Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

CALFED Bay-Delta Program

The CALFED Bay-Delta Program, a consortium of 18 state and federal agencies, was created to address a number of interrelated water problems in the state's Bay-Delta region. Program implementation began in September 2000. Over a seven-year period, the program is estimated to cost $8.5 billion.

The 2001-02 budget proposes $414 million in state funds for CALFED. In determining a funding level for the program, there are a number of policy, fiscal, and programmatic issues for the Legislature to consider.

CALFED Created to Address Bay-Delta Water Problems

Problems in the Bay-Delta. The San Francisco Bay/Sacramento-San Joaquin Delta Estuary (the Bay-Delta) supplies much of the water used in the state for urban, agricultural, and environmental purposes. A number of interrelated water problems have developed in the Bay-Delta, including inadequate water quality, declining fish and wildlife populations, deteriorating levees, and uncertain water supplies.

The Bay-Delta Accord. In December 1994, federal and state agencies that have regulatory and resource management responsibilities in the Bay-Delta signed the Bay-Delta Accord. Among other things, the accord provided for the creation of the CALFED Bay-Delta Program to develop a long-term solution to the Bay-Delta problems. Specifically, the objectives of the program are to:

• Provide good water quality for all uses.
• Improve fish and wildlife habitat.
• Reduce the gap between water supplies and projected demand.
• Reduce the risks with deteriorating levees.

The CALFED Bay-Delta Program. Pursuant to the Bay-Delta Accord, the CALFED Bay-Delta Program (CALFED) was administratively created in 1995 as a consortium of federal and state agencies that have regulatory authority over water and resource management responsibilities in the Bay-Delta. The program is currently housed in the Department of Water Resources (DWR) and has an executive director. As shown in Figure 1, CALFED now encompasses 18 agencies. For 2001-02, the budget proposes $414 million of state funds in various departments for CALFED. In addition to the executive director, the budget proposes at least 363 personnel-years in seven state departments to implement CALFED-related programs in 2001-02. Of these staff, about 59 are for overall CALFED program management and policy coordination.

"Record of Decision" Is Foundation for CALFED Program

An August 2000 planning document referred to as the "Record of Decision" provides a framework for the implementation of CALFED-related programs and projects costs, over a seven-year period, of $8.5 billion. The Record of Decision proposes a cost-sharing of expenditures among federal, state, and user/local sources.

August 2000 "Record of Decision." The CALFED Bay-Delta Program is divided into three phases: problem identification, planning, and implementation. Since 1995, CALFED has been developing a planning framework. The planning process culminated in August 2000 with the signing of the "Record of Decision" (ROD) by the lead state and federal CALFED agencies. With the signing of the ROD, the lead agencies approved the final environmental review documents for the framework. The ROD divides CALFED into 11 interrelated program elements. The ROD is focused on the first seven years of the program's implementation beginning in September 2000, although it is anticipated that it will take at least 30 years to carry out programs and construct projects in each of the 11 elements.

Record of Decision Guides Program Implementation. The ROD lays out the key parameters for the implementation of CALFED in the following ways:

• Designates Lead Agencies. The ROD includes an implementation agreement among the 18 CALFED agencies that lays out the roles and responsibilities of each participating agency. A lead agency has been negotiated for each program element.
• Establishes Program and Project Goals, Types of Projects to Be Pursued. The ROD sets goals, some very broad and others rather specific, to guide CALFED programs and projects. For example, the broadly defined goal of the water transfer program is to facilitate water transfers while protecting the environment and local economies impacted by transfers. In other cases, the ROD guides projects more specifically. This may be done by setting geographic boundaries (such as by setting a goal to restore habitat in a particular stream) or by identifying a specific type of project that should be studied or implemented (such as a particular type of water storage facility).
• Estimates and Allocates Costs. The ROD includes a rough estimate of costs to carry out each of the program's elements for the first seven years of implementation. The cost estimates are very much subject to change, as CALFED gains experience by reviewing how well its programs and projects that have been implemented are meeting their goals. The schedule also allocates responsibility for paying these costs among federal, state, and user/local sources.

