California finances its highway and mass transportation programs with a combination of state, federal, local, and private funds. The multiyear expenditure of state and federal funds for transportation capital projects is contained mainly in the State Transportation Improvement Program (STIP), which is adopted every two years by the California Transportation Commission (CTC). The STIP includes projects designed to increase the capacity of the state's transportation infrastructure. Another program, the State Highways Operation and Protection Program (SHOPP) includes projects that do not increase capacity, but rather projects that primarily address rehabilitation and safety issues.
State law requires the Department of Transportation (Caltrans) to submit a fund estimate to CTC that projects state and federal revenues and expenditures for highway and rail projects over the forthcoming STIP 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 December 1997, CTC adopted the 1998 Fund Estimate to be used as the basis for programming projects in the 1998 STIP, covering the period from 1998-99 through 2003-04.
In 1997, the Legislature enacted Chapter 622, Statutes of 1997, (SB 45, Kopp), which makes significant changes in the STIP process. In the following sections, we summarize the key features of Chapter 622 and discuss:
Chapter 622, Statutes of 1997, significantly revises the State Transportation Improvement Program process. We recommend that the Legislature clarify several issues to facilitate the California Transportation Commission 's implementation of the new process.
Figure 4 summarizes the key provisions of Chapter 622. Specifically, Chapter 622 shortens the STIP horizon from seven to four years, and provides for a six-year 1998 STIP as a transition to the four-year 2000 STIP. Chapter 622 also modifies the procedures for selecting and funding STIP projects. The changes are generally directed towards increasing local flexibility, control, and accountability for the expenditure of state transportation improvement funds, thereby resulting in more efficient use of revenue for projects that better reflect local and regional needs and preferences. The major changes enacted by Chapter 622 are the following:
|Key Provisions of
Chapter 622, Statutes of 1997
(SB 45, Kopp)
Implementation Questions. In implementing Chapter 622 through the 1998 STIP, the CTC has encountered several areas where the intent of the legislation is unclear and requires either interpretation by the CTC or clarification by the Legislature. We recommend that the Legislature provide clarification on the following issues:
Clarification of these issues will help insure that CTC implements Chapter 622 in a manner consistent with legislative intent.
Effect of Chapter 622 on Budget Is Relatively Small. Although Chapter 622 makes significant changes to the state's procedures for selecting, programming and funding transportation improvement projects in the STIP, its effect on the budget preparation process is small. This is because Chapter 622 does not change Caltrans' responsibility for designing and constructing STIP projects, as well as maintaining and operating the state highway system. Consequently, the budget will still appropriate funds to Caltrans for the same activities as prior to Chapter 622.
However, adoption of the 1998 STIP, the first STIP to be adopted under Chapter 622, will have an impact on the adoption of the Caltrans' 1998-99 budget. This is because the 1998 STIP will program several billion dollars worth of new transportation improvement projects over the next six years. These projects, combined with existing projects carried forward from the 1996 STIP, will determine Caltrans' need for capital outlay support (design and engineering) resources in the budget year. However, the 1998-99 request for capital outlay support is only a rough estimate as presented in the Governor's budget. This is because at the time the budget was prepared, the additional projects to be programmed in the 1998 STIP were not yet identified and therefore the associated support needs could not be estimated. As we discuss further in the Department of Transportation write-up (Item 2660), the level of capital outlay support requested in the 1998-99 Governor's Budget does not take into account support Caltrans will need to provide for additional Regional Improvement projects to be programmed in the 1998 STIP. Rather, Caltrans indicates that the total level of capital outlay support will be adjusted in April as more information on the 1998 STIP is available.
In future years, the STIP timetable as provided by Chapter 622 should minimize this timing problem. This is because with the STIP being adopted in the even-numbered years, nearly all STIP projects would have been identified for purposes of preparing the budget in odd-numbered years. Furthermore, Chapter 622 requires that the CTC adopt future STIPs by April of each even-numbered year, and allows the Department of Finance to revise its budget proposal based upon the adopted STIP. Thus, it should be possible to base future budgets more directly on the actual projects programmed in the STIP.
Chapter 622 also requires that the STIP display estimated support costs for each project. While this display should increase Caltrans' accountability for project design costs, it is important to note that this display will notprovide a direct link between the STIP and Caltrans' annual capital outlay support budget. There are two primary reasons for this:
Projected revenues in the 1998 Fund Estimate exceed projected expenditures by about $4.6 billion. As a result, for the first time in recent years, the new State Transportation Improvement Program will program a significant number of new projects for delivery over the next six years.
In December 1997, the CTC adopted the 1998 Fund Estimate for the six-year period from 1998-99 through 2003-04. The 1998 STIP will be prepared based on the resource projections provided by the fund estimate. Figure 5 summarizes the 1998 Fund Estimate projections for highway funds.
