Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Fund Conditions For Resources Programs

The state uses a variety of special and bond funds to support the departments, conservancies, boards, and programs under the Resources Agency that regulate and manage the state's natural resources. Of the $4.1 billion in state-funded expenditures for resources programs proposed for 2003-04, about $1.3 billion (31 percent) would be from special funds, and $1.9 billion (46 percent) from bond funds. The remainder—$959 million—would be from the General Fund.

In this section, we provide a status report on selected special funds and bond funds supporting these programs. In general, the use of these special and bond funds is specified in statute. Some funds can be used for a wide variety of programs and activities, while the use of other funds is more limited. For purposes of this review, we divided the funds into two categories: (1) resources special funds and (2) resources bond funds. We conclude with a discussion of a number of issues for legislative consideration when evaluating the Governor's bond expenditure proposals.

Resources Special Funds

The budget proposes to spend most of the special funds projected to be available in 2003-04 for resource protection. If the Governor's spending proposals are approved, a balance of $34.3 million will remain in these special funds, the use of most of which is statutorily restricted to specific purposes.

Figure 1 summarizes the total resources available in 2003-04 for selected special funds, the Governor's proposed expenditures from these funds, and the balances available after the Governor's proposed expenditures. Approval of the Governor's spending proposals would leave a balance of $34.3 million available for these selected funds, mostly in the Beverage Container Recycling Fund. As the use of most of these remaining funds is statutorily restricted to specific purposes, the Legislature's flexibility in expending these funds for resources projects is limited.

Below we discuss in greater detail the funds shown in Figure 1.

Environmental License Plate Fund (ELPF). The ELPF derives its funding from the sale of personalized motor vehicle license plates by the Department of Motor Vehicles. Funds from ELPF can be used for the following purposes: 

• Control and abatement of air pollution.
• Acquisition, preservation, and restoration of natural areas and ecological reserves.
• Environmental education.
• Protection of nongame species and threatened and endangered plants and animals.
• Protection, enhancement, and restoration of fish and wildlife habitat, and related water quality.
• Purchase of real property, consisting of sensitive natural areas, for the state, local, or regional park systems.
• Reduction of the effect of soil erosion and discharge of sediments into the water of the Lake Tahoe region.

The budget proposes expenditures totaling $31.4 million from ELPF, a decrease of about $3.3 million (10 percent) below estimated current-year spending. The decrease is the result of lower capital outlay expenditures by the California Tahoe Conservancy and lower ELPF support for the Department of Fish and Game. Almost all of the proposed ELPF expenditures in 2003-04 would be for departmental support purposes, the largest being $17.8 million for support of Department of Fish and Game (DFG). Only $3.6 million would be for local assistance. The proposed ELPF expenditures will leave a balance of $885,000 at the end of 2003-04.

Public Resources Account, Cigarette and Tobacco Products Surtax Fund (PRA). The PRA receives 5 percent of the Cigarette and Tobacco Products Surtax Fund (C&T Fund) revenues. Generally, PRA funds must be used in equal amounts for (1) park and recreation programs at the state or local level and (2) habitat programs and projects. 

The budget projects $15.7 million in PRA resources in 2003-04 and proposes total expenditures from PRA of $15.3 million. Almost all proposed expenditures would be for departmental support purposes. About 77 percent ($11.7 million) of the proposed expenditures would be used to support the Department of Parks and Recreation (DPR), 14 percent ($2.1 million) would support the operations of the State Water Resources Control Board, and 3 percent ($384,000) would support DFG.

The budget proposes a reserve of $436,000 in PRA at the end of 2003-04.

Habitat Conservation Fund (HCF). The HCF was created by Proposition 117, the California Wildlife Protection Act of 1990. The proposition requires that the fund receive annual revenues of $30 million primarily for wildlife habitat acquisitions and improvements. To provide this funding level, Proposition 117 requires transfers of (1) 10 percent of funds from the Unallocated Account, C&T Fund, and (2) additional funds from the General Fund in order to provide a total of $30 million. Proposition 117 allows the Legislature to substitute other appropriate funds for the General Fund.

For 2003-04, the budget proposes to transfer $7.8 million from the Unallocated Account, C&T Fund, and $21.7 million from the General Fund to HCF. These transfers, together with carryover balances, would fund proposed expenditures of $30.2 million (from all funds), leaving a balance of $1.7 million at the end of the budget year. (For a further discussion of HCF and of an opportunity to substitute bond funds for the General Fund transfer, please see the "Wildlife Conservation Board" write-up of this chapter).

