Analysis of the 2008-09 Budget Bill: Transportation

Funding for Transportation Programs

In recent years, revenues from the state gas (excise) tax and truck weight fees have not kept pace with the growing demands for highway maintenance and rehabilitation. This leaves no state funding to expand the state’s highways from these revenue sources. The passage of Proposition 42 in 2002 permanently dedicated gasoline sales tax revenues to transportation uses, and provides essentially the only ongoing source of state funding to expand highways and local transit. Proposition 1B, passed in 2006, supplements this source by providing a one–time infusion of bond funds for transportation capital improvements.

However, actions taken as part of the 2007–08 budget package significantly changed the way the state uses some of its transit funds. In particular, a portion of gasoline sales tax revenues will be diverted from transit programs to pay for certain transportation–related activities which previously were supported by the General Fund. These changes will have not only a current–year, but also an ongoing, impact on funding for transportation programs. While the impact may be mitigated in the short run by the availability of bond funds, these changes will likely delay projects and will reduce overall transportation capital funding in the long run.

In the following write–up, we discuss the impact of the current–year actions on funding of the state’s transportation capital program, as well as the ongoing funding constraint the state faces relative to the maintenance and rehabilitation of its highway system.

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, the passage of Proposition 1B in November 2006 provides almost $20 billion in bond funds to support 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 changes in 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 Congestions 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, Proposition 1B created 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 provided 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 sources of repayment are to include revenues from the General Fund and bonds backed by tribal gambling revenue. By the end of the current year, the TCRF will have received about $3.8 billion. (This amount assumes the bonds are not issued in the current year to repay General Fund debt to the TCRF.) 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, Proposition 1A (approved by voters in 2006) restricts the state’s ability to borrow these funds.
• Proposition 1B Bond Program. Proposition 1B, the Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, authorizes the state to sell $20 billion in GO bonds to fund transportation projects to relieve congestion, facilitate goods movement, improve air quality, and enhance the safety and security of the state’s transportation system. All funds in the Proposition 1B program are subject to appropriation by the Legislature.

Current–Year Funding Actions

The 2007–08 budget provided a substantially higher level of expenditures on transportation programs relative to 2006–07 due primarily to the availability of funds authorized by Proposition 1B. As part of the budget package, actions were taken to significantly restructure the allocation of transit funding. Below, we discuss the impacts of these budget actions, as well as subsequent actions taken by the California Transportation Commission (CTC), on future funding for transportation programs.

Major 2007–08 Budget Actions

Fully Funded Proposition 42. The 2007–08 budget provided the full transfer of Proposition 42 revenues ($1.4 billion) to the TIF for transportation purposes. In addition, the budget included $83 million from spillover revenue to partially repay the outstanding amount owed from past Proposition 42 suspensions.

Began Implementation of Proposition 1B. The 2007–08 budget appropriated a total of $4.2 billion in Proposition 1B funds for various transportation programs. As part of the budget package, the Legislature also adopted trailer bill legislation that further defines and directs the implementation of Proposition 1B programs. (For a detailed discussion regarding the status of each these programs, please see “Implementation of Proposition 1B” following this write–up.)

Diverted $1.3 Billion in Transit Funds to Provide General Fund Relief for 2007–08. Because of the state’s fiscal condition, the 2007–08 budget included a number of actions that diverted $1.3 billion in transit funds to provide one–time General Fund relief. These actions include the following.

• Use $539 million from spillover revenue to reimburse the General Fund for transportation–related debt service.
• Use $409 million from PTA to reimburse the General Fund for transportation debt service incurred in past years.
• Use $83 million to partially repay a prior Proposition 42 loan.
• Provide $129 million to fund regional center transportation.
• Provide $99 million to cover a portion of the cost of home–to–school transportation.

(As we note in a later discussion, a recent court ruling rejected a portion of the current–year diversions.)

Significant Restructuring of Transit Funding Effective 2008–09. As shown in Figure 1, and discussed in greater detail below, the 2007–08 budget package also made numerous changes to the ongoing allocation of transit funding, including in particular, the allocation of spillover (gasoline sales tax) revenues. Major actions include (1) creating the Mass Transportation Fund (MTF) to provide a source of funds that can be used to reimburse the General Fund for certain transportation–related expenditures, and (2) changing the traditional 50/50 split of PTA revenues between STA and non–STA activities. The STA program provides funding assistance to transit systems. Non–STA activities include primarily intercity rail service, support of the Department of Transportation (Caltrans) mass transportation program, and transit capital improvements (funded through the STIP).

