The 2018-19 Budget: Transportation Proposals

The 2018-19 Budget: Transportation Proposals MAC TAYLOR LEGISLATIVE ANALYST FEBRUARY 8, 2018 analysis full gutter 2018-19 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET Executive Summary Overview. The Governor’s budget provides a total of $22.5 billion from all fund sources for transportation departments and programs in 2018-19. This is an increase of $4.2 billion, or 23 percent, over estimated expenditures for the current year. Specifically, the budget includes $13.6 billion for the California Department of Transportation (Caltrans), $2.7 billion for local streets and roads, $2.6 billion for the California Highway Patrol (CHP), $1.2 billion for the Department of Motor Vehicles (DMV), $1.1 billion for the High-Speed Rail Authority, and $1.3 billion for various other transportation programs. In this report, we assess the Governor’s budget proposals in the transportation area. Below, we summarize our major findings and recommendations. We provide a complete listing of our recommendations at the end of this report. Motor Vehicle Account (MVA) Fund Condition. The MVA, which receives most of its revenues from vehicle registration and driver license fees, mainly supports the activities of CHP and DMV. The administration’s five-year projection (2018-19 through 2022-23), which reflects expenditures already approved by the Legislature and those proposed in the Governor’s budget, estimates that the MVA will have operating surpluses over the next several years. The administration projects that the MVA would maintain a reserve for economic uncertainties of approximately 11 percent of projected expenditures in 2018-19 and about 8 percent in the following years. We note that various additional cost pressures could affect the condition of the MVA over the next several years. Caltrans. The Governor’s budget provides $2.8 billion in revenues from the increased fuel taxes and vehicle fees established in Chapter 5 of 2017 (SB 1, Beall) for Caltrans programs. The budget distributes the funding according to formulas contained in the legislation. Of the $2.8 billion, about $1.6 billion is available for appropriation between the State Highway Operations and Protection Program (which pays for replacing or rehabilitating sections of highways) and the Highway Maintenance Program (which funds preventive measures to keep highways from deteriorating). The Governor’s budget provides $994 million for highway rehabilitation and replacement, versus $576 million for maintenance. Our assessment indicates both programs require additional funding to keep highways in good condition. We recommend that the Legislature, however, consider modifying the Governor’s proposal to weight additional funding toward highway maintenance since it can save money in the long term by delaying the need for highway rehabilitation and replacement projects. The budget also includes $99 million in other spending proposals for the department. We recommend the Legislature require Caltrans to provide additional information on proposals related to compensation funding, liability cost increases, and implementing a road usage charge pilot program, prior to taking action on these proposals. We recommend the Legislature reject the Governor’s proposed budget bill language authorizing the Department of Finance to increase Caltrans’ budget by up to $12 million after the enactment of the budget to replace information technology (IT) equipment. Instead, we recommend the Legislature require Caltrans to submit a plan for equipment replacements during 2018-19 for legislative review. CHP. The Governor’s budget proposes to shift from a “pay-as-you-go” approach for the design-build phase of four previously approved CHP area office replacement projects to financing the projects with lease revenue bonds supported from the MVA. According to the administration, this approach would allow the projects to continue and ensure the MVA can maintain an adequate reserve. While adopting www.lao.ca.gov 1 analysis full gutter 2018-19 BUDGET the Governor’s lease revenue bond approach would lock in some future MVA costs, funding the projects using a pay-as-you-go approach would significantly reduce the projected reserve levels discussed above. DMV. The Governor’s budget proposes a multiyear funding plan for the implementation of a major new IT project, with $15 million requested for 2018-19. While modernizing DMV’s IT systems has merit and is consistent with legislative direction, we recommend the Legislature reject the proposal as it is premature to provide the requested implementation funding prior to completion of the planning process for the project. The Governor’s budget also proposes to consolidate several DMV investigations offices into a new leased facility at a location yet to be determined. While the proposed consolidation is consistent with recent legislative actions and could allow for more efficient operations, we recommend that the Legislature require DMV to provide information at budget hearings that justifies the proposed square footage and staffing level for its proposed consolidated investigations office. To the extent the Legislature approves the proposed consolidation, we recommend that it only approve the planning funds for 2018-19 and reject the proposed out-year funding for moving and lease costs. This would allow the department to initiate site selection and request funding for moving and lease costs as part of the 2019-20 budget process with a more precise estimate of such costs. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Overview of the Governor’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Cross-Cutting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Senate Bill 1 Funding ....................................................................7 MVA Fund Condition ...................................................................10 Caltrans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Senate Bill 1 Funding for Highway Maintenance and Repairs .....................................12 Compensation Cost Adjustment ..........................................................16 Liability Cost Increases .................................................................17 Information Technology .................................................................18 Road Usage Charge ...................................................................19 California Highway Patrol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Area Office Replacement ................................................................21 Department of Motor Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Front-End Applications Sustainability Project .................................................24 Consolidation of Investigations Offices ......................................................27 Field Office Replacement and Improvement ..................................................29 Summary of Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 www.lao.ca.gov 3 analysis full gutter 2018-19 BUDGET 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET INTRODUCTION The state budget provides funding for six In this report, we analyze the Governor’s budget transportation departments: the California Department proposals for these departments and programs. We of Transportation (Caltrans), the California Highway begin by providing an overview of the Governor’s Patrol (CHP), the Department of Motor Vehicles proposed budget for each department and program. (DMV), the High-Speed Rail Authority (HSRA), the In the next section, we discuss two cross-cutting state California Transportation Commission (CTC), and the transportation issues: (1) funding from the tax and Board of Pilot Commissioners. The state budget also fee increases authorized by Chapter 5 of 2017 (SB 1, provides funding for the California State Transportation Beall), and (2) an update on the condition of the Motor Agency (CalSTA), which has jurisdiction over these Vehicle Account (MVA). In the following three sections, six departments and is responsible for coordinating we analyze the Governor’s budget proposals for the state’s transportation policies and programs. In Caltrans, CHP, and DMV. In each of these sections, we addition, the state budget provides funding to local provide relevant background, describe the proposals, governments for transportation purposes through assess the proposals, and identify issues and “shared revenues” for local streets and roads and the recommendations for legislative consideration. The final State Transit Assistance (STA) program. section consists of a summary of the recommendations we make throughout the report. OVERVIEW OF THE GOVERNOR’S BUDGET Figure 1 (see next page) shows the Governor’s for the department, including to pay for certain cost proposed spending for the state’s transportation increases, perform new federally mandated workload, departments and programs from all fund sources, and upgrade information technology (IT). including the General Fund, state special funds, bond CHP. The budget proposes $2.6 billion for CHP in funds, federal funds, and reimbursements. In total, the 2018-19, which is $177 million, or 7 percent, greater Governor’s budget proposes $22.5 billion in expenditures than the current-year estimated level. The increase for all departments and programs in 2018-19. This is an mainly reflects an assumption that funding to replace increase of $4.2 billion, or 23 percent, over estimated various CHP field offices will be spent in the budget expenditures for the current year. The increase primarily year rather than in the current year (as was previously reflects the new funding for several transportation assumed). The budget also proposes to shift from a departments and programs from SB 1. Below, we pay-as-you-go approach to funding these projects with describe the major changes by department. lease revenue bonds. Caltrans. The Governor’s budget proposes DMV. For DMV, the Governor’s budget proposes total expenditures of $13.6 billion in 2018-19 total expenditures of $1.2 billion—$27 million, or for Caltrans—$2.3 billion, or 20 percent, higher 2 percent, greater than estimated current-year than estimated current-year expenditures. About expenditures. About $18 million of the proposed $878 million of the increase is from new revenues increase is to pay for new IT software and hardware. generated by SB 1. (This is on top of $1.9 billion in HSRA. The Governor’s budget proposes total SB 1 funding included in the 2017-18 budget for expenditures of $1.1 billion in 2018-19 for HSRA. This Caltrans, bringing total SB 1 funding for Caltrans to amount is $849 million, or three times, more than the $2.8 billion in 2018-19.) The remainder mainly reflects estimated level of expenditures in the current year. The an assumption that a greater amount of expenditures increase primarily reflects the carryover of funds from will be spent in the budget year rather than in the the Greenhouse Gas Reduction Fund—which receives current year (as was previously assumed). The budget revenue from cap-and-trade allowance auctions—that also proposes $99 million in new spending proposals were previously appropriated but not spent in prior years. www.lao.ca.gov 5 analysis full gutter 2018-19 BUDGET Local Streets and Roads and State Transit Transportation Bond Debt Service. In addition to Assistance. The budget proposes $2.7 billion in shared the department and program expenditures identified revenues for local streets and roads—a 54 percent in Figure 1, the state also pays debt service costs increase over estimated current-year expenditures. For on transportation bonds. For 2018-19, the budget STA, the budget proposes $855 million—a 21 percent assumes $1.8 billion in spending on debt service, about increase. The increases for both programs reflect new the same as the estimated current-year level. (We note funding from SB 1. that this spending relates to repaying bonds issued CalSTA. The Governor’s budget proposes primarily to fund expenditures made in prior years.) $366 million for CalSTA, a $241 million, or 40 percent, Most of the proposed spending—$1.3 billion—is to decrease from the current year. The year-to-year repay Proposition 1B (2006) bonds that support various decrease reflects an assumption that a greater amount highway, local road, and transit projects. Another of Greenhouse Gas Reduction Funds will be spent in $366 million is to repay Proposition 1A (2008) bonds the current year rather than in the prior year (as was for the high-speed rail project. Funding for debt service previously assumed). These funds support a transit and primarily comes from truck weight fee revenues. The intercity rail grant program administered by CalSTA. budget assumes these revenues provide $1.4 billion (including $324 million in weight fee loan repayments CTC and Board of Pilot Commissioners. The from the General Fund). Another $278 million for debt Governor’s budget proposes $15 million for CTC and service comes from the General Fund. $2 million for the board—about the same level of spending as the current year. The budget includes only a few small adjustments for these two departments. Figure 1 Transportation Budget Summary (Dollars in Millions) Change From 2017-18 Actual Estimated Proposed 2016-17 2017-18 2018-19 Amount Percent Department/Program Department of Transportation $9,138 $11,328 $13,617 $2,289 20% Local Streets and Roads 1,277 1,783 2,738 955 54 California Highway Patrol 2,340 2,415 2,592 177 7 Department of Motor Vehicles 1,059 1,141 1,168 27 2 High-Speed Rail Authority 733 284 1,133 849 299 State Transit Assistance 339 707 855 149 21 California State Transportation Agency 322 607 366 -241 -40 California Transportation Commission 10 15 15 —a 1 Board of Pilot Commissioners 2 2 2 —a —a Totals $15,221 $18,282 $22,487 $4,205 23% Fund Source Special funds $8,901 $11,628 $14,809 $3,181 27% Federal funds 4,813 5,209 5,802 593 11 Reimbursementsb 1,075 1,084 1,236 152 14 Bonds funds 427 356 638 281 79 General Fund 4 5 3 -2 -39 Totals $15,221 $18,282 $22,487 $4,205 23% a Less than $500,000 or 0.5 percent. b Primarily local government payments to Caltrans for roadwork activities. 