Analysis of the 2005-06 Budget Bill Legislative Analyst's Office February 2005

Overview

The budget proposes significantly lower state expenditures for resources and environmental protection programs in 2005-06 compared to the estimated current-year level. Most of this reduction reflects a decrease in available bond funds. The budget also proposes somewhat higher General Fund expenditures for the budget year, reflecting a handful of program augmentations mainly concentrated in three resources departments. The budget also proposes to finance a pending $464 million settlement of flood litigation against the state using a judgment bond.

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 $4.7 billion in 2005-06, which is 4.2 percent of all state-funded expenditures proposed for 2005-06. This level is a decrease of about $1.9 billion, or 29 percent, below estimated expenditures for the current year.

Decrease Largely Reflects Reduction in Bond Expenditures. The proposed reduction in state-funded expenditures for resources and environmental protection programs mostly reflects a $2 billion decrease in bond fund expenditures for water, land conservation, and other resources-related projects. (As discussed below, the decrease in bond-funded expenditures is partially offset by an increase in expenditures from the General Fund.) Between 1996 and 2002, the state's voters approved $11.1 billion of resources bonds. Roughly $2 billion of this total remains available for appropriation in the budget year.

Spending From General Fund Up Significantly, Special Funds Down Slightly. On the other hand, the budget reflects an increase in General Fund expenditures for various purposes. The increases from the General Fund are largely concentrated in the Department of Water Resources (DWR), California Department of Forestry and Fire Protection (CDFFP), and De partment of Parks and Recreation (DPR). Special fund increases are proposed for the Air Resources Board (ARB). In total, the budget proposes General Fund expenditures for resources and environmental protection programs in 2005-06 that are $198 million, or 17 percent, higher than the current-year level. The budget proposes special fund expenditures that are $49 million, or 2 percent, below the current-year level.

Funding Sources. The largest proportion of state funding for resources and environmental protection programs—about $2.6 billion (or 55 percent)—will come from various special funds. These special funds include the Environmental License Plate Fund, Fish and Game Preservation Fund, funds generated by beverage container recycling deposits and fees, an "insurance fund" for the cleanup of leaking underground storage tanks, and a relatively new electronic waste recycling fee. Of the remaining expenditures, $1.3 billion will come from the General Fund (29 percent of total expenditures) and about $800 million will come from bond funds (16 percent of total expenditures).

Expenditure Trends. Figure 1 shows that state expenditures for resources and environmental protection programs increased by about $2 billion since 1998-99, representing an average annual increase of about 8 percent. The increase between 1998-99 and 2005-06 mostly reflects an increase in special fund and bond expenditures. On the other hand, the budget proposes General Fund expenditures for 2005-06 at a level roughly the same as that found in 1998-99.

When adjusted for inflation, total state expenditures for resources and environmental protection programs increased at an average annual rate of about 5 percent. When adjusted for inflation, General Fund expenditures proposed for 2005-06 are actually lower than the 1998-99 level, reflecting an average annual decrease of about 2 percent. 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.

Spending by Major Program

Cost Drivers for Resources Programs. For a number of resources departments, the 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 and the related composition of the regulatory universe.

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 CDFFP's emergency fire suppression activities and the emergency flood response actions of 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 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 60 percent ($530.6 million) of the department's 2005-06 expenditures. On the other hand, the General Fund provides less support for the other resources departments. For instance, for the Department of Conservation (DOC), the General Fund will constitute less than 1 percent ($4.9 million) of its budget-year expenditures. In the case of the Department of Fish and Game (DFG) and DPR, the General Fund will pay about 13 percent ($37.3 million) and 24 percent ($101 million) of the respective departments' expenditures. The DWR's expenditure total is skewed by the $5.3 billion budgeted under DWR for energy contracts entered into on behalf of investor-owned utilities (IOUs). If these energy-related expenditures are excluded from DWR's total, the General Fund pays for about 11 percent ($113 million) of DWR's expenditures.

Figure 2 also shows that compared to current-year expenditures, the budget proposes an overall spending reduction in many resources departments. Specifically, for DFG and DPR , the reduction mostly reflects a reduction in available bond funds. Although not shown in the figure, entities affected by a decrease in available bond funds include other land acquisition agencies, which include the Wildlife Conservation Board and the state's several land conservancies. In the case of the Secretary for Resources, the reduction mainly reflects the elimination of one-time funding of $10 million (tidelands oil revenues) that was provided in the current year for ocean protection projects. In the case of DOC, the reduction mainly reflects a decrease in payments to recycling industries from recycling special funds.

The budget's proposed reduction in total spending in DWR (4 percent) largely reflects a $331 million reduction in expenditures from the Electric Power Fund, due to decreased payments on energy contracts entered into on behalf of IOUs. This decrease reflects expiring energy contracts. However, DWR's General Fund expenditures are proposed to increase substantially—by $70 million, or 163 percent. Included in this increase are $59.1 million for the lining of the All-American Canal and $9.7 million for levee maintenance and other flood management activities. In addition, although not reflected in the budget's proposed spending totals for DWR, the Governor's budget display for DWR references a proposal to finance a pending $464 million settlement of flood litigation against the state with a "judgment bond." We discuss this proposal in our DWR writeup under this chapter.

Finally, the budget proposes a slight net increase in expenditures for CDFFP in 2005-06. The increases include $23 million for firefighting equipment and to support year-round staffing in Southern California and $55 million for increased employee compensation and retirement costs. On the other hand, the budget proposes a $25 million decrease in General Fund spending for emergency fire suppression—from $120 million in the current year to $95 million in the budget year. This is because the current year has turned out to be a high fire year, with higher-than-average expenditures while the budget assumes somewhat lower expenditures in 2005-06. We note that the budgeted expenditures for emergency fire suppression reflect the increasing ten-year average of these expenditures.

Spending for Environmental Protection Programs. As Figure 3 shows, the budget proposes either increased or essentially stable spending for most environmental protection programs. The one area with a significant proposed overall reduction is the State Water Resources Control Board (SWRCB), mostly reflecting a decrease in available bond funds for water projects.

For ARB, the proposed substantial spending increase from the Air Pollution Control Fund ($61.3 million, or a change of almost 100 percent) mainly reflects additional funding from vehicle registration-related fees for a diesel emissions reduction incentives program—the Carl Moyer Program. The scope of the Carl Moyer Program was recently expanded by Chapter 707, Statutes of 2004 (AB 923, Firebaugh).

For the California Integrated Waste Management Board, the proposed increase in spending mostly reflects the first full year of fee revenues from a new electronic waste recycling program established pursuant to Chapter 526, Statutes of 2003 (SB 20, Sher). Finally, while the budget proposes an overall reduction of spending in SWRCB due to declining bond fund availability, the SWRCB's budget reflects a significant increase in spending from special funds for the cleanup of leaking underground storage tanks (an increase of $31.6 million, or 13 percent).

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 and special fund increases throughout resources and environmental protection departments. Of particular note are $71 million of special fund increases in ARB for diesel emission reduction incentives and various other activities; $59.1 million (General Fund) for the lining of the All-American Canal and $9.7 million (General Fund) for levee maintenance in DWR; and $48 million of General Fund increases in CDFFP for firefighting equipment and year-round firefighting staffing in Southern California. Additionally, as mentioned previously, the budget proposes to issue a judgment bond to finance a pending $464 million settlement of flood litigation against the state