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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 Transportation Equity Act for the 21st Century (TEA-21). For a specified period of years (the TEA-21 covers 6 years, but this 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.8

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 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. Both concepts are described in the following paragraphs.

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.13 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."


Before the authorizations are distributed, several deductions are made.

Administration. As provided in the law, an allowance of "not to exceed 1.5 percentum," is deducted for administering the provisions of Title 23, U.S.C.14 This deduction (known as the "administrative takedown") is made from the funds authorized for the following programs: Interstate Maintenance Program (IM), National Highway System (NHS), Surface Transportation Program (STP), Congestion Mitigation and Air Quality Improvement Program (CMAQ), Highway Bridge Replacement and Rehabilitation Program (HBRRP), Minimum Guarantee, Appalachian Development Highway System Program, Recreational Trails Program, and the Federal Lands Highways Program (FLHP). This provision is an upper limit; thus the amount deducted for this purpose may be less than 1.5 percent if the full deduction is not necessary to cover the costs to administer the program.

This administrative takedown is used to pay the salaries of FHWA employees, travel expenses, supplies, office space, etc. Congress may also direct that additional programs be funded out of the administrative takedown. For example, in FY 1999, Congress directed that several programs be funded from the administrative takedown, including $750,000 for the Office of the Inspector General (OIG) audit cost reimbursement15 and $2,000,000 for administrative expenses for the Appalachian Regional Commission.16

Metropolitan planning. A second deduction is used to finance the metropolitan transportation planning activities mandated by Section 134 of Title 23, U.S.C. The deduction is equivalent to 1 percent of the authorizations remaining after the administrative deduction is made from IM, NHS, STP, CMAQ, and HBRRP.17 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.18

Although these are the only deductions applied across several programs, other funds may be deducted for particular purposes. For example, a deduction of $500,000 per year is made from the STP authorization to fund the OperationLifesaver Program, an education program designed to eliminate collisions at railroad grade crossings.19 Similarly, a deduction of an additional $5.25 million per year is made from the STP authorization to fund Railway-Highway Crossing Hazard Elimination in High Speed Rail Corridors.20 In some instances, the amount may vary from year to year.

A complete list of these deductions over the period of the TEA-21 can be seen in Appendix D.

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.


When new apportionments or allocations are made, the amounts are added to the program’s unused balance from previous years (e.g., 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.


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 by permitting transfers to be made among certain programs.

Appendix J contains a list of the transferability provisions.


An obligation is a commitment—the Federal government’s promise to pay the States for the Federal share of a project’s eligible cost. This commitment occurs when the project is approved and the project agreement is executed.34 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.


As mentioned previously, 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 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.48

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 are 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 1990.49 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.

Figure 4

Figure 4.—Reimbursement.

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Electronic version of Publication No. FHWA-PL-99-015

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