Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Air Resources Board (3900)

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

The budget proposes $134 million from various funds, primarily the Motor Vehicle Account and the General Fund, for support of ARB in 2002-03. This is a decrease of about $86 million, or 39 percent, from estimated 2001-02 expenditures. This decrease reflects (1) the elimination of $52 million in one-time expenditures for diesel emissions reduction and zero-emission vehicle incentives that occurred in the current year, and (2) a $10.5 million reduction in Motor Vehicle Account funding for mobile source programs and local air district subventions.

Legislature Should Reexamine Stationary Source Funding and Fee Structure

We recommend the enactment of legislation to apply the "polluter pays principle" to the board's stationary source program. We find that the application of this funding principle would result in a shift of $18.7 million from the General Fund to fees. (Reduce Item 3900-001-0001 by $18.7 million and increase Item 3900-001-0115 by a like amount.)

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

Today there are 35 local air districts that are the primary agencies responsible for regulating emissions from stationary sources of pollution. Stationary sources include "point" sources (fixed sources such as petroleum refineries) and "area" sources (sources which individually emit small quantities of pollutants but which collectively emit significant emissions, such as gas stations). The ARB conducts research, planning, and compliance functions in conjunction with the local districts and oversees local air district activities.

Stationary sources contribute substantially to emissions of certain pollutants. For example, between one-quarter and one-half of ozone-forming chemicals (the major components of smog) are from stationary sources. The nature of stationary source pollution is that it is identifiable, from a specific source, whether it be a single polluter such as a factory or a class of polluters such as home chimneys.

Budget Proposes Mix of Fund Sources to Support Stationary Source Program. As shown in Figure 1, the budget proposes $43 million for ARB's stationary source program in 2002-03. Funding is proposed from various sources, primarily the General Fund (58 percent). Fees, federal funds, and reimbursements make up the balance. 

Fees Support Little of the Stationary Source Program. As shown in Figure 1, the budget proposes that special funds support only 11 percent ($4.9 million) of stationary source program expenditures. Of this amount, $3 million is from fees levied on stationary source polluters. (The balance mainly comes from penalties.) The California Clean Air Act (Chapter 1568, Statutes of 1988 [AB 2595, Sher]) caps the total amount of fees that may be levied on stationary sources for ARB's stationary source program at $3 million. Further, these may only be levied on facilities emitting over 500 tons of pollution per year. Currently, less than 250 facilities (out of about 20,000 point stationary sources statewide) pay the stationary source fee. The fee is currently $25.56 per ton of emissions. Additionally, to the extent that more high-emitting polluters are added in the state, the fee per ton of emissions would be adjusted downward due to the $3 million statewide cap on fees.

General Fund Proposes to Fund Various Activities. As shown in Figure 2, the budget proposes about $25 million from the General Fund for various activities under the stationary source program. 

As mentioned above, the budget proposes to fund a majority of stationary source program expenditures from the General Fund, with fees and penalties supporting only 11 percent of the program. As discussed below, our review finds that a large proportion of the activities proposed to be funded from the General Fund are more appropriately funded from fees.

The "Polluter Pays" Principle. We think that funding for the stationary source program should be governed by the polluter pays principle. Under the polluter pays principle, private parties that benefit from using public resources are responsible for paying the costs imposed on society to regulate such activities. We think that the relationship between private degradation of resources and public costs is particularly strong in the case of stationary source pollution.

The nature of stationary source pollution is that it is identifiable, in the form of stack or emission pipe, whether it be a single polluter or class of polluters. We have previously recommended that those pollution sources that can be identified should pay for any planning, permitting, compliance, and enforcement activities necessary to regulate and reduce pollution. (For example, please see our write-up on the State Water Resources Control Board's core regulatory program in the Analysis of the 1999-00 Budget Bill, page B-110.)

Review Finds Much of General Fund Support Can Be Shifted to Fees. Our review of various activities proposed to be funded by the General Fund (as shown in Figure 2) finds that if the polluter pays principle were fully applied, a substantial portion of the General Fund support could be shifted to fees. Of the $24.9 million General Fund proposed, we think that all but the $5.8 million for research and about $0.4 million for program support would be funded appropriately by fees. The stationary source research division performs studies of broad health and ecological effects of stationary source pollution, indoor air quality studies, and supports broader air quality research. We find that the General Fund is the more appropriate fund source for the research division because of its broad-based public health nature. In addition, program direction and support associated with the research division should also remain payable by the General Fund.

We think that the remaining activities proposed to be funded from the General Fund ($18.7 million) are appropriately funded from fees. The remaining activities, including data collection, planning, and monitoring, are critical steps to develop air quality standards that form the basis of air quality permitting and enforcement activities statewide. These activities provide a basis in science and technology for the permits and prevent the permit requirements from being arbitrary or unduly burdensome. As such, they provide a benefit to the permit holder and therefore should be funded through fees.

Recommend Enactment of Legislation to Increase Fee-Based Support. We recommend the enactment of legislation that would shift certain stationary source expenditures from the General Fund to fees, for a General Fund savings of $18.7 million. We therefore recommend the deletion of $18.7 million from the General Fund and an increase of $18.7 million in the Air Pollution Control Fund.

There are a number of issues for the Legislature to consider in enacting this legislation, including determining who should pay the fee, what the fee rates should be, and whether there should be a cap on total revenues collected from the fee. The state fees should not supplant efforts in local air districts to assess fees to capture their costs of regulating stationary sources within their jurisdictions, but should be added to offset the costs of providing the statewide regulatory program.

Specifically, we think that the Legislature should consider the following. First, the existing statutory cap of $3 million on the total amount of stationary source fees that may be collected by the state would have to be removed to fully apply the polluter pays principle. The ARB should be given the flexibility to set fees at a level that allows full recovery of its costs for the stationary source program that are appropriately funded from fees, as discussed above. Second, increasing the feepaying universe to include a broader group of feepayers than currently would spread the burden of paying fees among more feepayers, thereby reducing the burden on an individual feepayer.