BILL ANALYSIS                                                                                                                                                                                                    Ķ



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 1794                          |Hearing    |6/22/16  |
          |          |                                 |Date:      |         |
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          |Author:   |Cristina Garcia                  |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |6/9/16                           |Fiscal:    |Yes      |
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          |Consultant|Weinberger                                            |
          |:         |                                                      |
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                        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  







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          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








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           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  








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               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.









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          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  








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          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









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           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  








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          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








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          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.



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