BILL ANALYSIS Ó AB 1794 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1794 (Cristina Garcia) As Amended August 15, 2016 Majority vote -------------------------------------------------------------------- |ASSEMBLY: |78-0 |(June 2, 2016) |SENATE: |31-4 |(August 19, | | | | | | |2016) | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: L. GOV. SUMMARY: Establishes, in Municipal Water District Law, a governance structure for the Central Basin Municipal Water District Board of Directors. The Senate amendments: 1)Remove all provisions relating to the creation and composition of a Technical Advisory Committee. 2)Revise the election date for the Central Basin Municipal Water District (District) Board of Directors from November 6, 2018, to November 8, 2022, to transition from the interim Board. AB 1794 Page 2 3)Require the election of directors to be in accordance with the Uniform District Election Law. 4)Prohibit the appointment of directors from resulting in any of the following: a) The appointment of three directors that are all employed by or representatives of all large water purveyors; b) The appointment of three directors that are all employed by or representatives of all cities; and, c) The appointment of three directors that are all employed by or representatives of all small water purveyors. 5)Delete the prohibition on a president, vice president, chief financial officer or shareholder of a private company that purchases water from the District from serving as an appointed director, and instead prohibit an appointed director from holding more than 0.5% ownership in a company regulated by the Public Utilities Commission. 6)Prohibit an appointed director from holding more than one consecutive term of office on the Board. 7)Require an appointed director to be subject to all applicable conflict-of-interest and ethics provisions and require that they recuse themselves from participating in a decision that could have a direct material benefit on the financial interests of the director. 8)Require an appointed director to be eligible for all of the following: AB 1794 Page 3 a) Reimbursement for travel and conference expenses pursuant to the District's Administrative Code; b) Compensation for up to 10 meetings per month at the per meeting rate provided in the District's Administrative Code; and, c) Health insurance benefits, if those benefits are not provided by the director's employer. 9)Prohibit an appointed director from being eligible to receive communication or car allowances. Clarify for the purposes of this bill car allowances does not include travel expenses, as specified. 10)Require the District to be subject to a specified statute in the Political Reform Act which imposes limits on, and requires disclosure of, contributions to public officials. 11)Add the following definitions: a) "Public water system" to mean a system for the provision of water for human consumption through pipes or other constructed conveyances that have 15 or more services connections or regularly serves at least 25 individuals daily at least 60 days out of the year, and includes specified water systems; b) "Relevant technical expertise" to mean "employment or consulting for a total period of at least five years, prior to the date of first appointment, in one or more positions materially responsible for performing services relating to the management, operations, engineering, construction, AB 1794 Page 4 financing, contracting, regulation, or resource management of a public water system"; and, c) "Small water purveyor" to mean "a public water system with less than 5,000 connections". 12)Remove the urgency clause. 13)Provide that this bill only becomes operative if SB 953 (Lara) of this legislative session is enacted and becomes effective. EXISTING LAW establishes the Municipal Water District Law, which 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. AS PASSED BY THE ASSEMBLY, this bill: 1)Established, in Municipal Water District Law, a governance structure for the Board and required the Board to establish a Technical Advisory Committee. 2)Required the Board to be composed of seven directors, as follows: a) Four directors elected by division by the voters of that division. Required 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 AB 1794 Page 5 District, pursuant to the appointment process described in 4) below. 3)Established an interim governance structure for the Board until the directors elected, pursuant to 2) a) above, at the November 6, 2018, election take office. Required the Board to be composed of eight directors, as follows: a) Five directors in accordance with the Municipal Water District Law which required 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 District, pursuant to the appointment process described in 4) below. 4)Established 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. Required each water purveyor to have one vote. b) One director selected by cities that are water purveyors of the District from the nominees of cities. Required each city to have one vote. c) One director selected by all water purveyors of the District from any nominee. Established a weighted vote for each purveyor to reflect their number of service connections. 5)Established a nomination process and required each nominee AB 1794 Page 6 that received the highest number of votes cast for each director to be appointed to the Board. 6)Required individuals nominated for an appointment to the Board to demonstrate eligibility and relevant technical expertise, and required each appointed director to live or work within the District. 7)Prohibited 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. 8)Required the Board to establish a Technical Advisory Committee composed of representatives of five water purveyors, as specified, selected by December 31, 2016. Required the Technical Advisory Committee to meet for specified purposes regarding the District's budget, changes to the administrative code, and procurement. 9)Defined "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. 10)Contained an urgency clause. 11)Provided 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. FISCAL EFFECT: According to the Senate Appropriations Committee, unknown local costs, some of which may be reimbursable by the state General Fund. Potentially reimbursable costs may exceed $100,000. Actual costs would AB 1794 Page 7 depend upon a determination by the Commission on State Mandates regarding what expenses incurred by [the District] in implementing this bill are deemed to be subject to state reimbursement. See staff comments in the [Senate Appropriations Committee] analysis from the August 1 hearing for a discussion of potentially reimbursable costs. Staff notes that the amendments adopted by this Committee reduce the potentially reimbursable costs. Specifically, eliminating the technical oversight committee and delaying the redistricting process until after the next census (at which time the District would be required to update district division boundaries anyway) would reduce local costs that may be subject to 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 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 AB 1794 Page 8 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. 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 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 AB 1794 Page 9 public at large to one appointed by the District's customers." 2)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, 2022 election, this bill adds an additional three appointed seats to the existing five-member elected Board. This bill establishes an appointment process for the three 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 small 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 is author-sponsored. 3)Author's Statement. According to the author, "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 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." 4)Related Legislation. SB 953 (Lara) of the current legislative session establishes restrictions on the District's use of sole source contracting. This bill and SB 953 (Lara) contain language that requires contingent enactment. AB 1794 Page 10 5)Policy Consideration. 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 Legislature 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. 6)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. 7)Arguments in Opposition. None on file. Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958 FN: 0004353