April 30, 2004 - From the April, 2004 issue

USC's Keston Institute Encourages Fresh Look At State Transportation Finance And User Fees

MIR is pleased to present this excerpt of "Initiatives in Transportation Funding & Finance," a report prepared by the Keston Institute for Infrastructure at USC and presented to Sunne Wright McPeak, California's Secretary of Business, Transportation and Housing. The report advances innovative recommendations that can be implemented immediately to benefit transportation funding and projects in California.

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 years states face budget shortfalls, with a cumulative gap of $200 billon.

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 2004-5) 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 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 million of dollars of economic activity. 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 was once 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 address 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 Infrastructure, 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

What Can We Do Now

De-Link the State's General Fund from the State Transportation Fund. Specifically, the panel recommends "fire walling: the Proposition 42 funds from legislative and administrative appropriation to subsidize the General Fund deficits. The panel acknowledged that the May Revise to the 2004-05 state budget will not contain this provision. However, the panel strongly recommends that the Governor indicate in the May Revise that this would be the last time his administration would recommend tapping these funds. The panel further recommends that the Governor support statewide legislative attempts, specifically ACA 29, to repeal language that permits the transfers altogether.

Pursue "Hold Harmless," "Revenue Neutral" strategies to tapping transportation funds for General Fund reduction. The panel believes that the Department of Finance is singling out transportation to pay a disproportionate share of the General Fund deficit. For example, transportation represents roughly 6% of State spending, but has funded and is funding reductions well in excess of that percentage. The panel is willing to pursue "revenue neutral" options to reduce the General Fund deficit and increase transportation resources in order to hold harmless transportation spending to the greatest degree possible.

Revise the Administration's proposal to convert federal funding for local projects from accrual to cash and transfer the cash to the General Fund. The accounting technique to cash out the federal funding may be a prudent cash management strategy if applied to delivering transportation projects. However, in this instance the Department of Finance proposes to use the "cash" freed up in this case to pay previous debt service for Propositions 111 and 116, which are general obligation bonds approved by the state's voters in 1990. The panel underscored in the strongest terms that the precedent the Department of Finance is setting with this proposal undermines voter trust and penalizes Caltrans and regional transportation agencies unjustly.

Explore refinancing of existing General Fund transportation-related debt. Consistent with the above item, the panel believes that more attention should be given to restructuring existing Proposition 108, 116, and 192 debts. Savings achieved should be applied to reducing the overall "hit" on transportation funds needed to keep a "bare bones" program moving forward.

Seek to monetize State transportation assets and other facilities to fund transportation improvements. As part of the May Revise, the panel recommends that the Governor authorize the Department of Finance to determine whether the State assets – such as transportation facilities constructed or acquired in prior years with transportation funds – can be used to generate private sector funding for new capital investment, through sale-leaseback, concession, and other mechanisms. Proceeds derived from such transactions would be deposited into the State Infrastructure Bank (SIB), which would make investments in new transportation projects that had the potential to leverage additional funding.

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Amend Caltrans' workload reduction plan in current budget years to provide for contracting out. The panel concurs with Caltrans position that it be held to its position-reduction target of 1,600 positions in FY 2004-05 but not be held to the dollar reduction target in order to transfer those funds into contracting authority. The panel believes this is a prudent action to be announced in the May Revise of the 2004-05 budget. By retaining the authorized funding, Caltrans can begin to contract our essential design work to keep critical elements of the transportation program going

Monitor and prepare for the infusion of funding resources from the federal change in how ethanol gasoline is taxed. Congress has adopted a new taxing formula for ethanol in gasoline, which will increase federal funds by more than $400 million per year – or over $2 billion over the life of the next five-year fund estimate. Mindful of what has happened in the past fifteen years when new infusions of funding become available, the panel urges the Administration to provide Caltrans with budget authority to contract out as well as undertake reimbursed work with internal staff.

Initiate a serious dialogue between the Administration and the state's transportation community on how to attract private funds to transportation improvements. The panel believes that California can overcome "boom-and-bust" aspect to transportation resources by developing mechanisms to attract private capital to planning, finding and implementing transportation projects, such as tolling, private activity bonds warranties and operating agreements, and other instruments. The panel urges the Governor to call for this dialogue as part of the May Revise to the 2004-05 budget message so that its recommendations could be included in the Governor's 2005-06 budget.

Support Federal initiatives for goods movement and other mega-projects. Congress will be finalizing the pending six-year federal surface transportation authorization bill within the next several weeks. While much attention has been focused on how California would fare under various formulas under consideration for apportioning Federal Resources, the State stands to gain hundreds of million of dollars under two new tax incentives proposed in the Senate version of the bill.

