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

Resources Bonds

The state uses a number of bond funds to support the departments, conservancies, boards, and programs under the Resources and California Environmental Protection Agencies that regulate and manage the state’s natural resources. Of the $4.6 billion in state-funded expenditures for resources and environmental protection programs proposed for 2006-07, about $500 million (10 percent) is proposed to come from bond funds. This amount is about $1.7 billion less than estimated bond expenditures in the current year, reflecting a decrease in available bond funds. Although not reflected in the Governor‘s budget expenditure proposal, the Governor has proposed a number of new resources-related bonds as part of his ten-year Strategic Growth Plan. In the sections that follow, we provide a status report on the fund condition of various existing resources bond funds, describe the Governor’s proposal for new bonds, and discuss issues for legislative consideration as the Legislature evaluates proposals for new bonds.

Resources Bond Fund Conditions

The budget proposes expenditures in 2006-07 of $496 million from the five resources bonds approved by the voters since 1996. The proposed expenditures would leave a balance of about $950 million for new projects beyond the budget year. Essentially all bond funds for park projects have been appropriated, with the funds remaining being mainly for water projects, land acquisition and restoration, and the CALFED Bay-Delta Program.

As Figure 1 shows, the budget proposes expenditures totaling $496 million in 2006-07 from five resources bonds approved by the voters between 1996 and 2002. These bonds include Proposition 204 approved in 1996, Propositions 12 and 13 approved in 2000, and Propositions 40 and 50 approved in 2002. While Propositions 204 and 13 are generally referred to as water bonds, and Proposition 12 as a park bond, Propositions 40 and 50 are more accurately described as resources bonds, since they provide funding for a mix of water, park, and land acquisition and restoration purposes.

As shown in Figure 1, most of the bond funds from Propositions 12 and 40 will have been appropriated at the end of the budget year. The budget projects a balance remaining of about $950 million from the five bonds for new projects beyond the budget year.

Figure 2 shows proposed expenditures and remaining fund balances in the five resources bonds, broken down by broad program category. We discuss each of these program categories in further detail below.

Parks and Recreation. Propositions 12 and 40 together allocated about $2.3 billion for state and local park projects and for historical and cultural resources preservation. The budget proposes expenditures of $23 million for these purposes in 2006-07, essentially leaving no balance for new projects.

Water Quality. Propositions 204, 13, 40, and 50 together allocated about $2 billion for various water quality purposes. These include funding for wastewater treatment, watershed protection, clean beaches, and safe drinking water infrastructure upgrades. The budget proposes expenditures of $136 million for these purposes in 2006-07, with a balance of $205 million remaining for new projects.

Water Management. Propositions 204, 13, and 50 together allocated about $1.7 billion for various water management purposes, including water supply, flood control, desalination, water recycling, water conservation, and water system security. The budget proposes expenditures of $71 million for these purposes in 2006-07 leaving a balance of $313 million remaining for new projects.

Land Acquisition and Restoration. Propositions 204, 12, 40, and 50 together allocated about $3.2 billion for a broad array of land acquisition and restoration projects. These allocations include funding to the several state conservancies and the Wildlife Conservation Board, as well as for ecosystem restoration, agricultural land preservation, urban forestry, and river parkway programs. The budget proposes expenditures of $138 million for these purposes in the budget year, with a balance of $88 million remaining for new projects.

CALFED Bay-Delta Program. The CALFED Bay-Delta Program is a consortium of over 20 state and federal agencies that was created to address a number of interrelated water problems in the state’s Bay-Delta region. These problems relate to water quality, water supply, fish and wildlife habitat, and flood protection. Although each of the five bond measures allocated funds that were used for purposes that are consistent with the CALFED Bay-Delta Program’s objectives and work plan, only Propositions 204, 13, and 50 allocated funds explicitly for this program. From these specific allocations, the budget proposes expenditures of $128 million in 2006-07, leaving a balance of $345 million.

Air Quality. Finally, Proposition 40 allocated $50 million for grants to reduce air emissions from diesel-fueled equipment operating within state and local parks. This allocation has been depleted.

