BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 1794 (Cristina Garcia) - Central Basin Municipal Water District ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: June 9, 2016 |Policy Vote: GOV. & F. 5 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: Yes |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 1, 2016 |Consultant: Mark McKenzie | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 1794, an urgency measure, would revise the composition of the Central Basin Water District's (CBMWD's) board of directors, as specified, and establish a technical oversight committee (TOC), comprised of five water purveyors, that would review and approve certain CBMWD actions. Fiscal Impact: Unknown local costs, some of which may be reimbursable by the state General Fund. Potentially reimbursable costs may be in the hundreds of thousands annually. Actual costs would depend upon a determination by the Commission on State Mandates (Commission) regarding what expenses incurred by CBMWD in implementing the bill are deemed to be subject to state reimbursement. See staff comments for a discussion of potentially reimbursable costs. AB 1794 (Cristina Garcia) Page 1 of ? Background: Existing law, the Municipal Water District Law of 1911, governs the formation, internal organization, and elections for municipal water districts. That law requires the board of directors of a municipal water district to consist of five members elected by voters in each of five divisions of the district, and requires each board member to be a resident of the division that he or she represents. Existing law requires board members to receive compensation of up to $100 per day, up to six days per month, for attendance at board meetings or other service rendered as a board member, plus expenses incurred in the performance of official duties. Municipal water districts have the authority to fix rates at which water is sold, as specified, to cover operating expenses, repairs and maintenance, improvements, and principal and interest on debt payments. The 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, investor-owned utilities, and private companies within the district's boundaries. Those water retailers in turn provide water to residents and businesses within their respective service areas. CBMWD serves a population of more than 2 million people living in 24 cities and some unincorporated areas within the district's approximately 227 square mile service area. An audit report issued in December of 2015 by the Bureau of State Audits (BSA) 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 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. The BSA 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 AB 1794 (Cristina Garcia) Page 2 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. Poor leadership by the board of directors 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 would make changes regarding the composition of CBMWD's board of directors. Specifically, this bill would: Require the board of directors to be composed of eight directors until the November 8, 2018 election by adding three directors appointed by water purveyors to the existing five-member elected board, as specified. Require the board of directors to undergo a process to divide the district into four divisions (rather than the current five divisions) that equalizes the populations for purposes of future board member elections. AB 1794 (Cristina Garcia) Page 3 of ? Require the board of directors to be composed of seven directors after the November 8, 2018 election, composed of four elected directors and three directors appointed by water purveyors, as specified. Specify a process by which water purveyors appoint and select three directors to serve four-year terms on the CBMWD board. One director would be selected by large water purveyors from nominees selected by those purveyors, one would be selected by all cities that are water purveyors from nominees by those cities, and one would be selected by all CBMWD water purveyors from any nominee. Specify eligibility criteria and other requirements for appointed directors. Require that appointed directors are eligible for: (1) reimbursement for travel and conference expenses; (2) per diem compensation for up to 10 meetings per month; and health insurance benefits, if they are not already provided by the director's employer. An appointed director may waive reimbursement and compensation, and may be required to reimburse his or her employer for compensation received. AB 1794 also requires the CBMWD board of directors to establish a TOC composed of the representatives of five water purveyors selected before December 31, 2016, and every two years thereafter, as specified. One position must be selected by large water purveyors, one must be selected by cities that are water purveyors, one must be selected by small water purveyors, and two must be selected by all water purveyors. The bill specifies eligibility and other requirements for members of the TOC, and authorizes those members to request reimbursement for actual and necessary expenses incurred for TOC duties, up to $500 per year. AB 1794 also requires the TOC to meet at least quarterly for the following purposes: (1) to review the district's budget and projects to provide nonbinding advice to the general manager and board of directors; (2) review and approve changes to the administrative code of ethics, director compensation, and benefits; and (2) review and approve proposed changes related to procurement. AB 1794 (Cristina Garcia) Page 4 of ? Related Legislation: SB 953 (Lara), which is currently pending in the Assembly Appropriations Committee, would add two appointed members to the CBMWD's board of directors, prohibit the use of district funds for board members to conduct community outreach, and make specified changes to CBMWD's contracting practices. Staff Comments: AB 1794 would impose new duties and costs on the CBMWD by revising the composition of the board of directors and expanding board membership, and requiring the board to establish a TOC, as