The 2023-24 Budget: Proposed Budget Solutions in Transportation Programs

2023-24 BUDGET The 2023-24 Budget: Proposed Budget Solutions in Transportation Programs GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2023 SUMMARY Governor Proposes $4 Billion in Multiyear Budget Solutions From Transportation Programs. In response to the multibillion-dollar budget problem the state is facing, the Governor’s 2023-24 budget proposes $4 billion in multiyear budget solutions from the recent General Fund augmentations provided to transportation programs in the 2022-23 budget package. The Governor relies on three main strategies to provide General Fund relief from transportation programs: (1) $2.2 billion in program reductions, (2) $1.3 billion in funding delays, and (3) $500 million in cost shifts to other funding sources. Overall, the Governor’s budget would sustain $8.7 billion, or 80 percent, of the $10.9 billion in total augmentations intended for transportation programs. The Governor also proposes language that would allow $1 billion of the proposed reductions in the budget year to be administratively restored in January 2024. This would only occur if the administration determines that budget resources are able to support the state’s baseline costs and all of the programs selected for the “trigger restoration,” which total $3.8 billion across the budget. Recommend Legislature Direct Administration Not to Prematurely Solicit Applications and Award Program Funding. While the 2022-23 budget package included the intent to provide funding for transportation programs in 2023-24 and future years, the authority to spend this funding still is contingent on each year’s annual budget legislation and, therefore, has not yet been provided to the corresponding departments. Despite this absence of spending authority, in certain cases, departments are prematurely taking steps to allocate these funds for specific projects. We find that these actions limit the Legislature’s ability to solve the current budget problem by creating a dynamic where the Legislature would then need to consider whether it should cut funding that local agencies (1) had already applied for and/or (2) had already been promised. Accordingly, we recommend the Legislature direct the administration to not prematurely solicit applications and award program funding before the Legislature grants spending authority. Recommend Legislature Adopt Package of Transportation Budget Solutions Based on Its Priorities, Including Identifying Additional Options in Case They Are Needed. We recommend the Legislature develop its own package of budget solutions based on its highest priorities and guiding principles. In several cases, we find the Governor’s proposals to be reasonable, but so too would alternative decisions the Legislature could make instead of or in addition to the Governor’s selections. Given the distinct possibility of worse fiscal conditions, we also recommend the Legislature begin to prepare now for the likely need to solve for a deeper revenue shortfall when it adopts its final budget this summer. Finally, we recommend the Legislature reject the Governor’s trigger restoration proposal. We find that the trigger is unlikely to occur and minimizes the Legislature’s authority and flexibility to respond to changing revenue conditions and evolving spending priorities. www.lao.ca.gov 1 2023-24 BUDGET Introduction bicycle routes, and pedestrian pathways. All of these various modes provide people and businesses In response to the multibillion-dollar budget the ability to access destinations and move goods problem the state is facing, the Governor’s and services throughout the state. Funding for 2023-24 budget proposes $4 billion in multiyear the state’s transportation system comes from budget solutions from the recent General Fund numerous local, state, and federal sources, as augmentations provided to transportation programs. well as private investments. State funding primarily In this brief we (1) provide background on the comes from various fuel taxes and vehicle fees that recent funding augmentations in transportation are dedicated to specified transportation purposes. from both state and federal funds, as well as on the In 2023-24, total state transportation funding from state’s budget problem; (2) describe the Governor’s these sources is estimated to be $14.7 billion. proposed transportation budget solutions; (3) discuss (This does not include revenues from vehicle fees our assessment of the Governor’s proposals; and that support the Department of Motor Vehicles (4) offer recommendations for how the Legislature and the California Highway Patrol.) Most of this could craft its own package of solutions, including funding is dedicated to maintaining, rehabilitating, suggestions for potential additional reductions should and improving state highways and local streets and the budget condition make them necessary. roads, with a smaller amount supporting transit Background operations and capital improvements. Overview of California’s Transportation State Provided $6.1 Billion in General System. California’s transportation system consists Fund Augmentations for Transportation in of streets, highways, railways, airports, seaports, 2022-23. As shown in Figure 1, the 2022-23 Figure 1 Recent and Planned Augmentations for Transportation Programs General Fund (In Millions) Program Department 2021-22a 2022-23 2023-24 2024-25 2025-26 Totals Transportation Infrastructure Package $5,400 — $2,100 $2,000 — $9,500 TIRCP CalSTAb $3,650c — — — — $3,650 Active Transportation Program Caltransd 1,050 — — — — 1,050 Grade separation projects within TIRCP CalSTA/Caltranse 350 — — — — 350 Local climate adaptation programs Caltransb 200 — — — — 200 