Legislative Analyst's Office

Analysis of the 2002-03 Budget Bill


State Water Resources Control Board (3940)

The State Water Resources Control Board (SWRCB), in conjunction with nine semiautonomous regional boards, regulates water quality in the state. The regional boards--which are funded by the state board and are under the state board's oversight--implement water quality programs in accordance with policies, plans, and standards developed by the state board.

The board carries out its water quality responsibilities by (1) establishing wastewater discharge policies and standards; (2) implementing programs to ensure that the waters of the state are not contaminated by underground or aboveground tanks; and (3) administering state and federal loans and grants to local governments for the construction of wastewater treatment, water reclamation, and storm drainage facilities. Waste discharge permits are issued and enforced mainly by the regional boards, although the state board issues some permits and initiates enforcement action when deemed necessary.

The state board also administers water rights in the state. It does this by issuing and reviewing permits and licenses to applicants who wish to take water from the state's streams, rivers, and lakes.

The budget proposes expenditures of $663.6 million from various funds for support of SWRCB in 2002-03. This amount is a decrease of $394.6 million, or about 37 percent, below estimated current-year expenditures. Most of this decrease reflects a reduction of $403.2 million of bond-funded expenditures, mainly for loans and grants for local water quality and water recycling projects. Major budget proposals include (1) a one-time increase of $22.4 million in payments from an insurance fund to underground storage tank owners and operators for the cleanup of leaking tanks, (2) an increase of $4.3 million for information management improvements, and (3) a shift of $15 million from the General Fund to fees to support the board's core regulatory program.

Funding SWRCB's Core Regulatory Program

The budget proposes to create General Fund savings by shifting some General Fund support for the State Water Resources Control Board's core regulatory program to fees. In the sections that follow, we discuss the Governor's proposal, make recommendations for fee legislation, and provide an assessment of the board's funding requirements over the longer term in order to meet its statutory mandates.

The SWRCB's Core Regulatory Program

The board's core regulatory program involves permitting, inspection, monitoring, and enforcement activities concerning dischargers of waste into the state's waters. The program has been traditionally funded by a mix of funding sources. While General Fund support for the program has increased substantially in recent years, fee-based support has remained relatively stable. This is partially due to the fact that statute provides a cap on fee levels as well as fee exemptions.

Regulation of Waste Discharges. Since the 1960s, discharges of waste into the state's surface waters and groundwater have been regulated by the state and regional boards. The state board assesses the state's water quality, sets standards, and develops statewide plans to control water pollution.

There are two major types of water pollution--"point source" and "nonpoint source" pollution. Point source pollution involves the discharge of an identifiable amount of waste directly into water bodies by identifiable entities. To control point source pollution, the state and regional boards issue permits ("waste discharge permits") that set limits on the types and amount of discharges and enforce compliance with these permits.

Nonpoint source pollution is created when water picks up contaminants from pesticide use, mining, logging, and other sources and deposits them in water bodies. The diffuse nature of nonpoint source pollution makes it difficult to identify and quantify the extent to which an individual source degrades water quality. These sources are generally not controlled by a permitting program. Rather, the board develops voluntary best management practices to be adopted by farmers and other nonpoint source waste dischargers. An exception pertains to stormwater pollution, which, while sometimes nonpoint source in nature, is regulated through a series of statewide or countywide permits that apply to a multitude of construction, industrial, or municipal sources of pollution.

The board's "core regulatory program" refers to the board's five programs that issue and enforce permits for point sources, including the stormwater program. Figure 1 shows the type and number of facilities regulated under the various components of the core regulatory program. 

Figure 1

State Water Resources Control Board
Core Regulatory Program Components

Program Component

 

Rivers, lakes, coastal waters (NPDES)a

·   Regulates about 2,600 dischargers of waste into the state’s streams, rivers, lakes, and coastal waters.

·   Regional boards issue NPDES permits to dischargers.

·   There is a special category of NPDES permits for dairy farms.

·   Under federal law, NPDES permits generally must be reissued every five years.

