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Press Release · March 12, 2014

California’s Water System Faces a Funding Drought

Resources, Reforms Needed For Rural Communities, Flood Protection, Stormwater Pollution, Aquatic Ecosystems

SAN FRANCISCO, March 12, 2014—California faces critical funding gaps in five key areas of water management, according to a report released today by the Public Policy Institute of California (PPIC). These areas include safe drinking water in small, disadvantaged communities; flood protection; management of stormwater and other polluted runoff; aquatic ecosystem management; and integrated water management.

The report identifies the overall funding gap in these five areas at $2 billion to $3 billion annually. Filling this gap would require a spending increase of 7–10 percent—or $150 to $230 per household—for a water system with annual spending of more than $30 billion.

“Our water challenges seem daunting, but this is a fixable problem,” said Ellen Hanak, PPIC senior fellow and one of the authors of the report. “With a bold, concerted effort by state and local leaders, Californians can sustainably manage this critical resource—despite increasing water scarcity, population growth, and climate change.”

The report pinpoints the funding gaps in each area:

  • Safe drinking water for small, disadvantaged communities. Overall, 80,000 to 160,000 Californians live in rural communities that have difficulty providing safe drinking water. Ratepayers have low incomes and the cost of supplying drinking water to households is high. These communities generally rely on groundwater, which is often highly contaminated. For example, many Tulare Lake and Salinas Valley wells are contaminated by nitrate, primarily from fertilizer and animal manure. An additional $30 million to $160 million per year is needed to adequately address this problem.
  • Flood protection. Roughly 25 percent of the population lives in a floodplain in a state where climate change may bring warmer winters and more severe inland flooding, along with rising sea levels and storm surges on the coast. Much of the state’s flood-control infrastructure is aging, and rebuilding typically requires costly upgrades to meet higher safety standards. New capital investments of $800 million to $1 billion annually are needed to shore up the system. Statewide, this means doubling the amount of money currently spent by local residents on flood management.
  • Management of stormwater and other polluted runoff. Regulations to limit polluted runoff have become more stringent. As a result, costs have risen for capturing and treating stormwater before it is discharged into rivers, bays, and the ocean. Stormwater agencies need an additional $500 million to $800 million per year to meet urban permit requirements.
  • Aquatic ecosystem management. Recovery plans for endangered species, habitat conservation, and other restoration projects need $400 million to $700 million more each year to mitigate the damage of past actions and promote the health of native species. About half of the cost is for work in the Delta and greater Sacramento–San Joaquin watershed, and about half is for coastal and estuarine ecosystems.
  • Integrated water management. Better integration will improve the cost-effectiveness of California’s large and decentralized water management system. One example: members of the Santa Ana Watershed Project Authority jointly manage a range of activities in the Santa Ana River watershed, from groundwater recharge to the protection of water supplies in the upper watershed. An additional $200 million to $300 million annually would jump-start more collaborations across agency boundaries and provide the scientific support to effectively manage these systems.

The report also offers some unexpected good news about the financial health of the water system. The two biggest ticket items—water supply and wastewater management—are still reasonably successful. Most water and wastewater utilities, which together account for over 85 percent of total spending, are successfully providing safe drinking water and collecting and treating wastewater. Local utilities, relying primarily on fees from ratepayers, have generally been able to raise rates to cover costs and invest at a healthy pace. However, these utilities face looming legal challenges related to Proposition 218, which requires that fees be linked specifically to the services for each property. This jeopardizes utilities’ ability to provide “lifeline” discounts to low-income households, for example.

Based on recent spending patterns, funds from general obligation bonds can at best cover half of the total spending gap—even if a water bond passes this year. The report suggests a range of funding alternatives that also include new state and local special sales or parcel taxes, surcharges on water use and fertilizer or pesticide use, property assessments, and developer fees.

To tap this mix of funding sources, the legislature needs to approve new state fees and taxes. Californians also need to revisit certain aspects of Propositions 218, 26, and 13. These voter-approved laws have pushed agencies to be more transparent and accountable to the public, but they have also compromised local governments’ ability to manage water responsibly. Many kinds of fees have been redefined as special taxes, and such taxes now need to be approved by two-thirds of local voters—a higher bar for passage than fees or local general taxes have. These restrictions have encouraged a heavy reliance on state bonds—which require only a simple majority for passage—to fund the water system. And they have made it increasingly difficult for agencies to raise money locally—from the individuals and communities that either share responsibility for problems or enjoy the benefits of spending on water projects.

“California will need to better align its funding laws with the goals for modern water management to address funding gaps and prevent new ones from forming,” said report co-author Brian Gray, professor at the University of California, Hastings College of Law.

The report, Paying for Water in California, is supported with funding from the S. D. Bechtel, Jr. Foundation and the California Water Foundation, an initiative of the Resources Legacy Fund. The other co-authors are Jay Lund, director of the UC Davis Center for Watershed Sciences and PPIC adjunct fellow; David Mitchell, a principal in the Oakland-based economic consulting firm M.Cubed; Caitrin Chappelle, PPIC research associate; Andrew Fahlund, deputy director of the California Water Foundation; Katrina Jessoe, assistant professor in the UC Davis Department of Agricultural and Resource Economics; Josué Medellín-Azuara, research scientist at the UC Davis Center for Watershed Sciences; Dean Misczynski, PPIC adjunct fellow; James Nachbaur, economist and American Association for the Advancement of Science policy fellow; and Robyn Suddeth, Ph.D. candidate in hydrologic sciences at UC Davis.


PPIC is dedicated to informing and improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett. PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office.