The 2017-18 Budget: Transportation Funding Package

The 2017-18 Budget: Transportation Funding Package MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2017 2017-18 BUDGET ii Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET EXECUTIVE SUMMARY California’s Transportation Systems Face Several Challenges. California has a large and complex network of transportation systems that currently face several challenges. These challenges include (1) aging highways, (2) aging local roads and transit systems, (3) increased traffic congestion, (4) increased demand for transportation alternatives, and (5) increased goods movement. There is widespread concern that current funding levels for transportation programs are insufficient to fully address these challenges. Governor’s Proposed Transportation Funding Package. The Governor’s 2017-18 budget includes a transportation funding package that is estimated to generate an annual average increase in transportation funding of $4.2 billion over the next ten years. This funding would come from a mix of revenue sources including a new $65 vehicle registration tax, increases to gasoline and diesel excise taxes, cap-and-trade auction revenues, and the early repayment of certain transportation loans. The revenues generated under the proposal would be distributed through a complex series of formulas in a manner that partially addresses a mix of transportation challenges. For example, the Governor’s proposal would fully fund core highway rehabilitation needs in the State Highway Operation and Protection Program (SHOPP), but provide relatively little to address the state’s significant highway maintenance needs. LAO Road Map for Developing a Transportation Package. In order to assist the Legislature in its deliberations on a transportation package, we provide in this report a road map to addressing five key issues that merit legislative consideration. Specifically, the Legislature will want to: • Determine Specific Challenges to Address. The Legislature will want to consider its priorities and how they compare to the Governor’s proposal. In doing this we recommend that the Legislature first determine the level of shared funding for cities and counties and then make the Highway Maintenance Program its highest priority for the state’s share of new funds, followed by SHOPP. After which, the Legislature will want to consider whether to address additional transportation challenges, such as supporting local transit. • Determine Overall Funding Level. The magnitude of funding needed will vary based on which transportation needs are prioritized and how robustly the Legislature wishes to fund those needs. In order to assist the Legislature, we provide three different scenarios to illustrate what level of funding would likely be needed to meet different sets of priorities. For example, we estimate that an annual average of $4.8 billion would be needed over the next decade to fully fund highway maintenance and certain core SHOPP needs, as well as providing a share of revenues for local streets and roads. Conversely, an annual average of $8.8 billion would be needed to meet these needs, as well as more robust funding for other programs proposed by the Governor. • Determine Revenue Sources. After determining its transportation priorities and the level of funding needed to meet them, the next step would be for the Legislature to determine how www.lao.ca.gov Legislative Analyst’s Office 1 2017-18 BUDGET to generate the necessary revenue. In determining which specific taxes or fees to increase, we recommend that the Legislature consider: (1) charging users of transportation systems, (2) a mix of sources, (3) stability of sources, and (4) distinguishing between temporary and permanent sources. • Simplify Funding Distribution Model. In developing a funding package, we recommend that the Legislature adopt an approach that is more simplified than that proposed by the Governor in order to allow for future growth across all priorities. Moreover, putting together a funding package is an excellent opportunity for the Legislature to review the existing distribution formulas and consider improvements to reduce complexity and ensure that transportation funding is being distributed to the state’s highest priorities. • Determine Administration of New Programs and Establish Accountability Measures. The Legislature will want to determine how new programs will be administered. We recommend that the Legislature consider having the California Transportation Commission (CTC) administer any new programs and consider awarding funds through competitive grants. The Legislature will also want to consider adopting well-defined and robust accountability measures in the allocation of funds for both new programs and existing programs. For example, we recommend the Legislature require CTC to perform project-level oversight of SHOPP by thoroughly reviewing the proposed cost, scope, and schedule of all SHOPP projects and allocating all funding for SHOPP projects. 2 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET INTRODUCTION California has a large and complex network of the Legislature and the Governor reaching an transportation systems that currently face several agreement on a transportation funding package. challenges, such as aging infrastructure and The Governor’s proposed budget for 2017-18 increased demand. There is widespread concern includes a package of proposals to increase that current funding levels for transportation funding for transportation programs, as well as to programs are insufficient to fully address these increase accountability. The proposed package is challenges. In the fall of 2015, as part of a special similar to the package previously proposed by the legislative session to identify additional funding for Governor. In this report, we (1) provide background transportation programs, the Governor proposed information on the state’s major transportation a transportation package to provide an ongoing programs and funding sources, (2) describe the increase in transportation funding and some Governor’s proposed 2017-18 transportation measures intended to increase accountability and package including how the increased funding would efficiency regarding the use of transportation be allocated, and (3) provide a road map to assist the funding. The special session ended without Legislature in making certain key decisions it will face in developing a transportation package. BACKGROUND The state has several major transportation Highway Maintenance Program, as well as the programs that are funded from various state State Highway Operation and Protection Program revenue sources to support state and local (SHOPP) which we discuss below. Figure 1 (see transportation systems. In this section, we provide next page) summarizes the spectrum of highway background information on the state’s major maintenance and rehabilitation work that is transportation programs and how these programs performed by these two programs. As shown in the are currently funded. We also identify some of the figure, the Highway Maintenance Program focuses major transportation challenges currently facing on highways that are in good or fair condition. the state. Specifically, the program is responsible for: • Minor Routine Maintenance. Most Major State Transportation minor routine maintenance consists of Infrastructure Programs operational activities such as maintaining Highway Maintenance Program. The roadside landscaping, graffiti removal, California Department of Transportation and trash pick-up. A small portion of (Caltrans) is responsible for maintaining and this routine maintenance includes minor rehabilitating the state’s highway system, which repairs to pavement, bridges, and culverts. includes about 50,000 lane-miles of pavement, Such repairs include filling potholes 13,100 bridges, and 205,000 culverts (pipes that and bridge painting. Minor routine allow naturally occurring water to flow beneath maintenance work is performed directly by a roadway). The department does so through the Caltrans staff. www.lao.ca.gov Legislative Analyst’s Office 3 2017-18 BUDGET • Major Maintenance Projects. Major work by Caltrans staff to design and manage each maintenance projects are more significant project. The construction of SHOPP projects is repairs to help preserve highway pavement, done by a construction contractor. In 2016-17, bridges, and culverts. These projects are Caltrans estimates that it will spend $2.3 billion performed by construction contractors and on SHOPP projects. Of the total amount, Caltrans overseen by Caltrans staff. A typical project plans to spend about $1.2 billion: on pavement would be the application of a thin overlay ($800 million), bridges ($350 million), and culverts of new pavement to a stretch of state ($50 million). The remainder of SHOPP funding highway. is available for other purposes such as responding to emergencies, making safety improvements, and In 2016-17, Caltrans plans to spend a total improving roadside facilities. of $1.5 billion in state funds for the Highway Shared