Analysis of the 2007-08 Budget Bill: Transportation

Funding for Transportation Programs

California’s state transportation programs are funded by a variety of sources, including special funds, federal funds, and general obligation (GO) bonds. While state transportation programs have been traditionally funded on a pay-as-you-go basis from taxes and user fees, last year’s passage of Proposition 1B provides almost $20 billion in bond funds, which will fund state and local transportation programs.

State Funding for Transportation

Traditional State Fund Sources. Two special funds-the State Highway Account (SHA) and the Public Transportation Account (PTA)-have traditionally provided the majority of ongoing state revenues for transportation.

• The SHA. The SHA is funded mainly by revenues from an 18 cent per gallon excise tax on motor fuels (referred to as the gas tax) and truck weight fees. Generally, these funds have provided a predictable source of funding for transportation.

• The PTA. The PTA has been traditionally funded by sales tax on diesel fuel and a portion of the sales tax on gasoline. Some PTA revenues come from “spillover”-the amount that gasoline sales tax revenues at the 4.75 percent rate exceed the amount generated from sales tax on all other goods at the 0.25 percent rate. Most PTA revenues are fairly stable; however, spillover can vary greatly from year to year, as it corresponds with fluctuations in gasoline prices at the pump and the total economy.

More Recent State Fund Sources. Since 2000, state transportation programs have been supplemented by additional funding sources. In 2000, the Legislature enacted the Traffic Congestion Relief Program (TCRP), a six-year funding plan to address state and local transportation needs. The program created two new state transportation accounts-the Traffic Congestion Relief Fund (TCRF) and the Transportation Investment Fund (TIF). Both accounts have received funding from a combination of General Fund revenues (one-time) and gasoline sales taxes (ongoing) that did not previously go to transportation. In addition, the recent passage of Proposition 1B creates a number of new transportation accounts, which are to receive revenues through the issuance of GO bonds.

• The TCRF. The TCRF was created by Chapter 91, Statutes of 2000 (AB 2928, Torlakson), to allocate $4.9 billion to 141 specific transportation projects over a six-year period from a combination of General Fund and gasoline sales tax revenues. Originally, all of the $4.9 billion was to be transferred to the TCRF by 2005-06. However, due to the state’s fiscal condition in the early 2000s, much of this funding was loaned to the General Fund. As a result, later statutes extended the annual transfer of revenues to the TCRF through 2007-08 and specified repayment of prior-year loans. The repayment is to include revenues from the General Fund and tribal bonds, which have yet to be issued. By the end of the current year, the TCRF will have received about $3.1 billion. (This amount assumes tribal bonds are not issued in the current year to repay General Fund debt to the TCRF.) In addition to the final annual transfer of $602 million scheduled for 2007-08, the fund will likely receive payments on prior-year loans into the next decade.

• The TIF. The TIF allocates revenues from gasoline sales taxes by formula to various transportation purposes, including local street and road improvements, the State Transportation Improvement Program (STIP), State Transit Assistance (STA), and other transit purposes. In 2002, voters passed Proposition 42, which made the transfer of gasoline sales tax revenues to the TIF permanent. The amount is estimated at $1.4 billion for the current year. These funds have been loaned to the General Fund when the state faced fiscal difficulties in previous years. However, the 2006-07 Budget Act repaid most of this debt, and Proposition 1A (approved by voters in 2006) restricts the state’s ability to borrow these funds.

• Proposition 1B Bond Program. Proposition 1B authorizes the state to sell $20 billion in GO bonds. The bond act creates several new transportation programs and will fund a variety of purposes including highway and transit capital, facilities for goods movement, local road improvements, as well as safety and security enhancements. All funds in the Proposition 1B bond program are subject to appropriation by the Legislature. (For more detailed information about Proposition 1B, please see “Implementation of the Transportation Bond” following this write-up.)

Funding Condition Improves in 2006-07

2006-07 Budget Fully Funded Transportation, Repaid Debt. Generally speaking, 2006-07 has been a good year for transportation programs. The budget provided for the full transfer of Proposition 42 revenues ($1.4 billion) and prepaid $1.4 billion in debt to transportation programs. Additionally, as a result of projected high gasoline prices, the budget appropriated $668 million in spillover revenues to support public transit and various other transportation-related purposes.

