Draft Budget

Abstract of Fiscal Year 2002-03 Draft Budget and Draft Work Program

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Attached is the Executive Officer's transmittal letter to the Governing Board and the Budget Summary from the Fiscal Year 2002-03 Draft Budget and Draft Work Program. The Budget Summary is a brief overview of AQMD and includes program and financial information.

If you have any questions about the Fiscal Year 2002-03 Draft Budget and Draft Work Program, please contact Cheryl Wade, Financial Services Manager, at (909) 396-2767.

South Coast Air Quality

Management District Board

Transmittal of the Executive Officer’s

This proposed draft Budget and Work Program continues the AQMD’s commitment to protecting public health. For Fiscal Year (FY) 2002-03, I am proposing a budget that decreases expenditures by approximately $3.8 million (4%) over the FY 2001-02 amended budget. A significant portion of this decrease reflects the 33% reduction ($2.1 million) in State Subvention funding as a result of the Governor’s proposed cutbacks in the State budget. While staff is actively working to request restoration of these funds, at this point in time prudent fiscal policy dictates that we assume that the funding is lost. Therefore, to mitigate a portion of this reduction in State support, this request unfunds 29 of the 32 positions added last year (with the new Subvention dollars) to enhance AQMD’s compliance activities. Such action will significantly impact our permit processing and enforcement programs.

Moreover, since FY 1991-92, the AQMD has reduced staffing and program costs despite increased program requirements. This year’s proposal is $99.2 million and includes funding for 785 of the proposed 814 authorized positions. Compared to ten years ago, this request reflects 33% less staffing and a 13% reduction in budgeted expenditures. Adjusting today’s dollar for inflation, this proposal is 36% less than the FY 1991-92 adopted budget. Despite these reductions and the success of several streamlining measures adopted by the Board, revenues in past years had not kept pace with increased program requirements and declining emissions. Last year, based on an independent assessment of AQMD’s fee structure and an audit of the agency by the State Auditor which recommended increases in both permit processing and emission fee revenues, the Board approved adjustments to the permit processing fees and emission fees to more closely recover program costs. These adjustments are being phased-in over a two-to-three year period. Therefore, to fund this year’s budget request I am proposing an across-the-board fee increase of 2.5% consistent with the change in the California Consumer Price Index plus an appropriation of the remaining balance of the Subvention Reserve.

The budget is based on the goals and priorities presented to the Governing Board at the February 1, 2002 meeting. These goals emphasize achieving a balanced budget and improving efficiency and productivity; implementation of the SIP; implementation of the Board’s eight Strategic Alliance Initiatives; implementation of the Fleet Rules; pursuing environmental justice activities; reduction of Air Toxics; and continuing to address the energy crisis.

The public and the business community have many opportunities to participate in the budget process. These include meetings of the Budget Advisory Committee which is made up of representatives from the business and environmental communities; two public workshops -- one on the proposed changes to the fee rule held on March 8, 2002 and one to discuss the proposed budget and work program scheduled for April 17, 2002; and two public hearings. In addition, the AQMD held a follow-up public consultation meeting with businesses on March 28 to further discuss the impacts of the proposed amendments to the fee rule.

In summary, while the proposed budget for FY 2002-03 represents a decrease form the current amended budget, it represents an approximate 3.2% increase over last year’s originally adopted budget. This increase reflects funding to cover approved (by one bargaining unit) and proposed salary and benefit adjustments with its employees; significant increases in liability and workers compensation costs; and increases in retirement costs associated with higher contribution rates. Estimated revenues for FY 2002-03 are $98,366,900 which with the addition of the remaining $789,615 from the reserve for legislatively directed Subvention activities, brings funding in balance with expenditures. As in past years, the AQMD will continue its efforts to make progress toward attaining the federal and state clean air mandates in the most cost-effective manner possible.

Table Of Contents

• Preface
• Introduction
• Government
• Mission
• Budget
• Air Quality
• Mandates
• Programs
• Work Program
• Fiscal Year 2002-2003 Budget

The following represents the preliminary Draft Budget and Work Program of the South Coast Air Quality Management District (AQMD). This proposal is available for public review and comment during the month of April and will be discussed at two workshops, one for the public and one for the Governing Board scheduled for April 17, and April 19, respectively. A final Draft Budget and Work Program, which may include changes based on comments from the public and Board, will be presented for adoption at a public hearing scheduled for May 3, 2002.

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The South Coast Air Basin has suffered unhealthful air since its rapid population growth and industrialization during World War II. While air quality has improved, the residents of the Basin still breathe some of the most polluted air in the nation.

