Overview of the 2017 Transportation Funding Package

Overview of the 2017 Transportation Funding Package MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • JUNE 2017 Summary In April 2017, the Legislature enacted Chapter 5 (SB 1, Beall), also known as the Road Repair and Accountability Act. The administration estimates this legislation will increase state revenues for California’s transportation system by an average of $5.2 billion annually over the next decade. In this report, we (1) provide a brief background on the state’s transportation system, (2) describe the major features of the transportation funding package contained in the legislation, and (3) discuss issues for the Legislature to consider moving forward. (Though California’s transportation system also is supported by federal and local funds, this report focuses only on state funding given the purview of SB 1.) CALIFORNIA’S TRANSPORTATION SYSTEM The state’s transportation system helps to move and maintain these streets and roads. They people and goods around and through the state. also operate and maintain other aspects of State funding primarily supports three segments: their local street and road systems, such as traffic signals and storm drains. • State Highways. The state’s highway system includes about 50,000 lane-miles • Transit Operations. There are 200 transit of pavement, 13,000 bridges, and agencies in California that primarily 205,000 culverts (pipes that allow naturally operate bus, light rail, and subway systems. occurring water to flow beneath a roadway). These transit systems are generally owned The California Department of Transportation and operated by local governments, such as (Caltrans) is responsible for maintaining and local transit authorities. rehabilitating the highway system. As we discuss below, SB 1 increases state • Local Streets and Roads. The state has over funding for these transportation segments from 300,000 paved lane-miles of local streets various state transportation taxes and fees, and roads, including nearly 12,000 bridges. including gasoline excise taxes, diesel excise and California’s 58 counties and 482 cities own sales taxes, and vehicle taxes and fees. AN LAO BRIEF MAJOR FEATURES OF THE 2017 TRANSPORTATION FUNDING PACKAGE This section consists of three parts. First, we Improvement Fee are the two largest revenue describe the funding package’s revenues. Second, sources. Altogether, the administration projects we describe its spending provisions. Lastly, ongoing revenues to increase by $5.2 billion we discuss accountability and other measures annually. Currently, state funding for transportation contained in the legislation. from these and other revenue sources (such as truck weight fees and cap and trade auction revenues) total I s t r ncreases tate ransportatIon evenues about $7.5 billion annually. Below, we provide more Figure 1 shows the tax and fee rate increases detail on each revenue increase. established by SB 1. The legislation increases both State Fuel Taxes gasoline and diesel taxes, while also creating new vehicle taxes and fees to fund transportation. Gasoline Taxes ($2.5 Billion). The state Figure 2 shows the share of revenues from each currently has two excise taxes on each gallon of tax and fee increase. (Because the tax and fee rate gasoline: a base tax and a variable “swap” tax. increases are phased in over the next several years, (We note that there is also a federal excise tax of the associated revenue increases cited here and 18.4 cents per gallon.) throughout the remainder of this report reflect the • Base Excise Tax ($2.2 Billion). This administration’s estimated annual average increase tax is set in state law at 18 cents per over the next decade.) As shown, the gasoline gallon. Starting November 1, 2017, the excise tax increases and the new Transportation transportation funding package adds a 12 cent per gallon base excise tax—bringing Figure 1 total base excise taxes Tax and Fee Rate Increases to 30 cents per gallon. Current Rates New Ratesa Effective Date It also adjusts the rates Fuel taxesb for inflation starting Gasoline in 2020. These changes Base excise 18 cents 30 cents November 1, 2017 Swap excisec 9.8 cents 17.3 cents July 1, 2019 are expected to raise Diesel $2.2 billion annually. Excisec 16 cents 36 cents November 1, 2017 Swap sales 1.75 percent 5.75 percent November 1, 2017 • Swap Excise Tax Vehicle taxes and feesd ($300 Million). Currently, Transportation — $25 to $175 January 1, 2018 this tax is set annually by Improvement Fee the Board of Equalization ZEV registration fee — $100 July 1, 2020 a (BOE), which considers Adjusted for inflation starting July 1, 2020 for the gasoline and diesel excise taxes, January 1, 2020 for the Transportation Improvement Fee, and January 1, 2021 for the ZEV registration fee. The diesel sales both gasoline price and taxes are not