Transportation Funding Status Report 091411

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Transportation Funding Status Report 091411

  1. 1. Update on Federal Transportation Legislation in the 112th CongressThe Federal surface transportation programs (highway, highway safety, and transit) are scheduled toexpire on September 30, 2011. Both the U.S. Senate and the U.S. House of Representatives areworking on multi-year reauthorization bills. These bills will not, however, be finished by the time theprograms expire. Therefore, it is necessary for Congress to extend the current programs for a period oftime so that work can continue on the major reauthorization legislation.On September 13th, the House of Representatives approved H.R. 2887 to extend the surfacetransportation programs until March 31, 2012. The bill also extends Federal aviation programs untilJanuary 31, 2012. The bill has been sent to the Senate for its approval. This process is expected to gorelatively smoothly, although it is always hard to predict what will happen in the Senate. It is hoped thatthe President will be able to sign the bill before the aviation programs expire on September 16th.In addition to H.R. 2887, Congress must also take up a continuing resolution for FY 2012 since only afew appropriations bills will have been passed by October 1st when the new fiscal year starts. TheTransportation Appropriations Bill is one of the bills that will most likely not be finished by October 1st,so transportation will be covered by the FY 2012 continuing resolution.There are significant financing and funding issues facing the Federal highway program. To fullyunderstand the current situation, it might prove useful to first review the way the highway program isfinanced, including recent changes made by Congress. This is followed by a discussion of H.R. 2887and the Continuing Resolution for FY 2012.Highway FinancingBackgroundMost Federal programs operate using appropriated budget authority, which requires a two-step processto implement. The first step is the congressional passage of authorizations for the program. This step,in itself, does not permit the program to begin, but only sets an upper limit on program funding. Thesecond step in the process is the congressional passage of appropriations for the program. In anappropriations act, the Congress makes available the amount that can actually be used for theprogram. It is at this point that the program can proceed. In other words, "budget authority"–theapproval to distribute, spend, loan, or obligate funds–has been granted through the appropriations actat the level of the appropriations, which may be equal to or lower than the originally authorized level offunding.Limon Office Lubbock OfficeP.O. Box 9 5401 N MLK Blvd., Unit 395Limon, CO 80828 Lubbock, TX 79403P: 303.586.1787 P: 806.775.2338F: 719.775.9073 Fax: 806.775.3981 www.portstoplains.com
  2. 2. Update On Federal Highway Legislation In The 112th CongressSeptember 14, 2011Page 2Contract Authority and the Federal-Aid Highway ProgramsThe Federal highway programs, however, do not require this two-step process. Through what is termed"contract authority" (a special type of budget authority), authorized amounts become available forobligation according to the provisions of the authorization act without further legislative action. The useof contract authority, first legislated for the highway program in the Federal-Aid Highway Act of 1921,gives the States advance notice of the size of the Federal-aid program at the time an authorization actis enacted and eliminates much of the uncertainty contained in the authorization-appropriationsequence.Obligation LimitationsAgain, because of contract authority, there is a smooth and stable flow of Federal-aid to the States. Butsome in Congress in the mid-1970s felt that this very benefit was a disadvantage to overall Federalbudgeting. A major function of the appropriations and budget processes is to assess the current needfor, and effect of, Federal dollars on the economy. The appropriations process has been the traditionalway to control Federal expenditures annually. But the highway program, with multiple-yearauthorizations and multiple-year availability of funds, appeared to be exempt from this annual review.This led Congress to place a limit, or ceiling, on the total obligations that could be incurred for theFederal highway programs during a year. By controlling obligations annually, the program could bemade more responsive to budget policy. As a result, obligation limitations have been included in theannual transportation appropriations bills in recent decades.Before moving on, it is important to note that the obligation limitation represents the operative programlevel in any given year. Let’s look at an example to see why. Let’s say that a state has $300 million inunobligated contract authority at the start of a fiscal year. Let’s also say that it receives an additional$950 billion in new contract authority on the first day of the new fiscal year. That means that the statehas $300 million plus $950 million, or a total of $1,250 million, to spend