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET CROSS-CUTTING ISSUES SENATE BILL 1 FUNDING revenues from the new taxes and fees to different transportation programs and purposes. In most In April 2017, the Legislature passed SB 1 to cases, the formulas split the revenues based on fixed increase state funding for California’s transportation percentages, but in some cases the legislation sets system, including state highways, local streets and aside fixed dollar amounts for certain programs. Though roads, and transit. Below, we (1) provide background the formulas dedicate funding specifically for highway on the legislation, (2) review the Governor’s proposals repairs, they do not distinguish between highway for SB 1 revenues and spending, and (3) provide an maintenance (such as filling potholes) and highway update on program implementation. rehabilitation (such as rebuilding a stretch of road). The split between highway maintenance and rehabilitation Background instead is left up to the annual budget act. Funding for California’s highways, local streets and Governor’s Proposals roads, and transit systems comes from numerous state, local, and federal sources. State funding mainly Revenue Estimates. The administration estimates comes from several fuel taxes and vehicle fees. In that the tax and fee increases and loan repayments will 2016-17, state funding for transportation programs provide $2.8 billion in 2017-18, increasing to $4.6 billion totaled about $7.2 billion. In order to help address the in 2018-19, and $6.8 billion annually within ten years. state’s transportation needs, the Legislature passed Figure 3 (see next page) shows the administration’s SB 1 to increase state funding levels. Specifically, this revenue estimates over the next decade. The legislation increased several fuel taxes and vehicle fees administration expects revenues to increase steadily and dedicated the funding to transportation programs even after all taxes and fees take effect, primarily according to various formulas. Tax and Fee Increases. Senate Figure 2 Bill 1 increased existing excise taxes Senate Bill 1 Increased Several Taxes and Fees on gasoline as well as existing excise and sales taxes on diesel. Additionally, Old Rates New Ratesa Effective Date the legislation created two new Fuel Taxesb vehicle fees: (1) a transportation Gasoline improvement fee that varies Base excise 18 cents 30 cents November 1, 2017 depending on the value of the vehicle, Variable excisec variable 17.3 cents July 1, 2019 and (2) a supplemental registration Diesel Excisec variable 36 cents November 1, 2017 fee for zero-emission vehicles (such Sales 1.75 percent 5.75 percent November 1, 2017 as electric cars) model year 2020 and later. Figure 2 summarizes these Vehicle Feesd Transportation — $25 to $175 January 1, 2018 taxes and fees. The legislation phases Improvement Fee them in over time, with most already ZEV registration fee — $100 July 1, 2020 having taken effect. In addition, a Adjusted for inflation starting July 1, 2020 for the gasoline and diesel excise taxes, SB 1 provides $706 million in loan January 1, 2020 for the Transportation Improvement Fee, and January 1, 2021 for the ZEV repayments from the General Fund to registration fee. The diesel sales taxes are not adjusted for inflation. b Excise taxes are per gallon. transportation programs over three c Variable rates set annually by the California Department of Tax and Fee Administration. The years. current gasoline variable excise tax rate is 11.7 cents. The rate has ranged from 9.8 cents to 21.5 cents in prior years. The most recent diesel excise tax rate was 16 cents. This rate ranged Formulas for Distributing from 10 cents to 18 cents in prior years. Senate Bill 1 converts both variable rates to fixed rates. d Per vehicle per year. Both fees are new, though the state levies other similar fees on vehicles, Revenues. Senate Bill 1 created a such as vehicle license fees and registration fees. series of formulas to distribute the ZEV = zero-emission vehicle. www.lao.ca.gov 7 analysis full gutter 2018-19 BUDGET because SB 1 adjusts the tax and fee rates annually to New Program Implementation account for inflation. These estimates are not notably Senate Bill 1 primarily funds existing transportation different than the administration’s estimates from May programs (though in many cases it adds new 2017, just after the legislation was enacted. requirements to them). For new programs, the Spending Increases. The Governor’s budget legislation tasks CTC and CalSTA with creating distributes the new revenues to various transportation guidelines for transportation agencies to receive programs according to the formulas in SB 1. Figure 4 funding. For instance, the legislation requires the shows the administration’s spending estimates for CTC to create a process for allocating funding for the 2018-19 by program area. About two-thirds of SB 1 new Solutions for Congested Corridors program that funding supports highways and local streets and balances transportation, environmental, and community roads, while another quarter supports either transit access objectives. Figure 5 shows the CTC’s and programs or multimodal programs (that can support CalSTA’s progress toward implementing guidelines a combination of roadway and transit projects). The and selecting projects for new programs. As shown, remainder primarily supports active transportation they have developed guidelines for all new programs programs, which fund projects such as pedestrian and expects to select projects for all programs by this crosswalks and bicycle lanes. The Governor’s budget spring. also contains a proposal to allocate funding between Senate Bill 1 also includes several provisions aimed highway maintenance and rehabilitation, which we at ensuring funds are spent efficiently and achieve discuss in the “Caltrans” section of this report. legislative goals. These provisions include: • Caltrans Efficiencies. The legislation requires Caltrans to achieve $100 million in savings annually from operating more Figure 3 efficiently. The Governor’s budget summary indicates that Caltrans Senate Bill 1 Revenues Expected to Increase to will generate “considerably more” Nearly $7 Billion Annually Within Ten Years savings than expected by reducing (In Billions) overhead costs, accelerating projects, streamlining environmental $7 Loan Repayments reviews, and implementing other Vehicle Fees changes. The budget indicates that 6 Fuel Taxes the department plans to provide additional detail at an upcoming 5 CTC meeting. • Independent Audits 4 and Investigations. Senate Bill 1 established a new independent 3 Office of Audits and Investigations within Caltrans to ensure its 2 contractors (including local agencies) spend funding efficiently, 1 economically, and in compliance with state and federal requirements. The 2017-18 budget provided 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 58 positions to staff the new office (including 10 new positions and 48 positions redirected from an existing internal audit office within 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET the department), and, in Figure 4 October 2017, the Governor Senate Bill 1 Spending Mostly Supports appointed an Inspector Highway and Local Streets and Roads Programs General to direct the office’s 2018-19 work. According to Caltrans officials, the office is still Total = $4.6 Billion developing its procedures for selecting audits and Otherb investigations to perform. Trade and Congested • Preliminary Performance Corridorsa Outcomes. Senate Bill 1 states legislative intent for Caltrans to achieve five outcomes by the end of State Highways 2027. These outcomes are Transit (1) at least 98 percent of state highway pavement in good or fair condition; (2) at least 90 percent level of service for maintenance of potholes, spalls, and cracks; (3) at least Local Streets and Roads 90 percent of culverts in good or fair condition; (4) at least 90 percent of transportation a Programs can involve a combination of state highway, local street and road, and transit projects. management system units b Includes active transportation programs (such as for pedestrian crossings and bicycle lanes), local transportation planning grants, freeway service patrols, university transportation research, in good or fair condition; workforce development programs, agricultural and parks programs (funded from tax revenues and (5) at least an additional from fuel used in off-highway vehicles), and administration. 500 bridges fixed. Caltrans is to report annually to the CTC on its progress in meeting the Legislature. In June 2017, the CTC adopted a outcomes, and the CTC, in turn, is to evaluate requirement for Caltrans to report quarterly on its Caltrans’ progress toward the outcomes and progress in meeting the targets. include any findings in its annual report to the Figure 5 Senate Bill 1 New Program Implementation Timeline As of November 2017 Guidelines Project Implementing Department/Program Adopted Selection California Transportation Commission Local Partnership Program October 2017 January/March 2018 Trade Corridor Enhancement Program October 2017 May 2018 Solutions for Congested Corridors Program December 2017 May 2018 California Secretary of Transportation State Rail Assistance Program October 2017 February 2018 www.lao.ca.gov 9 analysis full gutter 2018-19 BUDGET MVA FUND CONDITION Expenditures. The California Constitution restricts most MVA revenues to supporting the administration The MVA supports the state administration and and enforcement of laws regulating the use of vehicles enforcement of laws regulating the operation and on public highways and roads, as well as the mitigation registration of vehicles used on public streets and of the environmental effects of vehicle emissions. highways, as well as the mitigation of the environmental Accordingly, the MVA primarily provides funding to three effects of vehicle emissions. Below, we (1) provide state departments—CHP, DMV, and the Air Resources background information on MVA revenues and Board (ARB). Funding supports staff compensation, expenditures, (2) review the Governor’s proposals department operations, and capital expenses on related to the MVA, and (3) assess the condition of the department facilities. For 2017-18, a total of $3.7 billion MVA. is expected to be spent from the MVA, mostly to support CHP and DMV. Background Governor’s Proposals Revenues. The MVA receives most of its revenues from vehicle registration fees. In 2017-18, the MVA is The Governor’s budget estimates the MVA will expected to receive a total of $3.7 billion in revenues, receive a total of $3.9 billion in revenues in 2018-19 with vehicle registration fees accounting for $3.2 billion and proposes a total of $3.8 billion in expenditures. (87 percent). Vehicle registration fees currently total The budget proposes a total of $3.4 billion from the $83 for each registered vehicle, consisting of two MVA for CHP, DMV, and ARB—about 91 percent of components: total MVA expenditures. A small share of MVA revenues (from miscellaneous fees) are not restricted by the State • Base Registration Fee ($58). The state charges Constitution. Because they are available for broader a base registration fee of $58, with $55 dollars purposes, the state typically transfers these revenues to going to the MVA and $3 going to support certain the General Fund. In 2018-19, the Governor’s budget environmental mitigation programs. The state assumes this transfer totals $89 million. last increased the base registration fee in 2016, The Governor’s budget includes various new when it increased the fee by $10 (from $46 to spending proposals that would affect MVA expenditures $56). At the same time, the state indexed the in 2018-19 and, in some cases, beyond. Some of the fee to the Consumer Price Index (CPI), thereby proposals include: allowing it to automatically increase with inflation moving forward. The inflation adjustment for • Environmental Mitigation Activities at the 2018 increased the fee to the current $58. Department of Fish and Wildlife (DFW). The • CHP Fee ($25). The state also charges an Governor’s budget proposes $18 million in additional fee of $25 that directly supports CHP. new, ongoing funding from the MVA to support The state last increased this fee in 2014, when workload at DFW resulting from the impacts of it increased the fee by $1 (from $23 to $24) and roads and vehicles on fish and wildlife, such as indexed it to the CPI. The inflation adjustment for fragmented habitat, impeded stream flows, spills 2018 increased the fee to the current $25. on roadways, and wildlife-vehicle collisions. The MVA also receives revenues from driver license • DMV Capital Outlay. The Governor’s budget appropriates $7.9 million from the MVA to fees. These revenues tend to fluctuate based on the (1) advance previously approved projects to number of licenses renewed each year. For 2017-18, replace or renovate certain DMV field offices the state is expected to collect $300 million from and (2) support the design and construction of these fees. The current fee is $35. The remaining MVA perimeter fences at 13 existing state-owned DMV revenues primarily come from late fees, identification field offices. card fees, and miscellaneous fees for special permits and certificates (such as fees related to the regulation of • DMV IT Proposals. The administration proposes automobile dealers and driver training schools). $15 million in 2018-19 to begin implementing a multiyear IT project to replace the software DMV 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET uses for vehicle registration and the collection of (SB 84, Committee on Budget and Fiscal Review) fees. In addition, the budget includes $3.1 million approved a plan to borrow $6 billion from the on a one-time basis for DMV to replace critical IT state’s cash balances to make a one-time hardware that has reached the end of its useful supplemental payment to the California Public life. Employees’ Retirement System (CalPERS). • CHP Vehicle Fleet and Radio Console All funds that make employer contributions to Replacement. The budget includes $4.5 million CalPERS—including the MVA—will repay a share on an ongoing basis to replace CHP’s of this loan. The administration accounts for enforcement vehicles. The budget also provides these annual repayments in its MVA projections, $3.9 million to support a multiyear plan to forecasting modest growth in these expenditures replace the dispatch radio consoles at CHP from $59 million in 2018-19 to $69 million in communications centers. 