Improving Proposition 1B Implementation and Accountability

Proposition 1B, approved by voters in November 2006, authorizes the state to sell $20 billion in general obligation bonds for transportation projects through specific programs intended to relieve congestion, facilitate goods movement, improve air quality, and enhance the safety and security of the state’s transportation system. (For a more detailed description of the Proposition 1B programs, please see our Analysis of the 2008–09 Budget Bill, page A–40.) These bonds provide a major one–time infusion of state funds into the transportation system that are to be spent over multiple years.

Figure 6 shows the various Proposition 1B programs and the amount of funding allocated to each. As the figure shows, about $9.3 billion of the Proposition 1B funds have been appropriated in 2007–08 and 2008–09 combined. As part of his economic stimulus package, the Governor is requesting further Proposition 1B appropriations totaling $1.7 billion in the current year for highway projects, transit capital, and local streets and roads. For 2009–10, the Governor requests an additional $3.5 billion for Proposition 1B programs. Below, we discuss the challenges and risks the programs face, and make recommendations to improve the implementation and accountability of the Proposition 1B programs.

Cash Problems Cause Stoppage of Projects

Money from PMIA is used to provide short–term funding to pay expenses on projects incurred before bonds are sold, including those for Proposition 1B bond projects. These expenses include mainly construction costs. As noted earlier in this report, on December 17, 2008, PMIB voted to suspend disbursements from PMIA for projects funded from Proposition 1B due to the state’s difficult cash situation. (The board did later allow some past obligations to be paid.)

As a result of the board’s action, money is not currently available to pay for work to continue on most Proposition 1B projects. Figure 7 shows that there are 196 projects totaling about $4 billion that may be delayed. Depending on how long funding remains unavailable, projects would likely be delayed for at least several months and potentially up to a couple of years.

Projects Already Under Construction May Be Stopped. As Figure 7 shows, 98 Proposition 1B projects are currently under construction, with contracts already awarded. These projects have estimated total construction costs of $1.8 billion, including $1.5 billion from Proposition 1B. In view of the state’s cash situation, DOF has indicated it will order Caltrans to suspend work on most if not all of these projects by early February. It is unclear, at the time this analysis was prepared, how many of the 98 projects have actually been stopped.

A stoppage of work not only causes delays, but can result in substantial additional costs to the state. As summarized in Figure 8, Caltrans estimates that it would cost about $150 million just to shut down these projects. There would be additional costs to restart these projects in the future when funding is again available. These restart costs are estimated by Caltrans to be about $200 million.

Projects Planned for Award in 2008–09 Are Delayed. In addition to stopping projects that are under construction, Caltrans has also stopped awarding any new contracts to construct Proposition 1B projects. From January 2009 through June 2009, Caltrans and local project sponsors had planned to award contracts for 98 projects with total construction costs of $2.1 billion (including $1.7 billion from Proposition 1B). These projects are now delayed until bonds can be issued or until the board allows new loans from the PMIA.

Disbursements for Local Programs Also Held Up. In addition, Proposition 1B provides grants to local transportation agencies for transit capital and street and road improvements. The disbursement of these funds has also been stopped due to the state’s cash problem. Specifically, as much as $420 million for local transit capital improvements and about $290 million for local streets and roads may not be disbursed to local entities in the second half of 2008–09 because of the current situation.

Delay of Bond Projects Has Many Negative Impacts. Delaying funding for projects currently in construction would cause a costly suspension of projects. The lengthened time to complete projects also delays the benefits (such as reduced traffic congestion) that are to be realized from improved transportation facilities. There are negative impacts to the state’s economy as well. Because project construction is done by the private sector, delaying projects negatively affects the employment of construction workers. In addition, due to the current economic climate, the state now faces a substantially more competitive bidding environment than in recent years, and is able to bid projects at prices that are significantly lower than estimated. By delaying projects, the state may miss an opportunity to save on the cost of construction by building projects while prices are low.

