|Budget Issue:||Support and training for the network of California fairs|
|Program:||Department of Food and Agriculture|
|Finding or Recommendation:||Modify Governor’s proposal to provide funding to the fairs on a one-time basis and target that funding to the fairs at highest risk of closure. Structure funding to incentivize improved management. Pass budget bill language requiring CDFA to report on fairs at greatest risk of closure due to their financial conditions and provide recommendations to address their challenges.|
Background. State law establishes 80 California fairs, including 54 fairs run by statutorily created District Agricultural Associations, 23 county fairs, 2 fairs that promote the citrus industry, and the California State Fair. These fairs generate revenue from their operations that is used to support their activities and maintenance. In 2013, the fairs generated over $350 million in total revenue.
The California Department of Food and Agriculture (CDFA) oversees the fairs and offers some training and technical assistance. This includes monitoring 15 fairs that CDFA has identified as at risk for closure because they have operating deficits. The CDFA also distributes state funding that supplements local fair revenues. Annual state support for the fairs comes from the Fairs and Expositions Fund, a state special fund that derives revenue from certain horse racing licensing fees. Over time, however, monies in this fund have decreased as horse racing activity declined. To maintain the level of state support for the fairs, the Legislature appropriated $32 million from the General Fund in 2009-10 and in 2010-11 to supplement the lower amount of funding available from the Fairs and Expositions Fund. General Fund support for the fairs was eliminated in 2011-12. As a result, state funding for fairs since 2011-12 has been limited to annual appropriations of approximately $3 million to $4.5 million from the Fairs and Expositions Fund.
Governor’s Proposal. The Governor’s budget proposes a baseline increase of $3.1 million from the General Fund to support the fairs. This includes (1) $2.6 million to be distributed among the fairs for general operations, and (2) $486,000 for two CDFA positions to assist the fairs with completing required audits of their activities and to provide training for the staff that manage the fairs. The $2.6 million would be distributed to fairs according to their annual revenues, with smaller “classes” of fairs receiving slightly larger amounts of money. For example, each fair in the smallest class of fairs (Class I fairs, with revenues between roughly $8,000 and $613,000 in 2013) would receive $50,920, while the largest class of fairs (Class VII fairs, with revenues between about $20 million and $72 million in 2013) would receive no support. The administration states that the purpose of this proposal is to decrease the likelihood that some fairs will close for financial reasons.
Proposal Raises Concerns. We find that the Governor’s proposal raises three concerns. Specifically, the proposal does not:
Target Funding to At-Risk Fairs. The proposal does not address the main problem identified, specifically to ensure the continued operation of the fairs at risk of closure. This is because the proposal does not target funding among the fairs based on their financial condition. Instead, fairs would receive a set amount of funding based on how much revenue they generate regardless of their financial condition. For example, under the proposal, the five Class I fairs that reported operating deficits in 2013 would receive the same amount of funding as the six Class I fairs that reported an operating surplus.
Provide Incentive to Improve Fair Operations. The way that the proposal would distribute funding does not provide fairs that run an operating deficit an incentive to improve their operations. Specifically, providing an ongoing lump sum payment annually to all fairs in the same class would allow those fairs that are running deficits to continue to do so without having to make any changes to their management or operations.
Include Analysis of Constraints or Challenges Faced by Certain Fairs. The proposal also does not include a fair-by-fair analysis of the causes of the financial constraints or challenges faced by those fairs at risk of closure. Given the number of fairs and the range of operating circumstances (such as location, regional population, and amenities offered), each fair may experience unique challenges. For example, some fairs may have creative and entrepreneurial management but may face challenging markets and competition from other entertainment venues. In other cases, better fiscal management might be sufficient to ensure financial sustainability. Without information on the specific drivers of the various fairs’ financial conditions, the Legislature is unable to identify the best ways to address their challenges.
LAO Recommendations. We recommend that the Legislature modify the Governor’s proposal to provide funding to the fairs on a one-time basis and target that funding to the fairs at highest risk of closure. We also recommend that this funding be structured in such a way as to incentivize improved management. This could be done in a couple of ways. For example, the funding could be provided as a low- or no-interest loan. Alternatively, the funding could be tied to a percentage of the fair’s operating deficit. In 2013, 29 of the fairs had operating deficits totaling $2.8 million. The Legislature could appropriate funding to meet 75 percent of those fairs' deficits, at a cost of $2.1 million ($500,000 less than the Governor’s proposal).
We also recommend the Legislature pass budget bill language requiring CDFA to provide a report with the 2016-17 budget that identifies the fairs at greatest risk of closure due to their financial conditions, the main reasons that each of those fairs face challenges earning enough revenue to support their operations, and recommendations for addressing the specific challenges faced by those fairs. The purpose of this report is to provide the Legislature with the information it needs to determine how best to address the needs of the fairs.
Finally, we note that this proposal raises questions about the most appropriate role of the state in supporting fairs. These fairs are on state properties and its employees are state employees. However, they provide primarily local benefits and, until recent years, have not been reliant on the General Fund to operate. To the extent that the Fairs and Exposition Fund continues to be a limited revenue source and some fairs persistently run operating deficits, the Legislature may wish to consider whether these fairs should continue to receive state funds. In fact, in 1997-98, CDFA closed two fairs that it determined were not financially viable.