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THE CENTRAL BASIN MUNICIPAL WATER DISTRICT’S BOARD OF DIRECTORS HAS CONSISTENTLY FAILED TO PROVIDE APPROPRIATE LEADERSHIP AND OVERSIGHT
Chapter Summary
The board of directors (board) of the Central Basin Municipal Water District (district) has failed to lead the district in a manner that encourages its efficient operation, effective management, and adherence to laws and rules. For example, the board has not maintained stability in the district’s top executive position: Over the five years of our review, six different individuals filled this role, a level of turnover that significantly affected the district’s ability to perform its necessary functions. Further, the board did not establish an effective structure for reporting and investigating ethics violations by board members and staff. In fact, the Fair Political Practices Commission (FPPC) uncovered such violations. Also, the board did not ensure that it approved or that the district implemented its previous strategic plan; it did not require the district to create a long‑term financial plan; and through its lack of action, it contributed to the district suffering two credit rating downgrades. Finally, the board’s actions led to several changes in its liability insurance, resulting in higher costs for less coverage.
Because the district has lacked effective leadership, the public’s confidence in it has eroded, and it has risked being unable to meet its obligations to its customers. The district has recently taken some positive steps to correct these issues, such as retaining an experienced general manager on a two‑year contract and creating a new strategic plan. However, given the magnitude of its past problems, we believe considering ways to improve the district’s governance is necessary. Although the public currently elects the district’s board, the district does not serve the public directly but instead sells water to various entities that in turn sell water to the public. Thus, those who select the board are not those whom it directly serves. If the Legislature chose to change the district’s governance structure, it could consider a structure through which board members would be directly accountable to the entities the district serves. Such a change would enable those entities to hold the board responsible when it takes actions or makes decisions that are not in the district’s best interest.
The Board’s Dysfunctional Oversight Has Threatened the District’s Ability to Meet Its Responsibilities
The board’s poor leadership and decision making significantly impeded the district’s ability to effectively and efficiently perform its necessary functions over the course of our audit period from July 2010 through June 2015. Specifically, during this time, the board failed to ensure that it provided the district with stability in either the general manager or finance director position. In addition, the board did not establish a structure for investigating or referring ethics complaints against board members and staff related to violations of the district’s code of conduct or conflict‑of‑interest code that minimizes political influence. Finally, the board failed to approve or implement a strategic plan dated October 2010, and it is too soon to tell whether the district will effectively implement a subsequent strategic plan it adopted in May 2015. When the board fails to exercise appropriate leadership, it impedes the district’s ability to operate in an efficient and effective manner.
The Board Has Not Ensured That the District Has Consistent Leadership
Between July 2010 and June 2015 the board and the general manager demonstrated a lack of leadership by not maintaining stability in the district’s key executive management and finance positions, hindering the district’s ability to effectively manage and meet its responsibilities. Figure 5 presents the length of time these two critical positions were either vacant or filled by one of numerous individuals over the five‑year period.
As shown in Figure 5, the district has faced high turnover in its top executive position. State law requires municipal water district boards to appoint a general manager. The board has full authority over the employment of the general manager, who in turn has full charge and control of the operation of the district, including the authority to employ and discharge all personnel except for those the board is required to appoint. However, between July 2010 and June 2015, the district had six individuals in this critical leadership role, including four general managers or interim general managers and two interim chief operating officers (interim chiefs). According to the position description, the interim chiefs served at the pleasure of the board until the board finalized the recruitment for the general manager position. The interim chiefs were not to have the authority to hire or fire staff or to enter into new contracts without board approval. Further, they could not participate as candidates for the general manager position.
Figure 5
Timeline of Changes in Key Leadership Positions at the Central Basin Municipal Water District
Sources: District human resources records, interviews with district staff, and the County of Los Angeles’s final official election results for June 5, 2012.
* In certain cases during our audit period, this position was referred to as the interim chief operating officer and some of the position’s duties were restricted.
† In certain cases during our audit period, this position was referred to as the chief financial officer, interim finance manager, finance director, and interim finance director.
‡ As shown in the figure, Richard Aragon briefly served as interim general manager during this time.
§ Kevin Hunt was initially hired as the interim general manager, a position he held from November 10, 2014, through May 10, 2015, until the district hired him as the current general manager on May 11, 2015.
Lack of agreement among the board members was a contributing factor to instability in the district’s top executive position. In October 2012, the district’s long‑standing general manager retired. According to the district’s director of human resources, the board appointed an interim chief in October 2012. However, the board terminated him less than four months later in January 2013, during a contentious board meeting shortly after two new board members took office. The board approved the termination by a three‑to‑two vote.
The board subsequently appointed a series of individuals to the top executive role. In January 2013 the board appointed a second individual to the position of interim chief. He returned to his former position as the district’s water resources and planning manager after the board hired a new general manager effective May 2013. The board placed this general manager on paid administrative leave in September 2014 and terminated his employment in October 2014. As with the first interim chief in 2013, this termination occurred during a contentious board meeting and was the result of a three‑to‑two vote by the board. Also in September 2014, the board appointed the district’s then‑finance director to also serve as an interim general manager. In November 2014 the board appointed another interim general manager and approved a recruitment process for hiring the general manager in that same year. The board subsequently entered into a two‑year employment contract in May 2015 with the individual it had previously appointed as interim general manager.
The district’s current general manager’s two‑year contract expires in May 2017, and he stated that he is contemplating retiring at that time. If he chooses to retire at the completion of his contract, the general manager anticipates the board would start the recruitment process between June 2016 and October 2016. The most recent hiring process the district conducted for a general manager included establishing an independent ad hoc hiring committee, selecting a recruitment firm, and having the board interview the top candidates. However, the district does not have a formal policy for recruiting and hiring a general manager in the future, and the current general manager acknowledged that the district would benefit from such a policy. In our judgment, establishing a formal policy for the hiring process of the general manager position and beginning the hiring process a year in advance of the end of the current general manager’s contract provides the district ample time to identify and select a replacement, should the current general manager retire. If the board does not fill the general manager position either prior to the current general manager’s retirement or within a reasonable amount of time thereafter, the board will likely hinder the district’s ability to effectively meet its responsibilities.
In addition, the district had five different individuals and one financial services firm perform the role of finance director or a similar position between 2010 and 2015. In December 2010, the district’s chief financial officer resigned after more than five years in the position, and the district hired a financial services firm to perform the duties of the chief financial officer. Despite the financial services firm’s recommendation in March 2012 that the district recruit and hire a full‑time dedicated finance director, the district did not fill the role with an interim finance manager until December 2012. According to the district’s director of human resources, she raised the question of hiring a finance director on multiple occasions, and the general manager at that time told her that the financial services firm was performing the job adequately and had some remaining work to complete. Nevertheless, the fact that the same financial services firm recommended that the district hire a finance director suggests that the district should have prioritized filling this position. The district finally hired a finance director in May 2013. He remained in the position until February 2015, when the district hired an interim replacement until it recruited a new finance director in April 2015.
The lack of stability in these two key management positions has threatened the day‑to‑day operations of the district. As we note later in this chapter, a lack of stable management was a factor in the district’s losing its insurance in 2014. Further, together these positions help establish an environment that promotes effective stewardship of both resources and staff. As we note in Chapter 2, the district’s management of its contracts and expenditures needs improvement, and in Chapter 3 we discuss that the lack of a general manager contributed to staff not receiving timely performance evaluations. If the board struggles to maintain consistency in these critical positions in the future, the district may continue to lack the leadership necessary to meet its responsibilities.
The Board Lacks an Effective Structure to Investigate Its Own and District Staff’s Noncompliance With Laws and Rules
The board has not adequately maintained a mechanism to respond to complaints regarding its members’ or district staff’s violations of laws and district codes related to ethics. From the beginning of our audit period in July 2010 until the end of July 2015, the district’s administrative code called for an ethics committee to investigate ethics complaints against board members and staff. According to the administrative code in force prior to July 2015, this committee was to include two board members. Further, the administrative code indicated that certain district staff and the district’s counsel were to be members of the committee but was silent as to whether they would be voting members. However, according to the human resources director, district staff only provided information to the ethics committee and, according to our review of the district’s board minutes, these staff were not voting members.
Until July 2015 the district’s administrative code stated that the ethics committee would meet twice yearly. However, this committee did not meet regularly. Specifically, according to the district’s director of human resources, she informed the then‑general manager in July 2011 that the ethics committee was listed in the administrative code as a standing committee that met every six months. She explained that the ethics committee met the following month, although it conducted no business during that meeting, and that it met again in February 2012. It scheduled another meeting for October 2012, but this meeting did not occur because not enough committee members attended. The ethics committee did not schedule another meeting until August 2013, 18 months after its February 2012 meeting. The director of human resources did not know why the ethics committee did not meet regularly during this time but commented that the board had not established the practice of ensuring the committee met every six months.
When the committee finally did meet to conduct business in August 2013, the meeting generated controversy. First, the chair of the ethics committee chose to conduct the meeting in open session, even though the posted agenda indicated that this meeting was to be in closed session. By conducting an open meeting without correctly noting that in the advance agenda, the committee violated the Ralph M. Brown Act (Brown Act). We discuss additional concerns with the board’s adherence to the Brown Act and make a related recommendation in Chapter 2. Further, at its meeting the ethics committee discussed a letter from the district attorney’s office regarding its investigation into the alleged release of confidential information by the then‑board president to a local newspaper. During this meeting, the committee authorized the general manager to seek an investigator to review the matter further. After the investigation was completed, the committee voted in September 2013 to refer the then‑board president’s alleged disclosure of confidential information to the Los Angeles County Grand Jury. As of September 2015, published reports of the Los Angeles County Grand Jury had not addressed this issue.
Shortly after the September 2013 meeting, the then‑board president—who had the authority to appoint members of committees—stated in a memorandum to the general manager that he was very concerned about the ethics committee and the manner in which it was using its role to investigate board members. He stated that he was reconfiguring the ethics committee immediately by placing himself on the committee as the chair, adding another board member, and replacing the two sitting board members. In October 2013, in another memorandum to the general manager, the then‑board president stated that there was dissension and turmoil caused by the ambiguity of the administrative code and the ethics committee, and this was having a pernicious and destructive impact on staff morale. At a subsequent October 2013 meeting, the board temporarily suspended the ethics committee until it could resolve the ambiguity in the district’s administrative code.
Although the board temporarily suspended the ethics committee in October 2013, it did not approve revisions to the district’s administrative code regarding the committee until July 2015. According to the district’s director of human resources, a former general manager postponed finalizing a new policy because he was concerned that board members would use a reinstated ethics committee to act on political disagreements. The board finally approved amendments to the administrative code in July 2015, establishing a new ethics committee; however, the committee’s structure remained fundamentally the same. Like its predecessor, it consists of two board members, and the ambiguity regarding staff membership—whether they are voting members or only provide information to the committee—remains. The director of human resources stated that the district plans to address this ambiguity in the administrative code and make staff nonvoting members of the committee, although she did not give a timeline. Because the board did not make significant structural changes to the new ethics committee, it will be subject to the same issues the former ethics committee faced.
The district recognizes the inherent conflicts of interest in its current ethics committee structure and is making changes. In August 2015 the general manager made a presentation to the board on this topic, and the board’s agenda included an informational document regarding its new ethics committee. The informational document acknowledged that the most significant difficulty in crafting an ethics enforcement policy is the inherent conflict of interest in asking board members and the general manager to investigate their peers, coworkers, friends, or bosses. To address this, the general manager discussed in the meeting the possibility of contracting with an independent law firm to conduct preliminary investigations. Also, the informational document suggested that the new ethics committee consider its role and alternative ways for it to function effectively. Finally, the general manager noted in the meeting that district staff recently met with the ethics officer for the Metropolitan Water District of Southern California (Metropolitan) and learned that Metropolitan participates in an independent, anonymous ethics hotline. Metropolitan’s ethics officer made a presentation to the board in September 2015. At a meeting in October 2015, the board adopted a plan to implement a hotline for reporting potential ethics violations and to contract with a law firm to conduct an independent review of those alleged violations.
Further, board members and staff have attended ethics training; however, the training by itself may not prevent ethical violations. As we will discuss in Chapter 2, in 2015 a former general manager and a former board member received fines from the FPPC of about $30,000 each for violating the Political Reform Act by, for example, receiving gifts in excess of established limits from a district contractor. Although a functioning independent ethics committee may not have prevented or detected these specific violations, the lack of such a body would prevent the district and the board from receiving and acting on complaints of similar potential violations.
The Board Failed to Demonstrate Any Commitment to the Strategic Planning Process in the Past
Until recently, the board demonstrated a lack of leadership by not ensuring the district had an approved strategic plan or made progress in achieving the plan’s goals and objectives. According to the Government Finance Officers Association (GFOA), strategic planning is a comprehensive and systematic management tool to help an organization assess its current environment, anticipate and respond appropriately to changes in that environment, envision the future, increase effectiveness, develop commitment to its mission, and achieve consensus on strategies and objectives for achieving that mission.3 The GFOA recommends that all governmental entities use some form of strategic planning to provide a long‑term perspective for service delivery and budgeting, thus establishing logical links between their authorized spending and broad organizational goals.
However, the board did not demonstrate a commitment to the strategic planning process and missed opportunities to identify whether the district was making progress in achieving its goals and objectives. Specifically, the board considered a five‑year strategic plan in October 2010 that included a mission statement, a vision of the district in 2015, goals, and a set of metrics to help assess and guide the district’s progress toward that vision. However, according to the director of human resources, the board never approved this strategic plan. Nevertheless, she explained that when she began working at the district in January 2011, the then‑general manager directed her to use this plan and implement its objectives. The director of human resources stated that staff initiated implementation of the strategic plan in the summer of 2011, but that continued execution of the plan was put on hiatus once the then‑general manager left the district in 2012. Not only did the district lack this critical organizational planning tool for several years, but the board failed to demonstrate its commitment to the strategic planning process by not approving the strategic plan or ensuring its appropriate implementation.
