Existing law authorizes a water replenishment district, for the purposes of replenishing the groundwater supplies within the district, to buy and sell water; exchange water; distribute water to persons in exchange for ceasing or reducing groundwater extractions; spread, sink, and inject water into the underground; store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and build the necessary works to achieve groundwater replenishment.

Existing law authorizes a water replenishment district to establish an annual reserve fund not to exceed $10,000,000, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources and, beginning in the 201920 fiscal year, requires a minimum of 80% of the reserve to be used for water purchases. Existing law excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.

This bill would repeal this reserve fund authorization and would make conforming changes.

Existing law requires a water replenishment district to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the districts fiscal year and requires copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year. Existing law requires that the independent audited financial statement be consistent with the standards provided in the Standards for Audit of Governmental Organizations, Programs, Activities, and Functions prepared by the Comptroller General of the United States and that it include specified information.

This bill would instead require the district to order, review, and maintain the statement not later than 180 days from the conclusion of the districts fiscal year and would require the statement to be consistent with the Generally Accepted Government Auditing Standards prepared by the United States Government Accountability Office. The bill would also revise the required contents of the statement, require that copies of the statement, as described, be submitted to specified committees of the Legislature instead of the Legislature generally, and require that all copies submitted to the Governor, the California State Auditor, and the legislative committees be submitted on or before December 31 of each year. The bill would require the district to provide, in addition to the statement, information on expenditures relating to capital improvement projects planned to be undertaken by the district.

Existing law authorizes a water replenishment district, for the purposes of replenishing the groundwater supplies within the district, to buy and sell water; exchange water; distribute water to persons in exchange for ceasing or reducing groundwater extractions; spread, sink, and inject water into the underground; store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and build the necessary works to achieve groundwater replenishment.

Existing law authorizes a water replenishment district to establish an annual reserve fund not to exceed $10,000,000, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources and, beginning in the 201920 fiscal year, requires a minimum of 80% of the reserve to be used for water purchases. Existing law excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.

This bill would repeal this reserve fund authorization and would make conforming changes.

Existing law requires a water replenishment district to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the districts fiscal year and requires copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year. Existing law requires that the independent audited financial statement be consistent with the standards provided in the Standards for Audit of Governmental Organizations, Programs, Activities, and Functions prepared by the Comptroller General of the United States and that it include specified information.

This bill would instead require the district to order, review, and maintain the statement not later than 180 days from the conclusion of the districts fiscal year and would require the statement to be consistent with the Generally Accepted Government Auditing Standards prepared by the United States Government Accountability Office. The bill would also revise the required contents of the statement, require that copies of the statement, as described, be submitted to specified committees of the Legislature instead of the Legislature generally, and require that all copies submitted to the Governor, the California State Auditor, and the legislative committees be submitted on or before December 31 of each year. The bill would require the district to provide, in addition to the statement, information on expenditures relating to capital improvement projects planned to be undertaken by the district.

Existing law authorizes a water replenishment district, for the purposes of replenishing the groundwater supplies within the district, to buy and sell water; exchange water; distribute water to persons in exchange for ceasing or reducing groundwater extractions; spread, sink, and inject water into the underground; store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and build the necessary works to achieve groundwater replenishment.

Existing law authorizes a water replenishment district to establish an annual reserve fund not to exceed $10,000,000, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources and, beginning in the 201920 fiscal year, requires a minimum of 80% of the reserve to be used for water purchases. Existing law excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.

This bill would repeal this reserve fund authorization and would make conforming changes.

Existing law requires a water replenishment district to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the districts fiscal year and require copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year. Existing law requires that the independent audited financial statement be consistent with the standards provided in the Standards for Audit of Governmental Organizations, Programs, Activities, and Functions prepared by the Comptroller General of the United States and that it include specified information.

This bill would instead require the district to order, review, and maintain the statement not later than 180 days from the conclusion of the districts fiscal year and would require the statement to be consistent with the Generally Accepted Government Auditing Standards prepared by the United States Government Accountability Office. The bill would also revise the required contents of the statement, require that copies of the statement, as described, be submitted to specified committees of the Legislature instead of the Legislature generally, and require that all copies submitted to the Governor, the California State Auditor, and the legislative committees be submitted on or before December 31 of each year. The bill would require the district to provide, in addition to the statement, information on expenditures relating to capital improvement projects planned to be undertaken by the district.

Existing law authorizes a water replenishment district, for the purposes of replenishing the groundwater supplies within the district, to buy and sell water; exchange water; distribute water to persons in exchange for ceasing or reducing groundwater extractions; spread, sink, and inject water into the underground; store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and build the necessary works to achieve groundwater replenishment.

Existing law authorizes a water replenishment district to establish an annual reserve fund not to exceed $10,000,000, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources and, beginning in the 201920 fiscal year, requires a minimum of 80% of the reserve to be used for water purchases. Existing law excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.

This bill would repeal this reserve fund authorization and would make conforming changes.

Existing law requires a water replenishment district to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the districts fiscal year and require copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year. Existing law requires that the independent audited financial statement be consistent with the standards provided in the Standards for Audit of Governmental Organizations, Programs, Activities, and Functions prepared by the Comptroller General of the United States and that it include specified information.

This bill would instead require the statements the district to order, review, and maintain the statement not later than 180 days from the conclusion of the districts fiscal year and would require the statement to be consistent with the Generally Accepted Government Auditing Standards prepared by the United States Government Accountability Office. The bill would also revise the required contents of the statement, require that copies of the statement, as described, be submitted to the appropriate policy specified committees of the Legislature instead of the Legislature generally. generally, and require that all copies submitted to the Governor, the State Auditor, and the legislative committees be submitted on or before December 31 of each year. The bill would require the district to provide, in addition to the statement, information on expenditures relating to capital improvement projects planned to be undertaken by the district.

