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SGMA Amendments for 2017

In 2016, the California Legislature made moderate amendments to the Sustainable Groundwater Management Act (SGMA), which go into effect on January 1, 2017. You can find an annotated version of SGMA here, including all the newest changes. Early in 2017, look for a revised version of my earlier white paper on the significant groundwater law, including regulations adopted by the California Department of Water Resources (DWR) and the formation of groundwater sustainability agencies (GSAs) across the state.

Bills adopted in 2016 related to SGMA included:

  • Assembly Bill 2874 (Gaines), which requires a GSA to provide notice of any groundwater management fee increase to the California Public Utilities Commission (CPUC), if any public utility extracts water from the basin;
  • Senate Bill 37 (Vidak), which added the Kings River East Groundwater Sustainability Agency to the list of statutory GSAs; and
  • Senate Bill 564 (Cannella), which added the North Fork Kings Groundwater Sustainability Agency to the list of statutory GSAs.

In addition, several bills were rejected by the Legislature, including:

  • Assembly Bill 938 (Rodriguez), which would have allowed a watermaster or local agency administering an adjudicated groundwater basin to elect that the basin be subject to SGMA; and
  • Senate Bill 1317 (Wolk), which would have required cities and counties to establish programs for issuance of permits for new groundwater wells in any high- or medium-priority basin, and prohibited the issuance of a permit in any basin that is designated by DWR as subject to critical conditions of overdraft.

Fortunately, it is supposed to rain this week across much of California, so those dark clouds may contribute needed water supplies.

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California Mutual Water Companies Training 2016

Since 2012, I have had the privilege of providing training to approximately 300 directors of California mutual water companies to satisfy the legal requirements of AB 54 (2011). Given continued interest in the topic, I will offer the course on two dates this year. Because mutual water companies are spread across the state, making travel to a central location impracticable, the training will be conducted by webinar on the following dates:

  • Tuesday, December 13, 2016 at 6:00 pm Pacific
  • Thursday, December 15, 2016 at 6:00 pm Pacific

The training will be similar to previous years, updated for new developments in 2016. Like last year, the training is free to all directors of a mutual water company. Since there is no charge, I hope some directors will attend who have had the required training but could benefit from a refreshed memory and the 2016 updates.

If you are interested in attending the training or learning more, please call Pat Starkie at (512) 236-2231 or email her at pstarkie@jw.com. I can also answer questions below. I look forward to meeting you.

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Mutual Water Companies in the California Legislature 2016

I am happy to report that the California Legislature did no harm to mutual water companies in 2016. Given the past few sessions, that should be considered a positive outcome.

The only bill specifically naming mutual water companies that was passed by the Legislature, Senate Bill 1328, was vetoed by Governor Brown on September 24, 2016. That bill would have allowed the State Water Resources Control Board (SWRCB) to provide grants from the Greenhouse Gas Reduction Fund to implement drinking water, wastewater, water reuse and stormwater projects that were intended to decrease demand for fossil fuels needed to pump, transport and treat water. Named beneficiaries were public agencies, nonprofit organizations, public utilities and mutual water companies. It was good that mutuals and public utilities would have qualified for grant funding along with public agencies, and that the Legislature recognized the important role private water companies play in delivering water and wastewater services in California.

Governor Brown’s veto statement referenced a desire to prevent duplicative programs. He directed the Resources Agency to work with the SWRCB to include stormwater projects in the Urban Greening Program. Since SB 1328 was unlikely to provide a significant source of funds for private water companies, the veto can be considered neutral in its effect.

The Legislature did pass a number of bills which will affect the water supplies used by mutual water companies, but since those bills will impact all water organizations and users, I will address them in future posts.

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Irrigation Districts and the IRS Proposed Rulemaking for Tax-Exempt Bonds

The Internal Revenue Service has proposed changes to the rules by which it determines which entities may issue bonds for which the interest is exempt from federal income taxation. Issuance of tax-exempt bonds is by far the most common means of financing water and wastewater infrastructure in the United States, so the IRS proposal is significant for affected entities. The proposed rule would potentially affect irrigation or similar districts that supply water to a relatively small number of landowners, by excluding such districts from the definition of a “political subdivision.”

