BOARD MEETING DATE: June 9, 2006
AGENDA NO. 2
(Continued from June 2, 2006 Board Meeting)

Amend Regulation III - Fees

SYNOPSIS:

Staff has prepared two options for Board consideration to amend Regulation III - Fees for FY 2006-07.  Both options incorporate proposals to better recover program costs and changes to clarify or correct existing language.  Both options also include new Rule 313, which is proposed to consolidate administrative fiscal activities such as fee surcharges and Fee Review Committee.  Option 1 includes an increase in fees reflecting the 2005 California Consumer Price Index (CPI) of 3.65 percent for most fee categories for FY 2006-07.  Furthermore, in order to better recover program costs, Permit Processing Fees, Annual Operating Permit Renewal Fees and Annual Operating Emission Fees are proposed to be increased by an additional increment above the CPI, resulting in a total increase of 10 percent for each of the next three years through FY 2008-09.  Option 2 proposes to increase all AQMD related fees by CPI for only FY 2006-07. 

COMMITTEE:

Stationary Source, April 28, 2006; Administrative, May 12, 2006

RECOMMENDED ACTION:

Adopt the attached resolution:

1. Certifying the Notice of Exemption for Proposed Amended Rules 301 – Permitting and Associated Fees (Option 1 and 2), 303 – Hearing Board Fees, 304 – Equipment, Materials and Ambient Air Analyses, 304.1 – Analyses Fees, 305 – Fees for Acid Deposition Research, 306 – Plan Fees, 307 – Fees for Air Toxics Emissions Inventory, 307.1 – Alternative Fees for Air Toxics Emissions Inventory, 308 – On-Road Motor Vehicle Mitigation Options Fees, 309 – Fees for Regulation XVI, 311 – Air Quality Investment Program (AQIP) Fees, 312 – Special Permitting Fees for Agricultural Sources and Proposed Rule 313 – Authority to Adjust Fees and Due Dates (Option 1 and 2).
2. Amending Rule 301 - Fees, by adopting only one of the following options:
   • Option 1 (staff recommendation) – 3.65% (CPI) increase in fees, except for permit related and emissions fees which will be increased by 10% in FY 2006-07, 10% in FY 2007-08 and 10% in FY 2008-09, or
   • Option 2 – 3.65% (CPI) increase in fees, and

in addition, for either option, specific amendments to better recover program costs and to clarify or correct existing language.

3. Amending Rules 303 – Hearing Board Fees, 304 – Equipment, Materials and Ambient Air Analyses, 304.1 – Analyses Fees, 306 – Plan Fees, 307 – Fees for Air Toxics Emissions Inventory, 307.1 – Alternative Fees for Air Toxics Emissions Inventory, 308 – On-Road Motor Vehicle Mitigation Options Fees, 309 – Fees for Regulation XVI and 311 – Air Quality Investment Program (AQIP) Fees, to increase these fees by 3.65% (CPI), better recover program costs and to clarify or correct existing language.
4. Adopting proposed Rule 313 – Authority to Adjust Fees and Due Dates (Option 1 or Option 2), corresponding to the proposed amended option of Rule 301 above adopted, to consolidate administrative fiscal activities.
5. Rescinding Rule 305 – Fees for Acid Deposition Research and Rule 312 – Special Permitting Fees for Agricultural Sources.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

Regulation III – Fees, establishes the fee rates and schedules associated with permitting, annual renewals, emissions and other activities that help fund most of AQMD's regulatory programs and services.  Shortfalls exist despite the significant budget reductions adopted and continuous improvements in performance and efficiency.  Key Contributors to the shortfalls include the declining emissions fee revenues, and the legally mandated retirement contributions, which in FY 2005-06, have increased $3.0 million.  However, as a result of recently-completed labor contracts with employees, a portion of the total retirement contribution costs will be shifted to the employees, with the employees paying, on an annualized basis, approximately $1.9 million of the total retirement contribution costs.  Retirement contribution rates for FY 2006-07 will increase on average 9%.

To address the shortfall in revenues, staff prepared two separate proposals (options) for consideration by the Governing Board.  Each option has the same amendments to more fully recover specific program costs and fee increases.  Option 1 proposes a 3.65% fee increase (the change in the 2005 California Consumer Price Index) for all source categories for FY 2006-07, except for permitting, annual renewal and emission fees which are proposed to be increased by a total of 10% annually for the next 3 years, to more fully recover program costs.  Option 2 proposes to increase fees by 3.65% for FY 2006-07 only, including permitting, annual renewal and emission fees, and will partially recover program costs.  Staff is recommending the adoption of Option 1 which, while not fully recovering all program costs will better do so than Option 2.

California Health and Safety Code Section 40500, et seq., established AQMD’s authority to adopt rules and regulations, including fee schedules intended to cover AQMD’s actual costs of cleaning the air.  There are currently twelve rules within Regulation III - Fees that set fees and procedures in three major categories:

1. Permitting, including permit processing and annual renewals of permits to stationary sources;
2. annual emission fees for facilities that emit toxic or criteria air contaminants; and
3. other District services including variances from the Hearing Board, compliance monitoring and testing, review of emission control plans, registration programs, fee schedules and certain training programs.

