Directors Officers*

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. The District wholly disagrees. The District was formed in 1933 by an act of the California State Legislature. The District has the unique responsibility to protect Orange County's water rights to the Santa Ana River and to protect and manage the groundwater basin that underlies north and central Orange County. No other agency in the County has similar responsibilities. The District has actively explored consolidation with another local water agency multiple times in the past, including very recently. As of this date, there is insufficient support to consolidate the agencies. Additionally, the District is willing to consider any logical consolidation with another agency if doing so is consistent with the District Act and in the best interest of the groundwater producers and water users in the District's service area. PO Box 8300 18700 Ward Street (714) 378-3200 www.ocwd.com Fountain Valley, CA 92728-8300 Fountain Valley, CA 92708 (714) 378-3373 fax Thomas J. Borris, Presiding Judge July 20, 2012

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. The District 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. The District wholly disagrees. The District anticipates receiving approximately $19.4 million in property tax revenues in fiscal year 2012-13. This funding has been pledged and used by the District to repay debt service from previous bond issuances which were used to fund the construction of local water supply projects. Elimination of the property tax revenue the District annually receives would necessitate increasing the District's replenishment assessment rate by approximately 24%. If the Grand Jury's recommendation were to occur, the District would recommend a reduction in the ratepayer's property taxes to offset the increase in the District's replenishment assessment. Thomas J. Borris, Presiding Judge July 20, 2012

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. The District wholly disagrees. The District has adopted policies at public meetings for the need and amounts of unrestricted reserves that are maintained. The District has also discussed these policies with representatives of the 19 retail water agencies the District serves. Restricted and unrestricted reserves are accumulated for specific uses to assist the District in managing the groundwater basin. The District has long-established and strict policies for the reserves it maintains. Reserves are accumulated to ensure the successful operation of the groundwater basin. Among other necessary reserve funds, the District maintains the following: Toxic Cleanup Reserve Fund - established for toxic spill emergencies and cleanup. The current target level is $ 4 million and is to be replenished annually after the adoption of the annual OCWD budget. Contingency Reserve Fund - established by the District Act to provide for expenditures that have not been anticipated or provided for in the District's annual budget. The money for this fund is to be allocated from the Operating Fund and the Water Reserve Fund at the beginning of each fiscal year. The level of this fund as established by the District Act is not to exceed $ 3 million. Basin Equity Assessment Fund - established by the District Act for funds received from the levy of the District's Basin Equity Assessment. These funds are to be used only for the purchase of water for the purpose of groundwater replenishment and/or to reimburse producers assigned pumping limitations per the District Act. Water Reserve Fund - established by the District Act to accumulate any excess general assessment, or unexpended funds, other than funds allocated to the operating reserve or operating contingencies by the Board of Directors. These funds can be used for the purchase of supplemental water for groundwater replenishment, acquiring, constructing or developing any groundwater intrusion prevention projects, pipelines, wells or other works necessary for the purposes of the district. Going forward, under the new Reserve Policy, this fund shall be designated only for purchases of supplemental water in order to have funds set aside and available. This will provide accountability and transparency to the Board and Groundwater Producers on funds collected and spent on water Thomas J. Borris, Presiding Judge July 20, 2012 purchases. The maximum upper limit is set at enough funds to purchase 50% of water needed to have an accumulated basin overdraft of 125,000 acre-feet. Repair and Replacement Fund - established for replacement or refurbishment of District facilities, to be equal to thirty years of projected Replacement and Refurbishment (R&R) costs as defined in the District's R&R model. From 2008 to 2011 the District accumulated $59 million in reserves which provided for the purchase of 93,000 acre-feet of discounted replenishment water from the Metropolitan Water District in 2011. These purchases will save the groundwater producers and water users within our service territory approximately $28.3 million in water supply cost. The District also maintains unrestricted reserves at the current levels to preserve its AAA/AAA/Aa1 credit ratings, which allows the District to access very low interest rate debt to fund local water supply projects, thereby saving the District (and its groundwater producers and water users) millions of dollars. Moreover, in keeping with the District's policies of financial transparency, the District's reserves are provided in monthly reports to the Board which are agendized at public meetings and available to the public on the District's website, www.ocwd.com, and/or upon written request.

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. The District partially disagrees. The District has not independently surveyed all of the special districts' unrestricted reserves amounts, nor their operating budgets, and therefore cannot provide an informed response to this finding. The District agrees with the Grand Jury finding that it is the duty of the boards of directors of the special districts to oversee how reserves are accumulated and spent.

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. Thomas J. Borris, Presiding Judge July 20, 2012 The District partially disagrees. The District concurs that there are special districts that could be studied, reviewed and considered for consolidation. The District is not aware of what criteria was used to determine that "five or six" special districts was the optimum number, nor the minimum $500,000 estimated savings.

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. The District wholly disagrees. The District believes that it is important for water and sanitary sewer districts to be financially transparent, including provision of full revenue source disclosures, so the public is aware of the costs of service. The District's financial information is available on line and is discussed publicly at agendized meetings. The District will continue to improve upon its financial transparency.

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. The District partially disagrees. Performance audits are one way to maintain an efficient and effective organization. If special districts are not routinely considering ways to improve the operation of their organizations then the potential for waste exists. District staff spoke with senior management at the South Coast Water District, who indicated the performance audit being cited was of limited value to the organization. The publication of performance audits could help educate the public on the role and function of special districts. However, there are more appropriate methods to educate the public regarding the roles of special districts and there are other audits the District does and has participated in that validate the District's responsible fiscal management. Audits include regular financial audits and project audits conducted independently by state and federal agencies. Thomas J. Borris, Presiding Judge July 20, 2012