LAO 2003 Budget Analysis: Resources

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill

Air Resources Board (3900)

The Air Resources Board (ARB), along with 35 local air pollution control and air quality management districts, protects the state's air quality. The local air districts regulate stationary sources of pollution and prepare local implementation plans to achieve compliance with federal and state standards. The ARB is responsible primarily for the regulation of mobile sources of pollution and for the review of local district programs and plans. The ARB also establishes air quality standards for certain pollutants, administers air pollution research studies, and identifies and controls toxic air pollutants.

The budget proposes $163 million from various funds, primarily special funds, for support of ARB in 2003-04. This is an increase of $2.7 million, or 2 percent, from estimated 2002-03 expenditures. The budget reflects an increase of $6 million for equipment to evaluate fine particulate matter pollution and a shift of $10 million from the General Fund to fees in the stationary source program.

Stationary Source Fee Proposal Lacks Detail, Should Go Further

The budget proposes a $10 million shift from the General Fund to fees in the stationary source program. We recommend the Legislature set parameters for collection of this new fee. We also recommend the Legislature go further to shift an additional $4.4 million in General Fund stationary source costs to fees. (Reduce Item 3900-001-0001 by $4.4 million and increase Item 3900-001-0115 by a like amount.)

Stationary Source Program. Air quality was first regulated at the local level in 1947 when state statute authorized the creation of an air district in every county. (Subsequent law provided for the formation of multicounty and regional districts). The focus of air regulation was initially on stationary sources of "visible" pollution, such as smoke and particulate matter.

Today there are 35 local air districts that are the primary agencies responsible for regulating emissions from stationary sources of pollution. Stationary sources include "point" sources (fixed sources such as petroleum refineries) and "area" sources (sources which individually emit small quantities of pollutants but which collectively emit significant emissions, such as gas stations).

The ARB carries out research, planning, and compliance in conjunction with the local districts and oversees local air district activities. The ARB also has primary jurisdiction over certain stationary sources of pollution, including consumer products (such as aerosol sprays) and architectural coatings (such as paints and wood stains). These sources generally involve emissions that come from the widespread use of a product that is portable, available statewide, and generally used in a similar fashion.

Current Law Includes a Stationary Source Fee on Major Polluters. The California Clean Air Act (Chapter 1568, Statutes of 1988 [AB 2595, Sher]) caps at $3 million the total amount of fees that may be levied on stationary sources for support of ARB's stationary source program. Further, these fees may only be levied on facilities emitting over 500 tons of pollution per year. Currently, only about 75 of the 20,000 stationary point sources statewide pay the stationary source fee. The fee is approximately $26 per ton of emissions. Additionally, to the extent that more high-emitting polluters are operating in the state, the fee per ton of emissions is adjusted downward due to the $3 million statewide cap on fees. Similarly, should a point source reduce its tonnage below 500 tons per year, the fee for the rest of the remaining stationary sources increases.

Governor Proposes to Increase Stationary Source Fee Revenues. The budget proposes $39.6 million for ARB's stationary source program, of which $14.9 million is to come from the Air Pollution Control Fund (stationary source fees), $10.4 million from the General Fund, and the balance mainly from federal funds and reimbursements. The budget reflects the Governor's proposal to shift $10 million from the General Fund to fees in the stationary source program. The budget proposes to generate the additional fee revenues by (1) removing the statutory $3 million cap on total stationary source fee revenues and (2) expanding the base of fee payers to include manufacturers of consumer products and architectural coatings. The proposal keeps the threshold level of tons at which the fee begins to be assessed at 500 tons per year.

The Governor's proposal specifically adds to the list of fee payers the new category of consumer products (primarily aerosols) and architectural coatings (paints, stains, varnishes). According to the board, these products contribute significantly to ozone pollution. For example, when certain consumer products are used, they emit volatile organic compounds that are a key contributor to ozone. It is not the impact of a single use, but rather the cumulative impact of many product uses that brings their contribution to over 500 tons per year. There are approximately 40 consumer product companies and 16 architectural coatings companies whose products meet these criteria.

Basis of Governor's Proposal is "Polluter Pays" Principle. According to the Governor's budget documents, the basis for the proposed shift of funding from the General Fund to fees is the implementation of the polluter pays principle. This principle provides that private individuals or business that use or degrade a public resource (such as air, water, or wildlife) should pay all, or a portion of the social cost imposed by their use of the resource.

