East Orange County The Honorable Thomas J. Borris Water District Presiding Judge of the Superior Court*

Most Orange County special districts with or without the assistance of 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. Response: We disagree. There have been numerous consolidations of special districts in Orange County, but other organizations will speak to this. With regards to EOCWD, in 1985, the County of Orange requested that we absorb their Water Works District No. 8 into our district, and we obliged – despite the fact that we received it in extremely poor condition and with no reserve funds to repair Honorable Thomas J. Borris June 21, 2012 Response to Grand Jury Report Re: 'Let There Be Light' it. We've been trying to play "catch-up" ever since; this is the reason we levied our Capital Replacement Fee. Since 1994, our District twice reviewed consolidation with Serrano Water District, and twice reviewed privatizing with the Southern California Water Company (currently Golden State Water Company). Also, exploratory discussions were held with Irvine Ranch Water District many years ago to consolidate with them and they declined. As recently as 2009/2010, in another attempt at consolidation, and in coordination with Supervisor Campbell's office and LAFCO; EOCWD formally issued Requests for Proposals (RFPs) to six potential merger/consolidation candidates (City of Orange, City of Tustin, Irvine Ranch Water District, Golden State Water District, Serrano Water District and the Municipal Water District of Orange County). We spent one year working with these agencies, providing them detailed information on the state of our system and our finances. On the bid opening date of February 1, 2010, all of these agencies declined to make an offer to consolidate. We believe that having reviewed our management structure, our operating costs and our still heavy capital replacement burden, these agencies realized that none of them would be able to operate the system less expensively than we are doing - which meant that they would have to raise their new customer's rates, or else their current customers would be subsidizing the new customers – a situation that wouldn't be fair to their current customers.

Special districts have made very little progress in complying with the

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: We partially disagree. We don't know why or how many of these districts started, or how many have been absorbed by larger districts, but EOCWD was never formed for agriculture irrigation; it was formed to supply imported water to the Honorable Thomas J. Borris June 21, 2012 Response to Grand Jury Report Re: 'Let There Be Light' east county area because there was insufficient groundwater to supply the area - which included portions of the growing cities of Orange and Tustin. These cities were already formed and functioning - but they did not extend water service to the unincorporated areas of the county (Orange Park Acres, Lemon Heights, Cowan Heights, Panorama Heights and North Tustin). We agree that in 1985, EOCWD cooperated with the County of Orange and absorbed Water Works District No. 8 into our district.

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. Response: We disagree. The property taxes we receive form the firm foundation of our short and long range financial plans. These funds are fundamental to the ability to operate and maintain this water system at a competitive price for the benefit of our ratepayers. The Grand Jury's statement that special districts could "wean themselves from tax subsidies," implies that the property taxes we receive are not critical to the operation and maintenance of this district - and that there is something better and more readily available to take their place. They are critical, and there is no place else to go to get this money than from the people that are already paying it - our ratepayers. Property taxes comprise one-fifth of our revenue – an estimated $950,000 out of a proposed $5,525,000 FY 2012/13 budget. If we lost this revenue, we would need to increase our Retail customer's bills by approximately $29.00 per month. For our customers that use very little water, this increase would almost double their monthly water cost. Further, much as it would for a household to lose one-fifth of its income, the loss of these funds would wreck havoc with the financial planning that - along with the frugal nature of our operation – has allowed us to take care of our obligations. Water districts are capital intensive operations – we set aside funds for emergency repairs (if one of our 24" water lines breaks under a major road such as Newport Avenue or Jamboree, the cost of repair could easily approach $500,000 to $700,000), for the planned replacement of pipelines, water tanks and pump stations. Just two years ago it cost us $1,200,000 to paint the inside and outside of just one of our reservoirs - and because of the economy, we felt fortunate to receive a price that was almost $400,000 less than we estimated it would have two years earlier. In 2011, we replaced 2,400 feet (less than ½ mile) of old 1940s/50s steel pipe at a cost of over $700,000 (inclusive of engineering) - we still have about 26,600 feet or 5 miles of this pipe in our system. Taking away these funds would mean that we would either defer or forgo this work. Honorable Thomas J. Borris June 21, 2012 Response to Grand Jury Report Re: 'Let There Be Light' Our cost for water - which is our single largest annual expense and over 40% of our budget, has risen over 100% since 2006. Our Retail Zone water rate has risen 40% over this same period – the loss of these property taxes would add another 63% increase on top of this. Taking away this source of revenue means that a portion of the property taxes our customers are paying to operate, maintain, repair and reconstruct their water system will no longer be going towards something that not only maintains their property value – but that through the provision of fire flow – protects life and property. They would pay more and not get anything more than they are receiving now - and this would be a further disincentive to consolidation with another agency.

