ASSEMBLY THIRD READING

ATR Bill Id:AB 217

Author:(Burke)

As Amended Ver:June 13, 2019

2/3 vote. Urgency

SUMMARY:

Enacts the Loophole Closure and Small Business and Working Families Tax Relief Act of 2019.

Major Provisions

1. Revises the calculation factors to increase the California Earned Income Tax Credit (CalEITC) for specified taxpayers.
2. Increases, for taxable years beginning on or after January 1, 2019, the maximum eligible earned income to $30,000 for the CalEITC.
3. Provides, for each taxable year beginning on or after January 1, 2019, a refundable young child tax credit to a qualified taxpayer of up to $1,000.
4. Provides that the excess business losses, as defined, of a non-corporate taxpayer are not allowed as a deduction.
5. Limits "like-kind" exchange treatment to real property, subject to limited exceptions for middle-income taxpayers.
6. Disallows the use of net operating loss (NOL) carrybacks by individual and corporate taxpayers.
7. Disallows or limits the amount specified taxpayers may deduct for Federal Deposit Insurance Corporation premiums depending on the amount of total consolidated assets, as defined, of the taxpayer.
8. Revises the definitions of a "covered employee" and "publicly held corporation" to limit the amount those specified taxpayers may deduct for executive employee compensation.
9. Repeals the provisions providing for the technical termination of a partnership under certain circumstances.
10. Allows a small business to use the cash method of accounting if its average annual gross receipts for the three taxable years ending with the prior taxable year do not exceed $25 million.
11. Excludes from an individual's gross income the amount of student loan indebtedness discharged on or after December 31, 2018, due to the death or disability of the student, as provided.
12. Allows for additional contributions to ABLE accounts.
13. Provides that a federal election under Internal Revenue Code Section 338 shall be binding for state purposes.

COMMENTS:

This bill's modifications to the CalEITC: Among other things, this bill increases, for taxable years beginning on or after January 1, 2019, the maximum eligible earned income to $30,000 for the CalEITC. This bill also provides, for each taxable year beginning on or after January 1, 2019, a refundable young child tax credit to qualified taxpayers of up to $1,000.

Small business relief: This bill aligns with federal law by allowing small businesses with gross receipts of up to $25 million to use the "cash method" of accounting, rather than the more complicated accrual method. The current state threshold is generally set at $5 million. Without this bill, small businesses may be forced to keep two separate sets of books for federal and state purposes.

Assisting ABLE beneficiaries: This bill allows funds in a 529 account for higher education expenses to be rolled over, without penalty or tax, to an individual's ABLE account. This, in turn, will allow individuals with disabilities to plan for a secure future.

Loophole closures: Among other things, this bill aligns with federal law by: 1) providing that the excess business losses of a non-corporate taxpayer are not allowed as a deduction; 2) eliminating NOL carrybacks; and 3) limiting "like-kind" exchange treatment to real property (subject to an exception for middle-income individuals).

According to the Author:

"AB 217 advances three critical priorities. First, this bill provides much-needed assistance to working Californians by expanding California's Earned Income Tax Credit. Second, this bill provides significant tax relief to small businesses, students, and individuals with disabilities. Finally, AB 217 helps to safeguard California's fiscal footing, in both the short and long term, by closing a series of loopholes that provide unjustified tax breaks. All in all, this legislation reflects a thoughtful and balanced approach that puts the needs of everyday Californians first."

Arguments in Support:

The California Business Roundtable notes: "We believe that conformity is not just good tax policy, it is good public policy as well. It will help decrease confusion for tax filers – both individuals and businesses – and will help provide a more predictable and stable revenue structure that will not adversely affect the economy or worsen our state's affordability crisis."

Arguments in Opposition:

The Association of Global Automakers notes: "Repealing LKE is not true tax conformity and enacts a substantial and inequitable tax increase on auto manufacturers. The Administration's elimination of LKE fails to conform to the TCJA, which mitigated the repeal of LKE treatment by also enacting full expensing, in the form of 100 percent bonus depreciation, for assets placed in service after September 28, 2017 and before January 1, 2023."

FISCAL COMMENTS:

The Department of Finance estimates that this bill will result in revenue losses of $216 million in fiscal year (FY) 2018-19, and revenue gains of $602 million in FY 2019-20, and $278 million in FY 2020-21.

VOTES:

ASM ENVIRONMENTAL SAFETY AND TOXIC MATERIALS: Vote not relevant

YES:

NO:

ASM APPROPRIATIONS: Vote not relevant

YES:

NO:

ASM REVENUE AND TAXATION: 7-0-4

YES: Burke, Chu, Gray, Mullin, Quirk, Luz Rivas, Ting

ABS, ABST OR NV: Brough, Mayes, Melendez, Petrie-Norris

UPDATED:

VERSION: June 13, 2019

CONSULTANT: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0001107

Date of Hearing: June 17, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 217 (

Author:Burke) – As Amended Ver:June 13, 2019

2/3 vote. Urgency. Fiscal committee.

SUBJECT: Income taxation: credits: exclusions: federal conformity

SUMMARY: Enacts the Loophole Closure and Small Business and Working Families Tax Relief Act of 2019. Specifically, this bill:

1. Revises the calculation factors to increase the California Earned Income Tax Credit (CalEITC) for specified taxpayers.
2. Increases, for taxable years beginning on or after January 1, 2020, the maximum eligible earned income to $30,000 for the CalEITC.
3. Provides, for each taxable year beginning on or after January 1, 2019, a refundable young child tax credit to a qualified taxpayer of up to $1,000.
4. Provides that the excess business losses, as defined, of a non-corporate taxpayer are not allowed as a deduction.
5. Limits "like-kind" exchange treatment to real property, subject to limited exceptions for middle-income taxpayers.
6. Disallows the use of net operating loss (NOL) carrybacks by individual and corporate taxpayers.
7. Disallows or limits the amount specified taxpayers may deduct for Federal Deposit Insurance Corporation (FDIC) premiums depending on the amount of total consolidated assets, as defined, of the taxpayer.
8. Revises the definitions of a "covered employee" and "publicly held corporation" to limit the amount those specified taxpayers may deduct for ordinary and necessary expenses.
9. Repeals the provisions providing for the technical termination of a partnership under certain circumstances.
10. Allows a small business to use the cash method of accounting if its average annual gross receipts for the three taxable years ending with the prior taxable year do not exceed $25 million.
11. Excludes from an individual's gross income the amount of student loan indebtedness discharged on or after December 31, 2018, due to the death or disability of the student, as provided.
12. Allows for additional contributions to ABLE accounts.
13. Provides that a federal election under Internal Revenue Code (IRC) Section 338 shall be binding for state purposes.

EXISTING FEDERAL LAW allows eligible individuals a refundable EITC. A refundable credit allows for the excess of the credit amount over the taxpayer's tax liability to be refunded to the taxpayer. The EITC is calculated as a percentage of the taxpayer's earned income and is phased out as income increases. For 2018, the EITC is available to individuals and families earning up to $54,884. The federal credit rate varies from 7.65% to 45%, depending on the number of qualifying children. The maximum credit ranges from $519 for an eligible individual without a qualifying child up to $6,431 for an eligible individual with three or more qualifying children.

EXISTING STATE LAW:

1. Allows, with certain modifications, a refundable CalEITC based on the federal EITC amount determined in accordance with IRC Section 32.
2. Provides that the amount of credit determined under IRC Section 32, as modified, shall be multiplied by an EITC adjustment factor for the taxable year, and that unless otherwise specified in the annual Budget Act, the EITC adjustment factor shall be 0%.
3. Generally conforms, with modifications, to the federal definitions of an "eligible individual" and a "qualifying child". However, for taxable years beginning on or after January 1, 2018, the age limit for an eligible individual without a qualifying child is 18 years or older, rather than between the ages of 25 and 64 years.
4. Provides, for 2018, that the CalEITC is generally available to households with adjusted gross income (AGI) of less than $24,950.
5. Conforms, with modifications, to various provisions of federal tax law as it read on January 1, 2015.

FISCAL EFFECT: Pending

COMMENTS:

1. The author has provided the following statement in support of this bill:

AB 217 advances three critical priorities.  First, this bill provides much-needed assistance to working Californians by expanding California's Earned Income Tax Credit.  Second, this bill provides significant tax relief to small businesses, students, and individuals with disabilities.  Finally, AB 217 helps to safeguard California's fiscal footing, in both the short and long term, by closing a series of loopholes that provide unjustified tax breaks.  All in all, this legislation reflects a thoughtful and balanced approach that puts the needs of everyday Californians first.

1. This bill is supported by Small Business California, which notes the following:

Assembly Bill 217 will expand the CalEITC program to individuals making up to $30,000 annually. The expansion would ensure that many of the low-income solo entrepreneurs and small businesses are eligible for the Earned Income Tax Credit. [. . .]

Additionally, AB 217 will increase the number of eligible California households from [2] million to [3] million, thereby providing more expendable income to lower income families and their children.

Most importantly, expanding the CalEITC program would close loopholes and eliminate the discrepancies between state and federal tax filings.

