The 2014-15 Budget: Resources and Environmental Protection

The 2014-15 Budget: Resources and Environmental Protection MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2014 2014-15 BUDGET CONTENTS Executive Summary ...............................................................................................................................3 Overview of Governor’s Budget ..........................................................................................................5 Crosscutting Issues ................................................................................................................................8 Hydraulic Fracturing and Other Well Stimulation—Implementation of SB 4 ...............................................8 Deferred Maintenance ...................................................................................................................................................11 Water Action Plan ............................................................................................................................................................15 State Water Resources Control Board ................................................................................................23 Transfer of Drinking Water Program..........................................................................................................................23 Department of Water Resources ........................................................................................................29 Integrated Regional Water Management................................................................................................................29 Water and Energy Efficiency ........................................................................................................................................30 CalRecycle ............................................................................................................................................31 Beverage Container Recycling Fund Operating Deficit .....................................................................................31 CalFire ...................................................................................................................................................38 SRA Protection Adjustment .........................................................................................................................................39 Illegal Fireworks Management and Disposal .........................................................................................................41 Air Resources Board ............................................................................................................................44 Cap-and-Trade Market Surveillance .........................................................................................................................44 California Alternative Energy and Advanced Transportation Financing Authority .......................46 Energy Efficiency Financing Pilot Program and PACE Loss Reserve .............................................................46 Department of Fish and Wildlife ........................................................................................................48 Oil Spill Prevention and Response Fee Increase ...................................................................................................48 Department of Toxic Substances Control .........................................................................................50 Proposals to Reduce Backlogs and Improve Hazardous Waste Tracking ....................................................50 Summary of Recommendations .........................................................................................................53 Cover Photo: “Tuolumne Meadows Sunset” courtesy of Steve Dunleavy. http://commons.wikimedia.org/wiki/File:Tuolumne_Meadows_Sunset.jpg 2 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET EXECUTIVE SUMMARY In this report, we assess many of the Governor’s budget proposals in the resources and environmental protection area and recommend various changes. We provide a complete listing of our recommendations at the end of the report. Total Expenditures Down by 16 Percent—Due to Drop in Bond Spending. The Governor’s budget proposes a total of $8.3 billion in expenditures from the General Fund, special funds, bond funds, and federal funds for resources and environmental protection programs in 2014-15. The proposed budget includes $3.8 billion for the Department of Water Resources (DWR), $1.5 billion for the Department of Resources Recycling and Recovery (CalRecycle), and $1.4 billion for the Department of Forestry and Fire Protection (CalFire), as well as funding for many other departments. This proposed level of funding is a decrease of $1.6 billion, or 16 percent, below estimated expenditures for the current year, almost entirely from lower bond funds. Budget Includes Several Major Policy Proposals. The budget includes a cap-and-trade expenditure plan from the administration—totaling $850 million in 2014-15. (We discuss this proposal in more detail in our report The 2014-15 Budget: Cap-and-Trade Auction Revenue Expenditure Plan.) The administration also proposes $621 million from various fund sources to implement the first phase of its recently released Water Action Plan (WAP). This plan identifies a series of actions the administration believes the state should take over the next five years to address a range of water-related challenges, such as reduced water supply and poor water quality. For example, one WAP activity proposed in the Governor’s budget is the transfer of the state’s drinking water oversight program from the Department of Public Health (DPH) to the State Water Resources Control Board (SWRCB). Another important issue addressed in the Governor’s budget is the roughly $100 million annual structural deficit in the Beverage Container Recycling Fund (BCRF). The administration proposes to reduce or eliminate several programs currently funded by the BCRF in order to bring the fund into balance. We find that these proposals are generally reasonable approaches to addressing significant policy challenges. We also identify trade-offs in the administration’s approach and offer recommendations to allow the Legislature to ensure that proposals are consistent with its priorities. Opportunities for Legislative Oversight. The Governor’s proposed budget raises several issues that we believe merit greater legislative oversight. For example, the budget includes one-time funding of $43 million from the General Fund to address deferred maintenance at the Department of Parks and Recreation (DPR) and CalFire facilities. We find that while it makes fiscal sense to address deferred maintenance, there is uncertainty about what factors have contributed to the large amount of deferred maintenance in these departments, as well as how the state can best address maintenance needs on an ongoing basis. Similarly, the budget includes a total of $4.6 million for the Department of Toxic Substances Control (DTSC) to implement changes designed to address several operational problems, including backlogs in updating hazardous waste permits. We find that the funding requested will not be sufficient to fix all of the issues identified on an ongoing basis. This finding raises questions about how the department will manage these problems in out years. www.lao.ca.gov Legislative Analyst’s Office 3 2014-15 BUDGET 4 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET OVERVIEW OF GOVERNOR’S BUDGET Governor’s Budget Proposal and Game Preservation Fund, and cap-and-trade auction revenues. Total Spending Down by 16 Percent. The General Fund Spending Grows Slowly. Governor’s budget for 2014-15 proposes a total of The Governor’s budget includes $2.2 billion in $8.3 billion in expenditures from various fund expenditures from the General Fund (27 percent sources—the General Fund, various special funds, of total expenditures) in 2014-15 for resources and bond funds, and federal funds—for programs environmental protection programs. This is a net administered by the Natural Resources and increase of $54 million, or 2 percent, from 2013-14, Environmental Protection Agencies. This level reflecting both General Fund spending increases is a decrease of $1.6 billion, or 16 percent, below and decreases. The largest General Fund proposal in estimated expenditures for the current year. these programs is a proposed $14 million increase The proposed reduction in spending is related Graphic Sign Off for CalFire to increase fire protection services in to bond funds. Specifically, the budget proposes bond expenditures totaling about $1.4 billion Lake Tahoe, San Bernardino, and Riverside. Secretary Overall Expenditure Trends. Figure 1 shows in 2014-15—a decrease of $1.9 billion, or about Analyst total expenditures for resources and environmental 58 percent, below estimated bond expenditures in MPA protection programs from all funding sources the current year. Deputy since 2005-06. As indicated in the figure, total Multiple Funding Sources; Special Funds spending generally has grown steadily between Predominate. The largest amount of state funding 2005-06 and 2013-14, averaging roughly a 9 percent for resources and environmental protection programs in the budget year—about $4 billion Figure 1 (or 49 percent)—would Resources and Environmental Protection Expenditures come from various special (In Billions) funds. This reflects an increase of $142 million, or $12 Federal Funds 4 percent, when compared Bond Funds 10 to estimated special fund General Fund expenditures in the current Special Funds 8 year. The primary special funds that support resources 6 and environmental protection programs include 4 funds generated by beverage container recycling deposits 2 and fees, an “insurance fund” for the cleanup 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 of leaking underground (Proposed) storage tanks, the Fish www.AlaRo.TcaW.gOovR K L e#g1is4la0t0iv5e6 Analyst’s Office 5 Template_LAOReport_mid.ait 2014-15 BUDGET annual increase. The increase is mainly due to jurisdiction of the Natural Resources Agency. the availability of a greater amount of special As the figure shows, total spending proposed for fund revenues. The availability of bond funds also most resources programs is generally down in resulted in spikes in spending in certain fiscal 2014-15, resulting from a reduction in bond fund years, such as in 2007-08 and 2013-14. As indicated expenditures. For example, the budget proposes above, the proposed reduction in total expenditures a reduction of $1.3 billion, or 63 percent, in bond in 2014-15 primarily reflects a lower-than-expected spending for DWR. level of bond expenditures. Despite an overall decline in proposed bond spending for resources programs, the budget Spending by Major Resources Programs includes the appropriation of new bond funds Figure 2 shows spending by selected fund in 2014-15 for both existing and new programs. sources for the state’s major resources programs For example, the budget proposes to spend and departments—that is, programs within the $473 million in bond funds from Proposition 84 Figure 2 Major Resources Budget Summary—Selected Funding Sources (Dollars in Millions) Change From 2013-14 Actual Estimated Proposed Department 2012-13 2013-14 2014-15 Amount Percent Water Resources General Fund $91.6 $100.2 $100.9 $0.7 0.7% State Water Project funds 1,180.8 1,558.9 1,896.6 337.6 21.7 Bond funds 361.5 2,015.8 744.4 -1,271.4 -63.1 Electric Power Fund 937.8 988.6 956.4 -32.2 -3.3 Other funds 50.9 127.8 94.9 -32.9 -25.7 Totals $2,622.5 $4,791.3 $3,793.2 -$998.1 -20.8% Forestry and Fire Protection General Fund $859.2 $721.9 $777.6 $55.8 7.7% Other funds 469.0 538.5 663.0 124.5 23.1 Totals $1,328.2 $1,260.3 $1,440.6 $180.3 14.3% Parks and Recreation General Fund $110.3 $117.6 $115.9 -$1.7 -1.4% Parks and Recreation Fund 117.1 141.5 169.7 28.3 20.0 Bond funds 179.1 146.3 89.9 -56.4 -38.6 Other funds 157.7 312.6 279.2 -33.4 -10.7 Totals $564.3 $718.1 $654.8 -$63.2 -8.8% Fish and Wildlife General Fund $61.1 $63.5 $63.6 $0.1 0.1% Fish and Game Fund 92.3 115.8 113.3 -2.6 -2.2 Bond funds 27.1 91.9 16.6 -75.3 -81.9 Other funds 154.5 184.6 210.5 25.8 14.0 Totals $335.0 $455.9 $404.0 -$52.0 -11.4% Conservation General Fund $3.6 $3.0 $3.0 — 0.1% Bond funds 25.3 48.6 2.4 -$46.2 -95.0 Other funds 57.4 73.2 88.1 14.9 20.4 Totals $86.3 $124.8 $93.5 -$31.3 -25.1% 6 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET for grants to local agencies for multibenefit water as $50 million from cap-and-trade auction revenues projects through the Integrated Regional Water to implement several programs designed to reduce Management (IRWM) program. The budget greenhouse gas (GHG) emission levels. also proposes $77 million in bond funds from Spending by Major Propositions 1E and 84 for flood control projects, Environmental Protection Programs planning, and emergency response activities. The only major resources department with an increase Similar to Figure 2, Figure 3 shows spending in total funding proposed in the Governor’s and fund source information for the major budget is CalFire, which is proposed to receive an environmental protection programs—those within increase of $180 million, 14 percent, over estimated the jurisdiction of the California Environmental current-year expenditures. This includes a Protection Agency (CalEPA). The proposed $14 million General Fund increase to expand its fire budget for CalRecycle includes a $31 million protection service area as described above, as well reduction in the BCRF from a proposal to Figure 3 Major Environmental Protection Budget Summary—Selected Funding Sources (Dollars in Millions) Change From 2013-14 Actual Estimated Proposed Department 2012-13 2013-14 2014-15 Amount Percent Resources Recycling and Recovery Beverage container recycling funds $1,216.3 $1,193.5 $1,143.2 -$50.2 -4.2% Other funds 244.2 282.8 328.5 45.7 16.1 Totals $1,460.5 $1,476.3 $1,471.8 -$4.6 -0.3% State Water Resources Control Board General Fund $14.5 $15.0 $22.6 $7.6 50.9% Underground Tank Cleanup 233.9 281.5 233.2 -48.3 -17.2 Waste Discharge Fund 100.5 109.9 116.0 6.1 5.6 Bond funds 33.1 144.6 187.1 42.5 29.4 Other funds 71.2 231.6 453.7 222.0 95.8 Totals $453.2 $782.7 $1,012.7 $230.0 29.4% Air Resources Board Motor Vehicle Account $113.7 $121.5 $128.1 $6.6 5.4% Air Pollution Control Fund 140.0 125.7 114.4 -11.3 -9.0 Greenhouse Gas Reduction Fund — 31.3 204.7 173.3 553.5 Bond funds 19.0 135.9 240.0 104.1 76.6 Other funds 69.9 137.8 114.1 -23.7 -17.2 Totals $342.7 $552.2 $801.3 $249.1 45.1% Toxic Substances Control General Fund $21.4 $21.8 $21.2 -$0.6 -2.6% Hazardous Waste Control 44.7 52.1 55.7 3.6 7.0 Toxic Substances Control 43.6 43.7 44.1 0.3 0.8 Other funds 93.0 86.1 74.4 -11.7 -13.6 Totals $202.7 $203.6 $195.3 -$8.3 -4.1% Pesticide Regulation Pesticide Regulation Fund $71.8 $79.3 $80.2 $0.9 1.2% Other funds 6.6 3.1 3.1 — 0.3 Totals $78.4 $82.4 $83.3 $0.9 1.2% www.lao.ca.gov Legislative Analyst’s Office 7 2014-15 BUDGET implement various financial reforms designed to Board (ARB) includes (1) about $200 million from fix an ongoing structural deficit in the fund. The cap-and-trade revenues (GHG Reduction Fund) to budget also proposes to transfer responsibility for expand incentive programs designed to promote administering the state’s drinking water regulation clean transportation, and (2) a $240 million program from DPH to the SWRCB and shifts reappropriation of Proposition 1B funds to support $202 million (primarily in federal and various local agencies’ efforts to reduce emissions from special funds) to the board for these activities. The goods movement sources, such as diesel trucks, proposed 2014-15 budget for the Air Resources trains, and ships. CROSSCUTTING ISSUES Hydraulic Fracturing and these processes. The legislation also states that Other Well Stimulation— workload associated with its implementation Implementation of SB 4 can be funded by the Oil, Gas, and Geothermal Administrative Fund (OGGAF). The OGGAF is Background funded through a fee administered by the Division of Oil, Gas, and Geothermal Resources (DOGGR) Hydraulic fracturing and acid matrix within the Department of Conservation. The stimulation are two types of well stimulation fee is designed to recover the division’s costs to techniques used to increase the production of oil regulate oil and gas extraction in the state. The and gas. Typically, hydraulic fracturing relies on fee is currently assessed at $0.14 per barrel of injecting a mixture of high-pressure water, sand, oil produced or 10,000 cubic feet of natural gas and chemicals deep into underground geologic produced in the state. formations. Acid matrix stimulation utilizes the Among its regulatory requirements, SB 4 injection of one or more acid mixtures into an requires DOGGR to adopt rules and regulations underground geologic formation. Of the roughly by January 2015 regarding the construction of 42,000 active wells in California, it is estimated wells and well casings, as well as the disclosure of that on average between 1,000 and 2,000 wells will the composition and disposal of well stimulation likely undergo one or more of these types of well fluids. As part of the regulations, DOGGR must stimulation activities each year. require well operators to apply for a permit prior Chapter 313, Statutes of 2013 (SB 4, Pavley), to performing well stimulation activities, which commonly referred to as SB 4, requires the must be posted on a publicly accessible portion regulation of oil and gas well stimulation of DOGGR’s website. The regulations must also treatments such as hydraulic fracturing. The include provisions for random inspections by legislation requires, among other things, the DOGGR during well stimulation activities. In development of regulations (which we discuss addition, SB 4 requires DOGGR to provide a in more detail below), a permitting process, and progress report to the Legislature by April 1, 2014. public notification and disclosure of wells that Senate Bill 4 also requires that groundwater will undergo hydraulic fracturing and acid matrix monitoring be performed in areas that have stimulation and the types of chemicals used for well stimulation activity, in order to detect if 8 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET groundwater is contaminated. Specifically, the such as monitoring compliance with state legislation requires SWRCB to (1) provide guidance regulations at extraction sites. to DOGGR on the development of regulations • SWRCB. The budget requests $6.2 million for wells where groundwater could be affected, and 14 positions in 2014-15 for SWRCB (2) develop criteria specifying requirements to develop the groundwater monitoring for groundwater monitoring in areas with well criteria and plan, as well as to evaluate stimulation activities and a plan for monitoring compliance by well owners and operators groundwater based on those criteria by July 1, 2015, who develop their own groundwater and (3) begin monitoring groundwater by January monitoring plans. It also includes funding 1, 2016. Senate Bill 4 also requires well owners for contracts to perform groundwater and operators to develop groundwater monitoring monitoring. The request for SWRCB would plans if they are in an area which is not monitored increase to $9.4 million in 2015-16, which is by SWRCB. In addition, SB 4 requires DOGGR primarily due to additional costs related to to enter into formal agreements with multiple groundwater monitoring contracts. departments (including the ARB and DTSC), in order to delineate roles and responsibilities related • ARB. The Governor’s budget requests to its implementation. six positions and $1.3 million for ARB to develop regulations to control and mitigate Governor’s Budget GHG emissions, “criteria pollutants,” and The Governor’s budget includes proposals toxic air contaminants resulting from well in three departments for workload related to the stimulation. regulation of hydraulic and acid matrix fracturing. The Governor also proposes budget trailer In total, the administration requests $20.5 million legislation to address what the administration from the OGGAF and 85 positions in 2014-15. describes as an inconsistency in SB 4 related to Of this total, $19.9 million and 80 positions are groundwater monitoring. Specifically, sections proposed to be ongoing. The Governor’s budget of SB 4 varied in whether it required SWRCB to reflects an increase of $23 million in OGGAF “review” or “approve” groundwater monitoring revenue based on an assumed increase in the plans developed by well owners and operators. regulatory fee administered by DOGGR to pay for The proposed legislation would specifically these additional costs. At the time of this analysis, require SWRCB to review—rather than approve— it is uncertain how such a fee increase will be monitoring plans. According to the administration, assessed. Specifically, the administration proposes this change is necessary in order to clarify adjustments for the following departments. DOGGR’s role as the lead state agency responsible • DOGGR. The Governor’s budget requests for preparing environmental impact reports. 