Figure 2 shows how transit funding will be allocated beginning in 2008–09 as a result of the restructuring action, compared to before the action was taken in 2007–08. Specifically, STA will no longer receive one–half of all PTA revenues, with the other one–half going to fund non–STA activities. Instead, STA would receive different shares of PTA revenues depending on the source of the revenues—whether they come from spillover, diesel sales tax, a portion of gasoline sales tax (referred to as the Proposition 111 gasoline sales tax) , or Proposition 42 (TIF) transfers. The remaining funds would be available for non–STA purposes.

In addition to restructuring the allocation of transit funds, the Legislature also directed that on an ongoing basis, regional center transportation services will be funded from PTA instead of the General Fund.

Impact of Current–Year Actions on Transit Funding and STIP

The redirection of Public Transportation Account funds in the current year and on an ongoing basis reduces the amount of funding available for transit projects programmed in the State Transportation Improvement Program (STIP). Because STIP projects for the next few years were programmed before the 2007–08 budget was adopted, the total amount of projects to be funded in 2007–08 through 2009–10 exceeds the funding now expected to be available by about $1 billion. Some of these projects will likely be delayed into later years, and will not receive funding until after 2009–10.

Budget Actions Reduced Funding for PTA Programs. Because PTA is the state’s primary funding source for transit, the current–year diversion of $1.3 billion and restructuring of the ongoing allocation of PTA revenues reduced the annual level of PTA money available to fund transit, including STA and non–STA purposes. Because some of the non–STA uses of transit funds (such as intercity rail services) are ongoing programs that cannot easily be scaled back, a drop in non–STA transit funds effectively results in a drop in funding for transit capital projects in STIP.

Below, we first discuss the impact of the current–year actions on transit capital funding. Specifically, we discuss (1) the magnitude of the reduction in transit capital funding, (2) how CTC responded to the drop in funding in the current year and the effect of that response, (3) what the reduction in transit capital funding means for the 2008 STIP, and (4) what alternative sources might be used to fund transit projects. We then discuss the impact on STA uses.

STIP Funding Reduced by About $1 Billion Through 2009–10; Likely Delay Projects. The PTA funds that are not allocated for STA purposes are used to fund, among other things, transit capital projects in STIP. The STIP is the state’s biennial program to fund capacity expansion projects on highway, rail, and transit systems. Projects are funded primarily from Proposition 42 (TIF) and PTA funds. (Proposition 1B also provided $2 billion to augment STIP funding.) The current–year budget actions reduced the amount available to fund projects already planned in the 2006 STIP, which extends from 2006–07 through 2010–11. In total, from 2007–08 through 2009–10, CTC estimates that there would be about $1 billion less in PTA funds for STIP projects planned for those years. This means that $1 billion worth of projects would need to be delayed, as they will have to await funding in later years. Alternatively, they would have to seek other sources of funding, such as local funds, or be deleted from funding altogether.

CTC Keeps Current–Year Projects on Track by Advancing Proposition 1B Funding. In order to deal with the funding drop and to minimize funding disruption to STIP projects in 2007–08, CTC decided to allow projects scheduled for funding in the current year to receive a funding allocation when they become ready. In the event current–year STIP funding runs out, CTC would advance the use of Proposition 1B funds, as authorized by the 2007–08 budget package, to provide a backfill.

CTC Action Delays Impact on Project Funding to 2008–09. The CTC decision will effectively delay the impact of the current–year shortfall in STIP project funding to 2008–09, thereby adding to the shortfall expected in the budget year. According to CTC staff, the commission will encourage regional transportation agencies to continue projects with local funds, where possible, in exchange for STIP funding to be provided in the future. However, not all regional transportation agencies have other sources of funds to keep projects on schedule and, therefore, some projects will be delayed beginning in 2008–09.

Future STIP Revenues Will Fund Backlog of Projects. The CTC is in the process of programming the 2008 STIP, covering 2008–09 through 2012–13. The last two years of the period are expected to provide about $2 billion in new funding (including Proposition 42 TIF money and PTA revenue) that has not yet been committed to specific projects. Up to one–half of this amount will likely be used to fund the backlog of projects that cannot be funded through 2009–10.

