Legislative Analyst's Office

Analysis of the 2000-01 Budget Bill

Condition of Transportation Funds

California's state transportation programs are funded by a variety of sources, including special funds, federal funds, and general obligation bonds for transportation. Two special funds--the State Highway Account (SHA) and the Public Transportation Account (PTA)--provide the majority of ongoing state revenues for transportation. The SHA is by far the larger account and derives its revenues primarily from truck weight fees and the 18 cents state excise tax on gasoline and diesel fuels. Specifically, the SHA receives about 62 percent of all gas tax revenues, while the remainder go primarily to cities and counties for local streets and roads. The 2000-01 budget estimates the SHA's total resources to be $3.9 billion.

Article XIX of the State Constitution currently prohibits gas taxes and weight fees from being used to fund transit rolling stock (such as buses and rail cars or locomotives). As a result, the state has relied primarily on the PTA for such purposes. The PTA's revenues are comprised of a portion of the sales and use taxes on gasoline and diesel fuel. The 2000-01 budget estimates the PTA's total resources to be $366 million. The following section discusses the condition of these two accounts.

The SHA Cash Balance Approaching $2 Billion,
But Fully Committed to Projects

The State Highway Account (SHA) balance has grown continuously since 1993-94. The balance, however, is fully committed towards projects and does not represent a reserve available for new expenditures. To the extent more projects are delivered for construction, as sought by the Governor's initiative, the SHA cash balance would decrease. However, this is unlikely to occur in the near term.

Funds in the SHA are used to support the Department of Transportation's operations, provide local assistance, and fund transportation capital outlay.

The SHA Cash Balance Approaches $2 Billion. Continuing what is now a seven-year trend, the SHA cash balance has increased in the last year. As of November 30, 1999, the cash balance in the SHA was $1.8 billion. From October 1998 through November 1999, the average daily cash balance ranged from $1.5 billion to $1.9 billion.

The SHA Funds Already Committed. It is important to keep in mind that virtually all of the SHA cash balance is already committed to the State Transportation Improvement Program (STIP) and State Highway Operation and Protection Program (SHOPP) projects, but has yet to be paid out. The balance will decline as design work is completed and projects go to construction. As of November 30, 1999 the account's total commitments exceeded the available balance by $316 million. Commitments against the cash balance include a variety of types of projects. The most significant is about $800 million which is reserved for seismic retrofit of the state's toll bridges, including the east span of the San Francisco-Bay Bridge. The other major commitments include about $400 million for rail projects and $300 million for projects off the state highway system.

Several Factors Contribute to High Cash Balance. In addition to general delays in project delivery, the cash balance in the SHA is a result of the following:

Legislature Authorizes Loan Program. In order to take advantage of the available cash balance in the SHA, Chapter 783, Statutes of 1999
(AB 1012, Torlakson) added a short-term loan program for local transportation agencies. Specifically, the law authorizes loans of up to $500 million whenever the SHA cash balance exceeds $400 million. Loans can be made for up to four years and can only be made for construction, not for design or environmental review. In order to encourage timely construction, the law requires that construction begin within six months of the date of the loan. Caltrans estimates that $200 million is currently available for loans.

Governor's Initiative Also Aims at Lowering SHA Cash Balance. The Governor's initiative seeks to make better use of the SHA cash balance through more aggressive programming. Specifically, it proposes to lower the cash reserve from $440 million to $140 million and to assume a
$300 million shortfall in project delivery. This frees up an additional
$600 million in programming capacity. To the extent that these projects are developed and constructed sooner, the SHA cash balance will decrease. However, as we noted in our review of the Governor's initiative, it is unlikely that newly programmaed projects will be delivered in the near term. Thus, it is unlikely that the SHA balance will shrink significantly in the foreseeable future.

Projected Shortfall in PTA

The Public Transportation Account provides a source of state funds primarily for mass transportation (including bus and rail) purposes. Our review projects a shortfall in the account of approximately $53 million over a four-year period (2000-01 through 2003-04). Beyond 2003-04, we project the shortfall to increase significantly.

In order to address the projected shortfall, we identify several options including increasing revenues or reducing expenditures. In addition, we recommend the adoption of a constitutional amendment to relax Article XIX limitations. Such an amendment would provide more flexibility in funding public transportation improvements.

The PTA: Uses and Sources of Revenue. The PTA was established by the Transportation Development Act of 1971. The purpose of the PTA is to promote the development of a public transportation infrastructure by providing a source of funds to local and state transportation agencies primarily for transit (including bus and rail) purposes.

The two main sources of revenue into the PTA are sales and use taxes on diesel fuel and gasoline. The largest revenue source is a 4.75 percent sales tax on diesel fuel that is estimated to generate about $113 million in 1999-00. The second major revenue source is a 4.75 percent sales tax on
9 cents of the state excise tax on gasoline. In 1999-00, this sales tax is estimated to generate for the PTA is about $61 million.

The PTA Primarily Supports State Transit Assistance (STA), Intercity Rail, and Transit Capital Improvements. Historically, the three largest expenditures from the PTA have been the STA program, intercity rail services, and transit capital improvement projects. In recent years, however, due to increasing expenditures for intercity rail services and STA, there has not been funding for new transit capital improvement projects.

