Analysis of the 2008-09 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 performs public safety functions 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 $7.7 billion in 2008–09 (including capital outlay), a decrease of $376 million, or about 5 percent below estimated expenditures in the current year. Although this is a net decrease, the proposed DWR budget reflects both spending increases and decreases. As regards decreases, the department’s General Fund expenditures ($141 million) are lower in the budget year, largely reflecting reduced General Fund expenditures for Colorado River management and flood control capital outlay. There is also slightly lower spending from bond funds ($1.2 billion), a decrease of $67 million from current–year estimated expenditures. In addition, the CERS budget proposes a decrease of $208 million in the budget year, largely due to decreases in energy contract payments.

Major budget proposals include increases of $598 million (Propositions 1E and 84 bond funds) for flood control investments, including a new “Flood SAFE California” initiative implementing bond–funded programs; $13.5 million (General Fund) for the lining of the All–American and Coachella Canals and related Colorado River management projects; $452 million from Propositions 1E and 84 bond funds for integrated regional water management, mostly for local assistance; $1.8 million (General Fund) to establish the Central Valley Flood Protection Board (formerly the Reclamation Board); and $1.4 million (State Water Project funds) to develop options for an alternative Delta conveyance facility.

The budget total includes $266 million for capital outlay projects, of which $122 million is for the SWP (the costs of which are reimbursed from SWP contractors), and $139 million for flood control (Proposition 1E and reimbursements).

Broad–Based Flood Management Fee Could Create Substantial General Fund Savings

We recommend the enactment of legislation to establish a fee to cover the department’s flood management expenditures that provide a direct benefit to property owners in flood zones statewide and those protected by the state Central Valley flood control system. The implementation of this recommendation would result in General Fund savings of about $40 million. (Reduce Item 3860–001–0001 by $40 million and increase new special fund item by a like amount.)

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 operations and maintenance to local reclamation districts, although the state retains ultimate responsibility for the levees and the system as a whole.

The department serves as the lead state agency for predicting and responding to floods both within the Central Valley and outside this system. In addition, outside the Central Valley flood system, the state’s role in flood management has traditionally been limited to providing local assistance funds to local governments for flood control projects. In the Delta region, for example, the state does not have an oversight role with respect to local levee construction or maintenance (a majority of the Delta levees—about 700 miles—are located outside the state system). However, because a significant portion of the state’s population depends on water supplies that come from the Delta, several initiatives recently have begun to increase the state’s role with respect to Delta levees.

Budget Proposal Expands State’s Role. The budget proposes $461 million (Propositions 1E and 84 bond funds) to implement the planning and management (state operations) portion of the Governor’s proposed Flood SAFE California initiative. The initiative is a multiyear, mostly bond–funded, proposal to (1) reduce flood risk throughout the state, including outside the state system of flood control in the Central Valley, (2) develop sustainable flood management systems statewide, and (3) reduce risk during flood events. In addition, the budget proposes $127 million (Proposition 1E) in capital outlay expenditures for evaluation and repairs within the state system of flood control, and $8.5 million (bond funds) for specific flood control projects. This initiative is an expansion of the state’s traditional flood management role.

General Fund Proposed for Baseline Flood Management. The budget includes about $43 million from the General Fund for baseline expenditures (state operations and local assistance) in the flood management program (excluding debt–servicing costs for a flood–related lawsuit settlement). This funding is used for (1) floodplain management to include identifying land subject to flooding and encouraging local land use practices consistent with the existing flood threat, (2) managing the Central Valley Flood Protection Board, (3) maintenance of the state–federal system of flood control including encroachment control and inspection, (4) administration of local flood control subventions, and (5) flood forecasting and natural disaster assistance.

Department Lacks Fee Authority to Cover its Flood Management Costs. The department funds its flood management activities using some baseline General Fund support as well as significant bond funds. The department currently lacks fee authority to cover the costs of its flood management activities that benefit local agencies and/or private parties (such as landowners). This is unlike many other resources and environmental protection agencies where fees currently pay for services the department provides directly to identifiable beneficiaries.

Previous Proposals to Fund Flood Management. The department has previously explored funding a portion of its flood control activities through fees. For example, in the early 1990s, the Reclamation Board explored issuing permit fees for its encroachment control and inspections program. In 2005, the department explored a maintenance assessment on all landowners protected by the entire Central Valley flood control system. In our 2005–06 Budget: Perspectives and Issues (P&I) (see page 217), we recommended the enactment of legislation to establish a systemwide benefit assessment based on the application of the beneficiary pays principle.