1. Committee Staff Comments:
   
   1. The federal EITC: The federal EITC allows workers filing a tax return who earn less than a certain amount (roughly $46,000 for single workers with two dependents) to reduce their federal tax liability. The credit is refundable. Put simply, this means that a worker receives the full credit amount even if it reduces their tax liability below zero.

The amount of the credit, in turn, depends on the worker's "earned income" (which primarily includes wages and self-employment income), filing status, and number of qualifying dependent children. The amount of the federal credit initially rises with earnings. The credit peaks and is then flat for a range of income – between $14,250 and $18,700, for example, in the case of single workers in 2018 with two dependents. The credit then gradually phases out for workers with higher levels of income (generally those working full time).

The Legislative Analyst's Office (LAO) notes that, in 2016, the average credit nationally was $3,181 for workers with dependent children. The benefit for workers with no qualifying children, however, is significantly less. The maximum credit for such individuals is $519.

• 1. A successful tool in fighting poverty: In 2016, 3.1 million California workers earned a total of $7.2 billion in federal credits, with an average credit amount of $2,314. According to the LAO, these EITC amounts moved an estimated 750,000 Californians' income above the federal poverty level ($20,160 annually for a family of three in 2016).
  2. California's EITC: California began offering its own CalEITC starting with the 2015 tax returns. Most of the CalEITC's provisions are modeled after the federal program. As with the federal credit, the CalEITC is refundable and the credit amounts are larger for filers with more dependents. The Franchise Tax Board (FTB) annually adjusts the income thresholds and credit amounts for inflation. The LAO notes that, in tax year 2017, roughly 1.5 million California filers received a total of $348 million in credits under the CalEITC program. Nearly one-half of these workers did not have dependents and, as such, received much smaller CalEITC benefits.

The Legislature expanded the CalEITC for tax year 2018 in two ways. First, the income limits were raised from $22,300 to $24,950 for filers with dependents and from $15,000 to $16,750 for workers with no dependents. Second, workers with no dependents who are under age 25 or over age 65 were made eligible. The LAO notes that no filing data is currently available on how this expansion has impacted the number of filers claiming the credit or the credit's total cost. According to the Administration's current estimates, however, the current CalEITC program is expected to cost $410 million in fiscal year 2018-19.

• 1. This bill's modifications to the CalEITC: Among other things, this bill revises the calculation factors to increase the CalEITC for specified taxpayers. This bill also increases, for taxable years beginning on or after January 1, 2020, the maximum eligible earned income to $30,000 for the CalEITC. Finally, this bill provides, for each taxable year beginning on or after January 1, 2019, a refundable young child tax credit to qualified taxpayers of up to $1,000.
  2. The Tax Cuts and Jobs Act of 2017: On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 (the "Act"), which dramatically restructured the federal tax system for both individuals and businesses. Among other things, the Act:
     1. Replaced the graduated corporate tax structure with a flat 21% rate;
        
     2. Established a new rate structure for the individual income tax;
        
     3. Increased the basic standard deduction to $24,000 for a joint return or a surviving spouse, $18,000 for a head of household, and $12,000 for other individuals;
     4. Allowed individual taxpayers generally to deduct 20% of qualified business income with respect to a partnership, S corporation, or sole proprietorship;
     5. Repealed the corporate alternative minimum tax; and,
     6. Made significant changes to federal taxes for multinational corporations.

Several of the Act's tax law changes are temporary, and apply only for tax years 2018 through 2025. Many of the Act's changes to business taxation, however, are permanent.

Because California's income tax laws are largely tied to federal statute as it read on January 1, 2015, many of the Act's changes created new differences between state and federal tax law. Specifically, state law has not yet aligned with any of the federal changes made in 2017.

• 1. The Governor's proposal: The Governor has proposed adopting, either wholesale or with modifications, several provisions of the Act. These provisions include limits on non-corporate business losses, increased accounting flexibility for small businesses, changes to like-kind exchanges, and the elimination of NOL carrybacks.
  2. Why align state and federal law? States conform to federal tax law for several reasons. The LAO notes that, by using the federal definition of income as a starting point to calculate state tax liability, states may reduce the compliance burden for tax filers while reducing errors. Moreover, referring to federal tax law allows state tax administrators and filers alike to rely on federal regulations, judicial rulings, and guidance from the Internal Revenue Service. In addition, alignment allows states to benefit from federal tax audits.
     
  3. A brief history of California conformity: The LAO notes that after the last major federal tax overhaul in 1986, California passed legislation in 1987 to selectively adopt federal changes while updating the specified date of conformity. The LAO notes that this legislation also reduced state tax rates, increased the personal exemption credit, and increased the standard deduction. It should be noted, however, that the Legislature has sometimes passed conformity legislation several years after changes in federal law. For example, the most recent major tax conformity legislation was AB 154 (Ting), Chapter 359, Statutes of 2015, which changed California's "specified date" of conformity from January 1, 2009, to January 1, 2015.
     
  4. This bill's tax-related provisions: This analysis is intended to provide a high-level overview of each of this bill's major provisions. For a more detailed explanation, readers are encouraged to review the Summary of Federal Income Tax Change prepared by the FTB.

• • 1. Limitation on losses for taxpayers other than corporations: The Personal Income Tax (PIT) Law generally allows a non-corporate taxpayer to deduct business losses from a pass-through entity, such as an S corporation. Under existing federal law, as amended by the Act, for taxable years beginning after December 31, 2017, and before January 1, 2026, the excess business losses, as defined, of a non-corporate taxpayer are not allowed as a deduction and instead those losses must be carried forward and treated as a NOL in subsequent taxable years.
       
       This bill, for taxable years beginning after December 31, 2018, would provide modified conformity to the above-described limitation, including not conforming to the federal sunset date.
       1. LAO comments: The LAO noted the following in its tax conformity report of March 6, 2019:

In some years, the costs of running a business exceed its gross income, resulting in a loss. Filers generally can deduct business losses from other sources of income. (To prevent abuses, there are limitations on the type of business losses a filer may deduct.) The [Act] limits such deductions to $250,000 ($500,000 for married couples). Business losses in excess of that amount become a NOL, which the filer may deduct from income the following year.

The LAO notes that limiting the ability of some taxpayers to use business losses to reduce taxable income from nonbusiness sources could potentially discourage investment in new or expanded business operations. New businesses often experience losses in their first few years. Allowing taxpayers to use these business losses to offset other income lessens the impact of these losses on business owners. Nevertheless, the LAO notes that conforming to the federal limits on non-corporate business losses in excess of $250,000 could make sense for a number of reasons. Among other things, the LAO notes that some taxpayers create businesses not to make a profit but to generate losses aimed at reducing the filer's tax liability. Limiting business losses would discourage this kind of activity.

• • • 1. Administration comments: The Administration notes that limiting non-corporate business losses will impact fewer than 11,000 households in the state. According to 2016 data, these households have an average income (after excluding excess losses) of $3.4 million.

• • 1. Like-kind exchange limits: The PIT Law and the Corporation Tax (CT) Law, in modified conformity with federal law, exclude the recognition of any gain or loss on the exchange of property held for productive use in a trade or business or for investment, if that property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment, unless an exception applies.

This bill would conform to federal income tax law, as amended by the Act, by generally limiting that exclusion to the recognition of any gain or loss on the exchange of real property, as provided.

• • • 1. LAO comments: The LAO noted the following in its tax conformity report of March 6, 2019:

Tax filers may defer paying PIT and CT on capital gains from sales of certain types of property if they purchase a similar type of property within 180 days. The [Act] restricted these "like-kind exchanges" rules to apply only to real estate. As a result, tax filers who sell certain other types of tangible or intangible assets – such as vehicles, artwork, collectibles [. . .] – may no longer defer paying tax on their capital gains through like-kind exchanges. Real estate has historically accounted for most like-kind exchanges.

Conforming to the federal limits on like-kind exchanges raises competing policy arguments. As the LAO notes, there is a reasonable argument for deferring capital gains taxes in a like-kind exchange scenario. Specifically, if a taxpayer uses all of the cash from a property sale to purchase new property, he or she may not have funds available to pay taxes on their capital gains. At the same time, the benefits conferred by like-kind exchange treatment may induce taxpayers to invest in certain property to achieve favorable tax treatment when a different investment decision may be optimal. At the end of the day, it is highly likely that the number of personal property like-kind exchanges will decrease significantly as a result of the federal tax changes. Thus, the LAO notes that state conformity likely will have a smaller effect on behavior than would otherwise be the case.

• • • 1. Protecting middle-class taxpayers: To ensure that this provision does not adversely impact middle-class taxpayers, this bill limits this provision to individual taxpayers making over $250,000 a year, or $500,000 if filing jointly. Thus, taxpayers falling below these thresholds will still be able to benefit from like-kind exchanges for personal property at the state level.

• • 1. Eliminating NOL carrybacks: The PIT Law and the CT Law allow various deductions in computing the income that is subject to the taxes imposed by those laws. Existing law also allows NOLs attributable to taxable years beginning on or after January 1, 2013, to be "carrybacks" to each of the preceding two taxable years, as provided.

This bill, in turn, would disallow the use of NOL carrybacks by individual and corporate taxpayers.

