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

Department of Transportation (2660)

The Department of Transportation (Caltrans) is responsible for planning, coordinating, and implementing the development and operation of the state's transportation systems. These responsibilities are carried out in five programs. Three programs—Highway Transportation, Mass Transportation, and Aeronautics—concentrate on specific transportation modes. Transportation Planning seeks to improve the planning for all travel modes and Administration encompasses management of the department.

The budget proposes total expenditures of $8 billion by Caltrans in 2005-06. This is about $100 million, or 1.5 percent, less than estimated current-year expenditures. However, the budget includes a number of errors that the administration recognizes and plans to correct in April 2005. Adjusting for the errors, the budget proposes expenditures of $7.7 billion by Caltrans in 2005-06—$629 million (or 7.5 percent) less than the current-year level.

Even with the above adjustment, the budget display does not provide an accurate picture of total expenditures by the department in any one year. This is because Caltrans' budget does not use a consistent accounting methodology to account for expenditures from different funding sources. We discuss this issue in detail in the following section.

Misleading Budget Numbers Weaken Legislative Oversight

The Governor's budget displays transportation funds in multiple and changing ways, making it impossible to determine Caltrans' total expenditures in a given year and complicating comparisons from one year to the next. Legislative oversight is severely hampered by these inconsistent displays, which also create additional work for Caltrans' staff. We recommend the enactment of legislation requiring transportation expenditures to be displayed according to standard budgetary display requirements.

Budget Numbers Are Inconsistent Across Funds and Over Time

Caltrans Funds Are Displayed Differently Than Other Funds. Most funds in the Governor's budget, including federal funds and the General Fund, are displayed on a modified accrual basis, as required by state law. This means that the budget generally shows "expenditures" from funds at the time the state commits to making a payment, not when the payment is actually made. State law, however, provides an exemption for four Caltrans funds, listed in Figure 1. Statute allows the Department of Finance (DOF) to establish whatever accounting and reporting system it desires for these four state funds, which represent roughly half of Caltrans' budget.

The DOF has chosen to display the capital outlay and local assistance expenditures for each of these funds on a cash basis, while continuing to show state operations expenditures on a modified accrual basis. By contrast, all expenditures from other transportation funds, including federal funds, continue to be shown on a modified accrual basis. This means that the budget shows certain Caltrans expenditures when payments are made, and others when the state commits to making the payments. For most state programs, this distinction would make little difference from an oversight perspective, as the commitment to pay funds and the payment of those funds usually happen within the same year. Caltrans' capital outlay and local assistance expenditures, however, are on transportation projects for which Caltrans commits to spending money up front, but for which money may be paid out over multiple years. Thus, displaying part of Caltrans' budget on a cash basis and part on a modified accrual basis makes it impossible to determine Caltrans' total expenditures in a given year. As we discuss below, this practice prevents the Legislature and the public from holding the department accountable for managing taxpayer funds, tracking program changes over time, determining the level of support expenditures required to deliver scheduled transportation projects, and comparing Caltrans' expenditures to those of other programs.

State and Federal Expenditures Cannot Be Aggregated. One effect of the different accounting basis used for these four state funds is that adding together the state and federal funds that make up Caltrans' budget yields only a rough approximation of the budget's size. For example, the 2005-06 Governor's Budget shows total budget-year expenditures for Caltrans of $8 billion, including $2.4 billion from federal funds, $2.9 billion from the State Highway Account (SHA), and $2.7 billion from other funds. However, if SHA expenditures were accounted for on a modified accrual basis as federal funds are, SHA expenditures would total $3.4 billion (instead of $2.9 billion). Likewise, the $2.7 billion expended from other funds would change significantly if they were all shown on the same basis as the federal fund expenditures. Thus, even if the budget contained no errors, it would still be incorrect to state, as the Governor's budget does, that Caltrans' expenditures for 2005-06 are projected to be $8 billion.

Figure 2 illustrates this problem using a single hypothetical transportation project as an example. This hypothetical project has capital outlay costs of $100 million and will take three years to construct. The project is funded by $80 million in federal funds and $20 million in state funds. As the figure shows, on an accrual basis, the entire $100 million project would appear in Caltrans' budget the year the contract to construct the project is awarded. Thus, the budget would reflect Caltrans' funding commitment to complete the project. On a cash basis, part of the project would appear in each year that Caltrans paid some money to the contractor. In this case, the budget would reflect Caltrans' actual cash expenditures. However, the way DOF would currently show this project would be to count all the federal funds as expenditures in the first year, while the state funds would be shown as expended over the life of the project. Thus, for any given year, the Legislature is unable to ascertain the magnitude of the department's project commitments or payments from the information displayed in the budget. The information presented is both incorrect and misleading and prevents the Legislature from holding the department accountable for managing taxpayer funds.