Revenues for Local Roads. The Maintenance Program—$1.1 billion for minor 58 counties and 482 cities in California own routine maintenance and about $400 million and maintain over 300,000 paved lane-miles of for major maintenance projects. For major local streets and roads. They also own nearly maintenance projects, Caltrans plans to spend 12,000 bridges and numerous other aspects of $234 million for pavement, $131 million for bridges, their local road systems, such as storm drains and and $23 million for culverts in 2016-17. traffic signals. Funding for local streets and roads SHOPP. SHOPP is a program of capital projects comes from local, federal, and state sources. Of the to rehabilitate or reconstruct highways when total funding for local roads, roughly one-third they reach the end of their useful life. Unlike the comes from the state from “shared revenues”—a Highway Maintenance Program, SHOPP projects portion of the state’s excise taxes on gasoline and focus on highways that are in distressed condition diesel that are distributed to cities and counties. and can involve tearing up and replacing an entire The state has historically shared a portion of its roadway or building a new bridge to replace an transportation revenues with cities and counties old one. SHOPP projects often require significant Figure 1 State Highway Repair Programs Perform Various Types of Work Highway Maintenance Program SHOPP Minor Maintenance Major Maintenance Minor Rehabilitation Major Rehabilitation • Performed on highway • Performed on highway • Performed on highway • Performed on highway components in good components in good or components in distressed components in distressed condition. fair condition. condition. condition. • Examples include filling • Examples include thin • Examples include thick • Examples include potholes, damage pavement overlays, bridge pavement overlays and complete removal assessment, and bridge joint seals, and culvert concrete panel and replacement, painting. debris removal. replacement. reconstructing road base, and mitigating erosion • Work performed by • Work performed by • Work designed by around bridge foundations. Caltrans staff. contractors. Caltrans staff and performed by contractors. • Work designed by Caltrans staff and performed by contractors. SHOPP = State Highway Operation and Protection Program. 4 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET in recognition that some of the state revenue portion of cap-and-trade auction revenues collected is associated with driving on local each year. Specifically, 10 percent of roads and that state and local systems function annual cap-and-trade auction revenue is together to allow people and goods to move around continuously appropriated to the program. communities and across the state. Over the last For 2016-17, the estimated funding level couple of decades, the proportion of state revenue for the Transit and Intercity Rail Capital shared with locals is roughly one-third of the Program is about $235 million, which state’s transportation revenues. In 2016-17, shared includes an estimated $100 million revenues for local streets and roads is estimated to from the continuous appropriation and be $1.3 billion. $135 million provided on a one-time basis. State Transportation Improvement • Low Carbon Transit Operations. The state Program (STIP). STIP is the state’s program for also provides funding through the STA improving transportation systems, generally by program formula for transit operations increasing their capacity. STIP focuses on highway that help to reduce GHG emissions. The improvements, but can also fund local road program is funded from 5 percent of improvements and certain transit projects. Funding cap-and-trade auction revenues that are in STIP is allocated with 75 percent to counties for continuously appropriated. In 2016-17, projects they select and 25 percent to Caltrans for funding for this program is estimated interregional projects. In 2016-17, revenues for STIP at $50 million from the continuous are estimated at about $175 million. appropriation. Transit. There are 200 transit agencies in California. While these transit systems Active Transportation Program (ATP). The are generally owned and operated by local ATP, which is administered by the California governments, the state provides some funding to Transportation Commission (CTC), funds support them. The state has three primary ongoing bicycling and pedestrian improvement projects. transit programs: Program goals include increasing the proportion of walking and bicycling trips and reducing GHG • State Transit Assistance (STA). The STA emissions. Funds in the program are allocated program distributes funding to transit through competitive grants with half of the operators based on a formula. STA funds funds distributed to projects selected by the state, can be used for either operational support 40 percent distributed to projects selected by large or to fund capital projects based on local urban regions, and 10 percent for projects selected priorities. In 2016-17, funding for STA is by rural and small urban regions. In 2016-17, estimated at $260 million. funding for ATP is estimated at about $130 million. • Transit and Intercity Rail Capital Program. The Transit and Intercity Rail Current State Transportation Funding Sources and Uses Capital Program is a competitive grant program that awards funding to transit Funding for transportation in California and rail capital projects that meet certain comes from numerous state, local, and federal criteria, such as reducing greenhouse gas sources. State funding for transportation comes (GHG) emissions. This program receives a from various state transportation taxes and fees www.lao.ca.gov Legislative Analyst’s Office 5 2017-18 BUDGET that are dedicated to transportation purposes, generate about $2.6 billion. Two-thirds including gasoline excise taxes, diesel excise and of the revenue from the base excise sales taxes, and vehicle weight fees. In addition, tax is allocated to the State Highway the state allocates a portion of its cap-and-trade Account (SHA) to support the Highway auction revenues to transportation programs and Maintenance Program, SHOPP, and provides General Fund support by paying a portion Caltrans administration. One-third of the of the cost of transportation bond debt service. funding is shared with cities and counties For 2016-17, total state funding for transportation to support their local streets and roads. infrastructure is estimated to be $7.2 billion. • Variable Swap Rate. The variable swap Figure 2 provides a breakdown of this total by the gasoline excise tax rate was established as different fund sources, which we describe in more part of the “fuel tax swap”—a package of detail below. legislation that changed the way the state State Gasoline Excise Taxes. The majority of taxes fuels. This tax is set annually by the state transportation funding comes from excise Board of Equalization (BOE). BOE sets the taxes on gasoline. Figure 3 shows the current rates rate by considering both gasoline price and for the state’s two gasoline excise taxes—the base quantity sold in an effort to mimic a sales tax and the variable “swap” tax. (As shown in the tax, which had previously been collected figure, there is also a federal excise tax of 18.4 cents on gasoline for transportation purposes. per gallon.) BOE has set this rate at 9.8 cents per gallon • Base Rate. The state base gasoline excise in 2016-17, which is estimated to generate tax is set at a rate 18 cents per gallon. about $1.4 billion. Figure 4 shows the In 2016-17, this tax is estimated to distribution of revenues from the swap excise tax on gasoline. First, an amount is Figure 2 taken “off the top” to fully backfill weight State Sources of fees that are used to help pay debt service Transportation Infrastructure Funding on transportation bonds, as discussed 2016-17 below. For 2016-17, the amount necessary to backfill weight fees is roughly $1 billion. General Fund Misc. Revenues The remaining funds, which amount Diesel Sales Tax to about $400 million in 2016-17, are Diesel Excise Tax allocated: 44 percent to cities and counties for local streets and roads, 44 percent to Cap-and-Trade STIP, and 12 percent to SHOPP. State Diesel Taxes. The state also collects revenue from taxes on diesel fuel. Figure 5 (see Weight Fees page 8) shows the current diesel tax rates for the state’s three taxes on diesel fuel—an excise tax and Gasoline two sales taxes. (As shown in the figure, there is Excise Taxes Total: $7.2 billion also a federal excise tax of 24.4 cents per gallon.) 6 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET • Diesel Excise Tax. The Figure 3 diesel excise tax is a variable Current Gasoline Excise Tax Rates tax, with a rate set annually Per Gallon, 2016-17 by BOE. BOE has set this rate at 16 cents per gallon in 2016-17, which is estimated to SSttaattee VVaarriiaabbllee SSwwaapp EExxcciissee TTaaxx generate about $500 million. 9 . 8 ¢ Revenue generated from 6 cents of this tax is allocated to cities and counties for SSttaattee BBaassee EExxcciissee TTaaxx 1 8 . 