Coachella Valley Water District – How Can Associations Raise Funds for the New Domestic Water Rates?

As of July 1, 2016, water rates have gone up drastically for residents in the Coachella Valley Water District (CVWD) despite a concerted effort by the members of the Coachella Valley Chapter of CAI, individual homeowners and various other members of the public to dissuade CVWD’s Board from approving the rate hike on June 14. The volumetric (tiered) rate increased on July 1, along with the way that household water budgets are calculated.  The fixed monthly rates calculated by meter size will increase on October 1, 2016.

Common interest developments located in CVWD’s service area could see a 50% or greater increase in water rates.  Additionally, these rate increases commence well after most associations have set their budget for the current fiscal year.  Whether the rate increase is fair or not, it is happening. As such, associations within CVWD’s service area need to know the available legal options to obtain the funds needed to pay these increased water rates.   When deciding which option is right for your association some factors to consider are whether your membership can survive a mid-year assessment increase, whether there are additional water conservation alternatives your association has not yet explored, and whether there are other budgeted expenditures that can be modified to free up funds to pay for the water rate increase.

Option 1: Reallocate Current Budget Expenditures

One complaint of associations affected by the CVWD rate increases is that these increases have been decided and imposed well after budgets were calculated and approved for the current fiscal year. As a result, these affected associations were unable to anticipate and budget for the increase in assessments necessary to meet the increased water rates.

It is always good to remember that a budget is merely an association’s best prediction of what its future expenses will be for the upcoming fiscal year.  Sometimes the amount an association budgets is spot on, but sometimes life throws a financial curve ball and circumstances arise that the association did not or could not have anticipated in the budget. Luckily there is nothing in the law that says that budgets must be set in stone.  As such, associations may reallocate money among budget line items during the course of the fiscal year as long as a board believes that the reallocation is done in the best interests of the community as a whole and is a financially prudent decision. This may mean delaying until the following year routine repair projects that were to be funded out of the association’s operating expenses .

Option 2: Levy an Emergency Assessment

Civil Code section 5610 gives associations the ability to handle financial curve balls by allowing assessment increases in case an emergency situation arises.  Among other scenarios, Section 5610 defines an emergency situation as “[a]n extraordinary expense necessary to repair or maintain the common interest development or any part of it for which the association is responsible that could not have been reasonably foreseen by the board in preparing and distributing the annual budget report under Section 5300.” (Emphasis added). (Civil Code § 5610(c).)  So are these water rate hikes affecting common area irrigation costs an extraordinary expense that could not have reasonably been foreseen by the board before preparing or distributing its annual budget report? In my opinion, yes.

CVWD had announced around mid-2015 that a rate increase was on the horizon as a result of the 2014 passage of California’s new standard for chromium-6 (otherwise known as hexavalent chromium) levels in drinking water, but it took until around April of 2016 for CVWD to publicly disseminate specific proposed rate increases. As such, it is impossible for any association whose budget for the current fiscal year was required to be distributed to the membership prior to April 2016 to have budgeted a reasonable assessment increase to cover the increased water rates for common area irrigation costs when the proposed water rate increases were not available to the public before then.

Boards throughout the Coachella Valley should have and most likely did reasonably anticipate the necessity of an assessment increase in the future due to CVWD’s announcement of looming water rate increases. However, associations could not have calculated with any degree of certainty the amount of increased assessments needed to meet the increased water rates for common area irrigation costs prior to the distribution of their current fiscal year budgets because CVWD failed to disseminate the exact proposed rate increase until April 2016.  Therefore, an association would likely be able to impose an emergency assessment(s) pursuant to Civil Code section 5610 to cover the increased costs of water provided by CVWD for common area irrigation.

For an association to levy an emergency assessment pursuant to Civil Code section 5610(c), the board must pass a resolution that contains written findings explaining why the expense was not or could not have reasonably been foreseen during the budgeting process and why the extraordinary expense is necessary for the association to be able to maintain the common interest development. The board must pass this resolution prior to levying the emergency assessment. Moreover, the resolution must be distributed to the members with a notice of assessment.

Option 3: Borrow Money from Reserves

Another available option for an association is to borrow money from the reserves to pay for the increased water rates.

Civil Code section 5515 allows a board to temporarily transfer money from the reserves to the association’s general operating fund “to meet short-term cashflow requirements or other expenses, if the board has provided notice of the intent to transfer” in a notice of a board meeting that meets the requirements of Civil Code section 4920.  The notice must include (1) the reason the transfer of funds is needed; (2) some of the options for repayment of the funds; and (3) whether a special assessment will be considered.  (Civil Code § 5515(b).)

Section 5515 also requires that the board issue written findings explaining why the transfer is needed and when and how the money will be repaid.  These written findings must be recorded in the board’s minutes.  (Civil Code § 5515(c).)

One major caveat of borrowing money from the reserves to pay for operating expenses is that Section 5515 requires the money to be paid back to the reserves within one year of the date of the initial transfer of funds, except that a board can temporarily delay the restoration. (Civil Code § 5515(d).) The board will need to consider whether a large increase in regular assessments will be needed in the next year’s budget to both repay reserves and increase the regular assessment to cover ongoing increased water costs.

Option 4: Impose a Special Assessment

Associations may also be able to impose a special assessment for the remainder of the fiscal year to cover the costs of the increased water rates.  Then, at the end of the current fiscal year, the association could increase their regular assessments for the following fiscal year to incorporate these costs.  Be aware that pursuant to Civil Code section 5605 (b) a board cannot impose special assessments which in the aggregate exceed five percent (5%) of the budgeted gross expenses of the association for that fiscal year without obtaining the approval of a majority of a quorum of the members.

Option 5: Increase the Amount of Regular Assessments

The final potential option is to increase regular assessments. A board is allowed to increase the amount of regular assessments as long as the board met the requirements of paragraphs (1), (2), (4), (5), (6), (7) and (8) of subdivision (b) of Civil Code section 5300(b). (Civil Code § 5605(a).)  Civil Code section 5300(b) details which documents associations are required to be distribute in the association’s annual budget report.  ”Notwithstanding more restrictive limitations placed on the board by the governing documents,” Civil Code section 5606(b) provides that a board cannot impose a regular assessment that is more than 20% greater than the regular assessments for the association’s preceding fiscal year without the approval of a majority of a quorum of the members. (Civil Code § 5605(b).) Depending on how much an association increased the regular assessments from the previous fiscal year and the wording of the governing documents, the association may be able to impose a mid-fiscal year increase in the regular assessments. Consult with the association’s legal counsel to determine whether a mid-fiscal year increase in regular assessments is a viable option.

Consult with your Landscaping and Pool Vendors for Ways to Decrease Water Use

While foregoing payment of the water bill is not an option, one way to combat the increasedwater rates is to find ways to decrease water usage.  In this current climate (pun intended) where all Californians have been told to conserve water in any way we can, it is likely that your association has already sought advice from landscaping or pool vendors for ways to decrease water use.  However, depending upon how high the new water rates are for your association, drastic times may call for drastic measures. Landscaping and pool vendors may have additional recommendations on how your association can save water. CVWD also offers conservation tips on its website at http://www.cvwd.org/31/Conservation. The State of California also offers water saving tips at http://saveourwater.com/.