Departmental Issues


Secretary for Environmental

Protection (0555)

The Secretary for Environmental Protection heads the California Environmental Protection Agency (Cal-EPA). The Secretary is responsible for overseeing and coordinating the activities of the following departments that make up Cal-EPA:

Beginning in 1999-00, the budget combines the Secretary's budget with that for "Special Environmental Programs," which was previously budgeted separately under Item 3985. Special Environmental Programs includes four agency-wide activities: permit assistance centers, scientific peer review, information technology, and the Circuit Prosecutor Project. The Circuit Prosecutor Project provides funds to train local attorneys in rural areas on enforcement of environmental laws.

The budget proposes expenditures of about $8 million for the Secretary (including Special Environmental Programs) in 1999-00. This amount is about $1.1 million, or 16 percent, above estimated current-year expenditures. Of the proposed expenditures, about $2.5 million is for the Office of the Secretary (the same as estimated current-year expenditures) and $5.5 million is for Special Environmental Programs ($1.1 million higher than estimated current-year expenditures). The increase reflects two major budget adjustments: (1) a one-time increase of $1.6 million for information technology at the new Cal-EPA headquarters (scheduled for completion in the summer of 2000) and (2) a decrease of $444,000 for staffing at the permit assistance centers. Additionally, the budget proposes to continue 24 limited-term positions within the Secretary which were set to expire on December 31, 1999.

Governor Plans Review of Cal-EPA Program Delivery, Structure, and Funding

The administration's planned review of Cal-EPA program delivery, structure, and funding would examine issues of substantial concern to the Legislature. We recommend approval of the budget's proposal to continue 24 positions set to expire on December 31, 1999, but recommend that these positions be made two-year, limited-term.

Governor Plans Review of Cal-EPA. While no specific proposal was included in the budget, the Governor indicated in his summary of the budget that he would direct the Secretary to review the operations of Cal-EPA. Specifically, the Secretary is to examine (1) the delivery of environmental programs, (2) the structure of environmental organizations, and (3) funding mechanisms for environment programs, as ". . . there is substantial room for improving the efficiency, effectiveness, and accountability of environmental programs."

Review Will Address Legislative Concerns. We think that the review proposed by the Governor is important in that it would examine issues that have been of substantial concern to the Legislature. During the past session, the Legislature passed, but the Governor vetoed, SB 1577 (Sher) that would have established a legislative sunset review of the structure and functions of Cal-EPA. (The agency would have sunset on January 1, 2000, unless a statute were passed to continue the agency in some form.) The purpose of this review was to develop recommendations on how the agency could better meet the goals set for it when it was established by a Governor's reorganization plan in 1991. These goals include:

The Legislature has expressed concerns at budget hearings in recent years about how well the agency is meeting these goals. Of particular concern have been the use of science in regulatory development (this lead to a recent statutory requirement for scientific peer review); the effectiveness of enforcement activities within the agency; and how well the agency addresses issues--such as the MTBE issue--that cut across a number of environmental media (air, water, land). We discuss the issue of how well the agency is meeting its goals in further detail in our Analysis of the 1998-99 Budget Bill (please see page B-51). In that write-up, we found that the current organizational structure of Cal-EPA, which includes 12 independent boards, is inherently problematic, and recommended that the agency's structure be reexamined.

Budget Extends Positions Set to Expire on December 31, 1999. The 1998-99 Budget Act made all 24 positions in the Secretary 18-month, limited-term positions to expire on December 31, 1999. This action was taken in conjunction with the Legislature's approval of SB 1577 which would sunset the Secretary on January 1, 2000. However, since the Secretary will not sunset on January 1, 2000 due to the veto of SB 1577, the budget proposes to continue on an ongoing basis the 24 positions that were set to expire on December 31, 1999.

Recommend Continuing Positions, But on a Limited-Term Basis. The Secretary's review of Cal-EPA may result in recommendations that affect the function and structure of the agency. Therefore, we recommend that these 24 positions be made two-year, limited-term positions to expire on June 30, 2001. We think that this would provide the Secretary with sufficient time to conduct the planned review of Cal-EPA and for changes to be made based on the review's findings and recommendations.

Legislative Oversight of Proposed Information Technology Infrastructure

We recommend that the Legislature adopt budget bill language requiring the Secretary to notify the Legislature of the final plan for an information technology infrastructure in the new Cal-EPA headquarters prior to funds being made available for equipment purchases.

Information Technology Infrastructure for New Headquarters. The budget proposes $1.6 million for development and equipment costs for an information technology infrastructure in the Cal-EPA headquarters building currently under construction. The Cal-EPA headquarters--expected to be completed in the spring/summer of 2000--will collocate in one building about 2,700 employees from the six boards and departments within the agency. Currently, these employees are dispersed in several locations throughout Sacramento. The budget proposal is for the installation of a data communications infrastructure that will allow all Cal-EPA employees to communicate with one another and share data.

Equipment Needs Are Not Certain at This Time. Of the $1.6 million proposed expenditure, $393,000 is for staff and consultant contracts to, among other things, evaluate technologies that will provide electronic communication and database sharing, identify areas of potential equipment needs, and oversee the procurement and installation of the networking infrastructure. The remaining $1,207,000 would fund ". . . possible equipment needs." The feasibility study report (FSR) for the project--which has been approved by the Department of Information Technology and the Department of Finance--however, does not specify the equipment needs. Rather, the FSR provides for staff (one position) and consultants to evaluate and finalize the equipment to be purchased. The Secretary does not expect that the consultant will finalize the equipment needs before the end of the current fiscal year.

Recommend That Legislature Be Notified of Chosen Infrastructure. While our review finds that the request for $1,207,000 for equipment may be reasonable, we think that it is premature for the Legislature to approve this amount without being provided details of the equipment ultimately to be purchased. Accordingly, we recommend that the following budget bill language be adopted to require notification of the Legislature prior to $1,207,000 of funds being made available for equipment, as follows:

Item 0555-001-0044. Of the funds appropriated in this item, $1,600,000 is appropriated for the development and installation of a data communications infrastructure in the Cal-EPA headquarters building. Of this amount, up to $393,000 may be expended for a staff position and to contract with an outside vendor to evaluate equipment needs, recommend equipment purchases, and oversee the installation of the procurement and installation of the networking infrastructure. Funds may be expended for equipment purchases no sooner than 30 days after the Secretary notifies the Chairperson of the Joint Legislative Budget Committee and the chairpersons of the legislative fiscal committees of (1) the equipment to be purchased and (2) any written approvals from the Department of Information Technology and the Department of Finance for equipment purchases to the extent such approvals are required.

