Analysis of Proposition 204

by the Legislative Analyst

BACKGROUND

Water Quality and Supply. In past years, the state has provided funds for projects that improve water quality and supply. For example, the state has provided loans and grants to local agencies for the construction and implementation of wastewater treatment, water supply, and water conservation projects and facilities. The state has sold general obligation bonds to raise the money for these purposes. As of June 1996, all but about $79 million of the $2 billion authorized by previous bond acts had been spent or committed to specific projects. Project applications have been received for most of the remaining uncommitted funds.

Bay-Delta. The state also has funded the restoration and improvement of fish and wildlife habitat in the San Francisco Bay/Sacramento-San Joaquin Delta Estuary (the Bay-Delta) and other areas, using various fund sources including general obligation bonds and the state General Fund. The Bay-Delta supplies a substantial portion of the water used in the state for domestic, industrial, agricultural, and environmental purposes. For example, water flowing through the Bay-Delta provides drinking water for about 22 million people in California and irrigates 45 percent of the fruits and vegetables produced in the United States. In addition to supplying water, the Bay-Delta provides habitat for fish and wildlife, including several endangered species, and an estimated 80 percent of the state's commercial fishery species live in or migrate through the Bay-Delta. Increased demand for water from the Bay-Delta, combined with other factors such as pollution, degradation of fish and wildlife habitat, and deterioration of delta levees and flood control facilities, has reduced the Bay-Delta's capacity to provide reliable supplies of water and sustain fish and wildlife species.

The CALFED Bay-Delta Program is a joint state and federal effort to develop a long-term approach to restoring ecological health and improving water management in the Bay-Delta. Total capital costs for the various alternatives under consideration range from $4 billion to $8 billion over the next 20 to 40 years. It is anticipated that funding would come from a variety of federal, state, local, and private sources.

Flood Control. The state also provides funds to local agencies for flood control projects. The state has not previously sold general obligation bonds to fund the construction of local flood control projects or facilities. Rather, these projects have primarily been funded from the state General Fund. However, due to the state's fiscal condition in recent years, the state has been unable to pay its share of the costs of these projects. As of June 1996, the unpaid amount of the state's share of costs for local flood control was about $158 million.

PROPOSAL

This measure authorizes the state to sell $995 million of general obligation bonds for the purposes of restoration and improvement of the Bay-Delta; wastewater treatment and water supply and conservation; and local flood control and prevention. General obligation bonds are backed by the state, meaning that the state is required to pay the principal and interest costs on these bonds. General Fund revenues would be used to pay these costs. General Fund revenues come primarily from the state personal and corporate income taxes and sales tax.

Figure 1 lists the purposes for which the bond money would be used. The bond money will be available for expenditure by various state agencies and for loans and grants to local agencies. The measure specifies the conditions under which the funds are available for loans, including the terms for interest and repayment of the loans.

In some instances, the measure makes the expenditure of bond funds contingent on actions by the state or federal government. For example, under the measure, funds for projects to restore the Bay-Delta ecosystem may not be spent until the state and federal governments have completed their environmental review of the projects and have entered into a cost-sharing agreement for funding those projects.

In addition to authorizing the sale of bonds, the measure requires that the repayment of loans funded under the 1988 Clean Water and Water Reclamation Bond (Proposition 83) be used to provide additional loans and grants for local water recycling projects.

FISCAL EFFECT

Costs of Paying Off the Bonds. For these types of bonds, the state typically makes principal and interest payments from the state's General Fund over a period of about 25 years. If all of the bonds authorized by this measure are sold at an interest rate of 6 percent, the cost would be about $1.8 billion to pay off both the principal ($995 million) and interest ($776 million). The average payment for the principal and interest would be about $71 million per year.

However, total debt repayment costs to the state will be somewhat less than the $1.8 billion. First, bonds used to fund revolving loan programs ($175 million) may have to be financed over a shorter period than is typically used for most state bonds in order to comply with federal law. Consequently, total interest costs on these bonds would be less than if the payments were made over 25 years. Second, the measure requires that loans made for construction of drainage water management and local water projects be repaid to the state General Fund. The repayments of these loans could reduce the state General Fund cost by about $70 million over the life of the bonds.

Use of Repayments of Past Loans. The 1988 Clean Water and Water Reclamation Bond (Proposition 83) authorized up to $40 million in loans to local agencies. Currently, repayments of these loans are used to pay off the bonds. This measure requires, instead, that the repayments be used to provide additional loans and grants for local water recycling projects. As a result, this will result in a General Fund cost of at least $60 million to pay off the principal and interest of these bonds.

Figure 1 Proposition 204 Safe, Clean, Reliable Water Supply Act Uses of Bond Funds (In Millions) Amount Bay-Delta Improvement $193 Central Valley Project Improvement--fish and wildlife restoration 93 Bay-Delta non-flow-related projects 60 Delta levee rehabilitation and maintenance and flood protection 25 South Delta environmental enhancement and mitigation 10 CALFED state's share of administration 3 Delta recreation 2 CALFED Bay-Delta Ecosystem Restoration $390 Existing habitat protection and enhancement -- a Tidal, riparian, wetlands, and other habitat restoration -- a Instream flow improvements -- a Fish protection and management -- a Clean Water and Water Recycling $235 Wastewater treatment 110 Water recycling and reclamation 60 Treatment and management of agricultural drainage water 30 Delta tributary watershed rehabilitation 15 Seawater intrusion control 10 Lake Tahoe water quality 10 Water Supply Reliability $117 Water conservation and groundwater recharge 30 River parkway acquisition and riparian habitat restoration 27 Local water supply development and environmental mitigation 25 Sacramento Valley water management and habitat protection 25 Feasibility investigations for off-stream storage, water recycling, water transfer facilities, and desalination 10 Local Flood Control and Prevention $60 Claims submitted by 6/30/96 for projects in specified counties 60 Total $995 a Amounts not specified.