition, 2.5 cents of the ethanol tax is deposited in the General Fund. All of these ethanol users inflict the same damage and congestion on roads that straight gasoline users do.

The General Accounting Office (GAO) has estimated that the ethanol subsidy has cost the Highway Trust Fund -- that is, highway users -- $6 billion in potential revenue over the past four years. If the current tax structure remains in place, the trust fund could lose $20 billion over the next 11 years in potential revenue. All of this will impact future RABA accounting.

While the ethanol exemption is unpopular in the industry and highway lobby, politically it will be very difficult to remove, even in the context of TEA-212 reauthorization next year. One reason is that corn-growing Iowa is a major ethanol-producing state, and because the first caucus of the presidential campaign takes place in Iowa, presidential contenders seeking early momentum are quick to get behind ethanol in gasoline.
 

Fallout from negative RABA

The result of the "negative RABA" downwardly adjusts states' obligation limitation to $23.3 billion from the FY 2003 TEA 21-guaranteed level of $27.7 billion, and represents a 27 percent ($8.4 billion) drop from the $31.7 billion FY 2002 funding level.

"The short-term effect of this funding decrease is one that puts states' transportation implementation plans and priority projects in a precarious situation which will require state DOT officials to reprogram, reprioritize, delay, and reject projects in an attempt to accommodate this 'cliff' in federal-aid highway funding," said the National Governors Association. "This task is more daunting given the climate of rapidly shrinking state revenues and already distressed budgets."

Further, NGA said, it limits states' authority to issue bonds for capital improvement projects for which states heavily rely upon the steady, reliable stream of federal funding authorized under TEA 21, which guaranteed funding to ensure minimal disruptions to transportation projects that require multiyear outlays. An estimated 360,961 jobs nationwide would be at stake as a result.

"Mobility is a matter of economic security," said Michigan Gov. John Engler, NGA co-chair, at an American Association of State Highway & Transportation Officials (AASHTO) Washington Briefing, Feb. 27, where he was honored by the Foundation for Pavement Preservation (FP2) with its first President's Award for Pavement Preservation Excellence.

"The economy depends on good roads, good airports, access to railroads, intermodal opportunities to get the job done," Engler said. "States must have the necessary resources to develop and maintain transportation infrastructure that meets the needs of the economy."
 Accordingly, Engler decried the threatened cuts in federal highway funding. "As the co-chair of the National Governors Association, I have one primary objective when it comes to transportation: We must secure funds to replace the decline in revenue aligned budget authority, or RABA, funds. Every single state -- your states and my state -- will lose a third of their highway program at a time when both state budgets and the economy are in critical condition. We simply cannot afford to let this happen."

In support, the NGA has produced a letter signed by 46 of 50 governors urging Congress to fix the RABA problem.
 

Reauthorization compromised?

Even worse, the negative RABA has to potential to adversely impact TEA-21 reauthorization, required by Oct. 1, 2003 (see Green Advocates Seek Monumental Change in U.S. Surface Transportation Policy).  The lines are being drawn between various surface transportation advocacies as to how the next surface transportation act should be structured.

But because the preceding bill acts as a point of departure for the following act, all parties want to go into the reauthorization process for "TEA-3", as it's dubbed, with the highest level of spending possible for the final year. Negative RABA will draw this spending down going into reauthorization.

"Longer-term impact could be on the reauthorization of TEA-21 in 2003, which will provide highway funding beginning in FY 2004," the NGA said. "Due to the downward adjustment triggered by the negative-RABA in the last year of TEA-21, it could have the result of setting a significantly reduced funding base line for the lifetime of the next surface reauthorization law."
 

$30.1 billion program sustainable

Despite the technicalities of RABA, our Highway Trust Fund could support highway spending of $30.1 billion in FY 2003 without triggering cutbacks in future funding, according to testimony from the Congressional Budget Office (CBO) in late March before the House Highways and Transit Subcommittee.

In light of the negative RABA adjustment for FY 2003, congressmen asked CBO to determine what level of highway spending could be sustained by the Highway Trust Fund, reported AASHTO.

CBO's Kim Cawley said the balance in the trust fund could support $30.1 billion in FY 2003 highway spending without triggering cutbacks in future funding. If the FY 2002 highway spending level of $31.8 billion were projected over the next 10 years, the cash "balance" of the Highway Trust Fund would be depleted by FY 2006, based on current assumptions, she said.

And if highway programs are funded at the $27.7 billion base line level authorized in TEA-21, Cawley said, the balance of the Highway Trust Fund would drop from the current $18 billion to about $11 billion in FY 2005 before gradually increasing. She projected an improving picture for Highway Trust Fund revenues in FY 2003,
 Subcommittee Chairman Tom Petri (R-Wis.) said options to direct more revenue into the Highway Trust Fund would be examined during reauthorization of TEA-21, including the possibility of indexing the federal motor fuel tax to the rate of inflation. He also asked the U.S. DOT to examine whether there were other highway-related taxes that were currently going into the General Fund rather than the Highway Trust Fund.
 

Urban roadways hurting

Keeping the pot boiling in March was the release of a study which showed nearly one-fourth, or 23 percent, of major roads in the nation's largest urban areas have significant deterioration and need immediate repair or reconstruction.

The Road Information Program (TRIP) report, Rough Ride in the City: How Poor Road Conditions Increase Motorists' Costs, concluded that motorists in the nation's major cities are paying an average of $358 per motorist in extra vehicle operating costs (VOC) to drive on roads in need of repair.

"Motorists in our nation's largest cities are in for a rough ride every time they drive unless needed road improvements are made," said TRIP executive director Will Wilkins. "Many states are facing a double whammy because proposed cuts in federal programs are taking place at the same time that state budgets are being curtailed."

TRIP analyzed FHWA data for major urban areas, and found the 10 urban areas with a population of 1 million or more which had the highest percentage of roads in poor condition are Boston, New Orleans, Los Angeles, Detroit, New York, San Jose, San Francisco-Oakland, Oklahoma City, Sacramento and Grand Rapids. Another 27 percent of the nation's urban roads are rated in mediocre condition and currently or soon will be in need of repairs to return them to good condition.
 

California OKs dedicated taxes

In some good news, in early March, California voted in favor of Proposition 42, which dedicates all state gas taxes to highway and transit use. The measure passed with a 69 percent majority, and preserves the $1.4 billion collected yearly by the state in gasoline taxes.