Analysis of the 2007-08 Budget Bill: Resources

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 also 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 charged with 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 $8 billion in 2007-08 (including capital outlay), an increase of $104 million, or 1.3 percent above estimated expenditures in the current year. Although this is a net increase, the proposed DWR budget reflects both major spending increases and decreases. The department’s General Fund expenditures ($5 million) are much lower in the budget year, reflecting the elimination of one-time expenditures for flood control that occurred in the current year. On the other hand, much higher spending from bond funds ($990 million) is proposed in the budget year, largely reflecting the availability of Propositions 1E and 84 bond funds for flood control and other water management projects. In addition, because of price increases in natural gas, the CERS budget proposes increases of $760 million in the current year and $546 million in the budget year to accommodate bond operating reserve requirements.

Major budget proposals include increases of $8.4 million (mostly General Fund) and 35 personnel-years for state operations of flood management and local assistance, as part of a three-year program initiated in the 2005-06 budget; $82 million ($47.3 million General Fund and $34.7 million bond funds) for the lining of the All-American and Coachella Canals and related projects; $597.8 million (Propositions 1E and 84 bond funds) for flood control investments including capital outlay; and $364.6 million from various bond funds for integrated regional water management, mostly local assistance.

The budget total includes $331.8 million for capital outlay projects, of which $122.3 million is for SWP (the costs of which are reimbursed from SWP contractors), $31.4 million (Proposition 13 and Proposition 50 bond funds) for CALFED water conveyance projects, and $178.2 million for flood control ($135.2 million Proposition 1E, $30 million General Fund, and $12.9 million reimbursements). The budget also proposes to use $200 million of Proposition 1E bond funds to reimburse the General Fund for flood control expenditures made from an emergency appropriation (Chapter 34, Statutes of 2006 [AB 142, Nuñez]) prior to bond passage.

In the following pages, we review the department’s efforts and the budget’s proposals to address the state’s flood management problems, present an opportunity to create General Fund savings, make recommendations on reforming the department’s capital outlay process, and discuss bringing SWP on budget to enhance legislative oversight.

Flood Management Issues

New Bonds Provide Influx of Funding to Department

Propositions 1E and 84—approved by voters in November 2006—together allocate up to $6.4 billion of bond funds to the department, of which $4.9 billion is for flood control.

Two major bonds related to water passed in November 2006. Proposition 1E, the Disaster Preparedness and Flood Prevention Bond Act of 2006, authorizes the state to sell a total of $4.1 billion in general obligation bonds for various flood management programs. Proposition 84, the Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Bond Act of 2006, authorizes the state to sell $5.4 billion for safe drinking water, water quality, and water supply; flood control; natural resource protection; and park improvements. Figure 1 shows that under the terms of the measures the department is allocated all of the Proposition 1E funds ($4.1 billion) and up to $2.3 billion of Proposition 84 funds, of which $800 million is specifically allocated for flood control.

Funding History and Budget Proposal

The budget proposes an increase of $12.5 million (mostly bond funds and General Fund) in 2007-08 for flood management-related state operations. The budget also proposes $147.1 million in bond funds and reimbursements for flood control capital outlay. In this section, we give a historical perspective of flood management funding and describe the proposed budget increases.

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 federally authorized 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. Figure 2 shows a map of the Central Valley flood control system.

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 3 illustrates the state’s funding of flood management activities since 2001-02. As can be seen, not only has the overall level of funding available for flood management varied considerably in recent years, but what has been funded (for example, local assistance versus state operations) and the breakdown of funding sources (for example, General Fund versus bonds) has also varied year to year.

Department Currently in Second Year of Multiyear Flood Management Funding Plan. 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. Starting in the 2005-06 budget, the department proposed a number of increases in flood management baseline funding to take effect over a three-year period. These increases are proposed from various sources, including the General Fund, bond funds, and special funds.

