Highway Trust Fund Insolvency 201: Impact on States

While some of the newer House members did not appear stirred by the dire consequences of the impending insolvency of the Highway Trust Fund as explained by Department of Transportation (DOT) under secretary Polly Trottenberg and Congressional Budget Office unit chief Kim Cawley on July 23, "it’s state transportation officials who should be worried", writes Holeywell.

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.

Holeywell writes how the DOT pays for state projects when using federal funding. Rather than fronting them them the money, the "state departments of transportation enter agreements with the Federal Highway Administration (FHWA), award contracts to construction companies and then rely on getting payments from the feds in order to make payments to the contractors."

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.

How this impending repayment uncertainty to states will play out on Capitol Hill is yet to be seen. Two of the three options listed in Transportation Insolvency 101 for fixing the problem - raising the gas tax or transferring funds from the General Fund, would avert the problem altogether. While Congress is not known for planning in advance to avert financial crises, pressure from the states that legislators represent could be helpful to nudge them to act sooner than later.