State law requires the Department of Transportation (Caltrans) to submit, every two years, a fund estimate to CTC that projects state and federal revenues and expenditures for highway and rail projects over a seven-year period. The CTC used the 1996 fund estimate as the basis for scheduling projects to be funded in the 1996 STIP, extending from 1996-97 through 2002-03.
In the following sections, we conclude that:
1996 STIP Deleted Projects. As we have reported in previous Analyses, there has been a chronic shortage of funds for transportation projects scheduled in the STIP, due to a multitude of factors. As a consequence, CTC added no new projects in either the 1994 or 1996 STIPs. The CTC took a further step to balance projected revenues and expenditures in the 1996 STIP by deleting about $500 million of projects. As a result, few new projects have been scheduled in the past six years, and the projects originally scheduled in the 1992 STIP will take much longer to deliver than initially intended.
Funding for 1996 STIP Improves. As we reported in the 1996-97 Analysis, the 1996 STIP began about $560 million out of balance, because it did not reserve full construction funding for projects in the last years of the STIP. One year later, we find that available revenue will be substantially higher than forecast, primarily due to the passage of Proposition 192. Support and local assistance expenditures will also be higher, and the net result, summarized in Figure 4, is that the gap narrows to about $210 million.
Proposition 192 Provides $1.35 Billion. The 1996 STIP reserved approximately $1.35 billion of state and federal funds for seismic retrofit of highway bridges. However, voters approved Proposition 192 in March 1996, which provides $1.35 billion in general obligation bond funds for highway seismic retrofit. (Proposition 192 also provides $650 million for toll bridge seismic retrofit.) These bond funds free up the funds that had been reserved in the STIP, providing an additional $1.35 billion over the 1996 STIP period.
State and Federal Revenue Changes. We estimate that SHA revenues for the 1996 STIP could be about $300 million higher than forecast, as shown in Figure 4. (This estimate is based upon gas tax revenues for 1996-97 and 1997-98 that are projected to exceed the revenues assumed by the fund estimate.) Federal funds in the first two years of the 1996 STIP have been close to the levels predicted in the fund estimate; however, as we discuss later in this section, the level of federal funds in later years is contingent upon enactment of a new federal transportation act.
|1996 STIP Funding Outlook
Summary of Major Changes
|Initial funding deficit||-$560|
|Proposition 192 bonds||1,350|
Higher Support and Local Assistance Expenditures. Although new bond funds and higher revenues improve the condition of STIP funding, these factors are partially offset by an increase in Caltrans' support and local assistance expenditures. Caltrans was unable to reconcile its actual support expenditures to those projected in the 1996 STIP fund estimate in time for this analysis, but we estimate higher support costs of at least $100 million each year in 1996-97 and 1997-98. If this trend continues, then support of Caltrans will require an additional $700 million of revenues over the seven years of the 1996 STIP.
Additionally, the 1996 fund estimate assumes that the State-Local Transportation Partnership Program (SLTPP), a local assistance program, will be funded at $100 million annually. In the 1997-98 budget, however, Caltrans proposes increasing SLTPP funding to $200 million, the level specified in statute. If the Legislature funds the SLTPP at $200 million in 1997-98 and in the each of the remaining years of the 1996 STIP, the program will consume $600 million not anticipated in the fund estimate.
STIP Is Close to Balance. As Figure 4 illustrates, the net effect of these changes is to reduce the fund gap from $560 million to $210 million. This amount is less than 1 percent of total revenues assumed during the seven-year STIP. We believe that a $210 million gap is within the margin of error of the 1996 fund estimate, and consequently find that revenues and expenditures are essentially balanced over the 1996 STIP period. However, we note that a balanced STIP was achieved only at the cost of two STIP cycles (1994 and 1996) that added no new projects and by deleting about $500 million of projects from the 1996 STIP. In addition, while Proposition 192 freed up $1.35 billion in SHA funds, higher support and local assistance expenditures threaten to use the entire amount. As a result, the 1998 STIP may be unable to use any of the $1.35 billion freed up by Proposition 192 for new projects. Furthermore, as we discuss later in this section, several significant financial threats exist that could again plunge STIP finances into a shortfall.