Recommend Broad–Based Flood Management Fee. As noted above, our review finds that the department’s existing flood–related activities funded by the General Fund, while largely focused in the Central Valley system, also significantly benefit other flood–prone areas of the state. This includes activity in the Sacramento–San Joaquin Delta through which much of the state’s drinking water passes, as well as areas in Southern California in flood zones. We therefore recommend the Legislature enact a flood management fee on the broad segment of the state’s population that benefits from the department’s flood management activities currently funded from the General Fund. There are a number of options available for structuring the fee, including imposing fees based on current federal flood–zone designations, or seeking a more broad–based fee to include those jurisdictions with locally determined flood zones designations, and taking into account the protection afforded to the property owner by the state Central Valley flood control system.

We also recognize that a package of flood management legislation enacted in 2007 was designed to improve the connection between land use decision–making and resulting flood–related fiscal consequences. For example, the legislation requires local governments to prepare local flood safety plans and gives priority for state funding for flood management to those localities completing these plans. The legislation also makes local governments responsible for contributing their fair share of costs for property damage resulting from the failure of a state flood control project in cases where they have unreasonably approved new development protected by the project. In a similar vein to the 2007 legislation, we recommend that the broad–based flood management fee be structured in a way that provides incentives for local governments who give greater consideration to potential costs and benefits of approving development in flood zones. For example, the fee could be lower for those living in local areas with good land–use planning practices from a flood management perspective and higher in areas lacking such practices.

Legislation Would Need to Specify the Particulars of the Flood Fee. In order for a new broad–based fee to be created for flood management activities, legislation should be enacted to determine the fee structure, the collection mechanism (potentially the fee could be collected as a state surcharge on property tax bills), where the fee revenues are to be deposited (we would recommend the creation of a new special fund), and the eligible uses of the special fund revenues. In addition, for General Fund savings to be realized in the budget year, legislative action to establish the fee would need to be taken soon. Assuming timely enactment, this recommendation could result in General Fund savings of about $40 million in the budget year, as the new fee revenues could replace General Fund support for flood management of a like amount.

Opportunity for General Fund Savings From Colorado River Management Proposal

We recommend enactment of legislation to allow bond funds to be used to pay for canal lining and other Colorado River management projects, as specified in a legal agreement between the state and water users on California’s use of water from the Colorado River. Implementation of this recommendation would result in General Fund savings of $13.5 million in the budget year. (Eliminate Item 3860–102–0001 for $13.5 million and Increase Item 3860–101–6051 by $13.5 million.)

The California Plan to Reduce Its Colorado River Water Use. California currently has agreements with the federal government and other Colorado River water users to reduce its annual use of water from the Colorado River to 4.4 million acre–feet. This amount is referred to as the “basic apportionment” of California’s rights to use Colorado River water under the “Law of the River.” Prior to 1998, California traditionally used more than its basic apportionment, by using water that other water rights holders on the river left unused. Due to increasing demand on the river, a series of agreements were reached between 1998 and 2003 that both required California to develop a plan to reduce its use of Colorado River water as well as complete several local assistance projects designed to increase water availability within the state. These projects included lining canals and creating more storage through groundwater and other means. These agreements are commonly referred to as the California Plan and the Quantification Settlement Agreement (QSA).

State Obligated to Fund Local Assistance for Colorado River Management. As part of the agreement to reduce Colorado River water use, the law implementing the QSA requires the state to provide $235 million in General Fund to finance California Plan projects. Legislation enacted in 1998 provided these funds as a continuous appropriation; $13.5 million of the appropriation remains available for expenditure in the budget year. In addition to the General Fund appropriation, subsequent bond funds have been made available for specified projects to cover increasing construction costs.

Budget–Year Proposal. The department proposes to spend $13.5 million from the General Fund to complete the state’s General Fund commitment to the QSA. Of the $13.5 million, $11.2 million is proposed for a project to increase storage through “conjunctive use,” that is, a combination of groundwater and surface water storage management. The remaining $2.3 million is proposed to be expended on lining the All American Canal to prevent water seeping through the base of the canal and being lost for use among downstream water rights holders. (The All American Canal brings Colorado River water to the Imperial Valley, feeding into multiple regional water distribution systems.)

Bond Funds Eligible, Available. We find that there are sufficient bond funds available that can be used instead of the General Fund for both the lining of the canal and the conjunctive use project. Funds from Proposition 84 are available for projects to increase water supply reliability and for integrated regional water management, of which conjunctive use and the lining of the All American Canal are eligible project types.

