BILL ANALYSIS Ķ SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 1794 |Hearing |6/22/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Cristina Garcia |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |6/9/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Weinberger | |: | | ----------------------------------------------------------------- Central Basin Municipal Water District Adds appointed directors to the Central Basin Municipal Water District's governing board and creates a technical advisory committee to perform specified functions for the District. Background The Central Basin Municipal Water District (CBMWD) was established by voters in 1952 to help mitigate groundwater overpumping in southeast Los Angeles County. CBMWD purchases imported water from the Metropolitan Water District of Southern California for sale to retail water suppliers, including cities, other water districts, mutual water companies, investorowned utilities, and private companies within the districts boundaries. Those water retailers in turn provide water to residents and businesses within their respective service areas. CBMWD serves a population of more than two million people living in 24 cities and some unincorporated areas within the district's approximately 227 square mile service area. The five members of CBMWD's board of directors are each elected by voters residing in one of five divisions within the district's boundaries. An audit report issued in December of 2015 by the Bureau of State Audits identified numerous concerns with various aspects of CBMWD's operations, including deficiencies in the district's contracting practices, a pattern of expenditures that may have AB 1794 (Cristina Garcia) 6/9/16 Page 2 of ? constituted gifts of public funds, and inadequate leadership by the board of directors. Specifically, the audit report found that: CBMWD often inappropriately circumvented its competitive bidding processes when it awarded contracts to vendors during the period that was audited. In support of this finding, the audit report noted that the district did not use competitive bidding for 13 of the 20 contracts reviewed by auditors and did not adequately justify why it failed to competitively bid for 11 of those 13 sole source contracts. CBMWD spent thousands of dollars of district money on purposes unrelated to its underlying authority, some of which likely constitute gifts of public funds. For example, the audit report noted that CBMWD provided thousands of dollars in community outreach funds to each board member annually, which various board members had the district donate on their behalf to golf tournaments, a legislator's breakfast panel, religious organizations, high school sports programs, pageants, and car shows. The board of director's poor leadership has impeded CBMWD's ability to effectively meet its responsibilities. In support of this finding, the audit report cited the board's failure to provide stability in the district's general manager position, lack of essential policies necessary to safeguard the district's long-term financial viability, inability to maintain the district's insurance coverage, and failure to disclose the district's establishment of a legal trust fund and transfers of money into the trust fund. All but one of the more than two dozen recommendations contained in the audit report are the CBMWD's responsibility to implement. However, one recommendation in the audit report is directed to the Legislature. Specifically, the audit report suggests a change in state law that would preserve the district as an independent entity but modify the district's governance structure to ensure that the district remains accountable to those it serves. Proposed Law AB 1794 (Cristina Garcia) 6/9/16 Page 3 of ? Assembly Bill 1794 adds appointed directors to CBMWD's governing board and creates a technical advisory committee to perform specified functions for the District. Governing Board Structure. Assembly Bill 1794 requires that, when the CBWMD directors elected at the November 6, 2018 election take office, CBWMD's board of directors must be composed of seven directors as follows: Four directors must be elected by the voters in each of four divisions established by CBWMD's board pursuant to specified requirements. Each director must be a resident of the division from which he or she is elected and the election must be in accordance with the Uniform District Election Law. Three directors must be appointed by the water purveyors of the district, as specified. Until the directors elected at the November 6, 2018 election take office, AB 1794 requires CBMWD's board of directors to be composed of eight directors, with five directors elected in accordance with the statute establishing the board's current structure, and three directors appointed by the water purveyors of the district, as specified. AB 1794 requires CBWMD to be subject to a specified statute in the Political Reform Act imposing limits on, and requiring disclosure of, contributions to public officials. Appointed Directors. AB 1794 establishes the process by which water purveyors must appoint and select three directors to serve four-year terms on CBMWD's board and specifies that: One director must be selected by all