Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Fund Conditions for Resources Programs

The state uses a variety of special and bond funds to support the departments, conservancies, boards, and programs that regulate and manage the state's natural resources. Of the $2.7 billion in state-funded expenditures for resources programs proposed for 2002-03, about $1.1 billion (40 percent) would be from special funds, and $628 million (23 percent) from bond funds. The remainder--$993 million--would be from the General Fund.

In this section, we provide a status report on selected special funds and bond funds supporting these programs. In general, the use of these special and bond funds is specified in statute. Some funds can be used for a wide variety of programs and activities, while the use of other funds is more limited. For purposes of this review, we divided the funds into three categories: (1) resources special funds, (2) park-related bond funds, and (3) bond funds for water programs. We conclude with a recommendation to provide the Legislature with better information on expenditures and fund balances of existing and future bond funds.

Resources Special Funds

The budget proposes to spend most of the special funds projected to be available in 2002-03 for resources protection. If the Governor's spending proposals are approved, it will leave about $21 million for legislative priorities. However, the use of most of these remaining funds is statutorily restricted to specific purposes.

Figure 1 summarizes the total resources available in 2002-03 for selected special funds, the Governor's proposed expenditures from these funds, and the balances available after the Governor's proposed expenditures. Approval of the Governor's spending proposals would leave $20.8 million available for legislative priorities. This amount would be even less if the Legislature wishes to maintain some level of reserves in the accounts to meet contingencies such as revenue shortfalls or unanticipated expenditures. Furthermore, most of the remaining funds can only be used for specific purposes, as required by statute. For instance, about $5.1 million of the projected balance in the Fish and Game Preservation Fund (FGPF) is dedicated statutorily and can only be used for activities related to certain species. As a result, the Legislature's flexibility in expending these funds for resources projects is limited. 

Below we discuss in greater detail the funds shown in Figure 1.

Environmental License Plate Fund (ELPF). The ELPF derives its funding from the sale of personalized motor vehicle license plates by the Department of Motor Vehicles. Funds from ELPF can be used for the following purposes:

• Control and abatement of air pollution.
• Acquisition, preservation, and restoration of natural areas and ecological reserves.
• Environmental education.
• Protection of nongame species and threatened and endangered plants and animals.
• Protection, enhancement, and restoration of fish and wildlife habitat, and related water quality.
• Purchase of real property, consisting of sensitive natural areas, for the state, local, or regional park systems.
• Reduction of the effect of soil erosion and discharge of sediments into the water of the Lake Tahoe region.

The budget proposes expenditures totaling $24.1 million from ELPF, a decrease of about $2.2 million (9 percent) below estimated current-year spending. The decrease is the result of lower capital outlay expenditures by the California Tahoe Conservancy and lower ELPF support for the California Department of Forestry and Fire Protection (CDFFP). Almost all of the proposed ELPF expenditures in 2002-03 would be for departmental support purposes, the largest being $16.7 million for support of Department of Fish and Game (DFG). Only $967,000 would be for local assistance. The proposed ELPF expenditures will leave a balance of $9.6 million at the end of 2002-03.

Public Resources Account, Cigarette and Tobacco Products Surtax Fund (PRA). The PRA receives 5 percent of the Cigarette and Tobacco Products Surtax Fund (C&T Fund) revenues. Generally, PRA funds must be used in equal amounts for (1) park and recreation programs at the state or local level and (2) habitat programs and projects.

The budget projects $21.8 million in PRA resources in 2002-03 and proposes total expenditures from PRA of $18.5 million$0.8 million higher than the estimated current-year expenditure level. Almost all proposed expenditures would be for departmental support purposes. About 73 percent ($13.7 million) of the proposed expenditures would be used to support the Department of Parks and Recreation (DPR), 10 percent ($2 million) would support the operations of the State Water Resources Control Board, and 8 percent ($1.6 million) would support DFG.

The budget proposes a reserve of $3.3 million in PRA at the end of 2002-03.

Habitat Conservation Fund (HCF). The HCF was created by Proposition 117, the California Wildlife Protection Act of 1990. The proposition requires that the fund receive annual revenues of $30 million primarily for wildlife habitat acquisitions and improvements. To provide this funding level, Proposition 117 requires transfers of (1) 10 percent of funds from the Unallocated Account, C&T Fund, and (2) additional funds from the General Fund in order to provide a total of $30 million. Proposition 117 allows the Legislature to substitute other appropriate funds for the General Fund.

For 2002-03, the budget proposes to transfer $8.6 million from the Unallocated Account, C&T Fund, and $21.3 million from the General Fund to HCF. These transfers, together with carryover balances, would fund proposed expenditures of $30.1 million, leaving a balance of $0.4 million at the end of the budget year.

