Publication Number: FHWA-RD-02-006
Date: January 2002

Carolina Takes a New Approach to Financing Road Maintenance

Faced with a problem confronting many States-where to find money to maintain highways-North Carolina turned to a process known as cash flow financing, or cash management, to obtain the needed funds. As part of the process, North Carolina's General Assembly passed a special provision in September 2001 authorizing the State Department of Transportation (DOT) to use $470 million in State Highway Trust Fund cash balances to restore primary routes that range from fair or poor condition to good condition.

Although North Carolina is only 11th in the Nation in population, it has the second largest State-maintained road system at 126,000 km (78,000 mi). More than 23,000 km (14,000 mi) of the system are primary highways carrying 60 percent of vehicle miles traveled in the State. Forty-one percent of the State's road system is currently rated at "fair" or "poor." Because it was crucial to improve safety and mobility for North Carolina's drivers, the State budget bill (SB1005) directed a portion of the Highway Trust Fund's cash balance to be spent on pavement preservation efforts, which include the strengthening, shoulder widening, and resurfacing of the State's primary (non-Interstate) highway system. In all, $150 to $170 million has been allocated each year for 3 years to North Carolina's 14 highway divisions for needed road work.

Essentially, cash flow financing allows State DOTs to tap into funds to which they previously did not have access; in North Carolina's case, it took a legislative act to free up money for pavement preservation. At the end of the 1999-2000 fiscal year, the Highway Trust Fund had reserves of $858 million and the Highway Fund had a cash balance of $270 million. The State's Joint Legislative Oversight Committee, seeking to divert some of that money into projects that could immediately help fulfill the State's highway maintenance needs, contracted with Dye Management Group, Inc., of Bellevue, Washington, to study the matter. Dye recommended that North Carolina use the cash balance for road repair projects if the General Assembly passed legislation making the funds available. According to Dye's David Rose, "This idea is not unique in that several other States have done it in recent years. However, the approach isn't foolproof-States must implement sound financial management and planning or else run the risk of depleting highway funds."

The North Carolina legislation directs the DOT to use "cash flow financing to the maximum extent possible to fund highway construction projects" and addresses the inherent risks by mandating a number of controls, including the establishment of a financial planning committee, monthly financial reports, fund cash level targets, revenue forecasting procedures, reorganization of preconstruction functions to expedite project delivery and maximize use of cash flow financing of projects, and the designation of a person to be responsible for project delivery. The law also empowers the State Treasurer to combine the balances of the Highway Trust Fund and the Highway Fund and to make short-term loans between the Funds to facilitate cash flow financing.

In addition to the $470 million to be used for primary route pavement preservation, the legislation specifies two other smaller provisions: $15 million per year for 3 years is to be used for the planning and design of projects so that money can be saved over the long run in maintenance costs. And another $15 million per year for 3 years is designated for installing electronic signal and traffic management systems that will improve the operational efficiency of the State's road system by reducing delays and facilitating traffic flow. The new provisions also stipulate that the DOT must ensure that improvements made using cash balance funds will not interfere with the delivery of Highway Trust Fund projects on the 2002-2008 Transportation Improvement Program schedule.

In an announcement of the special provision, North Carolina Transportation Secretary Lyndo Tippett called the law a "landmark" move that is "undoubtedly the most significant transportation legislation since the Highway Trust fund in 1989." In illustrating the importance of the provision, Tippett added, "Under [the previous] funding system, it might be 10 to 20 years before some of these roads would ever be resurfaced. In fact, some of these projects would not have been completed for many generations."

Quick to allocate the new funds, the DOT reports that $115 million was let to contractors by the end of December 2001. These funds are allowing needed repairs to be made immediately to the State's primary roads, thus increasing safety and mobility for customers. Dye Management Group, Inc., is currently assisting the DOT in implementing new cash management procedures, developing forecasting tools, and making the transition to a cash-flow based program.

For more information, contact Len Sanderson, State Highway Administrator for North Carolina DOT, 919-733-7384 (email: lsanderson@dot.state.nc.us).

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