Budget Proposal. The budget proposes $462.6 million in Propositions 84 and 1E bond funds for flood management state operations and local assistance. Most of these funds are for local assistance, including flood control subventions, and grants for projects to improve flood protection in urban Central Valley areas and Delta levee maintenance and improvements. The state operations funding is to develop a California Flood Plan, evaluate floodplains, and provide technical assistance for grant programs. In addition, the budget also includes $135.2 million in Proposition 1E bond funds as well as $11.9 million in reimbursements for flood management-related capital outlay projects in the Central Valley. (Please see our “Resources Bonds” write-up in the “Crosscutting Issues” section of this chapter for a detailed discussion of the bond-funded component of the budget proposal.)

Finally, as discussed earlier, 2007-08 is the third year of a three-year budget plan to improve flood management-related state operations. The budget proposes increases of $3 million in one-time funds and $9.5 million in ongoing funds (mainly General Fund) for this purpose. The major components of these increases as well as capital outlay expenditures proposed for the budget year are summarized in Figure 4 and discussed below.

Proposed flood management capital outlay increases include:

• Central Valley Flood Control System—Systemwide Levee Evaluations and Repairs—$100 Million (One-Time Proposition 1E Bond Funds). These funds would be used to begin conducting a systemwide evaluation of the state’s levees and repair erosion sites where deficiencies are found.

• Continuing Capital Outlay Projects—$47.1 Million ($35.2 Million Bond Funds, $11.9 Million Reimbursements). There are several continuing Central Valley flood control system capital outlay projects in the budget. These projects, while funded by the General Fund in past years, are proposed to be funded entirely by bond funds (and reimbursements) in the budget year. These projects include, for example, the Folsom Dam Modifications Project and the American River (Common Features) Project.

Proposed increases for flood management state operations that are part of the three-year budget plan include:

• Flood Project Maintenance—$3.2 Million ($1.7 Million General Fund, $1.5 Million Reimbursement Authority). These augmentations are proposed for Maintenance Area Formation in areas where locals are not maintaining the state system, and for channel vegetation maintenance, mostly by the California Conservation Corps. The proposal also includes $1.5 million in reimbursement authority to implement a beneficiary pays system of payment from locals benefiting from the projects.

• Floodplain Management—$3.1 Million. These augmentations are proposed to improve DWR’s ability to inform local governments about potential flood risks through increased floodplain mapping. The proposal also increases resources for enforcing violations of the Reclamation Board’s designated floodway standards, creates a floodplain administrator for state buildings and a Community Rating System program to assist local communities reduce their insurance rates through proactive community flood activities.

• Emergency Response—$3.2 Million ($445,000 One-Time). These augmentations are proposed to improve DWR’s ability to predict and respond to flood events. Under the proposal, for example, the department would improve reservoir operations coordination and expand the flood emergency training program.

• Flood Protection Programs—$2.5 Million (One-Time Proposition 13 Bond Funding). This request will complete the Flood Protection Corridor Program, which funds nonstructural flood management projects that include wildlife habitat enhancement and/or agricultural land preservation.

• Flood-Fighting Equipment—$465,000 (One-Time AB 142 funds). This request will purchase equipment for use in flood emergencies.

Finally, we note that the budget proposes to use $200 million of Proposition 1E funds to reimburse the General Fund for flood control expenditures that were incurred prior to bond passage. We discuss this “payback” proposal in more detail later.

Priorities and Oversight Needed for Capital Outlay Projects

While we recommend the Legislature approve the baseline augmentations for flood management state operations and local assistance, we recommend the Legislature withhold action on all flood-related capital outlay projects until the department (1) submits a required Proposition 1E expenditure plan, (2) reports at budget hearings on its priorities and criteria for selecting flood-control capital outlay projects, and (3) provides a plan for independent review and oversight of capital outlay projects. We further recommend the enactment of legislation requiring the department to regularly report on its capital outlay projects.

Baseline Augmentations for State Operations and Local Assistance Warranted. As we discussed in our 2005-06 Budget: Perspectives and Issues (P&I) (page 217), the state faces a crisis in flood management. We have previously recommended that the Legislature adopt the department’s three-year flood management plan as a prudent initial step to begin addressing the state’s obligation to provide adequate flood control. The proposed flood management state operations and local assistance augmentations fit within the 3-year plan, and we therefore recommend approval.