60 permanent positions, 5 limited-term Finally, the administration states that it may also positions, and $13 million in 2014-15 propose budget trailer legislation to clarify how the ($9.2 million ongoing) for DOGGR to fee increase will be assessed in order to generate the regulate well stimulation techniques. The additional revenue reflected in the proposed budget bulk of these positions would be used for to fund the requested proposals. engineering and geological workload, www.lao.ca.gov Legislative Analyst’s Office 9 2014-15 BUDGET LAO Assessment Third, SWRCB’s groundwater monitoring and other activities will vary based on a variety The Governor’s proposals raise several issues of factors, such as how many wells are stimulated, for legislative consideration. First, as indicated where the stimulated wells are located, and above, while SB 4 states that monies from the whether well operators/owners perform monitoring OGGAF can be used for costs associated with the themselves. These factors will depend on the implementation of the bill, the administration criteria and monitoring plan developed by SWRCB. has not yet determined how the fee increase will Thus, while SWRCB will almost certainly have be assessed. The administration is currently workload associated with monitoring and ensuring considering two options, either (1) increasing the compliance by well owners and operators in per barrel fee on all production in the state, or 2015-16, the extent of that workload is unknown (2) assessing a fee increase just on those wells that until the criteria and monitoring plan are undergo well stimulation. This is a policy choice developed. Thus, the number of positions needed on which SB 4 was silent, and there are trade-offs to complete that workload in 2015-16 is currently with each option. On the one hand, assessing the unknown. fee on all in-state production would spread the Fourth, while we agree with the costs over many more parties, thus reducing the administration’s contention that current law fee burden associated with regulating any single regarding SWRCB’s role in reviewing or approving well. However, this would mean charging some monitoring plans is somewhat inconsistent, the oil producers for the costs associated with the proposed trailer bill language is a policy change regulation of an activity in which they are not that would affect which agency is responsible for engaged. On the other hand, if the fee increase approving groundwater plans, as well as who is the were levied solely on those entities that are using lead agency for preparing environmental impact well stimulation, it would be more expensive for reports. Therefore, the Legislature will want to those producers. Based on the cost proposals from make sure the proposal reflects its intentions for the administration, we estimate that if the fee were how groundwater monitoring is carried out. only charged to those entities performing well Finally, the administration’s proposal to stimulation each year, the average cost would be provide ARB with positions and contract funding around $10,000 to $20,000 per well, though the to develop regulations to control and mitigate exact amount paid by any individual driller or GHG emissions, criteria pollutants, and toxic air operator might vary depending on the number of contaminants related to well stimulation raises wells which undergo well stimulation. questions regarding legislative intent and workload Second, it appears that the SWRCB request justification. Senate Bill 4 only requires monitoring for contract funding in 2014-15 is premature. of air quality in areas where well stimulation As indicated above, SWRCB is not required to occurs. The legislation does not explicitly direct complete the development of its criteria and ARB or any other agency to develop regulations monitoring plan until July 1, 2015. In addition, to control or mitigate emissions resulting from SWRCB cannot begin monitoring groundwater well stimulation. Thus, it is unclear if the proposed until the criteria and plan are developed. Thus, funding and positions for ARB are consistent with funding for groundwater monitoring is not needed the intent of SB 4. We also note that, under state until 2015-16. and federal authority, local air districts currently 10 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET regulate emissions from wells. In fact, it appears SB 4. The Legislature may want to approve that some air districts are already monitoring legislation to clarify its intent in some of emissions that occur with well stimulation, these cases. In addition, if the Legislature potentially resulting in some duplication of effort decides that ARB’s role should be more between ARB and local boards. In addition, it is limited than is proposed, we recommend unclear why the Governor’s budget is proposing to ARB’s proposal be reduced or rejected to provide ARB with ongoing resources for activities reflect that role. that primarily constitute one-time workload in • Reduce SWRCB Request. We recommend developing regulations. that the Legislature deny the request to LAO Recommendations fund groundwater monitoring contracts ($3.5 million in 2014-15 and $7 million With regards to the administration’s hydraulic in 2015-16) and direct SWRCB to request fracturing request, we recommend that the funding in the 2015-16 budget once Legislature: its criteria and monitoring plan are • Approve DOGGR Request. The Governor’s complete. In addition, we recommend request for additional positions for that the Legislature approve SWRCB’s DOGGR to implement SB 4 is justified on request for 14 positions on a two-year a workload basis. We therefore recommend limited-term basis. This would allow that the Legislature approve 60 permanent SWRCB and the Legislature to reevaluate positions, 5 limited-term positions, and the need for positions depending on actual $13 million in 2014-15 ($9.2 million workload data following the first year ongoing) to regulate well stimulation of implementation of the groundwater techniques. monitoring plans and other activities. • Ensure Proposals Are Consistent With Deferred Maintenance Legislative Intent. As described above, certain aspects of SB 4 are unclear. The Background Legislature will want to review these budget proposals to determine whether Many state departments own and operate their the administration’s interpretations of own facilities and other types of infrastructure. the requirements in SB 4 are consistent Within the resources and environmental protection with legislative policy intent. Specifically, program area, DPR and CalFire have large amounts the Legislature will want to determine of property and physical assets. As shown in (1) how the proposed fee increase should Figure 4 (see next page), this includes thousands of be assessed—on all oil producers in the miles of trails and tens of thousands of campsites state or just those using hydraulic or acid and other facilities spread over 1.6 million acres of matrix fracturing techniques, (2) if SWRCB park land, as well as nearly 300 fire stations, camps, should review or approve well owners’ and bases used to combat forest fires. groundwater monitoring plans, and It is the responsibility of departments to (3) what activities it wants ARB and local maintain their infrastructure. Maintenance needs air districts to perform in implementing are driven by the number, age, types, and uses of www.lao.ca.gov Legislative Analyst’s Office 11 2014-15 BUDGET growth in maintenance Figure 4 costs. If maintenance Department of Parks and Recreation and CalFire Key Assets Maintained is routinely delayed, Holdings Quantity a backlog of deferred Department of Parks and Recreation maintenance forms Museum objects, archaeological specimens, and archival documents More than 6,000,000 and grows. Deferred Acres of land 1,600,000 Campsites 14,421 maintenance is Archeological sites 10,271 problematic because when Picnic sites 7,647 repairs to key building Miles of nonmotorized trails 4,456 Historic buildings 3,375 and infrastructure Overnight noncamping facilities 709 components are delayed, Park units 280 facilities can eventually Department of Forestry and Fire Protection (CalFire) require more expensive Fire stations 228 Communications tower and vault sites 112 investments, such as Lookouts 66 emergency repairs (when Conservation camps 39 systems break down), Air and helitack bases 22 capital improvements a department’s infrastructure. The maintenance (such as major needs for DPR and CalFire are significant because rehabilitation), or replacement. Some facilities they have a large quantity of diverse assets, and that are particularly overdue for repairs can even many of their facilities were built a long time ago. create liabilities for the state. As a result, while For example, roughly three-fourths of CalFire’s deferring annual maintenance avoids expenses in facilities were built prior to 1950. In addition, the short run, it often results in substantial costs many facilities were not designed for the amount in the long run. For more information on deferred and type of use required of them today. For maintenance and infrastructure, please see our example, the older park units operated by DPR recent report The 2014-15 Budget: A Review of the were designed for far fewer visitors when they 2014 California Five-Year Infrastructure Plan. were constructed. Additionally, today’s parks Governor’s Budget accommodate recreational vehicles and many more group campers than the number for which they The Governor’s budget for 2014-15 proposes a were designed. This contributes to deterioration total of $43 million (one-time) from the General and damage of many park properties and facilities, Fund for deferred maintenance in the natural thereby necessitating more frequent repairs and resources program area. Specifically, the budget modifications. includes $40 million for DPR and $3 million Frequently, preventive and routine facility for CalFire. By comparison, DPR estimates a maintenance does not occur as scheduled. $1.2 billion backlog of deferred maintenance and When this happens, it is referred to as “deferred CalFire estimates a backlog of $27 million. (We maintenance.” This typically happens due to a note that the DPR estimated backlog in this report lack of funding or resources, the diversion of differs from that in the Governor’s infrastructure maintenance funding to other priorities, and plan and reflects an updated estimate from the department.) Neither department has identified 12 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET the specific deferred maintenance projects they the use of their allocations and determining which would complete with these additional funds. projects they would complete. The departments Instead, the Governor proposes budget control have identified some general criteria that they language requiring that the administration report would use to prioritize projects, such as safety and to the Joint Legislative Budget Committee the list building integrity. This could include, for example, of deferred maintenance projects (DPR, CalFire, installation of smoke detectors, roof repairs, and and other state departments) that will be funded fixing broken water treatment facilities. Based on 30 days prior to the allocation of funds. (We our conversations with both DPR and CalFire, note that the Department of Fish and Wildlife there appear to be many more projects that fit [DFW] and the California Conservation Corps these criteria than can be completed with the also expressed a deferred maintenance need of proposed funding. It is, therefore, unclear how $15 million and $1 million, respectively. However, the departments would select among their higher the Governor’s proposal does not include deferred priority projects when making funding decisions. maintenance funding for these departments.) Proposal Does Not Address Underlying Problems. One-time money, such as the funding LAO Assessment provided under the Governor’s proposal, can be Proposal Addresses Clear Problem, but Is directed towards the most critical maintenance Only Partial Solution. The proposed funding for projects, but it is only a temporary fix if facilities deferred maintenance is reasonable given that the are not maintained in subsequent years. Yet, the size of the backlog identified by CalFire and DPR is state does not currently have a strategy for either much larger than the funding proposed. However, (1) reducing the deferred maintenance backlog we find that the proposal for one-time funding is beyond the budget year, or (2) maintaining parks only a partial solution. The $43 million proposed in and CalFire facilities at a sufficient level on an the Governor’s budget would address only a small ongoing basis to avoid deferred maintenance in the fraction—3.5 percent—of the estimated deferred future. A plan that extends beyond the budget year maintenance backlog for CalFire and DPR. More could ensure that existing assets are maintained in significantly, deferred maintenance, particularly order to continue serving the public in the future. It in DPR, appears to be a growing problem. For could also reduce long-term maintenance costs by example, past analyses found that DPR’s deferred avoiding the need for unnecessary and expensive maintenance backlogs were $900 million in facilities investments such as emergency repairs or 2007-08. Therefore, while the proposed funding replacement. will reduce deferred maintenance in the short term, We acknowledge, however, that developing the backlog is likely to grow in the future without a long-term strategy for eliminating deferred additional actions. maintenance is difficult for several reasons. For Unclear How Projects Will Be Prioritized by example, it is often difficult to understand the Departments. As indicated above, it is unclear scope of the problem in each department because what specific projects will be undertaken with the there are no standard ways to define, track, or proposed funding. At the time of this analysis, prioritize deferred maintenance. This is especially DPR and CalFire reported that they were in the true in the natural resources program area due to preliminary stages of developing their plans for the diversity of programs and maintenance needs. In addition, the specific causes for the deferred www.lao.ca.gov Legislative Analyst’s Office 13 2014-15 BUDGET maintenance backlog are not always clear. For maintenance backlog or a plan to resolve the example, facility and maintenance funding is not underlying problem by ensuring that departments specifically identified in the Governor’s budget, are completing necessary routine and preventive making it difficult to identify how well aligned maintenance on an ongoing basis. Addressing these resources are with actual need. It is also unknown issues is challenging, but longer-term planning can the degree to which deferred maintenance backlogs reduce future facilities costs and protect valuable have occurred because of decisions made by the state resources. The DPR currently has one of the departments, such as whether they have historically largest identified deferred maintenance backlogs in used their maintenance funding for other purposes the state, and it has been building for many years. when unexpected operational costs occurred. In Due to these factors, this department might serve addition, it is unclear whether the departments’ as a useful “test case” in how the state can develop funding for maintenance has increased to meet the a long-term maintenance plan for departments. additional demand of new or expanded facilities. We recommend that the Legislature request that For example, the number of state parks has grown the administration report at budget hearings on from around 100 in 1950 to 280 today. what approach the state might take to develop such a plan. Ultimately, given the scale of the problem LAO Recommendations and the potential budget implications, it might Direct Department to Report on Funding make sense for there to be a collaborative approach Priorities. We recommend that the Legislature involving not only DPR, but also the Department adopt the Governor’s proposal, which provides of Finance (DOF), our office, and other legislative some one-time funding for the most critical staff. deferred maintenance projects. Additionally, we In order to assist the Legislature and recommend that the Legislature require CalFire administration in identifying longer-term solutions and DPR to report at budget subcommittee to DPR’s deferred maintenance problem, the state hearings this spring on the list of projects that could analyze various factors including: DPR’s they plan to fund and how they would prioritize annual maintenance budget and expenditures, how competing maintenance needs. This would better it tracks maintenance and calculates maintenance enable the Legislature to ensure that the priorities need, actual maintenance performed, and the identified by the departments align with legislative causes of the ongoing backlog. The analysis priorities. For example, the Legislature has sought might also consider whether it makes sense to opportunities for revenue enhancement at state provide guidelines to the departments on how parks in recent years and might prefer to prioritize to classify and track maintenance. The approach DPR projects that could increase the amount of could determine the appropriate level of ongoing park fees collected. maintenance funding to maintain facilities at a Develop Longer-Term Approach to Fixing reasonable level, and tie the estimates to industry DPR’s Facility Maintenance Problems. The benchmarks to the extent possible. While it is administration’s decision to address deferred difficult to estimate a standard maintenance cost maintenance is commendable. However, as for some park assets given the wide variety of discussed earlier, the state currently does not have holdings, there are industry standards availble a strategy for eliminating the remaining deferred for some park infrastructure, such as average maintenance cost per mile of trail or per campsite. 14 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Based on this information, it might be possible to Governor’s Budget Proposal develop a more specific plan to address the deferred As shown in Figure 6 (see next page), maintenance backlog for legislative review. the Governor’s budget for 2014-15 proposes Water Action Plan $621 million (mostly bond funding) to begin implementing some aspects of the WAP. The administration indicates that for the first year of Background WAP implementation, it selected expenditures In January 2014, the administration released that it considered (1) actionable, (2) affordable, the WAP, which identifies the state’s main water- (3) supported by local agencies, (4) necessary to related challenges. These include uncertain or achieve implementation of the plan within five scarce water supplies, declining groundwater years, and (5) necessary for other activities in supplies, poor water quality, declining native fish the plan to proceed. Below, we describe the most species, flood risk, and climate change. The WAP significant budget proposals. lays out more than 60 activities—categorized IRWM. The budget proposes $473 million under ten broad goals—to begin addressing those in one-time bond funds for the IRWM program, challenges. Figure 5 lists some of those activities. which provides grants for water stakeholders within Nearly all of the activities in the WAP have been the same region to collaborate on projects that meet recommended in numerous plans and reports multiple water goals, such as improved quality, issued in recent years by various state departments. increased supply, and ecosystem restoration. (We These other plans and reports vary in terms of discuss the IRWM proposal in more detail later in (1) their specific objectives, (2) which agency this report.) would be responsible for implementation, (3) the Flood Protection. The budget proposes geographic area covered, and (4) the duration $77 million in one-time bond funds for flood of the activities. When compiling the WAP, the control planning and projects. Of this amount, administration asked departments to identify $26 million is for improvements to Folsom Dam activities in those documents that they consider to and $12 million is for the construction of a facility be achievable in the next five years. Figure 5 Water Action Plan Includes Activities Intended to Meet Numerous Goals Goal Example of Activity Make conservation a California way of life Provide funding for conservation and efficiency Increase regional self-reliance and IWM across all levels of government Increase use of recycled water Achieve co-equal goals for the Delta Restore Delta aquatic and intertidal habitat Protect and restore important ecosystems Bring salmon back to the San Joaquin River Manage and prepare for dry periods Revise reservoir operations to respond to extreme conditions Expand water storage capacity and improve groundwater management Increase statewide groundwater replenishment Provide safe water for all communities Consolidate drinking water and water quality agencies Increase flood protection Improve access to emergency funds Increase operational and regulatory efficiency Improve and clarify coordination of state Bay-Delta actions Identify sustainable and integrated financing opportunities Develop water financing strategy IWM = Integrated Water Management. www.lao.ca.gov Legislative Analyst’s Office 15 2014-15 BUDGET Figure 6 Budget Proposal for Water Action Plan Addresses Multiple Water Issues (In Millions) Activity Department Amount Fund Source IRWM grants DWR $473 Proposition 84 bond Flood protection DWR 77 Proposition 1E