The 2023-24 Budget: Proposed Fund Shift for CHP and DMV Capital Projects

2023-24 BUDGET The 2023-24 Budget: Proposed Fund Shift for CHP and DMV Capital Projects GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2023 SUMMARY In this brief, we analyze the Governor’s proposal to shift the funding approach for various California Highway Patrol (CHP) and Department of Motor Vehicles (DMV) capital outlay projects from the General Fund to lease revenue bonds. We find that such a switch is reasonable given the General Fund condition. However, the administration has not identified a funding source for the debt service on the bonds, which is problematic because both potential fund sources—the Motor Vehicle Account (MVA) and General Fund—present important trade-offs. Accordingly, we recommend the Legislature weigh the associated considerations and provide clear direction regarding which fund source to use for debt service payments. Background traffic management. CHP’s facility needs are driven primarily by complying with the seismic safety CHP and DMV Supported by MVA. Both standards required under the Essential Services CHP and DMV primarily are supported by funding Building Seismic Safety Act of 1986, as well as from the MVA. Historically, the departments have by a desire to update older facilities and add received minimal support from the General Fund, more space to accommodate the department’s typically to support activities that are not eligible modern operational needs. Over the past several for funding from the MVA. Specifically, CHP’s years, CHP has been implementing a plan to estimated expenditures in 2022-23 total $3.2 billion, gradually replace its area offices. Similarly, DMV of which $2.8 billion is from the MVA and $25 million also operates facilities across the state, including is from the General Fund. Similarly, DMV’s 171 field offices that serve as a main point of estimated expenditures in 2022-23 total $1.7 billion, contact for customers to access various services of which $1.4 billion is from the MVA and (such as attaining driver’s licenses). DMV’s facility $229 million is from the General Fund. The MVA needs are driven primarily by the demand for new or mostly receives revenues from vehicle registration larger facilities as a result of population growth and fees, including a base fee and an additional fee that shifts, as well as by the desire to address seismic is dedicated specifically for CHP. The MVA also and other deficiencies in existing aging buildings. receives some support from other vehicle-related fees, such as those charged for attaining and Concern About MVA Fund Condition Has Led renewing driver’s licenses. Over the past several to Changes in State’s CHP and DMV Facility years, expenditures from the MVA have generally Funding Approach in Recent Years. Traditionally, grown faster than revenues, leading to persistent CHP’s and DMV’s facility needs—such as office concerns about the MVA’s fund condition. As of replacements—have been funded up front with January 2023, the administration projects that the cash from the MVA. However, due to concerns MVA will face an operational shortfall of $324 million about the condition of the MVA, over the past in 2026-27, resulting in a negative fund balance several years, the state has explored alternative of $314 million. ways to fund CHP and DMV facilities. In 2019-20, this included issuing lease revenue bonds to be CHP and DMV Have Significant Facility repaid from the MVA to spread the cost of the Needs. CHP and DMV both operate large numbers projects over time and limit near-term pressures of facilities across the state, many of which on the fund. More recently, in 2021-22 and 2022-23, have significant needs. CHP’s facilities include the state provided cash from the General Fund to 103 area offices that are mostly responsible for www.lao.ca.gov 1 2023-24 BUDGET support such projects. This approach was made was appropriated mostly in 2021-22 with lease possible by the robust condition of the General Fund. revenue bond authority for an equal amount Notably, as of 2022-23, the administration’s out-year to support the construction phase of the budget plan assumed that the construction of CHP Inglewood DMV Field Office replacement. and DMV projects would continue to be funded from Using $127 Million in Lease Revenue Bonds the General Fund over the next few years. for the Next Phases of Certain Projects. The Governor’s Proposals Governor also proposes to fund the upcoming construction-related phases of a few continuing In response to concerns about the condition of the projects in 2023-24 with lease revenue bonds, General Fund that have emerged in recent months, rather than with General Fund as the administration the Governor proposes a total of $332 million in had originally planned. These projects include: lease revenue bonds in 2023-24 to support the construction of several CHP and DMV projects that • CHP Area Office Replacements—Humboldt the administration had previously planned to fund and Gold Run. The Governor proposes using cash from the General Fund. This amount $86 million in lease revenue bonds for the includes (1) a $205 million shift from previously design-build phase of two CHP area offices: approved General Fund appropriations to lease Humboldt and Gold Run. revenue bonds and (2) $127 million in lease revenue bonds for the next phases of certain projects that • DMV Field Office Replacement— were scheduled to be funded from the General Fund San Francisco. The Governor proposes in 2023-24. As shown in Figure 1, this includes the $42 million in lease revenue bonds for the following specific proposals. design-build phase of the San Francisco DMV Shifting $205 Million Field Office replacement project. From Existing General Fund Appropriations to Lease Revenue Figure 1 Bonds. The Governor proposes to Governor Proposes Changing the Funding Approach revert General Fund from several CHP for Several Office Replacement Projects and DMV capital outlay projects and Lease Revenue Bonds (In Millions) instead fund them using lease revenue bonds. These projects include: 2021-22 and Location 2022-23a 2023-24b 2024-25c 2025-26c Totals • CHP Area Office CHP $184 $86 $255 — $525 Replacements—Santa Fe Santa Fe Springs $68 — — — $68 Springs, Baldwin Park, and Baldwin Park 65 — — — 65 Quincy. The Governor proposes Quincy 51 — — — 51 to substitute $184 million Humboldt — $42 — — 42 of General Fund that was Gold Run — 44 — — 44 Redding — — $61 — 61 appropriated in 2021-22 with Los Banos — — 43 — 43 lease revenue bond authority Antelope Valley — — 52 — 52 for an equal amount to support Barstow — — 56 — 56 the design-build phases of three Porterville — — 43 — 43 DMV $21 $42 — $62 124 existing CHP office replacement Inglewood $21 — — — $21 projects: Santa Fe Springs, San Francisco — $42 — — 42 Baldwin Park, and Quincy. El Centro — — — $62 62 • DMV Field Office Totals $205 $127 $255 $62 $649 Replacement—Inglewood. The a Includes projects proposed to be shifted from existing General Fund appropriations to lease revenue bonds in 2023-24. Governor proposes to substitute b Includes projects now proposed for lease revenue bonds in 2023-24 for the next project phases. $21 million of General Fund that c Includes projects now planned for lease revenue bonds for construction in the out-years. CHP = California Highway Patrol and DMV = Department of Motor Vehicles. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Also Planning to Fund Future Construction Administration Has Not Identified a Funding Phases Using Lease Revenue Bonds. In addition Source for the Repayment of Bonds. We estimate to the proposed $332 million in lease revenue bonds that the total debt service (including interest) on the in 2023-24, the Governor now also anticipates using $332 million in projects proposed for lease revenue lease revenue bonds to fund the construction phases bond financing in 2023-24 would be about $25 million of future projects that were previously planned to be per year for 25 years, resulting in a total cumulative funded after the budget year from the General Fund. cost of over $600 million. The administration indicates For example, as shown in Figure 1, the Governor that it has not yet determined which source of now plans to submit future proposals to fund the funding—whether MVA or General Fund—would be design-build phase of five CHP projects with a total used to make these debt service payments. Either of $255 million in lease revenue bonds in 2024-25 way, municipal bond investors will view the General and the design-build phase of one DMV project Fund as ultimately backing the bonds and would with $62 million in lease revenue bonds in 2025-26. include the lease revenue bonds as part of the state’s (Separate from the amounts shown in the figure debt portfolio in their assessment of the state’s for lease revenue bonds, the Governor proposes overall creditworthiness. $13 million from the General Fund for the performance Using Either MVA or General Fund for criteria for these six projects in 2023-24.) Repayments Would Raise Issues for Legislative In total, including all of the projects discussed Consideration. Having clarity about what fund above, the Governor’s overall plan is to use source would be used to support debt service $649 million in lease revenue bonds through 2025-26 payments on the lease revenue bonds is important. for the construction of 13 CHP and DMV projects This is not only because the fund source is a key that the administration had previously planned for component of any proposal, but also because, in this General Fund. case, the two potential options for fund sources for repayments—the MVA and General Fund—both have Assessment important implications. These include the following: Switch to Lease Revenue Bonds Is Reasonable, • Using MVA Would Strain Fund, Raise Given General Fund Condition. To the extent the Pressure to Address Fund Condition. We Legislature would like to continue to support the think the MVA is generally the most appropriate planned replacement of CHP and DMV facilities, fund source to support CHP’s and DMV’s we think a shift to lease revenue bonds merits core operating costs, such as facility costs. legislative consideration. As we discuss in a separate This is because both departments provide