Assembly Standing Committee on Local Government

There we go. Perfect. Thank you. Well, good morning, everyone. Welcome to this Joint Committee with LocalGov.

Delighted that we could take this subject matter on because it is very, very urgent at this moment. Climate change is upon us. With that comes changes in hydrology and how we are getting our water. And we've got a lot of deluges of water that come at certain times, and we've got a lot of old infrastructure.

And so the topic really today is given that we have major investments in front of us that we need to make because of aging infrastructure and the change in hydrology, how do we get there?

How are we currently paying for needed infrastructure, and how do we get to increased financing for the increased need for infrastructure. So I would like to welcome my cochair from from Local Gov and turn it over to him for some opening remarks.

Good morning, everybody. And thank you for being here. And thank you, my cochair, Assemblyman Pappan. And looking forward to hear from the panelists that have taken the time of their busy schedule to attend and speak on the informational hearing. Thank you again.

Looking forward to the conversations we're gonna have, and hopefully, we'll have others join us later on. You know, you want me to introduce the first panel? You wanna introduce them?

Oh, sure. We'll, we'll have the first panel come forward. Go ahead. If you want to. Take it over.

So the first panel is how does California Pay for Water, what does water cost, and are we using the right tools to keep water affordable. And with that, we want to introduce Bradley Franklin, the Public Policy Institute of California. Sonja Petek, Legislative Analyst Office. Miss Kasey Shimke, the Department of Water Resources implementation of SB 72, and Carla Nemeth, Association of California Water Agencies. Welcome and thank you for being here.

Before we start, we do have Carla remotely. Just wanna make sure that's been secured. Not yet? Okay.

If you could let me know when she comes on. Thank you.

Alright. Let's just start with Bradley Franklin. Welcome.

Madam Chair, Mister Chair, honorable members of the committee, thank you for inviting me to speak today on financing California's water.

So the main message of my talk today is that California needs to identify steady reliable sources of funding for water. We are currently overly dependent on general obligation bonds to finance many areas of the water sector.

So, California's water system is exceptionally complex. We have a climate where water conditions change dramatically from season to season and year to year. And moreover, we have to transport water long distances from Northern to Southern California.

All of that requires a very complex highly engineered system which is costly to maintain. California currently spends over $40,000,000,000 a year to maintain the system. Most of that funding comes from local sources.

Over 80% of our funding comes from local water bills and sewer bills, primarily water and sewer bills, and the state contributes over 10% and the Federal Government a small, small proportion of the total cost. Climate change is of course one of the major stressors that on the system that requires major new investments.

Other stressors are aging infrastructure and new water regulations, and I'd like to go into those in turn. So much of California's water infrastructure was built between the 1930s and 1970s. The dams, canals, and aqueducts that were built are now aging and need expensive upgrades.

On top of that, we have key parts of the system that convey water which have been damaged from sinking land due to groundwater overuse and those require expensive fixes as well.

Climate change is adding new pressure on top of that.

So our snowpack is becoming less reliable as temperatures rise and that puts stream on our infrastructure and requires different ways of operating the infrastructure that we do have. Sea level rise is a factor in coastal flooding and and we have seen three major floods since 2012 that cost about $8,000,000,000 in damages and 99 lives lost.

On top of that, there are new water regulations and rules that need to be implemented that come with significant costs.

For groundwater, the sustainable Groundwater Management Act requires overdrafted basins to avoid undesirable results which in practice often means reduced groundwater pumping. This is especially a problem in the San Joaquin Valley.

The local water agencies tasked with implementing SGMA have identified many possible projects to ease the the groundwater cuts but they are quite expensive in aggregate with $19,000,000,000 in projects proposed to date.

For drinking water, there are new standards from contaminants that need to be treated. One of the big ones is PFAS or the forever chemicals that will require significant new treatment infrastructure and costs going forward. In Orange County alone, that's expected to cost $1,800,000,000.

As I said, most of the funding comes from local sources.

So the rules of setting, setting water rates are very important understanding the finance situation. I believe some of the other panelists will go into this in more detail. But I would just like to point out that Proposition 218 creates several constraints for local water agencies. The central kind of philosophy of Prop 218 is that water rates should be charged proportional to the cost of delivery to each customer.

Now that creates a high bar for proving why you're charging what you are and if you wanna charge someone differently, and that limits the ability to use conservation pricing.

So water utilities would like to implement tiered rates so that people who use more water pay more for that additional water and therefore giving them an incentive to conserve. It also, Proposition 218 also greatly limits the ability of agencies to implement affordability programs because they cannot use rates from one set of customers to subsidize other customers. In this case, low income households that could use help with their water bills.

So Prop 218 creates legal constraints for these agencies and on top of that, they have practical limits as to how much they can raise how much they can raise their rates and pass through cost to their customers.

Many water agencies are very concerned about having unaffordable rates that have. And so that's a serious challenge. But at least urban water agencies and wastewater agencies have a rate payer base that they can rely on. Many parts of California's water system do not. At PPIC, we call those fiscal orphans.

They are parts of the water system that have a persistent funding gap and no obvious way to fill it. There are several. The biggest of them by far though is flood risk management. Over 7,000,000 Californians live in areas with flood risk. The flood risk maps that we have are outdated.

So the risk is in all likelihood higher and growing. This year, we're seeing of course a super El Nino event which has already caused record at sea level conditions and flooding and coastal areas and the rest of the winter may may see further flooding.

So currently, California spends about $1,000,000,000 a year on flood risk management projects. Of that, about half comes from State and Federal Government and and the half is very dependent on general obligation bonds to fund its its share.

There's a need for though, for $1,000,000,000 to $3,500,000,000 annually in addition to that, and that is just for the risk from rivers that flood.

Coastal flooding is a different problem and sea level rise is exacerbating that. We have estimates that in the Bay Area over 100 or about $105,000,000,000 of adaptation projects are needed to meet the need by 2050. Now there are several other fiscal orphans as I mentioned. Headwaters management is a critical one. Two thirds of our water comes from headwaters and the state has ramped up efforts to treat those for.

The forest in those areas to make them more wildfire resilient so that severe wildfire does not impair our water supply in terms of quality and quantity. Drinking water systems for small low income communities are very challenged because they do not have the rate payer base to cover the needed investments to raise their water quality standards up to up to the level required.

This state Water Board needs assessment 2024 estimated that there's a $3,900,000,000 need over five years for eligible. Grant eligible projects in at risk and failing public water systems.

Similarly, stormwater to treat polluted stormwater is perennially of a funding challenge outside of LA County where they have Measure W.

Most areas of the state did not have a way of funding these projects and the funding need there is estimated to be about $700,000,000 to $1,100,000,000. Ecosystems are likewise challenged with the need of about 600,000,000 to $1,000,000,000 a year.

Although, ecosystem stewardship has received considerable bond funding in recent years, the ongoing need is still there. So in conclusion, I'd just like to reiterate that California has large, large and growing financing needs for water.

We are reliant on local rate payers to fund much of it, but they are limited in how much they can contribute.

Beyond that, fiscal orphans lack a reliable source of funding. They're overly reliant on general obligation bonds. And so in some, we need somehow to find a source of steady reliable funding for these, for these areas of water. Thank you very much for the opportunity to present today.

Thank you so much. And I think we'll probably have questions at the end of the of this panel. So don't go away. With that, I will turn it over to Sonja Petek.

Good morning, Madam Chair, Mister Chair. I'm Sonja Petek with the Legislative Analyst's Office, and we were asked to come today to provide some background on the state's role in funding water related projects. And you should have a handout before you. I'm not sure. It may be projected.

It's also available on our website for viewers online, at lao.ca.gov. If you can turn to page one of the handout, I wanted to start by talking about why does the state fund what it what it does fund. As we've already heard and will continue to hear from other panelists today, there are definitely some challenges facing local agencies.

We'll also hear some perspectives from other panelists on what the state should fund, but I thought I'd go ahead and start with why the state funds what it currently funds. Most of what the state funds stems from some sort of legal requirement.

Legal or statutory or regulatory requirement. The list before you are some examples. It's not an exhaustive list. And these projects are not necessarily 100 state funded. Oh, great.

Thank you. Oh, that's very hard to read. Sorry. This is not a PowerPoint presentation. It's just a PDF.

Apologies for that.

We're sharing on our computer screen here. So we'll stay right with you. Thanks.

Okay. Thank you so much. So I wanna start by highlighting just a couple of examples. I'm not gonna go through all of these. But for example, the state has legal liability when it comes to the state's plan of flood control, and this is due to a 2003 court decision, Paterno versus the state.

Because of this, the state has an interest in helping to fund some of the flood projects in the Central Valley to reduce some of that risk. The state also has, some contractual and settlement agreement obligations. Just to name one example, the state has some financial responsibilities when it comes to ecosystem and habitat restoration at the Salton Sea due to the quantification settlement agreement.

Some of the state's obligations are, in statute such as debt service on general obligation bonds, And then some of the statutory requirements are things that the state has chosen to do and put into statute and thereby can also be changed or added to or removed. In addition, the state has some regulatory requirements and just a couple of examples there.

It must follow requirements related to State and Federal Endangered Species Acts, as well as ensure the safety of state owned dams. If you turn to the next page, the op. The next page that you can't really see on this, you know. Okay.

I wanted to next talk about. Oh, you know, maybe I'm gonna just give up. Maybe you could just, I don't know if it's easy to just take that down. I feel like that's not helping.

I wanted to go over what the state's main sources of funding are for water related projects. And on this, page two, we'll start with general obligation bonds. This is probably the biggest source of state funding, especially since 2000. Voters have approved nine general obligation thousand. Voters have approved nine general obligation bonds totaling about $41,000,000,000.

Not all of these bonds are strictly for water related projects and activities. They all, some are more expansive to include other natural resources related projects. If you turn to the next page, however, I wanted to highlight in the three most recently approved bonds, Propositions 1, 68, and 4 voters have approved about 14,000,000,000 in general obligation bonds for water related projects.

These bonds fund a wide variety of projects, everything from sort of hard infrastructure, you know, water recycling projects, desalination, flood related projects, as well as habitat restoration projects.

Another obviously important source of state funding is the state's general fund. The general fund often comes into play when there's not another available source of funding or there's not another eligible source of funding. It's also come into play when there have been budget surpluses, and this was the case in in recent years.

The legislature appropriated about 6,500,000,000 through, one of the climate packages for Water and Drought Resilience just in the in the past several years, and most of that 6,500,000,000 was from the general fund.

Another key source of funding in recent years has been the Greenhouse Gas Reduction Fund, which is the the proceeds from the State's Cap and Invest Program.

And since 2020- 2021, GGRF has provided $130,000,000 annually for the State's Safe Drinking Water Program called SAFER. However, changes to the cap, recent changes to the Cap and Invest Program mean that revenues are likely going to be coming in lower, to the Greenhouse Gas Reduction Fund.

Changes made in statute also, made it so that the SAFER program is not guaranteed a 130,000,000 annually. And to that point in fiscal '26-'27, GGRF is providing 71,000,000 to the SAFER program.

