State Transit Assistance

The state provides assistance to regional and local transit systems in two ways. First, the state funds transit capital improvements, such as equipment purchase, track, and facility construction. The PTA has provided over $1 billion to these types of transit and rail projects over the past five years, and since 2007, Proposition 1B has provided an additional $1.2 billion for these purposes. Second, the state provides financial support for transit operations through STA program. Funding comes from PTA and is allocated to local recipients (mainly transit operators) based on a statutory formula. Before 2001, STA funding ranged mostly from $40 million to $70 million a year. Since the passage of Proposition 42 in 2002, however, funding for STA has been significantly higher. The current–year funding of the STA program is at $306 million.

Governor Proposes to Eliminate STA Funding

Traditionally, PTA monies were used to fund the state intercity rail service, transit capital projects programmed in STIP, and Caltrans mass transportation and planning activities. As we noted earlier (see the “Background” section of this report), PTA uses have been broadened in recent years specifically to fund home–to–school transportation and regional center transportation in order to help address the state’s General Fund shortfall. Falling fuel prices have led to an unanticipated decrease in the fuel tax revenues deposited into the PTA. In response to this problem, the Governor’s budget proposes to reduce the current–year funding for STA by one–half, or $153 million, in order to ensure adequate funding for home–to–school and regional center transportation in 2008–09, as planned. Additionally, the Governor proposes to eliminate the STA program statutorily, thereby providing no further funding for this program as of 2009–10.

Approve the Governor’s Budget Proposal

PTA Will Have Shortfall in Current Year Absent Corrective Action. As noted above, due to falling gasoline prices, PTA resources will be less than projected in the current year. After funding home–to–school and regional center transportation, maintaining the intercity rail program, and paying outstanding transit capital obligations, the account will not have sufficient resources to fund the STA program at the planned level of $306 million. To avoid a significant shortfall in the account, the Legislature faces having to prioritize the use of PTA funds. Given the state’s fiscal condition, we concur with the Governor’s proposal to reduce STA by $153 million—the equivalent of half of the original full–year appropriation—in order to achieve the planned level of General Fund relief in the current year. Accordingly, we recommend that the Legislature adopt the Governor’s proposal.

PTA Resources Will Continue to Be Limited in the Budget Year. The PTA’s resources in the budget year are projected to be about $750 million. This amount, however, assumes that (1) the current–year proposed STA reduction is adopted and (2) the Governor’s proposal to increase the state sales tax is effective in 2009–10. The budget proposes to provide $541 million for home–to–school and regional center transportation combined in 2009–10, as relief to the General Fund. Doing so and supporting all its other existing purposes—paying for state intercity rail service, as well as obligations on transit capital projects—would essentially deplete all projected PTA resources in 2009–10. Thus, there would be no resources left to fund STA in the budget year. Based on the lack of available funding and state budgetary concerns, we recommend that the Legislature provide no funding for STA in 2009–10. (See additional discussion about the PTA fund condition in “Unstable Funding Adversely Impacts Transportation Programs” in this report.)

Program Elimination Should Be Considered on Policy Grounds

In assessing the Governor’s proposal to change state law to permanently eliminate the STA program, the Legislature should consider a number of policy issues beyond the immediate budgetary solution of using PTA to help address the current General Fund problem. For example, the Legislature should assess the state’s role in funding local transit and the goals and objectives of any state assistance. We discuss these issues below.

State’s Role in Funding Transit. Public transit exists primarily to serve local communities. In large metropolitan areas, integrated transit systems now provide an alternative to road and highway use within entire regions. As such, these services are primarily a local and regional responsibility.

However, the state has had a longstanding policy of assisting public transportation services and encouraging regional transportation coordination. The first step in this direction was the Legislature’s enactment of the Transportation Development Act (TDA) in 1971. The law provides funding equal to ¼ cent of the general sales tax that is collected statewide to counties for transit assistance purposes. In 2007–08 (the most recent year of data from the State Controller’s Office [SCO]), local transit received about $1.4 billion in TDA funds mainly for operating expenses. Since 1980, the STA program has provided supplemental state funding to the TDA monies to help support transit operations from a portion of the gasoline sales tax revenue.

As noted earlier, the state also provides substantial funding to transit operators to make capital improvements. Most recently, Proposition 1B allocated $3.6 billion in bond funds for these purposes. Given the substantial amount of state capital funds and TDA funds that transit operators receive, the Legislature should consider what other goals and objectives it may want to achieve with the additional assistance provided under STA. For instance, should STA be used to create incentives for operators to provide specific types of transit service or to achieve specific service goals? Alternatively, should any additional state role in transit be limited to just capital assistance?

STA Accounts for Small Portion of Overall Transit Operations. Currently, transit operations total in excess of $6 billion statewide a year. About 70 percent of all transit operating revenues comes from local sources, including passenger fares and local (mainly sales) taxes. The TDA funds account for about 16 percent of annual transit revenues, while federal funds account for about 10 percent. The remaining funding—about 3 percent per year—comes from STA. The relative small portion of overall transit operations supported by STA raises the question of how significant a contribution the program provides to overall transit services in the state.

