[Federal Register Volume 71, Number 20 (Tuesday, January 31, 2006)]
[Rules and Regulations]
[Pages 4992-4996]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-863]

[[Page 4992]]



Federal Highway Administration

23 CFR Part 630

[FHWA Docket No. FHWA-2005-20764]
RIN 2125-AF05

Project Authorization and Agreements

AGENCY: Federal Highway Administration (FHWA), DOT.

ACTION: Final rule.


SUMMARY: The FHWA is revising its regulations relating to project 
authorization and agreements and the effect on obligations of Federal-
aid highway funds under these requirements. The changes in this 
rulemaking will assist the States and the FHWA in monitoring Federal-
aid highway projects and provide greater assurance that the Federal 
funds obligated reflect the current estimated cost of the project. In 
the event that Federal funds are de-obligated as a result of these 
changes, those funds may then be obligated for new or other active 
projects needing additional funding to the extent permitted by law.

EFFECTIVE DATE: March 2, 2006.

FOR FURTHER INFORMATION CONTACT: Mr. Dale Gray, Federal-aid Financial 
Management Division, (202) 366-0978, or Mr. Steven Rochlis, Office of 
the Chief Counsel, (202) 366-1395, Federal Highway Administration, 400 
Seventh Street SW., Washington, DC 20590. Office hours are from 7:45 
a.m. to 4:15 p.m., e.t., Monday through Friday, except Federal 


Electronic Access

    An electronic copy of this document may be downloaded by using the 
Internet to reach the Office of the Federal Register's home page at: 
http://www.archives.gov and the Government Printing Office's Web page 
at: http://www.access.gpo.gov/nara.


    The FHWA currently funds more than 120,000 highway projects that 
are administered by State and local governments. The amount of Federal 
funds legally obligated (committed) to a project is generally based on 
an estimate of the cost to complete the project. As a project 
progresses, those costs may increase or decrease. The U.S. Department 
of Transportation's Office of Inspector General has repeatedly found 
that some States have failed to timely release Federal funds when 
project estimates decrease or when projects are completed and no 
additional expenditures are expected.\1\ The failure to take timely 
action reduces the amount of Federal funds available to finance new 
projects. The FHWA has worked with the States for many years to 
identify projects where funds can be released and has recommended that 
States adopt certain best practices to further the efficient use of 
Federal funds. Nevertheless, in Fiscal Year 2005, the FHWA identified 
over $750 million of Federal funds on inactive projects that could be 
released, and in most cases reapplied to new projects. Because 
substantial unneeded obligations continue to be identified, despite the 
implementation of best practice procedures in many States, the FHWA 
believes regulations are necessary to clearly define the 
responsibilities and procedures for identifying and releasing these 
funds. In addition, as a Federal agency, the FHWA is responsible for 
maintaining valid obligations and must annually certify that the 
amounts shown as obligated in its financial statements are accurate.

    \1\ See DOT IG Report Number FI-2006-011, entitled, ``Inactive 
Obligations, Federal Highway Administration,'' dated November 14, 
2005, available at http://www.oig.dot.gov/item.jsp?id=1722.

    The FHWA is revising its regulation relating to project agreements, 
23 CFR 630, to establish a systematic process that will assist the 
States and FHWA in monitoring projects, provide greater assurance that 
the amount of Federal funds obligated on a project reflects the current 
cost estimate, and ensure that funds no longer needed are de-obligated 
in a timely manner. The new requirements included in the final rule are 
consistent with Federal appropriation law principles requiring Federal 
obligations to be based on a documented cost estimate and revised if 
the estimate changes.\2\
    The regulation will require the States to monitor projects and (1) 
de-obligate Federal funds when the amount obligated exceeds the current 
cost estimate by $250,000 or more, and (2) re-evaluate cost estimates 
on inactive projects and release unneeded funds. The FHWA will revise 
the Federal obligation amount if the State fails to take action as 
required by the regulation.

    \2\ See the ``Principles of Federal Appropriations Law, 3rd 
Edition'' available at http://www.gao.gov/special.pubs/redbook1.html.

