After some browsing around, I found the file I need to modify to have the pop-up list in the panel reflect the folder names I wanted to use. The file is located in the following directory:
/System -> Library -> PreferencePanes -> DesktopPictures.prefPane -> Contents -> Resources. The name of the file to edit is Collections.plist.
You can open and look at the file but in order to make and save changes I would suggest to be root to make the changes. In that file, I deleted all the groups except for two of them. What I mean by a group is, for example, the following:
{
identifier = "Stock";
path = "/Library/Desktop Pictures/Stock";
showScalingPopUp = NO;
}The quotes for the identifier were added by me since one of my indentifiers has a space in it, this was the way i got it to display the names in the menu with the spaces. If the identifier is only a single word you do not need the quotes but I did it for consistency. You can change the path to whatever you want to have for the location of the images as far as I can tell. I hope that this works for others like it did for me.
[Editor's note: You should probably make a duplicate of this file before starting a project like this! And if you don't know how to use the terminal and root powers to duplicate the file, you may not wish to start a project like this just yet!]
[Editor's second note: See the comments for an easier (and safer) way to achieve the same end result - duplicate the file to your local PreferencePanes folder, and modify the copy there.]