Existing law authorizes a water replenishment district, for the purposes of replenishing the groundwater supplies within the district, to buy and sell water; exchange water; distribute water to persons in exchange for ceasing or reducing groundwater extractions; spread, sink, and inject water into the underground; store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and build the necessary works to achieve groundwater replenishment.

Existing law authorizes a water replenishment district to establish an annual reserve fund not to exceed $10,000,000, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources and, beginning in the 201920 fiscal year, requires a minimum of 80% of the reserve to be used for water purchases. Existing law excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.

This bill would repeal this reserve fund authorization and would make conforming changes.

Existing law requires a water replenishment district to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the districts fiscal year and require copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year.

This bill would repeal these requirements. require the statements to be submitted to the appropriate policy committees of the Legislature instead of the Legislature generally.

Existing law gives the Department of Transportation full possession and control of all state highways. Existing law describes the authorized routes in the state highway system and establishes a process for adoption of a highway on an authorized route by the California Transportation Commission. Existing law also provides for the commission to relinquish to local agencies state highway segments that have been deleted from the state highway system by legislative enactment, and in certain other cases.

This bill would make nonsubstantive changes to these provisions.

 UNFINISHED BUSINESS  

Bill No: SB 963

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/11/18

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Moorlach

NO VOTE RECORDED: Lara

SENATE FLOOR: 37-0, 4/30/18

AYES: Allen, Anderson, Atkins, Bates, Beall, Bradford, De León, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Newman, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

NO VOTE RECORDED: Berryhill, Cannella

ASSEMBLY FLOOR: 76-0, 8/16/18 - See last page for vote

SUBJECT:

SOURCE: Water Replenishment District of Southern California

DIGEST:

This bill repeals certain limitations on the reserve funds of the Water Replenishment District of Southern California.

Assembly Amendments

revise the reporting requirements that the Water Replenishment District of Southern California must meet to conform with current standards.

ANALYSIS:

Existing law:

1. Authorizes a water replenishment district, for the purposes of replenishing the groundwater supplies within the district, to:
   1. Buy and sell water;
   2. Exchange water;
   3. Distribute water to persons in exchange for ceasing or reducing groundwater extractions;
   4. Spread, sink, and inject water into the underground;
   5. Store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and
   6. Build the necessary works to achieve groundwater replenishment.
2. Limits the annual reserve fund of a water replenishment district to $10 million, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources.
3. Requires, beginning in the 2019–20 fiscal year, a minimum of 80% of the reserve to be used for water purchases.
4. Excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.
5. Requires a water replenishment district to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the district’s fiscal year and require copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year.

This bill:

1. Repeals the limit on a water replenishment district’s reserve funds.
2. Repeals the requirement that 80% of the reserve be used for water purchases.
3. Revises the reporting requirements that a water replenishment district must meet to conform to the Generally Accepted Governmental Auditing Standards prepared by the United States Government Accountability Office.
4. Requires the report to be accompanied by any other reports or documents describing any finding or findings involving deficiencies in internal control, fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and abuse, as well as written comments in response to those findings and information on expenditures relating to capital improvement projects planned to be undertaken by the district.
5. Directs a water replenishment district to send the required report to the appropriate policy committees of the Legislature, including the Senate Committee on Governance and Finance and the Assembly Local Government Committee, or their successors, instead of the Legislature generally.
6. Grants the district 180 days from the end of each fiscal year to distribute the report, instead of 60 days as in current law.

Background

State law allows the formation of water replenishment districts to recharge water into groundwater basins for later withdrawal by water purveyors. In 1959, the voters of Los Angeles County established the Water Replenishment District of Southern California (WRD) in 1959. The WRD is the state's sole water replenishment district. It earns revenue by charging water replenishment assessments to the agencies, utilities, and companies that pump groundwater. The District also gets property tax revenues from its share of the 1% property tax rate. The WRD uses these funds to secure water—by purchasing imported water and constructing projects that produce local water supplies—that percolates into the groundwater basin.

Fiscal controls. The WRD has been the subject of considerable local controversy over its water rates, fund balances, capital projects, and administrative practices. A December 1999 State Auditor’s report found that WRD didn’t exercise strict fiscal controls. Among other issues, the State Auditor found that the WRD had established an operating reserve of $20 million—twice what the Auditor estimated was necessary to ensure prudent reserves.

In response to the audit, the Legislature amended the Water Replenishment District Act to install a host of restrictions over the WRD’s finances. Specifically, SB 1979 (Escutia, Chapter 894, Statutes of 2000):

• Limited the WRD’s annual reserve fund to a maximum of $10 million, adjusted annually to reflect changes in the cost of purchased water. Reserves appropriated for capital improvements under construction are not subject to this limit.
• Required 80% of the WRD’s reserves to go to water purchases.
• Mandated that the WRD annually commission an independent, audited, financial statement that lists fund balances, includes specified reports on capital projects, and records the WRD’s response to any management recommendations from the State Auditor.
• Required the above financial statements to be submitted to the Governor, the Legislature, and the State Auditor annually by November 1.

The Legislature also established rules for contracting and constructing capital projects, and required follow-up audits of the WRD by the State Auditor in 2002 (AB 1834, Havice, Chapter 888, Statutes of 2000) and 2004 (AB 1163, Calderon, Chapter 941, Statutes of 2002). Those audits found that although the WRD had implemented many of the recommendations in previous audits, its reserve policies continued to raise questions.

Changing nature of replenishment. Over time, the manner by which the WRD replaces pumped groundwater has changed. When it was originally formed, the WRD purchased 100% of the water it used for replenishment from imported sources. In the 1960s, the WRD began a steady shift towards developing local sources of water, such as captured stormwater and recycled water. As a result, the WRD relied less on purchasing water and more on building its own capital projects. In 2013, the WRD sought relief from some of the fiscal controls imposed by the Legislature. The WRD argued that these controls threatened its financial viability and prevented it from investing in local sources of water. In response, the Legislature temporarily repealed the requirement that 80% of reserves must be spent on water purchases until the 2019-20 fiscal year (SB 620, Wright, Chapter 638, Statutes of 2013). In order to continue some oversight of the WRD’s reserves, SB 620 also required the establishment of a budget advisory committee, composed of the WRD’s ratepayers, to review and make recommendations on any replenishment assessment levied by the WRD and the WRD’s operating budget and reserves. SB 620 further contained intent language that records of the recommendations from the budget advisory committee should be used to evaluate the permanent repeal of the 80% requirement.

