Proposition 1 Oversight Hearing, part 1: Background on the water bond and principles for moving forward

Anton Favorini-Csorba gives an overview of Prop 1 and makes recommendations for ensuring legislative oversight on the expenditure of water bond funds

Last November, voters approved Proposition 1, the water bond, which provides $7.545 billion in general obligation bond funding for various water-related projects and programs. Voter approval of Prop. 1 means the state now has permission to sell general obligation bonds for the purposes and the amounts specified in the language of the bond.

Spending the bond monies made available by Proposition 1 will spread out over many years.  It’s a significant amount of money, and so accordingly, the Assembly Committee on Water, Parks, and Wildlife held an oversight hearing on February 10 to discuss how the bond’s monies will be spent, and how the legislature can ensure the funds are spent wisely and cost-effectively.

Prop 1 LevineChair Marc Levine opened the hearing by saying, “As I was preparing for this hearing, I was reflecting on the fact that the history of water development in California is filled with spectacular successes and devastating failures, often with respect to the same projects. Sometimes one region has benefitted at the expense of another, or sometimes the economy has grown, even as we decimated the environment. We’ve gotten better at balancing our needs but we must go further and continuously strive to improve. After all, California is a launching pad for innovation.”

Chair Levine noted that the Governor’s proposed budget sets out an initial $532.5 million of Prop 1 spending, but that is only the start. “There are multiple goals for today’s hearing: To learn how the agencies are proposing to turn those funds into projects and programs, how they will ensure accountability, and also to receive recommendations and considerations for how we should maximize the public benefits of Prop 1 dollars as we move forward.”

ANTON FAVORINI-CSORBA: Legislative Analyst’s Office

Anton Favorini-Csorba began by saying that in his presentation, he would provide a brief bit of background on Proposition 1 and the Governor’s proposals, information on how bonds work and how bond funds are expended, and then also discuss some of the principles that the Legislative Analyst’s Office has identified in order to ensure that bond funding delivers the most public benefits for the dollars spent.

Overview of Proposition 1

LAO Handout_Page_2Voters approved Proposition 1 in November 2014 which provides $7.5 billion for various water related projects. Mr. Favorini-Csorba noted that the two biggest allocations are $2.7 billion for water storage, and nearly $1.5 billion for ecosystem restoration.

He also noted that of the $7.5 billion, $425 million was redirected from already approved bond measures. “What that means is that more money is available for the projects that are laid out in this bond,” he said. “It doesn’t necessarily have to be spent consistent with the previous bond measures.

How bond funds are spent

Mr. Favorini-Csorba then went through the basic process of how bond funds are spent, as well as some particular aspects of Proposition 1.

Prop 1 AntonThe first point is that the $2.7 billion for water storage projects is continuously appropriated to the California Water Commission, and that means that it doesn’t have to go through the annual state budget process,” he said. “However, for the remaining funding in the measure, the legislature would appropriate that funding; they allocate it to specific departments. The way that that would work is typically because these appropriations would be for longer-term capital projects that take a bit of time to construct, the appropriation allows a state department to encumber or commit the funds to a project within the next three years after the appropriation, and then another two years to actually spent the dollars, for the money to go out the door. The reason for that is first, the projects have to get built and then the state typically reimburses local agencies after they’ve either begun work on the project or completed it.”

The Departments then select the projects, typically through a competitive process, and in most cases, local agencies that would receive funding under the measure have to supply some matching funds, typically about 50% of the total project costs,” he said.

Once projects are selected by the departments, then the state goes through the process of selling bonds,” he said. “Essentially the Department of Finance, the treasurer, and the Department coordinate their activities so that we’re only selling the bonds, going out to market and starting to borrow once there’s actually a need to pay for the project – once we need the cash on hand.”

Once the bonds have been sold, the state repays them over time, typically 30 years from the time the bonds are sold, he said. “We estimate the annual cost of the repaying the bonds as well as the interest on them is about $360 million per year for the next 40 years,” he said.

The Governor’s Budget Proposal

Mr. Favorini-Csorba said that the Governor has several proposals for the first year of implementation of the bond measure, noting that the largest area of expenditures proposed is for watershed restoration and protection. “A fair amount of that money will go to the ten state conservancies and the ocean protection council – that’s $84 million in total,” he said. “The next largest allocation would be for the Wildlife Conservation Board which would begin implementing its program to enhance stream flows to increase the amount of water flowing through streams.”

