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Financing Federal-aid Highways

Federal-aid Financing Procedures

The financing cycle for the Federal-aid Highway Program (FAHP) begins when Congress develops and enacts surface transportation authorizing legislation, such as the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). For a specified period of years (the duration of coverage is not mandatory), the authorizing act not only shapes and defines programs, but also sets upper limits (authorizations) on the amount of funds that can be made available to the Secretary of Transportation, acting through the FHWA and other departmental agencies, to carry out these programs.13

Budget Authority

Once Congress has established these authorizations, the next question is when do they become available for obligation. The license to proceed with Federal programs is called "budget authority." There are two types of budget authority: "contract authority," which is available for obligation without further Congressional action, and "appropriated budget authority," which cannot be distributed and used until a second piece of legislation, an appropriations act, is passed.14 Both concepts are described in the following paragraphs.

Appropriated budget authority. Most Federal programs operate using appropriated budget authority, which requires a two-step process to implement. The congressional passage of authorizations is only the initial step. This, in itself, does not permit the program to begin, but only sets an upper limit on program funding. The program may start, i.e., the authorizations may be distributed and used, only after passage of a second piece of legislation, the appropriations act. In an appropriations act, the Congress makes available the amount that can actually be used for the program. It is at this point that the program can proceed. In other words, "budget authority"–the approval to distribute, spend, loan, or obligate funds–has been granted through the appropriations act at the level of the appropriations, which may be equal to or lower than the originally authorized level of funding.

An example of an appropriated budget authority program in the SAFETEA-LU is Roadway Safety Improvements for Older Drivers and Pedestrians.15 SAFETEA-LU authorizes "such sums as may be necessary," rather than specific dollar amounts, and funds will only be distributed for this program if subsequently provided in an appropriations act.

Figure 2 shows the typical procedural steps for appropriated budget authority programs.

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Figure 2. – Appropriated Budget Authority Programs.

Contract authority. Most of FHWA's programs, however, do not require this two-step process. Through what is termed "contract authority" (a special type of budget authority), authorized amounts become available for obligation according to the provisions of the authorization act without further legislative action. With respect to the FAHP, funds authorized for a fiscal year are available for distribution via apportionment or allocation (both concepts will be discussed in a subsequent section of this report) on the first day of that fiscal year (October 1). The use of contract authority, first legislated for the highway program in the Federal-Aid Highway Act of 1921, gives the States advance notice of the size of the Federal-aid program at the time an authorization act is enacted and eliminates much of the uncertainty contained in the authorization-appropriation sequence.

The financial procedures for contract authority programs are shown in Figure 3.

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Figure 3. – Contract Authority Programs.

To have contract authority, a Federal-aid highway program must meet the following two criteria:

1) Chapter 1 reference. The authorization must be encompassed in Chapter 1 of Title 23, United States Code (U.S.C.), or its authorizing language must refer to Chapter 1. The primary wording conferring contract authority states that the Secretary of Transportation shall distribute funds that have been authorized16 and the authorizations "shall be available for obligation on the date of their apportionment or allocation or on October 1 of the fiscal year for which they are authorized, whichever occurs first."17 As stated earlier, apportionments and allocations will be discussed later in this section.

2) Trust funded. The program must be financed from the Highway Trust Fund (HTF). This link between the HTF and contract authority programs has existed since enactment of the Congressional Budget and Impoundment Control Act of 1974. Because one of the main purposes of that act was to give Congress greater control over Federal spending, it sought to reduce the number of programs that received budget authority prior to passage of appropriations acts, the legislation through which Congress annually meters spending. However, Congress also realized that there were certain programs, such as the highway program, that required advance knowledge of the size of future funding commitments to do long-range planning and to operate smoothly from year to year. Thus, the 1974 Budget Act permits several exceptions to the standard two-step, authorization/appropriation process. One of these is for programs whose new budget authority is derived from trust funds, 90 percent or more of whose receipts are user-related taxes.18 The FAHP falls into this category since it is supported by the HTF, and was thus allowed to continue to operate with contract authority.

