Crosscutting Issues


Funding Outlook for State Transportation Programs

California finances its highway and mass transportation programs with a combination of state, federal, local and private funds. The multiyear expenditure of state and federal funds for transportation capital projects is contained mainly in the State Transportation Improvement Program (STIP), a four-year programming document which is adopted every two years by the California Transportation Commission (CTC). The STIP includes projects designed to increase the capacity of the state's transportation infrastructure. Another program, the State Highway Operation and Protection Program (SHOPP), includes all major state highway system projects that do not increase capacity, but rather provide traffic safety, roadway and bridge rehabilitation, and operational improvements. (The STIP period was shortened from a seven-year to a four-year period by Chapter 622, Statutes of 1997 [SB 45, Kopp]. Chapter 622 also made the 1998 STIP a six-year STIP to allow for the transition.)

State law requires the Department of Transportation (Caltrans) to submit a fund estimate to CTC that projects state and federal revenues and expenditures for highway and rail projects over the forthcoming STIP period. In January 1998, CTC adopted the 1998 Fund Estimate, which projected an additional $4.6 billion available for new transportation projects. In June 1998, subsequent to the adoption of the 1998 STIP, the President signed the Federal Transportation Efficiency Act for the 21st Century (TEA-21). The new legislation provided California with significantly more federal funds than in previous years.

The following sections examine:

TEA-21 and Its Impact on California

The TEA-21 will provide about $20 billion to California over the next six years, including about $15 billion for highway programs and $5 billion for transit.

We recommend the enactment of legislation to limit the time period for which state funds are available to local agencies as a substitute for federal funds in order to encourage local agencies to expend federal funds in a more timely manner. We further recommend that the Department of Transportation and the California Transportation Commission advise the Legislature at budget hearings on what other measures are needed to improve the timely use of federal funds by local agencies.

The Basics of TEA-21. The TEA-21 reauthorized the federal transportation program over the six-year period from 1998 through 2004. In general, TEA-21 maintains the same program structure and funding flexibility as its predecessor, the federal Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), while providing an increase in funding of about 40 percent. The act provides funding for two major areas--highways (including safety and research programs) and transit. Specifically, TEA-21 authorizes total nationwide funding of $217 billion, including $175 billion for highways and $42 billion for transit. Similar to ISTEA, the new federal act allows state and regional agencies to move up to 50 percent of funds from one funding category to another under various restrictions.

The TEA-21 increases both the authorized level of funding, as well as the certainty of funding levels by making the following changes:

As indicated in Figure 1, based on the federal authorization level, over the next six years California is estimated to receive about $14.8 billion in federal funding for highway-related programs. All of these funds will be
Figure 1
Highway Programs

TEA 21 Estimated Levels for California

(Dollars In Billions)
Formula Grant Programs Maximum Six-Year Funding Level Percentage Share of National Total
  • •Expands and maintains the nation's 46,000 mile interstate and 163,000 mile highway system.
$4.7 9.4%
  • •Flexible funds that can be used on NHS, bridge, transit capital, or environmental mitigation.
3.2 9.9
  • •Bridge replacement and rehabilitation program.
1.6 8.1
  • •Funds projects in urban areas that do not meet federal clean air standards. Projects must reduce congestion and air pollution.
1.7 21.0
High priority projects
  • •Designates funding for 157 projects in California
0.9 9.4
Minimum guarantee
  • •Each state is guaranteed 90.5% of their contribution to the federal highway trust fund. Fund uses are same as STP funds.
2.5 6.6
Metropolitan planning
  • •Supports regional and state-level planning
0.2 15.4
Totals $14.8 9.2%
IM--Interstate Maintenance Program; NHS--National Highway System; STP--Surface Transportation Program; CMAQ--Congestion Mitigation/Air Quality Improvement Program.

allocated by formula. In addition, TEA-21 includes a number of discretionary grant programs providing up to $21 billion for which California may compete. The grants will fund a variety of projects related to surface transportation, including acquisition of scenic lands and corridors, creation of tourist welcome centers and safety education for pedestrians and bicyclists.

For transit, California is estimated to receive about $5 billion over the six-year period. Most of the funds will be allocated based on population and other factors to urban areas with populations over 50,000. A portion of funds is allocated for rail modernization, based on miles of rail tracks and passenger miles traveled. As Figure 2 shows, California urban areas will receive about $3.6 billion in transit formula funding, with the bulk of the funds going to Los Angeles and San Francisco/Oakland. In addition, Caltrans estimates that California will receive approximately $1.3 billion in discretionary grants (not shown in Figure 2) which will be available on a competitive basis.