Turning to the next page, I just wanted to highlight a few of the areas. These are just, not. Examples, again, not an exhaustive list, but just a few examples of where the state works with the Federal Government to either administer funds or provide a state match for federally run, programs.

So, just to highlight here, the State Water Resources Control Board administers federal grants from the US Environmental Protection Agency through the state revolving funds, the Drinking Water State Revolving Fund and the Clean Water Drinking Water State Revolving Fund.

These are grants from the Federal Government that the state administers as low interest loans or principal, forgiveness to local water agencies for mostly capital projects. The California Office of Emergency Services also administers funds from the Federal Emergency Management Agency.

These funds are related to disasters, either disaster recovery or in some cases, sort of pre disaster mitigation risk. These, in the water space, this is primarily in the area of flood management and dam safety.

And then I wanted to highlight, the Department of Water Resources collaborates with the US Army Corps of Engineers on flood management projects. And in this case, the projects are led by the US Army Corps and the state and local governments provide the nonfederal match.

Turning to the next page, I want to conclude by highlighting some of the key challenges associated with the state sources of funding for water related projects and activities.

I've already talked about the current sort of challenge we're facing with the the lower revenues in the Greenhouse Gas Reduction Fund for the SAFER program, but I also wanted to highlight some challenges with bond funding, federal funding, and the state's general fund. So bonds are typically used for large infrastructure projects that have long term benefits.

And because of that, it makes sense that, current residents as well as future residents are going to be paying off the cost of those bonds over time. However, bonds are typically not used to pay for ongoing annual, sort of annual maintenance and operations costs.

And because of that, another source of funding often has to be identified to pay for operations and maintenance. In addition, in addition to being sort of episodic, bonds don't happen all the time.

Bonds can be expensive, an expensive way to fund projects because of the interest that accumulates on those bonds over time.

I also wanted to highlight, one of the federal programs, the state revolving funds. So the state is about to face a large reduction in the amount of federal funding provided for theState Revolving Funds, and this is because the Federal Infrastructure Investment and Jobs Act had provided a significant but temporary increase in the amount of funding provided to these funds.

Those additional funds were available from 2022 to 2026.

In addition to the sort of drop off in that, because those funds are now exhausted, so in addition to the drop off in those funds, Congress is increasingly using the state revolving funds to, pay for sort of earmarked projects around the country.

And although some of these projects may take place or be be located in California, which is a benefit to the state, they are not necessarily going through the State Water Resources Control Board's, planning process, so they're not sort of part of this strategic statewide plan.

In addition, those funds are used one time, whereas funds that go through the state's revolving fund are revolving. So they can begin. They can be used again and again as those low interest loans are paid off.

Finally, on the last page, I wanna close by noting that the state general fund outlook is tenuous, and our office will be publishing its annual fiscal outlook in a couple of weeks. I'm sorry it wasn't available for today's hearing. But we just wanna highlight that rev. You know, income tax revenue collections have been coming in very strong, but we don't think that this is sustainable.

Those tax collections reflect sort of an overheated stock market, and we think that, it's now showing several classic signs of a financial bubble.

And these types of sort of speculative episodes typically result in a dramatic reversal. As such, we would recommend against viewing those, strong tax collections as sustainable and instead be prepared for potentially lower revenues in the tens of billions of dollars over the next one to two years. So with that, thank you very much, and I'll pass it to the next speaker.

Good morning, madam Chair, Mister Chair. My name is Kasey Schimke. I am the Deputy Director for legislative affairs with the California Department of Water Resources. I wanna echo some of the comments that have been, been made so far. I also wanna then talk a little bit about what we are doing as a state in response.

How are we planning for the next steps, next phases? So when we have.

Just... Aye... I'm gonna I'm gonna jump in really quickly with what I call the the the scary slide for you, which is...

Going back one. What what are the... What are some of the stresses we're facing? And we've we've heard some of those already from doctor Franklin. We heard those, madam Chair, in your opening statements, climate change, aging infrastructure.

And and we're gonna be we're gonna be looking at at at some of those specifically. I think a lot of them do key in on on what what has been mentioned, climate change, aging infrastructure, rising costs, and competing needs. I think those are the four big ones. We as a department are charged with every five years updating the California water plan. In that plan, we evaluate the state's water system regionally, statewide, what what are the conditions that we're facing.

For years now, we've been talking about, you know, future impacts of climate change, and now we are seeing the impacts of climate change as we move move into this. So I'm gonna quickly go through the next slide because it has been previously mentioned. You know, how do we get here? Well, we have our aging infrastructure. We have eighteenth...

Or, sorry, nineteenth century nineteenth century, you know, priorities, a bit of manifest destiny. We're coming in. We're gonna take this land. We're gonna use this land. That's not necessarily how the the the modern world thinks, but we built our twentieth century and in nineteenth and twentieth century infrastructure starting with some of those views.

And now we're facing a future that is gonna be facing climate change and and how we are gonna adapt to the changing climate, more frequent storms, more frequent droughts. I wanna talk a little bit about what we as a department are doing in the California water plan.

Under SB 72, from 2025 by Senator Caballero, We were tasked with, as part of the water plan, doing a number of things, but chief amongst that was identifying how do we secure sufficient waters, water supplies to meet California's needs. Those needs both from a growing population, but also from the impacts of climate change where we will...

Are expecting to see, excuse me, where we are expecting to see, reduced snowpack, more of the precipitation falling as water, and and just to give an example of some of the some of the impacts we are expecting to see.

So the SB 72 requirement was identify how we can come up with an 9,000,000 acre feet of water... Of new water, and we are then tasked with identifying is 9,000,000 sufficient? Is 9,000,000 the right number? And we're gonna be evaluating that as we move forward in our analysis. That 9,000,000 is gonna come from the different categories identified for you on the screen, and they are not new categories.

They are nothing that you probably wouldn't be able to identify on your own, but our our advisory committee has keyed these as as the major. New storage, reoperation of our existing reservoir facilities? How do we retain more water so that we aren't, reacting to incoming storms inappropriately, either from a water supply perspective or a flood flood management perspective. Increasing our groundwater recharge, capturing stormwater, better watershed and forest management, which was mentioned earlier in the headwaters piece.

Continuing urban water conservation, water recycling, desalination, new ways of conveying water, both regionally and statewide, water transfers, and then ultimately the the the big water demand reduction, which is both urban and agricultural water sub...

Water reduction. These are the key points that the state is looking at in our California water plan, and that water plan is used as an informative document for local water managers. We obviously operate the state water project and a a major water supply system to the state, and all of those local agencies in turn operate their own systems, many of whom receive water. 27,000,000 Californians receive some portion of their water from the state water projects system. But our our local waters managers really implement that greatly.

And I think that was identified in in some of the the the cost discussions earlier. Our water plan... And and this is not the greatest of, images, but size wise, what our water plan is doing specifically with regard to, financing and water affordability, we're looking at each of these strategies in... Under the lens of of of four categories, infrastructure, regulation, affordability, and data.

And really really the the advisory committee to the water plan, which is a broad group of experts and participants, water managers, tribal representatives, We we we have really done...

And that was also a requirement of recent legislation passed to to take a broad spectrum approach to to compiling the the water plan. And, again, it's a five year process. So it is a very in-depth process that we're we're engaged in. The next one will be completed in 2028 and will come out at the end of twenty twenty eight. And it's going to look at each of these strategies through these...

Through the lens of, is this is this possible? Is this affordable? What are the benefits? What are the... Where are the gaps in data that we need to do this type type of work?

So we really hope that this helps advise future actions to address the very question you're asking at this committee. How do we move forward in financing future water needs? How do we address the changes that we're seeing? I don't think this is gonna be necessary because I think a lot of people will speak to this also. But simply put that there there is no do nothing option in in this.

Something needs to be done. There are impacts from inaction as we've talked about with regard to aging infrastructure. Something has to happen. You can't just keep putting Band Aids on on actual infrastructure. With regard to climate change, we're seeing those impacts now.

We're seeing the chain... The changes. We need... Doing nothing is not an option. And and I wanna kind of leave that there for you, but hopefully hopefully, you've heard what are the problems, what are the stressors, what are we facing, what are the costs.

I wanna hope to leave you with, we we are looking at doing this. We are looking at addressing this. We are working statewide with experts to identify what are the few... What are the recommendations?

What are the recommendations that the next water plan is gonna make to the legislature, to water managers, to the state broadly that need to happen, for next steps, which include, just recently, the State Water Resources Control Board approved the, Bay Delta Water Quality Control Plan and included the Healthy Rivers and Landscapes proposal, which was basically make sure that if you are improving habitat, if you are improving flood plains, if you are doing additional work to have the same benefits as, two species, that is a beneficial purpose also.

The site's reservoir, project just received its approval permit from the State Water Resources Control Board as well, which is another piece of the the broader puzzle that we're looking at too. And those are just two not insignificant examples of things that are being done. But I I hope to leave you with, collectively, water managers are investigating this, are moving forward, and are addressing this. And as as we as the state are are hoping to help guide that process.

Thank you so much, Mister Kimchi. I appreciate it. And we remotely have Carla Nemeth, who is now the head of ACWA. So, Carla, I know you're with us remotely, and, hopefully, we'll see you on our screen.

Yeah. I am. Good morning, chairs Pavin and, Carrillo. I I am Carla Namath. I'm the executive director of the Association of California Water Agencies.

We represent more than four seventy public water agencies, really in all corners of the state, large and small, a real diversity of needs and interests. So you can imagine, you know, in in California, having our public water agencies speak with one voice can at times be challenging. But the one thing that is very uniting for all of us is affordability. So I'm very grateful that you're taking the time to dig into these issues.

We view California's general challenge with affordability as, water as, really the third leg of the stool, housing, energy, and water.

All of those are are very basic needs that Californians have, to live and flourish here. And so we're eager to start this discussion today and and really stand ready to supply more information as as this body continues to deliberate. I want to pick up on, I think it was Casey Shimke's last slide. I believe that, without a clear strategy around water investment, there's no doubt in my mind that cost will skyrocket. It's not an if.

It's it's an is, and our challenge is what are those clear strategies and how do we start moving some of those clear strategies in the context of a pretty complex picture. We did submit a a letter that goes through a lot of the themes you've heard from other panelists that really frames up the issue from ACWA's perspective. But I wanna just touch on a few more points that I think really bear most important consideration moving forward.

One, for for California's water rate payers and and local governments, they pick up the tab for 80 per... 84% of our water infrastructure treatment and delivery costs in the state.

You heard from a previous speaker for PPIC really touching on, some of the constraints on how local water agencies, can use those rate payer payer dollars and and local, local revenues, things like connection fees and property taxes. And so I think for for for many years, our our public water agencies could work maybe with acceptable affordability inside the context of those constraints.

But when we do pile on the the real challenges of of aging infrastructure combined with more, more weather whiplash, more extremes, I think that whole, that whole package becomes a lot more challenging to maintain water rates, that enable water agencies to be... To to offer water at affordable rates throughout their communities. Just for a little more context, US EPA put out in 2021 that California had an $84,000,000,000 infrastructure need over the next twenty years just for drinking water.

