Municipal Water District*

Most Orange County special districts, with or without the assistance of the Director Local Agency Formation Commission (LAFCO), have been incapable or Susan Hinman unwilling to consolidate, absorb, or eliminate these outmoded and/or redundant Director agencies. LAFCO typically addresses larger issues such as merging of cities and Wayne S. Osborne Director elimination of "islands" within the county. The special districts themselves have Kevin P. Hunt, P.E. not worked seriously toward their consolidation or demise. In this regard, the General Manager enterprise special districts and the non-enterprise special districts require independent evaluation and handling. MEMBER AGENCIES RESPONSE: MWDOC disagrees. MWDOC is not aware of the need for City of Brea wholesale reorganization among special districts. Special districts provide a City of Buena Park key role in delivering of services to Orange County customers. One aspect East Orange County Water District often cited as a benefit of special districts is that of "local control" and direct El Toro Water District accountability to the customers in the service area. Citizens tend to trust Emerald Bay Service District City of Fountain Valley local government more than state or federal governments. City of Garden Grove Golden State Water Co. It should be noted that Orange County special districts have initiated a City of Huntington Beach number of dissolutions and consolidations during the past two decades, Irvine Ranch Water District particularly when there have been significant opportunities for ratepayer Laguna Beach County Water District savings, operational and system efficiencies, and other benefits. Since 1995, City of La Habra the following consolidations, dissolutions, and mergers of Orange County City of La Palma Mesa Consolidated Water District special districts have occurred: Moulton Niguel Water District City of Newport Beach Dissolution of the Laguna Niguel Community Service District • City of Orange Dissolution of County Service Area 25 (Aliso Viejo) . Orange County Water District Dissolution of the Carpenter Irrigation District City of San Clemente Dissolution of the Tri-Cities Municipal Water District City of San Juan Capistrano Santa Margarita Water District Reorganization of four special districts (South Coast reorganization) . City of Seal Beach Consolidation of Coastal Municipal Water District with Municipal Serrano Water District Water District of Orange County South Coast Water District continued ... Trabuco Canyon Water District City of Tustin City of Westminster Yorba Linda Water District Municipal Water District of Orange County Let the Be Light: Bringing Special Districts Out of the Shadows July 24, 2012 /6 Acquisition of Santa Ana Heights Water Company by Irvine Ranch Water District . Merger of Los Alisos Water District with Irvine Ranch Water District • Merger of Santiago County Water District with Irvine Ranch Water District Acquisition of Orange Park Acres Mutual Water Company by Irvine Ranch Water District • and annexation of that territory We note that special districts have worked seriously toward consolidations and improved efficiencies when there is a demonstrated need, desire, and opportunity. Wholesale reorganizations without the necessary level of study, analyses, and debate have not been pursued. We do not agree that special districts require independent evaluation other than that provided by LAFCO's Municipal Service Review (MSR) process.

Special districts have made very little progress in complying with the recommendations made by various governmental agencies. To ensure recommendations are followed, more coordination and cooperation is needed from the city and county agencies. RESPONSE: MWDOC disagrees. We can advise that, in the development of MWDOC's responses to the Grand Jury recommendations, over the years, considerable debate and discussion of the recommendations has occurred. That is not to say that all recommendations are implemented, but they are all seriously considered. Furthermore, in certain years MWDOC has facilitated discussions and presentations directly with the Grand Jury members as part of an "educational process." MWDOC is always able and willing to collaborate with the Grand Jury in exploring issues and topics regarding water and local government issues. One of MWDOC's

The sixteen enterprise districts typically started as local agricultural irrigation providers and sanitation providers for local communities. These special districts have transitioned into providers of potable water and sewerage disposal for the cities that blossomed around them after 1950. These districts grew until their boundaries met a neighboring special district that was also growing. Some of these local smaller providers have already been absorbed by larger districts under one management. RESPONSE: MWDOC agrees.

