Report 2002-126 Summary - July 2003

California Department of Transportation: Low Cash Balances Threaten the Department's Ability to Promptly Deliver Planned Transportation Projects

HIGHLIGHTS

Our review of the California Department of Transportation's (department) delivery of projects in the State Transportation Improvement Program (STIP) and Traffic Congestion Relief Program (TCRP) revealed that:

RESULTS IN BRIEF

The California Department of Transportation (department) maintains and repairs more than 15,000 miles of the State's highway system by managing numerous transportation projects ranging from repairing roads to adding freeway lanes. With declining revenues and depleted cash reserves, the department is unable to complete on time many of the transportation projects scheduled through two of the department's main transportation programs, the State Transportation Improvement Program (STIP) and the Traffic Congestion Relief Program (TCRP).1 Delayed transportation projects will cause Californians to face increased traffic congestion and the accompanying costs of wasted fuel, lost productivity, and unhealthy air.

The California Transportation Commission (commission) oversees and allocates funds for the department's highway projects. In December 2002, at the commission's request, the department prepared an 18-month cash forecast of the department's main transportation funds to provide the commission with a complete picture of the department's financial condition. At that time, the department forecast that the primary transportation funding source for the STIP, the State Highway Account (highway account), would end fiscal year 2002-03 with a negative balance. Further, the department's forecast of a positive cash balance in the main funding source for the TCRP, the Traffic Congestion Relief Fund (TCRF), depended on the department receiving almost $1.2 billion in revenue transfers and loan repayments, both of which the governor's December 2002 midyear spending proposal requested the Legislature to suspend and forgive. Prompted by the department's analysis, the commission temporarily halted allocations to STIP and TCRP projects. Although the department's March 2003 cash forecast revision convinced the commission to resume allocations for STIP projects (but not for TCRP projects), we believe the revised cash forecasts are overly optimistic and could result in the commission making allocations for which the department will lack available funds.

Although the commission has resumed some allocations for STIP projects, these allocations are dramatically lower than those originally scheduled in the 2002 STIP plan. The department's lack of cash will prevent the commission from allocating funds in fiscal year 2002-03 to 194 STIP projects that need $103 million to move them to their next phase of work. For fiscal years 2002-03 and 2003-04, the commission plans to allocate almost $3 billion less to STIP projects than it originally scheduled in the 2002 STIP plan, a five-year schedule of transportation projects and allocations that the commission updates every two years. The commission will include planned STIP projects that do not receive allocations in the new 2004 STIP plan to the extent possible. However, carrying over a large number of ongoing projects will limit the number of new projects in the 2004 STIP plan and could prevent the commission from scheduling some new projects at all. Further, the department's cash shortages also affect TCRP projects—15 TCRP projects have submitted allocation requests totaling $147 million since December 2002; however, the commission has suspended those requests because of the lack of cash in the TCRF. Until the State resolves budget uncertainties associated with the TCRF, the commission has declared that it does not plan to resume allocations to TCRP projects. We interviewed agencies responsible for implementing these TCRP projects and found that the agencies' lack of spending authority had stalled 12 of the 15 projects. The remaining three projects had sufficient funds from other sources to continue work in the short term.

Delayed or cancelled projects will affect the State's aging transportation system, resulting in deteriorated highways, increased traffic congestion, and reduced air quality. A 1999 commission report to the Senate noted funding requirements over a 10-year period of over $100 billion, and a U.S. Department of Transportation assessment for calendar year 2000 found that California's road conditions had deteriorated since 1996. The combination of age and increased vehicle-miles traveled results in a faster rate of pavement deterioration, increased concentrations of accidents in new locations, and increased hours of traffic congestion. Delays in making improvements to congested highways mean that California residents will pay higher direct costs for wasted fuel and lost productivity. Also, consumers will pay increased indirect costs of the delays in the form of higher prices for goods and services, as well as compounded repair costs for fixing later what the department should fix now. Further, a congested highway system, with the increased emissions caused by frequent stops and starts, will negatively affect California's air quality.

Several factors contributed to the department's reduced ability to deliver transportation projects2. First, loans that the Legislature authorized from the highway account and the TCRF to the State's General Fund (General Fund) drained approximately $1.5 billion in cash from these two funding sources, leaving the department more vulnerable to the unanticipated decreases in revenues that have occurred recently and resulting in fewer funds for planned projects. Second, the department expects to receive approximately $138 million less in revenue in fiscal year 2002-03 than it had projected from one revenue source, commercial-vehicle weight fees, because a task force headed by another state agency underestimated the amounts to charge under a new weight-fee schedule. Moreover, although the department believes that the commission's decision to halt STIP allocations temporarily has improved the highway account's fund balance, the department's revised estimate of the highway account fund balance remains somewhat optimistic. Our analysis indicates that the department may be continuing to overstate expected revenues from federal sources, the fuel excise tax, and weight fees.