bond Wetlands and watersheds restoration DFW 30 Cap-and-trade auction revenues Water quality grants for disadvantaged communities SWRCB 11 Various special funds State Water Project energy efficiency DWR 10 Cap-and-trade auction revenues Water use efficiency project grants DWR 10 Cap-and-trade auction revenues Groundwater monitoring and management SWRCB, DWR 8 General Fund, Waste Discharge Permit Fund Drinking Water Program transfera SWRCB 2 Propositions 50 and 84 bonds Salton Sea restoration maintenance DFW —b Salton Sea Restoration Fund Total $621 a Included in Water Action Plan but proposed separately in budget. b Proposal totals $400,000. IRWM = Integrated Regional Water Management; DWR = Department of Water Resources; DFW = Department of Fish and Wildlife; and SWRCB = State Water Resources Control Board. that would enhance DWR’s ability to respond to $10 million for grants to local agencies to flood emergencies in the Sacramento-San Joaquin reduce energy consumption associated Delta (the Delta). with water use. GHG Emission Reductions. The budget Groundwater Monitoring and Management. proposes $50 million in cap-and-trade auction The budget proposes a total of $7.8 million for revenues for projects intended to reduce GHG groundwater monitoring and management emissions and provide water-related co-benefits, activities. The specific activities include: such as improved ecosystems. (Please see our • Overdraft Management. The budget report, The 2014-15 Budget: Cap-and-Trade includes $1.9 million (General Fund) Auction Revenue Expenditure Plan, for a more for ten positions at SWRCB to identify detailed discussion regarding these proposals.) The basins that are in danger of suffering proposals include: permanent damage due to overdraft, • Ecosystem Restoration. The budget which occurs when water withdrawals includes $30 million and 17 positions consistently exceed the water entering the for DFW to restore wetlands and other basin. These positions would also develop watersheds in order to improve the ability management plans for those basins in of those lands to capture and store carbon which local agencies do not address the from the atmosphere. overdraft condition. The proposed funding would support management of one basin • Water-Energy Efficiency. The budget at the requested level of resources. The includes $20 million for DWR for projects administration intends to propose budget that would save energy and reduce water trailer legislation to grant SWRCB the use, including $10 million for upgrades authority to develop these management to State Water Project (SWP) generators plans. to increase hydroelectric generation and 16 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET • Groundwater Elevation Monitoring. required Delta Plan, such as prioritizing The budget includes $2.9 million from improvements to Delta levees and restoring habitat the General Fund for DWR to (1) meet a in specific areas of the Delta. The WAP also states statutory requirement that the department the administration’s intent to establish a stable, monitor groundwater elevation in basins long-term funding source to fund water systems in where no local agency performs such disadvantaged communities, including operations monitoring, and (2) develop an information and maintenance. (Currently, the state operates technology (IT) system so that individuals some financial assistance programs supported by who drill wells can submit well records bond funds and federal funds, but these programs online. exclusively fund capital improvements.) The establishment of such a fund source is explicitly • Groundwater Quality Monitoring. The intended to meet the intent of Chapter 524, Statutes budget includes $3 million from the Waste of 2012 (AB 685, Eng), which states that every Discharge Permit Fund for SWRCB to human being has the right to safe, clean, affordable, monitor the water quality of groundwater and accessible water. used for public water supplies. This Reasonable Assumptions About Activities to proposal would continue an existing Be Completed. In addition, it appears that progress monitoring program that was previously could be made on all activities in the plan in the supported by bond funds. next five years. This is because the plan focuses Transfer of Drinking Water Regulation primarily on efforts that could be undertaken to SWRCB. The budget proposes to transfer administratively or with statutory changes, and drinking water regulation and financial assistance does not assume that construction of significant responsibilities from DPH to SWRCB. The budget new infrastructure will be completed during the includes a one-time increase of $1.8 million for plan’s implementation. For example, the WAP moving and IT costs. This proposal is budget- identifies completing the development of the Bay neutral on an ongoing basis. (We discuss this Delta Conservation Plan (BDCP) as an activity to proposal in more detail later in this report.) be accomplished in the next five years, but does not assume that the major infrastructure associated Governor Presents Legislature with it—a pair of tunnels under the Delta and With Reasonable Approach 150,000 acres of habitat—will be completed in that We find that the WAP generally offers the time. Legislature a reasonable blueprint for addressing Budget Proposals Provide Useful Starting many of the state’s water challenges, as discussed Point. The specific activities proposed in the below. Governor’s budget for 2014-15 also appear to be Generally Consistent With Legislative generally reasonable first steps in implementing Priorities. Many of the activities in the WAP the WAP. The proposals have merit because they were derived from legislatively mandated plans or would take steps to address some of the state’s reports or were developed in response to legislative water challenges. We also note that proposed priorities. For example, the WAP includes several activities can be accomplished in the budget year recommendations described in the legislatively and primarily use existing fund sources. www.lao.ca.gov Legislative Analyst’s Office 17 2014-15 BUDGET Several Budget Proposals Initiate Positive While we generally find that the administration Policy Changes. The budget includes two has put forward reasonable proposals for legislative noteworthy proposals that, in our view, represent consideration, it is important to note instances significant positive policy changes. First, we find where the administration’s proposals do not fully that transferring the Drinking Water Program address legislative priorities or current issues (DWP) from DPH to SWRCB could improve the facing the state. As such, we identify below some efficiency and effectiveness of state water policy by selected areas where the Legislature may want to allowing a single department to address interrelated take additional actions. Depending on the specific water issues more comprehensively. For example, actions taken, proposed resources may need to there could be a more coordinated focus on the be redirected, or additional resources may need sources of pollution and their effects on drinking to be provided, relative to the Governor’s budget water. It could also improve the administration proposals. of drinking water-related financial assistance Response to Current Drought. California and enhance accountability and transparency on is currently experiencing severe drought, with drinking water issues. significant economic, environmental, public health, Second, the Governor’s groundwater proposals and water management effects. For example, DPH appear to be consistent with recommendations has identified 17 communities that may face severe that we have made in the past on groundwater water supply shortages as a result of the current management. Unlike most other western states, drought. In addition, groundwater throughout the California currently does not monitor or permit Central Valley has been rapidly depleted over the groundwater use at the state level. In past reports, past two years due to increased reliance on this we have recommended that the Legislature water source for irrigation and drinking water. establish “active management areas”—defined Though the WAP discusses the need for the state to geographic areas where specific rules are improve its ability to respond to periodic droughts, established to govern the withdrawal and use of the Governor’s budget includes little to address the groundwater—in circumstances where the highest effects of the current drought. (The administration potential for groundwater overdraft exists. The has, however, issued a drought declaration that proposal for SWRCB to identify and potentially includes some administrative actions, such as regulate overdrafted basins could align with this directing state agencies to reduce water use and recommendation. We note that the effectiveness beginning a statewide public information campaign of this proposal would depend on (1) the specific to encourage water conservation.) For example, authority granted to the board, and (2) the while the proposed IRWM funding might reduce availability of adequate groundwater quality and the consequences of future droughts, the program supply data to identify overdrafted basins. would not alleviate the effects of water shortages during the current drought because of the time Certain Priorities Could Be required to award grants and construct the funded Addressed More in First Year projects. Furthermore, the effects of the SWRCB As discussed above, the WAP lists activities groundwater management proposal is likely to be that the administration intends to complete in the of limited help in addressing the current drought next five years, and the administration has chosen because the proposed funding would only support to implement a subset of those activities in 2014-15. activities in one basin. 18 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET To the extent the Legislature wants to take Plan to address the decline of the Delta ecosystem additional actions to address the current drought, and the decreasing reliability of water exports there are a variety of options it could consider. Two from the Delta. The legislation also required such options include: implementation of the Delta Plan to begin by January 1, 2012. Implementation has begun, but the • Enable Water Transfers for Communities level of funding proposed in the Governor’s budget Facing Shortages. The Legislature for continued implementation of the Delta Plan in could direct DWR to—as it has in past 2014-15 is limited. While the budget includes about droughts—purchase water to transfer $19 million across various state agencies for Delta- to urban and agricultural areas facing related activities—mainly for responding to floods extreme shortages. The state could and for scientific activities—it does not include new also offer emergency loans to fund spending on a variety of Delta activities described water purchases by those areas. Small in the Delta Plan and the WAP. These activities or disadvantaged communities are at include (1) levee maintenance and improvements, particular risk of water shortages because (2) ecosystem restoration, or (3) “near-term actions” of the funding challenges they face in that can be accomplished as other longer-term developing new supplies. For example, actions are carried out (such as increased efforts to the 17 communities identified by DPH as eradicate invasive species). facing the potential for severe shortage To the extent the Legislature wants to address range in size from 39 to 11,000 people. the challenges in the Delta to a greater degree than • Expand Groundwater Management and is proposed in the Governor’s budget, it could Monitoring. Groundwater use increases consider a variety of options, including: significantly in dry years, increasing the • Establishing a Delta Levee Assessment risk of overdraft. Additional groundwater District. Historically, the state has paid most monitoring or management could allow of the costs to upgrade and maintain levees the state to identify and prevent damage in the Delta, in part because they protect to basins during the current drought and state infrastructure (such as highways) to better target assistance to communities that run through the Delta and allow SWP that rely on those basins. For example, and Central Valley Project to move water the Legislature could fund the SWRCB through the Delta. This maintenance has groundwater management proposal at a been supported by bond funds and the higher level, which would allow the board General Fund in the past. The Legislature to regulate additional basins in overdraft. could prioritize establishing a Delta Levee We have recommended in the past that the Assessment District, as included in the state require local water districts to submit WAP. The district would charge entities standardized groundwater use data, which that benefit from Delta levees (such as could improve the state’s ability to identify landowners in the Delta and water agencies overdraft conditions. that transport water across the Delta) for the Delta Activities. In 2009, the Legislature cost of maintaining those levees, potentially passed legislation that identified the Delta as a increasing funding available for levee priority and required the development of a Delta maintenance. www.lao.ca.gov Legislative Analyst’s Office 19 2014-15 BUDGET • Integrating DFW Wetland Restoration considering how those pieces affect each Proposal With Existing Delta Efforts. other can ensure that ecosystem restoration Research indicates that the restoration benefits (such as improvements to fish of certain Delta wetlands can reduce populations) are achieved in the most GHG emissions and improve the Delta cost-effective manner. ecosystem. The Legislature could direct Conservation. While the WAP includes DFW to focus cap-and-trade auction water conservation as one of its ten goals, the revenues proposed for restoration activities Governor’s budget includes few specific proposals on those wetlands in the Delta that to achieve that goal. Yet, there are a variety of steps (1) produce the greatest GHG benefits and that could be taken now to significantly increase (2) are consistent with habitat restoration water conservation in the future. First, research described in the Delta Plan or BDCP. At demonstrates that the price of water and how water the time of this analysis, DFW had not rates are structured can significantly increase identified a specific amount of cap-and- water conservation by consumers. However, the trade revenues it would spend on Delta WAP does not propose changes to how water is restoration. priced in the state. Second, as described in our publication California’s Water: An LAO Primer • Funding Additional Delta Plan (2008), the current water rights system can lead Implementation, Including Near-Term to inefficient uses of water. For example, Article X Actions. The major activities included of the California Constitution requires that waste in the Delta Plan and BDCP (such as or unreasonable use of water be prevented. State constructing the tunnels or restoring regulatory agencies have interpreted this to require significant amounts of habitat) will water users to consistently use their full allocation require several years or more to complete. or forfeit the unused part, which can discourage During that time, species in the Delta are conservation. (Water rights are granted in specific expected to decline and threats to water volumes for specific uses, such as irrigating crops.) supply reliability will continue. Thus, The WAP does not propose any changes to the the Legislature may want to consider water rights system. Finally, the WAP identifies funding actions that can be completed a goal of maintaining total urban water at 2000 in the interim to begin addressing those levels through 2030, but the plan does not include challenges. For example, the Legislature goals or policies to significantly reduce agricultural could increase funding for efforts to reduce water use, which accounts for roughly 80 percent the amount of aquatic invasive plants in of total water use in the state. While the Governor’s the Delta, which could improve conditions budget includes funding for water use efficiency for native fish. The Legislature could also ($10 million in DWR’s water-energy proposal), such direct state agencies to develop guidelines funds would most likely support urban water use for how the acquisition and restoration efficiency projects. of individual parcels can be coordinated If the Legislature wishes to address at larger scales. Research indicates that conservation to a greater degree than identified in restoring connected parcels of land and the WAP or the Governor’s budget, it could: 20 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET • Require Changes to Water Pricing. The nitrate contamination and offer recommendations Legislature could take steps to reduce on how to address its impacts. The SWRCB released demand for water by changing how water a report with such recommendations in 2013. users are charged for water. For example, Despite wide recognition of this problem, neither the Legislature could require that water the WAP nor the Governor’s budget specifically agencies (1) charge higher rates for water address nitrate contamination. If the Legislature in drought years, or (2) adopt “increasing wants to address nitrate contamination, it could block pricing,” which encourages take various actions, such as those recommended conservation by charging water users in the SWRCB report. These include: lower per-gallon rates for essential water • Funding Nitrate Reduction Projects use (such as drinking, cooking, and Through IRWM. Currently, DWR uses bathing) but charges water users more per numerous factors to award funding for gallon above a certain threshold of water IRWM projects through a competitive use deemed less necessary (such as for process. The Legislature could direct DWR landscaping). to prioritize IRWM projects that would evaluate or treat nitrate problems. • Refine Definition of “Reasonable Use.” The Legislature could encourage conservation • Reevaluating Agricultural Waste by making changes within the existing Discharge Requirements. As noted above, water rights system to account for the nearly all nitrate contamination is the potential for water conservation in the result of agricultural activity. In many definition of reasonable use. For example, cases, SWRCB waives certain water quality where water is required for agricultural regulations for agricultural operations. purposes, the water right could reflect the The Legislature could direct SWRCB to amount of water needed to grow a crop reevaluate the conditions under which using available water efficiency technology. waste discharge requirements are waived in order to reduce nitrates entering • Encourage Agricultural Conservation. The groundwater. Legislature could take steps to encourage agricultural water conservation, such as by • Funding Drinking Water System setting goals for reductions in agricultural Operations and Maintenance. According water use or funding agricultural water use to SWRCB’s report, one of the factors efficiency measures. that limits nitrate treatment is the limited Nitrate Contamination. Nitrates are the most financial capacity of small disadvantaged common contaminant in groundwater that is communities to operate and maintain not naturally occurring, and has been an area of their drinking water systems. In order recent legislative interest. Nitrate contamination to ensure that small disadvantaged of groundwater is common in many areas of the communities have the capacity to operate Central Valley and is generally caused by the and maintain such systems, the Legislature application of fertilizers. In 2008, the Legislature could establish a new fund source for required SWRCB to study the sources and extent of that purpose. Options recommended by www.lao.ca.gov Legislative Analyst’s Office 21 2014-15 BUDGET SWRCB include a charge on fertilizer or a sources (such as bonds, user fees, or charges on broader charge on all water use. polluters) should be used and which activities will be supported by those funding sources, it will Strategy for Completing and Funding be difficult for the Legislature to ensure that any Remaining Activities Is Unclear future water bond measure provides the funding consistent with WAP priorities. Plan for Completing Remaining Activities While the administration has not yet proposed Needed. In the future, the Legislature is likely to be a specific funding strategy to implement the asked by the administration to appropriate funding WAP, the plan does identify a couple of financing or change statute to implement additional activities proposals that, if implemented, could provide contained in the WAP. Without a description of additional funding for water-related activities. The the activities that the administration intends to intent of these proposals is to shift more funding accomplish and the years in which those activities responsibilities to beneficiaries, which is generally will be undertaken, it is difficult for the Legislature consistent with recommendations that we have to determine whether the administration’s made in the past. Specifically, the WAP proposes direction on water aligns with its priorities. Based to analyze the potential for additional user and on our conversations with the administration, it is polluter fees. This could include