LAO’s Fee–Based Recommendations

Basis for Recommendations

In this section, we offer a number of recommendations for achieving General Fund savings by shifting funding for an activity from the General Fund to new or increased fees. While the resulting General Fund savings are clearly a benefit from adopting these recommendations, we have offered these kinds of recommendations in both good and bad fiscal times. Our analysis finds that these fees are the appropriate funding source, as a matter of policy, for the activities in question, either because the state is providing a service directly to beneficiaries (such as wildland fire protection), or administering a pollution control program that could be funded on a polluter pays basis (such as the SWRCB’s water quality regulatory program).

It is important to note that the application of the “beneficiary pays” funding principle does not imply that fees will necessarily cover the full cost of an activity. Rather, some activities—take the state’s wildland fire protection, for example—provide benefits to the public at–large (such as by providing habitat protection) as well as directly to identifiable individuals (such as property owners in or near wildland areas). In such cases, we recommend that fees be assessed to cover the portion of the costs that can reasonably be allocated to the activity’s direct beneficiaries, with state General Fund resources being used to pay for its broad public benefits.

As we have presented each of these recommendations outlined below in previous analyses, we refer the reader to the document where the prior analyses can be found for a more in–depth discussion of the recommendation.

New Wildland Fire Protection Fee

State Is Responsible for Wildland Fire Protection. Under existing statute, the state is responsible for providing wildland fire protection in “State Responsibility Areas” (SRAs). These SRAs encompass about 31 million acres of the state, primarily privately owned timberlands, rangelands, and watershed areas. There are an estimated 860,000 homes in SRAs. Initially, CalFire’s mission was the prevention and suppression of wildland fires in undeveloped areas. Over time, however, there has been considerable “mission creep” and the department now spends considerable time and resources protecting homes in SRA from wildfire, as well as responding to medical emergencies and other non–wildfire calls.

Costs of State Fire Protection Have Increased Dramatically. Today, the state’s largest General Fund expenditure in the natural resources area is for fire protection. Over the last ten years, the cost to provide fire protection in SRAs has increased substantially. In the 1998–99, the General Fund cost for fire protection (including both the base budget and Emergency Fund expenditures) was $307 million. In the current year, estimated General fund fire protection expenditures are $967 million—a tripling of these costs.

Recommend a New Wildland Fire Protection Fee in SRAs. Property owners in an SRA directly benefit from the protection of their property provided by CalFire. Therefore, we believe it is appropriate that property owners in an SRA pay a portion of the state’s cost for fire protection. Since housing development has been a key driver of increasing CalFire expenditures, we believe it is appropriate that homeowners in an SRA pay most of the cost of a new fire protection fee. Because the department provides fire protection for natural resources of statewide significance—such as watersheds that provide drinking water for much of the state—it is also appropriate that the state as a whole pay for a portion of the cost of fire protection. Therefore, we consider it reasonable that the state’s cost of providing fire protection in an SRA be shared between the direct beneficiaries and the state’s taxpayers as a whole.

We recommend that the Legislature enact a fee on the owners of structures in SRA that would be generally proportional to the additional costs imposed on the state as a result of the presence of those structures. When determining the level of such a fee for structures in a given area, the Legislature may wish to consider actual expenditures made by the department in that area, the local fire risk, and the adequacy of fire protection provided by local governments. We recommend that the Board of Equalization (BOE) be authorized to collect such a fee.

Because our recommendation would create a new fee, there will be a significant amount of one–time administrative work by CalFire and BOE to set up the fee–collection mechanism and make the initial determinations of who must pay the fee. It is likely this work would take several months. It may be possible to generate revenues beginning as early as the budget year if the Legislature were to enact our fee recommendation soon. Otherwise, revenues from the new fee would most likely begin accruing in 2010–11.

