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Fiscal Flows: How Metropolitan Water District's budget adjustments affect Riverside

"Metropolitan is in the undesirable position of having high fixed costs for maintenance of its extensive water system and construction of needed new facilities but low fixed revenue."

The Metropolitan Water District of Southern California provides imported water from the Colorado River and the Sacramento River to 26 member agencies in Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Ventura Counties. These agencies, in turn, serve water directly to customers and indirectly through smaller water agencies.

As an example, Western Municipal Water District is a Metropolitan member agency. Western Water, in turn, serves customers directly in portions of the city of Riverside and Murietta and sells water to agencies like Riverside Public Utilities, Corona, Norco, and the Jurupa and Rubidoux Community Service Districts for use by their customers. Metropolitan does not serve any retail customers directly, but through its member agencies, about 19 million people depend on Metropolitan for at least some of their water.

On April 9, the Metropolitan Board adopted a two-year $2.4 billion budget and rate increases to provide the revenue to meet the budget. Metropolitan is in the undesirable position of having high fixed costs for maintenance of its extensive water system and construction of needed new facilities but low fixed revenue. This means that Metropolitan is heavily dependent on water sales for its revenue. The last couple of years have been wet and demand for Metropolitan water fell as other water sources became available and some agencies switched to more abundant local supplies. The Los Angeles Department of Water and Power displaced almost 100% of its Metropolitan water with water from the Owens Valley, which was a major hit on Metropolitan water sales.

Metropolitan is authorized to charge an Ad Valorem Tax on all property in its service area. When it was first formed, Metropolitan was 100% funded by this tax, but over the years, as water sales increased, more of that revenue was shifted from the tax to the commodity cost. Today, the tax rate is .00035%, which raises $200 to $300 million a year. Metropolitan can increase the tax rate to pay 100% of its State Water Project costs, which are about $800 million a year. As part of its budget and rate adoption process Metropolitan decided to double the Ad Valorem Tax rate to .0007% beginning in 2025. This allows for the rate increase for treated water from Metropolitan to be reduced from 17% in 2025 and 8% in 2026 to 11% in 2025 and 10% in 2026. Metropolitan also sells untreated water at a lower cost, but few of our local water agencies have treatment facilities, so they will rely on treated water from Metropolitan.

Changing the Ad Valorem Tax rate is controversial because all properties in the Metropolitan service area are affected regardless of whether that property receives Metropolitan water. The argument for increasing the tax rate is that it provides revenue stability and moderates the water cost increase. The tax increase is small; Metropolitan estimates $2 to $3 per month for the median price of a home in its service area. In my own case, the increase will be $4.51 a year or a little over 37.5 cents a month. I do live in a pre-Prop 13 home, so my tax rate may be lower than yours. You can find your rate on your county tax bill under MWD West.
I am a Riverside Public Utilities customer, so I will be paying this increase even though RPU has not taken any Metropolitan water for years. I don’t like paying for something I don’t receive a direct benefit from, but I think this is a sensible approach. If Metropolitan raises its water rates to cover all its increased costs, more alternative water sources will become cost-effective, and users will buy less Metropolitan water, further reducing Metropolitan revenue. This could put Metropolitan into a financial death spiral of ever-increasing rates and declining sales.

Metropolitan did consider a larger increase in the Ad Valorem Tax rate but decided not to do so at this time. Metropolitan also included some significant cost savings in its budget. These include staffing, program, and infrastructure expense reductions from what was originally proposed.

If you are a Western Water customer, you will see an overall cost savings from this action. If you are an RPU customer, you will see a small increase in your property taxes, and if RPU needs imported water in the future, it will be at a lower rate.