Issues for Legislative Consideration. The proposed shift of funding from the General Fund to fees is consistent with our prior recommendation to increase fee-based support in the board's stationary source program. (See our Analysis of the 2002-03 Budget Bill, page B-80.) Therefore, we are supportive of the Governor's proposal in concept. However, we think that there are several issues regarding the details of the proposal that the Legislature should consider in evaluating the Governor's fee plan. These include the following issues which are discussed in further detail below:

Legislature Should Set Parameters for Collection of New Fee. The board has not specified how this fee will be structured, leaving the details to be determined in the regulatory process. We think, however, that the Legislature should provide guidance through legislation for the fee structure, including who should pay the fee, what the fee rates should be, and whether there should be a cap on total revenues collected from the fee.

We think the Legislature should consider increasing the fee paying universe to include a broader group of fee payers, thereby spreading the burden of paying fees and reducing the burden on individual fee payers. While the Governor's proposal includes adding a new category of fee payers, we think the Legislature should also consider adding further stationary point sources. For example, reducing the threshold level of pollution before the fee is assessed from 500 tons to 100 tons per year would increase the fee base from about 75 to 300 fee payers. These polluters are already tracked in both federal and local air pollution control district databases as major polluters, and they include such large businesses as furniture manufacturing, metals manufacturing, propane and fuel storage plants, commodity manufacturing, and sewerage systems.

Further Shift to Fees Possible. In our Analysis of the 2002-03 Budget Bill, we recommended the enactment of legislation to increase fee-based support for the stationary source program to replace all General Fund support with the exception of the program's research division. We considered the research division's expenditures appropriately funded from the General Fund.

The 2003-04 Governor's Budget proposes $10.4 million from the General Fund for the stationary source program, of which $6 million is for the research division and $4.4 million for other activities. Consistent with our recommendation last year, we think the $6 million in the research division should continue to be funded from the General Fund and that the $4.4 million for other activities is appropriately funded by fees. Therefore, we recommend that the Legislature shift an additional $4.4 million from the General Fund to fees in the board's stationary source program.

Recommend Denying Governor's Proposal to End Reporting to the Legislature. Finally, as part of the fee proposal, the Governor proposes to delete the current statutory requirement for an annual report on the expenditure of stationary source fees. This report, due on January 1 of each year, reports to the Governor and Legislature on the expenditure of fees collected in the Air Pollution Control Fund and includes a discussion of the status of implementation of programs in the stationary source program. In light of the new proposal for fees, we think this reporting requirement is particularly important for legislative oversight of the stationary source program. This report will allow the Legislature to monitor the board's progress in applying the new fees. Therefore, we recommend denying the proposed statutory change.

Agriculture Exemption Could Cost State Transportation Funds

We recommend the enactment of legislation amending statute to remove the existing exemption for agriculture pollution sources from permitting requirements, in order to comply with federal law. Failure to comply will result in federally imposed sanctions, including the loss of federal transportation funding to the state.

Federal Permitting Requirements. On May 14, 2002, the federal government signed a lawsuit settlement agreement which will require "major" agricultural emission sources in California to apply for federal air quality permits as required by Title V of the federal Clean Air Act. Currently, state law exempts such emission sources from air quality permitting requirements. Title V defines "major sources" as those polluting 100 tons per year or more in moderate nonattainment areas, 25 tons per year in serious and severe nonattainment areas, and ten tons per year in extreme nonattainment areas. In agricultural operations, this would mean that stationary diesel engines and certain confined feeding operations, among other sources, would no longer be exempt from air pollution permitting requirements.

Legislature Must Act to Prevent Federal Sanctions. The settlement agreement dictated a schedule for processing permits for this new category of permittees. (Permit applications are submitted to the U.S. Environmental Protection Agency [U.S. EPA].) Specifically, permit applications are due for agricultural sources that operate diesel engines by May 2003, and by October 2003 for all other major agricultural emission sources. Should these permits be delayed due to a failure to remove the state's exemption for agricultural sources, two sanctions would be imposed. First, beginning in November 2003, the federal government would impose "two-to-one offsets" on permittees who propose to emit new sources of pollution in some of the state's air districts. In order for the district to grant a permit in this situation, the district must demonstrate that two-to-one offsets were a condition of each new permit. (Currently, offsets vary by local air district, with the most common permit requiring a reduction of an equal amount of pollution for each new permit.) Second, beginning in May 2004, the federal government would withhold federal transportation funding to the state. The total amount of this funding at stake is projected to be up to $2.5 billion annually.

Given the severe nature of the federal sanctions, we recommend the enactment of legislation to amend state statute to remove all exemptions for agricultural air pollution permitting before May 2003, to allow permits to be submitted to U.S. EPA pursuant to the schedule dictated by the settlement agreement. By doing so, the state would avoid the risk of federal sanctions.

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