As we discuss below, the Governor has proposed a different approach that involves levying a surcharge on property insurance premiums in the state to initially fund the expansion of emergency response activities, primarily wildland fire protection. In contrast, our proposal is designed to generate General Fund savings as soon as the fee revenues become available. We also note that the Governor’s proposed insurance premium surcharge would be considered a tax. This would increase the state’s funding obligations under Proposition 98, a constitutional provision mandating a set portion of the proceeds of state taxes be used to provide specified minimum funding levels for public schools and community colleges. In contrast, our proposed funding mechanism would be structured as a fee and thus would not add to the state’s funding obligations under Proposition 98.

For a more detailed discussion of our SRA fee proposal, please see our Analysis of the 2008–09 Budget Bill, page B–47.

Increased Fish and Game Regulatory Fees

Regulatory Programs Supported by the General Fund Could Be Funded by Fees. The DFG administers various regulatory programs to protect public resources, including fish and wildlife. These programs are generally supported by fees charged to the regulated community. However, there are some cases when the General Fund lends significant support for a regulatory program. We recommend that General Fund support be shifted to regulatory fees in such cases, which are highlighted below:

• California Endangered Species Act Review. The department reviews projects that may impact endangered species under state law. Currently, this program is supported primarily by the General Fund, with additional support from various special funds. We recommend the enactment of legislation to create a new regulatory fee to fully fund this program, saving the General Fund about $1.9 million and potentially $800,000 in special funds.
• Natural Communities Conservation Planning Review. The Natural Communities Conservation Planning Act is an alternative regulatory program to the Endangered Species Act. Currently, this program is supported by the General Fund, as well as various bond, special, and federal funds. Current law allows a fee to be assessed by the department to recover its costs. We recommend that the Legislature eliminate the General Fund support for this program and direct the department to raise fees sufficient to cover its costs, as state law allows it to do—yielding General Fund savings of about $850,000 and potential additional savings to the other fund sources currently supporting the program.

For more detailed information on these DFG–related fee recommendations, please see our Analysis of the 2008–09 Budget Bill, page B–58.

Increased Water Board Regulatory Fees and New Water Quality Fee

Background. The SWRCB, in conjunction with nine semiautonomous regional boards, regulates water quality in the state. The state and regional boards issue and enforce permits that regulate the discharge of pollution into the state’s waters. The state board also administers water rights in the state, by issuing and enforcing permits and licenses to applicants who wish to take water from the state’s streams, rivers, and lakes. The board’s proposed budget for 2009–10 includes $40.3 million from the General Fund, an increase of about $1.6 million (4 percent) above current–year expenditures.

As we discussed in our Analysis of the 2008–09 Budget Bill, page B–100, we recommend applying the polluter pays funding principle more fully to the board’s core water quality and water rights programs by expanding regulatory fees to fully fund water quality management programs. We discuss each of our two specific recommendations in turn.

Recommend Fully Funding Core Regulatory Programs From Fees. Core regulatory programs include water quality permitting activities (pollution discharge permitting program), the agricultural waiver program, THP reviews, and water rights activities. While these programs receive much of their funding from fees, the proposed budget includes about $11.6 million for these core programs, of which $4.7 million is for THP review.

As a general principle, we recommend that the core regulatory programs at the water boards be fully funded by fees, based on the polluter pays funding principle. Shifting the funding of the balance of the water boards’ core regulatory activities from the General Fund to fees (except for THP review) would save the General Fund $6.9 million in the budget year. As a legislative policy review of the state’s multiagency THP review process is pending, we withhold making a recommendation at this time on the board’s THP funding component.

Recommend Creation of New Water Quality Fee. In our 2008–09 Analysis, we recommended that the bulk of the board’s General Fund–supported programs outside of the core regulatory programs be funded by a new water quality fee. These are water quality management programs that assess the state’s water quality and develop water quality plans and standards, which ultimately form the basis for the board’s permitting and enforcement activities. These program activities—which include the Total Maximum Daily Load program, basin and groundwater planning, and non–point source pollution programs—are proposed to receive General Fund support of about $21.6 million, a 10 percent increase over current–year expenditures.

