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

CALFED Bay-Delta Program

The CALFED Bay-Delta Program, a consortium of 11 state and 13 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 2002-03 budget proposes $519 million in state funds for CALFED. We raise a number of policy, fiscal, and programmatic issues for the Legislature to consider.

CALFED Created to Address Bay-Delta Water Problems

The CALFED Bay-Delta Program. Pursuant to a federal-state accord signed in 1994, the CALFED Bay-Delta Program (CALFED) was administratively created as a consortium of state and federal agencies that have regulatory authority over water and resource management responsibilities in the Bay-Delta region. CALFED now encompasses 11 state and 13 federal agencies. 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 of deteriorating levees.

After five years of planning, CALFED began to implement programs and construct projects in 2000. The program's implementation--which is anticipated to last 30 years--is guided by the "Record of Decision" (ROD). The ROD represents the approval by the lead CALFED agencies of the final environmental review documents for the CALFED "plan." Among other things, the ROD lays out the roles and responsibilities of each participating agency, sets goals for the program and types of projects to be pursued, and includes an estimate of the program's costs for its first seven years. In the ROD, these costs are projected to total $8.5 billion for the program's first seven years (2000-01 through 2006-07). According to CALFED, this cost estimate which was developed in 2000 has not been updated.

The ROD also includes a schedule that allocates responsibility for paying the $8.5 billion of projected costs among federal ($2.4 billion), state ($2.5 billion), and local/private ($2.6 billion) sources. (About $930 million of program costs have yet to be allocated among funding sources.) The proposed cost-sharing is rather arbitrary, and in most cases reflects simply a 50-50 split between state and federal sources or a 33-33-33 split among federal, state, and local/private sources.

For more in-depth information on CALFED's history, please refer to our write-up beginning on page B-17 in the Analysis of the 2001-02 Budget Bill.

The Budget Proposal

The budget proposes $519 million in state funds for CALFED-related programs in 2002-03, of which $59 million is from the General Fund and the balance is mainly from bond funds. The largest expenditures are for ecosystem restoration and water storage.

Figure 1 shows the breakdown of CALFED expenditures in the current year and as proposed for 2002-03, among the program's 11 elements.

Current-Year Expenditures. As shown in the figure, the budget estimates CALFED-related expenditures from state funds of about $557 million in 2001-02. Of this amount, about $57 million is from the General Fund, with the balance mainly from Proposition 13 ($227 million) and Proposition 204 ($179 million) bond funds.

For the current year, the largest state expenditures are in the ecosystem restoration ($165 million), water use efficiency ($120 million), and water storage ($116 million) programs. A majority of the ecosystem restoration expenditures is funded by Proposition 204 funds that became available with the signing of the ROD. A majority of the water use efficiency and water storage expenditures is for water recycling and local groundwater projects funded by various bond funds.

Budget Proposes $519 Million of State Funds for 2002-03. As shown in Figure 1, the budget proposes $519 million of state funds for various departments to carry out CALFED in 2002-03, a decrease of about $38 million (7 percent) from the current year. Of this amount, $59 million is proposed from the General Fund, with the balance mainly from three bond funds--Proposition 13 ($161 million), Proposition 204 ($155 million), and the yet-to-be-approved Proposition 40 ($101 million) on the March 2002 ballot.

As Figure 1 indicates, CALFED expenditures are spread among ten state agencies. The largest expenditures are found in the Department of Water Resources (DWR) ($286 million) and the Secretary for Resources ($163 million). (The funding to 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 ($208 million) and substantial expenditures are proposed for water storage feasibility studies and local groundwater projects ($103 million). However, the budget proposes substantially lower expenditures for water use efficiency projects (such as water recycling) in 2002-03. This reflects a significant reduction in available bond funds for these projects.

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 is enhanced by having the relevant policy and budget committees, in each house, jointly consider CALFED budget proposals at oversight hearings.

Recommend Holding Joint Hearings

In order for the Legislature to effectively evaluate CALFED-related budget proposals--which are spread through 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 as was done for the current-year's budget.

CALFED's Budget Encompasses Policy Choices. As was discussed in our Analysis of the 2001-02 Budget Bill , there are trade-offs inherent in CALFED's plan (the ROD) and in its budget proposals that require policy choices to be made. This is because all elements of CALFED are interrelated and interdependent. For example, construction of a water storage or flood control facility could negatively affect fish habitat. Increasing the reliability of water supplies could reduce the incentive to conserve water.

We think that it is important for the Legislature to be apprised of the policy choices and funding priorities that are inherent in the Governor's budget proposal for CALFED. The Legislature will need this information to evaluate whether these choices and priorities are consistent with those of the Legislature, determine whether policy direction should be given to CALFED, and determine the state's funding contribution.

