Water Rates To Go Up To Fund Schools?

The California legislature may vote as early as Monday on borrowing a percentage of property taxes from water and sewer districts to plug the state budget deficit as authorized under Prop 1-A (2004) when there is a declared “severe state fiscal hardship.”

But this is different than the recent state raid on redevelopment agencies for property taxes for public schools. The difference is that redevelopment agencies can’t just raise property taxes to make up for the loss but water agencies can raise water rates. To add salt to the wounds of water ratepayers, where municipal water departments also tack on a Utility User’s Tax of 5% to 10% to siphon to a city’s general fund, any water rate increase to replace lost property taxes may result in compounded higher utility surcharge taxes. Call it a tax on a rate increase.

Under Prop 1-A: the governor must declare there is a “severe state fiscal hardship;” the legislature must adopt a statute with a minimum 2/3rd’s vote to suspend protections against raiding local government and special district coffers; and the legislature must adopt a statute to promise to repay the borrowed funds.

The property taxes taken may not exceed 8% of the total property taxes collected in the prior year according to Prop 1-A. But the California Legislative Analyst is recommending that the legislature increase the percentage to 25% for water agencies. The Association of California Water Agencies has estimated that this would result in a reduction of a half billion dollars ($500 million) from affected water agencies. Recently, redevelopment agencies across the state were raided to the tune of over $2 billion by the state to plug the budget gap for public schools.

Officials at the Eastern Municipal Water District in central Riverside County have stated that a 25% reduction in their property taxes would likely result in about a 10% increase in water rates for its customers. This is on top of a recent 15% water rate increase passed along by the regional Metropolitan Water District of Southern California (MWD) related to the dry spell and court shut down of water supplies from Northern California to protect the endangered Delta Smelt fish.

Officials at the MWD are stating that they will not roll back water rates even though state reservoirs are full and a judge has relaxed the shut down of water shipments to Central Valley farmers and Southern California cities. MWD is now calling the state’s water situation a “crisis” instead of a drought.

Property taxes are typically considered “non-operational” funds that go toward such activities as capital improvement projects, not the daily operational costs of a water agency that are funded from water rates. Likely activities to be curtailed are deferred maintenance on older water facilities, non-payment of bond payments on already completed projects, and postponement of current and planned water system improvement projects. Such cutbacks will likely have a ripple effect on construction and engineering firms who do contract work for water agencies.

Municipal water agencies that rely mostly on revenues from water rates are not likely to see a direct hit. But if they rely on imported water from water wholesalers they are likely to be hit with pass through water rate increases. The taking of property taxes by the state affects both the 1% property tax levy by each county that is distributed to various county agencies including water agencies as well as water agency set property taxes.

Municipal water departments had to raise water rates this past year because of MWD’s 15% rate increase over 2 years.

Additionally, many city water departments had to additionally raise water rates to plug the hole created in their water funds due to the lack of water sales resulting from few sales of homes and condos and rentals of new apartments created by the bursting of the Real Estate Bubble in late 2008. The City of Pasadena had to raise water rates to fill a $4 million hole in their water fund cause by so much unsold and unrented housing inventory sitting in its downtown core and a decrease in water sales due to conservation. So municipal water agencies have been hit with a double whammy.

Wholesale water agencies that rely heavily on property taxes instead of just water rates, such as the Castaic Lake Water District in Southern California, may be more affected by the state’s property tax grab.

First hand reports in cities such as Pasadena indicate that water customers are ignoring conservation ordinances and going back to watering lawns every day of the week, especially since water policing seems to have been relaxed. With higher water rates and extra penalties imposed for over-watering, cities are unlikely to discourage any overwatering that would result in greater revenues for cities from water users. But with the public knowing that the drought is over look for the public protests calling for water rate rollbacks and a cessation of imposing Utility User Taxes on top of any new water rate hikes.

How this all will impact voters if the State Water Bond – Prop 18 – remains on the ballot is uncertain. Recently,Governor Schwarzenegger has called for the legislature to pull Prop 18 from the November ballot due to the condition of the economy. But Prop 18 would fund capital projects, which is what the lost property taxes are mainly used for.

A bigger question is how the state will ever pay back water agencies for the funds taken. The California Legislative Analyst’s Office doesn’t project a recovery of the state budget until 2013 to 2014. But if there is a double dip recession and no recovery or a weak recovery? Will the State eventually have to raise the state sales tax rate to pay back water and redevelopment agencies? Or will the “loans” end up as a taking without reimbursement?

The bottom line to water ratepayers is why should their water rates go up to fund public schools? In Pasadena taxpayers recently defeated a school parcel tax – Measure CC – to fund public schools. Now part of that proposed tax may be funded through the back door of increased water rates.