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Paying for Water’s “Fiscal Orphans”

Lori Pottinger July 9, 2018
Contracts in orange vests with an assistance with a California Department of Water Resources worker, perform final close-out repairs at the Pool 30 project.

California’s water system is generally well funded and adequately maintained, but there are a few areas that lack a steady funding source. The most prominent of these “fiscal orphans” are safe drinking water for disadvantaged rural communities, flood management, stormwater management, and water for the environment. We talked to Dean Misczynski, an expert in infrastructure financing and an adjunct fellow with the PPIC Water Policy Center, about how to create a more reliable funding stream to address these problems.

PPIC: Are there better ways to pay for California’s underfunded “fiscal orphans”?

Dean Misczynski: Water is one of the easier things in government to pay for, because you can sell it. Local water fees and local taxes pay for most spending on water in California. State voter-approved general obligation bonds also play a pretty big role. But our thinking about how to use state bond acts developed sometime around the Civil War, and we could do a better job using bonds to fund 21st-century realities.

We currently use bond acts to raise the capital needed to build projects. But funding for the operation and maintenance costs of those projects is expected to come from somewhere else―or nowhere. No sensible business thinks this way; capital funding and operations and maintenance should be part of a unified financing plan. In addition to authorizing borrowing money for specified purposes, a state bond act could easily include ongoing expenses by appropriating money from the General Fund to pay for the operation and maintenance needed to make the project work. This approach would offer a more business-like, coherent financing plan and give voters a more honest look at what the undertaking would really cost.

To be clear, the operations and maintenance budget would not be part of the borrowing authorized by the bond act, because that would be an expensive way to pay for ongoing costs. But the funding would be earmarked and committed for the long term. And note that this doesn’t call for a new tax or fee; it just requires an ongoing commitment to use some General Fund dollars to cover the ongoing costs. In this way it’s similar to the bond itself—repayment comes from the General Fund, which ultimately comes from existing taxes.

PPIC: What types of issues would this approach be especially appropriate for?

DM: It’s best in situations where there aren’t good ways to cover operations and maintenance for projects funded by the bond. If we were to take this idea seriously, we’d want to do some careful thinking to identify the most legitimate uses of this new authority and to caution against using it for unnecessary or unwise purposes.

So, for example, a relatively well-off community getting a bond-funded project wouldn’t need state money for ongoing expenses. But for a water system in a very poor community, this type of funding mechanism could be very useful. There are a number of small, disadvantaged communities in the Central Valley that can’t afford to upgrade or maintain parts of their water system and that lack safe drinking water as a result. They might be good candidates.

These types of appropriations could also pay for ongoing expenses for projects that are important and have political support, but are easy targets for cuts during the state’s inevitable next recession. Two examples that come to mind are maintaining watershed areas, and data collection and analysis to improve water management.

This approach wouldn’t just be useful in the context of water—it could help with the transportation sector, low-income housing, and other statewide challenges. And it could be used as a model for local bond funding as well.

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