LAO

The 2017-18 Budget: Resources and Environmental Protection

Legislative Analyst's Office · lao-3558 · Report · 2017-02-15

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The 2017-18 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 2017 2017-18 BUDGET Cover Photo: The cover photo image was provided courtesy of the California Department of Water Resources. i Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET TABLE OF CONTENTS Executive Summary ��1 Overview of Governor’s Budget ��3 Cross-Cutting Issues ��5 Cap-and-Trade ��5 Drought Response ��7 Proposition 1—2014 Water Bond ��13 Sustainable Groundwater Management Act ��16 Timber Regulation and Forest Restoration Program ��21 Summary of New Natural Resources Capital Outlay Projects ��26 Department of Parks and Recreation ��26 Base Funding to Maintain Operations ��27 The Department of Fish and Wildlife ��32 Fish and Game Preservation Fund ��33 Department of Conservation ��42 Oil, Gas, and Geothermal Well Statewide Tracking and Reporting ��42 Department of Resources Recycling and Recovery ��45 Beverage Container Recycling Reforms��45 Air Resources Board ��50 Volkswagen Settlement ��51 Southern California Consolidation Project ��54 Department of Toxic Substances Control ��57 Statutorily Required Budget Estimate ��57 Lead-Acid Battery Recycling Act Implementation ��59 Summary of Recommendations ��62 www.lao.ca.gov Legislative Analyst’s Office ii 2017-18 BUDGET iii Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET EXECUTIVE SUMMARY In this report, we assess many of the Governor’s budget proposals in the resources and environmental protection areas and recommend various changes. Below, we summarize our major findings. We provide a complete listing of our recommendations at the end of this report. Budget Provides $8 Billion for Programs The Governor’s budget for 2017-18 proposes a total of $8.3 billion in expenditures from various sources—the General Fund, various special funds, bond funds, and federal funds—for programs administered by the Natural Resources ($5 billion) and Environmental Protection ($3.3 billion) Agencies. This total funding level in 2017-18 reflects numerous changes compared to 2016-17, the most significant of which include (1) decreased bond spending of $2.8 billion, largely attributable to how prior-year bond expenditures are accounted for in the budget; (2) a reduction of $600 million in spending from the Greenhouse Gas Reduction Fund related to shifting this funding to a “control section” of the budget act; and (3) a net reduction of $299 million from the General Fund, in large part due to one-time funding provided in 2016-17, such as for deferred maintenance projects. Governor Proposes to Extend Cap-and-Trade Beyond 2020 The Governor’s budget proposes to spend $2.2 billion in cap-and-trade auction revenue on activities intended to reduce greenhouse gas (GHG) emissions. However, $1.3 billion would only be spent after the Legislature enacted—with a two-thirds urgency vote—new legislation extending the Air Resources Board’s authority to operate a cap-and-trade program beyond 2020. In our recent report, The 2017-18 Budget: Cap-and-Trade, we provide a full assessment of the policy issues raised by the Governor’s proposal. In summary, we recommend approving the extension of cap-and- trade (or a carbon tax) with a two-thirds vote in order to (1) better ensure the state meets its GHG reduction goals cost-effectively, (2) reduce uncertainty regarding the state’s authority to auction allowances, and (3) broaden the allowable uses of auction revenues based on legislative priorities. Water Policy Continues to Be a Focus of Budget The budget includes several notable proposals intended to continue and extend efforts related to the recent drought and implementation of the Sustainable Groundwater Management Act (SGMA). Drought-Related Funding. While a series of winter storms has significantly increased the amount of water available for both human and environmental uses, they will not be sufficient to eliminate all of the impacts from the state’s multiyear drought. We recommend approving some of the Governor’s proposed $178 million in one-time funding for continued drought response activities. The specific amount to approve should be based on an assessment of updated conditions later this spring, but we expect that the increase in precipitation has rendered some components of the Governor’s proposals unnecessary. We also recommend the Legislature consider providing some ongoing funding for activities that would both address current conditions and increase the state’s resilience in future droughts. www.lao.ca.gov Legislative Analyst’s Office 1 2017-18 BUDGET Implementation of SGMA. Effective management of its groundwater resources is a vital component of the state’s overall water management strategy, and local agencies are in a critical stage of SGMA implementation. As such, we recommend the Legislature approve the Governor’s proposals to provide additional resources to the Department of Water Resources to provide assistance to local agencies ($15 million) and the State Water Resources Control Board to conduct intervention activities ($2.3 million). We also recommend the Legislature continue to monitor and oversee implementation of the act to ensure it stays on track and to identify if additional legislative action might be needed. Several Special Funds Face Potential Shortfalls Many of the state’s resources and environmental protection programs are funded largely from special funds, which rely on non-General Fund revenues, such as fees. In this report, we evaluate the fund condition of several special funds that face future budget shortfalls if actions are not taken to bring revenues and expenditures in line. Base Funding for State Parks. The Governor proposes one-time augmentations from the State Parks and Recreation Fund (SPRF) and the Environmental License Plate Fund to address a projected budget-year shortfall in SPRF of $25 million. We find that these options are not available on an ongoing basis. Consequently, we recommend the Legislature begin consideration of options that would provide an ongoing budget solution to the SPRF structural deficit. Fish and Game Preservation Fund (FGPF). We are concerned that the Governor’s proposal to address the $20 million operating shortfall in the FGPF nondedicated account: (1) includes a commercial fishing landing fee increase that may be too large for the industry to sustain and (2) adds new activities that exacerbate the account’s imbalance. Moreover, the proposals leave an ongoing shortfall for the Legislature to address in 2018-19. We recommend the Legislature (1) adopt a commercial landing fee increase but perhaps at a lower level or more gradually, (2) adopt the Governor’s proposal to transfer lifetime license fee revenues to the nondedicated account, (3) modify the Governor’s proposals to begin two new activities by funding them on a limited-term basis using different funding sources, and (4) begin the process of identifying and considering options for addressing the remaining shortfall on an ongoing basis. Beverage Container Recycling Program. While the budget does not include a proposal to address the Beverage Container Recycling Fund’s structural imbalance—most recently estimated at $24 million at the end of 2017-18—the administration did release a policy paper outlining general principles and suggested approaches to addressing the problem. We find that the issues and ideas raised in the paper provide a reasonable starting place for discussion, but the Legislature will require more details in order to enact program reform. Timber Harvest and Forestry Program. The budget includes a total of $15.2 million for three state departments to implement various forest health related programs. The administration’s proposed activities are reasonable but represent a relatively large amount of additional spending that will draw down the Timber Regulation and Forest Restoration Fund balance. We recommend that the Legislature identify program activities and grants it would prioritize and determine a funding strategy for the budget year and thereafter that reflects those priorities. 2 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET OVERVIEW OF GOVERNOR’S BUDGET Total Proposed Spending of $8.3 Billion. environmental protection programs—$2.8 billion, The Governor’s budget for 2017-18 proposes a or 85 percent—is from special funds. total of $8.3 billion in expenditures from various Decreases From 2016-17 Largely Reflect sources—the General Fund, various special funds, Technical Changes. The proposed 2017-18 funding bond funds, and federal funds—for programs levels for both natural resources and environmental administered by the Natural Resources and protection departments are significantly lower Environmental Protection Agencies. Specifically, than estimated expenditures for 2016-17. Notably, the budget includes $5 billion for resources the budget shows significant decreases in spending departments and $3.3 billion for environmental from bond funds, special funds, and the General protection departments. Fund. However, these changes largely reflect Funding Mostly From General Fund and certain technical budget adjustments rather than Special Funds. As shown in Figure 1, more than significant programmatic changes. half—$2.8 billion—of the $5 billion proposed for • Bond Funds. Proposed bond funds resources departments is from the General Fund. are estimated to decline by a total of Another $1.4 billion (27 percent) is from special $2.8 billion, half for resources departments funds. As shown in Figure 2 (see next page), the and half for environmental protection vast majority of the $3.3 billion in funding for departments. Much of this apparent Figure 1 Natural Resources Budget Summary (Dollars in Millions) Change From 2016‑17 2015‑16 2016‑17 2017‑18 Actual Estimated Proposed Amount Percent Expenditures Department of Forestry and Fire Protection $1,306 $1,548 $1,423 -$126 -8% General obligation bond debt service 970 1,029 1,002 -27 -3 Department of Parks and Recreation 466 681 621 -60 -9 Energy Commission 436 661 489 -172 -26 Department of Water Resources 916 2,005 449 -1,556 -78 Department of Fish and Wildlife 409 493 442 -51 -10 Wildlife Conservation Board 116 502 124 -379 -75 California Conservation Corps 95 95 119 24 25 Department of Conservation 87 151 118 -33 -22 Coastal Conservancy 44 143 55 -88 -61 Other resources programs 214 226 182 -44 -19 Totals $5,059 $7,535 $5,024 ‑$2,511 ‑33% Funding General Fund $2,600 $3,110 $2,811 -$299 -10% Special funds 1,283 1,646 1,359 -287 -17 Bond funds 1,030 2,477 564 -1,914 -77 Federal funds 146 302 290 -11 -4 www.lao.ca.gov Legislative Analyst’s Office 3 2017-18 BUDGET budget-year decrease is related to how spending from this fund for these bonds are accounted for in the budget, departments has decreased. In 2016-17, making year-over-year comparisons resources and environmental protection difficult. Specifically, bond funds that were departments are estimated to spend appropriated but not spent in prior years $600 million from GGRF. In total, the are assumed to be spent in the current year. 2017-18 budget proposes to appropriate The 2016-17 bond amounts will be adjusted a total of $1.3 billion from GGRF for in the future based on actual expenditures. various programs, including resources and environmental protection programs. • Special Funds. The 2017-18 budget reflects reduced special fund expenditures of • General Fund. The budget for resources $552 million for environmental protection departments includes a net reduction of departments and $287 million for natural $299 million (10 percent) in General Fund resources departments. However, the support. However, much of this decrease Governor’s budget does not include is related to one-time funding provided spending from the Greenhouse Gas in 2016-17, including $187 million for Reduction Fund (GGRF)—which receives deferred maintenance projects. Estimated revenue from cap-and-trade allowance current-year expenditures also include auctions—in the budgets of individual $45 million in additional emergency departments in 2017-18 as it has in prior firefighting costs for the Department of years. Instead, these expenditures are Forestry and Fire Protection (CalFire), an funded in a separate “control section” amount that is adjusted annually based on of the budget, making it appear that historical emergency firefighting costs. Figure 2 Environmental Protection Budget Summary (Dollars in Millions) Change From 2016‑17 2015‑16 2016‑17 2017‑18 Actual Estimated Proposed Amount Percent Expenditures Resources Recycling and Recovery $1,687 $1,599 $1,563 -$36 -2% State Water Resources Control Board 897 2,943 934 -2,009 -68 Air Resources Board 698 844 401 -443 -53 Department of Toxic Substances Control 220 248 272 24 10 Department of Pesticide Regulation 91 99 96 -3 -3 Environmental Health Hazard Assessment 18 21 22 1 5 General obligation bond debt service 3 3 3 — -4 Totals $3,613 $5,757 $3,291 ‑$2,466 ‑43% Funding General Fund $225 $90 $89 — — Special funds 2,656 3,347 2,795 -$552 -16% Bond funds 396 1,936 23 -1,914 -99 Federal funds 337 384 384 — — 4 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET CROSS-CUTTING ISSUES Cap-and-Trade additional target of reducing emissions by at least 40 percent below 1990 levels by 2030. LAO Bottom Line. In our recent report, Cap-and-Trade Aims to Limit Emissions and The 2017-18 Budget: Cap-and-Trade, we provide Encourage Cost-Effective Reductions. Assembly comments and recommendations related to the Bill 32 authorized ARB to implement a market- Governor’s proposal to spend $2.2 billion in based mechanism—known as a cap-and-trade cap-and-trade auction revenue, contingent on the program—through 2020. Under the cap-and- Legislature extending authority for cap-and-trade trade program, ARB issues a limited number of beyond 2020 with a two-thirds vote. Figure 3 “allowances” (essentially, emission permits), which provides a summary of our recommendations. large GHG emitters can purchase at a state-run Background auction or on the private market. (ARB also gives some allowances away for free.) From an economic Senate Bill 32 Established 2030 Greenhouse perspective, the primary advantage of a cap-and- Gas (GHG) Target. The Global Warming Solutions trade program is that the market sets a price for Act of 2006 (Chapter 488 [AB 32, Núñez/Pavley]) GHG emissions, which creates a financial incentive established the goal of limiting statewide GHGs for businesses and households to implement the to 1990 levels by 2020. The legislation directed the least costly emission reduction activities. Air Resources Board (ARB) to adopt regulations to Legal Uncertainty Around Cap-and-Trade. achieve the maximum technologically feasible and Currently, there is a court case challenging ARB’s cost-effective GHG emission reductions by 2020. authority to auction allowances and raise revenue In 2016, Chapter 249 (SB 32, Pavley) established an through 2020. There is also legal uncertainty Figure 3 Summary of LAO Recommendations 9 Should Cap‑and‑Trade Be Authorized Beyond 2020? • Authorize cap-and-trade (or a carbon tax) beyond 2020 because it is likely the most cost-effective approach to achieving 2030 greenhouse gas target. • If the Legislature approves cap-and-trade, we also recommend the Legislature (1) strengthen the allowance price ceiling because there is potential for substantial price volatility and (2) provide clearer direction to the Air Resources Board regarding the criteria that will be used to determine whether a direct regulation should be adopted. • Ensure oversight and evaluation of major climate policies. 9 Is a Two‑Thirds Vote Needed? • Approve cap-and-trade (or a carbon tax) with a two-thirds vote because it would give greater legal certainty and ensure ability to design effective program. 9 How Should Cap‑and‑Trade Revenue Be Used? • With a two-thirds vote, broaden allowable uses of revenue because it would give the Legislature flexibility to use funds on highest priorities, including offsetting higher costs for households and businesses. • If adopting a spending plan, then (1) reject language making spending contingent on future legislation, (2) consider alternative strategies for dealing with revenue uncertainty, and (3) allocate funds to specific programs. www.lao.ca.gov Legislative Analyst’s Office 5 2017-18 BUDGET whether ARB has the authority to operate the market-based approach to reducing emissions) cap-and-trade program beyond 2020 and whether beyond 2020 because it is likely the most extending the authority to auction allowances cost-effective approach to achieving the state’s 2030 beyond 2020 would require a two-thirds vote of the GHG emissions target. If the Legislature approves Legislature given changes to the definition of taxes cap-and-trade, we recommend the Legislature and fees under Proposition 26 (2010). (1) strengthen the allowance price ceiling because there is potential for substantial price volatility Governor Proposes Extending Cap-and- associated with the lower cap and (2) provide Trade With Two-Thirds Vote clearer direction to ARB regarding the criteria The Governor’s 2017-18 budget proposes that the board should use to determine whether a to spend $2.2 billion in cap-and-trade auction complementary policy should be adopted. We also revenue on activities intended to reduce GHGs. recommend the Legislature continue to take steps However, $1.3 billion would only be spent after the to ensure oversight and evaluation of major climate Legislature enacted—with a two-thirds urgency policies by establishing an independent expert vote—new legislation extending ARB’s authority committee. to operate a cap-and-trade program beyond 2020. Approve With a Two-Thirds Vote to Ensure Under the Governor’s proposal, the Department of Ability to Design Effective Program. Although Finance (DOF) would have authority to select the cap-and-trade could be extended with a simple specific programs within each category of activities majority vote, we recommend the Legislature that would receive funding. In addition, under the approve cap-and-trade (or a carbon tax) with a Governor’s proposal, DOF would have the authority two-thirds vote because it would provide greater to adjust downward allocations to discretionary legal certainty and ensure ARB has the ability programs proportionally based on available funds. to design an effective program. For example, a two-thirds vote would provide legal certainty LAO Recommendations regarding ARB’s authority to auction allowances—a In our report, we make recommendations in method for distributing allowances that is generally response to three critical questions raised by the recommended by economists. A two-thirds vote Governor’s proposal: would also allow the Legislature to remove the current requirement that cap-and-trade auction • Should cap-and-trade be authorized revenues can only be used on activities that reduce beyond 2020? GHG emissions. • Is a two-thirds vote needed to extend Broaden Allowable Uses of Revenue to cap-and-trade? Include Other Legislative Priorities. With a two-thirds vote, we recommend the Legislature • How should the Legislature use cap-and- broaden the allowable uses of auction revenue trade revenue? because it would give the Legislature flexibility We summarize our recommendations below. to use the funds on its highest priorities. The Authorize Cap-and-Trade Beyond 2020 Legislature could use the funds to (1) offset higher Because Likely Most Cost-Effective Approach. We energy costs for households and businesses by recommend the Legislature authorize cap-and- providing tax reductions or rebates; (2) promote trade (or a carbon tax, which is an alternative other climate-related policy goals, such as climate 6 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET adaptation activities; and/or (3) support other more notably, 2012 through 2015 was the driest legislative priorities unrelated to climate policy. In consecutive four-year stretch since statewide our view, returning the revenue to businesses and precipitation record-keeping began in 1896. In consumers by reducing taxes or providing rebates addition, statewide average temperatures have could become a particularly important option been higher than normal in each of the past five if allowance prices—and, consequently energy years, and the past three years were the warmest costs for households and businesses—increase on record since such measurements began in substantially in the future. 1895. Scientific evidence indicates these warmer When finalizing its 2017-18 cap-and-trade temperatures have contributed to the severity spending plan, we also recommend the Legislature of recent drought conditions by leading to more (1) reject the administration’s proposed language precipitation falling as rain rather than snow, making spending contingent on future legislation, faster melting of winter snowpack, greater rates of (2) consider alternative strategies for dealing with evaporation, and drier soils. revenue uncertainty, and (3) allocate funds to Drought Has Affected Various Sectors in specific programs rather than providing DOF that Different Ways. The severity of the drought’s authority. impacts across the state have varied significantly based on sector-specific water needs and access Drought Response to alternative water sources. For example, while LAO Bottom Line. While a series of winter the drought has led to a decrease in the state’s storms has significantly increased the amount of agricultural production, farmers and ranchers have water available for both human and environmental moderated the drought’s impacts by employing uses, they will not be sufficient to eliminate all of short-term strategies, such as fallowing land, the impacts from the state’s multiyear drought. We purchasing water from others, and—in particular— recommend approving some one-time funding pumping groundwater. In contrast, some rural for continued drought response activities based communities—mainly in the Central Valley—have on an assessment of updated conditions later this struggled to identify alternative water sources upon spring, but expect that the increase in precipitation which to draw when their domestic wells have gone has rendered some components of the Governor’s dry. For urban communities, the primary drought proposals unnecessary. We also recommend the impact has been a state-ordered requirement to use Legislature consider providing some ongoing less water, including mandatory constraints on the funding for activities that would both address frequency of outdoor watering. current conditions and increase the state’s resilience Additionally, multiple years of warm in future droughts. temperatures and dry conditions have had severe effects on environmental conditions across Background the state, including degrading habitats for fish, State Has Experienced Serious Multiyear waterbirds, and other wildlife; killing an estimated Drought. Until recent storms, California had 102 million of the state’s trees; and contributing to been experiencing an exceptionally dry and warm more prevalent and intense wildfires. period. Annual precipitation rates were below State Has Funded Both Short- and average for the past five years, and only one of Long-Term Drought Response Activities. The state the past ten years was exceptionally wet. Even has deployed numerous resources—fiscal, logistical, www.lao.ca.gov Legislative Analyst’s Office 7 2017-18 BUDGET and personnel—in responding to the impacts of the increased funding, the state’s drought response has current drought. This includes appropriating more included certain policy changes. Because drought than $3 billion to 13 different state departments conditions required immediate response but were between 2013-14 and 2016-17. Figure 4 summarizes not expected to continue forever, most changes these appropriations by type of activity. All of this were authorized on a temporary basis, primarily funding was initially provided on a one-time basis, by gubernatorial executive order or emergency although funding for certain activities has been departmental regulations. For example, one of renewed—sometimes repeatedly—in subsequent the most publicized temporary drought-related years. State general obligation bonds (primarily policies was the Governor’s order (enforced Proposition 1, the 2014 water bond) provided through regulations) to reduce statewide urban about three-quarters of these funds, with the state water use by 25 percent, in effect from May 2015 to General Fund contributing around one-fifth. The May 2016. (The regulations were then modified to emergency response and environmental protection account for available local water supplies, and were activities (such as fighting more frequent wildfires, recently extended through November 2017 unless providing bottled drinking water, and rescuing repealed sooner.) In response to a subsequent fish) were to meet urgent needs stemming from executive order, state agencies are in the process the current drought. In contrast, most of the of developing a comprehensive plan—“Making water supply and some of the water conservation Water Conservation a California Way of Life”—to activities (such as building new wastewater increase statewide water efficiency on an ongoing treatment plants), which were primarily supported basis. State regulatory agencies also have