Report 2003-137 Summary - June 2004

California's Independent Water Districts:

Reserve Amounts Are Not Always Sufficiently Justified, and Some Expenses and Contract Decisions Are Questionable

HIGHLIGHTS

Our review of independent water districts revealed the following:

  • Five of the eight water districts we visited may have trouble defending to their ratepayers and taxpayers the need for some portion of their accumulated resources.
  • The Office of the Legislative Counsel has opined that the Legislature cannot lawfully enact a statute that would transfer to the State's General Fund money in a special district's reserve fund.
  • Three of the eight water districts paid attendance or similar fees for their directors' participation in events that the districts could not demonstrate were reasonable and necessary.
  • One water district did a much better job than did the others of disclosing reimbursements for individual expenses by directors.
  • A director at one water district made questionable decisions in which she had financial interests in apparent violation of the State's conflict-of-interest laws.

RESULTS IN BRIEF

Water districts do not always have sufficient policies guiding the accumulation and use of resources. Lacking such policies, commonly referred to as reserve policies, water districts might have difficulty demonstrating to ratepayers and taxpayers how some of the accumulated resources serve public purposes. As of the close of fiscal years ending in 2003, the eight water districts we reviewed had accumulated resources totaling $485 million, an amount that would be sufficient to cover their total annual expenses for about 2.2 years. However, we acknowledge that water districts will ultimately use these resources for various purposes, not all of which will be to cover operating expenses. Resources held by the eight water districts to meet externally imposed restrictions would cover expenses for six months, while resources designated to meet specific district needs would cover expenses for about 17 months. The remaining balance would be sufficient to cover expenses for more than three months and could be used for other purposes, including rate reduction. We did not conclude that these accumulations are excessive. However, five of the eight water districts we visited might have trouble defending to ratepayers and taxpayers the need for some portion of their accumulated resources because either they have no reserve policies or the policies they do have are weak.

Regardless of how much resources water districts have accumulated, some people have asked whether the State could tap these resources to help it get through its current budget crisis. An opinion from the Office of the Legislative Counsel states that the Legislature cannot lawfully enact a statute to transfer money from a special district's reserve fund to the State's General Fund and allocate that money for a purpose other than that for which the special district was created.

After reviewing the expense records of the eight water districts we visited, we concluded that some expenses for the districts' directors did not appear to be reasonable and necessary uses of public funds. State law provides water districts only general guidance on spending for their directors. Therefore, water districts must enact and execute their own policies to ensure that the funds they spend for their directors are reasonable and necessary. The policies addressing directors' expenses at some water districts are not always sufficiently specific or constraining.

The expense records of three water districts we visited showed that they paid attendance or similar fees for their directors' participation in dozens of events that the water districts could not demonstrate were reasonable and necessary. Questionable events included retirement, anniversary, and holiday celebrations; social mixers; and chambers of commerce functions. In some instances, water districts also paid their directors stipends for attending the events and paid for the directors' spouses to attend. One water district told us that attending such events gives directors the opportunity to informally discuss many issues with other agencies and community leaders. This water district also pointed out that it encouraged its directors to attend regular meetings of other entities important to its interests to achieve its goal of "maintaining consistent, effective, and open channels of communication." Although the goal appears to have some merit, we question whether the directors' attendance at the events previously described truly represents a reasonable and necessary means to achieve that goal.

We also observed that one water district appeared to be overly generous in the amounts it paid for some directors' meals. Specifically, this water district paid a total of almost $18,000 for 15 meals provided to its directors and others while away from the district. According to information provided by the water district, the number of people attending these 15 meals ranged from six to 29, the number of directors attending ranged from one to four, and the average cost per person for each meal ranged from $62 to $155. If the cost of each of the director's meals was equivalent to the average cost per person, then the estimated total cost to ratepayers and taxpayers for the 40 total instances when the water district paid the directors' share was $3,700.

Further, one water district we reviewed appears to do a much better job than do the others of disclosing the reimbursements it made to directors for individual expenses. Disclosing reimbursements, which is required by law, enables ratepayers and taxpayers to more easily see the purposes and amounts of the reimbursements. This water district periodically issues a document that describes a particular expense, the date the district incurred the expense, and the director who incurred it. The water district also reviews the disclosure document during a public meeting of its governing board. In their efforts to meet the disclosure requirements, the other water districts use other practices, which include summarizing directors' expenses rather than listing individual expenses and making internal reports available only to those who request it.

Finally, we found that water districts provide their directors with varying levels of training regarding conflicts of interest. We noted that a director at one water district made questionable decisions regarding issues in which she had financial interests, in apparent violation of the State's conflict-of-interest laws. Further, directors from several water districts did not always properly complete the forms, as required by law or district policy, to disclose their personal investments, incomes, business positions, and interests in real property.

RECOMMENDATIONS

To demonstrate that they are using their accumulated public funds to cover reasonable and necessary expenses, water districts should ensure that they have comprehensive reserve policies in place that, at a minimum, do the following:

  • Distinguish between restricted and unrestricted net assets.
  • Establish distinct purposes for all reserves.
  • Set target levels, such as minimums and maximums, for the accumulation of reserves.
  • Identify the events or conditions that prompt the use of reserves.
  • Conform with plans to acquire or build capital assets.
  • Receive board approval and be in writing.
  • Require periodic review of reserve balances and the rationale for maintaining them.

The Legislature should consider amending the California Water Code to require all water districts to develop and implement comprehensive reserve policies that include the key elements discussed in this report and outlined in our recommendation to the water districts.

To ensure that all payments to or on behalf of their directors are reasonable and necessary, water districts should adopt and implement policies that are sufficiently specific and constraining.

To clearly inform ratepayers and taxpayers about the nature and amounts of reimbursements paid to directors, water districts should adopt and implement policies to periodically report in public board meetings the specific amounts paid to or on behalf of their directors and the specific purposes of those payments.

To ensure that their directors are better aware of their responsibilities regarding conflict-of-interest requirements, water districts should do the following:

  • Provide periodic training related to conflicts of interest.
  • Guide directors in completing forms disclosing their economic interests and stress the importance of disclosing all economic interests as required by law or district policy.

WATER DISTRICT COMMENTS

Most of the water districts we visited generally agreed with the bulk of our recommendations. One water district—the Walnut Valley Water District—strenuously objected to nearly everything we mention in the audit report about it and believes that the Bureau of State Audits exceeded the scope of the audit, as determined by the Joint Legislative Audit Committee.


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