The 2025-26 Budget

State Mandate—Santa Ana Regional Water Quality Control Board

Constitution Requires the State to Reimburse Local Governments for Mandated Activities. State law tasks the Commission on State Mandates (CSM) with determining whether new state laws or regulations affecting local governments create state-reimbursable mandates. Typically, the process for determining whether a law or regulation is a state-reimbursable mandate takes several years. State law further requires our office to analyze any new mandates identified by the Commission as a part of our annual analysis of the state budget. In particular, state law directs our office to report on the annual state costs for new mandates and make recommendations to the Legislature as to whether the new mandate should be repealed (permanently eliminating it or making it optional), suspended (rendering it inoperative for one year), modified, or funded. Below, we discuss the Santa Ana Regional Water Quality Control Board’s (regional board’s) municipal stormwater permit for local governments in Orange County for the June 1, 2009 through December 21, 2017 period. This mandate is one of four newly identified mandates since enactment of the 2024-25 Budget Act. We will assess the other three mandates—also related to stormwater permits—after the administration proposes a course of action, potentially in the Governor’s revised budget proposal in May.

Summary. The Governor’s budget proposes suspending several requirements in the regional board’s municipal stormwater permit for the June 1, 2009 through December 31, 2017 period. CSM determined these requirements were state-reimbursable mandates for that time frame. However, the administration maintains that local governments could have raised local fees to cover their costs during that time frame and therefore proposes suspending the requirements for that period and not reimbursing them. We recommend the Legislature reject the Governor’s proposal and instead fund past costs—which total less than $1 million—for three reasons: (1) in a similar case in the San Diego region, a 2022 court decision found that local governments lacked sufficient authority to raise fees for stormwater mandates when they had to seek voter approval to do so; (2) CSM determined through its deliberative process that the requirements were state-reimbursable mandates; and (3) the local governments already incurred the costs to conduct the required activities during that period and cannot retroactively undo such activities.

Introduction

This post begins by providing background about stormwater permit requirements, CSM’s process for determining whether state-imposed requirements for local governments are mandates subject to state reimbursement, and how voter-approved Proposition 218 (1996) complicates local governments’ ability to increase fees to cover these types of costs. We then describe the Governor’s proposed suspension of the Santa Ana regional board’s stormwater-related mandate, assess the proposal and the Legislature’s options, and conclude with our recommendation.

Background

Federal and State Laws Require Local Governments to Limit Amount of Pollutants in Stormwater Runoff. The State Water Resources Control Board, together with nine Regional Water Quality Control Boards, help to enforce state and federal laws governing water quality across the state, including the federal Clean Water Act. To comply with this act, the water boards issue water quality permits—including stormwater discharge permits—to entities such as cities, counties, and businesses that discharge pollutants into water bodies. Such pollutants include sewage, trash, and chemicals. For municipalities, the act directs the water boards—through the state’s delegated federal authority—to design stormwater discharge permits that address their specific local conditions, and to “require controls to reduce the discharge of pollutants to the maximum extent practicable.” For example, permits might require cities to install storm drain filters in street gutters to catch trash before it enters the stormwater sewer. To satisfy the federal Clean Water Act, local governments must comply with the specific permit requirements established by the water boards when operating their local storm sewer systems.

CSM Determines What Constitutes State-Reimbursable Mandates. The California Constitution requires the state to reimburse local governments when (1) new state laws or regulations mandate that they implement a new program or higher level of service and (2) the local government does not have offsetting revenues—such as fees or federal funds—available to cover the associated costs. For example, if the local government could have imposed service charges, fees, or assessments to pay for the activities, the costs are not reimbursable by the state. In addition, activities required by federal law are not considered mandates for which the state must reimburse costs. State statute tasks CSM with determining what constitutes a state-reimbursable mandate and estimating associated costs. (The process is initiated when a local government files a “test claim” with CSM for reimbursement of costs to comply with the new requirement.)