publication, both cash and lease revenue bonds are services that primarily benefit motorists, and reasonable ways to pay for capital projects but each thus motorists should generally bear their comes with trade-offs. Specifically, one justification associated costs. However, under current for using bonds to spread the costs of capital projects projections, the MVA cannot support its out over time is that these projects are expected to existing commitments in the out-years without provide services over many years. Also, bonds can corrective actions to improve its condition. be an important tool if insufficient funding is available Adding additional commitments to the fund— to pay for the up-front costs of high-priority projects. such as the $25 million in annual debt service For example, when the state has a budget problem, for current proposed projects and additional bonds can help fund the project while lessening debt service for forthcoming projects—would potential pressure on the state to cut into existing accelerate the fund’s anticipated insolvency programs. On the other hand, one benefit of using and necessitate legislative action to address cash is that, compared to bonds, it results in a lower the fund condition somewhat sooner overall project cost because the state does not have than would otherwise be the case. As we to pay interest. discussed in previous publications, such as our February 2020 report, The 2020-21 Budget: Transportation, the Legislature has various options to address the condition of the MVA. www.lao.ca.gov 3 2023-24 BUDGET For example, it could reduce spending from Moreover, using the General Fund for ongoing the fund. Alternatively, it could raise one or debt service payments would also put some more of the fees—such as vehicle registration incremental pressure on the General Fund, and/or driver’s license fees—that support the which is projected to face out-year deficits under fund. (For reference, we estimate that roughly both the Governor’s and our office’s projections. $35 million in additional revenue could be generated annually from a $1 increase in the Recommendations base vehicle registration, and roughly $6 million Weigh Trade-Offs Regarding Whether from a $1 increase in the driver’s license fee.) to Finance Projects and Fund Sources. We As we discuss in a recent report, The 2023-24 recommend the Legislature weigh the trade-offs Budget: Proposed Reauthorization of associated with using up-front cash versus lease AB 8 Vehicle Fees, the Governor is requesting revenue bonds for CHP and DMV projects, such as that the Legislature reauthorize a set of the resulting implications for the timing and level of expiring vehicle fees (known as “AB 8” fees) costs. Additionally, to the extent the Legislature would and continue using them for the clean like to use lease revenue bonds for these projects, we transportation programs they currently support. recommend it carefully weigh the trade-offs involved The Legislature could opt to extend those fees in the fund sources for debt service payments on but instead direct their revenues to support the the bonds. For example, as we discuss above, while MVA, CHP, and DMV. None of these available we think the MVA is generally the most appropriate options for addressing the MVA’s fund condition source of funding to support CHP’s and DMV’s core is without trade-offs. operations—including their ongoing area office and • General Fund Would Be a Notable Change in field office costs—relying on it to pay debt service Approach. Occasionally but infrequently, the would precipitate the need to take near-term actions General Fund has been used for CHP and DMV to address the condition of the fund. Ultimately, the on a one-time basis when it had surpluses and source of funding to use for the debt service is an could support up-front facility costs. However, important policy choice for the Legislature. using the General Fund for debt service Specify Fund Source for Repayments. Whatever would mean providing ongoing General Fund the Legislature chooses as a fund source for debt to support CHP’s and DMV’s facilities. This service payments, making this intent clear now is approach would raise important questions about important given the implications of both available deviating from the past practice of applying options. Accordingly, we recommend the Legislature the “user pays” principle to these departments provide clear direction to the administration regarding by having general taxpayers pay for a portion which source of funds to use for debt service. The of their core activities on an ongoing basis. Legislature could provide this direction in various While non-drivers may benefit from some of ways, such as through provisional language in the CHP’s and DMV’s services, this proposal does budget act or intent language included in budget not include an analytical justification tying trailer legislation. the level of payment to an assessment of the broad-based benefits the departments provide. LAO PUBLICATIONS This report was prepared by Helen Kerstein, 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. 4 LEGISLATIVE ANALYST’S OFFICE