U.S. Department of Transportation
Federal Highway Administration
1200 New Jersey Avenue, SE
Washington, DC 20590
Publication No. FHWA-PL-17-011
The foregoing discussion has described the routine procedures for funding the Federal-Aid Highway Programs (FAHP) that have contract authority: authorizing legislation, distribution of funds, and obligations. 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 funds 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. However, 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: what controls can annual Federal budget decisions place on the highway program?
The answer is to place a limit, or ceiling, on the total obligations that can be incurred for the FAHP during a year. 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. However, by controlling obligations annually, the program may be made more responsive to budget policy. As discussed in Chapter 4, once an obligation is made, the Federal government must pay the State when bills become due. That “promise” must be kept, and so it is impossible to place direct controls on outlays. But by limiting the obligations, Congress may prevent FHWA from making the promise in the first place—eliminating the need for any subsequent payment.
This chapter details the history, function, and characteristics of an obligation limitation. It also discusses the process through which FHWA applies that limitation across the Federal-aid highway program. For convenience, the chapter uses the terms “obligation limitation” and “obligation ceiling” interchangeably.
The highway program has been subject to limitations on obligation since 1966. In the early years, the executive branch limited obligations. The common term for this action was “impoundment.” However, a turnabout came with enactment of the Congressional Budget and Impoundment Control Act of 1974. This act established a formal process for the executive branch and Congress to follow in setting limits on the use of authorized funds.
Beginning in fiscal year (FY) 1976, Congress became the branch of government that places annual limitations on obligations. Each year the President’s budget request has recommended such a limitation for the FAHP. This recommendation is only a proposal to Congress for enactment. Congress will consider the recommendation, but may or may not actually follow it.
Congress limits FAHP obligations through a legislative act—most frequently in an appropriations act, since limitations are a form of budget control. Surface transportation authorization acts also typically include obligation limitations, and on occasion other types of legislation, such as reconciliation bills, do as well.
The FAST Act established obligation ceilings for each of FY 2016 through 2020. Each year, the appropriations legislation will confirm or modify these ceilings.
The obligation ceiling limits the amount of funding that may be obligated during the specified fiscal year—generally without regard to the year in which the funds in question were apportioned or allocated. However, the FAST Act provided a few specific programs with multi-year obligation limitation, which may be carried over for several years. Some prior authorization acts also provided individual programs with “no-year” limitation, which is available until it is used (i.e., it does not expire).
A few programs within the FAHP are exempt from the obligation limitation, allowing FHWA to obligate funding under these programs without regard to the limitation on obligation. Under the FAST Act, these exempt programs included the Emergency Relief program, certain balances of programs exempt under prior Acts, and a portion ($639 million per year) of the National Highway Performance Program (NHPP).
It is important to recognize that the distribution and redistribution of the individual State obligation 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 obligation limitation only governs how much of its unobligated balance of apportionments and allocations the State may obligate during a given fiscal year. Furthermore, if a State retains an unobligated balance of apportioned or allocated funding at the end of a fiscal year, it may carry over those funds for use during the following fiscal year, assuming that they have not lapsed.
Table 5 illustrates the degree to which an obligation limitation constrains the ability to obligate Federal-aid funds within a given fiscal year. As the table shows, the FAHP ended FY 2015 with a total of $23.3 billion in available contract authority. After subtracting amounts with carry-over obligation limitation from prior years, then adding new FY 2016 funding, the FAHP began FY 2016 with a total of $58.0 billion in available contract authority. The FY 2016 obligation limitation was $42.4 billion. Consequently, $15.6 billion was not available for obligation that year, due to the obligation ceiling.
|Unobligated balance (9/30/2015)||23.2|
|Unobligated balance with carryover limitation (no-year or multi-year) from prior years||- 7.6|
|Unobligated balance without carryover limitation||15.6|
|New FY 2016 apportionments and allocations||+ 42.4|
|Total funding (without carryover limitation) available to obligate in FY 2016||58.0|
|FY 2016 obligation limitation||- 42.4|
|Amount not available for obligation in FY 2016||15.6|
As with prior authorization acts, the FAST Act laid out a multi-step process that directs FHWA how to divide the obligation limitation among programs and the States. Parallel provisions in the annual Transportation, Housing and Urban Development, and Related Agencies (THUD) Appropriations Act typically restate the process without change. In the case of conflict, the later-enacted provision (usually in the appropriations act) prevails.
Under the FAST Act (and the FY 2016 THUD Appropriations Act), FHWA distributes the obligation limitation through the process specified below.
Appendix I also provides a step-by-step analysis of FHWA’s process for distributing the obligation limitation, using FY 2016 as an example. Except as specified below, each portion of the obligation limitation expires at the end of the fiscal year.
