Chapter Five

Transportation Finances

The State of Connecticut created the Special Transportation Fund (STF) to plan, budget, and account for all transportation-related activities. The fund, which is financed through various motor vehicle related taxes and fees, currently supports operating expenses of the Department of Transportation, and the Department of Motor Vehicles (DMV). It also provides the essential financial foundation for the capital program.

Overall, some important aspects of ConnDOT's operating and capital expenses should be noted:

• the overall state budget cap, which limits year-to-year growth in expenditures to either the five-year average in personal income growth or the 12-month rate of inflation, whichever is greater, also applies to the STF as part of total state funding;
• the main revenue engine for the fund is the motor fuel tax, which accounts for about 56 percent of the fund's revenues; this tax has been cut three times over the last four years, and though there has been some other revenue enhancements, they fall far short of what has been cut;
• using FY 00 as a snapshot of overall resources available to the department -- operating funds for DOT and DMV were $465 million, debt service was $375 million, and capital funds totaled $672 million;
• ConnDOT and DMV operating expenses and debt payment represent only 7 percent of total state expenditures;
• federal resources provide the majority of funding for the capital program (57 percent), but federal funds come with certain requirements that may skew state priorities; and
• overall capital expenditures and state bonding for transportation declined in the last eight years.

This chapter highlights the history and purpose of the STF and its relationship to the capital program. Revenue and expenditure components of both the fund and the capital program are also examined. (Bradley International Airport, which is operated through an enterprise fund, is not included in this analysis. A separate committee report addresses in detail the revenue and expenditures of Bradley.)

History and Purpose of the Special Transportation Fund

History. It is widely acknowledged that the state, during the mid- to late-1970s, under- funded highway and bridge maintenance. A Governor's Task Force Report on Infrastructure in 1984 found, "the elimination of the dedicated highway fund, coupled with increasing emphasis on other priorities, and a decline in bonding for highway purposes caused a substantial under investment in our highway facilities."

The General Assembly enacted Public Act 83-30 establishing the Special Transportation Fund on July 1, 1983, after a portion of I-95 fell into the Mianus River in Greenwich, resulting in the death of three people and injuring three others. In February 1984, Governor William O'Neill proposed a comprehensive Transportation Infrastructure Renewal Program based on the recommendations of a task force appointed in April 1983 (three months before the Mianus incident). At about the same time, the General Assembly considered and passed Public Act 84-254, which served to expand the existing STF. As a result, the STF could be used not only to finance an expanded infrastructure rehabilitation program, but could also support the operating expenses of the department and the state's transportation system.

The legislation expanding the STF also provided for a series of incremental tax and fee increases, which produced a predictable revenue base for the initial 10 years of the infrastructure renewal program. This approach served to define the scope of the infrastructure program and provided a stable stream of revenue to support the improvements.

The principal financing instrument of the Transportation Infrastructure Renewal Program established by the act, (now called the capital program) was the Special Tax Obligation (STO) bond. As special obligations of the state, STO bonds are not chargeable against any other revenue of the state except those specifically identified in the act. There are some unique features of STO bonds by which the state is bound. By law, the first obligation of the STF is the payment of debt for STO bonds. In addition, bond covenants require that pledged revenues in each fiscal year equal two times the aggregate principal and interest payments on debt.

Sources of STF Revenue³

The STF has several sources of revenue specified in statute. There are three categories of transportation-related revenues: taxes on motor fuels; various motor vehicle fees; and license, permit, and other fee revenue. In addition, the fund receives grants from the Federal Transit Authority, interest income, and has on occasion received money from other state funds. Recently a tax on oil company revenues and the sales tax from automobiles have been added. Figure V-1 shows the revenues of the STF collected for FY 00. The major revenue categories are described below.

