The 2024-25 Budget: Insolvency Risks for Environmental and Transportation Special Funds

2024-25 BUDGET The 2024-25 Budget: Insolvency Risks for Environmental and Transportation Special Funds GABRIEL PETEK | LEGISLATIVE ANALYST FEBRUARY 2024 www.lao.ca.gov 1 2024-25 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Overarching Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Overarching Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Special Funds at Risk of Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Hazardous Waste Control Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Motor Vehicle Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Environmental License Plate Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Harbors and Watercraft Revolving Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Energy Resources Programs Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 State Parks and Recreation Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 www.lao.ca.gov 3 2024-25 BUDGET 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Executive Summary Multiple Funds at Risk of Insolvency. Current projections suggest that various special funds which support transportation, environmental protection, and natural resources programs likely will become insolvent in the near future (meaning that they will not have sufficient revenues and fund balances to cover expenditures). These include: the Department of Pesticide Regulation (DPR) Fund, the Energy Resources Program Account (ERPA), Environmental License Plate Fund, Harbors and Watercraft Revolving Fund, Hazardous Waste Control Account (HWCA), Motor Vehicle Account, and State Parks and Recreation Fund. The Governor’s budget proposes actions to address two of the fund conditions—the DPR Fund and ERPA—and the administration indicates that it plans to propose solutions for HWCA at the May Revision. General Causes and Solutions for Fund Condition Problems. Fund deficits occur when expenditures exceed revenues. When left unaddressed, deficits put funds at an increased risk of insolvency. The state generally has four key approaches it can utilize to address deficits and bring revenues and spending back into balance—each of which comes with varying trade-offs. The first— and, generally, easiest—is to draw down reserves or fund balances to temporarily cover a share of expenditures. The state also can pursue approaches to supplement a fund’s revenues to ensure it has sufficient resources to cover expenditures by providing funding from other sources or increasing revenues. The fourth option is to reduce expenditures. The state can deploy these strategies in isolation or in combination. Specific Circumstances and Considerations Vary by Fund. While each of the funds we discuss in the report are at risk of insolvency, their individual circumstances vary—including the reasons for their deficits and the urgency of the need for legislative action. In addition, the specific trade-offs associated with options to address fund conditions differ by fund. Simultaneous General Fund and Special Fund Deficits Complicate Potential Solutions. Both the administration and our office anticipate that the state faces significant General Fund problems over the next several years—which coincide with the timing of the deficits and potential insolvencies of the identified special funds. These circumstances reduce the ability of these special funds to help address the General Fund condition. Similarly, the General Fund shortfall makes addressing the special fund deficits more challenging by constraining available options such as loans or transfers. Recommend Legislature Begin Taking Actions, Making Plans to Address Special Fund Deficits. As noted, the Governor’s January budget proposes solutions for the DPR Fund and ERPA and the administration indicates that it plans to address HWCA as part of the May Revision. We recommend that the Legislature take actions this year to implement ongoing solutions for all three of these funds. Specifically, for ERPA we recommend the Legislature adopt the Governor’s proposal, but constrain expenditure growth (and the resulting impacts to the surcharge applied to ratepayers) by continuing to closely monitor both future requests for increases to ERPA spending as well as the need for and cost-effectiveness of existing expenditures. For the DPR Fund, we recommend adopting the overall framework of the Governor’s proposals but making modifications as needed to ensure the department is well-positioned to implement the Legislature’s priorities. (We discuss this proposal in a separate report, The 2024-25 Budget: Sustainable Funding for the Department of Pesticide Regulation.) For HWCA, we note that the May Revision gives the Legislature little time to review the proposal and consider alternatives. As such, we recommend the Legislature begin this spring to weigh various options for addressing the HWCA fund condition. For the remaining funds, we recommend the Legislature begin developing plans to address the problematic fund conditions before they become insolvent. We also offer specific suggestions regarding time lines and considerations for addressing each individual fund. www.lao.ca.gov 5 2024-25 BUDGET INTRODUCTION Current projections suggest that various special happening at the same time, and (5) overarching funds that support transportation, environmental recommendations for the Legislature to consider. protection, and natural resources programs likely We then provide a more detailed description will become insolvent in the near future (meaning of each of the funds listed below, including a that they will not have sufficient revenues and fund discussion about the specific circumstances balances to cover their planned expenditures). regarding each fund’s insolvency risks and This report provides information on specific funds at recommendations for legislative action. (In addition risk of insolvency and issues and recommendations to the funds listed below, we discuss issues related for the Legislature to consider. to the Department of Pesticide Regulation Fund The report begins with overarching comments in a forthcoming separate report, The 2024-25 about these funds including (1) an overview of Budget: Sustainable Funding for the Department of the environmental and transportation special Pesticide Regulation.) funds we have identified as facing current or • Hazardous Waste Control Account. forthcoming deficits, (2) general causes and • Motor Vehicle Account. options for addressing special fund insolvencies, • Environmental License Plate Fund. (3) a discussion about how circumstances and considerations vary by fund, (4) implications • Harbors and Watercraft Revolving Fund. of General Fund and special fund deficits • Energy Resources Programs Account. • State Parks and Recreation Fund. OVERARCHING COMMENTS Multiple Funds at Risk of Insolvency Governor’s Budget Includes Proposals to Address Two Funds. As part of the January Several Transportation and Environmental budget proposal, the Governor includes actions Funds at Risk of Insolvency. As shown in Figure 1 to address fund conditions for the DPR Fund on the next page, current estimates project that and ERPA. We assess the ERPA proposal later various special funds that support transportation, in this report, and the DPR Fund proposal in environmental protection, and natural resources our forthcoming report, The 2024-25 Budget: programs likely will become insolvent in the near Sustainable Funding for the Department of future (meaning that they will not have sufficient Pesticide Regulation. The administration also fund balances to cover their planned expenditures). indicates that it plans to address the HWCA deficit These include the following funds: the Department as part of the May Revision. The administration has of Pesticide Regulation (DPR) Fund, Hazardous not yet put forth proposals—or indicated a time line Waste Control Account (HWCA), Motor Vehicle for plans to do so—for any of the other funds we Account (MVA), Environmental License Plate Fund discuss in this report. (ELPF), Harbors and Watercraft Revolving Fund (HWRF), Energy Resources Programs Account General Causes and (ERPA), and State Parks and Recreation Fund Solutions for Fund Condition Problems (SPRF). We note that while the figure includes the major funds we have identified as having significant Fund Deficits and Pending Insolvency fund condition challenges, it does not necessarily Primarily Due to Expenditure Growth represent an exhaustive list of all environmental and Outpacing Revenues. Fund deficits occur when expenditures exceed revenues. When left transportation special funds at risk of insolvency. 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET unaddressed, deficits put funds at an increased risk The first—and, generally, easiest—is to draw down of insolvency. In some cases, deficits are temporary reserves or fund balances to temporarily cover a in nature and can be addressed by tapping into share of expenditures. The state also can pursue reserves or by receiving loans or transfers from approaches to supplement the fund’s revenues other sources to keep the fund solvent until the to ensure it has sufficient resources to cover deficit is addressed. However, if a fund’s deficit is expenditures by providing funding from other structural—meaning that its ongoing expenditures sources or increasing revenues. The other option exceed its ongoing revenues—then it eventually is to reduce expenditures. The state can adopt will exhaust any limited-term reliance on reserves, these strategies in isolation or in combination. loans, or transfers and become insolvent. A fund Depending on which approach is deployed and in also can become insolvent if past actions to what manner, it might help address the fund deficit balance revenues and expenditures have not on a short-term or permanent basis. Each of these fully addressed the gap. For example, a fee that options, however, comes with varying trade-offs. was established in 2021 to address an operating • Use Reserves or Fund Balances. In many imbalance within HWCA has generated less revenue cases, funds carry reserves or balances that than expected. As a result, the fund is now at risk of can be used to cover deficits on a temporary insolvency again. basis. These balances may have accrued from Four Key Options for Addressing Fund previous one-time transfers or periods when Deficits. The state generally has four primary revenue exceeded expenditures, such as approaches it can utilize to address deficits and when funds experienced lower-than-expected bring revenues and spending back into balance. expenditures or short-term revenue surges. Figure 1 Select Environmental and Transportation Special Funds at Risk of Insolvency (Dollars in Millions) Year Expected Projected Administering Expenditures to Become Fund Department Primary Revenue Sources in 2024-25 Insolvent Department of Pesticide Regulation Funda DPR Tax on pesticide sales and pesticide $157b 2024-25 registration and licensing fees Hazardous Waste Control Accountc DTSC Hazardous waste generator fee and 124 2024-25 hazardous waste facility fees Motor Vehicle Account DMV Vehicle registration fees 4,904 2025-26 Environmental License Plate Fund CNRA Fees on personalized and specialty 76 2025-26 license plates Harbors and Watercraft Revolving Fund Parks Vessel registration and renewal fees, 49d 2026-27 as well as transfers from the MVFA Energy Resources Programs Accounta CEC Surcharge on retail electricity sales 96 2027-28 State Parks and Recreation Fund Parks Park entrance fees, overnight 272 2028-29 camping fees, and transfers from the MVFA a Governor’s budget includes related proposal. b Governor’s budget proposal increases revenues above structural deficit to support programmatic expansions. Amount displayed does not include proposed increases related to this proposal. c Governor’s proposal