Figure 2 shows CALFED's 11 program elements, the estimated costs for each element over seven years, and the proposed cost-sharing for the program.

Seven-Year Costs Total $8.5 Billion; Proposed Cost-Sharing Contingent on Availability of Funds. As shown in Figure 2, CALFED estimates total costs of about $8.5 billion to implement the program over seven years. It is important to note that the proposed cost-sharing is relatively arbitrary and is not based on available sources of funds. Rather, in most cases the cost shares reflect simply a 50-50 split between state and federal sources or a 33-33-33 split among federal, state, and user/private sources. The CALFED documents state explicitly that the commitments of the state and federal governments under the ROD are contingent upon the availability of appropriated funds or upon enactment of legislation providing other sources of funding.

The Budget Proposal

The budget proposes $414 million of state funds for CALFED-related programs in 2001-02, of which $94 million is from the General Fund and the balance mainly from bond funds. The largest expenditures are for ecosystem restoration and water storage.

Current-Year Expenditures. The budget estimates CALFED-related expenditures from state funds of about $605 million in 2000-01. Of this amount, about $175 million is from the General Fund, with the balance mainly from Propositions 13 ($258 million) and Proposition 204 ($133 million) bond funds. Of the General Fund amount, the expenditure of $135 million is contingent on legislation (not yet enacted) certifying that the planned use of the funds is consistent with the ROD.

For the current year, the largest state expenditures are in the ecosystem restoration ($188 million) and the water storage ($105 million) programs. A majority of the ecosystem restoration expenditures are funded by Proposition 204 funds that became available upon the signing of the ROD. A majority of the water storage expenditures are for local groundwater projects funded by Proposition 13 bond funds appropriated in the 2000-01 Budget Act.

Budget Proposes $414 Million of State Funds for 2001-02. As shown in Figure 3 (next page), the Governor's budget proposes $414 million of state funds for various departments to carry out CALFED in 2001-02, a decrease of about 32 percent from the current year. Of this amount, $94 million is proposed from the General Fund, with the balance mainly from Proposition 13 ($148 million) and Proposition 204 ($150 million) bond funds.

As Figure 3 (see next page) indicates, CALFED expenditures are spread among seven state agencies, with the largest expenditures in DWR, the Secretary for Resources, and the State Water Resources Control Board. (The funding for the secretary—mainly for ecosystem restoration—will be disbursed to a number of state departments to administer for specific projects.) As in the current year, the largest state expenditures are proposed for ecosystem restoration ($161 million) and water storage ($56 million). The budget proposes lower expenditures in 2001-02 than in the current year for all program elements. This is largely due to lower expenditures from Proposition 13 bond funds in the budget year.

In the sections that follow, we raise a number of issues for the Legislature to consider in its review of the Governor's budget proposal for CALFED. As discussed below, we think that the Legislature's policy direction to, and oversight of, CALFED would be improved by changing the way in which the Legislature reviews CALFED-related budget proposals.

An Approach to Enhancing Legislative Review of CALFED Proposals

In order for the Legislature to effectively evaluate CALFED-related budget proposals—which are spread throughout several state departments—and provide appropriate policy direction to CALFED, we recommend that the water and natural resources policy committees and budget subcommittee, in each house, jointly consider CALFED budget proposals.

Trade-Offs Are Inherent in CALFED's Plan. All elements of CALFED are interrelated and interdependent. For example, water quality is dependent on stable levees and healthy watersheds. Construction of a water storage or flood control facility could negatively impact fish habitat. Increasing the reliability of water supplies could reduce the incentive to conserve water. Given these interrelationships, there are trade-offs inherent in CALFED's plan that require policy choices to be made.

Legislature Should Be Apprised of Trade-Offs and Policy Choices. Since the ROD was agreed upon, the Legislature has not had an opportunity to review CALFED's planning framework as reflected in the ROD. Implementation of the planning framework implies a certain level of funding. Because the state will be called upon to contribute substantially to this total funding level over many years, we think that it is important for the Legislature to be informed of the policy choices inherent in the CALFED framework. The Legislature will need this information to evaluate whether these policy choices are consistent with legislative priorities, determine what policy direction should be given to CALFED, and decide on the state's funding contribution.

