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

Resources Bonds

In past years, the state has used a substantial amount of bond funds to support the departments, conservancies, boards, and programs under the Resources and California Environmental Protection Agencies that regulate and manage the state's natural resources. Of the $3.6 billion in state-funded expenditures for resources and environmental protection programs proposed for 2004-05, only about $136 million (less than 4 percent) is proposed to come from bond funds. Of this amount, $107 million comes from five resources bonds approved by the voters since 1996. This mainly reflects the administration's decision to defer to later in the spring the submittal of most of the Governor's proposals to spend resources bond funds in 2004-05.

In the sections that follow, we provide:

• A status report on the fund condition of various resources bond funds.
• Details of the Governor's January budget proposal for resources bond funds, including the program activities being funded.
• A summary of program areas that have received bond funds in the past and where bond funds remain available, but where the January budget proposal has put bond funding on hold until the submittal of the balance of the Governor's proposal later this spring.
• A discussion of a number of issues for legislative consideration when evaluating the Governor's bond expenditure proposals.

Resources Bond Fund Conditions

The budget proposes expenditures in 2004-05 of about $107 million from five resources bonds approved by the voters since 1996. The proposed expenditures would leave a balance of about $3 billion for new projects. Most of the bond funds for park projects have been appropriated, with the funds remaining being mainly for water projects, land acquisition and restoration, and the CALFED Bay-Delta Program.

As Figure 1 shows, the budget proposes expenditures totaling about $107 million in 2004-05 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 and restoration purposes.

As shown in Figure 1, most of the bond funds from Propositions 204 and 12 will have been appropriated at the end of the budget year. The budget projects a balance remaining of about $3 billion from the five bonds for new projects.

Figure 2 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 $31 million for these purposes in 2004-05, with a balance remaining of $113 million for new projects. Bond funds for historical and cultural resources preservation have essentially all been appropriated.

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 $26 million for these purposes in 2004-05, with a balance of $746 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 $7 million for these purposes in 2004-05, leaving a balance of $749 million remaining for new projects.

Land Acquisition and Restoration. Propositions 204, 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 (WCB), as well as for ecosystem restoration, agricultural land preservation, urban forestry, and river parkway programs. The budget proposes expenditures of $30 million for these purposes in the budget year, with a balance of $878 million remaining for new projects.

CALFED Bay-Delta Program. The CALFED Bay-Delta Program (CALFED) 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 CALFED'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 $13 million in 2004-05, leaving a balance of $555 million.

Air Quality. Finally, Proposition 40 allocated $50 million for grants to reduce air emissions from diesel-fueled equipment operating within state and local parks. This allocation will be depleted in the current year.

Governor's Resources Bond Expenditure Proposal

The Governor is deferring the submittal of most of his proposals to spend resources bond funds in 2004-05 to later in the spring. Most of the bond expenditures proposed in the January budget are for state operations or capital outlay, rather than for local assistance.

Governor's January Proposal. As mentioned previously, the budget proposes expenditures from all resources bonds totaling $136 million in 2004-05. Of this amount, $107 million is for programs funded by the five resources bonds approved by the voters since 1996. These proposed expenditures represent a decrease of about 97 percent from estimated bond expenditures in the current year. This reflects the administration's deci sion to defer to later in the spring the submittal of most of the Governor's 2004-05 resources bond expenditure proposals. In the sections that follow, we first provide a summary of what program activities are proposed for funding from bond funds in the January budget. We then provide a summary of program activities for which bond funding is available, but where the Governor's expenditure proposals for this funding have been deferred.

Programs Funded in January Budget. The Governor's January budget proposal includes the following significant resources bond expenditures:

• CALFED. The budget proposes $20.3 million from various bond funds for CALFED. These funds are to support staff in various of the CALFED program elements, with the water conveyance program receiving the largest amount of funding.
• Habitat Conservation Fund. As in the current year, the budget proposes to transfer $21 million of Proposition 50 bond funds to the Habitat Conservation Fund (HCF). The HCF funds wildlife habitat acquisitions and improvements by WCB.
• State Parks. The budget proposes about $24 million from Propositions 12 and 40 bond funds for state park operations and capital outlay.
• Safe Drinking Water. The budget proposes $24 million from Proposition 13 bond funds for grants and loans to upgrade safe drinking water infrastructure. (These funds are administered by the Department of Health Services.)

