LAO 2006-07 Budget Analysis: Resources

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Reforming the CALFED Bay-Delta Program

The CALFED Bay-Delta Program (CALFED), a consortium of 12 state and 13 federal agencies, was created to address a number of interrelated water problems in the state’s Bay-Delta region. Responding to legislative concerns about the program’s overall performance, the Governor directed a number of independent management, fiscal, and program reviews of CALFED be conducted. These reviews identified several problems with CALFED’s current organizational structure and found that the program lacks clear goals and priorities to guide its decision making, hindering its ability to move forward. In the sections that follow, we provide a history of CALFED, summarize the Governor’s budget proposal, highlight the findings of the program reviews, and make a number of recommendations for legislative next steps to improve CALFED.


What Is CALFED? Pursuant to a federal-state accord signed in 1994, CALFED was administratively created as a consortium of state and federal agencies that have regulatory authority over water and resource management responsibilities in the Bay-Delta region. The CALFED program now encompasses 12 state and 13 federal agencies, overseen by a relatively new state agency-the California Bay-Delta Authority (CBDA)-created by statute in 2002. The objectives of the program are to:

After five years of planning, CALFED began to implement programs and construct projects in 2000. The program’s implementation-which is anticipated to last 30 years-is guided by the “Record of Decision” (ROD). The ROD represents the approval of the final environmental review documents for the CALFED “plan” by the lead CALFED agencies. Among other things, the ROD lays out the roles and responsibilities of each participating agency, sets goals for the program and the types of projects to be pursued, and sets milestones for achieving program outputs and outcomes. The ROD also addresses how CALFED should be financed, providing that “a fundamental philosophy of the CALFED Program is that costs should, to the extent possible, be paid by the beneficiaries of the program actions.” The ROD, however, provides few details as to how this principle would be implemented.

A Brief History of CALFED Governance. The program’s organizational structure evolved administratively in the mid-1990s, and was not spelled out in state statute. The initial organizational structure was very loosely configured. Early on, the program was housed within the Department of Water Resources (DWR), with an Executive Director. For a number of years, the staffing and funding arrangements for the program were complicated, with staff coming largely from employees loaned to DWR and temporary hires. In the late 1990s, the Legislature for the first time approved funding explicitly for CALFED program staff. At that time, CALFED staff (around 50 positions) was focused mainly on planning, although there was some implementation of projects taking place in the various state agencies participating in the program, including DWR, the Department of Fish and Game and the Secretary for Resources.

After the signing of the ROD, the program shifted from being a relatively small program focused on planning to a much larger program focused on implementation. Since the ROD in many respects is a plan at a very general level, the implementation phase of the program requires decisions to be made regarding the type, location, timing, and financing of specific projects. A number of important policy decisions are also made, both in terms of developing project criteria as well as setting expenditure priorities within and among the program’s several activity areas. It was in this context that the Legislature statutorily established a governance structure for CALFED in 2002.

Chapter 812, Statutes of 2002 (SB 1653, Costa), created a new state agency in the Resources Agency-CBDA-to oversee the overall CALFED program, as well as to directly implement the CALFED science program. Chapter 812 assigns responsibility for implementing the program’s other elements (such as water quality, ecosystem restoration, and water storage) among a number of other state agencies. For example, the State Water Resources Control Board is designated as the implementing agency for the water quality element.

The CBDA’s 24-member board, led by a Governor-appointed chair, includes 12 representatives from state and federal agencies, 7 public members (5 appointed by the Governor, and 2 by the Legislature), 4 nonvoting members of the Legislature, and 1 representative from a public advisory committee. Additionally, CBDA has a Governor-appointed Director, who currently oversees a staff of about 70 positions.

Under Chapter 812, CBDA is charged generally with coordinating the activities of the various implementing agencies. While CBDA reviews and approves the annual work plans and expenditure plans of the implementing agencies, CALFED governance legislation explicitly provides that “nothing [in the legislation] limits or interferes with the final decision making authority of the implementing agencies.”

