The 2018-19 Budget:

Fire Recovery Proposals

LAO Bottom Line. The Governor’s budget assumes $760 million in additional General Fund will be needed in 2017‑18 for response and recovery associated with the 2017 fires in Northern and Southern California, $388 million of which will be reimbursed by the federal government in 2018‑19. For 2018‑19, the Governor proposes a total of $35 million from the General Fund for recovery costs associated the fires in Northern California, such as related to rebuilding public infrastructure and backfilling local tax revenue losses. While we do not raise specific concerns about the administration’s funding requests, we recommend that the Legislature direct the administration to report at budget hearings on the proposed funding and submit formal proposals for any future budget-year funding requests. We also recommend that the Legislature consider its priorities for allocating assistance to local governments affected by disasters and longer-term strategies for reducing future wildfire risk, such as strategies to improve forest health.

Background

California Faced Very Destructive Fires in 2017. The state experienced some of the most destructive and costly fires in its history in 2017. Specifically, starting on October 8, 2017, the state experienced a series of fires in Northern California’s wine country, particularly Napa and Sonoma Counties. Due to hot, windy conditions, these fires spread rapidly, eventually burning more than 200,000 acres and destroying about 9,000 structures. These fires were also the most lethal in the state’s history, killing 44 people.

In December, the state experienced another set of devastating fires, this time in the southern part of the state. Most notably, on December 4, 2017, the Thomas Fire began burning near Santa Paula in Ventura County. The fire spread quickly due to strong winds and rugged terrain that made fire fighting difficult, eventually burning about 280,000 acres, destroying over 1,000 structures, and killing two people. We note that, in addition to the direct damage caused by the Thomas Fire, the fire also denuded hillsides. This created the conditions that resulted in mudslides in Montecito in January 2018. These mudslides killed 21 people and also damaged or destroyed public infrastructure and hundreds of homes. Due to their large scale, both the October and December fires were declared emergencies by the state and major disasters by the federal government, making them eligible for various types of state and federal assistance, as described further below.

State Provides Various Funding for Fire Response. The state funds the California Department of Forestry and Fire Protection (CalFire), which provides fire response in wildland areas that the state is responsible for protecting, known as state responsibility areas (SRAs). SRAs cover about one-third of the state’s acreage and include primarily privately owned timberlands, rangelands, and watersheds. Most of CalFire’s budget is supported by the General Fund and includes an amount—the Emergency Fund (or E-Fund)—set aside specifically to pay for additional, unanticipated costs of emergency fire suppression of large fires. The budget act allows the Department of Finance (DOF) to augment CalFire’s E-Fund budget during the course of the year, as needed. We note that California’s fire response expenditures have increased in recent years. For example, as shown in Figure 1, CalFire’s expenditures, adjusted for inflation, increased by more than 60 percent between 2006‑07 and 2016‑17, and are projected to increase more in 2017‑18, in large part due to the major fires described above. This increase in expenditures is likely driven by a variety of factors, such as increasingly destructive fires, labor costs, and additional development in SRAs. We note that in the case of large fires, the California Military Department (CMD) often assists CalFire in responding to fires by providing resources such as additional aircraft for fire suppression.

State Also Provides Funding for Fire Recovery. For large fires that are declared state emergencies, such as the October and December 2017 fires, the state usually provides certain types of assistance for recovery. The state’s recovery efforts are typically coordinated by the Office of Emergency Services (OES) and carried out by a variety of state departments. For example, in the immediate aftermath of a large fire, the California Department of Resources Recycling and Recovery and Department of Toxic Substances Control will often be involved in cleaning up debris from fires. This is because fires create ash and can expose hazardous waste such as paint, heavy metals, and asbestos, which can pose health and environmental hazards if not disposed of properly. In addition, the state funds a large share—usually 75 percent—of the costs to rebuild state and local infrastructure, such as roads, public buildings, and schools, with local governments generally paying the remaining share. (As discussed below, state and local cost shares are reduced when an event is declared a federal emergency or disaster.) For some past disaster events, the state has funded other types of recovery assistance, such as support for emergency shelters and transitional housing, limited financial assistance to certain individuals facing disaster loses, staff and supplies for emergency evacuation centers, and reimbursements to counties for lost property taxes. Statute allows DOF to allocate funding to pay for these types of unanticipated costs that occur during emergencies, such as from the state’s budget reserve—known as the Special Fund for Economic Uncertainties.

