The 2025-26 Budget: Transportation Proposals

2025-26 BUDGET The 2025-26 Budget: Transportation Proposals GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2025 SUMMARY In this brief, we discuss major transportation funding proposals included in the Governor’s 2025-26 budget. Specifically, we (1) present an overview of total funding proposed for state transportation agencies and departments, (2) provide an update on recent previous augmentations provided to transportation programs, (3) evaluate a proposal to allocate $25 million from the General Fund to establish a new local litter abatement program (the Clean California Community Cleanup and Employment Pathways Grant Program), and (4) assess a proposed one-time solution to shift a total of $166 million from two special funds—the Greenhouse Gas Reduction Fund (GGRF) and Air Pollution Control Fund (APCF)—to keep the Motor Vehicle Account (MVA) solvent in the budget year. Our main takeaways include the following: • Governor Does Not Propose Any Changes to Multiyear Transportation Funding Package Approved in 2024-25. Recent budget packages planned for multiyear augmentations totaling $11.5 billion for transportation programs funded primarily by the General Fund. The Governor’s 2025-26 budget proposal maintains these plans as agreed to in the 2024-25 budget package, including $2 billion in the budget year for various programs. • Recommend Rejecting Funding to Establish New Local Litter Abatement Grant Program. Given the uncertain budget context and limited General Fund available, we recommend the Legislature reject the Governor’s proposal to provide $25 million to create a new local litter abatement grant program. In our assessment, this proposal does not meet the high bar for approving new discretionary General Fund spending because (1) local litter abatement is not a core state responsibility and (2) one-time funding is unlikely to address persistent local issues around litter. • Address 2025-26 MVA Shortfall in a Way That Best Aligns With Legislature’s Priorities and Develop Plan to Address Structural Issues. Any steps taken to address the MVA fund condition will come with trade-offs. However, given the operational funding shortfall, some action is needed in 2025-26 if the state wants to avoid significant impacts to public services. As such, we recommend the Legislature either adopt the Governor’s proposed fund shifts or some alternative for the budget year. We also recommend that the Legislature develop a plan to address the MVA’s structural deficit on an ongoing basis. www.lao.ca.gov 1 2025-26 BUDGET OVERVIEW The state provides funding for eight expenditures for the current year. The decrease is transportation departments: the California largely associated with (1) the gradual phase-out Department of Transportation (Caltrans), the of one-time augmentations provided in previous High-Speed Rail Authority (HSRA), the California budget packages and (2) the timing in which Highway Patrol (CHP), the Department of previously approved funds are needed to support Motor Vehicles (DMV), the California State the high-speed rail project. Transportation Agency, the California Transportation Commission, the Board of Pilot Figure 1 Commissioners, and the HSRA Overview of Governor’s Proposed Office of the Inspector General. Transportation Budget The California State Transportation (In Millions) Agency has jurisdiction over the various departments and is 2023-24 2024-25 2025-26 responsible for coordinating the Actual Estimated Proposed state’s transportation policies Total $31,169 $38,203 $30,974 and programs. In addition, the By Department/Program state provides funding to local Caltrans $14,674 $15,544 $16,050 governments for transportation Local streets and roads (shared revenues) 3,526 3,559 3,625 purposes through “shared High-Speed Rail Authority 3,490 4,339 975 California Highway Patrol 3,159 3,313 3,305 revenues” for local streets and Transportation Agency 1,869 6,907 2,453 roads and the State Transit General obligation bond debt service 1,690 1,777 2,016 Assistance program. Department of Motor Vehicles 1,503 1,489 1,408 State Transit Assistance 1,246 1,251 1,120 Figure 1 shows the Governor’s Transportation Commission 8 11 10 proposed spending for the state’s Board of Pilot Commissioners 3 9 9 transportation departments and High-Speed Rail Authority OIG 1 3 4 programs from all fund sources— By Funding Source special funds, federal funds, the Special funds $19,052 $27,117 $21,736 Federal funds 9,455 6,708 6,915 General Fund, and bond funds. General Fund 2,580 4,275 2,225 In total, the Governor’s budget Bond funds 81 104 97 proposes about $31 billion in Caltrans = California Department of Transportation and OIG = Office of the Inspector General. expenditures for 2025-26. This is a net decrease of $7.2 billion (19 percent) relative to estimated PREVIOUS BUDGET AUGMENTATIONS FOR TRANSPORTATION Governor Does Not Propose Any Changes