Analysis of the 2007-08 Budget Bill: Transportation

Implementation of the Transportation Bond

In November 2006, voters approved Proposition 1B, which allows the state to sell $20 billion in general obligation (GO) bonds to fund transportation projects to relieve congestion, facilitate goods movement, improve air quality, and enhance the safety and security of the transportation system. These bonds provide a major one-time infusion of state funds into the transportation system to be spent over multiple years. However, in order to achieve their anticipated benefits, bond funds must deliver effective projects in a timely manner. In this piece, we review the Governor’s proposals for bond implementation and recommend measures-statutory and administrative-to ensure effective implementation of the bond program.

Background

In recent years, California has spent about $20 billion annually in state, federal, and local funds to maintain, operate, and improve its multimodal transportation network. These expenditures have been primarily funded on a pay-as-you-go basis from taxes and user fees.

Primary State Fund Sources. There are two primary state revenue sources that have funded transportation programs. First, the state’s 18 cent per gallon excise tax on gasoline and diesel fuel (often referred to as the gas tax) generates roughly $3.4 billion annually. Second, revenues from the state sales tax on gasoline and diesel fuel provide about $2 billion a year. Additionally, the state imposes weight fees on commercial trucks, which generate roughly $950 million a year. Generally, these revenues must be used for specific transportation purposes, including improvements to highways, streets and roads, passenger rail, and transit systems.

Bonds Have Played a Limited Role in State Transportation Funding. Since 1990 (and prior to Proposition 1B), voters have approved $5 billion in state GO bonds to fund transportation­-less than 5 percent of the total investment in transportation over that period. These bond proceeds have been dedicated to passenger rail and transit improvements, as well as retrofit of highways and bridges for earthquake safety. As of November 2006, only $350 million of these bonds remain unissued and most of these funds are committed to specific projects.

Federal and Local Funds. In addition to state funds, California’s transportation system receives federal and local money. The state receives roughly $4.6 billion a year in federal transportation funds. Collectively, local governments invest about $9.5 billion a year into California’s highways, streets and roads, and transit systems. Local governments have also issued bonds backed mainly by local sales tax revenues to fund transportation projects.

Major Provisions of Proposition 1B

Allocation of Funds. Proposition 1B, the Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, approved by voters at the November 2006 election, provides $20 billion in GO bond funds for projects to relieve congestion, facilitate the movement of goods, improve air quality, and enhance the safety and security of the transportation system. Figure 1 details the purposes for which the bond money can be used. The bonds will provide a major one-time infusion of state funds into the transportation system to be spent over multiple years.

Bond Act Creates Several New Programs, Involves Many Implementing Entities. As shown in Figure 2, $5.5 billion (28 percent) of the $20 billion in Proposition 1B funding are directed to existing state and local transportation programs, while the majority of the bond revenues-$14 billion (72 percent)-will be used to create new programs. Some of these new programs-including Trade Corridors, Port Security, and Transit Security-address goods movement and security issues that have not historically been a focus of state transportation funding.

The monies for this myriad of programs, in turn, are to be administered by a variety of state and local entities, as highlighted in Figure 2. State entities include primarily the California Transportation Commission (CTC) and the California Department of Transportation (Caltrans). For funds provided directly to locals, recipients include cities and counties, as well as transit authorities, ports, harbors, and ferry terminal operators.

All Funds to Be Appropriated by Legislature. Proposition 1B specifies that all bond funds are subject to appropriation by the Legislature, either through the annual budget process or through other legislation before becoming available to a state or local entity for expenditure. Many Proposition 1B programs do not require oversight measures (such as reports or audits) to verify how bond funds are actually spent.

Some Programs Allow for Further Statutory Direction. With the exception of $1 billion in Air Quality funds, all monies provided in Proposition 1B could be appropriated and put to use without additional implementing statute. However, the bond act explicitly allows the Legislature to provide additional conditions and criteria through statute to five new programs created by the measure, involving $5.1 billion. These programs include Trade Corridors, Transit Security, Air Quality, State-Local Partnership (SLP) grants, and Port Security.

