Language Unavailable, Concerns Remain on Impacts to Local Funding

The Senate is expected to vote next week on the Senate Democrat's alternative proposal to Gov. Arnold Schwarzenegger's Transportation Funding "Swap" proposal. In January, the League raised concerns about the Governor's plan to raid transit funding because it would threaten the stability of other vital state and local transportation funds. The primary objective for the Swap is motivated by desires to create savings to the state General Fund rather than improvement or stability to state transportation funding or policy.

The actual language of the Senate Democrats' proposal has not yet been made available. The following summary is based on the Senate Committee on Budget hearing on Tuesday, Feb. 16. In brief, the Senate Democratic Transportation Funding Swap Proposal contains four major provisions:

1. Repeals the sales tax on gasoline;
2. Creates a new statewide excise tax on gasoline with an index;
3. Retains the sales tax on diesel and changes the funding formulas; and
4. Authorizes a new locally-imposed fee on gasoline to fund transit, bicycle, and pedestrian projects.

Sales-Excise Tax Swap: The sales tax on gasoline is currently 6 percent but will go back down to 5 percent in FY 2011-12. At $3 per gallon, the 6 percent sales tax on gasoline equates to about 18 cents per gallon. The proposal would create a new excise tax of 12.9 cents per gallon in FY 2009-10 and FY 2010-11 which would be increased to 18 cents per gallon starting in FY 2011-12. The proposal includes some kind of index, possibly done every three years and ties to what would have been received if the sales tax on gas had not been repealed. The alternative revenues will be allocated first to pay state transportation debt service, then as follows:

1. 30 percent to the State Transportation Improvement Program;
2. 30 percent to the State Highway Operation and Protection Program; and
3. 40 percent split evenly between cities and counties using current Highway User's Tax Account (HUTA) formulas.

Sales Tax on Diesel: The sales tax on diesel currently provides $313 million to transit programs equally divided between local transit agencies and state transit programs. The Governor proposed to eliminate this tax, but the Senate proposal would retain this funding and alter future allocations to allocate 75 percent to local transit agencies and 25 percent to state transit programs. While this is an improvement over the Governor's proposal, it is far less than what local transit agencies are supposed to receive under current law (note: transit funding has been diverted by the legislature in recent years, and transit has rarely actually seen what they are supposed to receive.) Local transit agencies have indicated that they need a minimum of $350 million annually to continue operations.

Authorizing New Local/Regional "Fee" on Gas: Local or regional agencies would be given the power to impose a local fee on gas with the support of the majority of the voters in the area. There is discussion among legislators regarding which local agencies should have this authorization - the municipal planning organization or county. The fee would be authorized for 30 years, and revenues could be used for operations and capital. It is also believed that the region would be required to adopt an SB 375 (Steinberg)' Sustainable Communities Strategy before the fee could be implemented. Absent language, the League has not had the opportunity to review potential legal issues, or consider the local political dynamics and viability of such a tool.

Undermines existing voter protections for local funding. Voters adopted Proposition 42 in order to earmark the sales tax on gasoline for capital improvement projects, public transit, and local streets and roads. Since the alternative funding source would no longer be from the state sales tax on gasoline, these funds would no longer receive Prop. 42 protections.

Under Prop. 42, shares can only be changed after a two-thirds vote of the Legislature and revenues can be borrowed only if the following conditions are met:

• An emergency proclamation is issued by the Governor;
• Two-thirds of the Legislature agrees;
• Repayment source is identified;
• Repayment is made within three years; and
• Revenues can be borrowed only twice in 10 years.

Under the new proposal, transportation funding would be "protected" by Article XIX of the state constitution - the same law that protects current 18 cent per gallon Highway Users Tax Account (HUTA) excise tax allocations. This is also the same law under which the Governor's Administration last year believed it was possible to take all local government shares to fund state debt payments, and was narrowly defeated.

The protections provided by Article XIX are much more limited that the protections provided under Prop. 42 for the gasoline sales tax. Local transportation funds could be more easily borrowed the next time the state runs into difficulties. Only a majority vote of the legislature is required to change the HUTA allocation formulas or to borrow the revenues. While Article XIX requires that borrowed revenues be paid back within three years, the state does not have to pay interest nor is there a restriction on number of times revenue can be borrowed (in other words, the state can borrow the funds every year).

Increasing state debt service could erode local funding. State transportation debt service costs will grow to approximately $1.3 billion annually over the 10 years. In the future, additional transportation debt could be added into this debt service cost paid by the excise tax which could erode funds available for local streets and roads if additional bonds are approved by the voters. The recent history of the state-local relationship with local funding suggests the local shares of HUTA will be at risk for many years.

Take Action

City officials are urged to contact their legislators to ask that any language associated with this proposal be publicly available so that all parties can carefully review details and weigh the full impacts of any "swap" proposal on the long-term transportation policy goals previously set by the legislature and voters of this state. A decision of this importance should not be rushed with little transparency driven by the budget crisis of the hour.