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Initiatives in Transportation Funding and Finance Report CoverInitiatives in Transportation Funding & Finance

Report and Recommendations to Sunne Wright McPeak
Secretary, Business, Transportation and Housing Agency
State of California
March 17, 2004
USC Keston Institute for Public Finance and Infrastructure Policy


Executive Summary

Like most states, California is in a budget crisis. We are struggling to supply urgently needed services with diminishing revenues. As in many states, California's transportation funds are being cut to fund other needs. Across the country, fiscal year 2003 was the third straight year states faced budget shortfalls, with a cumulative gap of $200 billion.

In the last three California budget cycles, transportation funding has been used to augment the General Fund. The Governor's mid-year and budget year (FY 2004-05) proposals continue that tradition by including $2 billion - in addition to the billions previously 'borrowed" or diverted from transportation accounts - in transfers and loans from transportation funds to address the ongoing budget deficit. Not only are these funds coming from sources specifically designated for transportation projects, but also from a source that recently received overwhelming voter support statewide (Proposition 42).

By continuing to divert these limited transportation funds to address our General Fund deficit problems, we risk delaying completion of many transportation projects critical to California's safety and mobility. Of equal importance, we risk severe economic loss. Every $1 billion invested in transportation infrastructure yields 47,500 jobs and millions of dollars of economic activity.1 But, perhaps even more important, we risk breaking promises to Californians who voted to direct their tax dollars to fund real transportation projects. California had a transportation system that once was considered the finest in the nation. If we act now, we can restore and perpetuate that legacy.

What action should we take? That question was addressed by a panel of transportation, finance and public policy professionals, which convened March 17, 2004, for a daylong discussion on the "state of transportation funding" in California. Held at the University of Southern California's Keston Institute for Public Finance and Infrastructure Policy, the panel was convened at the request of California's Business, Transportation and Housing Secretary Sunne Wright McPeak. Its purpose was to evaluate what transportation funding and delivery initiatives could be undertaken immediately as part of this year's budget proposal and to recommend longer-term actions to address California's transportation funding and delivery problems.

The panel recommends the following principles in addressing these issues:
  • Do no harm to the Governor's proposed budget.
  • Commit to protecting California's transportation funding, beginning with the May Revise.
  • Articulate a vision of transportation certainty, stability and continuity in the 2005 State of the State address.
  • Provide a specific agenda of actions and reforms, including proposed legislation, as part of the FY 2005-2006 budget submittal.

With California squeezed by a suffering budget and a desperate need for transportation improvements, the panel set out to find a fiscally prudent yet entrepreneurial approach to transportation funding and financing. By including panel members from all levels of government, from other states, from the worlds of finance and project delivery, this group was able to craft a set of recommendations that are realistic, innovative and can immediately be put into action.

The recommendations are further explored in the following pages, but can be summarized here as:

1. De-link the state's General Fund from the state transportation fund. Begin the process of reform by pledging that this is the last year of diverting Proposition 42 revenue.

2. Pursue "Hold Harmless", "Revenue Neutral" strategies to tapping transportation funds for General Fund deficit reduction. Should additional transportation funds be identified over and above funds already identified in the proposed budget (such as an increase in Proposition 42 receipts due to high gas prices), these funds should be kept for transportation purposes.

3. Revise the Administration's proposal to convert federal funding for local projects from accrual to cash and transfer the cash to the General Fund. Leveraging these dollars for transportation is good policy; leveraging these funds to pay previously approved bond debt is not good policy, is a dangerous precedent, and hurts transportation.

4. Explore refinancing of existing General Fund transportation debt. Given today's interest rates, can Proposition 108, 116 and 192 debts be refinanced at a savings? If so, the incremental savings should go to transportation.

5. Seek to monetize State Transportation assets and other facilities to fund transportation improvements. Proceeds from the sale and/or lease of state assets, particularly transportation facilities and buildings, could be deposited in the State Infrastructure Bank and leveraged to provide badly needed funding for transportation projects.

6. Amend Caltrans' workload reduction plan in current and budget years to provide for contracting out. With the pent-up demand for projects, experienced construction and engineering staffing are needed to keep these projects moving and ready them for construction; otherwise California won't be ready-to-go when funds become available. Given the amount of savings involved, there is an opportunity to keep projects moving both through Caltrans and contract resources.

7. Monitor and prepare for the infusion of funding resources from the federal change in how ethanol in gasoline is taxed. New tax provisions could mean as much as $400 million per year in increased federal transportation returns to California. These funds must be for transportation only and we must be ready to use them.

8. Initiate a serious dialogue between the Administration and the state's transportation community on how to attract private funds to transportation improvements. States across the country are leveraging their transportation funds, welcoming private investment in their transportation infrastructure programs, eliminating backlogs, and moving forward. California can and should do the same.

9. Support Federal Initiatives for Goods Movement and other Mega Projects. Reauthorization of federal surface transportation legislation is imminent. California potentially stands to gain hundreds of millions in benefit under two new tax incentives in the Senate version of reauthorization. Support the issuance of Federal tax credit bonds by the Build America Corporation, and support provisions for $15 billion in private activity bonds for highway and intermodal projects.

10. Enhance accountability for project and policy outcomes. It is not enough to report quarterly that a project is "underway". Measurable criteria regarding a clear set of deliverables is the very least expected by a public that has approved transportation relief and now looks for urgently needed progress.