Governor’s Proposal

Proposed Expenditures and New Positions. The Governor’s budget proposes appropriating $7.7 billion in Proposition 1B money in 2007-08, with about $2.8 billion of this being expended in the budget year, as shown in Figure 3. This includes:

• About $1.5 billion to be expended by Caltrans or provided as grants for various highway, bridge, transit, and grade crossing projects.

• $600 million to be expended by transit operators on transit capital improvements.

• $600 million to be expended by local governments on street and road improvements.

• $97 million to be expended by the Air Resources Board on school bus retrofit and replacement.

Despite proposing significant expenditures in the budget year, the Governor’s budget provides almost no staffing to support the project development activities funded with the bonds. Caltrans advises us that additional personnel resources will be requested in the May Revision.

In addition, the Governor’s budget proposes expenditures of $523 million by Caltrans in the current year on projects mainly in the State Transportation Improvement Program (STIP), State Highway Operations and Protection Program (SHOPP), and newly created Corridor Mobility program. Because all Proposition 1B funds are subject to legislative appropriation, these expenditures would require separate legislative action.

Proposed Policy Changes. In addition to appropriations, the administration is also proposing to expand the oversight role for CTC in the implementation of Proposition 1B. Specifically, the administration proposes that Local Transit funds be dispersed by formula to transit operators, as provided by Proposition 1B, but only after projects are approved by CTC. Moreover, the administration has adopted guidelines for the Highway 99 program, which channel funds through CTC rather than directly to Caltrans, as specified in the bond act.

Issues for Legislative Consideration

The infusion of bond funding is only a first step in improving California’s transportation landscape. In order to realize the full benefits of these funds, it is important that the projects funded are cost-effective in achieving desired results-including improved mobility, a more secure transportation system, and cleaner air. Moreover, these projects must be delivered in a timely manner. In this section, we highlight key challenges to achieving the goals of Proposition 1B and assess how well the Governor’s proposals address these challenges. Also, we recommend measures-statutory and administrative-to ensure that bond funds are used to deliver effective projects in a timely manner and that adequate oversight measures are in place. Our recommendations are summarized in Figure 4.

Determining Project Eligibility

The bond act varies in the level of detail it provides regarding project eligibility. For three programs totaling $3 billion-Air Quality, Transit Security, and SLP-the act provides little or no guidance as to the types of projects eligible for funding. While no expenditures from the Air Quality and Transit Security programs are proposed for 2007-08, the Governor’s budget shows $170 million in SLP grants to be awarded in the budget year. Before any bond funds are spent, the Legislature should provide eligibility guidelines statutorily to ensure that funds are used for projects that address state priorities. Below we present a general principle for determining project eligibility for all projects. We then discuss eligibility issues particular to two specific programs.

Limit Bond Funds to Projects With Long-Term Benefits. As a general principle, bond funds should be used only for capital improvements or activities that provide benefits over many years to taxpayers who finance the bonds. However, in the case of some Proposition 1B programs, the bond act does not prohibit funding activities that yield only short-term benefits. For example, $1 billion in Air Quality program monies are to be available for “strategies and public benefit projects” to reduce emissions related to goods movement. This language does not exclude short-term operational approaches to emissions reduction, even though the debt-service payments on the bond could outlast the activities they finance. To avoid this issue, we recommend the Legislature enact statute specifying that all Proposition 1B funds are available only for capital purchases or strategies that provide long-term benefits.

Decide Whether to Limit Transit Security Funds to Just Security-Oriented Investments. The bond act limits Transit Security dollars to capital projects, yet provides little additional guidance regarding project eligibility. Language directing the use of these funds is very open-ended-it allows these funds to be used either for transit projects that specifically address a security threat (for example, installing detection devices or security gates at train stations) or for projects that more generally increase a transit system’s capacity (such as adding vehicles to a transit fleet). Given this ambiguity, we recommend enacting statute that outlines more explicit eligibility requirements.

Structure SLP Grant Program to Spur New Local Investment. Proposition 1B provides $1 billion in SLP grants to match local funds for transportation projects over the next five years. The measure also allows the Legislature to add conditions and criteria to the program through statute. The CTC proposed guidelines that would provide funding to local jurisdictions that have adopted local sales tax measures or developer fees for transportation. These guidelines, however, do not set aside any of these funds to create incentives for new local revenues to be pursued in the future. In order to spur new local funding for transportation, we recommend that the Legislature adopt guidelines that would set aside a portion of SLP grants for cities and counties that establish new fees or tax measures for local transportation purposes.

