Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Overview

The Governor’s budget shows total state-funded expenditures for transportation programs to be higher, by 6 percent, in 2006-07 than estimated current-year expenditures. The increase is primarily from higher state-funded expenditures by the Department of Transportation for state and local capital outlay improvements, and additional support for the California Highway Patrol. The higher level of transportation capital outlay expenditures proposed for the budget year is due in part to the partial, early repayment of a loan in 2006-07.

The budget does not reflect any expenditures that would occur in 2006-07 if $6 billion in general obligation bond funds for transportation are approved in 2006, as proposed as part of the Governor’s ten-year Strategic Growth Plan.

Expenditure Proposal and Trends

Budget Proposal. The budget shows total expenditures of about $10.2 billion from all state funds for transportation programs and departments under the Business, Transportation and Housing Agency in 2006-07. This is an increase of $582 million, or 6 percent, over estimated expenditures in the current year. The major components of the increase include:

• $333 million in additional capital expenditures for highways and public transportation improvements.

• $117 million in additional support for the California Highway Patrol (CHP).

• $56 million in additional support for the Department of Motor Vehicles (DMV).

• $35 million in additional funding for the State Transit Assistance (STA) program.

The increase in transportation capital expenditures proposed for the budget year is in part due to the proposed early repayment of a loan to transportation. In 2004-05, the transfer of gasoline sales tax revenue from the General Fund to transportation as required by Proposition 42 was suspended. The suspended amount was to be repaid in 2007-08 with interest. The budget proposes to repay a portion ($920 million) of the loan in 2006-07, thereby allowing for higher capital expenditures.

The budget-year increase will likely be substantially higher when compared to actual current-year expenditures. This is because the budget assumes $1 billion in tribal gaming bond money to fund transportation projects in the current year. However, due to pending lawsuits, it does not appear that the bond funds will be available in 2005-06. Rather, the Department of Finance now expects the bond funds to be available in 2006-07. In that case, expenditures originally expected for the current year would be shifted to the budget year.

Also, as part of the budget, the Governor is proposing a Strategic Growth Plan, a ten-year funding plan for various state infrastructure. Among other things, the plan calls for $6 billion in general obligation bonds for transportation to be authorized by voters in 2006. The proposed bond funds would be used for various improvements on the state highway system and intercity rail service. To the extent the proposed bond measure is approved and projects are ready to use the bond funding, expenditures of the bond funds could further increase total state transportation expenditures in 2006-07 beyond what is currently reflected in the Governor’s budget.

Historical Trends. Figure 1 shows total state-funded transportation expenditures from 1999-00 through 2006-07. As the figure shows, over the period, these expenditures are projected to increase by $4 billion, or 66 percent. This represents an average annual increase of 7.8 percent. Figure 1 also displays the spending for transportation programs adjusted for inflation (constant dollars). On this basis, expenditures are estimated to increase by 32 percent from 1999-00 through 2006-07, at an average annual rate of 4 percent.

As Figure 1 shows, state-funded transportation expenditures increased slightly from 1999-00 to 2000-01 and stayed relatively constant from then through 2003-04. Since 2003-04, state-funded expenditures on transportation have increased significantly and are proposed to continue to do so into 2006-07. This expenditure trend is driven by a combination of factors. First, state-funded expenditures by the Department of Transportation (Caltrans), which represent about 60 percent of all state-funded transportation expenditures, stayed relatively constant from 1999-00 through 2003-04 and increased steadily from then on. The increase in the current and budget years is primarily due to the full funding of Proposition 42 gasoline sales tax for transportation. In contrast, Proposition 42 transfers were partially suspended in 2003-04 and fully suspended in 2004-05. Additionally, as mentioned earlier, the budget assumes expenditures of $1 billion in tribal gaming bond funds to occur in the current year. This amount of expenditures was initially anticipated for 2004-05.

Another reason for the change in the expenditure trend is due to a change in the method by which Caltrans expenditures are accounted for in the Governor’s budget. Specifically, prior to 2004-05, Caltrans expenditures were shown on a cash basis (that is, when funds were actually paid out). As a result of a statutory change, data for 2004-05 and onward are shown on an accrual basis (when funds are encumbered, not when they are paid out). The statutory change was made in order that all transportation expenditures are reflected in the Governor’s budget on a consistent basis to facilitate comparison of expenditure trends from year to year. Because capital expenditures for transportation projects tend to be large, showing these expenditures on an accrual basis (when they are encumbered) results in a generally higher level of expenditures than showing them when they are actually paid out over a number of years.