Transit Projects Could Be Shifted to Funds Otherwise Available for Highways… In recent years, the state has funded transit projects mainly with PTA. With the substantial reduction in PTA funding, however, continued funding of transit projects in STIP will likely need to come from other sources, namely Proposition 42 TIF money. Prior to the current–year budget actions, CTC had intended to use TIF dollars mostly for highway projects. Given the budget actions, CTC is allowing transit projects, in addition to highway projects, to receive allocations from TIF.

…Or Be Shifted to Proposition 1B Funding. Whether transit projects will continue to be funded in STIP will be the decision of regional transportation agencies, and may depend on the availability of other funds for transit projects, such as Proposition 1B Local Transit, STA, and local funds. Proposition 1B provides $3.6 billion for local transit capital. Some of this funding could be used to continue transit projects in STIP. Caltrans is already implementing a similar approach to fund intercity rail projects—by not seeking allocations in the STIP and instead, proposing to fund some of these projects out of the $275 million set aside by Proposition 1B for intercity rail projects.

Impact on STA. The STA program provides funding for assistance to transit systems. Funds for the program are mainly for operation support, such as to pay employees and purchase fuel, however, funds can also be used for capital improvements. The diversion of PTA revenues in the current year reduced funding for STA by about $290 million. Under current law, STA will receive $743 million in 2008–09, this is about $80 million less than would have been received prior to the funding changes made in the 2007–08 budget and related legislation. Beginning in 2008–09, STA will receive a greater share of Proposition 42 revenues to PTA on an ongoing basis. This is offset, however, by the reduction in the STA share of spillover revenues. Whether future funding levels for STA will be higher or lower under the new allocation formula ultimately will depend on how much spillover revenues are generated.

Court Rejected Part of Current–Year Diversions

A lawsuit brought against the state challenged the 2007–08 budget package’s use of Public Transportation Account (PTA) revenues to provide General Fund relief. The court ruled in January 2008 that $409 million of the current–year use of PTA for past debt service was not legal.

In the fall of 2007, the California Transit Association filed a lawsuit against the state contesting the diversion of PTA revenues to General Fund relief. In January 2008, the court ruled that the transfer of $409 million from PTA to reimburse the General Fund for debt service costs incurred in years prior to 2007–08 was illegal. The state’s use of the remaining $779 million in transit funding that was contested in the lawsuit was upheld by the court.

Expansion of the Trade Corridor Improvement Fund (TCIF) Program Would Delay SHOPP

The California Transportation Commission plans to approve projects totaling $3 billion for the new Trade Corridor Improvement Fund program. This amount includes the $2 billion authorized for the program in Proposition 1B, as well as an additional $1 billion—including $500 million in assumed new revenue sources and $500 million redirected from delaying projects currently programmed in the State Highway Operation and Protection Program (SHOPP). We find that the proposed plan would effectively give otherwise lower–priority SHOPP projects higher priority for funding.

The CTC is responsible for administering the TCIF program, a new program established in the Proposition 1B bond act to fund projects that facilitate the movement of goods in the state. The bond act provides $2 billion for this program. In adopting the necessary guidelines for the program, CTC stated its plan to approve projects totaling $3 billion, based on the assumption that an additional $1 billion from non–Proposition 1B resources will also be available to support TCIF projects. The commission’s plan is based on its finding that the state’s goods movement needs far exceed the $2 billion authorized in Proposition 1B. The additional $1 billion would consist of (1) $500 million from new revenue sources (such as federal funds, user fees, and tolls) and (2) $500 million in SHA funds available for the State Highway Operation and Protection Program (SHOPP).

Redirecting $500 Million by Delaying Existing SHOPP Projects. As an ongoing program, SHOPP funds capital projects to improve the state highway system, including pavement rehabilitation and safety and operation enhancements. According to CTC staff, many of the projects already identified as possible candidates for TCIF funding could also be considered SHOPP projects. However, due to limited SHA and federal funds, such projects may not have been approved for SHOPP in the past years. The commission plans to give priority to goods movement projects when approving a new SHOPP, thus enabling some TCIF projects to be funded from a mix of bond funds, SHA, and federal funds. (A new four–year 2008 SHOPP is being developed by Caltrans to be approved by CTC later this year.)