By 2015, only 20% of the water used for replenishment came from imported water purchases, and in 2018 and going forward, the District expects to rely entirely on local sources. In order to continue its independence from imported water purchases, the WRD’s officials want more flexibility to spend the District’s reserves.

Comments

1. Purpose of the bill. The WRD plays an integral role in the sustainable management of water in Southern California. But because of past concerns over the WRD’s fiscal practices, it is subject to multiple restrictions on its budgeting practices that impair its effectiveness. As the WRD has shifted from purchasing imported water to producing its own from local sources, its fiscal needs have changed: it must incur larger operating expenses because its capital projects require costly replacement parts, and its need to purchase imported water has dropped dramatically. Accordingly, the WRD needs to spend more on operating expenses and less on purchased water, but the statutory restrictions on the WRD’s reserves pose a significant barrier. No other independent special district is subject to a restriction on its reserves, and in the years since these restrictions were imposed, the WRD has won multiple awards for its fiscal practices and transparency. SB 963 eliminates these restrictions, allowing the WRD to better manage its finances for changing water conditions and demands. This bill also promotes the state’s policy on reducing reliance on the state’s main source of imported water: the Sacramento-San Joaquin Delta.
2. What’s changed? The Legislature established numerous fiscal controls on the WRD in response to a State Auditor’s report, which found that the District’s replenishment assessment rates were too high and that the District maintained excessive cash reserves. More recently, the Legislature loosened the 80% restriction, but only until the 2019-20 fiscal year. Simultaneously, the Legislature added additional oversight in the form of a budget advisory committee (with a 2020 sunset) while retaining the cap on reserves in existing law. The temporary nature of the reprieve from the 80% restriction promotes continued discretion on the part of the WRD—it knows it has to justify additional legislation to permanently remove that restriction. And the existing cap on reserves similarly benefits ratepayers by providing a cushion against overcharges. These requirements were installed to protect ratepayers from overcharging. SB 963 permanently repeals these controls, and the budget advisory committee sunsets on January 1, 2020. At the same time, Constitutional restrictions on the WRD’s assessments appear to be loosening. In 2017, the California Supreme Court ruled that certain groundwater augmentation charges, similar to the replenishment assessments charged by the WRD, are not “property-related fees” and therefore are not subject to Proposition 218’s proportional cost limitation (City of San Buenaventura v. United Water Conservation District, S226036). Will removing the statutory checks on the WRD allow it to overcharge ratepayers in the future?

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 8/16/18)

Water Replenishment District of Southern California (source)

Orange County Water District

OPPOSITION: (Verified 8/16/18)

None received

ASSEMBLY FLOOR: 76-0, 8/16/18

AYES: Acosta, Aguiar-Curry, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rivas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Travis Allen, Cristina Garcia, Harper, McCarty

Prepared by:

8/18/18 13:25:34

**** END ****

SENATE THIRD READING

STR Bill Id:SB 963

Author:(Allen)

As Amended Ver:June 18, 2018

Majority vote

SENATE VOTE: 37-0

SUMMARY: Repeals certain limitations on the reserve funds of the Water Replenishment District of Southern California (WRD). Specifically, this bill:

1. Deletes provisions in existing law that require WRD to establish an annual reserve fund in an amount not to exceed $10 million commencing with the 2000-01 fiscal year (FY), and deletes provisions related to limitations on that reserve.
2. Requires WRD to order, review, and maintain on file an independent, audited financial statement not later than 180 days from the conclusion of WRD's FY (instead of current law which specifies that this must happen not later than 60 days).
3. Revises the requirement in existing law that requires WRD's independent audited financial statement to be consistent with certain accounting standards to reflect current standards.
4. Deletes provisions that specify what must be included in the independent audited financial statement, including:
   1. The balances in all accounts established for the maintenance of WRD's funds;
   2. A report describing the amount of district funds to be expended for any capital improvement project authorized to be constructed or funded by WRD and a detailed description of the capital improvement project;
   3. A report detailing the source of funds to be expended on any authorized capital improvement project, and whether the source of funds is the water replenishment assessment, as specified;
   4. A report describing the propriety of WRD's operating expenses;
   5. A summary of independent audited financial statement exceptions and management improvement recommendations; and,
   6. A description of correction or plan of correction to be incorporated in the financial statement, describing the specific actions that are planned to be taken, or that have been taken, to correct the problem identified by the auditor, as specified.
5. Requires the financial statement to include, regardless of whether the certified public accountant or public accountant reports separately, including separate reports bound in the same document, any findings or findings involving deficiencies in internal control, fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and abuse. Requires WRD to include its written comments in response to findings that provide the perspectives of the responsible officials of WRD and the corrective actions they plan to take.
6. Requires the revised independent auditor financial statement to be submitted to the Governor, the Senate Committee on Governance and Finance or its successor, the Assembly Committee on Local Government or its successor, and the State Auditor on or before December 31 of each year.
7. Requires WRD to also provide information on expenditures relating to capital improvement projects planned to be undertaken.
8. Makes other conforming changes.

EXISTING LAW:

1. Authorizes WRD, for the purposes of replenishing the groundwater supplies within the district, to:
   1. Buy and sell water;
   2. Exchange water;
   3. Distribute water to persons in exchange for ceasing or reducing groundwater extractions;
   4. Spread, sink, and inject water into the underground;
   5. Store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and,
   6. Build the necessary works to achieve groundwater replenishment.
2. Limits the annual reserve fund of WRD to $10 million, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources.
3. Requires, beginning in the 2019–20 fiscal year, a minimum of 80% of the reserve to be used for water purchases.
4. Excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.
5. Requires WRD to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the district's fiscal year and require copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year.

