BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:  June 29, 2016 


                       ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT


                           Susan Talamantes Eggman, Chair


          SB  
          1298 (Hertzberg) - As Amended June 13, 2016


          SENATE VOTE:  Vote not relevant


          SUBJECT:  Local government:  fees and charges.


          SUMMARY:  Makes numerous changes to the Proposition 218 Omnibus  
          Implementation Act.  Specifically, this bill:   


          1)Adds the following definitions to the Proposition 218 Omnibus  
            Implementation Act:


             a)   "Proportional costs of the service attributable to the  
               parcel" to mean "when applied to a fee or charge for water  
               or sewer service, means the share of the total cost of  
               providing water or sewer service to water or sewer users  
               within the service area reasonably attributable to the  
               parcel.  The total cost of providing water or sewer service  
               includes all costs of acquiring water and water rights,  
               costs of collecting, conveying, treating, and managing  
               water and wastewater, costs of satisfying all regulatory  
               requirements lawfully imposed on water and sewer service  
               providers and costs of providing communitywide water  
               service in an equitable manner, including the cost of  








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               lifeline water rates."  


             b)   "Sewer service" to mean "services provided by all real  
               estate, fixtures, and personal property owned, controlled,  
               operated, or managed in connection with or to facilitate  
               sewage collection, treatment, or disposition for sanitary  
               or drainage purposes, including lateral and connecting  
               sewers, interceptors, trunk and outfall lines, sanitary  
               sewage treatment or disposal plants or works, drains,  
               conduits, outlets for surface or storm waters, and any and  
               all other works, property, or structures necessary or  
               convenient for the collection or disposal of sewage,  
               industrial waste, or surface or storm waters."  Prohibits  
               "sewer system" from including a sewer system that merely  
               collects sewage on the property of a single owner.  


          2)Makes changes to the definition of "water" to instead define  
            "Water service" to mean services provided by any system of  
            public improvements intended to provide for the production,  
            storage, supply, treatment, or distribution of water from any  
            source.  


          3)Makes findings and declarations including that Proposition 218  
            was meant to improve transparency and accountability of local  
            government fees.  Some court interpretations of the law have  
            constrained three important tools that local governments need  
            to manage water supplies and address water pollution:  
            stormwater management, rates to encourage water conservation,  
            and assistance for low-income Californians.  


          4)Provides that one vote per parcel, filed by an owner or tenant  
            of the parcel, shall be counted in determining whether a  
            proposed fee or charge is approved by a majority vote,  
            pursuant to Article XIII D of the California Constitution,  
            which establishes voter approval requirements for new or  








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            increased fees or charges, except for sewer, water, and refuse  
            collection services.  


          5)Adds the following findings and declarations to the  
            Proposition 218 Omnibus Implementation Act:


             a)   Water service may be used for purposes that are  
               indispensable to the use of the property, including, but  
               not limited to cooking, sanitation and reasonable  
               irrigation;  


             b)   Water service may also be used for purposes that are not  
               indispensable to the use of property, including, but not  
               limited to excessive indoor use, unabated leakage,  
               excessive irrigation, and other activities that constitute  
               an inefficient use of water;  


             c)   The amount of water that is indispensable to the use of  
               a property may vary depending on the use to which the  
               property is put, local conditions, water shortages,  
               environmental factors, and other factors affecting water  
               demand and supply availability.  


             d)   Local agencies should have the authority to determine  
               the amount of water that is indispensable for property use,  
               pursuant to specified conditions;  


             e)   Charges for water that are not indispensable for  
               property use are not imposed as an incident of property  
               ownership and therefore are not property-related charges,  
               as defined by Article XIII D of the California  
               Constitution;  









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             f)   Charges for water that is not indispensable for property  
               use may be either specific benefits or specific government  
               services under Article XIII C of the California  
               Constitution; and,


             g)   Article XIII C of the California Constitution does not  
               identify the costs that may be associated with water  
               service, define "a fair or reasonable relationship" between  
               costs of the service and the burdens or benefits associated  
               with the service, or prescribe a particular method for  
               allocating the costs of providing nonproperty-related water  
               services or benefits.  


          6)Authorizes an agency, in addition to any property-related fee  
            or charge imposed, pursuant to Article XIII D of the  
            California Constitution, and this bill for water service, to  
            impose or increase a separate and distinct conservation and  
            efficiency fee or charge for the same service to create price  
            signals to encourage conservation and increased efficiency in  
            the use of water.  