And that was 2021. And I think, you know, our our understanding of, the acceleration of of warming, conditions, the role that warming temperatures play on actual, supply availability, even if we get more water or or continue to get precipitation, and it's coming more as rain than as snow. The reality is also temperature has a drying effect on all of our systems. So even if it... If more comes as rain, there will be less that is available to manage for people, the economy, and the environment.

And so that $84,000,000,000 just on drinking water, you know, is a a data point from five years ago, and I think we can also generally sense that all of that is is accelerating. That's a portion of the costs, but even the cost writ large are accelerating at at a rapid pace. A couple of affordability strategies that...

Or framing that I think we need to develop this this clear strategy for, for water infrastructure in the state is I think we need to upfront acknowledge the interconnectedness of many of our water supply sources. We...

Aqua agrees wholeheartedly with with the notion that our our headwaters really have become financing orphans, and all the challenges on on water rate payers are exponentially more difficult. And some of these headwater communities where they have very old systems from the eighteen hundreds, these wooden flumes that are very vulnerable to wildfire. They're vulnerable to rain land movement relative to to rain events after wildfire. And they also happen to serve service areas that are very sparsely populated.

So you can imagine that sort of affordability curve in some of our rural communities in in our headwaters just becomes extremely steep.

So extremely steep. So affordability strategies that take that into account are are really important for moving forward because those headwater conditions are very much interconnected to what happens downstream that that supplies the more populated parts of our state, be that sort of agriculture in our... In the Sacramento Valley or the San Joaquin Valley, you know, all the way out to our our urban communities that tend to be more developed along the coasts. And I would say we have sort of...

In addition to our big systems in those areas and in places like the North Northern Bay Area all the way up the Northern Coast, you know, we just have these sort of circumstances that may be at a smaller scale, but they're still really important for those communities that live there.

So folks in Napa and Sonoma and Mendocino Counties and Lake County and and and further north, they all have headwater issues that tend to... If we don't address those headwater issues, they have downstream effects that are also challenging for managing water supplies. So acknowledging the interconnectedness of our surface water systems that many of which originate in the Sierra Nevada, but other mountain ranges, how those are managed really matters to how we manage our groundwater basins, for example.

It really matters to, our ability to recycle water in a... In an affordable way.

And what also matters is how we interconnect important needs that we have to use water more efficiently. So conservation is hugely important.

Our 2018 conservation as a way of life legislation put us on a path to to have reductions over certain periods of time, 2035, 2040, focused on urban areas, focused largely on outdoor water use, which is where our urban areas have the most water use, dealing with things like system water losses, dealing with things like our commercial areas and the way that they they use water.

So we have estimates that our our conservation as a way of life potentially essentially generates, 400,000 to 500,000 acre feet, sort of in the context of this warming climate and in the context of what's what's our new charge via SB 72 in the water plan. I mentioned that because as a water community, we had some original estimates of the cost of those conservation programs in the $3 to $4,000,000,000 range.

I think we don't fully know exactly how much it's going to cost to adapt, to to achieve those adaptations in, in 2035, and in 2040. So that's something that, ACWA is paying close attention to and really starting to understand, not just the cost of those conservation programs, but the follow on effect that increased levels of water use efficiency have on the affordability of other supplies we know we need to invest in. And I think therein lies the challenge.

We do need to do all of these component pieces. We do need to stabilize our surface water supplies and deal with the aging infrastructure that's that's that's challenging those those conveyance and storage systems.

We do need to invest in our groundwater basins. We do need to invest in recycled water, and we need to use water more efficiently. So when you put all of those things together, it's... Those upward pressures on water rates are are enormous. And as I mentioned, felt more acutely in those communities where there really aren't the ratepayers to really spread that kind of cost.

I think the other piece of it that we need to acknowledge is that, especially some of our bigger systems, they do afford multiple benefits. Our big built water conveyance system plays an important role in flood protection, you know, here in the Greater Sacramento area, but all the way up and down our big Sacramento and San Joaquin system. And then at the local level, they... Our our water systems also provide flood control when we have big big storms event... Storm events coming through California.

And I think this year will be... Will offer some interesting, an interesting look at the challenges, but more optimistically, the opportunities we have to capture, more of our storm events, protect public safety, but capture those storm systems better, more efficiently so that we can use them when drought returns. So, again, I think acknowledging the interconnectedness of all of our systems needs to be part of a discussion around affordability strategies. The second piece is, no surprise, delay makes everything more costly.

And one of our big examples of that is Anderson Dam, a seismic retrofit project.

This is in the Santa Clara Valley. It's a important, water storage system, but also flood protection system. This is a a project that's been, working on permits for twenty years, 13 different state and federal agencies. The cost of that project has jumped in the last three years from 3.2 to about $4,200,000,000 But 900,000,000 of that, over the last twenty years has been spent on permitting, engineering, and design, all important things that we have to do.

But when when our permitting processes take twenty years, you can see that those costs add up.

And I think it's important for us as a state to look at what are the things that we can do to streamline those processes, streamline those processes that really help us deal with serial kinds of permitting conditions that, generate changes, that, generate, redundant work, that needs to be done at the local agency level, and the cost of which are exclusively borne by our water rate payers.

And then finally, I think the third strategy is how do we think about the ways in which our funding sources and our funding strategies, our bond initiatives and our state revolving funds work in the context of our permitting processes that can be lengthy or work in the context of projects that need to have multiple funding sources. It can be very challenging at the local agency level to align an ability to use your rate pay...

Rate payer dollars in going out to an election as as required by prop two eighteen. So we're clearing that hurdle, matching that up in a timeline with the availability of state dollars, and matching that up in a timeline with an availability of federal dollars.

It is not an efficient way to plan for big capital projects. And so I think there's an alignment there that we can do, in the near term across existing state funding sources. But I also think, you know, we have real challenges, around, around bond dollars, and bond dollars that go out. And it it takes, it takes a long time, to to see those projects realized.

I can't help but comment on, the site's reservoir project, which, as as Casey Shimpke mentioned, just received its final permit last night.

If I can just kind of put my my former hat back on or or just claim director Emeritus status for a brief moment. There was a lot of enthusiasm and excitement in 2014 associated with water storage. And the big excitement, of course, as I'm sure you can relate to, is those funds were continuously appropriated, which felt like an important step forward in water infrastructure funding.

But I think what happened was we had a very complex process for both sorting through the analysis that needed to support decision making by the California Water Commission. And we had an original sort of set of projects, if you will, that sort of automatically qualified.

But in the course of the last you know, twelve years, and, of course, that program kind of predates SIGMA. Right? So when SIGMA was passed, suddenly we had this, immediate sense and desire to acknowledge our underground aquifers for what they are, which is really critical water storage infrastructure. That's 12 times the size of our surface water reservoirs. It plays a really important role in water security.

But that program, that 2,700,000,000 for public benefits, was not really able to shift off of a particular construct in a timely way.

And and I think about if California invested that 2,700,000,000 in a different way in in a kind of financing structure that enabled us to realize interest on those dollars versus continuously try and cover the cost of inflation, we would be in a better position today to fund the things that we need to fund, that are responsive to climate conditions, that are responsive to the interconnectedness of of our our water supply systems, and do it in a way that is, more to...

More affordable to water rate payers in the state. I think we need to learn from the things that we've tried, and how they hold up in the context of some really important change conditions with climate and a change regulatory environment with Sigma, for example. And I think I have tremendous respect for, my my colleagues on the water commission.

I think they've they've followed the letter of the law and, but it has been a laborious process, and I think we can learn from that going forward. So with that, I'll conclude my remarks and just thank you for allowing me the opportunity to speak with you this morning.

Thank you so much for the for each of the witnesses to be here and and to bring a a different component as it relates to financing and what folks are up against. We have time for a few questions. I'd like to turn it over to Mister Manuel Carrillo.

Thank you. Thank you to the panelists for, their presentations. A couple of, questions and and comments. What what could possibly local water agencies do to plan for future water? The fees that they charge, it seems to be based on either going after the voters to increase the the water fees.

And that seems to be that it's not gonna be very popular, as you know, for what's going on with the cost of living. Increasing those fees and what is it that they can possibly do to better plan for future improvements on infrastructure? Thank you for mentioning the the money that is available to the different grant allocations and things like that.

And is there a mechanism that ensures that rural areas are getting some of that money for the improvements that they need to do as opposed to what urban areas get, like, you know, the LA Basin? You talked about the LA County, the measure that was passed...

Measured up, I believe it was. But in LA County, it's so big and there's also rural areas. In North LA County, the area that I represent, and we always question if we get our fair share of what's available. I think I asked two questions in one. If you need me to clarify, just let me

know. Yeah. Thank you for your question. Yes. I mean, the situation for small and rural community water systems is extremely challenging.

It is unrealistic that most of them could afford to pay for it given their small rate payer basis. So I I don't know what's possible, but to me the the obvious source would be some kind of further state funding to to make those, you know, to to to allow those systems to make the needed investments. Aye... So in terms of affordability for for water agencies generally, you know, the the rate...

The low income rate payer assistance programs that I know of that are out there currently either pre existed prop two eighteen or are using non rate revenue to to pay for that.

And so, sometimes an agency will have a property that they can lease out. They They can use funding from those sources to pay for them. But of course, that does not apply to every agency in every every situation. So it is extremely challenging. I mean, you know, to be very optimistic or or I see shoot for the stars, you know, reforming prop two eighteen would be...

Would make a lot of things more possible. But that... Yeah.

Thank you. And one one last thing. Do do you believe that it's worth investing in covering the California aqueduct with solar panels to help with operation? I know there's some pilot program in the Central Valley. Is it worth investment?

Well, the pilot program in in Turlock has been quite expensive for the amount of canals that were covered. And and that had to do with engineering challenges because they needed to be able to bring in earth movers to do regular maintenance around the canals. And because of that, they had to essentially build pillars and put the panels up up high, which added a huge amount of cost that was not anticipated. So at least for that pilot has not... I mean, there's...

It is a trial, but that was not cost effective and and sort of makes me wonder if it would scale up in a cost effective manner.

Any other members? I got a couple questions. So I wanna I wanna ask about bonding capacity and where the state is. Because we've seen over the past couple decades, in order to do these capital improvements, we've really relied on bonds. So where are we as it relates to our ability to get some more bonding capacity or or to get more bonds as protect?

Thank you for the question, madam Chair. I think I need to start by first pointing out that the state is paying more than 7 bill... An estimated more than 7,000,000,000 in 2627 for, bond debt service. And for the resources bonds, this is 1,600,000,000 in 2627, and this obviously doesn't include the bonds that were just approved by voters in the election on Tuesday. So the...

It's definitely a consideration how much we can and should, depend on bonds because, obviously, the more bonds that are approved, the higher that debt service is is going to go. And at some point, you know, it's like, should we be paying the debt service or using that money for the actual projects? So it's sort of a fine fine balance. I don't know if I really answered your question.

Well, that was... You kinda segued into my next question, and that is how high is the debt service and have we reached that inflection point? I guess that's really...

