Analysis of the 2008-09 Budget Bill: Transportation

Implementation of Proposition 1B

Proposition 1B, approved by voters in November 2006, allows the state to sell $20 billion in general obligation 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. In this write–up, we (1) review the implementation of Proposition 1B, (2) identify issues that could delay the delivery of projects, and (3) recommend steps that can be taken to ensure that projects are delivered in a timely manner.

Since 2005–06, California has spent about $20 billion annually in state, federal, and local funds to maintain, operate, and improve its multimodel transportation network. Although these expenditures have been traditionally funded on a pay–as–you–go basis from taxes and user fees, voters have approved state bonds on a limited basis to fund transportation. In November 2006, voters approved Proposition 1B (Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006), which provides $20 billion in general obligation (GO) bonds for transportation projects. These bonds provide a major one–time infusion of state funds into the transportation system to be spent over multiple years.

Major Provisions of Proposition 1B

Figure 1 details the purposes for which the Proposition 1B bond money can be used. As shown in the figure, the $20 billion in bond funds are designated to relieve congestion, facilitate the movement of goods, improve air quality and enhance the safety and security of the transportation system.

 The major provisions of Proposition 1B are as follows:

• Creates Several New Programs. While some of the Proposition 1B funding is directed to existing state and local transportation programs (such as the State Transportation Improvement Program [STIP] and the State Highway Operation and Protection Program [SHOPP]), almost three–fourths of the bond revenues will be used to create new programs. Some of these new programs will address goods movement and security issues that have not historically been a focus of transportation funding.
• Involves Many Implementing Agencies. The monies for the myriad of Proposition 1B programs, in turn, are to be administered by a variety of state agencies. The California Transportation Commission (CTC) and the California Department of Transportation (Caltrans) are responsible for implementing many of the programs.
• Requires Legislative Appropriation. 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. The bond act specifically requires that $7.5 billion in funds from three programs—Corridor Mobility Improvement Account (CMIA), Highway 99 Improvement, and Trade Corridor Improvement Fund (TCIF)—be appropriated in the annual budget bill.
• Allows for Further Statutory Direction. The bond act explicitly allows the Legislature to provide additional conditions and criteria through statute to five new programs created by the measure. These programs are TCIF, Transit Security, State–Local Partnership (SLP), and Port Security.

2007–08 Proposition 1B Appropriations

As shown in Figure 2, the 2007–08 budget appropriates a total of $4.2 billion in Proposition 1B funds for various transportation programs. Of this amount, 49 percent is for local assistance, 38 percent for capital outlay, and 13 percent for support (which primarily includes project development and management). For each program, the amount of funds appropriated in 2007–08 is less than the amount of funds authorized in Proposition 1B for the program. In other words, additional bond funds will need to be appropriated for all of the programs in subsequent years.

As part of the 2007–08 budget package, the Legislature also adopted trailer bill legislation—Chapter 181, Statutes of 2007 (SB 88, Committee on Budget and Fiscal Review), Chapter 314, Statutes of 2007 (AB 196, Committee on Budget), and Chapter 187, Statutes of 2007 (AB 201, Committee on Budget)—that further defines and directs the implementation of Proposition 1B. For example, the adopted legislation imposes various requirements on the appropriate administrative agencies (like CTC and Caltrans) relative to adopting program guidelines and reporting on how bond funds are actually spent.

Implementation of Proposition 1B to Date

For each Proposition 1B program, Figure 3 specifies the state entity that is responsible for administering the program. As indicated in the figure, Caltrans and CTC are responsible for administering many of the programs. Implementing agencies are generally responsible for (1) developing guidelines that specify the requirements of each program and the criteria for evaluating project nominations, (2) selecting specific projects for funding, and (3) allocating funds to specific projects.

In reviewing the administrative agencies’ efforts to implement each of the different programs, we find that (1) guideline adoption and project selection have generally been on schedule, (2) many projects are being funded with multiple fund sources, (3) CTC plans to expand the TCIF program by $1 billion, and (4) funding allocations for the Local Streets and Roads program have been unnecessarily slow.

