Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Funding for Transportation Programs

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—have traditionally provided the majority of ongoing state revenues for transportation. Additionally, in 2000, the Legislature enacted the Traffic Congestion Relief Program (TCRP), which created a six-year funding plan for state and local transportation needs, later extended to eight years—through 2007-08—by Chapter 113, Statutes of 2001 (AB 438, Committee on Budget). The program is funded by two fund sources—the Traffic Congestion Relief Fund (TCRF) and the Transportation Investment Fund (TIF)—from a combination of General Fund revenues (one-time) and ongoing revenues from the sales tax on gasoline that are to be transferred from the General Fund to the TIF annually beginning in 2003-04. In March 2002 voters passed Proposition 42, which permanently extended the transfer of gasoline sales tax revenues into the TIF and dedicated the funds to various transportation programs. These programs include local street and road improvement, the State Transportation Improvement Program (STIP), State Transit Assistance, and other mass transportation activities funded by the Department of Transportation (Caltrans). 

The STIP. The state's primary program for the construction of new transportation projects is the STIP. Funding comes primarily from the SHA and federal funds. In addition, under Proposition 42, a portion of TIF money will annually be made available for the STIP. Each even-numbered year, the California Transportation Commission (CTC) programs new projects to receive STIP funding based on an estimate of the funds available over the next five years. Statute allows Caltrans to spend 25 percent of the available STIP funds on interregional transportation improvements, with the remaining 75 percent going to designated regional transportation planning agencies for regional transportation improvements. The regional funding is further allocated to counties based on statutory formula.

The TCRP. The TCRP is the second major project construction program. It consists of 141 statutorily-defined projects located throughout the state, with each project receiving a specified amount of money. Collectively, TCRP projects are to receive about $4.9 billion through 2007-08, with the General Fund providing $1.6 billion in 2000-01 and the sales tax on gasoline providing $678 million each year from 2003-04 through 2006-07 and $602 million in 2007-08. Because TCRP does not provide full funding for all of the projects, many of them are funded from multiple sources, including STIP money.

In this section, we review the Governor's proposal related to TCRP funding and discuss actions that the Legislature should take and options it can consider. We also review the condition of SHA and how it affects the funding of TCRP and STIP projects.

Funding for TCRP

TCRP Funds to Provide Substantial General Fund Relief

The administration proposes to use about $1.7 billion in transportation funds to aid the General Fund in the current and budget years, primarily from the Transportation Investment Fund and the Transportation Congestion Relief Fund. The proposal would significantly delay projects in the Traffic Congestion Relief Program and raise substantial uncertainties regarding the program's future funding.

Actions Taken in Prior- and Current-Year Budgets. To help balance the General Fund budget in 2001-02 and the current year, a total of about $1.3 billion from the TCRF has been loaned to the General Fund. This money is currently scheduled to be repaid over a multiyear period to the TCRF beginning in 2003-04. Under current law, all TCRF loans must be repaid by June 30, 2006. 

Budget Proposes Further Redirection of TCRF Money and Suspension of TIF Transfer. The Governor proposes to address part of the projected General Fund shortfall by shifting about $1.7 billion from the TCRF and the TIF to the General Fund. Specifically, the budget proposes the following actions:

• Transfer $100 million from the TCRF to the General Fund in the current year.
• Forgive a $500 million loan repayment from the General Fund to the TCRF scheduled for the budget year.
• Suspend the transfer of about $1.1 billion in sales tax revenue from the General Fund to the TIF in the budget year. If the transfer were to occur as scheduled, $678 million of this money would fund TCRP projects, and the remainder would be split among STIP projects, local street and road improvements, and mass transportation.

In addition, the budget proposes to reduce SHA funding of local streets and road improvements in the current year by about $90 million to address a projected cash shortfall in the account.

Immediate Impact of the Governor's Proposal. Figure 1 (see next page) summarizes the programmatic impact of the Governor's proposal. At the time this analysis was prepared, the Legislature had rejected the Governor's proposal to reduce SHA funding for local street and road improvements in the current year. Accordingly, Figure 1 reflects this legislative action. As the figure shows, the largest effect of the remainder of the Governor's proposal would be on TCRP projects—about $1.3 billion. This amount includes $100 million transferred in the current year, the $500 million loan forgiveness, and $678 million (out of the $1.1 billion) that otherwise would be available from TIF in 2003-04. According to the administration's May 2002 projections of TCRP expenditures, almost all of the $1.3 billion would be needed through the budget year if TCRP projects were to proceed without delay. The Governor's proposal would provide no funding in the budget year for TCRP projects and would leave only about $300 million in TCRF to cover remaining current-year costs. The administration estimates that this amount is needed to reimburse Caltrans and local agencies for expenditures they have already incurred, and to close out or terminate existing contracts for TCRP projects in the current year. The administration's estimate assumes that TCRF would have to make payments to 114 projects, 36 of which would include contract termination expenditures.