The 50-year history of the region’s air pollution control efforts is, in many ways, one of the world’s key environmental success stories. Peak ozone levels have been cut by almost three-fourths since air monitoring began in the 1950s. Population exposure was cut by 50% during the 1980s alone.

Since the late 1940s when the war on smog began, the region’s population has tripled from 4.8 million to over 15 million; the number of motor vehicles more than quadrupled from 2.3 million to 9.7 million; and the area has grown into one of the most prosperous regions of the world. This phenomenal economic growth illustrates that pollution control and strong economic growth can coincide.

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The South Coast Air Quality Management District (AQMD) began operation on February 1, 1977 as a regional governmental agency established by the California Legislature pursuant to the Lewis Air Quality Management Act. The AQMD encompasses all of Orange County and parts of Los Angeles, San Bernardino and Riverside Counties, representing over 15 million citizens. It succeeded the Southern California Air Pollution Control District and its predecessor four county air pollution control districts, of which the Los Angeles County Air Pollution Control District was the oldest in the nation, having been formed in 1947. The AQMD Governing Board is composed of 12 members, including four members appointed by the Boards of Supervisors of the four counties in AQMD’s jurisdiction, five members appointed by cities in the AQMD’s jurisdiction and three members appointed by the Governor, the Speaker of the State Assembly and the Rules Committee of the State Senate, respectively. The members appointed by the various Boards of Supervisors and cities consist of one member of the Board of Supervisors of Los Angeles, Orange, Riverside, and San Bernardino Counties, respectively, and a mayor or member of the city council of a city within Orange, Riverside and San Bernardino Counties. Los Angeles County cities have two representatives, one each from the western and eastern portions of the county.

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The mission of the AQMD is to protect public health from air pollution while being sensitive to the economic needs of the Basin’s businesses. It does this through a comprehensive program of planning, regulation, education, enforcement, compliance incentives, technical innovation and promoting public understanding of air quality issues. Over the past several years the AQMD has implemented a policy of working with regulated businesses to ensure their participation in making the rules which will impact them. This cooperative approach has resulted in greater business support for achievement of air that is healthful to breathe.

To carry out its mission the AQMD has developed a set of Goals and Priorities, which is evaluated and revised annually and presented at a public hearing. The following Goals have been established for FY 2002-2003:

1. Ensure expeditious progress toward clean air.
2. Ensure equitable treatment for all communities.
3. Operate efficiently and in a manner sensitive to businesses.

These goals are the foundation for the AQMD’s Work Program. Each goal is supported by multiple activities, which target specific areas of program performance. A public hearing to receive input on the Goals and Priorities for FY 2002-2003 was held on February 1, 2002.

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The AQMD’s annual appropriated budgets are adopted for the general fund. Budgets are adopted on a budgetary basis that includes encumbrances as expenditures. All annual appropriations lapse at fiscal year end to the extent they have not been expended or encumbered. Amendments to increase the budget must be approved by the Governing Board.

To meet its financial needs, the AQMD utilizes a system of evaluation fees, annual operating fees, emission fees, Hearing Board fees, contracts, penalties/settlements and investments that generate approximately 7376% of its revenues. The remaining 2724% of its revenue are from an Environmental Protection Agency grant, Air Resources Board subvention, and California Clean Air Act Motor Vehicle fees. Beginning with its Fiscal Year 1978-79 Budget, the AQMD no longer received any property tax moneys.

The draft budget consists of two volumes. The first volume is the Draft Budget and Draft Work Program that presents the primary information regarding proposed program revenues and expenditures for the new fiscal year and a forecast for the second and third years. The second volume is the Supporting Documentation, which contains detailed expenditure and program justifications supporting the draft budget and work program requests. The budget is a line-item budget structured by office. The budget is supplemented with a work program which estimates staff resources and expenditures along program and activity lines.

This draft budget and work program is scheduled for adoption by the South Coast Air Quality Management District Governing Board at its May meeting. The period covered by this budget is Fiscal Year 2002-2003, which ends on June 30, 2003.

The AQMD has a comprehensive budget process, which establishes goals and priorities and monitors progress in meeting those goals and priorities.

Up to and including the budget adoption hearing by AQMD’s Governing Board, the public and the business community have several opportunities to participate in the budget process. The opportunities include:

• meetings of a budget advisory committee made up of business and environmental representatives
• two public workshops—one to discuss proposed changes to the fee rule and one to discuss the proposed budget
• two public hearings—one on the Goals and Priorities and one on the proposed budget

The following flow chart represents the major milestones that take place in the development of the AQMD budget.

Following input from the public, Budget Advisory Committee, and Governing Board the draft budget for the ensuing fiscal year is prepared and made available in early April of each year. In May the AQMD Governing Board holds a public hearing on the adoption of a final proposed operating budget, including final fee schedules. The adopted budget becomes operative on July 1.

