Funding for transportation improvements is not keeping pace with the increasing demands from the growing number of people, vehicles and goods that rely on California's transportation systems. Highways are deteriorating and congestion is causing increased travel time. The state should increase transportation funding, expand the use of financing techniques, and increase flexibility to respond to the growing need to move people and goods safely and efficiently.

Transportation projects are generally funded from federal and state user taxes, as well as federal and state taxes on both gasoline and diesel fuel. Most transportation projects are funded on a "pay as you go" basis.

Gasoline and diesel fuel user taxes are 18 cents for each gallon sold and have not changed since 1994.[1] Between 1994 and 2001, however, the cost of roadway construction increased around 42 percent, the annual number of miles traveled on California's roads increased 16.4 percent and the number of registered vehicles increased 29 percent.[2] During the same time period, the taxable sales of fuel only increased 16 percent and only 13 miles of highway were added to the state highway system (from 15,185 miles to 15,198 miles).[3] In 2000, congestion was estimated to cost motorists about $4.7 billion annually, which equates to about 530,000 hours of vehicle delay.[4]

Increased vehicle efficiency allows more miles of travel with fewer gallons of fuel. With increased miles traveled and less fuel used, revenues for improvements are diminishing. Without revenue sources tied to actual system usage, revenue will never be sufficient to meet the demands for improving the highway system. The existing user tax does not address the increased use of the system by alternative-fueled vehicles. Electric vehicles, fuel cell vehicles or other future fuels would not be taxed under the existing user tax. Unless a method to capture user fees from the new fuels is adopted, revenues for improvements will fall even farther behind system needs.

Oregon is studying alternative revenue sources for transportation in lieu of the cent per gallon fuel tax. They are focusing on a fee based upon vehicle miles traveled and are leading the nation in this effort. Oregon expects to begin a pilot project to transition from the cents per gallon fuel tax to a user fee based on vehicle miles traveled in early 2005.[5]

Proposition 42, passed in 2002 added Article XIX B to the state constitution. Article XIX B directs a portion of sales taxes collected on gasoline and diesel fuel to be spent on surface transportation. This can only be suspended if the Governor determines a General Fund emergency exists and two-thirds of the Legislature agrees. Then the revenues are transferred to the General Fund. By the end of the Fiscal Year 2005-2006, around $3.1 billion of the taxes will have been taken from transportation for General Fund expenditures.[6]

Article XIX of California's Constitution requires revenue from the user taxes on gasoline and diesel fuels to be used for certain transportation purposes. While Article XIX restricts the use of the user taxes, it is silent on the use of revenues from the investment of the taxes. Consequently, revenues generated from investing the taxes (over $40 million during FY 2003-2004)[7] are being used for other purposes.

California receives around $2.7 billion of federal transportation funds annually.[8] In 2004, California began blending ethanol with gasoline. Because of this change, federal funds received will be reduced by about $560 million in FY 2005-2006 and over $700 million each year thereafter.[9] California is required to add an oxygenate (MTBE or ethanol) to gasoline in order to comply with the Federal Clean Air Act. Prior to 2004, MTBE was being added to gasoline because it was more readily available than ethanol and cheaper. Unfortunately, MTBE was discovered to be infiltrating and contaminating groundwater, so it was replaced with ethanol. The ethanol gasoline blend is taxed by the federal government at a lower rate than the MTBE blend.[10] Part of the annual federal transportation fund allocations are based on a state's payments into the federal highway trust fund. Lower tax rates mean lower payments into the trust fund and lower federal transportation funds allocated to the state. The use of ethanol blends is increasing nationally, resulting in significantly lower revenues for the federal aid transportation program. Congress is considering revising the taxing rates on ethanol blends to the same rate as other blends, which would restore slightly over eight cents per gallon to the federal trust fund. Reductions in California's federal allocation will be avoided if Congress increases the tax rate on ethanol blends.[11]

A 1999 report entitled "Inventory of Ten Year Funding Needs for California's Transportation System" identified around $116 billion of unfunded needs for operations, system expansion, rehabilitation, reconstruction and other work.[12] Maintenance of freeways and highways is being delayed. There is a backlog of $587 million of deferred pavement maintenance.[13] Delaying maintenance results in continued decay and higher future repair costs.