Notice of Proposed Rulemaking (NPRM)

    The FHWA published a notice of proposed rulemaking (NPRM) on July 
11, 2005, at 70 FR 39692. In the NPRM, the FHWA proposed to (1) require 
the de-obligation of Federal funds that remain committed to inactive 
projects as well as require the de-obligation of excess funds not 
needed for a project; (2) reduce the occurrences where Federal funds 
are committed to inactive projects or where an obligation is in excess 
of the amount needed to complete the project; (3) establish a project 
completion date that would be added in all new project agreements and 
in those cases where modifications are made to existing project 
agreements; and (4) require States to assure that third party contracts 
and agreements are processed and billed promptly when the work is 
    We received comments from 56 entities. The comments that were 
received included; 37 State transportation departments (States), 10 
local governments, four metropolitan planning organizations, two 
companies, one individual representing five States, and two national 
associations, the American Association of State Highway and 
Transportation Officials (AASHTO) and the Association of American 
Railroads (AAR).

Discussion of Comments by Section


    Thirty commenters included a statement supporting the efficient use 
of Federal funds and closing out projects. For example, AASHTO, which 
represents the State transportation departments, expressed full support 
for the goal of increasing the efficient use of Federal funds and the 
timeliness of project close-outs, but expressed substantial concern 
that the proposed provisions would be burdensome for the State and 
local governments to implement. Comments from the TG Associates 
expressed support for FHWA's commitment and efforts to foster fiscal 
stewardship and improve financial management. Michigan DOT agreed that 
adequate financial controls need to be in place to make certain that 
all available Federal funds are used in a timely fashion for 
transportation improvements, but was concerned about the ``one-size-
fits-all approach'' proposed in the NPRM. The County of Los Angeles, 
California, agreed with the overall objective of the proposed changes 
and stated that an increase in the collaborative efforts among the 
FHWA, the States, and third-party agencies is needed to improve the 
management of Federal funds.
    Twenty-seven commenters expressed opposition to some or all of the 
proposed changes. Among the reasons

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given for those in opposition were that the unilateral action on the 
part of FHWA to de-obligate funds is contrary to the cooperative 
working relationship of the States and the FHWA, concern that a State 
may lose funds, concern that the process would be burdensome for the 
States, and States that currently manage funds effectively would be 
penalized under a one-size-fits-all approach. AASHTO recommended that 
the FHWA work cooperatively with the States to develop a rule that 
works for all parties.
    The FHWA has been working with the States for a number of years, 
but these efforts have not resulted in a reduced level of unneeded 
obligations on a national level. In our view, a consistent policy is 
necessary for the States to clearly understand the level of effort 
necessary to properly manage Federal funds. While some commenters were 
concerned that the requirements would be burdensome, we believe that 
the effective management of funds is a prudent government agency 
business practice. The FHWA recognizes that some States may need to 
apply additional resources to manage funds to meet the requirements of 
this rule, but the result is that funds will be made available to 
finance new or active projects that will benefit the State in meeting 
its transportation needs. The regulation does not require the release 
of any funds that are needed for a valid and current obligation.
    There were some questions about the application of these new 
requirements, i.e., would the requirements apply to all projects, and 
how are projects defined? For example, the Arizona DOT recommended that 
congressionally mandated projects be exempt from the proposed changes, 
and the South Carolina DOT recommended that a State be allowed to 
choose whether to define a project as the entire project or as a phase 
of the project. The Tri-County Regional Planning Commission, 
California, recommended that projects for statewide planning and 
environmental studies be excluded from the proposed requirements.
    The requirements established in the final rule apply to any project 
for which the State and the FHWA enter into a project agreement under 
Title 23 CFR 630, subpart A, which generally includes congressionally 
mandated projects and planning projects. There is no basis to exempt 
any project from the requirement to maintain a valid obligation. The 
scope of the project is defined in the project agreement that is 
initiated by the State and may include only a single phase of work, 
such as design or construction, or may include multiple phases under a 
single agreement.

