FY 2006-07 State Budget: Transportation

This is the overview of the California State Budget 2006-07 process as it affects transportation funding, courtesy of Josh Shaw, executive director of the California Transit Association.

The originally proposed California State Budget 2006-07, based on the CTA's review of the Governor's original Budget documents, as well as participation in a January 10 briefing conducted by Business, Transportation & Housing Agency Secretary Sunne Wright-McPeak and Caltrans Director Will Kempton:

California revenues showed solid growth in 2004 and even stronger growth in 2005. The outlook for 2006 and 2007 is for continued gains. Revenue expectations have improved from what was projected at the time the 2005 Budget Act was enacted. Since that time, General Fund revenues have increased by $5.5 billion for the past and current years combined, with total 2005-06 revenues and transfers estimated at $87.7 billion. For 2006-07, revenues are expected to grow by $4.3 billion, to $92 billion, a 4.9-percent increase year-over-year.
On the other hand, the Governor estimates a General Fund (GF) operating (or "structural") deficit in excess of $5.4 billion (i.e. a continuing mismatch between Budget year revenues and Budget year expenditures), and therefore proposes a number of steps to close the gap, including deep cuts in social services programs.
However, because there are carry-over funds from the current Budget year and because state revenues are up from many sectors over last year, the Governor proposes several spending enhancements for transit and transportation, as detailed below, as well as education, law enforcement and other program spending enhancements.
He proposed full funding for Proposition 42 which will transfer about $1.4 billion in revenues from the GF to transportation programs, including transit and highway projects & services. These funds would flow as follows: $678 million to Traffic Congestion Relief Program (TCRP) projects; $582 million to the State Transportation Improvement Program (STIP); and, $146 million to the Public Transportation Account. (Per current law, cities and counties are not scheduled to receive any local streets & roads funds from Prop. 42 in both 2006-07 and 2007-08, because the State provided what would have been their share in 2001-02 and 2002-03, even though Prop. 42 was not fully funded in those years.)
He also proposes $920 million for advance payment of a portion of the Proposition 42 loan due in 2007-08 (including interest). These dollars will be allocated as follows: $410 million to the Traffic Congestion Relief Fund (TCRF) for TCRP projects; $255 million to the STIP; and, $255 million to cities and counties for local streets & roads.
The 2005 Budget Act assumed repayment of a portion of outstanding transportation loans with $1 billion in bond proceeds derived from certain Indian gaming revenues to specified transportation programs. However, several lawsuits have delayed the issuance of the bonds to obtain the cash to repay these loans. One is still pending, and another, which was dismissed, may be appealed. Nonetheless, the California Infrastructure and Economic Development Bank late last year authorized the sale of the compact revenues, which is the first step in the process. The Budget assumes the bond sale will occur in the spring of 2006. If and when this takes place, the revenues are scheduled to be allocated as follows: $290 million to Traffic Congestion Relief Program (TCRP); $465 million to the State Highway Account; $122 million to the Public Transportation Account; and, $122 million to be allocated to cities and counties for streets & roads purposes.
The Governor, as mentioned in his State of the State Address last week, seeks to implement a long-term, $222 billion infrastructure plan for California that would fund a variety of objectives. $100 billion of the identified total "Strategic Growth Plan" would already materialize from existing funding sources. Nevertheless, the Governor still proposes $120 billion of new revenue, with $68 billion to be funded through General Obligation bonds. The transportation focus of this program is on highway spending, but he does proposes $4.5 billion in new intercity and commuter rail funding, most if which only assists the State's rail services, not local public transit.
The proposed funding level for the State Transit Assistance Program is $235 million, about a $34 million increase from the current year (primarily due to full Prop. 42 funding), and double the level from 2004-05.
Unfortunately, the Governor also proposes to use dedicated transit funds for non-transit purposes, by suspending all "spillover" transfers from the GF to the Public Transportation Account, costing transit programs another $318 million. He would retain the first $200 million in the General Fund (per last year's budget deal), and transfer the final $118 million to the Bay Area Toll Account (per last year's San Francisco-Oakland Bay Bridge re-financing legislation).
He does propose a constitutional amendment to "firewall" Proposition 42 (i.e. by eliminating the current ability of the Governor and Legislature to suspend Proposition 42).
The Governor's Budget also includes $5 million from the Antiterrorism Fund to establish a new Mass Transportation Security Grant Program. It is not clear yet whether this is new State spending or "pass through" of Federal funds.
As part of his infrastructure plan, the Governor also proposes to incorporate elements of his "GoCalifornia" plan, which was unveiled -- but languished -- last year. These include broader statutory authority for transportation agencies to use design-build and design sequencing techniques.
Finally, the Governor proposes postponing indefinitely the vote on the $9.95 billion high speed rail bond act currently called for in law to occur in November of 2006.

