Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Department of Transportation (2660)

The Department of Transportation (Caltrans) is responsible for planning, coordinating, and implementing the development and operation of the state's transportation systems. These responsibilities are carried out in five programs. Three programs—Highway Transportation, Mass Transportation, and Aeronautics—concentrate on specific transportation modes. Transportation Planning seeks to improve the planning for all travel modes and Administration encompasses management of the department.

The budget proposes total expenditures of $7.3 billion by Caltrans in 2004-05. This is about $1.1 billion, or 13 percent, less than estimated current-year expenditures. This decrease is primarily due to (1) the proposed repeal of the Traffic Congestion Relief Program (TCRP), (2) a drop in federally funded expenditures, and (3) a change in the accounting of federally funded expenditures.

Highway Transportation

Accounting Inconsistencies Make Budget Comparisons Difficult

The budget proposes expenditures of $6.5 billion for the highway transportation program, about $1.1 billion, or 14 percent, less than estimated current-year expenditures. However, proposed accounting changes by the administration and differences in accounting for state and federal funds make it difficult to compare Caltrans' expenditures from year to year, from category to category, or to aggregate information presented in the Governor's budget.

The major responsibilities of the highway program are to design, construct, maintain, and operate state highways. In addition, the highway program provides local assistance funds and technical support for local roads. For 2004-05, the budget proposes to spend $6.5 billion on highway transportation, approximately 89 percent of the department's proposed budget. This is a decrease of $1.1 billion, or 14 percent, from estimated current-year expenditures. This decrease is primarily due to a sizable drop in projected expenditures for local assistance, as discussed below.

As shown in Figure 1, the budget indicates that state funds would support about $3.4 billion (51 percent) of highway program expenditures in the budget year. Federal funds would fund about $2.3 billion (35 percent) of the program, while the remaining $900 million (14 percent) would be paid through reimbursements, primarily from local governments.

Accounting Changes Make Comparison of Local Assistance Expenditure Between Years Difficult. Of the $6.5 billion in proposed expenditures, the budget proposes $991 million in local assistance expenditures, a decrease of 59 percent below the estimated 2003-04 level of $2.4 billion. This decrease is overstated mainly due to two changes in the way the Governor's budget accounts for federal expenditures for local projects. First, according to Caltrans, many federally funded local projects that were "delivered" (that is, projects ready for construction) in the last quarter of 2002-03 did not obligate any funding until 2003-04, thereby overstating the 2003-04 expenditure level. Caltrans expects this to recur at the end of the current year. To adjust for this lag in obligating funds, the administration proposes to change its accounting procedure beginning in 2004-05 to more accurately reflect actual expenditures in the budget year. However, the department is not proposing similar changes for the current year.

A second accounting difference is in how the budget treats the federal funds the administration plans to "cash in" by shifting local projects from an accrual to a cash accounting basis. Specifically, the local assistance expenditure figure for 2004-05 does not include the amount of cash the administration hopes to generate to help the General Fund, whereas the figure for the current year does. This difference in accounting explains about $320 million of the difference between current-year and budget-year local assistance expenditures.

Inconsistent Accounting Methodology Makes Federal and State Expenditures Not Comparable. Our review also shows that Caltrans' expenditure figures as shown in the Governor's budget do not use a consistent accounting methodology. In fact, a different accounting basis has been used for state and federal expenditures for several years. The Department of Finance (DOF) has chosen to display state-funded expenditures on a cash basis, but federal expenditures are displayed on an accrual basis (consistent with the display of federal funds throughout the budget). This means that the federal and state components of Caltrans' budget are not directly comparable. Caltrans does not have precise figures on federal cash expenditures each year, although it can make rough estimates based on expenditure models. For example, while the Governor's budget shows federal funding for Caltrans at $3.3 billion in the current year, Caltrans budget staff estimate cash expenditures of federal funds in 2003-04 at about $2.9 billion.

The inconsistent accounting also means that aggregating state and federal expenditure data as contained in the Governor's budget provides only a rough approximation of the department's program activities. Furthermore, this inconsistency, combined with the accounting changes described above, means Caltrans' budget figures should be interpreted with caution.

Essential Information Needed on Accounting Change Proposal

The administration proposes changing the accounting basis for federally funded local transportation projects to generate cash to help the General Fund. However, generating this one-time cash will create ongoing workload for Caltrans and local transportation agencies and increase the risk that funding will not be available for some projects in the future. We recommend Caltrans provide workload and risk information to the Legislature prior to budget hearings regarding its proposed accrual-to-cash accounting change. Absent this information, we recommend that the Legislature withhold action on the transfer of any generated cash to the General Fund.

Accounting Shift Proposed to Aid General Fund. As we describe in our analysis of transportation funding, the Governor proposed in November 2003 to change the way the state manages federal money used on local transportation projects. (Please see the "Crosscutting Issues" section of this chapter.) The administration estimates that shifting the accounting from an accrual to a cash basis will enable the state to cash in $800 million in federal money over the current and budget years, without delaying any local projects. The additional cash (to the State Highway Account [SHA]) is proposed to be used by the state to (1) pay the General Fund $406 million for debt service on general obligation transportation bonds and (2) loan $200 million to the General Fund. The administration can make the accounting change without legislative approval, but transferring the proposed amounts to the General Fund will require legislative action.