Section 630.106

    In the NPRM, we proposed to include section 630.106(a)(3) that 
would have required the States to promptly (1) revise the amount 
obligated on a project when the cost estimate decreases by $100,000 or 
10 percent and (2) to adjust the amount obligated on inactive projects 
that are expected to be inactive for 24 months.
    Most of the commenters stated that modifying changes of ``$100,000 
or 10 percent'' would require additional administrative effort by the 
State and local agencies and would result in an inefficient use of 
limited resources. Since project costs range from a few thousand 
dollars to tens of millions of dollars, many of the commenters 
recommended that different parameters be established. Recommended 
parameters ranged from $200,000 to $500,000 and from 2 percent to 10 
percent of project costs. For example, the Indiana Department of 
Transportation (DOT) stated that a more workable solution would be to 
change the threshold to $250,000. The Connecticut DOT and Maryland DOT 
recommended parameters of $250,000 or 5 percent, whichever is greater, 
and the Florida DOT recommended that projects with estimated costs of 
$5,000,000 or less be exempt from the requirement.
    We agree that the parameters should be changed to enable the States 
to focus resources on significant sums of Federal funds obligated on 
large-scale projects. Based upon the comments such as those mentioned 
above, the FHWA is revising this provision to require a State to 
maintain a process for revising cost estimates as required by Federal 
appropriations law principles referenced in the Background section. As 
a minimum, a State will be required to revise the Federal obligation 
amount on a project within 90 days when the Federal share decreases by 
$250,000 or more.
    Most of the commenters recommended that the term ``promptly'' be 
removed from the regulation or be specifically defined. The 
Pennsylvania DOT stated that the term ``promptly'' could be interpreted 
to require daily accounting and adjustment of Federal-aid obligations. 
While the commenters did not suggest a definition for the term, we 
agree that the term should be defined and have defined ``promptly'' as 
being ``within 90 days after the State or local agency determines that 
the costs have decreased.'' We believe that 90 days after the 
determination that an adjustment to the obligation amount is needed is 
sufficient time to process a modified agreement to adjust the 
    The Michigan DOT stated that financial monitoring should occur at 
the end of each phase of a job/project. We agree that this should not 
be a daily activity and are including language to clarify that re-
estimates would only be expected at the end of a project phase or when 
some other significant event occurred that would impact project costs, 
such as a value engineering study or a change in design. For clarity we 
have separated this provision that relates to all projects from the 
provision that relates to ``inactive projects.''
    Some commenters expressed concern about the use of the term, 
``inactive projects.'' The term was defined in the NPRM as projects for 
which no costs have been billed to FHWA in the past 12 months. We 
recognize that a number of factors can result in no billings for 12 
months, but the objective of the requirement is to identify projects 
that need to be evaluated and a lack of billing is the best indicator 
available to the FHWA that a project may be stalled or completed. If 
the State determines that work on the project is still underway or that 
the obligation amount is valid, then no further action is needed. Most 
commenters recommended that the inactivity threshold be extended to 24 
months. For example, AASHTO stated that 24 months of inactivity on a 
project is a more reasonable timeframe than 12 months because there are 
multiple reasons why projects may not be finalized within a one-year 
    We agree that 24 months may be an appropriate time period for most 
projects and have revised the rule to state that projects with 
unexpended obligations of $50,000 to $500,000 are not required to be 
evaluated until they are determined to be inactive for a 24-month 
period. However, we believe that 12 months is a more appropriate time 
to review the projects that have larger amounts of unexpended 
obligations so that if unneeded funds are identified, these more 
significant amounts do not remain idle for an additional year. Our 
current practice is to review projects that are inactive for 12 months 
with unexpended obligations over $500,000. As noted in the background 
section, our review in Fiscal Year 2005 identified over $750 million 
that could be applied to active projects. We believe that these 
projects should be reviewed after 12 months of inactivity. Allowing the 
States to review projects with $50,000 to $500,000 of unexpended 
obligations after two years of inactivity will reduce

