How is transit service funded in California? The answer is a complex maze of government rules, regulations, and restrictions ... and involves state, federal, and local agencies.
As the population increases, the percentage of those who drive increases at a non-proportional rate. This creates not only congestion, but unhealthy air, lowered physical activity, and a drop in community involvement. This increased traffic cause more deaths -- especially among children and young adults. However, there are still many who depend on mass transit (including nine-tenths of all former welfare recipients).
Transit service carries far more of California's population than most people imagine. More people use transit than use the state's major airports!
There is a "trickle-down" effect from transit funding that most people (including elected officials) do not realize. Transit creates jobs, carries people to and from their jobs, and contributes to the state's economy.
The problems caused by congestion only get worse as the population increases. Transportation funding is not keeping pace with growth, leaving transit service at an inadequate level to service the needs of the community.
Without transit service, the infrastructure needed to handle increased auto traffic would be overwhelming.
Very little transportation funding is available, and only a small part of that is used for transit; in many areas, discretionary funds aren't going to transit either.
In addition to funding transit system operation and maintenance, transportation funds are needed for street repair and for transit-oriented development.
Transportation funding statewide has not kept pace with needs; a conservative estimate is that over $100 billion in projects alone are awaiting funding that may or may not arrive. In addition, transit only makes up about one-third of the unfunded needs.
It is becoming more and more obvious that population growth is outpacing auto-oriented infrastructure development, yet non-auto projects receive only about 10% of funding at the state level.
It has only been 100 years since state taxes started to be used to fund transportation-related projects. It has been less than 40 years since transit started receiving any of that funding, and that came ten years after federal funds started being made available for highway construction.
Pre-1950's, transit service was provided by private companies who more often than not designed that service around their own real estate developments. (In Los Angeles, it is well documented that the Pacific Electric "Red Cars" ran primarily to housing projects owned by Henry Huntington.)
Beginning with the 1956 Federal Highway Act, the automobile has become the primary focus of government spending, transportation-wise.
The urbanization begun by the real estate developers/transit companies ultimately resulted in lower ridership, which forced government to take over the operation of transit service. Nevertheless, it wasn't until 1964 (at the federal level) and 1971 (at the state level) that non-local funding became widely available for transit.
There are two ways that revenues for transportation are generated. The first is direct to the public ... paying a fare to ride a bus or train is the obvious one, but since some sales taxes go to support transportation buying a car also generates revenues. Although there are few examples of private toll roads in Southern California, these are also funds used for transportation purposes. The key point is that money changes hands.
The second way to generate revenues for transportation is less visible. Property tax revenues can be used for local street repair, gasoline taxes can be used for highway construction, or sales tax revenues can be used to have a private company operate transit service (in Los Angeles County, LADOT and Foothill Transit are good examples of this).
Over the past 20 years there have been significant efforts to replace transit funding eliminated by the passage of Proposition 13. Prior to 1978, property taxes funded most transportation projects.
Transportation funding comes from a variety of sources developed in the post-Proposition 13 era. Property taxes still provide some of the funding (but nowhere near the amount before 1978); gasoline taxes and other state, federal, and local funds help augment fare revenue.
Taxes and user fees are collected from both transportation and non-transportation sources and may likewise be used both for transportation and non-transportation purposes. Much depends on how those taxes and user fees are designated by the laws that created them.
Focusing on the transit portion of transportation funding, the revenue from the farebox (including pass sales, in those areas that have them) average less than one-quarter of the total. Local taxes make up the largest component.
Transit funding is split between capital (construction projects and equipment acquisition) and operations. The largest percentage of capital transit funding comes from the federal government; operations are largely funded by local taxes (farebox revenue typically provides less than one-third of a transit agency's operating costs).
This pie chart shows the sources of funding for Metro bus service in Los Angeles (as of April, 2005). Note that cash fares, passes and tokens combined only pay for about one-third of the cost of operating service, and that other revenue sources -- such as local sales taxes, state funds, and federal grants -- make up the other two-thirds. Transit users are heavily subsidized in order to keep fares low.
