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DEPARTMENT OF TRANSPORTATION,
HIGHWAY TRUST FUND
Washington, D.C.

INDEPENDENT AUDITOR'S REPORT
AND FINANCIAL STATEMENTS
September 30, 2005 and 2004

INDEPENDENT AUDITOR'S REPORT

To the Inspector General of the Department of Transportation,

Federal Highway Administrator,
National Highway Traffic Safety Administrator,
Federal Transit Administrator,
Federal Railroad Administrator, and
Federal Motor Carrier Safety Administrator

In our audit of the financial statements of the Department of Transportation (DOT) Highway Trust Fund (HTF) for fiscal year (FY) 2005 we found:

The following sections discuss in more detail these conclusions and the scope of our audit.

OPINION ON FINANCIAL STATEMENTS

The HTF financial statements comprise the Highway Corpus Trust Fund, held by the Department of Treasury Bureau of Public Debt, and certain accounts of the following Operating Administrations (Agency) of DOT: Federal Highway Administration (FHWA), National Highway Traffic Safety Administration (NHTSA), Federal Transit Administration (FTA), Federal Railroad Administration (FRA), and Federal Motor Carrier Safety Administration (FMCSA).

The financial statements including the accompanying notes present fairly, in all material respects, in conformity with accounting principles generally accepted in the United States of America, HTF's assets, liabilities, and net position as of September 30, 2005 and 2004; and their related net costs; changes in net position; budgetary resources; and reconciliation of net costs to budgetary obligations for the years then ended.

As discussed in Note 1, Summary of Significant Accounting Policies, and Note 11, Excise Taxes and Associated Revenue, the accompanying financial statements reflect actual excise tax collections\revenue through March 31, 2005 and excise tax collections\revenue estimated by the Department of Treasury's Office of Tax Analysis for the two quarters ended June 30, 2005 and September 30, 2005.

As discussed in Note 14 to the financial statements, certain errors resulting in an overstatement of previously reported Unobligated Balance — Beginning of Period and an overstatement of previously reported Unobligated Balance Not Available as of September 30, 2004, were discovered by management of DOT during the current year. Adjustments to correct these errors resulted in a net reduction of Total Budgetary Resources at September 30, 2004.

CONSIDERATION OF INTERNAL CONTROL

In planning and performing our audit, we considered the internal control over financial reporting and compliance at the Agencies comprising HTF. We did this to determine our procedures for auditing the financial statements and to comply with OMB audit guidance, not to express an opinion on internal control. Accordingly, we do not express an opinion on internal control over financial reporting and compliance.

The objectives of an effective internal control system are the following:

Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be reportable conditions. Under standards issued by the American Institute of Certified Public Accountants, reportable conditions are matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect HTF Agencies' ability to record, process, summarize, and report financial data consistent with the assertions made by management in the financial statements. Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their duties. Because of inherent limitations in internal controls, misstatements, losses, or noncompliance may nevertheless occur and not be detected.

The following sections detail the improvements made in FY 2005 and the continuing deficiencies noted during the audit involving the internal control and its operation that we consider to be reportable conditions or material weaknesses. The continuing deficiencies are summarized as follows:

Material Weaknesses

Other Reportable Conditions

MATERIAL WEAKNESSES

Background

HTF agencies continue to improve the accounting processes they use to support financial management and prepare their financial statements. During FY 2005, FHWA management began to reorganize and refocus its accounting functions both at the management and staff levels. However, most of the more significant procedural and organizational changes occurred or were implemented after the third quarter of the year, including the hiring of a new CFO in September 2005. As a result, management did not have enough time to resolve all of the weaknesses identified in our prior year report or thoroughly test the effectiveness of its new procedures.

We commend management for the improvements made this year and their commitment to continue to improve the accuracy and timeliness of financial reporting. Some of the improvements in accounting processes made in FY 2005 were as follows:

The financial reporting control structure is much better than it was in FY 2004. However, deficiencies continue to exist in the internal control structure at HTF agencies, especially at FHWA, that has ultimately prevented management from preparing accurate and timely financial statements of HTF during FY 2005. Improvements continued to be made with the preparation of the September 30, 2005 financial statements. These deficiencies are noted in the later sections of this report. Certain components of the financial statements prepared during the year were not considered reliable, and many of the matters identified in these earlier period financial statements were not resolved until the end of the year. In addition, certain account discrepancies remained at September 30, 2005. The resolution of these discrepancies was identified during the audit process and resulted in material adjustments to amounts reflected in the HTF financial statements and note disclosures provided for audit in October 2005.

Many of the improvements were made late in the year, and the effectiveness of these changes on future financial reporting is uncertain. However, as noted in Appendix A, Management Response to Auditor's Report, DOT Agencies plan to continue to refine the changes made in FY 2005, test the effectiveness of such changes and continue implementing further improvements in their systems and processes.

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1. Financial Accounting Processes Do Not Fully Support Financial Management or Facilitate The Timely Preparation of Accurate Financial Statements

Condition: Improvements Made But More Are Needed: In our FY 2004 report, we noted specific deficiencies in "Financial Statement Preparation and Analysis" and certain key "Reconciliation Procedures." As noted in the previous section of this report, management began making organizational and procedural improvements in FY 2005 to address the recommendations detailed in our FY 2004 report. However, many of the improvements came late in the fiscal year and were not in effect long enough to completely overcome the accounting problems that existed in prior years. In addition, extraordinary efforts were needed to prepare the HTF financial statements during the year and at September 30, 2005.

The deficiencies noted during the FY 2005 audit are detailed in six main areas: Financial Statement Preparation and Analysis, Account Reconciliations, Managerial Cost Accounting, Intragovernmental Transactions, FACTS II, and Other General Matters. Collectively these deficiencies represent a Material Weakness in the area of financial reporting.

  1. Financial Statements Preparation and Analysis Process Needs Improvement

    HTF Agencies' financial statement preparation process continues to be manually intensive because of the extensive amount of "top-side" non-standard journal entries needed to correct data in the accounting system. For the year ended September 30, 2005, HTF agencies posted hundreds of adjustments with an absolute value of $425 billion, several of which were posted in the fourth quarter. Many of these adjustments related to prior year "account clean-up," however, some related to current year transactions, which at times repeated corrections of the same item. The volume and amount of these adjustments suggests that the system is not working properly to accurately capture all financial events at the transaction level at the time that the transaction occurred. This manually intensive process has a high risk of error, is time consuming and utilizes resources that should be spent on the analysis of the financial statements.

    It appears that these adjustments may have been a factor in management not being able to confirm the reliability of the financial statements at June 30, 2005, to be able to provide full explanations of the composition of balances in the financial statements at June 30, 2005, or to be able explain the fluctuations of many line items in those financial statements with those reported at June 30 or September 30, 2004.

    Certain HTF agencies, principally FHWA, had particular problems in preparing and analyzing the amounts reported in Statement of Budgetary Resources (SBR). In addition, the relationship between propriety and budgetary accounts were not adequately analyzed during the year or at year end. The initial analysis provided to us for audit at the end of the year included unexplained differences with an absolute value of $38 billion between the propriety and budgetary accounts. This likely occurred because some HTF agencies did not reconcile differences between the SBR and SF-132 throughout FY 2005 and at year end. To further illustrate the potential impact this deficiency can have on the HTF financial statements, a $1.9 billion difference was noted during the audit between the SBR for FHWA and the SF-133 at September 30, 2005. The correction of this error resulted in adjustments (decreases) to both Contract Authority and Permanently Not Available amounts in the SBR at September 30, 2005. We later learned that this error remained after several attempts were made to fix an erroneous accounting entry during the year, including a final entry made in connection with the preparation of the financial statements at September 30, 2005.

    Analysis of HTF's financial statements through June 30, 2005 was inadequate. The research for many of the significant unusual balances noted at June 30, 2005 was deferred to the last quarter of the FY. Significant improvement was noted in the financial statement analysis at September 30, 2005; however, there were still anomalies that were identified in certain aspects of the financial statements during the audit that resulted in adjustments or reclassifications to those financial statements.

    We also noted that the FY 2005 Statement of Financing was corrected by over $1 billion from the first draft of the final financial statements. In addition, the Corpus group of accounts had a negative Net Position balance at September 30, 2005. In March 2005, the DOT OIG issued a memorandum on the cause of this situation, and a follow up report was issued in November 2005. However, the significance of this matter was not adequately disclosed in the notes to the HTF financial statements at September 30, 2005 or in the Management Discussion & Analysis.

    The Statement of Net Cost, and the related analysis of net cost by program, was particularly troublesome for FHWA. For example:

    • Federal Lands program cost was understated by $265 million in the financial statements initially provided;
    • The program cost fluctuation for Other Highway Trust Fund was approximately $400 million (an increase of 132% from last year); FHWA did not provide an explanation for this fluctuation;
    • The explanation for the difference in the Allocation Program between 2004 and 2005 did not consider an adjustment of $629 million that was made to the child allocation accounts in 2004;
    • FHWA reported over $1.3 billion of program costs in multiple miscellaneous and other categories. Per OMB Circular A-136, such non-descript categories should only be used for miscellaneous immaterial programs; and
    • FHWA reported an activity item in error in its FY 2005 Statement of Net Position. The correction of the error for approximately $289 million resulted in a reduction in net cost.

    The absolute value and net changes to the HTF financial statements for audit adjustments are summarized as follows: Net Cost by $1.7 billion, Net Position by $1.3 billion and Budgetary Resources by $11.4 billion, and Statement of Financing by $2.1 billion.

  2. Accounting Reconciliations Differences Were Not Resolved In A Timely Manner During the Year

    We identified reconciliation procedures as a separate Material Weakness in our FY 2004 audit report. We have noted some improvement since last year; however, we continue to note that certain accounts reconciliation differences were not being resolved in a time manner. We also continue to note that procedures used to perform account reconciliations were not adequately documented for all accounts as of and for the year ended September 30, 2005. The deficiencies noted in this aspect of internal control affect the reliance that needs to be placed on the accuracy of amounts reported in the financial statements.