Since the early 90’s the AQMD has experienced a decline in expenditures as well as a significant reduction in staff.

To meet its program commitments, despite new federal and state mandates and increased workload complexity, the AQMD has successfully streamlined many of its operations reducing the cost of its programs. Compared to FY 1991-92, this year’s proposal reflects staffing and expenditure levels that are 33% (378 FTEs) and 13% ($13.8 million) below FY 1991-92 levels. When adjusted for inflation, this year’s expenditure request is 36% less than FY 1991-92.

This year’s request proposes the use of approximately $790 thousand in reserves set-aside for Subvention activities along with estimated revenues of $98.4 million to balance a proposed expenditure budget of $99.2 million. Despite a proposed CPI adjustment to fees and increased revenue from fee adjustments made in FY 2001-2002, the Governor’s recently announced 33% reduction ($2.1 million) in State Subvention support to the AQMD will impact AQMD’s compliance programs. To offset the Governor’s proposed reduction, this year’s request includes the unfunding of 29 of the 32 positions added last year in response to the special Subvention increase.

To continue our progress toward meeting federal and state health standards, the AQMD has implemented several programs in recent years such as market-based incentives (RECLAIM), permit streamlining, source education, business assistance, and technology advancement. For FY

2002-2003 emphasis will be on implementing the Fleet Rules; implementing the Board’s eight Strategic Alliance Initiatives; implementing the State Implementation Plan (SIP); pursuing environmental justice activities; reducing Air Toxics; and continuing to address the energy crisis.

The following table compares AQMD budgets to actual/amended expenditures and revenues for Fiscal Years (FY) 2000-2001 and 2001-2002 and proposed for 2002-2003.

¹ $99.2 million includes the remaining $789,615 in Subvention revenue reserved in the FY 2001-02 Fund Balance for compliance activities.

This draft budget request represents an approximate $3.8 million decrease in expenditures from the FY 2001-02 amended budget and a $1.7 million increase from the final budget of two years ago. There are several significant changes to this year’s budget request. They include the unfunding of staff as a result of the $2.1 million reduction in Subvention funding mentioned previously and increases of approximately $2.8 million to cover the estimated first year Salary and Benefit costs associated with new labor agreements. The AQMD has completed negotiations with its professional employees and is continuing to meet with the two remaining bargaining groups. Any changes necessary to reflect the results of these ongoing negotiations will be brought back to the Board. Also included are estimated increases of $800 thousand in retirement contributions as a result of retirement rate changes and increases in liability and workers compensation costs. This years proposal adds four new clerical positions in support of increased work related to facilities management, contracts processing and legal support, bringing AQMD’s total staffing request to 814 positions.

To balance the budget, the AQMD is proposing an across-the-board fee increase consistent with the change in the California Consumer Price Index (CPI) of 2.5%, plus an appropriation of the remaining Subvention Reserve.

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The four-county Southern California region, designated for air quality purposes as the South Coast Air Basin, has the dirtiest air in the United States. The federal government has designated six pollutants that are pervasive enough across the nation to warrant national health standards. Called "criteria pollutants," these are: ozone (O₃); nitrogen dioxide (NO₂); particulates (PM₁₀); fine particulates (PM_2.5); carbon monoxide (CO); lead (Pb); and sulfur dioxide (SO₂).

In addition, the State of California through the ARB sets ambient air quality standards for these same pollutants. California’s standards generally are tighter than the federal Environmental Protection Agency’s, reflecting the conclusion on ARB’s part that the federal standards are not adequate to protect public health in this region. Toxic compounds also are a potential problem. More toxic pollution is emitted into the air in the South Coast Basin than in any other region in California. The Basin’s large number of cars and small sources—including small businesses and households using ozone-forming consumer products and paints—compounds the problem.

Ozone levels have fallen by about three-quarters since peaks in the mid-1950s. Lead, nitrogen dioxide, and sulfur dioxide levels have gone down from nonattainment to full attainment of federal health standards. 2001 was the cleanest ozone year on record and preliminary analysis of the 2001 data shows that the downtrend in number of days exceeding state and federal standards is consistent with the previously reported downtrend in the Basin.

Particulate and carbon monoxide levels have also decreased in the past decade but not to the degree which ozone has improved. While our air quality is getting better it remains the most unhealthful in the nation.