Recommend that Fund Estimate Contain Reconciliation. As illustrated in Figure 4, support and local assistance expenditures that exceed those forecast in the fund estimate can have a substantial impact on STIP funding. Were it not for new bond revenues and higher state revenues, Caltrans' support and local assistance expenditures could have reduced funding for STIP project construction. In order to improve the accuracy of fund estimate forecasts and to hold Caltrans more accountable for its expenditures, we recommend that the Legislature adopt supplemental report language directing Caltrans to include a reconciliation in future fund estimates:
Beginning with the 1998 STIP fund estimate, and for all future STIP fund estimates, Caltrans shall include in the fund estimate (1) a reconciliation of actual support and local assistance expenditures shown in the Governor's budget to those forecast in the previous fund estimate and (2) a summary of forecast expenditures over the seven years of the fund estimate, in a format suitable for comparison to the Governor's budget.
The cash balance in the SHA, the primary source of state funds for transportation expenditures, has grown substantially since 1994-95. While Caltrans and CTC endeavor to keep the fund balance around $200 million--by ensuring that SHA funds are spent on projects rather than accumulating in the account--the current cash balance is around $1 billion (and the budget estimates the balance at $991 million by the end of the current year). This large balance, however, does not represent funding capacity for programming of additional projects. Rather it indicates that, while expenditures and revenues are roughly balanced over the seven years of the 1996 STIP, timing differences between receipts and expenditures have allowed cash to accumulate in the account.
Much of the balance accumulated in 1995-96. For that year, Caltrans initially proposed $901 million in SHA capital outlay expenditures, only to revise the amount down to $477 million by mid-year. Actual SHA capital outlay expenditures were $276 million, or $625 million less than proposed. With expenditures down and revenues holding steady, the cash balance grew.
Allocation Plan Restricted Expenditures. The low level of capital outlay expenditures in 1995-96 results primarily from Caltrans' slow delivery of seismic retrofit projects and from a decision to ration non-seismic construction. In late 1994, Caltrans and CTC determined that there would not be sufficient funds to construct all programmed projects along with Phase 2 of highway bridge seismic retrofit (having a $1 billion construction cost). They therefore adopted a "1995 allocation plan" that restricted the number of nonseismic projects that would be financed from January 1995 through June 1996. By limiting the construction of nonseismic projects, the allocation plan intended to ensure that cash would be available to construct Phase 2 retrofit projects.
However, Caltrans did not deliver retrofit projects on the assumed schedule, and the funds saved by constructing fewer nonseismic projects were not yet needed for seismic retrofit. Caltrans now anticipates that the bulk of its retrofit expenditures will occur in 1997-98 and later; however, Proposition 192 now provides bond funds for retrofit, so the accumulated SHA cash is not needed. We conclude that the allocation plan's restriction of nonseismic construction, Caltrans' failure to deliver retrofit projects on its assumed schedule, and the passage of Proposition 192 are primarily responsible for the high SHA cash balance.
SHA Cash Balance Outlook. Actual 1996-97 year-end cash balances will be even higher than the $991 million estimated in the Governor's budget. This is because the Governor's budget does not include $103 million of Proposition 192 bond funds that CTC transferred to SHA as repayment for earlier seismic retrofit expenditures. Additionally, Caltrans historically overestimates its capital outlay expenditures. Caltrans' year-to-date SHA capital outlay expenditures are only $137 million, so it probably will not achieve the full-year expenditure of $716 million that the budget assumes. If actual expenditures remain lower than estimated, the account balance will rise further.
Caltrans indicates that SHA balances will not drop soon, and the Governor's budget predicts that balances near $1 billion will persist through the end of 1997-98. As we discuss in the Highway Transportation section of this Analysis, Caltrans proposes to accelerate delivery of some STIP projects, and CTC is likely to schedule new projects in the early years of the 1998 STIP in order to use the available cash.
