From Local government

Tax Collectors and Other Sinners

What California’s SB-623 reveals about water affordability and the politics of public finance

Who shall pay? is the perennially vexing refrain for would-be providers of public goods. Everyone likes nice things; no one likes to pay for them. In 2012 the State of California declared that drinking water is a human right, and as I’ve observed before, turning such lofty rhetoric into safe and affordable water at the tap is no easy thing. Figuring out how to pay for it all is perhaps the hardest part.

Addressing some water affordability challenges involves reducing household-level costs of water service, and my last post considered the possibility of providing for water affordability through rate design. But sometimes the challenges are more systemic: in California and across the United States, small, rural communities receive inadequate and often unaffordable water. Bringing small systems into compliance with drinking water standards is crucial to making the human right to water a reality—and everyone agrees that it won’t be cheap.

SB-623: The Safe & Affordable Drinking Water Fund

Last year, California Senator Bill Monning and several cosponsors introduced SB-623 to create a Safe and Affordable Drinking Water Fund. This Fund would give $140 million annually to the State Water Resources Control Board (SWRCB), which would in turn channel those funds to failing water systems. Such a massive injection of capital and operating funds would go a long way toward making safe drinking water affordable to California’s rural communities.

To generate that revenue, SB-623 would impose fees on fertilizers, dairy products, and—most controversially—water bills. The fee would be $0.95 per month for most residential water customers, and low-income households would be exempt. The fees would be collected by water utilities and then transferred to the SWRCB for reallocation to struggling water systems.

Funds, Fees & Taxes

In addition to generating significant and badly needed revenue, SB-623’s funding mechanisms include important guards against what political scientists call coalitional drift—the idea that future governments will have different priorities from the present government, and so undo the policies established today. The Safe & Affordable Drinking Water Fund would be institutionally separate from the state’s general fund, and have dedicated revenue sources instead of relying on the conventional income, property, and/or sales taxes. In that way, the Fund would be resistant to efforts by future politicians to cut the program in the event of an economic downturn or fiscal crisis.

Opponents of SB-623 decry the $0.95 monthly fee as a “water tax”—an accurate claim, since the fee is not associated with the cost of the customer’s water service. Rather than paying for rural water system support through this new water tax, a coalition of SB-623 opponents—mostly local government water utilities—propose an alternate solution that would generate hundreds of millions of dollars, mainly through tax-funded state water bonds and general fund revenue.

Who shall pay collect?

There is apparently broad consensus in California that significant new funding is necessary to solve the problems of failing small water systems. In this case, who shall pay is clear: whether funded through a water tax or state general funds, the people of California will have to pay the money needed to help failing water systems. The conflict is over who will collect it.

SB-623 would turn California’s water utilities into tax collectors. Across the United States, energy utilities and telecommunications companies already collect a variety of taxes on behalf of the government. That’s convenient for politicians, since it redirects citizen anger over taxes away from government and toward utility companies.

But since a large majority of Californians get their drinking water service from local government utilities, paying for a Safe & Affordable Drinking Water Fund through a water utility tax would shift the political costs of affordable water away from the state legislature and toward local boards and councils.

Tax collectors are no more popular today than they were in first century Palestine. Instead of seeing their tax bills increase, citizens would see their water bills increase and (understandably) associate the increase with the governments whose logos are at the top of the bills. The citizen wrath that would have been focused on the statehouse will instead be aimed at city halls and water district boardrooms. That wrath will make it harder for local officials to build the political support they need for operations and maintenance of their own water systems.

When political costs > financial costs

There may be widespread agreement in California that water is a human right. But in a democracy, public policies that compel the majority to pay to help a vulnerable minority are always politically costly. California’s history of tax revolts give lawmakers, advocates, and utility leaders good reason to be wary about shouldering that political burden. The conflict of SB-623 reveals fault lines that are likely to appear elsewhere as states and communities grapple with the challenge of supporting failing water systems.

What Jacksonville utilities say about municipal governance

The City of Jacksonville, FL is contemplating sale of JEA, its municipal electric, water, and sewer utility. For years Jacksonville has toyed with the idea of selling JEA to a private investor, but the possibility has gained new urgency recently with the release of a valuation study. The city’s current mayor is advocating for the sale, which has generated significant controversy within the city council; a former mayor recently weighed in on the issue with an Op-Ed.

Why sell a utility?

This kind of privatization is uncommon for a couple reasons. First, JEA is a very big utility: it serves more than 450,000 electricity, 340,000 water, and 264,000 sewer customers. Privatization is uncommon for utilities of that size; most privatizations (or municipalizations, for that matter) occur with small or medium-sized utilities.

Second, sale of a municipal utility usually follows some kind of failure. The utility may be failing due to poor investment decisions, mismanagement, or inadequate revenue. Alternatively, a city in financial crisis may choose to sell an otherwise solid utility simply for a badly needed cash infusion. Neither seems to be the case in Jacksonville; by all accounts, JEA is a well-managed utility with a strong record of financial, regulatory, and environmental performance. The city appears to be in solid financial shape. The utility generates a great deal of revenue for the city, both in service fees and taxes.

Arbitrage opportunity

Instead, it seems that the proposed JEA sale is simply an arbitrage opportunity for Jacksonville. It’s a seller’s market for utilities, and some of the city’s leaders apparently see the multi-billion-dollar windfall from the JEA sale as a chance to channel resources to other city priorities. From a governance and policy perspective, the critical question is: what would Jacksonville do with the billions in proceeds from a JEA sale?

Along with such economic considerations, the sale would shift JEA’s primary governance from city hall to the state’s Public Utilities Commission. For better or worse (or better and worse), JEA’s new owners would make supply, contracting, employment, and investment decisions with its investors in mind.

City as holding company?

The JEA controversy also prompts deeper questions about the nature and purpose of municipal government. In colonial America, the first municipalities were private, investor-owned companies (that’s why the process of forming a city government is called “incorporation”!)—collections of assets that generated profits for their owners. At some level, a municipality is still a collection of assets—utilities, streets, parks, stadiums, etc.—any of which might theoretically be commodified and sold to investors.

But as Alexis deTocqueville observed, local governments are also social institutions that facilitate citizenship and foster democracy. When public infrastructure moves from municipal to investor ownership, the span of local governance shrinks; democracy becomes technocracy, and another element of daily life is transformed from collective choice to private transactions.