Based on our review of the commission’s plan, we find that it would impact the availability of future SHOPP funding. For example, less funding would be available for other types of SHOPP projects—specifically, non–goods movement projects. Essentially, $500 million worth of projects (including support costs) currently programmed in SHOPP, which have not yet been funded, would need to be delayed in order to fund TCIF projects. Such a delay would only further constrain the limited resources projected for SHOPP in the next couple of years.

Already Not Enough Funding for SHOPP. According to CTC’s 2008 Fund Estimate, which projects the availability of future federal and state transportation funds, there will be about $600 million less available in 2008–09 and 2009–10 than assumed in the 2006 SHOPP. This change is primarily due to lower levels of federal and SHA funds projected to be available for SHOPP projects than initially assumed. In other words, for the next couple of years, there will not be enough funding to cover the costs of projects currently programmed in SHOPP. Thus, $600 million worth of SHOPP projects will need to be shifted to later years. This amount is in addition to the $500 million of SHOPP projects mentioned above that would have to be delayed in order to free up funds for TCIF projects, resulting in a combined total of about $1 billion worth of projects whose delivery would be pushed back. Moreover, as we discuss in more detail later in this write–up, the current SHOPP only funds a portion of the state’s overall highway rehabilitation needs. Thus, CTC’s plan for the TCIF program would effectively give otherwise much lower–priority SHOPP needs higher priority for funding. In addition, the plan would disproportionately impact regions in the state that do not necessarily have goods movement needs (some of the state’s rural regions, for example).

2008–09 Budget Proposals

Major Transportation Proposals

The 2008–09 Governor’s Budget includes a number of proposals related to transportation funding. These proposals are summarized in Figure 3 and described below.

Fully Fund Proposition 42 in 2008–09. The Governor’s budget proposes to transfer $1.5 billion of gasoline sales tax revenues to TIF, the amount required under Proposition 42. Of these funds, $594 million will be used for STIP projects, $594 million will be allocated for local streets and road purposes, and $297 million will be allocated to PTA for public transit.

Partially Repay 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 2007–08, there will be $670 million of 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 proposed budget includes $83 million in spillover revenue (in the MTF) to repay a portion of the outstanding amount in 2008–09.

Continue to Spend Proposition 1B Funds. The Governor’s budget proposes $4.3 billion in Proposition 1B expenditures in 2008–09 for various transportation programs. This amount includes the first–year expenditures for two new programs—TCIF and State–Local Partnership—created under Proposition 1B. (Please see further discussion relating to these two programs in the “Implementation of Proposition 1B” and the “Department of Transportation” write–ups later in this chapter.)

Use Tribal Gambling Revenues to Repay Debt, Instead of Bond Funds. Under current law, $1.2 billion in previous loans to TCRF are to be repaid using bonds backed by tribal gambling revenues. However, due to pending lawsuits, the bonds will not be issued in the current year, and most likely not in 2008–09. Absent the bonds, the budget proposes to use $100 million of tribal gambling revenue in 2008–09 to repay a portion of the loan. (We recommend, instead, that this revenue be deposited in the General Fund on a one–time basis in the “General Government” chapter of this Analysis.)

Fully Fund STA. The Governor‘s budget proposes to fully fund transit assistance according to current law. In 2008–09, this amounts to $743 million in STA funds to be allocated for transit operations or capital projects.

MTF to Provide $455 Million in General Fund Relief. As mentioned previously, MTF was created to receive one–half of the spillover revenues to fund expenditures previously paid from the General Fund beginning in 2008–09. The MTF’s share of spillover is estimated to be about $455 million for the budget year. Of this amount, the budget proposes to use $354 million to pay the debt service on transportation bonds and $83 million as a partial repayment on prior Proposition 42 loans.

Defer Transfer of Gas Tax Revenues to Cities and Counties. About one–third of the revenue from the state’s 18 cents per gallon gas tax is allocated to cities and counties on a monthly basis to plan, construct, and maintain local streets and roads. This amount is about $1.1 billion in the current year. The State Constitution allows gas tax revenues to be loaned to the General Fund for short–term cash flow purposes if the full amount is repaid within the same fiscal year, except that the repayment may be delayed up to 30 days after adoption of a state budget for the following fiscal year. As part of the special session on the budget, the Governor is proposing legislation to defer the gas tax subventions to cities and counties for the months of April through August 2008 and make these payments in September 2008 instead, in order to facilitate short–term cash flow for the General Fund. The administration estimates that this would result in a total deferral of about $500 million.

