Analysis of the 2005-06 Budget Bill Legislative Analyst's Office February 2005

Overview

The Governor's budget shows total state-funded expenditures for transportation programs to be higher, by 11 percent, in 2005-06 than estimated current-year expenditures. This increase, however, is overstated due to a number of errors in the budget display. After adjusting for the errors, total state-funded expenditures for transportation are proposed to be $7.8 billion in 2005-06. This is about $300 million, or 4 percent, higher than estimated current-year expenditures. The increase is primarily from higher expenditures by the Department of Transportation (Caltrans) for support and capital outlay improvements, and additional support for the California Highway Patrol.

Expenditure Proposal and Trends

Budget Proposal. The budget shows total expenditures of about $8.1 billion from all state funds for transportation programs and departments under the Business, Transportation and Housing Agency in 2005-06. This is an increase of $810 million, or 11 percent, over estimated expenditures in the current year. The budget display, however, includes a number of errors, which the administration recognizes and plans to correct in the spring. Adjusting for the errors, state-funded expenditures for transportation are proposed to be $7.8 billion—about $300 million, or 4 percent, higher than current-year estimated expenditures. The increase includes primarily:

• $174 million in additional state-funded support and capital outlay expenditures by Caltrans.
• $54 million in additional support for the California Highway Patrol (CHP).
• $20 million in additional funding of the State Transit Assistance (STA) program.

The increase, however, masks the real impact of the budget proposal to again use transportation funds to aid the General Fund in 2005-06. Specifically, the budget proposes to suspend the transfer of about $1.3 billion in gasoline sales tax revenue to transportation programs, required by Proposition 42. The budget year would be the third year in which Proposition 42 is suspended in whole or in part. The administration proposes to repay the suspended amount over a 15-year period. In addition, as in the current year, the budget proposes to suspend in 2005-06 the transfer of "spillover" sales tax revenue from the General Fund to the Public Transportation Account (PTA) for various rail and transit programs. The budget projects that this would save the General Fund $216 million in 2005-06.

Absent the above proposals to suspend transfers of funds to transportation, an additional $1.5 billion would be available for transportation in 2005-06. This additional funding would allow a significantly higher level of capital outlay expenditures in transportation than that proposed in the budget.

Historical Trends. Figure 1 shows total state-funded transportation expenditures from 1998-99 through 2005-06 (after adjustments for the errors noted above). As the figure shows, over the period, these expenditures are projected to increase by $2.1 billion, or 36 percent. This represents an average annual increase of 4.5 percent. Figure 1 also displays the spending for transportation programs adjusted for inflation (constant dollars). On this basis, expenditures are estimated to increase by 19 percent from 1998-99 through 2005-06 at an average annual rate of 2.5 percent.

As Figure 1 shows, state-funded transportation expenditures increased each year from 1998-99 through 2004-05. The increase is projected to continue in 2005-06. This expenditure trend is driven by a combination of factors. First, state-funded expenditures by Caltrans, which represent about 52 percent of all state-funded transportation expenditures, are projected to increase by 37 percent over the period. From 1998-99 through 2000-01, the increase was mainly in both support and capital outlay for highway improvements, including seismic retrofit of state highways and bridges. Also, in 2000-01, under the Traffic Congestion Relief Program (TCRP), the state allocated $400 million from the General Fund for streets and road improvements. Since 2000-01, state transportation funding has been diverted each year to help the General Fund. As a result, state-funded expenditures on transportation remained relatively flat through 2003-04. Expenditures are expected to be higher in 2004-05 as a result of partial repayment of certain loans made to the General Fund allowing some TCRP projects to proceed. The budget projects that the availability of bond funds backed by tribal gaming revenues would allow TCRP expenditures to continue in 2005-06.

A second program driving expenditure growth is the CHP. Specifically, the CHP's expenditures grew by about 68 percent from 1998-99 through 2004-05, or at an average annual rate of 8.3 percent. The growth is driven mainly by increases in the cost of employee (primarily uniformed staff) salaries and benefits. Additionally, after September 11, 2001, the department increased its staff and overtime expenditures in order to enhance its statewide security activities. The budget proposes a 4.3 percent increase in CHP expenditures in 2005-06 over the 2004-05 level.

