Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Condition of Transportation Funds

California's state transportation programs are funded by a variety of sources, including special funds, federal funds, and general obligation bonds for transportation. Two special funds—the State Highway Account (SHA) and the Public Transportation Account (PTA)—have traditionally provided the majority of ongoing state revenues for transportation. Additionally, in 2000, the Legislature enacted the Traffic Congestion Relief Program (TCRP) under SB 406 (Ortiz), SB 1662 (Burton), and AB 2928 (Torlakson), (Chapters 92, 654, and 91, respectively). This program creates a six-year funding plan for state and local transportation needs. The program is funded by two new fund sources—the Traffic Congestion Relief Fund (TCRF) and the Transportation Investment Fund (TIF)—funded out of a combination of General Fund revenues (one-time) and revenues from the sales tax on gasoline (ongoing) for six years. The following section discusses the condition of these four accounts.

The SHA Cash Balance Projected to Fall

The 2001-02 budget projects a significant decrease in the State Highway Account cash balance, from an estimated $878 million at the end of 2000-01 to $222 million at the end of 2001-02. Based on past expenditure trends, we find it unlikely that the balance will fall to this level.

The SHA derives its revenues primarily from truck weight fees and the 18 cents state excise tax on gasoline and diesel fuels. Specifically, SHA receives about 62 percent of all gas tax revenues, while the remainder is provided to cities and counties for local streets and roads.

The SHA Cash Balance Projected to Drop to $222 Million. The 2001-02 budget estimates SHA's total resources to be $3.4 billion, which is about 16 percent lower than estimated 2000-01 resources. The decline is primarily due to two factors. First, the budget projects a lower balance being carried over from 2000-01, as a result of 17 percent higher estimated expenditures in 2000-01 compared to 1999-00. Secondly, the budget projects a substantially higher level of funds to be transferred from SHA to fund the seismic retrofit of state-owned toll bridges.

While SHA resources are projected to decline, SHA expenditures are projected to grow. Specifically, the budget proposes an increase in SHA expenditures of approximately $108 million, or 3.2 percent, above estimated expenditures for 2000-01. The combination of a lower beginning balance and a higher level of expenditures brings the projected SHA cash balance down to $222 million by the end of 2001-02, the lowest level in five years.

Actual Cash Balance Likely to Be Higher Than Projected. Historically, the budget has significantly underestimated the size of the SHA cash balance (please see our Analysis of the 1999-00 Budget Bill, page A-19). For instance, the 1998-99 budget projected the cash balance to be $856 million at the end of 1998-99, while in actuality it was $1.4 billion. Similarly, the 1999-00 ending cash balance was projected to be $1.1 billion, compared to the actual balance of $1.4 billion. Given past experience, we find it highly unlikely that SHA's cash balance will fall to $222 million by the end of 2001-02. Whether or not the balance falls to this low level will depend on how fast Caltrans and local agencies can deliver projects.

Traffic Congestion Relief Program Projected to Provide More Funding Than Anticipated

Due to higher-than-anticipated revenues from the sales tax on gasoline, funding for the Traffic Congestion Relief Program is estimated to be $1.3 billion higher (over the six-year period) than originally estimated at the time the program was enacted. Under current law, this additional funding will be split between local street and road maintenance, the State Transportation Improvement Program, and the Public Transportation Account.

Substantial Funding Provided by TCRP. In 2000, the Legislature and administration enacted TCRP which provides a substantial amount of new funding for transportation from 2000-01 through 2005-06. Figure 1 shows the estimated funding sources and levels of TCRP and how funds are allocated. As shown in Figure 1, TCRP is funded in 2000-01 by $1.5 billion from the General Fund and $500 million from gasoline sales tax revenues. Annually thereafter through 2005-06, TCRP is funded from revenues from the sales tax on gasoline that previously were deposited in the General Fund. (A portion of the sales tax on gasoline is deposited in PTA.)

These monies are distributed to two new funds—TIF and TCRF as shown in Figure 2. Funding for TIF fluctuates depending on the price and amount of gasoline consumed, whereas funding for TCRF is set in statute. Specifically, for 2000-01, TCRF received a total of $2 billion, consisting of $1.5 billion from the General Fund and $500 million in revenues from the sales tax on gasoline. Of that amount, $1.6 billion was designated towards 141 designated projects, while $400 million was designated for local street and road maintenance.