It should be recognized that, by definition, contract authority is unfunded and a subsequent appropriations act is necessary to liquidate (pay) the obligations made under contract authority.

Reimbursable Nature of the Program

It is important to understand that the FAHP is not a "cash up-front" program. That is, even though the authorized amounts are "distributed" to the States, no cash is actually disbursed at this point. Instead, States are notified that they have Federal funds available for their use. Projects are approved and work is started; then the Federal government makes payments to the States for costs as they are incurred on projects.19 Furthermore, the amount of cash paid to the States reflects only the Federal share of the project's cost. The step-by-step procedures related to distributing and using authorized amounts are discussed later in this section under "Distribution of Funds."


The law provides for some programs to be funded through deductions made prior to distribution of authorizations, such as the deduction made to finance metropolitan planning activities mandated by Section 134 of Title 23, U.S.C. Under SAFETEA-LU, the deduction is equivalent to 1.25 percent of the authorizations from IM, NHS, STP, CMAQ, and HBRRP.20 These funds are distributed to each State through a formula prescribed by law and are made available to Metropolitan Planning Organizations (MPOs) by the State, subject to the approval of the Secretary.21

Although the deduction for metropolitan planning is now the only deduction applied across multiple programs,22 other funds may be deducted for particular purposes. For example, a deduction of $30 million per year is made from the NHS authorization to fund the Alaska Highway program.23 Another example is the deduction of $10 million per year from the STP authorization to fund On-the-Job Training/Supportive Services.24

A list of these deductions over the period of the SAFETEA-LU can be seen in Appendix C.

Distribution of Funds

Once these deductions have been made from the authorized amounts, the FHWA distributes the remainder (unless there is a penalty situation, as described below) among the States based on formulas (apportionments) and other procedures (allocations) as prescribed by law.

Apportionments. The distribution of funds using a formula provided in law is called an apportionment. An apportionment is usually made on the first day of the Federal fiscal year (October 1) for which the funds are authorized.25 At that time, the funds are available for obligation by the State in accordance with the State's approved transportation improvement program.

A list of apportioned programs, as well as a description of the formulas by which the funds are distributed, is contained in Appendix D.

At the time of an apportionment, certificates denoting the sums deducted and the exact amount of each apportionment are issued by the FHWA, generally to the State's transportation agency. These certificates officially notify the States of the new funding available to them for each program. States then have the opportunity to request the Federal government to approve the obligation of funds in the various categories, thereby promising to reimburse the States later. Again, it is not cash that is apportioned.

When funds are distributed by apportionment, every eligible State is assured of receiving some portion of the amount distributed. Further, once an apportionment is made to a State, it cannot be taken away except by a congressional action (or by lapsing, which will be discussed later in this section).

Penalties. In order to enforce certain national priorities, the law may require the Secretary to take action that prevents a State from receiving/using its full apportionment. The action may be taken when the State does not comply with a required provision of law. Types of actions include the following:

Appendix E contains a complete list of penalties associated with FHWA programs.

Earmarking of apportioned funds. Federal highway law requires that certain sums be used only for special purposes once they are apportioned to the States–

Further distribution of apportioned funds. To promote the fair and equitable use of funds and to meet certain priorities, the remaining apportionments (after earmarkings) may be required by law to be further distributed within the State.

Surface Transportation Program. Of the remainder of the authorization after earmarking, 62.5 percent must be reserved in the following areas in proportion to the relative share each area constitutes of the State's population:

  1. urbanized areas of over 200,000 population (the funds for which are further suballocated to each such area within a State based on the population of the area)28, and
  2. other areas of the State. Out of this portion, the State must reserve in rural areas below 5,000 population an amount equal to 110 percent of the amounts apportioned to the State for the Secondary Program in FY 1991.29

The remaining 37.5 percent can be used anywhere in the State.30 Appendix F outlines the flow of funds for the Surface Transportation Program.

Highway Bridge Replacement and Rehabilitation Program. At least 15 percent of a State's HBRRP apportionment must be used for public bridge projects that are not on a Federal-aid highway.31 The 15 percent requirement can be waived whenever the Secretary determines that this expenditure is not needed.