Given all the sources of transportation funding -- state, federal, and local -- and the variety of transportation programs that utilize that funding, transit frequently finds itself lost in the shuffle. In this flowchart, note that transit operations are funded by only one of the many sources that exist. Even some federal funds flow through the state to the local level.
As previously stated, transit projects have to compete with auto-oriented projects, and the latter receives more than three-quarters of available state funding. (Transit receives only about ten percent.)
Over the past 40 years, funding at the state level for transportation (and thus, the small percentage of that funding allocated to transit) has declined in proportion to other state-funded programs such as health and social services, which have grown substantially over the same period.
Part of California's sales tax has been dedicated to mass transportation for over 30 years. For more than a decade, the state gasoline tax has also provided increased funding for transportation, much of which funds the Traffic Congestion Relief Program (TCRP), which the Legislature created in 2000 and which the voters extended the life of by approving Proposition 42 in 2002.
In 1971, the California Legislature passed the Transportation Development Act, which shifted a small percentage of the state sales tax to mass transportation needs of the 58 counties in the state. In doing so, it created the first permanent source of state revenue that could be spent on transit operations, as well as started the collection of sales tax on gasoline sales in California.
The Transportation Development Act created two funding streams. The Local Transportation Fund comes from a portion of all sales taxes, and the State Transit Assistance Program comes from sales taxes collected on gasoline and diesel fuel.
To qualify for LTF funds, a transit operator must maintain the recovery of operating costs from the farebox (including passes, etc.) at a specified percentage. The 1978-79 benchmark relates to when the TDA formula was modified by the Legislature after the passage of Proposition 13.
The state Public Utilities Code defines what components of a transit agency's budget qualifies as "operating costs".
STA funds are given to transit agencies statewide using a formula based on population and local effort. These funds can be used for operation of service or for acquisition of equipment at the agencies' discretion. STA is the only source of state funding which has this flexibility.
STA funds are based not on the farebox recovery ratio, but rather on keeping the cost per revenue service hour at consistent levels, adjusting for inflation. Costs for starting new service (such as the Consent Decree "pilot project" in L.A. County) are exempted from this requirement for the first two years; other exemptions are allowable only to the degree that their costs rose higher than the Consumer Price Index.
As with the LTF, the state Public Utilities Code defines what components of a transit agency's budget qualifies as "operating costs" for STA qualification.
Gasoline tax revenues are prohibited by the State Constitution from being used for transit operations and maintenance. This makes STA funding critical to transit agencies' ability to continue providing service to the public.
In 2000, the California Legislature approved the Traffic Congestion Relief Program, which made the California Transportation Commission responsible for selecting projects funded by the state Public Transportation Account (which also included dedicated State Transit Assistance funds).
Sales tax is collected in California not only on the price of the gasoline itself, but on the federal and state excise taxes which fund much of California's highways and streets. Depending on what part of the gasoline purchase price the sales tax is collected on, it goes either to the Transportation Investment Fund or to the Public Transportation Account.
The largest state program allocating both federal and state gas tax revenues is the State Highway Account. In addition to highway maintenance, these funds are also programmed through the State Transportation Improvement Program to capital projects. STIP funds are restricted by the State Constitution from being used to make up the transit operating shortfall, however.
The TCRP takes the sales taxes collected on gasoline sales in California and transfers it from the General Fund to transportation programs and projects.
Two-thirds of TCRP funding is dedicated for capital projects. The other third is split between highway and capital rail projects (State Transportation Improvement Program), funding for local road repair, and the Public Transportation Account.
Projects funded by the State Transportation Improvement Program are selected by the California Transportation Commission from a list of eligible projects submitted by Regional Transportation Planning Agencies (in Los Angeles County, the MTA is the RTPA).
The STIP has a mandated formula for allocating sales tax revenue. Three-quarters of the funding must go to regional projects proposed by the RTPAs, with the balance going to intercity rail, highways that cross regional boundaries, and projects of statewide significance.
The TCRP set up a allocation program for the sales tax collected on gasoline, but that revenue would have reverted to the state General Fund after the TCRP period expired. Proposition 42, passed by the voters in March 2002, permanently dedicated those revenues to transportation programs and allows the Legislature to alter the distribution percentages.
