Governor’s Transportation Economic Stimulus Proposal

As part of his budget plan, the Governor proposes an economic stimulus package that includes a number of proposals relating to transportation. In the following analysis, we review these proposals and recommend an alternative to accelerate transportation projects to stimulate the economy.

The Governor’s Proposal

The Governor’s economic stimulus package as it relates to transportation includes the following proposals:

• Exempting certain highway projects from environmental review.
• Authorizing the use of design–build procurement.
• Authorizing public–private partnerships for transportation projects.
• Making additional bond funds available for local transportation.

Exempt Several Large Highway Projects From Environmental Review. The administration proposes to exempt a number of large highway projects from the state’s environmental review (California Environmental Quality Act, or CEQA) process. Since the initial stimulus proposal was made in November 2008, Caltrans has modified the list of projects to be advanced to include eight projects with estimated total construction costs of about $713 million, including $311 million funded from Proposition 1B bonds and $402 million funded from GARVEE bonds that are backed by future federal funds. Instead of being subject to the CEQA process, these projects would only need to obtain necessary permits to move forward. The proposal also includes streamlining certain state and local permitting processes, mainly by shortening the time period within which permits would be granted.

Authorize Design–Build. The Governor proposes to set up a demonstration program to allow the construction of up to ten transportation projects using the design–build procurement method. Projects would be sponsored and the contract awarded by either Caltrans or a local transportation entity, and the types of projects may include highway, bridge, tunnel, or public transit capital improvements. The design–build authority would expire January 1, 2016. The Governor is also proposing to broaden the authority for local entities to use design–build for non–transportation projects.

Authorize Additional Public–Private Partnerships. The Governor proposes to allow Caltrans and other state agencies to enter into public–private partnerships for certain projects. Partnerships could be agreements whereby a private partner assists the public sponsor to define a feasible project and negotiates reasonable terms to implement the project. Alternatively, partnerships could involve a private entity assuming the responsibility for delivering, improving, operating, or maintaining eligible facilities in exchange for payment. For transportation projects, such payments could be made from revenue generated by tolls or other road user fees.

Make Local Transportation Funds Available. The Governor proposes to increase by $800 million the amount of Proposition 1B bond funds available in the current year for local transit capital improvements. This would bring total current–year funding to $1.15 billion for these purposes. The Governor also proposes to make an additional $700 million available for local streets and roads, thereby increasing the current–year funding for these uses to $950 million.

Below, we discuss various issues and concerns we have with the Governor’s proposals.

Bond Funds May Not Be Available to Advance Projects

The Governor’s economic stimulus proposal relies heavily on the expenditure of additional Proposition 1B funds in 2008–09. However, simply appropriating the funds does not mean they would be available for expenditure on projects in a timely manner. As we noted in our earlier analysis of the state of transportation funding, due to the state’s current cash problems, short–term loans from PMIA are not currently available to pay for project expenses before bonds are sold. Additionally, the state has not been able to sell bonds due to the tight credit market. Without the ability to sell bonds or borrow from the PMIA, the state would not be able to spend more on Proposition 1B projects under the Governor’s proposal, and the objective to stimulate the economy would not be achieved. Even when the state’s cash (and budget) problems are resolved and access to the bond market is restored, we think there still are several additional factors that would limit the benefits of the proposal, as described below.

Highway Projects May Only Advance by Couple of Months

The Governor initially proposed to advance $822 million in highway projects as part of his economic stimulus package in November 2008. Our review of the proposal at that time found that exempting projects from the CEQA process would likely only advance projects by a couple of months. Since November, Caltrans has modified slightly the list of projects proposed for acceleration. Instead of 11 projects, the list now includes 8.

Projects Require More Than CEQA Exemptions to Be Expedited. Our review of the updated request to expedite eight projects finds that CEQA exemptions and streamlined permitting alone are not likely to advance most of these projects by more than a couple of months. For instance, most of the projects would also require expediting federal environmental permits or exempting the state from project development work required to get necessary federal permits, such as studying the impact of a project on an endangered species. It is unknown at this time whether and when the state would get the necessary federal waivers and permits. If all these requests were granted on an expedited basis, Caltrans indicates that it could advance some projects by a couple of years.

Caltrans Can Advance Some Projects With Existing Authority. In addition, our review shows that Caltrans intends to redesign some projects so that certain segments of the projects may proceed to construction early while the design and development of the remainder of the project is completed in the customary time frame. It appears that, by splitting these projects up into smaller components, Caltrans could accelerate some projects without the requested CEQA exemptions and state permitting changes.

Design–Build and Public–Private Partnerships Not Needed to Advance Projects

Design–Build Has Merit, but Not Needed to Advance Projects. Design–build procurement would allow Caltrans to contract with the same private business to perform both the design and construction of a given project. This differs from the traditional procurement method in which the state contracts with private businesses only for the construction of projects after they have been fully designed. As noted earlier, the Governor’s proposal would allow Caltrans or local transportation agencies to use this procurement method for up to ten transportation projects.