Voter-Approved Ballot Measures Improve Funding Reliability, Increase Investment. The passage of Propositions 1A and 1B also improve the state’s transportation funding picture. Proposition 1A enhances the reliability of transportation funding, as it limits the conditions under which Proposition 42 gasoline sales tax revenues may be loaned to the General Fund. The measure also requires that about $750 million in outstanding loans be repaid to transportation within nine years. Proposition 1B increases the state’s investment in transportation by authorizing $20 billion in bonds, which will be spent on state and local transportation programs over multiple years. Together, these measures will help advance a number of projects that have been stalled in past years due to lack of funds, as well as deliver new projects.

2007-08 Budget Proposals

The 2007-08 Governor’s Budget includes a number of proposals related to transportation funding. These proposals are summarized in Figure 1 and described below.

Aggregate Funding for Major Transportation Programs to Increase. As shown in Figure 2, the Governor’s proposals would, in aggregate, increase funding for major transportation programs in 2007-08 relative to estimated funding in the current year. Increased spending is due mainly to budget-year expenditure of nearly $2.8 billion in Proposition 1B bond funds. However, due to the large prepayment of Proposition 42 loans in 2006-07, a few programs, including STIP and TCRP, would receive less funding in the budget year. Two transit programs, STA and High-Speed Rail, are to receive considerably less in 2007-08, due to policy proposals in the Governor’s budget.

Proposition 42 to Be Fully Funded in 2007-08. The budget proposes to transfer $1.5 billion of gasoline sales tax revenues to the TIF, the full amount required under Proposition 42. Of these funds, $602 million will be available to fund construction of TCRP projects, $698 million will be used for STIP projects, and $175 million will be allocated to PTA for public transit. Consistent with current law for the budget year, none of the revenues will be allocated for local streets and road purposes.

Partial Repayment of Proposition 42 Loan. Due to the state’s fiscal condition, the Proposition 42 transfer was suspended partially in 2003-04 and fully in 2004-05. By the end of 2006-07, there will be about $750 million in outstanding Proposition 42 loans that must be repaid by the General Fund. Proposition 1A requires that the amount be repaid, with interest, no later than June 30, 2016, with the minimum annual repayment of one-tenth the amount owed. The budget proposes to repay from the General Fund $83 million, about one-ninth of the outstanding amount in 2007-08.

Begin Using Proposition 1B Bond Funds. The Governor’s budget proposes to appropriate $7.7 billion in Proposition 1B bond money in 2007-08. Of the amount, about $2.8 billion would be expended in 2007-08. The budget also proposes that the Department of Transportation (Caltrans) expend $523 million in bond funds in the current year, mainly on projects in existing state programs and one new program created under Proposition 1B. Because all Proposition 1B bond funds are subject to legislative appropriation, any expenditure in the current year would require separate legislative action. (For a more detailed discussion of the Governor’s proposals for Proposition 1B funds, please see our write-up on “Appropriating Proposition 1B Funds.”)

Use Tribal Compact Revenues to Repay Debt, Instead of Bond Funds. Chapter 91, Statutes of 2004 (AB 687, Nuñez), provided that $100 million in annual tribal compact revenues would back the issuance of $1.2 billion in bond funds to repay certain transportation loans made to the General Fund. Due to pending lawsuits, the bonds will not be issued in the current year, and most likely not in 2007-08. Absent the bonds, the budget proposes to use $100 million of tribal compact revenue in each of the current year and the budget year to repay a portion of the loan.

Use Transportation Funds to Offset General Fund Expenditures. The budget proposes to use $1.1 billion in PTA funds to offset a number of General Fund expenditures, including:

• Use the first $340 million in spillover in 2007-08 to pay debt service on outstanding transportation bonds, including bonds issued under Propositions 108 and 116 (1990) for transit and Proposition 192 (1996) to retrofit highways and bridges for seismic safety. Debt service for these bonds has traditionally been paid from the General Fund.

• Use $771 million in PTA money to fund Home-to-School transportation ($627 million) and regional center transportation ($144 million) in 2007-08. Currently, Home-to-School transportation is paid from Proposition 98 school funding. The budget proposes the funding shift to PTA on a permanent basis and to “rebench” the Proposition 98 funding requirement downward by a like amount. (This has the effect of lowering the school funding guarantee beginning in the budget year.) The proposal to fund regional center transportation from PTA instead of the General Fund, however, would be a one-time shift in the budget year only.