Department of Conservation (3480)

The Department of Conservation (DOC) is charged with the development and management of the state's land, energy, and mineral resources. The department manages programs in the areas of: geology, seismology, and mineral resources; oil, gas, and geothermal resources; agricultural and open-space land; and beverage container recycling.

The department proposes expenditures totaling $367.4 million in 1999-00, which represents a decrease of about $27.9 million, or 7 percent, from estimated current-year expenditures. Almost 90 percent of the department's proposed expenditures ($329.4 million) represents costs associated with the Beverage Container Recycling Program.

Beverage Container Recycling Program

The Beverage Container Recycling Program was created twelve years ago by Chapter 1290, Statutes of 1986 (AB 2020, Margolin). The program seeks to encourage the voluntary recycling of beverage containers by guaranteeing a minimum payment (California Redemption Value, or CRV) for each container returned to certified recycling centers. Certain provisions of the Beverage Container Recycling Act will expire on January 1, 2000. This report analyzes the implications of those sunsets, and suggests actions for the Legislature's consideration.

Operation of the Program

Specific types of beverages (largely carbonated soft drinks, beer, and wine and spirit coolers) fall under California's recycling program. In general, the program operates as shown in Figure 1 (see next page). Manufacturers make containers and fill them with beverages. Distributors of beverages subject to the program pay the CRV (currently 2.5 cents for most containers) into the Beverage Container Recycling Fund (BCRF), which is maintained by the DOC. Distributors typically pass the cost of the CRV along to retailers who in turn charge the CRV to consumers.

Consumers can recoup the CRV at any certified recycling center when they return their empty containers. Recyclers pay the CRV, as well as scrap value in some circumstances, for each container returned. Recyclers then sell the containers to processors, who collect, sort, clean, and consolidate the materials. In addition to paying scrap value, processors reimburse recyclers for CRV payments they made to consumers. Processors are in turn reimbursed for those CRV pass-throughs out of the BCRF. Finally, processors sell the collected material to container manufacturers or other end users. (In order to simplify this discussion, we subsume processors under the term "recyclers" for the rest of this write-up.)

The program is administered by DOC's Division of Recycling. In addition to maintaining the BCRF, the department enforces program requirements, certifies and audits recyclers and processors, calculates recycling costs and associated fees, encourages the development of markets for recycled materials, and awards grants to public and private groups that promote recycling. For 1998-99, the department has 181 staff and $21 million to administer the program. Program support is drawn from the BCRF, which is expected to take in about $355 million in CRV during the current fiscal year. The department estimates it will expend about $287 million of that amount in CRV payments to recyclers.

Recycling Rates Have Declined

After peaking in 1995, recycling rates for all types of beverage containers have stagnated or declined.

California's Beverage Container Recycling Program was developed with the primary objective of diverting containers from landfills and litter. Although CRV beverage containers only comprise about 3 percent of generated solid waste, their potential for winding up as litter made them a logical target. By guaranteeing a refund payment for these containers, the program provides a financial incentive for consumers to recycle their containers. The same incentives also encourage third parties to retrieve and redeem containers from litter. Assembly Bill 2020 established a goal of maintaining a minimum 80 percent recycling rate for all applicable containers.

Figure 2 (see next page) shows the annual recycling rates for CRV beverage containers since 1988. As the figure illustrates, the 80 percent rate has been met for aluminum cans consistently since 1991, and for all beverage containers as a group from 1991 through 1995. However, recycling rates for glass, plastic, and bimetal (steel-and-aluminum) containers have never met the 80 percent goal.

More worrisome, recent trends reveal a stagnation and decline in recycling rates. The downward trend has been most pronounced since 1995 . The drop in recycling rates means more containers will wind up in landfills or as litter. This problem is compounded by ever-higher volumes of CRV containers sold in the state. Even if recycling rates were to remain constant, the raw number of unredeemed containers would increase as the volume of sales increases.

The recent decline in recycling rates could stem from several factors. Improvements in the state's economy may have dampened the financial incentive to recycle afforded by a 2.5 cent CRV per container. Also, the continuing trend toward food and drink consumption away from home may make recycling less convenient. In addition, limited markets for recycled glass and plastic keep scrap values low, and thus may dampen recyclers' enthusiasm for promoting recycling of those materials. Given a low overall recycling rate for plastic containers, an increase in the market share for beverages in plastic (versus glass and aluminum) containers has helped to pull down the aggregate recycling rate for all containers. Furthermore, as we explain later, subsidies from the BCRF to beverage manufacturers may reduce manufacturers' incentive to switch from container types with low recycling rates to containers with higher recycling rates.

Large, Growing Reserve in Beverage Container Recycling Fund

Low recycling rates have contributed toward a growing reserve in the Beverage Container Recycling Fund that currently exceeds $120 million.

To the extent affected beverage containers are not redeemed for CRV, a reserve accumulates in the BCRF. Our review shows that the reserve of unredeemed CRV has continued to mount throughout the 1990s. Although statutory changes (as well as a one-time diversion of BCRF monies to the Department of Parks and Recreation) in 1995 resulted in a temporary reduction in the reserve, the fund balance has been growing ever since. Figure 3 shows the BCRF balances over time.

The large reserve is frequently identified by various interested parties, such as recyclers and beverage manufacturers, as a way to reduce their expenses associated with the recycling program. The most recently enacted major legislation to make use of the reserve was Chapter 624, Statutes of 1995 (SB 1178, O'Connell). This legislation directed moneys from the BCRF to reduce the expenses of recyclers and manufacturers. It is significant to note that even with this provision, the unexpended balance of the BCRF reached $123 million by the end of 1997-98.

