The Legislature has approved a $70.8 billion spending plan (AB 1765) for the 2003-04 fiscal year, which began July 1, 2003. The Senate approved the Budget Act by a vote of 27-10 on July 27 and the Assembly passed the bill with a vote of 56-22 on July 29, after more than 29 hours in session.

Governor Davis signed the budget on August 2, saying the spending plan “offers no reason for celebration. But I'm going to sign this budget nonetheless because the cost of not signing it is too high." He said the budget bill addresses the entire $38 billion projected shortfall. Governor Davis vetoed a total of $1 million from the budget, which has a reserve of $2.2 billion.

The budget will leave the state facing $8 billion in red ink in the fiscal year that begins July 1, 2004, according to the nonpartisan Office of the Legislative Analyst. The budget relies heavily on one-time fixes and does not remedy the structural problems that led to California's massive deficit.

The 2003-04 budget includes the unprecedented sale of $10.7 billion in deficit bonds, which will be repaid over a five years from revenue derived from a complicated tax swap with cities and counties. The swap consists of taking away a half-cent of sales tax revenue that currently flows to cities and counties and replacing it with a half-cent of property tax proceeds for five years in order to secure the dedicated repayment source for the deficit-financing plan that Wall Street is requiring of California. Local government would receive property tax money currently going to schools to cover its loss. The state’s General Fund would repay schools for the money shifted to local government. The budget plan also borrows to pay state pensions and takes out loans secured by settlement payments from cigarette makers. Finally, the budget relies on a tripling of the vehicle license fee, the receipt of $2.2 billion in federal funds, suspension of the manufacturer’s investment tax credit, and significant fee increases.

Two recent events—the state’s credit downgrade to near junk bond status and the qualification of the first gubernatorial recall in California history—pushed along the budget compromise. Senator John Burton (D-San Francisco), President Pro-Tempore of the State Senate, told his fellow Senators on the floor of the Senate chambers prior to the vote that there was “something in here for almost everyone to hate.” Although Burton also remarked “most MediCal options and MediCal eligibility were kept,” social service programs are at the top of Sen. Burton’s budget protection priority list.

The Legislature also voted on more than 20 trailer bills that followed the initial passage of the Budget. The trailer bills are needed to help implement the final budget plan.

Here are the key items of interest to water agencies throughout California and how they appear in the 2003-04 State Budget and its trailer bills:

Multi-County ERAF Exemption – This exemption will stay intact. As a comparison, redevelopment agencies took a big hit with trailer bill language that requires a one-time $250 million shift to ERAF.
Enterprise Special Districts – This exemption will stay intact. However, the SB 407 (Torlakson) proposal is still on the Assembly Appropriations Suspense File and could move forward in late August.

1% Ad Valorem Property Tax – The current portion that special districts receive from their counties will not be reduced.

Proposition 50 – Implementation language for Prop. 50 is included in an AB 1747 Budget trailer bill.

CALFED Beneficiaries Pay – The Budget bill contains legislative intent language directing the California Bay-Delta Authority to submit a broad based Bay Delta user fee proposal for inclusion in next year’s 2004-05 Governor’s Budget, consistent with the "beneficiaries pay" principle specified in the CALFED Record of Decision (ROD).

Flood Control Subvention – $116 million has been appropriated toward the Department of Water Resources’ local flood control subvention program the 2002-03 fiscal year.

District Reserves – Water agencies' internal savings accounts and dedicated reserves will not be utilized to help balance the budget.

Dam Safety Fees – Water districts and other public and private dam owners pay an annual dam safety fee to the state Department of Water Resources from a formula that is a combination of a $150 flat fee with a fee of $16 per foot of dam height. The state is currently paying 70% of the costs of the dam safety program. A new fee schedule was previously contained within the AB 1747 trailer bill: $200 flat fee combined with $60 per foot of dam height with a newly created 20-cents per acre-foot of total dam storage capacity. AB 1747, passed by the Senate, does not contain the Dam Safety Fee increases. (The Legislative Counsel Web site had hosted the incorrect version. The Web site is now hosting the correct, fee-free version at www.leginfo.ca.gov.)

Water Rights Compliance Fees – Water districts pay an initial one-time water rights fee. The Legislature has included a new Water Rights Compliance Fee to be assessed on all water rights holders under the State Water Resources Control Board's (SWRCB) jurisdiction. An as-yet-unnamed budget trailer bill will eventually hold the language of this new fee, and the Budget bill, AB 1765, earmarks $4.39 million to come from water rights holders annually. Senator Brulte announced prior to the Budget bill vote that more Budget trailer bills would be considered on new fees and current fee increases when the Legislature returns from its summer recess in mid-August. Those could include the return of the Dam Safety Fee increase as well as others.

“ACWA members are going to be hit with dramatically higher fees for state services with this budget, which represents a shift from state General Fund support to user fees,” said Bob Reeb, ACWA state legislative director. “We’re seeking more information on the state board water rights and DWR dam safety fee proposals and will be prepared to lobby on our behalf of our members when the Legislature reconvenes August 18th. Our principal concern remains the threat to local property tax revenues that remain after the ERAF shift imposed in the early 1990s given calls for structural reform in the context of the state budget. We’re not out of the woods yet.”

Reeb said the shift to user fees will reduce legislative oversight because little and in some cases no General Fund dollars will go to support state programs. That means it will be more difficult to ensure that these state programs are efficiently run.

“Of course, reducing or removing General Fund support for these programs fails to take into account the tax revenue flowing into the General Fund as a result of the economic activity generated by water and wastewater facilities and services. The General Fund benefits, but the burden for paying for state services will now fall more heavily on local water and wastewater ratepayers. The nexus between state benefits and state responsibility to pay for programs has been completely lost with these actions.”

To view the full text of the Budget Act, AB 1765, log on to www.leginfo.ca.gov.

– Wendy Ridderbusch, State Legislative Advocate