If, as our analysis indicates, federal funds are reduced and the revenues from fuel tax and weight fees remain at their fiscal year 2002-03 levels rather than increasing as the department predicts, the highway account could end fiscal year 2003-04 with a negative balance of approximately $154 million. In addition, the governor's May 2003 revision to the governor's budget threatens TCRF funds, calling for the Legislature to delay $938 million of the transfer of state gasoline sales tax revenues from the General Fund to the Transportation Investment Fund (TIF). Because state law provides for only a set number of annual transfers of specified amounts from the TIF to the TCRF, delays or reductions in amounts transferred to the TIF could result in a permanent annual loss of revenues to the TCRF of up to $678 million.

To address its reduced ability to fund planned projects, the commission and the department have several options to provide needed funding for projects in the short term. However, most of these options have the drawback of reducing the department's flexibility to fund future projects, and one potential option available to the commission may be perceived as unfair. Grant Anticipation Revenue Vehicle (GARVEE) bonds are tax-exempt financing instruments that can be used to advance projects and use future federal-aid highway funds to retire debt; however, GARVEE bonds limit the amount of federal funding available to implementing agencies in the future. Another option, State Infrastructure Bank (SIB) loans, offers short-term financing to public entities to complete transportation projects; but again, recipients must set aside future revenue streams to meet commitments to repay such debt. Local agencies can also request that the commission approve project replacements or direct reimbursements in the STIP. With a replacement project, the commission allows a local agency to replace a project, that is, to advance a project that it had scheduled for a later year in the STIP to an earlier year using its own funds and replacing the project advanced with an unidentified future replacement project (or placeholder) of equivalent value, allowing the agency to identify the specific replacement project at a later date.

Direct reimbursement allows the local agency to use its own funds for the early delivery of a project that the commission scheduled in the STIP for a future fiscal year and receive a guaranteed direct cash reimbursement from the department in that future fiscal year (up to a prescribed yearly limit). The commission has limited the amount of direct reimbursements because they lock in priorities for future project reimbursement, thus making funding for other projects more inflexible for the region and the commission. Finally, the Department of Finance is considering seeking legislation allowing the commission to rescind TCRP allocations in times of fiscal crisis. Although this would allow the commission to transfer funds from stalled projects to agencies that are ready to begin or continue their projects, the commission will need to set criteria carefully to ensure that it does not unjustly deprive some agencies or regions of funds they need, and give the perception of favoring other agencies' or regions' needs.

RECOMMENDATIONS

The Legislature is currently deliberating on whether to adopt the governor's recommendations to suspend the transfer of gasoline sales tax revenues from the General Fund to the TIF and to forgive the loan repayment to the TCRF. If the transfer to the TIF is reduced or delayed without a commitment to repay the TCRF the reduced or delayed amount in future fiscal years, the department will lose permanently up to one year's worth of TCRP funding from the TIF transfer, further eroding the TCRF balance. Considering the State's fiscal crisis, the Legislature may wish to allow the TIF to transfer the entire $678 million to the TCRF, and then authorize a loan of the money from the TCRF to the General Fund so that those funds would be repaid to the TCRF and therefore still be available in future years.

To meet its short-term needs for project funding, the department should pursue cautiously other funding alternatives (GARVEE bonds, SIB loans, and direct cash reimbursement and replacement projects) to meet short-term project funding needs, but continue to set limits on most of these funding alternatives to avoid making future project scheduling inflexible.

Should the commission be granted the authority to rescind unspent TCRP allocations, it should carefully consider statewide priorities and ensure that all counties are treated fairly before taking such actions.

AGENCY COMMENTS

The Business, Transportation and Housing Agency concurs with our findings and recommendations. It believes the report provides additional guidance to consider as the department explores alternative funding mechanisms over the short term.

The commission chose not to provide a formal response to the report.

1 The STIP is a long-range program of transportation projects that primarily expand traffic capacity; the TCRP is a onetime program to speed up completion of 141 traffic congestion relief projects.

2 As we discuss later in the text, "project delivery" refers to the completion of a particular phase of a project.