Innovative Management of Federal Funds

Advance Construction and Partial Conversion of Advance Construction

Advance construction (AC) and partial conversion of advance construction (PCAC) are cash flow management tools that allow states to begin projects with their own funds and later convert these projects to Federal assistance.

How does it work?

AC allows a state to construct Federal-aid projects in advance of the apportionment and obligation of authorized Federal-aid funds. Under normal circumstances, states can "convert" advance-constructed projects to Federal-aid at any time sufficient Federal-aid funds and obligation authority are available. States may either convert and obligate the entire eligible amount, based on funding availability or, using PCAC, may obligate funds in stages.

PCAC allows states to convert, obligate, and receive reimbursement for a portion of the Federal share of project costs, removing the need to wait until the full amount of obligation authority is available. PCAC is used in conjunction with GARVEE bonds when Federal funds are obligated for debt service payments over a period of time.

What are the benefits?

AC can help facilitate construction of large projects, while maintaining obligation authority for smaller projects. PCAC eliminates a major single year "draw down" of Federal funds, and obligation of funds for the entire Federal share of a project, thereby making Federal-aid funds available to support a greater number of projects. This partial conversion technique can enable completion of a project earlier than under the conventional approach, avoiding construction cost inflation, and bringing the benefits of a completed facility to the public at an earlier date.

How is it used?

States have been using AC for a wide range of projects to expedite project construction, begin projects sooner, and improve cash flow. The Connecticut DOT advanced a $55.4 million major bridge project through partial conversion of a $35.7 million component. Connecticut spread its Federal-aid obligations for the project over two years, enabling it to redirect some funds to other smaller bridge projects.

Tapered Match

Tapered match enables the project sponsor to vary the non-Federal share of a Federal-aid project during development and construction so long as the total Federal contribution toward the project does not exceed the Federal-aid limit.

How does it work?

Under the tapered match approach, the non-Federal matching ratio is imposed on projects rather than individual payments. Therefore, Federal reimbursements 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 Federal-aid limit established when the project was authorized.

To ensure effective management of Federal funds, FHWA limits the use of tapered match to situations that result in expediting project completion, reducing project costs, or leveraging additional non-Federal funds.

What are the benefits?

Tapered match may be most useful in cases where the project 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 in time for project completion. Tapering may also be beneficial when a project sponsor needs to overcome a near-term gap in state matching funds, thereby avoiding delays in getting the project underway. Tapering also allows a sponsor to advance a project before fully securing capital market financing.

How is it used?

This technique may be used to facilitate a project when a new local transportation tax has been enacted, but revenue collections have yet to accumulate sufficient matching funds. Using tapered match, the project can move forward immediately with 100 percent Federal funds, allowing time for the tax revenues to accumulate. The locally generated revenues would be used to fund the final 20 percent share of project costs.

In Washington State, tapered match enabled the state DOT to proceed with a $35.9 million high-occupancy vehicle-lane project when state expenditure limits threatened to delay the project by more than a year. The DOT obtained Federal reimbursement of 100 percent of its project expenditures until a new budget cycle provided the spending authority for the state share.

Flexible Match

Flexible match allows a wide variety of public and private contributions to be counted toward the non-Federal match of Federal-aid projects.

How does it work?

The NHS Act and TEA-21 introduced new flexibility to the matching requirements for the Federal-aid program by allowing certain public donations of cash, land, materials, and services to satisfy the non-Federal matching requirement. These matching options include:

What are the benefits?

Flexible match provisions increase a state's ability to fund its transportation programs by:

How is it used?

In Maine, flexible match was used to advance the construction of an Auburn intermodal truck/rail transfer facility. The value of the private railroad's contribution of materials, equipment, and labor was credited toward the match.

Toll Credits

States may apply toll revenues used for capital expenditures to build or improve public highway facilities as a credit toward the non-Federal share of certain transportation projects.

How does it work?

Toll credits are earned when a state, a toll authority, or a private entity funds a capital highway investment with toll revenues from existing facilities. The amount of toll revenues spent on non-Federal highway capital improvement projects earns the state an equivalent dollar amount of credits to apply to the non-Federal share of a Federal-aid project. To utilize this tool, the state must certify that its toll facilities are properly maintained and must pass an annual maintenance of effort test to earn credits. By using toll credits to substitute for the required non-Federal share on a Federal-aid project, Federal funding can effectively be increased to 100 percent.

What are the benefits?

Toll credits provide states with more flexibility in financing projects. For example, by using toll credits, 1) Federal-aid projects can be advanced when matching funds are not available, 2) state and local funds normally required for matching may then be directed to other transportation projects, or 3) project administration may be simplified when a single funding source is used. States wishing to take advantage of the toll credit provision must apply toll revenues to capital improvements and meet the maintenance of effort test that may result in an increased investment in transportation infrastructure.

How is it used?

Toll credits are being used extensively by states with toll facilities. At the end of FY 2001, 20 states had accumulated $9.2 billion in toll credits. The credits are being applied in a variety of ways, depending on the state's needs. Missouri reserves its toll credits for situations where project matching funds are unavailable in order to increase Federal funding to 100 percent of project costs. Ohio uses toll credits as a match on GARVEE projects and also shares its toll credits with local government agencies for both highway and transit projects.

The Florida DOT has been applying toll credits on a statewide basis since 1993. Today the state is using toll credits on almost every new Federal-aid project, so that most of its Federal highway program is 100 percent Federally funded, freeing up state dollars for state-administered projects.