Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Overview

The budget proposes substantially lower state expenditures for resources and environmental protection programs in 2004-05 compared to the estimated current-year level. This mainly reflects the administration's decision to defer to later in the spring the submittal of most of the Governor's proposal to spend resources bond funds in 2004-05. The budget also proposes a lower level of General Fund expenditures for the budget year, reflecting the combination of generally small program reductions and the shifting of program funding to fees.

Expenditure Proposals and Trends

Expenditures for resources and environmental protection programs from the General Fund, various special funds, and bond funds are proposed to total $3.6 billion in 2004-05, which is 3.6 percent of all state-funded expenditures proposed for 2004-05. This level is a decrease of about $3.8 billion, or 51 percent, below estimated expenditures for the current year.

Decrease Largely Reflects Incomplete Bond Expenditure Proposal. The proposed reduction in state-funded expenditures of $3.8 billion for resources and environmental protection programs largely reflects a decrease in bond fund expenditures for park and water projects of a similar amount. Most of the bond expenditures from the current year have been taken out of the budget, leaving only about $136 million of proposed bond expenditures for the budget year. As discussed in greater depth in our write-up on "Resources Bonds" in this chapter, the administration plans to submit its complete bond proposal later in the spring.

The reduction in state expenditures also reflects a decrease in General Fund expenditures for various purposes, including emergency fire suppression and support for the California Conservation Corps. (We discuss the budget's proposal for emergency fire suppression later in this write-up.) Some of the proposed General Fund reductions do not result in overall decreased funding levels, as the budget proposes to shift funding in some program areas from the General Fund to fees. In total, the budget proposes General Fund expenditures for resources and environmental protection programs in 2004-05 that are $68 million, or 6 percent, lower than the current-year level.

Funding Sources. In recent years, the largest proportion of state funding for resources and environmental protection programs has come from bond funds. However, since the budget reflects an incomplete bond expenditure proposal, only $136 million of bond funding is proposed, the budget for now proposes that a majority of state funding for these programs come from various special funds totaling $2.4 billion. These special funds include the Environmental License Plate Fund, Fish and Game Preservation Fund, funds generated by beverage container recycling deposits and fees, and an "insurance fund" for the cleanup of leaking underground storage tanks. These special funds also include funds generated by a new electronic waste recycling fee, levied pursuant to Chapter 526, Statutes of 2003 (SB 20, Sher). Of the remaining expenditures, $1 billion will come from the General Fund (28 percent of total expenditures).

Expenditure Trends. Figure 1 shows that state expenditures for resources and environmental protection programs increased by about $1.3 billion since 1997-98, representing an average annual increase of about 7 percent. (The amount of average annual increase is substantially skewed by the delay in the Governor's proposal for bond expenditures in 2004-05. If on the other hand the average annual increase for the years 1997-98 through 2003-04 is considered, the average annual increase jumps to 21 percent.) The increase between 1997-98 and 2004-05 includes about $200 million in General Fund expenditures and the remainder mainly in special fund expenditures.

When adjusted for inflation, total state expenditures for resources and environmental protection programs increased at an average annual rate of about 4 percent. General Fund expenditures increased at an average annual rate of about 3 percent over this period. When adjusted for inflation, General Fund expenditures proposed for 2004-05 are essentially at the same level as in 1997-98. General Fund expenditures for resources and environmental protection programs peaked in 2000-01 and have since declined due to the state's weakened fiscal condition. The budget proposes General Fund expenditures at a level that is above that found in 1997-98 and prior years, but is significantly below the General Fund expenditures in each of the years 1998-99 through 2002-03.

Spending by Major Program

Cost Drivers for Resources Programs. For a number of resources departments, expenditure levels are driven mainly by the availability of bond funds for purposes of fulfilling their statutory missions. This would include departments whose main activity is the acquisition of land for restoration and conservation purposes as well as departments who administer grant and loan programs for various resources activities. For other departments that rely heavily on fees, their expenditure levels are affected by the amount of fees collected.

Some resources departments own and operate public facilities, such as state parks and boating facilities. The number and nature of such facilities drive operations and maintenance expenditures for these departments.

In addition, the state's resources programs include a number of regulatory programs. The cost drivers for these programs include the number and complexity of regulatory standards that are required to be enforced.

Finally, some resources activities have a public safety purpose, and the cost drivers include emergency response costs that can vary substantially from year to year. These activities include the California Department of Forestry and Fire Protection's (CDFFP's) emergency fire suppression activities and the emergency flood response actions of the Department of Water Resources (DWR).

Cost Drivers for Environmental Protection Programs. A core activity of departments and boards under the California Environmental Protection Agency (Cal-EPA) is the administration of regulatory programs that implement federal and state environmental quality standards. These regulatory programs generally involve permitting, inspection, and enforcement activities. The main cost drivers for environmental protection programs are the number and complexity of environmental standards that are required to be enforced, which dictate the universe of parties regulated by the departments and therefore the regulatory workload.

In addition, a number of Cal-EPA departments administer grant and loan programs. The expenditure level for grant and loan programs, and the staffing requirements to implement them, are driven largely by the availability of bond funds or fee-based special funds to support them.

Budget's Spending Proposals. Figure 2 shows spending for major resources programs—that is, those programs within the jurisdiction of the Secretary for Resources and the Resources Agency.

