LAO 2003 Budget Analysis: Transportation

Legislative Analyst's Office

Analysis of the 2003-04 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 about $96 million in the current year to over 100 transit operators statewide, largely to support public transportation operating costs. For 2003-04, the budget proposes $100.4 million for STA, an increase of 4.6 percent over the current-year level.

The STA program is funded from the Public Transportation Account (PTA). Currently, revenues from the sales tax of diesel fuel as well as a portion of gasoline sales tax revenues are deposited in the PTA. Under current law, 50 percent of PTA revenues are allocated to the STA program to provide financial assistance for public transportation, including transit planning, operations, and capital acquisition. The remaining 50 percent of PTA funds are used to support intercity rail services, the Mass Transportation program in the Department of Transportation, and transportation planning.

STA Funding Reflects Proposed Suspension of Proposition 42. Proposition 42, passed by the voters in March 2002, would require the transfer of about $1.1 billion in gasoline sales tax revenue from the General Fund to the Transportation Investment Fund in 2003-04. Of this amount, $84 million would be allocated to the PTA, with 50 percent ($42 million) allocated to STA. In order to save General Fund money, the budget proposes to suspend the Proposition 42 transfer in 2003-04. Correspondingly, the proposed STA funding of $100.4 million reflects no transfer pursuant to Proposition 42. (Please see the discussion under the "Funding for Transportation Programs" section of this chapter.)

Review of Transit Operating Costs

AB 381 Reporting Requirement

Chapter 745, Statutes of 2002 (AB 381, Salinas) requires the Legislative Analyst to conduct an analysis of the impact of extraordinary increases in operating costs experienced by transit operators and providers on their ability to meet the farebox ratio requirement of the Transportation Development Act (TDA) and the efficiency standards of the STA program. Specifically, we were required to look at the impact of those costs that are beyond the control of transit operators and providers. Additionally, the Analyst is to examine:

Transit Operating Costs. Transit systems' operating costs include a number of cost elements, the largest of which is employee compensation. Other cost elements include fuel and material, liability and casualty insurance, lease rentals, utilities, tax and interest, and purchased services. A transit operator can control these costs to varying degrees. For instance, an operator has relatively more control over its employee costs that are often determined through collective bargaining. In contrast, the operator's control over fuel cost is much less because the operator cannot affect the price of fuel. As directed by Chapter 745, our review focuses only on increases in those costs that are beyond the control of transit operators. Our analysis is primarily based on a review of data on farebox ratios and operating costs that transit operators and providers, that claim funding under TDA, report annually to the State Controller's Office. These data include actual data from 1998-99 through 2000-01 and budgeted data for 2001-02. In addition, we reviewed data provided by 33 transit operators and providers in response to a survey regarding their recent operating cost experience for those same years.

Chapter 745 requires that the Analyst conduct the study in consultation with transit operators and providers of community transit services and report her findings in the 2003-04 Analysis. The following section presents our analysis and findings.

Transportation Development Act

The TDA provides two major sources of funding for public transportation: the Local Transportation Fund (LTF) and the PTA. First, the LTF provides counties with revenues generated from a one-quarter percent sales tax on all goods for transportation purposes. These funds can be used for transit planning, construction and operations, capital (equipment) acquisition, as well as for local streets and roads after transit needs are met. Second, as indicated above, revenues from the sales tax of diesel fuel and gasoline, deposited in the PTA, are used mainly for bus and rail purposes. In particular, 50 percent of PTA revenues are allocated to the STA program. Figure 1 shows the amount of LTF and STA funding for the last five years.

Figure 1

Transportation Development Act Funding

1998-99 Through 2002-03
(In Millions)


Transportation Fund

State Transit


















2002-03 (est)




The TDA designates transportation planning agencies to be responsible for allocating LTF and STA funds to transit operators and service providers. The act also specifies numerous requirements transit operators and providers must meet to be eligible to receive funds, as well as a number of variances and exemptions from the requirements. 

Eligibility Requirements. In general, the eligibility requirements are intended to promote cost efficiency in the operation of a transit system and to encourage local funding support for the provision of transit services. In particular:

Failure to Meet Eligibility. If a transit operator fails to meet the farebox ratio requirement for a year in which it receives LTF funding, its LTF funding in a subsequent "penalty year" would be reduced by a specified amount. The operator must also demonstrate to the transportation planning agency how it would achieve the required ratio in the penalty year. Regarding STA funding, if an operator fails to limit its unit operating cost (per revenue-vehicle hour) as required, its STA allocation would be withheld for two years following the year of ineligibility until it meets the eligibility requirement again. If it continues to not meet the requirement, then withheld funds would be reallocated to other high priority regional transit activities.