    Fund Balance with Treasury (FBWT), grants and non-expenditure transfers and budgetary accounts were particularly troublesome and, accordingly, further details are provided below:

    Fund Balance with Treasury Reconciliation — We noted the following deficiencies:

    • FHWA management did not perform reconciliations of all parent and child allocation accounts throughout most of the fiscal year.
    • Management did not report suspense accounts in accordance with the United States Standard General Ledger (USSGL). Numerous asset, net position and budgetary accounts were used by management to report suspense activities.
    • Management did not properly age their suspense account transactions. Certain unreconciled differences remained in the account for several months and, in some cases over several years. Consequently, suspense account balances were not adequately cleared out and recorded in the proper accounts in a timely manner throughout the year. The absolute value of the suspense accounts is $467 million at September 30, 2005.
    • FHWA management had a suspense account balance with an absolute value of $259 million at September 30, 2005. FHWA reclassified all of its suspense transactions to a different appropriation and to a general ledger account (Account 2190) that is not USSGL compliant for recording suspense activities. Such reclassifications were also not supported by valid source documentation.
    • Certain Treasury Fund Symbols not provided in Treasury's guidelines (FAST Book) were included in the HTF Agencies' financial statements.

    Grant Reconciliations — Even though improvement was noted during FY 2005 for all Agencies, we continue to note unreconciled differences between amounts in the grant subsidiary ledger (FMIS) and amounts recorded in the Delphi general ledger at September 30, 2005. The absolute value (ABV) differences noted were most significant at FHWA, and are summarized as follows:

    OA ABV * (Net) Difference FMIS and PO Module ABV* (Net) Difference FMIS and GL Module ABV * (Net) Difference PO and GL
    FHWA $92 million ($.3 million) $578 million ($58 million) $503 million ($58 million)

    * ABV represents the sum of all differences between the amount in the general ledger and that reflected in the subsidiary ledger.

    Non-expenditure Transfers and Budgetary Account Reconciliations — HTF Agencies recorded a significant number of adjustments in various net position and budgetary accounts during the fiscal year. This appears to have occurred because the general ledger system was not originally set up to record the numerous types of trust fund transactions. HTF Agencies have developed a somewhat systematic method in an attempt to compensate for this system deficiency. However, this method resulted in some of the budgetary and certain net position transfer accounts not being recorded through the standard transaction codes and, consequently, some entries were not USSGL compliant. In certain instances, the journal entries were subsequently reversed and reposted several times, which may indicate inadequate research of the financial event prior to these journal entries being posted into the accounting system.

    In addition, reconciliations for the non expenditure transfers in/out accounts were not routinely performed during the year between the parent and recipient accounts to ensure agreement. As a result, material adjustments made for recipient allocation accounts aggregated an absolute value approximately $15 billion in late FY 2005.

  3. System Is Not In Place To Properly Implement Managerial Cost Accounting

    As noted in our prior year report, HTF Agencies did not have a cost accounting system in place to properly allocate costs to their programs. As a result, management was unable to produce a Statement of Net Cost in compliance with OMB requirements. OMB Circular A-136 and Statement of Federal Financial Accounting Standard (SFFAS) #4 require the entity to report the full cost of each program's output. This cost should consist of both direct and indirect costs, including the cost of identifiable supporting services.

    Management did not adequately identify programs for disclosure in its financial statements. The program cost information detailed in Note 10 ("Net Program Cost") to the financial statements is based on a set of allocation methodologies different than that used in FY 2004. In fact, this is the 3rd year that the allocation methodology has been revised. The methodology continues to be inconsistent with OMB's definition of a program, "a specific activity or project as listed in the program and financing schedules of the annual budget of the U.S. Government."

    A consequence of not having a cost accounting system is that HTF agencies do not appear to have sufficient information to identify and eliminate wasteful spending, hold or reduce operating costs, or fully evaluate the effectiveness of programs by linking resources and results.

  4. System Is Not In Place To Properly Track Intra-governmental Transactions

    Agencies are responsible for accumulating intra-DOT, intra-HTF and intergovernmental activity during the year and providing such trading partner information to DOT and to Treasury (which is responsible for government-wide financial statements). Significant corrections were made during the year to trading partner codes in the general ledger. Such reclassifications resulted in hundreds of adjustments aggregating an absolute value of over $1 trillion in FY 2005; however, these reclassifications did not change the total amounts reported.

    Management has made some progress tracking transactions by Trading Partner codes; however, more clean-up and refinement of the underlying data is needed. Reconciliations for eliminations were not performed consistently for all Intra-governmental transactions throughout FY 2005. The Agencies were unable to support the accuracy of all the information disclosed in the "Trading Partner" schedule included in the HTF financial statements at September 30, 2005. In addition, the HTF Trading Partner schedule produced by the accounting system did not fully support the amounts reported in the Required Supplementary Information (RSI) schedule.

  5. FACTS II Preparation Needs To Be Linked To Financial Statement Preparation Process

    The U.S. Treasury requires that cash and budgetary information be reported via the FACTS II system on a quarterly basis. The report should be prepared using the same trial balance data that is used in preparing the basic financial statements. In reviewing amounts reflected in certain Agencies' (FHWA and FRA) fiscal 2005 FACTS II transmission, we noted differences with the amounts reflected in its September 30, 2005 trial balance of accounts (used to prepare its financial statements). Such differences related to FBWT and certain budgetary accounts on the FACTS II submission, with an aggregate absolute value (ABV) of approximately $12.4 billion (net of $48.4 million). Such amounts principally relate to FHWA and the working trial balances of all agencies were subsequently adjusted to FACTS II.

    HTF Agencies do not have a process in place to ensure that erroneous accounts are reviewed and corrected prior to the financial statements being prepared. For some Agencies, it took as much as three weeks after the financial statements were provided for audit for these differences to be fully researched, and necessary adjustments made in their accounting system.

    These FACTS II difficulties, coupled with the late in the year analysis of the relationship between budgetary and propriety accounts, identified a problem with the Unobligated Balance Not Available at September 30, 2005. After further research it was determined that there was an error in accounts comprising the Unobligated Balance Not Available reflected on the SBR. The error was traced back to before FY 2003 and the beginning and ending balance of Unobligated Balance in the FY 2004 SBR was reduced by $2.5 billion. This correction resulted in a reduction of Budgetary Resources of $2.5 billion at September 30, 2005 and 2004.

  6. Other General Matters

    Currently, the FHWA accounting and financial reporting function is handled by a significant number of people from several contractor companies, with oversight by a limited group of FHWA employees. With such a diverse group, institutional knowledge is sometimes lost and the coordination/communication of accounting and audit support activities is inconsistent.

Condition Summary: We commend management for the improvements made this year and their commitment to continue to improve the accuracy and timeliness of financial reporting.

The level of manual intervention needed to "clean-up" the accounting records during the year and at year end to "get the numbers right," and the nature and extent of adjustments resulting from the audit, inherently confirms that the Material Weakness criteria is met. The main premise of a Material Weakness is ""¦the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur." In addition, the level of effort spent by DOT employees and contractors in preparing quarterly and year-end financial statements is considered extraordinary and not being performed ""¦.by employees in the normal course of performing their duties."

It appears that FHWA may need to continue its extensive analysis of its FY 2006 quarterly financial statements until the new procedures recently implemented are adequately proven effective to produce accurate financial statements.

Given the circumstances described above, it is impractical to determine whether the changes implemented during FY 2005 will be effective in FY 2006 to ensure the timely and accurate completion of the financial statements in FY 2006. Only with further testing in FY 2006 can this determination be made.

Recommendations: The new accounting and financial reporting practices implemented in FY 2005 must be performed routinely throughout the year for all the Agencies and the reorganization of the accounting functions at FHWA must be completed as soon as possible. We hereby provide the following specific recommendations for HTF Agencies and DOT management:

2. Grants Financial Management Oversight At FHWA

Condition: FHWA disbursed approximately $32 billion to grantees and others in FY 2005. Our prior year audit report noted that FHWA did not have adequate controls in place to ensure that funds distributed to grantees were safeguarded against fraud, waste, and abuse. We concluded, as did the DOT Office of Inspector General (OIG) in prior years, that FHWA had not been adequately monitoring the financial status of its highway projects. The DOT OIG had also previously reported that FHWA needed to improve its ability to identify hundreds of millions of dollars of idle funds on completed, canceled, or modified projects, so the funds can be used more productively on active projects.

Financial oversight of Highway grants was noted as a material weakness in DOT's Federal Managers' Financial Integrity Act (FMFIA) report to the President in November 2004. In addition, the DOT OIG has also recently issued a report entitled "DOT FY 2006 Top Management Challenges" for which grants financial management is discussed in detail. According to the report, one of DOT's, and specifically FHWA's, most significant challenges is getting the most for every tax dollar invested in highway projects.

The rest of this condition section provides a discussion of the major policy changes made by FHWA in FY 2005 to begin addressing the weaknesses identified in prior years, a summary of the results of our internal controls testing in FY 2005, and the status of the implementation of the new policies and procedures at September 30, 2005.

Policy Changes Were Initiated in April 2005 But Implementation Results Are Inconclusive

In FY 2004, FHWA began work on a new program to address the weaknesses in its financial management oversight. In April 2005, FHWA Management officially issued the Financial Integrity Review and Evaluation (FIRE) Program. FIRE is an extensive set of policies and procedures intended to improve financial management oversight controls and require many changes in the way its Division Offices conduct their business.

The FIRE Program requires each Division Office to perform a risk assessment, or similar prioritization process, to identify appropriate oversight activities. The Division Office is required to document activities to be performed in their annual review plan and then submit the plan to FHWA headquarters for review. This policy has not yet been consistently followed by the FHWA Division Offices. FHWA headquarters has historically relied on its Division Offices to determine the extent and frequency of conducting risk assessment and oversight activities on the grantees. Due to the late start in FY 2005 of FIRE implementation, FHWA management has not fully developed a mechanism to determine if the Division offices are following the FIRE requirements, or to ensure that it has quality controls in place to monitor, assess, and validate the Division Office's implementation of FIRE.

