Limitation on Obligations
The foregoing discussion has described the routine procedures for financing the Federal-Aid Highway Programs (FAHP) that have contract authority: authorizing legislation, distribution of funds, obligations, and reimbursements. Again, because of contract authority, the flow of these program funds is not directly affected by the annual appropriations process. This permits a smooth and stable flow of Federal-aid to the States, but this very benefit can be a disadvantage to overall Federal budgeting. A major function of the appropriations process is to assess the current need for, and effect of, Federal dollars on the economy. The appropriations process has been the traditional way to control Federal expenditures annually. But the highway program, with multiple-year authorizations and multiple-year availability of funds, would appear to be exempt from this annual review. The question arises: how can the highway program be covered under annual Federal budget decisions?
The answer is to place a limit, or ceiling, on the total obligations that can be incurred for the FAHP during a year. By controlling obligations annually, the program may be made more responsive to budget policy. As was discussed in the previous section, once an obligation is made, the Federal government must reimburse the States when bills become due. That "promise" must be kept. Consequently, it is impossible to place direct controls on outlays. However, Congress can limit obligations, thereby preventing that promise–and the subsequent payment–from being made. It should be pointed out that a limitation on obligations in a given year does not affect the scheduled apportionment or allocation of Federal-aid highway funds after they are authorized. The obligation ceilings set in the SAFETEA-LU for fiscal years 2005 through 2009 are part of the guaranteed level of spending58 (see discussion under "Appropriations"). Each year, the appropriations legislation will confirm or modify these ceilings.
A limitation on obligations acts as a ceiling on the sum of all obligations that can be made within a specified time period, usually a fiscal year. In general, a limitation is placed on obligations that can take place during a certain fiscal year, regardless of the year in which the funds were apportioned or allocated. A few, specific programs, however, have limitation which may only be used for that program, and which may be carried over for several years or until it is used. This will be discussed in more detail later in this section.
There are certain programs within the FAHP that are exempt from the obligation limitation. These programs include the Emergency Relief program, certain balances of programs exempt under previous Acts, and a portion of the Equity Bonus program ($639 million per year). Accordingly, obligations from these programs do not count against the obligation limitation.59
The obligation limitation is divided among programs and the States based on a multi-step process provided in the SAFETEA-LU60, but this process can be changed for a single year by the annual DOT Appropriations Act. A step-by-step analysis of the obligation limitation distribution process, using FY 2006 as an example, is shown in Appendix J.
Under this distribution process, limitation is first reserved, or set aside, for administrative expenses, the Bureau of Transportation Statistics, the Highway Use Tax Evasion program, and carryover balances for allocated programs from previous years.61
The limitation that remains after these initial set-asides are made is then compared to the total remaining new authorizations subject to the limitation for the year.62 This ratio of total limitation to total authorizations (the "limitation ratio") is used in the remaining steps of the distribution process to determine how much limitation each program or State receives.
Next, the limitation ratio is used to calculate how much limitation is set aside for certain programs—High Priority Projects, the Appalachian Development Highway System, Projects of National and Regional Significance, National Corridor Infrastructure Improvement program, Transportation Improvements, and designated Bridge projects. The limitation set aside for these programs remains available until it is used. Similarly, $2 billion in limitation is set aside for $2 billion of funding for the Equity Bonus program and this limitation is also available until it is used; that is, it is "no-year" limitation.63 It should also be noted that the lop off provision (described below) does not apply to these programs; i.e., the amount of the authorizations that may not be used due to the limitation simply carries forward to the next year.
