Access to reliable water resources plays a major role in California’s economic and social well-being, and continuous investment in sustainable water systems is vital to the livelihood and health of our state.
As some communities deal with the growing impacts of climate change and extreme weather, emerging contaminants and strict water quality requirements, there is a growing urgency to expand investment in water and wastewater management systems in order to continue to provide high-quality and reliable water services to Californians.
A key question, however, is how to pay for these needed investments?
While California’s Legislature is debating a revised and leaner water bond for 2014, the Pacific Institute recently prepared an analysis of some of the other water financing options used in the past few decades locally, regionally, and/or statewide to invest in existing water systems and services, develop new ones, and, in some cases, mitigate environmental impacts throughout the state.
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Some people think of water as an open-access good that should be provided to “all” customers free of charge. But it takes money to build and maintain the systems that provide our reliable, safe water and take away our wastewater, and our water bills should reflect the cost of these services.
Unfortunately, water rates in most regions do not fully capture the actual costs associated with the wider array of water services provided, including required and voluntary ecosystem protection and restoration, water conservation and upgrades to maintain high-quality, reliable water supplies. This often leads to a gap between revenue collected from customers and total costs to operate these systems. As a result, a first and critical step is more realistic, full-cost pricing approaches for water that can still protect affordable access for low-income communities.
Nevertheless, increasing water prices to cover water services adequately has become increasingly difficult due to some voter-approved initiatives, such as Propositions 13 and 218. Contributing to the problem, many water suppliers are governed by publicly elected boards that tend to resist water rate increases for fear of voter backlash.
Due, in part, to inadequate water prices, since the 1980s California has relied heavily on municipal and state bond financing mechanisms. Between 2000 and 2010, statewide about $22.4 billion (in 2010 dollars) in general obligation bonds and $22 billion in revenue bonds have been issued to finance various water efforts, including projects for safe drinking water and water quality, flood protection, ecosystem restoration, conservation and water reliability.
Municipal bond financing, especially general obligation bonds, are unreliable and often costly since they require voter approval if they survive the legislative process and ultimately are paid back with interest. According to the California Department of Finance, the real annual debt service for outstanding state general obligation water bonds has increased almost threefold from 2000 to 2010, from about $27 to $80 annually per household.
California has also benefited from federal initiatives such as state revolving funds to invest in the water projects throughout the state. These monies, which are partly matched by the state, provide low-interest loans to develop or improve water and wastewater infrastructure in California. Currently, there are two active state revolving funds: the Clean Water State Revolving Fund administered by the State Water Resources Control Board and the Drinking Water State Revolving Fund administered by the California Department of Public Health.
From 2000 to 2010, California has received about $2.4 billion of federal grants as part of the state revolving funds. Unfortunately, despite the availability of these federal funds, health department, in particular, has been charged with not distributing the monies in a timely manner despite dire needs in the state for drinking water system improvements.
The health department has recently taken some corrective actions to improve and speed up its funding process for water system projects in various scales across the state. This has led to a renewed commitment from the U.S. Environmental Protection Agency to award the health department with a $79 million grant to invest through the Drinking Water State Revolving Fund in major water infrastructure projects in California.
California has also been exploring other mechanisms to finance water projects, including public-private partnerships to inject and leverage private money to finance the development of public projects, tax initiatives to encourage local financing of individual projects through property tax repayment, and public benefit funds that impose a fixed charge on unit water use to fund various small water projects such as efficiency and conservation.
While there is no single solution to financing the necessary improvements in California’s water systems, the state must have a more comprehensive and stable financing portfolio to help coordinate local, regional and statewide efforts, and to expand the scope and scale of the projects that can be pursued.
Unless the water sector moves to comprehensive and accurate water pricing and explores new, more innovative financing strategies, California’s pressing water problems will remain underfunded and unresolved.