Highways to Boulevards Pilot Program Caltrans 150 — — — — 150 Population-based TIRCP CalSTA — — $2,000 $2,000 — 4,000 Clean California Local Grant Program Caltrans — — 100 — — 100 Supply Chain Package — $670 $650 $50 $10 $1,380 Port and Freight Infrastructure Program CalSTA — $600 $600 — — $1,200 Supply chain workforce campus CWDB — 30 40 $40 — 110 Port operational improvements GO-Biz — 30 — — — 30 Increased commercial driver’s license DMV — 10 10 10 $10 40 capacity Totals $5,400 $670 $2,750 $2,050 $10 $10,880 a Funding provided in summer 2022 but accounted for as part of 2021-22 budget. b CTC also provided small amount of total funding in 2022-23 and 2023-24 for administrative-related activities. c Includes $300 million dedicated to adapting certain rail lines to sea-level rise, as well as $1.8 billion for projects in Southern California and $1.5 billion for projects in Northern California. d CTC also has role in allocating funding to projects. e CalSTA is responsible for awarding funds, but a portion of funding is included in Caltrans’ budget to reflect awards to projects on the state highway system. TIRCP = Transit and Intercity Rail Capital Program; CalSTA = California State Transportation Agency; Caltrans = California Department of Transportation; CWDB = California Workforce Development Board; Go-Biz = Governor’s Office of Business and Economic Development; DMV = Department of Motor Vehicles; and CTC = California Transportation Commission. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET budget package provided $6.1 billion from the and federal funding. Figure 2 provides a brief General Fund across 2021-22 and 2022-23 for description of the programs that were augmented various departments to implement activities as part of the 2022-23 budget package. intended to support the state’s transportation Federal Infrastructure Investment and system. This included $5.4 billion as part of Jobs Act (IIJA) Providing Additional Funding a Transportation Infrastructure Package and for California. In November 2021, the federal $670 million in a Supply Chain Package. (Not government enacted IIJA, which authorized displayed in the figure, the Transportation $1.2 trillion across federal fiscal years 2022 to Infrastructure Package also provided essentially 2026 for various types of infrastructure, such as all of the remaining unappropriated Proposition 1A transportation, water, and energy. Within IIJA, bond funds—$4.2 billion—for the high-speed rail a new five-year federal surface transportation project in 2021-22.) Both packages also included reauthorization replaced the expired Fixing agreements to provide additional General Fund in America’s Surface Transportation (FAST) Act. the outyears—including $2.8 billion in 2023-24— In total, IIJA authorized $567 billion in spending for for a five-year total of $10.9 billion. These total federal transportation programs over the five-year amounts represent a significant dedication period. Funding will go towards both existing and of General Fund resources for transportation new federal transportation programs (formula and programs, which historically have been supported competitive) that support highways, transit, rail, primarily by state special funds (made up of and freight. revenues from fuel taxes and vehicle fees) Figure 2 Overview of Recently Augmented Transportation Programs Program Description Transportation Infrastructure Package Transit and Intercity Rail Competitive program that funds transit and intercity rail improvements that reduce greenhouse gas Capital Program (TIRCP) emissions, vehicle miles traveled, and congestion. Active Transportation Competitive program that funds projects that encourage the use of active modes of transportation such as Program biking and walking. Grade separation projects Recent budget set-aside within TIRCP for projects that create a physical separation between railroad tracks with TIRCP and roadways, generally to improve safety. Local climate adaptation Includes (1) a new competitive program that funds capital projects that adapt transportation infrastructure programs to climate change and (2) a resumption of a competitive program that funds the development of climate adaptation plans. Highways to Boulevards New competitive pilot program that funds the planning or implementation of projects that convert or Pilot Program transform underutilized state highways. Population-based TIRCPa New set-aside within TIRCP that provides formula funding directly to regional agencies to fund transit and intercity rail improvements that reduce greenhouse gas emissions, vehicle miles traveled, and congestion. Clean California Local Competitive program initiated in 2021-22 that funds litter abatement and beautification projects. Grant Program Supply Chain Package Port and Freight New competitive program that funds projects that improve the movement of goods to and from ports. Infrastructure Program Supply chain workforce Funding to establish a new workforce training campus at the Port of Los Angeles. campus Port operational New competitive program that funds operational and process improvements at ports. improvements Increased commercial Funding for the Department of Motor Vehicles to temporarily increase the state’s capacity to issue driver’s license capacity commercial driver’s licenses by leasing space to establish dedicated commercial drive test centers. a Chapter 71 of 2022 (SB 198, Committee on Budget and Fiscal Review) included statutory language indicating that this specific augmentation for TIRCP should be allocated to regional agencies based on population. www.lao.ca.gov 3 2023-24 BUDGET As shown in Figure 3, IIJA will provide the state In addition to highway funds, the state is with a significant increase