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

Department of Parks and Recreation (3790)

The Department of Parks and Recreation (DPR) acquires, develops, and manages the natural, cultural, and recreational resources in the state park system and the off-highway vehicle trail system. In addition, the department administers state and federal grants to local entities that help provide parks and open-space areas throughout the state.

The state park system consists of 277 units, including 31 units administered by local and regional agencies. The system contains approximately 1.4 million acres, which includes 3,800 miles of trails, 300 miles of coastline, 800 miles of lake and river frontage, and about 14,800 camp sites. Over 80 million visitors travel to state parks each year.

The budget proposes $389.6 million in total expenditures for the department in 2004-05. This is an overall decrease of about $1.1 billion below estimated current-year expenditures. Most of this reflects a decrease in available bond funds for local parks.

The budget proposes $290.1 million in departmental support, $41.1 million in local assistance, and $58.4 million in capital outlay expenditures. (Please also see the "Capital Outlay" chapter of this Analysis.) Of the total proposed expenditures in 2004-05, about $82.3 million (21 percent) will come from the General Fund; $57.8 million (15 percent) from bond funding; $117.1 million (30 percent) from the State Parks and Recreation Fund; $67.8 million (17 percent) from the Off-Highway Vehicle Trust Account; and the remainder $64.6 million (17 percent) from various other state funds, federal funds, and reimbursements.

The budget proposes to increase state park fees by $18 million to offset General Fund costs ($15 million) and expand specified activities, as discussed in detail below.

Governor's Fee Proposal

The budget proposes to increase revenues from park fees by $18 million in order to offset General Fund expenditures of the department. While we recommend approval of the funding shift, we also recommend that the department report prior to budget hearings on its revenue projections for the fee changes and be directed to report mid-year on the implementation of the new fee schedule. We also recommend the enactment of legislation to set parameters for the structure of state park fees.

Governor Proposes Increasing Park Fee Revenue by $18 Million. The budget proposes to increase revenues from state park visitor fees by $18 million, of which $15 million will be used to replace General Fund support currently budgeted in the department for state park operations. The remaining additional revenue will be used for expanded collection activities ($1 million) and additional maintenance activities ($2 million). Under this proposal, the percentage of the department's operating costs that will be funded by visitor fees will increase from 18 percent to 24 percent. The balance of state park operations will be funded mainly by the General Fund and other special funds.

Under the Governor's fee proposal, almost all types of park fees will increase, effective July 1, 2004. For example, day use fees will be increased from a current range of $3 to $5 to a proposed range of $4 to $14. Figure 1 compares the current and proposed fee schedules.

The administration's proposal includes a plan to change the way fee increases are structured. In the past, the fees at all parks have generally been increased at the same rate. Under this proposal, the degree to which the fees will increase will vary from park to park. This is because fee adjustments will be based more on "market" factors than in the past. These market factors would include a consideration of other competing recreational opportunities (both public and private) in the vicinity of the park, visitor demand for the park, the time of year, and the particular service features at a park. As a result, there will be a greater differential in fees among and within parks under the new schedule. Figure 2 illustrates this variation in fees for selected parks.

Day use fees for individual state parks have not yet been set. However, current law requires the department to make available reduced price day-use passes to those receiving public assistance and senior citizens.

Recommend Approval of Fund Shift to Fees. We think the Governor's proposal to increase the support of park operations from park visitors is appropriate because park users benefit directly from the recreational services provided by state parks. We therefore recommend that the Legislature approve the fund shift of $15 million from the General Fund to visitor fees deposited in the State Parks and Recreation Fund. We also support, in concept, the department's plan to structure fees using more of a market-based approach that results in differential pricing based on demand and the service provided. This is because such a market-based approach is better able to reflect the value to park users of their visit to state parks, thereby being consistent with the application of the beneficiary pays principle. This approach is in line with the way other state and federal land managers structure park fees.

Recommend Department Report Prior to Budget Hearings on Revenue Projections. At the time this analysis was prepared, the department had not provided information supporting its revenue projections under the proposed revised fee structure. In order for the Legislature to be confident that the department's revenue projections are realistic and achievable, we recommend the department report prior to budget hearings on how such projections were calculated.

