State law requires Caltrans to submit, every two years, a fund estimate to the CTC that projects state and federal revenues and expenditures for highway and rail projects over a seven-year period. The fund estimate is used to provide a basis for scheduling projects to be funded over the seven-year period in the STIP.
In the following sections, we conclude that:
Projected expenditures in the 1996 Fund Estimate exceed projected revenues by about $600 million. As a result, the CTC requested that regional agencies prepare a list of projects for potential deletion.
In August 1995, the CTC adopted the 1996 Fund Estimate for the seven-year period from 1996-97 through 2002-03. The 1996 STIP will be prepared based on the resource projections provided by this fund estimate.
Expenditures Are Projected to Exceed Revenues. Figure 4 summarizes the 1996 Fund Estimate projections as adopted. As the figure shows, resources are projected to total approximately $28.1 billion over the seven-year period. However, expenditures are projected to total about $28.7 billion, resulting in a shortfall of about $600 million. This projected level of expenditures includes noncapital outlay primarily for highway maintenance and operations, local assistance and subventions, and Caltrans administration. In addition, it includes the costs of engineering, and design and construction of capital outlay projects previously scheduled for funding by the CTC.
Shortfall Means No New Projects to Be Added in 1996 STIP. The $600 million shortfall results after all state and federal funds projected to be available in the 1996 STIP period are used to fund previously scheduled projects. This means that for the 1996 STIP period, no new projects will be added for funding the last two years of the period--2001-02 and 2002-03.
Additionally, Some Projects Previously Scheduled Will Not Be Funded. The CTC has also directed local and regional transportation planning agencies to identify $575 million in projects for potential deletion. At the time this analysis was prepared, Caltrans and regional transportation agencies were compiling projects to be considered for deletion. For those projects that are deleted, future funding will not be automatic. Rather, funding will be available if these projects are considered of high priority and are programmed in future STIPs. Thus, the earliest that they could receive state and federal funding would be after 2002-03. (Deleted projects could be rescheduled in the 1996 STIP if their relative priority changes. However, doing so would displace other projects.) Because many of these projects were initially to be funded in the 1992 STIP, this means that it will take 11 to 12 years--instead of seven years--to fund all projects in this STIP.
| Figure 4 1996 STIP Fund Estimate |
||
|---|---|---|
| (In Billions) | ||
| Seven-Year Total |
||
| Resources | $28.1 | |
| Expenditures | $28.7 | |
| Maintenance/operations | (5.9) | |
| Local assistance/administration | (5.5) | |
| Capital outlay support | (3.2) | |
| Seismic retrofit | (0.5) | |
| Non-STIP capital outlay | (7.7) | |
| STIP capital outlay | (5.9) | |
| $0.6 | |
Funded Projects Will Be Delayed. Even projects that are funded will experience delays in construction. For example, projects originally scheduled to be funded in 1998-99 may not be funded until 2002-03. The CTC estimates that on average, funding of projects will be delayed by about two years.
Lower Priority Projects May Be Funded Over Higher Priority Projects. The deletion and rescheduling of projects could also result in some projects of relatively lower statewide priority being funded over other higher priority projects. This is because projects have been programmed to meet statutory funding requirements, such as the county minimum requirement. These requirements attempt to ensure equitable geographic distribution of funds without regard for the relative priority and need for projects amongst regions. Thus, what can be funded according to the statutory formula may not match what should be or needs to be funded.
The funding shortfall is the result of overly optimistic projections of resources coupled with underestimating expenditures. As a consequence, the state has scheduled more transportation improvement projects for funding than it has available resources.
Prior Resource Estimates Too Optimistic. Past projections of transportation resources have turned out to be overly optimistic, primarily due to the following reasons:
Unanticipated Expenditures for High Priority Projects. In addition to significantly lower than expected resources, unanticipated events have increased transportation expenditures. In particular, the state expanded its seismic retrofit efforts to make state highway structures and toll bridges more earthquake-safe as a result of the Loma Prieta and the Northridge earthquakes. Caltrans estimates the costs of the expanded retrofitting program for state highways to be about $2 billion. Allocating resources to this high priority program reduces the amount available for other STIP projects.
The 1996 Fund Estimate also takes into consideration the increasing need for highway pavement rehabilitation. For the seven-year period, the fund estimate sets aside an additional $675 million for rehabilitation purposes. Caltrans estimates that this amount will enable it to bring the state's backlog in pavement rehabilitation down to about 10,000 lane-miles, the level that existed in 1980-81.