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the burden on the States in complying with this provision. To further 
reduce the State's burden, the final rule allows projects with 
unexpended obligations less than $50,000 to be reviewed after 36 months 
of inactivity.
    Recognizing that projects may be entering inactive status on a 
daily basis, the FHWA is clarifying that States are not required to 
review inactive projects more often than quarterly. Previously, the 
FHWA reviewed inactive projects on an annual basis but has determined 
that an annual review allows unneeded funds to remain on a project too 
long before a review is performed. Quarterly reviews also result in a 
more orderly and routine review and analysis of inactive projects.
    Some commenters were concerned about the provision that would have 
required adjustments to projects that are ``unlikely to proceed within 
the next 12 months,'' stating that such a determination would be 
difficult to predict in most cases. For example, Montana DOT stated 
that additional clarification is needed to define what is meant by 
``unlikely to proceed.'' The purpose of this provision was to ensure 
that funds are not obligated for a project prematurely which would tie-
up funds that should be used for projects that are ready to be 
advanced. We agree with the comments that it would be difficult to 
determine that a project is ``unlikely to proceed'' and are not 
including the provision in the final rule. We are replacing this 
provision with a general provision that an obligation of Federal funds 
must be documented and based on the State's best estimate of costs. 
This provision reflects the requirements of the Federal appropriations 
law principles as discussed in the background section.
    In the NPRM, we proposed to revise obligations when the State fails 
to take the required actions under these requirements. Some commenters 
suggested that the FHWA should have the discretion to take action, but 
that it should not be a mandatory requirement so that the FHWA can 
adequately react to the various circumstances. Since this rule requires 
the States to take specific actions to manage funds, we believe that if 
the FHWA has determined that a de-obligation of funds is appropriate 
and the State has failed to act in a timely manner, that the FHWA 
should revise the obligations or take other appropriate action.
    Most commenters recommended that the FHWA should be required to 
consult with the State before adjusting obligations. The Arizona DOT 
strongly objected to the language in the NPRM because it allows the 
FHWA to de-obligate Federal funds on a project with absolutely no 
consultation with the State. The Arizona DOT recommended that the State 
be notified 60 days before funds are de-obligated. We agree that the 
FHWA should advise and consult with the State before the FHWA 
unilaterally de-obligates funds. We have added a statement in the rule 
that the FHWA will advise the State of its proposed actions and provide 
an opportunity for the State to respond. We did not specify an amount 
of time to be provided to the State to respond as recommended by 
Arizona DOT because circumstances will differ from State to State. We 
view this action on the part of the FHWA as a remedy of last resort, 
and expect unilateral actions by FHWA to be rare.
    Concerns were expressed that de-obligations at the end of the 
fiscal year may result is a loss of obligation authority. For example, 
the California DOT stated that FHWA should make sure that the States do 
not lose any obligation authority if the timing of de-obligations is 
close to the end of the Federal fiscal year. We also recognize that 
Congress intends that all obligation authority be used before the end 
of a fiscal year, and to further such intent Congress provides for an 
August redistribution of that authority to ensure that it is fully 
used. The final rule has been revised to include a provision that no 
adjustments in obligations will occur from August 1 to September 30 to 
ensure the efficient execution of the August redistribution process 
unless the State requests the adjustment.

Sections 630.108 and 630.110

    In the NPRM, the FHWA proposed revisions to sections 630.108 and 
630.110 that would have required States to establish a project 
completion date in the Federal-aid project agreement. If the project is 
delayed, the completion date could be revised except that the date 
could not be changed because of a delay in billing or processing third 
party claims. When the completion date occurs, the State would be 
required to close the project within 90 days.
    Almost all commenters expressed opposition to these provisions. 
AASHTO summed up many of the comments by stating that the definition of 
``project completion date'' needs to be clarified; it is impractical to 
establish project completion dates in the early phases of project 
development; it is impossible for the States to ensure third party 
compliance, particularly those States that have statutory time 
allowances for submitting claims; and that the 90-day closing 
requirement would result in State and local agencies having to absorb 
the remaining costs without reimbursement. The AAR stated that the 
project completion date provides insufficient time for the processing 
of bills and that closure and release of unexpended funds within 90 
days of the completion date is inconsistent with commercial practices.
    In response to these comments, we will not revise sections 630.108 
and 630.110 at this time. The FHWA plans to modify its Fiscal 
Management Information System (FMIS) during Fiscal Year 2006 to include 
a project completion date simply as an information item. The FMIS 
tracks the amount of and type of Federal funds obligated on individual 
Federal-aid highway projects and collects a variety of data on the 
projects, such as, type of work, location, project description, etc. We 
will work with the States to better define the project completion date 
and the best way to use the date to improve project funds management.