Landfills
(Chapter 15
b)

·   Regulates about 1,200 dischargers of waste to waste management units such as landfills.

·   Regional boards issue Chapter 15 waste discharge requirements (WDRs) to dischargers.

·   WDRs are to be updated every three, five, and ten years, based on relative threat to water quality of the permittee’s activities.

Lands, other than landfills (non-Chapter 15)

·   Regulates about 3,500 dischargers of waste to land, excluding landfills and other specified lands.

·   Regional boards issue non-Chapter 15 WDRs to dischargers.

·   WDRs are to be updated every three, five, and ten years as above.

Stormwater

·   Regulates about 16,000 construction and industrial sites contributing to stormwater runoff under a statewide general NPDES permit.

·   Regulates municipal stormwater runoff under areawide general NPDES permits.

Water quality certificationd
(Section 401)

·   Reviews about 1,100 applications annually for projects requiring a federal permit or license to certify that discharges will not violate state water quality standards.

a   National Pollutant Discharge Elimination System, implementing the federal Clean Water Act under agreement with U.S. Environmental Protection Agency.

b   Chapter 15, Title 23, California Code of Regulations, pursuant to Porter-Cologne Water Quality Control Act.

c   Pursuant to Porter-Cologne Water Quality Control Act.

d   Section 401, federal Clean Water Act.

 

Core Regulatory Program Involves Permitting and Enforcement. The main activities of SWRCB's core regulatory program are permitting, inspections, review of self-monitoring conducted by dischargers, and enforcement for the five categories of waste dischargers as set out in Figure 1. The program does not encompass a number of other major activities carried out by the board in other programs. Specifically, the program does not include the board's water quality planning and standard-setting activities, nor does it include the local assistance, nonpoint source pollution control, or the underground fuel tank cleanup programs.

Core Regulatory Program Is Funded By A Mix of Fund Sources. The board's core regulatory program has traditionally been funded by a mix of four funding sources. These include:

Figure 2 shows the expenditures of the core regulatory program by funding source.

Figure 2

Core Regulatory Program
Expenditures by Funding Source

(In Millions)

 

2000-01

2001-02

2002-03a

General Fund

$26.8

$39.0

$22.5

Waste Discharge Permit Fundb

15.3

17.0

31.7

Integrated Waste Management Accountb

6.0

5.3

5.3

Federal funds

5.7

8.8

8.8

  Totals

$53.8

$70.1

$68.3

a   As proposed by the Governor's budget.

b   Fees.

 

Through the current year, the General Fund has supported a majority of the expenditures in the core regulatory program. For example, about 56 percent of the estimated $70.1 million of program expenditures in 2001-02 will come from the General Fund.

General Fund Support Has Increased Substantially in Recent Years. From 1990-91 through 1998-99, annual General Fund support for the core regulatory program remained relatively stable--at around $13 million. However, beginning with the 1999-00 budget, the Legislature has approved a number of General Fund augmentations to the core regulatory program to bring General Fund support to $39 million in the current year.

These augmentations came about largely as a result of findings from legislative oversight hearings on the board's core regulatory program conducted in 1999 and 2000. At these hearings, the Legislature expressed concern about the low level of inspections and enforcement, as well as the significant backlog in the update and renewal of water quality permits which had developed. In particular, the Legislature found that there were substantial unmet funding requirements in the board's stormwater program.

Fee-Based Support Has Remained Stable. Although General Fund support for the core regulatory program has increased substantially in recent years, the program's fee-based support has remained relatively stable. The ability of the board to increase fee revenues by raising fee rates has been restricted due to a statutory cap of $10,000 on annual waste discharge permit fees that was set in 1989. (Although fee rates are capped, fee revenues have increased somewhat, although rather modestly over time, due to an increase in the number of feepayers.)

The setting of the statutory cap of $10,000 in 1989 was based in part on the board's analysis of workload needs in light of statutory requirements at that time. However, as will be discussed later, the board's core regulatory workload has increased significantly since 1989 due to federal and state law changes affecting the board's responsibilities.