Aggregate Expenditures for Major Transportation Programs to Decrease

As shown in Figure 4, the Governor’s proposals would, in aggregate, reduce expenditures for major transportation programs in 2008–09 relative to estimated expenditures in the current year. (These amounts include estimated expenditures for capital outlay support or pre–construction activities.) The reduction in spending is primarily due to lower levels of budget–year expenditures for STIP, SHOPP and TCRP. For example, the budget includes a roughly $500 million reduction in total STIP expenditures (including Proposition 1B funds) from 2007–08 to 2008–09. This is because (1) the current–year level for STIP includes the expenditure of one–time funds related to a loan repayment and (2) the budget–year level reflects a reduction in PTA revenues, as discussed earlier in this write–up. As indicated in the figure, the proposed budget includes an increase in Proposition 1B expenditures.

Spending Will Focus on Proposition 1B Programs

Under the Governor’s proposed budget, a large portion of transportation expenditures will be on Proposition 1B programs. Although these programs may meet the state’s transportation needs in the short term, they do not address the needs on a long–term, ongoing basis.

For 2008–09, most transportation spending will be on programs authorized in Proposition 1B. As shown in Figure 4, about 40 percent (or $4.3 billion) of the proposed transportation program expenditures in the budget year will be on Proposition 1B programs. Thus, a large portion of the state’s capital improvement needs in transportation will be met in the budget year through one–time bond programs rather than through ongoing programs, which is in contrast to past practices. While the bond funds can meet the state’s transportation needs in the shortterm, they do not address these needs on a long–term, ongoing basis. Moreover, as we discuss in a later section of this write–up, the state’s highway rehabilitation and maintenance needs are growing faster than the revenues which have traditionally paid for them.

Delays in TCRP Funding Will Delay Some Projects

Due to the state’s fiscal condition in 2001–02 through 2004–05, a significant portion of the funding for the Traffic Congestion Relief Program was delayed or loaned to the General Fund. Repayment of the outstanding loans is likely to trickle in over the next nine years. This lengthy repayment schedule will delay projects that are ready to be funded. This is particularly true for large projects that require funding levels in excess of amounts available in any one year.

TCRP Funding Delayed, Loaned to General Fund. As mentioned previously, due to the state’s fiscal condition in 2001–02 through 2004–05, a significant portion of the funding for the TCRP was delayed and loaned to the General Fund. Current law extends funding for the TCRP through 2007–08 and establishes repayment of past loans. Through 2007–08 the TCRP will have received $3.8 billion.

Loan Repayments Will Trickle in Slowly. Outstanding loans to the TCRP currently total about $1.1 billion. This amount will be repaid in two ways, as shown in Figure 5. First, about $664 million will be repaid from the General Fund, under conditions set up in Proposition 1A. Proposition 1A requires that this amount be repaid by June 30, 2016, at a minimum annual rate of one–tenth the amount owed. The Governor’s budget proposes to repay $83 million in 2008–09 from MTF. Second, about $482 million is to be repaid from bonds backed by tribal gambling revenues. The Governor’s budget proposes that until bonds can be issued, TCRP would be repaid using annual tribal gambling revenues. However, as Figure 5 shows, TCRP will not receive any tribal revenues in 2008–09. This is because current law requires that the $100 million in anticipated revenues must be used first to repay an SHA loan made to the program in prior years.

Given the loan repayment time lines, and assuming no issuance of tribal bonds, funding for TCRP would stretch over the next nine years, and trickle in through 2016–17.

CTC to Allocate Projects Based on Annual Repayments. In view of the current funding time line for TCRP, CTC has decided to make funding allocations to projects based on the annual level of loan repayments to the program. Consequently, for 2008–09, CTC plans to allocate up to $83 million for TCRP projects. As a result, some projects that are ready to be funded in the budget year will be delayed. This is particularly true for large projects that require funding at a level in excess of the amount of tribal revenues anticipated in any one year.

PTA Requires Loan to Stay Solvent

The budget proposes a $60 million loan from the Traffic Congestion Relief Fund to the Public Tranportation Account (PTA) to keep the account solvent in the budget year. If actual revenues to PTA in 2008–09 are less than estimated, the account could require additional loans to stay solvent.