Require Department to Report Mid-Year on Actual Revenues, Visitor Attendance, and Final Fee Schedule. The department's revenue projections in the budget are more uncertain than in past years because of the magnitude and number of fee adjustments proposed and the uncertain impact of these fee changes on park visitor attendance. Because of the uncertainties related to this proposal, we recommend that the Legislature adopt supplemental report language to direct DPR to report at the time the Governor submits his 2005-06 budget proposal on various matters. The report should include information on the department's final fee schedule, updated revenue estimates, and visitor attendance numbers. By mid-year, DPR will have sufficient data from the summer visitor season, which is the most significant revenue period. This information will help the Legislature in evaluating the need for any mid-year budget adjustments or addressing policy concerns that may arise (such as a greater-than-anticipated reduction in visitors).

Recommend Legislation to Provide Parameters for Fees. Current law provides DPR the authority to enact fees, but provides few parameters to guide how park fees should be structured. While we think that the setting of specific park fees should be done administratively, we think that the Legislature should provide some policy and implementation parameters to guide the department and to ensure an effective level of legislative oversight. We therefore recommend such guidance be developed in legislation to ensure adjustments in visitor fees over time are guided consistently by legislative policies.

We think legislation establishing policies for the setting and collection of park fees should specify the following, while leaving the department with an appropriate level of flexibility to set specific fees:

• The Role of Fees in State Park Funding. Funding for state parks should include a reasonable sharing of costs between the users of state parks and the general public.
• Fee Structure Should Include Differential Pricing. Any fee structure should reflect the different levels of service and facilities that are offered by state parks.
• Fees Should be Comparable With the Fees of Similarly Situated Recreational Providers. Fees for the use of state parks should be comparable with the fees for the use of similar privately and publicly owned facilities in the vicinity of the state park.
• Innovative User-Friendly Fee Collection Should Be Encouraged. Revenues from fee collections are likely to increase when visitors are offered convenient methods of payment (such as automated fee machines and payment by credit cards).
• Schedule of Park Fees Should Be Reported Annually. The department has the authority to administratively adjust fees at any time during the year. The department should be required to annually prepare a schedule of park fees for all units of the park system and submit the schedule as part of its annual budget proposal to the Legislature.
• Fees Should Be Used to Support Deferred Maintenance When Feasible. The department should be encouraged to maintain a portion of the fee revenues at the site where they are collected in order to address deferred maintenance needs. Research from federal park managers who use such a fee system has shown positive results in terms of reducing deferred maintenance and increasing user support for the fees.

Evaluating the Potential for Increased Private Sector Partnership in State Park Services

The Governor's budget document indicates the administration's intent to propose a constitutional amendment to expand the circumstances in which the state can contract with private entities. While a specific proposal is not included in the department's budget, we think there are opportunities for the Department of Parks and Recreation to expand its current contracting with the private sector in providing park services. We discuss these opportunities, their limitations, and identify the factors that can increase the success of private sector involvement. We then recommend a specific pilot program to further explore these opportunities.

During the last several years, DPR has faced a number of operational and funding challenges. The size of the park system and the number of visitors have increased, while there have been reductions in the operating budgets for the department. The department currently estimates that it is only spending about 40 percent of what is needed on maintenance. As a result, the department's deferred maintenance backlog has increased to about $1 billion, thereby impairing the quality of visitor experience.

In light of increasing costs and unmet funding requirements for state park operations, it is particularly important to identify opportunities for efficiencies and to create savings in state park operations. One such approach is to increase the role of contracting with the private sector in the delivery of state park services. We discuss this approach in the sections that follow.

Increased Private Sector Involvement in State Parks Warrants Consideration. The Governor's budget document indicates the administration's intent to pursue a state constitutional amendment which would allow for a greater use of contracting for the delivery of services. (Please see the discussion of this proposal in the "Crosscutting Issues" section of the General Government chapter of this Analysis.) This constitutional amendment is designed to provide greater legal certainty and therefore opportunities to contract out for services.

The increased use of the private sector is seen as having several potential advantages, including reduced costs, increased efficiencies, and/or improved service delivery. While a specific "privatization" proposal is not proposed for state parks, the budget does recommend that there be further consideration given to promoting the greater use of concessions within state parks.

Recreational services provided by public agencies, such as those provided by DPR, are often considered good candidates for increasing private sector involvement because these are activities that the private sector is substantially involved in. For example, recreational services such as golfing and camping are often offered by the private sector. In fact, DPR already uses the private sector in many ways, such as in providing food, equipment, lodging rentals, and professional services such as archaeological and architectural services.