Figure 3 (see page B-12) shows similar information for major environmental protection programs—those programs within the jurisdiction of the Secretary for Environmental Protection and Cal-EPA.

Spending for Resources Programs. Figure 2 shows the General Fund will provide the majority of CDFFP's total expenditures, accounting for 54 percent ($370.3 million) of the department's 2004-05 expenditures. The General Fund will account for less in the support of other resources departments. For instance, for the Department of Conservation (DOC), the General Fund will constitute less than 1 percent ($3.8 million) of its budget-year expenditures. In the case of the Departments of Fish and Game (DFG) and Parks and Recreation (DPR), the General Fund will pay about 14 percent ($37.4 million) and 21 percent ($82.3 million) of the respective departments' expenditures. The DWR's expenditure total is skewed by the $5.4 billion budgeted under DWR for energy contracts entered into on behalf of investor-owned utilities. If these energy-related expenditures are excluded from DWR's total, the General Fund pays for about 5 percent ($45.9 million) of DWR's expenditures.

Figure 2 also shows that compared to current-year expenditures, the budget proposes a substantial reduction in most resources departments. These are mainly departments affected by the administration's decision to defer most of its resources bond expenditure proposals to later in the spring. As shown in the figure, the departments affected substantially by this decision include the Secretary for Resources, DPR, and DWR. Although not shown in the figure, entities that are also affected by this decision include other land acquisition agencies, which include the Wildlife Conservation Board and most of the state's eight land conservancies.

For CDFFP, the proposed reduction in spending—$162.9 million or 19 percent of total spending—largely reflects a decrease of $95 million from the General Fund for emergency fire suppression. This leaves $70 million proposed for emergency fire suppression in the budget year—about $18 million less than the ten-year annual average for these expenditures. The General Fund expenditures for emergency fire suppression in 2003-04 ($165 million) reflect the current year being a particularly high fire year. As in the current year, the proposed budget bill for 2004-05 authorizes the Director of Finance to augment the baseline appropriation for emergency fire suppression by an amount necessary to fund these costs.

For DPR, the proposed reduction in General Fund spending largely reflects a shift of $15 million of funding for state park operations from the General Fund to state park fees.

Finally, the budget proposes a substantial increase in expenditures for DOC in 2004-05. This mainly reflects an increase in payments to recycling industries due to changes enacted by Chapter 753, Statutes of 2003 (AB 28, Jackson).

Spending for Environmental Protection Programs. As Figure 3 shows, the budget proposes decreases in a number of environmental protection programs. As with resources programs, the largest of these reductions—found under the State Water Resources Control Board (SWRCB)—largely reflects the budget's incomplete proposal for bond expenditures. In the case of the Air Resources Board (ARB), the proposed spending reduction mainly reflects the end of limited-term funding from the Motor Vehicle Account for zero-emission vehicle incentives and the depletion of Proposition 40 bond funds for diesel emission reduction incentives.

The budget proposes significant General Fund reductions in a number of Cal-EPA departments totaling about $23 million. In the case of ARB, SWRCB, and the Department of Toxic Substances Control (DTSC), most of the reduction reflects a shift of funding from the General Fund to fee-based special funds.

Finally, the budget for environmental protection programs includes one substantial funding increase—$52.3 million (special funds) under the California Integrated Waste Management Board (CIWMB) to implement a new electronic waste recycling program pursuant to Chapter 526.

Major Budget Changes

Figure 4 presents the major budget changes in resources and environmental protection programs.

As shown in Figure 4, the budget proposes several General Fund reductions throughout resources and environmental protection departments. These reductions reflect both program reductions as well as funding shifts. The one major funding shift involving a fee increase is the proposed increase in state park fees in DPR. (The budget proposes to increase state park fees by $18 million, $15 million of which would replace the General Fund.) Although not reflected in the figure, the budget also proposes some other, smaller funding shifts from the General Fund to fees in the budgets of ARB, DFG, DOC, DTSC, and SWRCB. As far as General Fund program reductions are concerned, the budget proposes reductions in the California Conservation Corps totaling $12.8 million.

The budget also assumes the enactment of fee legislation that would provide $10 million of revenues from a new timber harvest review fee in 2004-05. The collection of these fee revenues would not, however, result in new General Fund savings. This is because the 2003-04 Budget Act assumed the enactment of similar fee legislation and reduced CDFFP's General Fund appropriation for timber harvest plan review by the amount of anticipated fee revenues ($10 million). The fee legislation was not enacted, leaving CDFFP with a funding gap of $10 million. The Governor's budget proposes to address this funding gap in the current year with the enactment of fee legislation that would raise $5 million in the current year and with a $5 million General Fund augmentation. The budget proposes to address the funding gap in the budget year fully with the new fee revenues.

In addition to General Fund reductions, the budget proposes some reductions in programs funded by special funds. These include a $12.3 million reduction from the Forest Resources Improvement Fund for resource management activities in CDFFP, particularly those in state-owned forests.

Finally, the budget also proposes two major augmentations in resources and environmental protection programs. These include $52.3 million (special funds) for a new electronic waste recycling program in CIWMB and $16.1 million (General Fund) in DWR to pay for the lining of the All-American Canal.