Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Overview

The budget proposes significantly lower state expenditures (from all funds) for resources and environmental protection programs in 2006-07 compared to the estimated current-year level. Most of this reduction reflects a decrease in available bond funds. The budget also proposes somewhat higher General Fund expenditures for the budget year, reflecting increases mainly concentrated in four resources departments. Although the Governor has proposed a $3 billion flood protection and water management bond measure to be submitted for voter approval in 2006, as well as resources-related provisions in other bond measures, the budget does not reflect any expenditures from these bonds.

Expenditure Proposals and Trends

Expenditures for resources and environmental protection programs from the General Fund, various special funds, and bond funds are proposed to total $4.6 billion in 2006-07, which is 3.7 percent of all state-funded expenditures proposed for the budget year. This level is a decrease of about $1.8 billion, or 28 percent, below estimated expenditures for the current year.

Decrease Largely Reflects Reduction in Bond Expenditures. The proposed reduction in state-funded expenditures for resources and environmental protection programs mostly reflects a $1.7 billion decrease in bond fund expenditures for water, land conservation, and other resources-related projects. (As discussed below, the decrease in bond-funded expenditures is partially offset by an increase in expenditures from the General Fund.) Between 1996 and 2002, the state’s voters have approved $11.1 billion of resources bonds. Less than $1 billion of this total remains available for appropriation in the budget year. Although not included in the Governor’s budget expenditure proposal for environmental and protection programs in 2006-07, the Governor has proposed over $9.4 billion of new resources-related bonds as part of his $222 billion, ten-year Strategic Growth Plan to address the state’s infrastructure needs. These new bonds include a $3 billion bond for flood protection and water management projects proposed to be submitted for voter approval in 2006. We discuss the status of current bond funds as well as the Governor’s proposed bond measures in greater detail in the Resources Bonds write-up in the Crosscutting Issues section of this chapter.

Spending From General Fund Up, Special Funds Down. On the other hand, the budget reflects an increase in General Fund expenditures for various purposes. The increases from the General Fund are largely concentrated in the Department of Water Resources (DWR), California Department of Forestry and Fire Protection (CDFFP), Department of Fish and Game (DFG), and the California Conservations Corps (CCC). In total, the budget proposes General Fund expenditures for resources and environmental protection programs in 2006-07 that are $135 million, or 9 percent, higher than the current-year level.

The budget proposes special fund expenditures that are $187 million, or 7 percent, below the current-year level. Most of this decrease in special fund expenditures reflects a reduction in capital expenditures in the Department of Parks and Recreation (DPR) for Off-Highway Vehicle parks and in renewable energy incentive payments administered by the Energy Resources Conservation and Development Commission.

Funding Sources. The largest proportion of state funding for resources and environmental protection programs-about $2.6 billion (or 56 percent)-will come from various special funds. These special funds include the Environmental License Plate Fund, Fish and Game Preservation Fund, funds generated by beverage container recycling deposits and fees, an “insurance fund” for the cleanup of leaking underground storage tanks, and a relatively new electronic waste recycling fee. Of the remaining expenditures, $1.6 billion will come from the General Fund (34 percent of total expenditures) and about $465 million will come from bond funds (10 percent of total expenditures).

Expenditure Trends. Figure 1 shows that state expenditures for resources and environmental protection programs increased by about $1.7 billion since 1999-00, representing an average annual increase of about 7 percent. The increase between 1999-00 and 2006-07 mostly reflects an increase in special fund and bond expenditures. On the other hand, the budget proposes General Fund expenditures for 2006-07 at roughly the same level as 1999-00 spending-an increase of $250 million.

When adjusted for inflation, total state expenditures for resources and environmental protection programs increased at an average annual rate of about 3 percent. When adjusted for inflation, General Fund expenditures proposed for 2006-07 are actually lower than the 1999-00 level, reflecting an average annual decrease of about 1 percent. General Fund expenditures for resources and environmental protection programs peaked in 2000-01, declined from 2001-02 through 2004-05 due to the state’s weakened fiscal condition, but ticked up in 2005-06 and 2006-07.

Spending by Major Program

Cost Drivers for Resources Programs. For a number of resources departments, expenditure levels are driven mainly by the availability of bond funds for purposes of fulfilling their statutory missions. This would include departments whose main activity is the acquisition of land for restoration and conservation purposes as well as departments who administer grant and loan programs for various resources activities.

For other departments that rely heavily on fees, their expenditure levels are affected by the amount of fees collected.

Some resources departments own and operate public facilities, such as state parks and boating facilities. The number and nature of such facilities drive operations and maintenance expenditures for these departments.