The purpose of this analysis is to evaluate the potential of increasing the role of the private sector in state park operations in order to achieve savings, expand services, or increase the efficiency and quality of the services delivered. We discuss the department's current use of the private sector, how the private sector is used in other park jurisdictions, and important factors for the successful use of the private sector in state park operations.

In preparing this analysis, we surveyed a broad variety of other land management agencies who have a track record in contracting with the private sector. We spoke to federal land managers at the National Park Service (NPS) and the United States Forest Service (USFS) as well as provincial park managers in Canada. We also interviewed state park departments in several states, including New York, Montana, Ohio, and Texas, as well as local park agencies. In the sections that follow, we use the term "park jurisdictions" broadly to refer to these land management agencies and the term "parks" to refer to the land they manage, such as campgrounds, beaches, open space areas, as well as traditional parks.

Private Sector Participation in Park Operations Can Take Many Forms. Private sector participation can take many different forms within public park operations. For example, we found examples of private concession operators that provide recreational and food services, as well as lodging. We also found park jurisdictions that use the private sector to do basic maintenance, operate campgrounds, collect fees, or run an entire park. The providers of these services to park jurisdictions can be businesses, nonprofit organizations, or even other public jurisdictions.

Current DPR Park Operations Rely on a Mix of Private and Public Sector Involvement. Contracting with the private sector to provide services at parks is nothing new in California. Currently, DPR relies on a combination of the private and public sectors to operate and maintain its parks. Typically, DPR uses it own seasonal and permanent staff for housekeeping activities, maintenance, fee collection, interpretative services, and public safety activities. However, the department also relies on the private sector (including nonprofit organizations) for a variety of activities, as shown in Figure 3.

As shown in Figure 3, the department contracts for a variety of activities related to the operation of state parks. The department reports expenditures of about $17 million (about 5 percent of its operating budget) on these activities in 2002-03.

Through its concession program, the department offers visitors a variety of services as illustrated in Figure 3. Concessions are private businesses operating under contract in state parks to provide products and services to state park visitors. Concessionaires keep the revenues that they generate, after making a rental payment to the state. Currently the department has about 160 concession contracts which in 2004-05 are expected to generate about $12 million in revenue for state parks. In the past, DPR has also used concessionaires to operate campgrounds and day use areas.

Lastly, private sector involvement also includes the use of volunteers and nonprofit organizations. In 2002-03, volunteer services with a "value" of about $14 million were provided at state parks. For example, volunteers serve as docents, provide clerical support, collect fees, and do habitat restoration.

Other Park Jurisdictions Go Further in Involving the Private Sector. Our review found several examples where other park jurisdictions involve the private sector significantly in additional ways beyond those used by DPR. We have categorized these additional activities into four general categories. While some jurisdictions used the private sector for only one of these activities, others involved the private sector in all of them.

• Assisting With Daily Maintenance Activities. We found that several park jurisdictions contract with the private sector for daily maintenance activities such as maintaining restrooms and landscaping. For example, USFS uses the private sector to maintain restroom facilities at several of its lakefront parks in the Lake Tahoe basin. At the local level, the County of Los Angeles has contracted extensively with the private sector to provide basic maintenance activities. The City of Sacramento uses contracts to provide some of the landscaping and maintenance activities at its new parks. At the state level, New York has experimented using the private sector to provide basic maintenance activities.
• Operation of Campgrounds. The USFS, NPS, several Canadian provinces, and Ohio have all used the private sector to operate some of their campgrounds. For example, most of the USFS campgrounds in the Lake Tahoe basin are operated as concessions, with the concessionaire collecting the fees, operating the campground, and doing basic maintenance. In return, the concessionaire pays a rental payment to the land management agency. Like all concessions, the amount of rent paid to the land manager varies by individual parks.
• Operating Day Use Facilities. Many of the Canadian provinces use the private sector to operate day use facilities.
• Operating Entire Parks. Among the many park jurisdictions we spoke to, only Canadian provinces reported contracting with the private sector for the operation of an entire park. In some cases these parks are self-supporting, in other cases, the province pays the private sector to operate the park.

