Legislative Analyst's Office Analysis of the 2002-03 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)--have traditionally provided the majority of ongoing state revenues for transportation. Additionally, in 2000, the Legislature enacted the Traffic Congestion Relief Program (TCRP), which created a six-year funding plan for state and local transportation needs, later extended to eight years by Chapter 113, Statutes of 2001 (AB 438, Committee on Budget). The program is funded by two fund sources--the Traffic Congestion Relief Fund (TCRF) and the Transportation Investment Fund (TIF)--from a combination of General Fund revenues (one-time) and ongoing revenues from the sales tax on gasoline beginning in 2003-04.

In this section, we first discuss the budget proposal to loan TCRF money to the General Fund and the impact the proposal would have on transportation funds. We then discuss the status of funding for toll bridge seismic retrofit. Finally, we review the condition of the PTA.

Transportation Loan Proposal

Substantial Transportation Funds to Be Loaned to the General Fund

The budget proposes loaning $672 million from the Traffic Congestion Relief Fund (TCRF) to the General Fund. The budget proposes shifting other transportation funds in order to prevent a fund shortfall in TCRF.

The TCRF to Loan Money to General Fund, Backfilled by SHA. The budget proposes to loan $672 million from TCRF to the General Fund. This amount is in addition to the $238 million transferred in the current year. In order that the proposed loan would not negatively affect the delivery of transportation projects in 2002-03, the Governor's budget proposes a number of transportation funding shifts, as detailed in Figure 1. As Figure 1 shows, the budget proposes to backfill most of the TCRF loan with a transfer of $474 million from SHA.

The SHA Contribution to Toll Bridge Seismic Retrofit to Be Deferred. The SHA is the state's main fund source for highway maintenance and construction. Current law also requires SHA to provide a total of at least $745 million for the seismic retrofit of state-owned toll bridges. The Department of Transportation (Caltrans) estimates that a total of $795 million would be transferred for this purpose, and the current-year budget approved a transfer of $342 million to meet part of that requirement. In order to accommodate the SHA loan to TCRF, the budget proposes not to make this current-year transfer to the Toll Bridge Seismic Retrofit Account (TBSRA). Caltrans indicates that it now intends to delay the transfer of SHA funds to TBSRA as long as possible to ensure that SHA's cash-flow needs are met.

Toll Bridge Seismic Retrofit Shortfall to Be Filled With Loan. Seismic retrofit of state-owned toll bridges is funded with a combination of state and federal funds as well as toll revenues. Without the SHA transfer in the current year, the budget projects that there would not be sufficient funds in 2002-03 to cover projected toll bridge seismic retrofit expenditures. To pay for these expenditures, the budget proposes $210 million in "interim financing" in the budget year, involving a short-term loan to be repaid by a later bond issuance authorized by Chapter 907, Statutes of 2001 (AB 1171, Dutra). The bonds in turn will be repaid by toll revenues.

Caltrans will certainly have to issue these bonds in future years to meet its cash-flow needs for toll bridge seismic retrofit. However, the interim financing proposed for 2002-03 would not be necessary if the SHA transfer to TBSRA in the current year were made as originally enacted.

Balance of TCRF Likely Higher; SHA Loan Needed May Be Smaller

We believe the budget overestimates current-year and budget-year expenditures from the Traffic Congestion Relief Fund (TCRF), and therefore a large loan from the State Highway Account (SHA) will likely not be required. We recommend adoption of budget bill language limiting the transfer from SHA to TCRF. We further recommend adoption of budget bill language to provide increased flexibility in the transfer of TCRF money to the General Fund.

Under the TCRP, the General Fund provided TCRF $1.6 billion in 2000-01 to fund 141 designated transportation projects. These projects were to receive additional General Fund transfers of $678 million annually for five years, beginning in 2001-02.

Funding for TCRP Deferred in Current Year. In enacting the current-year budget, the Legislature and Governor approved a loan of $238 million from TCRF to the General Fund in order to address a shortfall in the General Fund. Additionally, Chapter 113 deferred the first $678 million transfer until 2003-04. In order to ensure that the cash-flow needs of TCRP projects are met, Chapter 113 authorizes the Department of Finance to make loans to TCRF from various transportation funds, including: 

• An interest-free loan of up to $100 million from the Motor Vehicle Account to be repaid no later than June 30, 2007.
• Loans of up to $280 million from PTA.
• Loans of up to $180 million from SHA.

The PTA and SHA loans will be repaid no later than June 30, 2008 and June 30, 2007, respectively.

Budget-Year Loan to Be Repaid in Three Years. The Governor's budget now proposes to loan $672 million from TCRF to the General Fund in the budget year. According to Caltrans, these loans are to be repaid over three years, beginning in 2003-04. Figure 2 shows when all the loans authorized by Chapter 113 and proposed in the budget are to be made and repaid.

