TITLE: Use of Proceeds from the Sale of Real Property Purchased with Federal Highway Funds, B-290744, September 13, 2002
BNUMBER: B-290744
DATE: September 13, 2002
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Use of Proceeds from the Sale of Real Property Purchased with Federal Highway
Funds, B-290744, September 13, 2002
B-290744
September 13, 2002
The Honorable John McCain
Ranking Minority Member
Committee on Commerce, Science and Transportation
United States Senate
Subject: Use of Proceeds from the Sale of Real Property Purchased with
Federal Highway Funds
Dear Senator McCain:
This is in response to your letter dated April 3, 2002, requesting our
views regarding the Federal Highway Administration's (FHWA) interpretation
of 23 U.S.C. S: 156 (2000). As explained below, S: 156 authorizes states
to use the proceeds from sales of real property purchased with federal
funds for other eligible projects. Your letter asks whether the proceeds
from real property sales retain their character as federal funds under
S: 156; you also ask questions about how the states have applied S: 156.
This opinion addresses the proper interpretation of S: 156. The remaining
issues you raise will be addressed in a separate GAO report.
Under S: 156, and in particular, S: 156(c), states disposing of excess
property acquired with Federal Highway Trust (title 23) funds are
authorized to reapply the federal share of the proceeds to other eligible
title 23 projects. The FHWA construes S: 156 as allowing states to treat
the proceeds of excess property sales as state funds. FHWA believes that
the federal government retains no residual interest in those proceeds. It
has informed the states that projects funded through proceeds from such
transactions are not subject to restrictions that would otherwise apply if
such funds were treated as federal funds.
As your letter points out, the Department of Transportation's (DOT's)
Office of Inspector General (DOT-IG) questioned FHWA's interpretation of
S:156 in its report, October 2001 Finance Plan for the Central
Artery/Tunnel Project, IN-2002-086, March 11, 2002. You ask us to examine
the issues raised in the DOT-IG's report and determine whether FHWA's
interpretation is correct. In this regard, you would also like us to
consider whether states (1) can convert federal money to state money by
buying and selling property, (2) can use such means to reduce or avoid
their obligation to provide matching funds, and (3) can thus avoid normal
safeguards on the use of federal funds.
As explained below, we disagree with FHWA's interpretation of S: 156.
Section 156 permits states to apply the federal share of proceeds of
excess property dispositions to other title 23 projects in lieu of
returning those funds to the Highway Trust Fund. The federal interest in
such funds is not extinguished. Consequently, states may not convert
federal money to state money by buying and selling property or use the
federal share of recaptured funds to reduce or avoid their obligation to
provide matching funds.
Background
Prior to 1998, if a state sold real property purchased with federal
highway funds, it had to return the federal share of the net proceeds of
the sale to FHWA. In 1998, Congress adopted the Transportation Equity Act
for the 21st Century (TEA-21), Pub. L. No. 105-178, title I, S: 1303(a),
112 Stat. 227 (1998), which authorized states to reapply the federal share
to other projects. As amended by TEA-21, 23 U.S.C. S: 156 reads as
follows:
*(a) Minimum charge.‑‑* a State shall charge, at a minimum,
fair market value for the sale, use, lease, or lease renewal (other than
for utility use and occupancy or for a transportation project eligible for
assistance under this title) of real property acquired with Federal
assistance made available from the Highway Trust Fund*.
(b) Exceptions.‑‑The Secretary may grant an exception to the
requirement of subsection (a) for a social, environmental, or economic
purpose.
*(c) Use of Federal share of income.‑‑The Federal share of net
income from the revenues obtained by a State under subsection (a) shall be
used by the State for projects eligible under this title.*
The predecessor to S: 156 of title 23, U.S.C., applied only to the sale,
use, lease or lease renewals of *right-of-way airspace,* as opposed to the
broader coverage of *real property* under TEA-21. It provided:
** States shall charge, as a minimum, fair market value, with exceptions
granted at the discretion of the Secretary for social, environmental, and
economic mitigation purposes, for the sale, use, lease, or lease renewals
(other than for utility use and occupancy or for transportation projects
eligible for assistance under this title) of right‑of‑way
airspace acquired as a result of a project funded in whole or in part with
Federal assistance made available from the Highway Trust Fund*. The
Federal share of net income from the revenues obtained by the State for
sales, uses, or leases (including lease renewals) under this section shall
be used by the State for projects eligible under this title.* (Emphasis
added.)