the General Fund, with a smaller portion coming to Multiyear Transportation Funding Package from special funds. Initially, budget packages Approved in 2024-25. Recent budget packages from 2021-22 through 2023-24 planned to planned for significant multiyear augmentations provide augmentations totaling $12.3 billion over for transportation programs funded primarily by the multiyear period. To address General Fund 2 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET shortfalls, the 2023-24 and 2024-25 budgets allocates funding to transit agencies to support made a few modifications to these plans, including capital projects and/or operational expenditures. various reductions, delays, fund shifts, and cash Large Share of Remaining Funding Has flow adjustments. The 2024-25 budget retained Already Been Committed for Specific Projects. $11.5 billion for transportation programs across Notably, even though $4 billion from the multiyear a seven-year period (2021-22 through 2027-28), package displayed in the figure remains subject which represents 93 percent of the multiyear to budget appropriations in 2025-26 and the amount originally planned. The Governor’s 2025-26 subsequent two fiscal years, for over half of these budget proposal maintains the transportation funds the administering departments have already program augmentations as agreed to in the made grant awards and committed to specific 2024-25 budget package, which we display in projects. This applies to $2.3 billion of the funding Figure 2. This includes $2 billion in the budget displayed from 2025-26 through 2027-28—all year for various programs. Notably, $1 billion would programs except for formula-based TIRCP and the be provided through the formula-based Transit Zero-Emission Transit Capital Program (ZETCP). and Intercity Rail Capital Program (TIRCP), which This somewhat unusual circumstance is the result of cash flow adjustments the state made as part of Figure 2 Governor Does Not Propose Changes to Multiyear Transportation Funding Packagea (In Millions) 2021-22 to Program Department 2023-24 2024-25 2025-26 2026-27 2027-28 Totals Transportation Infrastructure Package Formula-based TIRCP CalSTA $2,000 $1,000 $1,000 — — $4,000 Competitive TIRCP CalSTA 1,525 512 564 $438 $611 3,650 Active Transportation Program Caltrans 450 100 100 — — 650 Local climate adaptation programs Caltrans 200 — — — — 200 Clean California Local Grant Program Caltrans 100 — — — — 100 Grade separation projects CalSTA/Caltrans — — 75 75 — 150 Highways to Boulevards Pilot Program Caltrans — — 25 50 — 75 Supply Chain Package Port and Freight Infrastructure CalSTA $800 $100 $200 $100 — $1,200 Program Supply chain workforce campus CWDB 70 — 20 20 — 110 Port operational improvements GO-Biz 30 — — — — 30 Increased commercial driver’s license DMV 9 — — — — 9 capacity Other Zero-Emission Transit Capital Program CalSTA $190 $220 — $230 $460 $1,100 Port of Oakland improvements CalSTA 184 — — — — 184 Totals $5,558 $1,932 $1,984 $913 $1,071 $11,458 General Fund $4,122 $1,350 $1,591 $538 $611 $8,212 Greenhouse Gas Reduction Fund $596 $582 $393 $300 $460 $2,331 State Highway Account $650 — — $75 — $725 Public Transportation Account $190 — — — — $190 a Figure reflects package as modified by the 2023-24 and 2024-25 budget agreements. 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; and DMV = Department of Motor Vehicles. www.lao.ca.gov 3 2025-26 BUDGET the current-year budget agreement. Specifically, have taken steps such as entering into contracts the 2024-25 budget package reverted funds and initiating pre-construction activities such as appropriated for these programs in prior years—that planning and permitting. had already been awarded to projects—with the While about $1.7 billion planned for intent of reappropriating the dollars in a future year formula-based TIRCP and ZETCP in 2025-26 and when they are actually needed to cover planned the subsequent years has not yet been committed expenditures. This approach helped generate for specific projects by the state, local transit short-term General Fund savings, but leaves the agencies that would receive these funds likely have Legislature with little flexibility to opt not to resume already begun making plans for how they will spend these expenditures as they are now scheduled, them—either for eligible capital projects or to help even if the budget condition worsens—at least cover operational funding shortfalls. Of this total, not without causing significant fiscal and logistical the $1 billion for TIRCP is planned from the General disruptions for projects and their local sponsors. Fund ($812 million) and GGRF ($188 million) and Once grant awards have been made, grantees $690 million for ZETCP is planned from GGRF. reasonably expect that funding is forthcoming and CLEAN CALIFORNIA COMMUNITY CLEANUP AND EMPLOYMENT PATHWAYS GRANT PROGRAM Background • State Beautification Projects ($287 Million). For Caltrans