As CALFED is starting to implement projects and programs, there will be many funding requests on an annual basis—spread among various state agencies—for the Legislature to approve. We think that it would be difficult for the Legislature to make this evaluation if it were to review CALFED proposals on a department-by-department basis. This is because such a review would not give the Legislature a comprehensive picture of the proposed funding and program activities and how the various program elements work together.

Recommend Joint Policy/Budget Committee Hearings. To facilitate the Legislature's review of the Governor's budget proposal for CALFED, we recommend that each house's water and natural resources policy committees and budget subcommittee hold joint hearings on CALFED's budget proposals. This will help identify any need for legislation to provide policy direction to CALFED and will provide a policy basis for the budget subcommittees as they decide which proposals to fund. These oversight hearings should be held on an as-needed basis; the Legislature may wish to continue this practice in future years.

As regards the 2001-02 budget proposal, CALFED should be directed to provide at the joint hearings certain information to present the "big picture" of CALFED so as to facilitate the Legislature's decision-making process. The CALFED should be directed to:

• Provide summary details on the major activities planned for each of the program's 11 elements in the budget year, including project specifics and time lines.
• Explicitly set out the policy choices inherent in the ROD and made in developing the budget proposal and explain how the 11 program elements work together.
• Discuss the programmatic implications of the lack of federal funds for CALFED in the current federal fiscal year, the implications of the uncertainty in future federal funding, and the administration's plans if federal funds do not materialize in the budget year. (We discuss this issue later.)

Based on this information, the Legislature should enact legislation to authorize and provide direction to particular components of the CALFED program. Specifically, as we discuss below, legislation should be enacted to define a governance structure for CALFED. Additionally, we think that CALFED's proposal for an Environmental Water Account raises a number of policy issues that are best addressed in legislation.

New Governance Structure Needed to Improve Accountability

We recommend the enactment of legislation to establish a governance structure for CALFED that will improve accountability to the Legislature.

While legislative review of CALFED's budget in joint hearings will improve the Legislature's oversight of CALFED, we think that the Legislature's oversight will continue to be complicated by CALFED's current organizational structure.

As discussed in our Analysis of the 2000-01 Budget Bill (please see page B-48), CALFED's current organizational structure is loosely configured, as it has evolved administratively and has not been authorized in statute. The lines of accountability among the program's director and the heads of the various state agencies involved in the program are unclear. It is also not clear who is ultimately responsible for making decisions. As a result of this loose structure, there is not a clear point of accountability to the Legislature for CALFED-related decisions and expenditures.

Therefore, we recommend the enactment of legislation to establish an organizational structure that provides this accountability. A revised organizational structure could take many forms. For example, a new state oversight commission could be established, as proposed in AB 909 (Machado) last session. Whatever form it takes, we think that the organizational structure should at a minimum include the following responsibilities for the entity overseeing CALFED program implementation:

• Ensure coordination among the various agencies implementing the program.
• Set expenditure priorities among the program's 11 elements and inform the Legislature of these priorities on an annual basis.
• Establish a work plan encompassing all CALFED-related activities, including program milestones. This work plan should be submitted annually to the Legislature.
• Provide greater accountability to the Legislature in the budget process. The new entity should be required to submit to the Legislature a budget for all proposed CALFED-related expenditures. The new entity should also be required to report periodically to the Legislature on the progress in implementing the ROD.

Lack of Federal Funds a Major Concern

The budget proposal for CALFED assumes a level of federal funds to be allocated among all program elements. We recommend that CALFED advise the Legislature on the programmatic implications and the administration's plans if federal funds do not materialize. We further recommend that budget bill language be adopted to provide clear direction on expenditure priorities. We also recommend the adoption of supplemental report language to require a status report on federal funding.