• • • 1. LAO comments: The LAO noted the following in its tax conformity report of March 6, 2019:

Conforming to federal changes related to NOL deductions could allow the state to recognize some benefits while continuing to smooth corporations' gains and losses. Although conforming to the federal changes would restrict businesses' ability to smooth income and tax payments to some extent, businesses would retain significant ability to do so. At the same time, conformity – specifically limiting carrybacks – likely would offer increased fiscal certainty for the state, especially during a recession.

• • 1. FDIC premiums: The PIT Law and the CT Law, in modified conformity with federal law, allow various deductions from gross income in computing AGI under those laws, including a deduction, as a trade or business expense, of the premiums paid pursuant to an assessment by the FDIC.

This bill would conform to federal law, as amended by the Act, by disallowing or limiting the amount specified taxpayers may deduct for these premiums depending on the amount of total consolidated assets, as defined, of the taxpayer.

• • • 1. Administration comments: The Administration notes that this provision caps the deduction on FDIC premiums for banks with more than $10 billion in assets and eliminates it for banks above $50 billion. The Administration also notes that smaller banks and credit unions will not be impacted by this change.
    1. Closing executive compensation loophole: The PIT Law and the CT Law, in modified conformity with federal law, allow various deductions from gross income in computing AGI under those laws, including a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Existing law, however, prohibits a deduction from being allowed with respect to any "covered employee" of a publicly held corporation if the amount of applicable employee remuneration exceeds $1 million.

This bill would conform to federal law, as amended by the Act, by revising the definitions of a "covered employee" and "publicly held corporation" to limit the amount those specified taxpayers may deduct for ordinary and necessary expenses. This bill would also disallow the performance-based compensation and commission exceptions with respect to the deduction limitation relating to covered employees.

• • • 1. Administration comments: The Administration notes that this provision closes the loophole that subsidizes massive payouts to executives by allowing corporations to deduct compensation to executives in excess of $1 million by styling it as a "bonus".

• • 1. Repeals "technical termination" of partnerships: The PIT Law conforms as of a specified date to federal income tax laws (January 1, 2015), and therefore allows for the termination of a partnership by the sale or exchange of 50% or more of the interest in a partnership within a 12-month period. The Act, however, repealed that provision of federal income tax law for taxable years beginning on or after January 1, 2018.

This bill, in turn, would conform to federal income tax law with regard to the termination of partnerships described above and would additionally allow a partnership to elect to have this conformity apply to partnership taxable years beginning after December 31, 2017, and before January 1, 2019.

• • 1. Increasing flexibility for small business accounting: At the federal level, the Act allows a small business to use the cash method of accounting if its average annual gross receipts for the three taxable years ending with the prior taxable year do not exceed $25 million. Existing state law, however, only allows a small business to use the cash method of accounting if its average annual gross receipts for the three taxable years ending with the prior taxable year do not exceed $5 million.

This bill, for taxable years beginning on or after January 1, 2019, would conform the PIT Law and the CT Law to the increase to $25 million made by the Act in the allowable amount of annual gross receipts of a small business allowed to use the cash method of accounting. This bill would also allow a taxpayer to elect to have this conformity apply to taxable years beginning on or after January 1, 2018, and before January 1, 2019.

• • • 1. LAO comments: The LAO noted the following in its tax conformity report of March 6, 2019:

Allowing greater accounting flexibility would simplify tax filing for roughly 60,000 businesses in California. Given the complexity associated with business accounting, conforming to this change would reduce significant differences in tax filing for some medium-sized businesses. This additional flexibility, however, could result in some businesses reducing their tax liability and lower tax payments somewhat.

• • • 1. Administration comments: The Administration notes that this provision, among other things, would provide $280 million in relief to small businesses by simplifying accounting rules for small businesses with up to $25 million in receipts, enabling them to elect cash rather than the more complicated accrual method of accounting.

• • 1. Student loan indebtedness discharged due to death or disability: The PIT Law provides for various exclusions from gross income, including an exclusion for the amount of student loan indebtedness repaid or cancelled pursuant to specified federal law.

This provision would exclude from an individual's gross income the amount of student loan indebtedness discharged on or after December 31, 2018, due to the death or disability of the student, as provided.

• • 1. Rolling over funds into ABLE accounts: Recent changes to federal tax law allow for amounts from a 529 account to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account or a member of such designated beneficiary's family. The rolled-over amounts count toward the overall limitation on amounts that can be contributed to an ABLE account within a taxable year. Because California conforms to IRC Section 529 as of the "specified date" of January 1, 2015, amounts that are rolled over from a 529 account into an ABLE account will be included in income and subject to an additional tax of 2.5% for California purposes. Conformity to recent federal changes in the ABLE Act made by the Act may be especially important in that beneficiaries and guardians of beneficiaries may be unaware of the disparity between federal and state law. Without realizing the disparity, beneficiaries may be shocked to find that funds transferred to an ABLE account are subject to the 2.5% penalty for state purposes.
    2. Increased contributions to ABLE accounts: Recent changes to federal tax law allow a designated beneficiary to contribute an additional amount, up to the lesser of the federal poverty line for a one-person household or the individual's compensation for the taxable year. The increased contribution limit for a designated beneficiary applies to taxable years beginning after December 22, 2017, and before January 1, 2026. Because California conforms to federal law as of the "specified date" of January 1, 2015, an ABLE account may not receive aggregate contributions during the taxable year in excess of the gift limitation, which prevents a designated beneficiary from contributing an additional amount once the gift limit has been reached.
    3. 338 election: Existing federal law allows a purchasing corporation to make an election to treat its qualified stock purchase from a target corporation as an asset acquisition resulting in a step up in basis. The CT Law, however, allows for a different election at the state level. This, in turn, permits large, multi-state corporations to take advantage of differing rules at the state and federal levels to minimize their tax liability with no economic justification. This bill would provide that, once a taxpayer makes a 338 election at the federal level, that same election shall be used for state purposes.

REGISTERED SUPPORT / OPPOSITION:

Support

AFSCME CA

Alameda County Community Food Bank

California Asset Building Coalition

California Business Roundtable

California Catholic Conference

California Church Impact

California Food Policy Advocates

California Partnership

California Reinvestment Coalition

Children's Defense Fund – CA

Close Loopholes, Open Opportunities Coalition

County Welfare Directors Association

Economic Security Project Action

End Child Poverty in California

Food Bank of Contra Costa and Solano

Friends Committee on Legislation of California

Golden State Opportunity

GRACE Institute

Interfaith Movement for Human Integrity

John Burton Advocates for Youth

Justice in Aging

Lutheran Office of Public Policy California

National Association of Social Workers, California Chapter

National Association of Women Business Owners, California

National Association of Women Business Owners, Sacramento

National Association of Women Business Owners, Ventura County

National Council of Jewish Women CA

NextGen California

SEIU CA

Small Business California

UFCW CA

Western Center on Law and Poverty

Young Invincibles

Opposition

None on file

Analysis Prepared by: M. David Ruff & Carlos Anguiano / REV. & TAX. / (916) 319-2098

ASSEMBLY THIRD READING

ATR Bill Id:AB 217

Author:(Eduardo Garcia)

As Amended Ver:May 21, 2019

2/3 vote. Urgency

SUMMARY:

Creates the Safe Drinking Water for All Act (Act), which establishes the Safe and Affordable Drinking Water Fund (Fund) to provide a source of funding for safe drinking water for all Californians, and long-term sustainability of drinking water systems. Imposes several fees on agricultural activities and a charge on retail water systems that together would provide the source of revenue to the Fund.

Major Provisions

1) Requires each producer owning a nondairy confined animal facility, a licensee of bulk or packaged fertilizing materials, and a handler of milk to pay an annual drinking water fee. Requires the State Water Resources Control Board (State Water Board) to ensure that these fees are used to address nitrate-related contamination issues.

2) Requires the State Water Board to administer the Fund to provide funding for all Californians to secure access to safe drinking water, and for ensuring long-term sustainability of drinking water service and infrastructure.

3) Requires the State Water Board to prioritize the use of the Fund to assist disadvantaged communities and low-income households served by a state small water system or a domestic well.

4) Requires the State Water Board to expend moneys in the fund for grants, loans, contracts, or services to assist eligible applicants with the provision of replacement water, to ensure immediate protection of health and safety as a short-term solution; for the development, implementation, and sustainability of long-term drinking water solutions; and, for testing the drinking water quality of domestic wells serving low-income households in high-risk areas identified by the State Water Board

5) Requires the State Water Board, in administering the Fund, to make reasonable efforts to ensure that funds are used to secure the long-term sustainability of drinking water service and infrastructure, including, but not limited to, requiring adequate technical, managerial, and financial capacity of eligible applicants as part of funding agreement outcomes. Requires the State Water Board, to make reasonable efforts to ensure that parties responsible for the contamination of drinking water supplies who can be directly or easily identified by the State Water Board pay or reimburse costs associated with contamination.

6) Authorizes the State Water Board to provide money from the Fund to the Attorney General for the purpose of bringing litigation against parties responsible for the contamination of drinking water supplies and to recover costs of remediation from those responsible parties.

7) Creates a statewide safe and affordable drinking water system charge of 50 cents per service connection per month on all retail water systems. Requires public water systems that seek to recover this system charge from its ratepayers to incorporate the costs into its water rates and not impose a per-connection fee.