Disadvantaged Business Enterprises. Unless the Secretary determines otherwise, not less than 10 percent of the SAFETEA-LU authorizations for highway, transit, and research programs must be spent with small business concerns owned and controlled by socially and economically disadvantaged individuals.32

Allocations. Although most highway program funds are distributed to the States through apportionments, some categories do not have a legislatively mandated distribution formula. Distributions of funds when there are no formulas in law are called "allocations" and may be made at any time during the fiscal year.

In most cases, allocated funds are divided among States with qualifying projects using criteria provided in law. Some allocations are made entirely according to provisions in the law and others, such as the National Scenic Byways Program, allow for some discretion on the part of the Secretary in selecting recipients. Because of the limited funding for, and discretionary nature of, these programs, not every State will receive an allocation in a given fiscal year. If a State receiving an allocation does not use it within a specified period of time, it can be withdrawn and reallocated to other States.

Appendix G contains a list of allocated programs.

In some cases, Congress directs how certain allocated funds are to be distributed by requiring that particular projects are to receive specific amounts of funding. This may be done either in the legislative language or by including statements of congressional intent in the committee reports accompanying the legislation. Examples of congressionally directed funds in SAFETEA-LU include High Priority Projects33 and Transportation Improvements34.

It is important to note that in distributing Federal-aid highway funds, whether by apportionment or allocation, the entire amount of the authorization will be distributed (except in the case of a penalty situation, as discussed earlier).

Funding equity. Federal-aid highway funds for individual programs are apportioned by formula using factors relevant to the particular program. After those computations are made, additional funds are distributed to ensure that each State receives an amount based on equity considerations. In SAFETEA-LU, this provision is called the Equity Bonus35 (replaces TEA-21's Minimum Guarantee) and ensures that each State will be guaranteed a minimum rate of return on its share of contributions to the Highway Account of the Highway Trust Fund, and a minimum increase relative to the average dollar amount of apportionments under TEA-21, and that certain States will maintain at least the share of total apportionments they each received during TEA-21. An open-ended authorization is provided, ensuring that there will be sufficient funds to meet the objectives of the Equity Bonus.

The three elements of the Equity Bonus computation are as follows:

All but $2.639 billion annually of Equity Bonus funding is programmatically distributed among certain programs–IM, NHS, Bridge, CMAQ, STP, and HSIP. Amounts programmatically distributed to the programs take on the eligibilities of those programs. The remaining $2.639 billion has the same eligibilities as STP funds, but is not subject to the STP set-asides or suballocations. Of this remainder, $639,000,000 is exempt from the obligation limitation and $2 billion receives special no year obligation limitation.


When new apportionments or allocations are made, the amounts are added to the program's unused balance from previous years. For example, newly apportioned NHS funds are added to any existing balance of unused (unobligated) NHS funds. This situation arises because Federal-aid highway funds are available for use (obligation) for more than one year. Their availability does not terminate at the end of the fiscal year, as is the case with many other Federal programs.

Period of Availability. As specified in law, most of the major Federal-aid program funds are available "…for a period of three years after the last day of the fiscal year for which the funds are authorized…"36 Thus, they are available for 4 years. For example, FY 2006 NHS funds apportioned on October 1, 2005, are available until September 30, 2009. It is also possible that some funds may be available until they are expended (such as for High Priority Projects), and are known as "no-year" funds. Appendix H lists major program categories for which new authorizations are provided by the SAFETEA-LU, and their period of availability.

Lapse. Should a State not obligate a particular year's funding within the period of availability, the authority to obligate any remaining amount lapses–it is no longer available.37 An exception to this lapsing provision is the HBRRP apportionment. In the unlikely event that HBRRP funds are unused after 4 years, they would be pulled back from that State and redistributed to the other States.38

When a State obligates funds, it is assumed that the oldest funds in a given category are obligated first. Through this firstin, firstout method, the oldest funding still available for obligation is considered to be used first. When funds lapse, no cash need be returned to the Federal government since there was never any cash distributed.