Over $9 Billion in New Resources-Related Bonds Proposed

As part of his Strategic Growth Plan, the Governor proposes new bonds, to be placed before the voters in 2006 and 2010, that would provide a total of $9.4 billion for various resources-related purposes. Of this total, $9 billion is for flood protection and water management projects and programs that would be funded in two proposed water bond measures. The balance of resources bond funds is contained in other bond measures, including $216 billion for state park improvements and $215 million for the repair or replacement of emergency response facilities of the California Department of Forestry and Fire Protection.

Proposed New Resources Bonds. As part of his ten-year Strategic Growth Plan, the Governor proposes two bond measures (to be placed before the voters in 2006 and 2010, respectively), from which all of the funds would be used for resources purposes. These bond measures- totaling $9 billion-would be used to fund a variety of flood protection and water management projects and programs. Assembly Bill 1839 (Laird) and SB 1166 (Aanestad) contain these bond measures. The allocation of the $9 billion among projects and programs to be funded by these measures is summarized in Figure 3.

Resources-Related Components of Other Proposed Bonds. In addition to the $9 billion of resources bonds discussed above, the Governor proposes other new bonds, components of which would be for resources-related purposes. These components include:

• State Park Capital Improvements-$216 Million. As part of the Governor’s proposed 2006 critical infrastructure facility (including courts) bond, $216 million is for state park capital improvements, including improvements to sewage systems and other water quality infrastructure. Assembly Bill 1831 (Jones) and SB 1163 (Ackerman) contain this bond.

• Firefighting Emergency Response Facility Improvements-$215 Million. As part of the Governor’s proposed 2006 public safety bond, $215 million is for the replacement or relocation of facilities that support the emergency fire response activities of the California Department of Forestry and Fire Protection. Assembly Bill 1833 (Arambula) contains this bond.

Bond Issues for Legislative Consideration

We discuss below issues for legislative consideration when evaluating the Governor’s, as well as other, proposals for new resources bonds.

Retaining Legislative Oversight of Bond Expenditures

The Legislature’s oversight of bond expenditures is substantially weakened if bond funds are “continuously appropriated” and thus outside of the budget process. Unless there is a well-justified programmatic reason for doing so, we recommend that the expenditure of bond funds be subject to legislative appropriation in the annual budget act.

Continuous Appropriations Versus Budget Act Appropriations. When bond funds are continuously appropriated, the Legislature loses much of its ability to oversee bond fund expenditures, as this oversight is generally exercised in its review and approval of the annual budget. Without its oversight role in the budget process, it becomes difficult for the Legislature to ensure that the bond funds are proposed to be spent consistent with both the bond measure and legislative priorities.

As a general rule, we recommend that bond funds be appropriated by the Legislature in order to retain effective legislative oversight over bond expenditures. However, in a limited set of circumstances, a continuous appropriations authority may be appropriate. These circumstances would include cases where the bond measure itself is relatively specific as to how bond funds are to be spent, such that little policy discretion is left to the administering agency.

We note that the Governor’s flood protection and water management bond measures, as initially proposed, include a large amount of bond funds that are subject to continuous appropriations. Of particular concern is that most of the continuous appropriations authority is provided to new programs for which funding eligibility guidelines and administrative processes will need to be put in place and major policy decisions would be made solely by the administration. These are the very circumstances in which it would be important for the Legislature to retain its oversight of bond expenditures in the budget process.

Funding Eligibility of Private Entities

The question of whether private entities should be eligible to receive bond funds raises several legal, tax, and policy issues for legislative consideration. We recommend that the Legislature explicitly declare its policy position on this matter in any future resources bond measure.

Past Bond Measures Vary on Funding Eligibility of Private Entities, and Are Sometimes Silent. Most prior resources bond measures have explicitly restricted grant and loan funds to public agencies and nonprofit organizations. A notable exception to this is the Proposition 50 resources bond, approved by the voters in 2002, that is in most cases silent on the issue of public versus private eligibility. Rather, that measure typically provides funds for “water systems” or “water projects,” without making a distinction between public and private ownership. In contrast, the Governor’s proposed bonds explicitly provide that private investor-owned utilities and incorporated mutual water companies are eligible to receive water management grant funding from the bonds.

