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What a Depleted Highway Trust Fund Means for States

U.S. DOT tells states to be prepared for a slowdown in cash disbursements.
by | July 29, 2013

Last week Congress was warned of what might happen if the federal accounts that pay for transportation become depleted, as they’re forecast to do in fiscal year 2015. The scenario, outlined by Polly Trottenberg, the undersecretary for policy at the U.S. Department of Transportation (DOT), prompted plenty of questions from members of Congress. But it’s state transportation officials who should be worried.

By now, the fiscal challenges facing the Highway Trust Fund, which receives federal gas tax revenue and then distributes it to states for infrastructure projects, are well known: Americans are driving less, vehicles are becoming more fuel efficient and the gas tax hasn't been increased in 20 years. If the trust fund experiences a cash shortfall, the DOT will be forced to start taking steps to manage whatever cash it has left. Trottenberg gave Congress a detailed look at what exactly that might mean for states -- and the situation isn’t pretty.

The Federal Highway Administration (FHWA) sends funds to states through six formula programs, but the money isn't provided in advance. Instead, state departments of transportation enter agreements with FHWA, award contracts to construction companies and then rely on getting payments from the feds in order to make payments to the contractors.

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Some states bill the feds daily; others bill them weekly. But if the trust fund gets too depleted, states will start getting reimbursed less and less frequently, perhaps as rarely as twice a month, Trottenberg warned. Even worse for states: If the situation gets bad enough, the feds might only be able to cover a portion of states’ reimbursement requests. If that happens, states could be forced to pull back on some projects.

If such a scenario seems far-fetched, it shouldn’t. While the Highway Trust Fund has a relatively healthy history that dates back to 1956, it was in fiscal year 2008 that the DOT announced that it didn't have enough cash in the account to cover states’ outstanding bills. At the time, it was agreed that FHWA would stop twice-daily payments and switch to weekly payments. States would get most of what they were owed on their scheduled payment dates, with a portion of the balance carried over to the following week. The system ensured a steady stream of funds coming to states, but it quickly built up the balances owed on the back end and relied on states to carry the difference.

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