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Local Government
Highway Finance Trends

1984 - 1993

by Leonard S. Goldberg


Introduction

According to the 1995 Status of the Nation's Surface Transportation System: Conditions & Performance, the cost to maintain the nation's highways and bridges in 1993 was estimated at $49.7 billion.(1) However, the amount actually expended by all levels of government for capital investment requirements totaled only $34.8 billion - a deficiency of $14.9 billion.(2) And the federal contribution is about to be significantly decreased.
A reduction of about 18 percent in federal transportation expenditures will occur between fiscal years (FY) 1997 and 2002, stated Jane Garvey, deputy administrator of the Federal Highway Administration (FHWA), in an interview published in the AASHTO Journal Feb. 26, 1996.(3) In light of this information, she asserted that the states and local governments must optimize use of their available funding.
The role of local government is frequently overlooked in the discussion of highway finance. However, in 1993, which is the latest data available, local governments contributed 23 percent of the total capital expenditures by all levels of government and approximately 58 percent of the total maintenance expenditures.
Nevertheless, local governments trying to finance their road and street programs in the mid-1990s must face several challenges: uncertainty over the federal budget; state governments scrambling for funds for health care, education, and other items; and county and city governments running deficits and looking for ways to tax its citizens to balance their budgets.
This article gives a brief historical overview of local government highway finance trends from 1921 to 1983 and takes a closer look at the data from 1984 to 1993, the latest year from which FHWA has complete data from local governments. The data presented on local government highway finance trends illustrates the important role played by local governments in public sector highway financing.

Purpose of Collecting Local Government Highway Finance Data

Collecting data on local highway finance serves many purposes. The resulting database allows local, state, and federal government planners to better assess the current sources and uses of funds for highways and to plan future road and street programs based on the trends in the data. University researchers use the database to analyze historical receipt and expenditure patterns, as well as to estimate future sources and uses of local government highway finance data. The data are used by Congress and the federal executive branch to prepare legislation for national highway bills. Accurate local government highway finance data are required by federal and state legislators to assess the current and future needs for federal and state assistance to local road and street programs.

Local Government Highway Finance Defined

The states report the data on a biennial basis for odd-numbered data years. Local government highway finance consists basically of receipts, disbursements, and debt service for highways and, in some cases, disbursements of highway user revenue for nonhighway purposes.
Local government highway receipts consist of receipts from local government, private funding, state government, and federal government. Local government sources include local highway user taxes (motor fuel and motor vehicle), general fund appropriations, property taxes and other local imposts dedicated for roads and streets, miscellaneous receipts (investment income, traffic fines, parking fees, etc.), transfers from toll facilities, and bond and note proceeds. Private funding sources include donations in cash or the transfer of real property, the construction of facilities, and the performance of support services (surveys or preliminary and construction engineering). State funding sources include state highway user taxes (motor fuel, motor vehicle, and motor carrier), state general funds, and other state funds (state bond proceeds, state lottery proceeds, and imposts such as severance taxes, cigarette taxes, etc.). Federal funding sources include FHWA funds and funds from all other federal agencies (Federal Transit Administration, United States Department of Agriculture, Housing and Urban Development, National Highway Traffic Safety Administration, U.S. Army Corps of Engineers, Bureau of Indian Affairs, Bureau of Land Management, Federal Emergency Management Administration, National Park Service, and others).
Local government highway disbursements consist of current disbursements, debt service on local obligations for highways, transfer payments (to state and toll facilities), and disbursements of highway user revenue for nonhighway purposes (from local highway user revenue and state highway user revenue). Current disbursements include capital outlay, maintenance, road and street services, general administration and engineering, and highway law enforcement and safety. Capital outlay includes right of-way, engineering, and construction. Maintenance here is defined as physical maintenance. Road and street services include snow and ice removal and other traffic service functions. General administration includes all administrative costs.
Engineering refers to engineering services, as opposed to preliminary engineering included in capital outlay above. Highway law enforcement and safety includes police activities involving highway law enforcement and safety programs such as drunk driving reduction. Debt service on local obligations includes interest and redemption on bonds and notes earmarked for roads and streets. Transfer payments consist of transfer of funds to the state for road and street purposes and transfer of funds to state or local toll facilities for road and street purposes.
Disbursement of highway user revenue for nonhighway purposes includes the disbursement or transfer of either state or local highway user revenue (motor fuel tax, motor vehicle tax, or toll revenue) for a nonhighway distribution (e.g., education, social services, etc.).
Local highway debt is also tracked in terms of its current status at the par value. This consists of the opening balance for debt, the amount of debt issued, the amount of redemptions, and the closing balance for debt. Local highway debt status is tracked for bonds and notes separately. The opening debt balance consists of the par value of the outstanding debt as of the opening of the relevant data year (calendar or fiscal year).
The amount issued consists of the par value of the debt issued within the relevant data year. The redemptions consist of the amount of debt redeemed during the relevant data year. Finally, the closing balance consists of the balance of debt remaining at the end of the relevant data year (closing balance is equal to the opening balance, plus the amount of debt issued, and minus the amount of redemptions).