to implement beautification Clean California Included Funding for projects on the state highway system. Litter Abatement and Beautification Projects. Assembly Bill 149 guided the implementation The 2021-22 budget package provided roughly of this new program. $1.1 billion from the General Fund over a three-year period for Clean California, a statewide program • Program Support ($62 million). For Caltrans centered around supporting litter abatement staff to support Clean California activities. and beautification projects. The 2022-23 budget • Public Education ($32 Million). For Caltrans agreement committed an additional $100 million to support a public education campaign aimed from the General Fund that was provided in at reducing litter. 2023-24 to augment funding for the Clean California Caltrans Established the Clean California Local Grant Program. The statewide program Community Designation. Along with the funded was administered by Caltrans and the combined activities, Caltrans established a voluntary program $1.2 billion was used for the following activities: to recognize certain localities as “Clean California • State Litter Abatement ($418 Million). Communities.” We note that this initiative was not To augment Caltrans’ ongoing litter abatement directed in statute, but rather was established by activities on the state highway system through the department as part of its statewide outreach its maintenance program. and engagement for Clean California. Local • Clean California Local Grant Program governments and nongovernment entities (such ($400 Million). For competitive grants to local as neighborhood groups and community-based governments for beautification and cleanup organizations) can obtain this designation by projects within public spaces and local right applying and completing a variety of steps. These of ways. Beautification projects included include activities such as (1) having a local leader infrastructure improvements such as art sign a pledge, (2) establishing an informal advisory installations, graffiti removal, and landscaping. board, (3) conducting an initial litter assessment, Trailer bill language—Chapter 81 of 2021 (4) organizing community cleanups, and (5) creating (AB 149, Committee on Budget)—guided the a long-term plan for keeping communities clean. implementation of this new program. 4 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Governor’s Proposal While this would result in maintaining prior funding levels for these activities, it would preclude this Proposes $25 Million One-Time General Fund amount of Proposition 4 funds from supporting for New Local Litter Abatement Program. The expanded service levels or additional projects. Governor proposes $25 million from the General Additionally, the budget faces a number of notable Fund on a one-time basis in 2025-26 to establish risks and uncertainties—including related to a new Clean California Community Cleanup forecasted revenues, federal funding levels, and and Employment Pathways Grant Program. The fire recovery costs—that could lead to the General program would offer competitive grants to local Fund condition worsening over the coming months. governments and federally recognized tribal Given this context, the Legislature will want to governments for litter abatement efforts. As apply a higher bar to its review of new spending opposed to the previous Clean California Local proposals than it might in a year in which the Grant Program, this new program would focus General Fund has more capacity to support new exclusively on local litter abatement and would commitments. Overall, the Legislature will want to not support infrastructure-related beautification weigh the importance and value of the proposed projects. The program would prioritize funding for new program against the activities to which it has (1) projects that create employment pathways, such already committed. as those involving partnerships with workforce development organizations, and (2) communities Local Litter Abatement Is Not a Core State that are designated as Clean California Responsibility. The state is responsible for Communities or are actively working toward maintaining safe and clean conditions on its own this designation. property, such as on the state highway system. While addressing litter issues at the local level may Assessment be a worthwhile goal, it does not fall within the core High Bar for Approving New Proposals Under responsibilities of the state—a distinction which is Current Budget Conditions. The Governor’s especially important in a budget environment with proposal to establish the new Clean California limited General Fund resources where the state Community Cleanup and Employment Pathways may find it challenging to address its own areas Grant Program would commit a modest amount of of responsibility. Rather, addressing litter issues discretionary General Fund in 2025-26. However, at the local level