Caltrans to Reimburse Local Expenditures. This accounting change will alter Caltrans' role in funding local projects. Under the current method of accounting, all the federal money for a local transportation project is set aside for that project up front. This money is then expended over several years. Under the proposed shift, however, local agencies will get only an assurance from Caltrans that the money will be available to reimburse them when they need it. As they expend the "federal" portion of their projects' funding, local agencies will submit requests to Caltrans for reimbursement. Caltrans will reimburse them with SHA funds. It will then request the same amount of money from the federal government.

Accurate Expenditure Projections Will Be Needed. By no longer setting aside the full amount of federal funding for a project up front, the accounting shift increases the risk that future funding may not be sufficient to cover local project expenditures. The proposal could theoretically have no impact on local agencies' ability to deliver projects, but only if Caltrans can accurately estimate and budget for the amount of federal funds local projects will expend in a given year. If expenditures do exceed available funds, the SHA will be required to make up the difference under the administration's proposal, taking funds from other state transportation projects. If the SHA does not have the funds, some local agencies will not be reimbursed for their work. In order to ensure that these situations do not occur, it is essential that Caltrans and local agencies accurately project the timing of future expenditures for all affected local projects.

Projecting Expenditures Will Increase Workload; Caltrans Has No Estimate. Currently, Caltrans does not have a system in place to allow it to track and project federal expenditures by local projects. It does have staff to monitor and project expenditures for about 1,500 state projects. By contrast, there are about 7,000 federally funded local projects ongoing at any one time, and Caltrans would have to project expenditures for a significant number of them as a result of the proposal. At the time this analysis was prepared, Caltrans did not have a firm estimate of the number of local projects that it would need to track on an ongoing basis.

Regardless of the number of local projects affected by the proposal, local agencies would have to bear much of the additional workload of tracking and estimating the cash needs of projects. Caltrans' workload could also be significantly higher, as it would have to collect and combine all the information from local agencies, double-check suspected errors, and ensure that different agencies used the same methodology. Even so, it would be impossible to guarantee that all local agencies projected their expenditures in exactly the same way.

In view of the potential workload implication and the risk the proposal creates for local projects, we have requested Caltrans repeatedly—when the proposal was first made in November 2003 and again during the development of this analysis—to provide an estimate of the new workload associated with this expenditure tracking. The department had not provided that information at the time this analysis was prepared in early February.

Essential Information Needed Before Legislature Takes Action. The administration can make the proposed accounting change without legislative approval, and Caltrans indicates that it is currently working to establish a tracking system. However, we think that the Legislature should be assured that the department is capable of projecting and managing the cash needs of local projects before deciding on the proposal to use the realized cash for General Fund purposes. Accordingly, we recommend that Caltrans provide the Legislature, prior to budget hearings, with a workload estimate associated with the proposed accounting change and an assessment of the increased risk to transportation projects and to the SHA. Absent this information, we recommend that the Legislature withhold action on the transfer and loan of $606 million from the SHA to the General Fund.

Capital Outlay Support Request Will Be Revised

The budget proposes to decrease capital outlay support (COS) positions by 2.4 percent to reflect the proposed repeal of the Traffic Congestion Relief Program (TCRP), but the administration will revise its total COS proposal in the spring based on new information. We recommend that the Legislature withhold action on the proposed reduction pending its decision on the status of TCRP and the administration's revised COS budget proposal.

Capital outlay support (COS) is the work required to produce capital outlay projects. Before a capital outlay project can be constructed, Caltrans must assess environmental impacts, acquire rights-of-way, and design and engineer the project. Caltrans is also responsible for overseeing the progress of project construction. The COS budget consists primarily of the salaries, wages, benefits, and operating expenses of the more than 10,000 state staff who perform these functions. It also includes the costs of consultants who perform a portion of this work. The COS budget does not, however, include the salaries and benefits of the contractors who construct the actual projects; these costs are part of the capital outlay projects budget.

Budget Proposes COS Reduction. The budget proposes $1.2 billion to fund 10,001 COS personnel in the budget year. This represents a net decrease of 246 personnel-years (PYs), or 2.4 percent, from the estimated current-year level. The bulk of this drop is due to a proposed elimination of 276 TCRP-related PYs. This reduction conforms to the administration's proposal to repeal TCRP in the budget year.

COS Adjustment for TCRP Should Await Determination of Program Status. Caltrans is responsible for the development of TCRP projects on the state highway system. Currently, TCRP projects are in various phases of development and funding. If the Legislature decides to repeal the program, as proposed, thereby eliminating all TCRP workload for Caltrans, the TCRP-related positions should be deleted. Alternatively, the Legislature may choose to keep the program intact or modify the program, resulting in the continuation of COS workload for the department. As we discuss in the transportation funding write-up, the Legislature has several options to consider regarding the level of funding to be provided for TCRP projects in 2004-05. (Please see the "Crosscutting Issues" section of this chapter.) Because the Legislature has yet to make a decision regarding the program's status, it would be premature to eliminate the related COS positions at this time. Depending on the Legislature's decision, the department should revise its COS workload estimate and adjust the proposed COS staffing level accordingly.

COS Proposal Will Be Revised. The administration typically revises its proposed COS budget in the spring. By that time, the department will have more accurate estimates regarding the amount of project development work that will be performed during the upcoming fiscal year. We expect the department to do the same for its 2004-05 COS budget.

Accordingly, we recommend that the Legislature withhold action on Caltrans' COS request, including the request to eliminate TCRP-related COS staffing pending the Legislature's decision on the program's status and the department's updated workload estimation in the spring.

Reduce COS Fluctuations for More Efficient Project Delivery

In approving a level of capital outlay support (COS) staffing resources, we recommend that the Legislature consider funding COS at a stable level to avoid large fluctuations in project delivery.

