California Proposition 55, Bonds for Local Water Projects (1986)

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California Proposition 55, or the California Safe Drinking Water Bond Law Of 1986, was on the November 4, 1986 ballot in California as a legislatively-referred bond act, where it was approved.
  • Yes: 5,405,385 (78.7%) Approveda
  • No: 1,466,214 (21.3%)

Proposition 55 permitted the State of California to sell $100 million of general obligation bonds to make loans and grants for local water systems. General obligation bonds of the sort approved by Proposition 54 are backed by the taxing power of the state, which meant that the state was authorized to use its taxing power to assure that money was available to pay off the bonds.

The state's Department of Water Resources administered the bond funds. Authorized expenditures included loans and grants to public and private water suppliers to bring drinking water quality up to state health standards. Under Proposition 55, the loans and grants could be used for constructing, improving, or rehabilitating water systems to meet drinking water standards.



  • The first priority for loans made with the funds from Proposition 55 were loans to "water suppliers whose facilities pose the most critical public health problems."
  • The maximum loan to any water supplier was $5 million, although the legislature could raise this on an ad hoc basis.
  • The interest rate on these loans would be one-half of the interest rate that the state pays on the bonds.


All money available because of Proposition 55 could go to loans, but some could also go to outright grants.

  • Up to $25 million of Proposition 55 money could be used for grants to public agencies that supply water in order to make up the difference between the cost of a project and the loan amount the agencies can repay.
  • The maximum grant to any supplier was $400,000.
  • Up to $3 million for short-term loans or grants to water suppliers to study and identify ways of improving their water systems.
  • Up to $1 million could be used for grants to public agencies.
  • Up to $5 million for administrative costs of the Department of Water Resources and Department of Health Services.
  • About $3 million of those costs had to be repaid from fees charged to the loan recipients.
  • Up to $1.5 million for legal expenses of the Attorney General.

Reduced rates

Some Proposition 55 money was available to reduce the interest rate on existing and new loans made from the 1984 Safe Drinking Water Bond Fund.

Fiscal impact

The fiscal estimate provided by the California Legislative Analyst's Office said:

Paying Off the Bonds. For these types of bonds the state typically would make principal and interest payments over a period of up to 30 years from the state's General Fund. The average payment would be about $8.1 million each year if the bonds were sold at an interest rate of 7.5 percent.

Net Costs. If all of the loans are repaid on time, the net state cost could average up to $5.5 million each year for 30 years, for a total of $165 million. This net cost would consist of (1) up to $28.5 million for grants, administrative, and legal costs, and (2) one-half of the interest cost on the new bonds and the 1984 bonds because loans would be provided at a reduced interest rate. Over the 30 years, the total interest subsidy would be $94.5 million for the new bonds, and $42 million for the 1984 bonds.

Borrowing Costs for Other Bonds. By increasing the amount which the state borrows, this measure may cause the state and local governments to pay more under other bond programs. These costs cannot be estimated.

State Revenues. Purchasers of these bonds are not required to pay state income tax on the interest they earn. Therefore, if California taxpayers buy these bonds instead of making other taxable investments, the state would collect less taxes. This loss cannot be estimated.

Path to the ballot

The California State Legislature voted to put Proposition 55 on the ballot via Assembly Bill 2668 (Statutes of 1986, Chapter 410), and it added sections to the state's Water Code.

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