falls to local governments, which because our office currently estimates that the can raise funds, hire maintenance staff and solicit budget is roughly balanced, every dollar of new volunteers, and oversee practices within their own spending essentially requires offsetting reductions jurisdictions. Moreover, because it does not oversee elsewhere in the budget. The Governor “makes local litter abatement, the state does not have a way room” for this proposal by making modifications to ascertain the magnitude of this problem. For the to funds committed to other programs. As we state highway system, Caltrans monitors data on discuss in our January 2025 report, The 2025-26 the volume of litter collected and the number of Budget: Overview of the Governor’s Budget, service requests submitted by individuals related overall, the Governor proposes $2.2 billion in to litter. Caltrans does not collect similar data on actions that would create capacity in the General an ongoing basis related to local streets and roads Fund to support $570 million of discretionary and public spaces more broadly. However, the proposals (including this proposal), $150 million department notes that based on discussions with of tax expenditures, and a larger discretionary local governments and feedback from the Clean reserve than the state typically plans. These actions California Local Grant Program, local governments include shifting nearly $300 million in previous continue to face persistent challenges related General Fund augmentations for climate- and to litter. environmental-related programs to instead be supported by the new Proposition 4 climate bond. www.lao.ca.gov 5 2025-26 BUDGET One-Time Funding Unlikely to Address Recommendation Persistent Issues Around Litter. One-time Reject Funding to Establish Clean California funding can provide short-term benefits by enabling Community Cleanup and Employment Pathways cleanup in specific areas within a community, but Grant Program. Given the limited General Fund it is unlikely to lead to sustained improvements available and uncertain budget context, we without ongoing funding. The department indicates recommend the Legislature reject this proposal to that by targeting funding to communities that are create a new local litter abatement grant program. designated as Clean California Communities or In our assessment, this proposal to create a new are actively working toward that designation, the program does not meet the high bar for approving program can be focused on localities that have new discretionary General Fund spending because displayed a commitment to reducing litter and (1) local litter abatement is not a core state therefore hope to have a more enduring impact. responsibility and (2) one-time funding is unlikely However, this approach relies heavily on voluntary to address persistent local issues around litter. pledges that are not accompanied by long-term If litter abatement is an issue of high legislative funding. The department also indicates that it priority, the Legislature could consider directing would require local governments to provide a this funding to support state-level activities, such match to receive this state funding. Yet, a one-time as for Caltrans’ ongoing litter abatement activities match similarly does not ensure lasting efforts to on state highways, although that too would face address litter. a number of competing priorities and likely would necessitate making modifications to other existing spending commitments. ADDRESSING THE MVA SHORTFALL Background Expenditures Outpacing Revenues. Since 2021-22, annual expenditures from MVA have MVA Supports Various State Programs, exceeded the account’s yearly revenues, resulting Receives Revenues From Vehicle Registration in a structural imbalance. Some of the major Fees. MVA is the primary funding source for expenditure cost drivers have included (1) increased CHP and DMV. The account also provides some employee compensation costs which have funding for the California Air Resources Board been driven by both increases to staffing levels (CARB). The uses of most MVA revenues are and growing salary and benefit costs at CHP, constitutionally limited to the administration and (2) workload related to the issuance of new driver enforcement of laws regulating the use of vehicles licenses and ID cards that comply with federal on public highways and roads, as well as certain standards (commonly referred to as “REAL IDs),” other transportation activities. For 2025-26, MVA and (3) supplemental pension plan repayments that revenues are estimated to total about $5 billion. began in 2019-20. (These payments are related to Of this amount, over $4 billion is projected to a 2017-18 budget action that borrowed from the come from vehicle registration fees. The remainder General Fund for a large one-time contribution largely is generated by other DMV fees such to the state employee pension fund, requiring as driver license fees. (We note that DMV also future repayment from all relevant funds that collects various other fees at the time of vehicle make employer pension contributions, including registration that are not deposited into MVA, such MVA. Over the next 30 years, MVA is expected to as vehicle license fees, truck weight fees, and an receive savings that outweigh these near-term loan additional registration fee charged to owners of repayment expenditures due to slower growth in zero-emission vehicles.) employer pension contributions.) 