LAO 2006-07 Budget Analysis: General Government

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Secretary for Business, Transportation, and Housing (0520)

The Secretary for Business, Transportation, and Housing oversees the following 14 departments that develop and maintain the state’s transportation infrastructure, promote traffic safety, promote housing availability in the state, and regulate state-licensed financial entities as well as managed health care:

Business and Regulatory Departments

Transportation Departments

Housing Departments

In addition, the secretary’s office also manages a number of economic development programs, such as the Infrastructure Bank, the Film Commission, the Small Business Loan Guarantee Program (SBLGP), and the Tourism Commission.

The budget requests $29 million (and 60 personnel-years) for the secretary’s operations in 2006-07. This represents a 13 percent increase over estimated current-year expenditures. The largest proposed augmentation is for the Tourism Commission, which we discuss below. The proposed budget includes $16 million from the General Fund, with the remainder coming from a number of special funds and reimbursements. The budget also proposes to repay a 2002-03 loan from the SBLGP of $10.7 million.

Tourism Marketing Augmentation Not Justified

We recommend that the Legislature reject the proposal to expand the state’s General Fund subsidy of the tourism industry from $7.3 million to $10 million. The industry has not contributed its targeted share and the value of the subsidy is questionable. In addition, we recommend the adoption of budget bill language making the state’s existing contribution contingent on industry making its targeted contributions. (Reduce Item 0520-001-0001 by $2.7 million.)

Background. The California Tourism Marketing Act (Chapter 871, Statutes of 1995 [SB 256, Johnston]) establishes the framework for the Tourism Commission, which provides domestic and international marketing of California as a tourism destination. The act creates a public-private funding model in which the state provides General Fund spending and the tourism industry provides funding through a voluntary assessment. The law establishes minimum annual funding targets-$7.3 million from the state and $25 million from the industry (a funding ratio of 23 percent to 77 percent). Neither the state nor industry, however, are obligated to provide funding. Due to budget constraints, the state did not make any contributions in 2003-04 or 2004-05. In those years, the industry provided roughly $7 million in contributions. The 2005-06 Budget Act provides $7.3 million in General Fund support to the Tourism Commission, with industry assessments providing an additional $11 million (a funding ratio of 40 percent to 60 percent).

Proposal to Increase State Support. The Governor’s budget proposes a General Fund augmentation of $2.7 million, to bring annual state support to a total of $10 million. The industry has committed to maintaining 60 percent of total funding, which would raise its contribution to $15 million.

Proposal Does Not Meet Funding Ratio of Marketing Act. As noted above, state law establishes a minimum annual funding target of $25 million from industry to match the state’s contribution of $7.3 million. The industry can voluntarily raise its contribution by vote.

Industry Subsidy Questionable. The state’s contribution to the marketing program is a subsidy of the state’s tourism industry. The administration asserts that the state-funded marketing program generates additional state tax revenues. To date, however, we have not seen evidence that the subsidy actually significantly affects tourists’ behavior on the margin.

Recommend Rejecting the Administration’s Proposal. Given the state’s overall budget situation and the intent of state law, we recommend that the Legislature reject the administration’s proposal to increase General Fund support for the tourism marketing program. In addition, we recommend the adoption of budget bill language making the $7.3 million General Fund contribution contingent on the industry providing its targeted contribution level of $25 million. If the industry determines that an expansion of the marketing program will provide the industry with cost-effective benefits, then it should be willing to fund the increase on its own.

Return to General Government Table of Contents, 2006-07 Budget Analysis