Unstable Funding Adversely Impacts Transportation Programs

The state has several programs to fund capital improvements to state and local transportation systems. Figure 5 summarizes these programs and their respective state funding sources. In order to effectively plan, develop, and construct transportation projects, funding for these programs should be predictable over time. Currently, funding for the state’s transportation programs is not predictable from year to year. This creates difficulties in the state’s ability to plan and deliver capital improvements. In the following analysis, we review the outlook for funding and the effect that funding instability has on the state’s transportation programs.

We note that, in the previous section of this report, we have recommended that the Legislature take various steps to use transportation funds to help address the state’s General Fund deficit. While we continue to recommend such actions given the state’s massive deficit, it is nonetheless important for the Legislature to understand the negative effects on the stability of California’s transportation finance system. We discuss these and other aspects of these problems in this analysis.

Stable and Predictable Funding Assists With Multiyear Projects

As Figure 5 shows, two ongoing programs—the State Transportation Improvement Program (STIP) and SHOPP—are supported from special funds with monies collected mainly from taxes on fuels. These programs are multiyear plans to fund the various phases of work (such as environmental review, design, and construction) required to build transportation capital improvements. Both programs are updated once every two years, so that each program continually schedules funding for projects for several years into the future, based on funding that is projected to be available under existing law.

The state also has two major programs—Proposition 1B and the TCRP—that provide one–time funding for transportation projects. While these are one–time programs, like STIP and SHOPP they provide funding for projects over multiple years.

Multiyear Nature of Projects Requires Predictable Funding. The multiyear approach to funding transportation improvements is necessary because of the length of time it takes to build capital projects. Simple capital improvements generally take a couple of years to complete from the time initial plans are prepared, through project development, to the end of construction. Complex projects take longer, sometimes many years, to complete.

A lack of predictable funding from year to year complicates planning for project workload and the setting of priorities. For instance, it would not make sense to fund the first phase of a project in a particular year if the funding required to complete the project will not be available in subsequent years. Without predictable funding, future funding to complete the project cannot be assured at the time the decision is made to fund the start of the project. This could lead to poor decisions about which projects to fund and when to fund them. Having predictable levels of funding from year to year can avoid unnecessary complications in determining project workload and the setting of priorities.

Predictable Funding Needed Because Projects Funded From Many Sources. In addition, most transportation projects are funded from multiple sources, including state, bond, local, and federal funds. Each source generally has different requirements or limitations on how funds can be spent. If expected funding from one source does not materialize, a project could be delayed while it awaits replacement funding. Therefore, predictable and stable funding from each source helps to avoid unnecessary project delays that can often make projects more costly.

Frequent Changes Create Instability and Inefficiencies, Delay Projects

Since 2001–02, transportation funds have been used to help balance the state’s budget. Because the decisions to do so are made annually, depending upon the state’s overall budget requirements, it is difficult to predict from year to year (1) how much transportation money will be redirected to help the General Fund and (2) the funding source from which the money would be redirected. As a result, it is not possible to determine which programs and projects would be affected until after budgetary decisions are made. The resulting instability and unpredictability of funding delays project progress, complicates efforts to plan for future projects, and creates inefficiencies in the department.

Transportation Loans Increase Instability and Will Delay Projects. In the current year, $231 million was loaned from SHA and other accounts to help balance the state’s budget. These funds are required to be repaid by June 30, 2011. This means that some projects that rely on SHA money, mainly highway repair projects, will not progress in 2008–09 as originally scheduled in the SHOPP. Instead, these projects will be pushed out to later years.

For 2008–09 and 2009–10, the Governor’s budget proposes to redirect a total of $202 million of tribal gambling revenues to the General Fund. These funds are supposed to repay past SHA loans (about $114 million) and loans from TCRF ($86 million) which funds TCRP projects. The redirection of these funds would affect a mix of SHA–funded projects and TCRP projects. Under the Governor’s proposal, the redirection would occur only if the state receives federal stimulus money for transportation. However, there is no assurance that the federal money would be available for the same set of projects. Depending on the conditions imposed on the use of the federal funds, the department may have to delay one set of projects and work to deliver other projects instead.