Due to the additional funds provided by Proposition 192 and the billion dollar SHA balance, CTC plans to adopt the 1998 STIP earlier than usual. The CTC plans to adopt the 1998 fund estimate in May (rather than August) 1997 and the 1998 STIP, including a list of projects to be funded from 1998-99 through 2004-05, in December 1997 (rather than March 1998). The 1998 STIP will present the first opportunity in six years to add a large number of new projects to the STIP, and early adoption could somewhat speed project design and construction. However, while the outlook for the 1998 STIP is positive, there are several prominent threats that may reduce funding for the STIP and constrain its ability to fund new projects. In the following sections, we discuss three issues that may reduce STIP funding:
In early 1995 Caltrans raised its cost estimate for seismic retrofit of state-owned toll bridges from $650 million to $2.1 billion. Even with $650 million in bond funds provided by Proposition 192, a $1.4 billion gap remains. The Governor has suggested that SHA contribute $500 million to close the gap, but whatever amount of SHA funds the Legislature provides will reduce funds available for other projects in the 1998 STIP.
Funding Needed for 1997-98. At this time last year, Caltrans reported that it would begin construction on all bridges in 1996-97, creating an urgent need for the Legislature to develop a funding solution so that Caltrans could begin construction. Caltrans now indicates that schedules have slipped three to six months, and that it will require only $102 million in 1996-97. This delay pushes the funding crisis to 1997-98, when Caltrans believes that it will award construction contracts worth $1.5 billion.
The retrofit of the San Francisco-Oakland Bay Bridge is responsible for the largest share of estimated costs in 1997-98--$860 million out of the $1.5 billion total. When this analysis was prepared, Caltrans had not decided whether to retrofit or replace the east span of the Bay Bridge. (As we discuss later, these options have different price tags.) Consequently, we believe that the cost and schedule for the Bay Bridge retrofit are subject to change.
Even if Caltrans begins no construction on the Bay Bridge in 1997-98, construction on other bridges will require $650 million. According to Caltrans, however, only $380 million from Proposition 192 will remain uncommitted for 1997-98. Therefore, even without Bay Bridge costs, the Legislature will need to enact a funding solution in 1997-98 to enable retrofitting to proceed.
Solution Should Use SHA and Toll Funds. The Legislature could close the entire $1.4 billion gap with SHA funds, but this would greatly reduce funds available for the 1998 STIP to program new projects throughout the state. Still, we believe that it is appropriate that statewide funds--the SHA--should contribute to toll bridge retrofit, because toll bridges are part of the state highway system, intended to benefit the state by facilitating travel and commerce between cities. We also note that SHA currently funds other rehabilitation, safety, and retrofit projects according to need and without regard to their geographic location, an approach that we believe should apply as well to toll bridge retrofit.
Alternatively, the Legislature could require that bridge users fund the entire $1.4 billion gap through toll revenue. This would require a $1 toll surcharge on all toll bridges for at least 14 years, and would also likely delay construction of other bridge improvements that are already scheduled to use toll funds. Still, it is appropriate that toll funds contribute to retrofit, because bridge users are the most direct beneficiaries.
In order to share the burden between bridge users and drivers statewide, we recommend that the Legislature enact a funding solution that combines SHA and toll revenues. Additionally, we believe that it is important to enact a funding solution in time to allow retrofit to proceed on schedule.
New Bay Bridge Span May Cost Less. At the time this analysis was prepared, Caltrans had not determined whether to retrofit or replace the east span of the Bay Bridge (between Treasure Island and Oakland). Retrofitting this span of the Bay Bridge is the most expensive and difficult element of the toll bridge retrofit program. A recent report, prepared for Caltrans by expert consulting engineers, concludes that Caltrans should replace, rather than retrofit, the east span. The report finds that a new bridge would cost less to construct and maintain, and would also offer better seismic resistance, improved driver safety, less environmental damage, and less traffic disruption during construction. Caltrans, however, is concerned that it could take several years longer to construct a new bridge and that it could be further delayed by environmental reviews.
