Report 2002-016 Summary - June 2004
Water Replenishment District of Southern California:
Although the District Has Addressed Many of Our Previous Concerns, Problems Still Exist
Although it has implemented many recommendations of our May 2002 report, the Water Replenishment District of Southern California (district) has not fully addressed all our concerns. Specifically, our review revealed that the district:
- Adopted a reserve-funds policy that calls for increasing its reserve funds, but since adopting the policy, the district allowed its reserve funds to further deplete.
- Likely overstated its reserve-funds targets by using some faulty assumptions in calculating them.
- Included goals and objectives in its strategic plan, but did not include outcomes by which the district and public can measure the district's progress in meeting them.
- Spent district funds on items such as gifts and flowers that its policies specifically prohibit.
- Incurred costs for items such as award dinners and food and beverages for meetings that do not appear to be the most prudent use of its funds.
RESULTS IN BRIEF
The voters of Los Angeles County established the Water Replenishment District of Southern California (district) in 1959 to counteract the effects of overpumping groundwater from the West Coast and Central basins (basins). The California Water Code (water code) grants the district broad powers to do what is necessary to replenish and maintain the integrity of the basins. In December 1999, the Bureau of State Audits (bureau) issued a report concluding that the district's poor management had led to its charging an excessively high replenishment assessment rate (assessment rate) to entities who pump groundwater. Because that report raised significant issues, the Legislature amended the water code to ensure that the district implemented the bureau's recommendations. The Legislature also directed the bureau to perform a second audit. In May 2002 the bureau issued a report concluding that since 1999 the district had eliminated excessive water rates, and it had depleted its reserve funds to a level that threatened its ability to maintain the current quantity of groundwater in the basins because it lacked a long-term vision of its finances.1 We also concluded that the district had not adequately planned for its capital improvement projects nor implemented adequate accounting and administrative controls over its operating expenses. The Legislature amended the water code again in 2002 and required the bureau to perform this follow-up audit of the district's operations and management.
Although it has implemented many of the recommendations of the May 2002 report, the district has not fully addressed all our concerns. We recommended that the district determine its need for reserve funds and adopt a policy to ensure sufficient funds to meet its statutory responsibilities. The district did adopt a policy that calls for increasing its reserve funds, but the policy lacks credibility largely because the district has since allowed its reserve funds to diminish even further. Having established a low assessment rate for fiscal year 2003-04, the district projects its reserve funds will fall to $3.5 million by June 30, 2004, less than the maximum that the water code currently allows and a fraction of the district's targets of at least $18.4 million and not more than $28.9 million. The district recently adopted an increased assessment rate for fiscal year 2004-05, one that its general manager asserts will not further deplete its reserve funds. However, unless the new assessment rate is sufficient to cover its planned costs and begins to replenish its reserve funds, we will continue to question the district's commitment to its reserve-funds policy. Also, the district has likely overstated these reserve-funds targets by using some faulty assumptions in calculating them. Moreover, to fully implement its reserve-funds policy, the district would need a statutory change to increase its reserves from the current limit—a change that the district is not currently seeking. Without a sound reserve-funds policy, the district cannot ensure that it has an adequate amount of reserves to continue to meet its responsibilities.
In contrast, the district's policy establishing an optimum and minimum quantity of stored groundwater in the basins appears reasonable. Further, the district is discussing with a work group a variety of options for a program to store surplus surface water in the basins for future withdrawal and use. Such a program could change how the district uses storage space in the basins and benefit the entire region, but it is too early to evaluate the outcome of these discussions.
Both our earlier audits highlighted the district's lack of up-to-date strategic and capital improvement plans and recommended that the district develop them. Although the district has developed strategic and capital improvement plans, both need refinement. The district's strategic plan includes goals and objectives but lacks outcomes by which to measure the district's progress in meeting them. In its capital improvement plan—which should prioritize capital improvement projects—the district specifies its funding needs and scheduling of proposed projects as recommended, but does not identify those projects the district believes it should complete first, possible funding sources available for each project other than issuing bonds, and the projects the district's board of directors (board) has formally approved.