Funding Fluctuations Create Other Inefficiencies in Caltrans. As mentioned earlier, most transportation projects rely on multiple sources to be fully funded. For instance, many projects that receive Proposition 1B funds also receive STIP funding from Proposition 42 revenues or from SHA. Some of these projects also receive TCRF funding. Caltrans staff must monitor and keep account of the availability of money from each source when they work to deliver the projects. When funding is held up due to budgetary or other decisions, staff resources are expended to determine which projects would be affected and how to minimize the impact on the projects. Staff resources are also spent to seek alternatives to provide backfill funding. This additional staff work could be reduced and inefficiencies minimized if funding for projects in the various programs are more predictable from year to year.

Proposed Sales Tax Increase Would Increase Funding

Higher Sales Tax Rate Would Provide More Proposition 42 Funding. To help balance the state’s budget, the Governor proposes to temporarily increase the state’s sales tax rate by 1–1/2 cents for three years. At this higher rate, the sales tax on gasoline would generate about $1.7 billion in Proposition 42 gasoline revenue for transportation in 2009–10. This amount is about $400 million more than estimated in the current year. Proposition 42 revenues are allocated as follows: 40 percent to cities and counties for local streets and roads, 40 percent to the state for the STIP, and 20 percent to the PTA for mass transportation purposes.

Budget Display Incorrect; Caltrans Plans to Spend State’s Share. The Governor’s January budget documents suggest that the full amount of the STIP’s share of Proposition 42 funds would not be spent in the budget year. The budget documents indicate that a portion ($160 million) would be held as a balance in the Transportation Investment Fund. Given the lack of transportation funding available from other sources, we questioned Caltrans as to why these funds should be held as reserve. The department has since indicated that the budget display is in error, and that Caltrans does intend to spend the STIP share of Proposition 42 funds in the budget year.

Uncertainty of Higher Revenue Complicates Project Delivery. The Governor’s proposal assumes that the higher sales tax rate would be effective March 1, 2009. The prospect of having additional Proposition 42 money for STIP projects means that the department would need to reassess which additional projects it can fund in the budget year and be prepared to move the projects forward. However, if the proposal is not adopted, then the department would have to reverse course and make further delivery adjustments.

Additionally, the proposal has a particularly significant impact on the PTA, which receives 20 percent of total Proposition 42 revenues. If the sales tax increase is rejected, there would not be sufficient funds to pay all the expenses proposed from the account, as we discuss later.

Unavailable Bond Funds Disrupt Project Progress

Proposition 1B, passed by voters, provides $20 billion in bonds to fund transportation improvements. Although the bond measure is a one–time program, it was expected to provide a degree of predictability in funding for a number of years. Currently, the Proposition 1B programs are well under way with about one–half of the funds appropriated in 2007–08 and 2008–09 combined. However, using bonds to fund projects has recently become problematic, as the state’s cash problems, together with a tight credit market, have held up the issuance of bonds.

Pooled Money Investment Account (PMIA) Provides Short–Term Financing for Projects. Current law allows cash from the PMIA—the state’s short–term savings account—to pay expenses incurred on bond–funded projects before bonds are sold. This process (known as “AB 55 loans”) provides short–term financing for projects that are to be funded from bonds, including projects in the Proposition 1B programs.

Bond Funds Unavailable Due to Cash Problems. In view of the state’s overall cash condition and the inability to sell bonds, the Pooled Money Investment Board (PMIB) voted on December 17, 2008, to suspend disbursements from the PMIA for bond projects. As a result of the board’s action, money is not currently available to pay for work to continue on most Proposition 1B projects. Consequently, Caltrans is holding back on awarding new contracts to build projects and may have to stop construction on some projects. (Please see “Improving Proposition 1B Implementation and Accountability” later in this report.)