COS Budget Based on Budget-Year Workload; Subject to Funding Fluctuations. Caltrans develops its annual COS budget using primarily a bottom-up process, by aggregating the estimated staffing needs for each of the capital outlay projects that it plans to work on in a given year. (Please see a discussion of the COS budget process on page A-52 of the Analysis of the 2003-04 Budget Bill.) This approach ensures that staffing is adequate to work on all capital outlay projects so that they are delivered as scheduled.

This approach works well when there is relative stability in the funding of the capital outlay program. Specifically, a stable capital program allows the department to retain a stable corps of staff. If, however, there are big fluctuations in capital funding from year to year, workload and staffing levels would experience big fluctuations as well. This is because the department would have to expand or contract its staff to match the changing workload of a fluctuating capital program.

Big Fluctuations in Staffing Cause Inefficiencies. As we noted in our analysis of transportation funding, fluctuations in the COS budget can have adverse effects on project delivery several years into the future. (Please see the discussion in the "Crosscutting Issues" section of this chapter.) This is because much of the design and engineering work performed by Caltrans staff is on projects that will not incur significant expenditures until several years into the future, when they are in the middle of construction. If Caltrans cuts back work on projects too severely during lean funding years, it could significantly reduce the delivery of projects in future years when more funding is available. This would lead to large fund balances that sit idle for some time until project delivery catches up. Conversely, if project delivery capability is expanded too quickly in good times, too many projects may be ready in the future, when the funding situation may have worsened. This would cause projects to have to wait in line for funding.

Previous large fluctuations in transportation funding have caused large staff fluctuations in the department similar to those discussed above. The most recent fluctuation occurred in the early 1990s, as Caltrans faced restricted transportation funding that forced the attrition of about 2,000 COS staff over several years. When funding expanded again in the late 1990s, Caltrans' project delivery ability was far below what was needed to deliver the higher level of capital projects. This lag in project delivery resulted in the SHA's fund balance climbing rapidly and peaking at more than $2 billion by the end of the 1990s. Caltrans subsequently expanded its COS staffing and increased project delivery in an attempt to reduce that balance.

It is important to note that reducing and rehiring staff to match the funding fluctuations add to project costs and delays. This is because the department experiences the loss of staff expertise in the case of cutbacks and incurs the cost of recruiting and training in the case of heavy staff expansion. A lack of experienced staff in the face of an expanding capital program would lead to more delays in project delivery, particularly in the case of large, complex projects.

Enhance Project Delivery by Stabilizing COS Budget. With the diversion of transportation funds to help the General Fund in recent years, Caltrans' COS workload and staffing have been reduced, pushing out the delivery of TCRP and State Transportation Improvement Program (STIP) projects to later years. With the current-year elimination of 369 COS positions pursuant to Control Section 4.10 and the budget proposals to repeal the TCRP and to fully suspend Proposition 42, we expect the COS staffing level to be further reduced when Caltrans revises the budget in the spring. This means that less work would be done on fewer projects in 2004-05. When funding does increase beyond 2004-05, as a result of additional federal funds and the repayment of loans, there may not be sufficient projects ready for construction.

The ideal way to stabilize project delivery would be to stabilize transportation funding, as we recommend in our funding analysis. Without funding stabilization, however, we recommend that the Legislature consider staffing the department for project delivery at a relatively stable level over the long term, so that COS staffing levels from year to year are less driven by funding fluctuations. Such a staffing level would attempt to match the average funding level (and therefore workload) over the long term. In this way, Caltrans may retain more staff in lean years to work on a "shelf" of projects that could be delivered quickly when the funding situation improves. In years when funding increases significantly and workload expands, the department is authorized to rely on contracting to accomplish additional workload.

Program Impact of Reducing Contracts Unknown

The administration proposes to reduce funding for non-project-specific capital outlay support contracts by $6 million, but it has not yet identified the programmatic impacts of those reductions. We withhold recommendation pending receipt of further information.

The administration proposes to reduce funding for non-project-specific COS contracts by $6 million in the budget year, in addition to a cut of about $4 million already taken in the current year. These contracts include activities such as aerial photography, business process improvement studies, and environmental studies not related to specific projects. The current-year and budget-year cuts combined reduce the funding level for this type of contracting by about 45 percent, from $22 million down to $12 million. We have asked the department to indicate the programmatic effects of such a large cut, but we have not received a response to date. Accordingly, we withhold recommendation on this reduction pending receipt of further information.

Storm Water Management Staffing Inadequate

The budget proposes to make permanent 77 of 148 limited-term personnel-years (PYs) for storm water management activities. This provides a staffing level lower than that justified by ongoing workload. Combined with the statewide hiring freeze, Caltrans would have to continue redirecting staff from other maintenance activities to meet storm water management requirements. In order that Caltrans can meet these legal requirements and adequately maintain the highway system, we recommend that all storm water positions be made permanent. We further recommend the adoption of budget bill language expressing the intent that these positions are exempt from the statewide hiring freeze. (Augment Item 2660-007-0042, Schedule 4, by $2,853,000 and 71 PYs.) 

Budget Proposes Extending Some Limited-Term Positions. The 2002-03 Budget Act provided a total of 263 PYs in Caltrans' maintenance division to perform storm water management activities, increasing the base level of staffing by 148 limited-term PYs. Storm water management activities are required under the federal Clean Water Act and a Storm Water Management Plan (SWMP) negotiated between Caltrans and the State Water Resources Control Board (SWRCB). The SWMP delineates all the activities Caltrans must perform to comply with its statewide pollution discharge permit. Caltrans' original request was that the 148 limited-term PYs be permanent, but the Legislature determined that Caltrans did not have reliable workload estimates to justify their permanent status. The Legislature provided the requested positions on a limited-term basis, requiring Caltrans to rejustify its workload in the 2004-05 budget. The 2004-05 budget now proposes to make 77 of the 148 limited-term personnel permanent, allowing the rest of the positions to terminate at the end of 2003-04. This would leave the maintenance division with 192 PYs for storm water management.