Using the limitation ratio, limitation is then set aside for remaining allocated programs.64 The amount of limitation each allocated program receives is calculated by multiplying the new authorization for the fiscal year of each program by the limitation ratio. The SAFETEA-LU also provides that the limitation reserved for research programs through this process is available for 3 years instead of expiring at the end of the year.65
In years when the total limitation is less than the total new authorizations, the authorizations for these allocated programs are reduced to the amount of limitation they receive.66 The authorizations that are removed or "lopped off" from these programs are then distributed to the States as additional funding that can be used on STP-eligible projects. For example, in FY 2006, the National Scenic Byways Program was authorized at $29,700,000 and the limitation ratio for the year was 87%, resulting in $25,839,000 in limitation being set aside for the program. Consequently, the authorization was reduced to $25,839,000 and the excess $3,861,000 was distributed to the States.67 A complete list of affected programs is provided in Appendix K.
After these set-asides are made, the balance of the limitation is then distributed among the States with each State's portion of the limitation being based on the State's relative share of the total of apportioned funds (subject to the limitation) to all States for the fiscal year.68 This limitation is available only until the end of the fiscal year.
The law also provides for a redistribution on August 1 of each fiscal year of the obligation ceiling from those States and programs unable to obligate their share of the full ceiling to other States that are able to obligate more than their initial share of the ceiling.69 This ensures the total limitation which is available for only 1 year will be used. The multi-year and no-year limitation that may be carried over is not subject to this provision.
Table 1 illustrates how an actual limitation on obligations affects the highway program.
|Unobligated Balance (9/30/2005)||$32.2|
|Unobligated Balance with Special Carryover Limitation:|
|FY 2005 No-Year Limitation||-8.7|
|FY 2005 Multi-Year Limitation||-0.5|
|Unobligated Balance without Carryover Limitation||23.0|
|Total Funding Available without Carryover Limitation||61.1|
|FY 2006 Limitation||-35.7|
|Amount Not Available for Obligation in FY 2006||25.3|
It is important to recognize that the distribution and redistribution of the individual State ceilings do not constitute a grant or a retraction of apportioned and allocated sums. A State already has received apportionments or allocations as a result of authorizations in highway acts; the limitation is only how much of the State's total unobligated balance of apportionments and allocations that the State may obligate during a given fiscal year.
Although a ceiling on obligations restricts how much funding a State may use in a fiscal year, the ceiling does give States more flexibility than an outright funding reduction. Each State receives a single, overall ceiling for the fiscal year that covers all of its programs, except those that are either exempt or receive special or no-year limitations. Within this overall limitation, the State has the flexibility to determine the best combination of program funds to obligate in each category (e.g., STP, NHS, CMAQ) based on its individual needs, as long as it does not exceed the ceiling in total. Also, the unobligated balance of apportionments or allocations that the State has remaining at the end of any fiscal year is carried over for use by that State during the next fiscal year.
History of Highway Limitations
The highway program has been subject to limitations since 1966. In the early years, the executive branch limited obligations. The common term for this action was "impoundment." But, a turnabout came with enactment of the Congressional Budget and Impoundment Control Act of 1974.70 This act established a formal process for the Executive Branch and the Congress to follow in setting limits on the use of authorized funds.
Beginning with FY 1976, Congress became the branch of government that places annual limitations on obligations. However, the President's budget each year has recommended a level for the ceiling to be imposed on the program. This recommendation is only a proposal to Congress for enactment. The Congress will consider it but may or may not actually follow the recommendation.
Congress places limits on the program through a legislative act, most frequently in an appropriations act since limitations are a form of budget control. But they may also appear in other acts such as surface transportation authorization acts or reconciliation bills.
Highway programs having contract authority receive special consideration in that contract authority allows the obligation of funds based on an authorization act only. These highway programs are not affected by the annual adjustments in funding levels made to appropriated budget authority programs through the appropriations process. In order to control the highway program and make it responsive to current budgetary conditions, Congress imposes limits on the amount of multi-year Federal-aid highway apportionments and allocations that can be obligated each year. These limitations may be proposed by the executive branch but must be enacted by Congress to take effect. Limitations do not take back funds already provided to the States; they only slow the rate of obligation. The obligation limitation does result in the permanent loss of authorized funds from certain allocated programs through a "lop off" provision; these "lopped off" funds are not lost to the FAHP, as they are apportioned to the States.