Section 1111(c) of the Transportation Equity Act for the 21st Century (TEA-21) has incorporated into 23 U.S.C. 120(j) toll credit provisions initially set forth in Section 1044 of ISTEA. Under Section 120(j) a State is permitted to use certain toll revenue expenditures as a credit toward the non-Federal matching share of programs authorized by Title 23 (except for the emergency relief program) and for transit programs authorized by Chapter 53 of Title 49.
In general, the Section 1044 requirements have not been significantly modified as codified in Section 120(j) except as follows:
- Effective June 9, 1998, toll credits can no longer be applied to FHWA's emergency relief program funds. This includes credits previously earned under Section 1044 as well as credits established under 23 U.S.C. 120(j).
- Additional flexibility is available in calculating the maintenance of effort determination beginning with Federal fiscal year (FFY) 1998. This flexibility concerns calculation of the 3-year average used as part of the determination. This is discussed further in the implementing guidance below (see two-year rule).
The following provides implementing guidance for 23 U.S.C. 120(j) as well as consolidating into one document the previous guidance for Section 1044 issued by memoranda dated June 22, 1992, September 2, 1992, April 3, 1995 and April 29, 1996.
Determination of Amount of Credit
The amount of credit earned is based on revenues generated by the toll authority (i.e., toll receipts, concession sales, right-of-way leases or interest), including borrowed funds (i.e., bonds, loans) supported by this revenue stream, that are used by the toll authority to build, improve or maintain highways, bridges or tunnels that serve interstate commerce. The following requirements apply:
- The toll facility generating the revenue must be open to public travel.
- The toll authority may be a public, quasi-public or private entity.
- The amount of credit is based on expenditures (actual cash outlays) by a toll authority for capital improvements to build, improve or maintain public highway facilities that carry vehicles involved in interstate commerce (the degree does not matter). It cannot include expenditures for items such as routine maintenance work (i.e., snow removal, mowing), debt service or costs of collecting tolls. Further, such expenditures must have been for improvements paid for entirely without Federal funds. These improvements can be on facilities which have had prior Federal funding.
- Toll authority expenditures are based on when the actual expenditures are made regardless of when the toll authority revenue is generated. For example, if funds are raised through the issuing of bonds that will later be repaid from toll revenues, the actual expenditure of the funds raised from the bonds represents the amount used in the credit determination.
- Expenditures for preliminary engineering or right-of-way acquisition for upcoming construction projects can be counted when calculating the credit amount.
- Expenditures can include the initial construction of a toll authority's own facility provided these construction costs are to be repaid with toll revenues.
- Expenditures can include revenues collected from a toll ferry provided the ferry serves as a link on a public highway.
- Funding grants received by a toll authority from the State DOT or State legislature are not considered to be revenues generated by the toll authority and expenditure of these grants cannot be included when calculating the credit amount.
- The amount of the toll credit earned for a given Federal fiscal year (FFY) is based on the prior year's expenditures. For example, for a toll credit to be earned in FFY 1998, a State must determine if it had qualifying toll authority expenditures during the prior year, in this case FY 1997. In determining the 12-month period to use for the prior year's expenditures, a State can use the 12-month period represented by the FFY or either the State or toll authority's fiscal year if the financial data is more readily available. In any case, whatever 12-month period is used in the first credit determination must continue to be used in later determinations.
- For chartered multi-State toll entities, the amount of credit must be divided equally among all the charter States.
- A credit for any given FFY can only be earned if a State satisfies the maintenance of effort determination, as described below, for that year.
Determination of Maintenance of Effort (MOE)
To be able to earn a credit, a State must satisfy the MOE determination. This determination covers a State's non-Federal transportation capital expenditures over a 4-year period. The expenditures in the last year of the 4-year period must exceed the annual average of the expenditures in the preceding three years of the 4-year period.
A State may select one of three alternate 4-year periods for the MOE determination as follows:
- MOE Alternate 1 - This alternate uses the 4 years prior to the FFY for which a credit is being determined. For example, if a toll credit is to be earned for FFY 1998, a MOE Alternate 1 determination would compare FY 1997 expenditures with the annual average expenditures for FYs 1994, 1995 and 1996.
- MOE Alternate 2 - This alternate uses the 4-year period beginning 3 years prior to the FFY with the fourth year being the FFY itself. For example, if a toll credit is to be earned for FFY 1998, a MOE Alternate 2 determination would compare FY 1998 expenditures with the annual average expenditures for FYs 1995, 1996 and 1997.
- MOE Alternate 3 - This alternate uses the 4-year period beginning 2 years prior to the FFY and extending through the year after the FFY. For example, if a toll credit is to be earned for FFY 1998, a MOE Alternate 3 determination would compare FY 1999 expenditures with the annual average expenditures for FYs 1996, 1997 and 1998.
Both MOE Alternates 2 and 3 represent increased risk for a State since these alternates rely on current and future year non-Federal transportation capital expenditures that could be significantly affected by economic turndowns or political changes. Should a State not meet the future expenditure levels and in turn fail to be able to certify that a specific MOE test has been met, any credit earned based on the MOE determination would be lost. This would require immediate replacement of Federal funds with State funds on projects where this credit has been used and could create a cash flow problem for a State.
MOE Alternates 2 and 3 can only be used beginning with credit determinations for FFY 1995 or subsequent FFYs. Once a State has selected the MOE alternate it wants to use, it must continue to use this same MOE alternate in all future MOE determinations.