0 ¢ local streets and roads. The remainder of the revenue is deposited into SHA to fund FFeeddeerraall EExxcciissee TTaaxx the Highway Maintenance 1 8 . 4 ¢ Program, SHOPP, and Caltrans administration. • Base Sales Tax. The state collects a base sales tax on diesel at a rate of 4.75 percent for transportation programs. In 2016-17, this tax is estimated to generate about Figure 4 $300 million. Half of this Distribution of Revenues revenue is allocated to the From Variable Swap Tax on Gasoline STA program to support local transit. The other half is used to fund state-supported Variable Swap Gasoline Excise Tax intercity rail and other state mass transportation programs. Weight Fee Backfill • Swap Sales Tax. The state also collects a second Remaining Funds sales tax on diesel at a rate of 1.75 percent for 44% 44% 12% transportation programs. This diesel sales tax, which is Cities and Counties STIP SHOPP referred to as the swap sales tax, was established in the STIP = State Transportation Improvement Program and fuel tax swap discussed above. SHOPP = State Highway Operation and Protection Program. All of the revenue from this www.lao.ca.gov Legislative Analyst’s Office 7 2017-18 BUDGET tax is allocated to the STA program. In Cap-and-Trade Auction Revenues. The 2016-17, this tax is estimated to generate state’s cap-and-trade regulation places a “cap” on about $110 million. aggregate GHG emissions from large emitters, such as large industrial facilities, electricity Vehicle Weight Fees. Vehicle weight fees are generators and importers, and transportation fuel registration fees charged to vehicles that carry heavy suppliers. Under the cap-and-trade program, the loads on the state’s roadways, such as commercial Air Resources Board issues allowances permitting trucks. Weight fees generate about $1 billion GHG emissions up to the amount of the cap. Some annually. Since 2011, vehicle weight fees have been of these allowances are given away for free, while used to offset a portion of the debt service costs on the remainder of allowances are sold at quarterly transportation bonds, rather than fully paying these auctions. The revenue generated from these costs from the General Fund. In 2016-17, estimated cap-and-trade auctions is available to fund various debt service costs are about $1.5 billion. These costs programs that reduce GHG emissions, including will be paid from the roughly $1 billion in weight fee certain transportation programs. Specifically, revenues collected in the current year, $100 million 25 percent of the total auction revenue collected in weight fee revenues collected in prior years, and each year is continuously appropriated to the state’s $60 million from certain miscellaneous revenues, high-speed rail project, 10 percent to the Transit such as revenue from rental properties owned by and Intercity Rail Capital Program, and 5 percent Caltrans. The remainder of the costs will be paid to the Low Carbon Transit Operations Program. from the General Fund. Current Transportation Figure 5 Challenges Current Diesel Tax Rates As we discuss below, the Per Gallon, 2016-17 state’s transportation system faces several key challenges. These challenges include: SSttaattee ““SSwwaapp”” SSttaattee BBaassee (1) aging highways, (2) aging SSaalleess TTaaxx SSaalleess TTaaxx 1 . 7 5 % 4 . 7 5 % local roads and transit systems, (3) increased traffic congestion, (4) increased SSttaattee EExxcciissee TTaaxx 1 6 . 0 ¢ demand for transportation alternatives, and (5) increased goods movement. FFeeddeerraall EExxcciissee TTaaxx Aging Highway 2 4 . 4 ¢ Infrastructure. The state’s highway infrastructure is aging and requires regular maintenance to keep highways in a state of good Note: Figure does not include other statewide and local sales taxes. repair. The highways also 8 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET need rehabilitation or reconstruction when they level. These estimates are based on a variety of data reach the end of their useful life. As we discussed provided by Caltrans including historical project in our report, The 2016-17 Budget: Transportation costs, and infrastructure life cycles, such as how Proposals, the state has significantly less funding often minor rehabilitation or major reconstruction available to adequately maintain and rehabilitate are generally needed. the core aspects of the state highway system— In addition to the ongoing needs, there is pavement, bridges, and culverts. Figure 6 compares a backlog of deferred SHOPP projects that has the current funding levels for major highway accumulated over the years. This is partly due to maintenance projects to the ongoing maintenance insufficient funding levels in prior years, as well needs (specifically, to meet certain maintenance as highways needing rehabilitation sooner due to schedules provided to us by Caltrans). As shown a lack of proper maintenance. We estimate that in the figure, the total annual amount of funding roughly $9 billion is needed one a one-time basis needed to meet ongoing major maintenance needs to eliminate this backlog. We note that there are is about $1.6 billion, or about $1.2 billion more than additional SHOPP needs that were not part of our the current funding level for major maintenance analysis, such as roadside rest areas. projects. Aging Local Transportation Systems. Many In addition to the ongoing needs, there is a local transportation systems, such as local roads backlog of deferred major maintenance projects. and transit systems, also face significant funding In our 2016 report, we found that there were shortfalls for maintenance and rehabilitation in the about 6,000 lane-miles of pavement, 900 bridges, Figure 6 and 41,000 culverts Current Funding Level Falls Short of requiring a major Meeting Ongoing Major Maintenance Needs maintenance project. We (In Millions) estimate that it would Current Ongoing Annual cost about $3 billion Funding Level Annual Need Shortfall on a one-time basis to Pavement $234 $750 -$516 Bridges 131 200 -69 eliminate this backlog. Culverts 23 600 -577 Figure 7 compares Totals $388 $1,550 -$1,162 the current funding levels for SHOPP projects to the Figure 7 ongoing rehabilitation Current Funding Level Falls Short of needs for pavement, Meeting Ongoing SHOPP Needs bridges, and culverts. (In Millions) As shown in the figure, Current Ongoing Annual the total amount of Funding Level Annual Need Shortfall funding needed to meet Pavement $800 $900 -$100 ongoing SHOPP needs Bridges 350 350 — is roughly $2 billion, or Culverts 50 750 -700 about $800 million more Totals $1,200 $2,000 -$800 than the current funding SHOPP = State Highway Operation and Protection Program. www.lao.ca.gov Legislative Analyst’s Office 9 2017-18 BUDGET billions of dollars. While it is generally known that intercity and commuter rail, and safer options for local systems face the same challenges as the state, bicycling or walking as a means of travel over short it is more difficult to precisely quantify the level distances. Many travelers prefer these alternatives of funding necessary to address these challenges as they can avoid the stresses of being in traffic, given the diversity in needs and differing levels of as well as obtain other benefits. For example, information available across cities, counties, and individuals who travel on a train or bus are able transit operators in the state. to simultaneously complete other tasks (such as Increased Traffic Congestion. As the state’s working or reading), while those who walk or population grows, increased travel demand bike are able to get exercise. As traffic congestion contributes to traffic congestion on highways and on highways and roads increases, the demand for roads. According to Caltrans, traffic congestion these alternatives grows. on the state highways increased from an average Increased Goods Movement. In addition to of about 250,000 hours each commute day in 2011 increased travel demand by drivers or passengers, to about 475,000 hours each commute day in 2016. the state faces increased movement of goods (This is based on the amount of time vehicles are through ports and along freight corridors. There in traffic with travel speeds below 35 miles per are 12 deep-water seaports in California, as hour.) In other words, Californians collectively well as a couple of cargo border crossing areas spent roughly 125 million hours in highway traffic with Mexico. These ports are a primary way of congestion in 2016. Significant traffic congestion bringing imported goods into the country and is problematic for several reasons. First, the also exporting U.S. products to other countries. individuals in traffic are giving up time that could For example, the Federal Highway Administration otherwise be spent on personal, recreational, reports that the ports of Los Angeles and Long or professional pursuits. Congestion also poses Beach combined form one of the largest container challenges to businesses that must plan around port complexes in the world and that these two the uncertainty of when employees will arrive ports handle 35 percent of all waterborne cargo for work and how long it will take to accomplish in the U.S. According to reports from the ports transportation-related business tasks, such as of Los Angeles and Long Beach, the number of making deliveries. In addition, vehicles that are cargo containers handled through these two ports sitting in traffic congestion also use more fuel and increased from 5.7 million containers in 1996 to emit more pollution due to the longer travel times. 