From 2001-02 through 2005-06, TIF receives all revenues generated from the sales tax on gasoline that were previously deposited into the General Fund. Of this amount, $678 million will be transferred annually to TCRF for 141 designated transportation projects. The remainder will be distributed as follows:

• The State Transportation Improvement Program (STIP) (40 percent).
• Local street and road repairs (40 percent).
• The Public Transportation Account (20 percent).

High Fund Balance Projected for TCRF in 2001-02. The budget estimates that of the $2 billion available in TCRF in 2000-01, only $805 million will be expended in the current year, including $400 million for local street and road repairs and $405 million on specific projects. This will leave an estimated balance of $1.2 billion at the end of 2000-01. This balance carries forward into 2001-02 and when added to the annual transfer of $678 million, results in total TCRF resources of about $1.9 billion in 2001-02. Because the budget projects expenditures of only $680 million in 2001-02, TCRF is forecast to end the budget year with a fund balance of $1.2 billion.

Higher-Than-Anticipated Revenues for Transportation Investment Fund. Due to higher-than-anticipated revenues from the sales tax on gasoline, the budget projects that a total of $8.2 billion will be available from 2000-01 through 2005-06 to fund TCRP. This is $1.3 billion, or 25 percent, more than earlier estimates. Whether or not actual revenues reach this level will depend on the price of gasoline and amount consumed. The budget assumes that gasoline prices will rise 9 percent in 2001 above 2000 prices.

Because statute specifies the amount to be transferred to TCRF each year, any unanticipated additional revenues will be distributed among the STIP, local street and road repairs, and PTA. For the five-year period, current estimates indicate that the STIP and local street and road repairs will each receive $520 million more than anticipated, while PTA will receive an additional $260 million. For the budget year alone, TIF is projected to provide approximately $1.1 billion in total, about $130 million more than the original estimate.

The PTA Shortfall Averted; Substantial Funds Available for Legislative Priorities

The Public Transportation Account provides a source of state funds primarily for mass transportation (including bus and rail) purposes. Recent increases in revenues generated from diesel fuel and gasoline sales, combined with revenues provided under the Transportation Congestion Relief Program substantially augment the account's resources from 2001-02 through 2005-06. With this increase, we project a sizable amount of uncommitted funds totaling approximately $264 million in 2001-02 and another cumulative total of $261 million over the subsequent four years (2002-03 through 2005-06). These additional funds provide the Legislature more financial resources to meet its public transportation priorities.

The PTA was established by the Transportation Development Act (TDA) of 1971, in order to provide a source of state funds primarily for transit (including bus and rail) purposes. Historically, the three largest expenditures from the PTA have been the State Transit Assistance (STA) program, intercity rail services, and transit capital improvements. Under current law, the STA program receives at least 50 percent of annual PTA revenues. (For an in-depth review of STA, please see Item 2640.) The remaining PTA funds support various other public transportation purposes, including intercity rail service, capital improvements of transit systems, rail and mass transportation planning and support, and high-speed rail development. In the current year, PTA also supports new programs, such as the Bay Area Water Transit Authority, ferry operating costs on the San Francisco Bay, and a farm worker transportation safety pilot project.

Previously Projected Account Shortfall. In January 2000, we released a report on the condition of the PTA (please see our report entitled Public Transportation Account: Options for Addressing Projected Shortfall). In the report, we projected a funding shortfall in the PTA of about $158 million over six years (between 2000-01 through 2005-06). To address the shortfall, the Legislature and Governor provided additional funds in the 2000 TCRP to supplement PTA revenues under TDA.

The TDA Revenue Sources. Under TDA, the two main sources of revenue into PTA are sales and use taxes on diesel fuel and gasoline. The largest source is a 4.75 percent sales tax on diesel fuel. The second major source is a 4.75 percent sales tax on 9 cents of the state excise tax on gasoline. In addition, PTA receives any excess revenue generated from a 4.75 percent sales tax on all taxable goods, including gasoline, as compared to a 5 percent rate on all taxable goods, excluding gasoline. (Such a mechanism holds the General Fund harmless, but provides additional revenues to PTA.) In 2001-02, the Department of Finance (DOF) projects that total revenues for PTA from TDA sources will be about $293 million. Figure 3 shows resource and expenditure estimates for the budget year, as well as for the subsequent four years (2002-03 through 2005-06). The figure also summarizes estimates for uncommitted funds in the budget year and future years.