large water purveyors, as defined, from the nominees of large water purveyors. Each large water purveyor must have one vote. One director must be selected by all cities that are water purveyors of the district from the nominees of cities. Each city must have one vote. One director must be selected by all of the water purveyors of the district from any nominee. The vote of each purveyor must be weighted to reflect the number of AB 1794 (Cristina Garcia) 6/9/16 Page 4 of ? service connections of that water purveyor within the district. AB 1794 prohibits the appointment of directors from resulting in any of the following: The appointment of three directors that are all employed by or representatives of entities that are all large water purveyors. The appointment of three directors that are all employed by or representatives of entities that are all cities. The appointment of three directors that are all employed by or representatives of entities that are all small water purveyors. The bill requires that if the selection process for directors would result in a violation of any of these prohibited outcomes, the first eligible candidate receiving the next highest number of votes must be selected. AB 1794 specifies the manner in which CBMWD must stagger the term served by appointed directors. AB 1794 requires that an appointed director's term is terminated if the appointed director is no longer employed by, or a representative of, a water purveyor or city, as specified. The bill specifies the manner in which a vacancy in an office of appointed director must be filled. AB 1794 requires that appointed directors must: Live or work within CBMWD's boundaries. Not hold an elected office. Not hold more than 0.5% ownership in a company regulated by the Public Utilities Commission. Be subject to all applicable conflict-of-interest and ethics provisions and to recuse himself or herself from participating in a decision that could have a direct material benefit on the financial interests of the director. AB 1794 (Cristina Garcia) 6/9/16 Page 5 of ? AB 1794 requires that an appointed director must be eligible for specified reimbursement, compensation, and benefits, and allows an appointed director to waive these sources of reimbursement and compensation subject to specified conditions. AB 1794 prohibits an appointed director from receiving communication or car allowances, with a specified exception. Technical Oversight Committee. AB 1794 requires CBWMD's board of directors to establish a technical oversight committee composed of the representatives of five water purveyors selected before December 31, 2016, and every two years thereafter, as follows: One position must be selected by the large water purveyors from nominated large water purveyors, each large water purveyor having one vote. One position must be selected by the cities that are water purveyors of the district from nominated cities, each city having one vote. One position must be selected by the small water purveyors from nominated small water purveyors, each small water purveyor having one vote. Two positions must be selected by all water purveyors of the district from nominated water purveyors with the vote of each purveyor weighted to reflect the number of service connections of that water purveyor. AB 1794 establishes the process by which water purveyors are nominated and selected to each position on the technical oversight committee. AB 1794 requires that a person and an alternate from each water purveyor selected to a position must serve on the technical oversight committee and allows a purveyor to change the person or alternate who serves on the technical oversight committee at any time. Those selected must demonstrate eligibility and relevant technical expertise, as defined. AB 1794 prohibits a water purveyor that has an individual employed by or representing that water purveyor on the board of directors from being eligible to serve on the technical oversight committee. A water purveyor cannot hold more than one AB 1794 (Cristina Garcia) 6/9/16 Page 6 of ? technical oversight committee seat. AB 1794 prohibits a member of the technical oversight committee from owning more than 1% of a company regulated by the Public Utilities Commission. AB 1794 requires a member of the technical oversight committee to be subject to all applicable conflict-of-interest and ethics provisions and to recuse himself or herself from participating in a decision that could have a direct material benefit on the financial interests of the member. AB 1794 allows a member of the technical oversight committee to request reimbursement from the district for actual, necessary, and reasonable expenses incurred in furtherance of his or her duties on the technical oversight committee. The bill limits reimbursements to no more than $500 during a 12-month time period. AB 1794 requires the technical oversight committee to meet on at least a quarterly basis to: Review the district's budget and projects for the purpose of providing nonbinding advice to the district's general manager and the board of directors. Review and approve proposed changes to the administrative code relating to ethics, director compensation, and benefits. Review and approve proposed changes relating to