Overview of Local Government Highway Finance Data From 1921 to 1983(3)

Figure 1 - Local government highway finance data: 1921-1983.
Figure 1 - Local government highway finance data: 1921-1983.

As a historical backdrop, I will briefly review the local government highway finance trends from 1921 to 1983, as they appear in "Highway Statistics: Summary to 1985."(4)
Surprisingly, during the 1920s and the first few years of the 1930s, total disbursements for highways by local governments (local rural governments and municipalities) exceeded total disbursements by the states. From 1933 until 1994, state government total disbursements on highways have exceeded local government total disbursements. Also during the 1920s and early 1930s, total receipts for highways by local governments exceeded total receipts by the states. And as with disbursements, since 1933, state government total receipts for highways have exceeded local government total receipts for highways. The federal government, always a major actor in the highway sector, has played a major role in the reimbursement of state and local governments for disbursements and only a minor role in direct, federal expenditures for highways.
I selected the years 1923, 1953, and 1983 to present an overview of the local government highway finance data during the 1921 to 1983 period. (See figure 1.) In 1923, $1.04 billion were received by local governments for highways. Of these total receipts, 96.2 percent was raised by the local governments themselves, and 3.8 percent was transferred from state governments. By 1983, $19.53 billion were received by local governments for highways. Of these total receipts, only 66.5 percent was raised by the local governments themselves, 26.7 percent was transferred from state governments, and 6.8 percent was transferred from the federal government. Thus, as the total receipts by local governments increased almost nineteenfold between 1923 and 1983, the percentage raised by these local governments declined by almost 30 percent. With the state and federal governments providing about one-third of the funding sources for local government highway programs in 1983, the local government is at the political and economic mercy of these two larger governmental layers for significant funding for highways.
In 1923, $1.05 billion were expended by local governments for highways. Of these total expenditures, 44.7 percent was spent for capital outlay, 29 percent was spent for maintenance, and 26.3 percent was spent for all other areas. By 1983, local governments spent $18.80 billion for highways: 25.4 percent for capital outlay, 44.8 percent for maintenance, and 29.8 percent for all other areas. Thus, as the total disbursements by local governments increased about eighteenfold between 1923 and 1983, the percentage used for capital outlay declined about 43 percent (44.7 percent of total expenditures to 25.4 percent). On the other hand, the percentage used for maintenance increased 54 percent. The percentage of disbursements used for all other areas increased slightly. Thus, the primary function of local government highway programs shifted from predominantly capital outlay to maintenance.
Figure 2 - Local government highway finance data: 1984 - 1993.
In 1923, local governments funded about 96 percent of their highway receipts, and the states contributed about 4 percent. By 1983, the local governments were funding only about 67 percent of their total receipts for highways, while the state's contribution increased about seven times in percentage terms to 26.7 percent of the total. The federal government in 1983 was contributing almost 7 percent of the total receipts for highways. Local Government Highway Finance Data Trends From 1984 to 1993 I selected the years 1984, 1989, and 1993 to present a short trend of the local government highway finance data during the most recent decade for which data are available, 1984 to 1993. (See figure 2.)
In 1984, $20.45 billion were received by local governments for highways. Of these total receipts, 65 percent was raised by local governments themselves, 28.2 percent was transferred from state governments, and 6.8 percent was transferred from the federal government. By 1993, $34.75 billion were received by local governments for highways: 67.7 percent raised by the local governments, 30 percent from state governments, and 2.3 percent from the federal government. Thus, as the total receipts by local governments increased 70 percent between 1984 and 1993, the percentage raised by these local governments increased by 2.7 percent. In 1993, as in 1983, the state and federal governments were providing about one-third of the funding sources for local government highway programs. Again, this leaves them at the political and economic mercy of these two governmental layers for significant funding for highways.
For the 1984 to 1993 period, I also looked at receipts more closely in terms of the types of local government source receipts to analyze the change in the composition of these receipts. Local government receipts were divided into seven categories: general fund, property taxes, miscellaneous receipts, bond proceeds, other local imposts (included with miscellaneous receipts for the years 1984 and 1989), local highway user revenue, and toll revenue.
The percentage of local government receipts derived from general funds decreased significantly from 47.7 percent in 1984 to 43.6 percent in 1989 and to only 32.6 percent in 1993. Receipts from property taxes also decreased - from 23.7 percent in 1984 to 22.1 percent in 1989 and to 20 percent in 1993.
All other local government receipt sources increased during the 1984-1993 period. Miscellaneous receipts (including other local imposts) increased from 12.8 percent in 1984 to 24.5 percent in 1993. Bond proceeds increased from 10.8 percent in 1984 to 16 percent in 1993 although bond proceeds are more volatile and have more variance than the other receipt types. Local highway user revenue increased from 3.3 percent in 1984 to 5 percent in 1993. And finally, toll revenue increased slightly through the 10-year period - 1.7 percent of local government receipts in 1984, 1.8 percent in 1989, and 1.9 percent in 1993.
In summation, the traditional sources of local government receipts for highways, namely general funds and property taxes, decreased during the 1984 to 1993 period. On the other hand, nontraditional sources - such as miscellaneous receipts (including other local imposts), bond proceeds, local highway user revenue, and toll revenue - increased during the same time frame.
In 1984, $19.95 billion were expended by local governments for highways: 27.6 percent for capital outlay, 44.4 percent for maintenance, and 28 percent for all other areas. By 1993, the breakdown for the $33.52 billion expended by local governments for highways was 27 percent for capital outlay, 39.7 percent for maintenance, and 33.3 percent for all other areas. Thus, as the total disbursements by local governments increased by 68 percent between 1984 and 1993, the percentage used for capital outlay decreased only slightly from 27.6 percent to 27 percent of total disbursements. The percentage used for maintenance, however, decreased significantly from 44.4 percent to 39.7 percent, and the percentage of disbursements used for all other areas increased significantly from 28 percent to 33.3 percent.