State Can Suspend, Modify, or Repeal Mandates to Manage Costs. If CSM determines that a new law or regulation constitutes a state-reimbursable mandate, the Governor and Legislature must either fund the mandate in the annual state budget or take another action. Specifically, the state can suspend the mandate for one year, meaning local governments are not required to comply, and the state does not provide funding for related costs. The state also can modify the mandate to reduce costs—for example, by easing its requirements or making them optional. Alternatively, the state can repeal the mandate entirely, eliminating both the obligation and its associated costs.

Which Water-Related Activities Qualify as State Mandates Has Been a Source of Disagreement. The water boards implement federal law through water quality permits. Because the California Constitution does not require the state to reimburse local governments for costs to comply with federal law, disagreements have arisen over the years about whether all of the requirements in a given water quality permit are specifically required by federal law or whether they impose additional requirements from the state. Two key court decisions addressed this issue:

• 2007 Court Ruling Allowed Local Governments to Seek Reimbursement for Water Board Mandates. Prior to 2007, state statute exempted water boards’ water quality permits from the state mandate process (and, therefore, consideration for reimbursement) as they were generally understood to be implementing federal law. However, in 2007, the courts found this section of statute to be unconstitutional (County of Los Angeles v. Commission on State Mandates). This decision opened the door for local governments to seek reimbursement for complying with water boards’ permit requirements that they believe go beyond federal requirements.

• 2016 State Supreme Court Ruling Found That Water Boards’ Implementation Decisions Can Be Reimbursable. As noted, the federal Clean Water Act directs states to design permits based on local conditions to implement the law and reduce pollutants. Despite the general federal direction to the state water boards, however, the California Supreme Court found that specific permit conditions required by the boards but not explicitly stated in federal law can be state-reimbursable mandates (Department of Finance v. Commission on State Mandates, 2016).

Ability of Local Governments to Pay for Local Stormwater Costs With Fees Also Has Been Disputed. Another area of disagreement is whether local governments did or did not have sufficient authority to raise fees to support complying with the mandate when the associated costs were incurred. If they did have sufficient fee authority, the state is not required to provide them with reimbursements. Some relevant laws and court decisions include:

• Proposition 218 Limits Local Governments’ Ability to Increase Fees. Proposition 218 amended the Constitution to require voter approval for new or increased local taxes, assessments, and property-related fees. However, for certain property-related services—water, sewer, and refuse collection—local governments can raise fees without voter approval unless a majority of affected property owners submit written protests (majority protest). The majority protest process makes it less burdensome to increase fees for these services. Notably, Proposition 218 did not define what activities are encompassed by “sewer services.”

• A 2017 State Law Defined “Sewer,” Making Fee Increases Less Burdensome. Chapter 536 of 2017 (SB 231, Hertzberg) explicitly defined sewer to include both sanitary and stormwater systems. It asserted that common use of the word sewer is not limited to sanitary systems and cited earlier statute that uses a more expansive definition of “sewer system” which includes systems to dispose of sewage, industrial waste, and surface and stormwaters. It also asserts that a 2002 appellate court decision (Howard Jarvis Association v. City of Salinas)—which found that the city did not have sufficient fee authority to levy a stormwater fee due to the voter approval requirement—was wrongly decided. Senate Bill 231, which took effect in 2018, makes increasing stormwater-related fees more straightforward for local governments because they can use the majority protest provision rather than having to seek voter approval.

• Court Ruled Local Governments Lacked Sufficient Fee Authority to Pay for State Mandates When Voter Approval Required. Prior to approval of SB 231, disputes had arisen about whether or not local governments had “sufficient fee authority” to cover stormwater-related costs if they had to obtain voter approval for fee increases. In a San Diego area case—Department of Finance v. Commission on State Mandates (2022)—the Third District Court of Appeal found that prior to 2018 (when SB 231 took effect), local governments did not have sufficient authority to levy stormwater-related fees because Proposition 218 required them to attain voter approval before enacting such fees. It held that SB 231 did more than clarify existing law, but actually changed it, and thus could not be applied retroactively. The California Supreme Court declined to hear the case, making the appellate court decision final and binding on CSM and statewide trial courts.