FISCAL EFFECT: None

COMMENTS:

1. Background. State law allows the formation of water replenishment districts to recharge water into groundwater basins for later withdrawal by water purveyors. In 1959, the voters of Los Angeles County established WRD, which is the state's sole water replenishment district. It earns revenue by charging water replenishment assessments to the agencies, utilities, and companies that pump groundwater. The District also gets property tax revenues from its share of the 1% property tax rate. WRD uses these funds to secure water – by purchasing imported water and constructing projects that produce local water supplies – that percolates into the groundwater basin.

WRD has been the subject of considerable local controversy over its water rates, fund balances, capital projects, and administrative practices. A December 1999 State Auditor's report found that WRD did not exercise strict fiscal controls. Among other issues, the State Auditor found that the WRD had established an operating reserve of $20 million – twice what the Auditor estimated was necessary to ensure prudent reserves.

In response to the audit, the Legislature amended the Water Replenishment District Act to install a host of restrictions over the WRD's finances. Specifically, SB 1979 (Escutia), Chapter 894, Statutes of 2000:

• 1. Limited the WRD's annual reserve fund to a maximum of $10 million, adjusted annually to reflect changes in the cost of purchased water. Reserves appropriated for capital improvements under construction are not subject to this limit;
  2. Required 80% of the WRD's reserves to go to water purchases.
  3. Mandated that the WRD annually commission an independent, audited financial statement that lists fund balances, includes specified reports on capital projects, and records the WRD's response to any management recommendations from the State Auditor; and,
  4. Required the above financial statements to be submitted to the Governor, the Legislature, and the State Auditor annually by November 1.

The Legislature also established rules for contracting and constructing capital projects, and required follow-up audits of the WRD by the State Auditor in 2002 [AB 1834, (Havice), Chapter 888, Statutes of 2000] and 2004 [AB 1163, (Calderon), Chapter 941, Statutes of 2002]. Those audits found that although the WRD had implemented many of the recommendations in previous audits, its reserve policies continued to raise questions.

Over time, the manner by which the WRD replaces pumped groundwater has changed. When it was originally formed, the WRD purchased 100% of the water it used for replenishment from imported sources. In the 1960s, the WRD began a steady shift towards developing local sources of water, such as captured stormwater and recycled water. As a result, the WRD relied less on purchasing water and more on building its own capital projects. In 2013, the WRD sought relief from some of the fiscal controls imposed by the Legislature. The WRD argued that these controls threatened its financial viability and prevented it from investing in local sources of water. In response, the Legislature temporarily repealed the requirement that 80% of reserves must be spent on water purchases until the 2019-20 fiscal year [SB 620, (Wright), Chapter 638, Statutes of 2013]. In order to continue some oversight of the WRD's reserves, SB 620 also required the establishment of a budget advisory committee, composed of the WRD's ratepayers, to review and make recommendations on any replenishment assessment levied by the WRD and the WRD's operating budget and reserves. SB 620 further contained intent language that records of the recommendations from the budget advisory committee should be used to evaluate the permanent repeal of the 80% requirement.

By 2015, only 20% of the water used for replenishment came from imported water purchases, and in 2018 and going forward, the District expects to rely entirely on local sources. In order to continue its independence from imported water purchases, the WRD's officials want more flexibility to spend the District's reserves.

1. Bill Summary. This bill repeals provisions that currently require WRD to establish an annual reserve fund in an amount not to exceed $10 million, and also strikes provisions related to limitations on that reserve. This bill strikes provisions that specify what must be included in WRD's independent audited financial statement, but maintains the requirement that WRD continue to provide this audited financial statement to the Governor, State Auditor, and relevant committees in the Legislature. The financial statement must also include any findings or findings involving deficiencies in internal control, fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and requires WRD to include its written comments in response to the findings.

The bill is sponsored by WRD.

1. Author's Statement. According to the author, "In the year 2000, responding to a State Auditor's report regarding WRD, the Legislature added language to the Water Code placing a $10 million cap on the general reserves of a water replenishment district, and requiring that a minimum of 80 percent of the reserve fund be expended specifically for water purchases.

"The reserve restrictions prevented the WRD from accumulating unnecessarily higher reserve levels, and the water purchase requirement made sense at the time. However, times and groundwater replenishment best practices have changed. Fluctuations in cost and the reliability of supply have convinced the WRD of the financial and practical need to become independent of imported water, shifting instead to the production of local, reliable supplies for purposes of replenishing the Central and West Coast groundwater basins.

"In October 2016, the WRD Board of Directors approved an agreement with the State Water Resources Control Board that provides WRD $95 million in funding for the construction of the Groundwater Reliability Improvement Project (GRIP), an advanced water treatment facility currently under construction in the City of Pico Rivera. GRIP is the final and most significant project within WRD's Water Independence Now (WIN) program that aims to eliminate WRD's need to purchase imported water from Northern California and the Colorado River for groundwater replenishment. Once built, the WRD region's groundwater basins will be completely locally sustainable.

"The move from buying to producing water means that the WRD will need additional operating reserves for issues related to managing its own facilities. Along with operations, there are large replacement costs associated with items such as microfiltration units, reverse osmosis membranes and ultra-violet light bulbs. The District will need greater reserve balances to cover these infrastructure costs when items need to be replaced.

"SB 963 gives the WRD ability to shift away from outdated reliability on water imports to a modern model of local sustainability, while planning for substantial operating costs it will incur in financing its advanced water treatment facilities. The bill will limit the ultimate price to taxpayers, by permitting costs to be addressed on a pay-as-you-go basis rather than through more expensive debt financing."

1. Arguments in Support. Supporters argue that moving from purchasing water to producing water using advanced water treatment science and techniques will require greater flexibility in budget practices to enable WRD to appropriately operate and maintain its facilities.
2. Arguments in Opposition. None on file.