Federal Funding for CALFED Has Not Been Forthcoming. As shown in Figure 2, CALFED's proposed cost-sharing plan in the ROD includes a federal funding contribution totaling at least $2.4 billion over seven years. Of this amount, $365 million is scheduled currently for the state's 2001-02 fiscal year. However, no federal funds for CALFED were appropriated for the current federal fiscal year (ending September 30, 2001). Based on the current-year experience, federal funding for the 2002 federal fiscal year (covering the period October 2001 through September 2002), is highly uncertain.

Budget Proposal Assumes Federal Funding. According to CALFED, if less than the $365 million in federal funding were forthcoming for 2001-02, the state would need to reevaluate its budget proposal. This is because the budget is based on the seven-year cost-sharing plan in the ROD, thereby assuming a certain amount of federal funds to be available for each of the 11 program elements. Therefore, no element would be able to complete all planned activities if federal funds fail to materialize. The impact of a lack (or a reduced level) of federal funds would vary by program element. For elements that assume a large amount of federal funds, a lack of federal funds would have a major impact on the ability to complete planned activities in the budget year. For those elements that assume smaller amounts of federal funds, the programmatic impact would be less severe.

Legislature Should Evaluate State's Options if Federal Funds Do Not Materialize. It is important for the Legislature to be informed of the programmatic implications if federal funds do not materialize as proposed in the cost-sharing arrangement. The Legislature should also be informed of CALFED's expenditure priorities if a lack of federal funds necessitates a redistribution of state funds among the program elements as proposed in the Governor's budget. To the extent those priorities do not coincide with the Legislature's priorities, the Legislature should provide clear direction to guide the redistribution of funds.

Accordingly, we recommend that the Legislature adopt budget bill language that establishes its expenditure priorities for state funds should the federal funds not materialize. In addition, because it will not be known until later this year whether federal funds for CALFED will be appropriated for the 2002 federal fiscal year, we recommend that the Legislature adopt the following supplemental report language to ensure that it is updated on the status of federal funding for CALFED:

Item 3860-001-0001—Department of Water Resources. The CALFED Bay-Delta Program (CALFED) shall report to the Legislature by November 1, 2001 on the federal appropriations for CALFED for the 2002 federal fiscal year. The report shall provide details of the programmatic implications of this level of federal funding in 2001-02, to the extent that it is less than the $365 million indicated in CALFED's cost-sharing plan for "year 2" of program implementation. The report shall also identify any plans to revise CALFED's budget for 2001-02, as approved in the 2001-02 Budget Act.

CALFED's Environmental Water Account Raises Policy Issues

We find that the budget proposal for an Environmental Water Account (EWA) raises many policy and implementation issues that should be considered by the Legislature before funding is provided for this activity. We therefore recommend that funding be deleted from the budget bill and instead be put in legislation authorizing EWA. (Reduce Item
3600-001-0001 by $261,000, Item 3860-001-0001 by $1,752,000, and Item 3860-001-6027 by $28,233,000.)

The budget proposes $30.2 million (mainly Proposition 13 bond funds) for the Environmental Water Account (EWA) program in 2001-02. Of this amount, about $30 million is for DWR and $261,000 is for the Department of Fish and Game (DFG). Basically, EWA is a new concept that would involve the state buying water to hold in reserve to release when needed for fish protection. The program's objective is to minimize reductions in water deliveries from the state and federal water projects due to endangered species requirements.

As discussed in our recent (January 2001) report, Environmental Water Account: Need for Legislative Definition and Oversight, we think that EWA raises a number of policy and implementation issues that should be considered by the Legislature before this activity proceeds. These issues include:

• The costs and benefits of EWA, and the program's impacts on the water transfer marketplace and groundwater resources.
• The appropriate state role in EWA, particularly in terms of funding.
• Operational issues including governance, scientific review, and acquisition and use of water by EWA.
• How to facilitate the water transfers and provide the storage capacity necessary for EWA to work well.
• How to hold the program accountable to the Legislature.