adjusted for inflation. b Excise taxes are per gallon. quantity sold in an effort c Current rate set annually by the state Board of Equalization. The funding package converts the variable to mimic a sales tax on rate to a fixed rate. d Per vehicle per year. gasoline (which the swap ZEV = zero-emission vehicle. tax replaced in 2010). The 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF current swap rate is 9.8 cents per gallon but • Swap Sales Tax ($350 Million). The will increase to 11.7 cents on July 1, 2017. state also has a sales tax specific to diesel Starting July 1, 2019, the funding package (enacted as part of the gasoline tax swap) eliminates the swap tax and replaces it with set at 1.75 percent. The funding package a fixed excise tax of 17.3 cents per gallon— increases this rate to 5.75 percent. This is the rate in effect when the swap was expected to increase associated revenues by created in 2010. It also adjusts the rate for $350 million annually. (In addition, state inflation starting in 2020. These changes and local sales taxes on tangible goods that are expected to raise $300 million annually. together average 8.5 percent statewide also (This estimate reflects the administration’s apply to diesel, with revenue from a rate of assumption that the swap tax increases to 4.75 percent funding transportation. Senate 16.9 cents just prior to the funding package Bill 1 makes no changes to this tax.) fixing the rate at 17.3 cents.) Vehicle Taxes and Fees Diesel Taxes ($1.1 Billion). The state currently collects revenue from excise and sales taxes on diesel Transportation Improvement Fee fuel. (We note that there is also a federal excise tax of ($1.7 Billion). The funding package creates a 24.4 cents per gallon.) new vehicle charge—called a Transportation • Excise Tax ($700 Million). Currently, this Improvement Fee—specifically to fund tax has a variable rate set annually by BOE. transportation. Vehicle owners are to pay the fee The board adjusts the rate to ensure the annually at the same time they pay their vehicle combined revenues from this tax and a registration fee. Figure 3 (see next page) shows the diesel sales tax enacted in the 2010 tax swap rate schedule for the new fee. The fee is expected to (discussed below) are neutral compared generate $1.7 billion annually. to diesel excise tax revenues prior to the swap. The current rate is 16 cents per gallon. Figure 2 Starting November 1, Transportation Revenue Increases 2017, SB 1 increases Total: $5.2 Billion a this tax by 20 cents per gallon to 36 cents Transportation per gallon and makes Improvement Fee the rate fixed. It also adjusts the rate for inflation starting in Gasoline 2020. These changes Excise Tax are expected to raise $700 million annually. (This estimate reflects Diesel Excise Tax an assumption by the administration that Diesel Sales Tax ZEV Registration Fee the rate would have a Reflects average annual increase over the next ten years. decreased to 14 cents ZEV = zero-emission vehicle. starting July 1, 2018.) www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO BRIEF I s t s ncreases tate ransportatIon pendIng Figure 3 Transportation Improvement As shown in Figure 4, SB 1 creates a series of Fee Schedule formulas to distribute the revenues from the new Value of Vehiclea Annual Fee taxes and fees to different transportation programs and purposes. In most cases, the formulas split the $0 to $4,999 $25 $5,000 to $24,999 50 revenues based on percentages, but in some cases $25,000 to $34,999 100 the legislation sets aside fixed dollar amounts for $35,000 to $59,999 150 certain programs. (Revenues from the inflation $60,000 and higher 175 a Based on depreciated value of vehicle. Values not adjusted for adjustments imposed by SB1 on existing taxes inflation in the future. are distributed according to existing statutory formulas.) Figure 5 shows how much ends up being Zero-Emission Vehicle Registration Fee spent by each type of program. As shown, the ($19 Million). Senate Bill 1 creates a new $100 largest spending increases are for state highways registration fee for zero-emission vehicles only. and local streets and roads. Below, we describe Called a Road Improvement Fee, it is expected to the specific transportation programs that receive generate $19 million annually. (The reason for this the new revenues. (Additionally, as we discuss fee is because drivers of zero-emission vehicles do in the box on page 6, a proposed constitutional not pay fuel taxes like other drivers.) Figure 4 Formulas for Distributing New Transportation Revenues Gas Excise Taxa Transportation Improvement Fee Diesel Excise Tax Diesel Sales Tax ZEV Fee 12.5% $350 millionb $250 million 50% 87.5% 50% 100% 100% Intercity and Public Transit Congested Trade Commuter Rail Account Corridors Corridors 30% 70% Remaining Funds State Transit Transit and Road Maintenance