At the time we prepared this analysis, it was not clear when Caltrans will have an official recommendation on whether to retrofit or replace the east span of the bridge. While Caltrans can consider engineering factors in its analysis, we believe that it is the appropriate role of the Legislature to weigh the relative cost, timing, seismic safety, traffic disruption, aesthetics and other factors that distinguish the retrofit and replacement options. The Legislature should then enact its choice in statute, along with a funding solution.
The 1996 STIP fund estimate assumes that California will receive $1.6 billion in federal highway funds during each year of the seven-year STIP period. Caltrans based this estimate upon the historical funding level that California has received under the federal Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). However, ISTEA expires in September 1997, thus the amount of federal highway funds that California will receive during the last six years of the 1996 STIP is unknown.
It is our understanding that Congress intends to write a new federal transportation act during the current year. However, the CTC has accelerated the 1998 STIP process, and Caltrans will present the 1998 fund estimate in April 1997--well before Congress will have completed ISTEA reauthorization. If the new federal transportation act changes funding levels significantly, the 1998 STIP could face either a shortfall or surplus. In addition, the federal act specifies how states may use federal transportation funds, and if the new act adds program requirements then some projects in the 1998 STIP may not qualify for federal funds.
We understand that the most likely result of the reauthorization process will be a new federal act which is similar, in provisions and funding levels, to ISTEA. However, there are several competing proposals that could have very different effects on the 1998 STIP:
Other Issues. Congress will consider other issues as it debates ISTEA reauthorization. Congress may consider taking transportation funds off-budget, in order to reduce the tendency to use transportation funds to balance the federal budget. Also, 4.3 cents of the federal gas tax currently goes to the federal budget for deficit reduction; Congress must determine whether to maintain this 4.3 cent tax, divert it to the transportation fund, or eliminate it. If the new federal transportation act provides a different level of funds than anticipated in the 1998 fund estimate, or changes restrictions on the uses of federal funds, the revenues and expenditures in the 1998 STIP may become unbalanced.
Projects that extend the useful life of the existing transportation infrastructure and improve its safety are scheduled in the SHOPP, rather than in the STIP, which includes projects that increase transportation system capacity. Typical SHOPP projects include pavement rehabilitation, bridge repair, roadway alignment, and landscaping. Because SHOPP projects protect the state's investment in its existing transportation system, SHOPP expenditures have a higher priority in statute than do STIP expenditures. Thus, the amount of money available for new projects in the 1998 STIP will be partially determined by how much is set aside for projects in the SHOPP. In 1995, CTC increased SHOPP funding by $96 million per year, which reduced funds available for the 1996 STIP by $675 million. As Caltrans and CTC prepare for the 1998 STIP, it is likely that SHOPP expenditures will continue to grow, further squeezing funding for the STIP.
Pavement Rehabilitation Costs Will Grow. As we reported in last year's Analysis, the primary reason that CTC increased SHOPP funding is that most pavement on the state highway system is over 30 years old and is beginning to deteriorate rapidly. Rehabilitation projects add many years to pavement life and can be very cost-effective, because if pavement deterioration is not addressed in time it will progress into serious pavement failure requiring much more expensive reconstruction.
Because of the advanced age of the state highway system and its heavy use, particularly by commercial trucks that cause the most pavement damage, pavement rehabilitation costs are likely to continue rising. Caltrans has identified six options for improving pavement conditions over the next 10 years, such as holding pavement deterioration constant, repairing structural damage on major highways, or increasing pavement strength on major commercial routes. The department estimates that it would cost $4.7 billion over ten years to implement all of its options. This would require an increase of about $800 million above current rehabilitation funding levels during the seven years of the 1998 STIP. Caltrans and CTC will determine the actual level of funding for rehabilitation when they adopt the 1998 STIP fund estimate in April.
Bridge Expenditures to Rise. In addition to pavement rehabilitation, Caltrans estimates that expenditures will rise for bridge rehabilitation. The SHOPP currently provides an average of about $80 million per year for bridge rehabilitation and replacement. As highway bridges age along with the rest of the state highway system, Caltrans estimates that rehabilitation and replacement costs will increase to $250 million per year by 2005. If fully funded, this would require about $600 million above current levels during the seven years of the 1998 STIP, and still higher levels in later STIPs.
