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Highway Trust Fund, FY 2006 Financial Report

Department of Transportation
Highway Trust Fund
Notes to Financial Statements
September 30, 2006

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation

The financial statements of the Highway Trust Fund (HTF) are comprised of the Highway Corpus Trust Fund (Corpus), held by the U.S. Department of Treasury Bureau of Public Debt (BPD), and certain accounts of the following Operating Administrations (Agencies) of the Department of Transportation (DOT): Federal Highway Administration (FHWA), Federal Motor Carrier Safety Administration (FMCSA), Federal Transit Administration (FTA), National Highway Traffic Safety Administration (NHTSA), Pipeline and Hazardous Materials Safety Administration (PHMSA), Research and Innovative Technology Administration (RITA), Office of the Secretary of Transportation (OST), Maritime Administration (MARAD), and Federal Railroad Administration (FRA) as well as the activity of certain funds allocated to other Federal agencies as described in Note 1.S.

The financial statements have been prepared to report the financial position, net cost of operations, changes in net position, status and availability of budgetary resources, and the reconciliation of net cost to budgetary resources.

The financial statements have been prepared from the books and records of the DOT Agencies, the U.S. Department of the Treasury, BPD, and certain other Federal agencies as described in Note 1.S. Such financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and the form and content requirements specified by the Office of Management and Budget (OMB) Circular No. A-136 - Financial Reporting Requirements. U.S. generally accepted accounting principles (GAAP) for Federal entities are the standards prescribed by the Federal Accounting Standards Advisory Board (FASAB), which has been designated as the official accounting standards-setting body for the U.S. Federal Government by the American Institute of Certified Public Accountants.

The statements are in addition to the financial reports used to monitor and control budgetary resources, which are prepared from the same books and records. The statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity. One implication of this is that liabilities cannot be liquidated without legislation that provides resources to do so.

DOT has received a waiver from OMB to produce comparative financial statements as part of the HTF fiscal year 2006 financial statements due to the impact of certain legislation, which as described in the second paragraph of Note 1B below, resulted in a material amount of program costs reported in FY 2006 that were not reported in FY 2005.

B. Reporting Entity

For purposes of these financial statements, the principal reporting entity is the HTF, not the performing agencies, and all assets are considered "entity assets." The financial statements report activity for all relevant HTF funds included in the DOT's surface transportation budget function category. The HTF was created in 1956 with the Highway Revenue Act of 1956 with the main objective of funding the construction of the Dwight D. Eisenhower System of Interstate and Defense Highways. Over the years, use of the fund has been expanded to include mass transit and other surface transportation programs such as highway and motor carrier safety programs.

Prior to FY 2006, the FTA's Formula and Bus grants program, funded by the mass transit account as well as direct appropriations from the Treasury general receipts account, which was included in the non-HTF appropriation accounts of the DOT's budget and, therefore, was not included in the HTF financial statements. On August 10, 2005, the President signed into law the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). As a result of this legislation, this program is now 100 percent funded by the mass transit account, included in DOT's HTF budgetary accounts and, therefore, included in HTF's financial statements in FY 2006.

C. Budgets and Budgetary Accounting

Programs are financed from authorizations enacted in highway and transit authorizing legislation and codified in Title 23 United States Code (U.S.C.). The HTF receives its budget authority in the form of contract authority and direct appropriations. Contract authority permits programs to incur obligations in advance of an appropriation, offsetting collections, or receipts. Subsequently, Congress provides an appropriation for the liquidation of the contract authority to allow payments to be made for the obligations incurred. Funds apportioned by state under Titles 23 and 49 U.S.C., Subtitle III by the Secretary of Transportation for highway and transit construction activities in advance of the liquidation of appropriations are available for a specific time period.