Key Provisions to Sunset in 2000

Major provisions of the program are due to expire on January 1, 2000. This will cause program reserves to increase by more than $80 million annually.

Several major provisions of the program--in particular, provisions created or extended by SB 1178--will expire on January 1, 2000. (These provisions actually expired on January 1, 1999, but were reinstated for one year by Chapter 1, Statutes of 1999 [SB 1, Sher], enacted in late January.) These provisions, which are discussed in greater detail below, include:

An offset of the processing fee paid by container manufacturers.

A special methodology for calculating those processing fees.

A subsidy for convenience zone recyclers.

A subsidy for curbside recyclers.

The expiration of these provisions will effectively eliminate these subsidies, and will likely add more than $80 million to the program's mounting reserves each year.

Offset and Reduction of Processing Fee. The Beverage Container Recycling Program requires manufacturers of beverage containers to pay a per-container "processing fee" whenever DOC determines that the cost of recycling a container type exceeds its scrap value. Revenues from the processing fees are dispersed by DOC in the form of per-container payments to recyclers. In this way, recyclers are assured that their costs, including a reasonable financial return, are covered for each container type. This also is consistent with the Legislature's expressed intent in establishing the program, that each type of container should pay its own recycling costs. Aluminum cans are the only containers whose scrap value exceeds recycling costs, and thus are not subject to processing fees.

Senate Bill 1178 allocated a portion of BCRF reserves to reduce the processing fee paid by manufacturers. Specifically, 25 percent of all CRV payments into the BCRF for each container type are applied annually toward the respective processing fees, thereby backfilling fees that otherwise would be paid by manufacturers. In 1998, this offset effectively reduced glass processing fees paid by manufacturers by half and eliminated bimetal processing fees altogether. While manufacturers of plastic containers do not pay a processing fee, they experience an analogous cost in the form of above-market prices they voluntarily pay to purchase scrap plastic from recyclers. Per SB 1178, plastics manufacturers receive an offset similar to other manufacturers.

From 1993 through 1999, processing fees paid by manufacturers are reduced in another way as well. Specifically, manufacturers are required to pay the fee only on containers that are redeemed, rather than for all containers that are sold. As a practical matter, if only 65 percent of a container type is being redeemed, then manufacturers have to pay only 65 percent of the processing fee. This methodology does not affect the payments that are actually made to recyclers, who continue to receive the full processing fee for each container they accept.

Predetermination of Processing Fee Calculation. As indicated earlier, the purpose of charging manufacturers processing fees is to generate revenues to pay recyclers whenever their recycling costs for a container type exceed the scrap value. In order to calculate processing fees, DOC must ascertain the costs to recycle beverage containers and the scrap value of each container type. However, SB 1178 requires the processing payments to be set at a specified amount regardless of the actual difference between the recycling costs to a recycler and the scrap value of the container type. For glass and bimetal containers, the processing fee is set at $65.72 per ton and $340.26 per ton, respectively, adjusted for inflation. For plastic containers, SB 1178 requires that the recycling fee be set between $770 and $900 per ton.

In anticipation of the expiration of SB 1178's provisions, DOC conducted surveys in 1998 in order to establish new processing fees for 1999. Figure 4 (see next page) compares (1) DOC's initial calculation of processing fees to be paid by manufacturers and processing payments to be made to recyclers for 1999, and (2) DOC's revised figures in response to Chapter 1's reinstatement of SB 1178's provisions. Without Chapter 1, costs to manufacturers of glass and plastic containers would have been about three times as high.

Subsidy to Convenience Zones. An important feature of the Beverage Container Recycling Program is the requirement that areas close to supermarkets be served by certified recycling centers. If no certified recycling center is operating within a half-mile of a supermarket conducting a specified volume of business, the supermarket itself would be required to accept returned containers. These half-mile-radius areas are referred to as "convenience zones" ("CZs").
Figure 4
Comparison of 1999 Per-Container Processing Fees

Before and After Chapter 1, Statutes of 1999

(Per Ton)
1999 Before Chapter 1 1999After Chapter 1
Payment to Recyclers Actual Amount Paid by Manufacturers Payment to Recyclers Actual Amount Paid by Manufacturers
Aluminum NA NA NA NA
Glass 1.4 cents 1.4 cents 1.9 cents 0.5 cents
Bimetal 5.3 cents 5.3 cents 4.1 cents 0.0 cents
Plastica 3.6 cents 3.6 cents 3.5 cents 1.1 cents
a Though not formally paying a processing fee, plastic container manufacturers have paid a voluntary amount to increase scrap payments to recyclers. Figures are rough estimates assuming a market value of $120/ton for scrap plastic.
NA--Not applicable.

When the program was established in 1986, recyclers were offered a per-container subsidy as an enticement to locate in CZs. Assembly Bill 2020 authorized these subsidies (originally called "incentive payments") until January 1, 1991. Chapter 1266, Statutes of 1992 (AB 87, Sher), extended the subsidies (renaming them "handling fees"), allocating a total of $18.5 million per year for the subsidy until January 1, 1996. Senate Bill 1178 extended the subsidy until January 1, 1999, and Chapter 1 again extended it until January 1, 2000.

The CZ recyclers receive 1.7 cents per container in handling fees, up to a maximum of $2,000 per month. Fees are paid to recyclers in priority order from those with the highest to the lowest volume of business, until the $18.5 million allocated for each year is depleted. About 70 percent of all CZ recyclers received handling fees in 1998.

The expiration of the handling fee will place CZ recyclers on the same footing as "old line" recyclers, who pre-date the Beverage Container Recycling Program and have never received handling fees. Both groups, however, will continue to be subsidized with processing fees.

Subsidy to Curbside Programs. Another important aspect of the recycling infrastructure is curbside recycling programs. Though not mandated by the Beverage Container Recycling Program, many local governments provide for the collection of specified recyclable materials (such as newspapers and various containers) from local residents. Residents typically place their recyclable material into dedicated bins, which are picked up as part of scheduled trash collection. Although local governments usually recoup CRV and processing fees for the beverage containers they collect, as well as scrap value for most recyclables, these revenues do not cover the costs of collection and other overhead. Remaining curbside program costs typically are borne by residents through fees.