The level of authorizations reflects Congress' relative priority among the many Federal-aid funding categories. However, the States may have differing needs or priorities. In response to this, the law provides flexibility in the use of specific sums,39 such as by permitting transfers to be made among certain apportioned highway programs. Appendix I contains a list of the options for transferring funds among the programs.

The law also allows for States to request the transfer of funds among entities (e.g., between FHWA and the Federal Transit Administration, and from one State to another or to the FHWA to fund one or more eligible projects) for ease of administration. In these instances, transferred funds are still used for the original purpose.


An obligation is a commitment–the Federal government's promise to pay a State for the Federal share of a project's eligible cost. This commitment occurs when the project is approved and the project agreement is executed.40 Obligation is a key step in financing. Obligated funds are considered "used" even though no cash is transferred.

Obligation also is the step in the financing process under contract authority programs where budgetary controls may be imposed. If such controls are necessary, they are usually achieved by the imposition of limitations on the FAHP obligations (this is discussed later in the "Limitation on Obligations" section).

Federal Share

With a few exceptions, the Federal government does not pay for the entire cost of construction or improvement of Federal-aid highways. To account for the necessary dollars to complete the project, Federal funds must be "matched" with funds from other sources.

Federal share percentages. Unless otherwise specified in the authorizing legislation, most projects will have an 80 percent Federal share.41 Exceptions include–

Appendix H shows the basic Federal share for selected programs.

Sources for matching funds. The required matching funds can come from the following sources:

  1. State and/or local governments' funds;
  2. private contributions;
  3. credit for donated private property or land lawfully obtained by the State or local government without the use of Federal funds;50
  4. toll revenue credits may be applied to the non-Federal share of certain highway and transit projects,51
  5. other Federal agencies, if specifically authorized in law, such as:
    • --Federal land management agency funds may be used toward the non-Federal share of any Federal-aid highway project the Federal share of which is funded under title 23 or chapter 53 of title 49;52
    • --funds from other Federal agencies may be applied to meet matching requirements for transportation enhancement projects;53
  6. Federal Lands Highway Program funds, for Federal-aid projects that provide access to or within Federal or Indian lands.54
  7. Recreational Trails funds may be used to match other Federal program funds for purposes that would be eligible under the Recreational Trails program. Funds from any other Federal program may be used to fulfill the non-Federal share requirement for Recreational Trails projects, for purposes eligible under the program from which the funds are derived.55


The FAHP is a reimbursable program. States are not apportioned cash but rather are notified that a balance of Federal funds is available for their use, meaning that the State can incur obligations, begin projects, and then later be reimbursed for eligible costs incurred. The project need not be completed, however, before a State begins to receive reimbursement. Depending upon the type of the project, the time elapsing from obligation to reimbursement can vary from a few days to several years.

While payments normally are made to the States, if projects have been initiated on toll facilities under the jurisdiction of a public authority in a State, reimbursements can be made directly to that public authority if requested by the State transportation department.56

The normal sequence of events for reimbursement is:

  1. Work is done by a contractor.
  2. The contractor sends a bill to the State and the bills for all work done throughout the State are processed by the State.
  3. Vouchers for the bills are sent electronically by the State to the FHWA for review and approval.
  4. The FHWA certifying officer certifies the State transportation department's claim for payment.
  5. Certified schedules are submitted to the Treasury Department.
  6. The Federal share of the cost for all projects on the vouchers is transferred directly from the Treasury Department to the State's bank account by electronic fund transfer.

It is possible that steps 3 through 6 may occur on the same day. The timing of the Federal payment to the State is governed by an agreement between the State and the U.S. Treasury in accordance with the Cash Management Improvement Act of 1990.57 The FHWA's payments are generally deposited in the State's account on the same day payments to the contractor are made.

This sequence repeats, often beginning again before the previous round is completed. This is illustrated in Figure 4.

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Figure 4. – Reimbursement.


Page last modified on June 28, 2016
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