exercised by bond funds, will be implemented over the their existing authority in responding to drought course of several years, and therefore will be conditions. For example, the State Water Resources more helpful in mitigating the effects of future Control Board (SWRCB) has ordered and enforced droughts. Some other water conservation activities that less water be diverted from some of the state’s (such as providing rebates for lawn removal or rivers and streams, and the Department of Fish and water efficiency upgrades) were intended to have Wildlife (DFW) has closed some streams and rivers noticeable effects in both the current and future to fishing. droughts. Recent Storms Have Dramatically Improved Drought Response Has Also Included Policy Conditions . . . A series of winter storms between Changes and Regulatory Actions. In addition to October 2016 and February 2017 has brought significant precipitation Figure 4 to California and will Recent State Drought Response Appropriations undoubtedly help ameliorate some of the (In Millions) drought symptoms that Type of Activity 2013‑14 2014‑15 2015‑16 2016‑17 Totals have plagued the state for Water supply $480 $267 $1,488 — $2,235 Emergency response 108 213 183 $325a 829 several years. As of the Water conservation 54 44 177 4 280 beginning of February Environmental protection 2 60 — 16 78 2017, most of the state’s Totals $643 $584 $1,849 $345 $3,420 large reservoirs held a Includes midyear augmentation of $90 million provided from Emergency Fund for increased fire protection. more than their historical 8 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET average levels for that date, after measuring well For example, a recent study from researchers at below average for the past several years. Moreover, Stanford University predicts that by around 2040, as of the beginning of February, the water content California’s climate will have transitioned to one in the state’s snowpack measured 173 percent of in which there is nearly a 100 percent likelihood the historical average for that date, compared to that low precipitation years will also be severely a low of 19 percent in 2015. This is particularly warm. This is one factor contributing to warnings significant, as runoff from the mountain snowpack from many climate researchers that the state will typically provides about one-third of the state’s experience more frequent and intense droughts in annual residential and agricultural water supply. the coming years. Additional water flowing through the state’s rivers Governor’s Proposal and streams will begin to address both the human and environmental impacts of recent shortages. Proposes $178 Million for Drought Response . . . But Certain Drought Impacts Linger. Activities in 2017-18. Figure 5 (see next page) While this year’s boost in precipitation will summarizes the Governor’s proposals for drought increase the amount of water available for both response activities in 2017-18. Generally, the human and environmental uses, it will not be proposals represent continuations of activities sufficient to eliminate all of the drought’s impacts. conducted in prior years and are proposed to be Most notably, while increased availability of surface funded on a one-time basis. As shown, the activities water should help stem groundwater pumping rates span five departments and total $178 million, in the coming year, it likely will take many years primarily from the General Fund ($174 million). of both natural and engineered replenishment Majority of Funding Is for Fire Protection to reestablish groundwater levels. Groundwater and Tree Mortality. About 70 percent of the depletion has left some communities—primarily in proposed drought-related funding ($121 million) the Central Valley—without a safe drinking water is related to increased fire danger and responding supply. Moreover, existing surface water supplies to the estimated 102 million trees that have died in some areas of the state—especially in the Santa during the drought. The largest single proposal Barbara region—are still dangerously low. As of ($91 million) would fund CalFire to hire and early February, the U.S. Drought Monitor still train firefighters, purchase and repair equipment classified about one-tenth of the state—focused in and vehicles, and remove dead trees. The budget the southern half—as being in “severe” drought also includes an augmentation for the California status. These lingering dry conditions continue Disaster Assistance Act (CDAA) program in the to threaten fish and wildlife in that part of the Office of Emergency Services (OES) for disaster state, including runs of steelhead trout along assistance activities. This includes $30 million the southern-central coast and in Southern that could be used to provide grants to counties to California that the federal government had listed remove dead or dying trees that represent a threat as threatened and endangered even before the most to public safety. Under the Governor’s proposal, recent drought began. these CDAA funds could also be used for any Science Suggests State Will Experience More CDAA-eligible activity related or unrelated to the Frequent and Intense Droughts in the Future. drought. Numerous climate models predict that warmer Funds State Agency Drought Response and temperatures are indicative of future trends. Coordination. As shown in Figure 5, the budget www.lao.ca.gov Legislative Analyst’s Office 9 2017-18 BUDGET also proposes funding for the Department of Water $5 million for DWR to address emergency Resources (DWR), SWRCB, DFW, and OES to drinking water shortages that continue to afflict continue various drought response activities. This certain communities. (As noted above, CDAA includes a total of $24 million for all four agencies funding through OES can also be used for to coordinate statewide responses through the other, non-drought related disaster assistance Governor’s Drought Task Force and to respond activities.) Additionally, the budget proposes to emergency needs as they emerge. Such needs funding for DWR to implement a targeted effort might include implementing temporary permits for to improve conditions for the endangered Delta changes in water rights and flow requirements or smelt ($3.5 million) and conduct a statewide water rescuing fish that become stranded in dangerously conservation campaign ($2 million). low or warm streams. Framework for Considering Proposals Includes Funding for Drinking Water, Delta Smelt, and Water Conservation Campaign. Because the state’s rainy season is still only The budget includes $22 million for OES and halfway completed, it is premature to determine what drought conditions will remain and what Figure 5 state-level responses will Governor’s 2017‑18 Drought Response be required in 2017-18. Spending Proposals The significant increase (In Millions) in precipitation that Activity Department Amounta has occurred since the Fire Protection and Tree Mortality Governor prepared his Expand/enhance fire protection CalFire $91.0b Disaster assistance: tree removalc OES 30.0 budget proposal, however, Subtotal ($121.0) likely will reduce the Statewide Emergency Response and Coordination need for some of his Rescue and monitor fish and wildlife DFW $8.2 proposed activities and Conduct drought assistance and response DWR 7.0 funding. Additionally, Monitor/enforce water rights and conservation SWRCB 5.3 Coordinate statewide drought response OES 3.5 even as the state appears Subtotal ($24.0) to be emerging from the Address Drinking Water Shortages recent drought, it faces Disaster assistance: emergency drinking waterc OES $22.2 the challenge of how to Provide temporary and permanent water supplies DWR 5.0 Subtotal ($27.2) best prepare for more Other Activities prevalent droughts in the Conduct activities to assist Delta smelt DWR $3.5d future. These evolving Save Our Water conservation campaign DWR 2.0 conditions—both with Subtotal ($5.5) Total $177.7 current-year precipitation a General Fund unless otherwise noted. and longer-term climate— b Includes $3 million from State Responsibility Area Fund. c suggest the Legislature Could also be used for other drought or non-drought related disaster response activities. d Includes $0.9 million from Harbors and Watercraft Fund. may want to modify the CalFire = California Department of Forestry and Fire Protection; OES = Office of Emergency Services; DFW = Department of Fish and Wildlife; DWR = Department of Water Resources; and SWRCB = State drought response proposal Water Resources Control Board. currently before it. In 10 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Figure 6, we offer a framework the Legislature proposals within this framework. The amount could use to consider the proposal, consisting of of funding under each category is based on our three categories: analysis of the proposed activities in the context of updated hydrologic conditions. We discuss the • Necessary Emergency Response. rationale behind our classifications in more detail One-time emergency response activities below. needed to address lingering drought Most Funding Addresses Lingering Emergency impacts (consistent with the Governor’s Needs. We expect that some drought response portrayal). activities will continue to be needed despite • Build Drought Resilience. Activities that increased precipitation and improved conditions. both respond to current conditions and As shown in Figure 6, we estimate that this could be continued on an ongoing basis to represents $154 million of the Governor’s drought help build the state’s resilience for future proposals. The vast number of dead and dying trees droughts. in the state’s forests has contributed to an increased risk of wildfire and many need to be removed to • Potentially Not Necessary. Activities that improve public safety. We therefore anticipate that could be decreased or eliminated based funding for tree removal and firefighting through on improved hydrologic conditions and CalFire and OES still will be needed in 2017-18. decreased response needs. Additionally, as discussed above, drought In the figure, we illustrate one specific approach conditions and impacts linger, particularly in to how the Legislature could modify the Governor’s Figure 6 LAO Preliminary Classification of Governor’s Drought Proposals (In Millions) Necessary Build Potentially Emergency Drought Not Activity Department Response Resilience Necessary Totals Fire Protection and Tree Mortality Expand/enhance fire protection CalFire $91.0 — — $91.0 Disaster assistance: tree removal OES 30.0 — — 30.0 Statewide Emergency Response and Coordination Rescue and monitor fish and wildlife DFW 3.5 $1.0 $3.7 8.2 Conduct drought assistance and response DWR 3.0 1.0 3.0 7.0 Monitor/enforce water rights and conservation SWRCB 2.2 1.0 2.1 5.3 Coordinate statewide drought response OES 1.7 — 1.8 3.5 Address Drinking Water Shortages Disaster assistance: emergency drinking water OES 14.0 — 8.2 22.2 Provide temporary and permanent water supplies DWR 5.0 — — 5.0 Other Activities Conduct activities to assist Delta smelt DWR 3.5 — — 3.5 Save Our Water conservation campaign DWR — — 2.0 2.0 Totals $153.9 $3.0 $20.8 $177.7 CalFire = California Department of Forestry and Fire Protection; OES = Office of Emergency Services; DFW = Department of Fish and Wildlife; DWR = Department of Water Resources; and SWRCB = State Water Resources Control Board. www.lao.ca.gov Legislative Analyst’s Office 11 2017-18 BUDGET the southern half of the state. As such, we expect Given Recent Increase in Precipitation, that DWR, SWRCB, DFW, and OES will need Some Proposals May Not Be Needed. We believe to continue conducting some level of statewide improved hydrologic conditions around the state coordination and emergency response. Given that have negated the need for some of the proposed the amount of urgent response that is needed in drought spending—perhaps around $21 million— 2017-18 is likely to be less than in recent years, as there likely will be fewer urgent issues requiring however, one possible approach would be to provide state agency response. As discussed above, we about half of the Governor’s proposed funding find that it might be reasonable to reduce about for coordination and emergency response (after half of proposed statewide coordination and backing out the $3 million that we find could emergency response funding for DWR, SWRCB, be made ongoing, as described below). We also DFW, and OES. Prior-year spending data suggest anticipate a continued need for DWR and OES to that OES will not need the full amount proposed address emergency drinking water needs, and for to provide emergency drinking water. Thus, our DWR to provide support for the endangered Delta preliminary classification reduces this proposed smelt. amount by $8 million. Additionally, improved Some Proposals Address Longer-Term water conditions across much of the state suggest Drought Resilience. While requested to be funded one-time funding for the statewide Save Our Water on a one-time basis, our review found that certain public relations campaign will no longer be needed. emergency drought response activities proposed by Rather than this short-term effort, the state could the Governor at DWR, SWRCB, and DFW actually focus on longer-term policies for encouraging address ongoing needs. In addition to responding sustainable water use at the local level, as described to current conditions, these activities, if ongoing, in the administration’s conservation plan. would help the state prepare for and build resilience LAO Recommendations for future droughts. Examples of proposed activities we believe could provide ongoing Delay Decisions Until May When Statewide value include (1) data collection and analysis, Conditions Are More Certain. Given ongoing including modeling various hydrologic scenarios; storms are still affecting statewide hydrology, (2) monitoring conditions and developing we recommend delaying any action on the resiliency approaches for how to address needs Governor’s drought response proposals until after of fish and wildlife in light of climate change and the May Revision. The administration has also recurring water shortages; and (3) implementing indicated it will reexamine its proposals based the administration’s long-term water conservation on evolving conditions, and likely will submit a plan, including supporting urban water agencies revised proposal for the Legislature to consider. in developing local plans for sustainable water As discussed above, while increased precipitation use and drought planning. Based on our initial suggests less one-time funding than initially review of the activities described in the Governor’s proposed may be warranted, there may also be proposals—and considering funding the state has value in providing ongoing resources for certain already provided in recent years—in Figure 6 we activities. In considering its final drought response identified a total of $3 million, or $1 million per funding package, we recommend the Legislature department, for these types of efforts. adopt a combination of the following three actions: 12 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET • Approve Some Amount of One-Time Background Funding for Continued Emergency Proposition 1 Provides $7.5 Billion in Response. Determine which needs will General Obligation Bonds. In November 2014, continue to require statewide action voters approved Proposition 1, a $7.5 billion water despite improved hydrology. Should this bond measure aimed primarily at restoring habitat include funding for OES to provide disaster and increasing the supply of clean, safe, and reliable assistance, we recommend restricting those water. Most of the projects funded by Proposition 1 CDAA funds to be used for drought-related will be selected on a competitive basis, based tree removal and drinking water—and not on guidelines developed by state departments. for non-drought related activities—to ensure Generally, the measure prohibits the Legislature that intended outcomes are achieved. from allocating funding to specific projects. State in Midst of Implementing Proposition 1. • Consider Making Some Funding Ongoing As shown in Figure 7 (see next page), the bond to Increase State’s Resilience for Future provides funding for eight categories of activities. Droughts. Given scientific evidence These funds will be distributed across 16 state that the state is likely to experience departments (including ten state conservancies). more frequent and intense droughts in As shown in the figure, the Legislature already has the future, identify activities that are appropriated a combined $3 billion of available important to addressing both the current bond funding. The $2.7 billion for water storage and future droughts, and provide resources projects is not subject to legislative appropriation to support them on an ongoing basis. This but rather is continuously appropriated to the would reduce the amount of General Fund California Water Commission (CWC). As such, resources available for other state purposes $1.8 billion in authorized Proposition 1 funding in future years. remains for the Legislature to appropriate. • Reduce Some Funding in Recognition Of the amount available for appropriation, of Improved Hydrology and Conditions. $1.3 billion represents funding to continue Determine which emergency response activities initiated in prior years. (Departments needs will no longer be necessary. do not plan to submit formal funding requests in budget change proposals for these funds Proposition 1—2014 Water Bond unless they wish to deviate significantly from the multiyear plan presented to the Legislature in prior LAO Bottom Line. We recommend the years.) The remaining $500 million represents Legislature adopt the Governor’s proposal to funding for two new activities that are not yet appropriate $421 million from Proposition 1 in underway and for which the Legislature has not yet 2017-18, as it is generally consistent with the bond approved any appropriations: Los Angeles River language and with an appropriation schedule restoration ($100 million) and flood management previously approved by the Legislature. We also ($395 million). recommend the Legislature continue to monitor Bond Implementation Subject to Certain Proposition 1 implementation through oversight Accountability Provisions. Proposition 1 hearings and information provided by stakeholders included a requirement that the California Natural and the administration. Resources Agency (CNRA) annually publish a www.lao.ca.gov Legislative Analyst’s Office 13 2017-18 BUDGET list of all program and project expenditures on to the Legislature on January 10 but as of this its website. Additionally, last year the Legislature publication had not yet been submitted for 2017. enacted statutory requirement that CNRA The administration indicates the report is in the publish an annual report summarizing bond process of being finalized and will be submitted in implementation. The report is to include status the coming weeks. updates on funding allocations, projects initiated Governor’s Proposals and completed, measurable project outcomes, and common challenges and successes reported Appropriates $421 Million From Proposition 1. by project grantees. This annual report is due As shown in Figure 7, the Governor’s budget Figure 7 Summary of Proposition 1 Bond Funds (In Millions) Implementing Bond Prior 2017‑18 Purpose Departments Allocation Appropriations Proposed Water Storage $2,700 $10 $416 Water storage projects CWC 2,700 10 416 Watershed Protection and Restoration $1,496 $792 $162 State obligations and agreements CNRA 475 448a 17 Watershed restoration benefiting state and Delta DFW 373 93 37 Conservancy restoration projects Conservancies 328 163 60 Enhanced stream flows WCB 200 78 39 Los Angeles River restoration Conservancies 100 — — Urban watersheds CNRA 20 10 9 Groundwater Sustainability $900 $825 $35 Groundwater cleanup projects SWRCB 800 764a — Groundwater sustainability plans and projects DWR 100 61 35 Regional Water Management $810 $290 $217 Integrated Regional Water Management DWR 510 87 214 Stormwater management SWRCB 200 105 3 Water use efficiency DWR 100 98 — Water Recycling and Desalination $725 $648 $1 Water recycling SWRCB 725 598a — Desalination DWR 51 1 Drinking Water Quality $520 $475 $5 Drinking water for disadvantaged communities SWRCB 260 248 3 Wastewater treatment in small communities SWRCB 260 227 2 Flood Management $395 — — Delta flood management DWR and CVFPB 295 — — Statewide flood management DWR and CVFPB 100 — — Administration and Oversight — $2 $1 Administrationb DWR and CNRA — 2 1 Totals $7,546 $3,042 $837 a Reflects reversion of some previously appropriated funds, as proposed in the 2017‑18 Governor’s Budget. b Bond does not provide a specific allocation for bond administration and oversight, but allows a portion of other allocations to be used for this purpose. CWC = California Water Commission; CNRA = California Natural Resources Agency; DFW = Department of Fish and Wildlife; WCB = Wildlife Conservation Board; SWRCB = State Water Resources Control Board; DWR = Department of Water Resources; and CVFPB = Central Valley Flood Protection Board. 14 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET plan assumes total spending of $837 million administration’s intention to request $22 million from Proposition 1 in 2017-18. Of this total, the in 2017-18 and $3 million in 2018-19 for SWRCB administration projects that the CWC will award to allocate wastewater treatment grants, the actual $416 million in grants for water storage projects. budget-year proposal swaps those amounts. That (As noted earlier, the funding for water storage is, the 2017-18 proposal is for $3 million, and the projects are continuously appropriated outside administration now plans to request $22 million in of the legislative budget process.) Additionally, 2018-19. This is in response to delays in allocating $421 million is proposed to be appropriated in the the nearly $230 million for this activity that budget. All of these budgeted spending proposals has already been appropriated and a desire to before the Legislature represent additional avoid appropriating funding more quickly than funding for activities that have received initial departments can manage its allocation. appropriations in prior years. The largest proposal The administration has also submitted a is for DWR to award $214 million in additional few technical budget change proposals to the grants for integrated regional water management Legislature for Proposition 1 funds, mostly projects. This continues a program the state has reclassifying small amounts of funding from local also funded through previous bonds, in which local assistance to state operations for some agencies to groups can apply for funding to implement water better administer grant programs. We view these management projects on a regional scale. as similarly minor and justifiable changes from the No Proposals to Allocate Funding From original plan presented to the Legislature. Unappropriated Categories of Bond. Similar to LAO Recommendations prior budgets, no appropriations are yet proposed from the sections of the bond set aside for restoring Adopt Governor’s Proposition 1 Proposals. the Los Angeles River or flood management Because they continue implementing Proposition 1 projects. Discussions amongst stakeholders are projects consistent with the bond language still underway regarding the best way to allocate and with an appropriation schedule previously funds between the two conservancies identified approved by the Legislature, we recommend in the bond for Los Angeles River restoration. The adopting the Governor’s Proposition 1 proposals administration plans to wait to begin requesting for 2017-18. appropriation authority for flood-related funding Continue Ongoing Oversight, Modify until 2020-21 because funds from previous bonds Course if Needed. We recommend the Legislature are still available for flood management projects. continue to monitor Proposition 1 through oversight hearings and information provided by LAO Assessment stakeholders and the administration. This could Governor’s Proposal Largely Reflects include asking the administration to present its Multiyear Funding Plan Presented to Legislature annual Proposition 1 implementation report, in Prior Years. In general, the Governor’s which at the time of this publication was not yet proposals for Proposition 1 reflect the “rollout” available for our review. While the Legislature plan the administration presented in prior budget approved the administration’s multiyear funding proposals. Our review found that deviations from plan in previous years, it has the authority to revisit that plan are relatively minor and justifiable. For this approach each year via the annual budget act example, whereas the previous plan indicated the if it has concerns about bond implementation. www.lao.ca.gov Legislative Analyst’s Office 15 2017-18 BUDGET Moreover, lessons learned from implementation of communities without access to surface water or Proposition 1 can help shape potential future bonds in other areas during years where surface water or state programs by identifying the programs deliveries are not available and rainfall is scarce. and practices that are (and are not) successful at Severe Groundwater Depletion Exists achieving desired outcomes. in Some Areas of the