Despite these past shortcomings, the board recently adopted a new strategic plan that, if properly implemented, appears adequate. The current general manager stated that one of his first priorities after joining the district in November 2014 was to develop a new strategic plan for the district. The district engaged a consultant to coordinate and facilitate the development of a strategic plan in January 2015. The plan was developed with input from the district’s customers, board members, and a project team that included the current general manager as well as various district managers. The new plan covers three years and reflects the district’s overall mission and responsibilities. The board adopted this strategic plan in May 2015, and the district implemented it beginning in fiscal year 2015–16. District staff developed a performance measurement scorecard that provides a basis for the district’s periodic review of its progress toward its strategic planning objectives. According to the general manager, the district will review this scorecard on a quarterly basis. Additionally, he explained that the district will use the budgetary process to update the board and identify strategic plan goals for the upcoming year. In October 2015 district staff presented a status update to the board that indicated steady progress has been made under the major goals included in the strategic plan. To the extent the board ensures that the district follows through on its plans to monitor and publicly report on its progress in achieving the strategic plan’s goals and objectives, the board will help ensure the district is transparent in its actual achievement of the strategic plan.
The Board Has Failed to Take Critical Steps Necessary to Ensure the District’s Continued Financial Sustainability
The board has not established the essential policies necessary to safeguard the district’s long‑term financial viability. It has not ensured that the district engages in long‑term financial planning to protect its long‑term financial viability or that the district conducts a water rate study to ensure it collects sufficient revenue to cover its operating expenses. These deficiencies, at least in part, contributed to the district’s inability to meet the debt coverage ratio required by its debt agreements, and as a result the district’s credit rating was downgraded in 2013. These deficiencies may also have contributed to the downgrade in 2015. The downgrades may lead to an increase in the costs the district pays on its debt. In addition, the board’s inaction at a critical moment led to the avoidable loss of the district’s insurance coverage, resulting in a substantial increase in costs and reduction in coverage for the district’s subsequent liability insurance policies.
The District Has Not Developed a Long‑Term Financial Plan
Although the GFOA recommends that all government entities regularly engage in long‑term financial planning, the district failed to do so throughout our audit period. Long‑term financial planning could help the district develop strategies to overcome financial challenges and achieve long‑term sustainability. Instead, the district has forecast its revenue and expenditures on a year‑to‑year basis during its budget process. According to the current finance director, one of the reasons the district did not engage in long‑term financial planning was its lack of consistent leadership in the finance director and general manager positions, which we describe in Chapter 1.
In August 2015 Moody’s Investors Service (Moody’s) placed $48.4 million of the district’s debt credit rating on review for a possible downgrade, in part because of the district’s lack of future year financial projections.4 Moody’s subsequently downgraded the credit rating on this debt in October 2015 citing other reasons, as we discuss in Chapter 1. According to an article the GFOA published on building a financially resilient government, credit rating agencies point to long‑term financial planning as evidence of management’s dedication to the practices that maintain long‑term financial health. The credit rating downgrade—the second the district has received in the past three years—may cause the district to incur additional costs. We describe the credit downgrades and their financial consequences in the next section. Not surprisingly, the district’s recently adopted strategic plan includes an objective related to conducting long‑term financial planning. In October 2015 the board authorized the general manager to engage a consultant to prepare a 10‑year financial forecast. The general manager stated that his goal is for the district to have a completed long‑term financial plan by the end of 2016.
The district’s lack of a long‑term financial plan to guide its revenue estimation process contributed, at least in part, to the district overestimating its revenues during the last four fiscal years in our audit period. When the district does not develop reasonable revenue estimates during its budgeting process, it risks that its revenue will not cover its expenses. The current general manager, who has more than 20 years of experience in the water industry, explained that in his experience it is normal for actual revenues from water sales to vary somewhere between 10 percent and 15 percent of estimates. However, as shown in Table 3, the yearly variance in the district’s budgeted‑to‑actual revenues was greater than 20 percent in three of the five fiscal years within our audit period. The district did not have an individual in the finance director position when it prepared its budgets for fiscal years 2011–12 and 2012–13—two of the fiscal years in which its actual revenues were at least 20 percent less than its corresponding estimates—and instead engaged a consultant to perform its financial management duties. According to the current general manager, the district’s former management was too optimistic when developing revenue estimates. Additionally, he explained that the 21 percent variance in fiscal year 2014–15 was primarily the result of lower replenishment water sales than the district had estimated because an invasive shellfish contaminated the source of the district’s replenishment water.
| 2010–11 | 2011–12 | 2012–13 | 2013–14 | 2014–15 | |
|---|---|---|---|---|---|
| Budgeted revenues | $58.3 | $64.1 | $66.0 | $52.0 | $71.4 |
| Actual revenues | 60.9 | 50.8 | 45.1 | 46.3 | 56.2 |
| Difference (Shortfall) | 2.6 | (13.3) | (20.9) | (5.7) | (15.2) |
| Difference as a percentage of budgeted amount | 4% | 21% | 32% | 11% | 21% |
Sources: Central Basin Municipal Water District budget documents, comprehensive annual financial reports for fiscal years 2010–11 through 2013–14 and draft financial statements as of October 2015 for fiscal year 2014–15.
Despite large variances in the district’s past budgeted‑to‑actual revenues, it appeared to follow a reasonable methodology when preparing its budget for fiscal year 2015–16. Specifically, in a memorandum to the board, district staff reported that the district surveyed its customers to determine a baseline projection for potable water sales and then reduced the projection to reflect allocations from the district’s regional wholesaler. Staff also reported that they adjusted the projection to reflect the State’s recent mandated water conservation order due to the drought. The current general manager believes that this methodology will provide a reasonable estimate for the district’s revenue in fiscal year 2015–16. We believe the district’s approach was logical, especially since the drought has made it problematic to use historic trends to predict future water sales.
Although the district appears to now have a reasonable methodology for forecasting its revenue on a short‑term basis, it has not conducted a water rate study to determine the appropriateness of its water rate structure to ensure it meets its operating costs on a long‑term basis. As a wholesaler, one of the district’s main sources of revenue to cover its expenses is the surcharge it adds to the water it purchases from the regional wholesaler and sells to its customers. The district risks running deficits when declining water sales lead to lower surcharge revenues than it estimated and it does not reduce its expenses accordingly. Nonetheless, the district’s board has not increased the district’s surcharge since fiscal year 2011–12. According to the current general manager, the district intends to contract with an outside consultant to provide technical analysis of its water rate schedule to determine the appropriateness of its rates. He further stated that the district should not adjust its surcharge until it develops a long‑term financial plan to forecast its revenues and expenses; the water rate study it plans to conduct can then help it set its water rates to meet these revenue forecasts. The general manager plans to have the water rate study completed by spring 2017.
Largely because the district collected less revenue than it had budgeted, its expenses exceeded its revenues in three of the past five fiscal years. The district incurred deficits in each of the fiscal years 2011–12 through 2013–14, with the largest of nearly $5 million occurring in fiscal year 2012–13. These deficits were due to a combination of factors, including reduced water sales, increased expenses, and an early debt payment. For instance, the district made a $3.9 million payment in June 2013 to pay off part of its debt early in order to reduce its overall debt load. In addition, the district’s imported water revenue declined by more than $12 million between fiscal years 2010–11 and 2013–14. During the same time period, its general and administrative expenses increased by more than half a million dollars, in part because its legal costs were greater than $1.5 million every year from fiscal year 2010–11 through 2013–14. In particular, the district reported historically high general and administrative expenses in fiscal year 2012–13 due to litigation involving another water agency. Further, during fiscal year 2013–14, the district’s legal expenses accounted for almost $2.6 million, or 60 percent, of its general and administrative costs. The district has now settled most of its litigation issues, and its fiscal year 2014–15 legal expenses of $677,000 were $900,000 less than its legal expenses in any of the other years during our audit period.
Finally, until recently, the board did not ensure the district had an adequate reserve policy. An article the GFOA published about building a financially resilient government highlights that public entities must maintain a reserve policy as a component of long‑term financial planning. By not following a reserve policy in the past, the board did not demonstrate a commitment to financial prudence and careful stewardship of district assets, and the district risked potential adverse impacts from unanticipated expenditures. The current general manager stated he wrote the district’s current reserve policy soon after he began providing interim general manager services to the district in November 2014; the board approved the updated reserve policy in April 2015. According to the district’s current reserve policy, its reserves are funds it sets aside to achieve its objectives, respond to operational uncertainties, and address emergencies. The district’s updated policy establishes funding levels for several designated reserves, which are earmarked for purposes such as cash flow, legal expenses, and building replacement. The current general manager stated that in his experience, an adequate reserve policy is necessary for the financial health of the district and is an important tool to assist with the budgeting process.
According to the finance director, the district will reassess its reserve levels, which totaled nearly $15 million at the end of fiscal year 2014–15, on an ongoing basis during its budget process. Nevertheless, because the district averaged a $2.9 million deficit between fiscal years 2011–12 and 2013–14, and if these deficits continue, the district may not achieve its reserve goals.
The District Could Incur Additional Costs on Its Debt Due to Credit Rating Downgrades in 2013 and 2015
The district may incur an increase in its debt costs due to downgrades by Moody’s to its credit rating. In August 2013 and again in October 2015, Moody’s downgraded the credit rating on the district’s debt. As a result of these downgrades, Moody’s current rating indicates the district’s debt is upper‑medium grade and subject to low credit risk. Nevertheless, in 2014, a former general manager stated he estimated that the district had already incurred costs and would incur additional costs due to the August 2013 credit rating downgrade. In addition, the current general manager stated that due to the October 2015 downgrade, the district will likely incur additional costs when it restructures its outstanding debt.
Moody’s stated that it downgraded the district’s credit rating on $53 million of its debt in August 2013 in part to reflect the precipitous decline in the district’s debt coverage ratio in fiscal year 2012. Essentially a calculation of the district’s net revenues divided by its net debt‑service costs, the debt coverage ratio serves as a benchmark to measure the district’s ability to produce enough cash to cover its debt payments. When the district issued debt in the past to fund its capital projects, such as its recycled water distribution system, it entered into debt agreements with financial institutions that required it to maintain a minimum debt coverage ratio of 1.15. As shown in Table 4, the district’s debt ratio coverage dropped below the 1.15 ratio required by its debt agreements twice within the past five fiscal years, falling as low as 0.20 in fiscal year 2012–13 but improving since then. According to the district’s comprehensive annual financial report for the fiscal year ending June 30, 2013, this decrease occurred in part because the district faced sustained high legal costs and in part because of a decline in water revenues in fiscal year 2012–13. Moody’s also stated that the other reason for its 2013 downgrade of the credit rating on the district’s debt was the litigation surrounding one of its primary customers. Moody’s indicated that it was concerned about the district’s ability to restore debt‑service coverage and cash reserves to their historic levels.
| Required debt coverage ratio* | 2010–11 | 2011–12 | 2012–13 | 2013–14 | 2014–15 |
|---|---|---|---|---|---|
| 1.91 | 0.64 | 0.20 | 1.33 | 1.75 |
Sources: Central Basin Municipal Water District’s (district) comprehensive annual financial reports for fiscal years 2010–11 through 2013–14 and the California State Auditor’s analysis of information in the district’s draft financial statements as of October 2015 for fiscal year 2014–15.
* The required debt coverage ratio is set by the district’s debt agreements.
After Moody’s downgraded its rating of the district’s debt in August 2013, the then‑general manager prepared a memorandum to the board in April 2014 in which he estimated that the downgrade would cause the district’s costs related to one of its credit agreements to increase by a two‑year total of $65,000 from fiscal year 2013–14 through fiscal year 2014–15. The memorandum also stated that because of the downgrade, the district could face an increase in total interest costs when it issues new debt to restructure its outstanding debt. Specifically, the former general manager estimated that the credit downgrade could result in additional interest costs of between $100,000 and $500,000 over the life of the district’s restructured debt. The district’s current finance director, who was not a district employee at the time, explained that he does not have information related either to the decrease in the debt ratio coverage in fiscal years 2011–12 and 2012–13 or to the costs resulting from the credit rating downgrade. The current general manager explained that he would like to restructure the district’s debt. The district’s financial advisor has recommended the district wait until the conclusion of our audit before proceeding with its plans for debt restructuring.
Additionally, Moody’s stated that it downgraded the district’s credit rating on its debt again in October 2015 because it believed that debt service coverage levels will likely be lower than previously anticipated, given declining operating revenues caused largely by the conservation efforts associated with prolonged drought conditions. The current general manager stated that, as a result of this downgrade, the district will likely incur additional borrowing costs when it issues new debt to restructure its outstanding debt, although it is too early to determine what the actual effect will be. The district’s finance director believes this downgrade will not affect the district’s current debt costs because the district’s debt service coverage remains above the target set by the district’s bond agreements.
The district may have struggled with its debt coverage ratio because the board has not ensured the district has a formal debt management policy. In 2011, 2012, and 2013, two different external auditors recommended that the district implement a formal debt management policy. According to the GFOA, a government’s adherence to such a policy signals to rating agencies that it is well managed and therefore is likely to meet its debt obligations in a timely manner. The GFOA recommends the policy should include, among other things, debt structuring practices and the potential credit rating impacts of weak debt coverage ratios. Although two district managers wrote memoranda to the board during our audit period that indicate their awareness of the district’s debt coverage ratio requirements, the current general manager confirmed that the district has never implemented a formal debt management policy. The current finance director stated he is uncertain why the board did not address the external auditors’ past findings but that he is aware of the GFOA’s recommendation. He explained that his goal is for the district to maintain a debt coverage ratio of over 1.50. However, the district’s lack of a formal debt management policy may put it at risk of making financial decisions that could impair its ability to meet its required debt coverage ratio of 1.15, let alone its higher goal for this ratio.
The Board’s Inaction Resulted in the District’s Loss of Insurance Coverage and Subsequent Higher Insurance Costs
The district’s costs for its liability insurance increased significantly in 2014 and 2015 when the board failed to take action to preserve its insurance policies. Because an agency such as the district can be exposed to significant liability, we believe it is a good business practice for it to maintain both general and employment practices liability insurance. Until May 2014 the district procured its insurance through the Association of California Water Agencies Joint Powers Insurance Authority (Insurance Authority), a public entity that is a partnership of water agencies that provides risk‑sharing pools to meet its members’ needs for property, liability, workers’ compensation, and employee benefits insurance coverage. However, in March 2014 the Insurance Authority notified the district of its plans to recommend to its executive committee that it cancel the district’s participation in the insurance program, citing its concerns with the magnitude and frequency of employment practices claims against the district. The Insurance Authority specifically stated that its greatest concern was that many of these claims stemmed from the board’s actions. In that same month, the Insurance Authority’s executive committee voted to recommend to its board of directors the cancellation of the district’s participation in insurance programs for liability, property, and workers’ compensation—a recommendation the Insurance Authority’s board of directors approved in May 2014.