Maintenance and Rehabilitation Funding Continues to Shrink

A key component of the state’s transportation programs is the rehabilitation and repair of the state’s highway system. Major repairs and rehabilitation, as well as safety improvements to the system, are accomplished under the SHOPP. Routine repairs and maintenance of the system are carried out by the department under the Maintenance program. State funding for highway maintenance and rehabilitation comes from the SHA.

Maintenance Costs Continue to Increase, Leaving Less for Rehabilitation. In recent years, the cost of maintaining the state’s highways has increased. Spending more to pay these increasing costs leaves less funding for major rehabilitation and repair work. As a result, a substantial number of repair projects planned by Caltrans have not been funded. In addition, as the highways age, the amount of major rehabilitation needed has increased.

Gas Tax Revenues Are Declining, Recommend Rate Increase. As noted earlier, revenue from the 18 cents excise tax on gasoline and diesel—commonly referred to as the “gas tax”—and from truck weight fees fund the SHA. Currently, these sources do not provide sufficient funding for highway maintenance and rehabilitation. In addition, revenues from the gas tax have declined in recent years. While in the past gasoline consumption has increased at a stable rate of between 1 percent and 2 percent, it has declined every year since 2005. In the future, increasing fuel efficiency and a switch to alternatively powered vehicles could continue to put downward pressure on the consumption of gasoline and therefore on gas tax revenues. If the declining trend continues, an increasing amount of highway repair and reconstruction work would not be funded.

In previous analyses, we have identified substantial requirements, in the tens of billions of dollars, to repair the state’s highways over the next ten years. To provide an ongoing, stable source of funding for highway repairs we have recommended the Legislature increase the gas tax by 10 cents per gallon, and index it in order to keep pace with future inflation. (Please see our Analysis of the 2008–09 Budget Bill, page A–34). In light of the growing disparity between revenues and needed maintenance and rehabilitation work, we continue to recommend a gas tax rate increase as a way to provide more ongoing funding for maintenance and rehabilitation.

Explore Mileage–Based Fees. In the long term, we think the Legislature should evaluate new ways of funding the maintenance, rehabilitation, and improvements to the transportation system that are becoming available due to advancements in technology. One method, in particular, would be to charge fees to drivers based on the number of miles traveled. The state of Oregon has conducted a pilot program to test such a mileage–based fee system. While this could prove to be an effective new way of funding transportation programs, it would require a significant amount of research to determine if a mileage–based fee system is feasible for California, and if so, how such a system would best be implemented. Accordingly, we recommend the Legislature begin exploring how a mileage–based fee system could potentially be implemented in California. We are continuing to collect information about this issue.

PTA Expenditure Priorities Unclear

Recent Broadened Use of PTA Has Resulted in Project Delays. Traditionally, PTA funds the state’s intercity rail service and the STA program, provides support for Caltrans’ mass transportation program, and funds transit capital improvement projects that are programmed in the STIP. In the past several years, the use of PTA funds was broadened to include home–to–school and regional center transportation in order to help the General Fund. To free up PTA money for these latter uses, transit capital projects have been delayed. According to the California Transportation Commission (CTC) staff, about $520 million in projects programmed for funding from 2007–08 through 2009–10 have been delayed or deprogrammed. Many of these projects would instead be funded with Proposition 1B funds to the extent they are still high in priority for transit operators.

Absent Sales Tax Increase, Home–to–School Transportation Funding Will Be Reduced. The Governor’s budget projects PTA revenues of $752 million in 2009–10, assuming the proposed sales tax rate increase becomes effective. Given the state’s fiscal problems, the budget proposes to use $541 million for home–to–school and regional center transportation. The remaining funds would go to pay for intercity rail service, Caltrans’ support, and pay about $78 million in outstanding obligations on transit capital projects. (These are payments for STIP transit projects for which PTA funding was allocated in previous years.) In order to leave a small reserve ($9 million) in the account at the end of 2009–10, the budget proposes no funding for STA in the budget year and to eliminate program funding for the second half of the current year. (Please see further discussion in the “State Transit Assistance” section of this report.)