• Motor fuels tax. The motor fuels tax consists of three taxes: the gasoline tax, the special fuels tax (e.g., diesel and gasohol), and the motor carrier road tax. The gasoline tax has received much attention recently as it reached a high of 39 cents per gallon on January 1, 1997, and has since been reduced three times to the current 25 cents per gallon. Motor fuel taxes are the most significant revenue component of the STF. In FY 00, $502 million was collected through the tax on motor fuels, 56 percent of STF's total resources after rebates for certain exempt entities (e.g., sales to U.S., state, and local governments). The tax on gasoline represents 90 percent of the total revenue for the motor fuels tax category.
• Motor vehicle receipts. Motor vehicle receipts are collected by the Department of Motor Vehicles and comprise 48 sections of the General Statutes that involve the levy of transportation related charges for licenses and services provided by the department. They include amounts collected for motor vehicle operator's licenses, registrations, and late fees. In FY 00, motor vehicle receipts provided 21 percent ($188 million) of the income for the STF.
• License, permit, and fee revenue. The third category of funding assigned to the STF is license, permit, and fee revenue, which accounted for 12 percent ($108 million) of STF revenue in FY 00. This income is derived from several sources and includes charges for certain permits issued and services provided by the department, the use of state property under DOT control, and traffic fines. The largest source of revenue in this category for FY 00 was motor vehicle fines and penalties, which brought in about 28 percent of LPF revenue.
• Oil company tax and DMV sales tax. In recognition of the recent reductions in the gas tax, two new revenue sources were added to the STF. The Petroleum Products Gross Earnings Tax (or oil company tax) is revenue received from the gross earnings from the sale of petroleum products attributed to sales of motor vehicle fuel. Beginning in FY 99, this source contributed $20 million; in FY 00, $36 million was added. Legislative changes in 2000 raised the amount transferred to $46 million for FY 01. In 1998, legislation was passed pledging an increasing portion of the tax imposed on the sale of automobiles to the fund (i.e., $10 million in FY 00, $20 million in FY 01, $30 million in FY 02, and $40 million in FY 04 and each year thereafter). Legislative enactments in 2000 increased the amount to be received by the fund by authorizing the transfer of all of the sales taxes received on automobiles -- a net increase of about $35 million in FY 01. The effect of the gas tax cut for FY 01 was a reduction of about $95 million, the added revenue totaled about $35 million to $45 million, leaving a net loss for the fund of about $50 million to $60 million annually.

Other revenue. The remaining revenue sources contribute about 7 percent to the overall revenue of the STF. These include operating assistance grants from the Federal Transit Authority, interest earnings, and transfers from other funds. The state received $3 million in FY 96 from FTA grants, which are treated as reimbursement for mass transit operating expenses. Interest earnings credited to the STF amounted to $36 million in FY 00 and represented about 4 percent of STF's total resources.

Revenue trends. As Figure V-2 shows, total fund revenues increased from$359 million to about $900 million over the 16-year period, or 151 percent. This is somewhat misleading because not all first year collections from the LPF revenues were fully credited to the STF. If that revenue were accounted for, the increase would be 122 percent. The largest revenue increase occurred in interest income, which went from $7.4 million to $36 million (386 percent), followed by motor fuels -- $223 million to $502 million (125 percent). The only decrease was in Federal Transit Administration grants for mass transit operating assistance, which dropped 81 percent from $15.7 million to $3.0 million.

Expenditures of the STF

Figure V-3 shows the expenditures of the STF for FY 00. By statute, STF funds may only be used for specific activities. The first call on the fund is for the payment of debt service for Special Tax Obligation bonds that support the capital program. The other obligations of the STF are described below.

• Debt payments. As previously noted, the STF supports debt payments for both Special Tax Obligation bonds and general obligation bonds issued for transportation purposes. The combined payments for these two debt categories represented 45 percent of the STF expenditures for FY 00.
• DOT operations. The second largest expenditure of the fund ($310 million in FY 00 or 37 percent of STF expenditures) goes to support the operations of DOT. The three largest expenses in this category were: personnel services for nearly 3,700 employees ($118 million); bus operations for 15 urban and five rural systems ($62 million); and rail operations for the New Haven Line and Shoreline East ($61 million). In addition, the DOT operations category contains a program that impacts capital improvements. The Highway and Bridge Renewal account (or "pay-go") provides funding, on a pay-as-you-go basis, for various highway and bridge maintenance, safety, and resurfacing projects. (Pay-go funding is normally included in the appropriations for DOT operations, but has been separated here for analysis purposes). Funding on a pay-as-you-go basis saves money by not incurring bond interest and issuance costs. The FY 00 expenditure of $60 million represented an unusually high amount. For the last 5 years, pay-go has averaged $16 million.
• Department of Motor Vehicles, and pension and fringe. The final categories of STF expenses -- DMV operations and pension and fringe costs for ConnDOT and DMV -- were not originally assigned to the fund when it was established. In FY 00, these combined expenses were $95 million or about 11 percent of fund obligations.