Other Risks Threaten Project Delivery

The CTC is the administrative agency for a number of Proposition 1B programs. These include three predominantly highway–related programs for which CTC selected projects on a competitive basis: (1) the Corridor Mobility Improvement Account (CMIA) program, (2) the Trade Corridor Improvement Fund (TCIF) program, and (3) the State Route 99 improvement program. (The commission also administers other Proposition 1B programs that provide funding for non–highway purposes or are allocated by formulas.) Projects in these programs were selected based on criteria that include meeting set construction deadlines. Additionally, it is expected that the projects would be fully funded from a combination of sources, including a specific, fixed amount from Proposition 1B bonds.

In addition to the immediate risks to projects relating to the actions of PMIB, there are other risks to the delivery of projects in these three programs. We discuss these other risks below.

Less Local Money Available to Pay for Cost Increases. Because the amount of Proposition 1B funding allocated for each project is fixed, any increased costs must be paid from another source, most likely from local funds. Currently, 19 counties have adopted local sales tax measures to fund transportation improvements, including local contributions toward Proposition 1B projects. However, due to the downturn in the economy, potentially less revenue is available from these local sales taxes to cover any project cost increases. Discussions with local transportation agencies indicate that, in general, local sales tax revenues have declined by about 5 percent to 20 percent in the past one to two years. Additionally, many local agencies issue bonds against future sales tax revenues in order to raise money upfront to pay project costs. However, because of tight credit markets, these agencies may have difficulty issuing such bonds in the near future.

Some Projects Are Already Overbudget. Proposition 1B requires that CMIA projects begin construction no later than December 2012 in order to receive bond funds. Because of this requirement, a substantial amount of project development work (environmental review, design, acquisition of rights–of–way) has already been completed for most of the projects selected for CMIA. It is during these project development activities that cost increases are often discovered. For instance, the environmental review could reveal that additional costly mitigation measures would be required. Given that most CMIA projects are already well into this development phase, it is not likely that these projects will have significant cost increases.

Nevertheless, our review found that as of November 1, 2008 about 20 percent (or 11 out of 54) of CMIA projects had known cost increases of at least either $5 million or 5 percent above the original cost estimate. While cost increases of $5 million or more may not be substantial when compared to the total cost of kinds of large projects that are typical in the CMIA program, any cost overrun can be problematic, because it would still require that additional monies be provided (from non–bond sources) to fully fund the projects.

At this time, it is too early to determine the extent to which projects in the TCIF and State Route 99 programs will incur costs that are higher than planned. Most TCIF and state Route 99 projects still require a substantial amount of project development work. Thus, there is a greater risk that the costs for these projects could escalate significantly before they are ready for construction.

CTC Should Report on Risks and Lagging Projects. In order to monitor the progress of the bond program, we recommend that the Legislature enact legislation that requires CTC to include the following additional types of information in its annual report to the Legislature:

• The overall status of the Proposition 1B programs.
• Risks to project delivery.
• Evaluations of projects that are more than six months behind schedule and/or more than 20 percent over cost.
• Recommendations to improve project delivery and program effectiveness.

This information would provide the Legislature with an annual, aggregate look at the progress of all Proposition 1B programs and identify the key risks and threats to program progress as well as means to mitigate them.

Intercity Rail Procurement Progress Slow

Intercity rail ridership has experienced substantial growth in recent years. The state’s three intercity rail services had an average ridership increase of 12 percent in 2007–08. The Capitol Corridor service in particular has recorded nearly 50 percent ridership growth since 2003–04. In order to meet the growing demand, service capacity has to increase by procuring additional cars and locomotives (rolling stock). The department’s most recent State Rail Plan projects a $290 million need for additional rolling stock and maintenance facilities over the next ten years.

Proposition 1B provides $400 million for intercity rail improvements, including at least $125 million for rail car and locomotive procurement. The Legislature appropriated $187 million of these funds in 2007–08 and an additional $71 million in 2008–09 for Caltrans to procure rail rolling stock and improve track and other rail facilities.

