Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Special Transportation Programs (2640)

State Transit Assistance

The State Transit Assistance (STA) program is one of the state's primary sources of financial support for public transportation. The program will provide approximately $111.8 million to over 100 transit operators statewide in 2000-01, largely to support public transportation operating costs. For 2001-02, the budget proposes $189.2 million for STA, an increase of 69 percent over the current year.

In the following sections, we review:

• How the STA program is funded and how funds are distributed to transit operators.
• How the program operates in practice and how funds are utilized by transit operators.
• Recommendations and options for legislative consideration.

Purpose and Priorities of STA

Established by the Transportation Development Act, current law specifies the purpose of the State Transit Assistance program to be similar to the act's other programs—to provide financial operating and capital acquisition assistance to transit operators.

Law Specifies Four Priorities for Use of STA Funds. The Transportation Development Act of 1971 (TDA) established two sources of funds that provide substantial support for public transportation services statewide—the Local Transportation Fund (LTF) and the Public Transportation Account (PTA). Under LTF, counties receive revenues from a one-quarter percent sales tax on all goods statewide for transportation purposes. These funds can be used for transit planning, construction and operations, as well as for local streets and roads after transit needs are met. The STA program is funded from PTA revenues. State law specifies the purpose of the STA program to be the same as the use of LTF money—to provide financial assistance for public transportation service, including funding for transit planning, operations, and capital acquisition projects. The act also enumerated four priorities for the use of STA funds, which include:

• Offsetting reductions in federal operating assistance.
• Assisting with increases in the cost of fuel.
• Enhancing existing public transportation services.
• Meeting high-priority regional public transportation needs.

How STA Is Funded and Distributed

The State Transit Assistance program is funded through the Public Transportation Account. Program funds are disbursed to transportation planning agencies by statutory formulas based on population and transit revenues. Transportation planning agencies in turn allocate funds to transit operators to support operating costs and capital acquisition projects.

State Transit Assistance Receives Half of PTA Revenues. As explained above, STA is funded by PTA revenues. Under current law, PTA revenues are generated from a portion of the state sales tax on diesel fuel and gasoline. (For a more detailed description of PTA revenue generation, please see our January 2000 report Public Transportation Account: Options to Address Projected Shortfall.) Of the annual revenues generated by the account, statute designates 50 percent to fund the STA program.

Funds Distributed According to Population and Revenue-Based Formulas. Program funds are disbursed by the State Controller to 49 transportation planning agencies (TPAs) statewide according to formulas specified in statute. Under current law, 50 percent of STA funds are distributed based on population, and the remaining 50 percent of funds are distributed based on transit revenues.

Transportation Planning Agencies Allocate STA to Transit Operators. The TPAs in turn allocate STA funds to eligible public transit operators under their jurisdiction. For the revenue-based portion, the TPAs allocate the funds to individual transit agencies based on the ratio of a transit agency's revenues to all transit agency revenues in the TPA's area for the prior fiscal year. As for the population-based portion, however, TPAs generally have more discretion over how these STA funds are allocated. Depending on the TPA's adopted allocation policy, in some cases a portion may be retained for regional public transportation purposes.

State Transit Assistance Used for Both Operating and Capital Acquisition Support. Because STA revenues are derived from the state sales tax, they are not restricted by Article XIX of the State Constitution, which prohibits the use of state gasoline and diesel fuel excise tax revenues for operational support of public transportation and the acquisition of transit rolling stock (such as buses or passenger trains). Therefore, at the discretion of transit agencies, STA funds may be used for both operating costs and for transit capital projects, such as the purchase of vehicles or improvements to passenger rail facilities. Because the STA program is the only source of state transportation funds that may be used for transit operating support, all transit operators we interviewed stated that STA funds were valuable because they were not restricted in their use.

How STA Program Functions

While State Transit Assistance (STA) funds are spread across many transit agencies, the ten largest transit operators, in terms of total passengers carried, received 72 percent of all STA funds in 1998-99. Overall, STA revenues are a small component of transit agencies' budgets. The majority of STA funds are used for operating expenses.

Because of limitations on available data, we had to use different years for the following analysis. Our review of the use of STA funds by transit agencies is based upon the most recent data available from the State Controller for 1998-99. As regards STA allocations to individual TPAs, we used data for 1999-00. While funding levels and actual allocations may fluctuate from year to year, these fluctuations are not substantial enough to invalidate our general findings.