Yeah. I I have to say I'm not I'm not a... An economist in this area, so I don't I don't wanna necessarily speak out of term. But we're definitely... Our debt service is is definitely on the high high side at the moment, and we'll have to keep an eye on that, particularly in light of the additional bonds that we're adding as a result of the election.

Sure. Sure. Mister Kimchi, I have a question for you. And as we talk about strategies going forward and there are so many different projects that we... You you referenced the dollar figures for for groundwater recharge.

You've mentioned dollar figures for, I think, the dam improved dam safety. Do you foresee... Because you're doing these plans... And as I've looked into this and prepared for this hearing, you know, we got plans from o five. We got plans from '20...

2009, 2013, '15, you know, '21, and here we are in '26 and you're working on '28. Fantastic, but plans do not a infrastructure construction make. So my question to you is how do you foresee prioritizing projects? And especially when... As you had your...

You started with your doomsday slide and Aye... Believe me, I took it all in. But what are... What is DWR gonna do as it relates to prioritizing? And especially with given the backlog of climate change and receiving water in different ways?

Sure. Thank you. What we're focusing on right now with this next 2028 California water plan, and and maybe I'll take a half a step back and say, you reference a lot of the the historic plans and planning efforts. And each one of those does build on it, and we learn what was missing from one and what was... And so we we we like to think we are improving as we move forward with our planning efforts.

But you asked specifically about prioritization, and that's what we're hoping to do by by evaluating the various strategies of groundwater conservation, surface storage, how we are utilizing our existing system. When we evaluate that, you you can begin to essentially score the strategy. Is this one feasible? Which one is more feasible? Which one is is more regulatorily feasible, but does it have a cost?

That's gonna be that discussion that then would advise projects. So that's... So there's, like, two levels of prioritization that I see. One is identifying, not necessarily prioritizing, but identifying what works under what scenarios.

If cost is not a factor but this, if cost is a factor, then, you know, looking at that, but then evaluating the local projects or the state and local projects in that lens, either to guide future state investment, be that bonds or General Fund Dollars, or local investments, oftentimes with with local bonding measures and the likes of that.

That's really what, what we're looking at our planning process doing and and helping to make those decisions, not necessarily imposing a decision, but providing the detail, the background, the information, and the guidance as to where where local agencies may wanna go. And I know you've got some that that might have some thoughts here, today too, but that... That's really how we're we're viewing the the need and how this next level of planning is is focusing.

So I'm gonna make my pitch. I'm looking for the best bang for our buck, the most urgent need. How can we address it for the best cost? And I know that that's not rocket science, but as I said, we've done a lot of planning over the years and and I think crunch time has come. And we really need to get down to actually making these investments.

And I think if we prioritize and show where we're getting the best bang for our buck, we're gonna get there a whole lot faster with folks like us that wanna implement policy but have to get reelected and and we wanna make sure that we're serving the public in the best way that we can. I'm not saying anything. I'm sure none of you don't disagree with it. The time is now.

And and so I I really am so appreciative of you being here and lending to the discussion because you are in the trenches on these topics every day and and we're gonna continue that discussion.

Anybody else before we, move on to the next panel? Great. Thank you so much and let us maintain, continued discussions. We're here for you. Alright.

Let's get the next panel coming. We're gonna hear from the local agencies now. We've talked about you. Now it's time for you to come forward. We've got, Matsuka and Christine Compton and, Michael Colantuano Colantiano.

I'm gonna get it right before the end of the hearing, I promise, who I believe is coming to us remotely. Okay. So who are we gonna start with? Okay. Mister Colantuano, who is, remotely, we're gonna turn the the screen over to you.

Welcome. Are you here?

Sorry about that. Head on mute.

Okay.

It's not Welcome.

Good morning, madam Chair and Mister Chair. Thank you for the opportunity to present this morning. I am a local government lawyer with particular expertise in the revenue side of municipal finance, and I have both advised cities, counties, and special districts on these topics and litigated them. And your staff has asked me to present in eight minutes or less the pitfalls and challenges of making water rates under Prop two eighteen. I do have slides, but I'm not in a position to present them.

I don't know whether your staff can make them available to you. But let me dive right in. Under proposition two eighteen, which applies to retail water rates, but not wholesale water rates, the agency, not any challenger, must prove to a court satisfaction that its rates don't exceed the cost of service, the reasonable cost of service, and are fairly apportioned among those who pay those costs consistently with the cost of service. So that's one of the obligations of Prop two eighteen.

Judges apply a demanding independent judgment review, which means they get to second guess the decisions that rate makers make.

And what is rate making? It is quintessentially a line drawing exercise about how to apportion costs where there's no one right answer, and there are different legislative approaches. Courts are not generally well suited to independently judging legislative policy decisions, but the voters and their wisdom gave us the standard. And rate making is based on predictions, educated guesses of the future.

So, when you get strict judicial review of pure choice and a range of policies that could be lawful based on predictions, what you get is a whole lot of uncertainty.

It's a mismatch between estimate driven judgments and a lack of differential review. What's the result of this mismatch? One is uncertainty. I can't tell my clients with a great deal of... I'm on slide four for those of you who need to catch up.

I can't tell my clients with confidence, that any given rate making strategy will withstand judicial review because I'm predicting the outcome of the human process. A couple of cases from the early, teens established that when government gets it wrong, refunds can be ordered. And if refunds are ordered, the plaintiff's counsel gets a third to a quarter of the recovery.

The City of Los Angeles is such a large utility provider and such an attractive target for litigants that one of my colleagues has a caseload for LA in a dozen cases at any given time on all of their utility charges, water, sewer, trash, you name it. Anything that comes up in the paper that suggests a new theory, suddenly there's a bunch of cases filed.

So there's a lot of litigation that's paid for by ratepayers, and they pay both defense counsel and ultimately if plaintiffs win, plaintiff's counsel. What's the process look like? Under Prop two eighteen for retail rates, we have to mail a written notice to all of our customers, call that about a dollar a notice. So for San Diego, for example, 250,000 customers, $250,000 just to do the notice. City of LA, much larger.

You got to mail them a notice. You got to wait forty five days, and have a hearing at which majority protests can be lodged. And that's just something in writing by an owner or a customer saying I object. Because a majority protest is defined by 50% plus one of customers responding in writing in a forty five day period, we don't see them very often. We don't see majority participation in public life.

You know, local governments are likely to get 40% turnouts in their elections. So, asking people to put it in writing in a forty five day window, we don't see them very often. But you don't need to be a successful majority protest to make a real difference in how government, how politically brave it may feel, to tackle costs, that need to be tackled. So I'm on to my next slide now. Let's see.

So how do this local government manage these risks? How do I advise my clients to manage these risks? One is I think we should be in regular dialogue with our clients, our customers about what things cost so that when we come to them with an ask for money, it's not out of the blue and it's not the only thing they hear from us. I advise my clients to hire a rate making consultant, somebody independent of the agency with the right set of initials after their name.

And if they don't have house counsel with the ability to do it, hire a lawyer expert in this area to review the rate maker's work.

This is what's needed to make a record that will allow us to sell our rates to a judge, and it can be costly. So an idea is to see that technical assistance is provided to smaller agencies, which may not be able to do this at home. The next is to implement procedural protections that the legislature has given us. And I've got a slide on that coming. Cite and use the standards the legislature has adopted to try to protect water rates.

I got a slide on that too. And then where there's a Supreme Court case pending involving LA's tiered water rates that we're all watching very closely.

I got a slide on that too. And then where there's a Supreme Court case pending involving LA's tiered water rates that we're all watching very closely.

The procedural protections the Legislature has given us so far are three. There's SB 1072—that was Senator Padilla's ban on refunds of water and sewer rates, but not trash rates, requiring that any error that we make in the light of the court second guessing us, after the fact, be paid by credits on future bills rather than refunds that will, A, reduce what I see as the over litigation of these subjects. There's too much incentive to challenge.

You need some to make sure that we're following the rules, but I think we have too much, and it's just expensive. The mechanics of refunds are expensive. We got, courtesy of Senator, Senator...AB 2257, which allows us to opt into a process by which before you sue us, you got to come to a hearing, tell us what the problems are, and give us a chance to fix it. It's modeled on CEQA.

Most agencies are doing it. I think it will make a positive difference. And then, we have SB 323 from 2021, which established relatively short statutes of limitations, 120 days after the rates take effect. First time somebody sees it on the bill, the clock starts.

The Legislature has also given us, courtesy of our Chair today and some others, standards that are intended to sort of guide the court's independent judgment review and our ratemaking to keep us out of trouble. So, 2016's SB 1386 gave us a protection of fire flows. You know, when you open your tap, you're getting enough pressure to run your fire sprinklers, and there's enough pressure in the street to run the fire hydrant. And that pressure doesn't come for free.

And some people wanted to argue that that should be funded by taxes as a fire service.

We think that it is an aspect of lawful water service, and the Legislature has agreed with us. You've made three efforts as a Legislature, two of them courtesy of our Chair and recently, to try to protect tiered water rates, the Legislature—the Supreme Court—has asked for a brief on the most recent bill, 1827. These have been helpful. Have they ended the problem of too much litigation?

Not yet. And then, the intrepid Senator Hertzberg—I always call him that because he likes to take on the toughest problems—gave us some guidance on storm sewer rates. Nobody's been brave enough to test that out just yet. So, next slide. The City—there have been three big cases lately.

San Diego lost their tiered rates case. The Otay Water District adjacent to San Diego down on the border lost its tiered rates case. And my partner, Holly Watley, won for Los Angeles on its tiered rates case.

The difference between those cases is the older two cases were based on records prepared before we really learned what the courts were demanding on records, and LA's is a more modern record that does a better job of explaining to a judge who may have gone to law school, because he or she doesn't like math—how we got to our rates. And LA won, much to our chagrin in local government, the Supreme Court didn't take review of the two that we lost.

They took review of the one that we won. But they did limit the question to just whether Los Angeles's record was adequate to support its rates, and another issue we won, a procedural protection, was less standing. That case is now fully briefed. The supplemental briefs on AB 1827 just came in this month.

We would expect the Supreme Court to set this for argument probably late 2027, and we'll get a decision early 2028, and until then, all of us concerned with tiered water rates are holding our breath. And with that, Madam Chair and Mister Chairman, that's what I have for you.

Great. Thank you so much. Who's gonna go first, Mister Zucca or Mister Compton? Mister Zucca, welcome.

Thank you. I think I'm next on the list. Wait for the PowerPoint to come up. While we're waiting, I hope—I'm gonna provide a local perspective on this problem. I sort of see this as a twofold.

One, there is the challenge of how do we pay for the infrastructure that we need. The other part of that, though, and equally important, is how do we allocate the costs. So, right now, some of the conversations have been around Prop 218 and the legal constraints on that, what I'm hoping to show today is, and talk a little bit about, is how the cost of utilities is playing into the affordability crisis as well and sort of the equity around Prop 218 and some of the issues that it creates.