STA Funding More Important to Small Operators. Of the roughly 260 entities statewide eligible to receive STA funding, 150 operators received funding between 2001–02 and 2005–06, according to data reported to the SCO. For the 25 largest recipients (among them the Los Angeles County Metropolitan Transportation Authority, Bay Area Rapid Transit, and Santa Clara Valley Transportation Authority), which received the bulk (over 90 percent) of the total annual STA allocation, program funding constituted on average about 3 percent of operating revenues. However, STA was a significant resource for the 25 smallest recipients, comprising between 17 percent and 31 percent of their annual operating revenues. Most of the small operators each received amounts in the tens of thousands of dollars annually. Many of these recipients are specialized service operators located in rural areas such as Humboldt and Imperial Counties, providing mainly paratransit–type service.

Summary. The specific service–level benefits realized by the state’s current role in funding transit operations through STA are unclear at this time. Compared to TDA funding, the STA program contributes a relatively small amount to statewide transit operations. Most of STA is allocated to the state’s largest operators and comprises a small percentage of their overall revenue, although it is a larger part of funding for many smaller operators, particularly rural and specialized service providers. The impact of the program on the overall public transportation system, however, cannot be determined. This is both because of the relatively small size of the program overall and the general–purpose nature of the funding assistance. If the Legislature chooses to continue the STA program, we recommend that the Legislature improve the program by adopting a more rational funding formula and tying the distribution of funds to recipient performance so as to better target the use of state funding. We discuss the advantages of these changes in state policy below.

Create a More Rational Funding Formula

Current Funding Formula Results in Unpredictable Allocations. The PTA receives its revenues from sales taxes on gasoline and diesel. (Currently, state gasoline sales tax receipts are split into three separate allocations of funding—spillover, Proposition 111, and Proposition 42. Depending on the price of gasoline and the state’s economic conditions, the amount of spillover varies from year to year.)

Prior to 2007–08, STA was statutorily allocated 50 percent of all PTA revenues each year, regardless of the revenue source. Beginning in 2008–09, the funding formula was revised such that the shares of PTA revenues that the program receives differ depending on the source of the revenues. Specifically, STA now receives:

• Two–thirds of all spillover gasoline sales tax revenue deposited into the PTA.
• Seventy–five percent of all Proposition 42 gasoline sales tax revenues transferred into the PTA.
• One–half of all Proposition 111 gasoline sales tax revenue and diesel sales tax revenues deposited into the PTA.

As Figure 10 shows, the current formula can provide different STA funding levels from the same amount of gasoline sales tax revenue depending on the amount of overall revenue that is counted as spillover revenue. Essentially, the higher the spillover amount, the higher the formula–determined STA funding level.

We see no logical basis for funding the program differently depending on whether a certain increment of gasoline sales tax revenue is determined to be spillover. Because of the volatility of spillover revenue from year to year, STA funding levels have and will continue to fluctuate under the current formula.

Given the unpredictable nature of STA funding, transit operators may be reluctant to plan for receipt of these funds in their budgets. As such, it is likely that STA is not always being used in the most effective manner.

Predictable Formula Would Enable Better Planning. A predictable funding formula would allow recipients to better plan how to use the funds. If the Legislature decides to continue the STA program and provide transit assistance on a formula basis, we recommend that the Legislature enact a more predictable funding formula. A new funding formula could be structured in one of two ways. The Legislature could choose a specific funding level, based on some average of the previous years’ funding amounts, and provide that amount each year. This would provide funding certainty to transit operators. Another option is to set STA funding each year as a percentage of total PTA revenues, similar to the way funding was calculated prior to 2007–08. In this way, STA funding would not be allocated differently for each particular revenue source and be somewhat more predictable than it is currently.

Include Performance Measures in Distribution Formula

If the Legislature chooses to continue the STA program in the future, we further recommend that performance measures be used in the distribution of funding to transit operators. The current formula for distribution of STA funding does not effectively consider the performance of transit operators. One–half of STA funds is now allocated based on population and one–half based on operating revenues. To be eligible for funding, an operator must meet a minimum farebox recovery ratio, generally 20 percent. We find that this eligibility measure is artificially low and does little to encourage performance improvement.

If the Legislature decides to continue the STA program, we recommend that the Legislature adjust the way funding is distributed to tie the amount that an operator receives to specific, measurable outcomes of performance. For instance, the Legislature could choose to reward operators that are increasing the cost–effectiveness of their operations. Many measures currently used by operators to track their own performance could be instituted to determine the amount of STA awarded to each recipient.

Integrating these performance measures into the distribution of funds would reward well–operated systems and encourage others to improve their operations. For example, to promote cost–effectiveness, recipients with an improving (declining) ratio of annual operating costs per passenger mile, or annual subsidy per passenger mile, could be eligible for a larger percentage of funding than they would otherwise receive under the present formula. Transit operators that were improving their efficiency would be able to expand their systems and the state’s funds would better benefit statewide transit operations.

Conclusion

Due to the state’s budget problem, we recommend that the Legislature suspend STA for the remainder of the current year and for the budget year, but consider the policy implications before statutorily eliminating the program. If the Legislature decides not to eliminate STA, we recommend two statutory changes to the current program. First, in order to enable local operators to reliably budget for state assistance, we recommend enactment of a more predictable annual funding calculation. Second, we recommend the adoption of performance criteria for the distribution of funds in order to drive desired behavior among recipients. These changes would enable the Legislature to then better determine the impact of the program on the state’s overall public transportation system.