Close to Half of Transit Providers Received No STA Funds. In 1998-99, almost half of the transit agencies (103 out of 212) received no STA funds. Based on discussions with Caltrans' staff and officials from TPAs, we have concluded that several factors account for this, including:

• Limited Number of Allocations. Several TPAs receive a relatively small amount of population-based STA funds and little to no revenue-based funds because the operators in their area are proportionally small compared to the rest of the state. In these cases, a TPA may limit the number of transit operators receiving STA allocations in order to pool funds to make allocations of useful size.
• Cumbersome Auditing and Reporting Requirements. Some transit agencies may choose not to claim TDA funds (both STA and LTF revenues) because the cumbersome auditing and reporting requirements under current law outweigh the small amount of funds they would receive.
• Fund-Sharing Agreement Between Transit Operators. Some transit agencies have negotiated fund-sharing agreements among themselves. For example, the Alameda-Contra Costa Transit District (AC Transit) receives the majority of the San Francisco Bay Area Rapid Transit District's (BART) STA funds in return for bus transportation services provided for BART customers. Though infrequent, there may be other cases where agencies share STA funds for mutual benefit.

Huge Variation in Size of STA Allocations. Excluding the 103 agencies that received no STA support, the average STA allocation in 1998-99 was about $863,000. Allocations, however, are skewed toward large transit operators. As a result, the median allocation was significantly lower, at about $110,000. Interestingly, the largest and smallest allocations occurred in the same county for that fiscal year—Los Angeles. The state's largest STA allocation—about $27 million—was provided to the Los Angeles County Metropolitan Transportation Authority (LACMTA), and the smallest—$2,950—was allocated to the City of Claremont. Figure 1 lists the ten largest and smallest STA allocations for 1998-99.

Large Operators Utilize Vast Majority of STA Funds. The ten largest transit operators (based on ridership) transported 79 percent—about 980 million passengers—of the state's total ridership in 1998-99. As shown in Figure 2, these same agencies received approximately 72 percent ($68 million) of total STA funds. Indeed, 95 percent of all STA funds were utilized by only 51 agencies, which carried 93 percent of the state's total transit ridership. The remaining $5 million was allocated to 58 other transit operators during that year.

From the TPA perspective, over two-thirds of all STA revenues are shared between two TPAs. In 1999-00, the Metropolitan Transportation Commission (MTC), the TPA for the nine-county San Francisco Bay Area, was allocated $38.3 million, while LACMTA was allocated $29.7 million. This finding is not surprising, however, as the largest urban centers and transit operators are located in their respective jurisdictions.

State Transit Assistance Small, But Important, Component of Agencies' Budgets. For the ten largest transit operators, STA funds comprised, on average, only about 3.2 percent of their total resources in 1998-99. In discussions with several large operators, they indicated that nonetheless, STA has been a stable and predictable fund source that is built into their baseline budget projections for the past several years. For example, STA funds accounted for only 1.1 percent of LACMTA's and about 2 percent of San Francisco Municipal's (Muni) total resources respectively in 1998-99. According to these officials, however, it would be difficult for LACMTA and Muni to backfill $27 million and $9.7 million respectively if these revenues were lost.

For small transit operators, STA allocations on average represented a significantly larger portion of their overall budget. For example, 5 percent of total STA funds (or $5 million) was allocated to 58 agencies in 1998-99. On average, STA funds comprised 13 percent of total resources for these small transit providers, and in nine cases, STA revenues accounted for over 20 percent of their total resources.

The STA Supports Small Paratransit Service Providers. The above mentioned 58 smallest transit providers that utilize the remaining 5 percent of STA funds largely provide community transit services in addition to traditional public transportation. Community transit services include primarily paratransit services for those, such as the elderly and disabled, who cannot use conventional transit services. Even though these are small operations, transporting only one-half percent of the state's overall public transportation ridership in 1998-99, they carried a disproportionate number (over 19 percent) of the state's paratransit riders.

Majority of STA Funds Utilized for Operations. Of the $94 million allocated in 1998-99, about $79 million (or 84 percent) was used to cover operating expenses. These expenses include staff salaries, maintenance expenses, as well as vehicle fuel and insurance costs. The remaining funds were used for capital projects, such as vehicle acquisition and facilities improvements. Generally, the large transit operators use their STA allocations to support operating costs. For instance, AC Transit, LACMTA, San Francisco Muni, the Santa Clara Valley Transportation Authority, the Orange County Transportation Authority—all used their STA allocations to support transit operations rather than capital projects in 1998-99.

The STA Program Meets Legislative Priorities

In general, State Transit Assistance achieves its legislative priorities by enhancing existing public transportation services and supporting high-priority regional transit needs.

The STA Program Generally Meets Statutory Priorities. Based on our review, STA generally achieves the four above-mentioned legislative priorities. However, the priorities were specified when the program was created over 20 years ago and may no longer be as pertinent as when STA was established. For example, during the fuel price spikes of the late 1970s and early 1980s, STA provided relief for transit operators. When fuel prices moderated relative to the rest of the economy, however, its importance as a source of relief for fuel costs to operators was reduced. Today, STA funds are not widely viewed specifically as cost-of-fuel assistance. Instead, STA is largely perceived by transit operators as general state support for operations and, to a limited extent, as funds for capital acquisition projects.