6 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET State Has Undertaken Previous Efforts to Governor’s Proposal Help Address Deficits and Delay Insolvency. Fund Shift to Prevent Insolvency, Continue Over the last couple of decades, MVA has Existing Support for CARB Program in experienced periodic deficits and risks of 2025-26. To maintain a positive MVA balance in insolvency. In response, the state has taken 2025-26, the Governor proposes to transfer funds various actions to shore up the fund. Some of into the account from two other state accounts these past solutions provided temporary relief, totaling $166 million on a one-time basis. These such as the state making a one-time repayment transfers are intended to fully offset the estimated of loans that previously were provided from MVA $166 million that MVA annually provides to support to the General Fund and delaying supplemental CARB’s Mobile Source Program. (That program pension plan repayments to the General Fund aims to reduce emissions from on- and off-road (which temporarily reduced MVA expenditures mobile sources, such as vehicles and construction but created additional out-year liabilities). Other equipment.) The two components of these transfers actions provided longer-term solutions, including consist of: (1) ending a previous practice of transferring about • $85 million From the Air Pollution Control $90 million annually from MVA to the General Fund (APCF). The proposal would transfer Fund, (2) authorizing vehicle registration fees to be $85 million from APCF to MVA. The APCF is adjusted annually based on the percent change in overseen by CARB and receives revenues the California Consumer Price Index to account for from fees and penalties on vehicle and inflation, (3) shifting certain programs from MVA non-vehicle pollution sources. The account’s to other fund sources, and (4) the state recently funds generally are used to carry out CARB’s shifting away from using up-front cash from MVA to duties and functions. pay for CHP’s and DMV’s facility needs. • $81 Million From GGRF. GGRF contains MVA Projected to Become Insolvent auction proceeds from the state’s Beginning in 2025-26. Without action, MVA is cap-and-trade program. The proposed funds projected to become insolvent in 2025-26 with to be transferred to MVA consist of $49 million deficits increasing in future years, as shown in from unallocated projected discretionary Figure 3. Specifically, if left unaddressed, MVA is GGRF revenues and $32 million that would projected to have a deficit of $87 million in 2025-26, be “freed up” by shifting some prior planned increasing to $1.9 billion by 2029-30. Figure 3 Motor Vehicle Account Facing Insolvency in 2025-26 (In Billions) $7 6 Expenditures 5 Revenues and Transfers 4 3 2 1 -1 Balance -2 -3 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Note: Estimates reflect LAO adjustments to Department of Finance projections and do not include Governor's proposals or resulting impacts. www.lao.ca.gov 7 2025-26 BUDGET GGRF expenditures for clean energy activities • Does Not Address Underlying Problem. to the Proposition 4 climate bond. (More The Governor’s proposal represents a information about the climate bond fund one-year fix but would not provide an ongoing can be found in our recent publication, and sustainable solution to address the MVA The 2025-26 Budget: Proposition 4 funding shortfall. Moreover, the shortfall Spending Plan.) is projected to grow in future years. The administration indicates that APCF will not Reduces MVA Expenditures in Response have sufficient funds available to support to 2024-25 Budget Solutions. Through Control MVA beyond 2025-26. MVA will remain at risk Sections 4.05 and 4.12, the 2024-25 budget of insolvency until the state addresses the package directed departments to identify underlying imbalance between its revenues expenditure reductions from vacancies and and expenditures. operational efficiencies regardless of fund source. • Relies on Revenue Source Subject to The administration states that it has identified Uncertainty. As we discuss in further detail expenditure reductions from MVA-supported in our publication, The 2025-26 Budget: programs across CARB, DMV, and CHP totaling Cap-and-Trade Expenditure Plan, GGRF $28 million in 2024-25 and $33 million annually in revenues are subject to substantial uncertainty 2025-26 and ongoing. While the