Proposition 42, approved by over two-thirds of the vote on the March, 2002 ballot, made the funding of the Transportation Investment Fund permanent. However, it did contain a provision for suspending that funding under certain conditions.
The Governor and the Legislature have suspended Proposition 42 every fiscal year since it was enacted, continuing a trend of loans and transfers to the state General Fund going back to the 2001-02 fiscal year. It was not until the 2005-06 budget that the Governor did not take this action, although he did still propose that the "spillover" gasoline sales tax be diverted from transportation. (For a more complete overview of the budget process, click here to look at how the 2006-07 budget evolved.) Proposition 1A, passed by the voters in 2006, now prohibits the state sales tax on motor vehicle fuels from being used for any purpose other than transportation improvements, and also authorizes loans of these funds (repaid within three years) only in the case of severe state fiscal hardship and restricts such loans to no more than twice in any ten-year period.
As a result of the diversion of revenues, funding for the TCRP has been significantly below the expected amount for many years.
Making matters worse, gasoline tax revenues have not kept pace with vehicle miles traveled over the years, which results in further funding shortfalls.
Fuel economy improved drastically between 1980 and 1990, which has further reduced the tax revenues from gasoline sales. When adjusted for inflation, the state gasoline tax rate is almost half what it was in 1970, and the revenue from those taxes are only now returning to the same level as 1970.
To return to the equivalent level of funding that taxes on gasoline sales had in 1970 would require an increase of more than 40 cents per gallon, and to return to the equivalent of 1960 levels would require an increase of about 60 cents per gallon.
Faced with these funding shortfalls, the California Transportation Commission has found itself unable to properly fund any STIP or TCRP projects (only funds earmarked for the State Highway Operation and Protection Program, or SHOPP, were fully funded from 2002 to 2005) . Local funds were used instead to keep projects on track, but that created local budget crises.
The difference Proposition 42's dedicated funds make is a total of $5 billion dollars, although if the tribal gaming revenues negotiated by Gov. Schwarzenegger are upheld by the courts, there could be partial mitigation for that loss.
The $1.5 billion in Proposition 42 funding makes a significant difference for STIP, TCRP, STA, and other transportation accounts.
One half of the Public Transportation Account funds the State Transit Assistance Program, which -- as stated before -- is the only state program that provides funding that can be used for the operation of transit service. The other half of the PTA funds CalTrans, the California Transportation Commission, the California High Speed Rail Authority, PUC rail safety programs, and intercity rail.
However, PTA funds and funding sources -- totalling almost $3 billion -- were consistently diverted for seven years. The restrictions placed on the diversion of those funds by Proposition 1A does not, in and of itself, undo the damage to funding from those seven years.
Another factor in the equation is that TCRP was set to expire after the 2007-08 fiscal year. To protect these funds, SB 717 was introduced to transfer the taxes that had gone to the TCRP and distribute them according to the formula set by Proposition 42.
As a result of SB 717, all of the sales taxes on gasoline are distributed under the Proposition 42 allocation formula, effective with the 2008-09 fiscal year.
At the federal level, transit fares somewhat better in terms of allocation, but it still receives less than half the funding (and highways still receive the highest share).
Beginning in 1991, the Intermodal Surface Transportation Efficiency Act (ISTEA) and its successors the Transportation Equity Act (TEA-21, in 1998) and the Safe, Accountable, Flexible and Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU, in 2005), created flexible funding for transit and other non-auto projects, among other things. However, it still does not provide transit operations funding.
SAFETEA-LU, like its predecessors, allocates the federal gas tax in a 80%/20% split between highway-related projects and transit-related projects.
Under TEA-21, transit-related projects were defined under a variety of program categories. SAFETEA-LU uses similar categorizations.
However, after a significant rise in the 1970s, 1980s, and 1990s, the balance in the federal Highway Trust Fund has been declining since the beginning of this century.
Although federal funding for transit is not expected to decline as precipitously as highways, it is still expected to be non-existent by 2012, unless deficit financing is approved by Congress, as is likely to happen for the Highway Trust Fund.