expected as part of the May Revision. d Does not include General Fund transfers. DPR = Department of Pesticide Regulation; DTSC = Department of Toxic Substances Control; DMV = Department of Motor Vehicles; CNRA = California Natural Resources Agency; Parks = Department of Parks and Recreation; MVFA = Motor Vehicle Fuel Account; and CEC = California Energy Commission. www.lao.ca.gov 7 2024-25 BUDGET However, this is not a viable long-term • Reduce or Control Expenditures. Reducing approach to addressing fund imbalances. expenditures can alleviate cost pressures The fund will continue to be at risk of and help bring a fund’s expenditures back insolvency in the future if and when these into alignment with its level of revenues. reserves or balances are depleted and This strategy can be employed on a short-term not replenished. basis as a temporary solution or permanently • Use Funding From Other Sources. to address an ongoing imbalance. However, Other fund sources can be used to bolster doing so typically requires reducing activities a problematic fund condition and help or service levels, which can be difficult to address cost pressures. For example, a implement and may result in the state failing fund can receive loans or transfers from to achieve some of its intended programmatic the General Fund or a different special fund outcomes. Constraining expenditure increases to increase its resources on a one-time or to keep them from growing at a faster rate ongoing basis. Alternatively, expenditures for than revenues can be somewhat easier specific programs can be shifted away from to implement and can help a deficit from the struggling fund to instead be supported worsening, but usually does not address by a different fund source temporarily or existing operating imbalances. permanently. While these approaches can provide immediate relief for addressing the Specific Circumstances and fund’s deficit, they impact the availability Considerations Vary by Fund of resources for the other fund source that While each of the funds highlighted in provides the loan or transfer or absorbs the Figure 1 is at risk of insolvency, their individual expenditure. For example, a transfer from circumstances—including the reasons for their the General Fund means there are fewer deficits, urgency for legislative action, and specific resources available for the Legislature to trade-offs associated with options to address their allocate from the General Fund for other fund conditions—all differ somewhat. purposes. In addition, obligations to repay Funds Display Varying Revenue Trends. loans can create additional cost pressures While all of the funds discussed in this report for the special fund in future years. Moreover, currently maintain expenditure levels that exceed if the underlying cause of the deficit is not their ongoing revenues, the associated revenue addressed, the fund could still be at risk trends vary by fund. For example, the main of eventually becoming insolvent when revenue sources for some funds generally have expenditures continue to outpace revenues kept pace with inflation, such as for MVA (which in future years. relies on vehicle registration fees that are adjusted • Increase Revenues. To address the annually for inflation) and the DPR Fund (which imbalance on an ongoing basis, the state relies on a sales tax on pesticides). However, can take action to increase the revenues despite these revenue increases, expenditures that support the fund. Typically, doing so for these funds still are increasing at a faster requires increasing existing taxes or fees or rate. In contrast, several charges, such as those establishing a new revenue stream. In some providing revenues for ERPA, HWRF, and SPRF, circumstances, fee or tax increases must have not been systematically updated for many be approved by the Legislature or by voters. years, even to adjust for inflation. As a result, the In other cases, the Legislature has granted the revenues for these funds have remained relatively administration statutory authority to increase flat while facing increased cost pressures. charges, sometimes up to a threshold or Revenues for ELPF are highly dependent on vehicle according to a schedule. owners’ choices about purchasing specialty license plates, which can be difficult to predict. 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Recent actions were taken to restructure and Implications of General Fund and increase the fees that support HWCA but the Special Fund Deficits Happening at resulting revenues have come in significantly Same Time lower than anticipated. These distinctions will State Faces a Multiyear, Multibillion-Dollar be important considerations as the Legislature Budget Problem. Both the administration and considers the most appropriate avenues for our office anticipate that the state faces significant addressing each fund condition. General Fund deficits over the next several years— Some Funds Require More Urgent Action which coincides with the timing of the deficits and Than Others. Some of the projected funds are potential insolvencies of the identified special funds. at risk of becoming insolvent within the next year Estimates of the magnitude of the General Fund or two—and as such require more immediate deficit in 2024-25 differ based on how “baseline” action—while the state may be able to wait a few spending is defined—the administration estimates years before addressing certain other funds. For a $38 billion deficit whereas, in January, our office example, the DPR Fund and HWCA are projected estimated that the Governor’s budget addresses to become insolvent within the budget year and a $58 billion deficit—as well as somewhat therefore require urgent intervention. In contrast, different revenue projections. More recent fiscal ELPF and MVA likely will be able to use reserves to data we summarize in our February publication, support anticipated expenditures through 2024-25 The 2024-25 Budget: Deficit Update, indicate but could become insolvent the following year. the budget outlook continues to worsen—we Other funds, such as HWRF, ERPA, and SPRF likely now estimate the state has a $73 billion deficit to have sufficient reserves to remain solvent for a few address with the 2024-25 budget. Moreover, both more years. our office and the administration estimate that Trade-Offs of Options to Address Deficits the state will face significant operating deficits in Vary by Fund. Given the diverse characteristics subsequent fiscal years. Specifically, in January, the of each fund—and the differing circumstances administration projected that even if the Governor’s that contributed to their deficits—the trade-offs proposals were adopted, the state would confront associated with the options for addressing them General Fund deficits of $37 billion in 2025-26, also vary. For example, raising vehicle registration $30 billion in 2026-27, and $28 billion in 2027-28. fees to increase MVA revenues would impact a large Special Fund Deficits Complicate Addressing share of California households and businesses. General Fund Condition… Historically, one of On the other hand, the main revenue source for the ways the state has helped bolster the General the DPR Fund is a tax on pesticide sales that Fund is through making transfers or loans from affects a relatively small subset of businesses in special funds to the General Fund. For example, the state. As another example, fees that support MVA transferred around $90 million per year to HWRF have not been raised since 2005, whereas the General Fund from 2009-10 through 2018-19. HWCA fees were increased substantially as Additionally, special funds can help ease General recently as 2021. Moreover, while for every fund Fund pressures by absorbing certain expenditures. the option of reducing expenditures would have For instance, ELPF funded new staff at the Truth implications for state department activities and and Healing Council and Forest Management programs, the nature of these impacts would vary Task Force in 2021-22. These activities likely would notably. For instance, depending on the fund, have been funded by the General Fund absent reduced expenditures could affect amenities the availability of ELPF. When special funds also at state parks, staffing levels for the California have deficits, however, they are not available Highway Patrol (CHP), state oversight of hazardous to contribute to these kinds of General Fund waste, or state-level activities related to the clean budget solutions. energy transition. www.lao.ca.gov 9 2024-25 BUDGET …And General Fund Condition Complicates Overarching Recommendations Addressing Special Fund Deficits. The current Begin Taking Actions to Address Some General Fund condition also makes addressing Special Fund Problems This Year. The Governor’s the special fund deficits more challenging by January budget includes proposals related to two of constraining available options. On many occasions, the funds we highlight in this report (the DPR Fund the state has used General Fund resources to and ERPA) and the administration indicates plans to backfill shortfalls in special funds. For example, address HWCA as part of the May Revision. As we over the past few years, when the General Fund had discuss in more detail in this and our companion large surpluses, the state has transferred General DPR report, we recommend the Legislature take Fund to help cover deficits in HWCA, HWRF, and actions this year to implement ongoing solutions for SPRF. Additionally, when certain special funds are all three of these funds. For ERPA we recommend facing deficits, the state has used the General Fund the Legislature adopt the Governor’s proposal, but to cover some costs that the funds might otherwise constrain expenditure growth (and the resulting have paid. For instance, in 2021-22 and 2022-23, impacts to the surcharge applied to ratepayers) by the state used General Fund rather than MVA to pay continuing to closely monitor both future requests for office replacements at the Department of Motor for increases to ERPA spending as well as the need Vehicles (DMV) and CHP. When the state also has for and cost-effectiveness of existing expenditures. an overall budget problem, however, the General For the DPR Fund, we recommend adopting the Fund is less able to contribute to addressing special overall framework of the Governor’s proposals but fund deficits through transfers or expenditure making modifications as needed to ensure the shifts. Moreover, other special funds with surpluses department is well-positioned to implement the that the state might otherwise use to support a Legislature’s priorities. For HWCA, we note that struggling special fund likely will face calls to instead the May Revision gives the Legislature little time assist the General Fund condition. For example, to review the proposal and consider alternatives. in 2023-24 the budget authorized a loan from the As such, we recommend the Legislature begin this Beverage Container Recycling Fund to HWCA to spring to weigh various options for addressing the evade its insolvency. Now that the state budget HWCA fund condition. picture has worsened, however, the Governor Begin Developing Plans to Address Looming proposes relying on the Beverage Container Insolvency in Remaining Funds. The Governor Recycling Fund—along with other special funds—for does not offer proposals or plans to address the loans to the General Fund in 2024-25, reducing its other four imbalanced special funds we discuss availability to help special funds facing insolvency. in this report. The overlapping projected time Legislature Could Need to Address Multiple frames for their insolvencies could result in a Fund Conditions at Same Time. Not only do need to address multiple special fund problems concurrent deficits keep special funds and the simultaneously. This scenario both complicates and General Fund from being able to contribute to is complicated by the current and projected General each other’s potential solutions, they also magnify Fund budget condition. Beginning now to develop challenges related to the Legislature’s other plans to address the remaining problematic fund available options. For example, if the Legislature conditions before they become insolvent would wanted to increase revenues to address deficits afford the Legislature more time to develop and for the General Fund and special funds, it might review solutions that align with its priorities. have to consider raising multiple fees or taxes Specifically, for each fund at risk of insolvency, simultaneously—which could create burdens for we recommend the Legislature consider what the households and businesses who pay them. option or combination of options for bringing Similarly, the Legislature might need to consider the fund into balance on an ongoing basis reducing services supported by special funds (including using funding from other sources, at the same time it is making reductions to other revenue increases, and reducing expenditures) is state programs funded by the General Fund, appropriate and best aligns with its priorities. compounding negative impacts for Californians. 