A conflict between city and state laws could deprive the city of millions in state funding for city construction projects and threaten an emerging solution to the city’s water future.

By the time San Diego voters weighed in on Proposition A, a law affecting labor contracts on city construction projects, in June 2012, state legislators had already passed a law designed to make the city ineligible for state funds if Prop. A passed.

It did pass, and now, as designed, the city is facing the possibility that it’s no longer eligible for state funds for things like roads, bridges and sewer projects.

One source of possibly lost money is subsidized loans called “state revolving funds.” The city’s public utilities department says it’s identified $383 million in projects that could get those loans, but if the state makes them unavailable they’d be financed by bonds with higher interest rates, which could cost the city an additional $300 million.

And another gigantic potential project could also be at risk – one that’s the result of a rare kumbaya moment between environmentalists, business groups, Democrats and Republicans.

Right now the city dumps millions of gallons of partially treated sewage into the ocean every day thanks to a waiver from the Environmental Protection Agency. The city also survives on expensive imported water because it doesn’t have a major local source.

The city has crafted a solution to address both problems, but it’s funded in part through loans the state says are no longer available.

San Diego Versus Sacramento

Voters approved Prop. A in June 2012, making it illegal for city construction projects to require a “project labor agreement,” which set wages and working conditions for a specific project before any workers are hired.

Those agreements are supported by labor unions that generally end up with more work and better pay, and opposed by contractors for increasing project costs and favoring unions.

In October 2011, a day before PLA opponents qualified Prop. A for the ballot, Gov. Jerry Brown signed a law, SB 922, that said if a local law bars a contractor from signing a PLA on a project, that project isn’t eligible for state funds.

But Prop. A’s supporters weren’t concerned, because of a clause in Prop. A that said it doesn’t apply in cases where the city would lose state or federal funds.

“Except as required by state or federal law … as a condition of the receipt of state or federal funds, the city shall not require a contractor on a construction project to execute or otherwise become a party to a (PLA),”  Prop. A reads.

City Attorney Jan Goldsmith’s legal analysis of the law that appeared on the ballot made this same basic argument.

Then, in April, after the law was written but before Election Day, the state Legislature passed another law, SB 829, seeking to make it even harder for cities to restrict PLAs.

It said a city that “constrains in any way” the use of a PLA for a given project isn’t eligible for state money on any project. The difference being: Funds aren’t just withheld for the project that restricts a PLA, they’re withheld from all of that city’s projects.

Approaching the election, State Controller John Chiang was unequivocal: “If Prop. A passes, San Diego would no longer be eligible to receive state grants for local construction projects,” he said.

The ratings agency Fitch even said the loss of state funds could hurt the city’s bond ratings.

Then voters overwhelmingly approved Prop A.

In February of this year the League of Cities on behalf of Oceanside, Vista, Carlsbad and El Cajon challenged the two state laws and one other as unconstitutional, arguing they effectively ended the autonomy of charter cities.

San Diego Superior Court Judge Joel Wohlfeil rejected the challenge in August, saying the state was within its rights to dictate the terms of business when it gives money to cities.

That ruling is now on appeal and is expected to head to the state Supreme Court. In the meantime, it appears the city isn’t eligible for state funds.

Scott Crosby, president of the local Associated Builders and Contractors chapter, one of Prop. A’s strongest supporters, said his organization is confident the court will eventually rule in favor of charter cities.

Even if he’s right, that could take some time.

“Any large-scale projects where we get grants or loans or whatever, they’re all in trouble,” said former Councilwoman Donna Frye, a vocal Prop. A opponent. “This is serious, it’s real, the situation is not good, and everyone needs to figure out a way to fix it.”

How to Keep the Money Flowing

The state water resources control board became the first state department to directly force the issue when it sent the city a letter on Oct. 3 saying San Diego is ineligible for money for a pipeline replacement under University Avenue because of the conflict between Prop. A and SB 829.

“Funds are not available so long as the city cannot satisfy” the water board’s concern, the letter said.

Goldsmith responded last week with the same argument he made when Prop. A was on the ballot: that Prop. A doesn’t apply if it means losing state or federal funds.

“The exception clause allows the city to meet the condition for receipt of state funds imposed by SB 829,” he wrote.

That is, the exception swallows the law.

He also added — after three paragraphs ruminating on the legal meaning of the word “as” (seriously) — that his office believes the law is unconstitutional.

That’s one possible solution: Convince the state that there isn’t a conflict.

Councilman David Alvarez at a recent committee meeting suggested a similar solution.