Required Storm Water Activities Exceed Budgeted Amount; Staff Redirected. Our review shows that the department actually used 305 PYs for storm water activities in 2002-03, exceeding the authorized level of 263. Based on expenditures to date, the department expects it will use 287 PYs in the current year. The department states that these personnel are necessary to perform all the activities required by its SWMP. In order to use more personnel for storm water management than were budgeted, the maintenance division redirected staff from other maintenance activities, reducing the amount of other maintenance work performed.

In fact, because of the statewide hiring freeze, Caltrans could not hire any new people to fill the temporary positions. Therefore, Caltrans had to redirect maintenance staff to perform all the workload envisioned for the 148 limited-term PYs. In addition, in 2002-03, Caltrans redirected enough additional staff time to perform 42 more PYs of work than the budgeted level (305 PYs of work rather than the 263 PY authorization). This means that storm water activities reduced other maintenance activities by 190 PYs in 2002-03.

Finance Report Finds That Costs Will Increase. Concurrent with the approval of the limited-term positions in the 2002-03 Budget Act, the Legislature provided funding for DOF to review Caltrans' storm water management activities and assess their likely long-term costs. That study, issued in November 2003, found that, while the ultimate cost of compliance was unknown, Caltrans' storm water management costs were likely to continue escalating. The report cited a recent study that estimated the total costs of complying with storm water quality standards in the Los Angeles basin alone could reach $102 billion. Caltrans' costs would be only a portion of that figure, but the department's statewide compliance costs are sure to expand beyond the $85 million budgeted in the current year.

The DOF report also made several recommendations to improve the administration of the storm water program and deal with rising costs. For example, the report found that Caltrans was not accurately tracking all storm water management costs, and it recommended that Caltrans develop tools and practices to accurately account for the costs of storm water compliance. Other recommendations included taking action to ensure statewide consistency in the department's storm water activities, increasing staff training to minimize resistance to the requirements, and better tracking enforcement actions. The report's recommendations appear reasonable, and Caltrans should make every effort to follow them.

Caltrans Cannot Comply With Storm Water Requirements and Budget Simultaneously. In order to remain in compliance with the Clean Water Act, Caltrans must perform the activities agreed to in its SWMP. If it fails to do so, it is subject to enforcement actions by SWRCB—including monetary fines—and potential legal action at the state and federal levels. Although the DOF report found that the projected costs of storm water compliance are escalating, the Governor's budget proposes to reduce the number of positions dedicated to storm water management activities. As Caltrans has had to redirect maintenance staff with other responsibilities to perform all of its storm water management activities in 2002-03 and 2003-04, it will almost certainly have to continue to do so in 2004-05. The continued redirection of other maintenance staff to storm water activities means less work is being done in other maintenance functions. (We discuss the importance of highway maintenance in the following section.)

Storm Water Staffing Should Be Permanent; Hiring Freeze Exemption Should Be Granted. Our review shows that the workload for storm water management justifies making permanent all 148 limited-term PYs of staff. Accordingly, we recommend that the Legislature reject the budget proposal, and instead make all existing storm water staff in the maintenance division permanent by augmenting Item 2660-007-0042 by $2,853,000.

However, adding storm water management personnel in the budget will have no effect unless the department is exempted from the statewide hiring freeze. Accordingly, we further recommend the adoption of the following budget bill language to exempt these positions from the statewide hiring freeze.

Of the amount appropriated in this item, $29,076,000 is for 263 permanent personnel-years of staff for storm water management activities conducted by the department's maintenance division. It is the intent of the Legislature that these positions be exempt from the statewide hiring freeze.

Pavement Maintenance: Protecting the State's Investment

Preventive and corrective maintenance of highway pavement can save the state a great deal of money in future rehabilitation and reconstruction, but pavement maintenance funding has sharply declined. We recommend Caltrans develop a plan for investment in the maintenance of the state highway system, which can guide future budgets. We also recommend Caltrans adopt performance measures that link the state's investment to the resulting quality of the highway system.

In addition to developing and constructing the state highway system, Caltrans is responsible for maintaining the system. This work is carried out by the maintenance division. With a 2003-04 budget of $765 million and 5,452 PYs, the division is responsible for the upkeep of all aspects of the system, including all pavement, structures, roadsides, and signage. The division does not, however, perform major rehabilitation and reconstruction projects on the state highway system. Those activities are included in the State Highway Operation and Protection Program (SHOPP) and are performed as part of the capital outlay program. Current law allows state maintenance staff to work only on projects of $25,000 or less; larger projects, such as repaving long stretches of highway, are classified as "major maintenance," and are done through contracting with the private sector.

The state highway system for which the maintenance division is responsible encompasses more than 15,000 miles of highway with more than 50,000 miles of lanes. The roads in this system range from large urban freeways to two-lane rural roads to major city streets. In total, they carry more than 170 million miles of vehicle travel per year.

