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Advance Construction

MnDOT Policy FM008
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Policy statement

The Minnesota Department of Transportation (MnDOT) uses federal advance construction (AC) financing for the federal aid eligible highway program. The amount of federal obligation authority cannot exceed 125 percent of forecast for that year. At the end of each state fiscal year, the Federal AC financing balance will not exceed 100 percent of the federal funds amount specified above. Use of federal obligation authority for AC conversions for all projects must not exceed 50 percent of the official, estimated federal formula funds available for use during a state fiscal year, unless the Transportation Program Investment Committee approves a different amount.

For purposes of calculation federal earmarked funds for local projects are exempt. The use of Federal AC financing to finance projects other than those on the trunk highway system must be included when calculating the total for compliance with this policy.

Reason for policy

Planned advance construction more closely matches actual reimbursements from the Federal Highway Administration when project expenditures occur on multi-year projects. Expenditures for projects exceeding $1 million are multi-year payments; typically, these payouts will be 30% in the first year, 50% in the second year, and 20% in the third year.

Use of Federal AC financing allows executing a Federal AC agreement for the entire project, but delaying the use of regular federal funding until times that more closely match when actual project expenditures occur by executing Federal AC conversions at various times during the project’s timeframe.

The use of Federal AC frees up, on a one-time basis, federal funds in the first year of multi-year federal projects that otherwise would have been entirely committed to these projects. The State Transportation Improvement Program (STIP) includes Planned AC and paybacks.

Managed Advance Construction

Another type of use of Federal AC financing is “managed AC.” Managed AC involves entering into Federal AC agreements in order to respond to unplanned events such as delays in actual receipt of federal funding during a federal fiscal year. The U.S. Congress has not been able to pass full year appropriations legislation prior to the start of a federal fiscal year for a number of years. This results in receipt of only portions of the total amount of funding for a federal fiscal year, rather than the entire amount early in the year.

Federal AC financing bridges the gap in time between federal approval and federal obligation authority (funding). In addition, because the federal fiscal year runs from October to September, while the state fiscal year runs from July to June, use of Federal AC financing for the period July through September. Managed AC is typically not included in the STIP and does not have planned AC paybacks.

Who needs to know this policy

  • Commissioner
  • Deputy Commissioner/Chief Engineer
  • Deputy Commissioner/COO/CFO
  • Director, Governmental Affairs
  • Director, Transportation System Management
  • Financial Controller & Director, Financial Management
  • District Engineers
  • Office Directors
  • Executive Budget Officer, Minnesota Management & Budget
  • Legislative Staff


  • Federal AC financing will be used to finance multi-year projects (planned AC) and for temporary federal fund management (managed AC).
  • Each project for which Federal AC financing is used must be authorized in the same way as projects that use regular funding; that is, these projects must be authorized by the Federal Highway Administration prior to advertising for letting or expending any funds on the project.
  • Use of Federal AC financing requires full encumbrance in the state road construction budget for trunk highway construction projects for both the state funds and the federal advance construction agreement amounts.
  • Prior to using Federal AC financing, assurance must be obtained that the cash balances in the trunk highway fund are sufficient to pay project expenditures prior to the time an Federal AC financing is converted to regular funding (this normally should not be an issue).
  • Assuming federal funds are available, conversions of Federal AC financing to regular federal funding, initiated when unbilled eligible costs for a project are determined to exceed $500,000. At the end of the state fiscal year, unbilled amounts cannot carry into the next fiscal year for state aid projects and unbilled amounts for trunk highway projects are minimized as well. This reduces the impact on both the general fund and trunk highway fund balances.
  • Overall Federal AC balances should be within the balances prescribed in this policy at the time of the final State Transportation Improvement Program.
  • MnDOT will not utilize additional advance construction that would exceed these Federal AC financing limits unless the Transportation Program Investment Committee, in consultation with the Chief Financial Officer, approves in advance.
  • If any forecast projects that these Federal AC financing limits will be exceeded, changes must be proposed to the Federal AC financing plan to bring it back into compliance by the beginning of the following year’s State Transportation Improvement Program.
  • Management of Federal AC financing provides estimates for each upcoming biennium and for the biennial budget preparation process. Federal AC financing amounts are revenue in the formal fund statement for the trunk highway fund that is prepared to support the biennial budget proposals.