Within HTF's bugetary accounts, the major programs consist of the Federal-aid Highway Program (FAHP) and the Mass Transit Program. The FAHP provides Federal financial assistance to the States to construct and improve the National Highway System (NHS), urban and rural roads, and bridges. Annual appropriation laws establish the level of obligations, which States can obligate against their FAHP account in any single year. The Mass Transit Program was created within the HTF effective April 1, 1983 to fund transit needs such as FTA's Formula and Bus Grants program, which is also held to the same aforementioned annual appropriation laws. Obligations are incurred based on these annual limitations under allotment control procedures and recognized appropriately under Category B apportionment categories as either direct or reimbursable. Category B apportionments typically distribute budgetary resources by activities, projects, objects or a combination of these categories.

D. Basis of Accounting

Agencies use both the accrual basis and budgetary basis of accounting to record transactions. Under the accrual basis, revenues are recognized when earned and expenses are recognized when a liability is incurred, without regard to receipt or payment of cash. Budgetary account balances are included in certain statements as appropriate. Budgetary accounting principles ensure that funds are obligated according to legal requirements. Balances on these statements may therefore differ from those on financial reports prepared pursuant to other OMB directives that are primarily used to monitor and control the Agencies' use of budgetary resources.

All material intra-HTF Agency transactions and balances have been eliminated for presentation on a consolidated basis. However, the Statement of Budgetary Resources is presented on a combined basis in accordance with OMB Circular No. A-136.

Intragovernmental transactions and balances result from exchange transactions made between the HTF Agencies and another Federal government reporting entity, while those classified as "with the public" result from exchange transactions between the HTF Agencies and non-Federal entities. For example, if the HTF Agencies purchase goods or services from the public and sell them to another Federal entity, the costs would be classified as "with the public," but the related revenue would be classified as "intragovernmental." This could occur, for example, when the HTF Agencies provide good or services to another Federal governement entity on a reimbursable basis. The purpose of this classification is to enable the Federal government to prepare consolidated financial statements, and not to match public and intragovernmental revenue with costs that are incurred to produce public and intragovernmental revenue.

The HTF has adopted provisions of the Federal Accounting Standards Advisory Board's Statement of Federal Financial Accounting Standards (SFFAS) No. 27, Identifying and Reporting Earmarked Funds, which became effective October 1, 2005. This new standard amended SFFAS No. 7, Revenue and Other Financing Sources, by: elaborating the special accountability needs associated with dedicated collections; separating dedicated collections into two categories --- earmarked funds and fiduciary activity; and defining and providing accounting and reporting guidance for earmarked funds. In adopting the new standard, the HTF considers all of its activities related to earmarked funds.

E. Use of Estimates

Management has made certain estimates and assumptions when reporting assets, liabilities, revenue, and expenses, and in the note disclosures. Actual results could differ from those estimates. Estimates will be adjusted with actual amounts in the year such actual amounts are known. Significant estimates include the recognition of non-exchange revenue as described in Note 1.F and the accrual of grants payable.

F. Revenue and Other Financing Sources

Substantially all programs and activities covered by these financial statements are financed from non-exchange revenue related to excise taxes collected on specific motor fuels and trucks. Such collections are recognized as revenue when allocated to the Corpus HTF account by the U.S. Treasury. Congress enacts annual, multi-year, and no-year appropriations of these collections to be used, within statutory limits, for operating, capital, and grant expenditures. A small portion of activities is financed from offsetting collections for reimbursable work performed under agreement with other agencies.

Excise taxes collected are initially deposited to the general fund of the U.S. Treasury. The IRS does not receive sufficient information at the time the taxes are collected to determine how these payments should be distributed to specific trust funds. Therefore, the U.S. Treasury makes initial semi-monthly distributions to trust funds based on estimates prepared by its Office of Tax Analysis (OTA). These estimates are based on historical excise tax data applied to current excise tax receipts. When actual amounts are certified by the IRS, generally six months after each quarter-end, adjustments are made to the estimated amounts and the difference is adjusted as a transfer of resources to the HTF account.

