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

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 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 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 $6.5 billion in 2006-07 (including capital outlay), a reduction of $340 million, or 5 percent below estimated expenditures in the current year. Most of this reduction reflects reduced interest costs from a refinancing of bonds which were originally issued to finance energy contracts entered into by CERS during the state’s energy crisis.

Major budget proposals include increases of $38.2 million (mostly General Fund) and 30 personnel-years for state operations of flood management and local assistance, as part of a three-year program initiated in the 2005-06 budget, and $84.1 million (General Fund) for the All-American Canal lining project.

The budget total includes $208 million for capital outlay projects, of which $122 million is for SWP (the costs of which are reimbursed from SWP contractors), $44.4 million (Proposition 13 and Proposition 50 bond funds) for CALFED water conveyance projects, and $41.3 million for flood control ($31.4 million comes from the General Fund and $9.9 million is from reimbursements).

Addressing the State’s Flood Management Problems

The budget proposes an increase of $38.2 million (mostly General Fund) in 2006-07 for flood management-related state operations and local assistance. The budget also proposes $31.4 million (General Fund) for flood control capital outlay. Due to the critical need to improve the Central Valley flood control system and for the state to be able to respond to flood events, we recommend that the Legislature approve the Governor’s proposal. However, we also identify several issues for legislative consideration as it evaluates solutions to the state’s flood management problems. These issues relate to the role of bond funding, the relationship between land use and flood control, “beneficiary pays” financing, and state oversight of Delta levees.

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 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.

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 1 illustrates the state’s historic funding on flood management activities. As can be seen, the level of funding available for flood management has varied considerably in recent years.

Unmet Funding Requirements Identified by Department. 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. Based on available, but limited, information, the department has made rough estimates of the costs to restore and upgrade the Central Valley flood control system. According to the department’s preliminary estimates, it would cost between $50 million and $100 million simply to complete a systemwide assessment of the structural integrity of the Central Valley flood control system. The department has also estimated that it will cost between $1 billion and $1.5 billion to restore Central Valley levees to their original design capacity; an additional $1 billion to $1.5 billion to upgrade flood control for urban areas; and an additional $2 billion to $4 billion to reconstruct the levee and channel system in order to provide improved flood protection, provide environmental restoration, and improve the state’s ability to maintain the system. In addition, DWR estimates that it could cost $3 billion to $5 billion to make critical Delta levee upgrades to protect the operation of SWP and the Central Valley Project.

Budget Proposal. The budget proposes increases of $7.6 million in one-time funds and $30.6 million in ongoing funds (mainly General Fund) for various flood management-related state operations and local assistance. Collectively, these increases make up the department’s “flood management plan.” The budget also includes $31.4 million (General Fund) for flood management-related capital outlay projects in the Central Valley. The major components of the flood management plan and capital outlay expenditures are summarized in Figure 2 and described below.

Details of the proposed increases for flood management are as follows:

• CALFED Levees System Integrity-$17.5 Million ($4.5 Million One Time). These augmentations would provide increased levee maintenance, levee improvements, and other flood control activities in the Delta, including drafting a Delta Risk Management Study required under current law.

• Flood Project Maintenance-$13.3 Million ($2 Million One Time). These augmentations are proposed to improve the department’s maintenance efforts in the Central Valley. Proposed activities include: maintenance of levees and channels, levee inspections, sediment removal, coordination with other state and federal agencies, erosion repair, and levee and flood channel capacity surveys.

• Floodplain Management-$3 Million. These augmentations are proposed to improve DWR’s ability to inform local governments about potential flood risks through increased floodplain mapping. The department will update existing Federal Emergency Management Flood Insurance Rate Maps and prepare maps for unmapped areas, in both cases, focused on areas of new or anticipated development. The DWR will also create an Awareness Floodplain Mapping Program, which will cover areas that are unmapped or unlikely to be mapped soon but which are expected to experience development in the next 25 years. In theory, these maps will assist local decision makers in planning for new development. Additionally, the department will participate in several ongoing programs which provide assistance to local governments for flood control projects and floodplain mapping activities.

• Emergency Response-$2.3 Million ($670,000 One Time). These augmentations are proposed to improve DWR’s ability to predict and respond to flood events. Under the proposal, the department will increase staff at its flood operations center, increase planning for flood events, restore and expand the network of sensors used to monitor river levels, and improve the collection and analysis of data used to predict floods.