8) Requires the State Water Board to annually allocate 20% of the revenues originating in each of the Division of Drinking Water regions to the region from which the revenues originate for implementation of an approved sustainable plan for restoring safe drinking water to an identified community.

COMMENTS:

Lack of clean, safe drinking water: Although most of the state's residents receive drinking water that meets federal and state drinking water standards, many drinking water systems in the state consistently fail to provide safe drinking water to their customers. The lack of safe drinking water is a problem that disproportionately affects residents of California's disadvantaged communities.

Current approaches to address a lack of clean safe drinking water: In addition to this bill, there is a senate bill, SB 200, and a proposal by the Governor. SB 200 (Monning) would create the Safe and Affordable Drinking Water Fund, administered by the State Water Board, to assist communities and individual domestic well users on addressing contaminants in drinking water that exceed safe drinking water standards. SB 200 would require the State Water Board to adopt a fund implementation plan and would require expenditures of the fund to be consistent with the plan. It would also require the State Water Board, in consultation with local health officers and others, to make publicly available a map of aquifers that are used or likely to be used as a source of drinking water that are at high risk of contamination.

Governor Newsom has proposed a trailer bill as part of his fiscal year 2019-20 Budget that would establish the Safe and Affordable Drinking Water program (program) to increase access to safe drinking water for Californians. The program would provide certain local water agencies with grants, loans, contracts, or services to help support their operations and maintenance costs. This funding would be supported by new charges proposed by the Governor on water system ratepayers, fertilizer sales, and certain agricultural entities. The proposal also provides enforcement protections for agricultural operations that exceed nitrate groundwater objectives.

Path towards sustainable water systems: This bill prioritizes funding for the sustainability of public water systems. One of the ways to achieve sustainability is by consolidating failing water systems. If the state orders consolidation, as it has done in a few cases, it pays for the costs to consolidate. Currently the State Water Board has limited funding for ordered consolidations. However, the new funding stream from this bill would provide the State Water Board with resources so that it is able to use its consolidation authority to address failing water systems. There would be a short-term increase in funding for this purpose with a long-term goal of reduced state costs by creating more sustainable water systems.

Given that almost one million Californians lack access to clean drinking water, one thing is very clear: waiting is not an option. The problem is known and it is real. This bill moves the state closer to a sustainable approach to address the lack of clean drinking water facing too many Californians. The bill contains a diversified approach of fees as well as recognizing the many needs of both rural communities and urban communities, by including a regional approach.

According to the Author:

According to the author, "More than one million Californians are living without access to safe, reliable drinking water. It is unacceptable that the world's 5^th largest economy cannot ensure this essential resource and fundamental human right to all its residents. This is a public health emergency impacting our families and students. We must rise together and commit to an equitable and importantly a sustainable safe drinking water solution that will work for all Californians. We must get this done."

Arguments in Support:

According to a coalition letter which includes public health organizations, environmental groups, and environmental justice advocates, "As is well understood by now, California has a statewide safe drinking water crisis that affects one million Californians each year. California's drinking water crisis proportionately impacts low-income communities and communities of color and can be found in every corner of the state. Existing state and federal funding sources cannot be used to address significant funding gaps such as operations and maintenance costs necessary to sustain treatment systems, and for assistance to Californians not served by a public water system. We urge the Legislature to address California's drinking water crisis THIS YEAR in a manner that is not merely a band-aid approach or that lacks funding certainty but that instead solves this crisis once and for all."

Arguments in Opposition:

According to the Howard Jarvis Taxpayers Association (HJTA), "It is certainly clear that there is a lack of access to clean water for one million people in certain regions of the Central Valley. HJTA is strongly supportive of different mechanisms to fund this legitimate problem, including General Fund surplus dollars or the creation of a trust. While we are pleased AB 217 does include a drinking water trust fund, we believe it should not be done in conjunction with a statewide water tax."

FISCAL COMMENTS:

According to the Assembly Appropriations Committee, enactment of this bill could result in increased ongoing annual revenue of $58 million from the retail water system charge and approximately increased ongoing revenue of $31 million to $35 million per year from the agricultural related fees. Additionally there are potential annual costs to the State Water Board of $1.3 million to administer the retail water system charge and approximately $7 million to administer grants, loans, contracts, and services to provide safe and affordable drinking water.

VOTES:

ASM ENVIRONMENTAL SAFETY AND TOXIC MATERIALS: 6-3-0

YES: Quirk, Bloom, Bauer-Kahan, Cristina Garcia, Holden, Muratsuchi

NO: Melendez, Dahle, Mathis

ASM APPROPRIATIONS: 11-7-0

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Maienschein, Obernolte, Petrie-Norris

UPDATED:

VERSION: May 21, 2019

CONSULTANT: Josh Tooker / E.S. & T.M. / (916) 319-3965 FN: 0001011

Date of Hearing: May 8, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 217

Author:(Eduardo Garcia) – As Amended Ver:May 1, 2019

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill creates the Safe Drinking Water for All Act, administered by the State Water Resources Control Board (SWRCB), and imposes water, fertilizer, dairy and confined animal facility fees to fund grants and loans for safe drinking water programs throughout the state. Among other provisions, this bill:

1. Establishes the Safe and Affordable Drinking Water Fund (Fund) and requires the revenues (minus any allowed administrative costs) of the water, fertilizer, dairy and confined animal facility fee to be deposited in the Fund and continuously appropriated to SWRCB. Allows for the deposit into the Fund federal and voluntary contributions, gifts, grants, bequests and settlements from parties responsible for drinking water contamination.
2. Imposes a statewide safe and affordable drinking water system charge of $0.50 per service connection per month on all public water systems.
3. Requires each public water system to remit the proceeds from the system charge for its water system to the SWRCB by July 1, 2020, and every July 1 thereafter.
4. Requires a public water system seeking to recover costs of the system charge from its ratepayers to incorporate costs into its water rates. Prohibits a public water system from imposing a per connection fee. Allows a public water system to use other resources to pay the system charge.
5. Authorizes SWRCB to adopt regulations, as specified, to implement the water system charge.
6. Requires, by January 1, 2023, the Legislative Analyst’s Office (LAO) to report to the Legislature, and SWRCB as determined by the LAO, that at least $3 billion has been made available in an interest-bearing account in the State Treasury with a goal of at least $100 million in interest revenues per year available for use in the Fund.
7. Authorizes SWRCB to establish a region-specific program and allocate sufficient funds to develop and implement sustainable plans to communities identified by AB 134 (Bloom).
8. Establishes the Safe and Affordable Drinking Water Trust Fund (Trust Fund) and requires $200 million to be transferred to the Trust Fund for five years. Requires interest derived from the Trust Fund to be transferred to the Fund.
9. Imposes a safe drinking water fee on confined animal facilities (confined animal facility fee) and requires, beginning in the 2021 calendar year, each owner of a confined animal facility to pay to the California Department of Food and Agriculture (CDFA) secretary, $1,000 for one facility and $750 for each additional facility, not to exceed $12,000 per year.
10. Requires the CDFA secretary to adopt regulations to enforce the confined animal facility fee and requires the secretary to deposit all proceeds in the Fund.
11. Imposes a $0.004 per dollar of sale safe drinking water fee on all fertilizing materials (fertilizer fee) to be paid by licensees who sell or distribute packaged fertilizer until January 1, 2034, and $0.002 per dollar of sale after.
12. Imposes a $0.008 per dollar of sale safe drinking water fee on all other fertilizing materials (fertilizer fee) to be paid by licensees who sell or distribute bulk fertilizer until January 1, 2034, and $0.004 per dollar of sale after.
13. Authorizes the CDFA secretary, on January 1, 2035, to adjust the fertilizer fee through regular or emergency regulations to meet but not exceed 70% of the anticipated funding need for nitrate, as specified, or $7 million, whichever is less. Requires the CDFA secretary to notify all licensees of the amount of the fertilizer fee that will be assessed in the following calendar year. Allows CDFA secretary to retain up to 5% of the proceeds for implementation and enforcement.
14. Imposes a $0.01355 per hundred weight of milk safe drinking water fee (dairy fee) by requiring every milk handler already subject to specified regulatory milk fees from January 1, 2022 through January 1, 2035, to deduct this amount from payments made to producers of milk. Requires the secretary of CDFA to adopt regulations to implement and enforce the dairy fee by January 1, 2022. Authorizes the CDFA secretary retain up to 2% for implementation and enforcement.
15. Requires SWRCB, working with a multi-stakeholder advisory group, to adopt a Fund implementation plan and policy handbook with priorities and guidelines for
    Fund expenditures.
16. Requires SWRCB to annually hold a public hearing for the purpose of adopting estimated funding needs for the next year.
17. Requires SWRCB to report annually on expenditures from the fund.

