Public Finance in California's Central Coast Region

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Public finance is the management and expenditure of revenue available to the government to fulfill public needs.[1] The revenue is payment for a specific service by customers, revenue that requires voter approval, or provided by state and federal agencies. [2] Public finance is generated through the following instuments:

  • Taxes- Compulsory payments to the government to finance services for the common good
  • Fees- Charges for a service to the user or beneficiary of the service
  • Fines- Charges for a violation of laws, regulations, or codes.
  • Grants- Payments from one level of the government to another level of the government, or from a private organization to a government. Grants entail specified purposes and must only be spent for that purpose
  • Bonds-A written intent for repayment of borrowed money with a definite schedule, usually at a fixed rate of interest for the life of the bond. [3]

This page describes the mechanisms that drive public finance, illustrated by examples found on the Central Coast region of California.


There are two categories of taxes. "General taxes" are used for general funding purposes and "special taxes" are intended for specific uses.[4] General taxes must be approved by a majority of voters. Special taxes must be approved by two-thirds of voters. State and local governments can levy both categories of taxes.[3]

Some examples include:

  • Local general taxes including: property tax and sales tax, are often used to fund projects like stormwater management and street maintenance. [4]
  • Local special taxes including: parcel tax, are sometimes used to pay for stormwater management, flood protection, and watershed protection projects.[4]
    • Parcel tax: a type of property tax which is based on characteristics other than the assessed value of the property, such as by acre or square foot. [5]
    • Tax increment financing: often used to finance redevelopement projects. A portion of future assessed property value increases is earmarked to pay for the project, assuming that the project will increase property values. [6] [7]


A fee is a charge in exchange for a specific service. These services include bills, property assessments or fees, developer or connection fees, and permitting fees.

Some examples include:

  • Bills for utility expenses.
    • Cambria Community Services District funded the Emergency Water Supply Project (Desalination Facility) through increased water rates [8]
  • Property assessments or fees are charged for a specific service to the property and are included as a part of a property tax bill.
  • Developer or connection fees are charged on new construction, and are used to fund a variety of infrastructure projects.
  • Permitting fees are used to support the operation of some regulatory agencies.


Fines are charges from government agencies or the court due to a law violation. Fines provide a limited and unpredictable source of revenue, but are exempt from the legal limitations on taxes and fees. [4]

Some examples include:

  • Violations of wetlands permitting requirements or pollution discharge limits
  • Excessive pumping of groundwater (in some locations)
  • Violation of rationing restrictions [4]
  • Wildlife Conservation Commission Grant Funds - funding for these grants is provided by California Department of Fish and Game fines and settlements
  • Settlement from the Cosco Busan-November 7, 2007 a container ship Cosco Busan struck the Bay Bridge and spilling 53,569 gallons of oil. The trustees settled the portion of the case for $32.3 million.

Bond measures

A bond is a form of borrowing used by state and local governments to finance long-term projects. Bonds are sold to investors and then repaid over a predetermined period of time. Interest is paid to debtholders on the bond, and can be variable or fixed rate [11] . Bond borrowing periods are often as long as 30 or 40 years. [12] [4] The state uses two types of bonds to finance projects: general obligation (GO) bonds and revenue bonds.

GO bonds are the most simple, where the state or local government commits its "full faith and credit" to repayment. These bonds are also pose the least risk for investors, with the lowest interest. In order repay GO bonds, local property taxes are raised in accordance with Prop. 13 (1978). GO bonds require 2/3 voter approval. [12]

Local Examples:

Revenue Bonds are backed by the revenues of the proposed project. Revenue bonds are often used to pay for somewhat unpopular projects, such as prisons, and governments usually pay higher interest rates. [12] These bonds typically do not require voter approval.[14]

Local Examples:

Grants and Loans

Federal Many grants and loans for water-related projects are available through federal programs, including: [15]

Federal Examples

California Grants and loans are sometimes available to local municipalities from the state, and are funded by taxes or bonds which must be approved by 2/3 of the voters.

State and Local Examples

State of Funding of California's Water system

As of 2011, the annual funding gap for California's water system was in excess of $2 billion. The next 20 year need is projected to exceed $45 billion. A study by Public Policy Institute of California identified five areas contributing major funding gaps in California's water management system. They are as follows :

  • drinking water in small disadvantaged communities
  • flood protection
  • stormwater and polluted water runoff management
  • ecosystem management
  • integrated water management[16]

Many public finance instruments exist for generating the revenues necessary to meet the state's water supply and management needs, including taxes, fees, bonds, and grants. However, a number of propositions have been approved that limit the use of those tools.

Proposition 13 (2000 Water Bond)

Proposition 13 authorized $763.9 million in general bond funds for local water projects, mostly through competitive grants to be administered by the State Water Resources Control Board. Prop 13 provided funding to the following programs, some of which are still operational: [17]

Note: Prop. 13 (2000) discussed in this section is different from the Proposition 13 (1978) discussed below.