Actual TCRF Balance Likely to Be Higher Than Projected. Based on our review of the department's cash-flow needs for TCRP projects, the additional loan to the General Fund proposed in the budget will most likely not have an adverse impact on project delivery. This is because TCRF expenditures in all likelihood will be lower than projected. In fact, we believe TCRF expenditures by the end of the budget year could be about $300 million lower than the budget projects, allowing a larger TCRF loan to the General Fund, if needed. As an indication of the likelihood of lower TCRF expenditures, consider recent experience. In January 2001, Caltrans estimated that TCRF expenditures would total $1.1 billion by the end of the current year. Caltrans has now revised that amount downward to $665 million. Our review further shows that less than $200 million has been expended to date leaving, we believe, an estimated TCRF balance of about $1.4 billion.

Based on the expenditure experience to date as well as Caltrans' historical overestimation of SHA expenditures (discussed later), we believe that expenditures on TCRF projects in 2002-03 could be substantially lower than projected, leaving a much higher than projected cash balance in TCRF. As a consequence, it is likely that part of the proposed $474 million loan from SHA would not be needed. Accordingly, we recommend that the following budget bill language be adopted limiting the transfer from SHA to only what is needed for cash-flow purposes, up to the amount proposed. This will provide Caltrans with maximum flexibility and not commit it to needless transfers.

Item 2660-013-0042. The amount to be transferred to the Traffic Congestion Relief Fund is limited to an amount needed for cash-flow purposes, up to the amount specified in the item.

Similarly, to provide the Legislature with the flexibility to transfer more from TCRF to the General Fund if necessary, we recommend that budget bill language under Item 2660-011-3007 be adopted to allow the Department of Finance, with adequate notification to the Legislature, to transfer more than $672 million if TCRF expenditures are lower than projected.

The Director of Finance may authorize the transfer of an amount exceeding the $672 million provided by this item if the Director determines both that (1) the General Fund condition necessitates such a transfer and (2) expenditures from the Traffic Congestion Relief Fund are lower than originally expected and the additional transfer will not negatively affect cash-flow needs of transportation projects. Any additional transfer may be authorized not sooner than 30 days after notification in writing of the necessity therefor to the Chair of the Joint Legislative Budget Committee and the chairs of the committees of both houses that consider the state budget and that consider appropriations. The total amount transferred by this item shall not exceed $1 billion.

Expenditure Projection for SHA Is Optimistic; Fund Balance Likely to Remain Much Higher

With the use of the State Highway Account (SHA) to backfill the Traffic Congestion Relief Fund, the budget projects an SHA cash balance of only $84 million at the end of the budget year. Based on past expenditure trends, we find it unlikely that the balance will fall to this level.

Substantial Balance in SHA; Actual Cash Balance Consistently Higher Than Projected. Our review shows that for the past two decades, the department has consistently underestimated the SHA cash balance. In fact, the SHA has maintained a substantial cash balance of more than $1 billion since 1996-97. Figure 3 compares the actual cash balances in SHA to the levels projected. As Figure 3 shows, actual balances have been above projected levels since 1986-87, and the SHA cash balance has risen dramatically since 1993-94. In 1998-99, the balance reached a record high of $2.3 billion$1.4 billion more than projected. Likewise, for the current year, Caltrans now estimates a balance of $1.3 billion, more than $1 billion higher than the $222 million originally projected in January 2001.

Higher Cash Balances Due to Optimistic Projection of Expenditures. One of the primary reasons for the higher than projected SHA fund balance is the consistent overestimate of capital outlay expenditures. For example, 1999-00 SHA capital outlay expenditures were projected at $683 million, but actual expenditures were only $405 million. In fact, for the six years from 1995-96 through 2000-01, actual SHA capital outlay expenditures were on average $323 million less per year than projected. There are a number of reasons for these large differences, one of which is Caltrans' difficulty in delivering projects as quickly as it projects it can, as described in more detail later in this chapter (Item 2660).

Projected Large Drop in SHA Cash Balance Unlikely. The Governor's budget again projects that the SHA cash balance will fall dramatically, from $1.8 billion at the end of 2000-01 to $558 million by the end of 2002-03, not including the proposed loan to the TCRF. (With the transfer, the SHA balance will drop to $84 million as shown in Figure 3.) This decline in cash balance assumes a significant increase in capital outlay expenditures to $915 million in 2002-03. The projected expenditure level represents an increase of 63 percent over the estimated level in 2001-02 and 149 percent above actual expenditures in 2000-01.

Given Caltrans' past overestimates of expenditures, we do not believe that actual capital outlay expenditures will grow this rapidly. Consequently, the SHA fund balance could be hundreds of millions of dollars higher at the end of 2002-03.