To review the district's proposed capital improvement projects and provide recommendations to the board, the Legislature created a technical advisory committee (committee) comprising representatives of the ratepayers. The committee has worked with the district to develop a process to review and approve capital projects and to periodically update the capital improvement plan. Recently, the committee completed its initial review of 11 projects, nine of which the district included in its final capital improvement plan, but the district has not yet had an opportunity to implement the committee's updating procedure. The statute mandating the committee will sunset on January 1, 2005. However, according to the district's general manager, the district intends to revise its administrative code to ensure that the committee remains a part of its process for reviewing and approving its capital improvement projects. If the district does not revise its administrative code and the statute sunsets, the ratepayers may lose important opportunities to provide input to the district on future capital projects and during the district's process for periodically updating the capital improvement plan.
Finally, the district has improved its accounting and administrative controls and made changes to its administrative policies since our last audit. However, the district does not always follow these policies. For example, the district has spent district funds on gifts and flowers, which its policies specifically prohibit. Also, the district lacks thorough accounting policies to control reimbursements to staff and board members, especially for travel costs. Moreover, although the district instituted controls to ensure that its costs are reasonable and necessary, the district incurred costs that do not appear to be the most prudent use of its funds. In reviewing the district's 2003 administrative payments, we found that the district spent about $1.19 million on legal services, more than $17,500 on food and beverages for meetings, $2,250 for award dinners, and more than $23,000 to send one director to 17 conferences. By modifying its administrative policies to limit or prohibit certain purchases, the district could better control its administrative costs, especially at a time when its low assessment rate is continuing to shrink its reserve funds.
To ensure that the district has sufficient funds to meet its statutory responsibilities and to show its commitment to its reserve-funds policy, the district should do the following:
- Set its assessment rate at a level that will support the district's planned activities and allow it to replenish its reserve funds, if necessary, and keep them at an appropriate level.
- Reevaluate the assumptions that underlie the amount it targets to have available as reserve funds and, if necessary, seek legislative approval to revise the amount allowed as reserve funds.
To ensure that the district and the public can assess the district's progress in achieving the goals and objectives described in its strategic plan, the district should refine its plan to include measurable outcomes.
To make its capital improvement plan more informative to the district and its ratepayers, the district should consider doing the following when it updates its capital improvement plan:
- Rank projects by their importance to identify the projects it believes it should complete first to meet its statutory requirements.
- Include alternative sources of funding for the projects in addition to issuing bonds.
- Distinguish between board approved projects and proposed projects.
To ensure that the district continues to collaborate with ratepayers on projects, it should pursue its plan to revise its administrative code to make the technical advisory committee part of its process for reviewing and approving capital improvement projects. If the district fails to implement this recommendation, the Legislature should consider extending the committee at least until the committee has had the opportunity to participate in the process of periodically updating the district's capital improvement plan.
To strengthen controls over its administrative expenses and to ensure that it uses public funds prudently, the district should take the following steps:
- Reaffirm its commitment to following the policies in its administrative code, and ensure that its staff abides by the policies.
- Perform a detailed review of the reasonableness of the costs for contracted legal services, and consider whether hiring an in-house lawyer is more cost-effective.
- Reassess its use of public funds for such purposes as award dinners, catered meals, high airfares, and lodging for local conferences, and revise its administrative code to limit or prohibit such costs.
- Amend its administrative code to provide better guidance on reimbursable travel expenses, including a limit on the number of conferences staff and directors can attend and a process for justifying exceptions to that limit.
The district indicates that it accepts our recommendations and further states that it has already implemented one of them by extending the life and function of the technical advisory committee.
1 In this report, the term reserve funds refers to the district's current net assets, or current assets less its current liabilities, that are not legally restricted.