“In the meantime, hopefully we get a response through the city attorney’s office, or through the Council president docketing an item that would allow the Council to take any action that’s required to clarify our position, that will make us eligible for the state revolving fund loans in the future,” he said.

Frye is wary of that route, given Chiang’s statement before the vote, and proponents of Prop. A seem to agree the conflict is real, since the alternative is essentially the nullification of Prop. A.

Two other options would require either the city or the state undoing the relevant laws.

For the city, that would mean holding a special election to put it to voters again. That’s Frye’s suggestion, but that approach is risky, since special elections in San Diego favor Republicans, who tend to support Prop. A.

“The fact of the matter is we are where we are and we need a solution,” Frye said. “We don’t need to rehash Prop. A, we need to find out how to secure state funding. That’s really the only thing anyone should be talking about.”

It’d be easier for the state to undo SB 829, but lawmakers would have to be willing – and they’re the ones who created this situation intentionally.

Or, the city and state could come to a temporary agreement to keep money flowing while the court sorts out SB 829. That’s where Prop. A supporters seem to be settling.

“We would be happy to fly to Sacramento to sit down with (Assembly Speaker) Toni Atkins, Donna Frye, and (construction union head) Tom Lemmon or anyone else interested in making sure San Diego gets its share of state funds,” said Jim Ryan, CEO of the local chapter of the Associated General Contractors, another major Prop. A supporter.

“If they’re not interested in that, we’d be happy to work with the city attorney to work out some language for the state water board while the Supreme Court decides the constitutionality of SB 829, or we could let the people decide in a vote.”

The Grand Compromise at Stake

Potentially caught up in all this is the emerging solution to two of San Diego’s biggest problems.

The Point Loma Wastewater Treatment Plant dumps millions of gallons of partially treated sewage and sediment into the ocean each day from a pipe four miles out and 300 feet deep.

The plant’s a primary treatment facility — which screens out large materials and sediment, and uses chemicals to remove smaller particles — but it’s supposed to be upgraded to a secondary treatment facility, which removes up to 90 percent of organic matter in wastewater. That upgrade would cost $2.1 billion. The city gets a waiver every five years from the Environmental Protection Agency to avoid those upgrades.

Meanwhile, San Diego environmentalists have pushed for years for the city to build a system to recycle sewage into pure, drinkable water to help bolster the city’s water supply.

Recycled water could provide the city 83 million gallons of water a day by 2035, or more than a third of its overall water needs, said Halla Razak, the city’s public utilities director.

That’s water the city wouldn’t need to purchase from outside sources, which have more than doubled in cost since 2008. And, it would cut down on the sewage going to Point Loma to be treated and eventually dumped into the ocean.

The water recycling program is expected to cost between $2.5 billion and $3 billion.

Local environmental groups and the city put together a three-part compromise they hope will solve both problems.

One, the city will commit to building a recycled water system. That’ll give the city a local water source, and cut the amount of treated sewage Point Loma dumps in the ocean to a level that could eventually approach the results expected of the $2.1 billion upgrade into a secondary treatment facility.

Two, the city will emphasize this change and request another waiver from the EPA. Environmental groups have pledged to support the waiver request and recruit other groups to the cause.

Three, the city would lobby the federal government to recognize the facility as functionally equivalent to a secondary treatment plant, ending the need for future waivers.

Altogether, the city’s Public Utilities Department estimates the arrangement could save the city $2 billion by 2050, compared with upgrading Point Loma and continuing to buy outside water sources.

The City Council first needs to approve the agreement with environmental groups. Even if it does, there’s a hiccup to the grand compromise.

The state water board — the one that says the city is ineligible for state funds — approves loans for water and wastewater-related projects. Razak estimated at a recent committee hearing that around $380 million of the project could come from state loans.

“If we cannot determine the level of funding, then really this agreement and what we are all working toward to achieve is not going to be possible,” Alvarez said when the item was at his environmental committee last week.

“We don’t know if the city will be able to access millions of dollars to be able to pay for this with state funding,” said Councilman Ed Harris.

And the city’s working on a crunched schedule.

The waiver application it needs to submit to the EPA is due Feb. 1, 2015.

And unless the state is satisfied with Goldsmith’s response, the city needs to find a solution to the city-state conflict by Jan. 1 or lose access to state funds.

Andrew Keatts

I'm Andrew Keatts, a managing editor for projects and investigations at Voice of San Diego. Please contact me if you'd like at andrew.keatts@voiceofsandiego.org...

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