Fish and Game Preservation Fund. The FGPF derives most of its revenues from fishing and hunting licenses, tags, and permits. Money in FGPF is used to support DFG activities to protect and preserve fish and wildlife, including the acquisition and construction of projects for these purposes. Certain revenues in the fund are restricted (or dedicated) to be used for specific purposes or species. For instance, revenues from hunting or fishing stamps for particular species can be used only for activities related to the protection of those species. The costs of commercial fishing programs are to be paid solely out of revenues from commercial fishing taxes and license fees.

For 2002-03, the budget proposes total FGPF expenditures of $89 million, almost entirely for the support of DFG. This amount is $2.7 million (2 percent) less than estimated current-year expenditures. Of the budget-year amount, $73.5 million is proposed to be spent from nondedicated funds and the remaining $15.6 million from dedicated revenues.

With the proposed expenditures, the budget projects a reserve of $6.1 million in FGPF for 2002-03, of which $1 million is expected to be in nondedicated funds.

Forest Resources Improvement Fund. Revenues generated from timber harvesting in state forests are deposited into the Forest Resources Improvement Fund (FRIF). Most of this revenue is generated from Jackson State Demonstration Forest. Funds for FRIF can be used for the following purposes:

• Forest improvement programs.
• Urban forestry programs.
• Wood energy programs.
• Reimbursing the General Fund for the operation of state demonstration forests.
• Regulation of forest practices.
• Support of state nurseries.
• Forest pest research and management.

Figure 2 shows the proposed 2002-03 expenditures for FRIF in the budget.

The current revenue projection for FRIF is uncertain due to pending litigation which has forced the halt of timber harvesting on Jackson State Demonstration Forest, the primary revenue source for FRIF. The department anticipates it will begin harvesting in July 2002. In order for the department to resume harvesting, however, a number of conditions must be met. These include: (1) lifting the present injunction prohibiting harvesting in the Jackson State Demonstration Forest, (2) completing a management plan for Jackson State Forest by CDFFP, (3) completing the environmental review process for the plan, and (4) approval of the plan by Board of Forestry. 

State Parks and Recreation Fund (SPRF). The SPRF is the main special fund source that supports DPR. The fund generates most of its revenues from state beach and park service fees. For 2002-03, the budget projects SPRF resources of $73 million, including $29 million from state beach and park service fees collected in 2002-03. The amount of resources available reflects a proposed transfer of $19.8 million from SPRF to the General Fund.

The budget proposes to use $73 million for DPR support, thereby leaving no balance at year-end.

Budget Proposes Major Changes To Tidelands Revenue Distribution

The budget proposes eliminating the current statutory requirements for distributing tidelands oil revenues to various special funds to fund resource activities. In addition, the recent downturn in oil prices suggests the tidelands revenues in 2002-03 will likely be lower than projected in the Governor's budget. We recommend that the State Lands Commission provide an updated estimate on tidelands revenues at budget hearings.

Tidelands Oil Revenues Fund Various Special Funds. The state receives a portion of the revenue derived from oil, gas, and other minerals extracted from the state's tidelands. The amount of state revenue from tideland oil leases is based primarily on the net profit received by oil producers leasing state tidelands. Figure 3 shows the Governor's proposed distribution of tidelands revenues--relative to current law requirements.

Current law requires that after specified amounts are deposited in the Housing Trust Fund and in the General Fund mainly to support the State Lands Commission (SLC), the remaining tidelands revenues are deposited into the Resources Trust Fund (RTF) created by Chapter 293, Statutes of 1997 (SB 271, Thompson). The RTF in turn funds the following accounts that support various resource programs.

• The first $8 million is to be deposited in the Salmon and Steelhead Trout Restoration Account (created by Chapter 293) for expenditures by DFG for the recovery of salmon and steelhead trout.
• The next $2.2 million is to go to the Marine Life and Marine Reserve Management Account (created by Chapter 326, Statutes of 1998 [AB 2784, Strom-Martin]) for expenditure by DFG for marine life management. 

• The next $10 million is to be deposited in the State Parks Deferred Maintenance Account (also created by Chapter 326) for expenditure by DPR for deferred maintenance expenses.
• Finally, any remaining RTF money is then to be deposited in the Natural Resources Infrastructure Fund (NRIF). Chapter 293 identified four priorities for the use of NRIF: (1) environmental review and monitoring by DFG, (2) Natural Community Conservation Plan acquisitions, (3) HCF funding requirements, and (4) nonpoint source pollution control programs. Funds not appropriated to these priorities will be available to be spent generally on natural and recreational resources.

Tidelands Oil Revenue Is Difficult To Project. The amount of state revenue from tidelands oil leases is based primarily on the net profit received by oil producers leasing state tidelands. It is difficult to project the revenue from tidelands oil leases, because historically this revenue has been subject to large fluctuations for a number of reasons. A major contributor to this volatility is the instability of oil prices as well as fluctuating costs of production that figure into net profits of oil producers.

