BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1794


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          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


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          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  








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               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.  








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          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  








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            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  








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            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,








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             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.  








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          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  








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            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  








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            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  








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            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  








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               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  








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               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.  










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               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  








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               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.  









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          Analysis Prepared by:                                             
                          Misa Lennox / L. GOV. / (916) 319-3958  FN:  
          0003137