However, the board failed to act on an opportunity to negotiate its coverage with the Insurance Authority before the district’s insurance was canceled. In April 2014 the Insurance Authority offered the district the opportunity to apply to continue the district’s participation in its liability and property insurance programs so long as the district agreed to certain conditions. Specifically, these conditions included the district accepting a six‑month suspension of its employment practices liability coverage, withdrawing from the workers’ compensation insurance program, assuming responsibility for certain costs resulting from a number of lawsuits, and securing a four‑fifths vote by the district’s board before it could terminate a general manager. Had the district agreed to these conditions, based on its assessment, it would have had to temporarily obtain workers’ compensation and employment practices liability insurance from another insurance provider. However, the district then would have had the opportunity to apply to have its insurance coverage reinstated by the Insurance Authority.
During March and April 2014 district staff informed the board on several occasions of the causes and consequences of the potential loss of the district’s insurance coverage, as well as proposed solutions. At a board meeting in late April 2014, the board postponed its decision on its response to the Insurance Authority’s proposal. Instead, it stated that it would consider the district’s insurance coverage at a special meeting that was scheduled just days before the Insurance Authority’s May 5, 2014, meeting when it was to consider the district’s response to its proposal. However, the special meeting was canceled because not enough board members attended. As a result of the board’s inaction, it failed to reach an agreement on the Insurance Authority’s proposed conditions or to submit a counterproposal before the meeting. Consequently, the Insurance Authority’s board of directors voted in May 2014 to cancel the district’s insurance coverage effective in June 2014. Before its cancellation became effective, however, the district withdrew from the Insurance Authority’s coverage in order to obtain coverage from alternate carriers in May 2014.
The district subsequently obtained new insurance; nonetheless, the board’s poor management practices caused the district to lose a part of that coverage. As previously mentioned, the Insurance Authority proposed as one of its conditions that the board require a four‑fifths vote to terminate its general manager. However, the board did not agree to this condition before the Insurance Authority canceled its coverage. After the district had obtained new insurance coverage from private insurance companies, the district’s insurance broker warned the district in September 2014 that any change to senior staff would create a level of uncertainty in the insurance markets that would affect the pricing for the district’s employment practices liability insurance. Despite this warning, the board terminated the district’s then‑general manager the next month in October 2014. In response, he filed a legal claim in February 2015 for more than $8.2 million against the district and three board members for wrongful and illegal termination. At that time, the insurance company that provided the district with its employment practices liability coverage notified the district that it would not renew the district’s policy when it expired in May 2015, citing its annual reevaluation of risks in light of changing conditions in the insurance market. As a result of the board’s poor decision making, the district is currently paying substantially more for less general liability and employment practices liability insurance coverage than it had before, as noted in Table 5.
If the board fails to maintain the district’s current insurance coverage, it will place the district at risk of becoming uninsurable. According to correspondence from the district’s insurance broker in May 2015, marketing of its employment practices liability insurance coverage has been quite challenging. In fact, the insurance broker notified the district that it had approached numerous companies to obtain quotes for the district’s coverage, but only two responded while all the others declined. In other words, the coverage the district obtained in June 2015 was the less expensive of the only two quotes it received, in part due to the district’s history of litigation.
| Coverage period | October 1, 2013, through May 15, 2014* | May 15, 2014, through May 15, 2015 | May 15, 2015, through May 15, 2016 | ||
|---|---|---|---|---|---|
| General liability coverage | $2 million per occurrence Carrier: Association of California Water Agencies Joint Powers Insurance Authority (Insurance Authority) Deductible: $10,000 |
$1 million per occurrence Carrier: Allied World Assurance Company |
Deductible: $1,000 |
$1 million per occurrence Carrier: Allied World Assurance Company |
Deductible: $10,000 |
| Premium: $49,950 | Premium: $49,096 | ||||
| Coverage period | May 15, 2014, through June 15, 2015 | June 15, 2015, through June 15, 2016 | |||
| Employment practices liability coverage | $2 million per claim Carrier: ACE Municipal Advantage |
Self‑Insured Retention:† $100,000 |
$1 million per claim Carrier: Kinsale Insurance Company |
Deductible: $250,000 | |
| Premium: $69,826‡ |
Premium: $150,000 | ||||
Sources: Central Basin Municipal Water District (district) insurance policies and its comprehensive annual financial reports for fiscal years 2010–11 through 2013–14.
* The district maintained insurance through the Insurance Authority from the beginning of our audit period in July 2010 through May 2014.
† The district’s former employment practices liability insurance had a self‑insured retention rather than a deductible. The insurance carrier’s liability only applies to the part of damages and claim expenses that are in excess of the retention.
‡ The district made an additional $6,000 payment for a one‑month extension to this insurance policy, which is not included in the amount above.
§ The $70,420 was the cost to the district of the policy through September 2014. However, the Insurance Authority voted to cancel the policy effective in June 2014, but the district withdrew from coverage earlier in May 2014.
Further, according to the current general manager, the district losing its insurance would expose it to substantial liability and severe operational impacts. For example, between 2013 and 2015, the district’s insurers paid out about $1 million in claims against the district, amounts the district would have had to pay on its own in the absence of any insurance coverage. As of September 2015 the district had three employment practices lawsuits pending against it, including the more than $8.2 million lawsuit from the former general manager, which demonstrates the magnitude of the financial risk the district could face in the absence of adequate insurance coverage.
A New Method of Governance Would Improve the District’s Leadership
As described in this chapter, the board has failed to lead the district in a manner that encourages its efficient operation and effective management. Further, as we will show in Chapters 2 and 3, the board has violated its own policies related to contracting and hiring, and it also violated state open meeting law when it inappropriately approved the establishment of a legal trust fund in 2010. The board’s poor decisions over the past five years have eroded the public’s trust in the district and cost the district many thousands of dollars in misspent funds.
As previously discussed, the district and board recently made certain changes that have improved—or have the potential to improve—the management of the district. Most significantly, in the past year, the board hired a general manager with significant experience managing another water district and a finance director with experience in local government. Also, in July 2015 the board approved various changes to the district’s administrative code that, if followed, will help the district to address some of the issues we describe in Chapter 1, Chapter 2, and Chapter 3. Finally, since October 2014 the district has generally held monthly meetings for its customers to update them on the district’s activities and other issues of interest. Such meetings provide an opportunity for the district to report to and receive feedback from its customers.
Although these are positive steps, we remain skeptical of the board’s ability to consistently ensure the district’s stability and to provide it with effective, ongoing leadership. For instance, days after an October 2014 report by the County of Los Angeles Department of Public Works (Public Works) noted the improved stability of the district’s operations and senior management team, the board voted to terminate the employment of the individual serving as general manager at that time. At this time, we have little assurance that the board will not make similar decisions in the future that could undo the positive effects of the recent changes.
Overall, Public Works’ report was critical of the district, and it included an exploration of the steps necessary to dissolve it. However, the report stopped short of recommending such an extreme action. Public Works noted that the Local Agency Formation Commission for the County of Los Angeles (LAFCO) controls the process for dissolving the district. Under state law, a petition for dissolution of the district could be filed by a resolution of the legislative body of an affected agency such as a city, county, or the district itself. A petition may also be filed by 10 percent of the voters in the district, or LAFCO itself may initiate a proposal. State law then requires LAFCO to hold a public hearing on the proposal and inform the affected entities, including providing written notice of the hearing to landowners and registered voters. Further, LAFCO may terminate the proposed dissolution or place the matter up for a vote by the voters in the district, depending on whether protests are received to the proposal under various specified conditions.
If the district were dissolved, another entity would need to take over its responsibilities. According to state law, the choice of a successor to the district would be based on the existing jurisdiction within the district—such as the county or an individual city—that has the greatest assessed value of taxable property, or the terms and conditions of the petition for dissolution could name the entities to take responsibility for the district’s duties. Public Works’ report also noted that a reorganization of the district—for example, breaking it into smaller pieces—is also under the jurisdiction of LAFCO and would be subject to steps similar to those required to dissolve it. The report did not indicate whether Los Angeles County would be willing or able to take on the district’s work itself, nor did it recommend another entity to assume those responsibilities. Instead, the report recommended this audit.
Given the concerns we raise in this report, a dissolution or restructuring may become necessary in the future. Should the board not succeed in maintaining a stable leadership team, should the district experience additional lawsuits, or should it lose its insurance coverage again, it will risk not being able to operate effectively as an independent entity. However, because of the district’s recent progress, a complete dissolution may be premature at this time.
A less extreme option to address the lack of leadership of the district would be to change its governance structure. Currently, the five divisions within the district elect the board members by popular vote, but electing new board members has proven to be ineffective at improving the board’s leadership. For example, in 2012 two board members were defeated and replaced with two new individuals, yet some of the same problems we discuss in this report continued well beyond 2012. In fact, the financing of board members’ political campaigns may also have contributed to some of the missteps we describe in this report, as their campaigns receive donations from entities doing business with the district.
To address the problems we found, we believe that board members need to be answerable to those who select them. Although the voters in the district elect the board members, the district’s direct customers are not members of the public; rather, they are the cities, other water districts, mutual water companies, investor‑owned utilities, and private companies to whom the district sells imported and recycled water. Because these entities do not select the board members, the board members are only indirectly accountable to those they actually serve. As a result, the board may face few or no repercussions if it chooses to ignore the input of the district’s customers. Further, the board’s responsibilities are narrow in scope. Specifically, the district’s role is to purchase water from a limited number of sources and resell it to entities who in turn sell it directly to the public. Such a role does not require broad policy making, but instead requires significant input from its customers regarding water purchases and sales. The district and its residents would be better served if its direct customers were able to select its policymakers.
Consequently, we believe an option for improving the district’s governance would involve a board appointed by its customers, a structure for which precedent exists. For example, Metropolitan, which delivers water to numerous member public agencies including the district, has a board composed of representatives from its member agencies. The San Diego County Water Authority also has a board appointed by its member agencies. If the Legislature chooses to act on our recommendation, it could preserve the district as an independent entity, allowing the district to continue to provide both imported and recycled water without confusion or disruption. However, the Legislature could modify the district’s governance structure to adopt an appointed board, thus improving the board’s accountability to the entities the district serves. Further, because the local entities the district serves would appoint the board members from within their communities, the board would continue to represent the interests of the residents of the district.
The district’s current general manager expressed reservations about an appointed board. He acknowledged that an appointed structure is possible but stated that such a move may simply replace one set of problems with another. For example, he said that state law does not provide for private water companies or mutual water companies having a seat on the board. Instead, the underlying city is represented, which would create a disconnect between service and rate setting and affect 25 percent of the district’s service area. Further, the general manager stated that the district’s electors are not its direct customers; however, they are all rate payers through the district’s standby charge. Also, he stated that the district serves residents through 47 water retailers and one water wholesaler. All of the district’s customers benefit from district activities, including its Metropolitan representation and its efforts regarding water conservation, water recycling, water resources planning, and water education. Further he stated that rate setting by more than 40 agencies—which is the model Metropolitan follows—that benefit in different ways from their associations with the district would be difficult and divisive. The electorate provides a balance for the various water entities the district serves and helps to ensure that they do not unduly influence the board. He said that, depending on how the district’s customers were to select their appointed representatives, larger or wealthier water districts could attempt to establish policies that disadvantage smaller or less wealthy districts. Finally, he noted that the district has been in existence for more than 60 years and the structure has worked fine for most of that period. In the opinion of the current general manager, the problems in the last five years are a result of actions by individual board members and not a failure of the institutional structure. Nevertheless, as we previously discussed, the district’s board is not directly accountable to those the district serves, and the decisions it needs to make are narrowly defined according to the district’s mission. Given the significant problems we outline in this report and the lack of leadership displayed by the board, in our judgment it is time to consider an alternate governance structure to improve the accountability of the board to its customers and ensure the district continues to focus on its responsibilities.
Recommendations
Legislature
District
To ensure the stability of the district’s operations, by June 2016 the district’s board should establish a formal policy for hiring for the general manager position. Because the current general manager is on a contract set to expire in May 2017, the board should initiate the hiring process for a new general manager or begin the process of renegotiating the contract with the current general manager in the fall of 2016.
To evaluate its progress toward its goals and objectives, the district should use its recently adopted strategic plan and issue an annual report that describes the steps it has taken toward achieving the goals and objectives in the strategic plan.
To ensure its long‑term financial sustainability, the board should complete a long‑term financial plan no later than December 2016.
To ensure its water rate structure is appropriate to provide the revenue necessary to cover its legitimate costs, the district should complete its planned water rate study no later than the spring of 2017.
To strengthen its financial stability against present and future uncertainties, the district should follow its recently adopted reserve policy.
To ensure that it continues to take steps to improve its financial condition and avoids additional costs due to downgrades of its debt credit ratings, the district should immediately create a formal debt management policy. This policy should clearly define its credit objectives and provide guidelines for suitable debt agreements. This policy should also require the district to periodically monitor its specific financial ratios, such as its debt coverage ratio, that are relevant to its credit rating.
To help it maintain its current insurance coverage and better position it to negotiate for more cost‑effective and appropriate coverage in the future, the board should immediately adopt a policy requiring a four‑fifths majority to terminate the district’s general manager. Further, the board should review the district’s insurance coverage annually and renegotiate costs and coverage amounts as necessary, particularly as the district resolves outstanding legal claims against it.
Chapter 2
THE CENTRAL BASIN MUNICIPAL WATER DISTRICT HAS ESTABLISHED INADEQUATE POLICIES RELATED TO CONTRACTING AND EXPENDITURES AND HAS CIRCUMVENTED OTHER POLICIES
Chapter Summary
The Central Basin Municipal Water District (district) has not always demonstrated good stewardship of the public funds entrusted to it. Its board of directors (board) violated state law when it set up a legal trust fund (trust fund) in 2010 that it did not disclose to the public. Further, the board’s inadequate oversight of the millions of dollars of expenditures its outside legal counsel subsequently made from the trust fund may have led to payments for services unrelated to the fund’s purposes. In addition, the district consistently engaged in questionable contracting practices during our audit period. Specifically, it improperly avoided competitive bidding when selecting vendors in more than half the contracts we reviewed, and it inappropriately used amendments to extend and expand other contracts. Its inadequate contract management may also have led it to pay for unnecessary or unperformed services. Finally, some of the district’s expenditures very likely could be viewed as gifts of public funds.