15.5 million containers in 2016. Goods are moved Increased Demand for Transportation to and from ports and border crossings primarily Alternatives. In response to significant by trucks operating on the state’s highways and and ongoing traffic congestion, as well as by freight railroads. Accordingly, the demand environmental impacts of highways and roads, and congestion on these trade corridors has also transportation agencies have increasingly sought increased as the volume of goods moving in and to provide alternatives to driving. Alternatives out of ports has increased. include more comprehensive transit services, 10 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET GOVERNOR’S PROPOSAL The Governor’s 2017-18 budget includes a Funding from the package would phase in during transportation funding package. The proposed 2017-18 and 2018-19, resulting in an increase of package is similar to the package proposed by the $1.8 billion in the budget year. The administration Governor in the fall of 2015 as part of a special estimates that the funding package would generate legislative session on transportation funding. an annual average increase in transportation Specifically, the Governor’s package includes funding of $4.2 billion over the next ten years. proposals to (1) increase funding for transportation Figure 8 shows the annual funding increase programs, (2) create new formulas for distributing estimated over this time period. transportation funds, (3) allocate the increased Mix of Revenue Sources. Under the Governor’s funding to partially address certain transportation proposal, the increased transportation funding challenges, and (4) establish some accountability would come from a mix of revenue sources. measures. Figure 9 (see next page) summarizes the proposed revenue sources and the annual average amount Increases Transportation Funding that each source is estimated to generate over the $4.2 Billion Annual Average Increase. The next ten years. The specific revenue sources include: Governor’s transportation funding package • New Vehicle Registration Tax. As shown proposes to provide an ongoing increase in funding in the figure, about half of the funding for transportation programs beginning in 2017-18. would come from a new $65 registration Figure 8 New Transportation Funding Under the Governor's Proposal (In Billions) $6 5 Average $4.2 Billion 4 3 2 1 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 www.lao.ca.gov Legislative Analyst’s Office 11 2017-18 BUDGET tax (called a “road improvement charge”) per gallon rate would be adjusted for that all vehicle owners would pay annually inflation each year. when registering their vehicles. • Cap-and-Trade Auction Revenues. The • Gasoline Excise Tax Increase. The Governor’s funding package proposes Governor proposes to increase the to allocate an additional $500 million state’s total gasoline excise tax rate by annually in cap-and-trade auction 11.7 cents per gallon compared to the revenues to transportation programs. current rates—from a total excise tax Under the proposed budget for 2017-18, rate of 27.8 cents per gallon to 39.5 cents the Governor’s total cap-and-trade expen- per gallon, beginning in 2018-19. The diture plan (including the $500 million proposed 39.5 cents per gallon is based for transportation programs) is contingent on (1) maintaining the existing 18 cents on the Legislature extending the state’s base excise tax; (2) making the swap tax a cap-and-trade program beyond 2020 fixed rate (rather than a variable rate) that with a two-thirds urgency vote. (For would be set at 18 cents per gallon, which more information on the Governor’s is 8.2 cents higher than the current rate; cap-and-trade expenditure plan, please and (3) imposing an additional excise tax see our recent report The 2017-18 Budget: rate of 3.5 cents per gallon. In addition, Cap-and-Trade.) under the proposal, the total 39.5 cents • Loan Repayments. The proposal also per gallon gasoline excise tax rate would provides for the early repayment of about be indexed to adjust for future inflation. $700 million in transportation loans. • Diesel Excise Tax Increase. The Governor Specifically, one-third of the loan amount proposes to increase the state’s excise tax would be repaid each year from 2017-18 to on diesel from the current level of 16 cents 2019-20. per gallon to 27 cents per gallon beginning In addition to the revenues described above, in 2018-19. Under the Governor’s proposal, the proposal assumes that Caltrans will achieve the excise tax on diesel fuel would no savings of $100 million annually through longer be a variable rate that is set annually efficiencies, although the proposal does not by BOE, but instead the proposed 27 cent identify how those savings will be achieved. Figure 9 Creates New Governor’s Proposed Revenue Sources Distribution Formulas (In Billions) Most of the revenue Revenue Source Annual Average Amount generated under the New registration tax (road improvement charge) $2.1 Governor’s funding Gasoline excise tax increase 1.1 package—including Cap-and-trade auction revenues 0.5 all of the revenue from Diesel excise tax increase 0.4 Loan repayments 0.1 the proposed vehicle Total $4.2 registration tax—would be 12 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET deposited into a new state transportation account allocated to support a trade corridor program. The that the Governor is proposing to establish, the remaining funds in the account would be split, with Road Maintenance and Rehabilitation Account 60 percent allocated to the state for SHOPP and the (RMRA). While some of the new fuel tax revenues Highway Maintenance Program and 40 percent to would be deposited into this new account, a portion cities and counties for local streets and roads. of such revenues would be distributed under the Fuel Tax Revenues Distributed Under state’s existing formulas. Below, we describe in Multiple Formulas. Figure 11 (see next page) detail how the different revenue sources in the summarizes how state gasoline tax revenues would Governor’s package would be distributed. be distributed under the Governor’s proposal. As All Vehicle Registration Tax Revenues shown in the figure, revenue from the different tax Distributed Under New RMRA Process. Under rates would be distributed under different formulas. the Governor’s proposal, all of the revenue from Specifically, revenue from: the $65 vehicle registration tax would be deposited • The first 18 cents per gallon (base excise into the new RMRA and distributed to specific tax rate) would continue to be distributed transportation programs under a new formulaic under the existing formula with two-thirds process proposed by the Governor. Figure 10 to the state for the Highway Maintenance summarizes the proposed RMRA distribution Program, SHOPP, and Caltrans process. As shown in the figure, a total of administration, and one-third to cities and $800 million from RMRA would first be taken off counties for local streets and roads. the top and allocated to specific transportation programs, with each program receiving a specified • The next 18 cents per gallon (set swap amount. For example, $250 million would be tax rate) would be allocated according to the existing swap formula with Figure 10 weight fees first being backfilled and Road Maintenance and remaining funds allocated: 44 percent Rehabilitation Account Distribution to local roads, 44 percent to STIP, and 12 percent to SHOPP. Revenue From Vehicle Registration Tax and Portion of Fuel Taxes • Gasoline excise tax rates above 36 cents per gallon would the Off the Top Allocations deposited into RMRA. Specifically, • $275 Million - Corridor Mobility the initial increase of 3.5 cents per • $250 Million - Trade Corridor • $250 Million - Local Partnership gallon in 2018-19, as well as all funding • $25 Million - Local Planning Grants from future increases resulting from inflationary adjustments. RReemmaaiinniinngg FFuunnddss Figure 12 (see page 15) 60% 40% summarizes how state diesel tax revenues would be distributed under SHOPP/ Local Streets the Governor’s proposal. As the Highway Maintenance and Roads figure shows, the proposal maintains SHOPP = State Highway Operation and Protection Program. the existing distribution of revenues www.lao.ca.gov Legislative Analyst’s Office 13 2017-18 BUDGET Figure 11 New State Gasoline Excise Tax Per Gallon Distribution Formula FFuuttuurree IInnccrreeaasseess ttoo AAddjjuusstt ffoorr IInnffllaattiioonn New Road Maintenance and 39.5¢ New Rate Rehabilitation Account IInniittiiaall IInnccrreeaassee 3 . 