Farebox Ratios Have Declined; But Meeting Requirement Generally Not a Problem

Overall, farebox ratios of transit operators have deteriorated in recent years. Nonetheless, our review shows that most transit systems receive local tax revenue support and therefore are able to meet the farebox ratio required by the Transportation Development Act.

The farebox ratio measures the portion of a transit system's operating costs that is covered by fare revenue. To meet the farebox ratio requirement, operators must control their operating costs, while ensuring their service generates a certain amount of fare revenue. Because TDA allows local tax revenue support to supplement fare revenue for purposes of calculating the farebox ratio, the amount of local funding is also a critical factor in meeting the farebox ratio requirement.

Farebox Ratios Have Deteriorated. Our review of data reported by operators to the State Controller's Office, as well as data from operators that responded to our survey, shows that for most transit operators, operating costs as well as passenger fare revenue have increased in the past few years. However, increases in fare revenue have not kept pace with the increases in operating costs. Figure 2 shows the percentage of transit agencies that reported increases in operating costs compared to the percentage of agencies that reported increases in fare revenues. As the figure shows, a smaller proportion of agencies reported increases in fare revenue in each of the years from 1999-00 through 2001-02 than the proportion of agencies reporting increases in their operating costs. For instance, in 2000-01 (the last year of actual data reported to the State Controller's Office), 47 percent of transit agencies had more than a 10 percent increase in operating costs. However, only a third of these agencies reported fare revenue increases of over 10 percent.

Figure 2

Percent of Transit Operators Reporting Increases in Operating Costs and Fare Revenues

1999-00 Through 2001-02




2001-02 Estimated

Operating Costs




0 - 10 percent increase




Over 10 percent increase




Fare Revenue




0 - 10 percent increase




Over 10 percent increase




Source: State Controller's Office.

As a result, from 1999-00 through 2001-02, the portion of operating costs covered by fare revenue has declined for a majority of transit operators. Figure 3 shows that of 167 agencies that received TDA funds in 1999-00, 57 percent experienced a decline in their farebox ratio as compared to 1998-99. The percentage increased to about 62 percent in 2000-01, and 71 percent of these agencies expected to see their ratio decline in 2001-02.

Figure 3

Decline in Farebox Ratio

1999-00 Through 2001-02




Agencies With Farebox Ratio Decline



2001-02 Estimated





















Percent of agencies with decline





But Most Systems Meet Requirement. Despite the general decline in farebox ratios, our review shows that the large majority of transit operators continue to meet the TDA farebox ratio requirement. Our review also shows that most operators, in particular operators serving urbanized areas, receive local tax revenue funding such that meeting the farebox ratio requirement in general does not pose a problem. For instance, of the transit systems responding to our survey, each year about 16 percent do not generate sufficient fare revenue to meet the farebox ratio requirement. But most of these agencies receive sufficient local funding to make up that gap. However, annually there is a small number of transit operators and providers that fail to meet the farebox ratio requirement. These systems are typically small in size, serving nonurbanized areas, and receiving no local funding support. 

Significant Cost Increases Worsen Farebox Ratio; Increases Will Likely Continue

In the past couple of years, transit systems have experienced sizeable cost increases, particularly for fuel and insurance. These increases contributed to the worsening of farebox ratios. Our review shows that transit systems will likely continue to face significant increases in the cost of liability insurance, workers' compensation insurance, as well as health insurance in the near future.

As with other business entities, transit systems plan for anticipated cost increases and adjust their operations correspondingly when costs exceed their projections. Adjustments may be in the form of service reduction, fare and other revenue (such as state and local funding) increases, cost control or reduction, or expenditure deferrals. These adjustments may result in a decline in ridership and therefore a transit system's farebox ratio.

Any significant unanticipated cost increases would worsen the ratio further. To the extent a system's farebox ratio exceeds the minimum required, a decline in the ratio due to such cost increases may have no impact on the system's eligibility for TDA funds. But for systems that are barely meeting the required ratio, large unanticipated cost increases could result in their not being able to comply with the eligibility requirement.