Revenues Are Projected to Exceed Expenditures. As Figure 5 shows, resources are projected to total about $28.1 billion over the six-year period. Expenditures are projected to total about $23.5 billion. This level of expenditures includes noncapital outlay expenditures for state operations, including highway maintenance, operations, program development, and departmental administration; local assistance and subventions; and the costs of engineering and design of SHOPP projects, minor projects, and projects that are already programmed for delivery in the 1996 STIP. In addition, expenditures include projected costs of construction of SHOPP and minor projects, as well as 1996 STIP projects.
Significant Balance for New Projects. The projected balance of $4.6 billion will be available to program and fund new projects. Twenty-five percent of the balance will be available for projects in the Interregional Improvement program, including intercity rail improvement, and the remaining 75 percent will be available for the Regional Improvement program.
Under the requirements of Chapter 622, these funds will be used for both capital outlay projects and project support--design and engineering support needed to deliver projects. Caltrans, in past years, has used 33 percent of capital costs as a rough approximation of project support costs. Based on this historical experience, this would leave about $3.4 billion available for new project construction and right of way acquisition.
|1998 STIP Fund
Projected Revenues and Expenditures
|SHOPP, minor projects||5.6|
|Support (non-STIP projects)||2.8|
|1996 STIP commitment||2.7|
|Support (1996 STIP), reserve||1.0|
|Additional programming capacity||$4.6|
While the 1998 Fund Estimate projects a significant improvement in resources available for new projects, various uncertainties exist that may substantially change the funding picture. These uncertainties include the federal funding level, the level of gas tax revenues, and potentially higher expenditures for the budget year.
Federal Funds Uncertain. As we
discuss in a later section, the federal Intermodal Surface
Transportation Efficiency Act (ISTEA) has expired, and a new
multiyear federal transportation act has not been authorized. The
1998 Fund Estimate projects federal funds based on the amount
provided to the state through April 1998, and assumes that
annually thereafter federal funds would grow marginally. While
this is a reasonable approach, depending on the new federal act,
the actual amount available to the state particularly for 1999-00
and later may be subject to significant changes.
State Revenue Projections May Not Materialize. The fund estimate projects fuel tax revenues to increase at an annual rate of 2.2 percent--a doubling of the rate used in the 1996 Fund Estimate. This assumption accounts for $600 million more in state revenues from 1998-99 through 2002-03 (the five years common to both the 1996 and 1998 STIPs). Past experience, however, shows that fuel consumption, the primary factor determining fuel tax revenues, has grown at a much lower average rate. For instance, since 1990-91, fuel consumption has grown at an average rate of less than 1 percent per year. To the extent actual fuel consumption is lower than projected, due to continued fuel efficiency in vehicles and use of alternative fuel not subject to the gas tax, total state revenues would be lower.
Expenditures Will Be Higher Than Fund Estimate Projects. For purposes of projecting support and local assistance expenditures in the fund estimate, Chapter 622 limits these expenditures to the amounts provided in the most recent Budget Act, adjusted for inflation and inventory changes. The budget, however, is proposing total support and local assistance expenditures for 1998-99 that are larger than the amount reflected in the fund estimate. To the extent the higher proposed expenditures are authorized for 1998-99, correspondingly lower amounts will be available for capital projects.
In addition to supporting Caltrans, the State Highway Account (SHA) is used to support the California Highway Patrol (CHP) and the Department of Motor Vehicles. For instance, in 1998-99, the budget proposes $91.6 million in SHA for these departments' support. The fund estimate, however, does not reflect this use of SHA funds. Depending on the amount of SHA used for CHP's Commercial Vehicle Inspection program, we estimate that ongoing use of SHA for support of these two departments would result in less funds for projects ranging from $380 million to $580 million over the 1998 STIP period. (Please see discussion in Item 2720.)
The 1998 Fund Estimate reflects the funding package the Legislature enacted to provide for seismic retrofit of state-owned toll bridges. The budget proposes $111.5 million for toll bridge seismic retrofit in 1998-99.
Funding Package Provides $2.5 Billion for Toll Bridge Seismic Retrofit. In 1997, the Legislature enacted a funding package for seismic retrofit of state-owned toll bridges. Chapters 327 and 328 (SB 60 and 226, Kopp) provided the sources of funding and Chapter 777 (AB 1302, Wayne) provided for the retrofit of the San Diego-Coronado Bridge. Specifically:
Figure 6 summarizes the $2.5 billion funding package. Proposition 192 bond revenues will provide $790 million (31 percent of the total),
|Source of Funds
Toll Bridge Seismic Retrofit
|Proposition 192 Bond Funds|
|Dedicated toll bridge retrofit funds||$650|
|State Highway Account||$745|
|Public Transportation Account||130|
|Toll Bridge Revenues|
|Vincent Thomas bridge||$15|
|San Diego-Coronado bridge||33|
|San Francisco Bay Area bridges||827|
$875 million (34 percent) will come from state transportation funds--SHA and Public Transportation Account (PTA), and at least $875 million (34 percent) will come from toll revenues. The funding package does not specify when the various contributions are to be made.