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The South Coast AQMD is governed and directed by several state laws and a comprehensive federal law which provide the regulatory framework for air quality management in this Basin. These laws require the AQMD to take prescribed steps to improve air quality. Among the major statutes are:

Under state law, the AQMD must develop and submit to the state at least every third year an Air Quality Management Plan (AQMP) demonstrating how the region will achieve state and federal ambient air quality standards, or at a minimum demonstrate that all feasible measures are being carried out to meet state air quality standards. To date, the AQMD’s Governing Board has adopted such plans demonstrating attainment in 1989, 1991, 1994, 1996 and amendments in 1999. Earlier plans in 1979 and 1982 did not show attainment and predicted continued unhealthful air well into the next century.

Generally speaking, AQMD is responsible for stationary sources such as factories and businesses. The ARB is primarily responsible for mobile sources. The AQMD and ARB share responsibilities with respect to area sources. The AQMD and Southern California Association of Governments (SCAG) share some responsibilities with ARB regarding some aspects of mobile source emissions. Control of emissions from sources such as airports, harbors, trains, and federal facilities is shared by the federal EPA, ARB and the AQMD.

California Clean Air Act (AB 2595) requires air districts in California to adopt plans to meet state ambient air quality standards expeditiously. It mandates that AQMD’s attainment plans meet several specific requirements including:

• a 5% per year reduction in emissions (the plan can achieve less than 5% annual reduction if it includes every feasible measure and an expeditious adoption schedule);
   
• Best Available Control Technology (BACT) for new and modified sources;
   
• Best Available Retrofit Control Technology (BARCT) for existing sources;
   
• Measures to require a significant number of low-emissions vehicles in fleets.

Lewis-Presley Air Quality Management Act (SB 151) specifies additional, more stringent requirements for air quality plans in the South Coast area. It specifies that AQMD has responsibility to prepare the plan in conjunction with SCAG, which must prepare the portions of the plan relating to demographic projections, land use, and transportation programs.

State law also includes the following measures:

• authorizes AQMD to adopt market incentives such as the emissions trading program known as RECLAIM as long as they achieve reductions equivalent to command-and-control regulations;
   
• requires AQMD to establish a program to encourage voluntary participation in projects to increase the use of clean-burning fuels;
   
• requires AQMD to adopt and enforce rules to ensure no net emission increases from stationary sources;
   
• authorizes AQMD to adopt rules requiring clean fuel vehicles in fleets.

Air Toxics "Hot Spots" Information & Assessment Act (AB 2588) requires facilities that emit significant quantities of pollutants to prepare health risk assessments describing the impact of toxic contaminants on neighboring areas. If the AQMD determines that the toxic emissions create a significant risk, the public must be notified, and facilities must reduce emissions to below significant levels.

Tanner Air Toxics Process (AB 1807) requires ARB to adopt air toxic control measures to limit emissions of toxic air contaminants from classes of industrial facilities. Local air districts are required to enforce these regulations or adopt equally stringent regulations of their own.

The Clean Air Act. Under federal law, the AQMD must develop and submit to ARB for review and submittal to the federal EPA, an element of the State Implementation Plan (SIP) demonstrating how the region will achieve federal ambient air quality standards. In the case of ozone the plan was required to be submitted by November 15, 1994 and for fine particulates, PM₁₀, the plan was required to be submitted by February 8, 1997. Plans for other pollutants were submitted in earlier years. The federal Clean Air Act mandates that sanctions be imposed on an area if a suitable plan is not adopted. These sanctions can include loss of key federal funds and more stringent requirements on new or expanding industries. Specific requirements for our air quality management plan include stringent requirements plus LAER and offsets for major new sources. Federal law also requires an operating permit program for major stationary sources, known as Title V, which must be supported by permit fees. Also, air toxics regulations adopted by EPA pursuant to Title III must be implemented by AQMD.

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During the past 12 months, AQMD actively pursued the following specific programs as well as others:

Working closely with industry representatives, government agencies and members of the public, AQMD took several steps to help ease the state’s energy crisis while still protecting air quality, such as:

• Adopting several changes to its RECLAIM (Regional Clean Air Incentives Market) credit trading program to ensure the program meets its pollution reduction goals and to provide relief from the high emission credit prices many businesses had faced since 2000; and
   
• Adopting a measure that will increase the supply of particulate emission offsets to new and expanding power plants for the next three years. Amended Rule 1309.1 -- Priority Reserve will allow power plants to purchase PM10 emission reduction credits from AQMD's Priority Reserve for $25,000 per pound per day through 2003. Revenues from emission credits will be targeted to mobile source emission reduction programs.

AQMD adopted Rule 1195 -- Clean On Road School Buses -- the seventh and last of a series of clean fleet rules. The rule will gradually shift the region’s school bus fleet to clean-burning compressed natural gas and other clean technologies.