Under SB 1178, $5 million from the BCRF is provided annually to subsidize curbside programs. The money is allocated among the state's approximately 513 curbside programs in proportion to the number of beverage containers they collected. The subsidy generally covers only a fraction of a typical program's operating costs. The expiration of the subsidy on January 1, 2000 could result in slightly higher monthly bills for residents, although other government revenues, increased operating efficiencies, or lower payments for contracted services could help to offset the lost subsidies.

Use Reserves to Raise Recycling Rates

In order to raise recycling rates, we recommend the enactment of legislation to authorize the raising of CRV payouts and the dispersal of grants to encourage the expansion and creation of new curbside recycling programs. We further recommend the Legislature not to continue the processing fee offset, the restrictions on the Department of Conservation's calculation of processing fees, and the handling fees for CZ recyclers.

The expiration of the provisions discussed above will alter the economics of the Beverage Container Recycling Program. In general, the effect would be to simplify aspects of the program and to somewhat increase the costs experienced by beverage manufacturers and CZ recyclers. If manufacturers were to pass on all those new costs to consumers, the price of a CRV beverage in a glass or plastic container could increase by about one or two cents, respectively. Meanwhile, the expiration of SB 1178's (and Chapter 1's) provisions will cause the program to receive more than $80 million in additional funds each year.

In our opinion, the Legislature should respond to the twin issues of declining recycling rates and increasing reserves. The Legislature has the opportunity to ensure that moneys collected by the program are used to boost recycling rates. With this central objective in mind, we believe four central questions deserve the Legislature's consideration:

What Should Be Done With Program's Mounting Reserve? As noted above, the reserve in BCRF has increased to more than $120 million. Before Chapter 1 reinstated curbside subsidies and handling fees, DOC estimated the fund's reserve would reach $147 million by the end of 1998-99, and $179 million by the end of 1999-00. In addition, reserves of collected processing fees were expected to reach about $28 million by the end of 1998-99, and $78 million by the end of 1999-00. Thus, if SB 1178's provisions had not been extended by Chapter 1, total program reserves would have reached about $257 million by June 2000. Even with the one-year extension of those provisions, total program reserves are expected to approach $200 million.

We believe that reserves of this magnitude are unwarranted. We recommend that they be reduced by targeting excess moneys toward efforts that directly improve recycling rates. Increasing the per-container CRV payout (without increasing CRV pay-in) could be an effective method. The previous major increase in CRV (from 1 cent to 2.5 cents in 1990) resulted in a dramatic increase in the overall recycling rate (from 54 percent to 70 percent in one year).

We believe that permitting further increases in CRV payout for containers experiencing low recycling rates, without any corresponding increase for the CRV pay-in by distributors, would be a prudent and effective use of mounting BCRF revenues. Such a change would impose no additional costs on any stakeholders--consumers, distributors, container manufacturers, recyclers, and others--and would create a greater financial incentive for recycling. The actual increase in CRV payout should be recalculated periodically by DOC, as a function of recycling rates and fund reserves. For illustration purposes, a one cent increase in the CRV payout for glass and plastic containers would cost approximately $100 million per year at current recycling levels.

We recommend, therefore, that DOC be authorized to disperse a portion of fund reserves for increasing CRV payout for container types with low recycling rates. In order to ensure that the higher CRV payout has the desired effect of increasing recycling rates, we recommend that DOC be required to report to the Legislature on the higher payouts' effects on actual recycling rates after one year. The DOC also should report on how the higher payouts affect the condition of the BCRF.

How Should Processing Fees Be Structured? When the Legislature established the Beverage Container Recycling Program in 1986, it expressed its intention that each container type should "pay its own way." In other words, the costs of recycling a certain type of container should be borne by the manufacturers and purchasers of that type of container. This is sometimes referred to as the "polluter pays" principle.

By imposing a processing fee on containers with high recycling costs--in excess of scrap value--the program returns the costs of recycling to the responsible parties (manufacturers and consumers). To the extent that manufacturers pass the fee on to consumers, this in turn directs consumers toward containers that are more efficiently recycled. In addition, by using the processing fees to help cover the costs of recyclers, the program ensures that viable recycling opportunities are provided for all eligible container types.

We believe, therefore, that manufacturers should bear the full cost of the processing fees. Offsetting those fees, as currently being done until January 1, 2000, dilutes the market signals the fee is designed to communicate to manufacturers and consumers.

In addition, we believe that processing fees should reflect, as closely as practicable, the actual differential between recycling costs and scrap value for beverage containers. We believe that prescribing the fee amounts unreasonably constrains DOC's ability to assign fair and effective processing fees.

Based on these considerations, we recommend that the Legislature (1) not continue the processing fee offset past its scheduled sunset date and (2) continue to allow DOC to base its processing fee calculation on periodic cost and scrap value surveys for 2000 and beyond.

Should CZ Recyclers Receive Handling Fees? When the Beverage Container Recycling Program was created, CZ recyclers entered a new and unproven market for CRV recycling. Start-up costs, programmatic requirements (such as hours of operation and location), and market uncertainties posed significant difficulties for these new recycling businesses. These conditions were especially onerous when compared with those faced by "old line" recyclers, whose start-up costs had already been depreciated and some of whom were exempt from some of the Beverage Container Recycling Program's requirements.

The disadvantages experienced by CZ recyclers have diminished over time. They have developed an infrastructure, established a presence, increased consumer awareness, and gained a better understanding of the market over the past dozen years. As the program enters its thirteenth year, we see no justification for continuing a special subsidy to CZ recyclers. Further, because DOC surveys reveal that consumers do not experience more "convenience" from convenience zones (compared with opportunities afforded by old line recyclers and curbside programs), providing a special subsidy for CZ recyclers in order to enhance consumer convenience is even less warranted.

We recommend, therefore, that handling fee subsidies for CZ recyclers not be continued past their scheduled sunset date.