It is, however, important to note the extent to which the program supports the priority of meeting high-priority regional public transportation needs. Given the flexibility TPAs have over the population-based portion of STA revenues, they have utilized the funds for high-priority regional transit projects that might not have been otherwise funded. For example, population-based STA funds support the Southern California Regional Rail Authority's (SCRRA) Metrolink commuter rail system. In the San Francisco Bay Area, MTC plans to use STA funds to operate a new regional express bus system.

Program's Role Is Diminishing

In terms of financial assistance, State Transit Assistance (STA) constitutes a relatively small portion of transit funding. The program's role in funding transit services has diminished when compared to that of the Local Transportation Fund. As public transit operators face increasing costs to provide transit services in future years, the role played by STA will diminish further.

State Transit Assistance Makes Up Small Portion of Transit Funding. While STA represents a fairly substantial expenditure of state funds—averaging about $100 million annually from 1997-98 through 2000-01—the amount constitutes a relatively small proportion of all resources expended for public transit. Specifically, of all resources for public transit agencies statewide, STA constituted only 1.1 percent in 1990-91 and 1.6 percent in 1998-99.

Relative to LTF, STA Role Is Diminishing. In 1999-00, LTF revenues totaled about $1 billion and accounted for about 12 percent of total transit revenues in the state. Because of the flexibility in how these revenues can be used, LTF constitutes a critical source of local revenues for public transit systems.

Figure 3 shows how LTF funding has grown since 1972 compared to STA funds. As Figure 3 shows, LTF revenues, being sales tax revenues, have grown with inflation and the expansion of the economy. By contrast, STA revenues, being dependent mainly on gasoline and diesel fuel consumption, have stayed relatively flat. As a result, STA's role in transit funding compared to LTF's role has diminished. We project that this trend will continue. As Figure 3 shows, we project the growth in LTF revenues through 2005-06 would continue to outpace the growth in STA funds.

As Transit Operating Expenditures Increase, STA's Role and Effectiveness Will Be Even Smaller. In discussions with urban transit operators statewide, all indicated that they face increasing operating expenditures in order to sustain current services. This is due to a combination of factors. Specifically, the expansion of bus and rail transit systems over the past two decades have resulted in significant increases in operating costs. In addition, their costs have increased due to various federal and state requirements, such as the Americans with Disabilities Act (ADA) and vehicle emission standards.

According to a recent study, these current funding pressures translate into a funding gap in the future for public transit operations. The Inventory of Ten-Year Funding Needs for California's Transportation System, prepared by the California Transportation Commission pursuant to SR 8 (Burton, 1999), estimated that transit operators face a $700 million shortfall in operating revenues to sustain existing levels of transit service over the next ten years.

This gap will likely grow as transit services are expanded. For example, the 2000 Transportation Congestion Relief Program (TCRP) enacted as part of the current-year budget plan, provided substantial funds for public transit projects. Our review found that, once the TCRP projects are completed, annual operating costs for just these projects will be between $247 million and $280 million. Only a portion of these costs will be covered by passenger fares. To address the funding gap, transit operators have several options. These include reducing costs through efficiency measures, increasing passenger fares, levying additional local taxes, approaching the state for additional assistance, or cutting service.

Assuming that transit operating costs continue to increase and STA's revenue stream remains relatively flat, STA's role in providing transit services will continue to diminish. As such, the program's effectiveness in meeting the statutory goals of enhancing transit services will also decline.

State Should Reexamine Role of Assisting Public Transportation

We recommend that the Legislature reexamine the state's role in providing operating assistance for public transit and how State Transit Assistance fits into that role.

Current State Role. Currently, the state approaches funding for public transit from two directions. On one side, state funding in general adheres to the policy established by Chapter 622, Statutes of 1997 (SB 45, Kopp). Under that legislation, local and regional transportation, including public transit, is considered a local and regional responsibility, while the state is responsible for interregional transportation. Consequently, the majority of state funds allocated for mass transportation is for intercity rail projects that improve mobility on passenger rail among regions of the state. Commuter and local public transit service is considered a regional and local matter.

However, with the passage of TCRP, the Legislature and Governor sponsored a substantial investment in public transportation systems throughout the state totaling $2.8 billion over six years (2001-02 through 2005-06). The large majority of these investments are for regional and local public transit.

Recommendation. Given the diminishing role of STA on the one hand, and the state's encouragement for public transit systems to expand services as indicated by TCRP on the other, as well as the projected gap in transit operators' funding, we recommend that the Legislature reexamine (1) the state's role in providing operating assistance for public transportation and (2) how STA fits into that role.

