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The Federal funds management techniques described in this chapter are designed to provide states with greater flexibility in managing Federal-aid highway funds. The principal objective of these management techniques is to ease restrictions on the timing of obligations and reimbursements and create a broader range of options for meeting matching requirements. While it is usual to think of the transportation financing challenge simply in terms of finding more money, sometimes the problem facing states and project sponsors has more to do with how best to align funds' availability with funding needs. For this reason the grant management strategies are commonly termed cash flow tools.
Expediting project construction through the use of these techniques can generate real economic returns through such benefits as travel time savings and safety improvements. The four techniques for managing Federal funds are summarized in the following table, with the details provided in the remainder of this chapter. These techniques are available to all states as part of the regular Federal-Aid Highway Program.
| Technique | What Does It Do? |
|---|---|
| Advance Construction (AC) and Partial Conversion of Advance Construction (PCAC) |
AC allows a state to begin a project even if the state does not currently have sufficient Federal-aid obligation authority to cover the Federal share of project costs. Under PCAC, a state may elect to obligate funds for an advance-constructed project in stages. |
| Tapered Match | With tapered match, the non-Federal matching requirement applies to the aggregate cost of a project rather than on a payment-by-payment basis. |
| Flexible Match | Flexible match allows states to substitute private and other donations of funds, materials, land, and services for the non-Federal share of funding for highway projects. |
| Toll Credits | States may use revenue from toll facilities as a credit toward the non-Federal matching share of certain highway projects. |
Advance construction and partial conversion of advance construction are cash flow management tools that allow states to begin projects with their own funds and only later convert these projects to Federal assistance. Advance construction allows a state to request and receive approval to construct Federal-aid projects in advance of the apportionment of authorized Federal-aid funds. Under normal circumstances, states "convert" advance-constructed projects to Federal aid at any time sufficient Federal-aid funds and obligation authority are available, and do so all at once. Under partial conversion, a state may obligate funds for advance-constructed projects in stages.
Under the Federal-Aid Highway Program, states receive annual shares of Federal obligation authority and then obligate, or commit Federal funds for individual projects throughout the fiscal year. The act of obligation commits the Federal government to reimburse expenditures on the project up to a predetermined matching share (usually 80 percent).
Advance-constructed projects differ from conventionally funded Federal-aid projects in that a state obligates Federal funds for an advance-constructed project after the project is started, rather than before. This technique allows a state to initiate a project using non-Federal funds, while preserving eligibility for future Federal-aid funds. Why would a state elect to use this technique? Under advance construction, a state can move a project forward even if available obligation authority is insufficient to cover the entire Federal share before construction starts. The requirement that states set aside obligation authority before beginning construction often presents difficulties when several large projects are being advanced at the same time, and can impede construction of other projects, particularly if the large projects consume a significant share of the state's annual obligation authority.
Advance construction has been part of the Federal-Aid Highway Program since 1956, but the TE-045 process and several subsequent changes to Federal law have now eased certain restrictions on its use. Section 308 of the NHS Act eliminated the requirement that future year authorizations be in effect one year beyond the fiscal year for which the advance construction application was sought. Now FHWA can approve an advance construction project at any time provided the project is on the state's transportation improvement program (STIP). This change provides greater flexibility to use advance construction based on anticipated apportionments beyond the final year of an authorization act. This flexibility was also important in making Grant Anticipation Revenue Vehicles (i.e., GARVEE bonds) feasible.
Partial conversion of advance construction is a relatively new form of advance construction that enables states to convert an advance-constructed project to a Federal-aid project in stages rather than all at once. This feature was implemented by FHWA through a Federal Register notice on July 15, 1995.
The resulting refinement to the advance construction procedure enables a state to tailor its use of Federal-aid obligation authority and receipt of subsequent cash reimbursements to match its cash flow needs. The tool is especially helpful in cases where the project is so large that an all-at-once conversion would consume so much of a state's obligation authority in the given year of conversion that the obligation would impact progress on other Federal-aid projects planned for that year.