5 ¢ Local Streets and Roads 44% SSwwaapp 1 8 . 0 ¢ 44% 27.8¢ Current Rate Backfill Weight Fees STIP 12% SHOPP 66.7% State Highway Account BBaassee 1 8 . 0 ¢ Local Streets and Roads 33.3% STIP = State Transportation Improvement Program and SHOPP = State Highway Operation and Protection Program. generated from the first 16 cents per gallon of the corridors, (2) $256 million to the Transit and Intercity excise tax rate. All revenue generated from diesel Rail Capital Program, and (3) $127 million to SHOPP. excise tax rates above 16 cents per gallon would be The Governor’s proposal assumes that Caltrans deposited into RMRA, meaning that deposits into will generate $100 million in savings from various RMRA would include revenue from the 11 cent per efficiencies. However, the proposal does not identify gallon increased rate taking effect in 2018-19 as well how the $100 million savings would be spent. as all funding from future inflationary adjustments. Allocates Funds to Partially Cap-and-Trade Revenues Allocated to Specific Address a Mix of Challenges Programs. As mentioned above, the Governor’s proposal provides $500 million annually from As indicated above, the Governor’s funding cap-and-trade auction revenues as part of the package would allocate additional transportation transportation funding package. These funds would revenues to various programs. Figure 13 shows be allocated from the existing GHG Reduction the estimated level of new funding that would be Fund, with $400 million to the Transit and Intercity provided to each transportation program. As we Rail Capital Program and $100 million to ATP. discuss below, the proposed allocations would Loan Repayments Allocated to Specific partially address a mix of the challenges currently Programs, but Not Efficiency Savings. Of the facing the state’s transportation system. $706 million in early loan repayments, the Governor Fully Addresses Core Highway Rehabilitation proposes to allocate (1) $323 million to trade Needs, but Not Highway Maintenance Needs. 14 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Figure 12 New State Diesel Tax Per Gallon Distribution Formulas FFuuttuurree IInnccrreeaasseess ttoo AAddjjuusstt ffoorr IInnffllaattiioonn 27¢ New Rate New Road Maintenance and Rehabilitation Account IInnccrreeaassee 1 1 ¢ 16¢ Current Rate 62.5% State Highway Account EExxiissttiinngg SSwwaapp RRaattee 1 6 ¢ Local Streets and Roads 37.5% Figure 13 As shown in the figure, the Governor’s plan Average Annual Funding would allocate about $1.6 billion to SHOPP. This Increase By Program level of funding is roughly the amount needed to (In Millions) fully fund SHOPP pavement, bridge, and culvert Program Amount needs on an ongoing basis as well as to address SHOPP $1,560 the current backlog of SHOPP projects over a ten Shared revenues—local roads 1,140 year period. However, the $120 million proposed Transit 430 for the Highway Maintenance Program would do Trade corridors 280 Corridor mobility 275 relatively little to address the state’s significant Local partnership grants 225 highway maintenance needs. Under the Governor’s Highway Maintenance 120 proposal, we estimate that about $1.1 billion Active Transportation 100 STIP 30 in annual maintenance projects would remain Local planning grants 25 unfunded. In addition, the proposal provides no Total $4,185 funding to address the approximately $3 billion SHOPP = State Highway Operation and Protection Program and STIP = State Transportation Improvement Program. backlog of deferred maintenance projects. Shares Some Revenues With Cities and the $4.2 billion in new annual total transportation Counties. The Governor proposes to share a revenues, the Governor estimates that $1.1 billion, portion of the new funds with cities and counties or 27 percent, would be shared with cities and to help meet their local street and road needs. Of counties. This level is somewhat less than the current www.lao.ca.gov Legislative Analyst’s Office 15 2017-18 BUDGET one-third proportion of revenues shared with cities would be allocated for local partnership grants, and counties from existing transportation revenues. beginning in 2018-19. This is a program that has Increases Transit and Intercity Rail Capital received occasional funding in the past from Program. The Governor’s proposal provides various state sources, including Proposition 1B, a $400 million increase, or 70 percent, above but currently receives no state funding. The the current-level of funding for the Transit and program provides grants to local transportation Intercity Rail Capital Program. Assuming the new agencies that have approved local sources of funds are allocated to similar types of projects transportation funding as a way of incentivizing as the previous mix of grants provided by the local governments to generate new local funding program, the $400 million increase would partially sources for transportation. fund about 15 transit and intercity rail capital The funding package also allocates improvement projects. $100 million annually to the state’s ATP. This Creates Modestly Sized New Corridor Mobility reflects an increase of 77 percent compared to and Trade Corridor Programs. The proposal also the program’s current-year level of funding. The provides funding to two new programs that are proposal would also provide $25 million each modeled after programs in the 2006 Proposition 1B year for local planning grants to assist local bond act. Specifically, the Governor’s proposal agencies in paying the cost of meeting certain state includes $275 million annually to improve transportation planning requirements. traffic congestion on commute corridors. This Assumes Slight Increase in STIP Funding. new program is similar to the state’s previous Under the Governor’s proposal, the swap excise tax Proposition 1B corridor mobility program, which that provides funding to STIP would be increased. funded large corridor improvement projects costing In the short term, this would generate additional an average of about $120 million each. This means funding for STIP as well as the other programs that if the new proposed corridor mobility program that receive funding from this source. However, funds the same types of projects, the proposed under current law this tax varies from year to year, funding level would fully fund, on average, two to and would likely increase over the next decade three corridor mobility projects each year. in the absence of the Governor’s proposal. This The proposal also creates an ongoing trade means that much of the increase proposed by corridor program modeled after the one-time the Governor would likely occur even without Proposition 1B bond trade corridor program. Under the changes proposed in the funding package. In the Governor’s funding package, the new trade addition, in some years the level of funding for corridor program would receive about $250 million STIP generated under the Governor’s proposal annually. Projects in the Proposition 1B bond trade could be less than would otherwise be the case corridor program had an average cost of about under current law. For these reasons, the Governor $40 million. This means that if the new proposed estimates an average annual STIP funding increase trade corridor program funds the same types of of about $30 million over the first decade following projects as the previous bond program, the proposed the implementation of the funding package. funding level would fully fund, on average, about six While the Governor does not estimate significant trade corridor improvement projects each year. increases to STIP funding under his package, the Allocates Funds to Mix of Other Programs. proposal intends to stabilize funding for STIP by Under the funding package, $250 million each year reducing the year-to-year volatility in funding. 