2022-23. (Over the next 30 years, the SB 84 plan anticipates that the MVA is likely to receive As we discuss in more detail in the “California savings that outweigh these near-term loan Highway Patrol” section of this report, the state repayment expenditures, due to slower growth in has typically funded the replacement of CHP area employer pension contributions.) The projected offices from the MVA on a “pay-as-you-go” basis. expenditures, however, could be higher in The Governor’s budget proposes to finance the the coming years depending on how the loan replacement of four CHP offices with lease revenue repayments are structured. bonds, rather than as with pay-as-you-go as they were • Deferred Maintenance Costs. According to initially approved by the Legislature. According to the the Governor’s five-year infrastructure plan, DMV administration, this change would allow the projects and CHP have deferred maintenance backlogs to continue and ensure the MVA can maintain an totaling $11 million and $39 million, respectively. adequate reserve. Because the administration lacks a plan to ensure that routine maintenance is adequately funded on MVA Currently Balanced but Additional an ongoing basis, this maintenance backlog could Cost Pressures Could Arise grow and place additional pressure on the MVA. The Department of Finance’s five-year projection • CHP Officer Salaries and Benefits. The state and (2018-19 through 2022-23) estimates that the MVA the union representing CHP officers last negotiated will have operating surpluses over the next several a memorandum of understanding (MOU) in 2013, years. These projections reflect expenditures already which provided salary increases annually through approved by the Legislature and those proposed in 2018-19. The administration’s projections for CHP the Governor’s budget, as well as identified in the expenditures assume ongoing compensation administration’s 2018 Five-Year Infrastructure Plan. increases after 2018-19 in line with historical According to the administration, the MVA fund balance growth. These costs could turn out to be greater will be $429 million in 2018-19, falling to $336 million depending on the provisions of a new MOU. in 2019-20 and stabilizing thereafter. This balance • New Federal or State Requirements. represents approximately 11 percent of projected Legislatively enacted requirements at the state expenditures in 2018-19 and about 8 percent in the or federal level can result in additional workload following years. This is equivalent to slightly more and costs for state departments. For example, than one month of MVA expenditures, and seems the federal REAL ID Act, which required states to reasonable as a balance for this account. implement certain driver license and identification We note that various additional cost pressures could card issuance procedures and security affect the condition of the MVA over the next several enhancements to prevent fraud, has resulted in years, including: new workload and funding requirements for DMV. Future legislative action could lead to additional • Supplemental Pension Plan Payments. As requirements and cost pressures at CHP, DMV, or part of the 2017-18 budget package, Chapter 50 ARB. www.lao.ca.gov 11 analysis full gutter 2018-19 BUDGET CALTRANS Caltrans is responsible for planning, coordinating, of expenditures will be spent in the budget year rather and implementing the development and operation than in the current year (as was previously assumed). of the state’s transportation system. The Governor’s Below, we discuss the Governor’s proposals related to budget proposes total expenditures of $13.6 billion for (1) SB 1 funding for highway maintenance and repairs, Caltrans in 2018-19. This is $2.3 billion, or 20 percent, (2) a compensation cost adjustment, (3) liability cost higher than the estimated current-year expenditures. increases, (4) IT upgrades, and (5) a road usage charge Figure 6 shows proposed expenditures by program pilot program. and fund source. Most spending supports the department’s highway program and comes from various SENATE BILL 1 FUNDING FOR state special funds (which mainly receive revenues from HIGHWAY MAINTENANCE AND fuel taxes and vehicle fees) as well as federal funds. The REPAIRS total level of spending proposed for Caltrans in 2018-19 supports about 19,500 positions. Background Governor’s Proposals. Of the $2.3 billion proposed increase in expenditures, about $878 million relates Caltrans Responsible for Maintaining and to SB 1 implementation and $99 million relates to Rehabilitating Highway System. The state highway other budget proposals. Figure 7 summarizes these system includes about 50,000 lane-miles of pavement, proposals. The remainder of the year-to-year increase 13,100 bridges, and 205,000 culverts (pipes that mainly reflects an assumption that a greater amount allow water to flow beneath the roadway). Highway Figure 6 Caltrans Budget Summary (Dollars in Millions) Change From 2017-18 Actual Estimated Proposed 2016-17 2017-18 2018-19 Amount Percent Program Highways Capital outlay projects $3,370 $3,258 $4,595 $1,337 41% Local assistance 1,715 2,728 3,393 665 24 Maintenance 1,442 1,992 2,187 195 10 Capital outlay support 1,658 1,852 1,858 6 — Other 434 467 494 27 6 Subtotals ($8,619) ($10,297) ($12,527) ($2,230) (22%) Mass transportation $364 $729 $779 $50 7% Othera 156 302 312 9 3 Totals $9,138 $11,328 $13,617 $2,289 20% Fund Source Special funds $3,439 $5,256 $6,607 $1,351 26% Federal funds 4,603 4,992 5,681 690 14 Reimbursementsb 939 948 1,100 152 16 Bond funds 158 132 229 96 73 Totals $9,138 $11,328 $13,617 $2,289 20% a Includes Aeronautics, Planning, and Office of Inspector General. b Primarily payments from local governments for roadwork activities. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET infrastructure is designed and built to have certain performed directly by Caltrans staff. The program lifespans and requires maintenance and rehabilitation also is responsible for major maintenance work at regular intervals over the course of a lifespan. projects that entail more significant repairs, such Caltrans is responsible for maintaining and rehabilitating as applying a thin overlay to a stretch of a state the state’s highway system and does so through two highway. These projects are typically performed programs—the Highway Maintenance Program and by construction contractors and overseen by the State Highway Operation and Protection Program Caltrans staff. (SHOPP): • SHOPP. The SHOPP is a program of capital projects to rehabilitate or reconstruct highways • Highway Maintenance Program. The Highway when they reach the end of their useful life. Unlike Maintenance Program is responsible for minor the Highway Maintenance Program, SHOPP routine maintenance, such as landscaping, projects can involve tearing up and replacing filling potholes, and bridge painting. This work is an entire roadway or building a new bridge to Figure 7 Governor’s Proposals for Caltrans (In Millions) Out-Year Costsa Proposed Proposal 2018-19 2019-20 2020-21 Implement Senate Bill 1 $878.2b $878.2 $878.2 Adjust compensation costs 58.0 58.0 58.0 Upgrade information technology Security $10.4 $2.1 $2.1 Equipment 2.0c — — Subtotals ($12.4) ($2.1) ($2.1) Fund liability cost increases Tort payments $7.0d $7.0 $7.0 Vehicle insurance 4.9 4.9 — Subtotals ($11.9) ($11.9) ($7.0) Continue existing workload Continue Proposition 1B staffing $6.5 $5.9 — Continue legal work performed for HSRA — 2.8 $2.8 Subtotals ($6.5) ($8.7) ($2.8) Perform federally required activities Highway safety plan $3.0 $1.5 $1.5 Tunnel inspections 0.9 0.8 0.8 Highway spending audits 0.8 0.8 0.8 Subtotals ($4.7) ($3.1) ($3.1) Implement new road usage charge pilot program $3.2 $0.7 — Fund facilities cost increase 2.1 4.4 $6.7 Totals $977.0 $967.2 $958.0 a Reflects changes associated with limited-term funding or full implementation costs. Does not reflect changes in SB 1 revenues expected in the out years. b The Governor’s budget displays a $1.3 billion increase. The main reason the Governor’s figure is higher is because he treats all capital outlay spending as new in 2018-19. c Proposal allows the Department of Finance to increase by up to $12 million. d Proposal allows the Department of Finance to increase by up to $20 million. HSRA = High-Speed Rail Authority. www.lao.ca.gov 13 analysis full gutter 2018-19 BUDGET replace an old one. SHOPP projects often require Maintenance Program or SHOPP (though the legislation significant work by Caltrans staff to design and specifies at least $400 million of this funding be spent manage each project. The construction of SHOPP specifically on bridges and culverts). The 2017-18 projects is done by a construction contractor. Budget Act appropriated the funds as follows: Condition of the State Highway System. While • Highway Maintenance Program ($421 Million). the highway system is aging, the majority of it is still The budget provided (1) $400 million for Caltrans in good condition. In its last State of the Pavement to contract for major maintenance services report prior to the passage of SB 1, Caltrans reported and (2) $21 million to support 48 positions and that 53 percent of pavement was in good condition, overtime for Caltrans staff to perform minor 31 percent was in fair condition, and 16 percent was maintenance and oversee maintenance contracts. distressed. For bridges, it reported a “Bridget Health • SHOPP ($424 Million). The budget provided Index” of 97.1 out of 100—meaning on average the $368 million to advance SHOPP projects state’s bridges were in very good condition. Caltrans awaiting funding. (This amount includes the also reported, however, that about 500 highway bridges $75 million that SB 1 dedicated specifically to statewide were distressed (about 4 percent of total SHOPP.) Additionally, it provided $56 million and bridges). For culverts, the department reported that 187 positions to initiate planning and to design 60 percent were in good condition, 26 percent were in additional SHOPP projects. fair condition, and 14 percent were distressed. Senate Bill 1 Also Sets Performance Outcomes Assessment of Maintenance and Rehabilitation for Highway Conditions. In addition to dedicating Needs. In our report The 2016-17 Budget: funding for highway maintenance and rehabilitation, Transportation Proposals, we estimated Caltrans’ SB 1 established associated performance outcomes for ongoing funding needs for major maintenance and Caltrans to achieve within ten years. These outcomes SHOPP, as well as the size of project backlogs in both are (1) at least 98 percent of state highway pavement programs. Specifically, we estimated Caltrans would in good or fair condition; (2) at least 90 percent level require about $2.6 billion annually to meet its ongoing of service for maintenance of potholes, spalls, and major maintenance needs and clear its backlog cracks; (3) at least 90 percent of culverts in good or of projects over three years. For SHOPP projects fair condition; (4) at least 90 percent of transportation addressing pavement, bridges, and culverts, we management systems in good or fair condition; and estimated Caltrans would require $2.9 billion annually (5) at least an additional 500 bridges fixed. Caltrans is for ongoing needs and to clear the program’s backlog to report annually to the CTC on its progress in meeting over the next ten years. These identified funding the outcomes, and the CTC, in turn, is to evaluate needs greatly exceeded Caltrans’ annual spending of Caltrans’s progress toward the outcomes and include $417 million for major maintenance and $1.3 billion for any findings in its annual report to the Legislature. SHOPP projects addressing pavement, bridges, and culverts. To address the ongoing needs as well as the Governor’s Proposal backlogs, we recommended the Legislature prioritize new funding for highway maintenance over SHOPP, The Governor’s budget estimates SB 1 funding for because Caltrans estimates each dollar of major Caltrans will increase from $1.9 billion in 2017-18 to maintenance funding saves between $4 and $12 by $2.8 billion in 2018-19, as most of the legislation’s postponing the need for rehabilitation. tax and fee increases were in effect for only part of the current year. This is an increase of $878 million, Senate Bill 1 Increases Funding for Caltrans. or 46 percent. Figure 8 summarizes the changes by In 2017-18, SB 1 increased funding for Caltrans by program. Of the $2.8 billion in 2018-19, SB 1 dedicates $1.9 billion. Of this amount, SB 1 restricted $1.2 billion $1.2 billion to specific programs. The remaining for specific programs, including $75 million for SHOPP $1.6 billion is available for appropriation in the budget (from a General Fund loan repayment). Under SB 1, the act for either