FHWA correctly interprets the TEA-21 amendment as expanding the scope of
S: 156 to allow reapplication of the proceeds from all real property
dispositions, including the disposition of excess real property. It goes
on, however, to apply its interpretation of air rights dispositions under
the pre-TEA-21 statute to excess property dispositions. Under the prior
statute, FHWA treated air rights receipts as being in the nature of
project income that it believes the states had the right to use as they
saw fit. Indeed, until the current regulations were adopted in 1999,
FHWA's regulations stated that *Disposition of income received from the
authorized use of airspace shall be the [state highway department's]
responsibility and credit to Federal funds is not required.*[1] Starting
from this vantage point, FHWA now reads the current language of S: 156 as
extinguishing the federal share in all proceeds from the disposition of
any kind of real property, allowing the states to treat all proceeds as
state funds. It reads its regulation, 23 C.F.R. S: 710.403(e), added by
64 Fed. Reg. 71290 (Dec. 21, 1999), similarly. That regulation provides
*The Federal share of net income from the sale or lease of excess real
property shall be used by the STD for activities eligible for funding
under title 23 of the United States Code. Where project income derived
from the sale or lease of excess property is used for subsequent title 23
projects, use of the income does not create a Federal‑aid project.*
As noted, FHWA's views regarding the proceeds from the sale of excess
property were questioned by the DOT-IG in its recent report concerning the
October 2001 finance plan for the Boston Central Artery/Tunnel Project
(CA/T Project). The CA/T Project was unique in that Congress capped the
total amount of federal funds for the project at $ 8.549 billion.
Department of Transportation and Related Agencies Appropriations Act, Pub.
L. No. 106-346, S: 340(d), 114 Stat 1356 (2000). The DOT-IG found that
this amount was fully identified in the CA/T Project Finance Plan but that
Massachusetts intended to sell land on which it had temporarily located
its project headquarters, reinvesting that money in the project as *state
funds.* Pointing out that the federal government had contributed a
significant portion of the monies the state would realize, the DOT-IG
questioned reclassification of that money as state funds and concluded
that the CA/T cap would be exceeded if that money was counted as part of
the federal share.
In rejecting FHWA's position that a sale or other disposition of excess
property extinguishes the federal share, the DOT-IG stated that in its
opinion the better view is that in TEA-21 Congress intended merely to
streamline the process for reapplying the federal share of real estate
proceeds to other federal-aid projects but did not intend to extinguish
the federal share of the money. In support of this view, the DOT-IG
observed that S: 156(c) specifically refers to the *federal share* of the
net income from the proceeds obtained by a state from the sale or lease of
excess property. The DOT-IG also pointed out that consequences of FHWA's
position might include allowing states: (1) to convert federal to state
money by buying and selling property, (2) to use such transactions to
reduce or avoid their obligation to make matching contributions, and (3)
to avoid the safeguards that govern the expenditure of federal funds. The
DOT-IG stated that the better view of the statute was that the federal
share of real property remains federal money but that the states should be
permitted to reapply the money to other eligible projects.
In reviewing the DOT-IG report, we focused on the general issue of how the
proceeds from excess property sales should be treated under S: 156. We
did not review matters that were not raised by your request (e.g., the
nature of the credit for recaptured property and the CA/T cap).
FHWA's Comments
As did the DOT-IG, we requested that FHWA provide us with a written
explanation of its interpretation. According to FHWA, the TEA-21
amendment of S: 156 was proposed by the executive branch in order to
combine the rules governing disposal of excess real property by sale or
lease with the rules governing the disposition of air rights. FHWA says
this was done to reduce administrative overhead by eliminating different
sets of rules and by simplifying those rules. It points out that in
drafting TEA-21 the Senate Committee on Environment and Public Works
embraced its rationale, stating that the purpose of the change was to
simplify property management practices by applying the same standard to
all real property interests acquired with Federal-aid highway funds. S.
Rep. No. 105-95, at 28-39 (1997). The Senate provision was adopted in the
Conference Report, H.R. Conf. Rep. No. 105-550, at 424-425 (1998).
In addressing this matter in its comments to the DOT-IG and our office,
FHWA maintains that nothing in S: 156 either after amendment by TEA-21 or
before, or the legislative history of either provision, could be construed
to require that S: 156 proceeds be treated as federal funds or be returned
to the Treasury, to the Highway Trust Fund, or to the apportionment
category from which they were derived. In its analysis, FHWA acknowledged
the government-wide common rule[2] governing grants to states and local
governments, under which the federal government retains a percentage
interest in the proceeds from real property sales. However, with little
explanation, it dismissed this retained federal interest as *superceded
by* S: 156, as amended, and by its regulation.