State. When the rate at which groundwater is pumped out of a basin Sustainable Groundwater exceeds the rate at which the water is restored or Management Act (SGMA) “recharged,” the basin can become depleted, or LAO Bottom Line. Effective management of “overdrafted.” While not every basin is overdrafted, its groundwater resources is a vital component overall, California uses more groundwater than of the state’s overall water management strategy, is restored through natural or artificial means. and local agencies are in a critical stage of SGMA Estimates suggest that on average, extractors implementation. As such, we recommend the pump about 15 million acre-feet a year, whereas Legislature approve the Governor’s proposals to 13 million to 14 million acre-feet seeps back into provide additional resources to DWR to provide the ground through rain, runoff, irrigation, or assistance to local agencies and to SWRCB intentional recharge efforts. This imbalance has to conduct intervention activities. We also led to several groundwater basins across the state recommend the Legislature continue to monitor reaching serious levels of overdraft. Specifically, and oversee implementation of the act to ensure based on data collected between 1989 and 2009, it stays on track and to identify if additional DWR identified 21 of the state’s 515 groundwater legislative action might be needed. basins as being “critically overdrafted,” such that a “continuation of present water management Background practices would probably result in significant Groundwater Is Important Component of adverse overdraft-related environmental, social, or State’s Overall Water Resources. Groundwater economic impacts.” Implications of such overdraft is the portion of water from precipitation that can be serious, including failed wells, deteriorated infiltrates (either naturally or deliberately) water quality (from intrusion of seawater or other under the surface of the ground. In a sense, contaminants), and irreversible land subsidence all groundwater starts as some form of surface that can damage infrastructure and diminish water, meaning that the two types of water are aquifers’ future water storage capacity. DWR has integrally connected. Much like a sponge, the not identified which other basins around the state ground—depending on soil type—soaks up the may be experiencing a lower level of overdraft—and water into underground basins available to be some of these concerning impacts—but have pumped out of the ground for human uses, such as not yet reached its definition of critical status. residential purposes or agricultural irrigation. This Moreover, groundwater pumping rates increased infiltration can happen over a period ranging from during the recent drought, potentially worsening several years to over a millennium. Historically, the risk and prevalence of such impacts compared California’s groundwater provides about 30 percent to when DWR conducted its analysis. of the state’s total water supply in wet years and Groundwater Use Has Not Been Regulated nearly 60 percent in dry years. Groundwater may on Statewide Basis. In contrast to its practice of provide up to 100 percent of water supplies in monitoring and enforcing surface water rights, 16 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET the state historically has not directly regulated SGMA Requires That Groundwater Be groundwater use. (Groundwater usage in certain Managed Locally . . . The act assigns primary areas of the state, referred to as adjudicated basins, responsibility for ongoing groundwater is regulated through court orders.) Indeed, for management to local entities. Local groundwater many years California was one of the only western sustainability agencies (GSAs) are responsible states without a comprehensive state-managed for developing and implementing long-term groundwater use permitting system. Experts argue groundwater sustainability plans (GSPs) defining this lack of state management has contributed to the specific guidelines and practices that will excessive groundwater extraction in some regions, govern the use of individual groundwater resulting in the aforementioned critical levels of basins. These GSAs will be formed by a single or overdraft. combination of local public agencies with existing SGMA Marks Significant Change in State’s water or land management duties, such as cities, Approach. In 2014, the Legislature passed and the counties, or special districts. The GSAs are vested Governor signed three new laws—Chapters 346 with broad management authority, including (SB 1168, Pavley), 347 (AB 1739, Dickinson), the ability to (1) define the sustainable yield of and 348 (SB 1319, Pavley)—collectively known a groundwater basin, (2) limit extractions from as SGMA. With the goal of achieving long-term that basin, (3) impose fees to pay for management groundwater resource sustainability, the legislation costs, and (4) enforce the terms established in the represents the first comprehensive statewide GSP. Basins that are already legally adjudicated requirement to monitor and operate groundwater are not required to form GSAs or develop GSPs, basins to avoid overdraft. The act’s requirements provided they can prove they are already being apply to the 127 of the state’s 515 groundwater managed sustainably. Additionally, certain basins basins that DWR has found to be high and medium that can display existing plans and sustainable priority based on various factors, including practices can submit alternative plans in lieu of overlying population and irrigated acreage, formal GSPs. number of wells, and reliance on groundwater. . . . But Overseen by Two State Agencies. (DWR will update this prioritization in future The legislation tasks DWR and SWRCB with years if any of the factors change significantly—for discrete roles in carrying out SGMA. DWR has example, if groundwater use data shows notable primary responsibility for the initial phases changes for a particular basin, or if an updated of implementation, including defining and census shows significant shifts in population.) prioritizing groundwater basins, collecting and While only comprising about one-fourth of the disseminating data and best practices, providing groundwater basins in California, the 127 high technical and financial assistance to GSAs, and and medium priority basins account for 96 percent reviewing GSPs. Previous budgets have provided of California’s annual groundwater pumping and DWR with roughly $15 million annually to begin supply water for nearly 90 percent of Californians these activities; however, this initial funding was who live over a groundwater basin. The remaining only provided through 2019-20. basins ranked as being lower in priority—generally SWRCB is tasked with enforcing the law smaller and more remote—are encouraged but not and intervening when local entities fail to follow required to adhere to SGMA. SGMA’s requirements. Specifically, SWRCB is responsible for intervening when it designates www.lao.ca.gov Legislative Analyst’s Office 17 2017-18 BUDGET a basin as being in “probationary status” due time, funding support for these positions will to (1) failing to form a GSA (referred to as an transfer to fee revenue as the board’s SGMA-related “unmanaged basin”), (2) failing to complete a GSP, responsibilities and fee authorities increase. or (3) developing or implementing an inadequate Requirements Phased in Over Several Years. or ineffective GSP (one that will cause significant Given the magnitude of the changes it entails, depletion of groundwater or interconnected SGMA is designed to be implemented over a surface water). SWRCB’s intervention activities period of several decades. Figure 8 highlights the may include imposing reporting requirements significant milestones for implementing the act. As around groundwater extractions and use, issuing shown, local entities currently are in the process fees, assuming management responsibilities, of forming GSAs to oversee the management of developing interim management plans governing individual groundwater basins, with a requirement how groundwater may be used in the basin, to do so by June 30, 2017. Basins that fail to meet and conducting enforcement actions for this deadline are subject to intervention from noncompliance. SWRCB currently receives SWRCB. The figure also shows that the deadline $1.9 million from the General Fund annually for for implementing a GSP is expedited for the ten staff to conduct SGMA-related activities. Over 21 groundwater basins that DWR has defined as Figure 8 Implementation Timeline for Major Sustainable Groundwater Management Act (SGMA) Requirements January 2015 DWR released initial basin prioritization. High and medium priority basins are subject to SGMA requirements. January 2016 DWR identified final list of basins subject to critical conditions of overdraft. These basins face some expedited compliance deadlines. June 30, 2017 Local agencies must establish groundwater sustainability agencies (GSAs). SWRCB may designate probationary basins subject to intervention for areas that fail to comply. January 31, 2020 GSAs from basins in critical overdraft must adopt and begin to implement groundwater sustainability plans (GSPs). DWR will review plans for adequacy after adoption. January 31, 2022 GSAs from basins not in critical overdraft must adopt and begin to implement GSPs. DWR will review plans for adequacy after adoption. January 31, 2040 GSAs from basins in critical overdraft must achieve sustainability goals. January 31, 2042 GSAs from basins not in critical overdraft must achieve sustainability goals. DWR = Department of Water Resources and SWRCB = State Water Resources Control Board. 18 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET being in critical overdraft status—January 2020, as groundwater users and usage rates within compared to 2022 for the remaining basins. unmanaged basins, (2) issue and collect fees, and (3) conduct enforcement efforts for noncompliance. Governor’s Proposals The $750,000 funding request is based on an The Governor has two 2017-18 budget estimate that five basins will fail to form GSAs proposals related to SGMA implementation that and will require SWRCB intervention in 2017-18. total $17.3 million, which we discuss below. The number, size, and complexity of potential Support Local Agencies in Planning and unmanaged basins, however, remains unknown. As Implementation (DWR, $15 Million). The such, the proposed one-time $1.5 million would be Governor’s budget proposes an ongoing $15 million contingency funding for the department to contract General Fund augmentation to both continue for assistance if there are significantly more than and expand DWR’s SGMA implementation five unmanaged basins and associated workload activities. These funds would be in addition to exceeds the ongoing resources. the limited-term funding—roughly $15 million a The proposed funding source for these year—that the Legislature previously provided to activities in 2017-18 would be a loan from the DWR for SGMA-related activities. (The previously Underground Storage Tank Clean-Up Fund approved funding will phase out over the next few to the Water Rights Fund. According to the years.) administration, revenue from fees paid by DWR would use the combined roughly groundwater extractors in unmanaged basins $30 million in 2017-18 and 2018-19 to accomplish will be used to repay the loan in 2019 and provide activities such as assisting in the formation of ongoing support for program activities beginning GSAs, reviewing alternative management plans in 2018-19. (These fees are required under SGMA.) submitted by qualifying GSAs, and collecting and LAO Assessment disseminating the data GSAs need to develop their GSPs. In future years, the proposed $15 million Successful Implementation of SGMA Is would be used for ongoing activities such as Fundamental to State’s Management of Water providing technical assistance to GSAs, reviewing Resources. The passage of SGMA was an important and evaluating GSPs, monitoring groundwater first step towards better groundwater management, levels, and continued data collection and and there are a number of reasons why successful dissemination. The department would accomplish implementation of the act’s requirements should the proposed activities within its existing position continue to be a key state priority. First, because authority. of the geological connectivity of above- and Intervene in Areas That Fail to Comply With below-ground water sources in many locations, the SGMA (SWRCB, $2.3 Million). The Governor’s increased efforts the state has taken to measure, budget proposes five new positions and $2.3 million restrict, and regulate surface water usage will be ($750,000 ongoing and $1.5 million on a one-time somewhat ineffective if groundwater extraction basis) for SWRCB to assume management is allowed to continue or increase without responsibilities in basins that fail to form GSAs by similarly robust oversight. Second, surface water June 30, 2017. The ongoing funding and new staff supplies face increasing pressures from a growing would be used to establish a new SGMA Reporting population and projected reductions due to Unit within SWRCB that would (1) identify climate change, resulting in groundwater playing www.lao.ca.gov Legislative Analyst’s Office 19 2017-18 BUDGET an increasingly important role in the state’s of the state. Additionally, the state can play an overall water supply. Third, possible impacts from important role in providing technical assistance, continued overdraft of groundwater resources— offering neutral facilitation services, monitoring including land subsidence, contamination of local agency progress, and providing additional underground aquifers, and widespread well failures support when needed to ensure GSAs stay on track and drinking water shortages—are serious and to meet deadlines. Finally, the state serving as a potentially irreversible. Fourth, consistent and “backstop” if local agencies fail to meet SGMA’s reliable monitoring could encourage additional requirements both raises the pressure for local efforts to recharge groundwater basins. Regional compliance as well as increases the likelihood that management of basins could provide individual the act’s sustainability goals ultimately will be met. parties with greater certainty that they would LAO Recommendations benefit from their efforts to recharge their basins without fear that the additional water would be Given the essential function that successful pumped out by other parties. implementation of SGMA plays in the state’s overall SGMA Implementation at Critical Stage. As approach to water management, we recommend the shown in the earlier figure, the next five to seven Legislature: years represent a critically important period for • Adopt Governor’s Proposals. Because state establishing how SGMA will guide local operations agencies could provide helpful assistance and practices in future years. Local agencies must to local agencies during this critical negotiate and collaborate to form functional GSAs, implementation period, we recommend then undertake the difficult work of gathering and adopting the Governor’s proposals for analyzing data about their areas’ groundwater use, DWR and SWRCB. defining sustainability targets for their basins, and developing enforceable plans and practices for • Continue to Monitor Successes and how the basins can be managed to achieve those Challenges of SGMA Implementation. sustainability goals. The comprehensiveness and Because the next several years are a effectiveness of these processes and plans will decisive period of SGMA implementation, determine the overall success of the act and of the we recommend maintaining careful state’s nascent efforts at comprehensively managing and regular oversight over how it its groundwater resources. is proceeding. This could include State Plays Important Role in Ultimate Success asking the administration to report on of Implementation. The significant and complex implementation status, successes, and workload facing local agencies in the coming years challenges through budget and oversight heightens the importance of assistance from state hearings. To avoid delays, pitfalls, or agencies during this period. In particular, the state unforeseen consequences, we recommend can help by providing GSAs with baseline data that the Legislature monitor whether to inform their GSPs. When possible, collecting additional state action—such as follow-up data on a statewide basis—such as through remote legislation or a modification to the sensing technology—can save funding by taking activities conducted by state agencies— advantage of economies of scale, and ensure that might be warranted to stay on track and data are valid and consistent across different areas achieve sustainability goals. 20 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Timber Regulation and Forest Lumber Assessment Established to Pay for Restoration Program (TRFRP) Regulatory Activities. Prior to 2012-13, the state’s review of THPs was funded mainly from the LAO Bottom Line. The budget includes a total General Fund. In addition, DFW and SWCRB of $15.2 million for three state departments to also levied a few fees for various THP-related implement various forest health related programs. permits to support such activities. Total funding The administration’s proposed activities are for THP reviews was about $25 million. However, reasonable but represent a relatively large amount General Fund support for THP-related activities of additional spending that would draw down was reduced to less than $20 million as a result of the Timber Regulation and Forest Restoration the state’s fiscal condition during the recession. Fund (TRFRF) balance. We recommend that the Position authority also declined during this period. Legislature identify program activities and grants it For example, DFW had fewer than eight positions would prioritize and determine a funding strategy working on THP review in 2010-11, a decline of for the budget year and thereafter that reflects those over 75 percent from 2007-08 staffing levels. Staff priorities. reductions limited the ability of administering Background departments to perform some required THP review activities in a timely fashion. TRFRP Reviews Timber Harvest Permits. In 2012, the Legislature approved Chapter 289 Under the state’s Z’Berg-Nejedly Forest Practice Act (AB 1492, Committee on Budget), which of 1973, timber harvesters must submit and comply authorized a tax on the sale of lumber products with an approved timber harvesting permit. The in California—effective January 2013—to fully most common permit is a Timber Harvesting fund THP regulatory activities. This revenue Plan (THP), which describes the scope, yield, was to be used to increase staffing and reduce harvesting methods, and mitigation measures the amount of time it takes for departments to that the timber harvester intends to perform review THPs, as well as provide departments with within a specified geographical area over a period additional resources necessary to perform more of five years. After the plan is prepared, TRFRP comprehensive THP reviews. Revenues collected staff review and approve them for compliance from this tax are deposited into the TRFRF and with timber harvesting regulations designed to are intended to fully fund the timber harvest ensure sustainable harvesting practices and lessen regulatory program. In 2015-16, the lumber environmental harms. CalFire takes the lead role assessment generated $40 million in revenues. in conducting these reviews but gets assistance Staffing Increases Have Contributed to from DFW, the Department of Conservation, Faster Reviews on Average. As shown in Figure 9 and SWRCB. The regulation of timber harvesting (see next page), staffing at the departments is exempt from meeting certain California conducting THP review has increased under the Environmental Quality Act (CEQA) requirements, TRFRP. Overall staffing has increased by more including the preparation of an environmental than 50 percent since 2010-11, the year before the impact report, because this process is sufficiently TRFRP was implemented. In fact, staffing levels are equivalent to the CEQA process. The state approved higher now than they were in the years prior to the 254 THPs in 2015-16. budget cuts described above. In total, the program had 216 authorized positions in 2015-16. www.lao.ca.gov Legislative Analyst’s Office 21 2017-18 BUDGET It appears that the increase in staffing has affect departments’ ability to perform inspections, contributed to a moderate reduction in review and the completeness of the information submitted. times overall. Since the program was established, TRFRP Also Supports Forest Health Activities. the average review time for THPs has declined Assembly Bill 1492 specifies that in addition to from more than 150 days in 2011-12 to 127 days funding regulatory costs (and maintaining a in 2015-16 (a 16 percent decline), as shown in minimum $4 million reserve), revenue from the Figure 10. In addition, the maximum number of TRFRF can be spent on specific programs to days a THP is in review and the median review improve forest health and promote climate change time have also declined since the TRFRP was mitigation or adaptation in the forestry sector. In implemented in 2012-13. Notably, reduced review 2016-17, about $7.5 million—or roughly one-fifth times have occurred even though, according to of the TRFRP budget—is budgeted for local the departments, they have undertaken more assistance grants for forest restoration. The largest comprehensive plan reviews. It is also important to program is the California Forest Improvement note that other factors could be affecting average Program (CFIP) run by CalFire, which currently review times, such as the size and complexity of receives about $5 million from TRFRF. CFIP the THP, weather and wildfire conditions that can reimburses part of the costs for smaller landowners (between 20 and 5,000 acres) to conduct certain Figure 9 THP Review Staffing Has Increased Under TRFRP Authorized Positions 250 200 150 100 50 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13a 2013-14 2014-15 2015-16 a Implementation of TRFRP began during 2012-13. THP = Timber Harvest Plan and TRFRP = Timber Regulation and Forest Restoration Program. 22 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET forest health activities on Figure 10 their land, such as preparing Average Days in THP Review Has Declined management plans, tree planting, land conservation, 250 and improvement of fish and Implementation of TRFRP wildlife habitat. In 2015-16, 200 this program provided 96 grants to treat 35,000 acres of forest land. 150 The rest of the TRFRF local assistance funding 100 is administered by DFW and SWRCB and supports 50 grants to nonprofits and local governments, primarily for restoration of habitat and 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 watersheds. For example, in THP = Timber Harvest Plan and TRFRP = Timber Regulation and Forest Restoration Program. 