the Highway Maintenance Program or remaining $771 million was subject to appropriation SHOPP. Of this $1.6 billion, the Governor proposes to in the annual budget act for either the Highway spend somewhat more on SHOPP ($994 million) versus 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET the Highway Maintenance Program ($576 million). $1 million in contracts, based on historical According to the administration, its proposal averages. accelerates as many SHOPP projects as currently await • SHOPP ($570 Million Increase). The proposed funding, and spends the remainder of the funding on SHOPP increase is all for highway rehabilitation maintenance. The administration indicates it envisions projects (including $300 million specifically for weighting more funding toward SHOPP in the future as bridges and culverts). The Governor does not new projects are developed. It believes its proposed propose to adjust SHOPP staffing levels (such as level of funding for maintenance in the meantime will for architects and engineers) at this time but will help Caltrans catch up on its maintenance work. do so as part of his May Revision. The specifics of the Governor’s proposed increase Figure 9 (see next page) summarizes the Governor’s for each program include: proposals for the Highway Maintenance Program and • Highway Maintenance Program ($154 Million SHOPP, compared to the levels of funding provided to Increase). The Governor proposes an additional each program from SB 1 in 2017-18 . $100 million for major maintenance contracts Issues for Legislative Consideration (specifically for bridges and culverts) and $53.6 million to support 400 new positions Prioritizing Funding Between Highway at Caltrans. Of the new positions, 300 are to Maintenance Program and SHOPP. Under the perform routine maintenance, while the remaining Governor’s proposal, we estimate Caltrans would 100 are to oversee construction contracts for still have near-term annual funding shortfalls of major maintenance. For routine maintenance, about $1.6 billion for major maintenance and at least the Governor’s request for positions is based on $600 million for SHOPP, largely due to the significant the number of staff needed to perform specific backlog of projects. Though both programs remain activities—such as filling potholes; sealing underfunded, the Legislature may want to consider pavement cracks; and replacing and repairing modifying the Governor’s proposal to allocate more highway guardrails, lighting, and signs—to funding toward major maintenance and less funding increase ten levels of service to meet specified toward SHOPP, because major maintenance projects targets. For major maintenance, the proposal are critical for achieving long-term savings on the assumes one position is required for each roughly state highway system. Additionally, we note that the Figure 8 Senate Bill 1 Funding for Caltrans (Dollars in Millions) Change Estimated Proposed Program 2017-18 2018-19 Amount Percent SHOPPa $424 $994 $570 134% Highway Maintenance Program 421 576 154 37 Transit/intercity rail capital 330 330 — — Trade corridors 153 306 153 100 Congested corridors 250 250 — — Local partnerships 200 200 — — Active transportation 100 100 — — Local planning grants 25 25 — — Freeway service patrols 25 25 — — Totals $1,929 $2,807 $878 46% a Includes $75 million each year from a General Fund loan repayment. Senate Bill 1 dedicates this funding specifically to SHOPP. SHOPP = State Highway Operations and Protection Program. www.lao.ca.gov 15 analysis full gutter 2018-19 BUDGET Figure 9 a Governor’s Proposals for Highway Maintenance Program and SHOPP (Dollars in Millions) Change Estimated Proposed Program 2017-18 2018-19 Amount Percent Highway Maintenance Program Major maintenance contracts $400 $500 $100 25% Staffing and support 21 76 55 260% Subtotals ($421) ($576) ($154) (37%) SHOPP Projects $368 $938 $570 155% Staffing and supportb 56 56 — — Subtotals ($424) ($994) ($570) (134%) Totals $845 $1,570 $725 86% a From the Road Maintenance and Repair Account. Also includes $75 million in loan repayments each year from the General Fund to SHOPP. b The Governor will submit his proposal to adjust SHOPP staffing levels as part of the May Revision. SHOPP = State Highway Operations and Protection Program. Governor’s proposal funds some routine maintenance Governor’s Proposal activities on highway assets—such as guardrails, The Governor’s budget proposes a $58 million lighting, and signs—that are not specifically addressed increase from the State Highway Account (SHA) to in SB 1. Given SB 1 focused specifically on pavement, address what Caltrans characterizes as insufficient bridges, culverts, and transportation management funding for its positions. The department believes it systems, the Legislature could consider whether lacks sufficient funding because it does not receive directing funding toward these other asset classes at annual compensation adjustments for its temporary this time is consistent with its immediate priorities for positions. According to Caltrans, the proposed repairing California’s highways. augmentation would fund about 340 positions that it otherwise would have to hold vacant. Caltrans COMPENSATION COST plans to allocate the proposed augmentation across ADJUSTMENT its programs based on their historical compensation expenditures and position history, with most of the Background increase going to the Highway Maintenance Program ($20.5 million) and administration ($16.1 million). In The Governor’s budget annually includes its proposal, Caltrans indicates that providing the adjustments for each state department to account for requested funding would alleviate the need for new changes in compensation costs arising from collective position requests for most of its programs over the next bargaining agreements and changes in employer few years. retirement rates. These adjustments are calculated based on the number of permanent positions Assessment authorized for each department in the state budget. The Legislature generally expects state departments The budget does not provide similar compensation to fill all their positions in order to perform their adjustments for temporary positions. In 2017-18, expected workload. Though the Governor’s proposal Caltrans has about 500 temporary positions. aims to address this goal, we find that it raises some concerns. Specifically, the proposal: 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET • Lacks Complete Information. The Governor’s LIABILITY COST INCREASES proposal identifies the lack of compensation adjustments for temporary positions as a key Background justification for the proposed augmentation. Yet, the proposal does not document the effects of Caltrans Can Be Liable for Conditions on this budgetary practice over time to justify its need the State Highway System. Caltrans can be held for additional funding, nor does it propose any financially liable for personal and property damages changes to current budgetary practices to prevent where the cause is due to the design or condition the need for another augmentation in the future. of the state highway system. The department’s Moreover, the proposal does not describe what base budget to pay for these damages—known as workload would be performed if the department torts—is $68.6 million. Tort costs have increased were able to fill its vacancies. sharply in recent years, growing from $45 million in 2014-15 to $93.6 million in 2016-17, mainly due to • Appears to Duplicate Other Proposals for some exceptionally high judgments against the state. Staffing Increases. As discussed elsewhere in To cover the cost increases above its base funding this chapter, the Governor has several proposals level, the department has redirected funding from other to increase Caltrans staffing to perform new program areas in recent years. For instance, Caltrans workload. For instance, the Governor proposes covered the cost increase for 2016-17 by redirecting to add 400 positions for maintenance and funding from the Highway Maintenance Program as well 4 positions for IT security. As noted above, as other programs. however, the Governor’s proposal states that providing the $58 million to fully fund its positions Caltrans Also Can Be Liable for Collisions should alleviate the need for new staffing requests Caused by Its Employees While Driving. To insure in the near term by allowing Caltrans to fill its itself against damages to other individuals and their vacant positions. property caused by Caltrans drivers, the department participates in the State Motor Vehicle Liability • Treats Caltrans Differently Than Other Self-Insurance Program, which is administered by State Departments. Like Caltrans, other state the Department of General Services (DGS). Caltrans departments do not receive compensation pays DGS a premium each year in order to be insured adjustments for temporary positions. And many under the program. This premium is primarily based other state departments also have ongoing vacant on the average annual cost of the previous five years positions. Yet, the Governor does not propose of Caltrans’ collision claims. Caltrans’ premium more to adjust funding levels or otherwise address than tripled from 2014-15 to 2017-18, growing from position vacancies at these other departments. $4.2 million to $14.6 million, due to a handful of exceptionally costly claims. The department’s ongoing Recommendation base budget to pay for claims is $4.2 million, though Given the above concerns, we recommend the it received a one-time augmentation of $5.1 million in Legislature require Caltrans to provide (1) information 2017-18. The department indicates it has been paying showing in detail how the identified funding shortfall for the cost increases in recent years by redirecting developed over time, (2) options to prevent another funding from other activities, such as replacing vehicles. shortfall from reoccurring in the future, and (3) an Governor’s Proposals explanation for what workload would be performed with the funding. Until this information is provided, we The Governor’s budget proposes two increases recommend the Legislature withhold action on the totaling $11.9 million from the SHA to account for rising Governor’s proposal. liability-related costs: • Tort Payments ($7 Million). The Governor proposes an ongoing $7 million increase for tort payments. Additionally, the Governor proposes budget bill language allowing the Department of www.lao.ca.gov 17 analysis full gutter 2018-19 BUDGET Finance (DOF) to increase funding by up to an vehicles (such as snow plows and pick-up trucks). additional $20 million, following notification to Thus, if the Legislature were to approve the Governor’s the Legislature. The administration believes this proposals, the additional funding would allow the flexibility is necessary due to fluctuations in tort department to send the redirected funds back to their costs. original purpose—for example, from paying for the • Vehicle Insurance Costs ($4.9 Million). The vehicle insurance premium back to paying for vehicle Governor proposes $4.9 million on a two-year replacements. Prior to taking action on the Governor’s limited-term basis to pay for a portion of the proposals, we recommend the Legislature ask Caltrans recent increases in Caltrans’ vehicle insurance to explain at budget hearings how these funding premium. (We note that this proposal does not redirections have impacted the departments operations appear intended to address any potential cost and why funding is no longer available to redirect. increases for 2018-19, as DGS will not set its premium rates for the budget year until this INFORMATION TECHNOLOGY spring.) Background Issues for Legislative Consideration Caltrans’ IT program provides services that support Caltrans must pay for its tort costs and vehicle various activities department-wide. For example, the insurance premium—meaning these operational program manages the department’s IT projects, and costs are not discretionary. In our view, however, the is responsible for maintaining its IT infrastructure. Governor’s proposals raise two issues for legislative In 2017-18, the program has a budget totaling consideration regarding (1) ways to reduce these costs, about $115 million (equal to about 1 percent of the and (2) Caltrans’ redirection of funding to pay for the department’s overall budget) and about 550 positions. costs up until now. Recent Budget Increases for IT Program. In Options to Reduce Costs. The recent cost 2017-18, Caltrans requested, and the Legislature increases for Caltrans’ tort payments and vehicle approved, two augmentations from the SHA for its IT insurance premium both appear to be due to a few program: exceptionally large legal settlements and judgments. • IT Devices ($12 Million). The budget provided For example, in early 2017, Caltrans incurred two tort a $12 million one-time increase for Caltrans to judgments totaling $86 million, whereas the largest replace 1,100 of its IT devices, such as network judgment two years earlier was $9.5 million. Along the switches. In its proposal, Caltrans noted that same lines, we found in our recent report, A Review of about 6,000 of its 11,000 IT devices were at Caltrans’ Vehicle Insurance Costs, that three multimillion the end of their useful life, and it would use the dollar vehicle insurance claims accounted for virtually funding to replace devices at the greatest risk of all of the recent increase in Caltrans’ vehicle insurance failure. premiums. As we discuss in that report, the Legislature could consider establishing a state liability limit as one • IT Security ($4 Million). The budget provided way to reduce costs, as many other states have done. a $4 million increase ($1.8 million ongoing Additionally, Caltrans could explore ways to reduce and $2.2 million limited term), as well as six vehicle