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Tuesday, Dec 5, 2023

Special Districts Get Stuck With Bigger Tax Losses Than Planned

The state’s local water and sewer districts face millions of dollars in property tax losses because of Sacramento’s budget problems, and some are considering postponing capital projects or raising rates to make up for the lost revenues.

As part of the budget agreement reached earlier this year between local governments and Gov. Arnold Schwarzenegger and approved by voters as Proposition 1A last month hundreds of special districts must give up a total of $350 million in local property taxes this year and next. In exchange, the state is barred from taking property taxes in future years without paying the local districts back.

Special districts initially welcomed the deal, grateful that the state would be forced to stop the decade-long practice of taking their funding to balance its books.

But the Legislature tinkered with the arrangement during budget negotiations, exempting special districts that rely solely on property tax assessments, and also insect control districts that were combating the spread of the West Nile Virus. As a result, the state issued new figures showing that the remaining districts would be hit with millions of dollars more in property tax cuts than initially expected.

“Many of our members are being forced to consider imposing temporary rate increases as line items on property tax bills, while others are simply postponing much-needed maintenance and capital projects,” said Geoff Neill, spokesman for the California Special Districts Association, which represents most of the state’s 2,200 special districts.

The rate increases will likely hit business customers harder than homeowners, as companies generally use more water and generate more wastewater and trash than residences.

Locally, the hardest hit entity is Los Angeles County Sanitation Districts, a conglomeration of two dozen agencies that serve 78 of the county’s 88 cities (excluding Los Angeles). Officials initially expected to lose up to $20 million a year out of their cumulative $400 million budget. But last month, they found out it would be $31.5 million a year for the next two years.

“We were expecting a hit, but the magnitude of the hit caught us off guard,” said Jim Stahl, the sanitation districts’ chief engineer and general manager. “We just passed a four-year rate increase earlier this year, so going back for another one so soon is out of the question.”

He said the districts will likely postpone some of their capital projects and then look at raising rates which were just increased by about $6 a month for a typical household in three or four years. “Over the long haul, we’re going to have to make up the lost revenues if we’re going to complete our projects,” he said.

Stahl said the state’s property tax diversion is especially painful because the sanitation districts have made extra efforts to keep rates low.

“What is disconcerting is those agencies that have worked very hard to keep rates down are looked upon now as a target because their rates are lower than other districts and in Sacramento’s eyes, can afford to raise their rates,” Stahl said.

Some districts say they can weather the tax hits without resorting to rate hikes.

The Castaic Lake Water Agency in northern L.A. County is losing $7 million a year, but general manager Dan Masnada said the agency has sufficient reserves to cover the impact of the tax loss for the next two years.

The problem, Masnada and others say, is if the state decides to take local property taxes for a third straight year to balance its 2006-07 budget. A report by the state legislative analyst shows a likely structural budget deficit of $8 billion to $9 billion, just at the time when the first deficit refinancing bonds come due.

Under terms of Proposition 1A, if the state were to raid local coffers in that budget year, it would have to repay that money with interest before it takes any more. But there’s no time constraint on when the money must be paid back.

“If we get hit a third time, I doubt seriously if we can sustain that hit without having to enact an immediate rate increase,” Stahl said.

Howard Fine
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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