2015-16, funding for SWRCB supported four projects • State Operations ($2 Million). The budget for habitat restoration and includes about $1 million ($472,000 watershed assessments and planning. ongoing) for CNRA and CalFire to support Governor’s Budget development of an online timber harvest permitting system, $549,000 to convert The Governor’s budget includes three proposals four limited-term positions at SWRCB to supported from TRFRF that total $15.2 million permanent status, $300,000 annually for in 2017-18, declining in subsequent years to CNRA to continue existing pilot projects $4.4 million annually beginning in 2019-20. for an additional two years, and $149,000 Forest Restoration and Accountability for one additional support position at ($9 Million). The largest proposal is for CNRA to assist in the development $9 million and 15 positions in 2017-18 (declining of ecological metrics and monitoring to $1.2 million and 7 positions in 2019-20 protocols. and thereafter) to support activities in three departments: Restore Nursery Operations ($4.9 Million). The budget includes $4.9 million ($2.1 million • Forest Restoration Grants ($7 Million). ongoing) for CalFire to resume state nursery The budget includes $5 million to support operations at L.A. Moran Reforestation Center CFIP, which extends for one additional year (LAMRC), which has been used in the past to the same level of resources that CFIP has support the reforestation of public and private received for the past two years. The Governor forest lands, especially those that have been also proposes extending current SWRCB damaged by fire, flood, drought, insects, and grants for another two years at their current disease. The administration proposes resuming funding level of $2 million annually. www.lao.ca.gov Legislative Analyst’s Office 23 2017-18 BUDGET these activities to encourage landowners to the Forest Fire Prevention Pilot, which participate in reforestation activities as soon as provides a THP exemption for specific tree possible following natural disasters in order to removal activities that could reduce fire begin recovery of forest health and reduce soil risk. The department is required to monitor erosion and water pollution. The center is expected all projects submitted under the pilot. to provide 300,000 seedlings annually. • Chapter 476 of 2016 (SB 122, Jackson) Historically, the state operated three requires CalFire to prepare a record of nurseries, which provided 600,000 to 800,000 proceedings—an official record of all seedlings annually that were native to the state’s project application materials, reports, and approximately 80 “seed zones” or habitat types. The related documents—concurrently with a last of these nurseries closed in 2011 due to budget THP or other type of harvest permit at the constraints during the recession. The department request of the applicant. (These costs are indicates that federal and private nurseries were reimbursed by the applicant.) unable to fully backfill the loss of state seedlings, and that there are currently no private nurseries LAO Assessment operating within California that cover all of California’s seed zones. Additionally, according to Budget Requests Reasonable. We have no the department, private nurseries typically only specific concerns with the activities proposed grow seedlings on request, which can result in by the administration. Much of the proposal is significant delays in acquiring seedlings after a the continuation of forest health activities that natural disaster. Conversely, state nurseries keep have been funded for the past couple of years. seedlings stocked so they are immediately available. Additionally, these activities are in line with those Seedling delays can allow unwanted vegetation to identified in TRFRP statute to promote forest take over and increase erosion. The department health, and requested funding levels appear to be in anticipates a significant demand for seedlings over line with associated workload. the next few years due to tree mortality and the TRFRF Unlikely to Be Able to Support associated increased fire risk. Current Efforts Ongoing. While we have no Monitoring Exemptions and Emergency specific concerns with the proposed activities, Notice Provisions ($1.4 Million). The budget we note that under the Governor’s budget plan, includes $1.4 million ($1.2 ongoing) from TRFRF total spending from TRFRF is expected to be for CalFire to implement the following three pieces about $15 million higher than revenues in the of recent legislation: budget year, as shown in Figure 11. This does not present a problem in 2017-18 because the fund has • Chapter 583 of 2016 (AB 1958, Wood) accumulated a large fund balance. However, in out exempts the removal of non-oak trees for years—perhaps as early as in 2018-19—the fund the purpose of restoring or conserving oak is unlikely to be able to support the same level of woodlands from being subject to a THP. spending for program operations and grants. While The law also requires CalFire to evaluate the funding for CFIP and SWRCB grants is only and report on the effects of this exemption. proposed on a limited-term basis, the Legislature • Chapter 563 of 2016 (AB 2029, Dahle) has supported these programs in each of the past requires the department to evaluate few years, suggesting they might reflect ongoing 24 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET legislative priorities. Consequently, decisions about LAO Recommendations whether to approve the increase in ongoing funding Budget Action Should Depend on Legislative from TRFRF—totaling $4.4 million—should take Priorities. Given the potentially limited amount into consideration how these new funding requests of future TRFRF funds available, we recommend should be prioritized against other spending that the Legislature identify the specific program options in the future, such as for local assistance activities and grants it would prioritize and grants. determine a funding strategy for the budget Future Revenue Uncertainty. We note that year and out years that reflects those priorities. the revenue from the lumber assessment depends In making this prioritization, one of the first in large part on new housing construction, which considerations could be the degree to which the can be subject to significant fluctuations. Over the Legislature is satisfied with the current length past several decades, the number of new housing of time it takes departments to complete plan permits has experienced several very large swings, reviews, as well as the comprehensiveness of those including some dramatic decreases. Keeping this reviews. To the extent the Legislature wanted revenue uncertainty in mind will be important as to further reduce review time or increase the the Legislature is considering its funding plan for comprehensiveness of the reviews, that would likely TRFRP. require additional resources, thereby reducing future funding available for other activities. Figure 11 TRFRF Balance Reduced in Recent Years (In Millions) $60 Expenditures 50 Ending Balance 40 Revenues 30 20 10 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 TRFRF = Timber Regulation and Forest Restoration Fund. www.lao.ca.gov Legislative Analyst’s Office 25 2017-18 BUDGET To the extent that the Legislature is generally improvements and new equipment—if the program satisfied with the current THP review program, it would be a lower priority in the future in the event could then consider how much funding to provide of declining revenues. The Legislature could direct to other programs in the future. For example, to the department to report at budget hearings on the extent the Legislature places a high priority on these issues, as well as any other options available local assistance grants, it might want to consider to the state to achieve TRFRP goals. rejecting or reducing the amount of ongoing Summary of New funding requested in the Governor’s budget for Natural Resources the new state operations activities proposed. Capital Outlay Projects On the other hand, if the Legislature prioritizes the proposed ongoing expenditures—such as The Governor’s budget includes $18 million for the seedling program—and it is comfortable 16 new capital outlay projects in two departments with significantly reduced funding for the grant within CNRA. As shown in Figure 12, these programs in the future, it could approve the proposals primarily fund the acquisition and Governor’s budget as proposed. planning phases for these projects. Projects include In making its determination about priorities, replacement of three CalFire facilities, as well the Legislature might want to consider factors as several projects to improve and expand state such as whether there are other funding sources vehicular recreation areas and implement other or partnerships available to support local forest improvement projects in state parks. Total costs for restoration efforts or seedling programs. For completion of all proposed projects is expected to example, there might additional funding available be $132 million. Of this total, 80 percent is for the from local conservation groups or possible CalFire projects, which would be funded from the partnerships with federal or private nurseries. General Fund or the Public Buildings Construction The Legislature might also want to consider Fund, which would be repaid with interest from which set of activities is likely to be most effective the General Fund. The projects at the Department at addressing the state’s current tree mortality of Parks and Recreation (DPR) would be funded problem. Another consideration might be whether from various special funds. While we do not have the Legislature wants to make the significant specific concerns with the individual proposals, up-front investments necessary to reestablish the overall they do amount to a significant budgetary LAMRC seedling program—such as for facility commitment over the next few years. DEPARTMENT OF PARKS AND RECREATION The state park system, administered by DPR, In addition, parks offer a wide range of amenities contains almost 280 parks and serves about including campsites, golf courses, ski runs, visitor 75 million visitors per year. State parks vary widely information centers, tours, trails, fishing and boating by type and features, including state beaches, opportunities, restaurants, and stores. Parks also museums, historical sites, and rare ecological vary in the types of infrastructure they maintain, reserves. The size of each of park also varies, including buildings, roads, power generation ranging from less than one acre to 600,000 acres. facilities, and water and wastewater systems. 26 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Figure 12 New Resources Capital Outlay Projects Proposed in 2017‑18 (Dollars in Thousands) 2017‑18 2017‑18 Total Project Funding Phase Project Cost Fund Source Department of Forestry and Fire Protection Shasta Trinity unit headquarters relocation $365 A $65,505 PBCF Statewide: communications facilities phase V 1,755 W 21,233 General Fund Macdoel Fire Station relocation 500 A 9,922 General Fund Temecula Fire Station relocation 1,065 A 9,384 General Fund Department of Parks and Recreation Hollister Hills SVRA: Martin Ranch acquisition 5,000 A 5,000 OHVTF Candlestick SRA: Yosemite Slough public use improvements 4,125 P,W,C 4,125 Reimbursements Ocotillo Wells SVRA: Holly Road solar well 3,500 A 3,500 OHVTF San Luis Reservoir SRA: ramp and parking improvements 142 P 2,048 HWRF Calaveras Big Trees SP: campsite relocation 138 P 1,847 Reimbursements Mendocino Headlands SP: Ford House restoration 205 P 1,785 HWRF Lake Oroville SVRA: Gold Flat campground upgrades 216 P 1,628 Proposition 84 bonds Ocotillo Wells SVRA: Holmes Camp water system upgrades 107 P 1,412 OHVTF Oceano Dunes SVRA: Grand Avenue lifeguard tower 91 P 1,339 OHVTF Lake Del Valle SRA: boat ramp replacement 132 P 1,228 HWRF Pismo SB: entrance kiosk replacement 124 P 1,042 OHVTF Hungry Valley SVRA: 4x4 obstacle improvements 74 P 569 OHVTF Totals $17,539 $131,567 PBCF = Public Buildings Construction Fund; SVRA = State Vehicular Recreation Area; OHVTF = Off-Highway Vehicle Trust Fund; SRA = State Recreation Area; HWRF = Harbors and Watercraft Revolving Fund; SP = state park; and SB = state beach. A = acquisition; W = working drawings; P = preliminary plans; and C = construction. For 2017-18, the Governor’s budget proposes budget-year shortfall in SPRF. However, these $621 million in total expenditures for the options are not available on an ongoing basis. department. This includes $433 million for state Consequently, we recommend the Legislature park operations, $151 million for local assistance begin consideration of options that would provide grant programs, and $37 million for capital an ongoing budget solution to the SPRF structural projects. The proposed budget total represents deficit. a decrease of $60 million, or 9 percent, below Background the estimated level of current-year spending for state parks. This in large part reflects a one-time Major Funding Sources for State Park appropriation of $60 million in the current year to Operations. Park operations are ongoing activities undertake deferred maintenance projects. necessary to run the park system, including staffing, management, maintenance, fee collection, Base Funding to and administration. Other activities performed Maintain Operations by DPR, such as capital outlay projects and grants LAO Bottom Line. The Governor’s proposal to provided to local governments, are not considered provide one-time funding from the State Parks and part of park operations. The state park system Recreation Fund (SPRF) and the Environmental receives funding from many sources to support its License Plate Fund (ELPF) addresses the projected operations. The major sources for funding include: www.lao.ca.gov Legislative Analyst’s Office 27 2017-18 BUDGET • SPRF. In recent years, the department’s land for new SVRAs, and make grants to largest fund source for operations has agencies for OHV trails on other public been SPRF, which has provided about lands. 40 percent of the department’s operations • Other Special Funds. State parks also funding. The fund is supported primarily by receive support from various special revenues collected from fees charged to park funds, including revenue from the state users. Parks frequently charge user fees, boating gas tax, federal highway dollars for including for parking, park entrance, and trails, and various state revenue sources specific recreational activities (such as the earmarked for natural resource habitat use of overnight campsites). The fund also protection. Historically, DPR has also receives revenue from contracts with state received funding from ELPF, which collects park concessionaires that provide certain revenue from specialty license plate sales. services, as well as some revenue from the However, this funding was eliminated Highway Users Tax Account and the Motor as part of a solution to ELPF’s structural Vehicle Fuel Account for constructing and deficit in 2015-16. maintaining public roads in state park units. Recent SPRF Shortfalls. Changes to DPR’s • General Fund. With a few exceptions, state budget since 2011-12 have resulted in a SPRF parks cost more to operate and maintain operating deficit and depletion of the SPRF fund than they currently generate in revenue. balance. During the recent recession, the 2011-12 For this reason, state park operations are and 2012-13 budgets reduced baseline General partly funded from the state General Fund. Fund support for the department by a total of The Governor’s 2017-18 budget includes $22 million to achieve General Fund savings. In $137 million in General Fund support for response to the reduction, the Legislature provided DPR operations. As we discuss in more additional SPRF funding on a temporary basis detail below, the amount of General Fund rather than close state parks. The Legislature also support for the parks has declined since took other actions to encourage parks to become 2006-07. more self-sufficient through increased revenue generation, which we discuss in more detail below. • Off-Highway Vehicle (OHV) Trust Fund. This also increased expenditures and transfers The department also receives roughly from SPRF to provide funding for new projects and $60 million annually from the OHV Trust activities intended to generate revenue. Fund for operations of the Off-Highway These changes, coupled with other one-time Motor Vehicle Recreation Division of and ongoing spending, caused expenditures from DPR. Revenue for the OHV Trust Fund SPRF and its subaccounts to increase by more than primarily comes from (1) fuel taxes $66 million between 2011-12 and the projected that are attributable to the recreational 2017-18 level. Revenues and transfers to the fund use of vehicles off highway, (2) OHV did not increase at the same rate over that period. registration fees, and (3) fees collected at As shown in Figure 13, these trends resulted in a State Vehicular Recreation Areas (SVRAs). structural deficit and the virtual depletion of the This fund primarily is spent to operate and SPRF fund balance. expand the state’s eight SVRAs, to acquire 28 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Legislature Created Revenue Generation and projects to improve the experiences of visitors. Program. State parks have historically relied on A district that does not exceed its target does park-generated revenue to help support operations. not receive an allocation under the program. In recent years, the Legislature has directed DPR Chapter 39 also created and transferred bond funds to improve its revenue generation. Specifically, to the State Park Enterprise Fund to be used for Chapter 39 of 2012 (SB 1018, Committee on Budget infrastructure and facility improvement projects and Fiscal Review) directed DPR to maximize designed to increase revenue. revenue generation activities (consistent with the Parks Forward Commission and mission of the department). Transformation Team Created to Address Issues. A major component of Chapter 39 is the The California State Parks Stewardship Act of 2012 District Incentive Program. This program sets (Chapter 533 of 2012 [AB 1589, Huffman]) and annual revenue targets for each district based Chapter 530 of 2012 (AB 1478, Blumenfield) called on how much revenue that district earned in for the formation of a multidisciplinary advisory the previous three years. If both the state as a council to conduct an independent assessment of whole and an individual district exceed revenue the state parks system and make recommendations targets, half of the district’s revenue earned for improvement of the management, planning, and above its target is allocated back to that district. funding of state parks. In response, the California The remainder stays in SPRF—in the Revenue Parks Forward Commission was formed, and it Incentive Subaccount—to be used for specified issued its final recommendations in February 2015. purposes, including new fee collection equipment Among the recommendations was the creation of a Figure 13 SPRF Expenditures Exceeded Revenues in Recent Years (In Millions) $200 180 160 140 120 Expenditures 100 Revenues and Transfers 80 Year-End Fund Balance 60 40 20 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17a 2017-18 Estimated Projected a The 2016-17 budget included a one-time diversion of $31 million in motor vehicle fuel tax revenues to SPRF. SPRF = State Parks and Recreation Fund. www.lao.ca.gov Legislative Analyst’s Office 29 2017-18 BUDGET dedicated Transformation Team to implement and LAO Assessment oversee changes—including developing a sustainable Governor’s Proposal Is Reasonable Way ongoing budget for DPR—within two years. to Address Shortfall on One-Time Basis. SPRF One-Year Budget Actions Used in Past Three and ELPF can support these expenditures on a Years. To address the SPRF shortfall discussed one-time basis. The Governor’s budget projects that above while maintaining overall service levels at SPRF will have a year-end fund balance of only state parks, the past three budgets have relied on $4.6 million (3 percent of revenues and transfers) at reserve draw downs and special fund transfers. In the end of the budget year. In addition, while ELPF 2014-15 and 2015-16, the state accessed the SPRF is projected to have a fund balance of $10.8 million fund balance. In 2016-17, that balance would have at the end of 2017-18, it could not sustain the been depleted, so the budget redirected $31 million proposed funding for parks on an ongoing basis in fuel tax revenue that would otherwise have gone without putting that fund into a structural deficit. to the OHV Trust Fund to SPRF. The redirected In fact, the ELPF had its own structural deficit revenue was enough to cover the SPRF shortfall in until a series of budget actions was taken last 2016-17 and leave the fund with a small balance. year that included eliminating ELPF support for The 2016-17 budget package also included language DPR. Thus, ELPF would not be able to support the that it was the Legislature’s intent for the transfer proposed use for DPR on an ongoing basis without to be one-time only and was made with the reductions in spending for other ELPF-funded expectation that the department would provide a programs. One reason ELPF could support this sustainable solution to balance SPRF as part of the expenditure in the budget year is because of administration’s 2017-18 budget proposal. a proposed one-time transfer of $6.3 million from the Motor Vehicle Account into ELPF. This Governor’s Proposal transfer is related to past overcharges to the ELPF The 2017-18 budget includes two, one-time discovered in a 2013 audit by the California State funding sources totaling $16.6 million in order to Auditor. We would also note that using ELPF to maintain operations at current-year levels. Of that support DPR in the budget year delays rebuilding amount, $12.6 million would come from the SPRF the fund’s balance and reduces the amount fund balance. The remaining $4 million in funding available for other ELPF-supported activities. would be provided from ELPF. Long-Term Solution Still Needed to Address The budget also provides $477,000 to move the SPRF Structural Shortfall. The budget year will operational costs for four existing revenue generation be the fourth year in a row that SPRF has needed projects into the SPRF base budget. The projects a “one-time” action. The department has not include new tours at Hearst Castle, the Morro Strand indicated when it anticipates proposing an ongoing State Beach campsite conversion project, the South solution to bring SPRF into structural balance Carlsbad State Beach electrical hookups project, and as intended by the Legislature. The department retrofitting and rehabilitation of lodging facilities is still in the process of implementing programs in the Central Valley District. The department and collecting data to inform such a proposal. For anticipates that the projects will continue to generate example, an important initiative the department more revenue than they cost to operate. is working on is referred to as the “service-based budgeting” initiative, which is intended to gather 30 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET data on the staffing and costs associated with Below, we identify some of the key questions the various operational tasks. The department could Legislature could consider, as well as the type of use this data to determine what level of funding information that might assist its deliberations: would be required to provide different levels of • What Is the Desired Service Level for service. The department originally anticipated State Parks? The total amount of funding the service-based budgeting program would be needed for DPR will ultimately depend on implemented in time to incorporate the resulting the service levels it provides to the public data as part of a 2017-18 budget proposal to at state parks. It is difficult to know what address the SPRF structural deficit. However, those service levels are currently. The last implementation is still underway. survey of hours of operations and other services was conducted several years ago. LAO Recommendations The Legislature could ask DPR how it One-Time Funding Makes Sense for Budget defines current and optimal service levels Year but Requires Decision on Fund Source. We and require the department to perform find that the one-time SPRF and ELPF actions another survey in order to update available for parks are reasonable, are roughly the same service level information. magnitude as in the past three years, will allow DPR to maintain current service levels, and can be • What Efficiencies Has the Department supported by these funds on a one-year basis. Implemented and What Efficiencies However, we note that the proposal reduces Could They Implement in the Future? funding available for other ELPF activities in The department is in the process of the future. The only existing alternative funding making several changes that could sources that we have identified are the General result in efficiencies and reduce the total Fund or another diversion of fuel tax revenue. As funding need, including changes to its noted above, however, the Legislature included organizational structure. As part of the budget bill language as part of the 2016-17 budget department’s transformation activities, stating that it intended to divert fuel tax revenues it is exploring other options that could on a one-time basis only. We recommend the result in additional philanthropy and Legislature choose the funding source that aligns reduced costs. For example, the Parks with its priorities regarding ELPF-supported Forward Commission recommended that activities and other competing priorities. the department partner with a nonprofit Begin Consideration of Ongoing Budget organization to expand fundraising Solutions. We find that one-time fixes are not opportunities and provide certain services sustainable in the long-run. We recommend that the currently done by the department, Legislature begin deliberations in budget hearings such as volunteer coordination and on possible ongoing solutions to bring SPRF community outreach. The Legislature revenues and expenditures into balance. In so doing, could ask the department what changes it we recommend that the Legislature require the is implementing or considering that could department to report information that could help result in efficiencies and, therefore, reduced inform decisions on a long-term budget solution. operating costs. www.lao.ca.gov Legislative Analyst’s Office 31 2017-18 BUDGET • What Share of Park Operational Costs • What Incentives Could Help Achieve Should Be Covered by Park Users Desired Revenue Generation Levels? Versus General Fund or Other Funding Currently, the revenue generation Sources? In our view, a key decision for the programs are designed to encourage Legislature to make is to broadly determine park districts to generate more revenue. how it prioritizes the different goals of However, it can be difficult to determine the state park system and, based on that to what extent these programs have been assessment, establish what share of statewide successful and how much revenue can park operational costs should be borne by be attributed to them. We recommend users versus the General Fund (or alternative the Legislature ask the department to funding sources). On the one hand, the estimate the outcomes of these programs. Legislature might view state parks primarily Depending on the Legislature’s goals for as a public benefit that all Californians park-generated revenue, it might wish should be able to easily access at low or no to