Analysis of the 2007-08 Budget Bill: Resources

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. In the sections that follow, we provide a history of CALFED, including its recent reorganization, discuss financing issues and the use of performance measures, summarize the Governor’s budget proposal, and raise a number of issues with particular budget proposals.

Background

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. The objectives of the program are to:

• Provide good water quality for all uses.

• Improve fish and wildlife habitat.

• Reduce the gap between water supplies and projected demand.

• Reduce the risks from deteriorating levees.

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 lead CALFED agencies of the final environmental review documents for the CALFED “plan.” 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 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.

CALFED Governance: The Early Years Through 2005-06. The program’s organizational structure evolved administratively in the mid-1990s, as it 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 their related 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 (DFG), 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. 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, for the first time, statutorily established a governance structure for CALFED in 2002. (The governance structure has since changed, as discussed later.)

Chapter 812, Statutes of 2002 (SB 1653, Costa), created a new state agency in the Resources Agency—the California Bay-Delta Authority (CBDA)—to oversee the overall CALFED program, as well as to directly implement the CALFED science program. Chapter 812 assigned 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 (SWRCB) is designated as the implementing agency for the water quality element. While the CBDA reviewed and approved the annual work plans and expenditure plans of the implementing agencies, Chapter 812 explicitly provided that “nothing [in the legislation] limits or interferes with the final decision making authority of the implementing agencies.”

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. Through the end of 2005-06, CBDA had a Governor-appointed director, who oversaw a staff of about 70 positions.

Independent Reviews of CALFED Found Many Problems. At the request of the Governor, four independent management, fiscal, and program reviews of CALFED were conducted in the summer and fall of 2005. These reviews were conducted by the Little Hoover Commission, the Department of Finance, and KPMG (a private consultancy firm). These reviews found common agreement that the then-current governance structure was not working well, state priorities for CALFED were not clear, and meaningful performance measures for the program were lacking.

The CALFED governance structure was reviewed by the Little Hoover Commission. The 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, among 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 was that the program as it was then structured lacked a leader to move the program forward and who could be held accountable to the Governor and Legislature for the program’s performance.

CALFED Reorganized in 2006

The Legislature reorganized the CALFED governance structure in 2006, in an effort to clarify lines of accountability within the program and hold the program accountable for its performance. The reorganization included the transfer of all of California Bay-Delta Authority’s positions (totaling 71) to the Secretary for Resources and five other CALFED implementing agencies. Most of these transferred positions are filled.

Governance Structure Revised. During the course of budget hearings on the 2006-07 budget, the Legislature took action to address problems with CALFED’s governance structure as identified in the various independent reviews. The Legislature approved a budget trailer bill and made a number of adjustments to the CALFED budget. The main components of the reorganization are as follows:

• CBDA Defunded. All of the positions at CBDA (totaling 71 positions) were transferred to the Secretary for Resources and five other CALFED implementing agencies, and CBDA was defunded as a state agency. The board of CBDA continues to exist, however, and staff support to the board is provided by the Secretary for Resources.

• Secretary for Resources in Charge and Accountable for Program Performance. The Secretary for Resources (receiving 32 positions) became the single main “point of accountability” for CALFED. (The previous confusion as to the Secretary’s authority versus the CBDA director’s authority has been removed.) In addition to being given the programmatic responsibility for the CALFED science program, the Secretary was given clear responsibility for the overall program planning, performance, and tracking.

• Forestry Department Serves Administrative Support Function. The California Department of Forestry and Fire Protection (receiving 19 positions) was given the traditional administrative support functions (such as human resources, contracting, information technology, and accounting) to assist the Secretary in carrying out its duties under the reorganized structure.

• Implementing Agencies Do the Implementation. The remaining 20 CBDA positions—those doing programmatic rather than oversight or coordination work at CBDA—were transferred to the respective CALFED implementing agencies (DWR, SWRCB, or DFG) responsible under current law for the particular program at issue. For example, positions at CBDA involved in ecosystem restoration program implementation were transferred to DFG.

Most Transferred Positions Filled. As of the time this analysis was written, 67 of the 71 positions that were transferred from CBDA to other agencies are filled, with active recruitment being conducted for the balance.

CALFED Financing: Still No Progress on Implementing “Beneficiary Pays”

In spite of legislative direction, CALFED has made little progress in implementing the “beneficiary pays” principle in funding its programs. The CALFED does not currently have a long-term financing plan. It will need to await the conclusion of a number of ongoing planning efforts, including the Delta Vision process, to be guided on long-term financing issues.

