Paying for Water in California: The Legal Framework

Brian Gray, Dean Misczynski, Ellen Hanak, Andrew Fahlund, Jay Lund, David Mitchell, and James Nachbaur

Volume 65, Issue 6, 1603-1664

Over the past four decades, California voters passed a series of initiatives that amended the California Constitution to limit the power of the state legislature and local governments to enact taxes and restrict their authority to adopt fees and other charges to fund government programs. Three of these initiatives—Proposition 13 (enacted in 1978), Proposition 218 (passed in 1996), and Proposition 26 (approved in 2010)—have placed significant constraints on the funding of water resources projects. Although each of these laws has enhanced the transparency and accountability of the decision-making process, the funding constraints now jeopardize an array of vital water supply, management, and regulatory functions. These include funding for the development of new water supplies, integrated water management, protection of groundwater resources, development of alternative water sources (including recycled and conserved water programs), control of stormwater discharges, and regulation of water extraction and water use to protect water rights, water quality, aquatic species, and other beneficial uses of the state’s water systems.

This Article is a companion to the report Paying for Water in California and focuses on the legal aspects of water financing. The Paying for Water study demonstrated the critical importance of local funding to support California’s water system: local utilities and governments raise eighty-five percent of the more than thirty billion dollars spent annually on water supply, quality, flood, and ecosystem management through local fees and taxes. The study identified a two to three billion dollar annual funding gap, with critical gaps already evident for provision of safe drinking water in small, rural communities, prevention of stormwater pollution, protection of people, property, and infrastructure from flooding, recovery efforts for aquatic ecosystems, and integrated water management. In most cases, these gaps reflect legal obstacles to raising more funds locally. In addition, urban water and wastewater systems—now in relatively good fiscal health—face looming challenges related to rising costs and legal constraints on the ability to raise fees to support modern, integrated water management.

This Article begins with an overview of the traditional sources of funding for water development, management, and regulation, and proceeds to a detailed analysis of the effects of the constitutional constraints (especially of Propositions 218 and 26) on these essential governmental programs. Topics include: (i) analysis of the effects of Proposition 218 on water rates and fees charged by public retail water agencies for water service and integrated, portfolio-based water management; (ii) consideration of the special problems of Proposition 218 for groundwater regulation and stormwater discharge programs; (iii) predictions about the effects of Proposition 26 on wholesale water rates, water stewardship charges, and regulatory fees; and (iv) suggestions for harmonizing the fiscal strictures of Propositions 218 and 26 with the reasonable use mandates of Article X, Section 2, of the California Constitution, which form the foundation of the state’s water law and policy.

Our key conclusions are that: (1) Propositions 218 and 26 have created significant impediments to economically rational and sustainable funding of California’s most important water service, management, and regulatory programs; (2) judicial interpretations of the constitutional restrictions generally have compounded these impediments; and (3) reform of the law is needed. The Article concludes with recommendations that water agencies, the legislature, the courts, and the voters should consider as a means of correcting (or at least ameliorating) those aspects of the law that are inconsistent with sound and creative water resources administration.

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