Emissions from the region’s 8,800 school buses, which run almost exclusively on diesel fuel, contain cancer-causing diesel soot. The buses also emit nitrogen oxides, which contribute to the region’s fine particulate and ozone pollution problems, both of which are associated with respiratory ailments.

AQMD also helped provide significant funding to assist school districts in acquiring compressed natural gas-powered or lower-emitting diesel buses.

In October 2001, the Jurupa Unified School District in Riverside County became the first school district in the region to convert its entire bus fleet to compressed natural gas models. AQMD awarded $3.23 million to Jurupa USD to help purchase a total of 34 full-sized compressed natural gas (CNG) buses and nine smaller gasoline-powered buses.

In addition, AQMD awarded a total of $34.7 million to school districts to assist in the purchase of 228 CNG and lower-emission diesel school buses and fueling stations.

AQMD, widely recognized for its seminal efforts in pursuing environmental justice, continued to implement its Environmental Justice Initiatives during the last year by:

• Hosting numerous Town Hall meetings in the four-county region to offer residents an opportunity to express their air quality concerns directly to AQMD Board members and executives;
   
• Initiating a $1.5 million ethnic outreach program to Asian-American, African American and Latino communities; and
   
• Further reducing toxic diesel emissions through incentive programs.

AQMD’s Governing Board adopted an Air Toxics Control Plan in March 2000 to reduce cancer risk to residents. The agency achieved several goals in the plan including:

• Adopting Rule 1425 – Film Cleaning and Printing Operations, to reduce emissions of the toxic air contaminant perchloroethylene ("perc"); and
• Developing a proposed rule for adoption this year to reduce perc emissions from dry cleaners.

As the result of a concerted streamlining effort and the use of temporary help, AQMD reduced its air pollution permit backlog by 37 percent this past year and shortened the time required for businesses to obtain permits.

The agency has put into practice more than two dozen streamlining measures. As a result, while the permit processing staff has been reduced by 40 percent over the last decade, the number of permits processed by each engineer has almost doubled.

AQMD conducted several activities to help educate the public, government agencies and businesses, including:

• Implementing a Clean Air Choice labeling program to help educate potential car buyers on the lowest-emission cars, trucks, vans and sport utility vehicles; and
• Hosting the highly successful Clean Air Technologies 2001 conference at the Disneyland Hotel in Anaheim, attended by about 400 scientists and policy makers from across the region and around the world.

In January 2002, upon her appointment as Chairman of the AQMD Governing Board, Newport Beach City Council member Norma J. Glover announced eight Strategic Alliance Initiatives to improve the region's business climate and further reduce air pollution.

AQMD staff developed and the Governing Board adopted a work plan to carry out the initiatives, which are well underway. The initiatives are:

1. Modernize the Emission Reduction Credit System to ensure that existing businesses can expand and new ones can start up while still protecting the region's air quality. Emission reduction credits, required by state and federal law, may be in short supply in the future under the current system.
   
   
2. Petition the U.S. Environmental Protection Agency to Review Outdated Policy Interpretations of the Clean Air Act to give AQMD greater flexibility in developing its clean air plans and in permitting new facilities. A working group will make recommendations to the full Governing Board, which will in turn request changes from EPA.
   
   
3. Create a Natural Gas Vehicle Partnership of vehicle and engine manufacturers, fuel providers and other interested parties to advance natural gas vehicle technology and assist in implementing AQMD's Clean Fleet rules.
   
   
4. Form a Multi-Regional Alliance for Clean Air to share technical information and political resources with other major metropolitan areas in the United States experiencing air pollution problems.
   
   
5. Create a Strategic Alliance on Advanced Air Pollution Research with input from scientists in academia, government, community organizations and businesses to develop a three-year research plan on such topics as ultrafine particle pollution and risk assessment of cumulative toxic risk.
   
   
6. Form a Strategic Alliance on Environmental Justice for 2002 to review AQMD's past Environmental Justice activities and consider developing new programs such as the use of monetary air pollution penalties to improve air quality in impacted communities.
   
   
7. Form a Strategic Alliance on Clean Fuel Funding with fleet operators to help secure long-term funding for clean fuel fleets, particularly for local governments.
   
   
8. Develop a Negotiated Rulemaking Pilot Program to test a process used periodically by EPA where rules are developed using an outside facilitator and a formal negotiation process between businesses and the regulatory agency. AQMD would conduct a pilot program on one rule only and would select a measure that goes beyond the requirements of the agency's clean air plan.

The agency carried out several other significant air quality improvement programs.

Among them:

• Initiating the preparation of a new dust control plan for the Coachella Valley. After several years of complying with federal PM10 health standards, the area has slightly exceeded the standard during the last three years, triggering the need for a new plan; and
• Proposing an enhancement to the state’s Smog Check program in several Inland Empire communities to further reduce mobile source emissions.