administration and are trending lower than forecasted in the has not yet provided specific details around which current year. To the extent these declining positions and activities it is reducing to achieve revenue trends persist, GGRF may not have these savings—or how service levels might be capacity to support new commitments—such impacted—it has stated that it is not reducing public as the proposed fund shift—without requiring safety positions at CHP. Absent these expenditure reductions to the 2025-26 GGRF expenditure reductions, the MVA deficit in 2025-26 and future plan that was agreed to as part of the 2024-25 years would be larger. budget process. Assessment Alternative Options Also Come With Several Trade-Offs Associated With Proposal. Trade-Offs. The Legislature could consider one or We have a identified a number of trade-offs raised more alternative actions to keep the MVA balanced by the Governor’s proposed MVA transfers. in 2025-26. However, each of these options also • Solves Shortfall in 2025-26 Without has associated trade-offs. Impacting MVA-Supported Activities. • Use Funding From Other Sources. Similar to Based on the administration’s estimated the Governor’s proposal, the Legislature could expenditures, the proposed fund transfers consider using funding from other sources would provide sufficient resources to keep to bolster MVA. For example, the Legislature MVA balanced in 2025-26 without needing could consider a transfer from the General to make changes to service levels for Fund to MVA. However, any shift would result MVA-supported programs or increasing fees. in less funding from the transferring fund left • Results in Less Funding Available for Other available for other activities. Moreover, the Activities. Shifting APCF and GGRF to MVA General Fund does not currently have much means that those funds are not available for capacity to take on new expenditures without other spending priorities across the budget impacting existing commitments. which they typically help support. Additionally, • Increase Revenues. The Legislature could one portion of the proposed GGRF transfer is take steps to increase MVA revenues, such as dependent on shifting planned expenditures by increasing DMV fees. For example, based to Proposition 4, resulting in that amount on the number of cars currently registered in of the bond being used to sustain existing California, every $1 increase in registration commitments rather than to enhance state fees would raise about $36 million. However, climate efforts. this would increase costs for businesses and households that own cars. 8 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET • Reduce Expenditures. The Legislature trade-offs. However, given the operational funding could take steps to reduce expenditures shortfall, some action is needed in 2025-26 if the from MVA. For example, the Legislature state wants to avoid significant impacts to public could temporarily suspend the supplemental services. As such, we recommend the Legislature pension repayments. However, this would either adopt the Governor’s proposal or some not be sufficient on its own to address the alternative for the budget year. The Legislature fund condition and would lead to increased likely will want to closely monitor evolving cost pressures in the near future because the budget conditions over the next few months— principal and interest for the loan still would including GGRF revenue trends—as it weighs its need to be repaid by June 30, 2030. Other various options. expenditure reductions likely would reduce Develop Plan to Ensure Fund Remains DMV and/or CHP service levels, which could Solvent. In order to remain solvent, MVA affect both customer service (in the case expenditures and revenues must be brought of DMV) and safety (with regard to CHP). In into balance. As such, we recommend that the addition, implementing sufficient expenditure Legislature develop a plan to address MVA’s reductions in time to keep the fund balanced structural deficit on an ongoing basis. To assist in 2025-26 could be particularly challenging. with developing such a plan, the Legislature could consider holding hearings this spring as part of the Recommendations budget process to get a better understanding of Weigh Trade-Offs and Address 2025-26 the underlying causes of the MVA’s insolvency risk, MVA Shortfall in a Way That Best Aligns With the potential options for a long-term solution to the Legislature’s Priorities. Any steps taken to fund condition, and the trade-offs associated with address the MVA fund condition will come with these options. www.lao.ca.gov 9 2025-26 BUDGET 10 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET www.lao.ca.gov 11 2025-26 BUDGET LAO PUBLICATIONS This report was prepared by Frank Jimenez and Luke Koushmaro, and reviewed by Rachel Ehlers and Ross Brown. 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. 12 LEGISLATIVE ANALYST’S OFFICE