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U.S. Economic Development and Benefit-Cost Policy for Transportation in the Era of TEA-21

Martin Weiss, Transportation Specialist, FHWA

HEPI-20, 400 7th St. S.W. Washington D.C. 20590

202-366-5010 (v) 202-366-3713 (f)

and Glen Weisbrod

Economic Development Research Group

2 Oliver Street, 9th floor, Boston, Massachusetts 02109

617-338-6775 extension 11 (voice)

gweisbrod@erdgroup.com

Author's Note: Just before beginning work on this paper, the two authors were speaking about an earlier article that was a precursor to this paper. One of us (Weiss) remarked that Congress had, in the TEA-21 era, addressed economic development policy but only OMB has addressed benefit cost policy. This seemed to fit with another of the songs on the REM 1987 album, Document. This album had enough song titles to produce section headings for both the paper "A Brief History of Economic Development and Highways" as well as this paper. As mentioned in the Author's note in the "A Brief...", the use of music as an organizing principle for the paper has positive results as a mnemonic for people to remember the paper.

King of the Birds

A thumbnail sketch of these two subjects must begin with a distinction between them. Economic Development policy in transportation is generally thought of as using improved transportation to facilitate, inaugurate, coordinate or motivate new jobs, new business or tax paying entities or preserve existing ones in a certain geographic area (typically a municipality, a county or group of municipalities/counties). Benefit-Cost policy is generally thought of as using analysis to distinguish between projects or groups of projects on the basis of which will likely produce a higher benefit/cost ratio or (less frequently) a higher net benefit. The use of the analysis is to choose (based on the analysis and several other considerations) some projects or groups of projects to be implemented sooner and others to be implemented later. Benefit-cost also has a more technical meaning to some, namely the net present value (NPV) of a specific action. An important point to realize is that very few formal NPV analyses are actually done. Thus the remainder of this paper will use the phrase in the broader meaning[1].

Neither economic development policy nor benefit-cost policy began with TEA-21; neither will end with TEA-21. In the TEA-21 era, the practice of both is a product mostly of the long term evolution of the art/science of the two subject areas, less of specific mandates/guidance in TEA-21 and not-at-all a mean idea that FHWA calls its own.

Briefly, the status of economic development policy at the dawn of the era were:

USDOT policy: none

USDOT guidance on technical analysis: none

USDOT statements on the subject: Transportation and Economic Development are linked[2]

USDOT special funding for economic development: Appalachian Highway Program

State DOT policies: Some State DOTs recognize economic development as a goal of the state transportation plan, some State DOTs consider certain projects or certain corridors to be 'economic development projects' or 'economic development corridors', economic development funding unknown

Local agency policies: some seeking funds for economic development, some trying to avoid more development or avoid certain types of development

Similarly, the status of benefit-cost policy at the dawn of the era were:

USDOT policy: Analysis sometimes done at the gross program level e.g., using HERS model and HPMS 'data', TERM for transit; project b-c analysis is not required[3]

USDOT guidance: For some feasibility studies use of FHWA guidance required[4], for some transit projects cost effectiveness study required; computer models requiring substantial input available and are sometimes used for alternatives analysis, major investment analysis or transportation/land use analysis[5]

State DOT policy: some mentioning (or inference) of benefit-cost as justification for certain Statewide priorities e.g., preservation before expansion

State DOT practice: some studies done using variety of b-c methods, some b-c computations in EISes

Local agency policies: some mention of b-c or cost effectiveness in transportation plan

Not Exhuming McCarthy

TEA-21, changed this situation, but not by requiring economic development or benefit-cost or even by addressing them directly. Instead, the change was by virtue of reemphasis of certain planning factors and, more importantly, by the evolution (or genesis) of certain funding programs. Certainly, there was not sharpening of accounting stones.

Specifically, the metropolitan and statewide planning factors required in by TEA-21 are: economic vitality, safety, accessibility, environment, integration, efficiency and preservation[6]. These were a reduction from the more extensive list of factors under ISTEA. Of these factors, efficiency (value of time saved by highway users) and safety (value of accidents and fatalities avoided) are typically incorporated quantitatively in benefit-cost calculations; the others are typically not incorporated quantitatively. TEA-21, also included provisions to increase the considerations of local agencies in project selection[7], which presumably indirectly leads to more economic development projects in some areas since a number of local agencies have that as a local goal and more quality of life projects in other areas where local agencies have that as a local goal[8].