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET In order to help inform these decisions, the In some cases, the Legislature may want to Legislature could consider holding hearings to consider a combination of solutions to help mitigate get more information about the nature of the potential impacts. In determining which funds to fund deficits, any actions the administration is prioritize for more near-term action, we recommend considering to address these issues, and the the Legislature consider how soon the funds might potential implications and trade-offs of options become insolvent, the magnitude of the potential to address the fund conditions. In particular, insolvencies, potential near-term implications for the Legislature will want to consider potential spending and service levels, and how long it will effects on fee payers and on service-levels— take to implement the option or set of options. with a particular focus on potential impacts for In the subsequent sections of this report we lower-income and vulnerable Californians—as offer specific comments regarding time lines and well as how readily solutions can be implemented. considerations for addressing each individual fund. SPECIAL FUNDS AT RISK OF INSOLVENCY In the sections below, we discuss each of the expansions that would better enable DTSC to protect major funds that we have identified as being at people and the environment from toxic substances, risk of insolvency in more detail, including relevant and (4) build sufficient reserves in both accounts. background, details on the fund condition, For HWCA specifically, SB 158 replaced several prior and comments and recommendations for the fees with a new generation and handling fee and also Legislature to consider when it weighs its options increased existing facility fees. (We discuss these for addressing these funds. (As noted previously, fees in greater detail in the section below.) While we discuss the DPR Fund proposal and associated the legislation was enacted as part of the 2021-22 recommendations in a separate publication.) budget package, the state did not begin to receive additional revenues until 2022-23 due to the timing of HAZARDOUS WASTE how charges for both accounts are collected. CONTROL ACCOUNT Senate Bill 158 also established BES within the department. Besides hearing permit appeals for Background hazardous waste facilities and providing strategic HWCA Funds Support the Regulation of guidance to the department, beginning in 2023-24 Hazardous Waste. HWCA primarily supports the five-member board is responsible for setting activities the Department of Toxic Substances charge levels for HWCA and TSCA. Specifically, the Control (DTSC) conducts related to regulating the board is responsible for setting charges annually to generation, storage, transportation, and disposal of align revenues from both accounts with the amount hazardous waste through permitting, compliance of expenditures authorized by the Legislature monitoring, and enforcement of noncompliance. through the annual budget act. HWCA Restructured as Part of a Larger DTSC HWCA Revenues Primarily Come From Two Reform Package. Budget trailer legislation adopted Major Regulatory Fees. Funding for HWCA as part of the 2021-22 budget package, Chapter 73 primarily comes from the generation and handling of 2021 (SB 158, Committee on Budget and Fiscal fee (established in SB 158) and facility fees. Review), restructured and increased the charges The generation and handling fee is charged on a that support DTSC’s two major fund sources: HWCA per-ton basis to all entities that generate five or more and the Toxic Substances Control Account (TSCA). tons of hazardous waste in a calendar year, while The resulting revenues were intended to (1) solve facility fees are annual charges levied on permitted longstanding structural deficits in HWCA and TSCA, facilities that treat, store, or dispose of hazardous (2) support a new Board of Environmental Safety waste. Senate Bill 158 set rates for both fees for (BES) (discussed below), (3) support programmatic 2022-23, but authorized BES to adjust rates each year starting in 2023-24. www.lao.ca.gov 11 2024-25 BUDGET Lower-Than-Projected Generation and 2023-24 Budget Package Authorized Special Handling Fee Revenues Reestablished HWCA Fund Loans for HWCA. To address the revenue Deficit in 2022-23. During the enactment of shortfall, the 2023-24 budget provided $55 million SB 158, the new generation and handling fee in special fund loans—$15 million from TSCA and was set at $49.25 per ton and was projected to $40 million from the Beverage Container Recycling generate approximately $81 million in total revenues Fund—to support HWCA. (Budget bill language in 2022-23. However, in the middle of 2022-23, currently requires DTSC to repay both loans by DTSC indicated that these revenues were coming in June 30, 2026.) The loans were intended to allow significantly below what had been anticipated and HWCA to cover its planned expenditures in both would only generate about $40 million that year. 2022-23 and 2023-24. The loans also avoided The lower-than-projected revenues reestablished the need for BES to increase the generation and the structural deficit within HWCA in 2022-23 and handling fee in 2023-24. This approach was set the fund on a path to insolvency in 2023-24. adopted to provide DTSC with additional time to The department’s preliminary analysis of the conduct a more in-depth analysis of the revenue issue indicated the shortfalls were attributable shortfalls and to identify a potential solution. to a combination of three primary factors: The department was authorized to use a small (1) a reduction in the amount of hazardous waste portion of the loans to support this analysis and to generated; (2) a higher utilization of government improve fee administration and data collection. fee exemptions, such as related to a government Insolvency Projected in 2024-25 entity removing or remediating hazardous waste caused by another entity; and (3) nonpayment or HWCA Projected to Be Insolvent in the low payment of fee amounts owed. Budget Year. As shown in Figure 2, HWCA has experienced a longstanding structural deficit between its ongoing revenues and expenditures. Figure 2 HWCA Projected to Be Insolvent in the Budget Year (In Millions) $140 120 100 Expenditures 80 60 Revenues and Transfersa 40 20 Year-End Fund Balanceb -20 -40 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22c 2022-23 2023-24 2024-25 Actuals Estimates and Projections a Reflects ongoing revenues and transfers to and from the fund. Excludes one-time General Fund backfills ($28 million in 2019-20, $20 million in 2020-21, and $29 million in 2021-22) and one-time special fund loans ($55 million in 2023-24). b Includes one-time backfills and loans and prior-year adjustments. c Chapter 73 of 2021 (SB 158, Committee on Budget and Fiscal Review) was enacted as part of 2021-22 budget, but the additional revenues and increases in expenditure authority to support programmatic expansions began in 2022-23. HWCA = Hazardous Waste Control Account. 12 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET The state has responded by providing a series of ensure that funding levels in both accounts were one-time General Fund backfills to keep the fund sufficient to support DTSC in better delivering on solvent, which is primarily how the fund balance its mission and statutory authorities. For activities has remained positive. The reform package was supported by HWCA, this included improving intended to address the structural deficit and hazardous waste generator inspections and generate additional ongoing revenues for HWCA to enhancing criminal enforcement investigations. support both existing services and programmatic Given that the Legislature recently identified the expansions. However, the lower-than-projected department’s current HWCA expenditure levels generation and handling fee revenues have as being essential to protecting the public and prevented this from being accomplished. environment from hazardous waste, this suggests Under the administration’s estimates, HWCA is that reducing them could result in a resumption projected to become insolvent in the budget year, of the safety concerns that initially led to the absent any corrective action. We note that the reform. This does not mean that opportunities department is in the process of gathering revenue for some savings do not exist. For example, the data from generation and handling fees that are Legislature potentially could direct the department currently being collected, which could change to implement program efficiencies that reduce this projection—potentially for the better or for the cost pressures on HWCA and still allow for worse. Accordingly, uncertainty still exists around important services and protections. However, the the exact magnitude of shortfall that the state will Legislature likely will want to proceed with caution need to address both in the budget year and on an in considering any reductions to the activities ongoing basis. For instance, higher-than-expected supported by HWCA and ensure they do not result revenues and/or lower-than-expected spending in increased hazards for Californians. Moreover, levels in the current year could shrink the identifying enough efficiencies to fully address anticipated deficit and reduce the magnitude of the fund’s structural deficit and maintain essential solutions needed in the budget year. activities is highly unlikely. Administration Indicates Proposal Legislature Has Several Options to Provide Forthcoming at May Revision. DTSC indicates Support for HWCA. Given concerns about that it still is in the process of completing its reducing DTSC’s expenditures and activities, analysis of the causes of the HWCA revenue the Legislature might instead want to consider shortfall, along with collecting updated revenue (1) increasing HWCA revenues and/or (2) identifying information. The department has stated that it other fund sources to backfill HWCA. Two primary will use this analysis as the basis for a proposal pathways exist for increasing revenues. First, the to address the 2024-25 revenue gap that will be Legislature could defer to BES to use its statutory included as part of the May Revision. authority to raise the generation and handling fee and align revenues with the amount of 2024-25 LAO Comments expenditures authorized for HWCA. Second, the Reducing HWCA Expenditures Could Have Legislature could begin to develop its own proposal Negative Implications for Health and Safety. to increase the amount of revenues collected from As discussed earlier, generally the