collisions and improve highway conditions to permanent positions, to improve the department’s reduce its legal exposure. cybersecurity and prevent the reoccurrence of recent cyberattacks on the department. Funding Redirections. Each of the Governor’s two proposals address cost increases that began several Legislature Expressed Concerns Over Lack of years ago. Because the costs are not discretionary, the Detailed Plans. Though it approved the above funding department has been paying for them by redirecting requests, the Legislature during budget hearings asked funding from other activities. For instance, Caltrans has if Caltrans had developed detailed plans for both the been paying for its increased vehicle insurance premium replacement of its IT devices as well as improvements by redirecting funding originally budgeted for replacing to its IT security. In particular, the Legislature asked 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET whether Caltrans had a multiyear plan to replace $2.1 million is ongoing ($1.6 million for software equipment, as well as whether it had looked at paying and hardware purchases and $488,000 for the for IT storage space “in the cloud” rather than replacing four positions), while the remainder is one time storage devices. Caltrans indicated that it was in the (primarily for hardware and software purchases). process of developing long-term plans to consider these and other issues. Recommendations Caltrans Recently Released Two of Three IT Recommend Approving Funding for Roadmap, Plans. In the spring of 2017, Caltrans released an Rejecting Budget Bill Language. The development “IT Infrastructure Roadmap.” This roadmap outlines of a roadmap for Caltrans to manage and replace its IT short- and long-term goals for Caltrans’ IT program devices would help ensure that the department is taking (such as creating operational efficiencies). It also sets a cost-effective approach. Accordingly, we recommend forth 46 specific initiatives to help the department the Legislature approve the proposed $2 million meet its goals (such as by reducing printing costs). to develop the roadmap. However, the Governor’s Subsequently, in fall 2017, Caltrans released a proposed budget bill language puts the Legislature in “Cybersecurity Roadmap” that identifies activities to the position of approving funding to start implementing elevate the strength of its cybersecurity from “weak” the roadmap without providing the Legislature with to “optimized.” This roadmap calls for three separate an opportunity to first review it. In our view, this waves of activities, with the first wave of activities being approach significantly diminishes legislative oversight implemented with the funding provided in the current over the costs of Caltrans’ IT program. Therefore, year. In 2017, Caltrans also initiated planning for an “IT we recommend the Legislature reject the language Architecture Roadmap” that would address its business authorizing the administration to increase spending applications and data processing needs, as well as after the enactment of the state budget to implement options for hosting its data and replacing equipment. the roadmap. Instead, we recommend adopting budget Caltrans determined, however, that it did not have the bill language requiring Caltrans to submit a copy of in-house expertise to complete this roadmap. the roadmap to the Legislature upon its completion. Governor’s Proposals Under this approach, Caltrans could submit a budget request in 2019-20 to implement the roadmap, after The Governor’s budget contains two augmentations the Legislature has an opportunity to review it. (Though from the SHA that are related to the 2017-18 budget Caltrans would not be able to replace additional devices augmentations: in 2018-19, we note that the 2017-18 budget already provided funding for Caltrans to replace devices at the • IT Devices ($2 Million, Plus the Potential for greatest risk of failure.) Another $12 Million). The Governor proposes $2 million (one time) for Caltrans to contract with Recommend Approving Funding for IT Security a vendor to develop the IT Architecture Roadmap and Privacy. We recommend the Legislature approve for managing and replacing its IT devices. Caltrans’ separate request for funding for IT security Additionally, the Governor proposes provisional and privacy, given the department already has budget bill language authorizing up to $12 million completed its cybersecurity roadmap that outlines how (one time) to begin implementing the roadmap it intends to improve its cybersecurity through specific after its completion, contingent upon DOF, the courses of action. California Department of Technology (CDT), and CalSTA determining the roadmap is “viable.” ROAD USAGE CHARGE • IT Security and Privacy Office ($10.4 Million). The Governor proposes a $10.4 million increase, Background along with four positions, to implement the Legislature Created Pilot Program to Study second wave activities identified in Caltrans’ Road Usage Charge. In 2014, the Legislature cybersecurity plan (such as addressing mobile enacted Chapter 835 (SB 1077, DeSaulnier), to study security needs). Of the proposed increase, the feasibility of a “road usage charge”—an amount www.lao.ca.gov 19 analysis full gutter 2018-19 BUDGET charged to individuals for each mile they drive—as an the SB 1077 pilot because drivers already are familiar alternative to raising revenue for roads through fuel with paying gas taxes when filling up at the pump. taxes. Specifically, the legislation required CalSTA to In approving Caltrans’ request, the Legislature also conduct a pilot program to analyze various methods added budget bill language requiring the department for collecting road usage data and report by June to report on its progress in studying a pay-at-the-pump 2018 on the feasibility of implementing a road charge pilot program by July 1, 2018. In early January 2018, on a statewide basis. CalSTA, in turn, selected Caltrans Caltrans issued a request for information to gauge to implement the pilot program. The 2015-16 budget market conditions for implementing a pay-at-the-pump provided $10.7 million for Caltrans to conduct the pilot pilot program, with responses due on February 15, program, including $8.8 million for consultant contracts, 2018. $618,000 for five limited-term positions (for three years), Governor’s Proposal and $1.3 million for overtime and other costs. Pilot Program Concluded Early, Assessed Governor Proposes $3.2 Million to Implement Several Revenue Collection Methods. The pilot the Pay-at-the-Pump Pilot Program. This proposal program enrolled 5,000 vehicles from volunteer would allow Caltrans to proceed to solicit vendors participants to test several options for collecting the to actually implement the new pilot program. The revenues, including: (1) prepurchased time and mileage proposed amount includes (1) $2.5 million for permits, (2) manual odometer readings, (3) vehicle one-time expenses (such as consultant contracts) plug-in devices, (4) smart phone applications, and (5) a and (2) $674,000 to continue, for two years, the five specific built-in technology found in newer vehicles. The limited-term positions provided in the 2015-16 budget pilot program concluded early in March and CalSTA for the SB 1077 pilot program. Caltrans recently was issued its report in December 2017. In its report, awarded a $1.8 million federal grant that would pay for CalSTA concluded that a road usage charge is viable most of the one-time expenses. The remainder of the but that certain obstacles remain to be addressed for funding would come from the SHA. Additionally, the each of the methods tested. For example, CalSTA proposed budget contains the same reporting language noted that the two permit options could be difficult as the 2017-18 budget—specifically, a requirement for to enforce and costly to administer, while the vehicle Caltrans to report on its progress by July 1, 2018. plug-in devices tested could be obsolete by the time a Assessment road usage charge is implemented. Caltrans Recently Started to Plan for a New Pay-at-the-Pump Revenue Collection Method “Pay-at-the-Pump” Pilot Program. The SB 1077 pilot Might Have Advantages but Also Potential program did not test collecting road usage charges Drawbacks. Caltrans makes a reasonable case that when drivers pay for fuel purchases at the pump. This a pay-at-the-pump revenue collection method might is because Caltrans determined that cost-effective have an advantage over other methods because technology did not exist to transmit mileage data from drivers already pay fuel taxes at the pump, potentially vehicles to fuel pumps to include in the price of fuel making the transition to a new road usage more purchases. However, in adopting the 2017-18 budget, seamless for them. However, a pay-at-the-pump the Legislature approved a request from Caltrans to collection method likely will not prove to be workable reappropriate $737,000 in unspent funding from the for collecting revenue from drivers of certain alternative pilot program to match a new $750,000 federal grant fuel vehicles, such as plug-in electric vehicles. This is to, in part, initiate planning for a new pay-at-the-pump because these vehicle owners can charge their vehicles pilot program. According to Caltrans, new technologies at home rather than using public fueling stations. As a emerged after the initiation of the SB 1077 pilot that result, these drivers could evade the pay-at-the-pump now make a pay-at-the pump option feasible to study. road usage charge. Though electric vehicles currently Moreover, Caltrans believes the pay-at-the-pump make up less than one percent of registered vehicles option has a key advantage over the options tested in in California, both the state and automakers have 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET undertaken efforts in recent years to increase electric remains uncertain. Additionally, the costs are also still vehicle adoption. Thus, a pay-at-the-pump collection subject to some uncertainty, as Caltrans’ request for method could face serious issues in the long term information asks respondents to submit a specific cost as electric vehicle adoption increases. Indeed, in its estimate for implementing the pilot program. Caltrans December 2017 report on the SB 1077 pilot program, also has not yet submitted the statutorily required CalSTA noted that a pay-at-the-pump collection report on its progress in studying the feasibility of a method would only address gas-powered vehicles and pay-at-the-pump pilot program, due July 1, 2018. that alternative technologies would be needed to collect Recommendation from alternative fuel vehicles. Feasibility of Pay-at-the-Pump Pilot Program Given the feasibility and costs of a pay-at-the-pump Not Known at This Time. As noted above, Caltrans pilot program are somewhat uncertain at this time, we only recently issued a request for information to recommend the Legislature ask Caltrans to provide see if vendors are available who can offer a feasible information summarizing the results of its request technological solution for collecting road usage charge for information at spring budget hearings. Once the revenues at the pump, with responses not due until Legislature has this information, it would be better February 15. Therefore, at the time of this analysis, positioned to evaluate whether to fund the new pilot the feasibility of a new pay-at-the pump pilot program program. CALIFORNIA HIGHWAY PATROL The primary mission of the CHP is to ensure safety AREA OFFICE REPLACEMENT and enforce traffic laws on state highways and county roads in unincorporated areas. The CHP also promotes Plan to Replace CHP Offices traffic safety by inspecting commercial vehicles, as well Initiated in 2013-14 as inspecting and certifying school buses, ambulances, and other specialized vehicles. The CHP carries The CHP operates 103 area offices across the out a variety of other mandated tasks related to law state, which usually include a main office building for enforcement, including investigating vehicular theft and CHP staff, CHP vehicle parking and service areas, providing backup to local law enforcement in criminal and a dispatch center. Beginning in 2013-14, the matters. The operations of the CHP are divided across administration initiated a plan to replace a few CHP eight geographic divisions throughout the state. field offices each year for the next several years. The The Governor’s budget proposes total expenditures Legislature has approved funding from the MVA in of $2.6 billion in 2018-19, which is about $177 million, accordance with this plan each year since 2013-14 as or 7 percent, more than the revised current-year follows: estimate. The year-over-year increase is mainly the • 2013-14. $1.5 million for advanced planning and result of the Governor’s proposal to revert $141 million site selection to replace up to five unspecified in funding for four capital outlay projects and shift to CHP area offices. lease revenue bonds to finance these same projects. • 2014-15. $32.4 million to fund the acquisition and The level of spending proposed for CHP for 2018-19 preliminary plans for five new CHP area offices in supports about 10,850 positions, of which about 7,600 Crescent City, Quincy, San Diego, Santa Barbara, are uniformed officers. and Truckee, and $1.7 million for advanced planning and site selection to replace up to five additional unspecified CHP area offices. • 2015-16. $136 million to fund the design and construction of the area offices in Crescent City, Quincy, San Diego, Santa Barbara, and Truckee, www.lao.ca.gov 21 analysis full gutter 2018-19 BUDGET as well as $1 million for advanced planning and • El Centro. $30.4 million to fund the design-build site selection to replace five additional unspecified phase of the El Centro area office