Jurisdictions Report Mixed Results From Increasing the Use of Private Sector. All of the jurisdictions we surveyed reported a lack of quantifiable data on the results of their efforts to increase the role of the private sector in park operations. These jurisdictions were not able to report on specific savings that resulted or to what extent any savings were redirected to providing other activities. Despite the lack of quantifiable results, these other jurisdictions were able to provide anecdotal evidence on some of the benefits and risks in increasing the involvement of the private sector in state park operations. Although the experience of these jurisdictions varied, we have identified common advantages and disadvantages reported by the jurisdictions that we surveyed, as shown in Figure 4.

Park jurisdictions reported several different kinds of advantages from the expanded use of the private sector in their operations. For example, those jurisdictions that use concessions to deliver certain park services reported that the use of concessions eliminated cash flow difficulties because the concessionaire assumes the operational costs of the park. Park jurisdictions also reported that as the private sector assumed certain responsibilities, they were able to redirect public resources to other activities such as resource management. However, some park jurisdictions also reported concerns with the provision of services by the private sector. These concerns included observations that the quality of maintenance provided by the private sector may be reduced by efforts of the private sector to contain costs. Other jurisdictions also noted that when privatization results in a significant loss of public staff and equipment, it limits the flexibility of the public agency to resume providing the services if the private sector provider proves to be unsuccessful.

Key Factors for Success in Increasing the Involvement of the Private Sector. Our survey found that there are several factors that tend to increase the likelihood of achieving successful outcomes from private sector involvement in park operations. These factors include:

• Bidding Includes the Park Jurisdiction. Park jurisdictions should have an opportunity to bid on services they are seeking to privatize. In many cases, the public sector may offer a proposal that delivers the service most efficiently and at least cost. In addition, for the public jurisdiction, the process of competitive bidding may provide it with the incentive to carefully analyze the costs to deliver the services, thereby identifying efficiencies in the way it can deliver the services.
• Competitive Market Should Exist. Involving the private sector tends to work best when there is a well-developed and competitive private sector market for the activity under consideration. In order to attract private sector involvement, the activity which is being considered for privatization should have characteristics that will allow it to generate a fair return on investment for the private party. These include:

1. _ Economies of Scale. Using the private sector for park operational activities seems to work best when economies of scale can be achieved. For example, USFS bundles all of it campgrounds in the Lake Tahoe basin into one concession contract in order that the less profitable campgrounds are balanced with the larger, more profitable campgrounds and to maximize economies of scale.
2. _ Activities With Reasonable Revenue Potential. Those park activities that can generate reasonable revenues, such as the operation of popular campgrounds, are likely to generate the greatest interest from the private sector. Other campgrounds with less revenue potential may be more difficult for the private sector to operate without subsidies.

• Contract Performance Requirements and Good Contract Management and Oversight Are Essential. It is important that any service contract specify clear performance requirements for the delivery of the service. Good contract management and oversight are essential to ensure that the specific performance requirements for the delivery of services are being met.
• Cost and Revenue Information for the Activity Must Be Available. In order to evaluate the benefits of the private delivery of a service, the park jurisdiction will need to have accurate information on its costs to deliver the service and the amount of any revenues it has generated. This information is essential in determining any cost savings from the effort to involve the private sector.
• Decisions to Involve the Private Sector Should Be Park Specific. The decision to increase private sector involvement in a particular park jurisdiction should be based upon a careful analysis considering the factors discussed above. Because each park has a unique set of circumstances, privatization efforts may not be appropriate at all parks.

Recommend Pilot Program to Increase Private Sector Involvement in State Parks. As discussed earlier, the private sector is already significantly involved in DPR's state park operations. In light of this, and our survey results, we recommend a pilot program to selectively expand private sector involvement in state parks into activities that currently are not being partnered with the private sector. We think a pilot is appropriate because our research shows that there is a potential for increased private sector involvement to benefit state park operations if such an effort is carefully designed and managed and includes key factors necessary for its success. The lack of conclusive studies of success in other park jurisdictions makes moving beyond a pilot effort premature at this time. The pilot program—if structured appropriately—can be used to provide much needed information on the pros and cons as well as the costs and benefits of greater private sector involvement. Under current law, contracting on a temporary basis also faces fewer restraints than permanent changes.