Legislative Direction Regarding CALFED Financing. Neither Chapter 812 nor any other legislation lays out a comprehensive framework for how CALFED should be financed over the long term. However, the Legislature on a number of occasions has stated its intent regarding CALFED financing. These include budget control language in the 1999-00 and 2000-01 Budget Acts stating that beneficiaries of surface water storage projects that proceed to construction should reimburse all prior planning expenditures made from the General Fund. Similarly, in the Supplemental Report of the 2002 Budget Act, the Legislature directed CALFED to draft a financing plan for potential surface storage facilities consistent with the “beneficiary pays” principle. Finally, the 2003-04 Budget Act includes a statement of legislative intent that CBDA submit a broad-based user fee proposal for inclusion in the 2004-05 Governor’s Budget, consistent with the beneficiary pays principle specified in the ROD. However, such a fee proposal was not submitted to the Legislature.

State Funds Have Contributed Most to CALFED. Although the ROD envisioned CALFED being financed over time by roughly equal contributions of federal, state, and local/user funding, the state has been the major funding source for the program’s first six years, providing about $4.2 billion, or close to 50 percent, of funding. Figure 1 shows the imbalance of the contributions from these three funding sources.


Figure 1

CALFED Funding, by Source

2000-01 Through 2005-06
(In Millions)


State Funds

Federal Funds


Total Funding




































Funding as
Percent of Total






a  Includes revenues from Central Valley Project Improvement Act Restoration Fund (funded by water users), State Water Project contractor revenues, and local matching funds mainly for water recycling grants. There is additional local funding of an unknown amount that supports CALFED objectives, but it is not currently tracked by the California Bay-Delta Authority unless it is in the form of matching funds.


Almost all of the state funds supporting CALFED have been taxpayer-supported “general-purpose” funds, namely monies from the General Fund and bond funds. Apart from a relatively small contribution from the State Water Project and Central Valley Project contractor revenues, no user fees have supported the program. The local funding support for the program, while significant, largely reflects a local match for state bond funds, mainly for water use efficiency projects.

CALFED’s Funding Challenges. The CALFED program is facing a number of funding challenges. First, there is significant competition for the funding sources that the program has traditionally relied on-namely the General Fund and state bond funds. Second, the program’s funding requirements are likely to increase as major projects that have been in the study stage for a number of years move toward funding. Third, the most recent long-term CALFED finance plan submitted to the Legislature projects a funding shortfall, absent new revenue sources, of several billions of dollars. While CBDA is currently revising its finance plan and projections of funding requirements over the longer term, as discussed below, the unmet funding requirements are likely to remain substantial.

Legislative Concerns and the Governor’s Commitment To Improve CALFED

Responding to legislative concerns, the Governor directed that (1) there be independent management, fiscal, and program reviews of CALFED, (2) CALFED refocus its efforts on solving water-related conflicts in the Delta region, and (3) a finance plan be developed that is consistent with the “beneficiary pays” funding principle.

Legislative Concerns. At policy and budget committee hearings last year, the Legislature raised a number of concerns about CALFED. These related to the program’s failure to develop a viable long-term finance plan (as directed by the Legislature), the program’s lack of focus and priorities, and the program’s lack of a performance orientation.

As far as financing issues are concerned, CBDA submitted to the Legislature in January 2005 a finance plan that provided a funding framework for CALFED through 2013-14, based on a ten-year funding target of $8.1 billion. Much concern was raised in the Legislature that this funding target was unrealistic, given that it assumed high levels of highly uncertain federal funding (21 percent of the total funding was assumed from this source) and unspecified sources of new state funds (19 percent of total funding was assumed from these sources). In fact, almost 80 percent of the $8.1 billion funding target was proposed to be met from new sources of revenue that would need to be identified.