Compared to CHP and Caltrans, growth in state-funded expenditures for the Department of Motor Vehicles (DMV) has been modest. From 1998-99 through 2004-05, expenditures grew by 17 percent. The growth was mainly to accommodate higher employee compensation costs and to implement various statutes. The budget proposes a 2 percent increase in 2005-06 over the current-year level.

As a share of total state expenditures, Figure 1 also shows that transportation expenditures have declined since 1998-99, when they made up about 7.9 percent of all state expenditures. In 2004-05, transportation expenditures are estimated to account for 7.3 percent of all state-funded expenditures and remain at 7.2 percent for 2005-06.

Spending by Major Program

Figure 2 shows spending for the major transportation programs and departments from all fund sources, including state, federal, and bond funds, as well as reimbursements. 

Caltrans. The Governor's budget shows proposed total expenditures of $8 billion in 2005-06—a reduction of $119 million, or 1.5 percent, below estimated current-year expenditures. However, as noted earlier, the Governor's budget erroneously shows certain expenditures from the Traffic Congestion Relief Fund to be occurring in 2005-06 rather than in 2004-05. Correcting for the errors, the department's expenditures for 2005-06 are proposed at $7.7 billion, $629 million (or 7.5 percent) lower than the estimated current-year level of expenditures, as shown in Figure 2. These expenditures would be funded mainly from the State Highway Account and federal funds.

CHP and DMV. Spending for the CHP is proposed at $1.4 billion—$44 million, or 3.2 percent, higher than the estimated current-year level. About 90 percent of all CHP expenditures would come from the Motor Vehicle Account (MVA). The increase in expenditures is mainly due to higher employee compensation and retirement costs and various price increases.

For DMV, the budget proposes expenditures of $762 million—$7 million, or 1 percent, more than the current year. These expenditures would be funded primarily from the MVA and the Motor Vehicle License Fee Account. The increase in expenditures is due primarily to various price increases and mandated costs for local law enforcement agencies to implement the administrative driver license suspension program.

Transit Assistance. Annual funding for the STA program is determined based on a statutory formula, and the level varies depending on anticipated revenues in the PTA. For 2005-06, the budget proposes to fund the program at $137 million, which is $20 million, or 17 percent, higher than the current-year level. This level, however, is lower than that called for under existing law. This is because the budget proposes to suspend the transfer of $216 million in "spillover" sales tax revenue into the PTA and retain the amount in the General Fund instead. Under current law, the STA would receive half of the spillover amount. As a result, the proposed STA funding level is $108 million lower than it would be otherwise if the transfer is made.

Major Budget Changes

Figure 3 highlights the major changes proposed for 2005-06 in various transportation programs. 

Caltrans. The budget shows a reduction of $785 million in local assistance for highway improvement in 2005-06 from the current-year level. This large reduction is due to abnormally high estimated current-year expenditures for local assistance. Because of the lack of a federal transportation reauthorization act in 2003-04, Caltrans had to carry over $680 million in federal local assistance expenditure authority from 2003-04 to the current year. The budget estimates that the carry-over amount would be expended in the current year along with the amount anticipated to be authorized in the current year. However, federal reauthorization may continue to be delayed, preventing the expenditure of these funds in the current year. This would shift some current-year expenditures shown in the budget to the budget year, reducing or even erasing the apparent drop in local assistance expenditures.

The budget also shows expenditures for intercity rail capital improvements to be $263 million higher in 2005-06 than the current year. This increase is overstated due to the way Caltrans accounts for expenditures for certain state funds in the budget display. (Please see our writeup on this issue in Item 2660, Department of Transportation.)

CHP and DMV. The budget proposes expenditures for CHP and DMV that would maintain current-year service and program levels. For CHP, the budget proposes $65 million to cover the higher cost of uniformed personnel, as called for by the current memorandum of understanding. For DMV, the budget requests $1.5 million to reimburse local law enforcement agencies for the mandated cost of implementing the administrative driver license suspension program. The budget also requests $1.5 million to fund the costs of processing refund claims and litigation in the Woosley case, a class-action lawsuit brought by certain vehicle owners that were overcharged by the department for their vehicle license fees.