Survey of Independent Special Districts*

0. ISD directors perform valuable service at minimal cost. However, this survey reveals inconsistent behaviors regarding compliance with sound management practices. Response to Finding 1.0. SMUD agrees that members of the SMUD Board provide a valuable service to the agency, the Sacramento community, and their respective constituents by providing policy direction and oversight for the organization and its activities. SMUD disagrees with the second sentence of the finding to the extent it implies that SMUD lacks sound management practices. As set forth in this and subsequent responses to the Grand Jury Report, SMUD has policies and practices in place to ensure sound management practices. The SMUD Board of Directors' oversight and policy functions are articulated in a series of governance policies divided into three categories: (i) Governance Process policies, which describe the duties of the Board, its members, and how the members conduct the Board's business; (ii) the Board-Staff Linkage policies, which set forth the duties of the General Manager and Chief Executive Officer, the General Counsel, Internal Auditor and Special Assistant to the Board and also establish clear delegations of authority from the Board to the General Manager and Chief Executive Office; and (iii) the Strategic Direction policies which articulate the Board's expectations and metrics around key operational areas, such as competitive DISTRICT HEADQUARTERS • 6201 S Street, Sacramento CA 95817-1899 Honorable Steve White September 20, 2010 -2- LEG 2010-0395 rates, access to credit markets, customer relations, reliability, safety, ethics and environmental leadership. The governance policies provide clear policy direction to the organization, and management actions are directly linked to the achievement of the governance policies. The governance policies can be found on the SMUD website at http://www.smud.org/en/board/pages/strategic-direction.aspx. SMUD takes no position on the practices of other independent special districts (ISDs).

0. Some ISDs grant monetary awards for education and training; many have inadequate evaluation of employees and degrees. Response to Finding 2.0. SMUD Does not grant monetary awards for education and training. SMUD disagrees with Finding 2.0 to the extent it can be read to imply that SMUD conducts inadequate evaluation of employees and degrees. SMUD takes no position as to the practices of other ISDs. September 20, 2010 Honorable Steve White -5- LEG 2010-0395

0. ISD pension awards and Other Post Employment Benefits (OPEB) have increased markedly in the last decade. Some of these awards are unfair and unsustainable. Response to Finding 3.0. SMUD disagrees with Finding 3.0 to the extent it implies that SMUD has failed to prudently manage its pension and OPEB obligations. SMUD has no opinion with regard to the practice of other ISDs. As evidenced by the Grand Jury Report, SMUD's pension formula of 2.0% at age 55 based on the highest three years pensionable compensation is in the least generous category of pension benefits (see Grand Jury Report, p. 16). The Grand Jury Report expresses concerns regarding compensation spiking and pension boosting and appears to September 20, 2010 Honorable Steve White -6- LEG 2010-0395 attribute the phenomenon to ISD's changing their pension formula to base final compensation on the single highest year of compensation and increasing the percent component of the formula (e.g., increasing from 2.0% to 2.5% or greater) (see Grand Jury Report, pp. 15, 20-22). Neither of these factors are present with regard to SMUD's pension benefit which continues at the baseline formula (2.0% at 55 (36months)). While the Grand Jury Report does not engage in a meaningful discussion of the impacts of OPEB, SMUD agrees that OPEB liability has increased over the last decade. As a result, SMUD has taken prudent steps to reduce its OPEB liability. SMUD has a three-tier OPEB medical benefit program: (i) Tier 1 is comprised of employees hired before January 1, 1993 with at least five years of service receive coverage of 100% of their retiree medical premiums; (ii) Tier 2 is comprised of employees hired between January 1, 1993 and December 31, 2006 and retiring with ten years of service receive 50% of the retiree medical premiums covered, increasing up to 100% coverage with twenty years of service; and (iii) Tier 3 is comprised of employees hired after January 1, 2007 and retiring with ten years of service receive 25% of the retiree medical premiums covered, increasing to 75% coverage with twenty-five years of service. SMUD's proactive adjustment to the retiree medical benefit portion of the OPEB has resulted in a reduction in the annual required contribution to fund the OPEB (e.g., $21.4 million in 2010 as compared to $26.7 million in 2007). Unlike many ISDs, pension and OPEB costs represent a relatively small percentage of SMUD's annual budget with CalPERS pension costs accounting for 1.77% of the budget and OPEB funding accounting for 1.32% of the budget. Accordingly, SMUD believes its current OPEB and CalPERS pension obligations are sustainable into the future.

