BOARD AGENDA MEMORANDUM
SUBJECT:
Title
Open Space Credit Policy Discussion.
End
RECOMMENDATION:
Recommendation
Consider information provided by staff and provide policy direction as necessary.
Body
SUMMARY:
The purpose of this discussion is to review the District’s Open Space Credit policy and receive direction from the Board. This policy was thoroughly reviewed during a series of Board discussions that occurred in calendar year 2013. Those discussions included status updates on July 23, 2013 and September 10, 2013 regarding a Board requested stakeholder review process, followed by a policy evaluation discussion on November 12, 2013. The Board reviewed the policy again on November 10, 2015 and requested staff to return in July or August 2016 with a detailed review of Open Space Credit cost recovery options, including tiered water rates and alternatives to reallocate costs across South County water users during the Fiscal Year 2018 rate setting process.
Background:
The District Board has historically recognized that agriculture brings value to Santa Clara County in the form of open space and local produce. In an effort to help preserve this value, the District Act limits the agricultural charge to be no more than 25% of the municipal and industrial (M&I) charge. In 1999, to further its support for agricultural lands, a policy was put into place to limit the agricultural groundwater production charge to no more than 10% of the M&I charge. The agricultural community currently benefits from low groundwater charges that are 2% of M&I charges in North County and 6% of M&I charges in South County. According to Section 26.1 of the District Act, agricultural water is “water primarily used in the commercial production of agricultural crops or livestock.”
The credit to agricultural water users has become known as an “Open Space Credit.” It is essentially paid for by fungible, non-rate related revenue. Under current protocol, ad valorem property taxes generated in the Water Utility, General, and Watershed Stream Stewardship Funds are used to pay for the Open Space Credit. The net South County Open Space Credit is currently estimated to be $8.0 million in FY 2016-17 and projected to continually increase in the years that follow.
The Board expressed concern in February 2013 as to whether or not the property taxes used to support the Open Space Credit should be used to fund other important District activities. If the Open Space Credit policy were modified and/or agricultural groundwater production charges increased, this would decrease the open space credit and the property tax revenues that were used to fund it, which could be used to fund other District activities. However, the Board also expressed concern as to whether increasing the agricultural groundwater production charges would affect the viability of the agricultural lands. Consequently the Board directed staff to:
1. Engage community, such as the Agricultural Advisory Committee, Santa Clara County Farm Bureau, Water Commission, and farmers in North County and South County to gain insight on the impact of the current Open Space Credit policy on them and the impact of any potential changes to this policy;
2. Determine the short- and long- term impacts of transferring ad valorem property taxes for Open Space Credit;
3. Create a schedule outside of the rate process to have dialogues; and
4. Evaluate options to decrease the Open Space Credit, within the legal limits.
Accordingly, District staff performed the following activities in 2013:
• Convened three Working Group meetings with members representing various interests (e.g., agricultural, water retailer, business community, County of Santa Clara Land Planning)
• Solicited feedback from District Advisory Committees
• Conducted a Community Stakeholder Meeting
• Contracted with a consultant, ERA Economics LLC, to provide an independent perspective on the district’s Open Space Credit Policy
Results of Working Group Engagement:
After a series of meetings, the Working Group comprised of members representing various stakeholder interests was able to reach a consensus recommendation as follows:
A. Maintain Open Space Credit as is; both in practice (keep Ag at 6% of M&I charge) and policy (limit Ag charge to 10% of M&I charge)
B. Weigh any decisions regarding the open space credit policy in the context of other external factors that affect agriculture
• The Open Space Credit is only one factor that impacts agricultural costs
• Incremental increases to Ag costs can have significant impact on farmers
C. Explore other sources of money for capital and operating projects that are not fully funded or where funding sources are less than robust
The Working Group prepared the following pros and cons for their recommendation:
Pros of Recommendation:
• This will encourage economic viability for agriculture
• The District will not be perceived as anti-agriculture
• The nexus of agriculture and ecosystem services will be maintained
• It aligns with county and District vision for land use as it applies to Ag
• As Ag usage decreases, the cost of credit will decrease
Cons of Recommendation:
• There is no guarantee that the Open Space Credit policy alone will meet goals to preserve Ag land (external factors)
• Some funds remain less than robust financially (i.e., Watershed Stream Stewardship Fund)
Board Direction on November 12, 2013:
On November 12, 2013 the Board passed the following motion:
A. Maintain the Open Space Credit Policy language as is;
B. Direct staff to continue referring to the Board’s policy as the “Open Space Credit Policy”;
C. Direct staff to explore other sources of funding to improve the financial health of the Watershed Stream Stewardship fund; and
D. Direct staff to maintain the South County agricultural groundwater production charge at 6% of M&I, and to continue the practice of setting the North County agricultural groundwater production charge equal to the South County agricultural groundwater production charge.
Options to minimize the Open Space Credit:
On November 10, 2015 the Board requested that additional information on options to minimize the Open Space Credit be brought back for discussion. The following options are provided for Board consideration:
1) M&I users pay for the open space credit. Prior to changing the open space credit methodology to conform to Proposition 218, the vast majority of the Open Space Credit was paid for by M&I users in accordance with the District Act limit, which required that the agricultural groundwater production charge be no more than 25% of the M&I groundwater production charge. This option is not feasible now, but could be in the future depending on the outcome of the City of San Buenaventura v. United Water Conservation District.
2) Increase the agricultural groundwater charge to 10% of M&I over a 5-year time frame, and provide a discount to 6% of M&I for Williamson Act participants and agricultural water users that are ineligible for Williamson Act participation (i.e. less than 10 acres in parcel size). The anticipated savings is $200K to $400K over 5 years, which would be partially offset by $25K implementation cost and potentially some ongoing operations costs. This proposal provides an incentive for agricultural land owners to maintain or incorporate long-term protection of land from development.
3) Increase the agricultural groundwater charge to 10% of M&I over a 5-year timeframe. The impact, according to the 2013 ERA Economics study, would be that less than 1% of Agricultural Lands would fallow, while reducing the Open Space Credit by $1.5M over 5 years. The agricultural groundwater charge in FY 2021-22 would be $50.70/AF vs. $30.43/AF currently forecasted.
Agricultural Commissioner’s Office Study - 2016:
In early 2016, the Agricultural Commissioner’s Office published its study on the economic contributions of farming in Santa Clara County. The study was prepared by ERA Economics. The quantification of ecosystem service benefits ranges from $610 to $1,280 per acre for flood control, recharge, water quality, pollination, biodiversity and open space benefits. For reference purposes, the amount of the FY 2016-17 open space credit in South County Zone W-5 is roughly $626 per acre assuming 2 acre-feet of agricultural water use per acre.
FINANCIAL IMPACT:
Depending on direction provided by the Board, there could be a future financial impact to the District, and rate payers.
CEQA:
CEQA Guidelines Section 15273: CEQA does not apply to establishment or modification of water rates.
ATTACHMENTS:
Attachment 1: PowerPoint
UNCLASSIFIED MANAGER:
Manager
Jim Fiedler, 408-630-2736