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AQMD expenditures are organized into nine Work Program Categories which describe its program activities. These categories are: Policy Support; Monitor Air Quality; Develop Programs to Achieve Clean Air; Develop Rules to Achieve Clean Air; Advance Clean Air Technology; Timely Review of Permits; Ensure Compliance with Clean Air Rules; Maintain a Program of Customer Service; and Operational Support.

Each activity within the Work Program falls into one of the above categories. The Work Program ties the goals and priorities of the agency to each of its program activities, identifying resources, performance measures/outputs and legal mandates. A complete description of each program category along with a detailed work program sort by program is included in the section on Work Program. The justifications in support of each activity are contained in the second volume of the Draft Budget Supporting Documentation. The pie chart that follows represents budgeted expenditures by program for FY 2002-2003.

The following table compares budgeted AQMD Work Program activities by category for FY 2001-02 and proposed for FY 2002-03.

¹ Difference reflects reallocation from Develop Rules to Develop Programs, Permits and Clean Air Technology.
² Incorporates software development for compliance and financial systems and enhanced facility management.
³ Reflects deletion of Temporary Engineers for Permit Backlog reduction.
⁴ Includes enhanced outreach to Local Gov’t; enhanced public education and environmental justice activities.

Developing solutions to the air quality problem involves highly technical processes to meet the legal requirements of California and federal laws.

The first step is simply to determine the smog problem by measuring air pollution levels. AQMD today operates 32 monitoring stations throughout its four-county jurisdiction. These range from full-service stations that measure all criteria pollutants, as well as some toxic pollutant levels, to those which measure fewer pollutants in critical areas. These measurements provide the basis for our knowledge about the nature of the air pollution problem and for all planning to address this problem.

The AQMD in cooperation with ARB and SCAG estimates the sources of emissions causing the air pollution problem. Nature itself causes a small portion of the emissions and must be considered. In general, the AQMD estimates stationary and natural sources of emissions. SCAG develops the information necessary to estimate population and traffic, and ARB develops the information necessary to estimate mobile- and area-source emissions using the SCAG traffic data.

AQMD pulls this data together in the AQMP for use in developing the necessary control strategies.

The AQMD’s planners take monitoring data and estimates of pollution sources and enter it into state-of-the-art computer programs to model the movement and peak locations of smog. Through a series of "what if" questions, planners can look at different control scenarios to determine what strategies best reduce air pollution at the least cost.

Due to the nature of air pollution, these models can be very complex. Some pollutants are not emitted directly into the air but are products of photochemical reactions in the atmosphere. For example, VOCs mix with nitrogen dioxide (NO₂) and "cook" in sunlight to form ozone; similarly, nitrogen oxide gases from tailpipes and smokestacks can be transformed into nitrates or particulates (PM₁₀). The planners thus must take into account the location and size of each source, how the wind carries the emissions, how different emissions react to one another once they are in the atmosphere, and where the pollution is eventually carried. This means considerable weather data must be collected along with the emissions data.

With emissions data and an air quality model in place, planners can develop possible control strategies and scenarios. As mentioned earlier, for the most part, strategies to reduce driving are developed by SCAG, while mobile source control standards are developed by ARB. The AQMD focuses most of its effort on stationary source controls.

The AQMD has taken a more proactive role in recent years trying to persuade the EPA to adopt national standards to address sources more appropriately within EPA’s jurisdiction, such as interstate trucks, trains, airplanes and ships. AQMD’s concern is that any emission reductions that are not made by these sources can only be made up by those sources under its jurisdiction--local businesses.

Once a plan of emission controls to achieve federal standards is outlined, the AQMD is required to hold multiple public meetings to present the proposed control strategies and receive public input. The AQMD also must complete a socioeconomic analysis of the control program. The AQMD maintains an ongoing and independent advisory group of outside experts for both its air quality and socioeconomic modeling.

To meet federal air quality standards, the 1999 amendments to the 1997 AQMP calls for significant reductions from 2010 projected baseline emissions:

• 51% for VOCs
   
• 0% for sulfur oxides
   
• 38% for carbon monoxide
   
• 27% for nitrogen dioxide
   
• 33% for directly emitted particulates

These reductions, while meeting federal standards, will still not result in attainment of all California air quality standards since these are more stringent than federal standards. The attainment plan is estimated to cost $1.76 billion dollars per year to achieve and will provide more than $5.7 billion per year in benefits relative to achieving the federal standards.