1998 Fund Estimate Reflects Contribution of State Funds. The fund estimate projects that SHA will provide its full contribution over the 1998 STIP period. In addition, PTA will provide $70 million over the six years.Consistent with the fund estimate, the budget proposes to transfer $101.5 million from SHA and $10 million from PTA to the Toll Bridge Seismic Retrofit Account in order to fund seismic retrofit work on toll bridges in 1998-99. The budget also projects $114.2 million in toll surcharge revenues to be available for toll bridge seismic retrofit in 1998-99.
The budget proposes a transfer of $30.5 million from the State Highway Account to avert a projected deficit in the Public Transportation Account (PTA). Even with the transfer, projected reserves in the account will still be substantially short of outstanding obligations made through 1997-98 for transit capital improvement projects.
Beyond 1998-99, the fund estimate projects a funding shortfall in PTA over the six-year STIP period. As a consequence, there will be no PTA funds for additional transit capital improvements beyond those funded through 1997-98. The Legislature may want to consider having the General Fund repay a loan to the PTA in order to provide funds for new transit capital improvements.
Chapter 622 renamed the Transportation Planning and Development account as the PTA. Chapter 622 also modified the allocation of PTA resources and requires 50 percent of account revenues to be allocated annually for transit operating assistance under the State Transportation Assistance (STA) program. The remaining resources will support intercity rail service, transportation planning, high speed rail development, and provide funds for transit capital improvements. In general, PTA is the primary source of state funds for transit equipment and rolling stock (such as buses and rail cars) acquisition and improvement.
Public Transportation Account Deficit Projected Without SHA Transfer. The budget projects a significant increase in PTA revenues from the sales tax on diesel and gasoline in 1998-99. Consequently, the budget projects significantly higher funding for STA, in accordance with the requirements of Chapter 622. However, there will not be sufficient funds remaining in the PTA to cover proposed Caltrans' support expenditures, pay $17.8 million in outstanding commitments for transit capital projects (which are estimated to total $82.8 million by the end of 1997-98), and contribute $10 million for toll bridge seismic retrofit. In order to avert a projected deficit, the budget proposes a transfer of $30.5 million from SHA.
Projected 1998-99 Balance Insufficient to Cover Outstanding Obligations. With the transfer, the budget projects a balance of $26.8 million in the account at the end of 1998-99. This amount, however, is substantially less than the remaining outstanding transit capital improvement commitments, made in the current and prior years, estimated at about $65 million.
Fund Estimate Projects PTA Shortfall for 1998 STIP. Beyond the problem it faces in 1998-99, PTA is projected to have a funding shortfall over the entire 1998 STIP period. Specifically, the fund estimate projects total resources to fall short of total expenditures, including expenditures for STA, funding of all outstanding commitments made prior to 1997-98 for transit capital improvements, support for intercity rail services, and departmental support. As a consequence, there will be no PTA funds available for new transit capital improvement projects over the six-year period. Because PTA is the primary source of state funds for transit equipment and rolling stock acquisition and improvement, no new projects of this type can be funded in the 1998 STIP period. In addition, support expenditures--for instance, for intercity rail service--would need to be curtailed or additional transfers from another fund source, such as SHA, would be necessary over the period.
Loan Repayment Option. In 1993-94, due to the state's fiscal condition, $91.5 million was loaned from PTA to the General Fund. While the 1993 budget required the loan to be repaid with interest, no repayment date was specified for the loan. In order to provide some funds for transit capital projects in the budget year and beyond, the Legislature may want to consider directing the repayment of the loan in 1998-99 from the General Fund.
The federal transportation act expired in 1997 and a new multiyear transportation act has yet to be authorized. Congress passed a temporary extension to provide six-month funding to the states through April 1998. The Department of Transportation does not anticipate any adverse consequences from the temporary extension to the federal act.
California receives over $1 billion annually in federal highway funds. These funds, which are collected primarily through the federal gas tax, provide a large share of funding for Caltrans. The federal ISTEA of 1991 had authorized these federal expenditures, as well as determined the amount of funding for California and specified how the funds may be spent. However, ISTEA expired in October 1997, and Congress has not yet enacted a new multiyear transportation authorization act.
Short-Term Funding Available. In order to provide short term funding to the states while continuing to work on a long term transportation bill, Congress passed the Surface Transportation Extension Act (STEA). The STEA extends the terms of ISTEA for six months and provides partial year funding until the end of April 1998. As a result, Caltrans estimates that federal highway funding for 1997-98 will total $1.8 billion. Caltrans indicates that the short-term funding provided by STEA should allow the department to avoid any funding shortfalls during the current year.