in formula transportation expected to receive a total of $10.3 billion in formula funding when compared to FAST Act levels—with transit funding over the five-year period, or about funding steadily increasing each year over the $2.1 billion annually. As displayed in Figure 3, five-year period. Specifically, the state is expected this represents an average annual increase of to receive a total of $28.6 billion in formula $620 million, or $3.1 billion more across the five highway funding over the five-year period, or about years, compared to FAST Act levels. Most of this $5.7 billion annually. This represents an average funding does not flow through the state budget annual increase of $1.7 billion, or $8.5 billion more and is provided directly to local agencies. Formula across the five years, compared to FAST Act levels. transit funding from the federal government Formula highway funding is allocated through generally focuses on capital improvements, but the state budget process through the California can also be used for operating expenses under Department of Transportation (Caltrans). Of this certain circumstances. amount, 60 percent is used for state activities— State Faces a Multibillion-Dollar Budget such as highway maintenance and rehabilitation— Problem. Due to a deteriorating revenue picture and 40 percent is apportioned to local agencies to relative to expectations from June 2022, both our address local transportation system needs. office and the administration have anticipated that the state faces a budget problem in 2023-24. Figure 3 Federal IIJA Increases Formula Highway and Transit Funding to California (In Billions) IIJA Augmentations Base Formula Highway Funding Base Formula Transit Funding $6 5 4 3 2 1 FFY 2021 FFY 2022 FFY 2023 FFY 2024 FFY 2025 FFY 2026 FAST Actª IIJA a Amount provided under the last year of the FAST Act. IIJA = Infrastructure Investment and Jobs Act; FFY = federal fiscal year; and FAST = Fixing America's Surface Transportation. 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET A budget problem—also called a deficit— deficits of $9 billion in 2024-25, $9 billion in occurs when funding for the upcoming budget 2025-26, and $4 billion in 2026-27. That is, if the is insufficient to cover the costs of currently Governor’s budget projections are accurate, the authorized services. Estimates of the magnitude state would have to address deficits of these of this shortfall differ based on how “baseline” amounts in each of these future years. Moreover, spending is defined—the administration estimates our office’s estimates suggest there is a good a $22 billion problem whereas our office estimates chance that revenues will be lower than the that the Governor’s budget addresses an $18 billion administration’s projections for 2022-23 and problem. Regardless of these technical definitions, 2023-24. Given this downside risk, in our overview it is clear that—absent a major and unexpected report we recommend that the Legislature (1) plan jump in state revenues—the state faces the task for a larger budget problem and (2) address this of “solving” the budget problem. The Governor larger problem by reducing more one-time and proposes to address the problem primarily through temporary spending. reducing spending, and targets the climate, Governor’s Proposals resources, environment, and transportation policy areas for the largest proportional share of these Proposes Several Multiyear Budget Solutions solutions. We discuss the overall budget condition in Transportation. The Governor proposes in our recent report, The 2023-24 Budget: about $4 billion in multiyear budget solutions Overview of the Governor’s Budget. from transportation programs—all coming from the recent General Fund augmentations for Budget Outlook Could Actually Be Even transportation in the 2022-23 budget package. Worse. While the administration estimates that the Governor’s proposal would balance the state As shown in Figure 4, the Governor relies on three main strategies to provide General Fund relief: budget for the coming year, it projects operating Figure 4 Governor's Proposed Multiyear Budget Solutions in Transportation 2021-22 Through 2025-26 (In Billions) Population-Based TIRCP TIRCP Port and Freight Infrastructure Program Active Transportation Program Grade Separation Projects Within TIRCP Local Climate Adaptation Programs GF Retained as Originally Budgeted GF Delayed Other Supply Chain Package Cost Shift to SHA Highways to Boulevards Pilot Program GF Reduction Clean California Local Grant Program 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 $4.5 TIRCP = Transit and Intercity Rail Capital Program; GF = General Fund; and SHA = State Highway Account. www.lao.ca.gov 5 2023-24 BUDGET (1) $2.2 billion in reductions (reduces or eliminates reduction of $2.2 billion. As shown in the figure, the funding for a program), (2) $1.3 billion in delays Governor would leave planned funding for several (shifts funding for a program with the intent of transportation programs unaffected, including providing the same amount in a specified future the largest single appropriation ($3.7 billion for year), and (3) $500 million in cost shifts (reduces the Transit and Intercity Rail Capital Program, or or eliminates the General Fund for a program, but TIRCP), as well as some funding not yet provided backfills it with funding from a different source). but intended for the budget year (such as Proposed Solutions Affect Multiple $100 million for the Clean California Local Grant Programs. In total, the Governor’s budget Program). (The Governor also does not propose any would sustain $8.7 billion, or 80 percent, of the changes to the $4.2 billion in Proposition 1A bond total augmentations intended