Current Fee Structure. By regulation, the board has adopted a schedule for the annual waste discharge permit fees ranging from $200 to the statutory cap of $10,000, based on a discharger's relative threat to water quality. Under current law, confined animal feeding operations (such as dairy farms) are exempt from paying the annual permit fee, but they may be subject to a one-time $2,000 fee. This exemption has been in statute since 1990.

The board has interpreted statute as authorizing the assessment of only one permit fee per permit. Therefore, for example, if a regional board issues a municipal stormwater permit to a county (with individual cities as copermittees), the maximum permit fee under statute would remain $10,000, even though dozens of cities might be covered under the permit.

Currently, the board's waste discharge permit fees generate about $15 million annually from about 17,000 dischargers, less than 2 percent of which pay a $10,000 annual fee (the statutory cap). About 70 percent of these feepayers are stormwater dischargers who pay an annual fee of up to $500 to operate under a statewide stormwater permit.

State's Fees Are Much Lower Than Several Other States' Fees. Based on a survey of other states' waste discharge fees conducted in 1998, our review finds that California's maximum fee ($10,000) is significantly lower than the maximum fee in several other states. For example, the survey found a maximum fee of $400,000 in New Jersey, $100,000 in South Dakota, and $54,000 in Ohio.

Increasing Fee-Based Support

The budget proposes to create General Fund savings of $15 million by increasing the level of fee-based support for the program. While we think that this is a step in the right direction, we recommend that the Legislature shift a higher amount of General Fund to fees than proposed by the Governor. We also recommend that the Legislature enact legislation to revise the board's fee structure, both to facilitate a higher level of fee revenues as well as address equity and other issues. (Reduce Item 3940-001-0001 by $22.5 million and increase Item 3940-001-0193 by a like amount.)

Governor's Budget Proposal. For 2002-03, the budget proposes $68.3 million for the board's core regulatory program, a slight decrease from estimated expenditures in the current year. However, the budget proposes a significantly different mix of funding sources than in the current year. Specifically, as shown in Figure 2, the budget proposes to shift funding of about $15 million from the General Fund to the WDPF. Accounting for this fund shift, the budget proposes $22.5 million from the General Fund, $31.7 million from WDPF, $5.3 million from IWMA, and $8.8 million from federal funds for the core regulatory program. Under the proposed funding mix, fees (from WDPF and IWMA) would support about 54 percent of the core regulatory program's budget.

In order to raise the additional revenues in WDPF to support the proposed fund shift, the budget proposes that the current statutory cap on fee levels of $10,000 be raised to $20,000. Presumably, the board would by regulation establish a fee schedule setting particular fee rates for different classes of dischargers up to the higher cap.

Basis of Governor's Proposal Is "Polluter Pays" Principle. In documents submitted with the Governor's budget proposal, it is stated that the basis for the proposed shift of funding from the General Fund to fees is the implementation of the polluter pays principle. The budget documents note that "private individuals or businesses that use or degrade a public resource (such as air, water, or wildlife) should pay all, or a portion of, the social cost imposed by their use of the resource."

The budget documents also note that the particular dollar amount for the fund shift was derived from the results of a survey of 800 of the board's feepayers (of which 116 responded) regarding their preferences for a revised fee system. According to the board, 80 percent of survey respondents supported a funding structure where permit fees fund up to 50 percent of program costs. As mentioned above, the budget proposes that fees cover 54 percent of program costs.

Proposed Fund Shift Is Step in Right Direction, But Should Go Further. We think that the budget proposal to shift some current General Fund support of the board's core regulatory program to fees is a step in the right direction. We agree with having the polluter pays principle guide the funding of this program.

However, we think that the proposed fund shift does not go far enough. As we discussed in a prior-year's analysis (please see our Analysis of the 1999-00 Budget Bill, page B-109), we think that the relationship between private degradation of resources is particularly strong in the case of point source water pollution (the focus of the board's core regulatory program), thereby justifying a full fee-based recovery of the (nonfederal) costs of the core regulatory program. Furthermore, fee-based support is appropriate given that the workload of the core regulatory program (permitting, inspections, discharger monitoring, and enforcement) is tied directly and completely to individual polluters/feepayers.

