Arroyo Grande authorizes $1.43 million interfund loan to cover Lopez Lake litigation billing

Arroyo Grande's City Council voted unanimously Tuesday to authorize an interfund loan of up to $1,430,000 to the Water Enterprise Fund to cover a Zone 3 contract water billing tied to litigation over Lopez Lake operations.

The loan was proposed after Administrative Services Director Nicole Valentine told the council that on Nov. 1 the city received "the fiscal year 24, 25 zone 3 contract water billing for $1,426,491.50," an unplanned obligation that staff said would be difficult to meet without short-term financing. Valentine said staff reviewed five options — including rate increases, bank loans and bonds — and recommended a 10-year interfund loan from the Measure 6 sales tax fund as the most cost‑effective, timely and flexible approach.

"An interfund loan lets the city address the true-up bill quickly without immediately raising water rates," Valentine said during the presentation. She added that staff proposes a 10-year repayment schedule beginning in fiscal year 2029–30 to allow time for a rate study and to rebuild repayment capacity.

City Manager Downing and council members described the billing as an extraordinary and unexpected expense connected to federal litigation that increased downstream releases from Lopez Lake. Downing said the city is not a named party in the lawsuit but nonetheless is being billed for associated costs based on water allocation and stressed the difficulty of communicating details to the public because of ongoing legal constraints.

Councilmembers pressed staff on repayment timing and reserve impacts. Valentine said the scheduled water rate increase on Jan. 1, 2026 (6.4 percent), is expected to help stabilize the water fund but that staff recommended delaying principal repayment until 2029 to avoid immediate pressure on capital projects and operations. She assured the council that the loan structure would not lower required general fund reserve levels.

Several members of the public asked whether Measure O or road-tax revenue would be used; staff clarified the loan would not draw from recently enacted road funding. A question about the last local steelhead observation was declined on the record because attorneys advise limiting public comment while litigation is pending.

After discussion, the council adopted a resolution authorizing appropriation of up to $1,430,000 to pay the Zone 3 FY 24–25 billing, noting the action is intended as an interim measure while staff pursues longer-term financial solutions and further coordination with the county and Zone 3.