Toll Bridge Seismic Retrofit

Funding Augmented, But Potential for Further Cost Overruns Remains

In 2001, Caltrans revealed that projected costs for seismic retrofit of state-owned toll bridges had substantially increased. The Legislature responded by providing additional funding for toll bridge seismic retrofit, including coverage for potential future cost overruns. Despite the increased funding, seismic retrofit costs could still exceed the overrun coverage in future years.

Since 1993, the state has been retrofitting all state-owned toll bridges for seismic safety. In 1997, Caltrans estimated total costs of the retrofit program at $2.6 billion, including $1.3 billion to replace the east span of the San Francisco-Oakland Bay Bridge. All retrofit work was scheduled to be completed by 2004. The $2.6 billion costs were to be funded with a $1 toll surcharge on the state's Bay Area toll bridges, general obligation bonds, and a combination of SHA and PTA funds.

Toll Bridge Seismic Retrofit Costs Have Greatly Increased. In 2001, Caltrans revealed that toll bridge seismic retrofit schedules had slipped and total costs would increase by 77 percent, from $2.6 billion to $4.6 billion. Projected costs for the largest component of the program, replacement of the east span of the Bay Bridge, more than doubled from $1.3 billion to $2.6 billion. Figure 4 shows Caltrans' revised cost estimates.

New Funding Provided by AB 1171. In response to the significantly higher cost estimates, the Legislature enacted Chapter 907, Statutes of 2001 (AB 1171, Dutra), which provided additional funding of up to $2.5 billion from several sources:

• An Additional $1.4 Billion From Toll Revenues. Assembly Bill 1171 repealed the 2008 sunset date for the $1 toll surcharge on the state's Bay Area toll bridges. Instead, the surcharge will be extended for up to 30 additional years. This surcharge is now expected to provide a total of $2.3 billion, almost half of the entire projected seismic retrofit cost.
• $642 Million in Federal Funds. Part of the federal funds the state receives annually for highway bridge rehabilitation and replacement will be used for toll bridge seismic retrofit, with the first expenditure of these funds occurring in the budget year.
• $448 Million Overrun Coverage by State or Federal Funds. Recognizing that Caltrans' projected costs could still be low, AB 1171 gave Caltrans the authority to cover any costs over $4.6 billion with up to $448 million from the State Transportation Improvement Program (STIP), the State Highway Operation Protection Plan (SHOPP), or federal bridge funds. If Caltrans uses this authority, it would reduce the number of other projects it can deliver with the selected funding source(s). Caltrans has complete discretion as to which of the three sources would supply this funding.
• Bond Issuance to Cover Cash-Flow Needs. Because annual toll revenue from state bridges will be much lower than the cash-flow needed to meet retrofit schedules, AB 1171 allows Caltrans to issue bonds that will be repaid by future toll revenues. The $210 million "interim financing" proposed in the Governor's budget is a short-term loan that would be repaid by these bonds.

Figure 5 compares the funding of toll bridge seismic retrofit under AB 1171 to the funding previously provided in 1997. 

First Contract for Bay Bridge East Span Over Budget. In January 2002, Caltrans awarded the first of four contracts for the replacement of the east span of the Bay Bridge. The lowest bid was $1 billion, over $200 million more than Caltrans' estimate. Despite the significantly higher cost of this contract, Caltrans currently projects it will not need the overrun authority provided by AB 1171. Previous experience with Caltrans' toll bridge seismic retrofit expenditure projections suggests that this projection is optimistic. While bids for the remaining contracts have not yet been received, it appears likely that, at a minimum, Caltrans will have to use part of its overrun authority. If future bids also come in substantially higher than expected, or there are cost overruns on the other toll bridges, Caltrans may have to obtain additional money from the Legislature in future years.

Public Transportation Account (PTA)

Budget Projects Substantially Less PTA Funds

As a result of a combination of factors, the budget projects substantially less Public Transportation Account funds to be available in the current and budget years than originally anticipated.

The PTA was established by the Transportation Development Act of 1971, to provide a source of state funds primarily for transit (including bus and rail) purposes. Historically, the three largest expenditures from the PTA have been for the State Transit Assistance (STA) program, intercity rail services, and transit capital improvements. Under current law, the STA program receives at least 50 percent of annual PTA revenues. The remaining PTA funds 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.

Sales Taxes on Diesel and Gasoline Generate Most PTA Revenue. The two main sources of revenue into PTA are sales and use taxes on diesel fuel and gasoline. The largest source is a 4.75 percent sales tax on diesel fuel. The second major source is a 4.75 percent sales tax on 9 cents of the state excise tax on gasoline. In addition, PTA receives any "excess revenue" generated from a 4.75 percent sales tax on all taxable goods, including gasoline, as compared to a 5 percent rate on all taxable goods, excluding gasoline. This mechanism, known as "spillover," holds the General Fund harmless, but provides additional revenues to PTA. For 2002-03, the budget projects that these sales tax revenues to PTA will total $231 million.