Gonna go up. There you go. Okay. So, just by way of introduction to—because I come at this wearing a few hats—again, my name is Matt Zucca. My background is in a combination of consulting engineering for 25 years. I'm a licensed civil engineer. I worked in consulting for about 25 years before I went into local government, and I've worked as Deputy Director and Assistant Director of Public Works for San Mateo and City of Palo Alto. At Palo Alto, I oversaw the water, gas, and wastewater utilities, so both on the Prop 218 side and the Prop 26 side, the gases in particular.

Leaving Palo Alto, I'm now the General Manager for Silicon Valley Clean Water, and I've also been on the board of directors from a political standpoint for Mid Peninsula Water District for about the last 25 years. There we go. Alright.

The chart that I'm showing here—oh, actually, let me get back up. Sorry. Clicking too much. Alright.

Silicon Valley Clean Water is located in the peninsula. We're a joint powers authority. Member agencies are Belmont, San Carlos, Redwood City, and West Bay Sanitary District. We treat wastewater for about 300,000 people. Mid-Peninsula Water District is in the same area.

It serves the city of Belmont, about 30,000 people, just to provide context to some of my sphere of influence in the, the jurisdiction that I support. This chart is intended to highlight two things. The bottom blue line represents cumulative inflation in the Bay Area, since about 1984. So, what you can see is that since then, inflation has gone up about a 125%. The upper line represents the wholesale water cost in San Francisco.

So this is the San Francisco Public Utility Commission's cost of providing or their... What they charge for water to the retail agencies. That has gone up 350%. So, the cost of utility and water service at the wholesale level is drastically outpacing the actual cost of inflation in the Bay Area. So in this chart, the bottom line is the wholesale water cost that you saw in the previous slide.

The green line is now what we are charging consumers. And so you can see that even that is continuing to accelerate as well. And, you know, the the cost to the local consumer is that the... And I'll talk about this in a little bit more detail. Water rates are going up disproportionately and and more quickly than the cost of inflation and the general cost of goods.

That is mirrored by, and this is a sort of a national average. Wages have not kept up, needless to say. So on the upper end of earners, the top 10 percentile nationwide, and it might be a little bit different in the Bay Area, but I wouldn't expect it to be that much drastically different, is up 64% compared to a 125% on inflation, 350% on the wholesale cost of water. And so what we're seeing is this widening gap, I think, locally in in local government.

Putting on my Silicon Valley Clean Water hat now as a general manager for the wastewater authority, What I wanted to show on this slide is sort of the life cycle since inception of our facility and and how the costs are being borne.

So if you look at this, this bottom... This chart goes back to 1976. This is back when the Clean Water Act, initially was passed, and it funded our... The construction of our facility. The blue bars represent federal grant dollars, not loans, not WIFIA, not SRF, but actually free money that was given to our agency to actually build this plant.

So for the first thirty years of this plant, the only cost that our rate payers incurred was the annual operation and maintenance of the plant. Since about 2008, after thirty years of running a wastewater plant right on the bay, we had to institute a capital improvements program. It was starting to fall apart. So since on the slide again, it changes colors. 2008 to present, we're probably close to a billion dollars of capital projects that we've had to implement on the same plant.

And so when we're talking about the rate base, the rate payers never paid for the original plant. That came with free federal money. That's why we've been doing 10, 20% rate increases is because you've gotta get from a rate system that was designed to only pay for O and M to a rate system that is now designed to pay for o and m and a billion dollars worth of capital costs in a very short ten year window of time.

Going forward, which is sort of the right part of this slide, we have additional expenses as well. What's not shown on here is that we have a new permit.

We have about $400,000,000 of additional expenses, so... To treat... To deal with the new permit. And if you were to lay out the the chart between now and 2034, it would duplicate that high spike that we've seen over the last ten years. That's to remove nitrogen and our wastewater discharges going to the bay.

All of those costs over the last ten years and all of the costs going forward are gonna be borne by the rate payers unless we can find other sources of funding. And, again, sort of the the concern is is how do we pass those costs on? Right now as a JPA, we send out four bills. Our member agencies then have to allocate those costs based upon their own prop two eighteen process. So what do these costs mean?

The chart certainly shows a a lot, but the US EPA tends to or has criteria on affordability. They would characterize something that's low financial impact as less than 1% of the AMI or the area median income. With the nutrient removal project coming up, we expect that we're gonna be greater than 2% of the AMI, so that would be considered a high impact. But that's 2% of AMI in an area with the highest median income in the country.

If you are living in the area and you are not fortunate enough to be making $210,000 a year as a family, maybe you're 50% of the AMI, now your wastewater bill is gonna start approaching 5% of your of your income, and that's just wastewater.

That doesn't account for water. That doesn't account for gas. That doesn't account for the energy side as well. So one of the things that we're very concerned about is how do we continue with the constraints on prop two eighteen that force us to do cost of service? How do we continue to do this in such a way where utilities aren't becoming part of the affordability crisis, or how can we mitigate that?

Right now, we're sort of locked in in terms of how we allocate these costs. So you've heard a lot today about Prop two eighteen. Prop 26 is another one on there, and, you know, we are constrained in terms of how we can allocate those. I will say that, you know, my conclusion on this is that utility costs have historically exceeded and far outpaced inflation. There is no sign of that slowing down anytime soon.

In fact, I think it's probably accelerating. The current rates, and we see this going forward into the future, will be disproportionately affecting lower income households that would be spending a lot greater part of their take home pay on the basic cost of utilities. The current... We're we're constrained by law. This isn't a choice.

We don't have the ability to charge based on income or any other kind of metrics. So this is, you know, a a sort of an obligation of ours. And, you know, the the challenge that we face is sort of twofold. How do we continue to fund these projects that are getting more expensive, but then actually also allocate the cost in an equitable manner? And that is my presentation.

Thank you.

Okay. Thank you, Mister Zukum. Miss Compton, welcome.

Thank you so much for having me. I'm Christine Compton, and I'm with Irvine Ranch Water District. We are one of the 10 largest retail water agencies in the state, which means we actually are the ones who build directly the customers for the services we provide. We provide four lines of service, to our customers, which feed into kind of the other panelists today. Obviously, water service, which is the topic, sewer service, recycled water, and then urban runoff treatment because of the watershed that we're in.

What that means in serving 20% of Orange County is we have a a daytime population because there's tons of business in our area, and it's a huge part of the state's economy of over 600,000, probably approaching 650,000, and a nighttime residential population of about 450,000. So with that, we've done a lot of the things the legislature would have want every water agency to do. Over 50% of our water supply is from water that's reused. We have invested heavily in water conservation.

We have some of the lowest water uses in the state.

We have an extensive cost of service that's allocating all the costs that you've heard of today directly to the proportional service of our customers. And we've done things that are looking at our water water reliability going out. So we have water reliability studies looking at all the bad reasonably foreseeable things that you can do to make sure that we can be reliable to our customers.

All of those things, when you factor in then climate change means, there are infrastructure investments that need to be made, but we're also a community that is continuing to grow. And so we have lots of housing still coming on in our service area.

And so what I've been asked to talk to you today about is how do we assess those infrastructure needs? How do we assess the need for the growth that we're seeing, and then how do we pay for it? And so we are, at IRWD, a sophisticated agency. And so as I said, we start with looking at water reliability for our customers and the growth. And so we have an extensive study that goes into that, and I'd be more than happy to talk to you.

But I really wanna focus on the growth. How do we know what's coming, and how do we anticipate and plan for that? And so we at IRWD have very good relationships with our land use agencies. And so we're talking to them regularly about what they're doing in their general plans and the changing, so we can accommodate that and put them into the plans that we're developing for the infrastructure we need to serve our community and those new developments that are coming on board.

We also talk to our developers at length.

So we're getting the most up to date information. And we have what's called a water resource master plan. That water resource master plan takes that information that we're getting on, you know, what folks are planning and coming and the approved land uses. So we can put that into the existing uses that we have. That includes redevelopment and greenfield development.

And then plan for the infrastructure we need. So whether that's, you know, we have our water supplies, the pipes in the ground, our reservoirs, what do we need for fire flow in those communities, all based... And we factor that in using... We know how much our... Each house...

Housing unit uses. We know how much business use. And so we use those demand factors in in that full analysis. But we also do this on our sewer side. So fully in on the infrastructure, so we can allocate those costs.

Once we have that, we're able to plan ahead, and we look very, very far ahead. Additionally, I just wanted to note because the other question that comes up in this conversation is, great, you're planning for the future, but how do you maintain your existing infrastructure? And at IRWD, we have a replacement model. We're looking at all of our current infrastructure. We're evaluating its useful life, and that model goes out decades.

So we're planning ahead for the replacement of all of that in our rates. All of those things come into play, but it means that no matter what, our local community development is, we're planning ahead for the services to serve them and allocating those costs. All of this, we've been able to do, and we have the lowest water rates in Orange County. So that's our intent, is to try and keep things as low as possible. But as my colleagues have said, we're all seeing upward cost pressures.

And so when we look at this infrastructure, there's three categories of funding that basically can fund it. We can use our rates. We can use debt financing, which we do when it makes sense. And then there are grants. All of those essentially come into play because debt financing ends up going into rates.

Mean that the only category that doesn't affect affordability is federal and state grant funding opportunities. And so with affordability, what we're seeing in my area and across the state with water retailers is there's essentially six categories that are driving upward cost pressure on rates and affecting affordability. And that goes into what you can also do with infrastructure and how much you can put towards being able to adapt for climate change and whiplash. So the six categories that

we've identified, a colleague of

mine, Danielle Coats at Rancho California, have spent a lot of time in this affordability space. Energy costs are a direct input to water and sewer. They just are. And you all are debating those costs in other forums up here. Chemical costs.

We have to buy chemicals to treat water to ensure it's safe. Same with sewer to treat it. Those... That's driven by the global marketplace. And so there's not a whole lot we can all do to affect and bring down those costs currently.

The staff costs. It's just the cost of living in California, and it takes bodies to be able to provide these services in a safe and healthy way and to ensure that folks have the right certificates and training to be able to do that so we're protecting the public. Because at the end of the day, water and sewer service is a public health and safety issue. We also have regulatory costs.

We've seen a substantial increase for good reason, but in in the cost it takes to comply with regulations.

And that's conservation costs, water quality costs, all of those things. But we've seen huge increases in the last decade in that, and that's going directly into rates. The last two are really infrastructure costs. It's taking a lot more to build infrastructure. At my agency, in the last...

In the... About the... If you go from, like, six months back and a year out, we're probably issuing contracts for about $1,500,000,000 worth of infrastructure. We have dam safety projects where we have new information based on climate change and flood predictions, where we have to make those improvements. It's a $500,000,000, and that's one of the cheaper projects.

And you're seeing those across the state, but there's 1,500,000 people downstream who would be impacted if it fails and another million people that get their water supply from that. We're seeing other costs like that across the board. And finally, climate adaptation costs. And so with that, my colleague, Danielle Coates and I thought about, well, we know what the budget situation is. We know the affordability impacts on a third of Californians are at the 200% of the federal poverty line in Plev.