Fish and Game Preservation Fund (FGPF). The FGPF derives most of its revenues from fishing and hunting licenses, tags, and permits. Money in FGPF is used to support DFG activities to protect and preserve fish and wildlife, including the acquisition and construction of projects for these purposes. Certain revenues in the fund are restricted (or dedicated) to be used for specific purposes or species. For instance, revenues from hunting or fishing stamps for particular species can be used only for activities related to the protection of those species. The costs of commercial fishing programs are to be paid solely out of revenues from commercial fishing taxes and license fees.

For 2003-04, the budget proposes total FGPF expenditures of $91.3 million, almost entirely for the support of DFG. This amount is $3.6 million (4 percent) less than estimated current-year expenditures. Of the budget-year amount, $76.3 million is proposed to be spent from nondedicated funds and the remaining $15 million from dedicated revenues. With the proposed expenditures, the budget projects a negative fund balance of $5.2 million in the non-dedicated account and a positive balance of $5.2 million in the dedicated account. Therefore, the combined balance of the dedicated and nondedicated accounts is almost zero.

Forest Resources Improvement Fund (FRIF). Revenues generated from timber harvesting in state forests are deposited into FRIF. Most of this revenue is generated from Jackson State Demonstration Forest. Funds in FRIF can be used for the following purposes:

• Forest improvement programs.
• Urban forestry programs.
• Wood energy programs.
• Reimbursing the General Fund for the operation of state demonstration forests.
• Regulation of forest practices.
• Support of state nurseries.
• Forest pest research and management.

Figure 2 shows the proposed 2003-04 expenditures for FRIF in the budget.

The budget projects $11.7 million in FRIF resources. This expenditure level assumes resolution of litigation that halted the sale of timber harvesting on Jackson State Demonstration Forest, the primary revenue source for FRIF.

State Parks and Recreation Fund (SPRF). The SPRF is the main special fund source that supports DPR. The fund generates most of its revenues from state beach and park service fees. For 2003-04, the budget projects SPRF resources of $96.8 million—$16.9 million higher than the estimated current year resource level, due to a proposed increase in park service fees. The budget proposes to use $96.7 million for DPR support, thereby leaving essentially no balance at year-end.

Beverage Container Recycling Fund (BCRF). Chapter 1290, Statutes of 1986 (AB 2020, Margolin), created the Beverage Container Recycling Fund as a depository for processing fees, fines, and redemption values paid to the Department of Conservation. Expenditures from the fund are limited to recycling program activities and payment of the redemption values. To the extent beverage containers are not redeemed for the California Redemption Value, a reserve accumulates in BCRF.

In order to address the shortfall in the General Fund condition, the budget proposes to loan $80 million from BCRF to the General Fund and outlines specific provisions to ensure the loan does not adversely affect the operation of BCRF. A similar loan to the General Fund for $218 million was made in the current year.

Tideland Oil Revenues. The state receives a portion of the revenue derived from oil, gas, and other minerals extracted from the state's tidelands. The amount of state revenue from tideland oil leases is based primarily on the net profit received by oil producers leasing state tidelands. The tideland revenues are difficult to project because of the instability of oil prices as well as fluctuating costs of production that figure into net profits of oil producers.

Current law requires that after specified amounts are deposited in the Housing Trust Fund and in the General Fund mainly to support the State Lands Commission (SLC), the remaining tidelands revenues are deposited into the Resources Trust Fund (RTF) created by Chapter 293, Statutes of 1997 (SB 271, Thompson) to support various resource special funds. The Department of Finance has interpreted the current statute to sunset at the end of the current year and therefore the proposed budget does not distribute tidelands oil revenues to various special funds to fund resource activities. Rather, the budget proposes to transfer to the General Fund $18.8 million of tidelands revenues that would have previously been deposited into RTF. 

Resources Bond Fund Conditions

The budget proposes expenditures in 2003-04 of about $2.2 billion from five resources bonds approved by the voters since 1996. The proposed expenditures would leave a balance of about $2.8 billion for new projects beyond the budget year. Most of the bond funds for park projects will be depleted at the end of the budget year, with the funds remaining being mainly for water projects, land acquisition and restoration, and the CALFED Bay-Delta Program.