In addition, the state’s resources programs include a number of regulatory programs. The cost drivers for these programs include the number and complexity of regulatory standards that are required to be enforced and the related composition of the regulatory universe.

Finally, some resources activities have a public safety purpose, and the cost drivers include emergency response costs that can vary substantially from year to year. These activities include CDFFP’s emergency fire suppression activities and the emergency flood response actions of DWR.

Cost Drivers for Environmental Protection Programs. A core activity of departments and boards under the California Environmental Protection Agency (Cal-EPA) is the administration of regulatory programs that implement federal and state environmental quality standards. These regulatory programs generally involve permitting, inspection, and enforcement activities. The main cost drivers for environmental protection programs are the number and complexity of environmental standards that are required to be enforced, which dictate the universe of parties regulated by the departments and therefore the regulatory workload.

In addition, a number of Cal-EPA departments administer grant and loan programs. The expenditure level for grant and loan programs, and the staffing requirements to implement them, are driven largely by the availability of bond funds or fee-based special funds to support them.

Budget’s Spending Proposals. Figure 2 shows spending for major resources programs-that is, those programs within the jurisdiction of the Secretary for Resources and the Resources Agency.

Figure 3 shows similar information for major environmental protection programs-those programs within the jurisdiction of the Secretary for Environmental Protection and Cal-EPA.

Spending for Resources Programs. Figure 2 shows the General Fund will provide the majority of CDFFP’s total expenditures, accounting for 56 percent ($591.3 million) of the department’s 2006-07 expenditures. The General Fund will account for less in the support of other resources departments. For instance, for the Department of Conservation, the General Fund will constitute less than 1 percent ($4.2 million) of its budget-year expenditures. In the case of DFG and DPR, the General Fund will pay about 17 percent ($53.6 million) and 27 percent ($112.8 million) of the respective departments’ expenditures. The DWR’s expenditure total is skewed by the over $5 billion budgeted under DWR for energy contracts entered into on behalf of investor-owned utilities (IOUs). If these energy-related expenditures are excluded from DWR’s total, the General Fund pays for about 17 percent ($247.3 million) of DWR’s expenditures.

Figure 2 also shows that compared to current-year expenditures, the budget proposes an overall spending reduction in many resources departments. Specifically, for the Secretary, DFG, and DPR, the reduction mostly reflects a reduction in available bond funds. Although not shown in the figure, entities affected by a decrease in available bond funds include other land acquisition agencies, which include the Wildlife Conservation Board and the state’s several land conservancies.

The budget’s proposed reduction in total spending in DWR (5 percent) largely reflects a $239 million reduction in expenditures from the Electric Power Fund, due mainly to decreased finance costs on energy contracts entered into on behalf of IOUs. This decrease reflects a refinancing at lower interest rates of the ratepayer-supported bonds that pay for these contracts.

Finally, the budget proposes a significant increase in expenditures for CDFFP in 2006-07. This reflects increases of $37 million (General Fund) for employee compensation and an increase of $121 million in capital outlay expenditures (funded mainly from lease-revenue bonds).

Spending for Environmental Protection Programs. As Figure 3 shows, the budget proposes relatively stable spending for most environmental protection programs. The one area with a significant proposed overall reduction is the State Water Resources Control Board, mostly reflecting a decrease in available bond funds for water projects. The reduction in spending in the Department of Toxic Substances Control (8.4 percent) largely reflects expenditure reductions (mainly achieved through operational efficiencies) to bring the Toxic Substances Control Account into balance and the elimination of one-time site cleanup expenses that occurred in the current year.

Major Budget Changes

Figure 4 presents the major budget changes in resources and environmental protection programs.

As shown in Figure 4, the budget proposes several General Fund and special fund increases throughout resources and environmental protection departments. Of particular note are various special fund increases in the Air Resources Board that are components of various environmental initiatives of the Governor. These include $6.5 million as matching funds for hydrogen fueling stations and fuel cell buses in public transit fleets under the Governor’s Hydrogen Highway Initiative; $5.2 million (special funds) to implement greenhouse gas reduction strategies under the Governor’s Climate Change Initiative (in addition to $2 million in other Cal-EPA and Resources Agency departments); and $4 million (special funds) for enforcement activities as part of the Governor’s Environmental Enforcement Initiative (in addition to $2.2 million in other Cal-EPA departments).

The budget also proposes two significant increases from the General Fund to bring two special fund accounts into balance-the fee-funded Fish and Game Preservation Fund in DFG ($10 million funding shift) and the Collins-Dugan Reimbursement Account in CCC ($8 million funding shift). Also of note are General Fund increases of $84.1 million for the lining of the All-American Canal and $35.7 million for levee maintenance and flood management in DWR, and $37 million for employee compensation in CDFFP.