Legislative Direction Regarding CALFED Financing. Neither the CALFED governance legislation 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 that CALFED financing should in part rely upon user fees for funding its programs. For example, budget language in the 1999-00 and 2000-01 Budget Acts states 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, and the ROD endorsed the concept of the beneficiary pays, the state has been the major funding source for the program’s first seven years, providing about $2.3 billion, or close to 50 percent, of funding.

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.

January 2005 Long-Term Financing Plan—Neither Viable Nor Complete. Although the ROD in 2000 called for the development of a CALFED finance plan, it was not until January 2005 that a long-term finance plan, adopted by CBDA, was submitted for legislative review at budget hearings. This plan, however, was not considered to be viable or complete. Much concern was raised in the Legislature that the plan’s $8.1 billion ten-year 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. Second, 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.

April 2006 Action Plan—Only Near-term Funding Plan; Relies on “Voluntary” Water User Contributions. In the following year during the course of hearings on the 2006-07 budget, CALFED released a “10-Year Action Plan,” outlining a number of proposed changes to CALFED’s governance, program and fiscal management, and strategic planning processes. (The plan’s governance proposals predated the legislative reorganization of CALFED.) On the financing plan front, two items are of note. First, the action plan did not include a long-term financing plan, but rather a “near-term” funding plan for 2005-06 through 2007-08. This was largely a plan to draw down existing bond funds available for CALFED programs. Second, instead of incorporating a water user fee component as directed previously by the Legislature, the near-term funding plan included the concept of water users who, in negotiated agreements with CALFED, would voluntarily contribute monies to CALFED based on their perceived benefits from the program. As we noted in our Analysis of the 2006-07 Budget Bill (see page B-28), we concluded that such a proposal appeared more in line with a “willingness to pay,” as opposed to a true beneficiary pays funding principle as previously articulated by the Legislature.

No New Developments. There have been no new developments within the administration this year relative to a long-term finance plan, and the budget includes no new proposals to implement the beneficiary pays principle. (In fact, as discussed below, the budget proposes to use bond funds to support an activity that had been receiving funding from voluntary water user contributions because those contributions will have run out.)

Long-Term Finance Plan Development Will Await Conclusion of Various Planning Efforts. According to CALFED, it is currently involved in a number of planning efforts that fundamentally will define the future for CALFED programmatically, thereby determining both CALFED’s financing requirements and its program beneficiaries over the long term. Given this, it would be premature for CALFED to develop a long-term financing plan when it does not yet know what programs and projects will be financed over this period. On the other hand, the timing of these planning efforts does not provide a justification for the lack of action on the beneficiary pays front.

The multiple, ongoing planning efforts include the following:

• “Stage One” Assessment. Pursuant to ROD requirements, CALFED is required to oversee an independent, technical review of the program’s performance (relative to project milestones found in the ROD) over its first seven years, to help guide the remainder of what is anticipated to be a 30-year program. Specifically, the review will assess the current state of the Delta ecosystem and evaluate how well CALFED has achieved the program’s water quality objectives. The CALFED expects to release a public draft of the Stage One report in June.

• Delta Risk Management Strategy (“DRMS”). Chapter 573, Statutes of 2005 (AB 1200, Laird), requires DWR to evaluate the potential impacts of levee failures in the Delta (from risks such as earthquakes and climate change) and further requires DWR and DFG to evaluate options for protecting various benefits provided by the levees. The departments are to report to the Governor and Legislature by January 1, 2008, with the results of their evaluation.

• Delta Vision. Chapter 535, Statutes of 2006 (SB 1574, Kuehl), and Chapter 77, Statutes of 2006, (AB 1803, Committee on Budget), require the Secretary for Resources to develop a strategic vision for a “sustainable” Delta, including sustainable ecosystems, land use patterns, transportation uses, water supply uses, utility uses, recreation uses, and flood management strategies. The plan, referred to as the “Delta Vision,” is to be submitted to the Governor and Legislature by December 31, 2008.

Performance Measures

The CALFED is currently working with the various implementing agencies to develop a select group of performance measures based on the broad program objectives in the CALFED Record of Decision. We recommend the adoption of supplemental report language requiring the Secretary for Resources to report on the chosen measures and to state legislative intent that future-year budget proposals provide how the proposal affects any relevant performance measure.

CALFED Is Developing Performance Measures. As noted earlier, the statutory reorganization of CALFED placed a program performance review function in the Secretary for Resources. Over the next several months, CALFED scientific staff will continue working with the various implementing agencies to develop a select group of performance measures tied to each of the four overriding objectives of CALFED. Program staff expect to have a preliminary set of measures developed by this June.