Analysis Prepared by: Debbie Michel / L. GOV. / (916) 319-3958 FN: 0003513

Date of Hearing: June 13, 2018

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Cecilia Aguiar-Curry, Chair

SBPCA Bill Id:SB 963

Author:(Allen) – As Amended Ver:June 4, 2018

SENATE VOTE: 37-0

SUBJECT: Water replenishment districts.

SUMMARY: Repeals certain limitations on the reserve funds of the Water Replenishment District of Southern California (WRD). Specifically, this bill:

1. Deletes provisions in existing law that require WRD to establish an annual reserve fund
   in an amount not to exceed $10 million commencing with the 2000-01 fiscal year (FY),
   and deletes provisions related to limitations on that reserve.
2. Requires WRD to order, review, and maintain on file an independent, audited financial statement not later than 180 days from the conclusion of WRD’s FY (instead of current law which specifies that this must happen not later than 60 days).
3. Revises the requirement in existing law that requires WRD’s independent audited financial statement to be consistent with certain accounting standards to reflect current standards.
4. Deletes provisions that specify what must be included in the independent audited financial statement, including:
   1. The balances in all accounts established for the maintenance of WRD’s funds;
   2. A report describing the amount of district funds to be expended for any capital improvement project authorized to be constructed or funded by WRD and a detailed description of the capital improvement project;
   3. A report detailing the source of funds to be expended on any authorized capital improvement project, and whether the source of funds is the water replenishment assessment, as specified;
   4. A report describing the propriety of WRD’s operating expenses;
   5. A summary of independent audited financial statement exceptions and management improvement recommendations; and,
   6. A description of correction or plan of correction to be incorporated in the financial statement, describing the specific actions that are planned to be taken, or that have been taken, to correct the problem identified by the auditor, as specified.
5. Requires the financial statement to include, regardless of whether the State Auditor reports separately, including separate reports bound in the same document, any findings or findings involving deficiencies in internal control, fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and abuse. Requires WRD to include its written comments in response to findings that provide the perspectives of the responsible officials
   of WRD and the corrective actions they plan to take.
6. Requires the revised independent auditor financial statement to be submitted to the Governor, the Senate Committee on Governance and Finance or its successor, the Assembly Committee on Local Government or its successor, and the State Auditor on or before December 31 of each year.
7. Requires WRD to also provide information on expenditures relating to capital improvement projects planned to be undertaken.
8. Makes other conforming changes.

EXISTING LAW:

1. Authorizes WRD, for the purposes of replenishing the groundwater supplies within the district, to:
   1. Buy and sell water;
   2. Exchange water;
   3. Distribute water to persons in exchange for ceasing or reducing groundwater extractions;
   4. Spread, sink, and inject water into the underground;
   5. Store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and,
   6. Build the necessary works to achieve groundwater replenishment.
2. Limits the annual reserve fund of WRD to $10 million, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources.
3. Requires, beginning in the 2019–20 fiscal year, a minimum of 80% of the reserve to be used for water purchases.
4. Excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.
5. Requires WRD to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the district’s fiscal year and require copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year.

FISCAL EFFECT: None

COMMENTS:

1. Background. State law allows the formation of water replenishment districts to recharge water into groundwater basins for later withdrawal by water purveyors. In 1959, the voters of Los Angeles County established WRD, which is the state's sole water replenishment district. It earns revenue by charging water replenishment assessments to the agencies, utilities, and companies that pump groundwater. The District also gets property tax revenues from its share of the 1% property tax rate. WRD uses these funds to secure water – by purchasing imported water and constructing projects that produce local water supplies – that percolates into the groundwater basin.

WRD has been the subject of considerable local controversy over its water rates, fund balances, capital projects, and administrative practices. A December 1999 State Auditor’s report found that WRD did not exercise strict fiscal controls. Among other issues, the State Auditor found that the WRD had established an operating reserve of $20 million – twice what the Auditor estimated was necessary to ensure prudent reserves.

In response to the audit, the Legislature amended the Water Replenishment District Act to install a host of restrictions over the WRD’s finances. Specifically, SB 1979 (Escutia), Chapter 894, Statutes of 2000:

1. Limited the WRD’s annual reserve fund to a maximum of $10 million, adjusted annually to reflect changes in the cost of purchased water. Reserves appropriated for capital improvements under construction are not subject to this limit;
2. Required 80% of the WRD’s reserves to go to water purchases.
3. Mandated that the WRD annually commission an independent, audited financial statement that lists fund balances, includes specified reports on capital projects, and records the WRD’s response to any management recommendations from the State Auditor; and,
4. Required the above financial statements to be submitted to the Governor, the Legislature, and the State Auditor annually by November 1.

The Legislature also established rules for contracting and constructing capital projects, and required follow-up audits of the WRD by the State Auditor in 2002 [AB 1834, (Havice), Chapter 888, Statutes of 2000] and 2004 [AB 1163, (Calderon), Chapter 941, Statutes of 2002]. Those audits found that although the WRD had implemented many of the recommendations in previous audits, its reserve policies continued to raise questions.

Over time, the manner by which the WRD replaces pumped groundwater has changed. When it was originally formed, the WRD purchased 100% of the water it used for replenishment from imported sources. In the 1960s, the WRD began a steady shift towards developing local sources of water, such as captured stormwater and recycled water. As a result, the WRD relied less on purchasing water and more on building its own capital projects. In 2013, the WRD sought relief from some of the fiscal controls imposed by the Legislature. The WRD argued that these controls threatened its financial viability and prevented it from investing in local sources of water. In response, the Legislature temporarily repealed the requirement that 80% of reserves must be spent on water purchases until the 2019-20 fiscal year [SB 620, (Wright), Chapter 638, Statutes of 2013]. In order
to continue some oversight of the WRD’s reserves, SB 620 also required the establishment
of a budget advisory committee, composed of the WRD’s ratepayers, to review and make recommendations on any replenishment assessment levied by the WRD and the WRD’s operating budget and reserves. SB 620 further contained intent language that records of the recommendations from the budget advisory committee should be used to evaluate the permanent repeal of the 80% requirement.