Under current IRS rules, an irrigation district or other governmental body is considered to be a political subdivision with the authority to issue tax-exempt bonds, if it is empowered to exercise at least one of the generally recognized sovereign powers. The proposed rule would continue that requirement and add new qualifications that the issuing entity have a governmental purpose and be governmentally controlled.

Under the current and proposed rules [§ 1.103-1(c)(2)], there are three recognized sovereign powers: eminent domain, police power and taxing power. Irrigation districts in the western United States generally possess both the eminent domain and taxing powers, but do not exercise any police powers, which are reserved to the state, counties and cities. Thus, irrigation districts normally qualify as political subdivisions under this requirement.

The proposed rule adds two new qualifications: that the entity issuing bonds have a governmental purpose and be governmentally controlled. Governmental purpose is determined by the purpose for which the entity was created, as set out in its enabling legislation, and the actual conduct of the entity [§ 1.103-1(c)(3)]. Supplying of water for irrigation and other purposes has been widely recognized as a public purpose, and irrigation districts are almost certain to satisfy the governmental purpose requirement under normal circumstances. In fact, the rule includes special districts that provide water, sewer, reclamation or irrigation services as examples of political subdivisions [§ 1.103-1(c)(1)].

The potential difficulty for relatively small irrigation districts arises from the requirement of governmental control [§ 1.103-1(c)(4)]. Under the proposed rule, this requirement is met if the issuing entity is controlled by a state or local governmental unit or an electorate. Control is defined as the power to direct significant actions of the entity and may be determined by three non-exclusive factors: (1) the power to approve or remove a majority of the governing body; (2) the power to elect a majority of the governing body; and (3) the power to approve or direct the significant uses of funds or assets of the entity in advance.

While irrigation districts are generally controlled by electors who own lands within the district, pursuant to normal state election laws, the proposed rule specifically excludes an electorate consisting of a “private faction” [§ 1.103-1(c)(4)(ii)(B)]. A private faction exists if control of the entity is exercised by the votes of an unreasonably small number of private persons. The rule expressly states that a controlling group of voters will always be unreasonably small if it contains three or fewer persons and will never constitute a private faction if it contains more than 10 persons. Groups of between four and 10 persons will be evaluated on the basis of all facts and circumstances. For purposes of counting voters, related parties are treated as a single person. This rule excluding private factions has the potential to impact smaller irrigation districts.

Determining the number of voters in an irrigation district and their degree of control would require a fact-specific analysis. However, there very likely exist small irrigation districts in the western United States that are controlled by a “private faction” as defined in the proposed IRS rule, and therefore would lose the ability to issue tax-exempt bonds. Smaller irrigation districts may include lands owned by a limited number of farmers, especially after application of the “related parties” rule. Compiling the votes of the largest landowners within a district may well result in control of the district by 10 or fewer persons, and the proposed rule should be concerning to those districts and their landowners.

The IRS is accepting comments on the proposed rule until May 23, 2016. The rule would not apply to bonds issued before the effective date of the changes (90 days after publication), and entities that were created prior to the effective date would be granted a three-year reprieve. If you are interested in further information on the proposed rule or how it might affect a particular irrigation district, please feel free to contact me.

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GAO Report Finds USEPA Violated Law in Promoting Clean Water Rule

The U.S. Government Accountability Office released a report today finding that two social media campaigns operated by the U.S. Environmental Protection Agency violated federal laws against publicity, propaganda and grassroots lobbying by the agency. The violations occurred as part of USEPA’s efforts to adopt the Clean Water Rule defining the scope of “waters of the United States” under the federal Clean Water Act.

For a more detailed analysis of the report, you can see my article contained in the December 2015 issue of Global Water Intelligence, which will be published later this week.