Department of Pesticide Regulation’s Mill Assessment Study
The following KSC Update summarizes the recommendations proposed in the Mill Assessment Study “Mill Alternatives Concept Paper” developed and released by Crowe LLP (Crowe) on December 2, as commissioned by the Department of Pesticide Regulation (DPR). This summary is not exhaustive of the Concept Paper content. The full study with further detail can be found here.
I. Background and Impetus
In response to budgetary constraints[1] and a shift in mission[2], DPR pursued an adjustment to the pesticide mill assessment through a budget change proposal in 2021. In that original proposal, DPR suggested to tier the mill assessment, which accounts for roughly 80% of DPR’s annual budget ($95m), from a flat rate to a tiered rate, based on a product’s toxicity utilizing U.S. EPA signal word.[3] Increasing the mill from 0.021 per dollar sale (21 mills) to 0.045 (45 mills) over a four year period would have generated an additional $45 million per year to be expended on various core and non-core activities.
The budget proposal was ultimately tabled and replaced with two-year bridge funding and $1 million for DPR to fund a study on the mill assessment structure and potential changes. In February 2022, DPR contracted with Crowe to assess the existing structure and rate of the mill, current and future funding needs for DPR and County Agricultural Commissioners, ways to advance safer, more sustainable pest management activities and methods that offer stable funding. The mill assessment study offers alternative potential assessment funding models.
II. Study Methodology and Process
Since February 2022, DPR and Crowe have conducted a brief program analysis, interviewed subject matter experts, reviewed historical data, sales and use data, and conducted a cursory fiscal and workload analysis. Crowe has researched other regulatory fund frameworks, best practices related to fiscal management and accounting principles, and scientific papers related to economics, pesticide use and consumer behavior. Crowe has also conducted stakeholder interviews with various representatives from production agriculture, Agricultural Commissioners, consumer/home use product users, registrants, applicators, environmental justice, and other non-governmental organizations.[4]
In October 2022, Crowe released a synopsis[5] of the initial stakeholder consultations: (1) DPR needs sustainable funding, (2) DPR needs to be robust in their regulatory and enforcement functions, (3) State General Fund should play a more active role in funding DPR activities, (4) Divergent opinions on a tiered mill structure, (5) Funding should align with workload, and (6) “Safer, More Sustainable Pest Management” needs to be defined. The results of the initial study were released on December 2 and DPR conducted a webinar on December 6.
III. Study Content
For ease of review, content of the study has been divided into sections. While all should be evaluated collectively, they should also be independently considered.
PLEASE NOTE: Crowe and DPR have not identified what the final revenue request should equate to ($20m versus $50m+/year). That factor will be an important variable to weigh when considering which model, structure, and time proposal to favor.
A. Fee Rate and Structure
Under current law, the structure and maximum assessment rate is set in statute (Food and Agricultural Code §12841 & 12841.1). The Director of DPR may then, in regulations, set the established rate (3 CCR §6386). Within the study, Crowe proposes two alternatives to the current structure: (1) the established rate is set in statute, or (2) the established rate is set in regulations.
In addition to these two alternatives, the study considered whether the mill should be monitored and adjusted overtime. It has proposed to potentially adjust the rate at set intervals (every 1, 2, or 5 years), establishing a threshold trigger (such as a ratio of revenues to expenditures), or use an annual adjustment variable (such as a cost-of-living adjustment, also referred to as COLA). The study also discussed the reserve fund ratio may be an impetus for adjustment (see “C. Role of a Budget Reserve” below).
B. Timing of Rate Increases
The study evaluates two options for how a potential mill adjustment could take place—immediately or phased in over several years. A phased in mill increase has the advantage of offering time for registrants or users to adjust to an increase in fees but would prolong DPR’s budget deficit. Conversely, an immediate mill adjustment would be easier for DPR to administer and would afford for more immediate funding but would likely have a punitive effect on small companies or disadvantaged users.
The mill study also explores whether the adjustment, either all at once or phased in, should be initiated in fiscal year 2023-24 (starting July 1, 2023) or fiscal year 2024-25 (starting July 1, 2024).
C. Role of a Budget Reserve
In the process of a fiscal analysis, the study suggests the importance of a robust fund balance, defined as the resources available at the end of the fiscal year. In accordance with cited the Government Finance Officers Association (GFOA), a fund balance (or reserve) should equal, at a minimum, 2-month operating expenses. The Government Accounting Office (GAO), a non-partisan federal agency, recommends a reserve but does not identify the proper amount.
In the last ten years, DPR has maintained a fund reserve balance between $10m and $20m. In fiscal year 2021-22, the reserve balance was $12.5m, and the fiscal year 2022-23 budgeted reserve balance is expected to be $12.2m. Should the mill fee remain flat and revenue stable at $95m annually, an additional mill assessment of $0.001 (1 mill) could allow DPR to achieve a $20m (or 2 month) reserve in approximately 3 years. The study has also proposed the concept of a reserve balance to expenditures ratio “triggering” a mill adjustment (increase and lower). Under the concept, when the reserve fund balance fell below a ratio of 1.2 (roughly 2 months of expenses), the mill would be increased temporarily to increase revenues and allocate more funds to the reserve until such time that the ratio is met. The ratio of 1.2, as proposed by the study, would be the Fund Balance + Revenue/Expenditures.