Adopting Additional Evaluation Criteria for Project Selection

The bond act specifically authorizes the Legislature to adopt additional conditions and criteria for five new programs, involving $5.1 billion. These programs include Trade Corridors, Air Quality, Transit Security, SLP, and Port Security. Of these programs, the Governor’s budget proposes expenditures of $170 million in SLP grants and $185 million in Trade Corridors funds through 2007-08.

Of the five programs, the bond act provides evaluation criteria only for selecting Trade Corridors projects, but none for the other four programs. We recommend that the Legislature adopt project evaluation criteria for these new programs to ensure that bond funds are used efficiently and deliver effective projects. The following criteria could be applied across multiple Proposition 1B programs.

Require Measures of Cost-Effectiveness. This criterion focuses on the estimated benefit achieved per dollar spent on a project in order to ensure that bond funds consistently deliver the biggest bang for the buck. Depending on the program and its goals, the specific benefits to be measured will vary by program. For example, a measure to evaluate projects competing for Trade Corridors funds could include the volume of goods transported per dollar invested; whereas, the appropriate metric for Air Quality funds would be the level of emissions reduced for the amount spent on the project.

While cost-effectiveness is a useful criterion to evaluate projects competing for a number of Proposition 1B programs, it may not be the most appropriate to use in selecting projects for Transit Security and Port Security funds. This is because the particular benefits achieved by security-oriented projects (for example, lives saved from terrorist attacks) may be difficult to quantify.

Require Fund Leveraging Be Considered. Because the benefits of transportation investments are felt most at the local level, evaluating projects by their ability to tap into local, federal, and private dollars (so that state funds can be applied to more projects) makes sense. Currently, the bond measure requires fund leveraging in only some instances. These include Local Bridge funds that supplement available federal dollars, as well as SLP, Trade Corridors, and Grade Separation grants, which generally require a one-to-one match of nonstate funds. There are other programs, however, where leveraging should play a role in evaluating projects. In selecting Corridor Mobility projects, CTC indicates it will consider a project’s ability to leverage nonstate funds, particularly for large projects where matching funds are available.

In order to stretch bond funds as broadly as possible, we recommend the Legislature require projects be evaluated based on their ability to leverage nonstate funds. For example, statute should require consideration of applicants’ ability to leverage Transit Security and Port Security funds with federal grants or private dollars.

Admittedly, there may be cases where leveraging is less feasible. For example, projects located in rural areas may not be able to generate significant investment from local or private sources. To address such concerns, fund leveraging considerations should take into account a region’s ability to leverage funds.

Require Air Quality Impacts Be Considered for New Capacity Projects. Given that all of California’s major urban areas violate federal air emissions standards, project selection for Proposition 1B programs should consider a project’s impact on air quality. Proposition 1B addresses air quality in varying ways. Some programs, including Air Quality and School Bus Retrofit, are specifically targeted at reducing emissions. Language describing the Trade Corridors program lists emissions reduction as one consideration among many in evaluating projects for funding. The CTC’s proposed guidelines for the Corridor Mobility and SLP programs list air quality analysis as an optional element in project nominations.

So that entities, like CTC, that are charged with selecting projects can take emissions impacts into account, we recommend that the Legislature require analysis of air quality impacts to be included in all nominations where projects would add capacity to the highway and local road network. This would include projects funded by Trade Corridors and SLP grants.

Federal law requires many California regions to evaluate the emissions impact of transportation projects in their long-range plans. Thus, including air quality analysis as a part of the project nomination process should not impose significant additional analysis workload for these regions. For the few rural regions not subject to emissions reporting in their federal plans, these regions might be exempted from quantifying emissions impacts in project nominations.

Encouraging Timely Project Delivery

Projects must be completed and opened to users in a timely manner in order to offer any mobility, air quality, or safety benefits. Moreover, in an era of rising construction costs, delayed delivery often means increased construction costs, reducing the amount of improvements that can be achieved with available funding.