Our review shows that transit systems have experienced in recent years significant cost increases for fuel and liability insurance. Additionally, transit systems will likely continue to face cost increases, particularly in various insurance costs, in the near future.

Significant Increases in Fuel Costs. Transit and paratransit fleets use a combination of gasoline, diesel fuel, and natural gas. Currently, diesel fuel accounts for the larger portion of fuel used by operators, although many fleets are converting to cleaner fuel such as natural gas. Our review shows that in general, fuel costs account for a relatively small proportion—typically between 3 percent and 7 percent—of a transit system's total operating costs. However, given a set level of service and fleet size, operators often have little room to adjust their operations in the short run in response to any sizeable unanticipated increase in fuel prices that last for an extended period. An example was in 2000, when average diesel prices increased by about 50 percent over the 1999 prices while natural gas prices increased by about 42 percent.

Figure 4 shows the cost of fuel as a portion of total operating costs for a selected sample of transit operators from 1998-99 through 2001-02. As the figure shows, the proportion of total operating costs accounted for by fuel increased during the years when diesel and natural gas prices increased sharply. Because fuel prices fluctuate (both upward and downward) from month to month, transit systems would expect a certain amount of fuel cost fluctuations in their financial planning. It is when prices increase by unusually large amounts as in 2000, and remain higher than anticipated for an extended period of time, that transit operators' ability to meet the required farebox ratio can be negatively affected.

Figure 4

Fuel Costs as Percent of Operating Costs
Selected Transit Operators

1998-99 Through 2001-02






Amador Regional Transit





Golden Gate Bridge, Highway and
Transportation District





Mendocino Transit Authority





Monterey-Salinas Transit





Orange County Transportation Authority





Sacramento Regional Transit





Yuba-Sutter Transit Authority





Data from State Controller's Office except for 2001-02, which are reported in LAO survey.

Fluctuations in Fuel Costs Will Continue. Projections by key suppliers of natural gas in the state show that prices are expected to be relatively stable over the next decade. However, these long-term projections do not attempt to anticipate any short-term fluctuations in prices. To the extent external factors, such as natural disasters or other catastrophic events, affect the supply or demand, prices would fluctuate. As for diesel fuel, based on past experience, these prices can be expected to fluctuate from month to month, although there is no indication that they will consistently increase over an extended period of time.

Liability Insurance Is Costing Significantly More; Cost Increase Will Continue. Transit systems purchase insurance to cover the risk of casualty damages and liability such as would be incurred in accidents involving transit vehicles or passengers. The cost of casualty and liability insurance depends mainly on the size of the fleet in service, the miles of service provided, and the level of ridership. Data reported to the State Controller's office show that liability insurance costs generally range from 2 percent to 5 percent of a transit operator's operating costs.

Our review shows that the cost to purchase liability insurance coverage has increased significantly in recent years, such that transit operators, in particular small operators, are finding it increasingly difficult to purchase coverage. To facilitate transit systems purchasing liability insurance, the California Transit Insurance Pool provides liability coverage currently to 32 public transit systems in the state. The program provides $500,000 of pooled coverage (essentially, self-insurance) for members in the pool and purchases excess coverage over that level. Our review shows that for $5 million in excess coverage (over the pooled $500,000 layer), the premium per transit vehicle increased from $433 in 2001-02 to $1,402 in 2002-03, an increase of 224 percent.

To reduce premium costs, a transit system may choose to reduce coverage purchased or shift to self-insurance. However, doing so would make the system more susceptible to significant unanticipated costs such as having to pay a sizeable settlement or judgment resulting from successful claims.

Discussions with the insurance industry indicate that while the cost of liability insurance has increased for all sectors, public transit is among the sectors that have been affected significantly due to a number of factors. These factors include:

As a result, the cost of liability insurance is expected to continue to increase in the near future. Discussions with the industry indicate that transit systems may be able to control their liability insurance costs to some extent via a number of measures, including training of personnel, proper maintenance of equipment, deployment of new buses which typically have more safety features, et cetera. Nonetheless, short of reducing coverage (including becoming self-insured), public transit systems will still face significant increases in premiums in the near future due to the other factors discussed above.