replacement. area offices. The proposed facility would be 27,481 square • 2016-17. $32 million for the acquisition and feet, or about five-to-six times the size of the preliminary plans for the area offices in El Centro, existing 4,575 square foot facility that was built Hayward, San Bernardino and Ventura and in 1966. The total estimated cost to replace $800,000 for advanced planning and site this office is estimated at $34.7 million (includes selection. $4.3 million for acquisition and planning provided in the 2016-17 budget). • 2017-18. $139 million to fund the design construction of the area offices in El Centro, • Hayward. $38.1 million for the design-build Hayward, San Bernardino, and Ventura; phase of the Hayward area office replacement. $2.5 million to fund the acquisition and The proposed facility would be 43,518 square performance criteria phases in Humboldt; feet, or about four times the size of the existing and $2.1 million to fund the acquisition and 11,033 square foot facility that was built in 1971. performance criteria phases in Quincy, and The total estimated cost to replace this office is $500,000 for advanced planning and site estimated at $53.1 million (includes $15 million selection. for acquisition and planning provided in the 2016-17 budget). Governor’s Proposal • Ventura. $38.4 million to fund the design-build phase of the Ventura area office replacement. The Shift to Lease Revenue Bond Financing for CHP proposed facility would be 40,972 square feet, or Area Office Replacements. The Governor’s budget about three-to-four times the size of the existing proposes to shift from a pay-as-you-go approach 12,469 square foot facility that was built in 1976. for the design-build phase of four CHP area office The total estimated cost to replace this office is replacement projects in El Centro, Hayward, Ventura, estimated at $45.7 million (includes $7.3 million and San Bernardino to financing the projects with lease for acquisition and planning provided in the revenue bonds that would be supported from the MVA. 2016-17 budget). According to the administration, this approach would • San Bernardino. $34.2 million to fund the allow the projects to continue and ensure the MVA can design-build phase of the San Bernardino office maintain an adequate reserve. Under the Governor’s replacement. The proposed facility would be proposal, $138.7 million—El Centro ($30.3 million), 44,000 square feet, or about three-to-four times Hayward ($38.1 million), San Bernardino ($33.2 million), the size of the existing 12,253 square foot facility and Ventura ($37.1 million)—in previously authorized that was built in 1973. The total estimated cost funds would revert to MVA, and $141.1 million in lease to replace this office is estimated at $39.5 million revenue bond authority would be authorized. (The (includes $5.4 million for acquisition and planning $2.3 million difference between lease revenue bond provided in the 2016-17 budget). authority and the reversion amount is due to cost • Quincy. $32.7 million to fund the design-build increases for the design-build phase for the Ventura phase of the Quincy replacement facility. The office [$1.3 million], and the San Bernardino office proposed facility would be 24,538 square feet, [$1 million].) The Governor’s budget also proposes or roughly six times the size of the existing lease revenue bond authority to build a new office in 4,006 office that opened in about 1967. The Quincy. (The funding approved in the 2015-16 budget total estimated cost to replace this office is to build a new office in Quincy subsequently reverted estimated at $34.9 million (includes $2.1 million due to difficulties acquiring a site.) for acquisition and planning provided in the Specifically, the Governor’s budget requests 2017-18 budget). $173.8 million in lease revenue bond authority as follows: Shift Procurement Method for Santa Barbara Office. The budget plan proposes to shift the 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET procurement methodology for the Santa Barbara area two area office replacements in Humboldt and Santa Fe office replacement from pay-as-you-go capital outlay Springs, and other phases of five identified replacement to build-to-suit leasing. Specifically, the administration projects; and (3) $14.6 million for yet-to-be-identified requests a reversion of the unexpended authority of replacement projects. $32.4 million appropriated for the project in 2014-15 Assessment and 2015-16, and the addition of budget trailer language to authorize a lease-purchase agreement or Administration’s Five-Year Plan Signals a lease with an option to purchase. The administration Slowdown for Future Office Replacements. As sites its inability to acquire suitable land in the Santa shown in Figure 11 (see next page), the 2018 Five-Year Barbara area as its reason for the proposed shift from Infrastructure Plan projects significantly less spending capital outlay to build-to-suit lease. The proposed for office replacements than was projected in the facility would be 25,232 square feet, or almost four 2017 Five-Year Infrastructure Plan. For example, times the size of the existing 7,008 square foot facility the 2018 plan assumes that the state will spend that opened in about 1982. $45.6 million less in 2019-20 on CHP facilities than Five-Year Plan for Replacement of CHP assumed in the 2017 plan. The differences displayed in Offices. The administration’s recent 2018 Five-Year Figure 11 are mainly due to the elimination of funding Infrastructure Plan—which proposes state spending on for yet-to-be-identified office replacement projects. infrastructure projects in all areas of state government The administration also shifts the bulk of its through 2022-23—includes ongoing projections of the proposed funding for acquisition, study, performance CHP’s area office replacement needs. As Figure 10 criteria, and various phases out beyond 2020-21. shows, the plan proposes a total of $326 million The effect of this shift is to move related design-build over the next five years. This amount includes costs out to 2023-24 and beyond for various area (1) $174 million for the design-build phase of five area office replacements. By spreading the area office office replacement projects in 2018-19 (as discussed replacements out over a longer period of time above); (2) $137.4 million for the design-build phase of Figure 10 California Highway Patrol Five-Year Office Replacement Plan (In Thousands) Total 2018-19 2019-20 2020-21 2021-22 2022-23 Project Cost Statewide—area office replacement program — — — — $14,586A,D $14,586 Statewide—site identification and planning — $700A,S $700A,S $700A,S 700A,S 2,800 El Centro—area office replacement $30,413B — — — — 30,413 Hayward—area office replacement 38,103B — — — — 38,103 Quincy—replacement facility 32,719B — — — — 32,719 Ventura—area office replacement 38,414B — — — — 38,414 San Bernardino—area office replacement 34,167B — — — — 34,167 Humboldt—area office replacement — 34,292B — — — 34,292 Tracy—area office replacement — — 4,613V 2,750V 2,811V 10,174 Santa Fe Springs—area office replacement — — 2,400A,D — 49,107B 51,507 Baldwin Park—area office replacement — — — 2,653A,D — 2,653 Santa Barbara—area office replacement — — — — 9,000V 9,000 Santa Ana—area office replacement — — — 9,702V 7,764V 17,466 Westminster—area office replacement — — — — 9,263V 9,263 Totals $173,816 $34,992 $7,713 $15,805 $93,231 $325,557 Note: Figure excludes capital outlay proposals unrelated to office replacement such as (1) Keller Peak Tower Replacement ($281,000 in 2018-19; $1.8 million in 2019-20), and (2) Enhanced Radio System—Replace Towers and Vaults ($12.9 million in 2019-20). Phases: A = acquisition; D = performance criteria; S = study; B = design-build; and V = various. www.lao.ca.gov 23 analysis full gutter 2018-19 BUDGET than previously proposed, the Figure 11 administration reduces spending Five-Year Infrastructure Plan Signals Slowdown from MVA over the next few years. According to the administration, this (In Millions) change, combined with the shift form 2019-20 2020-21 2021-22 a pay-as-you-go approach to lease 2017 Five-Year Infrastructure Plan $80.6 $96.0 $102.0 revenue bond financing, would allow 2018 Five-Year Infrastructure Plan 35.0 7.7 15.8 the projects to continue and improve Difference $45.6 $88.3 $86.2 the condition of the MVA. Note: Figure excludes capital outlay proposals unrelated to office replacement such as (1) Keller Shift to Lease Revenue Peak Tower Replacement ($281,000 in 2018-19; $1.8 million in 2019-20), and (2) Enhanced Radio System—Replace Towers and Vaults ($12.9 million in 2019-20). Bond Financing Helps MVA Maintain Reasonable Reserve. The Governor’s proposal to shift under the Governor’s plan, the MVA would maintain a from a pay-as-you-go approach to lease revenue reserve for economic uncertainties of approximately bond financing for the design-build phase of the five 11 percent of projected expenditures in 2018-19 and previously approved office replacement projects would about 8 percent in the following four years—equivalent reduce MVA expenditures in 2018-19 for these projects to slightly more than one month of MVA expenditures. by roughly $174 million and help ensure that the While adopting the Governor’s lease revenue bond MVA maintains a reasonable level of reserve over the approach would lock in some future MVA costs, funding next several years. As discussed earlier in this report, the projects using a pay-as-you-go approach would significantly reduce the above reserve levels. DEPARTMENT OF MOTOR VEHICLES The DMV is responsible for registering vehicles, FRONT-END APPLICATIONS issuing driver licenses, and promoting safety on SUSTAINABILITY PROJECT California’s streets and highways. Additionally, DMV licenses and regulates vehicle-related businesses (such Background as automobile dealers and driver training schools), and collects certain fees and taxes for state and local Existing System to Process Numerous DMV agencies. Currently, there are 26.5 million licensed Transactions Has Functionality Issues. Each year, the drivers and 35.3 million registered vehicles in the state. DMV issues about 7 million driver licenses and registers The Governor’s budget includes $1.2 billion for roughly 35 million vehicles, and collects $3.5 billion in DMV in 2018-19—a 2 percent increase over the associated fees. In addition, the department collects estimated level of spending in the current year. About and distributes various fees (such as unpaid parking 95 percent of all DMV expenditures are supported from penalties) on behalf of local authorities and other the MVA, which generates its revenues primarily from state agencies. According to DMV, its current vehicle vehicle registration and driver license fees. The level registration and fee collection system, commonly of spending proposed for 2018-19 supports about referred to as the legacy system, is dependent on 8,300 positions at DMV. approximately 45-year old technology, which is inflexible and fragmented leading to significant challenges. Efforts to Replace Existing System Began Over Ten Years Ago. In 2005, DMV sponsored the Information Technology Modernization (ITM) project, which was intended to replace the legacy system with sustainable, scalable, and readily supported 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET technologies. In 2006, the Legislature approved the • Stage 2—Alternatives Analysis. The project with an estimated total cost of $242 million and department must evaluate various alternatives for full implementation scheduled for May 2013. accomplishing the project objectives identified First Modernization Effort Terminated in 2013. in Stage 1. Based on this analysis, departments The ITM project proceeded to incrementally upgrade identify the recommended alternative and DMV’s legacy system through four subprojects that develop a procurement strategy. Sponsoring sought to: (1) update DMV’s database; (2) update departments must also provide a financial analysis DMV’s transaction management system; (3) upgrade for the project, including a comparison of the the driver license, vehicle registration, and cashiering cost of not implementing a new IT system—that systems; and (4) update DMV’s code written in a is, maintaining existing technology or manual now-obsolete programming language. However, processes—to the various alternatives. disagreements regarding staffing arose between DMV • Stage 3—Procurement Analysis. Departments and the vendor in 2012, which eventually made the must identify the detailed requirements for the May 2013 completion date unachievable. Due to the project based on the recommended alternative inability of both parties to reach a mutual agreement selected in Stage 2 and develop a solicitation—a on the issues and a timeline for completing the project, request for information from vendors. The the California Technology Agency—predecessor to the solicitation documents the project requirements, current CDT—terminated the ITM project in January terms, and conditions. 