Budget Proposes Major Changes To Tidelands Oil Distribution. The budget projects that tidelands revenues to the state will be about $56 million in 2002-03. The budget proposes to transfer $12 million of these funds to the General Fund mainly for support of SLC. However, the budget proposes no funding from tidelands revenues for the Housing Trust Fund or for RTF and all of its subaccounts. Instead, as shown in Figure 4, the budget proposes using a combination of General Fund and bond funds to fund activities currently funded by the RTF, with the exception of NRIF, which is proposed to receive no funding.

In lieu of allocating tidelands revenues to the various accounts under RTF, the budget proposes to transfer the remaining funds to the General Fund ($44 million). The Department of Finance reports it will request urgency legislation to eliminate the current statutory requirements to fund the various RTF accounts.

Tidelands Revenues Will Likely Be Less Than Projected. Our review of prior-year projections for tidelands revenues found that these revenues are inherently uncertain. As a consequence, the projections in some years have been overly optimistic. This is likely to be the case for 2002-03. Specifically, the budget's projections for tidelands revenues in 2002-03 were made this past September, according to SLC. The budget assumed that the oil price prevailing in September--about $20 per barrel--would hold for the budget year. However, oil prices sharply decreased since September (oil prices averaged $13 per barrel in December). In light of the subsequent reduction in tidelands oil revenue in the current year, the budget's current-year revenue estimates and budget-year revenue projections are both likely to require downward adjustments.

At the time this analysis was written, SLC reported it was in the process of revising the tidelands revenue projections for both the current and budget years. We recommend that SLC provide an updated estimate of tidelands revenues for the current and budget years at budget hearings. To the extent that revised revenue estimates for the current year are below those found in the budget, current-year expenditures from tidelands revenues (including state park deferred maintenance and local park assistance) may have to be further reduced. To the extent that the revised revenue estimates are lower for the budget year, the proposed transfer of $44 million of tidelands revenues to the General Fund may also have to be reduced.

Parks Bond

The budget proposes expenditures in 2002-03 of about $123 million from the 2000 Parks Bond for park acquisitions, development, improvement, and restoration. The proposed expenditures would leave a balance of about $221 million. After netting out administrative costs and set-asides for future obligations ($151 million), this leaves about $70 million for new projects beyond the budget year.

In March 2000, the voters approved Proposition 12 (the Safe Neighborhood Parks, Clean Water, Clean Air, and Coastal Protection Bond Act), which authorized $2.1 billion in bond funds for specified and unspecified parks projects and habitat acquisition. Proposition 12 allocates $540 million to DPR for various state park development and improvement projects, plus another $825 million to provide grants to local and nonprofit agencies. The remaining $736 million is to be allocated to a dozen other state departments for land acquisition and parks-related projects.

The 2000-01 and 2001-02 budgets appropriated a total of $1.8 billion of the bond funds across all the recipient departments. As shown in Figure 5, the budget proposes a total of $122.9 million to be expended by these departments in 2002-03. This will leave a balance of $220.7 million. The actual balance available for park projects, however, will be less. This is because some funding has been set aside to provide for the completion of existing projects, and to fund program support costs and the administration of the bond. Netting out these administrative costs and set-asides for future years, the funds remaining for new projects and grants beyond 2002-03 would be about $70.1 million. Most of this is for specified purposes or programs.

Resources Bond on March Ballot

If adopted by voters, Proposition 40 on the March 2002 ballot would provide $2.6 billion in new bond funds for various resources purposes including parks. The budget proposes expenditures of about $119 million from this bond measure, mainly for the CALFED Bay-Delta program.

Proposition 40 (the California Clean Water, Safe Neighborhood Parks, Clean Air, and Coastal Protection Act of 2002) on the March 2002 ballot, if adopted, would provide $2.6 billion to conserve natural resources (land, air, and water), acquire and improve state and local parks, and preserve historical and cultural resources. As shown in Figure 6, about $1.3 billion would be used for land, air, and water conservation; $1 billion for parks and recreation; and $267.5 million for historical and cultural resource preservation.

Budget Proposes $119 Million in Proposition 40 Expenditures. As shown in Figure 7, the budget proposes about $119 million in expenditures from Proposition 40 in 2002-03 across various resource departments. Most of the funding ($101.1 million) is to support the CALFED Bay-Delta program. 

Water Bonds Update

The budget proposes expenditures of about $480 million from a number of water bonds for various water quality, water supply, flood control, and ecosystem restoration projects. Bond funds are no longer available in the budget year for the state's unmet share of costs for federally authorized local flood control projects. The budget proposes no funding from other sources for this purpose, resulting in an estimated $132 million owing to local agencies at the end of the budget year. 