Legislature the generation and handling fee. For instance, one has two key categories of ongoing options for factor leading to the shortfalls is a higher utilization addressing structural fund imbalances: increase of government fee exemptions. The Legislature revenues (including by raising charges or through could reduce these exemptions and thereby apply loans and transfers) or reduce expenditures. the fee to more payers and generate additional In the case of HWCA, the latter option could raise revenues. In addition to raising revenues, the some concerns. In addition to addressing the Legislature could identify other fund sources to structural deficits within HWCA and TSCA, a central backfill HWCA, similar to the approach it took in component of the recent governance and fiscal the 2023-24 budget. We note that utilizing this reform package the Legislature enacted was to option may be more difficult given the overall www.lao.ca.gov 13 2024-25 BUDGET budget problem with which the state is grappling. Fund Rapidly Heading for Insolvency Furthermore, the Governor’s budget already Expenditures Outpacing Revenues. proposes using special fund loans—such as Between 2018-19 and 2023-24, MVA revenues from the Beverage Container Recycling Fund—to have increased by $714 million (18 percent) support the General Fund, which limits the ability to while expenditures have increased by about utilize such sources to support HWCA. $1 billion (26 percent). Since 2021-22, annual expenditures have exceeded yearly revenues, Recommendation resulting in a structural imbalance. Some of the Use Spring Budget Process to Consider major expenditure cost drivers have included Options. The administration plans to propose a (1) replacement of older CHP area offices and DMV solution for HWCA as part of the Governor’s May field offices, (2) increased employee compensation Revision. While a solution is needed, this schedule costs—which have been driven by both increases limits the time the Legislature has to (1) weigh the to staffing levels and growing salary and benefit benefits and trade-offs of the administration’s costs at CHP, (3) workload related to the issuance proposal and (2) develop a proposal that aligns of new driver licenses and ID cards that comply with with its own priorities. Given these constraints, we federal standards—commonly referred to as “REAL recommend the Legislature begin this spring to IDs,” and (4) supplemental pension plan repayments weigh the various options it has for addressing the that began in 2019-20. (These payments are related HWCA revenue shortfall. Considering the merits to a 2017-18 budget action that borrowed from and trade-offs associated with these options now the General Fund for a large one-time contribution would put the Legislature in a better position to to the state employee pension fund, requiring evaluate the Governor’s proposal and alternative future repayment from all relevant funds that solutions in May when the budget deadline and make employer pension contributions, including need for action are more pressing. MVA. Over the next 30 years, MVA is expected to receive savings that outweigh these near-term loan MOTOR VEHICLE ACCOUNT repayment expenditures due to slower growth in employer pension contributions.) Despite this gap Background between revenues and expenditures, MVA has MVA Supports Various State Programs. MVA remained solvent thus far due to the state actions is the primary funding source for CHP and DMV. described in the next paragraph and by relying on The account also provides some funding for the its reserves. However, these reserves are rapidly California Air Resources Board. The uses of most declining. MVA entered 2021-22 with $585 million MVA revenues are constitutionally limited to the in reserves but its year-end balance is projected to administration and enforcement of laws regulating drop to $130 million by the beginning of 2024-25. the use of vehicles on public highways and roads, State Has Undertaken Previous Efforts to as well as certain transportation activities. Address Deficits and Delay Insolvency. Over Revenues Mainly Come From Vehicle the last couple of decades, MVA has experienced Registration Fees. For 2023-24, MVA revenues periodic deficits and risks of insolvency. In are estimated to total about $4.7 billion. Of this response, the state has taken various actions to amount, nearly $4.1 billion (87 percent) is projected shore up the fund. Some of these past solutions to come from vehicle registration fees. The provided temporary relief, such as the state making remainder largely is generated by other DMV fees a one-time repayment of loans that previously such as driver license fees. (We note that DMV also were provided from MVA to the General Fund and collects various other fees at the time of vehicle delaying supplemental pension plan repayments registration that are not deposited into MVA, such to the General Fund (which temporarily reduced as vehicle license fees, truck weight fees, and an MVA expenditures but created additional out-year additional registration fee charged to owners of liabilities). Other solutions provided longer-term zero-emission vehicles.) solutions, including (1) ending a previous practice of 14 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET transferring about $90 million annually from MVA to LAO Comments the General Fund; (2) authorizing vehicle registration Governor Proposes New Spending From fees to be adjusted annually based on the percent MVA. The Governor’s budget does not include change in the California Consumer Price Index (CPI) a proposal to address MVA’s fund condition or to account for inflation; (3) shifting certain programs structural deficit. In contrast, the January budget from MVA to other fund sources; and, as we discuss includes various proposals for DMV and CHP in more detail below, (4) the state recently has that would increase cost pressures for MVA. shifted away from using up-front cash from MVA to Specifically, the Governor proposes $18 million pay for CHP’s and DMV’s facility needs. in 2024-25 (including $10 million ongoing) from Due to Ongoing Structural Imbalance, MVA MVA for various DMV programs. In addition, the Projected to Become Insolvent in 2025-26. Governor proposes $4 million annually in ongoing Despite the previous efforts to address MVA’s spending from MVA for outside counsel to represent condition, the severity of the fund’s imbalance is CHP and its officers in civil litigation cases related expected to become worse in the near term, with to officer-involved shootings. expenditures growing about 1 percent faster than Debt Service for Infrastructure Projects revenues over the next several years. Due to this Could Create Additional MVA Cost Pressures. imbalance, MVA is expected to fully exhaust its CHP and DMV both operate large numbers of reserves and become insolvent in 2025-26, as facilities across the state, many of which have shown in Figure 3. Specifically, the administration significant needs. Traditionally, CHP’s and DMV’s projects expenditures will exceed available facility projects—such as office replacements— resources by roughly $140 million in 2025-26. have been funded up front with cash from MVA. If left unaddressed, expenditures would continue However, due to concerns about MVA’s condition, to outpace revenues, resulting in a negative fund over the past several years, the state has explored balance of $1.4 billion in 2028-29. For context, alternative ways to fund CHP and DMV facilities. total MVA revenues are projected to be about In 2019-20, this included issuing lease revenue $5 billion in 2024-25. By 2028-29, these revenues bonds with plans to repay the debt service from are only projected to increase by about $500 million MVA, in an effort to spread the costs of the projects while expenditures are projected to increase by over time and limit near-term pressures on the fund. roughly $1 billion. Figure 3 Motor Vehicle Account Facing Insolvency in 2025-26 (In Billions) $7 Expenditures 6 5 Revenues and Transfers 4 3 2 Fund Balance 1 -1 -2 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 Actuals Estimates and Projections www.lao.ca.gov 15 2024-25 BUDGET In 2021-22 and 2022-23, when the state was Legislature Could Address MVA Fund experiencing a budget surplus, the state provided Condition Through Reducing or Constraining cash from the General Fund to support such Costs… As noted, MVA’s expenditures are projects. However, as the General Fund condition outpacing revenue growth and cost pressures has worsened, funding for recent projects has been could be higher than projected depending on future shifted to lease revenue bonds. While this approach lease revenue bond debt service decisions and reduces costs to move forward with the projects in employee compensation trends. To help address the near term, repaying the bonds will create cost the fund condition, the Legislature could take steps pressures in future years. Whether the General to reduce or constrain expenditures. For example, Fund or MVA will bear the burden of these future the Legislature could reduce overall employee costs currently is unclear, as the fund source for compensation costs by cutting the number of repaying the bonds has not yet been determined. positions at DMV and CHP. However, such actions The administration indicates that these decisions would result in a decrease in the level of service the will be made during annual budget deliberations departments would be able to offer, which could beginning in 2025-26. affect both public satisfaction (in the case of DMV) Automatic Pay Increases for CHP Officers and safety (with regard to CHP). Going forward, the Could Impact MVA Cost Pressures. The impact Legislature also could consider MVA’s fund condition future employee compensation costs will have when it is evaluating agreements negotiated between on MVA’s fund condition is somewhat uncertain the administration and the employee unions that and depends on future pay trends decided represent the majority of DMV and CHP employees upon by select local governments. For more pertaining to pay and other benefits. Specifically, the than 40 years, statute has based highway patrol Legislature could take into consideration the level officers’ compensation on an average of specified of costs the fund can support as one of the factors elements of compensation provided to peace it weighs when considering whether to approve officers employed by five local jurisdictions. The five these draft agreements. As we noted previously, the jurisdictions are Los Angeles County and the Cities state currently has limited control over CHP officer of Los Angeles, Oakland, San Diego, and San pay because it is determined based on a formula. Francisco. Because these statutory pay increases However, the Legislature could consider changing are wholly dependent on decisions made by the this methodology to regain more decision-making five local governments, actual pay increases for power and the ability to align costs with what MVA CHP officers could be higher or lower than current can afford to support. assumptions—potentially impacting MVA cost …And/Or Through Increasing Revenues. pressures in future years. The Legislature also could help MVA remain Temporary Actions Could Delay, but Not solvent by taking steps to increase its revenues. Prevent, Insolvency. The Legislature has a couple One option would be to raise vehicle registration of options for actions that could temporarily delay fees—either through a base increase or by changing insolvency for MVA. First, the Legislature could the methodology for annual fee adjustments direct the administration to make a loan or transfer such that they exceed changes in the CPI. to MVA from another fund source such as the A strong policy rationale exists for raising fees General Fund. However, the current General Fund in that it would continue to task vehicle