Cost Sharing Between Developed and Undeveloped Properties

We recently received two good questions that are the subject of our second blog entry. The questions were:

1) Does the $200/month estimate factor in payments from vacant properties; and


2) will the project be sized to accommodate build-out of those vacant properties?

These questions are related to a very important topic, which also existed with the previous project when it was under the authority of the Los Osos Community Services District (LOCSD). That is:

How do the developed and undeveloped property owners in the community equitably share the cost of the wastewater project?

While this is a complicated question with many variables, the County team is confident that we will be able to address all of these issues in the financing plan as we move forward with the project. We also believe that the community has an option to consider spreading some of the project costs on a community-wide basis, discussed in more detail below. It is important to note that from a cost sharing perspective, the equities between developed properties, undeveloped properties, and the community as a whole should be resolved prior to the end of construction, and that they do not need to be resolved before construction starts.

County Efforts in comparison to the LOCSD Project

First, let us review the prior LOCSD financing plan. In the LOCSD financing plan, assessments were a very low portion of the repayment equation, equal to $3,889.30 per single family benefit unit. Consequently, the vast majority of the costs allocable to undeveloped properties would be included in the monthly wastewater bill of developed properties until undeveloped properties obtained building permits and paid their “connection fees” for their share of the wastewater project construction costs. Due to this fact, the LOCSD would not have been able to collect from vacant lots until those lots were actually developed, which would take many years. The time horizon was uncertain because of the existing water supply deficiency, seawater intrusion, and Project conditions established through the Coastal Development Permit (CDP) that do not allow new development to hook up to the project until a water management plan, a habitat conservation plan, and the General Plan updates are complete (referred to here as the “Three Big Conditions”).

When the County began working on the Project under Assembly Bill 2701 (Blakeslee), we recognized that the same challenges still existed. In addition, since the prior CDP prohibited connection of undeveloped properties to the wastewater system until the “Three Big Conditions” were satisfied, we recognized that any attempt to assess undeveloped properties in 2007 could be challenged, since at that time it was uncertain how the water situation could be solved, or if it could be solved to allow owners of undeveloped properties to build.

So, in 2007, while discussing these issues in a public hearing with the Board of Supervisors, we proposed and the Board approved some specific Project strategies, discussed below (Here is a link to the item, see page 5.) The straight-forward way to address the issue is through passage of the second Proposition 218 vote by undeveloped property owners. If this vote passes, it will require all vacant property owners to pay their share of the costs from the start-up of the project, regardless of when they get around to building on their lots. The County’s strategy recognizes that since a community wastewater system is a necessary requirement for a building permit for properties within the prohibition zone, it is extremely likely that the vacant property owners will approve the proposed assessment when the ballot is before them. If the vacant property owners do not approve their assessment, then they would pay progressively higher assessments when they do connect (similar to the LOCSD plan).

County Cost Estimates and Efforts to Mitigate Affordability

In order to arrive at cost estimates, we had to make several assumptions. The $200/month estimate includes assumptions such as interest rate, financing term, number of ratepayers, and project cost. In answering the first question, yes, one assumption is that the vacant property owners will approve funding for their share of the wastewater project, so the $200/month figure does include vacant lots as if they were part of the assessment base. If undeveloped properties do not approve their assessment, then the impact on monthly bills to wastewater customers would be about $30/month, assuming no new development, and the amount would be less when homes are built on undeveloped properties.

An important effort by the County to mitigate the risk of deferred payments from undeveloped properties is to reduce the overall cost of the project through grants, financing or other cost saving measures. The current estimate of $200/month is based on several conservative assumptions regarding financing and a 25% construction cost inflation since the LOCSD Project in 2005. The inflation that was included in the estimate has not occurred. In fact, construction bids throughout California and in our region have been below engineers estimates by as much as 30%, which means that we are in an unprecedented bidding environment that could significantly benefit Los Osos. If the project can proceed under the County’s Plan and does not have major delays, we can solicit bids during this great bidding climate, and we fully expect that there will be some significant savings off the $200/month estimate.