At a minimum, the Governor's proposal would delay many TCRP projects until 2004-05, when under Proposition 42 another $678 million would become available for these projects. In the interim, only projects that have access to other funding sources may be able to continue. In response to the Governor's proposal and a projected low balance in the SHA, the CTC suspended making any new allocations for TCRP projects from December 2002 until at least February 2003 in order to avoid increasing the amount it has committed to pay on these projects. It is uncertain at this point whether any project would be permanently cancelled, although the Governor's proposal calls for statutory authority for CTC to de-allocate prior project allocations.

As Figure 1 also indicates, several other programs would lose funding under the Governor's proposal. Specifically, as the result of the proposed suspension of the transfer of gasoline sales tax revenue into the TIF, counties and cities would receive about $168 million less in 2003-04 for road improvements. The STIP would receive up to $168 million less, while funding for mass transportation programs would be lower by a total of about $84 million.

Governor's Proposal Creates Uncertainty for TCRP. The Governor's proposal raises a number of uncertainties related to funding of TCRP. In the near term, with no new funding for TCRP projects in the budget year, the projects will have to be funded from other sources if they are to continue. The administration indicates that project sponsors should look to the STIP process for replacement funding, and proposes that Caltrans and local agencies work with the CTC to reprioritize their STIP and TCRP projects in order to direct available STIP dollars to the highest-priority projects.

The CTC initiated discussions with local agencies and Caltrans in January with the goal of coming up with more precise estimates by March on the amount of funding available for projects and the demand for those funds. However, it is unclear at this point how priorities will be set, and the administration has not provided any guidance. It is also unclear what the level of available funds will be for TCRP projects in the budget year, as legislative deliberations have just begun on the Governor's proposal. These uncertainties make it difficult for the CTC and project sponsors to set priorities among projects, because how projects are reprioritized would depend in large part on how much and when funding is available.

The Governor's proposal also raises substantial uncertainty regarding long-term funding for TCRP. While the Governor's proposal clearly signals an intention to stop all TCRP funding through the budget year, the administration's intention for future years is unknown. The Mid-Year Budget Revision in December 2002 suggested that the administration was considering suspending the Proposition 42 transfer for several years, and possibly stopping funding for TCRP projects entirely. The Governor's January budget, however, only proposes stopping the TIF transfer in 2003-04, without reference to the administration's intent for future funding of the program.

Uncertainty about the status of TCRP funding in future years creates doubt about how to deal with the proposed cuts now. If funding for the program will be made whole after 2003-04, project sponsors need only find temporary funding solutions to keep projects going in the budget year. If funding of the program is to be terminated, then project sponsors will have to decide whether their TCRP projects should continue and how to fund them. 

Funding TCRP: Issues and Options for Legislative Consideration

To assist the Legislature in determining whether to provide any funding for projects in the Traffic Congestion Relief Program (TCRP) in 2003-04, we recommend that the California Transportation Commission provide by mid-March an updated status on all TCRP projects. We also think that the Legislature should determine the state's long-term funding commitment for the program. We provide several options for the Legislature's consideration.

In considering the Governor's proposal to use funds dedicated for TCRP to address the state's General Fund condition, the Legislature should also address two issues related to the funding of the TCRP. Addressing these issues in a timely manner would significantly reduce the uncertainties discussed above.

• First, if the Governor's proposal is adopted, should any "bridge" funding for TCRP projects be provided for 2003-04?
• Second, what is the state's commitment to funding the TCRP program?

Should "Bridge" Funding Be Provided? As noted above, the Governor's proposal to redirect $1.3 billion from TCRP would leave about $300 million to cover estimated expenditures in the rest of the current year, but no funding at all in 2003-04. However, some projects will continue to incur expenditures in the budget year unless outstanding contracts are terminated. For instance, some projects are under construction. Cutting funding for these projects could leave partially constructed projects unfinished. Other projects may have just entered into contracts for work to be done in the budget year. Terminating these contracts could entail costs that might exceed the cost of completing the contract. In deciding whether to provide bridge funding in the budget year, the Legislature needs accurate information on the current status of TCRP projects and their funding requirements in 2003-04, absent the Governor's proposal.

