Funding Alternative #2

Funding Alternative #2 to the Proposed Tax on Drinking Water in the Budget Trailer Bill

Irrevocable Safe and Affordable Drinking Water Trust

The establishment of an Irrevocable Safe and Affordable Drinking Water Trust is a viable alternative to a tax on drinking water because it could provide a stable and perpetual source of funding. The Irrevocable Safe and Affordable Drinking Water Trust could provide a targeted amount of revenue each year into perpetuity to fund safe drinking water solutions for disadvantaged communities and low-income residents. For example, the targeted annual funding generated from the trust could be $50 million per year.

In general, an irrevocable trust is a mechanism into which an entity or person (the grantor) places assets for the benefit of a designated beneficiary. Once the grantor places the assets into an irrevocable trust, the assets cannot be removed. Instead, the trust assets, which comprise the trust’s principal, are managed by a trustee who invests the principal and make distributions from the trust for the benefit of the beneficiary. Trustees have fiduciary duties, responsibilities and obligations to trust beneficiaries.

One type of irrevocable trust is a charitable trust. A charitable trust is a trust designed to advance a charitable or governmental purpose. In the case of the Irrevocable Safe and Affordable Drinking Water Trust, the trust would be created as an irrevocable charitable trust designed to advance the governmental purpose of providing a continual source of funding for drinking water solutions for disadvantaged communities and low-income residents which currently do not have access to safe drinking water. The primary purpose of the Irrevocable Safe and Affordable Drinking Water Trust would be to provide a perpetual source of funding of at least $50 million dollars each year to the Safe and Affordable Drinking Water Fund.

How the Irrevocable Trust Would Work:

  1. The Irrevocable Safe and Affordable Drinking Water Trust Fund would be established in the State Treasury and be designated as the fund which would hold the funds placed into the Irrevocable Safe and Affordable Drinking Water Trust.
  2. To generate $50 million per year, the one-time sum of $725 million would be irrevocably transferred in Fiscal Year 2018-19 from the General Fund to the Irrevocable Safe and Affordable Drinking Water Trust Commission (the Commission) for deposit in the Irrevocable Safe and Affordable Drinking Water Trust Fund. This funding would serve as the trust’s principal. (The $725 million amount is based on an assumption of a 6.5 percent annual rate of return.)
  3. The Commission would serve as the trustee for the trust and would consist of 3 members and would be comprised of the State Treasurer, the Lieutenant Governor and the State Controller.
  4. The Commission would invest the trust principal. If the net income earned by the trust during the previous fiscal year is less than or equal to $50 million, the trustee would deposit the entire value of the net income into the Safe and Affordable Drinking Water Fund for the benefit of the trust’s beneficiary.
  5. If the net income earned by the trust during the previous fiscal year was greater than $50 million, the trustee would deposit $50 million into the Safe and Affordable Drinking Water Fund and would split the remaining portion of the net income between the Safe and Affordable Drinking Water Fund and the trust principal. Increasing the size of the trust principal would enable the trust to generate more money annually for transfer to the Safe and Affordable Drinking Water Fund.
  6. The trustee and others would be statutorily restricted from drawing down the trust principal.