Recommend Greater Funding Shift to Fees. In order to fully apply the polluter pays principle to funding the board's core regulatory program, we therefore recommend that the General Fund be reduced by an additional $22.1 million and that WDPF be increased by a like amount.

In order to implement the funding shift at either the level the budget proposes or as we recommend, the Legislature would need to enact legislation. This is because the existing statutory fee cap of $10,000 would have to be lifted (raised or removed) in order that sufficient revenues could be raised from feepayers to provide for the fund shift.

We think that the need to enact fee legislation provides the Legislature the opportunity to address a couple of other issues arising with the existing fee structure. These issues relate to (1) an existing fee exemption and (2) the one permit, one fee rule. We discuss these two issues in the sections that follow.

Annual Fee Exemption for Dairy Operations Should be Revisited. As mentioned above, current law exempts confined animal feeding operations (mainly dairy farms) from paying the annual waste discharge permit fee. (Some of these operations are required to pay a one-time fee of $2,000. Also, if a dairy undergoes a significant change in operations or expands, it may be required to pay another one-time fee.)

We think that in enacting fee legislation to accommodate our recommended funding shift, the Legislature should consider whether or not to continue this fee exemption. When the fee exemption was established in the late 1980s, it was generally thought that waste from these operations were not a significant source of water pollution. However, enhanced monitoring of the state's waters in recent years has shown that these operations contribute much more to water pollution than originally thought. In light of this fact, the board's budget was increased by $401,000 (General Fund) in 1999-00 to provide specifically for permitting and inspections of dairies.

Our review finds that the board plans expenditures of $883,000 to regulate dairies in 2002-03, while it expects to collect only about $60,000 in one-time fees from dairies. Accordingly, the (one-time) fees levied on dairies bear little relationship to the board's workload to regulate this source of pollution. As a consequence, fees levied on other polluters, and the General Fund, have been used to subsidize the board's regulation of dairies. This has raised concerns from other feepayers that the fee structure is not equitable. 

Therefore, we recommend that the Legislature consider removing the current exemption from paying the annual waste discharge permit fee that is granted to confined animal feeding operations. Alternatively, the Legislature could consider enacting annual fees only for the larger feeding operations that pose greater threats to water quality.

"One Permit, One Fee" Rule Needs Revision. As mentioned above, current law appears to limit fee assessment to one fee for each permit. In light of the addition of the stormwater component to the board's core regulatory program (in 1991) as discussed below, we think that the one permit, one fee rule leads to problems and should be revised.

Currently, municipalities are required to implement plans for controlling stormwater runoff. These plans are regulated under municipal stormwater permits issued by the regional boards. Rather than issue a separate permit to every city, regional boards generally issue a municipal stormwater permit to a county, with individual cities as "copermittees." Issuing an areawide permit is more cost-efficient and is appropriate particularly when cities drain into a single county storm drain system. However, given that an areawide permit is issued only to one jurisdiction (the county), only one fee (up to the $10,000 statutory cap) is assessed.

Our review finds that the workload (inspections, enforcement) generally associated with these areawide permits greatly exceeds $10,000 annually. This is particularly the case in larger counties, such as Los Angeles County that has over 80 cities as copermittees.

Given workload demands associated with the municipal stormwater permit program, we think that a change in the statutory fee structure that explicitly allows for an assessment of fees on copermittees is warranted. In addition to the stormwater permit program, there are other permitting programs under the board's core regulatory program which issue a single permit that includes copermittees. The Legislature may wish to consider authorizing fees to be assessed on copermittees in general to cover these other cases as well.

Substantial Unmet Funding Requirements Identified

The budget does not address the substantial unmet funding requirements identified by the board in its legislatively required review of the core regulatory program. We think that the Legislature should consider these funding requirements as part of its review in enacting the fee legislation to increase the level of fee-based support for the program.

