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Council Recommends BPA-Requested Funding Reductions by Barry Espenson Columbia Basin Bulletin - February 21, 2003

The Northwest Power and Conservation Council this week is to offer its recommendations -- with caveats -- for balancing a fiscal year 2003 budget that the Bonneville Power Administration estimated in December would spend $40 million more than the federal agency can afford.

Bonneville's chief, Steve Wright, asked the Council to rein in the program.

During a Thursday session, Council members struggled in an effort to maintain the "integrity" of its own fish and wildlife program while helping satisfy the fiscal and Endangered Species Act constraints imposed by the program's funding source -- BPA.

The anticipated overrun, the Council and the region's fish and wildlife managers insist, is a result of a mid-stream changing of the rules, not excess.

Bonneville originally told the Council that it could have a $186 million annual budget during the current rate period, 2002-2006. The federal power marketing agency funds the program as mitigation for the impacts of federal hydrosystem construction and operation. That represented $150 million in "expense" and $36 million for capital projects. BPA says the capital program consists, for the most part, of major construction-related expense such as hatcheries.

The expense side of the budget has bedeviled the Council and staff since December. The $150 million allowance was a "planning" target, meaning the NPCC could recommend fish and wildlife projects totaling that amount. BPA reasoned that only an average of $139 million worth of projects could be actually contracted and set in motion during the fiscal year.

Over the past several months, BPA has shifted to an "accrual" method of accounting that will concentrate on the actual amount -- invoices for project tasks billed and paid -- that will be spent during the year, rather than a planning target.

BPA calculations late last year indicated that some $40 million in contractual obligations from 2002 and previous years would likely be cashed in during the current fiscal year, along with $139 million in obligations made for 2003. With the agency amidst a financial crisis it says has nearly bankrupted its reserves and limited its cash flow capabilities, BPA announced in December that it needed to dissolve that $40 million budget bubble.

Wright, in a Dec. 10 letter, asked the Council to take the steps necessary to "ensure spending for the Integrated Program does not exceed $139 in expense accruals for FY 2003." He set Feb. 21 as a deadline to receive the Council's recommendation.

In a Jan. 24 letter to the Council, Wright asked for further "guidance," as regards the ability to lower the "average annual accrual expense spending for the Integrated Program to below $139 million for the out-years of this rate period, and if it is, by approximately how much."

Wright asked that the Council respond by March 21 -- in time to inform a wholesale power rate revision process that BPA expects to trigger to help balance its books for the rest of the rate period. The implementation of a Safety Net Cost Recovery Adjustment Clause process, which would likely be completed toward the end of the current fiscal year, is intended to assure that the agency can make its annual payment to the U.S. Treasury for, to a large extent, costs associated with construction of the hydrosystem.

The fish and wildlife program is a cost associated with Bonneville's operations. Those operations would likely end up with a budget deficit in excess of $1 billion if some combination of cost cutting and rate increases are not employed. BPA officials have said it must seek efficiencies in all of its programs while assuring as a first priority, in the case of the fish and wildlife program, that the agency still meets its obligations under the Endangered Species Act and "preserve" program investments.

The Council this week culminated its effort to hold that $139 million line without leaving its own non-ESA obligations by the wayside. It was expected to offer today a letter and project list to BPA that essentially puts more than $20 million worth of planned land acquisitions on hold. A majority of those habitat purchases are in areas of the basin where ESA-listed salmon and steelhead can no longer travel, blocked by hydro projects.

The Council's Northwest Power Act edict called for the protection and restoration of fish and wildlife, listed and unlisted. As a federal agency, BPA has obligations under both the Power Act and the ESA.

The NPCC recommendation developed by staff in consultation with the BPA and Columbia Basin Fish and Wildlife Authority's staff and members also constrains many project budgets, in many some cases pushing tasks into future years.

A fine-tuning of 2003 accrual or spending estimates has resulted in a bottom line of $137.5 million, according to Doug Marker, NPCC fish and wildlife director. That includes $114.7 million in anticipated project expenses and $22.8 million in placeholders ($12 million for BPA overhead, $900 million for independent scientific review, $4.3 million for subbasin planning, $4 million to meet newly identified ESA research needs and $250,000 for data management).

BPA's Therese Lamb said Thursday that the NPCC staff's accrual estimates are within $3 million to $5 million of those developed most recently by her agency. Lamb is BPA's acting vice president for Environment, Fish and Wildlife.

She said that the federal agency would respond to the Council's recommendations within the next two weeks. She, and Wright in an address to the Council Tuesday, stressed that because of BPA's crimped cash flow, it would be impossible to fund both the 2003 planned expenses and the so-called "carryover" from previous contractual obligations that the agency expected to come due this year.

The 2003 accrual or spending estimates recommended by the Council and approved by BPA will be "memorialized" via an accrual limit letter from BPA to each project sponsor, Lamb said.

Much of Thursday's discussion focused on what council members felt was a need to return the program to more solid footing. Oregon's Melinda Eden said that she appreciated BPA's financial predicament but stressed that the Council's actions were being undertaken to accommodate the federal agency, not because the four-state panel felt the 2003 spending should be held to $139 million.