(For more detailed information about TEA-21, see our report Transportation Equity Act for the 21st Century: What the New Federal Act Means for California, August 28, 1998.)

Timely Project Delivery Essential to Expend Increased Federal Funds. In order to maximize the benefits of increased federal funding, Caltrans and local agencies must first have projects ready to deliver when federal funds become available. Each year, the state and local agencies receive the authority to spend a certain amount of federal funds. This amount, known as "obligation authority" expires on an annual basis. If Caltrans or local agencies fail to use all of their obligation authority within the federal fiscal year in which it is authorized, the funds are redistributed among the states to projects that are ready for construction.

It typically takes considerable time--multiple years in many instances--for projects to be delivered, that is, planned and ready for construction. Given the substantial increase in federal funding, timely project delivery by both Caltrans and local agencies will therefore play a key role in the state's ability to: (1) take advantage of the redistribution of federal funds from other states; and (2) prevent the loss of federal funds.

Local Agencies Behind in Spending Federal Funds. Local agencies tend to underspend their annual share of federal funds. During the years of ISTEA (1991 through 1997), for example, local agencies were able to obligate only 87 percent of their federal funding. In 1998, only 41 percent of available funding was obligated. As a result, by October 1998, local agencies had accumulated a $730 million backlog in federal funds. This failure to obligate federal funds in a timely fashion is the result of a variety of factors, including the complexity of federal guidelines and reduced technical assistance from Caltrans. In addition, as we discuss next, Caltrans' current policy of swapping state funds for federal funds provides no incentive for local agencies to spend their share in a timely manner.
Figure 2
Transit Formula Grant Funding

For California Urban Areasa

(In Millions)
Urban Formula Maximum


Fund Level

Los Angeles $1,210.7
Sacramento 82.9
San Diego 247.5
San Francisco/Oakland 699.5
San Jose 184.7
33 other urban areas 438.8
Nonurban areas 54.7
Total $2,918.6
Fixed Guideway Modernization Maximum


Fund Level

Los Angeles $165.5
Sacramento 19.0
San Diego 45.3
San Francisco/Oakland 389.2
San Jose 71.8
Total $690.8
a Excludes: clean fuels, elderly and disabled transportation, and rural transportation accessibility.

Caltrans Covers for Local Agency Delivery Shortfall. Despite the failure of local agencies to obligate their annual share of federal funds, California has never failed to use all federal funds available statewide in a given year. This is because whenever local agencies anticipate not being able to use their share of federal funds, Caltrans would use the local share of federal funds in place of state funds for state STIP and SHOPP projects, and allow local agencies to use state funds for their projects at a later time.

This policy essentially guarantees local agencies their allocation of funds indefinitely, regardless of when they would use those funds. Although this approach has worked in the past, increased funding levels for both Caltrans and local agencies will make it increasingly difficult for Caltrans to have projects ready to use up both the state's portion of federal funds as well as any federal funds left unobligated by local agencies. To the extent that this happens, the state would be ineligible to receive funds left unobligated by other states and would lose its share of unobligated federal funds.

Incentives Needed for Local Agencies to Use Funds on a Timely Basis. Over the last decade, California has received about $30 million annually through the redistribution of federal funds left unobligated by other states. In order to ensure that the state remains eligible for this redistribution and prevent any loss of federal funds, it is essential that both Caltrans and local agencies deliver projects and obligate federal funds on a timely basis. One option to encourage more timely use of federal funds by local agencies is to limit the length of time for which Caltrans can substitute state funds for any local agencies' unobligated federal funds. If a local agency cannot have projects ready to use those funds within that time limit, it would then risk losing those funds. This would create an incentive for local agencies to plan projects such that their allocation of funds is expended in a more timely manner.

Current law already requires local agencies to expend state transportation funds on a timely basis. Failure to do so results in a local agency losing its allocation of state funding. Applying a similar time limit to Caltrans' policy of substituting state funds for unobligated federal funds would be consistent with current statute. Accordingly, we recommend that legislation be enacted to limit the time period for which state funds would be available to local agencies as a substitute for federal funds.

Caltrans Should Provide Adequate Technical Assistance. Additionally, it may be beneficial to the state as a whole for Caltrans to work with regional planning agencies and CTC to provide adequate technical assistance to local agencies regarding federal regulations and requirements in order to facilitate local agencies' timely use of federal funds. Accordingly, we recommend that Caltrans and CTC advise the Legislature at budget hearings as to what they plan to do in order to make sure that adequate assistance is available to local agencies. Additionally, we recommend that CTC advise the Legislature on any other measures that would ensure that local agencies use their allocation of federal funds on a timely basis.