Legislature Required Baseline Needs Analysis. In light of findings that the board was not carrying out a number of core regulatory program activities at adequate levels, the Legislature in the Supplemental Report of the 1999 Budget Act directed the board to conduct a baseline funding "needs analysis" for the program. The needs analysis was to reflect current program responsibilities under state and federal law and the major threats to water quality needing to be addressed in light of existing water quality conditions. In particular, the board was directed to assess the funding needs for a cost-effective compliance assurance and enforcement program.

Board Identified Substantial Unmet Funding Requirements. In order to project workload for the needs analysis, the board identified any requirement in state or federal law that dictates how its work is to be conducted. For example, federal law requires that National Pollutant Discharge Elimination System (NPDES) permits (which are federal permits) must be reissued at least every five years. In other cases where law does not provide direction, the board applied administratively developed standards that are intended to provide a reasonable level of frequency for inspections and the updating of permits. For example, the board's administrative standards provide that permittees should be inspected between one-and-three times a year, depending on relative threat to water quality. Similarly, these standards provide that permits should be "updated" every three, five, or ten years, again depending on threat to water quality (except in the case of NPDES permits discussed earlier). We think that the board's methodology was reasonable.

In its January 2001 report to the Legislature with the baseline needs analysis, the board identified substantial unmet funding requirements, both in terms of existing workload and new workload that was anticipated in future years. As shown in Figure 3, the baseline needs analysis identified funding requirements for the board's existing workload of about $107 million above the level of funding provided in the 2002-03 proposed budget for the core regulatory program. In other words, the board estimates that it would cost an additional $107 million to inspect currently permitted waste dischargers, conduct enforcement, and update permits at a frequency it considers adequate in light of threats to water quality.

The needs analysis also identified an additional $73.7 million of funding requirements in future years, related to an expansion of the universe of dischargers to be regulated under the stormwater program. This brings the unmet annual funding requirements in the longer term to a total of $180.7 millionan increase of over 260 percent above the proposed 2002-03 budget for the core regulatory program. 

Figure 3

Core Regulatory Program
Funding Requirementsa

(In Millions)

 

 

Additional Funding Requirementsb

Program Component

2002-03
Budget

Existing Workload

Future-Year
Requirements

Total

NPDES

$23.3

$11.5

$11.4

Dairies

0.9

24.3

Non-Chapter 15

12.7

20.8

Chapter 15

10.1

9.2

Stormwater

18.9

27.8

$73.7

101.5

Section 401 Certification

2.4

13.4

13.4

  Totals

$68.3

$107.0

$73.7

$180.7

a   Based on January 2001 SWRCB report submitted to the Legislature pursuant to the Supplemental Report of the 1999 Budget Act.

b   Funding requirements identified above 2002-03 baseline, including staffing and contracts.

 

Proposed Budget Does Not Address Unmet Funding Requirements. The proposed budget for the core regulatory program is essentially a status quo budget in terms of total expenditures. Therefore, the budget does not address the issue of workload identified by the board that is going undone.

To get a sense for the workload that is going undone, we reviewed the board's most recent set of performance measures for the core regulatory program--for 2000-01. For example, we find that only about 25 percent of NPDES and stormwater permitees were inspected at least once that year (the board's standard being at least one-to-three inspections for all permittees annually). As another measure of performance, only 44 percent of significant permit violations of WDR permitees resulted in any form of enforcement action (whether informal--such as a verbal warning, or formal--such as a penalty). We also find that significant backlogs in updating and reissuing permits continue to exist. For example, at the beginning of 2001-02, 26 percent of "major" NPDES permits (facilities posing the most significant potential threats to water quality) had already expired under federal law and needed to be reissued.

Fee Legislation Discussion Is Opportunity to Consider Unmet Funding Requirements. While we think that the board has made considerable progress in its core regulatory program as a result of the recent budgetary augmentations, the board reports that there remains substantial workload that is not being addressed. According to the board, it would probably take at least seven years for it to absorb all the additional staffing needed in the core regulatory program, assuming facilities (and funding) needs can be met. We think that in the discussions surrounding the fee legislation that would be required to implement the funding shift to fees, the Legislature should consider the role that fees may play over the coming years in addressing the unmet funding requirements that have been identified.


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