We think a pilot program on the use of design–build procurement for transportation projects has merit, and we have recommended that the Legislature enact legislation to do so in the past. (Please see LAO Recommended Legislation, December 2008, page 54). Discussions with the department, however, indicate that design–build authority would not be used for any of the highway projects being proposed for acceleration. While a design–build pilot program has merit, it is not a necessary element to implementation of the Governor’s economic stimulus proposal.

Public–Private Partnerships Also Not Needed to Advance Projects. Similarly, Caltrans indicates that it does not plan to use the proposed public–private partnership authority to speed up any of the projects designated for acceleration. Additionally, it could take a significant amount of time for the state to identify appropriate projects, request proposals from the private sector to form partnerships, and negotiate the terms of the agreements to set up the partnerships. Consequently, it is not likely that the Governor’s proposal to authorize public–private partnerships for transportation projects would result in economic stimulus in the near term. Nonetheless, because private–public partnerships provide a tool for attracting private investment and financing of state infrastructure, we think that the Legislature should evaluate the proposal to determine whether, and under what circumstances, this tool may be used to the state’s benefit.

Stimulus Effect of Local Road Funding Would Be Delayed

One component of the Governor’s proposal is to appropriate an additional $700 million from Proposition 1B to cities and counties for streets and road improvements in the current year. Because many street and road projects are relatively limited in scope (involving activities such as resurfacing and repaving), the additional funds could provide relatively immediate economic stimulus to localities—at least, to the extent cities and counties have projects ready for construction.

However, to deal with the state’s cash crisis, the Governor is also proposing to defer about $900 million in regularly scheduled payments to cities and counties until October 2009. These payments involve fuel (excise and sales) tax revenues that the state provides to cities and counties on a regular basis. Thus, the full stimulus impact of accelerating $700 million for local streets and roads would be delayed.

Transit Funds Have Limited Economic Stimulus Benefit

The current–year budget provided $350 million in Proposition 1B funds for local transit capital improvements. The Governor is requesting an additional $800 million in the current year for the same purpose. (Separate from this stimulus proposal, the budget requests $350 million for these purposes for 2009–10.)

Our review, however, indicates that not all of the $800 million could be encumbered by recipients (mainly transit operators) in 2008–09. Specifically, in an initial survey conducted by Caltrans, transit operators indicated that they only have about $676 million in projects that are ready to go. In addition, other factors could limit the benefits of this proposal, as discussed below.

Economic Stimulus Benefits to California May Be Limited. Our review of the survey data shows that about one–half of the proposed funding would be used for projects other than the construction of facilities, which may have limited economic stimulus benefit for California. For instance, new bus procurement comprises 28 percent of the requested stimulus funding. According to Caltrans, there is only one bus manufacturer in the state. Depending on the manufacturer’s production capacity, some or most of the funds would likely go to out–of–state manufacturers. In that event, spending millions of dollars all at one time to procure new buses would provide little economic stimulus to California directly. In addition, bus procurement typically takes a couple of years. Any stimulus to the economy (such as increased employment of drivers or maintenance workers) resulting from the added transit capacity supplied by new buses would be delayed until the new rolling stock is delivered.

Other potential projects include expenditures on Global Positioning System (GPS) systems, marketing, radios, and computer software. Because it is unknown how much spending for these items would remain in California, the amount these projects would benefit the state’s economy is also unclear.

Some Transit Capital Allocation Not Used for Highest–Priority Projects. As discussed in the “Improving Proposition 1B Implementation and Accountability” section of this report, the uneven and uncertain disbursal of bond funds for transit capital improvement may result in funds being used for projects that are not the highest priority. This is because not knowing how much and when funding would be available makes it difficult for transit operators to effectively plan for the best use of the funds. Injecting additional funds midyear may only further complicate their planning efforts.

Since the budget already proposes to make $350 million available for 2009–10, we recommend delaying the $800 million to the budget year and instead providing the combined amount ($1.15 billion) in 2009–10. This would facilitate better planning opportunities for local operators and encourage higher priority use of the funds.

LAO Alternative

In a report we issued in December 2008, entitled Advancing Transportation Projects to Stimulate the Economy: An Alternative Approach, we reported our findings and recommendations in regard to the Governor’s proposed economic stimulus package for transportation. In the report, we highlighted the potential challenges to success for the Governor’s proposal and offered an alternative approach for the Legislature to provide economic stimulus to the state using available transportation funding.

Specifically, we recommend the use of revenue bonds backed by future state gas tax revenues to accelerate 122 highway rehabilitation projects. These projects would be ready for construction in 2008–09, 2009–10, and 2010–11 but are not scheduled for construction until later years due to limited funding.

Federal Stimulus Could Fund Highway Rehabilitation. In addition, if the state were to receive federal economic stimulus funds for transportation projects, we think funding highway rehabilitation projects such as those we identified in our report would have the greatest economic benefit to the state. Accordingly, we recommend that the Legislature target any federal economic stimulus funds that California receives for transportation to highway repair projects to the extent possible.