As noted above, certain funding programs clearly related to economic development or benefit-cost evolved or were begun under TEA-21. For example:

The Appalachian Highway Program was continued (this program began in the 1960s). Under TEA-21, the program was authorized[9] at a level of $450 million per year[10], about 30% higher in current dollars than in the ISTEA era. The Appalachian Highway Program is about as close to a pure economic development program as there is in the federal aid program.

The National Corridor Planning and Development and Coordinated Border Infrastructure Program was initiated at a level of $140 million per year beginning in 1999[11]. The program statute explicitly used the words 'economic growth and development' as a consideration in the selection of projects for funding but safety, efficiency and other aspects of projects are also to be considered. However, a great number of the applications were specifically for economic development.

The Scenic Byways program was continued (this program was begun under ISTEA). Under TEA-21, the program was authorized at a level of $23.5 million to $26.5 million per year [12]. Although the program statute does not use the words 'economic development', the fact that the program is about tourism, which in some parts of the country is the predominant economic development program available.

The Transportation and Community and System Preservation Pilot Program was initiated at a level of $20 million to $25 million per year[13]. Although the program statute mostly deals with land use and environmental issues, development is mentioned also (and many of the applications for funding have been primarily for economic development).

The Value Pricing Pilot Program was continued (this program was begun in a somewhat different form in ISTEA). Under TEA-21, the program was authorized at a level of $7 million to $11 million per year[14]. Although the phrase 'benefit-cost' does not occur, the program is clearly designed to create user benefits by allowing better use of highway capacity (e.g., allowing SOVs to 'buy' access to underused HOV lanes).

A number of other initiatives related to economic development are connected with TEA-21 in various ways but their status is in flux and thus their influence on policy is more difficult to determine, e.g., welfare-to-work, the Delta Regional Initiative.

Lightnin' Hopkins

As important as the actual TEA-21 language are the administrative actions of the FHWA, State and local agencies in response to that language and to internal policies. Among the most discernable such responses are:

FHWA began development of guidance to measure the impact of highway improvement in terms of economic growth. This guidance was completed in FY 2001[15].

FHWA began the process of defining economic development by developing a definition for a congressionally required initiative[16]. The definition for the initiative assumes the desirability of a spatial transfer of economic activity to areas of long-term high unemployment.

In both of the above activities, FHWA choose to begin by concentrating on rural economically depressed areas because the rural areas are easier to analyze (less background economic 'noise') and because Congressional language in the history of the initiative favored working with economically depressed areas. However, it is not out of the question that areas that are not economically depressed but that had population declines since, say, the 1950s could be considered in the future.

Probably most important of all, FHWA personnel were visited by numerous delegations seeking discretionary funding for highway improvements with the ultimate purpose being economic development. These delegations frequently contained high level elected officials. Similarly, during the project selection period for these discretionary programs, many such officials, including US Representatives and Senators sent letters advocating these kinds of projects in low lands, timberlands, bad lands and high lands. Not coincidentally, many projects in the discretionary programs noted above, were effectively earmarked for projects that were economic development related.

With respect to benefit-cost, FHWA also adjusted the analytical process used to report on the conditions and performance of the Nation's Highways and Bridges, continued to support benefit-cost software developed before TEA-21 and began new efforts to look at benefit-cost methodology[17]. Existing benefit-cost practice has a number of fairly well known problems. For one thing, it is fairly expensive and there are numerous cases of individual benefit-cost studies running into the millions. For another, there is no general agreement on how to (or even whether it is desirable to) quantify the various social and environmental benefits and costs associated with highway (or transit) improvements. Additionally, some benefits of transportation are entirely neglected in existing practice, e.g., current practice places a zero time value on freight when it is known that, especially in a just-in-time economy, the timeliness of delivering products is critical in a number of industries, to take one concrete example, a cement mixer caught in a three hour traffic jam may lose much of the value of its content. Also, there is the well-known problem that the value of life as used in regulatory studies varies by agency within the Federal government. Finally, there has never been a good way to anticipate, within benefit-cost analysis, the vulnerability of high profile urban projects (highways and public transit) to have significant cost escalation as project definition changes[18].