The Board Established an Improper Legal Trust Fund and Did Not Disclose Its Actions to the Public
In June 2010, the board improperly approved the establishment of a trust fund for which it authorized the use of an unspecified amount of money, ultimately totaling millions of dollars, without adequate disclosure to the public. Because the board took this action in a closed session, we believe it violated state open meeting law. Further, the board allowed its outside legal counsel to make expenditures from the trust fund with no board oversight; thus, it has no assurance that its outside legal counsel used the trust fund only for purposes that aligned with the fund’s original intent.
According to a board member at the time, the board voted in a closed‑session meeting on June 28, 2010, to approve the establishment of the trust fund whose proceeds would be used to develop a programmatic environmental impact report (PEIR) to support a groundwater storage program. The money in this trust fund was to be held by outside legal counsel retained by the district at that time. According to the former board member, the board also authorized its then‑general manager and the outside legal counsel to use whatever financial resources they deemed necessary to develop the PEIR. However, the published agenda for this meeting indicated that the purpose of the closed session was to discuss an issue under the pending litigation exception.
The California Constitution provides that the constituents of public agencies have the right of access to information concerning those entities’ conduct, and therefore the entities’ meetings and writings must be open to public scrutiny. To ensure that public entities, in this case the district’s board, meet this goal, the Ralph M. Brown Act (Brown Act) requires them to hold open and public meetings unless a specific closed‑session exception applies. The board’s meeting minutes from June 28, 2010, indicate that the board believed it did not have to meet in open session under the Brown Act to discuss the establishment of the trust fund because the Brown Act makes an exception for pending litigation. This exception authorizes legislative bodies to discuss pending litigation, including anticipated litigation, in closed session with legal counsel if public deliberation on the matter would prejudice the legislative body’s litigation position. However, the pending litigation exception permits public entities to receive legal advice and make litigation decisions only; the Brown Act does not allow them to use the exception as a subterfuge to reach nonlitigation‑oriented policy decisions.
Although the board had previously been involved in a legal dispute regarding the storage of groundwater, we did not observe evidence that suggested such litigation could reasonably be anticipated when the board took this action. An investigation performed by a law firm subsequent to the establishment of the trust fund stated that, while the board’s decision to create a groundwater storage plan was within the district’s legal authority at the time, if this action were to be reviewed by a governmental authority, that authority would conclude that this action should have been taken in open session.
We also believe that the pending litigation exception did not apply in this case and that the board should have held the vote to establish the trust fund in open session. Although the board’s official minutes from the June 2010 meeting state that in closed session it authorized its then‑general manager to provide resources and enter into an agreement as necessary for ongoing litigation, the law firm’s investigation found reason to believe the board used the discussion and vote to finance many nonlitigation expenses, avoid criticism, and create a PEIR. Although the investigation concluded that the board relied on its outside legal counsel’s advice when it decided that it was permitted to discuss and cast its vote in closed session, we believe it was the board’s responsibility to be intimately familiar with the laws governing its operations, including the Brown Act, and that it should have questioned its outside legal counsel’s advice on this matter.
Further, the district did not disclose to the public the $2.75 million in transfers it made to the trust fund. It omitted the first $2 million in transfers from its public expenditure reports, and it reported the final transfer of $750,000 as a generic “legal services” expense. These omissions deprived the district’s constituents of their constitutional right of access to information concerning the district’s conduct.
Once the board approved the establishment of the trust fund, the district violated another state law that requires the general manager to select competent environmental professionals when it instead allowed the district’s outside legal counsel to make this selection and contract with vendors to provide various services, including creating the PEIR. In fact, as reported in the law firm’s investigation, the district’s outside legal counsel selected the vendors, drafted contracts, and processed payments from the fund. According to a board member who approved the establishment of the trust fund, he did not have specific knowledge of how the outside legal counsel spent the resources of the trust fund because those expenditures did not come before the board for its approval. This acknowledgment indicates that the board did not ensure district staff or outside legal counsel provided it with the information necessary for it to fulfill certain of its duties, such as safeguarding the assets of the district.
In addition, because the board did not approve the expenditures the district’s outside legal counsel made from the fund, the board could not ensure the district’s outside legal counsel entered into only contracts related to the fund’s purpose. As indicated in the law firm’s investigation, the outside legal counsel tracked the expenditures outside of the district’s ordinary course of business. Because of this lack of oversight, the district’s outside legal counsel may not have spent all the money in the trust fund on the purpose for which it was established. As shown in Table 6, the outside legal counsel paid a total of roughly $2.3 million from the trust fund to the engineering services firm that was primarily responsible for creating the PEIR. However, according to the contracts or other available documentation, it also paid more than $400,000 to seven other consultants for services, summarized in Table 6.
| Contractor | Total Amount Paid | Type of Firm | Contracted Services |
|---|---|---|---|
| HDR Engineering, Inc. | $2,298,750 | Engineering services | To create a programmatic environmental impact report (PEIR) and to provide water resources consulting services. |
| Mark Fabiani LLC and CSL Strategies LLC | 270,000 | Strategic communications | To provide advice, counsel, and litigation support regarding the representation of the district in various litigation and other related matters, including both ongoing and potential or anticipated litigation. |
| Matrix New World Engineering, Inc. | 38,725 | Engineering services | To conduct a peer review of the PEIR. |
| Horvitz & Levy LLP | 33,185 | Law | To conduct all necessary legal research and prepare and file in the California Supreme Court a letter asking it to depublish the Court of Appeal’s opinion in a lawsuit to which the district was not a party. |
| Irell & Manella LLP | 25,000 | Law | To provide legal consulting services in connection with appellate proceedings in a lawsuit between the local replenishment district and local cities. |
| The Calderon Group | 20,000 | Consultant | To provide advice and consultation services related to ongoing litigation, as well as to provide advice and/or settlement negotiation consultation concerning the storage and extraction of groundwater resources. |
| Fitzgerald Public Finance | 15,625 | Financial services | To provide advice with regard to financial matters as needed related to ongoing litigation, as well as to evaluate financial implications and resources of the storage and extraction of groundwater for anticipated litigation. |
| Iverson, Yoakum, Papiano & Hatch | 553 | Law | To provide advice with regard to legal matters related to ongoing litigation, as well as to evaluate an opinion on other legal issues involving litigation. |
Sources: Accounting records, contracts, and other available documentation provided by the Central Basin Municipal Water District (district).
* The remaining balance of approximately $48,000 plus interest left in the trust fund after the final disbursement by the district’s outside legal counsel was transferred back to the district by the end of January 2013.
The district appears to have received very little value from its trust fund expenditures. In August 2012, after the district’s outside legal counsel had spent most of the trust fund, the governor approved statewide legislation that effectively denied the district the authority to manage, control, or administer the importation of water for the storage of groundwater. Nevertheless, the engineering services firm had created a draft PEIR by this time. As noted by the law firm’s investigation, the district categorized this cost as a five‑year capital asset rather than as a litigation expense. The district’s decision to categorize the cost of the PEIR as an asset instead of as a litigation expense further demonstrates that the pending litigation exception described earlier did not apply and that the board violated the Brown Act when it established the fund.
Finally, as a result of the board establishing the trust fund in closed session and not disclosing its actions to the public, the district incurred significant investigative and legal costs. Specifically, according to the district’s records, it has spent more than $500,000 on a law firm’s investigation and on legal costs related to a whistleblower lawsuit filed by a current board member. In particular, in 2013 a current board member who was not involved in establishing the fund filed a lawsuit under the California False Claims Act (CFCA) against certain former district contractors and employees pertaining to the establishment and use of the trust fund.5 The purpose of the lawsuit is to recover the money transferred to the fund and to recover certain damages and expenses related to the district officials’ actions. As of November 2015 the outcome of this lawsuit was still pending.
The District Did Not Consistently Use Competitive Bidding and May Not Have Received the Best Value for Its Expenditures
The district did not consistently adhere to robust contracting policies and practices between fiscal years 2010–11 and 2014–15. Specifically, we found that the district did not adequately adhere to its own policies when it did not competitively bid 11 of the 20 contracts we selected for review. Further, it used amendments to circumvent the competitive bidding process in four out of five additional contracts that we reviewed. When the district does not make full use of its competitive bidding process, it cannot ensure that it receives the best value for the public funds it awards and it increases the risk that its board members or staff will develop conflicts of interest with vendors.
The District Inappropriately Avoided Competitively Bidding Its Contracts
Central Basin Municipal Water District Procurement Authorization Requirements for Contracts for Professional Services
- Services up to $5,000 require a single price quote and purchase order approved by the department manager and the general manager.
- Services over $5,000 and up to $25,000 require an informal solicitation with at least three competitive proposals or quotes, a justification for the contract award, and a contract executed by both the general manager and the Central Basin Municipal Water District’s (district) general counsel.
- Services over $25,000 require a formal solicitation process and board approval prior to execution of the contract by the general manager and district general counsel.
Source: The district’s administrative code.
Competitive bidding is a vital component of the district’s contracting practices. The district states in its procurement policy that it is committed to obtaining the most reasonable value for the goods and services it purchases. Further, the district states that it will procure the services of consultants and contractors through a competitive bidding process. The text box describes the district’s competitive bidding requirements for services at different purchasing levels. When the district purchases services without using competitive bidding by entering into a contract with a singular or sole‑source service provider, it skips key steps in its vendor selection process. These steps, such as soliciting bids and evaluating vendors, help the district to ensure it meets its commitment to obtain the most reasonable value for its purchases. Figure 6 illustrates the district’s contracting process for obtaining services valued at greater than $25,000 and the critical stages in this process that the district bypasses when it chooses to use sole‑source contracts.
Despite a policy to competitively bid its contracts, the district frequently purchased services through sole‑source contracts, often without providing sufficient justification for circumventing the competitive bidding process. Specifically, 13 of the 20 district contracts we reviewed were sole‑source. The district’s procurement policy suggests that the district’s justification for using a sole‑source contract when purchasing services demonstrates either that a vendor has a unique capability that meets the district’s needs or that it is an emergency. According to the district’s policy, the district should base the determination to award a sole‑source contract because of a unique need based on the vendor’s unique expertise, demonstrated competence, and qualifications. However, the district did not include adequate justifications for 11 of the 13 sole‑source contracts we reviewed.
Figure 6
Summary of Key Stages in the Central Basin Municipal Water District’s Procurement Process for Professional Services Contracts Greater Than $25,000
Sources: The district’s administrative code, procurement procedures, interviews with district staff, and the California State Auditor’s observations during its testing of the district’s contracts.
* The general manager can also be a project manager.
The district’s justifications for these 11 contracts did not contain all of the information its policy suggests its justifications should include. For example, in July 2012 a former general manager approved a sole‑source contract with the overall objective of providing professional assistance to the district’s public relations efforts and to support the district and board by creating the public perception that district staff are committed to the betterment of the community. The general manager at the time entered into this contract under his authority for an amount not to exceed $24,960. In his justification for the contract, he stated that communication with local agencies became strained two to three months earlier and a sole‑source contract was necessary because staff could not take the normal amount of time to solicit firms for this service. Similarly, in February 2013 a former public affairs manager justified a sole‑source contract not to exceed $9,000 for specialized media and public relations services by stating that the district was in a transitional period, had come under increased legislative and media scrutiny, and needed a crisis media expert immediately to assist with correcting misperceptions and misinformation. Neither of these justifications provided any description of the vendors’ unique expertise or demonstrated competence and qualifications, nor did they indicate an emergency. When the district does not adequately justify the reasons it enters into sole‑source contracts, it cannot demonstrate it received the best value for the services it procures and it leaves itself vulnerable to allegations of favoritism.
Other public entities have more restrictive requirements for sole‑source contracts than the district. For example, the San Diego County Water Authority’s policy allows for noncompetitively bid procurements only when a contract’s requirements are so critical or call for such specialized expertise that only one source is capable of providing the services. State law also limits the circumstances under which a state agency may procure goods and services without a competitive bidding process. For example, a state agency can use a sole‑source contract in an emergency, when immediate acquisition is necessary for the protection of the public health, welfare, or safety. Further, the State Contracting Manual requires a department that awards a sole‑source contract to submit detailed information explaining why it circumvented the competitive bidding process, including its reasons for restricting the purchase to one vendor, the events leading to the purchase, a description of the vendor’s uniqueness, the consequences of not purchasing from the vendor, market research to substantiate lack of competition, and an evaluation of other items it considered. By contrast, the policies the district had in effect since the beginning of our audit period suggested but did not require that it justify sole‑source contracts based on a vendor’s unique ability or based on emergency circumstances. When the district cannot clearly identify and justify its reasons for avoiding a competitive bidding process, it leaves itself vulnerable to allegations of favoritism. Moreover, it also cannot demonstrate that it is obtaining the best value for the services it purchases with public funds.
The District Inappropriately Used Amendments to Extend and Expand Contracts
The district’s inappropriate use of amendments to extend and expand contracts left it unable to demonstrate that it did not pay more than it should have for services. Although the district’s administrative code requires board approval of contract amendments that exceed the contract amounts the board originally approved, it does not offer guidance on the circumstances under which the district should amend an existing contract rather than use competitive bidding. According to the State Contracting Manual, a contract amendment that changes a contract’s original scope of services constitutes a noncompetitively bid contract award. It defines changes to quantity, pricing, and products as scope changes. Although we could not identify a similar district policy or process related to amendments that change a contract’s scope of work, the district’s current general manager stated that the district should reopen a contract to competitive bidding when the scope of work is so different that it constitutes a new project altogether. However, we noted instances in which the district appeared to circumvent the competitive bidding process by amending existing contracts to add new services. We also found an instance in which a former general manager failed to adhere to board instructions when amending a contract.
The district circumvented the competitive bidding process through contract amendments on several occasions during our audit period. In fact, we found that four out of five contracts with significant amendment histories that fell within our audit period contained amendments that the district could have opened for competitive bidding. For example, in October 2009 the district entered into a $920,000 contract with a nonprofit foundation to purchase and install 3,000 high‑efficiency toilets for residents of a city within the district’s service area. Four months later, however, the district amended the contract to include marketing and outreach services to the city’s residents to promote the program and educate the community about the city’s water conservation efforts, and increased the contract amount by $27,400. Because these services are a separate product from purchasing and installing toilets, the district could have competitively bid these services. In another example, the board failed to competitively bid strategic planning duties for the 2010 strategic plan we discussed in Chapter 1. Specifically, the district engaged the services of a human resources consultant to provide various human resources work in October 2008. However, in November 2009 the board approved changing this vendor’s contract to include providing services related to strategic planning for the district’s management team and board—a separate work product from the original scope of work. Ultimately, the board never approved the strategic plan or ensured its proper implementation. When the district chooses not to use competitive bidding to purchase additional goods or services and instead adds them to existing contracts through amendments, it risks paying for services that are not the best value for the district and creates the appearance of favoritism when other potential bidders are not given the opportunity to compete.