Dependent on ARB’s update to the mobile source portions of the plan, the AQMD plans to revise the AQMP by the end of year 2002. The new AQMP will lay the foundation for future AQMPs to address the new federal ozone and fine particulate air quality standards. In addition, ARB has indicated that by 2003 AQMD should provide ozone attainment demonstrations of the state standard.

The regulatory process, known as rulemaking, takes the concepts of control measures outlined in the AQMP and turns them into proposed rule language. This process involves:

• Extensive research on technology

• Site inspections of affected industries to determine feasibility
• Typically a year or more of public task force and workshop meetings
• In-depth analyses of environmental, social and economic impacts
• Thorough review with appropriate Governing Board Committees

This extensive process of public and policymaker participation encourages consensus in development of rule requirements so that affected sources have an opportunity for input into the rules which will regulate their operations. Once the requirements are developed, the proposed rule, along with an environmental impact report and a socioeconomic report, is presented to the Governing Board at a public hearing. Public testimony is presented and considered by the Board before any rule is adopted.

The AQMD issues permits to construct and operate equipment to companies to ensure equipment is operated in compliance with adopted rules. Follow-up inspections are made to ensure that equipment is being operated under permit conditions.

In the late 1980s, AQMD recognized that technological innovation, as well as rule enforcement, would be necessary to achieve clean air standards. So it created the Technology Advancement Office to look for and encourage technical innovation to reduce emissions. The Legislature supported this effort by providing a $1 surcharge on every DMV registration fee paid within the AQMD. These funds have been matched at a ratio of approximately four-to-one with funds from the private sector to develop new technologies such as electric and low-emission vehicles, low-NO_x burners for boilers and water heaters, zero-pollution paints and solvents, fuel cells and other innovations.

An additional $4 vehicle registration fee was authorized by the state legislature in 1990. These fees are administered through the AQMD with $1.20 going to the AQMD for mobile source emissions reductions, $1.60 subvened directly to cities and counties to support their air quality programs, and $1.20 to the Mobile Source Reduction Review Committee. This outside panel established by state law makes the decisions on the actual projects to be funded from this portion of the revenue.

In the end, AQMD’s efforts to clean up the air will be successful only to the extent that the public understands air quality issues and supports and participates in our cleanup effort. Thus, the AQMD strives to involve and inform the public through the Public Affairs Office, public meetings, publications, the press, and—to the extent limited funds are available—free and paid public service announcements.

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The following table compares the 2001-2002 adopted budget to the proposed budget for 2002-2003. The middle column is the current 2001-2002 budget that includes Board-approved midyear adjustments.

The proposed budget for FY 2002-2003 represents a decrease of approximately $3.8 million from current budgeted expenditures. The amended budget includes midyear increases associated with special funding from the Environmental Protection Agency to implement projects in the areas of Photochemical Assessment Monitoring System (PAMS) and PM_2.5 air monitoring; continuation of the California Air Resources Board Children’s Health Study and increased California Energy Commission funding for alternative fuels infrastructure projects; Clean Fuel Fund projects for website upgrades and a natural gas fueling station; funding to privatize portions of the Annual Emissions Report program; and an appropriation from the AES Settlement Fund for community outreach assistance.

Comparing the 2002-2003 budget proposal to the May 2001 adopted budget; this budget proposal represents an increase of approximately $3.1 million over last year’s adopted budget. This increase reflects the addition of $3 million in Salary and Benefit costs associated with four new positions and the estimated cost of labor agreements; $800 thousand in additional retirement costs associated with rate increases ranging between 15% and 20%; and a $350 thousand increase in the Insurance account to cover anticipated higher liability and workers compensation costs. These total cost of these increases are offset somewhat by the unfunding of 29 positions related to Subvention activities.

The pie chart below represents proposed expenditures by office for FY 2002-2003.

Comparison of Revenues

Each year, in order to meet its financial needs, the AQMD Governing Board adopts a budget supported by a system of permit evaluation fees, annual operating fees, emission fees, Hearing Board fees, toxic "hot spots" fees, and transportation plan fees which are estimated to generate approximately $66.9 million or about 68% of AQMD revenues. Other sources, which include contracts, penalties/settlements, investment, and miscellaneous income, generate approximately 8% of total revenues. The remaining 24% of revenue will be received in the form of EPA grants, ARB subvention, and California Clean Air Act motor vehicle fees.

The following table compares the 2001-2002 adopted revenues to the proposed revenues for 2002-2003. The middle column is the adjusted 2001-2002 revenue that includes Board-approved midyear changes.