Impact of TEA-21 on 1998 STIP and Fund Estimate

Additional federal funds from TEA-21, together with a change in methodology for expenditure projection, result in $1.8 billion of additional resources available for capital projects over the 1998 STIP period. The California Transportation Commission plans to amend the 1998 STIP to program the additional funds.

1998 STIP to be Amended. In order to expedite the programming of additional federal funding, CTC plans to amend the 1998 STIP in March 1999. This will enable Caltrans to begin designing additional projects, and thereby speed up their delivery. Otherwise, work on these projects would be delayed up to a year when they would be programmed in the 2000 STIP in April 2000.

In order to amend the 1998 STIP, Caltrans revised the fund estimate to reflect changes in revenue and expenditure projections. The revised 1998 Fund Estimate, adopted by CTC in January 1999, identifies $1.8 billion in additional funds available for new projects. In addition to incorporating the unanticipated federal revenues from TEA-21, the revised 1998 Fund Estimate reflects a new expenditure methodology.

Change in Expenditure Methodology Allows Projects to Be Programmed Sooner. In an effort to improve its ability to manage available resources which include both state and federal revenues, Caltrans has changed the way it reports expenditures. Previous fund estimates assumed some expenditures to be fully incurred in the year they were programmed, even though a large portion of the expenditures would not be incurred until future years. Other expenditures were assumed to be made over several years based on an aggregate historical expenditure rate. Instead, the new methodology projects expenditures by using historical expenditure rates for each program.

Given that STIP projects often take more than one year to construct and expenditures typically are spread out over multiple years, this new methodology is likely to improve Caltrans' ability to more accurately estimate the balance of available resources in any one year. To the extent that resources not needed in a particular year are accurately estimated, they provide opportunities for additional projects to be programmed and funded, allowing the state to utilize its resources more efficiently. While the new methodology is an improvement in our view, it requires the department to keep track of outstanding expenditures that will occur beyond the STIP period.

Revised Fund Estimate Identifies $1.8 Billion More for Projects. The 1998 STIP amendment provides an opportunity for Caltrans and regional agencies to program new projects. As Figure 3 shows, the revised 1998 Fund Estimate projects resources to total about $30 billion over the six-year period. Expenditures are projected to total about $28.2 billion. This level of expenditures includes noncapital outlay expenditures for state operations, including highway maintenance, operations, program development, and departmental administration; local assistance and subventions; and the costs of engineering and design of SHOPP projects, minor projects, and projects that are already programmed for delivery in the STIP. In addition, expenditures include projected costs of construction of SHOPP and minor projects, as well as all existing STIP projects. After providing for these expenditures, the revised 1998 Fund Estimate projects $1.8 billion to be available for additional projects.

Figure 3
1998 Revised STIP Fund Estimate

Highway Transportation

Projected Revenues and Expenditures

1998-99 Through 2003-04

(In Billions)

Six-Year Total
Federal $13.0
State 17.0
Subtotal ($30.0)
State operations $6.8
Local assistance 5.2
SHOPP, minor projects 5.2
Support (non-STIP projects) 2.5
1998 STIP commitment 6.7
Support (1998 STIP) & reserve 1.8
Subtotal ($28.2)
Additional programming capacity $1.8

The CTC expects to amend the STIP to program the additional $1.8 billion in late March. This amendment will:

SHA Cash Balance Mounting; Will Exceed $1 Billion in 1999-00

The State Highway Account cash balance has grown continuously since 1993-94, and is estimated to be $1.5 billion by the end of the current year. The balance for 1999-00 will likely exceed the $1.1 billion projected by the budget.

The State Highway Account (SHA) is the primary source of state funds for transportation expenditures. The account derives its revenues primarily from taxes on gasoline and diesel fuel and from truck weight fees. Funds are used to support Caltrans operations, provide local assistance and fund transportation capital outlay.

Cash Balance Has Increased Significantly. Figure 4 (see next page) shows the projected and actual SHA cash balance from 1993-94 through 1999-00. As the figure shows, the cash balance has grown continuously since 1993-94. The budget estimates that the cash balance will be $1.5 billion by the end of 1998-99. For the budget year, the balance is projected to drop to $1.1 billion.

The bulk of the SHA cash balance is already committed to STIP projects, but has yet to be paid out for numerous reasons, including delays in project delivery.

Actual Balances Have Far Exceeded Projected Amounts. Figure 4 also shows that actual SHA balances have consistently exceeded the amounts projected--by significant margins. For example, the budget projected the cash balance to be $883 million at the end of 1997-98. The actual balance, however, was almost $1.4 billion--57 percent higher than projected. Similarly, when the 1998-99 budget was proposed in January 1998, the balance was projected at $856 million. However, that balance is now estimated to be $1.5 billion--75 percent higher.