Because the district does not maintain and adhere to clear contract amendment policies, it risks spending millions of dollars on professional services of substandard value. Unaudited district records from the database it has used since 2012 indicate that the amendments it executed during the most recent three years of our audit period constituted a sizable portion of its contracts’ overall costs. Our review found that the district had 264 contracts that were active between July 2012 and July 2015. We calculate that during these three years, the district executed a total of 134 amendments to 65 of these contracts. These 134 amendments increased the total cost of the associated contracts by roughly $14 million, from more than $15 million to almost $30 million. When the district avoids seeking competitive bids on new work and instead amends existing contracts, it increases the risk that it is spending millions of dollars on services that may not provide the best value.
We also identified an instance in our review of 20 contracts that were active between July 2010 and June 2015 in which the district mishandled an amendment. In April 2012 the board voted to amend a $36,000 contract with a consultant who provided public affairs and public policy outreach services, increasing the contract’s value by $6,000, and extending its term by two months. Although the contract’s total value after the amendment should have been $42,000, the general manager at the time did not adhere to the board‑approved changes and instead amended the contract by increasing its value by $42,000, for a total contract value of $78,000. He also increased the contract’s term by 14 months rather than two months. According to district records, the district ultimately paid the vendor $30,000 during the amended term of the contract, or $24,000 more than the amount of the amendment authorized by the board. According to district records, staff noticed this discrepancy in an audit of the district’s contracts and in February 2013 asked the board to retroactively approve the additional payments. Although the board later approved the payments, the initial mistake was a violation of the district’s administrative code that cost the district more than the original contract amount.
The district can do more to ensure that it executes accurate amendments that its board has approved. For example, according to its administrative code, the San Diego County Water Authority requires its general manager to provide annual reports to the district’s board of directors on all the contracts and contract amendments greater than $10,000 made or awarded by the general manager. The San Diego County Water Authority’s administrative code states that the report must identify the original amount and term of each contract, its total number of amendments, its cumulative dollar value, and any extensions to its term. By requiring a similar report, the board could ensure that it has the opportunity to review the amendment history of contracts to identify errors in contract execution and to uncover instances in which the district could have used competitive bidding.
The District Repeatedly Circumvented Competitive Bidding in Its Contract With One Firm
The district spent several million dollars on a contract with one firm—Pacifica Services Incorporated (Pacifica)—that exemplifies the concerns related to competitive bidding that we have previously described. According to its marketing materials, Pacifica is a professional consulting firm that specializes in providing engineering, environmental, and related management services to various clients, including private‑sector entities and federal, state, and local public agencies. In October 2007 the district entered into a $600,000 contract with Pacifica to perform a variety of activities that included assisting the district with recycled water operations, providing technical assistance for the district’s southeast water reliability project, and managing the district’s move to a new headquarters. However, the district did not use its competitive bidding process when it awarded this contract to Pacifica. Further, it subsequently amended the contract numerous times, in some cases changing the original scope of work. The contract ended in 2013.
When we reviewed the contract files and board approvals for the district’s original contract with Pacifica, we could not find any requests for proposals, Pacifica’s proposal, or other competitive bidding process documents that would accompany a competitively bid contract. When we asked the district’s interim engineering and operations manager why the district did not get competitive bids for this contract, she stated that the district executed the contract before her employment. Other district staff we interviewed who were employed at the time of the contract’s execution also did not know why the contract was not competitively bid because they told us they were not directly involved with it. The district could not provide any evidence that the services procured from Pacifica were unique and that a sole‑source procurement was justified. Consequently, the district cannot demonstrate that it received the best value for the public funds it spent on the services in this contract.
The district ultimately amended its contract with Pacifica eight times, two of which we identified as opportunities to competitively bid as separate contracts. In October 2009 the district amended Pacifica’s contract, adding nearly $1.9 million to its value and 18 months to its contract term so that Pacifica could provide project management services during construction of the district’s southeast water reliability project. The district had not specifically included this project in the contract’s original scope of work. Further, in July 2011 the district executed another amendment for $278,000 for engineering design, project management, and construction management services for new projects not included in the contract’s original scope of work. In fact, at the time it executed this amendment, the district recorded in the board’s action calendar that the contract’s original scope of work was nearing completion, which suggests that the district could have competitively bid for these services. When we asked the district’s interim engineering and operations manager about these amendments, she stated that she was not a part of the district’s management when Pacifica contracted with the district. Because the services the district covered in these two amendments could have been competitively bid as new contracts, the district cannot ensure that it received the best value for the more than $2.1 million it spent on them.
Moreover, circumventing competitive bidding processes can lead to the district developing inappropriate relationships that influence how it recommends and approves its contract awards. Early in 2015 the Fair Political Practices Commission (FPPC) found that during the majority of the period of the district’s contract with Pacifica, the district’s former general manager accepted gifts from this contractor in excess of annual gift limits and failed to report to the public in a timely manner 31 gifts totaling approximately $3,500. These gifts included rounds of golf and a company holiday party. The FPPC further determined that the former general manager made, participated in, or attempted to use his official position to influence eight district decisions to award Pacifica more than $6 million in contracts. The FPPC also found that one of the district’s board members during this same time period committed similar violations by voting to approve these contract awards, accepting gifts from Pacifica in excess of gift limits, and failing to report 28 gifts totaling approximately $4,400. The FPPC fined the former general manager and former board member $30,000 and $31,500, respectively, for the violations.
The Pacifica contract and a subsequent legal settlement ultimately cost the district more than $5 million. By the time the district made its final payment to Pacifica in April 2013, district records indicate it had paid the firm nearly $4.2 million, or roughly $3.6 million more than the original contract amount. Further, in July 2013 the district sued Pacifica for fraud and misrepresentation. The district settled its dispute with Pacifica in June 2014 and agreed to pay an additional $875,000 to the firm. Because the district did not use its competitive bidding process when it awarded and amended its contract to Pacifica, it cannot know whether it received the best value for the services it purchased. Finally, neither the district nor the public can know to what degree the district’s decisions to enter into the contract and to add subsequent amendments were motivated by conflicts of interest rather than what was best for the district.
The District Has Poorly Managed Its Contracts and Did Not Always Follow Best Practices or Its Own Contracting Procedures
In addition to failing to use competitive bidding, the district often used procurement processes that did not follow best practices we identified from the State Contracting Manual, a global project management organization, and other water agencies. Further, it sometimes circumvented its own policies for managing its contracts. We noted that the district’s legal counsel did not always sign contracts when required to do so. When the district does not adequately manage its contracts, it increases the risk that it will pay for inadequate services, unnecessary services, or even services not rendered.
The District’s Management of Its Contracts Did Not Follow Best Practices
Although the district’s contracting processes should closely align with procurement and project management standards and best practices, they often have not. A global organization recognized for its development of standards for project management, the Project Management Institute publishes the Project Management Body of Knowledge (PMBOK), which provides guidelines for managing individual projects, including project procurements. According to PMBOK, an organization’s management of project procurement includes four processes: planning, conducting, administering, and closing procurements. However, we noted numerous instances where the district did not conduct its procurements according to the best practices that PMBOK describes for these processes.
For example, the district failed to include in many contracts’ scopes of work information that would allow it to effectively administer the contracts. The district’s procurement process calls for its project managers to develop a scope of work that clearly defines all expected tasks and deliverables for a proposed procurement; the scope of work should then form the basis for vendor solicitations and the contract. Similarly, PMBOK defines scope as the sum of the products, services, and results to be provided by a project. Although the district is not bound by the State Contracting Manual, the manual’s requirements further illustrate best practices in this area. According to the State Contracting Manual, a scope of work includes measurable results, timelines or progress reports, and an evaluation component. Nonetheless, we found that the scopes of work for 19 of the 20 contracts we reviewed did not include all of these elements.6 In fact, 15 of the 20 contracts did not contain any of these elements. Altogether, the 19 contracts constituted nearly $3.7 million the district awarded to vendors.
When the district does not provide clear and concise language in its scopes of work, it increases the risk that it will not procure services of sufficient or relevant value. For example, in May 2011 the district entered into a $36,000 contract with a consultant to provide public affairs and public policy outreach services. When the former general manager recommended to the board that it approve this contract, he stated that the district was looking to develop potential projects and agreements in the San Gabriel Valley area and that he believed this consultant provided the unique services for this endeavor. However, the scope of work in the contract the general manager executed did not contain any evaluation component; any timelines or required progress reports to inform the district of the consultant’s progress; or any specific results to measure the consultant’s performance, despite requiring a review after six months to determine whether to extend the contract term further. When we asked the district to provide us with any reviews or evaluations it performed that were related to this contract, it was unable to do so. After a subsequent amendment in June 2012, this contract ultimately cost the district $66,000. However, because the scope of work lacked any mechanisms that would enable the district to monitor and review the adequacy of the services the consultant provided, the district cannot demonstrate to its stakeholders that the costs it incurred for this contract provided any value.
In addition to the inadequate scopes of work in its contracts, the district could not always produce documentation demonstrating that it had verified vendors’ work products before approving their invoices for payment. As PMBOK indicates, project managers should monitor payments to vendors to ensure that they have met their contracts’ payment terms and that their compensation is linked to their progress, as defined in the contract. PMBOK emphasizes that one of the principal concerns when making payments to vendors is ensuring a close relationship between the payments and the work accomplished. The State Contracting Manual also notes that keeping an auditable paper trail of contract administration is a best practice, stating that departments are responsible for maintaining records in sufficient detail to allow anyone who reviews the documentation to understand how each procurement was requested, conducted, awarded, and administered. However, when we reviewed 30 invoices from the contracts that we had selected, we found 13 instances in which the district paid its vendors without sufficient evidence that they had provided the contracted services. For example, we identified nine invoices totaling about $125,000 that the district paid in advance for work the consultants in question had not yet performed. These consultants’ contracts each indicated that the district would pay them after they rendered the services. When the district disregards legally agreed‑upon payment processes and approves invoices for services yet to be completed, it risks paying for substandard or incomplete services.
When we asked the current general manager about the issues we identified with the district’s contract administration, he stated that when the district split with West Basin Municipal Water District (West Basin) in 2006, West Basin kept most of its previously shared technical staff and projects. He further explained that Central Basin has historically tended to focus on public relations projects and contracts because the former general manager was a journalist by trade. He stated that, as a result, many employees have not had the necessary training to manage contracts and therefore do not know how to properly do so. The current general manager explained that the district is planning a comprehensive training on contract management, based on the Project Management Institute’s curriculum. Nevertheless, when the district does not effectively administer its contracts, it increases the risk that it will pay for inadequate services or even services never rendered.
The District Circumvented Other Established Procedures Related to Contracting
The district did not always follow its procurement policies when executing contracts between fiscal years 2010–11 and 2014–15. According to its administrative code, the district requires that both the general manager and the district’s general counsel execute all procurements of professional services over $5,000. Further, the district’s administrative code requires the general manager to report all sole‑source contracts and contracts entered into under the general manager’s authority to the board’s finance committee, composed of two board members, on a quarterly basis. Nevertheless, we identified instances where the district violated each of these provisions.
Specifically, three of the 20 contracts we reviewed did not include the general counsel’s signature, even though it was required in each case. If the district’s general counsel does not review contract language, the district risks engaging in contracts or contract terms that could lead to overpayments or lawsuits. For example, we found that one of the three contracts that lacked the general counsel’s signature resulted in the district settling with the vendor who had filed a lawsuit. Specifically, according to an email from a former general manager, in one case a former interim chief operating officer and the then‑board president entered into a verbal agreement with a law firm for $20,000 for investigative and legal services. The subsequent written contract, executed in March 2013, did not include a contracted amount and was not executed by the general counsel. When the district refused to pay more than the verbally arranged amount, the firm took the district to court, and the district eventually settled with the firm for a payment of more than $23,000.
In addition, former district general managers did not always report certain contracts to the district’s finance committee. Specifically, former general managers did not correctly report seven of the 20 contracts we reviewed to the finance committee. For example, in August 2012 the then‑general manager approved a contract with a consultant for services related to client relations and government affairs for an amount not to exceed $24,960. Although the general manager entered into a sole‑source contract for this procurement and executed it under his authority, he approved a report to the finance committee in October 2012 that stated the district had not entered any contracts under his authority or entered any sole‑source contracts from July through September 2012.
When we asked the district’s contracts and procurement analyst (contracts analyst) why some contracts were not accurately reported to the finance committee during our review period, she stated that prior to July 2014 the former general managers were in charge of finalizing and submitting these reports. Based on our review of the reports, it appears the general managers did not always ensure that they were accurate. The contracts analyst explained that the district created a new report template and process, which it implemented in July 2014. Based on our review, we believe that if appropriately followed, this process, which now includes approval of the report by the finance director, should help ensure the accurate reporting of contracts to the finance committee in the future. Nevertheless, when district leaders enter into contracts without publicly reporting them, the district decreases transparency while increasing the opportunity for waste and fraud.
Allowable District Expenditures
- An expenditure must serve a public purpose that is within the scope of the district’s jurisdiction and specific purpose.
- For an expenditure made to a private party, the district must receive consideration.
Sources: Golden Gate Bridge and Highway District v. Dale W. Luehring (1970) 4 Cal.App.3d 204, 84 and Robert E. Winkelman v. City of Tiburon (1973) 32 Cal. App. 3d 834, 108.
The District Spent Funds on Purposes Unrelated to Its Mission That Likely Constitute Gifts of Public Funds
The California Constitution prohibits governmental agencies such as the district from making gifts of public funds. Rather, the district must use its public funds to carry out those purposes the Municipal Water District Law of 1911 authorizes. The district may not spend public funds for purposes that do not return benefits to the district that are reasonably related to the laws under which the district was established. Allowable district expenditures are defined in the text box. Expenditures that do not demonstrate a clear relationship to the district’s purpose, which is to provide an adequate supply of water within its service area, constitute a gift of public funds.