charging polluter currently developing a strategy for implementing fees on fertilizer sales with revenues used to reduce the remainder of the activities in the WAP over the nitrate pollution. The structure of user and polluter following four years. Such a strategy might include fees and whether they are fees or taxes would specific activities to be performed, the scope of determine the activities that could be supported by those activities, the schedule of when each activity the fees. would be undertaken, and the specific outcomes The plan also includes several proposals anticipated. that would change how the costs of some water Water Financing Strategy Needed. The activities are allocated among parties so that administration expects to develop a water financing beneficiaries pay a higher share of project costs. strategy that will identify how WAP activities will First, as discussed above, the WAP proposes be funded in the future. Many of the activities creating a Delta Levee Assessment District, which in the WAP would require funding to complete. would assess a charge on those that benefit from General obligation bonds have been a major source Delta levees in order to upgrade and maintain of funding for water activities since 1996, but those levees. Second, the WAP proposes to clarify these one-time funds are rapidly being exhausted. the types of water-related taxes and fees that are Of the nearly $16 billion in bonds approved by affected by Proposition 218 (1996). Proposition 218 voters for water programs since 2000, about enabled property owners to stop increases on their 10 percent ($1.7 billion) remains unappropriated. water bills through a formal protest process, as The Governor’s budget proposes $550 million in well as required voter approval for rate increases to new bond fund appropriations for WAP activities support flood control and stormwater management in 2014-15. We note that there currently is an activities. Although the WAP identifies the $11.1 billion bond scheduled for the November administration’s intent to address some of these 2014 ballot, but that the Legislature is considering issues, it does not propose specific changes. We changes to that bond. In the absence of a specific note, however, that an initial public draft of the funding strategy that specifies how various funding 22 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET WAP discussed the option of exempting flood budget years, the estimated costs of those activities, management agencies from some of the voting and the expected funding source. Having such requirements of Proposition 218, as is the case with a strategy would allow the Legislature to better water service providers. understand how the goals of the WAP will be achieved and at what cost. The Legislature could LAO Recommendations then determine whether the strategy is consistent In view of the above, we offer some with its water priorities for the state. recommendations for the Legislature as it considers Administration Should Report at Budget the WAP as a whole. These recommendations are Hearings on Future Bond Funding for WAP intended to help ensure that the Legislature has Activities. In addition, as noted above, the sufficient information from the administration to Legislature is currently considering potential assess long-term implementation of the plan. Later changes to the water bond scheduled for the in this report, we make specific recommendations November 2014 ballot. In order to ensure on certain budget proposals related to the plan. that the Legislature is able to make a fully Administration Should Provide informed decision as it considers those changes, Implementation Strategy With 2015-16 Budget. the administration should report at budget The administration indicates that it is developing subcommittee hearings this spring on the degree a strategy for implementing the remainder of the to which the bond currently scheduled for the WAP. We recommend the Legislature direct the ballot would fund specific aspects of the WAP. The administration to provide that implementation administration could also identify any changes it strategy no later than the release of the Governor’s would recommend to align the funding included in proposed budget for 2015-16. This strategy the water bond with the activities proposed in the should include a schedule of activities that the WAP. administration proposes for each of the next four STATE WATER RESOURCES CONTROL BOARD Transfer of DPH directly regulates some public water systems Drinking Water Program in California, including all systems with more than 200 service connections. It does so utilizing Background two field operations branches and 23 district offices throughout the state. In 31 counties, the The DPH Administers State DWP. The DPH department enters into agreements with “local administers and oversees various programs that primacy agencies,” such as county health agencies, address health issues, such as chronic disease to regulate public water systems with fewer than prevention, communicable disease control, 200 service connections. environmental health, and inspection of health The state spends about $300 million annually facilities. The department’s DWP regulates on DWP’s activities, which include the following: 7,900 public water systems, defined as privately • Regulating the quality of drinking water or publicly owned water systems that serve more by (1) setting drinking water quality than 15 service connections or 25 people. The www.lao.ca.gov Legislative Analyst’s Office 23 2014-15 BUDGET standards, (2) inspecting public water executive director) under the proposed transfer. systems, (3) issuing permits, and (4) taking The SWRCB’s water quality regulatory function, enforcement actions when necessary. by comparison, is generally carried out by the regional water boards (staff reports to regional • Responding to emergencies by providing board executive management), with the state board technical assistance to damaged water setting enforcement standards and priorities. systems, assessing drinking water Administration of financial assistance programs, contamination, and ensuring access to safe including the Safe Drinking Water State Revolving drinking water. Fund (SDWSRF), would be consolidated with SWRCB’s existing Division of Financial Assistance, • Providing financial assistance to fund safe which administers SWRCB’s similar state revolving drinking water improvements to public fund program for wastewater treatment and other water systems. water quality improvements. The transfer would • Providing oversight, technical assistance, occur effective July 1, 2014. and training for local primacy agency Objectives of the Transfer. The administration personnel. intends for the transfer to achieve several objectives. First, it believes consolidating the SWRCB Oversees State’s Water Quality state’s drinking water and water quality programs Program. The SWRCB and the nine regional would result in more integrated water quality boards perform a variety of activities related to management. It considers that consolidating the state’s water resources. These boards regulate responsibilities for drinking water oversight and the quality of the state’s surface waters and regulation with SWRCB’s water quality and water groundwater by permitting waste discharges into rights regulatory activities could allow a single the water and enforcing water quality standards. department to address interrelated water issues The boards also provide financial assistance to fund more comprehensively. For example, there could be wastewater system improvements, underground a more coordinated focus on the sources of water storage tank cleanups, and other improvements pollution and their effects on drinking water. In to water quality. In addition, the state board addition, there may be opportunities to coordinate administers the state’s system of water rights. permitting processes for entities that are currently Governor’s Proposal regulated by both DWP and SWRCB. The administration also believes this The 2014-15 Governor’s Budget proposes consolidation would improve the state’s ability to transferring DWP from DPH to SWRCB. Under provide financial assistance to small disadvantaged the proposal, DWP’s regulatory and technical communities. A SWRCB-administered drinking assistance activities would be housed in a newly water program may be more likely to have the created Division of Drinking Water Quality expertise and administrative resources required (DDWQ) within SWRCB. The DDWQ would to adequately run the program and get financial continue to utilize DWP’s field operations branches assistance out the door in a timely manner. For and district offices and would retain existing example, the SWRCB has significant expertise in DWP staff to carry out drinking water activities. financial management, including recent experience The DDWQ, however, would report directly leveraging their revolving fund to increase the to SWRCB’s state headquarters (to SWRCB’s 24 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET amount of loans the fund is able to offer. This • Emergency Response. The DDWQ would expertise could be extended to SDWSRF. retain a similar structure for responding Finally, the administration believes the transfer to drinking water emergencies (such as a would enhance accountability and transparency chemical spill affecting drinking water) on drinking water issues because SWRCB’s board as currently used by DWP. This involves structure with regular hearings provides a process having an on-call duty officer who triages for the public and stakeholders to offer comments emergency calls and communicates on proposed rules or other issues. This could with the Office of Emergency Services as improve the ability of the public to hold decision- necessary. The director of DPH, as the makers accountable for drinking water outcomes. State Public Health Officer, would retain Implementation Details. In designing the authority to issue regionwide or statewide structure of the proposed program transfer, the drinking water advisories, and to regulate Governor had several important implementation the actions of and provide guidance to local choices regarding the reorganization. health officers in the case of drinking water • Permitting and Enforcement. As noted emergencies. above, drinking water permitting and The administration has indicated that it plans enforcement responsibilities would remain to move DWP staff currently located in Sacramento with district offices reporting to SWRCB’s into the CalEPA building in order to effectively state headquarters. The agreements consolidate the staff of SWRCB. The administration delegating authority to local primacy has indicated that moving DWP staff into the agencies in some counties would remain in CalEPA building could displace some staff at other place. CalEPA departments. The administration plans to release a formal transition plan in February • Rulemaking Process. The DDWQ would 2014, which should include further detail on the develop drinking water quality standards transfer of responsibilities and staff between the using the same rulemaking process used departments. by DWP, which requires formal review by Budgetary Effects of Transfer. The proposed DOF and the Office of Administrative Law, transfer would shift the total DWP budget of as well as a public comment period. The $308 million—including $43 million for state state board would ultimately adopt those operations and $265 million for local assistance limits through its hearing process. (mostly bond and federal funding for grants)— • Public Health Expertise. The deputy from DPH to SWRCB in 2014-15. In addition, director over DDWQ would be required the budget includes a one-time increase of to have specific public health expertise, $1.8 million in 2014-15 for moving expenses and including minimum amounts of experience IT consolidation. Accordingly, with the exception in a public-health related field. In addition, of modest one-time transition expenditures, the all personnel currently employed by DWP proposed transfer is essentially budget-neutral, would be transferred to DDWQ in order to meaning that it does not, on net, result in added maintain program expertise. costs or savings in the budget as a whole as proposed by the Governor. www.lao.ca.gov Legislative Analyst’s Office 25 2014-15 BUDGET LAO Comments For example, the audit found that some districts chose not to issue some nonhealth related As described below, we find that the proposed monitoring violations due to insufficient staffing. transfer is likely to improve the effectiveness The U.S. EPA report also noted that the DWP and efficiency of state water policy. We also has not issued a statewide enforcement policy. comment on specific aspects of the transfer that In conversations with DPH, it indicated that the warrant legislative consideration, including (1) the DWP has relied on internal memos regarding continuation of some potential enforcement enforcement policy to promote consistency rather concerns, (2) coordination between SWRCB and than issue a statewide enforcement policy. It is DPH in responding to emergencies and protecting unclear the degree to which the steps DPH has public health, and (3) statutory changes to the taken in response to the U.S. EPA audit have administration of SDWSRF. resulted in improved consistency and appropriate Transfer Is Likely to Improve Effectiveness levels of enforcement across districts and local and Efficiency of State Water Policy. We agree primacy agencies. Publicly available data on DWP that the transfer should meet the broad objectives enforcement activities are aggregated at a statewide laid out by the Governor. In particular, we find level, not by district, thereby making it difficult that the transfer could allow for some efficiencies to analyze the extent to which DWP enforcement and increased administrative capacity relating improvements have been made in recent years. to drinking water financial assistance. Previous Despite these previous concerns, the Governor’s LAO analyses have identified many of the same proposal would maintain the current approach to advantages of combining the state’s drinking water drinking water enforcement. The administration and water quality programs within SWRCB. For has not proposed creating a uniform statewide example, some economies of scale may be realized enforcement policy, and the administration’s plan by consolidating SWRCB’s and DWP’s financial is to continue to rely on district offices and the assistance programs. Such a consolidation could existing local primacy agencies to enforce state allow staff to be shared across programs, allowing regulations. In addition, the proposal explicitly them to process additional grants and loans using rules out establishing mandatory minimum the same resources. We also find that the transfer penalties (MMPs) for drinking water violations. creates the potential for accelerated rulemakings The SWRCB has used MMPs for water quality related to drinking water. For example, SWRCB violations since 2000, when the Legislature enacted indicates that it intends to administratively update legislation requiring MMPs for serious water some eligibility requirements for SDWSRF grants quality violations in order to address concerns over and loans through its public hearing process. the consistency and appropriateness of the level of This process allows for public participation but SWRCB enforcement (carried out mostly by the typically is completed more quickly than the formal regional boards). According to the most recent regulatory process that DPH has used in the past. SWRCB enforcement report (from January 2013), Past Concerns About DWP Enforcement MMPs have contributed to a reduction in water Could Remain. In a 2010 audit of DWP, the quality violations by acting as a deterrent. U.S. Environmental Protection Agency (U.S. EPA) Coordination With DPH Will Be Necessary. raised concerns regarding how consistently DPH While the proposed transfer will mean that most district offices and the local primacy agencies drinking water responsibilities reside within enforced violations of drinking water regulations. 26 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET SWRCB, some related activities will remain with might be required between the two state entities DPH. Therefore, it will be important that the two to continue the coordination of some of these state entities establish effective ways to coordinate activities. their efforts. This would allow for a continued Statutory Changes Could Improve public health perspective within the DWP and Administration of SDWSRF. As described above, help ensure that public health objectives continue the Governor proposes to move administration to be met. In particular, the SWRCB and DPH of the financial assistance program for drinking would need to coordinate on emergency response water currently administered by DPH—including in cases of statewide drinking water emergencies. the SDWSRF—to SWRCB. In so doing, the As described above, the director of DPH is the State administration has stated its intent to introduce Public Health Officer and would retain authority statutory changes to allow greater flexibility in to issue regionwide or statewide drinking water how the drinking water grants and loans are advisories, as well as to regulate the actions of administered to be similar to the SWRCB’s local health officers and provide guidance to local program. In particular, the administration would health officials. Under a local emergency, SWRCB allow SWRCB to reduce the interest rates of district office duty officers and district engineers loans issued through SDWSRF and would repeal would handle the emergency response and would existing state law that limits DPH’s ability to notify the deputy director of the DDWQ of the fund projects that are ready to proceed but may emergency. The SWRCB would then be responsible be ranked as lower priority by district offices. If for determining when to notify the State Public implemented, these changes could allow SWRCB Health Officer. The administration states that its to distribute financial assistance more quickly and forthcoming transition plan will include more would allow them to give loans to water systems detail on how drinking water emergencies will be in disadvantaged communities that may not handled and how DPH and SWRCB will coordinate qualify for loans with higher interest rates. The when the authority of the State Public Health administration states its intent to provide these Officer is required. statutory changes following the release of the In addition to collaborating with DPH under transition plan. a drinking water emergency, SWRCB would need LAO Recommendations to collaborate with DPH on several programmatic activities. An interagency agreement would be As described below, we recommend that the required between SWRCB and DPH for the Legislature: (1) approve the proposed transfer of utilization of DPH’s Drinking Water and Radiation DWP to SWRCB; (2) require the administration Laboratory to analyze water samples submitted by to report at budget hearings on the details of the district engineers for monitoring and compliance transition plan and progress made by DPH and purposes. Additionally, the DWP is currently SWRCB on coordinating implementation of the assessing what functions it coordinates with other transfer; and (3) require reports on the outcomes DPH activities related to drinking water, such of the transfer, including its effects on permitting, as identifying waterborne disease and providing enforcement, and emergency response. health expertise to communities interested in Approve Transfer. We recommend that the fluoridating their drinking water. The departments Legislature approve the proposed transfer of indicate that a memorandum of understanding DWP to SWRCB. In our view, the proposal has www.lao.ca.gov Legislative Analyst’s Office 27 2014-15 BUDGET the potential for significant improvements in the State Public Health Officer authority is needed; the administration of the state’s drinking water (2) other areas of coordination that will be required programs, particularly regarding the effectiveness between SWRCB and DPH; (3) the transfer of of financial assistance programs, the integration of Sacramento-based DWP staff to the CalEPA drinking water with other water policy issues, and building; and (4) proposed statutory changes to the ability of the public to hold decision-makers SDWSRF and other statutory changes deemed accountable for drinking water outcomes through required to effectuate the transfer as proposed by the SWRCB’s board structure. In addition, we the administration. note that the transfer also is likely to have greater Require Reports on Outcomes of Transfer. benefits than other options intended to achieve In order to ensure that the transfer successfully the objectives identified by the administration. meets the Legislature’s goals for drinking water, For example, in a previous analysis, we found that we recommend the Legislature adopt trailer bill transferring only SDWSRF activities to SWRCB language requiring SWRCB to report on the could introduce significant coordination and outcomes of the transfer in January of 2015 and regulatory challenges because financial assistance 2016. This report should compare the performance staff would reside in one department while staff of the program before and after the transition with programmatic expertise and regulatory using quantifiable metrics for drinking water authority over drinking water issues would reside activities such as permitting, financial assistance, in a different state entity. We also evaluated the rulemaking, and enforcement. These metrics option of creating a stand-alone drinking water should include measures of the timeliness of agency within CalEPA and found that transferring grant approvals and the rate at which available the DWP to a stand-alone entity would not allow state and federal funding is disbursed. This report for the economies of scale that could be provided should also include summary and trend data by consolidating financial assistance programs and on enforcement actions by each district office would hinder the new entity’s ability to leverage and local primacy agency, including the number SWRCB’s expertise in distributing financial of monitoring and health-based violations, the assistance. It likely would also result in an increase enforcement actions taken, and whether the in state costs because such a department would violations were corrected. Finally, the report should require positions to perform the new department’s include information on coordination with DPH, various administrative functions. including the number of responses to emergencies Require Administration Report at Budget and how often DPH was notified of an emergency. Hearings on Transition Plan. We recommend These reports would provide the Legislature that the Legislature require DPH and SWRCB to with additional information to evaluate the report at budget hearings, providing an update effectiveness of the state’s drinking water activities on their progress in coordinating implementation as administered by SWRCB, as well as determine if of the transfer. This should include an overview additional policy changes are needed in the future. of the transition plan and proposed statutory For example, if concerns over enforcement continue changes. This should also include providing the even following the transfer, the Legislature could Legislature with more information on (1) the consider other options, such as requiring that emergency response plan, including the protocol MMPs be utilized to address drinking water for coordination between SWRCB and DPH when violations. 