Furthermore, while the finance plan included the concept of new fee revenues from water users, it did not include specific proposals for these new fees. Therefore, the finance plan provided little substance on how the beneficiary pays principle would actually be implemented, in spite of legislative intent that the program proceed in this direction. In an effort to provide policy guidance to CALFED on this issue, SB 113 (Machado) was introduced last session to statutorily define “public benefit” and “private benefit” so as to provide objective guidance as to when public funding and fee-based water user funding, respectively, are appropriate for financing CALFED.

Given that the revenue assumptions in the finance plan appeared unrealistic, the Legislature was concerned that the plan’s projected expenditures would exceed revenues. In such circumstances, it would be necessary for the program to be “right sized” to better match expenditures and revenues.

In deciding where reductions might be made in a program to align expenditures with revenues, decision makers would normally be guided by the program’s expenditure priorities. However, in evaluating this issue at legislative hearings on CALFED, it became clear to the Legislature that CALFED was not operating from a set of clear priorities. It also appeared that the program had strayed from its original focus of resolving conflicts among water-related interests in the Delta, by expanding into what looked like a statewide water management program, resulting in substantial overlap with the mission and responsibilities of DWR.

Finally, at the legislative hearings, the Legislature expressed concern about CALFED’s lack of a performance orientation and the difficulty in articulating the outcomes achieved from the program’s expenditures.

As a result of the above concerns, the Legislature reduced the Governor’s 2005-06 budget proposal by almost 50 percent. This action was taken to provide CALFED with a placeholder base budget until a workable long-term finance plan and a zero-based budget justifying the program’s expenditures were developed to guide future-year budget decisions.

Governor’s Commitment to Improve CALFED. As part of his May Revision of the 2005-06 budget, the Governor proposed a number of actions in order to make program improvements to CALFED. Specifically, the Governor proposed that there be:

The intent conveyed at the May Revision was that a “refocused” finance plan, reflecting a clear statement of program priorities, would be incorporated in the Governor’s 2006-07 budget proposal.

Governor’s Budget Proposal: Business as Usual for Now

The budget proposes $249.9 million of state funds for CALFED in 2006-07. The budget does not reflect any changes to CALFED’s organizational structure or other reforms.

Budget Proposal Does Not Reflect a Revised Finance Plan or Other Reforms. The Governor’s budget proposal for CALFED does not reflect any significant changes to how CALFED is financed or governed. While CBDA submitted a ten-year action plan to the Governor in December that recommends changes to the program’s governance, fiscal management, and expenditure priorities, the Governor had not submitted his approved plan to the Legislature as of the time this analysis was prepared.

Expenditure Summary. Figure 2 shows the breakdown of CALFED expenditures in the current year and as proposed for 2006-07, among the program’s 12 elements.


Figure 2

CALFED Expenditures—State Funds Only

(In Millions)

Expenditures by Program Element



Ecosystem restoration



Environmental Water Account



Water use efficiency



Water transfers

Watershed management



Drinking water quality






Water storage



Water conveyance






Water supply reliabilitya



CALFED program management






Expenditures by Department



Water Resources



State Water Resources Control Board



California Bay-Delta Authority



Fish and Game






Forestry and Fire Protection



San Francisco Bay Conservation



Health Services






Expenditures by Fund Source



Proposition 50



Proposition 13



Proposition 204



General Fund



State Water Project funds



Other state funds







a  Could include conveyance, water storage, water use efficiency, water transfers, and Environmental Water Account expenditures.


Current-Year Expenditures. As shown in the figure, the budget estimates CALFED-related expenditures from state funds of $324 million in 2005-06. Of this amount, $11.5 million is from the General Fund, with the balance mainly from Proposition 50 bond funds ($232.7 million), Proposition 204 bond funds ($29 million) and State Water Project funds ($29.7 million).

For the current year, the largest state expenditures are for the ecosystem restoration ($162.1 million), science ($34.7 million), and water conveyance ($34.4 million) programs.