Four Options for STA

We provide four options for shaping the future of State Transit Assistance (STA)—maintain the status quo, substantially expand the size of the program, sunset STA, or target STA funds at more specific goals.

With respect to STA, we offer four options for legislative consideration. These options include: maintain the status quo, substantially increase STA funding, sunset STA, or target STA at more specific goals. The appropriate option would depend on the Legislature's priorities and policy decision regarding the state's role in providing financial assistance for transit services.

Maintain Status Quo. One component of TCRP provides an increase in funds to PTA and, ultimately, to the STA program. In 2001-02, the Department of Finance projects STA revenues to be about $89 million more than the 1999-00 appropriation. However, relative to growing operating costs, this increase will not provide substantive additional assistance to California's transit operators. Furthermore, TCRP sunsets in 2005-06 and the current sales tax revenues diverted to PTA will revert to the General Fund at that time.

Therefore, under current practice, STA will continue to be a small program relative to both the size of other transit revenue sources and to the growing costs associated with providing public transportation. The program will play a diminishing role in terms of its importance as a state program to assist with transit operating costs. Consequently, the state will have little leverage in shaping or guiding the provision of public transit service through STA.

Substantially Increase STA Funding. When considering potential alterations to STA, one option would be to provide a substantial increase in revenues. For example, according to the New York State Department of Transportation, the State of New York distributes over $1.6 billion annually to over 130 transit operators statewide primarily through the State Mass Transportation Operating Assistance program. Funds are disbursed to individual operators utilizing a per-passenger and per-vehicle-mile formula. If the Legislature wants to encourage continued expansion of public transit as an alternative mode of transportation, it may want to consider significantly increasing STA funding for operating assistance to operators.

Potential fund sources for an augmentation include increasing STA's share of PTA revenues or an additional transfer of General Fund monies. Such an augmentation in operating assistance, however, requires both a new state perspective on its role in regional and local transit service delivery and a commitment to continue providing substantive financial assistance in the long term. If the augmentation were provided, the Legislature could establish additional service performance criteria to help ensure that state funds are used most effectively.

Sunset STA Program. If the Legislature and Governor determine that the state should focus its funding on interregional transportation and not provide regional and local transit assistance, one option is to sunset the STA program, with PTA revenues that formerly went to STA purposes redirected to fund other public transportation purposes including transit capital improvement projects and intercity rail service. In order to hold transit operators harmless financially, an additional state sales tax amount could be diverted to LTF. While this would provide transit operators with a revenue source that is stable and more likely to grow in the future, it would require diverting funds away from the state General Fund.

Target STA Towards More Specific Objectives. This option recognizes that, while the STA program is a substantial funding amount by itself, it plays a small role in financially assisting public transit statewide. The Legislature could establish more specific objectives and priorities for STA than currently. Doing so would target funds towards achieving more particular policy outcomes. For example:

• All Urban STA. The Legislature could determine that the state should concentrate STA funds where public transit service generally serves the largest number of riders—in the largest urban areas. This option would provide a modest boost in additional flexible STA funds to the largest operators, but could have a potentially onerous impact on the state's suburban and rural operators, particularly those operators providing paratransit services.
• Suburban and Rural STA. Alternatively, the Legislature could reconfigure STA to provide assistance exclusively to the smaller suburban and rural transit operators who carry relatively small numbers of riders but incur high annual mileage on their vehicles. Because these agencies' budgets are small relative to the largest urban operators, a small increase in STA funds could provide a substantive increase in operating assistance. As mentioned above, however, the largest operators would have difficulty backfilling a loss of their STA allocations.
• Americans With Disabilities Act STA. In discussions with numerous transit operators, meeting ADA requirements and providing paratransit services to those who cannot otherwise utilize existing fixed-route transit services is increasingly creating a heavy financial burden. The Legislature could decide that STA funds should be focused to support community transit needs, such as ADA paratransit requirements. The program could be restructured to fund paratransit services exclusively statewide.
• Jobs Access STA. Transit operators have also explained that providing off-peak, reverse commute, and other forms of non-traditional public transportation service is expensive. Therefore, many operators cannot afford to operate these services. Unfortunately, many jobs for lower-income families and welfare recipients require access to reliable transportation during off-peak hours (such as late at night or early in the morning) or in reverse commute directions (from the urban core out to suburban areas). The Legislature could refashion STA to provide assistance to transit operators for these types of nontraditional, "jobs access" services.

The Legislature may want to consider funding a combination of the above targeted uses for STA, as several of the options (particularly the ADA and Jobs Access uses) would not likely utilize the entire amount of STA funding.