0. The majority of the ISDs surveyed in this study are neglecting their fiduciary responsibility to taxpayers and ratepayers by excessive use of no-bid purchasing. Honorable Steve White September 20, 2010 -8- LEG 2010-0395 Response to Finding 4.0. SMUD disagrees with the finding to the extent the finding can be read to imply that SMUD is neglecting its fiduciary duty to its customer-owners through the excessive use of no-bid purchasing. SMUD agrees that excessive use of no-bid purchasing may operate to the detriment of the public. SMUD takes no position with regard to the contracting practices of other ISDs. The SMUD Board of Directors has adopted a clearly defined policy regarding the procurement of goods and services, Board Staff-Linkage Policy BL-7, Delegation to the GM with Respect to Procurement, which sets forth principles to ensure that the procurement process is conducted, "in accordance with applicable legal requirements in a fair, competitive and inclusive manner to maximize the benefit to SMUD ratepayers and the economic development of the community." Among the principles articulated in the policy is that, "procurement activities be competitive whenever practical." From January 1, 2004 through August 31, 2010, SMUD has awarded contracts valued at approximately $2 billion; of which 90.73% have been pursuant to a competitive process. The non-competitive awards fall into two categories--either sole source awards or direct procurements; non-competitive contract awards are used in very limited instances. BL-7 provides that a, "sole source procurement shall be performed only in the case of emergency or when a competitive process would be an idle act." An "idle act" means there is only one supplier to provide the service or the good. All sole source procurements require written documentation substantiating that the procurement qualifies as a sole source contract. Since 2004, sole source procurements have accounted for 6.93% of all contracts awarded. Examples of sole source contracts include ongoing software maintenance and licensing agreements where the original software was procured through a competitive process and parts or equipment where there is only one supplier of the equipment or part. Direct procurements are defined as, "procurements of goods and services made in SMUD's best interest without competition when multiple sources of supply are available." All direct procurements require written documentation establishing why it is in SMUD's best interest to move forward with a contract without engaging in the competitive process. Since 2004, direct procurements have accounted for 2.33% of all contracts awarded. Direct procurements are generally limited to instances where a contractor has special knowledge of a SMUD business process where the contract will result in a best value solution to SMUD or where the contractor is uniquely positioned to provide the service (e.g., The Sacramento Tree Foundation). Honorable Steve White -9- September 20, 2010 LEG 2010-0395

0. ISDs have not consistently conducted and reported required Independent Financial Audit Reports and management audits. Response to Finding 5.0. SMUD disagrees with Finding 5.0 to the extent it can be read to imply that SMUD fails to conduct and report Independent Financial Audit Reports and Management Audits. SMUD takes no position with regard to the practices of other ISDs. The SMUD Board of Directors has adopted Governance Process (GP3), Board Job Description, which provides that the Board shall contract with, "an external auditor to audit SMUD's finances and procedures; such audits are to be performed on an annual basis." In addition, the SMUD Board of Directors has adopted Board-Staff Linkage policy (BL-3), Board Internal Auditor Relationship, which sets forth the duties for the Internal Auditor and provides the Internal Auditor with a direct reporting obligation to the Board of Directors. Under BL-3, the Internal Auditor prepares an annual audit plan and presents the plan to the Board of Directors' Finance Committee for comment. The Internal Auditor's plan and work is designed to achieve the following objectives: (i) adherence to plans, policies and procedures; (ii) compliance with laws and regulations; (iii) effectiveness and application of administrative and financial controls; (iv) effectiveness and efficiency of operations; (v) reliability of data; (vi) safeguarding assets; and (vii) ensuring the accuracy of staff prepared monitoring reports presented to the Board. Audit reports include recommendations for changes and management's response to the recommendations. All audit reports developed under the audit plan are provided to the Board and discussed at a publicly noticed Board committee meeting.