Analysis of the 2007-08 Budget Bill: Transportation

Overview

The Governor’s budget shows total state-funded expenditures for transportation programs to be significantly higher, by $1.8 billion, or 17 percent, in 2007-08 than estimated current-year expenditures. The increase is primarily due to Proposition 1B bond-funded expenditures for state and local transportation capital improvements.

Expenditure Proposal and Trends

Budget Proposal. The budget shows total expenditures of $12.6 billion from all state funds, including special funds and bond funds, for transportation programs and departments under the Business, Transportation and Housing Agency in 2007-08. This is a net increase of $1.8 billion, or 17 percent, over estimated expenditures in the current year. The major components of the net increase include:

• $2 billion in additional transportation capital expenditures for highways, roads, and transit improvements.

• $145 million in additional support for the California Highway Patrol (CHP).

• $18 million in additional support for the Department of Motor Vehicles (DMV).

• $439 million less funding for the operations of transit agencies under the State Transit Assistance (STA) program.

The increase in transportation capital expenditures proposed for the budget year is almost exclusively due to the availability of bond funds as a result of the passage of Proposition 1B in November 2006. Specifically, Proposition 1B authorizes the issuance of about $20 billion in general obligation (GO) bonds for various transportation improvements.

Historical Trends. Figure 1 shows total state-funded transportation expenditures from 2000-01 through 2007-08. As the figure shows, over the period, these expenditures are projected to increase by $5.8 billion, or 86 percent. This represents an average annual increase of 9.2 percent. Figure 1 also displays the spending for transportation programs adjusted for inflation (constant dollars). On this basis, expenditures are estimated to increase by 43 percent from 2000-01 through 2007-08, at an average annual rate of 5.2 percent.

As Figure 1 shows, state-funded transportation expenditures stayed relatively constant from 2000-01 through 2003-04. Since 2003-04, these expenditures have increased significantly, at an average annual rate of about 16 percent. These expenditures are proposed to increase in 2007-08 by 17 percent over the current year.

Figure 1 also shows that a portion of the current-year increase (over 2005-06) in state-funded transportation expenditures, and all of the increase expected in the budget year (over current year) are due to bond-funded expenditures. These expenditures, to be funded by Proposition 1B bonds, will be for capital improvements on the state’s highways, streets and roads, and transit systems.

The expenditure trend shown in Figure 1 is driven by a combination of factors. First, the overall trend parallels the trend in expenditures by the Department of Transportation (Caltrans) for the period. Expenditures by Caltrans, which make up about 60 percent of total state-funded transportation expenditures, stayed relatively constant from 2000-01 through 2003-04. This is mainly the result of transportation funds being loaned to the General Fund in order to help the state’s fiscal condition. Since 2004-05, expenditures increased as a result of repayment from the General Fund of some of the loans made in prior years. Additionally, beginning in 2005-06, transportation received the full amount of gasoline sales tax revenues required under Proposition 42. With the passage of Proposition 1B, the Governor’s budget proposes significantly higher transportation bond expenditures in both the current and budget years.

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). 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. (The accounting change was adopted in order to improve accountability of the department’s expenditures. The change created a one-time anomaly in the overall expenditure trend.)

A second program driving expenditure growth is CHP. Specifically, the CHP’s expenditures grew by about 91 percent from 2000-01 through 2007-08, or at an average annual rate of 9.7 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 a 9.3 percent increase in CHP expenditures in 2007-08 over the current year, mainly for additional patrol officers, increased staff to inspect truck terminals, and funding to continue replacement of the department’s radio equipment.

Compared to the CHP and Caltrans, growth in state-funded expenditures for DMV has been modest. From 2000-01 through 2006-07, expenditures grew by 34 percent, or at an average annual rate of 4.3 percent. The growth was mainly to accommodate higher employee compensation costs and to implement various statutes. The budget proposes a 2.2 percent increase in 2007-08 over the current-year level to continue modernization of DMV’s information technology (IT) systems, and to pay processing fees for customers who pay for various fees with credit or debit cards.