The sixteen enterprise special districts of Orange County founded between 1919 and 1964 have grown with the urbanization of the county. Thirteen of these special districts rely upon taxes collected by the county while three rely on fees and other sources for their revenue. This suggests that all of these enterprise special districts could wean themselves from tax subsidies and rely on fees for their revenue. Severance from the tax subsidies would enable financial transparency and let the customers see the true cost of the services provided. continued... Municipal Water District of Orange County Let the Be Light: Bringing Special Districts Out of the Shadows July 24, 2012 /6 RESPONSE: MWDOC disagrees. While MWDOC is one of three Orange County enterprise special districts that do not receive county tax revenue, we are troubled by the suggestion that enterprise special districts should simply wean themselves from this revenue source and rely solely on fees to fund their operations and services. The loss of county tax revenue would directly impact these districts and their ratepayers. Further, the informal term "wean" understates the fiscal and legal complications that would arise from such a change.

The unrestricted reserves of the special districts are available to the governing boards to spend as they please. Local citizens are not openly informed of this wealth when agencies ask for fee increases, special assessments, or bond measures. Most of the special districts do not appear to have specific criteria for amassing these reserves nor do they have published long-range plans for their constructive use. RESPONSE: MWDOC disagrees. The finding states that special district governing boards can spend "unrestricted" reserves "as they please." This is not correct. Reserves are maintained to provide districts with the ability (and flexibility) to respond to events such as variations in water sales, unforeseen emergencies, lawsuits or legal challenges, the repair and replacement of infrastructure, and other issues the districts may face. The uses and restrictions on the uses of reserves are pursuant to policies set by each special district's governing body, and the policy considerations for each district are different.

The twenty-seven special districts in Orange County have amassed unrestricted reserves of over \$866,000,000. That is enough money to fund all of these special districts for more than a year without taxes, fees, interest, or other sources of revenue. The boards of directors have the sole discretion to spend these unrestricted reserves. RESPONSE: MWDOC agrees with the finding, but not the implication. The finding is correct. The implication, however, is that special districts have amassed inappropriate levels of financial reserves and that their boards of directors should not have the authority to spend it without some sort of additional oversight or approval. This, or course, undermines the fiduciary duty that board members are entrusted with and accept when they are sworn into office. Water infrastructure is very capital intensive and is constantly facing new regulations. Because of the safety and health issues associated with water, our industry tends to be conservative. The facilities and systems must last between 30 and 100 years depending on the structures involved, and they require ongoing investments to keep the facilities in good condition. Annual surveys conducted by many organizations (the best known are the American Water Works Association and the American Society of Civil Engineers) indicate that funding pressures are impacting the quality of our systems. The ongoing investments needed for upkeep, repair, and upgrades of water and wastewater facilities are extremely large. We are proud that planning and management within the water and wastewater community in Orange County has resulted in accumulation of these reserves for a time when they will be needed. We believe with a greater understanding of the issues facing our industry, the Grand Jury would have come to the conclusion that reserves should probably be increased for water and wastewater investments needed in the future. continued... Municipal Water District of Orange County Let the Be Light: Bringing Special Districts Out of the Shadows July 24, 2012 /6

The enterprise special districts could save millions of dollars in administration costs by consolidation into regional special districts. Five or six such enterprise special districts within Orange County could save at least $500,000 per year for each special district absorbed. RESPONSE: MWDOC disagrees. The savings may be estimated based on assumptions put forth, but without a very detailed analysis, identifying and quantifying potential savings would be erroneous. Further comments on the finding would require a detailed analysis of the information developed in making the Grand Jury forecast. Primary considerations would require comparison of the level of service to be provided, the costs to physically integrate water agencies, and consideration of the implication of the loss of local control.

Only one of the special districts, The South Coast Water District, has had recent performance audits. The lack of performance audits for the remaining special districts leaves the potential for inefficiencies, poor practices, outmoded operations, etc. hidden from the governing boards and the communities they serve. The lack of published performance audits has contributed to the public's ignorance of these districts. RESPONSE: MWDOC disagrees. We believe that the MSRs that LAFCO conducts with all special districts every five years is an effective process for evaluating performance in many of the same areas that a performance audit would cover. The MSRs are prepared and published by LAFCO and made available to the district and its board of directors, the public, the media, and others who may have an interest in assessments of local agencies. The MSRs evaluate the subject district in many areas, identifies its strengths and weaknesses, and makes recommendations as appropriate. Through the three MSRs cycles that have now occurred, LAFCO has found no significant issues with special districts.