State Mandate Issues Reflected in Challenges to Orange County Stormwater Permit. As part of its federal Clean Water Act implementation responsibilities, the Santa Ana Regional Water Quality Control Board adopted a new stormwater permit for Orange County in 2009. The permit regulates discharges from municipal separate storm sewer systems and requires the applicable local governments to undertake a number of activities. In 2010, Orange County, Orange County Flood Control District, and 14 cities within Orange County filed a test claim with CSM contending that various sections of the 2009 permit represented state-reimbursable mandated activities. In 2023, CSM determined that the specific requirements listed in Figure 1 were state mandates. It further determined that between June 1, 2009 and December 31, 2017, these mandates were reimbursable by the state because during that period, local governments did not have fee authority sufficient to cover the cost due to the applicability of the Proposition 218 voter approval requirements. However, CSM said that costs were not reimbursable after 2017 because SB 231 made it less burdensome for local governments to increase fees beginning in 2018. The commission estimates that, in total, local reimbursements for these activities will cost the state less than $1 million (between $459,106 and $690,409, depending on how many final local reimbursement claims ultimately are submitted). (The test claims also included some additional activities which CSM deemed were either not state mandates or not reimbursable by the state.)

Many Additional Stormwater-Related Test Claims Pending Before the Commission. While not directly linked to this mandate, CSM has significant pending workload related to other stormwater permits issued by the state water boards dating back to 2007. This includes 32 pending test claims and 4 additional claims for which CSM has already identified state-reimbursable mandated activities but has not yet developed cost estimates. (These are in addition to the four mandates—including the Santa Ana regional board mandate—which CSM already identified and assigned cost estimates over the past year.) Depending on commission determinations, the Legislature will receive future proposals from the administration to suspend or modify mandates or to reimburse eligible costs for at least some of these claims, potentially including three as part of the May Revision.

Governor’s Proposal

Suspends Mandate for Time Period in Question, Does Not Reimburse Local Governments for Their Past Costs. The Governor’s 2025-26 budget proposes to suspend the Santa Ana Regional Water Quality Control Board’s stormwater permit requirements that CSM determined were reimbursable by the state for the time period in question—June 1, 2009 through December 31, 2017. The suspension would mean the state would not reimburse claims by local governments for costs already incurred to implement the permit requirements for that time period. The commission estimated these costs were less than $1 million in total. (Since the current proposal is only for 2025-26, to keep the requirements suspended for the historic period and avoid any future state obligation to pay for past claims, subsequent budget acts also would have to include language continuing the suspension of this mandate.)

Maintains Mandate From January 1, 2018 Forward. Because the Governor’s proposed suspension would only concern the historic time period in question, the permit requirements would remain in effect as of January 1, 2018 and until the regional board adopts a new permit.

LAO Comments

Administration Maintains That Local Governments Always Had Fee Authority. The Governor proposes suspending the requirements for the historic period and denying reimbursement to local governments on the basis that it believes that local governments always had fee authority to cover their costs. The administration’s position, reflected in various documents concerning the test claim and in communications with our office, is two-fold:

• It contends that the Proposition 218 voter approval requirement never applied to fees for stormwater systems, meaning local governments always could have increased fees using the majority protest process. It believes that SB 231 merely clarified existing law rather than changing the law—that is, that the word sewer always included stormwater systems—and thus applies retroactively.

• It believes that local governments have fee authority even in cases where they have to obtain voter approval and even if obtaining voter approval is challenging. That is, the administration contends that having to obtain voter approval does not negate the underlying fee authority itself.