And so there's a lot of interest in how do we address and help those households up. As you've heard, we're limited by Prop two eighteen. I can't use my rates to do that. And so we worked really hard on a proposal that was before you all this last year, AB 2739, that took a slightly different approach to how we deal with cost drivers of rates with the budget and low income rate assistance.

And the idea was to create a trust fund to set aside money, so that way when there was, assuming you all would appropriate, money to deal with infrastructure costs, but also low income rates.

And again, I think I raise that as an example. I'm more than happy to talk more about any of these or answer your questions, but we need to think creatively to address the affordability issue. We need to make general additional investments in our water systems to prepare for what we're already seeing with the impacts of climate change. But it is some of these things. We need to think outside the box because resources are limited and rate payers are feeling the pressure.

And so we're trying to do that at IRDi. I know my colleagues in the water industry are trying to do that. And I think that's why you saw on some of these affordability bills on water last year, partnerships and coalitions that range from the environmental justice folks, water, business, environmental, you know, coalitions that are normally at war in water, all coming together to say, yes, we need to tackle this.

So with that, I will conclude my comments, but I'm more than happy to answer any questions you have and dive deeper

if you'd like.

Well, thank you so much to each of you. And in articulating not only the challenges of the local folks, but then the attempts to try to be as creative as possible given various constraints, whether they be regulatory, whether they be just affordability issues. Do we have any questions from colleagues?

I do. Thank you again for those presentations. Mister Suk, I may have misunderstood what you explained in terms of separating the cost of infrastructure. I I believe you said that that could come from federal grants to place the infrastructure needed for water or sewer. Then at the end, I believe that you said that then after you get those grants to put the infrastructure, whatever amount of time to put it, then I misunderstood maybe.

So you said that then that gets passed on to the right user so that you can come even?

Sorry if I wasn't clear. No. The example I think I was highlighting were... Was that SDCW when the plant was built. That was back in the seventies.

That was done under grants issued under the Clean Water Act. That didn't hit the rate payers at all. The more recent capital improvement program, we do have loans from the federals, you know, either under under a state administered SRF or WIFIA. So they're low interest rate. I mean, I think our our weighted cost of debt is around 1.6%, which is a great rate.

But all of the cost of those loans is being borne by the the rate payers currently. So the point that I was trying to articulate it... Original construction of this infrastructure was essentially 85% paid for by the Federal Government. And so the first thirty years of rates was just a straight o and m. There was no capital element to it.

And now we're layering on top of the straight o and m all of the capital replacement costs that come with an aging... The aging infrastructure. And so as a result, there's no there's no basis in the rate. You're starting almost from zero, right, on the capital side.

Thanks for that clarification. Thank you. Sure.

It was the good old days.

Free federal money.

That's right. I don't know about free, but nonetheless, certainly easier on the ratepayers, taxpayers at some point. Got it. But do we still have the attorney with us?

I'm still here.

Oh, great. So I got a question for you who's litigating these Prop two eighteen challenges and whatnot. And it is that... Do you see any tweaks that could be made to Prop two eighteen that would make it easier while at the same time meeting transparency to the public? When you when you...

When you're going by things like, oh, yeah. Your average notice is at least... What did you say? 250?

A dollar notice.

Yeah. And that that ain't a cheap date by any means. So, anyway, you got any suggestions about prop two eighteen that would maybe make it less of an onerous process while at the same time meaning transparency?

We could make the the the notice hearing process a little more efficient. You could use more electronic communication and less US mail. We could also recognize that asking courts to review rate making is a bad idea. At least asking courts to do it in a hands on second guessing kind of way. Because many of us went to law school because we don't like math and judges are drawn from the ranks of lawyers.

And so just looking at the institutional competency of the players in our democracy, judges are not well suited to this task. And so the choice the voters made in Prop two eighteen to overlitigate these disputes has proven very costly and very expensive. My hunch is that politically it would not be possible to make that kind of a change to Prop two eighteen unless it had an environmental benefit.

And we would have to work with our friends in the environmental movement to frame a change to Prop two eighteen that would advance in a legitimate way our green utility supply goals and still make things less costly and less litigious.

Okay. Thank you so much. With that, unless there's any questions from the panel, Assemblymember Hart?

Thank you. Thank you, Chair Papan and Chair Carrillo for having this hearing. Mister Zuka, your charts were really helpful in in in Australia and very scary. I assume that That was by design. The experience that you have... You demonstrated there with, you know, the essentially free water facilities at the beginning are duplicated across the whole state. That's that's basically how our system was built.

The whole country. That was federal. Federal dollars as a result of the Clean Water Act. So it affected the wastewater side, obviously, more than the water. But, yes, it was it was nationwide.

And so as you said, if you project out beyond the scale of your chart that that's not going back down to a place where we're gonna just be operating equipment that has been replaced and improved, it's gonna just continue at these higher rates. And that is a sobering fact to come out of this hearing

Yeah.

That I didn't expect. So...

Yeah. It is it is very sobering. And that's why that chart, when we put it together, we we were shocked ourselves at how illustrative it was of the problem. It does also paint a light that maybe over the last thirty years, we should have been collecting more than just O and M costs. I mean, that is also part of the message.

But I think what it highlights is that we got into some of this infrastructure under the assumption that we're just paying over this... You know, paying the cost year over year, not realizing that they're all this... They're all Golden Gate Bridges. They're all gonna... You're gonna get to the end and you're gonna start over, and you're gonna get to the end and you're gonna start over.

So we need to be dealing with the infrastructure more on a life cycle basis, not on a ten year CIP basis, which is how I think municipalities tend to think. It's... Let's line up the work for the next ten years, and we'll just keep going. And, unfortunately, that's fine if you're doing it at a sufficient pace where you're gonna keep up.

But if you're not looking at the entire life cycle, you might be falling short and you're just, you know, proverbially kicking the can down the road.

And miss Compton, you spoke about the planning that you're doing at the wire agency to anticipate those things and to try and and be ahead of that. And do you feel confident that you are now not in a place where there's gonna be unanticipated manager increases? Or is it just it's all gonna be unanticipated? No.

And we've actually been doing this sort of replacement planning for decades. We've been doing it, I think, even before the nineties. So we, in each one of our bills to our customers, have a small percentage that goes based on their use of the useful, you know, life of the infrastructure to be put aside for that. And so our plan goes out, you know, fifty, hundred years looking at each piece. So that is built in.

The... It's the unexpected things, you know, weather whiplash and then when you have to change a facility substantially beyond those assumptions. But we we do that. So our typical rate increase over, say, the last handful of years has been about 4%. That's much lower than some of our neighbors, and that's not a criticism.

It's just because we've been ahead of the curve in this area than many other people putting aside. The other side of that is then folks ask, well, why do you have so much money to put aside for reserves? And it's not reserves, it's replacement. And so we explain that and our customers understand that, but it takes that sort of money, and we we pair that with debt where it makes sense. So we're planning that out fifty, a hundred years.

So am I understanding it right that you were charging more earlier because you understood this problem and your rates were higher sooner. But as a result of that, you don't have this spike in...

When you look historically at our rates compared to others, they've always been lower. Part of that is because we have budget based rates. But, yes, we've been charging, you know, a little bit every month. Again, consistent with the plan based on that user's use of the infrastructure and their useful life of it. So, you know, it's...

I don't think it's really fair to say that, like, our rates were higher because of it. It's just we've looked at it as good financial stewardship of the billions of dollars worth of infrastructure we're gonna have to replace one day. Yeah.

I didn't mean that in a critical way. I just sort of was trying to figure out the magic math. That's what we can do.... Low rates and also know, doing these major... Yeah.

It's a fixed cost. And so we we definitely divide our fixed cost versus our variable, and it meets both the financial items that we're talking about in terms of infrastructure replacement and running the system, but also our conservation goals, which are use water efficiently.

Well, thank you both for those answers since it's a sobering hearing.

So just to dovetail a little bit. When you gather money upfront, are you getting a rate of return on it as it sits there? And I noticed that you mentioned the SORIA bill, which was a trust fund concept. So tell me a little bit about what you do with the money on the front end before you use it.

It. Yeah. So the money for replacement, that piece of it, we're investing, and we've been out... Been able, quite frankly, to get a very good return for our customers on it for a variety of reasons. But we've we've been able to do that, and so we're using basically what we're...

To grow that pot over time in addition to the monthly contribution. So if you think of it a little bit, like, you know, your four zero one k or your four fifty seven, it's that sort of concept. But, obviously, with in investments that is a local agency we're allowed to make. And so we've been able to do that quite successfully for our customers. And so that has not only helped keep rates low, but also put us in a better position.

Sure. Sure. Making your money work for you.

Yeah.

And you you did touch on growth and having a plan as it related to growth in the area, especially in Orange County. We're seeing a lot of growth. And you have to allocate the expense of that growth. So I was just curious how you, Irvine is taking that.

So the way we allocate growth, we look at, the infrastructure needs for new development both on a regional basis. Those, you know, the water treatment plant that serves everybody versus the the localized area. Because there's two types of that infrastructure. On the regional basis, it's their share, like, what their demand is driving for that. So if there's no cross subsidization between customers, everybody's paying their fair share for that because that piece of the infrastructure that those new development is using, they should pay for.

On the reach... On the localized area, we're looking, okay, what are the size of the pipes that you need and those sorts of things? And that gets split because it's a policy call my board has made on infrastructure between... Because we have a share of property taxes, prop... Half 50% property tax and 50% that development doing it.

And so we're able to move that forward in a way that, again, tries to spread the cost, but absolutely abiding by prop twenty six and two eighteen and making sure there's not cross cross subsidization between rate pairs because we aren't allowed to do that. And so that's the way we're looking at it going... That we've looked at it historically and going forward.

When it comes to redevelopment, because that's something that we're seeing is redevelopment that then has intensified uses, we look at it on, you know, when the... That property was connected to our system, you know, it could be, for example, a manufacturing plant and they put up apartments.

You know, if the water use or sewer use and demand for infrastructure is the same, there's nothing additional. Otherwise, we have to upgrade, and then we work with that developer to do it. So, again, we're trying to abide by those cost-of-service principles and be fair about recognizing we need more housing units in Minak. In other words, there's affordability, and so those things go into it.

And we really look at ourselves as the land use entities decide what's there, and then we're making sure that we have, the infrastructure and the utilities to serve them.

Sounds reasonable. Okay. Well, thank you so much. And with that, we'll go on to our third panel. And it seems appropriate that as we've covered a lot of what happens in California and what sort of options are on the table for California, it would be worthwhile to look at other states.

So our third panel brings to us folks from other states and and we're gonna start off with with the great state of Texas. And we have Senator Perry here who... They... Texas has grappled with water and then created a water fund. So I I look forward to hearing about what Texas has done. And after that, we'll follow along with Colorado and what they've done with respect to financing and water infrastructure. So Senator Perry, are you there, and can you hear us?

Yes, ma'am. I can hear you guys. Can you hear me?

Good morning.

Good morning. It's, it's about 13:00 here, so I forgot about the time change. That said, I appreciate the opportunity to visit. You know, water is, definitely nonpartisan if everybody needs it. And everybody... I could take your hearing and put it in Texas legislature as far as how do we pay for it.