strengthen or weaken the revenue cost. This approach would imply lower fee generation incentives in order to increase levels and greater reliance on funding parks or reduce park-generated revenue. through the General Fund. On the other • What Revenue Alternatives Are hand, it might decide to treat state parks Available Besides the Current Sources? more like an enterprise that should be more We recommend the Legislature ask the self-sufficient and funded by the visitors that department to identify all possible sources benefit directly. This approach would imply of revenue for state parks and consider that a relatively high share of park operations the trade-offs of each. For example, a be funded by user fees. Ultimately, the share report prepared for the Parks Forward of costs that should be borne by park users is Commission identified several dedicated a policy decision about the state’s priorities tax options to increase revenues for parks. for the park system. (For more information As another example, some states offer on this issue, please see our January 2017 motorists the option to purchase an annual report Improving State’s Approach to Park parks pass when they register their vehicles. User Fees.) THE DEPARTMENT OF FISH AND WILDLIFE The DFW is responsible for promoting and The 2017-18 Governor’s Budget proposes total regulating the hunting of game species, promoting expenditures of $523 million for the department and regulating recreational and commercial from various sources, a decrease of $51 million fishing, and protecting California’s fish and (9 percent) compared to current-year expenditures. wildlife. The department currently manages over Most of this decrease reflects the removal of 1 million acres of public land including ecological one-time appropriations from bond funds and reserves, wildlife management areas, and hatcheries for deferred maintenance projects. Of the total throughout the state. proposed expenditures, $121 million comes from 32 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET the Fish and Game Preservation Fund (FGPF) 80 percent ($75 million) in 2015-16, are deposited (23 percent), $89 million from the General Fund into the nondedicated account. As shown in (17 percent), $80 million from federal funds Figure 14 (see next page), the nondedicated account (15 percent), $64 million from general obligation receives revenues from recreational hunting and bond funds (12 percent), and the rest from fishing license and permit fees, commercial fishing reimbursements and other special funds. fees, and environmental review fees paid by project proponents. The department issues more than 500 Fish and Game different types of hunting and fishing licenses and Preservation Fund permits. LAO Bottom Line. We are concerned that Nondedicated Account Supports Multiple the Governor’s proposal to address the operating Department Activities. The nondedicated FGPF shortfall for the FGPF nondedicated account account supports a wide range of activities. The includes a commercial fishing landing fee increase largest expenditure category is law enforcement. that may be too large for the industry to sustain, This includes supporting wildlife officers and and adds new activities that exacerbate the wardens to enforce the state’s laws and regulations, account’s imbalance. Moreover, the proposals protecting fish and wildlife resources, preventing leave an ongoing shortfall for the Legislature to habitat destruction, and investigating illegal address in 2018-19. We recommend the Legislature commercialization of wildlife. Additionally, (1) adopt a commercial landing fee increase but the account supports management of both perhaps at a lower level or more gradually, (2) adopt department-owned lands (including wildlife areas, the Governor’s proposal to transfer lifetime ecological reserves, and public access areas), as license fee revenues to the nondedicated account, well as inland and coastal fisheries. (A fishery (3) modify the Governor’s proposals to begin two is an area where fish or sea animals are caught.) new activities by funding them on a limited-term Land management activities include scientific basis using different funding sources, and (4) begin research, implementation of policies to protect and the process of identifying and considering options restore species and their habitats, and support for for addressing the remaining shortfall on an recreational hunting and fishing opportunities. ongoing basis. The nondedicated account also funds various activities related to overseeing the Background state’s commercial fishing industries, including FGPF Contains Multiple Accounts. The FGPF implementing and enforcing laws, collecting and is the largest source of ongoing support for DFW’s managing data and records, monitoring catches activities. Established in 1909, it is one of the oldest and quotas to prevent overfishing, and scientific special funds in the state. The fund is divided into research to preserve the health and sustainability of 29 “dedicated accounts” (for which revenues can the fisheries. only be spent on specified activities linked to the Funds from the nondedicated account are also particular source of revenue, such as the Duck used to support departmental review activities Stamp Account for restoring duck habitat) and a required by CEQA. Finally, the account supports “nondedicated” account (for which revenues can be various wildlife conservation activities, including spent on a variety of the department’s activities). specific efforts targeted at preserving salmon and The majority of FGPF revenues, comprising steelhead trout. www.lao.ca.gov Legislative Analyst’s Office 33 2017-18 BUDGET Nondedicated Account Has Roughly and benefit costs for the state’s fish and $20 Million Operating Shortfall. Figure 15 game wardens increased by 16 percent, compares revenues and expenditures from the environmental scientists by 13 percent, and nondedicated account of the FGPF for the last senior environmental scientist supervisors eight years. As shown, in recent years expenditures by 61 percent. These classifications make have exceeded revenues, with the gap reaching up just over half of all of the positions over $20 million annually beginning in 2014-15. supported by the nondedicated account While the department has been able to sustain (mostly wardens and environmental the higher level of expenditures by drawing from scientists). These personnel costs exceeded the account’s fund balance, that balance has been the inflationary adjustments that were mostly depleted. Reasons that expenditures from made to most of the license fees that the account have increased in recent years include: are deposited into the nondedicated FGPF account, which were increased by • Employee Salary Increases. Several 10 percent over the same period. classifications of DFW employees have received salary increases through the • Shifting Existing Activities Into FGPF state’s collective bargaining process in Without Increasing Revenues. The state recent years. For example, from 2010-11 has shifted expenditures for existing DFW to 2015-16, average per-employee salary Figure 14 Nondedicated FGPF Revenues Come From a Variety of Fees 2015-16 Recreational Hunting License and Permit Total = $75 Million Commercial Fishing License and Permit Recreational Fishing License and Permit CEQA Review Other Commercial Landing FGPF = Fish and Game Preservation Fund and CEQA = California Environmental Quality Act. 34 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET activities from other funding sources to response activities in 2015-16 ($3 million the FGPF nondedicated account, both one time). to reduce General Fund costs during the • Lifting of Temporary Spending recession and to remove costs from a Restrictions. During the recession, different oversubscribed state fund, the normal department expenditures were ELPF. Ongoing shifts that have increased reduced by mandatory statewide spending FGPF expenditures have totaled at least restrictions such as worker furloughs $4.3 million since 2009-10. In addition, and a ban on purchasing vehicles. The various one-time shifts (which diminished state lifted those temporary limitations in the account’s reserves) have totaled at least recent years, resulting in a resumption of $37 million over the same period. baseline costs as well as higher short-term • New Activities Without New Funding. costs to address accumulated needs. For The Legislature has also assigned the example, vehicle expenditures from the department new costs to be funded by account, which typically average around the account without providing additional $2.5 million annually, were only $7,000 resources. Such costs have included new in 2010-11, but jumped to $5 million in law enforcement positions beginning 2015-16. in 2009-10 and 2010-11 (at an ongoing cost of $5 million), the purchase of law Governor’s Proposals enforcement radio infrastructure in The Governor has three proposals to address 2011-12 ($4 million one time), and drought the FGPF nondedicated account’s structural Figure 15 FGPF Nondedicated Account Expenditures Exceed Revenues in Recent Years (In Millions) $120 Expenditures Revenues 100 Year-End Fund Balance 80 60 40 20 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Projected FGPF = Fish and Game Preservation Fund. www.lao.ca.gov Legislative Analyst’s Office 35 2017-18 BUDGET imbalance and two proposals for new spending established based on an 11-tier system linked to from the account. As summarized in Figure 16, the the value of the specific fishery, with the species combination of proposals yields about $18 million that generate higher revenue triggering a higher towards solving the funding shortfall in 2017-18, fee. This is similar to ad valorem systems used by but only $10.7 million in 2018-19. We discuss the several other western states. At the time of this proposals in more detail below. publication, the administration had not provided Increase Commercial Landing Fees our office with its proposed fee schedule or draft Significantly. To address just over half of the trailer bill language. account’s structural imbalance, the Governor Transfer Funds From and Eliminate Lifetime proposes trailer bill language that would increase License Trust Account. The other major component the fee that commercial fishermen pay on the of the Governor’s approach to addressing the amount of seafood they catch, or “land.” Currently, nondedicated account’s imbalance in 2017-18 is the statutorily established fees assessed on seafood to shift $8.7 million from a different account, that is commercially landed in California range the Lifetime License Trust Account, into the from 0.13 cents per pound to 5 cents per pound nondedicated account on a one-time basis. The depending on the species. These rates have not Lifetime License Trust Account contains revenue been changed since 1992. (Unlike most of the other from recreational hunters and anglers who have license fees that are deposited into the account, opted to purchase lifetime—rather than annual— landing fees are not automatically adjusted for hunting and fishing licenses. Currently, a small inflation.) Landing fee revenues totaled $500,000 portion of the fee revenues from the account is in 2015-16, and the administration estimates annually transferred to the nondedicated FGPF the fees will generate $900,000 in the current account (as well as to a few other dedicated year. The Governor’s proposal would increase accounts) and used for the broad variety of landing fee revenue by $12.4 million, or more activities the nondedicated account supports. This than 1,300 percent. Based on the administration’s account has accumulated a large fund balance, description of its proposal, the new fees would be however, due to statutory formulas that limit the Figure 16 Summary of Governor’s FGPF Nondedicated Account Proposals (In Thousands) 2017‑18 2018‑19 Reduces Shortfall Increase commercial landing fees $12,400 $12,400 Transfer from and eliminate Lifetime License Trust Account 8,725 750 Shift advisory program to other fund sourcea 381 381 Subtotals ($21,506) ($13,531) Adds to Shortfall Water diversion assessment -$1,800 -$1,800 Algal bloom monitoring program -1,717 -996 Subtotals (-$3,517) (-$2,796) Net Solutions $17,989 $10,735 a The administration is still in the process of identifying a viable new fund source. FGPF = Fish and Game Preservation Fund. 36 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET rate at which funds can be transferred to the other • Measure Water Diversions on accounts for expenditure. Department Lands. The Governor The Governor also proposes trailer bill proposes $1.8 million in ongoing funding language to abolish the Lifetime License Trust for the department to measure and report Account and instead allow most of the revenues to the SWRCB the amount of surface from future sales of lifetime licenses to be annually water it diverts and uses on its lands and deposited directly into the nondedicated account. facilities. This proposal responds to a new This would provide $750,000 in ongoing annual state reporting requirement that took effect revenues to the nondedicated account beginning in 2016 applying to all public and private in 2018-19. (A separate portion of revenues from entities that divert at least ten acre-feet lifetime license sales would also be directed to of surface water a year. The department certain dedicated FGPF accounts and to the estimates it has at least 140 points of Hatchery and Inland Fisheries Fund in both diversion, but indicates that it does not 2017-18 and on an ongoing basis, corresponding to currently measure the amount of water the types of licenses purchased.) diverted, nor have the staff or equipment Shift Funding for Advisory Program to to begin doing so. The proposed funding Different Fund Source. The Governor proposes would be for the department to conduct to reduce FGPF nondedicated account costs an assessment of the equipment and costs by $381,000 by finding a replacement funding it will need to comply with the law. The source for two positions that are currently funded administration indicates it will submit a through an interagency agreement with DFW. subsequent budget request in future years The administration indicates that the alternative for the funding to purchase and install the funding source it initially identified—the Clean-up measurement devices, and potentially for and Abatement Account of the State Water Quality additional staff to oversee their operation Control Fund—is actually not appropriate for these and maintenance. activities, so it will propose a different source later • Monitor Harmful Algal Blooms. The in the spring. The program, run out of the Office of Governor proposes $1.7 million in 2017-18 Environmental Health Hazard Assessment, issues and $996,000 annually thereafter to fish consumption advisories based on evaluations establish a new program to collect and of fish chemical contaminant data. The advisories analyze samples of biotoxin-producing provide guidance to sport fish consumers to harmful coastal algal blooms. These blooms, minimize their exposure to contaminants, and are which can make seafood species unfit for also used to inform decisions by SWRCB, regional human consumption, have become more waters boards, DFW, and the Fish and Game prevalent in recent years, and have led Commission to regulate specific water bodies and the state to close certain coastal fisheries fisheries and protect public health. to commercial fishing. The department, Add Two New Programs to Nondedicated working together with the California FGPF Account. The Governor also proposes Department of Public Health, would use the creating two new ongoing activities to be funded information collected to inform and more out of the nondedicated account beginning in accurately target fishery closures. 2017-18. www.lao.ca.gov Legislative Analyst’s Office 37 2017-18 BUDGET LAO Assessment the proposed increase raises some concerns about whether it will be set at a level the state’s Current Commercial Landing Fees Insufficient commercial fishing industry could sustain. The to Support Associated Department Workload. industry has struggled in recent years due to poor An analysis the department conducted in 2007 conditions and closures brought about by drought, estimated that its expenditures on behalf of the El Niño weather patterns, and climate change. commercial fishing industry totaled around While prices for many types of seafood have $22 million. While it has not conducted a similarly increased, in many cases the catch amounts are way detailed analysis since that time, the department down. For example, the California coast was closed estimates that associated costs have increased to Dungeness crab, rock crab, and razor clam over the past decade due to inflationary costs fishing for extended periods starting in the fall of and additional regulatory mandates. However, 2015 due to widespread algal blooms and resulting combined revenues deposited into the FGPF domoic acid concentrations in the shellfish. nondedicated account from commercial licenses, Additionally, the state’s salmon catch has declined permits, and landing fees totaled only around precipitously in recent years due to the drought’s $5 million in 2015-16. Other revenue sources— effects on the state’s rivers and high mortality rates particularly from recreational hunting and fishing experienced by the fish. licenses—have, therefore, been subsidizing the Adjusting the landing fees by changes in the department’s commercial fishing-related work. Consumer Price Index since 1992 (when they Moreover, the state has not increased commercial were last increased) would result in a roughly landing fees for 25 years, so current fee levels have 80 percent (about $725,000) increase over projected not kept pace with inflationary increases. current-year levels, compared to the more than Detail Lacking on How New Fees Would Be 1,300 percent ($12.4 million) increase proposed by Structured. Since the administration has not yet the Governor. However, a modest increase of this shared its proposed trailer bill language or fee amount would not cover much more of the actual schedule, we are unable to conduct an in-depth department costs related to commercial fishing. analysis of the merits of the landing fee proposal. Use of Lifetime License Account Fee Revenues Moreover, while the administration describes Consistent With Intended Purpose. While the the proposed increase as a fee, without reviewing Governor’s proposal to shift funds from and then the specific language we are unable to confirm statutorily abolish the Lifetime License Trust that it meets the requirements established by Account would break from longstanding practice, voters through Proposition 26 (2010). Under the it would not alter the ultimate use of the funds in constitutional provisions of Proposition 26, the either the budget year or future years. Abolishing fee level must be reasonably related to the costs the account would simply allow the revenues of the services being provided in order to be to be used more rapidly—for the same types of approved with a majority vote of the Legislature. By activities—and avoid the continued accumulation comparison, revenues from a tax can be used more of a large fund balance that has resulted from broadly and must be approved by two-thirds of the outdated fund transfer formulas. Legislature. Viable Alternative Fund Source for Advisory Rate of Proposed Increase Is Considerable. Program Still Not Identified. Looking to shift Even without specific information as to how costs for the fish consumption advisory program the fee would be structured, the magnitude of 38 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET to a different source may be a useful way to relieve worthwhile activity and consistent with state law. a small portion of the nondedicated account’s Efforts to account for surface water diversions structural imbalance. Until the administration has are an important part of improving statewide identified an appropriate alternative, however, we water management, and the department would are unable to evaluate the merits of this proposal. face costly penalties for failing to comply with the Budget-Year Proposals Buy Time, but new statutory requirements to do so. Moreover, Additional Ongoing Solution Clearly Needed. continued provision of water to department lands is The Governor acknowledges that additional action vital for the wildlife that live there. will be required to balance the FGPF nondedicated . . . But Funding With Nondedicated Account account in 2018-19 and beyond, and expresses plans Would Exacerbate Structural Imbalance. While to work with stakeholders to develop an ongoing monitoring algal blooms and water diversions both solution. As shown in Figure 16, the administration are worthwhile activities, the Governor’s proposed estimates that its three proposals would provide an approach to funding them is problematic. Adding additional $21.5 million to the account in 2017-18, additional new expenditures to the nondedicated which would be sufficient to fund all proposed account when it already faces a funding shortfall activities (including the two new proposals) worsens the problem the Legislature will have and leave a balance of $1.1 million at the end of to solve in 2018-19 and future years. Even if the the fiscal year. Because most of the additional Legislature adopts the proposed landing fee revenue from the Lifetime License Trust Account increase and Lifetime License Trust Account shift, is only available on a one-time basis, however, the adding new costs would increase the amount of proposals would only increase revenues to the additional revenue or cuts that the Legislature will account by $13.5 million annually after 2017-18. need to approve to keep the account in balance This would leave an out-year annual gap between beginning in 2018-19. revenues and expenditures of roughly $10 million if Proposal to Measure Water Diversions the Legislature also adopts the Governor’s two new Represents Short-Term—Not Ongoing—Activity. spending proposals (or $7 million if the Legislature While we believe the Governor’s proposal to rejects the two new spending proposals or funds account for the water diverted and used on them with a different source). department lands has merit, the specific activities Two New Proposed Activities Meet Important proposed do not warrant the ongoing funding Needs . . . We believe the Governor’s two requested. The Governor’s proposal is to conduct new proposed activities have some merit. The an initial assessment of where the department is information produced through additional sampling diverting water and what equipment and actions— of harmful algal blooms would enable the state and associated costs—ultimately will be necessary to more precisely target fishery closures to where to comply with the new law and efficiently meet and when contamination exists. This would both wildlife needs. These assessments represent improve public health protections and avoid one-time activities, so the Governor’s rationale for potentially unnecessary closures and the resulting requesting $1.8 million in ongoing funding—before economic effects on the commercial fishing the ongoing costs have been determined—is industry. unclear. Similarly, measuring water diversions and Legislature Has Several Options for uses on department lands and properties is a Addressing Remaining Shortfall. Below, we www.lao.ca.gov Legislative Analyst’s Office 39 2017-18 BUDGET describe three broad options that the Legislature waterways, and wildlife. Alternatively, the could pursue to solve the remaining structural Legislature could impose a tax on products imbalance in the nondedicated account in 2018-19 that can pollute the natural environment and future years, as well as some trade-offs (such as tires, gasoline, or pesticides) associated with each option. Additionally, since these can impact fish and wildlife should the Legislature opt to modify or reject and result in a need for the department’s the Governor’s two proposals for addressing the preservation work. One argument in favor shortfall in the budget year—for example by of such an approach is the intent that adopting a smaller increase to commercial landing parties who benefit from or are responsible fees—it also could implement one or a combination for the department’s activities would help of these solutions for 2017-18. to support them. On the other hand, the linkage between the entities paying the tax • Provide Increased General Fund Support. and the department’s workload is relatively The Legislature could increase General tenuous. Moreover, adding individual Fund support for the department to pay excise taxes that have restricted uses for some of the activities currently funded limits the Legislature’s flexibility to direct by the FGPF. One argument in favor of tax revenues towards the state’s highest this approach is that some of the work priorities in future years, should those supported by the nondedicated FGPF priorities change. contributes to broad public benefits—such as land preservation, enforcement of the • Reduce Expenditures. The Legislature also state’s laws, and protection of nongame has the option of addressing the account’s species and habitats—and that the general operating shortfall by reducing some of public (not just hunters and anglers) should