Pavement Maintenance Is a Core Mission of the Maintenance Division. Caltrans' maintenance division has several important responsibilities, as shown in Figure 2. Structures maintenance, for example, ensures that structures like bridges and retaining walls remain structurally sound. Traffic guidance and electrical maintenance ensures the continued functionality of guardrails, signs, striping, and other systems that help drivers understand how to proceed. Of at least equal importance to these functions is pavement or roadway maintenance, which ensures that the surface on which drivers travel remains smooth and safe to drive on. Pavement maintenance can be divided into two categories; preventive maintenance includes activities such as sealing chips and cracks in the roadway to slow the rate of pavement deterioration, while corrective maintenance involves activities like filling potholes and repairing concrete slabs to correct problems before they get worse.

This analysis focuses on the pavement maintenance that the division performs, as opposed to its other functions. While the maintenance division performs many important functions, we believe maintaining the functionality of the roadway is its core responsibility.

Pavement Maintenance Spending: A Wise Investment in the Highway System

Adequate maintenance of highway pavement significantly reduces future costs for roadway rehabilitation and reconstruction, and state law recognizes it as one of the highest priorities for transportation spending. The importance of pavement maintenance will only increase as the highway system ages and traffic increases.

Preventive Maintenance Costs Less Than Road Reconstruction. Pavement maintenance expenditures are important because the cost of adequately maintaining a stretch of highway is significantly lower over the long run than the cost of rehabilitating and reconstructing that highway. Specifically, the Federal Highway Administration (FHWA) has found that one dollar spent on preventive maintenance can save up to six dollars in future costs, and FHWA staff indicates that this estimate is out of date and probably should be revised upward.

The State of Michigan's recent experiences support that view. Michigan instituted a preventive maintenance program in 1992 for the purpose of preserving its highway system in the face of declining resources. Since that time, the Michigan Department of Transportation estimates that its $80 million investment in preventive maintenance activities such as crack sealing and minor concrete repair has saved it $700 million in rehabilitation and reconstruction costs that would have otherwise been necessary—a savings of eight to nine dollars for each dollar spent. Increasing pavement maintenance expenditures in the near term can save significant money in the long run, freeing up more money for other purposes, such as new construction projects.

If a stretch of pavement is not maintained on a regular basis, it eventually reaches the point at which it must be rehabilitated at significant cost. This brings the pavement back to an almost new condition, but without subsequent preventive maintenance, the rehabilitated pavement will continue to degrade and need to be rehabilitated on a regular basis, at great expense. The pavement's life cycle is very different if it receives regular preventive maintenance. While preventive maintenance requires some money to be spent earlier, the result is that the pavement lasts much longer, and stays in a much better average condition, before it must ultimately be rehabilitated. Money is saved by significantly delaying the point at which the pavement will need expensive rehabilitation.

State Law Recognizes Importance of Maintenance. Maintenance of the state highway system is recognized as a first priority for the expenditure of state transportation funds. Specifically, state law lists maintenance, along with operation and rehabilitation of the highway system, as one of SHA's first priorities, ahead of safety improvements, capacity expansion, and environmental enhancement and mitigation. This makes sense, as Caltrans estimates the value of the existing state highway system at around $300 billion. It is fiscally prudent to maintain the quality of the huge existing investment by the state before spending money to expand it.

Importance of Maintenance Increases as Traffic Increases and Highway Ages. The importance of adequate highway maintenance is increasing over time. Much of California's highway system was built in the 1960s. As the highway system ages, the pavement requires more maintenance to retain basic functionality. However, the real driver of maintenance needs is not the physical age of the pavement, but rather the amount of traffic that has driven over a given location. As Figure 3 shows, the average lane-mile of the state highway system now carries more than 3.4 million vehicles per year. Much of this travel is concentrated in urban areas, so average vehicle travel on urban lane-miles is much higher. As vehicle-miles of travel increase in the state, the aging and deterioration of the state's pavement accelerate.

Limited Funding Has Reduced Pavement Maintenance Work

Pavement maintenance must compete for funding with other transportation priorities. In recent years, expenditures on pavement maintenance have declined, resulting in the accumulation of a significant backlog. The State Highway Operation and Protection Program (which focuses on reconstruction/rehabilitation) has faced similar pressures in recent years. Limited pavement maintenance has resulted in a rough road system that costs the state money in rehabilitation and reconstruction costs, and costs drivers money for vehicle repairs.

Maintenance Must Compete for Funding. Although highway maintenance is important, there are other demands on transportation funding as well. Capacity expansion projects are the highest-profile use of transportation funds, and the delivery of STIP projects receives a great deal of attention from external observers, in part because these projects provide a tangible measure of efforts to reduce congestion and meet increasing travel demand. Regional transportation agencies are also motivated to advocate for STIP expenditures over other priorities, because 75 percent of STIP funds are used for regionally chosen projects. Maintenance and SHOPP expenditures, on the other hand, reduce the "bottom line" funding available for STIP projects and thus are not typically regional priorities. These factors combine to reduce the visibility and apparent priority of maintenance expenditures.

Pavement Maintenance Must Compete With Other Maintenance Activities. Even within the total funding for highway maintenance there are competing demands. The largest maintenance function within Caltrans in terms of both funding and staffing is not pavement, but roadside maintenance. As Figure 4 shows, roadside maintenance grew from 27 percent to 35 percent of the maintenance budget from 1990-91 through 2002-03. One of the reasons for roadside maintenance's relative size is that it contains much of the storm water management activities conducted by the department. These activities, which are required by agreements with state and local resources agencies, have grown rapidly in recent years. Roadside maintenance also includes landscaping and litter pick up. Maintenance division representatives indicate that local governments often request more spending in this area due to its high visibility. These factors have led to the growth of roadside maintenance as a percentage of total maintenance expenditures over time.