Should Curbside Programs Receive Subsidies? Curbside recycling programs are an important and growing element of the state's recycling infrastructure. These programs recycle a wide range of materials, including newspapers, cardboard, and various food and beverage containers. By providing consumers with the convenience of being able to recycle materials in front of their homes, California's more than 500 curbside recycling programs have become a significant element in communities' efforts to redirect waste away from landfills.

Surveys conducted by DOC demonstrate that consumers value the convenience of curbside programs to recycle their beverage containers, even though they are essentially donating their CRV to the curbside operators. We believe that these programs serve an important role in encouraging and facilitating beverage container recycling. Support for the expansion of curbside recycling appears to be an appropriate activity for the Beverage Container Recycling Program. Currently, about one in four California residents does not have access to curbside service. Further, some curbside programs are not currently able to accept certain types of beverage containers.

We recommend that the Legislature create a new grant program for extending curbside recycling. We believe that a portion of the grants should be earmarked specifically to help extend the types of beverage containers that an existing program can accept. By defraying start-up costs, these grants would provide an incentive to local governments to establish or expand curbside recycling programs.


The Beverage Container Recycling Program has become an important component of the state's recycling efforts. While it has achieved considerable success when compared with the early 1980s, recycling rates have stagnated and even declined in recent years.

We believe that the January 1, 2000 sunset of the provisions relating to processing and handling fees will improve the program's ability to encourage beverage manufacturers and consumers to make choices that increase recycling rates. We recommend that the sunset provisions not be extended. Rather, we recommend that the program provide grants to assist the startup of curbside programs. We further recommend that DOC be authorized to disperse a portion of fund reserves for increasing CRV payout for container types with low recycling rates.

Audits Reveal Overpayment and Other Problems In Land Conservation Program

We recommend approval of the department's request for funding to continue audits of land conservation grants. We recommend further that the Department of Finance's Office of State Audits and Evaluation and the Department of Conservation explain at budget hearings how the department should address the regulatory and procedural shortcomings identified by the audits and what steps the department is taking to do so.

In carrying out one of its primary missions, the department encourages the preservation of agricultural and open-space land by administering the California Land Conservation Act, also known as the Williamson Act. Through this act, owners of undeveloped property are offered reduced local tax assessments in exchange for agreeing not to develop the land for ten years. These contracts between landowners and local governments are renewable. If a landowner cancels a contract, the county must be paid a cancellation fee. These fees must be forwarded to the state. About 16 million acres of undeveloped land currently is covered by Williamson Act contracts.

Local governments are reimbursed by the state for a portion of the tax receipts that they forego through these contracts. The amount of these reimbursements, or subvention payments, depends on the type and quantity of land under contract. The department currently expends about $35 million in subvention payments annually.

Audits Reveal Mismanagement and Violations. In 1996-97 and 1997-98, the department contracted with the Department of Finance's Office of State Audits and Evaluations (OSAE) to audit five counties for compliance with the program's requirements. The audits found numerous instances of inflated claims for state subventions, failure to pay cancellation fees owed to the state, and various other irregularities.

The faulty reporting identified by the audits resulted in overpayments of at least several million dollars from DOC to the counties over the past several years. The full extent of overpayment to the 48 participating counties is likely to be many times this amount.

Recommend Permanent Funding of Audits and Regulatory Reform of Program. The DOC requests an increase of $90,000 to continue the audits on a regular basis. We think this request is warranted. It is important that there be continuing efforts to monitor compliance with this program, both to ensure the promotion of its goals and to guard against the inappropriate use of state funds.

In addition, we note that the audits identified a number of departmental procedures and regulations that may have inadvertently contributed to the overpayments and other errors. We recommend that OSAE report at budget hearings on its recommendations for correcting these problems, and that DOC report on the steps it has taken in response to the audits' findings.

Department of Forestry

and Fire Protection (3540)

The California Department of Forestry and Fire Protection (CDFFP), under the policy direction of the Board of Forestry, provides fire protection services directly or through contracts for timberlands, rangelands, and brushlands owned privately or by state or local agencies. In addition, CDFFP (1) regulates timber harvesting on forestland owned privately or by the state, and (2) provides a variety of resource management services for owners of forestlands, rangelands, and brushlands.

The budget requests $534.9 million for total departmental expenditures in 1999-00. This is an increase of $47.3 million, or 9.7 percent, from estimated current-year expenditures. Of that increase, $43.3 million is from an increase in the level of funds budgeted for fire protection--specifically, an increase in the airtanker fleet within the aviation management unit of 10 new S-2T airtankers.

The General Fund would provide the bulk of CDFFP's funding--$378.9 million. The remaining funding would come from the Forest Resources Improvement Fund ($12.9 million), various other state funds ($13.9 million), and federal funds and reimbursements ($129.2 million).

Increased Reserves Can Fund Legislative Priorities

The Forest Resources Improvement Fund is projected to have a $12.7 million reserve by the end of 1999-00--significantly higher than the past reserve amount of about $5 million. This reserve offers the Legislature opportunities to fund its priorities relative to forest improvement activities.

The Forest Resources Improvement Fund (FRIF) derives most of its revenues from the sale of forest products on four of the state's eight demonstration forests. The original purposes of FRIF, when established in 1978, was to reinvest revenues from the sale of forest resources back into California's forests. This was to be done through (1) forest improvement programs; (2) urban forestry programs; (3) wood energy programs; and (4) reimbursement to the General Fund for the cost of operating the state's demonstration forests. As a result of the state's fiscal crisis in the early 1990s, the Legislature amended statute to allow FRIF also to be used for the regulation of forest practices, direct funding of state forest operations, forest pest research and management, and support of state tree nurseries.

Large FRIF Reserve Resulted From Expenditures Being Vetoed in Current Year. For the current year, the Legislature funded forest practice regulation from the General Fund while providing $16.8 million in FRIF money to forest resource management programs. The Governor subsequently vetoed $8.5 million of the FRIF expenditures. This resulted in an increase in the FRIF reserve which is projected to reach $12 million by the end of the current year.

For 1999-00, the budget proposes to spend $12.9 million from FRIF on forest resources management, leaving a reserve of $12.7 million.