its current expenditures. This approach therefore contribute more to support would lessen or avoid the need to raise such efforts. One argument against this new tax revenue or redirect General Fund approach is that it would reduce available from other state priorities. We did not have funds for other statewide General Fund sufficient time or information to conduct priorities. an in-depth analysis of the department’s activities. Our initial review, however, was • Impose New Dedicated Tax. Some have unable to identify obvious candidates for suggested the state impose a new excise reduction. Eliminating certain existing tax on specific activities or goods that are activities could result in failing to enforce somewhat related to the type of work the some of the state’s laws (potentially department conducts and direct the new increasing poaching or pollution), harm revenues into the FGPF. For example, it to fish or wildlife (including those that could impose a tax on outdoor gear (such are already threatened or endangered), as tents or binoculars) or activities (such long-term damage to the commercial as whale watching or boat rentals) under fishing industry (from failure to monitor the rationale that individuals who enjoy and maintain safe yields and fishery outdoor recreation generally benefit from conditions), or foregoing some federal the department’s work to protect lands, 40 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET funds (since maintaining a certain level of modified funding proposal later this spring for the state expenditures for specified activities is $381,000 supporting fish consumption advisories. a condition of receiving such funds). Provided it can identify an appropriate alternative, we believe this is a reasonable approach to LAO Recommendations lowering the FGPF nondedicated account’s costs. We will conduct further analysis and provide a Adopt Some Form of Commercial Landing recommendation to the Legislature once we have Fee Increase. We recommend the Legislature reviewed the administration’s revised proposal. adopt some level of increase for commercial Modify Two New Proposed Activities. While landing fees because they have not kept pace with we find there is some merit in the Governor’s two either the department’s associated workload or new proposed activities, we do not believe the state inflation. Because the administration has not yet should worsen the ongoing operating shortfall for provided detail on the specific structure of its the FGPF nondedicated account before identifying proposal, we are unable to advise the Legislature an ongoing solution for how to fund the account’s as to its merits. The amount of increase proposed, existing activities in future years. As such, we however, is substantial, and could result in negative recommend the Legislature modify the Governor’s consequences for some in the industry. The two proposals as follows: Legislature may want to consider adopting a lower level of increase, or phasing the increase in over a • Use Other Fund Sources. Until the number of years to temper its impact. Adopting nondedicated account has sufficient annual an increase that raises less funding than proposed revenues to cover the costs of algal bloom by the Governor could require the Legislature to monitoring, we recommend funding also adopt one of the additional solutions described it using General Fund ($1.7 million above for 2017-18 in order to balance the fund in in 2017-18). Additionally, we find that the budget year. (Adopting our recommendation some amount of the federal funds the below to use a different funding source for the department receives for land conservation Governor’s new proposed activities would reduce could be used to pay for a portion of the the amount of solution needed for the account in costs of monitoring water diversions on 2017-18.) department lands. We recommend the Approve Permanent Transfer From Lifetime Legislature direct the department to License Fees. We recommend the Legislature provide an estimate of how much federal adopt the Governor’s proposal to transfer the fund funding could be made available for this balance from and then abolish the Lifetime License activity, then allocate General Fund for the Trust Account. These funds would help provide remaining amount. a short-term fix to the nondedicated account’s • Provide Funding on Limited-Term Basis. funding shortfall and thereby allow the Legislature We recommend the Legislature limit more time to identify an ongoing solution. The General Fund support for these activities fee revenues still would be used consistently with to two years, then revisit whether the previous practice in both the budget year and FGPF nondedicated account has sufficient future years. resources to absorb them after the funding Consider Fund Shift Based on Revised shortfall has been addressed. Additionally, Proposal. The administration will submit a www.lao.ca.gov Legislative Analyst’s Office 41 2017-18 BUDGET conducting a needs assessment for water Fund—for the budget year, using the coming year diversions on department lands is a to discuss and consider the trade-offs of potential short-term activity. The administration can permanent changes to revenues or expenditures submit a subsequent request for one-time can help inform future decisions. This could equipment and ongoing maintenance costs include soliciting feedback from stakeholders in future years once they are better defined. during budget hearings, such as representatives from the commercial fishing industry, recreational Identify Additional Ongoing Solution hunters and anglers, and environmental and for Account by 2018-19. We recommend the conservation groups. The Legislature could also Legislature begin the process of identifying form work groups to explore and vet potential which ongoing options it will want to pursue to proposals. Additionally, the Legislature will want address the full operating shortfall in the FGPF to ask the administration to report on what options nondedicated account. Even if it opts to adopt it is considering for an ongoing solution to the short-term solutions—such as the lifetime license shortfall. fee transfer or perhaps limited-term use of General DEPARTMENT OF CONSERVATION The Department of Conservation (DOC) is Oil, Gas, and Geothermal charged with the development and management Well Statewide Tracking and of the state’s land, energy, and mineral resources. Reporting (WellSTAR) The department manages programs in the LAO Bottom Line. We recommend that the areas of (1) geology, seismology, and mineral Legislature approve the request for $21.1 million in resources; (2) oil, gas, and geothermal resources; 2017-18 to fund only the first year of development and (3) agricultural and open-space land. The of the WellSTAR database system. We further Governor’s budget proposes $118 million for DOC recommend the Legislature fund the remainder of in 2017-18, a net decrease of about $33 million the request on a year-to-year basis. This approach (22 percent) from estimated expenditures in the will require the administration to return with current year. The year-over-year net decrease in additional funding requests in the future, thereby spending is mainly explained by a decrease in ensuring that the Legislature has additional expenditures from the Greenhouse Gas Reduction opportunities to exercise oversight over this Fund—which receives revenue from cap-and-trade complex information technology project. allowance auctions—that is partially offset by an increase in spending from the Oil, Gas, and Background Geothermal Administrative Fund (OGGAF) for Division of Oil, Gas, and Geothermal initiatives to improve regulation of oil and natural Resources (DOGGR) Regulates Oil and Natural gas drilling operations. Gas Production. DOGGR regulates onshore and offshore oil, natural gas, and geothermal wells. The division is charged with ensuring the safe development of oil, natural gas, and geothermal 42 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET resources in the state through sound engineering Recent Legislation Mandates DOGGR to practices that protect the environment, prevent Collect Data on Oil and Gas Wells. In Chapter 313 pollution, and ensure public safety. The division’s of 2014 (SB 4, Pavley), the Legislature found that regulatory responsibilities include (1) well insufficient information is available to fully assess permitting and testing; (2) safety inspections; the potential effects of hydraulic fracturing and (3) oversight of oil, natural gas, and geothermal well other well stimulation treatments in California, drilling; (4) inspecting oil field tanks, pipelines, including environmental, occupational, and public and sumps; (5) oversight of well stimulation such health hazards and risks. The Legislature enacted as hydraulic fracturing and steam injection; and several requirements designed to provide greater (6) oversight of plugging and abandonment of transparency and accountability to the public wells. regarding well stimulation treatments; emissions to The division works in collaboration with local the environment; and the handling, processing, and governments and other state agencies to meet its disposal of well stimulation wastes. Chapter 561 of regulatory mandate. For example, the division 2014 (SB 1281, Pavley) requires reporting of specific collects information on water production, water data regarding the source, volume, and storage use, and water disposal from oil and natural and disposal status of water produced during oil gas production operations and provides this and natural gas drilling operations. This reporting information to SWRCB. This information helps should provide regulators and policy makers with SWRCB identify oil and natural gas injection wells key information to evaluate how industry practices that may be injecting fluids into aquifers used for affect groundwater. drinking water. 2015-16 Budget Included Funding for Oil and U.S. EPA Letter Requires California to Gas Data Management System. The Legislature Improve Oversight of Oil and Gas Production. In approved $20 million in funding—$10 million February 2015, DOGGR and SWRCB submitted per year in 2015-16 and 2016-17—for an oil and a comprehensive plan to the United States gas data management system, which has since Environmental Protection Agency (U.S. EPA) to been named WellSTAR. WellSTAR is designed bring California’s Class II Underground Injection to give DOGGR, other state agencies, industry, Control (UIC) program into compliance with and the public an integrated information system the federal Safe Drinking Water Act. (Class II that provides the information on oil and gas wells are wells where fluids associated with oil production operations that is required by recent and natural gas production are injected into the legislation and U.S. EPA. DOGGR entered into ground.) In a letter sent in March of 2015, the an agreement with the California Department U.S. EPA responded to California’s plan and of Technology (CDT) to complete a “Stage/Gate” directed DOGGR to create a searchable injection process with assistance and direction of staff from well database. U.S. EPA stated that an effectively the CDT Consulting and Planning Division. This designed searchable database is necessary for process consists of providing legal and technical (1) DOGGR to properly manage permitting and evidence of the project’s vitality, sustainability, and enforcement of injection activity across the state, cost-effectiveness. (2) U.S. EPA to conduct its oversight of the Class II The initial stages of the project demonstrated UIC program, and (3) the public to monitor how complex it would be to identify all of the injection activity. system requirements necessary to meet legislative www.lao.ca.gov Legislative Analyst’s Office 43 2017-18 BUDGET and U.S. EPA requirements. Notably, during one of ongoing M&O of the system. This M&O is essential the initial stages, 473 requirements were identified. for maintaining system technologies and for However, a later in-depth analysis revealed the making any necessary fixes identified by DOGGR initial analysis was incomplete, and a total of 1,384 during operational use. The M&O estimated cost requirements were documented and confirmed does not include any enhancements to WellSTAR by DOGGR. The division states that because of that may be necessary to comply with new the rigorous process that was followed to gather, legislation or regulations. document, and reconfirm requirements, it is LAO Assessment confident in the final requirements for the new system. The administration’s proposal is necessary to comply with U.S. EPA requirements and to Governor’s Proposal implement the requirements of Chapters 313 As shown in Figure 17, the Governor’s budget and 561. However, we have concerns regarding plan proposes $45 million (OGGAF) over five years how effectively the Legislature will be able to beginning in 2017-18 to implement WellSTAR. exercise oversight of the WellSTAR project if the This includes a request of $21.1 million for 2017-18. administration’s proposal is approved as budgeted. The activities funded in this proposal will be As proposed, the request would be approved performed by a mix of external vendors, CDT staff, for funding through 2018-19 for project design, and DOC staff. The bulk of this funding occurs development, and implementation costs, and in 2017-18 and 2018-19 and would support project then from 2019-20 onward for stabilization costs design, development, and implementation costs. and ongoing M&O costs. Under this proposal, In 2019-20, funding primarily will support one the administration would not have to make a year of stabilization costs (related to transitioning request for additional expenditure authority unless operational ownership of the project from the the project experienced a shortfall. Typically, developer to DOC), as well as the first year of information technology projects—especially ongoing maintenance and operation (M&O) costs. complicated projects such as WellSTAR—are Beginning in 2020-21, funding would support funded on a year-to-year basis. This funding Figure 17 Governor’s Budget Request for Well Statewide Tracking and Reporting (In Millions) Project Stages Design, Development, and Implementation Stages Stabilization and M&O M&O 2021‑22 Five‑Year 2017‑18 2018‑19 2019‑20 2020‑21 (Ongoing) Totala Vendor services $18.9 $12.9 $4.1 $2.2 $1.0 $39.1 CDT services 0.8 0.8 0.1 — — 1.7 DOC staff 1.4 1.3 1.3 0.3 0.3 4.6 Totals $21.1 $15.0 $5.5 $2.5 $1.3 $45.5 a May not total due to rounding. CDT = California Department of Technology; DOC = Department of Conservation; and M&O = Maintenance and Operations. 44 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET approach ensures that the administration will to design, develop, and implement a data system submit a request for funding for such projects that can meet the requirements of the U.S. EPA, as part of the Governor’s annual budget plan, Chapters 313 and 561, and maintain the flexibility providing an opportunity for the Legislature to be modified to meet new regulatory demands. By to exercise oversight of the project in budget taking this year-by-year approach to funding, the subcommittee hearings. Legislature would ensure that the administration will have to return with an additional funding LAO Recommendation request annually as part of the Governor’s budget Approve Only Budget-Year Funding Requested proposal until the project has reached the O&M for WellSTAR Project. We recommend that the stage. This will trigger a review of WellSTAR’s Legislature approve the request for $21.1 million in development and implementation as part of the 2017-18 to fund the next year of WellSTAR design, Legislature’s budget process, thereby ensuring an development, and implementation. As discussed opportunity for members of the Legislature to earlier in this analysis, it is a complex undertaking exercise further oversight of the project. DEPARTMENT OF RESOURCES RECYCLING AND RECOVERY (CALRECYCLE) CalRecycle regulates solid waste facilities place for Beverage Container Recycling Program (including landfills) and manages the recycling (BCRP) reform, but the Legislature will require more of various materials, such as beverage containers, details in order to enact program reform. electronic waste, tires, and used oil. The Overview of the BCRP department also promotes waste diversion practices, such as source reduction, composting, The BCRP was established 30 years ago for the and reuse. purpose of encouraging consumers to recycle certain The Governor’s budget proposes $1.6 billion beverage containers. Under the program, consumers from various special funds for support of must pay a deposit for each eligible container CalRecycle in 2017-18. This is a reduction of purchased and then have that deposit repaid for each $36 million, or 2 percent, from current-year eligible container returned to a certified recycler. The estimated expenditures. This is largely due repayment amount is referred to as the California to a technical budget adjustment that moved Redemption Value, or “CRV.” Most containers made Greenhouse Gas Reduction Fund appropriations from glass, plastic, and aluminum are eligible for from the budgets of departments—such as CRV, though there are exceptions, such as containers CalRecycle—into a control section of the budget. for wine, spirits, and milk. Statute includes two main goals for the program: (1) reducing litter and Beverage Container (2) achieving a recycling rate of 80 percent for eligible Recycling Reforms containers. (For more information on the BCRP, LAO Bottom Line. The general principles please see our 2015 report entitled An Analysis of the and suggested approaches discussed in the Beverage Container Recycling Program.) administration’s policy paper are a reasonable starting www.lao.ca.gov Legislative Analyst’s Office 45 2017-18 BUDGET Flow of CRV Containers and Payments. beverage containers and CRV are exchanged at The CRV program involves the flow of beverage each stage between participants. The Beverage containers and payments between several sets Container Recycling Fund (BCRF) is the state fund of parties. This includes (1) manufacturers used to collect and distribute payments for the CRV that produce containers, (2) distributors that program. deliver beverages to retailers, (3) retailers that Several Ways to Redeem Containers. sell beverages, (4) consumers that purchase Consumers can redeem containers in one of several the beverages, (5) recyclers that collect empty ways. containers, and (6) processors that prepare the • Traditional Recycling Centers. Most materials for reuse. As shown in Figure 18, beverage containers are returned to Figure 18 How the CRV Program Works Pay CRV to retailers and receive CRV from recyclers. Consumers Purchase beverage from retailer and recycle empty beverage container. Sell beverages to consumers. Receive CRV from processors Retailers and pay CRV to consumers. Collect CRV from consumers and Recyclers pay CRV to distributors. Collect empty containers from consumers and sell to processors. Deliver beverages to retailers. Receive CRV from BCRF and pay CRV to recyclers. Distributors Processors Collect CRV from retailers and pay CRV to CalRecycle. Buy empty containers from recyclers and . process them into formats ready for reuse. Manufacturers Purchase scrap material from processors for reuse in new containers. Make containers and fill with beverages to sell to distributors. BCRF Collects CRV from distributors and pays CRV to processors. Flow of CRV Flow of Beverage Containers CRV = California Redemption Value; BCRF = Beverage Container Recycling Fund; and CalRecycle = California Department of Resources Recycling and Recovery. 46 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET traditional recycling centers, which recycling collection sites, and providing grants for usually accept large quantities of materials, market development and other recycling-related frequently by truckload, from municipal or activities. These particular programs are projected commercial waste collection services. to cost about $292 million in 2017-18. Each of the supplemental programs is described in Figure 19 • Convenience Zone Recyclers. These (see next page). centers must be located close to a High Redemption Rates and Supplemental supermarket in order to provide a Programs Create Shortfall in BCRF. Over convenient location for consumers to time, redemption rates have increased and are return their bottles. These recyclers roughly the target recycling rate defined in typically collect a lower volume of statute—80 percent. This leaves less money for the containers than traditional recycling supplemental programs supported by BCRF. As a centers and consequently receive a result, CalRecycle projects that the BCRF will have “handling fee” payment from the BCRF to a structural deficit of $24 million by the end of help cover their operating costs. 2017-18, as shown in Figure 20 (see page 49). While the BCRF has had operating deficits in recent years, • Curbside Collection. Consumers can it has been able to absorb the deficits from its large also place containers in their residential fund balance built up when the CRV redemption curbside recycling collection or take them rate was low. This balance is now estimated to be to other community drop-off programs, $170 million at the end of the budget year, about such as those operated as fundraisers or 13 percent of annual revenues. Given the structural by local nonprofit groups. Under these imbalance, the fund is likely to be further depleted options, the CRV is kept by the collecting in future years. organization when it sends the material to Proportional Reductions. Under current law, a processor. if there are insufficient funds available in the BCRF Unredeemed Deposits Support Supplemental to make all of the required CRV and supplemental Programs. The CRV redemption rate—the percent payments while maintaining a 5 percent of all CRV that is actually collected by consumers reserve, the department is required to reduce from recyclers—is less than 100 percent. This supplemental program payments (except program means that more CRV is paid into the BCRF administration) in equal proportions, in order to than is claimed by consumers. In 2017-18, for keep the fund in balance (commonly referred to example, the BCRF is projected to receive roughly as “proportional reductions”). The only time the $1.3 billion in deposits, but only about $1 billion department has had to implement proportional is projected to be spent on redemptions—an reductions was in 2009, which resulted in 80 percent redemption rate. State law requires that significant cuts to supplemental programs. much of the unredeemed CRV be spent on specified Convenience Zone Recycling Center Closures. recycling-related programs. In total, there are Since January 1, 2016, more than 300 (about currently 11 supplemental programs funded from 15 percent) “convenience zone” (CZ) recycling the BCRF (including program administration). centers have closed. These closures have been the Such programs include subsidizing glass and result of (1) a decline in scrap values for recycled plastic recycling, subsidizing supermarket materials that have reduced revenues for recyclers, www.lao.ca.gov Legislative Analyst’s Office 47 2017-18 BUDGET Figure 19 Supplemental Programs Funded by Unclaimed California Redemption Value Projected 2017‑18 (In Millions) Description Amount Processing fee offsets Processing payments by manufacturers are intended $103.6 to cover the difference between the cost of recycling and the scrap value of recycled materials. Processing fee offsets from the BCRF are currently provided to manufacturers so that they do not pay the full cost. Program administration Costs to CalRecycle of running the Beverage Container 50.0 Recycling Program. Handling fees Monthly payments made to recycling centers located in 47.8 convenience zones near supermarkets. Administrative fees Administrative payments to participants to defray costs 39.1 associated with program. 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 Payments to curbside programs or other certified entities 10.0 for higher quality of materials collected through curbside programs. Local Conservation Corps (LCC) Grants to LCC to be used for beverage container recycling 7.2 and litter reduction programs. Plastic Market Development Payments to processors and manufacturers 5.0 for processing plastic bottles into a format for manufacturing and for manufacturing products with recycled plastic. Public education Education campaigns encouraging recycling. 