owners condition and overall budget problem would make with paying to support the services from which this challenging. Second, the administration could they benefit. Based on the number of vehicles temporarily suspend supplemental pension plan currently registered in California, we estimate repayment requirements. Doing so, however, would that every $1 increase in vehicle registration result in higher cost pressures for MVA in the near fees would increase MVA revenues by about future because the principal and interest for the $36 million. However, one key trade-off to consider loan still would need to be repaid by June 30, 2030. is that increasing fees would result in additional Moreover, suspending these repayments would only costs to households and businesses that own delay MVA’s insolvency by a few months. vehicles. This could be particularly burdensome for 16 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET lower-income households. As of January 1, 2024, state’s flexibility for controlling MVA expenditures. base vehicle registration fees were $74 but once Similarly, the Legislature might want to consider other fees (such as weight fees and vehicle license MVA’s fund condition and impact of employee fees) are factored in, the average cost vehicle compensation costs when evaluating future owners pay when registering a vehicle is $329. memoranda of understanding negotiated between the administration and the employee unions that Recommendations represent the majority of DMV and CHP employees. Consider MVA Cost Pressures When While the state currently has limited discretion Evaluating New Spending Proposals. As over the formula that determines CHP officer pay, noted, the Governor’s budget includes proposals the Legislature could change this methodology to that would increase expenditures from MVA by regain more decision-making power. roughly $22 million in 2024-25 and $14 million ongoing. Regardless of the merits of these specific ENVIRONMENTAL proposals—and absent actions to address the LICENSE PLATE FUND MVA fund condition—approving them will make the structural deficit worse and hasten the time line for Background MVA going insolvent. Until a plan is put in place to Fund Supports Specific Resources and address MVA’s structural deficit, we recommend the Environmental Protection Activities. ELPF Legislature set a high bar for considering approval was established in 1979 to fund various natural of any proposals that create additional MVA cost resources and environmental protection-related pressures and accelerate the risk of insolvency. programs. Existing state law restricts the use of Develop Plan to Ensure Fund Remains ELPF monies to program administration and the Solvent. In order to remain solvent, MVA following purposes: expenditures and revenues must be brought • Control and abatement of air pollution. into balance. As such, we recommend that the Legislature develop a plan to address MVA’s • Acquisition, preservation, and restoration of natural areas or ecological reserves. structural deficit on an ongoing basis. To achieve ongoing sustainability for the fund, the state will • Purchase of real property for park purposes need to reduce MVA’s costs, increase the fund’s and addressing deferred maintenance at revenues, or adopt some sort of combination of state parks. these strategies. To help determine which options • Environmental education. best align with legislative priorities, the Legislature • Protection of nongame species and threatened could hold hearings to get a better understanding and endangered plants and animals. of the fund condition, any actions the administration • Protection, enhancement, and restoration is considering to address the problem, and the of fish and wildlife habitat, and related trade-offs associated with options such as raising water quality. fees or reducing positions at CHP and DMV. • Reduction of the effects of soil erosion and the Consider Cost Pressure Impacts From discharge of sediment into the waters of the Employee Compensation. Even if the Legislature Lake Tahoe region. takes action to address MVA’s current deficit, • Scientific research on the impacts of climate the fund could be at risk of future insolvency if change on California’s natural resources expenditures related to employee compensation and communities. outpace revenues in the future. When addressing the MVA fund condition, the Legislature will Fund Supported Primarily by License Plate want to consider how the fund could absorb Sales. The fund is primarily supported from the future increases in employee compensation. sale and renewal of personalized motor vehicle The Legislature also might want to consider license plates, as well as a portion of fees on the whether changes to the methodology for setting sale and renewal of certain specialty plates (such as CHP officer pay could be needed to increase the “Whale Tail” and 1960s Legacy plates). www.lao.ca.gov 17 2024-25 BUDGET ELPF Fund Condition we estimate the fund will be insolvent by 2025-26 Continues to Deteriorate if revenues and expenditures remain stable and corrective actions are not taken. We highlight these Structural Imbalance Has Arisen as estimates in Figure 4. (While the administration has Expenditures Have Been Added to the Fund not provided a fund condition projection for ELPF, and Revenues Have Not Kept Pace. ELPF has it indicates it expects revenues and expenditures to experienced periodic fund condition challenges be stable in the coming years.) in the past. Most recently, a structural imbalance Administration Indicates It Is Taking has emerged related to both expenditures Current-Year Actions, Monitoring Fund and revenues: Condition, and Considering Future Options. • Increasing Expenditures. First, ELPF The California Natural Resources Agency (CNRA) supports operating activities at various indicates it is relying on one-time savings— departments, and these costs have including $2 million from the Department of Fish increased over time due to rising employee and Wildlife—as a mechanism to help ensure the compensation and other factors. Second, fund balance is not depleted in the current year. numerous new or expanded one-time and The agency also is working on expanding the ongoing activities have been funded using pool of available license plates—such as through ELPF in recent years. These include a partnerships with National Football League team K-12 access program, a water data access foundations on specialized plates—to attract program, a beaver restoration program, the additional customers who do not yet have a Bolsa Chica Lowlands restoration project, and specialized plate and thereby generate additional the Clear Lake rehabilitation project. ELPF revenue for ELPF. The agency states that it also is also has been used to support new staff at monitoring ELPF’s fund condition and considering the Truth and Healing Council and Forest potential additional options. The administration Management Task Force, as well as to cover did not provide a proposal to address ELPF’s fund increases in administrative support for a few condition as part of the January budget. conservancies, among other activities. • Revenues Have Not Kept Pace With LAO Comments Increasing Expenditures. ELPF revenues Given Potential Near-Term Insolvency, Prompt have been relatively flat over the past few Action Makes Sense. As discussed above, ELPF years. Notably, the administration indicates could face insolvency as soon as 2025-26, absent that when it proposed augmentations in corrective actions or an unexpected increase in expenditures to the fund in recent years, it revenues. Accordingly, actions to address the assumed that revenues from additional license condition of the fund are likely to be needed within plates would increase sufficiently to support roughly the next two years. both those new costs and the rising costs Legislature Has Various Options for of existing activities. However, the revenue Addressing Condition of ELPF. Some of the types growth the administration had anticipated has of actions that the Legislature has considered when not yet materialized. ELPF has encountered shortfalls in the past include ELPF Could Become Insolvent by 2025-26. (1) increasing license plate fees; (2) reducing the Over the budget window, the administration number of programs funded by ELPF; (3) requiring estimates the fund will have an annual gap of departments funded by ELPF to achieve certain approximately $9 million between existing revenues levels of targeted savings (such as by holding (roughly $67 million) and current expenditures positions vacant); and (4) shifting the costs of some (roughly $76 million). Given this structural activities that were previously funded by ELPF to imbalance, under the administration’s estimates, other accounts, such as SPRF. The various options ELPF will maintain a reserve of just $3 million come with trade-offs, such as which programs at the end of 2024-25. Based on these trends, to maintain and who will bear the associated 18 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET costs—whether personalized and specialized license plate fee increases could help inform license plate holders, general taxpayers, or fee legislative decision-making. Additionally, the payers associated with other funds. Moreover, Legislature would benefit from additional details on as discussed later, SPRF also currently faces the myriad of programs currently funded by ELPF a structural imbalance, along with several so it can prioritize across them and determine if any other special funds across the resources and could be good candidates for reductions or shifts to environmental protection areas highlighted in this other fund sources. report. The structural imbalances within these funds Recommendation currently would make it difficult for them to support additional costs. Additionally, while in principle Adopt a Solution to ELPF Imbalance No Later some costs could be shifted to the General Fund— Than 2025-26, Informed by Information From as has also been done in the past—this also would the Administration. Given our ELPF projections, be difficult given its current condition. we recommend that the Legislature adopt a solution to bring long-term stability to the fund no later than Additional Information on Options Would Help 2025-26. We recommend the Legislature request Inform Legislative Decision-Making. Obtaining additional information from the administration as more details on the options CNRA is considering part of the spring budget hearing process—such and the associated trade-offs and impacts would as on the estimated revenues from potential license be helpful for the Legislature as it begins to grapple plate fee increases and about programs currently with how it might address deficits within ELPF. supported by the fund—to help it begin to craft its For example, any estimates the administration has preferred solution. for the amount that could be raised by various Figure 4 ELPF Could Face Insolvency as Soon as 2025-26 (In Millions) $100 Expenditures 80 60 Revenues and Transfers 40 20 Year-End Fund Balancea -20 -40 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 Actuals Estimates and Projectionsb a Includes prior-year adjustments. Most notably, a $30 million adjustment was made in 2019-20. b Amounts from 2025-26 through 2028-29 represent LAO projections assuming stable revenues and expenditures. ELPF = Environmental License Plate Fund. www.lao.ca.gov 19 2024-25 BUDGET HARBORS AND vessel registration and renewal fees across the two-year fee cycle have remained largely stable, WATERCRAFT REVOLVING FUND as registrations have remained mostly flat and the Background state has not increased existing vessel registration and renewal fee levels (even for inflation) since Fund Supports Boating-Related Activities. 