Establish Delivery Deadlines to Ensure Funds Do Not Linger. Generally, the bond act does not require that projects be constructed and opened to users by a specific date. The Corridor Mobility program is an exception-the bond act requires that these projects start construction by December 31, 2012. (If projects fall behind schedule, CTC is to remove funds.) The administration has adopted the same delivery timeline for Highway 99 funds. Setting timelines enables the Legislature to hold the administration and other fund recipients accountable for the delivery of projects. In other state transportation programs, notably the Traffic Congestion Relief Program, the absence of delivery deadlines has allowed funds to remain available indefinitely, even for stalled projects that show few signs of progress. To avoid repeating this situation with Proposition 1B funds, we recommend the enactment of legislation requiring the establishment of deadlines to begin project construction.

To ensure that adopted deadlines are reasonable on a program-by-program basis, the Legislature should direct CTC to specify project delivery deadlines for each program. For example, CTC could specify later deadlines for programs that fund large or complex projects requiring longer time frames and shorter time frames for programs where the delivery process is less involved.

Adopt Provisions to Remove Funds From Lagging Projects. In addition to setting delivery deadlines, the Legislature should enact statute that requires projects’ progress to be monitored and funds to be removed from those projects that are not advancing. The state already has a “use-it-or-lose-it” policy, established under Chapter 783, Statutes of 1999 (AB 1012, Torlakson), which allows CTC to redirect certain federal funds not expended by regions in a timely manner. Prior to the use-it-or-lose-it policy, regions had accumulated a $1.2 billion backlog of unused federal funds. This policy gives regions a strong incentive to expend federal funds in a reasonable time frame and enables the state to make sure funds do not go unused.

Beyond regional agencies, Caltrans has a less than perfect record in delivering projects on time and on budget. Thus, we recommend the Legislature require an entity, like CTC, to regularly check fund recipients’ progress in meeting major project milestones, such as plan approval, completion of environmental review, right-of-way certification, and advertising a project for construction. Admittedly, this approach creates additional oversight workload. But, more importantly, it holds fund recipients accountable for delivering projects in a timely manner and provides the opportunity to identify delays and redirect funds, as necessary, to alternative projects that can meet delivery goals.

The Legislature has a few options in deciding how to redirect funds once removed from a stalled project. One approach would be to transfer funds to the highest performing project that did not previously receive funding. This option maximizes the benefit of bond funds on a statewide basis. Another option would be to redirect funds to other projects in the same geographic region, so that regions are held harmless. This option does not maximize the benefit of bond funds at a statewide level, but ensures that a region maintains its level of investment even when a local project loses funding. How the Legislature redirects funds from stalled projects depends on whether project performance or regional equity is the primary consideration.

To ensure that funds can be removed from lagging projects and redirected to other projects that address state priorities, we recommend the enactment of legislation that (1) directs CTC to monitor project milestones and identify delays, (2) authorizes CTC to redirect funds away from lagging projects, and (3) provides guidance on how these funds should be redirected.

Ensuring Oversight Measures Are in Place

In many cases, the bond act does not call for specific program oversight through reports or audits, as shown in Figure 2. Given the large number of programs funded by Proposition 1B, the substantial amount of funding provided, as well as the number of entities charged to implement these programs, we recommend the Legislature adopt additional oversight measures to ensure that bond funds are used effectively.

Require Periodic Reports to Legislature. Current law requires CTC to report annually to the Legislature on funds it allocates to transportation programs and related policy issues. This report provides the Legislature with necessary information to monitor programs and take statutory action, as needed, to ensure funds are used appropriately. The CTC plans to include in future annual reports discussion of all Proposition 1B programs for which it will allocate funds. Under the bond act, this includes about one-half of the monies-Corridor Mobility, Trade Corridors, SLP grants, funds for STIP and SHOPP, as well as $100 million of the Grade Separation grants. If the Legislature concurs with the administration’s proposal that CTC allocate an additional $4.6 billion in bond monies, including funds for Highway 99 and Local Transit, these programs would also be included in CTC’s annual report.