Systematic Approach Needed for Bond-Funded Capital Outlay Projects. However, we believe the influx of new bond funds gives the department the opportunity to use a systematic approach to complete improvements and repairs to the Central Valley flood control system. We believe that a systematic approach would be furthered by a number of recommendations we have made in our January 2007 publication, Implementing the 2006 Bond Package: Increasing Effectiveness Through Legislative Oversight. Specifically, in that report, we make a number of recommendations related to the department’s proposed expenditures from Propositions 84 and 1E bond funds for flood control.

Proposition 1E Expenditure Plan Late, Priorities Unclear. Proposition 1E required the department to submit a bond expenditure plan annually with the Governor’s budget. The plan is required to describe in detail the (1) proposed expenditures of bond funds, (2) the amount of federal and local funds obtained to support disaster preparedness and flood prevention projects to match state expenditures, and (3) an investment strategy to meet long-term flood protection needs and minimize state taxpayer liabilities from flooding. We think this plan is crucial to the Legislature’s evaluation of both bond-funded flood proposals as well as related state operations and local assistance expenditures. At the time this analysis was prepared, the plan had not been submitted. Without the required expenditure plan for Proposition 1E, it is difficult for the Legislature to evaluate individual projects proposed for funding, as it is difficult to determine how these projects fit into the overall program of improving the flood control system. Further, expending funds without a prioritization plan with clear criteria to guide the selection of projects to be funded could cause increased flood risk in some areas. For example, if funding were used to upgrade one part of the system, such as a levee in one county, and no funding were provided to upgrade a levee on the opposite side of the river, in another county, the area not upgraded potentially would be subject to increased flooding risk.

We therefore recommend that the department submit the plan prior to budget hearings and report at hearings on it. We further recommend that the Legislature withhold action on all flood-related capital outlay projects until it has had the opportunity to review the expenditure plan and be advised of the department’s criteria for selecting projects for funding.

The Legislature Should Consider Its Priorities for Flood Management Proposals. The Legislature has an opportunity to give the department guidance on expenditure priorities for the state flood control system. We make a number of recommendations in our “Resources Bonds” write-up in the “Crosscutting Issues” section of this chapter regarding cost-sharing, project funding eligibility, and federal funding. We recommend the Legislature hold joint policy and budget hearings to review its expenditure priorities for flood management funding, particularly related to Proposition 1E.

Structure for Capital Outlay Project Management Oversight Lacking. In the past, the department has had few direct capital outlay projects that did not also include partnering with the federal government as the lead agency. This partnering provided independent management oversight for capital outlay projects. For example, projects were reviewed by the Army Corps of Engineers, or its designee, at various stages to ensure the public interest was protected with regard to cost overruns, contract management, and project bidding. As we discuss in our “Resources Bonds” write-up, federal funding for flood control projects is highly uncertain. As a consequence, given the known critical deficiencies in the system, there are pressures for the department to move forward on projects without the traditional federal involvement. Thus, when proceeding in this manner, the federal project management oversight process is no longer present.

The department has indicated that, absent the federal oversight process, the state Reclamation Board, by default, would provide an oversight function for capital outlay projects. However, as the Reclamation Board is staffed by DWR, it may not provide the needed independence to review all of the capital projects that lack a federal partner. While this may not have been an issue in the past, we think the new bond funds, plus the increased state liability for flood control, makes providing independent project oversight a needed step for flood-related capital projects. We therefore recommend that the department report at budget hearings on its plan to provide independent review and oversight of capital outlay projects.