Nevertheless, the district’s board members have spent thousands of dollars of district funds on purposes unrelated to the district’s underlying authority. The district’s current administrative code allows each board member to spend up to $3,000 annually for outreach‑related purposes in their respective divisions. For example, the district may sponsor programs, conferences, and events on behalf of a particular board member’s own choosing. However, our review of the district’s records found that the purposes for which the board members directed the use of the funds did not always clearly support the district’s authorized activities. For instance, on behalf of various board members, the district donated funds to golf tournaments, a legislative member’s breakfast panel, religious organizations, local high school sports programs, local pageants, organizations that feed those in need, car shows, and other purposes unrelated to providing an adequate supply of water in the district. In addition to these board member‑directed expenditures, the district also spent more than $9,000 on holiday turkeys in fiscal year 2012–13 to provide to organizations in the community, a purpose that is also unrelated to the district’s mission. As a result, these expenditures very likely constitute gifts of public funds.
After we began our audit, the district updated its administrative code to clarify that the board members should use the $3,000 allocated to each of them annually for purposes that promote discussion and educational activities for regional water conservation, water public policy, and water‑use efficiency issues. However, we fail to see the value of providing any district funds to board members to spend at their discretion, particularly because the board’s role is the governance of the district, not its administration. Further underscoring our point, the district already has a public affairs department whose responsibility is to inform community stakeholders about the district’s programs and the water issues that impact the region.
The district’s current general manager agrees that the district should eliminate the board members’ outreach funds because they are difficult to administer and subject to potential abuse. For example, a neighboring water district, West Basin, also allocated outreach funds to its board members until early 2015, when its ethics committee recommended—based on an independent audit—that the district eliminate these funds. West Basin’s board approved the elimination of these funds after one of its board members accepted a plea bargain on charges of misuse of public funds in September 2014. Similar to West Basin, the district’s current general manager suggested to the board in April 2015 that it should eliminate the outreach funds; however, rather than eliminating the funds, the board members agreed to reduce them from $5,000—the amount each board member was authorized to receive during fiscal year 2014–15—to the current annual amount of $3,000.
The district has also spent an unreasonable amount of money on board member installation ceremonies that provided little or no benefit to the district. The current general manager stated that, in his experience, the practice in most of the Southern California region is for water agencies to swear board members into office at regular board meetings. In contrast, we found that the district has spent significant, and we believe unreasonable, amounts on its board member installation ceremonies. For instance, in January 2013 the district spent more than $6,500 on catering expenses and the equipment rental for an installation event for three board members. Further, the district’s records show that in January 2011 it spent more than $6,400 on catering expenses for an installation event for two board members. According to the district’s director of administration and board services, the district has budgeted as much as $10,000 per board member in the past when it has held these ceremonies off‑site, requiring the rental of a hall. Further, she stated that the district does not expressly limit the amounts it can spend on these ceremonies. The current general manager believes that board member installation ceremony expenses should be minimal and that a budget of $10,000 per board member is unreasonable. The district’s most recent installation ceremony—in December 2014 for two board members—cost less than $1,300. However, until it places reasonable and specified limits on these costs, the district risks spending unreasonable amounts on these ceremonies, which can undermine public confidence in its stewardship of the public’s funds.
Recommendations
To ensure it holds itself accountable to the public, the district should follow the law and operate in an open and transparent manner by, among other things, disclosing to the public the true nature and purpose of all of its expenditures. To ensure its board makes informed decisions on when it is proper to hold discussions and take votes in closed‑session meetings, the district should require its board members to attend training—as soon as possible and biennially thereafter—specifically focused on the Brown Act and its closed‑meeting requirements.
To make better use of the funds it spends on services, the district should amend its administrative code by June 2016 to limit its sole‑source contracts to emergency circumstances and circumstances in which only one vendor can meet the district’s needs. Further, before executing any sole‑source contracts, the district should require written justification demonstrating the reasons for not competitively bidding the services. The justification should include the background of the purchase, a description of the vendor’s uniqueness, an explanation of the consequences of not purchasing from the vendor, market research to substantiate a lack of competition, and an analysis of pricing and alternatives.
To ensure that it does not unnecessarily use amendments that limit competitive bidding for its contracts, the district should amend its administrative code by June 2016 to require that it rebid contracts if it significantly changes those contracts’ scopes of work, specifically the nature of the services or work products.
To ensure its contract amendments reflect the authorization of the board, the district should revise its administrative code to require the general manager to submit a quarterly report to the district’s board detailing all its contracts, contract amendments, and contract and amendment dollar amounts.
To ensure it receives the best value from its contracts, the district should do the following by June 2016:
- Adopt and implement a policy requiring that it include in all its contracts’ scopes of work specific, well‑defined deliverables, measurable results, timelines or progress reports, and evaluations of the contractors once they complete the work.
- Ensure project managers verify services were rendered before approving invoices for payment.
- Create processes for project managers to organize and retain contract files that include important documents such as vendor performance and deliverable verification and acceptance.
To ensure its employees are able to properly administer contracts, by September 2016 the district should follow through with its plan to require that staff responsible for project management attend training by a reputable trainer on contract management.
To minimize its risk when contracting with vendors, the district should adhere to its administrative code and execute all contracts only after approval by its general counsel. Further, the district should amend its administrative code to prohibit engaging in a verbal contract. Finally, the district should continue to report to its finance committee all sole‑source contracts and contracts entered under the general manager’s authority.
To ensure its expenditures do not constitute gifts of public funds, the district should do the following:
- Immediately eliminate its allocation of funds to individual board members for community outreach.
- Develop policies that specify limitations on the types of activities it will sponsor in the future to ensure that it funds only those organizations whose activities have a direct link to its authorized purposes. For example, it should eliminate its purchase of holiday turkeys.
- Revise its administrative code by June 2016 to include more specific guidance as to what constitutes a reasonable and necessary use of public funds. The guidance should establish restrictions on the amount spent for board member installation ceremonies. It should also include a process for the district to ensure that expenses are reasonable and necessary before it pays them.
Chapter 3
THE CENTRAL BASIN MUNICIPAL WATER DISTRICT DID NOT ALWAYS FOLLOW ESTABLISHED HIRING POLICIES AND NEEDS TO ENSURE CERTAIN BENEFITS AND EXPENDITURES ARE APPROPRIATE
Chapter Summary
The Central Basin Municipal Water District (district) did not always follow its policies for hiring employees. For example, it did not use a competitive process to hire certain former staff members, which led it to employ individuals who did not possess the necessary qualifications for their positions. In one instance, the district paid more than $22,000 for an employee to obtain a bachelor’s degree when the high‑level position for which he was hired required him to already have one. Further, the district’s board of directors (board) improperly hired another employee for a position that it never formally created and that appears to have been unnecessary for district operations. In addition, the district did not always conduct annual performance evaluations as its administrative code requires.
Although the district’s compensation for its staff and board generally appears reasonable, we found that some of the benefits it offers may be overly generous. Specifically, it provides board members with full health benefits, even though their work is essentially part‑time. It also pays its board members a generous automobile allowance. Finally, we found multiple instances in which it paid for unreasonable travel and meal expenses for both its board members and staff.
The District Has Hired Some Unqualified Staff and Failed to Perform Regular Performance Evaluations
Although the district has established appropriate policies related to hiring employees, it did not always follow them. Specifically, it hired individuals who did not meet the minimum qualifications for their positions. It also created a new position without following its approved process, which includes board authorization. Further, in some instances, it incurred unnecessary expenses because of its failure to follow its hiring policies. For example, the district violated its policies when it prepaid more than $22,000 for a new employee to complete his bachelor’s degree when such a degree was a minimum qualification for the position; this individual subsequently was laid off by the district before completing his degree. Additionally, the district’s administrative code requires it to provide employees with performance evaluations every fiscal year and generally to base their raises on performance. However, we found the district did not always perform these required evaluations.
The District’s Failure to Follow Its Policies Led It to Hire Some Unqualified Staff
The district failed to follow its policies for hiring employees in several instances during our audit period from July 2010 through June 2015. State law gives the board the authority to hire the general manager and gives the general manager full power and authority to employ and discharge all other employees, with certain exceptions. The district’s administrative code states that the district must use a competitive process for hiring employees that is based on their qualifications and ability. It also outlines the use of an interviewing panel for senior manager positions. Further, the district maintains job descriptions that detail the minimum qualifications job applicants must possess before being hired. However, in our review of the hiring process for individuals in certain positions, we identified four instances in which the district did not follow its established policies when hiring staff, as shown in Table 7. The district’s failure to follow its hiring policies resulted in legal disputes and caused it to incur unnecessary expenses in salary and benefits.
| Position | Dates of Employment | Final appointment must be made by the general manager, but this process was not followed | Central Basin Municipal Water District (district) Did Not Follow a Competitive Hiring Process | The Individual Was Unqualified | The Position Was Not Approved by the Board as required |
|---|---|---|---|---|---|
| Interim chief operating officer | October 2012 through January 2013 |
NA | ✓ | ✓ | |
| Business development manager | April 2011 through July 2013 |
✓ | |||
| Assistant to the general manager | December 2012 through January 2013 |
✓ | ✓ | ✓ | |
| Public affairs manager | December 2012 through March 2013 |
✓ | ✓ |
Sources: California State Auditor’s analysis of minutes from the district’s board meetings, the district’s administrative code, its human resources records, and interviews with the district’s human resources director.
NA = Not applicable.
Although the district’s current senior managers meet the qualifications required for their positions, the district hired certain individuals in the past who did not possess bachelor’s degrees in the fields their positions required. For example, in 2010 the board created a business development manager position. Although the position required a bachelor’s degree, the resume of the individual the district hired for the position in April 2011 shows that he did not possess one. The individual’s annual salary—nearly $113,000 by the time of his layoff in July 2013—made him one of the highest paid senior managers at the district, despite his not meeting his position’s minimum qualifications.
The district further violated its policies when it paid in advance for this individual’s education. As a condition of the business development manager’s employment, the district required him to pursue and complete a bachelor’s degree. Nevertheless, the district hired and continued to employ him for more than a year without his having such a degree. He eventually requested that the district pay his registration, tuition, and fees to obtain the required degree. Although these costs totaled more than $22,000, the district violated its administrative code by paying the amount in advance of the individual successfully completing any of the required coursework. Specifically, the district’s administrative code allows it to reimburse individuals for only 90 percent of the cost of college courses and then only upon the individuals’ completion of the courses with a passing grade. However, according to course records he provided to the district, this employee did not begin his coursework until after the district made the payment for his entire degree program, and he did not complete the program while he was employed by the district. According to the director of human resources, the former general manager authorized this payment at his own discretion.
In July 2013—a little more than two years after hiring the business development manager—the district eliminated the position and laid off the individual. The director of human resources explained that the district did not seek reimbursement from him because he did not leave the district voluntarily. Regardless, the district hired this individual in violation of its own policies and then inappropriately paid his tuition and fees.
The district also hired another individual for a high‑level position who did not meet that position’s minimum qualifications. Specifically, in September 2012 the board approved the October hiring of an interim chief operating officer who, according to his resume, did not hold a bachelor’s degree in business management, business administration, engineering, or public administration as the position description required. Rather, his resume indicated that he attended college and studied Latin American studies and general education. Also, according to the director of human resources, the district did not follow a formal recruitment process for this individual and thus cannot demonstrate that it used a competitive process to hire him.
Further, the board did not follow the appropriate hiring process when it approved the hiring of an assistant to the general manager in December 2012. This appointment violated the district’s policies in a number of different ways. First, the district’s administrative code provides the general manager with authority over appointing and terminating subordinate employees. Nonetheless, in December 2012 the board voted in closed session to approve the hiring of an individual for the position of assistant to the general manager, with an annual salary of about $98,000. In addition, the administrative code requires the district to follow a competitive process when hiring district employees and states that the general manager must make the final appointment for senior manager positions based in part on the recommendations of an interviewing panel. However, according to the director of human resources, the board did not use any competitive process or perform any interviews when hiring for this position.
The board also violated district policy by hiring the assistant to the general manager without having previously approved the creation of the position. According to the district’s administrative code, the general manager must propose a labor budget to the board for its approval each year. The director of administration and board services acknowledged that the assistant to the general manager position was not in the district’s labor budget at the time the board approved the hiring of the individual for this position. By not following the district’s administrative code, the board risks hiring and paying an individual to fill a position for which the district has not budgeted sufficient funds. Further, the current general manager believes that such a position is unnecessary for an office of the district’s size.
The board’s approval of hiring the assistant to the general manager was only one of two instances in which it did not follow the administrative code as it relates to hiring employees that occurred in the same month. Specifically, in the same closed session in December 2012, the board appointed a public affairs manager without following a competitive hiring process. The district terminated both this individual and the assistant to the general manager less than three months after their appointments.
Two of these hires resulted in legal disputes, while another caused it to incur unnecessary expenses in salary and benefits. Subsequent to their dismissal, the former interim chief operating officer and the former assistant to the general manager filed two lawsuits and one made a demand for additional claims against the district for wrongful termination and retaliation. The district signed settlement agreements with the former interim chief operating officer for $80,000—which the district’s insurance paid—leaving one remaining lawsuit still pending. Furthermore, the district paid the former assistant to the general manager more than $6,000 in salary and benefits for less than one month of employment in an unapproved position that was likely unnecessary. Finally, if the district had hired a business development manager with the requisite degree, it would not have incurred the more than $22,000 in education expenses described previously.
To avoid similar situations in the future, the board approved changes to the district’s administrative code in July 2015 that expressly prohibit board members from participating in any aspect of its employment and personnel matters except those pertaining to the general manager. The director of human resources confirmed that these changes were made to address the issues created by these past board decisions. At the same time, the board also approved changes to the administrative code to create a specific requirement for it to approve employee positions and classifications as part of its review of the general manager’s proposed labor budget. Nevertheless, the board and the district must follow these and all other established policies if they are to avoid the risks associated with hiring individuals in a manner that is inconsistent with the district’s administrative code.
The District Did Not Consistently Evaluate the Performance of Its Senior Managers
The district did not consistently review its senior managers’ performance, and it issued raises to some of these employees without having completed the required evaluations. The district’s administrative code specifies that district employees will receive performance evaluations each fiscal year in May. Further, the code notes that the evaluating manager will review each employee’s compensation and will base decisions regarding raises on performance. However, the district did not provide some of its managers with the required performance evaluations. We reviewed the performance evaluations of six senior managers employed continuously by the district from fiscal year 2010–11 through fiscal year 2013–14 and expected to find a total of 24 performance evaluations for the four fiscal years. Instead, we found the district had completed only 14 evaluations and did not perform the other 10. Nonetheless, during this same time period, the district provided raises to most of these managers without the corresponding required evaluations. Although district policy allows for merit increases between evaluations, the policy states that such increases are rare.