Reasons for Huge Cash Balance. As the figure shows, the cash balance jumped considerably in 1995-96, and continued to grow thereafter. This was due to several factors, the most important of which was a decision in 1996 by CTC and Caltrans to delete $500 million worth of highway projects from the 1996 STIP (covering the period from 1996-97 through 2002-03) in order to reserve sufficient funds for Phase 2 of the highway seismic retrofit program. Caltrans, however, was unable to deliver all the retrofit projects as scheduled. This resulted in a build-up of the balance. Furthermore, voters approved Proposition 192 in 1996, authorizing $2 billion in bond funds for the Phase 2 seismic retrofit program and for seismic retrofit of state-owned toll bridges. As a result, the SHA money that was to be expended in 1995-96 and 1996-97 for seismic retrofit was freed up.

Another factor that contributes to the SHA cash balance is the inability of local agencies to obligate federal funds. As discussed in an earlier section of this write-up, when local agencies are unable to use their allocation of federal funds on a timely basis, Caltrans tries to use up the local agencies' unobligated federal funds for state projects in order to avoid any loss of federal funds. This leaves funds in the SHA unexpended until local agencies are ready to deliver their projects.

Caltrans Underestimates Size of Cash Balance. Over the last five years, Caltrans has consistently underestimated the size of the cash balance. Our review also shows that this is primarily because Caltrans overestimates SHA expenditures for capital outlay purposes. Specifically, in projecting capital outlay expenditures, Caltrans assumes all projects scheduled for delivery in the budget year will be delivered. However, for various reasons, projects are dropped or their schedules slip so that not all projects are delivered in the year in which they are scheduled for construction. Additionally, certain costs, such as right-of-way acquisition, that are projected to be fulled expended in the budget year may be incurred at a later date. As a consequence, actual expenditures tend to be lower, resulting in SHA cash balances that are consistently larger than projected.

Balance for 1999-00 Will Remain High, and Likely Exceed Projected Amount. The budget projects the SHA balance at $1.1 billion for 1999-00, about 27 percent lower than the estimated current-year level. This decrease is mainly due to higher local assistance and capital outlay expenditures projected for 1999-00. Specifically, the budget projects $420 million more SHA expenditures for these purposes than the current-year level. Based on past experience, however, we believe the projected cash balance to be low. In fact, past data, as shown in Figure 4, suggest that the 1999-00 year-end balance will most likely be significantly higher.

Faster Project Delivery May Not Reduce Cash Balance. With the significant increase in federal funds under TEA-21, it will be a challenge for Caltrans and local agencies to deliver projects on a timely basis in order to obligate all federal funds available in the budget year and beyond. Given that, it is likely that the SHA cash balance will continue to stay at an extremely high level for the foreseeable future. However, it is important for the Legislature to bear in mind that the bulk of the cash balance is already committed to transportation projects.

Public Transportation Account Faces Funding Shortfall; Budget Proposes State Highway Account Transfer

The budget proposes a transfer of $28 million from the State Highway Account to the Public Transportation Account in 1999-00, in order to meet outstanding obligations for transit capital improvements through 1999-00. Over the six-year period from 1998-99 through 2003-04, the Department of Transportation estimates the Public Transportation Account to have a shortfall of $38 million.

The Public Transportation Account (PTA), formerly the Transportation Planning and Development (TP&D) Account, is a trust fund whose main purpose is funding transportation planning and mass transportation. The PTA revenues are derived from the sales tax on gasoline and diesel fuels. Current law requires that half of these revenues be allocated annually for transit operating assistance under the State Transportation Assistance (STA) program. The remaining funds support intercity rail service, transportation planning and research, high speed rail development, passenger rail safety, CTC activities, and transit capital improvements. Due to constitutional restrictions on the use of gas taxes (most of the revenues in the SHA), PTA is the sole source of state transportation funding for the maintenance and operation of mass transit systems and the acquisition or improvement of rolling stock (railcars or buses.)

Revised Fund Estimate Projects Public Transportation Account Shortfall; Budget Proposes $28 Million State Highway Account Transfer. The revised 1998 Fund Estimate, adopted in January 1999, projects a shortfall in PTA through 2003-04, with the shortfall occurring as early as the budget year. This deficit is projected despite a loan repayment of $115 million from the General Fund in 1998-99. To delay the onset of the shortfall, the budget proposes a $28 million transfer from SHA to pay for outstanding commitments to transit capital improvement projects. Even with this transfer, PTA is still projected to have a shortfall of $38 million. This is largely because the budget proposes to fund the STA program at 16 percent above the statutory level. If this funding is sustained throughout the STIP period, Caltrans projects the account shortfall to reach $73 million.