DWR Should Report Regularly on Capital Outlay Projects. Most state departments are required to report quarterly on capital outlay projects to the Department of Finance, pursuant to the State Administration Manual (SAM), Section 6864. The Department of General Services also reports quarterly to the Legislature on all major projects under its purview. The department is currently exempt from this reporting requirement for its flood control capital projects. As the department plans to move ahead with projects without the federal government as the lead agency, we think that such periodic reporting would further oversight of the department’s capital outlay program. Such reports could provide the Legislature with information on project scope, timing and changes to projects, overall funding patterns, and cost-sharing proposals. The department’s current information technology (IT) management system is capable of monitoring capital outlay projects and providing relevant reports, with specifics such as timeline, budget, and expenditures. Therefore, we recommend the enactment of legislation requiring the department to report semi-annually on flood control-related capital outlay projects in a manner similar to the SAM requirement (specifically Section 6864, Capital Outlay Project Reporting) using their existing internal IT system. This will provide the Legislature with timely and up-to-date information on the department’s capital outlay expenditures, allowing for timely action to address issues that arise for projects in progress.

AB 142 Spending Needs Scrutiny; Opportunity for General Fund Savings

The Legislature appropriated $500 million from the General Fund in 2006 legislation (AB 142) to evaluate, repair, and improve the flood control system. The budget proposes to use $200 million of Proposition 1E bond funds to pay back the General Fund for AB 142 expenditures incurred before the bond’s passage. The “payback” proposal may raise legal issues, and we think that there is another option to create General Fund savings. We recommend the Legislature hold joint budget and policy hearings on AB 142 spending.

The AB 142 Appropriation. Chapter 34—commonly referred to as AB 142—provided an urgency appropriation of $500 million from the General Fund for flood preparedness and repair of critical levees. The bill continuously appropriated the funding to the department for levee evaluation, repair, and flood control improvements. The bill followed an executive order by the Governor declaring a State of Emergency based on findings of degradations within the California levee system by the federal Army Corps of Engineers.

Pursuant to the Supplemental Report of the 2006 Budget Act, the department is required to report quarterly on the expenditure of AB 142 funds. Figure 5 shows how AB 142 funds have been spent/committed through November 30, 2006, broken down between cash-out-the-door expenditures and contract commitments (encumbered, but not spent, funds).

Proposed Payback to General Fund. As mentioned previously, the budget proposes to use $200 million in Proposition 1E bond funds in the budget year to repay the General Fund for expenditures from the AB 142 appropriation that were incurred prior to the passage of the bond.

Legal Issues. According to the administration, since AB 142 and Proposition 1E each provide funds for similar types of flood management projects, it is an eligible use of Proposition 1E bond funds to reimburse the General Fund for AB 142-funded expenditures that were incurred before bond passage. We are concerned about the policy implications of using bond funds to reimburse another fund source for expenditures made prior to bond passage. In addition, the administration’s proposal raises legal issues. We recommend that the Legislature seek the advice of Legislative Counsel regarding this proposal.

Other Issues and Option to Consider. In addition to the legal issue, we think there are other issues for the Legislature to consider regarding this proposal. First, even if the payback proposal passes legal muster and the Legislature wishes to proceed with it, it appears that the amount of the payback is too high. Specifically, as shown in Figure 5, $164.7 million, rather than $200 million, was spent from AB 142 funds through the end of November. In light of this, we recommend that the department advise the Legislature at budget hearings on the maximum potential amount of the payback.

Second, in addition to, or in lieu of, the payback proposal, the Legislature should consider the opportunity to create General Fund savings by “reverting” (transferring back) to the General Fund the unspent balance of the AB 142 appropriation—currently estimated to be about $335 million. Proposition 1E funds could be used as a replacement funding source prospectively for future expenditures that would otherwise be funded from the AB 142 appropriation.

Required Reports Late and Lacking Details. As mentioned above, the department is required to report quarterly on expenditures using the AB 142 continuous appropriation. These reports have generally been submitted late. The most recent report was due on January 1, 2007, and at the time this analysis was prepared, had yet to be submitted. In addition, the reports that have been submitted have generally lacked sufficient detail to evaluate the expenditure of funds. For example, the department has not consistently included details on land acquisitions in the expenditure reports, nor has it provided information on the level of flood risk faced by projects it decided to fund. In other words, the expenditure reports provide insufficient information to discern the basis for the department’s selection of projects for AB 142 funds.