2.5 Beverage Container Recycling Grants to governments, nonprofit entities, and private 1.5 Competitive Grants businesses for beverage container recycling programs. Total $292.1 BCRF = Beverage Container Recycling Fund and CalRecycle = California Department of Resources Recycling and Recovery. (2) increased operating costs for recyclers, and of recyclers conducted by CalRecycle, it costs (3) BCRF payment formulas that do not reflect small CZ recyclers over twice as much on average most recent changes in scrap value. (Please see to recycle a container than large CZ recyclers. our 2016 web post entitled Addressing California’s Payments from the state intended to cover recycling Convenience Zone Recycling Center Closures costs are based on a per-container statewide for a detailed discuss of these issues.) Based on average rate, so they are usually less than a our conversations with CalRecycle, many of the low-volume recycler’s actual costs. CZ recycling center closures have been at rural, Governor’s Budget low-volume sites. This is likely because many low-volume recyclers have higher per-container The Governor’s budget does not include a recycling costs, which makes them more financially proposal to address the BCRF structural shortfall. vulnerable to market changes. Based on surveys Rather, the administration has submitted a policy 48 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET paper identifying high-level principles and general Figure 20 suggestions for program improvement. The BCRF Structural Deficit department indicates that it will hold stakeholder Projected in 2017‑18 meetings in the coming months, and it plans to (In Millions) return with a detailed proposal to reform the Revenues BCRP this spring. Major components of the Total CRV paid by consumers $1,310 administration’s policy paper are below. Other revenue 3 Subtotal ($1,313) • Expand Eligible Containers. As discussed Expenditures above, not all beverage containers are Total CRV paid out on redeemed $1,044 included in the BCRP. Those containers containers that are not eligible are typically recycled at Other program expendituresa 292 Subtotal ($1,337) lower rates. CalRecycle suggests expanding Net (Structural Deficit) $24 container eligibility, for example, by including Projected Ending Fund Balance $170 wine, distilled spirits, and large juice bottles, a Supplemental programs including administrative fees and as well as other beverage container material processing fee offsets. BCRF = Beverage Container Recycling Fund and CRV = California types such as cartons and pouches. Redemption Value. • Restructure Various Payments to cover more of these costs, as was the Program Participants. CalRecycle suggests case earlier in the program’s history. The reorganizing some payments in order department’s paper also discusses requiring to improve collection and processing of manufacturers to play a stronger role in recycled materials. This includes (1) making supporting recycled material markets payments to recyclers based on a tiered through minimum content requirements, structure to better support low-volume material buy-back requirements, refillable recyclers, (2) allowing greater flexibility beverage container options, and/or to meet CZ recycler requirements, container designs that are more easily (3) restructuring payments made to recycled. cities and counties into a competitive grant program, (4) incentivizing less • Improve Program Efficiency and Update contamination of materials in curbside Requirements. The department indicates collection programs, and (5) replacing the that it should review the BCRP in order curbside supplemental payments with a to remove out-dated provisions, clarify competitive grant program. definitions and requirements, and update payment calculations and mechanisms. • Shift Responsibility of Container For example, the department suggests Recycling Back to Beverage modifying certain payment formulas for Manufacturers. For some materials, recyclers in order to better reflect market the cost of recycling can be greater than changes (an issue that has contributed to the scrap value that recyclers can get for recycling center closures). the material. The department suggests requiring beverage manufacturers to www.lao.ca.gov Legislative Analyst’s Office 49 2017-18 BUDGET LAO Assessment suggested several similar approaches in past publications. For example, in our 2016 web post BCRP Requires Legislative Attention. We Addressing California’s Convenience Zone Recycling agree with the administration that comprehensive Center Closures, we noted that some options to BCRP reform has merit. The BCRF has faced a address CZ recycling center closures included structural deficit for several years, and while the making adjustments to their payment formulas, BCRF is currently projected to have a modest requiring manufacturers to buy recycled materials, balance in the budget year, it is unclear how soon and shifting some payments to a tiered structure it could be depleted. If this occurs, the department based on recycler size. Additionally, in our 2015 will need to implement proportional reductions, report An Analysis of the Beverage Container which are problematic because they do not allow Recycling Program, we recommended shifting for discretion in spending based on priorities or recycling costs back to manufacturers, considering other factors. For example, under proportional changing the purpose of curbside payments, and reductions, the department cannot prioritize considering expanding containers in the program. programs that are most effective or central to the Enacting Broad Program Reform Will Require BCRP’s overall mission. Additionally, proportional More Specifics. The merit of any specific proposal reductions are very disruptive to program will depend on the details. More specific language participants. Since all payments are reduced and implementation details will be important equally and quickly, participants can experience a in determining whether the reform makes significant cut in funding without much warning to sense. Reaching a consensus for reform will be plan accordingly. challenging given the large number of stakeholders Principles Outlined in Administration’s Policy involved in the BCRP and might be difficult to Paper Are Reasonable. We find that the general accomplish if the department does not provide a principals and suggested changes discussed in detailed proposal in the spring. the administration’s policy paper are reasonable program changes in concept. In fact, we have AIR RESOURCES BOARD (ARB) In California, regulation of pollution is divided ARB also began overseeing the state’s efforts to between ARB and 35 local air quality management reduce greenhouse gas (GHG) emissions—including districts. The local air districts manage the regulation regulations that affect both stationary and mobile of stationary sources of pollution (such as industrial sources of GHGs. facilities) and prepare local implementation plans to The Governor’s budget proposes $401 million achieve compliance with the federal Clean Air Act. for ARB in 2017-18, a net decrease of $443 million ARB is responsible primarily for the regulation of (53 percent) compared to estimated expenditures mobile sources of pollution (such as automobiles) in the current year. This year-over-year decrease and for the review of local district programs and is primarily the result of a technical change in the plans. Historically, the ARB’s regulations focused on way cap-and-trade expenditures are budgeted. (We emissions that affect air quality, such as particulate discuss the Governor’s proposed cap-and-trade matter and ozone-forming emissions. More recently, expenditures earlier in this report.) 50 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Volkswagen (VW) Settlement • Modify VW Vehicles. Requires VW to implement engine and emission control LAO Bottom Line. The Governor’s budget system modifications to vehicles equipped requests a total of $2.3 million and 14 positions with defeat devices to bring them into for ARB to administer and implement the compliance with emissions standards. VW Consent Decree. We recommend the ARB is responsible for ensuring these Legislature approve a portion of the request— modifications adequately control NOx ten positions and $1.6 million—related to testing emissions. and monitoring VW’s vehicle modifications. We recommend the Legislature withhold action on • Invest in ZEV Technologies. Requires VW the remaining four positions related to overseeing to invest $2 billion nationwide—including Zero Emission Vehicle (ZEV) investment plans $800 million in California—over ten years and administering programs funded from the to increase the use of ZEVs. Investments Mitigation Trust, pending additional information will be made in four 30-month cycles and on the Legislature’s role in directing these may go to four different types of activities: funds and how the funds will fit into the state’s (1) promoting ZEV infrastructure such as broader ZEV and air quality strategies. After the electric vehicle charging infrastructure; Legislature has had an opportunity to evaluate this (2) increasing public awareness campaigns; information and determine the extent to which (3) supporting programs to increase access ARB’s plans are consistent with the authority and to ZEVs, such as ZEV car sharing; and direction provided to ARB by the courts and the (4) investing in a “Green City” program Legislature, it could act on the Governor’s proposal meant to promote zero-emission car accordingly. We also recommend reducing the sharing, transit, and freight projects in a ARB’s budget by $1.2 million (Air Pollution select city. These funds will be managed by Control Fund [APCF]) and two positions because VW, but ARB is responsible for advising the ARB no longer has workload associated with the development of, as well as reviewing litigating VW civil penalties. and approving, the investment plans in California. ARB expects VW to submit its Background first plan in February 2017. VW Consent Decree. Between 2009 and 2015, • Deposit Funds in Mitigation Trust. VW sold approximately 500,000 2-liter diesel Requires VW to deposit $2.7 billion vehicles nationwide equipped with “defeat devices.” into a Mitigation Trust to fund projects Defeat devices are designed to control nitrogen oxide that reduce NOx emissions, including (NOx) emissions during vehicle certification but $381 million for projects in California. then to illegally turn off emissions controls during For example, funds may be used to replace on-road driving. (NOx emissions contribute to older heavy duty vehicles and equipment ozone.) Roughly 70,000 of these vehicles were sold with low- or zero-emission alternatives. in California. In October 2016, the courts finalized The Mitigation Trust will be overseen by a settlement between VW, U.S. EPA, and ARB. The a court-appointed trustee. Projects will be terms of the settlement are described in a Consent selected by individual states and funded Decree that includes the following requirements: over a five-year period. Under the terms of www.lao.ca.gov Legislative Analyst’s Office 51 2017-18 BUDGET the settlement, the Governor must select infrastructure. In 2016, CPUC authorized three a lead agency to identify and oversee the IOUs to implement electric vehicle charging projects in California. infrastructure pilot programs. These programs are estimated to result in the installation of Civil Penalties Settlement. Last year, 12,500 charging stations at a ratepayer cost of the Legislature approved eight positions and about $200 million. These utilities recently filed $3.2 million from the APCF for costs associated new proposals with CPUC to spend an additional with litigating VW civil penalties and additional $1 billion on electric vehicle infrastructure over the compliance and enforcement activities. Of this next few years. amount, $1.2 million and two permanent positions were approved on an ongoing basis for activities Governor’s Proposal associated with litigating VW civil penalties. ARB requests a total of $2.3 million and On January 11, 2017, ARB announced that 14 positions to administer and implement the VW it reached a civil penalty settlement with VW. Consent Decree. The request includes resources to The settlement provides a total of $154 million in conduct three different types of activities: civil penalties to the state, including $60 million in cost reimbursement to ARB. Under current • Test and Monitor VW Vehicle state law, penalties for violating air pollution laws Modifications ($1.6 Million). Ongoing are deposited in the APCF. (The APCF generally funding for ten permanent positions, plus supports ARB’s regulatory activities related to air $125,000 annually for five years, from the quality.) APCF to test and monitor VW vehicle State Air Pollution and ZEV Policies and modifications to ensure they comply with Programs. The Legislature has adopted various emissions standards. policies and programs for promoting ZEVs and • Review and Approve VW’s ZEV reducing pollution from mobile sources. For Investment Plans ($135,000). One position example, Chapter 524 of 2014 (SB 1204, Lara) created funded from APCF to review and approve the California Clean Truck, Bus, and Off-Road ZEV investment plans submitted by VW. Vehicle and Equipment Technology Program, which provides a framework for spending cap-and-trade • Implement and Monitor Mitigation Trust revenue on heavy duty zero- and near-zero emission Programs ($490,000). Three positions to technologies and projects, including giving priority develop a spending plan and administer to projects that benefit disadvantaged communities. the programs that are funded in California. In 2016-17, the Legislature allocated $150 million These positions would be funded by in cap-and-trade revenues for heavy duty vehicle reimbursements from the Mitigation Trust. and off-road equipment projects, consistent with The budget does not include a request for SB 1204. These projects are intended to reduce GHG authority to spend any funds from the Mitigation and NOx emissions. Trust on actual emission-reduction projects. Nor In addition, Chapter 547 of 2015 (SB 350, does the budget include a proposal to spend civil de León) directs the California Public Utilities penalty funds. (The civil penalty agreement was Commission (CPUC) to require investor-owned reached after the Governor’s budget proposal was utilities (IOUs) to submit plans to accelerate released.) transportation electrification, such as ZEV 52 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET LAO Assessment of this report, ARB has not provided a detailed justification that this notice is likely to drive Process for Mitigation Trust Fund Activities ongoing workload. Unclear. The specific processes for allocating funds from the Mitigation Trust are not detailed in the LAO Recommendations consent decree. According to ARB, these details Approve Ten Positions and $1.6 Million to will likely become clearer after the court appoints a Test and Monitor Vehicle Modifications. We trustee and the Governor selects a lead agency, both recommend the Legislature approve the ARB’s of which ARB expects will happen within the next request for ten positions and $1.6 million to test couple of months. The administration indicates that and monitor the vehicle repairs made by VW. These the related budget request for three positions and resources are justified based on the additional $490,000 will be withdrawn if the Governor does workload required by the consent decree. not select ARB as the lead agency. Withhold Action on Positions Related to ZEV Importantly, ARB has not indicated whether Investments and Mitigation Trust. We recommend the administration will need appropriation the Legislature withhold action on the four authority from the Legislature to allocate the positions related to overseeing ZEV investment project funds from the Mitigation Trust. It is also plans and administering programs funded unclear what authority the Legislature has to direct from the Mitigation Trust, pending additional the use of California’s share of funds that are in information on the planned investments, as well as the Mitigation Trust. Consequently, it is unclear the Legislature’s role in directing these funds. ARB what role, if any, the Legislature will have in expects VW to submit its first ZEV investment plan directing these funds to meet its priorities or, more for ARB review in February and, at the time of this generally, how the funded programs will fit into the report, the court has still not appointed a trustee state’s broader ZEV and air quality strategies. For for the Mitigation Trust. example, it is unclear whether heavy duty vehicle Accordingly, the board should report at programs funded from the Mitigation Trust will budget hearings on the status and spending plans follow the direction provided in SB 1204 or whether for ZEV investments and the Mitigation Trust. different criteria and processes will be used to select This information will help the Legislature better projects. evaluate the extent to which the proposed activities ARB Provides Limited Justification for are targeted towards the most effective efforts, Continuing Legal Resources Approved Last Year. consistent with the Legislature’s priorities, and Since the VW civil case was settled last month, are being coordinated with existing ZEV and ARB no longer has the workload associated with air quality programs operated by various state litigating VW civil penalties that was used to justify agencies. the $1.2 million and two permanent positions In addition, ARB should report at budget authorized in 2016-17. According to ARB, these hearings on whether it plans to seek appropriation resources might still be needed to litigate similar authority from the Legislature to allocate the project civil cases against other car manufacturers in funds from the Mitigation Trust. After the Legislature the future. For example, the ARB recently issued has had an opportunity to evaluate this information Notices of Violation to Fiat-Chrysler following the and determine the extent to which ARB’s plans are discovery of undisclosed auxiliary emission control consistent with the authority and direction provided devices in certain vehicles. However, at the time www.lao.ca.gov Legislative Analyst’s Office 53 2017-18 BUDGET to ARB by the courts and the Legislature, it could act districts—South Coast and San Joaquin Valley—as on the Governor’s proposal accordingly. the two areas with the highest ozone concentrations Reduce Funding for Legal Resources Approved in the nation. These districts are required to achieve Last Year. We recommend the Legislature reduce the most stringent federal ozone standards by 2031. ARB’s budget by $1.2 million and eliminate two As part of ARB’s mobile source regulatory positions that were initially approved in the 2016-17 activities, it administers emissions testing and budget for litigating VW civil penalties. The research activities that are used for such things as workload that was used to justify these resources developing regulations, researching new emission no longer exists. If ARB has ongoing workload that control technologies and vehicles, evaluating the justifies the continuation of these resources, it can effects of different fuels on engine emissions, and submit a new request to the Legislature. developing methods for measuring emissions. Existing Southern California Testing and Southern California Research Facilities. Most of the ARB’s mobile Consolidation Project emission testing and research occurs at facilities in LAO Bottom Line. Prior to taking action on Southern California. The state-owned Haagen-Smit the proposed $413 million for the construction of Laboratory (HSL), located in El Monte and built a new testing and research facility in Riverside, in 1971, is ARB’s primary testing and research we recommend the Legislature direct the facility. The state also leases five buildings adjacent administration to consider alternative fund to the HSL for additional testing and office space. sources—such as VW civil penalty revenues—to In addition, ARB currently conducts heavy-duty pay for at least a portion of the new lab. We also testing—such as testing of large diesel truck recommend the Legislature direct ARB to report emissions—at the Metropolitan Transit Authority at budget hearings on the rationale and trade-offs (MTA) facility about ten miles away in Los Angeles. associated with changes in building design that led The various testing facilities use specialized to an increase in estimated costs, such as installing equipment, such as dynamometers (equipment solar panels. used to simulate road conditions) and chambers specifically designed to measure emissions from Background vehicles and other engines. Staff at these various Mobile Source Regulations. Mobile sources, facilities conduct vehicle testing, laboratory such as automobiles, are a large portion of the analysis, regulatory development, and enforcement state’s overall emissions. For example, 83 percent of activities. statewide NOx emissions—a major contributor to 2015-16 Budget Provided $6 Million to ground-level ozone—comes from mobile sources. Develop Performance Criteria for New Facility. Under the federal Clean Air Act, California is In 2015, the administration proposed to consolidate authorized to adopt motor vehicle emissions and relocate the existing Southern California standards that are more stringent than the federal testing and research facilities. According to the standards, subject to U.S. EPA approval. While administration, the existing Southern California California has made progress in reducing air facilities do not meet current and future emission pollution in recent decades, it still faces significant testing needs. Some of the main concerns include: air quality challenges. For example, the federal • The MTA facility is too small to meet government has designated two of the state’s air heavy-duty testing needs. 54 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET • The HSL property is too small and cannot VIRF ($4 million)—for a total project cost of be adapted to accommodate the equipment $739 million. These costs would be partially offset needed for current and future testing by no longer having to pay $2 million in annual operations. lease payments at the existing facilities. Several Project Changes Contribute to • Some of the equipment at the HSL has $53 Million Estimated Net Cost Increase. The reached the end of its service life and will estimated construction and equipment costs for need to be replaced soon. the project have increased by $53 million since The 2015-16 budget provided a total of 2015-16—from $360 million to $413 million. $6 million from the Motor Vehicle Account According to ARB, the major factors that (MVA), the APCF, and the Vehicle Inspection contribute to the higher cost estimates are: Repair Fund (VIRF) to begin the planning work • Grading and Roadways—$21 Million. necessary to move mobile emissions testing ARB estimates additional site development operations—including light-duty and heavy-duty costs, including additional grading vehicle testing operations—to a new consolidated and road development. These costs are facility in Southern California. The funding was associated with selecting the Riverside site used to assess the suitability of two potential (19 acres) instead of Pomona (14 acres). sites—Riverside and Pomona—and develop performance criteria. At the time that the 2015-16 • Solar Photovoltaics (PV)—$19 Million. budget was adopted, the total estimated project cost The revised project proposal includes the was $366 million, including site assessment and installation of solar panels on the property. development of performance criteria ($6 million), The board indicates that the solar panels construction ($258 million), and equipment are needed as part of its effort to obtain ($102 million). Construction was scheduled to LEED Platinum certification and achieve begin July 2017 and be completed January 2020. a goal of zero net energy for the building. The board did not identify the estimated Governor’s Proposal reduction in ongoing electricity costs Requests $413 Million to Construct Testing associated with the solar panels. Facility. ARB requests $413 million to construct • Central Plant—$16 Million. The proposal a new testing and research facility in Riverside, to includes additional costs associated with be completed in December 2020. The new facility constructing a central plant to provide the would be roughly 383,000 square feet, including heating, ventilation, and air conditioning testing centers, a chemistry laboratory, offices, (HVAC). The original proposal assumed a and space for administrative services (such as less expensive ground sourced heat pump receiving and shipping and storage areas). The that would provide HVAC, but this type of administration proposes to use a design-build system was determined to be infeasible at procurement process, and the project would the Riverside location. be funded through lease revenue bonds. The administration estimates $29 million in annual • Updated Estimates for Fees, debt service costs over 25 years—split between Contingencies, and Inflation— MVA ($19 million), APCF ($6 million), and $12 Million. There are increased costs www.lao.ca.gov Legislative Analyst’s Office 55 2017-18 BUDGET estimated for such things as additional The Department of Finance’s five-year projections contingencies, design fees, and cost (2017-18 through 2021-22) estimate there will be escalations due to a delay in the estimated sufficient funding available in the MVA to pay for start of construction. projected expenditures, including the new ARB facility. However, over the next few years, the MVA • Equipment Cost Escalation and Electric would be barely balanced and likely face a modest Vehicle Chargers—$7 Million. The operational shortfall in certain years. proposal assumes additional equipment Second, as discussed above, a settlement in the costs, which now total $108 million. Most VW civil penalties case was announced soon after of the increase is due to updated equipment the budget