As Figure 3 shows, the budget proposes expenditures totaling about $2.2 billion in 2003-04 from five resources bonds approved by the voters between 1996 and 2002. These bonds include Proposition 204 approved in 1996, Propositions 12 and 13 approved in 2000, and Propositions 40 and 50 approved in 2002. While Propositions 204 and 13 are generally referred to as water bonds, and Proposition 12 as a park bond, Propositions 40 and 50 are more accurately described as resources bonds, since they provide funding for a mix of water, park, and land acquisition as well as restoration purposes.

As shown in Figure 3, most of the bond funds from Propositions 204 and 12 will be depleted at the end of the budget year. The budget projects a balance remaining of about $2.8 billion from the five bonds for new projects beyond the budget year.

Figure 4 (see next page) shows proposed expenditures and remaining fund balances in the five resources bonds, broken down by broad program category. We discuss each of these program categories in further detail below.

Parks and Recreation. Propositions 12 and 40 together allocated about $2.3 billion for state and local park projects and for historical and cultural resources preservation. The budget proposes expenditures of $708 million for these purposes in 2003-04, with a balance of $141 million remaining for new projects beyond the budget year. Bond funds for historical and cultural resources preservation will essentially be depleted at the end of the budget year.

Water Quality. Propositions 204, 13, 40, and 50 together allocated about $2 billion for various water quality purposes. These include funding for wastewater treatment, watershed protection, clean beaches, and safe drinking water infrastructure upgrades. The budget proposes expenditures of $293 million for these purposes in 2003-04, with a balance of $579 million remaining for new projects. 

Water Management. Propositions 204, 13, and 50 together allocated about $1.7 billion for various water management purposes, including water supply, flood control, desalination, water recycling, water conservation, and water system security. The budget proposes expenditures of $213 million for the purposes in 2003-04, leaving a balance of $560 million for projects in future years.

Land Acquisition and Restoration. Propositions 203, 12, 40, and 50 together allocated about $3.2 billion for a broad array of land acquisition and restoration projects. These allocations include funding to the several state conservancies and the Wildlife Conservation Board, as well as for ecosystem restoration, agricultural land preservation, urban forestry, and river parkway programs. The budget proposes expenditures of $590 million for these purposes in the budget year, with a balance of $935 million remaining for new projects in future years.

CALFED Bay-Delta Program. The CALFED Bay-Delta Program is a consortium of over 20 state and federal agencies that was created to address a number of interrelated water problems in the state's Bay-Delta region. These problems relate to water quality, water supply, fish and wildlife habitat, and flood protection. Although each of the five bond measures allocated funds that could (and have) been used for purposes that are consistent with the CALFED Bay-Delta Program's objectives and work plan, only Propositions 204, 13, and 50 allocated funds explicitly for this program. From these specific allocations, the budget proposes expenditures of $400 million in 2003-04. This leaves a balance of $617 million for CALFED projects in future years.

Air Quality. Finally, Proposition 40 allocated $50 million for grants to reduce air emissions from diesel-fueled equipment operating within state and local parks. The budget proposes to spend the $23 million that remains from this allocation in the budget year.

Bond Issues for Legislative Consideration

In order to facilitate the Legislature's oversight of the Governor's proposed bond expenditures, we recommend a number of steps be taken. These include (1) holding joint hearings on the budget proposal for Propositions 40 and 50 expenditures, (2) scheduling the Wildlife Conservation Board's Propositions 40 and 50 appropriations in the budget bill, (3) enacting legislation requiring budget display of bond fund conditions and designating a lead agency to implement bonds, and (4) enacting legislation to provide guidance for certain bond fund expenditures.

We discuss below a number of issues for legislative consideration when evaluating the Governor's budget proposals to expend resources bond funds.

Legislative Oversight Through the Hearing Process. As has been done in recent years, we recommend that the budget and policy committees of each house hold joint hearings on the Governor's budget proposal for each of the recently enacted bond measures—specifically Propositions 40 and 50 for this year's hearings. We think that it is important for the Legislature to evaluate the bond proposals as a "package" rather than on a department-by-department basis. This is important for a couple of reasons. First, since multiple departments, often with overlapping missions, are implementing programs funded from these bond funds, it is important that the Legislature assess the extent to which the bond expenditure proposals are coordinated both among the various departments and with similar programs in these departments that are funded from other fund sources. Second, we think that this approach would allow the Legislature to be apprised of the Governor's overall expenditure priorities from each of these bond measures.