However, even if the administration’s proposals are adopted, there would still be almost $5 billion in Proposition 1B funds that would not be included in CTC’s annual report because CTC does not allocate these funds. Though expenditures from some of these programs would be included in other miscellaneous reports, the information would be scattered, making it less conducive to oversight of the total bond program.

We think that having information on the status of all Proposition 1B programs in one place would facilitate legislative oversight. Accordingly, we recommend the enactment of legislation directing CTC to include discussion of all bond-funded programs in its annual report. Additionally, the Legislature should require fund recipients to provide CTC with information on all projects funded by Proposition 1B monies. This information should include each project’s annual expenditures and progress in meeting major milestones (including plan approval, completion of environmental review, right-of-way certification, and listing for construction), as well as explanation of any delays in the delivery process.

Hold Joint Legislative Hearings. Beyond requiring project specific information through annual reporting, we further recommend that the policy committees and budget subcommittees of the Legislature hold periodic joint hearings in which CTC, Caltrans, and other key implementing entities report on the use of bond funds and the timeliness of project delivery. This would provide the Legislature an opportunity to monitor the progress of the bond program in the aggregate, and assess whether the programs are being carried out effectively to meet the measure’s objectives.

Enhance CTC’s Oversight Capabilities. Given the size of the bond program and number of fund recipients, one central entity should provide ongoing oversight of all bond-funded activities. With its experience in overseeing transit and highway programs statewide, CTC is a logical choice to perform that oversight function. The Governor’s budget provides two positions to supplement CTC’s current staff of 16 personnel-years (PYs). However, depending on the role the Legislature decides CTC is to play, significant workload could be involved. We recommend that the Legislature take action to enhance the commission’s oversight capacity.

The Legislature has a few options in doing so. One option is to provide additional staff to CTC, beyond what is proposed in the Governor’s budget. An alternative is to provide CTC with the authority and flexibility to use consultant services to perform selected project evaluation and oversight functions, on an as-needed basis to supplement commission staff.

Identifying Personnel Resources to Deliver Projects

Caltrans will play a crucial role in delivering $12 billion in highway, bridge, and transit projects through several Proposition 1B programs. This represents a 33 percent increase in the value of total projects that Caltrans is currently working on. To deliver these projects in a timely manner, Caltrans will need additional personnel resources to plan and construct projects in 2007-08 and beyond. Ensuring that Caltrans has adequate capital outlay support (COS) resources-including both state staff and contracted services-will be essential to the timely delivery of many Proposition 1B projects.

Require Annual Update of Multiyear Personnel Resource Plan. Given the upsurge in workload, it is important that Caltrans inform the Legislature about its estimates of the future-year COS funding needs, as well as what portion of the delivery workload it will have to contract out given constraints in hiring state staff.

Supplemental report language accompanying the 2006-07 Budget Act requires Caltrans to develop, by May 1, 2007, a multiyear staffing plan that estimates the level of personnel resources Caltrans will need each year through 2010-11 for project development workload related to Proposition 1B. The report is also required to provide (1) the anticipated composition of these resources, in terms of the breakdown between state staff, cash overtime, and contracting out; (2) data on Caltrans’ recent experience in recruiting and retaining project delivery employees; and (3) actions the department will take to attract employees, cost-effectively train its new workforce, and minimize attrition rates.

The information in the May 2007 report will help the Legislature determine Caltrans’ COS resource requirements in 2007-08. We recommend the enactment of legislation requiring Caltrans to update this report annually, as the Proposition 1B program progresses. We further think that Caltrans should identify in the report administrative as well as statutory actions that can be taken to improve its capacity to efficiently deliver projects.

Authorize Additional Use of Contracted Resources as Necessary to Ensure Timely Project Delivery. In order to deliver the portfolio of bond-funded projects in a timely manner, Caltrans could require as many as 4,800 PY equivalents of additional resources beginning in 2007-08. Meeting this personnel requirement through state staff would mean an estimated 37 percent increase in the level of Caltrans staff currently working on COS activities.