The small balance in the PTA creates significant risk for the programs it funds because revenues could come in lower than expected. If, for instance, the Governor’s proposed sales tax increase is not adopted, PTA revenues would be lower in the budget year and the account would probably have a funding shortfall of about $70 million. The Department of Finance (DOF) indicates that, should this occur, the administration will provide less PTA for home–to–school transportation to make up the difference.

In order to avoid a shortfall in the fund, we recommend that the Legislature reduce the home–to–school transportation funding from PTA by $79 million if the Governor’s sales tax rate increase proposal is not adopted. Additionally, we recommend that the Legislature adopt budget bill language under Item 6110–111–0046 stating that if resources in the PTA fall short of projections, PTA appropriation for home–to–school transportation will be reduced correspondingly.

Future Federal Funding for Transportation Is Uncertain

The state receives about $3 billion in federal transportation funds a year. However, the future level of federal funding is uncertain at this time.

Potential Federal Economic Stimulus Funding for Transportation. It appears that substantial amounts of one–time funding, potentially in the billions of dollars, may come to the state as part of a federal economic stimulus package in early 2009. Many details of the federal package are not yet available for review by the Legislature. Depending on the level of assistance provided, and the restrictions on its use, federal stimulus funding could potentially pay for state projects that have been delayed due to insufficient funding. However, it is likely that the one–time funding must be expended within a relatively short period of time. In order to meet that requirement, Caltrans would have to again readjust its project delivery priorities. So that Caltrans will have sufficient time to adjust its workload, we recommend that the Legislature provide direction to the department on the use of federal funds. Specifically, we think the Legislature should have Caltrans (1) identify and expedite SHOPP projects that are almost ready for construction, and (2) identify delayed Proposition 1B projects that would likely be able to use federal funds.

Ongoing Federal Funding Uncertain. The current federal act that authorizes funding for transportation programs over multiple years will expire at the end of September 2009. Given past congressional delays in enacting new transportation authorization acts, it could potentially be some time before a new federal act is approved. As a consequence, the proposed funding level and policy approach of the federal transportation program may not be known for a while.

In addition, due to lower–than–projected tax revenues, the federal highway trust fund, which funds federal transportation programs, ran out of funds in 2008. Congress subsequently provided $8 billion to allow funding for transportation programs to continue. Even with the infusion of funds, it is possible the account could run out of money again before the end of 2009, at about the same time the federal act expires. It is unclear what Congress and the new administration would do in such a situation. The uncertainty regarding the availability of federal funds makes it even more complicated for the state to plan and deliver the state’s transportation programs.

Issues for Legislative Consideration

As we noted previously, a number of different factors are contributing to a lack of stability and predictability in the funding for transportation programs. Some of the factors, such as large variations in the availability of federal funding for transportation programs, are not within the state’s control. The Legislature has only limited options in the short term for other factors, such as the redirection of state transportation funding to benefit the General Fund, due to the state’s severe budget problems.

Neveretheless, we have identified in this analysis some actions the Legislature can take to provide greater predictability in the funding for transportation programs. For instance, we recommend that the Legislature set clear budget–year priorities for programs funded from the PTA. We also recommend increasing the state’s gas tax to provide additional funding for highway maintenance and rehabilitation. In the longer term, the Legislature should consider additional strategies to provide more stable and predictable funding for transportation programs. One option, as noted previously, would be to explore the possible use of mileage–based fees.

The key strategy, we believe, is for the Legislature to think comprehensively about how the different pieces of the transportation funding puzzle can be fit together to provide a stable set of resources for the programs and projects it considers to be its highest priority. In the end, we believe this approach would lead to a more efficient, and cost–effective, use of each transportation dollar.