FISCAL EFFECT:

1. Increased ongoing annual revenue of $58 million resulting from the water system charge.
2. Increased annual investment income of approximately $35 million from the Trust Fund once it reaches $1 billion.
3. Increased ongoing revenue of approximately $17 million to $20 million per year from 2020 until 2034 and $8.5 to $10 million per year thereafter resulting from the fertilizer fee. Additional unknown revenue if the CDFA secretary adjusts the fee after 2035. Annual CDFA costs are capped at 5%.
4. Increased ongoing revenue of approximately $5.5 million per year from 2022 until 2035 resulting from the dairy fee. Annual CDFA administrative costs are capped at 2%.
5. Unknown revenue increases, beginning January 1, 2021, estimated in the range of hundreds of thousands of dollars per year, from the confined animal facility fee. CDFA costs are not capped.
6. $1 billion GF transfer to establish the Trust Fund over five years.
7. SWRCB annual costs of $1.3 million (7 PY) to administer the monthly service charges from over 7000 public water systems.
8. SWRCB annual costs of $7 million to administer grants, loans, contracts and services to provide safe and affordable drinking water.

COMMENTS:

1. Purpose. According to the author:

More than one million Californians are living without access to safe, reliable drinking water. It is unacceptable that the world’s 5^th largest economy cannot ensure this essential resource and fundamental human right to all its residents. This is a public health emergency impacting our families and students. We must rise together and commit to an equitable and importantly a sustainable safe drinking water solution that will work for all Californians. We must get this done.

1. Background. The Milk Pooling Branch (Branch) Administers the California Pooling Plan for Market Milk which, together with the Dairy Marketing Branch, promotes, fosters and encourages the intelligent production and orderly marketing of fluid milk. Currently, there are seven mandatory deductions subtracted from a producer’s check to pay for programs and services provided by the state for the benefit of the industry. The following are mandated deductions:
2. Dairy Council of California --$0.0065 - $0.01625 per hundredweight)
3. National Dairy Promotion --$0.05 per hundredweight
4. State Dairy Promotion (CMAB) --$0.10 per hundredweight
5. Pool Administration Fee (CDFA) --$0.012 per hundredweight
6. Market Milk Administration Fee (CDFA) --$0.008 per hundredweight
7. Dairy Inspection Fee (CDFA or County Inspectors) --$216.90 per month ($0.135 per hundredweight, on first 482,000 lbs of milk produced each quarter, which almost every dairy exceeds).

This bill adds another mandated deduction for safe drinking water.

The Fertilizing Materials Inspection Program at CDFA is an industry-funded program that ensures consumers receive fertilizing materials that are safe and effective and meet the quality and quantity guaranteed by the manufacturer. The program's three arms include registration, inspection and research. Currently, there is an assessment on fertilizer of 2 mill ($0.002) for enforcement and one mill ($0.001) for research and education.

This bill adds an additional 4 mill assessment for packaged fertilizer and 8 mill assessment bulk fertilizer for the fertilizer fee. The assessments together form the fertilizer fee.

This bill imposes the confined animal facilities fee on those facilities that pay waste discharge permit fees through SWRCB.

Although over the years a statewide water user fee, or public goods charge, has been contemplated in different arenas to pay for a variety of water quality and infrastructure projects, one has never been charged. This bill proposes the first-of-its-kind water user fee in the form of a water system charge.

1. The Polluter Pays Principle. In California, many of our environmental laws are guided by the polluter pays principle, which refers to the principle that if pollution occurs, the person or organization that causes it should pay for the consequences and for avoiding it in the future.

While this bill requires the agriculture, livestock and dairy industries to pay towards clean-up through industry assessments, the total contribution of both are likely less than 25% of the total revenue raised by this bill.

1. Companion Legislation. AB 134 (Bloom) establishes a comprehensive framework to address the state’s current contaminated, and in some cases unaffordable, drinking water supply and establishes safeguards and mechanisms to prevent the same problems in the future. AB 134 is single-joined to AB 217 and is currently pending in this committee.
2. Related and Prior Legislation. SB 200 (Monning), creates the Safe and Affordable Drinking Water Fund, administered by the SWRCB to assist communities and individual domestic well users to address contaminants in drinking water that exceed safe drinking water standards. The bill is pending in the Senate Appropriations Committee.

SB 669 (Caballero) establishes the Safe Drinking Water Fund to assist community water systems in disadvantaged communities that are chronically noncompliant. The bill creates the Safe Drinking Water Trust Fund to receive funding from the state and is the funding source for the Safe Drinking Water Fund. The bill is pending in the Senate Appropriations Committee.

SB 623 (Monning), of the 2017-18 Legislative Session, would have created the Safe and Affordable Drinking Water Fund, administered by the SWRCB, and would have imposed water, fertilizer and dairy fees to fund safe drinking water programs. The bill was held in the Assembly Rules Committee.

Analysis Prepared by: Jennifer Galehouse / APPR. / (916) 319-2081

Date of Hearing: March 26, 2019

ASSEMBLY COMMITTEE ON ENVIRONMENTAL SAFETY AND TOXIC MATERIALS

Bill Quirk, Chair

ABPCA Bill Id:AB 217 (

Author:Eduardo Garcia) – As Amended Ver:March 19, 2019

SUBJECT: Safe Drinking Water for All Act

SUMMARY: Creates the Safe Drinking Water for All Act (Act), which establishes a Safe and Affordable Drinking Water Fund (Fund) to provide a source of funding to secure access to safe drinking water for all Californians, while also ensuring long-term sustainability of drinking water systems. Imposes several fees on agricultural activities and creates a trust fund using investments from the state General Fund that together would provide the source of revenue to the Fund. Specifically, this bill:

1) Requires, beginning in the 2021 calendar year, each producer owning a nondairy confined animal facility to pay annually to the Secretary of the Department of Food and Agriculture (Secretary) a safe drinking water fee. Requires the amount of the fee to be one thousand dollars ($1,000) for a producer that owns a single nondairy confined animal facility. Requires the amount of the fee, for a producer that owns more than one nondairy confined animal facility, to be one thousand dollars ($1,000) for the first facility and seven hundred fifty dollars ($750) for each facility thereafter owned by the same producer.

2) Authorizes the Secretary to prescribe, adopt, and enforce regulations relating to the assessing, collecting, and imposition of the safe drinking water fee on producers owning a nondairy confined animal facility.

3) States that the intent of the Legislature is to require licensees of bulk fertilizing materials, and to authorize licensees of packaged fertilizing materials, to pass the fertilizer safe drinking water fee on to the end user of the fertilizer.

4) Requires a licensee whose name appears on the label of bulk or packaged fertilizing materials to pay to the Secretary a fertilizer safe drinking water fee of six mills ($0.006) per dollar of sales for all sales of fertilizing materials.

5) Authorizes the Secretary to prescribe, adopt, and enforce regulations relating to the administration and enforcement of a safe drinking water fee on bulk or packaged fertilizing materials.

6) Authorizes the Secretary, up until June 30, 2022, to retain up to four percent of moneys collected from the safe drinking water fee on bulk or packaged fertilizing materials for implementation and enforcement of administering and collecting the fee and after July 1, 2022, the Secretary may retain up to two percent for implementation and enforcement of administering and collecting the fee.

7) Requires each handler, including a producer-handler, beginning January 1, 2022, to deduct the sum of one cent and three hundred fifty five mills ($0.01355) per hundredweight of milk from payments made to producers of milk, including the handler's own production, as a dairy safe drinking water fee.

8) Requires the Secretary to adopt regulations necessary for the proper administration and enforcement of the dairy safe drinking water fee.

9) Requires a handler to pay the dairy safe drinking water fee to the Secretary on or before the 45^th day following the last day of the month in which the milk was received.

10) Authorizes the Secretary, up until June 30, 2022, to retain up to four percent of moneys collected from the dairy safe drinking water fee for reasonable costs associated with implementation and enforcement, and after July 1, 2022, to retain up to two percent for reasonable costs associated with implementation and enforcement.

11) Defines "eligible applicant" as a public water system, including but not limited to, a mutual water company; a public utility; a public agency, including but not limited to, a local educational agency that owns or operates a public water system; a nonprofit organization; a federally recognized Indian tribe; a state Indian tribe listed on the Native American Heritage Commission's California Tribal Consultation List; an administrator; or, a groundwater sustainability agency.

12) Defines "Fund" as the Safe and Affordable Drinking Water Fund.

13) Creates the Fund in the State Treasury. Provides that all moneys in the Fund are continuously appropriated to the State Water Resources Control Board (State Water Board) without regard to fiscal year.

14) Prohibits moneys in the Fund from appropriation or borrowing for use for any purpose not established pursuant to this bill, unless that use of the moneys receives an affirmative vote of two-thirds of the membership of each house of the Legislature.

15) Requires the State Water Board to administer the Fund to provide a source of funding to secure access to safe drinking water for all Californians, while also ensuring long-term sustainability of drinking water service and infrastructure.

16) Requires the State Water Board to prioritize the use of the Fund to assist disadvantaged communities and low-income households served by a state small water system or a domestic well.

17) Requires the State Water Board to prioritize use of the Fund for costs other than those related to capital construction costs, except for capital construction costs associated with consolidation and service extension, to reduce the ongoing unit cost of service and to increase sustainability of drinking water infrastructure and service delivery.

18) Requires, beginning January 1, 2020, expenditures from the Fund to be consistent with the annual fund implementation plan.

