Water Industry News

Californians face increased water rates after state allocates property tax and Feds reduce income tax

November 11, 2004

SACRAMENTO Homeowners across the state soon could be surprised by sewer and water rate increases as local agencies blindsided by a larger-than-expected state raid on property taxes frantically dig deeper to come up with $75 million more.

Sewer and water districts determined to avoid punishing rate hikes may have to plunder their savings, scramble to borrow, delay capital improvements or curtail services.

Whatever they do, the districts face a two-year fix: The state is taking $1.3 billion in local property tax revenues this year and next to help close its budget deficit.

In San Diego County, Fallbrook-area homeowners are being warned to brace for a potential combined $20 climb in their monthly sewer and water bills to cover an expected deficit of nearly $1 million.

"For a small homeowner like Mrs. McGillicuddy on Main Street it represents a 30 percent increase," said Keith Lewinger, general manager of the Fallbrook Public Utility District, which has not yet acted to raise the rates.

The Padre Dam Municipal Water District is weighing fee increases of as much as $4 a month, or dipping into reserves to buffer the potential increase for its 25,000 customers in East County

The much larger Otay Water District plans to avoid a rate increase by raiding its savings account to offset the state's take of $2.4 million over two years.

District officials say that any rate increases would probably be erased from customers' bills when the state's property tax shift ends two years from now.

Even the San Diego County Water Authority, a wholesaler to water districts in the region, is not immune. It will lose $5.75 million this year.

But the city of San Diego escaped the additional hit.

Its sewer and water agencies were not affected by the latest shift affecting districts, although the city overall did lose property taxes.

Sewer and water districts this summer had accepted a two-year deal between Gov. Arnold Schwarzenegger and local governments to partially offset a state budget deficit by providing $2.6 billion in property tax over two years.

As part of the agreement, special districts agreed to send $350 million in property tax revenues to the state. Of that, about $225 million became the responsibility of mostly sewer and water agencies that can raise rates.

Sewer and water district officials initially figured they would lose about 40 percent of their property tax, a hefty price but manageable.

But those calculations proved premature. Lawmakers exempted fire and hospital districts. Panicked by an outbreak of West Nile virus, lawmakers exempted Mosquito Abatement Districts. That left the remaining districts on the hook for an additional $75 million.

The Schwarzenegger administration is distancing itself from the added cost for the districts, saying special district association officials statewide were responsible for carving out compromises internally.

"Representatives of each of the agencies said they would take the responsibility of resolving intergovernment disputes," said H.D. Palmer, a spokesman for the state Department of Finance.

District officials are exploring legislation.

"We will be asking the Legislature to revisit the issue," said Steve Hall, who leads a statewide coalition of water districts. "I don't think the Legislature understood just how dramatic the hit would be."

But lawmakers are not expected to reopen a hard-fought, two-year deal that helps them avoid squeezing state services more or raising taxes.

Significantly, influential legislators are openly skeptical of some water districts, following recent revelations of fat reserves and questionable spending on luxury junkets and high-priced dinners.

Asked whether he would find sympathy in the Capitol corridors, Hall responded, "Probably not."

Knowing the political delicateness of rate increases, Hall's organization the Association of California Water Agencies will be counseling directors to make sure the public understands that higher fees are courtesy of Sacramento.


$75 million hit

Left unchanged, the $75 million hit and another $75 million in the next fiscal year will chew up the vast majority of property tax dollars now used for sewer and water services in the state.

The state controller is expected to wrap up calculations soon for each district's contribution, and sewer and water agencies are bracing for the worst.

"We were looking at losing $700,000 or $800,000. If you listen to the rumors and watch the tea leaves, we could lose $1.8 million," said Mark Watton, Otay's general manager.

Watton, whose agency serves 45,000 customers, said the district will raid its own reserves and borrow.

"If we just raised our rates it would be a shock to our customers," he said.

Still, borrowing will come at a price in interest, Watton said.

"What the state is doing is, instead of them borrowing, they're making the special districts borrow. There's no free money," he said.

At the Padre Dam district, directors probably will try a combination of reserves and rate increases to cover projected losses, said Doug Wilson, director of finance.

As first proposed by the state, the property tax loss to the Padre district would have been about $850,000. But the added bill could inflate the loss to $2 million, Wilson said.

Wilson said he would recommend that the board use reserves to cover half the loss and temporarily raise rates to generate the other half. Under that strategy, rate increases would be limited to about $2 a month. If savings are not tapped, the fee hike could reach $4, he said.

"The $4 probably is not going to happen," Wilson said.

To be hit twice?

Fallbrook Public Utility District customers could be hit twice because that district provides sewer and water services.

To recoup a projected nearly $1 million loss, the district is pondering hefty sewer and water rate increases. Sewer bills could climb $8 and water rates may go up $13. That could mean higher bills of $21 a month for the 4,500 households hooked up to the district's twin services.

"We're losing nearly every penny of our property tax," said Lewinger, the general manager.

Frustrated, Lewinger pointed out that decades ago Fallbrook-area residents voted to tax themselves to pay for these services. Now the state is taking away that money.

"It seems the philosophy of the state is that we can take care of it. All we have to do is raise rates," he said.

The county water authority had expected a $2.3 million annual loss, under the first draft of the budget deal. Now it will lose 99 percent of its property tax, or $5.75 million annually over the next two years. No decisions have been made on how to cover the loss.

The wrenching choices confronting San Diego County districts will be repeated across the state, officials said.

"Some agencies will postpone projects. Some will use reserves and some will likely have to raise rates," said Mike Dillon, who represents many sewer districts in Sacramento.

The water district coalition's Hall said: "In some cases, they cannot raise rates. Some of them are going to have to go to reserves, curtail services and perhaps lay people off."