16 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Establishes Accountability Measures However, at the time this report was prepared, the administration had not provided much detailed The Governor’s proposal includes certain information about the proposed accountability accountability measures, such as the establishment measures. of performance metrics for Caltrans to meet with regard to the condition of the state highway system. ROAD MAP FOR DEVELOPING A TRANSPORTATION PACKAGE As discussed earlier in this report, much Determine Specific of the state’s transportation infrastructure is Transportation Challenges aging and needs maintenance, rehabilitation, to Address and improvements to meet current and future As indicated above, the state’s transportation needs. Thus, we think the Governor’s attention to system faces several challenges. While the transportation funding makes sense and that his Governor’s proposal would begin to partially proposed funding package is a step in the right meet these challenges, the Legislature will want to direction in increasing funding to address certain consider its priorities and how they compare to the transportation needs. However, in reviewing the Governor’s proposal. Based on our assessment of proposed package, the Legislature will want to the various challenges and needs, we recommend consider its own priorities and how they compare that the Legislature first determine the level of to the specific aspects of the Governor’s package. shared funding for cities and counties and then In order to assist the Legislature in its make the Highway Maintenance Program its deliberations on a transportation package, below highest priority for the state’s share of new funds, we provide a road map to addressing five key followed by SHOPP. After which, the Legislature questions that merit legislative consideration: will want to consider whether to address additional • What specific transportation needs or transportation priorities, such as those identified in challenges does it want to address? the Governor’s proposal. • What level of funding is necessary to meet Determine Funding Share for Local Roads these priorities? In developing a transportation funding • What funding sources best align with its package, one of the first decisions that the priorities and desired funding levels? Legislature will want to consider is how much of the new funding to share with local governments. • How to distribute funds to meet its The state historically has shared a portion of its priorities? transportation revenues with cities and counties for their local streets and roads. Accordingly, • How to ensure that additional funds are the Legislature will most likely want to maintain spent effectively and in a way that meets the practice of sharing any increase in revenues legislative priorities? that result from a funding package. There are www.lao.ca.gov Legislative Analyst’s Office 17 2017-18 BUDGET different ways that the Legislature could determine Consider Meeting Other Challenges the share it provides for local streets and roads. The Legislature will also want to consider For example, the Legislature could choose to the extent to which it wants to address other maintain the existing proportional allocation of transportation challenges, such as supporting local revenue between the state and local governments transit and improving trade corridors. with roughly one-third of total revenues going Local Transit Systems. While transit to cities and counties and two-thirds to the state. systems are generally the responsibility of local The Legislature could also choose an allocation governments, the state historically has had amount based on various other factors, such as the some role in funding capital improvements and number of heavy trucks on state and local streets providing operational support for local transit and roads. systems. Local transit can benefit travelers and the state by providing alternatives to driving, which Make Highway Maintenance can ease the demand on state highways and provide Program Highest Priority travel options for people who cannot drive. The We recommend making the Highway Legislature will want to consider how large of a Maintenance Program the highest priority for the role the state should have in funding local transit, state’s share of any new funding. This is because as well as the extent to which the state will support maintenance projects are significantly more and encourage alternatives to driving. In doing so, cost-effective than allowing highways to deteriorate the Legislature will want to determine its transit such that a SHOPP rehabilitation project is needed. priorities. For example, the Legislature could For example, Caltrans estimates that for every focus new transit funds on capital projects, such dollar spent on a major maintenance project for as the rehabilitation of aging transit systems or pavement, bridges, and culverts, between $4 to $12 the construction of new systems. Alternatively, the of costs can be deferred by postponing the need Legislature could provide funding for operational for rehabilitation. In addition, major maintenance support of existing systems, or for a mix of capital projects can improve safety and ride quality (such projects and operational support. as pavement smoothness) of highways. Commute and Trade Corridors. The Governor’s proposal acknowledges the growing Make SHOPP Next Priority challenges on congested commute and trade After meeting the needs of the Highway corridors. The Legislature will also want to consider Maintenance Program, we recommend that the these challenges and the priority of addressing Legislature make additional funding for SHOPP them relative to other transportation needs. In pavement, bridge, and culvert projects its next doing so, the Legislature will want to consider priority for the state’s share of new revenues. As the Governor’s general approach of creating new indicated above, we previously estimated that ongoing funding programs to address commute there is an annual ongoing shortfall of around and trade corridor congestion. In determining $800 million and a one-time $9 billion need to whether to fund such new programs and at what address the current backlog of pavement, bridge, level, the Legislature could consider how many and culvert projects. major corridor mobility and trade corridor improvement projects it would like to fund each year. As discussed earlier, under the Governor’s 18 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET proposal the state would likely fund a relatively what level of funding would likely be needed to modest number of new projects with about two to meet different sets of priorities. three corridor mobility projects and about six trade In each of the three scenarios discussed corridor projects each year. below, we assume that the Legislature will at a Other Challenges. The Legislature will also minimum want to meet its core highway needs in want to consider the extent to which it is a priority the Highway Maintenance Program and SHOPP, to increase funding for other priorities, such as as we have recommended. We also assume that the ATP and local planning grants as proposed by the Legislature will share one-third of all new revenues Governor. In determining priorities and funding with cities and counties for their local streets and levels for ATP, the Legislature will want to consider roads, maintaining the current proportional share (1) the extent to which bicycling and pedestrian of revenues. To the extent that the Legislature infrastructure will be provided by cities and chooses to provide a greater share of revenue to counties through shared revenues for local streets cities and counties, the level of funding needed and roads and (2) the additional priorities that under each scenario would increase. Figure 14 would be addressed by also increasing funding summarizes the Governor’s proposal and the three through ATP. scenarios, which are described in more detail below. Determine Overall Scenario 1—Fully Fund Highway Funding Level Maintenance Program and SHOPP. This scenario The Legislature will want to determine the shows how much it will cost the state to fully fund level of funding to include in a transportation the Highway Maintenance Program and fully fund package based on its identified priorities. The pavement, bridge, and culvert projects in SHOPP, magnitude of funding needed will vary based on and share one-third of total revenues with cities which transportation needs are prioritized and how and counties for local streets and roads. The level robustly the Legislature wishes to fund those needs. of funding needed under this scenario averages In order to assist the Legislature, we illustrate below $4.8 billion annually over the first decade. This Figure 14 Potential Scenarios for Additional Transportation Funding (In Millions) Program Governor Scenario 1 Scenario 2 Scenario 3 Shared revenues—local roads $1,140 $1,600 $2,200 $2,900 SHOPP 1,560 1,700 1,700 1,700 Highway Maintenance 120 1,500 1,500 1,500 Transit 430 — 430 860 Trade corridors 280 — 280 560 Corridor mobility 275 — 275 550 Local partnership grants 225 — 225 450 Active Transportation 100 — 100 200 STIP 30 — 30 60 Local planning grants 25 — 25 50 Totals $4,185 $4,800 $6,765 $8,830 SHOPP = State Highway Operation and Protection Program and STIP = State Transportation Improvement Program. www.lao.ca.gov Legislative Analyst’s Office 19 2017-18 BUDGET includes an annual average of $1.7 billion for Determine Revenue Sources SHOPP, $1.6 billion to cities and counties, and After determining its transportation priorities $1.5 billion for the Highway Maintenance Program. and the level of funding needed to meet them, This scenario also assumes that the Legislature the next step would be for the Legislature to funds both the ongoing and backlog of the determine how to generate the necessary revenue. Highway Maintenance Program and SHOPP needs. This includes determining which specific taxes In comparison to the Governor’s proposal, the or fees to increase. Below, we address several key level of funding identified in the above scenario considerations for the Legislature in choosing is greater than the $4.2 billion total annual level revenue sources. proposed by the Governor for the next decade for all transportation programs. However, the amount Focus on