Figure 4 shows that the increase in roadside expenditures was mirrored by a corresponding decrease in pavement expenditures, but there was no similar decrease in other maintenance activities. From 1990-91 through 2002-03, pavement maintenance expenditures declined from 24 percent to 16 percent of the maintenance budget, while all maintenance expenditures other than pavement and roadside maintenance hovered around 50 percent of the budget.

Pavement Maintenance Expenditures and Accomplishments Are Declining. The other priorities for transportation dollars have resulted in a sharp decline in pavement maintenance. As Figure 5 shows, inflation-adjusted pavement maintenance expenditures have dropped precipitously in recent years, with a decline of 39 percent in expenditures between 1997-98 and 2003-04. This has led to a concurrent decline in road repaving. Figure 5 also shows that lane-miles of road repaved dropped from a high of 3,850 in 2000-01 to just over 1,000 planned in 2003-04.

As Maintenance Activity Drops, Significant Backlog Has Accumulated. While pavement maintenance expenditures and activity have declined in recent years, maintenance needs have not. In fact, Caltrans' maintenance division estimates that the value of necessary pavement maintenance that has been deferred in recent years totals $587 million. This work includes both preventive maintenance, such as sealing cracks in the road, and corrective maintenance, such as repairing potholes. All of the work included in this figure is classified as major maintenance, meaning that it must be performed by contractors under state law. If these activities are not performed, the problems they are meant to correct will eventually grow and become far more expensive SHOPP projects. In addition to this backlog in basic pavement maintenance, Caltrans has identified several recurring problems that can threaten stretches of the highway system, such as drainage and erosion problems, rockfalls, and slope movement. While a thorough assessment of needs in these areas has not been performed, Caltrans staff believes the work necessary to remedy these problems would potentially cost several billion dollars. This unfunded amount is in addition to the $587 million backlog identified above.

SHOPP Is Facing the Same Pressures. While the maintenance division is supposed to do preventive work and correct small problems before they grow, Caltrans' SHOPP program is tasked with correcting major highway system issues through rehabilitation or reconstruction. As maintenance funding has not kept pace with the highway system's maintenance needs, SHOPP workload has grown. In 2002, Caltrans estimated that one in every five lane-miles of state highway needed rehabilitation or major reconstruction. At that time, Caltrans created a SHOPP plan that would, among other things, reduce the number of lane-miles on the highway system that need this type of work from 11,000 to 5,500 within ten years. This plan would have cost $22 billion, or about $2.2 billion per year for a decade. However, the California Transportation Commission (CTC) has not funded SHOPP at this level. Rather, average annual SHOPP funding is projected to be about $1.65 billion over the next five years. Underfunding pavement maintenance and SHOPP now will only make the problems more expensive to fix when they are eventually addressed.

State Highway System Is Poorly Maintained. The state's inadequate investment in pavement maintenance is apparent in the condition of the state's roads. According to statistics published annually by FHWA, California's roadway system, including interstate highways, state highways, and major arterial streets and roads, is the second roughest in the nation, with over 26 percent of those roads rated by drivers as unacceptably rough. As Figure 6 indicates, only Massachusetts has more roads at this level of roughness, and California is far worse than the national average of just over 8 percent of roads being unacceptably rough. Many of the roads included in this statistic are the responsibility of regional transportation agencies, demonstrating that more pavement maintenance is necessary at both the state and local levels.

Poorly Maintained Roads Cost the State and Drivers Money. As already noted, insufficient maintenance effort leads to higher SHOPP expenditures and ultimately higher total expenditures to rehabilitate and rebuild state highways. But this is not the only cost of insufficient maintenance effort. The rough roads that result create direct costs for California drivers as well, in the form of higher vehicle operating costs and accidents. The Road Information Program (TRIP), a nonprofit group, aggregated FHWA's data on road roughness by urban area, and found that six of the ten urban areas with the highest proportion of rough roads are in California, with Los Angeles and San Jose having the roughest roads in the nation. Using models to estimate how much more drivers will pay on average for repairs, fuel, and tire costs due to rough roads, TRIP estimated that while the average U.S. driver will pay $396 extra annually due to rough roads, the average driver in Los Angeles or San Jose will pay more than $700 annually. Thus, increased investment in pavement maintenance can save both the state and its residents money in the long run.

Caltrans Should Refocus Efforts on Highway System Maintenance

We recommend the enactment of legislation requiring Caltrans to develop a long-range plan to reduce the backlog of maintenance projects, which in turn will provide the basis for future maintenance budgets. We also recommend that the maintenance division examine potential ways to spend its money more efficiently. Finally, we recommend the enactment of legislation directing Caltrans to develop performance measures to track the results of the state's maintenance investment.

Investment Plan Needed. The decline in pavement maintenance funding and the condition of California's roads argue strongly for more investment in pavement maintenance. However, we do not recommend that the Legislature invest the state's money blindly. Rather, we recommend the enactment of legislation that requires Caltrans to develop and update biennially a multiyear plan to reduce its pavement maintenance backlog. This plan should be developed in conjunction with the ten-year plan currently required for SHOPP. Planning long-range maintenance and SHOPP expenditures together makes sense, as maintenance expenditures will directly affect the level of needed SHOPP expenditures. This plan should be reviewed by CTC and submitted to the Legislature and the Governor, as the SHOPP is now. This plan should form the basis for the pavement maintenance budget and should be used in the development of the biennial STIP fund estimate, similar to the use of the SHOPP ten-year plan currently. Such a plan should explicitly identify the funding requirements and provide a timeline to address the backlog. Reducing the maintenance backlog would in turn slow the flow of projects into the SHOPP.