specified. Board of directors: This bill would expand the size of CBMWD's board of directors from five to eight members on a temporary basis, and to seven members on a permanent basis, as specified. The CBMWD indicates that it could incur the following annual expenses related to each new board member: $27,960 in per diem compensation, $24,000 in health benefits, and $7,000 in conference and travel expenses. CBMWD also notes, however, that the bill provides for waivers or reductions of allowable reimbursements and benefits, which could substantially reduce those expenses. Staff notes that current law only requires board member compensation of up to $100 per day for a maximum of six days per month ($7,200 per year), plus reimbursement of expenses incurred in the performance of official duties; any other compensation is provided at the discretion of the board. The BSA audit report noted that some of the benefits provided to board members, such as full health benefits and a substantial automobile allowance, may be overly generous considering board members essentially work part time. The CBMWD also estimates that the additional board members may also drive indirect costs of $50,000 per director for district staff and general counsel services. Since most of the board member compensation costs cited by the district are discretionary, except per diem and reimbursements, they are not likely to be subject to state reimbursement. AB 1794 would temporarily add three appointed members to the existing board, but following the election on November 6, 2018, the elected membership of the board would be reduced from five to four directors. As a result, CBMWD would need to undergo a redistricting process to divide the district into four equalized AB 1794 (Cristina Garcia) Page 5 of ? divisions, rather than the current five divisions. CBMWD estimates that one-time costs associated with this redistricting process, including public outreach as well as legal, demographic, and communications consultant contracts, would be approximately $320,000. Actual costs subject to state reimbursement would be determined by the Commission, if the district files a successful reimbursement claim. TOC: This bill would also require the CBMWD board of directors to establish a TOC composed of five appointed representatives of water purveyors, as specified. The TOC would have a number of administrative tasks, such as reviewing the district's budget and any district projects and advising the general manager and board of directors. The TOC would also review and approve any proposed changes to procurement procedures or any changes to the administrative code related to ethics, director compensation, and benefits. CBMWD estimates costs related to the TOC would be in the range of $22,000 to $54,000 annually, depending on the number of meetings each year (up to ten). Actual costs subject to state reimbursement would be determined by the Commission, if the district files a successful reimbursement claim. Mandate reimbursement: Under the mandates process, local governments, including special districts, may file test claims with the Commission alleging that statutes, regulations, and executive orders impose new programs or increased levels of service upon local entities. The Commission primarily relies on Article XIII of the California Constitution and related case law to make determinations. Reimbursement is required under Article XIII B, section 6 only when the local agency is subject to constitutional tax and spend limitations, and reimbursement is not required when costs are for expenses that are recoverable from sources other than tax revenue (service charges, fees, or assessments). The CBMWD is an enterprise special district with revenues derived from water rates. Existing law provides the district with the authority to set those rates to cover operating expenses, repairs and maintenance, improvements, and principal and interest on debt payments. AB 1794 (Cristina Garcia) Page 6 of ? Two recent Commission decisions raise questions about whether any new costs imposed upon CBMWD by AB 1974 would be deemed eligible for reimbursement. The Commission's Statement of Decision on AB 1234, Chapter 700, Statutes of 2005, (Case # 07-TC-04) regarding new requirements for local agency officials to comply with certain ethics training requirements, denied reimbursement authority for special districts that are not funded by proceeds of taxes and are not subject to the tax and spend restrictions of articles XIII A and XIII B of the CA Constitution. According to special district reports filed with the State Controller's Office, the CBMWD does not receive any proceeds of taxes. In addition, the Commission denied reimbursement to urban retail water suppliers and agricultural water suppliers in its combined Statement of Decision on SBx7 7, Chapter 4, seventh extraordinary session of 2009-10 (Case # 10-TC-12), and Agricultural Water Measurement regulations promulgated by the Department of Water Resources (Case # 12-TC-01). These measures imposed new water conservation requirements on water suppliers and expanded their duties when adopting urban water management plans. The Commission found in this decision that enterprise districts funded exclusively through user fees, charges, or assessments are ineligible for mandate reimbursement. As noted above, the CBMWD is also an enterprise district funded through service charges, fees, or assessments. Staff notes, however, that decisions by the Commission are not precedential, and each test claim is decided on its individual merits. To the extent that CBMWD is deemed eligible to claim reimbursement, and successfully files a claim with the Commission, reimbursable costs could be in the hundreds of thousands annually. Actual costs would be dependent upon what the Commission determines are eligible mandated costs subject to reimbursement. Recommended Amendments: The bill should be amended to make the following correction: On page 3, line 1, strike out "subdivision (b)" and insert: "subdivision (c)" AB 1794 (Cristina Garcia) Page 7 of ? -- END --