Charging Users of needed after the backlogs of work are addressed Transportation Systems in the first ten years, would be about $3 billion As described above, state transportation annually. programs are generally funded from various taxes Scenario 2—Fully Fund SHOPP and and fees on fuels and vehicles, which function Maintenance and Fund Other Priorities at somewhat as user fees—meaning the individuals Governor’s Proposed Levels. In this scenario we who directly benefit from the good or service pay show how much it would cost to fully fund the the associated costs. For example, with fuel taxes, priorities described in scenario 1 and also fund all generally the more someone drives on the state’s other programs included in the Governor’s funding highways and roads the more they will pay in package at the levels proposed by the Governor. fuel taxes. As the Legislature considers various The level of funding needed under this scenario sources of revenue for a transportation funding averages $6.8 billion annually over the next decade. package, we think a good approach is to focus on As shown in the figure, this amount includes an increasing existing taxes and fees on fuels and annual average of $2.2 billion in shared revenues vehicles to maintain the state’s general approach for local streets and roads, $1.7 billion for SHOPP, to having users of the transportation system pay $1.5 billion for the Highway Maintenance Program. for the associated costs. Figure 15 shows the major Scenario 3—Fully Fund SHOPP and existing fuel and vehicle taxes and fees, the current Maintenance and Provide More Robust Funding allowable uses of each source, and the potential for Other Priorities. In this scenario we show how revenue that could be generated from an increase much it would cost to fully fund the priorities in the rates of each tax and fee. Major factors to described in scenario 1, and provide more robust consider with each revenue option are discussed funding for other programs proposed by the below. Governor. Specifically, it includes twice the amount Gasoline and Diesel Excise Taxes. The amount proposed by the Governor for these programs. of excise taxes on gasoline or diesel fuel paid by The level of funding needed under this scenario drivers is generally proportional to how much they averages $8.8 billion annually over the first drive and how much fuel they consume. Because decade. Under this scenario, an annual average of most vehicles operate on gasoline or diesel fuel, $2.9 billion would be provided for local streets and increasing these taxes would share the costs of roads. transportation systems broadly across drivers. 20 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Figure 15 Options to Increase Existing State Transportation Taxes and Fees Revenue Source Allowable Uses Potential Revenue Gasoline excise tax State highway and local road construction, maintenance, $150 million per 1 cent mitigation, and associated administrative costs. Transit increase. fixed guideways. Diesel excise tax State highway and local road construction, maintenance, $30 million per 1 cent mitigation, and associated administrative costs. Transit increase. fixed guideways. Diesel sales tax General use. $85 million per 1 percent increase.a Vehicle State highway and local road construction, maintenance, $34 million per $1 increase. registration fee mitigation, and associated administrative costs. Transit fixed guideways. State administration and enforcement of traffic laws. Vehicle weight fees State highway and local road construction, maintenance, $10 million per 1 percent mitigation, and associated administrative costs. Transit increase of all rates. fixed guideways. State administration and enforcement of traffic laws. Vehicle license fee General use. $3.5 billion to $4 billion per 1 percent increase. a Assumes an average diesel price of $3 per gallon. However, drivers of fuel efficient vehicles pay less price of the fuel. An increase in the diesel sales tax than other drivers. In addition, drivers of vehicles could be used for any purpose, which would give that do not operate on gasoline or diesel fuel, such flexibility to the Legislature in spending revenue as electric vehicles, do not pay gasoline or diesel from this source in a way that meets its priorities. excise taxes. Fuel excise taxes also generally do not Vehicle Registration Fee. The state currently take into account that certain vehicles, because charges vehicle registration fees that fund state of their weight, can cause more wear and tear administration and enforcement of traffic laws. In on highways and roads than other vehicles. It is addition to these fees, the Legislature could charge also important to note that fuel excise taxes are a vehicle registration tax, such as that proposed by restricted primarily to highway and road purposes, the Governor, that charges a flat rate to all vehicle with only limited transit purposes being allowable. owners and allocates the revenue to transportation Diesel Sales Tax. The sales tax on diesel is infrastructure programs. The Legislature can paid only by drivers of vehicles that operate using think about this option as an access charge that all diesel fuel. Since much of the diesel fuel in the drivers would pay for having access to the state’s state is used by heavy trucks, raising this tax would transportation systems, regardless of level of use. generally have the effect of charging more to the Such a tax would be charged broadly to all vehicle drivers with vehicles that do the most damage to owners, including electric vehicle owners that are roadways. However, similar to excise taxes, not all excluded under the fuel tax options. However, heavy vehicles operate on diesel fuel. A sales tax is the amount paid would not differentiate between also more volatile than an excise tax as the revenue drivers who put a lot of wear and tear on roadways it generates will fluctuate based primarily on the from those who rarely drive. Similar to fuel excise www.lao.ca.gov Legislative Analyst’s Office 21 2017-18 BUDGET taxes and weight fees, vehicle registration taxes can to consider a mix of sources that are primarily only be used to fund primarily highway and road available for highways and roads along with sources purposes. that could also be used more broadly to support Vehicle Weight Fees. Vehicle weight fees are other priorities that it may have now or in the taxes charged on heavy vehicles or those carrying a future, such as transit or active transportation. heavy load, such as commercial trucks. Increasing For example, the Legislature could adopt a modest these fees would directly link the vehicles doing vehicle registration tax as an access fee that all the most damage to increased costs of maintaining vehicle owners would pay. This could be paired and rehabilitating roadways. Similar to fuel excise with an increase in vehicle weight fees, to account taxes, weight fee revenue is restricted primarily to for the greater damage done to roadways by heavy highway and road purposes. vehicles. Since both of those sources would provide Vehicle License Fee (VLF). The state currently funding restricted primarily for highways and levies a VLF at 0.65 percent on the value of a roads, the Legislature could also consider one of vehicle. The tax is charged broadly to all vehicle the taxes that can be used for general purposes in owners, including electric vehicles. The amount order to have the flexibility to fund transit or other charged is based on the vehicle’s value rather than priorities. the driver’s use or wear and tear on roadways. Consider Stability of Revenue Sources VLF revenue can be used for general purposes and could therefore be available to fund any mix of Another factor that the Legislature will want transportation priorities. to consider in selecting revenue sources, is the New Taxes or Fees. In addition, the Legislature stability of that source year to year and over the could consider charging other new taxes or fees long term. In order to ensure that any funding in order to increase funding for transportation package provides stable revenues, we recommend programs. For example, Caltrans is currently that the Legislature (1) take steps to stabilize conducting a pilot program to evaluate whether existing fuel taxes, and (2) consider non-fuel tax the state could implement a road usage charge—a sources for long-term funding stability. charge based on the number of miles driven. Such a Stabilize Fuel Tax Revenues. As discussed charge would most directly link individual driver’s above, two of the state’s fuel taxes—the swap usage of highways and roads with the amount gasoline tax and the diesel excise tax—have charged. However, given the complexity of such rates that vary from year to year. These rates, a system, it would not be available for immediate in particular the gasoline rate, are impacted by implementation. the price of gasoline. Because the state has seen relatively low gasoline prices recently, BOE has Consider a Mix of Sources reduced the rate charged for the swap excise tax so In developing a funding