LAO 2006-07 Budget Analysis: Resources

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Department of Water Resources (3860)

The Department of Water Resources (DWR) protects and manages California’s water resources. In this capacity, the department maintains the State Water Project (SWP), which is the nation’s largest state-built water conveyance system, providing water to 23 million Californians and 755,000 acres of agriculture. The department maintains public safety and prevents damage through flood control operations, supervision of dams, and water projects. The department is also a major implementing agency for the CALFED Bay-Delta Program (CALFED), which is putting in place a long-term solution to water supply reliability, water quality, flood control, and fish and wildlife problems in the San Francisco Bay/Sacramento-San Joaquin Delta Estuary (the “ Delta”).

Additionally, the department’s California Energy Resources Scheduling (CERS) division manages billions of dollars of long-term electricity contracts. The CERS division was created in 2001 during the state’s energy crisis to procure electricity on behalf of the state’s three largest investor owned utilities (IOUs). The CERS division continues to be financially responsible for the long-term contracts entered into by the department. (Funding for the contracts comes from ratepayer-supported bonds.) However, IOUs manage the receipt and delivery of the energy procured by the contracts.

Proposed Funding. The budget proposes total expenditures of about $6.5 billion in 2006-07 (including capital outlay), a reduction of $340 million, or 5 percent below estimated expenditures in the current year. Most of this reduction reflects reduced interest costs from a refinancing of bonds which were originally issued to finance energy contracts entered into by CERS during the state’s energy crisis.

Major budget proposals include increases of $38.2 million (mostly General Fund) and 30 personnel-years for state operations of flood management and local assistance, as part of a three-year program initiated in the 2005-06 budget, and $84.1 million (General Fund) for the All-American Canal lining project.

The budget total includes $208 million for capital outlay projects, of which $122 million is for SWP (the costs of which are reimbursed from SWP contractors), $44.4 million (Proposition 13 and Proposition 50 bond funds) for CALFED water conveyance projects, and $41.3 million for flood control ($31.4 million comes from the General Fund and $9.9 million is from reimbursements).

Addressing the State’s Flood Management Problems

The budget proposes an increase of $38.2 million (mostly General Fund) in 2006-07 for flood management-related state operations and local assistance. The budget also proposes $31.4 million (General Fund) for flood control capital outlay. Due to the critical need to improve the Central Valley flood control system and for the state to be able to respond to flood events, we recommend that the Legislature approve the Governor’s proposal. However, we also identify several issues for legislative consideration as it evaluates solutions to the state’s flood management problems. These issues relate to the role of bond funding, the relationship between land use and flood control, “beneficiary pays” financing, and state oversight of Delta levees.

State’s Role in Flood Management. In the Central Valley, the state is the nonfederal sponsor of federally authorized flood control projects. For these projects, the state provides capital outlay funds for the construction and repair of flood control structures such as levees, with a federal and local cost share. For approximately 80 percent of the 1,600 miles of levees in the Central Valley, the state has turned over the operations and maintenance to local reclamation districts, although the state retains ultimate responsibility for the levees and the system as a whole. The state oversees the operations and maintenance efforts of the local districts in the Central Valley system and provides floodplain management services by designating floodways and providing assistance to local agencies through floodplain mapping and other technical assistance. The department also serves as the lead state agency for predicting and responding to floods.

Outside the Central Valley flood control system, the state’s role in flood management is generally limited to providing local assistance funds to local governments for flood control projects. In the Delta region, for example, the state has no oversight role with respect to local levee construction or maintenance (a majority of Delta levees-about 700 miles-are located outside the state system). While the state has provided subventions for levee rehabilitation in the past, the state has no formal role in assessing the structural integrity of these levees. However, because a significant portion of the state’s population depends on water supplies that come from the Delta, there is a strong state interest in the continued operation of the Delta levee system.

Funding for Flood Management Has Varied Substantially Over Time. Figure 1 illustrates the state’s historic funding on flood management activities. As can be seen, the level of funding available for flood management has varied considerably in recent years.


Figure 1

Department of Water Resource’s
Flood Management Funding

(In Millions)

Fund Source








General Fund








  State Operations








  Local Assistance






  Capital Outlay







Proposition 13 bond funds








Proposition 50 bond funds






Other fundsa

















a    Includes federal funds and reimbursements.


Unmet Funding Requirements Identified by Department. The department has indicated that there are substantial unmet funding requirements in the state’s flood control system. This is due to an aging system of flood control infrastructure, deferred maintenance, increasing development in floodplains (often behind substandard levees), and limited resources for flood management in recent years. Based on available, but limited, information, the department has made rough estimates of the costs to restore and upgrade the Central Valley flood control system. According to the department’s preliminary estimates, it would cost between $50 million and $100 million simply to complete a systemwide assessment of the structural integrity of the Central Valley flood control system. The department has also estimated that it will cost between $1 billion and $1.5 billion to restore Central Valley levees to their original design capacity; an additional $1 billion to $1.5 billion to upgrade flood control for urban areas; and an additional $2 billion to $4 billion to reconstruct the levee and channel system in order to provide improved flood protection, provide environmental restoration, and improve the state’s ability to maintain the system. In addition, DWR estimates that it could cost $3 billion to $5 billion to make critical Delta levee upgrades to protect the operation of SWP and the Central Valley Project.

Budget Proposal. The budget proposes increases of $7.6 million in one-time funds and $30.6 million in ongoing funds (mainly General Fund) for various flood management-related state operations and local assistance. Collectively, these increases make up the department’s “flood management plan.” The budget also includes $31.4 million (General Fund) for flood management-related capital outlay projects in the Central Valley. The major components of the flood management plan and capital outlay expenditures are summarized in Figure 2 and described below.


Figure 2

Department of Water Resources,
Flood Management Increasesa

(In Millions)


 One-Time Funds


State Operations and Local Assistance



  CALFED levees (includes $2.5 million bond funds)



  Flood project maintenance



  Floodplain management


  Emergency response



  System reevaluation and rehabilitation






Capital Outlay Projects



  Seven projects (excludes reimbursements)




a  General Fund, unless noted.


Details of the proposed increases for flood management are as follows:

Recommend Approval of Budget Request. As we discussed in our 2005-06 Budget: Perspectives and Issues (P&I) (see page 217), the state faces a crisis in flood management. We recommend that the Legislature adopt the department’s proposed flood management plan as a prudent initial step to begin addressing the state’s obligation to provide adequate flood control.

Issues for Legislative Consideration. While we recommend approval of the department’s flood management budget proposal, we also think that there are a number of other issues that the Legislature should consider when evaluating this and other proposed solutions to state’s flood management problems. These include:

Due to the critical need to improve the Central Valley flood control system, we recommend that the Legislature approve the Governor’s budget proposal. However, we believe the Legislature should also consider the role of bond funding, the relationship between land use and flood control, “beneficiary pays” financing, and state oversight of Delta levees in the broader context of evaluating proposed solutions to address the state’s flood management problems.

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