California Health and Safety Code sections relating to the fees of the AQMD allow staff to align fees with revenues.

The AQMD is currently in the process of finalizing the Budget for FY 2006-07.  The proposed fee amendments were formulated to address cost recovery by better aligning program revenue with program costs that have typically never been fully recovered.  Staff currently projects a $13.2 million dollar deficit in programs supported by Annual Operating Renewal fees, Annual Operating Emissions fees, Permit fees, and a $3.3 million shortfall in programs supported by Source Test/Lab Analyses fees, Hearing Board fees, Transportation Program fees, Subscription Services revenue, and Public Records Act revenue.  Factors impacting program costs include legally mandated funding for the San Bernardino County Employee Retirement Association (SBCERA), decreasing annual operating emissions fees revenues, and revenues remaining generally flat from permit processing and annual permit renewal fees.  Also, revenues from CPI adjusted emission fees have declined by more than 50 percent over the last fifteen years and have remained flat over the last several years due to rapidly declining emission inventories at rates exceeding annual CPI rates.  The proposed Fiscal Year 2006-07 Budget and Work Program are hereby incorporated by reference in this report.

Proposed Amendments

The amendments being considered for Regulation III focus on better recovering the costs of the various stationary source programs and clarifying existing language in the rule.  Two options have been prepared.  Both options incorporate proposals to better align program revenue with program costs and other amendments to clarify and streamline the rule.  Both options also adjust fees to address current and projected changes to AQMD costs.  Option 1 increases all fees by the CPI for the pending fiscal year, except fee rates for Permitting, Annual Renewal and Emissions are proposed to be increased by 10% for each of the next three years.  Option 2 proposes a one year fee increase consistent with the CPI of 3.65%. 

The following summarizes the proposed amendments and the anticipated cost recovery, as shown in Table 1.  Some of the proposed amendments produce less than $10,000 of cost recovery; however, these fees are being aligned for equity purposes so that the same fees are charged for comparable work performed and also to streamline and simplify the overall permit fee structure.  In both Option 1 and Option 2 alignment of fees for permitting activities are phased in over two years.

The major proposed amendments are listed below in sequential order (beginning with the rate increase, followed by Rule 301 and concluding with Rule 313 proposals):

Table 1.  PAR III Summary of Cost Recovery

Public and Board Review of Budget/Fee Options

PAR III was presented at a Public Workshop on April 12, 2006 and at the Governing Board Budget / REG III Workshop on April 28, 2006.  It was also presented at the Budget Advisory Committee on April 6, Stationary Source Committee on April 28, Administrative Committee on May 12, Ethnic Community Advisory Group on May 10 and the Local Government and Small Business Assistance Advisory Group on May 11, 2006.

AQMP and Legal Mandates

The fee rules are not part of the AQMP.  California Health and Safety Code §§ 40500 et seq. established the authority to “adopt fee schedules for the issuance of variances and permits to cover the reasonable cost of permitting, planning, enforcement, and monitoring related thereto,” and to assess fees for the approval of plans for the control of air contaminants and for regulatory programs affecting indirect and area sources (H& S §§ 40522 and 40522.5).

California Health and Safety Code Sections 40500.1, 40510, 40510.5 and 40523 authorize AQMD to increase fees consistent with annual increases in the California Consumer Price Index (CPI).  The AQMD can recover program costs from under-funded categories by assessing fees greater than the increase in the annual CPI provided that the Board makes a finding, based on evidence in the rulemaking record that the fee increase is necessary and will result in an apportionment of fees that is equitable.  Further, the permit fee increase is to be phased in over a period of at least two years.  The change in the California CPI applicable to the year 2005 is 3.65%.  To provide for a balanced budget and to maintain revenues required to support AQMD’s legally mandated functions of achieving and maintaining health-based state and federal air quality standards, staff is proposing amendments to Regulation III that will increase fees in order to more closely align program costs with program revenues.  These increases would exceed the annual CPI.  Staff believes the evidence included in the staff report and the referenced AQMD budget (Attachment B) allows the Board to make the required findings of necessity and equity.  These findings are included in the adopting resolutions.

Further discussion on legal authority is found in Attachment G, Staff Report on Proposed Amended Regulation III–Fees.

CEQA & Socioeconomic Analysis

AQMD staff has reviewed the proposed amendments to Rules 301, 303, 304, 304.1, 305, 306, 307, 307.1, 308, 309, 311, 312 and 313, and because the proposed project involves the modification and structuring of charges by public agencies for the purpose of meeting operating expenses and financial reserve requirements, it is statutorily exempt from CEQA, pursuant to state CEQA Guidelines § 15273 – Rates, Tolls, Fares, and Charges.  A Notice of Exemption will be filed with the county clerks immediately following adoption of the proposed project.

A Socioeconomic Assessment of the proposed amendments to Regulation III - Fees is included as Attachment H to this letter. 

Attachments (EXE 1.7mb)
A.     Summary of Proposals
B.     Abstract of Fiscal Year 2006-07 Draft Budget and Draft Work Program
C.     Rule Development Process
D.     Key Contacts
E.      Resolution
F.      Proposed Rule Language
G.     Staff Report
H.     Socioeconomic Assessment
I.       Notice of Exemption