A second program driving expenditure growth is the CHP. Specifically, CHP’s expenditures grew by almost 65 percent from 1999-00 through 2005-06, or at an average annual rate of 8.7 percent. The growth is driven mainly by increases in the cost of employee (primarily uniformed staff) salaries and benefits. Additionally, after September 11, 2001, the department increased its staff and overtime expenditures in order to enhance its statewide security activities. The budget proposes an 8.6 percent increase in CHP expenditures in 2006-07 over the 2005-06 level, mainly for additional patrol officers and other staff, as well as to replace and enhance the department’s radio equipment.

Compared to CHP and Caltrans, growth in state-funded expenditures for DMV has been modest. From 1999-00 through 2005-06, expenditures grew by 25 percent. The growth was mainly to accommodate higher employee compensation costs and to implement various statutes. The budget proposes a 7.3 percent increase in 2006-07 over the current-year level for cost increases and for implementation of a vehicle registration suspension program.

As a share of total state expenditures, Figure 1 also shows that transportation expenditures have remained relatively stable between 1999-00 and 2004-05, accounting for about 7 percent of all state expenditures. In 2005-06, transportation expenditures are estimated to account for a larger proportion-about 8.3 percent-of all state-funded expenditures, and are proposed to remain at the same proportion for 2006-07.

Spending by Major Program

Figure 2 shows spending for the major transportation programs and departments from all fund sources, including state, federal, and bond funds, as well as reimbursements.

Caltrans. The Governor’s budget proposes total expenditures of $11.5 billion in 2006-07-a reduction of almost $900 million, or 7.2 percent, below estimated current-year expenditures. The decrease is primarily due to two major one-time expenditures anticipated to occur in the current year. However, as we note below, both of the one-time expenditures are likely to slip from the current year to the budget year. Consequently, the budget likely overstates expenditures for the current year and understates expenditures for the budget year.

First, the current-year budget assumes a $1 billion in tribal gaming bond funds will be available for transportation projects. However, due to litigation it seems unlikely that these funds arrive in the current year, and instead will be shifted to the budget year.

Second, the budget assumes $1.8 billion in reimbursed expenditures for the construction of the self-anchored suspension (SAS) portion of the San Francisco-Oakland Bay Bridge as part of the east span replacement. However, due to the recent extension of the contract bidding period for the project, expenditures for the contract may slide into 2006-07.

The budget proposes significantly higher General Fund expenditures for transportation in 2006-07. The amount includes (1) the transfer of $1.4 billion in Proposition 42 gasoline sales tax revenues to transportation, and (2) $920 million in partial repayment of a loan made to the General Fund that is due in 2007-08.

CHP and DMV. Spending for CHP is proposed at $1.6 billion-$124 million, or 8.5 percent, higher than the estimated current-year level. About 90 percent of all CHP expenditures would come from the Motor Vehicle Account (MVA). The increase in expenditure is mainly due to various price increases, in addition to proposals to begin replacing and upgrading its radio system, and to hire additional patrol staff as well as staff to handle wireless 911 calls.

For DMV, the budget proposes expenditures of $818 million-$47million, or 6.2 percent, more than the current year. These expenditures would be funded primarily from the MVA and the Motor Vehicle License Fee Account. The increase in expenditures is due primarily to various price increases and expenditures to implement a vehicle registration suspension program and to replace the department’s fee payment system.

Transit Assistance. Annual funding for the STA program is determined based on a statutory formula, and the level varies depending on anticipated revenues in the Public Transportation Account. For 2006-07, the budget proposes to fund the program at $235 million, which is $34 million, or 17 percent, higher than the current-year level.

Major Budget Changes

Figure 3 highlights the major changes proposed for 2006-07 in various transportation programs.

Caltrans. The budget proposes an increase of $775 million in local assistance for highway improvement and mass transportation in 2006-07 over the current-year level. The increase is mainly due to higher anticipated funding available from the proposed early repayment of a loan due in 2007-08 and from federal sources. The budget also shows a huge drop in highway capital outlay expenditures in 2006-07 below the current year level. However, as indicated in the previous section, this is due to the current-year assumptions of very high expenditures of tribal gaming bond funds and the awarding of a contract for the SAS portion of the Bay Bridge replacement.

CHP and DMV. The budget proposes to expand and enhance the CHP’s staffing and operations. Specifically, the budget proposes to increase patrol officers and their support by 233 positions to handle increasing workload and to provide additional proactive road patrol. The budget is also requesting to add about 170 positions to handle wireless 911 calls. In addition, the CHP also proposes $57 million to begin a five-year project (with an estimated total cost of $491 million) to replace and upgrade its radio system in order to improve operability and to improve its connectivity to other state and local law enforcement agencies.

Regarding DMV, the budget proposes about $9 million to contract with a private vendor to implement a vehicle registration suspension program. Chapter 920, Statutes of 2004 (SB 1500, Speier), requires that such a program be effective by October 2006. The department also proposes to replace its functionally obsolete system that handles mailed-in fee remittances.