Up a Creek without a Financial Paddle

Upon reviewing annual audits, the Grand Jury determined that LCWD has been operating at a deficit for at least the past five years. LCWD budgets are incomplete, inaccurate, and do not provide for economic uncertainties or a capital improvement plan. • Revenue to the district comes from customer water bill payments and a percentage of property taxes refunded to the water district from the State. In two recent years, a portion of the tax money was not released to the district on schedule because of the State’s budget crises. Although that money now has been released, the water district finances remain in a deficit status. • The approximate revenue to LCWD is $400,000 annually. The Grand Jury was unsuccessful in its efforts to obtain an accurate copy of the district’s budget, including up-to-date revenue and expenditure figures. The budgets received were incomplete, were missing information, and did not include a capital improvement plan or a reserve account. • Three redwood water storage tanks have serious leaks and need to be replaced. Moreover, the system of old lateral pipes going to residences needs to be replaced due to manufacturer defects in the pipes originally purchased by the district. Up a Creek without a Financial Paddle ∫ 153 Approximately 40 percent of the plastic lateral pipes have been replaced with copper. Much of the replacement work was done on an emergency overtime basis, costing the district additional money. • The ready-to-serve (RTS) rate, which must be paid by every customer before any charge for actual water usage, is $82.64 every two months; this includes the most recent rate hike of $15 per billing period. The actual water usage portion of the bill is based on a tier system calculated on the amount of water used in the current billing cycle. Bi-Monthy Residential Charge for Average Santa Cruz County Customer (5/9 x 3/4" meter and 20 CCF usage) City of Watsonville Central Water District San Lorenzo Valley Water District Soquel Creek Water District City of Santa Cruz Scotts Valley Water District Davenport County Water District Lompico County Water District $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 Source: Santa Cruz LAFCO: Countywide Service Review - June 2005 Until very recently, customers’ water bills were not itemized to show the amount in each category on an individual’s water bill. LCWD has the highest water rates of any public district in the county. This was true in 2005, as revealed in the chart below, and it is still true today. • The board of directors was dependent upon staff for all financial and budgetary information. Board members indicated that their financial oversight of the water district budget was hampered by their lack of direct access to information maintained on the district’s computer. • An independent audit in 2008 recommended that LCWD hire a qualified bookkeeper. This recommendation was not implemented. 154 ∫ Santa Cruz County Grand Jury Final Report 2009-2010 • After the secretary and the district manager were fired in early 2010, the board of directors became aware that the district’s financial information was disorganized, incomplete, inaccurate, or missing altogether. Additionally, the board found many overdue bills in the office. • The Santa Cruz County Auditor-Controller’s office performed an Independent Accountant’s Report on Applying Agreed-Upon Procedures at the request of the LCWD board of directors and presented the report on December 3, 2009. The audit examined payroll procedures for the three-year period of June 30, 2005, through June 30, 2008. That report, now part of public record, indicated the following: o Pay rates for this three-year period were provided for the secretary but not the district manager. o At the time of the LCWD 2008 official audit by an outside auditor, the accrued compensation for district employees for unpaid vacation and overtime since 1999 had grown to $140,000. o Numerous errors abound in timekeeping and payroll processing, including inaccuracies in tracking forms, inaccurate reporting for the California Public Employees Retirement System (CalPERS), and intermittent omission of state and/or federal tax withholdings. o LCWD did not provide any evidence of payroll-related policies for this report, which includes executive leave accrual guidelines, board-approved minutes authorizing various cost of living adjustments (COLA), and other payroll details. o During the period analyzed, there were numerous examples of apparent misreporting of on-call pay, overtime pay, executive pay, and vacation time, including lack of reporting state and federal taxes and correct hours for CalPERS, ultimately resulting in loss of district funds. • Since July 1, 2009, at the request of the LCWD board of directors, the County Auditor- Controller’s office has taken over the function of paying the bills and payroll. They also have been extending “dry period financing” to cover payroll and bills when there have not been adequate district funds on hand to cover these expenses. The County covered two pay periods in February 2010 due to lack of revenue in LCWD. Once the tax revenues are distributed to the water district in April 2010, the Auditor-Controller’s office, by statute, will no longer be able to extend financing to LCWD. • Due to the District Attorney’s arrest of the district secretary for embezzlement, the most recent independent auditor stated that a detailed forensic audit is required, which could push this year’s accounting costs to approximately $20,000. Up a Creek without a Financial Paddle ∫ 155 • PG & E has threatened to cut off power to LCWD for failing to pay bills in a timely manner and for ignoring two negotiated payment plan agreements. As of March 2010, LCWD had an outstanding bill of $2,700 with PG & E. • LCWD currently is on a cash-on-delivery basis with suppliers. In March 2010, the district could not pay for the chemicals needed for the filtration system and had to appeal to the County of Santa Cruz to cover the bill.

