Report 2013-101 Summary - November 2013

Salton Sea Restoration Fund:

The State Has Not Fully Funded a Restoration Plan and the State's Future Mitigation Costs Are Uncertain

HIGHLIGHTS

Our review of the administration of the Salton Sea Restoration Fund, highlighted the following:

RESULTS IN BRIEF

The Salton Sea, located in Riverside and Imperial counties in Southern California, is the State's largest inland lake. The Salton Sea was formed in 1905 when Colorado River floodwater breached an irrigation canal being constructed in the Imperial Valley; it has since been primarily fed by agricultural drain water. According to experts, the Salton Sea serves as an important fishery and wildlife habitat and is a major stopping point for migratory birds along the Pacific flyway. However, beginning in 2003, a series of agreements known collectively as the Quantification Settlement Agreement (QSA), between the State, local water agencies, and other entities have required, among other things, a water transfer that has reduced the amount of water that flows into the Salton Sea (water transfer). To mitigate the effects of the water transfer, the QSA requires one of the local water agencies that is a party to the agreement to provide additional water (mitigation water) to the Salton Sea for 15 years, from 2003 to 2017. Experts anticipate that when the Salton Sea stops receiving this mitigation water, the water transfer will cause profound negative environmental impacts, including the loss of fishery habitat, exposure of soils to wind erosion, and declines in bird species because of the loss of food.

Under the QSA, the State has agreed to assume sole responsibility for payment of the costs for environmental mitigation requirements in excess of $133 million (in 2003 dollars), the amount that the QSA requires three local water agencies to pay for this purpose.1 Although it has not performed a formal analysis, the joint powers authority that includes the three local water agencies roughly estimates that the water agencies could exhaust most of their mitigation contributions as early as 2025, at which time any state financial obligations will commence. Although this financial responsibility could materialize in just over 10 years, it is currently unknown how significant the State's financial obligations might be.

The State has not yet performed a cost estimate to determine how much it may need to pay for mitigation costs under the QSA. Legislation enacted in 2003 to facilitate the implementation of the QSA requires the secretary of the California Natural Resources Agency (Resources Agency), in consultation with other entities, to undertake an ecosystem restoration study to determine a preferred alternative for restoring the Salton Sea ecosystem and permanently protecting the wildlife dependent on it. In May 2007 the Resources Agency published its Salton Sea Ecosystem Restoration Program Preferred Alternative Report and Funding Plan (Preferred Alternative Report). In the Preferred Alternative Report, the Resources Agency estimated—based on a technically feasible, worst-case scenario—that construction costs for fulfilling a portion of the QSA's mitigation requirements could be $801 million, with annual operations and maintenance costs of roughly $50 million for many years thereafter. Because this estimate is in 2006 dollars, the actual costs under this scenario are likely to be significantly greater when adjusted for inflation. However, this cost estimate was based on conditions that were known at the time it was developed, and it does not reflect all of the mitigation costs the State may incur in satisfying its financial obligations under the QSA. The State will ultimately be financially responsible for any QSA-related mitigation costs once the three local water agencies finish making their payments.

The 2003 legislation also establishes the State's broad goals for restoring the Salton Sea. Unlike mitigation, which refers to activities that reduce the impact of an action, restoration refers to actions that bring back something that previously existed. An example of mitigation might be reducing dust emissions from exposed seabed, while an example of restoration might be constructing and maintaining bird habitat that has been lost. Although the QSA imposes a number of requirements on the State related to mitigation, it does not impose requirements related to restoration. However, by performing restoration activities now that are also designed to reduce the need to undertake mitigation activities in the future, the State could potentially decrease its future mitigation costs. For example, according to a California Department of Fish and Wildlife (Fish and Wildlife) official, restoring habitat could lessen the amount of exposed dry seabed in the future, thereby reducing the need to mitigate dust. To address restoration of the Salton Sea and the State's QSA-related mitigation responsibilities, the Legislature required the Resources Agency to evaluate several alternatives for restoring the Salton Sea, which the Resources Agency presented in its Preferred Alternative Report. Nonetheless, more than six years after the report was submitted, none of the alternatives have been fully funded, perhaps because of their high construction costs, which range from an estimated $2.3 billion to $8.9 billion.