Reduce STA Funding Level. The budget proposes to permanently discontinue the allocation of spillover revenue to STA. For 2007-08, the proposal would free up $309 million in PTA revenue for other proposed uses, including Home-to-School transportation, regional center transportation, and debt service on transportation bonds.

Additionally, the budget proposes to reduce 2007-08 STA by the “extra” amount appropriated in 2006-07. Specifically, the current-year budget appropriated $624 million in spillover funds and other PTA revenues to STA. The budget now indicates that because overly high gasoline prices were used to project spillover revenue, the amount provided in the 2006 budget is about $102 million more than current law requires. The Governor’s budget proposes to offset this extra allocation by reducing the 2007-08 funding level by a corresponding amount.

Fund Only Staff Support for High-Speed Rail Authority (HSRA). The budget proposes to indefinitely postpone the bond measure for the development of a statewide high-speed rail system (which is scheduled for the November 2008 ballot) in order to free up bonding capacity for other capital improvements proposed by the Governor. At the same time, the budget proposes $1.2 million from the PTA for staff support of HSRA, but no funding for any contracted services to develop a high-speed rail system.

Slim PTA Balance Could Evaporate; Expenditure Priorities Should Be Established

The budget curtails certain transit expenditures in 2007-08 in order to use $1.1 billion in Public Transportation Account (PTA) funds to offset General Fund expenditures, and leaves a small balance of $69 million at the end of the budget year. Because of the volatility of certain revenues, total available PTA funds could be significantly lower than projected, resulting in an account shortfall in 2007-08. Higher than assumed expenditures for transit projects could also bring about a shortfall in PTA.

We recommend that the Legislature establish priorities for PTA expenditures in 2007-08 to clarify what expenditures would not be made in the event of insufficient PTA funds. We further recommend the California Transportation Commission and the California Department of Transportation advise the Legislature at budget hearings on the transit capital projects that would be delayed or not funded as a result of the budget proposals.

Traditional Uses of PTA Funds. Under current law, PTA funds can only be used for transit and transportation planning purposes. Current law allocates one-half of all PTA revenues to STA to assist the operations of local and regional transit systems, mainly bus and rail. The remaining one-half of PTA revenues is used to support the state-funded intercity rail service contracted through Amtrak, fund Caltrans’ mass transportation program to oversee federal transit funding to local entities, support the development of high-speed rail, as well as provide funds for transit capital improvements in the STIP.

Budget Proposes to Use PTA Funds to Offset General Fund Expenditures. Instead of using PTA for purposes established in current law, the Governor’s budget proposes to use the bulk of the money in the account-$1.1 billion-to offset a number of General Fund expenditures, as discussed earlier. Figure 3 compares how PTA funds are used in the current and budget years, as proposed in the Governor’s budget. The proposals are intended to help the state’s fiscal condition by using the PTA funds in lieu of General Fund monies.

Budget Curtails Other Transportation Expenditures to Free Up PTA Funds. In order to fund the Governor’s expenditure proposals, and leave a PTA balance of $69 million at the end of 2007-08, the budget proposes to curtail other transportation expenditures funded by PTA. Specifically, the budget proposes to:

• Reduce STA Funding. The budget proposes to fund this program at $185 million in 2007-08. This is $410 million less than the level called for under current law (assuming the administration’s projections for spillover revenue). This reduced funding level results from the budget’s proposal to (1) permanently discontinue allocating one-half of spillover revenue to STA, and (2) reduce 2007-08 STA funding by $102 million to offset the amount the program received beyond the statutory requirement in the current year.

• Provide No Contract Funding for HSRA. The budget provides $1.2 million to support existing staff of HSRA, but includes no funding for contract services to develop the rail system.

• Defer PTA Allocations for Transit Projects. The 2006 budget appropriated $571 million in PTA money for local transit capital projects. These projects have been scheduled for funding in the 2006 STIP (covering the period from 2006-07 through 2010-11). The budget estimates that the California Transportation Commission (CTC) would allocate $362 million for various projects in the current year, with the remaining amount (about $210 million) to be allocated to projects in later years. The Governor’s budget assumes that no new allocations would be made in 2007-08 to these projects. This means that any transit projects requesting allocations in 2007-08, when they are ready to spend the funds (such as for construction) would not receive any PTA funding. Thus, absent other funds, these projects would be delayed.

