In light of the increasing federal-aid highway program funding and concerns over future federal revenues for highways, you asked us to provide information on past trends in the federal, state, and local capital investment in highways, and how federal-aid highway program grants influence the level of state and local highway spending. We responded to the first part of your request in June 2003. 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. In addition, this report identifies characteristics associated with differences among states’ levels of effort for highways (see app. III).
To update information on federal, state, and local capital investment in highways, we obtained 2002 (the most recent year available) expenditure data from the Federal Highway Administration. We converted these expenditure data to 2001-year dollars to coincide with the data in our previous report,1 which presented data from 1982 through 2001.
To assess the influence that federal-aid highway grants have had on all state and local highway spending, we reviewed and synthesized the research literature on this issue. Our literature review revealed a number of studies that used statistical models to estimate the influence of federal funding on state spending. These models examined different time periods, employed different statistical methods, and considered different potential social, demographic, economic, and political factors that may affect state highway spending decisions. None of the models used in the studies we reviewed included the most recent data now available on highway funding, and none examined whether the effect of federal grants on state spending changed during the time period covered in the study. Therefore, based on the models used in the earlier studies, we developed our own statistical model of state highway capital and maintenance outcomes to estimate the fiscal effects of federal highway funding on state highway spending. The purpose of our statistical model was to isolate the effect of federal grants on highway spending in states by controlling for other factors that affect state spending decisions. Our model therefore considered a wide range of potential factors such as economic conditions and the size of a state’s highway system, that may affect state spending choices. In addition, our
1GAO, Trends in Federal and State Highway Investment (GAO-03-744R).
Appendix I
Objectives, Scope, and Methodology
model included the most recent data available and examined whether the effect of federal grants on state spending changed during the time period.2 A more detailed description of the literature and our statistical model is contained in appendix II. Finally, our model was reviewed by experts in the Department of Transportation (DOT) and peer reviewed by three authors of the earlier studies on the fiscal effects of federal highway grants. These experts and authors generally agreed with our methods, and we made revisions based on their comments as appropriate.
To address the implications of the effect of federal highway grants on state and local highway spending and options raised by these implications, we reviewed pertinent legislation and congressional actions affecting the federal-aid highway program, including goals, funding trends, program features, and financing mechanisms. We reviewed the Government Performance and Results Act and DOT’s strategic and performance plans and reports for 2003 and 2004. We then evaluated how our model results and other analysis on the existence of substitution affect the design and performance of the federal-aid highway program.
Finally, to identify state characteristics associated with their effort to fund highways from state resources, we defined a state’s level of effort broadly to include both a state’s and its local governments’ spending for highway maintenance and capital construction relative to the personal income of state residents.3 We determined a multivariate analysis is required so that other factors, in addition to the state characteristic under consideration, can be taken into account and held constant. (See app. III for results.) To perform this multivariate analysis, we utilized the same statistical model of state highway spending used to analyze the fiscal effect of federal highway grants (see app. II). The variables expected to affect state highway spending fall into four broad categories: (1) fiscal capacity, (2) the cost of transportation services to the representative voter/consumer (tax price),
2We adjusted for the changing cost of highway services over time by deflating expenditures using the chain-price deflator for state and local government streets and highways published by the Bureau of Economic Analysis.
3Our previous report defined level of effort more narrowly as highway capital spending as a percentage of gross state product. We have adopted a broader definition for the current analysis that is consistent with the scope of this report’s focus on highway spending broadly defined to include capital as well as maintenance spending. Also consistent with this report, we have used the personal income of state residents rather than gross state product to reflect states’ fiscal capacities.
Appendix I
Objectives, Scope, and Methodology
(3) federal grants, and (4) indicators of state preferences for highway spending. The specific variables we considered are listed in
table 6.
We conducted our work from August 2003 through July 2004 in accordance with generally accepted government auditing standards.
Appendix II