Employee costs including compensation and accrued benefits have escalated in recent years, placing a significant strain on the district’s limited resources. • With a budget of approximately $400,000 in revenue, LCWD spends about $300,000 annually on personnel costs for three employees. The remainder of the budget, approximately $100,000, is left to run the district, to make repairs, buy replacements, and maintain water quality. This amount has proven insufficient to meet the district’s needs. • During the five-year period 2001-2006, approximately 55 percent of the district budget went for employee expenses. By 2007-2009, these expenses increased to approximately 75 percent of the budget due to increased salaries and benefits. At the same time, revenue remained flat due to reduced tax revenues and reduced income from customers because of drought-condition water conservation. • In 1999, Resolution 99-679 was approved by the board placing a two-year limit on compensation and benefit accruals. However, the Grand Jury found no evidence that the board adhered to this resolution thus creating a substantial unfunded liability to LCWD. • Records indicate that day laborers’ wages were paid out of petty cash funds and were not part of budget planning and development.

LCWD does not have the funds to conduct the preparatory work required to apply for grants or loans. The generally weak national and local economy severely hampers LCWD’s ability to qualify for additional working capital. Most large projects require studies and pre-engineering costs which the district cannot afford. Furthermore, grant money generally is restricted to innovative projects and cannot be used to replace leaky tanks or to subsidize operational costs. Financial Conclusions C1. Neither the board of directors nor management fulfilled their fiscal responsibilities to create and maintain a budget to meet the financial and infrastructural needs of the water district. C2. LCWD has not created an adequate rate structure to sustain the operation of the water district, and so the revenues are insufficient to cover the district expenses or the present and future facility needs and obligations. 156 ∫ Santa Cruz County Grand Jury Final Report 2009-2010 C3. While elsewhere salaries have remained flat and some City and County employees have been furloughed due to the State financial crises, LCWDs salaries and benefits have increased in the past few years, further contributing to the deteriorating financial conditions of the district. C4. The handling of the district’s financial resources by the boards of directors and management staff has left LCWD on the verge of bankruptcy. Governance The LCWD is governed by a board of five directors and managed by a single general or district manager. Registered voters in the Lompico water district elect the five members of the board. Candidates do not need to meet any qualifications, other than being a qualified voter in the water district, or hold any special credentials, and frequently they do not have any relevant experience to hold this office. Once elected, they receive limited training to prepare them for the considerable challenge of governing a district that supplies water to 500 homes. Since the early 1960’s, the board has suffered financial and infrastructure demands that have led to turmoil and dissension, resulting in frequent resignations by board members. The resulting vacancies were filled by board appointments on some occasions and by uncontested or hotly contested elections on other occasions. In the 1970’s the board of directors planned an ambitious $2 million modernization and upgrade of the water distribution system. It successfully financed the project with bonds and grants and completed the work in 1979. Just six years later, however, several directors were recalled as the result of an outstanding bill for $138,000 for a mandated San Lorenzo Valley septic system study; the septic system was not built and the debt eventually was forgiven. In April 1987, the Scotts Valley Banner published an article titled “Down the Drain” describing the directors’ dissension and indecision in collecting bills, a situation that cost LCWD thousands of dollars. In May 1987, the Santa Cruz Sentinel reported that two directors resigned. In the fall of that year, the Santa Cruz County Grand Jury began an investigation of the LCWD. Its report, Lompico Water District, was published in June 1988 and described the lack of governance and oversight and the poor accounting that resulted in the LCWD’s failure to collect thousands of dollars owed by customers. The report revealed that the board of directors tried to manage the water district itself for several years after the departure of the district manager. The Grand Jury recommended “a public dialogue concerning some combination or coordination of operations with the neighboring San Lorenzo Valley Water District.” During the 1990’s, despite frequent turnovers in board membership, numerous resolutions were passed only to be later ignored by subsequent boards. As an example, in 1999 a two-year limit on vacation and overtime accruals was approved, but successive boards appear to have ignored or were not made aware of the limit. Furthermore, while water rates were raised occasionally, there was never enough revenue to create a healthy reserve fund for replacing equipment. Up a Creek without a Financial Paddle ∫ 157 From 2006 to 2008, district residents were divided on what role LCWD should play in replacing a section of Lake Boulevard’s main water line loop that failed in a landslide. The issue was prominently featured in the November 2008 election, with eight candidates competing for three of the five board seats. Two new directors were elected and an incumbent was re-elected. Months of difficult discussions followed, and on November 23, 2009, the board voted 2-2 with one abstention on whether to apply for an extension on a request for FEMA funds to reconnect the water line. Three years after the event, the board could not agree on how to fix the problem. Governance Findings