Budget Proposes $249.9 Million of State Funds for 2006-07. As shown in Figure 2, the budget proposes $249.9 million of state funds for various departments to carry out CALFED in 2006-07, a decrease of $74.1 million, or about 23 percent, from the current year. Most of the decrease reflects a reduction in bond funds available for a number of CALFED programs. Of the proposed expenditures, $26.4 million is proposed from the General Fund, with the balance mainly from Proposition 50 bond funds ($105.8 million), Proposition 13 bond funds ($73.8 million), and State Water Project funds ($39 million). The proposed expenditures from the General Fund reflect an increase of about $15 million, or 130 percent, above current-year General Fund expenditures. All of this General Fund increase is for the levees program, and is part of the package of flood management augmentations proposed in the budget.

As Figure 2 indicates, CALFED expenditures are spread among eight agencies. The largest expenditures are found in DWR ($210.3 million) and the Department of Fish and Game ($19.2 million). The largest state expenditures are proposed for water conveyance ($66.6 million), water use efficiency ($62.1 million), and ecosystem restoration ($32.3 million).

CALFED Under the Audit Microscope

Four independent reviews of CALFED were conducted this past summer and fall. These reviews found common agreement that the current governance structure is not working well, state priorities for CALFED are not clear, and meaningful performance measures for the program are lacking.

Independent Management, Fiscal, and Program Reviews. As mentioned above, the Governor directed that a number of independent reviews of CALFED be conducted. Four separate reviews were conducted over the summer and fall as follows:

Summary of Review Findings. We have reviewed the four reports and discuss the major findings and recommendations from them below. There appears to be common agreement on the following three points:

Governance Structure Problematic. The Little Hoover Commission summed up the CALFED organizational structure as “convoluted,” with two major problems: the lack of clear assignment of authority among the many participating entities and fuzzy lines of accountability. Regarding the first problem, the Commission noted that CBDA is an authority without authority, in that the CBDA board has no actual authority over the implementing agencies, making it very difficult for CBDA to fulfill the management function it has been given. Additionally, within the implementing agencies, it is not clear who is in charge of CALFED implementation.

Regarding the second problem of accountability, the Commission found that there were many positions of authority within the program, including the CBDA executive director, the CBDA board, the heads of the many implementing departments, and the Secretary for Resources. The bottom line of the Commission’s findings is that the program as currently structured lacks a leader to move the program forward and who can be held accountable to the Governor and Legislature for the program’s performance.

The Commission’s recommendation is to rely on the structure of the traditional government hierarchy to focus CALFED’s leadership and provide a direct line of accountability to the Governor. Specifically, the Commission recommended that CALFED be led on the state side by the Secretary for Resources who, along with the U.S. Secretary of Interior, would co-chair a policy group made up of the leadership of the major state and federal CALFED implementing agencies. The policy group would be responsible for CALFED’s program management and policy development functions, while the public involvement function would be handled separately by an advisory entity created to advise the policy group, Legislature, and the Governor. Under the Commission’s recommended structure, there is a leader (Secretary for Resources) who can direct actions of the state implementing agencies and who is directly accountable to the Governor.

Disagreement on Priorities. A major finding of the reviews is that CALFED is not being guided currently by clear, specific goals that reflect the state’s priorities for the program. While the ROD and the CALFED governance legislation include objectives for the program, these are stated very broadly, thereby leaving decisions to be made in the future about the specific means to pursue them. Accordingly, major decisions with potentially substantial policy and fiscal implications need to be made, but the program’s progress is being held up because agreement is lacking on what should be CALFED’s priorities and preferred implementation strategies. The Little Hoover Commission was of the view that it is the role of the Legislature to establish the state’s goals, priorities, and preferred implementation strategies for the program.