In our write-up on the Wildlife Conservation Board (WCB) in this chapter, we raise concerns about a substantial amount of Proposition 40 and 50 bond funds for land acquisition and restoration that are "continuously appropriated," meaning that they are spent outside of the legislative review and approval process for the annual budget bill. In the WCB write-up, we recommend that these bond funds be appropriated in the budget bill and that expenditures be scheduled in the budget bill by broad project category. This scheduling is needed in order to provide the Legislature with a meaningful basis on which to evaluate the bond proposal, particularly given the lack of details in the Governor's budget display regarding the projects to be funded with these bond funds.

Legislative Oversight by Improving Bond Fund Accountability. In response to the Legislature's direction in the Supplemental Report of the 2002 Budget Act, the 2003-04 Governor's Budget includes a fund condition statement for Proposition 40. However, the Governor's budget document does not include fund conditions for a number of other resources bonds—Propositions 204, 12, 13, and 50. As we have concluded in past years, the lack of these fund condition statements has complicated the Legislature's ability to oversee the budget's expenditure of these funds, as well as monitor and identify fund balances for appropriation in current and future budgets. A number of the bond measures are rather complex and legislative oversight would be facilitated by fund condition statements. For example, Proposition 13 established 26 subaccounts for the various programs funded by the measure. Therefore, we recommend the enactment of legislation that requires the balances for each of the subaccounts or allocations in Propositions 204, 12, 13, 40, and 50, as well as any future bond measure, be displayed annually in the Governor's budget document. This will promote accountability and will facilitate the monitoring of fund balances for use in current and future budget appropriations.

As a related matter, we think that the coordination of decision making, accounting, and reporting under the bond measures would be facilitated by designating a lead agency responsible for overseeing implementation of the bonds. For instance, the Resources Agency, which oversees the departments with most of the Proposition 40 expenditures, could be designated as the lead agency for that bond. Accordingly, we recommend that the legislation designate a lead agency for the overall implementation of each of Propositions 40 and 50—the two bond measures with substantial budget-year and future-year expenditures remaining.

Providing Legislative Guidance for Bond Fund Expenditures. The budget proposes bond expenditures for a number of new programs or to substantially expand expenditures for existing programs. In many of these cases, the bond measure provides very broad authority as to the eligible uses of the funds, and the budget proposal submitted to the Legislature provides few details regarding the proposed expenditures. As a consequence, the Legislature is unable to evaluate whether the Governor's expenditure proposal is consistent with legislative priorities or how the new program expenditures are coordinated with existing efforts. 

In cases where the budget proposal provides few details regarding the proposed expenditures, we recommend that funding be deleted from the budget bill, and instead be put in legislation that defines the program and guides its implementation. There is significant legislative precedent for this approach. For example, a number of bills were enacted this past year to guide the implementation of Proposition 40-funded programs. These include AB 2534 (Pavley) which related to Proposition 40's $300 million allocation for clean beaches and water quality projects.

For a more detailed discussion of this issue, please see our write-up on "Proposition 50 Water-Related Proposals Need Better Definition" in the "Crosscutting Issues" section of this chapter, as well as our write-ups under the Secretary for Resources, Department of Parks and Recreation, and Department of Water Resources elsewhere in this chapter.

Ensuring That Legislative Direction Is Followed. In evaluating the Governor's bond proposals, the Legislature should consider whether the proposals are consistent with previous direction provided by the Legislature. Our review of the Governor's budget proposal found a few examples where the budget appears to deviate from the Legislature's direction. For example, please see our write-up on the bond fund proposal for Colorado River management under WCB and our write-up on the "CALFED Bay-Delta Program" in the "Crosscutting Issues" section of this chapter.

Evaluating the Appropriateness and Eligibility of Bond Fund Expenditures. Finally, in evaluating the Governor's bond fund proposals, it is important for the Legislature to consider whether the expenditures are consistent with both (1) the provisions of the bond measure and (2) current law that provides general direction regarding the type of expenditures that are appropriately funded from general obligation bonds. We think that this issue is particularly relevant in light of the Governor's proposals to shift funding from the General Fund to bond funds in a number of resources program areas.