Through a review of district records and interviews with past and present directors, the Grand Jury determined that the boards of directors have failed to adequately perform some of the basic duties of a governing board. • LCWD directors indicated that they had little or no training to be board members. In addition they have not taken sufficient advantage of opportunities to educate themselves, nor have they created a training manual or handbook to appropriately educate successive boards. • The LCWD board has not created rules or guidelines for its proceedings, such as district bylaws, as required by the California Water Code section 30530. • The Board Policy Manual created in 2009 was duplicated from San Lorenzo Valley Water District. • Interviews and documentation reveal that the LCWD consistently failed to hold regular board and committee meetings. • LCWD board members stated that the agenda for meetings did not reflect items board members requested to be placed on the agenda. • The Grand Jury observed that some LCWD board members were not familiar with using Sturgis’ Rules of Order and that they sometimes failed to treat each other and members of the public with civility when conducting their meetings. • The Grand Jury’s review of meeting minutes from 2006 to the present revealed that the LCWD board did not monitor minutes for completeness or accuracy. • Letters from the District Attorney’s office in 2008 and 2009 indicated that citizens filed complaints about alleged violations of the Brown Act. The District Attorney did not find sufficient grounds to warrant criminal charges.

The board of directors failed to adequately oversee the financial activities of the water district and to verify that operations were conducted according to good business practices, and they made questionable business decisions. 158 ∫ Santa Cruz County Grand Jury Final Report 2009-2010 • LCWD board did not set rates and charges at a level sufficient to provide for repairs and depreciation of works owned or operated by the district as required by California Water Code section 31007. • LCWD directors did not set rates and charges sufficient to cover the operational expenses of the water district, in part because they lacked the background or knowledge of bookkeeping and budgeting procedures in general, and they did not demand the information specific to the district that would allow them to set rates reasonably. In interviews, board members stated they were reluctant to impose higher rates on their friends and neighbors. • In 1998, the LCWD board made a voluntary $100,000 CalPERS retirement payment on behalf of the district manager for ten years he had worked for the district prior to the adoption of the retirement program. • LCWD boards ignored or did not know about a 1999 resolution to cap the accrual of vacation and overtime pay to two years. The Grand Jury was unable to find any official action to rescind the limits. However, the board did re-impose the limits in 2009.

The past and present board of directors failed to provide adequate oversight of the personnel and personnel functions and activities of the district. • The original Personnel Manual was rewritten and approved in early 2010. The approved manual is still incomplete because there are no job descriptions. • The LCWD board did not conduct adequate due diligence to confirm the qualifications of new hires, specifically the district secretary. • The LCWD board did not systematically conduct in-depth performance evaluations for the district manager. • The LCWD board did not hold the site management adequately accountable for day-to- day activities, long-term planning, and financial tasks. Governance Conclusions C6. The boards of directors consistently demonstrated a lack of knowledge and oversight of all aspects of the district’s operations: governance, finances, management and facilities. C7. The directors often appeared to disregard the California Water Code, the Director’s Guide for Setting a Budget, the Lompico Water District Manual, the Board Policy Manual, and resolutions passed by preceding boards. C8. Members of the board of directors appear to lack the financial knowledge necessary to develop and oversee a balanced budget and consequently may not be adequately prepared to guide the district in a financially sustainable direction. Up a Creek without a Financial Paddle ∫ 159 C9. Because agendas are poorly developed and meeting minutes are incomplete and inaccurate, there is a lack of reliable records to allow consistent governance of the district’s business. C10. Board policies pertaining to personnel matters have at times not been followed. C11. The board of directors did not hold the site management and staff sufficiently accountable from day-to-day activities to long-term planning. Management The LCWD district manager is an at-will employee reporting to the board, and management duties are outlined in the Personnel Manual and referenced in the Board Policy Manual. The district manager is responsible for the business activities and the day-to-day operations of the district. The other employees (two at the time of this investigation: the district secretary and the operations technician) report to the manager, who also serves as the safety officer for the district. While there have been many members of the board of directors through the years, there has been only one district manager over the past 20 years. Management Findings

The board of directors depends on the LCWD staff for accurate information delivered in a timely manner. • The LCWD board did not receive timely and accurate board meeting agendas. Furthermore, protocol and board requests regarding the preparation of the agendas were at times disregarded or altered. • For the last five years, management did not provide complete and realistic budgets for review and approval by the board. • The urgency of infrastructure repairs was evident upon inspection of the physical plant. However, board members stated that management did not stress the importance of the need for immediate repairs.