Governor’s Position Conflicts With the Court’s and Commission’s Decisions. The justification behind the Governor’s proposal conflicts with decisions by both the 2022 appellate court and CSM. The court determined that local governments lack fee authority when voter approval pursuant to Proposition 218 is required, distinguishing this requirement from the majority protest requirement. In addition, the court found that SB 231 did not apply retroactively because that legislation did more than clarify the law, it changed the law. Citing previous court decisions, including the 2002 and 2022 appellate court decisions, CSM also concluded that local governments in the Santa Ana case lacked sufficient authority to raise fees during the historic period and that SB 231 did not apply retroactively.

Suspending the Mandate Does Not Actually Remove the Past Requirement. Often when the state decides to suspend a mandate through the budget process, it will do so to avoid paying costs for one year on a prospective basis. In those cases, the suspension also makes the required activity optional for local governments to conduct for that forthcoming year. In the case of the current mandate, however, the proposal is essentially a retroactive suspension. The Department of Finance indicates that this approach is allowable under the Constitution. We note, however, that local governments cannot go back in time 15 years and cease required activities to avoid incurring costs.

Based on Our Assessment, the Administration’s Proposal Lacks a Strong Rationale. Given the judicial record, we do not find the administration’s justification for its proposed approach compelling. Unless and until a different appellate court or the California Supreme Court were to reach an alternative conclusion in a future similar case, we cannot find a strong analytical reason for the Legislature to disregard the 2022 decision by the Third District Court of Appeal. Furthermore, CSM conducted a thorough deliberative process before determining that the activities conducted by local governments in Orange County were state mandates, that the local governments did not have sufficient fee authority to cover the costs they incurred to comply with the mandates, and that those costs are reimbursable by the state. In addition, as noted above, the local governments already conducted the activities and incurred the costs. As a result, suspending the mandate would mean the local governments would be required to pay the costs without having been given the option of avoiding the activities.

No Future Costs Anticipated for This Particular Mandate…The municipal stormwater mandate in Orange County is not anticipated to result in ongoing costs for the state. This is because beginning January 1, 2018 (when SB 231 took effect), local governments have had sufficient fee authority to cover their costs. As such, the state should not expect future costs to materialize for this mandate beyond those included in CSM’s statewide cost estimate. (In addition, four of the six required activities were one time in nature and thus local governments have already completed them without cause to incur further costs.)

…However, Multiple Additional Stormwater-Related Test Claims Pending at the Commission. Each test claim submitted to CSM is different and has to be considered individually. However, if CSM was to determine that each of the currently pending stormwater-related test claims constituted state-reimbursable mandates for costs incurred before 2018, the state could face greater costs to reimburse local governments. The exact amount is unknown until CSM completes its mandate and cost determinations. Hypothetically, if CSM approved all costs submitted by local governments in every test claim, the state could face—at most—costs in the hundreds of millions of dollars. In most cases when CSM approves a municipal stormwater test claim, however, it only partially approves costs (because it usually does not find all requirements to be state-reimbursable mandates). As such, the ultimate costs to the state likely will be less than the amounts local governments are requesting. Since 2016, the water boards have been trying to design permits in a way that minimizes creation of state-reimbursable mandates while also continuing to enforce state and federal water quality laws. In addition, SB 231 reduces the likelihood that the state will have to reimburse other local stormwater-related costs incurred since 2018.

Recommendation

Reject Governor’s Proposal and Reimburse Local Governments’ Past Costs. We recommend the Legislature reject the Governor’s proposal and fund the mandate for three key reasons: (1) the appellate court found that SB 231 does not apply retroactively and local governments lacked sufficient authority to raise stormwater-related fees prior to 2018, (2) CSM determined these were state-reimbursable mandates, and (3) local governments already incurred the costs to comply with the permit requirements and cannot go back in time and choose to avoid these costs. Final costs will total less than $1 million. Funding this mandate does not have direct out-year fiscal implications for the state.