BILL ANALYSIS Ó AB 1794 Page 1 ASSEMBLY THIRD READING AB 1794 (Cristina Garcia) As Amended April 11, 2016 2/3 vote. Urgency ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Local |8-0 |Eggman, Waldron, | | |Government | |Mullin, Chiu, Cooley, | | | | |Beth Gaines, Gordon, | | | | |Linder | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |20-0 |Gonzalez, Bigelow, | | | | |Bloom, Bonilla, | | | | |Bonta, Calderon, | | | | |Chang, Daly, Eggman, | | | | |Gallagher, Eduardo | | | | |Garcia, Roger | | | | |Hernández, Holden, | | | | |Jones, Obernolte, | | | | |Quirk, Santiago, | | | | |Wagner, Weber, Wood | | | | | | | | | | | | ------------------------------------------------------------------ AB 1794 Page 2 SUMMARY: Establishes, in Municipal Water District Law, a governance structure for the Central Basin Municipal Water District Board of Directors. Specifically, this bill: 1)Establishes, in Municipal Water District Law, a governance structure for the Board of Directors (Board) of the Central Basin Municipal Water District (District) and requires the Board to establish a Technical Advisory Committee. 2)Requires the Board to be composed of seven directors, as follows: a) Four directors elected by division by the voters of that division. Requires each director to be a resident of the division he or she is elected from; and, b) Three directors appointed by the water purveyors of the District, pursuant to the appointment process described in 5) below. 3)Establishes an interim governance structure for the Board until the directors elected, pursuant to 2) a) above, at the November 6, 2018, election take office. Requires the Board to be composed of eight directors, as follows: a) Five directors in accordance with the Municipal Water District Law which requires each of the five directors to be a resident from the division which they are elected from; and b) Three directors appointed by the water purveyors of the AB 1794 Page 3 District, pursuant to the appointment process described in 5) below. 4)Requires the Board to divide the District into four divisions to equalize, as nearly as practicable, the population into respective divisions, pursuant to the process established in Municipal Water District Law and the Elections Code. 5)Establishes an appointment process for the three directors appointed by water purveyors every four years, as follows: a) One director selected by large water purveyors from the nominees of large water purveyors. Requires each water purveyor to have one vote. Terminates the term of an appointed director if the director is no longer employed by or a representative of a large water purveyor. b) One director selected by cities that are water purveyors of the District from the nominees of cities. Requires each city to have one vote. Terminates the term of an appointed director if the director is no longer employed by or a representative of a city. c) One director selected by all water purveyors of the District from any nominee. Establishes a weighted vote for each purveyor to reflect their number of service connections. Terminates the term of an appointed director if the director is no longer employed by or a representative of a water purveyor. 6)Requires the District's general manager (general manager) to notify each water purveyor and provide a 60-day period to accept nominations for appointments to the Board. AB 1794 Page 4 7)Requires each nominee that receives the highest number of votes cast for each director as described pursuant to 5) above, to be appointed to the Board and to take office pursuant to existing law which requires an appointed director to qualify and serve in office exactly as if elected at a general district election. Requires the general manager to collect the votes and report the results to the water purveyors. Provides that the votes for an appointed director are public records. 8)Requires individuals nominated for an appointment to the Board to demonstrate eligibility and relevant technical expertise, and requires each appointed director to live or work within the District. 9)Requires, in order to ensure continuity of knowledge, directors appointed at the first purveyor selection to classify themselves by lot, as follows: a) Requires two directors to hold office until the selection of their successors at the first succeeding purveyor selection; and, b) Requires one director to hold office until the selection of their successor at the second succeeding purveyor selection. 10)Prohibits an appointed director from holding elected office or from being a president, vice president, chief financial officer, or shareholder of a private company that purchases water from the District. 11)Requires a vacancy for an appointed director to be filled in AB 1794 Page 5 accordance with the selection process described in 5) above. 12)Requires the Board to establish a Technical Advisory Committee composed of representatives of five water purveyors selected by December 31, 2016, and every two-years thereafter, as follows: a) One position selected by large water purveyors from nominated large water purveyors. Provides each large water purveyor with one vote. b) One position selected by cities that are water purveyors of the District from nominated cities. Provides each city with one vote. c) Three positions selected by all water purveyors of the District from nominated water purveyors. Provides each water purveyor with a weighted vote to reflect their number of service connections. 