The diversion of PTA funds to help the General Fund in the current year is made possible in part by drawing down cash reserves in the account and delaying the payment of funding allocations made to transit capital projects in previous years. These actions combined will leave the account with a slim balance of about $26 million at the end of 2007–08.

For 2008–09, the budget assumes two actions in order to limit expenditures from the account. First, the budget expects that some past allocations made to projects (as much as $300 million) will continue to go unpaid until after 2008–09. The budget makes this assumption because projects typically take more than one year to complete, and cash outlays to pay for the cost of a project often stretch over multiple years. Second, the budget is proposing no PTA funding for transit projects programmed in STIP for 2008–09 (as discussed earlier). Even so, PTA still will not have sufficient resources to pay all projected expenditures. Budget–year expenditures include mainly STA ($743 million), intercity rail services ($106 million), and regional center transportation ($141 million). To keep PTA solvent the budget proposes a $60 million loan from the TCRF, to be repaid in 2011–12. With the loan, the account will end 2008–09 with a slim balance of $29 million. If actual revenues to PTA for 2008–09 are lower than estimated, this balance could disappear, and PTA may require additional loans to stay solvent.

TCRF Loan Will Not Affect TCRP Progress. The TCRF loan to the PTA proposed by the budget, however, is not likely to impact the allocation of funds to TCRP projects. This is because funds allocated to projects are not expended immediately. Instead, funds are typically drawn down over several years, and cash for the cost of the entire project would not be needed in the budget year. The scheduled repayment of these TCRF funds in 2011–12 should mitigate any impact on projects.

Maintenance and Rehabilitation Funding Continue to Shrink

The costs to maintain and rehabilitate the state highway system have grown considerably in recent years. At the same time, however, the revenues which traditionally pay for these costs have grown at a much slower pace, resulting in an underfunding of highway maintenance and rehabilitation needs. In order to address this long–term imbalance between needs and resources, we recommend actions to ensure that sufficient revenues are available in future years to meet the projected costs.

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. (Please see the text box below for a distinction between maintenance and rehabilitation activities.) However, the Governor’s budget does not include any proposals to increase expenditures on either preventive maintenance (for roadways, structures, and drainage systems) or highway rehabilitation projects. In fact, the proposed budget shows total expenditures (including Proposition 1B) on SHOPP projects to be almost $500 million less in 2008–09 than the estimated current–year expenditure level of about $3.6 billion (see Figure 4). In view of the above, the proposed budget does not address the long–term mismatch between maintenance and rehabilitation needs and the revenues to pay for them.

Maintenance and Rehabilitation Costs Continue to Increase

The 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. As outlined in both the 2007 Five–Year Maintenance Plan and the 2007 Ten–Year SHOPP Plan, this trend is projected to continue.

2007 Five–Year Maintenance Plan. Chapter 212, Statutes of 2004 (SB 1098, Committee on Budget and Fiscal Review), requires that Caltrans adopt biennially a five–year maintenance plan. This plan is to assess preventive maintenance needs on the highway system and recommend investments that would cost–effectively address these needs. The 2007 Five–Year Maintenance Plan recommends that the state increase its annual investment in preventive maintenance of pavement, structures (such as bridges and overpasses), and drainage (such as culverts) by $147 million in order to reduce the maintenance backlog. (In order to eliminate the identified backlog over a five–year period, the report estimated that maintenance funding would need to increase by $589 million each year.)

Of the recommended annual amount of $147 million, $85 million is for pavement maintenance contracts to eliminate the backlog of over 7,000 lane–miles in need of preventive maintenance over ten years. Additionally, $41 million is to reduce by one–half the number of structures in need of major maintenance—the plan estimates that about 20 percent of the state’s 12,500 bridges are in need of major maintenance. Lastly, the plan recommends an additional $21 million to maintain 355 culverts annually, which would reduce, but not eliminate, growth in the drainage maintenance backlog. While the enacted 2007–08 budget included the additional $85 million identified in the maintenance plan for pavement preservation, the budget did not fund the plan’s recommendation to increase the investment in structures and drainage maintenance by $62 million annually. For 2008–09, the Governor’s budget essentially proposes the same level of spending on preventive maintenance as in the current year.