          7)Authorizes a conservation and efficiency fee or charge imposed  
            pursuant to this bill to be imposed on water that is not  
            indispensable for property use.  


          8)Authorizes a conservation and efficiency fee or charge  
            imposed, pursuant to this bill, to be imposed for purposes,  
            including, but not limited to:


             a)   Deterrence of excess consumption of water, as determined  
               by the local agency;










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             b)   Encouragement of the adoption of technologies that  
               support more efficient use of water; and,


             c)   Encouragement of compliance with the goals of avoiding  
               waste and unreasonable use of water, pursuant to Section 2  
               of Article X of the California Constitution.  


          9)Authorizes a conservation and efficiency fee or charge to  
            raise revenue as an incident to its intended purposes.   
            Requires any revenue produced to only be used to pay the costs  
            of providing water service, to lower the rate or rate  
            structure of the associated property-related fee or charge for  
            water service, or to provide lower rates or rebates for  
            disadvantaged households.  Prohibits the total amount  
            collected from the property-related fee or charge for water  
            service and the conservation and efficiency fee or charge from  
            exceeding the reasonable costs incurred by the agency to  
            provide water service.  


          10)Requires the rate of a conservation and efficiency fee or  
            charge to bear a fair or reasonable relationship to the burden  
            imposed on the local agency or the benefits received from the  
            water service based on the amount of water used by each  
            customer or class of customers.  


          11)Authorizes the agency to determine that the burden on, or  
            benefits derived from, the provision of water service per unit  
            of water used is greater for customers who use relatively  
            large amounts of water for their type and size of real  
            property.  


          12)Authorizes the agency to establish a water structure for a  
            conservation and efficiency fee or charge intended to  
            encourage conservation and increased efficiency of water use  








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            in order to bring the burdens of providing water service to  
            customer or classes of customers into reasonable balance.   
            Authorizes the charge to be structured in a tiered, ascending,  
            or other incremental manner.  Authorizes the agency to  
            determine that the fairness of the rate structure is enhanced  
            if it provides for lower rates, known as lifeline rates, for  
            disadvantaged households.  


          13)Requires consideration and imposition or increase of a  
            conservation and efficiency fee or charge to comply with the  
            notice, hearing, protest, and election requirements, if any,  
            required by Article XIII D of the California Constitution.   
            Provides that the requirements in the California Constitution,  
            which prohibit the amount of a fee or charge imposed on any  
            parcel or person as an incident of property ownership from  
            exceeding the proportional cost of the service attributable to  
            the parcel, does not apply to any conservation and efficiency  
            fee or charge levied pursuant to this bill.  


          14)Requires, for the purposes of this bill, "reasonable costs"  
            of the specific benefit or specific government service to  
            include, but not be limited to costs that will, directly or  
            indirectly, enable an agency to meet water demands, reduce  
            water demands, conserve potable water supplies, procure water  
            supplies to provide water that is not indispensable to the use  
            of property, and provide communitywide water service in an  
            equitable manner, including lifeline water rates.  Provides  
            that the determination of reasonable costs may consider the  
            relative income of the payer of the fee or charge.  


          15)Defines, for purposes of this bill and Article XIII C of the  
            California Constitution, "fair or reasonable relationship" to  
            include a relationship consistent with principles of equity  
            that hold that more affluent individuals benefit more from  
            public services, including water service, than less affluent  
            individuals receiving the same service.  








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          16)Provides that the provisions of this bill are severable.   
            Provides that, if any provision of this bill or its  
            application is held invalid, the invalidity shall not affect  
            other provisions or application that can be given effect  
            without the invalid provision or application.  


          FISCAL EFFECT:  None


          COMMENTS:   


          1)Financing Water Infrastructure.  Local governments in  
            California provide most water related services in the state  
            which include water service, sewer service, flood control, and  
            stormwater management.  A PPIC report, Paying for Water in  
            California, outlines four sources of funding currently used  
            for water in California: a) Fees, which include water and  
            waste water bills, property assessments or fees, developer or  
            connection fees, and permitting fees; b) Taxes, which include  
            both general and special taxes, including parcel taxes; c)  
            Fines and penalties, which include excessive pumping on  
            groundwater or directly to customers in violation of rationing  
            restrictions during drought emergencies; and, d) Bonds, which  
            include general obligation and revenue bonds.  Local agencies  
            frequently point to the series of constitutional reforms,  
            Proposition 13 (1978), Proposition 218 (1996), and Proposition  
            26 (2010), that have made it increasingly more difficult to  
            generate the necessary revenue to fund the costs of providing  
            water and other essential services.  