Guideline Adoption and Project Selection Generally on Schedule

For each of the different Proposition 1B programs, Figure 3 also indicates whether the necessary guidelines for project eligibility and selection have been adopted and whether specific projects have been selected. In general, progress of a particular program has been influenced by statutory deadlines. For example, Proposition 1B required CTC to adopt guidelines for CMIA by December 1, 2006, and an initial program of projects by March 1, 2007. As indicated in the figure, both guidelines and projects have been approved for STIP, CMIA, and Highway 99 Improvement. In programming the Proposition 1B funds for STIP, CTC decided to also program small amounts of additional revenues from other STIP sources (such as the Public Transportation Account) that were not available when the 2006 STIP was adopted. Collectively, this is referred to as the 2006 STIP Augmentation, for which the commission adopted new program guidelines. The CTC also approved projects to receive the additional SHOPP funding, using existing program guidelines. Recently, CTC adopted guidelines for TCIF and plans to select projects for the program in April 2008.

To date, a total of 162 projects have been approved and are expected to receive bond funds in the next several years (see Figure 3). However, this is not to say that these are 162 distinct projects. This is because projects may be relying on funding from more than one Proposition 1B program. For example, a few CMIA projects were also approved by CTC to receive some of the additional funding made available through the STIP augmentation.

Projects Relying on Other Fund Sources

Bond Funds Will Support Mainly Construction Costs. In implementing its respective Proposition 1B programs, CTC gave priority to projects that it determined could be delivered in a timely manner. Specifically, the commission selected those projects that would be able to go to construction within a certain time frame. For example, the guidelines for CMIA required that projects must begin construction by December 31, 2012, which is also the deadline specified in the bond act. The Highway 99 Improvement program guidelines also stated that CTC would only fund projects that could begin construction by the end of 2012. In addition to these construction deadlines, the commission also specified that bond funds would primarily support construction costs. Thus, project sponsors had to find other revenue sources, such as federal funds, local funds, or other state funds, to fund the pre–construction activities, such as environmental review and right–of–way acquisition.

Many CMIA and Highway 99 Projects Are Also STIP Projects. Given the above requirements, as well as the sheer magnitude in terms of the total cost of individual projects, those projects with identifiable funds for pre–construction activities were at an advantage in the selection process. This is because CTC essentially used bond funds to speed up projects that were dependent on future STIP revenues for construction costs. Specifically, CTC decided to fund projects already programmed in the STIP—the state’s ongoing program for adding capacity to its transportation system—that also met the criteria of the particular Proposition 1B program. For example, more than one–half of the projects for CMIA are also STIP projects (non–Proposition 1B). Although some of the pre–construction activities for these projects have already begun, STIP funding would still need to be allocated in the next several years to finish getting all of them ready for construction, since the bond funds are primarily for construction purposes only. The current 2006 STIP also includes specific pre–construction activities that would eventually improve Highway 99.

CTC Plans to Expand Trade Corridor Improvement Program by $1 Billion

Proposition 1B established a new program, TCIF, to fund improvements along trade corridors with a high volume of freight movement, as well as authorized $2 billion in one–time funding to support the program. According to the bond act, the funds are not limited to projects on the state highway system. For example, TCIF can provide funding to projects that would improve the freight rail system, the capacity and efficiency of seaports, and airport ground access. Effectively, the TCIF program represents a change from the state’s traditional transportation funding program. Prior to Proposition 1B, the state had no transportation funding specifically dedicated to trade corridor mobility. Furthermore, projects such as freight rail improvements have not been traditionally funded by the state in the past.

In adopting the guidelines for the new TCIF program, CTC stated its intention to initially approve projects for a total of $3 billion, based on the assumption that $1 billion in additional resources will be provided to the program. Specifically, the commission anticipates the diversion of about $500 million from the State Highway Account (SHA) to TCIF. In addition, CTC also assumes the availability of $500 million from yet to be determined new revenue sources, such as federal funds, user fees, and tolls. According to CTC staff, the overall intent of the commission is to establish TCIF as an ongoing program, rather than a one–time bond program. (Please see the “Funding for Transportation Programs” write–up in the “Crosscutting Issues” section of this chapter for further discussion regarding the implications of these actions.)

