Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Department of Toxic Substances Control (3960)

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 $156 million from various funds for support of DTSC in 2002-03. This is a decrease of about $152 million, or 49 percent, from estimated current-year expenditures. This decrease is accounted for mostly by the elimination of one-time expenditures that occurred in the current year consisting of (1) $115 million for the Stringfellow/Casmalia hazardous waste site settlements and (2) $21 million from the General Fund to repay a loan from the Superfund Bond Trust Fund. Major budget proposals include (1) an increase of $2.2 million (special funds) for various purposes in the hazardous waste management program, (2) an increase of $6.8 million (special funds) for office-related costs, and (3) a shift of $7.9 million from the General Fund to special funds for site cleanup and administrative costs.

Governor's Budget Proposes to Substantially Reduce CLEAN Program

The budget proposes $1 million for a loan and grant program (the Cleanup Loans and Environmental Assistance to Neighborhoods program) to assess and clean up contamination at abandoned or underutilized sites known as brownfields. This reflects a decrease of $7 million from current-year expenditures.

"Brownfield" sites are abandoned, idled, or under-used industrial and commercial facilities where expansion or redevelopment is complicated by real or potential environmental contamination. To address the impediments to brownfield redevelopment, Chapter 912, Statutes of 2000 (SB 667, Sher) established the Cleanup Loans and Environmental Assistance to Neighborhoods (CLEAN) program in DTSC. The CLEAN program provides grants and low-interest loans to property owners, developers, community groups, and local governments to (1) assess the level of contamination at abandoned and underutilized properties with either real or potential toxic waste found on site and (2) clean up the contamination at these sites. The majority of funds are to be dispersed as loans, creating a "revolving door" of funding such that, after an initial investment in the program, the program would largely refinance itself.

In 2000-01, the Legislature approved a transfer of $85 million from the General Fund to the CLEAN Account as "seed money" for the loans and grants to assess and clean up brownfield sites. Due to the state's General Fund condition, the Legislature has approved the transfer of $77 million of the $85 million back to the General Fund. Figure 1 shows the use of the remaining $8 million in funds (almost all to be spent in the current year). As shown in the figure, the Governor proposes expenditures of $1 million for the CLEAN program in 2002-03, a decrease of $7 million from the current-year level. Expenditures in the current year have been mainly for cleanup loans. For the budget year, expenditures will be solely for ongoing loan administration and oversight. 

To date, the financial assistance provided under the CLEAN program has been in the form of loans approved for commercial and industrial redevelopment, low-income and market rate housing, mixed-used developments, and downtown revitalization. The DTSC has encumbered six loans ranging from $400,000 to $1.9 million in six different communities.

Overlap Found Between Pollution Authority Program and CLEAN Program

We find that the department and the California Pollution Control Financing Authority (CPCFA) have overlapping statutory authority to operate potentially similar programs to promote the redevelopment of brownfields. We therefore recommend the enactment of legislation to reduce the potential for programmatic overlap between the department and CPCFA. We further recommend the adoption of supplemental report language requiring CPCFA and the department to report on their efforts to coordinate their activities.

The CPCFA Also Has a Brownfields Program. The main activity of CPCFA is to issue bonds (sometimes tax-exempt) on behalf of private borrowers for the acquisition, construction, or installation of pollution control facilities. The authority charges fees to borrowers for its services and accordingly has built up a fund balance from these fees since the mid-1980s. 

Recent legislation (Chapters 914, Statutes of 2000 [AB 779, Torlakson] and Chapter 915, Statutes of 2000 [SB 1986, Costa]) also authorized CPCFA to establish a program to provide grants and loans for the identification, assessment, and mitigation of brownfield sites. According to the authority, the CPCFA has a fund balance of approximately $55 million in the current year. Of this amount, CPCFA has set aside $10 million for the brownfield program and $2.5 million for another economic development program. Additionally, the Governor's budget proposes a $20 million loan to the General Fund from this fund. This leaves the authority with approximately $22.5 million for future CPCFA program activity.

Of the $10 million set aside for brownfield programs, $2.3 million has been encumbered to date for three communities to assess contamination at sites and determine the development potential of the sites. This leaves an uncommitted balance of $7.7 million. The three loans serve the communities of Oakland ($1 million), San Diego ($1 million), and Emeryville ($0.3 million). According to CPCFA, priority for remaining funds will be given to "cleaner" sites that have greater development potential rather than "dirtier" sites. If a redevelopment project proceeds, any funding from CPCFA for site assessment must be repaid with interest.

Overlap in Statutory Authority, But Differences in Practice. Both DTSC and CPCFA have the authority to provide financial assistance through loans and grants to identify, assess, and clean up sites with real or potential environmental hazards. Although there is overlap between DTSC and CPCFA in their statutory authority, we find that there are clear differences in how each has implemented its brownfield program in practice. To date, both DTSC and CPCFA have focused on specific portions of their statutory authority in their grant/loan programs, reflecting their specific expertise. The DTSC through the CLEAN program has focused on actual mitigation and cleanup of brownfield sites while the CPCFA program has focused on funding the assessment (prepurchase) phase of development. The DTSC's focus appears reasonable, as DTSC is able to offer the recipients of cleanup loans ongoing technical assistance on cleaning up sites, based on its programmatic knowledge and scientific expertise. This is an expertise that is not found at the CPCFA.