was released. Under the settlement, cost estimates to adjust for inflation. About $154 million in penalties will be deposited in the $1 million of the higher costs are associated APCF. The only restriction on the funds that we are with installing 111 electric vehicle charging aware of is that $60 million must be used for ARB stations and the underground electrical testing, compliance, and enforcement activities. infrastructure necessary to support an The construction of the new facility might meet additional 139 charging stations. these requirements. The exact timing of when the In addition, the proposal assumes a $15 million funds will be deposited is unclear at this time. cost reduction relative to the initial budget proposal If the penalty revenue were used to fund some in 2015-16 because a parking structure is no longer of the construction costs, the state could issue needed. The larger Riverside site provides space for fewer bonds and, thereby, reduce long-term debt ground-level parking. payments. Approval Would Likely Result in Additional Third, the Legislature might want to consider Future Costs Not Included in Proposal. ARB using revenue from cap-and-trade auctions to pay estimates that the new facility would result in for at least a portion of the lab. Under current law, some additional future ongoing costs that are not the funds must be used to advance the purposes of included in this budget request. For example, ARB AB 32 and facilitate GHG reductions. Some of the estimates that 75 additional staff would be needed testing and research activities conducted at the new to fully staff the new testing facility once it is facility would help ARB develop and enforce GHG complete. In addition, ARB estimates $2 million to regulations related to mobile sources. Using the $7 million in one-time staff relocation costs. funds to help construct the lab would potentially be an allowable use. LAO Assessment Certain Design Decisions Have Trade-Offs. Alternative Fund Sources Might Be Available. ARB has made some design decisions that involve We find that there are several important trade-offs. For example, it is unclear whether the considerations when deciding how to fund this additional investment in PV panels will pay for project. First, we note that ARB’s request—as itself in long-term reductions in future electricity well as other budget proposals to increase MVA costs. At the time this report was prepared, expenditures—would impact the condition of the ARB had not provided a cost-benefit analysis to MVA. As part of the 2016-17 budget package, the demonstrate that these costs would be fully offset Legislature increased the vehicle registration fee by future electricity savings. In addition, ARB does to prevent the MVA from becoming insolvent. not have a formal estimate of the costs of achieving 56 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET LEED Platinum building certification. However, If viable alternative funding sources were according to ARB staff, efforts to achieve LEED identified, it could help ease long-term cost Platinum certification typically increase building pressures on the MVA, as well as reduce costs by at least a couple of percent. overall project borrowing costs. LAO Recommendations • Direct ARB to Report on Net Costs and Trade-Offs Associated With Major Design Prior to taking action on ARB’s request Decisions. We recommend the Legislature for $413 million to construct a new testing and direct ARB to report at budget hearings on research facility in Riverside, we recommend that the trade-offs and rationale for any major the Legislature: design decisions that led to changes in • Consider Alternate Fund Sources to program costs. For example, what amount Pay for Part of Lab. We recommend the of environmental benefits—such as GHG Legislature direct the administration to emission reductions—and future energy report at budget hearings on the potential savings are expected to be achieved with for using alternative fund sources to pay for the $19 million solar panels? at least a portion of the construction costs. DEPARTMENT OF TOXIC SUBSTANCES CONTROL The Department of Toxic Substances Control in spending in the Hazardous Waste Control (DTSC) regulates hazardous waste management, Account, primarily related to limited-term funding cleans up or oversees the cleanup of contaminated provided in prior years. hazardous waste sites, and promotes the reduction Statutorily Required of hazardous waste generation. The department is Budget Estimate funded from (1) fees paid by persons who generate, transport, store, treat, or dispose of hazardous LAO Bottom Line. At the time this analysis wastes; (2) other environmental fees levied on was prepared, DTSC had not provided a statutorily businesses; (3) the General Fund; and (4) federal required estimate of expenditures necessary to funds. The Governor’s budget requests $272 million meet the state’s obligations to pay for (1) cleanup from various funds for support of DTSC in 2017-18. and operations and maintenance (O&M) at federal This is a net increase of $24 million, or 10 percent, Superfund sites, and (2) O&M at state-only orphan from the estimated current-year level. The net sites. We recommend the Legislature require the increase primarily reflects increased spending of department to report at budget hearings on the $43 million—loaned from the General Fund—from status of the overdue estimate. the Toxic Substances Control Account (TSCA) for Background the Exide Technologies Facility Contamination Cleanup Program, offset by (1) one-time funding U.S. EPA Remediates Largest, Most of $14 million from the General Fund provided Complex Hazardous Waste Sites. The federal in the current year to retrofit the Argonaut Mine Comprehensive Environmental Response, Dam in Jackson and (2) a $3.6 million reduction Compensation, and Liability Act (CERCLA) of www.lao.ca.gov Legislative Analyst’s Office 57 2017-18 BUDGET 1980—as amended by the Superfund Amendments fences around sites have to be inspected and Reauthorization Act in 1986—was enacted to and maintained, and this is considered reduce and eliminate threats to human health and O&M. the environment posed by hazardous waste sites. State Law Provides DTSC With Hazardous CERCLA, also known as the Federal Superfund Waste Site Cleanup Authority. The Hazardous Act, gives U.S. EPA authority to (1) identify Substances Account Act (HSAA) was enacted by and investigate hazardous waste sites that need the Legislature in 1981 (which sunset and was cleanup, (2) clean up contaminated sites or reenacted by Chapter 23 of 1999 [SB 47, Sher]) to direct responsible parties (RPs) to do the cleanup address the need for cleanup of hazardous waste themselves, and (3) require RPs to pay cleanup sites that pose a threat to human health and the costs. U.S. EPA evaluates and ranks sites based on environment. The HSAA is also known as the State their potential to pose a threat to human health or Superfund Act. The Site Mitigation and Brownfields the environment. Sites ranked highly enough are Reuse Program administered by DTSC implements eligible to be placed on the National Priorities List the HSAA provisions regarding hazardous waste (NPL) for cleanup. site cleanup and the state funding requirements Under the “polluter pays” principle, when under CERCLA. Like U.S. EPA, DTSC has the RPs for a site have been identified, the U.S. EPA’s authority to identify and investigate sites, clean up policy is to pursue the RPs to conduct and pay for contaminated sites, and require RPs to perform the site response rather than conduct the cleanup the cleanup or pay the cleanup costs. DTSC can with federal funds. Sites where the RP has either undertake all of these actions independently from not been identified, is insolvent, cannot be located, or in coordination with U.S. EPA. or enforcement activities have not resulted in the While U.S. EPA focuses on the largest, most RP performing site cleanup actions are considered complex sites, DTSC investigates and remediates orphan sites. CERCLA authorizes U.S. EPA to pay many different types of sites, including smaller for cleanups at orphan sites. While U.S. EPA pays and less complex sites than those typically listed as for all of the costs to design the remedy, CERCLA federal Superfund sites. DTSC has legal authority requires states to pay other costs as follows: to recover cleanup costs from RPs. When done • State Pays 10 Percent of Costs for independently from U.S. EPA, DTSC pays for Remedial Phase. For the remedial action investigation, remediation, and O&M from state phase at orphan sites, federal funds pay funds if no RP can be compelled to pay these costs. for 90 percent of the costs and the state These projects are referred to as “state-only orphan pays for 10 percent of the costs. The sites.” remedial phase includes design of the Costs for Federal NPL Sites Prioritized Over remedy followed by the remedial action State-Only Sites. The Site Remediation Account (construction) phase when the project is (SRA) administered by DTSC is used to fund carried out. the state’s share of the remedial phase and O&M costs at NPL orphan sites, as well as the costs for • State Pays All O&M Costs. The state pays state-only orphan sites. State obligations for federal 100 percent of the O&M costs after the NPL sites take priority over state-only orphan remedial action phase at an orphan site site funding. Funding for state-only orphan sites is complete. For example, in some cases, is generally available only to the extent that there 58 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET are funds available in the SRA after meeting LAO Assessment obligations to pay for remediation and O&M at Legislature Needs Estimate to Assess NPL NPL orphan sites. and State-Only Orphan Site Cleanup Costs and Recent Legislation Requires DTSC to Options. At the time this analysis was prepared, Provide an Estimate of the State Cleanup Costs. the DTSC had not released the statutorily required Chapter 704 of 2016 (AB 2891, Committee on estimate of the state’s fiscal obligations at NPL Environmental Safety and Toxic Materials) orphan sites and ongoing O&M costs at state-only requires DTSC to submit to the Legislature orphan sites. Without this information, the with the Governor’s budget each year a report Legislature does not have the information it needs on DTSC’s estimated hazardous waste cleanup to (1) assess whether the proposed SRA funding costs. The law requires this report to include an level is sufficient to meet federal NPL orphan site estimate of the state funding needed for direct obligations, (2) determine the amount of SRA site remediation costs at state and federal orphan funds available to pay for O&M costs at state-only sites. Chapter 704 further requires the estimate to orphan sites, and (3) weigh the need for funding to include projected costs in the current and following begin the cleanup of additional state-only orphan two fiscal years for the state’s (1) 10 percent funding sites against other legislative spending priorities. obligation for remedial actions at NPL orphan sites, (2) 100 percent obligation for ongoing O&M LAO Recommendation at NPL orphan sites, and (3) ongoing O&M costs at Require DTSC to Report at Budget state-only orphan sites. Hearings on the Status of Overdue Estimate. We Chapter 704 expressed the Legislature’s intent recommend the Legislature require DTSC to report that the funds deposited in SRA be appropriated at budget hearings on the status of the estimate in the annual budget act each year. Chapter 704 required under Chapter 704. Once the Legislature further expressed the Legislature’s intent that has the estimate required under Chapter 704, funding for the SRA be in an amount that is key information will be available to help it decide sufficient to pay for estimated costs for direct whether to approve the Governor’s proposed site remediation and O&M at both federal NPL funding level for SRA or to adjust the proposal to orphans sites and at state-only orphan sites, and reflect legislative priorities. not less than $10.8 million (an amount adjusted Lead-Acid Battery Recycling annually for inflation). Act Implementation Governor’s Proposal LAO Bottom Line. We recommend the The Governor’s budget plan proposes to Legislature approve DTSC’s request for additional transfer $10.9 million from the TSCA to SRA in positions and funding to implement the provisions 2017-18, and projects expenditures from SRA of of the Lead-Acid Battery Recycling Act of 2016 $9.6 million. This leaves a reserve of $1.8 million that require investigation and remediation of in the SRA. At the time this analysis was prepared, contamination from lead-acid battery recycling DTSC had not provided the report required in facilities. In addition, we recommend that the Chapter 704. Legislature adopt budget bill language requiring DTSC to provide a report summarizing its progress implementing the act. Given the uncertainty about www.lao.ca.gov Legislative Analyst’s Office 59 2017-18 BUDGET the amount of contamination that may have been According to DTSC, in addition to the Exide caused by lead-acid battery recycling facilities in site, it has so far identified 14 former lead smelting some areas of the state, the report would serve facilities in California that may fall under the act’s to update the Legislature on the department’s definition of a lead-acid battery recycling facility. progress towards addressing this issue and inform These types of facilities have been in operation in the Legislature on future resource needs for this California since at least the 1920s. Under the act’s program. definition of lead-acid battery recycling facility, there could be many more sites identified in Background coming years. Lead-Acid Battery Recycling Act of 2016. Governor’s Proposal Chapter 666 of 2016 (AB 2153, Garcia), known as the Lead-Acid Battery Recycling Act of 2016 (act), The Governor’s budget proposes $610,000 from imposes several new requirements on lead-acid LABCF for five environmental scientist positions battery manufacturers and dealers, and on state to begin the investigation, evaluation, and cleanup agencies. Among these new requirements, the of contamination from lead-acid battery recycling act generally requires lead-acid battery dealers to facilities. DTSC will conduct investigations of charge customers a nonrefundable $1 fee on each properties to determine if they qualify as lead-acid lead-acid battery sold beginning April 1, 2017 battery recycling facilities that require further (increasing to $2 per battery after April 1, 2022). investigation and cleanup. DTSC will also conduct The act also generally requires manufacturers investigations to determine if residential and of lead-acid batteries to pay a $1 per battery fee other properties in the vicinity of lead-acid battery beginning April 1, 2017. Revenues from both recycling facilities are potentially contaminated. fees will be deposited into the Lead-Acid Battery Where cleanups are needed, DTSC will develop Cleanup Fund (LABCF) and may be used for and implement remediation plans. Part of this certain purposes specified in the act. These process will include DTSC’s coordination of public purposes include: workshops in neighborhoods contaminated by lead-acid battery recycling facilities. • Loan Repayment. Repayment of a $177 million loan made from the General LAO Assessment Fund to TSCA in 2016 to provide funding Some Key Information Not Available. DTSC for activities related to lead contamination is in the early stages of implementing the act and in the communities surrounding the Exide will need to research historical smelting facilities lead-acid battery recycling facility in the and gather additional information on each of these City of Vernon. facilities to ascertain the scope and nature of their • Response Actions to Contaminated Areas. operations and their impact on the surrounding Investigation, site evaluation, cleanup, communities. Therefore, there is uncertainty about remedial action, removal, monitoring, or the total number of lead-acid battery recycling other response actions at any area of the facilities that have operated in California, the state that is reasonably suspected to have extent of contamination caused by all of these been contaminated by the operation of a facilities, and the resources that will be required to lead-acid battery recycling facility. remedy the contamination. 60 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET LAO Recommendation provisions of the act. Specifically, the department should report on sites (1) identified as potentially Approve Request but Require Report on meeting the definition of a lead-acid battery Progress Implementing Program. The Governor’s recycling facility under the act; (2) investigated, proposal is consistent with the act and has along with a summary of the results of those merit. Therefore, we recommend approval of the investigations; (3) pending investigation; and requested positions and funding. However, given (4) evaluated for lead contamination. The the considerable uncertainty about the amount of information provided in the report would help workload DTSC will be required to perform in the inform discussions about the department’s progress future, we recommend the Legislature enact budget towards implementing the act and future decisions bill language requiring that DTSC provide a report about the level of resources necessary to meet the to the Legislature by April 1, 2018 that describes the act’s intent. department’s progress towards implementing the www.lao.ca.gov Legislative Analyst’s Office 61 2017-18 BUDGET SUMMARY OF RECOMMENDATIONS Issue Governor’s Proposal LAO Recommendation Crosscutting Issues Cap-and-trade $2.2 billion from cap-and-trade auction revenue (1) Authorize cap-and-trade (or a carbon tax) beyond expenditure plan for activities intended to reduce greenhouse gas 2020 with a two-thirds vote, (2) strengthen the emissions, contingent on extending authority for allowance price ceiling and provide clearer direction cap-and-trade beyond 2020 with a two-thirds vote. to ARB regarding complementary policies, (3) take actions to ensure adequate oversight and evaluation of major climate policies, (4) broaden the allowable uses of auction revenue, and (5) adopt various changes intended to maintain legislative authority. Drought response $178 million (one time) primarily from the General Delay decisions until late spring when statewide Fund to continue several drought emergency conditions are more certain. Consider a package response activities. that (1) continues some funding for one-time emergency response, (2) provides some ongoing funding to improve the state’s drought resilience, and (3) reduces some of the proposals in light of improved hydrology. Proposition 1—2014 $421 million from Proposition 1 to continue a Approve Governor’s proposal. Continue to monitor water bond variety of grant programs, largely consistent with Proposition 1 implementation through oversight multiyear appropriation schedule provided in hearings and information provided by stakeholders previous years. and the administration. Sustainable $15 million ongoing from the General Fund for DWR Approve Governor’s proposals. Continue to monitor Groundwater to support local agencies’ implementation of SGMA. SGMA implementation to ensure it stays on track Management Act $2.3 million ($750,000 ongoing) from a special fund and to identify whether additional legislative action (SGMA) loan and five new permanent positions for SWRCB might be needed. to intervene in noncompliant areas, to be repaid and sustained using fee revenue. Timber Regulation $15.2 million (Timber Regulation and Forest Identify program activities and grants the Legislature and Forest Restoration Fund) for three departments to prioritizes and determine a funding strategy for Restoration implement forest health related programs, the budget year and thereafter that reflects those Program including forest restoration grants, seedling priorities. nursery operations, and development of an online timber harvest permitting system. New Natural $18 million for 16 new capital outlay projects in two No specific concerns with the individual proposals, but Resources capital departments within CNRA, including construction overall they do amount to a significant budgetary outlay projects of a new northern regional operations center for commitment—$132 million total—over the next few CalFire. years. Department of Parks and Recreation Base funding for $16.6 million ($12.2 million State Parks and Recreation Begin consideration of options that would provide parks Fund [SPRF] and $4 million Environmental License an ongoing budget solution to the SPRF structural Plate Fund) in 2017-18 in order to maintain park deficit. operations at current-year levels. Department of Fish and Wildlife Fish and Game (1) Increase commercial landing fees by (1) Adopt some commercial landing fee increase but Preservation Fund $12.4 million, (2) transfer $8.7 million from and perhaps at a lower level or more gradually, (2) adopt then abolish Lifetime License Trust Account, proposal to transfer lifetime license fee revenues, (3) shift $381,000 for fish advisory program to (3) consider fund shift based on revised proposal another source, and (4) establish new $1.7 million later this spring, (4) modify proposals to begin two algal bloom monitoring program ($1 million new activities by funding them on a limited-term ongoing) and $1.8 million (ongoing) assessment of basis using different fund sources, and (5) begin water diversions. identifying options for addressing ongoing shortfall. (Continued) 62 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Issue Governor’s Proposal LAO Recommendation Department of Conservation Well Statewide $21.1 million (Oil, Gas, and Geothermal Approve only $21.1 million in 2017-18 to fund the Tracking and Administrative Fund) to continue implementation next year of WellSTAR design, development, and Reporting of WellSTAR information technology system. Total implementation. Will better ensure opportunity for (WellSTAR) request of $45 million over next five years. legislative oversight of the project. Department of Resources Recycling and Recovery Beverage Container Policy paper identifying high-level principles and Begin deliberations on BCRP reform in budget Recycling Program general suggestions for program improvement. hearings and require regular updates from the (BCRP) The department indicates that it will hold department throughout the stakeholder process. stakeholder meetings in the coming months, and it plans to return with a detailed proposal to reform the BCRP in the spring. Air Resources Board Volkswagen $2.3 million and 14 positions to administer and Approve ten positions and $1.6 million related to settlement implement the Volkswagen (VW) Consent Decree. vehicle modifications. Withhold action on the remaining four positions related to ZEV investment plans and Mitigation Trust pending additional information on legislative role in directing these funds. Reduce budget by $1.2 million and two positions for resources related VW civil penalty litigation approved in 2016-17 budget. Southern California $413 million to construct a new testing and research Direct the administration to consider alternative fund Consolidation facility in Riverside. sources—such as VW civil penalty revenues—to pay Project for at least a portion of the new lab. Direct board to report at budget hearings on the rationale and trade- offs associated with changes in building design that led to an increase in estimated costs. Department of Toxic Substances Control Department has not $10.9 million transfer from the Toxic Substances Require department to report at budget hearings on the provided statutorily Control Account to the Site Remediation Account status of the estimate required under Chapter 704 of required budget (SRA) and projected expenditures from SRA of 2016 (AB 891, Committee on Environmental Safety estimate $9.6 million to pay for remediation and operations and Toxic Materials) on the amount of expenditures and maintenance (O&M) at federal Superfund and necessary to meet the state’s obligations to (1) pay state-only orphan sites. for cleanup and O&M at federal Superfund sites, and (2) pay for O&M at state-only orphan sites. Lead-Acid Battery $610,000 from the Lead-Acid Battery Cleanup Fund Enact budget bill language to require DTSC to provide Recycling Act and five positions to begin the implementation a report to the Legislature by April 1, 2018, that implementation of the Lead-Acid Battery Act’s provisions describes the department’s progress towards regarding investigation, evaluation, and cleanup implementing provisions of the Lead-Acid Battery of contamination from lead-acid battery recycling Recycling Act. facilities. www.lao.ca.gov Legislative Analyst’s Office 63 2017-18 BUDGET Contact Information Brian Brown Managing Principal Analyst, 319-8325 Brian.Brown@lao.ca.gov Resources and Environment Ashley Ames Forestry and Fire, Parks, and Recycling 319-8352 Ashley.Ames@lao.ca.gov Ross Brown Cap-and-Trade and Air Pollution 319-8345 Ross.Brown@lao.ca.gov Rachel Ehlers Water and Fish and Wildlife 319-8330 Rachel.Ehlers@lao.ca.gov Shawn Martin Conservation and Toxics 319-8362 Shawn.Martin@lao.ca.gov LAO Publications 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. 64 Legislative Analyst’s Office www.lao.ca.gov