LAO Handout_Page_4Principles for legislative oversight over bond funds

Mr. Favorini-Csorba then went over some of the principles the Legislative Analyst’s Office identified that would be helpful to ensuring that bond funds are spent cost effectively and that there’s adequate legislative oversight.

Furthering state priorities:

The first principle is to ensure that the proposals further the state’s priorities and that can include the priorities that have been laid out in Proposition 1,” he said. “You can also consider priorities in other state legislation, so you might want to consider the Delta Reform Act of 2009, which set out some of the state’s goals for achieving certain ends in the Sacramento-San Joaquin Delta. … You might also want to consider to the extent that this aligns with AB32, to the extent that you can identify projects that align with AB 32, the state’s greenhouse gas regulation law.”

LAO Handout_Page_5The idea of ensuring that the expenditure of the funds furthers state priorities allows the legislature to make sure there’s consistency in state actions, so we’re not taking contradictory actions or conversely, that we’re possibly achieving more of the state’s environmental goals with the same project,” he said.

Funding cost-effective projects for the state:

The second principle for implementing the bond would be to fund cost effective projects for the state, and there are actually a couple of key pieces to that, Mr. Favorini-Csorba said. “The first one is to ensure that the bond dollars go to projects that supply state level public benefits,” he said. “The thinking behind that is that state taxpayers as a whole are paying for this bond over time, so the projects that are funded with that money should provide a benefit to the state as a whole. This also means is that in general, bond funds should not be prioritized for projects that have identified or specific beneficiaries – organizations or people who benefit directly from those.”

A second key point of ensuring cost effective projects for the state would be to ensure that you’re generating benefits above what otherwise would have occurred,” he said. “In some cases, there are regulatory requirements; certainly state bond funds in most cases shouldn’t support activities that meet existing regulatory requirements. You may want to focus on funding long-term projects and related to that, limiting the cost of administration for the bond, and then finally just recognizing that there are going to be tradeoffs among some of these different principles, and just more generally with other state priorities.

Ensuring accountability and oversight

The last key principle identified is to ensure accountability and oversight, as accountability is important for promoting transparency, Mr. Favorini-Csorba said. “It can also provide departments that are giving out funds as well as the grantees that are receiving funds with an additional incentive to either select better projects or implement those projects more effectively,” he said. “Essentially if they know that the legislature has an interest and is focusing on what is the outcome, they may be more likely to focus their efforts on that.”

One way to do that would be to have departments collect and evaluate data on project outcomes, as well as programs as a whole,” he said. “That will essentially allow the legislature and the voters to understand what it is that they bought with their bond dollars. A couple of options as you consider ways to do this might be to add additional reporting requirements on how projects are selected or the outcomes that the projects are intended to achieve. You might want to establish ongoing monitoring and evaluation programs, and in some cases, you might want to seek third party evaluations such as those done by academic researchers to take a look at broader programs.”

So with that …

Chair Marc Levine asked Mr. Favorini-Csorba to elaborate on the Water Commission and ensuring accountability on the $2.7 billion which they’ve been entrusted to spend wisely.

Prop 1 CommitteeJust as a little bit of background, the bond requires the water commission to identify public benefits associated with water storage projects,” replied Mr. Favorini-Csorba. “Water storage projects can include surface reservoirs, dams, but it can also include groundwater projects, and the public benefits that are laid out in the bond fall into five categories. Some examples are ecosystem restoration, so if a project provides more flows, say, in the Sacramento-San Joaquin Delta, that might be considered a public benefit.”

The Commission is currently in the process of developing how it’s going to identify and value those public benefits,” he continued. “As you’re looking at what the Commission is going to do, you might want to think about those five categories of public benefits more broadly and where is the state level public benefit that’s the interest there. You may want to ask the Commission how it plans to identify a state level public benefit rather than say a local public benefit, a benefit for a community or something like that. I think oversight hearings might be a valuable tool.”

Coming up tomorrow …

In the second part of coverage from the oversight hearing, John Laird, Secretary of Natural Resources; Mark Cowin, Director of the Department of Water Resources; Chuck Bonham, Director of the Department of Fish and Wildlife; Felicia Marcus, Chair of the State Water Resources Control Board; John Donnelly, Executive Director of the Wildlife Conservation Board; and Joe Byrne, Chair of the California Water Commission tell legislators how they plan to spend the first round of Prop 1 funds.

For more information …

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