in that year—at least in theory.The actual amount it can spend, i.e., obligate, is dependent on the obligation limitation Congress enactsthrough the appropriations process. If the state receives a limitation of $925 million, for example, then itcan only obligate $925 million in that year even though it has $1,250 million available to obligate.Obligation limitations are important!Budget Firewalls and Guaranteed FundingDuring the 1980s and 1990s, balances in the Highway Trust Fund ballooned to unacceptably highlevels as a result of obligation limitations that were set at artificially low levels just to mask the size ofthe Federal deficit. Recognizing the special status of programs funded from self-financed trust funds,Congress rectified this abuse in the Transportation Equity Act for the 21st Century (TEA-21). TEA-21created firewalls between highway spending, transit spending, and other domestic discretionaryspending. These firewalls take the form of separate spending caps for the protected programs thatprevent the programs from being reduced in order to increase spending for other discretionaryprograms.Limon Office Lubbock OfficeP.O. Box 9 5401 N MLK Blvd., Unit 395Limon, CO 80828 Lubbock, TX 79403P: 303.586.1787 P: 806.775.2338F: 719.775.9073 Fax: 806.775.3981 www.portstoplains.com
  3. 3. Update On Federal Highway Legislation In The 112th CongressSeptember 14, 2011Page 3In addition to the firewalls, TEA-21 provided a second level of protection. It guaranteed a certain levelof highway funding by establishing a point of order in the Rules of the House of Representatives. TheHouse Rules were amended to specify that it is out of order to consider a bill, joint resolution,amendment, or conference report that contained an obligation limitation that would result in funding at alower level than the guaranteed amount.The 112th CongressThe 112th Congress, in particular the House of Representatives, has made drastic changes in the waythe Federal highway programs are funded. First, it repealed the funding guarantees in the House Rules.Second, in the recent Budget Control Act of 2011, it repealed the transportation firewalls. These twoactions eliminated all of the budgetary protections contained in TEA-21.FY 2012 FundingIn analyzing highway funding for FY 2012, it is important to remember that there are no more firewallsor guarantees. Congress can set the FY 2012 funding levels--both contract authority and the obligationlimitation--at whatever levels it chooses.H.R. 2887, The Extension BillH.R. 2887 extends the highway, highway safety, and transit programs for 6 months, until March 31st. Ithas been described as extending the existing programs at “current levels.” As we shall see, this is notentirely accurate, at least in the usual meaning of that term.HighwaysThe highway program was funded at about $43.0 billion in FY 2011. When the Congressional BudgetOffice (CBO) prepared its “current level” baseline in March for the FY 2012 budget, it included $43.0billion in contract authority for highways.H.R. 2887, however, extends the highway program at a level of $39.9 billion in contract authority, about7 percent below the FY 2011 level of $43.0 billion. Therefore, states will receive about seven percentless in contract authority than they received in FY 2011. Of course, since this extension is for only 6months, they will receive 1/2 of that reduced annual amount on October 1st, or soon thereafter,assuming the bill is enacted in a timely manner. The amount of contract they receive for the secondhalf of the fiscal year will depend on future legislation--either the multi-year reauthorization bill oradditional extensions.Just to be clear, here is how a state should calculate what they will receive in contract authority underthe highway program at the start of FY 2012. First, they should determine what they received in FY2011. Second, they should reduce that number by 7 percent to reflect the overall cut in the program.And third, they should take that reduced amount and divide it by 2 to reflect that the fact that theprogram is being extend for only 6 months. That is the approximate amount they will receive in contractauthority for the various highway programs.Limon Office Lubbock OfficeP.O. Box 9 5401 N MLK Blvd., Unit 395Limon, CO 80828 Lubbock, TX 79403P: 303.586.1787 P: 806.775.2338F: 719.775.9073 Fax: 806.775.3981 www.portstoplains.com