Rehabilitation Account Assistance Program Intercity Rail • $400 million state bridges/culverts Capital Program • $200 million “self-help” counties c • $100 million active transportation • $25 million freeway patrols • $25 million local planning grants • $7 million university research d a Excluding revenues from off-highway vehicles that go to support parks • $5 million workforce development and agricultural programs. b Amount for 2017-18. Amount adjusted annually for inflation thereafter. Remaining Funds c Counties that have imposed a sales tax or developer fee and dedicated the 50% 50% revenues for transportation. d Until 2021-22 only. Highway Local streets and maintenance/ roads maintenance/ rehabilitation rehabilitation ZEV = zero-emission vehicle. 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF amendment would add to Figure 5 existing restrictions on the use Transportation Spending Increases of transportation revenues.) (In Billions) State Highway Programs $2.0 The funding package 1.8 1.6 includes $1.9 billion annually 1.4 specifically for state highways. 1.2 1.0 This includes funding for: 0.8 • Maintenance and 0.6 0.4 Rehabilitation 0.2 ($1.8 Billion). State Local Streets Transit Trade and Otherb Caltrans’ Highway Highways and Congested Roads Corridorsa Maintenance Program performs a Programs can involve a combination of state highway, local street and road, and transit projects. minor maintenance b Includes active transportation program (for pedestrian walkways and bicycle paths), local transportation planning grants, freeway service patrols, university transportation research, (such as roadside workforce development programs, agricultural and parks programs, and administration. landscaping) and major maintenance The administration estimates the funding (such as laying a thin overlay of package will increase revenues for state pavement) on highways that are in good STIP projects by $33 million annually. (As or fair condition, while its State Highway discussed further below, STIP also funds Operations and Protection Program local road improvements.) (SHOPP) delivers capital projects to rehabilitate or reconstruct highways when Local Streets and Roads Programs they reach the end of their useful life. The administration estimates that the The funding package includes about $1.8 billion funding package will increase ongoing annually specifically for local streets and roads. This revenues for highway maintenance and includes funding for: rehabilitation by $1.8 billion annually, • Maintenance and Rehabilitation including $400 million specifically for ($1.7 Billion). The funding package increases bridges and culverts. The funding package revenues for local road maintenance and does not designate revenues between the rehabilitation by $1.5 billion annually, and it two programs, leaving it up to the annual distributes this funding to local jurisdictions budget act. (Additionally, the legislation according to existing statutory formulas makes a $225 million loan repayment from based on factors such as population and the General Fund to the SHOPP.) number of registered vehicles. The package • Capacity Expansion ($33 Million). also sets aside an additional $200 million The State Transportation Improvement annually for road maintenance and Program (STIP) is the state’s program rehabilitation for counties that have enacted for improving transportation systems, developer fees or voter-approved taxes generally by increasing their capacity. dedicated specifically to transportation. www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO BRIEF The California Transportation Commission Transit Programs (CTC) is to determine how to allocate the The funding package includes about funds. (Additionally, the legislation makes $750 million annually for three transit programs: a $225 million loan repayment from the • State Transit Assistance Program General Fund to the local streets and roads ($430 Million). This program distributes program.) funding to transit operators based on a • Capacity Expansion ($100 Million). The formula. The funds can be used for either administration estimates the local share of operational support or to fund capital the funding package’s revenues for STIP will projects based on local priorities. The total about $100 million annually. (These administration estimates the funding funds primarily support streets and roads package will increase state revenues for this but in some cases could be used for transit program by about $430 million annually. projects as well.) Proposed Constitutional Amendment Related to Funding Package Currently, the State Constitution places restrictions on the use and borrowing of certain state transportation revenues. A companion measure to the transportation funding package, Chapter 30 of 2017 (ACA 5, Frazier), proposes to amend the State Constitution to place similar