D. Method of Assessment
The study analyzed and proposed three methods of assessment—a flat rate, a tiered rate based on product category workload, and a base plus tiered rate based on product workload. Descriptions of each are below:
a. Flat Rate — This method would be a continuation of the current manner of assessment.
b. Tiered Based on Product Category Workload — This method would assess different mill rates based on a product’s categorization. DPR has identified the following “high-level” categories: Antimicrobials, Biochemicals and microbials (i.e., biopesticides), Conventional pesticides, Plant growth regulators, Spray adjuvants, and Others. Under this tiered approach, pesticide categories that result in additional focus (and therefore workload) of DPR or Agricultural Commissioners would be assessed a higher mill fee versus those with less focus.
c. Tiered Based on Pesticide Product Workload — This method would impose a base rate (assessed on all products) and then an additional mill based on “regulatory activity (i.e., level of workload to regulate, monitor, and assess pesticide risks).” The study has presented a variety of examples of areas that may require higher workloads, including but not limited to those requiring re-evaluations, toxic air contaminants, restricted use products, those requiring environmental monitoring, products featured in use enforcement cases or in the injury and illness reporting surveillance program.[6]
Through the evaluation of alternative mill proposals, the study offered a short post-mortem rejecting the previously suggested tiered criteria of toxicity and hazard/risk. The study reiterated stakeholder feedback that signal word or acute toxicity did not account for chronic toxicity, environmental impacts, product concentrations, and unintended consequences. They expressed that scientific consensus was that hazard and risk are significantly difficult to measure and therefore, too subjective to assign mill value to. In both proposals, the authors stated, “there is limited evidence to suggest that implementing a tiered mill structure would influence behavior and ultimately promote the use of safer pesticides based on the general inelasticity of pesticide use.”[7]
E. What Activities to Fund
DPR developed a list of core budgeted, core unbudgeted, County Agricultural Commissioner, Reserve, Sustainable Pest Management, positive incentives, and other funding needs. No fund amounts were prescribed to each section and DPR determined what are core versus discretionary activities.
a. Core Budgeted — These activities are reflected in DPR’s existing expenditures covered by mill revenues.
b. Core Unbudgeted — These activities account for DPR’s unbudgeted “core” needed to fulfill its mission. Identified activities have been broken out by DPR branch.
c. County Agricultural Commissioners — These additional funds would be utilized to support County Agricultural Commissioners’ regulatory and administration costs. Commissioners are offered $0.0076 per dollar sale (7.6 mills)—this accounts for roughly half of Commissioners’ total funding. Crowe conducted a survey of several Commissioners reviewing if the mill apportionment shared amongst counties was adequate to cover expenditures. 90% of respondents answered “no” and noted additional funding needs ranged from $20,000 to $2 million per county.
d. Reserve — see “C. Role of Budget Reserve” above.
e. Sustainable Pest Management — Study authors were offered an early review of the Sustainable Pest Management Roadmap and identified additional unbudgeted core programmatic needs. Activities have been outlined by DPR branch and include but are not limited to PCA licensing, statewide leadership, public outreach, product registration and re-evaluation, CEQA compliance, and IT project management.
f. Positive Incentives — Considering the inelasticity of pesticide costs and the lack of user responses to negative market signals, the study evaluated what types of positive incentives could be utilized to “support the transition to safer, more sustainable pest management.” These include but are not limited to research and grants, enhanced environmental and human health monitoring, the registration of new alternatives, and others.
g. Others — Under Food and Agricultural Code §12841.1, an additional 0.75 mill ($0.00075 per dollar of sales) may be assessed to cover costs related to CDFA’s Office of Pesticide Consultation and Analysis (OPCA). The study will work with CDFA to determine any additional budgeted needs.
IV. Next Steps
Crowe and DPR will be conducting additional stakeholder interviews and accepting written public comment until January 13, 2023. Following the public comment period, Crowe will be revising the study, reporting preliminary draft proposals for mill recommendations and an implementation plan in Spring 2023. View Update
[1] In 2020-21, due to COVID-19 furloughs and higher fund balance requirements, DPR’s expenditures were reduced by $7 million. This figure is distinct from the potential structural imbalance (or deficit) in 2022-23 and ongoing.
[2] Safer, more sustainable pest management
[3] U.S. EPA requires most registered pesticides to have a “signal word” on its product label. The signal word indicates a product’s relative acute toxicity to humans and ranges from (1) Caution, (2) Warning, (3) Danger, and (4) Danger/Poison.
[4] A full list of interviewees can be found in Appendix A on page 54.
[5] https://www.cdpr.ca.gov/docs/mill/mill_study_update_october_2022.pdf
[6] A full list of proposed categories can be found on page 46 of the study.
[7] Page 50