28 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET DEPARTMENT OF WATER RESOURCES The DWR protects and manages California’s awarding $205 million in 2011 and $152 million in water resources. In this capacity, DWR plans for 2013 for a total of 60 implementation grants, as well future water development and offers financial as $30 million in planning grants to help potential and technical assistance to local water agencies applicants develop and improve their IWRM plans. for water projects. In addition, the department Proposition 84 also allocated $100 million for other maintains SWP, which is the nation’s largest interregional projects and up to $50 million for state-built water conveyance system. Finally, administrative costs. DWR performs public safety functions such as Governor’s Proposal. The Governor’s budget constructing, inspecting, and maintaining levees proposes $473 million to support a final round and dams. of implementation grants. This would fully The Governor’s 2014-15 budget proposes a total appropriate the remaining IRWM funding from of $3.8 billion from various funds (mainly special Proposition 84. The DWR expects to solicit funds) for support of the department. This is a net proposals by November 2014 and to award funding decrease of $1 billion, or 21 percent, compared to by January 2015. projected current-year expenditures. This change Size of Proposed Funding Could Reduce primarily reflects reduced bond expenditures. Overall Quality of Funded Projects. In previous funding rounds, DWR has funded most of the Integrated Regional requests it received. Specifically, the $357 million Water Management awarded for implementation grants by DWR Background. The IRWM program is an represents 70 percent of the total amount requested effort to encourage greater regional collaboration in the first two rounds. There was a relatively in the management of water resources. Under modest amount—$90 million—of projects that the IRWM program, DWR awards competitive went unfunded in the most recent round. Yet, the grants to coalitions of local agencies and partners Governor’s proposal for 2014-15 would award three to construct various types of projects aimed at times the total amount awarded last year. Therefore, achieving multiple water benefits in a region—such it is currently unclear whether there are a sufficient as increased water reliability and quality, flood number of high-quality projects to support the control, and ecosystem restoration. For example, amount requested by the administration. If there some IRWM projects improve water quality were not enough high-quality project proposals, and reduce flooding by improving stormwater DWR might have to choose between funding some management. projects with comparatively fewer benefits or not Since 2002, voters have approved three bond awarding all of the grant funding appropriated. measures—Propositions 50 (2002), 1E (2006), and The DWR did not establish minimum qualifying 84 (2006)—providing a total of $1.8 billion for scores for past rounds of IRWM grants. Moreover, IRWM projects. Proposition 84 provided $1 billion DWR funded some proposals in past rounds that it to DWR to support IRWM grants. Of the total determined would not meet many statewide goals amount provided in Proposition 84, DWR has for water management or would provide uncertain awarded $387 million in grants. This includes levels of benefits. www.lao.ca.gov Legislative Analyst’s Office 29 2014-15 BUDGET Uncertain Whether Legislative Goals for in Chapter 1 when awarding the third round of Groundwater Monitoring Will Be Met. Chapter 1, IRWM funds. This would allow the Legislature Statutes of 2009, Seventh Extraordinary Session to determine whether DWR’s interpretation is (SBX7 6, Steinberg), established a program to consistent with legislative intent. monitor groundwater elevation throughout Water and Energy Efficiency the state by collecting standardized data from local agencies with groundwater management Proposal. The Governor’s budget proposes authority, including local water districts and $20 million from cap-and-trade auction revenues counties. The legislation requires DWR to perform in 2014-15 and 2015-16 for water-energy efficiency the monitoring in groundwater basins where no programs, including $10 million each year for agency voluntarily provides this information and upgrades to two hydroelectric generators on the no monitoring wells exist that could provide the SWP. The SWP is a large water storage and delivery information. Chapter 1 also incentivizes local system that provides water to homes and farmland agencies to share groundwater data by making throughout the state. counties and certain local water agencies ineligible SWP Funds More Appropriate for Generator for state water grants (such as IRWM grants) or Upgrades. Currently, the vast majority of SWP loans if DWR performs monitoring for them. expenditures are funded by payments from the Despite this requirement, DWR did not deny water agencies (“water contractors”) that receive IRWM grants due to the failure of applicants to water from the project because they are the provide the state elevation monitoring data. direct beneficiaries of the project. The generating We would also note that there is some unit upgrades proposed by DWR would benefit ambiguity in how DWR should interpret how water contractors by (1) reducing the amount of these eligibility requirements apply to IRWM electricity purchased in order to operate the SWP; grants. This is because the groups that apply for (2) reducing the cost SWP would have to pay to these grants can include both entities that are purchase allowances to comply with cap-and-trade performing monitoring and entities that are not. regulations; and (3) reducing the water used to Based on our conversations with the department, generate energy, making the water available for it is unclear how strictly DWR will adhere to these delivery to water contractors when needed. Thus, requirements in the third round. payments from those contractors may be a more LAO Recommendations. In light of the above appropriate source for funding these upgrades. concerns, we recommend that the Legislature Therefore, we would recommend the Legislature reduce the proposed appropriation from reject the proposed use of $10 million in cap-and- $473 million to $200 million, in order to more trade auction revenues for this purpose. We note closely align the amount with past grant award that denying this request does not prevent DWR levels and help ensure the funding of high-quality from performing the upgrades using contractor projects. The DWR could request appropriation of funds if the department considers them to be the remaining Proposition 84 funding for IRWM necessary. grants in future budget years. We also recommend (For further information on the Governor’s that the Legislature require DWR to report at cap-and-trade proposals, see our report The budget subcommittee hearings this spring on 2014-15 Budget: Cap-and-Trade Auction Revenue how it intends to apply the eligibility requirement Expenditure Plan.) 30 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET CALRECYCLE CalRecycle regulates solid waste facilities that encourages consumers to recycle beverage (including landfills) and manages the recycling containers. The program accomplishes this goal by of various materials, such as beverage containers, guaranteeing consumers a payment—referred to electronic waste, tires, and used oil. The as the CRV—for each eligible container returned department also promotes waste diversion to a certified recycler. As shown in Figure 7, only practices, such as source reduction, composting, certain beverage containers are part of the CRV and reuse. program. Whether a particular container is part of The Governor’s budget proposes $1.5 billion the program depends on the material, content, and from various funds for support of CalRecycle size of the container. in 2014-15. This is a reduction of $4.6 million, The BCRF—administered by DOR—is the or 0.3 percent, from current-year estimated funding source of the CRV program. As shown in expenditures. Major changes are (1) a $31 million Figure 8 (see next page), the program involves the flow net decrease in expenditures for the Beverage of beverage containers and payments between several Container Recycling Program (BCRP) resulting sets of parties, and generally operates as follows: from reforms to address the program’s structural • Distributors and Retailers. For each deficit, and (2) a $30 million increase from the beverage container subject to the CRV that GHG Reduction Fund (cap-and-trade auction distributors sell to retailers, they make revenue) for loan and grant programs. redemption payments to the BCRF. The Beverage Container Recycling distributors typically recoup this cost in Fund Operating Deficit payments from retailers. • Retailers and Consumers. Beverage Background retailers sell beverages directly to Overview of California Redemption Value consumers, collecting the CRV from (CRV) Program. The Figure 7 Division of Recycling Containers Covered Under the (DOR) within CalRecycle California Redemption Value (CRV) Program administers the BCRP Not Covered (commonly referred Covered in Program In Program to as the “bottle bill Container Type Glass Aseptic program”). This program Plastic (all resin types) Foil pouches was established more Aluminum Styrofoam than 25 years ago Bimetal Beverage Type Soda Wine with the enactment of Water Distilled spirits Chapter 1290, Statutes Sports drinks Milk of 1986 (AB 2020, Fruit juice Vegetable juices Beer Soy drinks Margolin). The purpose Container Size Less than 24 ounces—5-cent CRV 64 ounces or more of the program is to be 24 to 64 ounces—10-cent CRV a self-funding program www.lao.ca.gov Legislative Analyst’s Office 31 Graphic Sign Off Secretary Analyst MPA Deputy 2014-15 BUDGET processors in exchange Figure 8 for the CRV, as well as the How the CRV Program Works scrap value of the recycled material. Processors are Recycling Fund then reimbursed from the Reimburses recyclers/ BCRF for CRV. Then the processors for CRV. Funds CalRecycle activities: processors sort, clean, and $ - Administration - Grants, offsets, and $ consolidate the recyclable payments - Education and outreach materials and sell them to container manufacturers or Distributors Manufacturers Recyclers/ other end users who make Processors Pay CRV to CalRecycle. Make containers and Deliver beverages fill with beverages. Pay CRV to consumers. new bottles, cans, and to retailers. C em ol p le ty c t c /c o o n n ta so in li e d r a s t . e other products from these Sell scrap to materials. manufacturers. $ Unredeemed Deposits $ Support Supplemental Programs. The CRV redemption rate—the Retailers Consumers Pass CRV back to distributor. Pay CRV when purchasing beverage. percent of all CRV that Sell beverages to consumers. Receive CRV when redeeming is actually collected empty container at recycler. by consumers from recyclers—is less than 100 percent. This means $ that distributors pay more Flow of beverage containers. $ Flow of CRV. CRV into the BCRF than is claimed by consumers. In 2012-13, for example, CRV = California Redemption Value. the BCRF received roughly $1.2 billion in consumers for each applicable beverage deposits, but only about container sold. $1 billion was spent in redemption—an 88 percent redemption rate. State law requires that much of the • Consumers and Recyclers. When unredeemed CRV be spent on specified recycling- consumers redeem empty recyclable related programs. In total, there are currently ten beverage containers, they recoup the cost supplemental programs funded from the BCRF ARTWORK #140056 of the CRV from the recycler. In this way, (including program administration), such as from tTheem copnlasutem_eLrA’s OpeRresppeocrtti_vela, rtghee .CaRitV programs to subsidize glass and plastic recycling, can be viewed as a “deposit.” subsidize supermarket recycling collection sites, and provide grants for market development and • Recyclers/Processors and Manufacturers. other recycling-related activities. These particular Recyclers sell the recyclable materials to programs cost $254 million in 2012-13. 32 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Figure 9 lists all of the expenditures from the higher than the target recycling rate defined in BCRF (including the supplemental programs), statute—80 percent. This leaves less money for the with a brief description and the amount spent in other BCRF expenditures discussed above. As a 2012-13. result of the combination of a higher redemption High Redemption Rates and Supplemental rate and the cost of supplemental programs, the Programs Create Shortfall in BCRF. Over time, BCRF has been operating under an annual redemption rates have increased and are now structural deficit averaging about $100 million Figure 9 Beverage Container Recycling Fund Expenditures and Revenues 2012-13 (In Millions) Description Amount California Redemption Value (CRV) Consumers receive CRV when they redeem eligible $1,032.3 containers at a recycling center. Processing payments and offsets Processing payments are intended to cover the 67.4 difference between the cost of recycling and the scrap value of recycled materials. Processing fee offsets are currently provided to manufacturers. Handling fees Monthly payments made to recycling centers located in 40.4 convenience zones near supermarkets. Administrative fees Statute provides administrative payments to participants 25.8 to drefray costs associated with program. Plastic Market Development Payments to processors and manufacturers 20.0 for processing plastic bottles into a format for manufacturing and for manufacturing products with recycled plastic. Local Conservation Corps (LCC) Grants to LCC to be used for beverage container 19.5 recycling and litter reduction programs. Curbside Supplemental Payments Payments to operators of single-family residential 15.0 curbside recycling collection programs and neighborhood drop-off programs. Payments to local governments Payments to city and county governments for beverage 10.5 container recycling and litter reduction activities. Quality Incentive Payments Provides payments to curbside programs or other 10.0 certified entities for higher quality of materials collected through curbside programs. Beverage Container Recycling Grants to governments, nonprofit entities, and private 1.5 Competitive Grants businesses for beverage container recycling programs. Program administration Costs to CalRecycle of running the Beverage Container 43.9 Recycling Program. Total Expenditures $1,286.2 CRV Distributors pay CRV when they sell eligible containers. $1,167.9 Processing fees Manufacturers pay processing fees for materials with a 13.3 net recycling cost. Total Revenue $1,181.1 Net (Structural Deficit) -$105.1 www.lao.ca.gov Legislative Analyst’s Office 33 2014-15 BUDGET since 2008-09. For example, as shown above participants. Since all payments are reduced in Figure 9, the BCRF had a structural deficit equally and quickly, participants can experience a of $105 million in 2012-13. Based on current significant cut in funding without much warning to expenditure levels, the “break even” recycling plan accordingly. rate—the rate at which there is enough unclaimed In 2009, CalRecycle had to implement CRV to support all other program spending—is proportional reductions to maintain the BCRF’s around 75 percent. Therefore, anytime the recycling solvency. This included (1) reduced payments rate is above 75 percent, the fund is operating in to recyclers of about 15 percent, (2) increased a deficit. According to CalRecycle’s estimates, processing fees charged to beverage manufacturers the fund is currently forecast to run a deficit of totaling around $50 million, and (3) elimination $110 million in 2014-15 absent any changes made of most grant and market development program to reduce expenditures or increase revenues. funding. Based on current revenue and expenditure While the BCRF has had operating deficits on projections, CalRecycle expects to implement several occasions in the past, it was able to absorb proportional reductions in 2015-16. the deficits from its large fund balance built up Governor’s Budget when the CRV redemption rate was low, as well as payments received from loans made to other The Governor’s budget proposes ten funds. This balance is now nearly depleted, and the programmatic changes that are expected to result loans are mostly repaid. Thus, the fund no longer in a net increase to the BCRF annual fund balance has a healthy reserve to help offset the impact of $72.3 million in 2014-15, growing to $127 million of operating shortfalls. CalRecycle projects the when fully implemented in 2016-17. As shown in BCRF balance to fall below the healthy reserve in Figure 10, two changes raise revenue; four changes September of 2015. decrease expenditures; and four changes increase Under current law, if there are insufficient expenditures for fraud prevention, data collection, funds available in the BCRF to make all of the and expanded grant programs. The administration required CRV and supplemental payments, projects that these changes would eliminate the the department is required to reduce most program’s structural deficit once fully implemented supplemental program payments in equal and avoid the need to implement proportional proportions (commonly referred to as reductions. “proportional reductions”), in order to keep the We note that two BCRF-funded programs are fund in balance. The only payments from the not proposed for spending cuts or elimination: the fund that are not subject to the proportional Quality Incentive Payment program and the Plastic reductions are the return of CRV to consumers, Market Development program. According to the as well as program administration. Proportional administration, these two programs are central reductions are problematic because they do not to the department’s recycling goals because they allow for discretion in spending based on priorities support recycling and the use of products made or other factors. For example, under proportional from recycled material. We describe in more detail reductions, the department cannot prioritize below each of the programmatic changes proposed programs that are most effective or central to the by the Governor and identified in Figure 10. BCRP’s overall mission. Additionally, proportional • Eliminate Processing Fee Offsets. Some reductions are very disruptive to program container types—especially plastic and 34 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET glass—cost more to recycle than their Funding. Each of the state’s 13 LCCs material is worth in scrap value, making provides job training and academic it unprofitable for recyclers to accept instruction for at-risk youth, as well as those containers. Consequently, state operates a beverage container recycling law previously required manufacturers program. As part of the recycling to pay a “processing fee” into the BCRF programs, the LCC receive supplemental that would be passed along in the form of funding from the BCRF for litter cleanup “processing payments” to recyclers in order and recycling