FY 2005 Test Results

Our tests of internal controls in the grants area were initially performed on transactions through March 31, 2005 (before the implementation of FIRE), and the results of such tests were similar to those noted during the FY 2004 audit.

The majority of FHWA's grant payments are processed on a Payment Request Voucher through the Rapid Approval State Payment System (RASPS). The payment request details expenditures by project at the summary level. The Division Financial Manager typically reviews the payment requests submitted in RASPS for unusual items. Such reviews are based on the Financial Manager's knowledge and expertise in the project expenditures, coupled with discussions with the Division Engineer, Project Manager, etc. However, support for the payment request is maintained by the grantee. At the time of our testing, we concluded that FHWA did not have a systematic process in place to ensure that the grant payments made were supported by systems and processes to capture the appropriate costs of the project, in accordance with acceptable accounting standards and practices. We also concluded that the current system in place was not conducive to reviewing supporting documents for such payments. Although this does not mean that all payments were improper, it does raise questions about the potential magnitude of improper disbursements.

Our internal control testing included 45 grant projects, focusing on projects open during FY 2005. Our test results were based on information received from the Division Offices through June 2005, and the most significant exceptions noted are summarized as follows:

Based on the analysis below and the results of our site visits, it appears that FHWA may still have a number of inactive grant projects open at September 30, 2005. The chart below shows the total number of Undelivered Orders (UDO) by age and their total dollar amounts at September 30, 2005.

Age (yrs) No. Grant Projects Amount in Absolute Value (in thousands)
3 and older 301 $ 2,238,037
2 612 2,690,024
1 629 37,262,586
Total 1,542 $ 42,190,647

The age indicates the number of years since the last transaction, whether it represents an obligation or disbursement.

The OIG recently issued a report that indicated that FHWA had made significant progress in freeing up idle funds for other infrastructure expansion and preservation projects by recently deobligating unneeded funds. The OIG report noted that, according to management, $757 million of inactive obligations had been recently deobligated and made those funds available for use on active transportation projects. The OIG's review was completed after the completion of our tests of internal controls performed in connection with the audit of the HTF statements at September 30, 2005, and the OIG has not yet performed extensive audit procedures to fully test management's representation.

In addition to our testing, DOT management also performed a review of FHWA's FY 2004 payments, including payments made by HTF Agencies' major grant programs in FY 2005. They concluded that there is little evidence of review of supporting documentation to ensure that those payments were made properly. As a result, management is currently working on a pilot project to develop and test a methodology for estimating the improper payments made to construction related grants programs.

Status Of Implementation Of New Policies And Procedures At September 30, 2005

Even though FHWA Management was aggressive in implementing FIRE during the second half of FY 2005, initial results gathered by us during the audit and by FHWA management in August 2005 have been mixed and, accordingly, the effectiveness of FIRE is inconclusive as of September 30, 2005. FHWA management has developed a time line for full implementation of FIRE by Division Offices, including training and independent testing by September 30, 2006.

Recommendations: We commend FHWA management for its FIRE program and its aggressive plan for training, procedural implementation and testing. However, the key to the success of this or any new program is for the program to be fully embraced by management in the Division Offices, with accountability consequences established. In addition, the implementation of these FIRE policies and procedures must be reviewed and monitored closely by headquarters to ensure compliance by the Division offices. We therefore recommend that such monitoring should include:

  1. Tracking risk assessment and review results issued by the Division Offices to assess the overall impact of these results on the grant programs;
  2. Conducting on-site quality reviews to ensure the proper implementation of the Program requirements;
  3. Follow-up on findings and potential issues in a timely manner to ensure that grantees and Division Offices implement necessary changes; and
  4. Update FIRE procedures as necessary to address specific weakness in the policies noted during the program's implementation.

With respect to inactive undelivered orders, we recommend that management continue to review the grant projects' undelivered orders balances that contain negative amounts or those that have been extended past one year to ensure inactive projects are liquidated promptly. This review should be conducted quarterly. Management should also continue to work with the states to institutionalize recently enacted new processes to identify and release unneeded obligations.

REPORTABLE CONDITIONS

1. Federal Lands Highway Program Transaction Processing and Reconciliations

Condition: FHWA has a program titled Federal Lands Highway Program (Fed Lands) whose mission is to plan, design, construct and rehabilitate roads and bridges providing access to, through and within Federal and Indian lands. Direct SAFETEA-LU funding for Fed Lands was approximately $750 million in FY 2005.

We reported in our prior year report several accounting deficiencies in the accounting for this program. Limited progress has been made during FY 2005 in resolving these deficiencies.

Fed Lands still has not performed a complete reconciliation for all open projects in Delphi since its conversion in FY 2003. Even though FHWA management has begun to reconcile project obligations, expenditures, advances, revenue and available funds during the last quarter of FY 2005, the reconciliation was not complete at September 30, 2005. The reconciliation initially provided by management contained Fed Lands Undelivered Orders (UDO) in the total amount of approximately $78 million, while another query from the same accounting system showed UDOs in the amount of approximately $695 million. Based on our testing of transactions during the year, we noted differences between amounts supported by source documentation and those reflected in Delphi.

In connection with our tests of the Fed Lands accounting process used by FHWA, we selected a sample of twenty-five Fed Lands transactions. Our examination included a review of source documentation to determine whether the transactions were properly authorized and complete. The sample was randomly selected to represent the characteristics of the population as a whole. The nature and extent of exceptions noted from our testing are similar to those noted last year, and are summarized below:

In addition, Fed Lands collects advance payments from other Federal Agencies prior to providing services. It also makes advance payments to other Federal Agencies prior to receiving services outlined in the inter-agency agreements. In prior years, earned revenues and expenses were not recorded at the transaction level based on when the service was provided or received, but recorded instead when cash was received or paid. As a result, some earned revenue and expense balances at year-end were inaccurately reported ($236 million and $265 million, respectively) in the financial statements at September 30, 2005. During FY 2005, Fed Lands began to record advances, but Treasury established transaction codes were not used. In addition, the earned revenue was recorded using SGL Account 5900 "Other Revenue," instead of SGL Account 5200, "Revenue from Services Provided."

Recommendations: We recommend the following:

  1. Establish comprehensive reconciliation policies and procedures to ensure that revenue, expense, advance, and obligation amounts are recorded correctly in Delphi on all open projects. Source documentation should be reviewed to ensure the accuracy of data in Delphi. Discrepancies should be researched and necessary adjustments made in Delphi in a timely manner.

    • Develop accurate subsidiary detail of the account balances for Fed Lands Highway Program, including allotment status, and eliminations at the transaction/project level to facilitate their reconciliation to the general ledger.
    • Develop written procedures for Fed Lands to assist staff in preparing reconciliations, including the review of such reconciliations by management. A complete reconciliation between Delphi and the source documentation should be performed for all open projects to ensure the accuracy and reliability of the data in Delphi. Policies should be established indicating individuals authorized to make adjustments to the general ledger as a result of the reconciliation and to communicate such adjustments to appropriate individuals (i.e., those involved in the reconciliation process.)

  2. Establish correct transaction codes in Delphi to properly record revenue and advance payments made to and collected from other agencies. Such recording should also be based upon when services are received or provided and should be reconciled on a periodic basis to source documentation.

  3. Implement procedures to ensure that source documentation supporting the payments is properly approved and maintained.

  4. Completed contracts should be closed immediately after the contractor has satisfied all contract requirements. FHWA management should review Delphi reports of open contract to determine the status of old contracts.

  5. Provide necessary training and oversight to all relevant personnel to ensure transaction documentation, procurement and approval procedures are followed. f) Strengthen procedures to ensure payments are made within 30 days of invoice receipt. g) Develop appropriate object class codes for Federal Lands transactions in Delphi, and implement procedures to ensure that all Federal Lands transactions are assigned to the proper object class.

2. Information Technology Control Weaknesses

Condition: HTF relies on extensive information technology systems to administer internal controls over the preparation of financial statements. Information technology systems are essential to ensure the integrity, confidentiality, and reliability of critical data while reducing the risk of errors, fraud and other illegal acts.

In our prior year report we noted that there was a Material Weakness in the Information Technology (IT) control environment. The report noted that such weakness directly affected the ability of users to rely on data being generated by the systems and, accordingly, required users to employ extended financial analysis of such information to ensure its accuracy. Without effective user controls, the data being generated from the information systems could not be relied upon to produce accurate financial statements. Accordingly, the breadth of weaknesses noted in FY 2004, and the lack of compensating controls to mitigate these weaknesses, collectively indicated a material weakness in internal control in FY 2004.

HTF agencies made significant progress in improving various aspects of the IT internal control environment during FY 2005. The remaining deficiencies in the IT control environment require management's attention; however, such remaining deficiencies constitute a Reportable Condition.

The following is a summary of the systems reviewed in connection with the FY 2005 audit of the HTF financial statements, along with a general discussion of weaknesses noted. Because of the sensitivity of the matters described below, a separate report ("Limited Use Management Letter") has been issued to management describing in detail, the specific deficiencies identified and recommendations to correct these deficiencies.

  1. Delphi — Delphi is referred to as the Central System for Financial Accounting and Reporting. It is used by all HTF agencies and is more commonly known as the general ledger accounting system.

    A SAS 70 (Statement of Auditing Standards No. 70) examination was performed on Delphi for period from October 1, 2004 to May 31, 2005. The SAS 70 report noted that Management's assertions relating to two of the ten control objectives (Logical Access and Physical Access Controls) were not suitably designed. The report also noted that three of ten control objectives (Security Administration, Logical Access and Physical Access controls) were not working effectively.

    General controls deficiencies noted do not effectively prevent (1) unauthorized access to and disclosure of sensitive information, (2) unauthorized changes to systems and applications software, or (3) lack of adherence to several applications of security programs. Other user controls are needed to compensate for this weakness.

  2. Specific Feeder Systems Applications - Grants related activity represents over ninety percent of activity reflected in the HTF financial statements. Accordingly, reliance on data being generated from these systems by the systems users is critical to their ability to prepare reliable financial statements in a timely manner. In addition, weaknesses noted could have a material effect on the amounts reflected in the HTF financial statements at September 30, 2005. Management has made progress in correcting weaknesses identified in FY 2004. However, we found some of the same issues during this year's audit. We have noted issues that require continued management attention.

