A long-standing feud over who should pay a $650 million bill for state water infrastructure reared its head Tuesday, as board members of Santa Clara County's regional water district weighed whether to raise water bills or ramp up reliance on property taxes.
At the center of the Jan. 22 discussion was the Santa Clara Valley Water District's so-called State Water Project (SWP) tax, which is evenly levied on all property owners within the district's boundaries and goes to help pay for a massive system of reservoirs, aqueducts and pumping plants that circulate water throughout the state. But North County cities including Palo Alto and most of Mountain View import water from an entirely different system -- the Hetch Hetchy Reservoir -- and officials from the area argue their residents are paying millions into a system while receiving none of the benefits.
The tax generates about $18 million each year and is expected to rise to more than $20 million in future years. While board members made no formal decision and were reluctant to reveal their opinions at the meeting, district staffers suggested that the water district could taper off its reliance on property tax revenue in favor of higher water rates.
Alternatively, those property tax bills could increase. The water district is looking for more money to pay for its share of the controversial California WaterFix, a $16.7 billion state project that would build two 40-foot-wide tunnels from Sacramento to Tracy. Water district board members agreed in May last year to be a partner agency in the project, which was estimated to cost the district $650 million.
If the board decides to pass the bill off to taxpayers, residents could see up to a $37 increase in their property taxes through at least the 2066-67 fiscal year, according to a district staff report. Whether passing on the costs of WaterFix in the form of a property tax increase is even legal remains up in the air, and a final determination from state courts may take between five and seven years.
"There's a lot of litigation on this issue," said Stan Yamamoto, the district's legal counsel. "I would be hesitant to try to make a bet on what that ultimate outcome will be."
An October letter from Palo Alto's city attorney, Molly Stump, makes the case that North County residents have long faced taxation without adequate justification, and that the district hardly has grounds to use tax money from property owners -- rather than water users -- to pay for its obligations to the State Water Project. Property owners pay $42 per $1 million of property value, and she estimates that Palo Alto alone pays between $1 million and $1.5 million into a system for which it reaps none of the benefits.
"The Santa Clara Valley Water District's longstanding practice of taxing property owners in Palo Alto and other parts of Santa Clara County who do not receive water from the SWP to pay for the entirety of the district's SWP contractual obligations, rather than attempting to fund those costs from rate payers who use SWP water, is clearly inequitable and legally tenuous," the letter states.
Water district board member Gary Kremen, who represents North County cities including Mountain View, ran for the seat in 2014 on a platform deeply critical of the tax on North County residents as unfair, saying that property owners in the area face the tax as well as the higher costs of Hetch Hetchy water.
The tax is a little unusual in that its age precedes the 1978 passage of Proposition 13, and court rulings have reaffirmed that the State Water Project tax is an "override tax" that can go in excess of the 1 percent cap imposed by the voter-approved measure. Some water districts, including Southern California's Metropolitan Water District, have limited reliance on taxing powers in favor of higher water rates, and the question is whether Santa Clara Valley Water District should follow suit.
Stump's letter argues that the original legislation passed by voters in 1960 to build the water infrastructure, the Burns-Porter Act, was never intended to rely on property tax money as its sole revenue source, and should only be relied on when raising water rates is "infeasible."
"The district should take prompt action to correct its practice of relying on property taxpayers to meet 100 percent of its SWP obligations, rather then waiting until litigation is filed against it," the letter states.
When asked by board members about the legal rationale, Yamamoto said the precedent has been set and withstood challenges for decades: Taxes don't have to benefit those who pay for the State Water Project, and the district faces no legal jeopardy by staying the course.
"There is no support for an argument that the district should levy the override tax only on those properties who receive direct benefit," he said.
Kremen pressed Yamamoto on his argument, noting that Stump and other attorneys have sought to challenge the district's even-handed approach to the tax. He also pointed out that -- outside of the legal arena -- the board has written policies stating that beneficiaries should be the ones to pay.
"Is it fair that people have to pay the tax who aren't allowed to get water?" he asked.
Yamamoto said numerous taxes, including business license taxes, hotel taxes and the district's own 2012 Safe, Clean Water and Natural Flood Protection tax, frequently benefit residents in certain jurisdictions even though everyone pays.
"If you look at the last election for instance, those cities that went out for what they called a head tax -- it had nothing to do with benefit going back to those industries that are going to have to pay a business license tax," he said. "It was a general tax, that's what it's for."
Board members purposefully held off on discussing and deciding whether to reduce reliance on property taxes until a future meeting, limiting the item to questions to staff members.