activities. The administration to encourage recyclers to take otherwise proposes expanding LCC programs to unprofitable materials (as well as to provide include oil, tires, and electronic waste a fiscal incentive for manufacturers to use activities, and diversifying LCC funding materials that are more cost-effective to to reflect this change. Specifically, the recycle). These payments were calculated proposal shifts $15 million in program based on the difference between the funding from the BCRF to other cost to recycle the material and its scrap funds—$2 million from the California value. Subsequent legislation established Used Oil Recycling Fund, $5 million from “processing fee offsets,” which significantly the California Tire Recycling Management reduce the amount of processing fees paid Fund, and $8 million from the Electronic by manufacturers, thereby requiring CRV Waste Recovery and Recycling Account. revenue to make up the difference. The The LCCs would continue to receive administration proposes phasing out the $6 million from the BCRF. processing fee offset over three years in order to have Figure 10 manufactures Impact of Governor’s Proposal on BCRF Fund Balance cover the full net cost of recycling (In Millions) unprofitable Change 2014-15 2015-16 2016-17 materials. The Increased Revenues administration Eliminate processing fee offsets $26.3 $52.6 $67.4 Diversify LCC funding 15.0 15.0 15.0 estimates that Subtotals, Revenues ($41.3) ($67.6) ($82.4) this would result Reduced Expenditures in savings to the Eliminate Curbside Supplemental Payments $15.0 $15.0 $15.0 BCRF of about Restructure administrative fees 13.0 26.0 26.0 Eliminate local government payments 10.5 10.5 10.5 $67 million Restructure handling fees 7.0 7.0 7.0 annually when Increased Expenditures fully implemented. Create a recycling enforcement grant program -7.0 -7.0 -7.0 Expand Competitive Grant Program -3.5 -3.5 -3.5 • Diversify Local Public education and information -2.5 -2.5 -2.5 Program administration -1.5 -1.2 -1.2 Conservation Subtotals, Expenditures ($31.0) ($44.3) ($44.3) Corps (LCC) Net Savings to BCRF Balance $72.3 $111.9 $126.7 BCRF = Beverage Container Recycling Fund and LCC = Local Conservation Corps. www.lao.ca.gov Legislative Analyst’s Office 35 2014-15 BUDGET • Eliminate Curbside Supplemental activities. This payment is distributed in Payments. Curbside recycling collection proportion to the population residing programs and neighborhood drop-off in each jurisdiction. According to the programs currently receive supplemental administration, the CalRecycle has payments to support their operations. minimal oversight on the use of the The administration proposes eliminating funds, which makes it difficult for the these supplemental payments because department to direct funding to activities curbside programs make up only 8 percent that promote its policy goals. Therefore, the of recycling. The administration also administration proposes eliminating this believes that curbside collection programs payment, though it proposes redirecting will likely continue even without the the funds to two grant programs (described supplemental payment. This change is below). The elimination of the local expected to result in $15 million in annual government payments would result in savings. a savings to the BCRF of $10.5 million annually. • Restructure “Administrative Fees.” Statute requires CalRecycle to provide • Restructure Handling Fees. Handling administrative fees, which are payments fees are monthly payments made from to program participants intended to cover the BCRF to recycling centers located in costs associated with their participation. “convenience zones”—typically within a These fees are provided to distributors one-half mile radius around supermarkets. (in the form of reduced CRV payments), These payments are intended to offset as well as processors and recyclers. The additional costs a recycler may incur as administration proposes eliminating a result of their location, such as higher administrative fees paid to processors rent. The amount of handling fees paid to and recyclers because they believe that recyclers is based on volume of material administrative costs will decline with recycled, which the administration believes the use of a new computer system being is administratively burdensome for the implemented, and these payments do department to calculate and susceptible not have a direct impact on recycling. to fraud. The administration proposes Distributors will keep their administrative replacing the volume-based handling fee fees, but will have increased reporting with a flat monthly payment of $1,700 requirements to provide additional data to per site. The flat payment is lower than CalRecycle. The administration estimates the current average of the volume-based that this will result in $25 million in fee, resulting in a savings to the BCRF of annual savings. approximately $7 million annually. • Eliminate Local Government Payments. • Create Recycling Enforcement Grant. The Currently, state law requires a $10.5 million administration proposes to establish a new annual payment to incorporated city competitive grant program, which would and county governments for beverage provide funding for local enforcement container recycling and litter reduction agencies to perform activities targeted 36 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET toward detecting and deterring fraud. This inherent in forecasting BCRF revenues and program would increase expenditures from redemption rates. Therefore, it is possible that even the BCRF by $7 million annually. if the Legislature were to adopt all of the Governor’s proposed changes, there could be funding shortfalls • Expand Beverage Container Recycling in the future. Competitive Grants. This grant program Proposal Could Have Small Impact on provides funding for local recycling and Recycling Rates. The proposed program changes litter reduction projects, such as projects would reduce some payments to participants, to increase the recycling rates in schools, especially high-volume recyclers in convenience improve container collection in cities, zones, curbside recyclers, and cities and counties or reduce litter at public events. The currently receiving payments. Consequently, some administration proposes increasing funding recyclers and processors currently operating with for this program by $3.5 million, resulting in a very small profit margin might shut down or $5 million in total funding for the program. operate fewer hours. However, these changes are a small portion of revenue for most participants, • Public Education and Information. The and they still receive other payments through the proposal includes $2.5 million for public program. For example, while curbside collection education in order to inform program programs would no longer receive curbside participants and the public of recent and supplemental payments, they would still receive proposed changes to the BCRP. CRV and processing payments, and are eligible • Program Administration. The proposal for several grant programs. This is in addition includes an additional 12 positions and to revenue from their contract with the local $1.5 million in funding for increased government and scrap value of the materials they program administration workload collect. Therefore, we expect that any impact on resulting from the above changes, such as recycling to be small. the establishment of a new grant program. Future Recycling Rate Increases Can Cause Another Structural Deficit. We calculate LAO Assessment that the proposed reforms would put the fund balance at the current break even redemption Proposal Is Reasonable Way to Eliminate rate of approximately 88 percent. However, if Structural Deficit. We find that the Governor’s the redemption rate were to increase past this proposal is a reasonable approach to addressing point, it could result in another structural deficit the BCRF structural deficit and avoiding the in the future. If that were to occur, CalRecyle need for proportional reductions in 2015-16. For anticipates that additional programmatic changes example, the proposal eliminates some program (such as additional spending reductions) would elements that are not as central to the mission of be necessary to support a redemption rate higher the CRV program, such as processing fee offsets. than 88 percent. The department states that it The Governor’s proposal also reduces payments expects the rate to stay close to the current rate. The where there is little data on the program’s impact department is currently required to issue quarterly on the overall beverage container recycling rate, reports on the status of the BCRF to allow the such as curbside supplemental payments. We note, Legislature to monitor revenue and expenditure however, that there is some level of uncertainty www.lao.ca.gov Legislative Analyst’s Office 37 2014-15 BUDGET trends. Figure 11 shows Figure 11 projected BCRF revenue Beverage Container Recycling Fund and expenditures in Summary of Fiscal Impacts of Governor’s Proposal 2016-17 under different Under Different Assumptions for Redemption Rates redemption rate (In Millions) assumptions. 2016-17 Few Outcome Redemption Rate 85% 88% 91% Metrics for Some Total revenues (CRV payments less $1,131 $1,131 $1,131 Grant Programs. administrative fees) Currently, there is little CRV payments to consumers -976 -1,010 -1,045 data available on the Funds Available for Programs $155 $121 $86 Program Expenditures $121 $121 $121 effectiveness of existing Net Surplus (+)/Deficit(-) $35 — -$34 grant programs. The administration is not in a recycling program participant—especially proposing outcome reporting on the new program distributors and recyclers—bearing greater costs. proposed. While CalRecycle issues reports that Therefore, the Legislature will want to make sure include the number of grants, grant recipients, that each of the changes is consistent with policy and grant statuses, these statistics do not indicate priorities. the overall effectiveness of the grant programs. Second, we recommend that the Legislature Other CalRecycle grant programs, such as the require the department to report annually on Tire Enforcement Grant, by comparison, do outcome metrics for all BCRF-funded grant track performance metrics such as the number of programs to ensure that in the future the violation notices issued by grantees that resulted in Legislature can determine whether these programs collections. are an effective use of funds. These reports should include data related to effects of programs on LAO Recommendations recycling rates and cost-effectiveness. For example, We recommend that the Legislature adopt the evaluation of enforcement grants should the Governor’s proposal. As stated above, we find include the amount of collections and estimates that the proposal is a reasonable way to ensure the of cost savings from reduced fraud. This would fiscal solvency of the BCRF, which is currently allow the Legislature to compare how effective operating with a large structural deficit. We would the enforcement grants are relative to other note, however, that each proposed reduction enforcement options. does come with some trade-offs and would result CALFIRE CalFire, under the policy direction of the owned privately or by state or local agencies. These Board of Forestry and Fire Protection, provides fire areas of CalFire responsibility are referred to as protection services directly or through contracts “state responsibility areas” (SRA) and represent for timberlands, rangelands, and brushlands approximately one-third of the acreage of the state. 38 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET In addition, CalFire regulates timber harvesting that result in a multiagency wildland fire protection on forestland owned privately or by the state system. As shown in Figure 12 (see next page), state and provides a variety of resource management or federal agencies have primary responsibility for services for owners of forestlands, rangelands, and providing wildland fire protection for 79 million brushlands. acres—almost 80 percent of all land—in California. The Governor’s budget proposes $1.4 billion Specifically, the state is currently responsible from various funds for support of CalFire in for wildland fire protection on approximately 2014-15. This is an increase of $180 million, 31 million acres of wildlands (generally privately or 14 percent, from estimated current-year owned). Federal Responsibility Areas (FRA) are expenditures. This increase is due to various budget comprised of 48 million acres of land owned and adjustments. For example, the budget reflects administered by various federal agencies including the allocation of $50 million in cap-and-trade the United States Forest Service (USFS), the Bureau auction revenues for fire prevention activities of Land Management, the National Park Service, and urban forestry. The budget also includes an the Fish and Wildlife Service, and the Bureau of increase of $39 million in reimbursements from Indian Affairs. local and federal governments for firefighting Since the 1930s, state and federal agencies services provided by CalFire. In addition, the have entered into agreements that provide for budget proposes a $56 million increase in General interagency cooperation between these two levels Fund support related to a shift in responsibilities of government. As part of this agreement, CalFire from the federal government to CalFire, increased and its federal counterparts have determined in payments for employee compensation, and which areas it is most efficient for the state and the annual adjustment to the emergency fund federal governments to have resource protection (e-fund). Chapter 8, Statutes of 2011 of the First responsibility. This includes, in some areas, CalFire Extraordinary Session (ABX1 29, Blumenfield), having fire protection responsibilities of FRAs, authorized a fee on all habitable structures within while in other areas, the federal government has fire the SRA. The revenue collected from this fee— protection responsibilities in SRAs. Approximately projected to be $76 million in 2014-15—is deposited four million acres of SRA are protected by the in the SRA Fire Prevention Fund for fire prevention USFS for wildland fire prevention and suppression, activities within the SRA. and CalFire protects a similar amount of federal land. Once responsibility for protecting lands is SRA Protection Adjustment determined, the agency accepting responsibility for Background. Fire protection efforts in the protection of that land assumes full financial California’s wildlands involve firefighting responsibility for any firefighting costs associated resources at the state, federal, and local levels. The with it. In addition, the agreement provides that responsibilities for each level of government are each agency, to the extent possible, will fight fires set forth in law and policy directives. However, consistent with the approach of the other agency these responsibilities and the geographic areas of had it been the one responsible. protection often overlap among governments. In Following the 2007 Angora Fire near Lake order to reduce overlap and maximize the use of Tahoe, the agreement between CalFire and its resources across jurisdictions, firefighting agencies federal counterparts was reexamined, and a generally rely on a complex series of agreements statewide review by CalFire and USFS determined www.lao.ca.gov Legislative Analyst’s Office 39 2014-15 BUDGET that the USFS could no longer adequately protect in these SRAs to CalFire. Consequently, the state some SRA it had previously covered. This resumed primary protection responsibility for determination was based on the following factors: 92,000 acres of high-risk, high-value SRA in 2013. Graphic Sign Off (1) a large number of homes in wildland areas, For the past year, CalFire has utilized existing (2) the likelihood of high-intensity wildfires, and resources from other areas in order toS ceocverer ttaheryse (3) high property and resource values. In particular, additional areas of responsibility. Analyst the review identified areas around the Lake Tahoe MPA Governor’s Budget. The Governor’s budget basin, Idyllwild (Riverside County), and Big Bear Deputy proposes ongoing funding of $14.2 million to Lake (San Bernardino County) as areas in which support 62.5 permanent positions, in order USFS could no longer offer adequate protection. to expand CalFire fire protection in the areas CalFire and USFS reached a new agreement in 2013 around Lake Tahoe, Idyllwild, and Big Bear that transfers primary fire protection responsibility Lake. This includes (1) $13.6 million from Figure 12 the General Fund to State and Federal Responsibility support 59.5 positions Areas for Wildland Fire Protection for fire suppression, and (2) $670,000 from the SRA Fire Prevention Fund to Federal Responsibility Areas support three positions for fire prevention State Responsibility Areas activities within the SRAs. These resources will provide staffing for seven fire stations and one helitack base in these areas. Proposed Expansions Likely to Have Additional Costs. The administration’s budget request is for the additional positions and operating costs necessary to provide fire prevention and protection services in these areas. The request, however, does 40 Legislative Analyst’s Office www.lao.ca.gov ARTWORK #140056 Template_LAOReport_large.ait 2014-15 BUDGET not identify CalFire’s long-term facility needs in adopt budget trailer legislation requiring CalFire these areas or the potential costs for purchase or to report on other areas of SRA currently protected construction of new facilities. by federal agencies that are most likely to be More Changes to Interagency Agreement transferred back to CalFire responsibility in the Likely. Since the interagency agreement between future. This report to the Legislature should be CalFire and federal agencies was first established completed prior to renewing the interagency in the 1930s, the nature of the SRA and FRA agreement. The report should identify the reasons have changed significantly. For instance, housing why those areas are most likely to be shifted back to development has increased in many areas of SRA. CalFire, the operational and capital costs associated Additionally, the responsibilities of CalFire and with CalFire management of those areas, and federal agencies have shifted. For example, CalFire any policy alternatives the state could consider is now required to provide certain fire prevention other than taking back full responsibility (such services to all inhabitants in SRA since those as sharing of resources and facilities or different residents pay the SRA fee. The USFS, on the other reimbursement policies). hand, does not have the authority to conduct the Illegal Fireworks same level of fire prevention activities as CalFire. Management and Disposal In addition, the USFS and CalFire have different fire suppression and fire fuel management policies. Background. Under state law, the Office of The current interagency agreement with the federal the State Fire Marshal (OSFM) within CalFire is government is set to expire in 2018. Based on our responsible for the management and disposal of conversations with CalFire, as SRA land continues seized illegal fireworks. Fireworks may be declared to be developed and fire suppression costs rise, illegal by federal, state, or local governments. federal agencies will want to shift more SRA fire Federal regulations designate some types of protection responsibility to the state. This would fireworks as illegal to be sold in the U.S. State result in additional costs to the state. law allows only certain fireworks legal under LAO Recommendations. It is consistent with federal law—those designated as “safe and sane” CalFire’s mission to protect these three areas to by the OSFM—to be sold in California. Many California’s fire protection standards, and the local jurisdictions in California choose to ban proposal would provide the level of resources the sale or use of any fireworks within their necessary for sufficient staffing according to borders. Consequently, illegal fireworks seized by the department’s methodology. Therefore, we law enforcement agencies include those that are recommend that the Legislature approve the illegally made in or transported into the U.S., as Governor’s proposal. However, the Legislature well as fireworks that are legally purchased in one should request additional information to jurisdiction (including parts of California, in some understand the full magnitude regarding the cases) and brought into another jurisdiction where fiscal impact of these changes, as well as potential they are illegal. changes in the future. Specifically, we further Possession of fireworks illegal in California recommend that the Legislature require CalFire is usually a misdemeanor and is punishable by to report at budget hearings on the expected penalties ranging from $500 to $50,000, as well capital outlay costs associated with the proposal. as possible incarceration, with the size of the In addition, we recommend that the Legislature penalty depending on the quantity of fireworks. www.lao.ca.gov Legislative Analyst’s Office 41 2014-15 BUDGET Law enforcement agencies, such as the California Governor’s Budget. The Governor’s budget Highway Patrol and local police, are authorized proposes $1.5 million in one-time funding from to seize