Figure 2 shows the administration's rough estimates of the amounts that would be needed in 2003-04 if funding is provided to move projects through different stages. For instance, if all existing contracts are closed out in the current year, the state could suspend all additional funding of TCRP projects in 2003-04, as the Governor proposes. In that case, the Leg islature may not need to provide any bridge funding. If, on the other hand, the Legislature wishes to see existing construction contracts completed, then funding of about $200 million would be needed in 2003-04. Similarly, funding all outstanding contracts to completion would cost about $310 million in the budget year. These amounts are the estimates the administration used in preparing the Governor's budget, but they were calculated without input from the local agencies responsible for TCRP projects and are therefore subject to change.

As noted earlier, the CTC has started discussions with Caltrans and local agencies that sponsor TCRP projects, and plans to have more up-to-date information on project status by March. We think this information is essential in order for the Legislature to determine the amount of money that would be needed to fund TCRP projects in 2003-04. Accordingly, we recommend that the CTC provide to the Legislature by mid-March detailed information on the status of each TCRP project, including projected expenditures to close out all contracts, to continue only construction contracts through the budget year, and to continue all contracts through the budget year.

What Is the Ultimate Fate of the TCRP? A more fundamental issue that the Legislature should consider is the state's commitment to fund the TCRP program. Addressing this issue would reduce the uncertainties surrounding the program's status and provide a clear signal to project sponsors so they can plan accordingly. It would also provide a basis to determine whether any bridge funding in 2003-04 is warranted. 

Transportation projects typically span multiple years from project initiation to completion because they are developed in various phases beginning with siting and environmental reviews through construction. From a financing perspective, it is important to identify funding availability over the life of a project to insure that once projects are initiated they can be completed. Predictable funding is essential in order for projects to progress efficiently and effectively. Even projects with multiple funding sources can experience major disruptions if one of those sources is jeopardized. For example, much of the transportation funding provided by the federal government comes with a requirement that the recipient agencies provide matching funds. If the matching funds are lost on a project, the federal funds are too. By contrast, if a project sponsor has stable future sources of funding committed to a project, it can obtain financing by bonding against those future sources in order to get a head start on the project. If the future source of that funding is uncertain, this type of project acceleration is impossible.

The Legislature has a number of options in considering the status of the TCRP program. One of the options is to adopt the Governor's proposal as a one-time action, making clear that total funding of the program is reduced by $1.3 billion. In adopting this option, the Legislature should also determine how to allocate the reduction among the TCRP projects. 

Other options range from terminating any future funding for TCRP to making a full funding commitment for the program. We discuss these options below.

• Option: End the State's Commitment to the TCRP. This option would remove from statute the commitment of state funds to TCRP projects. The Legislature could then allocate any future funds from Proposition 42 that have been designated to TCRP project to various transportation uses, including the STIP, local street and road improvements, and public transportation. This option would allow the Legislature to adopt the Governor's proposal to aid the General Fund without having to repay the funds. It would also eliminate outstanding loans from the TCRF to the General Fund that are to be repaid in 2004-05 and later.

Under this option, all TCRP projects would compete equally for transportation funding under the STIP process implemented by the CTC. However, some large TCRP projects might never be constructed. This is because currently some TCRP projects are designated to receive state funding far exceeding the share of STIP money allotted to the county in which the project is located. Funding such projects may mean that the county would not have any STIP funds for other transportation priorities for a number of years. To the extent these TCRP projects are still of high priority to the Legislature, it may have to separately provide funding for them. 

• Option: Partial or Full Deferred Repayment of TCRP Dollars From the General Fund. This option would entail adopting the Governor's proposal, but with the clear commitment that in future years the General Fund would partially or fully repay the TCRF both the amount redirected by the Governor's proposal ($1.3 billion), as well as all prior year loans ($0.8 billion). Full repayment would allow the state to fulfill its commitment to TCRP projects, although projects would be significantly delayed by the lack of funding in the near term. Full repayment would also create General Fund expenditures of $2.1 billion in future years.
• Option: Provide Full Funding for TCRP From a Predictable Funding Source. The Legislature could consider imposing a gas tax to raise revenues to fully fund the TCRP. A 3-cent-per-gallon increase would provide about $2.1 billion over four years. This option would relieve the General Fund of any obligation to repay TCRP projects for the Governor's proposed actions in the current and budget 
• years ($1.3 billion) and for the funds that have already been borrowed from TCRF ($0.8 billion), which together remove $2.1 billion from TCRP projects. It would also provide a steady revenue stream, allowing projects to proceed without further delay. If the tax were to be continued on a permanent basis, the additional revenues could begin to address a ten-year transportation funding shortfall of over $100 billion that was identified by the CTC in 1999.