Recommend Legislation to Shift Final $13.5 Million Payment From General Fund to Bond Funds. Current law requires that the General Fund be used to meet the QSA obligations. We recommend that legislation be enacted to allow bond funds to replace the General Fund, while holding the QSA and California Plan whole, to complete California’s obligation to reduce its water use from the Colorado River. Implementation of this recommendation would result in General Fund savings of $13.5 million, without negative impact to the proposed projects.

Integrated Regional Water Management Program— Guidelines and Policy Direction Needed Prior to Awards

We recommend rejection of most of the integrated regional water management budget proposal, because program guidelines and legislative policy direction are needed prior to awarding grants. We recommend retaining $2.5 million for program development in the budget year. (Decrease Item 3860–001–6051 by $28.5 million, Decrease Item 3860–001–6052 by $1.5 million, Decrease Item 3860–101–6051 by $319.5 million, Decrease Item 3860–101–6052 by $100 million, and Reject Fund Shift of $6.4 million within Item 3860–001–6031.)

Bonds Provide Funding for Integrated Regional Water Management. Propositions 1E and 84 provide a combined $1.3 billion for integrated regional water management (IRWM) programs, the majority of which is for local assistance. Of this amount, about $900 million from Proposition 84 is allocated among 11 identified regions, while $100 million is for interregional projects. Under Proposition 1E, $300 million is allocated for stormwater–related projects that are consistent with any applicable IRWM plan. Many types of projects would be eligible for bond funding under the broad definition of IRWM, including regional water storage, water quality, stormwater projects, canal lining, and drinking water projects.

Budget Proposes $452 Million Increase in Expenditure Authority. The budget–year proposal includes three separate components related to

IRWM funding: (1) $350 million from Proposition 84 IRWM funding, of which $30.5 million is for state operations and the remaining $319.5 million is for local assistance grants, (2) $102 million from Proposition 1E stormwater management funds, of which $2 million is for state operations and the remaining $100 million for local assistance, and (3) a fund shift of $6.4 million in Proposition 50 bond funds from drought programs to IRWM programs. The budget proposal states that approval of the budget request gives the department authority to spend the entire $1.3 billion. This is anticipated to take place during a nine–year period.

Proposal Lacks Guidelines, Policy Direction. The budget proposes to spend the funds among a broad array of categories including allocation among the 11 regions as required by Proposition 84. However, the department has not completed its guidelines for expenditure of the funds and plans to do so in the budget year. The department estimates that guideline development will require about $2.5 million, split between Proposition 84 ($2 million) and Proposition 1E ($500,000). Previous legislative actions indicated the Legislature’s desire for clear guidelines in the IRWM program prior to project awards. In this regard, the Legislature rejected the Governor’s 2007–08 IRWM budget proposal, as program guidelines had not been developed and legislative policy direction had not been enacted. Subsequent proposals to provide guidelines for expenditure in legislation— SB 1002 (Perata) and AB 1452 (Wolk)—were not enacted in 2007.

Recommend Funding Guideline Preparation, Deny Implementation Funds. We think the department should move forward with its efforts to implement the bond–funded IRWM program by establishing guidelines necessary for awarding grants, and submitting these guidelines for legislative review. The guidelines should address funding eligibility criteria for awarding both competitive grants within the regions and allocations from the statewide pot. The department should also provide an updated timeline for spending the IRWM bond funds. Accordingly, we recommend the Legislature only approve at this time funding required to complete the IRWM guidelines, which as indicated by the department, should total $2.5 million. Upon receipt of these guidelines, the Legislature will be in a position to consider how and when the bond funding should be appropriated to the department for local assistance grants, and provide any policy direction that it deems necessary in legislation. We therefore recommend denying most of the IRWM funding request (including the proposed funding shift from Proposition 50) until these guidelines are received and reviewed by the Legislature and required legislative policy direction is provided.

Recommend Hearings on State’s Water Supply

We recommend joint budget and policy hearings on the state’s water supply given related major proposals in the Governor’s budget, as well as recent events affecting both the Colorado River supply and water deliveries through the Sacramento–San Joaquin River Delta. We further recommend that the Legislature withhold action on storage and conveyance funding proposals until after such hearings to give the Legislature the opportunity to set its funding priorities.