    We tested general information technology controls and application controls over the following key systems in support of Highway Trust Fund's financial transactions and reporting:

    1. FHWA - Rapid Approval and State Payment System (RASPS), Fiscal Management Information System (FMIS), User Profile and Access Control System (UPACS), and Delphi Interface Management System (DIMS), and

    2. FTA - Electronic House Operation System (ECHO), Transportation Electronic Award Management System (TEAM), and Delphi Online Transaction System (DOTS)

    Weaknesses were noted in the grant management and payment systems used by FHWA and FTA relating to agency-wide security program planning and management, program change control, segregation of duties, access controls, business continuity planning, application control environment controls and duplicate payment systems.

    With respect to general controls, we found similar weaknesses as in prior years pertaining to the approval of system security program plans, approval of program changes, background checks for financial system contractors, logical access controls over financial applications, and financial systems access for separated employees, computer room environmental controls, and alternate processing facility.

    With respect to application controls in these feeder systems, we noted similar issues as identified last year, whereby the ECHO applications needed various improvements. Such improvements were centered on complying with the Federal Financial Management Improvement Act (FFMIA), compliance with OMB Circular NO. A-127 "Financial Management Systems," unsupported operating system/application platforms, and that TEAM and ECHO applications lacked auto log-off (standby) feature.

    Even though the data processed by TEAM and ECHO is primarily used in other DOT activities, the weaknesses noted do have some impact on certain amounts reported in the HTF financial statements.

Recommendation: We recommend HTF Agencies continue to work with DOT management to improve their information technology environment by implementing the specific recommendations provided in the aforementioned separate report. We have been informed that management has made changes to address many of the weaknesses noted during the audits. However, management must test the effectiveness of these changes during FY 2006, at which time they will be evaluated during the FY 2006 audit.

**********************************

We considered the Agencies internal control over Required Supplementary Stewardship Information by obtaining an understanding of the agency's internal control, determined whether these internal controls had been placed in operation, assessed control risk, and performed tests of controls as required by OMB Circular No. A-136 and not to provide assurance on these internal controls. Accordingly, we do not provide an opinion on such controls.

Finally, with respect to internal control related to performance measures reported in the Management Discussion and Analysis, we obtained an understanding of the design of significant internal controls relating to the existence and completeness assertions, as required by OMB Bulletin No. 01-02. Our procedures were not designed to provide assurance on internal control over reported performance measures and, accordingly, we do not provide an opinion on such controls.

In summary, the Material Weaknesses in internal control described above may adversely affect any decision by management that is based, in whole or in part, on information that is inaccurate because of the deficiencies. Unaudited financial information reported by HTF Agencies, including budget information, also may contain misstatements resulting from these deficiencies.

In addition to the reportable conditions described above, we noted certain matters involving internal control and its operations that we reported to the management of HTF Agencies in a separate letter dated November 8, 2005.

COMPLIANCE WITH LAWS AND REGULATIONS

Except as noted below, our tests for compliance with selected provisions of laws and regulations disclosed no other instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards or OMB audit guidance. The objective of our audit was not to provide an opinion on the Agencies' overall compliance with laws and regulations. Accordingly, we do not express such an opinion.

  1. Federal Managers Financial Integrity Act of 1982 (FMFIA) — FMFIA, and the related OMB Circular No. A-123 requires agencies to issue an Annual Statement to OMB on whether the Agency's financial management systems and automated information security programs conform with government-wide requirements, as defined by OMB Circular No. A-127. OMB Circular No. A-130, Appendix III, requires agencies to report security deficiencies and material weaknesses within their FMFIA reporting mechanisms as defined by OMB Circular No. A-123, and take corrective actions in accordance with that directive.

    Accordingly, those Agencies did not adequately document and/or validate their support for DOT's compliance with FMFIA. In general, the Agencies except for FMCSA, do not have complete formalized procedures in place to identify, assess, and monitor management controls over various financial areas, including their financial information systems. FMCSA has formally conducted risk assessment on its assessable units and developed a comprehensive FMFIA program.

    DOT's FMFIA report has made reference to the weaknesses in its internal control and its non-compliance with financial management systems and processes that are detailed in this audit report.

  2. Anti-Deficiency Act — The two previous year audit reports identified an anti-deficiency matter whereby DOT improperly expended the Treasury miscellaneous receipts in the amount of $49 million. DOT reported this violation to OMB and Congress in FY 2003. DOT returned $44 million to the Treasury through September 30, 2003. The remaining $5 million is mostly attributed to FHWA's Federal-Aid Highway activities. Due to lack of funding, FHWA has not returned the remaining $5 million to the Treasury as of September 30, 2005, and Congress has not provided a waiver for the repayments.

  3. Government Performance and Results Act of 1993 - GPRA requires agencies to adequately manage programs efficiently and effectively. To comply with this law Agencies must have a cost accounting system to capture costs of specific programs. As reported in FY 2003, HTF Agencies have not fully implemented the managerial cost accounting in FY 2004 and, accordingly, did not present the full cost of each program in its Statement of Net Cost for FY 2004.

    In response to the President's Management Agenda, HTF Agencies must devise an accounting methodology to allocate resource use by program objectives and link resource use to actual program results. HTF Agencies' strategic plans typically link management goals with program goals and objectives, but the full cost to accomplish the desired program result is not readily available to management. The Agencies do not allocate internal resources such as salaries, equipment, and program resources such as formula and discretionary grants to specific activities or program delivery outcomes. Cost accounting is intended to enhance this linkage by identifying the cost of Federal resources used by a program in relation to specific goals and objectives, and to support the process of resource allocation to program allocation in the budget process. Management did not adequately identify programs for disclosure in its financial statements. The line items detailed in Note 10 (Net Program Cost) to the financial statements were not consistent with OMB's definition of a program, "a specific activity or project as listed in the program and financing schedules of the annual budget of the

    U.S. Government." The implementation of a managerial cost accounting system will allow Agency management to analyze program costs in relation to achieving program objectives. This will enable management to improve the performance of program cost effectiveness.

SYSTEMS COMPLIANCE WITH FFMIA REQUIREMENTS

Under the Federal Financial Management Improvement Act of 1996 (FFMIA), we are required to report whether the financial management systems used by HTF Agencies substantially comply with the Federal financial management systems requirements, applicable Federal accounting standards, and the SGL at the transaction level. To meet this requirement, we performed tests of compliance with FFMIA Section 803a requirements.

The objective of our audit was not to provide an opinion on compliance with FFMIA. Accordingly, we do not express such an opinion. However, our work disclosed instances, described below, in which financial management systems used by HTF Agencies did not substantially, comply with federal financial management systems requirements, Federal Accounting Standards and the SGL at the transaction level. Such instances of noncompliance, summarized below, are described in more detail in the Material Weaknesses section of our Report on Internal Control.

  1. Preparation of Financial Statements -As indicated in our Report on Internal Controls, the process used, including utilization of the Delphi accounting system, was not adequate to prepare reliable and timely financial statements during the year or at September 30, 2005. Prior to preparing the HTF financial statements, an extensive amount of adjustments were made to the FHWA accounting records. Even though some of these adjustments are considered "normal cleanup" entries, many were the result of the performance of manually intensive analysis and reconciliations. In addition, these adjustments included entries to correct system processing errors, record activities not recorded at the transaction level due to the lack of standard transaction codes set up in Delphi, and entries to correct the discrepancies with the data reflected in subsidiary systems.

    FFMIA requires agencies to produce auditable financial statements based on data from its financial systems on a timely basis. Given the problems HTF Agencies encountered in generating reliable financial statements in a timely manner, and the difficulties they encountered with their accounting and reporting systems, HTF Agencies did not substantially comply with Federal financial management system requirements for the year ended September 30, 2005.

  2. Use of Standard General Ledger — The condition reported in FY 2004 continues. Agencies have not consistently used Delphi for routine accounting events at the transaction level to meet OMB and Treasury reporting requirements. Some examples of this condition are noted below:

    • Many day-to-day transactions made during the year and at year-end did not follow the SGL posting rules set forth by the Treasury because Delphi was not originally set up to record various types of trust fund transactions. Many transactions had to be manually reclassified from SGL Account 3107 and 5700 since these accounts do not apply to trust fund accounting.
    • NHTSA incorrectly recorded budgetary closing entries by not using SGL Account 4139 as the closing account for contract authority carried forward. A FACTS II adjustment was made at year-end to reclassify amounts between SGL 4139 and 4201.
    • HTF Agencies continue to use SGL accounts 1450, 2190, 2120, 2310 and 2980 for suspense transactions throughout fiscal 2005.
  3. Federal Accounting Standards — Some HTF Agencies were not in full compliance with the SFFAS No. 4 Managerial Cost Accounting Concepts and Standards for the Federal Government and the related provisions of the Government Performance and Results Act (GPRA). The FY 2004 financial statements did not properly reflect full costs or measure the effectiveness of the Agencies' programs. The Statement of Net Cost for HTF was not presented by GPRA program and was therefore not comparable to DOT's major goals and outputs described in its strategic and performance plan.
  4. Data Processing Control Environment — Reportable Condition No. 2 details the weaknesses in the Information Technology Control Environment.

STATUS OF PRIOR YEAR'S REPORTABLE CONDITIONS

As required by Government Auditing Standards and OMB Bulletin No. 01-02, Audit Requirements for Federal Financial Statements, we have reviewed the status of the Agencies' corrective actions with respect to the findings and recommendations included in the prior year's report on Agencies' internal control dated November 8, 2004. The following analysis provides our assessment of the progress Agencies have made through September 30, 2005 in correcting the conditions identified in the FY 2004 Internal Control and Laws and Regulations Compliance reports.

Internal Control Report:

The FY 2004 Internal Control Report identified the following Material Weaknesses:

Even though improvements have been made in the Financial Accounting Processes and Grants Financial Management Oversight, these conditions continue to exist and are described in Material Weakness Nos. 1 and 2, respectively. Reconciliation Procedures have also improved, but have been included with other matters in the Material Weakness relating to Financial Accounting Processes referred to above. Information Technology Control has also improved and, accordingly, the condition has been downgraded to a Reportable Condition (No. 2).