Enhance accountability for project and policy outcomes. The panel feels strongly that direct public accountability for measurable results is essential to the success of California's transportation program. Commensurate with its recommendations, the panel recommends that the Governor and Secretary direct Caltrans to provide a set of criteria to the Secretary by which all project and policy outcomes are tracked and reported quarterly.

Where We Go From Here

The Keston panel, as part of its recommendation to begin the process of transportation and delivery reform now, developed a series of additional recommendations that the Administration should consider as part of its development of an overall transportation reform program.

As the Administration develops an agenda and approach to ransportation funding and delivery reform in California, it should consider the following approaches subsequent to the May Revise process for the 2004-05 budget:

Develop a menu of opportunity for California transportation by adopting comprehensive transportation funding, finance and delivery reforms. Many states are beginning to understand that their maintenance and mobility needs are outstripping their ability to pay for transportation infrastructure at any more than a fraction of what is in their programs. More and more states are beginning to focus on new methods, approaches, and partners to help achieve their transportation infrastructure goals and objectives. The current pay-as-you-go approach, resulting in backlogs of transportation projects, is giving way to leveraged capital, private investment, and methods and mechanisms to create long-term revenue streams to pay not only for the capital and investment in transportation, but in ongoing operation and maintenance costs as well.

Clearly, the Texas model warrants further study, evaluation and action. The panel was grateful to have Texas State Representative Mike Krusee to share his experience in reforming transportation funding and delivery in Texas, and the panel believes that California can learn from what other states, regions, and nations are doing to bring critically needed safety, congestion relief and mobility to their citizens.

Begin meaningful leveraging of existing transportation resources. As part of the notion of creating a "firewall" around transportation funds, including proposition 42, the panel spent a significant amount of time discussing the value of using some of the revenue stream at California's disposal to leverage additional funding. One notion for consideration is the idea of setting aside a portion of transportation revenues (e.g. Proposition 42) as security for a transportation revenue bond to fund the backlog of allocated but pending transportation projects ($1.7 billion), a portion for deferred maintenance, and the balance for significant statewide projects. For example, reserving $400 million per year of Proposition 42 proceeds as a revenue stream for a transportation bond could generate up to $4 billion in proceeds for these purposes – consistent with what Texas has done in leveraging their State Highway Fund. The principle of "leverage" – whether existing or future resources – is one with which the panel strongly identified and strongly recommends be theme a going forward as part of any statewide reform effort. The panel recommends that the leveraging – of existing and/or future transportation revenues – be an integral part of any legislative effort.

De-link the State's General Fund from the Transportation Fund – Part II. Consistent with the first two items in preparation of an overall reform program, an effective way to help ensure that transportation resources are not redirected to other purposes would be to establish a separate State debt financing program backed by a pledge of specific transportation revenues – similar to what is used in over a dozen other states – not only would reduce the likelihood of transfers, but also would likely result in more favorable bond ratings, with corresponding reductions in interest cost. For example, most statewide transportation programs enjoy "AA" credit ratings, whereas California's current obligation rating is only "BBB."

Develop a Golden State Corridors Program to compete for Federal support. As noted above, Congress is in the final stages of reauthorizing federal surface transportation legislation. Two key provisions – the issuance of Federal tax credit bonds by the Build America Corporation and up to $15 billion or private activity bonds for highway and intermodal projects – are opportunities for California. The panel recommends that the Administration identify Golden State Corridors, the handful of very critical, strategic goods and people movement corridors in California (e.g., Interstate 5) that could compete for funding from these proposed provisions in federal legislation. It is the panel's suggestion that being prepared strategically with a discrete set of transportation infrastructure investment opportunities that focus on not just California's economy, but on the nation's economy in the form of interstate and international trade, could be a strategic advantage for California in attracting more Federal resources than by formula alone.

Allow Counties and Cities to select project delivery efficiency. Large, complex transportation capital investments often benefit from having a single-purpose public agency exclusively responsible for planning, developing, constructing, financing and operating the project. Under current state law, if one or more counties or municipalities wish to form a joint powers agency to serve as a sponsor for a particular project, they must obtain approval from the legislature in Sacramento. This process can become politicized and the enabling legislation can encounter lengthy delays, to the detriment of the project. The Governor should propose state legislation authorizing political subdivisions to enter into arrangements to establish a joint powers agency without further State approval.

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