The One I Love

September 30, 2003 will be the sunset of the TEA-21 era. A reasonable extrapolation of current activities would place the status of economic development and benefit-cost policy at the following points at this time:

FHWA will have concluded some additional research on the extent of the perceived need for highway economic development and on the actual impacts of highway improvements undertaken for that reason. Additionally work will be concluded or underway to assess the likelihood that individual economic development proposals can be distinguished on the basis of their value; the ones we love vs. the ones we leave behind, hopefully, a simple process to occupy the mind. The ability to perform this kind of distinguishing is proportional to the ability to inform any reauthorization proposals in the field of economic development or to have a robust policy on the subject. It is possible that there will also be additional information on the economic benefits of high speed ferries or transit stations, however, the difficulty of doing analysis in urban areas makes it unlikely that information will be very definitive.

FHWA will also have concluded additional research on benefit-cost related activities. However, FHWA's use of research in this area is constrained by a number of controls, e.g., the OMB circular A-94 on discount rates and direction from the Office of the Secretary of Transportation. However, it is conceivable that the additional research will justify formal USDOT or FHWA guidelines on this subject. More probable is the continuing evolution of different States[19] who use components of benefit-cost analysis or other methodologies for choosing which projects to advance and which to leave behind.


[1] Considerable additional information on this distinction is provided in "Development of Benefit-Cost Policy in the Era of TEA-21" by Glen Weisbrod of the Economic Research Development Group and myself in a paper prepared for the Transportation Association of Canada, Benefit-Cost Analysis Symposium, February, 2001

[2] Linking the Delta Region with the Nation and the World, An Update by the Federal Highway Administration on Progress Achieved in Transportation and Employment in the Lower Mississippi Delta Region; FHWA with assistance from numerous Federal, State, local and quasi governmental agencies and other individuals and agencies; December 1995

[3] USDOT's requirements for grants and cooperative agreements is at: http://www.dot.gov/ost/m60/grant/49cfr18.htm

[4] FHWA's feasibility study guidance is at: http://www.fhwa.dot.gov/planning/border_planning/corbor/feastudy.cfm and incorporates both the narrow (NPV) view and broader public policy view of benefit-cost.

[5] STEAM and SCALDS are computer models for this available at: http://www.fhwa.dot.gov/steam/ and http://www.fhwa.dot.gov/scalds/scalds.html respectively

[6] Title 23 U.S.C. sections 134(g) and 135( c) respectively.

[7] Title 23 U.S.C. 135(d)

[8] The caveat in this sentence is because no definitive classification exists as to what an economic development project or a quality of life project.

[9] Section 1117 of TEA-21

[10] Actual obligation authority for authorizations under TEA-21 is limited each year by the terms of section 1102 of TEA-21. Typically, obligation authority has been a bit less than 90% of authorizations but it varies each year.

[11] Sections 1118 and 1119 of TEA-21 with the same obligation authority provision as the Appalachian Highway Program (AHP)

[12] Section 1219 of TEA-21 with same obligation authority provision as the AHP

[13] Section 1221 of TEA-21 with same obligation authority provision as the AHP

[14] Section 1101(a)(12) of TEA-21 provides the funding (with same obligation authority provision as the AHP) but refers to section 1012(b) of ISTEA for program function.

[15] Using Empirical Information to Measure the Economic Impact of Highway Investments, Economic Development Research Group, Inc. and Cambridge Systematics, Inc. for FHWA, 2001

[16] Senate report 106-55 accompanying S. 1143, May 27, 1999, pg 96 and House report 106-355 accompanying H.R. 2084, September 30, 1999, pg 81

[17] For example, see presentation later in this conference on benefit-cost analysis for freight

[18] Cost overrun all stars are fairly well known in both highways and transit mega projects and the USDOT has increased its monitoring of such projects.

[19] Indiana and Wisconsin, for example have developed their own methodologies.

Updated: 02/07/2013
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