Spillover Revenue Volatile-Lower Gasoline Prices Could Erase Account Balance. Spillover revenue is very volatile and can fluctuate greatly depending on gasoline prices and the economy. If everything else stays constant, higher-than-expected gasoline prices would generate additional spillover. Conversely, lower-than-projected gasoline prices would result in lower spillover than projected in the budget. This has occurred in the current year. Specifically, the budget now estimates that STA funding for 2006-07 is too high-$102 million more than current law requires because overly high projected gasoline prices were used in the spillover projection when the 2006 budget was adopted last June.

The Governor’s budget assumes gasoline prices to average $2.87 per gallon (at the pump) for purposes of projecting PTA revenues for 2007-08. This would generate $617 million in spillover revenue. Since the budget was proposed in January, however, gasoline prices have been dropping. If the current trend continues, spillover revenue for 2007-08 would be substantially lower than the budget projects. We estimate that if gasoline prices were 5 percent lower than projected in the Governor’s budget (at $2.73 per gallon), everything else staying the same, spillover revenue into PTA would be about $100 million less than the budget projects for 2007-08. In that case, funding all of the Governor’s proposals would create a shortfall instead of leaving the account with a $69 million balance at the end of 2007-08.

Expenditures Could Be Higher; Adding to the Shortfall. Expenditures also could be higher than the budget projects due to higher-than-assumed expenditure of funds that have been allocated to transit capital projects. When CTC allocates funding to a transit capital project (such as to construct stations or rail tracks), the allocated amount is often expended (or liquidated) over several years. The rate of liquidation is mostly beyond the state’s control. Rather, it depends largely on how quickly a project is constructed. About $280 million in PTA funds allocated for transit capital projects in the current and prior years have not been liquidated. The budget anticipates that $100 million or so would be liquidated in 2007-08, leaving $180 million to be liquidated in subsequent years. However, if projects are constructed sooner than the budget assumes, the amount of expenditure (liquidation) would be higher. For example, if expenditures are $70 million higher than assumed in the budget, a shortfall would result in the account in 2007-08.

Establish Priorities for PTA Expenditures. The Governor’s budget does not indicate the priorities of its proposed PTA expenditures. If a shortfall occurs, it is not known what expenditures should have funding priority, and what projects or programs should be left unfunded. Accordingly, we recommend that the Legislature establish clear expenditure priorities for PTA funds in the budget to guide the use of these monies in the event that revenues fall below projections or expenditures exceed the forecast.

Administration Should Report on How Projects Would Otherwise Be Funded. As noted earlier, the budget assumes that $210 million of transit capital projects scheduled for funding in the 2006 STIP would not receive PTA allocations in 2007-08. At the same time, the Governor’s budget is proposing to expend $600 million in Proposition 1B funding for transit capital. It is not clear whether the administration proposes to substitute bond funds for PTA funding for these projects. So that the Legislature is informed on the impact of the Governor’s budget proposals on these transit capital improvements, we recommend that CTC and Caltrans advise the Legislature during budget hearings on (1) the projects that would not be allocated PTA funds in 2007-08, and (2) the impact, including the extent of delay, on these projects. The administration should also advise the Legislature on whether it intends to substitute Proposition 1B bond funds for PTA funds for the $210 million of transit capital projects scheduled for funding in the 2006 STIP.

Home-to-School Transportation Proposal Requires Substantial Spillover

The administration’s proposal to fund Home-to-School transportation from the Public Transportation Account, rather than the General Fund, raises significant issues for the Legislature regarding the impact on transit capital projects and the financing of K-12 education.

Shift Proposal Raises Significant Issues. The administration’s proposal to fund Home-to-School transportation using PTA funds on an ongoing basis raises significant issues for the transportation program. Specifically, the proposal would divert $627 million annually to support Home-to-School transportation, leaving little, if any, funding for transit capital improvements.

Funding Home-to-School Transportation Requires Substantial Spillover. Meeting the PTA spending priorities proposed in the Governor’s budget beyond the budget year would require substantial spillover revenue into the PTA annually, in addition to the account’s other revenue sources. Specifically, to keep the PTA in balance, the account would require about $320 million in spillover revenue each year, over and above revenue from other sources. This amount would be needed to fund on an ongoing basis $627 million in Home-to-School transportation, provide support for STA (at the level proposed by the Governor’s budget, which is allocating no spillover to the program), and sustain the current level of intercity rail service. With this level of spillover revenue, there would be no PTA funds available for transit capital projects. Furthermore, after 2007-08, any liquidation of outstanding allocations (funding commitments) that have previously been made to transit capital projects would have to be paid from non-PTA funds. Given the historical volatility of spillover, it is highly unlikely that the necessary amount of funds would be generated on an annual basis.