for transportation funds provided to the high-speed rail project in programs. The proposed multiyear solutions summer 2022.) The specific solutions proposed by would affect several programs in various ways. the Governor include: Figure 5 provides an overview of the solutions, • Population-Based TIRCP. The Governor which we describe in more detail below. The net proposes to (1) reduce funding in 2023-24 programmatic effect of the Governor’s proposed by $1 billion, (2) reduce funding in 2024-25 solutions across the five years is a funding by $1 billion, and (3) delay $500 million from Figure 5 Governor’s Proposed Changes to Transportation Funding (In Millions) Proposed Changes New Total 2021-22 and Amounts Program Department Augmentations 2022-23 2023-24 2024-25 2025-26 Proposed Transportation Infrastructure Package $9,500 -$1,050 -$500 -$1,500 $850 $7,300 Population-based TIRCP CalSTA $4,000 — -$1,000 -$1,500 $500b $2,000 TIRCP CalSTA 3,650 — — — — 3,650 Active Transportation Program Caltrans 1,050 -$500 300a — — 850 Grade separation projects CalSTA/ 350 -350 — 350b 350 with TIRCP Caltrans Local climate adaptation Caltrans 200 -200 200a — — 200 programs Highways to Boulevards Pilot Caltrans 150 — — — — 150 Program Clean California Local Grant Caltrans 100 — — — — 100 Program Supply Chain Package $1,380 — -$400 $200 $200 $1,380 Port and Freight CalSTA $1,200 — -$400 $200 $200 $1,200 Infrastructure Program Supply chain workforce CWDB 110 — — — — 110 campus Commercial driver’s license DMV 40 — — — — 40 capacity Port operational GO-Biz 30 — — — — 30 improvements Totals $10,880 -$1,050 -$900 -$1,300 $1,050 $8,680 a Funding shifted to State Highway Account. b Delayed from a prior year. Note: All amounts are General Fund unless specified. TIRCP = Transit and Intercity Rail Capital Program; CalSTA = California State Transportation Agency; Caltrans = California Department of Transportation; CWDB = California Workforce Development Board; DMV = Department of Motor Vehicles; and Go-Biz = California Governor’s Office of Business and Economic Development. 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET 2024-25 to 2025-26. This would have the the administration would have to determine that the net effect of halving the intended support for state has sufficient resources to fund its baseline the program ($2 billion instead of $4 billion) costs and all of the programs the administration has along with extending the timing of when the selected for the trigger. The trigger restoration list remaining amounts are provided. totals $3.8 billion across the budget. • Active Transportation Program (ATP). Assessment The Governor proposes to (1) reduce the amount of General Fund provided by Given Magnitude of Recent One-Time $500 million and (2) partially backfill this Augmentations, Identifying Budget Solutions decrease with $300 million from the State From Transportation Programs Is Appropriate. The Legislature directed a considerable portion Highway Account (SHA). (SHA is largely of the state’s recent budget surpluses towards supported by fuel excise taxes and primarily transportation programs. These investments is used to fund highway maintenance and support several priorities, such as improving rehabilitation projects.) This would result the state’s transportation system, encouraging in a net reduction of $200 million for ATP projects intended to help the state meet its climate in 2022-23. However, because the full goals, and assisting local agencies in drawing $500 million has already been awarded for down additional federal funds from IIJA. The specific projects, the administration indicates state focused most of its recent General Fund that it would apply the proposed $200 million augmentations on one-time and limited-term reduction to future ATP grant-award cycles, activities—both within the transportation sector and resulting in fewer projects in the outyears. in other areas of the budget—in order to provide (The administration would use other ATP funds some underlying flexibility if economic conditions and cash-management strategies to delay the changed. As such, helping to solve the current impacts of the reduction and avoid disruption budget problem by focusing on these one-time for current projects.) and limited-term augmentations is appropriate. • Grade Separation Projects. The Moreover, revisiting these recent augmentations Governor proposes to delay the full amount likely is necessary if the Legislature wants to avoid provided—$350 million—to 2025-26. cutting ongoing General Fund-supported programs This program is a set-aside within the across the budget. Although making reductions in non-population-based TIRCP. transportation will result in fewer of the activities • Local Climate Adaptation Programs. The that the Legislature intended for the state to Governor proposes to shift the full $200 million conduct, even reduced amounts still will represent provided to these programs from the General significant augmentations compared to historical Fund to SHA in 2022-23. levels for these programs. This is particularly true • Port and Freight Infrastructure Program. since many of these activities have not typically The Governor proposes to delay a portion of received General Fund support. Through careful the $600 million scheduled for 2023-24. This prioritization, the state can continue to support its would be done by maintaining $200 million in priorities within transportation even at moderately 2023-24 and providing additional allotments of reduced spending levels. $200 million in both 2024-25 and 2025-26. Governor’s Budget Represents One Set Proposes Trigger Restoration for of Priorities, but Legislature Could Apply Its Population-Based TIRCP Reduction Should Own Decision-Making