Local Government Highway Finance in the 21st Century

According to the "Bulletin: Highway Funding 1993-1996," released by FHWA on Feb. 16, 1996, local governments represent approximately 23 percent of total expenditures on capital outlay and approximately 58 percent of total expenditures on maintenance and traffic services.(5) Thus, the importance of local governments as major players in the total highway finance picture is clear, and their role is likely to increase as we move into the 21st century.
The needs of local governments to maintain their existing roads and streets and to construct new ones for expanding populations will drive the demand for a bigger role in highway financing for local governments. The newly designated National Highway System (NHS) and declining federal budgets require local governments to spend more of their own dollars on both NHS and non-NHS roads and streets under their jurisdiction. Local governments have recently been in the forefront in innovative highway financing, and they must continue to leverage scarcer federal, state, and local funds. Local governments will probably continue to use private funds as another important source of highway funding. In increasing numbers, local governments in various states are being given the authority to implement local-option motor fuel taxes and motor vehicle taxes. Local government debt for roads and streets is another source of funds being used more by local governments.
In addition, an increasing number of local or regional transportation authorities are being created as yet another source of funding for local government road and street projects. Several examples of these local and regional transportation authorities include the Transportation Corridor Authority of Orange County in California, the Toll Roads Partnership II (for the Dulles Toll Road Extension or "Greenway" ) in Virginia, and the Regional Street and Road Commission in Nevada.

References

1. 1995 Status of the Nation's Surface Transportation System: Condition & Performance, Report to Congress, Publication No. FHWA-PL-96-007, Federal Highway Administration, Washington, D.C., 1995, p. 296.
2. Ibid, p. 190.
3. AASHTO Journal, Vol. 96, No. 8, Feb. 26, 1996.
4. "Highway Statistics: Summary to 1985," Government Printing Office, Washington, D.C., 1986.
5. "Highway Funding: 1993-1996," Federal Highway Administration, Washington, D.C., Feb. 16, 1996.

red line for spacing.

Leonard S. Goldberg is a transportation specialist in the Highway Funding and Motor Fuel Division of FHWA's Office of Highway Information Management. He has a bachelor's degree in business administration from Boston University and a master's degree in international transactions from George Mason University. He has worked in the local highway finance area for more than 15 years.


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