Currently, there are about 20,000 entities that pay one or more of several categories of the board’s water quality regulatory fees. We recommend expanding this fee base to include, to the extent feasible and administratively efficient, a larger number of parties who, while impacting water quality and creating regulatory program workload on the state and regional boards, currently pay no, or minimal, fees to support these programs. There are a number of issues for the Legislature to consider in structuring such a fee. These include determining (1) who should pay the fee, (2) what the fee rates should be, and (3) how the fees might vary, based on factors such as differences in regional water quality problems and costs imposed on the water boards by pollution type, and accounting for whether or not the fee payer currently pays a water–quality related fee. Any legislative concerns about the impact of such a fee on economically disadvantaged communities could be addressed in the fee structure design, such as by including exemptions from the fee.

Increased Watermaster Fees

Recommend Fully Funding DWRs’ Watermaster Program From Fees. The Watermaster Program administered by DWR ensures that water is allocated according to established water rights as determined by court adjudications or agreements, by an unbiased party, in an attempt to reduce water rights–related lawsuits and law enforcement. The program encompasses watermaster service areas for a number of Northern California stream systems and for two Southern California groundwater basins. The budget proposes to continue baseline General Fund support of $1.2 million for this program. In contrast, most groundwater–related watermaster programs, administered mainly at the local level, are fully supported by program beneficiaries within the watermaster service area. We recommend funding the Watermaster Program from fees, resulting in General Fund savings of $1.2 million.

Office of Environmental Health Hazard Assessment—Fee–Based Funding Shifts

Office Provides Scientific Support for Regulatory Programs. The OEHHA identifies and quantifies the health risks of chemicals in the environment. It provides these assessments, along with its recommendations for pollutant standards and health and safety regulations, to the boards and departments in Cal–EPA and to other state and local agencies. The OEHHA also provides scientific support to environmental regulatory agencies.

The OEHHA’s Funding a Mix of General and Special Funds. The budget requests total funding of $19.8 million for support of OEHHA in 2009–10. The General Fund support requested is $8.3 million, with the remaining $11.5 million requested from fee–based special funds and reimbursements.

Figure 8 shows the 11 OEHHA programs that have at least some level of General Fund support. In addition to these programs, there are several other programs within OEHHA funded entirely by special funds.

Regulatory Support Activities Should Be Funded by Fee–Based Special Funds. In our Analysis of the 2005–06 Budget Bill, page B–92, we reported on the potential for alternative funding sources for many of OEHHA’s activities currently funded from the General Fund, namely environmental protection and public health regulatory programs benefiting directly from OEHHA’s technical expertise. We have found that where OEHHA provides services (in the form of assessments and recommendations) to regulatory programs administered by other state agencies, it is appropriate to fund these services from regulatory program fees.

On the other hand, some of OEHHA’s activities have more of a broad–based public health focus—such as those related to children’s health and Proposition 65, a 1986 initiative measure that requires the state to annually publish a list of cancer–causing chemicals and inform citizens about exposures to these chemicals. These activities cannot be reasonably or easily connected with discrete regulatory programs. The General Fund, in our view, continues to be the appropriate primary funding source for these activities. After accounting for such activities, we have concluded that there is the potential to shift up to about $5 million of OEHHA’s funding from the General Fund to fees.

As shown in Figure 8, many of OEHHA’s regulatory program support activities receiving General Fund support are already partially funded with fee–based special funds. We recommend going further where such a special fund is available to assume the General Fund’s current funding contribution. Examples of potential funding shifts include transferring support for pesticide regularity programs to the Department of Pesticide Regulation Fund and for toxic air contaminant programs to the Air Pollution Control Account and/or the Motor Vehicle Account.

Accommodating the Funding Shifts May Require Statutory Changes or Fee Increases. We note that for the budget year, a number of the special funds to which OEHHA’s General Fund support could be shifted have reserves that could support the funding shift. In other cases, an increase in fees or redirection of monies from other activities may be required to accommodate the funding shift. In yet other cases, a statutory change may be required to specify that OEHHA’s activities are an eligible use of the special fund in question.