            On January 17, 2014, the Governor declared a state of  
            emergency in California due to severe drought conditions.  In  
            addition to challenges presented by the drought, local  








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            governments face several barriers to funding for stormwater  
            and dry weather runoff projects due to the constitutional  
            requirements for special taxes, benefit assessments, and  
            property-related fees.  Many of the local governments that  
            operate MS4 (Municipal Separate Storm System) systems differ  
            from water and wastewater utilities that existed prior to the  
            passage of Proposition 218, which have in place service fees.   
            On the other hand, many stormwater programs in cities and  
            counties are funded by the general fund, primarily through  
            property and local sales taxes.  As regulatory burdens  
            continue to increase, financially strapped local governments  
            are forced to examine alternative funding mechanisms and  
            regional strategies to address MS4 costs, which some cities in  
            Los Angeles County are citing to be in the millions of  
            dollars.  


          2)Proposition 218.  Proposition 218 distinguishes among taxes,  
            assessments and fees for property-related revenues, and  
            requires certain actions before such revenues may be  
            collected.  Counties and other local agencies with police  
            powers may impose any one of these options on property owners,  
            after completing the Proposition 218 process.  Special  
            districts created by statute, however, must have specific  
            authority for each of these revenue sources.  



            The Constitution defines a fee (or charge) as any levy other  
            than an ad valorem tax, special tax, or assessment that is  
            imposed by a local government on a parcel or on a person as an  
            incident of property ownership, including a user fee for a  
            property-related service.  The fee imposed on any parcel or  
            person cannot exceed the proportional cost of the service that  
            is attributable to the parcel.  Prior to imposing or  
            increasing a property-related fee, the local government is  
            required to identify the parcels, mail a written notice to all  
            the property owners subject to the fee detailing the amount of  
            the fee, the reason for the fee, and the date, time, and  








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            location of a public hearing on the proposed fee.  No sooner  
            than 45 days after mailing the notice to property owners, the  
            agency must conduct a public hearing on the proposed fee.  If  
            a majority of owners of the identified parcels provide written  
            protests against the fee, it cannot be imposed or increased by  
            the agency.  





            Additionally, Article XIII D, Section 6, subdivision (c) of  
            the California Constitution, provides election requirements,  
            "Except for fees or charges for sewer, water, and refuse  
            collection services, no property-related fee or charge shall  
            be imposed or increased unless and until that fee or charge is  
            submitted and approved by a majority vote of the property  
            owners of the property subject to the fee or charge or, at the  
            option of the agency, by a two-thirds vote of the electorate  
            residing in the affected area."  The election for the fee is  
            required to be conducted no less than 45 days following the  
            public hearing.  





            The definition of "water" and "sewer" under the Proposition  
            218 Omnibus Implementation Act are significant because the  
            election requirements are on fees for services other than  
            water, sewer, and trash services.  





          3)Bill Summary.  This bill addresses a number of issues in the  
            Proposition 218 Omnibus Implementation Act.  This bill is  
            sponsored by the Water Foundation.  








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             a)   Conservation Rates.  Tiered rates are common among local  
               governments to promote water conservation by structuring  
               the price of water per unit according to the level of use.   
               An appellate court ruled that the city's tiered rate  
               violated the proportionality requirements for  
               property-related fees (Howard Jarvis Taxpayers Association  
               v. City of Salinas (2002)).  In this case, the city failed  
               to demonstrate that its rate tiers corresponded to the  
               actual cost of providing service on a parcel basis at a  
               given level of usage.  


               This bill authorizes a local agency to impose or increase a  
               separate and distinct conservation and efficiency fee or  
               charge for the same services (water service) to create  
               price signals to encourage conservation and increased  
               efficiency in the use of water.  The conservation and  
               efficiency fee or charge imposed, pursuant to this bill, is  
               authorized to be imposed on water that is not indispensable  
               for property use.  


             b)   Lifeline Rates.  Lifeline programs reduce the water and  
               sewer service rates charged to low-income households in  
               order to provide them with more affordable services.  In  
               order to backfill a decrease in revenue from lifeline  
               rates, agencies would need to either charge higher rights  
               to other households or backfill with other sources of  
               funding.  