restrictions on transportation revenues not covered by existing constitutional provisions. Additionally, the measure adds to existing exemptions on certain transportation spending from counting toward a constitutional spending limit. The measure will go before the voters in June 2018. Below, we summarize its provisions. Spending Restrictions. ACA 5 requires that revenues from the Transportation Improvement Fee established in the transportation funding package only be spent on specified transportation purposes. These purposes are researching, planning, constructing, improving, maintaining, and operating public streets and highways and transit systems. ACA 5 also prohibits the state from using Transportation Improvement Fee revenues to pay for debt service on state transportation general obligation bonds authorized on or before November 8, 2016. Additionally, ACA 5 requires that revenues from the diesel sales swap tax be restricted to transportation planning and mass transportation purposes. (Currently, such revenues could be used for any general purpose.) Borrowing Restrictions. ACA 5 restricts the Legislature from borrowing Transportation Improvement Fee and diesel sales swap tax revenues, except in limited circumstances when the General Fund is exhausted. Spending Limit Exemptions. The State Constitution currently includes spending limits— technically, appropriations limits—on the state and most local governments, known as “Gann limits.” The Constitution exempts certain appropriations from these limits, including appropriations from a portion of gas excise tax revenues and appropriations for capital outlay (including transportation capital outlay). ACA 5 adds to these exemptions by excluding all appropriations from revenues raised by the transportation funding package. 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF • Transit and Intercity Rail Capital projects. (Proposition 1B of 2006 created Program ($270 Million). This is a a similar program.) The administration competitive grant program that awards estimates this program will receive about funding to transit and rail capital projects, $310 million annually. including intercity, commuter, and urban • Solutions for Congested Corridors rail projects, as well as projects for bus Program ($250 Million). This is another and ferry transit systems. The program new program created by SB 1. Under the requires projects to meet certain criteria, program, Caltrans and local agencies can such as reducing greenhouse gas emissions. apply to the CTC to fund projects that The administration estimates the funding address transportation, environmental, and package will increase state revenues for this community access improvements within program by about $270 million annually. highly congested travel corridors. The (Additionally, the legislation makes a legislation sets aside $250 million annually $256 million loan repayment from the for the program. General Fund to this program, with up to $20 million of this repayment amount available for local and regional agencies to Other Programs plan for climate changes.) The funding package includes about $270 million annually for various other programs, • Commuter Rail and Intercity Rail including: ($44 Million). Senate Bill 1 creates a new stream of revenues for commuter • Active Transportation Program and intercity rail operations and capital ($100 Million). This program funds improvements. The legislation splits bicycling and pedestrian improvement funding equally between commuter projects. Funds in the program are rail and intercity rail. The California allocated through competitive grants with Transportation Agency is to develop half of the funds distributed to projects guidelines to allocate funding among selected by the state, 40 percent distributed eligible rail agencies. The administration to projects selected by large urban regions, expects the funding package to provide and 10 percent for projects selected by $44 million annually for both commuter rural and small urban regions. The funding and intercity rail combined. package increases funding for this program by $100 million annually. Trade and Congested Corridor Programs • Freeway Service Patrols ($25 Million). The funding package includes a total of about Caltrans, the California Highway Patrol, $560 million annually for two new programs to and local agencies jointly operate freeway improve trade corridors and congested corridors. service patrols that remove disabled These programs, which can support state highways, vehicles from state freeways in order to local streets and roads, or transit, include: mitigate traffic congestion. Senate Bill 1 increases funding for this program by • Trade Corridor Enhancements Program $25 million annually. ($310 Million). Under this program, Caltrans and local agencies can apply for funds for corridor-based freight