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

Resources Bonds

The state uses a number of bond funds to support the departments, conservancies, boards, and programs under the Resources and California Environmental Protection Agencies. Of the $4.7 billion in state-funded expenditures for resources and environmental protection programs proposed for 2005-06, about $800 million (16 percent) is proposed to come from bond funds. This amount is about $2 billion less than estimated bond expenditures in the current year, reflecting a decrease in available bond funds. In the sections that follow, we provide a status report on the fund condition of various resources bond funds and discuss bond fund implementation issues for legislative consideration.

Resources Bond Fund Conditions

The budget proposes expenditures in 2005-06 of $821 million from the five resources bonds approved by the voters since 1996. The proposed expenditures would leave a balance of about $1.2 billion for new projects beyond the budget year. Essentially all 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 $821 million in 2005-06 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 most 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 12 and 40 will have been appropriated at the end of 2005-06. The budget projects a balance remaining of about $1.2 billion from the five bonds for new projects beyond the budget year.

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 $48 million for these purposes in 2005-06, essentially leaving no balance 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 $213 million for these purposes in 2005-06, with a balance of $243 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 $215 million for these purposes in 2005-06 leaving a balance of $333 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, as well as for ecosystem restoration, agricultural land preservation, urban forestry, and river parkway programs. The budget proposes expenditures of $184 million for these purposes in the budget year, with a balance of $212 million remaining for new projects.

CALFED Bay-Delta Program. The CALFED Bay-Delta Program is a consortium of over 20 state and federal agencies that was created to ad dress 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 $161 million in 2005-06, leaving a balance of $417 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 has been depleted.

Bond Issues for Legislative Consideration

We discuss below issues for legislative consideration when evaluating the Governor's resources bond expenditure proposals.

Status of the Expenditure of Prior Bond Fund Appropriations

We find that there are significant amounts of bond funds that were appropriated in the current and prior years that have not been expended. 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.

Significant Bond Funds Have Not Been Expended. The Legislature has appropriated a large amount of resources bond funds over the past few years. For example, about $3.9 billion was appropriated from Propositions 40 and 50 bond funds from 2001-02 through 2003-04. We find that significant amounts of these bond funds have yet to be expended. Specifically, as of end of 2003-04, more than one-half (about $2.2 billion) of the prior appropriations from Proposition 40 and 50 funds had yet to be expended or encumbered. Although a majority of the bond funds appropriated in recent years were approved for expenditure over multiple years, and while we anticipate additional expenditures from these funds between now and the end of the current year, the balance of the appropriations that is unlikely to be spent until future years is likely to be substantial.

Recommend Administration Report on Status of Expenditures From Prior Appropriations. We recommend that the administration report at budget hearings on the expenditure of resources bond funds appropriated in the current and prior years. Specifically, for all prior appropriations from each allocation of funds under the five resources bonds, the administration should report on the amount of cash-out-the-door expenditures and en cumbrances to date, plus the anticipated additional expenditures/encumbrances in the remaining months of the current fiscal year. We think this will allow the Legislature to (1) evaluate the administration's proposal to spend bond funds in the budget year in the context of significant prior-year appropriation balances and (2) set its own priorities for use of these funds.

We note that in the Supplemental Report of the 2003 Budget Act, the Legislature directed that the 2004-05 and future-year Governor's budgets include a bond fund display for Propositions 40 and 50. While these displays were included with the Governor's 2004-05 Budget, they have been excluded in this year's proposed budget. This has made legislative oversight difficult, and we recommend that future-year Governor's budgets include bond fund displays for the resources bonds as directed by the Legislature.

Delays Persist in Getting Funds Out-the-Door

We find that past-year staffing reductions and other constraints significantly slowed the implementation of some bond-funded programs, particularly new ones, and that delays persist in getting funds out-the-door. We recommend that the administration report to the Legislature at budget hearings on its efforts to improve the timeliness of implementing bond-funded programs.

Some Bond Fund Programs Slow Getting Money Out-the-Door. In last year's Analysis (see Analysis of the 2004-05 Budget Bill, page B-39), we found that some departments were slow to undertake even the initial steps, such as hiring staff and developing guidelines, to implement new bond-funded programs. At that time, departments typically cited the previous hiring freeze and contracting ban (now both ended as of June 30, 2004) and vacancy reductions as reasons for the slowness in spending the bond funds.

However, we find that delays persist in getting a number of programs up-and-running and in a position to begin funding projects. For example, the State Water Resources Control Board (SWRCB) was appropriated $175 million from Proposition 40 bond funds in 2002-03 for various watershed management and pollution control programs. Our review finds that for roughly one-half of that appropriation, funds have not been awarded for projects as grant guidelines are still in the initial stages of development.

Recommend Administration Report on Its Plans for Improving Timeliness of Program Implementation. We recommend that the administration report at budget hearings on (1) its efforts to improve the timeliness of the implementation of bond-funded programs and (2) any legislative action that would assist in meeting this objective.

Some Specified Uses May Not Be in High Demand

Some bond fund accounts have large remaining balances, which may be due in part to a lack of demand for the specified use of the funds that is authorized in the bond measure. We recommend that the administration report at budget hearings on (1) any bond funds for which there does not seem to be significant demand and (2) any legislative action that would improve the administration's ability to award the funds.

Some Bond Fund Uses May Not Be in High Demand. As was mentioned above, several bond fund accounts have large balances of funds that have yet to be expended. In some cases, this is due to multiyear expenditure plans. In other cases, administrative impediments such as staffing reductions may have delayed the expenditure of funds. There are cases, however, in which the specified use of the bond funds as authorized by the terms of the bond measure is not in high demand. This may occur because there are other sources of funding available to address a program funding requirement or because the program requirements make the funds more difficult to spend.

For example, Proposition 204 (1996) allocated $30 million for loans ($27.5 million) and grants ($2.5 million) to local agencies for drainage management infrastructure. The Drainage Management subaccount in the Proposition 204 bond has a projected balance as of the end of 2005-06—almost ten years after voter approval of the bond—of about $19.6 million. The SWRCB has indicated that there has been little demand for the loan funds available from this account because there are other grant funds available and because the program requires that loans be passed through a local agency before they are loaned directly to agriculture producers.

Recommend the Administration Report on Funds for Which There Has Been Little Demand. We recommend that the administration report at budget hearings on (1) any bond funds for which there does not seem to be significant demand and (2) any legislative action that would improve the administration's ability to award the funds. If applicable, the administration should make recommendations for bond measure amendments if this would be the most appropriate course of action to address a lack of demand for funds.