Legal, Tax, and Policy Issues. As we discussed in a prior report, the issue of whether private entities are eligible to receive bond funds raises several legal, tax, and policy issues. (Please see our report, Proposition 50 Resources Bond: Funding Eligibility of Private Water Companies [May 2004]). As we discuss in our report, the legal and tax-related issues appear not to present significant barriers to allowing the allocation of grant and loan funds to private companies, provided a bond measure does not explicitly preclude such eligibility. Accordingly, the major issue for legislative consideration is a policy one. In addressing this issue in the context of a proposed bond measure, we think that the Legislature should ask whether excluding private companies from funding eligibility furthers or constrains the intended public purpose of the bond measure. For example, one of the stated public purposes of the Governor’s proposed water bonds is to provide a safe and clean water supply to meet the needs of all of the state’s residents and businesses. To this end, the bonds allocate funds for safe drinking water infrastructure upgrades. Since roughly one-quarter of Californians receive their water from privately owned water systems, the inclusion of private companies as eligible recipients of the bond funds for safe drinking water (as proposed by the Governor) would further one of the public purposes of the bonds. At the same time, however, it would provide a public subsidy to a private enterprise, which earns profits from its business activities. We note, however, that the California Public Utilities Commission has established rules that would prevent the benefit of state funded grants to private companies from being passed on to company shareholders in the form of higher profits.

Legislature Should Declare Its Policy Position. We think that there is a benefit from having a state policy on the issue of allocating bond funds to private companies and that this policy should be guided by legislative direction. Accordingly, we recommend that the Legislature evaluate this policy and explicitly declare its position on the matter in any future bond measure.

Ensuring Administrative Costs Are Reasonable

The Legislature can taken action to ensure administrative costs to implement bond programs are kept to a reasonable level by providing parameters for administrative costs in the bond measure.

Use of Bond Funds for Program Administrative Costs. Generally, program administrative costs related to bond-funded programs are for general administrative purposes, such as accounting and processing grant applications. These costs include staff salaries, benefits, equipment, and other operating expenses. To the extent that various administrative costs are charged to bond proceeds, there will be less bond funding available for specific projects and programs.

When prior bond measures have addressed the issue of administrative costs, it has generally been in the context of grant programs and property acquisitions. In such cases, the bond measure places a cap on administrative costs, typically 5 percent of the appropriation for grant programs or the purchase price of individual property acquisition projects. However, the most recent resources bonds-Propositions 40 and 50-do not provide any parameters for administrative costs beyond providing that they must be paid from the bond proceeds. Similarly, the Governor’s flood protection and water management bonds, as proposed, do not provide any limits on bond-funded administrative costs.

Recommend Legislative Definition and Oversight of Administrative Costs Charged to Bonds. Given the potentially substantial impact of program administrative costs on the amount of bond funds available for projects, we think it is important that the Legislature exercise effective oversight of these costs. In order to do this, we recommend that any future bond measure provide a reasonable limit on, and definition of, administrative costs funded from bond proceeds. As recommended in our report, Enhancing Implementation and Oversight: Proposition 40 Resources Bond (May 7, 2002), we think that a cap of up to 5 percent of appropriations for grant programs is reasonable.

Coordinating Bond Measures With Existing Programs

In the interest of program effectiveness and efficiency, funding allocated under bond measures should be coordinated with existing programs to the extent possible.

Need to Fit Bond Programs Within Existing Programs With Similar Purposes. Finally, we think that it is important that in cases where a bond measure allocates funds for a programmatic purpose that is being already carried out by another existing program, the bond measure should explicitly address how the programs will be consolidated or at least coordinated. To the extent that a bond program can fit within an existing program that has already paid its “start-up costs,” as opposed to creating a brand new administrative infrastructure to spend the bond proceeds, there are opportunities for efficiencies. Additionally, if the bond measure does not address this issue, programs with similar goals could find themselves working at cross purposes, thereby impeding program effectiveness.

In analyzing the Governor’s bond proposals, we found a number of cases where it was unclear how programs funded by the bonds fit within existing programs with similar purposes. As one example, the Governor’s proposed flood protection and water management bond provides substantial funding to the Department of Water Resources (DWR) for the purpose of ecosystem restoration. Not only is ecosystem restoration mainly the responsibility of other departments (most notably, the Department of Fish and Game), there is no mention in the bond proposal of how the bond expenditures for this purpose would be coordinated with those of other departments. If the Legislature decides to provide funding for ecosystem restoration, we would recommend deleting the funding allocation to DWR and instead providing it to the appropriate department(s) responsible for this program area.