Revenues from stationary sources are estimated to increase by approximately $4.6 million as a result of the proposed CPI change of 2.5%; reduction in the permit processing backlog and increases in the permit processing rates to more closely recover permit processing costs; and the emission fee assessment of $75.00 per facility for emissions between 0–4 tons. The 2001 adopted changes in permit processing and emission fee rates addressed the findings of the State Auditor who recommended that fee rates be adjusted to recover program cost and that all sources (not just those above 4 tons) pay emission fees. These changes have been phased-in over a two-year period.

Mobile source revenues that are subvened to the AQMD by the Department of Motor Vehicles (DMV) are projected to increase slightly, according to the DMV, over FY 2000-2001 budgeted revenues. Beginning with FY 1999-2000, Clean Fuel contract activities and revenues are recorded in a special revenue fund outside the general fund.

The Environmental Protection Agency 103/105 grants are expected to remain at prior year levels. However, the Governor’s proposed budget for FY 2002-03 include a significant reduction (33%) in the statewide Subvention program, representing a $2.1 million reduction in funding to the AQMD.

Over the past several years, total permit fees (including permit processing, annual operating permit, and emissions based fees) collected from stationary sources has dropped 10% (greater if adjusted for inflation) from $66.8 million in 1991-92 to $60.4 million (estimated) in 2001-02. In 2001 the Board adopted adjustments to the permit processing and emissions fees (phased-in over two years) which would more closely recover the cost of AQMD programs. This year’s budget request includes the second year phase-in of those stationary source fee rate increases plus an adjustment for the change in the California CPI.

Debt Structure

Installment Sale Revenue Bonds were issued by the South Coast Air Quality Management District Building Corporation (Corporation) in August 1988 and September 1989 for the purpose of financing the building of the AQMD Diamond Bar Headquarters. The bonds are secured by a pledge of the semiannual payments to be made by the AQMD pursuant to an Installment Purchase Agreement between the Corporation and AQMD, whereby the AQMD is required to make the debt service payments on the Corporation’s bonds. On December 1, 1992, AQMD’s obligation to the Corporation under the installment purchase agreement was refinanced to take advantage of lower interest rates. In August 1998 the AQMD further reduced its debt service through the defeasance of a portion of the debt with proceeds from the sale of its El Monte facility.

The annual payment requirements under the installment purchase agreement are as follows:

Annual Debt Service Requirement

Pension Obligation Refunding Bonds were issued jointly by the County of San Bernardino and the AQMD in December 1995 to refinance their respective obligations to the San Bernardino County Employee’s Retirement Association for certain amounts arising as a result of retirement benefits accruing to members of the Association. This increased debt service will be offset by a larger reduction in retirement payments to the Association.

The annual payment requirements under the refunding bonds are as follows:

Annual Debt Service Requirement

The AQMD is projecting an undesignated fund balance for June 30, 2003 of $16,669,771. Following are the projected Reserves and Designations at June 30, 2003.

Reserves represent portions of the fund balance set aside for future use and are therefore not available for appropriation. These reserves are made-up of encumbrances which represent the estimated amount of current and prior years’ unperformed purchase orders and contract commitments in process at year-end; inventory which represents the value at cost of office, computer, cleaning and laboratory supplies on hand at year-end; and subvention which was originally established (due to the lateness of the award) to account for the unearned portion of the FY 2000-2001 award that was legislatively restricted to enhance compliance activities. This years proposal appropriates the remaining balance to the FY 2002-03 budget to carry out enhanced compliance activities and therefore projects a zero balance for June 30, 2003. Designations in the fund balance indicate plans for use of financial resources in future years. The AQMD is self-insured for general liability, workers’ compensation, automobile liability, premise liability, and unemployment. These designations have been made to provide for unanticipated judgments against the AQMD, which exceed the budget. The designation for litigation/enforcement provides funding for outside legal support. The designation for budget stabilization, provides for revenue shortfalls in future year’s as revenues are not projected to keep pace with projected program maintenance costs. The designation for capital equipment replacement is to provide funding for the periodic purchase of costly replacement equipment or systems that have reached the end of their useful life. The designation for enhanced compliance activity is to provide funding for inspection/compliance efforts.

As mentioned at the beginning of this section on revenues, the AQMD currently receives the bulk of its funding (68%) from stationary sources and relies on State subventions and federal grants to support a majority of the remaining costs in such program areas as: air monitoring, regional modeling, emissions inventory, planning, rule making, public nuisance and emergency response. Over the past ten years the AQMD has made significant reductions in its workforce and budget (because State law caps AQMD fee rates) and relied on its reserves to fund ongoing program requirements. With last year’s Subvention increase, the AQMD enhanced its compliance program and proposed its first balanced budget in years. Unfortunately, the proposed 33% reduction in ARB subventions to local districts will force once again staffing and program reductions.

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