By 2015, only 20% of the water used for replenishment came from imported water purchases, and in 2018 and going forward, the District expects to rely entirely on local sources. In order to continue its independence from imported water purchases, the WRD’s officials want more flexibility to spend the District’s reserves.

1. Bill Summary. This bill repeals provisions that currently require WRD to establish an annual reserve fund in an amount not to exceed $10 million, and also strikes provisions related to limitations on that reserve. The bill strikes provisions that specify what must be included in WRD’s independent audited financial statement, but maintains the requirement that WRD continue to provide this audited financial statement to the Governor, State Auditor, and relevant committees in the Legislature. The financial statement must also include any findings or findings involving deficiencies in internal control, fraud, noncompliance with provisions of laws, regulations, contracts, and grant agreements, and requires WRD to include its written comments in response to the findings.

The bill is sponsored by WRD.

1. Author’s Statement. According to the author, “In the year 2000, responding to a State Auditor’s report regarding WRD, the Legislature added language to the Water Code placing a $10 million cap on the general reserves of a water replenishment district, and requiring that a minimum of 80 percent of the reserve fund be expended specifically for water purchases.

“The reserve restrictions prevented the WRD from accumulating unnecessarily higher reserve levels, and the water purchase requirement made sense at the time. However, times and groundwater replenishment best practices have changed. Fluctuations in cost and the reliability of supply have convinced the WRD of the financial and practical need to become independent of imported water, shifting instead to the production of local, reliable supplies for purposes of replenishing the Central and West Coast groundwater basins.

“In October 2016, the WRD Board of Directors approved an agreement with the State Water Resources Control Board that provides WRD $95 million in funding for the construction of the Groundwater Reliability Improvement Project (GRIP), an advanced water treatment facility currently under construction in the City of Pico Rivera. GRIP is the final and most significant project within WRD’s Water Independence Now (WIN) program that aims to eliminate WRD’s need to purchase imported water from Northern California and the Colorado River for groundwater replenishment. Once built, the WRD region’s groundwater basins will be completely locally sustainable.

“The move from buying to producing water means that the WRD will need additional operating reserves for issues related to managing its own facilities. Along with operations, there are large replacement costs associated with items such as microfiltration units, reverse osmosis membranes and ultra-violet light bulbs. The District will need greater reserve balances to cover these infrastructure costs when items need to be replaced.

“SB 963 gives the WRD ability to shift away from outdated reliability on water imports to a modern model of local sustainability, while planning for substantial operating costs it will incur in financing its advanced water treatment facilities. The bill will limit the ultimate price to taxpayers, by permitting costs to be addressed on a pay-as-you-go basis rather than through more expensive debt financing.”

1. Technical Amendment. Section 3 of the bill dealing with the independent audited financial statement contains a reference to the State Auditor making findings, which is incorrect. This reference to the State Auditor should be replaced with “certified public accountant or public accountant” who prepared the audited financial statement, to ensure consistency with terminology used previously.
2. Arguments in Support. Supporters argue that moving from purchasing water to producing water using advanced water treatment science and techniques will require greater flexibility in budget practices to enable WRD to appropriately operate and maintain its facilities.
3. Arguments in Opposition. None on file.

REGISTERED SUPPORT / OPPOSITION:

Support

Water Replenishment District of Southern California [SPONSOR]

Orange County Water District

Budget Advisory Committee, Water Replenishment District of Southern California

Opposition

None on file

Analysis Prepared by: Debbie Michel / L. GOV. / (916) 319-3958

 THIRD READING  

Bill No: SB 963

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 4/11/18

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Moorlach

NO VOTE RECORDED: Lara

SUBJECT:

SOURCE: Water Replenishment District of Southern California

DIGEST:

This bill repeals certain limitations on the reserve funds of the Water Replenishment District of Southern California.

ANALYSIS:

Existing law:

1. Authorizes a water replenishment district, for the purposes of replenishing the groundwater supplies within the district, to:
   1. Buy and sell water;
   2. Exchange water;
   3. Distribute water to persons in exchange for ceasing or reducing groundwater extractions;
   4. Spread, sink, and inject water into the underground;
   5. Store, transport, recapture, recycle, purify, treat, or otherwise manage and control water for the beneficial use of persons or property within the district; and
   6. Build the necessary works to achieve groundwater replenishment.
2. Limits the annual reserve fund of a water replenishment district to $10 million, as adjusted annually to reflect percentage increases or decreases in the blended cost of water from district supply sources
3. Requires, beginning in the 2019–20 fiscal year, a minimum of 80% of the reserve to be used for water purchases.
4. Excepts from this limitation the unexpended balance of any appropriated funds in a capital improvement project construction account established to pay the cost of a project or projects under construction.
5. Requires a water replenishment district to order, review, and maintain on file an independent, audited financial statement not later than 60 days from the conclusion of the district’s fiscal year and require copies of the statements to be submitted to the Governor, the Legislature, and the California State Auditor on or before November 1 of each year.

This bill:

1. Repeals the limit on a water replenishment district’s reserve funds.
2. Repeals the requirement that 80% of the reserve be used for water purchases.
3. Directs a water replenishment district to send the required report to the appropriate policy committees of the Legislature, including the Senate Committee on Governance and Finance, or its successor, instead of the Legislature generally.

Background

State law allows the formation of water replenishment districts to recharge water into groundwater basins for later withdrawal by water purveyors. In 1959, the voters of Los Angeles County established the Water Replenishment District of Southern California (WRD) in 1959. The WRD is the state's sole water replenishment district. It earns revenue by charging water replenishment assessments to the agencies, utilities, and companies that pump groundwater. The District also gets property tax revenues from its share of the 1% property tax rate. The WRD uses these funds to secure water—by purchasing imported water and constructing projects that produce local water supplies—that percolates into the groundwater basin.