While the 1996 Fund Estimate takes a more conservative approach to projecting resources, our review shows that an additional $560 million would be required to fully pay for all projects to be constructed in the 1996 STIP period. Additionally, many uncertainties still exist that may dramatically change the funding picture. In particular, the Fund Estimate does not address the funding of toll bridge seismic retrofit.
The 1996 Fund Estimate takes a more conservative approach to projecting resources than previous fund estimates. Additionally, the direction of the CTC to delete $575 million in projects also helps to provide a funding plan that is more realistic. Nonetheless, our review shows that it would require an additional $560 million to fund all projects left in the 1996 STIP, as we discuss below.
Accounting Change Masks Greater Shortfall. In preparing the 1996 Fund Estimate, Caltrans changed from an "accrual" basis of accounting to a "cash" basis for estimating state transportation revenues. We estimate that the net effect of this change is to understate the shortfall by about $560 million. This is because projects for which construction is started in the last two years of the STIP period will not be totally paid for in those two years. Instead, because project construction often takes more than one year, about $560 million in project costs will be paid in 2003-04 or later--in the 1998 STIP period.
Other Uncertainties Exist. Because the fund estimate is a seven-year projection, there are still many uncertainties. In particular, these uncertainties include the following:
Bond Measure Would Alleviate Estimated Funding Shortfall, But Not Cover Retrofit of Toll Bridges. 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 for seismic retrofit purposes, including $1.3 billion for the retrofit of state highways. Availability of the bond funds to retrofit state highways would eliminate the funding shortfall in the 1996 Fund Estimate and the need to delete projects.
Availability of bond funds would also provide $650 million for toll bridge seismic retrofit. However, that will not be sufficient to cover the costs of these retrofit activities, as we discuss in the following section. The 1996 Fund Estimate does not address the funding of toll bridge retrofit costs.
Caltrans' most recent cost estimates for seismic retrofit of state-owned toll bridges have tripled from initial estimates. Retrofitting toll bridges will cost the state between $1.7 billion to $2.1 billion. The Legislature and the Governor will need to address how to fund these costs in order that retrofit work can progress without significant impact on other transportation projects.
We recommend that Caltrans provide at budget hearings an estimate of the cash balances available in 1996-97 for toll bridge seismic retrofit from alternative fund sources.
Fund Estimate Does Not Include Toll Bridge Seismic Retrofit Costs. The 1996 Fund Estimate assumes that expenditures for the seismic retrofit of state-owned toll bridges would be paid from sources other than state and federal highway monies. The assumption is that these costs would be paid from toll revenues, bond funds or some other unidentified sources. At the time the fund estimate was adopted, Caltrans estimated the costs of toll bridge seismic retrofit to be $650 million. Proposition 192 (the Seismic Retrofit Bond Act of 1996), if approved by voters, would provide $650 million in general obligation bond funds for toll bridge retrofit.
Costs Will Be Significantly Higher. Based on consultant studies, Caltrans now estimates that the cost to retrofit seven state-owned toll bridges will range between $1.7 billion and $2.1 billion. Specifically, the costs to retrofit four Bay Area bridges (the Richmond-San Rafael, the San Mateo-Hayward, the east span of the Carquinez, and the Benicia-Martinez Bridges) and the two southern California bridges will be between $710 million and $780 million, instead of $420 million as originally estimated. In addition, the cost to retrofit the San Francisco-Oakland Bay Bridge is now estimated at $1 billion to $1.3 billion instead of the initial $250 million.
Given the significantly higher cost estimate, $650 million in bond funds, if available, will fall far short of funding toll bridge seismic retrofit.
With No Additional Funds, Toll Bridge Seismic Retrofit Would Crowd Out Other Projects. If seismic retrofit of toll bridges is to proceed as a high statewide priority, and if no additional funds are made available, any costs not covered by bond funds would have to be paid from either state and federal highway funds or from toll revenues. Using existing toll revenues would crowd out other bridge improvement projects, such as improving approach roads to the Dumbarton and Bay Bridges and widening the San Mateo-Hayward Bridge. (These are projects included in Regional Measure 1 whereby Bay Area bridge tolls were raised for various bridge improvements.) Using state and federal highway funds instead of toll revenues, however, would require additional STIP projects to be deleted (beyond the $575 million called for by the CTC), and further delays of other projects remaining in the STIP.