               This bill prohibits the total amount collected from the  
               property-related fee or charge for water service and the  
               conservation and efficiency fee or charge from exceeding  
               the reasonable costs incurred by the local agency to  
               provide water service.  This bill defines "reasonable  
               costs" and "fair or reasonable relationship" to provide  








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               that the determination of a reasonable cost may consider  
               the relative income of the payer of the fee or charge.  


             c)   Storm Drainage.  The definition of "water" and "sewer"  
               under the Proposition 218 Omnibus Implementation Act is  
               significant because the election requirements are on fees  
               for services other than water, sewer, and trash services.   
               This bill provides a definition of "sewer" in the Act using  
               the definition of sewer from the Public Utilities Code.  


          4)Author's Statement.  According to the author, "Proposition  
            218, approved in 1996, was meant to improve transparency and  
            accountability of local government fees.  Some court  
            interpretations of the law have constrained three important  
            tools we need to manage water supplies and address water  
            pollution: stormwater management, rates to encourage water  
            conservation, and rate assistance for low-income Californians.  
             These tools are needed now more than ever because California  
            remains in an historic five-year drought.



            "Stormwater is a key source of local water supply, and careful  
            management is necessary to reduce pollution.  Currently,  
            stormwater and flood control programs must meet a higher  
            standard than other services to raise capital, thus preventing  
            many important projects from being built.





            "One way to encourage conservation is to charge the largest  
            water users more per gallon. This is a common practice  
            throughout the world - and a requirement for California's  
            private water agencies.  Unfortunately, a recent court  
            decision makes it unclear if local agencies can employ this  








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            option. 





            "The US Environmental Protection Agency has found that  
            drinking water rates exceeding two percent of monthly income  
            are unaffordable, which is the case for millions of  
            Californians.  Private water and energy utilities are required  
            to offer programs to make rates affordable to low income  
            households.  Local governments in California, however, are  
            largely prohibited from doing the same thing.





            "SB 1298 addresses these issues by adding missing definitions  
            and direction on the interpretation of Proposition 218 while  
            maintaining transparency and accountability.  


            SB 1298 defines "sewer service" to include stormwater so local  
            governments can build and finance those projects, and provides  
            options for water agencies to develop rates that low income  
            households can afford and that encourage extravagant water  
            users to conserve.  These fixes are urgently needed during the  
            current drought to safeguard our water supplies and ensure  
            that all Californians have access to safe, affordable drinking  
            water."  
          5)Prior Legislation and Ballot Measures.  AB 1362 (Gordon) of  
            2015, would have provided a definition for "stormwater" to  
            mean "any system of public improvements, or service intended  
            to provide for the quality, conservation, control, or  
            conveyance of waters that land on or drain across the natural  
            or man-made landscape" in the Proposition 218 Omnibus  
            Implementation Act.  AB 1362 would have only become operative  
            if a constitutional amendment was approved by the voters.  The  








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            introduced version of AB 1362 was subsequently amended into a  
            different issue area to address mosquito and vector control  
            districts. 


            AB 2403 (Rendon), Chapter 78, Statutes of 2014, expanded the  
            definition of "water" in the Proposition 218 of 1996 Omnibus  
            Implementation Act.  


            The League of California Cities, California Association of  
            Counties and Association of California Water Agencies filed a  
            ballot initiative, California Water Conservation, Flood  
            Control and Stormwater Management Act of 2016.  The proposed  
            constitutional amendment addressed the same three issues and  
            this bill seeks to address with a majority vote bill.  The  
            proponents of the initiative declined to move forward after  
            doing polling research.  


          6)Policy Considerations and Committee Amendments.  


             a)   History of the Proposition 218 Omnibus Implementation  
               Act.  The creation of and amendments to the Omnibus  
               Implementation Act have been done on a consensus basis.   
                      The Committee may wish to note that the approach taken by  
               this bill diverges from that tradition.  Historically, if  
               provisions could not be agreed upon, they were left out of  
               the Act and litigated in the courts.  Proponents argue that  
               it is the Legislature's job to establish policy and provide  
               policy guidance to the courts and that this bill addresses  
               the same important issues that failed ballot initiatives  
               and constitutional amendments have failed to do.  


             b)   Litigation.  Following Proposition 218 there is an  
               extensive history of litigation involving both tiered rates  
               and services related to stormwater.  Opposition argues that  








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               this bill will result in additional uncertainty and more  
               litigation. 


             c)   Committee Amendments.  Given the policy considerations,  
               the Committee may wish to ask the author to narrow the  
               scope of this bill to address the stormwater issue and  
               remove all other provisions that have elicited the  
               strongest opposition.  Moving forward, the Committee may  
               wish to encourage the author to work collaboratively with  
               the stakeholders on the remaining stormwater provisions in  
               the bill.  