Fiscal controls. The WRD has been the subject of considerable local controversy over its water rates, fund balances, capital projects, and administrative practices. A December 1999 State Auditor’s report found that WRD didn’t exercise strict fiscal controls. Among other issues, the State Auditor found that the WRD had established an operating reserve of $20 million—twice what the Auditor estimated was necessary to ensure prudent reserves.

In response to the audit, the Legislature amended the Water Replenishment District Act to install a host of restrictions over the WRD’s finances. Specifically, SB 1979 (Escutia, Chapter 894, Statutes of 2000):

• Limited the WRD’s annual reserve fund to a maximum of $10 million, adjusted annually to reflect changes in the cost of purchased water. Reserves appropriated for capital improvements under construction are not subject to this limit.
• Required 80% of the WRD’s reserves to go to water purchases.
• Mandated that the WRD annually commission an independent, audited, financial statement that lists fund balances, includes specified reports on capital projects, and records the WRD’s response to any management recommendations from the State Auditor.
• Required the above financial statements to be submitted to the Governor, the Legislature, and the State Auditor annually by November 1.

The Legislature also established rules for contracting and constructing capital projects, and required follow-up audits of the WRD by the State Auditor in 2002 (AB 1834, Havice, Chapter 888, Statutes of 2000) and 2004 (AB 1163, Calderon, Chapter 941, Statutes of 2002). Those audits found that although the WRD had implemented many of the recommendations in previous audits, its reserve policies continued to raise questions.

Changing nature of replenishment. Over time, the manner by which the WRD replaces pumped groundwater has changed. When it was originally formed, the WRD purchased 100% of the water it used for replenishment from imported sources. In the 1960s, the WRD began a steady shift towards developing local sources of water, such as captured stormwater and recycled water. As a result, the WRD relied less on purchasing water and more on building its own capital projects. In 2013, the WRD sought relief from some of the fiscal controls imposed by the Legislature. The WRD argued that these controls threatened its financial viability and prevented it from investing in local sources of water. In response, the Legislature temporarily repealed the requirement that 80% of reserves must be spent on water purchases until the 2019-20 fiscal year (SB 620, Wright, Chapter 638, Statutes of 2013). In order to continue some oversight of the WRD’s reserves, SB 620 also required the establishment of a budget advisory committee, composed of the WRD’s ratepayers, to review and make recommendations on any replenishment assessment levied by the WRD and the WRD’s operating budget and reserves. SB 620 further contained intent language that records of the recommendations from the budget advisory committee should be used to evaluate the permanent repeal of the 80% requirement.

By 2015, only 20% of the water used for replenishment came from imported water purchases, and in 2018 and going forward, the District expects to rely entirely on local sources. In order to continue its independence from imported water purchases, the WRD’s officials want more flexibility to spend the District’s reserves.

Comments

1. Purpose of the bill. The WRD plays an integral role in the sustainable management of water in Southern California. But because of past concerns over the WRD’s fiscal practices, it is subject to multiple restrictions on its budgeting practices that impair its effectiveness. As the WRD has shifted from purchasing imported water to producing its own from local sources, its fiscal needs have changed: it must incur larger operating expenses because its capital projects require costly replacement parts, and its need to purchase imported water has dropped dramatically. Accordingly, the WRD needs to spend more on operating expenses and less on purchased water, but the statutory restrictions on the WRD’s reserves pose a significant barrier. No other independent special district is subject to a restriction on its reserves, and in the years since these restrictions were imposed, the WRD has won multiple awards for its fiscal practices and transparency. SB 963 eliminates these restrictions, allowing the WRD to better manage its finances for changing water conditions and demands. This bill also promotes the state’s policy on reducing reliance on the state’s main source of imported water: the Sacramento-San Joaquin Delta.
2. What’s changed? The Legislature established numerous fiscal controls on the WRD in response to a State Auditor’s report, which found that the District’s replenishment assessment rates were too high and that the District maintained excessive cash reserves. More recently, the Legislature loosened the 80% restriction, but only until the 2019-20 fiscal year. Simultaneously, the Legislature added additional oversight in the form of a budget advisory committee (with a 2020 sunset) while retaining the cap on reserves in existing law. The temporary nature of the reprieve from the 80% restriction promotes continued discretion on the part of the WRD—it knows it has to justify additional legislation to permanently remove that restriction. And the existing cap on reserves similarly benefits ratepayers by providing a cushion against overcharges. These requirements were installed to protect ratepayers from overcharging. SB 963 permanently repeals these controls, and the budget advisory committee sunsets on January 1, 2020. At the same time, Constitutional restrictions on the WRD’s assessments appear to be loosening. In 2017, the California Supreme Court ruled that certain groundwater augmentation charges, similar to the replenishment assessments charged by the WRD, are not “property-related fees” and therefore are not subject to Proposition 218’s proportional cost limitation (City of San Buenaventura v. United Water Conservation District, S226036). Will removing the statutory checks on the WRD allow it to overcharge ratepayers in the future?

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 4/17/18)

Water Replenishment District of Southern California (source)

OPPOSITION: (Verified 4/17/18)

None received

Prepared by:

4/18/18 11:59:35

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Water replenishment districts

Repeals certain limitations on the reserve funds of the Water Replenishment District of Southern California.

Background

State law allows the formation of water replenishment districts to recharge water into groundwater basins for later withdrawal by water purveyors. In 1959, the voters of Los Angeles County established the Water Replenishment District of Southern California (WRD) in 1959. Created to counteract the effects of over pumping groundwater from the West Coast and Central basins, the WRD’s mission is “to provide, protect and preserve high-quality groundwater through innovative, cost-effective, and environmentally sensitive basin management practices for the benefit of residents and businesses of the Central and West Coast Basins.” The WRD is the state's sole water replenishment district. It earns revenue by charging water replenishment assessments to the agencies, utilities, and companies that pump groundwater. The district also gets property tax revenues from its share of the 1% property tax rate. The WRD uses these funds to secure water—by purchasing imported water and constructing projects that produce local water supplies—that percolates into the groundwater basin.