The May revisions to the proposed budget, based on the CTA's review of the Governor's May 12 documents:

$4.1 Billion Transit Rip-Off for Transportation Bond Debt Service Fund - The May Revision revenue estimate says that substantial state sales tax revenue will be derived from the increase in gasoline prices. Under the "spillover" formula in existing law, this money is supposed to go to the Public Transportation Account (not Proposition 42). While the Governor acknowledges that, "Over the last two decades, the bulk of the spillover funds have been redirected to the General Fund," the Administration goes on to propose to shift these revenues to a new fund that will be dedicated to paying a portion of the debt service on existing and new transportation bonds. Based on current forecasts, the Governor estimates that over $4.1 billion in transit "spillover" revenues will be so diverted through 2015-16, with an initial diversion of $355 million in 2006-07 and a projected diversion of $336 million in 2007-08. (It appears that part of this proposal includes undoing current law calling for a diversion of $200 in spillover funds to the General fund, and instead sends that amount to the new bond debt service account; the May Revision does fully fund the $125 million transfer of spillover from the PTA to the Bay Bridge retrofit account, per current law.)

The Administration argues that using these funds is justified because they derive from motorists' taxes, will be used to pay down debt on a transportation-related bond, and will save the General Fund from bearing the full cost of the debt service.

Proposition 42 Loan Repayment Still Short-Changes Transit - The Governor maintains his January 10th proposal to repay $920 million to Proposition 42. However, we note that current statute requires the Proposition 42 loan from 2004-05 be repaid in the manner in which the funds would have been distributed in that year. The Governor's partial repayment proposal does not follow current law and instead provides no funds for public transit. The cost to the PTA in the Budget year is $48.4 million.
State Transit Assistance Program Funding Up Slightly - Other revenues to the Public Transportation Account, including the sales tax on diesel fuel (up almost $70 million in the May Revision), Tribal Gaming Bond proceeds, and Proposition 42 have resulted in a projected balance exceeding $500 million at the end of 2006-07 that is available for capital projects. The May Revision also reflects an increase of $35 million in State Transit Assistance Program grants for local transit to a level of $270 million.
Capital Project Spending - Project capital outlay support for Proposition 42 projects was funded out of the State Highway Account in the current year. For 2006-07, the May Revision proposes to shift these costs to the Transportation Investment Fund (Proposition 42), consistent with the way other capital outlay support is funded. This shift frees up $185 million in the State Highway Account that can be used to increase the State Highway Operations and Protection Program.
Tribal Gaming Funds - Due to litigation that has been filed against the state, the Administration proposed to shift $849.0 million of the $1.0 billion in tribal gaming expenditure authority from 2005-06 to 2006-07 in an April Finance Letter. To date, the state has received approximately $151.0 million in revenues from tribal gaming compacts. These funds will be used in 2005-06 pursuant to current law to repay the State Highway Account for previous loans made to the General Fund. The Governor says the California Transportation Commission plans to allocate these funds to State Transportation Improvement Program projects.

Following is our summary of the overall content and direction contained in the Governor's May Revise proposals:

A surge in revenues tied to corporate tax, capital gains, and stock options, has resulted in an increase in projected state revenues when compared to the Governor's January budget of $4.8 billion in the current year and $2.7 billion in the budget year, for a two-year increase of $7.5 billion.
$1 billion Economic Recovery Bond prepayment, which will result in full repayment by 2008-09.
$3.1 billion increase for Proposition 98 (schools).
$2.9 billion in repayments of other debts for 2004-05 and 2005-06 which will not have a General Fund effect until 2009-10.
400 million to hospitals and public health agencies to purchase equipment, medicine, and other assistance to prepare for public health emergencies and natural disasters.
$142 million in new spending for public safety.
A $2.2 billion budget reserve.