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: We disagree. As shown in the copies attached to this response, the EOCWD Board adopted reserve fund policies in 1979, 1985 and updated them in 2001. These funds are annually identified in our 5-Year Capital Improvement Program budget (also attached), and can only be spent with the specific approval of the EOCWD Board. Our CIP is part of our budget and is posted on our website. We are also required to submit annual financial reports to the State Controller's Office and a copy of our annual budget to the County of Orange.

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. Response: We disagree. By law, the only restricted reserve funds an agency can have are those that are limited by legal or contractual requirements - this does not mean that these funds are undesignated. As we noted in F7, our Capital Improvement Plan shows the allocation of reserve funds for planned repairs and replacements in our system and for security and back-up power enhancements. These lists don't include emergencies that can quickly ruin reserves. For example, even a relatively mild earthquake could significantly damage our wells; so instead of getting 68% of our water at a cost of $300/Acre-Foot (AF), we would be required to import it at a cost of $800/AF - a new well costs about $2 million, so we would have the expense of the well, plus the cost of the imported water for a year until we could get the well back on-line, an additional $520,000 expense. The enterprise special districts could save millions of dollars in administration FIO. costs by consolidation into regional special districts. Five or six such enterprise special Honorable Thomas J. Borris June 21, 2012 Response to Grand Jury Report Re: 'Let There Be Light' districts within Orange County could save at least $500,000 per year for each special district absorbed. Response: We disagree. The report provides no information upon which they based that statement, so we don't believe that we can constructively comment on it. We believe that with respect to EOCWD, we have demonstrated that contrary to generally accepted belief, small special districts can be efficient and effective in delivering services to their customers. One need only look to the myriad of small businesses that thrive in America to realize that while large agencies certainly enjoy economies of scale, they often blunt these advantages by becoming bureaucratic, lethargic and non-responsive to their customers. It is flawed logic to assume that just because another agency can deliver water services, that they will do it better or for a lower price than the existing agency. If this were the case, Orange County - and indeed the state - would only have 5 or 6 large cities or counties.

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 customers 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. Response: We disagree. Adam Smith, the Scottish Economist wrote in The Wealth of Nations that, "The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." A portion of the property tax that our customers pay to the County two times per year is returned to them in the form of a transfer payment to their water district. Therefore, their toil and trouble of acquiring water is reduced by $30.00 each month that they've already paid. If they were then required to pay an additional $30.00 and their taxes were reduced by $30.00, we assume that there would not be much outcry as this would be revenue neutral to them. But nowhere in the Grand Jury Report is that suggested. Instead, the implication is that they would still pay the $30.00 they have been paying (which would now go to some other government agency), plus an additional $30.00 - without getting them any closer to the "real price of water." The price didn't change, just the source of the revenue. We think customers are probably more interested in why all water districts don't receive a portion of their ratepayers' property taxes, than they are in the true cost of water.

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. Honorable Thomas J. Borris June 21, 2012 Response to Grand Jury Report Re: 'Let There Be Light' Response: We partially disagree. We welcome the concept of performance audits in general as we believe we run an efficient, no-frills operation that gets the job of safe, reliable water done. However, LAFCO conducts Municipal Service Reviews, which evaluate our efficiency and effectiveness and updates them every 5 years. Currently, we pay over $15,000 per year to fund this and other LAFCO work. Because of this, we disagree with the recommendation as it would, in our opinion, be duplicative and costly without yielding any more or better information. Responses to Recommendations R1, R4, R5, R6, R7, R8 and R9