2013. At that time, $135 million had been spent on • Stage 4—Bid Analysis and Finalization of the project. When the vendor closed out its work in Project Details. Departments release the the spring of that year, not all of the modernization solicitation developed in Stage 3, which is used work was fully completed. Specifically, upgrades to the by prospective vendors to develop their bid for vehicle registration system and cashiering functions, an IT project. The department evaluates the and updates to DMV’s code were left unfinished. submitted bids and selects a vendor. A planning Second Modernization Effort Initiated to document is developed that outlines the final Complete Unfinished Upgrades. Following the project details, including the project scope, termination of the ITM project, DMV and CDT initiated schedule, cost, and resource needs, which serves efforts to complete the unfinished upgrades to DMV’s as a baseline for monitoring the project’s progress legacy system. This project, the Front-End Applications and performance. Sustainability (FES) project, is currently proceeding Each stage in the PAL process builds off the analysis through the state’s IT project approval process—known from the prior stage. Departments cannot begin their as the Project Approval Lifecycle (PAL). The approval projects without receiving approval from CDT for each process consists of four stages: of the four stages. Once CDT approves the project after • Stage 1—Business Analysis. A department Stage 4, the sponsor department requests funding that is considering an IT project must first layout to begin designing, developing, and implementing the issue that could potentially be solved by an the IT project. This would be an opportunity for the IT project. This business case is centered on Legislature to review a complete and fully costed (1) the programmatic problems that substantially project plan. Typically, the Legislature approves design, and adversely affect the operation and delivery development, and implementation funding for IT of a service, (2) the programmatic opportunities projects on a year-by-year basis to ensure continued that may substantially improve operation and opportunities for oversight. delivery, (3) the expected revenue generation or DMV completed Stage 1 for the FES project in cost savings, or (4) compliance with legislative 2016 and Stage 2 at the end of 2017. The department mandate. Sponsoring departments must also is currently entering Stage 3 in the PAL process and document the project objectives and assess their expects to complete Stage 4 in January 2019. As part readiness to take on the project. of the 2017-18 budget, the Legislature approved up to $3.4 million to support pre-project activities related www.lao.ca.gov 25 analysis full gutter 2018-19 BUDGET to Stage 3, including the preparation of a Request for implementation of the project at this time (as requested Procurement. by the Governor) would limit the Legislature’s ability to track project progress and hold DMV accountable Governor’s Proposal should challenges arise during implementation. The Governor’s budget proposes $15 million Project Costs Could Change. One of the benefits (MVA) in 2018-19 to support the implementation of of the PAL process is that procurement takes place the FES project. Under the administration’s multiyear before project launch, which increases the likelihood proposal for the project, this amount will fluctuate over that the final baseline cost estimate for a project will the subsequent four years and total $89 million. The better reflect actual costs upon completion. Without a proposal also includes $14.9 million annually beginning vendor on board and contract established, the project’s in 2023-24 for system maintenance and operation. actual costs could be different than the amount In addition, the Governor proposes budget trailer currently requested, and result in the need for future legislation to authorize DMV to charge an additional budget augmentations. Moreover, approving the full $1 fee per transaction to the private industry partners funding now would also limit the Legislature’s ability to that work with the department to collect registration ensure that the department is taking appropriate steps fees. The revenue from the fee would be used to to mitigate the need for additional project funding in support the FES project. future fiscal years. Assessment Recommendations Premature to Provide Funding Prior to Reject Proposed Funding. While modernizing Completion of PAL Process. As noted previously, DMV’s IT systems has merit and is consistent with the Legislature improves its oversight by funding the legislative direction, it is premature to provide funding design, development, and implementation of an IT for the project prior to completion of the planning project following CDT’s approval of the project after the process. Thus, we recommend that the Legislature completion of Stage 4. This allows the Legislature to reject the Governor’s proposal to provide funding in evaluate a complete plan before authorizing funding. both 2018-19 and subsequent years to implement the However, DMV is only entering Stage 3 of the PAL FES project. This approach would still allow the PAL process and does not expect to complete Stage 4 until process to conclude with resources already available to January 2019 at the earliest. Accordingly, it appears the department, while providing the Legislature with an premature at this time to provide funding to the opportunity to consider key project information before department for the development and implementation of making its final decision on funding. More importantly, it the project before planning is complete. would ensure that DMV return to the Legislature to seek funding on an annual basis, which has generally been Additional Information Needed to Facilitate the practice for IT projects, and enhance legislative Legislative Oversight. Given that the PAL process for oversight on a project that has experienced challenges the FES project has not been fully completed, DMV in the past. has yet to develop a solicitation, select a vendor, and establish firmer baseline expectations for the project in As previously indicated, DMV currently expects to terms of cost and timeline. As a result, the Legislature complete Stage 4, the final stage in the state’s PAL has limited information at this time to fully assess process, in January 2019. Given that the department the project and determine the merits of funding the has only recently begun work for Stage 3 and the development and implementation of the project. required activities that must be done between now and the completion of Stage 4, it is likely that the Request for Out-Year Funding Limits Legislative planning process for the FES project will extend beyond Oversight. As noted above, typically the Legislature January 2019. If this is the case, the Legislature could approves funding for IT projects on a year-to-year basis, consider a request for implementation funding during which requires the sponsoring department to return its 2019-20 budget process with little or no delay in the in a subsequent funding year with a status update project’s timeline. However, to the extent that the PAL and a request for additional funding. Fully funding the process is completed on schedule, the administration 26 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET could seek the required funding through legislation United States. This process typically involves a DMV to begin implementing the project. At that point, the investigator interviewing the applicant and verifying the Legislature would have sufficient information to fully additional documentation that applicants must provide assess the project. to prove their identity and residency. Require Report Following Stage 4 Completion. The DMV operates 47 investigations offices We also recommend the Legislature adopt across the state, often colocated with a DMV field supplemental reporting language requiring that DMV office. A typical investigations office houses six to provide a status report on the FES project to the nine investigators, a supervising investigator, and Legislature within 45 days following CDT’s approval support staff. These offices are overseen by area of Stage 4. At a minimum, this report should include commanders, who are in turn overseen by division (1) an updated project cost and completion date; deputy chiefs. Generally, commanders oversee multiple (2) terms of the vendor contract (such as key vendor investigations offices and deputy chiefs supervise responsibilities, what options are available should multiple commanders. Currently, the division has the vendor fail to perform, and first-year project 225 investigators, all of whom have peace officer milestones); and (3) how the department plans to status. prepare employees for use of the new system. This Governor’s Proposal report would provide the Legislature with the necessary baseline information to hold DMV accountable as the The Governor’s budget for 2018-19 proposes to project progresses. consolidate the Arleta, Lincoln Park, and Mission Hills investigations offices at a new leased facility in CONSOLIDATION OF the Burbank area that has yet to be determined. INVESTIGATIONS OFFICES Specifically, the Governor’s budget requests $50,000 on a one-time basis from the MVA in 2018-19 for DMV to have DGS conduct preparatory work in Background advance of the site selection and lease negotiation. DMV’s Investigations Division is responsible for Such work includes identifying a specific area for the enforcing aspects of the California Vehicle Code related site search and collaborating with a broker consultant to DMV’s operations and providing protection for DMV to survey available office space. DMV expects that employees and properties in cases of emergency or staff would move into the new leased facility in spring threat. This includes investigating identification thefts 2020. Under the Governor’s proposal, $457,000 would or fraud, fraudulent lien sales, and misuse of disabled be provided in 2019-20 for moving and partial-year person parking placards and plates. In addition, the lease costs. This amount would increase to $692,000 division conducts the secondary review process for annually beginning in 2020-21 to reflect the full-year driver licenses issued under Chapter 524 of 2013 lease costs for the new office. Figure 12 summarizes (AB 60, Alejo), which requires that DMV accept key details about the existing investigations offices applications from California residents who are unable in Arleta, Lincoln Park, and Mission Hills, as well the to submit satisfactory proof of legal presence in the proposed consolidated office. As shown in the figure, Figure 12 Investigations Offices Proposed for Consolidation New Consolidated Arleta Lincoln Park Mission Hills Office Square footage 832 2,238 3,803 9,347 Number of staff 3 10 11 24 State-owned or leased State-owned State-owned Leased Leased Colocated with field office Yes Yes No No www.lao.ca.gov 27 analysis full gutter 2018-19 BUDGET the new office would not be colocated with a field office area is located. Second, the department proposes to as is currently the case with the Arleta and Lincoln Park amortize $558,000 in estimated tenant improvements investigations offices. over a four-year lease at a relatively high interest rate The administration indicates that the proposed of 8 percent, for an additional cost of $1.46 psf. The consolidation would result in improved and more proposal also assumes that including parking at the efficient operations. For example, DMV reports that office would cost an additional $0.30 psf. consolidating the three investigations offices would Thus, the total rental rate proposed in the Governor’s allow the respective area commanders and deputy budget for the new office is roughly $6 psf. (This chiefs to more efficiently oversee office operations. amount does not include janitorial services or utilities.) Similarly, consolidated offices can allow for tenured We note that since DGS has yet to begin a formal site investigators to mentor less-experienced staff, support search for this new office, the actual lease costs could efficiencies among the support staff performing clerical be significantly different from the above estimates. duties, and reduce interoffice travel time and costs. In fact, DGS staff acknowledge that the estimates According to the administration, another reason for assumed in the Governor’s proposal are likely on the the proposed office consolidation is that the lessor for high end of what the lease costs will actually be. the Mission Hills office is unwilling to renew the current Proposed Square Footage Much Higher Than lease for the office, which is scheduled to expire in Existing Offices. As shown earlier in Figure 12, the new 2020. investigations office is proposed to 9,347 square feet. This is 2,474 square feet, or 36 percent, more than the Assessment three existing offices combined. While DMV indicates The Governor’s proposal to consolidate the Arleta, that the existing investigations office in Lincoln Park is Lincoln Park, and Mission Hills investigations offices space deficient, the department had not provided—at is consistent with recent actions by the Legislature the time of this analysis—sufficient information on to consolidate other investigations offices and could the amount of additional space needed and why it is allow the division to operate more efficiently. We also needed. We note that if all of the proposed increase in note that the consolidation would free up space at the space were to accommodate Lincoln Park, it would be state-owned field offices in Lincoln Park and Arleta, equivalent to more than doubling that office. We also which could reduce the need to replace these offices note that the Governor’s proposal assumes that the in the future due to space constraints. (As we discuss total number of staff at the new facility will be the same later in this report, DMV initiated a long-term plan in as in the existing facilities combined. Given that DMV 2015-16 to replace existing field offices, particularly indicates that the proposed office consolidation would those that are not sufficiently sized to accommodate result in operational efficiencies, it is unclear if the new the number of customers who currently use the offices.) office would need the same level of staff. However, we have identified three specific concerns Funding for Moving and Lease Costs Not Needed with the Governor’s proposal, as discussed below. Until After Budget Year. The proposal indicates that Estimated Lease Costs Appear Unusually the DGS planning process