BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1794


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          1794 (Cristina Garcia)


          As Amended  August 15, 2016


          Majority vote


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          |ASSEMBLY:  |78-0  |(June 2, 2016) |SENATE: |31-4  |(August 19,      |
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          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.  









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          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:








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             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,  








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               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  








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               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  








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            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  








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          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  








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            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  








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            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.  










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          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