Local Streets and Roads Allocations Unnecessarily Slow

The Proposition 1B Local Streets and Roads program allocates funds directly to cities and counties based on statutorily required formulas to enhance the capacity, safety, and operations of local streets and roads. This program is similar to the existing state program which provides a portion of the state gasoline tax revenues directly to cities and counties for street and road improvements. A key difference, however, is that gas tax subventions can be used for support or capital purposes, whereas bond funds are to be used only for capital projects that have a useful life long enough to be considered appropriate for bond funding. Additionally, bond–funded projects will be monitored regularly to ensure their timely delivery and completion.

Department of Finance to Review Project List. Statute requires that before a city or county can receive a Proposition 1B allocation, a list of projects expected to be funded with bond funds must be sent to the Department of Finance (DOF). The DOF then must report to the State Controller’s Office on a monthly basis those cities and counties that have submitted project lists so that allocations can be made. After the allocation of funds, cities and counties are required, upon expending funds, to submit documentation to DOF providing project details necessary to meet the accountability requirements described above.

No Funding Has Been Allocated to Cities and Counties. At the time of this analysis, none of the $950 million in Proposition 1B funds appropriated for the current year has been allocated for street and road purposes. This is in part because DOF has been slow in initiating the allocation process. It did not notify cities and counties of the amount of funds they are eligible for nor provide them with the necessary information on how to file their project lists until January 15, 2008. It is unclear why it took DOF five months after the adoption of the budget to roll out the program. In comparison, the Local Transit program, which is administered by Caltrans and requires a similar process, did not experience this type of delay. Furthermore, given the similarities between the Proposition 1B Local Streets and Roads program and the existing gas tax subvention program, the Legislature would have expected the allocation of funds to progress more quickly.

Governor’s 2008–09 Proposition 1B Proposals

The Governor’s budget proposes appropriating about $4.7 billion in Proposition 1B funds in 2008–09, as shown in Figure 4. This amount includes:

• About $3.3 billion to relieve congestion and make improvements on the state’s highways. Although the budget includes support funding to administer the local streets and roads program, it does not appropriate additional local assistance funds for the program. The budget assumes the current–year amount would not be fully expended for a couple of years, and thus, no additional funding would be needed in 2008–09.
• $423 million for local transit and intercity rail projects.
• $750 million to facilitate goods movement and improve air quality, including $500 million for the newly created TCIF program. (Please see the “Department of Transportation” write–up for a further discussion about the proposed funding for TCIF.)
• $246 million to enhance the safety and security of the state’s transportation system, including $160 million for transit and port security programs to be administered by the Office of Emergency Services.

Based on the above Proposition 1B appropriations proposed in the Governor’s 2008–09 budget, roughly one–half of the total $20 billion authorized in Proposition 1B would remain available to be appropriated in future years.

Issues for Legislative Consideration: Factors That May Slow Future Progress

The appropriation of bond funding, the adoption of program guidelines, and the selection of projects are only the first steps in ensuring that Proposition 1B projects are delivered in a timely manner. Timely delivery of bond–funded projects depends on other factors as well, such as the availability of funds anticipated from other sources. In this section, we highlight key challenges that may slow the future progress of these projects.

Other Funds Necessary for Delivery May Not Be Available

State Funds. State law requires CTC to adopt a biennial fund estimate that projects all federal and state transportation funds that would be available for expenditure over a five–year period. These funds include mainly revenues from state and federal excise taxes on motor fuels, sales tax on motor fuels, and truck weight fees. The fund estimate also projects the amount of funds to be committed to various purposes over the forecast period. Priority is given to highway maintenance and operations, local assistance, and SHOPP projects. Any remaining funds would be available for STIP projects. Based on the funding level identified in the fund estimate, CTC programs specific projects in the STIP over the five–year period, which essentially represents a commitment of state funding for these projects. For example, the 2006 STIP programmed projects from 2006–07 through 2010–11 based on the 2006 Fund Estimate.