Legislature Should Review Measures and Create Tie to Budget Process. There is much precedent for the Legislature to require programs to have performance measures as a means of holding them accountable. However, experience has shown that a mere direction from the Legislature that a program have measures typically results in measures being developed by the program that are input-oriented and do not assist the Legislature in its oversight function of program accomplishments (outcomes). We think the Legislature can benefit when performance measures are designed to reflect legislative priorities and expected outcomes from the program. Accordingly, we think that the Legislature should be given the opportunity to evaluate the measures that the administration proposes to use to see whether the measures reflect legislative priorities for the program. One such measure might be the extent to which the program has improved water quality in the Delta.

Second, we think that one of the benefits of performance measures is the potential to inform, and thus increase the effectiveness, of future decision making. We think that one way of establishing this link with decision making is to create a tie with the budget process. To this end, we recommend that any CALFED budget proposal submitted to the Legislature, beginning with the 2008-09 budget, be required to indicate how the budget change would impact any applicable performance measure.

To facilitate legislative review of the performance measures and to link performance measures with the budget process, we recommend adoption of the following supplemental report language:

Item 540-001-0001. Secretary for Resources. In conjunction with the submittal of the 2008-09 Governor’s Budget, the Secretary for Resources shall submit to the Legislature a report on performance measures currently being used, and proposed for use, to evaluate the CALFED Bay-Delta Program (CALFED). It is the intent of the Legislature that CALFED-related budget change proposals for 2008-09 and future budget years show how the proposed budget change would impact any applicable performance measure.

Governor’s Budget Proposal

The budget proposes $473.6 million of state funds across eight state agencies for CALFED in 2007-08, essentially the same level as in the current year.

Expenditure Summary. Figure 1 shows the breakdown of CALFED expenditures in the current year and as proposed for 2007-08, among the program’s 12 elements.

Current-Year Expenditures. As shown in the figure, the budget estimates CALFED-related expenditures from state funds of $475.6 million in 2006-07. Of this amount, $26.7 million is from the General Fund, with the balance mainly from Proposition 50 bond funds ($276.5 million), Proposition 13 bond funds ($107.1 million), and State Water Project funds ($43.9 million).

For the current year, the largest state expenditures are for the ecosystem restoration ($124.6 million), water conveyance ($91.1 million), environmental water account ($74.6 million), and water use efficiency ($59.4 million) programs.

Budget Proposes Virtually No Change in State Funds for 2007-08. As shown in Figure 1, the budget proposes $473.6 million of state funds for various departments to carry out CALFED in 2007-08, essentially no change from the current year. Of the proposed expenditures, $16.6 million is proposed from the General Fund, with the balance mainly from Proposition 50 bond funds ($222.6 million), Proposition 84 bond funds ($148.3 million), and State Water Project funds ($49.6 million).

As Figure 1 indicates, CALFED expenditures are spread among eight agencies. The largest expenditures are found in DWR ($257.4 million), DFG ($109.6 million), and the Department of Public Health ($88.7 million). The largest state expenditures are proposed for ecosystem restoration ($127 million), water quality ($122.6 million), levee system integrity ($64 million), and water conveyance ($58.7 million) programs.

Issues for Legislative Consideration

We now turn to a discussion of a number of issues for the Legislature to consider related to particular budget proposals for the program.

South Delta Improvements Program Proposal Premature

The budget proposes $31.4 million in capital outlay funding from Propositions 13 and 50 bond funds for the South Delta Improvements Program. We recommend the Legislature deny the proposal as it is premature. (Reduce Item 3860-301-6026 by $14.4 million and Item 3860-301-6031 by $17 million.)

South Delta Improvements Program. The budget requests $14.4 million from Proposition 13 funds and $17 million in Proposition 50 funds for final design, staff support, and construction costs for the South Delta Improvements Program (SDIP). The objectives of the SDIP are to improve water supply reliability for the State Water Project (SWP) through project capital improvements, and to increase SWP’s capacity to make water deliveries. The proposal recognizes additional out-year costs of $18.9 million from Proposition 50 bond funds.

Legislative Direction. While the 2006-07 Budget Act appropriated $41.6 million of bond funds for SDIP, it included language prohibiting the expenditure of the funds until the Secretary of Resources submitted a specified report to Legislature. The Secretary is required to report on actions that it will take, other than study, to stabilize the ecosystem in the Delta and to address an identified decline in organisms that live in water above the bottom, commonly referred to as pelagic organism decline (POD). The intent of the language was to put on hold the development of SDIP until the impacts of pumping from the Delta on POD could be addressed.

Budget Request Premature on Several Counts. We find that the budget request is premature on a number of counts, and therefore recommend denying the request.

First, at the time this analysis was prepared, the legislatively required report had not been submitted to the Legislature. On this basis alone, the budget request should be denied, as it is premature to provide funding before the Legislature is given information it thought important to have before authorizing the program to go forward.

