California Approves Funds For Water Projects, Large And Small

The past few months have been highly eventful for California water watchers.  In June, by a margin of 57 to 43 percent, California voters approved Proposition 68, a $4.1 billion parks and water bond that will provide approximately $1.3 billion for water-related projects across the state.  Then in July, the California Water Commission approved $2.6 billion of funds authorized by Proposition 1, passed by the voters in 2014, to be used for eight new water storage projects.  These developments reflect that California is taking a bold and multi-pronged approach to addressing its water needs, investing both in new large infrastructure projects and in more modest projects to improve the state’s existing resources and assets.

Proposition 68, officially titled the California Drought, Water, Parks, Climate, Coastal Protection, and Outdoor Access For All Act of 2018, was authored by Kevin de León, then President Pro Tempore of the California Senate, and was passed as SB5 with a bipartisan two-thirds vote of the Legislature before being signed by Governor Jerry Brown in November 2017.  Because this measure proposes the issuance of state “general obligation” bond — that is, bonds guaranteed by the taxing power of the state and payable from the state’s General Fund — it next had to be approved by a majority vote during a statewide election.  On June 5, 2018, California voters decisively approved the measure.

Proposition 68 authorizes the sale of $4.1 billion of bonds, consisting of $4 billion of new bond authority and $100 million of bonds authorized by prior bond measures but not yet issued.  This $4.1 billion is allocated nearly evenly among three major categories: approximately $1.4 billion for parks and recreation, including the creation of parks in park-poor neighborhoods; approximately $1.5 billion for the conservation and resiliency of natural resources, including climate adaptation and waterway protection; and approximately $1.3 billion for various water-related projects.

Rather than focusing on a few marquee projects, such as big new dams, reservoirs, tunnels, or pipelines, Proposition 68’s water-related funds will be allocated across a broad range of projects.  Flood protection is a major focus of the measure, garnering an allocation of $550 million.  Of that amount, $350 million is allocated to the state Department of Water Resources for flood protection facilities, levee improvements, and other investments to protect against flood damage in the Central Valley, $100 million is allocated to stormwater, mudslide, and other flash-flood protections, and another $100 million will be disbursed pursuant to a competitive grant process to address flooding in urbanized areas.  Projects receiving funds from either of these $100 million allocations will be required to obtain local matching funds of at least 25 percent of the Proposition 68 funds received, unless the applicable project serves a disadvantaged community.  For all projects seeking Proposition 68 funds, priority will be given to those leveraging other funding sources, whether private, federal, or local.

The remaining Proposition 68 funds allocated to water projects fall into three broad categories.  Clean drinking water projects are allocated $250 million, water recycling and advanced treatment projects are allocated $100 million, and the remaining $370 million is allocated to groundwater cleanup and recharge projects.  At least $80 million of these funds for groundwater projects must be spent on competitive grants to treat and remediate groundwater contamination, with these projects required to obtain local matching funds of at least 50 percent of the Proposition 68 funds received (unless the funds directly benefit a disadvantaged community).  The remaining $290 million can be spent more broadly, including on projects addressing groundwater recharge, and not all such funds are required to be allocated through competitive grants or to receive local matching funds. 

In an effort to ensure that underserved communities across the state reap some of the benefits of Proposition 68 spending, at least 20 percent of the Proposition 68 funds made available for such each type of water-related project must be allocated to projects serving “severely disadvantaged communities,” meaning those that have a median household income less than 60 percent of California’s average.  Similar requirements apply to the parks and natural resources projects funded by the proposition.

Notably, Proposition 68 does not include funding for major new water storage projects, such as reservoirs and dams.  Several of these projects however, received a boost this summer nonetheless, as the California Water Commission in July conditionally approved $2.6 billion of Proposition 1 funds, approved by the voters in 2014, to be used for eight proposed water storage projects across the state.  Each project still needs to complete certain requirements, including obtaining necessary permits, to receive the approved funds.

Proposition 1 authorized $7.5 billion dollars of California general obligation bond funds for a variety of water-related projects, including $2.7 billion to fund the “public benefits” resulting from water storage projects.  This “public benefits” requirement means that the bond funds aren’t intended to fund the new water supply itself, but rather the broader positive impacts of each project.  Therefore, Proposition 1 funds can account for no more than half of the total costs of any funded project.  At least half of the funded public benefits of each project must be improvements to ecosystem conditions; other eligible public benefits include water quality improvements, flood control benefits, emergency response, or recreational purposes. 

To satisfy Proposition 1’s public benefits requirement, each project seeking funding was subjected to a lengthy, competitive application and review process to prove its qualifications.  (No such requirement applies to Proposition 68 money.)  The resulting multi-year process caused some public consternation, as funds remained unallocated several years after the proposition’s passage.  Finally, however, at the end of July, the Commission approved Proposition 1 funding for a total of eight water storage projects, including enlarging two existing reservoirs, developing two new reservoirs, and developing four underground water storage projects.

Reservoir projects received the bulk of the approved Proposition 1 funds.  Projects to enlarge the existing Los Vaqueros Reservoir in Contra Costa County, expanding the reservoir’s capacity from 160,000 acre-feet to 275,000 acre-feet, and the existing Pacheco Reservoir in Santa Clara County, expanding the reservoir’s capacity from 6,000 acre-feet to 140,000 acre-feet, were awarded approximately $459 million and $485 million, respectively.  With respect to new reservoir facilities, two projects received funds, either one of which would be the largest such new facility since the New Melones Dam was built in Calaveras County in 1979.  The single largest award, approximately $816 million, was given to the new Sites Reservoir project located in the Sacramento Valley, which would hold up to 1.8 million acre-feet of water.  The new Temperance Flat Reservoir project, which would create a new dam in Tulare County capable of holding 1.3 million acre-feet of water, received $171 million.  However, due to Commission concerns about the public benefits to be realized as part of the Temperance Flat project, this award was significantly below the $1 billion the project proponents had initially requested, putting the ultimate viability of the project in question.

The remaining four projects awarded Proposition 1 funding all provide for underground water storage.  Two such projects — the South County Ag Program in Sacramento County and the Chino Basin Conjunctive Use Program in San Bernardino County — involve storage and recycling of treated wastewater.  The remaining two — the Kern Fan Groundwater Storage Project and the Willow Springs Water Bank, both in Kern County — involve storage of surplus surface water.

With all of California’s new water spending approved in the last few months, it is notable that neither Proposition 68 nor Proposition 1 funds will be spent on arguably the most prominent water project currently under discussion in the state: Governor Brown’s $17 billion twin tunnel WaterFix project to bring water from the Sacramento-San Joaquin delta down to Southern California.  That project got a boost of its own earlier this year, when, in April and again in July, the Metropolitan Water District of Southern California approved a nearly $11 billion investment in the project.  Various permits and approvals will need to be obtained, and other hurdles cleared, before WaterFix goes forward, but the Met’s investment goes a long way toward smoothing the path for this transformative project.

The steps taken in California over the past few months demonstrate the state’s commitment to addressing its water needs using a holistic approach, investing in large-scale water storage and transport projects while still continuing to pursue more incremental water-saving solutions, such as water recycling and groundwater management.  California voters will soon make clear whether they think the steps taken so far are sufficient, or whether further bold steps are needed: the upcoming November ballot will include Proposition 3, another water bond measure similar in targeted uses but, at $9 billion, much larger in size than Proposition 68.

M. Elizabeth Dubeck is a partner in O’Melveny’s Project Finance and Infrastructure practice, with a specialty in the water sector.  The views expressed herein are those of the author and do not necessarily reflect those of O’Melveny & Myers LLP.