Proposal Raises Other K-12 Education Issues. Moreover, while the Home-to-School transportation program appears to meet the eligibility requirements for PTA funding, the administration’s proposal raises legal and programmatic issues in K-12 education. (Please see the “Home-to-School Transportation” section of the “K-12 Education” chapter for our discussion and recommendations concerning these issues.)

Reduce PTA Volatility; Increase STA Funding Predictability

In order to simplify the state’s transportation funding structure, we recommend the enactment of legislation to eliminate the “spillover” mechanism for generating revenue into the Public Transportation Account (PTA) beginning in 2008-09. This would also reduce the volatility in the PTA. While eliminating the spillover would result in less funding for STA in some years, it would increase the predictability and stability of annual program funding. Moreover, additional funds could become available for broader transportation uses.

Spillover: Anachronistic and Arcane Formula. The spillover funding formula was created as part of the Transportation Development Act (TDA) in 1971. The TDA reduced the state sales tax rate at the time by one-quarter percent, and reimposed that one-quarter percent as local sales tax, with revenues dedicated to local transit purposes. To offset the loss of state General Fund revenue resulting from the tax rate reduction, the state sales tax was extended to include gasoline. The law also provided that after offsetting the General Fund loss, any additional revenue-the spillover-would be deposited in what is now PTA, to be used for transit purposes. At that time, the spillover was the only source of state assistance to transit operators.

Between 1971 and 2000, the PTA funding base has been expanded to include sales tax on diesel fuel. Additionally, statute specifically designates revenues generated by the sales tax on 9 cents of the per gallon gasoline excise tax (as a result of the passage of Proposition 111 in 1990) to PTA.

Under the spillover formula, if there is no excess gasoline sales tax revenue after offsetting the General Fund loss, there would be no spillover for transportation. Generally, this occurs when gasoline prices are relatively low and the economy is robust and sales of all other goods are high. Conversely, when gasoline prices are high in a weak economy, spillover revenue is significant. Thus, spillover revenue is very volatile and can fluctuate greatly from year to year. For instance, between 1973-74 and 1985-86, annual spillover fluctuated from less than $2 million to $159 million. As Figure 4 shows, for 12 of the 15 years after that (through 2000-01) no spillover revenue was generated. Figure 4 also shows that spillover revenue has not always been deposited into the PTA. For instance, in 2003-04 through 2005-06, spillover revenue was retained in the General Fund as well as used to pay prior transportation loans. In the current year, a portion of spillover revenue was used for the seismic retrofit of the Bay Bridge and to help repay Proposition 42 loans. However, because of the expanded fund sources, PTA received steady revenues each year from diesel sales tax and the Proposition 111 portion of gasoline sales tax for transit.

Proposition 42 Use of Gasoline Sales Tax Revenues Renders Spillover Mechanism Unnecessary. Figure 5 shows how revenues from the state sales tax on gasoline were distributed before the passage of Proposition 42, and the current distribution under Proposition 42. As the figure shows, prior to the passage of Proposition 42, most of the state gasoline sales tax revenues accrued to the General Fund. Specifically, of the total state gasoline sales tax revenue, only the Proposition 111 portion and spillover revenue were used for transportation. The remainder was deposited in the General Fund for other purposes. Since 2002, this remainder amount has been dedicated to transportation as well, pursuant to Proposition 42. Thus, all state gasoline sales tax revenues are dedicated to transportation, as shown in Figure 5. As a result, for purposes of determining the state’s total level of transportation funding from gasoline sales tax, it is no longer necessary to estimate the spillover revenue that would be available for transportation versus the amount of gasoline sales tax revenue that would be paid to the General Fund.

Eliminate Spillover to Streamline Funding Structure; Reduce PTA Volatility. To streamline the state’s transportation funding structure, we recommend the enactment of legislation to eliminate the spillover formula. This would not alter the amount of total state funding for transportation. Instead, the issue is how to allocate revenue among various transportation uses. In contrast, the Governor’s proposal would retain the spillover formula, but change the allocation of spillover revenue to fund expenditures that currently are paid from the General Fund.

There are a number of advantages to eliminating the spillover formula. First, it increases the stability and predictability of PTA revenues, because they will be based on diesel sales tax and Proposition 111 gasoline sales tax only (in addition to the Proposition 42 transfer), which are relatively stable sources. In turn, the funding level for STA would also be more stable.