2007 Ten–Year SHOPP Plan. State law requires Caltrans to prepare biennially a ten–year SHOPP plan. This plan is to assess rehabilitation needs on the highway system and recommend investments that would cost–effectively address these needs. Caltrans develops this plan by periodically inspecting the state highway system to identify areas in need of rehabilitation, safety, or operational improvements. In its 2007 Ten–Year SHOPP Plan, the department identified a total of $55 billion in project development and capital needs over the ten–year period from 2008–09 through 2017–18, which amount to $5.5 billion on an annual basis. However, the 2008 Fund Estimate (adopted by CTC) sets aside only about $2.1 billion for each of the next several years to support SHOPP projects, a gap of over $3 billion annually. Annual revenues from the existing gas tax and weight fees will not be sufficient to address the state’s identified rehabilitation needs over the period.

Existing Gas Tax Inadequate to Cover Projected Costs

In general, state gas tax revenues have not increased enough in recent years to keep pace with escalating maintenance and rehabilitation costs because:

• The Gas Tax Has Not Increased in Over a Decade. The current state gas tax of 18 cents per gallon has been in place since 1994. Since then, inflation has eroded the value of per gallon tax revenues by 28 percent, so that 18 cents is worth 13 cents today (in constant dollar terms) based on the California Consumer Price Index (CPI). A more targeted measure of inflation tied to the costs of highway construction projects could also be used to assess the current value of the state gas tax. For example, based on the Producer Price Index for Highway and Street Construction, the 18 cent gas tax is worth 11 cents today.
• Eroding Revenues. As shown in Figure 6, between 1991 and 2007, travel on California roads increased by 28 percent (see dashed line). Meanwhile, gas tax revenues (adjusted for inflation) have not increased (see light–solid line). As a result, revenue generated per vehicle–mile traveled declined by more than 20 percent over the period (dark–solid line). Given the significant increases in highway construction costs over the last several years, the Producer Price Index for Highway and Street Construction discussed above would likely show an even greater decline in gas tax revenues relative to vehicle–miles traveled.

Funding Highway Maintenance and Rehabilitation Over the Long Haul

In deciding how to adequately fund highway maintenance and rehabilitation needs, we propose several actions to ensure long–term funding. Specifically we recommend the Legislature (1) raise the state gas tax and index it for inflation, (2) consider taxing alternative fuels, and (3) explore mileage–based fees and additional toll roads.

Raise State Gas Tax and Index for Inflation. In order to address the shortfall between gas tax revenues and the state’s highway maintenance and rehabilitation costs, we recommend the Legislature raise the gas tax to a level that would adequately fund these costs. We estimate that the current rate of 18 cents per gallon would need to be increased by at least 10 cents per gallon. We further recommend that the state gas tax be indexed for inflation to prevent further erosion of revenue over time. At the federal level, the National Surface Transportation Policy and Revenue Study Commission (appointed by Congress in 2005, as part of the federal transportation act [SAFETEA–LU]) recently issued a report in which it recommended increasing the current federal gas tax of 18.4 cents per gallon by at least 25 cents over the next five years, and indexing it for inflation using either a broad measure (such as CPI) or a more targeted measure (such as the Producer Price Index for Highway and Street Construction). The basis for this recommendation is to provide additional funds to states for highway improvement projects (including rehabilitation), which would effectively reduce the level of increase needed in the state’s gas tax.

Consider Taxing Alternative Fuels. Currently, many alternative fuels (such as ethanol and natural gas) are taxed at a lower rate than gasoline and diesel fuel. Thus, if alternative fuels become a more prevalent energy source for transportation, the Legislature should consider taxing these fuels at a comparable rate to conventional motor fuels to ensure that revenues for uses like highway maintenance and rehabilitation do not decline. This is because a greater usage of energy–efficient vehicles would not necessarily reduce the number of vehicle miles driven on the state’s highways.

Explore Mileage–Based Fees and Additional Toll Roads. 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 to which 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 recently undertook a pilot program to implement mileage–based fees. A recent report on the Oregon pilot program generally found that a mileage–based fee concept can be feasible as an alternative revenue collection system for replacing the state’s gas tax. 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. In addition, as an interim step towards possible greater reliance on toll revenue, the Legislature could authorize additional toll projects on a pilot basis and direct an evaluation of toll roads, including their effect on low–income drivers.

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