Public Finance in California's Central Coast Region

Summary

As of 2011, the annual financial need to support drinking water infrastructure in California is over $2 billion, and the projected 20 year need is over $45 billion The major funding gaps in California's water management system occur in the following five areas, according to a study by Public Policy Institute of California:

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

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.

Public Finance Instruments

Taxes

Taxes that are used for general funding purposes are called "general taxes," while taxes that are intended to toward specific uses are called "special taxes." State and local governments can levy both categories of taxes .

Water Services/Management examples

• State general taxes, such as income tax, sales tax, and corporate tax, are used to fund some state water agency programs and to pay back general obligation bonds .

• Local general taxes, such as property tax and sales tax, are often used to fund stormwater management and flood protection projects.

• Local special taxes, such as parcel tax, are sometimes used to pay for stormwater management, flood protection, and watershed protection projects.

• Tax increment financing (TAMC is considering this, SANDAG has one already)

Bond measures

A bond is a form of borrowing used by state and local governments to finance long-term projects. They are repaid, often over 30 or 40 years, with interest .

General Obligation Bonds

General obligation bonds are the most simple, where the state or local government commits its "full faith and credit" to repayment. In order repay GO bonds, local property taxes are raised in accordance with Prop. 13. GO bonds require 2/3 voter approval .

Revenue Bonds

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 rates .

Fees

Examples

• Benefit Assessments - SVWP, MPRPD

Grant programs

Examples

• 205j - under federal Clean Water Act
• Prop 13 (2000)

Constraining Propositions

Proposition 13 (1978)

Prior to the passage of Proposition 13, 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. This immediately decreased local property tax revenues by over 50%. This 1% property tax levy now must be split among all of the agencies, usually at the same proportion as before Prop. 13 .

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 .

Note the Prop. 13 from 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 .

Proposition 218 (1996)

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

• 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  :

• 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

Generally speaking, assessments, fees, charges, and rates in place before July 1, 1997 are exempt from Prop. 218 .

Proposition 26 (2010)

Proposition 26 redefined the term "tax," such that state and local governments could not avoid the restrictions of Props. 13 and 218 by using the term "fee" instead of "tax." Prop. 26 also amended Prop. 13 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 .

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

• 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, and this ambiguity will have to be settled by the court .

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

Links

Public Policy Institute for California Water Policy Center

Disclaimer

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.