According to the district’s director of human resources, the district’s former general managers were responsible for completing the necessary evaluations but failed to do so. She explained that the former general manager, who began his service in May 2013, believed he did not have a basis for evaluating senior managers in that year. She also stated that the former general manager in fiscal years 2010–11 and 2011–12 simply did not complete many of the evaluations he was required to perform. Nevertheless, if it fails to provide regular performance evaluations, the district risks not identifying and correcting concerns with performance in a timely manner. Further, the district may provide raises to individuals whose performance does not merit a pay increase.
Although the District’s Compensation for Its Board Members and District Managers Is Generally Reasonable, Some of the Benefits It Provides Board Members May Be Overly Generous
The district provides compensation and benefits to its board members and staff that are generally reasonable; however, benefits may be excessively generous in some cases. Board members receive payment for days on which they attend meetings or certain other events related to district business, such as conferences, a monthly automobile or transportation allowance for the use of their personal vehicles, and an allowance for their personal communication devices. Although they are not full‑time employees, they also receive many of the same benefits as full‑time staff at the district, including fully paid medical, dental, and vision insurance for themselves and their dependents. We noted that although some water agencies provide benefits to their board members, others do not; given that fact, the district could reconsider the necessity and reasonableness of some of the benefits it provides to its board members.
Although the District’s Per Diem Compensation for Its Board Members Is Slightly Above the Average Provided by Other Water Districts, Its Senior Managers’ Salaries Are Below Average
The district’s payments to its board members are above average relative to those provided by comparable water agencies but do not appear unreasonable. State law allows water districts to compensate their board members by paying them for the days they attend board meetings and the days they render services by request of their respective boards of directors. The district’s administrative code refers to these payments as per diems. The district’s administrative code authorizes board members to claim a maximum of 10 per diems each calendar month, although any board member who also serves as a representative to the Metropolitan Water District of Southern California may claim an additional 10 per diems for meetings associated with that agency. According to a 2014 district compensation survey of 10 municipal water agencies, the district’s per diem of approximately $233 was the third highest of the 10 agencies. The district’s survey noted that per diems ranged from $150 at the San Diego County Water Authority to roughly $241 at the Western Municipal Water District, with a median per diem of about $206. Although the district’s per diem is about 13 percent above the median, it does not appear unreasonable.
In total, the district may spend up to about $200,000 annually on board members’ per diems. According to the director of administration and board services, the district uses this amount when creating its annual budget. Table 8 shows the total per diem payments the district made to all of its board members in each of the last five fiscal years.
| Board Member | Division Represented | 2010–11 | 2011–12 | 2012–13 | 2013–14 | 2014–15 | Total for five years |
|---|---|---|---|---|---|---|---|
| Edward Vasquez | Division | I$26,348 | $27,048 | $13,524 | – | – | $66,920 |
| James Roybal | Division I | – | – | 13,524 | $27,048 | $27,980 | 68,552 |
| Robert Apodaca | Division II | 22,851 | 24,716 | 27,514 | 30,079 | 27,747 | 132,907 |
| Arturo Chacon | Division III | 18,654 | 20,053 | 19,353 | 21,918 | 21,918 | 101,895 |
| Rudy Montalvo | Division IV | 24,949 | 26,115 | 9,560 | – | – | 60,624 |
| Leticia Vasquez | Division IV | – | – | 20,752 | 55,494* | 37,074 | 113,321 |
| Phillip Hawkins | Division V | 31,759 | 31,245 | 23,783 | 21,918 | 24,716 | 133,421 |
Source: The Central Basin Municipal Water District’s (district) financial records.
* In fiscal year 2013–14 Leticia Vasquez’s per diem compensation was larger than that of any board member in any other fiscal year. During this fiscal year, she attended meetings as both a district board member and a member of the Metropolitan Water District of Southern California, and the total per diem compensation she received was within legally allowed limits.
While the district’s per diems for board members appear reasonable, the salaries it pays its senior managers are lower than those certain other water agencies pay. State law allows the district to hire staff as needed to conduct the district’s business. As we previously discussed, the general manager must submit salary classifications and a labor budget to the board for its approval each fiscal year. The general manager then sets the individual salaries of staff. We conducted a review of salary data from the California State Controller’s Office (State Controller) and found that the district’s current pay for senior managers overall is lower than that at certain other water agencies, which may in part reflect the fact that it has the smallest number of staff. For example, as shown in Table 9, the maximum salary for the water resources manager at the district was just under $125,000 based on data from 2013, which were the most recent available and complete data as of the end of September 2015. This amount is below the average maximum salary of roughly $157,500 for the five agencies we reviewed. The district’s director of human resources has also conducted past surveys indicating that the district’s salary ranges for its senior managers were generally below average.
| 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| General Manager* | Director of Human Resources | Finance Director | Water Resources Manager | Director of external Affairs | ||||||||
| Salary | Minimum | Maximum | Minimum | Maximum | Minimum | Maximum | Minimum | Maximum | Number of customers‡ | Number of Staff‡ | ||
| Central Basin Municipal Water District | $237,839 | $79,140 | $118,710 | NA† | NA† | $83,316 | $124,974 | $79,140 | $118,710 | 48 | 23 | |
| West Basin Municipal Water District | 239,187 | NA | NA | $124,827 | $166,957 | 124,827 | 166,957 | 124,827 | 166,957 | 11 | 43 | |
| Western Municipal Water District | 265,375 | 89,206 | 122,658 | 113,407 | 155,931 | 124,750 | 171,531 | NA | NA | 13 | 125 | |
| Municipal Water District of Orange County | 215,064 | NA | NA | 116,330 | 157,046 | 100,664 | 135,897 | 100,664 | 135,897 | 28 | 30 | |
| San Diego County Water Authority | 256,624 | 123,030 | 166,096 | 139,909 | 188,876 | 139,909 | 188,876 | 123,030 | 166,096 | 24 | 253 | |
| 2013 | ||||||||||||
| General Manager* | Director of Human Resources | Finance Director | Water Resources Manager | Director of external Affairs | ||||||||
| Salary | Minimum | Maximum | Minimum | Maximum | Minimum | Maximum | Minimum | Maximum | Number of customers‡ | Number of Staff‡ | ||
| Central Basin Municipal Water District | $185,000 | $79,140 | $118,710 | $87,492 | $131,238 | $83,316 | $124,974 | $79,140 | $118,710 | 48 | 23 | |
| West Basin Municipal Water District | 244,693 | 106,047 | 145,815 | 134,939 | 185,541 | 114,520 | 157,465 | 124,828 | 171,639 | 11 | 43 | |
| Western Municipal Water District | 269,881 | 90,990 | 125,111 | 127,245 | 174,961 | 127,245 | 174,961 | 127,245 | 174,961 | 13 | 125 | |
| Municipal Water District of Orange County | 225,000 | NA | NA | 127,556 | 172,201 | 102,678 | 138,615 | 102,678 | 138,615 | 28 | 30 | |
| San Diego County Water Authority | 291,019 | 123,030 | 166,096 | 142,008 | 191,709 | 142,008 | 191,709 | 133,625 | 179,716 | 24 | 253 | |
Sources: Data from the California State Controller’s Office, documentation provided by the Central Basin Municipal Water District, and information obtained from the water agencies’ websites.
Note: 2012 and 2013 are the most recent years for which data for all five water agencies are available.
NA = Not applicable.
* The listed water agencies set their general managers’ salaries by contract.
† Central Basin did not have a finance director in 2012 and contracted for its financial management services in that year.
‡ Data for the number of customers and staff are from the most recent information we were able to obtain. However, due to the structure of the agencies, we believe that these numbers have not changed significantly since 2013.
Additionally, based on information as of September 2015 from the websites of the four other agencies we reviewed, the current salary of the district’s general manager—$220,000 annually—is less than the general managers’ salaries for the four other agencies we reviewed. The board hires the general manager and negotiates an employment contract with that individual. The fact that the current general manager’s salary is less than that of the other agencies we reviewed is not surprising given that the district has the least number of full‑time staff. For example, the Municipal Water District of Orange County reported on its website as of September 2015 that its general manager receives a salary of nearly $238,000 but manages 30 full‑time staff members as opposed to the district’s 23 staff. The survey the district conducted indicates that its general manager’s salary is 7 percent below that of the average of seven other water agencies.
Some of the Benefits the District Pays to Board Members May Be Overly Generous, but Its Staff Benefits Are Reasonable
The district spends tens of thousands of dollars annually providing benefits to board members that appear to be excessively generous, especially given that the board members’ work is essentially part‑time. State law allows district boards to approve benefits in addition to the per diem we previously described as long as the amounts of most benefits do not exceed those that their staff receive. The district’s administrative code states that board members and their eligible dependents may receive medical, dental, and vision health care coverage and that the district will contribute to their insurance premiums in an amount it determines yearly. However, for most benefit categories, the district contributes the maximum possible—it pays all of the costs for board members’ and their dependents’ medical, dental, and vision coverage, as well as for their $10,000 life insurance policies. As of 2015 the cost for a board member’s medical, dental, and vision premiums with family coverage could be as much as approximately $2,000 per month. In addition, the district contributes a maximum of between $4,000 and $12,000 each year to each board member’s health expense reimbursement account, with the maximum determined by the board member’s number of dependents. The board member can use this account to pay for any eligible out‑of‑pocket health care expenses not fully covered by the insurance policies. Overall, these benefits are equivalent to those the district provides to its full‑time employees. The only exceptions are that the employees receive greater life insurance and disability insurance benefits.
Although state law does not prohibit the district from providing full‑time benefits to board members for part‑time duties, we believe that it risks providing benefits that are overly generous. In reviewing the most recent compensation data from the State Controller for 2013, we noted that the majority of water agencies’ board members in California do not provide any health benefits to their board members. For example, according to the websites of the Santa Margarita Water District and South Coast Water District, they do not provide board members any health, life, or retirement benefits. Based on district accounting records, the district spent more than $70,000 on medical, dental, vision, and life insurance benefits for board members in fiscal year 2014–15. According to the district’s director of human resources, the board has reviewed its benefit compensation during its annual budget review but has not voted to make any significant changes.
In addition to benefits, the district’s administrative code allows it to pay board members a $600 monthly automobile or transportation allowance that is significantly more generous than what other water agencies offer. Currently all board members receive this monthly benefit as reimbursement for any vehicle expenses they incur while conducting district business.7 According to a survey another water district in Southern California conducted regarding the compensation and benefits selected water agencies provided to their board members in 2014, most water agencies reimburse board members for mileage only, and the two agencies that reported providing automobile allowances offered much lower amounts. Specifically, Upper San Gabriel Valley Municipal Water District reported an automobile allowance of $335, and West Basin Municipal Water District reported an allowance of $411. According to district records, it paid nearly $36,000 to board members for the automobile or transportation allowance in fiscal year 2014–15. The director of human resources stated that the district has not formally considered a proposal to change the automobile allowance to a mileage‑based system. Further, in the past the district provided its automobile allowance without requiring proof that board members possessed valid California driver’s licenses and carried automobile insurance. However, the district updated its administrative code in July 2015 to ensure board members demonstrate they have a valid driver’s license, automobile insurance, and an acceptable driving record.
Finally, the district pays board members compensation for the use of their personal communication devices. Until July 2015 the administrative code allowed board members to receive this benefit in an amount the board determined. In July 2015 the district revised its administrative code by fixing the amount at $200 per month. In fiscal year 2014–15 district records indicate that it paid a total of $12,000 to its board members for the yearly communications allowance, or an average of $2,400 per board member. However, the director of human resources confirmed that during the past five years the district has not conducted an assessment to determine whether this amount was necessary or reasonable. Without conducting an analysis of the need for a communications allowance, the district cannot be certain whether the amount it pays is appropriate.
In contrast to the benefits the district provides to its board members, the benefits that its pays to its staff appear reasonable given their full‑time status and salary levels. For example, full‑time district employees receive the same medical, dental, vision, and health reimbursement account benefits as board members. However, staff also receive other benefits, including short‑ and long‑term disability insurance coverage and life insurance policies for up to $150,000, for which the district pays the premiums. Staff also participate in the State’s pension program, under which retirees can receive a percentage of their final compensation as retirement benefits. Although the general manager receives a communication allowance and an automobile allowance, other staff—unless approved by the board—do not receive such allowances. However, the district reimburses them for mileage when on district business, and senior managers receive cellular phones for business use. Additionally, in the most recent district survey of employee salaries and benefits conducted in 2012, district salary ranges for 11 of 12 of the positions compared, excluding the general manager, were at or below the median of the ranges reported by eight nonunion agencies with fewer than 300 employees. Although the district’s salaries for nearly all of its staff are reportedly lower than those at other water agencies, the director of human resources told us that the district’s benefits have generally been effective in retaining staff, but have not been as effective for recruiting new staff following the statewide pension reforms in 2013. She explained that she plans to conduct a salary and benefits survey with the help of a consultant by the end of 2016.
The current general manager participates in district‑sponsored benefit plans, including medical, dental, and vision, at the same level as other staff. However, the district has entered into contracts with past general managers that have provided for additional benefits beyond those the district provides to its staff. Because the board negotiates the general manager’s compensation separately from the staff’s compensation, it has the ability to make such offers. For example, in 2011 the board approved a new contract for the then‑general manager that included the district contributing about $158,000 over three years to his retirement account. According to district records, it paid $99,000 into this account, the maximum allowed during 2011 and 2012, before the general manger retired in October 2012. The district’s records indicate that it then paid him the remaining $59,000, plus roughly $34,000, which, according to the director of human resources, was to offset his taxes on the remainder, as allowed for by the provisions of his contract. Further, in 2013 the board approved a contract with its then‑general manager that included the offer of lifetime retiree health benefits to the general manager and his spouse if he remained with the district for five consecutive years. However, he remained with the district for only about 17 months and did not receive the lifetime retiree health benefits. We observed similar provisions in two other comparable districts’ contracts with their respective general managers. Nevertheless, according to the director of human resources, instead of contributing to the former general manager’s retirement, additional consideration could have been given to negotiating a higher salary.
The District Has Made Questionable and Inappropriate Expenditures for Travel and Meal Costs
In our limited review of the district’s expenditures, we identified instances in which the district paid amounts for travel and meal expenses in excess of what we consider reasonable. For example, we found instances in which the district paid travel expenses for board members and employees to attend conferences and seminars having no clear connection to its mission or purpose. In addition, when we reviewed six flight expenses, we found that three included higher‑class airfares than the district’s policies allow. Moreover, the district often paid for expenses that exceeded the meal reimbursement limits that the Internal Revenue Service (IRS) has established and, to the extent these meal expenses were incurred by board members, they violated state law. Further, the district paid for business meals that it could have avoided by holding meetings at its office. When the district pays for unreasonable travel and meal expenses, it wastes public funds.