In addition to securing project benefits earlier and improving cash flow, partial conversion is particularly useful when a variable revenue stream (e.g., sales taxes, development impact fees, local option taxes, and tolls) is dedicated to the cost of a project. At the start of a project, when there is no revenue history, the amount of Federal funding needed by the project may be uncertain. Partially converting the Federal share of the project once revenues have materialized economizes the use of Federal funds.
 AC/PCACSteps in the Process |
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All advance construction projects must be eligible for Federal assistance under Title 23 U.S.C. and must comply with the requirements that are attached to any other Federal-aid project. This is one of the reasons why a state must identify and receive Federal approval to advance construct any project that it intends later to convert to Federal aid.
A state may request advance construction designations for projects that will be funded from the following program categories:
Except for projects using NHS, IC, or IM funds, one of the following must be met to qualify for advance construction:
An advance construction project is processed in the same manner as a regular Federal-aid project, except that FHWA approval does not constitute a commitment of Federal funds on the project. The Federal obligation is created when the project is converted to a regular Federal-aid project. The project must be included on the STIP, and meet the tests of financial constraint.
The first step for a state considering use of advance construction or partial conversion of advance construction is to ensure that it meets the requirements for advance construction as summarized above and detailed in FHWA guidance.
The next step is to obtain Federal approval to designate a project for advance construction under a given program funding category (e.g., NHS or STP). At the time of approval, FHWA and the state will execute a project agreement. Even though the state is using its own funds to pay for design and construction, the state must ensure the project complies with all Federal-aid requirements in order to preserve eligibility for conversion to Federal aid at a later date. An advance construction project may be converted to a regular Federal-aid project at any time provided sufficient Federal apportionments and obligation authority are available. Following obligation, the state can submit a voucher and obtain reimbursement of eligible project costs up to the obligated amount.
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PCAC: An Example
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With partial conversion of advance construction, the state requests that only a portion of the Federal share of project costs be converted in a given period with the remainder converted at a later time provided that funds are available. Therefore, varying amounts of the project's eligible costs are obligated over time, depending on cash flow needs and the availability of obligation authority. This form of advance construction eliminates a major single year "draw down" of Federal funds, and obligation of funds for the entire Federal share of the project. Partial conversion of advance construction also makes bond and note financing more viable (see GARVEE discussion in Chapter 3).
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PCAC In Connecticut and Pennsylvania The following examples illustrate how state DOTs are using partial conversion of advance construction to manage capital for larger projects:
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Tapered match enables the project sponsor to vary the non-Federal share of a Federal-aid project over time, as long as the Federal contribution toward the project does not exceed the Federal-aid limit.
Since inception of the Federal-Aid Highway Program, Title 23 of the U.S. Code has required that states match Federal grants for individual highway projects on a payment-by-payment basis. Under this approach, states had to shoulder the required non-Federal matching share of project costs each and every time they sought reimbursement of eligible project costs. This requirement not only ensured that the state would pay the required non-Federal share over the life of a project's construction, but also that the state would do so at every step of the way to completion.
Following several years of experimentation with tapered match under the TE-045 innovative finance initiative, a legislative change was made in Section 1302 of TEA-21 removing the longstanding requirement for a payment-by-payment match. The removal of this restriction creates the option for states to use the tapered match approach within the context of the regular Federal-Aid Highway Program.
Under the tapered match approach, the non-Federal matching ratio is imposed on projects rather than individual payments. Thus, Federal reimbursement of state expenditures can be as high as 100 percent in the early phases of a project provided that by the time the project is complete, the overall Federal contribution does not exceed the statutory Federal-aid limit for the project in question.
States may request use of a tapered match approach for most projects eligible for Federal-aid assistance under Title 23. However, a few exceptions exist: tapered match cannot be used on advance construction projects, STP projects for which the non-Federal match is being provided on a program-wide basis, or projects that are financed with GARVEE bonds. These activities are considered to be inconsistent with the intent of tapered match.