2005. Additionally, the 2019-20 budget made a State departments use HWRF to support technical correction to how gas taxes are allocated various boating-related activities, including the that resulted in a significant reduction in the amount management of invasive aquatic plants and of annual revenues that are transferred from MVFA species, as well as local assistance grants for boat into HWRF, thus leading to a decline in overall safety programs. The administration estimates that revenue to the fund. a total of $53 million will be spent from the fund in the current year, primarily by four departments— Legislature Has Taken Some Steps to the Department of Parks and Recreation (Parks), Address HWRF’s Fund Condition in Recent the Department of Fish and Wildlife, the California Years. Initially, Parks covered the HWRF shortfall Department of Food and Agriculture, and DMV. primarily by depleting its reserves (including savings from underutilized grant programs). Most Revenue Generated From Vessel However, in 2021-22, the administration proposed Registration Fees and Fuel Taxes. HWRF a package of solutions to address the HWRF fund receives a significant portion of its revenues from condition, which included (1) a one-time increase vessel registration and renewal fees, as well as a in the existing biennial fees charged for vessel transfer of gas tax revenues from the Motor Vehicle registrations and renewals from $20 to $70 (and Fuel Account (MVFA). Vessel registration renewals from $10 to $35 for new registrations in even in California are conducted on a biennial basis. As a years), (2) $20 million in reductions to various result, fee revenue for HWRF fluctuates predictably funded programs, and (3) $10 million in one-time each year. The current fee rates are: General Fund support. This proposal would have • Initial Registration Fees. The state charges provided temporary stability to the fund, but it an initial registration fee of $20 for most would not have implemented a permanent solution vessels that are registered in odd years and as the deficit was expected to reemerge by $10 for those registered in even years (the 2024-25. Ultimately, the Legislature modified the second year of the two-year cycle). administration’s proposed package of solutions • Renewal Fees. The state also charges a in 2021-22 to (1) reject the proposed fee increase, registration renewal fee that is due every two (2) approve the proposed reductions to programs, years in odd-numbered years totaling $20 for and (3) provide an augmented level of temporary most vessels. General Fund support compared to the Governor’s proposal—$30 million in 2021-22, $30 million Fund Imbalance Continues to Present a in 2022-23, and $21 million in both 2023-24 Challenge, Despite Recent Actions and 2024-25. To facilitate the development of a permanent solution, the Legislature also adopted HWRF Has Faced Fund Condition Issues for a budget bill language requiring Parks, in consultation Few Years. In recent years, HWRF has faced fund with stakeholders and staff of the relevant fiscal and condition challenges, as its annual expenditures policy committees of the Legislature, to develop have exceeded its typical level of revenues. As a new proposal that included a combination of we discussed in our February 2021 analysis, this fee increases, expenditure reductions, and other imbalance arose in part because expenditures grew actions designed to keep HWRF in structural over time, driven by rising employee compensation, balance on an ongoing basis. The budget bill a growing prevalence of aquatic invasive species, language further required Parks to provide the and because new activities were shifted onto the proposal no later than January 2023. fund. Meanwhile, revenues into the fund from 20 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET In May 2023, the Governor proposed a second the General Fund transfers and expenditure package of solutions to address HWRF’s fund reductions—have improved the condition of condition, informed by a stakeholder process HWRF on a short-term basis. However, the fund undertaken by Parks as required by statute. still faces a structural imbalance. Specifically, This revised proposal included (1) $11.3 million in the administration estimates that absent any additional reductions across two programs and corrective actions, the fund has an annual gap (2) an increase in vessel registration fees from of approximately $30 million across its two-year $20 to $80 biennially (and from $10 to $40 for fee collection cycle between existing revenues of new registrations in even years). This proposal roughly $20 million and current annual expenditures would have provided temporary relief to the fund, of roughly $50 million. As shown in Figure 5, this but the administration still estimated that further imbalance is expected to result in HWRF depleting adjustments would have been needed in 2029-30 its remaining reserve and becoming insolvent to retain solvency. Given the limited time to consider by 2026-27. the proposal and some stakeholder concerns, Administration Indicates It Is Monitoring the Legislature adopted the Governor’s proposed Fund Condition and Considering Options. programmatic cuts but did not adopt any changes Parks indicates that it continues to explore options to the fee levels or structure. for addressing the condition of HWRF, including Despite These Actions, HWRF Still Has potentially increasing fees in the future. However, an Ongoing Structural Imbalance and Faces the Governor has not included a proposal to Insolvency by 2026-27. The actions taken address HWRF’s structural imbalance as part of the by the Legislature in recent years—namely January budget. Figure 5 HWRF Facing Insolvency by 2026-27 (In Millions) $150 Year-End Fund Balanceb 100 Expenditures 50 Revenues and Transfersa -50 -100 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 Actuals Estimates and Projections a Reflects ongoing revenues and transfers to and from the fund. Excludes one-time General Fund transfers ($30 million in 2021-22, $30 million in 2022-23, $20.7 million in 2023-24, and $20.7 million in 2024-25). b Includes one-time General Fund transfers and prior-year adjustments. HWRF = Harbors and Watercraft Revolving Fund. www.lao.ca.gov 21 2024-25 BUDGET LAO Comments Recommendation Given Structural Imbalance, Prompt Action Adopt a Permanent Solution to Fund Makes Sense. We find that additional actions to Imbalance—Including a Fee Increase—No Later provide long-term stability for HWRF are important, Than 2025-26. For the reasons cited above, we and as such, taking action soon to provide this recommend the Legislature take action no later stability would make sense. Specifically, while than 2025-26, but ideally in 2024-25, to address the fund condition projection shows insolvency in the condition of HWRF. While the Legislature could 2026-27, a solution likely will be needed no later consider a mix of solutions, we recommend it rely than 2025-26. This is because (1) Parks will need more heavily on fee increases given that fees have time to implement a fee increase once it has been not been adjusted in almost 20 years and significant adopted and (2) a lag exists before fee increases programmatic cuts already have been made. are fully reflected in revenues due to the fund’s The Legislature could adopt a new fee structure two-year fee cycle, which provides markedly more similar to the one proposed by the Governor in May revenue in odd years. Additionally, if the Legislature 2023, or it could consider various other options were to take action in 2024-25, it could potentially for fee amounts and design, such as those we reduce the size of the planned budget-year General discussed in our February 2021 report. We also Fund transfer of $21 million, thereby capturing the recommend that whatever solution the Legislature savings as a General Fund solution. adopts be crafted to bring long-term solvency to Reasonable to Include a Fee Increase as the fund, such as by incorporating a cost-of-living Part of a Permanent Solution. We find that a adjustment to enable fees to keep pace with balanced approach to addressing HWRF’s deficit— inflation and emerging needs. one that reflects both expenditure reductions and increased revenues—makes sense. So far, the ENERGY RESOURCES state has implemented significant reductions to PROGRAMS ACCOUNT the programs funded from HWRF and the General Fund has provided substantial one-time support. Background However, continuing to rely exclusively on these Main Operating Account for the California two approaches would be problematic because Energy Commission (CEC). The state uses ERPA (1) further expenditure reductions could have funds to support various energy programs and significant negative impacts on the programs that projects, including CEC’s operations. ERPA is HWRF supports, (2) the General Fund is not in a funded through a surcharge on retail electricity position to continue providing support, and (3) boat sales, originally set at $0.0001 per kilowatt hour users paying at a level commensurate with the (kWh) back in 1974. It was then raised to $0.0002 benefits they receive through HWRF is appropriate. sometime between 1984 and 2002. Subsequently, Accordingly, we think a fee increase should be a Chapter 1033 of 2002 (AB 3009, Committee on key part of a permanent solution. This would be Budget) raised the maximum allowable surcharge consistent with the budget bill language adopted by from $0.0002 per kWh to $0.0003 per kWh and the Legislature in 2021-22, which envisioned a fee gave CEC the authority to adjust rates up to that increase as a component of addressing the fund statutory cap. CEC set the surcharge at the cap condition. Additionally, the fees that support HWRF of $0.0003 per kWh in 2018. The ERPA surcharge have not been increased in nearly 20 years, so currently costs the average residential ratepayer adjusting them to meet current costs and demands about 16 cents per month, or $2 annually. It on the fund is warranted. generated about $72 million in revenue in 2022-23 and similar amounts in recent prior years. 22 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET ERPA Projected to Go Insolvent in 2027-28. greater home electrification. However, CEC As shown in Figure 6, ERPA is in a structural deficit, projects this increase (which it estimates will total with its ongoing revenues failing to keep pace 1.68 percent annually between 2022 and 2035) with its increasing expenditures. This imbalance still will not generate enough additional revenue for is primarily resulting from: (1) the continued rise of ERPA to cover its structural deficit at the current expenditures due to salary and benefit costs for surcharge rate. existing staff as well as growing costs to implement Administration Has Proposed Raising new chaptered legislation each year, (2) CEC ERPA Surcharge Each of the Past Two Years. being constrained by the current statutory cap The administration has proposed increasing the from setting the surcharge at a level that would statutory cap for the ERPA surcharge as part of generate revenues that keep pace with inflation the budget process twice in the past two years— and statutorily required expenditures, and (3) the in April 2022 and May 2023. These proposals current exemption of behind-the-meter (BTM) solar ultimately were rejected by the Legislature. generation from paying into ERPA. The growth of BTM solar in recent years has depressed ERPA Governor’s Proposal revenues as numerous customers who formerly Increases the ERPA Surcharge Cap and purchased traditional retail electricity (which carried Authorizes Future Inflationary Increases. with it an associated ERPA surcharge) have made The Governor proposes to more than double the the transition to solar panels (and therefore are now current surcharge cap, increasing it to $0.00066 exempt from paying the surcharge). As shown in per kWh. This would give CEC the ability to raise the figure, the fund’s reserves have helped