Because FRIF revenues are generated mainly from timber sales, annual total revenues may fluctuate. Thus, it is prudent to have some reserve in the account. In past years, the reserve has been maintained at about $5 million annually. The projected 1999-00 reserve of $12.7 million would far exceed that amount.

One-Time Expenditure Options for the Legislature. The sizeable reserve provides the Legislature with opportunities to further enhance forest improvement activities if it so desires. Specifically, the Legislature could provide one-time expenditures related to forest resources management to fund legislative priorities. Some options that the Legislature could consider are:

Enhance Operations of State Nurseries. The State Nursery Program provides a genetically appropriate and reliable supply of forest tree seed, seedlings, and other associated plant materials for reforestation or rehabilitation after forest fires or other catastrophes on nonfederal forestlands in the state. State nurseries are the major supplier of seedlings to small forest landowners throughout California. However, the number of seedlings the state produces has decreased considerably, compared to historic levels.

Proposed Budget Brings Bareroot Seedlings Close to Maximum Capacity. The maximum production level of bareroot seedlings is 2.7 million. The production level has remained at 1.2 million seedlings since 1996-97. For 1999-00, the budget proposes increasing production to 2.5 million bareroot seedlings.

Container Seedlings Nearing Historic Levels. The historic production level of container seedlings was about 305,000 annually until 1996-97 when it was reduced to the current level of 125,000. The 1999-00 budget proposes to increase production to 250,000 container seedlings.

Additional Funding for Forestry Grants. The department provides grants to landowners to encourage investment in, and improved management of, California forest lands and resources. The objective is to ensure adequate high quality timber supplies and to protect and maintain a productive and stable forest resource system in the state. Grant programs include:

California Forest Improvement Program (CFIP) Grants. Under this program, assistance is provided on a cost-share basis to private forest landowners, Resource Conservation Districts, and nonprofit watershed groups. This program includes a wide range of benefits including forest management planning, site preparation, tree purchase and planting, timber stand improvement, fish and wildlife habitat improvement, and land conservation practices for parcels containing up to 5,000 acres of forest land. The current-year budget includes about $850,000 for CFIP grants. For 1999-00, the budget includes $3.6 million for these grants.

California Urban and Community Forestry Program. The purpose of the program is to create sustainable urban forests providing benefits to local communities by (1) arresting the decline of urban forest resources through proper management and planting of trees in communities and (2) maximizing potential use of tree and vegetation cover to reduce energy consumption, improve air and water quality, and produce an assortment of products. For 1999-00, the budget proposes $1.6 million for this program--an increase of about $1.5 million over current-year level.

Forest Products Utilization and Special Projects. The purpose of this program is to improve the utilization of forest woody material and to reduce the fuel buildup on California forest lands. One project currently undertaken by the department is the "Tahoe ReGreen" project. For 1999-00, the budget proposes $159,000 in reimbursements from the California Tahoe Conservancy for this project which is about the same level as the current year.

The FRIF account was established by the Legislature to encourage investment in the state's forest resources. Among other things, the Legislature wanted to encourage investment in private forest lands as well as urban forests. With the current reserves in FRIF, the Legislature could consider increasing funding for CFIP and the Urban Forestry programs, among others, in order to further achieve these objectives.

Staff State Nurseries With California Conservation Corps And Corrections Crews

We recommend that the Departments of Forestry and Fire Protection and Corrections (CDC) report at budget hearings on the feasibility of dedicating an inmate crew to provide labor for state nurseries. We further recommend adopting budget bill language requiring the department to use California Conservation Corps or CDC crews, or both, as the labor source for the state nurseries if dedicated crews can be made available.

The department currently operates two state nurseries--the Magalia Reforestation Center (MRC) at Magalia in Butte County, and the Lewis A. Moran Reforestation Center (LAMRC) at Davis in Yolo County. The state operated a third nursery in Ben Lomand (Santa Cruz County) but it was closed in the early 1990s due to fiscal constraints. The Nursery Program collects, processes, and stores seeds to protect the genetic integrity and diversity of forest trees and plant species, and supplies forest tree seeds and seedlings for reforestation.

The Magalia Reforestation Center. The MRC was established in 1952 and is capable of producing 2.7 million bareroot seedlings per year but currently only produces 1.2 million seedlings. The MRC is currently staffed with two positions and two 16-person California Conservation Corps (CCC) crews which do the work equivalent to 12.5 positions annually. The CCC crew labor is provided under an interagency agreement in which CDFFP provides firefighting training in exchange for nonreimbursed CCC labor to respond to fires, floods, and other emergencies as needed. These crews also work at the state nurseries, at no cost to the nurseries. However, the number of crew members available varies depending on emergency needs.

Lewis A. Moran Reforestation Center. The Lewis A. Moran Reforestation Center (LAMRC) was established in 1917 and can produce 400,000 to 500,000 container seedlings per year. Its current production level, however, is 125,000. In addition to container production, nursery sales, and seed processing, this nursery also houses the State Seed Bank operations. Staffing at LAMRC is currently 5.2 positions. Additionally, CDC provides a 14-member crew from its Delta Conservation Camp which works three to eight days per month at LAMRC.

The Budget Proposes Increased Funding for State Nurseries. The budget proposes to increase funding for state nurseries from $654,000 to $894,000 in 1999-00 and staffing from 7.2 to 28 positions. The request would include $389,000 to provide 17.3 positions in temporary help. The department is proposing to use temporary help instead of the crews from CDC and CCC as the labor source for the nurseries on an ongoing basis.

Substituting Paid Temporary Help for CCC Crews at MRC Not Justified. The department proposes to use paid temporary help at Magalia instead of CCC crews because the current agreement does not provide adequate CCC labor to fully staff both the fire crew and the nursery. As a result, the nursery is disadvantaged whenever the crews are deployed for emergency response.

Instead of hiring temporary help for CDFFP, we recommend CDFFP contract for additional CCC crews on a reimbursed basis specifically for the nursery. Doing so would address CDFFP's concerns regarding the current CCC crew work arrangement. It would also be consistent with current law which directs CDFFP to cooperate with CCC to provide training and facilitate, wherever feasible, the creation of forest resources improvement work opportunities. The CCC has indicated that it would "dedicate" a 15-member crew to the nurseries that would not be required to leave their assignment in order to respond to emergencies.