She said that the BPA-imposed budget cap represented a $40 million reduction in spending because those past commitments were forced to vie for funding with a separate slate of 2003 projects that the Council has recommended for funding through its provincial review process. That process involving the fish and wildlife managers and other stakeholders and subjected to independent scientific review has played out over the past two years. Now, in the space of two months, BPA has forced a total reprioritization, she said.

"I'm reflecting the outrage of the project sponsors" that have, in some cases, spent three years to plan and stage their projects for funding, Eden said. "I'm still not convinced that there isn't money somewhere at Bonneville (that could be used) to quit trashing the fish and wildlife program."

Council members said that the planned letter to Wright from NPCC Chair Judi Danielson must stress the need to resolve several critical issues. At the forefront, Idaho's Jim Kempton and Montana's John Hines said, is the carryover issue. During the course of a 1996-2001 federal memorandum of agreement on fish and wildlife spending, carryover was for the most part allowed. That meant money unspent in one year could be reserved and added to the next year's allocation.

BPA announced last year that carryover would no longer, except for special cases, be allowed. The result, Marker told the Council, is forced management though the "rear view mirror. This is trying to manage what has already occurred " -- the $40 million in prior commitments that are expected to be billed this year.

"We're trying to preserve a lot of work that was done in good faith," Marker said, as well as protect the provincial review process.

"The one problem with accruals is that you don't know what kind of bombs that can drop on you," Marker said, referring as an example the unexpected rush of invoices from prior years' contracts.

Oregon Councilor Gene Derfler questioned how that could even happen. Marker said that the billing process, through the federal bureaucracy for example, can be prolonged and in some cases unpredictable. Many of the program's project sponsors are federal agencies.

Derfler said that as a private businessman he could not understand how such a huge amount of accruals from past years could suddenly materialize without warning. He said BPA needs a better system of tracking that stream from contract obligations to accruals. BPA's Sarah McNary said the development of such a tracking system has already begun to complement the transition to an accrual-based accounting system.

Kempton insisted that some sort of carryover provision is needed to maintain the integrity of the Council's three-year "rolling review" process. The Council launched that new process to allow three-year funding approvals for worthy projects. With carryover disallowed, the program is thrown back into a burdensome annual prioritization process. And with unspent monies in a particular project's annual budget not added to the next year's budget, that project's unfulfilled tasks will be unfairly tossed into the prioritization process for a second time, he said.

"We effectively amend the program if you can't have the carryover there," Kempton said. Derfler agreed.

"If we can't have some assurance that we can pay for what we say we're going to pay for, I don't see how this program can go forward," Derfler said.

Washington's Larry Cassidy said that, at the least, an exception policy is needed so that money be earmarked for beneficial projects that are delayed for reasons beyond the sponsor's control. He used as an example the installation of irrigation screening that would prevent salmon and steelhead mortality. If for some reason the screen shipment is delayed, the project can not be completed on time.

"We can't time fish recovery to the schedule of some bureaucratic agency," Cassidy said.

Marker said the accrual method puts the sponsors and Council in a tough spot. If they overestimate the amount of work that will get done in a year, the uncompleted work and the money necessary to carry it out would have to come from the next year's capped budget.

"If we guess wrong, we lose the funding and eat it the next year," Marker said of accrual estimates made at the start of a year.

Hines said that by managing to the $139 million cap, "the reality is you will be managing to less than $139 (million)."

"I too need some assurance (that a policy be developed) that allows us to have some spending carryfoward or I would have difficulty supporting the proposal," Hines said. He said that, by the nature of the tasks, there are unpredictable delays. One option being considered would be to carefully track spending and, if a project appears unlikely to accomplish its tasks for a particular year, the unspent money could be reallocated to a waiting list of needed projects.

Neither Lamb or Wright totally dismissed the idea of carryover. A reallocation scheme could be considered, and a project-specific consideration of carryover is a possibility.

Lamb said any carryover decisions would involve "a careful evaluation and conscious choice about whether you move it forward." She stressed that the agency is not considering a blanket carryover policy.

Wright said that the carryover concept does merit discussion.

"I don't want to be in the mode of being an appropriated program," Wright said. In that mode programs tend to make sure they spend every dollar available before year's end, regardless of need. Carryover has efficiencies, he said, but could cause cash flow and other problems.

Hines, and the entire Council, also insisted that capitalization issues must be resolved. BPA has said that under its current policy, land acquisitions cannot be capitalized. Much of the $20 million in land acquisitions that the Council has asked BPA to capitalize and pay for over time is in blocked areas, where there are no listed salmon, and no added ESA pressure for BPA funding.

The issue "needs to be resolved in a manner that allows us to fund the wildlife portion of the (Power) act," Hines said. Wildlife work and acquisitions has represented 50 percent of the money channeled from BPA to Montana as mitigation for hydrosystem impacts. A similar scenario plays out in Washington above Grand Coulee Dam.

Wright reinforced points made in a letter from Lamb to the Council last month.

"We need to define credit toward extinguishing our obligation" for mitigation of hydrosystem effects if BPA is to allow capitalization of land purchases, Wright said.

Related Sites:
NWPPC: www.nwcouncil.org
BPA: www.bpa.gov/indexmain.shtml
CBFWA: www.cbfwa.org/Default.htm