In October 2007, CTC adopted the 2008 Fund Estimate for 2008–09 through 2012–13 (with 2007–08 included as a base year). The fund estimate projects that there would be less funding, totaling $820 million, available for STIP during the 2007–08 through 2010–11 period, relative to the 2006 Fund Estimate. In other words, the projection is that there will not be enough revenues available to fund the current STIP program. Since many of the CMIA and Highway 99 Improvement projects selected for Proposition 1B funds are also projects that rely on STIP funding for the pre–construction phases, a shortage in STIP funding could cause project sponsors (regional transportation agencies as well as Caltrans) to delay the delivery of these bond projects. Alternatively, they could decide to keep the bond projects on schedule and, thus, delay other nonbond projects. Delaying STIP projects, including those that are not receiving bond funds, into future years would effectively reduce the availability of funds in those years for new STIP projects—meaning those not currently programmed in the 2006 STIP.

Local Funds. In addition to state funds, local funds—mainly local sales tax revenues—are also being used to support the total cost of many of Proposition 1B projects. The leveraging of local funds is occurring, in part, because Proposition 1B requires at least a one–to–one match of nonstate funds for TCIF, SLP, and Grade Separation grants. In addition, in selecting CMIA projects, CTC considered a project’s ability to leverage local funds, particularly for large projects where matching funds are available. Similarly, some of the projects in the other bond programs are so large that they would not be able to move forward without the support of local funds. Thus, the delivery of certain bond projects could be delayed if local funds are not available at the levels initially planned.

Legislative Clarification Needed for Some Programs

In order to ensure that the SLP and Local Transit programs authorized in Proposition 1B move forward in the budget year, the state will need to clarify its expectations of these programs. The absence of such direction could further delay project delivery.

SLP Program Eligibility. Proposition 1B provides $1 billion in SLP grants to match local funds for transportation projects over a five–year period. The bond measure does not specify the types of projects eligible for funding. In adopting the 2007–08 budget, the Legislature chose to appropriate no funding for the SLP program, mainly because it wanted to further define the program in legislation. Although a few bills that seek to further define SLP have been considered during the current legislative session, none of them have been adopted.

For 2008–09, the Governor’s budget proposes $200 million in Proposition 1B funds for the SLP program. In accordance with the Legislature’s intent, we believe that legislation defining how the program would operate should be enacted before appropriating any bond funds for the program in the 2008–09 budget. According to CTC, it is waiting for legislative direction regarding the implementation of the SLP program before it develops and adopts the necessary guidelines.

Future Local Transit Allocations. Proposition 1B provides $3.6 billion for local transit capital projects such as the construction and expansion of rail and bus systems, and the acquisition of rolling stock (buses and rail cars). These funds are to be distributed to local transit agencies by formula based on population and fare revenues.

Chapter 181, Statutes of 2007 (SB 88, Committee on Budget and Fiscal Review) provided direction only for the allocation of the $600 million appropriated for 2007–08. Accordingly, Caltrans adopted guidelines for the program that only cover the current year. For 2008–09, the budget proposes an appropriation of $350 million, however it is not known how the amount will be allocated because the existing statutory formula may not apply to the budget–year funding. The “one–year only” allocation formula raises issues for project sponsors, as follows.

• Uncertain Allocation Process Makes Project Planning Difficult. Uncertainty about how funds will be allocated from year to year can hamper efforts by project sponsors to plan for projects. For instance, large projects that require funding over multiple years would be difficult to plan and fund without some knowledge of how future bond funding will be distributed from year to year, and how much funding a project sponsor could reasonably expect over several years. This uncertainty could lead to projects being proposed that might not be of the highest priority just so that the project would fit the available funding.
• Not Clear if Allocations Can Be “Saved Up.” The current–year allocation formula does not specify whether transit operators can “save up” their allocations from year to year in order to make large purchases, or if annual allocations will be lost if not used. If allocations cannot be banked, project sponsors may be unable to fund larger projects. Additionally, some small transit operators may receive such a small annual allocation that they may not be able to effectively use the funds if they cannot be saved up.

