Legal Route to Elude U.S. Guidelines : Cities Clean Up by ‘Laundering’ Road Funds

Pssst. Hey, buddy, do you wanna buy some federal money at 80 cents on the dollar?

Sounds shady, but it’s not. Some of California’s finest cities are participating in the money sale, buying and selling federal road funds at 20% discounts to elude strict Federal Highway Administration requirements or to get more “bang for their buck.”

Poway is a first-timer in the “laundering” cycle. Tonight, the Poway City Council is expected to approve routinely the sale of $620,000 in FAU (Federal Aid Urban) funds to the City of Irvine for $496,000, money that Poway can spend without federal restrictions.

City Manager Jim Bowersox explained that Poway has two road projects on its priority list that can’t meet the federal guidelines, which include strict right-of-way, environmental and geological standards.

Money Couldn’t Be Spent

So, the $620,000 due the city in federal road money--allocated on the basis of population--could not be spent on Espola Road and Metate Lane improvements.

When the city receives its “laundered” money from Irvine, it will be able to spend it on any transportation-related venture it wants, Bowersox explained.

“There’s probably about $170 million in the (state’s) checkbook right now,” said Robert Watkins, who coordinates FAU funds for the state Department of Transportation. “It’s sitting back in the trust fund in Washington, earning interest.”

Cities and counties don’t get access to their money until they have an approved project, Watkins explained. For agencies without such approvals, it’s much easier to trade their allocations to communities that already have approved projects. In return, the sellers receive “unrestricted” money that can be used on a variety of road projects, such as buying a new road grader or filling potholes that otherwise would go unmended.

Smaller communities are usually the sellers; big cities or areas with major road projects are usually the buyers, Watkins said.

‘Smarter’ to Sell

“A small town in Siskiyou County, with maybe 5,000 population, would receive about $25,000 a year--not a fraction of what a . . . project might cost. It’s a lot smarter for them to sell the FAU funds at a discount and use the (unrestricted) funds they receive on whatever needs doing,” Watkins said.

Some cities sell their allotments at a discount, bank the funds they receive for two or three years, earning back in interest what they lost in the exchange, says Gene Marshall, San Diego district Caltrans engineer.

Marshall acts locally as a sort of middleman for the swaps and promotes the program as “a good deal for everyone, the buyer and the seller.”

Vista and San Marcos, for example, are in the trading mood, and La Mesa is buying cheap FAU dollars for its Fletcher Parkway improvement projects, he said.

In the case of Poway, the city wants to improve Espola Road north of Poway Road, but can’t meet Federal Highway Administration standards for the project because the road is too steep and narrow, he said.

Unrestricted Spending

So, by swapping its allotment to Irvine--which has two approved major FAU projects--Poway will receive funds that can be spent without federal restrictions and thus do the job.

Poway’s city manager agrees that the city is getting a good deal, although it is only receiving 80 cents for each FAU dollar it sells.

“We estimate that it adds almost 20% to the cost of the project to meet FAU standards,” Bowersox said. “We want to get the job done, and this is the fastest way of doing it. I call it laundering, but it’s legal laundering and it’s a good deal for both parties.”

Irvine is nearly finished buying discounted highway dollars for two major road projects due to start construction within the next six months, according to Dennis Wilberg, the city’s manager of transportation services said.

The federally approved projects include a $5-million widening of Irvine Center Road out toward the former Lion Country Safari, and a $10-million extension of Jamboree Boulevard through the Marine Corps helicopter base in Tustin.

Developer Fees Used

By buying up others’ idle FAU funds--using developer fees to make the payments--”we have leveraged our money to the greatest extent possible,” Wilberg said. “We are getting a bigger bang for our buck, and the sellers are getting to use their funds now, without having them eroded by inflation.”

Santa Clara County is the state champion at leveraging, using a half-cent transportation sales tax to buy up FAU dollars at a discount. Among the sellers is the City of Los Angeles, according to Federal Highway Administrator Bruce Cannon.

“Los Angeles sold Santa Clara $30 million a few years ago . . . and will get the same amount back (in unrestricted funds) shortly,” Cannon said. “We encourage anyone sitting on FAU money to get into this program. We don’t like to see these funds sitting idle. . . . (We want to) end up with some transportation projects around the state.”

Cannon is credited by state Caltrans officials as the originator of the swapping program, but Cannon shrugs off the tribute.

“Probably it started with a couple of road engineers in different counties about 15 years ago as an informal swap between the two,” Cannon said. “I just picked up the idea and promoted it. I just fanned the fire.”