Expenditure trends. The 16-year expenditure history of the fund is shown in Figure V-4. Total fund expenses increased 134 percent from $360 million to $841 million. By comparison, the state's General Fund increased about 192 percent over the same time period. Some additions have been made to the STF because of the state's overall fiscal picture. DMV and pension and fringes costs were added to the STF to relieve some of the pressure on the state's General Fund. In addition, the Department of Public Safety's patrol function, which was not originally part of the fund in 1985, was added in FY 94. The patrol function costs were moved from the STF back to the General Fund in 1999.

State budget comparison. In comparison to other major government programs, transportation is a relatively small part of the overall state budget. Total expenses of the Special Transportation Fund represented about 7 percent of total non-capital state expenditures in FY 00. Human Services represented 29 percent of the state budget, education 22 percent, and corrections 8 percent. Further, debt service for transportation projects is about 29 percent of the state's overall debt payment.

Cumulative balance. Figure V-5 indicates the actual or projected annual surplus or deficiency for each year of the Special Transportation Fund from FY 85 through FY 04. Since FY 88, actual fund expenditures have exceeded revenues five times. Despite this, as Figure V-6 shows, the cumulative fund balance has remained positive. The highest cumulative surplus posted to the fund was about $114 million in 1997. In 1997, ConnDOT was directed through legislative enactments to use all but $20 million of its fund balance to service outstanding debt. This requirement was repealed in 2000, and the fund balance was approximately $78 million on June 30, 2000. The annual operating position of the fund is expected to decline through FY 04, assuming current spending patterns.

Capital Program

The capital program is a financial entity distinct from the Special Transportation Fund. The capital program, though, is supported in part by funds from the STF. Capital financing is also supported by the federal government, state bonds, and to limited extent municipalities.

Figure V-7 shows the overall sources of funding for the $11.4 billion that has been authorized for the capital program from FY 85 through FY 00. Revenue trends included:

• federal resources provided the majority of funding for the capital program - $6.5 billion or 57 percent;
• Special Tax Obligation bonds contributed $4.2 billion or 38 percent of the total; and
• appropriations (or pay-go) were $448 million (4 percent) and other matching funds provided principally by municipalities equaled $90 million (1 percent).

State money is essentially used to leverage federal funding. Federal funding is critical to developing major transportation projects. However, federal funding sources come with certain restrictions. There are 17 major sources of funding under TEA 21; each has its own eligibility requirements, funding ratios (most are 80 percent federal and 20 percent state), and other limitations. This represents something of a dilemma. While federal priorities may not always match state needs, the department might open itself to criticism if it did not aggressively pursue federal funds.

Table V-1 shows the average amount of funding available from the federal government annually by mode of transportation. Both highway and transit funding is expected to increase under TEA 21 as compared to the ISTEA years. The average increase in total dollars is estimated to be about 20 percent.

Capital funding trends. The total amount committed by year for all capital elements is depicted in Figure V-8. As the graph shows funding levels fluctuate form year to year. Revenue trends include:

• total capital funding increased from $583 million in FY 85 to $672 million in FY 00;
• over the first six years, the trend was upward, hitting a high point of just over $1 billion in FY 90;
• in the last 8 years, the total funding has fluctuated within a narrow range averaging $603 million; and
• state bonding has declined from an average of $355 million in the first eight years to $178 million in the last eight years, while federal funding has increased over the same time period from an average of $406 million to $416 million.

The funds for the capital program are disbursed among 17 program elements. Figure V-9 shows the allocation of the $11.4 billion authorized for the capital program among six components. The largest amount of resources (82 percent) goes toward roads and bridges. Transit received 13 percent of the funding, while aviation and ports received 1 percent or less.

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