Caltrans Staffing Not on Track to Deliver Projects

Caltrans is responsible for the delivery of most highway and intercity rail projects funded by Proposition 1B. The department is also responsible for delivering SHOPP and STIP projects funded by nonbond sources (including SHA, Transportation Investment Fund, and federal funds). In order to ensure that Proposition 1B projects, as well as other non–Proposition 1B projects, will be delivered in a timely manner, Caltrans will need adequate personnel resources to plan and construct capital outlay projects. As we discussed in our January 2007 report, Implementing the 2006 Bond Package, before a capital outlay project can be constructed, Caltrans must first assess environmental impacts, acquire rights–of–way, and design and engineer the project. Caltrans is also responsible for overseeing the progress of project construction (including instances when others are performing the work on projects on the state highway system). Collectively, this type of work is typically referred to by the department as capital outlay support (COS).

In adopting the 2007–08 budget, the Legislature provided Caltrans $1.8 billion to fund 13,121 personnel–year equivalents (PYEs) in staff resources, including both state staff and contracted services, to design and engineer transportation projects. This level of resources was based on the department’s own workload estimates. As shown in Figure 5, about 5 percent (or 640 PYEs) of the total 13,121 budgeted PYEs are intended to specifically support certain Proposition 1B programs for which Caltrans is responsible for delivering and overseeing the projects.

Slow Progress in Hiring State Staff. In order for Caltrans to plan and construct all of the transportation projects—both Proposition 1B and non–Proposition 1B projects—it plans to work on in 2007–08, the department will need to hire roughly 700 PYEs in new state staff in the current year. At the time this analysis was prepared, Caltrans reported that it has hired 185 new COS staff in the first five months of the fiscal year (from July 1, 2007 through November 31, 2007). This amounts to an average of 37 PYEs per month. If the department maintains this current hiring rate, it will fill nearly 65 percent of the required 700 PYEs. This also assumes that the department will be able to contract out for project development services at the level originally planned, which is about 10 percent of COS personnel resources. Given Caltrans’ likely inability to hire all the necessary state staff, we believe that the delivery of projects will be delayed.

Recommendations

Based on our review of the implementation of the various Proposition 1B programs and our analysis of factors that could delay project delivery, we recommend below measures to ensure that bond funds are used to deliver effective projects in a timely manner. Specifically, we recommend the Legislature (1) establish SLP eligibility and selection guidelines, (2) determine an ongoing process for allocating future transit funds, (3) require Caltrans to provide a realistic staff–hiring plan, and (4) authorize design–build contracting for transportation projects.

Establish Eligibility and Selection Guidelines for SLP Program

Before appropriating funds for State–Local Partnership grants in 2008–09, we recommend the enactment of legislation to provide multiyear eligibility guidelines to ensure that the bond funds are used effectively in meeting the state’s priorities.

The Governor’s budget proposes $200 million for SLP in 2008–09. However, before any bond funds are spent on the program, the Legislature should ensure that eligibility guidelines are statutorily established to assure that funds are used for projects that address state priorities in the most efficient and effective manner. As discussed in our Analysis of the 2007–08 Budget Bill, we recommend the Legislature:

• Define Sources of Local Match. Proposition 1B requires a one–to–one match of local funds for the SLP program. However, the measure does not specify the types of fund sources that could be counted towards this match. The Legislature should define what local funds can be used as a match, which could include revenues from tolls, local sales tax measures, and developer fees.
• Require Fund Leveraging in Project Selection. Because the benefits of transportation investments are felt most at the local level, evaluating projects by their ability to tap into non–state dollars (so that state funds can be applied to more projects) makes sense. In order to stretch SLP funds, we recommend the Legislature require projects to be evaluated based on their ability to leverage local funds beyond the required one–to–one match.
• Structure Program to Spur New Local Investment. A primary source of local transportation funds is from existing local sales tax measures and transportation developer fees that have already been adopted by local jurisdictions. However, in order to spur new local funding for transportation, we propose that the Legislature adopt guidelines that would set aside a portion of the program funding for cities and counties that establish new fees or tax measures for local transportation projects. Alternatively, the Legislature could specify the term of the SLP program, as well as the annual total amount available for allocation, thus, giving local jurisdictions the incentive and time to develop and pass new local sales tax measures.
Require Consideration of Air Quality Impacts. Given that all of California’s major urban areas fail to meet federal air emissions standards, SLP project selection should consider a project’s impact on air quality. In order to enable CTC to take emissions impacts into account in selecting projects, we recommend 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.