Less Funds Available for STIP. Expenditures for both pavement and bridge rehabilitation are likely to continue increasing through the next decade, reducing the level of funds that can be used for STIP projects. Most STIP projects provide new transportation capacity to meet local and regional transportation demand. As SHOPP rehabilitation costs increase at the expense of STIP funding, less funds will be available to accommodate local traffic growth and congestion.
The Motor Vehicle Account (MVA) derives most of its revenues from vehicle registration and driver license fees. In 1996-97, these fees account for 79 percent ($870 million) and 10 percent ($109 million), respectively, of the estimated $1.1 billion in MVA revenues. The majority of MVA revenues are used to support the activities of the Department of Motor Vehicles (DMV), the California Highway Patrol (CHP), and the Air Resources Board (ARB).
Our review shows that the account faces significant challenges in the current and budget years. Specifically, current-year revenues are estimated to fall below projected amounts while expenditure of these revenues are higher than originally anticipated, necessitating corrective actions to balance the account. For the budget year, the account will incur a deficit if the expenditures proposed by the budget are approved without additional revenues being generated to the account.
Since July 1996, the condition of the MVA has worsened significantly, such that the account will be in a deficit by the end of the current year instead of having a balance of $25.4 million as projected a year ago. This change in the account's condition is due to a combination of lower-than-expected revenues and higher-than-anticipated expenditures. Specifically, current-year MVA revenues are estimated to be less than originally estimated by approximately 3 percent (or $36.4 million). The lower revenues reflect:
Total MVA expenditures for 1996-97 are also anticipated to be higher by about $35 million. The net result of the lower revenues and higher expenditures is that MVA will have a deficit of about $50 million if no corrective actions are taken.
Actions Proposed for Current Year. In order to balance the account in the current year, the budget proposes the following actions:
In addition, the budget assumes that about $22.2 million in CHP retirement contributions would be paid by surplus funds in CHP's Public Employees' Retirement Account (PERS). The availability of this amount, however, is not certain at this time. The Department of Finance indicates that a more definite estimate will be forthcoming by April. With these actions, the budget estimates that MVA will end the current year having practically no reserve--only a balance of $25,000.
Legislative Oversight Necessary to Ensure Expenditure Reductions. We believe that the Legislature needs to be informed of the administration's (and departments') spending priorities, and how the "unidentified savings" will be achieved. Therefore, we recommend that the Department of Finance (DOF) report to the Legislature during budget hearings on the activities or services that would be reduced in the current year by CHP and DMV as a result of the expenditure reductions. The DOF should also report on the availability of CHP-PERS surplus funds assumed in the budget for the current year.
Our analysis shows that, as in the current year, MVA will have a shortfall in 1997-98 of about $77 million. The budget proposes to balance MVA in the budget year by:
With these actions, the budget projects a balance of $23 million in MVA by the end of 1997-98.
However, our review shows that the balance of MVA is still shaky even if the Legislature adopts the above proposals, for the following reasons. First, the budget assumes that $17.8 million in CHP retirement contributions in 1997-98 would be funded from a projected surplus in the PERS account, and it is not certain if the amount would be forthcoming. Second, the full impact of Chapter 1126 on vehicle registration is highly uncertain, as it is yet unknown how motorists will react to this insurance requirement. If registration decreases by more than the 1 percent assumed, revenues will be less. (We estimate that a 1 percent drop in vehicle registration would result in about $8 million less in MVA revenues.)
Third, CHP's employee compensation expenditures might be higher than projected. The budget year expenditure estimates do not take into account the upcoming labor agreement negotiations with CHP traffic officers over salary and employee compensation. The current labor agreement will expire on June 30, 1997, and CHP's employee compensation expenditures may change as a result of a new agreement.
Legislative Action Necessary to Avert Deficit. Without new revenues and with the proposed budget-year expenditure levels, the account will face a deficit in the budget year. To balance the account, the Legislature will have to take action by enacting legislation to raise motor vehicle fees; by decreasing the proposed program expenditures, or by enacting a combination of both.