          7)Arguments in Support.  Supporters argue the following:


            Lifeline and Conservation Rates.  The Sierra Club argues,  
            "Water rates that encourage conservation should not be  
            required to be strictly linked to the specific parcel the  
            water is being provided to.  Taking a broader approach in a  
            community will allow for better price signals to high users  
            and lifeline rates consistent with the human right to water.   
            Pushing for greater conservation can actually lower the total  
            cost of service for all users, and supply increases and new  
            infrastructure are not needed."  


            Stormwater Drainage.  The Water Foundation argues, "While  
            hundreds of California's cities, counties, and stormwater  
            districts face federal mandates to reduce stormwater pollution  
            and are under pressure to seek new sources of local water  
            supply, only a handful of them have been able to collect funds  
            to meet these needs.  Drinking water and sanitary sewer  
            services, however, have not suffered such problems.  SB 1298  
            simply clarifies that stormwater is an integral part of both  
            sewer and water systems and that its management should be held  
            to the same high standards of transparency and  
            accountability."  








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          8)Arguments in Opposition.  Opposition argues the following:


            Lifeline Rates.  The League of Cities argues, "Lifeline rates  
            are unconstitutional under Article XIIID, Section 6 (b)  
            because the rate imposed on the higher-income user exceeds the  
            'proportional cost of the service attributable to the user's  
            parcel.'  SB 1298 seeks to address this issue by defining  
            'cost of service' to include the cost or providing water  
            services in an 'equitable manner' including the cost of  
            'lifeline water rates'.  This definition of 'cost of service'  
            does not address Proposition 218's proportionality  
            requirement."  


            Conservation Rates.  The Association of California Water  
            Agencies argues, "SB 1298 attempts to provide more flexibility  
            for voluntary conservation-based pricing.  SB 1298's  
            provisions in this area, however, have legal problems that  
            would create legal uncertainty and litigation risk for any  
            local agency which would try to implement them.  They also  
            have policy problems."  The League of California Cities  
            writes, "Unfortunately, SB 1298's water conservation and  
            efficiency charge does not take into account the cost and  
            revenue nexus required by Proposition 26."  


            


            Stormwater Drainage.  The Association of California Water  
            Agencies argues, "This proposal will create legal uncertainty.  
             One court has held that unless an agency operates a combined  
            storm/sewer system, fees for storm water facilities and  
            services do not fall under the exception in the Article XII D,  
            Section 6 for sewer and water services."  









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          REGISTERED SUPPORT / OPPOSITION:




          Support


          Water Foundation  [SPONSOR]


          American Rivers


          California Coastkeeper Alliance


          Humboldt Baykeeper


          Inland Empire Waterkeeper


          Klamath Riverkeeper


          Los Angeles Waterkeeper (LAW)


          Monterey Coastkeeper


          Orange County Coastkeeper


          Planning and Conservation League










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          Russian Riverkeeper


          San Diego Coastkeeper


          San Francisco Baykeeper


          San Luis Obispo Coastkeeper


          Santa Barbara Channelkeeper


          Sierra Club California


          South Yuba River Citizens' League (SYRCL)


          Ventura Coastkeeper




          Concerns




          League of California Cities




          Opposition










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          Association of California Water Agencies  


          City of Watsonville


          Coachella Valley Water District


          Cucamonga Valley Water District


          Dublin Sam Ramon Services District


          East Valley Water District


          Great Oaks Water Company


          Howard Jarvis Taxpayers Association


          Las Virgenes Municipal Water District


          Mesa Water District


          Monte Vista Water District


          Mountain Counties Water Resources Association


          Oakdale Irrigation District










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          Rowland Water District




          Opposition (continued)





          San Juan Water District


          Vallecitos Water District


          Vista Irrigation District


          San Diego County Water Authority


          Western Canal Water District


          Wheeler Ridge Maricopa Water Storage District




          Analysis Prepared by:Misa Lennox / L. GOV. / (916)  
          319-3958














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