With respect to the prior year Reportable Condition relating to Federal Lands Highway Program, last year's condition continues to exist and is described in Reportable Condition No. 1.

Laws and Regulations Compliance:

  1. Condition — Single Audit Act of 1984 (SAA): We have noted significant improvement in reporting timeliness in FY 2005. Therefore, HTF agencies are considered to be in substantial compliance with the SAA.
  2. Condition — The Federal Managers Financial Integrity Act of 1982 (FMFIA): The conditions identified in the prior year report continued to exist in FY 2005. These matters are addressed in our Report on Compliance with Laws and Regulations.
  3. Condition — Anti-Deficiency Act: Improvements have been noted during FY 2005 and two of the three matters previously reported have been resolved. The one matter remaining (relating to FHWA) from our prior year report is addressed in our Report on Compliance with Laws and Regulations.
  4. Condition — Managerial Cost Accounting and Performance Measurement: The conditions identified in the prior year report continued to exist in FY 2005. These matters are addressed in our Report on Compliance with Laws and Regulations.
  5. Condition — Federal Financial Management Improvement Act (FFMIA) — Even though some improvements have been made during FY 2005, most of the conditions identified in the prior year report continued to exist in FY 2005. These matters are addressed in the section of the audit report titled Systems Compliance with FFMIA Requirements.

CONSISTENCY OF OTHER INFORMATION

Management's Discussion and Analysis, required supplementary information (including stewardship information), and other accompanying information contain a wide range of data, some of which are not directly related to the financial statements. We do not express an opinion on this information. However, we compared this information for consistency with the financial statements and discussed the methods of measurement and presentation with HTF officials. Based on this limited work, we found no material inconsistencies with the financial statements or nonconformance with OMB guidance.

OBJECTIVES, SCOPE AND METHODOLOGY

Management is responsible for (1) preparing the financial statements in conformity with generally accepted accounting principles, (2) establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of the FMFIA (as codified in 31 U.S.C. 3512) are met, (3) ensuring that the financial management systems used by Agencies substantially comply with FFMIA requirements, and (4) complying with other applicable laws and regulations.

We are responsible for obtaining reasonable assurance about whether the financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles.

We are also responsible for (1) obtaining a sufficient understanding of internal control over financial reporting and compliance to plan the audit, (2) testing whether the financial management systems used by Agencies substantially comply with the three FFMIA requirements, (3) testing compliance with selected provisions of laws and regulations that have a direct and material effect on the financial statements and laws for which OMB audit guidance requires testing, and (4) performing limited procedures with respect to certain other information appearing in the Accountability Report.

In order to fulfill these responsibilities, we (1) examined on a test basis, evidence supporting the amounts and disclosures in the financial statements, (2) assessed the accounting principles used and significant estimates made by management, (3) evaluated the overall presentation of the financial statements, (4) obtained an understanding of internal control related to financial reporting (including safeguarding of assets), compliance with laws and regulations (including execution of transactions in accordance with budget authority), and performance measures reported in Management's Discussion and Analysis of the Accountability Report, (5) tested relevant internal controls over financial reporting, and compliance, and evaluated the design and operating effectiveness of internal control, (6) considered the process for evaluating and reporting on internal control and financial management systems under FMFIA, (7) tested whether the financial management systems used by the Agencies substantially complied with the three FFMIA requirements, and (8) tested compliance with selected provisions of certain laws and regulations.

We did not evaluate all internal controls relevant to operating objectives as broadly defined by the FMFIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. Because of inherent limitations in internal control, misstatements due to error or fraud, losses, or noncompliance may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. In addition, we caution that our internal control testing may not be sufficient for other purposes.

We did not test compliance with all laws and regulations applicable to specific HTF Agencies. We limited our tests of compliance to those laws and regulations required by OMB audit guidance we deemed applicable to the financial statements for the fiscal year ended September 30, 2005. Our work on FFMIA would not necessarily disclose all instances of lack of substantial non-compliance with FFMIA requirements. We caution that noncompliance with laws and regulations may occur and not be detected by these tests and that such testing may not be sufficient for other purposes.

The CFOs of DOT and of each HTF Agency comprising the accounts of HTF have been assigned the responsibility of addressing the weaknesses identified in our report and ensuring the substantial compliance with FFMIA. Attached to this report (Appendix A) is Management's Response to the findings and recommendations summarized above.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America; the standards applicable to the financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

This report is intended solely for the information and use of the management of FHWA, NHTSA, FTA, FRA, FMCSA, DOT, and DOT-OIG, OMB and Congress, and is not intended to be, and should not be, used by anyone other than these specified parties.

Signature of Clifton GundersonCalverton, Maryland November 8, 2005

Department of Transportation, Highway Trust Fund, Independent Auditor's Report and Financial Statements - September 30, 2005 and 2004

Consolidated Balance Sheets
As of September 30, 2005 and 2004 (Dollars in thousands)

  2005 2004
ASSETS    
Intragovernmental:    
Fund balance with Treasury (Note 2) $ 4,217,543 $ 4,270,531
Investments (Note 3) 8,270,638 10,211,852
Accounts receivable, net (Note 4) 28,805 594
Other assets (Note 5) 51,958 14,052
Total intragovernmental 12,568,944 14,497,029
Accounts receivable, net (Note 4) 11,271 14,889
Property, plant and equipment, net (Note 6) 106,653 47,021
Other assets (Note 5) 116,062 172,220
Total Assets $ 12,802,930 $ 14,731,159
Liabilities    
Intragovernmental:    
Accounts payable $ 4,923 $ 8,369
Other liabilities (Note 8) 97,309 53,964
Total intragovernmental 102,232 62,333
Accounts payable 52,017 139,252
Federal employee and veterans’ benefit payable (Note 9) 12,134 12,455
Grant liabilities (Note 7) 2,274,780 2,195,580
Other liabilities (Note 8) 130,339 180,966
Total liabilities 2,571,502 2,590,586
Net Position - Cumulative results of operations 10,231,428 12,140,573
Total Liabilities and Net Position $ 12,802,930 $ 14,731,159

Consolidated Statements of Net Cost
As of September 30, 2005 and 2004 (Dollars in thousands)

  2005 2004
     
PROGRAM COSTS - Surface Transportation (Note 10)    
     
Intragovernmental gross costs $ 377,145 $ 477,181
Less: intragovernmental earned revenue (27,607) (9,305)
Intragovernmental net costs 349,538 467,876
     
Gross costs with the public 31,932,575 30,965,084
Less: earned revenues from the public (49,348) (4,533)
Net costs with the public 31,883,227 30,960,551
     
NET COST OF OPERATIONS $ 32,232,765 $ 31,428,427

Consolidated Statements of Changes in Net Position
As of September 30, 2005 and 2004 (Dollars in thousands)

  2005 2004
  Cumulative Results of Operations Cumulative Results of Operations
     
BEGINNING BALANCES $ 12,140,573 $ 15,797,756
     
budgetary financing sources:    
Excise taxes/non-exchange revenue (Note 11) 37,901,628 34,724,328
Transfers in/out without reimbursement (7,664,303) (6,825,397)
Other adjustments, rescissions, etc. 54,802 (155,777)
     
OTHER FINANCING SOURCES:    
Imputed financing from costs absorbed by others 31,493 28,090
     
Total FINANCING SOURCES 30,323,620 27,771,244
     
NET COST OF OPERATIONS 32,232,765 31,428,427
     
ENDING BALANCES $ 10,231,428 $ 12,140,573

Combined Statements of Budgetary Resources
As of September 30, 2005 and 2004 (Dollars in thousands)

  2005 2004
BUDGETARY RESOURCES (Note 12)   (Restated-Note 14)
Budget authority:    
Appropriations received $ 44,392,531 $ 40,563,870
Contract authority 46,453,972 42,564,413
Other 24,992 25
Unobligated balance:    
Beginning of period 29,635,090 25,324,053
Subtotal 120,506,585 108,452,361
Spending authority from offsetting collections:    
Earned:    
Collected 79,127 76,595
Receivable from Federal sources 2,418 14,523
Change in unfilled customer orders:    
Advances received 26,577 93,584
Without advance from Federal sources (34,985) 20,446
Transfers from trust funds 14,191 11,150
Subtotal 87,328 216,298
     
Recoveries of prior year obligations 43,169 22,179
Temporarily not available pursuant to Public Law - (28,661)
Permanently not available (43,837,032) (40,965,872)
     
Total Budgetary Resources $ 76,800,050 $ 67,696,305
     
STATUS OF BUDGETARY RESOURCES:    
Obligations incurred    
Direct $ 41,960,718 $ 38,184,298
Reimbursable 29,003 21,218
Subtotal 41,989,721 38,205,516
Unobligated balance:    
Apportioned 10,534,946 7,191,471
Exempt from apportionment 28,065 80,310
Unobligated balance not available 24,247,318 22,219,008
     
Total Status of Budgetary Resources $ 76,800,050 $ 67,696,305
     
RELATIONSHIP OF OBLIGATIONS TO OUTLAYS:    
Obligated balance, net – beginning of period $ 43,288,571 $ 43,773,115
Obligated balance, net – end of period:    
Accounts receivable (17,187) (14,537)
Unfilled customer orders from Federal sources (23,997) (33,637)
Undelivered orders 42,755,413 40,985,050
Accounts payable 2,397,208 2,387,089
Outlays:    
Disbursements 40,156,253 38,623,114
Collections (119,896) (181,329)
Subtotal 40,036,357 38,441,785
Less offsetting receipts - (7,494)
Net Outlays $ 40,036,357 $ 38,434,291

Consolidated Statements of Financing
As of September 30, 2005 and 2004 (Dollars in thousands)

