HSR, Transit Funding in Reconciliation May Rely on 5-Year Cutoff, “Tapered Match” Grants

HSR, Transit Funding in Reconciliation May Rely on 5-Year Cutoff, “Tapered Match” Grants

October 29, 2021  | Jeff Davis

In the Byzantine budget reconciliation process, one of the big prohibitions is that each committee’s contribution to the bill has to be deficit-neutral after the scorekeeping period covered by the bill (in this case, ten years). For the Ways and Means Committee, this is less of a problem, since they are raising taxes to cover not only their own spending, but most (if not all) of the other spending in the bill, and can run those taxes as long as they need to.

But for committees like Transportation and Infrastructure, who have a lot of jurisdiction on the spending side but little to none on the “pay-for” side (unless you want to cut railroad retirement benefits or raise user fees, which leadership doesn’t want to do), it is a huge problem. Every dime of money they provide in reconciliation has to “spend out” of the Treasury by September 30, 2031, or else that part of the bill requires 60 votes, not 50, in the Senate under the “Byrd Rule” and all the political deals start falling apart.

T&I has an additional problem in that it is trying to fund a lot of capital programs, which always spend more slowly than operating programs. And chairman Peter DeFazio (D-OR) is using $20 billion of his committee’s allotment to fund two of the slowest-spending programs under his jurisdiction: new mass transit projects, and high-speed rail.

(Indeed, if you were to design a program from scratch and try to make it the slowest-spending capital program in government, you might come up with the T&I high-speed rail program – funding capital projects for real high-speed rail (top speeds of 160 mph on shared right-of-way and 186 mph on dedicated right-of-way) that “directly serves rail stations within urban areas…that are located in close proximity to a census tract…within the urban area that had a greater density population than the urban area as a whole.” Major downtown projects attract years worth of historical preservation lawsuits and endless political delays.)

How can these programs possibly spend out completely in just ten years?

Section 1552(a) of title 31, United States Code, that’s how:

1552. Procedure for appropriation accounts available for definite periods. (a) On September 30th of the 5th fiscal year after the period of availability for obligation of a fixed appropriation account ends, the account shall be closed and any remaining balance (whether obligated or unobligated) in the account shall be canceled and thereafter shall not be available for obligation or expenditure for any purpose.

T&I or the related appropriations subcommittee usually make slow-spending capital programs “indefinite” or “no-year” funding, which remains available until obligated, and is thus exempt from section 1552. But the $10 billion appropriation for mass transit, and the $10 billion appropriation for high-speed rail, each contain an obligation deadline of September 30, 2026, so the money is only available for a “definite period.”

That means that the Secretary has five years to negotiate and sign grant agreements (obligating the money), and then after that, on September 30, 2031, all funding for the program is shut off, whether or not construction of the projects is complete. Legally, no outlays can occur after September 30, 2031, so the reconciliation rules and the Byrd Rule are satisfied.

But signing a grant agreement for a new $500 million BRT system or a new $2 billion HSR tunnel to a downtown train station is not nearly as significant if the federal money cuts off while the project is only half-complete.

We have not seen a budget score from the Congressional Budget Office yet. When and if that is released, it may show that CBO expects that not all the HSR money (and possibly not all of the transit money) will ever be spent (outlays).

But even if all the money does get spent, bad policy choices may be required to spend it all.

The beleaguered California high-speed rail project faced a similar problem. Since the 2009 ARRA stimulus law (P.L. 111-5) was enacted under the guise of, you know, stimulus, most of the money had short use-it-or-lose-it deadlines. The highway, mass transit, airport and Amtrak money had to be obligated by September 2010. The new TIGER grants had to be obligated by September 2011. And the $8 billion in high-speed rail money had the longest obligation deadline DOT title of the bill – September 30, 2012.

After Florida, Ohio and Wisconsin turned back their preliminary grant money, the Federal Railroad Administration kept increasing the amount dedicated to the California project, eventually giving the project $2.5 billion. But none of the environmental impact work was complete, and the state, in close consultation with FRA, decided to put most of the $2.5 billion towards the segment that they thought would be the quickest to complete – the relatively flat and rural segment in the Central Valley between Fresno and Bakersfield.

In a normal USDOT grant agreement, the non-federal partner enters into an agreement with USDOT for a fixed split of project costs, and every dollar spent on the project, from start to finish, is split up by that ratio. For a normal highway project, 80 cents out of every dollar paid to the contractor comes from the federal government, and the other 20 cents from the state government. The California High Speed Rail Authority (CHSRA) and FRA negotiated a grant agreement for the Central Valley project that was a roughly 50-50 federal-state cost share.

But the California project got tied up in lawsuits, some of which threatened the ability of the state to issue the bonds to pay their share of the project. In the words of the USDOT Inspector General: “In September 2012, CHSRA requested an amendment to its grant agreement to allow tapered matching that would give the State more time to sell the bonds, and identified specific schedule and cost benefits that would result from the use of a tapered matching arrangement.”

Tapered matching is an unusual arrangement where the federal government allows a partner to spend a disproportionately high share of the federal money first, and then spend a higher share of their own money later in the process. For highway projects, the law allows a tapered match only if it would result in earlier project completion, reduce overall costs, or would allow the leverage of additional, non-federal funds. But USDOT needs to take care that the federal government isn’t overexposed if something goes wrong with the project partway through, after a lot of federal money (but little to no local money) is spent.

In this case, FRA agreed, and amended the grant agreement in late 2012 to allow a tapered match. But even though the lawsuit that was holding up the bonds was later dismissed, other problems have kept the Central Valley project from completion. All of the ARRA funding was outlaid on schedule, by September 30, 2017, but five years later, the state still hasn’t finished spending its matching money (or finished building the Central Valley segment). (CHSRA was filing quarterly updates on the status of the ARRA-funded segments, but stopped releasing those after November 2020.)

The original grant gave California until September 30, 2017 to complete the project. In May 2016, FRA amended the grant agreement to give California a five-year extension, to December 31, 2022, and it looks like they won’t make that deadline, either. In essence, the federal government paid up front for a project that is at least five years late and may never connect with anything else. Under the law, if they miss the deadline, USDOT can suspend other funding to California, but they will most likely just keep extending the deadline, forever if necessary.

The Government Accountability Office did an audit of the tapered match grant in 2015 and concluded that the tapered match did not violate any federal accounting laws, but cautioned “Tapered match funding under the Agreement increases risk to the federal government because it allows federal funds to be spent first, without securing the Authority’s matching funds. If the Authority does not obtain these funds, there is a risk the federal government may pay for a partially built Central Valley subsection under the Recovery Act Agreement without the state funds needed to complete it.” The audit also pointed out that FRA is responsible for monitoring, assessing and mitigating the risk to federal taxpayers caused by the tapered match agreement.

Can the high-speed rail and transit money in the budget reconciliation bill be spent without the use of tapered match agreements which put taxpayers at risk? And is DOT capable of using tapered match for big greenfield projects in a way that does not invite and subsidize project delays and cost overruns? We shall see.

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