The HTF's September 30, 2006 financial statements reflect excise taxes certified by the IRS through March 31, 2006 and excise taxes estimated by OTA for the period April 1 to September 30, 2006 as specified by SFFAS Number 7, Accounting for Revenue and Other Financing Sources. Actual tax collections data for the two quarters ended June 30, 2006 and September 30, 2006 will not be available from the IRS until December 2006 and March 2007, respectively. Management does not believe that the actual tax collections for the quarters ended June 30, 2006 and September 30, 2006 will be materially different than the OTA estimate.

The HTF recognizes as an imputed financing source the amount of accrued pension and post-retirement benefit expenses for current employees paid on the HTF's behalf by the Office of Personnel Management (OPM), as well as amounts paid from the Treasury Judgment Fund in settlement of claims or court assessments against the HTF.

G. Funds with the U. S. Treasury and Cash

The U.S. Treasury processes cash receipts and disbursements. Most Federal agencies receive appropriations as budget authority, which permits them to incur obligations and make outlays (payments). HTF Agencies, however, receive contract authority that permits them to incur obligations in advance of an appropriation. Subsequently, the contract authority is replaced with the appropriation or the spending authority from the offsetting collections to cover the obligations and then liquidate the obligations. Therefore, HTF Agencies do not have typical Fund Balance with Treasury (FBWT) amounts as funds remain invested in securities until needed to make payments and the entire FBWT amount is considered Obligated But Not Yet Disbursed.

H. Investments in U. S. Government Securities

The Federal Government does not set aside assets to pay future benefits or other expenditures associated with earmarked funds. The cash receipts collected from the public for an earmarked fund are deposited in the U.S. Treasury, which uses the cash for general Government purposes. Treasury securities are issued to the HTF as evidence of its receipts. Treasury securities are an asset to the HTF and a liability to the U.S. Treasury. Because the HTF and the U.S. Treasury are both parts of the Government, these assets and liabilities offset each other from the standpoint of the Government as a whole. For this reason, they do not represent an asset or a liability in the U.S. Government-wide financial statements.

Treasury securities provide the HTF with authority to draw upon the U.S. Treasury to make future expenditures. When the HTF requires redemption of these securities to make expenditures, the Government finances those expenditures out of accumulated cash balances, by raising taxes or other receipts, by borrowing from the public or repaying less debt, or by curtailing other expenditures. This is the same way that the Government finances all other expenditures.

As provided by Section B of the Comparison of Transportation Revenue and Related Provisions of House of Representatives 2400, the Highway Trust Fund investments consist of non-marketable par value U.S. Treasury securities that are non-interest bearing.

I. Accounts Receivable

Accounts receivable are generally reported net of an allowance for uncollectible accounts. As of September 30, 2006, the HTF has not recorded an allowance as all the receivables are deemed collectable at this time.

J. Property and Equipment

Property and equipment purchases are valued at cost and are capitalized when the cost is $25 thousand or more with a useful life of more than two years.

Depreciation on equipment, buildings and capital improvements is computed using the straight-line method based on the useful life of the assets with one-half year's depreciation taken in the year of acquisition. Property and equipment is depreciated as follows: Equipment over the useful life, ranging from three to five years, automated data processing software for five years, and structures, facilities and capital improvements ranging for thirty years. Useful life criteria for all property is based on an Internal Revenue Service classification system.

K. Liabilities

Liabilities covered by budgetary resources are those liabilities for which Congress has appropriated funds or funding is otherwise available to pay amounts due. Liabilities not covered by budgetary or other resources represent amounts owed in excess of available, congressionally appropriated funds or other amounts. The liquidation of liabilities not covered by budgetary or other resources are dependent on future congressional appropriations or other funding. Intragovernmental liabilities represent amounts due to other Federal entities.

L. Accounts Payable

Accounts payable are amounts the HTF entities owe to other Federal agencies and the public. Accounts payable to Federal agencies generally consist of amounts due under inter-agency reimbursable agreements. Accounts payable to the public primarily consist of amounts incurred, but not yet claimed, by the HTF contract recipients and unpaid goods and services received by HTF Agencies.