In 1996, California ranked ninth in the nation for the most interstate "lane miles" in poor condition. In 2001, California moved to the fourth rank, increasing from 10 percent to 14 percent of its interstate lane miles rated in poor condition.[14] Poor pavement conditions add about $400 annually to each vehicle's operating cost. California has six of the ten urban areas in the nation with the highest added annual vehicle operating cost. Los Angeles leads the nation with the highest added annual operating cost of about $705 per vehicle.[15]

California's seaports, international airports, trade corridor railways and highways and land ports of entry represent the largest trade transportation complex in the nation. The volume of goods moving through California is expected to increase 56 percent between 1996 and 2016.[16] During 2003, the equivalent of 13.8 million twenty-foot shipping containers passed through the Los Angeles, Long Beach and Oakland ports alone.[17] The trucking industry and railroads provide the means to move the goods. The increased volume will require more trips by both industries. The added truck trips will only add to the current congestion. Increased train trips will add to congestion on the rail lines as well as to road congestion. The rail lines have areas where only one set of tracks are available to serve trains traveling in each direction. Trains traveling in one direction must wait while trains traveling in the opposite direction pass. Also, there are a large number of railroad and roadway crossings. As the number of train trips increases, vehicles will be required to stop more frequently, adding to roadway congestion. Congestion-caused delay based on 2000 estimates costs over $8,800 per hour in California.[18]

While the state generally relies on fuel taxes to fund transportation projects, limited use of other financing tools has been implemented to accelerate projects. General Fund bonds, Grant Anticipation Revenue Vehicle (GARVEE) bonds, public private-partnerships and most recently a modest State Infrastructure Bank are being used.

GARVEE bonds are backed with future federal fund allocations which reduces the amount of future federal funds available for other projects. They also have limited use. The California Government Code restricts the use of GARVEE bonds, allowing no more than 30 percent of the annual federal appropriation for repayment of bonds.[19]

Public-private partnerships have been used for two projects, both constructed as toll roads. Private bonding is used with toll revenues paying the bond payments. This has allowed private investment in the transportation system. Since private bond costs are not exempt from being taxed, the average cost of the private bonds is 20 percent to 25 percent higher than tax exempt bonds.[20]

The State Infrastructure Bank is a revolving loan program that was established in 2002. The bank, with $3 million in federal grant funds, provides flexible, short-term financing to public and public-private entities to accelerate transportation projects. Loans from the bank are restricted to between $300,000 and $1 million and must be repaid within six years.[21] Projects must also meet federal eligibility requirements. The bank's use has been limited because of the restrictive loan amounts and federal eligibility requirements. Nationally, 32 states have implemented similar programs with loan agreements around $4.8 billion.[22]

Recommendations
The Governor should pursue a ballot initiative for legislative concurrence and voter consideration to amend Article XIX B Section 1 of the California Constitution as follows:

1. Amend the state constitution to protect the deposit of the sales tax on fuels to the State Highway Account consistent with current law.
2. Set aside $20 million per year for five years from funds in the Transportation Investment Fund to be deposited into the "Transportation Finance Bank." Allow up to 100 percent of these funds (with approval from the Secretary of the Business, Transportation and Housing Agency, or its successor) to be used for the payment of principal and interest on bonds issued for expanding the loan program for transportation improvements. Funds should be continuously appropriated; and
3. Establish a major maintenance fund supported by 15 percent of the sales taxes on fuels available for transportation capital improvement projects. Allow up to 100 percent of these funds (with approval from the Secretary of the Business, Transportation and Housing Agency or its successor) to be used for the payment of principal and interest on bonds issued for transportation maintenance improvements. Funds should be continuously appropriated.

The Governor should work with the Legislature to sponsor legislation removing Section 183.1 from the Streets and Highways Code to eliminate conflicts between this code section and amendments to Article XIX of the State Constitution.
The Secretary of the Business, Transportation and Housing Agency or its successor should develop and implement a pilot project to test the feasibility of implementing a user fee based on actual individual use of the transportation system for funding future operations, maintenance and improvements to the transportation system.

Vehicle miles traveled should be considered. The Secretary should review efforts by the Oregon State Department of Transportation to implement a pilot project for a user fee based on actual miles traveled.

The Secretary of the Business, Transportation and Housing Agency or its successor should prepare a letter from the Governor to the California Congressional Delegation supporting Congress' efforts to adjust the user tax on ethanol blend fuel to equal non-ethanol blend tax rates.
The Secretary of the Business, Transportation and Housing Agency or its successor, in cooperation with cities, counties, freight haulers (truck and railroads), the Legislature and the federal government should study how to increase the efficiency of moving goods and reducing congestion on both the highways and railroads.

The study should also identify appropriate funding for improvements, including greater flexibility using existing funds and new revenues sources. The Secretary of the Business, Transportation and Housing Agency or its successor should report the results of the study to the Governor.

The increase to the State Highway Account in the first year of implementation is anticipated to be over $500 million with federal gas tax correction. Amending California's Constitution to require revenues generated from investing motor vehicle fuel taxes to be spent for the same uses as the motor vehicle taxes would result in about $40 million each year. Constitutionally securing the sales tax on fuels for the State Highway Account would ensure that about $1.6 billion annually is protected and available for highway expenditures. During 2001 there were approximately 310.7 billion vehicle miles traveled on California's roads and highways.[23] A one-tenth of a cent fee per mile traveled would generate about $310 million. Successful implementation of a mileage fee would provide a revenue source that would increase in proportion to the actual use of the transportation system.

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