13)Requires the general manager to notify each water purveyor and provide a 60-day period for the District to accept nominations for appointments to the Technical Advisory Committee. 14)Requires each nominee that receives the highest number of votes cast for each position as described, pursuant to 12) above, to be appointed to the Technical Advisory Committee. Requires the general manager to collect the votes and report the results to the water purveyors. Provides that the votes for a position on the Technical Advisory Committee are public records. 15)Requires, in composing the Technical Advisory Committee, a AB 1794 Page 6 person and an alternate from each water purveyor selected to a position, pursuant to 12) above, to serve on the Technical Advisory Committee. 16)Authorizes a water purveyor to change their appointed position or alternate on the Technical Advisory Committee at any time. 17)Requires those selected to serve on the Technical Advisory Committee to demonstrate eligibility and relevant technical expertise. 18)Prohibits a person selected to represent a water purveyor on the Technical Advisory Committee from being a president, vice president, chief financial officer, or shareholder of a private company that purchases water from the District. 19)Prohibits a water purveyor from holding more than one seat on the Technical Advisory Committee or from serving on the Technical Advisory Committee if the water purveyor has an individual employed by or representing them on the Board. 20)Requires the Technical Advisory Committee to meet on a quarterly basis for the following purposes: a) To review the District's budget and projects for the purpose of providing nonbinding advice to the general manager; b) To review and approve proposed changes to the administrative code relating to ethics, director compensation, and benefits; and, AB 1794 Page 7 c) To review and approve proposed changes relating to procurement. 21)Prohibits the Board from voting on a proposed change described in 20) b) or c) above, until the Technical Advisory Committee approves the change by a majority vote. 22)Defines "Large Water Purveyor" to mean one of the top five purveyors of water as measured by the total purchase of potable and recycled water from the District for the three prior fiscal years. 23)Contains an urgency clause. 24)Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made, pursuant to current law governing state mandated local costs. EXISTING LAW: 1)Establishes the Municipal Water District Law, which governs the formation, internal organization, and elections for municipal water districts. 2)Requires a municipal water district board of directors to consist of five members elected by the voters in each of the five divisions of the district. Requires that each director elected is a resident of that division. AB 1794 Page 8 FISCAL EFFECT: According to the Assembly Appropriations Committee: 1)One-time costs to the District in the range of $200,000 to establish the technical advisory committee and implement other requirements in the bill. 2)On-going costs to the District, likely in the range of $350,000 per year, some of which may be reimbursable by the state General Fund. Actual costs would depend upon a determination by the Commission on State Mandates regarding what expenses incurred by the District in implementing the bill are deemed to be subject to state reimbursement. COMMENTS: 1)Central Basin Municipal Water District. The District was formed in 1952 by the voters, pursuant to the Municipal Water District Act of 1911 to help mitigate the overpumping of groundwater in southeast Los Angeles County. The District is a member agency of Metropolitan Water District of Southern California (Metropolitan) and purchases imported water from Metropolitan to wholesale to 40 retail water agencies and one wholesaler, which includes cities, water districts, mutual water companies, investor-owned utilities, and private companies. A smaller source of the District's incoming revenue is from the sale of recycled water for municipal, commercial, and industrial use. The District serves nearly two million people in 24 cities in southeast Los Angeles County and in some unincorporated areas of the County. The District is governed by a five-member Board with each AB 1794 Page 9 director representing a division within the District. Voters within each division elect a director to a four-year term. There are no term limits for the Board as some directors are currently serving their fourth and fifth terms on the Board. Directors in three of the five divisions are up for election in November of 2016. The District has been under increased scrutiny as news reports have highlighted the District's misuse of public funds, inappropriate contracting and employment practices, and several lawsuits. In June of 2014, the Los Angeles County Board of Supervisors directed the County Chief Executive Office, County Counsel, and Department of Public Works to consult with the District to ensure all necessary steps were being taken to address and correct their ongoing problems, investigate options to ensure continued water availability and service to the District's customers, and report back to the Board of Supervisors with findings and recommendations. While the report contained a section discussing the transfer of ownership of the District to another entity and the dissolution process outlined in current law, the ultimate recommendation to the Board of Supervisors was to request a comprehensive audit of the District by the California State Auditor. 