M. Grant Liability

The grant liability consists of an estimate of grantee expenses incurred but not yet paid by the HTF Agencies. Grantees primarily include state and local governments and transit authorities.

N. Annual, Sick and Other Leave

Annual leave is accrued as it is earned and the accrual is reduced as leave is taken. For each bi-weekly pay period, the balance in the accrued annual leave account is adjusted to reflect the latest pay rates and unused hours of leave. Liabilities associated with other types of vested leave, including compensatory, credit hours, restored leave, and sick leave in certain circumstances, are accrued at year-end. Sick leave is generally nonvested, except for sick leave balances at retirement under the terms of certain union agreements. Funding will be obtained from future financing sources to the extent that current or prior year revenues are not available to fund annual and other types of vested leave earned, but not taken. Non-vested leave is expensed when used.

O. Federal Employee Benefits

A liability is recorded for actual and estimated future payments to be made for workers' compensation pursuant to the Federal Employees' Compensation Act (FECA). The actual costs incurred are reflected as a liability because Agencies will reimburse the Department of Labor (DOL) two years after the actual payment of expenses. Future revenues will be used for the reimbursement to DOL. The liability consists of (1) the net present value of estimated future payments calculated by the DOL, and (2) the unreimbursed cost paid by DOL for compensation to recipients under the FECA.

P. Retirement Plans

The majority of employees whose salaries are paid from the HTF participate in the Federal Employees Retirement System (FERS). Other employees participate in the Civil Service Retirement System (CSRS). FERS went into effect pursuant to Public Law 99-335 on January 1, 1984. Most employees hired after December 31, 1983, are automatically covered by FERS and Social Security. Employees hired prior to January 1, 1984, can elect to either join FERS and Social Security or remain in CSRS. A primary feature of FERS is that it offers a savings plan to which the Agencies automatically contribute one percent of pay and match any employee contribution up to an additional 4 percent of pay. Employees, who participate in CSRS, make contributions equal to 7 percent of their pay that is matched by the Agencies.

For most employees hired since December 31, 1983, Agencies also contribute the employer's matching share for Social Security. Agencies do not report CSRS or FERS assets, accumulated plan benefits, or unfunded liabilities, if any, applicable to its employees. Reporting such amounts is the responsibility of the Office of Personnel Management (OPM).

GAAP requires that employing agencies recognize the full cost of pensions, health and life insurance benefits, during their employees' active years of service. OPM, as the administrator of the CSRS and FERS plans, the Federal Employees Health Benefits Program and the Federal Employees Group Life Insurance Program, must provide the "cost factors" that adjust the agency contribution rate to the full cost for the applicable benefit programs. Accordingly, an imputed financing source and corresponding imputed personnel cost are reflected in the Statements of Changes in Net Position, Net Cost, and Financing, respectively. These imputed balances do not affect the net position of HTF.

Q. Taxes

The HTF Agencies are not subject to Federal, State or local income taxes and, accordingly, no provision for income taxes has been recorded in the accompanying financial statements.

R. Contingencies

A contingency is an existing condition, situation or set of circumstances involving uncertainty as to a possible gain or loss. The uncertainty will ultimately be resolved when one or more future events occur or fail to occur. For pending, threatened or potential litigation, a liability is recognized when a past transaction or event has occurred, a future outflow or other sacrifice of resources is likely, and the related future outflow or sacrifice of resources is measurable. For other contingencies, a liability is recognized when similar events occur except that the future outflow or other sacrifice of resources is more likely than not.

S. Recipient (child) allocations

HTF's funds are allocated to 17 non-DOT Federal agencies in accordance with applicable public laws and statutes. Except for the proprietary activity related to the funds allocated to the U.S. Army Corps of Engineers and U.S. Forest Service, all activity and balances related to these allocations are reported in the HTF financial statements.

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