Although the district’s administrative code states that it will only allow payment for travel and other expenses that are reasonably necessary to represent its interests and objectives, we identified instances in which the district did not ensure its payments for travel were necessary or prudent. As shown in Table 10, we found that the district pays expenses for board members and staff to attend conferences and seminars unrelated to its responsibilities, let alone water policy. For instance, the district paid for board members to attend a legislative caucus related to another state’s immigration law. It also paid for one of its general managers to attend a scholastic press association seminar. We believe that these expenses had no direct connection to furthering the district’s mission and that the district’s payment of these costs demonstrates that it did not use public funds in a reasonable manner.
| Expense incurred for | Year | Central Basin Municipal Water District’s (district) Policy | Description | Inappropriate costs |
|---|---|---|---|---|
| Legislative Caucus | 2010 | Payment for travel and other expenses shall be allowed when reasonably necessary to represent the interests and objectives of the district. | The district paid for travel expenses for two board members to attend a legislative caucus in Arizona related to that state's proposed immigration law. We do not believe this trip was necessary for the district’s interests. The district's current general manager also believes Arizona's immigration laws have nothing to do with district business. | $784 |
| Journalism seminar | 2010, 2012 |
The district paid for travel expenses for the then‑general manager to attend a scholastic press association seminar in San Luis Obispo. For the 2012 seminar, the director of administration and board services stated that the former general manager explained that he would use previous board agendas in his teaching materials for high school students. We do not believe this trip was related to district business. | 2,461 | |
| Rental car | 2011 | Before July 2015, the district’s administrative code did not require vehicles to be rented under the name of a board member or employee. Nevertheless, we believe it is reasonable to conclude that this was the expectation. | The district reimbursed rental car expenses to a board member despite the fact that the rental agreement indicated that a different individual rented the vehicle. The board member provided no proof, except for a signed note, that he actually incurred the expense. We believe the district should not have paid this claim. The director of administration and board services stated that, due to this incident, the district revised its administrative code in July 2015 to require vehicles are rented only under the name of a board member or an employee. | 239 |
| Airfare | 2012, 2014 |
The district’s administrative code requires air travel in coach or an equivalent class unless otherwise justified, such as when a traveler has a physical disability or for prolonged travel in excess of four hours. | Three of the six airfares we reviewed were above the coach or base‑level economy fare for flights between the Los Angeles region and Sacramento. Using the same airline as the district for travel between the same airports in August 2015, we calculated the cost difference in flights when opting for base‑level economy flights could save roughly $150 per flight. The district’s director of administration and board services acknowledged that for shorter flights a base‑level economy class fare should be used. She also stated that moving forward, the district will document exceptions in writing and take them to the board for approval. | 450 (estimated) |
| Lodging | 2010 through 2015 |
State law requires board members traveling on business for the district to use the group or government rate for lodging when available or, if not, to obtain board approval in a public meeting before the expense is incurred. The district’s administrative code requires staff to use the government or group rate when possible. | In our limited review of 20 lodging expenses, we noted that the majority—14—lacked any documentation that the traveler had used one of the rates prescribed by state law or the district's administrative code. Seven of the claims lacked documentation that the board preapproved exceptions for board members and three lacked documentation that the general manager preapproved exceptions for staff. The director of administration and board services stated that, with respect to board members’ and staff lodging, the district has used the government or group rate in the past, but did not preserve independent evidence of this, such as the conference brochure, other than hotel receipts, which do not always indicate that a government or group rate was used. Moving forward, she stated staff would include documentation that conference rates were used. | Unknown* |
Sources: Government Code Section 53232.2, the district’s administrative code, and district financial records.
* Because the district could not demonstrate that it used government or group rates for these 14 lodging expenses, it was not possible to calculate the inappropriate cost incurred.
In addition, the district’s administrative code requires board members and staff to exercise sound judgment when traveling in order to incur reasonable costs to the district. However, as shown in Table 10, we identified occasions when district representatives did not take appropriate steps to ensure the reasonableness of the district’s costs. For example, the code requires travelers to fly coach or an equivalent class unless otherwise justified, such as when a traveler has a physical disability or for prolonged travel in excess of four hours. However, three of the six airfare expenses we reviewed included higher‑class airfares, which often include privileges such as priority boarding and premium beverages, for short flights between the Los Angeles region and Sacramento. Additionally, state law requires board members traveling on business for the district to use the group or government rate for lodging when available or, if not, to obtain board approval in a public meeting before the expense is incurred. The district’s administrative code also requires the district’s staff to use the government or group rate when possible. However, our review of 20 lodging expenses found that the majority—14—lacked any documentation that the travelers had used one of the rates prescribed by state law or the district’s administrative code. Finally, in 2011 the district reimbursed a board member for the cost of a car he purportedly rented while attending a water conference in Las Vegas. However, according to the car rental agreement and receipt, another individual who was not a representative of the district rented the vehicle. Other than a signed note from the board member claiming that he rented the car, the expense claim lacked any documentation showing that the board member had actually paid for the rental car. As a result of these incidents, we are concerned that the district is paying travel expenses for its board members and staff without ensuring that those expenses are reasonable and necessary.
In addition, we found that the district often paid for inappropriate and questionable meal costs for board members, employees, and others. As shown in Table 11, we found that the district often paid for meals in excess of IRS limits and, to the extent these meal expenses were incurred by board members, they violated state law. In addition, the district paid for meals in the local area for meetings that participants could have held at its office, thus avoiding such costs. Finally, the district paid for meals to third parties which, based on state law and California Attorney General opinions, we believe were not permissible.
| Issue | Number of expenses with issue (out of 95)* | Description | Total inappropriate costs |
|---|---|---|---|
| Meal expenses above IRS rates | 39 | California law allows local governments, such as the Central Basin Municipal Water District (district), to set limits on actual and necessary meal costs incurred in the performance of official duties that are reimbursed to board members. If a local government does not set its own meal reimbursement limits, state law requires the local government to use limits established by the Internal Revenue Service (IRS) unless the meal expenses have been preapproved by the board at a public meeting. Our limited review found no documentation that any of the meals we examined were preapproved by the board. According to the director of administration and board services, the district was not aware of the state law requirement to impose limits on meal expenses. In addition, the district did not have limits on other meal expenses, such as those charged to a district credit card or incurred by staff, or those for meals provided to third parties, until July 2015. | $1,461 |
| Example #1: In October 2011 a board member charged $61 on the district credit card for a second dinner on the same day he had already incurred dinner‑related expenses while attending a seminar. | |||
| Example #2: In May 2012 a former general manager spent $101 on breakfast for himself and three guests without identifying who the guests were or providing justification for the business purpose of the meal; the IRS breakfast rate at the time was $10 per person. | |||
| Meals in the local area† | 20 | The district’s external auditor noted in its audit of the fiscal year ending June 30, 2011, that in recent years, many governments have greatly restricted the practice of charging local meals to government agencies, but the district placed no limitations on local meals. Although the district revised its administrative code in July 2015 to state that board members and employees should make every effort to hold meetings at the district’s headquarters to limit unnecessary expenses, the administrative code is still permissive and, as a result, district staff and board members may continue to incur unnecessary expenses. | 1,113 |
| Example #1: In April 2012 the district paid for a dinner meeting in Los Angeles between a board member and the district’s then‑business development manager at a total cost of nearly $190, even though these two individuals could have easily held a meeting at the district’s office. | |||
| Example #2: In January 2015 the district paid almost $70 for a lunch meeting in Los Angeles between two board members, even though the district’s office could have been used. | |||
| Meals provided to third parties | 24 | State law permits reimbursement only for “actual and necessary” expenses incurred by board members or staff in the performance of their official duties. Based upon state law and California Attorney General opinions, we believe that actual and necessary expenses do not include meals purchased for third parties, such as constituents, public officials, or business owners, even if those meals are for a business purpose. Therefore, they are not permissible. | 986 |
| Example #1: In December 2010 the district paid about $565 for a dinner, or an average of about $81 per person, for board members attending a conference. The dinner included costs for two spouses. The director of administration and board services stated the district’s administrative code at that time allowed for these expenses because they were seen as a benefit to the district. We disagree with this assertion, and we note that the then‑general manager stated at a board meeting in December 2010 that the administrative code did not allow for reimbursement of spouses’ expenses. The director of administration and board services further elaborated that spouses’ expenses are no longer paid for and the administrative code has been amended to reflect this change. | |||
| Example #2: In July 2014 the district paid nearly $220 for a dinner while attending a conference for the then‑general manager, a board member, a Montebello school board member, and a Pico Rivera council member. In addition, the claim for the dinner expense lacks any description of the business purpose of the meal and how it furthered the interests of the district. | |||
| Example #3: The district paid over $100 for a dinner in February 2015 for a district board member and a board member from a neighboring water district. The claim lacks any description of the business purpose of the meal and how it furthered the interests of the district. | |||
Sources: California Government Code, Section 53232.2, California Court decisions, California Attorney General opinions, the district’s administrative code, and financial records.
* Some meal expenses are included under more than one issue. For instance, the district paid $188, or $94 per person, for a dinner meeting between a board member and a business development manager in the local area. We included $116 in the meal expenses above IRS rates row, which reflects the amount the district paid above the IRS dinner rate for two people. We included the full $188 in the meals in the local area row since this meeting was held in Los Angeles.
† The district defines the local area as Los Angeles County and Orange County.
Further, until recently, the district did not address a recommendation that it establish meal expense limits. Specifically, in 2011 the district’s external auditor at the time recommended the district set limits on the costs of meals, whether incurred locally or while traveling. The district disagreed with this recommendation, stating that some district business required travel around the country, which made setting limits on meals difficult because of cost variances between cities, states, and regions. However, we disagree, particularly given that the federal government has established meal rate limits for its employees that vary by city and that California sets a fixed meal reimbursement limit for state employees regardless of where they travel within the United States. Moreover, we believe that by failing to implement the external auditor’s recommendation, the district missed an opportunity to demonstrate to the public that it was spending its funds in a prudent manner. After we began our audit work and raised these concerns with district staff, the district finally adopted meal cost limits in July 2015 that are comparable to the IRS’s established rates. The district’s new limits apply to both board members and staff.
Finally, board members have consistently violated state law by failing to report back to the board on meetings or conferences they attend at the district’s expense. Both state law and the district’s administrative code require a board member who travels to a meeting or a conference at the district’s expense to make a brief oral or written report to the other board members at the board’s next regularly scheduled meeting. Our review of 12 conferences attended by board members between July 2010 and June 2015 at the district’s expense found no evidence in half of these instances that board members provided the required reports at the subsequent board meetings. When board members do not provide these required reports, they deprive other board members and district officials of the opportunity to learn from their experiences, and they also fail to justify to the public the value of the expenses they incurred.
Recommendations
To ensure that it does not inappropriately grant undeserved raises to its staff, the district should follow its policy to provide annual performance evaluations to all employees.
To ensure it is efficiently using its resources, the district should do the following:
- Eliminate its board members’ automobile or transportation allowances and instead reimburse them based on their business mileage or transit use.
- Periodically analyze and, beginning in June 2016, report to the board whether all elements of its board member compensation, including health and related benefits, are appropriate and reflect the common practices of special districts.
- Adopt a policy that its general managers will participate in benefits at the same level as district staff and that the board will negotiate the general managers’ contracts on the basis of salary and not other benefits, such as retirement.
To ensure that its travel expenses are reasonable and necessary, the district should take steps, such as issuing a clarifying memorandum or providing additional training, to ensure all board members and staff, especially those who process reimbursement claims, are aware of what the district considers to be proper expenses incurred while traveling, including only paying for the following:
- Air travel that is coach or an equivalent class.
- Meetings and conferences that have a direct connection to water policy or the district’s mission. It should update its list of such preapproved meetings accordingly.
- Lodging expenses that reflect group or government rates, unless there is documentation that such rates are unavailable.
To ensure it reimburses only reasonable and necessary meal expenses, the district should take steps, such as issuing a clarifying memorandum or providing additional training, to ensure that all board members and staff, especially those who process reimbursement claims, are familiar with its meal reimbursement limits.
The district should revise its administrative code by June 2016 to prohibit paying for or reimbursing meals that occur within the local area that involve meetings either between only district representatives or between district representatives and the district’s contractors.
The district should revise its administrative code by June 2016 to prohibit paying for the costs of meals provided to third parties.
To ensure it complies with state law and its own administrative code, the district should require board members to report back to the board on meetings and conferences they attend at the district’s expense. The district should record these reports in meeting minutes or document them in expense files before it reimburses the board members for their travel expense claims.
We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
Date:
December 3, 2015
Staff:
Laura G. Kearney, Audit Principal
John Lewis, MPA
Joseph R. Meyer, CPA, CIA
Richard Marsh, MST
Marshall Miller, MPAc
Kurtis Nakamura, MPIA
Ray Sophie, MPA
Legal Counsel:
Heather Kendrick, Sr. Staff Counsel
Richard B. Weisberg, Sr. Staff Counsel
For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255.
Footnotes
3 The GFOA represents public finance officials throughout the United States and Canada. The GFOA’s mission is to enhance and promote the professional management of governmental financial resources. One of the ways in which it does this is by providing best practice guidance to its members. Go back to text
4 Moody’s is a provider of credit ratings, research, and risk analysis. The purpose of its credit ratings is to provide investors with a simple system of gradation by which they may gauge the future relative creditworthiness of securities. Go back to text
5 The CFCA permits private residents to initiate and prosecute false claims actions on behalf of the state or local government entity whose funds are at issue. Private suits under the CFCA are permitted as qui tam actions, in which prevailing private litigants are entitled to a percentage of the proceeds recovered as payment for their efforts in successfully prosecuting fraudulent claims against the government. The district declined to join the board member as a plaintiff in the lawsuit, and the board member is pursuing the lawsuit as a private resident on behalf of the district. Go back to text
6 The remaining contract was a lease agreement for overflow parking. In our judgment, such an agreement does not need measurable results, timelines, progress reports, or evaluation components because there are no professional services being provided. Go back to text
7 According to the district’s administrative code, board members who are unable to drive due to a qualifying disability may use the automobile or transportation allowance for alternative transportation expenses if they provide medical certification on an annual basis. Go back to text