Legislative Analyst's Office
Analysis of the 2001-02 Budget Bill
The Department of Toxic Substances Control (DTSC) regulates hazardous waste management, cleans up or oversees the cleanup of contaminated hazardous waste sites, and promotes the reduction of hazardous waste generation. The department is funded by fees paid by persons that generate, transport, store, treat, or dispose of hazardous wastes; environmental fees levied on most corporations; the General Fund; and federal funds.
The budget requests $229 million from various funds for support of DTSC in 2001-02. This is an increase of about $60 million, or 35 percent, from estimated current-year expenditures. Major budget proposals include (1) $37.5 million from the General Fund to provide low-cost insurance for the cleanup of contaminated urban sites and (2) $3.7 million (various funds) for increased operating equipment and expenses. The budget also includes $21.3 million from the General Fund to repay a loan made from the Superfund Bond Trust Fund in 1991-92.
The budget proposes $37.5 million from the General Fund for the state to provide low-cost insurance for private developers to clean up contaminated urban sites ("brownfields"). This funding proposal is premature until policy issues are resolved and the program's structure is defined. We therefore recommend the deletion of the $37.5 million. (Reduce Item 3960-014-0001 by $37.5 million.)
Budget Proposal for Low-Cost Environmental Insurance. The budget proposes one-time funding of $37.5 million from the General Fund for a new environmental insurance program. (The amount will be transferred to the proposed Financial Assurance and Insurance for Redevelopment Account.) The new program is intended to facilitate private developers in obtaining financing to clean up and develop contaminated urban properties referred to as brownfields.
Currently, in order to secure financing (such as getting a bank loan), developers are typically required to obtain "environmental insurance" that (1) protects the developer and the lender from liabilities resulting from pollution conditions at the property and (2) covers cost overruns in cleaning up the site. While such environmental insurance is available, it is often extremely expensive, especially for smaller redevelopment projects. The high cost of environmental insurance is seen as an impediment to the redevelopment of brownfields.
The budget proposal intends to make such insurance more affordable, by having the state negotiate and subsidize group environmental insurance for brownfield redevelopment. Specifically, the proposed funding would be allocated as follows:
The budget proposal is similar to a proposal in the 2000-01 Governor's Budget for a $32.5 million low-cost environmental insurance program. The 2000-01 proposal was rejected by the Legislature, on the basis that the details of the program had yet to be worked out.
State-Negotiated Insurance Program Has Yet to Be Structured. As with the 2000-01 budget proposal, the specific details of how the environmental insurance would be structured have yet to be decided. Specifically, it is yet to be determined who would be eligible for a state subsidy, what criteria would be used in approving applicants, and how and by whom the program would be administered. While the budget proposal provides a general description of the type of insurance to be subsidized, it also recognizes that "there are numerous options for making such (environmental) insurance affordable" and that the department will be exploring those options with industry. The budget anticipates that the structure for the state-negotiated insurance will not be selected until at least the middle of 2001-02, following a competitive bidding process in response to a request for proposals from the insurance industry.
Policy Issues Need to be Addressed. We think that it is premature to provide funding for this proposal until a number of policy issues are addressed by the Legislature. First, there should be an analysis of the extent to which the apparent high cost of environmental insurance is impeding brownfield redevelopment. This analysis was not presented with the budget proposal. Second, the Legislature should evaluate the role for the state, if any, in making such insurance more affordable. This evaluation will determine if, and the degree to which, the state should subsidize environmental insurance premiums.
The resolution of the above issues will also help to structure the insurance program. Because the level of program funding will depend on the program structure, it is premature to propose a funding level before the policy issues are resolved and the program's structure is defined. Lacking specific information on insurance premium costs, it is not possible, for example, to assess how many brownfield properties would potentially benefit from the proposed program.
Proposed Program Lacks Statutory Authority. The budget proposal recognizes that legislation is needed to establish the insurance program because the department does not have the statutory authority to operate it. The budget proposes to introduce a budget trailer bill to provide this authority.
Recommend Deletion of Funding. Therefore, we recommend the deletion of $37.5 million from the General Fund for the program, since the funding is premature until policy issues are resolved in legislation and the program's structure is defined.
The budget proposes a transfer of $1.2 million from the General Fund to support the Hazardous Waste Management Program. As a need for these funds in the budget year has not been justified, we recommend disapproval of the transfer. (Reduce Item 3960-015-0001 by $1.2 million.)
Budget Proposal. The budget proposes a General Fund increase of $1.2 million for the department's Hazardous Waste Management Program (HWMP). The $1.2 million would be transferred annually into the Hazardous Waste Control Account (HWCA). The HWMP regulates the generation, storage, treatment, disposal, and transport of hazardous waste through permitting, inspections, enforcement, and oversight of local program implementation.
The program is funded mainly by hazardous waste control fees levied on parties that generate, store, treat, dispose, or transport hazardous waste. However, current law exempts state and local governments that clean up hazardous waste caused by another entity from one of the hazardous waste control fees. The department estimated that it loses about $1.2 million annually in fee revenues as a result of this exemption. On this basis, the budget proposes $1.2 million from the General Fund annually to make up this "loss."
Proposed Transfer Not Needed for Budget-Year Workload. Our review finds that the proposed transfer from the General Fund is not based on there being unfunded workload as a result of the fee exemption to state and local governments. In fact, the budget projects a 2001-02 ending reserve of $5.4 million in HWCA even without the proposed General Fund transfer. Rather, the transfer is proposed solely as a means to address "potential" funding shortfalls in future years.
Because HWCA has ample resources to fund DTSC's workload, the proposed transfer from the General Fund into HWCA is not needed. Accordingly, we recommend disapproval of the transfer.