Plan Should Identify Means to Increase Efficient Use of Maintenance Dollars. The plan should not only include a listing of work to be completed, but also examine and identify strategies and means to increase the efficiency of use of pavement maintenance dollars to ensure that the state gets the greatest possible return on its investment. For instance, the efficacy of different maintenance methods and materials should be examined in terms of their costs and benefits. Accordingly, we recommend that, concurrent with the development of a long-range plan, the department assess and report on possible means of spending its money more efficiently, such as:

• Performing work at night to reduce interference with traffic.
• Identifying conditions and situations where it makes sense to use long-life pavement that costs more, but requires less upkeep after installation.

Again, this effort should be modeled after the SHOPP plan, which statute requires to contain strategies to control costs and improve the efficiency of the program.

More Information Needed on Relationship Between Funding and Road Quality. If the Legislature is to dedicate more money for pavement maintenance, it should be able to measure the return the state is getting on its investment. A model that links pavement maintenance funding to the ultimate condition of the road would be valuable in holding the department accountable for its use of the funding provided. Such a measure would also provide useful information for the internal allocation of resources and management of the program.

Caltrans' maintenance division has taken the first steps toward creating such a budget model, but much work remains before the model will be able to link pavement maintenance funding to road condition. We recommend that the legislation mandating the development of a long-range maintenance plan also require the maintenance division to develop a budget model that will:

• Link dollars spent on each maintenance function with a specific level of outputs for that function (for example, number of lane-miles repaved for a given dollar investment).
• Link outputs with their resulting changes to the quality of the state highway system (for example, change in statewide road roughness or level of service expected from a given number of lane-miles repaved).
• Estimate the amount of new maintenance workload added each year due to natural aging and use of the system.
• Estimate the amount of maintenance workload that becomes SHOPP workload each year, as well as the amount of SHOPP workload avoided or postponed by maintenance activities.

Upon development of this model, we recommend that its findings be included in the biennial maintenance plan recommended earlier.

Project Delivery

Project delivery is one of the most critical elements in Caltrans' mission to improve mobility. Failure to deliver projects in a timely manner can delay congestion reduction and cause project costs to increase. Caltrans' staff is responsible for preparing state highway projects for construction—including environmental clearance, right-of-way acquisition, and project design—awarding projects for construction, and overseeing project construction through completion. Local agencies are responsible for local street and road improvement projects and mass transportation projects. For the purposes of this analysis, a project is considered delivered when all preconstruction work is completed and the project is ready to receive a fund allocation from the CTC so that construction can proceed. Comparing the number of projects delivered in a year to the number scheduled to be delivered in that time period provides an indication of how well the department and local agencies perform in meeting STIP and SHOPP targets.

In the following section, we describe Caltrans' and local agencies' STIP and SHOPP delivery performance in 2002-03, Caltrans' environmental document delivery, and the effects that limited funding is having on project delivery.

Little Change in Caltrans and Local Project Delivery

In 2002-03, Caltrans delivered 92 percent of programmed State Transportation Improvement Program (STIP) and State Highway Operation and Protection Program projects, and 91 percent of programmed expenditures on those projects. These delivery percentages are slightly lower than those in the previous year. Caltrans also advanced other projects that were originally programmed to be delivered in other years. Local agencies delivered 82 percent of programmed STIP projects and 88 percent of programmed expenditures. Like Caltrans, they delivered some projects scheduled for other years as well.

Caltrans Project Delivery Percentages Decline Slightly. According to information provided by CTC, in 2002-03 Caltrans delivered 87 percent of STIP projects that were programmed for delivery in that year, as shown in Figure 7. The SHOPP project delivery percentage was better, at 94 percent. For the two programs combined, the department delivered 92 percent of all programmed projects, slightly below the combined percentage of 95 percent in 2001-02. Nonetheless, the combined delivery exceeds Caltrans' goal of delivering at least 90 percent of scheduled projects each year.

In dollar terms, Caltrans delivered a similar percentage (88 percent) of scheduled STIP dollars and 93 percent of programmed SHOPP dollars, as shown in Figure 8. For the two programs combined, Caltrans delivered 91 percent of all dollars of projects scheduled for 2002-03, slightly below the previous year's average of 94 percent.

In addition to delivering projects that were scheduled for delivery in 2002-03, the department also delivered projects that were scheduled for delivery in later years. Specifically, as Figures 7 and 8 show, the department delivered 18 STIP and SHOPP projects that were not scheduled for delivery in 2002-03, worth $139 million. While Caltrans' goal should be to deliver the projects it is scheduled to deliver, advancing projects from other years when programmed projects are delayed allows the department to utilize project delivery staff and resources efficiently.

Local Project Delivery Improved Slightly. Under Chapter 522, Statutes of 1997 (SB 45, Kopp), local agencies are responsible for determining how to spend 75 percent of STIP funds. To the extent that local agencies decide to spend their share of STIP funds on highway capacity improvements, they have traditionally depended on Caltrans to deliver the projects. However, to the extent that they choose to spend their share of funds on transit projects or local road improvements, they are responsible for that delivery.

In 2002-03, local agencies delivered 376, or 82 percent, of the local street and road or mass transit projects programmed in the STIP for delivery in that year. These projects totaled $362 million—about 88 percent of the local agencies' goal to deliver $410 million worth of projects. These numbers represent a slight improvement from 2001-02, when local agencies delivered 81 percent of both projects and expenditures. Like Caltrans, however, local agencies also delivered a significant number of projects that were scheduled for different years. These additional projects bring total STIP delivery by local agencies to $517 million.