Figure 6 shows resource and expenditure estimates for the PTA for the current and budget years. Our review shows that due to a combination of factors, PTA revenues for the current and budget years are substantially lower than originally anticipated.

Available PTA Funds Substantially Reduced With TCRP Refinancing. As we discussed earlier, the 2001-02 budget refinanced the TCRP in order to free up money for the General Fund. The refinancing plan substantially reduced total available PTA funds in the current and budget years. Specifically, under the refinancing plan, the PTA loaned $180 million to TCRF in the current year, and will loan $100 million in the budget year. These loans are scheduled to be repaid in 2007-08. In addition, the refinancing plan also deferred the transfer of an estimated $177 million in gasoline sales tax revenues to PTA over the current and budget years. 

Lower Gasoline Prices and Drop in Diesel Fuel Sales Reduce PTA Funds Further. As Figure 6 shows, the Governor's budget estimates sales tax revenues from diesel fuel and gasoline to PTA to be $237 million for the current year. This is substantially lower than originally anticipated due to two factors. First, lower gasoline prices in 2001 have significantly reduced the spillover to PTA for the current year. Caltrans originally projected the amount to be $80.4 million. It now estimates the amount to be $12.7 million. Second, because of the economic slowdown, diesel fuel sales have declined. Caltrans estimates current-year diesel fuel sales tax revenues to total $161.3 million, a difference of $12.7 million.

For the budget year, Caltrans projects no spillover and diesel fuel sales tax revenues to be $167 million.

Tax Regulation to Reduce PTA Revenues Further; Account Faces Shortfall

While the budget projects a balance of about $26 million for the Public Transportation Account (PTA) at the end of the budget year, the account could in fact face a shortfall of about $24 million due to additional revenue losses resulting from recently adopted tax regulations. We recommend that the planned loan of $100 million from PTA to the Traffic Congestion Relief Fund be reduced accordingly in order to avert a PTA shortfall.

Chapter 156, Statutes of 2001 (AB 426, Cardoza), exempts from sales taxes diesel fuel used in farming activities and food processing, including the delivery of farm products to the marketplace. The exemption had been estimated to reduce annual PTA revenues by $6 million. However, in January 2002, the Board of Equalization adopted regulations to implement Chapter 156 that expanded the exemption significantly to include more types of farm equipment and activities. Caltrans estimates that the regulations would result in an additional revenue loss to PTA of as much as $50 million per year.

As Figure 6 shows, the budget projected a PTA balance of $26 million at the end of 2002-03. The budget, however, has not anticipated the impact of the regulations on PTA revenues. The additional revenue loss resulting from the regulations would result in a PTA shortfall of $24 million.

The budget proposes total PTA expenditures of $274 million in 2002-03, including $115 million for the STA program. The STA amount meets the statutory requirement that 50 percent of PTA revenues be allocated to the program. The remaining proposed expenditures are mainly for the support and capital improvement of intercity rail service, and for the support of Caltrans' Mass Transportation program.

Options to Avert PTA Shortfall. The Legislature has several options to avoid a fund shortfall in 2002-03. These include:

• Reduce STA funding to less than the amount called for under current law.
• Eliminate budget-year expenditures on capital improvements for intercity rail service. The budget proposes $25 million in capital expenditures mainly for track improvements. Eliminating these expenditures, however, would delay future expansion of intercity rail services.
• Fund track improvements for intercity rail service out of SHA instead.
• Reduce the amount of the loan to TCRF below the planned $100 million in 2002-03.
• A combination of the above options.

Loan to TCRF Should Be Reduced. The TCRP refinancing plan called for a $100 million PTA loan in 2002-03 in order to meet the cash-flow needs of TCRP projects. However, as we discussed in an earlier section, based on expenditure experience to date, TCRP expenditures are likely to be much lower than projected. Consequently, a full $100 million will likely not be needed.

Accordingly, we recommend that the planned PTA loan be reduced by at least $24 million in order to avoid a PTA shortfall. This would provide adequate funds for all PTA expenditures proposed for 2002-03.

The PTA Faces Funding Pressure Until 2007-08

The combination of loans to the Traffic Congestion Relief Fund, deferral of transfers from gasoline sales tax revenues into the Public Transportation Account (PTA), and expanded diesel sales tax exemptions will likely place pressure on the PTA for the next few years.

The original TCRP provided substantially more funds for PTA programs. In the 2001-02 Analysis, we projected a total of $261 million in uncommitted funds in PTA over the four years from 2002-03 through 2005-06. However, as a result of the TCRP refinancing, unexpected changes in the economy, and new tax exemptions, there will very likely be no uncommitted funds available for programming of capital improvements for the next four to five years, until the loans to TCRF are repaid in 2007-08.