procurement. Before CBMWD's board of directors votes on any administrative code changes relating to ethics, director compensation, and benefits or changes relating to procurement, AB 1794 requires the technical oversight committee to approve those changes by a majority vote. AB 1794 defines several terms that appear in the bill's provisions. State Revenue Impact AB 1794 (Cristina Garcia) 6/9/16 Page 7 of ? No estimate. Comments 1. Purpose of the bill . AB 1794 implements a recommendation made in the audit report published by the Bureau of State Audits last year to improve CBMWD's governance. Specifically, the bill implements the auditor's recommendation for legislation to change the membership of CBMWD's governing board. By requiring the board to include three additional appointed members and establishing an independent technical oversight committee, AB 1794 adds independent participants to the CBMWD's policymaking process, allows CBMWD's board to draw upon more technical expertise, and makes the board more representative and accountable to a broader range of stakeholders. By requiring the technical oversight committee to approve changes to CBMD's ethics, compensation, and benefits policies, AB 1794 makes it less likely that the district will continue some of the compensation and spending practices that were criticized in last year's audit report. The changes AB 1794 makes to state law will promote public transparency, sound fiscal management, and improved governance at CBMWD, benefitting the more than 2 million people served by the District. 2. Finding the right balance . AB 1794 adds three new appointed members to CBMWD's governing board, representing different categories of water purveyors served by the District. By making water purveyors responsible for appointing the three new district board members, the bill ensures that the appointees will bring some independent perspectives and technical expertise to CBMWD's board. However, because some water purveyors are private companies or investor-owned utilities, AB 1794 gives those purveyors, and the investors who hold them accountable, an expanded role in the governance of a public agency. The bill also reduces the number of board seats held by directors who are elected by voters who reside within the district, which has the effect of diluting voters' representation on CBMWD's board. While the water purveyors are most directly affected by CBMWD's actions, all water consumers within the district's service area have an interest in ensuring that the district is well-managed and performing its intended purpose. It is unclear whether AB 1794 strike the right balance between adding new perspectives to CBMWD's governance without unnecessarily diluting its AB 1794 (Cristina Garcia) 6/9/16 Page 8 of ? responsiveness to district voters. 3. Special legislation . The California Constitution prohibits special legislation when a general law can apply (Article IV, §16). Typically, when a bill's provisions apply only to a single special district, it would include findings and declarations to explain the need for the special legislation. To comply with the Constitution's special legislation provisions, the Committee may wish to consider amending AB 1794 to add findings and declarations relating to the need for a bill that applies only to CBMWD. 4. Mandate . The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because AB 1794 imposes additional duties on CBMWD, Legislative Counsel says that it imposes a new state mandate. AB 1794 requires the state to reimburse local agencies if the Commission on State Mandates determines that the bill imposes a reimbursable mandate. 5. Urgency . Regular statutes take effect on January 1 following their enactment; bills passed in 2014 take effect on January 1, 2015. The California Constitution allows bills with urgency clauses to take effect immediately if they're needed for the public peace, health, and safety. AB 1794 contains an urgency clause declaring that it is necessary for its provisions to go into effect immediately to ensure that the bill's provisions take effect before the November 8, 2016, election for the board of directors of the Central Basin Municipal Water District. 6. Related legislation . Earlier this year, the Senate Governance & Finance Committee voted 5-1 to approve SB 953 (Lara), which proposes different changes to the membership of the Central Basin Municipal Water District's board of directors and imposes restrictions on the district's use of sole source contracts. SB 953 is set for a hearing on June 29, 2016 in the Assembly Local Government Committee. Assembly Actions Assembly Local Government Committee: 8-0 Assembly Appropriations Committee:20-0 AB 1794 (Cristina Garcia) 6/9/16 Page 9 of ? Assembly Floor: 78-0 Support and Opposition (6/16/16) Support : California Association of Mutual Water Companies; California Domestic Water Company; California Water Association; Central Basin Municipal Water District; Central Basin Water Association; Cities of Bellflower, Lakewood, Norwalk, Paramount, Pico Water District; Maywood Mutual Water Company; Midland Park Water Trust; Montebello Land and Water Company; Rubio Caņon Land and Water Association; South Mesa Water Company;. Opposition : Unknown. -- END --