Criteria. The Governor’s State Revenues Rebound. The Governor’s budget budget represents one approach the state could includes language that would allow the proposed take in solving the current budget problem. $1 billion reduction to the population-based TIRCP However, this approach represents the Governor’s in 2023-24 to be administratively restored in overall priorities and reflects the Governor’s January 2024. In order for this restoration to occur, criteria for determining which programs should www.lao.ca.gov 7 2023-24 BUDGET be sustained or reduced. The Legislature has Reductions to Population-Based TIRCP numerous options for dealing with the budget Are Reasonable Given Budget Problem. Given problem, while also sustaining funding for its the magnitude of the budget problem facing the highest priorities—both within transportation and Legislature in the budget year (and the outyears), in other policy areas. For instance, the Legislature we find the Governor’s proposals to reduce and could (1) choose a different mix of actions across delay funding for the population-based TIRCP transportation programs, and/or (2) identify a to be reasonable. While providing $2 billion different mix of actions across policy areas, such less than planned would result in fewer overall as adopting more solutions in one part of the capital improvements to transit and rail systems, budget and providing additional support in other under the Governor’s proposal, transit agencies policy areas. In evaluating which transportation still would receive a significant increase in state programs might be the best candidates for budget General Fund support—$2 billion over a three-year solutions, the Legislature may want to consider the period—when compared to recent years. This following questions: funding would be in addition to the federal fund augmentations transit agencies are anticipated to • How Important Is the Activity to Achieving receive from IIJA. As mentioned previously, state Legislative Priorities and Goals? Is the transit agencies can expect to receive $3.1 billion in activity an important component of meeting additional formula transit funding over the five-year the Legislature’s priorities? Does the funding period, representing an average annual increase target vulnerable or underserved communities of $620 million compared to previous levels. As that may not have resources to undertake such, even with the Governor’s proposed reduction, the activity on their own? Does the activity transit agencies would still be receiving more net represent a core state responsibility? Does funding than their historical levels. compelling evidence exist that a program is effective at meeting its intended outcomes? Population-Based TIRCP Not Currently Structured to Address Transit Operational • Would the Solution Cause Major Funding Issues. Some transit agencies have Disruptions? Has the funding been raised concerns about operational funding appropriated? Has the funding been shortfalls, in part due to persistent declines in committed to specific projects or grantees? ridership and evolving commute patterns that How far along is the activity in being began during the pandemic. (Operational costs implemented? Would pulling back state for transit agencies are supported by local, state, funding affect the ability to access other and federal funds, as well as from passenger fares funding, such as federal funds? and fees.) However, the population-based TIRCP • Is the Funding Crucial to Addressing funding the Governor proposes reducing—as Urgent and Pressing Needs? What is the currently structured in statute—can only be used current demand for the funds? How likely is for capital improvements. As such, the Legislature it that delaying or not conducting the activity should not view maintaining—or reducing—this could lead to negative long-term outcomes? funding as meaningfully affecting transit agencies’ • What Other Resources Might Be Available? operational funding challenges one way or another, Are other funding sources available to help at least as it is currently structured. Based on its accomplish the activities at some level, either priorities, the Legislature could look at options from previous budget appropriations, special for providing additional flexibility around program funds, or federal funds? What implications requirements to allow transit agencies to use might result from potential fund shifts, such as the population-based TIRCP funding for some for the programs that funding might otherwise operational expenses, but this would require have supported? statutory changes and a reprioritization of the program. Even if the Legislature were to authorize such a shift in funding usage, this would need to be 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET viewed as a temporary relief measure, given that approach is not without trade-offs. In particular, the funding is one-time in nature. In some cases, any reductions from SHA would ultimately transit agencies will need to address the underlying result in less funding available for state highway sources of their operating budget pressures with maintenance and rehabilitation projects. This is more sustainable solutions. because SHA is one of the main funding sources Proposed Fund Shifts Would Minimize for Caltrans’ State Highway Operation and Disruption and Maintain Legislative Priorities. Protection Program (SHOPP), which supports Overall, we find that shifting program costs for ATP capital projects that rehabilitate and reconstruct and the local climate adaptation programs from the state highway system. In the budget year, the the General Fund to SHA have merit for several program is estimated to have about $5 billion for reasons. First, the