In the
 United States Court of Appeals
               For the Seventh Circuit
                         ____________

No. 02-4363
OLD TOWN NEIGHBORHOOD ASSOCIATION INCORPORATED
and HISTORIC LANDMARKS FOUNDATION OF INDIANA, INC.,
                                            Plaintiffs-Appellees,
                                v.

ALLAN KAUFFMAN, Mayor of Goshen, Indiana,
                                          Defendant-Appellant,
                               and


MARY E. PETERS, Federal Highway Administrator, et al.,
                                                      Defendants.
                         ____________
        Appeal from the United States District Court for the
        Southern District of Indiana, Indianapolis Division.
       No. 1:02-cv-01505-DFH—David F. Hamilton, Judge.
                         ____________
      ARGUED MAY 20, 2003—DECIDED JUNE 19, 2003
                    ____________


  Before COFFEY, EASTERBROOK, and DIANE P. WOOD,
Circuit Judges.
  EASTERBROOK, Circuit Judge. Municipal officials want
to widen Third Street in Goshen, Indiana. Groups believ-
ing that this project would damage or destroy buildings
of historic or architectural significance filed this suit un-
2                                               No. 02-4363

der three federal statutes: Sections 106 and 110 of the
National Historic Preservation Act (NHPA), 16 U.S.C.
§§ 470f and 470h-2(k); Section 4(f) of the Department of
Transportation Act, 49 U.S.C. §303(c); and §102 of the
National Environmental Policy Act (NEPA), 42 U.S.C.
§4332(2)(C). These laws specify steps that must precede
certain federal decisions. Goshen insists that they have
nothing to do with local projects. The district court did not
dispute this proposition but found, after an evidentiary
hearing, that federal participation was in the offing. The
judge summarized his conclusions this way:
    Plaintiffs have shown a substantial likelihood . . .
    that the Third Street project has been improperly
    “segmented” from a major federal undertaking—
    improvement of U.S. Highway 33 through down-
    town Goshen—that is subject to environmental and
    historic impact review. The evidence indicates that
    the City of Goshen, the Indiana Department of
    Transportation, and the Federal Highway Adminis-
    tration have reached an understanding that the
    City of Goshen should carry out its Third Street
    project without environmental and historic impact
    review, and then carry out a “swap” of Third Street
    and Main Street so that U.S. 33 and State Road 15
    will be shifted to use the widened and improved
    Third Street. The defendants discussed such a
    scheme, never definitively rejected it, and have
    acted in a way that is consistent with the scheme.
    In addition, the scheme makes a great deal of
    sense, at least from the standpoint of managing
    traffic through the city. It also offers the apparent
    advantage of sparing defendants from having to go
    through formal review of environmental and his-
    toric impacts of their desired course of action.

at *3-4 (S.D. Ind. Nov. 15,
2002). The judge entered a preliminary injunction forbid-
No. 02-4363                                                   3

ding local, state, and federal officials from taking any
further action to widen Third Street until they have
complied with all three statutes. Goshen has appealed;
Indiana and federal officials have not, nor have they filed
briefs informing us about their positions with respect to
the district court’s reasoning and relief. Yet unless the
Federal Highway Administration accepts the district court’s
view and treats Third Street as a federal undertaking, no
findings will be made and no environmental analysis
done; and, if not, Goshen will be perpetually banned from
using local funds to carry out a local project.
   For purposes of Goshen’s appeal, we take as estab-
lished all of the district court’s factual findings: that Goshen
would like Route 33 to go through Third Street eventually;
that local, state, and federal officials have discussed this
possibility favorably; and that neither the state nor the
federal government has definitively rejected the option. But
it has not been formally proposed to or discussed with
(let alone approved by) the senior federal officials who
would be responsible for making the decision. No federal
funds have been allocated. No concrete federal proposals
have been made; no reports or recommendations on any
proposals have been prepared. This is fatal to the plain-
tiffs’ claim under NEPA, which provides that “all agencies
of the Federal Government shall— . . . (C) include in every
recommendation or report on proposals for legislation and
other major Federal actions significantly affecting the
quality of the human environment, a detailed statement
by the responsible official on” five categories of information.
42 U.S.C. §4332(2)(C). Because no federal official has
prepared a “recommendation or report” on any proposal
concerning Route 33, the time for an environmental im-
pact statement has not arrived. See Kleppe v. Sierra Club,

(1976). Once a federal proposal has been
made and an environmental assessment of some kind is
required, a court may need to determine which subjects
4                                                No. 02-4363

it must cover; this is the “segmentation” question, see
Swain v. Brinegar, 

(7th Cir. 1976) (en banc),
to which the district court devoted much attention. But
that lies in the future; the Supreme Court held in Kleppe
that, until a formal proposal is made, no environmental
study of any particular scope is needed. And when the
federal agency does make a proposal, decisions about its
scope must be reviewed deferentially. See Marsh v. Oregon
Natural Resources Council, 