Another cost savings that is very possible for Los Osos and was not included in the assumptions is that Federal stimulus funding is available through the USDA program. Thanks to the bi-partisan work of Congresswoman Lois Capps, Congressman Kevin McCarthy and Senator Diane Feinstein, Los Osos was specifically included in the 2010 Agricultural Appropriations Bill signed by President Obama on October 21. “The Bill” waives population restrictions established in the USDA Rural Development Program and automatically pre-qualifies Los Osos for the Program.

On November 3, the Board of Supervisors approved staff to proceed with the USDA application, and the USDA has in turn invited us to apply for $80 million in financing, which includes a $16 million grant and a $64 million loan financed over 40 years at below market interest rates (link). In a normal year, USDA only funds between $40 and $50 million in projects, in total, throughout California. Undoubtedly, the work of our Congressional representatives and the support of the USDA and the Board of Supervisors, is finally starting to pay dividends provided we keep on track with the Project schedule. If the project does in fact receive USDA financing, including a $16 million grant, the costs to the average homeowner would be reduced by approximately $37/month.

Future Actions

The most critical issue to keeping the Project schedule on track is the Coastal Commission hearing on appeals filed in opposition to the Board of Supervisors approval of the Project’s Coastal Development Permit. We are hopeful that the Coastal Commission will consider the appeals in the next couple months, and if so, the USDA staff has indicated that our timing is very good. If not, USDA staff is concerned that other Projects will get ahead of Los Osos in line for remaining stimulus funds.

The second Prop 218 vote on undeveloped properties can be considered when the water management plan has been completed. This is an ongoing effort between the County and the water purveyors and is expected to be complete in 2010.

Pursuing grant funding is ongoing. Opportunities with USDA are the best at this time. However, the Project is in good shape to compete for California Integrated Water Management grants when they become available through the Department of Water Resources. The San Luis Obispo County Integrated Water Management Plan is the highest ranking plan in the State that has not received grants and the Project is the highest ranking project in the County Plan. Although the timing of grants has not been released by DWR, we continue to work with their staff and have targeted $10 million for the Project.

We have also received considerable feedback from the community that some of the Project costs should be spread on a community-wide basis and not just paid by those within the Prohibition zone. The basic argument in favor of spreading some of the Project costs on a community-wide basis is that in essence, the community as a whole receives some benefit from the Project. The groundwater situation is a good example. During the decision-making on the Project, through the Planning Commission and the Board of Supervisors, (and now on appeal to the California Coastal Commission), conditions were established relating to the disposal of wastewater that will help improve the groundwater situation. Although it is sometimes a fine line between what is a wastewater benefit, or a Project condition, versus a water supply benefit, and how it all relates to Prop. 218, it is nevertheless clear that the Project will help support community-wide water needs.

An option for spreading some of the Project costs community-wide is provided under Prop. 218 through the approval of a “special tax.” A special tax would require a “yes” vote by 2/3rds of the votes in an election, and, if passed, will result in reduced assessments so that property owners in the Prohibition Zone will pay less. A special tax would not be an added cost for the Prohibition Zone. Instead, it would take some of the costs of the Project and spread them to the entire community, thereby reducing costs for the Prohibition Zone. This is an issue of fairness and equity that we plan to take to the Board of Supervisor in the future and would also welcome community input on.

In summary, we are aware of this challenging issue and, through the financing plan and other funding mechanisms, the County understands the tools available to ensure equitable cost allocation within the community. Obviously, our pursuit of grants from the USDA and other governmental agencies will continue, as will our pursuit of other favorable financing.

In regards to the second question, yes, the Project is sized for build-out of the Prohibition Zone. It is important that this capacity is included in the project so that undeveloped properties can also be required to pay for their share of the costs. Because many elements of the project have a relatively fixed cost, (regardless of the relatively nominal differences in capacity), there would be minimal cost savings to down-size the Project compared to the additional revenues from undeveloped parcels that will be received. As discussed, the real issue is about when undeveloped properties will begin paying which causes us to believe that the County strategies are the best possible with the challenges what exist. We believe that the changes that have occurred since the 2005 LOCSD Project provide an excellent opportunity to deliver a Project for Los Osos that will cost less, provide greater equities, and will be better and more acceptable than the 2005 Project.

The next step is obtaining support from the California Coastal Commission.