keep the ERPA surcharge up to this amount, beginning it solvent since the structural deficit materialized January 1, 2025. The administration notes that and are projected to continue doing so for the next the new proposed cap is equal to indexing the few years, but the administration estimates these original surcharge ($0.0001) to inflation in the years balances will be exhausted by 2027-28. since its creation. Beginning January 1, 2026, and Administration Projects Increased Electricity annually thereafter, the surcharge rate cap would Sales Will Be Insufficient to Cover Deficit. be adjusted in an amount equal to the CPI. If and Residential electricity consumption is expected when CEC sets the surcharge at the new statutory to increase over the next several years due to cap, it would more than double current ERPA widespread adoption of electric vehicles and revenues (not including inflationary adjustments). Figure 6 ERPA Facing Insolvency by 2027-28 (In Millions) $180 130 Year-End Fund Balance Expenditures 80 Revenues and Transfers 30 -20 -70 2021-21 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 Actuals Estimates and Projections ERPA = Energy Resources Program Account. www.lao.ca.gov 23 2024-25 BUDGET At the current rate of electricity usage, surcharges increase is not likely to hit the maximum cap for set at the proposed new cap amount for current several years. This is because the current cap users would generate about $150 million annually of $0.0003 per kWh is nearly, but not entirely, and cost an average household about 32 cents sufficient to cover ERPA’s current expenditures, per month. so CEC will not have justification to adjust the Extends Charge to BTM Solar Owners. surcharge up to the maximum allowable cap The Governor also proposes extending the ERPA unless the Legislature authorizes significant and surcharge to BTM solar customers based on how unanticipated new near-term spending from ERPA. much energy their systems generate, beginning Existing Law Places Checks on ERPA January 1, 2025. The administration estimates Expenditures… Because ERPA is not continuously this would provide about $9.8 million in additional appropriated, in general, the administration must ERPA revenues based on the current surcharge rate submit a budget change proposal for legislative (and therefore more than twice that amount if and approval should it wish to add new expenditures when the surcharge were to reach the proposed and increase its spending authority from the new statutory cap, not including inflationary fund (for example, to add staff to implement new adjustments). About $4.5 million of this new revenue activities). Moreover, CEC is unable to use ERPA would come from applying the surcharge to about revenues for any spending beyond its statutorily 1.7 million existing residential BTM solar customers required duties and obligations. These guardrails in the state. On average, these customers would provide some limitations on how CEC can use ERPA experience a monthly bill increase of about 23 cents and the rate at which it can increase its spending. per month. The remaining revenue would come Without significant increases in spending authority from applying the surcharge to nonresidential from the Legislature, CEC will not have justification locations with solar generation and nonutility to significantly increase the ERPA surcharge, even generation facilities. To enable CEC to apply this if a higher cap technically provides it with more charge, the Governor’s proposal would update room to do so. This can provide the Legislature the Revenue and Taxation code to require electric with some comfort that even if it approves the utilities to use a specified methodology to calculate Governor’s proposal to notably increase the cap, the amount of kWh of electricity generated by a through helping to control ERPA expenditures, it solar energy system. also can help control surcharges for ratepayers. The requirement that CEC commissioners approve LAO Comments ERPA increases also provides an opportunity for the Surcharge Not Likely to Reach Cap Anytime Legislature (and stakeholders) to weigh-in through Soon. The administration has indicated that, should public comment prior to them raising the surcharge. the proposal be adopted, it would not proceed …But Legislature Will Want to Carefully with raising the ERPA surcharge all the way to the Monitor Growth in and Effectiveness of new cap immediately. Rather, CEC states that its Expenditures. The Governor’s proposal would annual process for considering adjustments to the give CEC authority to raise ERPA revenues if the surcharge would be to (1) forecast its projected, added expenses fulfill CEC’s statutorily required allowable ERPA expenditures as approved in the obligations and fall within the fund’s statutory most recent budget act; (2) evaluate whether those spending level as authorized by the annual budget projections show that the ERPA fund balance act. The Legislature will want to be diligent about would drop below a $20 million reserve (the monitoring how CEC is using the revenues, whether administration’s identified “prudent reserve”); if so, the activities the fund is supporting seem justified, (3) the CEC would propose a surcharge increase and how quickly the activities are expanding and sufficient to cover the associated expenditures; expenditures are growing. As part of this oversight, and (4) CEC commissioners would hold a vote on monitoring how quickly the surcharge rate charged the proposed increase at their November business by CEC is growing over the next several years meeting. Under this practice, the surcharge also will be important. Particularly given that any 24 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET increases to the surcharge will have impacts for Recommendation ratepayers—albeit minor ones, as discussed Approve Governor’s Proposal, but Monitor next—the Legislature will want to make sure Necessity and Effectiveness of Both Existing ERPA spending is well-justified, cost-effective, and Future ERPA Spending. The Governor’s and helping to meet state goals and fulfill proposal is a reasonable approach to addressing statutory obligations. the structural deficit in ERPA, which is projected to Cost Increase to Customers Would Be Minor, go insolvent in 2027-28 absent legislative action. but Still Worthy of Scrutiny. Any proposal that Moreover, the resulting impacts on ratepayers will increases electricity rates should be considered be minor and CEC is unlikely to have justification carefully. California’s electricity rates have increased for making notable increases to the surcharge at a rate far surpassing inflation in recent years, with in the near term. We recommend the Legislature rates charged by the state’s investor-owned utilities adopt the Governor’s proposal, but constrain increasing by nearly 90 percent over the past expenditure growth (and the resulting impacts to decade. Lower-income households spend a larger the surcharge applied to ratepayers) by continuing share of their income on energy costs as compared to closely monitor both future requests for to higher-income households. In addition, meeting increases to ERPA spending, as well as the need the state’s climate goals will be dependent on for and cost-effectiveness of existing expenditures. increasing electricity usage and moving away from This can help ensure the funds are being used for fossil fuels, and customers may be reluctant to essential and worthwhile activities and avoid levying make electrification transitions should associated undue or rapidly increasing charges on ratepayers. prices be too high. The Governor’s proposal will increase electricity rates, and as such bears STATE PARKS AND particular scrutiny. However, even with this in mind, RECREATION FUND the proposed increase for the average residential customer will be minor, resulting in additional costs Background for most households totaling only a few cents each SPRF Is the Main Special Fund Supporting month. Given the importance of making sure CEC is Parks. SPRF is the primary special fund supporting well-positioned to help the state meet its aggressive Parks. Under the Governor’s budget proposal, clean energy goals, these minor increases seem the department has a total operating budget of justified and not overly burdensome. $951 million in 2024-25. Of this amount, SPRF Extending Surcharge to BTM Solar and is projected to provide roughly $285 million, or Incorporating Inflationary Adjustments Are about 30 percent—more than any other single Reasonable. As described above, the growth funding source. These funds are used to support of BTM solar has eroded ERPA revenues while numerous aspects of Parks’ operations, such expenses have continued to grow. A strong policy as staff to maintain and operate state parks and rationale exists for extending the surcharge to contracts with park vendors (such as for services these customers so they pay their “fair share” of like trash collection). (In some cases, SPRF is supporting CEC’s statutorily required activities. also used to support capital projects, such as to The resulting charges would be modest, adding an replace aging park facilities.) In addition to SPRF, estimated 23 cents per month to bills for the typical the department also receives financial support household BTM solar customer. In addition, tying from various other sources, including the General the surcharge to inflation is a sensible strategy to Fund, various smaller special funds, federal funds, ensure future revenue is sufficient to accommodate and reimbursements. The amount of General Fund normal growth in baseline costs. This also will support for Parks has varied over time, in large part help ensure that inflationary changes will not be based on variations in the state’s overall General responsible for reestablishing a structural deficit. Fund condition. Adding this annual adjustment also will limit the SPRF Receives Majority of Its Revenues From need for repeated action by the Legislature in User Fees and Transfers From MVFA. The single future years. largest source of support for SPRF—providing www.lao.ca.gov 25 2024-25 BUDGET about $125 million annually—is fees charged to park • General Fund Provided Additional users, such as park entrance fees and overnight Support, but Only on a Temporary Basis. camping fees. After user fees, the second largest During the pandemic, the General Fund source of support for SPRF—providing about provided $114 million in one-time support $100 million annually—is transfers from MVFA. to counter-balance anticipated reductions These transfers more than doubled beginning in in revenues resulting from park closures. 