Second, most of the gasoline sales tax revenue would be available for broader transportation uses. Under the Proposition 42 allocation formula, beginning in 2008-09, 40 percent of gasoline sales tax revenues in the TIF would go to fund STIP projects including highways and transit projects, 40 percent would be allocated to local entities for local streets and road improvements, and 20 percent would accrue to PTA (with one-half of the revenue allocated to STA).

Third, and maybe most important, eliminating spillover would ensure that all gasoline sales tax revenue be used for transportation, in keeping with voters’ intent in passing Proposition 42.

There are a couple of disadvantages to eliminating spillover, however. First, in years where spillover would otherwise be positive, PTA and STA would receive less revenue than under current law. However, as we discuss in the STA write-up (Item 2640), we forecast that beginning in 2008-09, STA would receive substantial amounts-more than twice the average in past years-even if the program receives no spillover revenue.

While eliminating spillover would reduce volatility in PTA and STA, it would take away a source of funding that the administration and Legislature may use, as they have in recent years, to aid the General Fund. If such need arises in the future, Proposition 1A, passed by voters in November 2006, allows the state to borrow Proposition 42 transportation funds to help the state’s fiscal condition, as long as specified conditions are met.

On balance, we think eliminating the spillover mechanism is preferable in that it simplifies the state’s transportation funding structure. Any future need to use gasoline sales tax revenues to help the state’s fiscal condition could still be achieved under the provisions of Proposition 1A.

If Tribal Bonds Not Issued, Repayments to Transportation Would Span Far Into Future

Due to pending litigation, the Governor’s budget proposes to use tribal compact revenues to repay transportation loans in 2006-07 and 2007-08, rather than bond funds. This would provide almost $200 million for highway rehabilitation over the two years. However, based on current estimates, if bonds are not issued, it would take until 2016-17 to repay the loans with tribal compact revenues as they become available. The impact on transportation projects funded by these monies is unknown.

To aid the state’s fiscal condition, a total of $1.4 billion was loaned from the TCRF to the General Fund in 2001-02 and 2002-03. Of that amount, $183 million was repaid in 2004-05. Under Chapter 91, Statutes of 2004 (AB 687, Nuñez), the remaining $1.2 billion would be repaid from bonds backed by certain tribal compact revenues. These compact revenues will be paid to the state over 18 years (through 2022-23), at about $100 million a year.

Pending Lawsuits Make Bonds Uncertain, Compact Revenues Used to Repay Debt. Due to pending lawsuits, the state has not yet issued tribal bonds and probably will not be able to do so in the near future. In 2005-06, because of uncertainty regarding the timing of bond issuance, the state used the first $151 million of tribal compact revenues to repay a portion of the transportation debt. The Governor’s budget proposes to similarly use $200 million in compact revenues received in 2006-07 and 2007-08 to repay transportation loans. If these proposals are adopted, $871 million in transportation debt would remain.

If the state could issue tribal bonds in the near future, this would provide upfront capital to repay transportation loans and advance projects. However, beyond the uncertainty regarding the timing of bond issuance, there is also uncertainty over the amount that could be generated by tribal bonds. Specifically, the State Treasurer indicated in late 2004 that bond proceeds would total only about $800 million, far short of the $1.2 billion originally anticipated because of risks associated with the bonds. As the stream of income to back the bonds declines due to compact revenues being used to pay back loans on an ongoing basis, the amount of bonds that could be issued would be less. Thus, it is possible the tribal bonds could not generate sufficient capital to repay the entire transportation debt.

Using Existing Revenues Provides Certainty, but Stretches Repayment Far Into Future. Using tribal compact revenues to repay transportation debt as these revenues become available each year provides certainty of a repayment schedule and amount. However, this stretches repayment far into the future, making some recipients wait another ten years to receive funding. The order in which accounts are to be repaid is directed by Chapter 56, Statutes of 2006 (SB 1132, Committee on Budget and Fiscal Review). Figure 6 shows the repayment schedule under Chapter 56, assuming that compact revenues, rather than bonds, are used to repay transportation loans.