Transit Systems Also Face Increasing Workers' Compensation Insurance. Our survey also shows that the cost of workers' compensation insurance has increased in recent years and this trend will likely continue for the next few years. Specifically, beginning in 2003, the state's workers' compensation benefits are being increased as a result of Chapter 6, Statutes of 2002 (AB 749, T. Calderon). These increases will result in higher premium rates for workers' compensation insurance. For instance, in October 2002, the Commissioner of Insurance approved an average increase of 10.5 percent in premium rates for new and renewal policies that begin on or after January 1, 2003, and a 4.9 percent increase in premiums effective January 1, 2003 applicable to the portions of any 2002 policies that are still in effect. According to the Workers' Compensation Insurance Rating Bureau, the agency that sets rates for workers' compensation insurance, Chapter 6 will increase benefit costs by almost 18 percent when fully implemented in 2006. The higher benefit costs will be reflected in higher premiums.

As with liability insurance, transit systems have some control over their workers' compensation insurance costs, mainly by training of personnel and implementing worker and workplace safety procedures and measures. However, other cost drivers such as medical costs and other benefit costs are less within the control of transit operators.

Health Insurance Costs Expected to Increase by Double Digits. After a number of years of relatively modest increases, the cost of health coverage has increased in the current year, generally over 15 percent for all sectors. Projections by the healthcare industry show that the increase will likely continue at a double-digit rate annually for the foreseeable future. To the extent employee health benefits are set in labor contracts, operators have limited flexibility to control rising health insurance costs until a labor contract expires and is renegotiated. Transit providers that contract or purchase services (from a third party) may be able to avoid the cost increases under an existing service contract because the contractor must bear those increases. Nonetheless, the higher health insurance costs will likely be reflected in the cost of subsequent contracts to provide the same level of transit service. Because employers often provide health coverage as part of employee benefits, it is often subject to collective bargaining. The extent transit systems can control the increases in health insurance costs depends on their ability to negotiate with labor unions for a larger share of costs to be borne by employees (such as higher deductibles or copays), or reduced coverage provided to employees.

Cumulative Effect of Cost Increases on Meeting STA Efficiency Standards. Since 1995, the state has experienced low inflation, with the state CPI increasing between 1 percent and 3 percent annually. Because fuel and various insurance costs do not individually account for a significant portion of transit systems' operating costs, large increases in any one of these cost elements even if they are in excess of the CPI may not result in a transit operator's inability to meet the STA program's efficiency standard requirement. However, if there were large increases in a number of the cost elements concurrently, an operator's ability to limit its increase in operating cost per hour of service provided would be significantly lessened, making it more difficult to meet the efficiency standard. Current law recognizes the potential for significant increases in costs that are beyond the control of transit operators. As such, it allows transportation planning agencies to exclude increases in certain costs for the calculation of the STA efficiency standard.

Consistent Consideration of Operating Costs

We recommend the Legislature allow some modification in the calculation of farebox ratios in order to enable consistent application of the Transportation Development Act eligibility requirements for the Local Transportation Fund and the State Transit Assistance programs.

Currently, the TDA provides transportation planning agencies with the flexibility to take into consideration significant increases in certain costs that are beyond a transit operator's control when determining a transit operator's eligibility to receive STA funds. However, the act does not provide similar flexibility in the calculation of operating costs for the determination of a transit operator's farebox ratio.

We believe that the Legislature should allow some modification in the calculation of farebox ratio in order to provide similar flexibility in the determination of a transit operator's eligibility for LTF funding. Doing so would make the treatment of operating costs in the two programs' eligibility requirements consistent. The following two options would achieve that objective.

First, the Legislature could allow transportation planning agencies to adjust the calculation of operating expenses in determining a transit operator's actual farebox ratio in a way similar to current statutory flexibility provided under the STA program. For instance, significant increases in certain cost elements (such as fuel) may be excluded, in whole or in part, from operating costs for the calculation of farebox ratio.

Another option is to allow the averaging of farebox ratios over a period of time, for instance over three years. This would allow a transit system to adjust its fare, service level, and operations to accommodate any extraordinary increase in costs over a longer time period, thereby evening out some of the cost fluctuations. Doing so would be consistent with current statute that allows transit systems to average the increases in their operating costs per service hour under the STA program.

Our review shows that transit operators will be facing a number of cost pressures in future years. The magnitude of these cost increases and their impact on the supply of public transit services will vary among transit operators. While it is reasonable to require transit operators to meet certain farebox ratio requirements, there may be circumstances when transit operators are not able to comply due to conditions beyond their control. The options discussed above would allow transit operators, in meeting the eligibility requirements of both the LTF and STA programs, to mitigate those circumstances in which they experience significant increases in costs that are beyond their control.

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