The TCRP Revenue Streams. In addition to the traditional TDA revenue sources, the 2000 TCRP provides additional revenues to PTA for a six-year period through 2005-06. These include a portion of the sales tax on gasoline that was previously deposited in the General Fund (as discussed earlier), and a transfer of SHA revenues that are not restricted in use by Article XIX of the State Constitution. In the budget year, DOF estimates these two sources will total about $132 million.

New Revenue Sources and High Fuel Prices Provide Substantial New PTA Funds. Due to the combination of high fuel prices over the past calendar year and the infusion of additional funds under TCRP, DOF projects PTA to have more than sufficient funds to cover existing programmatic and support expenditures over the next five years, from 2001-02 through 2005-06.

In addition, as shown in Figure 3, we project a substantial amount of uncommitted PTA revenues to be available to meet legislative priorities. Based on revenue forecasts generated by DOF and expenditure projections from Caltrans, we estimate total uncommitted funds to be about $264 million in 2001-02 if all expenditure proposals in the Governor's budget are funded. These expenditure proposals include funding all existing programs as well as making significant ($98 million) capital expenditures on intercity rail and funding other new initiatives. For 2002-03 through 2005-06, we estimate the total amount of uncommitted PTA funds to be about $261 million.

Uncommitted PTA Funds Available for Legislative Priorities. The sizable projected balance provides the Legislature with an opportunity to fund its public transit priorities. The Legislature could direct the California Transportation Commission (CTC) to program a specified amount of the remaining uncommitted PTA funds in the STIP for new local and regional transit capital improvement projects. The Legislature also could direct a portion of the funds for its own public transit priorities. For example, the Legislature could appropriate the uncommitted funds for new statewide public transportation purposes. We provide the following options for consideration.

Option: Assistance for Complying With Air Resources Board Bus Fleet Emissions Rule. In 2000-01, the California Air Resources Board (ARB) adopted new regulations to reduce harmful air emissions (mainly particulate matter and nitrogen oxide) from urban transit buses. As a result, transit operators will have to either retrofit engines and use low-sulfur diesel fuel, or shift their fleet to an alternative fuel, such as compressed natural gas. In addition, the rules require large transit agencies (those with more than 200 buses) to have zero-emission buses comprise at least 15 percent of their bus purchases. The rules call for phased implementation, from 2003 through 2010.

Based on rough cost estimates from ARB and transportation planning agencies, we estimate total statewide costs to transit operators for a seven-year period (2002-03 through 2008-09) to range from $40 million to $70 million. The Legislature could appropriate uncommitted PTA funds for a multiyear program to assist transit operators with the costs associated with ARB's transit fleet rule.

Option: Lifeline Public Transit Competitive Grant Program. Lifeline transit services include paratransit and Americans with Disabilities Act (ADA) transportation services for the elderly and disabled who otherwise are unable to access traditional fixed-route transit service. In addition, lifeline services include additional public transportation to under-served areas. These services also include additional transit services during times of the day not served well with existing systems. Such transit services are important for lower-income families, disabled persons, and the elderly to access jobs, schools, and health services.

According to the study conducted by CTC, pursuant to Senate Resolution 8 (Burton, 1999), the state faces a funding shortfall of about $236 million for capital acquisitions and operating support for existing paratransit and ADA transportation services over ten years (2000-01 through 2009-10). In addition, the San Francisco Bay Area Metropolitan Transportation Commission has identified a need in the Bay Area region for additional operating assistance for lifeline transit services of about $24 million annually.

Currently, the state receives limited assistance (about $6 million in 2000-01) through the Federal Transit Administration's Job Access and Reverse Commute (JARC) grant program. Under JARC, federal funds are matched with local or state resources and may be used for both capital acquisition projects as well as for operating assistance. While JARC is designed to primarily improve mobility for welfare recipients and low-income persons, the Legislature could fashion a lifeline transit competitive grant program similar to the federal program that would also provide grants for paratransit and ADA services.

In the budget year, Caltrans proposes $18 million from PTA for a rural transit assistance program (see discussion in Item 2660). To the extent the Legislature deems that proposal worthwhile for funding, it could consider combining the rural transit program with a lifeline transit assistance program.

Other Options. In our discussion of the STA program (see Item 2640), we offer options to target STA funds to particular transit program areas in order to enhance the effectiveness of STA. The Legislature could also consider directing a portion of the uncommitted PTA funds to those options.