Legislature Should Act Soon to Minimize Uncertainty. As we discuss above, the Governor's proposal to remove $1.3 billion from TCRP projects in the current and budget years creates uncertainty regarding the ultimate fate of these projects. This uncertainty affects the reprioritization decisions that CTC and project sponsors must make. In order to assist these parties in making informed decisions regarding the priorities of their TCRP and STIP projects and to avoid having to revisit TCRP funding on an annual basis, the Legislature should act as quickly as possible to determine its level of commitment to the TCRP and to ensure that funds are available to match this level of commitment.

Funding for STIP

The SHA and STIP Face New Pressures

In the late 1990s, the State Highway Account (SHA) accumulated a large cash balance due to increasing revenues and lower-than-projected expenditures. With increased State Transportation Improvement Program expenditures, the balance has declined. However, this decline has occurred concurrently with other factors that put pressure on the SHA's fund balance.

As noted earlier, the five-year STIP schedules transportation projects to be developed and constructed based on an estimate of state and federal funding available over the period. The SHA is the primary source of state funding for the STIP.

High SHA Balance Has Begun to Decline. As we discussed in the Analysis of the 2002-03 Budget Bill, the SHA's cash balance began to rise dramatically in 1994-95. It continued growing through 1998-99, when it reached a record high of $2.3 billion. Reasons for this growth included the unexpected availability of funds that were no longer needed for seismic retrofit work, increased federal funding for transportation, and lower-than-projected levels of capital outlay expenditures. As available transportation funds increased, CTC programmed additional STIP projects, and Caltrans and local transportation agencies began to increase their levels of expenditures. Partly due to these higher spending levels, the SHA balance began to decline after 1998-99, reaching $1.2 billion at the end of 2001-02. Caltrans projects that the SHA balance will continue to fall, and absent corrective actions, will face a shortfall of $173 million by the end of the current year. However, increased STIP-related expenditures are only one of several factors that have lowered the SHA balance. Additional factors contributing to this funding situation are discussed below.

The SHA Has Loaned Money to Other Funds. As the General Fund condition has deteriorated in the past few years, transportation funds—TCRF money in particular—have been used to aid it. In order to prevent TCRP project delay, SHA funds have been used to partially backfill the TCRF loans. Figure 3 shows for the period 2000-01 through 2002-03 loans of SHA money for TCRP and other non-STIP purposes. As the figure indicates, loans from SHA to TCRF will total about $232 million by the end of the current year. Current law requires that these loans be repaid by June 30, 2007. Also, the SHA made a $173 million loan directly to the General Fund in 2001-02. This loan must be repaid by June 30, 2005. 

Additionally, under Chapter 113, which delayed the transfer of gasoline sales tax revenue into TIF for two years, SHA will pay about $288 million to local agencies for street and road improvements through 2002-03. Chapter 113 provided that the amount would be repaid to SHA from future TIF revenues. The budget proposes canceling the final three quarters of this payment—estimated at $90 million—in the current year. However, at the time this analysis was prepared, the Legislature had rejected this proposal to reduce SHA funding for local street and road improvement.

Weight Fee Revenues Have Declined. Truck weight fees are one of the primary sources of SHA funding. Chapter 861, Statutes of 2000 (SB 2084, Polanco), changed the way a portion of the weight fees is collected in order to be more consistent with the practices of other states. The change was intended to be "revenue neutral," meaning that it would not affect the total amount of weight fees collected annually. However, actual weight fee revenue in 2001-02—the year the new fee schedule took effect—was only $689 million, 15 percent less than the amount estimated. The budget now anticipates revenue in the current year to be $669 million, 20 percent less than originally projected. Figure 4 shows the difference between actual and projected weight fee revenues. As the figure shows, weight fee revenues in the last two years will total about $300 million less than estimated. According to the Department of Motor Vehicles (DMV), the reason for the difference is that the number of trucks paying the new weight fees is much lower than it anticipated. 

