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

Department of Pesticide Regulation (3930)

The Department of Pesticide Regulation (DPR) administers programs to protect the public health and the environment from unsafe exposures to pesticides. The department (1) evaluates the public health and environmental impact of pesticides use; (2) regulates, monitors, and controls the sale and use of pesticides in the state; and (3) develops and promotes the use of reduced-risk practices for pest management. The department is funded primarily by an assessment on the sale of pesticides in the state (the mill assessment).

The budget proposes expenditures of about $62 million in 2005-06 for the department, including $58.6 million from the DPR Fund (funded mainly by an assessment on pesticide sales). The proposed expenditures are $1.9 million (3 percent) above estimated current-year expenditures. This increase is primarily due to a projected increase in mill assessment revenues to be used to support local enforcement and other baseline adjustments.

Budget Does Not Address Substantial Revenue Undercollection

The budget does not address a substantial revenue undercollection in the mill assessment that has been identified in recent audits. To address this, we recommend the department and Department of Finance report at budget hearings on options for addressing the revenue undercollection. We also recommend the adoption of supplemental report language to require the department to report on options for the use of the new revenues.

What Is the Mill Assessment and Who Pays It? California assesses a fee on all pesticides (agricultural and nonagricultural) at the point of first sale in the state. This fee is paid either by the pesticide manufacturer, distributor, or retailer.

The current mill assessment rate is 21 mills (2.1 cents per dollar of sales). Mill assessment revenues are deposited into the DPR Fund and are the major source of funding for the state's pesticide regulatory program.

Licensing Requirements. Under current law, all sellers of pesticide products labeled for agricultural use are required to be licensed before they can sell such products in California. The requirements of being licensed include record-keeping responsibilities to (1) maintain records of all purchases, sales, and distributions of pesticides for four years and (2) submit a quarterly report to the department specifying the total dollars of sales and total pounds or gallons of pesticides sold in California. Additionally, if a license-holder is the first point of sale of the pesticide in the state, then the license-holder would be required to pay the mill assessment on those sales.

In contrast, sellers of pesticide products labeled for use in the home and other nonagricultural settings (consumer pesticides) are not required to be licensed. (See Figure 1 for examples of nonagricultural pesticides.) Both agricultural and nonagricultural pesticide sellers are required to pay the mill assessment on the first sale in the state. Thus, the requirement to pay the mill assessment is not dependent on one being licensed.

Current Scope of Licensing Requirements Have Created a Compliance Problem. There is some evidence that unlicensed entities selling pesticides in the state may not be aware that they are required to pay the mill assess ment. A recent departmental audit conducted of a statewide retail chain that sells consumer pesticides found substantial sales of pesticide products without the mill assessment being paid. It may be that the unlicensed entities are not paying the mill assessment because they do not receive the quarterly mill assessment reporting forms from the department that serve to enforce compliance with this requirement, as these forms are only sent to licensed entities.

Extrapolating the audit findings, it appears that the department is losing $4 million annually in mill assessments from unlicensed consumer pesticide retailers. As a consequence of this revenue undercollection, current fee payers who are complying with the requirement to pay the mill assessment are disproportionately funding the work of the department.

Budget Does Not Take Steps to Address Revenue Undercollection. The department has been aware of this compliance problem with retailers of consumer pesticides for at least a couple of years. During last year's budget hearings, the department indicated that it was working with the administration on means to collect mill assessments on these unlicensed entities. However, the budget does not contain any proposal to address this issue. The department indicates that it is still working with the administration on options.

Administration Should Report at Budget Hearings on Options to Address Problem. Since the budget does not address the revenue undercollection in mill assessment, we recommend that the Legislature step in to begin addressing this issue in a timely manner. For this reason, we recommend that the department and the Department of Finance (DOF) report jointly at budget hearings on the actions that can be taken for the budget year to improve the collection of the mill assessment revenues owed to the state. Specifically, the report should include an evaluation of the costs and benefits of at least the following two options that we have identified to address the uncollected mill assessment revenue.

• Option One—Require Licensing of Nonagricultural Pesticide Sellers. This option would require retailers of nonagricultural pesticides to (1) obtain a license (with the same record-keeping responsibilities of existing license-holders discussed earlier) from the department, (2) pay license fees, as is currently required of sellers of agricultural pesticides, and (3) annually submit a list of their suppliers (to assist the department in tracking the chain of pesticide sales in the state). This license requirement could be limited in some way, such as requiring a license only for
nonagricultural pesticide retailers who meet an annual sales threshold, in order to ensure administrative cost-effectiveness of an expanded licensing program. The report by the department and DOF should specify additional workload and costs created by such an expanded licensing function.
• Option Two—Increase Staff at the Mill Assessment Branch. This option would increase staff in the department's Mill Assessment Branch in order to inform (through public outreach) sellers of nonagricultural pesticides of the requirement to pay the mill assessment and to enhance the department's enforcement activities to ensure greater compliance with the requirement. For example, increased staffing could be used to perform additional audits of the chain of pesticide sales in the state to ensure that the mill assessment is being paid at the first point of sale in California.

Consider Options for Using New Revenues. If actions are taken to improve compliance of those required to pay the mill assessment, mill assessment revenues will correspondingly increase. Given the time required to implement changes to address the revenue undercollection in mill assessment, a major improvement in revenue collection may not be seen until 2006-07.

The future availability of these new revenues in the department presents the Legislature with some policy choices. For example, the Legislature could authorize that these revenues be used to restore a portion of the positions and funding lost in previous budget reductions. In this regard, we note that Chapter 523, Statutes of 2001 (AB 780, Thompson), required the department to report to the Legislature on the appropriate levels of funding needed to support its pesticide regulatory program. This report notes that the department considered that its funding requirements were met in 2001-02, when its budget was $50 million (excluding $13 million that was a pass-through to local pesticide programs). Reflecting subsequent budget reductions, including a loss of over 100 positions, the 2005-06 budget proposes about $45 million for the department's own programs.

Many of the programs that were reduced involved efforts to improve the timeliness of the pesticide registration process and the evaluation of the major environmental and health impacts posed by pesticide use. The restoration of such programs would not only strengthen the department's regulatory decisions to protect human health and the environment from the adverse effects of pesticide use, but would also improve the registration process so that chemicals can be fully and efficiently evaluated, without unnecessary delays in authorizing their introduction in the market.

Alternatively, the new revenues could facilitate a reduction in the mill assessment rate, perhaps in combination with some level of program restoration. Accordingly, we recommend that the Governor's 2006-07 budget proposal be accompanied by a report that evaluates the options for using the new revenues and explains the department's chosen course of action. To ensure that this report is submitted, we recommend the adoption of the following supplemental report language:

On or before January 10, 2006, the Department of Pesticide Regulation shall report to the Legislature on its evaluation of options for using the new revenues generated from the mill assessment due to actions taken to increase the compliance of nonagricultural pesticide retailers. The report shall include a list of all options considered by the department, the consequences of adopting each option (benefits and costs), and an explanation of the department's chosen course of action as reflected in the Governor's 2006-07 budget proposal.