So specifically, Texas has a five year water planning process. It plans for fifty year water supply need and deficit Planning in that and how we reach that. We have 16 regional planning groups that put that plan together every five years with the opportunity to amend it. So our water plan looks out fifty years. And in that means what we've done is we had a pretty good plan.

I would, I would caution. A plan without funding is no plan at all. And secondly, what I'd also say, as I became chairman of water back in '15, I tore the plan apart and started looking through it and there were some really big gaping holes of things that we thought would be doable at the time they were entered into the plan that were no longer politically affordability or regulatory. So plans need to be monitored and they need to be an honest assessment.

How we got over the funding hurdles. So it had been tried for about ten, I'd say five decades in the past. We are a large user of groundwater in Texas. We're a private landowner state. So a lot of times the pushback and the demise of those funding solutions were groundwater related in the area of private landowner rights. So, taking that and the knowledge I had and being a private property advocate, we were able to thread the needle to get a consistent source of funding going forward.

So these are long term decade of projects. They're expensive. They need continuity of funding. Vendor groups are not excited to be subjected to the will of the legislature every two years in the politics and to sue with those legislators. So we had done this similar in a road funding package back in '13.

So we specifically dedicated a billion dollars above a certain sales tax base going forward for twenty years. So in '28, we'll see our first installment of 20... Of of a billion dollar, $20,000,000,000 investment over twenty years, giving certainty to the vendor community that there would be funding in place regardless of politics subject to us, our budget meeting those excess funds. So we dedicated... Constitutionally dedicated.

That was the key because you don't wanna be subject to state appropriations and problems that come with that. So constitutionally, we dedicated voters approved 70 plus percent, a billion dollars above a baseline of sales tax. So we didn't create a new revenue need. We took existing revenue and anything above that excess baseline now to a billion dollars per year for twenty year commitment. So that's how we got to a consistent source.

It was what was needed to be able to tackle these long term infrastructure needs and the certainty of funding that comes with that need. And I think it was a slick deal. I will speak to one other program we put in place in '13. We funded a seed fund of $2 billion. Initial C, and it's geared more towards multi $1,000,000.

If not $1billion projects for some of our larger. Cities and urban areas, And what it has been used for is to develop about $11-12 billion dollars in capital asset CapEx on water supply projects specifically Over the last since since '13, and we've only used about $300,000,000 of that corpus net of earnings and ins and outs. And the... What that fund is defined specifically to do is effectively credit leverage. So locals might have a 4% bar rate.

State can bar that down to 1%, and we've used that funds and very successful. On our rural area, 41 counties, we've had 51 for ten years before prior redistricting. 38 of them were under 10,000 people. On our rural, it's a deliberate, legislative process which we always are focused on helping the rule in the water supply needs, be it leaky pipes or supply or flooding, etcetera. But in that, what came out of Senate Bill 7, which is the dedicated funding streams we passed last session, was a a clearly and obvious need to do hub and spoke.

We have found that there are regional request with multiple cities not talking very well to each other. When we put them into the plan, we can look at a a a master plan. It It says every one of them are looking to the same source of water. Therefore, they should be connected regionally so that the taxpayers can share love, if you will, a little bit later. You've gotta eat this elephant one bite at a time.

I applaud the the water person that just spoke about having the foresight to put in a replacement vehicle. We we set water rates through the Public Utilities Commission in Texas. They approve those rates, and I've encouraged legislation that would give an option of a two rate system, if you will. Here's your base. Right?

But if your taxpayers are willing to absorb the small percentage of point above it for replacement because, what we find is if you don't do that through inflation and other things, the elephant gets too big to eat. And then a lot of eat to elephant one bite at a time is definitely applicable in infrastructure. You are facing the same pressures that we are nationwide. There is a role for federal coordination on water supply planning specifically. Colorado River, desal out of the Pacific, so those kind of things.

And and I think we need to, as states go, set aside everything but infrastructure. We can be very partisan in our initiatives of coordinating a national water plan. I'll be in Israel for the fourth time in December, specifically twice for water initiatives and they always are leading back on what desalination. In Texas, we've not over appropriated our rivers, but we're close to being fully appropriated. We have three other new supply opportunities, specifically marine desalination makes sense.

And, we have produced water in our own gas space that we're coming to permit process. Today, we're going to start taking advantage of those. It's 26,000,000 barrels of water per day comes out of the ground in the Permian Basin. And then lastly, and this is the backfill for our water supply needs, we have about 5.2 billion estimated brackish aquifer system that, are... Is in use and will continue to be a larger share of this.

So the cost of all those projects are way beyond any individual taxing jurisdiction to get. State's role is to leverage on the front end the opportunities to do these developments because there's not a mayor or a city council person that can sell their local constituent in today's times of we we don't care about the future. We just wanna know what's at the end for us, is to effectively leverage the conversation.

So the mayor is not asking for a water share rate, twenty year advance of supply being developed. So that was kind of the overall picture. I will say my biggest challenge with water is if you're tapped from today, clearly, we have no problems. Getting over that has been a challenge, but we've got the awareness up to where it needs to be. If you took a shower today, someone thirty years ago committed to making sure you'd have the water to do it.

So we've been successful in raising the level of awareness of water supply development, but a consistent predictable funding source for vendor communities to rally around and projects to be met and started was the key and the heart of our state water planning going forward. With that, I'd be glad to take questions.

Thank you so much. I'd like to get through the other speaker on the panel and then take questions. Do we have speaker McCluskey here? I don't think so. Okay. Don't go away then, Senator Perry. We've got some questions for you from from, folks in the hearing room.

Sure.

My... I I do have a question about, the urban supply projects and your water fund. And is it that you put 2 billion of seed money in there and then localities are are taking loans from that fund and and and repaying it. Do I have that right? Yeah.

So... And I don't wanna confuse it. We actually have a $20 billion dedicated funding commitment that goes into the water development board's existing programs. And and that's kind of a direct either by grant or low-interest loans, physical... The cash is physically gone.

We had set up what I call the leverage fund, the credit buy down fund back in '13 and has proved to be immensely successful where regional planning supply companies, for instance, Tarrant County Water... Regional water supplies is responsible for 40 counties or whatever's water needs. They were able to go to the market and borrow money, with a state leveraged out of that $2,000,000,000 seed money. They could buy down the interest rate. And I'll give you an example.

Harris County or Houston, Texas, if you will, largest recipient of those seed monies for the leveraged buy down, have saved probably several $100 million of interest costs. So we took 2 billion in '13, put it to work. We've been able to roll that into, I think, 11 or $12 billion of projects And only diluted it by about $300 million in interest by them. So that's a credit leverage it's made for big dollar, big bonus, big, big, urban interest. That's different than the funding plan.

We just got dedicated that will, but the bulk of it will probably be low interest loans and for rural Texas, grants. So two projects with that. I will tell people that swift fund, the way it was set up, if you are interested in it, has been a huge success and saved taxpayers' interest cost with credit leverage from State Resource. And that's how you get to the rest of the regions, if that makes sense.

It does. So it's sort of the good faith and credit of the state of Texas is what folks

To And and we put that billion dollars Texas only cost the state actually 300,000,000 out of that. And I'm looking to put a billion dollars back into that program to recapitalize, actually, probably garner another, you know, 8 to $9,000,000,000 of projects over the next ten years of that.

I see. So it allows locals to go get money cheaper. And one more question just on the... It is that you were able to set aside a portion of an existing sales tax, and that was after a certain amount of money was collected on the tax, then you'd get the overage, or is it you're always entitled to x percentage of sales tax collected?

No. No. We only have one tax revenue in Texas and that's sales tax. We don't have an income tax. We we we rely on cost recovery through fees and then we have sales tax.

So that sales tax base, we looked at the history. We looked at what we can almost guarantee was gonna be in there, and I think it ended up being $46,500,000,000 a year in sales tax. And that had consistently been been been predictable. So we said that that anything above 46,500,000,000 in sales tax collection per year, the first billion in surplus goes to water infrastructure, and it's constitutionally dedicated. It comes off the top.

So we'll go into budget in January. We'll get our estimate. Anything above 46,500,000,000, the first billion goes into that water supply planning bucket debt. I'll give you an example. That same program was put in place in 2013 when our sales tax collections were $27 billion a year.

That's just been the growth in Texas. We now are getting somewhere in the neighborhood of 2.5 billion for roads and construction and maintenance of those roads. So our growth had doubled since since 2000 on sales tax. It continues to show double, our our growth capacity.

So it's a billion in excess of base. Therefore, we didn't sacrifice existing budget and services commitments, but we took new growth that was not part of a budget process and dedicated to specifically route side water.

And what's your percentage of sales tax?

Six and a quarter.

Six and a quarter. Okay.

Hasn't been changed since, gosh, 1990. I mean, it's been that way forever.

Okay. Such as the growth of Texas. Alright. We're gonna move on to our next panelist, which I I understand has joined us now. Speaker McCluskie from the state of Colorado.

Welcome.

Hello. Thank you. Great to see you again.

Nice to see you as well. Alright. Well, tell us about the creative ways, that might involve gambling and and water money.

Yeah. The marriage of two unlikely bedfellows. Right? In the state of Colorado, all of our funding for water projects is really framed by our water plan. And the Colorado water plan, which is now in its second iteration, is a grassroots effort to define by each of our river basins what the primary needs are around any type of infrastructure, watershed restoration, or preservation and conservation, water storage and supply, and certainly water education.

And over the years, since the water plan was originally developed, we were using, very limited resources, general fund, certainly, cash funds cash funds from the Colorado Water Conservation Board, and then, you know, limited grant funding that we were able to secure over over a period of time. But in 2019, we referred a measure to the voters, taxing sports betting, and assigning that revenue generation to any of our water plan grants, a water plan grant program that is currently administered by our water conservation board.

In the years since, sports betting was passed in the state and the taxation plan approved by voters, we have seen sports betting, explode in popularity. And in the state of Colorado, we have a states.

And because we had only asked for $29,000,000 in that original question, and we had only asked for $29,000,000 in that original question, and we're far exceeding that in the amount of revenue that was being driven by sports betting, we went back to the voters a few years ago. They overwhelmingly supported the idea that extra funding coming in through this tax should continue to go to our water projects.

So we are, we have been able to grow that fund and certainly, make the right kinds of investments. Just this past fiscal year, we awarded five eighty, sorry, since the inception of the water plan grant through 2526, we have awarded five eighty one grants at over $139,000,000 in local projects.

So it is for Colorado and a much smaller state than Texas. I was... Those billions that were rolling off your tongue, I dream of having that kind of money in our state. But given the funding that we have been able to generate, we are, you know, very pleased with the investments we've been able to make. And we get a lot of very positive, strong feedback about the ability to make these investments in water projects big and small.

Well, I guess your story is one of never underestimate the attraction of gambling and or Colorado's compact. But I'm impressed by you going back to the voters to get more of that share of revenue for water infrastructure projects. I'm I'm always amazed by the public is... Never seems to disappoint in being in tune with the import of of water projects.