Proposition 50 (2002)

Proposition 50, the Water Security, Clean Drinking Water, Coastal and Beach Protection Act of 2002, provided funding in the following categories [18]:

  • Water Security - $50 million
  • Small Community Water System Facilities - $14 million
  • Contaminant Treatment and Removal - $14 million
  • Community Water System Monitoring Facilities - $14 million
  • Drinking Water Source Protection - $14 million
  • Disinfection Byproduct Treatment Facilities - $14 million
  • Southern California Projects to Reduce Demand on Colorado River - $260 million
  • Contaminant Removal - $25 million
  • UV and Ozone Disinfection - $25 million

The State Water Resources Control Board is still accepting grant applications under Prop. 50 for projects related to Contaminant Removal and UV & Ozone Disinfection [19].

Local Examples

Prop. 50 grant funds contributed $2.9 million toward the Sand City Coastal Desalination Plant [20].

Proposition 84 (2006)

Proposition 84, The Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Act of 2006, made funds available for grants in the following categories [21]:

  • Interim Water Supplies
  • Chemical and Nitrate Contaminants
  • Groundwater

Proposition 1 (2014)

Proposition 1 authorized $7.545 billion in spending on water projects to be administered by the State Water Resources Control Board in the form of grants and loans in the following programs, some of which had previously received funding from Prop. 13 (2000): [22]

Constraining Propositions

Proposition 13 (1978)

Prior to the passage of Proposition 13 (1978), municipalities and Special Districts, including water districts, could levy their own property tax rates. Prop. 13 changed property tax law, limiting the amount of property tax that local governments could levy to 1% of the property's value. Local property tax revenues immediately decreased by over 50%. Presently, the 1% property tax levy must be split among all of the agencies, usually at the same proportion as before Prop. 13 [16].

Prop. 13 also requires that all changes in state taxes be approved by 2/3 in the legislature, and that local special taxes be approved by 2/3 of local voters [16].

Note: Prop. 13 (1978) discussed in this section is different from the Proposition 13 (2000 Water Bond) approved in 2000, which funds a number of grants for various projects throughout the state [23].

Proposition 218 (1996)

After the passage of Prop. 13 (1978) limited property tax revenue, local governments, and Special Districts turned to other funding sources including: fees, charges, special assessments, and non-property related "general" taxes. Proposition 218 limited these practices through amendments to the state's Constitution, including: [16]

  • clarified rules for local general taxes (requires majority voter approval) and special taxes (requires 2/3 voter approval)
  • prohibiting Special Districts from levying general taxes
  • placing burden of proof on agencies to show that assessments are proportional to benefits for each parcel
  • requiring proposed assessments be approved through elections where votes are weighted in proportion to special benefit received

Specifically, water agencies must comply with the following standards prior to any change in fee structure or rate: [16]

  • revenues from fees cannot exceed funds necessary to provide the service
  • revenues from fees may only be used for the project for which it was charged
  • a fee on a person/parcel cannot be more than the cost of service for that person/parcel
  • a fee cannot be charged for a service that will not be used by the property owner (cannot be based on future or potential use)
  • a fee cannot be charged for general services (available to the public in the same was as to the property owner)
  • a public hearing must be held on the proposed change, and the change cannot be made if a majority of the property owners file a written protest

Assessments, fees, charges, and rates in place before July 1, 1997 are exempt from Prop. 218 [16].

Proposition 26 (2010)

Proposition 26 redefined the term "tax," such that state and local governments could not avoid the restrictions of Props. 13 (1978) and 218 by using the term "fee" instead of "tax." Prop. 26 also amended Prop. 13 (1978) by requiring that any state law that increases taxes for any taxpayer must be approved by 2/3 in the legislature. Previously, "revenue-neutral" changes to taxes or fees could be approved by a simple majority vote [16].

The new definition of "tax" includes "any levy, charge, or exaction of any kind," with the following exceptions [16]:

  • a charge for a specific benefit, privilege, service, or product that is available only to the payor, and that does not exceed the reasonable costs of provision
  • a charge for the reasonable regulatory costs associated with issuing licenses, permits, inspections, audits, enforcement, etc.
  • a fine, penalty, or charge resulting from a law violation.
  • a charge as a condition of property development

It is unclear whether "regulatory fees" are included in this definition of taxes. The ambiguity will have to be settled by the court [16].

Prop. 26 does not apply to fees and charges in place prior to Nov. 2, 2010.


  1. Public Finance
  2. Finance Primer
  3. 3.0 3.1 Glossary of Finance Terms
  4. 4.0 4.1 4.2 4.3 4.4 4.5 4.6 PPIC Paying for Water Report
  5. Parcel Tax
  6. The Basics of TIF
  7. How Tax Increment Financing Works
  8. Cambria Community Services District
  9. Pajaro/Sunny Mesa Community Services District – Water Bond
  10. Carmel Valley Recreation and Park District
  11. Bonds
  12. 12.0 12.1 12.2 . PPIC Bonds
  13. Proposed Seawater Desalination Facilities
  14. FAQ Bonds
  15. Grant Funding
  16. 16.0 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 PPIC Paying for Water
  17. Prop 13
  18. Grant programs
  19. Drinking Water Funding
  20. Sand City Coastal Desalination Plant
  21. Prop 84
  22. Prop 1
  23. Prop 13 (1978)



This page may contain student work completed as part of assigned coursework. It may not be accurate. It does not necessary reflect the opinion or policy of CSUMB, its staff, or students.