2)Audit Findings. In December 2015, the Bureau of State Audits (BSA) issued a report that identified several key findings: a) the Board has failed to provide the leadership necessary for the District to fulfill its responsibilities; b) a lack of policies to safeguard the District's long-term financial viability; c) the District's debt coverage ratio is insufficient and the District's credit rating has been downgraded several times; d) the Board's actions caused the District to lose its insurance coverage; e) the Board violated state law in 2010 when it approved the establishment of a legal trust fund without adequate public disclosure; f) the District frequently inappropriately avoided its competitive AB 1794 Page 10 bidding processes while awarding contracts to vendors; g) the District spent thousands of dollars on purposes unrelated to its underlying authority; and, h) the District failed to follow its policies for hiring employees and failed to ensure stability in its key executive management position. To address these findings the audit made numerous recommendations most of which do not require legislation. Additionally, the audit included an addendum report from the District which includes actions to put in place many of the recommendations contained in the audit. The audit only includes one recommendation that requires legislation: "To ensure the efficient and effective delivery of imported and recycled water in southeastern Los Angeles County, the Legislature should pass special legislation to preserve the district as an independent entity but modify the District's governance structure. In doing so, the Legislature should consider a governance structure that ensures the District remains accountable to those it serves, for example, by changing the District's board from one elected by the public at large to one appointed by the District's customers." 3)Bill Summary. This bill builds upon the recommendation of the BSA audit and establishes a new governance structure for the District's Board. This bill requires a seven-member Board: four directors elected by residents within their divisions, and three directors appointed by water purveyors of the District. Prior to the November 8, 2018 election, this bill adds an additional three appointed seats to the existing five-member elected Board. Under this bill, the District must change the division boundaries to establish four divisions instead of the existing five divisions for the elected positions. This bill establishes an appointment process for the three AB 1794 Page 11 directors and requires that one director is appointed by large water purveyors, one director is appointed by cities that are water purveyors and one director is appointed by all water purveyors. The three appointed directors must have technical expertise, be employed by or be a representative of their respective purveyor category, and live or work within the District. This bill prohibits the appointed directors and members of the Technical Advisory Committee from holding office or from being a president, vice president, chief financial officer, or shareholder of a private company that purchases water from the District. Additionally, this bill requires the Board to establish a Technical Advisory Committee and specifies its composition and purpose. The Technical Advisory Committee will be composed of representatives of five water purveyors within the District. The appointment process, similar to the Board, is separated into three categories, one position selected by large water purveyors, one position selected by cities, and three positions selected by all water purveyors. The Technical Advisory Committee must review the District's budget and review and approve proposed changes relating to procurement and to the administrative code relating to ethics, director compensation, and benefits. This bill prohibits the Board from making any proposed changes to those issues in the administrative code or to procurement without the Technical Advisory Committee first approving the change by a majority vote. This bill is author-sponsored. 4)Author's Statement. According to the author, In the last decade, [the District] has lost credibility with the communities it serves, as it battled other water agencies in its region and its directors' actions were questioned. An auditor report from 2015 highlights the problems of leadership and ethics within the Board that AB 1794 Page 12 governs the District. While Central Basin has responsibilities to respond to the auditor report over the next year, permanent changes in governance are needed for real long-term reform. One of the biggest conclusions of the auditor is that the change in governance needs [to] make the Central Basin . . . more accountable to its direct customers, the purveyors of the [District]. The California Auditor report detailed a number of poor or unethical practices that occurred between July 2010 and June 2015 within the [District]. A lack of leadership on key decisions has led to the District having issues meeting its responsibilities. High turn-over in the positions of general manager and finance director helped lead to a lack of strategic planning and two credit rating downgrades. The District hired unqualified staff, which lead to legal suits, and had poor management of contracts. The District made 134 amendments to 65 contracts, which increased the cost from 14 million dollars to 30 million dollars. Many of the board members lacked