New Transit Projects Must Wait Until 2002 STIP. Because of the account condition, the 1998 STIP provides no funds for additional transit capital projects through 2003-04. As a result, it appears that the state would not be able to program transit equipment acquisition or improvement until the 2002 STIP, which covers the period 2002-03 through 2005-06.

Reasons for Public Transportation Account Shortfall

The Public Transportation Account shortfall is the result of lower-than-expected revenues combined with increasing expenditures.

Declining diesel sales tax revenues, lower-than-projected growth in gasoline consumption, and increasing expenditures account for the projected PTA shortfall.

Erosion of Revenues Results From Declining Diesel Prices and Low Growth in Gasoline Consumption. Revenues to PTA have declined since 1997-98 primarily as a result of a decline in diesel prices. For instance, the Department of Finance now estimates revenues from the sales tax on diesel, which constituted 68 percent of the account's total revenues in 1997-98, to be 8 percent lower in 1998-99 compared to 1997-98. In 1999-00, these revenues are projected to decline further, albeit at a slower rate of 2 percent.

Additionally, sales tax revenues from the sale of gasoline have not materialized, as projected. This is because gas consumption projections have been too optimistic. (Please see the 1998-99 Analysis of the Budget Bill, page A-18.) For example, the (earlier January 1998) fund estimate projected gas tax revenues to increase at an annual rate of 2.2 percent, despite the fact that gasoline consumption has grown at an average annual rate of about 1 percent since 1990-91. Since funding commitments are based on revenue projections, the account will experience a shortfall whenever revenues fall short of projections.

Expenditure Increases Crowd Out Transit Capital Improvement. Expenditures from PTA have increased in two main areas. The PTA funds, among other programs, the operation of the state intercity rail program. The state's share of intercity rail operations costs have increased at a rate of approximately 30 percent a year--from $29 million in FY 1994-95 to $63 million in FY 1998-99. From 1998-99 through 2003-04, intercity rail service is projected to cost a total of $454 million. This is due to both reduced federal subsidies and service expansion.

Change in Funding Formula Increases Costs. Recent legislative changes also increased PTA expenditures. Specifically, Chapter 622 increased the proportion of annual PTA support to STA. Under Chapter 622, 50 percent of total PTA revenues is dedicated to STA each year. In contrast, the previous formula called for 50 percent of net revenues--after support for intercity rail operations, transportation planning, and other support costs are deducted--to be dedicated to STA. Everything being equal, this formula change increases STA funding and leaves significantly less funds for intercity rail operations, transportation planning, and other support expenditures. For the budget year, the budget proposes to further increase STA funding above the amount required by statute.

As we mentioned earlier, based on current revenue projections, PTA will not be able to sustain the higher level of support for intercity rail operations, pay for other support expenditures, dedicate 50 percent of revenues to STA, and still pay for outstanding transit capital improvement projects.

The Legislature Should Enhance Flexibility for Transit Funding

We recommend that the Legislature enact a constitutional amendment, subject to voter approval, to permit expenditure of gas tax revenues for transit rolling stock.

Article XIX of the State Constitution restricts fuel tax revenues (deposited in SHA) from being used to fund rolling stock. As a result, these types of transit investments must rely on the PTA for funding.

To minimize the projected shortfall in the PTA, CTC recently voted to restrict the use of PTA funds to those projects that are eligible only for PTA funding (that is, rolling stock). Transit capital projects that are eligible to use SHA funds (tracks and facilities) will be funded from SHA. While this will free up more funding for rolling stock, it still may not provide sufficient funds to meet the state's transit needs.

Relax Constitutional Limitation. Transit rolling stock is the only type of transportation capital outlay that currently cannot use fuel tax revenues. Relaxing Article XIX to permit the use of these revenues for transit rolling stock could provide more flexibility in funding public transportation improvements, and enable funds to be used more efficiently to meet transit needs. Accordingly, we recommend the Legislature enact a constitutional amendment, subject to voter approval, to permit expenditure of gas tax revenues for transit rolling stock. (For further discussion of this issue, please see our report After the Transportation Blueprint: Development and Funding an Efficient Transportation System, March 1998).

Return to 1999-00 Budget Analysis Transportation Table of Contents
Return to 1999-00 Budget Analysis Table of Contents
Return to LAO Home Page