  4. 4. Update On Federal Highway Legislation In The 112th CongressSeptember 14, 2011Page 4One might ask why $39.9 billion is being described as the “current level” for FY 2012 when the realfunding level in FY 2011 was $43.0 billion. This is a good question. Unfortunately, the answer iscomplicated and requires exploring some of the more arcane aspects of Federal budgeting.In drafting H.R. 2887, Congress would normally have used the CBO’s March baseline level of $43.0billion as the “current level” for highways. But the recently enacted Budget Control Act of 2011 directedCBO to prepare a new August baseline that took into account, among other things, the final FY 2011Continuing Resolution (CR). The final FY 2011 CR contained a one-time $3.1 billion rescission of old,unobligated highway contract authority. In developing its revised August baseline, CBO assumed--incorrectly, in my view--that this one-time rescission would continue in perpetuity. Consequently, itreduced the baseline for highways by $3.1 billion for FY 2012 and the years beyond. In budgetingparlance, this new reduced level would now become the “current level,” notwithstanding the fact thatthe real level of new contract authority in FY 2011 was $3.1 billion higher.Two other points are worth noting regarding highway funding in the extension.First, it is worth looking how the $39.9 billion level compares to the highway funding levels beingconsidered by the House and Senate in their reauthorization proposals. In their two-yearreauthorization proposal, Senators Boxer and Inhofe have proposed annual funding of about $43.0billion, the FY 2011 level, adjusted for inflation. In his six-year reauthorization proposal, Chairman Micahas proposed significant reductions--on the order of 30 percent or more below the FY 2011 level of$43.0 billion--in annual highway funding. The $39.9 billion level in the extension is slightly below theSenate multi-year proposal and significantly higher than the House proposal.Second, it should be noted that, unlike previous extension bills, this extension bill does not contain aguaranteed obligation limitation for the highway program. Instead, the bill defers to the appropriationscommittee to set the obligation limitation for FY 2012 in the FY 2012 appropriations bill. This is quite adeparture from past practice and is discussed in more detail below.Highway Safety and Public Transportation ProgramsWith respect to highway safety and public transportation, there is no reduction in the extension bill fromFY 2011 contract authority levels. Therefore, in those programs, states and localities should receiveabout what it received in contract authority in FY 2011. Again, since this extension is for only 6 months,they will receive about 1/2 of the FY 2011 amounts on October 1st, or shortly thereafter.Other Policy ChangesH.R. 2887 is a “clean” extension in that it does not contain other policy changes to the surfacetransportation programs.FY 2012 Continuing ResolutionThe obligation limitation, i.e., the amount of contract authority that the states can obligate in FY 2012,will be set in this years appropriations legislation. This represents the "operational level of spending"for FY 2012.Limon Office Lubbock OfficeP.O. Box 9 5401 N MLK Blvd., Unit 395Limon, CO 80828 Lubbock, TX 79403P: 303.586.1787 P: 806.775.2338F: 719.775.9073 Fax: 806.775.3981 www.portstoplains.com
  5. 5. Update On Federal Highway Legislation In The 112th CongressSeptember 14, 2011Page 5The obligation limitation for highways was $41.1 billion in FY 2011. CBO’s March and August baselinesboth assume an obligation limitation of $41.6 billion ($41.1 billion adjusted for inflation).The Senate is most likely to take an approach similar to what Senators Boxer and Inhofe areadvocating for their two-year reauthorization bill--a continuation of current levels, which means about$41.6 billion. However, it should be noted that the Senate might reduce the obligation limitation by 7percent to reflect the 7 percent cut in contract authority in the extension bill.The House, on the other hand, appeared to be ready to take an approach similar to what ChairmanMica is advocating for his six-year reauthorization bill--a significant reduction in funding (about 30percent). If the House takes this position, then the obligation limitation would be significantly reduced toabout $27 billion in FY 2012. In fact, the House Transportation Appropriations Subcommittee approveda bill a week or so ago setting the FY 2012 obligation limitation at $27 billion. If this approach prevails,then states would receive about 30 percent less than they received in FY 2011. This would result in amore than 30 percent reduction in real highway spending.It should be noted, however, that given the recent action on the extension bill in the House, there maybe some hope that the House will not make major cuts in the obligation limitation in FY 2012. TheHouse extended the contract authority for the program at roughly current levels and did not impose thesignificant reductions from Chairman Micas reauthorization proposal for FY 2012. It may be a sign thatthe House Leadership is leery of cutting jobs-creating programs at a time of high unemployment. If thisassessment is correct, then one would expect to see the obligation limitation of $27 billion in thesubcommittees bill increased to a level much closer to the current FY 2011 level.Since the FY 2012 continuing resolution needs to be in place by the end of September, this issue willbe resolved, one way or the other, in the next couple of weeks. A lot is at stake. There is a bigdifference between $41 billion and $27 billion. Limon Office Lubbock OfficeP.O. Box 9 5401 N MLK Blvd., Unit 395Limon, CO 80828 Lubbock, TX 79403P: 303.586.1787 P: 806.775.2338F: 719.775.9073 Fax: 806.775.3981 www.portstoplains.com

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