Recommend Enhanced Legislative Oversight of AB 142 Spending. While we recommend the department submit the overdue quarterly report, we think that the Legislature’s oversight of AB 142 spending would be significantly enhanced by holding joint policy and budget hearings, possibly in conjunction with overall flood management hearings. We think that this evaluation would help the Legislature determine how it wishes to direct future expenditures for flood management, including Proposition 1E spending.

State Water Project Should Be Brought “On Budget”

The budget requests 78 new positions for the State Water Project (SWP). Given that funding for SWP is “off budget” and not subject to legislative appropriation in the budget bill, there is little information presented with the request to justify this staffing level. Further, given SWP’s increasing fiscal and programmatic ties to other state on-budget programs, such as the CALFED Bay-Delta Program, we recommend the enactment of legislation to bring SWP expenditures on budget in order to facilitate legislative oversight of state water issues.

SWP Background. The SWP is the state’s main water conveyance system mostly from Northern California to parts of the San Francisco Bay Area, the Central Valley, and Southern California. The project was initiated with a voter-approved bond (Proposition 1) in November 1960. The project is mainly funded by water users (“SWP contractors”) of the system. However, there are other significant sources of funding. Specifically, the federal government provides a share of the costs for flood control projects related to SWP, the General Fund and user fees pay for recreation and fish and wildlife programs, and state general obligation bond funds have funded related environmental programs such as CALFED.

SWP Staffing Request. The budget requests 78 new positions for SWP. These include (1) 42 capital outlay positions to improve and expand water conveyance capabilities of the system; (2) 10 positions to provide legal and billing staff for an increasing amount of billing protests experienced by the department on behalf of SWP contractors; (3) 7 positions for CALFED-related programs; and (4) 19 positions for other projects, including environmental review, drinking water quality, water transfers, and Oroville hydroelectric facility staffing. These positions require legislative approval, and are therefore presented to the Legislature for review. However, the expenditure authority for these positions is “off budget,” as is expenditure authority for all SWP operations and capital outlay. Off budget means that (1) funds to support these positions, as well as all other functions of the SWP, are not appropriated in the annual budget bill, and (2) the department is not required to submit funding requests in conjunction with position requests. Consequently, the Legislature does not have information to fully evaluate these position requests in the context of the SWP’s total existing staffing of about 1,450 positions.

After Nearly 50 Years, the Role of SWP Has Changed. We think that the role of SWP in the state is substantially different today than in 1960 when it was established, thereby justifying a change in its budget status. While in past years SWP operated more or less as a discrete, self-contained program, with fiscal oversight provided by SWP contractors who pay most of the project’s costs, the SWP of today is much more integrally connected to other major “on budget” state programs. In particular, there is a growing recognition of SWP’s role in contributing both to the causes of, and the potential solutions to, water-related problems in the Delta. The state has a number of ongoing programs to address Delta issues, including CALFED. (Please see our “CALFED Bay-Delta Program” write-up in the “Crosscutting Issues” section of this chapter.) The SWP often directly benefits from these programs (such as those improving water quality and water conveyance), contributes funding to them, and may even play a programmatic role in them, but this is done off budget and therefore outside of legislative budgetary oversight. Similarly, SWP contractors are beneficiaries of the state-funded improvements underway in the state system of flood control. Without SWP being on budget, the Legislature is unable to evaluate the entire water system and address the state’s water policy issues, including Delta issues, in a comprehensive way.

Recommend SWP Be Brought on Budget. The Legislature has faced the issue of whether to bring large off-budget programs on budget in the past. For example, the state’s transportation program was brought on budget in the 1970s. As previously noted, the role of SWP has changed, making it increasingly difficult for the Legislature to comprehensively address the state’s water policy issues in light of SWP’s off-budget status. Therefore, we recommend the enactment of legislation to bring SWP expenditures on budget in order to facilitate legislative oversight of state water issues.

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