  2005 2004
RESOURCES USED TO FINANCE ACTIVITIES    
Budgetary Resources Obligated:    
Obligations incurred $ 41,989,721 $ 38,205,516
Less: spending authority from offsetting collections and recoveries (130,497) (238,477)
Obligations net of offsetting collections and recoveries 41,859,224 37,967,039
Less: offsetting receipts - (7,494)
Net obligations 41,859,224 37,959,545
     
Non-budgetary Resources:    
Imputed financing from costs absorbed by others 31,493 28,090
Net non-budgetary resources used to finance activities 31,493 28,090
Total Resources Used to Finance Activities 41,890,717 37,987,635
     
RESOURCES USED TO FINANCE ITEMS NOT PART OF THE COST OF OPERATIONS    
Change in budgetary resources obligated for goods, services and benefit ordered but not yet provided 2,008,851 64,917
Resources that fund expenses recognized in prior periods 4,703 382
Resources that finance the acquisition of assets 4,885 -
Other resources or adjustments to net obligated resources that do not affect net cost of operations 7,678,959 6,731,837
Total Resources Used to Finance Items Not Part of the Net Cost of Operations 9,697,398 6,797,136
     
Total Resources Used to Finance the Net Cost of Operations 32,193,319 31,190,499
     
COMPONENTS OF NET COST OF OPERATIONS THAT WILL NOT REQUIRE OR GENERATE RESOURCES IN THE CURRENT PERIOD    
Components Requiring or Generating Resources in Future Periods:    
Increase in annual leave liability 18,296 13,525
Other 18,357 207,574
Total Components of Net Cost of Operations That Will Require or Generate Resources in Future Periods 36,653 221,099
     
Components Not Requiring or Generating Resources:    
Depreciation and amortization 2,653 1,099
Revaluation of assets or liabilities 67 15,730
Other 73 -
     
Total Components of Net Cost of Operations That Will Not Require or Generate Resources 2,793 16,829
     
Total Components of Net Cost of Operations That Will Not Require or Generate Resources in the Current Period 39,446 237,928
     
NET COST OF OPERATIONS $ 32,232,765 $ 31,428,427

Notes to Financial Statements
As of September 30, 2005 and 2004 (Dollars in thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Highway Trust Fund (HTF) comprise The Highway Corpus Trust Fund, held by the U.S. Department of Treasury Bureau of Public Debt, and certain accounts of the following Operating Administrations (Agency) of the Department of Transportation (DOT): Federal Highway Administration (FHWA), National Highway Traffic Safety Administration (NHTSA), Federal Transit Administration (FTA), Federal Railroad Administration (FRA), and Federal Motor Carrier Safety Administration (FMCSA). 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 Agencies and the U.S. Department of the Treasury, Bureau of Public Debt. Such financial statements have been prepared in accordance with generally accepted accounting principles (GAAP), and the form and content requirements specified by the Office of Management and Budget’s (OMB) Circular entitled, Financial Reporting Requirements No. A-136, which replaced OMB Bulletin 01-09. 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.

Reporting Entity

For purposes of this financial statement, the principal reporting entity is HTF, not the performing agencies. Accordingly all assets are considered “non-entity assets.” The financial statements report activity for all relevant funds and such activity is under the ground transportation budget function category. 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 embrace highway safety.


NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Reporting Entity (Continued)

Federal Highway Administration (FHWA)

69X8083 Federal Aid Highways Liquidation of Contract Authority

69X8072 Appalachian Highway Development System

30 Accounts Miscellaneous Trust Fund Accounts

National Highway Traffic Safety Administration (NHTSA)

69X8020 Highway Traffic Safety Grants

69X8016 Trust Fund and Traffic Safety Programs

69X8362 National Driver Register

Federal Transit Administration (FTA)

69X8191 Mass Transportation Capital Fund

69X8350 Trust Fund Share of Expenses

Federal Railroad Administration (FRA)

69X8552 High-Speed Ground Transportation

Federal Motor Carrier Safety Administration (FMCSA)

69X8048 National Motor Carrier Safety Grants

69X8055 Motor Carrier Safety Administrative Expenses

698274 Safety of Cross-Border Trucking

US Department of the Treasury, Bureau of Public Debt (Corpus HTF)

2081021 Corpus Highway Trust Fund

2081022 Corpus Mass Transit Account

Budgets and Budgetary Accounting

Programs are financed from authorizations enacted in highway and transit authorizing legislation and codified in Title 23 United States Code. Funds apportioned to states under Title 23 U.S.C. and Title 49, Subtitle III by the Secretary of Transportation Funds for highway and transit construction activities in advance of liquidating appropriations are available for a specific time period. Annual appropriation laws establish the level of obligations, which States can obligate against their Federal Aid funds in any single year. Obligations are incurred based on these annual limitations under allotment control procedures. Liquidating appropriations enable Federal aid payments to be made to states as claims are submitted and approved for payment.
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Budgets and Budgetary Accounting (Continued)

The HTF Agencies recognize budgetary resources as assets when cash funds held by the Department of Treasury (Treasury) is made available through the Department of Treasury General Fund warrants and Trust Fund transfers.

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. The financial statements were prepared following accrual accounting. 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 A-136.

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 these estimates. Significant estimates underlying the accompanying financial statements include (a) the allocation of trust fund receipts by the Office of Treasury Assessment (OTA), (b) year-end accruals of accounts and grants payable, (c) accrued workers’ compensation, and (d) allowance for doubtful accounts receivable. Actual results may differ from these estimates, and the difference will be reflected in the financial statements of that fiscal year.

Revenue and Other Financing Sources

All programs and activities covered by these financial statements are financed from excise taxes collected on specific motor fuels and tires. Annual appropriations make available these tax revenues collected for programs and activities as authorized by law. A small portion of activities is financed from offsetting collections for reimbursable work performed under agreement. Taxes are recognized as revenues at the time they are deposited in the Corpus Highway Trust Fund account.

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Funds with the U. S. Treasury and Cash

Funds appropriated for Federal Aid Highways and Mass Transit programs remain invested in non-interest bearing securities by the Treasury. As approved claims are submitted and approved for payment, requests for cash are made to the Treasury, securities are divested and funds are made available for payment of claims. Small amounts of cash receipts are deposited daily through a commercial lockbox bank. No cash is held outside the United States in foreign currency, gold or other monetary assets.

Investments in U. S. Government Securities

It is the responsibility of the Secretary of the Treasury to invest such portions of the trust fund that exceed current needs. Such investments may only be made in non-marketable obligations of the United States or in obligations guaranteed as to both principal and interest by the United States. Investments are controlled and processed by the Department of Treasury, Bureau of Public Debt.

Accounts Receivable

Accounts receivables are reported net of an allowance for uncollectible accounts. The balance consists primarily of cash drawn down from Treasury and recorded as a receivable to offset the liability on the Bureau of Public Debt book until needed by the allocation agencies to support State programs. In addition, some accounts receivable represents services performed for other Federal agencies under general working agreements with Federal agencies responsible for designated Federal domain areas such as park roads and parkways, forest highways, etc. Administrative reimbursable receivables represent technical services billed, motor carrier fines and penalties, reimbursements from employees, and miscellaneous refunds.

Property and Equipment

Property and equipment purchases are valued at cost and are capitalized when cost is $25 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 useful lives ranging from three to five years, ADP Software for five years, and structures, facilities and capital improvements ranging for thirty years. Class lives for all property are based on an Internal Revenue Service classification system. Routine maintenance and repair costs are
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property and Equipment (Continued)

expensed as incurred. Depreciation expense is recouped through rates assessed against Federal Lands Highway projects.

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 is dependent on future congressional appropriations or other funding. Intragovernmental liabilities are claims against HTF Agencies by other Federal entities.

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 estimated amounts incurred, but not yet claimed by HTF contract recipients, and unpaid goods and services received by HTF agencies.

Grant Liability

The grant accrued liability consists of requests for payments from grantees outstanding at September 30, plus an accrual for grantee expenses incurred but yet not reported to the HTF Agency as of September 30.

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, restore leave, and sick leave in certain circumstances, are accrued at year-end, based on latest pay rates and unused hours of leave. 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. Nonvested leave is expensed when used.

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accrued Workers’ Compensation

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.

Retirement Plans

The majority of employees whose salaries are paid from the trust fund participate in the Federal Employees Retirement System (FERS). Other employees participate in the Civil Service Retirement System (CSRS). FERS went into effect pursuant to Pubic 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 seven percent (7%) 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) and FERS.

The FASAB’s SFFAS No. 5, “Accounting for Liabilities of the Federal Government,” 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 Statement of Changes in Net Position, the Statement of Net Cost, and the Statement of Financing, respectively. These imputed balances do not affect the net position of HTF.

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

Contingencies

A contingency is an existing condition, situation or set of circumstances involving uncertainty as to possible gain or loss to an Agency of DOT. 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 litigations, a contingent liability is recognized when similar events occur except that the future outflow or other sacrifice of resources is more likely than not.

Reclassifications

Certain reclassifications were made to the FY 2004 financial statement presentation to conform with that used in FY 2005.