Under current state law, the STA program has first claim on at least 50 percent of annual PTA revenues. These funds are disbursed by formula to transportation planning agencies and county transportation commissions for allocation to public transit operators. Funds may be used for operating assistance, capital acquisition and improvement, and community transit services.

The remaining funds in the PTA support various other public transportation purposes, including intercity rail service, capital improvements of transit systems, rail and mass transportation planning and support, and high speed rail development. Figure 1 summarizes the use of PTA funds in 1999-00. The figure shows that PTA expenditures for 1999-00 total about $225 millionabout $46 million more than anticipated revenues of $179 million.
Figure 1
Public Transportation Account Supported Programs


(In Millions)


State Transit Assistance $100.3
Intercity rail service 64.0
Transit capital improvements 31.2
Planning, administration, and technical services 21.7
High speed rail 3.0
Passenger rail safety 2.4
California Transportation Commission 1.2
Transportation research 1.0
Total $224.8

The PTA Fund Condition: Increasing Shortfall Projected for Future Years. We recently released a report on the condition of the PTA (please see our January 2000 report, Public Transportation Account: Options for Addressing Projected Shortfall). In that report, we projected a funding shortfall in the PTA of about $53 million over four years (2000-01 through 2003-4), with the shortfall increasing to approximately $158 million over six years (2000-01 through 2005-06). Figure 2 summarizes the findings of our fund condition analysis.

The significant increase in the shortfall is the result of a number of factors. In particular, the costs of expanded intercity rail services are projected to increase substantially beginning in 2002-03 and these higher costs would continue through 2005-06.
Figure 2
Public Transportation Account Fund Condition

2000-01 Through 2005-06

(In Millions)

Four-Year Total


Six-Year Total

Sales tax on diesel $475.4 $729.1
Sales tax on gasoline--Proposition 111 256.3 393.0
Othera 320.3 448.0
Totals $1,052.0 $1,570.1
State Transit Assistance $365.8 $561.0
Support costs
Mass transit and rail 85.1 130.5
Otherb 258.9 395.5
Intercity rail--existing service 271.0 416.0
Intercity rail--new service 74.6 145.6
Transit capital improvement -- --
Transfer to Toll Bridge Retrofit Account 40.0 70.0
Reserve for economic uncertainties 9.5 9.9
Totals $1,104.9 $1,728.5
Shortfall -$52.9 -$158.4
a Includes beginning reserve in 2000-01, interest, and various transfers.
b Includes transportation planning, administration, California Transportation Commission, rail safety, high speed rail development, and transportation research.

Shortfall Impacts Not Only Transit Capital Funds Now, But Other Programs in Future. Because of the projected shortfall in the account, there will be no PTA funds available for new transit capital projects through 2003-04. Our projections show that this trend will continue through 2005-06, meaning that the state will not be able to fund any new transit capital improvements in the 2002 STIP period. The shortfall, however, will also impact other program areas. For example, expenditures for certain programs, such as intercity rail service, would have to be curtailed.

Addressing PTA Shortfall in the Immediate Future. The primary fiscal problem the PTA faces is clearan imbalance exists between revenues and expenditures. In our January 2000 report, we offer a number of options for reducing or eliminating the projected shortfall. The options fall into two broad categoriesincreasing account revenues and reducing expenditures.

Relax Article XIX Limitation. In addition, we discuss our recommendation for the relaxation of the limitation imposed by Article XIX of the State Constitution. Specifically, we recommend that the Legislature enact a constitutional amendment to permit expenditure of gas tax revenues for transit rolling stock. Doing so would provide an alternative funding source for transit rolling stock which, based on current projections, the PTA would not be able to fund.

Under Article XIX of the State Constitution, transit rolling stock (such as buses and rail cars or locomotives) is the only type of transportation capital outlay that currently cannot use the revenues generated from gasoline and diesel excise tax. Currently, the PTA funds are the only source of state funds, other than state General Fund, for transit equipment and rolling stock. The projected shortfall means that, absent other corrective actions, no state funds would be available for transit equipment or rolling stock.

Governor's Proposal Includes Additional Funds and Constitutional Amendment. As part of the budget, the Governor proposes to shift $45 million of SHA revenues (nongas tax and nonweight fee revenues that are not subject to the Article XIX limitation) to the PTA. In addition, the Governor also supports a constitutional amendment to relax the Article XIX limitation on gas excise tax revenues for transit equipment, rolling stock, and transit operations.

Long-Term Solution to PTA Shortfall. The Legislature can pursue various options in order to avert a projected shortfall in the PTA. We believe, however, that in addressing the account's financial condition, the Legislature should take a broader approach and reexamine its objectives and priorities regarding the state's role in funding public transportation. In doing so, the Legislature can determine the appropriate overall structure and level of state funding for public transportation, including the PTA, as well as appropriate allocation of state funds between state programs and those services that are provided by regional and local agencies. The Legislature should also examine the extent to which current state-funded programs, including the STA, intercity rail service, and transit capital improvements meet the Legislature's objectives and priorities in order to ensure that state funds are used most efficiently and effectively to provide mobility through public transportation.

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