In the “Department of Transportation” write–up in this chapter, we recommend the Legislature adopt budget bill language specifying that the availability of the proposed $200 million appropriation for the SLP program is contingent upon the enactment of legislation regarding the program’s eligibility guidelines.

Determine Ongoing Allocation Process for Transit Capital Program

We recommend the enactment of legislation that specifies an ongoing allocation formula for the local transit program that is applicable on a multiyear basis rather than adopting a formula one year at a time. We also recommend allowing project sponsors to bank funds over multiple years of the program. If adopted, both of these recommendations would reduce funding uncertainty for transit agencies, thereby facilitating the delivery of transit projects.

As mentioned previously, the allocation process for the transit program was only determined for the current–year appropriation. Uncertainty about future allocation formulas as well as future funding levels makes project planning difficult and can cause delays or other inefficiencies in project selection. We recommend the enactment of legislation that specifies how funds for the transit program will be allocated in 2008–09 and beyond.

• Determine Ongoing Allocation Process. The Legislature should establish a formula that directs the allocation of funds from year to year for the remaining funds in the program. Doing so would allow transit agencies to better estimate their share of each year’s funding they can expect to receive. This, in turn, would enable better project selection and priority–setting to utilize the bond funds.
• Allow Banking of Funds. Under current law, project sponsors have three years from the time an appropriation is made to have a project approved and encumber funds for the project. This effectively allows project sponsors to save up to three years of transit improvement bond allocations for a project. Nonetheless, there could still be instances where project costs exceed a sponsor’s three–year allocation. Because it is likely that the bond funds for transit improvements will be appropriated over a period longer than three years, we recommend the Legislature specify in statute that these bond funds can be banked over multiple years of the program. This would provide greater flexibility for project sponsors to more effectively use the bond funds.

Maximize Resources to Minimize Project Delay

We recommend the Legislature require the Department of Transportation to provide a realistic staff hiring plan that minimizes project delay.

Based on the level of Proposition 1B appropriations proposed by the Governor, Caltrans will most likely continue to need substantial COS resources in 2008–09 to deliver all projects. Meeting this personnel requirement predominately through state staff is likely to be difficult, given Caltrans’ slow progress in hiring state staff in the current year. Beyond hiring new state staff, Caltrans would also have to locate facilities to house these workers. In addition, the department would have to provide training in order for entry–level employees to perform many COS tasks.

Contracting out provides a means for Caltrans to perform project development workload that exceeds the capacity of its state staff to deliver. However, contracted resources have traditionally played a relatively limited role in performing COS workload at Caltrans—roughly 10 percent of total COS personnel resources in recent years. As we discuss in the “Department of Transportation” section of this chapter, the department will be submitting a revised request for COS resources this spring based on better workload estimates. (The Governor’s January budget proposes essentially the same COS level as estimated for the current year, pending this revised request.) As part of the request, Caltrans should provide a realistic staff hiring plan. This plan should include (1) a breakdown specifying what portion of the workload will be completed with state staff versus contracted resources; (2)recent data on Caltrans’ ability to recruit, hire, and retain COS staff; and (3) actions the department will take to attract employees and minimize attrition rate. Moreover, Caltrans should explain how its plan will minimize project delay.

Authorize Design–Build Contracting

We recommend the enactment of legislation authorizing a design–build pilot program to further facilitate the delivery of Proposition 1B projects.

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, including ensuring contracts are awarded fairly and competitively such that public accountability is not diminished.

We recommend that the Legislature authorize a design–build pilot program similar to that proposed by AB 143 (Núñez ), in 2006, and SB 56 (Runner), in 2007. Both bills proposed a demonstration program that would allow Caltrans and regional agencies to deliver a set number of projects using design–build. In addition, these bills required that transportation agencies report on their experiences so that the state could use the information in deciding whether to pursue future design–build projects.