Second, we think that the budget request should also be denied because cost-sharing agreements with the federal government and SWP contractors who benefit directly from the program have not been secured. In fact, the budget documentation submitted to the Legislature states that such cost sharing is the “preferred” way to fund the program, and that it would be “unacceptable” for the state to be the sole funding entity. However, the department has not received funding commitments from either the federal government or SWP contractors. Until such funding commitments are secured, it would be premature to appropriate state funds as requested.

Finally, we note that the federal Fish and Wildlife Service has recently put on hold its permitting for SDIP, citing problems with declines in fish populations in the South Delta area. This creates substantial uncertainty as to whether the project can proceed, providing yet another grounds for the budget request being considered premature.

In view of the above, we recommend a reduction of $31.4 million for SDIP.

CALFED Surface Storage Proposals Need Matching Funds

The budget proposes $9.8 million in bond funds for the Department of Water Resources, under CALFED, to continue feasibility studies for surface water storage projects. We find that the CALFED surface storage program has reached a point where these feasibility studies cannot practically move forward unless nonstate entities—parties who would benefit from the projects being studied—step up to the plate and share in the costs of studying and developing these projects. We recommend denying the budget request, given the lack of matching local or federal funding. (Reduce Item 3860-001-6031 by $3.8 million and Item 3860-001-6051 by $6 million.)

Surface Water Storage Feasibility Studies. As shown in Figure 2, over $62 million of state funds will have been spent under the CALFED program on surface water storage studies through the end of the current year. Some of these studies relate to a project at a specific location (such as Los Vaqueros Reservoir Expansion), while others relate to potential projects throughout a region (such as Upper San Joaquin River Storage).

Budget Proposal. The budget proposes a total of $9.8 million in bond funds ($3.8 million from Proposition 50 and $6 million from Proposition 84) to continue various surface storage studies, as summarized in Figure 2.

State Funding Should Continue Only if Funding Partners Come on Board. Our review finds that, for the most part, the preliminary feasibility study work for these projects is complete, and for the studies to practically move into the more costly final stage of investigation and into project development, local and/or federal funding partners (entities who benefit from and would have an interest in funding the project) must be on board to share in these costs with the state. This is consistent with legislative direction in the 2006-07 Budget Act regarding funding for the Los Vaqueros Reservoir Expansion. Specifically, the Legislature prohibited state funds being spent for this project until regional funding sources were secured to fund the continued investigation and planning of the project. (We note that while Contra Costa citizens voted in 2004 to support continued studies of the expansion project, local funding has yet to be committed.)

Recommend Denying Budget Request. Given the lack of funding from nonstate funding sources to move the storage studies proposed for funding in the budget year forward, we therefore recommend denying the budget request.

Budget Relies on Bond Funds to Continue Planning Effort That Benefits Delta Water Exporters

The budget proposes $1.7 million of Proposition 84 bond funds to continue funding a conservation planning effort that benefits Delta water exporters, as funding contributions from water users for this effort will have run out in the middle of the budget year. We recommend denying the budget request, because water user contributions are the more appropriate funding source. (Reduce Item 3600-001-6051 by $1.7 million.)

Budget Proposal. The DFG’s budget for CALFED includes $1.7 million in Proposition 84 bond funds and continuation of 16 existing positions for the development of a Natural Communities Conservation Plan (NCCP) for the Delta. An NCCP is a regulatory tool used to comply with the California Endangered Species Act. Essentially, the development and implementation of an NCCP allows project proponents (in this case, Delta water exporters relying on the Delta pumps for water deliveries) to “take” (incidentally harm) endangered species, provided that the overall health of the ecosystem is protected. The budget request represents the first year of a $20 million, six-year plan for spending Proposition 84 funds to develop the conservation plan. The budget proposal also includes shifting the fund source for 16 existing positions from user contributions to bond funds. (In the current year, funding for these positions is provided by SWP contractors, but this funding support, voluntarily agreed to by the SWP contractors, will expire in December 2007.)

Water Users Should Pay for NCCP Development and Implementation. When the proposal for developing an NCCP for the Delta was first presented to the Legislature at hearings on the 2006-07 budget, the administration indicated that water users (primarily SWP contractors) would pay for such an NCCP. Because the water users are the primary beneficiaries of water diversions from the Delta and must comply with the California Endangered Species Act, it is appropriate that they pay for such an NCCP. The recovery of state costs to develop and implement NCCPs from fees is also authorized in state law.

Recommend Denying Budget Request. While Proposition 84 authorizes up to $20 million for the development of an NCCP for the Delta, we think that the availability of bond funds does not relieve the water users from the responsibility for paying for projects that benefit them. We therefore recommend denying the budget request on the basis of the proposed funding source, but would recommend its approval if the water user contribution were to be reinstated.

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