Despite the Legislature's stated restoration goals, the Resources Agency has indicated that it cannot fully implement a long-term restoration plan without additional funding. To address this, the Legislature provided funding in the fiscal year 2013-14 Budget Act for the Resources Agency to coordinate with a local entity in creating a feasibility study. According to the fiscal year 2013-14 Enacted Budget Summary, the feasibility study will, among other things, update the analysis from previous restoration planning efforts and develop funding options to achieve restoration goals. However, the provisions governing the feasibility study do not impose a specific deadline for completing the study, do not fully prioritize the steps required to achieve the State's broad restoration goals, and do not require the study to identify restoration activities that could lessen future state mitigation costs. Lacking such guidance, Resources Agency officials have stated the Resources Agency will use an advisory committee to determine the contents of the study. Although we agree that soliciting input from stakeholders is a sound idea, we believe it is critical for the Legislature to clearly set forth its specific expectations in law regarding the feasibility study.

It is imperative that the feasibility study also include viable funding options for the proposed restoration activities. In particular, the 2003 legislation created the Salton Sea Restoration Fund (Restoration Fund) to be a dedicated source of funding for the State's restoration efforts. However, the Restoration Fund currently receives limited funding. As of June 30, 2013, the projected amount of money the fund can anticipate receiving through 2047—the year in which certain required payments from local water agencies to the Restoration Fund will end—totals roughly $81.8 million, or $2.2 billion less than the cost to construct the least costly restoration alternative included in the Preferred Alternative Report. To address this significant disparity, recent legislation provides for the feasibility study to analyze funding sources and economic development opportunities that might serve as revenue sources for the Salton Sea's restoration efforts.

In the absence of additional funding for a long-term restoration plan, an official from the Resources Agency maintains that it must take an incremental approach to the restoration of the sea, meaning it can only undertake restoration activities as additional funding becomes available. Consequently, the Resources Agency has worked with Fish and Wildlife and the California Department of Water Resources (Water Resources) over the last several years on planning the Species Conservation Habitat Project (Habitat Project). Based on a project included in the Preferred Alternative Report, the Habitat Project calls for the restoration of 3,770 acres of the sea—a small fraction of the roughly 200,000 acres the recommended alternative within the Preferred Alternative Report proposes to restore—at a cost of $132 million. However, Fish and Wildlife and Water Resources' officials maintain that the funds currently in the Restoration Fund will only support restoration of 600 to 700 of those acres, at a cost of roughly $30 million. Nevertheless, the agencies are near completion of the planning phase of the project and intend to begin construction after June 2014. Not surprisingly, during our audit period—fiscal years 2010-11 through 2012-13—the vast majority of expenditures from the Restoration Fund relate to Fish and Wildlife and Water Resources' personnel and contracts with consultants for planning of the Habitat Project. During our audit period, we also found that expenditures from the Restoration Fund were reasonable, appropriate, and furthered the purposes for which the fund was created.

RECOMMENDATIONS

LEGISLATURE

To ensure that the feasibility study it recently funded will provide it with meaningful and timely information, the Legislature should enact legislation that does the following:

RESOURCES AGENCY

To ensure that the Legislature has the information necessary to meet the State's restoration goals and to plan for the State's future financial obligations related to mitigation, the Resources Agency should work with Fish and Wildlife and Water Resources to do the following:

AGENCY COMMENTS

The Resources Agency does not have any concerns with our recommendations and stated that it looks forward to working with the Legislature on this very important issue.

1 The local water agencies are paying their mitigation contributions in installments over many years with interest accruing on the unpaid balances at an annual rate of 6 percent.