Substituting Paid Temporary Help for CDC Crews at LAMRC Not Justified. The department proposes to substitute paid temporary help instead of fire crews from CDC's Delta Conservation Camp at LAMRC because:

Instead of hiring temporary help in place of CDC crews, we recommend that CDFFP and CDC report at budget hearings on the possibility of (1) using CDC crews from other correctional facilities that are closer to LAMRC (for example, California State Prison, Solano, in Vacaville) and (2) varying crew sizes to provide the necessary seasonal labor. Using crews from other correctional facilities could continue to provide CDFFP with low cost labor at the nurseries in addition to providing additional work slots for minimum security inmates. The CDC should also report at budget hearings as to any restrictions on the movement of inmates at work sites that could limit their effectiveness in the nursery.

Recommend Budget Bill Language. In order to direct CDFFP to use CCC and CDC crews, if dedicated crews can be made available, we recommend the following budget bill language be adopted (Item 3540-001-0928):

Of the amount appropriated in this item, up to $389,000 shall be used to provide crews from the California Conservation Corps or the Department of Corrections, or both, to the state nurseries if dedicated crews can be made available.

Department of Fish and Game (3600)

The Department of Fish and Game (DFG) administers programs and enforces laws pertaining to the fish, wildlife, and natural resources of the state. The Fish and Game Commission sets policies to guide the department in its activities and regulates the sport taking of fish and game. The DFG currently manages about 850,000 acres including ecological reserves, wildlife management areas, hatcheries, and public access areas throughout the state.

The budget proposes total expenditures of $206.5 million from various sources. Of that amount, $201 million is for support, $4.5 million for local assistance, and $1.5 million in capital outlay. The proposed 1999-00 budget is an overall decrease of about $7 million (3.4 percent) from the estimated current-year level. This includes a General Fund reduction of $11.3 million, offset by increases of about $4 million from other sources. The bulk of the General Fund decrease is the result of the elimination of one-time funding in the current year of $7 million to backfill for lost revenues to the Fish and Game Preservation Fund as a result of El Niño.

Department's Reorganization Plan: An Update

We recommend that the department report at budget hearings on whether it plans to continue the reorganization effort under the new administration. To the extent the reorganization effort will continue, the department should present an update of its progress to date and the expected time line for full implementation. We further recommend that the department advise the Legislature at budget hearings what it plans to accomplish in the budget year given its reorganization efforts to date.

The department initiated a reorganization in 1997. In our Analysis of the 1998-99 Budget Bill (pages B-63 through B-69) we provided a preliminary overview of the department's reorganization plan. At that time, it appeared that only the organizational structure of the department--the number and location of regions, the number of divisions and the functions carried out by each--was being changed. However, as the department implements the reorganization, DFG indicates that it will also involve two other components:

Program Restructuring. In order to meet statutory requirements and objectives, DFG organizes its responsibilities by program area. The department has stated that the old program structure no longer reflected DFG's mission. The new program structure is identified for the first time in the 1999-00 Governor's Budget.

Management Systems Development. This component of the reorganization is still underway. It includes (1) the development of work plans for all programs, (2) activity time and expenditure reporting for all employees, and (3) tracking the use of resources and managing programs using these work plans and time and expenditure data.

According to the department, restructuring the organization, programs, and management systems will increase DFG's ability to implement its strategic plan, better define and communicate departmental and program priorities, improve cooperation between regions and divisions, and enhance accountability.

In the following sections, we provide a more detailed description of each of these components of DFG's reorganization.

Structural Reorganization to Better Develop and Administer Programs. The structural reorganization helps to define how the programs are delivered. This component of the department's reorganization has been completed and includes (1) the consolidation of nine divisions into four and (2) the expansion of five regions into seven.

Figure 1
Department of Fish and Game

Program Responsibilities

Under Current and Previous Divisions


Habitat Conservation
Biodiversity Conservation Program (for example, NCCP, Bay-Delta, wildlife and habitat protection restoration)
Wildlife & Inland Fisheries Division
  • Hunting, fishing, and other public use

-- Management of department lands and facilities

-- Conservation education and enforcement

Office of Spill Prevention and Response
  • Spill prevention and response
Inland Fisheries
  • Hunting, fishing, and other public use

  • Management of department lands and facilities
Marine Fisheries
  • Hunting, fishing, and other public use
Bay Delta
  • Biodiversity Conservation Program
Wildlife Management
  • Biodiversity Conservation Program

  • Hunting, fishing, and other public use

  • Management of department lands and facilities
Natural Heritage
  • Biodiversity Conservation

  • Hunting, fishing, and other public use

  • Management of department lands and facilities

  • Conservation education and enforcement
Environmental Services
  • Biodiversity Conservation

  • Enforcement

  • Spill prevention and response
Wildlife Protection
  • Conservation education

Oil Spill Prevention and Response
Spill prevention and response

Regions Deliver Services. The seven regions will administer programs in accordance with policy direction from the divisions. In this way, the department expects that departmental policies will be carried out in a more coordinated and consistent manner. The new structure also created two new regions in an attempt to enable the department to manage more effectively the vast geographic areas of the state which often have diverse wildlife populations and habitats.

(Please see pages B-63 through B-69 of our Analysis of the 1998-99 Budget Bill for more details on this component of the reorganization.)

New Program Structure Should Facilitate Priority Setting and Accountability. Through the years, DFG has had its responsibilities increased, especially in regard to its natural resources protection activities such as enforcement of the California Environmental Quality Act and the California Endangered Species Act. What once used to be an exclusively hunting- and fishing-related department, has evolved to be one of the state's main trustees of all natural resources. To reflect the changes in its responsibilities and its changing activities to meet those responsibilities, the department has realigned its programs. The realignment is an attempt to better define what DFG does and how it allocates its resources to meet existing statutory requirements and objectives. This realignment should enable the department (1) to focus on its priorities given the broader range of responsibilities within its mission, and (2) to be more accountable for its allocation of resources.

