San Dieguito WD explores debt financing as Lake Hodges litigation and wholesale costs drive up budget

San Dieguito WD explores debt financing as Lake Hodges litigation and wholesale costs drive up budgetFacing a 12% revenue requirement increase and a March 2027 court date over its loss of local surface water from Lake Hodges, the previously debt-free California utility is weighing new financing tools to fund aging pipe replacements.

The district's FY 2026-27 operating budget includes a 14% increase, heavily driven by anticipated 11% wholesale rate hikes from the San Diego County Water Authority and mounting legal fees.

SDWD is currently in litigation regarding the Lake Hodges dam, with a court date set for March 2027, and assumes zero surface water from the reservoir through 2035 due to a projected 15-year dam replacement timeline.

To mitigate future rate shocks, staff are exploring debt financing to fund capital needs, such as replacing aged asbestos cement pipes.

The district exceeded its CIP execution target for FY 2025-26, encumbering $2.8 million (108% of appropriations) using project savings and carryforward funds.

San Dieguito Water District (SDWD) in California is preparing to issue debt for the first time in its recent history as it grapples with rising wholesale water costs and mounting legal bills over a dispute regarding the Lake Hodges dam. During the May 20, 2026, board meeting, the district's Finance Manager introduced the draft FY 2026-27 operating and capital budget, which includes an overall operating expenditure increase of 14%, reaching $27.5 million. The budget is heavily influenced by a projected 11% rate increase from the San Diego County Water Authority and a 25% spike in contracts and services, primarily to cover the district's share of legal costs with the Santa Fe Irrigation District. The litigation centers on the loss of local surface water from Lake Hodges. According to district staff, SDWD is assuming a 15-year timeline for the construction of a replacement dam, projecting zero surface water from the reservoir through 2035. A court date for the ongoing litigation is scheduled for March 2027. The Finance Manager described the legal expenditures as "short-term pain for long-term gain." To support the budget, the board upheld a previously approved 12% water rate increase for the upcoming fiscal year. However, to mitigate the size of future rate increases and fund long-term infrastructure upgrades, the currently debt-free utility is exploring new financing options. Staff noted that debt will provide intergenerational equity for capital projects with lifespans exceeding 50 years, such as the replacement of aged asbestos cement pipes. On the capital side, the district plans to appropriate $4 million for FY 2026-27, with $2.9 million dedicated directly to infrastructure and construction. This represents a slight reduction from the $5 million initially projected in the district's cost of service study, a move intended to help build capital replacement reserves. The district also reported strong performance in its current capital program. SDWD has encumbered $2.8 million for planned projects in FY 2025-26, achieving a 108% execution rate. The over-performance was funded using project savings and carryforward dollars. Ongoing capital efforts include the continued rollout of an automated metering infrastructure (AMI) over the next eight years. The board is expected to formally adopt the budget at its June 17 meeting.