Rulemaking Analyses and Notices

Executive Order 12866 (Regulatory Planning and Review) and DOT 
Regulatory Policies and Procedures

    The FHWA has determined that this final rule is not a significant 
regulatory action within the meaning of Executive Order 12866 or 
significant within the meaning of Department of Transportation 
regulatory policies and procedures. We anticipate that the economic 
impact of this rulemaking will be minimal. In fact, funds released as a 
result of a de-obligation under this rule will be credited to the same 
program category and will be immediately available for obligation and 
expenditure on eligible projects in accordance with 23 U.S.C. 118(d). 
This final rule will not adversely affect, in a material way, any 
sector of the economy. In addition, these changes will not interfere 
with any action taken or planned by another agency and will not 
materially alter the budgetary impact of any entitlements, grants, user 
fees, or loan programs.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (Pub. L. 96-354, 
5 U.S.C. 601-612) the FHWA has evaluated the effects of this final rule 
on small entities and has determined that the action will not have a 
significant economic impact on a substantial number of small entities. 
This final rule addresses obligations of Federal funds to States for 
Federal-aid highway projects. As such, it affects only States and 
States are not included in the definition of small entity set forth in 
5 U.S.C. 601. Therefore, the Regulatory Flexibility Act

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does not apply and the FHWA certifies that this action will not have a 
significant economic impact on a substantial number of small entities.

Unfunded Mandates Reform Act of 1995

    This final rule does not impose unfunded mandates as defined by the 
Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4, March 22, 1995, 
109 Stat. 48). This rule will not result in the expenditure by State, 
local, and tribal governments, in the aggregate, or by the private 
sector, of $100 million or more in any one year. Additionally, the 
definition of ``Federal Mandate'' in the Unfunded Mandates Act excludes 
financial assistance of the type in which State, local, or tribal 
governments have authority to adjust their participation in the program 
in accordance with changes made in the program by the Federal 
government. The Federal-aid highway program permits this type of 

Executive Order 13132 (Federalism)

    This final rule has been analyzed in accordance with the principles 
and criteria contained in Executive Order 13132, and the FHWA has 
determined that this action does not have sufficient federalism 
implications to warrant the preparation of a federalism assessment. The 
FHWA has also determined that this action does not preempt any State 
law or State regulation or affect the States' ability to discharge 
traditional State governmental functions.

Executive Order 12372 (Intergovernmental Review)

    Catalog of Federal Domestic Assistance Program Number 20.205, 
Highway Planning and Construction. The regulations implementing 
Executive Order 12372 regarding intergovernmental consultation on 
Federal programs and activities apply to this program.

Paperwork Reduction Act

    This action does not contain a collection of information 
requirement under the Paperwork Reduction Act of 1995, 44 U.S.C. 3501-

National Environmental Policy Act

    The FHWA has analyzed this final rule for the purpose of the 
National Environmental Policy Act of 1969 (42 U.S.C. 4321-4347) and has 
determined that this action will not have any effect on the quality of 
the environment.

Executive Order 12630 (Taking of Private Property)

    This action will not affect the taking of private property or 
otherwise have taking implications under Executive Order 12630, 
Government Actions and Interface with Constitutionally Protected 
Property Rights.

Executive Order 12988 (Civil Justice Reform)

    This action meets applicable standards in sections 3(a) and 3(b)(2) 
of Executive Order 12988, Civil Justice Reform, to minimize litigation, 
eliminate ambiguity, and reduce burden.