It is virtually impossible that Caltrans could hire this level of state staff in the near term. In 2005-06, for example, Caltrans undertook an ambitious hiring effort for COS staff and was only able to hire a total of 1,040 PYs by the end of the year, an average of 87 new employees per month. Discussions with the department indicate that the 2005-06 hiring effort was likely as fast as the department can possibly employ new COS staff, given the available pool of qualified engineers, right-of-way agents, and environmental planners. Beyond hiring new state staff, Caltrans would have to locate facilities to house these workers. In addition, the department would have to provide extensive training in order for entry-level employees to perform many COS tasks. The department indicates that it has a two-year program to train new employees in the major areas of COS.

Contracted resources have traditionally played a relatively limited role in performing COS workload at Caltrans-about 10 percent of total COS personnel resources in recent years. Contracting out provides a means for Caltrans to perform project development workload that exceeds the capacity of its state staff to deliver. Accordingly, we recommend that the Legislature authorize and direct Caltrans to utilize a higher level of contracted resources than in prior years so that projects are not delayed.

Streamlining Measures to Improve Project Delivery

To further facilitate project delivery, the Legislature should authorize the use of design-build contracting and consider measures to streamline processes related to environmental documentation.

Authorize Design-Build Contracting. The design-build contracting method awards both the design and construction of a project to a single entity. The use of design-build to construct projects seeks to reduce project delivery times by integrating the design and construction processes. Under the federal transportation act (SAFETEA-LU), virtually any surface transportation project is eligible to be built using this method. Current state law, however, authorizes the use of design-build only for specific transportation projects (for example, I-405). Thus, Caltrans has little experience using this method to deliver projects. While there are potential advantages to using design-build, including the potential shortening of project delivery time, there are also potential pitfalls to avoid.

We recommend that the Legislature authorize a design-build pilot program similar to that proposed by AB 143 (Nuñez), in 2006 and SB 56 (Runner), in 2007. Both bills propose a demonstration program that allows Caltrans and regional agencies to deliver a set number of projects using design-build. In addition, these bills require that transportation agencies report on their experiences so that the state could use the information in deciding whether to pursue future design-build projects. The Governor’s budget summary indicates that the administration will propose design-build legislation in the 2007-08 session.

Consider Measures to Streamline Environmental Review. Environmental documentation is typically one of the longest phases of the delivery process. Because environmental review is subject to legal challenges, it is also the least predictable phase of the delivery process in terms of time requirements. Thus, measures to streamline the process and minimize uncertainty may offer significant benefits. One such example of environmental streamlining is Chapter 31, Statutes of 2006 (AB 1039, Nuñez). Among other actions, this statute allows Caltrans to take over federal environmental reporting duties on a pilot basis through January 1, 2009. The pilot may include bond-funded highway projects, as well as others receiving state funds. By allowing Caltrans to communicate directly with involved federal agencies, rather than doing so indirectly through the Federal Highway Administration, the pilot seeks to reduce project delivery times.

Caltrans estimates that per project time savings from the pilot will range from a few weeks on the simplest projects to over six months on large projects requiring a federal environmental impact report. If these estimates hold, the Legislature may want to extend the duration and scope of this pilot for several more years, subject to federal approval. We further recommend that the Legislature direct Caltrans to identify additional environmental streamlining measures to improve delivery times for specific bond-funded programs.

Appropriating the Bond Funds

All funds provided in the Proposition 1B bond program are subject to legislative appropriation before they are available for expenditure. The bond act specifically requires that $7.5 billion in funds from three programs-Corridor Mobility, Highway 99, and Trade Corridors-be appropriated in the annual budget bill. The remaining funds may be appropriated either through the budget or separate statute.

Appropriate All Funds Through Budget Bill. To provide the Legislature with a more comprehensive picture of year-to-year expenditures of Proposition 1B funds, we recommend that all Proposition 1B funds be appropriated in the annual budget, rather than through separate pieces of legislation. Doing so also allows the Legislature to see how these expenditures fit in with other state transportation programs, review program performance, and tie operational resources to the delivery of projects. (Please also see “Appropriating Proposition 1B Funds” following this piece.)

Conclusion

The passage of Proposition 1B provides the state with the opportunity to tackle major mobility, air quality, goods movement, and security issues that might not be addressed were it not for the infusion of bond funds. However, it is important that these investments be targeted to address the state’s highest priorities, and that available funds are used to deliver projects in a timely manner. In this piece, we have recommended actions that will help the state in meeting these goals.

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