Caltrans Slow to Use Funds. Caltrans is spending the funds at a much slower rate than was anticipated when they were appropriated. To date, only $64 million (out of the total $258 million) has been encumbered for various track improvement projects, and Caltrans does not expect to encumber any more funds for these projects in the current fiscal year. The department did not use any of the funding provided to it in 2007–08. This is because statutory language required an audit of intercity rail ridership before the funds could be encumbered for rolling stock, but the audit was not completed in time for the money to be spent.

Required Report Not Yet Submitted. Because of concerns over the fact that none of the funds appropriated for rail car procurement were spent in 2007–08, the Legislature added language to the 2008–09 budget that requires Caltrans to report to the Legislature by January 1, 2009 on the activities the department has undertaken to spend the money for rolling stock procurement. At the time this analysis was prepared, the report had not been submitted, and the department had yet to procure any rail cars or locomotives.

Caltrans Should Report Procurement Status at Budget Hearings. We recommend that the Legislature direct the department to explain at budget hearings why it has not submitted the required report. The department should also report on why it has not made any progress in procuring rail equipment.

Budget–Year Request for Track and Facility Improvements Warranted. The 2009–10 budget requests an additional $125 million for various intercity rail projects. These projects include mainly track and station improvements on all these corridors. Our review shows the requested projects to be reasonable.

Year–by–Year Transit Formula Hinders Project Planning and Skews Priorities

Proposition 1B provides $3.6 billion for transit capital improvements, including the construction and expansion of rail and bus systems and the acquisition of equipment. The Legislature appropriated $600 million of these funds in 2007–08 and $350 million in 2008–09. As of the beginning of 2009, somewhat over one–half of these funds had been provided to transit operators and regional transportation agencies. (As part of his economic stimulus package, the Governor is proposing to increase the current–year funding for this purpose by $800 million.)

Funding Uncertainty Hinders Project Planning. So far, the amount of funding appropriated for these projects has varied greatly from year to year. Also, the appropriated amounts have been allocated without a predictable, ongoing formula. Due to uncertainty about how much funding will be available each year, and over how funds will be allocated from year to year, planning efforts by project sponsors (mainly transit operators) are being hampered. Large projects are difficult to plan and fund without some knowledge of how future bond funding will be distributed annually, and how much funding a sponsor could reasonably expect over several years. Additionally, some small transit operators are having trouble effectively using their small annual allocations. This is because they are unable to carry the funds appropriated over multiple years to accumulate enough money to complete projects.

These challenges are leading sponsors to fund projects that may not be their highest priority just so that the project will fit the available funding. Eligibility guidelines require each project to be in a region’s long–range plan, which should include all high–priority or important future projects. However, our review showed that many of the project applications for bond funding indicated that the recipients recently amended their plans to include these projects. This means that many projects were not sufficiently high in priority to be included in the sponsors’ initial plans. Our review also found that over $100 million, or nearly 20 percent, of the disbursed bond funds have been spent on peripheral needs such as bus stop and station improvements and upgrading farebox equipment. In the case of some small operators, funds were spent for bus benches, bus LED signs, brochure holders, and bus stop signage rather than projects that would directly increase the capacity of transit systems.

Legislature Should Establish an Ongoing Allocation Process... As we proposed in our Analysis of the 2008–09 Budget Bill (see page A–54), we continue to recommend that the Legislature establish a formula that directs the allocation of the remaining funds such that the percentage of the total that each agency will receive over time is defined. Doing so would allow transit agencies to better estimate their share of funding. This, in turn, would enable better project selection and use of the bond funds for high–priority projects.

… And Allow for “Banking” of Funds. We also recommend that the Legislature enact legislation that allows recipients to either (1) bank their allocations over multiple years so that they can accumulate funds for large high–priority projects, or (2) fund projects in advance of future bond funding, with a commitment that future allocations would be made available as reimbursements for the project’s cost. This would allow fund recipients to use bond money more effectively to pay for large projects that are a high priority.