Executive Order 13045 (Protection of Children)

    We have analyzed this final rule under Executive Order 13045, 
Protection of Children from Environmental Health Risks and Safety 
Risks. The FHWA certifies that this action will not cause an 
environmental risk to health or safety that might disproportionately 
affect children.

Executive Order 13175 (Tribal Consultation)

    The FHWA has analyzed this final rule under Executive Order 13175, 
dated November 6, 2000, and believes that this action will not have 
substantial direct effects on one or more Indian tribes; will not 
impose substantial direct compliance costs on Indian tribal 
governments; and will not preempt tribal laws. This final action 
addresses obligations of Federal funds to States for Federal-aid 
highway projects and will not impose any direct compliance requirements 
on Indian tribal governments. Therefore, a tribal summary impact 
statement is not required.

Executive Order 13211 (Energy Effects)

    We have analyzed this action under Executive Order 13211, Actions 
Concerning Regulations That Significantly Affect Energy Supply, 
Distribution, or Use Dated May 18, 2001. We have determined that it is 
not a significant energy action under that order because it is not a 
significant regulatory action under Executive Order 12866 and it is not 
likely to have a significant adverse effect on the supply, 
distribution, or use of energy. Therefore, a Statement of Energy 
Effects is not required.

Regulation Identification Number

    A regulation identification number (RIN) is assigned to each 
regulatory action listed in the Unified Agenda of Federal Regulations. 
The Regulatory Information Service Center publishes the Unified Agenda 
in April and October of each year. The RIN contained in the heading of 
this document can be used to cross-reference this action with the 
Unified Agenda.

List of Subjects in 23 CFR Part 630

    Reimbursement, Grant programs--transportation, Highways and roads.

    Issued on: January 25, 2006.
J. Richard Capka,
Acting Federal Highway Administrator.

In consideration of the foregoing, the FHWA is amending title 23, part 
630, Code of Federal Regulations as follows:


Subpart A--Project Authorization and Agreements

1. The authority citation for part 630 continues to read as follows:

    Authority: 23 U.S.C. 106, 109, 115, 315, 320, and 402(a); 31 
U.S.C. 1.32; and 49 CFR 1.48(b).

2. Amend Sec.  630.106 by revising the heading to read as set forth 
below, and adding paragraphs (a)(3), (4), (5), and (6) to read as 

Sec.  630.106  Authorization to proceed and Project Monitoring.

    (a) * * *
    (3) The State's request that Federal funds be obligated shall be 
supported by a documented cost estimate that is based on the State's 
best estimate of costs.
    (4) The State shall maintain a process to adjust project cost 
estimates. For example, the process would require a review of the 
project cost estimate when the bid is approved, a project phase is 
completed, a design change is approved, etc. Specifically, the State 
shall revise the Federal funds obligated within 90 days after it has 
determined that the estimated Federal share of project costs has 
decreased by $250,000 or more.
    (5) The State shall review, on a quarterly basis, inactive projects 
(for the purposes of this subpart an ``inactive project'' means a 
project for which no expenditures have been charged against Federal 
funds for the past 12 months) with unexpended Federal obligations and 
shall revise the Federal funds obligated for a project within 90 days 
to reflect the current cost estimate, based on the following criteria:
    (i) Projects inactive for the past 12 months with unexpended 
balances more than $500,000,
    (ii) Projects inactive for the past 24 months with unexpended 
balances of $50,000 to $500,000, and
    (iii) Projects inactive for the past 36 months with unexpended 
balances less than $50,000.

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    (6) If the State fails to comply with the requirements of 
paragraphs (a)(3), (4), or (5) of this section, then the FHWA shall 
revise the obligations or take such other action as authorized by 23 
CFR 1.36. The FHWA shall advise the State of its proposed actions and 
provide the State with the opportunity to respond before actions are 
taken. The FHWA shall not adjust obligations without a State's consent 
during the August redistribution process, August 1 to September 30.
* * * * *
[FR Doc. 06-863 Filed 1-30-06; 8:45 am]