CalTrans takes California’s Taxpayers for a Ride

Ever wonder how the Golden State managed to run itself into the $26 billion budget hole that only recently was papered over, at least for the coming fiscal year, in a beyond-the-last-minute deal between Governor Schwarzenegger and the California legislature?

California’s Department of Transportation (CalTrans) supplies a modest but nevertheless instructive example of governmental incentives to overspend the public budget.

Every year, CalTrans identifies property it owns around the state as “surplus” and sells some of it to willing buyers. Funds raised in that way are deposited into the State Highway Account at closing and then transferred to the Public Transportation Account, from which CalTrans draws, in November. Then, in January, CalTrans estimates for the upcoming fiscal year the receipts expected from surplus property sales and informs the Department of Finance (DoF) how much new revenue it anticipates from that source.

The revenue estimate CalTrans supplies to the DoF in January is based on figures from the previous January, projected forward with a simple linear trend. But by the time the Governor actually gets around to signing the state budget, the funds raised by surplus property sales over the past twelve months already have been collected and deposited into the State Highway Account. Yet CalTrans never revises its revenue projections in light of that reality.

Failure to adjust its estimates lately has led CalTrans to overestimate the revenues it expects from surplus property sales – by $28 million in 2006, $27 million in 2007, and $60 million in the most recent fiscal year. It has a strong incentive to do so because the DoF apparently authorizes CalTrans to spend that overestimated revenue, allowing the agency legitimately to run a budget deficit, which it has now done consistently over at least the past three fiscal years.

As a result of DoF’s failure to punish CalTrans for overestimating the revenue it expects from surplus property sales, the balance in CalTrans’ current account now stands at just $10 million – an historic low.

Ex-post settling-up would easily solve CalTrans’ overspending problem. If CalTrans – or any other department of state government – does not generate as much revenue from surplus property sales as it expected (and told DoF to expect), it should not be permitted to dip into that inflated balance.

Deficit spending at CalTrans may be small beer compared with California’s multi-billion-dollar budget shortfall, but as Everett Dirksen once said, $60 million here and $60 million there eventually adds up to some real money.

Independent Institute intern Jonathan Wyse supplied able and helpful research assistance in the writing of this story.