Advance Construction

The Federal Highway Administration authorizes eligibility of using future federal appropriations for current year Minnesota trunk highway, local road, or other projects. An Advance Construction obligation with the FHWA occurs with the approval of the financing agreement. Advance construction project conversions result in cash reimbursement is similar that would have if regular federal aid financing were used.

Advance Construction Conversion

Advance Construction conversion is the process of converting advance construction to the obligation of actual federal funds.

Federal Aid Advance Construction Agreements (referred to as Federal AC financing in this policy)

Federal aid advance construction agreements are a special type of federal aid agreement. Typically rather than receiving reimbursement on a concurrent basis, reimbursement occurs in future periods of time or future years, with the agreements based on future federal aid amounts expected as allocation to MnDOT. Actual reimbursement, often referred to as a “conversion,” is typically a lump sum amount, representing reimbursement of costs incurred in the previous periods. When this occurs, this reduces the amount of federal funds available for current year project agreements.

Federal Aid Agreements

Federal Aid Agreements between MnDOT and the Federal Highway Administration, approved on a project-by-project basis and project costs reimbursed on a scheduled basis. The total dollar amount of an agreement is the maximum amount of reimbursement. Reimbursement is typically for 80% of eligible costs. Since the entire amount of a project encumbrance is an expenditure on a budgetary basis, so too is the entire amount of the federal aid agreement for the same project.

Federal Apportionment

Federally prescribed division or assignment of funds based on federal law formulas, by dividing the apportionment for a specific program among the states.

Federal Appropriation

Authorization of funding expenditures from Congress through passage of a federal appropriation law

Federal Earmarked Funds

Funds that the U.S. Congress allocates to specific projects; this funding is separate from the formula funding.

Federal Obligation Authority Forecast

The amount of federal formula funding that is specifically allocated to Minnesota (and each state), based on approved federal appropriations or continuing resolutions.


The Federal government's legal commitment (promise) to pay or reimburse the States or other entities for the Federal share of a project's eligible costs.

State Transportation Improvement Program Financial Plan

This is a detailed plan that outlines the financing plan for the State Transportation Improvement Program. It include information about the condition and forecast of state funding sources, especially the Trunk Highway Fund, forecast of federal formula funds for the four years of the STIP and other information about federal funding, and a variety of related information. The STIP must be fiscally constrained, and one of the primary goals of this plan is to provide information about the funding that is used to finance the projects contained in the STIP. This document also contains detailed information about the planned use of Federal AC financing for the four-year period encompassed by the STIP.

State Transportation Improvement Program (STIP)

The STIP is a federally required document listing transportation projects with anticipated federal transportation dollars within a four-year window. This list of projects includes state and local transportation projects funded with federal highway or federal transit funds. Minnesota also includes most projects on the state trunk highway system regardless of funding source (federal or state). Rail, port, and aeronautics projects are included for information purposes. Refer to the website for details, State Transportation Improvement Program.

Transportation Program Investment Committee

This committee has nine voting members, consisting of the deputy commissioner, all six division directors, the district engineer of the Metropolitan District, and the Chief Financial Officer. The committee’s main purpose is to provide strategic management leadership for all aspects of MnDOT’s trunk highway construction program.

Trunk Highway Fund

This fund is the principal operating fund for MnDOT, and to some extent for the Department of Public Safety. It is a governmental fund that accounts for public monies used to construct, maintain, and operate Minnesota’s trunk highway transportation infrastructure. Annual transfers of funds to the Minnesota Management & Budget (MMB) debt service account in the state debt service fund.


Deputy Commissioner/COO/CFO

  • Consult with the Director of the Office of Transportation System Management whenever a proposal to exceed the use of advance construction financing stated in the MnDOT policy.

Director, Transportation System Management

  • Prepare STIP Financial Plan
  • Forecast federal funds
  • Prepare quarterly advance construction reports and submit to the Federal Highway Administration
  • Inform the Transportation Program Investment Committee about the planned use of advance construction in the upcoming State Transportation Improvement Program, as part of the presentation to the committee about the entire State Transportation Improvement Program, as recommended for approval by the Commissioner.