Programs for Which Bond Funding Decisions Have Been Deferred. Major program areas for which bond funding has been provided in the past and remains available for expenditure in 2004-05, but where the administration has largely chosen to defer funding decisions to later in the spring, include:

• Land Acquisitions by the State Conservancies and WCB. The January budget has essentially zeroed out all bond funding for this purpose. In contrast, estimated bond expenditures by the conservancies and WCBfor capital outlay total over $1.5 billion in the current year.
• CALFED. Bond funds have been the major source of funding for CALFED in recent years, providing $472 million of support in 2003-04. The January budget proposes $20.3 million from bond funds for CALFED's state operations, deferring funding decisions for bond-supported local assistance and capital outlay to later in the spring.
• Local Water Quality and Supply Projects. A substantial amount of bond funds from Propositions 13, 40, 50, and 204 that are administered by the Department of Water Resources (DWR) and the State Water Resources Control Board (SWRCB) outside of CALFED remain available for local water quality and water supply projects. Most funding decisions regarding this local assistance have been deferred to later in the spring.
• Local Parks. Significant Proposition 40 bond funds for local parks remain available, and funding decisions with respect to these funds have been deferred to later in the spring.

Issues to Consider When Evaluating Bond Proposals

We discuss below a number of issues for legislative consideration when evaluating the Governor's resources bond expenditure proposals. We also make recommendations to improve the information available to the Legislature on the expenditure of bond fund appropriations in the current and prior years, as well as improve the coordination of bond-funded state land acquisition expenditures.

Substantial Prior Bond Fund Appropriations Remain Unexpended

We find that there are a significant amount of bond funds that were appropriated in the current and prior years that have not yet been expended, in part because a majority of these funds are available for expenditure over multiple years. However, we find that staffing reductions have substantially delayed the implementation of some new bond-funded programs. We recommend that the administration report to the Legislature at budget hearings on the status of expenditures made from current- and prior-year bond fund appropriations and its plans to improve the timeliness of implementing bond-funded programs.

Significant Bond Fund Appropriations Have Not Been Expended. The Legislature has appropriated a large amount of resources bond funds over the past few years. For example, over $3 billion was appropriated from Propositions 40 and 50 bond funds in 2002-03 and 2003-04 combined. Of the funds appropriated in the current and prior years, we estimate that roughly $2 billion of these bond funds have yet to be expended. In part, this delay reflects the fact that a majority of the bond funds appropriated in recent years were approved for expenditure over multiple years. While we anticipate additional expenditures from these funds between now and the end of the current year, the balance of the appropriations available in future years, although unknown, is likely to be substantial.

Staffing Reductions Have Slowed Some Bond Fund Expenditures. We find that some departments have not undertaken even the initial steps, such as hiring staff and developing guidelines, to implement new bond-funded programs. For example, DWR has taken few steps to initiate its Proposition 50 bond-funded program to finance projects that treat or remove contaminants from drinking water. Also, SWRCB indicates that due to staffing shortages, it will not distribute funds in the current year for several of its Proposition 40 bond-funded programs that provide grants for agricultural water quality and small community groundwater projects. In general, we find that staffing shortages resulting from the hiring freeze and vacancy reductions have slowed or stopped the initiation of a number of new bond-funded programs.

Recommend Administration Report on Status of Bond Fund Expenditures. We recommend that the administration report at budget hearings on the expenditure of resources bond funds appropriated in current and prior years. This will allow the Legislature to evaluate the administration's proposal to spend bond funds in the budget year in the context of existing prior-year appropriation balances. Specifically, in determining the amount of bond funds to appropriate in 2004-05, it is important for the Legislature to be advised of balances from prior-year appropriations that remain available for expenditure in the budget year, as this could affect the total level of budget-year expenditures. Second, information about the rate at which prior-year appropriations are being drawn down will assist the Legislature in identifying and addressing im pediments to the timeliness of implementing bond-funded programs. Therefore, we also recommend that the administration report at budget hearings on its plan for improving the timeliness of implementing bond-funded programs that have been delayed for various reasons, including staffing reductions.