illegal fireworks. Local fire departments the Toxic Substances Control Account (TSCA) to may also accept drop-offs of illegal fireworks. Once properly dispose of the current backlog of seized the fireworks are seized, state statute requires the fireworks. (The TSCA is used primarily by the OSFM to properly dispose of them. Because seized DTSC for responses to hazardous waste releases fireworks are considered hazardous waste and are and is funded mostly by a tax on businesses in explosive, proper disposal can be dangerous, labor industries that use, generate, or store hazardous intensive, and costly. Many of the fireworks must materials or that use products manufactured with be shipped to an out-of-state disposal site, at a cost those materials.) The Governor also proposes of roughly $10 per pound. Fireworks that cannot be to establish a 1.5 percent assessment on legal shipped because they are unpackaged or unstable safe and sane fireworks sold in California to are incinerated at a cost of about $30,000 annually. cover the ongoing costs of fireworks disposal. The OSFM estimates that around 100,000 pounds The administration estimates that the proposed of illegal fireworks are collected annually, and that assessment will generate $1.2 million annually it would cost approximately $600,000 if the state when fully implemented. Assessment revenues were to dispose of all collected fireworks in the will be deposited into the existing Fire Marshall’s state each year. Fireworks Enforcement and Disposal Fund to cover Chapter 563, Statutes of 2007 (SB 839, staffing and operation costs of the program. Calderon), increased the penalty amounts to the New Assessment Has Trade-offs. We find that levels described above in order to fund the disposal the new assessment proposed by the administration of seized fireworks. However, the revenue generated should raise more than a sufficient amount of from these penalties has never been sufficient to revenue to address the ongoing costs of the program. cover more than a small fraction of the program’s In addition, the proposed assessment avoids the need costs. The most penalty revenue collected in any to use other state resources—such as the General given year was around $30,000, and in some years, Fund or another special fund—on an ongoing basis. it has been as little as a few thousand dollars. It is However, the structure of the assessment means unclear why the penalty revenue collected is so low. that people purchasing fireworks legally would According to OSFM, the lack of ongoing funding be required to pay the costs associated with the for proper disposal has caused a backlog of illegal actions of those who break the law by purchasing fireworks needing proper disposal. The OSFM or transporting illegal fireworks. Moreover, the estimated that there was a backlog of 250,000 assessment does not impose a cost on those who pounds of fireworks as of August 2013. In 2012, a break the law and whose actions drive state costs. In working group made up of various stakeholders addition, we note that the administration’s proposed was convened to address the issues surrounding assessment is estimated to generate much more seized illegal fireworks, including funding for revenue—$1.2 million—than estimated annual disposal. However, the group did not issue a formal program costs—about $600,000. While there is proposal. The Legislature approved one-time some uncertainty surrounding the revenue estimates funding of $500,000 from the General Fund in the because of limited data, this assessment could result current year to help address the backlog. in twice as much revenue as the program costs on an annual basis. 42 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Other Funding Options Also Have associated with illegal activities, such as Trade-Offs. In reviewing this proposal, we illegal drug lab cleanups. identified several alternative options for funding • Local Governments—Share in Disposal fireworks disposal. Costs. Local law enforcement agencies and • TSCA. The Legislature could consider residents benefit from the OSFM’s disposal providing ongoing funding from TSCA. of fireworks through reduced fire and The Governor proposes using TSCA for safety risk. Moreover, local decisions—such one-time funding to address the existing as a county fireworks ban that increases backlog of seized fireworks, and we find the number of fireworks considered to be it to be an appropriate use of this fund. illegal—drive some of the OSFM’s costs. Additionally, TSCA currently has a large Therefore, a cost-sharing arrangement reserve, projected at $37 million—or between state and local governments 82 percent of revenues and transfers—in may be appropriate. This could be 2014-15. This financing mechanism achieved, for example, by (1) requiring avoids imposing an assessment on legal local governments to pay OSFM for a fireworks sales, and does not use money share of disposal costs, or (2) removing from the General Fund. However, creating the statutory requirement that OSFM be additional ongoing commitments from responsible for the disposal of all seized TSCA would compete with current fireworks, thereby leaving the responsibility activities paid for by the fund. For example, and cost with local governments. Both TSCA is currently used to fund many options avoid an assessment on legal other activities whose costs are projected to fireworks and do not divert state resources increase in the future, such as the cleanup from special funds. However, they may of hazardous waste sites and the Safer both be considered state-reimbursable Consumer Products program. Committing mandates. When the state mandates that a ongoing TSCA funding for fireworks local government provide a new program disposal may reduce the state’s ability to or higher level of service, the California perform these other activities in the future. Constitution often requires the state to • General Fund. To the extent that the reimburse the local government. Since the state currently provides seized fireworks Legislature determines that fireworks disposal, shifting the responsibilities or disposal has a benefit to the entire state, the costs back to local governments could General Fund is an appropriate funding require a higher level of local service and option. This financing mechanism avoids therefore be a state-reimbursable mandate. an assessment on legal fireworks sales Reimbursable mandates are paid from the and does not place a financial burden General Fund. Therefore, if these actions on any special funds. However, it does were determined to be reimbursable divert resources from the General Fund mandates, this option could be costly to the on an ongoing basis, an option that the General Fund. Moreover, the Legislature Legislature rejected in 2013-14. Notably, the would have less oversight of the program General Fund is used to fund some costs www.lao.ca.gov Legislative Analyst’s Office 43 2014-15 BUDGET and control of the costs than if the program materials, and once resold, much of this was operated by the state. material could end up back in California. LAO Recommendation. We find that the • Selling or Returning Fireworks to administration’s effort to develop a permanent Manufacturers. One option the working funding source for fireworks disposal is a group convened in 2012 considered was to reasonable one. The Governor’s proposed approach allow enforcement agencies to sell or give provides one option, and there are others—as we fireworks that are legal in California or the discussed above—that could be considered. Each U.S. back to manufacturers and retailers. option, however, has trade-offs. In determining Under this type of approach, fireworks which financing mechanism is most consistent companies would remove the fireworks with current legislative priorities, the Legislature from California and cover their costs by will need to make a policy decision about where reselling the fireworks where they are it wants the costs of disposal to be borne. If the legal. The benefit of this approach would Legislature chooses to adopt the Governor’s be to reduce the cost of disposal, as well as proposal, we recommend lowering the assessment generate some revenue that could be used, rate to 1 percent. This is enough to cover the for example, to cover costs of disposing of estimated costs of the program and account for the fireworks illegal in the U.S. On the other uncertainty in this new revenue stream. hand, this approach would put government agencies in the position of selling illegal AIR RESOURCES BOARD In California, air quality regulation is divided Cap-and-Trade Market between ARB and 35 local air quality management Surveillance districts. The local air districts manage the regulation of stationary sources of pollution Background (such as industrial facilities) and prepare local Cap-and-Trade. The Global Warming implementation plans to achieve compliance with Solutions Act of 2006 (Chapter 488, Statutes of the federal Clean Air Act. The ARB is responsible 2006 [AB 32, Núñez/Pavley]), commonly referred primarily for the regulation of mobile sources of to as AB 32, established the goal of reducing pollution (such as automobiles) and for the review GHG emissions statewide to 1990 levels by 2020. of local district programs and plans. The ARB also In order to help achieve this goal, ARB adopted oversees the state’s cap-and-trade program designed a regulation that establishes a cap-and-trade to reduce GHG emissions. The Governor’s budget program that places a “cap” on the state’s aggregate proposes $801 million for ARB in 2014-15, a net GHG emissions. To implement the cap-and-trade increase of $249 million (45 percent) over estimated program, ARB allocates carbon allowances equal expenditures in the current year. This increase to the cap. Each allowance equals one ton of largely reflects the appropriation of additional carbon dioxide equivalent. The ARB provides some Proposition 1B funds for port modernization, as well allowances for free, while making others available as increased funding from cap-and-trade auction for purchase at auctions. Once the allowances have revenues for ARB’s clean vehicle programs. 44 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET been allocated, entities can then “trade” (buy and financial contract whose price is “derived from” sell on the open market) the allowances in order to an underlying asset (in this case, cap-and-trade obtain enough to cover their total emissions for a allowances). Derivatives are primarily used for given period of time. hedging risk and investment purposes. Derivative The ARB is using a phased-in approach to trades of cap-and-trade allowances can be implement the cap-and-trade program. The first conducted through operated exchanges, such as the compliance period started in 2013 with electricity Intercontinental Exchange. The U.S. Commodity generators and large industrial sources subject Futures Trading Commission (CFTC) has oversight to the cap. Starting in January 2015, additional and enforcement authority of transactions that take entities—notably fuel suppliers—will become place in the derivatives market. subject to the cap, more than doubling the size of Governor’s Proposal the program. Oversight of Carbon Markets. The practice The Governor’s budget proposes $700,000 of auctioning, buying, and selling allowances for ARB to support three new positions and creates a “carbon market.” This market actually contract funding to expand its market surveillance consists of a number of distinct but interrelated capabilities and implement its market monitoring markets, each regulated in different ways. First, plan. The additional staff would review trades of emission allowances are introduced into the allowances to look for anomalies in trade patterns market via ARB’s quarterly auctions or through and coordinate with CFTC to incorporate more free allocations by the board. The ARB has advanced methods of surveillance into ARB’s own established rules for these auctions. For example, oversight activities. ARB’s rules allow entities that are not subject to LAO Recommendations cap-and-trade regulations to participate in auctions as long as ARB has determined that they do not Approve Positions Requested. As the state’s have a conflict of interest such as related to the cap-and-trade program expands and ARB links implementation and oversight of the program. California’s program with other countries, the Second, market participants can buy and sell cap-and-trade market will become larger and allowances. In January 2014, ARB linked the state’s more complex. Over the life of the program, it is cap-and-trade market with Quebec’s cap-and-trade anticipated that the market for allowances will market, which allows allowances in each market to be valued in the billions of dollars—making it be traded for each other. The ARB has regulatory essential that ARB provide adequate oversight to responsibility to oversee the direct trading of the program in order to ensure its integrity. Thus, California’s cap-and-trade allowances. These trades we find it is reasonable that ARB seek additional must be approved by ARB and inputted into the resources for this purpose and recommend that the Compliance and Tracking System Service. The Legislature approve the proposed three positions ARB has contracted with a third-party company and $700,000. to provide assistance with tracking of trades and Additional Legislative Oversight Warranted. market monitoring. While ARB has taken some steps to help build A third carbon market component—the its capacity to provide such oversight, which the derivatives market—has developed out of proposed funding and positions would expand, the the cap-and-trade program. A derivative is a Legislature will want to ensure that the board is www.lao.ca.gov Legislative Analyst’s Office 45 2014-15 BUDGET providing an adequate level of oversight. The ARB current monitoring plan and how its approach is an air pollution regulatory body, and regulating to market oversight will be adequate given the and overseeing international commodity markets size and complexity of the emerging market. In is not part of its core competency. In addition, conducting this oversight, the budget committees since ARB’s monitoring plan is confidential, may want to seek the participation of the relevant the Legislature currently has little information policy committees that deal with energy, as well as regarding planned monitoring activities. It will regulation of financial institutions. Depending on be important for the Legislature to evaluate the the outcome of these hearings, the Legislature could safeguards that ARB is putting in place. consider whether additional steps are necessary to Therefore, we recommend that the Legislature provide ongoing oversight of the carbon market or direct ARB to report at budget hearings on its ARB’s market surveillance activities. CALIFORNIA ALTERNATIVE ENERGY AND ADVANCED TRANSPORTATION FINANCING AUTHORITY (CAEATFA) The CAEATFA is housed within the State efficiency upgrades (through rebate and incentive Treasurer’s Office and is tasked with the authority programs) and renewable energy installations to provide financing assistance to entities that (through California’s Million Solar Roofs program). wish to develop and commercialize advanced The state has three main programs to help property transportation and alternative energy technologies owners finance these types of projects. They are as intended to reduce air pollution and conserve follows: energy. The CAEATFA consists of five members: • On-Bill Financing. Since 2010, all state the State Treasurer (who serves as the chairperson), investor-owned utilities (IOU) have the State Controller, the Director of the DOF, the provided upfront financing for commercial Chairperson of the California Energy Commission entities to install energy efficiency upgrades (CEC), and the President of the California Public and renewable energy projects. Entities Utilities Commission (CPUC). The Governor’s receiving financing repay with interest the budget proposes a total of $27.5 million IOUs over time through additional charges for CAEATFA in 2014-15, a net increase of on their electricity bills. $17.5 million over the estimated expenditures in the current year. The CAEATFA’s programs are • Property Assessed Clean Energy (PACE) primarily funded through transfers from CEC. Loss Reserve. Under state law, local governments may administer PACE Energy Efficiency programs to provide up-front financing Financing Pilot Program for renewable and energy efficiency-related and PACE Loss Reserve upgrades to properties. Through PACE, Background. The state is currently pursuing property owners who wish to install multiple approaches to assisting residential and renewable energy-generating devices or commercial property owners to implement energy make energy efficiency improvements to 46 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET their properties may borrow funds from CAEATFA as the administrator for the the participating local government for pilot program. those purposes. These loans are repaid by Governor’s Budget. The Governor’s budget the property owner over 10 to 20 years via includes two proposals that would provide an assessment on the owner’s property CAEATFA additional funding and positions for tax bill. The assessment remains on the energy efficiency financing programs. First, the property even if it is sold or transferred. Governor requests a reappropriation of $10 million Program participants anticipate that that was initially appropriated in the 2013-14 energy savings resulting from the retrofit budget for implementation of the PACE loss will offset the cost of the property tax reserve program. The administration requests assessments. In 2010, the Federal Housing the reappropriation because enabling legislation Finance Agency (FHFA) raised concerns was not passed until September 2013. Second, the that residential PACE financing could budget includes an augmentation of $3.2 million potentially create additional risk for federal in 2014-15 and seven limited-term positions to mortgage enterprises (Freddie Mac and administer the CPUC’s energy efficiency financing Fannie Mae) because when foreclosure pilot program. occurs, the original lender must pay Issues for Legislative Consideration. The property taxes owed—including PACE administration’s proposals are consistent with assessments—before paying mortgage legislative intent to promote energy efficiency costs. In order to address FHFA’s concerns and renewable energy technology in California. and to encourage local government However, based on the research we have reviewed, participation in this type of financing, the it is unclear how effective financing is at getting CAEATFA has set up a PACE loss reserve property owners to undertake projects that would program in which the state will reimburse not have otherwise occurred. Moreover, we note the original mortgage lender for the costs that with the addition of CPUC’s new pilot program associated with PACE assessments during a proposed to be administered by CAEATFA, there foreclosure. would now be three state financing programs with the same goal of increasing implementation of • CPUC Energy Efficiency Financing Pilot energy efficiency and renewable energy projects. Program. In 2010, the CPUC hired a Therefore, it is unclear to what extent these consulting team to identify financing programs’ overlapping missions could result in approaches that would encourage greater duplication of effort among programs. adoption of energy efficiency upgrades. LAO Recommendations. In order to better From this work, in 2012 the CPUC ensure that ratepayer funds are being used established a new financing pilot program efficiently, we recommend that the Legislature to provide loan loss reserve and interest approve budget trailer legislation that requires rate buy-downs for banks, in order to CPUC—in consultation with CAEATFA—to reduce their financial risk and provide evaluate the effectiveness of each of the three greater incentive for them to provide financing programs, upon completion of the new financing for these types of projects. CPUC pilot program. This evaluation should As part of its decision, CPUC selected include information that allows the Legislature www.lao.ca.gov Legislative Analyst’s Office 47 2014-15 BUDGET to compare the cost and effectiveness of each of these projects compared to their benefits; and approach, including information on (1) the number, (3) the degree to which these programs overlap with type, and scale of energy efficiency upgrades and each other for customers. renewable energy installations funded; (2) the costs DEPARTMENT OF FISH AND WILDLIFE The DFW administers programs and enforces inland spills because of funding limitations. The laws pertaining to the fish, wildlife, and natural 2013-14 budget included $44 million to support resources of the state. It protects and maintains OSPR activities, including 190 positions. habitat and manages about one million acres of The OSPR is principally funded by the Oil ecological reserves, wildlife management areas, Spill Prevention Administrative Fund (OSPAF), and fish hatcheries throughout the state. It also which is supported by a fee of 6.5 cents on each regulates hunting and fishing in conjunction with barrel of oil brought into California over marine the Fish and Game Commission. The DFW is also waters. (The State Lands Commission also receives the lead state