NOTE 2 – FUND BALANCES WITH TREASURY

Fund balances with Treasury are considered trust funds, and represent obligated balances not yet disbursed. The following table summarizes such funds by HTF Agency at September 30, 2005 and 2004:

  2005 2004
     
FHWA $ 1,148,030 $ 522,097
Corpus HTF 2,548,949 3,349,741
FMCSA 207,745 124,282
FTA 17,185 39,959
NHTSA 295,322 234,140
FRA 312 312
     
Total $ 4,217,543 $ 4,270,531


NOTE 3 - INVESTMENTS

Investments (cost equals market value) at September 30, 2005 and 2004 are summarized as follows:

  2005 2004
     
Highway Account $ 6,664,027 $ 6,819,962
Mass Transit Account 1,606,611 3,391,890
     
Total $ 8,270,638 $ 10,211,852

Securities represent non-marketable market based U.S. Treasury Certificates of Indebtedness. As provided by Section B of the Comparison of Transportation Revenue and Related Provisions of H.R. 2400, the Highway Trust Fund earns no interest on these securities. The amount by HTF Agency that has been appropriated, but not yet been transferred to DOT is detailed below:

  2005 2004
     
FHWA – Federal Aid $ 10,714,801 $ 6,666,776
FHWA - Other 579,787 809,400
FMCSA 166,135 165,832
NHTSA 2,280 -
FTA 245,000 377,050
     
Total $ 11,708,003 $ 8,019,058

NOTE 4 - ACCOUNTS RECEIVABLE

Accounts receivable as of September 30, 2005 and 2004 are summarized as follows:

  2005 2004
Accounts Receivable
Principal		 Allowance Net

Accounts Receivable		 Accounts Receivable Principal Allowance Net

Accounts Receivable
             
             
Intragovernmental $ 28,805 $ - $ 28,805 $ 594 $ - $ 594
With the Public 11,271 - 11,271 14,889 - 14,889
             
Total $ 40,076 $ - $ 40,076 $ 15,483 $ - $ 15,483

NOTE 4 - ACCOUNTS RECEIVABLE (CONTINUED)

Account receivable balances as of September 30, 2005 and 2004 by Agency are as follows:

  2005 2004
  Intragovernmental Public Intragovernmental Public
         
FHWA $ 11,319,448 $ 9,441 $ 7,476,770 $ 11,820
NHTSA 2,280 357 - -
FMCSA 170,030 1,473 165,832 3,069
FTA 245,050 - 377,050 -
Less elimination (Note 3) (11,708,003) - (8,019,058) -
         
Total $ 28,805 $ 11,271 $ 594 $ 14,889

NOTE 5 – OTHER ASSETS

Other assets at September 30, 2005 and 2004 are summarized as follows:

  2005 2004
     
Intragovernmental – Advances and prepayments $ 51,958 $ 14,052
     
With the Public:    
Advances to states for rights of way 95,860 98,557
Other advances and prepayments 20,202 73,663
Subtotal 116,062 172,220
Total $ 168,020 $ 186,272

Intragovernmental other assets consist of advances paid to other government agencies for expenses not yet incurred, or for goods or services not yet received, and undistributed assets and payments.

NOTE 6 –PROPERTY, PLANT AND EQUIPMENT

Property and equipment at September 30, 2005 and 2004 are summarized as follows:

  2005 2004
  Acquisition Cost Accumulated Depreciation Book

Value		 Acquisition Cost Accumulated Depreciation Book

Value
             
Land $ 6,377 $ - $ 6,377 $ 180 $ - $ 180
Buildings and structures 43,165 435 42,730 17,488 - 17,488
Furniture and equipment 58,365 25,847 32,518 48,462 20,024 28,438
Other 1,766 210 1,556 873 - 873
Construction in progress 23,472 - 23,472 42 - 42
             
Total $ 133,145 $ 26,492 $ 106,653 $ 67,045 $ 20,024 $ 47,021

FHWA recognizes amortization of costs (depreciation) over the life of assets. Capital expenditures for property are recognized as expended when applied to projects and/or upon disposal of assets.

Road construction equipment on Federal highway supervised projects account for the largest portion of the equipment/depreciation expense. The recorded construction equipment expense is based on the number of hours to total useful operating life.

Buildings consist of the Turner Fairbank Research Station located in Langley, Virginia and a historically designated Mule Barn in Vancouver, Washington.

NOTE 7 – GRANT LIABILITIES

Grant liabilities consist of two distinct categories and cover three Agencies: FHWA (Federal Aid and Federal Lands), FMCSA, and NHTSA.

The first category is grant related requests for payments that had been billed to an Agency entity as of September 30, but had not yet been paid. The information related to this portion of the grant liability is obtained directly from the DELPHI corporate accounting system as of September 30.

The second category is for grant related costs incurred, but not yet reported (IBNR). IBNR represents an estimate of amounts due to grantees for their expenditures made through September 30, for which payment requests have not been received from the grantees as of September 30.

NOTE 7 – GRANT LIABILITIES (CONTINUED)

The grant accrual calculation is principally based on the results of studies and grantee surveys conducted by the Agencies. The results of such studies resulted in an average number of days work that would have been incurred but not yet reported to the HTF Agency for disbursements. This calculated number of days is multiplied by an amount representing grant disbursements for a particular period of time to determine the amount of the grant liability accrual at year-end.

Grant liabilities by Agency at September 30, 2005 and 2004 are summarized as follows:

  2005 2004
     
FHWA $ 2,196,806 $ 2,115,993
FMCSA 17,972 10,268
NHTSA 60,002 69,319
     
Total $ 2,274,780 $ 2,195,580

NOTE 8 – OTHER LIABILITIES

  2005 2004
  Non-Current Liabilities Current

Liabilities		 Total Non-Current Liabilities Current

Liabilities		 Total
           
Intragovernmental          
Covered by budgetary resources:
Advances and prepayments
$ -
$ 91,371
$ 91,371
$ -
$ 48,085
$ 48,085
Accrued pay and benefits
-
2,259
2,259
-
2,090
2,090
Other
109
552
661
-
793
793
Total Intragovernmental

Liabilities Covered by

Budgetary Resources
109
94,182
94,291
-
50,968
50,968
 
Not covered by budgetary resources:
Federal Employees Compensation

Act
1,430
1,014
2,444
1,335
1,538
2,873
Other
-
574
574
-
123
123
Total Intragovernmental

Liabilities Not Covered by

Budgetary Resources
1,430
1,588
3,018
1,335
1,661
2,996
 
Total Intragovernmental

Other Liabilities
$ 1,539
$ 95,770
$ 97,309
$ 1,335
$ 52,629
$ 53,964

NOTE 8 – OTHER LIABILITIES (CONTINUED)

  2005 2004
  Non-Current Liabilities Current

Liabilities		 Total Non-Current Liabilities Current

Liabilities		 Total
         
Public          
Covered by budgetary resources:          
Other accrued unbilled payments $ - $ 68,748 $ 68,748 $ - $ 52,422 $ 52,422
Accrued pay and benefits - 40,877 40,877 - 12,485 12,485
Undistributed and unapplied

collections		 - - - - - -
Advances and prepayments - 2,945 2,945 - 289 289
Other - 1,141 1,141 - 28 28
Total Public Liabilities Covered

by Budgetary Resources		 - 113,711 113,711 - 65,224 65,224
           
Non-covered by budgetary resources:          
Accrued pay and benefits - 16,498 16,498 - 8,283 8,283
Other - 130 130 - 107,459 107,459
Total Public Liabilities Not

Covered by Budgetary

Resources		 - 16,628 16,628 - 115,742 115,742
Total Public Other Liabilities $ - $ 130,339 $ 130,339 $ - $ 180,966 $ 180,966

NOTE 9 – LIABILITIES NOT COVERED BY BUDGETARY RESOURCES

  2005 2004
     
Intragovernmental - other liabilities $ 3,018 $ 2,996
Federal employee and veterans’ benefits payable 12,134 12,455
Other 16,628 115,742
     
Total Liabilities Not Covered by Budgetary Resources 31,780 131,193
Total Liabilities Covered by Budgetary Resources 2,539,722 2,459,393
     
Total $ 2,571,502 $ 2,590,586

The Department of Labor calculates the FECA liability for DOT. DOT allocates the liability amount to the HTF Agencies based upon actual worker’s compensation payments to HTF Agency employees over the preceding four years. FECA liabilities include the expected liability for death, disability, medical and miscellaneous costs for approved compensation cases, plus a component for incurred but not reported claims. The estimated liability is not covered by budgetary resources and thus will require future appropriated funding.

NOTE 10 – NET PROGRAM COSTS

  2005 2004
Surface Transportation Programs    
Interstate Maintenance $ 4,109,000 $ 3,933,214
National Highway System 7,149,319 7,116,070
Bridge Program 3,986,213 3,498,203
Surface Transportation 7,496,099 7,256,287
Minimum Guarantee 2,302,346 2,516,100
Federal Lands Highways 314,338 221,599
Emergency Relief 800,782 177,015
Research and Development 566,411 816,813
Congestion Mitigation and Air Quality 810,589 937,166
Safety Programs 89,826 91,560
High Priority Projects 1,102,491 1,183,664
Planning 140,420 142,232
Appalachian Highway System 291,269 261,943
Other Highway Trust Funds 246,567 301,682
Miscellaneous Highway Trust Funds 99,575 188,411
Transit Programs 16,501 214,136
NHTSA Programs 353,676 622,217
FMCSA Programs 381,217 396,829
Department of Interior Allocated Programs 98,252 401,112
Department of Transportation Allocated Programs 700,362 23,144
Administration 467,205 356,592
Other – small miscellaneous projects 710,307 772,438
     
Total $ 32,232,765 $ 31,428,427

In order to provide more accurate reporting, management changed the manner in which it allocated costs to its Surface Transportation Programs in FY 2005. Such changes involved the method of categorizing projects within programs and a revision to the allocation of the grant accrual to each program. The "Other” category is comprised of small miscellaneous projects. The new method was not retroactively applied to FY 2004 amounts.

NOTE 11 – EXCISE TAXES AND NON-EXCHANGE REVENUE

The Internal Revenue Service (IRS) collects various excise taxes that are deposited into the HTF. These are used to fund operations in FHA, FTA, NHTSA, FRA, and FMCSA. The United States Treasury estimates the amount collected/revenue recognized, and adjusts such estimates for the
NOTE 11 – EXCISE TAXES AND NON-EXCHANGE REVENUE (CONTINUED)

actual quarterly collections. The IRS submits certificates of actual tax collections to FHWA six months after the quarter-end and, accordingly, the HTF financials statements are adjusted to reflect such actual amounts at that time. Accordingly, total taxes recognized for the year ended September 30, 2005 and 2004 includes the Office of Tax Analysis (OTA) estimates as follows:

Quarter Ended 2005 2004
     
June 30 $ 10,264,935 $ 9,042,544
September 30 9,731,466 8,689,872

For the six months ended September 30, 2004 actual tax collections reported by the IRS were greater than the OTA estimate by approximately $300,000. Since this actual information was only available after the end of FY 2004, the difference is reflected in the FY 2005 financial statements as a change in estimate.