Because of the relatively small amounts of state and federal funds available for transit, it is not surprising that a large percentage of local funds are allocated to it.
State-administered TDA funds, local General Funds, and local sales taxes dedicated to transportation make up the funding available for local transportation projects.
One option that county transportation planning agencies have to create revenue for their projects is to ask voters to approve special sales taxes. These funds, if approved by the electorate, typically have no restrictions placed upon them and transit generally receives a large percentage of that tax revenue. In Los Angeles County, the LACTC (predecessor agency to the MTA) was responsible for creating a permanent transportation sales tax, which funds not only the MTA but municipally-operated transit services as well.
Even with a $4 billion annual spending level, there is still a shortfall of just under two-thirds. This includes both transit operations and infrastructure projects.
In addition to increased levels of transit operating funds, there are also needs such as clean air requirements, maintenance and rehabilitation, and transit-oriented development incentives, which need funding.
Before we conclude this tutorial on transportation funding, we would like to discuss three possible future scenarios of transportation financing. We will first outline the three scenarios and then present the pros and cons of each funding option.The first would leave the gasoline taxes untouched but use more sales tax revenues and bonds.
The second possible option would be to increase taxes on gasoline and other fuels.
The third option would be to introduce more tolls for those who continue to drive.
Sales taxes are a popular way to raise money and can be enacted for local projects. As we saw earlier, Los Angeles County has dedicated sales taxes for transportation.
However, sales taxes can be unreliable, inflexible, and subject to political and voter popularity. There is also a concern that sales taxes are not linked to use of the transportation infrastructure they support and are therefore unfair.
Many transportation agencies use bonds to finance projects, using sales tax revenues for repayment. Bonds are useful in this regard because the typical project life of several years can match the bond period. In addition, most agencies are tax-exempt and this lowers the cost of such a move.
But bonds also can affect an agency's financial position, if tax revenues fall short of the amounts required to meet repayment obligations. In addition, the popularity of this funding mechanism means there is increased competition with other programs for revenues. And, like sales taxes, there can be a disconnect with those who will be the end users of the bond-funded project.
Increases in fuel taxes are often identified as a move that is long overdue. As we saw earlier, inflation has reduced the value of existing taxes that have not been adjusted over the years. In addition, if an increase was indexed to inflation, the problem of lessened value would never reoccur, even as fuel economy continues to improve (and in fact increased fuel taxes would continue to spur efforts toward such improvement).
However, voters -- already tired of increasing gasoline prices -- are not going to embrace increased taxes on that gasoline. There is also the risk that increased fuel efficiency may, as it has in the past, create further imbalances between vehicle miles and tax revenues. And many see fuel tax increases as being too heavy of a burden on lower income drivers.
Tolls, if implemented using a formula that increases the amount at times of highest road usage, not only raises funds but also improves the efficiency of the road system. Because tolls only impact those who actually use the road being charged for, there is little public opposition to them. And technology has improved to the point where tolls can be collected without the previous need for human interaction with the driver.
But, because of privacy issues, a perception of double taxation (being charged to use a road that taxes already paid to construct), and the lack of a guaranteed, predictable revenue stream, there are many political obstacles to overcome in order to enact tolls as a means of transportation financing.
So there are no easy answers to the question of how the needed improvements in transportation infrastructure will be financed. Only one thing is certain ... whether private vehicle or public transit, everything has to be subsidized in one way or another.
We hope this presentation has shown that there are many components to developing a transportation system that can handle the needs of California's growing population.
In closing, we thank Odyssey and the California Transit Association for allowing us to create this presentation by adapting the Power Point presentations given by them at CTA's Lobby Day and Spring Legislative Conference in 2003, and the Fall Conference in 2007. Additional material relating to the 2005-06 budget proposals provided by the state Legislative Analyst's Office, the chart of Metro revenue provided by MTA's Finance Dept., and current figures of the Highway Trust Fund provided by the Federal Highway Administration.We also appreciate the assistance of Dr. Brian D. Taylor at UCLA in allowing the use of information from his presentation to SCAG in March, 2007.
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