Priorities. As Figure 1 shows, the new program structure more clearly presents how the department allocates its resources. Figure 1 illustrates that in the previous structure, many of the programs shared the same responsibilities. For example, habitat conservation efforts (namely biodiversity conservation) was carried out under at least four different programs with varying program objectives and policies. This made it difficult, if not impossible, for the department to know what it was achieving or even how to set goals. By grouping common activities together, the department should be able to better understand its needs, establish priorities, and evaluate programmatic outcomes.

Accountability. In addition to the department understanding what it is doing and therefore better able to evaluate its funding, the new programs should help other interested parties--such as the Legislature, hunters, anglers, conservationists, and environmentalists--to understand how the department is allocating resources. The programs are displayed annually in the Governor's budget and provide a glimpse of the department's activities.

The new program alignment is displayed for the first time in the 1999-00 Governor's Budget. However, because work plans (we discuss this in the next section) have not been completed for each program, and therefore the goals are not yet established, resource allocation as presented in the budget essentially represents the status quo. Recognizing this is a transition year and that the objective of the reorganization is to be more goal oriented and accountable, the department should present the Legislature at budget hearings what it plans to accomplish in the budget year in each of the program areas.

New Management Systems to Increase Accountability. In order to increase accountability, better manage programs, and prioritize departmental needs given budgetary and personnel limitations, DFG has begun to implement changes in its management and information systems. Specifically, the department is (1) developing work plans; (2) requiring activity time and expenditure reporting; and (3) tracking how resources are used and managing programs using the work plans and the time and expenditure data.

Work Plans. The work plans are to be developed for each program. Standard formats and terminology will be used in the development of work plans to ensure that they can be compared to each other and from year to year. Additionally, work plans are to focus on key results and program objectives.

The work plans are currently being developed and it is not clear when the department expects to have them completed. We believe that in developing these work plans, the department should set goals based on statutory requirements. Additionally, the work plans should establish efficient and effective methods to achieve those goals.

Activity Time and Expenditure Reporting. In addition to work plans, the department is requiring all staff to report on activity time used and expenditures by activity. This will enable the department to maintain better records on where their special fund dollars are being spent and on what employees are focusing their time.

Managing Programs and Tracking Expenditures. The DFG expects these efforts to increase accountability. The department will use the information from the work plans and time and expenditure data to determine if objectives are being met and if they are being done on budget. Additionally, once the system is fully implemented, the department should be able to more accurately describe what its personnel does, how much it spends on programs, and the sources of those funds. This should enable the department to be more informed in setting its priorities.

Recommendations. Our review shows that the department's reorganization effort is a step in the right direction to improve its priority setting and accountability. Given the change in administration, we recommend that the department report at budget hearings whether it plans to continue the reorganization effort. To the extent the new administration carries on the reorganization effort, the department should present an update of its progress to date and the expected time line for full implementation. We further recommend that the department advise the Legislature at budget hearings what it plans to accomplish in the budget year for each of the programs given its reorganization efforts to date.

State Coastal Conservancy (3760)

The State Coastal Conservancy (SCC) is authorized to acquire land, undertake projects, and award grants for the purposes of (1) preserving agricultural land and significant coastal resources, (2) consolidating subdivided land, (3) restoring wetlands, marshes, and other natural resources, (4) developing a system of public accessways, and (5) improving coastal urban land uses. In general, the projects must conform to California Coastal Act policies and be approved by the conservancy governing board.

The 1999-00 budget includes $15 million from the General Fund for capital outlay, including $10 million for a new challenge grant program and $5 million to expand the existing Natural Community Conservation Planning program in San Diego County. The $15 million appropriation is about $10.9 million less than the estimated current-year General Fund expenditure for capital outlay by the conservancy.

Challenge Grant Program Proposed

We recommend that the conservancy explain at budget hearings the criteria it will use to allocate grant funds under the Challenge Grant Program. We further recommend adoption of budget bill language to ensure none of the proposed $10 million is used for the conservancy's administrative costs.

The SCC proposes to create a new competitive grant program to fund coastal access and wetlands restoration projects. The program will provide "challenge grants," which are intended to leverage federal and private funds for qualifying projects. This program is consistent with the conservancy's existing statutory authority.

The SCC is requesting $10 million for the Challenge Grant Program. Projects receiving grants from this source would be required to be matched by at least equal levels of nonstate funds. The grants would be available to local agencies and private entities. Grant funds also could be expended directly by the SCC on qualifying projects, so long as the match requirement is met.

Grant Criteria Should Be Explained. We believe the proposal would help to preserve some of the state's vital coastal resources. The matching requirement at least doubles the total funds available, and helps ensure the commitment of local and private partners to coastal resource preservation and enhancement.

However, given the broad range of projects which could conceivably compete for funding under this program, it is not possible to determine how the proposed expenditure maximizes the state's goal of protecting the coast without knowing which specific projects, or at the very least, categories of projects, would be provided grant funds. To enable the Legislature to determine whether the conservancy's planned use of grant funds meets legislative priorities, the conservancy should provide a clear description of (1) the major criteria which grant applications must meet, and (2) how funds would be allocated--for instance, whether certain funds would be set aside for different types of projects. The information would be helpful to the Legislature in gauging the long-term impact of these grants. For example, to the extent the grants are aimed at acquiring new property for the state, they may result in increased maintenance costs to the state.

We recommend, therefore, that the conservancy report at budget hearings on what major criteria it plans to establish for the grants, and how grant funds would be allocated to various categories of projects.

Grant Funds Should Not Pay SCC's Administrative Costs. The SCC and the Department of Finance have indicated that the entire $10 million requested would be expended as grant funds. The SCC's administration of the grant program, including advertising, technical assistance, and contract administration, would be funded out of existing resources. However, the SCC's written proposal indicates these administrative activities would be funded out of the $10 million request. In order to maximize the use of these funds for coastal access and wetlands restoration projects, we recommend the adoption of budget bill language prohibiting the use of the $10 million for the conservancy's administrative costs.

Of the $10 million appropriated in this item for the Challenge Grant Program, no funds shall be used for support of the conservancy's administrative costs.

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