2018 as a result of Chapter 5 of 2017 (SB 1, Beall), This provided temporary relief for the fund by which increased gasoline excise taxes and provided offsetting the losses in user fees discussed a share of the resulting revenue to SPRF. The fund above and added significantly to the SPRF also receives some revenue from other sources, fund balance in 2020-21. However, these including contracts with state park concessionaires transfers did not address the long-term trends that provide certain services (such as restaurants, affecting the solvency of SPRF. rentals, or gift shops), as well as transfers from the Parks Planning to Take Actions to Reduce Highway Users Tax Account. Expenditures From SPRF. The Governor’s SPRF Faces Fund Condition Challenges January budget does not include a proposal to address the condition of SPRF. However, as shown Structural Imbalance Has Arisen as Revenues in Figure 7, Parks plans to respond to SPRF’s fund Have Failed to Keep Pace With Expenditure condition challenges by decreasing its expenditures Growth. In recent years, yearly expenditures from from the fund in the budget year and then holding SPRF have exceeded its typical level of annual expenditures flat over the next few years. To revenues. The main contributors to this imbalance accomplish this, Parks likely will need to take relate to both sides of this equation. They include: actions such as keeping some positions vacant and • Expenditures Have Increased. Annual not hiring as many seasonal staff as is typical. expenditures from SPRF have been steadily Despite These Planned Actions, SPRF increasing due to factors such as growth in Expected to Be Insolvent In 2028-29. As shown negotiated employee compensation and the in the figure, even with its planned expenditure rising costs of various goods and services reductions, Parks estimates that SPRF will have an purchased by Parks. annual gap of approximately $15 million between • Increase in MVFA Transfers Provided its estimated revenues (roughly $255 million) and Temporary Relief, but Was Not Adequate projected expenditures (roughly $270 million) in to Address Structural Imbalance. each of the next few years. This structural deficit As mentioned above, SB 1 significantly would cause SPRF to deplete its remaining fund augmented MVFA transfers to SPRF, which balance (which is estimated to total $71 million helped improve the condition of the fund. at the end of 2023-24) and become insolvent These transfers have increased modestly by 2028-29. since the passage of SB 1, but their growth has not been sufficient to keep pace with the LAO Comments fund’s growing expenditure levels. SPRF Condition Poses Challenges for Parks • Revenues From User Fees Have Been to Meet Ongoing Demands. Parks faces a variety Relatively Flat. Apart from temporary of demands that will require funding to address. declines resulting from park closures due For example, the public has made longstanding to the pandemic, wildfires, and severe calls to improve the maintenance and operations winter storms, user fees have been relatively of the state park system. In particular, a lack of flat over the past ten years. This is largely adequate ongoing funding for park maintenance because no systemwide fee increase has has contributed to the development of a backlog of been implemented in at least the last decade deferred maintenance projects that Parks estimates and the number of paid users has increased exceeds $1 billion. Parks also faces increasing only modestly. pressure to ensure that the state park system is 26 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET accessible to all Californians, such as by providing charge day-use fees, (2) parks typically charge free park passes to targeted groups. Maintaining for parking and some users walk or bike rather a healthy and sustainable SPRF condition on an than drive, and (3) some groups of users ongoing basis is critical to positioning Parks to are eligible for fee exemptions. Parks also address these and other demands, particularly could increase rates for user fees (such as given that the General Fund may not be in a position for day use, camping, and/or annual passes). to provide significant levels of support for the Parks currently has the authority to raise fees department in the coming years. administratively. However, the department Options for Improving Condition of SPRF often encounters resistance to imposing Exist, but Present Trade-Offs. The state has fee increases, particularly along the coast various options for improving the condition of SPRF. where specific concerns about access have For example, some alternatives that the state has been raised. Additionally, efforts to expand considered in the past include the following: the share of paid users or increase fees can raise concerns about equity, as certain • Raising Revenues. The state has considered individuals or communities may become more a few different options for increasing revenues financially burdened by fee changes, resulting into the fund. For example, Parks could take in unequal access to state parks. Parks steps to increase the share of park users that also could explore options for increasing pay fees, as the department estimates that revenues from other sources, such as by roughly two-thirds of visitors do not currently expanding agreements with concessionaires pay to access the parks. Many visitors do or reviewing its Revenue Generation Program not pay fees because (1) some parks do not to see if changes could be made to increase Figure 7 SPRF Facing Insolvency by 2028-29 (In Millions) $330 Expenditures 280 230 Revenues and Transfersa 180 130 80 Year-End Fund Balanceb 30 -20 -70 -120 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 Actuals Estimates and Projections a Reflects ongoing revenues and transfers to and from the fund. Excludes one-time General Fund transfers ($114 million in 2020-21, $1 million in 2021-22, and $14 million in 2022-23). b Includes one-time General Fund transfers and prior-year adjustments. Most notably, $36 million, $41 million, and $144 million adjustments were made in 2018-19, 2021-22, and 2022-23, respectively. SPRF = State Parks and Recreation Fund. www.lao.ca.gov 27 2024-25 BUDGET its effectiveness. (This program is intended transportation purposes under the California to increase Parks’ revenues, such as by Constitution. As discussed above, the General setting annual revenue targets for each park Fund also has provided one-time transfers to district and providing financial incentives for SPRF, but additional shifts of this nature would exceeding those targets.) be difficult given the condition of the General • Reducing Expenditures. Another option Fund and such transfers would only represent the state could consider to address SPRF’s a short-term solution. structural shortfall would be to reduce Legislature Should Play an Important Part of expenditures for state parks. For example, in Crafting a Long-Term Solution. Although Parks the past, the state has considered reducing has some authority to address SPRF’s condition the number of roles for Parks’ employees administratively (such as by raising fees or reducing that require a peace officer certification, a expenditures), we think a strong rationale exists for change that could help lower staffing costs. the Legislature to play a proactive role in crafting a Another alternative the state has considered long-term solution. is expanding the use of third parties—such as First, in principle, we think it is important for the local agencies, nonprofits, and private firms— Legislature’s vision to be reflected in the solutions to operate state parks. As the Legislature that are adopted given the important role SPRF considers potential options to reduce plays in Parks’ operations and the difficult policy expenditures, it will be important to evaluate trade-offs associated with the various options for the impacts of any such reductions, such as achieving solutions. Specifically, the Legislature on the ability of the department to adequately will want to ensure that whatever solutions operate and maintain its parks. ultimately are implemented reflect its priorities for • Shifting Costs to Other Fund Sources. balancing considerations such as (1) providing Another potential approach to reduce adequate funding to operate and maintain parks; pressure on SPRF is to have other fund (2) supporting widespread access to state parks, sources bear a greater share of costs. particularly for those with limited incomes; For example, at some points in history, the (3) promoting geographic equity to accessible, General Fund has borne a greater share of appropriately maintained parks; (4) not placing the costs of operating state parks than it an undue burden on other fund sources; and does currently (such as in the early 1980s and (5) providing long-term fiscal stability for Parks. early 2000s). However, given the current and Second, from a practical standpoint, legislative projected General Fund condition, shifting involvement likely is necessary in order to develop additional costs out of SPRF onto the General a comprehensive solution. While the department Fund—either on a one-time or ongoing basis— can take various actions administratively—such as likely would be difficult at this time. holding positions vacant to reduce operating costs • Increasing Transfers. In the past, the state and raising fees—the scope of potential solutions it has increased transfers into SPRF from can pursue is somewhat limited without legislative other special funds, including from MVFA (as action. For example, one possible approach discussed previously) and the Off-Highway would be to pair an increase in park user fees with Vehicle Trust Fund. When evaluating whether expansions to targeted access programs in order additional transfers are viable, it will be to mitigate potential impacts on lower-income park important to consider whether the funds users. Such a wide-ranging package of solutions can sustain the additional expenditures likely would require legislative action and guidance. as well as whether constitutional or other legal impediments exist. For example, most MVFA funds are required to be used for 28 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Recommendations which options or combination of options—including increasing fees, expanding the share of paid users, Begin Developing Plan in 2024-25 to Provide reducing expenditures, and/or identifying new SPRF With Long-Term Solvency. We recommend funding sources to support Parks’ operations—best that the Legislature take steps now to begin align with legislative priorities. As it does so, we developing a plan to ensure SPRF’s stability over recommend that the Legislature consider the extent the long term. While SPRF is not projected to run to which the package of solutions appropriately out of funds for a few years, given the complexity balances its—sometimes competing—goals for and importance of the issue—as well as the Parks, such as promoting equity and access, challenges that an unhealthy SPRF condition poses adequately maintaining the park system, and not for Park operations—waiting until insolvency is placing undue burdens on other funding sources. looming to start the conversation is not advisable. We also recommend that whatever solution the Reflect Legislative Priorities and Prioritize Legislature adopts be sustainable over time so that Long-Term Sustainability When Developing it brings long-term stability to Parks’ operations. Plan. We recommend that the Legislature consider CONCLUSION While insolvency looms for each of the identified the same time. Moreover, it will take the Legislature funds we discuss in this report, the specific time to consider what combination of options for circumstances that led to the current problems—as bringing the funds into balance on an ongoing well as the most suitable options for addressing basis are most appropriate and best align with its them and the urgency of the need for action—vary priorities. As such, beginning now to develop plans by fund. Developing a phased approach for how to address the problematic fund conditions is a key to address these fund conditions will be important step in positioning the Legislature to take action to avoid major interruptions to state services and before the funds become insolvent. pressures to increase multiple fees and taxes at www.lao.ca.gov 29 2024-25 BUDGET 30 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET www.lao.ca.gov 31 2024-25 BUDGET CONTACTS Luke Koushmaro Overarching Comments Luke.Koushmaro@lao.ca.gov Motor Vehicle Account (916) 319-8355 Frank Jimenez Hazardous Waste Control Account Frank.Jimenez@lao.ca.gov Department of Pesticide Regulation Fund (916) 319-8324 Helen Kerstein Environmental License Plate Fund Helen.Kerstein@lao.ca.gov Harbors and Watercraft Revolving Fund (916) 319-8364 State Parks and Recreation Fund Sarah Cornett Energy Resources Programs Account Sarah.Cornett@lao.ca.gov (916) 319-8329 LAO PUBLICATIONS This report was reviewed by Rachel Ehlers. 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. 32 LEGISLATIVE ANALYST’S OFFICE