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Tapered
Match Steps in the Process |
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States typically find tapered match most useful in cases where the government
sponsor of a Federal-aid project lacks sufficient funds to match Federal grants
at the start of the project, but expects to accumulate the match over the life
of the project.
For example, tapered match may be beneficial when states need to overcome a near-term gap in state matching funds. As another example, tapered match may benefit a project when a local government has recently enacted a local transportation tax but has not yet begun to collect the revenues. Using tapered match, the project can move forward immediately using 100 percent Federal funds, allowing time for the transportation tax revenues to accumulate. The locally generated revenues would be used to fund the final 20 percent of project costs. As a third example, states can also benefit from use of tapered match in cases where they seek to advance a project before fully securing capital market financing.
It is necessary for the state to document the rationale for using tapering. The use of tapered match is subject to the approval by the FHWA Division Office, which can authorize use of tapered match for a given project in cases where the approach would:
The reason for these conditions is to assure that a benefit occurs when Federal funds are paid out first.
As noted above, states must obtain the appropriate FHWA Division Office approval before using tapered match on any given project. The first step in the process is to submit a request to use tapered match. This request must be accompanied by a statement indicating that the use of tapered match will achieve at least one of the three objectives noted above.
As with any Federal-aid project, the legal Federal share for a project is established at the time that the Division Office approves the project. The Federal share may be expressed either as a pro rata percentage of total project costs or as a lump sum amount. Either way, upon approval of the project the total amount of Federal funds being obligated for the project is entered on the project agreement. It is possible for this amount to be revised when a contract for the project is actually awarded. The agreement also specifies the point at which the state will provide the non-Federal share of funds.
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Tapered Match in Washington State In Washington State, limits on state expenditures threatened to delay by a year or more a $35.9 million project to construct high-occupancy vehicle lanes and make related road improvements for State Route 520, near the high-tech cities of Bellevue and Redmond. By using tapered match, the Washington State DOT was able to obtain Federal reimbursement of 100 percent of its expenditures on the project until the maximum Federal contribution had been reached. By that time a new state budget cycle had begun, providing the state DOT with the spending authority for completion of the project with 100 percent state funds. Tapering together with the use of partial conversion of advance construction allowed this project to get underway two years sooner than might otherwise have been possible. |
Figure 2.1 presents an illustrative example of a tapered match project with total project costs of $200 million. In this example the required non-Federal match is equal to 20 percent of total project costs, or $40 million. The project construction timeframe is four years. During the first two years of construction, the Federal contribution is equal to 100 percent of project costs. The state begins to provide the non-Federal share starting in year 3, and by the end of year 4 has provided its entire $40 million share of funding for this project - that is, the entire 20 percent of total contributions to the project.
Figure 2.1 - Illustrative Tapered Match Project
Flexible match allows a wide variety of public and private contributions to be counted toward the non-Federal match for Federal-aid projects.
The Federal-Aid Highway Program has traditionally required that recipients of Federal assistance themselves contribute toward the total cost of any given project. Historically, Federal law placed limits on both the types of contributions that can satisfy the matching requirement and the sources of those contributions. Cash contributed by state and local governments could satisfy the matching requirement while other types and sources of funding for Federally-assisted transportation projects simply reduced the total project cost. The standard matching requirement continued to apply to the remaining project cost.
Provisions in the NHS Act and TEA-21 introduced new flexibility to the Federal-Aid Highway Program's matching requirements by allowing certain public donations of cash, materials, and services to satisfy the non-Federal matching requirement. These legislative changes, known collectively as flexible match provisions, increase a state's ability to fund its transportation programs by:
The majority of flexible match opportunities now available were authorized under Section 322 of the NHS Act and are codified at Section 323 of Title 23. TEA-21 broadened the states' flexible matching options by expanding the opportunity to match Federal highway funds with certain other types of Federal funds. These changes are codified principally at Sections 120(k), 120(l), and 133(e) (5)(c) of Title 23.