Long-Term Reauthorization Pending. In 1998, Congress will be reauthorizing a new multiyear transportation program to replace STEA. Based on Congressional action to date, it appears that the next transportation act will remain roughly similar to ISTEA, but may provide greater flexibility, as well as higher funding levels, to the states. However, depending on whether Congress enacts a new transportation act by May 1998, the level of federal funds available to the state would remain uncertain.
The budget projects a moderate balance for the Motor Vehicle Account at the end of both the current and budget years. However, the 1998-99 balance will be achieved through a deferral of a loan repayment, continued shifts in expenditures to other sources, deferral of capital improvements, and overly optimistic projections of revenues.
The Motor Vehicle Account (MVA) derives most of its revenues from vehicle registration and driver license fees. In 1996-97, these fees accounted for 79 percent ($869 million) and 10 percent ($112 million) respectively, of the estimated $1.1 billion in MVA revenues. The majority of MVA revenues are used to support the activities of the California Highway Patrol (CHP), the Department of Motor Vehicles (DMV), and the Air Resources Board. In addition, approximately $23 million, or 3 percent, of MVA revenues are used to support other departments.
Actions Taken to Balance Account in Current Year. To close a $129 million funding shortfall in the account and to provide for a prudent reserve, the 1997-98 budget provides $179 million in new revenues, transfers, and expenditure reductions, as follows:
The budget projects a modest balance in Motor Vehicle Account (MVA) at the end of 1998-99, if certain actions are taken. Beyond 1998-99, growth in MVA expenditures will outpace revenue increases.
As a result of the current year actions, the budget now projects a $62 million balance in the account by the end of 1997-98. The budget also projects a balance of about $75 million by the end of 1998-99. However, our review shows this balance is predicated on a number of proposed actions. Absent these actions, the account will face continuing problems.
Additionally, vehicle registration renewals for the first quarter of 1997-98 showed a marked reduction from 1996-97. This may reflect the impact of the requirement to show proof of insurance for vehicle registration (Chapter 1126, Statutes of 1996 [AB 650, Speier]). As a result, vehicle registration renewal revenues are lower. The budget projects almost no reduction in renewal revenues. (Please see discussion in Item 2740.)
Revenues From Sale of Information
Projected Versus Actual
(Dollars in Millions)
|Sale of Information and Other Fees|
Long-Term Expenditure Growth Will Exceed Revenue Increases. Our review shows that MVA expenditures from 1991-92 through 1996-97 have grown by about 3.3 percent annually, compared to average annual growth in revenues of less than 2 percent. Beyond 1998-99, expenditure growth will continue to outpace revenue increases for several reasons. First, prior to 1996-97, CHP staff support was in part funded through an accumulated Public Employees' Retirement System surplus, thereby reducing the draw on the MVA. However, beginning in 1997-98, the surplus has been depleted and the MVA has to fund the state's retirement contribution for CHP uniformed staff. For 1998-99, the budget proposes $85 million to pay CHP staff retirement contributions.
Second, periodic increases in employment compensation will increase MVA expenditures. For instance, CHP expenditures increased by $16 million in 1995-96 and by $30 million in 1996-97 as a result of labor contract negotiations.
Third, legislation that adds new or expanded responsibilities to DMV and CHP often increases MVA expenditures without providing additional revenues to offset the costs of implementation. For instance, DMV estimates its cost at about $16 million annually to implement Chapter 1126 to check for proof of auto insurance upon vehicle registration.
Fourth, as mentioned earlier, both departments have facilities that are aging and will require increased repairs and refurbishment. These costs will be substantial over the next few years. Additionally, the departments currently lease some of their facilities, and will have to decide whether to exercise upcoming purchase options over the next five years. Purchasing these facilities will require a one-time outlay of significant amounts. However, deferring purchases will necessitate paying potentially increasing lease payments for the facilities.
The Legislature should consider various options to align the Motor Vehicle Account revenues and expenditures in order to provide long-term stable funding for the California Highway Patrol and the Department of Motor Vehicles.
Based on past MVA expenditure and revenue trends, our projection shows that the MVA will continue to experience deficits unless account revenues are increased periodically through higher fees, or expenditures are reduced or shifted to other fund sources. To address the long term MVA condition, we recommend that the Legislature consider the following options:
Similarly, DMV is required to expand its document authentication functions (such as for proof of legal presence) in issuing driver licenses. However, to the extent the purpose of such requirements are not solely to enhance enforcement and regulation of vehicular operations in the state, these functions should not be funded only by the MVA. Because verification of legal presence is intended to benefit the public at large, including facilitating law enforcement and enhancing public convenience and security by providing a verified identification, the Legislature may want to consider providing a portion of funding for such activities from non-MVA sources such as the General Fund.
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