Recommend Joint Policy/Budget Hearings. We think that the Legislature's current-year evaluation of the many individual CALFED-related budget proposals was significantly enhanced by holding joint policy and budget subcommittee hearings on CALFED. This gave the Legislature a "big picture" view of CALFED that could be missing if the budget proposals had been evaluated on a department-by-department basis (nine departments have CALFED budget proposals this budget year). We therefore recommend that the Legislature hold joint hearings of the water and natural resources policy committees and budget subcommittees, in each house, on CALFED. In the sections that follow, we raise a number of issues for the Legislature to consider at these hearings.

CALFED Budget Proposal Based on Risky Assumptions

The budget proposal assumes the receipt of federal reimbursements for CALFED in both the current and budget years, even though federal reimbursements have not been forthcoming to date. In addition, the budget assumes voter approval of the Proposition 40 resources bond on the March 2002 ballot. We recommend that CALFED advise the Legislature on the programmatic implications and the administration's plans if federal reimbursements and Proposition 40 bond funds fail to materialize. We also recommend approval of proposed budget language that would provide legislative oversight of CALFED expenditures.

The Federal Government Has Lagged Behind State in Funding CALFED. As discussed above, CALFED has allocated program costs of $2.5 billion and $2.4 billion to the state and federal governments, respectively, over a seven-year period. In providing its funding support, the federal government could either spend directly on projects or provide funding to the state as federal reimbursements.

While recognizing that CALFED has never anticipated that the state and federal contributions would be roughly equal on a year-to-year basis, our review nonetheless finds that the state has been contributing far more to CALFED than the federal government. As Figure 2 shows, from 2000-01 (the first year of program implementation) through the budget year, the state support for CALFED will total almost $1.5 billion. This contrasts with federal support of $170 million through the current year. For the most part, the federal contribution has been in the form of direct federal spending for CALFED, as opposed to federal reimbursements that are passed through the state budget. Although the federal total does not include funding that may become available in the 2003 federal fiscal year (covering the period October 2002 through September 2003), experience would indicate that this contribution is highly uncertain.

Budget Assumes Receipt of Federal Reimbursements. The budget assumes the receipt of $55 million of federal reimbursements by the state for CALFED in 2001-02 and proposes a like amount of federal reimbursements for the budget year. (These federal reimbursements are in addition to any direct federal spending for CALFED that does not pass through the state budget.) However, at the time this analysis was prepared, no federal funding had been made available as reimbursements to the state for the current year. Therefore, the likelihood of the state receiving this type of federal funding in the budget year is highly uncertain.

The impact of a lack (or reduced level) of federal funds would vary by program element. For elements that assume a large amount of federal reimbursements in the current and/or budget years, a lack of federal funds would have a major impact on the ability to complete planned activities. For both the current and budget years, federal reimbursements are budgeted mainly in two program elements--science and program oversight/coordination. For example, of the $34.3 million proposed for the CALFED science program in 2002-03, $20.2 million (59 percent) is budgeted to come from federal reimbursements.

Budget Assumes Voter Approval of Proposition 40. The budget proposal for CALFED also assumes that voters will approve Proposition 40the $2.6 billion resources bond on the March 2002 ballot. Specifically, the budget proposes about $101 million from Proposition 40 bond funds in 2002- 03 for various CALFED programs. Figure 3 shows the allocation of the Proposition 40 funds among CALFED programs.

As indicated in Figure 3, the budget proposes to fund a substantial portion of three CALFED programs from Proposition 40 bond funds. In particular, the budget proposes to fund 58 percent and 57 percent of the watershed and drinking water quality programs, respectively, from these bond funds.

Legislature Should Evaluate State's Options if Federal and Bond Funds Do Not Materialize. It is important that the Legislature be informed of the programmatic implications if federal reimbursements and Proposition 40 bond funds do not materialize as assumed by the budget. The Legislature should also be informed of CALFED's expenditure priorities if a lack (or reduced level) of these funds necessitates a redistribution of state funds among the program elements as proposed in the Governor's budget. To the extent that those priorities do not match with the Legislature's priorities, the Legislature should provide clear direction to guide the redistribution of funds.

Although the status of Proposition 40 will be known by the time of budget hearings, the status of federal support for CALFED in the budget year (both direct spending and reimbursements to the state) will not. The CALFED has stated that to the extent funding is not received as planned, there may be a need to reevaluate the state's budget proposal and adjust the allocation of expenditures among the program's 11 elements. This is because CALFED's budget is built on the principle that activities in each of the program's 11 elements should progress year-by-year in a "balanced" fashion.

Recommend Approval of Budget Language. In order to facilitate legislative oversight of changes that CALFED might make to its budget (namely, transferring expenditures among the 11 program elements) after approval of the budget act, the Legislature adopted budget language in the current-year budget act requiring that it be notified of and given justification for such changes. The Governor's budget proposes to continue to include this language in the 2002-03 Budget Act (Control Section 5.40). We recommend approval of this budget language.