Federal Government Provides Funding for Major Disasters. The federal government provides significant financial support for very large fires that are federally declared emergencies or major disasters, such as the October and December 2017 fires. The federal government typically reimburses 75 percent of eligible state and local government costs for responding to very large fires and repairing subsequent damage to public facilities. In the case of state-owned facilities, the state pays the remaining 25 percent. In the case of local government facilities, the remaining costs are typically shared between the state (19 percent, which represents 75 percent of the remaining costs) and the local government (6 percent, which represents 25 percent of the remaining costs). In some cases, the federal government has covered an even greater share of expenses—as much as 100 percent of eligible costs within the first 30 days of a disaster and 90 percent of costs thereafter. (In addition to the assistance described above, other entities—such as private property owners and insurance companies—also bear significant costs associated with fires.)

Governor’s Proposal

Budget Assumes $1.8 Billion for Fires in 2017‑18, Mostly Offset by Reimbursements. As summarized in Figure 2, the budget assumes that the state will spend about $1.8 billion in 2017‑18 for fire response and recovery activities related to the recent Northern and Southern California fires. These estimated costs are spread across 11 separate state departments and include expenditures on activities such as fire response, debris removal, temporary shelters, and operating emergency evacuation centers. As shown in Figure 3, of this amount, the budget assumes that, in 2017‑18, $931 million will be reimbursed by the federal government, $69 million will come from CalFire’s base E-Fund budget, and $4 million will be paid by local governments in the form of cost sharing. This leaves a net increase of $760 million in General Fund costs in 2017‑18 associated with these fires. The budget assumes that, of this amount, the federal government will reimburse an additional $388 million in 2018‑19. Thus, the budget assumes that the estimated net costs to the state’s General Fund for fire response and recovery activities conducted in 2017‑18 will ultimately be $371 million. (This represents just over 20 percent of the state’s estimated expenditures in 2017‑18 of $1.8 billion.)

Budget Proposes $35 Million in Additional Expenditures in 2018‑19. As shown in Figure 4, the Governor’s budget provides an additional $34.7 million in 2018‑19 from the General Fund for costs related to the Northern California fires. This amount includes:

• Backfill for Local Taxes ($23.7 Million). The administration estimates that cities, counties, and special districts will experience lower property tax revenue totaling $23.7 million in 2017‑18 and 2018‑19 as a result of the fires, and proposes to backfill these losses from the state General Fund. (Additionally, the budget assumes an additional $13 million in Proposition 98 General Fund to backfill schools in Northern California for local property tax revenues.)

• State and Local Infrastructure ($10.7 Million). OES estimates that it will incur a total of $50 million in costs in 2018‑19 to fund the repair of state and local infrastructure damaged by the fires, such as roads and bridges. Of this total amount, the administration assumes $37.5 million will be reimbursed by the federal government and $1.8 million will be covered by local governments. The Governor’s budget proposes $10.7 million from the General Fund to support the remaining costs. OES also indicates that it anticipates some additional costs for repairing state and local infrastructure beyond the budget year.

• Housing Assistance ($212,000). The Department of Housing and Community Development requests $212,000 in 2018‑19 to assist local communities identify housing-related grants and develop local recovery plans.

• State Supplemental Grant Program (SSGP) ($130,000). The Department of Social Services requests $130,000 in 2018‑19 for the SSGP, which provides financial assistance to individuals after they have exceeded other sources of funding, such as federal assistance and private insurance.

LAO Assessment

As noted above, the state experienced some of the most destructive and costly fires in its history in 2017. These fires imposed significant burdens—including financial costs—on the affected communities. Accordingly, it is appropriate for the state to provide significant assistance to help mitigate losses and assist communities rebuild, as is reflected in the administration’s proposals. While we do not raise concerns with the purposes or amounts of the funding proposed, we identify a few issues that the Legislature may want to consider as it reviews these specific proposals.

Uncertainty Regarding Costs. There is significant uncertainty regarding what the actual expenditure levels will be in both the current and budget years. This is to be expected because the fires occurred recently and it takes time for full evaluation of disaster costs to be compiled and for determinations to be made about eligibility and cost shares for federal funding. The Legislature should be aware that the administration plans to make budget revisions this spring and the amount of these revisions could be substantial, particularly for the southern California fires, which occurred only weeks before the release of the Governor’s budget. Notably, there are several categories of expenditures that are not currently included for the Southern California fires, such as those related to OES providing assistance to local communities with rebuilding local infrastructure and CMD providing fire response support. Federal reimbursements also likely will increase, partially offsetting these additional state costs. We also note there will likely be some additional recovery-related costs in years beyond 2018‑19, since rebuilding public infrastructure can take several years and the state typically funds these costs on a reimbursement basis.