www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO BRIEF • Local and Regional Planning spending new revenues. Most of these provisions ($25 Million). The funding package concern oversight of the new funding as well as provides $25 million annually for a new certain aspects of Caltrans’ operations. Below, we program of local planning grants. These summarize each provision. grants are to encourage local and regional Sets Preliminary Performance Outcomes for planning that further state goals. Caltrans. Senate Bill 1 states legislative intent for Caltrans to achieve five outcomes by the end of • University Transportation Research 2027. Caltrans is to report annually to the CTC ($7 Million). Four University of California campuses currently have transportation on its progress in meeting the outcomes. The research centers. The funding package commission is to evaluate Caltrans’s progress provides $5 million altogether annually for toward the outcomes and include any findings in its these centers. Additionally, the legislation annual report to the Legislature. The five outcomes appropriates $2 million annually to the are: California State University to conduct • At least 98 percent of state highway similar research activity. pavement in good or fair condition. • Workforce Development ($5 Million). The • At least 90 percent level of service for funding package appropriates $5 million maintenance of potholes, spalls, and annually from 2017-18 through 2021-22 cracks. to the California Workforce Development Board to assist local agencies in promoting • At least 90 percent of culverts in good or pre-apprenticeship training programs. fair condition. These training programs are to focus on • At least 90 percent of transportation delivering certain projects funded by SB 1. management system units in good • Parks and Agricultural Programs condition. ($108 Million). The funding package sets • At least an additional 500 bridges fixed. aside the increased base gasoline excise tax revenues from off-highway vehicles Expects Caltrans to Operate More Efficiently. and boats for the California Department Senate Bill 1 requires Caltrans to implement of Parks and Recreation for general unspecified efficiency measures with the goal of purposes. The administration expects these generating at least $100 million annually in savings revenues to total $82 million annually. to redirect toward maintaining and rehabilitating In addition, the legislation sets aside the state highways. Caltrans is to report on these increased base gasoline excise tax revenues savings to the CTC. from agricultural vehicles—estimated at Creates New Independent Office of Audits $26 million annually—for the California and Investigations for Caltrans. This new Department of Food and Agriculture. office is responsible for ensuring Caltrans I a and its contractors (including local agencies) ncludes ccountabIlItyand o p spend funding efficiently, economically, and in ther rovIsIons compliance with state and federal requirements. The transportation funding package includes The office is to report its findings annually to the several other provisions beyond raising and 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF Governor and the Legislature. The Governor is to 2011-12, on average. The State Controller’s Office is appoint an Inspector General to oversee the office, authorized to perform audits to ensure compliance. subject to Senate confirmation, for a six-year term. Additionally, cities and counties must submit to the Modifies Approval Process for Caltrans’ CTC a list of proposed projects approved by the city Biannual Proposal of Rehabilitation Projects. council or county board of supervisors. Currently, the CTC reviews and approves Caltrans’ Other Provisions. Other major provisions in proposed plan for rehabilitation projects every the legislation (1) create an Advance Mitigation other year. The funding package alters the current Program at Caltrans to protect natural resources approval process in a few ways, such as by requiring and accelerate project delivery, (2) require Caltrans (1) CTC to allocate funds for capital outlay to create a plan to increase contracts awarded support for each project phase and (2) Caltrans to to certain groups (such as small businesses), receive the commission’s approval for changes to (3) require Caltrans to incorporate the “complete a programmed project or increases in capital or streets” design concept into its highway design support costs (above a certain threshold). manual, (4) require the Department of Motor Establishes Requirements for Local Vehicles to confirm certain trucks are in Governments to Receive Funding. To be eligible compliance with state air pollution standards as to receive SB 1 funding for streets and roads a condition of registration starting in 2020, and maintenance and rehabilitation, the legislation (5) prohibit state and local regulations requiring a requires cities and counties to spend at least as truck to meet stricter air pollution standards for up much on transportation from their unrestricted to 18 years after it is first certified for use. funds as they spent from 2009-10 through ISSUES FOR LEGISLATIVE CONSIDERATION While SB 1 included specific funding maintenance as compared to rehabilitation. As allocations to individual programs, it left some maintenance projects can help prevent more costly implementation details up to future legislative rehabilitation projects in the future, the Legislature and administration actions. On May 11, 2017, could consider allocating more funding to the Governor released his May Revision budget maintenance to achieve long-term savings. proposal for 2017-18, which addresses some Establishing Program Guidelines. Most of implementation issues. We discuss these issues the programs funded through SB 1 already are in below. Additionally, we discuss at the end existence. The legislation, however, creates a few overarching issues for the Legislature to consider new programs, such as one for commuter and regarding oversight and accountability. intercity rail and another for trade corridors. CTC Allocating State Highway Funding. As and the California State Transportation Agency previously indicated, one area where the legislation are tasked with developing guidelines for the new does not explicitly allocate funding is between state programs. Nonetheless, the Legislature could highway maintenance and rehabilitation programs. consider specifying in statute certain program In his May Revision, the Governor allocates slightly requirements. In his May Revision, for example, more funding from the new revenues to highway the Governor proposes trailer bill language for the www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO BRIEF trade corridor program that establishes various Ensuring Oversight and Accountability. program requirements, such as for 60 percent Though SB 1 establishes various long-term of funds to support projects nominated by local performance outcome measures for highway and regional agencies and 40 percent for projects conditions, the legislation does not include specific nominated by Caltrans. mechanisms for holding the administration Increasing Efficiency at Caltrans. As accountable for achieving these outcomes nor described earlier, SB 1 includes several measures does it set interim benchmarks against which to increase efficiency at Caltrans, such as by to measure the administration’s progress in the creating a new Inspector General to find ways near term. To improve its oversight of the new to improve the department’s operations and by funding, we encourage the Legislature to begin setting an expectation for Caltrans to achieve now considering how to hold the administration efficiency savings. As part of his May Revision, the accountable in the near term. For instance, the Governor proposed an initial staffing plan for the Legislature could establish in state law interim Inspector General’s office but certain key questions outcome measures against which to measure remain unanswered, such as how the Inspector the administration’s progress in achieving the General would select audits and investigations longer-term outcomes contained in SB 1. It to perform. Additionally, the administration did also could consider consequences should the not present a plan for Caltrans to operate more administration not achieve these interim outcome efficiently and achieve the expected $100 million measures. For instance, the Legislature could in savings (though its spending plan documents consider reprioritizing funding across programs reflect the savings). One way our office in the past (such as from rehabilitation to maintenance) or has recommended having Caltrans operate more enacting organizational or governance changes efficiently is by reducing its capital outlay support to state transportation agencies to improve their staff relative to the volume of capital projects the effectiveness (such as by further strengthening the department delivers. The Governor’s May Revision authority of CTC to oversee Caltrans’ rehabilitation takes a step in this direction by reducing capital projects by authorizing the commission to approve outlay support staff, but it also leaves open the or reject individual projects, rather than an entire possibility for staffing augmentations in 2017-18 program of projects). after the enactment of the budget. 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO BRIEF www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO B R I E F LAO Publications This brief was prepared by Paul Golaszewski 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 brief 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. 12 Legislative Analyst’s Office www.lao.ca.gov