The business and personnel activities of the district were not always conducted in a professional and appropriate manner. • The district’s independent auditor recommended hiring a bookkeeper in 2008; however, the district did not hire one, citing the lack of funds. • In 2009, a district secretary was hired who had no bookkeeping experience, which was a specific qualification for that position. Selection protocol established by the board, such as posting the position in the newspaper, was not followed. • Performance reviews for the secretary and the operations technician were not performed annually as specified in the Personnel Manual. 160 ∫ Santa Cruz County Grand Jury Final Report 2009-2010 • Daily work logs sometimes were not completed and were not given to the board even when requested. • The office file of customer work was not updated on a daily basis. • Creditors’ bills were not always paid in a timely fashion. Board members revealed that checks were written and then stored in the district office safe until adequate revenues arrived to cover the checks. Consequently, in July 2009 the board of directors asked the Santa Cruz County Auditor-Controller’s office to take over payroll and other accounts payable functions. • LCWD received a letter dated February 1, 2010, from the State Controller’s Office Division of Accounting, informing it that the Annual Report of Financial Transactions had not been filed for the fiscal year ending June 30, 2009. The State imposed a $5,000 penalty for non-filing. • The Santa Cruz County Auditor-Controller’s office performed an Independent Accountant’s Report on Applying Agreed-Upon Procedures at the request of the LCWD board of directors and presented the report on December 3, 2009. The report revealed that sufficient and accurate data on payroll procedures was not provided to the County despite multiple requests. • Communications and unresolved complaints from customers sometimes were not recorded in the minutes or addressed, nor were they always reported to the board. • The main and satellite offices, and the records and files associated with the district’s business, were not maintained in an organized, orderly fashion.

The infrastructure was not maintained in good and working order. • The California State Public Health Department (CSPH) shut down the LCWD water treatment plant from May 6, 2010 to May 14, 2010 because the water treatment filters (Memcor filters) in the plant were no longer viable. The filters dated from 1996 and the effective life span of the filters, according to their manufacturer, was seven years. New Memcor filters were installed on May 12, 2010. • The monthly reports to the CSPH documenting the turbidity of the drinking water in LCWD were not accurate. The chart wheels that record daily turbidity provide the information that is transferred to the report form that is submitted to the CSPH. The information on the chart wheels should be exactly the same as information on the reports. Grand Jury members compared the two and noted that they did not match. • A written capital improvement plan (CIP) was not found. Up a Creek without a Financial Paddle ∫ 161 • There was no immediate systematic replacement plan for the faulty lateral pipes; consequently, failing pipes needed emergency repair, causing customers inconvenience and resulting in additional expense in overtime pay. • Facility maintenance was not done on a routine basis; for example, the fire hydrants had not been flushed annually nor had the gate shut-off valves been checked regularly. • There was no plan for the repair or replacement of the three finished water storage tanks that have severe leaks. Water tanks are leaking so seriously that pumps from the four district wells are being overworked to keep up with the loss of water. In addition, there is extra expense for the chemicals and power to treat additional water.

The safety of LCWD staff and the Lompico community was put at risk. • Frequently just one employee responded alone to night emergencies, regardless of the weather. • Employees failed to shore up the sides of the trench and walls of a deep excavation pit. • The fire hydrants had not been flushed for several years, although they should be flushed annually. • Zayante Fire District was not always notified of low water conditions that were a consequence of the tank leaks. • Zayante Fire District was not always notified when LCWD was doing repairs or maintenance on the tanks and there was low water pressure or no water at all. Management Conclusions C12. There often was poor communication between the board of directors and district management, and the board consistently lacked the accurate and complete information necessary to help it govern the district competently. C13. The condition of the district’s finances is so poor that the district is near collapse. Additionally, the infrastructure has deteriorated almost to the point of failure, and the board of directors was not properly apprised of the true condition of either the finances or the facilities. C14. The lack of water or water pressure puts the residents of the community at risk of serious fire damage, particularly when the Zayante Fire District is not informed of conditions. 162 ∫ Santa Cruz County Grand Jury Final Report 2009-2010