Multiple New Water Supply Proposals in Budget and Off Budget. The budget includes substantial funding (mostly bond funds) for proposals to increase the reliability of the state’s water supply. This funding includes $452 million (bond funds) for IRWM, of which supply and conveyance are projects eligible for funding. In addition to this, the department proposes $1.4 million (ongoing) for environmental studies related to an alternative Delta conveyance facility, with funds from the off–budget SWP (revenues derived from beneficiaries of SWP). The department also proposes $9.8 million in bond funds for feasibility studies for specific surface storage projects being considered by the CALFED Bay–Delta program. These multiple water supply and conveyance proposals build on existing funding for water supply reliability programs and studies funded by the department. Figure 1 describes selected new proposals for supply and conveyance proposed for the budget year.

Governor Proposes New Water Bond. As part of his ten–year Strategic Growth Plan to address the state’s infrastructure needs, the Governor has proposed an $11.9 billion water management general obligation bond to be submitted to voters in 2008. The proposal includes elements from the Governor’s proposal from 2006 in the amount of $4 billion, but goes significantly further in the magnitude of funding. The allocation of the $11.9 billion among projects and programs to be funded by the measure is as follows:

• Water Storage—$3.5 Billion. This funding is for the “state’s cost share” in the design, acquisition, and construction of surface water storage projects studied by DWR under CALFED—Los Vaqueros (Contra Costa County), Sites Reservoir (Colusa and Glenn Counties), and Temperance Flat Reservoir (Fresno and Madera Counties). The proposed measure also provides that the state’s cost share is not to exceed 50 percent of total project costs. The nonstate costs would be funded by the water suppliers who would benefit from the new storage.
• Water Conservation—$3.1 Billion. This component of the proposal is designed to supplement existing bond authority to support IRWM programs. Funding is proposed as state local assistance for water conservation grants to increase water use efficiency and protect water quality, and reduce energy use, urban and agricultural runoff, and urban effluent.
• Delta Sustainability—$2.4 Billion. This funding is to implement a strategic plan currently under development for sustainable management of the Delta’s multiple uses, resources, and ecosystem.
• Water Resources Stewardship—$1.1 Billion. This funding is for various restoration projects including restoration of the Klamath River, Sacramento River corridor and tributaries, Salton Sea, and San Joaquin River system.
• Water Quality Improvement—$1.1 Billion. This funding is to reduce groundwater contamination for sources used for drinking water supplies, assist local community wastewater treatment projects, provide grants for stormwater management projects, and support ocean protection efforts.
• Other Critical Water Projects—$700 Million. This funding provides specified amounts for water recycling, watershed restoration in fire–damaged areas, and fish barrier removal, including the removal of obsolete dams.

Many Agencies Have a Role in Water Supply and Conveyance. As shown in Figure 2, many boards and departments at the state level have roles that impact water supply and conveyance, in addition to DWR. For the most part, the activities of each of these agencies influence both water supply and conveyance. For example, the Coastal Commission regulates the development of desalination facilities in the Coastal Zone, some of which have been proposed to augment water supply in Southern California. We think it important for the Legislature to consider the roles of these many agencies as it reviews new water supply and conveyance budget proposals.

Legislature Should Consider Water Supply and Conveyance Proposals Together. We find that there have been a number of recent developments that have a significant bearing on the “state” of the state’s water supply and future challenges in addressing the state’s water supply requirements. These include court cases related to the Delta, multistate settlements related to the Colorado River, and the release of various Delta–related planning documents and reports. These planning documents and reports include,

(1) the Delta Vision task force report, (2) CALFED’s “End of Stage One Report,” and (3) the initial Delta Risk Management Study (Phase One).

We think the Legislature, after considering these developments and what they mean for the state’s water supply, would be in a better position to evaluate water supply/conveyance–related budget proposals and provide its policy direction for them, including how they should be funded. For example, the Legislature may wish to weigh in on whether budget–year funding for surface storage studies should follow the model proposed by the Governor in his water bond proposal, wherein those benefiting from the studies pay for those studies, or alternatively the model proposed in the budget where the studies are a state expense. (For a more detailed discussion of this issue, see our “CALFED Bay–Delta Program” write–up in the “Crosscutting Issues” section of this chapter.) We think that the Legislature should evaluate the water supply/conveyance proposals in the budget as a package.

Recommend Legislature Withhold Action on New Funding Proposals Until Joint Hearings Held. We recommend the Legislature withhold action on budget proposals related to water supply and conveyance until it has an opportunity to review these proposals in joint budget and policy hearings. At these hearings, the relevant boards and departments should be directed to (1) provide a complete picture of the actions proposed for the budget year to improve water supply and conveyance and (2) discuss the current state of knowledge regarding the state’s water supply and future challenges.