The Motor Vehicle Account (MVA) derives most of its revenues from vehicle registration and driver license fees. In 2007–08, 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 (CHP) (69 percent), the Department of Motor Vehicles (DMV) (22 percent), and the Air Resources Board (7 percent).
The Governor’s budget proposes to increase vehicle registration fees and penalties to address a projected deficit in the Motor Vehicle Account beginning in the budget year. Although our analysis finds that the administration’s revenue projections are overstated, the proposal likely would provide sufficient revenue to keep the account solvent for several years.
Historical Spending Outpaces Revenues. Historically, spending for programs supported by the MVA has routinely outpaced revenues. This is largely the result of growth in the CHP, which accounts for nearly 70 percent of MVA expenditures. While revenues on average have grown about 5 percent annually, CHP’s budget has grown at a rate of about 9 percent annually. In recent years, CHP’s growth has been driven by a variety of factors, including negotiated salary increases, major equipment upgrades, and increased antiterrorism responsibilities following the attacks of September 2001. In our Analysis of the 2007–08 Budget Bill, we noted that the MVA would likely face significant shortfalls beginning in 2009–10 and possibly sooner depending on a number of factors.
MVA Revenues Come Mainly From Vehicle Registration Fees. The MVA derives most of its revenues from vehicle registration fees. Of the estimated $2.1 billion in MVA revenues in 2007–08, approximately $1.7 billion (or 81 percent) is from vehicle registration fees. Vehicle registration fees consist of (1) a base vehicle registration fee of $31 per vehicle, (2) a CHP fee of $10 per vehicle, and (3) late payment penalties that vary from $10 to $100 depending on the lateness of the payment. Other sources of MVA revenue include driver license and identification card fees (12 percent), and a variety of other miscellaneous fees for special permits and certificates (7 percent).
It is important to note that there are other fees collected by DMV as part of the vehicle registration process, including the vehicle license fee. However, these fees are not deposited into the MVA.
Proposed 2008–09 Expenditures Would Result in MVA Shortfall. The Governor’s budget proposes total MVA expenditures of $2.4 billion, about $2.6 million more than the current year. At this proposed level of expenditure, the MVA would face a shortfall of over $160 million by the end of 2008–09 absent corrective actions. This shortfall would grow to $500 million in 2009-10, and reach nearly $1 billion by the end of 2010-11.
Governor Proposes to Increase Vehicle Registration Fee and Penalty. To address the MVA shortfall, the Governor’s budget proposes to increase vehicle registration fees and penalties. Specifically, the governor proposes to increase the CHP fee by $11—from $10 to $21—per vehicle, as well as add a new penalty for late payment of the CHP fee. This new penalty would be on top of other penalties currently imposed, essentially doubling the total penalty for late registration.
Revenues Overstated. The budget assumes the fee/penalty increase proposal would generate $385 million in 2008–09, and about $522 million annually thereafter. The proposal requires enactment of urgency legislation, as the fee and penalty hikes are proposed to take effect in October 2008.
In reviewing the proposal, we identified a technical error in the administration’s calculation of revenues. After correcting for the technical error, we estimate the Governor’s proposal would increase MVA revenues by $353 million in 2008–09, and $491 million in 2009–10, about $32 million less each year than is currently reflected in the Governor’s budget.
Based on current law and historical trends, even at this level of revenues, we think the Governor’s proposal would generate sufficient funds to support MVA programs for several years. Specifically, our forecast of revenues and expenditures under the Governor’s proposal suggests that the proposed increases would sustain the MVA through 2013–14. This assumes that spending continues at an average annual rate of about 7 percent.
Potential Risks to the Revenue Projection. We would note that there are some risks to the projections: (1) it is particularly sensitive to timely passage of the fee increase proposal, and (2) it assumes little change in the behavior of individuals who register their vehicles late.
- Maximum Revenues Reliant on Timely Adoption of Proposal. Current law requires the department to send out vehicle registration notices 60 days prior to the due date for vehicle registration. In order for the department to begin collecting the higher fees effective October 2008, it must modify the vehicle registration notification statements and promptly send those out beginning in August 2008. Each month of delay could result in the loss of as much as $29 million.
- Estimate Assumes Registrant Behavior Unaffected by Increases. Despite the proposed doubling of the late penalty, the administration’s revenue projection assumes that individuals will continue to pay late at about the same rate. This may be reasonable given that the last penalty increase (in 2003) failed to induce more registrants to pay on time. In fact, late payments have been increasing. However, given the magnitude of the overall proposed increase (both fees and penalties), we think it is possible that a significant number of vehicle registrants could pay more timely, thus, reducing the overall level of penalty revenues generated by the proposal.
In addition, there are a number of remaining funding pressures, and potential risks, in the programs for CHP and DMV that could bring about 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’s license and identification cards. In 2006, the DMV estimated this could cost $500 million over the next six years to implement in California. Based on our review of the final Real ID regulations issued in January 2008, we would expect costs to be lower. However, the department has not released a revised estimate of costs. (For more information on Real ID, please see our discussion later in this chapter under the
“Department of Motor Vehicles”, Item 2740.)
- Major Multiyear Projects. As an example of another potential risk, in 2006–07 the Legislature approved a request to replace CHPs radios at an estimated cost to the MVA of about $500 million over five years. Similarly, a multiyear project was approved allowing the DMV to upgrade its information technology infrastructure. This project was estimated to cost $240 million. While our estimates assume these projects are implemented as planned, large projects often take longer and cost more to complete than originally estimated.
Overall, although the budget overstates revenues from the Governor’s proposal by $32 million annually, we conclude that the proposed increase in fees and penalties would sustain the MVA through 2013–14, assuming historical rates of growth in revenues and expenditures from year to year. However, a number of risks and pressures could cause expenditures to increase and draw down the reserve at a faster rate. We will continue to monitor the fund and offer recommendations as appropriate.
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