For the six months ended March 31, 2005 actual tax collections reported by the IRS were less than the OTA estimates by approximately $815,000. The financial statements of HTF reflect actual tax collections for the six months ended March 31, 2005 plus an estimate of tax collections expected for the two quarters ended June 30, 2005 and September 30, 2005, as noted in the above table. Actual tax collections data for the two quarters ended June 30, 2005 and September 30, 2005 will not be available from the IRS until December 2005 and March 2006, respectively. Management does not believe that the actual tax collections for the quarters ended June 30, 2005 and September 30, 2005 will be materially different than the OTA estimate of such collections for those quarters.

For the years ended September 30, 2005 and 2004, respectively, excise taxes and associated nonexchange revenue, which are reported on the Statement of Changes in Net Position, were as follows:

  2005 2004
     
Excise taxes (transferred from the general fund):    
Gasohol $ 1,797,493 $ 5,716,127
Diesel and special motor fuels 9,551,359 8,935,465
Trucks 4,549,657 3,237,017
Gasoline 23,420,989 18,244,158
Fines and penalties 14,070 16,482
Total taxes 39,333,568 36,149,249
     
Less transfer to:    
Land and water conversation fund $ (1,000) $ (1,000)
General fund (113,994) (111,350)
Aquatic reserve (320,127) (311,639)
Gross taxes 38,898,447 35,725,260
     
Less refunds of taxes (reimbursed to general fund):    
Gasoline (308,508) (305,286)
Gasohol (17,063) (27,751)
Diesel (639,083) (625,821)
Special motor fuel (4,454) (1,342)
Gas to make gasohol (11,500) (22,865)
Diesel fuel bus use (26,246) (31,423)
Total refund of taxes (1,006,854) (1,014,488)
     
Total excise taxes 37,891,593 34,710,772
Other non-exchange revenue 10,035 13,556
     
Net Non-Exchange Revenue $ 37,901,628 $ 34,724,328

Motor Vehicle Tax Evasion (MFTE) – FHWA is addressing actions to be taken about the possible effects of anticipated future demands, events, conditions and trends related to MFTE, generally accepted to cost the trust fund about $1 billion or more annually. MFTE-related monies have been spent by the Internal Revenue Service to improve MFTE enforcement and determine the necessary program management changes needed. Working with the IRS, FHWA will develop a written oversight plan to identify future actions to oversee the development and implementation of highway use tax evasion project activity. During FY 2005 expenditures for the Highway Trust Fund exceeded revenue by approximately $6.4 billion. The Highway Trust Fund equity (Corpus) available as of September 30, 2005 is $10,819,587. However, Congress has authorized appropriations in excess of current available trust fund assets that amounts to $888,416 after considering amounts already transferred to the HTF agencies. FHWA is continuing to analyze the impact that SAFETEA-LU will have on the trust fund.

NOTE 12 – STATEMENT OF BUDGETARY RESOURCES

  2005 2004
     
The amount of direct and reimbursable obligations incurred against amounts apportioned under Category A, B and exempt from apportionment as of September 30 $ 41,989,721 $ 38,205,516
     
Available contract authority as of September 30 $ 34,810,329 $ 29,490,789

HTF Agencies did not have borrowing authority, repayment requirements, permanent indefinite appropriations, or receive any contributed capital in either fiscal year 2005 or 2004.

Unobligated balances of budgetary resources of unexpired accounts are available in subsequent years upon apportionment from OMB, and are subject to the obligation limitation contained in DOT Appropriations Acts. As a result of the obligation limitation, $25,357,953 and $24,222,017 was not available for obligation in FY 2005 and 2004, respectively. Unobligated balances of expired accounts are not available.

Appropriations received consist of liquidating contract authority that has been appropriated in the current year’s appropriation bill (P.L. 108-447). In addition, FHWA received supplemental emergency relief related to Florida hurricanes of $741,000 (P.L. 108-447) and $1,202,000 (P.L. 108-324), and $3,628 for TIFIA re-estimates.

HTF Agencies did not have borrowing authority, repayment requirements, permanent indefinite appropriations, or receive any contributed capital in FY 2005 and 2004.

The Federal-Aid Highway Act of 1956, as amended by subsequent legislation, established the Highway Trust Fund (HTF) as a mechanism for financing the accelerated highway program. It is a user-supported fund, with the revenues of the HTF identified for financing highways, and the taxes dedicated to the HTF paid by the users of highways. The HTF Corpus is a utility account that receives no budgetary resources. Excise and user taxes are collected by the Treasury and deposited to the HTF Corpus. Deposits not needed immediately for payments are invested by the Treasury’s Bureau of Public Debt (BPD) in non-interest bearing public debt securities. As funds are needed for payments, HTF Corpus investments are liquidated and funds transferred to FHWA for payment of obligations. Given the nature of the HTF Corpus activity, the budgetary resources relating to “HTF Corpus” account activity is not reflected in the HTF Statement of Budgetary Resources at September 30, 2004; however, such budgetary resources arereflected in the “Budget of the United States Government”. There are other differences between the information required by SFFAS No. 7 and the amounts in the amounts described as “actual” FY
NOTE 12 – STATEMENT OF BUDGETARY RESOURCES (CONTINUED)

2005 “Budget of the United States Government” aggregating approximately $980,000 for which management is researching with Treasury. Adjustments were posted to the unobligated balance carried forward at the beginning of FY 2004 as part of the restatement of the FY 2004 SBR. This adjustment resulted in differences of $2,539,000 to the unobligated balance at the beginning of the period and $2,261,000 to the unobligated balance at the end of the period that were less than what was reported in the 2004 actual column of the FY 2006 Budget of the United States Government.

Budget authority was allocated to and administered by departments outside of DOT in the amount of $297,918 in FY 2005 and $259,468 in FY 2004, the majority of which related to the Department of the Interior.

The September 30, 2004 obligated balance does not tie directly to the FY 2005 beginning balance. The difference is primarily due to negative balances at September 30, 2004 that were listed as positive balances in the amount of $121,900.

The Statement of Budgetary Resources (SBR) is combined and as such, intra-entity transactions have not been eliminated.

For FY 2006, the enacted budget of the United States has not been finalized. The President’s Budget of the United States for FY 2007 will not be published until February 2006, therefore, FHWA is unable to confirm if differences exist between the information required by SFFAS No. 7 and the amounts described as “actual” for FY 2005 in the FY 2007 Budget of the United States. The information will be published on OMB’s website located at www.whitehouse.gov.omb.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Advance Construction – FHWA pre-authorizes states to establish construction budgets without having received appropriations from Congress for such projects. FHWA does not guarantee the ultimate funding to the states for these “Advance Construction” projects and, accordingly, does not obligate any funds for these projects. When funding becomes available to FHWA, the states can then apply for reimbursement of costs that they have incurred on such project, at which time FHWA can accept or reject such request. At September 30, 2005 and 2004, $40,111,485 and $36,337,275, respectively, has been pre-authorized under these arrangements; however, no liability is reflected in the HTF financial statements for these arrangements.


NOTE 13 – CONTINGENCIES (CONTINUED)

Hurricane Emergency Relief – FHWA is in the process of identifying hurricane ravaged roads and bridges in the States affected by Hurricane Katrina. As of September 30, 2005 the total amount of damage had not yet been determined and it is unknown how much it will cost to repair the hurricane damage to the highway infrastructure. Damage surveys are currently ongoing to identify the scope of the damage. FHWA has established the following reporting categories to track cost for Katrina and the current obligations and expenditures for each category.

At September 30, 2005 October 2005
Reporting Category Obligations Expenditures Obligations Expenditures
         
Obligations and expenses related to the early response and clean-up aid directly out of FHWA’s appropriations and not eligible for reimbursement from FEMA or any other government agency. $ 46,535 $ 4,574 $ 3,899 $ -
         
Obligations and expenses related to the early response and clean-up incurred via a “Mission Assignment” (MA) with FEMA or other reimbursable vehicle from a government agency such as the DOD or the State Department. 55 5 - -
         
Obligations and expenses related to the rebuilding of hurricane affected areas paid directly out of FHWA appropriations. 4,157 9 14,137 -
         
Obligations and expenses related to the rebuilding of hurricane affected areas incurred via a MA and FEMA or other reimbursable vehicle from a government agency such as DOD or the State Department. 10 1 - -
         
Totals $ 50,757 $ 4,589 $ 18,036 $ -

Litigations– There are legal actions pending against the Agencies in Federal courts in which claims have been asserted that may be based on action taken by the Agencies. Management intends to vigorously contest all such claims. Management believes, based on information provided by legal counsel, that losses, if any, for the majority of these cases would not have a material impact on the Financial Statements. There are other cases that could result in significant payouts; however, legal counsel is unable to determine the probability of an unfavorable outcome, or determine an estimate or range of potential loss, for these matters, if any. No loss accrual has been made for these cases outstanding at September 30, 2005 or 2004.


Note 14 – RESTATEMENT OF AMOUNTS IN FY 2004 STATEMENT OF BUDGETARY RESOURCES

Significant adjustments were needed to the amounts previously reported on the Statement of Budgetary Resources (SBR) at September 30, 2004. The adjustments related to an error in unobligated balances and contract authority temporarily not available pursuant to public law which had been brought forward on FHWA’s Apportionment and Reapportionment Schedule (SF 132) since prior to FY 2003. This correction resulted in a net decrease to “Total Budgetary Resources” and “Total Status of Budgetary Resources” of $2,539,725 at September 30, 2004. A new SF 132 has been issued, including corrected balances to reflect the proper amount of carried forward budget authority, and approved by OMB. The following table details specific line items being restated on the SBR at September 30, 2004:

  As Previously Reported Adjustments As Restated
       
Budgetary Resources (selected components):      
Unobligated balance – beginning of period $ 27,863,778 $ (2,539,725) $ 25,324,053
Total Budgetary Resources $ 70,236,030 $ (2,539,725) $ 67,696,305
       
Status of Budgetary Resources (selected components):      
Unobligated balance not available $ 24,758,733 $ (2,539,725) $ 22,219,008
Total Status of Budgetary Resources $ 70,236,030 $ (2,539,725) $ 67,696,305

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