Analysis of the 2007-08 Budget Bill: Transportation

Motor Vehicle Account Condition

The Motor Vehicle Account (MVA) derives most of its revenues from vehicle registration and driver license fees. In 2006-07, those fees account for 90 percent of the estimated $2.1 billion in MVA revenues. The majority of MVA expenditures support the activities of the California Highway Patrol (69 percent), the Department of Motor Vehicles (22 percent), and the Air Resources Board (7 percent).

MVA Faces Outyear Deficits Without Corrective Actions

Our forecast shows the Motor Vehicle Account (MVA) is likely to face significant shortfalls beginning in 2009-10, and possibly sooner depending on the timing of a number of pending spending initiatives, as well as potential risks. We will continue to monitor the MVA and offer recommendations as appropriate.

Budget-Year Expenditures Exceed Revenues. The budget proposes total MVA spending of $2.3 billion in 2007-08. This represents an increase of $147 million, or 7 percent, above estimated current-year spending. Figure 1 shows the major proposed changes in MVA spending for 2007-08.

The proposed increase in MVA spending is mostly the result of increases for employee compensation, the rollout of major multiyear projects previously approved by the Legislature-such as the California Highway Patrol (CHP) radio replacement, the Department of Motor Vehicles (DMV) information technology modernization projects, and various facility improvements. These increases are partially offset by the proposed reduction in the Air Resources Board (ARB) spending from the MVA.

The budget projects MVA revenues to total $2.2 billion in 2007-08. This is an increase of $143 million, or 7 percent, above estimated current-year revenues. The increase mostly reflects anticipated growth in vehicle registration ($77 million) and driver license ($62 million) fee revenues. As a result, proposed MVA expenditures will exceed revenues in 2007-08. Nonetheless, the budget projects a substantial balance of $253 million at the end of 2007-08 because of the large carry-in balance from the current year ($408 million). This carry-in balance largely reflects the residual from the surge in revenues that followed the enactment of various penalty and fee increases in 2003.

LAO Forecast. Figure 2 shows total MVA resources (revenues plus the carryover balance) and expenditures for 2005-06 and the current year, and our forecast for 2007-08 through 2010-11. Our forecast is based on current law and reflects historical trends in revenues and expenditures.

Overall, Figure 2 shows that if revenues and expenditures continue at historical levels, the large balance in the account would be essentially depleted by the end of 2008-09, leaving a small balance of less than $50 million. Without corrective actions, the MVA would face a shortfall of $240 million in 2009-10, growing to more than $600 million in 2010-11.

New Pressures and Potential Risks. There are a number of new funding pressures, as well as potential risks, in the programs for CHP and DMV that could bring about significantly higher MVA expenditures and cause the MVA to draw down the reserve faster. These include:

• Federal Real ID Act. Perhaps the greatest potential new pressure on the MVA is the cost associated with the implementation of the federal Real ID Act. That law requires California to implement new standards for the production and issuance of state driver license and identification cards. The DMV has estimated this could cost $500 million over the next five years to implement in California. The administration has indicated that it may propose Real ID spending in the spring as it learns more of what would be required by the federal government. To date, federal funds have not been set aside to cover the cost of implementing Real ID nationwide. (For more information on Real ID, please see our discussion later in this chapter under the “Department of Motor Vehicles, Item 2740.”)

• Global Warming Solutions Act of 2006. Another potential pressure is the ongoing funding requirements of the Global Warming Solutions Act (Chapter 488, Statutes of 2006 [AB 32, Nuñez]). The Governor’s budget requests $24.4 million for ARB to begin implementation of the act. Of that amount, $15 million is proposed to be funded by a loan from the MVA. As yet, the ongoing cost of implementing the new law is not known and there is no long-term plan to cover these costs. Because mobile source emissions account for a significant amount of the state’s greenhouse gases, the MVA may be considered one of several potential sources of funding. Historically, MVA has been used to support ARB’s mobile source pollution programs. (We discuss the implementation of the act further in our write-up on climate change expenditure proposals in the “Crosscutting Issues” section of the “Resources” chapter.)

• Major Multiyear Projects. As an example of a potential risk, last year the Legislature approved a request to replace CHP’s radios at an estimated cost to the MVA of more than $500 million over five years. Similarly, a multiyear project was approved allowing DMV to upgrade its information technology infrastructure. This project was estimated to cost $240 million. While we have built these costs into our expenditure forecast, large projects often take longer and cost more to complete than originally estimated. A 5 percent increase in the estimated cost of these projects would amount to $37 million, enough to nearly wipe out the projected balance in 2008-09.

Depending on the spending proposed as part of the spring revision process for the departments that rely heavily on MVA funding, and more specifically for Real ID, it may be necessary for the Legislature and administration to consider measures to address the solvency of the MVA sooner (in 2007) rather than later. The alternatives include increasing revenues, reducing program spending, or identifying other funding sources for some programs.

In 2002-03, the last time the MVA faced a shortfall, the Legislature and the Governor adopted several increases in fees and penalties to generate higher revenues for the MVA. Specifically, legislation was enacted to increase (1) penalties for late vehicle registration, and (2) fees for the purchase of driver information and the re-issuance of a license for former driving-under-the-influence (DUI) offenders. In addition, two new fees were established: a $5 fee for retaking a driving test, and a $120 fee for second appeals of DUI sanctions.

We will continue to monitor the MVA and provide recommendations as appropriate.

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