technical expertise and the benefits given to board members were too generous. Members also created a legal trust fund containing $2.75 million without adequate public disclosure and did not ensure these monies were spent properly. The District now ends up paying more for general liability and employment practices liability insurance coverage. While the District has made strides to address the questions raised by the auditor report, it is important to have a governance structure that will protect consumers moving forward. In order to increase accountability a new governance structure is needed that balances input from the purveyors, who are the direct customers, with input from the public through elections. AB 1794 creates a new governance structure to ensure that AB 1794 Page 13 the [District] will effectively fulfill its responsibilities moving forward. The strategies that will be implemented by this bill reflect the input from working groups with the purveyors led by an independent auditor. In combination these two major changes will provide the mix of oversight, expertise, and accountability to protect the more than two million people served by Central Basin. 5)Related Legislation. SB 953 (Lara) of the current legislative session, pending in the Senate, also establishes a governance structure for the District. SB 953 establishes a seven-member Board composed of five directors elected pursuant to the Municipal Water District Law and two directors appointed by the Local Angeles County Board of Supervisors in a public meeting. The two appointed directors must reside within the boundaries of the District and have knowledge of the water industry and familiarity with the role and responsibilities of a municipal water district. SB 953 also contains language pertaining to the contracting practices of the District and prohibits funds from being provided to the Board for community outreach activities. 6)Policy Considerations. The Legislature may wish to ask the author to consider the following: a) Eligibility Requirements for Appointed Positions. This bill defines "large water purveyor," but does not include a definition for "water purveyor". The Legislature may wish to ask the author to define this term to clarify who is eligible to vote and serve in the appointed positions on the Board and Technical Advisory Committee. AB 1794 Page 14 This bill prohibits a president, vice president, chief financial officer, or shareholder of a private company that purchases water from the District from being appointed to serve on the Board and the Technical Advisory Committee. The Legislature may wish to consider if this provision provides adequate protection to ensure that any individual with a vested financial interest and is not held directly accountable to the voters pursuant to an elected process cannot serve on the Board. b) Compensation. Under this bill, the three appointments to the Board and five appointments to the Technical Advisory Committee will be individuals that do not hold elected office and are instead employed by or a representative of a water purveyor. This bill is silent on the issue of compensation provided to these appointed positions. The Committee may wish to ask the author to address the issue of compensation for these appointments by specifying a per diem amount for appointed members of the Board and a prohibition on compensation for the Technical Advisory Committee positions. c) Technical Advisory Committee. This bill does not require the Technical Advisory Committee to review and approve proposed changes to hiring practices or policies for employees including the general manager. In light of the audit findings regarding the Board's inability to follow its own hiring policy, the Committee may wish to ask the author if this will be addressed in the bill. d) Elections. Existing law requires that changes in division boundaries do not affect the term of office of any director. This bill requires the District to change its divisions from five to four. Given this protection in current law and protections provided by the Constitution regarding changes to a current term of office, the AB 1794 Page 15 Legislature may wish to ask the author to review the timelines for elections and provide a more clearly defined framework for when changes to the governance structure will occur. Additionally, the Committee may wish to ask the author to clarify that elections held pursuant to this bill must be done in accordance with the Uniform District Elections Law in the Elections Code. e) Will a change to the governance structure be enough? According to the BSA report, "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 recent progress, a complete dissolution may be premature at this time." The Committee may wish to consider if the internal changes made by the District, combined with proposed changes to the governance structure, will be enough to address the multitude of issues identified by the audit. 7)Urgency. This bill contains an urgency clause and requires a two-thirds vote on the Assembly Floor. 8)Arguments in Support. Supporters argue that this bill protects consumers and will improve the District's effectiveness as a water wholesaler by enhancing the technical knowledge of the Board and by encouraging the participation of the water retailers that are responsible for water delivery directly to the customers. 9)Arguments in Opposition. None on file. AB 1794 Page 16 Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958 FN: 0003137