Financial Controller & Director, Financial Management

  • The director ensures that the planned use of advance construction financing is consistent with the MnDOT policy.

Minnesota Management & Budget (MMB)

MMB reviews forecasts of use of Federal AC financing in conjunction with its responsibility to approve MnDOT’s overall forecast of federal agreements revenue for the trunk highway fund that are incorporated into the formal financial statements for this fund. The overall level of funding proposed in biennial budget requests for the trunk highway fund limited by the amount of revenue projected to be available in the fund.

Transportation Program Investment Committee

As part of carrying out its responsibilities related to the STIP, which includes review and recommend for approval by the Commissioner, review the federal funds forecast (which includes some of the information contained in the STIP Financial Plan), which includes specific recommended amounts for use of Federal AC financing during the upcoming four years that the STIP encompasses.

Frequently asked questions

What is the principal risk associated with using advance construction financing? What would be the risks of adopting higher levels of federal Advance Construction financing than are included in this policy?

Use of Federal AC financing involves use of the cash available in the Trunk Highway Fund to make project expenditures that would be reimbursed on a concurrent basis if Federal AC financing were not used. If expected federal revenue did not become available because of congressional inaction, major economic recession that dramatically reduced the amount of revenue received by the Federal Highway Trust Fund, or other factors, federal reimbursement could be delayed, resulting in lowered levels of cash in the Trunk Highway Fund. This would result in reduced investment income for the fund. In extreme circumstance, MnDOT’s ability to make other required payments from the Trunk Highway Fund might result, MnDOT Cash Balance Policy. If higher levels of use of Federal AC financing (especially significantly higher levels) than included in this policy were used, the risks mentioned above would become magnified.

What would be the risks of adopting lower levels of federal Advance Construction financing than are included in this policy?

There would be a loss of flexibility and the risk of losing federal funds. Having reasonable levels of Federal AC financing is desired in order to provide flexibility in managing federal funds. For example, if the amount of federal funding actually made available is greater than was originally planned, the additional funds can be used to execute additional AC conversions. Not being able to fully utilize federal funds might result in the loss of additional funds, through having some funds lapse, or not being able to apply for certain types of special funding where there is a requirement that Minnesota has committed all of its available federal funds.

What cash resources are used to pay project expenditures while projects are funded with advance construction financing, prior to executing conversions?

The cash balance in the Trunk Highway Fund provides the resources needed to pay all of the project expenditures, including the portion that would be reimbursed by the Federal Highway Administration if regular federal agreements were used. The Trunk Highway Fund typically has a substantial cash balance, because the State of Minnesota uses an encumbrance-based accounting system. This means that money for future expenditures must be fully encumbered (that is, set aside) to assure that money is available to pay for the commitments. For MnDOT’s highway construction contracts (and some other types), encumbrances are made for projects that might last one or more years. The encumbered money is placed in reserve, and these reserves result in substantial cash balances in the Trunk Highway Fund. Similarly, the state General Fund typically has large cash balances that are available for paying the portion of project expenditures that would be reimbursed by the Federal Highway Administration if regular federal agreements were used for local road and other types of projects that use Federal AC financing.

What would be the effect on state financing in the unlikely event that the federal government were unable to continue financing the federal aid highway system?

When highway construction contracts are encumbered, including those where federal reimbursement will pay for significant portions of the projects, the total amount of the contract is included in the encumbrance, including the anticipated federal reimbursement through executed federal aid agreements (both regular and AC agreements). In the unlikely event that the federal government was unable to continue to provide reimbursement, AC conversions would no longer be able to be made. This would require significant adjustments to the program of planned construction projects, including cancellations of project lettings. In addition, the cash balance in the Trunk Highway Fund would continue to be used for payments for projects already underway, leading to significantly lower levels of cash, with the same effects as described in response to the first question in this section.

History of policy updates or amendments


Policy FM008 – Advance Construction, established 7-1-2013


Policy 2.5 – Advance Construction, established 7-1-2010


Responsible Senior Officer

Tracy Hatch
Deputy Commissioner/COO/CFO

Policy Owner

Duane Leurquin
Financial Controller & Director

Policy Contact

Pa Youa Xiong
Analysis & Reporting Unit
Office of Financial Management