proposed fund shifts would projects through a combination of state and federal minimize disruptions to the current programs. funds (including additional funding from IIJA). This is particularly true for ATP, which has already The Governor’s proposed fund shifts would reduce committed $630 million of the roughly $1.1 billion funding available for SHOPP by $500 million. The augmentation to local agencies, and local agencies funding changes likely would not impact projects are in the process of submitting plans for the planned for the budget year, but would result in remainder. (As mentioned earlier, the administration fewer projects in the future. can use other ATP funds and cash-management …However, Significant Increase in Federal strategies to delay the impacts of the proposed Funds Can Help Make Up for Shifts. Given the $200 million reduction, but a deeper cut would increase in formula highway funding the state impact current projects.) Similarly, departments is expected to receive from IIJA, the impacts of have begun to receive applications for the local shifting funding away from SHA are less significant climate adaptation programs. Local agencies than they would have been otherwise. This have already started applying for funding from provides the Legislature with some additional the planning program and are expected to submit flexibility to shift funds from SHA to support other applications for the capital program in March 2023. transportation purposes. (The revenues that Backfilling the proposed reductions with SHA funds support SHA—such as fuel excise taxes—are would minimize disruption for the local projects for constitutionally protected and can only be used on which planning is already well underway. transportation-related expenditures.) As mentioned Second, we find that the proposed fund shifts earlier, 60 percent of the formula highway funding would help to achieve budget solutions while California receives is used for state activities and maintaining activities the Legislature has indicated 40 percent is apportioned to local agencies to are among its key priorities. For instance, during address local transportation system needs. Under the 2022-23 budget negotiations, the Legislature IIJA, the state-used portion is expected to be advocated for more than doubling the $500 million augmented by $5.1 billion over the five-year period, for ATP that the Governor had originally proposed. or about $1 billion annually. Caltrans plans to use This funding was intended to help address the most of this funding for SHOPP projects. Therefore, roughly $1.5 billion backlog of high-scoring projects while the proposed $500 million SHA fund shift that had applied to the program in previous years would decrease available funding for SHOPP, but were not funded due to limited resources. the recent federal fund augmentations would still Similarly, the local climate adaptation programs enable the program to spend at funding levels were budget items that originated from the exceeding its recent baseline. Legislature in order to address current and future Sustaining TIRCP Funding Would Minimize climate change impacts. Disruptions. Overall, we find the Governor’s Using SHA to Backfill Reductions in Other proposal to sustain the $3.7 billion provided to the Programs Means Less for Highways… While non-population-based TIRCP to be reasonable. utilizing SHA funds to backfill General Fund The program has already begun awarding funding reductions would come with some benefits, this to local agencies and is expected to finish awards www.lao.ca.gov 9 2023-24 BUDGET in the coming months. As such, reducing funding to be appropriated in 2023-24. The agency has through the budget act this summer would cause already received applications from local agencies significant disruptions for those local projects. and plans to award this funding later this spring. Moreover, as part of the statutory guidance for the That is, the agency will commit specific funding program, the Legislature directed the California amounts to local agencies before the Legislature State Transportation Agency (CalSTA) to prioritize has legally authorized such spending. Moreover, funding projects where state funds could leverage committing these funds now is inconsistent with the additional local and federal funds—particularly the Governor’s proposal to delay a share of this funding additional competitive funding made available under and instead provide $200 million annually from IIJA. Reducing funding for the program therefore 2023-24 through 2025-26. Similarly, Caltrans is in could jeopardize local agencies’ ability to draw the process of accepting applications from local down federal funds. agencies for the $100 million intended for the Clean Administration’s Plans to Solicit Applications California Local Grant Program in 2023-24. While and Award Program Funds Early Limits the department does not plan to make funding Legislature’s Flexibility to Navigate Budget awards until after the next fiscal year begins, it still Problem. As shown in Figure 1, the 2022-23 is having local agencies apply now for funding it budget package included agreements to provide does not yet have the legal authority to spend. significant additional funding for transportation These activities are problematic for several programs in 2023-24 and 2024-25. While the reasons. First, having local agencies go through budget agreement included the intent to provide the process of planning projects and applying for this future funding, the authority to spend this funds that may not ultimately be appropriated to a funding is contingent on each year’s annual department—as Caltrans is for the Clean California budget legislation, and therefore, has not yet been Local