Legislative Analyst's Office, December 1995

State Transportation Funding Shortfall

In August 1995, the California Transportation Commission (CTC) adopted a projection of revenues and expenditures for the state's transportation programs that contains a $600 million shortfall. The projection (known as the 1996 Fund Estimate) covers the seven-year period from 1996-97 through 2002-03 and is the basis for the 1996 State Transportation Improvement Program (STIP) which schedules transportation projects for design and construction during this period.

In this write-up, we provide an initial review of the 1996 Fund Estimate and actions taken by the CTC to address the shortfall. We will further assess the magnitude of the shortfall and its implications in the upcoming Analysis of the 1996-97 Budget Bill in February 1996.

$600 Million Shortfall

The 1996 Fund Estimate projects that state and federal resources will total approximately $28.1 billion over the seven-year period, as shown in Figure 1. Expenditures, however, are projected to total $28.7 billion, resulting in a shortfall of $600 million. This projected level of expenditures includes noncapital outlays primarily for highway maintenance and operation, local assistance and subventions, and Department of Transportation (Caltrans) administration. In addition, it includes the costs of engineering, design, and construction of capital outlay projects previously scheduled for funding by the CTC.

Implications of the Shortfall

In the absence of corrective action, the projected funding shortfall has the following implications for the state transportation program:

Why Is There a Funding Shortfall?

The funding shortfall is the result of overly optimistic resource projectins coupled with underestimating expenditures. As a consequence, the state has scheduled more transportation improvement projects for funding than it has available resources.

Prior Resources Estimates Too Optimistic. Past projections of transportation resources have turned out to be overly optimistic, primarily due to the following reasons:

Unanticipated Expendiutres for High Priority Projects. In addition to significantly lower-than-expected resources, unanticipated events have increased transportation expenditures. In particular, as a result of the Loma Prieta and the Northridge earthquakes, the state expanded its seismic retrofit efforts to make state highway structures and toll bridges more eathquake-safe. Reallocating resources to this high priority program reduces the amount available for other STIP projects.

How Realistic Is the 1996 Fund Estimate?

The 1996 Fund Estimate takes a more conservative approach to projecting resources than previous Fund Estimates. Because it is a seven-year projection, however, there are still many uncertainties. For instance, the current federal transportation act will expire in 1997 -- one year into the 1996 STIP period. At present, it is uncertain what funding level the new federal program will provide. Any reduction in federal funds below the currently anticipated funding level would increase the shortfall accord ingly.

Similarly, there are uncertainties regarding future expenditures. The fund Estimate, for example, assumes significant expenditure reductions in the support budget for Caltrans. Whether these reductions will be realized depend on efficiency measures to be implemented by the department, many of which are unknown at this time.

Additionally, the Fund Estimate assumes that about $650 million in seismic retrofit expenditures for state-owned toll bridges would be paid for from funds other than state and federal highway monies. To the extent that these funds are not available, the shortfall would increase.

Bond Measure Would Alleviate Problem

Proposition 192 -- the Seismic Retrofit Bond Act of 1996 -- will be on the March 1996 primary election ballot. If approved by the voters, it would authorize the state to sell $2 billion in general obligation bonds in order to retrofit state-owned highways, bridges, and toll bridges. Funding seismic retrofit work out of bond funds would, in turn, eliminate the funding shortfall. As a result, there would not be a need to delete projects. furthermore, some non-seismic-retrofit projects could be funded at an earlier time than currently estimated.

Contact -- Kim McCord -- (916) 445-5921

Economic and Revenue Developments

Economy Continues to Expand. Recent developments suggest that the California economy is continuing to expand at a moderate rate. Wage and salary employment increased by 9,000 in November, and is now up by more than 300,000 from last year at this time. The unemployment rate jumped by a full percent age point to 8.8 percent during the month; however, the increase appears to be a statistical anomaly rather than a meaningful indicator of labor market conditions. In fact, the Employment Development Department has indicated that, beginning in January, it will be modifying its method of estimating the state's unemployment rate, partly in response to the increased monthly volatility that the series has been showing.

In other economic developments, home sales increased during October to the highest level of 1995, and retail spending during the early fall continued to show moderate year-over-year increases. However, construction of new homes remained weak during October, continuing a trand that has persisted throughout 1995.

Revenues Up Again. General Fund revenues exceeded the 1995-96 budget estimate by $32 million in November, bringing total collections for the first five months of the fiscal year to $707 million above the forecast. It appears that over $600 million of the year-to-date gain is permanent, with the balance being temporary and reflecting cash-flow factors.

As shown in Fingure 2, each of the state's major taxes are running significantly above estimates. This refects stronger-that-expected retail spending, employment, income, and corporation earnings in California during the second half of 1995.

Revenue collections from December through early February will be key determinates of the overall 1995-96 revenue picture. During these months, individuals and corporations make the last prepayment twoard their 1995 tax liabilities, and retailers remit sales tax payments related to the important 1995 Christmas shopping season.

Contact -- Brad Williams -- (916) 324-4942

Return to LAO Home Page

Return to LAO Home Page