Fiscal controls. The WRD has been the subject of considerable local controversy over its water rates, fund balances, capital projects, and administrative practices. A December 1999 State Auditor’s report found that WRD didn’t exercise strict fiscal controls. Among other issues, the State Auditor found that the WRD had established an operating reserve of $20 million—twice what the Auditor estimated was necessary to ensure prudent reserves.

In response to the audit, the Legislature amended the Water Replenishment District Act to install a host of restrictions over the WRD’s finances. Specifically, SB 1979 (Escutia, 2000):

• Limited the WRD’s annual reserve fund to a maximum of $10 million, adjusted annually to reflect changes in the cost of purchased water. Reserves appropriated for capital improvements under construction are not subject to this limit.
• Required 80% of the WRD’s reserves to go to water purchases.
• Mandated that the WRD annually commission an independent, audited, financial statement that lists fund balances, includes specified reports on capital projects, and records the WRD’s response to any management recommendations from the auditor.
• Required the above financial statements to be submitted to the Governor, the Legislature, and the State Auditor annually by November 1.

The Legislature also established rules for contracting and constructing capital projects, and required follow-up audits of the WRD by the State Auditor in 2002 (AB 1834, Havice, 2000) and 2004 (AB 1163, Calderon, 2002). Those audits found that although the WRD had implemented many of the recommendations in previous audits, its reserve policies continued to raise questions.

Changing nature of replenishment. Over time, the manner by which the WRD replaces pumped groundwater has changed. When it was originally formed, the WRD purchased 100 percent of the water it used for replenishment from imported sources. In the 1960s, the WRD began a steady shift towards developing local sources of water, such as captured stormwater and recycled water As a result, the WRD relied less on purchasing water and more on building its own capital projects. In 2013, the WRD sought relief from some of the fiscal controls imposed by the Legislature. The WRD argued that these controls threatened its financial viability and prevented it from investing in local sources of water. In response, the Legislature temporarily repealed the requirement that 80 percent of reserves must be spent on water purchases until the 2019-20 fiscal year (SB 620, Wright, 2013). In order to continue some oversight of the WRD’s reserves, SB 620 also required the establishment of a budget advisory committee, composed of the WRD’s ratepayers, to review and make recommendations on any replenishment assessment levied by the WRD and the WRD’s operating budget and reserves. SB 620 further contained intent language that records of the recommendations from the budget advisory committee should be used to evaluate the permanent repeal of the 80 percent requirement.

By 2015, only 20 percent of the water used for replenishment came from imported water purchases, and in 2018 and going forward, the district expects to rely entirely on local sources. In order to continue its independence from imported water purchases, the WRD’s officials want more flexibility to spend the District’s reserves.

Proposed Law

Senate Bill 963 repeals the requirements that:

• The WRD’s operating reserve not exceed $10 million,
• 80 percent of the reserve be spent on water purchases beginning in fiscal year 2019-20, and
• The WRD prepare an independent, audited financial statement annually and submit it to the Governor, Legislature, and State Auditor.

The bill also makes technical and conforming changes.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. The WRD plays an integral role in the sustainable management of water in Southern California. But because of past concerns over the WRD’s fiscal practices, it is subject to multiple restrictions on its budgeting practices that impair its effectiveness. As the WRD has shifted from purchasing imported water to producing its own from local sources, its fiscal needs have changed: it must incur larger operating expenses because its capital projects require costly replacement parts, and its need to purchase imported water has dropped dramatically. Accordingly, the WRD needs to spend more on operating expenses and less on purchased water, but the statutory restrictions on the WRD’s reserves pose a significant barrier. No other independent special district is subject to a restriction on its reserves, and in the years since these restrictions were imposed, the WRD has won multiple awards for its fiscal practices and transparency. SB 963 eliminates these restrictions, allowing the WRD to better manage its finances for changing water conditions and demands. The bill also promotes the state’s policy on reducing reliance on the state’s main source of imported water: the Sacramento-San Joaquin Delta.

2. What’s changed? The Legislature established numerous fiscal controls on the WRD in response to a State Auditor’s report, which found that the District’s replenishment assessment rates were too high and that the District maintained excessive cash reserves. More recently, the Legislature loosened the 80 percent restriction, but only until the 2019-20 fiscal year. Simultaneously, the Legislature added additional oversight in the form of a budget advisory committee (with a 2020 sunset) while retaining the cap on reserves in existing law. The temporary nature of the reprieve from the 80 percent restriction promotes continued discretion on the part of the WRD—it knows it has to justify additional legislation to permanently remove that restriction. And the existing cap on reserves similarly benefits ratepayers by providing a cushion against overcharges. These requirements were installed to protect ratepayers from overcharging. SB 963 permanently repeals these controls, and the budget advisory committee sunsets on January 1, 2020. At the same time, Constitutional restrictions on the WRD’s assessments appear to be loosening. In 2017, the California Supreme Court ruled that certain groundwater augmentation charges, similar to the replenishment assessments charged by the WRD, are not “property-related fees” and therefore are not subject to Proposition 218’s proportional cost limitation (City of San Buenaventura v. United Water Conservation District, S226036). Will removing these checks on the WRD allow it to overcharge ratepayers in the future?

3. Trust but verify. In addition to repealing the operational restrictions on the WRD, SB 963 also repeals the requirement to prepare an audit and send copies to the Governor, Legislature, and State Auditor. The WRD notes that its financial statements are readily available on its website and the Government Code already requires special districts to be audited annually. Those audits must be sent to the State Controller. However, it has not been sending out copies in accordance with statute. Repealing a duplicative auditing requirement may be warranted, but the lack of compliance by the district with the reporting requirement raises questions about its commitment to transparency. The Committee may wish to consider amending SB 963 to retain the reporting requirement and to designate specific committees within the Legislature to receive copies of the audits.

Support and Opposition

(4/4/18)

Support: Water Replenishment District of Southern California (sponsor).

Opposition: Unknown.

-- END --