As a share of total state expenditures, transportation expenditures have stayed slightly below 7 percent through 2003-04, and increased thereafter, as shown in Figure 1. In 2006-07, transportation expenditures are estimated to account for a larger proportion-about 8 percent-of all state-funded expenditures, and are proposed to increase to 9 percent in 2007-08.

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 $12.8 billion in 2007-08-an increase of $1.5 billion, or 14 percent, over estimated current-year expenditures. The increase is primarily due to expenditures of Proposition 1B bond funds. Specifically, the Governor’s budget proposes to spend about $1.5 billion in bond funds in the budget year. Additionally, the budget proposes to transfer $1.5 billion in gasoline sales tax revenue from the General Fund to transportation, as required by Proposition 42. When compared to the current year, however, the total amount transferred is $1.2 billion less. This is because in 2006-07, the General Fund paid back to transportation a substantial amount ($1.2 billion) of past loans in addition to transferring Proposition 42 funds for transportation. The budget also proposes substantially higher transportation expenditures coming from federal funds in 2007-08, compared to the current year.

CHP and DMV. Spending for CHP is proposed at $1.8 billion--$150 million, or close to 9 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 expenditures is mainly due to the full-year cost of patrol officers added in the current year as well as the second-year cost of upgrading and replacing the department’s radio system. In addition, the department proposes to add another 120 patrol officers in 2007-08, and to increase staff by 71 positions in order to inspect truck terminals in a timelier manner than it current does.

For DMV, the budget proposes expenditures of $903 million--$19 million, or 2.2 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 to a number of cost increases in the budget year, including higher processing fees for credit or debit card transactions, continued modernization of the department’s IT systems, and additional facilities to provide various types of customer services.

Transit Assistance. Current law requires that one-half of the annual revenues into the Public Transportation Account (PTA) be appropriated to the STA program, based on a statutory formula. Transit operators generally use these funds for operational expenses, such as staff support, fuel, and insurance costs. The total revenue into PTA can fluctuate greatly depending on gasoline prices and the economy. For the current year, the budget appropriated $624 million to STA, as a result of very high projected revenue into PTA as well as repayments from the General Fund of past transportation loans.

The Governor’s budget proposes to fund STA in 2007-08 at $185 million-significantly less than what the program received in the current year. This funding level is the combined result of two proposed changes. First, on a permanent basis, the budget proposes that no “spillover” revenue into PTA be allocated to STA. (Spillover revenue is the amount that state gasoline sales tax at 4.75 percent exceeds the amount generated from sales tax on all other goods at the 0.25 percent rate.) Second, the budget proposes to reduce the 2007-08 STA level by the amount the program received in the current year that exceeds current law requirements.

The state also provides funding assistance to transit operators for capital improvements, such as construction of rail tracks and facilities, and acquisition of equipment. Proposition 1B includes $3.6 billion in GO bond funds for transit capital improvements. The Governor’s budget proposes to spend $600 million of the amount in 2007-08.

Major Budget Changes

Figure 3 highlights the major changes proposed for 2007-08 in various transportation programs.

Caltrans. The budget proposes significantly higher expenditures for various transportation capital improvements. In particular, the budget proposes an increase of about $1 billion in Proposition 1B bond-funded capital expenditures in 2007-08, and about $400 million more in capital outlay expenditures funded with federal money.

Regarding noncapital expenditures, the budget proposes an increase of $85 million to maintain and preserve highway pavements and $9.7 million to maintain intelligent transportation systems such as ramp meters, traffic signals, and changeable message signs. The budget also includes $13 million for equipment and strategies to monitor toxic air emissions.

CHP and DMV. The CHP proposes to add 120 traffic officers in 2007-08. This would be the second year of increases in patrol officers, with the department adding 240 in the current year. The department also proposes to increase its staff to inspect truck terminals by 71 positions. This would allow the department to double its annual inspections to more closely meet the statutory requirement of inspecting all terminals every 25 months. The budget also includes an additional $51 million for CHP to continue to replace and enhance its radio system. This five-year effort started in the current year.

The DMV is requesting $24 million to continue to modernize its IT systems. Additionally, the budget requests $11.4 million to cover fees charged by financial institutions for processing payments to DMV that are made with credit or debit cards. The budget also proposes $9.6 million to lease and consolidate facilities in order to improve services to customers.

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