and subsequent site search High. As indicated above, the Governor’s proposal will take place in 2018-19, and that DMV will not move identifies full-year lease costs of $692,000 beginning into the consolidated facility until the end of 2019-20. in 2020-21.We find that these costs are unusually Accordingly, it is not necessary for the Legislature to high and currently lack sufficient justification. First, approve the Governor’s multiyear plan that includes the department assumes that it will pay $4.30 per funding for lease costs beginning in 2019-20. The square foot (psf) for office space in the Burbank area, administration could request these funds as part of which is higher than the $3.28 psf that the department the 2019-20 budget process, which would facilitate currently pays for the Mission Hills investigations office. increased legislative oversight over the project by Moreover, the assumed rate is substantially higher requiring the administration to provide an update on the than the average rate of $2.49 psf for commercial site search and more precise lease cost estimates. leases in the San Fernando Valley, where the Burbank 28 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET Recommendation For 2017-18, $19.6 million was provided to (1) initiate or continue the replacement and renovation Given the amount of square footage proposed for of the Reedley, Oxnard, Inglewood, and San Diego the new investigations office and the assumed staffing (Normal Street) field offices ($19.3 million); and (2) plan level, we recommend that the Legislature require DMV for up to two future renovation projects ($300,000). to provide information at spring budget hearings that In addition, $4 million was provided to fund the first justifies these amounts. Moreover, to the extent that phase of a two-year plan to design and construct the Legislature approves the proposed consolidation, perimeter fencing at existing DMV field offices identified we recommend that it approve only DMV’s request for by the department as experiencing significant levels of $50,000 in planning funds for 2018-19 and reject the vandalism and safety concerns for state staff. out-year funding for moving and lease costs proposed by the Governor. This would allow the department to Governor’s Proposal initiate site selection and request funding for moving Field Office Replacements and Improvements. and lease costs as part of the 2019-20 budget process The Governor’s budget proposes $11.1 million from the with a more precise estimate of such costs. MVA to continue several field office replacement and reconfiguration projects, as well as the construction FIELD OFFICE REPLACEMENT AND of perimeter fencing at an existing 13 field offices. IMPROVEMENT Specifically, the budget includes $7.9 million in new appropriations as follows: Background • $1.1 million to fund preliminary plans for the Many DMV Field Offices Were Built Over Reedley field office replacement. The proposed 50 Years Ago. DMV operates 249 facilities, which facility would be 13,701 square feet. The total include customer service field offices, telephone estimated cost of the facility is $20.6 million. service centers, commercial licensing facilities, • $414,000 to fund the working drawings for headquarters, and driver safety and investigations the reconfiguration of the approximately offices. Over half of DMV facilities are customer service 15,000 square foot Oxnard field office. The total field offices. According to DMV, most of its field offices estimated cost of the reconfiguration project is are programmatically deficient. For example, the $6.6 million. department reports that many customer service field • $6.1 million to fund the design and construction offices were built in the 1960s and 1970s and are of perimeter fencing at 13 existing field offices. not sufficiently sized to accommodate the number of This reflects the final phase of DMV’s two-year customers who currently use them. This is primarily plan to install such fencing at certain offices. because of population increases in the areas served by the offices. In addition, DMV reports that certain In addition, the Governor’s budget proposes to customer service field offices are seismically deficient, reappropriate $3.2 million to fund the working drawings which can create safety risks. for the Delano, Santa Maria, and San Diego (Normal Street) field office replacement projects in the event that Plan to Replace and Renovate DMV Field the funds currently appropriated for these purposes are Offices Initiated in 2015-16. Beginning in 2015-16, not encumbered by the end of 2017-18 as planned. the administration initiated a plan to replace a couple of DMV field offices each year for the next several Statewide Planning. The budget includes $200,000 years. As part of this plan, the Legislature approved from the MVA to begin advanced planning for two $4.7 million to initiate the replacement of offices in future reconfiguration projects proposed for 2021-22. Inglewood, Santa Maria, and Delano and another Five-Year Plan for Replacement or Improvement $4.3 million in 2016-17 for the design phase of these of DMV Offices. The administration’s 2018 Five-Year offices. In addition, in 2016-17 the Legislature approved Infrastructure Plan—which proposes state spending on $1.3 million for preliminary plans to initiate a fourth DMV infrastructure projects in all areas of state government field office replacement in San Diego (Normal Street). through 2022-23—includes ongoing projections of www.lao.ca.gov 29 analysis full gutter 2018-19 BUDGET DMV’s field office needs. As Figure 13 shows, the plan Oceanside, Santa Ana, San Francisco, and Redlands, proposes a total of $121 million over the next five years. pending future reviews of priorities and available resources. Assessment Administration’s Plan Helps MVA Maintain Administration’s Five-Year Plan Signals Reasonable Reserve. The above slowdown of Slowdown for Future Office Projects. The 2018 future DMV office replacements would help reduce Five-Year Infrastructure Plan projects substantially less planned expenditures from the MVA in future years. As spending for office replacements and reconfigurations discussed earlier in this report, under the Governor’s than was projected in the 2017 Five-Year Infrastructure plan for projected expenditures (including for DMV Plan. For example, the 2018 plan assumes that the field office replacements and renovations), the MVA state will spend $102 million less in 2020-21 on DMV would maintain a reserve for economic uncertainties facilities than assumed in the 2017 plan. The differences of approximately 11 percent of projected expenditures between the two plans are mainly due to (1) pushing in 2018-19 and about 8 percent in the following four plans to construct a new DMV headquarters office in years—equivalent to slightly more than one month of Sacramento farther into the future and (2) postponing MVA expenditures. plans for replacement and reconfiguration projects in Figure 13 Department of Motor Vehicles Five-Year Office Replacement and Renovation Plan (In Thousands) Total 2018-19 2019-20 2020-21 2021-22 2022-23 Project Cost Statewide—minor capital outlay $6,100M — — — — $6,100 Reedley—field office replacement $1,142P $1,213W $16,113C — — 18,468 Oxnard—field office reconfiguration 414W 5,749C — — — 6,163 Statewide—site identification and planning 200S 700S 500S $500S $500S 2,400 San Diego (Normal Street)—field office replacement — 22,105C — — — 22,105 Santa Maria—field office replacement — 12,527C — — — 12,527 Delano—field office replacement — 10,088C — — — 10,088 Sacramento—headquarters west replacement — 1,000S — — 10,000P,C 11,000 Chula Vista—field office reconfiguration — 393P 431W 4,924C — 5,748 Pleasanton—field office reconfiguration — 370P 402W 4,527C — 5,299 San Diego (Clairemont)—field office reconfiguration — — 361P 392W 4,423C 5,176 Santa Barbara—field office reconfiguration — — 324P 277W 4,020C 4,621 Statewide—field office replacement program — — — 6,367A,P,C — 6,367 Costa Mesa—field office reconfiguration — — — 647P 554W 1,201 San Pedro—field office reconfiguration — — — 394P 338W 732 Daly City—field office replacement — — — — 1,709P 1,709 Fremont—field office reconfiguration — — — — 485P 485 Santa Teresa—field office reconfiguration — — — — 482P 482 Totals $7,856 $54,145 $18,131 $18,028 $22,511 $120,671 M = minor projects; P = preliminary plans; W = working drawings; C = construction; S = study; and A = acquisition. 30 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET SUMMARY OF RECOMMENDATIONS Issue Governor’s Proposal LAO Recommendations and Comments Crosscutting Issues Senate Bill 1 funding $4.6 billion allocated across various transportation Governor’s budget distributes revenues to various programs, including highways, local streets and transportation programs according to formulas in roads, and transit. SB 1. Administration has developed guidelines for all new programs and expects to select projects by this spring. Motor Vehicle Account Based on MVA expenditures proposed by the While the MVA is currently balanced, various additional (MVA) condition Governor and those previously approved by cost pressures could affect its condition over the next the Legislature, the MVA is projected to have several years. operating surpluses over the next several years. Caltrans Senate Bill 1 funding $994 million for highway rehabilitation and Consider shifting some funding from rehabilitation to $576 million for highway maintenance. maintenance because major maintenance projects are critical for achieving long-term savings on the state highway system. Compensation costs $58 million from the State Highway Account (SHA) Require Caltrans to provide better information on the for “underfunded” positions. issue and ways to address it. Liability costs $7 million (SHA) for tort payments and $4.9 million Consider establishing state liability limit as one way to (SHA) for vehicle insurance premiums. reduce costs. Require Caltrans to report at budget hearings on how it has been paying for cost increases until now. Information technology (1) $2 million (SHA) to plan for replacing equipment, Approve requested funding but reject provisional plus language authorizing up to $12 million to budget bill language as it would significantly diminish start implementing the plan, and (2) $10.4 million legislative oversight. (SHA) to enhance cybersecurity and privacy. Road usage charge $3.2 million to implement a “pay-at-the-pump” pilot Require Caltrans to report on responses to a request program. for information that the department recently issued to gauge market conditions for implementing a pay-at- the-pump program (expected in mid-February). California Highway Patrol Area office replacement (1) Revert $138.7 million in previously authorized Shifting from a pay-as-you-go approach to lease funds for the design-build phase of four area revenue bond financing would help ensure the MVA offices and provide $141.1 million in lease maintains a reasonable reserve. While adopting the revenue bond authority for these projects, Governor’s approach would lock in some future MVA (2) provide $32.7 million in lease revenue bond costs, funding the projects using a pay-as-you-go authority for the design-build phase of the area approach would reduce projected MVA reserve levels. office in Quincy, (3) revert $32.4 million for the design-build phase of the area office in Santa Barbara and provide budget trailer legislation to authorize a lease-purchase agreement. (Continued) www.lao.ca.gov 31 analysis full gutter 2018-19 BUDGET Issue Governor’s Proposal LAO Recommendations and Comments Department of Motor Vehicles (DMV) Front-End Applications Multiyear funding plan for the implementation of the Reject proposal as it is premature to provide the Sustainability (FES) FES project, with $15 million (MVA) in 2018-19. requested implementation funding prior to completion project Budget trailer legislation to authorize DMV to of the planning process for the FES project. charge an additional $1 fee per transaction to private industry partners that work with the department to collect registration fees. Consolidation of Consolidate the Arleta, Lincoln Park, and Mission Require DMV to provide information justifying the investigations offices Hills investigations offices into a new leased proposed square footage and staffing level for the facility yet to be determined. $50,000 in 2018-19 consolidated office. To the extent the Legislature for planning costs, $457,000 in 2019-20 to approves the proposed consolidation, only approve fund moving and partial-year lease costs, and planning funds for 2018-19 and reject proposed $692,000 annually beginning in 2020-21 for out-year funding. full-year lease costs. Field office replacement (1) $7.9 million (MVA) to advance two field office Administration’s long-term infrastructure plan signals a and improvement projects and fund perimeter fencing at 13 existing slowdown for future DMV office projects, which would offices, (2) $3.2 million (MVA) in reappropriations help the MVA maintain reasonable reserve levels over to fund working drawings for three field office the next several years. replacement projects in the event that currently appropriated funds are not encumbered by the end of the fiscal year, and (3) $200,000 (MVA) to begin planning for two future projects. 32 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET www.lao.ca.gov 33 analysis full gutter 2018-19 BUDGET Contact Information Paul Golaszewski Senate Bill 1 Funding 319-8341 Paul.Golaszewski@lao.ca.gov Caltrans Shawn Martin California Highway Patrol 319-8362 Shawn.Martin@lao.ca.gov Tom Van Heeke Motor Vehicle Account 319-8329 Tom.VanHeeke@lao.ca.gov Department of Motor Vehicles LAO PUBLICATIONS This report was 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. 34 LEGISLATIVE ANALYST’S OFFICE