Yeah. I would I would emphasize that that has taken this state, I am sure much like California. We saw the crisis coming. We have been aware of the impacts of a significant drought in this state now for years. And our, you know, consistent drumbeat about the importance of water as a natural resource, protecting both quantity and quality, is really, has really hit our community in pretty powerful and impactful ways.

And so at the same time, we were going to voters, with this creative taxation approach. We were also deeply invested in water and water infrastructure, water preservation, the work that was going on in so many of our communities and the projects that so desperately needed funding. And I think the the, the ability for us to be doing both of those things in parallel is really what has helped us secure the additional funding.

Excellent. Thank you, speaker McCluskie. We might have a couple questions, from, some of the members that are here. Assemblymember Rogers.

No. Thank you so much, and and thank you both for being here. My question is actually just more of an interest because I think about this a lot. When we talk about what the solutions have been in Texas and in Colorado and some other states as well, Some of that actually requires the buy in from your constituencies.

And if you were to guess from your conversations with folks, where do your constituents think the Local government, state government, Federal Government, and does that impact the solutions that you think they are willing to embrace to be able to get better infrastructure?

I'll I'll take it first. I think that if you're thinking about it as a constituent, which is the first hurdle, like I said, if the capturing today, the average person on the streets in Texas doesn't understand that we we need to be working on water for tomorrow. So set aside that, I think that the the realization where people that do understand water, they know it's a team approach. Take state, local, and local to meet the water needs not only in Texas, but everywhere we go.

We have to figure out how to do it more affordably. I heard some of the permitting numbers that California is expecting. We're not there yet as a percentage of projects, but we're we're we're in the soft cost arena. It's beginning to get real difficult to understand why it takes that. But set that aside, I would say the average person doesn't have the aptitude to think, well, this is a local federal state. They just know the need is there.

And I think everybody, especially at a council or city council level recognizes the need and know they can't afford it on their tax base. There's not any one particular taxing jurisdiction at any level in Texas that can say, we can do this on our own. We don't need help. So that's where state leverage and federal levere... Leverage makes it politically possible and actually practically doable.

So I don't know that the average person has an opinion of whose responsibility it is. I think it's every reason those that are in Timberwater get that it is everybody's responsibility both from conservation all the way up to funding and and anything.

That was a a very wise response. You know, I as I mentioned, our PR campaign, our education campaign, Water Education Colorado, an organization that the legislature stood up decades ago to ensure that there was a commitment to bringing folks along and understanding both water need, water structure. And I think the... You know, my response would immediately be all of the above.

You know, in Colorado, our outdoor recreation tourism economies are deeply dependent on the amount of snow and the, you know, the amount of CFS running in our rivers during the summer. And people see that. Right? It's very visible to us. I had a a...

Our Colorado Water Congress met, just a few months ago, and many of our statewide officials were driving up to Steamboat Springs for the meeting, and they passed several reservoirs that are bone dry. And there was shock and awe in the room. And it dawned on me that, you know, in this state where things are so clearly visible to so many of us, it is very impactful and can leave you with a sense of, you know, both desperation and need.

And I think when people start talking in their communities, as we have been doing, we're hosting statewide water conversations, an event that occurs every spring here, the State of the River, it's a a kind of a homegrown town hall for communities across the Western Slope, 15 different counties, hosts the community wide free open conversation with people.

And I think we've done a really good job of including federal, state, and local partners in those, state of the river meetings just to help build understanding and again, appreciation for the, the complexity of both water law and water need in Colorado and certainly the crisis that we are facing now.

Yeah. And I have a 900,000 acre feet depletion in the old for agriculture. I'm living in the agricultural community. So, you know, that's always been a stewardship conversation for that community. But I think as cities are tapping into it, they see that for what it is.

So, it's universal need. It's a, it's a low awareness factor of, of a few years ago. But I will tell you, the awareness factor in Texas, because of some similar things we've done, we have Texas Water Foundation. They had publicly put up a PSA, if you will, that has been running. And people are getting more and more.

We had a survey done just this past six months ago. 73 or plus percent Texans are interested in water and and and making sure we have that. So it's it's at a level it's never been. The data center explosion in Texas, One of the good at regions part of this conversation has been they've rose the level of conversation about water again in addition to the the stuff I did to get that initiative over. So people are beginning to talk and think water like they've never had in the past.

Alrighty. Thank you so much for... Oh, Assemblymember Hart, very quickly, if you want.

I just have a real quick question for either of the panelists or both. Are there any kind of maintenance of effort requirements when you added this additional funding to your systems to preserve what had historically been in the system, or is this new supplemental funding the the answer now?

So specifically to the new $20,000,000,000 twenty year commitment, we had existing programs. I did dedicate 50% of it to new supply specifically because it has to be new supply and not just leaking leaky pipes. We lose about 4% of our 17,000,000 acre feet of your use to leaky pipes. That is kind of locally issued. So I did separate.

But to your question specifically, the legislation, I believe, carved out 2% additional administration costs that the Water Development Board can take advantage of. And really what that was tied around is we anticipate a large volume of applications that had not been there before, and it just takes more people to push the applications through. And we didn't want to see a billion dollar setting stagnant with a backlog of applications because we didn't have FTEs.

So we committed, I think, the last two or three sessions, I've added a 100 FTEs to the water development board staffing that probably in the neighborhood to $300,000,000 of support that we went with that. So we recognized we're fixing to fill the pipeline up like it's never been before.

We didn't want the taxpayers to be waiting in line because it's already long enough and time is money and water. So, yes, there was a maintenance of effort, but as a big scheme of things, it was, I think, limited to 2%. And and they have made that well... Work really well. So that's kind of where where where the maintenance of that.

Once we charged the line and got that 20 billion, they'll have the backlog fixed with FTEs needed to push it out.

And Aye, I would offer... I mentioned we had very limited funding to implement the Colorado Water Plan at the time that it was developed. Our sports betting funding is the dedicated funding stream for most of our our sports

betting funding is the dedicated

funding stream for most of our water plan grant program. And it is not a, thank God we have it, especially in this moment. I wanted to throw out that 87% of Coloradans now understand and view the water crisis as one of the most significant priorities facing our state. And I actually thought it was the exact same number you had just thrown out, 70 some percent of Texans. I think our public is certainly understanding how dire our situation is.

Thank you both for the answers.

And thank you for joining us. We so appreciate hearing different perspectives and and different ways of being creative with with financing water infrastructure. With that...

Well, I I I do appreciate it. Let me leave you with this. Water knows no state boundaries and we all need it. I tell people we need air and water. Everything else is a quality of life.

I like my lights to be on, but I'll make it if they don't. So I welcome partnerships in a federal coalition that sometimes legislatures are reluctant to have. But this is one of those things that I think nationwide we need to be addressing and whether you like the administration or not, he's in the infrastructure and builder concept. And I said, I would love to see you to be the Eisenhower Water.

So we're working on some federal stuff, but they do need to hear from their state legislature that this can be something that we can unite on a national level and actually solve big problems, Colorado River specifically.

And and and and Israel's been... Figured this out and done it. If you've never seen it, you need to go see it. But I'm just telling you, I welcome the opportunity to visit my state colleagues and partners on water issues. Not not anything other than...

It's a it's a requirement we start talking about that. We can summon it. So anytime you need me, feel free to call me. Alright?

I appreciate you taking the time, and and we welcome collective discussions with the Bureau of Reclamation. Right. You're welcome anytime in California. Alright. So with that, we...

Thank you. Thank you so much, speaker McCluskie. And thank you very much, Senator Perry. With that, we will allow, public comment. We have some time constraints. So if, there is public comment, we'd ask that it be limited to, one minute. That would be sixty seconds. Any public comment? If that... If not, then I know Chair Carrillo is ready to hit the gavel. So bring it forward as fast as you can.

Good morning, Chair and members. Thank you so much for the discussion today. I will be brief given the the time constraints, but, definitely appreciate the converse... The conversation, excuse me. Really just wanna highlight the policy opportunity to align conservation affordability and the financial stability.

So we encourage the legislature to examine tools that let utilities recover, reasonable approved costs without depending on customers using more water. Customer should be able to conserve and manage their bills while utilities retain the financial capacity to provide safe, reliable service. Rate design is central to achieving both of those, and so we will definitely follow-up with the committee and share further details. Thank you.

Hi. Good morning. Michael Chan on behalf of Audubon in California. We just first like to say thank you for hosting this joint hearing. Water quality and supply are critical for maintaining migratory bird populations along the Pacific Flyway.

With the challenges being presented to California within the next few seasons, it is crucial to realize the impacts of water class... Water costs and supply on our vulnerable refuges around the state. Over the past few decades, wetlands in California have been shrinking. And if they go dry, we will never get them back. As we discuss solutions and alternative paths for funding, we wanna encourage the legislature to to consider impacts of water supply on the wildlife and habitat, which can sometimes be overlooked. Thank you so much.

Good morning, Chair and committee members. Melissa Sparks Kranz with the League of California Cities. As you are well aware, cities wear many hats, but in the water sector, we are also local public water agencies. We serve as urban water suppliers implementing conservation and drinking water programs, groundwater sustainability agencies, as well as stormwater permittees and wastewater treatment operators.

We agree with the challenges that the panels have presented that aging infrastructure, regulatory requirements, treatment costs, and the extremes between drought and flood are really, putting a strain on our water infrastructure needs and affordability.

We just wanted to echo some of the comments that the panelists made, that often local agencies, the capabilities to finance water infrastructure needs are beyond our capacities, which is why we support state, federal, local, leveraging of funds and, to support those needs. We've been supportive of water bonds in the past, general obligation bonds, But we also need to explore more sustainable, creative, long term funding solutions as was mentioned.

We previously have sponsored legislation aimed at funding solutions specifically for mitigating PFAS, which is an emerging and complex area in the water and wastewater space. And so we're very vested in those types of solutions because the treatment technologies are very different and more costly. And lastly, as was noted by some of the panelists, Cal Cities and the California Stormwater Quality Association support efforts to provide funding for stormwater management based on those prop two eighteen and constitutional constraints.

Stormwater programs are being implemented by municipalities, but we lack dedicated funding sources. So in this area, we wanna be helpful partners to explore everything from constitutional amendments to, stormwater user fee models to private public partnerships. Thank you so much for having this hearing today. It's really important for our cities. Thank you.

Good morning. Joshua Golka with the Santa Clara Valley Water District. Thank you for hosting this hearing today. It's a extremely important topic. We would encourage the committees to consider a future informational hearing, specifically focused on the dam safety and climate resilience and local action program.

You heard from Carla Nemeth earlier about our Anderson Dam seismic retrofit project and the costs involved in that project. We have three additional dam safety projects that will follow Anderson Dam. This is an enormous need for our water district and others throughout the state. These are not discretionary projects that we're undertaking. These are public safety...

Critical public safety projects that must be done. We're thankful that proposition four allocated $480,000,000 to these projects, but we have to be clear that that's less than 2% of the need for these damn safety projects. Thank you.

See no one else coming forward. With that, we conclude this joint hearing. Thank you, everybody, for being here.