Budget Display Choices Change From Year to Year, Distorting Program Trends. In addition to the differences in accounting between state and federal funds, the accounting basis for each of the four funds over which DOF has budget display control changes over time. This makes it impossible not only to aggregate Caltrans' expenditures correctly within each year to get a complete picture of the department's activities, but also to compare expenditures between years. Relying on data in the budget to examine expenditure trends over time would result in erroneous and misleading conclusions about program activity. For example, the Governor's budget shows Public Transportation Account (PTA) capital outlay expenditures increasing by 700 percent between 2004-05 and 2005-06, from $39 million to $313 million. The large increase in expenditures is based on a large projected increase in PTA revenues due to a one-time transfer of $275 million into PTA from the sale of tribal gaming bonds. (Please see our discussion of Caltrans' funding issues in The 2005-06 Budget: Perspectives and Issues for more information on tribal gaming bond revenue.) The budget shows Caltrans expending the entire $275 million in the budget year. However, Caltrans indicates that only a small fraction of that money would actually be paid out in the budget year. In fact, Caltrans currently has only $148 million worth of transit capital outlay projects planned through the end of 2008-09. By contrast, the $39 million in capital outlay expenditures shown in the current year is actually Caltrans' estimate of the cash they will spend this year. Thus, if the administration in fact intends to show the PTA on a cash basis, capital outlay expenditures for the budget year are grossly inflated.

Current Practice Hinders Oversight and Efficiency

Misleading Numbers Weaken Legislative Oversight by Reducing Budget Usefulness. Using multiple accounting methods to display Caltrans' budget weakens legislative oversight in several ways. Neither the Legislature nor the public is currently able to:

• Accurately determine the size of Caltrans' annual budget or compare it to other state expenditures.
• Hold Caltrans accountable for managing taxpayer funds.
• Track changes or trends in Caltrans' project expenditures over time.
• Use the budget to verify Caltrans' annual project delivery claims.
• Compare the budget to the California Transportation Commission's biennial project delivery plan.
• Determine the amount of federal and state funds paid out for transportation projects in any year.

The failure of the administration's budget to provide any of this information severely diminishes the usefulness of Caltrans' budget display to the Legislature and the public.

Caltrans Keeps Two Sets of Books, Reducing Efficiency. The federal Single Audit Act and state law require the state to annually report the financial condition of all of its funds on a modified accrual basis. Because of this requirement, Caltrans' accounting division continually keeps track of all of Caltrans' expenditures on a modified accrual basis. In order for DOF to show transportation expenditures on a cash basis in the Governor's budget, Caltrans' budget division must convert the expenditures recorded in its accounting system to a cash basis. When asked how much effort could be saved by converting the budget to a modified accrual basis, Caltrans staff responded that they could not quantify the savings, but did acknowledge that such a change would be a "simplification" of the budget process. Thus, while the savings of making such a switch are unknown, using the normal budgetary accounting method (modified accrual) would certainly reduce the level of effort required by Caltrans' budget division in preparing the annual budget.

Accrual Accounting Would Still Allow Effective Cash Management

Concern Over Cash Management. The DOF indicated that the purpose of showing the four transportation fund accounts on a cash basis is to facilitate Caltrans' management of the cash available in each of the accounts. The administration's concern is that using a modified accrual method would result in negative account balances because Caltrans makes project commitments in excess of the cash it has available in any given year. In order to display a positive fund balance, Caltrans would have to keep large reserves in the accounts instead of using the money more efficiently to fund additional projects.

Cash Management Can Occur Without Cash Accounting. We concur that Caltrans should use state funds efficiently to maximize the amount of transportation construction these funds can support at any one time. However, to do so, we do not think it is necessary to display the accounts on a cash basis in the budget. In fact, the negative balances (under the modified accrual method) would provide useful information on the amount the state has committed to pay in future years for which it does not currently have cash available. We think that one way to address the administration's concern is to specifically identify the amount of expenditures in the fund condition statement that are not due to be paid until future years. This would allow DOF to show actual (positive) cash balances available in the accounts in addition to the (potentially negative) accrual balances. This adjustment in the budget display would not hinder Caltrans' project delivery. In our view, it would increase Caltrans' efficiency as well as enhance budget accountability.

Recommend Making Caltrans' Numbers Comparable to Rest of Budget

Showing all of Caltrans' funds on the same accounting basis as the rest of the budget would allow the Legislature and the public to accurately determine the size of Caltrans' budget, track changes over time, and compare Caltrans' expenditures to those of other programs. This would greatly enhance legislative oversight and provide the Legislature with a firmer basis on which to make Caltrans budget decisions. Therefore, we recommend that the Legislature delete DOF's statutory authority to show Caltrans' funds on a different basis than the rest of the state budget, thereby making Caltrans' expenditure information comparable to the rest of the budget.

Highway Transportation

Capital Outlay Support Request Will Be Revised

We withhold recommendation on $1.45 billion requested for capital outlay support staff because staffing needs will be revised during the May Revision when more accurate information on workload for the State Transportation Improvement Program will be available.

Withhold Recommendation on Capital Outlay Support. The budget proposes $1.45 billion to fund capital outlay support, a 2.5 percent increase from current-year estimated expenditures. However, the department typically provides new estimates in the spring as part of the May Revision. By that time, the department will have more accurate estimates regarding the amount of project development work that will be performed during 2005-06. Pending receipt of new workload estimates, we withhold recommendation on the department's capital outlay support request.