agency for preventing and responding some funding from OSPAF.) This fee is currently to oil spills. collected by the Board of Equalization from marine The Governor’s 2014-15 budget proposes a total terminals and marine pipeline operators. The fee of $404 million from various funds (mainly special generates approximately $38 million in revenues funds) for support of the department. This is a net annually. In the current fiscal year, the state is decrease of $52 million, or 11 percent, compared to projected to spend $43 million from OSPAF, projected current-year expenditures. This change resulting in a structural deficit of about $5 million. primarily reflects reduced bond expenditures. Under current law, the OSPAF fee will decrease to 5 cents on January 1, 2015. Oil Spill Prevention and In addition, the department supports a Response Fee Increase statewide system of facilities throughout the state, Background. The Office of Spill Prevention called the Oiled Wildlife Care Network (OWCN), and Response (OSPR) within DFW is responsible to rapidly respond to and treat wildlife that have for preventing, preparing for, and responding to been affected by an oil spill. The OWCN is operated oil spills. The OSPR activities include reviewing oil by the University of California but receives spill contingency plans, performing inspections $2 million in support annually from DFW, using and investigations, tracking spills, and directing interest from the Oil Spill Response Trust Fund spill response and cleanup efforts. The OSPR (OSRTF). However, the interest from the OSRTF has statutory authority to regulate prevention of is no longer sufficient to fund OWCN as a result of marine spills (through activities such as reviewing a loan made to the General Fund and low interest oil spill contingency plans and conducting drills). rates. That authority, however, does not extend to inland Governor’s Proposal. The Governor proposes prevention activities. Statute further designates statutory changes to maintain the OSPAF fee at OSPR as the primary agency responsible for 6.5 cents per barrel on an ongoing basis, as well responding to both inland and marine spills. as expand the fee to all oil entering California Currently, OSPR responds to only about half of refineries, including oil transported by rail and 48 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET pipelines. The administration projects that the the case of OSPR’s oil prevention and response proposed fee increase would increase revenues programs, the potential harm is the risk associated by $6.6 million in 2014-15 ($12.3 million with an oil spill. Currently, the OSPAF fee is annually when fully implemented) compared to charged to marine vessels and facilities based on current-year revenues. The Governor’s budget for the amount of oil they transport and thus only 2014-15 proposes to increase ongoing spending by accounts for one aspect of oil spill risk. Other $8.7 million, as follows: aspects of risk include the likelihood that a spill will happen (which can vary based on how the oil • $6.2 million and 38 permanent positions is transported), the type and chemical makeup to support the proposed expansion of the oil, and the vulnerability of the ecosystem of OSPR’s activities to include inland where the spill occurs. For example, an oil spill prevention activities, as well as allow of a given size may have greater environmental the office to respond to all inland spills. consequences if it occurs in a smaller water body or According to the administration, the in an ecosystem with high numbers of endangered proposed expansion is necessary because species. Thus, the proposed fee structure is unlikely the amount of oil transported over land (by to charge regulated entities in proportion to the rail or pipeline) is expected to significantly potential risk they pose. increase in coming years. LAO Recommendations. Given the potential • $2.5 million to support the OWCN and environmental damage that can be caused by change the program’s fund source (from inland spills, as well as the projected increase the OSRTF to the OSPAF). The proposed in inland oil transportation, we find that the amount reflects an increase of $500,000 for intent of expanding prevention activities to land the program relative to the current-year is reasonable. Thus, we recommend that the funding level. Legislature approve the administration’s proposal to expand the OSPAF fee to all oil entering We note that even with the fee increase, California refineries to ensure that parties that expenditures from OSPAF are projected to exceed transport oil inland (and therefore pose a spill risk) revenues in 2014-15 by $7.1 million. While a fund pay for some prevention and readiness activities. surplus has been able to offset the structural deficit As noted above, a flat fee per barrel does not in past years, the projected fund balance would fully capture all factors that affect spill risk. Thus, decrease to only $1.8 million (4 percent of the total we recommend the Legislature amend the proposed estimated revenue) in 2014-15 under the proposal. budget trailer legislation to direct the department Thus, a relatively small difference between actual to develop a risk-based fee structure to cover the and estimated revenues in 2014-15 could put the costs of its combined inland and marine oil spill fund into deficit. In future years, the department prevention program. We also recommend that the proposes to use some of the increased revenue to legislation authorize the department to charge the address the structural shortfall in OSPAF. fees to generate total revenue up to the amount Fee Structure Not Tied to Spill Risk. One authorized for oil spill prevention and response in approach to apportioning the costs of a regulatory the annual state budget. program is to charge regulated entities in In developing this structure, the department proportion to the potential harm they impose on should consider several factors, including: (1) which public resources (such as the environment). In www.lao.ca.gov Legislative Analyst’s Office 49 2014-15 BUDGET factors are most important for determining oil In addition, as noted above, this proposal spill risk, including how oil spills affect different would significantly reduce the balance in OSPAF, ecosystems; (2) how often the fee should be adjusted putting it at risk of a deficit. Thus, we recommend to account for changing risk; and (3) how to ensure the Legislature fund the requested positions for that the fee structure is not administratively OSPR’s activities for a half year, resulting in a burdensome. Charging fees based on relative oil reduction of the appropriation by $1.6 million in spill risk could help ensure that the state is reducing 2014-15. Based on current revenue estimates, this risk effectively, as well as helping to ensure that would result in a fund balance of 8 percent. We regulated entities are bearing an appropriate share further recommend that the Legislature approve of the costs of the program. the requested funding for OWCN from OSPAF. DEPARTMENT OF TOXIC SUBSTANCES CONTROL The DTSC regulates hazardous waste permit renewals, many facilities are operating on management, cleans up or oversees the cleanup of “continued permits.” This means that these facilities contaminated hazardous waste sites, and promotes have submitted permit renewal applications, but the reduction of hazardous waste generation. The DTSC has not completed its review and approval department is funded from (1) fees paid by persons process, which usually takes several years. While who generate, transport, store, treat, or dispose of these particular facilities are allowed to continue hazardous wastes; (2) environmental fees levied operations under the terms of their original permit, on most corporations; (3) the General Fund; and these are frequently no longer based on up-to-date (4) federal funds. The Governor’s budget requests technologies, practices, and safeguards. Backlogs $195 million from various funds for support of the in continued permits are also problematic because DTSC in 2014-15. This is a decrease of $8.3 million, it means that permit holders have not undergone or 4 percent, from estimated current-year recent assessments of their facilities to determine expenditures. if they are releasing any hazardous wastes into the environment. These assessments are part of the Proposals to Reduce permit approval process. Backlogs and Improve In early 2012, the department responded Hazardous Waste Tracking with its “Fixing the Foundation” initiative, Background. The DTSC regulates hazardous which includes more than 30 different activities waste management by issuing permits; tracking intended to improve its operations and restore the generation, transportation, and disposal public trust in the department. Activities include of hazardous waste; coordinating cleanup of increasing cost recovery from those responsible contaminated sites; and seeking recovery of funds for hazardous waste contamination, reducing from parties responsible for contamination. permitting backlogs, strengthening enforcement, Concerns have been raised in recent years and improving the financial sustainability of its regarding how DTSC has carried out these operating funds. responsibilities. For example, due to a backlog Governor’s Budget. As shown in Figure 13, the in processing applications for hazardous waste Governor’s budget includes four proposals designed 50 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET to address the above concerns and implement Cost estimates need to be updated to certain aspects of the department’s Fixing the ensure that there are sufficient funds Foundation initiative. These proposals include to pay for the decontamination and increased funding over the next two years. In total, decommissioning of hazardous waste the budget proposes $4.6 million in 2014-15 and facilities. $3.2 million in 2015-16 from the Hazardous Waste • Hazardous Waste Tracking System. The Control Account and the TSCA. Specifically, the budget includes $1.3 million in one-time request includes the following: funding to rebuild the Hazardous Waste • Cost Recovery. The administration requests Tracking System, an IT system used by $1.6 million and 14 two-year limited the department to track the generation, term positions to reduce a backlog of transportation, and disposal of hazardous reimbursements owed to the department waste. The current software used by DTSC for hazardous waste clean-up activities. was last updated in 2002 and is no longer The administration estimates that this supported by the developer. Additionally, cost recovery backlog includes around the capabilities of the system no longer $26 million in unbilled or uncollected costs meet the current needs of DTSC and other that are recoverable. regulatory agencies. • Hazardous Waste Permitting. The • Hazardous Waste Manifest Error administration requests $1.2 million and Correction. The budget includes $381,000 eight two-year limited term positions and 3.5 two-year limited term positions for two sets of activities. First, the to correct existing errors in the hazardous administration proposes to address the waste manifest data. Hazardous waste hazardous waste permit renewal backlog. manifests travel with hazardous waste There are currently 24 hazardous waste from the point of generation, through facilities with continued permits, which transportation, to the final disposal is expected to grow to 34 by 2017. Second, facility. Each party in the chain of shipping the administration proposes to update (including the generator), signs and keeps cost estimates associated with closing one of the manifest copies, creating a hazardous waste facilities in the future. Figure 13 The Department of Toxic Substances Control Budget Proposals (Dollars in Thousands) 2014-15 Limited-Term Proposal Amount Fund Positions Address cost recovery backlog $1,618 TSCA, HWCA 14.0 Address permit renewal backlog and update cost estimates 1,191 HWCA 8.0 Rebuild hazardous waste tracking system 1,364 HWCA — Correct errors in the hazardous waste manifest data 381 HWCA 3.5 Totals $4,554 25.5 TSCA = Toxic Substances Control Account and HWCA = Hazardous Waste Control Account. www.lao.ca.gov Legislative Analyst’s Office 51 2014-15 BUDGET tracking system for the hazardous waste. the permitting proposal will eliminate the entire The manifests are used to verify that the backlog of permit renewals. Consequently, it is hazardous waste was managed properly unclear whether the backlogs will begin to grow in and arrived at its intended destination. the future after the limited-term positions expire. They are also often used as evidence in We would note, however, that the department criminal enforcement actions. However, reports that it is taking additional actions—such as according to the department, there are internal administrative and process changes—that many errors in the system. These errors are aimed at addressing some of these problems. can occur for various reasons, including Additionally, while the proposal to correct handlers of hazardous waste incorrectly, errors in the manifest data would be beneficial, incompletely, or illegibly filling out the it would not entirely fix the problems it seeks to handwritten manifests, as well as DTSC address. This is because the proposal does not staff making mistakes when entering the address the root causes of such errors (such as data into the electronic system. These illegible handwriting or data entry mistakes), thus errors create difficulties for monitoring continuing to allow incorrect data to be entered hazardous waste and prevent DTSC from into the system. We note, however, that many verifying that hazardous waste is being problems associated with the manifest system are properly managed. due to the paper manifests currently required by the federal government. So, DTSC is limited in its Proposals Would Address Important Issues. . . ability to make certain changes in this area. The Governor’s four proposals address documented LAO Recommendation. We recommend concerns and would allow the department to approval of the Governor’s proposals because they make progress toward resolving some key issues, should enable the department to make progress including low rates of cost recovery, inconsistent in addressing operational deficiencies. We further hazardous waste tracking, and permitting backlogs. recommend that the Legislature require the Therefore, the administration’s proposals present department to report at budget subcommittee the Legislature with a reasonable approach to hearings this spring on its progress in addressing these issues as part of the 2014-15 implementing the Fixing the Foundations initiative. budget. Such a report should include (1) how these four . . . However, Proposals Alone Will Not Fix proposals fit into the department’s overall strategy, All Issues on Ongoing Basis. While we find the (2) the next steps to be taken—especially regarding administration’s proposals to be reasonable, it is aspects of the initiative not proposed for funding, important to note they will not fully address the and (3) how each of these steps will be the most identified problems for the long run. For example, cost-effective means of accomplishing all of the while two of these proposals address current initiative’s objectives. The department should also backlogs, they rely on limited-term positions that provide information on how it will prevent the will not address the underlying problems that growth of cost recovery and permitting backlogs in caused the backlogs to form in the first place. In the future. fact, the administration does not anticipate that 52 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET SUMMARY OF RECOMMENDATIONS Issue Governor’s Proposal LAO Recommendation Crosscutting Issues Hydraulic fracturing and other well $20.5 million and 85 positions in (1) Approve DOC request; stimulation—SB 4a three departments—Department (2) ensure that administration’s of Conservation (DOC), SWRCB, interpretation of current law and ARB—to develop and is consistent with legislative implement regulations related intent, for example, regarding to hydraulic and acid matrix assessment of regulatory fees; fracturing. and (3) deny SWRCB request for groundwater monitoring contracts. Deferred maintenance $40 million for Department of Require administration to report Parks and Recreation (DPR) at budget hearings on how and $3 million for CalFire—all departments will prioritize from the General Fund—to projects. Consider using DPR address backlogs of deferred as a “test case” to identify maintenance. strategy for addressing deferred maintenance on an ongoing basis. Water Action Plan (WAP) Several budget proposals, Require administration to provide totaling $621 million, to an implementation and financing begin implementation of the strategy for the five years covered administration’s recently released by the WAP. WAP. State Water Resources Control Board (SWRCB) Transfer of drinking water program Shift drinking water program— Approve transfer. Require including $308 million—from the administration to report at budget Department of Public Health. hearings on transition plan, and require reporting on outcomes of transfer. Department of Water Resources (DWR) Integrated Regional Water $473 million (Proposition 84 funds) Reduce appropriation to Management (IRWM) for IRWM grants. $200 million to more closely align with past grant award levels. Also require DWR to report at budget hearings regarding consistency of implementation approach with legislative intent. Water and energy efficiency $20 million from cap-and-trade Reject use of $10 million from cap- auction revenues, including and-trade auction revenues for $10 million to upgrade two State generator projects. Water Project hydroelectric generators. Department of Resources Recycling and Recovery (CalRecycle) Beverage Container Recycling A series of programmatic changes Adopt proposals, and require Fund (BCRF) operating deficit to eliminate structural shortfall in department to report annually on BCRF. outcome metrics for all BCRF- funded grant programs. (Continued) www.lao.ca.gov Legislative Analyst’s Office 53 2014-15 BUDGET Issue Governor’s Proposal LAO Recommendation Department of Forestry and Fire Protection (CalFire) State Responsibility Area Increase $14.2 million (primarily Approve proposal. Require CalFire adjustment General Fund) to take over fire to report at budget hearings protection services from federal on future costs of proposal. agencies in three areas. Also require department to report on potential costs and alternatives associated with potential additional transfers of responsibility from federal agencies. Illegal fireworks management and Create assessment on fireworks Consider alternative options to disposal sales to fund costs to dispose of determine preferred policy option illegal fireworks. Also, one-time for disposing of illegal fireworks. transfer of $1.5 million from TSCA If the Governor’s proposal is to proporly dispose of current approved, reduce assessment to backlog of illegal fireworks. 1 percent. Air Resources Board (ARB) Cap-and-trade market surveillance $700,000 to expand cap-and-trade Approve positions, and direct board market surveillance capabilities to report at budget hearings and implement market monitoring regarding its market surveillance plan. strategy. California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) Energy financing pilot and PACE Reappropriate $10 million for Require CPUC—in consultation loss reserve implementation of PACE loan loss with CAEATFA—to evaluate the reserve program, and provide effectiveness of various financing $3.2 million to administer energy programs. efficiency financing pilot program. Department of Fish and Wildlife (DFW) Oil Spill Prevention and Response Expand current fee to all oil entering Approve proposal, and direct fee increase California refineries, including oil DFW to develop a risk-based fee transported by rail and pipelines. structure. Also, approve positions Use additional funding to expand for half year, resulting in reduction oil spill prevention and response of $1.6 million in 2014-15. activities by $8.7 million. Department of Toxic Substances Control Proposal to reduce backlogs Implement four proposals totaling Approve proposal, and require and improve hazardous waste $4.6 million from special funds department to report at budget tracking to address (1) cost recovery hearings regarding progress in backlog, (2) hazardous waste implementing reforms designed permit backlog, (3) an information to address various operational technology system in need issues. of updating, and (4) errors in hazardous waste tracking data. a Chapter 313, Statutes of 2013 (SB 4, Pavley). TSCA = Toxic Substances Control Account; PACE = Propery Assessed Clean Energy; and CPUC = California Public Utilities Commission. 54 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET www.lao.ca.gov Legislative Analyst’s Office 55 2014-15 BUDGET Contact Information Brian Brown Managing Principal Analyst 319-8325 Brian.Brown@lao.ca.gov Ashley Ames Forestry, Parks, Waste, and Recycling 319-8352 Ashley.Ames@lao.ca.gov Anton Favorini-Csorba Water, Fish and Wildlife 319-8336 Anton.Favorini-Csorba@lao.ca.gov Tiffany Roberts Air Quality and Energy 319-8309 Tiffany.Roberts@lao.ca.gov LAO Publications This report was reviewed by Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 56 Legislative Analyst’s Office www.lao.ca.gov