Improve Accountability for Proposition 1B Programs

After passage of Proposition 1B in 2006, the Legislature and the administration decided to require a greater level of accountability for the use of bond funds than other transportation programs in general. To achieve ongoing accountability over the course of the bond programs, the administration proposed to develop and maintain a “bond accountability” internet web site to report the progress and status of each bond project.

The Legislature agreed to the approach, but also adopted legislation requiring periodic reports on the Proposition 1B programs. Specifically, Chapter 181, Statutes of 2007 (SB 88, Committee on Budget and Fiscal Review), requires each Proposition 1B administrative agency to collect reports from bond fund recipients and to submit those reports to DOF every six months. The purpose of these reports is to ensure that projects are proceeding on schedule and within their estimated cost. As the administrative entity for many of the Proposition 1B programs, CTC is subject to this reporting requirement.

CTC Failed to Provide Statutorily Required Reports. Despite the statutory requirement, CTC has decided not to submit the semiannual reports for any of the Proposition 1B programs it oversees. Rather, on September 25, 2008, CTC notified DOF that it would not submit a report on the status of the Proposition 1B projects. The commission asserted that the information provided on the bond accountability web site developed by the administration fulfills its reporting requirements. (As we discuss below, our review found problems with the information posted on the web site.) In any event, CTC’s failure to submit the required reports leaves a gap in Proposition 1B accountability, because CTC is the only entity charged with oversight of these bond programs.

Furthermore, discussions with CTC staff in October 2008 indicate that the commission has no role in ensuring that information reported on the administration’s web site is accurate or helpful. For instance, CTC is not responsible for entering or even reviewing information on the web site. When asked about problems and changes to the web site (as described below), the commission staff was unaware of either.

Bond Accountability Web Site Not Very Helpful. Our review finds that certain information that is essential to understanding the progress and status of Proposition 1B projects is missing from the bond web site. This missing information about projects, as shown in Figure 9, mainly includes planned and actual dates for the beginning and completion of various phases of a project (also known as project milestones) as well as cost information.

Our review shows that while the web site does provide some information on the projects for several programs (namely CMIA, State Route 99, SHOPP Augmentation, and Local Bridge Seismic programs), it is difficult, and in some cases impossible, to determine basic information about the status of projects. For instance, for many projects it is unclear when the milestones are being completed and if the project is generally proceeding on schedule. In addition, for other Proposition 1B programs—specifically TCIF, STIP Augmentation, Traffic Light Synchronization, and Grade Separation programs—only a listing of the projects and their original schedule and costs are available. For these programs, the web site does not provide any of the information needed to perform ongoing oversight, such as to determine if projects are within cost estimates, on schedule, or if the project has even been started.

Overall Project Status Indicators Were Misleading…and Now Are Missing. In order to provide an easy way to determine if bond projects are on schedule and within cost, the administration had previously proposed to include status indicators for each project on the web site. The status indicators would show a green checkmark for projects that were on schedule, a yellow diamond for projects with potential risks, and a red “X” for projects with known cost or schedule changes. As of July 2008, the indicators showed that all projects were on schedule and within cost, despite the fact that at that time some projects had known increases in cost and delays in schedule.

After discussions with Caltrans about the seemingly inaccurate information, the project status indicators were removed from the web site. While removing inaccurate information from the web site was appropriate, completely removing the status indicator feature means that the web site no longer provides a short–hand summary on the status of the bond projects.

CTC Should Report at Budget Hearings. As noted above, CTC has failed to provide the required Proposition 1B reports. In addition, the commission is contributing to a lack of accountability for the use of Proposition 1B funds by not reviewing information on the administration’s web site to ensure its accuracy. Accordingly, we recommend that the Legislature direct CTC to report at budget hearings on why the commission has disregarded the statutory requirement to submit semiannual reports on the status of the bond programs. Given that the web site has proven to be a poor accountability tool, we recommend that the Legislature enact legislation requiring CTC to provide additional information on the Proposition 1B programs in its annual report to the Legislature, as we recommended earlier. Doing so would improve accountability and oversight of the bond programs.