As discussed below, we have identified three areas for consideration for increasing private sector involvement through a pilot. Based on our survey results, we have focused the pilot on maintenance and visitor service activities. We have excluded any public safety activities for consideration in this pilot. Within each component of the pilot program, we anticipate the department will also participate in the competitive bidding process by reviewing its own costs to provide the services and compare its costs with those of any other contract bids. While we think it is important that the department structure the pilot strategically, we defer to the department on the selection of the specific parks to use in the pilot. We recommend the following three components for the pilot program:

• Expand Concessions Operations to Include Selected Campgrounds. We think expanding the concession program to include carefully selected campgrounds should be included in the pilot for several reasons. First, the large presence of private sector operators of campgrounds suggests there will be competitive forces at work which are essential to achieving the most beneficial results from increasing private sector involvement. We think campground operations are also a good fit with the existing concessions program because campgrounds are similar to other concession activities in that they are a type of lodging, they generate revenue, and they offer an important visitor service. In addition, many other state and federal agencies have shown that campground operations can be successfully included in the group of visitor services provided by concessionaires. Lastly, because the existing state concessions program has extensive experience in negotiating contracts, determining rents to be paid to the state, and overall contract management, we think the program can be an effective manager of contracts with minimal additional oversight costs.

In selecting campgrounds for the pilot, the department should consider the experience of other states and federal agencies that suggests that not all state campgrounds are well suited for concession operations. In general, low-use remote campgrounds have not proven successful in other jurisdictions because they are not financially profitable for the concessionaire. The most successful campgrounds operated by concessionaires have been those that are in high-use areas, with high visitor numbers. The department may also wish to consider bundling several low revenue producing campgrounds with large revenue producing campgrounds.

• Expand Existing Concessions That Provide Visitor Services to Include Light Maintenance and Fee Collection Duties. Most concessionaires are responsible for light maintenance and revenue collection related to their own businesses operated on state parks. We recommend the pilot include expanding concession agreements to include some maintenance and fee collection duties in the park in which they operate. Such an expansion would enable an assessment of the potential for economies of scale when existing operations are expanded to include new activities.
• Contract on a Temporary Basis to Accomplish Seasonal Maintenance Activities. We recommend that individual state park districts be given the option of selecting a private operator to deliver some of the basic seasonal maintenance and fee collection activities. This is because basic maintenance and fee collection services are widely available in the private sector and may therefore be more efficiently delivered by the private sector.

Pilot Should Include Report on Results. As discussed above, there are limited data on actual results of increasing the involvement of the private sector in park operations. In order for the pilot to be valuable in informing the analysis of the costs and benefits of increasing the role of the private sector, we recommend the pilot program include a report to the Legislature that provides the following information. We recommend that the pilot program be conducted over a multiyear period in order to provide a sufficient amount of data to evaluate outcomes.

• Baseline Information on State Costs and Level of Services Provided. The report should include baseline information for each service contracted out in the pilot, including the department's costs to provide the services and any revenues generated by it. The report should also include some qualitative measures on the provision of those services, such as visitor feedback.
• Outcomes. The report should compare the results of the pilot with baseline information (and/or the department's projected costs to provide the service), and identify if there are any direct cost savings, expansion of services, or improvements in service delivery that were achieved as a result of the effort. The report should also note any changes in qualitative measures, such as visitor satisfaction and park cleanliness.
• Recommendations on Expansion of Pilot. Based on the results of the pilot, the department should report on the merits or disadvantages of expanding the pilot program.

Fiscal Impact of Pilot on Department. The pilot activities and the recommended reporting requirement will result in some additional workload to the department's existing concession and contracting activities. However, we think that the costs to set up and administer the pilot (for example, to review contract proposals and manage contracts) should not significantly increase departmental costs. This is because of the relatively small scale of the pilot and the department's existing expertise in partnering with the private sector. We further find that much of the information required for the report is information that should already be gathered as part of the carrying out of the department's operations and should therefore require minimal additional costs to gather.

Concession and Operating Agreement Proposals

The budget includes 13 concession-related proposals requiring legislative approval. We find all proposals to be warranted.

Under current law, the Legislature is required to review and approve any proposed or amended concession contract that involves a total investment or annual gross sales over $500,000. In past years, the Legislature has provided the required approval in the supplemental report of the budget act.

As shown in Figure 5, the department has included eight concession proposals and five proposed operating agreements in its budget that require legislative approval. We find all of the proposals to be warranted.