Two-year rule - Beginning with the credit for FFY 1998 or subsequent years, this special rule can be applied when making calculations under any of the previous MOE alternates. Normally, the MOE determination is made by comparing the fourth year of a 4-year period against the average of the three previous years. Under the special 2-year rule, if any one of the three previous years exceeds the average of the other two years by 130 percent, then the higher year can be dropped from the 3-year average computation and instead the average is based on only two years. This is illustrated as follows:
Example MOE determination for FY 1998 based on normal 3-year average vs. two-year rule --
A State wishes to establish a credit for FFY 98 and plans to use MOE Alternate 1. Its expenditures for the 4-year period for MOE Alternate 1 are:
Using the normal process, 440 would be compared to the previous 3-year average of (420+560+400)/3 or 460. In this case, 440 is less than the previous 3-year average of 460 so the State fails to meet the MOE test.
Using the 2-year rule, for the previous three years used in the average, one year, 560, exceeds the average of the other two, (420+400)/2= 410, by more than 130 percent (560 is greater than 410 x 1.3 or 533). As a result, the high year, 560, can be dropped from the average computation. In this case, 440 is then compared to the 2-year average of 410 and the State meets the MOE test.
The two-year rule provides some flexibility to account for large spikes in expenditures. The two-year rule can be applied at any time for FFY 1998 or subsequent FFY credit determinations.
The following requirements also apply to the MOE determination:
- The calculation of the non-Federal transportation capital expenditures must include expenditures to build, improve or maintain (but not routine maintenance) public highways. As a minimum, the calculation must include such expenditures by the State for public highways. Expenditures would include projects wholly funded by the State plus the State's shares of all federally funded highway projects. At the State's option, the calculation can also include qualifying expenditures by toll authorities or local officials for public highways, or expenditures by the State or local authorities on transit systems within the State. For consistency, those types of expenditures included in the first MOE determination must be included in all subsequent MOE determinations.
- In determining the 12-month period to use for the fiscal years in the MOE determination, similar to the credit determination, a State can use the 12-month period represented by the FFY or the 12-month period for the fiscal year(s) of the entities whose expenditures are included in the MOE. Whatever 12-month period(s) used in the first MOE determination must continue to be used in later determinations.
Request and Approval of Credit
- A State's request for approval of a credit shall identify the credit amount by FFY, indicate the MOE alternate (1, 2 or 3) being used, and provide a summary of expenditure amounts to support the MOE determination.
- A State's request shall include a certification by the State that 1) the credit and MOE determinations have been based on expenditures for improvements that met the above criteria, and 2) the State has on file adquate documentation to support the amounts included in the these determinations. This documentation will be available for audit or inspection.
- The State's request is to be submitted to the division office. The division should review the request for conformance with the credit provision requirements and then forward it to Headquarters for approval action. We are retaining approval at Headquarters to provide consistency in acceptance of requests and to continue the existing procedure whereby Headquarters notifies FTA and NHTSA of the approved credit amounts.
- If a State decides to use MOE Alternate 2 or 3, expenditure data may not be available yet. In this case, the State's submission will not include a "certification" covering the MOE deterrmination but instead merely be a request to use either MOE Alternate 2 or 3. Since both of these alternates rely on determining actual expenditures at a future point in time, the MOE certification will subsequently be made by the State once the time period involved has transpired and the actual expenditures are known.
- Credits earned may be applied toward the non-Federal matching share of programs authorized by Title 23, except beginning June 9, 1998, the credit may not be applied to projects funded with FHWA's emergency relief funds. Additionally, the credit may be applied to transit programs authorized by Chapter 53 of Title 49.
- Use of the toll credit provision can begin with FFY 1992. As discussed above, certain MOE alternates were only available beginning with FFY 1995. Additionally, the flexibility concerning use of the two-year rule in determining the average expenditures for the MOE determination is only available beginning with the FFY 1998 credit determination..
- The MOE determination only needs to be satisfied for the FFY for which a State earns the credit amount. Once a credit amount is appropriately established, it can be applied whether or not the State satisfies the MOE determination in later years. Additionally, any established credit does not lapse after a period of time but remains available until used by the State.
- A request to use toll credits on a specific Federally funded project should be submitted to the appropriate Federal agency (FHWA, FTA or NHTSA) administering the project.
- The use of toll credits is initiated at the time Federal funds are authorized for a project. A State has the option of using amounts of toll credit to cover all or a portion of the non-Federal share of a project. The result is that the effective Federal share of an eligible project could be any value up to 100 percent.
- Where the toll credit is applied on a project, whatever effective Federal share is established at the time of project authorization must be used throughout the life of the project. Subsequent underruns, or overruns if a balance of unused credit is available, should be processed at the initially authorized effective Federal share.
- The State must establish a special account to track appropriate toll credits. The State will place into the special account the amount of credit that the FHWA has approved. When the State requests authorization of a project using the toll credit, it shall request that all or a portion of the non-Federal share be credited from the special account. These projects will be processed and administered in accordance with normal procedures except that the amount of funds authorized on the project and the effective Federal share will be increased. When the State submits a request to use credits from the special account, it will reduce the account by the amount applied to a project. The amount of non-Federal share credited will be deducted from the unobligated balance of Federal-aid funds available and charged to the State's obligation limitation.
- The toll credit cannot be applied to projects retroactively, i.e., after project authorization. In general, a State may begin use of toll credits once a credit amount has been approved by the FHWA. However, it is acceptable on a Federal-aid project to conditionally authorize use of the toll credit provisions subject to a State providing appropriate credit and MOE certifications and their subsequent acceptance by the FHWA.
- At any time, a State may request approval of a toll credit for the current FFY or any past FFY starting with FFY 1992.
Questions on this memorandum should be directed to Jim Overton of my staff at 202-366-4653.