On the other hand, we find that CPCFA is well positioned to provide "predevelopment" assistance in the form of loans or grants to assess contamination and development potential at brownfield sites. This is because, as a financing authority, CPCFA understands the property development process. Commercial loan packages and grants do not typically provide financing at this stage of development, therefore the CPCFA's predevelopment program fits a specific need in brownfields site development financing.

While CPCFA and DTSC have to date each focused on different aspects of brownfield redevelopment (site assessment versus cleanup), there is no guarantee that their program activities will not overlap in future years given the overlap in their respective statutory authorities. We think that this overlap in authority--if exercised by DTSC and CPCFA in practice--could compromise the effectiveness of the state's overall effort to facilitate brownfield redevelopment.

Recommend Enactment of Legislation to Reduce Potential for Programmatic Overlap. As discussed above, we think that CPCFA and DTSC have unique expertise in different aspects of brownfield redevelopment. We therefore recommend the enactment of legislation that would divide authority for brownfields programs between these two agencies based on their respective expertise. Specifically, we recommend that statute require CPCFA to give priority to providing loans and grants for predevelopment site assessment and that DTSC be required to give priority to providing cleanup loans and grants.

We recognize that the department's and CPCFA's programs, even with their different focuses, will need to work together to ensure that there are not gaps in the assistance provided by the state to facilitate brownfield development. Additionally, with limited state resources for brownfields programs, it is important that the state is using its collective resources devoted to this purpose most effectively. We therefore recommend that the legislation also require that CPCFA and DTSC develop a memorandum of understanding (MOU) to establish the extent to which collaboration between the two agencies should occur. To the extent possible, criteria for providing financial assistance should be jointly established. As a result of these actions, limited state resources can be appropriately targeted and financing mechanisms for redevelopment and loan applicants can be streamlined.

There are a number of examples where state agencies with overlapping authorities have signed MOUs to coordinate their activities in order to be more effective. For example, the Department of Conservation and the California Integrated Waste Management Board have signed an MOU to coordinate both agencies' activities related to public education and outreach to promote recycling.

In addition, we recommend the adoption of supplemental report language requiring CPCFA and DTSC to submit a report to the Legislature, by January 1, 2003, on the MOU, including their efforts to reduce overlap and streamline the process for providing financial assistance for brownfield redevelopment.

Potential Funding for Cleanup Loans and Grants

If the Legislature wishes to provide additional state funding for loans and grants for brownfield site cleanup in the budget year, we recommend the enactment of legislation to authorize a one-time transfer of $5 million from the California Pollution Control Financing Authority's fund balance to the Cleanup Loans and Environmental Assistance to Neighborhoods Account.

We further recommend increasing the department's federal reimbursement authority by $1 million to enable the department to receive recently authorized federal funds for brownfield cleanup. (Increase 3960-001-0890 by $1 million.)

Budget Proposal Lacks Funding for One of Two Statutory Objectives. As discussed above, statute provides for various state functions to promote the development of brownfields. Statute sets two main objectives--the provision of financial assistance for site assessment and the provision of financial assistance for site cleanup. The Governor's budget proposal, however, lacks funding for one of these objectives--there is no funding proposed for new loans and grants for site cleanup under DTSC's CLEAN program. On the other hand, CPCFA plans to continue drawing down a $10 million set-aside to award new grants and loans for site assessment.

Option to Transfer Funds From CPCFA to DTSC. As discussed above, due to the state's General Fund condition, most of the funding initially deposited in the CLEAN account has been transferred back to the General Fund. This leaves slightly less than $1 million available for expenditure from the account in the budget year. The budget proposes that the $1 million be spent solely for ongoing administration and not for new loans and grants for site cleanup. Should the Legislature wish to provide funding for new loans and grants for site cleanup in the budget year, one option available to it is to enact legislation providing for a one-time transfer of $5 million from CPCFA's fund balance to the CLEAN account. Our review finds that CPCFA's fund (off-budget) has a sufficient balance to support this transfer. If the transfer were made, this would leave about $17.5 million in CPCFA's fund for future program activities, in addition to the $7.7 million remaining from the $10 million set-aside for CPCFA's brownfield programs.

Recommend Budget Include Authority to Receive Federal Funds. Our review finds that recently enacted federal legislation--the Small Business Liability Relief and Brownfields Revitalization Act--provides funding to states to be used for grants for brownfield liability relief, cleanup, reuse, and revitalization. According to the department, California appears eligible for about $1 million in subvention funding. We therefore recommend that the department's federal reimbursement authority be increased by $1 million to enable the department to apply for and expend these funds.