19) Requires the State Water Board to expend moneys in the fund for grants, loans, contracts, or services to assist eligible applicants with any of the following:

a) The provision of replacement water, to ensure immediate protection of health and safety as a short-term solution;

b) The development, implementation, and sustainability of long-term drinking water solutions;

c) Identifying and providing outreach to Californians who are eligible to receive assistance from the Fund;

d) Testing the drinking water quality of domestic wells serving low-income households in high-risk areas identified by the State Water Board;

e) The provision of administrative and managerial services; and,

f) The provision of wastewater treatment plant operations and maintenance for areas in which polluted water originates from outside of the state.

20) Requires the State Water Board, in administering the Fund, to make reasonable efforts to ensure both of the following:

a) That funds are used to secure the long-term sustainability of drinking water service and infrastructure, including, but not limited to, requiring adequate technical, managerial, and financial capacity of eligible applicants as part of funding agreement outcomes; and,

b) That funds are not used to subsidize large-scale nonpotable use.

21) Requires the State Water Board, in administering the Fund, to ensure that all moneys deposited from the safe drinking water fee for nondairy confined animal facilities, the fertilizer safe drinking water fee, and the dairy safe drinking water fee are used to address nitrate-related contamination issues.

22) Requires the State Water Board, at least once every ten years, to conduct a public review and assessment of the Fund to determine all of the following:

a) The effectiveness of the Fund in securing access to safe drinking water for all Californians, while also ensuring the long-term sustainability of drinking water service and infrastructure;

b) If the fees deposited into the Fund have been appropriately expended;

c) For community water systems that have received funding for ten years or more and for which self-sufficiency has not been achieved, the actions that have been taken, the reason why self-sufficiency has not been achieved, and if available, ways in which the community water system may become self-sufficient; and,

d) What other actions are necessary to carry out the purposes of the Act.

23) Requires the State Water Board to convene an environmental justice advisory committee, consisting of at least three members, to advise the State Water Board in conducting the public review and assessment of the Fund.

24) Requires the State Water Board, by July 1 each year, to do all of the following:

a) Prepare and make available a report of expenditures from the Fund;

b) Adopt, after a public hearing, an assessment of funding need, based on available data; and,

c) Adopt, after a public hearing, a fund implementation plan and policy handbook with priorities and guidelines for expenditures of the Fund.

25) Requires the State Water Board, by January 1, 2021, in consultation with local health officers and other relevant stakeholders, to use available data to make available a map of aquifers that are at high risk of containing contaminants; that exceed primary federal and state drinking water standards; and, that are used or likely to be used as a source of drinking water for a state small water system or a domestic well. Requires the State Water Board to update the map at least annually based on any newly available data and shall make the map available on its internet website.

26) Sunsets the drinking water fee, if, on or before January 1, 2023, the Legislative Analyst determines that at least three billion dollars ($3,000,000) has been made available in an interest bearing account in the State Treasury with a goal of at least one hundred million dollars ($100,000,000) in interest revenues per year made available for purposes of the Fund.

27) Requires the State Water Board to adopt, by regulation, a schedule of fees and deposit those fees into the Fund.

28) States that the intent of the Legislature is to establish a region-specific program to address the purposes of the Act.

29) Authorizes the State Water Board to distribute funds for any purpose of the Act through its drinking water regional offices. Prohibits the State Water Board from distributing more than 20 percent of the annual expenditures from the Fund pursuant to this regional distribution.

30) Creates the Safe and Affordable Drinking Water Trust Fund (Trust Fund) in the State Treasury and states that the intent of the Legislature is that moneys in the Trust Fund remain for the purposes of the trust in perpetuity.

31) Provides that on January 1 of each year, investment income derived from the Trust Fund is hereby transferred to the Fund.

32) Requires the sum of two hundred million dollars ($200,000,000) to be transferred into the Trust Fund by the Legislature each year for five years for the purpose of establishing a one-billion-dollar ($1,000,000,000) Trust Fund to derive interest revenues to fund the Act.

EXISTING LAW:

1) Establishes the California Safe Drinking Water Act (California SDWA) and requires the State Water Board to maintain a drinking water program. (Health & Safety Code (HSC) § 116270, et seq.)

2) Requires the State Water Board to submit to the Legislature a comprehensive Safe Drinking Water Plan for California every five years. (HSC § 116355 (a))

3) Authorizes the State Water Board, where a public water system or a state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order a physical or operational consolidation with a receiving water system. (HSC § 116682 (a))

4) Authorizes the State Water Board, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, to:

• 1. Contract with an administrator to provide administrative and managerial services to a designated public water system to assist the designated public water system with the provision of an adequate and affordable supply of safe drinking water; and,
  2. Order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the State Water Board. (HSC § 116686 (a))

5) Establishes as the policy of the state that every human being has the right to safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitary purposes. (Water Code § 106.3)

6) Establishes Maximum Contaminant Levels (MCLs) for the various forms of nitrate. (California Code of Regulations § 63341)

FISCAL EFFECT: Unknown.

COMMENTS:

Need for the bill: According to the author, "More than one million Californians are living without access to safe, reliable drinking water. It is unacceptable that the world’s 5^th largest economy cannot ensure this essential resource and fundamental human right to all its residents. This is a public health emergency impacting our families and students. We must rise together and commit to an equitable and importantly a sustainable safe drinking water solution that will work for all Californians. We must get this done."

Human right to water: In 2012, California became the first state to enact a Human Right to Water law, AB 685 (Eng, Chapter 524, Statutes of 2012). Public policy continues to be focused on the right of every human being to have safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitation. Water supply, contaminants, costs of treatment and distribution systems, the number and nature of small public water systems (PWSs), especially in disadvantaged communities, and many other factors will continue to challenge progress in addressing the Human Right to Water.

Regulation of drinking water: The federal SDWA was enacted in 1974 to protect public health by regulating drinking water. California has enacted its own SDWA to implement the federal law and establish state standards. The United State Environmental Protection Agency (U.S. EPA) enforces the federal SDWA at the national level. However, most states, including California, have been granted "primacy" by the U.S. EPA, giving them authority to implement and enforce the federal SDWA at the state level.

MCLs are health-based drinking water standards that public water systems are required to meet. MCLs take into account the health risk, detectability, treatability, and costs of treatment associated with a pollutant. Agencies responsible for regulating water quality enforce these standards.

The State Water Board regulates public water systems that provide water for human consumption and have 15 or more service connections, or regularly serve at least 25 individuals daily at least 60 days out of the year. (A "service connection" is usually the point of access between a water system’s service pipe and a user’s piping.) The state does not regulate water systems with less than 15 connections; county health officers oversee them. At the local level, 30 of the 58 county environmental health departments in California have been delegated primacy—known as Local Primacy Agencies (LPAs)—by the State Water Board to regulate systems with between 15 and 200 connections within their jurisdiction. For investor-owned water utilities under the jurisdiction of California Public Utilities Commission (CPUC), the State Water Board or LPAs share water quality regulatory authority with CPUC.

The State Water Board regulates approximately 7,500 water systems. About one-third of these systems have between 15 and 200 service connections. The number of smaller systems—specifically, those with 14 or fewer connections—is unknown but estimated to be in the thousands.

Multiple causes of unsafe drinking water: The causes of unsafe drinking water can generally be separated into two categories: (1) contamination caused by human action, and (2) naturally occurring contaminants. In some areas, there are both human caused and natural contaminants in the drinking water.

Three of the most commonly detected pollutants in contaminated water in California are arsenic, perchlorate, and nitrates. While arsenic is naturally occurring, perchlorate contamination is generally a result of military and industrial uses. High concentrations of nitrate in groundwater are primarily caused by human activities, including fertilizer application (synthetic and manure), animal operations, industrial sources (wastewater treatment and food processing facilities), and septic systems. Agricultural fertilizers and animal wastes applied to cropland are by far the largest regional sources of nitrate in groundwater, although other sources can be important in certain areas.

Drinking water contamination in disadvantaged communities: According to the State Water Board report, "Communities that Rely on Contaminated Groundwater," released in January 2013, 682 community public water systems, which serve nearly 21 million people, rely on contaminated groundwater as a primary source of drinking water. The report points out that an additional two million Californians rely on groundwater from either a private domestic well or a smaller groundwater-reliant system that is not regulated by the state, the water quality of which is uncertain. The findings from State Water Board report, and a 2012 University of California at Davis study, "Addressing Nitrate in California's Drinking Water," suggest that drinking water contamination in California disproportionally affects small, rural, and low-income communities that depend mostly on groundwater as their drinking water source. These numbers could be even greater today.

Nitrates: Nitrate is commonly used in fertilizers because plants need nitrates to live and grow. Nitrogen is applied to cropland in the form of synthetic fertilizers or as animal manure. The nitrogen in these fertilizers transforms to nitrate and is carried to groundwater by the percolation of water through the soil column, any time water from irrigation or rainfall percolates below the root zone.

Once consumed, nitrate is converted into nitrite in the body. Nitrite can interfere with the ability of red blood cells to carry oxygen to the tissues of the body, producing a condition called methemoglobinemia. The greatest threat is to infants, whose immature stomach environment enables conversion of nitrate to nitrite, which is then absorbed into the blood stream. The effects of nitrite are often referred to as the "blue baby syndrome" because their bodies are not absorbing enough oxygen. High nitrate levels may also affect the oxygen-carrying ability of the blood of pregnant women.

