Irvine Ranch Irvine Ranch Water District*

Most Orange County special districts, with or without the assistance of the Local Agency formation Commission (LAFCO), have been incapable or unwilling to consolidate, absorb, or eliminate these outmoded and/or redundant agencies. LAFCO typically addresses larger issues such as merging of cities and elimination of "islands" within the county. The special districts themselves have not worked seriously toward their consolidation or demise. In this regard the enterprise special districts and the non-enterprise special districts require independent evaluation and handling. We disagree wholly with this finding as it applies to IRWD. Over the last 10-plus years IRWD has consolidated with five water districts. The integrated services of IRWD allow for reduced overhead and administrative costs and lower rates and charges to customers of the consolidated district. When considering consolidation requests, the District looks for increased efficiencies through economies of scale and mutual benefits from combined expertise and resources. Although consolidations differ depending upon the local agency, the basic consolidation process is generally as follows: the agency seeking consolidation provides a framework and service requirements for the specific area in question. If IRWD determines that it is both appropriate and fiscally prudent to enter into consolidation discussions, we will respond. If selected, IRWD and the agency seeking consolidation will develop and agree to the terms and conditions of the consolidation agreement and an application will be filed with the Orange County Local Agency Formation Commission. LAFCO then evaluates and makes a decision on whether or not to accept the consolidation proposal. The Honorable Thomas J. Borris, Presiding Judge Orange County Superior Court July 25, 2012

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. IRWD cannot comment on this finding as it is unclear which recommendations this finding references. IRWD has a proactive record in working with other entities to promote accountable, efficient and effective local services. Please refer to IRWD response to F1.

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 smaller providers have already been absorbed by larger districts. IRWD concurs with this finding, making note that this is a typical historical growth pattern scenario not only for enterprise special districts, but also non-enterprise special districts as well as other forms of local government that provide specialized services, including cities and counties.

The sixteen enterprise special districts of Orange County founded between 1919 and 1964 have grown with the urbanization of the country. Thirteen of these special districts rely upon taxes collected by the county while three relay 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. We disagree wholly with this finding as it applies to IRWD. IRWD uses the one percent property taxes received from the state, along with other voter-approved local property taxes and new connection fee revenue, to make payments on its bonds that finance the facilities it needs. This makes sense - property owners directly benefit from the water and wastewater infrastructure and services their property taxes have paid for. These tax revenues are used by IRWD to fund the debt service on basic water and wastewater infrastructure – which includes projects like reservoirs, groundwater wells, water pipelines, water pump stations, sewage lift stations, sewage treatment and disposal capacity, and sewage collection pipelines. This enormous infrastructure serves about one fifth of Orange County and includes more than 1,100 miles of drinking water pipelines, more than 400 miles of recycled water pipelines, more than 900 miles of sewer pipes, 53 reservoirs, and two large wastewater treatment plants. The Honorable Thomas J. Borris, Presiding Judge Orange County Superior Court July 25, 2012 In fiscal years 2004-05 and 2005-06, the state grabbed a total of $19.4 million of the District's one percent property tax allocation in a budget-balancing maneuver. The "temporary" taking of that property tax revenue directly resulted in an increase in new service connection fees and local property taxes. Years later, the state still owes IRWD customers $2 million. The Orange County Grand Jury clearly and strongly suggests it would be the responsible thing to do for the state to once again divert property tax revenue from special districts. As we have illustrated, that would be the opposite of prudent, responsible policy. Such a shift, whether temporary or permanent, would once again result in connection fee and local property tax increases. A permanent redirection of that tax revenue into state coffers could well lead to increased monthly user rates. Even when the state takes property tax funds away from local agencies such as IRWD, our customers still continue to pay the same one percent property taxes to the state plus any additional IRWD imposed taxes and fees necessary to pay our infrastructure bond payments. In the end, this is a roundabout way for the state to quietly raise taxes by forcing IRWD to increase fees and assessments to offset the property tax revenues taken by the state.

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 wealthy 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. We disagree wholly with this finding as it applies to IRWD. IRWD's audited financial statements reflect no unrestricted water or sewer assets (California Water District Law, Division 13 of the Water Code). Financial statements as well as the annual operating and capital budgets are adopted in a public meeting process where our customers always have an opportunity to review and comment. Once finalized, these documents are placed on the IRWD website. IRWD "Cash and Investments" assets of approximately $250 million as of June 30, 2010 consists primarily of funds that are restricted to pay for infrastructure replacement and refurbishment needs of the District over time as well as restricted proceeds from bond issue to finance capital infrastructure (See note 2 in the Statement of Net Assets in the IRWD 2010 Comprehensive Annual Financial Report.) Every year IRWD evaluates its future replacement and refurbishment funding needs utilizing sophisticated planning models that currently indicate that IRWD will require an estimated $2 billion in infrastructure and refurbishment funding in the future. IRWD believes that setting aside funds now to fund future infrastructure expenditures is prudent financial management so our customer's rates are not severely impacted by large capital expenditures in the future. This approach to financing future infrastructure needs is described on of the IRWD 2010 Comprehensive Annual Financial Report. The Honorable Thomas J. Borris, Presiding Judge Orange County Superior Court July 25, 2012

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 year without taxes, fees, interest, or other sources of revenue. The boards of directors have the sole discretion to spend these unrestricted reserves. We disagree wholly with this finding as it applies to IRWD. Please refer to IRWD response to

The true cost of water and sanitary sewers in the enterprise special districts is hidden when both taxes and fees fund these districts. Only when the monthly service bills to the customer include all the costs for these services without the tax subsidy will the public understand the true cost of these services and achieve financial transparency. We disagree wholly with this finding as it applies to IRWD. Please refer to IRWD response to