State Land Acquisition Activities Should Be Coordinated

We find that significant bond funds have been allocated for land acquisitions by several state agencies. We recommend that the Secretary of Resources report at budget hearings on the administration's plan to coordinate the state's land acquisition efforts.

Significant Bond Funds Have Been Provided for Land Acquisitions. The most recent resources bond measures (Propositions 40 and 50) have provided close to $3 billion for land acquisitions. These funds are provided to several agencies, including WCB, the Department of Parks and Recreation, the State Coastal Conservancy, and the seven regional state conservancies. Around $900 million earmarked in the bond measures remain available for appropriation in future years.

Coordination of State's Land Acquisition Efforts Is Important. We find that coordination among the multiple agencies that engage in land acquisition activities is important. Coordination is needed to ensure that the state is acquiring land in a strategic manner and using its bond funds in a manner that is the most effective for meeting state resources objectives. For a further discussion on this issue, please see our January 5, 2001 report, California's Land Conservation Efforts: The Role of State Conservancies.

Recommend Secretary of Resources Report on Plans to Coordinate Land Acquisition Activities. We therefore recommend that the Secretary of Resources report to the Legislature on the administration's plan to coordinate the state's land acquisition activities. As mentioned above, we think coordinating the state's land acquisition activities will result in a more effective use of the bond funds proposed for expenditure on this activity. In addition, as part of this report, we recommend that the Secretary discuss the administration's plan to ensure that development and operational costs that arise from land acquisitions are adequately funded.

Additional Issues for Legislative Consideration

We have identified several additional issues for the Legislature to consider as it evaluates the Governor's forthcoming proposals to expend resources bond funds. These include evaluating whether the bond fund expenditures are consistent with the bond measure and current law governing expenditures funded by bonds, ensuring that administrative costs are reasonable, and ensuring that prior legislative direction and legislative priorities are followed.

Evaluate the Appropriateness and Eligibility of Bond Fund Expenditures. In evaluating the Governor's bond fund proposal in the spring, 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 find that the provisions of Proposition 50 provide more flexibility than earlier bond measures in funding activities of a "non-capital" nature that would traditionally be ineligible for bond funding. For example, Proposition 50 funds support a significant number of ongoing staff positions (previously funded from the General Fund) in CALFED's surface storage planning program. Since bond funds are only a temporary funding source, we think that the Legislature should be judicious in its approval of these expenditures, seeking to minimize debt financing of ongoing state operations expenditures (by the use of bond funds), such as for the support of staff positions.

Ensure Administrative Costs Are Reasonable. The administrative costs associated with implementing the Governor's bond proposals should be evaluated to ensure that they are reasonable. We find that reasonable administrative costs can vary considerably depending on the type of program being implemented, and it is important to consider legislative intent guiding program administration. For example, providing technical assistance to disadvantaged communities in the grant application process as required by recent legislation can increase program administrative costs, but may be required to be effective in reaching these communities as intended by the Legislature. However, as a rule of thumb, we think that a cap of up to 5 percent is a reasonable level of administrative costs for some grant programs and individual property acquisition projects. (Please see our May 7, 2002 report, Enhancing Implementation and Oversight: Proposition 40 Resources Bond, for a further discussion on bond administrative costs.)

Ensure 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, such as that found in implementing legislation. For example, Chapter 240, Statutes of 2003 (AB 1747, Committee on Budget), and other legislation enacted in the current year provide legislative direction and guidance on the implementation of Proposition 50 bond funds. Specifically, Chapter 240 requires state agencies administering bond funds for grants and loans to develop project solicitation and evaluation guidelines. For some programs, Chapter 240 specifies that priority be given for certain types of projects and designates a state agency to administer bond funds where the bond measure is silent on this issue.

Ensure That Expenditure Proposals Reflect Legislative Funding Priorities. Finally, in evaluating the Governor's bond proposals, the Legislature should consider whether they include funding for its priorities. For example, in recent years, the Legislature has expressed its commitment to provide adequate funding for CALFED by approving a substantial amount of bond funding for this program. Although bond funds have provided well over $300 million of CALFED's annual funding in recent years, the Governor's January budget includes just $20 million of bond funds for CALFED. Accordingly, the Legislature will want to determine whether the Governor's forthcoming bond proposals reflect its priorities for funding CALFED as well as other resources programs.