Administration’s Budgeting Approach Does Not Include Usual Information on Budget-Year Proposals. We do not raise concerns with the types of activities the Governor proposes to fund in the budget year because these are consistent with historical recovery activities funded by the state. However, the administration did not provide budget change proposals (BCPs) to fully justify the amount of requested budget augmentations. In our view, this is not the preferred approach because it makes it more difficult for the Legislature to fully understand what is proposed for funding and what alternatives might have been considered, such as funding other types of financial or in-kind assistance to communities.

Proposal for Tax Backfills Involves Policy Choices. The budget proposes $24 million to backfill losses of local tax revenues, which is a significantly higher amount than has been provided in recent years due to the severity of the 2017 fires. For example, the state provided approximately $2 million in tax backfills for the Lake and Calaveras fires in 2016‑17. Moreover, the amount requested likely will increase in May when better information about the losses from the Southern California wildfires is available. The Legislature has discretion in providing local assistance in the event of a disaster. Accordingly, the Legislature will face policy choices about how to prioritize providing local governments with assistance given limited state funding. This includes considerations such as (1) what types of assistance to provide, such as tax backfills, long-term loans, or reduced cost shares; (2), the duration of the assistance to provide, given that it may take a number of years for communities to fully recover; and (3) the amount of assistance to provide, such as whether to provide full backfills for all affected communities or some lesser amount.

State Also Faces Longer-Term Fire Challenges. The recent fires once again illustrate the widespread risk faced by California communities. While it is critical to address the short-term needs associated with the recent fires—such as proposed by the Governor—it is also important to consider strategies to address longer-term issues that are leading to more severe and costly fires. One reason for the increase in destructive fires is the poor health of the state’s forests. For example, almost 130 million trees have died in recent years due to drought and bark beetle infestations, contributing to fire risk. Additionally, certain forest management practices employed over the past several decades—including limitations on allowing moderate fires to burn as they historically would have—have significantly increased the density of trees and brush across the state’s forests, providing fuel that intensifies the severity of fires when they inevitably do occur. There are also other contributors to the longer-term trend of increasingly costly and damaging fires, such as the increased development in wildland areas that are at risk for wildfires, which places more property and life in danger when wildfires occur in the state.

LAO Recommendations

Based on the considerations we identify above, we provide the following recommendations to the Legislature to ensure that it has the information it needs to effectively deliberate on these proposals.

Report at Budget Hearings. We recommend that the Legislature require the administration to provide additional information at budget hearings on its proposals for budget-year augmentations related to the fires. In particular, the administration should report on the specific activities that they propose to undertake and the alternatives considered. This will provide the Legislature with information necessary to evaluate the administration’s cost estimates and assess the trade-offs associated with funding these activities compared to other potential activities related to fire recovery and resilience.

Require Use of BCPs for Future Requests. We recommend that the Legislature direct the administration to provide BCPs for future proposals requesting response and recovery funding in the budget year. The submission of BCPs would ensure that the Legislature has the appropriate information—such as descriptions of the proposed activities as well as the alternatives considered—to evaluate the spending requests.

Consider Preferred Approach to Providing Local Assistance. We recommend the Legislature consider the types and amounts of local assistance it would like to provide for the October and December 2017 fires based on its policy priorities. Specifically, we recommend that it consider (1) what type of funding to provide (whether tax backfills or other assistance), (2) for how long to provide the assistance, and (3) the amount of assistance to provide, such as whether to backfill all tax losses or only a portion. We note that it may make sense to provide significant funding to local governments affected by the 2017 fires given the large scale of destruction. However, the decisions that the Legislature makes on the assistance to provide to locals for the recent fires could set precedents for future disasters.

Consider Strategies to Address Longer-Term Issues. We recommend that the Legislature consider strategies to address the underlying, longer-term issues that are contributing to increasingly destructive and costly fires. For example, the Legislature might want to review the extent and success of the state’s programs to improve forest health through forest thinning projects and intentional controlled burns. In addition, the Legislature might want to review how state funding appropriated in recent years for forest health—such as the $200 million provided from the Greenhouse Gas Reduction Fund in 2017‑18—has been utilized. The Legislature could also consider whether there are other actions that could be implemented to expedite or expand the amount of forest health projects that could be implemented with existing resources.