As Figure 8 shows, the budget proposes expenditures totaling $480 million in 2002-03 from various water bonds for (1) safe drinking water; (2) water supply, including water conservation, water recycling, and groundwater recharge; (3) wastewater treatment and other water quality projects; (4) Bay-Delta improvements, including fish and wildlife restoration; and (5) flood control and prevention. Of the proposed expenditures, about 39 percent are from Proposition 204 bond funds and 55 percent from Proposition 13 bond funds. Proposition 204--the Safe, Clean, Reliable Water Supply Act of 1996--provided $995 million for various water-related purposes, including habitat restoration in the Bay-Delta, wastewater treatment, water recycling and conservation, and local flood control and prevention. Proposition 13--the Safe Drinking Water, Clean Water, Watershed Protection, and Flood Protection Act (2000)--provided $1.97 billion for safe drinking water, flood control, Bay-Delta restoration, watershed protection, and various water quality and supply projects.

Safe Drinking Water. The budget projects total expenditures of $12.1 million in 2002-03, leaving a balance of $36.8 million at the end of 2002-03. There are pending grant applications that would spend much of this balance in future years.

Water Supply and Water Recycling. The budget projects total expenditures of $158.5 million for water supply and recycling projects. This leaves a balance of $115.3 million, mainly for new projects.

Wastewater Treatment, Watershed Protection, and Other Water Quality Projects. The budget proposes $109.3 million in expenditures to fund wastewater treatment, agricultural drainage treatment, seawater intrusion control, watershed protection, and other water quality projects in 2002-03. This leaves a balance of $161.8 million.

Bay-Delta Improvements. Propositions 13 and 204 provide a total of about $1 billion for projects specifically related to the Bay-Delta. These funds are mainly for ecosystem restoration, fish screens to reduce fish losses from water diversions, delta levee rehabilitation, and water supply/quality projects in areas receiving water deliveries diverted from the Bay-Delta. About $388 million of these funds will remain available for expenditure at the beginning of the budget year. The budget proposes expenditures of $182.6 million in 2002-03, leaving a balance of $205.3 million.

Flood Control and Prevention. In addition to providing funds to pay the state share of costs for federally authorized flood control projects as discussed below, Proposition 13 bond funds provide a total of $217 million for other flood control projects. The budget proposes expenditures of $17.5 million for these projects in 2002-03, leaving a balance of $104.5 million for future years.

While Propositions 204 and 13 also provide $105 million in bond funds to pay the state's share of costs of federally authorized, locally sponsored projects, these funds have been depleted. The costs of these projects are currently shared by the federal government (50 percent to 75 percent), state government (12.5 percent to 35 percent), and local government (7.5 percent to 25 percent). These shares of costs vary depending on when the project was started and the level of statewide benefit. Due to the state's budget condition during the 1990s, however, the state has been unable to pay its full share of costs for these flood control projects.

According to the Department of Water Resources, the unpaid amount of the state's share of costs will be about $41.5 million at the end of 2001-02, and new claims totaling $90 million will be submitted from local agencies during the course of the budget year requesting the state share of costs. The budget proposes no funding to pay the arrears and estimated new claims. As a result, it is estimated that the arrearages owed local agencies will increase to about $132 million at the end of 2002-03.

Improving Bond Fund Accountability

Because the Governor's budget display does not provide fund condition information for a number of resources bonds, it has been difficult for the Legislature to monitor bond fund expenditures and fund balances. We therefore recommend the enactment of legislation that requires that these fund conditions be displayed annually in the Governor's budget document.

Governor's Budget Document Does Not Display Bond Fund Conditions. Currently, the Governor's budget document does not include fund condition statements for a number of resources bonds--Propositions 12, 13, and 204. The accounting required for these bond measures is rather complex. For example, Propositions 13 and 204 created many subaccounts for the various programs funded by these measures, with Proposition 13 establishing 26 subaccounts.

The lack of these fund condition statements has complicated the Legislature's ability to ascertain the budget's expenditure proposal for the various programs funded by the measures as well as monitor fund balances for use in current and future budget appropriations. In addition, there have been a number of instances in recent years where, after the Governor's budget was submitted to the Legislature, it was discovered that a bond subaccount did not have sufficient remaining funds to support the proposed level of expenditures. If bond fund conditions had been submitted as part of the Governor's budget, such errors would have been caught by the administration before the Governor's budget was finalized.

Recommend Fund Balances Be Displayed in Governor's Budget. In order to exercise oversight of bond programs, the Legislature needs clear and accurate information about expenditures and periodic updates on the fund balances remaining for the various programs and projects funded by bond measures. Therefore, we recommend the enactment of legislation that requires the account balances for each of the subaccounts of the Propositions 12, 13, and 204 bond measures and any future resources bond measures be displayed annually in the Governor's budget document. This will promote accountability and will facilitate the monitoring of fund balances for use in current and future budget appropriations.