TEA-21 also authorized program approvals for the STP and transportation enhancement programs. These provisions are codified in Section 133(e) of Title 23. Program approval allows a number of projects to be approved as a single activity. The matching requirement would then apply to the program instead of individual projects.
Any Federal-aid project for which a non-Federal match is required may employ some form of flexible match, though it is necessary for the project sponsor (generally, a state DOT) to obtain approval for use of flexible match from the FHWA Division Office beforehand. States have found that flexible match is useful in cases where a public or private partner (e.g., a sponsor of a new industrial park) has a clear interest in seeing a given project advance and is willing to make a contribution toward the project's construction. Any project employing flexible match must comply with all provisions that apply to any other Federal-aid highway project.
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Flexible
Match Steps in the Process |
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Most of the conditions related to the use of flexible match concern the types
of contributions that are eligible to offset the standard non-Federal matching
requirements. The critical part of this eligibility determination is the combination
of the source of the contribution (private, local, state, or Federal) and the
nature of the contribution (cash, materials, land, services, or buildings and
equipment). Table 2.1 lists the basic tests that determine whether a given non-Federal
contribution can satisfy Federal-aid matching requirements under the flexible
match provisions.
Table 2.1 - Eligibility for Credit Against Non-Federal Match
| Type of Donation | Source of Donation | Conditions |
|---|---|---|
| Funds | Private - Yes | Funds must be received during the period between project approval and submittal of final voucher |
| Funds | State - Yes | Same as above |
| Funds | Local Govt. - Yes | Same as above |
| Land (right-of-way) | Private - Yes |
Property must be appraised to determine fair market value Value must be included in total project cost Property may be donated anytime during the project development Donation does not influence environmental assessment |
| Land (right-of-way) | State - Yes | Same as above |
| Land (right-of-way) | Local Govt. - Yes | Same as above |
| Materials | Private - Yes | Materials must be appraised to determine fair market value |
| Materials | State - No | |
| Materials | Local Govt. - Yes | Materials must be appraised to determine fair market value |
| Services | Private - Yes | Grantee must document the market value of services |
| Services | State - Limited | Publicly-contributed services count toward match for only Transportation Enhancement projects |
| Services | Local Govt. - Limited | Publicly-contributed services count toward match for only Transportation Enhancement projects |
Table 2.2 displays the conditions that attach to use of other Federal funds
to satisfy the Federal-aid highway matching requirements.
Table 2.2 - Federal-to-Federal Matching Opportunities
| Source of Federal Grant Funding | Eligible Categories of Highway Projects |
|---|---|
Federal Land Management Agencies, including but not limited to:
Authorized at 23 U.S.C. 120(k). |
Federal highway
projects funded under the following program categories:
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Federal Lands Highway Program
Authorized at 23 U.S.C. 120(l). |
Federal highway projects funded under the programs shown above and that serve or provide access to Federal or Indian lands, except Scenic Byways |
Federal programs
with special legislative authorization to match other Federal funds,
including funds provided under:
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Any Federal-aid highway project |
The fair market value of the non-monetary contributions discussed in Table 2.1
must be determined and documented in order for the credit to be applied as non-Federal
match. Also, the value of the public or private contribution must be included
in the total project cost; it cannot both reduce the cost of the project and
be credited towards the required non-Federal share of the remaining project
costs.
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Flexible Match: An Example The following example offers a hypothetical illustration of a flexible match project. Assume that:
The non-Federal matching requirement could be met through a private donation of right-of-way as well as a cash contribution. Assuming that the value of the donated right-of-way is $500,000 and the developer contributes an additional $500,000 in cash, the entire $1 million donation would account for the 20 percent non-Federal match necessary for the $5 million project. |
The first step in using flexible match is for a state or local government to identify the non-Federal funds, materials, property, or services or eligible Federal grant funding that could be applied to a given Federal-aid project. If the state finds it desirable to use those contributions to offset non-Federal matching requirements, the next step is to request FHWA Division Office approval. As part of this process, it is essential to document the value of any non-monetary contributions during the approval process.