In its submission to our office, FHWA asserts that the income resulting
from real property sales should be treated in the same manner as were air
rights receipts, namely as project income that the states should have the
right to use as they see fit. To support its view that the disposition of
income received from the authorized use of airspace should be left to the
state highway department and that no credit to federal funds was required,
it cites our decision at 41 Comp. Gen. 653 (1962) in which we addressed
the way states handle airspace-use revenue.
Analysis
We agree with the DOT-IG's view that Congress, by adding the disposition
of excess property to the authority granted by S: 156, intended merely to
streamline the process for reapplying the federal share of real estate
proceeds to other federal-aid projects. The statute says nothing about
the federal share losing its identity. To the contrary, S: 156 refers to
a *federal share* in the proceeds of a real property disposition. The
statute states simply that any federal share in the net proceeds,[3] which
a state receives as a result of the sale, use, lease or lease renewal of
such property, is to be applied to other eligible title 23 projects.
Logically, the use of the term *federal share* indicates that the federal
share retains its character as federal funds. Furthermore, by providing
in S: 156(a) that states must dispose of real property at fair market
value, unless the Secretary grants an exception for a social,
environmental, or economic purpose, the statutory text evidences a strong
and on-going federal interest in any revenues generated from such
disposal.[4] In our view, this is a clear indication that the federal
share of these proceeds should continue to be treated as federal rather
than state funds.
Congress's continuing interest in the federal share of air rights and
recaptured excess property sales proceeds is illuminated by examining the
historical background leading to enactment of S: 156. As FHWA notes, that
history begins with our 1962 decision, 41 Comp. Gen. 653. There the
Bureau of Public Roads had proposed to recapture the federal share of
funds in air rights disposals by requiring that the federal share be
applied (1) to other interstate system projects or (2) to finance other
(non-Federal-aid) highway projects. 41 Comp. Gen. at 655. Our decision
pointed out that Congress had not considered that issue and hence provided
no specific direction concerning the disposition of receipts from the use
of air space. 41 Comp. Gen. at 657. Accordingly, absent statutory
language authorizing the Bureau to require that the proceeds derived from
air rights be used as proposed, we found that the state was free to retain
the proceeds. That said, we recognized the significance of the federal
contribution in Federal-aid projects and suggested that the Assistant
Secretary recommend that Congress consider an amendment providing an
appropriate credit to the United States from any profits derived by a
state from the use of air rights. 41 Comp. Gen. at 657-658.[5]
Subsequently, Congress adopted the language that is now S: 156(c) in the
Surface Transportation and Uniform Relocation Assistance Act of 1987,
Pub.L. 100-17, title I, S: 126(a), 101 Stat. 167 (1987). The original
text of S: 156 dealt only with the disposal of air rights and tracks the
Bureau's 1962 proposals discussed in 41 Comp. Gen. at 655. In other
words, in 1987, Congress asserted an interest in the federal share of the
proceeds resulting from the disposition of air rights. The fact that
S: 156 allows states to use the federal share of net income from such
proceeds for title 23 projects does not detract from, and indeed is
entirely consistent with, the proposition that Congress had addressed what
it perceived as the federal interest in such proceeds.
Under the common grant rules, air right proceeds, unlike proceeds from the
sale of excess property, were (and are still) treated as program income.
Such proceeds are to be handled as a deduction, reducing total allowable
project costs (federal and state share) by the total amount. 49 C.F.R.
S: 18.25(g)(1). The DOT implementation of the common rule, adopted just
after enactment of the 1987 act, expressly refers to S: 156, stating that
the statute requires that all such proceeds be applied to title 23
eligible projects. 49 C.F.R. S: 18.25(g)(7). Thus, the common rule as
applied to air rights also recognizes a substantial federal interest in
those proceeds.
The common rule governing the sale of excess property clearly articulates
the federal government's interest, as well, in controlling the proceeds of
sale. The regulations at 49 C.F.R. S: 18.31 then provided (and still
provide) that a grantee state, upon determining that real property is no
longer needed for the originally authorized purpose, must request
disposition instructions from the awarding (grantor) agency, which may
include retention or transfer of title, or sale of the property. 49
C.F.R. S: 18.31(c). The grantor agency is compensated if the property is
retained for use for other purposes, or sold. Id. The amount due the
awarding agency is calculated by applying the awarding agency's percentage
of participation in the cost of the original purchase to the fair market
value or proceeds of the sale after deducting actual and reasonable
associated expenses. 49 C.F.R. S: 18.31(c)(2). Thus, under the common
rule, a state would be required to return to FHWA the federal share of the
net proceeds resulting from the disposal of real property acquired with
federal grant funds.