Legal limits on nitrates: The current state MCLs for nitrates were adopted by the California Department of Health Services in 1994 based on the U.S. EPA's MCLs promulgated in 1991.

The Office of Environmental Health Hazard Assessment (OEHHA) established its public health goals (PHGs) for nitrate and nitrite in 1997. The PHGs, based on methemoglobinemia in infants, are 45 parts per million (ppm) for nitrate (equivalent to 10 ppm nitrate-nitrogen), 1 ppm for nitrite-nitrogen, and 10 ppm for joint nitrate/nitrite (expressed as nitrogen) in drinking water. The PHGs are the same as the drinking water MCLs. Typically PHGs inform the development of MCLs. In this case, the MCL predated the PHG.

Where is nitrate contamination? Nitrate in drinking water is widespread throughout the state. Public water systems (PWS), because they are regulated by the State Water Board (unlike private wells), are required to analyze drinking water sources for nitrates and report the results to the State Water Board's Division of Drinking Water. Among regulated contaminants detected at levels greater than their MCLs in California, nitrates rank high.

The 2012 University of California at Davis (UC Davis) report, "Addressing Nitrate in California’s Drinking Water," indicated that about 2.6 million people in the four-county Tulare Lake Basin and the Monterey County portion of the Salinas Valley rely on groundwater for drinking water, including those in some of the poorest communities in California. The report found that nitrate contamination is increasing and currently poses public health concerns for about 254,000 people in the study area. Again these numbers could be even greater today.

Costs for nitrate cleanup: The 2012 UC Davis nitrate report calculated that up to $36 million per year is needed for safe drinking water solutions to address nitrate contamination. The report elaborated that, "Costs for safe drinking water solutions to nitrate contamination in the Tulare Lake Basin and Salinas Valley are roughly $20 and $36 million per year for the short- and long-term solutions, respectively. About $17 to $34 million per year will be needed to provide safe drinking water for 85 identified community public and state small water systems in the study area that exceed the nitrate drinking water MCL (serving an estimated 220,000 people). The annualized cost of providing nitrate-compliant drinking water to an estimated 10,000 affected rural households (34,000 people) using private domestic wells or local small water systems is estimated to be at least $2.5 million for point-of-use treatment for drinking use only. The total cost for alternative solutions translates to $80 to $142 per affected person per year, $5 to $9 per irrigated acre per year, or $100 to $180 per ton of fertilizer nitrogen applied in these groundwater basins."

Lack of clean safe drinking water: Although most of the state’s residents receive drinking water that meets federal and state drinking water standards, many drinking water systems in the state consistently fail to provide safe drinking water to their customers. Lack of safe drinking water is a problem that disproportionately affects residents of California’s disadvantaged communities. More than 300 drinking water systems in disadvantaged communities, serving approximately 200,000 people, are unable to provide safe drinking water. These systems include 30 schools and daycare centers that serve over 12,000 children.

Disadvantaged communities often lack the rate base, as well as the technical, managerial, and financial capacity to show they can afford and effectively manage operations and maintenance costs related to water treatment. Without being able to pay for maintenance, these communities are effectively barred from accessing capital improvement funding. In contrast, larger water systems have the financial capacity both to pay treatment costs and to provide for a well-trained and technically competent workforce of water system operators.

Current sources of financial assistance, such as Proposition 1, the Water Quality, Supply, and Infrastructure Improvement Act of 2014 (Rendon, Chapter 188, Statutes of 2014), and the safe drinking water state revolving fund (SDWSRF), do not provide financial assistance for the long-term operation and maintenance costs of drinking water systems, which the community must provide in order to qualify for the capital improvement funding that is available from those sources. Disadvantaged communities often lack the rate base to pay for operation and maintenance costs, meaning that they are effectively prohibited from accessing capital improvement funding.

Urban disadvantaged water systems: A March 15, 2019 briefing paper (Paper) from the UCLA Water Resources Group noted that the legislature and Governor have made a strong commitment to rural water systems, but have not provided as much information about urban disadvantaged water systems. The Paper noted that Los Angeles County (LA County) has 210 community water systems, with 64 water systems serving either disadvantaged or severely disadvantaged communities. It estimates that these 64 disadvantaged urban water systems could be serving close to 1,000,000 people. One of the key points of the Paper is that there is very little information about these urban water systems, and whether or not they have the technical and managerial expertise to provide clean safe drinking water to their customers. In one recent example in Compton, that State Water Board appointed LA County to take over the administration of the Sativa Water District (District), and LA County discovered that the water system operated by the District was failing and that the District had a compliance order that would take 12 years of its revenues for compliance costs.

Consolidation of water systems: According to the US EPA, restructuring can be an effective means to help small water systems achieve and maintain technical, managerial, and financial capacity, and to reduce the oversight and resources that states need to devote to these systems. The State Water Board maintains that consolidating PWS and extending service from existing public water systems to communities and areas that currently rely on under-performing or failing small water systems, as well as private wells, reduces costs and improves reliability. Consolidation does this by extending costs to a larger pool of ratepayers.

Authority to require consolidation and the appointment of an administrator: Effective June 24, 2015, SB 88 (Senate Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2015) authorized the State Water Board, when a PWS or state small water system serving a disadvantaged community consistently fails to provide an adequate supply of safe drinking water, to order that system (referred to as a subsumed water system) to consolidate with, or receive an extension of service from, a compliant public water system (referred to as the receiving system). While for many years the state's drinking water program had encouraged voluntary consolidation of public water systems, the authority granted by SB 88 allows the state to mandate the consolidation of water systems where appropriate.

The following year, SB 552 (Wolk, Chapter 773, Statutes of 2016) expanded the State Water Board’s authority by enabling it to, in order to provide affordable, safe drinking water to disadvantaged communities and to prevent fraud, waste, and abuse, contract with a competent administrator to provide managerial and technical expertise to that system, if sufficient funding is available. SB 552 also authorizes the State Water Board to order the designated public water system to accept administrative and managerial services, including full management and control, from an administrator selected by the State Water Board.

Since 2016 the State Water Board has ordered the consolidation of 3 PWSs with an additional five water systems consolidating voluntarily.

Recent approaches to address lack of funding to provide safe drinking water to disadvantaged communities: SB 623 (Monning, 2017) would have created the Safe and Affordable Drinking Water Fund, administered by the State Water Board, and sought to impose water, fertilizer and dairy fees to fund safe drinking water programs. The bill would have imposed a Safe and Affordable Drinking Water Fee (water fee) on each customer of a PWS. Additionally, it would have required the State Water Board, in consultation with local health officers and other relevant stakeholders, to develop and annually update a map of aquifers at high risk of containing contaminants that exceed state and federal primary drinking water standards. SB 623 would have prohibited the State Water Board or regional water quality board from specified enforcement actions against agricultural operations for exceeding nitrate groundwater objectives or other groundwater pollution standards if the operation demonstrates certain mitigation requirements are met, including the timely payment of the fertilizer or dairy fee. SB 623 was held in the Assembly Rules Committee.

Governor Newsom's proposal: The proposal by Governor Newsom as part of his 2019-2020 proposed budget is substantially similar to SB 623 (Monning). It would also impose a water fee and similar agriculture related fees. The proposal also provides similar enforcement protections for agricultural operations that exceeded nitrate groundwater objectives.

Current approach to address these issues within AB 217: AB 217 is similar to both SB 623 and Governor Newsom's proposal in that it also imposes fees on agricultural activities. However, AB 217 does not sunset the agricultural related fees and does not provide the agricultural enforcement protections contained in SB 623 or the Governor's proposal. Additionally, AB 217 takes a hybrid approach to raising funds by seeking to impose a water fee as well as establishing a Trust Fund of $1 billion whereby investment income is used annually for the purposes of the bill. AB 217 also seeks to take a regional approach by acknowledging the fact that disadvantaged communities reside in urban communities as well as rural communities.

Policy options for consideration: Is there a need for a sustainable, ongoing fund to provide assistance to communities with contaminated drinking water throughout the state? Yes, and this does not seem to be in dispute. What is the estimated annual need? Well, that is a challenging question. A private consulting firm, Blue Sky Consulting, recently estimated an annual need of approximately $140 million (roughly $30 million of that amount was estimated to be needed for nitrate contamination). However, this estimate was based upon methodologies that included the size of the water system, the number of violations and income of that water system, among other factors. Some could argue that this estimate is too high, while others would argue this number is far too low. The State Water Board is currently required (SB 862, Budget Committee, Chapter 449, Statutes of 2018) to conduct a needs analysis of drinking water systems; however, this will not be completed until the fall of 2020. It is important to note that included in this need for an ongoing funding stream is the reality that the funding will be needed to assist some public water systems with ongoing operations and maintenance costs, as opposed to one-time capital improvements.

What is the correct funding source? As a funding option for assisting disadvantaged communities with contaminated drinking water, there of course is the state's General Fund and the state has had several years of a surplus in revenue. That surplus will not last forever. While the General Fund can provide both capital costs and ongoing operations and maintenance costs, the biggest question is once revenue dips (and history shows it will dip), then what? During previous budget crises, discretionary funding was the first to go – but would drinking water funding be discretionary? It would be competing with all of the other very important budgetary needs from education, to health and human services, to corrections and public safety. So, the General Fund is a good option in prosperous times. AB 217 seems to seize on this concept by setting up a Trust Fund during these current (and likely temporary) prosperous times.