Funding Issue Needs to Be Addressed. Based on the latest cost estimate, and depending on the outcome of the bond measure, the state will need from $1.1 billion to $2.1 billion in additional funding for toll bridge seismic retrofit. Caltrans maintains that its target is to construct all toll bridge seismic retrofit projects by the end of 1997, with a number of projects to begin in 1996. In order to ensure available funds for these projects to proceed, the Legislature will need to determine the relative funding priorities of toll bridge seismic retrofit, other STIP projects, and other toll bridge projects (funded from toll revenues).
Because the amount and timing of needed construction funds depends on Caltrans' ability to design and engineer projects, we think that the Legislature should know the construction schedule for bridge retrofit projects in order that it is able to determine when additional funds should be provided. In our writeup of Caltrans' budget (Item 2660), we recommend that the department provide prior to budget hearings a schedule of seismic retrofit projects for each toll bridge and an estimate of the amount of funds needed for each bridge project.
Because the budget projects large cash balances in the SHA (as discussed in the section below), the Legislature may be able to utilize such balances in 1996-97 for seismic retrofit of toll bridges while determining a long-term funding solution. Accordingly, we recommend that Caltrans provide at budget hearings an estimate of the amount of cash balances (such as from the SHA and toll revenues) that are available for these purposes in 1996-97, without adversely affecting the construction of other highway or toll bridge projects.
We recommend that the department provide, prior to budget hearings, a reconciliation of the State Highway Account reserve balance estimated for 1995-96 that quantifies (1) the savings resulting from project construction costs being lower than expected and (2) the increase in cash reserves as a result of delays in project delivery.
The SHA is the primary source of state funds for the state highways transportation program. Account revenues are generated mainly from gas tax revenues and weight fees on trucks. Funds in the SHA are used mainly for highway maintenance and operations, support of the Department of Transportation, and the design, engineering, and construction of highway projects. Funds in the SHA are also used to fund rail capital improvements.
As we discussed previously, over the 1996 STIP period there will not be sufficient state and federal funds to construct all of the transportation projects that have been scheduled thus far through 2002-03. As a result, some previously scheduled projects will have to be deleted. While there will not be sufficient funds over the long run to pay for all planned improvements, the 1996-97 Governor's Budget shows that the SHA will have a sizable cash balance in the current year. By the end of the budget year, the balance is projected to be about $528 million.
SHA Balance Significant and Increasing. Figure 5 shows the year-end balance in the SHA from 1994-95 through 1996-97. As the figure shows, the SHA cash balance has increased significantly. In addition, the figure shows that the budget has consistently under-projected the cash reserve in the account. For instance, the projected balance for 1994-95 was $73.8 million, but the actual year-end reserve was much higher at $380 million.
Similarly for 1995-96, the SHA was initially projected to end the year with a small cash balance of $20 million, only after Caltrans borrowed $147 million short-term to fund seismic retrofit projects. However, Caltrans now estimates the balance will escalate to $495.7 million, even without having to issue short-term notes. For 1996-97, the budget projects a reserve of $528 million.
| Figure 5 State Highway Account |
||||
|---|---|---|---|---|
| (In Millions) | ||||
| Fund Balance | 1994-95 | 1995-96 | 1996-97 | |
| Projected | $73.8 | $20.0 | $527.8 | |
| Actual/estimated | 380.1 | 495.7 | -- | |
| $306.3 | $475.7 | -- | |
Reserves Not the Result of Higher Revenues. There are three possible explanations for these higher-than-projected reserves:
Our review, however, shows that the high cash balance is not caused by higher-than-anticipated revenues. In fact, gas tax revenues and weight fees have only increased by about 1 percent since 1994-95, and overall revenues into the SHA have tracked closely to projected amounts on an annual basis. Rather, the large balance is primarily the result of actual expenditures--in particular, transportation capital outlay--being lower than projected. For instance, as shown in Figure 6, in 1994-95 actual capital outlay expenditures from the SHA were $98 million lower than projected. For 1995-96, the amount is estimated to be about $424 million less, accounting for almost all of the increase in the cash balance by the end of 1995-96.
| Figure 6 State Highway Account |
||||
|---|---|---|---|---|
| (In Millions) | ||||
| 1994-95 | 1995-96 | 1996-97 | ||
| Projected | $357.1 | $900.7 | $757.9 | |
| Actual/estimated | 259.2 | 476.9 | -- | |
| $97.9 | $423.8 | -- | |
Lower Expenditures Due to Lower Project Costs and Delivery Delays. Our review further shows that the lower-than-expected expenditure levels are attributable to the following:
Delayed Projects Potentially Cost More in Future. While delays in project construction will increase the SHA cash balance, delays may also result in higher project costs over time due to inflation. As projects are delayed, future costs are likely to be higher. This could in turn exert additional demand for transportation funds over the long run if the state is to construct all projects scheduled in the STIP.