Storm Water Maintenance Request Needs Revision

The budget proposes to increase funding for storm water treatment by $11.7 million in the budget year ($8.8 million ongoing) and 43.2 personnel-years (PYs), in order to perform ongoing maintenance for storm water treatment structures. This request is based on a new legal settlement requiring the department to expand its use of storm water treatment structures on the state highway system. However, the request is based on a poor estimate of the number of such structures Caltrans will have in the budget year. We recommend rejecting the request but allowing Caltrans to resubmit it based on corrected information. (Reduce Item 2660-007-0042, Schedule 4, by $9,611,000 and 43.2 PYs. Reduce Item 2660-502-0608 by $2,052,000.)

Budget Proposes Expanding Storm Water Treatment Activities. The 2004-05 Budget Act provided a total of 180 PYs in Caltrans' maintenance division to perform storm water management activities. These activities are required under the federal Clean Water Act and a Storm Water Management Plan (SWMP) negotiated between Caltrans and the State Water Resources Control Board. Caltrans' SWMP was developed in response to a lawsuit filed against it by environmental groups in Los Angeles in 1993. In April 2004, Caltrans reached a new settlement agreement with those environmental groups, requiring Caltrans to incorporate pollution control structures into the highway system statewide. In order to perform the ongoing maintenance that will be required for those structures, Caltrans is requesting an additional $11.7 million in the budget year for 43 PYs and the purchase of related equipment. Permanent funding after the budget year would be $8.8 million to cover the costs of the PYs and the ongoing maintenance of their equipment.

Budget Request Based on Poor Estimate. While the department's required storm water treatment structure maintenance will certainly increase because of this settlement agreement, its requested funding increase is based on a poor estimate of the number of structures it will have to maintain in the budget year and beyond. Specifically, the department's request assumes that it will have 487 such structures to maintain statewide by the end of the budget year. This assumption was based on a survey of four of Caltrans' 12 districts in the summer of 2004. However, the districts chosen for the sample were not representative of the state as a whole, and it was unclear how many of the 487 structures were already built. We asked the department to provide us with an estimate based on a more thorough review of its installed treatment structures. In response, Caltrans indicated (in January 2005) that a survey of seven districts revealed 881 storm water treatment structures currently in existence in those districts alone, with 109 more planned for completion by the end of the budget year. Caltrans did not estimate how many such structures it must have statewide based on this new information, but it may be more than double the number estimated in the budget request.

Caltrans has thus provided the Legislature with two very different estimates of the amount of additional storm water maintenance work it will have to perform. If the latter estimate is indeed correct, maintaining the treatment structures statewide could require about twice the resources Caltrans has requested.

Recommend Rejecting Request but Allowing Caltrans to Resubmit. While Caltrans will certainly require resources to maintain its storm water treatment structures, the Legislature has no basis to determine the amount of resources to provide. Therefore, we recommend rejection of the department's request. Instead, we recommend that Caltrans recalculate the number of storm water treatment structures it has statewide and resubmit its request for funding in April 2005 based on corrected numbers.

Significant Raise for Caltrans Engineers Not Shown in Budget

The collective bargaining unit to which Caltrans' engineers belong has negotiated substantial pay raises for its members over the next four years. Under current law, the administration is required to present the results of a salary survey to the Legislature each year before it considers approving the increase. The budget does not reflect the first year of this increase, as the administration is waiting for an updated survey.

Caltrans Engineers to Achieve Pay Parity With Their Counterparts, Subject to Legislative Approval. Caltrans' engineers belong to the Professional Engineers in California Government (PECG), otherwise known as collective bargaining Unit 9. The PECG's current negotiated memorandum of understanding (MOU) with the state indicates that PECG's members are to receive a raise in each year from 2005-06 through 2008-09. These raises are to be based on annual surveys of the pay received by engineers at large local agencies around the state, so that by the end of the four-year period PECG's members are to achieve pay parity with their local counterparts. However, while the Legislature has approved PECG's MOU, the annual pay increase is not automatic. Instead, according to current law, the results of the salary survey must be submitted to the Legislature annually before the Legislature will consider approving the corresponding pay increase.

Pay Increase Not Shown in Governor's Budget. An initial survey conducted by the Department of Personnel Administration estimated that under the provisions of the MOU, PECG members would receive a 4.8 percent pay increase in 2005-06, a more than 8 percent increase in each of the next two years, and a 5 percent increase in 2008-09. By the end of the four-year period, the state's annual salary expenditures for PECG members would increase by about $300 million annually over current levels. Most, but not all, of this amount would be for Caltrans engineers and would be funded by transportation funding sources, primarily the SHA. However, the Governor's budget does not reflect the first year of this pay increase, estimated at $48 million. This is because DOF is awaiting the results of an updated survey of local agencies before budgeting the corresponding pay increase in the budget year. It is our understanding that once this survey is complete, the administration will request the calculated pay increase in April or May 2005. The pay increase would then require legislative approval in the budget bill to go into effect.