Grant Program—is both unfair and creates provided to the corresponding departments. Until the potential for wasted time and resources. it grants such spending authority, the Legislature Second, taking the additional step of committing retains the authority to determine whether funding to local agencies when a department does the intended amounts should be sustained or not yet have the legal authority or certainty that the modified. This is particularly important for the Legislature will ultimately provide this funding—as amounts agreed to for the budget year, since the CalSTA is for the Port and Freight Infrastructure state faces a budget problem and the Legislature Program—creates unnecessary funding risks needs to identify spending changes that will to local projects. Third, these practices make enable it meet its constitutional requirement to solving the budget problem more difficult for the pass a balanced budget. Given how significantly Legislature. Specifically, they create a dynamic the budget condition has changed from when where the Legislature would then need to consider these commitments were made, the Legislature whether it should cut funding that local agencies will need to consider and reevaluate all potential (1) had already applied for and/or (2) had already future spending with a fresh perspective; the been promised. This places the responsibility state cannot afford to maintain all of its previous for the potential resulting disruption on the spending intentions. Legislature’s shoulders despite the fact that it was Despite the fact that departments do not yet the administration’s premature actions that created have the authority to spend funding planned for the expectations at the local level. future appropriations, CalSTA and Caltrans are Additional Solutions May Be Needed if prematurely taking steps to allocate funds for the Budget Problem Worsens. As discussed earlier, Port and Freight Infrastructure Program and the recent economic data and our fiscal outlook Clean California Local Grant Program. Currently, suggest that the Governor’s revenue estimates CalSTA is in the process of awarding all the planned have a high likelihood of being overly optimistic. funding for the Port and Freight Infrastructure Should that prove to be the case, the Legislature Program, including the $600 million intended will need to identify additional solutions in order 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET to meet its constitutional requirement to pass a • Clean California Local Grant Program. balanced budget. While it has several options for The Legislature could also consider reducing crafting such solutions—including from within other some or all of the $100 million intended for policy areas and using tools other than spending the Clean California Local Grant Program reductions—given the magnitude of the recent in 2023-24. This program first began when one-time investments in transportation programs, Caltrans received General Fund resources the Legislature likely will want to consider making of $148 million in both 2021-22 and 2022-23 additional reductions in this area. as part of a larger state initiative to clean up Legislature Could Consider Other Programs litter and beautify areas near transportation for Alternative or Additional Budget Solutions. infrastructure. Many of the previously funded As noted in Figure 5, the Governor would leave projects still are underway, working towards several programs unaffected by reductions. Should their required completion date of June 2024. the Legislature want to consider alternative or The Legislature could reduce funding for additional budget solutions than those proposed the program and wait to review reported by the Governor, we believe the following programs outcomes from the completed projects merit consideration: before deciding whether additional funding is warranted in the future. • Highways to Boulevards Pilot Program. • Grade Separation Projects. The Legislature The Legislature could consider reducing could also consider reducing the $350 million funding for the Highways to Boulevards Pilot provided for grade separation projects Program, which received $150 million in the supported under TIRCP. As mentioned earlier, 2022-23 budget package. In some cases, the the Governor proposes delaying this funding information the state is seeking to obtain from from 2022-23 to 2025-26. The Legislature this pilot program could be achieved through could instead convert the proposed delay the federal Reconnecting Communities Pilot to a reduction to capture savings and avoid Program—a new five-year IIJA program that exacerbating the state’s out-year budget will provide roughly $200 million annually problem. This program has existing annual in competitive grants for similar activities. funding of about $450 million that would The Legislature could consider reducing this allow the state to still complete some— program now and then providing funding in albeit fewer—grade separation projects. the future when budget conditions improve. The Legislature could revisit funding these This would allow the state to incorporate activities in 2025-26 should budget resources findings from the federal pilot. While California allow without making the commitment for such communities are not guaranteed federal spending now. funding, many of the projects that would apply for the state program likely would also Governor’s Trigger Restoration Approach be eligible for the federal program. We note Not Realistic, Minimizes Legislative Authority. that the state program has equity-driven The Governor identifies the $1 billion reduction goals in that it supports increased access to for the population-based TIRCP in 2023-24 as biking, walking, transit, and