Environmental Water Account: Heightened Need for Legislative Direction and Oversight

We recommend that the Legislature address a number of policy, program management, and funding issues raised by CALFED's Environmental Water Account (EWA) program before funding is provided for the budget year. We therefore recommend that funding be deleted from the budget bill and instead be put in legislation authorizing EWA. (Reduce Item 0540-001-0546 by $28,233,000; Item 3600-001-0001 by $160,000; and Item 3860-001-0001 by $786,000.)

The budget proposes $29.2 million (mainly Proposition 204 funds) for the EWA program in 2002-03. Of this amount, about $29 million is for DWR (about $28.2 million of which is transferred from the Secretary for Resources) and $160,000 is for the Department of Fish and Game. For the current year, the budget estimates expenditures of $35.5 million for EWA.

The EWA Is a New Concept. The EWA is a new concept, the implementation of which began in 2001. Basically, EWA involves the state buying water to hold in reserve to release when needed for fish protection. The program's objectives are twofold: (1) to minimize reductions in water deliveries from the state and federal water projects (or to compensate water users for such reductions) due to endangered species requirements and (2) to enhance endangered species protection and recovery. The CALFED estimates costs of $200 million for EWA over its initial four years of implementation.

The EWA Raises Policy Issues. In our January 2001 report, Environmental Water Account: Need for Legislative Definition and Oversight, we raised a number of policy and implementation issues for the Legislature to consider regarding EWA before the program proceeds. Most fundamentally, before proceeding further, we think that Legislature should "sign off" on the concept of EWA (after considering the program's costs, benefits, and impacts) and determine the appropriate state role in EWA, particularly in terms of funding. We think that water users should pay for at least some of the program's costs because they clearly benefit from EWA to the extent that it makes water supplies more reliable. Additionally, we think that the Legislature should consider operational issues for EWA, including governance, scientific review, and acquisition and use of water.

Need for Clear Accounting of EWA Activities and Impacts. At an oversight hearing on EWA last year, a number of stakeholders expressed the importance of having a clear accounting of the activities and impacts of an operational EWA. Since EWA is a new, untested concept, we think that it is important for the Legislature to have good information to assess whether the program is working as intended and meeting its goals. Specifically, at a minimum, there should be a clear accounting of:

• The amount, source, and cost of water acquired for EWA.
• The movement and use of the acquired water.
• The impact of EWA on (1) endangered species protection and recovery and (2) preventing additional endangered species-related restrictions that would have otherwise resulted in reduced water deliveries from state and federal water projects.

Recommend Enactment of Legislation. If the Legislature approves the concept of EWA, we think that legislation should be enacted to create the program and to specify how the program will be governed, funded, operated, and held accountable to the Legislature. The current version of SB 727 (Costa), introduced in 2001, would create and define EWA and require an accounting to the Legislature of its activities. Pending resolution in legislation of the issues discussed above, we recommend that $29.2 million for EWA be deleted from the budget bill.

General Fund Savings Potential in CALFED's Water Use Efficiency Program

The budget proposes $29.2 million of state funds, including $8.4 million from the General Fund, for CALFED's water use efficiency program. We think that the General Fund support could be reduced by $3.9 million, which would leave $25.3 million for the water use efficiency program to make progress in promoting water use efficiency through projects and technical assistance. (Reduce Item 3860-001-0001 by $3.9 Million.)

CALFED's Water Use Efficiency Program. The goal of CALFED's water use efficiency program is to accelerate the implementation of cost-effective actions to conserve and recycle water throughout the state. Funding in the program is used for water conservation loans and grants, water recycling grants, research, and to provide technical assistance and certify urban "best management practices."

CALFED Budget Proposal. The budget proposes a total of $29.2 million of state funds, of which $8.4 million is from the General Fund, for CALFED's water use efficiency program. The General Fund amount contains $3.9 million for a new "water and energy use efficiency" program in DWR that began in 2001-02. A majority of the $3.9 million is for contracts to provide technical assistance and increase public awareness on measures that improve water and energy efficiency.

Budget Proposes Substantial Expenditures to Promote Water Use Efficiency. In addition to CALFED's water use efficiency program, the Governor's budget proposes substantial expenditures exceeding $160 million to promote water use efficiency in other programs' budgets. For example, the budget proposes $143 million of bond funds for DWR's water conservation loan program. In addition, the budget includes about $18 million for the State Water Resources Control Board to award loans and grants for water recycling projects. Much of these two sets of expenditures would be for projects in the same geographic area covered by the CALFED program. In addition, as a consequence of promoting water use efficiency, many of these expenditures would also promote energy use efficiency.

Recommend Reduced Level of General Fund Support. In light of the budget's total proposed investment to promote water and energy use efficiency, we think that the $3.9 million for a new water and energy use efficiency program that began in 2001-02 could be eliminated in the budget year without undue harm to the CALFED's program's goals. We therefore recommend deletion of $3.9 million from the General Fund under DWR's budget.