It is in this light that we consider FHWA's argument that the absence of
specific language in the statute or its legislative history indicating
that any part of the proceeds be returned to FHWA or credited to federal
funds supports its construction of the statute. In our view, FHWA has the
argument precisely backwards. As applied to the sale of excess property,
the common rule protected the federal government's interest in its share
of the proceeds. Absent specific legislative direction to the contrary,
the natural presumption is that by enacting S: 156 Congress meant only to
authorize states to apply the recaptured federal share to other eligible
projects, rather than return such amounts to FHWA. There is nothing in
this legislative action that is inconsistent with the proceeds retaining
their character as federal funds.
The common rule, of which Congress was presumably aware when it adopted
TEA-21, has not been amended in response to the adoption of TEA-21. This
is appropriate, we believe, because properly understood the common rule
and S: 156 are entirely consistent when read together. In S: 156,
Congress said nothing explicitly or implicitly that would alter the
federal character of these funds, which is so clearly articulated in the
common rule. TEA-21 sought to enhance administrative effectiveness by
allowing recovered funds to be transferred for use in other title 23
projects but reflects Congress's continuing interest in grant funds
provided by the federal government. Viewed from this perspective, it is
not reasonable to interpret the S: 156(c) language as indicative of any
intent by Congress to negate the federal character of proceeds captured
upon the sale of excess property.
We recognize that the DOT-IG's report, after questioning FHWA's
interpretation of S: 156, states that in view of FHWA's administrative
role it will defer to FHWA's interpretation provided DOT's Office of
General Counsel would formally concur with FHWA's position. The DOT-IG
also required that the appropriate congressional committees be notified of
that concurrence.
As a general proposition, an agency's interpretation of a statute it is
charged with administrating is entitled to deference. Chevron U.S.A. Inc.
v. Natural Resources Defense Council Inc., 467 U.S. 837, 842-843 (1984);
United States v. Mead Corp., 533 U.S. 218 (2001); Skidmore v. Swift & Co.,
323 U.S. 134 (1944). This discretion, however, is not without limits.
The agency's interpretation must be reasonable and must be based on a
permissible construction of the statute. See, e.g., Chevron U.S.A. Inc.
v. Natural Resources Defense Council Inc., 467 U.S. at 844. For the
reasons discussed we do not view FHWA's position as a reasonable
construction of the statute.
Based on the above, we do not agree with FHWA's interpretation of S: 156.
Buying and selling real property does not extinguish the federal character
of these funds. Consequently, we do not believe states can convert
federal money to state money by buying and selling property or use the
proceeds of such transactions to reduce or avoid their matching fund
obligations or to avoid normal safeguards on the use of federal funds.
Sincerely yours,
Anthony H. Gamboa
General Counsel
------------------------
[1] 23 C.F.R. S: 713.204(v), adopted, 39 Fed. Reg. 34651 (Sept. 27, 1974),
repealed by adoption of 23 C.F.R. S: 710.403(e) in 1999. See 64 Fed. Reg.
71284 (Dec. 21, 1999).
[2] See Uniform Administrative Requirements for Grants and Cooperative
Agreements to State and Local Governments, 49 C.F.R. pt. 18, adopted
originally at 53 Fed. Reg. 8034, 8086 8087 (March 11, 1988), the objective
of which was to create insofar as possible a single, common set of
requirements for administering federal government grants and cooperative
agreements with state and local government.
[3] The term *net income* is not defined in the act. It could be
interpreted as referring to a federal share in the profits of a sale, but
it appears more likely in context and in view of the usage of *net
proceeds* in the common rule that the intent was to address the use of
proceeds remaining after the costs associated with the real property
disposition were deducted.
[4] The importance of this is emphasized by the Conference Report on
TEA-21, which indicates that the House agreed to the changes to S: 156 as
adopted by the Senate after the Senate agreed to include an exception to
allow the states with the Secretary's approval to dispose of property in
some instances at less than fair market value. H. Rep. No. 105-550, at
424-425 (1998).
[5] FHWA told us that to comport with our opinion it adopted its 1974
regulation stating that state highway departments could dispose of
airspace income without making any credit to federal funds. See footnote
1 for citations.