Step 1. Reserve dollar-for-dollar obligation limitation for certain programs. First, FHWA sets aside limitation for selected programs specified in law: Disadvantaged Business Enterprise (DBE) Supportive Services, On-the-Job Training (OJT) Supportive Services, Highway Use Tax Evasion projects, and the Bureau of Transportation Statistics. FHWA reserves limitation for each of these programs on a dollar-for-dollar basis—providing each program with an amount of obligation limitation equal to its contract authority. FHWA also reserves a specified amount of obligation limitation to allow the obligation of contract authority for the administrative expenses of both FHWA and the Appalachian Regional Commission (ARC). The FAST Act directed FHWA to set aside dollar-for-dollar limitation for both of these categories of administrative expenses. However, as described in Chapter 4, the annual appropriations act typically includes a specified sub-limitation on administrative expenses (LAE). This LAE may differ from the amount of available contract authority and overrides the direction to provide dollar-for-dollar limitation.
Step 2. Set aside obligation limitation for use with carryover allocated balances. For a variety of reasons, allocated programs are at times unable to obligate all of their available contract authority within a given fiscal year (e.g., FY 2015). In such a circumstance (assuming the contract authority has not lapsed), they carry over the unobligated balances of contract authority into the next fiscal year (e.g., FY 2016). This makes the carryover balances subject to that next year’s obligation limitation.
To enable the obligation of prior-year allocated funds, FHWA sets aside, for each such program, an amount of obligation limitation equal to that program’s carryover contract authority balance.
Step 3. Determine ratio of remaining obligation limitation to contract authority. After making these initial set-asides, FHWA compares the remaining amount of obligation limitation to the total amount of new authorizations for the fiscal year for programs that are subject to the obligation limitation (and that were not already accounted for under the first two steps). FHWA uses this ratio of total obligation limitation to total authorizations, known as the “limitation ratio,” in step four of the distribution process.
Step 4. Set aside obligation limitation for allocated programs at the ratio. In step one FHWA set aside obligation limitation for use with current-year contract authority for a few specified allocated programs: the “100 percent” programs. In step two, FHWA sets aside obligation limitation for use with all prior-year allocated contract authority. This leaves the question of how to account for current-year allocated funding, apart from that associated with “100 percent” programs.
FHWA reserves for each such program an amount of obligation limitation equal to the program’s new authorization for the fiscal year, multiplied by the limitation ratio. At the same time, FHWA “lops off” (removes) from an allocated program the “excess” contract authority, then distributes that lopped-off authority to States by formula; for additional detail, see the description of “Lop-off” below.
The FAST Act also made obligation limitation reserved for research programs through this process available for four years, instead of expiring at the end of a single fiscal year.
Step 5. Distribute the remaining “formula limitation” to the States. Finally, FHWA distributes the balance of the obligation limitation among the States based on each State’s relative share of total Federal-aid highway apportionments (subject to the limitation) for the fiscal year. Since FHWA distributes this obligation limitation by formula, it is known as “formula limitation.”
FHWA does not provide program-specific obligation limitation for formula programs (e.g, there is no NHPP obligation limitation, or STBG obligation limitation). Rather, FHWA provides each State with a single amount of formula limitation that applies to all of the State’s apportioned programs, apart from those that are exempt from the obligation limitation, or that have carried over no-year obligation limitation from prior years. This offers the State the flexibility to determine the best combination of program funds to obligate in each category (NHPP, STBG, etc.) based on its individual needs, as long as its total obligations stay within the overall ceiling.
August redistribution. For a variety of reasons, a given program may be unable to obligate its share of the obligation limitation by the end of a given fiscal year. In recognition of this, Congress has established a statutory process to allow FHWA to redistribute such obligation limitation to States that can, by the year-end deadline, obligate more than their initial share of the ceiling. This process takes place in August, and consequently is referred to as August redistribution. Multi-year obligation limitation and no-year obligation limitation are not subject to August redistribution.
In most fiscal years, the limitation ratio that FHWA calculates above is lower than 100 percent; i.e., the total obligation limitation (net of that set aside under steps one and two of the process) is less than total new authorizations of contract authority. In theory, this would leave each allocated program with more contract authority than obligation limitation, and no ability to obligate this excess contract authority. In practice, though, Congress has resolved this situation through a statutory “lop-off” process. Apart from a few exceptions, all allocated programs are subject to lop-off. The exceptions include the 100 percent programs covered by step one, as well as the Tribal Transportation Program, which since MAP-21 has been statutorily exempt from the lop-off requirement.
Under the lop-off process, FHWA removes from an allocated program any contract authority in excess of that program’s obligation limitation for the fiscal year. FHWA then combines the contract authority amounts lopped off from the various allocated programs and distributes the total sum among States by formula. States may use these funds for projects eligible under the Surface Transportation Block Grant Program (STBG). However, FHWA does not distribute additional obligation limitation to accompany lopped-off contract authority. Therefore, a State must draw upon its formula limitation when using lop-off funds.
As an example, in FY 2016, the FAST Act authorized $335 million in contract authority for the Federal Lands Transportation Program (FLTP), and the limitation ratio for that year was 94.9 percent. Consequently, FHWA set aside $318 million ($335 million x 94.9 percent) in obligation limitation for FLTP and reduced the amount of available FY 2016 FLTP contract authority to $318 million. FHWA then distributed the $17 million that it had lopped off from FLTP to States for use on STBG-eligible projects. The States must use their formula obligation limitation to obligate the lop-off funding for use on STBG-eligible projects.
Appendix J lists the programs subject to lop-off under the FAST Act, as well as the amount that FHWA lopped off from each such program in FY 2016.