And the final proposed budget that went to the California Legislature for approval:

An unanticipated $495 million filled the state's coffers from June tax receipts and some Members insisted that this amount go to repay the 2003-04 Prop 42 Suspension.

The following is what was approved by each House:

Proposition 42 for 2006-07. Provides an estimated $1.4 billion for full transfer of General Fund sales tax revenue on gasoline in accordance with Proposition 42. The transfer will provide $678 million for the Traffic Congestion Relief Fund (TCRF), $594 million to the State Transportation Investment Program (STIP) and $148 million for the Public Transportation Account (PTA). Local governments do not receive a share of the Proposition 42 transfer in 2006-07 due to local governments receiving what would have been their allocation during earlier years when the transfer was suspended. Instead, what would have been the local share is allocated to the STIP.
Early Repayment of 2003-04 Proposition 42 Suspension. Provides $495 million to repay a portion of the 2003-04 Proposition 42 suspension. The repayment is not required under current law until 2008-09. The repayment will provide full repayment of the principal and interest to the STIP (estimated at $198 million), local streets and roads ($198 million), and PTA ($99 million).
Early Repayment of 2004-05 Proposition 42 Suspension. Provides $920 million to repay a portion of the 2004-05 Proposition 42 suspension. The repayment is not required under current law until 2007-08. The repayment will provide full repayment of the STIP (estimated at $242 million), local streets and roads (estimated at $242 million), and the PTA (estimated at $121 million). In addition, the TCRF will receive $315 million.

Total $2.8 Billion General Fund Support for Proposition 42

(in millions) 2006-07	Prop 42 transfer	Early Prop 42 repayment	Total
TCRF	$678 M	$315 M	$993 M
STIP	$594 M	$440 M	$1.034 B
Local Streets & Roads	--	$440 M	$440 M
PTA	$148 M	$220 M	$368 M
Total	$1.42 B	$1.415 B	$2.835 B

The first $1.4 billion represents full funding for Proposition 42 for the 2006-07 fiscal year, as proposed in the Governor's January budget.
The $920 million early repayment of the 2004-05 Proposition 42 suspension was also proposed in the Governor's budget. As you may recall, the Budget Conference Committee only approved $660 million (the Assembly had recommended the full $920 while the Senate wanted $460), however Republicans made it a condition of signing off on a deal to have the full $920 million be the amount for the 2004-05 early repayment.
In addition, Republicans wanted $495 million of unanticipated tax revenue that came in June to go towards early repayment of the Proposition 42 2003-04 suspension, which was not contemplated by the Conference Committee, or the Governor, since the debt was not due until the 2008-09 fiscal year.
As a result, the Leadership of each House has increased the early repayment of Proposition 42 loans by $755 million over what the Budget Conference Committee had approved, for a total of $1.415 billion.

PTA Spillover. Stays the same as what the Conference Committee adopted. The spillover was estimated to be $343 million. As you may recall, a total of $33 million will be taken off the top ($20 million for one time grants for the farm worker transportation program expansion and $13 million for the High-Speed Rail Authority) with the remaining $310 million to be spilt 80%-20% between STA ($248 million) and STIP ($62 million).

The Governor had proposed to rip off the spillover revenue and use it to pay off existing and future transportation bond debt service; the legislature rejected this proposal.

State Transit Assistance (STA). The STA Program will receive a total of $630 million (the Governor proposed only $271 million in his May Revision to the January Budget). The increase is due to providing an additional $248 million from the PTA spillover and $110 million from the early repayment of Prop 42 loans.

This huge allocation amount represents a 214% increase in STA Program funding over the current year (i.e. 2005-06)! This should help take some pressure off of our operators from dealing with budget deficits due to higher fuel prices.

Tribal Gaming Bond. Shifts anticipated receipt of tribal gaming revenues from the current year to the budget year and reduces the amount from $1 billion to about $850 million. The state has already received $150 million from tribal gaming revenues, and those funds will be allocated in the current year for transportation purposes rather than securitized for the tribal gaming bond. The budget specifies that if the bond is not issued by June 15, 2007, then the first $60 million of the annual contribution will go to the PTA in order to guarantee cash flow needs for the account.

After this process, the Governor reviewed and signed the Budget bill and related trailer bills. He could have used his "blue pencil" (or, line-item veto) to reduce or eliminate any single expenditure, but did not do so.

Continue with the Transportation 101 presentation