We recommend that the joint policy/budget committees recommended above hold oversight hearings on CALFED's proposal for EWA. If the Legislature approves the concept, we recommend that legislation be enacted to create the program and to specify how the program will be governed, funded, operated, and held accountable. Pending resolution of these issues in legislation, we recommend that $30.2 million for EWA in the budget bill be deleted.

Update on Water Storage Studies

The budget proposes about $19 million for water storage studies in 2001-02. We recommend that the Legislature withhold action on funding these studies until CALFED submits an overdue report on the status of these studies in the current year.

Water Storage Studies: An Important Component of CALFED's Bay-Delta Solution. Planning for surface water and groundwater storage is an important component of CALFED's plan to address various water-related problems in the Bay-Delta. For example, water storage operations can be used to improve the reliability of water supplies, provide water to address environmental needs and improve water quality, and provide flood protection when operated in conjunction with flood control reservoirs.

In 1997, DWR began a multiyear program to investigate water storage alternatives focused entirely on potential offstream storage projects north of the Delta. In 1999, the department expanded the focus of its investigations to include various types of storage alternatives on a statewide basis and consolidated its activities into a single program—the Integrated Storage Investigations (ISI) program.

Legislative Oversight of Water Storage Studies Program. The ISI program was established administratively and, therefore, has not been given statutory direction. Expenditures for these studies have been requested on a year-by-year basis. At budget hearings in past years, the Legislature has expressed an interest in this program because water storage studies have important policy implications for the Legislature. Specifically, the Legislature has to assess the pros and cons, as well as policy and fiscal trade-offs, of:

• Pursuing water storage construction versus other means, such as water conservation, to address water supply shortfalls.
• Pursuing one type of water storage alternative over another, in light of varying, and potentially substantial, environmental impacts of these alternatives.

To provide oversight of expenditures for water storage studies, the Legislature specified funding for seven different storage options in the 2000-01 Budget Act. For example, of the $20 million appropriated for these studies in 2000-01, $8.1 million was allocated to study offstream storage options north of the Delta. The Legislature also adopted supplemental report language requiring DWR to report by January 1, 2001 on the status and expenditures of the ISI program in the current year.

Budget Proposal. As shown in Figure 4, the budget proposes $18.6 million (mainly from the General Fund) for DWR to conduct water storage studies in 2001-02. Figure 4 also shows the allocation of these funds among nine program elements—expanded from seven in the current year. In addition, the budget proposes $692,000 for DFG to assess environmental impacts of water storage options and $41.6 million of Proposition 13 bond funds for local groundwater storage projects.

Our review finds that the budget proposal for water storage studies makes a number of revisions to the long-term plan for water storage studies that was included with the 2000-01 budget proposal. These changes include the following:

• Significantly greater expenditures than originally projected for water storage studies overall. While the long-term plan anticipated expenditures of $12.6 million for 2001-02, the budget proposes $18.6 million.
• Significantly lower expenditures to study offstream storage options north of the Delta. While the long-term plan anticipated expenditures of $7.6 million for 2001-02, the budget proposes $4.6 million. According to CALFED, this element was reduced "due to competing priorities within CALFED programs."
• Creation of a program element to address storage need specifically in upper San Joaquin River watershed. The ROD identified a need for 250,000 to 750,000 acre-feet of additional storage in the upper San Joaquin River watershed. For this purpose, the budget proposes $1.1 million to continue studying raising Friant Dam to enlarge Millerton Lake near Fresno and the creation of Montgomery Reservoir as an offstream storage alternative in the Merced River Basin.
• Significantly greater expenditures, and the creation of a new program element, to continue studying the enlargement of the Los Vaqueros Reservoir in Contra Costa County. The budget proposes $2.8 million for this element.

We recommend that the Legislature evaluate whether the budget's proposed allocation of expenditures among the ISI program's nine elements meets with its own priorities. The DWR has not yet submitted the required supplemental report on the program's current-year activities. Before making funding decisions for the budget year, we think that the Legislature should evaluate the department's progress in the current year. Therefore, we recommend that the Legislature withhold action on approving the funding request for the ISI program until it receives and reviews the report.