Effect of Delayed Repayment on Project Delivery Unknown. As Figure 6 shows, stretching repayment through 2016-17 would likely be most detrimental for TCRF, which will receive funds in the later years. It is uncertain precisely what effect this repayment schedule would have on TCRP projects. To the extent that some projects are behind schedule due to reasons other than the availability of state funds, the effect of this delayed repayment may be fairly minor. However, if projects are ready to go, this repayment schedule could be detrimental to project delivery. (Please see further discussion of this issue under “Department of Transportation, Item 2660,” in this chapter.)

Maintenance and Rehabilitation Needs Outpacing Available Funds

As the state highway system ages, the costs to maintain and rehabilitate state highway miles are increasing. While the Governor’s budget proposes more funding for highway maintenance and rehabilitation in 2007-08, it does not address the long-term issue that needs are growing faster than the revenues which pay for these activities. We recommend actions to ensure sufficient revenues are available to address long-term maintenance and rehabilitation needs.

While travel on the state’s highway network continues to increase, many of California’s highways have surpassed their design life. As a result, maintenance and rehabilitation costs have grown considerably in recent years. The Governor’s budget includes some proposals to address highway maintenance and rehabilitation needs. For example, the budget proposes to use $141 million in Proposition 1B funds on State Highway Operation and Protection Program (SHOPP) projects in the current year and $403 million on SHOPP projects in the budget year. It also proposes to permanently augment funding for pavement maintenance by $85 million and provide $9.3 million more for pavement maintenance materials costs.

While these proposals provide some additional funding for highway maintenance and rehabilitation, they do not address the long-term issue that maintenance and rehabilitation needs are growing faster than the revenues which pay for them. In its 2006 annual report, CTC projects that annual gas tax and weight fee revenues are insufficient to address all of the state’s highway maintenance and rehabilitation needs. Over the next ten years, the state would have to spend about $2 billion more per year to address all of these needs.

Existing Gas Tax Inadequate to Cover Maintenance and Rehabilitation Costs. Growing maintenance and rehabilitation demands resulting from the state’s aging highway system consume increasing portions of SHA revenues (primarily gas tax and weight fees), which traditionally have been the state’s primary source to fund capacity expansion on highways. Gas tax revenues have not increased enough in recent years to keep pace with escalating maintenance and rehabilitation costs because:

• Gas Tax Has Not Increased in Over a Decade. The current state gas tax rate (18 cents per gallon) has been in place since 1994. Since then, inflation has eroded the value of per gallon gas tax revenues by 29 percent.

• Eroding Revenues. As shown in Figure 7, between 1991 and 2006, travel on California’s roads increased by an estimated 35 percent. Meanwhile, gas tax revenues (adjusted for inflation) have not increased. As a result, the revenue generated per vehicle-mile traveled declined by more than 20 percent over the period.

The failure of gas tax revenues to keep pace with growth in maintenance and rehabilitation costs is particularly troubling since the SHA is the sole source of funding for highway maintenance. Federal dollars may be used to fund highway rehabilitation. However, even with the addition of federal monies, the state is only able to fund about one-half of its annual rehabilitation needs.

Funding Highway Maintenance and Rehabilitation Over the Long Haul. In deciding how to adequately fund highway maintenance and rehabilitation needs, we recommend that the Legislature take the following actions to ensure long-term funding:

• Raise the Gas Tax and Index for Inflation. Because the gas tax has not been increased in 13 years, the per gallon value of the tax has declined by 29 percent. This means that the purchasing power of the 18 cent per gallon rate established in 1994 has been reduced to 13 cents per gallon (adjusted for inflation). As previously mentioned, CTC estimates that current gas tax and weight fee revenues are no longer sufficient to address the state’s maintenance and rehabilitation costs. In order to address this shortfall, we recommend that the Legislature raise the gas tax to a level that would adequately fund current maintenance and rehabilitation needs. We estimate that the current rate would need to be increased by about 10 cents per gallon. We further recommend that the gas tax be indexed to inflation to prevent further erosion of the revenue over time.

• Pave the Way for Mileage-Based Fees. Mileage-based fees offer an advantage over gas taxes in that these revenues are not eroded by increasing fuel economy or use of alternative fuels. Rather, the fees would closely match the extent motorists use highways and roads. There are privacy and technical obstacles to overcome in implementing a mileage-based approach to fund transportation. However, the State of Oregon is currently undertaking a pilot to implement mileage-based fees in Portland. Similarly, we recommend that the Legislature examine the policy and implementation issues that must be addressed if mileage-based fees were to be implemented in California.

Taking these actions would better match state revenues with long-term highway maintenance and rehabilitation needs.

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