• System Reevaluation and Rehabilitation-$2.1 Million ($450,000 One Time). These augmentations are proposed to increase DWR’s ability to identify deficiencies in the existing flood control system and begin the process of rehabilitating those deficiencies. The department will begin the process of assessing the structural integrity and capacity of the flood control system in the Central Valley and make repairs to a specified levee in Sacramento County.

• Additional Capital Outlay Projects-$31.4 Million. In addition to the state operations and local assistance funds in the flood management plan, there are several ongoing flood control capital outlay projects in the budget. These projects include the Sacramento River Bank Protection Project, the American River Flood Control Project (Natomas Features), the Folsom Dam Modifications Project, the American River (Common Features) Project, the American River Watershed, Folsom Dam Raise Project (Bridge Element), and the Upper Sacramento River Area Levee Restoration Project.

Recommend Approval of Budget Request. As we discussed in our 2005-06 Budget: Perspectives and Issues (P&I) (see page 217), the state faces a crisis in flood management. We recommend that the Legislature adopt the department’s proposed flood management plan as a prudent initial step to begin addressing the state’s obligation to provide adequate flood control.

Issues for Legislative Consideration. While we recommend approval of the department’s flood management budget proposal, we also think that there are a number of other issues that the Legislature should consider when evaluating this and other proposed solutions to state’s flood management problems. These include:

• Role of Bond Funding. The Governor’s ten-year Strategic Growth Plan includes $2.5 billion in new bond funds for flood management activities. These bond proposals are contained in AB 1839 (Laird), and SB 1166 (Aanestad), introduced this session. In addition, SB 1024 (Perata), provides an unspecified amount of funding for flood management projects. The Legislature should consider how the budget and bond proposals fit with one another and the appropriate mix of General Fund and bond funds in addressing the state’s flood management funding requirements. For example, DWR has identified a need of $50 million to $100 million to complete an evaluation of the existing flood control system. The budget proposal includes $1.6 million (General Fund) in ongoing funds for system evaluation and the Governor’s bond proposal includes funding for this purpose (though not a specified amount), as well as for actual repairs and infrastructure upgrades. It may be appropriate to begin funding this large-scale evaluation through General Fund appropriations today, so that the state could more quickly utilize any future bond funds for actual repairs and rehabilitation should they become available.

• Land Use and Flood Control. One of the key issues identified by DWR’s January 2005 white paper, Responding to California’s Flood Crisis, is the connection between development and flood risk. The department’s flood management plan includes increased funds for floodplain mapping, which should help to educate local land use decisionmakers about the flood risks of new development. However, this information will still be advisory for local governments. In our 2005-06 P&I (see page 231), we proposed that the Legislature consider improving the connection between land use planning and flood risk. First, we recommended that the Legislature tie flood control subvention funding to flood risk, so that local agencies that approve risky development would be ineligible for flood control subventions funding. Second, we recommended that the Legislature consider enacting a floodplain development fee, which could be used to fund increased flood control measures necessary to protect new development in flood-prone areas. Additionally, the state could require that local agencies make a determination that new development has an adequate level of flood control, as they must currently do for water supply. This last recommendation has been included in AB 1899 (Wolk), introduced this session.

• Central Valley Flood Control Benefit Assessment. In our 2005-06 P&I (see page 230), we also recommended that the Legislature establish a Central Valley systemwide assessment, so that the beneficiaries of the state’s flood management efforts in the Central Valley pay for a portion of the state’s costs. The Governor’s Strategic Growth Plan references support for the concept of a funding contribution from beneficiaries of the Central Valley flood control system to help pay a portion of the infrastructure-related costs. However, the Governor did not propose a specific mechanism to accomplish this. We think that the Legislature should consider the role for benefit assessments when evaluating flood management bond and budget proposals.

• Increased State Oversight of Delta Levees. In our 2005-06 P&I (see page 230), we recommended that the Legislature reconsider its role with regard to Delta levees. As noted above, the state has no direct oversight of the operations and maintenance for most of these levees. While the budget proposal includes $13 million in ongoing funds for CALFED (Delta) levee system integrity, the proposal does not increase the state’s level of oversight over these critical levees. The Legislature may wish to consider increasing its oversight role over the operations and maintenance of the Delta levees as a cost-effective measure to reduce the state’s risk of incurring significant emergency response and repair costs when these levees fail.

Due to the critical need to improve the Central Valley flood control system, we recommend that the Legislature approve the Governor’s budget proposal. However, we believe the Legislature should also consider the role of bond funding, the relationship between land use and flood control, “beneficiary pays” financing, and state oversight of Delta levees in the broader context of evaluating proposed solutions to address the state’s flood management problems.