, 375-78 (1989);
Robertson v. Methow Valley Citizens Council, 

(1989). Courts may not make independent decisions, as the
district judge did here. Until there is a concrete proposal, it
is impossible to determine whether the federal agency
has acted arbitrarily or capriciously in choosing the scope
of the project and environmental study.
  The other statutes on which plaintiffs rely depend on
federal licensing, ownership, or funding. Section 106 of
NHPA says that

    The head of any Federal agency having direct or
    indirect jurisdiction over a proposed Federal or
    federally assisted undertaking in any State and the
    head of any Federal department or independent
    agency having authority to license any undertaking
    shall, prior to the approval of the expenditure of
    any Federal funds on the undertaking or prior to
    the issuance of any license, as the case may be, take
    into account the effect of the undertaking on any
    district, site, building, structure, or object that is
    included in or eligible for inclusion in the National
    Register.
16 U.S.C. §470f. This statute sets conditions on the expendi-
ture of federal funds and the issuance of federal licenses.
As Goshen has not sought any federal support for the ren-
ovation of Third Street, no federal dollars have been obli-
gated, and no federal license is required, it is unnecessary
No. 02-4363                                                5

to satisfy these conditions. For its part, §110 imposes
duties on federal agencies with respect to “historic prop-
erties which are owned or controlled by such agency.”
16 U.S.C. §470h-2(a)(1). The district court did not find
that the Federal Highway Administration owns or con-
trols Third Street or any of the adjoining properties,
so this law drops out. As for §4(f) of the Department of
Transportation Act, 49 U.S.C. §303(c), this statute tells
us that:
   The Secretary may approve a transportation pro-
   gram or project (other than any project for a park
   road or parkway under section 204 of title 23)
   requiring the use of publicly owned land of a public
   park, recreation area, or wildlife and waterfowl
   refuge of national, State, or local significance, or
   land of an historic site of national, State, or local
   significance (as determined by the Federal, State,
   or local officials having jurisdiction over the park,
   area, refuge, or site) only if—
       (1) there is no prudent and feasible alterna-
       tive to using that land; and
       (2) the program or project includes all
       possible planning to minimize harm to the
       park, recreation area, wildlife and water-
       fowl refuge, or historic site resulting from
       the use.
No one has asked the Secretary of Transportation to
approve any program or project related to Third Street
in Goshen, so there was no need for the Secretary to
consider whether any prerequisites for approval have been
satisfied. Entities that proceed on their own dime need
not meet conditions for federal assistance or approval.
  What concerned the district judge is the possibility that
Goshen will seek reimbursement after the fact—either
in cash or in money’s worth, such as a swap of Third
6                                                No. 02-4363

Street for land now owned by the federal government.
Once the historic structures have been razed, the Secretary
could certify that the federal approval or expenditure does
not affect any historic site, for none would be standing.
That two-step would subvert the federal laws. It is not at all
clear that decomposing the transaction into “local” demoli-
tion followed by federal reimbursement could succeed.
Does any statute authorize the Secretary or the Admin-
istrator to reimburse local government for the cost of a
project after its completion? If there is such authority,
however, a court may combine the stages, after the
fashion of the step-transaction doctrine in tax law, into a
sequence. If there really is an agreement that Goshen
will prepay the costs of widening Third Street, following
which the Secretary will approve reimbursement, then the
federal government effectively is borrowing the construc-
tion costs from Goshen. Promising to repay borrowed
money is just a particular way to obligate federal funds, no
less subject to §106 of NHPA than any other means to
write a check. But if, as Goshen insists, there will never
be federal reimbursement, there is no series of stages to
be compressed into one transaction and no problem
under these federal statutes.
   This means that the district court afforded plaintiffs the
wrong relief. Instead of enjoining all construction work on
Third Street until the federal government has jumped
through the hoops needed to fund a federal project, the
district court should have enjoined Goshen from seeking
or accepting federal reimbursement. In other words,
because these federal laws do not apply to local projects
funded by local tax revenues, and Goshen insists that
the widening of Third Street is a genuinely local project,
it satisfies all of the federal statutes just to hold the City
to its representation. If Goshen files with the court a for-
mal undertaking that will be embodied in an injunction
(and thus enforceable through the contempt power) never
to seek or accept any federal reimbursement, direct or
No. 02-4363                                             7

indirect, for the cost of widening Third Street, the City
should be allowed to proceed with the work. Before ac-
cepting the undertaking, the district court should ensure
that it would not disrupt any federal plans that take
precedence under the Supremacy Clause. But unless the
state or federal government finds in the City’s undertak-
ing a transgression of some other federal law, regulation,
or undertaking, the City is entitled to opt out of fed-
eral reimbursement and the conditions attached to federal
money. If the City balks at making an ironclad commit-
ment, however, and if as a result federal reimbursement
remains in prospect, then the City must keep the work on
hold until the conditions of federal support have been
satisfied.
  The preliminary injunction is vacated, and the case
is remanded for further proceedings consistent with this
opinion.

A true Copy:
      Teste:

                       ________________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit




                  USCA-02-C-0072—6-19-03