Federal Funding Level Uncertain. Because the STIP funds projects based on an estimate of available SHA and federal funding, any reduction in federal funding below the estimated level increases the funding demands on SHA. This is because projects would look to SHA to make up any federal funding gap. Without SHA help, projects would be delayed due to insufficient funding. For the current federal fiscal year (extending through September 30, 2003), the President proposed a substantial decline in transportation funding. Congress has yet to approve a 2003 transportation funding level, but it is considering higher levels of funding than the President proposed. Until that level is decided, likely sometime this spring, the short-term federal funding picture remains uncertain.

A larger uncertainty is the upcoming reauthorization of the federal transportation legislation. The current federal act (TEA-21) expires on September 30, 2003. Because recent federal transportation acts have provided substantial funding increases, Caltrans assumed a similar increase in its federal fund projections to develop the 2002 STIP that extends from 2002-03 through 2006-07. If, however, the federal reauthorization provides a lower funding level, then the 2002 STIP will be short of sufficient funds to complete scheduled projects. In the worst-case scenario, if federal funding remained at the 2002 level for the six-year period from 2003- 04 through 2008-09, the state could receive $4 billion less in federal money than anticipated over that period. Recognizing that large federal funding increases were increasingly unlikely, Caltrans built this worst-case assumption into its December 2002 projection of the SHA fund condition. Until the reauthorization is decided, however, this will remain a substantial unknown for the state's transportation funding outlook.

Recognizing the deterioration in SHA, the administration has made a number of proposals to address the fund balance, as discussed below.

Budget Proposes Weight Fee Increase and Lower Expenditures

The budget proposes trailer bill legislation to increase truck weight fees and to reduce State Highway Account (SHA) expenditures in order to ease demands on SHA. We recommend that prior to budget hearings, the Departments of Finance and Motor Vehicles provide the Legislature with consistent, updated estimates of current-year weight fee revenue, an explanation of the causes for the drop in these revenues, and an estimate of the additional revenue that would be generated under the administration's proposal.

Given the pressures on SHA discussed above, Caltrans projected in December 2002 that SHA would have a shortfall of $173 million in the current year and $634 million by the end of the budget year absent corrective actions. To address this projected shortfall, the administration proposes: 

• Increases in truck weight fees through trailer bill legislation, to offset the unintended impact of Chapter 861.
• Reductions in Caltrans local assistance and state operations expenditures totaling about $240 million in the current and budget years. We discuss these expenditure proposals in our analysis of Caltrans' budget (Item 2660).
• Cancellation of the SHA payment for local street and road improvements, as discussed earlier.
• Redirection of $125 million in federal funds from local agencies to Caltrans in the current and budget years.
• Slowing allocations to new capital outlay projects, resulting in reduced expenditures of about $650 million in the current and budget years.

With these actions, the budget projects an SHA balance of about $116 million at the end of the budget year.

Weight Fee Estimates Inconsistent. To boost truck weight fee revenues, the administration proposes to increase enforcement of the weight fees under Chapter 861. In addition, it is proposing trailer bill legislation to increase the fees. It believes that these actions will bring weight fee revenue in 2003-04 back to it historic, higher levels. However, DMV indicates that the proposal is based on a current-year estimate of weight fee revenue that is $53 million lower than the estimate used in the Governor's budget. If this lower current-year estimate is correct, then the SHA condition will be worse than the Governor's budget projects and the actions proposed in the budget will not be adequate to address the SHA problem. If, on the other hand, the Governor's budget estimate is correct, then the proposed fee increases will generate more revenue than is needed to maintain revenue neutrality.

Furthermore, our review shows that the drop in weight fee revenue may not be due exclusively to a decrease in the number of trucks paying the new fee, as DMV indicated. There is anecdotal evidence that DMV may have delayed collection and enforcement of the new weight fees after they became effective December 31, 2001. If true, this would have decreased the amount of revenue collected regardless of the fee schedule contained in the law.

In order to assess the weight fee increase proposal, the Legislature should have better information. Accordingly, we recommend that prior to budget hearings, the Department of Finance and DMV provide the Legislature with consistent, updated estimates of the current-year weight fee revenue, an explanation of the causes for the drop in revenue, and an estimate of the additional amount of revenue that would be generated under the administration's proposal.