Lack of Accountability for Performance. All of the reviews highlighted the difficulty in articulating what “outcomes” the state has achieved from spending over $4 billion of state funds since the program’s inception. While current law requires CBDA to track and evaluate program performance, it does not specify any performance measures. As a result, while there is reporting to the Legislature on dollars spent or the status of particular projects, the reporting is of such a general nature that it does not allow answers to questions such as, “To what extent has water quality improved in the Delta as a result of CALFED?” or “To what extent have conflicts in the Delta been avoided or mitigated as a result of CALFED?”

Reforming CALFED: Where Do We Go From Here?

To improve CALFED, we recommend that the Legislature take a number of actions. These include enacting legislation to address the governance problems, setting expenditure priorities, establishing performance measures that tie to the budget process, and defining the beneficiary pays funding principle statutorily. We raise particular concerns about a draft proposal for a “voluntary” funding contribution from water users.

We recommend the following actions as legislative next steps in an effort to improve CALFED.

Addressing the Governance Problem. We agree with the Little Hoover Commission’s assessment that the diffused leadership under the current CALFED governance structure is problematic, making it difficult to manage the program and to hold anyone accountable for the program’s performance. We recommend the enactment of legislation establishing a revised governance structure, and we think that the Little Hoover Commission’s recommended structure is a model worthy of consideration. In particular, we think that focusing authority and responsibility for CALFED policy making and program management within the administration in a single individual with a direct line of accountability to the Governor would go a long way in addressing the problems with the current structure.

Setting Expenditure Priorities. We concur with the findings of the various program reviews that the lack of clear, specific goals and priorities to guide CALFED is stalling the program’s ability to make decisions and move forward. Also, it is difficult to hold entities accountable for outcomes if the expected outcomes have themselves not been articulated. However, we think that the issue of priorities should also be considered from a budgetary perspective. Given significant uncertainty surrounding potential new funding, we think it is particularly timely for the Legislature set expenditure priorities for the program. As discussed previously, these priorities are necessary to guide actions to align the program’s expenditures with available resources. The statement of these priorities could be contained in policy legislation that would guide future funding allocations for CALFED.

Establishing Performance Measures Tied to Budget Process. We think the state benefits when statute specifies a small, select group of performance measures and expected outcomes from a program. Accordingly, the Legislature should consider establishing such measures for CALFED. We think that CALFED naturally lends itself to performance measures that are both meaningful and measurable. For example, we would include a measure of the extent to which CALFED expenditures have improved water quality and the level of flood protection on this list.

We note that the Little Hoover Commission recommended that the Legislature create an incentive for performance measures by limiting state funding and expenditure authority for CALFED to programs with performance measures. We recommend making the link with the budget much stronger. Specifically, we recommend that the legislation establishing performance measures also require that any CALFED budget proposal submitted to the Legislature detail how the budget change would impact performance measures.

Approving a Financing Framework. As we discussed in The 2005-06 Budget: Perspectives and Issues (see page 240), we recommend the enactment of legislation that adopts the beneficiary pays principle for funding CALFED and provides specific guidance regarding its application. As discussed, this recommendation was adopted in SB 113 (Machado), introduced last session. As we mentioned last year, if this funding principle is not defined, there is a substantial risk that stakeholder gridlock would result when CALFED attempts to apply it on its own. This risk is more evident than ever today, given that a number of years have passed since the Legislature first directed the administration to develop a CALFED user fee proposal for its consideration.

Finally, we have particular concern with a proposal for water user contributions contained in CBDA’s draft ten-year action plan that is under consideration by the Governor. The proposal involves CALFED agencies negotiating agreements with water users who would voluntarily contribute monies to CALFED based on their perception of the benefits that they receive from the program. We do not think that this “behind closed doors” approach is a good way of making policy related to CALFED financing. Additionally, the proposal appears more in line with a “willingness to pay,” as opposed to a true beneficiary pays, funding principle as previously articulated by the Legislature.

Return to Resources Table of Contents, 2006-07 Budget Analysis