package, the that the rate is about half the amount it was when Legislature will want to consider approving a mix the tax was first implemented. This volatility in of various revenue sources. This would allow the the revenue sources makes it difficult for state and Legislature to ensure that everyone who benefits local transportation agencies to plan for multiyear from state and local transportation systems pays projects. We think the Governor’s proposal to an appropriate share for their maintenance and eliminate the current variable nature of these taxes improvement. The Legislature will also want and instead index them to inflation has significant 22 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET merit. While the Governor’s proposal would not Simplify Funding generate significant levels of funding, it would Distribution Model provide needed stability to the revenue source and Currently, state transportation funding is better allow state and local transportation agencies allocated to specific programs based on complex to plan for the receipt of these funds. distribution methods specific in statute. As Consider Non-Fuel Tax Sources for discussed earlier, the Governor’s transportation Long-Term Funding Stability. In the near term, package would create new distribution formulas fuel taxes continue to be a good option for funding for the increased revenues—further making the transportation programs. However, over the longer state’s transportation funding system even more term, there is uncertainty about the role of fuel unnecessarily complex. Moreover, the complex taxes in funding transportation programs. This is distribution of transportation funds proposed by because of advancements in vehicle technology that the Governor will result in uneven funding growth allow vehicles to operate while using significantly across the various programs over time. This is less fuel as well as the adoption of electric vehicle because programs funded from existing revenue technology. To mitigate against this uncertainty sources will essentially be capped, while the growth and provide long-term stability for transportation in revenues will all be allocated through the new funding, we recommend the Legislature consider RMRA process based on the Governor’s priorities. including funding sources in its package that are In addition, within the Governor’s proposed not based on fuel consumption, similar to the RMRA distribution formula, the proposal provides Governor’s approach. Weight fees and vehicle fixed amounts off the top for certain priorities, registration fees are such options that are not based which would not grow over time under the on fuel consumption. Governor’s proposal. Distinguish Between Temporary In developing a funding package, we and Permanent Sources recommend that the Legislature adopt an approach that is more simplified than that proposed by the In addition to funding shortfalls to meet Governor and allow for future growth across all ongoing needs, some transportation programs have priorities. One way of doing this would be to allow significant one-time backlogs of necessary work. future growth in fuel taxes to be distributed through For example, as we discussed earlier in this report, the existing formulas. Another approach would the Highway Maintenance Program currently has be to use proportional shares to establish funding a backlog of $3 billion in deferred projects and levels for all programs, rather than creating off the SHOPP has a backlog of projects totaling roughly top allocations. It will be important to ensure that $9 billion. These backlogs would be best addressed new revenues are actually allocated to legislative with one-time or temporary funding sources, since priorities and that the planned funding levels are ongoing funding needs will be less once backlogs maintained over time. Moreover, putting together of work are addressed. Temporary or one-time a funding package is an excellent opportunity for sources of funding could include temporary taxes, the Legislature to review the existing distribution general obligation bonds, or redirections from formulas and consider improvements to reduce existing revenues. complexity and ensure that transportation funding is being distributed to the state’s highest priorities. www.lao.ca.gov Legislative Analyst’s Office 23 2017-18 BUDGET Determine Administration of to be evaluated against certain criteria, with the New Programs and Establish highest priority projects meeting the criteria Accountability Measures receiving state funding. The Legislature will also want to determine Robust Accountability how new programs will be administered and In order to ensure that any additional funds for establish accountability measures to ensure the transportation are spent effectively and in a way efficient and effective use of all transportation that meets legislative priorities, the Legislature will funds. want to consider adopting well-defined and robust Administration of New Programs accountability measures in the allocation of funds for both new programs and existing programs. For Determine Administering Entity. The example, as we found in our May 2014 report, The Legislature will want to consider which agencies 2014-15 Budget: Capital Outlay Support Program or departments should have responsibility for Review, SHOPP currently has limited project-level administering any new transportation programs external oversight. Specifically, as discussed in that that may be established. For example, the report, we recommend that the Legislature require Governor’s package would establish corridor CTC to perform project-level oversight of SHOPP mobility and trade corridors programs. At the by thoroughly reviewing the proposed cost, scope, time of this analysis, the administration had not and schedule of all SHOPP projects when they are provided detailed information on the specific initially proposed. In addition, we recommend entity that would administer these programs, as that CTC allocate all funding for SHOPP projects well as how the funding would be allocated to (rather than only allocating a portion of the specific projects. In the past, CTC has administered funding as is currently the case), in order to ensure statewide transportation programs, such as the that Caltrans is providing regular updates to CTC corridor mobility and trade corridor programs on the status of each project and allowing for funded from Proposition 1B. This approach allowed oversight to occur while projects are still under for more independent oversight on the use of funds, development. given CTC’s role as an independent commission. In addition, the Legislature will want to To the extent that the Legislature establishes consider adopting performance metrics for the new transportation programs, we recommend it various programs. Specifically, we recommend consider having CTC administer them. This would adopting such metrics for both the Highway allow CTC to evaluate proposals and select projects Maintenance Program and SHOPP that provide a across the state that meet’s the highest priorities for comprehensive assessment of the condition of the those programs. highway system. For example, the Legislature could Consider Competitive Programs. For any establish goals that a certain amount of pavement new transportation programs established, the be kept in good condition. In order to track Legislature will want to ensure that funding for progress, toward meeting its identified goals, the the programs is allocated to the highest priority Legislature could require Caltrans to report on the projects. One way to help ensure this is to require status of these metrics on a regular basis. Similar that funds are awarded through competitive grants. accountability systems could be taken for the other Such a competitive process would allow projects state transportation programs, particularly SHOPP. 24 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET CONCLUSION The state faces significant transportation the Governor’s package. In order to assist the challenges, such as aging highways and roads and Legislature in its deliberations on a transportation increased traffic congestion, that require additional package, we provide in this report a road map to funding to be addressed. The Governor’s proposed guide the Legislature in determining key aspects of transportation package is a step in the right a funding package, such as establishing its funding direction in beginning to address these challenges. priorities, determining a specific funding level However, in reviewing the proposed package the need, how the additional revenue will be generated, Legislature will want to consider its own priorities and how to ensure that the funding is allocated in a and how they compare to the specific aspects of manner consistent with legislative priorities. www.lao.ca.gov Legislative Analyst’s Office 25 2017-18 BUDGET LAO Publications This report was prepared by Jessica Peters and reviewed by Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 26 Legislative Analyst’s Office www.lao.ca.gov