Once FHWA has approved use of flexible match, Federal-aid highway funds can be obligated for the remaining Federal share of project costs. Donations, except donations of land, must be made after the date the project receives FHWA approval to proceed with the project using flexible match, but prior to approval of the final reimbursement voucher. Land may be donated anytime during project development.
States may apply toll revenue used for capital expenditures to build or improve public highway facilities as a credit toward the non-Federal matching share of certain transportation projects.
The United States has a long history of financing roads, bridges, and tunnels with toll receipts. In some states, independent toll authorities have been established to build, maintain, and operate these facilities. Until the 1990s, toll receipts, concession sales, or right-of-way leases used to finance public highways for interstate commerce were not recognized as investments that could potentially be applied as the state's share of Federal-aid projects. The toll credit provisions first authorized in ISTEA changed that.
Now, Section 1044 of ISTEA (Public Law 102-240) permits a state to use certain toll revenue expenditures as a credit toward the non-Federal matching share of all programs authorized by ISTEA and Title 23. Section 1111(c) of TEA-21 incorporated into 23 U.S.C. 120(j) toll credit provisions initially set forth in ISTEA. This provision allows the Federal obligation to be increased up to 100 percent of project costs to the extent that credits are available.
The credit the state can earn for any Federal fiscal year is determined by the amount of toll revenue used by toll authorities for capital expenditures to build or improve public highway facilities that serve interstate travel. To qualify for the credit, the state's total non-Federal highway and transit transportation capital expenditures must equal or exceed the average of prior years. This is called the maintenance of effort (MOE) calculation. The MOE test is required at the time the credit amount is established. Once a credit amount is appropriately established, this credit will remain available until used by the state.
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Flexible Match in Pennsylvania and Maine
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The toll facility that generates the toll credits must be open to public travel. It may be operated by a public, quasi-public, or private toll authority. The amount of credit earned is based on toll revenues that the toll authority subsequently spends on eligible expenses for public highway facilities (including bridges, tunnels, and certain ferry systems) that serve interstate commerce. Expenditures for routine maintenance (e.g., snow removal, mowing), debt service, or costs of collecting tolls cannot be included. All such expenditures must have been made entirely from non-Federal sources.
The revenues may derive from toll receipts, concession sales, right-of-way leases, interest earnings, or bond or loan proceeds that are backed by these revenue streams. State grants are not considered to be revenues generated by the toll authority and cannot be used in calculating earned toll credits.
States may apply toll credits toward the non-Federal matching share of any Federal-aid highway project, except for emergency relief projects. Toll credits may also be applied toward the non-Federal matching share of transit projects eligible under Chapter 53 of Title 49. The state must establish a special account to track toll credits as they are earned and used.
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Toll
Credits Steps in the Process |
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Phase 1: Toll Credit Approval
Phase 2: Toll Credit Use
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In order to apply earned toll credits toward the non-Federal matching share of an eligible project, the state must make a request to FHWA at the time the project is put under agreement (project agreement for obligation of Federal funds) or before the funds are transferred to another Federal agency (i.e., Federal Transit Administration) responsible for administering the "receiving" project. The amount of credit (up to the total non-Federal share) should be debited from the special account set up for tracking approved toll credits.
Similar to toll credits, state and local funds expended on off-system bridges may be credited to the non-Federal share of Federal-aid bridge projects. The provision, codified in Title 23, Section 144(n), allows amounts exceeding 20 percent of construction costs of certain off-system bridges to be used to reduce the amount of state and local funds needed to match Federal-aid bridge replacement and rehabilitation projects.
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Toll Credits in Pennsylvania and Florida
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