Fewer Environmental Documents Completed, but Backlog Reduced

Compared to prior years, Caltrans completed fewer environmental documents for State Transportation Improvement Program and State Highway Operation and Protection Program projects in 2002-03. Despite the reduced level of completion, Caltrans appears to have worked through its backlog of environmental documents.

Number and Percentage of Completed STIP Environmental Documents Drop. Our review shows that of the 41 environmental documents for STIP projects the department planned to complete during 2002-03, 27 were completed. The remaining 14 rolled forward to 2003-04 and beyond. This completion rate (66 percent) represents a decline from the 73 percent completion rate achieved in 2001-02. In addition, as Figure 9 shows, the 27 documents completed in 2002-03 is the lowest number of documents completed since 1999-00. In 2003-04, Caltrans plans to complete 43 final environmental documents for STIP projects. Caltrans completed only one of these documents in the first quarter of the current year.

Environmental Document Completion Rate for SHOPP Higher. For SHOPP projects, Caltrans completed 54 out of 63 planned environmental documents in 2002-03. This represents a completion rate of 86 percent, compared to 76 percent in 2001-02. Similar to the trend for STIP projects, the number of documents completed in 2002-03 for SHOPP projects was the lowest in three years. In the current year, Caltrans plans to complete 69 environmental documents, of which five were completed in the first quarter.

Backlog of Environmental Documents Reduced. The large numbers of environmental documents delivered in 1999-00 and 2000-01 were due to Caltrans' efforts to reduce an existing backlog. Even though total document delivery numbers in the last two years have been lower, Caltrans has actually delivered more new documents due to the reduction of the backlog. For example, of the 54 STIP environmental documents Caltrans completed in 2000-01, 50 were carried over as backlog from previous years—only four were new projects. In contrast, of the 27 STIP environmental documents completed in 2002-03, 12 of these were carried over from previous years and 15 were new projects.

Project Delivery Affected by Funding Shortage

The state's fiscal crisis has affected project delivery. Caltrans' borrowing of federal funds from locals delayed their timely use of federal funds for local projects. Also, the California Transportation Commission could not allocate funds for many delivered projects, delaying the start of construction. Current-year delivery plans also have been constrained by available funding. Additional diversion of transportation funds will further delay project delivery.

Caltrans' Borrowing of Federal Funds Delays Local Projects. Over the last few years, local agencies have used federal funds that they receive in a more timely manner. In 1998 and 1999, the first two years of the current federal transportation act (TEA-21), local agencies underspent their allotment of federal funds by 41 percent and 57 percent, respectively. As a result, by October 1999, local agencies had accumulated $1.2 billion in unexpended federal allocations.

To remedy this situation, Chapter 783, Statutes of 1999 (AB 1012, Torlakson), was enacted to allow CTC to redirect most of a local agency's unused federal funds to another local transportation agency before the federal spending authority expired. In response, local agencies increased markedly their use of the major categories of federal funds, reducing the outstanding backlog to about $600 million by October 2002.

However, Caltrans borrowed $200 million in unexpended federal funds from the local agencies in July 2003, in order to prevent a cash shortfall in the SHA that resulted from the delay in the enactment of the 2003-04 Budget Act. This borrowing made federal funds unavailable to local agencies for two months, in turn delaying their use of federal funds.

Allocations for Delivered Projects Delayed, Thereby Slowing Construction. As mentioned earlier, projects are considered delivered when they are ready to receive a fund allocation from CTC so that construction can proceed. The shortage of available transportation funds in the last two years (due mainly to transportation funds being diverted to help the General Fund) has caused CTC to limit project allocations, thereby delaying project construction. Of the $1.6 billion in delivered 2002-03 STIP and SHOPP projects mentioned above ($1.1 billion delivered by Caltrans, $517 million delivered by local agencies), CTC could not make allocations for $359 million worth of projects. When combined with delayed allocations for other phases of projects and new projects delivered in the current year, the total allocation backlog for STIP and SHOPP projects as of January 2004 is $671 million. There is a similar backlog of $155 million for TCRP projects. Most of these projects could begin work within months if funding were available.

Funding Problems Constrain Current-Year Delivery. In addition to constraining allocations for delivered projects, limited funding has caused Caltrans to scale back the number of new projects it plans to deliver in 2003-04. Instead of delivering 233 STIP and SHOPP projects in 2003-04 worth $1.9 billion, it now plans to deliver 203 projects worth $1.3 billion. The shortage of transportation funding in the current year also means that CTC's ability to allocate construction funds to these projects is even more constrained than it was in 2002-03. In fact, CTC only plans to allocate $800 million to SHOPP projects in the current year, with no allocations for STIP projects. This means that even if Caltrans can deliver all of its planned projects, many of them will have to wait until funding is available before they can begin construction.

Additional Transportation Fund Diversion Will Further Delay Project Delivery. Within the past four years, the state has gone from having a large transportation funding surplus to being unable to fund its existing commitments. In 2001-02 and 2002-03, the funding surplus allowed transportation funds to be loaned to the General Fund with little immediate impact on project delivery. Once the surplus disappeared, however, further diversion of transportation funds reduced Caltrans' ability to deliver projects and CTC's ability to allocate funds for those projects, as described above. As the Legislature considers using transportation funds to help the General Fund in the budget year, it must weigh the potential General Fund benefits against the fact that any loss of transportation funding at this point will likely delay projects and postpone any related traffic congestion relief.