Department Should Quantify Delays and Identify Real Savings. The change in the SHA cash balance picture for 1995-96 raises questions concerning the reliability of the proposed 1996-97 capital outlay expenditure level and the projected reserves in the SHA. While the budget projects a balance of $528 million, this balance is highly sensitive to the level of project delivery and the timing of projects being awarded for construction. If delivery slows, the fund balance will rise.
In order that the Legislature is better able to assess when additional cash will be needed to fund the state transportation program, we recommend that the department provide a report, prior to budget hearings, that identifies the actual savings realized in 1994-95 and 1995-96 as a result of lower project bid prices. The report should also quantify the extent to which project delivery delays are likely to increase the cash balance in the SHA and the amount of cash needed in 1996-97 and subsequent years to fully pay for projects under construction in 1995-96.
The recently enacted National Highway System Designation Act restores about $80 million in federal funds for California's transportation program in 1996 and 1997 and allows advance use of future federal funds. Additionally, it will enable the state to use federal transportation funds more efficiently to meet state and regional priorities. Because the act eliminates certain federal mandates, Caltrans might be able to realize an unknown amount of savings.
We recommend that Caltrans report, at budget hearings, on the activities it will not carry out as a result of federal mandates being eliminated, and the amount of savings it could potentially realize.
The 1991 Intermodal Surface Transportation Efficiency Act (ISTEA) authorized the existing federal transportation program through September 1997. (Please see our Analysis of the 1992-93 Budget Bill for a summary of ISTEA, pages III-53 through III-58.) The act, among other things, also required Congress to approve a national highway system (NHS) by September 1995. In November 1995, the National Highway System Designation Act of 1995 was enacted.
Figure 7 summarizes the key provisions of the act and Figure 8 lists the mandates lifted by the act. The act designates the NHS as including about 161,000 miles of interstate and principal arterial roads nationwide, of which 7,400 miles are in California. In addition, the act amended many provisions of ISTEA. In general, these amendments seek to achieve the following:
Act Restores and Advances Federal Funds Available to the State. The ISTEA as well as federal budget actions limited the amount of federal transportation funds available in FFY 1996 and 1997. The NHS act restored a portion of those funds. As a result, Caltrans now estimates that it could receive up to $80 million more than anticipated over the two fiscal years.
Another provision of the act will also benefit California. Specifically, the new act permits states to commit to projects future federal funds that will be available in FFY 1998, or later--that is, after the current ISTEA has expired. This is advantageous to California because, as we pointed out in the Analysis of the 1995-96 Budget Bill (page A-15), California would be totally out of federal funds in 1996-97 if it could not continue to do "advance construction" and pre-commit future federal funds.
Act Increases Flexibility in Use of Federal Funds. The new act also broadens the use of federal funds which ISTEA has set aside for particular types of projects. For instance, states are allowed to transfer unobligated transportation funds under the Congestion Mitigation and Air Quality (CMAQ) program--funds available primarily to urban areas--to other non-CMAQ projects. The act also makes certain types of expenditures and projects--for example, capital and operating costs for traffic monitoring, management, and control facilities--eligible for NHS funding.
Act Allows Innovative Financing for Transportation Projects. In addition, the act liberalizes the use of federal funds for toll road projects. It raises from 50 percent to 80 percent the maximum percentage of project costs that may be funded with federal money. Additionally, federal funds may be used to fund debt service on bonds for toll projects.
The act also sets up a pilot program for up to ten states to form infrastructure banks, using in part federal funds as seed money, to provide loans and other assistance for transportation improvements.
