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Some thoughts

Budgeteers, in an attempt to meet some internal goal, may have very well told department heads to flatline their out year budget requests, regardless of actual requirements. I have seen this done at the federal level.

There may be other restrictions on the DPS as whole, or the CHL division in particular, that make it impossible for the department manager to request the actual required amount. For example, to meet some other budgetary goal, they may be limited on the number of full-time employees and contractors they may higher. This may mean they would not be able to spend more than $4.5M (which I am sure is largely personnel pay) because they would not be allowed to higher the extra people.

I certainly was under the impression that CHL fees were supposed to be no higher than what it takes to process an application. This implies that of course the fees collected would go to fund the work -- or at least fund the next year's CHL budget. Mr. Cotton probably knows the background skinny on this.

Governments generally hate restrictions on funds. Whenever a citizen initiative (in states like California) is passed to fence in money, there is much gnashing of government teeth. And many clever ways are invented to subvert this in the name of flexibility. Laws written to implement the initiatives, or other "will of the people" efforts are of course written by the same legislators who want to spend that money for their own projects, so "flexibility" gets written in and added to over time.

"Flexibility" only works at the top levels tho -- legislators have no problem whatsoever constructing very big fences around whatever pot of money they throw at their own interests. Woe be to the lower level government manager who mixes funds, even if in fact it is a good idea and would save the government money over all.