MorganHillTimes.com | Water district flooded with reserves

Water district flooded with reserves

Jul 2, 2009
By Michael Moore

When it comes to cash, the Santa Clara Valley Water District is overflowing, while cities, counties and the state are struggling to balance budgets.

The district has been criticized before for its propensity to set aside wildly fluctuating reserves that this year are equal to about 80 percent of the $305 million budget, and a grand jury report released last month said the agency has made "little to no effort to become cost effective" since a similar investigation three years ago.

The agency's reserve policy is complex, but district officials note that how $244 million got into the various reserve accounts is mostly dictated by outside factors such as state laws and bond conditions, as well as previous decisions by the board of directors.

But critics say the district's history of stockpiling reserves is a reflection of the water provider's wasteful ways. And a court ruling earlier this year even notes the district violates the state law that created it by improperly putting water rate revenues in reserve accounts.

"It goes to show they're collecting an excess amount of money and they're just sitting on it," frequent water district and San Martin resident Bob Cerruti said. He suggested the district could use its reserves to help water rate payers and well owners, or pay off millions of dollars worth of debt, or finish the Llagas Creek flood protection project which was conceived more than 40 years ago.

But district officials say most of the reserves cannot be used for such expenses, at least not yet. Only a portion of the reserves amount to a fully unrestricted rainy-day fund that would be available, for example, in the event of a natural disaster that could disable the infrastructure that serves 1.7 million people, or if the state decides to take away the district's portion of property tax revenues in the coming months, district officials say.

"The unrestricted reserve is not out of balance with most governmental agencies," SCVWD board of directors Chairman Sig Sanchez said. "Years ago I thought the reserves were much higher than they should have been, but as the state comes in and takes money away from us like they did a few years ago, we have to have (reserves) committed."

About $24.5 million is in the district's various "restricted" reserve funds, which have to be maintained at levels specified by external factors. An additional $31.5 million is designated for future costs of ongoing construction projects, some of which take years to complete. Those projects include property acquisition for planned South County pipelines, Coyote Lake Dam improvements, Alamitos Dam improvements and a recycled water treatment system.

Long-term debt proceeds and expenses for those projects are carried in reserve in case urgent circumstances such as a dam failure or economic hardship require the board to move money around.

However, most of the reserves are still intended to be used for planned projects.

"If we have anything like a levee failure, the costs tend to be more significant than an entity like a city or county," said district Chief Financial Officer Deborah McClain. "Because we are providing water we want to ensure we are prudent in our plans so that we can protect the water we can provide."

She added it would be "unusual" for the board to redirect reserve funds away from the projects for whose uses it has already approved, but it could vote to move funds from lower-priority projects in the case of an emergency.

That report noted the high reserve levels carried by the district, the total of which exceeded $500 million in 2002. It pointed out that special districts throughout California have regularly designated astronomical reserves. It also said funding the reserves out of current revenues "increases the cost to the current customers to ensure (it) has sufficient funding for future projects."

Furthermore, the Santa Clara County Superior Court ruled that the district violates its own governing act by using groundwater charges for unauthorized purposes. One of those purposes is over-budgeting for certain expenses at the beginning of the year, and placing the excess revenue into the reserves, according to an April 23 ruling by Superior Court Judge Kevin Murphy.

Plus, the city of Morgan Hill, a water retailer who buys water from the district, has long had issues with the district's procedures for setting rates, which rely on haphazard accounting, according to City Manager Ed Tewes. He said that although the district does not have separate funds for water utility expenditures for North County and South County, it sets different rates for the two zones. "Their approach to rate setting is not consistent with their accounting practices," Tewes said.

The 2005-2006 grand jury report also described how the water district has "opted more for reserve-based funding than for debt-based funding for future projects."

In the 2007-08 fiscal year, district reserves topped out at more than $421 million, dropping to about $244 million last year. District spokeswoman Susan Siravo said in 2007, the district took out about $123 million of long-term debt to fund three years' worth of capital projects.

The district has built and continues to maintain a "massive infrastructure" system that is expensive to maintain and improve, according to Siravo.

"There are a number of projects that will be planned, but maybe 100 percent of what's allocated won't be spent, and you may carry over funds to the next year," McClain added.

But last month's grand jury report suggests that some of those projects are not the best use of funds, singling out a $22 million project to restore Alviso Slough and a new water quality laboratory that was constructed over budget by about $13 million.

District officials say the board of directors is preparing a formal response to the report that will be presented later this month. They also noted that the report indicates recent progress has been achieved within the district, such as recent budget cuts of about $37 million over the last two years, and the elimination of 57 vacant positions.

In response to suggestions that the district use its reserves to help rate payers or finish off long outstanding projects, McClain explained that reserves in the budget categories where those expenses are defined are at the minimum as set by the district's reserve policy. For example, the water utility reserve, which would be the fund from which assistance to rate payers would be pulled, is already at the minimum per district policy. Reserves should be equal to a minimum of 15 percent of the water utility operations budget, the policy says. For 2009-2010, those reserves are $22.3 million, or about 17 percent of budgeted outlays of $125.5 million.

As the minimum is established based on "economic uncertainties or unforeseen catastrophic circumstances," according to McClain, district staff would be unlikely to recommend using reserves to subsidize rates paid by well owners this year.

Total unrestricted reserves add up to about $135 million.

Some reserves far surpass policy-guided minimums, such as the watershed management or flood control reserves, which total more than 100 percent of expenditures at about $106.3 million. The district minimum unrestricted reserve for this fund is 50 percent of expenses.

McClain added that a large part of the watershed reserves are designated for future projects, but not all of those projects have yet been identified.

Plus, funds are already set aside in the reserves for the Llagas Creek project, and that money will be spent as the project proceeds, McClain said.

The district's reserves and other cash revenues are kept in a pool of investments, including mutual funds, U.S. Treasury notes, and the state's Local Agency Investment Fund. About $57 million is invested in short-term return accounts, and about $340 million is in long-term investments.

Santa Clara Valley Water District reserves, fiscal year 2009-2010

Designated reserves (in millions)

Operating and capital (unrestricted) reserve - $135.4

Supplemental water supply reserve - 8.8

Environmental Enhancement reserve - 12.2

Currently authorized projects - 31.5

Other designated - 10.64

Restricted reserves

Water utility restricted operating reserve - 12.1

WU debt service reserve - 6.7

Other restricted - 5.65

Designated liability/other

Workers' comp self insurance reserve - 7.4

Property self insurance - 5.6

Compensated employee absences - 7.7

Total reserves - $244.05

Percentage of projected revenues - 83

------------------------------------

Santa Clara County reserves, 2009-2010 (in millions) - $93.7

Percentage of projected revenues - 4.7

City of Morgan Hill general fund reserves, 2009-2010 (in millions) - $10.1

Percentage of projected revenues - 37

Michael Moore
Michael Moore covers county and law enforcement issues for the Morgan Hill Times. Reach him at (408) 779-4106, ext. 202, or mmoore@morganhilltimes.com.