Act Reduces Certain Federal Mandates. The act also eliminates certain federal mandates established in ISTEA. Figure 8 summarizes the mandates lifted in the act. Eliminating or relaxing these mandates would likely result in savings to the states. For instance, the United States Department of Transportation (USDOT) will be prohibited from requiring states to use signs in the metric system or to require project design in the metric system before October 2000. In the past few years, Caltrans has expended about $3 million
| Figure 7 National Highway System (NHS) Designation Act of 1995 Key Provisions |
|
|---|---|
| NHS designation |
|
| Restoration of Section 1003(c) funds |
|
| Advance construction |
|
| Congestion Mitigation and Air Quality (CMAQ) improvements |
|
| Transportation Enhancement Activities (TEA) projects |
|
| Toll road funding |
|
| Infrastructure Bank Pilot Program |
|
| Intelligent Transportation Systems (ITS) |
|
| Traffic monitoring |
|
| Golden Gate Bridge |
|
| Alameda Corridor |
|
in preparation for the conversion to metric, mandated to be effective in October 2000. Modifying the mandate will enable the state to delay the conversion and potentially not incur further expenditures on the effort.
| Figure 8 National Highway System (NHS) Designation Act of 1995 Mandate Relief |
|
|---|---|
| Speed limits | Repeals 55 mph speed limit, and permits states to set higher speed limits |
| Motorcycle helmets | |
| Metrification | |
| Use of recycled rubber | |
| Emission testing requirement | |
| ISTEA management systems | |
| Overweight transit vehicles | |
| Call box signs | |
In summary, the new federal act will provide more federal funds to California, while at the same time, allowing the state more flexibility in how funds are used to meet state priorities. In order that the Legislature is informed on the impact of the federal act on Caltrans activities, we recommend that the department report at budget hearings on (1) the activities it will no longer perform as a result of federal mandates being eliminated and (2) the estimated savings that could be realized.
A recent State Supreme Court decision is likely to make it more difficult for local governments to raise local tax revenues for local government purposes, including transportation, in the long run. Consequently, the demands for state transportation funds could increase significantly. The Legislature should re-examine the role of local sales taxes in funding transportation as well as examine alternative financing sources to take the place of local sales taxes.
Since 1985, local sales tax revenues have become a major source of funds for transportation. For instance, from 1985 to 1995, Santa Clara County generated about $900 million for state highway improvements. Currently, 17 counties impose at least a ½ cent local sales tax for local transportation purposes. Generally, these measures raise funds for periods ranging between 10 and 20 years. In total, they are projected to generate about $22 billion. About one-third of these funds will be used to provide local funds for STIP projects. The remaining revenues will be used for local streets and road purposes and to fund rail and transit improvements and operations.
State Supreme Court Decision Requires Two-Thirds Vote for Local Tax Measures. In September 1995, the State Supreme Court ruled that local transportation sales taxes are special purpose taxes, and therefore fall under the requirements of Proposition 62. Proposition 62, passed by voters in 1986, prohibits a local agency from imposing (1) a tax for specific purposes (a "special tax") unless it is approved by two-thirds of the voters or (2) a tax for general purposes (a "general tax") unless it is approved by a majority of the voters.
The decision specifically ruled Santa Clara County's Measure A invalid because it did not meet the two-thirds vote requirement. Measure A would have imposed a ½ cent sales tax over 20 years for transportation purposes, beginning April 1995. The measure was projected to raised about $3.5 billion primarily for capital improvements and operations of the rail system in the county.
Short-Run Impact of Supreme Court Decision. Short of getting two-thirds voter approval for another tax measure in 1996, Santa Clara County will have to reprioritize transportation projects for funding. This could mean that certain projects in Santa Clara County now scheduled to be funded in the STIP would not go forward.
The other existing transportation sales tax measures do not appear likely to be affected in the short run by the court decision. This is because for all these measures, the time periods for legal challenge as provided in each measure have expired. Additionally, in many of the counties, these tax revenues already have been obligated for project construction, or bonds backed by projected revenue streams have been issued to fund project construction.
Raising Local Funds Likely More Difficult in Long Run. As the existing measures expire (ranging from 2003 to 2010), any future extensions would require two-thirds voter approval. Based on experience to date, it appears that it would be more difficult for local governments to raise funds to supplement state and federal money for transportation improvements.
The potential loss of local sales tax revenues would eliminate a significant source of funds for transportation. This would in turn increase the demand for state transportation funds. Because local governments were given the sales tax option in order to induce more local participation in transportation funding and to provide local governments greater means to address local and regional transportation needs, the Legislature should re-examine the role of local sales tax in transportation funding in view of the State Supreme Court decision. The Legislature should also examine what alternative financing sources are available to take the place of local sales taxes.
Return to LAO Home Page