Revenues from a Trust Fund: AB 217 proposes to transfer $200 million from the state's General Fund into the Trust Fund for each year for the next five years and commit investment income earned from the Trust Fund to the Fund. According to a recent analysis by the Legislative Analyst Office (LAO), a trust fund, utilizing a similar rate of return as the state's Pooled Money Investment Account (PMIA), would generate approximately 3.5 % in investment income each year. The analysis concluded that the proposed trust fund in AB 217 would generate several million dollars of investment income in the first year, rising to approximately $35 million in investment income once all five payments totaling $1 billion have been achieved. Using the same rate of return as the PMIA, a trust fund would require $4 billion in order to generate $140 million in investment income annually, as proposed in the Governor's budget. It is important to note that this analysis uses the PMIA because the State Constitution prohibits the state from investing in stocks or other equity instruments. Creating a trust fund does not protect the money in the fund from being taken or redirected for other uses by a future legislature. If the goal is to protect the trust then a constitutional amendment is the best alternative to ensure that the funds stay within the Trust Fund.

What are other funding options? In many environmental programs throughout California, there is a consistent theme – the polluter pays. Requiring those that have contributed to nitrate contamination, as envisioned in AB 217 (as well as SB 623 and the Governor Newsom proposal), seems to be an approach consistent with that principle. In the lean budget years, would these nitrate related fees be enough? Should there be more? The water fee, as contemplated in AB 217, and also in SB 623 and the Governor's proposal, would augment the nitrate fees by asking all Californians who pay a water bill to contribute a little bit each month (about $0.95). The need seems to be clear, but is this fair? There are approximately 39 million people living in California and the reality is many of us move around the state. Wouldn't we expect to have safe drinking water regardless of where we lived? Can we all afford it?

One of the criticisms of the Governor's proposal and SB 623 is that public water agencies believe the water fee that they would be imposing on their drinking water customers would be costly for them to impose and overburden the agency with additional regulatory costs and fees. Additionally, one of the reasons many of these water systems have a need for this ongoing funding source is that their water system serves a disadvantaged community and their ratepayers cannot afford any further rate increases. There are existing programs, such as those the electric utilities provide, that offer reduced rates for low-income customers. Such programs do not exist for drinking water customers. If AB 217 imposes a water fee, could it include an exemption for low-income households? Is there a more efficient way of imposing a water fee to make collection by the water agencies more efficient and less costly to implement?

There is a wildcard in this ongoing funding question: eliminating failing water systems and creating sustainable water systems. AB 217 includes in the priorities for funding long-term sustainability of the PWS. One of the ways to achieve this sustainability is by consolidating water systems. If the state forces consolidation, as it has done in a few cases, it pays for the costs to consolidate and the State Water Board has limited funding for this. However, if this new funding stream would flood the State Water Board with resources to use its consolidation authority to address those failing water systems, then there would be a short-term increase in funding for this purpose with a long-term goal of reduced state costs by creating a sustainable PWS.

AB 217 also highlights a need that is not explicitly raised in the Governor's proposal or in SB 623, that of regional needs. It is a reality that there are disadvantaged communities throughout California in the north, the south, the rural, the urban – we have it all (so to speak). How the funding should be allocated to address this reality is not an easy task; however, in order to provide for all Californians, as the bill strives for, then this regional approach is a key aspect that needs to be explored further. The State Water Board's needs assessment could shed some light on the needs of the urban disadvantaged communities.

Given that almost one million Californians lack access to clean drinking water, one thing is very clear: waiting is not an option. The problem is known and it is real. AB 217 moves the state closer to a sustainable approach to address the lack of clean drinking water facing way too many Californians. The bill contains a diversified approach of both fees and General Funds contributing to a Trust Fund, as well as recognizing the many needs of both our rural communities and our urban communities.

Arguments in Support: According to a coalition letter which includes public health organizations, environmental groups, and environmental justice advocates, "As is well understood by now, California has a statewide safe drinking water crisis that affects one million Californians each year. Additionally, roughly 2 million Californians rely on domestic wells and state small water systems not regulated by the state and ineligible for most assistance programs, leaving them particularly vulnerable. California’s drinking water crisis proportionately impacts low-income communities and communities of color and can be found in every corner of the state. Existing state and federal funding sources cannot be used to address significant funding gaps such as operations and maintenance costs necessary to sustain treatment systems, and for assistance to Californians not served by a public water system. As a result, small, rural or socioeconomically disadvantaged communities and households throughout the state are either forced to pay exorbitant rates for drinking water or buy bottled water, because they cannot afford the treatment costs or secure long-term financing due to a lack of a demonstrated long-term funding source. We urge the Legislature to address California's drinking water crisis THIS YEAR in a manner that is not merely a band-aid approach or that lacks funding certainty but that instead solves this crisis once and for all."

Arguments in Opposition: According to a coalition letter of groups, including Scotts Miracle- Gro and the Household and Commercial Products Association, they have taken an oppose unless amended position on AB 217, "…as it would impose a fee on all fertilizer materials to be paid by licensees who sell or distribute bulk and packaged fertilizer material. We strongly encourage the committee to adopt the fertilizer fee formula as outlined in SB 844 (Monning, 2018). The language in SB 844 proposed a $0.004 fee for every dollar sold of packaged non-commercial fertilizer materials, until 2034 at which time the fee is lowered to $0.002. These products are sold in small quantities, typically used by homeowners in lawns and gardens. They are not significantly contributing to water quality impairments. The fees on commercial fertilizer were proposed to be assessed at a higher level to achieve the total funding amount the previous administration sought. We appreciate the concerns of communities that lack reliable drinking water systems and support the goal of ensuring community access to safe, clean and affordable water. Unfortunately, the current language in AB 217 creates a disproportionate fiscal impact on non-ag fertilizer producers. We believe there are more equitable funding formulas that could be used to raise the necessary funds for safe and affordable drinking water, as it relates to nitrate contamination. Given these concerns, we request AB 217 be amended to replace the current fertilizer fee language with the language in AB 844 (2018)."

Potential amendments: The author and committee may wish to add some detail to the proposed safe and affordable drinking water fee. Specifically, the bill could be amended to impose a 50 cent per connection fee on all PWS and require the PWSs to remit the fee to the State Water Board. Additionally, the bill could be amended to clarify that the fertilizer fee contemplated in the bill does not include compost.

Related legislation:

1) AB 134 (Bloom). Requires that the Governor's annual budget show expenditures from Safe and Affordable Drinking Water Fund (Fund) and that the LAO review the effectiveness of expenditures from the Fund. This bill is set to be heard in the Assembly Environmental Safety and Toxic Materials Committee on March 26, 2019.

2) SB 200 (Monning). Creates the Safe and Affordable Drinking Water Fund, administered by the State Water Board, to assist communities and individual domestic well users to address contaminants in drinking water that exceed safe drinking water standards. This bill passed the Senate Environmental Quality Committee on March 20, 2019 and has been referred to the Senate Committee on Natural Resources and Water.

3) SB 669 (Caballero). Establishes the Safe Drinking Water Fund to assist community water systems in disadvantaged communities that are chronically noncompliant. Creates Safe Drinking Water Trust Fund to receive funding from the state and provide the fund source to the Safe Drinking Water Fund. This bill is set for hearing in the Senate Environmental Quality Committee on April 9, 2019.

4) SB 623 (Monning, 2017). Would have created the Safe and Affordable Drinking Water Fund, administered by the State Water Board, and would have imposed water, fertilizer and dairy fees to fund safe drinking water programs. This bill was held in the Assembly Rules Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Alliance Of Child And Family Services
American Heart Association
American Rivers
American Stroke Association
Arvin Community Services District
Asian Pacific Environment Network
Asociación De Gente Unida Por El Agua
Audubon California
California Alliance of Child And Family Services
California Bicycle Coalition
California Environmental Justice Alliance
California Food Policy Advocates
California League of Conservation Voters
California Rural Legal Assistance Foundation
California Water Service
Carbon Cycle Institute
Central Valley Air Quality (CVAQ) Coalition
Ceres
Clean Water Action
Coalition For Humane Immigrant Rights (CHIRLA)
Community Alliance for Agroecology
Community Water Center
Dolores Huerta Foundation
Environmental Defense Fund
Environmental Health Coalition
Esperanza Community Housing Corp
Faith In The Valley
Friends Committee On Legislation Of California
Leadership Council For Justice And Accountability
Lutheran Office of Public Policy - California
Martin Luther King Jr Freedom Center
Mi Familia Vota
NextGen California
Pesticide Action Network North America
Physicians for Social Responsibility - Los Angeles
PICO California
Planning And Conservation League
PODER
Policylink
Professional Engineers In California Government
Public Health Advocates
Pueblo Unido Community Development Coordinator
RCAC
Self-Help Enterprises
Service Employees International Union (SEIU)
The Nature Conservancy
Water Foundation
Western Center On Law And Poverty

Opposition

Central Garden and Pet

Harrell's LLC

Household and Commercial Products Association
Lawn & Horticulture Products Work Group

Scotts Miracle-Gro Company

Analysis Prepared by: Josh Tooker / E.S. & T.M. /