green space in being eligible for restoration should resources underserved communities, which makes it a exceed expectations by January 2024. The trigger priority for legislative focus. However, given restoration for this program would only occur if that the federal program focuses on similar there are sufficient resources to restore the full activities, the Legislature could potentially $3.8 billion budget-wide trigger restoration list. utilize savings from this program to sustain As discussed earlier, not only do the Governor’s funding for some of its other high-priority revenue estimates assume insufficient funds to equity programs across the budget that might trigger such a restoration, but the Governor also otherwise be reduced. forecasts a $9 billion budget deficit for 2024-25 that will need to be addressed. Given that our www.lao.ca.gov 11 2023-24 BUDGET revenue outlook is less optimistic than the principles. In the brief, we identify key questions Governor’s, we find it unlikely the trigger will be the Legislature could use in developing its own met. Specifically, we estimate there is about a one budget solutions. In several cases, we find the in three chance that the state will be able to afford Governor’s proposals to be reasonable, but so the Governor’s budget as proposed for 2022-23 too would alternative decisions the Legislature and 2023-24, and an even lower chance the state could make instead of or in addition to the could afford the Governor’s budget plus the trigger Governor’s selections. restorations. Accordingly, we believe the proposed Use Spring Budget Process to Identify trigger restorations to the population-based Additional Potential Budget Solutions in TIRCP funding—and other programs subject to Transportation. Given the distinct possibility the trigger—should not be viewed as items that of worse fiscal conditions, we recommend the could potentially be restored, but rather as pure Legislature begin to prepare now for the likely reductions. Additionally, no automatic trigger is need to solve for a deeper revenue shortfall when needed to make midyear funding augmentations— it adopts its final budget this summer. Specifically, the Legislature already has this ability through in addition to weighing the Governor’s proposed its authority to pass midyear spending bills. As solutions and substituting its own alternatives, such, we find that the Governor’s proposal is we recommend the Legislature identify additional structured in a way that reduces legislative authority reductions for a greater total amount of solutions and flexibility. than those proposed by the Governor. In this brief we identify other potential reductions for Recommendations transportation programs that are not proposed Direct Administration Not to Prematurely by the Governor. While this process will be Solicit Applications and Award Program challenging—and, likely, unpleasant—taking the Funding Before the Legislature Grants Spending time to consider, research, and select potential Authority. We recommend that the Legislature options over the spring will better prepare direct CalSTA to cease its plans to prematurely the Legislature to make decisions in May and award funding for the Port and Freight Infrastructure June when it will not have much time to gather Program. The agency should not commit funds information and carefully consider program to local agencies when it does not yet have the trade-offs before the budget deadline. legal authority to do so or certainty that the state Reject Governor’s Trigger Restoration budget will ultimately provide this funding. We also Approach, Maintain Legislative Flexibility. recommend that the Legislature direct Caltrans We also recommend the Legislature reject the to delay its application process for the Clean Governor’s trigger restoration proposal—both for California Local Grant Program until the funding the population-based TIRCP funding and all other is appropriated. Waiting until after the budget act non-transportation programs subject to the trigger. is passed would prevent additional local agencies Given the current revenue forecast and the “all or from going through the process of planning projects nothing” structure of the proposal, we believe the and applying for funds that may not ultimately likelihood of the state receiving sufficient funds be appropriated to the department. While these to activate the trigger is low. We also find that the directives might cause some disruptions given proposal minimizes the Legislature’s authority and the departments’ plans are underway, ultimately, flexibility to respond to changing revenue conditions our recommended approach would both minimize and evolving spending priorities. We therefore potential greater disruption for local agencies recommend the Legislature instead focus its efforts and preserve the Legislature’s tools in solving the on adopting the level of solutions needed to balance current budget problem. the 2023-24 budget. Then, as revenues become Adopt Package of Budget Solutions Based clearer over the coming year, it can make midyear on Legislature’s Priorities. We recommend the changes—including augmentations if possible, or Legislature develop its own package of budget additional reductions if needed—through its existing solutions based on its highest priorities and guiding authorities, such as passing midyear spending bills. 12 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 13 2023-24 BUDGET 14 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 15 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Frank Jimenez, and reviewed by Rachel Ehlers and 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, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE